SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
For the transition period from_____________________ to ___________________
Commission file number 0-13222
CITIZENS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2265045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 South Main Street, Mansfield, Pennsylvania 16933
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (570) 662-2121
Indicate by checkmark whether the registrant (1) has filed all reports
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes__X___ No_____
The number of shares outstanding of the Registrant's Common Stock, as of
May 1, 2002, 2,799,420 shares of Common Stock, par value $1.00.
Citizens Financial Services, Inc.
Form 10-Q
INDEX
Page
Part I FINANCIAL INFORMATION (UNAUDITED)
Item 1-Financial Statements
Consolidated Balance Sheet as of March 31, 2002, and
December 31, 2001 1
Consolidated Statement of Income for the
Three Months Ended March 31, 2002 and 2001 2
Consolidated Statement of Comprehensive Income for the
Three Months Ended March 31, 2002 and 2001 3
Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 2002 and 2001 4
Notes to Consolidated Financial Statements 5
Item 2-Management's Discussion and Analysis of Financial Condition
and Results of Operations 6-17
Item 3-Quantitative and Qualitative Disclosure About Market Risk 18
Part II OTHER INFORMATION
Item 1-Legal Proceedings 19
Item 2-Changes in Securities and Use of Proceeds 19
Item 3-Defaults upon Senior Securities 19
Item 4-Submission of Matters to a Vote of Security Holders 19
Item 5-Other Information 19
Item 6-Exhibits and Reports on Form 8-K 20
SIGNATURES 21
The accompanying notes are an integral part of these unaudited financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
Citizens Financial Service, 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"), and its subsidiary, First Citizens Insurance Agency, Inc. Our Company's consolidated financial condition and results of operations consist almost entirely of our wholly owned subsidiary's financial conditions and results of operations. All material inter-company balances and transactions have been eliminated in consolidation.
The accompanying interim financial statements have been prepared by the Company without audit and, in the opinion of management, reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company's financial position as of March 31, 2002, and the results of operations for the interim periods presented. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. For further information refer to the consolidated financial statements and footnotes thereto incorporated by reference in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Note 2 - 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 and dividends per share calculation was 2,799,420 for 2002 and 2001.
Note 3 - Income Tax Expense
Income tax expense is less than the amount calculated using the statutory tax rate, primarily the result of tax-exempt income earned from state and municipal securities and loans and investment in tax credits.
NOTE 4 - Recent Accounting Pronouncements
In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. The new statement changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. However, the new statement did not amend FAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, which requires recognition and amortization of unidentified intangible assets relating to the acquisition of financial institutions or branches thereof. The FASB has undertaken a limited scope project to reconsider the provisions of FAS No. 72 specifically to determine whether to require banks to continue amortization of the goodwill portion of the intangible assets. Although no final conclusion has been reached, management anticipates that it will no have a material effect on the Company's financial position or results of operations.
In August 2001, the 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.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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:
The following is management's discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in its accompanying consolidated financial statements for Citizens Financial Service, Inc., a bank holding company and its subsidiary (the Company). Our Company's consolidated financial condition and results of operations consist almost entirely of our wholly owned subsidiary's (First Citizens National Bank) financial conditions and results of operations. Management's discussion and analysis should be read in conjunction with the preceding March 31, 2002 financial information. The results of operations for the three months ended March 31, 2002 and 2001 are not necessarily indicative of the results you may expect for the full year.
Our Company currently engages in the general business of banking throughout our service area of Potter, Tioga and Bradford counties in North Central Pennsylvania and Allegany, Steuben, Chemung and Tioga counties in Southern New York. Our lending and deposit products and investment services are offered primarily within the vicinity of 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.
Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the direction and frequency of changes in interest rates. Interest rate risk results from various re-pricing frequencies and the maturity structure of the financial instruments owned by the Company. The Company uses its asset/liability 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 purchasing of securities. The Company's primary credit risk is in the loan portfolio. The Company manages credit risk by adhering to an established credit policy and through a disciplined evaluation of the adequacy of the allowance for loan losses. Also, the investment policy limits the amount of credit risk that may be taken in the investment portfolio.
Liquidity risk represents the inability to generate or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers and obligations to depositors. The Company has established guidelines within its asset/liability 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 Annual Report on Form 10-K for the year ended December 31, 2001, filed by our Company and any Current Reports on Form 8-K filed by our Company.
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 and mortgage brokers. 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 Department services range from professional estate settlement services through management of complex trust accounts to investment management and custody of securities. Our expanded Employee Benefits Department manages retirement accounts for many area companies and individuals. We also manage many individual IRAs, both rollover and contributory.
The Trust Department offers full service brokerage services in selected locations throughout the Bank's 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 2002.
FINANCIAL CONDITION
Total assets (shown in the Consolidated Balance Sheet) have declined .4% since year-end 2001 to $419.3 million. Total loans increased 2.7% to $279.1 million and investment securities decreased 7.1% to $105.5 million since year-end 2001. Total deposits decreased 1.6% to $364.7 million since year-end 2001. Explanations of variances will be described within the following appropriate sections.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents totaled $10,388,000 at March 31, 2002 compared to $11,480,000 on December 31, 2001.
We believe the liquidity needs of the Company, are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, and the portion of the investment and loan portfolios that mature within one year. These sources of funds will enable the Company to meet cash obligations and off-balance sheet commitments as they come due.
INVESTMENTS
Our investment portfolio decreased by $8,109,000 or 7.1% from December 31, 2001 to March 31, 2002. We were able to decrease our investments primarily as the result of net new loan funding requirements of $7,409,000 during the first quarter of 2002. During the current quarter, we sold approximately $3,149,000 of Municipal Bonds along with $1,658,000 of U.S. Government Agency Mortgage-backed securities. Proceeds from the fore mentioned sales were re-invested in Agency Mortgage-backed securities.
Management monitors the earnings performance and the effectiveness of the liquidity of the investment portfolio on a regular basis. Through active balance sheet management and analysis of the securities portfolio, the Company maintains sufficient liquidity to satisfy depositor requirements and various credit needs of its customers.
LOANS
The Company's loan demand increased significantly during the first three months of 2002. We anticipate loan demand will continue during the remainder of 2002 as a result of re-financings that will be taking place due to the current lower interest rate environment and our continued efforts to grow the new offices that we acquired from the acquisition. The Company's lending is focused in the north central Pennsylvania market and the southern tier of New York. The composition of our loan portfolio consists principally of retail lending, which includes single-family residential mortgages and other consumer lending, and commercial lending primarily to locally owned small businesses. New loans are generated primarily from direct loans to our existing customer base, with new customers generated by referrals from real estate brokers, building contractors, attorneys, accountants and existing customers.
As shown in the following tables (dollars in thousands), the change in net loans increased by $7,324,000 or 2.7% for the period compared to December 31, 2001. Residential mortgage lending is a principal business activity and one our Company expects to continue by providing a full complement of competitively priced conforming, nonconforming and home equity mortgages.
During the current period State & political subdivision loans increased 16.4% or $3,764,000 when compared to December 31, 2001. The result of this increase is primarily due to our increased effort to grow the loan portfolio.
The reduction of interest rates during 2001 continue to have a positive impact on loan originations through the first quarter of 2002. We expect that loan growth will continue for the rest of the year.
Our focus on commercial lending continues to be expanded over the past several years with the establishment of a core group of commercial lenders to handle a higher volume of small business loans.
ALLOWANCE FOR LOAN LOSSES
As shown in the following table (dollars in thousands), the Allowance for Loan Losses as a percentage of loans remained stable at 1.20%, at December 31, 2001 and March 31, 2002. The dollar amount of the reserve increased $85,000, since year-end 2001. The increase is a result of the provision of $120,000 expensed during the three months less net charge-offs. Gross charge-offs for the first three months of 2002 were $45,000, while recoveries were $10,000.
The adequacy of the allowance for loan losses is subject to a formal analysis by management of the Company. Management deems the allowance to be adequate to absorb probable losses in the portfolio, as of March 31, 2002. The Company has disclosed in its annual report on Form 10-K the process and methodology supporting the loan loss provision.
DEPOSITS
Traditional deposits continue to be the most significant source of funds for the Company. As shown in the following tables (dollars in thousands), deposits decreased $5,794,000 or 1.6%, since December 31, 2001. As of March 31, 2002, NOW accounts decreased by $1,580,000, while Money market funds decreased by $4,235,000, as state & political customers moved money out of the bank into other financial alternatives.
BORROWED FUNDS
Borrowed funds increased $3,597,000 during the first three months of 2002. The increase occurred primarily within our sweep repurchase agreements with one customer having a $5,000,000 increase from December 31, 2001 when compared to March 31, 2002. The Company's daily cash requirements or short-term investments are met by using the financial instruments available through the Federal Home Loan Bank.
In November 2000, the holding company borrowed $2,000,000 to invest in the bank subsidiary. This increased the Bank's capital and improved the negative impact on the regulatory capital ratios as a result of the branch acquisition (approximately $9.7 million in goodwill).
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.
Total Stockholders' Equity was $33,869,000, at March 31, 2002 compared to $33,389,000, at December 31, 2001, an increase of $480,000 or 1.4%. In the first three months, the Company earned $1,275,000 and declared dividends of $462,000, a dividend payout ratio of 36.2% of net income.
All of the Company's investment securities are classified as available-for-sale making this portion of the Company's balance sheet more sensitive to the changing market value of investments. Short-term interest rates in the first three months of 2002 have remained consistent since the end of 2001. This situation has caused a decrease in the accumulated other comprehensive income which is included in stockholders' equity of $333,000 since December 31, 2001.
On July 30, 1999, our Company began a plan to purchase, in open market or privately negotiated transactions, up to 135,000 shares of its outstanding common stock. This stock repurchase program was suspended, in April 2000, because of the acquisition. However, a total of 55,162 shares were repurchased at a cost of approximately $1 million as of March 31, 2002.
The Company has also complied with standards of capital adequacy mandated by the banking regulators. The Company's primary regulators have established "risk-based" capital requirements designed to measure capital adequacy. Risk-based capital ratios reflect the relative risks associated with various assets entities hold in their portfolios. A weight category of 0% (lowest risk assets), 20%, 50%, or 100% (highest risk assets), is assigned to each asset on the balance sheet. The Company's computed risk-based capital ratios are as follows (dollars in thousands):
On April 4, 2001, our Company filed a Registration Statement on Form S-3 establishing a Dividend Re-Investment Plan (DRIP), which was effective for the second quarter dividend in 2001.
RESULTS OF OPERATIONS
OVERVIEW OF THE INCOME STATEMENT
The Company had net income of $1,275,000, for the first three months of 2002. Earnings per share, for the respective period was $0.46. Net income was $791,000, for the first three months of 2001, which equates to earnings per share of $0.28. The return on assets and the return on equity, for the three months of 2002, were 1.23% and 15.64%. Details of the reasons for this change are discussed on the following pages.
Operating cash earnings (net income before amortization of intangible assets and merger and acquisition costs, net of tax) for the three month period ending March 31, 2002, was $1,443,000, an increase of $484,000 or 50.5%, from the $959,000 for the 2001 related period. Operating cash earnings per share was $0.52, during the first three months of 2002, compared with $0.34, during the comparable 2001 period.
NET INTEREST INCOME
Net interest income, the most significant component of earnings, is the amount by which interest generated from earning assets exceeds interest expense on interest-bearing liabilities.
Net interest income, for the first three months of 2002, after provision for loan losses, was $4,024,000, an increase of $750,000, compared to an increase of $472,000, at March 31, 2001. The Bank experienced an increase in average earning assets since March 31, 2001 of 3.5%, which came primarily from our continued efforts to grow the new offices.
The following table sets forth the average balances of, and the interest earned or incurred on, each principal category of assets, liabilities and stockholders' equity, the related rates, net interest income and rate "spread" created:
We continue to experience an increasing interest margin percentage during the first three months of 2002, compared to the narrowing margin that we have experienced in the last few years. When the flat yield curve became inverted in 2000, interest rates began to rise resulting in our higher volume of short-term liabilities re-pricing faster than our short-term assets. Currently the yield curve is extremely steep beyond 3 months. Most of the Company's investments, loans, deposits and borrowings are priced or re-priced 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.
As can be seen from the preceding tables, tax equivalent net interest income rose from $3,174,000, in 2000, to $3,654,000, in 2001, and increased to $4,403,000, in 2002. In the period ending March 31, 2002, net interest income increased $749,000, while overall spread increased from 3.54% to 4.29%. The increased volume of interest-earning assets generated an increase in interest income of $298,000 while increased volume of interest-bearing liabilities produced $80,000 of interest expense. The change in volume resulted in an increase of $218,000 in net interest income. The net change in rate was a positive $531,000, resulting in a total positive net change of $749,000, when combined with change in volume. The yield on interest-earning assets decreased 64 basis points from 8.13% to 7.49% and the average interest rate on interest-bearing liabilities decreased 139 basis points, from 4.59% to 3.20%, because of the previously described changes to the yield curve.
The provision for loan losses was $120,000 for the three-month period, ended March 31, 2002, compared to $75,000, for the same period in 2001.
This provision was appropriate given management's quarterly review of the allowance for loan losses that is based on the following information: migration analysis of delinquent and non-accrual loans, estimated future losses on loans, recent review of large problem credits, local and national economic conditions, historical loss experience, OCC qualitative adjustments and peer comparisons.
NON-INTEREST INCOME
Non-interest income, as detailed below, increased $381,000 or 44.8%, for the first three months of 2002, when compared to the same period in 2001. Service charge income continues to be the primary source of growth in non-interest income. For the first three months, account service charges totaled $736,000 up $174,000 or 31.0% over last year. These increases in fee income were mainly the result of the checking account acquisition strategy we put into place in the latter half of 2001, along with improved internal efficiencies. The trust income decreased for the three-month period as the result of large estate fees in the 2001 period. Other income increased $230,000 for the first three months of 2002, when compared to the same period in 2001. This increase is due to $67,000 from our insurance agency along with a $60,000 increase in Master card/Visa and loan insurance commissions, a $48,000 insurance claim on one of our corporate buildings and $54,000 related to loans sold on the secondary market.
The following table shows the breakdown of non-interest income for the three months ended March 31, 2002 and 2001(dollars in thousands):
We continue to evaluate means of increasing non-interest income. Our approach is to apply service charges on business transaction accounts by charging fees on transaction activity (reduced by earnings credit based on customers' balances) to more equitably recover costs. We expect to continue this analysis for our other products.
NON-INTEREST EXPENSES
Total non-interest expense, as detailed below, increased $403,000 or 12.6%, for the first three months of 2002, when compared to the same period in 2001. The increase in salaries and employee benefits is a result of the filling of some corporate positions related to the growth strategies that we have implemented, along with annual salary increases and adjustments. The increase in other expense is primarily the result of increased foreclosure expense of $32,000 and abnormally high operational charge-offs of $26,000 associated with a fraud scam that hit our market place.
The following tables reflect the breakdown of non-interest expense and professional fees as of March 31, 2002 and 2001(dollars in thousands):
The professional fees increase in 2002 reflects management's efforts to implement strategic income initiatives where we share a portion of the revenue over a stated time period.
PROVISION FOR INCOME TAXES
The provision for income taxes was $381,000 for the three-month period ended March 31, 2002 compared to $137,000, for the same period in 2001. The increase was primarily a result of increased taxable income.
We have entered into two limited partnership agreements to establish low-income housing projects in our market area. As a result of these agreements, we have recognized $123,000 out of a total $911,000 from one project and expect to begin recognition of an additional $385,000 over ten years 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 Company's 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 Company's historical activity in this area can be seen in the Consolidated Statement of Cash Flows from investing and financing activities.
Cash generated by operating activities, investing activities and financing activities influences liquidity management. The most important source of funds is the deposits that are primarily core deposits (deposits from customers with other relationships). Short-term debt from the Federal Home Loan Bank supplements our Company's availability of funds.
Our Company's use of funds is shown in the investing activity section of the Consolidated Statement of Cash Flows, where the net loan activity is presented. Other significant uses of funds include capital expenditures. Surplus funds are then invested in investment securities.
Capital expenditures during the first three months of 2002 were $241,000, $506,000 less than the same period in 2001. The large decrease is primarily the result of the building projects completed during 2001 (described below):
Major capital expenditures for 2002 were:
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.
CREDIT QUALITY RISK
The following table identifies amounts of loan losses and non-performing loans. Past due loans are those that were contractually past due 90 days or more as to interest or principal payments (dollars in thousands).
Interest does not accrue on non-accrual loans. Subsequent cash payments received are applied to the outstanding principal balance or recorded as interest income, depending upon management's assessment of its ultimate ability to collect principal and interest.
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 only 5.3% 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).
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 Company's net interest income because the re-pricing of certain assets and liabilities is discretionary and is subject to competitive and other pressures. In addition, assets and liabilities within the same period may, in fact, be repaid at different times and at different rate levels. We have not experienced the kind of earnings volatility that might be indicated from gap analysis.
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 Company's risk exposure.
We use numerous interest rate simulations employing a variety of assumptions to evaluate our interest rate risk exposure. A shock analysis at March 31, 2002, indicated that a 200 basis point movement in interest rates in either direction would have a minor impact on our Company's anticipated net interest income over the next twenty-four months.
GENERAL
The majority of assets and liabilities of a financial institution are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets and on non-interest expenses, which tend to rise during periods of general inflation. The recent action by the Federal Reserve of increasing short-term interest rates will help ensure that the level of inflation remains at a relatively low level.
Various congressional bills have been passed and other proposals have been made for significant changes to the banking system, including provisions for: limitation on deposit insurance coverage; changing the timing and method financial institutions use to pay for deposit insurance; and tightening the regulation of bank derivatives' activities.
Aside from those matters described above, we do not believe that there are any trends, events or uncertainties, which would have a material adverse impact on future operating results, liquidity or capital resources. We are not aware of any current recommendations by the regulatory authorities (except as described herein) which, if they were to be implemented, would have such an effect, although the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have, a negative impact on our Company's results of operations.
Item 3- Quantitative and Qualitative Disclosure About Market Risk
In the normal course of conducting business activities, the Company is exposed to market risk, principally interest rate risk, through the operations of its banking subsidiary. Interest rate risk arises from market driven fluctuations in interest rates that affect cash flows, income, expense and values of financial instruments and was discussed previously in this Form 10-Q. Management and a committee of the board of directors manage interest rate risk.
No material changes in market risk strategy occurred during the current period. A detailed discussion of market risk is provided in the SEC Form 10-K for the period ended December 31, 2001.
PART II - OTHER INFORMATION AND SIGNATURES
Item 1 - Legal Proceedings
Management is not aware of any litigation that would have a material adverse effect on the consolidated financial position of the Company. Any pending proceedings are ordinary, routine litigation incidental to the business of the Company and its subsidiary. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Company and its subsidiary by government authorities.
Item 2 - Changes in Securities and use of Proceeds - Note applicable.
Item 3 - Defaults Upon Senior Securities - Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
Carol J. Tama 2,265,871 36,290
Richard E. Wilber 2,259,311 42,850
John M. Thomas, M.D. 2,258,793 43,368
Larry J. Croft 2,265,871 36,290
Item 5 - Other Information - None.
Item 6 -Exhibits and Reports on Form 8-K.
(a) Exhibits.
(3)(ii)- By-laws of the Corporation, as amended. (Incorporated by Reference to Exhibit (3)(ii) to the Annual Report of Form 10-K for the fiscal year ended December 31, 1995, as filed with the Commission on March 26, 1996.)
(10) - Material Contracts. Employment Agreement between our Company and Richard E. Wilber. (Incorporated by Reference to Exhibit (10) to the Annual Report of Form 10-K for the fiscal year ended December 31, 1998, as filed with the Commission on March 17, 1998.)
(99) - Independent accountant's review of financial statements for the period ended March 31, 2002.
Pursuant to the requirements of the Securities Exchange Act of 1934, the undersigned Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
(Registrant)
May 9, 2002 /s/ Richard E. Wilber
By: Richard E. Wilber
President
(Principal Executive Officer)
May 9, 2002 /s/ Randall E. Black
By: Randall E. Black
Assistant Treasurer
(Principal Financial Officer &
Principal Accounting Officer)
EXHIBITS INDEX