UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2000

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 or 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

August 10, 2000 2,772,247 shares of Common Stock, par value $1.00.

Citizens Financial Services, Inc.

Form 10-Q

INDEX

Page

Part I FINANCIAL INFORMATION (UNAUDITED)

Item 1-Financial Statements

Consolidated Balance Sheet as of June 30, 2000, and

December 31, 1999 1

Consolidated Statement of Income for the

Three Months and Six Months Ended June 30, 2000 and 1999 2

Consolidated Statement of Comprehensive Income for the

Three Months and Six Months Ended June 30, 2000 and 1999 3

Consolidated Statement of Cash Flows for the Six Months Ended

June 30, 2000 and 1999 4

Notes to Consolidated Financial Statements 5

Item 2 -Management's Discussion and Analysis of Financial Condition

and Results of Operations 5-20

Item 3-Quantitative and Qualitative Disclosure About Market Risk 20

Part II OTHER INFORMATION

Item 1-Legal Proceedings 21

Item 2-Changes in Securities and use of Proceeds 21

Item 3-Defaults upon Senior Securities 21

Item 4-Submission of Matters to a Vote of Security Holders 21

Item 5-Other Information 21

Item 6-Exhibits and Reports on Form 8-K 22

SIGNATURES 23

 1

 2

The accompanying notes are an integral part of these financial statements

 4

CITIZENS FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of Presentation

The consolidated financial statements include the accounts of Citizens Financial Services, Inc. and its wholly-owned subsidiary, First Citizens National Bank (the "bank"), (collectively, the "company"). All material inter-company balances and transactions have been eliminated in consolidation.

The accompanying interim financial statements have been prepared by the company without audit and, in the opinion of management, reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the company's financial position as of June 30, 2000, 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, 1999.

Note 2 - Earnings per Share

Earnings per share calculations give retroactive effect to the July 6, 1999 stock dividends declared by the company. The number of shares used in the earnings per share and dividends per share calculation was 2,751,038 for 2000 and 2,800,563 for 1999.

 5

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. Our company's consolidated financial condition and results of operations consist almost entirely of our wholly owned subsidiary First Citizens National Bank. Our discussion should be read in conjunction with the preceding June 30, 2000 Financial Report. The results of operations for the three months and six months ended June 30, 2000 and 1999 are not necessarily indicative of the results you may expect 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.

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 annual report on Form 10-K 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.

On April 18, 2000, our company executed an agreement whereby we will acquire all Bradford County Pennsylvania offices of Sovereign Bank. These six offices located in Sayre, Troy, State Line, Leraysville and Towanda, have total deposits of nearly $80 million. We will also receive Sovereign's Bradford County loan portfolio totaling approximately $30 million. We expect the consummation date for this acquisition to be in the fourth quarter of the year.

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.

6

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 investment and trust 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 decreased by $3.3 million or 3.6% from December 31, 1999 to June 30, 2000. Primarily the result of principal payments received on mortgage-backed securities.

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 $6.8 million or 3% for the period compared to the December 31, 1999. 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 (dollars in thousands).

 7

We focus our commercial lending activity primarily 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 increase for the remainder of 2000 as we continue to focus on this segment of our customers.

DEPOSITS

Total deposits increased during the June 30, 2000 period by $4.8 million or 1.7%. Money market funds decreased as customers moved funds to certificates of deposit to "lock-in" higher long term rates.

8

BORROWED FUNDS

Borrowed funds decreased $3.1 million during the first six months of 2000. The company's daily cash requirements or short-term investments are met by using the financial instruments available through the Federal Home Loan Bank.

In October, 2000, we expect the holding company to borrow $3 million to investment in the bank subsidiary. This will increase the bank's capital and improve the negative impact on the regulatory capital of the branch acquisition (approximately $9.4 million in goodwill).

9

CAPITAL

The company computed its risk-based capital ratios as follows (dollars in thousands):

June 30, December 31,

2000 1999

Amount Ratio Amount Ratio

Total capital (to risk-weighted assets)

company $31,106 13.65% $30,610 14.09%

For capital adequacy purposes 18,236 8.00% 17,382 8.00%

To be well capitalized 22,795 10.00% 21,728 10.00%

Tier I capital (to risk-weighted assets)

company $28,715 12.60% $28,341 13.04%

For capital adequacy purposes 9,118 4.00% 8,691 4.00%

To be well capitalized 13,677 6.00% 13,037 6.00%

Tier I capital (to average assets)

company $28,715 8.32% $28,341 8.32%

For capital adequacy purposes 13,805 4.00% 13,620 4.00%

To be well capitalized 17,256 5.00% 17,025 5.00%

See the discussion of liquidity below for details regarding future expansion

plans and the impact on capital.

Due to the significant rise in market interest rate levels during 1999 and 2000, our investment portfolio continued to decline in value by $87,000, net of federal taxes. Dividend payments, stock repurchase and the rise in market rates resulted a modest increase in total shareholders' equity of $446,000 from December 31, 1999.

July 30, 1999, our company began a plan to purchase, in open market or privately negotiated transactions, up to 135,000 shares of its outstanding common stock. This stock repurchase programs was suspended because of the pending branch acquisition. However, a total of 55,162 shares were repurchased at a cost of $1 million as of June 30, 2000.

RESULTS OF OPERATIONS

Net income for the three month period ending June 30, 2000 was $897,000, a decrease of $56,000 or 5.9% from the $953 for the 1999 related period. Earnings per share was $.33 during the first three months of 2000 compared with $.34 during the comparable 1999 period.

Net income for the six month period ending June 30, 2000 was $1,835,000, nearly the same as the 1999 related period. Earnings per share was $.67 during the first six months of 2000 compared with $.66 during the comparable 1999 period. Details of the reasons for this change are discussed on the following pages.

Net interest income, the most significant component of earnings, is the amount by which interest generated from earning assets exceeds interest expense on interest-bearing liabilities.

Net interest income for the six month period ending June 30, 2000, after provision for loan losses, was $5,648,000 an increase of $124,000 compared to an increase of $143,000 at June 30, 1999.

10

Analysis of Average Balances and Interest Rates (dollars in thousands) (1)

11

We have experienced a narrowing interest margin percentage during 1999 and the first half of 2000, continuing the trend in recent years. The 1998 flat yield curve limited our opportunity to increase margin with new business as the existing investments and loans mature or repay. When the yield curve became steeper in 1999, interest rates began to rise resulting in our short-term liabilities repricing faster than our short term assets. Currently the yield curve is slightly inverted (not a normal up slope) beyond 2 years. Most of the company's investments, loans, deposits and borrowings are priced or repriced along the three month to five year portion of the yield curve.

We continue to review various pricing and investment strategies to enhance deposit growth while maintaining or expanding the current interest margin.

 12

As can be seen from the preceding tables, tax equivalent net interest income rose from $5,729,000 in 1998 to $6,045,000 in 1999 and increased to $6,404,000 in 2000. In the period ending June 30, 2000, net interest income increased $359,000 while overall spread decreased from 3.53% to 3.32%. The increased volume of interest-earning assets generated an increase in interest income of $1,344,000 while increased volume of interest-bearing liabilities produced $852,000 of interest expense. The change in volume resulted in an increase of $492,000 in net interest income. The net change in rate was a negative $133,000 resulting in a total positive net change of $359,000 when combined with change in volume. The yield on interest-earning assets increased 4 basis points from 7.99% to 8.03% and the average interest rate on interest-bearing liabilities increased 24 basis points from 4.47% to 4.71%.

 13

The provision for loan losses was $100,000 for the three-month period ended June 30, 2000 compared to $60,000 for the same period in 1999.

For the six-month period ended June 30, 2000 the provision for loan losses was $200,000 compared to $120,000 for the same period in 1999.

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 OPERATING INCOME (dollars in thousands)