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 September 30, 1997
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
November 3, 1997 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 September 30, 1997 and
December 31, 1996 1
Consolidated Statement of Income for the
Three months and Nine months Ended September 30, 1997 and 1996 2
Consolidated Statement of Cash Flows for the Nine months Ended
September 30, 1997 and 1996 3
Notes to Consolidated Financial Statements 4
Item 2-Management's Discussion and Analysis of Financial Condition
and Results of Operations 4-13
Part II OTHER INFORMATION AND SIGNATURES
Item 1-Legal Proceedings 14
Item 2-Changes in Securities 14
Item 3-Defaults upon Senior Securities 14
Item 4-Submission of Matters to a Vote of Security Holders 14
Item 5-Other Information 14
Item 6-Exhibits and Reports on Form 8-K 14
Signatures 15
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, December 31,
1997 1996
ASSETS:
Cash and due from banks:
Noninterest-bearing $ 5,792,531 $ 6,406,872
Interest-bearing 40,342 51,835
Total cash and cash equivalents 5,832,873 6,458,707
Available-for-sale securities 29,572,513 28,736,558
Held-to-maturity securities (estimated
market value 1997,$59,933,000;
December 31, 1996, $57,587,000) 59,431,822 57,320,754
Loans (net of allowance for possible loan
losses 1997, $2,147,272; December 31, 1996,
$1,995,028) 186,538,929 180,417,838
Foreclosed assets held for sale 214,065 164,223
Premises and equipment 5,446,129 4,344,977
Accrued interest receivable 2,886,878 2,930,283
Other assets 1,839,958 2,436,276
TOTAL ASSETS $291,763,167 $282,809,616
LIABILITIES:
Deposits:
Noninterest-bearing $ 19,039,184 $ 17,924,356
Interest-bearing 236,268,172 222,252,664
Total deposits 255,307,356 240,177,020
Borrowed funds 7,569,738 15,816,839
Accrued interest payable 2,076,500 2,292,742
Dividends payable 0 612,103
Other liabilities 1,464,519 1,007,099
TOTAL LIABILITIES 266,418,113 259,905,803
STOCKHOLDERS' EQUITY:
Common Stock
$1.00 par value; authorized 5,000,000
shares; issued and outstanding
2,746,564 shares and
1,360,228 shares in 1997
and 1996, respectively 2,746,564 1,360,228
Additional paid-in capital 7,180,759 6,828,301
Retained earnings 15,129,811 14,543,833
TOTAL 25,057,134 22,732,362
Unrealized holding gains on
available-for-sale securities 287,919 171,451
TOTAL STOCKHOLDERS' EQUITY 25,345,053 22,903,813
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $291,763,166 $282,809,616
The accompanying notes are an integral part of these financial statements.
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Nine months Ended
September 30, September 30,
1997 1996 1997 1996
INTEREST INCOME:
Interest and fees on loans $4,421,811 $4,039,128 $12,816,020 $11,702,755
Interest on interest-bearing deposits
with banks 104,231 881 174,600 146,600
Interest and dividends on investments:
Taxable 1,287,853 1,436,657 3,916,910 3,862,198
Nontaxable 12,567 16,246 37,642 53,634
Dividends 20,525 18,940 59,292 54,106
Total interest and dividends on investments 1,320,945 1,471,843 4,013,844 3,969,938
TOTAL INTEREST INCOME 5,846,987 5,511,852 17,004,464 15,819,293
INTEREST EXPENSE:
Interest on deposits 2,841,474 2,642,152 8,262,069 7,625,872
Interest on borrowed funds 116,682 173,340 396,176 404,819
TOTAL INTEREST EXPENSE 2,958,156 2,815,492 8,658,245 8,030,691
NET INTEREST INCOME 2,888,831 2,696,360 8,346,219 7,788,602
Provision for possible loan losses 52,500 52,500 157,500 152,500
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 2,836,331 2,643,860 8,188,719 7,636,102
OTHER OPERATING INCOME:
Service charge income 211,926 226,487 637,779 620,551
Trust income 78,912 55,181 236,712 189,890
Other income 80,210 92,507 196,478 198,313
Realized securities gains, net 0 0 0 19,264
Arbitration settlement 61,232 0 945,240 0
TOTAL OTHER OPERATING INCOME 432,280 374,175 2,016,209 1,028,018
OTHER OPERATING EXPENSES:
Salaries and employee benefits 995,750 852,406 3,018,029 2,498,583
Occupancy expenses 128,699 112,560 387,698 341,233
Furniture and equipment expenses 209,040 144,443 507,464 436,254
FDIC insurance expense 13,941 312,601 41,583 372,459
Other expenses 684,684 602,388 1,958,766 1,803,164
TOTAL OTHER OPERATING EXPENSES 2,032,114 2,024,398 5,913,540 5,451,693
Income before provision for income taxes 1,236,497 993,637 4,291,388 3,212,427
Provision for income taxes 359,133 284,252 1,325,559 968,430
NET INCOME $ 877,364 $ 709,385 $ 2,965,829 2,243,997
Earnings per share $0.32 $0.26 $1.08 $0.82
Cash dividend declared $0.00 $0.00 $0.23 $0.22
Weighted average number of shares outstanding 2,746,564 2,746,564 2,746,564 2,746,564
The accompanying notes are an integral part of these financial statements.
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine months Ended
September 30,
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996
Net income $ 2,965,829 $ 2,243,997
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 157,500 152,500
Provision for depreciation and amortization 403,411 321,720
Amortization and accretion of investment
securities 277,576 264,181
Deferred income taxes (15,629) 6,974
Realized gains on securities 0 (19,264)
Realized gains on loans sold (10,908) (34,069)
Originations of loans held for sale (788,250) (1,203,353)
Proceeds from sales of loans held for sale 799,158 1,237,422
Gain on sale of foreclosed assets
held for sale (10,197) (50,106)
Decrease (increase) in accrued interest
receivable and other assets 263,777 (747,086)
Increase in accrued interest
payable and other liabilities 241,177 627,959
Net cash provided by operating activities 4,283,444 2,800,875
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Proceeds from sales of securities 0 16,047
Proceeds from maturity of securities 4,200,000 1,000,000
Purchase of securities (4,949,641) (9,681,671)
Held-to-maturity securities:
Proceeds from maturity and principal
repayments of securities 6,810,469 7,039,747
Purchase of securities (9,108,961) (13,395,108)
Net increase in loans (6,437,735) (11,529,961)
Purchase of loans 0 (3,659,068)
Capital expenditures (1,172,986) (662,014)
Proceeds from sale of foreclosed assets held
for sale 119,500 285,100
Deposit acquisition premium 0 (1,017,714)
Net cash used by
investing activities (10,539,354) (31,604,642)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 15,130,336 12,093,690
Proceeds from long-term borrowings 957,184 143,206
Repayments of long-term borrowings (1,056,402) (49,650)
Net (decrease) increase in short-term
borrowed funds (8,147,883) 2,206,076
Dividends paid (1,253,159) (1,186,664)
Deposits of acquired branches 0 17,129,939
Net (used) cash provided by
financing activities 5,630,076 30,336,597
Net increase in cash and cash
equivalents (625,834) 1,532,830
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,458,707 5,572,661
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,832,873 $ 7,105,491
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 8,874,487 $ 8,134,883
Income taxes paid $ 1,305,000 $ 1,040,000
The accompanying notes are an integral part of these financial statements.
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 September 30, 1997, 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, 1996.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings Per Share".
This statement re-defines the standards for computing earnings per share and
is effective for financial statements issued for periods ending after December
15, 1997. Statement No. 128 establishes a new standard for computing and
presenting EPS and requires dual presentation of "basic" and "diluted" EPS on
the face of the income statement for all entities with complex capital
structures. Under Statement No.128, basic EPS is to be computed based upon
income available to common shareholders and the weighted average number of
common shares outstanding for the period. Diluted EPS is to reflect the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the Company.
Statement No. 128 also requires the restatement of all prior-period EPS data
presented. Management believes that the adoption of this statement will not
have a significant impact on the Company's financial position or results of
operations.
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.
During the current quarter, the Board of Directors approved a two-for-one
stock split. The additional shares resulting from the split were effected in
the form of a 100% stock dividend. All references to the number of average
common shares and per share amounts have been restated to reflect the stock
split.
The results of operations for the nine months ended September 30, 1997
and 1996 are not necessarily indicative of the results to be expected for
the full year.
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 1997 and
1996, respectively.
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 nine
months ended September 30, 1997 and 1996 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". 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, savings and loan associations and
other non-depository financial institutions, 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 entities 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.
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% (95% with PMI) 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
15 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 increase the interest rate by a maximum of 100 basis points once during
the term were some of the deposit product variations.
TRUST SERVICES
Traditional trust, investment management and estate settlement services
are offered by the Bank.
Financial Condition
For the nine month period ended September 30, 1997, the assets of the
Company increased $8.9 million compared with an increase of $32.9 million for
the same period in 1996 ($17.1 million the result of the acquisition of the
Canton and Gillett offices of Meridian Bancorp, Inc. on April 19, 1996).
Cash and cash equivalents increased $.6 million in 1997 compared with an
increase of $1.5 million for the same period in 1996. Surplus funds from
deposit growth in 1997 not used to fund loans or repay borrowings were placed
in short-term interest bearing investments.
Total investment securities increased $2.9 million or 3.4% during the
first nine months of 1997 compared with an increase of $14.3 million for the
same period in 1996. The 1996 increase reflects proceeds from the branch
acquisition.
Net loan balances increased by $6.1 million or 3.4% for the first nine
months of 1997, as compared to $14.9 million or 9.3% in 1996 ($3.7 million of
the increase resulting from branch acquisitions). The normal home building
season resulted in loan growth, however, the growth was not as strong as the
summer of 1996.
During the remainder of 1997, management expects that loan demand to
continue but slow as the home building season ( April through October) comes
to an end.
Management expects 1998 loan growth be somewhat less robust than the
historical trend of the last two years (see following table) as we are
experiencing a slowing of 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 loan portfolio consists of the following (in thousands):
September 30, December 31, September 30,
1997 1996 1996
Real estate loans - residential $122,354 $112,678 $ 108,403
Real estate loans - commercial 24,741 27,670 25,411
Real estate loans - agricultural 8,947 6,134 6,545
Loans to individuals for household,
family and other purchases 13,582 14,465 13,931
Commercial and other loans 9,672 11,529 12,016
State and political subdivision
loans 9,506 10,105 10,546
Total 188,802 182,581 176,852
Less: unearned income on loans 116 168 191
Loans, net of unearned income $188,686 $182,413 $176,661
Deposits increased by $15.1 million or 6.3%, because of the three new
offices in addition to the competitive pricing of certificates of deposit.
The first nine months of 1996 saw an increase of $29.2 million ($17.1 million
the result of the two office acquisitions).
Borrowed funds decreased by $8.3 million during the first nine months of
1997 compared with an increase of $2.3 million in 1996. This decrease
resulted from repayments of short-term borrowings 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. The strong increase in deposits coupled with investments maturing
enabled a decrease in short-term borrowing during the first nine months of
1997.
Capital
During this quarter the Board of Directors Approve a 2 for 1 stock
split. They also approved paying dividends on a quarterly basis beginning
with the dividend payable October 17, 1997 at 12.5 cents per share.
The Company has computed its risk-based capital ratios as follows
(dollars in thousands):
September 30, December 31,
1997 1996
Tier I - Total stockholders' equity $ 25,345 $ 22,904
Less: Unrealized holding gains (losses)
on available-for-sale securities 288 172
Goodwill and core deposit intangible 864 945
Tier I, net 24,193 21,787
Tier II - Allowance for loan losses(1) 2,064 1,977
Total qualifying capital $ 26,257 $ 23,764
Risk-adjusted on-balance sheet assets $157,282 $151,978
Risk-adjusted off-balance sheet
exposure (2) 7,727 6,129
Total risk-adjusted assets $165,009 $158,107
September 30, December 31,
Ratios: 1997 1996
Tier I risk-based capital ratio 14.7% 13.8%
Federal minimum required 4.0 4.0
Total risk-based capital ratio 15.9% 15.0%
Federal minimum required 8.0 8.0
Leverage ratio (3) 8.3% 7.8%
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 nine month period ending September 30, 1997 was
$2,966,000 an increase of $722,000 or 32.2% over the 1996 related period.
Earnings per share was $1.08 during 1997 compared with $0.82 during the
comparable 1996 period. A large part of the 1996 increase was the result of an
arbitration settlement 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 nine month
period, after provision for possible loan losses, was $8,189,000, an increase
of $553,000 or 7.2% compared with an increase of $650,000 or 9.3% during the
same period in 1996.
Analysis of Average Balances and Interest Rates (1)
(Dollars in thousands)
September 30, 1997 September 30, 1996 September 30, 1995
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
$ $ % $ $ % $ $ %
ASSETS
Short-term investments:
Interest-bearing deposits at banks 4,255 175 5.50 3,704 147 5.30 2,202 96 5.83
Investment securities:
Taxable 83,445 3,976 6.37 80,751 3,917 6.48 62,818 3,132 6.67
Tax-exempt(3) 604 58 12.84 854 81 12.67 2,305 219 12.70
Total investment securities 84,049 4,034 6.42 81,605 3,998 6.54 65,123 3,351 6.88
Loans:
Residential mortgage loans 118,003 8,149 9.23 101,744 7,055 9.26 96,903 6,719 9.27
Commercial & farm loans 43,669 3,161 9.68 41,553 3,071 9.87 38,391 2,829 9.85
Loans to state & political
subdivisions 9,666 614 8.49 9,391 613 8.72 7,192 487 9.05
Other loans 13,855 1,094 10.56 14,337 1,160 10.81 14,003 1,093 10.44
Loans, net of discount (2)(3)(4) 185,193 13,018 9.40 167,025 11,899 9.52 156,489 11,128 9.51
Total interest-earning assets 273,497 17,227 8.42 252,334 16,044 8.49 223,814 14,575 8.71
Cash and due from banks 4,002 3,317 3,029
Bank premises and equipment 4,950 4,260 4,119
FASB 115 adjustment 127 179 (51)
Other assets 4,831 6,046 6,375
Total noninterest-bearing assets 13,910 13,802 13,472
Total assets 287,407 266,136 237,286
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts 32,488 586 2.41 28,735 491 2.28 24,007 419 2.33
Savings accounts 28,040 465 2.22 27,628 460 2.22 25,898 482 2.49
Money market accounts 27,812 941 4.52 27,074 884 4.36 22,304 788 4.72
Certificates of deposit 143,955 6,270 5.82 131,774 5,792 5.87 118,003 5,173 5.86
Total interest-bearing deposits 232,295 8,262 4.76 215,211 7,627 4.73 190,212 6,862 4.82
Other borrowed funds 8,542 396 6.20 8,830 405 6.13 8,501 402 6.32
Total interest-bearing liabilities 240,837 8,658 4.81 224,041 8,032 4.79 198,713 7,264 4.89
Demand deposits 18,887 17,114 14,444
Other liabilities 3,617 3,118 4,231
Total noninterest-bearing liabilities 22,504 20,232 18,675
Stockholders' equity 24,066 21,863 19,898
Total liabilities & stockholders'
equity 287,407 266,136 237,286
Net interest income 8,569 8,012 7,311
Net interest spread (5) 3.61% 3.70% 3.82%
Net interest income as a percentage
of average interest-earning assets 4.19% 4.24% 4.37%
Ratio of interest-earning assets
to interest-bearing liabilities 1.14 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.
As described in the table above, the yield on earning assets, on a
tax-equivalent basis, was 8.42% and 8.49% during the first nine months of
1997 and 1996, respectively (a decline of 7 basis points). The cost of funds
was 4.81% and 4.79% during the same nine month period (an increase of 2 basis
points).
In comparing the average interest cost of 1997 versus 1996, NOW accounts
increased 13 basis points (primarily the result of a new higher rate tiered
product targeted to State and Political Accounts), while money market
accounts increased by 16 basis points. The interest rate on certificates of
deposit decreased by 5 basis points.
The Company has continued to experience a slight narrowing of its margin
percentage during the nine months of 1997. 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 for
the nine month period ending September 30 (in thousands):
1997 vs. 1996 (1) 1996 vs. 1995 (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 $ 22 $ 6 $ 28 $ 59 $ (8) $ 51
Investment securities:
Taxable 126 (67) 59 867 (82) 785
Tax-exempt (24) 1 (23) (138) 0 (138)
Total investments 102 (66) 36 729 (82) 647
Loans:
Residential mortgage loans 1,123 (29) 1,094 336 0 336
Commercial and farm loans 151 (61) 90 234 8 242
Loans to state & political
subdivisions 12 (11) 1 143 (17) 126
Other loans (38) (28) (66) 26 41 67
Total loans - net of
discount (2)(3)(4) 1,248 (129) 1,119 739 32 771
Total interest income 1,372 (189) 1,183 1,527 (58) 1,469
Interest expense:
Interest bearing deposits:
NOW accounts 67 28 95 81 (9) 72
Savings accounts 7 (2) 5 38 (60) (22)
Money market accounts 24 33 57 149 (53) 96
Certificates of deposit 530 (52) 478 605 14 619
Total interest-bearing
deposits 628 7 635 873 (108) 765
Other borrowed funds (13) 4 (9) 13 (10) 3
Total interest expense 615 11 626 886 (118) 768
Net interest income $ 757 $ (200) $ 557 $ 641 $ 60 $ 701
(1)The portion of the total change attributable to both volume and rate
changes during the year has been allocated to volume and rate components
based upon the absolute dollar amount of the change in each component prior
to allocation.
The above table detailing the change in net interest income shows
$1,372,000 resulting from volume increases in investments and loans. The
volume of interest expense increased the cost of interest-bearing deposits
$615,000. The positive gain in volume of $757,000 offset by the decrease in
the net change in rates of $200,000 resulted in a total increase of $557,000.
The provision for possible loan losses increased $5,000 to $157,500 in
the nine month period of 1997, compared with a provision of $152,500 in the
same period of 1996. This increase was appropriate given management's
quarterly review of the allowance for loan losses which 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 for the current nine month period was
$2,016,000 compared with $1,028,000 during the same period in 1996. Trust
income increased $47,000, service charge income increased $17,000, and other
income decreased $2,000. Net realized securities gains decreased by $19,000,
during the current nine month period compared to 1996, as there were no sales
during the current period.
Total other operating income was also impacted on February 27, 1997 by
the Bank's 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 ($61,000 in credits have been
used). The amount received by the Bank is net of fees associated with the
arbitration.
Total other operating expense was $5,914,000 in the first nine months of
1997 reflecting an increase of $462,000 over the 1996 period. Salaries and
benefit's expense increased by $520,000 for the current nine month period
reflecting normal merit increases, the addition of employees for the three
additional offices and an accrual of $154,000 for profit sharing attributable
to the arbitration award.
Occupancy expense increased by $47,000 or 13.6% while furniture and
equipment expenses increased by $71,000 or 16.3%, both reflecting the
addition of three offices and the new data processing equipment and software.
Changes in the Bank's FDIC assessment rate, caused by the enactment of
the Deposit Insurance Funds Act of 1996, will result in a premium expense
decreased $331,000 or 88.8%. This reduction is because the SAIF assessment of
$274,000 during the third quarter of 1996 will not reoccur.
Other expenses increased $156,000 or 8.6% in the first nine months of
1997 over the comparable 1996 period generally reflect the expenses resulting
from the additional three offices and the conversion to a new application
processing system.
The provision for income taxes was $1,326,000 during the first nine
months of 1997 compared with $968,000 during the 1996 related period. Income
before taxes increased $1,079,000 in the 1997 period over the same period in
1996.
The Company is analyzing the effect of the recently enacted tax law
changes. It does not currently expect that the new law will have a material
adverse effect on earnings, liquidity or capital.
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 and 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, cash dividends, and fund other capital expenditures.
During the first nine months of 1997 there was $1,173,000 of capital
expenditures, $511,000 more than the expenditures during the same period in
1996. The major expenditures were $259,000 to purchase, renovate and add
parking for the Canton, as well as improvements to the Wellsboro and Sayre
offices, $650,000 towards the new application processing system of which
$193,000 was for the IBM A/S 400 (financed by a capital lease through IBM) and
$115,000 for hardware to implement networking. Management projects that
capital expenditures for the remainder of 1997 will be approximately $200,000
for improvements to the Gillett office.
Management is currently renting two properties as a temporary solution
to the space limitations it has experienced at the main office. The Company
plans to build a new operations/administration center that has been in the
planning stages for more than six years. Management anticipates that the
construction will take place in early 1998 with a total estimated cost of
approximately $2 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 in 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 short-term borrowings from the FHLB as of September 30,
1997 or $715,000.
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.
Asset / Liability 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.
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
(individuals over 59 and one-half; have the option of changing), money market
deposits, savings deposits, NOW accounts and short-term borrowing.
Gap analysis, one of the methods used by the Company to analyze interest
rate risk, does not necessarily show the precise impact of specific interest
rate movements on the 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, reprice at different times and at different rate levels.
Management has procedures to manage the one year cumulative gap position
within the ranges outlined in its Asset/Liability policy guidelines.
The Company has not experienced the kind of earnings volatility that
might be indicated from gap analysis. The Company uses a computer simulation
model to better measure the impact of interest rate changes on net interest
income to simulate the potential effects of changing interest rates.
Management uses the model as part of its risk management process to effectively
identify, measure, and monitor the bank's risk exposure.
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).
September 30, December 31,
1997 1996 1995 1994 1993
Non accruing loans $ 1,028 $ 844 $ 762 $ 1,557 $ 1,566
Impaired loans 382 414 697
Accrual loans - 90 days or
more past due 18 723 689 267 418
Total non-performing loans 1,428 1,981 2,148 1,824 1,984
Foreclosed assets held for sale 214 164 208 168 231
Total non-performing assets $ 1,642 $ 2,145 $ 2,356 $ 1,992 $ 2,215
Loans outstanding at end of
period $188,802 $182,581 $161,886 $157,144 $143,218
Unearned income 116 168 259 575 1,311
Loans, net of unearned income $188,686 $182,413 $161,627 $156,569 $141,907
Non-performing loans as percent
of loans, net of unearned
income 0.76% 1.09% 1.33% 1.17% 1.40%
Total non-performing assets as a
percent loans, net of unearned
income 0.87% 1.18% 1.46% 1.27% 1.56%
Transactions in the allowance for possible loan losses were as follows (in
thousands):
At September 30, Years Ended December 31,
1997 1996 1995 1994 1993
Balance, beginning of period $1,995 $1,833 $1,721 $1,516 $1,201
Charge-offs (20) (64) (69) (68) (71)
Recoveries 14 21 18 18 71
Provision for loan losses 158 205 163 255 315
Balance, end of period $2,147 $1,995 $1,833 $1,721 $1,516
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.
Reflected in the above table, the Company has one loan as of September
30, 1997 that it considers impaired. Management believes that the liquidation
of the collateral would equal or exceed principal based on the current or last
appraisal. Thus, no allowance reserve is required. Management continues to
monitor the impaired loans and will liquidate the collateral as soon as legal
constraints are satisfied.
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
Congress is currently considering legislative reforms to modernize the
financial services industry, including repealing the Glass Steagall Act which
prohibits commercial banks from engaging in the securities industry.
Consequently, equity underwriting activities of banks may increase in the
near future. However, the Company does not currently anticipate entering into
these activities.
Recently, Pennsylvania enacted a law to permit State chartered banking
institutions to sell insurance. This follows a U. S. Supreme Court decision
in favor of nationwide insurance sales by banks and which also bars states
from blocking insurance sales by national banks in towns with populations of
no more than 5,000. The Company is currently evaluating its options regarding
the sale of insurance.
The enactment of the Deposit Insurance Funds Act of 1996, besides having
an impact on expense as discussed above, also provides regulatory relief to
the financial services industry relative to environmental risks, frequency of
examinations, and the simplification of forms and disclosures.
From time to time, various types of federal and state legislation have
been proposed that could result in additional regulation of, and restrictions
on, the business of the Company and the Bank. It can not be predicted
whether such legislation will be adopted or, if adopted, how such legislation
would affect the business of the Company or the Bank.
Further, the business of the Company is also effected by the state of the
financial services industry in general. As a result of legal and industry
changes, Management predicts that the industry will continue to experience an
increase in consolidations and mergers as the financial services industry
strives for greater cost efficiencies and market share. Management also
expects increased diversification of financial products and services offered
by the Bank and its competitors. Management believes that such consolidations
and mergers, and diversification of products and services may enhance its
competitive position as a community bank.
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 future operating results, liquidity or capital
resources nor is it aware of any current recommendations by the regulatory
authorities that if they were to be carried out 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.
Except as previously discussed in the section on the result of
operations, management believes that the effect of the provisions of future
legislation on liquidity, capital resources, and the results of operations of
the company will not be material.
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 - Nothing to
report.
Item 5 - Other Information - Nothing to report.
Item 6 - Exhibits and reports on Form 8-K.
(a) Exhibits - None.
(b) Reports - None.
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)
November 10, 1997 /s/ Richard E. Wilber
By: Richard E. Wilber
President and Chief Executive Officer
(Principal Executive Officer)
November 10, 1997 /s/ Thomas C. Lyman
By: Thomas C. Lyman
Treasurer
(Principal Financial & Accounting Officer)