-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LeUMyrwd2jd3yG28758pstSgo9ajf5Oh6pTHiF3W1QfQ5j7/WKZGtdfzyOZbw9ua +0j7l0pUp4kmtmn/KRk2xw== 0000739421-98-000004.txt : 19980511 0000739421-98-000004.hdr.sgml : 19980511 ACCESSION NUMBER: 0000739421-98-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980508 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0000739421 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232265045 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-13222 FILM NUMBER: 98613633 BUSINESS ADDRESS: STREET 1: 15 S MAIN ST CITY: MANSFIELD STATE: PA ZIP: 16933 BUSINESS PHONE: 7176622121 MAIL ADDRESS: STREET 1: 15 S MAIN ST CITY: MANSFIELD STATE: PA ZIP: 16933 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_____________________ to ___________________ Commission file number 0-13222 CITIZENS FINANCIAL SERVICES, INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2265045 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 15 South Main Street, Mansfield, Pennsylvania 16933 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (717) 662-2121 Indicate by checkmark whether the registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes__X___ No_____ The number of shares outstanding of the Registrant's Common Stock, as of May 6, 1998 2,746,564 shares of Common Stock, par value $1.00. Citizens Financial Services, Inc. Form 10-Q INDEX Page Part I FINANCIAL INFORMATION (UNAUDITED) Item 1-Financial Statements Consolidated Balance Sheet as of March 31, 1998 and December 31, 1997 1 Consolidated Statement of Income for the Three Months Ended March 31, 1998 and 1997 2 Consolidated Statement of Comprehensive Income for the Three Months Ended March 31, 1998 and 1997 3 Consolidated Statement of Cash Flows for the Three Months Ended March 31, 1998 and 1997 4 Notes to Consolidated Financial Statements 5 Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations 6-15 Item 3-Quantitative and Qualitative Disclosure About Market Risk 15 Part II OTHER INFORMATION AND SIGNATURES Item 1-Legal Proceedings 16 Item 2-Changes in Securities 16 Item 3-Defaults upon Senior Securities 16 Item 4-Submission of Matters to a Vote of Security Holders 16 Item 5-Other Information 16 Item 6-Exhibits and Reports on Form 8-K 16 Signatures 17 CITIZENS FINANCIAL SERVICES, INC. CONSOLIDATED BALANCE SHEET (UNAUDITED) March 31, December 31, 1998 1997 ASSETS: Cash and due from banks: Noninterest-bearing $ 6,590,906 $ 6,099,972 Interest-bearing 5,738,061 242,387 Total cash and cash equivalents 12,328,967 6,342,359 Available-for-sale securities 20,554,387 24,826,551 Held-to-maturity securities (estimated market value 1998,$62,655,000; December 31, 1997, $64,490,000) 61,979,378 63,734,826 Loans (net of allowance for loan losses 1998, $2,177,000; December 31, 1997, $2,138,000) 190,894,154 189,909,615 Foreclosed assets held for sale 239,613 238,284 Premises and equipment 5,729,476 5,754,026 Accrued interest receivable 2,425,484 2,426,512 Other assets 1,688,197 1,578,335 TOTAL ASSETS $295,839,656 $294,810,508 LIABILITIES: Deposits: Noninterest-bearing $ 18,826,701 $ 19,015,857 Interest-bearing 239,541,512 237,766,917 Total deposits 258,368,213 256,782,774 Borrowed funds 6,890,283 6,864,195 Accrued interest payable 1,761,998 2,331,439 Commitment to purchase investment securities 1,066,883 1,980,556 Other liabilities 1,383,150 928,638 TOTAL LIABILITIES 269,470,527 268,887,602 STOCKHOLDERS' EQUITY: Common Stock $1.00 par value; authorized 5,000,000 shares; issued and outstanding 2,746,564 shares in 1998 and 1997 2,746,564 2,746,564 Additional paid-in capital 7,180,760 7,180,760 Retained earnings 16,156,075 15,652,872 TOTAL 26,083,399 25,580,196 Net unrealized holding gains on available-for-sale securities 285,730 342,710 TOTAL STOCKHOLDERS' EQUITY 26,369,129 25,922,906 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $295,839,656 $294,810,508 The accompanying notes are an integral part of these financial statements. 1 CITIZENS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) Three Months Ended March 31, 1998 1997 INTEREST INCOME: Interest and fees on loans $4,303,018 $4,134,781 Interest on interest-bearing deposits with banks 36,205 6,958 Interest and dividends on investments: Taxable 1,230,660 1,313,194 Nontaxable 67,301 12,561 Dividends 21,515 18,058 TOTAL INTEREST INCOME 5,658,699 5,485,552 INTEREST EXPENSE: Interest on deposits 2,804,211 2,641,453 Interest on borrowed funds 111,067 167,921 TOTAL INTEREST EXPENSE 2,915,278 2,809,374 NET INTEREST INCOME 2,743,421 2,676,178 Provision for loan losses 52,500 52,500 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,690,921 2,623,678 OTHER OPERATING INCOME: Service charge income 211,638 194,765 Trust income 92,515 94,364 Other income 53,170 56,579 Arbitration settlement 67,678 884,008 Realized securities gains, net 94,797 0 TOTAL OTHER OPERATING INCOME 519,798 1,229,716 OTHER OPERATING EXPENSES: Salaries and employee benefits 927,219 1,103,971 Occupancy expenses 135,955 137,755 Furniture and equipment expenses 178,695 149,729 Other expenses 779,547 648,549 TOTAL OTHER OPERATING EXPENSES 2,021,416 2,040,004 Income before provision for income taxes 1,189,303 1,813,390 Provision for income taxes 342,780 598,529 NET INCOME $ 846,523 $1,214,861 Earnings per share $0.31 $0.44 Weighted average number of shares outstanding 2,746,564 2,746,564 The accompanying notes are an integral part of these financial statements. 2 CITIZENS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended March 31, 1998 1997 Net income $ 846,523 $ 1,214,861 Other comprehensive income: Unrealized gains on securities: Gain (loss) arising during the year $ 8,464 $ (331,501) Reclassification adjustment (94,797) (86,333) - (331,501) Other comprehensive income before tax (86,333) (331,501) Income tax expense related to other comprehensive income (29,353) (112,710) Other comprehensive income, net of tax (56,980) (218,791) Comprehensive income $ 789,543 $ 996,070
The accompanying notes are an integral part of these financial statements. 3 CITIZENS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) Three months Ended March 31, CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997 Net income $ 846,523 $ 1,214,861 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 52,500 52,500 Provision for depreciation and amortization 189,268 126,849 Amortization and accretion of investment securities 84,121 97,010 Deferred income taxes 6,856 (16,786) Realized gains on securities (94,797) 0 Realized gains on loans sold (13,795) (2,396) Originations of loans held for sale (886,300) (195,200) Proceeds from sales of loans held for sale 900,095 197,379 Loss on sale of foreclosed assets held for sale 7,625 2,432 Increase in accrued interest receivable and other assets (112,696) (90,904) (Decrease) increase in accrued interest payable and other liabilities (117,984) 424,020 Net cash provided by operating activities 861,416 1,809,765 CASH FLOWS FROM INVESTING ACTIVITIES: Available-for-sale securities: Proceeds from sales of securities 7,169,219 0 Proceeds from maturity of securities 1,000,000 1,700,000 Purchase of securities (4,117,552) 0 Held-to-maturity securities: Proceeds from maturity and principal repayments of securities 3,992,423 1,980,683 Purchase of securities (3,003,586) (153,200) Net (increase) decrease in loans (1,080,993) 240,856 Capital expenditures (137,526) (271,889) Proceeds from sale of foreclosed assets held for sale 35,000 20,000 Net cash provide by investing activities 3,856,985 3,516,450 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 1,585,439 8,065,582 Proceeds from long-term borrowings 61,104 22,991 Repayments of long-term borrowings (54,101) 0 Net increase (decrease) in short-term borrowed funds 19,086 (8,835,129) Dividends paid (343,321) (612,103) Net cash provided (used) by financing activities 1,268,207 (1,358,659) Net increase in cash and cash equivalents 5,986,608 3,967,556 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,342,359 6,458,707 CASH AND CASH EQUIVALENTS AT END OF PERIOD $12,328,967 $10,426,263 Supplemental Disclosures of Cash Flow Information: Interest paid $ 3,484,718 $ 3,333,193 Income taxes paid $ 0 $ 0
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 March 31, 1998, and the results of operations for the interim periods presented. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. For further information refer to the consolidated financial statements and footnotes thereto incorporated by reference in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. In July 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard Statement No. 130, "Reporting Comprehensive Income". Statement No. 130 establishes standards for reporting and presentation of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. It requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is presented with the same prominence as other financial statements. Statement No. 130 requires that companies (1) classify items of other comprehensive income by their nature in a financial statement and (2) display paid-in capital in the equity section of the statement of financial condition. Statement No.130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comprehensive purposes is required, as stated in the Consolidated Statement of Comprehensive Income on page 3 of this report. Note 2 - Earnings per Share Earnings per share calculations give retroactive effect to stock dividends Declared by the Company. The number of shares used in the earnings per share and dividends per share calculation was 2,746,564 for 1998 and 1997, respectively. 5 Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors that have affected the Company's financial position and operating results during the periods indicated in the accompanying consolidated financial statements. The results of operations for the three months ended March 31, 1998 and 1997 are not necessarily indicative of the results to be expected for the full year. In addition to historical information, this quarterly report contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Important factors that might cause such a material difference include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations". The following items are among the factors that could cause actual results to differ materially from the forward-looking statements: general economic conditions, including their impact on capital expenditures; business conditions in the banking industry; the regulatory environment; rapidly changing technology and evolving banking industry standards; competitive standards; competitive factors, including increase competition with community, regional and national financial institutions; new service and product offerings by competitors and price pressures; and like items. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date thereof. The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including the quarterly reports on Form 10-Q and any current reports on Form 8-K filed by the Company. The Bank currently engages in the general business of banking throughout its service area of Potter, Tioga and Bradford counties in North Central Pennsylvania and Allegany, Steuben, Chemung and Tioga counties in Southern New York. The Bank maintains its central office in Mansfield, Pennsylvania and presently operates banking facilities in Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton, Gillett and the Wellsboro Weis Market store as well as automatic teller machines located in Soldiers and Sailors Memorial Hospital in Wellsboro, Mansfield Wal-Mart and at Mansfield University. The Bank's lending and deposit products are offered primarily within the vicinity of its service area. The Company faces strong competition in the communities it serves from other commercial banks, savings banks, and savings and loan associations, some of which are substantially larger institutions than the Company's subsidiary. In addition, personal and corporate trust services are offered by insurance companies, investment counseling firms, and other business firms and individuals. The Company also competes with credit unions, issuers of money market funds, securities brokerage firms, consumer finance companies, mortgage brokers and insurance companies. These entities are strong competitors for virtually all types of financial services. In recent years, the financial services industry has experienced tremendous change to competitive barriers between bank and non-bank institutions. The Company not only must compete with traditional financial institutions, but also with other business corporations that have begun to deliver competing financial services. Competition for banking services is based on price, nature of product, quality of service, and in the case of certain activities, convenience of location. 6 LOANS Historically loans have been originated by the Bank to customers in North Central Pennsylvania and the Southern Tier of New York. Loans have been originated primarily through direct loans to our existing customer base with new customers generated by referrals from real estate brokers, building contractors, attorneys, accountants and existing customers. The Bank also does a limited amount of indirect loans though new and used car dealers in the primary lending area. All lending is governed by a lending policy which is developed and maintained by management and approved by the board of directors. The Bank's lending policy regarding real estate loans is that the maximum mortgage granted on owner occupied residential property is 80% of the appraised value or purchase price (whichever is lower) when secured by the first mortgage on the property. Home equity lines of credit or second mortgage loans are originated subject to maximum mortgage liens against the property of 80% of the current appraised value. The maximum term for mortgage loans is 25 years for one-to four- family residential property and 20 years for commercial and vacation property. DEPOSITS The Company tiers interest-bearing transaction and savings accounts by deposit size (larger balances receive higher rates). The Company has been offering a wide variety of deposit instruments, as have its competitors. Limited transaction deposit accounts with interest rates that vary as often as daily, unlimited transaction interest-bearing accounts, Premier 55 Club, Premier 55 Plus Club, Gold Club, individual retirement accounts, longer-term certificates of deposit (generally of five-year maturity),promotional 30-month, 66-month and Roll-Up certificates of deposit (allows the customer to adjust the interest rate up once during the term by a maximum of 100 basis points). The Company also offers a wide variety of IRA products including the new Roth and Educational IRA's. In most the community offices, lobby and drive-up hours include Wednesday afternoons as well as Saturday hours. The supermarket office is open seven days a week with extended hours on weekdays. The Company has eleven automated teller machines, which are part of the MAC regional and PLUS national network. Management is currently implementing a MasterMoney debit card program. In addition to the above, the Company has a voice response system to provide customers a convenient method of accessing account information and transferring funds 24 hours a day. TRUST SERVICES Traditional trust and investment management and estate settlements are offered by the Bank. FINANCIAL CONDITION For the three month period ended March 31, 1998, the total assets of the Company had a slight increase of $1 million or $295.8 million compared with a decrease of $.9 million for the same period in 1997. The modest growth in net assets was the increase in deposits being offset by a reduction of the commitments to purchase investment securities. Cash and cash equivalents increased $6 million in 1998 compared with an increase of $4 million for the same period in 1997. Surplus funds from deposit growth and investment sales and maturities in 1998 were temporarily placed in short-term interest bearing investments. Total investment securities decreased $6 million or 6.8% during the first three months of 1998 compared with a decrease of $1.8 million for the 7 same period in 1997. The decrease reflects security sales (U S Treasury securities available-for-sale) and normal maturities and principal repayments of $12.2 million. The purchase of $7.2 million securities were primarily obligations of state and political subdivisions, mortgage-backed securities, and equities. Net loan balances ($190.9 million) increased $1 million compared to a slight decrease of $.3 million for the first three months of 1998 and 1997, respectively. This modest growth represents a normal seasonal slow down and is not expected to continue as the normal home building season in spring and summer. During the remainder of 1998, management expects that loan demand will continue as a result of the attractive interest rates currently promoted and while we are experiencing a generally healthy local economy. The major concentrations of loans continue to be in residential real estate-consisting of loans to purchase and improve real estate, debt consolidation and home equity lines of credit. The Bank also expects to be successful in lending to local state and political subdivisions during the remainder of 1998. The loan portfolio consists of the following (in thousands): March 31, December 31, March 31, 1998 1997 1997 Real estate loans - residential $122,877 $123,054 $ 112,470 Real estate loans - commercial 27,075 27,480 28,174 Real estate loans - agricultural 8,111 8,769 5,848 Loans to individuals for household, family and other purchases 13,924 13,905 14,835 Commercial and other loans 10,545 9,485 11,103 State and political subdivision loans 10,621 9,457 9,879 Total 193,153 192,150 182,309 Less: unearned income on loans 82 102 154 Loans, net of unearned income $193,071 $192,048 $182,155 Deposit growth increased by $1.6 million or .6% compared to the first three months of 1997 that increased of $8.1 million. Deposit growth slowed primarily because of the competitive interest rate environment. Borrowed funds remained virtually the same during the first three months of 1998 compared with a decrease of $8.8 million in 1997. The decrease in 1997 resulted from repayments of short-term borrowing to the Federal Home Loan Bank. The Company's daily cash requirements or short-term investments are met by using the financial instruments available through the Federal Home Loan Bank. 8 CAPITAL The Company has computed its risk-based capital ratios as follows (dollars in thousands): March 31, December 31, 1998 1997 Tier I - Total stockholders' equity $ 26,369 $ 25,923 Less: Unrealized holding gains (losses) on available-for-sale securities 286 343 Goodwill and core deposit intangible 809 836 Tier I, net 25,274 24,744 Tier II - Allowance for loan losses(1) 2,118 2,123 Total qualifying capital $ 27,392 $ 26,867 Risk-adjusted on-balance sheet assets $160,916 $161,940 Risk-adjusted off-balance sheet exposure (2) 8,433 7,919 Total risk-adjusted assets $169,349 $169,859 March 31, December 31, Ratios: 1998 1997 Tier I risk-based capital ratio 14.9% 14.6% Federal minimum required 4.0 4.0 Total risk-based capital ratio 16.2% 15.8% Federal minimum required 8.0 8.0 Leverage ratio (3) 8.6% 8.5% Federal minimum required 4.0 4.0 (1) Allowance for loan losses is limited to 1.25% of total risk-adjusted assets. (2) Off-balance sheet exposure is caused primarily by standby letters of credit and loan commitments with a remaining maturity exceeding one year. These obligations have been converted to on-balance sheet credit equivalent amounts and adjusted for risk. (3) Tier I capital divided by average total assets. See the discussion of liquidity below for details regarding future expansion plans and the impact on capital. RESULTS OF OPERATIONS Net income for the three month period ending March 31, 1998 was $847,000 a decrease of $368,000 or 30.3% over the $1,215,000 for the 1997 related period. Earnings per share was $.31 during the first quarter of 1998 compared with $.44 during the comparable 1997 period. The large decrease was the result of an arbitration settlement realized in the first quarter of 1997 discussed below. Net interest income, the most significant component of earnings, is the amount by which interest generated from earning assets exceeds interest expense on liabilities. Net interest income for the current three month period, after provision for loan losses, was $2,691,000, an increase of $67,000 or 2.6% compared with an increase of $194,000 or 8% during the same period in 1997. 9 Analysis of Average Balances and Interest Rates (1) March 31, 1998 March 31, 1997 March 31, 1996 Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate $ $ % $ $ % $ $ % ASSETS Short-term investments: Interest-bearing deposits at banks 2,635 36 5.54 525 7 5.41 2,743 37 5.43 Investment securities: Taxable 76,236 1,252 6.66 84,017 1,331 6.42 71,192 1,157 6.54 Tax-exempt(3) 6,061 102 6.83 606 19 12.72 931 29 12.53 Total investment securities 82,297 1,354 6.67 84,623 1,350 6.47 72,123 1,186 6.61 Loans: Residential mortgage loans 122,809 2,711 8.95 114,496 2,584 9.15 97,206 2,267 9.38 Commercial & farm loans 35,186 835 9.62 35,124 852 9.84 31,883 786 9.91 Loans to state & political subdivisions 10,622 221 8.44 9,963 179 7.29 8,267 181 8.81 Other loans 24,455 611 10.13 23,249 589 10.27 23,295 605 10.54 Loans, net of discount (2)(3)(4) 193,072 4,378 9.20 182,832 4,204 9.33 160,651 3,839 9.91 Total interest-earning assets 278,004 5,768 8.41 267,980 5,561 8.42 235,517 5,062 8.64 Cash and due from banks 6,142 6,355 4,991 Bank premises and equipment 5,760 4,570 4,162 FASB 115 adjustment 314 218 482 Other assets 4,158 2,630 3,312 Total noninterest-bearing assets 16,374 13,773 12,947 Total assets 294,378 281,753 248,464 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: NOW accounts 32,151 180 2.27 31,184 184 2.39 24,255 126 2.09 Savings accounts 26,457 144 2.21 27,491 150 2.21 25,919 144 2.23 Money market accounts 35,577 425 4.84 26,219 285 4.41 24,288 267 4.42 Certificates of deposit 144,680 2,055 5.76 140,897 2,023 5.82 126,476 1,877 5.97 Total interest-bearing deposits 238,865 2,804 4.76 225,791 2,642 4.75 200,938 2,414 4.83 Other borrowed funds 7,198 111 6.25 11,130 168 6.12 7,284 114 6.29 Total interest-bearing liabilities 246,063 2,915 4.80 236,921 2,810 4.81 208,222 2,528 4.88 Demand deposits 19,060 17,976 15,178 Other liabilities 3,109 3,398 3,513 Total noninterest-bearing liabilities 22,169 21,374 18,691 Stockholders' equity 26,146 23,458 21,551 Total liabilities & stockholders' equity 294,378 281,753 248,464 Net interest income 2,853 2,751 2,534 Net interest spread (5) 3.61% 3.61% 3.76% Net interest income as a percentage of average interest-earning assets 4.16% 4.16% 4.33% Ratio of interest-earning assets to interest-bearing liabilities 1.13 1.13 1.13
(1) Averages are based on daily balances. (2) Includes loan origination and commitment fees. (3) Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using a statutory federal income tax rate of 34%. (4) Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets. (5) Interest rate spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. 10 As described in the table above, the yield on earning assets, on a tax-equivalent basis, was 8.41% and 8.42% during the first three months of 1998 and 1997, respectively (a decline of 1 basis point). The cost of funds was 4.80% and 4.81% during the same three month period (a decrease of 1 basis point). In comparing the average interest cost of 1998 versus 1997, NOW accounts decreased 12 basis points, savings accounts remained the same, and money market accounts increased by 43 basis points (the result of a increase in higher balance accounts). The interest rate on certificates of deposit decreased by 6 basis points. As described above, the Company has experience a stable but narrow interest margin percentage during the three months of 1998. The Company continues to review various pricing strategies to enhance deposit growth while maintaining or expanding the current interest margin. Analysis of Changes in Net Interest Income of a Tax Equivalent Basis (in thousands) 1998 vs. 1997 (1) 1997 vs. 1996 (1) Change in Change Total Change in Change Total Volume in Rate Change Volume in Rate Change Interest income: Short-term investments: Interest-bearing deposits at banks $ 29 $ 0 $ 29 $ (30) $ 0 $ (30) Investment securities: Taxable (131) 52 (79) 203 (29) 174 Tax-exempt 89 (6) 83 (10) 0 (10) Total investments (42) 46 4 193 (29) 164 Loans: Residential mortgage loans 182 (55) 127 388 (71) 317 Commercial and farm loans 2 (19) (17) 78 (12) 66 Loans to state & political subdivisions 12 30 42 37 (39) (2) Other loans 30 (8) 22 (1) (15) (16) Total loans - net of discount (2)(3)(4) 226 (52) 174 502 (137) 365 Total interest income 213 (6) 207 665 (166) 499 Interest expense: Interest bearing deposits: NOW accounts 6 (10) (4) 39 19 58 Savings accounts (6) 0 (6) 9 (3) 6 Money market accounts 110 30 140 21 (3) 18 Certificates of deposit 53 (21) 32 205 (59) 146 Total interest-bearing deposits 163 (1) 162 274 (46) 228 Other borrowed funds (61) 4 (57) 58 (4) 54 Total interest expense 102 3 105 332 (50) 282 Net interest income $ 111 $ (9) $ 102 $ 333 $ (116) $ 217
(1)The portion of the total change attributable to both volume and rate changes during the year has been allocated to volume and rate components based upon the absolute dollar amount of the change in each component prior to allocation. 11 The above table detailing the change in net interest income shows the $213,000 resulting from volume increases in investments and loans. The volume of interest expense increased the cost of interest-bearing deposits by $102,000. The positive gain in volume of $111,000 combined with decrease of income due to rate of $9,000 resulted in a net increase of $102,000 compared to a net increase of $217,000 for the same period in 1997. The neutral effect on income resulted from a change in rates was offset by a reduction in the rate of increase of the volumes of loans and deposits. The provision for loan losses was unchanged at $52,500 in both of the three month periods. This provision was appropriate given management's quarterly review of the allowance for loan losses that is based on the following information; migration analysis of delinquent and non accrual loans, estimated future losses on loans, recent review of large problem credits, local and national economic conditions, historical loss experience, OCC qualitative adjustments, purchase of loans through acquisitions and peer comparisons. Total other operating income decreased $710,000 compared with the same period in 1997. Trust income decreased $2,000, service charge income increased $17,000, and other income decreased $3,000. Net realized securities gainsincreased by $95,000, during the current three month period compared to 1997, as there were not sales during the 1997 period. On February 27, 1997 the Bank reached an arbitration settlement with a vendor. The settlement was for legal remedies associated with relationships with this vendor. The Bank received $884,000 in cash and $250,000 in credits to be applied to future expenditures, which if unused will expire within two years. The amount received by the Bank is net of fees associated with the arbitration. During the three months ended March 31, 1998, arbitration settlement income was $68,000. Total other operating expense was $2,021,000 in the first three months of 1998 reflecting a decrease of $19,000 over the 1997 period. Salaries and benefit's expense decreased by $177,000 for the current three month period reflecting normal merit increases. During the same period in 1997, an accrual to salaries and benefit expense of $154,000 for profit sharing reflecting the additional arbitration income. Occupancy expense decreased by $2,000 while furniture and equipment expenses increased by $29,000, for the additional expenses relating to the conversion to the new Jack Henry and Associates application software and IBM AS\400 computer. Other expenses increased $131,000 or 20.2% in the first three months of 1998 over the 1997 related period reflecting increases in other professional fees $24,000, software maintenance and expense $14,000, telephone and data communication expense $26,000, and other costs associated with the new data processing system and network. Management expect these costs to moderate over the remainder of 1998. The provision for income taxes was $343,000 during the first three months of 1998 compared with $599,000 during the 1997 related period. Income before taxes decreased $624,000 in the 1998 period over the same period in 1997. LIQUIDITY Liquidity is a measure of the Company's ability to efficiently meet normal cash flow requirements of both borrowers and depositors. To maintain proper liquidity, the Company uses funds management policies along with its investment policies to assure it can meet its financial obligations to depositors, credit customers and shareholders. Liquidity is needed to meet depositors' withdrawal demands, extend credit to meet borrowers' needs, provide funds for normal operating expenses and cash dividends, and fund other capital expenditures. As detailed in the Consolidated Statement of Cash Flows, positive net cash was provided from operating, investing and financing activities. The major components have been discussed previously in the financial condition section relating to investments, loans and deposits. During the first three months of 1998 there was $138,000 of capital expenditures, $134,000 less than the capital acquisitions during the same period in 1997. 12 Management is currently renting two properties as a temporary solution to the space limitations it has experienced at the main office for the last seven years. Management anticipates that the construction will take place on a new branch/operations center late 1998 or early 1999 with a total estimated cost of approximately $3.5 million. Management believes that it has sufficient resources to complete these projects from its normal operations and that they will have a long term positive effect on revenues, efficiency and the capacity for future growth. Liquidity is achieved primarily from temporary or short-term investments in the Federal Home Loan Bank of Pittsburgh, PA ("FHLB"), and investments that mature less than one year. The Company also has a maximum borrowing capacity at the FHLB of approximately $85 million as an additional source of liquidity. There are no short-term borrowings from the FHLB as of March 31, 1997. Apart from those matters described above, management does not currently believe that there are any current trends, events or uncertainties that would have a material impact on capital. CREDIT QUALITY RISK The following table identifies amounts of loan losses and nonperforming loans. Past due loans are those that were contractually past due 90 days or more as to interest or principal payments (dollars in thousands). March 31, December 31, 1998 1997 1996 1995 1994 Non accruing loans $ 1,563 $ 1,169 $ 844 $ 762 $ 1,557 Impaired loans 382 382 414 697 Accrual loans - 90 days or more past due 242 170 723 689 267 Total nonperforming loans $ 2,187 $ 1,721 $ 1,981 $ 2,148 $ 1,824 Other real estate owned $ 240 $ 238 $ 164 $ 208 $ 168 Loans outstanding at end of period $193,153 $192,150 $182,581 $161,886 $157,144 Unearned income 82 102 168 259 575 Loans, net of unearned income $193,071 $192,048 $182,413 $161,627 $156,569 Nonperforming loans as percent of loans, net of unearned income 1.13% .90% 1.09% 1.33% 1.16% Total nonperforming assets as a percent loans of net unearned income 1.26% 1.02% 1.18% 1.46% 1.27% Transactions in the allowance for loan losses were as follows (in thousands): At March 31, Years Ended December 31, 1998 1997 1996 1995 1994 Balance, beginning of period $2,138 $1,995 $1,833 $1,721 $1,516 Charge-offs (24) (83) (64) (69) (68) Recoveries 10 16 21 18 18 Provision for loan losses 53 210 205 163 255 Balance, end of period $2,177 $2,138 $1,995 $1,833 $1,721
The allowance is maintained at a level to absorb potential future loan losses. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. Management establishes the level of the allowance and the quarterly provision based on its evaluation of the loan portfolio, current and projected economic conditions, the historical loan loss experience, present and prospective financial condition of borrowers, the level of nonperforming assets, and other relevant factors. While management evaluates all of this information quarterly, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their evaluation of information available to them at the time of their examination. Based on this process, management currently believes that the allowance is adequate to offset any exposure that may exist for under-collateralized or uncollectible loans. 13 The Company does not accrue interest income on impaired loans. Subsequent cash payments received are applied to the outstanding principal balance or recorded as interest income, depending upon management's assessment of its ultimate ability to collect principal and interest. GENERAL The majority of assets and liabilities of a financial institution are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets and on noninterest expenses, which tend to rise during periods of general inflation. The level of inflation over the last few years has been declining. Management is aware of the possibility of exposure by banks to a computer problem known as the "Year 2000 Problem" or the "Millennium Bug" (the inability of some computer programs to distinguish between the year 1900 and the year 2000). The Company is in the process of assessing the cost and extent of vulnerability of the Company's computer systems to the problem. Modifications or replacements of computer systems to attain Year 2000 compliance have begun, and the Company expects to attain Year 2000 compliance and institute appropriate testing of its modifications and replacements before the Year 2000 change date. The Company's recent conversion to Jack Henry and Associates for core banking application software and the purchase of a new IBM AS/400 hardware system on which to run the core processing software, has greatly minimized the exposure to these problems as both systems are expected to be compliant. The Company believes that, with modifications to existing software and conversions to new software, the Year 2000 problem will not pose a significant operational problem for the Company. However, because most computer systems are, by their very nature, interdependent, it is possible that non-compliant third party computers could effect the Company's computer systems. The Company has taken steps to communicate with the third parties with whom it deals to coordinate Year 2000 compliance but could be adversely affected if it or the unrelated third parties are unsuccessful. Most of the costs incurred in addressing this problem are expected to be expensed as incurred. The financial impact to the Company of Year 2000 compliance has not been and is not anticipated to be material to the Company's financial position or results of operations in any given year. Various congressional bills have been passed and other proposals have been made for significant changes to the banking system, including provisions for: limitation on deposit insurance coverage; changing the timing and method financial institutions use to pay for deposit insurance; expanding the power of banks by removing restrictions on bank underwriting activities; tightening the regulation of bank derivatives' activities; allowing commercial enterprises to own banks; and permitting bank holding companies or the bank to own or control affiliates that engage in securities, mutual funds and insurance activities. Aside from those matters described above, management does not believe that there are any trends, events or uncertainties which would have a material adverse impact on future operating results, liquidity or capital resources, nor is it aware of any current recommendations by the regulatory authorities (except as described herein) which, if they were to be implemented, would have such an effect, although the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have, a negative impact on the Company's results of operations. 14 Item 3-Qualitative and Quantitative Disclosure About Market Risk In the normal course of conducting business activities the Company is exposed to market risk, principally interest rate risk, through the operations of its banking subsidiary. Interest rate risk arises from market driven fluctuations in interest rates which affect cash flows, income, expense and values of financial instruments. Interest rate risk is managed by an management and a committee of the board of directors. No material changes in market risk strategy occurred during the current period. A detailed discussion of market risk is provided in the SEC Form 10-K for the period ended December 31, 1997. 15 PART II - OTHER INFORMATION AND SIGNATURES Item 1 - Legal Proceedings Management is not aware of any litigation that would have a material adverse effect on the consolidated financial position of the Company. Any pending proceedings are ordinary, routine litigation incidental to the business of the Company and its subsidiary. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Company and its subsidiary by government authorities. Item 2 - Changes in Securities - Nothing to report. Item 3 - Defaults Upon Senior Securities - Nothing to report. Item 4 - Submission of Matters to a Vote of Security Holders: Results of the voting at the Annual Meeting of Shareholders held on April 21, 1998 at 12:00 p.m. at the Tioga County Fairgrounds Youth Building, Whitneyville, Pennsylvania, 16901 1. Election of Class 2 Directors whose term will expire in 2001 For Withhold Authority Mark L. Dalton 2,264,101 35,256 John E. Novak 2,263,639 35,718 Rudolph J. van der Heil 2,263,055 36,302 Continuing Directors: Carol J. Tama Class 1 Term Expires 1999 R. Lowell Coolidge Class 1 Term Expires 1999 Richard E. Wilber Class 1 Term Expires 1999 John M. Thomas, M.D. Class 1 Term Expires 1999 Larry J. Croft Class 1 Term Expires 1999 Bruce L. Adams Class 3 Term Expires 2000 William D. Van Etten Class 3 Term Expires 2000 2. Proposal to amend Article 4 of the Corporation's Articles of Incorporation, as amended, to increase the number of authorized shares of the Corporation's Common Stock, par value $1.00 per share, from 5,000,000 shares to 10,000,000 shares. FOR 2,219,034 AGAINST 21,924 ABSTAIN 58,399 3. Proposal to amend Article 13 of the Corporation's Articles of Incorporation, as amended, to eliminate preemptive rights. FOR 2,177,528 AGAINST 36,964 ABSTAIN 84,865 Item 5 - Other Information - Nothing to report. Item 6 - Exhibits and reports on Form 8-K. (a) Exhibits - Exhibit No. 27 Financial Data Schedule. (b) Reports - None. 16 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the undersigned Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Citizens Financial Services, Inc. (Registrant) May 7, 1998 /s/ Richard E. Wilber By: Richard E. Wilber President and Chief Financial Officer (Principal Executive Officer) May 7, 1998 /s/ Thomas C. Lyman By: Thomas C. Lyman Treasurer (Principal Financial & Accounting Officer 17 EX-27 2
9 3-MOS DEC-31-1998 MAR-31-1998 6,591 5,738 0 0 20,554 61,979 62,655 190,894 2,177 295,840 258,368 3,874 4,212 3,016 0 0 2,747 23,622 295,840 4,303 1,320 36 5,659 2,804 2,915 2,743 53 95 2,021 1,189 0 0 0 847 .31 .31 4.16 1,945 242 0 0 2,138 24 10 2,177 1,301 0 876
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