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, 1998
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, 1998 2,746,564 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, 1998 and
December 31, 1997 1
Consolidated Statement of Income for the
Three Months Ended March 31, 1998 and 1997 2
Consolidated Statement of Comprehensive Income for the
Three Months Ended March 31, 1998 and 1997 3
Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2-Management's Discussion and Analysis of Financial Condition
and Results of Operations 6-15
Item 3-Quantitative and Qualitative Disclosure About Market Risk 15
Part II OTHER INFORMATION AND SIGNATURES
Item 1-Legal Proceedings 16
Item 2-Changes in Securities 16
Item 3-Defaults upon Senior Securities 16
Item 4-Submission of Matters to a Vote of Security Holders 16
Item 5-Other Information 16
Item 6-Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31, December 31,
1998 1997
ASSETS:
Cash and due from banks:
Noninterest-bearing $ 6,590,906 $ 6,099,972
Interest-bearing 5,738,061 242,387
Total cash and cash equivalents 12,328,967 6,342,359
Available-for-sale securities 20,554,387 24,826,551
Held-to-maturity securities (estimated
market value 1998,$62,655,000;
December 31, 1997, $64,490,000) 61,979,378 63,734,826
Loans (net of allowance for loan
losses 1998, $2,177,000; December 31, 1997,
$2,138,000) 190,894,154 189,909,615
Foreclosed assets held for sale 239,613 238,284
Premises and equipment 5,729,476 5,754,026
Accrued interest receivable 2,425,484 2,426,512
Other assets 1,688,197 1,578,335
TOTAL ASSETS $295,839,656 $294,810,508
LIABILITIES:
Deposits:
Noninterest-bearing $ 18,826,701 $ 19,015,857
Interest-bearing 239,541,512 237,766,917
Total deposits 258,368,213 256,782,774
Borrowed funds 6,890,283 6,864,195
Accrued interest payable 1,761,998 2,331,439
Commitment to purchase
investment securities 1,066,883 1,980,556
Other liabilities 1,383,150 928,638
TOTAL LIABILITIES 269,470,527 268,887,602
STOCKHOLDERS' EQUITY:
Common Stock
$1.00 par value; authorized 5,000,000
shares; issued and outstanding
2,746,564 shares in 1998 and 1997 2,746,564 2,746,564
Additional paid-in capital 7,180,760 7,180,760
Retained earnings 16,156,075 15,652,872
TOTAL 26,083,399 25,580,196
Net unrealized holding gains on
available-for-sale securities 285,730 342,710
TOTAL STOCKHOLDERS' EQUITY 26,369,129 25,922,906
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $295,839,656 $294,810,508
The accompanying notes are an integral part of these financial
statements.
1
<PAGE>
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended
March 31,
1998 1997
INTEREST INCOME:
Interest and fees on loans $4,303,018 $4,134,781
Interest on interest-bearing deposits
with banks 36,205 6,958
Interest and dividends on investments:
Taxable 1,230,660 1,313,194
Nontaxable 67,301 12,561
Dividends 21,515 18,058
TOTAL INTEREST INCOME 5,658,699 5,485,552
INTEREST EXPENSE:
Interest on deposits 2,804,211 2,641,453
Interest on borrowed funds 111,067 167,921
TOTAL INTEREST EXPENSE 2,915,278 2,809,374
NET INTEREST INCOME 2,743,421 2,676,178
Provision for loan losses 52,500 52,500
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 2,690,921 2,623,678
OTHER OPERATING INCOME:
Service charge income 211,638 194,765
Trust income 92,515 94,364
Other income 53,170 56,579
Arbitration settlement 67,678 884,008
Realized securities gains, net 94,797 0
TOTAL OTHER OPERATING INCOME 519,798 1,229,716
OTHER OPERATING EXPENSES:
Salaries and employee benefits 927,219 1,103,971
Occupancy expenses 135,955 137,755
Furniture and equipment expenses 178,695 149,729
Other expenses 779,547 648,549
TOTAL OTHER OPERATING EXPENSES 2,021,416 2,040,004
Income before provision for income taxes 1,189,303 1,813,390
Provision for income taxes 342,780 598,529
NET INCOME $ 846,523 $1,214,861
Earnings per share $0.31 $0.44
Weighted average number of shares outstanding 2,746,564 2,746,564
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
Three Months Ended
March 31,
1998 1997
<S> <C> <C> <C> <C>
Net income $ 846,523 $ 1,214,861
Other comprehensive income:
Unrealized gains on securities:
Gain (loss) arising during the year $ 8,464 $ (331,501)
Reclassification adjustment (94,797) (86,333) - (331,501)
Other comprehensive income before tax (86,333) (331,501)
Income tax expense related to other
comprehensive income (29,353) (112,710)
Other comprehensive income, net of tax (56,980) (218,791)
Comprehensive income $ 789,543 $ 996,070
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
Three months Ended
March 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997
<S> <C> <C>
Net income $ 846,523 $ 1,214,861
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 52,500 52,500
Provision for depreciation and amortization 189,268 126,849
Amortization and accretion of investment
securities 84,121 97,010
Deferred income taxes 6,856 (16,786)
Realized gains on securities (94,797) 0
Realized gains on loans sold (13,795) (2,396)
Originations of loans held for sale (886,300) (195,200)
Proceeds from sales of loans held for sale 900,095 197,379
Loss on sale of foreclosed assets
held for sale 7,625 2,432
Increase in accrued interest receivable
and other assets (112,696) (90,904)
(Decrease) increase in accrued interest
payable and other liabilities (117,984) 424,020
Net cash provided by operating activities 861,416 1,809,765
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Proceeds from sales of securities 7,169,219 0
Proceeds from maturity of securities 1,000,000 1,700,000
Purchase of securities (4,117,552) 0
Held-to-maturity securities:
Proceeds from maturity and principal
repayments of securities 3,992,423 1,980,683
Purchase of securities (3,003,586) (153,200)
Net (increase) decrease in loans (1,080,993) 240,856
Capital expenditures (137,526) (271,889)
Proceeds from sale of foreclosed assets held
for sale 35,000 20,000
Net cash provide by
investing activities 3,856,985 3,516,450
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 1,585,439 8,065,582
Proceeds from long-term borrowings 61,104 22,991
Repayments of long-term borrowings (54,101) 0
Net increase (decrease) in short-term
borrowed funds 19,086 (8,835,129)
Dividends paid (343,321) (612,103)
Net cash provided (used) by
financing activities 1,268,207 (1,358,659)
Net increase in cash and cash
equivalents 5,986,608 3,967,556
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,342,359 6,458,707
CASH AND CASH EQUIVALENTS AT END OF PERIOD $12,328,967 $10,426,263
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 3,484,718 $ 3,333,193
Income taxes paid $ 0 $ 0
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<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 March 31, 1998, 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, 1997.
In July 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard Statement No. 130, "Reporting Comprehensive
Income". Statement No. 130 establishes standards for reporting and
presentation of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial statements. It
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is presented with the same prominence as other financial
statements. Statement No. 130 requires that companies (1) classify items of
other comprehensive income by their nature in a financial statement and (2)
display paid-in capital in the equity section of the statement of financial
condition. Statement No.130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier
periods provided for comprehensive purposes is required, as stated in the
Consolidated Statement of Comprehensive Income on page 3 of this report.
Note 2 - Earnings per Share
Earnings per share calculations give retroactive effect to stock
dividends Declared by the Company. The number of shares used in the earnings
per share and dividends per share calculation was 2,746,564 for 1998 and
1997, respectively.
5
<PAGE>
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, 1998 and 1997 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".
The following items are among the factors that could cause actual
results to differ materially from the forward-looking statements: general
economic conditions, including their impact on capital expenditures; business
conditions in the banking industry; the regulatory environment; rapidly
changing technology and evolving banking industry standards; competitive
standards; competitive factors, including increase competition with
community, regional and national financial institutions; new service and
product offerings by competitors and price pressures; and like items.
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.
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.
6
<PAGE>
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.
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 20 years for commercial and
vacation property.
DEPOSITS
The Company tiers 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 adjust
the interest rate up once during the term by a maximum of 100 basis points).
The Company also offers a wide variety of IRA products including the
new Roth and Educational IRA's.
In most the community offices, lobby and drive-up hours include
Wednesday afternoons as well as Saturday hours. The supermarket office is
open seven days a week with extended hours on weekdays. The Company has
eleven automated teller machines, which are part of the MAC regional and PLUS
national network. Management is currently implementing a MasterMoney debit
card program.
In addition to the above, the Company has a voice response system to
provide customers a convenient method of accessing account information and
transferring funds 24 hours a day.
TRUST SERVICES
Traditional trust and investment management and estate settlements are
offered by the Bank.
FINANCIAL CONDITION
For the three month period ended March 31, 1998, the total assets of the
Company had a slight increase of $1 million or $295.8 million compared with
a decrease of $.9 million for the same period in 1997. The modest growth in net
assets was the increase in deposits being offset by a reduction of the
commitments to purchase investment securities.
Cash and cash equivalents increased $6 million in 1998 compared with an
increase of $4 million for the same period in 1997. Surplus funds from
deposit growth and investment sales and maturities in 1998 were temporarily
placed in short-term interest bearing investments.
Total investment securities decreased $6 million or 6.8% during the
first three months of 1998 compared with a decrease of $1.8 million for the
7
<PAGE>
same period in 1997. The decrease reflects security sales (U S Treasury
securities available-for-sale) and normal maturities and principal repayments
of $12.2 million. The purchase of $7.2 million securities were primarily
obligations of state and political subdivisions, mortgage-backed securities,
and equities.
Net loan balances ($190.9 million) increased $1 million compared to a
slight decrease of $.3 million for the first three months of 1998 and 1997,
respectively. This modest growth 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 1998, 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 1998.
The loan portfolio consists of the following (in thousands):
March 31, December 31, March 31,
1998 1997 1997
Real estate loans - residential $122,877 $123,054 $ 112,470
Real estate loans - commercial 27,075 27,480 28,174
Real estate loans - agricultural 8,111 8,769 5,848
Loans to individuals for household,
family and other purchases 13,924 13,905 14,835
Commercial and other loans 10,545 9,485 11,103
State and political subdivision
loans 10,621 9,457 9,879
Total 193,153 192,150 182,309
Less: unearned income on loans 82 102 154
Loans, net of unearned income $193,071 $192,048 $182,155
Deposit growth increased by $1.6 million or .6% compared to the first
three months of 1997 that increased of $8.1 million. Deposit growth slowed
primarily because of the competitive interest rate environment.
Borrowed funds remained virtually the same during the first three months
of 1998 compared with a decrease of $8.8 million in 1997. The decrease in 1997
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.
8
<PAGE>
CAPITAL
The Company has computed its risk-based capital ratios as follows
(dollars in thousands):
March 31, December 31,
1998 1997
Tier I - Total stockholders' equity $ 26,369 $ 25,923
Less: Unrealized holding gains (losses)
on available-for-sale securities 286 343
Goodwill and core deposit intangible 809 836
Tier I, net 25,274 24,744
Tier II - Allowance for loan losses(1) 2,118 2,123
Total qualifying capital $ 27,392 $ 26,867
Risk-adjusted on-balance sheet assets $160,916 $161,940
Risk-adjusted off-balance sheet
exposure (2) 8,433 7,919
Total risk-adjusted assets $169,349 $169,859
March 31, December 31,
Ratios: 1998 1997
Tier I risk-based capital ratio 14.9% 14.6%
Federal minimum required 4.0 4.0
Total risk-based capital ratio 16.2% 15.8%
Federal minimum required 8.0 8.0
Leverage ratio (3) 8.6% 8.5%
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, 1998 was
$847,000 a decrease of $368,000 or 30.3% over the $1,215,000 for the 1997
related period. Earnings per share was $.31 during the first quarter of 1998
compared with $.44 during the comparable 1997 period. The large decrease was
the result of an arbitration settlement realized in the first quarter of 1997
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 loan losses, was $2,691,000, an increase
of $67,000 or 2.6% compared with an increase of $194,000 or 8% during the
same period in 1997.
9
<PAGE>
<TABLE>
Analysis of Average Balances and Interest Rates (1)
March 31, 1998 March 31, 1997 March 31, 1996
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 2,635 36 5.54 525 7 5.41 2,743 37 5.43
Investment securities:
Taxable 76,236 1,252 6.66 84,017 1,331 6.42 71,192 1,157 6.54
Tax-exempt(3) 6,061 102 6.83 606 19 12.72 931 29 12.53
Total investment securities 82,297 1,354 6.67 84,623 1,350 6.47 72,123 1,186 6.61
Loans:
Residential mortgage loans 122,809 2,711 8.95 114,496 2,584 9.15 97,206 2,267 9.38
Commercial & farm loans 35,186 835 9.62 35,124 852 9.84 31,883 786 9.91
Loans to state & political
subdivisions 10,622 221 8.44 9,963 179 7.29 8,267 181 8.81
Other loans 24,455 611 10.13 23,249 589 10.27 23,295 605 10.54
Loans, net of discount (2)(3)(4) 193,072 4,378 9.20 182,832 4,204 9.33 160,651 3,839 9.91
Total interest-earning assets 278,004 5,768 8.41 267,980 5,561 8.42 235,517 5,062 8.64
Cash and due from banks 6,142 6,355 4,991
Bank premises and equipment 5,760 4,570 4,162
FASB 115 adjustment 314 218 482
Other assets 4,158 2,630 3,312
Total noninterest-bearing assets 16,374 13,773 12,947
Total assets 294,378 281,753 248,464
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts 32,151 180 2.27 31,184 184 2.39 24,255 126 2.09
Savings accounts 26,457 144 2.21 27,491 150 2.21 25,919 144 2.23
Money market accounts 35,577 425 4.84 26,219 285 4.41 24,288 267 4.42
Certificates of deposit 144,680 2,055 5.76 140,897 2,023 5.82 126,476 1,877 5.97
Total interest-bearing deposits 238,865 2,804 4.76 225,791 2,642 4.75 200,938 2,414 4.83
Other borrowed funds 7,198 111 6.25 11,130 168 6.12 7,284 114 6.29
Total interest-bearing liabilities 246,063 2,915 4.80 236,921 2,810 4.81 208,222 2,528 4.88
Demand deposits 19,060 17,976 15,178
Other liabilities 3,109 3,398 3,513
Total noninterest-bearing liabilities 22,169 21,374 18,691
Stockholders' equity 26,146 23,458 21,551
Total liabilities & stockholders'
equity 294,378 281,753 248,464
Net interest income 2,853 2,751 2,534
Net interest spread (5) 3.61% 3.61% 3.76%
Net interest income as a percentage
of average interest-earning assets 4.16% 4.16% 4.33%
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.
10
<PAGE>
As described in the table above, the yield on earning assets, on a
tax-equivalent basis, was 8.41% and 8.42% during the first three months of
1998 and 1997, respectively (a decline of 1 basis point). The cost of funds
was 4.80% and 4.81% during the same three month period (a decrease of 1 basis
point).
In comparing the average interest cost of 1998 versus 1997, NOW accounts
decreased 12 basis points, savings accounts remained the same, and money
market accounts increased by 43 basis points (the result of a increase in
higher balance accounts). The interest rate on certificates of deposit
decreased by 6 basis points.
As described above, the Company has experience a stable but narrow
interest margin percentage during the three months of 1998. 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>
1998 vs. 1997 (1) 1997 vs. 1996 (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 $ 29 $ 0 $ 29 $ (30) $ 0 $ (30)
Investment securities:
Taxable (131) 52 (79) 203 (29) 174
Tax-exempt 89 (6) 83 (10) 0 (10)
Total investments (42) 46 4 193 (29) 164
Loans:
Residential mortgage loans 182 (55) 127 388 (71) 317
Commercial and farm loans 2 (19) (17) 78 (12) 66
Loans to state & political
subdivisions 12 30 42 37 (39) (2)
Other loans 30 (8) 22 (1) (15) (16)
Total loans - net of
discount (2)(3)(4) 226 (52) 174 502 (137) 365
Total interest income 213 (6) 207 665 (166) 499
Interest expense:
Interest bearing deposits:
NOW accounts 6 (10) (4) 39 19 58
Savings accounts (6) 0 (6) 9 (3) 6
Money market accounts 110 30 140 21 (3) 18
Certificates of deposit 53 (21) 32 205 (59) 146
Total interest-bearing
deposits 163 (1) 162 274 (46) 228
Other borrowed funds (61) 4 (57) 58 (4) 54
Total interest expense 102 3 105 332 (50) 282
Net interest income $ 111 $ (9) $ 102 $ 333 $ (116) $ 217
</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.
11
<PAGE>
The above table detailing the change in net interest income shows
the $213,000 resulting from volume increases in investments and loans. The
volume of interest expense increased the cost of interest-bearing deposits by
$102,000. The positive gain in volume of $111,000 combined with decrease of
income due to rate of $9,000 resulted in a net increase of $102,000 compared
to a net increase of $217,000 for the same period in 1997. The neutral
effect on income resulted from a change in rates was offset by a reduction in
the rate of increase of the volumes of loans and deposits.
The provision for loan losses was unchanged at $52,500 in both of the
three month periods. This provision was appropriate given management's
quarterly review of the allowance for loan losses that is based on the following
information; migration analysis of delinquent and non accrual loans,
estimated future losses on loans, recent review of large problem credits,
local and national economic conditions, historical loss experience, OCC
qualitative adjustments, purchase of loans through acquisitions and peer
comparisons.
Total other operating income decreased $710,000 compared with the same
period in 1997. Trust income decreased $2,000, service charge income
increased $17,000, and other income decreased $3,000. Net realized securities
gainsincreased by $95,000, during the current three month period compared to
1997, as there were not sales during the 1997 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.
During the three months ended March 31, 1998, arbitration settlement income
was $68,000.
Total other operating expense was $2,021,000 in the first three months
of 1998 reflecting a decrease of $19,000 over the 1997 period. Salaries and
benefit's expense decreased by $177,000 for the current three month period
reflecting normal merit increases. During the same period in 1997, an accrual
to salaries and benefit expense of $154,000 for profit sharing reflecting the
additional arbitration income.
Occupancy expense decreased by $2,000 while furniture and equipment
expenses increased by $29,000, for the additional expenses relating to the
conversion to the new Jack Henry and Associates application software and IBM
AS\400 computer.
Other expenses increased $131,000 or 20.2% in the first three months of
1998 over the 1997 related period reflecting increases in other professional
fees $24,000, software maintenance and expense $14,000, telephone and data
communication expense $26,000, and other costs associated with the new data
processing system and network. Management expect these costs to moderate
over the remainder of 1998.
The provision for income taxes was $343,000 during the first three
months of 1998 compared with $599,000 during the 1997 related period. Income
before taxes decreased $624,000 in the 1998 period over the same period in 1997.
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.
As detailed in the Consolidated Statement of Cash Flows, positive net
cash was provided from operating, investing and financing activities. The
major components have been discussed previously in the financial condition
section relating to investments, loans and deposits.
During the first three months of 1998 there was $138,000 of capital
expenditures, $134,000 less than the capital acquisitions during the same
period in 1997.
12
<PAGE>
Management is currently renting two properties as a temporary
solution to the space limitations it has experienced at the main office for the
last seven years. Management anticipates that the construction will take
place on a new branch/operations center late 1998 or early 1999 with a total
estimated cost of approximately $3.5 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.
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,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Non accruing loans $ 1,563 $ 1,169 $ 844 $ 762 $ 1,557
Impaired loans 382 382 414 697
Accrual loans - 90 days or
more past due 242 170 723 689 267
Total nonperforming loans $ 2,187 $ 1,721 $ 1,981 $ 2,148 $ 1,824
Other real estate owned $ 240 $ 238 $ 164 $ 208 $ 168
Loans outstanding at end of
period $193,153 $192,150 $182,581 $161,886 $157,144
Unearned income 82 102 168 259 575
Loans, net of unearned income $193,071 $192,048 $182,413 $161,627 $156,569
Nonperforming loans as percent
of loans, net of unearned
income 1.13% .90% 1.09% 1.33% 1.16%
Total nonperforming assets as a
percent loans of net unearned
income 1.26% 1.02% 1.18% 1.46% 1.27%
Transactions in the allowance for loan losses were as follows (in
thousands):
At March 31, Years Ended December 31,
1998 1997 1996 1995 1994
Balance, beginning of period $2,138 $1,995 $1,833 $1,721 $1,516
Charge-offs (24) (83) (64) (69) (68)
Recoveries 10 16 21 18 18
Provision for loan losses 53 210 205 163 255
Balance, end of period $2,177 $2,138 $1,995 $1,833 $1,721
</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.
13
<PAGE>
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.
GENERAL
The majority of assets and liabilities of a financial institution are
monetary in nature and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. However, inflation does have an important impact on the growth
of total assets and on noninterest expenses, which tend to rise during periods
of general inflation. The level of inflation over the last few years has been
declining.
Management is aware of the possibility of exposure by banks to a computer
problem known as the "Year 2000 Problem" or the "Millennium Bug" (the
inability of some computer programs to distinguish between the year 1900 and
the year 2000). The Company is in the process of assessing the cost and
extent of vulnerability of the Company's computer systems to the problem.
Modifications or replacements of computer systems to attain Year 2000
compliance have begun, and the Company expects to attain Year 2000 compliance
and institute appropriate testing of its modifications and replacements before
the Year 2000 change date. The Company's recent conversion to Jack Henry and
Associates for core banking application software and the purchase of a new IBM
AS/400 hardware system on which to run the core processing software, has
greatly minimized the exposure to these problems as both systems are expected
to be compliant. The Company believes that, with modifications to existing
software and conversions to new software, the Year 2000 problem will not pose
a significant operational problem for the Company. However, because most
computer systems are, by their very nature, interdependent, it is possible
that non-compliant third party computers could effect the Company's computer
systems. The Company has taken steps to communicate with the third parties
with whom it deals to coordinate Year 2000 compliance but could be adversely
affected if it or the unrelated third parties are unsuccessful.
Most of the costs incurred in addressing this problem are expected to be
expensed as incurred. The financial impact to the Company of Year 2000
compliance has not been and is not anticipated to be material to the Company's
financial position or results of operations in any given year.
Various congressional bills have been passed and other proposals have been
made for significant changes to the banking system, including provisions for:
limitation on deposit insurance coverage; changing the timing and method
financial institutions use to pay for deposit insurance; 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.
Aside from those matters described above, management does not believe that
there are any trends, events or uncertainties which would have a material
adverse impact on future operating results, liquidity or capital resources,
nor is it aware of any current recommendations by the regulatory authorities
(except as described herein) which, if they were to be implemented, would have
such an effect, although the general cost of compliance with numerous and
multiple federal and state laws and regulations does have, and in the future
may have, a negative impact on the Company's results of operations.
14
<PAGE>
Item 3-Qualitative and Quantitative Disclosure About Market Risk
In the normal course of conducting business activities the Company is
exposed to market risk, principally interest rate risk, through the operations
of its banking subsidiary. Interest rate risk arises from market driven
fluctuations in interest rates which affect cash flows, income, expense and
values of financial instruments. Interest rate risk is managed by an
management and a committee of the board of directors.
No material changes in market risk strategy occurred during the current
period. A detailed discussion of market risk is provided in the SEC Form 10-K
for the period ended December 31, 1997.
15
<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:
Results of the voting at the Annual Meeting of Shareholders held on April 21,
1998 at 12:00 p.m. at the Tioga County Fairgrounds Youth Building,
Whitneyville, Pennsylvania, 16901
1. Election of Class 2 Directors whose term will expire in 2001
For Withhold Authority
Mark L. Dalton 2,264,101 35,256
John E. Novak 2,263,639 35,718
Rudolph J. van der Heil 2,263,055 36,302
Continuing Directors:
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
Bruce L. Adams Class 3 Term Expires 2000
William D. Van Etten Class 3 Term Expires 2000
2. Proposal to amend Article 4 of the Corporation's Articles of
Incorporation, as amended, to increase the number of authorized shares of the
Corporation's Common Stock, par value $1.00 per share, from 5,000,000 shares
to 10,000,000 shares.
FOR 2,219,034 AGAINST 21,924 ABSTAIN 58,399
3. Proposal to amend Article 13 of the Corporation's Articles of
Incorporation, as amended, to eliminate preemptive rights.
FOR 2,177,528 AGAINST 36,964 ABSTAIN 84,865
Item 5 - Other Information - Nothing to report.
Item 6 - Exhibits and reports on Form 8-K.
(a) Exhibits - Exhibit No. 27 Financial Data Schedule.
(b) Reports - None.
16
<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)
May 7, 1998 /s/ Richard E. Wilber
By: Richard E. Wilber
President and Chief Financial Officer
(Principal Executive Officer)
May 7, 1998 /s/ Thomas C. Lyman
By: Thomas C. Lyman
Treasurer
(Principal Financial &
Accounting Officer
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,591
<INT-BEARING-DEPOSITS> 5,738
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,554
<INVESTMENTS-CARRYING> 61,979
<INVESTMENTS-MARKET> 62,655
<LOANS> 190,894
<ALLOWANCE> 2,177
<TOTAL-ASSETS> 295,840
<DEPOSITS> 258,368
<SHORT-TERM> 3,874
<LIABILITIES-OTHER> 4,212
<LONG-TERM> 3,016
0
0
<COMMON> 2,747
<OTHER-SE> 23,622
<TOTAL-LIABILITIES-AND-EQUITY> 295,840
<INTEREST-LOAN> 4,303
<INTEREST-INVEST> 1,320
<INTEREST-OTHER> 36
<INTEREST-TOTAL> 5,659
<INTEREST-DEPOSIT> 2,804
<INTEREST-EXPENSE> 2,915
<INTEREST-INCOME-NET> 2,743
<LOAN-LOSSES> 53
<SECURITIES-GAINS> 95
<EXPENSE-OTHER> 2,021
<INCOME-PRETAX> 1,189
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 847
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
<YIELD-ACTUAL> 4.16
<LOANS-NON> 1,945
<LOANS-PAST> 242
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,138
<CHARGE-OFFS> 24
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 2,177
<ALLOWANCE-DOMESTIC> 1,301
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 876
</TABLE>
