UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________________ to ___________________
Commission file number 0-13222
CITIZENS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2265045
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 South Main Street, Mansfield, Pennsylvania 16933
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (570) 662-2121
Indicate by checkmark whether the registrant (1) has filed all reports
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes__X___ No_____
The number of shares outstanding of the Registrant's Common Stock, as of
May 5, 1999 2,773,434 shares of Common Stock, par value $1.00.
<PAGE>
Citizens Financial Services, Inc.
Form 10-Q
INDEX
Page
Part I FINANCIAL INFORMATION (UNAUDITED)
Item 1-Financial Statements
Consolidated Balance Sheet as of March 31, 1999 and
December 31, 1998 1
Consolidated Statement of Income for the
Three Months Ended March 31, 1999 and 1998 2
Consolidated Statement of Comprehensive Income for the Three
Months Ended March 31, 1999 and 1998 3
Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
Item 2-Management's Discussion and Analysis of Financial Condition
and Results of Operations 6-16
Item 3-Quantitative and Qualitative Disclosure About Market Risk 16
Part II OTHER INFORMATION AND SIGNATURES
Item 1-Legal Proceedings 17
Item 2-Changes in Securities 17
Item 3-Defaults upon Senior Securities 17
Item 4-Submission of Matters to a Vote of Security Holders 17
Item 5-Other Information 17
Item 6-Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE>
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31, December 31,
1999 1998
ASSETS:
Cash and due from banks:
Noninterest-bearing $ 7,104,194 $ 7,175,095
Interest-bearing 54,183 129,708
Total cash and cash equivalents 7,158,377 7,304,803
Available-for-sale securities 87,896,512 93,082,429
Loans (net of allowance for loan
losses 1999, $2,275,000; December 31, 1998,
$2,292,000) 204,862,254 203,582,637
Foreclosed assets held for sale 1,050,636 528,630
Premises and equipment 5,922,088 5,605,686
Accrued interest receivable 2,175,262 2,188,372
Other assets 1,548,394 1,271,240
TOTAL ASSETS $310,613,523 $313,563,797
LIABILITIES:
Deposits:
Noninterest-bearing $ 20,683,874 $ 20,977,843
Interest-bearing 254,079,056 253,215,120
Total deposits 274,762,930 274,192,963
Borrowed funds 4,227,328 7,333,610
Accrued interest payable 1,761,277 2,362,596
Other liabilities 1,356,581 1,076,164
TOTAL LIABILITIES 282,108,116 284,965,333
STOCKHOLDERS' EQUITY:
Common Stock
$1.00 par value; authorized 10,000,000
shares in 1999 and 1998; issued and outstanding
2,773,434 shares in 1999 and
1998, respectively 2,773,434 2,773,434
Additional paid-in capital 7,912,967 7,912,967
Accumulated other comprehensive income 17,448,285 16,934,349
TOTAL 28,134,686 27,620,750
Net unrealized holding gains on
available-for-sale securities 370,721 977,714
TOTAL STOCKHOLDERS' EQUITY 28,505,407 28,598,464
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $310,613,523 $313,563,797
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended
March 31,
1999 1998
INTEREST INCOME:
Interest and fees on loans $4,449,017 $4,303,018
Interest on interest-bearing deposits
with banks 5,485 36,205
Interest and dividends on investments:
Taxable 997,813 1,230,660
Nontaxable 224,954 67,301
Dividends 35,619 21,515
TOTAL INTEREST INCOME 5,712,888 5,658,699
INTEREST EXPENSE:
Deposits 2,792,098 2,804,211
Borrowed funds 94,920 111,067
TOTAL INTEREST EXPENSE 2,887,018 2,915,278
NET INTEREST INCOME 2,825,870 2,743,421
Provision for loan losses 60,000 52,500
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,765,870 2,690,921
OTHER OPERATING INCOME:
Service charge 289,242 211,638
Trust 99,686 92,515
Other 133,371 53,170
Realized securities gains, net 95,482 94,797
Arbitration settlement 28,595 67,678
TOTAL OTHER OPERATING INCOME 646,376 519,798
OTHER OPERATING EXPENSES:
Salaries and employee benefits 1,011,575 927,219
Occupancy 136,190 135,955
Furniture and equipment 165,945 178,695
Other professional fees 182,644 67,636
Other 732,049 711,911
TOTAL OTHER OPERATING EXPENSES 2,228,403 2,021,416
Income before provision for income taxes 1,183,843 1,189,303
Provision for income taxes 295,491 342,780
NET INCOME $ 888,352 $ 846,523
Earnings per share $0.32 $0.31
Cash dividend declared $0.135 0.125
Weighted average number of shares outstanding 2,773,434 2,773,434
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Net income $ 888,352 $846,523
Other comprehensive income:
Unrealized gains on securities:
Gain (loss) arising during the year $ (824,204) $ 8,464
Reclassification adjustment 95,482 (919,686) (94,797) (86,333)
Other comprehensive income before tax (919,686) (86,333)
Income tax expense related to other
comprehensive income (312,693) (29,353)
Other comprehensive income, net of tax (606,993) (56,980)
Comprehensive income $ 281,359 $ 789,543
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
Three months Ended
March 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998
<S> <C> <C>
Net income $ 888,352 $ 846,523
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 60,000 52,500
Provision for depreciation and amortization 190,721 189,268
Amortization and accretion of investment
securities 114,800 84,121
Deferred income taxes 16,251 6,856
Realized gains on securities (95,482) (94,797)
Realized gains on loans sold (9,180) (13,795)
Gain of sales or disposals of premises and equipment (377) 0
Originations of loans held for sale (998,500) (886,300)
Proceeds from sales of loans held for sale 1,007,680 900,095
(Gain) loss on sale of foreclosed assets
held for sale (11,607) 7,625
Decrease (increase) in accrued interest receivable
and other assets 5,207 (112,696)
Increase in accrued interest
payable and other liabilities (320,902) (117,984)
Net cash provided by operating activities 846,963 861,416
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Proceeds from sales of securities 8,843,777 7,169,219
Proceeds from maturity and principal
repayments of securities 4,536,541 1,000,000
Purchase of securities (9,133,405) (4,117,552)
Held-to-maturity securities:
Proceeds from maturity and principal
repayments of securities 0 3,992,423
Purchase of securities 0 (3,003,586)
Net increase in loans (1,900,017) (1,080,993)
Capital expenditures (484,034) (137,526)
Proceeds from sale of premises and equipment 50,000 35,000
Proceeds from sale of foreclosed assets held
for sale 4,480 0
Net cash used by
investing activities 1,917,342 3,856,985
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 569,967 1,585,439
Proceeds from long-term borrowings 249,034 61,104
Repayments of long-term borrowings (203,172) (54,101)
Net (decrease) increase in short-term
borrowed funds (3,152,143) 19,086
Dividends paid (374,414) (346,679)
Net cash (used) provided by
financing activities (2,910,730) 1,268,207
Net (decrease) increase in cash and cash
equivalents (146,425) 5,986,608
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,304,803 6,342,359
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,158,378 $12,328,967
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 3,488,337 $ 3,484,718
Income taxes paid $ 0 $ 0
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated financial statements include the
accounts of Citizens Financial Services, Inc. and its
wholly-owned subsidiary, First Citizens National Bank (the
"Bank"), (collectively, the "Company"). All material
inter-company balances and transactions have been eliminated
in consolidation.
The accompanying interim financial statements have been
prepared by the Company without audit and, in the opinion of
management, reflect all adjustments (which include only
normal recurring adjustments) necessary to present fairly
the Company's financial position as of March 31, 1999, and
the results of operations for the interim periods presented.
In preparing the consolidated financial statements,
management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities
as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ
significantly from those estimates. For further information
refer to the consolidated financial statements and footnotes
thereto incorporated by reference in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
In June 1998, the Financial Accounting Standards Board
issued Statement No. 133, (SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. The
Company implemented this statement effective October 1, 1998
and has reclassified all of its securities as available-for-
sale. The impact of the reclassification resulted in a
significant change in net unrealized holding gains on
available-for-sale securities during the 4th quarter of 1998.
Note 2 - Earnings per Share
Earnings per share calculations give retroactive effect
to stock dividends declared by the Company. The number of
shares used in the earnings per share and dividends per
share calculation was 2,773,434 for 1999 and 1998.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 preceding March 31, 1999 Financial Report. The
results of operations for the three months ended March 31,
1999 and 1998 are not necessarily indicative of the results
to be expected for the full year.
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.
5
<PAGE>
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-K 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, Mansfield Wal-Mart 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.
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
INVESTMENTS
The investment portfolio, including available-for-sale,
decreased by $5.2 million or 5.6% in 1999 as compared to a
decrease of $4.3 million in 1998. Proceeds from maturing
investments were applied to borrowings and new loans.
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.
As shown in the following tables, the change in loans
grew by $14 million compared to the 1998 period, the result
of continued demand and attractive interest rates. In
addition, $1 million in conforming mortgage loans were
originated and sold on the secondary market through the
Federal Home Loan Mortgage Corporation, providing over
$9,000 of income in origination fees and premiums on loans
sold. 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.
6
<PAGE>
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 1999 as the result of bond
refinancing activity in a lower interest rate environment.
<TABLE>
March 31,
1999 1998 1997
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Residential $133,413 64.3 $122,877 63.6 $112,470 61.7
Commercial 27,481 13.3 27,075 14.0 28,174 15.5
Agricultural 8,817 4.3 8,111 4.2 5,848 3.2
Loans to individuals
for household,
family and other
purchases 14,544 7.0 13,924 7.2 14,835 8.1
Commercial and other
loans 12,008 5.8 10,545 5.5 11,103 6.1
State and political
subdivision loans 10,925 5.3 10,621 5.5 9,879 5.4
Total loans 207,188 100.0 193,153 100.0 182,309 100.0
Unearned income 51 82 154
Net loans $207,137 $193,071 $182,155
</TABLE>
1999/1998 1998/1997
Change Change
$ % $ %
Real estate:
Residential 10,536 8.6 10,407 9.3
Commercial 406 1.5 (1,099) (3.9)
Agricultural 706 8.7 2,263 38.7
Loans to individuals
for household,
family and other purchases 620 4.5 (911) (6.1)
Commercial and other loans 1,463 13.9 (558) (5.0)
State and political subdivision
loans 304 2.9 742 7.5
Total loans 14,035 7.3 10,844 5.9
7
<PAGE>
Deposits changed by $16.4 million or 6.3% during the 1999/1998 period.
Deposit growth increased primarily because of competitive pricing of our money
market deposit accounts and certificates of deposit.
<TABLE>
March 31,
1999 1998 1997
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits $20,684 7.5 $18,827 7.3 $18,829 7.5
NOW accounts 35,217 12.8 32,659 12.6 30,548 12.3
Savings deposits 27,759 10.1 26,561 10.3 27,471 11.1
Money market deposit accounts 38,826 14.1 34,884 13.5 26,175 10.6
Certificates of deposit 152,277 55.5 145,437 56.3 145,225 58.5
Total deposits $274,763 100.0 $258,368 100.0 $248,243 100.0
</TABLE>
1999/1998 1998/1997
Change Change
$ % $ %
Noninterest-bearing deposits 1,857 9.5 204 1.1
NOW accounts 2,558 7.8 2,111 6.9
Savings deposits 1,198 4.5 (910) (3.3)
Money market deposit accounts 3,942 11.3 8,709 33.3
Certificates of deposit 6,840 4.7 212 0.1
Total deposits 16,395 6.3 10,126 4.1
Borrowed funds decreased $3.1 million during the first three months of 1999
compared with almost no change during the 1998 period. The large decrease in
1999 resulted from repayments of short-term borrowing to the Federal Home Loan
Bank as a result of strong deposit growth. The Company's daily cash
requirements or short-term investments are met by using the financial
instruments available through the Federal Home Loan Bank.
CAPITAL
The Company has computed its risk-based capital ratios as follows (dollars
in thousands):
<TABLE>
March 31, December 31,
1999 1998
Amount Ratio Amount Ratio
<S> <C> <C> <C> <C>
Total capital (to risk-weighted assets)
Company $29,772 14.99% $29,296 14.99%
For capital adequacy purposes 15,887 8.00% 15,632 8.00%
To be well capitalized 19,859 10.00% 19,540 10.00%
Tier I capital (to risk-weighted assets)
Company $27,434 13.81% $26,893 13.96%
For capital adequacy purposes 7,943 4.00% 7,816 4.00%
To be well capitalized 11,915 6.00% 11,724 6.00%
Tier I capital (to average assets)
Company $27,434 8.82% $26,893 8.66%
For capital adequacy purposes 12,439 4.00% 12,423 4.00%
To be well capitalized 15,548 5.00% 15,529 5.00%
</TABLE>
See the discussion of liquidity below for details regarding future expansion
plans and the impact on capital.
8
<PAGE>
RESULTS OF OPERATIONS
Net income for the three month period ending March 31,
1999 was $888,000 an increase of $42,000 or 4.9% over the
$847,000 for the 1998 related period. Earnings per share
was $.32 during the first three months of 1999 compared with
$.31 during the comparable 1998 period.
Net interest income, the most significant component of
earnings, is the amount by which interest generated from
earning assets exceeds interest expense on liabilities. Net
interest income for the current three month period, after
provision for loan losses, was $2,766,000, an increase of
$75,000 or 2.8% compared with an increase of $67,000 or 2.6%
during the same period in 1998.
9
<PAGE>
<TABLE>
Analysis of Average Balances and Interest Rates (1)
March 31 March 31 March 31
1999 1998 1997
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 408 5 4.97% 2,635 36 5.54% 525 7 5.41%
Total short-term investments 408 5 4.97% 2,635 36 5.54% 525 7 5.41%
Investment securities:
Taxable 70,457 1,034 5.87% 76,236 1,252 6.57% 84,017 1,331 6.34%
Tax-exempt (3) 19,724 341 6.92% 6,061 102 6.73% 606 19 12.54%
Total investment securities 90,181 1,376 6.10% 82,297 1,354 6.58% 84,623 1,350 6.38%
Loans:
Residential mortgage loans 132,552 2,807 8.59% 122,809 2,711 8.95% 114,496 2,584 9.15%
Commercial and farm loans 37,325 840 9.13% 35,186 835 9.62% 35,124 852 9.84%
Loans to state and political
subdivisions 10,053 211 8.51% 10,622 221 8.44% 9,963 179 7.29%
Other loans 26,680 663 10.08% 24,455 611 10.13% 23,249 589 10.27%
Loans, net of
discount (2)(3)(4) 206,610 4,521 8.87% 193,072 4,378 9.20% 182,832 4,204 9.33%
Total interest-earning assets 297,199 5,902 8.05% 278,004 5,768 8.41% 267,980 5,561 8.42%
Cash and due from banks 7,016 6,142 6,355
Bank premises and equipment 5,757 5,760 4,570
Other assets 1,696 4,472 2,848
Total non-interest bearing
assets 14,469 16,374 13,773
Total assets 311,668 294,378 281,753
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts 34,988 155 1.80% 32,151 180 2.27% 31,184 184 2.39%
Savings accounts 26,787 124 1.88% 26,457 144 2.21% 27,491 150 2.21%
Money market accounts 39,253 418 4.32% 35,577 425 4.84% 26,219 285 4.41%
Sub-total 101,028 697 2.80% 94,185 749 3.23% 84,894 619 2.96%
Certificates of deposit 151,347 2,095 5.61% 144,680 2,055 5.76% 140,897 2,023 5.82%
Other borrowed funds 7,371 95 5.23% 7,198 111 6.25% 11,130 168 6.12%
Total interest-bearing
liabilities 259,746 2,887 4.51% 246,063 2,915 4.80% 236,921 2,810 4.81%
Demand deposits 20,333 19,060 17,976
Other liabilities 3,091 3,109 3,398
Total non-interest-bearing
liabilities 23,424 22,169 21,374
Stockholders' equity 28,498 26,146 23,458
Total liabilities and
stockholders' Equity 311,668 294,378 281,753
Net interest income 3,015 2,853 2,751
Net interest spread (5) 3.55% 3.61% 3.61%
Net interest income as a percentage
of average interest-earning assets 4.11% 4.16% 4.16%
Ratio of interest-earning assets
to interest-bearing liabilities 1.14 1.13 1.13
</TABLE>
(1) Averages are based on daily averages.
(2) Includes loan origination and commitment fees.
(3) Tax exempt interest revenue is shown on a tax equivalent basis for proper
comparison using a statutory federal income tax rate of 34%.
(4) Income on non-accrual loans is accounted for on a cash basis, and the loan
balances are included in interest-earning assets.
(5) Interest rate spread represents the difference between the average rate
earned on interest-earning assets and the average rate paid on interest-
bearing liabilities.
10
<PAGE>
As described in the table above, the yield on earning
assets, on a tax-equivalent basis, was 8.05% and 8.41%
during the first three months of 1999 and 1998, respectively
(a decline of 36 basis points). The cost of funds was 4.51%
and 4.80% during the same three month period (a decrease of
29 basis points).
In comparing the average interest cost of 1999 versus
1998, NOW accounts decreased 47 basis points, savings
accounts decreased 33 basis points, and money market
accounts decreased by 52 basis points (the result of an
increase in higher balance accounts). The interest rate on
certificates of deposit decreased by 15 basis points.
As described above, the we have experienced a narrowing
interest margin percentage during the three months of 1999.
The current flat yield curve has limited our 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.
Analysis of Changes in Net Interest Income of a Tax
Equivalent Basis (in thousands)
<TABLE>
1999 vs. 1998 1998 vs.1997
Change in Change in Total Change in Change in Total
Volume Rate Change Volume Rate Change
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Short-term investments:
Interest-bearing deposits at banks $ (30) $ (1) $ (31) $ 29 $ 0 $ 29
Total short-term investments (30) (1) (31) 29 0 29
Investment securities:
Taxable (94) (124) (218) (129) 50 (79)
Tax-exempt 227 12 239 87 (4) 83
Total investment securities 133 (112) 21 (42) 46 4
Loans:
Residential mortgage loans 216 (119) 97 182 (55) 127
Commercial and farm loans 51 (46) 5 1 (18) (17)
Loans to state and political subdivisions (12) 2 (10) 12 30 42
Other loans 55 (3) 52 30 (8) 22
Loans, net of
Discount 310 (166) 144 225 (51) 174
Total Interest Income 413 (279) 134 212 (5) 207
Interest Expense:
Interest-bearing deposits:
NOW accounts 16 (41) (25) 33 (37) (4)
Savings accounts 2 (22) (20) (6) 0 (6)
Money Market accounts 44 (51) (7) 98 42 140
Certificates of deposit 94 (54) 40 51 (19) 32
Total interest-bearing deposits 156 (168) (12) 176 (14) 162
Other borrowed funds 3 (19) (16) (60) 3 (57)
Total interest expense 159 (187) (28) 116 (11) 105
Net interest income $ 254 $ (92) $ 162 $ 96 $ 6 $ 102
</TABLE>
(1) The portion of the total change attributable to both volume and rate changes
during the year has been allocated to volume and rate components based upon the
absolute dollar amount of the change in each component prior to allocation.
The above table details the change in net interest income
and shows an increase of $413,000 resulting from volume changes
in investments and loans. The volume of interest expense
increased the cost of interest-bearing deposits and borrowings by
$159,000. The positive gain from volume of $254,000 when
combined with decrease of income due to rate of $92,000 resulted
in a net increase of $162,000 compared to a net increase of
$102,000 for the same period in 1998.
11
<PAGE>
The provision for loan losses increased to $60,000 in 1999
up from $52,500 in 1998. This provision was appropriate given
management's quarterly review of the allowance for loan losses
that is based on the following information: migration analysis of
delinquent and non accrual loans, estimated future losses on
loans, recent review of large problem credits, local and national
economic conditions, historical loss experience, OCC qualitative
adjustments, purchase of loans through acquisitions and peer
comparisons.
OTHER INCOME
March 31,
OTHER INCOME: 1999 1998 1997
Service charges $289 $212 $195
Trust 100 92 94
Other 133 53 57
Arbitration settlement 29 68 884
Realized securities gains, net 95 95 0
TOTAL OTHER OPERATING INCOME $646 $520 $1,230
1999/1998 1998/1997
Change Change
$ % $ %
Service charges 77 36.3 17 8.7
Trust 8 8.7 (2) (2.1)
Other 80 150.9 (4) (7.0)
Arbitration settlement (39) (57.4) (816) (92.3)
Realized securities gains, net 0 0 95
TOTAL 126 24.2 (710) (57.7)
Total other operating income increased $126,000 compared
with the same period in 1998 primarily as a result of the
increase in other income during 1999. Service charge income
increased as a result of additional 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, 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 continue this
analysis for our other products.
OTHER EXPENSES
March 31,
OTHER OPERATING EXPENSES: 1999 1998 1997
Salaries and employee benefits $1,011 $927 $1,104
Occupancy 136 136 138
Furniture and equipment 166 179 150
Professional fees 183 67 41
Other 732 712 607
TOTAL OTHER OPERATING EXPENSES $2,228 $2,021 $2,040
1999/1998 1998/1997
Change Change
$ % $ %
Salaries and employee benefits 84 9.1 (177) (16.0)
Occupancy 0 0 (2) (1.4)
Furniture and equipment (13) (7.3) 29 19.3
Professional fees 116 173.1 26 63.4
Other 20 2.8 105 17.3
TOTAL 207 10.2 (19) (0.9)
Total other operating expense was $2,228,000 in 1999
reflecting an increase of $207,000 over the 1998 period.
12
<PAGE>
Salaries and benefit's expense increased by $84,000 for the
current period reflecting normal merit increases.
Other professional fees increased $116,000 reflect
management's efforts to implement strategic growth initiatives.
In addition, Y2K expense was $7,000 for the three months
ending March 31, 1999.
Provision for Income Taxes
The provision for income taxes before extraordinary item was
$295,000 during 1999 compared with $343,000 during the 1998
related period.
LIQUIDITY
As detailed in the Consolidated Statement of Cash Flows, a
slightly negative net cash was provided from operating, investing
and financing activities during the 1999 period. The major
components have been discussed previously in the financial
condition section relating to investments, loans and deposits.
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 $484,000 in 1999, $347,000 more
than 1998, primarily the result of the acquisition of property
that is now our operations center described below.
These purchases will allow greater operating efficiency and
provide our customers 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 move should result in a net saving.
Our Company continues to plan for an approximate $2 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.
Management believes that it has sufficient resources to
complete these projects from its normal operations. It is
anticipated that these changes will have a long-term positive
effect on revenues, efficiency and the capacity for future
growth.
13
<PAGE>
Liquidity is achieved primarily from temporary or short-term
investments in the Federal Home Loan Bank of Pittsburgh, PA
("FHLB"), and investments that mature less than one year. The
Company also has a maximum borrowing capacity at the FHLB of
approximately $97.5 million as an additional source of liquidity.
There are no short-term borrowings from the FHLB as of September
30,1998.
Apart from those matters described above, management does
not currently believe that there are any current trends, events
or uncertainties that would have a material impact on capital.
CREDIT QUALITY RISK
The following table identifies amounts of loan losses and
non-performing loans. Past due loans are those that were
contractually past due 90 days or more as to interest or
principal payments.
March 31, December 31,
1999 1998 1997 1996 1995
Non-performing loans:
Non-accruing loans $ 494 $1,495 $1,169 $ 844 $ 762
Impaired loans 577 382 382 414 697
Accrual loans - 90 days or
more past due 17 15 170 723 689
Total non-performing loans 1,088 1,892 1,721 1,981 2,148
Foreclosed assets held for
sale 1,051 529 238 164 208
Total non-performing assets $2,139 $2,421 $1,959 $2,145 $2,356
Non-performing loans as a
percent of loans net of
unearned income 0.53% 0.92% 0.90% 1.09% 1.33%
Non-performing assets as a
percent of loans net of
unearned income 1.03% 1.18% 1.02% 1.18% 1.46%
Allowance for possible
loan loasses: March 31, December 31,
1999 1998 1997 1996 1995
Balance at beginning
of period $2,292 $2,138 $1,995 $1,833 $1,721
Charge-offs (110) (112) (83) (64) (69)
Recoveries 33 48 16 21 18
Provision for loan losses 60 218 210 205 163
Balance at end of period $2,275 $2,292 $2,138 $1,995 $1,833
Allowance for losses
as a percent of
total loans 1.10% 1.11% 1.11% 1.09% 1.13%
The provision for loan losses increased to $60,000 in the
current three month period.
The Company does not accrue interest income on impaired loans. Subsequent
cash payments received are applied to the outstanding principal balance or
recorded as interest income, depending upon management's assessment of its
ultimate ability to collect principal and interest.
14
<PAGE>
YEAR 2000 COMPUTER 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 is 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. Most internal
testing and validation for these primary mission critical
systems was successfully completed in November 1998. The
testing process of other critical systems will be completed in
May 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 we do businesses to coordinate Year 2000 compliance but
could be adversely affected if they or the unrelated third
parties are unsuccessful. We have assessed the impact the
Year 2000 may have on our large loan (credit risk) and deposit
customers and have determined that there is little risk to our
bank.
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. On the 1st quarter
of 1999, our Y2K expense was $7,000 and future expenditures are
not anticipated to be material to our Company's financial
position or results of operations for the remainder of 1999.
However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from these
plans.
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.
Customer Awareness
We have educated our employees and informed customers of our
Year 2000 efforts and the actions they can take to minimize
the impact on their financial activities. We have held
seminars, mailed brochures, and have reported our status in
our annual and quarterly reports to our shareholders.
15
<PAGE>
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.
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.
Item 3- Quantitative and Qualitative Disclosure About Market Risk
In the normal course of conducting business activities, the
Company is exposed to market risk, principally interest rate
risk, through the operations of its banking subsidiary. Interest
rate risk arises from market driven fluctuations in interest
rates that affect cash flows, income, expense and values of
financial instruments. Interest rate risk is managed by
management and a committee of the board of directors.
No material changes in market risk strategy occurred during
the current period. A detailed discussion of market risk is
provided in the SEC Form 10-K for the period ended December 31,
1998.
16
<PAGE>
PART II - OTHER INFORMATION AND SIGNATURES
Item 1 - Legal Proceedings
Management is not aware of any litigation that would have a material
adverse effect on the consolidated financial position of the Company. Any
pending proceedings are ordinary, routine litigation incidental to the
business of the Company and its subsidiary. In addition, no material
proceedings are pending or are known to be threatened or contemplated
against the Company and its subsidiary by government authorities.
Item 2 - Changes in Securities - Nothing to report.
Item 3 - Defaults Upon Senior Securities - Nothing to report.
Item 4 - Submission of Matters to a Vote of Security Holders
Results of the voting at the Annual Meeting of Shareholders held on April
20, 1999 at 12:00 p.m. at the Tioga County Fairgrounds Youth Building,
Whitneyville, Pennsylvania, 16901
1. Election of Class 1 Directors whose term will expire in 2002
For Withhold Authority
Carol J. Tama 2,307,847 35,402
R. Lowell Coolidge 2,307,847 35,402
Richard E. Wilber 2,307,843 35,406
John M. Thomas, M.D. 2,307,606 35,643
Larry J. Croft 2,308,111 35,138
Continuing Directors:
Mark L. Dalton Class 2 Term Expires 2001
John E. Novak Class 2 Term Expires 2001
Rudolph J. van der Hiel Class 2 Term Expires 2001
Bruce L. Adams Class 3 Term Expires 2000
William D. Van Etten Class 3 Term Expires 2000
Item 5 - Other Information - Nothing to report.
Item 6 -Exhibits and reports on Form 8-K.
Exhibits.
(3)(i) - Articles of Incorporation of the Corporation, as amended.
(Incorporated by Reference to Exhibit (3)(i) to the Annual Report
of Form 10-K for the fiscal year ended December 31, 1998, as filed
with the Commission on March 17, 1999.)
(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. 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.)
(11) - Computation of Earnings Per Share included on page 5 of this
Form 10-Q.
(27) - Financial Data Schedules, which are submitted electronically
to the Securities and Exchange Commission for information only and
not filed.
(b) Reports on Form 8-K None.
17
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
undersigned Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
Citizens Financial Services, Inc.
(Registrant)
May 13, 1999 /s/ Richard E. Wilber
By: Richard E. Wilber
President and Chief Financial Officer
(Principal Executive Officer)
May 13, 1999 /s/ Thomas C. Lyman
By: Thomas C. Lyman
Treasurer
(Principal Financial &
Accounting Officer
18
<PAGE>
EXHIBITS INDEX
(3)(i) - Articles of Incorporation of the Corporation, as amended.
(Incorporated by Reference to Exhibit (3)(i) to the Annual Report
of Form 10-K for the fiscal year ended December 31, 1998, as filed
with the Commission on March 17, 1999.)
(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. 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.)
(11) - Computation of Earnings Per Share included on page 5 of this
Form 10-Q.
(27) - Financial Data Schedule, which are submitted electronically
to the Securities and Exchange Commission for information only and
not filed.
19
<PAGE>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
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<INVESTMENTS-HELD-FOR-SALE> 87,897
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