UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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 our 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
Securities registered pursuant to section 12 (b) of the Act:
Title of each class Name of each exchange on
which registered
NOT APPLICABLE NOT APPLICABLE
Securities registered pursuant to section 12 (g) of the Act:
Common Stock, par value $1.00 per share.
(Title of class)
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 total market value of the voting stock of the Registrant
held by non-affiliates (for this purpose, persons or entities other
than executive officers, directors, or 5% or more stockholders) of
the Registrant, as of March 5, 1999, is estimated to have been
approximately $52,660,000.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 or Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
The number of shares outstanding of the Registrant's Common Stock,
as of March 5, 1999, 2,773,434 shares of Common Stock, par value
$1.00.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Parts I, III and IV are
incorporated by reference to Registrant's Definitive Proxy
Statement for the Annual Meeting of Stockholders to be held April
20, 1999.
Certain information required by Parts II and IV are incorporated by
reference to Registrant's Annual Report to Stockholders for the
Year Ended December 31, 1998.
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Citizens Financial Services, Inc.
Form 10-K
INDEX
Part I Page
Item 1-Business 1-4
Item 2-Properties 5
Item 3-Legal Proceedings 6
Item 4-Submission of Matters to a Vote of Stockholders 6
Part II
Item 5-Market for Registrant's Common Stock and Related
Shareholder Matters 7
Item 6-Selected Financial Data 7
Item 7-Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 7A-Quantitative and Qualitative Disclosure
About Market Risk 8
Item 8-Financial Statements and Supplementary Data 8
Item 9-Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 8
Part III
Item 10-Directors and Executive Officers of the Registrant 8
Item 11-Executive Compensation 8
Item 12-Security Ownership of Certain Beneficial Owners and
Management 8
Item 13-Certain Relationships and Related Transactions 8
Part IV
Item 14-Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 9
Signatures 10
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Part I
Item 1-Business
Citizens Financial Services, Inc. (the "Company") is a
Pennsylvania business corporation, incorporated April 30, 1984 to
form a bank holding company. On April 30, 1984, First Citizens
National Bank (the "Bank") became a wholly owned subsidiary
of our Company by means of a merger in which the stockholders of
our Bank became stockholders of our Company.
In 1932, First National Bank opened for business in
Mansfield, Pennsylvania. In 1970 the First National Bank in
Mansfield merged with Citizens National Bank of Blossburg,
Pennsylvania to form First Citizens National Bank. In 1971, the
Bank expanded into Potter County through the acquisition of
the Grange National Bank, which had offices in Ulysses and
Genesee, Pennsylvania.
On November 16, 1990, our Company acquired Star Savings and
Loan Association (the "Association"), originally organized as a
Pennsylvania-chartered mutual savings and loan association in 1899 and
converted to a Pennsylvania-chartered permanent reserve fund stock
savings and loan association on March 27, 1986. On December 31, 1991,
the Association merged with our Bank terminating the Association's
separate operations as a savings and loan.
On April 20, 1996 our Bank purchased two branch offices of Meridian
Bank in Canton and Gillett, Pennsylvania.
On October 31, 1996, our Bank opened a branch office in the new Weis
supermarket in Wellsboro, Pennsylvania.
As of December 31, 1998, our Bank employed 128 full time
equivalent employees at our ten banking facilities.
We are not dependent upon a few customers, which would cause a
material impact on us if their business were lost.
We are dependent geographically upon the economic conditions in
north central Pennsylvania and western New York. Additional information
related to our business and the competition is detailed in the
Management's Discussion and Analysis of the 1998 Annual Report to the
Stockholders, which information is included at Exhibit 13, hereof and
incorporated herein by reference.
1
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REGULATION AND SUPERVISION
The operations of our Bank are subject to federal and state
statutes applicable to banks chartered under our banking laws of
the United States, to members of the Federal Reserve System and
to banks whose deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC"). Bank operations are also subject
to regulations of the Office of the Comptroller of the Currency
("Comptroller").
The primary supervisory authority of our Bank is the
Comptroller, who regularly examines our Bank. The Comptroller
has the authority under the Financial Institutions Supervisory
Act to prevent a national bank from engaging in unsafe or unsound
practice while conducting our business.
Our Company is subject to regulation under our Bank Holding
Company Act of 1956, as amended (the "Act"), and is registered
with the Board of Governors of the Federal Reserve System (AFederal
Reserve@). Under the Act, bank holding companies are not permitted, with
certain exceptions, to acquire direct or indirect ownership or control of
more than 5% of the voting shares of any company which is not a bank and
are prohibited from engaging in any business other than that of banking,
managing and controlling banks or furnishing services to our subsidiary
banks, except that they may, upon application, engage in, and may own
shares of companies engaged in, certain businesses found by the
Federal Reserve to be so closely related to banking as to be a
proper incident thereto (if the Federal Reserve determines that
such acquisition will be, on balance, beneficial to the public).
The Act does not place territorial restrictions on the activities
of non-bank subsidiaries of bank holding companies. The Act
requires prior approval by the Federal Reserve of the acquisition
by our Company of more than 5% of the voting stock of any
additional bank. Our Company is required by the Act to file
annual reports of our operations with the Federal Reserve
and of any additional information that the Federal Reserve may
require. The Federal Reserve may also make examinations of our Company
and any or all of our subsidiaries. Further, under Section 106 of the
1970 amendments to the Act and the Federal Reserve's regulations, a bank
holding company and our subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit or
provision of credit or provision of any property or service.
The so-called "anti-tie-in" provisions state generally that a bank
may not extend credit, lease property, sell property or furnish any
service to a customer on the condition that the customer provide
additional credit or service to our Bank, to our bank holding company or
to any other subsidiary of our bank holding company. Our Company can not
require a condition that the customer not obtain other credit or service
from a competitor of ours.
Subsidiary banks of a bank holding company are subject to
certain restrictions imposed by the Federal Reserve Act on any
extensions of credit to our bank holding company or any of our
subsidiaries, or investments in the stock or other securities of
our bank holding company and on taking of such stock or
securities as collateral for loans to any borrower.
2
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PERMITTED NON-BANKING ACTIVITIES
The Federal Reserve permits our bank holding companies to
engage in non-banking activities so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
Our Company presently does not engage in any such activities nor
does it intend to in the near future.
Neither our Company nor our subsidiary anticipates that
compliance with environmental laws and regulations will have any
material effect on capital expenditures, earnings, or on our
competitive position.
Our Company is a legal entity, separate and distinct from
our Bank. Most of our Company's revenues, including funds
available for payment of dividends and for operating expenses,
are provided by dividends from our Bank. Certain
limitations exist on the availability of our Bank's
undistributed net assets for the payment of dividends to our
parent without prior approval of our Bank regulatory authorities
as further described in Footnote 14 of the 1998 Annual Report to the
stockholders, which information is included at Exhibit 13, hereof and
incorporated herein by reference.
LEGISLATION AND REGULATORY CHANGES
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 our Company and our Bank. Congress has
proposed a modernization of the financial services industry. This
proposed modernization will have the effect of deregulating and expanding
the business activities of financial institutions. These additional
activities may include broader insurance powers, securities underwriting
activities and equity investments by commercial banks. We cannot predict
whether such legislation will be adopted or, if adopted, how such
legislation would affect the business of our Company or our Bank. As a
consequence of the extensive regulation of commercial banking activities
in the United States, the Company's and Bank's business is particularly
susceptible to being affected by federal legislation and regulations that
may increase the cost of doing business.
Risk-Based Capital Guidelines. The Federal Reserve,
the FDIC and the Comptroller have issued certain risk-based
capital guidelines, which supplement existing capital
requirements and have been discussed in Footnote 14 of the 1998 Annual
Report to the stockholders, which information is included at Exhibit 13,
hereof and incorporated herein by reference.
We are not aware of any other current specific recommendations by
regulatory authorities or proposed legislation, which if it were adopted,
would have a material adverse effect upon the liquidity, capital
resources, or results of operations, although the general cost of
compliance with numerous federal and state laws and regulations does
have, and in the future may have, a negative impact on our Company's
results of operations.
3
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Futher, the business of our Company is also affected by the state of
the financial services industry in general. As a result of legal and
industry changes, we believe that the industry will continue to
experience an increase in consolidations and mergers as the financial
services industry strives for greater cost efficiencies and market share.
We believe that such consolidations and mergers may enhance our
competitive position as a community bank.
EFFECT OF GOVERNMENT MONETARY POLICIES
The earnings of our Company are and will be affected by
domestic economic conditions and the monetary and fiscal policies
of the United States government and our agencies.
The monetary policies of the Federal Reserve Board have had
and will likely continue to have, an important impact on the
operating results of commercial banks through our power to
implement national monetary policy in order, among other things,
to curb inflation or combat a recession. The Federal Reserve
Board has a major effect upon the levels of bank loans,
investments and deposits through our open market operations in
United States securities and through our regulation of, among
other things, the discount rate on borrowings of member banks and
the reserve requirements against member bank deposits. It is not
possible to predict the nature and impact of future changes in
monetary and fiscal policies (also see page 53 of Management's
Discussion and Analysis of the 1998 Annual Report to the Stockholders,
which information is included at Exhibit 13, hereof and incorporated
herein by reference).
4
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Item 2-Properties
The headquarters of our Company is located in Mansfield,
Pennsylvania. The building contains the central offices of the
Company and our Bank. Our Bank also owns eight other banking
facilities. All buildings are owned by our Bank and are
free of any liens or encumbrances.
PROPERTIES Current Building
Construction Date
(Renovation Date)
Main office:
15 South Main St.
Mansfield, PA 16933 1971
Branch offices:
320 Main St.
Blossburg, PA 16912 1988
502 Main St.
Ulysses, PA 16948 1977
Main St.
Genesee, PA 16923 1985
306 West Lockhart St.
Sayre, PA 18840 1989
99 Main St.
Wellsboro, PA 16901 1979
103 West Main St.
Troy, PA 16947 1988
29 West Main
Canton, PA 17724 1974 (1997)
Main St.
Gillett, PA 16925 1970 (1997)
The net book value for these properties, as of December 31, 1998 was
$5,606,000. The properties are adequate to meet the needs of the
employees and customers. The Mansfield office includes the corporate
headquarters (currently occupying rental facilities) and is in need of
expansion which is currently being reviewed by management and the board
of directors as discussed further in Management's Discussion and Analysis
on pages 50 of the 1998 Annual Report to the Stockholders, which
information is included at Exhibit 13, hereof and incorporated herein by
reference. All of the facilities are equipped with current technological
improvements for data and word processing.
Inflation has an impact on our Company's operating costs, however,
unlike many industrial companies, substantially all of our Company's
assets and liabilities are monetary in nature. As a result, interest
rates have a more significant impact on our Company's performance than
the general level of inflation. Over short periods of time, interest
rates may not necessarily move in the same direction or in the same
magnitude as prices of goods and services.
5
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Item 3-Legal Proceedings
We are not aware of any litigation that would have a
material adverse effect on the consolidated financial position of
our Company. There are no proceedings pending other than
ordinary, routine litigation incidental to the business of the
Company and our subsidiary. In addition, no material proceedings
are pending or are known to be threatened or contemplated against
our Company and our subsidiary by government authorities.
Item 4-Submission of Matters to a Vote of Stockholders
There were no matters submitted to a vote of security
holders in the fourth quarter of 1998.
Part II
Item 5-Market for the Registrant's Common Stock and Related
Shareholder Matters
Our Company's common stock is traded by local brokerage
firms and is not listed on any stock exchange.
Market and dividend information is incorporated by reference to
pages 21, 35, and 56 of our Company's 1998 Annual Report to the
Stockholders which are included in Exhibit 13 hereto.
Our Company has paid dividends since, April 30, 1984, the effective
date of our formation as a bank holding company. Our Company's Board of
Directors intends to continue the dividend payment policy; however,
future dividends necessarily depend upon earnings, financial condition,
appropriate legal restrictions and other factors as in existence at the
time the Board of Directors considers dividend policy. Cash available
for dividend distributions to stockholders of our Company comes from
dividends paid to our Company by our Bank. Therefore, restrictions on
the ability of our Bank to make dividend payments are directly applicable
to our Company.
Under the Pennsylvania Business Corporation Law of 1988,
our Company may pay dividends only if, after payment, our Company
would be able to pay our debts as they become due in the usual
course of our business and its total assets are greater than the
sum of our total liabilities.
As of March 5, 1999, our Company has approximately 1,479
stockholders of record.
Item 6-Selected Financial Data
The information required by this item is incorporated by
reference to page 35 of the 1998 Annual Report to the Stockholders, which
information is included at Exhibit 13, hereof and incorporated herein by
reference.
Item 7-Management's Discussion and Analysis of Financial
Condition and Results of Operations
The information required by this item is incorporated by
reference to pages 37 - 53 of the 1998 Annual Report to the Stockholders,
which information is included at Exhibit 13, hereof and incorporated
herein by reference.
6
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Item 7A-Quantitative and Qualitative Disclosures About Market Rate Risk
The information required by this item 7A is incorporated by
reference to pages 50 - 53 of the 1998 Annual Report to the Stockholders,
which information is included at Exhibit 13, hereof and incorporated
herein by reference.
Item 8-Financial Statements and Supplementary Data
The information required by this item is incorporated by
reference to pages 13 - 33 and 36 of the 1998 Annual Report to the
Stockholders, which information is included at Exhibit 13, hereof and
incorporated herein by reference.
Financial Statements:
Consolidated Balance Sheet as of December 31, 1998 and 1997
Consolidated Statement of Income for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
Item 9-Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None
Part III
Item 10-Directors and Executive Officers of the Registrant
Information appearing in the definitive Proxy Statement under the
caption "Information as to Nominees, Directors and Executive Officers"
and "Principal Officers" to the Annual Meeting of Stockholders to be held
April 20, 1999, is incorporated herein by reference in response to this
item.
Item 11-Executive Compensation
Information appearing in the definitive Proxy Statement under the
caption "Remuneration of Officers and Directors" related to the Annual
Meeting of Stockholders to be held April 20, 1999, is incorporated herein
by reference in response to this item.
Item 12-Security Ownership of Certain Beneficial Owners and
Management
Information appearing in the definitive Proxy Statement under the
caption "Principal Beneficial Owners of the Corporation's Stock" related
to the Annual Meeting of Stockholders to be held April 20, 1999, is
incorporated herein by reference in response to this item.
Item 13-Certain Relationships and Related Transactions
Information appearing in the definitive Proxy Statement under the
caption "Certain Transactions" related to the Annual Meeting of
Stockholders to be held April 20, 1999, is incorporated herein by
reference in response to this item.
7
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Part IV
Item 14-Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
a(1)-Financial Statements. The following consolidated
financial statements of Citizens Financial Services, Inc. and subsidiary
are incorporated by reference to the 1998 Annual Report:
Consolidated Balance Sheet as of December 31, 1998 and 1997
Consolidated Statement of Income for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
(2)-Financial Statement Schedules. Financial Statement Schedules are
omitted because the required information is either not applicable, not
required or is shown in the respective financial statement or in the
notes thereto.
(3)-Exhibits:
(3)(i) - Articles of Incorporation of the Corporation, as amended.
(3)(ii)- By-laws of the Corporation, as amended. (Incorporated by
reference to Exhibit (3) (ii) to the Annual Report of Form 10-K for the
fiscal year ended December 31, 1995, as filed with the Commission on
March 26, 1996.)
(4) - Instruments Defining the Rights of Stockholders. (Incorporated
by reference to the Registrant=s Registration Statement No.2-89103 on
Form S-14, as filed with the Commission on February 17, 1984.)
(10) - Material Contracts.
(i) Employment Agreement between the Company and Richard E. Wilber.
(Incorporated by Reference to Exhibit (10) to the Annual Report
of Form 10-K for the fiscal year ended December 31, 1998,
as filed with the Commission on March 17, 1998.)
(ii) Directors Deferred
(11) - Computation of Earnings Per Share. (Incorporated by Reference
to the 1998 Annual Report to Stockholders, which is included at page 20
of Exhibit 13, hereof and incorporated berein by reference.
(13) - Annual Report to Stockholders for the year ended
December 31, 1998.
(21) - Subsidiaries of Citizens Financial Services, Inc.
(27) - Financial Data Schedule
8
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14(b)Reports on Form 8-K.
No current report on Form 8-K was filed by the Registrant during
the fourth quarter of the 1998 fiscal year.
9
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on our behalf by the undersigned, there unto duly
authorized.
Citizens Financial Services, Inc.
(Registrant)
/s/ Richard E. Wilber /s/ Thomas C. Lyman
By: Richard E. Wilber By: Thomas C. Lyman
President, Chief Executive Officer Treasurer
(Principal Executive Officer) (Principal Financial &
Accounting Officer)
Date: March 16, 1999 Date: March 16, 1999
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature and Capacity Date
/s/ Richard E. Wilber March 16, 1999
Richard E. Wilber, President, Chief Executive Officer, Director
(Principal Executive Officer)
/s/ Carol J. Tama March 16, 1999
Carol J. Tama, Director
/s/ R. Lowell Coolidge March 16, 1999
R. Lowell Coolidge, Director
/s/ Rudolph J. van der Hiel March 16, 1999
Rudolph J. van der Hiel, Director
/s/ John E. Novak March 16, 1999
John E. Novak, Director
/s/ Bruce L. Adams March 16, 1999
Bruce L. Adams, Director
/s/ William D. VanEttan March 16, 1999
William D. VanEttan, Director
/s/ Larry J. Croft March 16, 1999
Larry J. Croft, Director
/s/ John M. Thomas, MD March 16, 1999
John M. Thomas, MD, Director
/s/ Mark L. Dalton March 16, 1999
Mark L. Dalton, Director
/s/ Thomas C. Lyman March 16, 1999
Thomas C. Lyman, Treasurer
(Principal Financial and Accounting Officer)
10
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EXHIBIT INDEX
(3)(i) - Articles of Incorporation of the Corporation, as amended.
(3)(ii)- By-laws of the Corporation, as amended. (Incorporated by
Reference to Exhibit (3)(ii) to the Annual Report of Form 10-K for the
fiscal year ended December 31, 1995, as filed with the Commission on
March 26, 1996.)
(4) - Instruments Defining the Rights of Stockholders. (Incorporated by
reference to the Registrant=s Registration Statement No.2-89103 on
Form S-14, as filed with the Commission on February 17, 1984.)
(10) - Material Contracts.
(i) Employment Agreement between our Company and Richard E. Wilber.
(Incorporated by Reference to Exhibit (10) to the Annual Report
of Form 10-K for the fiscal year ended December 31, 1998,
as filed with the Commission on March 17, 1998.)
(ii) Directors Deferred
(11) - Computation of Earnings Per Share. (Incorporated by Reference to
the 1998 Annual Report to Stockholders, which is included at page 20 of
Exhibit 13, hereof and incorporated berein by reference.
(13) - Annual Report to Stockholders for the year ended December 31,
1998.
(21) - Subsidiaries of Citizens Financial Services, Inc.
(27) - Financial Data Schedule
11
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EXHIBIT 3 (i)
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
CITIZENS FINANCIAL SERVICES, INC.
FIRST. The name of Corporation is Citizens Financial Services, Inc.
SECOND. The address of the Corporation's registered office in the
Commonwealth of Pennsylvania is:
15 South Main Street
Mansfield, Pennsylvania 16933
THIRD. The corporation was incorporated on April 30, 1984, under the
provisions of the Business Corporation Law of the Commonwealth of Pennsylvania
(Act of May 5, 1933, P.L. 364, as amended). The purpose of the Corporation is
and it shall have unlimited power to engage in and do any lawful act
concerning any or all lawful business for which corporations may be
incorporated under the provisions of the Business Corporation Law of the
Commonwealth of Pennsylvania.
FOURTH. The aggregate number of shares, classes of shares and par
value of shares that the Corporation has authority to issue is 10,000,000
shares of common stock, par value $1.00 per share.
FIFTH. The term of the Corporation's existence is perpetual.
SIXTH. [Intentionally omitted.]
SEVENTH. Cumulative voting rights shall not exist with respect to the
election of directors.
EIGHTH. A. The Board of Directors may, if it deems it advisable,
oppose a tender, or other offer for the Corporation's securities, whether the
offer is in cash or in securities of a corporation or otherwise. When
considering whether to oppose an offer, the Board of Directors may, but it is
not legally obligated to, consider any pertinent issues; by way of
illustration, but not of limitation, the Board of Directors may, but shall not
be legally obligated to, consider any and all of the following:
(1) Whether the offer price is acceptable based on the historical and
present operating results or financial condition of the Corporation.
(2) Whether a more favorable price could be obtained for the Corporation's
securities in the future.
<PAGE>
(3) The impact which an acquisition of the Corporation would have on its
employees, depositors and customers of the Corporation and its
subsidiaries in the community which they serve.
(4) The reputation and business practices of the offeror and its
management and affiliates as they would affect the employees,
depositors and customers of the Corporation and its subsidiaries and
the future value of the Corporation's stock.
(5) The value of the securities, if any, which the offeror is offering in
exchange for the Corporation's securities, based on an analysis of
the worth of the Corporation as compared to the corporation or other
entity whose securities are being offered.
(6) Any antitrust or other legal and regulatory issues that are raised by
the offer.
B. If the Board of Directors determines that an offer should be
rejected, it may take any lawful action to accomplish its purpose including,
but not limited to, any and all of the following: advising shareholders not to
accept the offer; litigation against the offeror; filing complaints with all
governmental and regulatory authorities; acquiring the authorized but unissued
securities or treasury stock or granting options with respect thereto;
acquiring a company to create an antitrust or other regulatory problem for the
offeror; and obtaining a more favorable offer from another individual or
entity.
NINTH. The Directors shall be divided into three (3) classes, as
nearly equal in number as possible, known as Class 1, consisting of not more
than eight (8) Directors; Class 2, consisting of not more than eight (8)
Directors; and Class 3, consisting of not more than nine (9) Directors. The
initial Directors of Class 1 shall serve until the third (3rd) annual meeting
of shareholders. At the third (3rd) annual meeting of the shareholders, the
Directors of Class 1 shall be elected for a term of three (3) years and, after
expiration of such term, shall thereafter be elected every three (3) years for
three (3) year terms. The initial Directors of Class 2 shall serve until the
second (2nd) annual meeting of shareholders. At the second annual meeting of
the shareholders, the Directors of Class 2 shall be elected for a term of
three (3) years and, after the expiration of such term, shall thereafter be
elected every three (3) years for three (3) terms. The initial Directors of
Class 3 shall serve until the first (1st) annual meeting of shareholders. At
the first (1st) annual meeting of the shareholders the Directors of Class 3
shall be elected for a term of three (3) years and, after the expiration of
such term, shall thereafter be elected every three (3) years for three (3)
year terms. Each director shall serve until his/her successor shall have been
elected and shall qualify, even though his/her term of office as herein
provided has otherwise expired, except in the event of his/her earlier
resignation, removal or disqualification.
2
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TENTH. The Board shall consist of not less than five nor more than
twenty-five shareholders, the exact number within such minimum and maximum
limits to be fixed and determined from time to time by resolution of a
majority of the full Board or by resolution of the shareholders at any meeting
thereof; provided, however, that a majority of the full Board of Directors may
not increase the number of directors to a number which; (i) exceeds by more
than two, the number of directors last elected by shareholder, (ii) in no
event shall the number of directors exceed twenty-five.
ELEVENTH. Any directorship to be filled by reason of an increase in
the number of directors may be filled by the Board of Directors. The Board of
Directors shall specify the class in which a director so elected shall serve.
Any director elected by the Board of Directors shall hold office only until
the next annual meeting of the shareholders and until his successor shall have
been elected and qualified, notwithstanding that the term of office of the
other directors in the class of which he is a member does not expire at the
time of such meeting. His successor shall be elected by the shareholders to a
term of office which shall expire at the same time as the term of office of
the other directors in the class to which he is elected.
TWELFTH. Commencing with the annual meeting of shareholders of
1984, no person shall be eligible to be newly elected or appointed as a
Director as he/she shall have attained the age of sixty-eight (68) years on or
prior to December 31 of the year prior to the date of his/her election.
THIRTEENTH. No shareholder of this Corporation shall be entitled to
preemptive rights and preemptive rights shall not exist with respect to shares
or securities of this Corporation.
FOURTEENTH. The Corporation shall have authority to borrow money
and the Board of Directors, without the approval of the shareholders and
acting within their sole discretion, shall have the authority to issue debt
instruments of the Corporation upon such terms and conditions and with such
limitation as the Board of Directors deems advisable. The authority of the
Board of Directors shall include, but not be limited to, the power to issue
convertible debentures.
FIFTEENTH. A. To the extent permitted by Section 410 of the
Pennsylvania Business Corporation Law, and any amendments thereto, and
sections relating thereto, including the Directors' Liability Act, subject to
Federal regulatory restrictions, the Board of Directors of the Corporation
shall cause the Corporation to indemnify any person who was or is threatened
to be made a party to any threatened, pending, or completed actions, suit, or
proceeding, whether civil, criminal, administrative, or investigative by
reason of the fact that he or she is or was a director, officer, employee or
agent of the Corporation against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or her in connection with such action, suit, or proceeding,
including any amount paid to the institution itself as a result of an action
or suit by or in the right of the Corporation.
3
<PAGE>
To the extent permitted by law, the Board of Directors of the Corporation
shall cause the Corporation to purchase and maintain insurance on behalf of
any person who is or was against any liability asserted against him or her and
incurred by him or her in any such capacity, and arising out of his or her
status as such.
B. A director of the Corporation shall not be personally liable for
monetary damages as such for any action taken, or any failure to take any
action, unless:
(1) the director has breached or failed to perform the duties of his or
her office under Section 8363 of the Directors' Liability Act
(relating to standard of care and justifiable reliance); and
(2) the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness.
Exception
The provisions of this section shall not apply to:
(1) the responsibility or liability of a director pursuant to any
criminal statute; or
(2) the liability of a director for the payment of taxes pursuant to
local, State or Federal law.
SIXTEENTH. No merger, consolidation, liquidation or dissolution of
the Corporation nor any action that would result in the sale of other
disposition of all or substantially all of the assets of the Corporation shall
be valid unless first approved by the affirmative vote of the holders of at
least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of
Common Stock. This Article may not be amended unless first approved by the
affirmative vote of the holders of at least sixty-six and two-thirds percent
(66 2/3%) of the outstanding shares of Common Stock.
4
<PAGE>
EXHIBIT 10 (ii)
CITIZENS FINANCIAL SERVICES, INC.
DIRECTORS' DEFERRED
COMPENSATION PLAN
<PAGE>
CITIZENS FINANCIAL SERVICES, INC.
DIRECTORS' DEFERRED COMPENSATION PLAN
ARTICLE I
DEFINITIONS
1.01 Administrator: The administrator appointed to administer the Plan.
1.02 Board: The Board of Directors of Citizens Financial Services, Inc.
1.03 Code: The Internal Revenue Code of 1986, as amended, or as it
may be amended from time to time.
1.04 Compensation: All of a Participant's fees, earnings or compensation
which is actually paid to him/her during the Plan Year.
1.05 Director: An individual who is a member of the Board of Directors
of First Citizens National Bank, as elected in accordance
with the bylaws of the Bank, Citizens Financial Services,
Inc. or any subsidiary and/or affiliated corporation.
1.06 Effective Date: January 1, 1991.
1.07 Employer: First Citizens National Bank, Citizens Financial Services,
Inc. and any subsidiary and/or affiliated corporation
1.08 Participant: A Director participating in the Plan.
1
<PAGE>
1.09 Plan: The Citizens Financial Services, Inc. Directors' Deferred
Compensation Plan.
1.10 Plan Year: The twelve (12) consecutive month period beginning each
January 1 and ending on December 31.
1.11 Retirement Date: As designated in the Articles of Association or By-Laws
of Citizens Financial Services and affiliated
corporations.
1.12 Valuation Date: The last day of each Plan Year.
2
<PAGE>
ARTICLE II
ELIGIBILITY
2.01 Only those Directors, as defined in section 1.05, shall be eligible to
participate in this Plan. Those Directors deemed eligible to participate shall
be so notified. A Director electing to participate in this Plan
shall notify the Board by filing a written notice with the Board, in the
form so prescribed by the Board. Such Director shall become a Participant on
the first day of the Plan Year (each January 1) following his/her election to
participate.
2.02 In addition, any individuals who are on the Board of Directors of an
institution or corporation which is absorbed or acquired by the Employer
sponsoring this Plan shall also become Participants in this Plan on the day
that such acquisition becomes effective, subject to approval by the Board.
3
<PAGE>
ARTICLE III
CONTRIBUTIONS
3.01 The Plan and the benefits thereunder shall be unfunded at all times. A
bookkeeping account shall be established and maintained for each Participant
to which will be credited the fee amounts that each Participant elects to
defer. The benefits payable under the Plan shall be paid by the Employer, when
due under the terms of the Plan, out of its general assets.
3.02 A limit on the amount of deferrals may be established by the Board and
shall be subject to the sole discretion of the Board. Deferrals shall be
limited such that when aggregated with Compensation paid to any one
Participant the generally accepted rules of "reasonableness of compensation"
will be observed. Thus the amount of Compensation paid during the Plan Year
shall not exceed the value of services performed. In determining whether
Compensation is "reasonable" the value of the services rendered in earlier
years shall be taken into consideration.
The test of reasonableness shall be whether the total payments in the current
Plan Year plus all Compensation paid in earlier years represents a reasonable
allowance for all services rendered up to the end of the current Plan Year.
3.03 The Employer shall pay all the administrative expenses of the Plan so long
as the Plan remains in effect.
3.04 A Participant may elect to deter all or a portion of his/her future
monthly Director's fees. Such election must be in writing and filed with the
Administrator prior to the first day of the Plan Year for Directors in office
and prior to the date their term begins for Directors elected to fill
vacancies and who were not Directors on the preceding December 31.
3.05 An election to defer Director's fees shall continue from year to year
unless the Participant terminates it in accordance with section 3.06.
3.06 An election by a Director to defer fees may be terminated by written
request to the Administrator. In the event of such termination the amount
already deferred by the Participant shall not be paid to such Participant
until the occurrence of one of the events enumerated in section 4.03.
4
<PAGE> ARTICLE lV
BENEFITS
4.01 The amount of the benefit payable under the Plan shall be equal to that
benefit which can be purchased with the funds in the Participant's account.
4.02 The benefit payable to or on behalf of a Participant as determined under
section 4.01 shall be paid in the form as decided upon by the Board, in its
sole discretion, upon the occurrence of one of the events enumerated in
Section 4.03. Under no circumstances shall a benefit payout period exceed the
life expectancy of the Participant or the Participant and his or her spouse.
4.03 Benefits due under the Plan shall be distributed upon the occurrence of
one of the following events:
(a) the Participant's attainment of his/her Retirement Date;
(b) the disability of the Participant;
(c) the death of the Participant;
(d) the "hostile" acquisition of the Employer by another
institution; or
(e) the termination of the Participant as a Director.
4.04 Benefits payable under the Plan shall be paid by the Employer from the
general assets of the Employer and charged against the Account maintained with
respect to the benefits of such Participant. No payment shall be made to or
with respect to a Participant to the extent that such payment would exceed the
balance then remaining in the Account maintained with respect to the benefits
of such Participant.
4.05 A Participant has the right to designate a Beneficiary to receive any
benefits under the Plan because of the death of the Participant before
retirement and to change that designation from time to time.
4.06 The Plan shall provide a death benefit to the Beneficiary of a
Participant who dies before reaching his/her Retirement Date. Such benefit
shall be equal to the benefit thus accrued under the Plan for such Participant
at the time of death.
4.07 In the event that a Participant incurs a long-term disability, as defined
below, he/she Shall be entitled to a benefit equal to the benefit thus accrued
under the Plan. Disability means the inability to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment that can be expected to last for a continuous period of not less
than twelve (12) months. The permanence and degree of such impairment shall be
supported by medical evidence.
5
<PAGE>
ARTICLE V
ADMINISTRATION
5.01 The Administrator shall have such powers and duties as are necessary for
the proper administration of the Plan, including, but not limited to, the
power to make decisions with respect to the application and interpretation of
the Plan.
5.02 The Administrator shall be entitled to rely on the advice or opinion of
any consultant, accountant or attorney and such persons may also act in their
respective professional capacities as advisors to the Employer.
5.03 Subject to the limitations contained in the Plan, the Administrator shall
be empowered from time to time, at its discretion, to establish rules for the
transaction of its business and for the administration of the Plan.
5.04 The Administrator shall be responsible for filing any returns, reports or
documents with the various government agencies, such as the Internal Revenue
Service, as required by law or the regulations. In addition, the Administrator
shall also be responsible for providing communication to Participants as
required by law or the regulations.
5.05 On each Valuation Date, or as soon as practicable thereafter, the
Administrator shall furnish to each Participant and retired Participant a
statement reflecting the status of his/her account, including interest
credited thereto, as of the end of such Plan Year.
5.06 Upon the occurrence of one of the events enumerated in section 4.03 of
the Plan, the Administrator shall begin payment of benefits to such
Participant, or such Participant's Beneficiary, from the Employer's general
assets in the form prescribed in section 4.02 until such Participant's account
is exhausted.
5.07 Claims: The Administrator shall make each claim determination in a
uniform and non-discriminatory manner. Within 90 days after the receipt of the
claim by the Administrator, the Administrator shall either grant the claim,
deny the claim or notify the Participant, former Participant, or Beneficiary
(hereafter "Claimant") that special circumstances have required an extension
of time for the processing of the claim; such extension not to exceed 180 days
from the original notice.
6
<PAGE>
Within 30 days after denial of any benefit under the Plan, the Administrator
shall give to the Claimant written notice by certified mail, directed to his
or her last address of record with the Administrator, of the denial of claim
for benefits. The notice shall set forth the specific reason for such denial,
shall make specific reference to Plan provisions upon which the denial is
based, shall describe any additional material or information necessary for the
Claimant to perfect his or her claim and why such material is necessary, and
shall advise the Claimant that he or she may file a written appeal of the
determination with the Administrator within 60 days after receipt of such
notice. In connection with such appeal, the Claimant or his or her duly
authorized representative may review pertinent documents and submit issues and
comments in writing. Failure of the Claimant to file a written appeal with the
Administrator within the allowable 60-day period shall constitute an
irrevocable consent by the Claimant to the Administrator's decision denying
the benefit claimed, and the Administrator's written notice shall so state.
Within 60 days after the filing of the appeal, the Administrator shall notify
the Claimant either as to the decision on the appeal or that special
circumstances require an extension of time for processing; such extension not
to exceed 120 days from the date of the filing of the appeal. If neither the
decision nor a notice of extension is furnished within the 60-day period, the
claim shall be deemed to be denied on appeal.
All notices under this section shall be written in a manner calculated to be
understood by Claimant.
7
<PAGE>
ARTICLE VI
AMENDMENT AND TERMINATION
6.01 While it is the intention of the Employer that this Plan should be
permanent and continue to operate, the Employer reserves the right to
terminate the Plan, at any time, at its discretion, subject to the approval
and consent of the Board.
6.02 The Employer reserves the right to amend the Plan agreement at any time,
and from time to time, by appropriate action of the Board and delivery of a
certified copy of the amendment to the Administrator.
8
<PAGE>
ARTICLE VII
MISCELLANEOUS
7.01 Nothing contained in this Plan shall create, or be construed or
interpreted to create, any new or additional obligations on the part of the
Employer to retain any person in its employ or interfere in any way with the
right of the Employer or the Board to discharge any Director.
7.02 Should any provision of this Plan be determined by a court of competent
jurisdiction to be unlawful or unenforceable, such determination shall not
adversely affect the remaining provisions of this Plan, unless it shall make
impossible the maintenance or operation of the Plan for its intended purpose.
To the extent any provision of this Plan is determined to be unlawful or
unenforceable, this Plan shall be construed to be carried out to the fullest
7.03 This Plan may be executed in any number of counterparts, each of which
shall be considered an original and said counterparts shall constitute by one
and the same instrument,
7.04 The Plan at all times shall be entirely unfunded and no provision shall
at any time be made with respect to segregating any assets of the Employer for
payment of benefits hereunder. No Participant, Beneficiary or any other person
shall have any interest in any particular assets of the Employer by reason of
the right to receive a benefit under the Plan and any such Participant,
Beneficiary or other person shall have only the rights of a general creditor
of the Employer with respect to any rights under the Plan. Nothing contained
in the Plan shall constitute a guarantee by the Employer or any other entity
or person that the assets of the Employer will be sufficient to pay any
benefit hereunder.
7.05 No benefit payable under the Plan shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or
charge prior to actual receipt thereof by the payee. Any attempt to do so
shall be void and the Employer shall not be liable for or subject to the
debts, contract, liabilities or torts of any person entitled to any benefit
under the Plan.
7.06 In the event a Participant ceases to be a Director and becomes a
director, proprietor, officer, partner, employee or otherwise becomes
affiliated with any business that is in competition with the Employer, the
entire balance of such Participant's account, including interest, if directed
by the Board, and in its sole discretion, shall be subject to forfeiture.
9
<PAGE>
Furthermore, a Participant will achieve a nonforfeitable interest in his or
her benefit only as such benefit becomes payable as determined by the form of
payment designated by the Board (section 4.02). If a terminated Participant
should become a director, proprietor, officer, partner, employee or otherwise
becomes affiliated with any business that is in competition with the Employer,
the balance of such Participant's benefit not yet paid out shall be subject to
forfeiture at the discretion of the Board.
7.07 The benefits of individuals (Directors) who are Participants in the
Directors' Deferred Compensation Plan of First citizens National Bank or the
Deferred Compensation Plan - Directors' Fees of Star Savings and Loan
Association on or before December 31, 1990, shall in no way be subject to
reduction or attachment due to a change in the ownership or ownership makeup
of First Citizens National Bank or Star Savings and Loan Association which is
effective on or after December 31, 1990.
IN WITNESS WHEREOF, the individuals have hereunto set their hands and have
caused this instrument to be executed by the Employer.
CITIZENS FINANCIAL SERVICES, INC.
Employer
December 17, 1991 /s/ Richard E. Wilber
Date Richard E. Wilber
10
<PAGE>
EXHIBIT 13
ANNUAL REPORT OF SHAREHOLDERS
CITIZENS
FINANCIAL SERVICES
INCORPORTAED
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[GRAPHIC OMITTED: Silhouette of colonial rider on horseback, bottom center of
page, approximately 1 inch length by 1.5 inches wide]
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Relationships...
Shareholders
Customers
Community
Employees
our building blocks for the future
1998 Annual Report
<PAGE>
<1>
________________________________________________________________________________
[GRAPHIC OMITTED: Watermark silhouette of colonial rider on horseback]
- --------------------------------------------------------------------------------
[GRAPIC OMITTED: Design of building blocks with the words, shareholders,
customers, community and employees printed in some of the blocks, across middle
of page]
________________________________________________________________________________
To our Shareholders,
Customers and
Employees:
Vision - it is essential for survival.
It is spawned by faith, sustained by hope, sparked by imagination, and
strengthened by enthusiasm. It is greater than sight, deeper than a dream,
broader than an idea. Vision encompasses vast vistas outside the realm of
the predictable, the safe, the expected.*
*As quoted by Zig Ziglar in Breaking Through to the Next Level, page 62, Honor
Books, copyright 1998.
First Citizens National Bank is embracing the new millennium.
Unlike dreamers who talk of grandiose plans of what they will do tomorrow or
the next day with no foundation on which to build, First Citizens National
Bank's foundation is firm and our vision is clear.
Our relationships with each of you are our building blocks.
Technology, information and our intense desire to serve our customers is the
cement that holds these relationships together.
Our vision for the new millennium addresses the needs of each of you - our
customers, our community, our employees and our shareholders.
<PAGE>
<2>
___________________________________________________________________________
[GRAPHIC OMITTED: Photograph of the Corporation's President, top left side of
page, approximately 5 inches length by 3 inches wide]
___________________________________________________________________________
"1998 brought exciting changes..."
___________________________________________________________________________
financial performance
Before discussing the future in more detail, I would like to report on the
accomplishments of 1998, and highlight our record setting performance.
Our total assets surpassed $300 million to reach a new high of $313.6 million
- - representing growth of $18.8 million or 6.4%. Total deposits grew $17.4
million (6.8%), while loans increased $13.7 million (7.2%). Of particular
importance, loans totaling $90 million were granted in 1998 as compared to $69
million, $75 million, and $50 million in 1997, 1996 and 1995 respectively.
Even though loan demand stood at an all time high, non-performing assets
(non-accrual loans, loans past due 90 days or more and foreclosed assets held
for sale) were $2.4 million at year end 1998 versus $2.0 million one year
prior. Our high quality loan portfolio is also reflected by the fact that net
loan charge-offs were $64 thousand in 1998 compared to $67 thousand in 1997.
Our reserve for possible loan losses grew 7.2% to $2.3 million and represents
1.11% of total loans (the same percentage as year-end 1997).
Net income for 1998 totaled $3.5 million, compared to $3.8 million in 1997.
These years are difficult to compare because of some very unusual revenues and
expenses. In 1997, as you know, we benefited significantly by an arbitration
award. Had it not been for this non-recurring revenue, our net income would
have approximated $3.2 million. During 1998, we also experienced unusual
revenues and expenses, most notably $457 thousand in securities gains. This
was offset somewhat by a $213 thousand prepayment charge to extinguish
long-term borrowings from the Federal Home Loan Bank in Pittsburgh. Had it
not been for these, our 1998 net income would have approximated $3.3 million.
Total stockholders' equity grew $2.7 million (10.3%) to $28.6 million. Cash
dividends declared in the fourth quarter 1998 were 13.5 cents (a 54 cents
annualized rate) versus 12.5 cents (a 50 cents annualized rate) in the
comparable quarter of 1997 - an 8% increase.
operating and strategic initiatives
The year 1998 brought exciting challenges as we introduced our debit card
program, saw a significant increase in usage of our automated voice response
system and installed a 24-hour ATM in Wellsboro.
In addition, considerable resources were devoted to the Year 2000 (Y2K)
challenge. Among our efforts was the engagement of Blair Technology Group to
oversee our comprehensive Y2K program. In addition, our Jack Henry software
system and the IBM AS/400 hardware was successfully tested in November 1998.
Other important ancillary systems were also identified and became the next
focus of attention to assure our readiness for January 1, 2000. We believe we
have this challenge well in-hand and do not expect to encounter any
significant disruptions.
Another major step forward was the engagement of Dearden, Maguire, Weaver and
Barrett as the professional investment advisory source for our Trust and
Investment department. This partnership has been very beneficial both in
terms of enhancing the professional research and investment evaluation
underlying our asset management, as well as proving to be cost effective. We
are optimistic that significant growth can be achieved through continued
customer awareness of this program.
As we look toward the next decade, we see continued changes occurring due to
the increased expectations of our customers, employees, communities and
shareholders. As a result, we have established objectives to fulfill the
expectations and to strengthen our relationships with each of these four
groups.
In setting strategies for 1999 and beyond, we must constantly ask whether we
have what it takes to continue our successes. In mid-1998, we launched a
new effort to strengthen our capabilities. One of the first efforts was to
enhance our knowledge of the marketplace we serve and to identify the changing
desires of our customers. As a result, we are streamlining the processes in
our community offices so employees can use their sales skills to build
customer relationships.
<PAGE>
<3>
___________________________________________________________________________
"There is a great sense of fulfillment as we capitalize on opportunities..."
___________________________________________________________________________
Strengthening leadership skills at all levels in our organization, we are
drawing upon the talents of a very supportive and committed team of
employees. We are working with our employees to ensure that each is aligned
with the strategic goals of our corporation and we are providing incentives to
employees for the successful achievement of such goals. Of great importance,
too, is for us to be viewed as being more sensitive to our communities than
other financial services providers, as well as being the customer's "provider
of choice" for all financial needs.
We are well underway toward implementing these efforts and expect full
implementation by the third quarter of 2000. Employees have been very
supportive and seem eager to "step up" to this challenge. I have great
optimism as we prepare to meet these new challenges head on.
human resources
While long term success is dependent on many variables, clearly one variable
is highly dedicated and skilled people. We are very fortunate to have this at
all levels of our corporation - employees and local board members, as well as
corporate board members. Let me highlight just a few examples of the
commitment by employees. During 1998, 69 employees attended 151 seminars,
schools or conferences. In addition, 71 employees utilized a weekly video
tape service to enhance their skills and knowledge of banking issues. Two
employees, Paula Bellows and Gina Boor, were specially recognized because they
viewed every video, requiring a commitment of nearly 110 hours of their
personal time.
Although no changes occurred in corporate board members, we were pleased to
welcome two new local board members. Michael Yanuzzi, part owner and operator
of his family business, Yanuzzi Restaurant in South Waverly, New York, joined
the Sayre local board. William Watkins, who owns Hess Farm Equipment with his
wife Barb, joined the Canton local board. Both bring a real sense of
community and business knowledge to their respective local boards, and will
assist us greatly in serving our customers and the needs of each marketplace.
building program
In recent weeks, we were fortunate to acquire a two-acre parcel of land
adjacent to the Wal-Mart store south of Mansfield. This parcel houses a
relatively new and nicely constructed 6,000 square foot building facility.
Use of the building will allow us to eliminate the two rented facilities
currently housing 18 employees. Furthermore, it will afford us plenty of room
to locate employees by workgroups, improving efficiency and reducing
disruptions caused by distance. We expect to add to this facility to
accommodate our data processing and operations departments.
Tentative plans call for the main office building in the center of Mansfield
to undergo some much needed renovation. The exterior will undergo changes to
make it appear more aesthetically pleasing. The changes will improve energy
efficiency and reduce maintenance cost. The interior will change dramatically
- - not only due to the "facelift" but also because we will enhance customer
service, offer opportunities to demonstrate new services and significantly
improve the area where lending, trust and investment and banking services are
available.
We are excited about the recent developments on this project and will have
much more information to share with you in our first quarter financial report
for 1999 and our annual meeting in April.
conclusion
Each year seems to be characterized by noticeable successes, as well as unique
challenges. Your board of directors with the support of each local board and
all employees are committed to finding opportunities within the never-ending
challenges. There is a great sense of fulfillment when capitalizing on such
opportunities extends the successful record we have enjoyed over the years.
As a final thought, I have found shareholders to be great ambassadors of this
corporation. Such shareholder loyalty and support are instrumental to our
success. Please continue to encourage others to utilize First Citizens
National Bank whenever the opportunity arises.
Sincerely,
/s/ Richard E. Wilber
Richard E. Wilber
President
<PAGE>
<4>
___________________________________________________________________________
[GRAPHIC OMITTED: Photograph of First Citizens National Bank's MasterMoney
Card, left middle of page, approximately 2 inches length by 3.25" wide]
___________________________________________________________________________
[GRAPHIC OMITTED: personal computer address line in which the location reads
http://www.firstcitizensbank.com/, near bottom right of page, approximately
one-half inch length by 5 inches wide]
___________________________________________________________________________
"First Citizens completed internal Year 2000 testing of its systems in
November 1998..."
___________________________________________________________________________
Our Relationship with our Customers
Builds Trust and Confidence
First Citizens National Bank is not passively waiting for the future to
dictate the materials used to build our customers' trust and confidence.
Aggressively implementing new ideas and technologies, the bank's leaders are
meeting the changing habits and needs of First Citizens' customers.
With the increased pace of life and all the new technologies available, our
customers needed more immediate access to our banking options. Early in 1998,
First Citizens customers began to actively use our new Bank-by-Phone service.
Our customers are able to access their accounts 24 hours a day by dialing
1-888-HLP-FCNB. Regardless of a customer's schedule, information on their
accounts is available when they need it.
Because customers want more convenient, yet secure, ways to access their
accounts, First Citizens also launched its MasterMoney card. Our customers
use this combination ATM/debit card in place of cash or checks at over 14
million locations worldwide where the MasterCard logo is displayed. As of the
end of 1998, nearly 2,500 First Citizens customers carried the MasterMoney
card. This enthusiastic response translated into an average of 3,633
transactions per month.
Another service First Citizens implemented to meet the individual needs of our
customers was to premiere Phase I of the First Citizens website. This
informational site is just the beginning of our vision for an interactive,
community centered resource. Currently, our website offers financial news,
lending rates, a mortgage calculator and a variety of links to financial
organizations such as the IRS, the FDIC and the Pennsylvania Bankers
Association. Embracing the growth in Internet use, First Citizens plans to
pursue the incorporation of PC banking as part of our website offerings.
With an estimated increase in on-line banking usage to 21% by the year 2000,
PC banking is one way to reach more customers and increase our service
offerings to our existing customers. We anticipate that our account holders
will be able to view their accounts, make transfers between eligible First
Citizens accounts, request copies of statements and more.
Our web vision extends past the predictable as we endeavor to incorporate
other community addresses to create a one-stop local site that feeds all of
the information needs of our customers. Links to local Chamber of Commerce
and borough sites would include areas for community events, church schedules,
births, news, banking services, sporting events, shopping, advertising, school
closings, etc. Watch for our progress at our address above.
<PAGE>
<5>
___________________________________________________________________________
[GRAPHIC OMITTED: Photograph of the Philip Prough, Trust and Investment
Services Officer with customer Maurice Harman, bottom right third of page,
approximately 3.5 inches length by 5 inches wide]
___________________________________________________________________________
Customer Maurice Harman reviews investment information with Trust and
Investment Services Officer Philip Prough
___________________________________________________________________________
"I wanted something local"
Maurice Harman served as controller at Ward Manufacturing in Blossburg for 24
years. He wanted to be sure that after his retirement, he had easy access to
his investments. So, he set up a self-directed IRA at First Citizens. "I
felt I wanted something in the area - something local," said Herman, who began
dealing with the First Citizens' Trust and Investment Services Department in
the 1980s. "If I want money transferred, I can just make a local phone call
and I'm in business." Harman describes the staff of the Trust and Investment
Services Department as "very good, very accommodating." On more than one
occasion, they have "come up with suggestions" that helped him get the most
out of his investment.
___________________________________________________________________________
Serving our customers has never been more important than with the approach of
the Year 2000 (Y2K). Helping our customers become more aware of the Y2K
programming issue, First Citizens has been advising our business customers to
plan and prepare for the millennium date change. By providing loan
assistance, preparation checklists and referral services to our commercial
clients, First Citizens is once again branching outside the predictable
services offered by a banking institution. Our definition of helping our
customers to be successful includes reaching out a helping hand to combat the
millennium bug.
While assisting our customers to plan and prepare for the millennium change,
First Citizens has been conducting its own internal testing for the past two
years. In 1997, First Citizens installed Year 2000 compliant core operating
software from Jack Henry and Associates (JHA) and hardware systems from IBM.
The JHA Silverlake System Software was certified by the Information Technology
Association of America (ITAA) on March 16, 1998 while the IBM AS/400 unit
received the first-ever Year 2000 certification by ITAA. First Citizens
successfully completed internal testing and validation of those primary
mission critical systems in November 1998.
First Citizens' Trust and Investment Services Division is also a demonstration
of our effort to meet the financial needs of our customers. While investment
firms are singularly focused, First Citizens' Trust and Investment Services
Division cares for our customers' entire financial situation.
The volume of financial information now available via the Internet and other
sources has the potential to be overwhelming. To use this information to the
best advantage, information often needs interpretation and the benefit of
experience. In a 1996 Dalbar survey, 83% of investors ranked education as the
primary expectation of their financial advisor. Without education and good
advice, the financial investments of our customers and our community could be
in jeopardy.
With Trust, Estate planning, individual and corporate investing services,
First Citizens' Trust and Investment Services Division was created as much to
inform and educate as to serve our customers. First Citizens feels that solid
personal and corporate investing provides the solid foundation on which our
community builds and grows.
<PAGE>
<6>
___________________________________________________________________________
[GRAPHIC OMITTED: photograph of Jim Wagner, Ulysses local board member,
bottom left side of page, approximately 3.5 inches length by 3 inches wide]
___________________________________________________________________________
[GRAPHIC OMITTED: Photograph of Wagner True Value, a business owned by Jim
Wagner, bottom right of page, approximately 1.5 inches by 2.5 inches wide]
___________________________________________________________________________
Jim Wagner pictured (left) in his Coudersport True Value Store, has been a
local director for the Ulysses community office for twelve years. Phil
Vaughn, Ulysses community office manager, states, "Jim is an excellent
representative of First Citizens and is very helpful with customer
development. His presence now in Coudersport is a real asset to our community
office and its business development effort."
Carrying on an 85-year-old business previously owned by his grandfather and
father, Jim expanded the Wagner True Value business in Ulysses (below) with
the purchase of Frederick True Value Hardware in Coudersport.
Jim also finds time for many community activities. He is chairman of the
Ulysses Municipal Authority, member of the Allegheny Good Time Singers and he
and his wife, Carolyn, are Deacons and choir members of the Ulysses First
Baptist Church.
___________________________________________________________________________
"Our commitment to our customers and our community enables us to rise above
the competition of larger banks..."
___________________________________________________________________________
Our Relationship with Our Community
Builds a Better Place for Everyone to Live
Our reputation as a community-driven, hometown bank is the cornerstone of our
foundation. In today's climate of mergers and acquisitions, First Citizens
continues to solidify its commitment to remain a key community support. Our
commitment, along with the active support of our community, allows us to grow
and mature as a financial institution, enabling us to rise above the
competition of larger corporate banks.
As members of the communities we serve, it is First Citizens' responsibility
to help our customers succeed through personal and business lending. First
Citizens is a flexible lender who does not exclusively use a strict formula to
make a lending decision. A one-size-fits-all method of lending would not
serve our customers. A First Citizens loan officer looks at alternative
methods to make a loan work and to say "yes" to our customers' loan needs.
As the new millennium approaches and the information age continues, First
Citizens is taking a proactive approach to shoring up its foundation for a
strong financial community. Our visioning team embraces the evolution of
banking into a broader, customer-driven, financial center. Statistics show
that consumers get their financial information from a diverse group of
resources such as TV/radio, finance magazines, investment advisors,
Internet/on-line services, libraries, reference books and newspapers. Welcome
to the First Citizens of the new millennium where we will be a one-stop
financial resource. We envision Internet access, a financial library, a
meeting place for local business people to gather and plan for the benefit of
the entire community. Shared knowledge is the most valuable resource of the
new millennium. We encourage and support this principle and want to actively
participate by providing a place to encourage the sharing of knowledge.
<PAGE>
<7>
___________________________________________________________________________
[GRAPHIC OMITTED: Photograph of Tim Gooch, Wellsboro local board member,
right hand side of page, approximately 4.25 inches length by 2.75 inches wide]
___________________________________________________________________________
Tim Gooch (right) has been a board member for the Wellsboro community office
since 1995. Wellsboro office manager, Jeff Wilson, states, "Tim's involvement
with the community and its businesses has been a driving force in the business
development efforts of the Wellsboro office. His referrals, forward thinking
and accounting expertise are an important asset in the continued growth of
First Citizens."
A certified public accountant and stockholder at the accounting firm,
Pennypacker and Gooch, P.C. in Wellsboro, Tim enjoys being involved with First
Citizens.
"If we can not only become involved but see a chance to improve, we have to
seize the opportunity to make ourselves and the bank better," says Tim. "We,
as a bank, have to be prepared to be more responsive, more creative, and
better prepared to meet our existing and potential customers' needs.
Satisfied customers are better than any sales force we can possibly hire at
any cost."
Tim and his wife, Rhonda, along with their two children are very involved with
community events including Tim's service as President of the Wellsboro Area
Chamber of Commerce.
___________________________________________________________________________
[GRAPHIC OMITTED: Photograph of Don White, Troy local board member, center,
left side of page, approximately 3.5 inches by 3 inches wide]
___________________________________________________________________________
Don White (left) has been a local board member for the Troy community office
since 1991. Kip Carlson, Troy office manager, says, "Don has been a member of
our community for a long time and his reputation as a well respected
businessman is unquestioned. We are very fortunate that Don is always
prepared to help us in our efforts to grow First Citizens. In fact, I would
guess that we receive more referrals for commercial business from Don than
from any other source."
An accountant, Don has owned and operated his own business since 1979
providing accounting, tax and payroll services to a wide variety of
businesses. Don views his involvement with First Citizens as an extension of
his business services. "Recommending First Citizens is easy because I know
they will do their best to meet the needs of those that I send their way. "
Together with his wife, Barbara, Don resides in Troy and is active in numerous
community and professional organizations.
___________________________________________________________________________
[GRAPHIC OMITTED: Photograph of John Hyslip, Genesee local board member and
his son, Jeff, bottom right hand side of page, approximately 2.75 inches
length by 3.5 inches wide]
___________________________________________________________________________
John "Jack" Hyslip has been a local board member for the Genesee community
office for nearly six years. Bill Austin, Genesee community office manager,
states, "Jack is very aggressive in making referrals to First Citizens because
he knows that First Citizens is indeed a community bank where customer service
is our biggest priority. Jack stops in the office a couple of times a week
just to see if there is anything that he can help with. A large deposit and
loan customer stated that it was the integrity of Jack Hyslip which brought
him to do business with First Citizens."
Jack believes and will tell others that at First Citizens, the customer is not
a number but an individual. He believes it is this customer service and
attention to the customer's individual needs, in a friendly and personal
manner, which will continue to bring residents from north of the border to the
Genesee office.
Jack owns and operates five car washes located in Wellsville, Portville and
Olean. He is also active in the wholesaling of used cars. Jack and his wife,
Marilyn, reside in Wellsville. He is pictured here with co-owner and son,
Jeff.
<PAGE>
<8>
___________________________________________________________________________
"Our employees take satisfaction in seeing their work play an important part
in the success of the community in which they live..."
___________________________________________________________________________
First Citizens' Degrees Earned - American Financial Skylink Education Program
Guy Abell, Associates Degree, Paula Bellows, Associates, Bachelors, Masters, 2
Doctorate Degrees, Gina Boor, Associates, Bachelors, Masters, 2 Doctorate
Degrees, Irene Douglass, Associates Degree, Paula Johnson, Associates and
Bachelor Degrees, Deb Kjellander, Associates Degree, Connie Mattison,
Associates Degree, Chris Miller, Associates Degree, Nancy Oldroyd, Associates
Degree, Cindy Pazzaglia, Associates and Bachelor Degrees, H. Kay Shedden,
Associates Degree
____________________________________________________________________________
Our Relationship with Our Employees
is the Foundation on Which We Build
Residents of a productive rural area understand that the key to building a
better community is the interdependence of its neighbors, its businesses, and
its financial institution. Helping to draw all of these players together are
the employees of First Citizens National Bank.
First Citizens' account managers have a stake in the ongoing financial success
of their customers. Our neighbors, our friends, our community leaders are
the customers we serve.
In an effort to empower our employees to better serve our customers, First
Citizens continues to invest in educational opportunities. In 1998, 69
employees attended a combined total of 151 seminars, schools and American
Institute of Banking classes. First Citizens also continues to participate in
the American Financial Skylink education program. Skylink is presented on
video by top professionals in the banking field. Owned and operated by and
for bankers, it is the first network of its kind providing the latest and most
up-to-date banking information available. To earn various Skylink degrees,
employees volunteer their time from 15 to 110 hours to increase their skills
in areas such as management, trust, security and risk, lending, human
resources, and marketing.
It is our employees' professional duty not to tell our customers why it can't
be done, but how it can. Every piece of their work, no matter how big or
small, is important; they are proud of their work. They want the satisfaction
of seeing their work play an important part in our customers' success and the
success of the community in which we live.
Fifty percent of our employees have been with us for over five years. These
experienced employees have a keen understanding of the bank, its services, the
community and the customers they serve, providing a solid foundation for our
growth.
<PAGE>
<9>
___________________________________________________________________________
[GRAPHIC OMITTED: Photograph of First Citizens National Bank employees being
recognized for years of service at the Company's Christmas party, top left
and center of page, approximately 3 inches length by 4.5 inches wide]
___________________________________________________________________________
Employees Recognized for Years of Service
First row shown from left are: Cindy Estep (15 years), Roxy LeBlanc (20
years), Nancy Stanton (20 years), and Agnes Worden (35 years). Second row:
Kristina Payne (10 years), Kim Chaapel (5 years), Mary Brooks (15 years),
Cindy Pazzaglia (15 years), and Eileen Page (5 years). Third row: Pam
Baldwin (5 years), Jan Pinkney (5 years), Mary Brook (5 years), Chet Reed (10
years), Tom Lyman (10 years), and Guy Abell (5 years). Not pictured are:
Paula Bellows (5 years), Randy Black (5 years), Laurie Copas (5 years), Alan
Hoover (5 years), Ruth Wilkinson (5 years), Sandy Baker (10 years), Chris
Miller (10 years), Bonney Welch (10 years), Shirley Whipple (15 years) and
Sherry Cornell (20 years).
___________________________________________________________________________
[GRAPHIC OMITTED: Photograph of the Corporation's President presenting a
plaque to an employee of the Corporation, left side of page, approximately,
2.5 inches square]
___________________________________________________________________________
Valerie S. Davis - 1998 Employee of the Year. Hired in 1989, Valerie has
consistently shown a willingness to work while maintaining her cheerful
disposition. As an Assistant Credit Services Manager, Valerie is shown here
accepting her plaque from President Dick Wilber, who comments that "Valerie
handles all customer contacts with an air of professionalism yet all the while
projecting understanding and concern."
___________________________________________________________________________
[GRAPHIC OMITTED: Photograph of the Corporation's President presenting a
plaque to an employee of the Corporation, center of page, approximately 2.5
inches square]
___________________________________________________________________________
Katie E. Brown - 1998 Employee of the Year. As a Customer Service Counselor
I, Katie exhibits outstanding dedication and concern for her customers. She
is shown here accepting her plaque from President Dick Wilber, who describes
her as have a "desire to serve customers to the fullest."
___________________________________________________________________________
[GRAPHIC OMITTED: Photograph of Jerald Rumsey, Senior Vice President, top
right of page, approximately 2 inches square]
___________________________________________________________________________
Senior Vice President Retiring in '99. Jerald J. Rumsey began working for
First Citizens' predecessor, the former First National Bank of Mansfield, when
he was 23 years old and fresh out of the Marine Corps.
He started as a bookkeeper but took on new roles as opportunities arose: head
bookkeeper, assistant cashier, and assistant loan officer. When the bank
became First Citizens in 1970, Rumsey was named Mansfield branch manager and
Assistant Vice President.
Rumsey will retire this year at the age of 62, vacating his current position
as Senior Vice President and Credit Service Manager. First Citizens total
assets are now more than 60 times the size of the holdings of the bank where
he began his career.
"I've always enjoyed most everything I did." Rumsey says. "The nice part is
meeting a lot of people, making a lot of friends."
Many changes have swept through the banking industry in the past several
decades - compliance and regulatory changes, adjustable rate mortgages,
information technology. But Rumsey points to relationships with customers and
bank employees as highlights of his career, and he will leave the bank with a
high regard for its directors.
"Over the years, we've had an excellent board of directors," he says. "Their
goal is what it has always been - for the bank to remain independent."
Typically, he says, the board has made decisions based on the long-term good
of the bank, its customers and employees, rather than trying to turn a quick,
short-term profit.
___________________________________________________________________________
<PAGE>
<10>
Our Relationship with Our Shareholders Builds Security for Our Customers, Our
Community and Our Employees
First Citizens' financial partners share and support our vision for the future
by providing the investment we need to embrace the challenges and
opportunities of the new millennium.
We currently have 1,477 shareholders and 2,773,434 shares outstanding.
Nearly 80% of our shareholders live in the market area served by First
Citizens. Our shareholders benefit from direct communication with our
directors and employees as well as from our upgraded shareholder service
programs. For example, since offering direct deposit for the quarterly cash
dividend disbursements in October 1997, over 370 shareholders have
participated to date. Also in 1997, First Citizens converted our shareholder
accounting process to a new software system allowing more efficient processing
and incorporating many new features. Upholding our service ethic, First
Citizens also continues to act as its own transfer agent to assure that our
shareholders have quick access to answers about their stock holdings.
First Citizens' commitment to keeping our bank financially strong is the key
to sustaining shareholder confidence and averting the threat of a corporate
merger. The success of our financial commitment to our shareholders is
reflected by the compound annual return as shown below (the return
incorporates all cash dividends and stock dividends over the respective time
periods).
20 Years 16.71%
10 Years 16.01%
5 Years 27.63%
As always, First Citizens remains alert for new opportunities that may arise
within a very challenging financial services business.
The relationships we have and continue to build with our customers, our
communities, our employees and our shareholders allows us to confidently
embrace the new millennium; building upon our solid foundation to create a
better and more secure place for all of us to live and work.
<PAGE>
<11>
___________________________________________________________________________
[GRAPHIC OMITTED: Watermark silhouette of colonial rider on horseback
___________________________________________________________________________
1998 Annual Report
Financial Highlights
in thousands, except per share data
1998 1997
Balance Sheet
Assets $313,564 $294,811
Deposits 274,193 256,783
Net Loans 203,583 189,910
Investments 93,082 88,562
Stockholders' Equity 28,598 25,923
Statement of Income
Interest Income 23,088 22,779
Interest Expense 11,920 11,610
Net Interest Income 11,168 11,169
Net Income 3,489 3,832
Per Share Data
Net Income 1.26 1.38
Cash Dividends .520 .355
Trust and Investment
Services
Trust Assets Managed 69,095 66,104
<PAGE>
<12>
___________________________________________________________________________
[GRAPHIC OMITTED: Silhouette of colonial rider on horseback, upper left hand
corner of page, .5 inches square]
___________________________________________________________________________
Financial Highlights
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
[GRAPHICS OMITTED: Six bar charts depicting: 1. total assets, 2. net
income, 3. stockholders' equity, 4. deposits, 5. net loans, and 6. cash
dividendS paid, each from 1994 to 1998. Tabular representation of those graphs
are set forth as follows:
TOTAL ASSETS
(Dollars in Thousands)
1994 1995 1996 1997 1998
$232,537 $247,094 $282,810 $294,811 $313,564
NET INCOME
(Dollars in Thousands)
1994 1995 1996 1997 1998
$2,625 $2,834 $3,003 $3,832 $3,489
STOCKHOLDERS' EQUITY
(Dollars in Thousands)
1994 1995 1996 1997 1998
$18,903 $21,297 $22,904 $25,923 $28,598
DEPOSITS
(Dollars in Thousands)
1994 1995 1996 1997 1998
$194,478 $213,316 $240,177 $256,783 $274,193
NET LOANS
(Dollars in Thousands)
1994 1995 1996 1997 1998
$154,848 $159,794 $180,418 $189,910 $203,583
CASH DIVIDENDS PAID
(Dollars in Thousands)
1994 1995 1996 1997 1998
$1,056 $1,121 $1,187 $1,596 $1,449]
___________________________________________________________________________
<PAGE>
<13>
___________________________________________________________________________
CONSOLIDATED BALANCE SHEET
December 31, 1998 and 1997
___________________________________________________________________________
Nineteen hundred ninety-eight Annual Report
___________________________________________________________________________
(in thousands)
1998 1997
ASSETS:
Cash and due from banks:
Noninterest-bearing $ 7,175 $ 6,100
Interest-bearing deposits with banks 130 243
Total cash and cash equivalents 7,305 6,343
Available-for-sale securities 93,082 24,827
Held-to-maturity securities (estimated market
value 1997,$64,490) - 63,735
Loans (net of allowance for loan losses
1998, $2,292; 1997, $2,138) 203,583 189,910
Foreclosed assets held for sale 529 238
Premises and equipment 5,606 5,754
Accrued interest receivable 2,188 2,426
Other assets 1,271 1,578
TOTAL ASSETS $313,564 $294,811
LIABILITIES:
Deposits:
Noninterest-bearing $ 20,978 $ 19,016
Interest-bearing 253,215 237,767
Total deposits 274,193 256,783
Borrowed funds 7,334 6,864
Accrued interest payable 2,363 2,331
Commitment to purchase investment securities - 1,981
Other liabilities 1,076 929
TOTAL LIABILITIES 284,966 268,888
STOCKHOLDERS' EQUITY:
Common Stock
$1.00 par value; authorized 10,000,000
shares in 1998 and 5,000,000 shares in
1997; issued and outstanding 2,773,434
and 2,746,564 shares in 1998 and 1997,
respectively 2,773 2,746
Additional paid-in capital 7,913 7,181
Retained earnings 16,934 15,653
TOTAL 27,620 25,580
Accumulated other comprehensive income 978 343
TOTAL STOCKHOLDERS' EQUITY 28,598 25,923
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $313,564 $294,811
See notes to consolidated financial statements.
<PAGE>
<14>
___________________________________________________________________________
[GRAPHIC OMITTED: Silhouette of colonial rider on horseback, upper left hand
corner of page, .5 inches square]
___________________________________________________________________________
CONSOLIDATED STATEMENT OF INCOME
Years Ended December 31, 1998, 1997 and 1996
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
<TABLE>
(in thousands, except per share data) 1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $17,652 $17,174 $15,817
Interest-bearing deposits with banks 290 221 148
Investment securities:
Taxable 4,550 5,250 5,238
Nontaxable 492 52 66
Dividends 104 82 72
TOTAL INTEREST INCOME 23,088 22,779 21,341
INTEREST EXPENSE:
Deposits 11,482 11,107 10,276
Borrowed funds 438 503 591
TOTAL INTEREST EXPENSE 11,920 11,610 10,867
NET INTEREST INCOME 11,168 11,169 10,474
Provision for loan losses 218 210 205
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,950 10,959 10,269
OTHER OPERATING INCOME:
Service charges 1,060 848 844
Trust 362 339 270
Realized securities gains, net 457 25 19
Other 304 246 258
Arbitration settlement 112 994 -
TOTAL OTHER OPERATING INCOME 2,295 2,452 1,391
OTHER OPERATING EXPENSES:
Salaries and employee benefits 3,848 3,882 3,418
Occupancy 522 519 466
Furniture and equipment 713 706 599
Professional fees 401 219 198
Federal deposit insurance premiums 56 56 372
Other 2,674 2,524 2,297
TOTAL OTHER OPERATING EXPENSES 8,214 7,906 7,350
Income before provision for income
taxes and extraordinary item 5,031 5,505 4,310
Provision for income taxes 1,401 1,673 1,307
Income before extraordinary item 3,630 3,832 3,003
Extraordinary item:
Loss on extinguishment of debt, net of related taxes of $72 141 - -
NET INCOME $ 3,489 $ 3,832 $ 3,003
EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEM $ 1.31 $ 1.38 $ 1.08
EARNINGS PER SHARE $ 1.26 $ 1.38 $ 1.08
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<15>
___________________________________________________________________________
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
___________________________________________________________________________
Nineteen hundred ninety-eight Annual Report
___________________________________________________________________________
<TABLE>
Accumulated
Additional Other
(in thousands, Common Stock Paid-in Retained Comprehensive
except per share data) Shares Amount Capital Earnings Income Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 1,347,323 $1,347 $6,512 $13,089 $349 $21,297
Comprehensive income:
Net income 3,003 3,003
Change in net unrealized gain (loss) on securities
available-for-sale, net of taxes of $(91) (177) (177)
Total comprehensive income 2,826
Stock dividend 12,905 13 316 (329)
Cash dividends, $.44 per share (1,219) (1,219)
($.445 per share on a historical basis)
Balance, December 31, 1996 1,360,228 1,360 6,828 14,544 172 22,904
Comprehensive income:
Net income 3,832 3,832
Change in net unrealized gain (loss) on securities
available-for-sale, net of taxes of $88 171 171
Total comprehensive income 4,003
Stock dividend 13,054 13 353 (366)
Stock split in the form of a dividend 1,373,282 1,373 (1,373) -
Cash dividends, $.355 per share (984) (984)
($.355 per share on a historical basis)
Balance, December 31, 1997 2,746,564 2,746 7,181 15,653 343 25,923
Comprehensive income:
Net income 3,489 3,489
Change in net unrealized gain (loss) on securities
available-for-sale, net of taxes of $327 635 635
Total comprehensive income 4,124
Stock dividend 26,870 27 732 (759)
Cash dividends, $.52 per share (1,449) (1,449)
Balance, December 31, 1998 2,773,434 $2,773 $7,913 $16,934 $978 $28,598
</TABLE>
1998 1997 1996
Components of comprehensive income:
Change in net unrealized gain on investment
securities available-for-sale $937 $188 $(164)
Realized gains included in net income,
net of tax (302) (17) (13)
Balance, end of year $635 $171 $(177)
See notes to consolidated financial statements.
<PAGE>
<16>
___________________________________________________________________________
[GRAPHIC OMITTED: Silhouette of colonial rider on horseback, upper left hand
corner of page, .5 inches square]
___________________________________________________________________________
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
<TABLE>
(in thousands) 1998 1997 1996
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 3,489 $ 3,832 $ 3,003
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 218 210 205
Provision for depreciation and amortization 761 588 442
Amortization and accretion on investment securities 358 368 362
Deferred income taxes (4) 59 36
Realized gains on securities (475) (25) (19)
Realized gains on loans sold (63) (19) (23)
Originations of loans held for sale (3,817) (1,152) (1,639)
Proceeds from sales of loans held for sale 3,880 1,171 1,662
Gain on sales or disposals of premises and equipment (1) - -
Losses (Gains) on sales of foreclosed assets held for sale 2 (10) (50)
Decrease (increase) in accrued interest receivable
and other assets 436 859 (487)
(Decrease) increase in accrued interest payable and
other liabilities (147) (40) 253
Net cash provided by operating activities 4,637 5,841 3,745
Cash Flows from Investing Activities:
Available-for-sale securities:
Proceeds from sales of securities 23,243 5,588 16
Proceeds from maturities of securities 8,786 5,900 2,000
Purchases of securities (35,444) (7,503) (9,682)
Held-to-maturity securities:
Proceeds from maturities and
principal repayments of securities 7,440 7,716 8,108
Purchases of securities (9,445) (12,311) (13,395)
Net increase in loans (14,242) (9,914) (17,361)
Purchase of loans - - (3,659)
Capital expenditures (504) (1,638) (539)
Proceeds from sale of premises and equipment 1 - -
Proceeds from sale of foreclosed assets held for sale 59 148 285
Property purchased for future expansion - - (250)
Deposit acquisition premium - - (1,018)
Net cash used in investing activities (20,106) (12,014) (35,495)
Cash Flows from Financing Activities:
Net increase in deposits 17,410 16,606 9,731
Proceeds from long-term borrowings 956 2,056 1,166
Repayments of long-term borrowings (2,850) (2,146) (1,050)
Net increase (decrease) in short-term borrowed funds 2,364 (8,863) 6,846
Dividends paid (1,449) (1,596) (1,187)
Deposits of acquired branches - - 17,130
Net cash provided by financing activities 16,431 6,057 32,636
Net increase (decrease) in cash and cash equivalents 962 (116) 886
Cash and Cash Equivalents at Beginning of Year 6,343 6,459 5,573
Cash and Cash Equivalents at End of Year $ 7,305 $ 6,343 $ 6,459
Supplemental Disclosures of Cash Flow Information:
Interest paid $11,889 $11,572 $10,680
Income taxes paid $ 1,380 $ 1,645 $ 1,310
Noncash activities:
Real estate acquired in settlement of loans $ 351 $ 212 $ 191
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<17>
___________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
Nineteen hundred ninety-eight Annual Report
___________________________________________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Citizens Financial Services, Inc. (individually and collectively, the
"Company") is a Pennsylvania corporation organized as the holding company of
its wholly-owned subsidiary, First Citizens National Bank (the "Bank"). The
Bank is a national banking association headquartered in Mansfield,
Pennsylvania and operating ten full-service banking offices in Potter, Tioga
and Bradford counties. The Bank provides a comprehensive range of services
including consumer loans, residential real estate loans, commercial loans, and
loans to various state and municipal entities. Deposit programs encompass the
full range of consumer as well as commercial checking and savings accounts.
Deposit products also include certificates of deposit and individual
retirement accounts. A comprehensive menu of trust and investment services
are also available. The Company's principal sources of revenue are derived
from its loan and investment portfolios. The Company is supervised by the
Board of Governors of the Federal Reserve System, while the Bank is subject to
regulation and supervision by the Office of the Comptroller of the Currency.
A summary of significant accounting and reporting policies applied in the
presentation of the accompanying financial statements follows:
BASIS OF PRESENTATION
The accounting policies followed by the Company and the methods of applying
these principles conform with generally accepted accounting principles and
with general practice within the banking industry. All material intercompany
balances and transactions have been eliminated in consolidation. 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.
INVESTMENT SECURITIES
Investment securities are classified as one of the three following types:
Held-to-Maturity Securities - includes securities that the Company has the
positive intent and ability to hold to maturity. These securities are reported
at amortized cost.
Trading Securities - includes debt and equity securities bought and held
principally for the purpose of selling them in the near term. Such securities
are reported at fair value with unrealized holding gains and losses included
in earnings. The Company had no trading securities as of December 31, 1998 and
1997.
Available-for-Sale Securities - includes debt and equity securities not
classified as held-to-maturity or trading securities. Such securities are
reported at fair value, with unrealized holding gains and losses excluded from
earnings and reported as a separate component of stockholders' equity, net of
estimated income tax effect.
The amortized cost of investment in debt securities is adjusted for
amortization of premiums and accretion of discounts, computed by a method that
approximates the effective interest method. Gains and losses on the sale of
investment securities are computed on the basis of specific identification of
the adjusted cost of each security.
Common stock of the Federal Reserve Bank and Federal Home Loan Bank
represents ownership in institutions which are wholly owned by other financial
institutions. These equity securities are accounted for at cost and are
classified as restricted equity securities available-for-sale.
The fair value of investments, except certain state and municipal securities,
is estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers. The fair value of certain state
and municipal securities is not readily available through market sources other
than dealer quotations, so fair value estimates are based on quoted market
prices of similar instruments, adjusted for differences between the quoted
instruments and the instruments being valued.
<PAGE>
<18>
___________________________________________________________________________
[GRAPHIC OMITTED: Silhouette of colonial rider on horseback, upper left hand
corner of page, .5 inches square]
___________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
LOANS
Interest on installment loans originated after 1992 is recognized on the
accrual basis based upon the principal amount outstanding. Interest on
installment loans originated before 1993 is recognized on the accrual basis
using a method which approximates the interest method. Interest income on all
other loans is recognized on the accrual basis based upon the principal amount
outstanding. The accrual of interest income on loans is discontinued when, in
the opinion of management, there exists doubt as to the ability to collect
such interest. Loans are returned to the accrual status when factors
indicating doubtful collectibility cease to exist.
The Company recognizes nonrefundable loan origination fees and certain direct
loan origination costs over the life of the related loan as an adjustment of
loan yield using the interest method.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents the amount which management estimates
is adequate to provide for potential losses in its loan portfolio. The
allowance method is used in providing for loan losses. Accordingly, all loan
losses are charged to the allowance and all recoveries are credited to it. The
allowance for loan losses is established through a provision for loan losses
which is charged to operations. The provision is based upon management's
periodic evaluation of individual loans, the overall risk characteristics of
the various portfolio segments, past experience with losses, the impact of
economic conditions on borrowers, and other relevant factors. The estimates
used in determining the adequacy of the allowance for loan losses are
particularly susceptible to significant change in the near term.
Impaired loans are commercial and commercial real estate loans for which it is
probable that the Company will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The Company
individually evaluates such loans for impairment and does not aggregate loans
by major risk classifications. The definition of "impaired loans" is not the
same as the definition of "nonaccrual loans," although the two categories
overlap. The Company may choose to place a loan on nonaccrual status due to
payment delinquency or uncertain collectibility, while not classifying the
loan as impaired if the loan is not a commercial or commercial real estate
loan. Factors considered by management in determining impairment include
payment status and collateral value. The amount of impairment for these types
of impaired loans is determined by the difference between the present value of
the expected cash flows related to the loan, using the original interest rate
and its recorded value, or, as a practical expedient in the case of
collateralized loans, the difference between the fair value of the collateral
and the recorded amount of the loans. When foreclosure is probable, impairment
is measured based on the fair value of the collateral.
Mortgage loans on one- to four-family properties and all consumer loans are
large groups of smaller balance homogeneous loans and are measured for
impairment collectively. Loans that experience insignificant payment delays,
which is defined as 90 days or less, generally are not classified as impaired.
Management determines the significance of payment delays on a case-by-case
basis, taking into consideration all of the circumstances surrounding the loan
and the borrower, including the length of the delay, the borrower's prior
payment record, and the amount of shortfall in relation to the principal and
interest owed.
FORECLOSED ASSETS HELD FOR SALE
Foreclosed assets acquired in settlement of foreclosed loans are carried at
the lower of fair value minus estimated costs to sell or cost. Prior to
foreclosure, the value of the underlying loan is written down to fair market
value of the real estate or other assets to be acquired by a charge to the
allowance for loan losses, if necessary. Any subsequent write-downs are
charged against operating expenses. Operating expenses of such properties, net
of related income and losses on disposition, are included in other expenses
and gains are included in other income.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Repair and maintenance expenditures which extend the useful life of an asset
are capitalized and other repair expenditures are expensed as incurred.
<PAGE>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
___________________________________________________________________________
Nineteen hundred ninety-eight Annual Report
___________________________________________________________________________
When premises or equipment are retired or sold, the remaining cost and
accumulated depreciation are removed from the accounts and any gain or loss is
credited or charged to income. Depreciation expense is computed on the
straight-line and accelerated methods over the estimated useful lives of the
assets.
OTHER ASSETS
Goodwill is the excess of the purchase price over the fair value of net assets
of companies acquired through business combinations accounted for as
purchases. Included in other assets at December 31, 1998 and 1997 is $500,000
and $541,000, respectively, of goodwill that is being amortized using the
straight-line method over 15 years.
Core deposit intangibles are a measure of the value of consumer demand and
savings deposits acquired in business combinations accounted for as
purchases. Included in other assets at December 31, 1998 and 1997 is $227,000
and $295,000, respectively, of core deposit intangibles which are being
amortized on a straight-line basis over 6 years.
The recoverability of the carrying value of intangible assets is evaluated on
an ongoing basis and permanent declines in value, if any, are charged to
expense.
INCOME TAXES
The Company and the Bank file a consolidated federal income tax return.
Deferred tax assets and liabilities are computed based on the difference
between the financial statement and income tax basis of assets and liabilities
using the enacted marginal tax rates. Deferred income tax expenses or
benefits are based on the changes in the net deferred tax asset or liability
from period to period.
EMPLOYEE BENEFIT PLANS
The Company has a noncontributory pension plan covering substantially all
employees. It is the Company's policy to fund pension costs on a current basis
to the extent deductible under existing tax regulations. Such contributions
are intended to provide not only for benefits attributed to service to date,
but also for those expected to be earned in the future.
The Company also has a profit-sharing plan which provides tax-deferred salary
savings to plan participants.
MORTGAGE SERVICING RIGHTS (MSR's)
The Company has loan agreements for the express purpose of selling these loans
in the secondary market. The Company maintains all servicing rights for these
loans. The loans are carried at cost. Originated MSR's are to be recorded by
allocating total costs incurred between the loan and servicing rights based on
their relative fair values. MSR's are amortized in proportion to the
estimated servicing income over the estimated life of the servicing portfolio.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". In adopting
Statement No. 130, the Company is required to present comprehensive income and
its components in a full set of general purpose financial statements. The
Company has elected to report the effects of Statement No. 130 as part of the
Consolidated Statement of Changes in Stockholders' Equity.
NEW ACCOUNTING STANDARDS
Employer's Disclosures About Pension and Other Post Retirement Benefits
In February 1998, the Financial Accounting Standards Board issued SFAS No. 132
"Employer's Disclosures About Pensions and Other Post Retirement Benefits."
This Statement revises employers' disclosures about pension and other
post-retirement benefit plans. It does not change the measurement or
recognition of those plans. It standardizes the disclosure requirements for
pensions and other post-retirement benefits to the extent practicable,
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis, and eliminates
certain disclosures that are no longer useful as they were when "FASB
Statements No. 87, Employers' Accounting
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
for Pensions, No. 88, Employers' Accounting for Settlement s and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits, and No. 106,
Employers' Account for Post-Retirement Benefits Other Than Pensions," were
issued. This statement requires changes in disclosures and would not affect
the financial condition, equity or operating results of the Company. This Statem
ent is effective for the fiscal years beginning after December 15, 1997.
Accounting for Derivative Instrument and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge
of the exposure to variable cash flows of a forecasted transaction, or (c) a
hedge of certain foreign currency exposures. This statement becomes effective
for fiscal years beginning after December 15, 1998. Earlier adoption is
permitted. The Company adopted SFAS 133 in its fourth fiscal quarter of 1998,
including its provision for the potential reclassification of investments,
resulting in a $63,585,000 transfer of securities from held-to-maturity to
available-for-sale and an increase of $1,152,000 of unrealized gains, net of
taxes, on securities available-for-sale. The adoption of this statement did
not affect operating results of the Company.
PENDING ACCOUNTING STANDARDS
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This SOP, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on
accounting for the costs of computer software developed or obtained for
internal use and provides guidance for determining whether computer software
is for internal use. The Company will adopt SOP 98-1 in the first quarter of
1999 and does not believe the effect of adoption will be material.
CASH FLOWS
The Company utilizes the net reporting of cash receipts and cash payments for
deposit and lending activities. The Company considers amounts due from banks
and interest-bearing deposits in banks as cash equivalents.
TRUST ASSETS AND INCOME
Assets held by the Bank in a fiduciary or agency capacity for its customers
are not included in the consolidated financial statements since such items are
not assets of the Bank.
Trust income is reported on a cash basis, which is not materially different
from the accrual basis.
EARNINGS PER SHARE
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share"
effective in the fourth quarter of 1997. Statement No. 128 is designed to
simplify the computation of earnings per share and requires disclosure of
"basic earnings per share" and, if applicable, "diluted earnings per share."
Earnings per share calculations give retroactive effect to the issuances of
stock dividends declared by the Company. The number of shares used in the
earnings per share and dividends per share calculation was 2,773,434 for 1998,
1997, and 1996.
RECLASSIFICATION
Certain of the 1997 and 1996 amounts have been reclassified to conform with
the 1998 presentation. Such reclassifications had no effect on net income.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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Nineteen hundred ninety-eight Annual Report
___________________________________________________________________________
2. COMMON STOCK SPLIT
On August 19, 1997, the Board of Directors approved a two-for-one stock
split. The additional shares resulting from the split were effected in the
form of a 100% stock dividend. All references to the number of average common
shares and per share amounts for 1996 and prior years have been restated to
reflect the stock split.
3. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserves, in the form of cash and balances
with the Federal Reserve Bank, against its deposit liabilities. The amount of
such reserves was $1,845,000 and $1,314,000 at December 31, 1998 and 1997,
respectively.
Deposits with one financial institution are insured up to $100,000. The
Company maintains cash and cash equivalents with other financial institutions
in excess of the insured amount.
4. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities at
December 31, 1998 and 1997, were as follows (in thousands):
<TABLE>
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Fair
December 31, 1998 Cost Gains Losses Value
Available-for-sale securities:
U.S. Treasury securities $31,763 $1,000 $ - $32,763
Obligations of state and
political subdivisions 18,289 247 (84) 18,452
Corporate obligations 14,818 75 (4) 14,889
Mortgage-backed securities 23,112 67 (66) 23,113
Equity securities 2,271 413 (167) 2,517
Restricted equity securities 1,348 - - 1,348
Total available-for-sale $91,601 $1,802 $ (321) $93,082
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Fair
December 31, 1997 Cost Gains Losses Value
<S> <C> <C> <C> <C>
Held-to-maturity securities:
U.S. Treasury securities $46,922 $668 $ (24) $47,566
Obligations of state and
political subdivisions 5,533 78 - 5,611
Corporate obligations 3,160 16 (1) 3,175
Mortgage-backed securities 6,838 20 (2) 6,856
Total debt securities 62,453 782 (27) 63,208
Restricted equity securities 1,282 - - 1,282
Total held-to-maturity $63,735 $782 $ (27) $64,490
Available-for-sale securities:
U.S. Treasury securities $14,599 $355 $ (6) $14,948
Corporate obligations 6,837 17 (5) 6,849
Mortgage-backed securities 2,758 13 - 2,771
Equity securities 113 146 - 259
Total available-for-sale $24,307 $531 $ (11) $24,827
</TABLE>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
Proceeds from the sale of securities available-for-sale during 1998, 1997 and
1996 were $23,243,000, $5,588,000 and $16,000, respectively. Gross gains and
gross losses were realized on those sales as follows (in thousands):
1998 1997 1996
Gross Gains $475 $34 $19
Gross Losses 18 9 -
Net Gains $457 $25 $19
Investment securities with an approximate carrying value of $43,695,000 and
$47,457,000 at December 31, 1998 and 1997, respectively, were pledged to
secure public funds and certain other deposits as provided by law.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. The amortized cost and estimated carrying value of
debt securities at December 31, 1998, by contractual maturity, are shown below
(in thousands).
Estimated
Amortized Cost Fair Value
Available-for-sale securities:
Due in one year or less $13,518 $13,639
Due after one year through five years 41,716 42,723
Due after five years through ten years 14,540 14,537
Due after ten years 18,208 18,318
Total $87,982 $89,217
On October 1, 1998, the Company transferred certain held-to-maturity
securities to the available-for-sale investment portfolio. The amortized cost
of the securities was approximately $63,585,000, gain net of taxes of
approximately $1,152,000. This transfer was in accordance with a special
reassessment provision contained within Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which was adopted by the Company on October 1, 1998.
5. LOANS
The Company grants commercial, industrial, residential, and consumer loans
primarily to customers throughout Northcentral Pennsylvania and Southern New
York. Although the Company has a diversified loan portfolio, a substantial
portion of its debtors' ability to honor their contracts is dependent on the
economic conditions within this region.
Major classifications of loans are as follows (in thousands):
December 31,
1998 1997
Real estate loans:
Residential $127,053 $120,019
Commercial 27,164 27,480
Agricultural 9,266 8,769
Construction 5,234 3,035
Loans to individuals for household,
family and other purchases 14,489 13,905
Commercial and other loans 12,457 9,485
State and political subdivision loans 10,272 9,457
205,935 192,150
Less unearned income on loans 60 102
Less allowance for loan losses 2,292 2,138
Loans, net $203,583 $189,910
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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Nineteen hundred ninety-eight Annual Report
___________________________________________________________________________
At December 31, 1998 and 1997, net unamortized loan fees and costs of $818,000
and $856,000, respectively, have been deducted from the carrying value of
loans.
At December 31, 1998 and 1997, the recorded investment in loans that are
considered to be impaired was $859,000, and $382,000, respectively, all of
which were on a nonaccrual basis. At December 31, 1998 and 1997, the Company
had an impaired loan of $336,000 and $382,000 with an allocation of $60,000
and $40,000 of the allowance for loan losses, respectively.
The average recorded investment in impaired loans during the year ended
December 31, 1998 and 1997, was approximately $621,000 and $398,000,
respectively. For the years ended December 31, 1998 and 1996, the Company
recognized interest income on impaired loans of $10,000 and $2,000,
respectively, all of which was recognized using the cash basis method of
income recognition. For the year ended December 31, 1997, there was no
interest income recognized on impaired loans.
Loans on which the accrual of interest has been discontinued or reduced
amounted to $1,877,000 and $1,551,000 (which included impaired loans) at
December 31, 1998 and 1997, respectively. If interest had been recorded at
the original rate on those loans, such income would have approximated
$298,000, $229,000, and $127,000 for the years ended December 31, 1998, 1997,
and 1996, respectively. Interest income on such loans, which is recorded as
received, amounted to approximately $89,000, $72,000, and $40,000 for the
years ended December 31, 1998, 1997, and 1996, respectively.
Transactions in the allowance for loan losses were as follows (in thousands):
Years Ended December 31,
1998 1997 1996
Balance, beginning of year $2,138 $1,995 $1,833
Provisions charged to income 218 210 205
Recoveries on loans previously
charged against the allowance 48 16 21
2,404 2,221 2,059
Loans charged against the allowance (112) (83) (64)
Balance, end of year $2,292 $2,138 $1,995
The following is a summary of the past due and nonaccrual loans as of December
31, 1998 and 1997 (in thousands):
December 31, 1998
Past Due Past Due
30-89 days 90 days or more Nonaccrual
Real estate loans $1,593 $12 $1,821
Installment loans 203 2 -
Credit cards and related loans 22 1 -
Commercial and all other loans 32 - 56
Total $1,850 $15 $1,877
December 31, 1997
Past Due Past Due
30-89 days 90 days or more Nonaccrual
Real estate loans $2,566 $146 $1,446
Installment loans 227 20 -
Credit cards and related loans 20 4 -
Commercial and all other loans 106 - 105
Total $2,919 $170 $1,551
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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Citizens Financial Services, Inc.
___________________________________________________________________________
6. PREMISES & EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
December 31,
1998 1997
Land $ 1,198 $ 1,198
Buildings 4,353 4,164
Furniture, fixtures and equipment 5,056 5,263
10,607 10,625
Less accumulated depreciation 5,001 4,871
Premises and equipment, net $ 5,606 $ 5,754
Depreciation expense amounted to $652,000, $479,000, and $370,000 for 1998,
1997, and 1996, respectively.
7. DEPOSITS
Certificates of deposit of $100,000 or more amounted to $24,658,000 and
$23,960,000 at December 31, 1998 and 1997, respectively. Interest expense on
certificates of deposit of $100,000 or more amounted to $1,504,000,
$1,420,000, and $1,172,000 for the years ended December 31, 1998, 1997, and
1996, respectively.
Following are maturities of certificates of deposit as of December 31, 1998
(in thousands):
1999 $ 66,633
2000 40,244
2001 22,240
2002 12,759
2003 7,944
Thereafter 277
Total certificates of deposit $150,097
8. BORROWED FUNDS
<TABLE>
Securities Sold Under Other Capital Total
Agreements to FHLB Borrowed Lease Borrowed
(dollars in thousands) Repurchase(a) Advances(b) Funds(c) Obligations Funds
<S> <C> <C> <C> <C> <C>
1998
Balance at December 31 $3,966 $3,208 $ - $ 160 $ 7,334
Highest balance
at any month-end 5,217 3,208 1,874 198 10,497
Average balance 4,903 269 1,746 182 7,100
Weighted average interest rate:
Paid during year 5.76% 5.47% 7.56% 4.91% 6.17%
As of year-end 5.48 4.96 - 4.90 4.23
1997
Balance at December 31 $4,789 $ - $1,874 $ 201 $ 6,864
Highest balance
at any month-end 5,202 7,625 1,874 222 14,923
Average balance 5,030 1,117 1,874 108 8,129
Weighted average interest rate:
Paid during year 5.85% 5.56% 7.56% 5.16% 6.19%
As of year-end 5.78 5.73 7.56 4.90 6.24
1996
Balance at December 31 $5,018 $8,925 $1,874 $ - $15,817
Highest balance
at any month-end 5,367 9,800 1,874 - 17,041
Average balance 5,263 2,599 1,874 - 9,736
Weighted average interest rate:
Paid during year 5.80% 5.54% 7.56% 6.07%
As of year-end 5.90 6.76 7.56 6.58
</TABLE>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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Nineteen hundred ninety-eight Annual Report
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(a) Securities sold under agreements to repurchase mature within one-to-five
years. The Company has pledged U.S. Treasury securities with a carrying value
at December 31, 1998 and 1997, of $5,170,000 and $5,921,000, respectively.
(b) FHLB Advances are comprised of two types of borrowings with the Federal
Home Loan Bank of Pittsburgh. FHLB "Open RepoPlus" advances are short-term
borrowings maturing within one year, bear a fixed rate of interest and are
subject to prepayment penalty. The Company has a borrowing limit of
$20,000,000, exclusive of any outstanding advances. As of December 31, 1996,
total FHLB advances were comprised of Open RepoPlus borrowings. At December
31, 1996, the Company also had an available line of credit with the FHLB
("Flexline"), with a borrowing limit of approximately $8,500,000. Flexline
advances also mature within one year and bear a variable rate of interest that
adjusts daily. There are no prepayment penalties for these borrowings. There
were no outstanding borrowings on this line of credit as of December 31, 1997
and 1996. Although no specific collateral is required to be pledged for Open
RepoPlus or Flexline borrowings, FHLB advances are secured by a blanket
security agreement that includes the Company's FHLB stock, as well as
investment and mortgage-backed securities held in safekeeping at the FHLB.
At December 31, 1998 and 1997, approximate carrying value of collateral was
$48,722,000 and $18,944,000, respectively.
(c) Other borrowed funds consist of separate loans with the FHLB as follows
(in thousands):
Fixed Rate Maturity December 31, 1997
7.25% May 15, 2000 $ 166
7.40% May 15, 2001 245
7.52% May 15, 2002 229
7.60% May 15, 2003 216
7.56% May 17, 2004 201
7.61% May 16, 2005 188
7.65% May 15, 2006 175
7.68% May 15, 2007 163
7.72% May 15, 2008 151
7.76% May 15, 2009 140
Total borrowed funds $1,874
During 1998, the Company retired these loans with the FHLB prior to their
stated maturity. The retirement resulted in the Company incurring a
prepayment penalty of $141,000, net of income tax of $72,000, which is
reported as an extraordinary item in the Consolidated Statement of Income.
Following are maturities of borrowed funds as of December 31, 1998 (in
thousands):
1999 $5,348
2000 641
2001 787
2002 558
Total borrowed funds $7,334
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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Citizens Financial Services, Inc.
___________________________________________________________________________
9. LEASES
The Company is committed under two noncancellable operating leases for
facilities with initial or remaining terms in excess of one year. The minimum
annual rental commitments under these leases at December 31, 1998, are as
follows (in thousands):
1999 $ 35
2000 30
2001 30
2002 30
2003 25
Total minimum lease payments $150
Total rental expense for all operating leases for 1998, 1997, and 1996
amounted to $50,000, $50,000, and $52,000, respectively.
10. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory, defined-benefit pension plan (the "Plan")
for all employees meeting certain age and length of service requirements.
Benefits are based primarily on years of service and the average annual
compensation during the highest five consecutive years within the final ten
years of employment. The Company's funding policies are consistent with the
funding requirements of federal law and regulations. Plan assets are comprised
of common stock, U.S. government and corporate debt securities. Plan assets
included 10,100 and 11,928 shares of the Company's common stock at December
31, 1998 and 1997, respectively.
The following table sets forth the change in plan assets and benefit
obligation at December 31 (in thousands):
1998 1997
Plan assets at fair value, beginning of year $2,681 $2,243
Actual return on plan assets 433 478
Amendments 1 -
Employer contribution - -
Benefits paid (51) (40)
Plan assets at fair value, end of year 3,064 2,681
Benefit obligation, beginning of year 2,226 1,782
Service cost 144 110
Interest cost 146 126
Amendments 48 248
Benefits paid (51) (40)
Benefit obligation, end of year 2,513 2,226
Funded Status 551 455
Transition adjustment (99) (114)
Prior service cost (57) (63)
Unrecognized net gain from past experience
different from that assumed (298) (125)
Benefit asset, end of year $ 97 $ 153
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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Nineteen hundred ninety-eight Annual Report
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Assumptions used in determining net periodic pension cost are as follows:
1998 1997 1996
Discount rate 6.50% 6.50% 7.00%
Expected return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 4.00% 4.00% 4.00%
Net periodic pension cost includes the following components (in thousands):
1998 1997 1996
Service cost of the current period $144 $110 $101
Interest cost on projected benefit obligation 146 126 111
Actual return on plan assets (433) (478) (229)
Net amortization and deferral 199 277 54
Unrealized gain - - -
Net periodic pension cost $ 56 $ 35 $ 37
The Company also has a profit-sharing plan, covering substantially all
employees, which provides tax-deferred salary savings to plan participants.
The Company's contributions to the profit-sharing plan are allocated to the
participants based upon a percentage of their compensation. The Company's
profit-sharing contribution is determined by the Board of Directors on a
discretionary basis. The Company's contributions for 1998, 1997, and 1996 were
$128,000, $187,000, and $131,000, respectively.
11. ARBITRATION SETTLEMENT
On February 24, 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. As of December 31, 1998 and 1997 there was $112,000 and $110,000,
respectively, of credits applied for current expenditures. At December 31,
1998, the Bank had $28,000 in remaining credits. The amount received by the
Bank is net of fees associated with the arbitration.
12. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
Years Ended December 31,
1998 1997 1996
Currently payable $1,333 $1,614 $1,271
Deferred (benefit) liability (4) 59 36
Provision for income taxes $1,329 $1,673 $1,307
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
The following temporary differences gave rise to the net deferred tax asset
(liability) at December 31, 1998 and 1997 (in thousands):
1998 1997
Deferred tax assets:
Allowance for loan losses $596 $544
Deferred compensation 211 201
Loan fees and costs 3 29
Core deposit intangible 37 23
Investment security loss 7 -
Total 854 797
Deferred tax liabilities:
Unrealized gains on available-for-sale
Securities (504) (177)
Premises and equipment (298) (235)
Bond accretion (94) (86)
Prepaid pension cost (33) (52)
Foreclosed assets held for sale (11) (10)
Total (940) (560)
Deferred tax (liability) asset, net $ (86) $ 237
The total provision for income taxes is different from that computed at the
statutory rates due to the following items (in thousands):
Years Ended December 31,
1998 1997 1996
Provision at statutory rates on
pre-tax income $1,638 $1,872 $1,465
Effect of tax-exempt income (364) (211) (198)
Nondeductible interest 56 27 27
Other items (1) (15) 13
Provision for income taxes $1,329 $1,673 $1,307
Statutory tax rates 34% 34% 34%
Effective tax rates 27.6% 30.4% 30.3%
Income taxes applicable to realized security gains at December 31, 1998, 1997,
and 1996, were $155,000, $9,000, and $1,000, respectively.
13. RELATED PARTY TRANSACTIONS
Certain executive officers, corporate directors or companies in which they
have 10 percent or more beneficial ownership were indebted to the Bank.
A summary of loan activity with officers, directors, stockholders and
associates of such persons is listed below (in thousands):
Beginning Ending
Balance Additions Repayments Balance
1998 $1,172 $1,753 $ 335 $2,590
Such loans were made in the ordinary course of business at the Bank's normal
credit terms and do not present more than a normal risk of collection.
<PAGE>
<29>
___________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
___________________________________________________________________________
Nineteen hundred ninety-eight Annual Report
___________________________________________________________________________
14. REGULATORY MATTERS
Dividend Restrictions:
The approval of the Comptroller of the Currency is required for a national
bank to pay dividends up to the Company if the total of all dividends declared
in any calendar year exceeds the Bank's net income (as defined) for that year
combined with its retained net income for the preceding two calendar years.
Under this formula, the Bank can declare dividends in 1999 without approval of
the Comptroller of the Currency of approximately $2,501,000, plus the Bank's
net income for 1999.
Loans:
The Bank is subject to regulatory restrictions which limit its ability to loan
funds to the Company. At December 31, 1998, the regulatory lending limit
amounted to approximately $2,843,000.
Regulatory Capital Requirements:
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by the regulators that, if undertaken, could
have a direct material effect on the Company's and Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's and Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk-weightings, and other factors.
Quantitative measures established by the regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of
Total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital to average assets (as defined).
Management believes, as of December 31, 1998, that the Company and the Bank
meet all capital adequacy requirements to which they (the Company and the
Bank) are subject.
As of December 31, 1998, the most recent notifications from the Federal
Reserve Board and the Office of the Comptroller of the Currency categorized
the Company and the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized they must
maintain minimum Total risk-based, Tier I risk-based and Tier I leverage
ratios at least 100 to 200 basis points above those ratios set forth in the
table. There have been no conditions or events since that notification that
management believes have changed the Company's or the Bank's category.
The following table reflects the Company's capital ratios at December 31 (in
thousands):
<TABLE>
1998 1997
Amount Ratio Amount Ratio
<S> <C> <C> <C> <C>
Total capital (to risk-weighted assets)
Company $29,296 14.99% $26,867 15.83%
For capital adequacy purposes 15,632 8.00% 13,589 8.00%
To be well capitalized 19,540 10.00% 16,986 10.00%
Tier I capital (to risk-weighted assets)
Company $26,893 13.76% $24,744 14.58%
For capital adequacy purposes 7,816 4.00% 6,794 4.00%
To be well capitalized 11,724 6.00% 10,192 6.00%
Tier I capital (to average assets)
Company $26,893 8.66% $24,744 8.47%
For capital adequacy purposes 12,423 4.00% 11,691 4.00%
To be well capitalized 15,529 5.00% 14,613 5.00%
</TABLE>
The most recent notification from the Office of the Comptroller of the
Currency categorized the Bank as well capitalized under the regulatory
framework for corrective action. At
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___________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
December 31, 1998, the Bank's Total capital and Tier I ratios were 13.91% and
12.68%, respectively, and Tier I capital to average assets was 8.16%. At
December 31, 1997, the Bank's Total capital and Tier I ratios were 15.75% and
14.50%, respectively, and Tier I capital to average assets was 8.54%.
This annual report has not been reviewed, or confirmed for accuracy or
relevance, by the Federal Deposit Insurance Corporation.
15. OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate or liquidity risk in excess of the amount recognized
in the consolidated balance sheet.
The Company's exposure to credit loss from nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual amount of these
instruments. The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
Financial instruments whose contract amounts represent credit risk at December
31, 1998 and 1997, are as follows (in thousands):
1998 1997
Commitments to extend credit $33,039 $21,871
Standby letters of credit 898 548
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity requirements.
The Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the Company on
extension of credit is based on management's credit assessment of the counter
party.
Standby letters of credit are conditional commitments issued by the Company
guaranteeing performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending normal loan commitments to customers. The Company generally holds
collateral supporting standby letters of credit.
16. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows (in thousands)
December 31, 1998
CARRYING ESTIMATED
AMOUNT FAIR VALUE
Financial assets:
Cash and due from banks $ 7,305 $ 7,305
Available-for-sale securities 93,082 93,082
Net loans 203,583 206,935
Accrued interest receivable 2,188 2,188
Total financial assets $306,158 $309,510
Financial liabilities
Deposits $274,193 $276,639
Securities sold under agreements to repurchase 3,966 4,024
Other borrowed funds 3,368 3,159
Accrued interest payable 2,363 2,363
Total financial liabilities $283,890 $286,185
<PAGE>
<31>
___________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
___________________________________________________________________________
Nineteen hundred ninety-eight Annual Report
___________________________________________________________________________
December 31, 1997
CARRYING ESTIMATED
AMOUNT FAIR VALUE
Financial assets:
Cash and due from banks $ 6,343 $ 6,343
Available-for-sale securities 24,827 24,827
Held-to-maturity securities 63,735 64,490
Net loans 189,910 191,658
Accrued interest receivable 2,426 2,426
Total financial assets $287,241 $289,744
Financial liabilities
Deposits $256,783 $258,829
Securities sold under agreements to repurchase 4,789 4,851
Other borrowed funds 2,075 2,240
Accrued interest payable 2,331 2,331
Total financial liabilities $265,978 $268,251
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of
the Company's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions can significantly affect the estimates.
Estimated fair values have been determined by the Company using historical
data, as generally provided in the Company's regulatory reports, and an
estimation methodology suitable for each category of financial instruments.
The Company's fair value estimates, methods and assumptions are set forth
below for the Company's other financial instruments.
Cash and Due From Banks:
The carrying amounts for cash and due from banks approximate fair value
because they mature in 90 days or less and do not present unanticipated credit
concerns.
Investment Securities:
The fair values of investments are based on quoted market prices as of the
balance sheet date. For certain instruments, fair value is estimated by
obtaining quotes from independent dealers.
Loans:
Fair values are estimated for portfolios of loans with similar financial
characteristics.
The fair value of performing loans has been estimated by discounting expected
future cash flows. The discount rate used in these calculations is derived
from the Treasury yield curve adjusted for credit quality, operating expense
and prepayment option price, and is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount rates
that reflect the credit and interest rate risk inherent in the loan. The
estimate of maturity is based on the Company's historical experience with
repayments for each loan classification, modified as required by an estimate
of the effect of current economic and lending conditions.
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___________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
Fair value for significant nonperforming loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are
discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined using available market information
and specific borrower information.
Deposits:
The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings and NOW accounts, and money
market accounts, is equal to the amount payable on demand. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
The deposit's fair value estimates do not include the benefit that results
from the low-cost funding provided by the deposit liabilities compared to the
cost of borrowing funds in the market, commonly referred to as the core
deposit intangible.
Borrowed Funds:
Rates available to the Company for borrowed funds with similar terms and
remaining maturities are used to estimate the fair value of borrowed funds.
Commitments to Extend Credit and Standby Letters of Credit:
There is no material difference between the notional amount and the estimated
fair value of off-balance-sheet items which are primarily comprised of
unfunded loan commitments which are generally priced at market at the time of
funding (see Note 15).
17. CONDENSED FINANCIAL INFORMATION
PARENT COMPANY ONLY
CITIZENS FINANCIAL SERVICES, INC.
CONDENSED BALANCE SHEET
December 31, 1998 and 1997
(in thousands) 1998 1997
Assets:
Cash $ 135 $ 46
Investment in subsidiary,
First Citizens National Bank 26,134 25,771
Available-for-sale securities 2,336 141
Other assets 9 1
Total assets $28,614 $25,959
Liabilities:
Other liabilities $ - $ 26
Deferred tax liability 16 10
Total liabilities $ 16 $ 36
Stockholders' equity 28,598 25,923
Total liabilities and stockholders' equity $28,614 $25,959
<PAGE>
<33>
___________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
___________________________________________________________________________
Nineteen hundred ninety-eight Annual Report
___________________________________________________________________________
CITIZENS FINANCIAL SERVICES, INC.
CONDENSED STATEMENT OF INCOME
Years Ended December 31, 1998, 1997, and 1996
(in thousands) 1998 1997 1996
Dividends from:
Bank subsidiary $3,801 $1,179 $1,265
Available-for-sale securities 17 1 -
Interest-bearing deposits with banks 12 - -
Total income 3,830 1,180 1,265
Realized securities losses (18) - -
Expenses 75 97 62
Income before equity in undistributed
earnings of subsidiary 3,737 1,083 1,203
Equity in undistributed
earnings - First Citizens National Bank (248) 2,749 1,800
Net income $3,489 $3,832 $3,003
CITIZENS FINANCIAL SERVICES, INC.
CONDENSED STATEMENT OF CASH FLOWS
Years Ended December 31, 1998, 1997, and 1996
(in thousands) 1998 1997 1996
Cash flows from operating activities:
Net income $ 3,489 $ 3,832 $ 3,003
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiary 248 (2,749) (1,800)
Deferred income taxes (6) - -
Realized gains on securities (1) - -
(Increase) decrease in other assets (8) 611 (32)
(Decrease) increase in other liabilities (26) 26 -
Net cash provided by operating activities 3,696 1,720 1,171
Cash flows from investing activities:
Purchase of available-for-sale securities (2,333) (111) -
Proceeds from the sale of available-for-sale
Securities 175 - -
Net cash used in investing activities (2,158) (111) -
Cash flows used in financing activities:
Cash dividends paid (1,449) (1,596) (1,187)
Net increase (decrease) in cash 89 13 (16)
Cash at beginning of year 46 33 49
Cash at end of year $ 135 $ 46 $ 33
<PAGE>
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___________________________________________________________________________
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___________________________________________________________________________
REPORT OF INDEPENDENT AUDITORS
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
SNODGRASS
Certified Public Accountants
___________________________________________________________________________
To the Stockholders and Board of Directors of
Citizens Financial Services, Inc.
We have audited the consolidated balance sheet of Citizens Financial Services,
Inc. and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Citizens
Financial Services, Inc. and subsidiary as of December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ S. R. Snodgrass, A.C.
Wexford, PA
February 5, 1999
S.R. Snodgrass, A.C.
101 Bradford Road Wexford, PA 15090-6909 Phone: 724-934-0344
Faxsimile: 724-934-0345
<PAGE>
<35>
___________________________________________________________________________
SELECTED FINANCIAL DATA
FIVE YEARS SUMMARY OF OPERATIONS
___________________________________________________________________________
Nineteen hundred ninety-eight Annual Report
___________________________________________________________________________
<TABLE>
(dollar amounts in thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Interest income $ 23,088 $ 22,779 $ 21,341 $ 19,422 $ 17,336
Interest expense 11,920 11,610 10,867 9,851 7,944
Net interest income 11,168 11,169 10,474 9,571 9,392
Provision for loan losses 218 210 205 163 255
Net interest income after provision
for loan losses 10,950 10,959 10,269 9,408 9,137
Other operating income 1,838 2,427 1,372 1,242 1,073
Realized securities gains, net 457 25 19 10 63
Other operating expenses 8,427 7,906 7,350 6,665 6,490
Income before provision for income taxes
and extraordinary item 5,031 5,505 4,310 3,995 3,783
Provision for income taxes 1,401 1,673 1,307 1,161 1,158
Income before extraordinary item 3,630 3,832 3,003 2,834 2,625
Extraordinary item 141 - - - -
Net income $ 3,489 $ 3,832 $ 3,003 $ 2,834 $ 2,625
Per share data:
Income before extraordinary item (1) $ 1.31 $ 1.38 $ 1.08 $ 1.02 $ .95
Net income (1) 1.26 1.38 1.08 1.02 .95
Cash dividends (1) .52 .355 .445 .425 .405
Book value (1) 10.31 9.35 8.26 7.68 6.82
Total investments $ 93,082 $ 88,562 $ 86,057 $ 73,715 $ 64,257
Loans, net 203,583 189,910 180,418 159,794 154,848
Total assets 313,564 294,811 282,810 247,094 232,537
Total deposits 274,193 256,783 240,177 213,316 194,478
Stockholders' equity 28,598 25,923 22,904 21,297 18,903
</TABLE>
(1) Amounts were adjusted to reflect the two-for-one stock split as described
in Footnote 2.
COMMON STOCK
Common stock issued by Citizens Financial Services, Inc. is traded in the
local over-the-counter market, primarily in Pennsylvania and New York. Prices
presented in the table below are bid/ask prices between broker-dealers
published by the National Association of Securities Dealers through the NASD
OTC "Bulletin Board", its automated quotation system for non-NASDAQ quoted
stocks and the National Quotation Bureau's "Pink Sheets." The prices do not
include retail markups or markdowns or any commission to the broker-dealer.
The bid prices do not necessarily reflect prices in actual transactions. Cash
dividends are declared on a quarterly basis and the effects of stock dividends
have been stated retroactively in the table below (also see dividend
restrictions in Note 14).
<TABLE>
Dividends Dividends
1998 declared 1997 declared
High Low per share High Low per share
<S> <C> <C> <C> <S> <C> <C> <C>
First quarter $24.75 $18.75 $ 0.125 First quarter (1) $13.31 $12.94
Second quarter 27.75 24.75 $ 0.130 Second quarter (1) 14.00 13.31 $ .230
Third quarter 27.75 26.50 $ 0.130 Third quarter 16.38 14.00
Fourth quarter 26.50 24.00 $ 0.135 Fourth quarter 18.75 17.00 $ .125
</TABLE>
(1) Amounts were adjusted to reflect the two-for-one stock split as described
in Footnote 2.
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___________________________________________________________________________
CONSOLIDATED QUARTERLY DATA
TRUST AND INVESTMENT SERVICES STATEMENT OF CONDITION
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
<TABLE>
CONSOLIDATED QUARTERLY DATA
(dollar amounts in thousands) Three Months Ended
1998 March 31 June 30 Sept 30 Dec 31
<S> <C> <C> <C> <C>
Interest income $5,659 $5,700 $5,857 $5,872
Interest expense 2,915 2,957 3,034 3,014
Net interest income 2,744 2,743 2,823 2,858
Provision for loan losses 53 52 53 60
Other operating income 425 480 446 487
Realized securities gains, net 95 78 202 82
Other operating expenses 2,021 1,973 2,075 2,358
Income before provision for income
taxes and extraordinary item 1,190 1,276 1,343 1,222
Provision for income taxes 343 361 375 322
Income before extraordinary item 847 915 968 900
Extraordinary item - - - 141
Net income $ 847 $ 915 $ 968 $ 759
Earnings Per Share $ .31 $ .33 $ .35 $ .27
Three Months Ended
1997 March 31 June 30 Sept 30 Dec 31
Interest income $5,486 $5,672 $5,847 $5,774
Interest expense 2,809 2,891 2,958 2,952
Net interest income 2,677 2,781 2,889 2,822
Provision for loan losses 53 52 53 52
Other operating income 1,229 356 432 410
Realized securities gains, net - - - 25
Other operating expenses 2,039 1,843 2,032 1,992
Income before provision for
income taxes 1,814 1,242 1,236 1,213
Provision for income taxes 599 368 359 347
Net income $1,215 $ 874 $ 877 $ 866
Earnings Per Share $ .44 $ .31 $ .32 $ .31
</TABLE>
TRUST AND INVESTMENT SERVICES FUNDS UNDER MANAGEMENT (market value)
1998 1997
INVESTMENTS:
Bonds $12,385 $15,384
Stock 34,270 28,060
Savings and money market funds 11,875 13,350
Mutual funds 9,557 8,414
Mortgages 302 374
Real estate 549 298
Miscellaneous 202 56
Cash (45) 168
TOTAL $69,095 $66,104
ACCOUNTS:
Estates $ 578 $ 833
Trusts 35,099 33,881
Guardianships 395 345
Pension/profit sharing 12,564 12,601
Investment management 14,921 16,071
Custodial 5,538 2,373
TOTAL $69,095 $66,104
The following graph shows personal trust asset growth over the past five
years.
___________________________________________________________________________
[GRAPHIC OMITTED: A bar chart depicting personal trust assets from 1994 to
1998. A tabular presentation of the graph is set forth as follows:
PERSONAL TRUST ASSETS
(Dollars in Thousands)
1994 1995 1996 1997 1998
$27,781 $31,786 $39,776 $41,643 $46,654]
___________________________________________________________________________
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___________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
___________________________________________________________________________
Nineteen hundred ninety-eight Annual Report
___________________________________________________________________________
[GRAPHIC OMITTED: A bar chart depicting investments from 1994 to 1998. A
tabular presentation of the graph is set forth as follows:
INVESTMENTS
(Dollars in Thousands)
1994 1995 1996 1997 1998
Available for Sale $14,640 $21,444 $28,736 $24,827 $93,082
Held to Maturity $49,617 $52,271 $57,321 $63,735 $ 0
Total $64,257 $73,715 $86,057 $88,562 $93,082
___________________________________________________________________________
Introduction
The following is management's discussion and analysis of the significant
changes in the results of operations, capital resources and liquidity
presented in its accompanying consolidated financial statements for Citizens
Financial Service, Inc., a bank holding company and its subsidiary (the
Company). Our Company's consolidated financial condition and results of
operations consist almost entirely of our wholly owned subsidiary's (First
Citizens National Bank) financial conditions and results of operations. Our
discussion should be read in conjunction with the 1998 Annual Report. Current
performance does not guarantee, assure or indicate similar performance in the
future.
Forward-looking statements may prove inaccurate. We have made forward-looking
statements in this document, and in documents that we incorporate by
reference, that are subject to risks and uncertainties. Forward-looking
statements include the information concerning possible or assumed future
results of operations of Citizens Financial Services, Inc., First Citizens
National Bank or the combined company. When we use such words as "believes",
"expects", "anticipates", or similar expressions, we are making
forward-looking statements.
You should note that many factors, some of which are discussed elsewhere in
this document and in the documents we incorporate by reference, could affect
the future financial results. These factors include, but are not limited to,
the following:
*operating, legal and regulatory risks;
*economic, political and competitive forces affecting our banking,
securities, asset management and credit services;
*risk that our analysis of these risks and forces could be incorrect
and/or the strategies developed to address them could be unsuccessful.
Readers should carefully review the risk factors described in other documents
our Company files from time to time with the Securities and Exchange
Commission, including the quarterly reports on Form 10-Q to be filed by our
Company and any current reports on Form 8-K filed by our Company.
Our Company currently engages in the general business of banking throughout
our service area of Potter, Tioga and Bradford counties in North Central
Pennsylvania and Allegany, Steuben, Chemung and Tioga counties in Southern New
York. We maintain our central office in Mansfield, Pennsylvania. Presently
we operate banking facilities in Mansfield, Blossburg, Ulysses, Genesee,
Wellsboro, Troy, Sayre, Canton, Gillett and the Wellsboro Weis Market store.
Additionally, we have automatic teller machines (ATMs) located in Soldiers and
Sailors Memorial Hospital in Wellsboro and at Mansfield University. Our
Company's lending and deposit products and investment services are offered
primarily within the vicinity of the service area.
Our 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 our subsidiary. In addition,
personal and corporate trust services are offered by insurance companies,
investment counseling firms, and other business firms and individuals. We
also compete 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. We not
only must compete with traditional financial institutions, but also with other
business corporations that have begun to deliver competing financial
services. Competition for banking services is based on price, nature of
product, quality of service, and in the case of certain activities,
convenience of location.
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___________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
Trust and Investment Services
Our Company offers the following trust and investment services:
*Investment management accounts that assume managerial duties for
investment accounts.
*Custody services for safekeeping and preservation of assets.
*Mutual funds that provide an asset allocation program.
*Personal trust services that include stand-by, living and testamentary
trusts.
*Estate planning and administration to provide financial planning.
*Retirement plan services for individuals and businesses.
Financial Condition
The following table presents the growth (dollars in millions) during the past
two years:
1997/1998 1996/1997
$ % $ %
Total assets 18.8 6.4 12.0 4.2
Total deposits 17.4 6.8 16.6 6.9
Total loans 13.7 7.2 9.5 5.3
Total investments
(including available-for-sale
and held-to-maturity) 4.5 5.1 2.5 2.9
Total stockholders' equity 2.7 10.3 3.0 13.2
Investments
The investment portfolio, including available-for-sale (and held-to-maturity
securities in 1997), increased by $4.5 million or 5.1% in 1998 as compared to
growth of $2.5 million in 1997.
From 1990 through 1996, the concentration of our Company's investment
portfolio shifted to U.S. Treasury securities and, until last year, no new
investments had been made in state and political subdivisions. During 1997
and 1998, we have been selling U.S. Treasury notes to restructure the
investment portfolio. We then reinvest the proceeds by purchasing AAA
municipal bonds, investment grade corporate bonds and U S agency mortgage
backed securities.
The following table shows the year-end composition of the investment portfolio
for the five years ended December 31, 1998:
<TABLE>
Estimated Fair Market Value at December 31,
1998 % of 1997 % of 1996 % of 1995 % of 1994 % of
Total Total Total Total Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
U.S. Treasury securities $ - - $47,566 53.2 $49,439 57.2 $43,905 58.5 $34,381 54.9
Federal agency obligations - - - - - - - - 506 0.8
Obligations of state & political
Subdivisions - - 5,611 6.3 620 0.7 1,348 1.8 2,832 4.5
Corporate obligations - - 3,175 3.6 4,712 5.5 4,845 6.5 6,787 10.9
Mortgage-backed securities - - 6,856 7.7 1,688 2.0 2,352 3.1 2,293 3.7
Available-for-sale:
U.S. Treasury securities 32,763 35.3 14,948 16.7 21,406 24.8 15,591 20.8 14,594 23.3
Obligations of state & political
Subdivisions 18,452 19.8 - - - - - - - -
Corporate obligations 14,889 16.0 6,849 7.7 7,253 8.4 5,778 7.7 - -
Mortgage-backed securities 23,113 24.8 2,771 3.1 - - - - - -
Equity securities 2,517 2.7 259 0.3 77 0.1 75 0.1 46 0.1
Restricted equity securities 1,348 1.4 1,282 1.4 1,128 1.3 1,139 1.5 1,098 1.8
Total $93,082 100.0 $89,317 100.0 $86,323 100.0 $75,033 100.0 $62,537 100.0
</TABLE>
<PAGE>
<39>
___________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Nineteen hundred ninety-eight Annual Report
___________________________________________________________________________
In addition, we adopted SFAS 133 discussed in Footnote 1 of the Consolidated
Financial Statements in the fourth quarter of 1998. This change in accounting
procedure allows us, over time, to continue to restructure our investments to
target mix shown in the following table.
% of
Target Mix Total
U. S. Treasury securities 12.5
Obligations of state and political subdivisions 25.0
Corporate obligations 25.0
Mortgage-backed securities 33.5
Other equity securities 2.5
Restricted equity securities 1.5
Total 100.0
The expected principal repayments (amortized cost) and average weighted yields
for the above investment portfolio as of December 31, 1998, are shown below.
Expected maturities are significantly different than the contractual
maturities detailed in Footnote 4 of the Consolidated Financial Statements.
Yields on tax-exempt securities are presented on a fully-taxable equivalent
basis assuming a 34% tax rate.
<TABLE>
Within One- Five- After Amortized Estimated
One Yield Five Yield Ten Yield Ten Yield Cost Yield Fair
Year (%) Years % Years (%) Years (%) Total (%) Value
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale securities:
U.S. Treasury 8,533 8.69 23,230 6.47 - - - - 31,763 7.07 $32,763
State and political subdivisions, 2 8.33 11,603 6.94 5,921 6.79 423 6.86 17,949 6.89 18,110
general obligation
State and political subdivisions, 340 9.85 - - - - - - 340 9.85 342
revenue
Corporate obligations 4,644 6.54 10,174 5.86 - - - - 14,818 6.07 14,889
Mortgage-backed securities 4,982 6.65 18,130 6.65 - - - - 23,112 6.65 23,113
Equity securities - - - - - - 2,271 2.30 2,271 2.30 2,517
Restricted equity securities - - - - - - 1,348 6.00 1,348 6.00 1,348
Total available-for-sale 18,501 7.62 63,137 6.51 5,921 6.79 4,042 4.01 91,601 6.64 93,082
</TABLE>
Approximately 93% of the amortized cost of debt securities are expected to
mature within five years or less (average expected maturity 5 years).
Our Company expects that earnings from operations, the high liquidity level of
the available-for-sale securities, growth of deposits and the availability of
borrowings from the Federal Home Loan Bank will be sufficient to meet future
liquidity needs.
Our Company has no securities from a single issuer representing more than 10%
of stockholders' equity.
Loans
Historically, loans have been originated by our Company 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. We also do a
limited amount of indirect loans through new and used car dealers in the
primary lending area.
All lending is governed by a lending policy which is developed and maintained
by us and approved by the Board of Directors. Our Company's lending policy
regarding real estate loans is that generally 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 generally
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.
<PAGE>
<40>
___________________________________________________________________________
[GRAPHIC OMITTED: Silhouette of colonial rider on horseback, upper left hand
corner of page, .5 inches square]
___________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
As shown in the following table, total loans grew by $13.7 million in 1998, or
7.2% the result of continued demand and attractive interest rates. In
addition, $3.8 million in conforming mortgage loans were originated and sold
on the secondary market through the Federal Home Loan Mortgage Corporation,
providing over $63,000 of income in origination fees and premiums on loans
sold, compared to $1.2 million in loans originated and $19,000 of income in
1997. Residential mortgage lending is a principal business activity and one
our Company expects to continue by providing a full complement of
competitively priced conforming, nonconforming and home equity mortgages.
Commercial lending activity is primarily focused on small businesses and our
Company's commercial lending officers have been successful in attracting new
business loans.
We expect loans to state and political subdivisions will continue to increase
in 1998 as the result of bond refinancing activity in a lower interest rate
environment.
The majority of lending activity has been mortgage loans secured by one- to
four-family residential property. As of December 31, 1998, residential real
estate and real estate construction loans made up 64.3% of our Company's total
loan portfolio.
Continuing in 1998, our Company's primary goal is to be the premier mortgage
lender in our market area, with our large menu of conforming mortgages
(including "jumbo" and low- to moderate-income home buyer mortgages) through
Farmers Home Administration (FmHA) and Pennsylvania Housing Finance Agency
(PHFA). Continued training of branch office personnel and the focus on
flexibility and fast "turn around time" will aid in meeting this goal. (Also
see the discussion in Footnote 5 of the Consolidated Financial Statements.)
<TABLE>
Five Year Breakdown of Loans by Type
December 31,
1998 1997 1996 1995 1994
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Residential 127,053 61.8 120,019 62.5 108,416 59.4 96,594 59.7 97,359 62.0
Commercial 27,164 13.2 27,480 14.3 27,670 15.2 24,167 14.9 21,915 13.9
Agricultural 9,266 4.5 8,769 4.6 6,134 3.4 8,027 5.0 7,125 4.5
Construction 5,234 2.5 3,035 1.6 4,262 2.3 1,018 0.6 1,271 0.8
Loans to individuals
for household,
family and other 14,489 7.0 13,905 7.2 14,465 7.9 13,198 8.2 11,886 7.6
purchases
Commercial and other loans 12,457 6.0 9,485 4.9 11,529 6.3 10,535 6.5 10,285 6.5
State and political 10,272 5.0 9,457 4.9 10,105 5.5 8,347 5.2 7,303 4.6
subdivision loans
Total loans 205,935 100.0 192,150 100.0 182,581 100.0 161,886 100.0 157,144 100.0
Unearned income 60 102 168 259 575
Allowance for loan losses 2,292 2,138 1,995 1,833 1,721
Net loans 203,583 189,910 180,418 159,794 154,848
</TABLE>
1998/1997 1997/1996
Change Change
$ % $ %
Real estate:
Residential 7,034 5.9 11,603 10.7
Commercial (316) (1.1) (190) (0.7)
Agricultural 497 5.7 2,635 43.0
Construction 2,199 72.5 (1,227) (28.8)
Loans to individuals
for household,
family and other purchases 584 4.2 (560) (3.9)
Commercial and other loans 2,972 31.3 (2,044) (17.7)
State and political subdivision loan 815 8.6 (648) (6.4)
Total loans 13,785 7.2 9,569 5.2
<PAGE>
<41>
___________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Nineteen hundred ninety-eight Annual Report
___________________________________________________________________________
The predominant source of earning assets is from the loan portfolio. The
following table shows the maturity of state and political subdivision loans,
commercial and agricultural loans and commercial loans secured by real estate
as of December 31, 1998, classified according to the sensitivity to changes in
interest rates within various time intervals:
<TABLE>
Commercial,
financial, Real estate
Maturity of loans: agricultural construction Total
<S> <C> <C> <C>
One year or less 4,791 0 4,791
Over one year but less than five years 15,402 0 15,402
Over five years 38,966 5,234 44,200
Total 59,159 5,234 64,393
Sensitivity of loans to changes in interest
rates - loans due after one year:
Predetermined interest rate 18,719 923 19,642
Floating or adjustable interest rate 35,649 4,311 39,960
Total 54,368 5,234 59,602
</TABLE>
Loan Quality and Provision for Loan Losses
As discussed previously, the loan portfolio contains a large portion of real
estate secured loans (generally residential home mortgages, mortgages on small
business properties, etc.), consumer installment loans and other commercial
loans. Footnote 5 of the Consolidated Financial Statements provides further
details on the composition of the loan portfolio.
A separate collections department was established to focus on the collection
and workout of problem loans. We believe all of these initiatives have led to
relatively low levels of nonperforming loans and loan chargeoffs. The
following tables indicate the level of nonperforming assets over the past five
years ending December 31:
<TABLE>
December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Nonaccruing loans 1,018 1,169 844 762 1,557
Impaired loans 859 382 414 697
Accrual loans - 90 days or
more past due 15 170 723 689 267
Total non-performing loans 1,892 1,721 1,981 2,148 1,824
Foreclosed assets held for sale 529 238 164 208 168
Total non-performing assets 2,421 1,959 2,145 2,356 1,992
Nonperforming loans as a percent of loans
net of unearned income 0.92 0.90 1.09 1.33 1.17
Nonperforming assets as a percent of loans
net of unearned income 1.18 1.02 1.18 1.46 1.27
</TABLE>
<PAGE>
<42>
___________________________________________________________________________
[GRAPHIC OMITTED: Silhouette of colonial rider on horseback, upper left hand
corner of page, .5 inches square]
___________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
Another way to view the credit quality exposure of the loan portfolio is by
reviewing the "watch list" categories used by us (and as required by the
regulatory agencies). This monitoring process is reviewed and reported
monthly to identify problems or potential problems.
1998 1997 1996
Special mention $ 532 $ - $ 216
Substandard 6,193 4,625 3,740
Doubtful 98 121 23
Total $6,823 $4,746 $3,979
Percent of total loans,
net of unearned income 3.31% 2.47% 2.18%
We do not believe there are any loans classified for regulatory purposes as
loss, doubtful, substandard, special mention or otherwise which will result in
losses or to have a material impact on future operations, liquidity or capital
reserves. We are not aware of any other information that causes us to have
serious doubts as to the ability of borrowers in general to comply with
repayment terms.
The following table presents an analysis of the allowance for loan losses for
the five years ending December 31:
<TABLE>
Summary of Loan Loss Experiance
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Balance at beginning of period 2,138 1,995 1,833 1,721 1,516
Charge-offs:
Real estate-construction - - - - -
Real estate-mortgage - 10 8 23 31
Loans to individuals for household,
family and other purchases 105 32 56 42 28
Commercial and other loans 7 41 - 4 9
Total loans charged-off 112 83 64 69 68
Recoveries:
Real estate-construction - - - - -
Real estate-mortgage 2 3 1 - -
Loans to individuals for household,
family and other purchases 37 11 19 15 14
Commercial and other loans 9 2 1 3 4
Total loans recovered 48 16 21 18 18
Net loans charged-off 64 67 43 51 50
Provision charged to expense 218 210 205 163 255
Balance at end of year $2,292 $2,138 $1,995 $1,833 $1,721
Loans outstanding at end of year $205,875 $192,048 $182,413 $161,627 $156,569
Average loans outstanding, net $196,281 $186,425 $170,104 $156,754 $146,894
Net charge-offs to average loans 0.03% 0.04% 0.03% 0.03% 0.03%
Year-end allowance to total loans 1.11% 1.11% 1.09% 1.13% 1.10%
Year-end allowance to total 121.14% 124.23% 100.71% 85.34% 94.35%
non-performing loans
</TABLE>
<PAGE>
<43>
___________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Nineteen hundred ninety-eight Annual Report
___________________________________________________________________________
As detailed in Footnote 5 of the Consolidated Financial Statements and the
above tables, total past due (90 days or more) and nonperforming loans
increased 9.9% from December 31, 1997 to December 31, 1998. The majority of
the loan volume is well-collateralized by real estate. Total charge-offs for
1999 are still expected to increase moderately from the historic levels
(although low in relationship to peers).
Allowance for Loan Losses
The allowance is maintained at a level to absorb potential future loan
losses. Provisions charged to operating expense and reduced by net
charge-offs increase the allowance.
Management's basis for the level of the allowance and the annual provision is
as follows:
*Our evaluation of the loan portfolio,
*Current and projected economic conditions,
*Historical loan loss experience,
*Present and prospective financial condition of the borrowers,
*The level of nonperforming assets,
*Other relevant factors.
While we evaluate all of this information, 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 our
Company's allowance for loan losses. These agencies may require us to
recognize additions to the allowance based on their evaluation of information
available to them. We believe that the current allowance is adequate to
offset any exposure that may exist for under secured or loans that might not
be collectable.
We do not accrue interest income on seriously past due loans. Subsequent cash
payments received are applied to the outstanding principal balance or recorded
as interest income, depending upon our assessment of our ultimate ability to
collect principal and interest.
Allocation of the Allowance for Loan Losses
The following table provides the percentage distribution of the allowance for
loan losses and the various loan categories that includes a percentage
comparison to total loans:
<TABLE>
1998 1997 1996 1995 1994
$ % $ % $ % $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Residential 140 61.8 140 62.5 143 59.4 165 59.6 185 62.0
Commercial, agricultural 927 17.7 577 18.9 325 18.5 328 19.9 323 18.5
Construction 0 2.5 0 1.6 0 2.3 0 0.6 0 0.8
Loans to individuals
for household,
family and other 365 7.0 321 7.2 164 8.0 181 8.2 140 7.6
purchases
Commercial and other loans 265 6.0 323 4.9 108 6.3 110 6.5 114 6.5
State and political 4 5.0 4 4.9 3 5.5 3 5.2 2 4.6
subdivision loans
Unallocated 591 N/A 773 N/A 1,252 N/A 1,047 N/A 957 N/A
Total loans 2,292 100.0 2,138 100.0 1,995 100.0 1,834 100.0 1,721 100.0
</TABLE>
Deposits
Our Company tiers interest-bearing transaction and savings accounts by deposit
size (larger balances receive higher rates). We have been offering a wide
variety of deposit instruments, as have our competitors.
<PAGE>
<44>
___________________________________________________________________________
[GRAPHIC OMITTED: Silhouette of colonial rider on horseback, upper left hand
corner of page, .5 inches square]
___________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
Some of the deposit product variations are:
*Money Market Investor accounts (limited transaction deposit accounts with
interest rates that vary as often as daily),
*NOW accounts (unlimited transaction interest-bearing accounts),
*Premier 50 and Premier 50 Plus (interest-bearing transactions accounts for
senior customers),
*Gold Club accounts (a package of services combined with a checking account),
*Individual retirement accounts (certificates of deposit),
*Longer-term certificates of deposit (generally of five-year maturity),
*Promotional 30-month, 66-month and Roll-Up certificates of deposit.
Our Company also offers a wide variety of IRA products including the new Roth
and Educational IRA's.
Deposit growth in 1998 was $17.4 million or 6.8%.
The following table shows the composition of deposit accounts over the last
three years as of December 31:
<TABLE>
Deposits by Major Classification
1998 1997 1996
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits $ 20,978 7.7 $ 19,016 7.4 $ 17,924 7.5
NOW accounts 37,113 13.5 32,794 12.8 31,836 13.2
Savings deposits 26,421 9.6 26,523 10.3 27,332 11.4
Money market deposit accounts 39,584 14.4 34,357 13.4 25,851 10.8
Certificates of deposit 150,097 54.7 144,093 56.1 137,234 57.1
Total $274,193 100.0 $256,783 100.0 $240,177 100.0
</TABLE>
1998/1997 1997/1996
Change Change
$ % $ %
Noninterest-bearing deposits 1,962 10.3 1,092 6.1
NOW accounts 4,319 13.2 958 3.0
Savings deposits (102) (.4) (809) (3.0)
Money market deposit accounts 5,227 15.2 8,506 32.9
Certificates of deposit 6,004 4.2 6,859 5.0
Total 17,410 6.8 16,606 6.9
Remaining maturities of certificates of deposit of $100,000 or more
1998 1997 1996
3 months or less $ 1,295 $ 1,658 $ 1,962
3 through 6 months 2,409 6,929 2,788
6 through 12 months 6,788 10,263 6,051
Over 12 months 14,166 5,110 8,479
Total $24,658 $23,960 $19,280
As a percent of total certificates 16.43% 16.63% 14.05%
of deposits
<PAGE>
<45>
___________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Nineteen hundred ninety-eight Annual Report
___________________________________________________________________________
<TABLE>
Deposits by Type of Depositor
1998 1997 1996
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Individual, partnerships and $240,466 87.7 $226,306 88.1 $212,398 88.4
corporation
United States government 22 - 20 - 148 .1
State and political subdivisions 32,374 11.8 28,721 11.2 25,794 10.7
Other 1,351 .5 1,736 .7 1,837 .8
Total $274,193 100.0 $256,783 100.0 $240,177 100.0
</TABLE>
The methods used by our Company to attract and retain deposits (in addition to
competitive interest rates) have been by increased marketing and business
development efforts, continuous emphasis on quality personal service, and
expanded trust and investment management services. In all of our community
offices, lobby and drive-up hours now include Wednesday afternoons (when they
were traditionally closed) as well as Saturday hours. The supermarket office
is open seven days a week with extended hours on weekdays. We currently
provide ten MAC automated teller machines, which are part of the MAC regional
and PLUS national network. We also implemented a MasterMoney debit card
program in 1998.
In addition to the above, continuing an effort to add value to products, we
began a voice response system to provide customers a convenient method of
accessing account information and transferring funds 24 hours a day.
Results of Operations
Net income during 1998 was $3.5 million (net income per share of $1.26), a
decrease of $343,000 or 9% less than the $3.8 million reported in 1997 (net
income per share of $1.38).
The following table sets forth certain performance ratios of our Company for
the periods indicated (net of the arbitration settlement discussed in Footnote
11 of the Consolidated Financial Statements):
1998 1997 1996
Return on Assets
(net income to
average total assets) 1.13% 1.10% 1.11%
Return on Equity
(net income to
average total equity) 12.75% 13.11% 13.59%
Dividend Payout Ratio
(dividends declared
divided by net income) 41.53% 25.68% 40.59%
Equity to Asset Ratio
(average equity to
average total assets) 8.86% 8.38% 8.18%
1) Return on average assets and average equity was computed after
excluding the nonrecurring after-tax income associated with the arbitration
award by a vendor.
Net income is influenced by five key elements: net interest income, other
operating income, other operating expenses, provision for income taxes and the
provision for possible loan losses. A discussion of these five elements
follows.
Net Interest Income
The most significant source of revenue is net interest income, the amount by
which interest earned on interest-earning assets exceeds interest expense on
interest-bearing liabilities.
Factors which influence net interest income are changes in volume of
interest-earning assets and liabilities as well as changes in the associated
interest rates.
The following tables set forth our Company's average balances of, and the
interest earned or incurred on, each principal category of assets, liabilities
and stockholders' equity, the related rates, net interest income and rate
"spread" created:
<PAGE>
<46>
___________________________________________________________________________
[GRAPHIC OMITTED: Silhouette of colonial rider on horseback, upper left hand
corner of page, .5 inches square]
___________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
<TABLE>
Analysis of Average Balances and Interest Rates (1)
December 31 December 31 December 31
1998 1997 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 5,403 290 5.37% 4,042 221 5.47% 2,782 147 5.28%
Total short-term investments 5,403 290 5.37% 4,042 221 5.47% 2,782 147 5.28%
Investment securities:
Taxable 75,722 4,654 6.15% 83,686 5,332 6.37% 82,163 5,310 6.46%
Tax-exempt (3) 10,428 745 7.14% 714 79 11.06% 792 100 12.63%
Total investment securities 86,150 5,399 6.27% 84,400 5,411 6.41% 82,955 5,410 6.52%
Loans:
Residential mortgage loans 126,683 11,254 8.88% 119,083 10,952 9.20% 104,176 9,699 9.31%
Commercial and farm loans 45,371 4,272 9.42% 43,790 4,263 9.74% 41,896 4,121 9.84%
Loans to state and political 10,299 885 8.59% 9,652 875 9.07% 9,631 829 8.61%
subdivisions
Other loans 13,928 1,542 11.07% 13,900 1,378 9.91% 14,401 1,435 9.96%
Loans, net of
discount (2)(3)(4) 196,281 17,953 9.15% 186,425 17,468 9.37% 170,104 16,084 9.46%
Total interest-earning assets 287,834 23,642 8.21% 274,867 23,100 8.40% 255,841 21,641 8.46%
Cash and due from banks 6,663 6,417 5,920
Bank premises and equipment 5,697 5,140 4,311
FASB 115 adjustment 499 170 218
Other assets 1,449 2,342 3,828
Total non-interest bearing assets 14,308 14,069 14,277
Total assets 302,142 288,936 270,118
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts 33,411 693 2.07% 32,644 786 2.41% 29,752 688 2.31%
Savings accounts 26,670 580 2.17% 27,736 614 2.21% 27,541 612 2.22%
Money market accounts 37,682 1,801 4.78% 29,420 1,349 4.59% 27,189 1,192 4.38%
Certificates of deposit 146,630 8,408 5.73% 143,837 8,358 5.81% 133,071 7,784 5.85%
Other borrowed funds 7,100 438 6.17% 8,129 503 6.19% 9,730 591 6.07%
Total interest-bearing liabilities 251,493 11,920 4.74% 241,766 11,610 4.80% 227,283 10,867 4.78%
Demand deposits 19,924 19,141 17,550
Other liabilities 3,950 3,804 3,184
Total non-interest-bearing 23,874 22,945 20,734
liabilities
Stockholders' equity 26,775 24,225 22,101
Total liabilities and stockholders'
equity 302,142 288,936 270,118
Net interest income 11,722 11,490 10,774
Net interest spread (5) 3.47% 3.60% 3.68%
Net interest income as a percentage
of average interest-earning assets 4.07% 4.18% 4.21%
Ratio of interest-earning assets
to interest-bearing liabilities 1.14 1.14 1.13
</TABLE>
(1) Averages are based on daily averages.
(2) Includes loan origination and commitment fees of $187, $141 and $155 for
1998, 1997 and 1996, respectively.
(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>
<47>
___________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Nineteen hundred ninety-eight Annual Report
___________________________________________________________________________
As described above, we have experienced a narrowing interest margin percentage
during 1998. The current flat yield curve has limited our Company's
opportunity to increase margin with new business as the existing investments
and loans mature or repay. We continue to review various pricing and
investment strategies to enhance deposit growth while maintaining or expanding
the current interest margin.
The following table shows the effect of changes in volume and rates on
interest income and expense. Rate/Volume variances are allocated to rate and
volume changes based upon the absolute change in each. Tax-exempt interest
revenue is shown on a tax-equivalent basis for proper comparison using a
statutory federal income tax rate of 34%.
<TABLE>
Analysis of Changes in Net Interest Income on a Tax-Equivalent Basis
1998 vs. 1997 1997 vs. 1996
Change in Change in Total Change in Change in Total
Volume Rate Change Volume Rate Change
<S> <C> <S> <C> <C> <C> <C>
Interest Income:
Short-term investments:
Interest-bearing deposits at banks $ 73 $ (4) $ 69 $ 69 $ 5 $ 74
Investment securities:
Taxable (494) (184) (678) 92 (70) 22
Tax-exempt 684 (18) 666 (9) (12) (21)
Total investment securities 190 (202) (12) 83 (82) 1
Loans:
Residential mortgage loans 648 (346) 302 1,369 (116) 1,253
Commercial and farm loans 98 (89) 9 184 (42) 142
Loans to state and political 45 (35) 10 2 44 46
subdivisions
Other loans 3 161 164 (50) (7) (57)
Loans, net of
discount 794 (309) 485 1,505 (121) 1,384
Total Interest Income 1,057 (515) 542 1,657 (198) 1,459
Interest Expense:
Interest-bearing deposits:
NOW accounts 19 (112) (93) 69 29 98
Savings accounts (23) (11) (34) 4 (2) 2
Money Market accounts 393 59 452 101 56 157
Certificates of deposit 155 (105) 50 625 (51) 574
Total interest-bearing deposits 544 (169) 375 799 32 831
Other borrowed funds (63) (2) (65) (99) 11 (88)
Total interest expense 481 (171) 310 700 43 743
Net interest income $ 576 $ (344) $ 232 $ 957 $ (241) $ 716
</TABLE>
As can be seen from the preceding tables, tax equivalent net interest income
rose from $10.7 million in 1996 to $11.5 million in 1997 and increased to
$11.7 million in 1998. In 1998, net interest income increased $232,000 while
overall spread decreased from 3.60% to 3.47%. The increased volume of
interest-earning assets generated an increase in interest income of $1,057,000
while increased volume of interest-bearing liabilities produced $481,000 of
interest expense. The change in volume resulted in an increase of $576,000 in
net interest income. The net change in rate was a negative $344,000 resulting
in a total positive net change of $232,000 when combined with change in
volume. The yield on interest-earning assets decreased 19 basis points from
8.40% to 8.21% and the average interest rate on interest-bearing liabilities
decreased only 6 basis points from 4.80% to 4.74%. Analysis of our Company's
current net interest income in 1999 indicates that the effects of stable
interest rates and the effect of the yield curve continuing to be level, has a
negative effect on interest margin. We are currently evaluating alternatives
to improve the interest spread.
<PAGE>
<48>
___________________________________________________________________________
[GRAPHIC OMITTED: Silhouette of colonial rider on horseback, upper left hand
corner of page, .5 inches square]
___________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
OTHER OPERATING INCOME: 1998 1997 1996
Service charges $1,060 $ 848 $ 844
Trust 362 339 270
Other 304 246 258
Arbitration settlement 112 994 0
Realized securities gains, net 457 25 19
TOTAL OTHER OPERATING INCOME $2,295 $2,452 $1,391
1998/1997 1997/1996
Change Change
$ % $ %
Service charges 212 25.0 4 .5
Trust 23 6.8 69 25.6
Other 58 23.6 (12) (4.7)
Arbitration settlement (882) (88.7) 994 -
Realized securities gains, net 432 1728.0 6 31.6
TOTAL (157) (6.4) 1,061 76.3
Total other operating income decreased $157,000 compared with the same period
in 1997 primarily as a result of the reduction of the arbitration settlement
during 1998. Service charge income increased as a result of additional
business checking account, ATM and MasterMoney Card charges.
We continue to evaluate means of increasing other operating income to off-set
the loss of net interest income described above. One approach, recently
adopted, is to apply service charges on business accounts by charging fees on
transaction activity (reduced by earnings credit based on customers' balances)
to more equitably recover costs. We expect to use this analysis for our other
products in the near future.
Investment security gains increased by $432,000 as a result of the
restructuring of our investment portfolio as discussed previously. This
restructuring was accomplished with out significantly reducing the yield of
the portfolio.
OTHER OPERATING EXPENSES: 1998 1997 1996
Salaries and employee benefits $3,848 $3,882 $3,418
Occupancy 522 519 466
Furniture and equipment 713 706 599
Professional fees 401 219 198
Federal Deposit Insurance premiums 56 56 372
Other 2,674 2,524 2,297
TOTAL $8,214 $7,906 $7,350
1998/1997 1997/1996
Change Change
$ % $ %
Salaries and employee benefits (34) (.9) 464 13.6
Occupancy 3 .6 53 11.4
Furniture and equipment 7 1.0 107 17.9
Professional fees 182 83.1 21 10.5
Federal Deposit Insurance premiums - - (316) (85.0)
Other 150 5.9 227 9.9
TOTAL 308 3.9 556 7.6
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Nineteen hundred ninety-eight Annual Report
___________________________________________________________________________
Total other operating expense was $8,214,000 in 1998 reflecting an increase of
$308,000 over the 1997 period.
Salaries and benefit's expense decreased by $33,000 for the current period
reflecting normal merit increases offset by a reduction of profit sharing
expense during the same period in 1997 (an accrual to salaries and benefit
expense of $154,000 for profit sharing reflecting the additional arbitration
income).
Professional Fees
1998 1997 1996
Other professional fees $301 $161 $141
Legal fees 59 19 19
Examinations and audits 41 39 38
Total $401 $219 $198
1998/1997 1997/1996
Change Change
$ % $ %
Other professional fees 140 87.0 20 14.2
Legal fees 40 210.5 - -
Examinations and audits 2 5.1 1 2.6
Total 182 83.1 21 10.6
Other expenses increased $331,000 or 11.9% during 1998 one of the major
expenses other professional fees increased $141,000 reflect management's
efforts to implement future strategic growth strategies. In addition, Y2K
expense of $37,000 were included in this category.
The extraordinary item represented the prepayment of Federal Home Loan Bank
long-term debt resulting in a one-time expense of $213,000 ($141,000 net of
taxes) and was done as part of the restructuring of the investment portfolio.
Provision for Income Taxes
The provision for income taxes before extraordinary item was $1,402,000 during
1998 compared with $1,673,000 during the 1997 related period. Income before
taxes decreased $271,000 in the 1998 period over the same period in 1997
reflecting the change in income and increased levels of tax exempt income.
Stockholders' Equity
Stockholders' equity is evaluated in relation to total assets and the risk
associated with those assets. The greater the capital resources, the more
likely a corporation is to meet our cash obligations and absorb unforeseen
losses. For these reasons capital adequacy has been, and will continue to be,
of paramount importance.
Stockholders' equity has grown by 10.3% in 1998, 13.2% in 1997, and 7.6% in
1996 to the current level of $28.6 million. Adjustments made to equity for
unrealized holding gains and losses on available-for-sale securities resulted
in an increase of $978,000 in 1998 compared to an increase of $343,000 in
1997. Total equity was approximately 9.1% of total assets at December 31,
1998, as compared to 8.8% at December 31, 1997.
The dividend rate is determined by the Board of Directors after considering
our Company's capital requirements, current and projected net income, and
other factors. In 1998 and 1997, 41.5% and 25.7% of net income was paid out
in dividends, respectively.
For the year ended December 31, 1998, the total number of common shares
outstanding was 2,773,434. For comparative purposes, outstanding shares for
prior periods were adjusted for the 1998 stock dividend in computing earnings
and cash dividends per share.
<PAGE>
<50>
___________________________________________________________________________
[GRAPHIC OMITTED: Silhouette of colonial rider on horseback, upper left hand
corner of page, .5 inches square]
___________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
There are currently three federal regulatory measures of capital adequacy.
Our Company's ratios substantially exceed all federal regulatory standards as
detailed in Footnote 14 of the Consolidated Financial Statements.
Liquidity
Liquidity is a measure of our Company's ability to efficiently meet normal
cash flow requirements of both borrowers and depositors. To maintain proper
liquidity, we use funds management policies along with our investment policies
to assure we can meet our financial obligations to depositors, credit
customers and stockholders. Liquidity is needed to meet depositors'
withdrawal demands, extend credit to meet borrowers' needs, provide funds for
normal operating expenses and cash dividends, and fund other capital
expenditures.
Our Company's historical activity in this area can be seen in the Consolidated
Statement of Cash Flows from investing and financing activities.
Cash generated by operating activities, investing activities and financing
activities influences liquidity management. The most important source of
funds is the deposits that are primarily core deposits (deposits from
customers with other relationships). Short-term debt from the Federal Home
Loan Bank supplements our Company's availability of funds.
Our Company's use of funds is shown in the investing activity section of the
Consolidated Statement of Cash Flows, where the net increase in loans is
detailed. Other significant uses of funds are capital expenditures, purchase
of loans and acquisition premiums. Surplus funds are then invested in
investment securities.
Capital expenditures were $504,000 in 1998, $1,134,000 less than 1997.
Some major capital expenditures in 1998 were:
*$213,000 for remodeling branch offices;
*$53,000 for ATMs;
Some major capital expenditures in 1997 were:
*$450,000 to purchase, renovate and add parking for the Canton office, as
well as major improvements to the Gillett, Sayre and Wellsboro offices;
*$958,000 for the software and hardware needed to implement the new Jack
Henry system and associated networking costs ($193,000 for the IBM AS/400
was financed by a capital lease through IBM).
These purchases will allow greater operating efficiency and provide the
customer with a higher quality product.
On February 8, 1999, we acquired a property near the Mansfield Wal-Mart
consisting of a large office building on 2 acres, to be used as an
administration and/or operations facility. We expect the costs of acquisition
and remodeling to be approximately $1 million. This building will allow us to
discontinue rentals of two other properties. Our calculations show this
should result in a net savings.
Our Company continues to plan for an approximate $1 million renovation of the
Mansfield community office. This effort has been in various stages of
planning for more than eight years. We expect renovation to take place in late
1999 or early 2000.
We believe our Company has sufficient resources to complete these projects
from our normal operations and that they will have a long-term positive effect
on revenues, efficiency and the capacity for future growth.
To assure the maintenance of liquidity reserves, our Company monitors and
places various internal constraints on the level of loans relative to core
deposits and other stable funding sources; the liquidity characteristics of
investments; and the volume and maturity structure of wholesale funding.
Interest Rate and Market Risk Management
The objective of interest rate sensitivity management is to maintain an
appropriate balance between the stable growth of income and the risks
associated with maximizing income through interest sensitivity imbalances and
the market value risk of assets and liabilities.
Because of the nature of our operations, we are not subject to foreign
currency exchange
<PAGE>
<51>
___________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Nineteen hundred ninety-eight Annual Report
___________________________________________________________________________
or commodity price risk and, since our Company has no trading portfolio, it is
not subject to trading risk.
Currently our Company has equity securities that represent only 4% of our
investment portfolio and, therefore, equity risk is not significant.
The primary components of interest-sensitive assets include adjustable-rate
loans and investments, loan repayments, investment maturities and money market
investments. The primary components of interest-sensitive liabilities include
maturing certificates of deposit, IRA certificates of deposit and short-term
borrowings. Savings deposits, NOW accounts and money market investor accounts
are considered core deposits and are not short-term interest sensitive (except
for the top-tier money market investor accounts which are paid current market
interest rates).
The following table shows the cumulative static GAP (at amortized cost) for
various time intervals:
<TABLE>
Maturity or Repricing of Company Assets and Liabilities at December 31, 1998
Over 5
(in thousands) 3 months 12 months 2 years 3 years 5 years years Total
<S> <C> <C> <C> <C> <C> <C> <C>
Investment securities and
interest-bearing deposits $ 3,509 $ 15,181 $ 13,121 $ 16,705 $ 33,217 $ 9,998 $ 91,731
Loans, net of unearned income and
deferred loan fees 32,648 65,200 41,200 33,689 26,056 7,142 205,935
Total interest-earning assets $ 36,157 80,381 54,321 $ 50,394 $ 59,273 $ 16,950 $297,476
Interest-bearing demand and savings deposits $ 45,100 $ - $ - $ - $ - $ 58,087 $103,187
Certificates of deposit 18,634 48,001 40,240 22,239 20,706 208 150,028
Borrowed funds 4,400 949 642 784 559 - 7,334
Total interest-bearing liabilities $ 68,134 $ 48,950 $ 40,882 $ 23,023 $ 21,265 $ 58,295 $260,549
Excess interest-earning
assets (liabilities) $(31,977) $ 31,431 $ 13,439 $ 27,371 $ 38,008 $(41,345)
Cumulative interest-earning assets $ 36,157 $116,538 $170,859 $221,253 $280,526 $297,476
Cumulative interest-bearing liabilities 68,134 117,084 157,966 180,989 202,254 260,549
Cumulative gap $(31,977) $ (546) $ 12,893 $ 40,264 78,272 36,927
Cumulative interest rate
sensitivity ratio (1) 0.53 1.00 1.08 1.22 1.39 1.14
</TABLE>
(1) Cumulative Interest-earning assets divided by interest-bearing
liabilities.
The previous table and the simulation models discussed below are presented
assuming money market investment accounts and NOW accounts in the top interest
rate tier are repriced within the first three months.
IRA certificates of deposit represent $36.6 million and are subject to being
repriced once per year if the individual is over 59 ½ years of age. We
project that 78% of the IRAs are over 59 ½ and would reprice if interest
rates moved up 100 basis points or more. However, a recent change in policy
would limit this repricing risk to once per contract rather than once per year
for any new or renewed IRA CDs.
The loan amounts reflect the principal balances expected to be repriced as a
result of contractual amortization and anticipated early payoffs.
Gap analysis, one of the methods used by us to analyze interest rate risk,
does not necessarily show the precise impact of specific interest rate
movements on our Company's net interest income because the 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, be repaid at different times and at different rate
levels. Our
<PAGE>
<52>
___________________________________________________________________________
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corner of page, .5 inches square]
___________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
Company currently uses a computer simulation model to better measure the
impact of interest rate changes on net interest income. We use the model as
part of our risk management process that will effectively identify, measure,
and monitor our Company's risk exposure.
Interest rate simulations using a variety of assumptions are used by us to
evaluate our interest rate risk exposure. A shock analysis at December 31,
1998, indicated that a 200 basis point movement in interest rates in either
direction would not have a significant adverse impact on our Company's
anticipated net interest income or the market value of assets and liabilities
over the next twenty four months.
Year 2000 Problem
* Bank's State of Readiness
We are 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). If not corrected, some computer applications could fail or create
erroneous results by or at the Year 2000. This could cause entire system
failures, miscalculations, and disruptions of normal business operations
including, among other things, a temporary inability to process transactions,
send statements, or engage in similar day to day business activities. The
extent of the potential impact of the Year 2000 Problem in not yet known, and
if not timely corrected, it could affect the global economy.
We have assessed the extent of vulnerability of our Company's computer systems
to the problem. Our Company's conversion, in August 1997, to Jack Henry and
Associates (JHA) 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 our exposure to these problems. The JHA Silverlake
System software was certified by the Information Technology Association of
America (ITAA) on March 16, 1998 while the IBM AS\400 received the first ever
Year 2000 certification by that organization. Internal testing and validation
for these primary mission critical systems was successfully completed in
November, 1998 and we expect that the entire testing process of critical
systems will be complete early in 1999.
*Risk Assessment of Year 2000
We believe that, with modifications to existing software and conversions to
new software, the Year 2000 problem will not pose a significant operational
problem for us. However, because most computer systems are, by their very
nature, interdependent, it is possible that non-compliant third party
computers could impact our Company's computer systems. Additionally, we have
taken steps to communicate with the third parties, such as wire transfer
systems, telephone systems, electric companies and other utility companies
with which it deals to coordinate Year 2000 compliance but could be adversely
affected if it or the unrelated third parties are unsuccessful. We are also
assessing the impact, if any, the Year 2000 may have on our large loan (credit
risk) and deposit customers.
*Cost of Year 2000
As described above, our primary systems are Year 2000 compliant, therefore,
little programming costs will be incurred. Most of the costs incurred in
addressing this problem are related to planning and internal testing and
validation which are expected to be expensed as incurred. The financial
impact to our Company of Year 2000 compliance was $39,000 in 1998 is not
anticipated to be material to our Company's financial position or results of
operations for 1999. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from those plans.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the replacement of noncompliance of third party vendors, and similar
uncertainties.
<PAGE>
<53>
__________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
__________________________________________________________________________
Nineteen hundred ninety-eight Annual Report
__________________________________________________________________________
*Contingency Plans
We, in conjunction with our Year 2000 and Disaster Recovery consultants, are
in the process of modifying our disaster recover plans to include the response
to a Year 2000 problem in a most likely worst case scenario. Our Company's
preliminary contingency plans involve the use of manual labor to compensate
for the temporary loss of certain automated computer systems or third party
vendors.
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.
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 our Company
to own or control affiliates that engage in securities, mutual funds and
insurance activities.
Normal examinations of our Company by the Office of Comptroller of the
Currency occurred during 1998. The last Community Reinvestment Act
performance evaluation by the same agency resulted in a rating of
"Satisfactory Record of Meeting Community Credit Needs."
Aside from those matters described above, we do not believe that there are any
trends, events or uncertainties which would have a material adverse impact on
future operating results, liquidity or capital resources. We are not aware of
any current recommendations by the regulatory authorities (except as described
herein) which, if they were to be implemented, would have such an effect,
although the general cost of compliance with numerous and multiple federal and
state laws and regulations does have, and in the future may have, a negative
impact on our Company's results of operations.
<PAGE>
<54>
CITIZENS
FINANCIAL SERVICES
INCORPORATED
15 SOUTH MAIN STREET 570-662-2121
MANSFIELD, PA 16933 800-326-9486
FAX 570-662-2365
DIRECTORS
R. Lowell Coolidge, Esquire
Chairman of the Board
Carol J. Tama
Vice Chairman of the Board
Bruce L. Adams
Larry J. Croft
Mark L. Dalton
John E. Novak
John M. Thomas, MD
Rudolph J. van der Hiel, Esquire
William D. VanEtten
Richard E. Wilber
DIRECTORS EMERITI
Robert E. Dalton
Edward Kosa
John G. Kuster
Robert J. Landy, Esquire
Robert G. Messinger
Wilber Wagner
DIRECTORS
R. Lowell Coolidge, Esquire
Chairman of the Board
Carol J. Tama
Vice Chairman of the Board
Bruce L. Adams
Larry J. Croft
Mark L. Dalton
John E. Novak
John M. Thomas, MD
Rudolph J. van der Hiel, Esquire
William D. VanEtten
Richard E. Wilber
President
Chief Executive Officer
OFFICERS
Administrative Services
Cynthia T. Pazzaglia
Assistant Vice President
Administrative Division Manager
Human Resources Manager
Audit/Compliance
V. Guy Abell
Auditor
Karen R. Jacobson
Assistant Auditor/Security Officer
Banking Services
Terry B. Osborne
Executive Vice President
Secretary, Citizens Financial Services, Inc.
Jerald J. Rumsey
Senior Vice President
Credit Services Manager
Valerie S. Davis
Assistant Credit Services Manager
Allan K. Reed
Assistant Vice President
Branch Administrator
Chester L. Reed
Commercial Services Officer
Robert P. Fitzgerald
Calling Officer
Pamela A. Baldwin
Appraiser
Wendy L. Southard
Marketing Coordinator
Finance/Control
Thomas C. Lyman
Assistant Vice President
Treasurer, Citizens Financial Services, Inc.
Finance/Control Division Manager
Randall E. Black
Controller
Asst. Treasurer, Citizens Financial Services, Inc.
Operations
William W. Wilson
Vice President
Operations Division Manager
Joanne W. Marvin
Banking Operations Manager
Trust and Investment Services
Philip A. Prough
Trust and Investment Services Officer
Jean A. Knapp
Trust Administrator
Sara J. Roupp
Trust Administrator
<PAGE>
<55>
___________________________________________________________________________
GRAPHIC OMITTED: First Citizens National Bank MasterMoney Card, bottom left
of page, approximately 1.5 inches length by 2.5 inches wide]
___________________________________________________________________________
Bank-By-Phone
24 Hour Banking
1-888-HLP-FCNB
(1-888-457-3262)
or
662-3874
___________________________________________________________________________
[MAC LOGO OMITTED]
___________________________________________________________________________
24 Hour Automated Teller
Blossburg, Mansfield
Mansfield University
Weis Market
Solders and Sailors Memorial Hospital
Wellsboro, Genesee, Ulysses, Sayre
Gillett
___________________________________________________________________________
COMMUNITY OFFICES
Toll free to all locations: 800-326-9486
MANSFIELD 570-662-2121
15 South Main Street
Mansfield, PA 16933 FAX 570-662-3278
Local Board
William J. Smith
Chairman
Anthony D. Fiamingo
Shari L. Johnson
Stephen A. Saunders
William J. Waldman
Officers
Shari L. Johnson
Office Manager
Michele E. Litzelman
Customer Service Counselor
Kristina M. Payne
Customer Service Counselor
BLOSSBURG 570-638-2115
300 Main Street
Blossburg, PA 16912 FAX 570-638-3178
Local Board
Thomas R. Phinney
Chairman
Terrance M. Asalone
George D. Lloyd
Susan M. Signor
William D. Zwicharowski
Officers
Terrance M. Asalone
Assistant Vice President
Office Manager
Alisha M. Fitch
Customer Service Counselor
ULYSSES 814-848-7572
502 Main Street
Ulysses, PA 16948 FAX 814-848-7633
Local Board
Ronald G. Bennett
Chairman
D. Thomas Eggler
Jerry R. McCaslin
Phillip D. Vaughn
James A. Wagner
Officers
Phillip D. Vaughn
Assistant Vice President
Office Manager
L. Abbie Lerch
Customer Service Counselor
GENESEE 814-228-3201
391 Main Street
Genesee, PA 16923 Fax 814-228-3395
Local Board
E. Gene Kosa
Chairman
William R. Austin
John K. Hyslip
Stephen B. Richard
Dennis C. Smoker
Officers
William R. Austin
Assistant Vice President
Office Manager
Christine M. Miller
Customer Service Counselor
SAYRE 570-888-6602
306 West Lockhart Street
Sayre, PA 18840 FAX 570-888-3198
Local Board
Joseph P. Burkhart, Jr.
Chairman
Blaine W. Cobb, MD
R. Joseph Landy, Esquire
William A. Richetti
Michael J. Yanuzzi
Officers
William A. Richetti
Assistant Vice President
Office Manager
Antoinette G. Tracy
Customer Service Counselor
TROY 570-297-4131
103 West Main Street
Troy, PA 16947 FAX 570-297-4133
Local Board
Lyle A. Haflett
Chairman
Thomas A. Calkins, III
Richard H. Packard
David E. Carlson
Donald D. White
Office Manager
David E. Carlson
Assistant Vice President
WELLSBORO 570-724-2600
99 Main Street
Wellsboro, PA 16901 FAX 570-724-4381
Local Board
William A. Hebe, Esquire
Chairman
Timothy J. Gooch, CPA
James K. Stager
Jeffrey L. Wilson
Officers
Jeffrey L. Wilson
Assistant Vice President
Office Manager
Marsha B. Jones
Customer Service Counselor
CANTON 570-673-3103
29 West Main Street
Canton, PA 17724 FAX 570-673-4573
Local Board
Roger C. Graham, Jr.
Chairman
William F. Watkins
Christopher S. Landis
Marilyn I. Scott
David L. Wright
Office Manager
Christopher S. Landis
Assistant Vice President
Catherine O. Casiello
Customer Service Counselor
GILLETT 570-596-2679
P.O. Box 125
Gillett, PA 16925 FAX 570-596-4888
Local Board
Forrest M. Oldroyd
Helen Kay Shedden
Office Manager
Helen Kay Shedden
Assistant Vice President
WEIS MARKET 570-724-4644
201 Weis Plaza
Wellsboro, PA 16901 FAX 570-724-1842
Officers
Carol L. Strong
Sales Manager
Richard A. Pino, II
Assistant Sales Manager
<PAGE>
<56>
___________________________________________________________________________
[GRAPHIC OMITTED: Silhouette of colonial rider on horseback, left side of
page, approximately 2.25 inches by 2 inches wide]
___________________________________________________________________________
[FDIC EQUAL HOUSING LENDER LOGO OMITTED]
___________________________________________________________________________
MISSION STATEMENT
We Recognize
That Our Customers
Are The Reason
For Our Existence.
Our mission is to be the dominant financial services provider in our
marketplace. We will establish ourselves apart from other financial vendors by
providing service excellence to our customers through satisfied, motivated,
professional employees and a profitable range of financial services to meet
the customers' changing needs. It is also our mission to profitably satisfy
shareholder performance expectations and to be an active citizen of the
communities we serve.
___________________________________________________________________________
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting and Luncheon for the shareholders of Citizens Financial
Services, Inc. will be held at the Tioga County Fairgrounds Youth Building in
Whitneyville, PA on Tuesday, April 20, 1999, at 12:00 noon.
FORM 10-K
The Annual Report to the Securities and Exchange Commission, Form 10-K, will
be made available upon request.
Contact:
Thomas C. Lyman
Treasurer
Citizens Financial Services, Inc.
15 South Main Street
Mansfield, PA 16933
The Annual Report and other Company reports are also filed electronically
through the Electronic Data Gathering, Analysis, and Retrieval System
("EDGAR") which performs automated collection, validation, indexing,
acceptance, and forwarding of submissions to the Securities and Exchange
Commission (SEC) and is accessible by the public using the Internet at
http://www.sec.gov./edgarhp.htm.
TRANSFER AGENT
Citizens Financial Services, Inc.
15 South Main Street
Mansfield, PA 16933
Telephone: 570-662-2121 / 800-326-9486
SHAREHOLDER SERVICES
Shareholder inquiries and requests for assistance should be directed to the
Transfer Agent listed above.
STOCK PURCHASING INFORMATION
The stock symbol for Citizens Financial Services, Inc. is "CZFS". Citizens
Financial Services, Inc. stock is quoted Over the Counter ("OTC") on the OTC
Bulletin Board through the following Market Makers:
Market Makers
Ferris-Baker-Watts Fahnestock & Co.
6 Bird Cage Walk 1500 Walnut Street
Hollidaysburg, PA 16648 Philadelphia, PA 19102
Telephone: 800-343-5149 Telephone: 800-722-2294
Ryan, Beck & Co. Janney Montgomery Scott
80 Main Street 1601 Market Street
West Orange, NJ 07052 Philadelphia, PA 19103
Telephone: 800-342-2325 Telephone: 800-JANNEYS
Hopper Soliday & Co., Inc. PaineWebber Incorporated
1703 Oregon Pike 10 Park Street, P.O. Box 2636
Lancaster, PA 17601-4201 Concord, NH 03302
Telephone: 800-646-8647 Telephone: 800-678-0619
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
____________________
First Citizens National Bank of Mansfield, Pennsylvania is the
Company's sole subsidiary.
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