CITIZENS
FINANCIAL SERVICES
INCORPORATED
our bank...
our community...
our 1997 annual report
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To our Shareholders, Customers and
Employees:
1997 was another year of tremendous achievement, which makes it a pleasure to
deliver this report. We built on the previous year's expansion, firmly
grounding our presence in new market spaces. We renewed our technology
infrastructure to streamline operations and enhance customer service,
providing key capabilities for competitive advantage. Our strategy of growth
through a community bank environment continues to ring loud and clear over the
noise of industry consolidation. Whether you measure our financial
performance, our human capital, our processes and technology, or our high
regard in the community, the outcomes underscore our continued success. Let
me share with you some of 1997's highlights.
financial performance
We are very pleased to report on another record-setting year as 1997 total
assets grew $12 million (4.2%) to $295 million. This growth was more modest
than the 14.5% achieved in 1996, however the acquisition of our Canton and
Gillett offices accounted for a large portion of that spectacular growth.
Deposits and loans increased $16.6 million and $9.5 million respectively in
1997. The strong deposit growth allowed us to reduce "borrowed funds" by $9
million. Loan demand continued to be very strong as evidenced by the $69
million of credit extended in 1997 as compared to $75 million in 1996 and $50
million in 1995.
Even while loan growth has been so strong, the quality of our loan portfolio
is exceptional. Our 1997 net charge-offs were only $67 thousand as compared
to $43 thousand in 1996 and $50 thousand in 1995. Total non-performing loans
at year end were $2 million or 1.04% of total outstanding loans, as compared
to $2.1 million or 1.18% for the prior year end. The reserve for possible
loan losses grew $143 thousand and stands at 1.11% of gross loans as compared
to 1.09% at year end 1996.
Net income for 1997 was $3.8 million or 27.6% over the $3.0 million in 1996.
As previously reported to you, this exceptional earnings growth was
influenced by a $994,000 one-time arbitration award. Had it not been for this
award, our net income would have been $3.2 million or 8% greater than 1996.
Total stockholders' equity grew $3 million or 13.2% and now represents 8.8% of
total assets as compared to 8.1% at year-end 1996. Cash dividends paid in
1997 totaled $1,596,000 as compared to $1,187,000 in 1996. In October 1997,
we initiated quarterly cash dividend payments (previously we paid dividends
semi-annually).
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for Dickens of a Christmas, left center of page, approximately 3.5 inches by
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Dickens of a Christmas at Weis Market
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Robert E. Dalton and son Mark
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follow-up on 1996 community office expansion
In April 1996, we acquired the Canton and Gillett offices from Meridian
Bancorp, Inc. I am delighted to report that, since joining our corporation,
total deposits in these two offices have grown $4.4 million or 25.6%.
Additionally, although the only loans we acquired in that transaction were of
Gillett customers (totaling $3.7 million), total loans in the two offices now
exceed $10.6 million-a 290% increase! Needless to say, we are pleased that
customer acceptance of our bank has been so strong. I'm very appreciative of
the support and commitment of the fine employees in these offices-typical of
employees throughout this corporation.
Our supermarket location at the Weis Market "superstore" in Wellsboro
continues its progress. Deposits and loans at year end surpassed $1.3
million and $350 thousand respectively. In a recent survey, we discovered
that every customer surveyed not only knew a bank was located in the store,
but also knew it was First Citizens! This recognition is the basis for our
continued optimism that growth opportunities exist at Weis Market.
operating and strategic initiatives
Each year, it seems, is marked by a major "distinguishable" event. In 1996,
as mentioned, was the acquisition of Canton and Gillett offices and the
opening of our supermarket office at Weis Market.
During 1997, we had a distinguishable event-a complete computer hardware and
software conversion. In April, we signed contracts for the new data
processing system and six months later, we were converted! This technology
transition was, by far, one of the most challenging actions we have ever
undertaken. Because we changed both hardware and software, every employee had
to adjust to new systems, procedures and internal reports, as well as
understand new customer statements, notices and other information. I was so
proud of how every employee embraced the challenges of this project and worked
so hard to minimize customer disruption.
The new data processing system allows us to continue enhancing customer
service by creating and delivering new products and services. In October, we
introduced a 24-hour "voice response" service whereby customers use their
touch-tone telephone to access account information, transfer funds between
accounts, obtain information on our current interest rates, etc. Evidence of
customer appeal for this service was clear by the nearly 3,200 telephone calls
handled by the system in December.
In March 1998, we are introducing our "debit card" product whereby customers
present a card (which looks like a charge card) to the merchant in payment for
goods and services knowing that such payment reduces their checking account
balance. The customer greatly appreciates the convenience and speed of this
new payment option.
We expect to build upon this new technology investment as we evaluate new
services and new operating methods that enhance efficiency. We believe we
have a technology partner that is committed to providing advanced capabilities
and we're very excited about using this tool for improving our competitive
success.
In addition to the product and service initiatives, we demolished the "old
A&P" building in Mansfield in preparation for our new building project,
modified our investment portfolio to enhance overall portfolio yield, and
revised service fees for commercial checking accounts (implementation is
scheduled for March 1998). Of particular significance, too, was our expansion
and renovation of the Gillett office facility which included the addition of a
24-hour drive-up ATM. The customer response to this "investment" in Gillett
has been very favorable.
human resources
This corporation continues to be blessed with outstanding directors (corporate
as well as local board members) and employees. We were all saddened by the
announced retirement of Robert E. Dalton (effective April 1998) who has been
chairman of Citizens Financial Services, Inc. (since 1994) and First Citizens
National Bank (since 1985). We will greatly miss the leadership that has been
so instrumental to the success of this corporation. Joining the board of
directors of First Citizens National Bank is Mark L. Dalton. Mark is owner of
Robert E. Dalton General Insurance and has been principal in this company for
12 years. Mark served on the Blossburg local board for 12 years (the last
five years as chairman) and is also very active in the Blossburg
community-currently president of the Blossburg Swimming Pool Association.
Mrs. Susan Signor and Mr. William Zwicharowski recently joined our Blossburg
local board and Mr. Jerry McCaslin was
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added to the Ulysses local board. Mrs. Signor is employed by the family owned
and operated business, Signor Brothers. She is a graduate of North Penn High
School and Mansfield University (she graduated Summa Cum Laude with a Bachelor
of Science Degree in Secondary Education). She is a member of the Arnot
Sportsmen's Club and is a volunteer for the American Heart Association.
Mr. Zwicharowski owns and operates William Zwicharowski Funeral Home in
Blossburg. His community activities include: Blossburg Area Catholic
Churches, Knights of Columbus, Kiwanis Club, Morris Run Legion and North
Williamson Cable Company. He is also on the board of directors for North Penn
Comprehensive Health Services and a trustee at the Arnot Sportsman's Club.
Mr. McCaslin was born and raised in Ulysses. In 1973, after attending college,
he began working with his father at Ulysses Motors. In 1988, upon his
father's retirement, Jerry assumed control of the family business. He is an
active resident of Ulysses and is president of the Borough Council, president
of Northeastern Potter Economic Development Association, member of the Ulysses
United Methodist Church, member of Charles Cole Memorial Hospital and board
member of the Northern Tier Children's Home.
In terms of professional development for employees, this past year was, as
usual, a busy one. One hundred and six employees attended some form of
education or training. We recently implemented an additional resource for
employee education - a weekly video tape service covering eight topics of
current interest. Employee response has been very positive and this promises
to be a very convenient method to enhance our knowledge and skills.
future
In many respects, the future of banking is very bright. The strength of our
industry is very sound. Most of us don't even remember that banks and thrift
institutions were failing in the early 1990s and there was even concern over
the solvency of the FDIC fund. In recent years, our industry has experienced
record profits while bank failures are now unheard of. Also positive are the
opportunities banks possess to expand into new lines of business.
The U.S. Supreme Court is expected to make an important decision regarding the
unfair competitive advantage that credit unions have over banks. The court is
expected to address the credit union's blatant circumvention of the "common
bond." Prior court rulings have sided with our industry and we hope the
Supreme Court will as well.
First Citizens should benefit by the continuing industry consolidation (as
evidenced by the First Union announcement to acquire CoreStates). We expect
new customers will join our bank in pursuit of a true community bank
environment.
Customers are expected to increase the demand for new services and delivery
methods (such as enhanced cash management services for businesses, "call
centers" where products and services can be obtained nearly 24 hours per day,
etc.).
A great deal of attention is being focused on "the year 2000" concern, which
centers on the belief that many computerized systems were not programmed to
distinguish the year 2000 from the year 1900. We must devote resources to
assure that our bank and customers are not significantly impacted by this
technological challenge.
We are quickly moving along on plans for a major building project here in
Mansfield. Architects are formulating plans and preliminary cost estimates on
alternative concepts, and we expect key decisions will be made over the next
few months.
As always, we will continue to pursue growth strategies. Successful
achievement will require a continued business development commitment by all
employees and directors which will be supported by the expanded computer
capabilities.
Yes, there is a lot to be done, but we are looking forward to meeting these
challenges and sustaining the success we've enjoyed. I am so proud of the
commitment and dedication of our directors and employees and derive a great
deal of optimism from them.
Sincerely,
/s/ Richard E. Wilber
Richard E. Wilber
President
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our bank...
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for years of service, top left one-third of page, approximately 5 inches by 3.5
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Shown from left are: Jim Hepp, Renee Davis, Shari Johnson, Jackie Hataloski,
Michele Litzelman, Katina Garrison, Sara Roupp, Jeff Wilson, and Claudia
Steadman.
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Receiving her plaque from President Richard E. Wilber (right) is Phyllis Estep
(left) for First Citizens' Employee of the Year.
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First Citizens National Bank employees were recognized for five year intervals
of service recently and received awards of Citizens Financial Services, Inc.
stock. Recognized for five years of service were Renee Davis and Jackie
Hataloski, Operations Department and Jim Hepp, Shari Johnson, and Judy
Kingston from the Mansfield community office. Recognized for ten years of
service were: Katina Garrison, Canton community office; Michele Litzelman,
Blossburg community office; Sara Roupp, Trust and Investment Services; and
Jeff Wilson, Wellsboro community office. Recognized for twenty years of
service were Diane Anderson, Loan Central; Claudia Steadman, Genesee community
office; and Margie Wesneski, Blossburg community office.
Phyllis B. Estep was nominated as our 1997 Employee of the Year. Phyllis's
outstanding dedication, professional attitude and concern for her customers
and fellow employees have earned her this honor. Since July 1964, Phyllis has
done an outstanding job serving her customers over the years in a fashion that
clearly distinguishes us. When honored with a plaque at the Christmas party,
Richard E. Wilber, President, stated "Phyllis is a person I can talk to about
how to improve service for customers and I can be sure she will offer great
insight. Her desire to serve customers to the fullest is very evident."
Thank you Phyllis for representing First Citizens so well!
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With sincere appreciation for 32 years of service, First Citizens National
Bank wishes Jane McGee all the best upon her retirement. Jane began with the
bank in 1959 as a teller and held various positions in the Trust and Proof
departments. At retirement, Jane held the position of General Ledger
Bookkeeper and added support services to Accounts Payable. At a dinner where
Jane was recognized, Richard E. Wilber, President of First Citizens, stated
"Throughout her years of service, Jane distinguished herself through exemplary
dedication to co-workers, customers and shareholders of this corporation."
We, at First Citizens, extend our wishes for continued success!
Philip Prough was appointed as Trust and Investment Services Officer this
year. Philip currently owns Prough Insurance Agency in Wellsboro and has six
years experience in the financial arena. Philip will be serving the investment
and trust needs of First Citizens' customers by visiting homes and businesses
in the area. Prior to owning his own insurance business, Philip was the
district agent for the Harvest Life Insurance Company and an accountant at the
Wilkes-Barre based accounting firm of Parente, Randolph, Orlando, Carey and
Associates. An honors graduate from Lycoming College, Philip obtained a
Bachelor of Arts Degree in accounting and is now licensed as an Annuity, Life
and Health Insurance agent. Together with his wife, Sherri, and their son,
Dylan, the Prough's are active members of the Wellsboro community. Please
join us in welcoming Philip.
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our community...
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branch, top left side of page, approximately 4 inches by 2.5 inches
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...a community bank, by definition, is one which involves itself through active
participation in the interests of its local area
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Gillett branch, center right side of page, approximately 4 inches by 2.5
inches
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...we believe in reinvesting in the community
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expanded Gillett branch, bottom left side of page, approximately 4 inches by
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...we
all work together as a community every day
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The definition of community is "an interacting and participating group sharing
a common history, interests and/or geography". Therefore, a community bank,
by definition, is one which involves itself through active participation in
the interests of its local area. First Citizens National Bank epitomizes that
definition. We "live" here-we reside here, work here, send our children to
school here, we recreate here, shop here, and offer support to groups intent
on bettering our environment and quality of life here.
First Citizens National Bank participates with the community in several ways.
We are actively involved in economic development which creates new jobs - the
result being enhanced household income and achieving a higher standard of
living. We are a participant with neighbors, friends and colleagues in a
fellowship aimed at fostering the best lifestyle we can for future
generations. We help others faced with various challenges and those less
fortunate through organizations such as Santa's Gift Bag and the Food Pantry.
We do these things because we believe in our communities just as we believe we
are a part of these communities.
During the second half of 1997, First Citizens demonstrated such a belief in
one of these communities by conducting some major renovations to the Gillett
community office. The remodeling included increasing the size of the
building, which allowed for more private office space to handle customers'
financial matters confidentially. We also added a 24-hour automated teller
machine (ATM), which enables our customers to do their banking when it is
convenient for them. Customers can now withdraw cash, transfer money between
accounts, conduct balance inquiries, and make loan payments and deposits 24
hours a day. In addition, we made the facility handicapped accessible by
installing a ramp to the front entrance, making the doorways wider, and adding
a wheelchair-accessible restroom and check counter. This remodeling occurred
on the heels of the previous institution wanting to shut the doors of the
Gillett bank. However, we believed in the potential of the Gillett community
and not only wanted the bank to remain open, we wanted to see it grow!
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Work in process Troy Fire Hall, Troy Pennsylvania
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Completed Troy Fire Hall, Troy Pennsylvania
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In addition to reinvesting in our communities through the remodeling of local
offices, we believe in reinvesting in the community by supporting volunteer
organizations which everyone relies on in a crisis. We have practiced this
belief by providing funding and low-interest loans to these organizations. In
1997, First Citizens donated $5,000 to the Troy Volunteer Fire Department for
their new facility. Not only did we make this donation, we also provided a
low-interest loan to make the new building a reality. We have provided
similar services for many of the volunteer organizations throughout Bradford,
Tioga and Potter counties. We do this because we recognize their importance
in offering aid to the families who live here. It is our responsibility to
support these organizations and ensure they are available to help all of us
when needed.
Unfortunately, in 1997 several First Citizens customers lost their homes to
fire. We have witnessed the best in interaction between the fire company, the
insurance company, the family, the contractor and the bank. Each play a vital
role in helping the family begin rebuilding their dreams. One example
demonstrates the part we play: A Mansfield home caught fire on a Saturday
afternoon; within minutes the home was completely engulfed. Luckily, no lives
were lost, although they lost most of their possessions. First Citizens
worked closely with their insurance agent and contractor in the rebuilding
process. We wrote a new mortgage for the customer and provided the line of
credit for the contractor. Everyone worked hand-in-hand in the best interest
of the family.
If any business member hadn't fulfilled its duty, the rebuilding process would
have been delayed. Because First Citizens is locally operated, there were no
lengthy delays in assuring that finances were in place. There were no delays
due to decisions being be made by strangers - because we make decisions
locally, the rebuilding process proceeded in a timely fashion. We provided
peace of mind to the family as their home was rebuilt. During this period,
many acts of kindness were witnessed, as is usually the case among small
communities. Neighbors, churches and organizations donated food, clothing and
money to fulfill the immediate needs of this family. Their acts of kindness
were quick and generous. Our hats are off to everyone who has ever helped
someone in need. After all, isn't that what any business is about, fulfilling
a need? Sometimes that need is most often felt by the youth organizations in
our area.
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wearing First Citizens National Bank logo shirts, center left of page,
approximately 4 inches by 3 inches]
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wearing First Citizens National Bank logo shirts, botter left of page,
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First Citizens National Bank makes annual donations of money, uniforms and
facilities to many local youth organizations. Each community office of First
Citizens sponsors at least one little league team, if not more. The
sponsorship usually includes a monetary donation toward the program with extra
money for uniforms. Often, First Citizens' employees participate by being a
coach, a team parent, a referee or a snack bar worker. Besides Little League,
First Citizens sponsors several AYSO (Area Youth Soccer Organization) teams,
contributes to the Boy Scouts of America, the Girl Scouts of America and many
others.
One event which First Citizens was proud to sponsor in 1997 was the Champions
for Today program. This program was held in the Southern Tioga School
District to help young people make positive choices in their lives. Each
Champions For Today (CFT) Pro is a former NFL player who is specifically
trained to address life's issues. The Pro for the local program was Mike
McCoy, retired defensive tackle for the Green Bay Packers. CFT Pro's have
spoken to thousands of students in schools across America. The Pro can help
students make changes: from dropping out to academic leadership, from peer
pressure to positive personal values, from alcohol and drug abuse to freedom
from the chemical culture. They also encourage those students who have made
positive choices.
Isn't this reinvestment in our youth the epitome of giving something back?
Aren't our youth also our future? First Citizens feels this is a most
worthwhile investment. After all, our youth are our future leaders of
tomorrow. They are our doctors and nurses, our farmers, our lawyers, our
principals and teachers, our politicians and maybe even our future
presidents! Without them, we can reasonably say we have no future.
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presenting a donation to the Football Gridiron Club, bottom left side of page,
approximately 3 inches by 4 inches]
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First Citizens is proud to support our community youth by giving a $5,000
donation to the Football Gridiron Club. Students from Liberty High School,
North Penn High School and Mansfield Jr. and Sr. High Schools participate in
this football program. The club worked diligently to raise funs for the
installation of lights at the Panther Football field at Island Park and
accomplished their goal by playing their first night game this past August.
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purchasing a market steer at a county fair, bottom right side of page,
approximately 3 inches by 2 inches]
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Potter County 1997 JR Livestock Sale - Shown is Phil Vaughn - Ulysses FCNB
Community Office Manager, Stacey Hamilton and Amanda Barker - daughter of
Richard and Karmen Barker. Amanda - 10, won second place in her division with
her market steer. First Citizens won the bid to purchase the steer
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When you consider all these scenarios together, you realize we all work
together as a community every day. Whether it's neighbor helping neighbor or
many people coming together to reach a larger goal, it is moments such as
these when you realize that community works. This is also why a community
bank like First Citizens National Bank works in the Twin Tiers.
When First Citizens develops or enhances products or services, we do so with
the needs of our customers and the community in mind. How do we know what is
important to the customer? We simply ask them. Then, we use their feedback
in making decisions about our products and services. During 1997, we added
the 24-hour Bank-By-Phone service. This service has been very well received,
with 3,200 callers being serviced in December alone. Early in 1998, we will
be offering another new service, a MasterMoney Debit Card. This is an
enhanced ATM card which looks like a MasterCard. This service will enable our
customers to shop with peace of mind at over 14 million locations worldwide.
We are very excited about the growth we expect to experience in 1998 through
the addition of other products and services. We look forward to continuing
our interaction with the communities in the Twin Tiers--contributing to each
other's success!
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our 1997 Annual Report...
Financial Highlights
in thousands, except per
share data
1997 1998
Balance Sheet
Assets $294,811 $282,810
Deposits 256,783 240,177
Net Loans 189,910 180,418
Investments 88,562 86,057
Stockholders' Equity 25,923 22,904
Statement of Income
Interest Income 22,779 21,341
Interest Expense 11,610 10,867
Net Interest Income 11,169 10,474
Net Income 3,832 3,003
Per Share Data
Net Income 1.40 1.09
Cash Dividends .355 .445
Trust and Investment
Services
Trust Assets Managed 50,510 43,311
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FINANCIAL HIGHLIGHTS
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Citizens Financial Services, Inc.
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[GRAPHICS OMITTED: Six bar charts depicting 1. total assets, 2. net income,
3.. stockholders' equity, 4. deposits, 5. net loans, and 6. cash dividends
paid, each from 1993 to 1997. Tabular representation of those graphs are set
forth as follows:
TOTAL ASSETS:
(Dollars in Thousands)
1993 1994 1995 1996 1997
$216,237 $232,537 $247,094 $282,810 $294,811
NET INCOME:
(Dollars in Thousands)
1993 1994 1995 1996 1997
$2,424 $2,625 $2,834 $3,003 $3,832
STOCKHOLDERS' EQUITY:
(Dollars in Thousands)
1993 1994 1995 1996 1997
$18,340 $18,903 $21,297 $22,904 $25,923
DEPOSITS:
(Dollars in Thousands)
1993 1994 1995 1996 1997
$191,013 $194,478 $213,316 $240,177 $256,783
NET LOANS:
(Dollars in Thousands)
1993 1994 1995 1996 1997
$140,391 $154,848 $159,794 $180,418 $189,910
CASH DIVIDENDS DECLARED:
(Dollars in Thousands)
1993 1994 1995 1996 1997
$1,023 $1,088 $1,153 $1,219 $984
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CONSOLIDATED BALANCE SHEET
December 31, 1997 and 1996
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Nineteen hundred ninety-seven Annual Report
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(in thousands) 1997 1996
ASSETS:
Cash and due from banks:
Noninterest-bearing $ 6,100 $ 6,407
Interest-bearing 243 52
Total cash and cash equivalents 6,343 6,459
Available-for-sale securities 24,827 28,736
Held-to-maturity securities (estimated market
value 1997, $64,490; 1996, $57,587) 63,735 57,321
Loans (net of allowance for loan losses
1997, $2,138; 1996, $1,995) 189,910 180,418
Foreclosed assets held for sale 238 164
Premises and equipment 5,754 4,345
Accrued interest receivable 2,426 2,930
Other assets 1,578 2,437
TOTAL ASSETS $294,811 $282,810
LIABILITIES:
Deposits:
Noninterest-bearing $ 19,016 $ 17,924
Interest-bearing 237,767 222,253
Total deposits 256,783 240,177
Borrowed funds 6,864 15,817
Accrued interest payable 2,331 2,293
Dividends payable - 612
Commitment to purchase investment securities 1,981 -
Other liabilities 929 1,007
TOTAL LIABILITIES 268,888 259,906
STOCKHOLDERS' EQUITY:
Common Stock
$1.00 par value; authorized 5,000,000 shares;
issued and outstanding 2,746,564 and 1,360,228
shares in 1997 and 1996, respectively 2,746 1,360
Additional paid-in capital 7,181 6,828
Retained earnings 15,653 14,544
TOTAL 25,580 22,732
Net unrealized holding gains on
available-for-sale securities 343 172
TOTAL STOCKHOLDERS' EQUITY 25,923 22,904
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $294,811 $282,810
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF INCOME
Years Ended December 31, 1997, 1996 and 1995
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Citizens Financial Services, Inc.
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(in thousands, except per share data) 1997 1996 1995
[S] [C] [C] [C]
INTEREST INCOME:
Interest and fees on loans $17,174 $15,817 $14,799
Interest-bearing deposits with banks 221 148 135
Investment securities:
Taxable 5,250 5,238 4,233
Nontaxable 52 66 179
Dividends 82 72 76
TOTAL INTEREST INCOME 22,779 21,341 19,422
INTEREST EXPENSE:
Deposits 11,107 10,276 9,340
Borrowed funds 503 591 511
TOTAL INTEREST EXPENSE 11,610 10,867 9,851
NET INTEREST INCOME 11,169 10,474 9,571
Provision for loan losses 210 205 163
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,959 10,269 9,408
OTHER OPERATING INCOME:
Service charges 848 844 732
Trust 339 270 255
Realized securities gains, net 25 19 10
Other 246 258 255
Arbitration settlement 994 - -
TOTAL OTHER OPERATING INCOME 2,452 1,391 1,252
OTHER OPERATING EXPENSES:
Salaries and employee benefits 3,882 3,418 3,150
Occupancy 519 466 413
Furniture and equipment 706 599 574
Federal deposit insurance premiums 56 372 289
Other 2,743 2,495 2,239
TOTAL OTHER OPERATING EXPENSES 7,906 7,350 6,665
Income before provision for income taxes 5,505 4,310 3,995
Provision for income taxes 1,673 1,307 1,161
NET INCOME $ 3,832 $ 3,003 $ 2,834
EARNINGS PER SHARE $ 1.40 $ 1.09 $ 1.03
See notes to consolidated financial statements.
<15>
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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
___________________________________________________________________________
Nineteen hundred ninety-seven Annual Report
___________________________________________________________________________
Net
Unrealized
Additional Holdings
(in thousand) Common Stock Paid-in Retained Gains/(Losses)
except per share data) Shares Amount Capital Earnings on Securities Total
Balance, December 31, 1994 1,334,543 $1,334 $6,224 $11,709 $(364) $18,903
Net income 2,834 2,834
Stock dividend 12,780 13 288 (301)
Cash dividends, $.42 per share (1,153) (1,153)
($.425 per share on a
historical basis)
Net unrealized gains on
available-for-sale securities 713 713
Balance, December 31, 1995 1,347,323 1,347 6,512 13,089 349 21,297
Net income 3,003 3,003
Stock dividend 12,905 13 316 (329)
Cash dividends, $.44 per share (1,219) (1,219)
($.445 per share on a
historical basis)
Net unrealized losses on
available-for-sale securities (177) (177)
Balance, December 31, 1996 1,360,228 1,360 6,828 14,544 172 22,904
Net income 3,832 3,832
Stock dividend 13,054 13 353 (366)
Stock split in form of a div 1,373,282 1,373 (1,373)
Cash dividends, $.355 per share (984) (984)
Net unrealized gains on
available-for-sale securities (171) (171)
Balance, December 31, 1997 2,746,564 $2,746 $7,181 $15,653 $343 $25,923
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
(in thousands) 1997 1996 1995
Cash Flows from Operating Activities:
Net income $ 3,832 $ 3,003 $ 2,834
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 210 205 163
Provision for depreciation and amortization 588 442 412
Amortization and accretion on investment securities 368 362 248
Deferred income taxes 59 36 25
Realized gains on securities (25) (19) (10)
Realized gains on loans sold (19) (23) (37)
Originations of loans held for sale (1,152) (1,639) (1,737)
Proceeds from sales of loans held for sale 1,171 1,662 1,760
Gain on sales of foreclosed assets held for sale (10) (50) (45)
Decrease (increase) in accrued interest receivable
and other assets 859 (487) (393)
Decrease) increase in accrued interest payable and
other liabilities (40) 253 468
Net cash provided by operating activities 5,841 3,745 3,688
Cash Flows from Investing Activities:
Available-for-sale securities:
Proceeds from sales of securities 5,588 16 -
Proceeds from maturities of securities 5,900 2,000 1,000
Purchases of securities (7,503) (9,682) (6,797)
Held-to-maturity securities:
Proceeds from maturities and
principal repayments of securities 7,716 8,108 5,556
Purchases of securities (12,311) (13,395) (8,375)
Net increase in loans (9,914) (17,361) (5,273)
Purchase of loans (3,659)
Capital expenditures (1,638) (539) (463)
Proceeds from sale of foreclosed assets held for sale 148 285 184
Property purchased for future expansion - (250) -
Deposit acquisition premium - (1,018) -
Net cash used in investing activities (12,014) (35,495) (14,168)
Cash Flows from Financing Activities:
Net increase in deposits 16,606 9,731 18,838
Proceeds from long-term borrowings 2,056 1,166 1,844
Repayments of long-term borrowings (2,146) (1,050) (186)
Net (decrease) increase in short-term borrowed funds (8,863) 6,846 (8,833)
Dividends paid (1,596) (1,187) (1,121)
Deposits of acquired branches - 17,130 -
Net cash provided by financing activities 6,057 32,636 10,542
Net (dec) increase in cash and cash equivalents (116) 886 62
Cash and Cash Equivalents at Beginning of Year 6,459 5,573 5,511
Cash and Cash Equivalents at End of Year $ 6,343 $ 6,459 $ 5,573
Supplemental Disclosures of Cash Flow Information:
Interest paid $11,572 $10,680 $9,437
Income taxes paid $ 1,645 $ 1,310 $1,135
Noncash activities:
Real estate acquired in settlement of loans $ 212 $ 191 $ 179
See notes to consolidated financial statements.
<17>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
Nineteen hundred ninety-seven Annual Report
___________________________________________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Citizens Financial Services, Inc. (individually and collectively, the
"Company") is a Pennsylvania corporation organized as the holding company of
its wholly-owned subsidiary, First Citizens National Bank (the "Bank"). The
Bank is a national banking association headquartered in Mansfield,
Pennsylvania and operating ten full-service banking offices in Potter, Tioga
and Bradford counties. The Bank provides a comprehensive range of services
including consumer loans, residential real estate loans, commercial loans, and
loans to various state and municipal entities. Deposit programs encompass the
full range of consumer as well as commercial checking and savings accounts.
Deposit products also include certificates of deposit and individual
retirement accounts. A comprehensive menu of trust and investment services
are also available. The Company's principal sources of revenue are derived
from its loan and investment portfolios. The Company is supervised by the
Board of Governors of the Federal Reserve System, while the Bank is subject to
regulation and supervision by the Office of the Comptroller of the Currency.
A summary of significant accounting and reporting policies applied in the
presentation of the accompanying financial statements follows:
BASIS OF PRESENTATION
The accounting policies followed by the Company and the methods of applying
these principles conform with generally accepted accounting principles and
with general practice within the banking industry. All material intercompany
balances and transactions have been eliminated in consolidation. 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.
INVESTMENT SECURITIES
Investment securities are classified as one of the three following types:
Held-to-Maturity Securities - includes securities that the Company has the
positive intent and ability to hold to maturity. These securities are reported
at amortized cost.
Trading Securities - includes debt and equity securities bought and held
principally for the purpose of selling them in the near term. Such securities
are reported at fair value with unrealized holding gains and losses included
in earnings. The Company had no trading securities as of December 31, 1997 and
1996.
Available-for-Sale Securities - includes debt and equity securities not
classified as held-to-maturity or trading securities. Such securities are
reported at fair value, with unrealized holding gains and losses excluded from
earnings and reported as a separate component of stockholders' equity, net of
estimated income tax effect.
The amortized cost of investment in debt securities is adjusted for
amortization of premiums and accretion of discounts, computed by a method that
approximates the effective interest method. Gains and losses on the sale of
investment securities are computed on the basis of specific identification of
the adjusted cost of each security.
Common stock of the Federal Reserve Bank and Federal Home Loan Bank represents
ownership in institutions which are wholly owned by other financial
institutions. These equity securities are accounted for at cost and are
classified as restricted equity securities held-to-maturity.
The fair value of investments, except certain state and municipal securities,
is estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers. The fair value of certain state
and municipal securities is not readily available through market sources other
than dealer quotations, so fair value estimates are based on quoted market
prices of similar instruments, adjusted for differences between the quoted
instruments and the instruments being valued.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
LOANS
Interest on installment loans originated after 1992 is recognized on the
accrual basis based upon the principal amount outstanding. Interest on
installment loans originated before 1993 is recognized on the accrual basis
using a method which approximates the interest method. Interest income on all
other loans is recognized on the accrual basis based upon the principal amount
outstanding. The accrual of interest income on loans is discontinued when, in
the opinion of management, there exists doubt as to the ability to collect
such interest. Loans are returned to the accrual status when factors
indicating doubtful collectibility cease to exist.
The Company recognizes nonrefundable loan origination fees and certain direct
loan origination costs over the life of the related loan as an adjustment of
loan yield using the interest method.
ALLOWANCE FOR LOAN LOSSES
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114 ("SFAS No. 114"), "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118. Under this Standard, the
Company estimates credit losses on impaired loans based on the present value
of expected cash flows or fair value of the underlying collateral if the loan
repayment is expected to come from the sale or operation of such collateral.
Prior to 1995, the credit losses related to these loans were estimated based
on undiscounted cash flows or the fair value of the underlying collateral.
SFAS No. 118 amends SFAS No. 114 to permit a creditor to use existing methods
for recognizing interest income on impaired loans, eliminating the income
recognition provisions of SFAS No. 114. The adoption of these statements did
not have a material effect on the Company's financial position or results of
operations.
Impaired loans are commercial and commercial real estate loans for which it is
probable that the Company will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The Company
individually evaluates such loans for impairment and does not aggregate loans
by major risk classifications. The definition of "impaired loans" is not the
same as the definition of "nonaccrual loans," although the two categories
overlap. The Company may choose to place a loan on nonaccrual status due to
payment delinquency or uncertain collectibility, while not classifying the
loan as impaired if the loan is not a commercial or commercial real estate
loan. Factors considered by management in determining impairment include
payment status and collateral value. The amount of impairment for these types
of impaired loans is determined by the difference between the present value of
the expected cash flows related to the loan, using the original interest rate
and its recorded value, or, as a practical expedient in the case of
collateralized loans, the difference between the fair value of the collateral
and the recorded amount of the loans. When foreclosure is probable, impairment
is measured based on the fair value of the collateral.
Mortgage loans on one- to four-family properties and all consumer loans are
large groups of smaller balance homogeneous loans and are measured for
impairment collectively. Loans that experience insignificant payment delays,
which is defined as 90 days or less, generally are not classified as impaired.
Management determines the significance of payment delays on a case-by-case
basis, taking into consideration all of the circumstances surrounding the loan
and the borrower, including the length of the delay, the borrower's prior
payment record, and the amount of shortfall in relation to the principal and
interest owed.
The allowance for loan losses represents the amount which management estimates
is adequate to provide for potential losses in its loan portfolio. The
allowance method is used in providing for loan losses. Accordingly, all loan
losses are charged to the allowance and all recoveries are credited to it. The
allowance for loan losses is established through a provision for loan losses
which is charged to operations. The provision is based upon management's
periodic evaluation of individual loans, the overall risk characteristics of
the various portfolio segments, past experience with losses, the impact of
economic conditions on borrowers, and other relevant factors. The estimates
used in determining the adequacy of the allowance for loan losses are
particularly susceptible to significant change in the near term.
<19>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
___________________________________________________________________________
Nineteen hundred ninety-seven Annual Report
___________________________________________________________________________
FORECLOSED ASSETS HELD FOR SALE
Foreclosed assets acquired in settlement of foreclosed loans are carried at
the lower of fair value minus estimated costs to sell or cost. Prior to
foreclosure, the value of the underlying loan is written down to fair market
value of the real estate or other assets to be acquired by a charge to the
allowance for loan losses, if necessary. Any subsequent write-downs are
charged against operating expenses. Operating expenses of such properties, net
of related income and losses on disposition, are included in other expenses
and gains are included in other income.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Repair and maintenance expenditures which extend the useful life of an asset
are capitalized and other repair expenditures are expensed as incurred.
When premises or equipment are retired or sold, the remaining cost and
accumulated depreciation are removed from the accounts and any gain or loss is
credited or charged to income. Depreciation expense is computed on the
straight-line and accelerated methods over the estimated useful lives of the
assets.
OTHER ASSETS
Goodwill is the excess of the purchase price over the fair value of net assets
of companies acquired through business combinations accounted for as
purchases. Included in other assets at December 31, 1997 and 1996 is $541,000
and $581,000, respectively, of goodwill that is being amortized using the
straight-line method over 15 years.
Core deposit intangibles are a measure of the value of consumer demand and
savings deposits acquired in business combinations accounted for as
purchases. Included in other assets at December 31, 1997 and 1996 is $295,000
and $364,000, respectively, of core deposit intangibles which are being
amortized on a straight-line basis over 6 years.
The recoverability of the carrying value of intangible assets is evaluated on
an ongoing basis and permanent declines in value, if any, are charged to
expense.
INCOME TAXES
The Company and the Bank file a consolidated federal income tax return.
Deferred tax assets and liabilities are computed based on the difference
between the financial statement and income tax basis of assets and liabilities
using the enacted marginal tax rates. Deferred income tax expenses or benefits
are based on the changes in the net deferred tax asset or liability from
period to period.
EMPLOYEE BENEFIT PLANS
The Company has a noncontributory pension plan covering substantially all
employees. It is the Company's policy to fund pension costs on a current basis
to the extent deductible under existing tax regulations. Such contributions
are intended to provide not only for benefits attributed to service to date,
but also for those expected to be earned in the future.
The Company's net periodic pension cost is based on the provisions of
Statement of Financial Accounting Standards No. 87.
The Company also has a profit-sharing plan which provides tax-deferred salary
savings to plan participants.
MORTGAGE SERVICING RIGHTS (MSR's)
The Company has loan agreements for the express purpose of selling these loans
in the secondary market. The Company maintains all servicing rights for these
loans. The loans are carried at cost. Originated MSR's are to be recorded by
allocating total costs incurred between the loan and servicing rights based on
their relative fair values. MSR's are amortized in proportion to the
estimated servicing income over the estimated life of the servicing portfolio.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
NEW ACCOUNTING STANDARDS
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings
based on a control-oriented "financial-components" approach. Under this
approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and liabilities it has incurred,
derecognizes financial assets when control has been surrendered and
derecognizes liabilities when extinguished. The provisions of Statement No.
125 are effective for transactions occurring after December 31, 1996, except
those provisions relating to repurchase agreements, securities lending, and
other similar transactions and pledged collateral, which have been delayed
until after December 31, 1997, by Statement No. 127, "Deferral of the
Effective Date of Certain Provisions of Statement No. 125, an amendment of
Statement No.125." The adoption of the provisions of Statement No. 127 is not
expected to have a material impact on financial position or results of
operations.
Reporting Comprehensive Income
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Statement No. 130 requires that all items that are
required to be recognized as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This Statement does not require a specific format for
that financial statement, but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. Statement No. 130 is effective for fiscal years beginning after
December 15, 1997. The impact of this Statement on the Company would be to
require additional disclosures in the Company's financial statements.
CASH FLOWS
The Company utilizes the net reporting of cash receipts and cash payments for
deposit and lending activities. The Company considers amounts due from banks
and interest-bearing deposits in banks as cash equivalents.
TRUST ASSETS AND INCOME
Assets held by the Bank in a fiduciary or agency capacity for its customers
are not included in the consolidated financial statements since such items are
not assets of the Bank.
Trust income is reported on a cash basis, which is not materially different
from the accrual basis.
EARNINGS PER SHARE
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share"
effective in the fourth quarter of 1997. Statement No. 128 is designed to
simplify the computation of earnings per share and requires disclosure of
"basic earnings per share" and, if applicable, "diluted earnings per share."
Earnings per share calculations give retroactive effect to the issuances of
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,
1996, and 1995.
RECLASSIFICATION
Certain of the 1996 and 1995 amounts have been reclassified to conform with
the 1997 presentation. Such reclassifications had no effect on net income.
2. COMMON STOCK SPLIT
On August 19, 1997, 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 for 1996 and 1995 have been restated to reflect
the stock split.
<21>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
___________________________________________________________________________
Nineteen hundred ninety-seven Annual Report
___________________________________________________________________________
3. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserves, in the form of cash and balances
with the Federal Reserve Bank, against its deposit liabilities. The amount of
such reserves was $1,314,000 and $1,262,000 at December 31, 1997 and 1996,
respectively.
Deposits with one financial institution are insured up to $100,000. The
Company maintains cash and cash equivalents with other financial institutions
in excess of the insured amount.
4. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities at
December 31, 1997 and 1996, were as follows (in thousands):
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Fair
December 31, 1997 Cost Gains Losses Value
Held-to-maturity securities:
U.S. Treasury securities $46,922 $668 $ (24) $47,566
Obligations of state and
political subdivisions 5,533 78 - 5,611
Corporate obligations 3,160 16 (1) 3,175
Mortgage-backed securities 6,838 20 (2) 6,856
Total debt securities 62,453 782 (27) 63,208
Restricted equity securities 1,282 - - 1,282
Total held-to-maturity $63,735 $782 $ (27) $64,490
Available-for-sale securities:
U.S. Treasury securities $14,599 $355 $ (6) $14,948
Corporate obligations 6,837 17 (5) 6,849
Mortgage-backed securities 2,758 13 - 2,771
Equity securities 113 146 - 259
Total available-for-sale $24,307 $531 $ (11) $24,827
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Fair
December 31, 1996 Cost Gains Losses Value
Held-to-maturity securities:
U.S. Treasury securities $49,169 $449 $ (179) $49,439
Obligations of state and
political subdivisions 606 14 - 620
Corporate obligations 4,694 22 (4) 4,712
Mortgage-backed securities 1,724 1 (37) 1,688
Total debt securities 56,193 486 (220) 56,459
Restricted equity securities 1,128 - - 1,128
Total held-to-maturity $57,321 $486 $ (220) $57,587
Available-for-sale securities:
U.S. Treasury securities $21,239 $238 $ (71) $21,406
Corporate obligations 7,235 21 (3) 7,253
Equity securities 3 74 - 77
Total available-for-sale $28,477 $333 $ (74) $28,736
Proceeds from the sale of available-for-sale debt securities during 1997
amounted to $5,588,000, with a gain of $25,000 realized on sales. There were
no sales of debt securities
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
in 1996 and 1995. In 1996 and 1995 gains of $4,000 and $10,000, respectively,
resulted from early calls of debt securities.
Net realized gains of $15,000 on sales of equity securities were recorded in
1996. There were no sales of equity securities in 1997 and 1995.
Investment securities with an approximate carrying value of $47,457,000 and
$48,103,000 and estimated market value of $48,085,000 and $48,390,000 at
December 31, 1997 and 1996, respectively, were pledged to secure public funds
and certain other deposits as provided by law.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. The amortized cost and estimated carrying value of
debt securities at December 31, 1997, by contractual maturity, are shown below
(in thousands).
Estimated
Amortized Cost Fair Value
Held-to-maturity securities:
Due in one year or less $ 7,010 $ 7,034
Due after one year through five years 45,439 46,086
Due after five years through ten years 6,127 6,167
Due after ten years 3,877 3,921
Total $62,453 $63,208
Estimated
Amortized Cost Fair Value
Available-for-sale securities:
Due in one year or less $ 4,754 $ 4,780
Due after one year through five years 18,057 18,396
Due after five years through ten years 1,383 1,392
Total $24,194 $24,568
5. Loans
The Company grants commercial, industrial, residential, and consumer loans
primarily to customers throughout Northcentral Pennsylvania and Southern New
York. Although the Company has a diversified loan portfolio, a substantial
portion of its debtors' ability to honor their contracts is dependent on the
economic conditions within this region.
Major classifications of loans are as follows (in thousands):
December 31
1997 1996
Real estate loans:
Residential $120,019 $108,416
Commercial 27,480 27,670
Agricultural 8,769 6,134
Construction 3,035 4,262
Loans to individuals for household,
family and other purchases 13,905 14,465
Commercial and other loans 9,485 11,529
State and political subdivision loans 9,457 10,105
192,150 182,581
Less unearned income on loans 102 168
Less allowance for loan losses 2,138 1,995
Loans, net $189,910 $180,418
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
___________________________________________________________________________
Nineteen hundred ninety-seven Annual Report
___________________________________________________________________________
At December 31, 1997 and 1996, net unamortized loan fees and costs of $856,000
and $874,000, respectively, have been deducted from the carrying value of loans.
At December 31, 1997 and 1996, the recorded investment in loans that are
considered to be impaired in accordance with SFAS No.114 was $382,000, and
$414,000, respectively, all of which were on a nonaccrual basis. At December
31, 1997, the Company had an impaired loan of $382,000 with an allocation of
$40,000 of the allowance for loan losses. At December 31, 1996, all of the
$414,000 of impaired loans did not have an allowance for loan losses allocated
as a result of the loans being collateral dependent and the value of the
collateral exceeding the recorded investment in the loan.
The average recorded investment in impaired loans during the year ended
December 31, 1997 and 1996, was approximately $398,000 and $696,000,
respectively. At December 31, 1997, there was no interest income recognized
on impaired loans. For the year ended December 31, 1996, the Company
recognized interest income on impaired loans of $2,000, all of which was
recognized using the cash basis method of income recognition.
Loans on which the accrual of interest has been discontinued or reduced
amounted to $1,551,000 and $1,258,000 (which included the impaired loans in
accordance with SFAS No. 114) at December 31, 1997 and 1996, respectively. If
interest had been recorded at the original rate on those loans, such income
would have approximated $229,000, $127,000, and $147,000 for the years ended
December 31, 1997, 1996, and 1995, respectively. Interest income on such
loans, which is recorded as received, amounted to approximately $72,000,
$40,000, and $58,000 for the years ended December 31, 1997, 1996, and 1995,
respectively.
Transactions in the allowance for loan losses were as follows (in thousands):
Years Ended December 31,
1997 1996 1995
Balance, beginning of year $1,995 $1,833 $1,721
Provisions charged to income 210 205 163
Recoveries on loans previously
charged against the allowance 16 21 18
2,221 2,059 1,902
Loans charged against the allowance (83) (64) (69)
Balance, end of year $2,138 $1,995 $1,833
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
The following is a summary of the past due and nonaccrual loans as of December
31, 1997 and 1996 (in thousands):
December 31, 1997
Past Due Past Due
30-89 days 90 days or more Nonaccrual
Real estate loans $2,566 $146 $1,446
Installment loans 227 20 -
Credit cards and related loans 20 4 -
Commercial and all other loans 106 - 105
Total $2,919 $170 $1,551
December 31, 1996
Past Due Past Due
30-89 days 90 days or more Nonaccrual
Real estate loans $2,283 $716 $1,229
Installment loans 12 - -
Credit cards and related loans 26 1 -
Commercial and all other loans 356 6 29
Total $2,677 $723 $1,258
6. PREMISES & EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
December 31,
1997 1996
Land $ 1,198 $ 907
Buildings 4,164 3,926
Furniture, fixtures and equipment 5,263 3,914
10,625 8,747
Less accumulated depreciation 4,871 4,402
Premises and equipment, net $ 5,754 $4,345
Depreciation expense amounted to $479,000, $370,000, and $412,000 for 1997,
1996, and 1995, respectively.
7. Deposits
Certificates of deposit of $100,000 or more amounted to $23,960,000 and
$19,280,000 at December 31, 1997 and 1996, respectively. Interest expense on
certificates of deposit of $100,000 or more amounted to $1,420,000,
$1,172,000, and $1,089,000 for the years ended December 31, 1997, 1996, and
1995, respectively.
Following are maturities of certificates of deposit as of December 31, 1997
(in thousands):
1998 $ 63,956
1999 24,016
2000 32,463
2001 10,068
2002 12,630
Thereafter 960
Total certificates of deposit $144,093
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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Nineteen hundred ninety-seven Annual Report
___________________________________________________________________________
8. BORROWED FUNDS
Securities
Sold Under Other Capital Total
Agreements to FHLB Borrowed Lease Borrowed
Repurchase(a) Advances(b) Funds(c) Obligations Funds
dollars in
thousands)
1997
Balance at December 31 $4,789 $ - $1,874 $ 201 $ 6,864
Highest balance
at any month-end 5,202 7,625 1,874 222 16,498
Average balance 5,030 1,117 1,874 108 8,129
Weighted average interest rate:
Paid during year 5.85% 5.56% 7.56% 5.16% 6.19%
As of year-end 5.78% 5.73% 7.56% 4.90% 6.24%
1996
Balance at December 31 $5,018 $8,925 $1,874 $ - $15,817
Highest balance
at any month-end 5,367 9,800 1,874 - 17,041
Average balance 5,263 2,599 1,874 - 9,736
Weighted average interest rate:
Paid during year 5.80% 5.54% 7.56% 6.07%
As of year-end 5.90% 6.76% 7.56% 6.58%
1995
Balance at December 31 $5,331 $1,650 $1,874 - $ 8,855
Highest balance
at any month-end 5,331 10,400 1,874 - 17,605
Average balance 4,257 1,900 1,874 - 8,031
Weighted average interest rate:
Paid during year 5.91% 6.20% 7.56% 6.36%
As of year-end 5.91% 6.05% 7.56% 6.29%
(a) Securities sold under agreements to repurchase mature within one-to-five
years. The Company has pledged U.S. Treasury securities with a carrying value
at December 31, 1997 and 1996, of $5,921,000 and $6,494,000, respectively.
The respective market values were $6,019,000 and $6,513,000.
(b) FHLB Advances are comprised of two types of borrowings with the Federal
Home Loan Bank of Pittsburgh. FHLB "Open RepoPlus" advances are short-term
borrowings maturing within one year, bear a fixed rate of interest and are
subject to prepayment penalty. The Company has a borrowing limit of
$20,000,000, exclusive of any outstanding advances. As of December 31, 1996,
total FHLB advances were comprised of Open RepoPlus borrowings. At December
31, 1996, the Company also had an available line of credit with the FHLB
("Flexline"), with a borrowing limit of approximately $8,500,000. Flexline
advances also mature within one year and bear a variable rate of interest that
adjusts daily. There are no prepayment penalties for these borrowings. As of
December 31, 1995, total FHLB advances were comprised of Flexline borrowings.
There were no outstanding borrowings on this line of credit as of December 31,
1997 and 1996. Although no specific collateral is required to be pledged for
Open RepoPlus or Flexline borrowings, FHLB advances are secured by a blanket
security agreement that includes the Company's FHLB stock, as well as
investment and mortgage-backed securities held in safekeeping at the FHLB.
At December 31, 1997 and 1996, approximate carrying value of collateral was
$18,944,000 and $17,339,000 and estimated market value was $19,213,000 and
$17,445,000, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
(c) Other borrowed funds consist of separate loans with the Federal Home Loan
Bank of Pittsburgh as follows (in thousands):
December 31,
Fixed Rate Maturity 1997 1996
7.25% May 15, 2000 $ 166 $ 166
7.40% May 15, 2001 245 245
7.52% May 15, 2002 229 229
7.60% May 15, 2003 216 216
7.56% May 17, 2004 201 201
7.61% May 16, 2005 188 188
7.65% May 15, 2006 175 175
7.68% May 15, 2007 163 163
7.72% May 15, 2008 151 151
7.76% May 15, 2009 140 140
Total borrowed funds $1,874 $1,874
Following are maturities of borrowed funds as of December 31, 1997 (in
thousands):
1998 $3,509
1999 358
2000 683
2001 293
2002 787
Thereafter 1,234
Total borrowed funds $6,864
9. LEASES
The Company is committed under two noncancellable operating leases for
facilities with initial or remaining terms in excess of one year. The minimum
annual rental commitments under these leases at December 31, 1997, are as
follows (in thousands):
1998 $ 50
1999 35
2000 30
2001 30
2002 30
Thereafter 25
Total minimum lease payments $200
Total rental expense for all operating leases for 1997, 1996, and 1995
amounted to $50,000, $52,000, and $31,000, respectively.
10. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory, defined-benefit pension plan (the "Plan")
for all employees meeting certain age and length of service requirements.
Benefits are based primarily on years of service and the average annual
compensation during the highest five consecutive years within the final ten
years of employment. The Company's funding policies are consistent with the
funding requirements of federal law and regulations. Plan assets are comprised
of common stock, U.S. government and corporate debt securities. Plan assets
included 11,928 and 5,905 shares of the Company's common stock at December 31,
1997 and 1996, respectively.
<27>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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Nineteen hundred ninety-seven Annual Report
___________________________________________________________________________
Pension cost for 1997, 1996, and 1995 include the following components (in
thousands):
Years Ended December 31,
1997 1996 1995
Service cost benefits earned during the period $ 110 $ 101 $ 85
Interest cost on projected benefit obligation 126 (111) 104
Return on assets (478) (229) (331)
Net amortization and deferral 277 54 189
Net pension cost $1035 $1037 $ 47
As of December 31, 1997 and 1996, the Plan's total accumulated benefit
obligation was $1,524,000 and $1,235,000, including vested benefits of
$1,480,000 and $1,196,000, respectively.
The funded status of the Plan and amount recognized in the Company's
consolidated balance sheet are summarized as follows (in thousands):
December 31,
1997 1996
Projected benefit obligation $(2,226) $(1,782)
Plan assets at fair value 2,681 2,242
Excess of assets over projected benefit obligation 455 460
Prior service costs (63) (69)
Unrecognized net (loss) from past experience
different from that assumed and effects
of changes in assumptions (125) (74)
Unrecognized net transition gain (114) (129)
Prepaid pension cost $ 153 $ 188
The projected benefit obligation for the Plan at December 31, 1997, 1996, and
1995, were determined using an assumed discount rate of 61/2%, 7%, and 7%,
respectively, and an assumed long-term rate of compensation increase of 4.0%,
4.0%, and 4.5%, respectively. The assumed long-term rate of return on Plan
assets was 8% at December 31, 1997, 1996, and 1995.
The Company also has a profit-sharing plan, covering substantially all
employees, which provides tax-deferred salary savings to plan participants.
The Company's contributions to the profit-sharing plan are allocated to the
participants based upon a percentage of their compensation. The Company's
profit-sharing contribution is determined by the Board of Directors on a
discretionary basis. The Company's contributions for 1997, 1996, and 1995 were
$187,000, $131,000, and $86,000, respectively.
11. ARBITRATION SETTLEMENT
On February 24, 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. As of December 31, 1997 there was $110,000 of credits applied for
current expenditures. The amount received by the Bank is net of fees
associated with the arbitration.
12. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
Years Ended December 31,
1997 1996 1995
Currently payable $1,614 $1,271 $1,136
Deferred liability 59 36 25
Provision for income taxes $1,673 $1,307 $1,161
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
The following temporary differences gave rise to the net deferred tax asset at
December 31, 1997 and 1996 (in thousands):
1997 1996
Deferred tax assets:
Allowance for loan losses $544 $495
Deferred compensation 201 194
Loan fees and costs 29 53
Core deposit intangible 23 9
Total 797 751
Deferred tax liabilities:
Unrealized gains on available-for-sale
securities (177) (88)
Premises and equipment (235) (147)
Bond accretion (86) (67)
Prepaid pension cost (52) (64)
Foreclosed assets held for sale (10) -
Total (560) (366)
Deferred tax asset, net $237 $385
The total provision for income taxes is different from that computed at the
statutory rates due to the following items (in thousands):
Years Ended December 31,
1997 1996 1995
Provision at statutory rates on
pre-tax income $1,872 $1,465 $1,358
Effect of tax-exempt income (211) (198) (188)
Nondeductible interest 27 27 23
Other items (15) 13 (32)
Provision for income taxes $1,673 $1,307 $1,161
Statutory tax rates 34% 34% 34%
Effective tax rates 30.4% 30.3% 29.1%
Income taxes applicable to realized security gains at December 31, 1997, 1996,
and 1995, were $9,000, $1,000, and $3,000, respectively.
13. RELATED PARTY TRANSACTIONS
Certain executive officers, corporate directors or companies in which they
have 10 percent or more beneficial ownership were indebted to the Bank.
A summary of loan activity with officers, directors, stockholders and
associates of such persons is listed below (in thousands):
Beginning Ending
Balance Additions Repayments Balance
1997 $1,274 $ 778 $ 880 $1,172
1996 1,379 156 261 1,274
1995 1,501 181 303 1,379
Such loans were made in the ordinary course of business at the Bank's normal
credit terms and do not present more than a normal risk of collection.
<29>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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Nineteen hundred ninety-seven Annual Report
___________________________________________________________________________
14. REGULATORY MATTERS
Dividend Restrictions:
The approval of the Comptroller of the Currency is required for a national
bank to pay dividends up to the Company if the total of all dividends declared
in any calendar year exceeds the Bank's net income (as defined) for that year
combined with its retained net income for the preceding two calendar years.
Under this formula, the Bank can declare dividends in 1998 without approval of
the Comptroller of the Currency of approximately $4,549,000, plus the Bank's
net income for 1998.
Loans:
The Bank is subject to regulatory restrictions which limit its ability to loan
funds to the Company. At December 31, 1997, the regulatory lending limit
amounted to approximately $2,791,000.
Regulatory Capital Requirements:
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by the regulators that, if undertaken, could
have a direct material effect on the Company's and Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's and Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk-weightings, and other factors.
Quantitative measures established by the regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of
Total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital to average assets (as defined).
Management believes, as of December 31, 1997, that the Company and the Bank
meet all capital adequacy requirements to which they (the Company and the
Bank) are subject.
As of December 31, 1997, the most recent notifications from the Federal
Reserve Board and the Office of the Comptroller of the Currency categorized
the Company and the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized they must
maintain minimum Total risk-based, Tier I risk-based and Tier I leverage
ratios at least 100 to 200 basis points above those ratios set forth in the
table. There have been no conditions or events since that notification that
management believes have changed the Company's or the Bank's category.
The following table reflects the Company's (which is substantially the same as
the Bank's) capital ratios at December 31 (in thousands):
1997 1996
Amount Ratio Amount Ratio
Total capital (to risk-weighted assets)
Company $26,867 15.83% $23,764 15.03%
For capital adequacy purposes 13,589 8.00% 12,649 8.00%
To be well capitalized 16,986 10.00% 15,811 10.00%
Tier I capital (to risk-weighted assets)
Company $24,744 14.58% $21,787 13.78%
For capital adequacy purposes 6,794 4.00% 6,324 4.00%
To be well capitalized 10,192 6.00% 9,486 6.00%
Tier I capital (to average assets)
Company $24,744 8.47% $21,787 7.76%
For capital adequacy purposes 8,768 3.00% 8,424 3.00%
To be well capitalized 14,613 5.00% 14,041 5.00%
This annual report has not been reviewed, or confirmed for accuracy or
relevance, by the Federal Deposit Insurance Corporation.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
15. OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate or liquidity risk in excess of the amount recognized
in the consolidated balance sheet.
The Company's exposure to credit loss from nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual amount of these
instruments. The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
Financial instruments whose contract amounts represent credit risk at December
31, 1997 and 1996, are as follows (in thousands):
1997 1996
Commitments to extend credit $21,871 $16,740
Standby letters of credit 548 660
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity requirements.
The Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the Company on
extension of credit is based on management's credit assessment of the counter
party.
Standby letters of credit are conditional commitments issued by the Company
guaranteeing performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending normal loan commitments to customers. The Company generally holds
collateral supporting standby letters of credit.
16. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows (in thousands)
December 31, 1997
CARRYING ESTIMATED
AMOUNT FAIR VALUE
Financial assets:
Cash and due from banks $ 6,343 $ 6,343
Available-for-sale securities 24,827 24,827
Held-to-maturity securities 63,735 64,490
Net loans 189,910 191,658
Accrued interest receivable 2,426 2,426
Total financial assets $287,241 $289,744
Financial liabilities
Deposits $256,783 $258,829
Securities sold under agreements
to repurchase 4,789 4,851
Other borrowed funds 2,075 2,240
Accrued interest payable 2,331 2,331
Total financial liabilities $265,978 $268,251
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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Nineteen hundred ninety-seven Annual Report
___________________________________________________________________________
December 31, 1996
CARRYING ESTIMATED
AMOUNT FAIR VALUE
Financial assets:
Cash and due from banks $ 6,459 $ 6,459
Available-for-sale securities 28,736 28,736
Held-to-maturity securities 57,321 57,587
Net loans 180,418 180,586
Accrued interest receivable 2,930 2,930
Total financial assets $275,864 $276,298
Financial liabilities
Deposits $240,177 $241,835
Securities sold under agreements
to repurchase 5,018 5,018
FHLB advances 8,925 8,925
Other borrowed funds 1,874 1,975
Accrued interest payable 2,293 2,293
Total financial liabilities $258,287 $260,046
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Also, it is the Company's general practice and interest
to hold its financial instruments to maturity and not to engage in trading or
sales activities. Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions can significantly affect the estimates.
Estimated fair values have been determined by the Company using historical
data, as generally provided in the Company's regulatory reports, and an
estimation methodology suitable for each category of financial instruments.
The Company's fair value estimates, methods and assumptions are set forth
below for the Company's other financial instruments.
Cash and Due From Banks:
The carrying amounts for cash and due from banks approximate fair value
because they mature in 90 days or less and do not present unanticipated credit
concerns.
Investment Securities:
The fair values of investments are based on quoted market prices as of the
balance sheet date. For certain instruments, fair value is estimated by
obtaining quotes from independent dealers.
Loans:
Fair values are estimated for portfolios of loans with similar financial
characteristics.
The fair value of performing loans has been estimated by discounting expected
future cash flows. The discount rate used in these calculations is derived
from the Treasury yield curve adjusted for credit quality, operating expense
and prepayment option price, and is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount rates
that reflect the credit and interest rate risk inherent in the loan. The
estimate of maturity is based on the Company's historical experience with
repayments for each loan classification, modified as required by an estimate
of the effect of current economic and lending conditions.
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___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
Fair value for significant nonperforming loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are
discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined using available market information
and specific borrower information.
Deposits:
The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings and NOW accounts, and money
market accounts, is equal to the amount payable on demand. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
The deposit's fair value estimates do not include the benefit that results
from the low-cost funding provided by the deposit liabilities compared to the
cost of borrowing funds in the market, commonly referred to as the core
deposit intangible.
Borrowed Funds:
Rates available to the Company for borrowed funds with similar terms and
remaining maturities are used to estimate the fair value of borrowed funds.
Commitments to Extend Credit and Standby Letters of Credit:
There is no material difference between the notional amount and the estimated
fair value of off-balance-sheet items which are primarily comprised of
unfunded loan commitments which are generally priced at market at the time of
funding (see Note 15).
17. CONDENSED FINANCIAL INFORMATION PARENT COMPANY ONLY
CITIZENS FINANCIAL SERVICES, INC.
CONDENSED BALANCE SHEET
December 31, 1997 and 1996
(in thousands) 1997 1996
Assets:
Cash $ 46 $ 33
Dividends receivable - subsidiary - 612
Investment in subsidiary,
First Citizens National Bank 25,771 22,871
Available-for-sale securities 141 -
Other assets 1 -
Total assets $25,959 $23,516
Liabilities:
Other liabilities $ 26 $ -
Deferred tax liability 10 -
Dividends payable - 612
Total liabilities $ 36 $ 612
Stockholders' equity 25,923 22,904
Total liabilities and stockholders'
equity $25,959 $23,516
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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Nineteen hundred ninety-seven Annual Report
___________________________________________________________________________
CITIZENS FINANCIAL SERVICES, INC.
CONDENSED STATEMENT OF INCOME
Years Ended December 31, 1997, 1996, and 1995
(in thousands) 1997 1996 1995
Dividends from:
Bank subsidiary $1,179 $1,265 $1,235
Available-for-sale securities 1 - -
Total income 1,180 1,265 1,235
Expenses 97 62 64
Income before equity in undistributed
earnings of subsidiary 1,083 1,203 1,171
Equity in undistributed
earnings - FCNB 2,749 1,800 1,663
CITIZENS FINANCIAL SERVICES, INC.
CONDENSED STATEMENT OF CASH FLOWS
Years Ended December 31, 1997, 1996, and 1995
(in thousands) 1997 1996 1995
Cash flows from operating activities:
Net income $ 3,832 $ 3,003 $2,834
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings
of subsidiary 2,749 (1,800) (1,663)
Decrease (increase) in other assets 611 (32) (32)
Increase in other liabilites 26 - -
Net cash provided by operating activities 1,720 1,171 1,139
Cash flows used in investing activities:
Purchase of available-for-sale securities (111) - -
Cash flows used in financing activities:
Cash dividends paid (1,596) (1,187) (1,121)
Net increase (decrease) in cash (13) (16) (18)
Cash at beginning of year 33 49 31
Cash at end of year $ 46 $ 33 $ 49
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REPORT OF INDEPENDENT AUDITORS
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
SNODGRASS
Certified Public Accountants
[LOGO OMITTED]
To the Stockholders and Board of Directors of
Citizens Financial Services, Inc.
We have audited the consolidated balance sheet of Citizens Financial Services,
Inc. and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Citizens
Financial Services, Inc. and subsidiary as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, effective
January 1, 1995, the Company changed its method of accounting for impairment
of loans and related allowance for loan losses.
/s/ S.R. Snodgrass, A.C.
Wexford, PA
February 20, 1998
S.R. Snodgrass, A.C.
101 Bradford Road Wexford, PA 15090-6909 Phone: 724-934-0344
Faxsimile: 724-934-0345
<35>
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SELECTED FINANCIAL DATA
FIVE YEARS SUMMARY OF OPERATIONS
___________________________________________________________________________
Nineteen hundred ninety-seven Annual Report
___________________________________________________________________________
(dollar amounts in thousands) 1997 1996 1995 1994 1993
Interest income $ 22,779 $ 21,341 $ 19,422 $ 17,336 $ 16,551
Interest expense 11,610 10,867 9,851 7,944 7,853
Net interest income 11,169 10,474 9,571 9,392 8,698
Provision for loan losses 210 205 163 255 315
Net interest income after provision
for loan losses 10,959 10,269 9,408 9,137 8,383
Other operating income 2,427 1,372 1,242 1,073 1,016
Realized securities gains, net 25 19 10 63 50
Other operating expenses 7,906 7,350 6,665 6,490 6,117
Income before provision for
income taxes 5,505 4,310 3,995 3,783 3,332
Provision for income taxes 1,673 1,307 1,161 1,158 908
Net income $ 3,832 $ 3,003 $ 2,834 $ 2,625 $ 2,424
Per share data:
Net income (1) $ 1.40 $ 1.09 $ 1.03 $ .96 $ .88
Cash dividends (1) 0.355 0.445 0.425 0.405 0.385
Book value (1) 9.44 8.34 7.75 6.88 6.68
Total investments $888,562 $ 86,057 $ 73,715 $ 64,257 $ 62,645
Loans, net 189,910 180,418 159,794 154,848 140,391
Total assets 294,811 282,810 247,094 232,537 216,237
Total deposits 256,783 240,177 213,316 194,478 191,013
Stockholders' equity 25,923 22,904 21,297 18,903 18,340
(1) Amounts were adjusted to reflect the two-for-one stock split as described
in Footnote 2.
COMMON STOCK
Common stock issued by Citizens Financial Services, Inc. is traded in the
local over-the-counter market, primarily in Pennsylvania and New York. Prices
presented in the table below are bid/ask prices between broker-dealers
published by the National Association of Securities Dealers through the NASD
OTC "Bulletin Board", its automated quotation system for non-NASDAQ quoted
stocks and the National Quotation Bureau's "Pink Sheets." The prices do not
include retail markups or markdowns or any commission to the broker-dealer.
The bid prices do not necessarily reflect prices in actual transactions. Cash
dividends are declared on a semiannual basis and the effects of stock
dividends have been stated retroactively in the table below (also see dividend
restrictions in Note 14).
Dividends Dividends
1997 declared 1996 declared
High Low per share High Low per share
First quarter (1) $13.31 $12.94 First quarter (1) $12.38 $11.63
Second quarter (1) 14.00 13.31 $ 0.230 Second quarter (1) 12.63 12.38 $ 0.210
Third quarter 16.38 14.00 Third quarter (1) 12.75 12.50
Fourth quarter 18.75 17.00 $ 0.125 Fourth quarter (1) 12.94 12.75 $ 0.215
Amounts were adjusted to reflect the two-for-one stock split as described in
Footnote 2.
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CONSOLIDATED QUARTERLY DATA
TRUST AND INVESTMENT SERVICES STATEMENT OF CONDITION
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
CONSOLIDATED QUARTERLY DATA
(dollar amounts in thousands) Three Months Ended
1997 March 31 June 30 Sept 30 Dec 31
Interest income $5,486 $5,672 $5,847 $5,774
Interest expense 2,809 2,891 2,958 2,952
Net interest income 2,677 2,781 2,889 2,822
Provision for loan losses 53 52 53 52
Other operating income 1,229 356 432 410
Realized securities gains, net - - - 25
Other operating expenses 2,039 1,843 2,032 1,992
Income before provision for income taxes 1,814 1,242 1,236 1,213
Provision for income taxes 599 368 359 347
Net income $1,215 $ 874 $ 877 $ 866
Earnings Per Share $ 0.44 $ 0.32 $ 0.32 $ 0.32
Three Months Ended
1996 March 31 June 30 Sept 30 Dec 31
Interest income $5,005 $5,302 $5,512 $5,522
Interest expense 2,528 2,687 2,816 2,836
Net interest income 2,477 2,615 2,696 2,686
Provision for loan losses 48 53 52 52
Other operating income 302 333 374 363
Realized securities gains, net 19 - - -
Other operating expenses 1,673 1,754 2,024 1,899
Income before provision for income taxes 1,077 1,141 994 1,098
Provision for income taxes 352 332 284 339
Net income $ 725 $ 809 $ 710 $ 759
Earnings Per Share $ 0.26 $ 0.29 $ 0.26 $ 0.28
TRUST AND INVESTMENT SERVICES STATEMENT OF CONDITION
1997 1996
INVESTMENTS:
Bonds $14,115 $14,770
Stock 14,995 10,284
Savings and money market funds 13,350 10,554
Mutual funds 7,100 6,756
Mortgages 374 491
Real estate 298 285
Miscellaneous 110 127
Cash 168 44
TOTAL $50,510 $43,311
ACCOUNTS:
Estates $ 827 $ 413
Trusts 24,666 25,458
Guardianships 332 197
Pension/profit sharing 9,871 8,611
Investment management 12,527 4,911
Custodial 2,287 3,721
TOTAL $50,510 $43,311
__________________________________________________________________________
[GRAPHIC OMITTED: One bar chart depicting personal trust assets from 1993 to
1997. Tabular representation of this graph is set forth as follows:
PERSONAL TRUST ASSETS:
(Dollars in Thousands)
1993 1994 1995 1996 1997
$26,085 $27,781 $31,786 $39,776 $41,643
___________________________________________________________________________
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___________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
___________________________________________________________________________
Nineteen hundred ninety-seven Annual Report
___________________________________________________________________________
This narrative is provided to assist in the understanding and evaluation of
the financial condition and results of operations of Citizens Financial
Services, Inc. and its subsidiary (the "Company") and should be read in
conjunction with the preceding consolidated financial statements and related
footnotes. Such financial condition and results of operations are not
intended to be indicative of future performance. Except as noted, tabular
information is presented in thousands of dollars.
In addition to historical information, this report contains forward-looking
statements. The 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 to be filed by the Company and
any current reports on Form 8-K filed by the Company.
Financial Condition
The following table presents the growth (dollars in millions) during the past
two years:
1997/1996 1996/1995
$ % $ %
Total assets 12.0 4.2 35.7 14.5
Total deposits 16.6 6.9 26.9 12.6
Total loans 9.5 5.3 20.6 12.9
Total investments
(including available-for-sale
and held-to-maturity) 2.5 2.9 12.3 16.7
Total stockholders'
equity 3.0 13.2 1.6 7.5
Investments
The investment portfolio, including available-for-sale and held-to-maturity
securities, increased by $2.5 million or 2.9% in 1997 as compared to growth of
$12.3 million in 1996.
From 1990 through 1996, the concentration of the Company's investment
portfolio shifted to U.S. Treasury securities and, until this year, no new
investments had been made in state and political subdivisions since 1985.
During 1997, the investment portfolio was restructured by selling $5.6 million
U. S. Treasury notes and purchasing $5.2 million AAA insured Pennsylvania
municipal bonds. In addition, throughout the year as funds became available
from deposits and the maturity of investments, $9.9 million in FNMA and FHLMC
mortgage-backed securities and $2.6 million in investment-grade corporate
bonds were purchased.
The deposits and other liabilities that are not used to fund loans are placed
in investments which possess less risk and, therefore, lower yield. The
impact on net interest income is discussed later in the Net Interest Income
section.
__________________________________________________________________________
[GRAPHIC OMITTED: One bar chart depicting investments from 1993 to 1997 for
available-for-sale and held to maturity. Tabular representation of this graph
is set forth as follows:
INVESTMENTS:
(Dollars in Thousands)
Available-for-Sale
1993 1994 1995 1996 1997
$16,171 $14,640 $21,444 $28,736 $24,827
Held to Maturity
1993 1994 1995 1996 1997
$46,474 $49,617 $52,271 $57,321 $63,735
Total
1993 1994 1995 1996 1997
$62,645 $64,257 $73,715 $86,057 $88,562
___________________________________________________________________________
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
The following table shows the year-end composition of the investment portfolio
for the five years ended December 31, 1997:
Book Value at December 31,
% of % of % of % of % of
1997 Total 1996 Total 1995 Total 1994 Total 1993 Total
Held-to-maturity:
U.S. Treasury securities $46,922 53.0 $49,169 57.1 $42,700 57.9 $36,042 56.1 $30,686 49.0
Federal agency obligations - - - - - - 500 0.8 502 0.8
Obligations of state & political
subdivisions 5,533 6.2 606 0.7 1,311 1.8 2,735 4.3 3,498 5.6
Corporate obligations 3,160 3.6 4,694 5.5 4,744 6.4 6,729 10.4 7,715 12.3
Mortgage-backed securities 6,838 7.7 1,724 2.0 2,377 3.2 2,513 3.9 3,066 4.9
Restricted equity securities 1,282 1.5 1,128 1.3 1,139 1.6 1,098 1.7 1,007 1.6
Available-for-sale:
U.S. Treasury securities 14,948 16.9 21,406 24.9 15,591 21.2 14,594 22.7 16,126 25.7
Corporate obligations 6,849 7.7 7,253 8.4 5,778 7.8 - - - -
Mortgage-backed securities 2,771 3.1 - - - - - - - -
Equity securities 259 0.3 77 0.1 75 0.1 46 0.1 45 0.1
Total $88,562 100.0 $86,057 100.0 $73,715 100.0 $64,257 100.0 $62,645 100.0
Maturities and Average Weighted Yields of Investment Securities
The expected maturities and average weighted yields for the above investment
portfolio as of December 31, 1997, are shown below. Yields on tax-exempt
securities are presented on a fully-taxable equivalent basis assuming a 34%
tax rate:
Within One- Five- After
One Yield Five Yield Ten Yield Ten Yield Yield
Year (%) Years (%) Years (%) Years (%) Total (%)
Held-to-maturity securities:
U.S. Treasury $7,008 6.77 $39,914 6.27 $ - - $ - - $46,922 6.34
State & political subdivisions,
general obligation 2 8.33 2,057 7.14 2,377 7.39 757 7.27 5,193 7.27
State & political subdivisions,
revenue - - 340 12.31 - - - - 340 12.31
Corporate obligations - - 3,160 6.53 - - - - 3,160 6.53
Mortgage-backed securities 76 7.25 2,240 6.55 4,522 6.86 - - 6,838 6.76
Restricted equity securities - - - - - - 1,282 6.00 1,282 6.00
Total held-to-maturity $7,086 6.78 $47,711 6.38 $6,899 7.04 $2,039 6.47 $63,735 6.50
Available-for-sale securities:
U.S. Treasury $2,029 7.13 $12,919 6.54 $ - - $ - - $14,948 6.62
Corporate obligations 2,751 6.11 4,098 6.43 - - - - 6,849 6.30
Mortgage-backed securities - - 2,771 6.46 - - - - 2,771 6.46
Equity securities - - - - - - 259 1.50 259 1.50
Total available-for-sale $4,780 6.54 $19,788 6.51 $ - - $ 259 1.50 $24,827 6.46
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Nineteen hundred ninety-seven Annual Report
___________________________________________________________________________
Approximately 87% of the amortized cost of debt securities are expected to
mature within five years or less (average expected maturity 3.3 years), as
evidenced in Footnote 4 of the Consolidated Financial Statements.
The Company expects that earnings from operations, the high liquidity level of
the available-for-sale securities, growth of deposits and the availability of
borrowings from the Federal Home Loan Bank will be sufficient to meet future
liquidity needs. Management does not anticipate selling securities for
liquidity requirements. Accordingly, the majority of the securities portfolio
is classified as held-to-maturity.
The Company has no securities from a single issuer representing more than 10%
of stockholders' equity.
Loans
Historically, loans have been originated by the 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. The Company also
does a limited amount of indirect loans through 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 Company's lending
policy regarding real estate loans is that generally 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
generally 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.
As shown in the following table, total loans grew by $9.6 million in 1997, or
5.2%, a decrease from the strong 12.8% increase during 1996. The residential
mortgage loan portfolio increased 10.7% as a result of continued strong demand
during 1997. In addition, $1.2 million in conforming mortgage loans were
originated and sold on the secondary market through the Federal Home Loan
Mortgage Corporation, providing over $19,000 of income in origination fees and
premiums on loans sold, compared to $1.6 million in loans originated and
$23,000 of income in 1996. Residential mortgage lending is a principal
business activity and one the Company expects to continue by providing a full
complement of competitively priced conforming, nonconforming and home equity
mortgages.
Total commercial real estate, agricultural real estate and commercial/other
loans increased by $.4 million or 1% (down from the 6% increase in 1996).
Commercial lending activity is primarily focused on small businesses and the
Company's commercial lending officers have been successful in attracting new
business loans.
Loans to individuals decreased $.6 million or 4% during 1997 compared to an
increase of $1.3 million in 1996. Loan consolidations moved some of these
volumes to residential mortgage loans.
State and political subdivision loans decreased $.6 million or 6.4% compared
to an increase of $1.8 million in 1996. Management expects this type of loan
will increase in 1998 as the result of bond refinancing activity in a lower
interest rate environment.
The majority of lending activity has been mortgage loans secured by one- to
four-family residential property. As of December 31, 1997, residential real
estate and real estate construction loans made up 64.1% of the Company's total
loan portfolio.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
Continuing in 1998, the Company's primary goal is to be the premier mortgage
lender in its market area, with its large menu of conforming mortgages
(including "jumbo" and low- to moderate-income home buyer mortgages) through
Farmers Home Administration (FmHA) and Pennsylvania Housing Finance Agency
(PHFA). Continued training of branch office personnel and the focus on
flexibility and fast "turn around time" will aid in meeting this goal. (Also
see the discussion in Footnote 5.)
Five Year Breakdown of Loans by Type
December 31,
1997 1996 1995 1994 1993
Amount % Amount % Amount % Amount % Amount %
Real estate:
Residential $120,019 62.5 $108,416 59.4 $ 96,594 59.7 $ 97,359 62.0 $ 92,149 64.3
Commercial 27,480 14.3 27,670 15.2 24,167 14.9 21,915 13.9 19,926 13.9
Agricultural 8,769 4.6 6,134 3.4 8,027 5.0 7,125 4.5 4,216 2.9
Construction 3,035 1.6 4,262 2.3 1,018 0.6 1,271 0.8 1,102 0.8
Loans to individuals
for family and other
purchases 13,905 7.2 14,465 7.9 13,198 8.1 11,886 7.7 11,696 8.2
Commercial and other 9,485 4.9 11,529 6.3 10,535 6.5 10,285 6.5 8,959 6.3
State and political
subdivision loans 9,457 4.9 10,105 5.5 8,347 5.2 7,303 4.6 5,170 3.6
Total loans 192,150 100.0 182,581 100.0 161,886 100.0 157,144 100.0 143,218 100.0
Unearned income 102 168 259 575 1,311
Allow for loan losses 2,138 1,995 1,833 1,721 1,516
Net loans $189,910 $180,418 $159,794 $154,848 $140,391
The predominant source of earning assets is from the loan portfolio. The
following table shows the maturity of commercial and agricultural loans and
commercial loans secured by real estate as of December 31, 1997, classified
according to the sensitivity to changes in interest rates within various time
intervals:
Commercial,
financial, Real estate
agricultural construction Total
Maturity of loans:
One year or less $ 5,365 $ - $ 5,365
Over one year but less than five years 12,143 - 12,143
Over five years 37,683 3,035 40,718
Total $55,191 $3,035 $58,226
Sensitivity of loans to changes in
interest rates - loans due after one year:
Predetermined interest rate $13,401 $ 102 $13,503
Floating or adjustable interest rate 36,425 2,933 39,358
Total $49,826 $3,035 $52,861
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Nineteen hundred ninety-seven Annual Report
___________________________________________________________________________
Loan Quality and Provision for Loan Losses
As discussed previously, the loan portfolio contains a large portion of real
estate secured loans (generally residential home mortgages, mortgages on small
business properties, etc.), consumer installment loans and other commercial
loans. Footnote 5 of the Consolidated Financial Statements provides further
details on the composition of the loan portfolio and is incorporated herein.
A separate collections department was established to focus on the collection
and workout of problem loans. The Board of Directors and management believe
all of these initiatives have led to relatively low levels of nonperforming
loans and loan chargeoffs. The following tables indicate the level of
nonperforming assets over the past five years ending December 31:
1997 1996 1995 1994 1993
Nonperforming loans:
Nonaccruing loans $ 1,169 $ 844 $ 762 $ 1,557 $ 1,566
Impaired loans 382 414 697 - -
Accrual loans - 90 days
or more past due 170 723 689 267 418
Total nonperforming
loans $ 1,721 $ 1,981 $ 2,148 $ 1,824 $ 1,984
Foreclosed assets
held for sale 238 164 208 168 231
Total nonperforming
assets $ 1,959 $ 2,145 $ 2,356 $ 1,992 $ 2,215
Total loans $192,150 $182,581 $161,886 $157,144 $143,218
Unearned income 102 168 259 575 1,311
Loans, net of unearned
income $192,048 $182,413 $161,627 $156,569 $141,907
Nonperforming loans as a
percent of loans, net
of unearned income .90% 1.09% 1.33% 1.17% 1.40%
Total nonperforming
assets as a percent
of loans, net of
unearned income 1.02% 1.18% 1.46% 1.27% 1.56%
Another way to view the credit quality exposure of the loan portfolio is by
reviewing the "watch list" categories used by management (and as required by
the regulatory agencies). This monitoring process is reviewed and reported
monthly to identify problems or potential problems.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
__________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
Loans classified on the "watch list" as of December 31:
1997 1996 1995
Special mention $ - $ 216 $ 232
Substandard 4,625 3,740 4,093
Doubtful 121 23 41
Loss - - -
Total $4,746 $3,979 $4,366
Percent of total loans,
net of unearned income 2.47% 2.18% 2.70%
Based upon current information available and upon measures taken to maintain
the allowance for loan losses at an appropriate level, management does not
believe there are any loans classified for regulatory purposes as loss,
doubtful, substandard, special mention or otherwise which will result in
losses which would reasonably be expected to have a material impact on future
operations, liquidity or capital reserves. At December 31, 1997, there were
no loans which were not included as past due, nonaccrual or restructured
troubled debt, where known information about possible credit problems of
borrowers causes management to have serious doubts as to the ability of such
borrowers to comply over the next six months with present loan repayment
terms. Management is not aware of any other information which causes it to
have serious doubts as to the ability of borrowers in general to comply with
repayment terms.
The following table presents an analysis of the allowance for loan losses for
the five years ending December 31:
Summary of Loan Loss Experience
1997 1996 1995 1994 1993
Balance at
beginning of period $1,995 $1,833 $1,721 $1,516 $1,201
Charge-offs
Real estate - construction - - - - -
Real estate - mortgage 10 8 23 31 25
Loans to individuals for household,
family and other purchases 32 56 42 28 43
Commercial and other loans 41 - 4 9 3
Total loans charged-off 83 64 69 68 71
Recoveries
Real estate - construction - - - - -
Real estate - mortgage 3 1 - - 3
Loans to individuals for household,
family and other purchases 11 19 15 14 60
Commercial and other loans 2 1 3 4 8
Total loans recovered 16 21 18 18 71
Net loans charged-off 67 43 51 50 -
Provisions charged to expense 210 205 163 255 315
Balance at end of year $2,138 $1,995 $1,833 $1,721 $1,516
Loans outstanding at end of year $192,048 $182,413 $161,627 $156,569 $141,907
Average loans outstanding, net $186,425 $170,104 $156,754 $146,894 $136,025
Net charge-offs to average loans 0.04% 0.03% 0.03% 0.03% 0.00%
Year-end allowance to total loans 1.11% 1.09% 1.13% 1.10% 1.07%
Year-end allowance to total
nonperforming loans 124.23% 100.71% 85.34% 94.35% 76.41%
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Nineteen hundred ninety-seven Annual Report
___________________________________________________________________________
As detailed in Footnote 5 and the above tables, total past due (90 days or
more) and nonperforming loans decreased 13.1% from December 31, 1996 to
December 31, 1997. The majority of the loan volume is well-collateralized by
real estate. Total charge-offs for 1998 are still expected to increase
moderately from the historic levels (although low in relationship to peers).
Allowance For Loan Losses
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's basis for the level of the
allowance and the annual provision is its evaluation of the loan portfolio,
current and projected economic conditions, the historical loan loss
experience, present and prospective financial condition of the borrowers, the
level of nonperforming assets, and other relevant factors. While management
evaluates all of this information, 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 believes
that the current allowance is adequate to offset any exposure that may exist
for under-collateralized or uncollectible loans.
The allowance for loan losses as a percentage of total loans was 1.13%, 1.09%,
and 1.11% as of December 31, 1995, 1996, and 1997, respectively. The 1997
growth in the allowance is the combined result of a $210,000 charge to
earnings and $67,000 in net loan losses. The level of charge-offs and
recoveries were similar to 1996.
Allocation of the Allowance for Loan Losses
The following table provides the percentage distribution of the allowance for
loan losses and the various loan categories:
1997 1996 1995 1994 1993
$ % $ % $ % $ % $ %
Real estate loans:
Residential 140 62.5 143 59.4 165 59.6 185 62.0 181 64.2
Commercial, agricultural 577 18.9 325 18.5 328 19.9 323 18.5 253 16.9
Construction - 1.6 - 2.3 - .6 - .8 - .8
Loans to individuals for household,
family and other purchases 321 7.2 164 8.0 181 8.2 140 7.6 174 8.2
Commercial and other loans 323 4.9 108 6.3 110 6.5 114 6.5 94 6.3
State and political
subdivision loans 4 4.9 3 5.5 3 5.2 2 4.6 2 3.6
Unallocated 773 N/A 1,252 N/A 1,046 N/A 957 N/A 812 N/A
Total allowance for loan losses 2,138 100.0 1,995 100.0 1,833 100.0 1,721 100.0 1,516 100.0
As described in Footnote 1 and Footnote 5, in 1995 the Company implemented
SFAS 114 as amended by SFAS 118, which impacted management's method for
determining the allowance for loan losses. Management does not believe any
material impact on earnings will occur as a result of applying SFAS 114 in the
future.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
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. Some of the
deposit product variations were limited transaction deposit accounts with
interest rates that vary as often as daily, unlimited transaction
interest-bearing accounts, Premier 50, Premier 50 Plus, 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 (which 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.
During 1996, the Company moved to expand and consolidate its market share by
the acquisition of two offices in Canton and Gillett and the start of its
first supermarket office at the Weis Market in Wellsboro.
Deposit growth in 1997 was $16.6 million or 6.9%. Deposit growth was higher
in 1996 (an increase of $26.9 million or 12.6%) primarily as the result of the
acquisition of two offices.
Transaction accounts (noninterest-bearing and interest-bearing) increased $2
million or 4% in 1997, while total certificates of deposit increased $6.9
million or 5%. Certificates of deposit growth in 1996 was $12 million or
9.7%.
During 1997, the interest cost of certificates of deposit remained high and
the interest rate paid on Money Market Investors accounts increased. This
rate environment (high rates for certificates of deposit and high balance
Money Market Investor accounts) resulted in growth in both types of deposits.
Money market deposit accounts (which are paid a higher interest rate than
savings and NOW accounts) had growth of $8.5 million or 32.9%.
The following table shows the composition of deposit accounts over the last
three years as of December 31:
Deposits by Major Classification
1997 1996 1995
Amount % Amount % Amount %
Noninterest-bearing deposits $ 19,016 7.4 $ 17,924 7.5 $ 15,140 7.1
NOW accounts 32,794 12.8 31,836 13.2 23,681 11.1
Savings deposits 26,523 10.3 27,332 11.4 25,317 11.9
Money market deposit accounts 34,357 13.4 25,851 10.8 24,096 11.3
Certificates of deposit 144,093 56.1 137,234 57.1 125,082 58.6
Total deposits $256,783 100.0 $240,177 100.0 $213,316 100.0
Remaining maturities of certificates of deposit of $100,000 or more:
1997 1996 1995
3 months or less $ 1,658 $ 1,962 $ 2,708
3 through 6 months 6,929 2,788 2,474
6 through 12 months 10,263 6,051 4,538
Over 12 months 5,110 8,479 8,822
Total $23,960 $19,280 $18,542
As a percent of total
certificates of deposit 16.63% 14.05% 14.82%
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Nineteen hundred ninety-seven Annual Report
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Deposits by Type of Depositor
1997 1996 1995
Amount % Amount % Amount %
Individual, partnerships
& corporations $226,306 88.1 $212,398 88.4 $188,471 88.4
United States government 20 - 148 .1 132 .1
State & political
subdivisions 28,721 11.2 25,794 10.7 23,279 10.9
Other 1,736 0.7 1,837 0.8 1,434 0.6
Total deposits $256,783 100.0 $240,177 100.0 $213,316 100.0
The methods used by the Company to attract and retain deposits (in addition to
competitive interest rates) have been increased marketing and business
development efforts, continuous emphasis on quality personal service, expanded
trust and investment management services and more convenient hours. In all of
our community offices, lobby and drive-up hours now include Wednesday
afternoons (when they were traditionally closed) as well as Saturday hours.
The supermarket office is open seven days a week with extended hours on
weekdays. The Company currently provides ten MAC automated teller machines,
which are part of the MAC regional and PLUS national network. Management will
be implementing a MasterMoney debit card program in the first quarter of 1998.
In addition to the above, continuing an effort to add value to products, the
Company began a voice response system to provide customers a convenient method
of accessing account information and transferring funds 24 hours a day.
Results of Operations
Net income during 1997 increased to $3.8 million (net income per share of
$1.40), an increase of $829,000 or 27.6% over the $3 million reported in 1996
(net income per share of $1.09).
The following table sets forth certain performance ratios of the Company for
the periods indicated (net of the arbitration settlement discussed on page
48):
1997 1996 1995
Return on assets (net income to average total assets) (1) 1.16% 1.11% 1.18%
Return on equity (net income to average total equity) (1) 13.87% 13.59% 14.10%
Dividend payout ratio (dividends declared divided by net income) 25.68% 40.59% 40.68%
Equity to asset ratio (average equity to average total assets) 8.45% 8.18% 8.45%
(1) Return on average assets and average equity was computed after excluding
the nonrecurring after-tax income associated with the arbitration award by a
vendor.
In 1997, the dividend payout ratio was effected by the Company changing from a
semi-annual dividend to a quarterly dividend in October, 1997.
Net income is influenced by five key elements: net interest income, other
operating income, other operating expenses, provision for income taxes and the
provision for possible loan losses. A discussion of these five elements
follows.
Net Interest Income
The most significant source of revenue is net interest income, the amount by
which interest earned on interest-bearing assets exceeds interest expense on
interest-bearing liabilities.
Factors which influence net interest income are changes in volume of
interest-bearing assets and liabilities as well as changes in the associated
interest rates.
Net interest income (tax adjusted) in 1997 was $11.5 million (an increase of $
.7 million or 6.6%) as compared to $10.8 million in 1996 and $9.9 million in
1995.
The following tables set forth the Company's average balances of, and the
interest earned or incurred on, each principal category of assets, liabilities
and stockholders' equity, the related rates, net interest income and rate
"spread" created:
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
Analysis of Average Balances and Interest Rates (1)
1997 1996 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 4,042 221 5.47 2,782 147 5.28 2,334 135 5.78
Total short-term investments 4,042 221 5.47 2,782 147 5.28 2,334 135 5.78
Investment securities:
Taxable 83,686 5,332 6.37 82,163 5,310 6.46 64,990 4,309 6.63
Tax-exempt (3) 714 79 11.06 792 100 12.63 2,150 271 12.61
Total investment securities 84,400 5,411 6.41 82,955 5,410 6.52 67,140 4,580 6.82
Loans:
Residential mortgage loans 119,083 10,952 9.20 104,176 9,699 9.31 96,998 9,018 9.30
Commercial & farm loans 43,790 4,263 9.74 41,896 4,121 9.84 38,615 3,829 9.92
Loans to state & political subdivisions 9,652 875 9.07 9,631 829 8.61 7,152 644 9.00
Other loans 13,900 1,378 9.91 14,401 1,435 9.96 13,989 1,501 10.73
Loans, net of discount (2)(3)(4) 186,425 17,468 9.37 170,104 16,084 9.46 156,754 14,992 9.56
Total interest-earning assets 274,867 23,100 8.40 255,841 21,641 8.46 226,228 19,707 8.71
Cash and due from banks 6,417 5,920 4,737
Bank premises and equipment 5,140 4,311 4,128
FASB 115 adjustment 170 218 46
Other assets 2,342 3,828 2,653
Total noninterest-bearing assets 14,069 14,277 11,564
Total assets 288,936 270,118 237,792
Liabilities and Stockholders' Equity
Interest-bearing deposits:
NOW accounts 32,644 786 2.41 29,752 688 2.31 24,152 556 2.30
Savings accounts 27,736 614 2.21 27,541 612 2.22 25,722 628 2.44
Money market accounts 29,420 1,349 4.59 27,189 1,192 4.38 23,003 1,089 4.73
Certificates of deposit 143,837 8,358 5.81 33,071 7,784 5.85 119,260 7,067 5.93
Total interest-bearing deposits 233,637 11,107 4.75 217,553 10,276 4.72 192,137 9,340 4.86
Other borrowed funds 8,129 503 6.19 9,730 591 6.07 8,031 511 6.36
Total interest-bearing liabilities 241,766 11,610 4.80 227,283 10,867 4.78 200,168 9,851 4.92
Demand deposits 19,141 17,550 14,647
Other liabilities 3,804 3,184 2,837
Total noninterest-bearing liabilities 22,945 20,734 17,484
Stockholders' equity 24,225 22,101 20,140
Total liabilities & stockholders' equity 288,936 270,118 237,792
Net interest income 11,490 10,774 9,856
Net interest spread (5) 3.60% 3.68% 3.79%
Net interest income as a percentage
of average interest-earning assets 4.18% 4.21% 4.36%
Ratio of interest-earning assets
to interest-bearing liabilities 1.14 1.13 1.13%
(1) Averages are based on daily balances.
(2) Interest includes loan origination and commitment fees of $225, $155, and
$155 for 1997, 1996, and 1995, respectively.
(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 nonaccrual 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.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Nineteen hundred ninety-seven Annual Report
___________________________________________________________________________
The following table shows the effect of changes in volume and rates on
interest income and expense. Rate/Volume variances are allocated to rate and
volume variances based upon the absolute change in each. Tax-exempt interest
revenue is shown on a tax-equivalent basis for proper comparison using a
statutory federal income tax rate of 34%.
Analysis of Changes in Net Interest Income on a Tax-Equivalent Basis
1997 vs. 1996 1996 vs. 1995
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 $ 69 $ 5 $ 74 $ 22 $ 10 $ 12
Investment securities:
Taxable 92 (70) 22 1,107 (106) 1,001
Tax-exempt (9) (12) (21) (172) 1 (171)
Total investments 83 (82) 1 935 (105) 830
Loans:
Residential mortgage loans 1,369 (116) 1,253 668 13 681
Commercial and farm loans 184 (42) 142 323 (31) 292
Loans to state & political
subdivisions 2 44 46 212 (27) 185
Other loans (50) (7) (57) 46 (112) (66)
Total loans - net of discount 1,505 (121) 1,384 1,249 (157) 1,092
Total interest income 1,657 (198) 1,459 2,206 (272) 1,934
Interest expense:
Interest bearing deposits:
NOW accounts 69 29 98 129 2 131
Savings accounts 4 (2) 2 59 (75) (16)
Money market accounts 101 56 157 174 (71) 103
Certificates of deposit 625 (51) 574 807 (90) 717
Total interest-bearing deposits 799 32 831 1,169 (234) 935
Other borrowed funds (99) 11 (88) 102 (21) 81
Total interest expense 700 43 743 1,271 (255) 1,016
Net interest income $ 957 $ (241) $ 716 $ 935 $ (17) $ 918
As can be seen from the preceding tables, tax equivalent net interest income
rose from $9,856,000 in 1995 to $10,774,000 in 1996 and increased to
$11,490,000 in 1997. In 1997, net interest income increased $716,000 while
overall spread decreased from 3.68% to 3.60%. The increased volume of
interest-earning assets generated an increase in interest income of $1,657,000
while increased volume of interest-bearing liabilities produced $700,000 of
interest expense. The change in volume resulted in an increase of $957,000 in
net interest income. The net change in rate was a negative $241,000 resulting
in a total positive net change of $716,000 when combined with change in
volume. The yield on interest-earning assets decreased 6 basis points from
8.46% to 8.40% and the average interest rate on interest-bearing liabilities
increased 2 basis points from 4.78% to 4.80%. Analysis of the Company's
current net interest income in 1997 indicates that the effects of stable
interest rates and the effect of the yield curve continuing to become more
level, has a negative effect on interest margin. Management is currently
evaluating alternatives to improve the interest spread.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
Other Operating Income
The Company achieved other operating income of $2,452,000 in 1997, which was
an increase of $1,061,000 or 76.3% from $1,391,000 in 1996. An increase of
$4,000 occurred in service charges on deposit accounts. The sale and maturity
of securities resulted in $25,000 in gains compared to $19,000 in 1996. Other
operating income decreased $12,000, or 4.8%, in 1997.
Management continues to evaluate means of increasing other operating income to
off-set the loss of net interest income described above. One approach,
recently adopted, is to apply service charges on business accounts by charging
fees on transaction activity (reduced by earnings credit based on customers'
balances) to more equitably recover costs. Management expects to use this
analysis for its other products in the near future.
Trust income of $339,000 increased 25.6% from the $270,000 earned during 1996,
primarily as the result of strong growth in traditional trust and investment
business and estate settlements. In 1998, management plans to continue to
expand small business and trust relationships by working with the community
offices and commercial lending staff. Management recently revised its trust
fees to better reflect level of service required to administer the various
accounts.
On February 24, 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. The income realized during 1997 was $994,000. Management
expects the remaining credits ($140,000) to be used during 1998.
Other Operating Expenses
Salaries and employee benefits, the largest category of noninterest expense,
increased $464,000 or 13.6% to $3.9 million in 1997 from $3.4 million in 1996,
$154,000 of the increase was the result of profit sharing expense associated
with the arbitration settlement.
Occupancy expense increased $53,000 in 1997, or 11.4%, as compared to a
similar increase of $53,000 in 1996. Furniture and equipment expense
increased $107,000 or 17.9% ($25,000 increase in 1996). These increases
reflect the addition of three offices and 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, resulted in a premium expense decrease in
1997 of $316,000 or 84.9%. Management expects the current level of FDIC
premium expense to continue in 1998.
Other expenses increased in 1997 by $248,000 or 9.9% compared to an increase
of $256,000 in 1996 and generally reflect the expenses resulting from the
additional three offices and the conversion to a new application processing
system.
Provision for Income Taxes
The provision for income taxes for 1997 increased by $366,000 to $1.7 million,
compared to the $146,000 increase in 1996, due to increased taxable earnings.
Stockholders' Equity
Stockholders' equity is evaluated in relation to total assets and the risk
associated with those assets. The greater the capital resources, the more
likely a corporation is to meet its cash obligations and absorb unforeseen
losses. For these reasons capital adequacy has been, and will continue to be,
of paramount importance.
Stockholders' equity has grown by 13.2% in 1997, 7.6% in 1996, and 12.7% in
1995 to the current level of $25.9 million. Adjustments made to equity for
unrelized holding gains and losses on available-for-sale securities resulted
in an increase of $171,000 in 1997 com-
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Nineteen hundred ninety-seven Annual Report
___________________________________________________________________________
pared to a decrease of $177,000 in 1996. Total equity was approximately 8.8%
of total assets at December 31, 1997, as compared to 8.1% at December 31,
1996.
The dividend rate is determined by the Board of Directors after considering
the Company's capital requirements, current and projected net income, and
other factors. In 1997 and 1996, 25.7% and 40.6% of net income was paid out
in dividends, respectively.
As detailed in the Consolidated Statement of Changes in Stockholders' Equity
and discussed in Footnote 2, the Company had two stock dividends. The Company
paid a one percent stock dividend in July, then in September it effected a
100% stock dividend. The one percent stock dividends resulted in 13,054
shares while the stock split increased common shares outstanding by 1,373,282
additional common shares outstanding. For the year ended December 31, 1997,
the total number of common shares outstanding was 2,746,564. For comparative
purposes, outstanding shares for prior periods were adjusted for the 1997
stock dividends in computing earnings and cash dividends per share.
There are currently three federal regulatory measures of capital adequacy.
The Company's ratios substantially exceed all federal regulatory standards as
detailed in Footnote 14 of the Consolidated Financial Statements.
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.
The Company's historical activity in this area can be seen in the Consolidated
Statement of Cash Flows from investing and financing activities.
Liquidity management is influenced by cash generated by operating activities,
investing activities and financing activities. The most important source of
funds is the deposits which are primarily core deposits (deposits from
customers with other relationships). In 1996, an additional source of funds
was $17.1 million in deposits from acquired offices. Short-term debt from the
Federal Home Loan Bank supplements the Company's availability of funds.
The Company's use of funds is shown in the investing activities section of the
Consolidated Statement of Cash Flows, where the net increase in loans is
detailed. Other significant uses of funds are capital expenditures, purchase
of loans and acquisition premiums. Surplus funds are then invested in
investment securities.
It is management's intention that (based upon current expectations and market
conditions) none of the proposed strategic technology projects will have a
material impact on liquidity of the Company, and capital expenditures will be
offset by improved operating efficiency.
Capital expenditures were $1,638,000 in 1997, $1,099,000 greater than 1996.
Major expenditures in 1997 were $450,000 to purchase, renovate and add parking
for the Canton office, as well as major improvements to the Gillett, Sayre and
Wellsboro offices; $958,000 for the software and hardware needed to implement
the new Jack Henry system and associated networking costs ($193,000 for the
IBM AS/400 was financed by a capital lease through IBM). These purchases will
allow greater operating efficiency and provide the customer with a higher
quality product.
In 1996, the Company purchased a building and lot adjacent to the Mansfield
office location for future expansion in the amount of $250,000. The Company
plans to use this area as part of the new operations/administration center and
community office that has been in the early planning stages for more than
seven years. Management anticipates that the construction will begin in late
1998 with a total current estimated cost of approximately $3.5 million.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
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.
To assure the maintenance of liquidity reserves, the Company monitors and
places various internal constraints on the level of loans relative to core
deposits and other stable funding sources; the liquidity characteristics of
investments; and the volume and maturity structure of wholesale funding.
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 it's operations, the Company is not subject to
foreign currency exchange or commodity price risk and, since the Company has
no trading portfolio, it is not subject to trading risk.
Currently the Company has equity securities that represent only 1.8% of its
investment portfolio and, therefore, equity risk is not significant.
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 1/2 have the option of changing their interest rate annually) 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).
The following table shows the cumulative static GAP for various time
intervals:
Maturity or Repricing of Company Assets and Liabilities at December 31, 1997
(in thousands) 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years Over 10 years Total
Investment securities and
interest-bearing deposits $ 4,653 $ 8,913 $ 33,969 $ 33,901 $ 4,392 $ 2,977 $ 88,805
Loans, net of unearned income
and deferred loan fees 30,192 58,048 63,126 21,948 13,382 5,352 192,048
Total interest-earning assets $ 34,845 $ 66,961 $ 97,095 $ 55,849 $ 17,774 $ 8,329 $280,853
Interest-bearing demand
and savings deposits $ 38,865 $ 13,527 $ 23,781 $ 17,501 $ - $ - $ 93,674
Certificates of deposit 21,744 42,195 56,427 22,704 1,023 - 144,093
Borrowed funds 976 2,537 908 1,007 943 493 6,864
Total interest-bearing
liabilities $ 61,585 $ 58,259 $ 81,116 $ 41,212 $ 1,966 $ 493 $244,631
Excess interest-earning
assets (liabilities) $(26,740) $ 8,702 $ 15,979 $ 14,637 $ 15,808 $ 7,836
Cumulative interest-earning
assets $ 34,845 $101,806 $198,901 $254,750 $272,524 $280,853
Cumulative interest-bearing
liabilities 61,585 119,844 200,960 242,172 244,138 244,631
Cumulative gap $(26,740) $(18,038) $ (2,059) $ 12,578 $ 28,386 $ 36,222
Cumulative interest rate
sensitivity ratio (1) 0.57 0.85 0.99 1.05 1.12 1.15
(1) Cumulative interest-earning assets divided by cumulative interest-bearing
liabilities.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Nineteen hundred ninety-seven Annual Report
___________________________________________________________________________
The previous table and the simulation models discussed below are presented assum
ing a decay rate of approximately 20% per year for the savings accounts and
NOW accounts (not in the top interest rate tier). Money market investment
accounts and NOW accounts in the top interest rate tier are primarily repriced
within the first three months.
IRA certificates of deposit represent $36.2 million and are subject to being
repriced once a year if the individual is over 59 1/2 years of age. The
Company projects the 65% of the IRAs are over 59 1/2 and would reprice if
interest rates moved up 100 basis points or more.
The loan amounts reflect the principal balances expected to be repriced as a
result of contractual amortization and anticipated early payoffs.
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, be repaid at different times and at different rate
levels. The Company has not experienced the kind of earnings volatility that
might be indicated from gap analysis.
The Company currently uses a computer simulation model to better measure the
impact of interest rate changes on net interest income. Management uses the
model as part of its risk management process that will effectively identify,
measure, and monitor the Company's risk exposure.
Numerous interest rate simulations using a variety of assumptions are used by
management to evaluate its interest rate risk exposure. A shock analysis at
December 31, 1997, indicated that a 200 basis point parallel movement in
interest rates in either direction would not have a significant adverse impact
on the Company's anticipated net interest income or the market value of assets
and liabilities over the next twelve 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 level of inflation over the last few years has been declining.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the "Act")
was signed into law on December 19, 1991. The Act addresses the
recapitalization of the bank insurance fund and is designed to limit risk
within the banking industry. Much of the impact of the legislation has taken
place and management does not believe that full implementation of the Act will
have a material impact on liquidity, capital resources or reported results of
operations in future periods.
The passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 and the Riegle Community Development and Regulatory Improvement Act
may have a significant impact upon the Company. The key provisions pertain to
interstate banking and interstate branching as well as a reduction in the
regulatory burden on the banking industry. Since September 1995, bank holding
companies have been able to acquire banks in other states without regard to
state law. In addition, banks can merge with other banks in another state
beginning in June 1997. States may adopt laws preventing interstate branching
but, if so, no out-of-state bank can establish a branch in such state and no
bank in such state may branch outside the state. Pennsylvania amended the
provisions of its banking code to authorize full interstate banking and
branching under Pennsylvania law and to facilitate the operations of interstate
banks in Pennsylvania.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
___________________________________________________________________________
Citizens Financial Services, Inc.
___________________________________________________________________________
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.
Normal examinations of the Company by the Comptroller of the Currency occurred
during 1997. The last Community Reinvestment Act performance evaluation by
the same agency during 1998 resulted in a rating of "Satisfactory Record of
Meeting Community Credit Needs."
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.
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FIRST CITIZENS NATIONAL BANK - COMMUNITY BANKING HOURS
___________________________________________________________________________
Nineteen hundred ninety-seven Annual Report
___________________________________________________________________________
FULL SERVICE
COMMUNITY BANKING HOURS
MANSFIELD*
M,T,W,Th: 8:30 am - 4:30 pm
Fri.: 8:30 am - 6:00 pm
Sat.:8:30 am - Noon
BLOSSBURG*
M,T,W,Th: 8:30 am - 4:30 pm
Fri.:8:30 am - 6:00 pm
Sat.: 8:30 am - Noon
ULYSSES*
M,T,W,Th: 8:30 am - 4:30 pm
Fri.: 8:30 am - 6:00 pm
Sat.: 8:30 am - Noon
GENESEE
M,T,W,Th: 8:30 am - 4:30 pm
Fri.: 8:30 am - 6:00 pm
Sat.: 8:30 am - Noon
SAYRE*
M,T,W,Th: 8:30 am - 4:30 pm
Fri.: 8:30 am - 6:00 pm
Sat.: 8:30 am - Noon
WELLSBORO*
M,T,W,Th: 8:30 am - 4:30 pm
Fri.: 8:30 am - 6:00 pm
Sat.: 8:30 am - Noon
TROY*
M,T,W,Th: 8:30 am - 4:30 pm
Fri.: 8:30 am - 6:00 pm
Sat.: 8:30 am - Noon
CANTON*
M,T,W,Th: 8:30 am - 4:30 pm
Fri.: 8:30 am - 6:00 pm
Sat.:8:30 am - Noon
GILLETT
Mon, Thurs: 10:00 am - 5:00 pm
Tues, Wed: 10:00 am - 2:00 pm
Fri: 10:00 am - 6:00 pm
Sat: 9:00 am - Noon
WEIS MARKET, WELLSBORO
Mon - Fri: 10:00 am - 8:00 pm
Sat & Sun: 10:00 am - 4:00 pm
* Drive-up opens at 8:00 am
<54>
___________________________________________________________________________
CITIZENS
FINANCIAL SERVICES
INCORPORATED
___________________________________________________________________________
15 SOUTH MAIN STREET 717-662-2121
MANSFIELD, PA 16933 800-326-9486
FAX 717-662-2365
DIRECTORS
Robert E. Dalton
Chairman of the Board
Bruce L. Adams
Carol J. Tama
R. Lowell Coolidge, Esquire
Larry J. Croft
John E. Novak
John M. Thomas, MD
Rudolph J. van der Hiel, Esquire
William D. VanEtten
Richard E. Wilber
DIRECTORS EMERITI
Edward Kosa
John G. Kuster
Robert J. Landy, Esquire
Robert G. Messinger
Wilber Wagner
DIRECTORS
Robert E. Dalton
Chairman of the Board
Bruce L. Adams
R. Lowell Coolidge, Esquire
Larry J. Croft
Mark L. Dalton
John E. Novak
Carol J. Tama
John M. Thomas, MD
Rudolph J. van der Hiel, Esquire
William D. VanEtten
Richard E. Wilber
President
Chief Executive Officer
OFFICERS
Administrative Services
Cynthia T. Pazzaglia
Assistant Vice President
Administrative Division Manager
Human Resources Manager
Audit/Compliance
V. Guy Abell
Auditor
Karen R. Jacobson
Assistant Auditor/Security Officer
Banking Services
Terry B. Osborne
Executive Vice President
Secretary, Citizens Financial Services, Inc.
Jerald J. Rumsey
Senior Vice President
Credit Services Manager
Allan K. Reed
Assistant Vice President
Branch Administrator
Robert L. Champion
Commercial Services Officer
Pamela A. Baldwin
Appraiser
Wendy L. Southard
Marketing Coordinator
Finance/Control
Thomas C. Lyman
Assistant Vice President
Treasurer, Citizens Financial Services, Inc.
Finance/Control Division Manager
Randall E. Black
Controller
Operations
William W. Wilson
Vice President
Operations Division Manager
Joanne W. Marvin
Banking Operations Manager
Trust and Investment Services
Philip A. Prough
Trust and Investment Services Officer
Jean A. Knapp
Trust Administrator
Sara J. Roupp
Trust Administrator
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COMMUNITY OFFICES
Toll free to all locations: 800-326-9486
MANSFIELD 717-662-2121
15 South Main Street
Mansfield, PA 16933 FAX 717-662-3278
Local Board
William J. Smith
Chairman
Anthony D. Fiamingo
Chester L. Reed
Stephen A. Saunders
William J. Waldman
Officers
Chester L. Reed
Assistant Vice President
Office Manager
Shari L. Johnson
Assistant Office Manager
Kristina M. Payne
Customer Service Counselor
BLOSSBURG 717-638-2115
300 Main Street
Blossburg, PA 16912 FAX 717-638-3178
Local Board
Thomas R. Phinney
Chairman
Terrance M. Asalone
George D. Lloyd
Susan M. Signor
William D. Zwicharowski
Officers
Terrance M. Asalone
Assistant Vice President
Office Manager
Michele E. Litzelman
Customer Service Counselor
ULYSSES 814-848-7572
502 Main Street
Ulysses, PA 16948 FAX 814-848-7633
Local Board
Ronald G. Bennett
Chairman
D. Thomas Eggler
Jerry R. McCaslin
Phillip D. Vaughn
James A. Wagner
Officers
Phillip D. Vaughn
Assistant Vice President
Office Manager
L. Abbie Lerch
Customer Service Counselor
GENESEE 814-228-3201
391 Main Street
Genesee, PA 16923 Fax 814-228-3395
Local Board
E. Gene Kosa
Chairman
William R. Austin
John K. Hyslip
Stephen B. Richard
Dennis C. Smoker
Officers
William R. Austin
Assistant Vice President
Office Manager
Christine M. Miller
Customer Service Counselor
SAYRE 717-888-6602
306 West Lockhart Street
Sayre, PA 18840 FAX 717-888-3198
Local Board
Joseph P. Burkhart, Jr.
Chairman
Blaine W. Cobb, MD
J. Robert Elsbree
William A. Richetti
Officers
William A. Richetti
Assistant Vice President
Office Manager
Antoinette G. Tracy
Customer Service Counselor
TROY 717-297-4131
103 West Main Street
Troy, PA 16947 FAX 717-297-4133
Local Board
Lyle A. Haflett
Chairman
Thomas A. Calkins, III
Richard H. Packard
David E. Carlson
Donald D. White
Office Manager
David E. Carlson
Assistant Vice President
WELLSBORO 717-724-2600
99 Main Street
Wellsboro, PA 16901 FAX 717-724-4381
Local Board
William A. Hebe, Esquire
Chairman
Robin K. Carleton
Timothy J. Gooch, CPA
James K. Stager
Jeffrey L. Wilson
Officers
Jeffrey L. Wilson
Assistant Vice President
Office Manager
Deborah A. Callahan
Customer Service Counselor
CANTON 717-673-3103
29 West Main Street
Canton, PA 17724 FAX 717-673-4573
Local Board
Roger C. Graham, Jr.
Chairman
Lester E. Hilfiger
Christopher S. Landis
Marilyn I. Scott
David L. Wright
Office Manager
Christopher S. Landis
Assistant Vice President
GILLETT 717-596-2679
P.O. Box 125
Gillett, PA 16925 FAX 717-596-4888
Local Board
Forrest M. Oldroyd
Office Manager
Helen Kay Shedden
Assistant Vice President
WEIS MARKET 800-326-9486
201 Weis Plaza
Wellsboro, PA 16901 FAX 717-724-1842
Officers
Jennifer L. Snyder
Assistant Vice President
Sales Manager
Carol L. Strong
Assistant Sales Manager
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MAC
Money Access Card
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24 Hour Automated Teller
Blossburg, Mansfield
Mansfield University
Mansfield WalMart, Weis Market
Solders and Sailors Memorial Hospital
Wellsboro, Genesee, Ulysses, Sayre
Gillett
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two inches square, top left one-third of page]
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MISSION
STATEMENT
We Recognize That Our Customers Are The Reason For Our Existence.
Our mission is to be the dominant financial services provider in our
marketplace. We will establish ourselves apart from other financial vendors
by providing service excellence to our customers through satisfied,
motivated, professional employees and a profitable range of financial services
to meet the customers' changing needs. It is also our mission to
profitably satisfy shareholder performance expectations and to be an active
citizen of the communities we serve.
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[LOGO OMITTED: F.D.I.C. Equal Housing Lender
___________________________________________________________________________
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting and Luncheon for the shareholders of Citizens Financial
Services, Inc. will be held at the Tioga County Fairgrounds Youth Building in
Whitneyville, PA on Tuesday, April 21, 1998, at 12:00 noon.
FORM 10-K
The Annual Report to the Securities and Exchange Commission, Form 10-K, will
be made available upon request.
Contact:
Thomas C. Lyman
Treasurer
Citizens Financial Services, Inc.
15 South Main Street
Mansfield, PA 16933
The Annual Report and other Company reports are also filed electronically
through the Electronic Data Gathering, Analysis, and Retrieval System
("EDGAR") which performs automated collection, validation, indexing,
acceptance, and forwarding of submissions to the Securities and Exchange
Commission (SEC) and is accessible by the public using the Internet at
http://www.sec.gov./edgarhp.htm.
TRANSFER AGENT
Citizens Financial Services, Inc.
15 South Main Street
Mansfield, PA 16933
Telephone: 717-662-2121 / 800-326-9486
SHAREHOLDER SERVICES
Shareholder inquiries and requests for assistance should be directed to the
Transfer Agent listed above.
STOCK PURCHASING INFORMATION
The stock symbol for Citizens Financial Services, Inc. is "CZFS". Citizens
Financial Services, Inc. stock is quoted Over the Counter ("OTC") on the OTC
Bulletin Board through the following Market Makers:
Market Makers
Ferris-Baker-Watts Fahnestock & Co.
6 Bird Cage Walk 1500 Walnut Street
Hollidaysburg, PA 16648 Philadelphia, PA 19102
Telephone: 800-343-5149 Telephone: 800-722-2294
Ryan, Beck & Co. Janney Montgomery Scott
80 Main Street 1601 Market Street
West Orange, NJ 07052 Philadelphia, PA 19103
Telephone: 800-342-2325 Telephone: 800-JANNEYS
Hopper Soliday & Co., Inc. PaineWebber Incorporated
1703 Oregon Pike 10 Park Street, P.O. Box 2636
Lancaster, PA 17601-4201 Concord, NH 03302
Telephone: 800-646-8647 Telephone: 800-678-0619
We invite you to mail any comments or questions to us at our E-Mail address,
which is fcnbank@epix.net. Visit our Web Site at www.firstcitizensbank.com.