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| CZFS.OB > SEC Filings for CZFS.OB > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-2009
Quarterly Report
Cautionary Statement
We have made forward-looking statements in this document, and in documents that we incorporate by reference, that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of operations of Citizens Financial Services, Inc., First Citizens National Bank, First Citizens Insurance Agency, Inc. or the combined Company. When we use words such as "believes," "expects," "anticipates," or similar expressions, we are making forward-looking statements. For a variety of reasons, actual results could differ materially from those contained in or implied by forward-looking statements. The Company would like to caution readers that the following important factors, among others, may have affected and could in the future affect the Company's actual results and could cause the Company's actual results for subsequent periods to differ materially from those expressed in any forward-looking statement:
· 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 to implement strategic initiatives designed to increase revenues or manage expenses, or we may not be able 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, regulations or requirements, including the costs of compliance with such changes.
· 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.
Additional factors that may affect our results are discussed in the Company's Annual Report on Form 10-K under "Item 1.A/ Risk Factors." Except as required by applicable law and regulation, we assume no obligation to update or revise any forward-looking statements after the date on which they are made.
Introduction
The following is management's discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in its accompanying consolidated financial statements for the Company. Our Company's consolidated financial condition and results of operations consist almost entirely of the Bank's financial condition and results of operations. Management's discussion and analysis should be read in conjunction with the preceding financial statements presented under Part I. The results of operations for the three months and six months ended June 30, 2009 are not necessarily indicative of the results you may expect for the full year.
Our Company currently engages in the general business of banking throughout our service area of Potter, Tioga and Bradford counties in North Central Pennsylvania and Allegany, Steuben, Chemung and Tioga counties in Southern New York. We maintain our central office in Mansfield, Pennsylvania. Presently we operate 17 banking facilities. In Pennsylvania, these offices are located in Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton, Gillett, Millerton, LeRaysville, Towanda, the Wellsboro Weis Market store, and the Mansfield Wal-Mart Super Center. In November 2008, we completed the acquisition of another Mansfield location from The Elmira Savings Bank, FSB (see Footnote 7 to the Consolidated Financial Statements). In New York, we have a branch office in Wellsville, Allegany County.
Risk Management
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 policy to control and manage interest rate risk.
Credit risk represents the possibility that a customer may not perform in accordance with contractual terms. Credit risk results from loans with customers and the purchasing of securities. The Company's primary credit risk is in the loan portfolio. The Company manages credit risk by adhering to an established credit policy and through a disciplined evaluation of the adequacy of the allowance for loan losses. Also, the investment policy limits the amount of credit risk that may be taken in the investment portfolio.
Liquidity risk represents the inability to generate or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers and obligations to depositors. The Company has established guidelines within its asset/liability and funds management policy to manage liquidity risk. These guidelines include, among other things, contingent funding alternatives.
Regulatory risk represents the possibility that a change in law, regulations or regulatory policy may have a material effect on the business of the Company and its subsidiary. We can not predict what legislation might be enacted or what regulations might be adopted, or if adopted, the effect thereof on our operations.
Competition
We face strong competition in the communities that we serve from other commercial banks, savings banks, and savings and loan associations, some of which are substantially larger institutions than the Bank. In addition, insurance companies, investment-counseling firms, and other business firms and individuals offer personal and corporate trust services. We also compete with credit unions, issuers of money market funds, securities brokerage firms, consumer finance companies, mortgage brokers and insurance companies. These entities are strong competitors for virtually all types of financial services. The financial services industry continues to experience tremendous change to competitive barriers between bank and non-bank institutions. We must compete not only with traditional financial institutions, but also other business corporations that have begun to deliver competing financial services and banking services that are easily accessible through the internet. Competition for banking services is primarily based on price, nature of product, quality of service, and convenience of location.
Trust and Investment Services
Our Investment and Trust Services Department offers professional trust administration, investment management services, estate planning and administration, and custody of securities. 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. Revenues and fees of the Trust Department are reflected in the Company's financial statements. As of June 30, 2009 and December 31, 2008, the Trust Department had $77.1 and $74.3 million of assets under management, respectively. The $2.8 million increase is primarily attributable to a recovery in market values of trust assets since the end of the year.
Our Investment Representatives offer full service brokerage services and financial planning throughout the Bank's market area. Products such as mutual funds, annuities, health and life insurance are made available through our insurance subsidiary, First Citizens Insurance. Fee income from the sale of these products is reflected in the Company's financial statements as a component of non-interest income in the Consolidated Statement of Income.
Results of Operations
Overview of the Income Statement
The Company had net income of $4,818,000 for the first six months of 2009 compared with earnings of $4,467,000 for last year's comparable period, an increase of $351,000 or 7.9%. Earnings per share for the first six months of 2009 were $1.69, compared to $1.57 last year, representing a 7.6% increase. Annualized return on assets and return on equity for the six months of 2009 were 1.42% and 17.79%, respectively, compared with 1.50% and 17.80% for last year's comparable period.
Net income for the three month's ended June 30, 2009 was $2,472,000 compared to $2,446,000 in the comparable 2008 period, an increase of $26,000. Earnings per share for the three months ended June 30, 2009 and 2008 were $0.87 and $0.86 per share, respectively. Annualized return on assets and return on equity for the quarter ended June 30, 2009 was 1.43% and 17.99%, respectively, compared with 1.64% and 19.24% for the same 2008 period.
Net Interest Income
Net interest income, the most significant component of the Company's earnings, is the amount by which interest income generated from interest-earning assets exceeds interest expense on interest-bearing liabilities.
Net interest income for the first six months of 2009 was $12,429,000, an increase of $1,191,000, or 10.6%, compared to the same period in 2008. For the first six months of 2009, the provision for loan losses totaled $300,000, an increase of $180,000 over 2008. Consequently, net interest income after the provision for loan losses was $12,129,000 compared to $11,118,000 during the first six months of 2008.
For the three months ended June 30, 2009, net interest income was $6,270,000 compared to $5,830,000, an increase of $440,000, or 7.5% over the comparable period in 2008. The provision for loan losses this quarter was $150,000 compared to $0 last year. As such, net interest income after the provision for loan losses was $6,120,000 for the quarter ended compared to $5,830,000 in 2008.
The following table sets forth the average balances of, and the interest earned or incurred on, each principal category of assets, liabilities and stockholders' equity, the related rates, net interest income and rate "spread" created for the three months and six months ended June 30, 2009 and 2008:
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Analysis of Average Balances and Interest Rates (1)
Six Months Ended
June 30, 2009 June 30, 2008
Average Average Average Average
Balance (1) Interest Rate Balance (1) Interest Rate
(dollars in thousands) $ $ % $ $ %
ASSETS
Short-term investments:
Interest-bearing 18,336 12 0.12 708 7 1.92
deposits at banks
Total short-term 18,336 12 0.12 708 7 1.92
investments
Investment securities:
Taxable 129,173 3,195 4.95 93,889 2,409 5.13
Tax-exempt (3) 46,574 1,493 6.41 33,867 1,043 6.16
Total investment 175,747 4,688 5.33 127,756 3,452 5.40
securities
Loans:
Residential mortgage 205,237 7,464 7.33 212,620 7,859 7.43
loans
Commercial & farm loans 174,692 6,092 7.03 154,987 5,900 7.66
Loans to state & 46,422 1,438 6.25 46,886 1,471 6.31
political subdivisions
Other loans 11,277 501 8.96 12,205 554 9.13
Loans, net of discount 437,628 15,495 7.14 426,698 15,784 7.44
(2)(3)(4)
Total interest-earning 631,711 20,195 6.44 555,162 19,243 6.97
assets
Cash and due from banks 9,684 9,148
Bank premises and 11,770 12,437
equipment
Other assets 27,476 18,961
Total non-interest 48,930 40,546
earning assets
Total assets 680,641 595,708
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
NOW accounts 119,847 497 0.84 102,051 710 1.40
Savings accounts 45,508 73 0.32 39,764 73 0.37
Money market accounts 41,268 185 0.90 46,177 495 2.16
Certificates of deposit 297,391 5,023 3.41 224,300 4,393 3.94
Total interest-bearing 504,014 5,778 2.31 412,292 5,671 2.77
deposits
Other borrowed funds 57,777 1,019 3.56 75,149 1,485 3.97
Total interest-bearing 561,791 6,797 2.44 487,441 7,156 2.95
liabilities
Demand deposits 55,793 52,005
Other liabilities 8,895 6,066
Total
non-interest-bearing 64,688 58,071
liabilities
Stockholders' equity 54,162 50,196
Total liabilities & 680,641 595,708
stockholders' equity
Net interest income 13,398 12,087
Net interest spread (5) 4.00% 4.02%
Net interest income as a
percentage
of average 4.27% 4.38%
interest-earning assets
Ratio of
interest-earning assets
to interest-bearing 1.13 1.14
liabilities
(1) Averages are based on daily
averages.
(2) Includes loan origination and
commitment fees.
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Analysis of Average Balances and Interest Rates (1)
Three Months Ended
June 30, 2009 June 30, 2008
Average Average Average Average
Balance (1) Interest Rate Balance (1) Interest Rate
(dollars in thousands) $ $ % $ $ %
ASSETS
Short-term investments:
Interest-bearing deposits 28,062 10 0.14 1,415 7 4.45
at banks
Total short-term investments 28,062 10 0.14 1,415 7 4.45
Investment securities:
Taxable 128,082 1,547 4.83 93,504 1,192 4.95
Tax-exempt (3) 48,346 779 6.45 34,586 533 5.99
Total investment securities 176,428 2,326 5.27 128,090 1,725 5.16
Loans:
Residential mortgage loans 203,680 3,717 7.32 211,695 3,911 7.43
Commercial & farm loans 178,297 3,111 7.00 155,642 2,950 8.02
Loans to state & political 45,613 704 6.19 48,693 761 6.07
subdivisions
Other loans 11,276 250 8.89 11,923 269 9.41
Loans, net of discount 438,866 7,782 7.11 427,953 7,891 7.55
(2)(3)(4)
Total interest-earning 643,356 10,118 6.30 557,458 9,623 6.99
assets
Cash and due from banks 10,516 9,410
Bank premises and equipment 11,770 12,377
Other assets 27,652 19,228
Total non-interest earning 49,938 41,015
assets
Total assets 693,294 598,473
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
NOW accounts 124,630 249 0.80 105,628 316 2.24
Savings accounts 46,111 37 0.32 40,630 37 0.36
Money market accounts 41,901 85 0.81 45,816 203 3.62
Certificates of deposit 301,066 2,492 3.32 227,549 2,172 4.14
Total interest-bearing 513,708 2,863 2.23 419,623 2,728 3.25
deposits
Other borrowed funds 57,861 496 3.44 67,502 628 5.40
Total interest-bearing 571,569 3,359 2.36 487,125 3,356 3.56
liabilities
Demand deposits 57,553 54,443
Other liabilities 9,224 6,038
Total non-interest-bearing 66,777 60,481
liabilities
Stockholders' equity 54,948 50,867
Total liabilities & 693,294 598,473
stockholders' equity
Net interest income 6,759 6,267
Net interest spread (5) 3.94% 4.17%
Net interest income as a
percentage
of average interest-earning 4.21% 4.52%
assets
Ratio of interest-earning
assets
to interest-bearing 1.13 1.14
liabilities
(1) Averages are based on
daily averages.
(2) Includes loan origination and
commitment fees.
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Tax exempt revenue is shown on a tax-equivalent basis for proper comparison using a statutory, federal income tax rate of 34%. For purposes of the comparison, as well as the discussion that follows, this presentation facilitates performance comparisons between taxable and tax-free assets by increasing the tax-free income by an amount equivalent to the Federal income taxes that would have been paid if this income were taxable at the Company's 34% Federal statutory rate. The following table represents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the periods ending June 30, 2009 and 2008:
For the Three Months For the Six Months
(dollars in thousands) Ended June 30 Ended June 30
2009 2008 2009 2008
Interest and dividend income from
investment securities
and interest bearing deposits $ 2,071 $ 1,541
at banks (non-tax adjusted) $ 4,191 $ 3,085
Tax equivalent adjustment 265 191 509 374
Interest and dividend income from
investment securities
and interest bearing deposits
at banks (tax equivalent basis) $ 2,336 $ 1,732 $ 4,700 $ 3,459
Interest and dividend income from
investment securities
and interest bearing deposits $ 7,558 $ 7,645
at banks (non-tax adjusted) $ 15,035 $ 15,309
Tax equivalent adjustment 224 246 460 475
Interest and fees on loans (tax
equivalent basis) $ 7,782 $ 7,891 $ 15,495 $ 15,784
Total interest income $ 9,629 $ 9,186 $ 19,226 $ 18,394
Total interest expense 3,359 3,356 6,797 7,156
Net interest income 6,270 5,830 12,429 11,238
Total tax equivalent adjustment 489 437 969 849
Net interest income (tax
equivalent basis) $ 6,759 $ 6,267 $ 13,398 $ 12,087
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The following table shows the tax-equivalent effect of changes in volume and rate on interest income and expense.
Analysis of Changes in Net Interest Income on a Tax-Equivalent Basis (1)
Three months ended June 30, 2009 vs. 2008 (1) Six months ended June 30, 2009 vs. 2008 (1)
Change in Change Total Change in Change Total
(in thousands) Volume in Rate Change Volume in Rate Change
Interest Income:
Short-term investments:
Interest-bearing
deposits at banks $ 15 $ (12) $ 3 $ 5 $ - $ 5
Investment securities:
Taxable 421 (66) 355 869 (83) 786
Tax-exempt 223 23 246 406 44 450
Total investments 644 (43) 601 1,275 (39) 1,236
Loans:
Residential mortgage
loans (134) (60) (194) (291) (104) (395)
Commercial & farm loans 416 (255) 161 562 (370) 192
Loans to state &
political subdivisions (45) (12) (57) (19) (14) (33)
Other loans (13) (6) (19) (43) (10) (53)
Total loans, net of
discount 224 (333) (109) 209 (498) (289)
Total Interest Income 883 (388) 495 1,489 (537) 952
Interest Expense:
Interest-bearing
deposits:
NOW accounts 51 (118) (67) 159 (372) (213)
Savings accounts 5 (5) - - - -
Money Market accounts (19) (99) (118) (49) (261) (310)
Certificates of deposit 643 (323) 320 1,086 (456) 630
Total interest-bearing
deposits 680 (545) 135 1,196 (1,089) 107
Other borrowed funds (71) (61) (132) (321) (145) (466)
Total interest expense 609 (606) 3 875 (1,234) (359)
Net interest income $ 274 $ 218 $ 492 $ 614 $ 697 $ 1,311
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(1) The portion of the total change attributable to both volume and rate changes, which can not be separated, has been allocated proportionally to the change due to volume and the change due to rate prior to allocation.
Tax equivalent net interest income rose from $12,087,000 in 2008 to $13,398,000 in 2009, an increase of $1,311,000 for the six months ended June 30, 2009. The tax equivalent net interest margin decreased from 4.38% for the first six months of 2008 to 4.27% in 2009.
Total interest income increased $952,000. This increase is primarily a result of a $1,489,000 increase due to volume as the average balance of interest earning assets increased by $77.5 million. There was a decrease of $537,000 due to change in rate, as the yield on interest earning assets decreased 53 basis points from 6.97% to 6.44%. Investment income for the six months ended June 30, 2009 increased $1,236,000 over the same period last year. Total investment securities increased by $48.0 million since last year due to investment opportunities and investing excess cash. Taxable securities increased by $35.3 million while tax-exempt securities increased by $12.7 million, which had the effect of increasing interest income by $869,000 and $406,000, respectively, due to volume. The purchase of tax-exempt securities, along with municipal loans, allows us to manage our effective tax rate as well as the overall yield on our . . .
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