Attached files
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
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For
the fiscal year ended
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December
31, 2009
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or
□ TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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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 whether the registrant has submitted electronically and posted on
its website, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files.
□ 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.
□ Yes ■ No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer 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. $53,368,585 as of June 30, 2009.
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date. 2,869,854 as of March 1,
2010
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.
II
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Citizens
Financial Services, Inc.
Form
10-K
INDEX
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Page
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PART
I
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ITEM
1 – BUSINESS
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1 –
4
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ITEM
1A – RISK FACTORS
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5 –
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 – [RESERVED]
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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
– 38
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ITEM
7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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38
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ITEM
8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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39
– 75
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ITEM
9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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76
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ITEM
9A(T) – CONTROLS AND PROCEDURES
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76
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ITEM
9B – OTHER INFORMATION
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76
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PART
III
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ITEM
10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
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77
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ITEM
11 – EXECUTIVE COMPENSATION
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77
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ITEM
12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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77
– 78
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ITEM
13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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78
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ITEM
14 – PRINCIPAL ACCOUNTING FEES AND SERVICES
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78
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PART
IV
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ITEM
15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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79
– 80
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SIGNATURES
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81
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III
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 bank related activities.
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’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 of the Bank
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, 2009, the Bank employed 158 full time employees and 26 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.
1
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 largely similar
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
2
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. Those rules also authorize the Federal Reserve Board to
prohibit a bank holding company from paying dividends under certain
circumstances if its subsidiary bank is undercapitalized.
Under
these policies and subject to the restrictions applicable to the Bank, the Bank
could have declared, during 2009, without prior regulatory approval, aggregate
dividends of approximately $10.9 million, plus net profits earned to the
date of such dividend declaration.
BANK
SECRECY ACT
Under the
Bank Secrecy Act (BSA), banks and other financial institutions are required to
retain records to assure that the details of financial transactions can be
traced if investigators need to do so. Banks are also required to
report most cash transactions in amounts exceeding $10,000 made by or on behalf
of their customers. Failure to meet BSA requirements may expose the
Bank to statutory penalties, and a negative compliance record may affect the
willingness of regulating authorities to approve certain actions by the Bank
requiring regulatory approval, including new branches.
INSURANCE
OF DEPOSIT ACCOUNTS
The
Bank’s deposits are insured up to applicable limits by the Deposit Insurance
Fund (DIF) 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, with less risky institutions paying lower
assessments. An institution’s assessment rate depends upon the
category to which it is assigned. For calendar 2008, assessments
ranged from five to forty-three basis points of each institution’s deposit
assessment base. Due to losses incurred by the DIF in 2008 as a
result of failed institutions, and anticipated future losses, the FDIC adopted
an across the board seven basis point increase in the assessment range for the
first quarter of 2009. The FDIC made further refinements to its
risk-based assessment that were effective April 1, 2009 and that effectively
made the range seven to 771/2
basis points. The FDIC may adjust rates 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 FDIC
assessment.
The FDIC
imposed on each insured institution a special emergency assessment of five basis
points of total assets minus tier 1 capital, as of June 30, 2009 (capped at ten
basis points of an institution’s deposit assessment base on the same date) in
order to cover losses to the Deposit Insurance Fund. That special
assessment was collected on September 30, 2009. The FDIC provided for
similar special assessments during the last fiscal two quarters of 2009, if
deemed necessary. However, in lieu of further special assessments,
the FDIC required insured institutions to prepay estimated quarterly risk-based
assessments for the fourth quarter of 2009 through the fourth quarter of
2012. The estimated assessments, which include an assumed annual
assessment base increase of 5%, were recorded as a prepaid expense asset as of
December 30, 2009.
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,
2014. In addition, the FDIC adopted an optional Temporary Liquidity
Guarantee Program by which, for a fee, noninterest bearing transaction accounts
would receive unlimited insurance coverage until December 31, 2009, subsequently
extended until June 30, 2010. Certain senior unsecured debt issued by
institutions and their holding companies between specified time frames could
also be guaranteed by the FDIC through June 30, 2012, or in some cases, December
31, 2012. The Bank made a business decision to participate in the
unlimited noninterest bearing transaction account coverage and the Bank and the
Company opted to
participate in the unsecured debt guarantee program.
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 funds. That payment is
established quarterly and for the four quarters ended December 31, 2009 averaged
1.06 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.
3
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.
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.
In
particular, the Obama Administration has proposed, and the Congress is
considering, legislation that would restructure the regulation of depository
institutions. Proposals range from the merger of the Office of Thrift
Supervision, which regulates federal savings associations, with the OCC, to the
creation of an independent federal agency that would assume the regulatory
responsibilities of the Office of Thrift Supervision, FDIC, OCC and Federal
Reserve Board. The federal savings association charter would be
eliminated and federal associations required to become banks under some
proposals, although others would grandfather existing charters. Also
proposed is the creation of a new federal agency to administer and enforce
consumer and fair lending laws, a function that is now performed by the
depository institution regulators. The federal preemption of state
laws currently accorded federally chartered depository institutions would be
reduced under certain proposals as well.
Enactment
of any of these proposals could revise the regulatory structure imposed on the
Company and Bank, which could result in more stringent regulation. At
this time, management has no way of predicting the contents of any final
legislation, or whether any legislation will be enacted at all.
4
ITEM 1A – RISK
FACTORS.
Changing
interest rates may decrease our earnings and asset values.
Our net
interest income is the interest we earn on loans and investments less the
interest we pay on our deposits and borrowings. Our net interest
margin is the difference between the yield we earn on our assets and the
interest rate we pay for deposits and our other sources of
funding. Changes in interest rates—up or down—could adversely affect
our net interest margin and, as a result, our net interest
income. Although the yield we earn on our assets and our funding
costs tend to move in the same direction in response to changes in interest
rates, one can rise or fall faster than the other, causing our net interest
margin to expand or contract. Our liabilities tend to be shorter in
duration than our assets, so they may adjust faster in response to changes in
interest rates. As a result, when interest rates rise, our funding
costs may rise faster than the yield we earn on our assets, causing our net
interest margin to contract until the asset yields catch
up. Changes in the slope of the “yield curve”—or the spread
between short-term and long-term interest rates—could also reduce our net
interest margin. Normally, the yield curve is upward sloping, meaning
short-term rates are lower than long-term rates. Because our
liabilities tend to be shorter in duration than our assets, when the yield curve
flattens or even inverts, we could experience pressure on our net interest
margin as our cost of funds increases relative to the yield we can earn on our
assets.
Changes
in interest rates also affect the value of the Bank’s interest-earning assets,
and in particular the Bank’s securities portfolio. Generally, the
value of fixed-rate securities fluctuates inversely with changes in interest
rates. Unrealized gains and losses on securities available for sale
are reported as a separate component of equity, net of tax. Decreases
in the fair value of securities available for sale resulting from increases in
interest rates could have an adverse effect on shareholders’
equity.
A
continuation of recent turmoil in the financial markets could have an adverse
effect on our financial position or results of operations.
Since
2008, United States and global financial markets have experienced severe
disruption and volatility, and general economic conditions have declined
significantly. Adverse developments in credit quality, asset values and revenue
opportunities throughout the financial services industry, as well as general
uncertainty regarding the economic, industry and regulatory environment, have
had a marked negative impact on the industry. Dramatic declines in
the U.S. housing market over the past two years, with falling home prices,
increasing foreclosures and increasing unemployment, have negatively affected
the credit performance of mortgage loans and resulted in significant write-downs
of asset values by many financial institutions. The United States and the
governments of other countries have taken steps to try to stabilize the
financial system, including investing in financial institutions, and have also
been working to design and implement programs to improve general economic
conditions. Notwithstanding the actions of the United States and other
governments, these efforts may not succeed in restoring industry, economic or
market conditions and may result in adverse unintended
consequences. Factors that could continue to pressure financial
services companies, including the Company, are numerous and include (i)
worsening credit quality, leading among other things to increases in loan losses
and reserves, (ii) continued or worsening disruption and volatility in financial
markets, leading to, among other things, continuing reductions in asset values,
(iii) capital and liquidity concerns regarding financial institutions
generally, (iv) limitations resulting from or imposed in connection with
governmental actions intended to stabilize or provide additional regulation of
the financial system, or (v) recessionary conditions that are deeper or last
longer than currently anticipated.
Higher
loan losses could require us to increase our allowance for loan losses through a
charge to earnings.
When we
loan money we incur the risk that our borrowers do not repay their loans. We
reserve for loan losses by establishing an allowance through a charge to
earnings. The amount of this allowance is based on our assessment of loan losses
inherent in our loan portfolio. The process for determining the amount of the
allowance is critical to our financial results and condition. It requires
subjective and complex judgments about the future, including forecasts of
economic or market conditions that might impair the ability of our borrowers to
repay their loans. We might underestimate the loan losses inherent in our loan
portfolio and have loan losses in excess of the amount reserved. We might
increase the allowance because of changing economic conditions. For example, in
a rising interest rate environment, borrowers with adjustable-rate loans could
see their payments increase. There may be a significant increase in the number
of borrowers who are unable or unwilling to repay their loans, resulting in our
charging off more loans and increasing our allowance. In addition, when real
estate values decline, the potential severity of loss on a real estate-secured
loan can increase significantly, especially in the case of loans with high
combined loan-to-value ratios. The recent decline in the national economy and
the local economies of the areas in which the loans are concentrated could
result in an increase in loan delinquencies, foreclosures or repossessions
resulting in increased charge-off amounts and the need for additional loan loss
allowances in future periods. In addition, our determination as to the amount of
our allowance for loan losses is subject to review by our primary regulator, the
Office of the Comptroller of the Currency, as part of its examination process,
which may result in the establishment of an additional allowance based upon the
judgment of the Office of the Comptroller of the Currency after a review of the
information available at the time of its examination. Our allowance for loan
losses amounted to $4.9 million, or 1.07% of total loans outstanding and
72.36% of nonperforming loans, at December 31, 2009. Our allowance for loan
losses at December 31, 2009 may not be sufficient to cover future loan
losses. A large loss could deplete the allowance and require increased
provisions to replenish the allowance, which would decrease our earnings. In
addition, at December 31, 2009, we had 9 loan relationships that were
performing according to their original terms with outstanding balances that
exceeded $3.0 million. However, the deterioration of one or more of these
loans could result in a significant increase in our nonperforming loans and our
provision for loan losses, which would negatively impact our results of
operations.
5
Our
emphasis on commercial real estate, agricultural and construction lending may
expose us to increased lending risks.
At
December 31, 2009, we had $134.0 million in loans secured by commercial real
estate, $19.5 million in agricultural loans and $5.6 million in construction
loans. Commercial real estate loans, agricultural and construction
loans represented 29.4%, 4.3% and 1.2%, respectively, of our loan
portfolio. At December 31, 2009, we had $2.9 million of reserves
specifically allocated to these loan types. While commercial real
estate, agricultural and construction loans are generally more
interest rate sensitive and carry higher yields than do residential mortgage
loans, these types of loans generally expose a lender to greater risk of
non-payment and loss than single-family residential mortgage loans because
repayment of the loans often depends on the successful operation of the
property, the income stream of the borrowers and, for construction loans, the
accuracy of the estimate of the property’s value at completion of construction
and the estimated cost of construction. Such loans typically involve
larger loan balances to single borrowers or groups of related borrowers compared
to single-family residential mortgage loans.
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, 2009, our investment portfolio included available for sale
investment securities with a carrying value of $193.6 million and an estimated
fair value of $198.6 million, which included unrealized losses on 33 securities
totaling $400,000. 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.
The
Company’s financial condition and results of operations are dependent on the
economy in the Bank’s market area.
The
Bank’s market area consists of the Pennsylvania Counties of Bradford, Potter and
Tioga in North Central Pennsylvania and Allegany, Steuben, Chemung and Tioga
Counties in Southern New York. As of December 31, 2009, management
estimates that more than 93% of deposits and 84% of loans came from its market
area. Because of the Bank’s concentration of business activities in
its market area, the Company’s financial condition and results of operations
depend upon economic conditions in its market area. Adverse economic
conditions in our market area could reduce our growth rate, affect the ability
of our customers to repay their loans and generally affect our financial
condition and results of operations. Conditions such as inflation,
recession, unemployment, high interest rates and short money supply and other
factors beyond our control may adversely affect our profitability. We
are less able than a larger institution to spread the risks of unfavorable local
economic conditions across a large number of diversified
economies. Any sustained period of increased payment delinquencies,
foreclosures or losses caused by adverse market or economic conditions in the
States of Pennsylvania and New York could adversely affect the value of our
assets, revenues, results of operations and financial
condition. Moreover, we cannot give any assurance we will benefit
from any market growth or favorable economic conditions in our primary market
areas if they do occur.
Increased
and/or special Federal Deposit Insurance Corporation
assessments will hurt our earnings
The recent economic recession has
caused a high level of bank failures, which has dramatically increased FDIC
resolution costs and led to a significant reduction in the balance of the
Deposit Insurance Fund. As a result, the FDIC has significantly increased the
initial base assessment rates paid by financial institutions for deposit
insurance. Increases in the base assessment rate have increased our deposit
insurance costs and negatively impacted our earnings. In addition, in May 2009,
the FDIC imposed a special assessment on all insured institutions. Our special
assessment, which was reflected in earnings for the quarter ended June 30, 2009,
was $330,000. In lieu of
imposing an additional special assessment, the FDIC required all institutions to
prepay their assessments for the fourth quarter of 2009 and all of 2010, 2011
and 2012. Additional increases in the base assessment rate or additional special
assessments would negatively impact our earnings.
The
Company and the Bank operate in a highly regulated environment and may be
adversely affected by changes in laws and regulations.
6
Proposed
regulatory reform may have a material impact on our operations.
The Obama
Administration has published a comprehensive regulatory reform plan that is
intended to modernize and protect the integrity of the United States financial
system and has offered, and the House of Representatives and Senate are
currently considering, proposed legislation to accomplish these
reforms. The Administration has also proposed the creation of a new
federal agency, the Consumer Financial Protection Agency, that would be
dedicated to protecting consumers in the financial products and services
market. The creation of this agency could result in new regulatory
requirements and raise the cost of regulatory compliance. In
addition, legislation stemming from the reform plan could require changes in
regulatory capital requirements, loan loss provisioning practices, and
compensation practices. If implemented, the foregoing regulatory
reforms may have a material impact on our operations. However,
because the final legislation may differ significantly from the reform plan
proposed by the President, we cannot determine the specific impact of any
regulatory reform at this time.
Strong
competition within the Bank’s market area could hurt profits and slow
growth.
The Bank
faces intense competition both in making loans and attracting
deposits. This competition has made it more difficult for the Bank to
make new loans and at times has forced the Bank to offer higher deposit
rates. Price competition for loans and deposits might result in the
Bank earning less on loans and paying more on deposits, which would reduce net
interest income. Competition also makes it more difficult to increase
loans and deposits. As of June 30, 2009, which is the most
recent date for which information is available, we held 33.0% of the deposits in
Bradford, Potter and Tioga Counties, Pennsylvania , which was the second largest
share of deposits out of eight financial institutions with offices in the area,
and 5.2% of the deposits in Allegany County, New York, which was the fourth
largest share of deposits out of five financial institutions with offices in
this area. Competition also makes it more difficult to hire and
retain experienced employees. Some of the institutions with which the
Bank competes have substantially greater resources and lending limits than the
Bank has and may offer services that the Bank does not
provide. Management expects competition to increase in the future as
a result of legislative, regulatory and technological changes and the continuing
trend of consolidation in the financial services industry. The Bank’s
profitability depends upon its continued ability to compete successfully in its
market area.
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.
7
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 fifteen banking facilities and leased three
other facilities as of December 31, 2009. All buildings owned by the
Bank are free of any liens or encumbrances.
The net
book value of owned properties and leasehold improvements totaled $11,421,586 as
of December 31, 2009. 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 – [RESERVED]
8
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 14
of the consolidated financial statements).
|
Dividends
|
Dividends
|
|||||
|
2009
|
declared
|
2008
|
declared
|
|||
|
|
High
|
Low
|
per
share
|
High
|
Low
|
per
share
|
|
First
quarter
|
$ 19.80
|
$ 16.93
|
$ 0.240
|
$ 21.78
|
$ 17.87
|
$ 0.230
|
|
Second
quarter
|
22.77
|
18.32
|
0.245
|
23.27
|
20.05
|
0.235
|
|
Third
quarter
|
24.00
|
20.79
|
0.245
|
24.50
|
21.25
|
0.235
|
|
Fourth
quarter
|
25.30
|
23.05
|
0.300
|
21.00
|
17.25
|
0.290
|
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 14 – 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 31, 2009 to all shareholders of
record as of July 17, 2009.
As of
February 9, 2010, the Company had approximately 1,528 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, 2009:
9
|
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) (2)
|
|
10/1/09
to 10/31/09
|
-
|
-
|
-
|
54,505
|
|
11/1/09
to 11/30/09
|
-
|
-
|
-
|
54,505
|
|
12/1/09
to 12/31/09
|
3,780
|
$25.09
|
3,780
|
50,725
|
|
Total
|
3,780
|
$25.09
|
3,780
|
50,725
|
|
(1)
|
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.
|
|
(2)
|
On
November 17, 2009, the Board of Directors authorized a Voluntary
Shareholder Buy-Back Program under which shareholders owning less than 100
shares of the Company could voluntarily sell their shares to the Company
at a purchase price of $26.00 per share. The program expired on February
4, 2010. Under this program, 343 shares were purchased during the 4th
quarter of 2009
|
10
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, 2009:
|
(in
thousands, except share data)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|
Interest
income
|
$ 38,615
|
$ 37,238
|
$ 36,024
|
$ 32,851
|
$ 28,699
|
|
Interest
expense
|
13,231
|
14,058
|
16,922
|
14,953
|
11,000
|
|
Net
interest income
|
25,384
|
23,180
|
19,102
|
17,898
|
17,699
|
|
Provision
for loan losses
|
925
|
330
|
365
|
330
|
60
|
|
Net
interest income after provision
|
|||||
|
for
loan losses
|
24,459
|
22,850
|
18,737
|
17,568
|
17,639
|
|
Non-interest
income
|
5,708
|
5,245
|
5,114
|
4,712
|
4,688
|
|
Investment
securities gains (losses), net
|
139
|
(4,089)
|
(29)
|
4
|
-
|
|
Non-interest
expenses
|
17,759
|
15,877
|
15,314
|
15,027
|
15,387
|
|
Income
before provision for income taxes
|
12,547
|
8,129
|
8,508
|
7,257
|
6,940
|
|
Provision
for income taxes
|
2,683
|
1,224
|
1,772
|
1,457
|
1,666
|
|
Net
income
|
$ 9,864
|
$ 6,905
|
$ 6,736
|
$ 5,800
|
$ 5,274
|
|
Return
on Assets (net income to average total assets)
|
1.42%
|
1.13%
|
1.16%
|
1.05%
|
1.04%
|
|
Return
on Equity (net income to average total equity)
|
17.65%
|
13.51%
|
14.38%
|
13.21%
|
12.63%
|
|
Dividend
Payout Ratio (dividends declared divided by net income)
|
29.92%
|
40.77%
|
37.86%
|
42.10%
|
44.28%
|
|
Equity
to Asset Ratio (average equity to average total assets,
|
8.02%
|
8.33%
|
8.10%
|
7.98%
|
8.20%
|
|
excluding
other comprehensive income)
|
|||||
|
Per
share data:
|
|||||
|
Net
income (1)
|
$ 3.43
|
$ 2.40
|
$ 2.33
|
$ 1.98
|
$ 1.78
|
|
Cash
dividends (1)
|
1.03
|
0.98
|
0.89
|
0.83
|
0.79
|
|
Book
value (1) (2)
|
20.71
|
18.34
|
16.96
|
15.58
|
14.57
|
|
Total
investments
|
$ 198,582
|
$ 174,139
|
$ 120,802
|
$ 109,743
|
$ 102,602
|
|
Loans,
net (3)
|
451,496
|
428,436
|
419,182
|
410,897
|
379,139
|
|
Total
assets (3)
|
729,477
|
668,612
|
591,029
|
572,168
|
529,241
|
|
Total
deposits (3)
|
605,559
|
546,680
|
456,028
|
446,515
|
429,799
|
|
Stockholders'
equity
|
61,527
|
52,770
|
48,528
|
43,500
|
41,561
|
|
(1)
Amounts were adjusted to reflect stock dividends.
|
|||||
|
(2)
Calculation excludes accumulated other comprehensive income and
unrecognized pension cost.
|
|||||
|
(3)
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.
|
|||||
11
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
financial condition, 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 18 banking facilities, 17 of which operate as bank
branches. 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.
12
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.
Reputational
risk, or the risk to our business, earnings, liquidity, and capital from
negative public opinion, could result from our actual or alleged conduct in a
variety of areas, including legal and regulatory compliance, lending practices,
corporate governance, litigation, ethical issues, or inadequate protection of
customer information. We expend significant resources to comply with regulatory
requirements. Failure to comply could result in reputational harm or significant
legal or remedial costs. Damage to our reputation could adversely affect our
ability to retain and attract new customers, and adversely impact our earnings
and liquidity.
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, 2009,
non-deposit investment products under management totaled $46.2
million. Additionally, as summarized in the table below, the Trust
Department had assets under management as of December 31, 2009 and 2008 of $85.9
million and $74.3 million, respectively. The increase is
primarily due to an increase in the fair value of plan assets given the overall
market increase in equity securities and mutual funds during 2009.
13
|
(market
values - in thousands)
|
2009
|
2008
|
|
INVESTMENTS:
|
||
|
Bonds
|
$ 21,007
|
$ 20,842
|
|
Stock
|
18,754
|
14,771
|
|
Savings
and Money Market Funds
|
10,396
|
10,068
|
|
Mutual
Funds
|
34,001
|
26,614
|
|
Mortgages
|
836
|
1,070
|
|
Real
Estate
|
931
|
978
|
|
Miscellaneous
|
8
|
1
|
|
Cash
|
-
|
3
|
|
TOTAL
|
$ 85,933
|
$ 74,347
|
|
ACCOUNTS:
|
||
|
Trusts
|
27,478
|
24,345
|
|
Guardianships
|
552
|
857
|
|
Employee
Benefits
|
31,781
|
26,722
|
|
Investment
Management
|
25,678
|
21,995
|
|
Custodial
|
444
|
428
|
|
TOTAL
|
$ 85,933
|
$ 74,347
|
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, 2009 was $9,864,000, which
represents an increase of $2,959,000, or 42.9%, when compared to the 2008
related period. Net income for the twelve months ended December 31,
2008 totaled $6,905,000, an increase of $169,000 from the 2007 related
period. Earnings per share were $3.43, $2.40 and $2.33 for the years
ended 2009, 2008 and 2007, respectively.
The
following table sets forth certain performance ratios of our Company for the
periods indicated:
|
2009
|
2008
|
2007
|
|
|
Return
on Assets (net income to average total assets)
|
1.42%
|
1.13%
|
1.16%
|
|
Return
on Equity (net income to average total equity)
|
17.65%
|
13.51%
|
14.38%
|
|
Dividend
Payout Ratio (dividends declared divided by net income)
|
29.92%
|
40.77%
|
37.86%
|
|
Equity
to Asset Ratio (average equity to average total assets, excluding other
comprehensive income)
|
8.02%
|
8.33%
|
8.10%
|
Net
income is influenced by five key components: net interest income, provision for
loan losses, non-interest income, non-interest expenses, 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.
14
|
Analysis
of Average Balances and Interest Rates (1)
|
|||||||||
|
2009
|
2008
|
2007
|
|||||||
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
||||
|
Balance
(1)
|
Interest
|
Rate
|
Balance
(1)
|
Interest
|
Rate
|
Balance
(1)
|
Interest
|
Rate
|
|
|
(dollars
in thousands)
|
$
|
$
|
%
|
$
|
$
|
%
|
$
|
$
|
%
|
|
ASSETS
|
|||||||||
|
Short-term
investments:
|
|||||||||
|
Interest-bearing
deposits at banks
|
21,496
|
43
|
0.20
|
7,118
|
57
|
0.80
|
102
|
5
|
5.10
|
|
Total
short-term investments
|
21,496
|
43
|
0.20
|
7,118
|
57
|
0.80
|
102
|
5
|
5.10
|
|
Investment
securities:
|
|||||||||
|
Taxable
|
131,620
|
6,072
|
4.61
|
99,872
|
5,013
|
5.02
|
95,417
|
4,702
|
4.93
|
|
Tax-exempt
(3)
|
51,588
|
3,325
|
6.45
|
36,016
|
2,235
|
6.21
|
24,173
|
1,451
|
6.00
|
|
Total
investment securities
|
183,208
|
9,397
|
5.13
|
135,888
|
7,248
|
5.33
|
119,590
|
6,153
|
5.14
|
|
Loans:
|
|||||||||
|
Residential
mortgage loans
|
203,526
|
14,743
|
7.24
|
211,958
|
15,726
|
7.42
|
211,171
|
15,640
|
7.41
|
|
Commercial
& agricultural loans
|
182,326
|
12,606
|
6.91
|
156,873
|
11,872
|
7.57
|
147,921
|
11,740
|
7.94
|
|
Loans
to state & political subdivisions
|
46,415
|
2,844
|
6.13
|
47,766
|
2,998
|
6.28
|
45,259
|
2,751
|
6.08
|
|
Other
loans
|
11,484
|
1,020
|
8.88
|
11,849
|
1,079
|
9.11
|
12,426
|
1,150
|
9.25
|
|
Loans,
net of discount (2)(3)(4)
|
443,751
|
31,213
|
7.03
|
428,446
|
31,675
|
7.39
|
416,777
|
31,281
|
7.51
|
|
Total
interest-earning assets
|
648,455
|
40,653
|
6.27
|
571,452
|
38,980
|
6.82
|
536,469
|
37,439
|
6.98
|
|
Cash
and due from banks
|
9,315
|
9,548
|
9,299
|
||||||
|
Bank
premises and equipment
|
11,876
|
12,390
|
12,773
|
||||||
|
Other
assets
|
27,408
|
19,756
|
18,832
|
||||||
|
Total
non-interest earning assets
|
48,599
|
41,694
|
40,904
|
||||||
|
Total
assets
|
697,054
|
613,146
|
577,373
|
||||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||||
|
Interest-bearing
liabilities:
|
|||||||||
|
NOW
accounts
|
123,225
|
971
|
0.79
|
106,694
|
1,314
|
1.23
|
95,098
|
2,026
|
2.13
|
|
Savings
accounts
|
46,457
|
147
|
0.32
|
41,494
|
153
|
0.37
|
38,443
|
137
|
0.36
|
|
Money
market accounts
|
42,186
|
337
|
0.80
|
45,073
|
828
|
1.84
|
50,189
|
1,787
|
3.56
|
|
Certificates
of deposit
|
305,777
|
9,767
|
3.19
|
242,751
|
9,197
|
3.79
|
225,590
|
9,413
|
4.17
|
|
Total
interest-bearing deposits
|
517,645
|
11,222
|
2.17
|
436,012
|
11,492
|
2.64
|
409,320
|
13,363
|
3.26
|
|
Other
borrowed funds
|
58,133
|
2,009
|
3.46
|
64,858
|
2,566
|
3.96
|
66,525
|
3,559
|
5.35
|
|
Total
interest-bearing liabilities
|
575,778
|
13,231
|
2.30
|
500,870
|
14,058
|
2.81
|
475,845
|
16,922
|
3.56
|
|
Demand
deposits
|
56,628
|
54,438
|
48,981
|
||||||
|
Other
liabilities
|
8,754
|
6,735
|
6,783
|
||||||
|
Total
non-interest-bearing liabilities
|
65,382
|
61,173
|
55,764
|
||||||
|
Stockholders'
equity
|
55,894
|
51,103
|
45,764
|
||||||
|
Total
liabilities & stockholders' equity
|
697,054
|
613,146
|
577,373
|
||||||
|
Net
interest income
|
27,422
|
24,922
|
20,517
|
||||||
|
Net
interest spread (5)
|
3.97%
|
4.01%
|
3.42%
|
||||||
|
Net
interest income as a percentage
|
|||||||||
|
of
average interest-earning assets
|
4.23%
|
4.36%
|
3.82%
|
||||||
|
Ratio
of interest-earning assets
|
|||||||||
|
to
interest-bearing liabilities
|
1.13
|
1.14
|
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.
|
|||||||||
15
|
2009
|
2008
|
2007
|
|
|
Interest
and dividend income
|
|||
|
from
investment securities (non-tax adjusted)
|
$ 8,310
|
$ 6,528
|
$ 5,626
|
|
Tax
equivalent adjustment
|
1,130
|
777
|
532
|
|
Interest
and dividend income
|
|||
|
from
investment securities (tax equivalent basis)
|
$ 9,440
|
$ 7,305
|
$ 6,158
|
|
2009
|
2008
|
2007
|
|
|
Interest
and fees on loans (non-tax adjusted)
|
$ 30,305
|
$ 30,710
|
$ 30,398
|
|
Tax
equivalent adjustment
|
908
|
965
|
883
|
|
Interest
and fees on loans (tax equivalent basis)
|
$ 31,213
|
$ 31,675
|
$ 31,281
|
|
2009
|
2008
|
2007
|
|
|
Total
interest income
|
$ 38,615
|
$ 37,238
|
$ 36,024
|
|
Total
interest expense
|
13,231
|
14,058
|
16,922
|
|
Net
interest income
|
25,384
|
23,180
|
19,102
|
|
Total
tax equivalent adjustment
|
2,038
|
1,742
|
1,415
|
|
Net
interest income (tax equivalent basis)
|
$ 27,422
|
$ 24,922
|
$ 20,517
|
The
following table shows the tax-equivalent effect of changes in volume and rates
on interest income and expense (in thousands):
16
Analysis
of Changes in Net Interest Income on a Tax-Equivalent Basis (1)
|
2009
vs. 2008 (1)
|
2008
vs. 2007 (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
|
$ (22)
|
$ 8
|
$ (14)
|
$ 53
|
$ (1)
|
$ 52
|
|
Investment
securities:
|
||||||
|
Taxable
|
1,421
|
(362)
|
1,059
|
223
|
88
|
311
|
|
Tax-exempt
|
1,001
|
89
|
1,090
|
733
|
51
|
784
|
|
Total
investment securities
|
2,422
|
(273)
|
2,149
|
956
|
139
|
1,095
|
|
Total
investment income
|
2,400
|
(265)
|
2,135
|
1,009
|
138
|
1,147
|
|
Loans:
|
||||||
|
Residential
mortgage loans
|
(617)
|
(366)
|
(983)
|
58
|
28
|
86
|
|
Commercial
& agricultural loans
|
1,571
|
(837)
|
734
|
568
|
(436)
|
132
|
|
Loans
to state & political subdivisions
|
(84)
|
(70)
|
(154)
|
155
|
92
|
247
|
|
Other
loans
|
(32)
|
(27)
|
(59)
|
(53)
|
(18)
|
(71)
|
|
Total
loans, net of discount
|
838
|
(1,300)
|
(462)
|
728
|
(334)
|
394
|
|
Total
Interest Income
|
3,238
|
(1,565)
|
1,673
|
1,737
|
(196)
|
1,541
|
|
Interest
Expense:
|
||||||
|
Interest-bearing
deposits:
|
||||||
|
NOW
accounts
|
258
|
(601)
|
(343)
|
289
|
(1,001)
|
(712)
|
|
Savings
accounts
|
33
|
(39)
|
(6)
|
11
|
5
|
16
|
|
Money
Market accounts
|
(50)
|
(441)
|
(491)
|
(167)
|
(792)
|
(959)
|
|
Certificates
of deposit
|
1,440
|
(870)
|
570
|
1,029
|
(1,245)
|
(216)
|
|
Total
interest-bearing deposits
|
1,681
|
(1,951)
|
(270)
|
1,162
|
(3,033)
|
(1,871)
|
|
Other
borrowed funds
|
(251)
|
(306)
|
(557)
|
(87)
|
(906)
|
(993)
|
|
Total
interest expense
|
1,430
|
(2,257)
|
(827)
|
1,075
|
(3,939)
|
(2,864)
|
|
Net
interest income
|
$ 1,808
|
$ 692
|
$ 2,500
|
$ 662
|
$ 3,743
|
$ 4,405
|
(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.
2009
vs. 2008
Tax
equivalent net interest income for 2009 was $27,422,000 compared with
$24,922,000 for 2008, an increase of $2,500,000 or 10.0%. The
increased volume of interest earning assets of $77.0 million generated an
increase in interest income of $3,238,000. The average rate on
interest earning assets decreased from 6.82% in 2008 to 6.27% in 2009, which had
the effect of decreasing interest income by $1,565,000.
Total tax
equivalent interest income from investment securities increased $2,149,000 in
2009 from 2008. The average balance of investment securities
increased $47.3 million, which had an effect of increasing interest income by
$2,422,000 due to volume. The average balance of taxable securities
increased $31.7 million while tax-exempt securities increased by $15.6 million,
which had the effect of increasing interest income by $1,421,000 and $1,001,000,
respectively. The average tax-effected yield on our investment
portfolio decreased from 5.33% in 2008 to 5.13% in 2009. This had the
effect of decreasing interest income by $273,000 due to rate. The
Company’s strategy in 2009 was to invest available funds primarily in shorter,
one-time callable agencies that offer higher coupon rates and are likely to be
called as well as two to four year agency bullet
structures. During 2009, we purchased $64.1 million of
U.S. agency obligations. While this strategy resulted in a decrease
in the overall yield on our investments, it was implemented to stabilize the
effective duration and average life of the portfolio in an upward rate
environment and to take advantage of the steepness in the yield
curve. The shorter term investments, while having lower yields, will
provide sufficient cash flows that will permit reinvestment opportunities as
market conditions improve. As a means to balance this strategy, we
also purchased $18.5 million of 15 to 20 year municipal bonds in order to obtain
higher yields.
17
Loan
income decreased $462,000 in 2009 from 2008. The average balance of
our loan portfolio increased by $15.3 million in 2009 compared to 2008 resulting
in an increase in interest income of $838,000 due to
volume. Offsetting this was a decrease in yield on total loans from
7.39% in 2008 to 7.03% in 2009 resulting in a decrease in interest income of
$1,300,000 due to rate.
Interest
income on residential mortgage loans decreased $983,000, of which $617,000 was
due to volume and $366,000 was due to rate. The average balance decreased $8.4
million due to the economic recession, higher unemployment rates and other
negative economic factors that resulted in lower loan demand for non-conforming
residential mortgages and home equity lines. With this said, the Company
continues to strive to be the top mortgage lender within our service area by
providing competitive products and exemplary service to our customers. During
2009, conforming loans totaling $21,716,000 were closed and sold due to the
historically low residential mortgage rates offered during 2009. The average
balance of commercial and agricultural loans increased $25.5 million from 2008
to 2009 primarily due to our emphasis to grow this segment of the loan
portfolio. This had the positive impact of $1,571,000 on total interest income
due to volume. Offsetting this, the average yield on commercial and agricultural
loans decreased from 7.57% in 2008 to 6.91% in 2009, decreasing interest income
by $837,000 due to rate. The decreasing yield was the result of competitive
pressures to obtain and retain quality credits in the current economic
environment.
Total
interest expense decreased $827,000 in 2009 compared to 2008. The
decrease is primarily attributable to change in rate from 2.81% in 2008 to 2.30%
in 2009, which had the effect of decreasing interest expense by $2,257,000. The
actions of the Federal Reserve and current economic downturn had the effect of
decreasing our short-term borrowing costs as well as rates on deposit products,
including shorter-term certificates of deposit and rate sensitive NOW and money
market accounts. The average balance of interest bearing liabilities increased
$74.9 million from 2008 to 2009. This had the effect of increasing
interest expense by $1,430,000 due to volume.
The
average balance of certificates of deposit increased $63.0 million causing an
increase in interest expense of $1,440,000. Offsetting the increase
in average balance was a decrease in the rate on certificates of deposit from
3.79% to 3.19% resulting in a decrease in interest expense of
$870,000. The average balance of NOW accounts also increased $16.5
million accounting for an increase of $258,000 in interest expense. The change
in rate from 123 basis points to 79 basis points, contributed to an offset in
interest expense of $601,000 resulting in an overall decrease of $343,000. The
average balance of Money Market accounts decreased $2.9 million accounting for a
decrease of $50,000 in interest expense. The change in rate from 184 basis
points to 80 basis points also contributed to an offset in interest expense of
$441,000 resulting in an overall decrease of $491,000. The average
balance of borrowed funds decreased by $6.7 million, resulting in a decrease in
interest expense of $251,000. The average interest rate paid on
borrowed funds also decreased by 50 basis points accounting for a decrease in
interest expense of $306,000 due to rate.
Our net
interest spread for 2009 was 3.97% compared to 4.01% in 2008. The
current economic situation has resulted in a relatively steep yield curve.
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.
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 was 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, which resulted 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.
18
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. 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.
PROVISION
FOR LOAN LOSSES
For the
year ended December 31, 2009, we recorded a provision for loan losses of
$925,000, which represents an increase of $595,000 over the same time period in
2008. This is the result of current economic conditions and an
increase in non-performing loans as of December 31, 2009, which have impacted
management's quarterly review of the allowance for loan losses (see also
“Financial Condition – Allowance for Loan Losses and Credit Quality
Risk”).
NON-INTEREST
INCOME
The
following table reflects non-interest income by major category for the periods
ended December 31 (dollars in thousands):
|
2009
|
2008
|
2007
|
|
|
Service
charges
|
$ 3,612
|
$ 3,489
|
$ 3,210
|
|
Trust
|
521
|
561
|
520
|
|
Brokerage
and insurance
|
284
|
240
|
132
|
|
Investment
securities gains (losses), net
|
139
|
(4,089)
|
(29)
|
|
Gains
on loans sold
|
430
|
84
|
134
|
|
Earnings
on bank owned life insurance
|
492
|
362
|
331
|
|
Other
|
369
|
509
|
787
|
|
Total
|
$ 5,847
|
$ 1,156
|
$ 5,085
|
|
2009/2008
|
2008/2007
|
|||
|
Change
|
Change
|
|||
|
Amount
|
%
|
Amount
|
%
|
|
|
Service
charges
|
$ 123
|
3.5
|
$ 279
|
8.7
|
|
Trust
|
(40)
|
(7.1)
|
41
|
7.9
|
|
Brokerage
and insurance
|
44
|
18.3
|
108
|
81.8
|
|
Investment
securities gains, (losses), net
|
4,228
|
-
|
(4,060)
|
-
|
|
Gains
on loans sold
|
346
|
411.9
|
(50)
|
(37.3)
|
|
Earnings
on bank owned life insurance
|
130
|
35.9
|
31
|
9.4
|
|
Other
|
(140)
|
(27.5)
|
(278)
|
(35.3)
|
|
Total
|
$ 4,691
|
405.8
|
$ (3,929)
|
(77.3)
|
19
2009
vs. 2008
Non-interest
income increased $4,691,000 in 2009 from 2008, or 405.8%. We recorded
investment securities gains totaling $139,000 compared with a $4,089,000 loss in
2008. 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.
During 2009, we elected to sell an agency bond that was likely to be called,
several higher coupon mortgage-backed securities that were prepaying very
quickly, and two corporate bonds for total gains of $253,000. These gains were
offset by losses incurred on the sales of three municipal securities and the
sale of certain bank equity securities totaling $60,000. Additionally, we
recorded an additional $54,000 other than temporary impairment charge on our
Freddie Mac preferred stock.
Service
charge income increased by $123,000 in 2009 compared to 2008 and continues to be
the Company’s primary source of non-interest income. Service charge fees related
to customers’ usage of their debit cards increased by $87,000, statement service
charges increased by $9,000 and fees charges to customers for non-sufficient
funds increased by $27,000. Management is currently evaluating regulatory
changes, specifically to Regulation E, regarding fees charged to customers for
non-sufficient funds, which could impact the level of fees that the Company
realizes.
Gains on
loans sold increased $346,000 compared to last year, which is the result of the
amount of refinancing due to favorable rates in the secondary markets during the
economic downturn. Earnings on bank owned life insurance (BOLI)
increased from $362,000 in 2008 to $492,000 in 2009. In the fourth
quarter of 2008, we invested an additional $3.4 million based upon an analysis
of new employees and updated future employee benefit costs, resulting in
additional BOLI income. Brokerage and insurance revenue increased by
$44,000 in 2009, as we continue to increase the principal amounts invested
through us by our customers. Trust income decreased by $40,000 in 2009 due to
the economy’s downturn and the affect it has had on the values of trust assets
under management for the first half of 2009. Other income decreased
$140,000 primarily due to a decrease in rental income from other real estate
owned properties as well a decrease in the gain from the sale of these
properties in 2009 compared with last year.
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, which was due to the non-recurring, other than
temporary impairment charges recorded in the third quarter of 2008 totaling $4.1
million.
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 continued 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. 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.
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):
|
2009
|
2008
|
2007
|
|
|
Salaries
and employee benefits
|
$ 9,472
|
$ 8,725
|
$ 8,386
|
|
Occupancy
|
1,179
|
1,162
|
1,151
|
|
Furniture
and equipment
|
437
|
479
|
539
|
|
Professional
fees
|
660
|
625
|
645
|
|
Amortization
of intangibles
|
160
|
145
|
144
|
|
FDIC
insurance
|
1,200
|
156
|
54
|
|
ORE
expenses
|
447
|
224
|
103
|
|
Other
|
4,204
|
4,361
|
4,292
|
|
Total
|
$ 17,759
|
$ 15,877
|
$ 15,314
|
20
|
|
2009/2008
|
2008/2007
|
||
|
Change
|
Change
|
|||
|
Amount
|
%
|
Amount
|
%
|
|
|
Salaries
and employee benefits
|
$ 747
|
8.6
|
$ 339
|
4.0
|
|
Occupancy
|
17
|
1.5
|
11
|
1.0
|
|
Furniture
and equipment
|
(42)
|
(8.8)
|
(60)
|
(11.1)
|
|
Professional
fees
|
35
|
5.6
|
(20)
|
(3.1)
|
|
Amortization
of intangibles
|
15
|
10.3
|
1
|
0.7
|
|
FDIC
insurance
|
1,044
|
669.2
|
102
|
188.9
|
|
ORE
expenses
|
223
|
99.6
|
121
|
117.5
|
|
Other
|
(157)
|
(3.6)
|
69
|
1.6
|
|
Total
|
$ 1,882
|
11.9
|
$ 563
|
3.7
|
|
2009
|
2008
|
2007
|
|
|
Other
professional fees
|
$ 299
|
$ 316
|
$ 367
|
|
Legal
fees
|
129
|
129
|
111
|
|
Examinations
and audits
|
232
|
180
|
167
|
|
Total
|
$ 660
|
$ 625
|
$ 645
|
|
2009/2008
|
2008/2007
|
|||
|
Change
|
Change
|
|||
|
Amount
|
%
|
Amount
|
%
|
|
|
Other
professional fees
|
$ (17)
|
(5.4)
|
$ (51)
|
(13.9)
|
|
Legal
fees
|
-
|
-
|
18
|
16.2
|
|
Examinations
and audits
|
52
|
28.9
|
13
|
7.8
|
|
Total
|
$ 35
|
5.6
|
$ (20)
|
(3.1)
|
2009
vs. 2008
Non-interest
expenses for 2009 totaled $17,759,000 which represents an increase of
$1,882,000, or 11.9%, compared with 2008 costs of $15,877,000. Much
of the increase is attributable to salary and benefit costs which increased
$747,000. Base salaries and related payroll taxes increased $262,000,
primarily due to merit increases. Full time equivalent staffing was
169 employees for 2009 and 2008. Incentive costs increased $165,000 compared to
2008 primarily due to the attainment of certain corporate goals and
objectives. Insurance costs for employees increased by $101,000
attributable to a significant increase in insurance premiums. Pension
expense increased by $229,000 compared to 2008, mostly attributable to a
significant decline in the market value of plan assets during 2008 and the
impact it had on the actuarial calculation of pension costs for
2009.
FDIC
Insurance increased $1,044,000 in 2009 primarily due to an increase in our FDIC
deposit insurance assessments and a five basis point special assessment based on
assets as of June 30, 2009, which was related to the continued failing of many
banks across the country. The impact of the special assessment was approximately
$330,000. Also, in 2008 we recognized approximately $209,000 in credits as a
result of the Federal Deposit Insurance Reform Act of 2005. Credits
related to this legislation were fully utilized by the end of 2008 with no
remaining credits available for 2009. In lieu of imposing an
additional special assessment, the FDIC required all institutions to prepay
their assessments for the fourth quarter of 2009 and all of 2010, 2011 and 2012.
These prepayments will be recognized as a charge to operations over the
applicable three year period. Due to the uncertainty involving many financial
institutions insured by the FDIC Insurance, the Company cannot predict whether
the prepayment made in December 2009 will be enough to cover its future
obligations through 2012 or whether an additional assessment will be
required.
Expenses
related with other real estate owned properties increased $223,000 from 2008 to
2009. This increase is the result of a general increase in non-performing
assets, with a significant component related to a customer with properties in
New York State that have significant real estate taxes associated with
them.
21
Furniture
and equipment expenses decreased $42,000 mainly due to a reduction in
depreciation expense from assets that became fully depreciated during the
year.
Exams and
audits expenses increased by $52,000 due to general increases and $18,000 of
costs incurred related to our audit of internal controls for Sarbanes
Oxley. Although the audit requirement was delayed later in 2009 until
2010, audit fees and related expenses were already
incurred.
2008
vs. 2007
Non-interest
expenses for 2008 totaled $15,877,000 which represented an increase of $563,000,
or 3.7%, compared with 2007 costs of $15,314,000. Much of the
increase was 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 2007 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.
Provision
For Income Taxes
The
provision for income taxes was $2,683,000 during 2009, $1,224,000 during 2008
and $1,772,000 for the 2007 related periods. The effective tax
rates for 2009, 2008 and 2007 were 21.4% 15.1% and 20.8%, respectively. The tax
rate for 2008 was impacted by the Emergency Economic Stabilization Act of 2008,
which permitted the write-down of the Freddie Mac preferred stock to be treated
as an ordinary loss, allowing a tax benefit of approximately
$1,000,000.
Income
before the provision for income taxes increased by $4,418,000 in 2009 compared
to 2008, while the provision for income taxes increased by $1,459,000 when
compared to 2008, the majority of which is attributable to the tax treatment of
the Freddie Mac preferred stock discussed above. We have managed our effective
tax rate by remaining invested in tax-exempt municipal loans and
bonds. As such, the provision was impacted in 2009 by an increase in
tax exempt bond and loan revenue.
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 $845,000 out of a total $913,000 in tax credits from one
project, $308,000 out of a total $385,000 in tax credits on the second project
and $172,000 out of a total of $574,000 tax credits on the third
project. $547,000 in tax credits remain and will be taken over the
next seven years.
FINANCIAL
CONDITION
The
following table presents ending balances (dollars in millions), growth and the
percentage change during the past two years:
|
2009
|
%
|
2008
|
%
|
2007
|
|||
|
Balance
|
Increase
|
Change
|
Balance
|
Increase
|
Change
|
Balance
|
|
|
Total
assets
|
$ 729.5
|
$ 60.9
|
9.1
|
$ 668.6
|
$ 77.6
|
13.1
|
$ 591.0
|
|
Total
loans, net
|
451.5
|
23.1
|
5.4
|
428.4
|
9.2
|
2.2
|
419.2
|
|
Total
investments
|
198.6
|
24.5
|
14.1
|
174.1
|
53.3
|
44.1
|
120.8
|
|
Total
deposits
|
605.6
|
58.9
|
10.8
|
546.7
|
90.7
|
19.9
|
456.0
|
|
Total
stockholders' equity
|
61.5
|
8.7
|
16.5
|
52.8
|
4.3
|
8.9
|
48.5
|
22
Cash
and Cash Equivalents
Cash and
cash equivalents totaled $31.4 million at December 31, 2009 compared with $19.9
million at December 31, 2008. The increase in cash and cash equivalents is the
result of the Company’s deposit growth and cash flows from the investment
portfolio, as discussed in more detail below. Management actively measures and
evaluates its liquidity through our Asset – Liability committee and believes its
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. Management expects that these sources of
funds will permit us to meet cash obligations and off-balance sheet commitments
as they come due.
Investments
2009
The
Company’s investment portfolio increased by $24,443,000, or 14.1%, during the
past year. During 2009, we purchased approximately $61.4 million U.S.
agency obligations, $7.4 million of mortgage-backed securities, $18.5 million of
state and local obligations and $125,000 of equity securities, which help offset
the $29.0 million of principal repayments and $25.1 million of calls and
maturities that occurred during the year. We also selectively sold $10.7 million
of bonds and equities at a net gain of $193,000. We also recorded an additional
$54,000 other than temporary impairment charge on our Freddie Mac preferred
stock. The market value of our investment portfolio increased approximately $2.2
million in 2009 due to market fluctuations. Significant market recoveries were
seen in our mortgage backed securities, state and local obligations and our
corporate bonds. Excluding our short term investments consisting of monies held
primarily at the Federal Reserve, the effective yield on our investment
portfolio for 2009 was 5.13% compared to 5.33% for 2008 on a tax equivalent
basis.
As
mentioned above and seen in the table below, due to the economic downturn and
the lowering of interest rates, we have experienced significant prepayments of
our mortgage backed securities of $29.0 million and calls on our agency bonds of
$25.1 million. Due to the amount of cash flow from the investment
portfolio as well as an increase in deposits and a lack of opportunities in
other investment types, our strategy has been to reinvest funds mainly in
short-term agency bonds via purchases of $61.4 million and longer-term municipal
bond purchases of $18.5 million. We believe this strategy will enable
us to reinvest cash flows in the next one to four years with improved investment
opportunities.
2008
The
Company’s investment portfolio increased $53,337,000, or 44.1%, during
2008. 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.
The
following table shows the year-end composition of the investment portfolio for
the five years ended December 31 (dollars in thousands):
|
2009
|
%
of
|
2008
|
%
of
|
2007
|
%
of
|
2006
|
%
of
|
2005
|
%
of
|
|
|
Amount
|
Total
|
Amount
|
Total
|
Amount
|
Total
|
Amount
|
Total
|
Amount
|
Total
|
|
|
Available-for-sale:
|
||||||||||
|
U.
S. Agency securities
|
$ 65,223
|
32.8
|
$ 28,942
|
16.6
|
$ 17,236
|
14.3
|
$ 16,651
|
15.2
|
$ 12,754
|
12.5
|
|
Obligations
of state & political
|
||||||||||
|
subdivisions
|
59,574
|
30.0
|
44,132
|
25.3
|
30,844
|
25.4
|
22,562
|
20.5
|
22,612
|
22.0
|
|
Corporate
obligations
|
3,166
|
1.6
|
5,296
|
3.0
|
7,813
|
6.5
|
7,997
|
7.3
|
8,627
|
8.4
|
|
Mortgage-backed
securities
|
70,194
|
35.3
|
95,407
|
54.8
|
62,642
|
51.9
|
59,875
|
54.6
|
55,852
|
54.4
|
|
Equity
securities
|
425
|
0.3
|
362
|
0.2
|
2,267
|
1.9
|
2,658
|
2.4
|
2,757
|
2.7
|
|
Total
|
$ 198,582
|
100.0
|
$
174,139
|
100.0
|
$
120,802
|
100.0
|
$
109,743
|
100.0
|
$
102,602
|
100.0
|
23
|
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
|
$ 26,221
|
3.0
|
$ 36,916
|
2.8
|
$ 1,446
|
5.5
|
$ -
|
-
|
$ 64,583
|
2.9
|
|
Obligations
of state & political
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
4,456
|
6.3
|
23,393
|
6.2
|
30,163
|
6.5
|
639
|
6.4
|
58,651
|
6.4
|
|
Corporate
obligations
|
-
|
-
|
-
|
-
|
2,998
|
5.6
|
-
|
-
|
2,998
|
5.6
|
|
Mortgage-backed
securities
|
20,420
|
4.3
|
42,316
|
5.1
|
4,290
|
5.6
|
-
|
-
|
67,026
|
4.9
|
|
Total
available-for-sale
|
$ 51,097
|
3.8
|
$ 102,625
|
4.5
|
$ 38,897
|
6.3
|
$ 639
|
6.4
|
$ 193,258
|
4.7
|
Approximately
79.5% of the amortized cost of debt securities is expected to mature, call or
pre-pay within five years or less. Our Company expects that earnings
from operations, the high liquidity level of the available-for-sale securities,
growth of deposits and the availability of borrowings from the Federal Home Loan
Bank and other third party banks will be sufficient to meet future liquidity
needs. There are no securities from a single issuer representing more
than 10% of stockholders’ equity.
Loans
The
Bank’s lending efforts are focused within its market area 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. The Bank offers a variety of loans although
historically most of our lending has focused on real estate loans including
residential, commercial, agricultural, and construction loans. As of
December 31, 2009, approximately 77% of our loan portfolio consisted of real
estate loans. All lending is governed by a lending policy that is
developed and maintained by us and approved by the Board of
Directors.
Residential
mortgage loans generally are written for terms of up to 25 years at a fixed rate
or one, three, and five year adjustable rate mortgages. Loan to value
ratios are usually 80% or less with exceptions for individuals with excellent
credit and low debt to income and/or high net worth. Adjustable rate mortgages
are tied to a margin above the Comparable Federal Home Loan Bank of Pittsburgh
borrowing rate. Home equity loans are written with terms of up to 15
years at fixed rates. Home equity lines of credit are variable rate
loans tied to the Prime Rate generally with a ten year draw period followed by a
ten year repayment period. Home equity loans are typically written with a
maximum 80% loan to value.
Commercial
real estate loan terms are generally 20 years or less with one to five year
adjustable rates. The adjustable rates are tied to a margin above the
Comparable Federal Home Loan Bank of Pittsburgh borrowing rate with a maximum
loan to value ratio of 80%. Where feasible, the Bank works with the United
States Department of Agriculture’s (USDA) guaranteed loan program to offset risk
and to further promote economic growth is our market area. During
2009, we originated $6.4 million in USDA guaranteed commercial real estate
loans.
Agriculture,
and particularly dairy farming, is an important industry in our market area.
Therefore the Bank has developed an agriculture lending team with significant
experience that has a thorough understanding of this industry. Agricultural
loans focus on character, cash flow and collateral, while also taking into
account the particular risks of the industry. Loan terms are
generally 20 years or less with one to five year adjustable
rates. The adjustable rates are tied to a margin above the Comparable
Federal Home Loan Bank of Pittsburgh borrowing rate with a maximum loan to value
of 80%. The Bank is a preferred lender under the USDA’s Farm Service Agency
(FSA) and participates in the FSA guaranteed loan program.
24
2009
Total
loans grew $23.6 million in 2009 from a balance of $432.8 million at the end of
2008 to $456.4 million at the end of 2009. Total loans grew 5.4% in
2009 compared with a 2.2% loan growth rate in 2008.
Commercial
real estate loans increased $26.2 million in 2009 or 24.3% while commercial and
other loans increased $6.1 million, or 16.2%. Agricultural loans
increased $2.4 million in 2009 or 14.2%. The growth in commercial
real estate, agricultural real estate and other commercial loans, despite the
recession, reflects the Company’s focus on commercial lending as a means to
increase loan growth and obtain deposits from farmers and small businesses
throughout our market area. We believe we have a strong team of
experienced professionals that enable us to meet the needs of these customers
within our service area. 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 $4.1 million, while construction loans decreased
$5.5 million or 49.5%. There has been a decrease in loan demand for residential
real estate, construction and consumer loans due to several economic
factors. Recessionary pressures, higher unemployment, and a depressed
housing market have had a negative impact on nonconforming, residential real
estate mortgage and home equity loan growth. Conversely, loan demand
for conforming mortgages, which the Company sells on the secondary market, has
increased dramatically. We have sold $21.7 million of loans in the secondary
market compared to $4.5 million in 2008, an increase of $17.2
million. Residential mortgage lending is a principal business
activity and our Company continues to offer a variety of competitively priced
conforming, nonconforming and home equity mortgages that positions us a leading
mortgage lender in our service area.
2008
Total
loans grew $9.4 million, or 2.2%, in 2008 from a balance of $423.4 million at
the end of 2007 to $432.8 million at the end of 2008. 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%.
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%. The economic recession
which began during 2008, included increasing unemployment rates, a softening
economy, tightened credit standards, low consumer confidence, and depressed
financial markets all of which had a negative impact on our loan
growth. Residential real estate loans totaled $199.1 million and
comprised 46.0% of the loan portfolio as of December 31, 2008 compared to 47.7%
as of December 31, 2007. 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.
25
Five Year
Breakdown of Loans by Type as of December 31,
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||
|
(dollars
in thousands)
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|
Real
estate:
|
||||||||||
|
Residential
|
$ 194,989
|
42.7
|
$ 199,118
|
46.0
|
$ 201,861
|
47.7
|
$ 206,059
|
49.7
|
$ 195,628
|
51.1
|
|
Commercial
|
133,953
|
29.4
|
107,740
|
24.9
|
100,380
|
23.7
|
94,122
|
22.7
|
82,128
|
21.5
|
|
Agricultural
|
19,485
|
4.3
|
17,066
|
3.9
|
16,891
|
4.0
|
17,054
|
4.1
|
12,991
|
3.4
|
|
Construction
|
5,619
|
1.2
|
11,118
|
2.6
|
11,330
|
2.7
|
7,027
|
1.7
|
7,245
|
1.9
|
|
Loans
to individuals
|
||||||||||
|
for
household,
|
||||||||||
|
family
and other purchases
|
11,895
|
2.6
|
11,651
|
2.7
|
13,082
|
3.1
|
12,482
|
3.0
|
13,017
|
3.4
|
|
Commercial
and other loans
|
44,101
|
9.7
|
37,968
|
8.8
|
34,664
|
8.2
|
32,766
|
7.9
|
29,260
|
7.6
|
|
State
& political subdivision loans
|
46,342
|
10.1
|
48,153
|
11.1
|
45,171
|
10.6
|
45,263
|
10.9
|
42,534
|
11.1
|
|
Total
loans
|
456,384
|
100.0
|
432,814
|
100.0
|
423,379
|
100.0
|
414,773
|
100.0
|
382,803
|
100.0
|
|
Less
allowance for loan losses
|
4,888
|
4,378
|
4,197
|
3,876
|
3,664
|
|||||
|
Net
loans
|
$ 451,496
|
$ 428,436
|
$ 419,182
|
$ 410,897
|
$ 379,139
|
|||||
|
2009/2008
|
2008/2007
|
|||
|
Change
|
Change
|
|||
|
Amount
|
%
|
Amount
|
%
|
|
|
Real
estate:
|
||||
|
Residential
|
$ (4,129)
|
(2.1)
|
$ (2,743)
|
(1.4)
|
|
Commercial
|
26,213
|
24.3
|
7,360
|
7.3
|
|
Agricultural
|
2,419
|
14.2
|
175
|
1.0
|
|
Construction
|
(5,499)
|
(49.5)
|
(212)
|
(1.9)
|
|
Loans
to individuals
|
||||
|
for
household,
|
||||
|
family
and other purchases
|
244
|
2.1
|
(1,431)
|
(10.9)
|
|
Commercial
and other loans
|
6,133
|
16.2
|
3,304
|
9.5
|
|
State
& political subdivision loans
|
(1,811)
|
(3.8)
|
2,982
|
6.6
|
|
Total
loans
|
$ 23,570
|
5.4
|
$ 9,435
|
2.2
|
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, 2009, 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.
26
|
Commercial,
|
|||
|
municipal,
|
Real
estate
|
||
|
agricultural
|
construction
|
Total
|
|
|
Maturity
of loans:
|
|||
|
One
year or less
|
$ 8,869
|
$ -
|
$ 8,869
|
|
Over
one year through five years
|
32,860
|
305
|
33,165
|
|
Over
five years
|
202,152
|
5,314
|
207,466
|
|
Total
|
$ 243,881
|
$ 5,619
|
$ 249,500
|
|
Sensitivity
of loans to changes in interest
|
|||
|
rates
- loans due after December 31, 2010:
|
|||
|
Predetermined
interest rate
|
$ 35,886
|
$ 985
|
$ 36,871
|
|
Floating
or adjustable interest rate
|
199,126
|
4,634
|
203,760
|
|
Total
|
$ 235,012
|
$ 5,619
|
$ 240,631
|
Allowance For
Loan Losses and Credit Quality Risk
The
allowance for loan losses is maintained at a level, which in management’s
judgment is adequate to absorb probable future loan losses inherent in the loan
portfolio. The provision for loan losses is charged against current
income. Loans deemed not collectable are charged-off against the
allowance while subsequent recoveries increase the allowance. The
following table presents an analysis of the change in the allowance for loan
losses for the years ended December 31, 2009, 2008, 2007, 2006 and
2005:
|
December
31,
|
|||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
|
|
Balance
|
|||||
|
at
beginning of period
|
$ 4,378
|
$ 4,197
|
$ 3,876
|
$ 3,664
|
$ 3,919
|
|
Charge-offs:
|
|||||
|
Real
estate:
|
|||||
|
Residential
|
76
|
31
|
64
|
37
|
43
|
|
Commercial
|
236
|
36
|
6
|
86
|
61
|
|
Agricultural
|
1
|
20
|
-
|
-
|
-
|
|
Loans
to individuals for household,
|
|||||
|
family
and other purchases
|
80
|
44
|
103
|
103
|
168
|
|
Commercial
and other loans
|
153
|
115
|
13
|
64
|
100
|
|
Total
loans charged-off
|
546
|
246
|
186
|
290
|
372
|
|
Recoveries:
|
|||||
|
Real
estate:
|
|
||||
|
Residential
|
1
|
6
|
2
|
6
|
2
|
|
Commercial
|
1
|
-
|
79
|
115
|
3
|
|
Agricultural
|
-
|
20
|
-
|
-
|
-
|
|
Loans
to individuals for household,
|
|||||
|
family
and other purchases
|
52
|
19
|
52
|
39
|
12
|
|
Commercial
and other loans
|
77
|
52
|
9
|
12
|
40
|
|
Total
loans recovered
|
131
|
97
|
142
|
172
|
57
|
|
Net
loans charged-off
|
415
|
149
|
44
|
118
|
315
|
|
Provision
charged to expense
|
925
|
330
|
365
|
330
|
60
|
|
Balance
at end of year
|
$ 4,888
|
$ 4,378
|
$ 4,197
|
$ 3,876
|
$ 3,664
|
|
Loans
outstanding at end of period
|
$ 456,384
|
$ 432,814
|
$ 423,379
|
$ 414,773
|
$ 382,803
|
|
Average
loans outstanding, net
|
$ 442,921
|
$ 423,382
|
$ 411,927
|
$ 400,507
|
$ 371,147
|
|
Non-performing
assets:
|
|||||
|
Non-accruing
loans
|
$ 5,871
|
$ 2,202
|
$ 1,915
|
$ 1,668
|
$ 1,898
|
|
Accrual
loans - 90 days or more past due
|
884
|
383
|
275
|
1,690
|
337
|
|
Total
non-performing loans
|
$ 6,755
|
$ 2,585
|
$ 2,190
|
$ 3,358
|
$ 2,235
|
|
Foreclosed
assets held for sale
|
302
|
591
|
203
|
758
|
619
|
|
Total
non-performing assets
|
$ 7,057
|
$ 3,176
|
$ 2,393
|
$ 4,116
|
$ 2,854
|
|
Net
charge-offs to average loans
|
0.09%
|
0.04%
|
0.01%
|
0.03%
|
0.08%
|
|
Allowance
to total loans
|
1.07%
|
1.01%
|
0.99%
|
0.93%
|
0.96%
|
|
Allowance
to total non-performing loans
|
72.36%
|
169.36%
|
191.64%
|
115.43%
|
163.94%
|
|
Non-performing
loans as a percent of loans
|
|||||
|
net
of unearned income
|
1.48%
|
0.60%
|
0.52%
|
0.81%
|
0.58%
|
|
Non-performing
assets as a percent of loans
|
|||||
|
net
of unearned income
|
1.55%
|
0.73%
|
0.57%
|
0.99%
|
0.75%
|
27
The
Company utilizes a disciplined and thorough loan review process based upon our
internal loan policy approved by the Company’s Board of
Directors. The purpose of the review is to assess loan quality,
analyze delinquencies, identify problem loans, evaluate potential charge-offs
and recoveries, and assess general overall economic conditions in the markets
served. An external independent loan review is performed on our
commercial portfolio semi-annually for the Company. As part of this
review, our underwriting process and loan grading system is
evaluated.
Management
believes it uses the best information available to make such determinations and
that the allowance for loan losses is adequate as of December 31,
2009. However, future adjustments could be required if circumstances
differ substantially from assumptions and estimates used in making the initial
determination. A prolonged downturn in the economy, continued high
unemployment rates, significant changes in the value of collateral and delays in
receiving financial information from borrowers could result in increased levels
of non-performing assets, charge-offs, loan loss provisions and reduction in
income. Additionally, bank regulatory agencies periodically examine
the Bank’s allowance for loan losses. The banking agencies could
require the recognition of additions to the allowance for loan losses based upon
their judgment of information available to them at the time of their
examination.
On a
monthly basis, problem loans are identified and updated primarily using
internally prepared past due reports. Based on data surrounding the
collection process of each identified loan, the loan may be added or deleted
from the monthly watch list. The watch list includes loans graded
special mention, substandard, doubtful, and loss, as well as additional loans
that management may choose to include. Watch list loans are
continually monitored going forward until satisfactory conditions exist that
allow management to upgrade and remove the loan from the
watchlist. In certain cases, loans may be placed on non-accrual
status or charged-off based upon management’s evaluation of the borrower’s
ability to pay. All commercial loans, which include commercial real
estate, agricultural real estate, state and political subdivision loans and
other commercial loans, on non-accrual are evaluated quarterly for
impairment.
The
adequacy of the allowance for loan losses is subject to a formal, quarterly
analysis by management of the Company. In order to better analyze the
risks associated with the loan portfolio, the entire portfolio is divided into
several categories. As stated above, loans on non-accrual status are
specifically reviewed for impairment and given a specific reserve, if
appropriate. Loans evaluated and not found to be impaired are
included with other performing loans, by category, by their respective
homogenous pools. Five year average historical loss factors are
calculated for each pool and applied to the performing portion of the loan
category. The historical loss factors for both reviewed and homogeneous pools
are adjusted based upon the following qualitative factors:
|
·
|
Level
of and trends in charge-offs and
recoveries
|
|
·
|
Trends
in volume, terms and nature of the loan
portfolio
|
|
·
|
Effects
of any changes in risk selection and underwriting standards and any other
changes in lending and recovery policies, procedures and
practices
|
|
·
|
Changes
in the quality of the Company’s loan review
system
|
|
·
|
Experience,
ability and depth of lending management and other relevant
staff
|
|
·
|
National,
state, regional and local economic trends and business
conditions
|
|
·
|
Industry
conditions including the effects of external factors such as competition,
legal, and regulatory requirements on the level of estimated credit
losses.
|
|
·
|
Existence
and effect of any credit concentrations, and changes in the level of such
concentrations
|
28
The
balance in the allowance for loan losses was $4,888,000 or 1.07% of total loans
as of December 31, 2009 as compared to $4,378,000 or 1.01% of loans as of
December 31, 2008. The $510,000 increase is a result of a $925,000
provision for loan losses less net charge-offs of $415,000. 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) as of December 31:
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|
|
Real
estate loans:
|
||||||||||
|
Residential
|
$ 801
|
42.7
|
$ 694
|
46.0
|
$ 599
|
47.7
|
$ 614
|
49.7
|
$ 493
|
51.1
|
|
Commercial,
agricultural
|
2,864
|
33.6
|
2,303
|
28.8
|
2,128
|
27.7
|
1,676
|
26.8
|
1,551
|
24.9
|
|
Construction
|
20
|
1.2
|
5
|
2.6
|
-
|
2.7
|
-
|
1.7
|
-
|
1.9
|
|
Loans
to individuals
|
||||||||||
|
for
household,
|
||||||||||
|
family
and other purchases
|
131
|
2.6
|
449
|
2.7
|
424
|
3.1
|
734
|
3.0
|
542
|
3.4
|
|
Commercial
and other loans
|
918
|
9.7
|
807
|
8.8
|
736
|
8.2
|
582
|
7.9
|
484
|
7.6
|
|
State
& political subdivision loans
|
93
|
10.1
|
19
|
11.1
|
22
|
10.6
|
22
|
10.9
|
21
|
11.1
|
|
Unallocated
|
61
|
N/A
|
101
|
N/A
|
288
|
N/A
|
248
|
N/A
|
573
|
N/A
|
|
Total
allowance for loan losses
|
$ 4,888
|
100.0
|
$ 4,378
|
100.0
|
$ 4,197
|
100.0
|
$ 3,876
|
100.0
|
$ 3,664
|
100.0
|
The
following table identifies amounts of loans contractually past due 30 to 90 days
and non-performing loans by loan category, as well as the change from December
31, 2008 to December 31, 2009 in non-performing loans (dollars in
thousands). Non-performing loans include those loans that are
contractually past due 90 days or more and non-accrual
loans. Interest does not accrue on non-accrual
loans. Subsequent cash payments received are applied to the
outstanding principal balance or recorded as interest income, depending upon
management's assessment of its ultimate ability to collect principal and
interest.
|
December
31, 2009
|
December
31, 2008
|
||||||||
|
Non-Performing
Loans
|
Non-Performing
Loans
|
||||||||
|
30
- 90 Days
|
90
Days Past
|
Non-
|
Total
Non-
|
30
- 90 Days
|
90
Days Past
|
Non-
|
Total
Non-
|
||
|
(in
thousands)
|
Past
Due
|
Due
Accruing
|
accrual
|
Performing
|
Past
Due
|
Due
Accruing
|
accrual
|
Performing
|
|
|
Real
estate:
|
|||||||||
|
Residential
|
$ 1,629
|
$ 75
|
$ 775
|
$ 850
|
$ 1,041
|
$ 267
|
$ 689
|
$ 957
|
|
|
Commercial
|
1,558
|
635
|
1,863
|
2,498
|
819
|
114
|
1,453
|
1,567
|
|
|
Agricultural
|
75
|
-
|
2,094
|
2,094
|
240
|
-
|
-
|
-
|
|
|
Construction
|
-
|
-
|
749
|
749
|
-
|
-
|
-
|
-
|
|
|
Loans
to individuals for household,
|
|||||||||
|
family
and other purchases
|
88
|
10
|
36
|
46
|
129
|
2
|
-
|
2
|
|
|
Commercial
and other loans
|
610
|
164
|
354
|
518
|
112
|
-
|
60
|
60
|
|
|
Total
nonperforming loans
|
$ 3,960
|
$ 884
|
$ 5,871
|
$ 6,755
|
$ 2,341
|
$ 383
|
$ 2,202
|
$ 2,586
|
|
29
|
Change in Non-Performing Loans
|
||
|
December
31, 2009 / 2008
|
||
|
(in
thousands)
|
Amount
|
%
|
|
Real
estate:
|
||
|
Residential
|
$ (107)
|
(11.2)
|
|
Commercial
|
931
|
59.4
|
|
Agricultural
|
2,094
|
-
|
|
Construction
|
749
|
-
|
|
Loans
to individuals for household,
|
|
|
|
family
and other purchases
|
44
|
2,200.0
|
|
Commercial
and other loans
|
458
|
763.3
|
|
Total
nonperforming loans
|
$ 4,169
|
161.2
|
For the year ended December 31, 2009 we recorded a provision for loan losses of $925,000 which compares to $330,000 for the same period in 2008, an increase of $595,000 or 180.0%. The significant increase is attributable to current economic conditions, an increase in non-performing loans as of December 31, 2009 and an increased level of charge-offs compared with the prior year. Non-performing loans increased $4.2 million, or 161.2%, from December 31, 2008 mainly due to the following:
|
·
|
An
agricultural customer with total loans of $3.0 million, $2.3 million of
which is an agricultural real estate loan and $700,000 is a related
construction loan. The current economic struggles of dairy
farmers, caused primarily from decreased milk prices, have created cash
flow difficulties for this customer. While we are hopeful that
increased milk prices would significantly improve cash flows for this
borrower and return them to current status, there is no certainty that
this will occur. Without a sizable and sustained increase in
milk prices, we will need to rely upon the collateral for repayment of
interest and principal. A real estate appraisal was completed
in October, 2009, which together with a collateral analysis on equipment
and livestock, resulted in an updated collateral value of approximately
$4.0 million. Based upon this analysis, management determined
not to allocate a specific reserve to this
loan.
|
|
·
|
A
real estate rental property with loans of $700,000 was placed on
non-accrual due to inadequate cash flows. This loan was
evaluated and found to be impaired and was subsequently written down in
the third quarter of 2009 by $175,000, to the net realizable
value.
|
|
·
|
A
commercial real estate property with a loan balance of $500,000 was past
due 90 days as of December 31, 2009. The downturn in the
economy has impacted commercial development activity and has negatively
affected the customer’s cash flow.
|
Bank
Owned Life Insurance
In 2008
and 2003 the Company purchased $3.4 and $7.0 million, respectively, of bank
owned life insurance to offset future employee benefit costs. The
Bank is the sole beneficiary on the policies, and will provide the Bank with an
asset that will generate earnings to partially offset the current costs of
benefits, and eventually (at the death of the insured’s) provide partial
recovery of cash outflows associated with the benefits. As of
December 31, 2009 and 2008, the cash surrender value of the life insurance was
$12.7 and $12.2 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
$492,000, $362,000 and $331,000 in 2009, 2008 and 2007,
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.
30
Other
Assets
2009
Other
assets increased 19.6% in 2009 to $9.7 million. The majority of this
increase is the result of increases in prepaid federal depository insurance and
regulatory stock of $2,814,000 and $586,000, respectively, offset by a decrease
in the deferred income tax asset of $1,288,000. The increase in the prepaid
federal depository insurance was the result of actions taken by the FDIC, which
are described above. The increase in regulatory stock was due to purchases made
to meet the requirements of the Federal Home Loan Bank of Pittsburgh (the
“FHLB”) and correspondent banks. The majority of the decrease in the deferred
income tax asset was the result of the activity related to the change in
unrealized gains on investments, goodwill amortization and the change in the
pension obligation.
2008
Other
assets decreased 6.2% in 2008 to $8.1 million. The majority of this
decrease is the result of a decrease in regulatory stock of $1,438,000 offset by
an increase in the deferred income tax asset of $594,000. The decrease in
regulatory stock was the result of a sale of stock in excess of the requirements
of the FHLB. The majority of the increase in the deferred income tax asset was
the result of the activity related to the change in unrealized gains on
investments, goodwill amortization, change in the pension obligation and the
allowance for losses on available for sale securities. .
Deposits
2009
As can be
seen in the tables below, total deposits increased $58.9 million in 2009, or
10.8%. The increase in deposits is due to several
reasons. Our market has been positively impacted from the Marcellus
Shale 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 on a national and local level has resulted in customers
seeking stability with strong, local community banks. Furthermore, our financial
performance, reputation as a strong, local community bank, acquisitions of local
competitors from institutions outside of our general market area and the fact
that the Company did not participate in the Troubled Asset Relief Program
Capital Purchase Program has positioned the Company as a leading financial
institution within our service area.
Non-interest
bearing deposits increased $4.5 million, or 8.1% in 2009. As a
percent to total, non-interest bearing deposits totaled 9.9% as of the end of
2009, which compares to 10.2% at the end of 2008. 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. We
are also 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 $20.8 million, or 18.0%, and savings deposits increased
$4.6 million, or 10.4%, since the end of 2008. The increase in NOW
accounts is due to state and local governmental agencies and our ability to meet
their financial needs. Additionally, the Company implemented a new
interest bearing checking account that rewards the customer based upon the usage
of their debit cards and participation in other electronic services in order to
qualify for higher interest rates earned on their
deposits. Certificates of deposit increased $28.5 million, or 9.8%
from 2008. The increase in certificates of deposit is primarily due to customers
shifting balances from lower paying deposit accounts into CD’s in order to
increase their return. As mentioned, oil and gas exploration
activities also has had a significant impact on this segment as well, with
approximately $26 million specifically in our Opportunity CD product as of
December 31, 2009.
31
2008
Total
deposits increased $90.7 million in 2008, or 19.9%. The increase in
deposits was due to several reasons. Products developed specifically
for the oil and gas exploration activities and customers seeking stability from
familiar local banks due to the turbulent and volatile financial markets
accounted for significant growth. Also, on November 21, 2008, our
Company gained approximately $16.9 million in deposits from a local branch
acquisition (see Note 19 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 compared to 11.2% at the end of 2007.
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 was 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 decreased short term rates significantly during 2008.
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.
The
following table shows the breakdown of deposits by deposit type (dollars in
thousands):
|
2009
|
2008
|
2007
|
||||
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|
|
Non-interest-bearing
deposits
|
$ 60,061
|
9.9
|
$ 55,545
|
10.2
|
$ 50,944
|
11.2
|
|
NOW
accounts
|
136,153
|
22.5
|
115,338
|
21.1
|
99,862
|
21.9
|
|
Savings
deposits
|
49,049
|
8.1
|
44,447
|
8.1
|
37,996
|
8.3
|
|
Money
market deposit accounts
|
42,210
|
7.0
|
41,752
|
7.6
|
51,398
|
11.3
|
|
Certificates
of deposit
|
318,086
|
52.5
|
289,598
|
53.0
|
215,828
|
47.3
|
|
Total
|
$ 605,559
|
100.0
|
$ 546,680
|
100.0
|
$ 456,028
|
100.0
|
|
2009/2008
|
2008/2007
|
|||
|
Change
|
Change
|
|||
|
Amount
|
%
|
Amount
|
%
|
|
|
Non-interest-bearing
deposits
|
$ 4,516
|
8.1
|
$ 4,601
|
9.0
|
|
NOW
accounts
|
20,815
|
18.0
|
15,476
|
15.5
|
|
Savings
deposits
|
4,602
|
10.4
|
6,451
|
17.0
|
|
Money
market deposit accounts
|
458
|
1.1
|
(9,646)
|
(18.8)
|
|
Certificates
of deposit
|
28,488
|
9.8
|
73,770
|
34.2
|
|
Total
|
$ 58,879
|
10.8
|
$ 90,652
|
19.9
|
Remaining
maturities of certificates of deposit of $100,000 or more are as follows
(dollars in thousands):
|
2009
|
2008
|
2007
|
|
|
3
months or less
|
$ 9,161
|
$ 7,152
|
$ 9,489
|
|
Over
3 months through 6 months
|
14,914
|
13,706
|
9,628
|
|
Over
6 months through 12 months
|
33,702
|
26,554
|
11,226
|
|
Over
12 months
|
62,775
|
50,297
|
27,794
|
|
Total
|
$ 120,552
|
$ 97,709
|
$ 58,137
|
|
As
a percent of total
|
|||
|
certificates
of deposit
|
37.90%
|
33.74%
|
26.94%
|
32
|
2009
|
2008
|
2007
|
||||
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|
|
Individual,
partnerships
|
||||||
|
&
corporations
|
$ 517,503
|
85.5
|
$ 465,234
|
85.1
|
$ 382,968
|
84.0
|
|
United
States government
|
907
|
0.1
|
2,069
|
0.4
|
752
|
0.1
|
|
State
& political subdivisions
|
87,149
|
14.4
|
79,377
|
14.5
|
72,308
|
15.9
|
|
Total
|
$ 605,559
|
100.0
|
$ 546,680
|
100.0
|
$ 456,028
|
100.0
|
Borrowed
Funds
2009
Borrowed
funds decreased $7.1 million during 2009, a decrease of 11.6%. As of
December 31, 2009 we had $39.0 million of term loans with the Federal Home Loan
Bank compared with $46.0 million outstanding as of December 31, 2008 (see Note
10 of the consolidated financial statements for additional
information). During 2009, $17.0 million of term loans
matured. We strategically replaced these funds with $10.0 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 2009. The
significant increase in our deposits continued to limit our need for short term
borrowings from the Federal Home Loan Bank during 2009 as the outstanding
balance on these arrangements was $0 at December 31, 2009 and 2008.
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. During 2008, $36.7 million of term loans matured, which were
replaced with $31.0 million of new term loans at various
maturities. 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.
Stockholders’
Equity
We
evaluate stockholders’ equity in relation to total assets and the risk
associated with those assets. The greater our 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 2009 and
2008, the Company paid out 29.9% and 40.8% of net income in dividends,
respectively.
For the
year ended December 31, 2009, the total number of common shares outstanding was
2,871,816. For comparative purposes, outstanding shares for prior periods were
adjusted for the July 2009 stock dividend in computing earnings and cash
dividends per share as detailed in Note 1 of the consolidated financial
statements. During 2009, we also purchased 13,575 shares of treasury
stock at a weighted average cost of $21.11 per share. The Company awarded 7,526
shares of restricted stock to employees and 900 shares to the Board of Directors
under equity incentive programs. The Company also awarded 1,530 shares of stock
to employees as an incentive for 2009.
There are
currently three federal regulatory measures of capital adequacy. The Company’s
ratios meet the regulatory standards for well capitalized for 2009 and 2008, as
detailed in Note 14 of the consolidated financial statements.
2009
Stockholders’
equity increased 16.6% in 2009 to $61.5 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 $6.7 million, or 12.8%. This increase is due to net
income of $9,864,000, offset by cash dividends of $2,951,000 and the purchase of
treasury stock of $286,000. All of the Company’s investment securities are
classified as available-for-sale, making this portion of the Company’s balance
sheet more sensitive to the changing market value of investments. Accumulated
other comprehensive income increased $1,435,000 from December 31, 2008 as result
of market value fluctuations. Total equity was approximately 8.4% of
total assets as of December 31, 2009, compared to 7.9% of total assets as of
December 31, 2008.
33
2008
Stockholders’
equity increased 8.7% in 2008 to $52.8 million. Excluding accumulated
other comprehensive income, stockholders’ equity increased $3.9 million, or
7.9%. This increase was 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.
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 and asset liability 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 a line of credit arrangement with
corresponding bank. 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 2009 totaled $1,566,000, which included:
|
§
|
Additional
expenditures to complete the new branch building in Troy totaling $769,000
and for furniture and equipment for the Troy branch office of
$190,000.
|
|
§
|
New
branch office in Wellsboro, which is in process, totaling
$312,000.
|
|
§
|
Roof
repairs and other building improvements for the Canton branch
$54,000
|
|
§
|
Upgrades
and new equipment associated with data processing branch capture and
security totaling $112,000.
|
Capital
expenditures in 2008 totaled $1,132,000, which included:
|
§
|
New
branch office in Troy which was in process, 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.
|
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 Bank
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 Bank also has a maximum borrowing capacity at the
Federal Home Loan Bank of approximately $263 million, inclusive of any
outstanding amounts, as an additional source of liquidity. The Bank
also had a federal fund line with a third party provider in the amount of
$10,000,000 as of December 31, 2009, which is unsecured. Subsequent to year end,
a borrower in custody agreement was established with the Federal Reserve Board
in the amount of $13.6 million, which is collateralized by $22.7 million of
municipal loans maintained in the Bank’s possession.
34
The
Company is a separate legal entity from the Bank and must provide for its own
liquidity. In addition to its operating expenses, the Company is
responsible for paying any dividends declared to its
shareholders. The Company also has repurchased shares of its common
stock. The Company’s primary source of income is dividends received
from the Bank. 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. At December 31, 2009, the Company had liquid assets of $4.9
million.
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.
Currently,
our Company has equity securities that represent only 0.2% of our investment
portfolio, and therefore equity risk is not significant.
The
primary factors that make assets interest-sensitive include adjustable-rate
features on loans and investments, loan repayments, investment maturities and
money market investments. 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):
35
|
Maturity
or Re-pricing of Company Assets and Liabilities as of December 31,
2009
|
|||||||
|
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
|
$ 21,944
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 21,944
|
|
Investment
securities
|
14,943
|
45,083
|
35,858
|
24,574
|
27,106
|
46,065
|
193,629
|
|
Residential
mortgage loans
|
31,472
|
50,903
|
50,125
|
32,974
|
32,376
|
2,758
|
200,608
|
|
Commercial
and agricultural loans
|
62,679
|
25,568
|
29,406
|
20,888
|
44,915
|
14,083
|
197,539
|
|
Loans
to state & political subdivisions
|
8,992
|
2,871
|
2,404
|
10,655
|
16,415
|
5,005
|
46,342
|
|
Other
loans
|
3,604
|
2,647
|
2,223
|
1,290
|
1,323
|
808
|
11,895
|
|
Total
interest-earning assets
|
$ 143,634
|
$ 127,072
|
$
120,016
|
$ 90,381
|
$
122,135
|
$ 68,719
|
$
671,957
|
|
Interest-bearing
liabilities:
|
|||||||
|
NOW
accounts
|
$ 71,423
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 64,730
|
$
136,153
|
|
Savings
accounts
|
-
|
-
|
-
|
-
|
-
|
49,049
|
49,049
|
|
Money
Market accounts
|
32,154
|
-
|
-
|
-
|
-
|
10,056
|
42,210
|
|
Certificates
of deposit
|
36,668
|
109,922
|
65,666
|
58,471
|
41,035
|
6,324
|
318,086
|
|
Short-term
borrowing
|
5,696
|
-
|
-
|
-
|
-
|
-
|
5,696
|
|
Long-term
borrowing
|
9,610
|
1,749
|
7,000
|
5,608
|
24,000
|
452
|
48,419
|
|
Total
interest-bearing liabilities
|
$ 155,551
|
$ 111,671
|
$ 72,666
|
$ 64,079
|
$ 65,035
|
$
130,611
|
$
599,613
|
|
Excess
interest-earning
|
|||||||
|
assets
(liabilities)
|
$ (11,917)
|
$ 15,401
|
$ 47,350
|
$ 26,302
|
$ 57,100
|
$(61,892)
|
|
|
Cumulative
interest-earning assets
|
$ 143,634
|
$ 270,706
|
$
390,722
|
$
481,103
|
$
603,238
|
$
671,957
|
|
|
Cumulative
interest-bearing liabilities
|
155,551
|
267,222
|
339,888
|
403,967
|
469,002
|
599,613
|
|
|
Cumulative
gap
|
$ (11,917)
|
$ 3,484
|
$ 50,834
|
$ 77,136
|
$
134,236
|
$ 72,344
|
|
|
Cumulative
interest rate
|
|||||||
|
sensitivity
ratio (1)
|
0.92
|
1.01
|
1.15
|
1.19
|
1.29
|
1.12
|
|
|
(1)
Cumulative interest-earning assets divided by interest-bearing
liabilities.
|
|||||||
The
previous table and the simulation models discussed below are presented assuming
money market investment accounts and NOW accounts in the top interest rate tier
are 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
Bank’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. We have not experienced
the kind of earnings volatility that might be indicated from gap analysis.
The Bank
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 and asset liability management processes that will effectively
identify, measure, and monitor the Bank’s risk exposure. In this
analysis, the Bank 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 and it is assumed that the change in
interest rates is instantaneous. The up 400 over 24 month scenario
assumes a parallel shift in rates to the extent possible and the change in rates
is assumed to occur over a 24 month period. 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, 2009 (dollars in thousands):
36
|
Change
In
|
%
Change In
|
||||
|
Prospective
One-Year
|
Prospective
|
Prospective
|
|||
|
Changes
in Rates
|
Net
Interest Income
|
Net
Interest Income
|
Net
Interest Income
|
||
|
-100
|
26,292
|
104
|
0.40
|
||
|
Base
|
26,188
|
-
|
-
|
||
|
+100
|
26,120
|
(68)
|
(0.26)
|
||
|
+200
|
25,971
|
(217)
|
(0.83)
|
||
|
+400
Over 24 Months
|
25,993
|
(195)
|
(0.74)
|
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 2009 to keep
short-term interest rates low was in response to various economic data including
a recessionary 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 the overall turbulence and volatility of the financial markets,
FDIC deposit insurance coverage increased to $250,000 for any deposit account
through December 31, 2009, which was subsequently extended to June
2014. 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.
37
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. For debt
securities, management considers whether the present value of cash flows
expected to be collected are less than the security’s amortized cost basis (the
difference defined as the credit loss), the magnitude and duration of the
decline, the reasons underlying the decline and the Company’s intent to sell the
security or whether it is more likely than not that the Company would be
required to sell the security before its anticipated recovery in market value,
to determine whether the loss in value is other than temporary. Once a decline
in value is determined to be other than temporary, if the Company does not
intend to sell the security, and it is more-likely-than-not that it will not be
required to sell the security, before recovery of the security’s amortized cost
basis, the charge to earnings is limited to the amount of credit loss. Any
remaining difference between fair value and amortized cost (the difference
defined as the non-credit portion) is recognized in other comprehensive income,
net of applicable taxes. Otherwise, the entire difference between fair value and
amortized cost is charged to earnings. 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.
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 the fair value of the
Company’s reporting units. If the fair value of the reporting unit is
less than its carrying value including goodwill, 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 12 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.
38
ITEM
8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
|
Citizens
Financial Services, Inc.
|
|||
|
Consolidated
Balance Sheet
|
|||
|
December
31,
|
|||
|
(in
thousands, except share data)
|
2009
|
2008
|
|
|
ASSETS:
|
|||
|
Cash
and cash equivalents:
|
|||
|
Noninterest-bearing
|
$ 9,505
|
$ 9,692
|
|
|
Interest-bearing
|
21,944
|
10,164
|
|
|
Total
cash and cash equivalents
|
31,449
|
19,856
|
|
|
Available-for-sale
securities
|
198,582
|
174,139
|
|
|
Loans
(net of allowance for loan losses:
|
|||
|
2009,
$4,888; 2008, $4,378)
|
451,496
|
428,436
|
|
|
Premises
and equipment
|
12,227
|
12,762
|
|
|
Accrued
interest receivable
|
3,141
|
2,912
|
|
|
Goodwill
|
10,256
|
10,256
|
|
|
Bank
owned life insurance
|
12,667
|
12,176
|
|
|
Other
assets
|
9,659
|
8,075
|
|
|
TOTAL
ASSETS
|
$ 729,477
|
$ 668,612
|
|
|
LIABILITIES:
|
|||
|
Deposits:
|
|||
|
Noninterest-bearing
|
$ 60,061
|
$ 55,545
|
|
|
Interest-bearing
|
545,498
|
491,135
|
|
|
Total
deposits
|
605,559
|
546,680
|
|
|
Borrowed
funds
|
54,115
|
61,204
|
|
|
Accrued
interest payable
|
2,037
|
2,233
|
|
|
Other
liabilities
|
6,239
|
5,725
|
|
|
TOTAL
LIABILITIES
|
667,950
|
615,842
|
|
|
STOCKHOLDERS'
EQUITY:
|
|||
|
Common
Stock
|
|||
|
$1.00
par value; authorized 10,000,000 shares;
|
|||
|
issued
3,076,253 and 3,048,289 shares
|
|||
|
in
2009 and 2008, respectively
|
3,076
|
3,048
|
|
|
Additional
paid-in capital
|
13,457
|
12,981
|
|
|
Retained
earnings
|
47,353
|
41,034
|
|
|
Accumulated
other comprehensive income
|
2,041
|
26
|
|
|
Treasury
stock, at cost:
|
|||
|
204,437
and 200,918 shares for 2009 and 2008, respectively
|
(4,400)
|
(4,319)
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
61,527
|
52,770
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ 729,477
|
$ 668,612
|
|
|
See
accompanying notes to consolidated financial statements.
|
|||
39
|
Citizens
Financial Services, Inc.
|
||||
|
Consolidated
Statement of Income
|
||||
|
Year
Ended December 31,
|
||||
|
(in
thousands, except per share data)
|
2009
|
2008
|
2007
|
|
|
INTEREST
AND DIVIDEND INCOME:
|
||||
|
Interest
and fees on loans
|
$ 30,305
|
$ 30,710
|
$ 30,398
|
|
|
Interest-bearing
deposits with banks
|
43
|
57
|
5
|
|
|
Investment
securities:
|
||||
|
Taxable
|
6,044
|
4,828
|
4,316
|
|
|
Nontaxable
|
2,195
|
1,475
|
958
|
|
|
Dividends
|
28
|
168
|
347
|
|
|
TOTAL
INTEREST AND DIVIDEND INCOME
|
38,615
|
37,238
|
36,024
|
|
|
INTEREST
EXPENSE:
|
||||
|
Deposits
|
11,222
|
11,492
|
13,363
|
|
|
Borrowed
funds
|
2,009
|
2,566
|
3,559
|
|
|
TOTAL
INTEREST EXPENSE
|
13,231
|
14,058
|
16,922
|
|
|
NET
INTEREST INCOME
|
25,384
|
23,180
|
19,102
|
|
|
Provision
for loan losses
|
925
|
330
|
365
|
|
|
NET
INTEREST INCOME AFTER PROVISION FOR
|
||||
|
LOAN
LOSSES
|
24,459
|
22,850
|
18,737
|
|
|
NON-INTEREST
INCOME:
|
||||
|
Service
charges
|
3,612
|
3,489
|
3,210
|
|
|
Trust
|
521
|
561
|
520
|
|
|
Brokerage
and Insurance
|
284
|
240
|
132
|
|
|
Investment
securities gains (losses), net
|
139
|
(4,089)
|
(29)
|
|
|
Gains
on loans sold
|
430
|
84
|
134
|
|
|
Earnings
on bank owned life insurance
|
492
|
362
|
331
|
|
|
Other
|
369
|
509
|
787
|
|
|
TOTAL
NON-INTEREST INCOME
|
5,847
|
1,156
|
5,085
|
|
|
NON-INTEREST
EXPENSES:
|
||||
|
Salaries
and employee benefits
|
9,472
|
8,725
|
8,386
|
|
|
Occupancy
|
1,179
|
1,162
|
1,151
|
|
|
Furniture
and equipment
|
437
|
479
|
539
|
|
|
Professional
fees
|
660
|
625
|
645
|
|
|
Federal
Depository Insurance
|
1,200
|
156
|
54
|
|
|
Other
|
4,811
|
4,730
|
4,539
|
|
|
TOTAL
NON-INTEREST EXPENSES
|
17,759
|
15,877
|
15,314
|
|
|
Income
before provision for income taxes
|
12,547
|
8,129
|
8,508
|
|
|
Provision
for income taxes
|
2,683
|
1,224
|
1,772
|
|
|
NET
INCOME
|
$ 9,864
|
$ 6,905
|
$ 6,736
|
|
|
NET
INCOME - EARNINGS PER SHARE
|
$ 3.43
|
$ 2.40
|
$ 2.33
|
|
|
CASH
DIVIDENDS PER SHARE
|
$ 1.03
|
$ 0.98
|
$ 0.89
|
|
|
See
accompanying notes to consolidated financial statements.
|
||||
40
|
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, 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, $.89 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 gain 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, $.98 per share
|
(2,815)
|
(2,815)
|
|||||
|
Balance,
December 31, 2008
|
3,048,289
|
3,048
|
12,981
|
41,034
|
26
|
(4,319)
|
52,770
|
|
Comprehensive
income:
|
|||||||
|
Net
income
|
9,864
|
9,864
|
|||||
|
Change
in unrecognized pension costs,
|
|||||||
|
net
of tax expense of $238
|
463
|
463
|
|||||
|
Change
in net unrealized gain on securities
|
|||||||
|
available-for-sale,
net of tax expense of $739
|
1,435
|
1,435
|
|||||
|
Change
in net unrealized loss on interest rate
|
|||||||
|
swap,
net of tax expense of $61
|
117
|
117
|
|||||
|
Total
comprehensive income
|
11,879
|
||||||
|
Stock
dividend
|
27,964
|
28
|
566
|
(594)
|
|
||
|
Purchase
of treasury stock (13,575 shares)
|
(286)
|
(286)
|
|||||
|
Restricted
stock awards
|
(147)
|
147
|
-
|
||||
|
Restricted
stock vesting
|
58
|
-
|
58
|
||||
|
Stock
awards
|
(1)
|
58
|
57
|
||||
|
Cash
dividends, $1.03 per share
|
(2,951)
|
(2,951)
|
|||||
|
Balance,
December 31, 2009
|
3,076,253
|
$ 3,076
|
$ 13,457
|
$ 47,353
|
$ 2,041
|
$ (4,400)
|
$ 61,527
|
41
|
2009
|
2008
|
2007
|
|
|
Components
of comprehensive income:
|
|||
|
Change
in net unrealized gain (loss) on investment
|
|||
|
securities
available-for-sale
|
$ 1,527
|
$ (1,107)
|
$ 874
|
|
Change
in unrecognized pension costs
|
463
|
(991)
|
496
|
|
Change
in unrealized loss on interest rate swap
|
117
|
(227)
|
-
|
|
Investment
losses (gains) included in net income, net
|
|||
|
of
tax (benefit) expense of $47, ($1,390), and ($10)
|
(92
)
|
2,699
|
19
|
|
Total
|
$ 2,015
|
$ 374
|
$ 1,389
|
|
See
accompanying notes to consolidated financial statements.
|
|||
42
|
Consolidated
Statement of Cash Flows
|
|||
|
Year
Ended December 31,
|
|||
|
(in
thousands)
|
2009
|
2008
|
2007
|
|
Cash
Flows from Operating Activities:
|
|||
|
Net
income
|
$ 9,864
|
$ 6,905
|
$ 6,736
|
|
Adjustments
to reconcile net income to net
|
|||
|
cash
provided by operating activities:
|
|||
|
Provision
for loan losses
|
925
|
330
|
365
|
|
Depreciation
and amortization
|
654
|
641
|
741
|
|
Amortization
and accretion on investment securities
|
486
|
12
|
124
|
|
Deferred
income taxes
|
245
|
(782)
|
54
|
|
Investment
securities (gains) losses, net
|
(139)
|
4,089
|
29
|
|
Earnings
on bank owned life insurance
|
(492)
|
(362)
|
(331)
|
|
Loss
(gains) on sale of foreclosed assets held for sale
|
10
|
(81)
|
(396)
|
|
Realized
gains on loans sold
|
(430)
|
(84)
|
(134)
|
|
Stock
awards
|
115
|
49
|
20
|
|
Originations
of loans held for sale
|
(21,715)
|
(4,365)
|
(6,689)
|
|
Proceeds
from sales of loans held for sale
|
22,145
|
4,449
|
6,823
|
|
Increase
in accrued interest receivable
|
(229)
|
(390)
|
(64)
|
|
Increase
in prepaid federal depository insurance
|
(2,814)
|
(5)
|
(13)
|
|
Increase
(decrease) in accrued interest payable
|
(196)
|
34
|
(88)
|
|
Other,
net
|
1,497
|
(34)
|
912
|
|
Net
cash provided by operating activities
|
9,926
|
10,406
|
8,089
|
|
Cash
Flows from Investing Activities:
|
|||
|
Available-for-sale
securities:
|
|||
|
Proceeds
from sales of available-for-sale securities
|
10,730
|
387
|
18,859
|
|
Proceeds
from maturity and principal repayments of securities
|
54,081
|
14,969
|
13,437
|
|
Purchase
of securities
|
(87,427)
|
(70,382)
|
(42,155)
|
|
Proceeds
from redemption of Regulatory Stock
|
-
|
5,044
|
3,676
|
|
Purchase
of Regulatory Stock
|
(586)
|
(3,606)
|
(4,489)
|
|
Net
increase in loans
|
(24,162)
|
(9,997)
|
(8,624)
|
|
Purchase
of Loans
|
-
|
(267)
|
-
|
|
Purchase
of bank owned life insurance
|
-
|
(3,436)
|
-
|
|
Purchase
of premises, equipment and software
|
(1,566)
|
(1,132)
|
(462)
|
|
Proceeds
from sale of premises and equipment
|
1,407
|
212
|
-
|
|
Proceeds
from sale of foreclosed assets held for sale
|
637
|
565
|
1,075
|
|
Deposit
acquisition premium
|
-
|
(1,718)
|
-
|
| Net cash used in investing activities |
(46,886)
|
(69,361) | (18,683) |
43
|
Cash
Flows from Financing Activities:
|
|||
|
Net
increase in deposits
|
58,879
|
73,762
|
9,513
|
|
Deposits
of acquired branches
|
-
|
16,889
|
-
|
|
Proceeds
from long-term borrowings
|
11,077
|
31,319
|
20,187
|
|
Repayments
of long-term borrowings
|
(17,576)
|
(17,493)
|
(4,406)
|
|
Net
increase (decrease) in short-term borrowed funds
|
(590)
|
(32,969)
|
(11,209)
|
|
Purchase
of treasury stock
|
(286)
|
(271)
|
(567)
|
|
Dividends
paid
|
(2,951)
|
(2,815)
|
(2,550)
|
|
Net
cash provided by financing activities
|
48,553
|
68,422
|
10,988
|
|
Net
increase in cash and cash equivalents
|
11,593
|
9,467
|
374
|
|
Cash
and Cash Equivalents at Beginning of Year
|
19,856
|
10,389
|
10,015
|
|
Cash
and Cash Equivalents at End of Year
|
$ 31,449
|
$ 19,856
|
$ 10,389
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|||
|
Interest
paid
|
$ 13,427
|
$ 14,024
|
$ 17,010
|
|
Income
taxes paid
|
$ 2,390
|
$ 2,015
|
$ 1,485
|
|
Non-cash
activities:
|
|||
|
Real
estate acquired in settlement of loans
|
$ 357
|
$ 942
|
$ 124
|
|
See
accompanying notes to consolidated financial statements.
|
44
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
Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic
280, Segment Reporting, 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 with original maturities of 90 or
less are considered cash equivalents. Net cash flows are reported for loan,
deposits and short term borrowing transactions.
45
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, 2009 and
2008.
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, 2009 and
2008.
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. For debt
securities, management considers whether the present value of cash flows
expected to be collected are less than the security’s amortized cost basis (the
difference defined as the credit loss), the magnitude and duration of the
decline, the reasons underlying the decline and the Company’s intent to sell the
security or whether it is more likely than not that the Company would be
required to sell the security before its anticipated recovery in market value,
to determine whether the loss in value is other than temporary. Once a decline
in value is determined to be other than temporary, if the Company does not
intend to sell the security, and it is more-likely-than-not that it will not be
required to sell the security, before recovery of the security’s amortized cost
basis, the charge to earnings is limited to the amount of credit loss. Any
remaining difference between fair value and amortized cost (the difference
defined as the non-credit portion) is recognized in other comprehensive income,
net of applicable taxes. Otherwise, the entire difference between fair value and
amortized cost is charged to earnings. 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. 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, Federal Home Loan Bank and correspondent
banks represent 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.
46
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, agricultural 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, agricultural 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 collateral
dependent loan, 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 and losses 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 40 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.
47
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 FASB ASC Topic 350-20 –
Goodwill. This topic 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,
no impairment of goodwill was recognized in 2009 or 2008.
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
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). Under the plan, the Company also makes contributions on
behalf of eligible employees, which vest immediately..
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.
48
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
In
December 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, 2009 and 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 years ended December 31, 2009
and 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 June
2009, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) No. 2009-01, Topic 105 - Generally Accepted
Accounting Principles - FASB Accounting Standards Codification™ and the
Hierarchy of Generally Accepted Accounting Principles. The Codification is the
single source of authoritative nongovernmental U.S. generally accepted
accounting principles (GAAP). The Codification does not change
current GAAP, but is intended to simplify user access to all authoritative GAAP
by providing all the authoritative literature related to a particular topic in
one place. Rules and interpretive releases of the SEC under federal
securities laws are also sources of authoritative GAAP for SEC registrants. The
Company adopted this standard for the interim reporting period ending September
30, 2009. The adoption of this standard did not have a material impact on the
Company’s results of operations or financial position.
In June
2008, the FASB issued accounting guidance related to determining whether
instruments granted in share-based payment transactions are participating
securities, which is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those
years. This guidance clarified that instruments granted in
share-based payment transactions can be participating securities prior to the
requisite service having been rendered. A basic principle of this
guidance 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. 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 this
guidance. This accounting guidance was subsequently codified into ASC
Topic 260, Earnings Per
Share. The adoption of this new guidance did not have a material
impact on the Company’s results of operations or financial position
49
In April
2009, the FASB issued new guidance impacting ASC Topic 820, Fair Value Measurements and
Disclosures. This ASC provides additional guidance in
determining fair values when there is no active market or where the price inputs
being used represent distressed sales. It reaffirms the need to use
judgment to ascertain if a formerly active market has become inactive and in
determining fair values when markets have become inactive. The
adoption of this new guidance did not have a material effect on the Company’s
results of operations or financial position.
In
September 2006, the FASB issued an accounting standard related to fair
value measurements, which was effective for the Company on January 1,
2008. This standard defined fair value, established a framework for
measuring fair value, and expanded disclosure requirements about fair value
measurements. On January 1, 2008, the provisions of this accounting
standard became effective for the Company’s financial assets and financial
liabilities and on January 1, 2009 for nonfinancial assets and nonfinancial
liabilities. This accounting standard was subsequently codified into
ASC Topic 820, Fair Value
Measurements and Disclosures. See Note 16 for the necessary
disclosures.
In August
2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and
Disclosures (Topic 820) – Measuring Liabilities at Fair
Value. This ASU provides amendments for fair value
measurements of liabilities. It provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more techniques. ASU 2009-05 also clarifies that when
estimating a fair value of a liability, a reporting entity is not required to
include a separate input or adjustment to other inputs relating to the existence
of a restriction that prevents the transfer of the liability. ASU
2009-05 is effective for the first reporting period (including interim periods)
beginning after issuance or fourth quarter 2009. The adoption of this
new guidance did not have a material impact on the Company’s financial position
or results of operations.
In April
2009, the FASB issued new guidance impacting ASC 825-10-50, Financial Instruments, which
relates to fair value disclosures for any financial instruments that are not
currently reflected on the balance sheet of companies at fair
value. This guidance amended existing GAAP to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial
statements. This guidance is effective for interim and annual periods
ending after June 15, 2009. The adoption of this new guidance did not
have a material impact on the Company’s financial position or results of
operations.
In April
2009, the FASB issued new guidance impacting ASC 320-10, Investments — Debt and Equity
Securities, which provides additional guidance designed to create greater
clarity and consistency in accounting for and presenting impairment losses on
securities. This guidance is effective for interim and annual periods
ending after June 15, 2009. The adoption of this new guidance did not
have a material impact on the Company’s financial position or results of
operations.
In
June 2009, the FASB issued an accounting standard related to the accounting
for transfers of financial assets, which is effective for fiscal years beginning
after November 15, 2009, and interim periods within those fiscal
years. This standard enhances reporting about transfers of financial
assets, including securitizations, and where companies have continuing exposure
to the risks related to transferred financial assets. This standard eliminates
the concept of a “qualifying special-purpose entity” and changes the
requirements for derecognizing financial assets. This standard also requires
additional disclosures about all continuing involvements with transferred
financial assets including information about gains and losses resulting from
transfers during the period. This accounting standard was
subsequently codified into ASC Topic 860, Transfers and
Servicing. The Company is currently evaluating the impact the
adoption of the standard will have on the Company’s results of
operations
In
December 2007, the FASB issued an accounting standard related to
noncontrolling interests in consolidated financial statements, which is
effective for fiscal years beginning on or after December 15,
2008. This standard establishes 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. This accounting standard was subsequently
codified into ASC 810-10, Consolidation. The
adoption of this standard did not have a material effect on the Company’s
financial statements.
50
On April
1, 2009, the FASB issued new authoritative accounting guidance under ASC
Topic 805, Business
Combinations, which became effective for periods beginning after December
15, 2008. ASC Topic 805 applies to all transactions and other
events in which one entity obtains control over one or more other businesses.
ASC Topic 805 requires an acquirer, upon initially obtaining control of
another entity, to recognize the assets, liabilities and any non-controlling
interest in the acquiree at fair value as of the acquisition date. Contingent
consideration is required to be recognized and measured at fair value on the
date of acquisition rather than at a later date when the amount of that
consideration may be determinable beyond a reasonable doubt. This fair value
approach replaces the cost-allocation process required under previous accounting
guidance whereby the cost of an acquisition was allocated to the individual
assets acquired and liabilities assumed based on their estimated fair value. ASC
Topic 805 requires acquirers to expense acquisition-related costs as
incurred rather than allocating such costs to the assets acquired and
liabilities assumed, as was previously the case under prior accounting guidance.
Assets acquired and liabilities assumed in a business combination that arise
from contingencies are to be recognized at fair value if fair value can be
reasonably estimated. If fair value of such an asset or liability cannot be
reasonably estimated, the asset or liability would generally be recognized in
accordance with ASC Topic 450, Contingencies. Under ASC
Topic 805, the requirements of ASC Topic 420, Exit or Disposal Cost
Obligations, would have to be met in order to accrue for a restructuring
plan in purchase accounting. Pre-acquisition contingencies are to be recognized
at fair value, unless it is a non-contractual contingency that is not likely to
materialize, in which case, nothing should be recognized in purchase accounting
and, instead, that contingency would be subject to the probable and estimable
recognition criteria of ASC Topic 450, Contingencies. The adoption
of this new guidance did not have a material impact on the Company’s financial
position or results of operations.
In
June 2009, the FASB issued new authoritative accounting guidance under ASC
Topic 810, Consolidation, which amends
prior guidance to change how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a company is
required to consolidate an entity is based on, among other things, an entity’s
purpose and design and a company’s ability to direct the activities of the
entity that most significantly impact the entity’s economic performance. The new
authoritative accounting guidance requires additional disclosures about the
reporting entity’s involvement with variable-interest entities and any
significant changes in risk exposure due to that involvement as well as its
affect on the entity’s financial statements. The new authoritative accounting
guidance under ASC Topic 810 will be effective January 1, 2010 and the
Company is currently evaluating the impact the adoption of the standard will
have on the Company’s financial position or results of operation.
On
December 30, 2008, the FASB issued new authoritative accounting guidance under
ASC Topic 715, Compensation—Retirement
Benefits, which provides guidance related to an employer’s disclosures
about plan assets of defined benefit pension or other post-retirement benefit
plans. Under ASC Topic 715, disclosures should provide users of financial
statements with an understanding of how investment allocation decisions are
made, the factors that are pertinent to an understanding of investment policies
and strategies, the major categories of plan assets, the inputs and valuation
techniques used to measure the fair value of plan assets, the effect of fair
value measurements using significant unobservable inputs on changes in plan
assets for the period and significant concentrations of risk within plan assets.
This guidance is effective fiscal year ending after December 15,
2009. The new authoritative accounting guidance under ASC
Topic 715 became effective for the Company’s financial statements for the
year-ended December 31, 2009 and the required disclosures are reported in
Note 11.
51
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 2,873,488, 2,878,907 and 2,896,689
for 2009, 2008 and 2007, respectively.
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 $1,023,000 and $1,317,000 at December 31, 2009 and 2008,
respectively.
Non-retirement
account deposits with one financial institution are insured up to $250,000
through June 2014. 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,
2009 and 2008 were as follows (in thousands):
|
Gross
|
Gross
|
Estimated
|
||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|
|
December
31, 2009
|
Cost
|
Gains
|
Losses
|
Value
|
|
Available-for-sale
securities:
|
||||
|
U.S.
Agency securities
|
$ 64,583
|
$ 888
|
$ (248)
|
$ 65,223
|
|
Obligations
of state and
|
||||
|
political
subdivisions
|
58,651
|
1,085
|
(162)
|
59,574
|
|
Corporate
obligations
|
2,998
|
168
|
-
|
3,166
|
|
Mortgage-backed
securities
|
67,026
|
3,168
|
-
|
70,194
|
|
Equity
securities
|
371
|
54
|
-
|
425
|
|
Total
available-for-sale securities
|
$ 193,629
|
$ 5,363
|
$ (410)
|
$ 198,582
|
52
|
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
|
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,
2009 and 2008 (in thousands). As of December 31, 2009 and 2008, the
Company owned 33 and 47 securities whose estimated fair value was less than
their cost basis, respectively.
|
December
31, 2009
|
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
|
$ 28,665
|
$ 248
|
$ -
|
$ -
|
$ 28,665
|
$ 248
|
|
|
Obligations
of states and
|
|||||||
|
political
subdivisions
|
11,326
|
120
|
454
|
42
|
11,780
|
162
|
|
|
Total
securities
|
$ 39,991
|
$ 368
|
$ 454
|
$ 42
|
$ 40,445
|
$ 410
|
|
|
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
|
|
53
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 management considers whether the present value of cash
flows expected to be collected are less than the security’s amortized cost basis
(the difference defined as the credit loss), the magnitude and duration of the
decline, the reasons underlying the decline and the Company’s intent to sell the
security or whether it is more likely than not that the Company would be
required to sell the security before its anticipated recovery in market value,
to determine whether the loss in value is other than temporary. Once a decline
in value is determined to be other than temporary, if the Company does not
intend to sell the security, and it is more-likely-than-not that it will not be
required to sell the security, before recovery of the security’s amortized cost
basis, the charge to earnings is limited to the amount of credit loss. Any
remaining difference between fair value and amortized cost (the difference
defined as the non-credit portion) is recognized in other comprehensive income,
net of applicable taxes. Otherwise, the entire difference between fair value and
amortized cost is charged to earnings. 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 2009, 2008, and 2007 were
$10,730,000, $387,000 and $18,859,000, respectively. The gross gains
realized during 2009 consisted of realized gains of $32,000, $157,000, $86,000
and $21,000 from the sale of an agency security, two mortgage backed securities,
a corporate bond and an equity security respectively. The gross losses incurred
during 2009 were made up of realized losses of $22,000, $27,000 and $54,000 from
the sale of a corporate bond, three municipal securities and one equity security
and an impairment charge of our Freddie Mac preferred stock in the amount of
$54,000. The gross losses incurred during 2008 were made up of 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. The gross gains
realized during 2008 consisted of realized gains of $13,000 and $30,000 from the
call of a municipal bond and the sale of an equity security. The gross gains
realized during 2007 of $166,000 were the result of the sale of 6 agency
securities. The gross losses incurred during 2007 consisted of realized losses
of $19,000 and $176,000 from the sale of an agency security and five mortgage
backed securities. Gross gains and gross losses were realized as follows (in
thousands):
|
2009
|
2008
|
2007
|
|
|
Gross
gains
|
$
296
|
$ 43
|
$ 166
|
|
Gross
losses
|
157
|
4,132
|
195
|
|
Net gains
(losses)
|
$
139
|
$ (4,089)
|
$ (29)
|
Investment
securities with an approximate carrying value of $144,880,000 and $106,669,000
at December 31, 2009 and 2008, 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, 2009, by contractual maturity, are shown below (in
thousands):
|
Amortized
|
Estimated
|
||
|
Cost
|
Fair
Value
|
||
|
Available-for-sale
securities:
|
|||
|
Due
in one year or less
|
$ 3,717
|
|
$ 3,797
|
|
Due
after one year through five years
|
32,202
|
|
32,526
|
|
Due
after five years through ten years
|
32,880
|
|
33,784
|
|
Due
after ten years
|
124,459
|
128,050
|
|
|
Total
|
$ 193,258
|
$ 198,157
|
54
4.
LOANS
The
Company grants commercial, industrial, agricultural, 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, 2009 and 2008, 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,
|
||
|
2009
|
2008
|
|
|
Real
estate loans:
|
||
|
Residential
|
$ 194,989
|
$ 199,118
|
|
Commercial
|
133,953
|
107,740
|
|
Agricultural
|
19,485
|
17,066
|
|
Construction
|
5,619
|
11,118
|
|
Loans
to individuals for household,
|
||
|
family
and other purchases
|
11,895
|
11,651
|
|
Commercial
and other loans
|
44,101
|
37,968
|
|
State
and political subdivision loans
|
46,342
|
48,153
|
|
456,384
|
432,814
|
|
|
Less
allowance for loan losses
|
4,888
|
4,378
|
|
Loans,
net
|
$ 451,496
|
$ 428,436
|
Real
estate loans serviced for Freddie Mac and Fannie Mae, which are not included in
the consolidated balance sheet, totaled $49,225,000 and $37,523,000 at December
31, 2009 and 2008, respectively.
At
December 31, 2009 and 2008, net unamortized loan fees and costs of $1,176,000
and $1,060,000, respectively, have been deducted from the carrying value of
loans.
The
Company had non-accrual loans, inclusive of impaired loans, of $5,871,000 and
$2,202,000 at December 31, 2009 and 2008, respectively. Interest
income on loans would have increased by approximately $331,000, $112,000 and
$230,000 during 2009, 2008 and 2007, 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):
|
2009
|
2008
|
2007
|
|
|
Impaired
loans without related allowance for loan losses
|
$ 4,345
|
$ 684
|
$ 796
|
|
Impaired
loans with related allowance for loan losses
|
799
|
938
|
292
|
|
Related
allowance for loan losses
|
115
|
108
|
146
|
|
Average
recorded balance of impaired loans
|
2,949
|
1,521
|
1,366
|
|
Interest
income recognized on impaired loans
|
22
|
156
|
25
|
55
Changes
in the allowance for loan losses were as follows (in thousands):
|
Year
Ended December 31,
|
|||
|
|
2009
|
2008
|
2007
|
|
Balance,
beginning of year
|
$ 4,378
|
$ 4,197
|
$ 3,876
|
|
Provision
charged to income
|
925
|
330
|
365
|
|
Recoveries
on loans previously
|
|||
|
charged
against the allowance
|
131
|
97
|
142
|
|
5,434
|
4,624
|
4,383
|
|
|
Loans
charged against the allowance
|
(546)
|
(246)
|
(186)
|
|
Balance,
end of year
|
$ 4,888
|
$ 4,378
|
$ 4,197
|
The
following is a summary of the past due and non-accrual loans as of December 31,
2009 and 2008 (in thousands):
|
December
31, 2009
|
|||
|
Past
Due
|
Past
Due
|
||
|
30
- 89 days
|
90
days or more
|
Nonaccrual
|
|
|
Real
estate loans
|
$ 3,262
|
$ 728
|
$ 5,516
|
|
Installment
loans
|
106
|
10
|
1
|
|
Commercial
and all other loans
|
592
|
146
|
354
|
|
Total
|
$ 3,960
|
$ 884
|
$ 5,871
|
|
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
|
5.
PREMISES & EQUIPMENT
Premises
and equipment are summarized as follows (in thousands):
|
December
31,
|
||
|
2009
|
2008
|
|
|
Land
|
$ 3,584
|
$ 3,890
|
|
Buildings
|
11,546
|
11,381
|
|
Furniture,
fixtures and equipment
|
7,572
|
7,318
|
|
Construction
in process
|
365
|
753
|
|
23,067
|
23,342
|
|
|
Less:
accumulated depreciation
|
10,840
|
10,580
|
|
Premises
and equipment, net
|
$ 12,227
|
$ 12,762
|
56
6.
GOODWILL
A summary
of goodwill is as follows (in thousands):
|
December 31,
|
||
|
2009
|
2008
|
|
|
Beginning
carrying amount
|
$ 11,036
|
$ 9,385
|
|
Add: amount
related to acquisition
|
-
|
1,651
|
|
Gross
carrying amount
|
$ 11,036
|
$ 11,036
|
|
Less:
accumulated amortization
|
780
|
780
|
|
Net
carrying amount
|
$ 10,256
|
$ 10,256
|
The gross
carrying amount of goodwill is tested for impairment on an annual
basis. Based on the fair value of the reporting unit, no goodwill
impairment loss was recognized in 2009, 2008 or 2007.
7.
CORE DEPOSIT INTANGIBLE ASSETS
A summary
of core deposit intangible assets is as follows (in thousands):
|
December 31,
|
||
|
2009
|
2008
|
|
|
Beginning
carrying amount
|
$ 3,619
|
$ 3,553
|
|
Add: amount
related to acquisition
|
-
|
66
|
|
Gross
carrying amount
|
$ 3,619
|
$ 3,619
|
|
Less:
accumulated amortization
|
3,570
|
3,410
|
|
Net
carrying amount
|
$ 49
|
$ 209
|
Amortization
expense amounted to $160,000, $145,000 and $144,000 for 2009, 2008 and 2007,
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, 2010
|
$ 17
|
|
For
the year ended December 31, 2011
|
17
|
|
For
the year ended December 31, 2012
|
15
|
|
Total
|
$ 49
|
8.
FEDERAL HOME LOAN BANK (FHLB) STOCK
The Bank
is a member of the FHLB system. Members are required to own a certain amount of
stock based on the level of borrowings and other factors, and may invest in
additional amounts. FHLB stock is carried at cost, classified as a restricted
security, and periodically evaluated for impairment. Because this stock is
viewed as a long term investment, impairment is based on ultimate recovery of
par value.
As of
December 31, 2009, the Bank holds $3,682,000 of stock in FHLB. In December 2008,
the FHLB announced that due largely to a decline in the fair value of a segment
of its mortgage-backed securities portfolio, it had suspended payment of
dividends on the stock and made a decision to no longer purchase “excess stock”
from its members. The Bank’s stock is not transferrable and can only be redeemed
by FHLB. Further deterioration in the financial condition of FHLB may lead
management to a conclusion that the cost of the Bank’s stock in FHLB is not
recoverable, which would result in a charge to earnings for impairment of the
Bank’s holdings of the stock. As of December 31, 2009 and 2008, the investment
in FHLB is not deemed other-than-temporarily impaired based upon management’s
determination of the recoverability of par value.
57
9.
DEPOSITS
Certificates
of deposit of $100,000 or more amounted to $120,552,000 and $97,709,000 at
December 31, 2009 and 2008, respectively. Interest expense on certificates of
deposit of $100,000 or more amounted to $3,353,000, $2,815,000 and $2,864,000
for the years ended December 31, 2009, 2008, and 2007,
respectively.
Following
are maturities of certificates of deposit as of December 31, 2009 (in
thousands):
|
2010
|
$ 146,590
|
||
|
2011
|
65,666
|
||
|
2012
|
58,471
|
||
|
2013
|
19,754
|
||
|
2014
|
21,281
|
||
|
Thereafter
|
6,324
|
||
|
Total certificates of deposit
|
$ 318,086
|
||
10.
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
|
|
2009
|
|||||||
|
Balance
at December 31
|
$ 7,615
|
$ -
|
$ -
|
$ -
|
$ 7,500
|
$ 39,000
|
$ 54,115
|
|
Highest
balance at any month-end
|
9,114
|
-
|
-
|
-
|
7,500
|
44,000
|
60,614
|
|
Average
balance
|
8,360
|
-
|
-
|
16
|
7,500
|
42,258
|
58,134
|
|
Weighted
average interest rate:
|
|||||||
|
Paid
during the year
|
1.16%
|
0.00%
|
0.00%
|
0.51%
|
5.87%
|
3.47%
|
3.41%
|
|
As
of year-end
|
1.16%
|
0.00%
|
0.00%
|
0.00%
|
5.87%
|
3.27%
|
3.28%
|
|
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%
|
58
(a) Securities
sold under agreements to repurchase mature within 5 years. The carrying value of
the underlying securities pledged at December 31, 2009 and 2008 was $9,994,000
and $11,348,000, 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
$262,795,000, inclusive of any outstanding advances. FHLB advances are secured
by a blanket security agreement that includes the Company’s FHLB stock, as well
as certain investment and mortgage-backed securities held in safekeeping at the
FHLB and certain residential and commercial mortgage loans. At
December 31, 2009 and 2008, the approximate carrying value of the securities
collateral was $31,747,000 and $54,093,000, respectively.
(d) The
federal funds line consists of an unsecured line from a third party bank at
market rates. The Company has a borrowing limit of $10,000,000,
inclusive of any outstanding balances. No specific collateral is
required to be pledged for these borrowings.
(e) In
December 2003, the Company formed a special purpose entity (“Entity”) to issue
$7,500,000 of floating rate obligated mandatory redeemable securities as part of
a pooled offering. The rate 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, 2009 and 2008 was a liability of $166,000 and $344,000,
respectively, 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
|
2009
|
2008
|
|
|
Fixed:
|
||||
|
5.26%
|
January
20, 2009
|
-
|
5,000
|
|
|
3.99%
|
February
25, 2009
|
-
|
2,000
|
|
|
5.25%
|
April
20, 2009
|
-
|
5,000
|
|
|
2.57%
|
September
3, 2009
|
-
|
2,000
|
|
|
3.80%
|
December
31, 2009
|
-
|
3,000
|
|
|
3.23%
|
January
14, 2010
|
2,000
|
2,000
|
|
|
2.82%
|
May
10, 2010
|
1,000
|
1,000
|
|
|
3.12%
|
May
9, 2011
|
1,000
|
1,000
|
|
|
3.73%
|
July
11, 2011
|
2,000
|
2,000
|
|
|
3.79%
|
August
22, 2011
|
1,000
|
1,000
|
|
|
3.70%
|
September
6, 2011
|
1,000
|
1,000
|
|
|
3.62%
|
September
6, 2011
|
2,000
|
2,000
|
|
|
3.57%
|
May
7, 2012
|
2,000
|
2,000
|
|
|
3.36%
|
May
9, 2012
|
2,000
|
2,000
|
|
|
3.89%
|
September
5, 2012
|
1,000
|
1,000
|
|
|
2.72%
|
March
31, 2013
|
1,150
|
-
|
|
|
2.58%
|
April
28, 2013
|
2,000
|
-
|
|
|
2.37%
|
May
5, 2013
|
2,000
|
-
|
|
|
3.75%
|
May
6, 2013
|
2,000
|
2,000
|
|
|
3.55%
|
May
9, 2013
|
2,000
|
2,000
|
|
|
2.26%
|
May
15, 2013
|
1,650
|
-
|
|
|
3.42%
|
December
2, 2013
|
5,000
|
5,000
|
|
|
3.52%
|
December
5, 2013
|
5,000
|
5,000
|
|
|
2.80%
|
April
17, 2014
|
3,200
|
-
|
|
|
Total
term loans
|
$ 39,000
|
$ 46,000
|
||
59
|
2010
|
$ 17,055
|
|
|
2011
|
7,000
|
|
|
2012
|
5,608
|
|
|
2013
|
20,800
|
|
|
2014
|
3,200
|
|
|
2015
|
452
|
|
|
Total
borrowed funds
|
$ 54,115
|
11.
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. For the years ended December 31, 2009
and 2008, contributions to the plan totaled $750,000 and $486,000,
respectively.
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. Contributions by the Company totaled $2,000 and
$0 for 2009 and 2008, respectively.
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):
|
2009
|
2008
|
|||||
|
Change
in benefit obligation
|
||||||
|
Benefit
obligation at beginning of year
|
$
|
7,114
|
$
|
7,016
|
||
|
Service
cost
|
330
|
324
|
||||
|
Interest
cost
|
424
|
407
|
||||
|
Actuarial
(Gain) / Loss
|
51
|
(398)
|
||||
|
Benefits
paid
|
(471)
|
(235)
|
||||
|
Benefit
obligation at end of year
|
7,448
|
7,114
|
||||
|
Change
in plan assets
|
||||||
|
Fair
value of plan assets at beginning of year
|
5,149
|
6,313
|
||||
|
Actual
return (loss) on plan assets
|
1,030
|
(1,415)
|
||||
|
Employer
contribution
|
750
|
486
|
||||
|
Benefits
paid
|
(471)
|
(235)
|
||||
|
Fair
value of plan assets at end of year
|
6,458
|
5,149
|
||||
|
Funded
status
|
$
|
(990)
|
$
|
(1,965)
|
||
|
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
|
$
|
2,179
|
$
|
2,922
|
||
|
Prior
service cost
|
(485)
|
(527)
|
||||
|
Total
|
$
|
1,694
|
$
|
2,395
|
||
60
The
accumulated benefit obligation for the defined benefit pension plan was
$7,147,000 and $6,638,000 at December 31, 2009 and 2008,
respectively. Information where the accumulated benefit obligation is
in excess of plan assets at December 31 is as follows (in
thousands):
|
2009
|
|||
|
Projected
benefit obligation
|
$
|
7,448
|
|
|
Accumulated
benefit obligation
|
7,147
|
||
|
Fair
value of plan assets
|
6,458
|
||
The
components of net periodic benefit costs for the periods ending December 31 are
as follows (in thousands):
|
2009
|
2008
|
2007
|
|||||
|
Service
cost
|
$
|
330
|
$
|
324
|
$
|
421
|
|
|
Interest
cost
|
424
|
407
|
407
|
||||
|
Return
on plan assets
|
(415)
|
(503)
|
(468)
|
||||
|
Net
amortization and deferral
|
137
|
18
|
73
|
||||
|
Net
periodic benefit cost
|
$
|
476
|
$
|
246
|
$
|
433
|
|
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 2010
is $110,300 and $(42,600), respectively.
The
weighted-average assumptions used to determine benefit obligations at December
31:
|
2009
|
2008
|
||||
|
Discount
rate
|
5.75%
|
6.00%
|
|||
|
Rate
of compensation increase
|
3.25%
|
3.25%
|
|||
61
The
weighted-average assumptions used to determine net periodic benefit cost for the
year ended December 31:
|
2009
|
2008
|
2007
|
|||||
|
Discount
rate
|
6.00%
|
6.00%
|
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%. At December 31, 2009, 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. The following table sets forth by level, within
the fair value hierarchy, the Plan’s assets at fair value as of December 31,
2009:
|
(In
thousands)
|
December
31, 2009
|
||||||||
|
Level
1
|
Level
II
|
Level
III
|
Total
|
||||||
|
Assets
|
|||||||||
|
Cash
and cash equivalents
|
$ 682
|
$ 682
|
|||||||
|
Equity
Securities
|
|||||||||
|
U.S.
Companies
|
2,424
|
2,424
|
|||||||
|
Mutual
Funds
|
1,679
|
1,679
|
|||||||
|
Corporate
Bonds
|
$ 906
|
906
|
|||||||
|
U.S.
Agency Securities
|
767
|
767
|
|||||||
|
Total
|
$ 4,785
|
$ 1,673
|
$ -
|
$ 6,458
|
|||||
|
(a)
|
This
category comprises mutual funds investing in domestic large-cap, mid-caps,
small caps, international large cap, emerging markets and
commodities.
|
Equity
securities include the Company’s common stock in the amounts of $277,000 (4.3%
of total plan assets) and $217,500 (4.2% of total plan assets) at December 31,
2009 and 2008, respectively.
The Bank
expects to contribute $500,000 to its pension plan in 2010. Expected
future benefit payments that the Bank estimates from its pension plan are as
follows (in thousands):
|
2010
|
$ 293
|
|
|
2011
|
281
|
|
|
2012
|
361
|
|
|
2013
|
263
|
|
|
2014
|
608
|
|
|
2015
- 2019
|
3,151
|
62
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 $212,000 and $203,000 for 2009 and 2008,
respectively.
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 $36,000, $40,000 and $47,000
for the years ended December 31, 2009, 2008 and 2007, 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. As of December 31, 2009, 84,067 shares remain available to
be issued under the Plan. 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
2009 and 2008, 7,526 and 4,993 shares of restricted stock were awarded and 2,630
and 1,247 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 $98,000, $56,000 and $23,000 for the years ended December 31, 2009,
2008 and 2007, 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, 2009 and 2008, an obligation of $399,000 and $188,000,
respectively, was included in other liabilities for this plan in the
consolidated balance sheet. Expenses related to this plan totaled
$211,000 and $188,000 for the years ended December 31, 2009 and
2008.
12.
INCOME TAXES
The
provision for income taxes consists of the following (in
thousands):
|
Year
Ended December 31,
|
|||
|
2009
|
2008
|
2007
|
|
|
Currently
payable
|
$ 2,438
|
$ 2,006
|
$ 1,718
|
|
Deferred
tax liability (asset)
|
245
|
(782)
|
54
|
|
Provision
for income taxes
|
$ 2,683
|
$ 1,224
|
$ 1,772
|
63
The
following temporary differences gave rise to the net deferred tax assets at
December 31, 2009 and 2008 (in thousands):
|
2009
|
2008
|
|
|
Deferred
tax assets:
|
||
|
Allowance
for loan losses
|
$ 1,662
|
$ 1,488
|
|
Deferred
compensation
|
592
|
588
|
|
Merger
& acquisition costs
|
48
|
57
|
|
Allowance
for losses on available-for-sale securities
|
1,015
|
985
|
|
Pension
and other retirement obligation
|
472
|
732
|
|
Unrealized
loss on interest rate swap
|
56
|
117
|
|
Other
|
66
|
-
|
|
Total
|
$ 3,911
|
$ 3,967
|
|
|
|
|
|
Deferred
tax liabilities:
|
||
|
Premises
and equipment
|
$ (304)
|
$ (221)
|
|
Investment
securities accretion
|
(236)
|
(161)
|
|
Loan
fees and costs
|
(106)
|
(125)
|
|
Goodwill
and core deposit intangibles
|
(1,201)
|
(903)
|
|
Low
income housing tax credits
|
(56)
|
(38)
|
|
Mortgage
servicing rights
|
(90)
|
(52)
|
|
Unrealized
gains on available-for-sale securities
|
(1,684)
|
(945)
|
|
Total
|
(3,677)
|
(2,445)
|
|
Deferred
tax asset, net
|
$ 234
|
$ 1,522
|
No
valuation allowance was established at December 31, 2009 and 2008, in view
of the Company’s ability to carryback to taxes paid in previous years and
certain tax strategies, coupled with the anticipated future taxable income as
evidenced by the Company’s earnings potential.
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,
|
|||
|
2009
|
2008
|
2007
|
|
|
Provision
at statutory rates on
|
|||
|
pre-tax
income
|
$ 4,260
|
$ 2,757
|
$ 2,892
|
|
Effect
of tax-exempt income
|
(1,372)
|
(1,178)
|
(961)
|
|
Low
income housing tax credits
|
(187)
|
(187)
|
(187)
|
|
Bank
owned life insurance
|
(167)
|
(123)
|
(113)
|
|
Nondeductible
interest
|
123
|
125
|
133
|
|
Valuation
allowance
|
-
|
(191)
|
9
|
|
Other
items
|
26
|
21
|
(1)
|
|
Provision
for income taxes
|
$ 2,683
|
$ 1,224
|
$ 1,772
|
|
Statutory
tax rates
|
34%
|
34%
|
34%
|
|
Effective
tax rates
|
21.4%
|
15.1%
|
20.8%
|
U.S.
generally accepted accounting principles prescribe 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 50
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.
64
13.
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 2009 and 2008 with officers, directors,
stockholders and associates of such persons is listed below (in
thousands):
|
Year
Ended December 31,
|
||
|
2009
|
2008
|
|
|
Balance,
beginning of year
|
$ 3,163
|
$ 2,828
|
|
New
loans
|
1,576
|
1,499
|
|
Repayments
|
(1,751)
|
(1,164)
|
|
Balance,
end of year
|
$ 2,988
|
$ 3,163
|
14.
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 2010 without approval of the
Comptroller of the Currency of approximately $10,937,000, plus the Bank’s net
income for 2010.
Loans:
The Bank
is subject to regulatory restrictions which limit its ability to loan funds to
the Company. At December 31, 2009, the regulatory lending limit
amounted to approximately $6,845,000.
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, 2009 and 2008, 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.
65
The
following table reflects the Company’s capital ratios at December 31 (dollars in
thousands):
|
2009
|
2008
|
||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||
|
Total
capital (to risk weighted assets)
|
|||||
|
Company
|
$ 62,751
|
13.77%
|
$ 54,924
|
13.06%
|
|
|
For
capital adequacy purposes
|
36,464
|
8.00%
|
33,652
|
8.00%
|
|
|
To
be well capitalized
|
45,580
|
10.00%
|
42,065
|
10.00%
|
|
|
Tier
I capital (to risk weighted assets)
|
|||||
|
Company
|
$ 57,839
|
12.69%
|
$ 50,546
|
12.02%
|
|
|
For
capital adequacy purposes
|
18,232
|
4.00%
|
16,826
|
4.00%
|
|
|
To
be well capitalized
|
27,348
|
6.00%
|
25,239
|
6.00%
|
|
|
Tier
I capital (to average assets)
|
|||||
|
Company
|
$ 57,839
|
8.15%
|
$ 50,546
|
7.91%
|
|
|
For
capital adequacy purposes
|
28,381
|
4.00%
|
25,547
|
4.00%
|
|
|
To
be well capitalized
|
35,478
|
5.00%
|
31,934
|
5.00%
|
|
The
following table reflects the Bank’s capital ratios at December 31 (dollars in
thousands):
|
2009
|
2008
|
||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||
|
Total
capital (to risk weighted assets)
|
|||||
|
Bank
|
$ 57,182
|
12.56%
|
$ 49,248
|
11.73%
|
|
|
For
capital adequacy purposes
|
36,414
|
8.00%
|
33,593
|
8.00%
|
|
|
To
be well capitalized
|
45,518
|
10.00%
|
41,991
|
10.00%
|
|
|
Tier
I capital (to risk weighted assets)
|
|||||
|
Bank
|
$ 52,286
|
11.49%
|
$ 44,871
|
10.69%
|
|
|
For
capital adequacy purposes
|
18,207
|
4.00%
|
16,796
|
4.00%
|
|
|
To
be well capitalized
|
27,311
|
6.00%
|
25,194
|
6.00%
|
|
|
Tier
I capital (to average assets)
|
|||||
|
Bank
|
$ 52,286
|
7.38%
|
$ 44,871
|
7.04%
|
|
|
For
capital adequacy purposes
|
28,348
|
4.00%
|
25,510
|
4.00%
|
|
|
To
be well capitalized
|
35,436
|
5.00%
|
31,887
|
5.00%
|
|
This
annual report has not been reviewed, or confirmed for accuracy or relevance, by
the Federal Deposit Insurance Corporation.
15.
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.
66
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, 2009
and 2008, are as follows (in thousands):
|
2009
|
2008
|
|
|
Commitments
to extend credit
|
$87,745
|
$84,089
|
|
Standby
letters of credit
|
6,442
|
6,203
|
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.
We also
offer limited overdraft protection as a non-contractual courtesy which is
available to demand deposit accounts in good standing for business, personal or
household use. The non-contractual amount of financial instruments
with off-balance sheet risk at December 31, 2009 was $11,150,000. The
Company reserves the right to discontinue this service without prior
notice.
During
the year ended December 31, 2009, the Company entered into an agreement with a
construction contractor for the construction of new branch totaling $1.1
million. As of December 31, 2009, progress totaling approximately $222,000 has
been completed.
16.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective
January 1, 2008, the Company adopted FASB ASC Topic 820, Fair Value Measurements
and Disclosures, which, among other things, requires enhanced
disclosures about assets and liabilities carried at fair value. FASB ASC Topic
820 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 FASB ASC Topic 820 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.
|
|
|
|
67
The
following tables present the assets reported on the consolidated balance sheet
at their fair value as of December 31, 2009 and 2008 by level within the fair
value hierarchy. As required by FASB ASC Topic 820, 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, 2009
|
||||||||
|
Level
1
|
Level
II
|
Level
III
|
Total
|
||||||
|
Fair
value measurements on a recurring basis:
|
|||||||||
|
Securities
available for sale:
|
|||||||||
|
U.S.
Agency securities
|
$ 65,223
|
$ 65,223
|
|||||||
|
Obligations
of state and
|
|||||||||
|
political
subdivisions
|
59,574
|
59,574
|
|||||||
|
Corporate
obligations
|
3,166
|
3,166
|
|||||||
|
Mortgage-backed
securities
|
70,194
|
70,194
|
|||||||
|
Equity
securities
|
$ 425
|
425
|
|||||||
|
Trust
Preferred Interest Rate Swap
|
(166)
|
(166)
|
|||||||
|
Fair
value measurements on non-recurring basis:
|
|||||||||
|
Impaired
Loans
|
5,029
|
5,029
|
|||||||
|
Other
real estate owned
|
101
|
101
|
|||||||
|
(In
thousands)
|
December
31, 2008
|
||||||||
|
Level
1
|
Level
II
|
Level
III
|
Total
|
||||||
|
Fair
value measurements on a recurring basis:
|
|||||||||
|
Securities
available for sale:
|
|||||||||
|
U.S.
Agency securities
|
$ 28,942
|
$ 28,942
|
|||||||
|
Obligations
of state and
|
|||||||||
|
political
subdivisions
|
44,132
|
44,132
|
|||||||
|
Corporate
obligations
|
5,296
|
5,296
|
|||||||
|
Mortgage-backed
securities
|
95,407
|
95,407
|
|||||||
|
Equity
securities
|
$ 362
|
362
|
|||||||
|
Trust
Preferred Interest Rate Swap
|
(330)
|
(330)
|
|||||||
|
Fair
value measurements on non-recurring basis:
|
|||||||||
|
Impaired
Loans
|
1,514
|
1,514
|
|||||||
|
Other
real estate owned
|
169
|
169
|
|||||||
68
The
estimated fair values of the Company’s financial instruments are as follows (in
thousands):
|
December
31,
|
|||||
|
2009
|
2008
|
||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
||
|
Amount
|
Fair
Value
|
Amount
|
Fair
Value
|
||
|
Financial
assets:
|
|||||
|
Cash
and cash equivalents
|
$ 31,449
|
$ 31,449
|
$ 19,856
|
$ 19,856
|
|
|
Available-for-sale
securities
|
198,582
|
198,582
|
174,139
|
174,139
|
|
|
Net
loans
|
451,496
|
466,967
|
428,436
|
445,571
|
|
|
Bank
owned life insurance
|
12,667
|
12,667
|
12,176
|
12,176
|
|
|
Regulatory
stock
|
3,957
|
3,957
|
3,371
|
3,371
|
|
|
Accrued
interest receivable
|
3,141
|
3,141
|
2,912
|
2,912
|
|
|
Financial
liabilities:
|
|||||
|
Deposits
|
$ 605,559
|
$ 611,705
|
$ 546,680
|
$ 555,089
|
|
|
Borrowed
funds
|
54,115
|
50,582
|
61,204
|
60,823
|
|
|
Trust
preferred interest rate swap
|
166
|
166
|
330
|
330
|
|
|
Accrued
interest payable
|
2,037
|
2,037
|
2,233
|
2,233
|
|
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
have original maturities of 90 days or less 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.
69
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.
Trust
Preferred Interest Rate Swap:
The fair
value of the trust preferred interest rate swap is based on a pricing model that
utilizes a yield curve and information contained in the swap
agreement.
70
17.
CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
|
CITIZENS
FINANCIAL SERVICES, INC.
|
||
|
CONDENSED BALANCE
SHEET
|
||
|
|
||
|
December 31,
|
||
|
(in
thousands)
|
2009
|
2008
|
|
Assets:
|
||
|
Cash
|
$ 4,909
|
$ 4,987
|
|
Investment
in subsidiary:
|
||
|
First
Citizens National Bank
|
63,560
|
54,821
|
|
Other
assets
|
856
|
962
|
|
Total
assets
|
$ 69,325
|
$ 60,770
|
|
Liabilities:
|
||
|
Other
liabilities
|
$ 298
|
$ 500
|
|
Borrowed
funds
|
7,500
|
7,500
|
|
Total
liabilities
|
7,798
|
8,000
|
|
Stockholders'
equity
|
61,527
|
52,770
|
|
Total
liabilities and stockholders' equity
|
$ 69,325
|
$ 60,770
|
|
CITIZENS
FINANCIAL SERVICES, INC.
|
|||
|
CONDENSED STATEMENT
OF INCOME
|
|||
|
Year
Ended December 31,
|
|||
|
(in
thousands)
|
2009
|
2008
|
2007
|
|
Dividends
from:
|
|||
|
Bank
subsidiary
|
$ 3,396
|
$ 3,284
|
$ 3,175
|
|
Available-for-sale
securities
|
15
|
21
|
12
|
|
Total
income
|
3,411
|
3,305
|
3,187
|
|
Realized
securities gains (losses)
|
(33)
|
30
|
-
|
|
Expenses
|
432
|
449
|
563
|
|
Income
before equity
|
|||
|
in
undistributed earnings
|
|||
|
of
subsidiary
|
2,946
|
2,886
|
2,624
|
|
Equity
in undistributed
|
|||
|
earnings
- First Citizens National Bank
|
6,918
|
4,019
|
4,112
|
|
Net
income
|
$ 9,864
|
$ 6,905
|
$ 6,736
|
71
|
CITIZENS
FINANCIAL SERVICES, INC.
|
|||
|
STATEMENT
OF CASH FLOWS
|
|||
|
Year
Ended December 31,
|
|||
|
(in
thousands)
|
2009
|
2008
|
2007
|
|
Cash
flows from operating activities:
|
|||
|
Net
income
|
$ 9,864
|
$ 6,905
|
$ 6,736
|
|
Adjustments
to reconcile net income to net
|
|||
|
cash
provided by operating activities:
|
|||
|
Equity
in undistributed earnings of subsidiaries
|
(6,918)
|
(4,019)
|
(4,112)
|
|
Investment
securities (gains) losses, net
|
33
|
(30)
|
-
|
|
Other,
net
|
94
|
164
|
38
|
|
Net
cash provided by operating activities
|
3,073
|
3,020
|
2,662
|
|
Cash
flows from investing activities:
|
|||
|
Purchases
of available-for-sale securities
|
(125)
|
(226)
|
(226)
|
|
Proceeds
from the sale of available-for-sale securities
|
211
|
162
|
-
|
|
Net
cash provided by (used in) investing activities
|
86
|
(64)
|
(226)
|
|
Cash
flows from financing activities:
|
|||
|
Cash
dividends paid
|
(2,951)
|
(2,815)
|
(2,550)
|
|
Purchase
of treasury stock
|
(286)
|
(271)
|
(567)
|
|
Net
cash used in financing activities
|
(3,237)
|
(3,086)
|
(3,117)
|
|
Net
decrease in cash
|
(78)
|
(130)
|
(681)
|
|
Cash
at beginning of year
|
4,987
|
5,117
|
5,798
|
|
Cash
at end of year
|
$ 4,909
|
$ 4,987
|
$ 5,117
|
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.
19.
SUBSEQUENT EVENT
In
January 2010, a borrower in custody agreement was established with the Federal
Reserve Board in the amount of $13.6 million, which is collateralized by $22.7
million of municipal loans maintained in the Company’s possession.
72
20.
CONSOLIDATED CONDENSED QUARTERLY DATA (UNAUDITED)
|
(in
thousands, except share data)
|
Three Months Ended,
|
|||
|
2009
|
Mar
31
|
Jun
30
|
Sep
30
|
Dec
31
|
|
Interest
income
|
$ 9,597
|
$ 9,629
|
$ 9,667
|
$ 9,722
|
|
Interest
expense
|
3,438
|
3,359
|
3,277
|
3,157
|
|
Net
interest income
|
6,159
|
6,270
|
6,390
|
6,565
|
|
Provision
for loan losses
|
150
|
150
|
400
|
225
|
|
Non-interest
income
|
1,338
|
1,433
|
1,452
|
1,485
|
|
Investment
securities gains, net
|
16
|
102
|
-
|
21
|
|
Non-interest
expenses
|
4,372
|
4,491
|
4,450
|
4,446
|
|
Income
before provision for income taxes
|
2,991
|
3,164
|
2,992
|
3,400
|
|
Provision
for income taxes
|
645
|
692
|
604
|
742
|
|
Net
income
|
$ 2,346
|
$ 2,472
|
$ 2,388
|
$ 2,658
|
|
Earnings
Per Share
|
$ 0.81
|
$ 0.86
|
$ 0.83
|
$ 0.93
|
|
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 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
(loss) income
|
$ 2,021
|
$ 2,446
|
$ (1,052)
|
$ 3,490
|
|
Earnings
(Loss) Per Share
|
$ 0.70
|
$ 0.85
|
$ (0.36)
|
$ 1.21
|
73
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, 2009 and 2008, 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,
2009. 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, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2009, in conformity with U.S. generally accepted accounting
principles.
We were
not engaged to examine management's assertion about the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2009,
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,
2010
74
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, 2009. 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, 2009, 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 11, 2010
/s/ Mickey L.
Jones
By:
Mickey L. Jones
Treasurer
(Principal
Financial & Accounting Officer)
Date:
March 11, 2010
75
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, 2009 that have materially affected,
or are reasonable likely to materially affect, the Company’s internal control
over financial reporting.
ITEM
9B – OTHER INFORMATION.
None.
76
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 2010 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 2010 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 2010 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 2010
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 2010 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 2010 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 2010 Annual Meeting of
Stockholders.
|
|
(c)
|
Changes
in Control
|
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.
77
|
(d)
|
Equity
Compensation Plan Information
|
The
following table sets forth information as of December 31, 2009 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
|
84,067
|
|||
|
Equity
compensation plans not approved by security holders
|
n/a
|
n/a
|
n/a
|
|||
|
Total
|
n/a
|
n/a
|
84,067
|
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 2010 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 2010 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 5.
Ratification of Independent Registered Public Accounting Firm” in the
Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders is
incorporated by reference.
78
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, 2009 and 2008
Consolidated Statement of Income for
the Years Ended December 31, 2009, 2008 and 2007
Consolidated Statement of Changes in
Stockholders' Equity for the Years Ended December 31, 2009, 2008 and2007
Consolidated Statement of Cash Flows
for the Years Ended December 31, 2009, 2008 and 2007
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(9)
|
|
|
10.7
|
*Change
in Control Agreement, between First Citizens National Bank, Citizens
Financial Services, Inc. (as guarantor) and Terry B. Osborne (10)
|
|
|
10.8
|
*Change
in Control Agreement, between First Citizens National Bank, Citizens
Financial Services, Inc. (as guarantor) and Mickey L. Jones (10)
|
|
|
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
|
______________________
79
*Management
contract or compensatory plan, contract or arrangement
(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 3.2) to the Company’s Current Report on Form 8-K, as
filed with the Commission on December 24, 2009.
(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.
(9) Incorporated
by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2008, as filed with the Commission on March 12,
2009
(10) Incorporated
by reference to the exhibits to the Company’s Current Report on Form 8-K as
filed with the Commission on January 22, 2010
80
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 11,
2010
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 11, 2010 |
|
/s/
R. Lowell
Coolidge
R.
Lowell Coolidge, Director
|
March 11, 2010 |
|
/s/
Rudolph J. van der Hiel
Rudolph
J. van der Hiel, Director
|
March 11, 2010 |
|
/s/
Robert W. Chappell
Robert
W. Chappell, Director
|
March 11, 2010 |
|
/s/
Mark L. Dalton
Mark
L. Dalton, Director
|
March 11, 2010 |
|
/s/
R. Joseph Landy
R.
Joseph Landy, Director
|
March 11, 2010 |
|
/s/
Roger C. Graham, Jr.
Roger
C. Graham, Director
|
March 11, 2010 |
|
/s/
E. Gene Kosa
E.
Gene Kosa, Director
|
March 11, 2010 |
|
/s/
Rinaldo A. DePaola
Rinaldo
A. DePaola, Director
|
March 11, 2010 |
|
/s/
Thomas E. Freeman
Thomas
E. Freeman, Director
|
March 11, 2010 |
|
/s/
Mickey L. Jones
Mickey
L. Jones, Treasurer
(Principal
Financial & Accounting Officer)
|
March 11, 2010 |
81