UNITED STATES
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, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 of 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: (717) 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 6, 1997 1,360,228 shares of Common Stock, par value $1.00.
<PAGE>
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, 1997 and
December 31, 1996 1
Consolidated Statement of Income for the
Three Months Ended March 31, 1997 and 1996 2
Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 1997 and 1996 3
Notes to Consolidated Financial Statements 4-5
Item 2-Management's Discussion and Analysis of Financial Condition
and Results of Operations 5-13
Part II OTHER INFORMATION AND SIGNATURES
Item 1-Legal Proceedings 14
Item 2-Changes in Securities 14
Item 3-Defaults upon Senior Securities 14
Item 4-Submission of Matters to a Vote of Security Holders 14
Item 5-Other Information 14
Item 6-Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31, December 31,
1997 1996
ASSETS:
Cash and due from banks:
Noninterest-bearing $ 8,039,159 $ 6,406,872
Interest-bearing 2,387,104 51,835
Total cash and cash equivalents 10,426,263 6,458,707
Available-for-sale securities 26,672,731 28,736,558
Held-to-maturity securities (estimated
market value 1997,$57,747,000;
December 31, 1996, $57,587,000) 55,428,587 57,320,754
Loans (net of allowance for possible loan
losses 1997, $2,042,293; December 31, 1996,
$1,995,028) 180,112,533 180,417,838
Foreclosed assets held for sale 153,958 164,223
Premises and equipment 4,767,209 4,344,977
Accrued interest receivable 2,937,580 2,930,283
Other assets 2,372,188 2,436,276
TOTAL ASSETS $282,871,049 $282,809,616
LIABILITIES:
Deposits:
Noninterest-bearing $ 18,824,408 $ 17,924,356
Interest-bearing 229,418,194 222,252,664
Total deposits 248,242,602 240,177,020
Borrowed funds 7,004,701 15,816,839
Accrued interest payable 1,768,923 2,292,742
Dividends payable 0 612,103
Other liabilities 1,954,939 1,007,099
TOTAL LIABILITIES 258,971,165 259,905,803
STOCKHOLDERS' EQUITY:
Common Stock
$1.00 par value; authorized 5,000,000
shares; issued and outstanding
1,360,228 shares
in 1997 and 1996 1,360,228 1,360,228
Additional paid-in capital 6,828,301 6,828,301
Retained earnings 15,758,694 14,543,833
TOTAL 23,947,223 22,732,362
Unrealized holding (losses)gains on
available-for-sale securities (47,339) 171,451
TOTAL STOCKHOLDERS' EQUITY 23,899,884 22,903,813
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $282,871,049 $282,809,616
The accompanying notes are an integral part of these financial statements.
<PAGE> 1
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended
March 31,
1997 1996
INTEREST INCOME:
Interest and fees on loans $4,134,781 $3,791,274
Interest on interest-bearing deposits
with banks 6,958 36,816
Interest and dividends on investments:
Taxable 1,313,194 1,140,013
Nontaxable 12,561 19,442
Dividends 18,058 17,306
TOTAL INTEREST INCOME 5,485,552 5,004,851
INTEREST EXPENSE:
Interest on deposits 2,641,453 2,414,438
Interest on borrowed funds 167,921 113,678
TOTAL INTEREST EXPENSE 2,809,374 2,528,116
NET INTEREST INCOME 2,676,178 2,476,735
Provision for possible loan losses 52,500 47,500
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 2,623,678 2,429,235
OTHER OPERATING INCOME:
Service charge income 194,765 179,802
Trust income 94,364 68,268
Other income 56,579 53,494
Arbitration settlement 884,008 0
Realized securities gains, net 0 19,264
TOTAL OTHER OPERATING INCOME 1,229,716 320,828
OTHER OPERATING EXPENSES:
Salaries and employee benefits 1,103,971 806,788
Occupancy expenses 137,755 113,955
Furniture and equipment expenses 149,729 136,209
Federal deposit insurance premiums 13,682 29,929
Other expenses 634,867 586,339
TOTAL OTHER OPERATING EXPENSES 2,040,004 1,673,220
Income before provision for income taxes 1,813,390 1,076,843
Provision for income taxes 598,529 351,789
NET INCOME $1,214,861 $ 725,054
Earnings per share $0.89 $0.53
Weighted average number of shares outstanding 1,360,228 1,360,228
The accompanying notes are an integral part of these financial statements.
<PAGE> 2
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three months Ended
March 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996
Net income $ 1,214,861 $ 725,054
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 52,500 47,500
Provision for depreciation and amortization 126,849 92,100
Amortization and accretion of investment
securities 97,010 75,971
Deferred income taxes (16,786) 28,449
Realized gains on securities 0 (19,264)
Realized gains on loans sold (2,396) (435)
Originations of loans held for sale (195,200) (518,000)
Proceeds from sales of loans held for sale 197,379 518,435
Loss (gain) on sale of foreclosed assets
held for sale 2,432 (10,315)
Increase in accrued interest receivable
and other assets (90,904) (335,405)
Increase (decrease) in accrued interest
payable and other liabilities 424,020 (60,851)
Net cash provided by operating activities 1,809,765 543,239
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Proceeds from sales of securities 0 16,047
Proceeds from maturity of securities 1,700,000 0
Purchase of securities 0 (1,080,625)
Held-to-maturity securities:
Proceeds from maturity and principal
repayments of securities 1,980,683 2,316,040
Purchase of securities (153,200) (2,168,438)
Net decrease (increase) in loans 240,856 (33,836)
Capital expenditures (271,889) (49,163)
Proceeds from sale of foreclosed assets held
for sale 20,000 66,600
Net cash provided (used) by
investing activities 3,516,450 (933,375)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 8,065,582 4,576,708
Proceeds from long-term borrowings 22,991 79,200
Repayments of long-term borrowings 0 (42,705)
Net decrease in short-term
borrowed funds (8,835,129) (1,742,782)
Dividends paid (612,103) (579,349)
Net (used) cash provided by
financing activities (1,358,659) 2,291,072
Net increase in cash and cash
equivalents 3,967,556 1,900,936
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,458,707 5,572,661
CASH AND CASH EQUIVALENTS AT END OF PERIOD $10,426,263 $ 7,473,597
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 3,333,193 $ 3,042,218
Income taxes paid $ 0 $ 10,000
The accompanying notes are an integral part of these financial statements.
<PAGE> 3
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated financial statements include the accounts of Citizens
Financial Services, Inc. and its wholly-owned subsidiary, First Citizens
National Bank (the "Bank"), (collectively, the "Company"). All material
intercompany 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, 1997, 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, 1996.
The results of operations for the three months ended March 31, 1997 and
1996 are not necessarily indicative of the results to be expected for the full
year.
The Bank currently engages in the general business of banking throughout
its service area of Potter, Tioga and Bradford counties in North Central
Pennsylvania and Allegany, Steuben, Chemung and Tioga counties in Southern New
York. The Bank maintains its central office in Mansfield, Pennsylvania and
presently operates banking facilities in Mansfield, Blossburg, Ulysses,
Genesee, Wellsboro, Troy, Sayre, Canton, Gillett and the Wellsboro Weis Market
store as well as automatic teller machines located in Soldiers and Sailors
Memorial Hospital in Wellsboro, Mansfield Wal-Mart and at Mansfield
University. The Bank's lending and deposit products are offered primarily
within the vicinity of its service area.
The Company faces strong competition in the communities it serves from
other commercial banks, savings banks, and savings and loan associations, some
of which are substantially larger institutions than the Company's subsidiary.
In addition, personal and corporate trust services are offered by insurance
companies, investment counseling firms, and other business firms and
individuals. The Company also competes 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. The Company 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.
LOANS
Historically loans have been originated by the Bank to customers in
North Central Pennsylvania and the Southern Tier of New York. Loans have been
originated 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. The Bank also
does a limited amount of indirect loans though new and used car dealers in the
primary lending area.
<PAGE> 4
All lending is governed by a lending policy which is developed and
maintained by management and approved by the board of directors. The Bank's
lending policy regarding real estate loans is that the maximum mortgage
granted on owner occupied residential property is 80% of the appraised value
or purchase price (whichever is lower) when secured by the first mortgage on
the property. Home equity lines of credit or second mortgage loans are
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 15 years for commercial and
vacation property.
DEPOSITS
Over the last few years the Company, responding to the demand for new
competitive products in the market area, began to tier interest-bearing
transaction and savings accounts by deposit size (larger balances receive
higher rates). The Company has been offering a wide variety of deposit
instruments, as have its competitors. Limited transaction deposit accounts
with interest rates that vary as often as daily, unlimited transaction
interest-bearing accounts, Premier 55 Club, Premier 55 Plus Club, Gold Club,
individual retirement accounts, longer-term certificates of deposit (generally
of five-year maturity), promotional 30-month, 66-month and Roll-Up
certificates of deposit (allows the customer to increase the interest rate by
a maximum of 100 basis points once during the term were some of the deposit
product variations.
TRUST SERVICES
Traditional trust and investment management and estate settlements are
offered by the Bank.
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 1,360,228 for 1997 and 1996.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors that have affected the Company's financial position and
operating results during the periods indicated in the accompanying
consolidated financial statements. The results of operations for the three
months ended March 31, 1997 and 1996 are not necessarily indicative of the
results to be expected for the full year.
In addition to historical information, this quarterly report contains
forward-looking statements. The forward-looking statements contained herein
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected in the forward-looking statements.
Important factors that might cause such a material difference include, but are
not limited to, those discussed in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date thereof.
The Company undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors described
in other documents the Company files from time to time with the Securities
and Exchange Commission, including the quarterly reports on Form 10-Q to be
filed by the Company and any current reports on Form 8-K filed by the Company.
Financial Condition
For the three month period ended March 31, 1997, the assets of the
Company had a slight decrease of $.9 million compared with an increase of $2.7
million for the same period in 1996. The lack of growth in net assets was the
increase in deposits being offset by principal reduction of short-term debt
along with the maturity of investments.
<PAGE> 5
Cash and cash equivalents increased $4 million in 1997 compared with an
increase of $1.9 million for the same period in 1996. Surplus funds from
deposit growth in 1997 were placed in short-term interest bearing investments.
Total investment securities decreased $4 million or 10.5% during the
first three months of 1997 compared with an increase of $.5 million for the
same period in 1996. The decrease reflects normal maturities.
Net loan balances had virtually the same change for both periods with a
slight decrease of $.3 million for the first three months of 1996 and 1997,
respectively. This represents a normal seasonal slow down and is not expected
to continue as the normal home building season in spring and summer.
During the remainder of 1997, management expects that loan demand will
continue as a result of the attractive interest rates currently promoted and
while we are experiencing a generally healthy local economy. The major
concentrations of loans continue to be in residential real estate-consisting
of loans to purchase and improve real estate, debt consolidation and home
equity lines of credit. The Bank also expects to be successful in lending to
local state and political subdivisions during the remainder of 1997.
The loan portfolio consists of the following (in thousands):
March 31, December 31, March 31,
1997 1996 1996
Real estate loans - residential $112,470 $112,678 $ 97,177
Real estate loans - commercial 28,174 27,670 24,607
Real estate loans - agricultural 5,848 6,134 7,525
Loans to individuals for household,
family and other purchases 14,835 14,465 13,425
Commercial and other loans 11,103 11,529 10,804
State and political subdivision
loans 9,879 10,105 8,122
Total 182,309 182,581 161,660
Less: unearned income on loans 154 168 220
Loans, net of unearned income $182,155 $182,413 $161,440
Deposit growth continues to be strong, increasing by $8.1 million or
3.4%, because of the three additional offices in addition to the competitive
pricing of certificates of deposit. The first three months of 1996 saw an
increase of $4.6 million.
Borrowed funds decreased by $8.8 million during the first three months
of 1997 compared with a decrease of $1.7 million in 1996. This decrease
resulted from repayments of short-term borrowing to the Federal Home Loan
Bank. The Company's daily cash requirements or short-term investments are met
by using the financial instruments available through the Federal Home Loan
Bank. The strong increase in deposits coupled with investments maturing
enabled a decrease in short-term borrowing during the first quarter of 1997.
<PAGE> 6
Capital
The Company has computed its risk-based capital ratios as follows
(dollars in thousands):
March 31, December 31,
1997 1996
Tier I - Total stockholders' equity $ 23,900 $ 22,904
Less: Unrealized holding gains (losses)
on available-for-sale securities (47) 172
Goodwill and core deposit intangible 918 945
Tier I, net 23,029 21,787
Tier II - Allowance for loan losses(1) 2,015 1,977
Total qualifying capital $ 25,044 $ 23,764
Risk-adjusted on-balance sheet assets $153,673 $131,111
Risk-adjusted off-balance sheet
exposure (2) 7,472 6,129
Total risk-adjusted assets $161,145 $137,240
March 31, December 31,
Ratios: 1997 1996
Tier I risk-based capital ratio 14.3% 13.8%
Federal minimum required 4.0 4.0
Total risk-based capital ratio 15.5% 15.0%
Federal minimum required 8.0 8.0
Leverage ratio (3) 8.2% 7.8%
Federal minimum required 4.0 4.0
(1) Allowance for loan losses is limited to 1.25% of total risk-adjusted
assets.
(2) Off-balance sheet exposure is caused primarily by standby letters of
credit and loan commitments with a remaining maturity exceeding one year.
These obligations have been converted to on-balance sheet credit
equivalent amounts and adjusted for risk.
(3) Tier I capital divided by average total assets.
See the discussion of liquidity below for details regarding future
expansion plans and the impact on capital.
Results of Operations
Net income for the three month period ending March 31, 1997 was
$1,215,000 an increase of $490,000 or 67.6% over the 1996 related period.
Earnings per share was $.89 during the first quarter of 1996 compared with
$.53 during the comparable 1996 period. The large increase was the result of
an arbitration settlement discussed below.
Net interest income, the most significant component of earnings, is the
amount by which interest generated from earning assets exceeds interest
expense on liabilities. Net interest income for the current three month
period, after provision for possible loan losses, was $2,624,000, an increase
of $194,000 or 8% compared with an increase of $165,000 or 7.3% during the
same period in 1996.
<PAGE> 7
<TABLE>
Analysis of Average Balances and Interest Rates (1)
March 31, 1997 March 31, 1996 March 31, 1995
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
$ $ % $ $ % $ $ %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Short-term investments:
Interest-bearing deposits at banks 525 7 5.41 2,743 37 5.43 36 1 5.59
Investment securities:
Taxable 83,799 1,331 6.44 71,192 1,157 6.54 61,644 1,023 6.73
Tax-exempt(3) 606 19 12.72 931 29 12.53 2,533 79 12.65
Total investment securities 84,405 1,350 6.49 72,123 1,186 6.61 64,177 1,102 6.96
Loans:
Residential mortgage loans 112,919 2,565 9.21 97,206 2,267 9.38 97,275 2,193 9.14
Commercial & farm loans 43,247 1,031 9.67 41,017 1,012 9.92 38,055 911 9.71
Loans to state & political
subdivisions 9,963 209 8.51 8,267 181 8.81 7,368 155 8.53
Other loans 15,312 399 10.57 14,161 379 10.76 14,066 339 9.77
Loans, net of discount (2)(3)(4) 181,441 4,204 9.40 160,651 3,839 9.61 156,764 3,598 9.31
Total interest-earning assets 266,371 5,561 8.47 235,517 5,062 8.64 220,977 4,701 8.63
Cash and due from banks 6,320 4,991 4,825
Bank premises and equipment 4,570 4,162 4,115
FASB 115 adjustment 218 482 (370)
Other assets 4,459 3,312 2,875
Total noninterest-bearing assets 15,567 12,947 11,445
Total assets 281,938 248,464 232,422
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts 31,125 184 2.40 24,255 126 2.09 23,788 148 2.52
Savings accounts 27,444 150 2.22 25,919 144 2.23 25,957 170 2.66
Money market accounts 26,187 285 4.41 24,288 267 4.42 21,302 248 4.72
Certificates of deposit 140,825 2,023 5.83 126,476 1,877 5.97 111,982 1,545 5.60
Total interest-bearing deposits 225,581 2,642 4.75 200,938 2,414 4.83 183,029 2,111 4.68
Other borrowed funds 11,129 168 6.12 7,284 114 6.29 13,422 203 6.13
Total interest-bearing liabilities 236,710 2,810 4.81 208,222 2,528 4.88 196,451 2,314 4.78
Demand deposits 18,104 15,178 14,150
Other liabilities 3,666 3,513 2,489
Total noninterest-bearing liabilities 21,770 18,691 16,639
Stockholders' equity 23,458 21,551 19,332
Total liabilities & stockholders'
equity 281,938 248,464 232,422
Net interest income 2,751 2,534 2,387
Net interest spread (5) 3.65% 3.76% 3.85%
Net interest income as a percentage
of average interest-earning assets 4.19% 4.33% 4.38%
Ratio of interest-earning assets
to interest-bearing liabilities 1.13 1.13 1.12
</TABLE>
(1) Averages are based on daily balances.
(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.
<PAGE> 8
As described in the table above, the yield on earning assets, on a
tax-equivalent basis, was 8.47% and 8.64% during the first three months of
1997 and 1996, respectively (a decline of 17 basis points). The cost of funds
was 4.81% and 4.88% during the same three month period (a decrease of 7 basis
points).
In comparing the average interest cost of 1997 versus 1996, NOW accounts
increased 31 basis points (the result of a new higher rate tiered product
targeted to State and Political Accounts), savings accounts and money market
accounts each decreased by 1 basis point. The interest rate on certificates
of deposit decreased by 14 basis points.
As described above, the Company has continued to experience a slight
narrowing of its margin percentage during the three months of 1997. The
Company continues to review various pricing strategies to enhance deposit
growth while maintaining or expanding the current interest margin.
Analysis of Changes in Net Interest Income of a Tax Equivalent Basis (in
thousands)
<TABLE>
1997 vs. 1996 (1) 1996 vs. 1995 (1)
Change in Change Total Change in Change Total
Volume in Rate Change Volume in Rate Change
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Short-term investments:
Interest-bearing deposits
at banks $ (30) $ 0 $ (30) $ 37 $ (1) $ 36
Investment securities:
Taxable 200 (26) 174 155 (21) 134
Tax-exempt (10) 0 (10) (50) 0 (50)
Total investments 190 (26) 164 105 (21) 84
Loans:
Residential mortgage loans 356 (58) 298 (2) 76 74
Commercial and farm loans 51 (32) 19 73 28 101
Loans to state & political
subdivisions 35 (7) 28 20 6 26
Other loans 30 (10) 20 2 38 40
Total loans - net of
discount (2)(3)(4) 472 (107) 365 93 148 241
Total interest income 632 (133) 499 235 126 361
Interest expense:
Interest bearing deposits:
NOW accounts 39 19 58 3 (25) (22)
Savings accounts 8 (2) 6 0 (26) (26)
Money market accounts 21 (3) 18 31 (12) 19
Certificates of deposit 204 (58) 146 210 122 332
Total interest-bearing
deposits 272 (44) 228 244 59 303
Other borrowed funds 58 (4) 54 (94) 5 (89)
Total interest expense 330 (48) 282 150 64 214
Net interest income $ 302 $ (85) $ 217 $ 85 $ 62 $ 147
</TABLE>
(1)The portion of the total change attributable to both volume and rate
changes during the year has been allocated to volume and rate components based
upon the absolute dollar amount of the change in each component prior to
allocation.
<PAGE> 9
The above table detailing the change in net interest income clearly
shows the $632,000 resulting from volume increases in investments and loans.
The volume of interest expense increased the cost of interest-bearing deposits
by $330,000. The positive gain in volume of $302,000 combined with a decrease
due to rate of $85,000 resulted in a net increase of $217,000.
The provision for possible loan losses increased $5,000 to $52,500 in
the three month period of 1997, compared with a provision of $47,500 in the
same period of 1996. This increase 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, purchase of loans through acquisitions and peer
comparisons.
Total other operating income increased $909,000 compared with the same
period in 1996. Trust income increased $26,000, service charge income
increased $15,000, and other income increased $3,000. Net realized securities
gains decreased by $19,000, during the current three month period compared to
1996, as there were not sales during the current period. On February 27, 1997
the Bank reached an arbitration settlement with a vendor. The settlement was
for legal remedies associated with relationships with this vendor. The Bank
received $884,000 in cash and $250,000 in credits to be applied to future
expenditures, which if unused will expire within two years. The amount
received by the Bank is net of fees associated with the arbitration.
Total other operating expense was $2,040,000 in the first three months
of 1997 reflecting an increase of $367,000 over the 1996 period. Salaries and
benefit's expense increased by $297,000 for the current three month period
reflecting normal merit increases, the addition of employees for the three
additional offices and an accrual of $154,000 for profit sharing reflecting
the additional income.
Occupancy expense increased by $24,000 or 21% while furniture and
equipment expenses increased by $14,000 or 9.9%, both reflecting the addition
of 3 branches.
Federal deposit insurance premium expense decreased $16,000 or 54.3%.
Based on estimated deposit levels projected for 1997, Management expects that
the FDIC assessment will be approximately $67,000 or $305,000 less than the
premium in 1996. This reduction is because the SAIF assessment of $274,000
during the third quarter of 1996 will not reoccur.
On September 30,1996, the President signed into law the Deposit
Insurance Funds Act of 1996 to recapitalize the SAIF administered by the FDIC
and to provide repayment of Financial Institution Collateral Obligation
("FICO") Bonds issued by the United State Treasury Department.
During 1997, 1998 and 1999, the average regular annual deposit insurance
assessment is estimated to be about 1.29 cents per $100 of deposits for BIF
deposits and 6.44 cents per $100 of deposits for SAIF deposits. Individual
institutions assessments will continue to vary according to their capital and
management ratings. As always, the FDIC will be able to raise the assessments
as necessary to maintain the funds at their target capital ratios provided by
law. After 1999, BIF and SAIF will share the FICO costs equally. Under
current estimates, BIF and SAIF assessment bases would each be assessed at the
rate of approximately 2.43 cents per $100 of deposits. The FICO bonds will
mature in 2018-2019, ending the interest payment obligation.
Other expenses increased $48,000 or 8.3% in the first three months of
1997 over the 1996 related period reflecting the expenses resulting from the
additional three branches.
The provision for income taxes was $599,000 during the first three
months of 1997 compared with $352,000 during the 1996 related period. Income
before taxes increased $737,000 in the 1997 period over the same period in
1996.
<PAGE> 10
Liquidity
Liquidity is a measure of the Company's ability to efficiently meet
normal cash flow requirements of both borrowers and depositors. To maintain
proper liquidity, the Company uses funds management policies along with its
investment policies to assure it can meet its financial obligations to
depositors, credit customers and shareholders. 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.
During the first three months of 1997 there was $272,000 of capital
expenditures, $223,000 more than the capital acquisitions during the same
period in 1996. The major expenditure of $203,000 was to purchase and
renovate the Canton office. Management projects that capital expenditures for
the remainder of 1997 will be approximately $900,000. During the second and
third quarters approximately $700,000 is anticipated for the purchase of new
hardware and software to be fully installed during August 1997. Additional
renovations are planned for the Canton and Gillett offices during 1997.
Management is currently renting two properties as a temporary solution
to the space limitations it has experienced at the main office. On July 17,
1996, the Bank purchased a building and lot adjoining the Mansfield branch
location for $255,000. The Company plans to use this area for the new
operations/administration center that has been in the early planning stages
for more than six years. Management anticipates that the construction will
take place in 1997 or early 1998 with a total estimated cost of approximately
$2 million.
Management believes that it has sufficient resources to complete these
projects from its normal operations and that they will have a long term
positive effect on revenues, efficiency and the capacity for future growth.
Liquidity is achieved primarily from temporary or short-term
investments in the Federal Home Loan Bank of Pittsburgh, PA ("FHLB"), and
investments that mature less than one year. The Company also has a maximum
borrowing capacity at the FHLB of approximately $85 million as an additional
source of liquidity. There are no short-term borrowings from the FHLB as of
March 31, 1997.
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.
Asset / Liability 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.
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
(individuals over 59 1/2 have the option of changing), money market deposits,
savings deposits, NOW accounts and short-term borrowing.
Gap analysis, one of the methods used by the Company to analyze interest
rate risk, does not necessarily show the precise impact of specific interest
rate movements on the Company's net interest income because the repricing 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, reprice at different times and at different rate levels.
Management has procedures to manage the one year cumulative gap position
to be within the Asset/Liability policy guidelines of .75 to 1.25.
The Company has not experienced the kind of earnings volatility that
might be indicated from gap analysis. The Company currently uses a computer
simulation model to better measure the impact of interest rate changes on net
interest income to simulate the potential effects of changing interest rates.
Management uses the model as part of its risk management process to
effectively identify, measure, and monitor the bank's risk exposure.
<PAGE> 11
Credit Quality Risk
The following table identifies amounts of loan losses and nonperforming
loans. Past due loans are those that were contractually past due 90 days or
more as to interest or principal payments (dollars in thousands).
<TABLE>
March 31, December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Non accruing loans $ 1,401 $ 844 $ 762 $ 1,557 $ 1,566
Impaired loans 414 414 697
Accrual loans - 90 days or
more past due 242 723 689 267 418
Total nonperforming loans $ 2,057 $ 1,981 $ 2,148 $ 1,824 $ 1,984
Other real estate owned $ 154 $ 164 $ 208 $ 168 $ 231
Loans outstanding at end of
period $182,309 $182,581 $161,886 $157,144 $143,218
Unearned income 154 168 259 575 1,311
Loans, net of unearned income $182,155 $182,413 $161,627 $156,569 $141,907
Nonperforming loans as percent
of loans, net of unearned
income 1.13% 1.09% 1.33% 1.17% 1.40%
Total nonperforming assets as a
percent loans of net unearned
income 1.21% 1.18% 1.46% 1.27% 1.56%
Transactions in the allowance for possible loan losses were as follows (in
thousands):
At March 31, Years Ended December 31,
1997 1996 1995 1994 1993
Balance, beginning of period $1,995 $1,833 $1,721 $1,516 $1,201
Charge-offs (8) (64) (69) (68) (71)
Recoveries 3 21 18 18 71
Provision for loan losses 52 205 163 255 315
Balance, end of period $2,042 $1,995 $1,833 $1,721 $1,516
</TABLE>
The allowance is maintained at a level to absorb potential future loan
losses. The allowance is increased by provisions charged to operating expense
and reduced by net charge-offs. Management establishes the level of the
allowance and the quarterly provision based on its evaluation of the loan
portfolio, current and projected economic conditions, the historical loan loss
experience, present and prospective financial condition of borrowers, the
level of nonperforming assets, and other relevant factors. While management
evaluates 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
the Company's allowance for loan losses. Such agencies may require the
Company to recognize additions to the allowance based on their evaluation of
information available to them at the time of their examination. Based on this
process, management currently believes that the allowance is adequate to
offset any exposure that may exist for under-collateralized or uncollectible
loans.
The Company has one loan as of March 31, 1997 that it considers
impaired. Management believes that the liquidation of the collateral would
equal or exceed principal based on the current or last appraisal. Thus, no
allowance reserve is required. Management continues to monitor the impaired
loans and will liquidate the collateral as soon as legal constraints are
satisfied.
The Company does not accrue interest income on impaired 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.
<PAGE> 12
General
Various congressional bills have been passed and other proposals have
been made for significant changes to the banking system, including provisions
for: recapitalization by the FDIC of the SAIF as discussed previously;
limitations on deposit insurance coverage; changing the timing and method
financial institutions use to pay for deposit insurance; expanding the power
of banks by removing restrictions on bank underwriting activities; tightening
the regulation of bank derivatives activities; allowing commercial enterprises
to own banks; and permitting bank holding companies or the bank to own or
control affiliates that engage in securities, mutual funds and insurance
activities.
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 future operating results, liquidity or capital
resources nor is it aware of any current recommendations by the regulatory
authorities that if they were to be carried out 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 the company's results of operations.
Except as previously discussed in the section on the result of
operations, management believes that the effect of the provisions of future
legislation on liquidity, capital resources, and the results of operations of
the company will not be material.
<PAGE> 13
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 - Nothing to report.
Item 3 - Defaults Upon Senior Securities - Nothing to report.
Item 4 - Submission of Matters to a Vote of Security Holders:
Results of the voting at the Annual Meeting of Shareholders April 15,
1997 held at 12:00 p.m. at the Tioga County Fairgrounds Youth Building,
Whitneyville, Pennsylvania, 16901
1. Election of Class 3 Directors whose term will expire in 2000
For Withhold Authority
Bruce L. Adams 1,010,039 27,790
William D. Van Etten 1,009,937 27,892
Continuing Directors:
Robert E. Dalton Class 2 Term Expires 1998
John E. Novak Class 2 Term Expires 1998
Rudolph J. van der Heil Class 2 Term Expires 1998
Carol J. Tama Class 1 Term Expires 1999
R. Lowell Coolidge Class 1 Term Expires 1999
Richard E. Wilber Class 1 Term Expires 1999
John M. Thomas, M.D. Class 1 Term Expires 1999
Larry J. Croft Class 1 Term Expires 1999
Item 5 - Other Information - Nothing to report.
Item 6 - Exhibits and reports on Form 8-K.
(a) Exhibits - None.
(b) Reports - None.
<PAGE> 14
Signatures
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.
Citizens Financial Services, Inc.
(Registrant)
May 7, 1997 /s/ Richard E. Wilber
By: Richard E. Wilber
President and Chief Financial Officer
(Principal Executive Officer)
May 7, 1997 /s/ Thomas C. Lyman
By: Thomas C. Lyman
Treasurer
(Principal Financial &
Accounting Officer
<PAGE> 15
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 8,039
<INT-BEARING-DEPOSITS> 2,387
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,673
<INVESTMENTS-CARRYING> 55,428
<INVESTMENTS-MARKET> 57,747
<LOANS> 180,113
<ALLOWANCE> 2,042
<TOTAL-ASSETS> 282,871
<DEPOSITS> 248,243
<SHORT-TERM> 4,030
<LIABILITIES-OTHER> 3,724
<LONG-TERM> 2,975
0
0
<COMMON> 1,360
<OTHER-SE> 22,540
<TOTAL-LIABILITIES-AND-EQUITY> 282,871
<INTEREST-LOAN> 4,135
<INTEREST-INVEST> 1,344
<INTEREST-OTHER> 7
<INTEREST-TOTAL> 5,486
<INTEREST-DEPOSIT> 2,642
<INTEREST-EXPENSE> 2,809
<INTEREST-INCOME-NET> 2,676
<LOAN-LOSSES> 53
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,040
<INCOME-PRETAX> 1,813
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,215
<EPS-PRIMARY> .89
<EPS-DILUTED> .89
<YIELD-ACTUAL> 4.19
<LOANS-NON> 1,815
<LOANS-PAST> 242
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,995
<CHARGE-OFFS> 8
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 2,042
<ALLOWANCE-DOMESTIC> 2,042
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
