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 1934For the quarterly period ended March 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For 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
May 2, 2000 2,745,401 shares of Common Stock, par value $1.00.<PAGE>
Citizens Financial Services, Inc.
Form 10-Q
INDEX
PagePart I FINANCIAL INFORMATION (UNAUDITED)Item 1-Financial Statements
Consolidated Balance Sheet as of March 31, 2000,
December 31, 1999 1Consolidated Statement of Income for the
Three Months Ended March 31, 2000 and 1999 2Consolidated Statement of Comprehensive Income for the
Three Months Ended March 31, 2000 and 1999 3Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 2000 and 1999 4Notes to Consolidated Financial Statements 5
Item 2 -Management's Discussion and Analysis of Financial Condition
and Results of Operations 5-16Item 3-Quantitative and Qualitative Disclosure About Market Risk 17
Part II OTHER INFORMATION AND SIGNATURES
Item 1-Legal Proceedings 18
Item 2-Changes in Securities 18
Item 3-Defaults upon Senior Securities 18
Item 4-Submission of Matters to a Vote of Security Holders 18
Item 5-Other Information 18
Item 6-Exhibits and Reports on Form 8-K 18-19
Signatures &nbs 20
<PAGE>
CITIZENS FINANCIAL SERVICES, INC. | |||
CONSOLIDATED BALANCE SHEET | |||
(UNAUDITED) | |||
|
|
||
|
|
||
ASSETS: | |||
Cash and due from banks: | |||
Noninterest-bearing |
$ 6,306,171
|
$ 8,363,742
|
|
Interest-bearing |
311,674
|
158,051
|
|
Total cash and cash equivalents |
6,617,845
|
8,521,793
|
|
Available-for-sale securities |
89,617,692
|
91,695,667
|
|
Loans (net of allowance for loan losses 2000, $2,374,000; December 31, 1999, $2,270,000) | |||
231,962,470
|
229,159,271
|
||
Foreclosed assets held for sale |
441,054
|
573,054
|
|
Premises and equipment |
6,004,077
|
5,942,078
|
|
Accrued interest receivable |
2,251,814
|
2,120,148
|
|
Other assets |
2,924,980
|
2,767,268
|
|
TOTAL ASSETS |
$339,819,932
|
$340,779,279
|
|
LIABILITIES: | |||
Deposits: | |||
Noninterest-bearing |
$ 24,443,767
|
$ 23,434,754
|
|
Interest-bearing |
260,271,920
|
260,882,983
|
|
Total deposits |
284,715,687
|
284,317,737
|
|
Borrowed funds |
24,629,018
|
25,852,980
|
|
Accrued interest payable |
1,988,885
|
2,557,303
|
|
Other liabilities |
1,476,950
|
968,646
|
|
TOTAL LIABILITIES |
312,810,540
|
313,696,666
|
|
STOCKHOLDERS' EQUITY: | |||
Common Stock | |||
$1.00 par value; authorized 10,000,000 shares; | |||
Issued
2,800,563 shares in 2000 and
at December 31, 1999, respectively |
2,800,563
|
2,800,563
|
|
Additional paid-in capital |
8,374,160
|
8,374,160
|
|
Retained earnings |
18,969,208
|
18,432,375
|
|
TOTAL |
30,143,931
|
29,607,098
|
|
Accumulated other comprehensive (loss) |
(2,185,372)
|
(2,064,150)
|
|
Less: Treasury Stock at cost | |||
55,162 shares at March 31, 2000 |
(949,167)
|
||
26,585 shares at December 31, 1999 |
(460,335)
|
||
TOTAL STOCKHOLDERS' EQUITY |
27,009,392
|
27,082,613
|
|
TOTAL LIABILITIES AND | |||
STOCKHOLDERS' EQUITY |
$339,819,932
|
$340,779,279
|
The accompanying notes are an integral part
of these financial statements.
1
<PAGE>
CITIZENS FINANCIAL SERVICES, INC. | ||
CONSOLIDATED STATEMENT OF INCOME | ||
(UNAUDITED) | ||
|
||
|
||
|
|
|
INTEREST INCOME: | ||
Interest and fees on loans |
$4,879,236
|
$4,449,017
|
Interest-bearing deposits with banks |
10,422
|
5,485
|
Investment securities: | ||
Taxable |
1,012,032
|
997,813
|
Nontaxable |
232,900
|
224,954
|
Dividends |
109,943
|
35,619
|
TOTAL INTEREST INCOME |
6,244,533
|
5,712,888
|
INTEREST EXPENSE: | ||
Deposits |
2,933,560
|
2,792,098
|
Borrowed funds |
408,845
|
94,920
|
TOTAL INTEREST EXPENSE |
3,342,405
|
2,887,018
|
NET INTEREST INCOME |
2,902,128
|
2,825,870
|
Provision for loan losses |
99,999
|
60,000
|
NET INTEREST INCOME AFTER | ||
PROVISION FOR LOAN LOSSES |
2,802,129
|
2,765,870
|
OTHER OPERATING INCOME: | ||
Service charges |
405,691
|
289,242
|
Trust |
116,991
|
99,686
|
Other |
99,769
|
133,371
|
Arbitration settlement |
-
|
28,595
|
Realized securities gains, net |
19,622
|
95,482
|
TOTAL OTHER OPERATING INCOME |
642,073
|
646,376
|
OTHER OPERATING EXPENSES: | ||
Salaries and employee benefits |
1,081,089
|
1,011,575
|
Occupancy |
141,456
|
136,190
|
Furniture and equipment |
178,031
|
165,945
|
Professional fees |
131,189
|
182,644
|
Other |
730,080
|
732,049
|
TOTAL OTHER OPERATING EXPENSES |
2,261,845
|
2,228,403
|
Income before provision for income taxes |
1,182,357
|
1,183,843
|
Provision for income taxes |
244,845
|
295,491
|
Net Income |
$ 937,512
|
$ 888,352
|
Earnings Per Share |
|
$ 0.32
|
Cash Dividend Declared |
$ .145
|
$ .135
|
Weighted average number of shares outstanding |
2,756,675
|
2,800,563
|
The accompanying notes are an integral part
of these financial statements.
2
<PAGE>
CITIZENS FINANCIAL SERVICES, INC. | |||||
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME | |||||
(UNAUDITED) | |||||
March 31 |
|||||
|
|
||||
Net income |
$ 937,512
|
$ 888,352 | |||
Other comprehensive income: | |||||
Unrealized gains(losses) on available for sale securities |
(164,048)
|
(824,204)
|
|||
Less: Reclassification adjustment for gain included in net income |
(19,622)
|
(183,670)
|
(95,482)
|
(919,686)
|
|
Other comprehensive income before tax |
(183,670)
|
(919,686)
|
|||
Income tax expense related to other comprehensive income |
(62,448)
|
(312,693)
|
|||
Other comprehensive income, net of tax |
(121,222)
|
(606,993)
|
|||
Comprehensive income |
$ 816,290
|
$ 281,359
|
|||
The accompanying notes are an
integral part of these financial statements.
3
<PAGE>
CITIZENS FINANCIAL SERVICES, INC. | |||
CONSOLIDATED STATEMENT OF CASH FLOWS | |||
(UNAUDITED) | |||
|
|||
|
|||
|
|
||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||
Net income |
$ 937,512
|
$ 888,352
|
|
Adjustments to reconcile net income to net | |||
Cash provided by operating activities: | |||
Provision for loan losses |
99,999
|
60,000
|
|
Provision for depreciation and amortization |
205,812
|
190,721
|
|
Amortization and accretion of investment securities |
56,380
|
114,800
|
|
Deferred income taxes |
(50,748)
|
16,251
|
|
Realized gains on securities |
(19,622)
|
(95,482)
|
|
Realized gains on loans sold |
(1,800)
|
(9,180)
|
|
Losses
(Gains) on sales or disposals of
Premises and equipment |
2,699
|
(377)
|
|
Originations of loans held for sale |
(270,975)
|
(998,500)
|
|
Proceeds from sales of loans held for sale |
272,775
|
1,007,680
|
|
Gains on sale of foreclosed assets held for sale |
(8,400)
|
(11,607)
|
|
(Increase)
decrease in interest receivable and
other assets |
(203,375)
|
5,207
|
|
Decrease in interest payable and other liabilities |
(60,114)
|
(320,902)
|
|
Net cash provided by operating activities |
960,143
|
846,963
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: | |||
Available-for-sale securities: | |||
Proceeds from sales of available-for-sale securities |
5,805,150
|
8,843,777
|
|
Proceeds
from maturity and principal repayments
of securities |
876,295
|
4,536,541
|
|
Purchase of securities |
(4,823,897)
|
(9,133,405)
|
|
Net increase in loans |
(2,868,248)
|
(1,900,017)
|
|
Capital expenditures |
(243,318)
|
(484,034)
|
|
Proceeds from sales of premises and equipment |
-
|
4,480
|
|
Proceeds from sale of foreclosed assets held for sale |
105,450
|
50,000
|
|
Net cash (used) provided in investing activities |
(1,148,568)
|
1,917,342
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: | |||
Net increase in deposits |
397,950
|
569,966
|
|
Proceeds from long-term borrowings |
698,950
|
249,033
|
|
Repayments of long-term borrowings |
(149,841)
|
(203,172)
|
|
Net decrease in short-term borrowed funds |
(1,773,070)
|
(3,152,144)
|
|
Acquisition of Treasury Stock |
(488,832)
|
-
|
|
Dividends paid |
(400,680)
|
(374,414)
|
|
Net cash used by financing activities |
(1,715,523)
|
(2,910,731)
|
|
Net decrease in cash and cash equivalents |
(1,903,948)
|
(146,426)
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
8,521,793
|
7,304,803
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ 6,617,845
|
$ 7,158,377
|
|
Supplemental Disclosures of Cash Flow Information: | |||
Interest paid |
$ 3,910,823
|
$ 3,488,337
|
|
Income taxes paids |
$ -
|
$ -
|
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, 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 stock dividends declared by the company. The
number of shares used in the earnings per share and dividends per share
calculation was 2,756,675 for 2000 and 2,800,563 for 1999.
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. The financial conditions and results of operations. You should read our discussion should be read in conjunction with the preceding March 31, 2000 Financial Report. The results of operations for the three months ended March 31, 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 to be filed by our company and any current reports
on Form 8-K filed by our company.
5
<PAGE>
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 be acquiring 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 around September 30, 2000.
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 and held-to-maturity securities, decreased by $2.1 million or 2.27% from December 31, 1999 to March 31, 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.
6
<PAGE>
As shown in the following tables,
the change in loans grew by $2.9 million or 1.3% for the period compared
to the December 31, 1999, reflecting a normal seasonal slow down. 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).
|
|
|||||
|
|
|||||
|
|
|
|
|||
Real estate: | ||||||
Residential |
$142,710
|
60.9
|
$143,877
|
62.2
|
||
Commercial |
32,453
|
13.8
|
32,159
|
13.9
|
||
Agricultural |
11,891
|
5.1
|
9,392
|
4.1
|
||
Loans to individuals | ||||||
for household, | ||||||
family and other purchases |
15,621
|
6.7
|
15,569
|
6.7
|
||
Commercial and other loans |
13,103
|
5.6
|
12,313
|
5.3
|
||
State and political subdivision loans |
18,582
|
7.9
|
18,148
|
7.8
|
||
Total loans |
234,360
|
100.0
|
231,458
|
100.0
|
||
Unearned income |
24
|
29
|
||||
Net loans |
$234,336
|
$231,429
|
||||
|
||||||
|
||||||
|
||||||
|
|
|||||
Real estate: | ||||||
Residential |
(1,167)
|
(0.8)
|
||||
Commercial |
294
|
0.9
|
||||
Agricultural |
2,499
|
26.6
|
||||
Loans to individuals | ||||||
for household, | ||||||
family and other purchases |
52
|
0.3
|
||||
Commercial and other loans |
790
|
6.4
|
||||
State and political subdivision loans |
434
|
2.4
|
||||
Total loans |
2,902
|
1.3
|
||||
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 continue to increase for the remainder of 2000.
There was virtually no change
in total deposits during the March 31, 2000 period. However, money market
funds decreased as customers moved funds to certificates of deposit to
"lock-in" higher long term rates.
7
<PAGE>
(dollars in thousands)
|
|
|||||
|
|
|||||
|
|
|
|
|||
Noninterest-bearing deposits |
$24,445
|
8.6
|
$23,435
|
8.3
|
||
NOW accounts |
36,873
|
12.9
|
36,081
|
12.7
|
||
Savings deposits |
27,504
|
9.7
|
26,276
|
9.2
|
||
Money market deposit accounts |
34,082
|
12.0
|
39,831
|
14.0
|
||
Certificates of deposit |
161,812
|
56.8
|
158,695
|
55.8
|
||
Total deposits |
$284,716
|
100.0
|
$284,318
|
100.0
|
||
|
||||||
|
||||||
|
||||||
|
|
|||||
Noninterest-bearing deposits |
1,010
|
4.3
|
||||
NOW accounts |
792
|
2.2
|
||||
Savings deposits |
1,228
|
4.7
|
||||
Money market deposit accounts |
(5,749)
|
(14.4) | ||||
Certificates of deposit |
3,117
|
2.0
|
||||
Total deposits |
398
|
0.1
|
||||
Borrowed funds decreased $1.2 million during the first three 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.
CAPITAL
The company has computed its
risk-based capital ratios as follows (dollars
in thousands):
March 31,
December 31,
2000
1999
Amount Ratio Amount Ratio
Total capital (to risk-weighted
assets)
company
$30,673 13.76% $30,610
14.09%
For capital adequacy purposes
17,836 8.00%
17,382 8.00%
To be well capitalized
22,294 10.00% 21,728
10.00%
Tier I capital (to risk-weighted
assets)
company
$28,300 12.69% $28,341
13.04%
For capital adequacy purposes
8,918 4.00%
8,691 4.00%
To be well capitalized
13,377 6.00%
13,037 6.00%
Tier I capital (to average assets)
company
$28,300 8.27% $28,341
8.32%
For capital adequacy purposes
13,690 4.00%
13,620 4.00%
To be well capitalized
17,112 5.00%
17,025 5.00%
8
<PAGE>
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 available-for-sale investment portfolio continued to decline in value by $100,000 net of federal taxes. Dividend payments, stock repurchase and the rise in market rates resulted the decline in our total shareholders' equity of $73,000 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. A total of 55,162 shares have been repurchase at a cost of $1 million as of March 31, 2000.
RESULTS OF OPERATIONS
Net income for the three month period ending March 31, 2000 was $938,000, an increase of $49,000 or 5.5% over the $888,000 for the 1999 related period. Earnings per share was $.34 during the first three months of 2000 compared with $.32 during the comparable 1999 period. Details of the reasons for this increase are discussed on the following pages (dollars in thousands).
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 three
month period ending March 31, 2000, after provision for loan losses, was
$2,802,000 an increase of $36,000 compared to an increase of $75,000 at
March 31, 1999.
9
<PAGE>
Analysis of Average Balances
and Interest Rates (1)
|
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ASSETS |
|
|
|
|
|
|
|
|
|
Short-term investments: | |||||||||
Interest-bearing deposits at banks |
796
|
10
|
5.05
|
408
|
5
|
4.97
|
2,635
|
36
|
5.54
|
Investment securities: | |||||||||
Taxable |
72,990
|
1,144
|
6.27
|
70,457
|
1,035
|
5.88
|
76,236
|
1,252
|
6.57
|
Tax-exempt (3) |
20,634
|
353
|
6.84
|
19,724
|
341
|
6.92
|
6,061
|
102
|
6.73
|
Total investment securities |
93,624
|
1,497
|
6.40
|
90,181
|
1,376
|
6.10
|
82,297
|
1,354
|
6.58
|
Loans: | |||||||||
Residential mortgage loans |
143,415
|
2,997
|
8.40
|
132,546
|
2,827
|
8.65
|
123,627
|
2,732
|
8.96
|
Commercial and farm loans |
57,294
|
1,292
|
9.07
|
49,341
|
1,157
|
9.51
|
45,794
|
1,112
|
9.85
|
Loans to state and political subdivisions |
18,492
|
380
|
8.26
|
10,051
|
211
|
8.51
|
10,256
|
221
|
8.74
|
Other loans |
15,355
|
340
|
8.91
|
14,616
|
326
|
9.05
|
12,900
|
313
|
9.84
|
Loans, net of | |||||||||
Discount (2)(3)(4) |
234,556
|
5,009
|
8.59
|
206,554
|
4,521
|
8.88
|
192,577
|
4,378
|
9.22
|
Total interest-earning assets |
328,976
|
6,516
|
7.97
|
297,143
|
5,902
|
8.06
|
277,509
|
5,768
|
8.43
|
Cash and due from banks |
6,844
|
7,016
|
6,142
|
||||||
Bank premises and equipment |
5,927
|
5,757
|
5,760
|
||||||
Other assets |
1,092
|
1,752
|
4,967
|
||||||
Total non-interest bearing assets |
13,863
|
14,469
|
16,374
|
||||||
Total assets |
342,839
|
311,668
|
294,378
|
||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||
Interest-bearing liabilities: | |||||||||
NOW accounts |
35,668
|
163
|
1.84
|
34,984
|
155
|
1.80
|
32,146
|
180
|
2.27
|
Savings accounts |
26,607
|
108
|
1.63
|
26,782
|
124
|
1.88
|
26,452
|
144
|
2.21
|
Money market accounts |
36,147
|
433
|
4.82
|
39,246
|
418
|
4.32
|
35,601
|
425
|
4.84
|
Certificates of deposit |
160,983
|
2,229
|
5.57
|
151,348
|
2,095
|
5.61
|
144,677
|
2,055
|
5.76
|
Total interest-bearing deposits |
259,405
|
2,933
|
4.55
|
252,360
|
2,792
|
4.49
|
238,876
|
2,804
|
4.76
|
Other borrowed funds |
27,695
|
409
|
5.94
|
7,335
|
95
|
5.25
|
7,191
|
111
|
6.26
|
Total interest-bearing liabilities |
287,100
|
3,342
|
4.68
|
259,695
|
2,887
|
4.51
|
246,067
|
2,915
|
4.80
|
Demand deposits |
22,993
|
20,333
|
19,060
|
||||||
Other liabilities |
3,721
|
3,142
|
3,105
|
||||||
Total non-interest-bearing liabilities |
26,714
|
23,475
|
22,165
|
||||||
Stockholders' equity |
29,025
|
28,498
|
26,146
|
||||||
Total liabilities and stockholders' | |||||||||
Equity |
342,839
|
311,668
|
294,378
|
||||||
Net interest income |
3,174
|
3,015
|
2,853
|
||||||
Net interest spread (5) |
3.28%
|
3.55%
|
3.63%
|
||||||
Net interest income as a percentage | |||||||||
Of average interest-earning assets |
3.88%
|
4.12%
|
4.17%
|
||||||
Ratio of interest-earning assets | |||||||||
To interest-bearing liabilities |
1.15
|
1.14
|
1.13
|
||||||
(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. |
We have experienced a narrowing interest margin percentage during 1999 and the first quarter 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 10 years. However, most of the
<PAGE>
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.We continue to review various pricing and investment strategies to enhance deposit growth
while maintaining or expanding the current interest margin.
|
|
|||||||||||
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|||||||
Interest Income: | ||||||||||||
Short-term investments: | ||||||||||||
Interest-bearing
deposits
at banks |
5
|
-
|
5
|
(28)
|
(3)
|
(31)
|
||||||
Investment securities: | ||||||||||||
Taxable |
38
|
71
|
109
|
(91)
|
(126)
|
(217)
|
||||||
Tax-exempt |
16
|
(4)
|
12
|
236
|
3
|
239
|
||||||
Total investment securities |
54
|
67
|
121
|
145
|
(123)
|
22 | ||||||
Loans: | ||||||||||||
Residential mortgage loans |
226
|
(56)
|
170
|
185
|
(91)
|
94
|
||||||
Commercial and farm loans |
177
|
(42)
|
135
|
82
|
(37)
|
45
|
||||||
Loans to state and political subdivisions |
174
|
(5)
|
169
|
(4)
|
(5)
|
(9)
|
||||||
Other loans |
16
|
(2)
|
14
|
33
|
(20)
|
13
|
||||||
Loans, net of | ||||||||||||
Discount |
593
|
(105)
|
488
|
296
|
(153)
|
143
|
||||||
Total Interest Income |
652
|
(38)
|
614
|
413
|
(279)
|
134
|
||||||
Interest Expense: | ||||||||||||
Interest-bearing deposits: | ||||||||||||
NOW accounts |
3
|
5
|
8
|
19
|
(44)
|
(25)
|
||||||
Savings accounts |
(1)
|
(15)
|
(16)
|
2
|
(22)
|
(20)
|
||||||
Money Market accounts |
(26)
|
41
|
15
|
136
|
(143)
|
(7)
|
||||||
Certificates of deposit |
134
|
-
|
134
|
90
|
(50)
|
40
|
||||||
Total interest-bearing deposits |
110
|
31
|
141
|
247
|
(259)
|
(12)
|
||||||
Other borrowed funds |
79
|
235
|
314
|
5
|
(21)
|
(16)
|
||||||
Total interest expense |
189
|
266
|
455
|
252
|
(280)
|
(28)
|
||||||
Net interest income |
463
|
(304)
|
159
|
161
|
1
|
162
|
||||||
(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. |
As can be seen from the preceding tables, tax equivalent net interest income rose from $2,853,000 in 1998 to $3,015,000 in 1999 and increased to $3,174,000 in 2000. In the period ending March 31, 2000, net interest income increased $159,000 while overall spread decreased from 3.55% to 3.28%. The increased volume of interest-earning assets generated an increase in interest income of $652,000 while increased volume of interest-bearing liabilities produced $189,000 of interest expense. The change in volume resulted in an increase of $463,000 in net interest income. The net change in rate was a negative $304,000 resulting in a total positive net change of $159,000 when combined with change in volume. The yield on interest-earning assets decreased 9 basis points from 8.06% to 7.97% and the average interest rate on interest-bearing liabilities increased 17 basis points from 4.51% to 4.68%. We are currently evaluating ways to improve the interest spread.The provision for loan losses was $100,000 for the three-month period ended March 31, 2000 compared to $60,000 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.
11
<PAGE>
OTHER OPERATING INCOME (dollars
in thousands)
|
|||||
|
|
||||
|
|
|
|
||
Service charges |
$405
|
$289
|
116
|
40.1
|
|
Trust |
117
|
100
|
17
|
17.0
|
|
Other |
100
|
133
|
(33)
|
(24.8)
|
|
Arbitration settlement |
-
|
29
|
(29)
|
||
Realized securities gains, net |
20
|
95
|
(75)
|
(78.9)
|
|
Total |
$642
|
$646
|
(4)
|
(0.6)
|
|
As indicated in the table above, other income was $642,000 for the three-month period ended March 31, 2000 compared to $646,000 for the same period in 1999.
The increase in service charges is directly attributable to increased checking account, ATM and MasterMoney Card charges.
The trust income increase is the result of a change in our fee structure and additional business.
The decrease in other income was primarily a result of an adjustment to insurance income.
We continue to evaluate means of increasing other operating income to off-set the loss of net interest income described above. Our approach is to apply service charges on transaction 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 OPERATING EXPENSES (dollars
in thousands)
|
|||||
|
|
||||
|
|
|
|
||
Salaries and employee benefits |
$1,081
|
$1,011
|
70
|
6.9
|
|
Occupancy |
142
|
136
|
6
|
4.4
|
|
Furniture and equipment |
178
|
166
|
12
|
7.2
|
|
Professional fees |
131
|
183
|
(52)
|
(28.4)
|
|
Other |
730
|
732
|
(2)
|
(0.3)
|
|
Total |
$2,262
|
$2,228
|
34
|
1.5
|
|
Other operating expenses detailed above were $2.3 million for the three-month period ended March 31, 2000 compared to $2.2 million for the same period in 1999.
The increase in salaries and employee benefits was a result of normal merit increases.
Occupancy and furniture and equipment expense had very little change in either period.
The other operating expense increase
reflects the cost of loan promotions and other normal operating expenses.
PROFESSIONAL FEES (dollars in thousands) |
|
|||
|
||||
|
|
|
||
|
|
|||
Other professional fees |
113
|
165
|
(52)
|
(31.5)
|
Legal fees |
5
|
5
|
-
|
- |
Examinations and audits |
13
|
13
|
-
|
|
Total |
131
|
183
|
(52)
|
(28.4)
|
Professional fees increase reflects
management's efforts to implement strategic growth initiatives and process
improvements most of which were completed in 1999.
12
<PAGE>
Provision for Income Taxes
The provision for income taxes was $245,000 for the three-month period ended March 31, 2000 compared to $296,000 for the same period in 1999. The decrease was primarily a result of increased levels of tax exempt income.
In November 1999, we entered into a limited partnership agreement to establish a low income housing project in Bradford County, Pa. As a result of this agreement we expect to receive approximately $900,000 of tax credits over a ten year period once the project has been completed.
BRANCH ACQUISITION
On April 18, 2000, our company executed an agreement whereby we will be acquiring 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. The consummation date for this acquisition is expected to be around September 30, 2000.
Our acquisition of Sovereign Bank's loans consist primarily of small business and consumer loans. Future growth in residential mortgage lending in anticipated.
$80 million from the Bradford County offices to be acquired will provide a significant addition to our core deposit base and will have a positive impact upon our liquidity.
The consummation of the acquisition of Bradford County branches will enable us to eliminate all of our short-term and long-term borrowings from the Federal Home Loan Bank.
We believe this transaction will increase earnings in 2001 and beyond.
LIQUIDITY
As detailed in the Consolidated Statement of Cash Flows, our company incurred a negative net cash flow 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 include capital expenditures. Surplus funds are then invested
in investment securities.
13
<PAGE>
Capital expenditures during the first quarter of 2000 were $243,000, $241,000 less than the same period in 1999.
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 operations facility. The cost of acquisition and the expected remodeling will be approximately $1.8 million
In addition, our company has contracted with Wal-Mart to include a First Citizens branch in their new Supercenter scheduled to be opened August 2000.
Our company continues to plan for an approximate $2.4 million renovation or replacement of the Mansfield community office. This effort has been in various stages of planning for more than nine years. We expect construction to take place in 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.
Our company achieves liquidity primarily from temporary or short-term investments in the Federal Home Loan Bank of Pittsburgh, PA, and investments that mature in less than one year. The company also has a maximum borrowing capacity at the Federal Home Loan Bank of approximately $89 million as an additional source of liquidity.
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.
14
<PAGE>
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 (dollars in thousands).
|
|
||||
|
|
|
|
|
|
Non-performing loans: | |||||
Non-accruing loans |
$ 303
|
$ 421
|
$ 1,495
|
$ 1,169
|
$ 844
|
Impaired loans |
847
|
1,334
|
382
|
382
|
414
|
Accrual loans - 90 days or | |||||
More past due |
228
|
78
|
15
|
170
|
723
|
Total non-performing loans |
1,378
|
1,833
|
1,892
|
1,721
|
1,981
|
Foreclosed assets held for sale |
441
|
573
|
529
|
238
|
164
|
Total non-performing assets |
$ 1,819
|
$ 2,406
|
$ 2,421
|
$ 1,959
|
$ 2,145
|
Non-performing loans as a percent | |||||||||
of loans net of unearned income |
0.59%
|
0.79%
|
0.92%
|
0.90%
|
1.09%
|
||||
Non-performing assets as a percent | |||||||||
of loans net of unearned income |
0.78%
|
1.04%
|
1.18%
|
1.02%
|
1.18%
|
||||
Allowance for possible loan loasses: |
|
|
|||||||
|
|
|
|
|
|||||
Balance at beginning of period |
$ 2,270
|
$ 2,292
|
$ 2,138
|
$ 1,995
|
$ 1,833
|
||||
Charge-offs |
(22)
|
(551)
|
(112)
|
(83)
|
(64)
|
||||
Recoveries |
26
|
54
|
48
|
16
|
21
|
||||
Provision for loan losses |
100
|
475
|
218
|
210
|
205
|
||||
Balance at end of period |
$ 2,374
|
$ 2,270
|
$ 2,292
|
$ 2,138
|
$ 1,995
|
||||
Allowance for losses as a percent | |||||||||
of total loans |
1.01%
|
0.98%
|
1.13%
|
1.11%
|
1.09%
|
||||
Interest does not accrue 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.
INTEREST RATE AND MARKET RISK MANAGEMENT
The objective of interest rate sensitivity management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest sensitivity imbalances and the market value risk of assets and liabilities.
Because of the nature of our operations, we are not subject to foreign currency exchange or commodity price risk and, since our company has no trading portfolio, it is not subject to trading risk.
Currently our company has equity
securities that represent only 4% of our investment portfolio and, therefore,
equity risk is not significant.
15
<PAGE>
The primary components of interest-sensitive assets include adjustable-rate loans and investments, loan repayments, investment maturities and money market investments. The primary components of interest-sensitive liabilities include maturing certificates of deposit, IRA certificates of deposit and short-term borrowings. Savings deposits, NOW accounts and money market investor accounts are considered core deposits and are not short-term interest sensitive (except for the top-tier money market investor accounts which are paid current market interest rates).
Gap analysis, one of the methods used by us to analyze interest rate risk, does not necessarily show the precise impact of specific interest rate movements on our company's net interest income because the repricing of certain assets and liabilities is discretionary and is subject to competitive and other pressures. In addition, assets and liabilities within the same period may, in fact, be repaid at different times and at different rate levels. We have not experienced the kind of earnings volatility that might be indicated from gap analysis.
Our company currently uses a computer simulation model to better measure the impact of interest rate changes on net interest income. We use the model as part of our risk management process that will effectively identify, measure, and monitor our company's risk exposure.
We us numerous interest rate simulations employing a variety of assumptions are used by us to evaluate our interest rate risk exposure. A shock analysis at March 31, 2000, indicated that a 200 basis point movement in interest rates in either direction would have a minor impact on our company's anticipated net interest income over the next twenty-four months.
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 recent action by the Federal Reserve of increasing short-term interest rates will help ensure that the level of inflation remains at a relatively low level.
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; and tightening the regulation of bank derivatives' activities.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999, which is also known as the Financial Services Modernization Act. The act repeals some depression-era banking laws and will permit banks, insurance companies and securities firms to engage in each others' business after complying with certain conditions and regulations which are yet to be finalized. The act grants to community banks the power to enter new financial markets as a matter of right that larger institutions have managed to do on an ad hoc basis. At this time, our company has no plans to pursue these additional possibilities.
Our company does not believe that the Financial Services Modernization Act will have an immediate positive or negative material impact on our operations. However, the act may have the result of increasing the amount of competition that our company faces from larger financial service companies, many of whom have substantially more financial resources than our company, which may now offer banking services in addition to insurance and brokerage products.
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
16
<PAGE>
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 and was disussed previously in this Form 10-Q. 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, 1999.
17
<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 18, 1999 at 12:00 p.m. at the Tioga County Fairgrounds Youth Building, Whitneyville, Pennsylvania, 16901
William D. Van Etten 2,129,147 53,852
Mark L. Dalton
Class 2 Term Expires
2001
John E. Novak
Class 2 Term Expires
2001
Rudolph J. van der Heil Class 2
Term Expires 2001
Carol J. Tama
Class 1 Term Expires
2002
R. Lowell Coolidge Class 1
Term Expires 2002
Richard E. Wilber Class
1 Term Expires 2002
John M. Thomas, M.D. Class 1
Term Expires 2002
Larry J. Croft
Class 1 Term Expires
2002
2. Proposal to Amend Article Twelfth of the Articles of Incorporation of Citizens Financial Services, Inc., as amended, to read in full an its entirety as follows: "TWELFTH: Commencing with the 2000 Annual Meeting of Shareholders, no Director of the Corporation shall be eligible to stand for election or continue to serve as a Director at the next Annual Meeting if, as of the date of the Annual Meeting change, such Director has attainde the age of 70 years.
For 1,956,236 Against 172,870 Abstain 53,897
Item 5 - Other Information -
Nothing to report.
18
<PAGE>
Item 6 -Exhibits and reports on Form 8-K.
(a) Exhibits.
(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.)
(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.
(99) - Independent accountant's review of financial statements for the period ended March 31, 2000.
(b)Reports on Form 8-K. Press release dated April 19, 2000 and filed May 9, 2000.
<PAGE>
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 10, 2000
/s/ Richard E. Wilber
By: Richard E. Wilber
President
(Principal Executive Officer)
May 10, 2000
/s/ Thomas C. Lyman
By: Thomas C. Lyman
Treasurer
(Principal Financial Officer &
Principal Accounting Officer)
20
<PAGE>
EXHIBITS INDEX
(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.)
(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.
(99) - Independent accountant's
review of financial statements for the period ended March 31, 2000.
21