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were charting our own COURSE |
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There is now another years distance between us and the nightmare of September 11, 2001, but the times are as dangerous as ever. Now we live in a world where on any given day our government informs us that the threat level has escalated from Serious to High, and on every day we have rumor of war and risk of danger. |
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Because uncertainty is the very worst thing for markets, September 11 changed the world of money and finance as much as it did everything elsemaybe more, as the escalating national debt and the continuing decline in stock values indicate. These extra uncertainties add to an ongoing litany of massive change in the banking industry over the past two decades. We have moved from being one of Americas most staid and routine industries to a highly fluid and fiercely competitive arena, where customers have options they never had before. |
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Over the past year, this reality has moved First Citizens to take a hard look at ourselves and re-evaluate our direction. What we saw compelled us to implement new sales and marketing initiatives that will enable us to more effectively set the course of our immediate future. This is the foundation of this years Citizens Financial Services Annual Report. I use the phrase set the course purposely: the entire idea here is that, after examining the ship for any and every way to make it more seaworthy, we are, in effect, overhauling the entire craft --so we can be ready to sail just about anywhere. |
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Before taking up the story, however, I should make one important note, since Annual Reports are about both the past and the future. For First Citizens, 2002 was a very good year. In terms of financial performance, it was the best year in the history of the bank. |
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In all the major areasasset growth, net income, return on shareholder equitywe continued our already-solid advances from the previous year, by achieving the best earnings in the history of the corporation. In 2002, net income grew almost 50% to $5.6 million, an increase of $1.8 million. Total assets grew $11.5 million, or 2.7%, while total deposits grew $2.6 million and total loansthe bulwark of our strengthgrew $26.7 million. The common stock price improved over 50% this past year, and more than 75% over the past two years. Cash dividends per share were $.68 during 2002, a 6.25% increase over 2001. In fact, return on shareholder equity was 16.5%the highest everand expected to be above average for Pennsylvania community banks. As usual, the details on these and other numbers are in the financial pages; suffice it to say that, given the general state of affairs, we are very pleased. |
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I should call particular attention to the interrelationship of our 2000 acquisition of the Bradford County Sovereign Banks customers and the growth in our loan portfolios, mainly mortgage loans. On one hand, the nationally significant decline in interest rates meant that our cost of funds declined, and our margins increased significantly as thousands of homeowners, who otherwise may not have made such a move, refinanced their homes, thus providing First Citizens with significant new loan volume. At the same time, the deposit funds accrued from Sovereign, which had been temporarily placed in investment securities, were transitioned into higher yielding loans. In fact the redeployment of investments into the loan portfolio has been our objective since the acquisition of the Bradford County Sovereign Bank branches. When you make such a significant acquisition, you hope to do it right. We greatly appreciate the support given to us by the shareholders on this decision, and we believe we have made it well worth their while. |
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I spoke earlier of our efforts to re-evaluate our direction based on the uncertain economic picture. That fact, together with the already mentioned reality that bank customers now have so many new banking products and investment options, prompted First Citizens to undertake the most comprehensive marketing survey ever, reaching 10,000 of our most active customers. |
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This outreach was a broad extension of actions taken in 2001, when we held round-table meetings with a number of our small-to-mid-sized businesses, which resulted in significant changes in our approach to satisfying the small business customer. |
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Weve never had any doubts about knowing the customers we serve, and customer response to the 2002 survey showed friendly, competent staff service as our strongest quality. But we needed to know more, to know what our customers needs and priorities are, and how well we satisfy them. We wanted to know to whom our community turned to for financial services, and why people made those choices. We wanted their candid evaluation of our performance, to assess their knowledge of us and to measure their loyalty to First Citizens. We wanted to know what we needed to do to retain profitable customers and attract new ones. In short, we needed to know what to do in order to gain the competitive advantage. |
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We confirmed some basic things and discovered some very interesting facts. A significant portion of our customers shared three common goals: saving for retirement, funding their childs education and paying off their home. Eighty-three percent (83%) of respondents identified First Citizens as their primary financial institution with First Citizens having 75% ore more of their total financial relationship. Fifty-four percent (54%) have used the bank for over 10 years. Nearly 97% said they would recommend First Citizens to others. Only about one third of respondents named First Citizens as their primary investment institution. The survey revealed our major competitors for investment business are non-bank mutual funds and brokerage providers. |
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We were proud to learn that over 90% of our customers said they were satisfied or highly satisfied with First Citizens, and there was no doubt that the sincere friendliness and competence of our staff was the largest factor contributing to their satisfaction. This is truly a Wow compliment. |
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Most importantly, we discovered an essential paradox: On one hand, First Citizens has the same dilemma as almost every other bank in the country: the higher the income, the more likely the customer is to use multiple financial service providers. Nonetheless, the survey confirmed that customers appear to be willing to give the majority of their financial relationship to us. |
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The opportunities inherent in this realization are immense. All businesses know that it is always more difficult and more expensive to attract a new customer than to broaden the relationship of existing customers. And, as our research has indicated, our existing customers are ready and willing to give us more business. So the obvious next step was to plan how to fulfill that opportunity to move far beyond satisfactory or even highly satisfactory, as nice as those compliments are, but to reach the level where we exceed expectations every time. |
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Weve found the way to do that in an approach called Customer Relationship Management, or CRM. Yes, it may sound like just another marketing acronym, but this is a systematic approach with true substance, to which First Citizens has made a major commitment. It was, in retrospect, not such a difficult decision, because we know the rewards of perfecting the ability to Offer What The Customers Need, When They Need It, will be well worth the effort. |
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At the heart of CRM is the use of modern tools of Customer Information database collection and projection to identify potential matches of our customers and services, to place this information effectively in the hands of our sales associates at the point of sale. To realize the potential power of CRM, our staff will be trained in using this knowledge to connect more precisely and effectively with customers. This customer may be an inexperienced first-time home buyer or a baby boomer concerned about retirement planning. The key is to elevate our already top-level staff to a status far beyond what is commonly known as a teller or a loan officer into the fully-armed, front-line customer service representative of First Citizens. |
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The purpose of this Annual Report is to chart in detail CRMs four seaworthy components: Tools, Process, People and Commitment. |
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Sincerely, |
Richard E. Wilber, President |
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Weve organized the TEAM |
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to acquire the TOOLS |
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The principal tool of CRM is yet another acronym, MCIF, which denotes a patented Customer Information software program. MCIF correlates dozens of different factors (including demographic information) about both individual customers, or groups of customers who share common circumstances, needs and goals. This will enable us to establish profiles of our most profitable prospects and increase our activity with customers with the highest potential. |
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The goal is to match customer needs and desires with products we offer, to create new products or delivery channels based on the customer needs that we identify. Ideally, the CRM tools and processes will identify customers who are not only most in need of a particular service or product, but who are most likely to contract for them. This enables the sales teams to streamline both the essential customer of one service as well as target the appropriate customers for new promotions. The CRM tools are the first step towards achieving our primary goal: To Offer What Customers Need, When They Need It. |
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For example, Katherine Kitty Thompson, of First Citizens Weis Markets branch in Wellsboro, effectively applied the use of customer information tools to identify opportunities when managing the relationship of Mildred Sherman, whom she had worked with previously on a mortgage for her new home. Knowing that Mildred would be selling her previous home, Kitty continued to monitor Mildreds relationship in order to contact her immediately and offer options for investing the proceeds from the sale of her previous home. |
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and create the PROCESS |
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Since the Tools dont mean much without a plan of execution (a strategy, if you will), the Business Process is the means by which all the pieces work together to make CRM successfulwhere we develop and deliver a consistent approach of selling and servicing customers throughout the company. This change in marketing mindset will be accomplished through the development of clear standards of operation, the perfection of sales management and coaching, and the creation of goals and performance measures with corresponding compensation and incentive programs. |
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It is through the effective execution of these activities and continuous training that an employee comes to understand the dynamics of the transformation to becoming a fully qualified customer-relationship manager. So that, for example, an associate who notices on her screen a customer with a large checking balance may not only proactively suggest options, but also know how best to meet that customers needs. It is the use of the CRM tools and process by employees who will now have a thorough knowledge of the customer at their fingertips and product-knowledge skills across a broad enough spectrum, to have a specific, informed discussion regarding the products and services we offer. |
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to educate our PEOPLE |
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Which leads back to our Peoplethe lifeblood of the Process. We already know from our survey, we have the right people who know how to please our customers. Now the task is to bring our people to the next levelof exceeding customer expectations. |
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This gets down to the most basic factors of human nature and communication; things as simple as sharpening skills to be a better listener and knowing when and how to ask the right questions. Not just questions directly related to why the customer came through the door, but more importantly, questions that uncover other needs and opportunities to further satisfy the customer. |
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Exceeding customer expectations means following up on every contact: Have you received your new checks? Is your debit card working for you at the grocery store? Did the delivery time on that loan help with your inventory? Or, best of all: I understand what you said yesterday and I have some ideas on how to make it happen. |
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Business Development Officer Chris Landis applied this approach when Jack and Carol Wheeler turned to him for help to purchase the 125-year-old building that Jack said was crying to be a bakery. Chris knew the creation of new jobs meant the Wheelers would qualify for assistance with a loan through the Northern Tier Regional Planning and Development Corporation. Chris expertise helped make Troy the place to go for donuts, in that old building now warm with the wonderful aromas of the Endless Mountain Donut Company & Bakery. |
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and engage their COMMITMENT |
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By now, commitment is one of the most famous words in the English language. We all know what it means, because no personal or business plan, either a diet or CRM, no combination of Tools, Process and People, can work without it. Thats why, with the advent of CRM at First Citizens, our focus is on commitment to the VERY IDEA of commitment, since thats the only way plans work and goals are accomplished. |
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Commitment is the wind in our sails, the strength that makes our new programs and ideas successful. This commitment exists throughout the companyBoard of Directors, President, Management Team, support areas and front-line associates. Just ask Nelle Rounsaville. Nelle wanted to expand her business holdings in the Wellsboro area, where she already owned the Wellsboro Diner and a bed and breakfast called La Petite Auberge to include a second bed and breakfast, now called La Belle Auberge. Where others may have seen red tape, Jeff Wilson, community office manager and business development officer of the Wellsboro branch, saw the potential for converting Nelles ambitious vision into attractive, lucrative businesses. Jeffs commitment means that Nelle is now the proud owner and operator of three successful businesses in Wellsboro. For ten years, Jeff has been committed to Nelles dream, and in turn, Nelle has been turning to First Citizens for all her financial needs. That kind of commitment is the foundation of Customer Relationship Management. |
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to BENEFIT our customers |
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The components of CRMthe detailed customer information tools, the structured business processes that ensure quality service across the board, and our employees, highly skilled in using customer knowledge to identify opportunities, surrounded by a sincere commitment by everyone in this organizationwill be especially powerful. Why? Because today, our employees do what they believe is best for the customer and it is that commitment, combined with CRM, that moves us closer to that place where this consistency of exceeding expectations becomes the standard by which all other financial service providers are judged. |
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Just ask Donna McCaslin. When Donna's husband Leroy died last year, Donna had to try to make some sense of the many files full of stock certificates and other investment instruments that Leroy had accrued in their 56 years together. Mary Brooks, of the First Citizens branch in Ulysses, listened to Donnas predicament and based on her knowledge of our investment-area capabilities, advised Donna to meet with Investment Representative Jeff Richardson to help her better understand the documents in question. Now First Citizens is partnering with Donna to ensure her retirement needs are taken care of as well. |
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Donna commented, Leroy was always a big believer in this bank, and now that he is gone, somebody is helping me shoulder this responsibility. Im pretty new at this financial business, but this bank and its people have been a Godsend. |
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With Customer Relationship Management, we will think and act faster than our competitors, build stronger and more profitable relationships, utilize our resources more efficiently and effectively, and therefore impact the bottom line more swiftly and with greater consistency. This means that not only will we know what you want when you walk through our doors, but we will also know that when your daughter comes with you, its the cherry-flavored lollipop that she wants. Its just that simple. |
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2002 FINANCIAL SECTION |
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Consolidated Financial Statements |
Financial Highlights |
|
(dollars in thousands, except per share data) | 2002 | 2001 | ||||||
|
||||||||
BALANCE SHEET | ||||||||
|
||||||||
Assets | $ | 432,658 | $ | 421,110 | ||||
Deposits | 373,051 | 370,474 | ||||||
Net Loans | 294,836 | 268,464 | ||||||
Investments | 100,725 | 113,604 | ||||||
Stockholders' Equity | 38,406 | 33,389 | ||||||
STATEMENT OF INCOME | ||||||||
|
||||||||
Interest Income | 27,377 | 29,025 | ||||||
Interest Expense | 10,404 | 14,306 | ||||||
Net Interest Income | 16,973 | 14,719 | ||||||
Net Income | 5,595 | 3,757 | ||||||
PER SHARE DATA | ||||||||
|
||||||||
Net Income | 1.98 | 1.33 | ||||||
Cash Dividends | 0.68 | 0.64 | ||||||
TRUST DEPARTMENT | ||||||||
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||||||||
Trust Assets Managed | 65,171 | 72,416 |
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17 |
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2002 FINANCIAL SECTION |
|
Consolidated Financial Statements |
Financial Highlights |
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|
December 31, | |||||||||||
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(in thousands) | 2002 | 2001 | |||||||||
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ASSETS: | |||||||||||
Cash and due from banks: | |||||||||||
Noninterest-bearing | $ | 11,173 | $ | 11,413 | |||||||
Interest-bearing | 421 | 67 | |||||||||
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|||||||||||
Total cash and cash equivalents | 11,594 | 11,480 | |||||||||
Available-for-sale securities | 100,725 | 113,604 | |||||||||
Loans (net of allowance for loan losses | |||||||||||
2002, 3,621; 2001, 3,250) | $ | 294,836 | 268,464 | ||||||||
Premises and equipment | 11,245 | 11,768 | |||||||||
Accrued interest receivable | 1,976 | 1,986 | |||||||||
Goodwill | 6,905 | 6,905 | |||||||||
Core deposit intangible | 1,413 | 1,870 | |||||||||
Other assets | 3,964 | 5,033 | |||||||||
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TOTAL ASSETS | $ | 432,658 | $ | 421,110 | |||||||
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LIABILITIES: | |||||||||||
Deposits: | |||||||||||
Noninterest-bearing | $ | 40,143 | $ | 37,361 | |||||||
Interest-bearing | 332,908 | 333,113 | |||||||||
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Total deposits | 373,051 | 370,474 | |||||||||
Borrowed funds | 17,027 | 13,311 | |||||||||
Accrued interest payable | 2,077 | 2,285 | |||||||||
Other liabilities | 2,097 | 1,651 | |||||||||
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TOTAL LIABILITIES | 394,252 | 387,721 | |||||||||
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STOCKHOLDERS' EQUITY: | |||||||||||
Common Stock | |||||||||||
$1.00 par value; authorized 10,000,000 shares; | |||||||||||
issued 2,882,070 and 2,854,582 | |||||||||||
shares in 2002 and 2001, respectively | 2,882 | 2,855 | |||||||||
Additional paid-in capital | 9,473 | 9,017 | |||||||||
Retained earnings | 24,447 | 21,253 | |||||||||
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TOTAL | 36,802 | 33,125 | |||||||||
Accumulated other comprehensive income | 2,553 | 1,213 | |||||||||
Less: Treasury stock, at cost | |||||||||||
55,162 shares for 2002 and 2001 | (949 | ) | (949 | ) | |||||||
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TOTAL STOCKHOLDERS' EQUITY | 38,406 | 33,389 | |||||||||
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 432,658 | $ | 421,110 | |||||||
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See accompanying notes to consolidated financial statements. |
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18 |
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2002 FINANCIAL SECTION |
|
Consolidated Financial Statements |
Consolidated Statement of Income |
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Year Ended December 31, | |||||||||||
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(in thousands, except per share data) | 2002 | 2001 | 2000 | ||||||||
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INTEREST INCOME: | |||||||||||
Interest and fees on loans | $ | 21,600 | $ | 22,163 | $ | 20,523 | |||||
Interest-bearing deposits with banks | 65 | 547 | 129 | ||||||||
Investment securities: | |||||||||||
Taxable | 4,711 | 4,969 | 4,093 | ||||||||
Nontaxable | 634 | 853 | 932 | ||||||||
Dividends | 367 | 493 | 549 | ||||||||
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TOTAL INTEREST INCOME | 27,377 | 29,025 | 26,226 | ||||||||
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INTEREST EXPENSE: | |||||||||||
Deposits | 10,012 | 13,839 | 12,766 | ||||||||
Borrowed funds | 392 | 467 | 1,472 | ||||||||
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TOTAL INTEREST EXPENSE | 10,404 | 14,306 | 14,238 | ||||||||
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NET INTEREST INCOME | 16,973 | 14,719 | 11,988 | ||||||||
Provision for loan losses | 435 | 445 | 610 | ||||||||
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NET INTEREST INCOME AFTER PROVISION FOR | |||||||||||
LOAN LOSSES | 16,538 | 14,274 | 11,378 | ||||||||
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NON-INTEREST INCOME: | |||||||||||
Service charges | 3,130 | 2,527 | 1,853 | ||||||||
Other | 1,100 | 527 | 385 | ||||||||
Trust | 562 | 578 | 432 | ||||||||
Realized securities gains (losses), net | 254 | 657 | (9 | ) | |||||||
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TOTAL NON-INTEREST INCOME | 5,046 | 4,289 | 2,661 | ||||||||
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NON-INTEREST EXPENSES: | |||||||||||
Salaries and employee benefits | 7,120 | 6,597 | 4,768 | ||||||||
Occupancy | 998 | 992 | 610 | ||||||||
Furniture and equipment | 881 | 966 | 761 | ||||||||
Professional fees | 667 | 494 | 474 | ||||||||
Amortization | 457 | 1,015 | 260 | ||||||||
Other | 4,103 | 3,977 | 3,314 | ||||||||
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TOTAL NON-INTEREST EXPENSES | 14,226 | 14,041 | 10,187 | ||||||||
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Income before provision for income taxes | 7,358 | 4,522 | 3,852 | ||||||||
Provision for income taxes | 1,763 | 765 | 644 | ||||||||
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NET INCOME | $ | 5,595 | $ | 3,757 | $ | 3,208 | |||||
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NET INCOME - EARNINGS PER SHARE | $ | 1.98 | $ | 1.33 | $ | 1.13 | |||||
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CASH DIVIDENDS PER SHARE | $ | 0.68 | $ | 0.64 | $ | 0.60 | |||||
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See accompanying notes to consolidated financial statements. |
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19 |
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2002 FINANCIAL SECTION |
|
Consolidated Financial Statements |
Consolidated Statement of Changes in Stockholders' Equity |
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Accumulated | ||||||||||
Additional | Other | |||||||||
Common Stock | Paid-in | Retained | Comprehensive | Treasury | ||||||
(in thousands, except share data) | Shares | Amount | Capital | Earnings | Income(Loss) | Stock | Total | |||
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Balance, December 31, 1999 | 2,800,563 | $ 2,800 | $ 8,374 | $ 18,432 | $ (2,064) | $ (460) | $ 27,082 | |||
Comprehensive income: | ||||||||||
Net income | 3,208 | 3,208 | ||||||||
Change in net unrealized gain on securities | ||||||||||
available-for-sale, net of taxes of $1,241 | 2,408 | 2,408 | ||||||||
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Total comprehensive income | 5,616 | |||||||||
Stock dividend | 26,846 | 27 | 296 | (323) | ||||||
Purchase of treasury stock (28,577 shares) | (489) | (489) | ||||||||
Cash dividends, $.60 per share | (1,660) | (1,660) | ||||||||
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Balance, December 31, 2000 | 2,827,409 | 2,827 | 8,670 | 19,657 | 344 | (949) | 30,549 | |||
Comprehensive income: | ||||||||||
Net income | 3,757 | 3,757 | ||||||||
Change in net unrealized gain on securities | ||||||||||
available-for-sale, net of taxes of $448 | 869 | 869 | ||||||||
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Total comprehensive income | 4,626 | |||||||||
Stock dividend | 27,173 | 28 | 347 | (375) | ||||||
Cash dividends, $.64 per share | (1,786) | (1,786) | ||||||||
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Balance, December 31, 2001 | 2,854,582 | 2,855 | 9,017 | 21,253 | 1,213 | (949) | 33,389 | |||
Comprehensive income: | ||||||||||
Net income | 5,595 | 5,595 | ||||||||
Change in net unrealized gain on securities | ||||||||||
available-for-sale, net of taxes of $690 | 1,340 | 1,340 | ||||||||
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Total comprehensive income | 6,935 | |||||||||
Stock dividend | 27,488 | 27 | 456 | (483) | ||||||
Cash dividends, $.68 per share | (1,918) | (1,918) | ||||||||
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Balance, December 31, 2002 | 2,882,070 | $ 2,882 | $ 9,473 | $ 24,447 | $ 2,553 | $ (949) | $ 38,406 | |||
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2002 | 2001 | 2000 | ||||||||
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Components of comprehensive income: | ||||||||||
Change in net unrealized gain on investment | ||||||||||
securities available-for-sale | $ 1,508 | $ 1,303 | $ 2,402 | |||||||
Realized losses (gains) included in net income, net | ||||||||||
of taxes (benefit) of $86, $223 and $(3) | (168) | (434) | 6 | |||||||
|
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Total | $ 1,340 | $ 869 | $ 2,408 | |||||||
|
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See accompanying notes to consolidated financial statements. |
20 |
|
2002 FINANCIAL SECTION |
|
Consolidated Financial Statements |
Consolidated Statement of Cash Flows |
|
Year Ended December 31, | |||||||||||||||
|
|||||||||||||||
(in thousands) | 2002 | 2001 | 2000 | ||||||||||||
|
|||||||||||||||
Cash Flows from Operating Activities: | |||||||||||||||
Net income | $ | 5,595 | $ | 3,757 | $ | 3,208 | |||||||||
Adjustments to reconcile net income to net | |||||||||||||||
cash provided by operating activities: | |||||||||||||||
Provision for loan losses | 435 | 445 | 610 | ||||||||||||
Depreciation | 990 | 953 | 737 | ||||||||||||
Amortization on intangible assets | 457 | 1,015 | 260 | ||||||||||||
Amortization and accretion on investment securities | 690 | 199 | 206 | ||||||||||||
Deferred income taxes | 116 | (279 | ) | (254 | ) | ||||||||||
Realized losses (gains) on securities | (254 | ) | (657 | ) | 9 | ||||||||||
Realized gains on loans sold | (185 | ) | (31 | ) | (6 | ) | |||||||||
Originations of loans held for sale | (11,857 | ) | (3,839 | ) | (517 | ) | |||||||||
Proceeds from sales of loans held for sale | 13,119 | 2,103 | 523 | ||||||||||||
Loss (gain) on sales or disposals of premises and equipment | (30 | ) | 36 | 3 | |||||||||||
Decrease (increase) in accrued interest receivable | 10 | 332 | (198 | ) | |||||||||||
Increase in other assets and intangibles | (429 | ) | (615 | ) | (1,182 | ) | |||||||||
Increase (decrease) in accrued interest payable | (208 | ) | (335 | ) | 62 | ||||||||||
Increase (decrease) in other liabilities | (8 | ) | 478 | 205 | |||||||||||
|
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Net cash provided by operating activities | 8,441 | 3,562 | 3,666 | ||||||||||||
|
|||||||||||||||
Cash Flows from Investing Activities: | |||||||||||||||
Available-for-sale securities: | |||||||||||||||
Proceeds from sale of securities | 13,927 | 35,529 | 10,717 | ||||||||||||
Proceeds from maturity of securities | 34,090 | 13,841 | 4,291 | ||||||||||||
Purchase of securities | (32,899 | ) | (63,216 | ) | (19,527 | ) | |||||||||
Net increase in loans | (28,045 | ) | (7,218 | ) | (3,810 | ) | |||||||||
Purchase of loans | - | - | (28,027 | ) | |||||||||||
Acquisition of premises and equipment | (473 | ) | (2,086 | ) | (5,722 | ) | |||||||||
Proceeds from sale of premises and equipment | 275 | 16 | - | ||||||||||||
Proceeds from sale of foreclosed assets held for sale | 422 | 425 | 271 | ||||||||||||
Deposit acquisition premium | - | - | (9,431 | ) | |||||||||||
|
|||||||||||||||
Net cash used in investing activities | (12,703 | ) | (22,709 | ) | (51,238 | ) | |||||||||
|
|||||||||||||||
Cash Flows from Financing Activities: | |||||||||||||||
Net increase in deposits | 2,577 | 2,688 | 2,345 | ||||||||||||
Proceeds from long-term borrowings | 1,268 | 1,993 | 3,579 | ||||||||||||
Repayments of long-term borrowings | (949 | ) | (1,720 | ) | (4,699 | ) | |||||||||
Net increase (decrease) in short-term borrowed funds | 3,398 | 1,834 | (13,530 | ) | |||||||||||
Dividends paid | (1,918 | ) | (1,786 | ) | (1,660 | ) | |||||||||
Acquisition of Treasury Stock | - | - | (489 | ) | |||||||||||
Deposits of acquired branches | - | - | 81,122 | ||||||||||||
|
|||||||||||||||
Net cash provided by financing activities | 4,376 | 3,009 | 66,668 | ||||||||||||
|
|||||||||||||||
Net increase (decrease) in cash and cash equivalents | 114 | (16,138 | ) | 19,096 | |||||||||||
Cash and Cash Equivalents at Beginning of Year | 11,480 | 27,618 | 8,522 | ||||||||||||
|
|||||||||||||||
Cash and Cash Equivalents at End of Year | $ | 11,594 | $ | 11,480 | $ | 27,618 | |||||||||
|
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Supplemental Disclosures of Cash Flow Information: | |||||||||||||||
Interest paid | $ | 10,612 | $ | 14,641 | $ | 14,176 | |||||||||
|
|||||||||||||||
Income taxes paid | $ | 1,755 | $ | 915 | $ | 955 | |||||||||
|
|||||||||||||||
Noncash activities: | |||||||||||||||
Real estate acquired in settlement of loans | $ | 162 | $ | 284 | $ | 177 | |||||||||
|
|||||||||||||||
See accompanying notes to consolidated financial statements. |
|
21 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
|
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|
Citizens Financial Services, Inc. (individually and collectively, the Company) is a Pennsylvania corporation organized as the holding company of its wholly-owned subsidiary, First Citizens National Bank (the Bank). The Bank is a national banking association headquartered in Mansfield, Pennsylvania and operating fifteen full-service banking offices in Potter, Tioga and Bradford counties. The Company provides a comprehensive range of services including consumer loans, residential real estate loans, commercial loans, and loans to various state and municipal entities. Deposit programs encompass the full range of consumer as well as commercial checking and savings accounts. Deposit products include certificates of deposit and individual retirement accounts. A comprehensive menu of trust and investment services is also available. The Companys principal sources of revenue are derived from its loan and investment portfolios. 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 consolidated financial statements 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 accounting principles generally accepted in the United States of America. All significant intercompany 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. |
|
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, 2002 and 2001. |
|
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, 2002 and 2001. |
|
Available-for-Sale Securities - includes debt and equity securities not classified as held-to-maturity or trading securities. Such securities are reported at fair value, with unrealized holding gains and losses excluded from earnings and reported as a separate component of stockholders equity, net of estimated income tax effect. |
|
The amortized cost of investment in debt securities is adjusted for amortization of premiums and accretion of discounts, computed by a method that results in a level yield. Gains and losses on the sale of investment securities are computed on the basis of specific identification of the adjusted cost of each security. |
|
22 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
|
Common stock of the Federal Reserve Bank and Federal Home Loan Bank represents ownership in institutions which are wholly owned by other financial institutions. These equity securities are accounted for at cost and are classified as other assets. |
|
The fair value of investments, except certain state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. |
|
LOANS |
|
Interest on all loans is recognized on the accrual basis based upon the principal amount outstanding. The accrual of interest income on loans is discontinued when, in the opinion of management, there exists doubt as to the ability to collect such interest. Payments received on nonaccrual loans are applied to the outstanding principal balance or recorded as interest income, depending upon our assessment of our ultimate ability to collect principal and interest. Loans are returned to the accrual status when factors indicating doubtful collectibility cease to exist. |
|
The Company recognizes nonrefundable loan origination fees and certain direct loan origination costs over the life of the related loan as an adjustment of loan yield using the interest method. |
|
ALLOWANCE FOR LOAN LOSSES |
|
The allowance for loan losses represents the amount which management estimates is adequate to provide for potential 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 managements periodic evaluation of individual loans, the overall risk characteristics of the various portfolio segments, past experience with losses, the impact of economic conditions on borrowers, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses are particularly susceptible to significant change in the near term. |
|
Impaired loans are commercial and commercial real estate loans for which it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Company individually evaluates such loans for impairment and does not aggregate loans by major risk classifications. The definition of impaired loans is not the same as the definition of nonaccrual loans, although the two categories overlap. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility, while not classifying the loan as impaired if the loan is not a commercial or commercial real estate loan. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value; or, as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral. |
|
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 borrowers prior payment record, and the amount of shortfall in relation to the principal and interest owed. |
|
23 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
|
FORECLOSED ASSETS HELD FOR SALE |
|
Foreclosed assets acquired in settlement of foreclosed loans are carried at the lower of fair value minus estimated costs to sell or cost. Prior to foreclosure, the value of the underlying loan is written down to fair market value of the real estate or other assets to be acquired by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties, net of related income and losses on disposition, are included in other expenses and gains are included in other income. |
|
PREMISES AND EQUIPMENT |
|
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation expense is computed on straight line and accelerated methods over the estimated useful lives of the assets, which range from 3 to 15 years for furniture, fixtures and equipment and 5 to 39 1/2 years for building premises. Repair and maintenance expenditures which extend the useful life of an asset are capitalized and other repair expenditures are expensed as incurred. |
|
When premises or equipment are retired or sold, the remaining cost and accumulated depreciation are removed from the accounts and any gain or loss is credited or charged to income. |
|
INTANGIBLE ASSETS |
|
Intangible assets include core deposit intangibles, which are a measure of the value of consumer demand and savings deposits acquired in business combinations accounted for as purchases. The core deposit intangibles are being amortized to expense over a 5 1/2 to 6-year life on a straight-line basis. 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 |
|
Goodwill is the excess of the purchase price over the fair value of assets acquired of companies in connection with business acquisitions accounted for as purchases and was being amortized on the straight-line method over 15 years, prior to January 1, 2002. On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (FAS) No. 142, Goodwill and Other Intangible Assets, which changed the accounting for goodwill from an amortization method to an impairment-only approach. This statement eliminates the regularly scheduled amortization of goodwill and replaces this method with a two-step process for testing the impairment of goodwill on at least an annual basis. This approach could cause more volatility in the Companys reported net income because impairment losses, if any, could occur irregularly and in varying amounts. The Company, upon adoption of this Statement, stopped amortizing existing goodwill of $6.9 million. In addition, the Company performed its initial impairment analysis of goodwill and determined that the estimated fair value exceeded the carrying amount. |
|
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, 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. |
|
24 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
|
EMPLOYEE BENEFIT PLANS |
|
The Company has a noncontributory defined benefit pension plan covering substantially all employees. It is the Companys 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 also has a profit-sharing plan which provides tax-deferred salary savings to plan participants. |
|
MORTGAGE SERVICING RIGHTS (MSRs) |
|
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 are carried at lower of cost or market. Originated MSRs are recorded by allocating total costs incurred between the loan and servicing rights based on their relative fair values. MSRs are amortized in proportion to the estimated servicing income over the estimated life of the servicing portfolio. |
|
COMPREHENSIVE INCOME |
|
The Company is required to present comprehensive income in a full set of general purpose financial statements for all periods presented. Other comprehensive income is comprised exclusively of unrealized holding gains (losses) on the available-for-sale securities portfolio. 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 August 2001, the Financial Accounting Standards Board (FASB) issued FAS No. 143, Accounting for Asset Retirement Obligations, which requires that the fair value of a liability be recognized when incurred for the retirement of a long-lived asset and the value of the asset be increased by that amount. The statement also requires that the liability be maintained at its present value in subsequent periods and outlines certain disclosures for such obligations. The adoption of this statement, which is effective January 1, 2003, is not expected to have a material effect on the Company s financial statements. |
|
In October 2001, the FASB issued FAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. FAS No. 144 supercedes FAS No. 121 and applies to all long-lived assets (including discontinued operations) and consequently amends APB Opinion No. 30, Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business. FAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less costs to sell. FAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, its provisions are to be applied prospectively. The adoption of this statement did not have a material effect on the Companys financial statements. |
|
In April 2002, the FASB issued FAS No. 145, Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. FAS No. 145 rescinds FAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB Opinion No. 30 will now be used to classify those gains and losses. This statement also amends FAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. FAS No. 145, is effective for transactions occurring after May 15, 2002. The adoption of FAS No. 145 did not have a material effect on the Companys financial position or results of operations. |
|
25 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
In July 2002, the FASB issued FAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The new statement will be effective for exit or disposal activities initiated after December 31, 2002, the adoption of which did not have a material effect on the Companys financial statements. |
|
On October 1, 2002, the FASB issued FAS No. 147, Acquisitions of Certain Financial Institutions, effective for all business combinations initiated after October 1, 2002. This statement addresses the financial accounting and reporting for the acquisition of all or part of a financial institution, except for a transaction between two or more mutual enterprises. This statement removes acquisitions of financial institutions, other than transactions between two or more mutual enterprises, from the scope of FAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method. The acquisition of all or part of a financial institution that meets the definition of a business combination shall be accounted for by the purchase method in accordance with FAS No. 141, Business Combinations, and FAS No. 142, Goodwill and Other Intangible Assets. This statement also provides guidance on the accounting for the impairment or disposal of acquired long-term customer-relationship intangible assets (such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets), including those acquired in transactions between two or more mutual enterprises. Upon adoption of this statement, the Company ceased the amortization of $6,905,000 in goodwill associated with branch acquisitions. The Company will continue to review the remaining goodwill on an annual basis for impairment. However, $1,413,000 in core deposit intangible will continue to be amortized and reviewed for impairment in accordance with FAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. |
|
On December 31, 2002, the FASB issued FAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, which amends FAS No. 123, Accounting for Stock-Based Compensation. FAS No. 148 amends the disclosure requirements of FAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. Under the provisions of FAS No. 123, companies that adopted the preferable, fair value based method were required to apply that method prospectively for new stock option awards. This contributed to a ramp-up effect on stock-based compensation expense in the first few years following adoption, which caused concern for companies and investors because of the lack of consistency in reported results. To address that concern, FAS No. 148 provides two additional methods of transition that reflect an entitys full complement of stock-based compensation expense immediately upon adoption, thereby eliminating the ramp-up effect. FAS No.148 also improves the clarity and prominence of disclosures about the pro forma effects of using the fair value based method of accounting for stock-based compensation for all companiesregardless of the accounting method usedby requiring that the data be presented more prominently and in a more user-friendly format in the footnotes to the financial statements. In addition, the statement improves the timeliness of those disclosures by requiring that this information be included in interim as well as annual financial statements. The transition guidance and annual disclosure provisions of FAS No. 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. |
|
26 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
In November, 2002, the FASB issued Interpretation No.45, Guarantors Accounting and Disclosure requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. This interpretation clarifies that a guarantor is required to disclose (a) the nature of the guarantee, including the approximate term of the guarantee, how the guarantee arose, and the events or circumstances that would require the guarantor to perform under the guarantee; (b) the maximum potential amount of future payments under the guarantee; (c) the carrying amount of the liability, if any, for the guarantors obligations under the guarantee; and (d) the nature and extent of any recourse provisions or available collateral that would enable the guarantor to recover the amounts paid under the guarantee. This interpretation also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the obligations it has undertaken in issuing the guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. The objective of the initial measurement of that liability is the fair value of the guarantee at its inception. The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantors fiscal year-end. The disclosure requirements in this interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. |
|
TREASURY STOCK |
|
The purchase of the Companys 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 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 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. |
|
EARNINGS PER SHARE |
|
Earnings per share calculations give retroactive effect to stock dividends declared by the Company. The number of shares used in the earnings per share computations presented was 2,826,908, 2,826,908 and 2,829,710 for 2002, 2001 and 2000, respectively. The Company has no dilutive securities. |
|
RECLASSIFICATION |
|
Certain of the prior year amounts have been reclassified to conform with the current year presentation. Such reclassifications had no effect on net income or stockholders equity. |
|
2. RESTRICTIONS ON CASH AND DUE FROM BANKs |
|
The Bank is required to maintain reserves, in the form of cash and balances with the Federal Reserve Bank, against its deposit liabilities. The amount of such reserves was $546,000 and $428,000 at December 31, 2002 and 2001, respectively. |
|
27 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
|
Deposits with one financial institution are insured up to $100,000. The Company maintains cash and cash equivalents with other financial institutions in excess of the insured amount. |
|
3. INVESTMENT SECURITIES |
|
The amortized cost and estimated fair value of investment securities at December 31, 2002 and 2001, were as follows (in thousands): |
|
Gross | Gross | ||||||||||||||
Unrealized | Unrealized | Estimated | |||||||||||||
Amortized | Holding | Holding | Fair | ||||||||||||
December 31, 2001 | Cost | Gains | Losses | Value | |||||||||||
|
|||||||||||||||
Available-for-sale securities: | |||||||||||||||
U.S. Agency securities | $ | 1,008 | $ | 44 | $ | - | $ | 1,052 | |||||||
Obligations of state and | |||||||||||||||
political subdivisions | 12,424 | 307 | - | 12,731 | |||||||||||
Corporate obligations | 19,845 | 1,311 | - | 21,156 | |||||||||||
Mortgage-backed securities | 58,913 | 1,888 | - | 60,801 | |||||||||||
Equity securities | 4,667 | 318 | - | 4,985 | |||||||||||
|
|||||||||||||||
Total available-for-sale | $ | 96,857 | $ | 3,868 | $ | - | $ | 100,725 | |||||||
|
|
Gross | Gross | ||||||||||||||
Unrealized | Unrealized | Estimated | |||||||||||||
Amortized | Holding | Holding | Fair | ||||||||||||
December 31, 2001 | Cost | Gains | Losses | Value | |||||||||||
|
|||||||||||||||
Available-for-sale securities: | |||||||||||||||
Obligations of state and | |||||||||||||||
political subdivisions | $ | 18,626 | $ | 64 | $ | (147 | ) | $ | 18,543 | ||||||
Corporate obligations | 11,616 | 584 | - | 12,200 | |||||||||||
Mortgage-backed securities | 76,414 | 945 | (148 | ) | 77,211 | ||||||||||
Equity securities | 5,110 | 540 | - | 5,650 | |||||||||||
|
|||||||||||||||
Total available-for-sale | $ | 111,766 | $ | 2,133 | $ | (295 | ) | $ | 113,604 |
|
Proceeds from sales of securities available-for-sale during 2002, 2001, and 2000 were $13,927,000, $35,529,000 and $10,717,00 respectively. Gross gains and gross losses were realized on those sales as follows (in thousands): |
|
2002 | 2001 | 2000 | ||||||||
|
||||||||||
Gross gains | $ | 287 | $ | 817 | $ | 232 | ||||
Gross losses | 33 | 160 | 241 | |||||||
|
||||||||||
Net gains (losses) | $ | 254 | $ | 657 | $ | (9 | ) | |||
|
|
28 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
Investment securities with an approximate carrying value of $50,733,000 and $57,180,000 at December 31, 2002 and 2001, 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 carrying value of debt securities at December 31, 2002, by contractual maturity, are shown below (in thousands): |
|
Amortized | Estimated | |||||||
Cost | Fair Value | |||||||
|
||||||||
Available-for-sale securities | ||||||||
Due in one year or less | $ | 372 | $ | 375 | ||||
Due after one yearthrough five years | 25,568 | 26,787 | ||||||
Due after five years through ten years | 30,353 | 31,198 | ||||||
Due after ten years | 35,897 | 37,380 | ||||||
|
||||||||
Total | $ | 92,190 | $ | 95,740 | ||||
|
|
4. LOANS |
|
The Company grants commercial, industrial, residential, and consumer loans primarily to customers throughout Northcentral Pennsylvania and Southern New York. Although the Company has a diversified loan portfolio at December 31, 2002 and 2001, a substantial portion of its debtors ability to honor their contracts is dependent on the economic conditions within this region. |
|
Major classifications of loans are as follows (in thousands): |
|
December 31, | |||||||||
2002 | 2001 | ||||||||
|
|||||||||
Real estate loans: | |||||||||
Residential | $ | 175,323 | $ | 160,439 | |||||
Commercial | 47,210 | 43,174 | |||||||
Agricultural | 9,844 | 12,169 | |||||||
Construction | 5,009 | 3,219 | |||||||
Loans to individuals for household, | |||||||||
family and other purchases | 13,915 | 14,694 | |||||||
Commercial and other loans | 18,564 | 15,099 | |||||||
State and political subdivision loans | 28,592 | 22,920 | |||||||
|
|||||||||
298,457 | 271,714 | ||||||||
Less allowance for loan losses | 3,621 | 3,250 | |||||||
|
|||||||||
Loans, net | $ | 294,836 | $ | 268,464 | |||||
|
|
Real estate loans serviced for Freddie Mac, which are not included in the consolidated balance sheet, totaled $20,087,000 and $9,892,000, at December 31, 2002 and 2001, respectively. |
|
29 |
|
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
|
At December 31, 2002 and 2001, net unamortized loan fees and costs of $767,000 and $794,000, respectively, have been deducted from the carrying value of loans. |
|
The Company had nonaccrual loans, inclusive of impaired loans, of $2,980,000 and $2,062,000 at December 31, 2002 and 2001, respectively. Interest income on loans would have increased by approximately $84,000, $105,000 and $39,000 during 2002, 2001 and 2000, respectively, if these loans had performed in accordance with their original terms. |
|
Information with respect to impaired loans as of and for the years ended December 31, is as follows (in thousands): |
|
2002 | 2001 | 2000 | ||||||||
|
||||||||||
Impaired Loans | $ | 1,916 | 1,077 | $ | 199 | |||||
Related allowance for loan losses | 327 | 325 | 25 | |||||||
Average recorded balance of impaired loans | 1,967 | 1,078 | 202 | |||||||
Interest income recognized on impaired loans | - | 26 | 1 |
|
Transactions in the allowance for loan losses were as follows (in thousands): |
|
Years Ended December 31, | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
|
||||||||||||
Balance, beginning of year | $ | 3,250 | $ | 2,777 | $ | 2,270 | ||||||
Provision charged to income | 435 | 445 | 610 | |||||||||
Recoveries on loans previously | ||||||||||||
charged against the allowance | 115 | 175 | 55 | |||||||||
|
||||||||||||
3,800 | 3,397 | 2,935 | ||||||||||
Loans charged against the allowance | (179 | ) | (147 | ) | (158 | ) | ||||||
|
||||||||||||
Balance, end of year | $ | 3,621 | $ | 3,250 | $ | 2,777 | ||||||
|
|
The following is a summary of the past due and nonaccrual loans as of December 31, 2002 and 2001 (in thousands): |
|
December 31, 2002 | ||||||||||
Past Due | Past Due | |||||||||
30 - 89 days | 90 days or more | Nonaccrual | ||||||||
|
||||||||||
Real estate loans | $ | 1,744 | $ | - | $ | 2,980 | ||||
Installment loans | 307 | 29 | - | |||||||
Credit cards and related loans | 36 | 3 | - | |||||||
Commercial and all other loans | 145 | 7 | - | |||||||
|
||||||||||
Total | $ | 2,232 | $ | 39 | $ | 2,980 | ||||
|
|
30 |
|
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
December 31, 2001 | ||||||||||
Past Due | Past Due | |||||||||
30 - 89 days | 90 days or more | Nonaccrual | ||||||||
|
||||||||||
Real estate loans | $ | 2,329 | $ | 89 | $ | 2,062 | ||||
Installment loans | 298 | 16 | - | |||||||
Credit cards and related loans | 33 | 6 | - | |||||||
Commercial and all other loans | 92 | - | - | |||||||
|
||||||||||
Total | $ | 2,752 | $ | 111 | $ | 2,062 | ||||
|
|
5. PREMISES & EQUIPMENT |
|
Premises and equipment are summarized as follows (in thousands): |
|
December 31, | |||||||
2002 | 2001 | ||||||
|
|||||||
Land | $ | 1,867 | $ | 1,867 | |||
Buildings | 9,681 | 9,524 | |||||
Furniture, fixtures and equipment | 6,476 | 5,903 | |||||
Construction in process | 21 | 294 | |||||
|
|||||||
18,045 | 17,588 | ||||||
Less accumulated depreciation | 6,800 | 5,820 | |||||
|
|||||||
Premises and equipment, net | $ | 11,245 | $ | 11,768 | |||
|
|
Depreciation expense amounted to $990,000, $953,000, and $737,000 for 2002, 2001, and 2000, respectively. |
|
6. DEPOSITS |
|
Certificates of deposit of $100,000 or more amounted to $35,671,000 and $33,991,000 at December 31, 2002 and 2001, respectively. Interest expense on certificates of deposit of $100,000 or more amounted to $1,654,000, $1,976,000, and $1,612,000 for the years ended December 31, 2002, 2001, and 2000, respectively. |
|
Following are maturities of certificates of deposit as of December 31, 2002 (in thousands): |
|
2003 |
|
$ |
88,314 |
|
2004 |
|
27,959 |
| |
2005 |
|
32,885 |
| |
2006 |
|
18,851 |
| |
2007 |
|
29,479 |
| |
Thereafter |
|
4,299 |
| |
| ||||
Total certificates of deposit |
|
$ |
201,787 |
|
|
|
31 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
|
7. BORROWED FUNDS |
|
Securities | |||||||||||||||||||||
Sold Under | Capital | Total | |||||||||||||||||||
Agreements to | TT&L | FHLB | Term | Lease | Borrowed | ||||||||||||||||
(dollars in thousands) | Repurchase(a) | Borrowings(b) | Advances(c) | Loans(d) | Obligations | Funds | |||||||||||||||
|
|||||||||||||||||||||
2002 | |||||||||||||||||||||
Balance at December 31 | $ | 7,647 | $ | - | $ | 7,380 | $ | 2,000 | $ | - | $ | 17,027 | |||||||||
Highest balance at any month-end | 14,897 | - | 7,380 | 2,000 | 20 | 24,297 | |||||||||||||||
Average balance | 11,096 | - | 1,208 | 2,000 | 6 | 14,310 | |||||||||||||||
Weighted average interest rate: | |||||||||||||||||||||
Paid during the year | 2.69 | % | - | 1.59 | % | 3.64 | % | 4.93 | % | 2.73 | % | ||||||||||
As of year-end | 2.94 | % | - | 1.31 | % | 3.13 | % | 0.00 | % | 2.25 | % | ||||||||||
|
|||||||||||||||||||||
2001 | |||||||||||||||||||||
Balance at December 31 | $ | 8,322 | $ | - | $ | 2,965 | $ | 2,000 | $ | 24 | $ | 13,311 | |||||||||
Highest balance at any month-end | 10,758 | - | 2,965 | 2,000 | 67 | 15,790 | |||||||||||||||
Average balance | 8,752 | - | 47 | 2,000 | 49 | 10,848 | |||||||||||||||
Weighted average interest rate: | |||||||||||||||||||||
Paid during the year | 4.31 | % | - | 2.00 | % | 5.94 | % | 4.93 | % | 4.60 | % | ||||||||||
As of year-end | 3.20 | % | - | 1.88 | % | 3.61 | % | 4.90 | % | 2.97 | % | ||||||||||
|
|||||||||||||||||||||
2000 | |||||||||||||||||||||
Balance at December 31 | $ | 9,133 | $ | - | $ | - | $ | 2,000 | $ | 71 | $ | 11,204 | |||||||||
Highest balance at any month-end | 10,515 | 4,606 | 25,030 | 8,000 | 113 | 48,264 | |||||||||||||||
Average balance | 4,705 | 1,512 | 13,398 | 4,093 | 96 | 23,804 | |||||||||||||||
Weighted average interest rate: | |||||||||||||||||||||
Paid during the year | 6.29 | % | 6.08 | % | 6.47 | % | 6.48 | % | 4.92 | % | 6.40 | % | |||||||||
As of year-end | 5.83 | % | - | - | 8.30 | % | 4.90 | % | 6.26 | % | |||||||||||
|
|
(a) |
Securities sold under agreements to repurchase mature within one to five years. The carrying value of the underlying securities at December 31, 2002 and 2001 was $16,297,000 and $13,122,000, respectively. |
|
(b) |
TT&L borrowings consist of notes issued under the U.S. Treasury Department's program of investing the treasury tax and loan account balances in interest-bearing demand notes insured by depository institutions. These notes bear interest at a rate of .25 percent less than the average Federal funds rate as computed by the Federal Reserve Bank. |
|
(c) |
FHLB Advances consist of an "Open RepoPlus" agreement with the Federal Home Loan Bank of Pittsburgh. FHLB "Open RepoPlus" advances are short-term borrowings maturing within one year, bear a fixed rate of interest and are subject to prepayment penalty. The Company has a borrowing limit of $166,339,000, exclusive of any outstanding advances. Although no specific collateral is required to be pledged for the "Open RepoPlus" borrowings, FHLB advances are secured by a blanket security agreement that includes the Company's FHLB stock, as well as investment and mortgage-backed securities held in safekeeping at the FHLB and certain residential mortgage loans. At December 31, 2002 and 2001, the approximate carrying value of the securities collateral was $58,722,000 and $57,183,000, respectively. |
|
(d) |
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 | 2002 | 2001 | |||||||
|
||||||||||
Variable: | ||||||||||
(e) | October 15, 2003 | $ | 2,000 | $ | 2,000 | |||||
|
||||||||||
Total term loans | $ | 2,000 | $ | 2,000 | ||||||
|
|
(e) Interest rate floats monthly based on the 1 month LIBOR +1.75, the interest rate was 3.13% and 3.61% at December 31, 2002 and 2001, respectively. |
|
32 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
|
Following are maturities of borrowed funds as of December 31, 2002 (in thousands): |
|
2003 |
$ |
13,864 |
2004 |
|
956 |
2005 |
|
390 |
2006 |
|
1,111 |
2007 |
|
706 |
| ||
Total borrowed funds |
$ |
17,027 |
|
|
8. EMPLOYEE BENEFIT PLANS |
|
The Company has a noncontributory, defined-benefit pension plan (the Plan) for all employees meeting certain age and length of service requirements. Benefits are based primarily on years of service and the average annual compensation during the highest five consecutive years within the final ten years of employment. The Companys funding policies are consistent with the funding requirements of federal law and regulations. Plan assets are comprised of common stock, U.S. government and corporate debt securities. Plan assets included 10,510 and 10,406 shares of the Companys common stock at December 31, 2002 and 2001, respectively. |
|
The following table sets forth the change in plan assets and benefit obligation at December 31 (in thousands): |
|
2002 | 2001 | 2000 | |||||||||
|
|||||||||||
Plan assets at fair value, beginning of year | $ | 3,181 | $ | 3,158 | $ | 3,294 | |||||
Actual return on plan assets | (371 | ) | (69 | ) | (83 | ) | |||||
Amendments | - | - | 23 | ||||||||
Employer contribution | 391 | 160 | - | ||||||||
Benefits paid | (84 | ) | (68 | ) | (76 | ) | |||||
|
|||||||||||
Plan assets at fair value, end of year | 3,117 | 3,181 | 3,158 | ||||||||
|
|||||||||||
Benefit obligation, beginning of year | 3,342 | 2,874 | 2,515 | ||||||||
Service cost | 269 | 222 | 155 | ||||||||
Interest cost | 229 | 201 | 181 | ||||||||
Amendments | 74 | 30 | 99 | ||||||||
Assumption change | 96 | 83 | - | ||||||||
Benefits paid | (84 | ) | (68 | ) | (76 | ) | |||||
|
|||||||||||
Benefit obligation, end of year | 3,926 | 3,342 | 2,874 | ||||||||
|
|||||||||||
Funded status | (809 | ) | (161 | ) | 284 | ||||||
Transition adjustment | (39 | ) | (55 | ) | (70 | ) | |||||
Prior service cost | 21 | (13 | ) | (44 | ) | ||||||
Unrecognized net gain from past experience | |||||||||||
different from that assumed | 1,010 | 244 | (161 | ) | |||||||
|
|||||||||||
Benefit asset, end of year | $ | 183 | $ | 15 | $ | 9 | |||||
|
|
33 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
|
Assumptions used in determining net periodic pension cost are as follows: |
|
2002 | 2001 | 2000 | ||||||||
|
||||||||||
Discount rate | 6.50 | % | 6.75 | % | 7.00 | % | ||||
Expected return on plan assets | 8.00 | % | 8.00 | % | 8.00 | % | ||||
Rate of compensation increase | 3.50 | % | 3.75 | % | 4.00 | % |
|
Net periodic pension cost includes the following components (in thousands): |
|
2002 | 2001 | 2000 | ||||||||
|
||||||||||
Service cost of the current period | $ | 269 | $ | 222 | $ | 155 | ||||
Interest cost on projected benefit obligation | 229 | 201 | 181 | |||||||
Actual return on plan assets | 371 | 69 | 83 | |||||||
Net amortization and deferral | (646 | ) | (338 | ) | (382 | ) | ||||
|
||||||||||
Net periodic pension cost | $ | 223 | $ | 154 | $ | 37 | ||||
|
|
The Company also has a profit-sharing plan, covering substantially all employees, which provides tax-deferred salary savings to plan participants. The Companys contributions to the profit-sharing plan are allocated to the participants based upon a percentage of their compensation. The Companys profit-sharing contribution is determined by the Board of Directors on a discretionary basis. The Companys contributions for 2002, 2001, and 2000 were $299,000, $131,000, and $49,000, respectively. |
|
9. INCOME TAXES |
|
The provision for income taxes consists of the following (in thousands): |
|
Years Ended December 31, | ||||||||||
2002 | 2001 | 2000 | ||||||||
|
||||||||||
Currently payable | $ | 1,647 | $ | 1,044 | $ | 898 | ||||
Deferred liability (benefit) | 116 | (279 | ) | (254 | ) | |||||
|
||||||||||
Provision for income taxes | $ | 1,763 | $ | 765 | $ | 644 | ||||
|
|
34 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
|
The following temporary differences gave rise to the net deferred tax assets (liabilities) at December 31, 2002 and 2001 (in thousands): |
|
2002 | 2001 | ||||||||||||
|
|||||||||||||
Deferred tax assets: | |||||||||||||
Allowance for loan losses | $ | 1,038 | $ | 922 | |||||||||
Deferred compensation | 243 | 225 | |||||||||||
Goodwill and core deposit intangibles | 108 | 189 | |||||||||||
Merger & acquisition costs | 34 | 44 | |||||||||||
|
|||||||||||||
Total | 1,423 | 1,380 | |||||||||||
|
|||||||||||||
Deferred tax liabilities: | |||||||||||||
Unrealized gains on available-for-sale securities | (1,315 | ) | (625 | ) | |||||||||
Depreciation and amortization | (259 | ) | (252 | ) | |||||||||
Bond accretion | (126 | ) | (80 | ) | |||||||||
Pension expense | (62 | ) | (5 | ) | |||||||||
Loan fees and costs | (69 | ) | (56 | ) | |||||||||
Mortgage servicing rights | (45 | ) | (9 | ) | |||||||||
|
|||||||||||||
Total | (1,876 | ) | (1,027 | ) | |||||||||
|
|||||||||||||
Deferred tax asset (liability), net | $ | (453 | ) | $ | 353 | ||||||||
|
|
No valuation allowance was established at December 31, 2001 in view of certain tax strategies coupled with the anticipated future taxable income as evidenced by the Companys earnings potential. |
|
The total provision for income taxes is different from that computed at the statutory rates due to the following items (in thousands): |
|
Years Ended December 31, | |||||||||||
2002 | 2001 | 2000 | |||||||||
|
|||||||||||
Provision at statutory rates on | |||||||||||
pre-tax income | $ | 2,502 | $ | 1,537 | $ | 1,309 | |||||
Effect of tax-exempt income | (693 | ) | (764 | ) | (780 | ) | |||||
Tax credits | (130 | ) | (113 | ) | - | ||||||
Nondeductible interest | 67 | 97 | 110 | ||||||||
State income taxes | 9 | - | - | ||||||||
Other items | 8 | 8 | 5 | ||||||||
|
|||||||||||
Provision for income taxes | $ | 1,763 | $ | 765 | $ | 644 | |||||
|
|||||||||||
Statutory tax rates | 34 | % | 34 | % | 34 | % | |||||
Effective tax rates | 24.0 | % | 16.9 | % | 16.7 | % |
|
35 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
|
10. 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. |
|
A summary of loan activity with officers, directors, stockholders and associates of such persons is listed below (in thousands): |
|
Years Ended December 31, | |||||||||||
2002 | 2001 | 2000 | |||||||||
|
|||||||||||
Balance, beginning of year | $ | 3,972 | $ | 2,814 | $ | 3,041 | |||||
New loans | 847 | 2,341 | 627 | ||||||||
Repayments | (1,141 | ) | (1,183 | ) | (854 | ) | |||||
|
|||||||||||
Balance, end of year | $ | 3,678 | $ | 3,972 | $ | 2,814 | |||||
|
|
Such loans were made in the ordinary course of business at the Banks normal credit terms and do not present more than a normal risk of collection. |
|
|
11. 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 Banks 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 2003 without approval of the Comptroller of the Currency of approximately $7,416,000, plus the Banks net income for 2003. |
|
|
Loans: |
|
The Bank is subject to regulatory restrictions which limit its ability to loan funds to the Company. At December 31, 2002, the regulatory lending limit amounted to approximately $4,360,000. |
|
|
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 undercapitalized. 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, 2002 and 2001, the Federal Reserve Board and the Office of the Comptroller of the Currency categorized the Company and 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. |
|
36 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
|
The following table reflects the Companys capital ratios at December 31 (in thousands): |
|
2002 | 2001 | ||||||||||||
Amount | Ratio | Amount | Ratio | ||||||||||
Total capital (to risk weighted assets) | |||||||||||||
|
|||||||||||||
Company | $ | 31,036 | 11.52 | % | $ | 26,761 | 10.72 | % | |||||
For capital adequacy purposes | 21,552 | 8.00 | % | 19,978 | 8.00 | % | |||||||
To be well capitalized | 26,939 | 10.00 | % | 24,972 | 10.00 | % | |||||||
Tier I capital (to risk weighted assets) | |||||||||||||
|
|||||||||||||
Company | $ | 27,522 | 10.22 | % | $ | 23,398 | 9.37 | % | |||||
For capital adequacy purposes | 10,776 | 4.00 | % | 9,989 | 4.00 | % | |||||||
To be well capitalized | 16,164 | 6.00 | % | 14,983 | 6.00 | % | |||||||
Tier I capital (to average assets) | |||||||||||||
|
|||||||||||||
Company | $ | 27,522 | 6.48 | % | $ | 23,398 | 5.68 | % | |||||
For capital adequacy purposes | 16,978 | 4.00 | % | 16,480 | 4.00 | % | |||||||
To be well capitalized | 21,223 | 5.00 | % | 20,600 | 5.00 | % |
|
At December 31, 2002, the Banks Total capital and Tier I ratios were 12.13% and 10.85%, respectively, and Tier I capital to average assets was 7.00%. At December 31, 2001, the Banks Total capital and Tier I ratios were 11.19% and 9.89%, respectively, and Tier I capital to average assets was 6.05%. |
|
This annual report has not been reviewed, or confirmed for accuracy or relevance, by the Federal Deposit Insurance Corporation. |
|
12. OFF-BALANCE-SHEET RISK |
|
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate or liquidity risk in excess of the amount recognized in the consolidated balance sheet. |
|
The Companys 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. |
|
37 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
|
Financial instruments whose contract amounts represent credit risk at December 31, 2002 and 2001, are as follows (in thousands): |
|
2002 | 2001 | ||||||
|
|||||||
Commitments to extend credit | $ | 33,946 | $ | 33,946 | |||
Standby letters of credit | 1,143 | 1,116 |
|
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 customers 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 managements credit assessment of the counter party. |
|
Standby letters of credit are conditional commitments issued by the Company guaranteeing performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending normal loan commitments to customers. The Company generally holds collateral supporting standby letters of credit. |
|
13. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS |
|
The estimated fair values of the Companys financial instruments are as follows (in thousands): |
|
December 31, 2002 | |||||||
|
|||||||
Carrying | Estimated | ||||||
Amount | Fair Value | ||||||
|
|||||||
Financial assets: | |||||||
Cash and due from banks | $ | 11,594 | $ | 11,594 | |||
Available-for-sale securities | 100,725 | 100,725 | |||||
Net loans | 294,836 | 297,913 | |||||
Regulatory Stock | 1,529 | 1,529 | |||||
Accrued interest receivable | 1,976 | 1,976 | |||||
|
|||||||
Total financial assets | $ | 410,660 | $ | 413,737 | |||
|
|||||||
Financial liabilities: | |||||||
Deposits | $ | 373,051 | $ | 375,007 | |||
Securities sold under agreements to repurchase | 7,648 | 7,700 | |||||
Other borrowed funds | 9,380 | 9,380 | |||||
Accrued interest payable | 2,077 | 2,077 | |||||
|
|||||||
Total financial liabilities | $ | 392,156 | $ | 394,164 | |||
|
|
38 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
December 31, 2001 | |||||||
|
|||||||
Carrying | Estimated | ||||||
Amount | Fair Value | ||||||
|
|||||||
Financial assets: | |||||||
Cash and due from banks | $ | 11,480 | $ | 11,480 | |||
Available-for-sale securities | 113,604 | 113,604 | |||||
Net loans | 268,464 | 277,461 | |||||
Regulatory Stock | 2,175 | 2,175 | |||||
Accrued interest receivable | 1,986 | 1,986 | |||||
|
|||||||
Total financial assets | $ | 397,709 | $ | 406,706 | |||
|
|||||||
Financial liabilities: | |||||||
Deposits | $ | 370,474 | $ | 373,439 | |||
Securities sold under agreements to repurchase | 8,322 | 8,350 | |||||
Other borrowed funds | 4,989 | 4,989 | |||||
Accrued interest payable | 2,285 | 2,285 | |||||
|
|||||||
Total financial liabilities | $ | 386,070 | $ | 389,063 | |||
|
|
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 Companys entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Companys 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 Companys regulatory reports, and an estimation methodology suitable for each category of financial instruments. The Companys fair value estimates, methods and assumptions are set forth below for the Companys other financial instruments. |
|
Cash and Due From Banks: |
|
The carrying amounts for cash and due from banks approximate fair value because they mature in 90 days or less and do not present unanticipated credit concerns. |
|
Investment Securities: |
|
The fair values of investments 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. |
|
39 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
|
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 Companys 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. |
|
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. |
|
|
14. Goodwill - Adoption of Statement 142 |
|
A summary of goodwill is as follows (in thousands): |
|
December 31, | ||||||||||
2002 | 2001 | 2000 | ||||||||
|
||||||||||
Gross carrying amount | $ | 7,685 | $ | 7,685 | $ | 7,685 | ||||
Less accumulated amoritzation | 780 | 780 | 268 | |||||||
|
||||||||||
Net carrying amount | $ | 6,905 | $ | 6,905 | $ | 7,417 | ||||
|
|
Amortization expense amounted to $512,000 and $268,000 for 2001 and 2000, respectively. |
|
40 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
|
The gross carrying amount of goodwill is tested for impairment in the fourth quarter, after the annual forecasting process. Due to an increase in overall earning asset growth, operating profits and cashflows were greater than expected. Based on the fair value of the reporting unit, estimated using the expected present value of future cashflows, no goodwill impairment loss was recognized in the current year. |
|
The following table sets forth a comparison of net income and basic earnings per share adjusted for the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets": |
|
(in thousands, except per share data) |
|
For the Year Ended | ||||||||||
December 31, | ||||||||||
2002 | 2001 | 2000 | ||||||||
|
||||||||||
Goodwill amortization | $ | - | $ | 512 | $ | 119 | ||||
Net Income | 5,595 | 3,757 | 3,208 | |||||||
Addback: Goodwill amortization (net of tax) | - | 338 | 79 | |||||||
|
||||||||||
Adjusted net income | $ | 5,595 | $ | 4,095 | $ | 3,287 | ||||
|
||||||||||
Basic earnings per share: | ||||||||||
Net income | $ | 1.98 | $ | 1.33 | $ | 1.13 | ||||
Goodwill amortization | - | 0.12 | 0.03 | |||||||
|
||||||||||
Adjusted basic earnings per share | $ | 1.98 | $ | 1.45 | $ | 1.16 | ||||
|
|
15. Core deposit intangible assets |
|
A summary of core deposit intangible assets is as follows (in thousands): |
|
December 31, | ||||||||||
2002 | 2001 | 2000 | ||||||||
|
||||||||||
Gross carrying amount | $ | 2,763 | $ | 2,763 | $ | 2,763 | ||||
Less accumulated amortization | 1,350 | 893 | 390 | |||||||
|
||||||||||
Net carrying amount | $ | 1,413 | $ | 1,870 | $ | 2,373 | ||||
|
|
Amortization expense amounted to $457,000, $503,000 and $390,000 for 2002, 2001 and 2000, respectively. |
|
41 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
|
Amortization expense of intangible assets for the years ended December 31, 2002, 2001 and 2000 is as follows: |
Aggregate Amortization Expense (in thousands): |
|
December 31, | ||||||||||
2002 | 2001 | 2000 | ||||||||
|
||||||||||
Core deposit intangibles | $ | 457 | $ | 503 | $ | 141 |
|
The estimated amortization expense of intangible assets for each of the five succeeding fiscal years is as follows: |
|
Estimated annual amortization expense (in thousands) |
Core deposit | ||||
intangibles | ||||
|
||||
For the year ended December 31, 2003 | $ | 435 | ||
For the year ended December 31, 2004 | 435 | |||
For the year ended December 31, 2005 | 435 | |||
For the year ended December 31, 2006 | 109 | |||
For the year ended December 31, 2007 | - |
|
16. Condensed Financial Information - Parent Company Only |
|
CITIZENS FINANCIAL SERVICES, INC. | |||||||||
CONDENSED BALANCE SHEET | |||||||||
December 31, | |||||||||
(in thousands) | 2002 | 2001 | |||||||
|
|||||||||
Assets: | |||||||||
Cash | $ | 68 | $ | 67 | |||||
Investment in subsidiary, | |||||||||
First Citizens National Bank | 39,978 | 34,423 | |||||||
Available-for-sale securities | 416 | 987 | |||||||
Other assets | 13 | 24 | |||||||
|
|||||||||
Total assets | $ | 40,475 | $ | 35,501 | |||||
|
|||||||||
Liabilities: | |||||||||
Other liabilities | $ | 23 | $ | 22 | |||||
Deferred tax liability | 46 | 90 | |||||||
Borrowed funds | 2,000 | 2,000 | |||||||
|
|||||||||
Total liabilities | $ | 2,069 | $ | 2,112 | |||||
Stockholders' equity | 38,406 | 33,389 | |||||||
|
|||||||||
Total liabilities and stockholders' equity | $ | 40,475 | $ | 35,501 | |||||
|
|
42 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
|
CITIZENS FINANCIAL SERVICES, INC. | |||||||||||
CONDENSED STATEMENT OF INCOME | |||||||||||
Year Ended December 31, | |||||||||||
(in thousands) | 2002 | 2001 | 2000 | ||||||||
|
|||||||||||
Dividends from: | |||||||||||
Bank subsidiary | $ | 1,478 | $ | 481 | $ | 2,219 | |||||
Available-for-sale securities | 19 | 44 | 63 | ||||||||
Interest-bearing deposits with banks | 2 | 22 | 9 | ||||||||
|
|||||||||||
Total income | 1,499 | 547 | 2,291 | ||||||||
Realized securities gains, net | 178 | 189 | 4 | ||||||||
Expenses | 213 | 264 | 150 | ||||||||
|
|||||||||||
Income before equity | |||||||||||
in undistributed earnings | |||||||||||
of subsidiary | 1,464 | 472 | 2,145 | ||||||||
Equity in undistributed | |||||||||||
earnings - First Citizens National Bank | 4,131 | 3,285 | 1,063 | ||||||||
|
|||||||||||
Net income | $ | 5,595 | $ | 3,757 | $ | 3,208 | |||||
|
|
CITIZENS FINANCIAL SERVICES, INC. | |||||||||||||||
STATEMENT OF CASH FLOWS | |||||||||||||||
Year Ended December 31, | |||||||||||||||
(in thousands) | 2002 | 2001 | 2000 | ||||||||||||
|
|||||||||||||||
Cash flows from operating activities: | |||||||||||||||
Net income | $ | 5,595 | $ | 3,757 | $ | 3,208 | |||||||||
Adjustments to reconcile net income to net | |||||||||||||||
cash provided by operating activities: | |||||||||||||||
Equity in earnings of subsidiaries | (4,131 | ) | (3,285 | ) | (1,063 | ) | |||||||||
Deferred income taxes | - | 3 | (4 | ) | |||||||||||
Realized gains on securities | (178 | ) | (189 | ) | (4 | ) | |||||||||
Decrease (increase) in other assets | 11 | 35 | (29 | ) | |||||||||||
Increase (decrease) in other liabilities | 1 | (4 | ) | 8 | |||||||||||
|
|||||||||||||||
Net cash provided by operating activities | 1,298 | 317 | 2,116 | ||||||||||||
|
|||||||||||||||
Cash flows from investing activities: | |||||||||||||||
Purchase of available-for-sale securities | - | (418 | ) | (1,076 | ) | ||||||||||
Proceeds from the sale of available-for-sale securities | 621 | 2,283 | 1,177 | ||||||||||||
Additional contribution in subsidiaries | - | (500 | ) | - | |||||||||||
|
|||||||||||||||
Net cash provided by investing activities | 621 | 1,365 | 101 | ||||||||||||
|
|||||||||||||||
Cash flows from financing activities: | |||||||||||||||
Cash dividends paid | (1,918 | ) | (1,786 | ) | (1,660 | ) | |||||||||
Acquisition of treasury stock | - | - | (489 | ) | |||||||||||
|
|||||||||||||||
Net cash used in financing activities | (1,918 | ) | (1,786 | ) | (2,149 | ) | |||||||||
|
|||||||||||||||
Net increase (decrease) in cash | 1 | (104 | ) | 68 | |||||||||||
Cash at beginning of year | 67 | 171 | 103 | ||||||||||||
|
|||||||||||||||
Cash at end of year | $ | 68 | $ | 67 | $ | 171 | |||||||||
|
|
43 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
|
17. Condensed Quarterly Data |
|
CONSOLIDATED QUARTERLY DATA | |||||||||||||
(dollar amounts in thousands) | Three Months Ended | ||||||||||||
2002 | Mar 31 | Jun 30 | Sep 30 | Dec 31 | |||||||||
|
|||||||||||||
Interest income | $ | 6,867 | $ | 6,825 | $ | 6,894 | $ | 6,791 | |||||
Interest expense | 2,723 | 2,632 | 2,558 | 2,491 | |||||||||
|
|||||||||||||
Net interest income | 4,144 | 4,193 | 4,336 | 4,300 | |||||||||
Provision for loan losses | 120 | 90 | 90 | 135 | |||||||||
Non-interest income | 1,201 | 1,154 | 1,177 | 1,260 | |||||||||
Realized securities gains, net | 30 | 186 | 38 | - | |||||||||
Non-interest expenses | 3,467 | 3,590 | 3,571 | 3,598 | |||||||||
|
|||||||||||||
Income before provision for income taxes | 1,788 | 1,853 | 1,890 | 1,827 | |||||||||
Provision for income taxes | 428 | 438 | 459 | 438 | |||||||||
|
|||||||||||||
Net income | $ | 1,360 | $ | 1,415 | $ | 1,431 | $ | 1,389 | |||||
|
|||||||||||||
Earnings Per Share | $ | 0.48 | $ | 0.50 | $ | 0.51 | $ | 0.49 | |||||
|
|||||||||||||
|
Three Months Ended | |||||||||||||
2001 | Mar 31 | Jun 30 | Sep 30 | Dec 31 | |||||||||
|
|||||||||||||
Interest income | $ | 7,164 | $ | 7,316 | $ | 7,339 | $ | 7,206 | |||||
Interest expense | 3,815 | 3,745 | 3,630 | 3,116 | |||||||||
|
|||||||||||||
Net interest income | 3,349 | 3,571 | 3,709 | 4,090 | |||||||||
Provision for loan losses | 75 | 120 | 175 | 75 | |||||||||
Non-interest income | 820 | 869 | 873 | 1,070 | |||||||||
Realized securities gains, net | 30 | 353 | 138 | 136 | |||||||||
Non-interest expenses | 3,196 | 3,416 | 3,513 | 3,916 | |||||||||
|
|||||||||||||
Income before provision for income taxes | 928 | 1,257 | 1,032 | 1,305 | |||||||||
Provision for income taxes | 137 | 220 | 147 | 261 | |||||||||
|
|||||||||||||
Net income | $ | 791 | $ | 1,037 | $ | 885 | $ | 1,044 | |||||
|
|||||||||||||
Earnings Per Share | $ | 0.28 | $ | 0.37 | $ | 0.31 | $ | 0.37 | |||||
|
|
44 |
|
2002 FINANCIAL SECTION |
|
Notes to Consolidated Financial Statements |
|
|
To the Stockholders and Board of Directors of |
Citizens Financial Services, Inc. |
|
|
We have audited the consolidated balance sheet of Citizens Financial Services, Inc. and subsidiary as of December 31, 2002 and 2001, 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, 2002. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. |
|
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. |
|
|
|
Wexford, PA |
January 17, 2003 |
|
|
|
|
|
S.R. Snodgrass, A.C. |
1000 Stonewood Drive, Suite 200 Wexford, PA 15090-8399 Phone: 724-934-0344 Facsimile: 724-934-0345 |
|
45 |
|
2002 FINANCIAL SECTION |
|
Selected Financial Data |
|
|
FIVE YEAR SUMMARY OF OPERATIONS | |||||||||||||||||
(dollar amounts in thousands) | 2002 | 2001 | 2000 | 1999 | 1998 | ||||||||||||
|
|||||||||||||||||
Interest income | $ | 27,377 | $ | 29,025 | $ | 26,226 | $ | 23,546 | $ | 23,088 | |||||||
Interest expense | 10,404 | 14,306 | 14,238 | 12,066 | 11,920 | ||||||||||||
|
|||||||||||||||||
Net interest income | 16,973 | 14,719 | 11,988 | 11,480 | 11,168 | ||||||||||||
Provision for loan losses | 435 | 445 | 610 | 475 | 218 | ||||||||||||
|
|||||||||||||||||
Net interest income after provision | |||||||||||||||||
for loan losses | 16,538 | 14,274 | 11,378 | 11,005 | 10,950 | ||||||||||||
Non-interest income | 4,792 | 3,632 | 2,670 | 2,345 | 1,838 | ||||||||||||
Realized securities gains (losses), net | 254 | 657 | (9 | ) | 279 | 457 | |||||||||||
Non-interest expenses | 14,226 | 14,041 | 10,187 | 9,033 | 8,214 | ||||||||||||
|
|||||||||||||||||
Income before provision for income taxes and | |||||||||||||||||
extraordinary item | 7,358 | 4,522 | 3,852 | 4,596 | 5,031 | ||||||||||||
Provision for income taxes | 1,763 | 765 | 644 | 1,043 | 1,401 | ||||||||||||
|
|||||||||||||||||
Income before extraordinary item | 5,595 | 3,757 | 3,208 | 3,553 | 3,630 | ||||||||||||
Extraordinary item | - | - | - | - | 141 | ||||||||||||
|
|||||||||||||||||
Net income | $ | 5,595 | $ | 3,757 | $ | 3,208 | $ | 3,553 | $ | 3,489 | |||||||
|
|||||||||||||||||
Per share data: | |||||||||||||||||
Income before extraordinary item (1) | $ | 1.98 | $ | 1.33 | $ | 1.13 | $ | 1.24 | $ | 1.26 | |||||||
Net income (1) | 1.98 | 1.33 | 1.13 | 1.24 | 1.21 | ||||||||||||
Cash dividends (1) | 0.680 | 0.640 | 0.600 | 0.560 | 0.520 | ||||||||||||
Book value (1) | 13.59 | 11.81 | 10.80 | 9.42 | 9.95 | ||||||||||||
Total investments | $ | 100,725 | $ | 113,604 | $ | 97,984 | $ | 90,031 | $ | 91,734 | |||||||
Loans, net (2) | 294,836 | 268,464 | 260,209 | 229,159 | 203,583 | ||||||||||||
Total assets (2) | 432,658 | 421,110 | 413,332 | 340,779 | 313,564 | ||||||||||||
Total deposits (2) | 373,051 | 370,474 | 367,785 | 284,318 | 274,193 | ||||||||||||
Stockholders' equity | 38,406 | 33,389 | 30,549 | 27,082 | 28,598 | ||||||||||||
|
(1) Amounts were adjusted to reflect stock dividends and previous years two-for-one stock split |
|
| |||
(2) Amounts in 2000 reflect the acquisition of branches in the fourth quarter of 2000 |
|
|
|
|
46 |
|
2002 FINANCIAL SECTION |
|
Selected Financial Data |
|
|
COMMON STOCK |
|
Common stock issued by Citizens Financial Services, Inc. is traded in the local over-the-counter market, primarily in Pennsylvania and New York. Prices presented in the table below are bid/ask prices between broker-dealers published by the National Association of Securities Dealers through the NASD OTC Bulletin Board, its automated quotation system for non-NASDAQ quoted stocks and the National Quotation Bureaus Pink Sheets. 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 the effects of stock dividends have been stated retroactively in the table below (also see dividend restrictions in Note 11). |
|
Dividends | Dividends | ||||||||||||||||||
2002 | declared | 2001 | declared | ||||||||||||||||
High | Low | per share | High | Low | per share | ||||||||||||||
|
|||||||||||||||||||
First quarter | $ | 16.75 | $ | 13.50 | $ | 0.165 | $ | 12.00 | $ | 11.51 | $ | 0.155 | |||||||
Second quarter | 17.50 | 16.80 | 0.170 | 13.37 | 12.00 | 0.160 | |||||||||||||
Third quarter | 19.35 | 17.00 | 0.170 | 13.45 | 13.02 | 0.160 | |||||||||||||
Forth quarter | 21.80 | 19.35 | 0.175 | 13.65 | 12.50 | 0.165 |
|
TRUST AND INVESTMENT SERVICES FUNDS UNDER MANAGEMENT (MARKET VALUE) | |||||||
2002 | 2001 | ||||||
|
|||||||
INVESTMENTS: | |||||||
Bonds | $ | 13,153 | $ | 15,860 | |||
Stock | 20,783 | 27,964 | |||||
Savings and Money Market Funds | 11,168 | 10,378 | |||||
Mutual Funds | 18,257 | 16,756 | |||||
Mortgages | 936 | 876 | |||||
Real Estate | 816 | 496 | |||||
Miscellaneous | 29 | 69 | |||||
Cash | 29 | 17 | |||||
|
|||||||
TOTAL | $ | 65,171 | $ | 72,416 | |||
|
|||||||
ACCOUNTS: | |||||||
Estates | $ | 1,016 | $ | 2,076 | |||
Trusts | 25,134 | 30,720 | |||||
Guardianships | 184 | 240 | |||||
Employee Benefits | 19,490 | 20,653 | |||||
Investment Management | 13,377 | 11,793 | |||||
Custodial | 5,970 | 6,934 | |||||
|
|||||||
TOTAL | $ | 65,171 | $ | 72,416 | |||
|
|
47 |
|
2002 FINANCIAL SECTION |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
|
CAUTIONARY STATEMENT |
|
Forward-looking statements may prove inaccurate. We have made forward-looking statements in this document, and in documents that we incorporate by reference, that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of operations of Citizens Financial Services, Inc., First Citizens National Bank, First Citizens Insurance Agency, Inc. or the combined Company. When we use such words 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: |
|
|
|
|
|
|
|
|
|
INTRODUCTION |
|
The following is managements discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in its accompanying consolidated financial statements for Citizens Financial Services, Inc., a bank holding company and its subsidiary (the Company). Our Companys consolidated financial condition and results of operations consist almost entirely of our wholly owned subsidiarys (First Citizens National Bank) financial conditions and results of operations. Managements 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 banking facilities 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. Additionally, we have automatic teller machines (ATMs) located in Soldiers and Sailors Memorial Hospital in Wellsboro and at Mansfield University. Our lending and deposit products and investment services are offered primarily within our service area. |
|
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 and liquidity risk. |
|
48 |
|
2002 FINANCIAL SECTION |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
|
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 repricing 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 Companys 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 contingent funding alternatives. |
|
Readers should carefully review the risk factors described in other documents our Company files from time to time with the Securities and Exchange Commission, including the quarterly reports on Form 10-Q and any current reports on Form 8-K filed by us. |
|
We face strong competition in the communities we serve from other commercial banks, savings banks, and savings and loan associations, some of which are substantially larger institutions than our subsidiary. In addition, insurance companies, investment-counseling firms, and other business firms and individuals offer personal and corporate trust services. We also compete with credit unions, issuers of money market funds, securities brokerage firms, consumer finance companies, mortgage brokers and insurance companies. These entities are strong competitors for virtually all types of financial services. |
|
In recent years, the financial services industry has experienced tremendous change to competitive barriers between bank and non-bank institutions. We not only must compete with traditional financial institutions, but also with other business corporations that have begun to deliver competing financial services. Competition for banking services is based on price, nature of product, quality of service, and in the case of certain activities, convenience of location. |
|
TRUST AND INVESTMENT SERVICES |
|
Our Trust & Investment Department services range from professional estate settlement services through management of complex trust accounts to investment management and custody of securities. Our expanded Retirement and Trust Department manages retirement accounts for many area companies and individuals. We also manage many individual IRAs, both rollover and contributory. |
|
The Investment Department offers full service brokerage services in selected locations throughout the Banks market area and appointments can be made in any First Citizens National Bank branch. |
|
Effective October 2001, the Bank began offering annuities and life insurance through our new insurance subsidiary, First Citizens Insurance Agency, Inc. We will add long term care insurance and other consumer insurance products in the near future. |
|
49 |
|
2002 FINANCIAL SECTION |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
|
FINANCIAL CONDITION |
|
The following table presents ending balances (dollars in millions), growth (reduction) and the percentage change during the past two years: |
|
2002 | Increase | % | 2001 | Increase | % | 2000 | ||
Balance | (Decrease) | Change | Balance | (Decrease) | Change | Balance | ||
| ||||||||
Total assets | $ 432.7 | $ 11.6 | 2.8 | $ 421.1 | $ 7.8 | 1.9 | $ 413.3 | |
Total loans, net | 294.8 | 26.3 | 9.8 | 268.5 | 8.3 | 3.2 | 260.2 | |
Total investments | 100.7 | (12.9) | (11.4) | 113.6 | 15.6 | 15.9 | 98.0 | |
Total deposits | 373.1 | 2.6 | 0.7 | 370.5 | 2.7 | 0.7 | 367.8 | |
Total stockholders' equity | 38.4 | 5.0 | 15.0 | 33.4 | 2.9 | 9.5 | 30.5 |
|
CASH AND CASH EQUIVALENTS |
|
Cash and cash equivalents totaled $11,594,000 at December 31, 2002 compared to $11,480,000 at December 31, 2001. Non-interest bearing cash decreased $240,000 since December 31, 2001, while interest-bearing cash increased $354,000 during that same time period. |
|
We believe the Companys 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, and the portion of the investment and loan portfolios that mature within one year. These sources of funds should permit us to meet cash obligations and off-balance sheet commitments as they come due. |
|
INVESTMENTS |
|
Our investment portfolio decreased by $12.9 million or 11.4% in 2002 as compared to an increase of $15.6 million in 2001. Our investment portfolio has decreased primarily as a result of mortgage-backed securities monthly principal repayments and the sale of some callable municipal bonds, allowing excess funds to be used for our continued loan growth. |
|
During 2002 new investments were made primarily in short-term mortgage-backed securities and corporate bonds. Our current investment strategy is to reinvest in short-term mortgage-backed securities as funds become available. |
|
The following table shows the year-end composition of the investment portfolio for the five years ended December 31, 2002: |
|
Estimated Fair Market Value at December 31, | |||||||||||||
2002 | % of | 2001 | % of | 2000 | % of | 1999 | % of | 1998 | % of | ||||
Amount | Total | Amount | Total | Amount | Total | Amount | Total | Amount | Total | ||||
| |||||||||||||
Available-for-sale: | |||||||||||||
U. S. Treasury securities | $ - | - | $ - | - | $ 8,655 | 15.2 | $ 13,628 | 15.1 | $ 32,763 | 35.7 | |||
U. S. Agency securities | 1,052 | 1.1 | - | - | 1,531 | 15.2 | - | - | - | - | |||
Obligations of state & political | |||||||||||||
subdivisions | 12,731 | 12.6 | 18,543 | 16.3 | 20,592 | 21.0 | 19,469 | 21.6 | 18,452 | 20.1 | |||
Corporate obligations | 21,156 | 21.0 | 12,200 | 10.7 | 19,710 | 20.1 | 18,629 | 20.7 | 14,889 | 16.2 | |||
Mortgage-backed securities | 60,801 | 60.4 | 77,211 | 68.0 | 38,473 | 39.3 | 34,045 | 37.8 | 23,113 | 25.2 | |||
Other equity securities | 4,985 | 4.9 | 5,650 | 5.0 | 9,023 | 9.2 | 4,260 | 2.8 | 2,517 | 2.7 | |||
| |||||||||||||
Total | $ 100,725 | 100.0 | $ 113,604 | 100.0 | $ 97,984 | 100.0 | $ 90,031 | 100.0 | $ 91,734 | 100.0 | |||
|
|
50 |
|
2002 FINANCIAL SECTION |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
|
The expected principal repayments (amortized cost) and average weighted yields for the investment portfolio as of December 31, 2002, are shown below. Expected maturities, which include prepayment speed assumptions for mortgage-back securities, are significantly different than the contractual maturities detailed in Footnote 3 of the Consolidated Financial Statements. Yields on tax-exempt securities are presented on a fully taxable equivalent basis, assuming a 34% tax rate. |
|
|
|
Within |
|
One- |
|
Five- |
|
After |
|
Amortized |
|
|
One |
Yield |
Five |
Yield |
Ten |
Yield |
Ten |
Yield |
Cost |
Yield |
|
Year |
(%) |
Years |
(%) |
Years |
(%) |
Years |
(%) |
Total |
(%) |
| ||||||||||
Available-for-sale securities: |
|
|
|
|
|
|
| |||
U.S. Agency securities |
$ - |
$ 1,008 |
4.0 |
$ - |
|
$ - |
|
$ 1,008 |
4.0 | |
Obligations of state & political |
|
|
|
|
|
|
|
|
|
|
subdivisions |
5,418 |
6.9 |
4,703 |
6.7 |
2,303 |
6.8 |
- |
- |
12,424 |
6.8 |
Corporate obligations |
- |
- |
17,901 |
5.8 |
1,944 |
7.2 |
- |
- |
19,845 |
5.9 |
Mortgage-backed securities |
7,531 |
5.4 |
51,382 |
5.7 |
- |
- |
- |
- |
58,913 |
5.6 |
Equity securities |
279 |
2.9 |
4,388 |
5.9 |
- |
- |
- |
- |
4,667 |
5.8 |
| ||||||||||
Total available-for-sale |
$ 13,228 |
5.9 |
$ 79,382 |
5.7 |
$ 4,247 |
7.0 |
$ - |
- |
$ 96,857 |
5.8 |
|
|
Approximately 95% of the amortized cost of debt securities is expected to mature 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 will be sufficient to meet future liquidity needs. |
|
Our Company has no securities from a single issuer representing more than 10% of stockholders equity. |
|
LOANS |
|
Historically, our Companys loan customers have been located in North Central Pennsylvania and the Southern Tier of New York. We originate loans primarily through direct loans to our existing customer base, with new customers generated by referrals from real estate brokers, building contractors, attorneys, accountants and existing customers. We also do a limited amount of indirect loans through new and used car dealers in the primary lending area. |
|
All lending is governed by a lending policy that is developed and maintained by us and approved by the Board of Directors. Our Companys real estate loan lending policy generally permits the Bank to lend up to 80% of the appraised value or purchase price (whichever is lower) on owner-occupied residential property, when secured by the first mortgage on the property. Home equity lines of credit or second mortgage loans are generally originated subject to maximum mortgage liens against the property of 80% of the current appraised value. The maximum term for mortgage loans is 25 years for one- to four-family residential property and 20 years for commercial and vacation property. |
|
As shown in the following table, total loans grew by $26.7 million in 2002, or 9.8%. In addition, $11.9 million in conforming mortgage loans were originated and $13.1 million sold on the secondary market through the Federal Home Loan Mortgage Corporation, providing over $185,000 of income in origination fees and premiums on loans sold, compared to $3.8 million in loans originated and $31,000 of income in 2001. The increased activity in loans sold was primarily a result of the conducive interest rate environment that continued during 2002. Residential mortgage lending is a principal business activity and one we expect to continue. |
|
51 |
|
2002 FINANCIAL SECTION |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
|
Our Company focuses its commercial lending activity on small businesses and our Companys commercial lending officers have attracted new business loans, especially loans to state and political subdivisions. |
|
The majority of lending activity has been mortgage loans secured by one- to four-family residential property. As of December 31, 2002, residential real estate and real estate construction loans made up 60.4% of our Companys total loan portfolio. |
|
Continuing in 2003, our Companys primary goal is to be the premier mortgage lender in our market area, with our menu of conforming mortgages (including jumbo and low- to moderate-income homebuyer mortgages) through Farmers Home Administration (FmHA). The local economy has slowed and the average unemployment rate has recently been approximately 5.9% (slightly higher than the state unemployment rate of 5.4%) up from 4.5% in 2001. Loan demand has continued during the last quarter of 2002 for residential mortgages and commercial loans. We believe that our continued training of branch office personnel (particularly in our newly acquired offices) and the focus on flexibility and fast turn around time will aid in growing our loan portfolio. (Also see the discussion in Footnote 4 of the Consolidated Financial Statements.) |
|
Five Year Breakdown of Loans by Type | ||||||||||||
December 31, | ||||||||||||
2002 | 2001 | 2000 | 1999 | 1998 | ||||||||
Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||
| ||||||||||||
Real estate: | ||||||||||||
Residential | $ 175,323 |
58.7 |
$ 160,439 | 59.0 | $ 151,782 | 57.7 | $ 139,518 | 60.3 | $ 127,053 | 61.7 | ||
Commercial | 47,210 |
15.8 |
43,174 | 15.9 | 40,044 | 15.2 | 32,159 | 13.9 | 27,164 | 13.2 | ||
Agricultural | 9,844 |
3.3 |
12,169 | 4.5 | 12,075 | 4.6 | 9,392 | 4.1 | 9,266 | 4.5 | ||
Construction | 5,009 |
1.7 |
3,219 | 1.2 | 3,112 | 1.2 | 4,359 | 1.9 | 5,234 | 2.5 | ||
Loans to individuals |
|
|||||||||||
for household, |
|
|||||||||||
family and other purchases | 13,915 |
4.7 |
14,694 | 5.4 | 15,020 | 5.7 | 15,540 | 6.7 | 14,429 | 7.0 | ||
Commercial and other loans |
18,564 |
6.2 | 15,099 | 5.6 | 17,509 | 6.7 | 12,313 | 5.3 | 12,457 | 6.1 | ||
State & political subdivision loans |
28,592 |
9.6 | 22,920 | 8.4 | 23,444 | 8.9 | 18,148 | 7.8 | 10,272 | 5.0 | ||
|
||||||||||||
| ||||||||||||
Total loans |
298,457 |
100.0 | 271,714 | 100.0 | 262,986 | 100.0 | 231,429 | 100.0 | 205,875 | 100.0 | ||
Less allowance for loan losses |
3,621 |
3,250 | 2,777 | 2,270 | 2,292 | |||||||
| ||||||||||||
Net loans |
$ 294,836 |
$ 268,464 | $ 260,209 | $ 229,159 | $ 203,583 | |||||||
|
|
2002/2001 | 2001/2000 | |||||||||||||
Change | Change | |||||||||||||
Amount | % | Amount | % | |||||||||||
|
||||||||||||||
Real estate: | ||||||||||||||
Residential | $ | 14,884 | 9.3 | $ | 8,657 | 5.7 | ||||||||
Commercial | 4,036 | 9.3 | 3,130 | 7.8 | ||||||||||
Agricultural | (2,325 | ) | (19.1 | ) | 94 | 0.8 | ||||||||
Construction | 1,790 | 55.6 | 107 | 3.4 | ||||||||||
Loans to individuals | ||||||||||||||
for household, | ||||||||||||||
family and other purchases | (779 | ) | (5.3 | ) | (326 | ) | (2.2 | ) | ||||||
Commercial and other loans | 3,465 | 22.9 | (2,410 | ) | (13.8 | ) | ||||||||
State & political subdivision loans | 5,672 | 24.7 | (524 | ) | (2.2 | ) | ||||||||
|
||||||||||||||
Total loans | $ | 26,743 | 9.8 | $ | 8,728 | 3.3 | ||||||||
|
|
52 |
|
2002 FINANCIAL SECTION |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
|
Our loan portfolio is our predominant source of earning assets. |
|
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, 2002, classified according to the sensitivity to changes in interest rates within various time intervals: |
|
Commercial, | ||||||||||||
municipal, | Real estate | |||||||||||
agricultural | construction | Total | ||||||||||
|
||||||||||||
Maturity of loans: | ||||||||||||
One year or less | $ | 9,038 | $ | 235 | $ | 9,273 | ||||||
Over one year but less than five years | 14,168 | - | 14,168 | |||||||||
Over five years | 81,004 | 4,774 | 85,778 | |||||||||
|
||||||||||||
Total | $ | 104,210 | $ | 5,009 | $ | 109,219 | ||||||
|
||||||||||||
Sensitivity of loans to changes in interest | ||||||||||||
rates - loans due after one year: | ||||||||||||
Predetermined interest rate | $ | 17,463 | $ | 1,412 | $ | 18,875 | ||||||
Floating or adjustable interest rate | 77,709 | 3,362 | 81,071 | |||||||||
|
||||||||||||
Total | $ | 95,172 | $ | 4,774 | $ | 99,946 | ||||||
|
|
LOAN QUALITY AND PROVISION FOR LOAN LOSSES |
|
As discussed previously, the loan portfolio contains a large portion of real estate secured loans (generally residential home mortgages, mortgages on small business properties, etc.), consumer installment loans and other commercial loans. Footnote 4 of the Consolidated Financial Statements provides further details on the composition of the loan portfolio. |
|
The following table indicates the level of non-performing assets over the past five years ending December 31: |
|
2002 | 2001 | 2000 | 1999 | 1998 | ||||||||||||||
|
||||||||||||||||||
Non-performing loans: | ||||||||||||||||||
Non-accruing loans | $ | 1,064 | $ | 985 | $ | 488 | $ | 421 | $ | 1,495 | ||||||||
Impaired loans | 1,916 | 1,077 | 199 | 1,334 | 382 | |||||||||||||
Accrual loans - 90 days or | ||||||||||||||||||
more past due | 39 | 111 | 39 | 78 | 15 | |||||||||||||
|
||||||||||||||||||
Total non-performing loans | 3,019 | 2,173 | 726 | 1,833 | 1,892 | |||||||||||||
|
||||||||||||||||||
Foreclosed assets held for sale | 221 | 408 | 508 | 573 | 529 | |||||||||||||
|
||||||||||||||||||
Total non-performing assets | $ | 3,240 | $ | 2,581 | $ | 1,234 | $ | 2,406 | $ | 2,421 | ||||||||
|
||||||||||||||||||
Non-performing loans as a percent of loans | ||||||||||||||||||
net of unearned income | 1.01 | % | 0.80 | % | 0.28 | % | 0.79 | % | 0.92 | % | ||||||||
|
||||||||||||||||||
Non-performing assets as a percent of loans | ||||||||||||||||||
net of unearned income | 1.09 | % | 0.95 | % | 0.47 | % | 1.04 | % | 1.18 | % | ||||||||
|
|
Other than those disclosed above, we do not believe there are any loans classified for regulatory purposes as loss, doubtful, substandard, special mention or otherwise which will result in losses or have a material impact on future operations, liquidity or capital reserves. We are not aware of any other information that causes us to have serious doubts as to the ability of borrowers in general to comply with repayment terms. |
|
53 |
|
2002 FINANCIAL SECTION |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
|
The following table presents an analysis of the allowance for loan losses for the five years ending December 31: |
|
2002 | 2001 | 2000 | 1999 | 1998 | ||||||||||||||
|
||||||||||||||||||
Balance | ||||||||||||||||||
at beginning of period | $ | 3,250 | $ | 2,777 | $ | 2,270 | $ | 2,292 | $ | 2,138 | ||||||||
|
||||||||||||||||||
Charge-offs: | ||||||||||||||||||
Real estate-mortgage | 59 | 19 | 86 | 73 | - | |||||||||||||
Loans to individuals for household, | ||||||||||||||||||
family and other purchases | 90 | 109 | 50 | 93 | 105 | |||||||||||||
Commercial and other loans | 30 | 19 | 22 | 385 | 7 | |||||||||||||
|
||||||||||||||||||
Total loans charged-off | 179 | 147 | 158 | 551 | 112 | |||||||||||||
Recoveries: | ||||||||||||||||||
Real estate-mortgage | 14 | 1 | 24 | 1 | 2 | |||||||||||||
Loans to individuals for household, | ||||||||||||||||||
family and other purchases | 34 | 20 | 26 | 38 | 37 | |||||||||||||
Commercial and other loans | 67 | 154 | 5 | 15 | 9 | |||||||||||||
|
||||||||||||||||||
Total loans recovered | 115 | 175 | 55 | 54 | 48 | |||||||||||||
Net loans charged-off (recovered) | 64 | (28 | ) | 103 | 497 | 64 | ||||||||||||
Provision charged to expense | 435 | 445 | 610 | 475 | 218 | |||||||||||||
|
||||||||||||||||||
Balance at end of year | $ | 3,621 | $ | 3,250 | $ | 2,777 | $ | 2,270 | $ | 2,292 | ||||||||
|
||||||||||||||||||
Loans outstanding at end of year | $ | 298,457 | $ | 271,714 | $ | 262,986 | $ | 231,429 | $ | 205,875 | ||||||||
Average loans outstanding, net | $ | 285,241 | $ | 266,116 | $ | 241,359 | $ | 217,265 | $ | 196,281 | ||||||||
Net charge-offs to average loans | 0.02 | % | -0.01 | % | 0.04 | % | 0.23 | % | 0.03 | % | ||||||||
Year-end allowance to total loans | 1.21 | % | 1.20 | % | 1.06 | % | 0.98 | % | 1.11 | % | ||||||||
Year-end allowance to total | ||||||||||||||||||
non-performing loans | 119.94 | % | 149.56 | % | 382.51 | % | 123.84 | % | 121.14 | % |
|
As detailed in Footnote 4 of the Consolidated Financial Statements and the above tables, total past due (90 days or more) and non-performing loans increased 39% from December 31, 2001 to December 31, 2002. Charged off commercial and other loans remained at historically low levels after the increase in 1999, which was the result of a single borrower going into bankruptcy during the fourth quarter. Overall, Northern Tier area development corporations were reporting an increase in unemployment, and property values have been stable to slightly increasing. The majority of our loan volume is well collateralized by real estate. |
|
ALLOWANCE FOR LOAN LOSSES |
|
The allowance is maintained at a level, which in managements judgment is adequate to absorb potential future loan losses inherent in the loan portfolio. The amount of the allowance is determined by a formal analysis of delinquencies, large problem credits, non-accrual loans, local economic conditions, trends in the loan portfolio and historic and projected losses. As part of this evaluation, the loan portfolio is divided into several categories in order to improve the analysis. These categories are loans classified on the Watch List, residential mortgages, commercial and consumer loans. |
|
54 |
|
2002 FINANCIAL SECTION |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
|
Historical loss factors are calculated for consumer, residential mortgage, and commercial loans for the past seven years. The worst historical loss factor for each category is applied to the performing portion of the loan category. For Watch List loans, the losses are calculated for the last eight quarters of experience. This is used along with regulatory guidelines to establish the loss factor applied to Watch List loans. These historical factors, for both the Watch List and homogeneous loan pools, are adjusted based on the five following qualitative factors: |
|
|
|
|
|
|
|
While we evaluate all of this information quarterly, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, review our Companys allowance for loan losses. These agencies may require us to recognize additions to the allowance based on their evaluation of information available to them. We believe that the current allowance is adequate to offset any exposure that may exist for loans that are under secured or loans that might not be collectible. In 2000, we added $210,000 to our loan loss provision when our loans increased by approximately $28 million in connection with the branch acquisition. |
|
The accrual of interest income on loans is discontinued when, in the opinion of management, there exists doubt as to the ability to collect interest. Payments received on nonaccrual loans are applied to the outstanding principal balance or recorded as interest income, depending upon our assessment of our ability to collect principal and interest. Loans are returned to the accrual status when factors indicating doubtful collectibility cease to exist. |
|
Allocation of the Allowance for Loan Losses |
|
The allocation of the allowance for loan losses is our determination of the amounts necessary for concentrations and changes in mix and volume of the loan portfolio. |
|
The unallocated portion of the allowance is based upon our assessment of general and specific economic conditions within our market. This allocation is more uncertain and considers risk factors that may not be reflected in our historical loss factors. Total charge-offs for 2003 are expected to be close to their moderate historic levels. |
|
The following table shows the distribution of the allowance for loan losses and the percentage of loans compared to total loans by loan category: |
|
2002 | 2001 | 2000 | 1999 | 1998 | ||||||||
Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||
| ||||||||||||
Real estate loans: | ||||||||||||
Residential | $ 347 | 58.7 | $ 252 | 59.0 | $ 294 | 57.7 | $ 232 | 60.3 | $ 140 | 61.7 | ||
Commercial, agricultural | 1,947 | 19.1 | 1,689 | 20.4 | 1,269 | 19.8 | 1,190 | 18.0 | 1,030 | 17.7 | ||
Construction | 6 | 1.7 | - | 1.2 | - | 1.2 | - | 1.9 | - | 2.5 | ||
Loans to individuals | ||||||||||||
for household, | ||||||||||||
family and other purchases | 471 | 4.7 | 402 | 5.4 | 367 | 5.7 | 313 | 6.7 | 365 | 7.0 | ||
Commercial and other loans | 537 | 6.2 | 542 | 5.6 | 488 | 6.7 | 350 | 5.3 | 299 | 6.1 | ||
State & political subdivision loans | 26 | 9.6 | 21 | 8.4 | 21 | 8.9 | 15 | 7.8 | 4 | 5.0 | ||
Unallocated | 287 | N/A | 344 | N/A | 338 | N/A | 170 | N/A | 454 | N/A | ||
| ||||||||||||
Total allowance for loan losses | $ 3,621 | 100.0 | $ 3,250 | 100.0 | $ 2,777 | 100.0 | $ 2,270 | 100.0 | $ 2,292 | 100.0 | ||
|
|
55 |
|
2002 FINANCIAL SECTION |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
|
DEPOSITS |
|
Traditional deposits continue to be the most significant source of funds for the Company. We are one of the only banks within our market to pay interest on a senior checking product and the only bank that does not require a minimum balance to do so. Larger deposit relationships are rewarded with higher interest rates on our Money Market Investor accounts and Certificates of Deposits. |
|
In addition to a competitive interest rate, the introduction of two new Certificates of Deposit, the Easy Access CD and the Hassle Free CD in 2001, has helped us retain existing CD deposit relationships and attracting new ones. Continuous emphasis on personal quality service also plays a large role in our ability to retain existing customers. One of our strategies for growth is to obtain a greater share of wallet from our existing deposit and loan customers. We plan to continue our focus on existing customer growth in 2003. |
|
The Company experienced moderate deposit growth in 2002 of $2.6 million or .7%. The table below shows that non-interest bearing deposits increased $2.8 million at December 31, 2002, while savings and certificates of deposit increased $1.6 million and $2.5 million, respectively, in 2002. Money market funds decreased by $4.3 million in 2002, as state & political customers moved money out of the bank into other financial alternatives. |
|
2002 | 2001 | 2000 | |||||||||||||||||
Amount | % | Amount | % | Amount | % | ||||||||||||||
|
|||||||||||||||||||
Non-interest-bearing deposits | $ | 40,143 | 10.8 | $ | 37,361 | 10.1 | $ | 42,353 | 11.5 | ||||||||||
NOW accounts | 51,304 | 13.7 | 51,259 | 13.8 | 48,384 | 13.2 | |||||||||||||
Savings deposits | 33,683 | 9.0 | 32,112 | 8.7 | 31,456 | 8.6 | |||||||||||||
Money market deposit accounts | 46,134 | 12.4 | 50,458 | 13.6 | 50,555 | 13.7 | |||||||||||||
Certificates of deposit | 201,787 | 54.1 | 199,284 | 53.8 | 195,037 | 53.0 | |||||||||||||
|
|||||||||||||||||||
Total | $ | 373,051 | 100.0 | $ | 370,474 | 100.0 | $ | 367,785 | 100.0 | ||||||||||
|
|
2002/2001 | 2001/2000 | ||||||||||||
Change | Change | ||||||||||||
Amount | % | Amount | % | ||||||||||
|
|||||||||||||
Non-interest-bearing deposits | $ | 2,782 | 7.4 | $ | (4,992 | ) | (11.8 | ) | |||||
NOW accounts | 45 | 0.1 | 2,875 | 5.9 | |||||||||
Savings deposits | 1,571 | 4.9 | 656 | 2.1 | |||||||||
Money market deposit accounts | (4,324 | ) | (8.6 | ) | (97 | ) | (0.2 | ) | |||||
Certificates of deposit | 2,503 | 1.3 | 4,247 | 2.2 | |||||||||
|
|||||||||||||
Total | $ | 2,577 | 0.7 | $ | 2,689 | 0.7 | |||||||
|
|
Remaining maturities of certificates of deposit of $100,000 or more: |
|
2002 | 2001 | 2000 | |||||||||
|
|||||||||||
3 months or less | $ | 4,674 | $ | 9,557 | $ | 2,517 | |||||
3 through 6 months | 2,559 | 8,523 | 3,295 | ||||||||
6 through 12 months | 4,819 | 3,866 | 6,569 | ||||||||
Over 12 months | 23,619 | 12,045 | 17,568 | ||||||||
|
|||||||||||
Total | $ | 35,671 | $ | 33,991 | $ | 29,949 | |||||
|
|||||||||||
As a percent of total | |||||||||||
certificates of deposit | 17.68 | % | 17.06 | % | 15.36 | % | |||||
|
|
56 |
|
2002 FINANCIAL SECTION |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
|
Deposits by Type of Depositor: |
|
2002 | 2001 | 2000 | ||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||
|
||||||||||||||||||||
Individual, partnerships | ||||||||||||||||||||
& corporations | $ | 338,079 | 90.6 | $ | 332,547 | 89.8 | $ | 332,362 | 90.4 | |||||||||||
United States government | 160 | 0.0 | 155 | 0.0 | 162 | 0.0 | ||||||||||||||
State & political subdivisions | 32,366 | 8.7 | 35,381 | 9.6 | 32,008 | 8.7 | ||||||||||||||
Other | 2,446 | 0.7 | 2,391 | 0.6 | 3,253 | 0.9 | ||||||||||||||
|
||||||||||||||||||||
Total | $ | 373,051 | 100.0 | $ | 370,474 | 100.0 | $ | 367,785 | 100.0 | |||||||||||
|
|
We have retained and acquired deposits through new product introductions and competitive pricing, increased marketing efforts, continuous, proactive one-to-one contact from consumer and business customer contact associates, as well as expanded trust and investment management services. |
|
Our wide range of delivery channels provides our customers with convenient options to satisfy their banking needs. This includes Saturday office hours, increased focus on the supermarket branches as full service offices, a network of 17 ATMs which are part of the STAR network, MasterMoney Debit Card for purchases, Bank-by-Phone and Internet Banking. |
|
BORROWED FUNDS |
|
Borrowed funds increased $3.7 million during the twelve months ending December 31, 2002 primarily due to funding needs required at the end of the year. The Companys daily cash requirements for short-term investments are met by using the financial instruments available through the Federal Home Loan Bank. |
|
In November 2000, the holding Company borrowed $2 million to invest in the bank subsidiary. This action increased the banks capital and improved the negative impact on the regulatory capital ratios as a result of the branches acquired in 2000 (approximately $9.7 million in goodwill). It is our intent to pay down the $2 million loan sometime during 2003, as a result of this projected pay down our analysis indicates that we would still be well capitalized for regulatory purposes. |
|
STOCKHOLDERS EQUITY |
|
We evaluate stockholders equity in relation to total assets and the risk associated with those assets. The greater the capital resources, the more likely a corporation is to meet its cash obligations and absorb unforeseen losses. For these reasons, capital adequacy has been, and will continue to be, of paramount importance. |
|
Stockholders equity increased by 15.0% in 2002 to $38.4 million, after increasing 9.5% in 2001 and increasing 12.5% in 2000. In 2002, we realized an increase of $1,340,000, compared to 2001 when equity was positively impacted by $869,000 to reflect unrealized holding gains and losses on available-for-sale securities. In comparison, in 2000, equity increased $2,408,000 as a direct result of the change in interest rates. Total equity was approximately 8.9% of total assets at December 31, 2002, as compared to 7.9% at December 31, 2001. |
|
Our Board of Directors determines our dividend rate after considering our Companys capital requirements, current and projected net income, and other factors. In 2002 and 2001, our Company paid out 34.3% and 47.5% of net income in dividends, respectively. |
|
57 |
|
2002 FINANCIAL SECTION |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
|
For the year ended December 31, 2002, the total number of common shares outstanding was 2,826,908. For comparative purposes, outstanding shares for prior periods were adjusted for the 2002 stock dividend in computing earnings and cash dividends per share. |
|
There are currently three federal regulatory measures of capital adequacy. Our Companys ratios meet the regulatory standards for well capitalized for 2002 and 2001, as detailed in Footnote 11 of the Consolidated Financial Statements. |
|
RESULTS OF OPERATIONS |
|
Net income for the twelve months ending December 31, 2002 was $5.6 million, an increase of $1,838,000 or 48.9% from the $3.8 million for the 2001 related period. Net income for the twelve months ending December 31, 2001 increased $549,000 or 17.1% from the $3.2 million for the 2000 related period. Operating cash earnings were $5.9 million, $4.4 million and $3.5 million for the twelve months ending December 31, 2002, 2001 and 2000, respectively. Earnings per share were $1.98, $1.33 and $1.13 for the years ended 2002, 2001 and 2000, respectively. The reasons for these changes are discussed on the following pages. |
|
The following table sets forth certain performance ratios of our Company for the periods indicated: |
|
2002 | 2001 | 2000 | ||||||||
|
||||||||||
Return on Assets (net income to average total assets) | 1.30 | % | 0.90 | % | 0.89 | % | ||||
Return on Equity (net income to average total equity) | 16.53 | % | 12.10 | % | 10.84 | % | ||||
Dividend Payout Ratio (dividends declared divided by net income) | 34.27 | % | 47.54 | % | 51.79 | % | ||||
Equity to Asset Ratio (average equity to average total assets) | 7.94 | % | 7.43 | % | 8.20 | % |
|
OVERVIEW OF THE INCOME STATEMENT |
|
In 2002, net income was $5,595,000, an increase of 48.9% compared to 2001 net income of $3,757,000. The increase in earnings is the result of enhanced net interest income from the utilization of increased earning assets, improved margin and improved non-interest income. |
|
Net income prior to amortization of intangible assets for 2002 was $5,897,000 compared to $4,427,000 for 2001 and $3,515,000 for 2000. The 2001 and 2000 period reflects net income prior to acquisitions cost and amortization of intangible assets and goodwill. This reflects the operating cash earnings of the Company for the three years. |
|
Net income is influenced by five key components: net interest income, non-interest income, non-interest expenses, provision for income taxes and the provision for loan losses. A discussion of these five components follows. |
|
NET INTEREST INCOME |
|
The most significant source of revenue is net interest income; the amount of interest earned on interest-earning assets exceeding interest incurred on interest-bearing liabilities. |
|
Factors that influence net interest income are changes in volume of interest-earning assets and interest-bearing liabilities as well as changes in the associated interest rates. |
|
Net interest income for 2002, after provision for loan losses, was $16,538,000, an increase of $2,264,000 or 15.9% compared with an increase of $2,896,000 during the same period in 2001. |
|
58 |
|
2002 FINANCIAL SECTION |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
|
The following tables set forth our Companys 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: |
|
2002 | 2001 | 2000 | |||||||||
Average | Average | Average | Average | Average | Average | ||||||
Balance (1) | Interest | Rate | Balance (1) | Interest | Rate | Balance (1) | Interest | Rate | |||
$ | $ | % | $ | $ | % | $ | $ | % | |||
| |||||||||||
ASSETS | |||||||||||
Short-term investments: | |||||||||||
Interest-bearing deposits at banks | 4,174 | 65 | 1.56 | 13,944 | 547 | 3.92 | 2,048 | 129 | 6.30 | ||
| |||||||||||
Total short-term investments | 4,174 | 65 | 1.56 | 13,944 | 547 | 3.92 | 2,048 | 129 | 6.30 | ||
Investment securities: | |||||||||||
Taxable | 91,915 | 5,169 | 5.62 | 85,570 | 5,553 | 6.49 | 73,393 | 4,761 | 6.49 | ||
Tax-exempt (3) | 14,016 | 960 | 6.85 | 18,858 | 1,292 | 6.85 | 20,635 | 1,412 | 6.84 | ||
| |||||||||||
Total investment securities | 105,931 | 6,129 | 5.79 | 104,428 | 6,845 | 6.55 | 94,028 | 6,173 | 6.57 | ||
Loans: | |||||||||||
Residential mortgage loans | 172,638 | 13,373 | 7.75 | 160,022 | 13,432 | 8.39 | 146,801 | 12,434 | 8.47 | ||
Commercial & farm loans | 72,230 | 5,683 | 7.87 | 68,708 | 6,088 | 8.86 | 59,844 | 5,583 | 9.33 | ||
Loans to state & political subdivisions | 26,698 | 1,847 | 6.92 | 22,906 | 1,760 | 7.68 | 20,210 | 1,639 | 8.11 | ||
Other loans | 13,675 | 1,305 | 9.54 | 14,480 | 1,472 | 10.17 | 14,504 | 1,400 | 9.65 | ||
| |||||||||||
Loans, net of discount (2)(3)(4) | 285,241 | 22,208 | 7.79 | 266,116 | 22,752 | 8.55 | 241,359 | 21,056 | 8.72 | ||
| |||||||||||
Total interest-earning assets | 395,346 | 28,402 | 7.18 | 384,488 | 30,144 | 7.84 | 337,435 | 27,358 | 8.11 | ||
Cash and due from banks | 9,310 | 9,912 | 7,991 | ||||||||
Bank premises and equipment | 11,613 | 11,281 | 7,078 | ||||||||
Other assets | 10,187 | 12,260 | 8,594 | ||||||||
| |||||||||||
Total non-interest earning assets | 31,110 | 33,453 | 23,663 | ||||||||
| |||||||||||
Total assets | 426,456 | 417,941 | 361,098 | ||||||||
| |||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
Interest-bearing liabilities: | |||||||||||
NOW accounts | 51,851 | 284 | 0.55 | 48,407 | 561 | 1.16 | 40,059 | 767 | 1.91 | ||
Savings accounts | 34,345 | 164 | 0.48 | 32,560 | 310 | 0.95 | 27,584 | 447 | 1.62 | ||
Money market accounts | 49,494 | 789 | 1.59 | 52,879 | 1,743 | 3.30 | 39,659 | 2,099 | 5.28 | ||
Certificates of deposit | 200,485 | 8,775 | 4.38 | 201,656 | 11,225 | 5.57 | 166,777 | 9,453 | 5.65 | ||
| |||||||||||
Total interest-bearing deposits | 336,175 | 10,012 | 2.98 | 335,502 | 13,839 | 4.12 | 274,079 | 12,766 | 4.66 | ||
Other borrowed funds | 14,449 | 392 | 2.71 | 10,185 | 467 | 4.59 | 24,248 | 1,443 | 5.95 | ||
| |||||||||||
Total interest-bearing liabilities | 350,624 | 10,404 | 2.97 | 345,687 | 14,306 | 4.14 | 298,327 | 14,209 | 4.75 | ||
Demand deposits | 38,272 | 36,241 | 25,244 | ||||||||
Other liabilities | 3,703 | 4,953 | 7,931 | ||||||||
| |||||||||||
Total non-interest-bearing liabilities | 41,975 | 41,194 | 33,175 | ||||||||
Stockholders' equity | 33,857 | 31,060 | 29,596 | ||||||||
| |||||||||||
Total liabilities & stockholders' equity | 426,456 | 417,941 | 361,098 | ||||||||
| |||||||||||
Net interest income | 17,998 | 15,838 | 13,149 | ||||||||
| |||||||||||
Net interest spread (5) | 4.22% | 3.70% | 3.36% | ||||||||
Net interest income as a percentage | |||||||||||
of average interest-earning assets | 4.55% | 4.12% | 3.90% | ||||||||
Ratio of interest-earning assets | |||||||||||
to interest-bearing liabilities | 1.13 | 1.11 | 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. |
|
59 |
|
2002 FINANCIAL SECTION |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
|
As disclosed in the previous table, we continued to experience an increasing interest margin percentage during 2001 and 2002, compared to the narrowing margin we experienced in the previous years. Currently, the yield curve is extremely steep beyond 3 months. Most of the Companys investments, loans, deposits and borrowings are priced or repriced along the three month to five-year portion of the yield curve and a more normal yield curve should enable us to maintain our current favorable net interest margin. We continue to review various pricing and investment strategies to enhance deposit growth, while maintaining or expanding the current interest margin. |
|
The following table shows the effect of changes in volume and rates on interest income and expense. Tax-exempt interest revenue is shown on a tax-equivalent basis for proper comparison using a statutory federal income tax rate of 34%. |
|
2002 vs. 2001 (1) | 2001 vs. 2000 (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 | $ | (259 | ) | $ | (223 | ) | $ | (482 | ) | $ | 447 | $ | (29 | ) | $ | 418 | ||||
Investment securities: | ||||||||||||||||||||
Taxable | 481 | (865 | ) | (384 | ) | 790 | 2 | 792 | ||||||||||||
Tax-exempt | (332 | ) | - | (332 | ) | (121 | ) | 1 | (120 | ) | ||||||||||
|
||||||||||||||||||||
Total investments | 149 | (865 | ) | (716 | ) | 669 | 3 | 672 | ||||||||||||
|
||||||||||||||||||||
Loans: | ||||||||||||||||||||
Residential mortgage loans | 1,059 | (1,118 | ) | (59 | ) | 1,108 | (110 | ) | 998 | |||||||||||
Commercial & farm loans | 342 | (747 | ) | (405 | ) | 764 | (259 | ) | 505 | |||||||||||
Loans to state & political subdivisions | 218 | (131 | ) | 87 | 200 | (79 | ) | 121 | ||||||||||||
Other loans | (80 | ) | (87 | ) | (167 | ) | (2 | ) | 74 | 72 | ||||||||||
|
||||||||||||||||||||
Total loans, net of discount | 1,539 | (2,083 | ) | (544 | ) | 2,070 | (374 | ) | 1,696 | |||||||||||
|
||||||||||||||||||||
Total Interest Income | 1,429 | (3,171 | ) | (1,742 | ) | 3,186 | (400 | ) | 2,786 | |||||||||||
|
||||||||||||||||||||
Interest Expense: | ||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||
NOW accounts | 43 | (320 | ) | (277 | ) | 233 | (439 | ) | (206 | ) | ||||||||||
Savings accounts | 18 | (164 | ) | (146 | ) | 107 | (244 | ) | (137 | ) | ||||||||||
Money Market accounts | (105 | ) | (849 | ) | (954 | ) | 698 | (1,054 | ) | (356 | ) | |||||||||
Certificates of deposit | (65 | ) | (2,385 | ) | (2,450 | ) | 1,911 | (139 | ) | 1,772 | ||||||||||
|
||||||||||||||||||||
Total interest-bearing deposits | (109 | ) | (3,718 | ) | (3,827 | ) | 2,949 | (1,876 | ) | 1,073 | ||||||||||
Other borrowed funds | 195 | (270 | ) | (75 | ) | (701 | ) | (275 | ) | (976 | ) | |||||||||
|
||||||||||||||||||||
Total interest expense | 86 | (3,988 | ) | (3,902 | ) | 2,248 | (2,151 | ) | 97 | |||||||||||
|
||||||||||||||||||||
Net interest income | $ | 1,343 | $ | 817 | $ | 2,160 | $ | 938 | $ | 1,751 | $ | 2,689 | ||||||||
|
|
(1) |
The change in interest due to both rate and volume has been allocated to the volume and rate in proportion to the absolute dollar amounts of each change. |
|
As can be seen from the preceding tables, tax equivalent net interest income rose from $13,149,000 in 2000 to $15,838,000 in 2001, and increased to $17,998,000 in 2002. In 2002, net interest income increased $2,160,000 while overall spread increased from 3.70% to 4.22%. The increased volume of interest-earning assets generated an increase in interest income of $1,429,000 while increased volume of interest-bearing liabilities produced $86,000 of interest expense. The change in volume resulted in a net increase of $1,343,000 in net interest income. The net change in rate was a positive $817,000 resulting in a total positive net change of $2,160,000 when combined with change in volume. The yield on interest-earning assets declined 66 basis points from 7.84% to 7.18% and the average interest rate on interest-bearing liabilities declined 117 basis points from 4.14% to 2.97%. Analysis of our Companys net interest income in 2001 and 2002 shows the effects of declining short-term interest rates and the effect of the steepening of the yield curve. |
|
60 |
|
2002 FINANCIAL SECTION |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
|
During 2002 the Federal Reserve reduced short-term interest rates by 50 basis points in the fourth quarter. We expect the 2002 Federal Reserve rate reduction to continue to help us maintain our current net interest margin during the first half of 2003. We continue to evaluate alternatives to improve or sustain the interest spread. |
|
NON-INTEREST INCOME |
|
Non-interest income, as detailed below, increased $757,000 or 17.6% in 2002 compared to a $1,628,000 increase in 2001. Service charge income, which increased $603,000 or 23.9% in 2002, continues to be the primary source of growth in non-interest income. The increase in fee income was mainly the result of the checking account acquisition strategy we put into place in the latter half of 2001. Other income increased $573,000 or 108.7% in 2002. This increase is due to $80,000 from our insurance agency along with a $70,000 increase in Master Card/Visa and loan insurance commissions and a $280,000 increase associated with the previously mentioned loans sold on the secondary market. |
|
The following table reflects non-interest income by major category for the periods ended December 31: |
|
2002 | 2001 | 2000 | ||||||||
|
||||||||||
Service charges | $ | 3,130 | $ | 2,527 | $ | 1,853 | ||||
Other | 1,100 | 527 | 385 | |||||||
Trust | 562 | 578 | 432 | |||||||
Realized securities gains (losses), net | 254 | 657 | (9 | ) | ||||||
|
||||||||||
Total | $ | 5,046 | $ | 4,289 | $ | 2,661 | ||||
|
|
2002/2001 | 2001/2000 | ||||||||||||
Change | Change | ||||||||||||
Amount | % | Amount | % | ||||||||||
|
|||||||||||||
Service charges | $ | 603 | 23.9 | $ | 674 | 36.4 | |||||||
Other | 573 | 108.7 | 142 | 36.9 | |||||||||
Trust | (16 | ) | (2.8 | ) | 146 | 33.8 | |||||||
Realized securities gains (losses), net | (403 | ) | (61.3 | ) | 666 | N/A | |||||||
|
|||||||||||||
Total | $ | 757 | 17.6 | $ | 1,628 | 61.2 | |||||||
|
|
We continue to evaluate additional means of increasing non-interest income. Our approach is to apply service charges on business accounts by charging fees on transaction activity (reduced by earnings credit based on customers balances) to more equitably recover costs. |
|
In an effort to continue to improve our capital ratios and take advantage of current market conditions, we elected to sell and reinvest approximately $13,927,000 of investment securities in 2002, which resulted in $254,000 of security gains. |
|
61 |
|
2002 FINANCIAL SECTION |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
|
NON-INTEREST EXPENSES |
|
The costs associated with operating the Company rose by 1.3% to $14,226,000 during 2002 compared to $14,041,000 in 2001. These costs include but were not limited to salaries, supplies, insurance, occupancy, and amortization expenses. The increase in salaries and employee benefits is the result of filling some corporate positions related to the growth strategies that we have implemented, along with annual salary increases and adjustments. Amortization expense decreased as a result of the adoption of FAS No. 142 that was previously discussed (see footnote 14). |
|
The following tables reflect the breakdown of non-interest expense and professional fees for the periods ended December 31: |
|
2002 | 2001 | 2000 | ||||||||
|
||||||||||
Salaries and employee benefits | $ | 7,120 | $ | 6,597 | $ | 4,768 | ||||
Occupancy | 998 | 992 | 610 | |||||||
Furniture and equipment | 881 | 966 | 761 | |||||||
Professional fees | 667 | 494 | 474 | |||||||
Amortization | 457 | 1,015 | 260 | |||||||
Other | 4,103 | 3,977 | 3,314 | |||||||
|
||||||||||
Total | $ | 14,226 | $ | 14,041 | $ | 10,187 | ||||
|
|
2002/2001 | 2001/2000 | ||||||||||||
Change | Change | ||||||||||||
Amount | % | Amount | % | ||||||||||
|
|||||||||||||
Salaries and employee benefits | $ | 523 | 7.9 | $ | 1,829 | 38.4 | |||||||
Occupancy | 6 | 0.6 | 382 | 62.6 | |||||||||
Furniture and equipment | (85 | ) | (8.8 | ) | 205 | 26.9 | |||||||
Professional fees | 173 | 35.0 | 20 | 4.2 | |||||||||
Amortization | (558 | ) | (55.0 | ) | 755 | 290.4 | |||||||
Other | 126 | 3.2 | 663 | 20.0 | |||||||||
|
|||||||||||||
Total | $ | 185 | 1.3 | $ | 3,854 | 37.8 | |||||||
|
|
62 |
|
2002 FINANCIAL SECTION |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
|
PROFESSIONAL FEES |
|
2002 | 2001 | 2000 | ||||||||
|
||||||||||
Other professional fees | $ | 505 | $ | 366 | $ | 362 | ||||
Legal fees | 70 | 43 | 41 | |||||||
Examinations and audits | 92 | 85 | 71 | |||||||
|
||||||||||
Total | $ | 667 | $ | 494 | $ | 474 | ||||
|
2002/2001 | 2001/2000 | ||||||||||||
Change | Change | ||||||||||||
Amount | % | Amount | % | ||||||||||
|
|||||||||||||
Other professional fees | $ | 139 | 38.0 | $ | 4 | 1.1 | |||||||
Legal fees | 27 | 62.8 | 2 | 4.9 | |||||||||
Examinations and audits | 7 | 8.2 | 14 | 19.7 | |||||||||
|
|||||||||||||
Total | $ | 173 | 35.0 | $ | 20 | 4.2 | |||||||
|
|
The professional fees increase in 2002 reflects managements efforts to implement strategic income initiatives where we share a portion of the revenue over a stated time period as a result of the account acquisition strategy. |
|
PROVISION FOR INCOME TAXES |
|
The provision for income taxes was $1,763,000 during 2002 compared with $765,000 during the 2001 related period. Income before taxes increased $2,836,000 in the 2002 period over the same period in 2001 reflecting the change in income, levels of tax-exempt income and tax credits described below. |
|
We have entered into two limited partnership agreements to establish low-income housing projects in our market area. As a result of these agreements for tax purposes, we have recognized $205,000 out of a total $911,000 from one project and $38,000 out of a total $385,000 on the second project, which was completed in November 2001. A total of approximately $1,290,000 of tax credits is anticipated over a ten-year period. |
|
LIQUIDITY |
|
Liquidity is a measure of our Companys ability to efficiently meet normal cash flow requirements of both borrowers and depositors. To maintain proper liquidity, we use funds management policies along with our investment policies to assure we can meet our financial obligations to depositors, credit customers and stockholders. 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 other capital expenditures. |
|
Our Companys 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 our Companys availability of funds. |
|
63 |
|
2002 FINANCIAL SECTION |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
|
Our Companys 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 were $473,000 in 2002, $1,613,000 less than 2001. The large decrease is primarily the result of the building projects completed during 2001 (described below): |
|
Major capital expenditures for 2002 were: |
|
|
Some major capital expenditures for 2001 were: |
|
|
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. |
|
Our Company achieves additional liquidity primarily from temporary or short-term investments in the Federal Home Loan Bank of Pittsburgh, PA, and investments that mature in less than one year. The Company also has a maximum borrowing capacity at the Federal Home Loan Bank of approximately $166 million as an additional source of liquidity. |
|
Apart from those matters described above, management does not currently believe that there are any current trends, events or uncertainties that would have a material impact on capital. |
|
INTEREST RATE AND MARKET RISK MANAGEMENT |
|
The objective of interest rate sensitivity management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest sensitivity imbalances and the market value risk of assets and liabilities. |
|
Because of the nature of our operations, we are not subject to foreign currency exchange or commodity price risk and, since our Company has no trading portfolio, it is not subject to trading risk. |
|
Currently our Company has equity securities that represent approximately 5% of our investment portfolio and, therefore, equity risk is not significant. |
|
The primary components of interest-sensitive assets include adjustable-rate 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 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 accounts which are paid current market interest rates). |
|
64 |
|
2002 FINANCIAL SECTION |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
|
The following table shows the cumulative static GAP (at amortized cost) for various time intervals: |
|
Maturity or Repricing of Company Assets and Liabilities as of December 31, 2002 | |||||||||
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 | $ 421 | $ - | $ - | $ - | $ - | $ - | $ 421 | ||
Investment securities | 8,265 | 24,853 | 39,231 | 15,775 | 2,901 | 5,832 | 96,857 | ||
Residential mortgage loans | 18,259 | 39,923 | 25,399 | 17,077 | 18,670 | 61,004 | 180,332 | ||
Commercial and farm loans | 3,277 | 8,383 | 9,894 | 11,426 | 19,361 | 23,277 | 75,618 | ||
Loans to state & political subdivisions | 2,818 | 2,062 | 539 | 3,495 | 10,731 | 8,947 | 28,592 | ||
Other loans | 1,939 | 1,078 | 842 | 986 | 1,187 | 7,883 | 13,915 | ||
| |||||||||
Total interest-earning assets | $ 34,979 | $ 76,299 | $ 75,905 | $ 48,759 | $ 52,850 | $ 106,943 | $ 395,735 | ||
| |||||||||
Interest-bearing liabilities: | |||||||||
NOW accounts | $ 12,269 | $ - | $ - | $ - | $ - | $ 39,035 | $ 51,304 | ||
Savings accounts | - | - | - | - | - | 33,683 | 33,683 | ||
Money Market accounts | 46,134 | - | - | - | - | - | 46,134 | ||
Certificates of deposit | 31,536 | 56,778 | 27,959 | 32,885 | 48,330 | 4,299 | 201,787 | ||
Short-term borrowing | 7,680 | - | - | - | - | 3,430 | 11,110 | ||
Long-term borrowing | 200 | 2,554 | 956 | 390 | 1,817 | - | 5,917 | ||
| |||||||||
Total interest-bearing liabilities | $ 97,819 | $ 59,332 | $ 28,915 | $ 33,275 | $ 5 0,147 | $ 80,447 | $ 349,935 | ||
| |||||||||
Excess interest-earning | |||||||||
assets (liabilities) | $ (62,840) | $ 16,967 | $ 46,990 | $ 15,484 | $ 2,703 | $ 26,496 | |||
| |||||||||
Cumulative interest-earning assets | 34,979 | 111,278 | 187,183 | 235,942 | 288,792 | 395,735 | |||
Cumulative interest-bearing liabilities | 97,819 | 157,151 | 186,066 | 219,341 | 269,488 | 349,935 | |||
| |||||||||
Cumulative gap | $ (62,840) | $ (45,873) | $ 1,117 | $ 16,601 | $ 19,304 | $ 45,800 | |||
| |||||||||
Cumulative interest rate | |||||||||
sensitivity ratio (1) | 0.36 | 0.71 | 1.01 | 1.08 | 1.07 | 1.13 |
|
(1) Cumulative Interest-earning assets divided by interest-bearing liabilities. |
|
The previous table and the simulation models discussed below are presented assuming money market investment accounts and NOW accounts in the top interest rate tier are repriced within the first three months. The loan amounts reflect the principal balances expected to be repriced 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 our Companys net interest income because the repricing 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. |
|
Our Company currently uses a computer simulation model to better measure the impact of interest rate changes on net interest income. We use the model as part of our risk management process that will effectively identify, measure, and monitor our Companys risk exposure. |
|
Interest rate simulations using a variety of assumptions are used by us to evaluate our interest rate risk exposure. A shock analysis at December 31, 2002, indicated that a 200 basis point movement in interest rates in either direction would have a minor impact on our Companys anticipated net interest income and the market value of assets and liabilities over the next twenty-four months, well within our ability to manage effectively. |
|