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| CZFS.OB > SEC Filings for CZFS.OB > Form 10-Q on 12-Nov-2009 | All Recent SEC Filings |
12-Nov-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 nine months ended September 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 September 30, 2009 and December 31, 2008, the Trust Department had $83.2 and $74.3 million of assets under management, respectively. The $8.9 million increase is primarily attributable to a recovery in market values of trust assets since the end of last year.
Results of Operations
Overview of the Income Statement
The Company had net income of $7,206,000 for the first nine months of 2009 compared to earnings of $3,415,000 for last year's comparable period, an increase of $3,791,000 or 111.0%. Earnings per share for the first nine months of 2009 were $2.51, compared to $1.19 last year, representing a 110.9% increase. Annualized return on assets and return on equity for the nine months of 2009 were 1.39% and 17.46%, respectively, compared with 0.76% and 8.93% for last year's comparable period.
Net income for the three month's ended September 30, 2009 was $2,388,000 compared to a net loss of $1,052,000 in the comparable 2008 period, an increase of $3,440,000. Earnings (loss) per share for the three months ended September 30, 2009 and 2008 were $0.83 and $(0.37) per share, respectively. Annualized return on assets and return on equity for the quarter ended September 30, 2009 was 1.35% and 16.84%, respectively, compared with -0.69% and -8.01% for the same 2008 period.
The comparison to last year's results is significantly impacted by the $4.1 million other than temporary impairment charge recorded in the third quarter of last year related to investments in Freddie Mac preferred stock and a Lehman Brothers corporate bond. The after tax impact for the three months and nine months ended September 30, 2008 was approximately $3.5 million. As a result of the Emergency Economic Stabilization Act of 2008 (EESA) being signed into law on October 3, 2008, a provision in the new bill allowed the Freddie Mac preferred stock to be treated as an ordinary loss, allowing a tax benefit of approximately $1,000,000. However, since the EESA was not signed until after September 30, 2008, accounting rules did not allow us to recognize the $1,000,000 tax benefit until the fourth quarter of 2008. As such, the after-tax impact for 2008 earnings was approximately $2.5 million, after recognition in the fourth quarter of 2008 for the additional tax benefit.
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 nine months of 2009 was $18,819,000, an increase of $1,618,000, or 9.4%, compared to the same period in 2008. For the first nine months of 2009, the provision for loan losses totaled $700,000, an increase of $475,000 over the comparable period in 2008. Consequently, net interest income after the provision for loan losses was $18,119,000 compared to $16,976,000 during the first nine months of 2008.
For the three months ended September 30, 2009, net interest income was $6,390,000 compared to $5,963,000, an increase of $427,000, or 7.2% over the comparable period in 2008. The provision for loan losses this quarter was $400,000 compared to $105,000 last year. Consequently, net interest income after the provision for loan losses was $5,990,000 for the quarter ended compared to $5,858,000 in 2008.
Analysis of Average Balances and Interest Rates (1)
Nine Months Ended
September 30, 2009 September 30, 2008
Average Average Average Average
Balance (1) Interest Rate Balance (1) Interest Rate
(dollars in thousands) $ $ % $ $ %
ASSETS
Short-term investments:
Interest-bearing deposits 19,894 27 0.18 2,543 34 1.79
at banks
Total short-term 19,894 27 0.18 2,543 34 1.79
investments
Investment securities:
Taxable 131,218 4,668 4.74 94,719 3,571 5.03
Tax-exempt (3) 49,726 2,398 6.43 34,356 1,588 6.16
Total investment 180,944 7,066 5.21 129,075 5,159 5.33
securities
Loans:
Residential mortgage loans 204,144 11,112 7.28 212,161 11,798 7.43
Commercial & farm loans 178,301 9,284 6.96 156,134 8,971 7.67
Loans to state & political 46,439 2,144 6.17 47,568 2,240 6.29
subdivisions
Other loans 11,436 761 8.89 11,981 818 9.12
Loans, net of discount 440,320 23,301 7.08 427,844 23,827 7.44
(2)(3)(4)
Total interest-earning 641,158 30,394 6.34 559,462 29,020 6.93
assets
Cash and due from banks 9,476 9,576
Bank premises and equipment 11,813 12,385
Other assets 27,496 19,193
Total non-interest earning 48,785 41,154
assets
Total assets 689,943 600,616
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
NOW accounts 120,999 732 0.81 104,866 1,037 1.32
Savings accounts 46,216 110 0.32 40,717 114 0.37
Money market accounts 41,513 262 0.84 45,350 681 2.01
Certificates of deposit 302,617 7,450 3.29 231,081 6,676 3.86
Total interest-bearing 511,345 8,554 2.24 422,014 8,508 2.69
deposits
Other borrowed funds 58,175 1,520 3.49 67,786 2,030 4.00
Total interest-bearing 569,520 10,074 2.36 489,800 10,538 2.87
liabilities
Demand deposits 56,564 53,587
Other liabilities 8,830 6,233
Total non-interest-bearing 65,394 59,820
liabilities
Stockholders' equity 55,029 50,996
Total liabilities & 689,943 600,616
stockholders' equity
Net interest income 20,320 18,482
Net interest spread (5) 3.97% 4.06%
Net interest income as a
percentage
of average 4.24% 4.41%
interest-earning assets
Ratio of interest-earning
assets
to interest-bearing 1.13 1.14
liabilities
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(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.
Analysis of Average Balances and Interest Rates (1)
Three Months Ended
September 30, 2009 September 30, 2008
Average Average Average Average
Balance (1) Interest Rate Balance (1) Interest Rate
(dollars in thousands) $ $ % $ $ %
ASSETS
Short-term investments:
Interest-bearing deposits at banks 22,956 15 0.27 6,173 27 1.74
Total short-term investments 22,956 15 0.27 6,173 27 1.74
Investment securities:
Taxable 135,243 1,473 4.36 96,360 1,162 4.82
Tax-exempt (3) 55,926 905 6.47 35,324 545 6.17
Total investment securities 191,169 2,378 4.98 131,684 1,707 5.19
Loans:
Residential mortgage loans 201,992 3,649 7.17 211,252 3,939 7.42
Commercial & farm loans 185,403 3,191 6.83 158,404 3,071 7.71
Loans to state & political 46,472 706 6.03 48,915 768 6.25
subdivisions
Other loans 11,751 260 8.74 11,539 266 9.17
Loans, net of discount (2)(3)(4) 445,618 7,806 6.95 430,110 8,044 7.44
Total interest-earning assets 659,743 10,199 6.13 567,967 9,778 6.85
Cash and due from banks 9,067 10,423
Bank premises and equipment 11,896 12,283
Other assets 27,533 19,653
Total non-interest earning assets 48,496 42,359
Total assets 708,239 610,326
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
NOW accounts 123,265 234 0.75 110,434 327 1.18
Savings accounts 47,609 37 0.31 42,602 41 0.38
Money market accounts 41,996 78 0.74 43,714 186 1.69
Certificates of 312,898 2,427 3.08 244,496 2,283 3.71
deposit
Total interest-bearing 525,768 2,776 2.09 441,246 2,837 2.56
deposits
Other borrowed funds 58,959 501 3.37 53,221 545 4.07
Total interest-bearing 584,727 3,277 2.22 494,467 3,382 2.72
liabilities
Demand deposits 58,080 56,715
Other liabilities 8,697 6,566
Total
non-interest-bearing 66,777 63,281
liabilities
Stockholders' equity 56,735 52,578
Total liabilities & 708,239 610,326
stockholders' equity
Net interest income 6,922 6,396
Net interest spread (5) 3.91% 4.13%
Net interest income as
a percentage
of average 4.16% 4.48%
interest-earning assets
Ratio of
interest-earning assets
to interest-bearing 1.13 1.15
liabilities
(1) Averages are based
on daily averages.
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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 September 30, 2009 and 2008:
For the Three Months For the Nine Months
(dollars in thousands) Ended September 30 Ended September 30
2009 2008 2009 2008
Interest and dividend income from
investment securities
and interest bearing deposits at $ 2,086 $ 1,552
banks (non-tax adjusted) $ 6,277 $ 4,637
Tax equivalent adjustment 307 182 816 556
Interest and dividend income from
investment securities
and interest bearing deposits at
banks (tax equivalent basis) $ 2,393 $ 1,734 $ 7,093 $ 5,193
Interest and fees on loans (non-tax $ 7,581 $ 7,793
adjusted) $ 22,616 $ 23,102
Tax equivalent adjustment 225 251 685 725
Interest and fees on loans (tax
equivalent basis) $ 7,806 $ 8,044 $ 23,301 $ 23,827
Total interest income $ 9,667 $ 9,345 $ 28,893 $ 27,739
Total interest expense 3,277 3,382 10,074 10,538
Net interest income 6,390 5,963 18,819 17,201
Total tax equivalent adjustment 532 433 1,501 1,281
Net interest income (tax equivalent
basis) $ 6,922 $ 6,396 $ 20,320 $ 18,482
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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 September 30, Nine months ended September 30, 2009 vs. 2008 (1)
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 $ 26 $ (38) $ (12) $ (8) $ 1 $ (7)
Investment securities:
Taxable 432 (121) 311 1,285 (188) 1,097
Tax-exempt 335 25 360 738 72 810
Total investments 767 (96) 671 2,023 (116) 1,907
Loans:
Residential mortgage
loans (137) (153) (290) (451) (235) (686)
Commercial & farm loans 497 (377) 120 922 (609) 313
Loans to state &
political subdivisions (32) (30) (62) (54) (42) (96)
Other loans 6 (12) (6) (37) (20) (57)
Total loans, net of
discount 334 (572) (238) 380 (906) (526)
Total Interest Income 1,127 (706) 421 2,395 (1,021) 1,374
Interest Expense:
Interest-bearing
deposits:
NOW accounts 36 (129) (93) 200 (505) (305)
Savings accounts 5 (9) (4) 39 (43) (4)
Money Market accounts (7) (101) (108) (54) (365) (419)
Certificates of deposit 578 (434) 144 1,480 (706) 774
Total interest-bearing
deposits 612 (673) (61) 1,665 (1,619) 46
Other borrowed funds 56 (100) (44) (270) (240) (510)
Total interest expense 668 (773) (105) 1,395 (1,859) (464)
Net interest income $ 459 $ 67 $ 526 $ 1,000 $ 838 $ 1,838
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