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 June 30, 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
August 5, 1997 1,373,282 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 June 30, 1997 and
December 31, 1996 1
Consolidated Statement of Income for the
Three months and Six months Ended June 30, 1997 and 1996 2
Consolidated Statement of Cash Flows for the Six months Ended
June 30, 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)
June 30, December 31,
1997 1996
ASSETS:
Cash and due from banks:
Noninterest-bearing $ 8,398,043 $ 6,406,872
Interest-bearing 1,889,608 51,835
Total cash and cash equivalents 10,287,651 6,458,707
Available-for-sale securities 27,407,225 28,736,558
Held-to-maturity securities (estimated
market value 1997,$56,446,000;
December 31, 1996, $57,587,000) 56,321,976 57,320,754
Loans (net of allowance for possible loan
losses 1997, $2,096,293; December 31, 1996,
$1,995,028) 185,574,943 180,417,838
Foreclosed assets held for sale 104,254 164,223
Premises and equipment 5,255,474 4,344,977
Accrued interest receivable 2,980,872 2,930,283
Other assets 2,646,064 2,436,276
TOTAL ASSETS $290,578,459 $282,809,616
LIABILITIES:
Deposits:
Noninterest-bearing $ 20,014,878 $ 17,924,356
Interest-bearing 234,259,466 222,252,664
Total deposits 254,274,344 240,177,020
Borrowed funds 7,285,852 15,816,839
Accrued interest payable 1,675,868 2,292,742
Dividends payable 641,057 612,103
Other liabilities 2,386,368 1,007,099
TOTAL LIABILITIES 266,263,489 259,905,803
STOCKHOLDERS' EQUITY:
Common Stock
$1.00 par value; authorized 5,000,000
shares; issued and outstanding
1,373,282 shares and
1,360,228 shares in 1997
and 1996, respectively 1,373,282 1,360,228
Additional paid-in capital 7,180,759 6,828,301
Retained earnings 15,625,729 14,543,833
TOTAL 24,179,770 22,732,362
Unrealized holding gains on
available-for-sale securities 135,200 171,451
TOTAL STOCKHOLDERS' EQUITY 24,314,970 22,903,813
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $290,578,459 $282,809,616
The accompanying notes are an integral part of these financial statements.
<PAGE>
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $4,259,378 $3,872,352 $ 8,394,159 $ 7,663,626
Interest on interest-bearing deposits
with banks 63,412 108,904 70,369 145,720
Interest and dividends on investments:
Taxable 1,315,863 1,285,528 2,629,058 2,425,541
Nontaxable 12,514 17,945 25,075 37,388
Dividends 20,709 17,861 38,767 35,166
Total interest and dividends on investments 1,349,086 1,321,334 2,692,900 2,498,095
TOTAL INTEREST INCOME 5,671,876 5,302,590 11,157,428 10,307,441
INTEREST EXPENSE:
Interest on deposits 2,779,141 2,569,282 5,420,594 4,983,720
Interest on borrowed funds 111,574 117,800 279,495 231,478
TOTAL INTEREST EXPENSE 2,890,715 2,687,082 5,700,089 5,215,198
NET INTEREST INCOME 2,781,161 2,615,508 5,457,339 5,092,243
Provision for possible loan losses 52,500 52,500 105,000 100,000
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 2,728,661 2,563,008 5,352,339 4,992,243
OTHER OPERATING INCOME:
Service charge income 229,722 214,262 424,487 394,063
Trust income 63,437 66,441 157,800 134,709
Other income 63,486 52,311 117,634 105,806
Realized securities gains, net 0 0 0 19,264
Arbitration settlement 0 0 884,008 0
TOTAL OTHER OPERATING INCOME 356,645 333,014 1,583,929 653,842
OTHER OPERATING EXPENSES:
Salaries and employee benefits 918,309 839,389 2,022,280 1,646,176
Occupancy expenses 121,245 114,719 258,999 228,673
Furniture and equipment expenses 148,694 155,601 298,423 291,810
FDIC insurance expense 13,960 29,929 27,642 59,859
Other expenses 641,597 614,715 1,274,033 1,201,054
TOTAL OTHER OPERATING EXPENSES 1,843,805 1,754,353 3,881,377 3,427,572
Income before provision for income taxes 1,241,501 1,141,669 3,054,891 2,218,513
Provision for income taxes 367,897 332,388 966,426 684,178
NET INCOME $ 873,604 $ 809,281 $ 2,088,465 1,534,335
Earnings per share $0.64 $0.59 $1.52 $1.12
Cash dividend declared $0.46 $0.44 $0.46 $0.44
Weighted average number of shares outstanding 1,373,282 1,373,282 1,373,282 1,373,282
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six months Ended
June 30,
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996
Net income $ 2,088,465 $ 1,534,335
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 105,000 100,000
Provision for depreciation and amortization 252,670 203,942
Amortization and accretion of investment
securities 190,112 166,912
Deferred income taxes (21,494) 12,556
Realized gains on securities 0 (19,264)
Realized gains on loans sold (10,016) (6,204)
Originations of loans held for sale (788,250) (1,052,031)
Proceeds from sales of loans held for sale 798,266 1,058,235
Loss (gain) on sale of foreclosed assets
held for sale 136 (10,315)
Increase in accrued interest receivable
and other assets (524,591) (939,912)
Increase (decrease) in accrued interest
payable and other liabilities 762,394 432,495
Net cash provided by operating activities 2,852,692 1,480,749
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Proceeds from sales of securities 0 16,047
Proceeds from maturity of securities 3,200,000 0
Purchase of securities (1,986,875) (9,681,671)
Held-to-maturity securities:
Proceeds from maturity and principal
repayments of securities 2,979,085 3,708,853
Purchase of securities (2,109,138) (13,395,108)
Net increase in loans (5,274,271) (7,232,481)
Purchase of loans 0 (3,659,068)
Capital expenditures (858,783) (177,406)
Proceeds from sale of foreclosed assets held
for sale 72,000 66,600
Deposit acquisition premium 0 (1,017,714)
Net cash used by
investing activities (3,977,982) (31,371,948)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 14,097,324 10,709,707
Proceeds from long-term borrowings 599,471 101,232
Repayments of long-term borrowings (536,657) (47,913)
Net (decrease) increase in short-term
borrowed funds (8,593,801) 2,979,006
Dividends paid (612,103) (579,349)
Deposits of acquired branches 0 17,129,939
Net (used) cash provided by
financing activities 4,954,234 30,292,622
Net increase in cash and cash
equivalents 3,828,944 401,423
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,458,707 5,572,661
CASH AND CASH EQUIVALENTS AT END OF PERIOD $10,287,651 $ 5,974,084
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 6,316,963 $ 5,737,107
Income taxes paid $ 830,000 $ 710,000
The accompanying notes are an integral part of these financial statements.
<PAGE>
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
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 June 30, 1997, and
the results of operations for the interim periods presented. In preparing the
consolidated financial statements, management is required to make estimates
andassumptions 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 six months ended June 30, 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, savings and loan associations and other
non-depository financial institutions, 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>
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% (95% with PMI) 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
Several years ago 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, investment management and estate settlement services
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 1,373,282 for 1997 and 1996,
respectively.
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 June 30, 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
and any current reports on Form 8-K filed by the Company.
Financial Condition
For the six month period ended June 30, 1997, the assets of the
Company increased $7.8 million compared with an increase of $32 million for
the same period in 1996 ($17.1 million the result of the acquisition of the
Canton and Gillett offices of Meridian Bancorp, Inc. on April 19, 1996).
<PAGE>
Cash and cash equivalents increased $3.8 million in 1997 compared with an
increase of $.4 million for the same period in 1996. Surplus funds from
deposit growth in 1997 not use to fund loans or repay borrowings were placed
in short-term interest bearing investments.
Total investment securities decreased $2.3 million or 2.7% during the
first six months of 1997 compared with an increase of $18.3 million for the
same period in 1996. The 1997 decrease reflects normal maturities.
Net loan balances increased by $5.2 million or 2.9% for the first six
months of 1997, as compared to $10.7 million or 6.7% in 1996 ($3.7 million of
the increase resulting from branch acquisitions). Loan growth is expected to
increase as the normal home building season is in the 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 loan portfolio consists of the following (in thousands):
June 30, December 31, June 30,
1997 1996 1996
Real estate loans - residential $118,876 $112,678 $ 103,833
Real estate loans - commercial 25,925 27,670 25,576
Real estate loans - agricultural 10,729 6,134 7,121
Loans to individuals for household,
family and other purchases 13,399 14,465 13,673
Commercial and other loans 9,423 11,529 11,531
State and political subdivision
loans 9,451 10,105 10,914
Total 187,803 182,581 172,648
Less: unearned income on loans 132 168 227
Loans, net of unearned income $187,671 $182,413 $172,421
Deposit growth continues to be strong, increasing by $14.1 million or
5.9%, because of the new offices in addition to the competitive pricing of
certificates of deposit. The first six months of 1996 saw an increase of
$27.8 million ($17.1 million the result of the two office acquisitions).
Borrowed funds decreased by $8.5 million during the first six months of
1997 compared with an increase of $3.1 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 six months of 1997.
<PAGE>
Capital
The Company has computed its risk-based capital ratios as follows
(dollars in thousands):
June 30, December 31,
1997 1996
Tier I - Total stockholders' equity $ 24,315 $ 22,904
Less: Unrealized holding gains (losses)
on available-for-sale securities 135 172
Goodwill and core deposit intangible 891 945
Tier I, net 23,289 21,787
Tier II - Allowance for loan losses(1) 2,018 1,977
Total qualifying capital $ 25,307 $ 23,764
Risk-adjusted on-balance sheet assets $154,399 $151,978
Risk-adjusted off-balance sheet
exposure (2) 6,945 6,129
Total risk-adjusted assets $161,344 $158,107
June 30, December 31,
Ratios: 1997 1996
Tier I risk-based capital ratio 14.4% 13.8%
Federal minimum required 4.0 4.0
Total risk-based capital ratio 15.7% 15.0%
Federal minimum required 8.0 8.0
Leverage ratio (3) 8.1% 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 six month period ending June 30, 1997 was
$2,089,000 an increase of $554,000 or 36.1% over the 1996 related period.
Earnings per share was $1.52 during the first half of 1997 compared with
$1.12 during the comparable 1996 period. A large part of the 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 $5,352,000, an increase
of $360,000 or 7.2% compared with an increase of $424,000 or 9.3% during the
same period in 1996.
<PAGE>
<TABLE>
Analysis of Average Balances and Interest Rates (1)
June 30, 1997 June 30, 1996 June 30, 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 2,594 70 5.44 5,556 146 5.28 811 25 6.22
Investment securities:
Taxable 83,719 2,668 6.43 76,067 2,461 6.51 61,935 2,063 6.72
Tax-exempt(3) 605 38 12.67 895 56 12.58 2,433 155 12.85
Total investment securities 84,324 2,706 6.47 76,962 2,517 6.58 64,368 2,218 6.95
Loans:
Residential mortgage loans 114,416 5,220 9.20 99,183 4,563 9.25 97,092 4,438 9.22
Commercial & farm loans 43,241 2,090 9.75 41,123 2,022 9.89 38,256 1,863 9.82
Loans to state & political
subdivisions 9,758 410 8.47 8,700 382 8.83 7,242 307 8.55
Other loans 14,659 810 11.14 14,161 818 11.62 13,980 697 10.05
Loans, net of discount (2)(3)(4) 182,074 8,530 9.45 163,167 7,785 9.59 156,570 7,305 9.41
Total interest-earning assets 268,992 11,306 8.48 245,685 10,448 8.55 221,749 9,548 8.68
Cash and due from banks 6,397 5,264 4,769
Bank premises and equipment 4,789 4,173 4,083
FASB 115 adjustment 131 275 (186)
Other assets 4,630 7,676 3,295
Total noninterest-bearing assets 15,947 17,388 11,961
Total assets 284,939 263,073 233,710
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts 31,672 376 2.39 26,849 295 2.21 23,772 286 2.43
Savings accounts 27,901 307 2.22 27,206 301 2.22 25,988 330 2.56
Money market accounts 26,749 594 4.48 26,111 566 4.36 21,660 510 4.75
Certificates of deposit 143,610 4,143 5.82 130,159 3,823 5.91 115,844 3,321 5.78
Total interest-bearing deposits 229,932 5,420 4.75 210,325 4,985 4.77 187,264 4,447 4.79
Other borrowed funds 9,095 280 6.21 7,461 231 6.23 9,722 302 6.26
Total interest-bearing liabilities 239,027 5,700 4.81 217,786 5,216 4.82 196,986 4,749 4.86
Demand deposits 18,624 16,500 14,189
Other liabilities 3,918 7,178 3,025
Total noninterest-bearing liabilities 22,542 23,678 17,214
Stockholders' equity 23,370 21,609 19,510
Total liabilities & stockholders'
equity 284,939 263,073 233,710
Net interest income 5,606 5,232 4,799
Net interest spread (5) 3.67% 3.74% 3.82%
Net interest income as a percentage
of average interest-earning assets 4.20% 4.28% 4.36%
Ratio of interest-earning assets
to interest-bearing liabilities 1.13 1.13 1.13
</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>
As described in the table above, the yield on earning assets, on a
tax-equivalent basis, was 8.48% and 8.55% during the first six months of
1997 and 1996, respectively (a decline of 7 basis points). The cost of funds
was 4.81% and 4.82% during the same three month period (a decrease of 1 basis
point).
In comparing the average interest cost of 1997 versus 1996, NOW accounts
increased 25 basis points (primarily the result of a new higher rate tiered
product targeted to State and Political Accounts), money market accounts
increased by 12 basis points. The interest rate on certificates of deposit
decreased by 9 basis points.
The Company has continued to experience a slight narrowing of its margin
percentage during the six 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 $ (80) $ 4 $ (76) $ 124 $ (3) $ 121
Investment securities:
Taxable 243 (36) 207 455 (57) 398
Tax-exempt (18) 0 (18) (96) (3) (99)
Total investments 225 (36) 189 359 (60) 299
Loans:
Residential mortgage loans 695 (38) 657 96 29 125
Commercial and farm loans 102 (33) 69 141 18 159
Loans to state & political
subdivisions 43 (15) 28 64 11 75
Other loans 33 (42) (9) 9 112 121
Total loans - net of
discount (2)(3)(4) 873 (128) 745 310 170 480
Total interest income 1,018 (160) 858 793 107 900
Interest expense:
Interest bearing deposits:
NOW accounts 56 25 81 27 (18) 9
Savings accounts 7 (1) 6 17 (46) (29)
Money market accounts 14 14 28 91 (35) 56
Certificates of deposit 387 (67) 320 419 83 502
Total interest-bearing
deposits 464 (29) 435 554 (16) 538
Other borrowed funds 50 (1) 49 (70) (1) (71)
Total interest expense 514 (30) 484 484 (17) 467
Net interest income $ 504 $ (130) $ 374 $ 309 $ 124 $ 433
</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>
The above table detailing the change in net interest income shows
the $1,018,000 resulting from volume increases in investments and loans. The
volume of interest expense increased the cost of interest-bearing deposits
$514,000. The positive gain in volume of $504,000 offset by the decrease in
the net change in rates of $130,000 resulted in a total increase of $374,000.
The provision for possible loan losses increased $5,000 to $105,000 in
the six month period of 1997, compared with a provision of $100,000 in the same
period of 1996. This increase was appropriate given management's quarterly
review of the allowance for loan losses which 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 for the current six month period was
$1,584,000 compared with $654,000 during the same period in 1996. Trust
income increased $23,000, service charge income increased $30,000, and other
income increased $12,000. Net realized securities gains decreased by $19,000,
during the current six month period compared to 1996, as there were no 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 $3,881,000 in the first six months of
1997 reflecting an increase of $454,000 over the 1996 period. Salaries and
benefit's expense increased by $376,000 for the current six month period
reflecting normal merit increases, the addition of employees for the three
additional offices and an accrual of $154,000 for profit sharing attributable
to the arbitration award.
Occupancy expense increased by $30,000 or 13.3% while furniture and
equipment expenses increased by $7,000 or 2.3%, both reflecting the addition
of three offices.
In 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 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.
Federal deposit insurance premium expense decreased $32,000 or 53.8%.
Based on estimated deposit levels projected for the balance of 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.
Other expenses increased $73,000 or 6.1% in the first six months of 1997
over the comparable 1996 period generally reflect the expenses resulting from
the additional three offices.
The provision for income taxes was $966,000 during the first six months
of 1997 compared with $684,000 during the 1996 related period. Income before
taxes increased $836,000 in the 1997 period over the same period in 1996.
The Company is analyzing the effect of the recently enacted tax law
changes. It does not currently expect that the new law will have a material
adverse effect on earnings, liquidity or capital.
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 and 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, cash dividends, and fund other capital expenditures.
During the first six months of 1997 there was $859,000 of capital
expenditures, $681,000 more than the expenditures during the same
period in 1996. The major expenditures were $259,000 to purchase, renovate
and add parking for the Canton office and $460,000 towards the new application
processing system of which $193,000 was for the IBM A/S 400 (financed by a
capital lease through IBM). Management projects that capital expenditures for
the remainder of 1997 will be approximately $300,000 for improvements to the
Gillett and Troy offices as well as the implementation of a wide-area
networking system.
Management is currently renting two properties as a temporary solution
to the space limitations it has experienced at the main office. The Company
plans to build a new operations/administration center that has been in the
planning stages for more than six years. Management anticipates that the
construction will take place in 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 June 30,
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 and one-half; 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
within the ranges outlined in its Asset/Liability policy guidelines.
The Company has not experienced the kind of earnings volatility that
might be indicated from gap analysis. The Company 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>
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).
<TABLE>
June 30, December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Non accruing loans $ 1,427 $ 844 $ 762 $ 1,557 $ 1,566
Impaired loans 382 414 697
Accrual loans - 90 days or
more past due 20 723 689 267 418
Total non-performing loans 1,829 1,981 2,148 1,824 1,984
Foreclosed assets held for sale 104 164 208 168 231
Total non-performing assets $ 1,933 $ 2,145 $ 2,356 $ 1,992 $ 2,215
Loans outstanding at end of
period $187,803 $182,581 $161,886 $157,144 $143,218
Unearned income 132 168 259 575 1,311
Loans, net of unearned income $187,671 $182,413 $161,627 $156,569 $141,907
Non-performing loans as percent
of loans, net of unearned
income 0.97% 1.09% 1.33% 1.17% 1.40%
Total non-performing assets as a
percent loans, net of unearned
income 1.03% 1.18% 1.46% 1.27% 1.56%
Transactions in the allowance for possible loan losses were as follows (in
thousands):
At June 30, 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 (11) (64) (69) (68) (71)
Recoveries 7 21 18 18 71
Provision for loan losses 105 205 163 255 315
Balance, end of period $2,096 $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.
Reflected in the above table, the Company has one loan as of June 30,
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>
General
Congress is currently considering legislative reforms to modernize the
financial services industry, including repealing the Glass Steagall Act which
prohibits commercial banks from engaging in the securities industry.
Consequently, equity underwriting activities of banks may increase in the near
future. However, the Company does not currently anticipate entering into
these activities.
Recently, Pennsylvania enacted a law to permit State chartered banking
institutions to sell insurance. This follows a U. S. Supreme Court decision
in favor of nationwide insurance sales by banks and which also bars states
from blocking insurance sales by national banks in towns with populations of
no more than 5,000. The Company is currently evaluating its options regarding
the sale of insurance.
From time to time, various types of federal and state legislation have
been proposed that could result in additional regulation of, and restrictions
on, the business of the Company and the Bank. It can not be predicted whether
such legislation will be adopted or, if adopted, how such legislation would
affect the business of the Company or the Bank.
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>
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 - Nothing to
report.
Item 5 - Other Information - Nothing to report.
Item 6 - Exhibits and reports on Form 8-K.
(a) Exhibits - None.
(b) Reports - None.
<PAGE>
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)
August 7, 1997 /s/ Richard E. Wilber
By: Richard E. Wilber
President and Chief Executive Officer
(Principal Executive Officer)
August 7, 1997 /s/ Thomas C. Lyman
By: Thomas C. Lyman
Treasurer
(Principal Financial & Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 10,288
<INT-BEARING-DEPOSITS> 1,890
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,407
<INVESTMENTS-CARRYING> 56,322
<INVESTMENTS-MARKET> 56,446
<LOANS> 185,575
<ALLOWANCE> 2,096
<TOTAL-ASSETS> 290,579
<DEPOSITS> 254,274
<SHORT-TERM> 3,549
<LIABILITIES-OTHER> 3,027
<LONG-TERM> 3,737
0
0
<COMMON> 1,373
<OTHER-SE> 22,942
<TOTAL-LIABILITIES-AND-EQUITY> 290,579
<INTEREST-LOAN> 8,394
<INTEREST-INVEST> 2,693
<INTEREST-OTHER> 70
<INTEREST-TOTAL> 11,157
<INTEREST-DEPOSIT> 5,421
<INTEREST-EXPENSE> 5,700
<INTEREST-INCOME-NET> 5,457
<LOAN-LOSSES> 105
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,881
<INCOME-PRETAX> 3,055
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,089
<EPS-PRIMARY> 1.52
<EPS-DILUTED> 1.52
<YIELD-ACTUAL> 4.20
<LOANS-NON> 1,809
<LOANS-PAST> 20
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,995
<CHARGE-OFFS> 11
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 2,096
<ALLOWANCE-DOMESTIC> 2,096
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
