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| CITZ > SEC Filings for CITZ > Form 10-Q on 31-Oct-2008 | All Recent SEC Filings |
31-Oct-2008
Quarterly Report
Forward Looking Statements
Certain statements contained in this Form 10-Q, in other filings made by the Company with the U.S. Securities and Exchange Commission (SEC), and in the Company's press releases or other stockholder communications are forward-looking statements, as that term is defined in U.S. federal securities laws. Generally, these statements relate to business plans or strategies, projections involving anticipated revenues, earnings, profitability or other aspects of operating results or other future developments in the Company's affairs or the industry in which it conducts business. Forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology such as "anticipate," "believe," "expect," "intend," "plan," "estimate," "would be," "will," "intends to," "project" or similar expressions or the negative thereof.
The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company also advises readers that various factors, including regional and national economic conditions, changes in levels of market interest rates, credit and other risks which are inherent in the Company's lending and investment activities, legislative changes, changes in the cost of funds, demand for loan products and financial services, changes in accounting principles and competitive and regulatory factors, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected. For further discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements see
"Part II. Item 1A. Risk Factors" of this Form 10-Q as well as "Part I. Item 1A. Risk Factors" of the Company's Annual Report on Form 10-K for the year ended December 31, 2007. Such forward-looking statements are not guarantees of future performance. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.
Overview
Unprecedented market conditions during the quarter continued to present unforeseen challenges to the Company, the entire financial services sector and the economy in general. The Company, however, continues to improve its financial results related to its core operations. Its liquidity, financial flexibility and capital remain strong.
The Bank's risk-based capital increased to 14.38 % from 13.93% at December 31, 2007 and continues to be in excess of the regulatory requirements to be considered "adequately capitalized" and "well-capitalized" of 8% and 10%, respectively. At September 30, 2008, the Bank's risk-based capital was $37.0 million in excess of amounts required by regulatory agencies to be "well-capitalized." .
The Bank's Tier 1 capital also continues to be in excess of the regulatory requirements to be considered "adequately capitalized" and "well-capitalized" of 4% and 5%, respectively. At September 30, 2008, the Bank's Tier 1 capital was 10.15% and was $57.2 million in excess of the amounts required by regulatory agencies to be "well-capitalized."
The Company's net interest margin expanded 40 basis points to 3.47% for the three months ended September 30, 2008 from 3.07% for the comparable 2007 period and expanded 31 basis points to 3.31% for the nine months ended September 30, 2008 from 3.00% for the comparable 2007 period. The expansion of the net interest margin resulted from decreases in short-term interest rates which decreased the Company's cost of deposits and borrowed money.
The financial results of the Company for the third quarter of 2008 were negatively impacted by a $3.5 million other-than-temporary impairment (OTTI) charge on its Fannie Mae and Freddie Mac preferred stock investments and a $1.4 million provision for losses on loans. As such, the Company reported a net loss for the third quarter of 2008 of $1.0 million or a loss per share of $0.10. Net income for the third quarter of 2007 was $1.9 million and diluted earnings per share was $0.18. The OTTI charge and provision for losses on loans reduced net income by $3.1 million and diluted earnings per share by $0.30. For the nine months ended September 30, 2008, the Company's net loss was $1.6 million resulting in a loss per share of $0.15 compared to net income of $5.5 million and diluted earnings per share of $0.50 for the 2007 period.
The Company's provision for losses on loans increased to $1.4 million for the third quarter of 2008 compared to $884,000 for the 2007 period. The increase reflects increased risks inherent in the loan portfolio in light of deteriorating real estate market conditions and lack of activity in housing and land development. Net charge-offs for the third quarter of 2008 totaled $3.2 million which included partial charge-offs of $3.0 million related to two impaired loan relationships totaling $9.2 million collateralized by land or commercial real estate which had previously identified impairment reserves of $2.2 million.
Critical Accounting Policies
The Company's consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP), which require the Company to establish various accounting policies. Certain of these accounting policies require management to make estimates, judgments or assumptions that could have a material effect on the carrying value of certain assets and liabilities. The estimates, judgments and assumptions used by management are based on historical experience, projected results, internal cash flow modeling techniques and other factors which management believes are reasonable under the circumstances.
The Company's significant accounting policies are presented in Note 1 to the consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" of the Company's Annual Report on Form 10-K for December 31, 2007. These policies, along with the disclosures presented in other financial statement notes and in this management's discussion and analysis, provide information on the methodology used for the valuation of significant assets and liabilities in the Company's financial statements. Management views critical accounting policies to be those that are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views the determination of the allowance for losses on loans, valuations and impairments of securities and the accounting for income taxes to be critical accounting policies.
Allowance for Losses on Loans. The Company maintains an allowance for losses on loans at a level management believes is sufficient to absorb credit losses inherent in the loan portfolio. The allowance for losses on loans represents management's estimate of probable incurred losses in the loan portfolio at each statement of condition date and is based on the review of available and relevant information.
One component of the allowance for losses on loans contains allocations for probable inherent but undetected losses within various pools of loans with similar characteristics pursuant to SFAS No. 5, Accounting for Contingencies. This component is based in part on certain loss factors applied to various loan pools as stratified by the Company. In determining the appropriate loss factors for these loan pools, management considers historical charge-offs and recoveries; levels of and trends in delinquencies, impaired loans and other classified loans; concentrations of credit within the commercial loan portfolios; volume and type of lending; and current and anticipated economic conditions.
The second component of the allowance for losses on loans contains allocations for probable losses that have been identified relating to specific borrowing relationships pursuant to SFAS No. 114. This component consists of expected losses resulting in specific credit allocations for individual loans not considered within the above mentioned loan pools. The analysis of each loan involves a high degree of judgment in estimating the amount of the loss associated with the loan, including the estimation of the amount and timing of future cash flows and collateral values.
Loan losses are charged off against the allowance when the loan balance or a portion of the loan balance is no longer covered by the paying capacity of the borrower based on an evaluation of available cash resources and collateral value, while recoveries of amounts previously charged off are credited to the allowance. The Company assesses the adequacy of the allowance for losses on loans on a quarterly
basis and adjusts the allowance for losses on loans by recording a provision for losses on loans in an amount sufficient to maintain the allowance at a level deemed appropriate by management. The evaluation of the adequacy of the allowance for losses on loans is inherently subjective as it requires estimates that are susceptible to significant revision as additional information becomes available or as future events occur. To the extent that actual outcomes differ from management estimates, an additional provision for losses on loans could be required which could adversely affect earnings or the Company's financial position in future periods. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review the allowance for losses on loans for the Bank and the carrying value of its other non-performing loans, based on information available to them at the time of their examinations. Any of these agencies could require the Bank to make additional provisions for losses on loans.
Securities. Under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, investment securities must be classified as held-to-maturity, available-for-sale or trading. Management determines the appropriate classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Debt securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and the Company has the ability to hold the securities to maturity. Securities not classified as held-to-maturity are classified as available-for-sale and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and do not effect earnings until realized.
The fair values of the Company's securities are generally determined by reference to quoted prices from reliable independent sources utilizing observable inputs. Certain of the Company's fair values of securities are determined using models whose significant value drivers or assumptions are unobservable and are significant to the fair value of the securities. These models are utilized when quoted prices are not available for certain securities or in markets where trading activity has slowed or ceased. When quoted prices are not available and are not provided by third party pricing services, management judgment is necessary to determine fair value. As such, fair value is determined using discounted cash flow analysis models, incorporating default rates, estimation of prepayment characteristics and implied volatilities.
The Company evaluates all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if an other-than-temporary impairment (OTTI) exists pursuant to guidelines established in Financial Accounting Standards Board (FASB) Staff Position (FSP) 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial conditions and near-term prospects of the issuer, and the ability and intent of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer's financial condition, the Company may consider whether the securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. The Company may also evaluate securities for OTTI more frequently when economic or market concerns warrant additional evaluations. If management determines that an investment experienced an OTTI, the loss is recognized in the income statement as a realized loss. Any recoveries related to the value of these securities are recorded as an unrealized gain (as other comprehensive income (loss) in stockholders'
equity) and not recognized in income until the security is ultimately sold.
The Company from time to time may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.
Income Tax Accounting. Income tax expense recorded in the Company's consolidated statements of income involves management's interpretation and application of certain accounting pronouncements and federal and state tax codes. As such, the Company has identified income tax accounting as a critical accounting policy. The Company is subject to examination by various regulatory taxing authorities. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management's current assessment of tax liabilities, the impact of which could be significant to the consolidated results of operations and reported earnings. Management believes the tax liabilities are adequately and properly recorded in the Company's consolidated financial statements.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table provides information regarding (i) the Company's interest
income recognized from interest-earning assets and their related average yields;
(ii) the amount of interest expense realized on interest-bearing liabilities and
their related average rates; (iii) net interest income; (iv) interest rate
spread; and (v) net interest margin. Information is based on average daily
balances during the periods indicated.
Three Months Ended September 30,
2008 2007
Average Balance Interest AverageYield/Cost Average Balance Interest AverageYield/Cost
(Dollars in thousands)
Interest-earning assets:
Loans receivable
(1) $ 728,312 $ 10,739 5.87 % $ 815,081 $ 14,362 6.99 %
Securities
(2) 261,574 3,278 4.90 251,463 3,036 4.72
Other interest-earning assets (3) 31,143 347 4.43 39,691 468 4.68
Total interest-earning assets 1,021,029 14,364 5.60 1,106,235 17,866 6.41
Non-interest earning
assets 82,098 78,313
Total
assets $ 1,103,127 $ 1,184,548
Interest-bearing liabilities:
Deposits:
Checking
accounts $ 104,159 141 0.54 $ 97,737 218 0.88
Money market
accounts 181,771 887 1.94 167,068 1,390 3.30
Savings
accounts 122,037 140 0.46 139,438 245 0.70
Certificates of
deposit 367,993 2,890 3.12 400,990 4,663 4.61
Total deposits 775,960 4,058 2.08 805,233 6,516 3.21
Borrowed money:
Other short-term borrowings (4) 29,140 129 1.76 19,139 200 4.15
FHLB debt
(5)(6) 94,118 1,270 5.28 147,153 2,600 6.91
Total borrowed
money 123,258 1,399 4.44 166,292 2,800 6.59
Total interest-bearing liabilities 899,218 5,457 2.41 971,525 9,316 3.80
Non-interest bearing deposits 63,418 66,043
Non-interest bearing liabilities 17,298 18,112
Total
liabilities 979,934 1,055,680
Stockholders'
equity 123,193 128,868
Total liabilities and stockholders'
equity $ 1,103,127 $ 1,184,548
Net interest-earning
assets $ 121,811 $ 134,710
Net interest income / interest rate
spread $ 8,907 3.19 % $ 8,550 2.61 %
Net interest
margin 3.47 % 3.07 %
Ratio of average interest-earning
assets
to average interest-bearing
liabilities 113.55 % 113.87 %
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(1) The average balance of loans receivable includes non-performing loans, interest on which is recognized on a cash basis.
(2) Average balances of securities are based on amortized cost.
(3) Includes Federal Home Loan Bank (FHLB) stock, money market accounts, federal funds sold and interest-earning bank deposits.
(4) Includes federal funds purchased and repurchase agreements (Repo Sweeps).
(5) The 2008 period includes an average of $94.6 million of contractual FHLB borrowings reduced by an average of $531,000 of unamortized deferred premium on the early extinguishment of debt. Interest expense on borrowed money includes $270,000 of amortization of the deferred premium on the early extinguishment of debt. The amortization of the deferred premium increased the average cost of borrowed money as reported to 4.44% compared to an average contractual rate of 3.54%.
(6) The 2007 period includes an average of $150.2 million of contractual FHLB borrowings reduced by an average of $3.1 million of unamortized deferred premium on the early extinguishment of debt. Interest expense on borrowed money includes $1.1 million of amortization of the deferred premium on the early extinguishment of debt. The amortization of the deferred premium increased the average cost of borrowed money as reported to 6.59% compared to an average contractual rate of 3.99%.
Nine Months Ended September 30,
2008 2007
AverageBalance Interest AverageYield/Cost AverageBalance Interest AverageYield/Cost
(Dollars in thousands)
Interest-earning assets:
Loans receivable
(1) $ 752,672 $ 34,823 6.18 % $ 805,831 $ 42,818 7.10 %
Securities
(2) 251,608 9,529 4.98 282,244 10,034 4.69
Other interest-earning assets (3) 50,492 1,358 3.59 57,435 2,149 5.00
Total interest-earning assets 1,054,772 45,710 5.79 1,145,510 55,001 6.42
Non-interest earning assets 85,156 77,897
Total
assets $ 1,139,928 $ 1,223,407
Interest-bearing liabilities:
Deposits:
Checking
accounts $ 105,791 498 0.63 $ 100,354 729 0.97
Money market accounts 187,363 3,152 2.25 178,252 4,549 3.41
Savings
accounts 123,822 465 0.50 145,837 721 0.66
Certificates of
deposit 374,514 10,185 3.63 402,156 13,830 4.60
Total deposits 791,490 14,300 2.41 826,599 19,829 3.21
Borrowed money:
Other short-term borrowings (4) 25,323 367 1.94 20,771 655 4.22
FHLB debt
(5)(6) 115,575 4,874 5.54 165,940 8,805 7.00
Total borrowed money 140,898 5,241 4.89 186,711 9,460 6.68
Total interest-bearing liabilities 932,388 19,541 2.80 1,013,310 29,289 3.86
Non-interest bearing deposits 62,357 63,438
Non-interest bearing liabilities 16,597 16,723
Total
liabilities 1,011,342 1,093,471
Stockholders'
equity 128,586 129,936
Total liabilities and stockholders'
equity $ 1,139,928 $ 1,223,407
Net interest-earning assets $ 122,384 $ 132,200
Net interest income / interest rate
spread $ 26,169 2.99 % $ 25,712 2.56 %
Net interest
margin 3.31 % 3.00 %
Ratio of average interest-earning
assets to
average interest-bearing
liabilities 113.13 % 113.05 %
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(1) The average balance of loans receivable includes non-performing loans, interest on which is recognized on a cash basis.
(2) Average balances of securities are based on amortized cost.
(3) Includes FHLB stock, money market accounts, federal funds sold and interest-earning bank deposits.
(4) Includes federal funds purchased and repurchase agreements (Repo Sweeps).
(5) The 2008 period includes an average of $116.5 million of contractual FHLB borrowings reduced by an average of $929,000 of unamortized deferred premium on the early extinguishment of debt. Interest expense on borrowed money includes $1.2 million of amortization of the deferred premium on the early extinguishment of debt. The amortization of the deferred premium increased the average cost of borrowed money as reported to 4.89% compared to an average contractual rate of 3.54%.
(6) The 2007 period includes an average of $170.2 million of contractual FHLB borrowings reduced by an average of $4.3 million of unamortized premium on the early extinguishment of debt. Interest expense on borrowed money includes $3.7 million of amortization of the deferred premium on the early extinguishment of debt. The amortization of the deferred premium increased the average cost of borrowed money as reported to 6.68% compared to an average contractual rate of 3.99%.
The following table details the effects of changing rates and volumes on the Company's net interest income. Information is provided with respect to (i) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume); (ii) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); and (iii) changes in rate/volume (changes in rate multiplied by changes in volume).
Three Months Ended September 30,
2008 compared to 2007
. . .
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