UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________________ to ___________________
Commission file number 0-13222
CITIZENS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2265045
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 South Main Street, Mansfield, Pennsylvania 16933
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 662-2121
Indicate by checkmark whether the registrant (1) has filed all reports
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes__X___ No_____
The number of shares outstanding of the Registrant's Common Stock, as of
August 6, 1998 2,746,564 shares of Common Stock, par value $1.00.
Citizens Financial Services, Inc.
Form 10-Q
INDEX
Page
Part I FINANCIAL INFORMATION (UNAUDITED)
Item 1-Financial Statements
Consolidated Balance Sheet as of June 30, 1998 and
December 31, 1997 1
Consolidated Statement of Income for the Three Months and
Six Months Ended June 30, 1998 and 1997 2
Consolidated Statement of Comprehensive Income for the Three
Months and Six Months Ended June 30, 1998 and 1997 3
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2-Management's Discussion and Analysis of Financial Condition
and Results of Operations 6-15
Item 3-Quantitative and Qualitative Disclosure About Market Risk 15
Part II OTHER INFORMATION AND SIGNATURES
Item 1-Legal Proceedings 16
Item 2-Changes in Securities 16
Item 3-Defaults upon Senior Securities 16
Item 4-Submission of Matters to a Vote of Security Holders 16
Item 5-Other Information 16
Item 6-Exhibits and Reports on Form 8-K 16
Signatures 17
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, December 31,
1998 1997
ASSETS:
Cash and due from banks:
Noninterest-bearing $ 7,422,729 $ 6,099,972
Interest-bearing 4,921,855 242,387
Total cash and cash equivalents 12,344,584 6,342,359
Available-for-sale securities 21,457,755 24,826,551
Held-to-maturity securities (estimated
market value 1998,$62,781,000;
December 31, 1997, $64,490,000) 62,116,508 63,734,826
Loans (net of allowance for loan
losses 1998, $2,213,000; December 31, 1997,
$2,138,000) 193,680,740 189,909,615
Foreclosed assets held for sale 418,866 238,284
Premises and equipment 5,689,941 5,754,026
Accrued interest receivable 2,093,614 2,426,512
Other assets 1,736,338 1,578,335
TOTAL ASSETS $299,538,346 $294,810,508
LIABILITIES:
Deposits:
Noninterest-bearing $ 19,809,458 $ 19,015,857
Interest-bearing 243,038,127 237,766,917
Total deposits 262,847,585 256,782,774
Borrowed funds 6,902,280 6,864,195
Accrued interest payable 1,730,513 2,331,439
Commitment to purchase
investment securities 1,980,556
Other liabilities 1,218,630 928,638
TOTAL LIABILITIES 272,699,008 268,887,602
STOCKHOLDERS' EQUITY:
Common Stock
$1.00 par value; authorized 10,000,000
shares in 1998 and 5,000,000 shares
in 1997; issued and outstanding
2,746,564 shares in 1998 and at
December 31, 1997 2,746,564 2,746,564
Additional paid-in capital 7,180,760 7,180,760
Retained earnings 16,714,028 15,652,872
TOTAL 26,641,352 25,580,196
Net unrealized holding gains on
available-for-sale securities 197,986 342,710
TOTAL STOCKHOLDERS' EQUITY 26,839,338 25,922,906
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $299,538,346 $294,810,508
The accompanying notes are an integral part of these financial statements.
1
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
INTEREST INCOME:
Interest and fees on loans $4,343,598 $4,259,378 $ 8,646,808 $ 8,394,159
Interest on interest-bearing deposits
with banks 94,241 63,412 130,447 70,369
Interest and dividends on investments:
Taxable 1,135,146 1,315,863 2,365,807 2,629,058
Nontaxable 103,259 12,514 170,560 25,075
Dividends 23,721 20,709 45,235 38,767
Total interest and dividends on investments 1,262,126 1,349,086 2,581,602 2,692,900
TOTAL INTEREST INCOME 5,699,965 5,671,876 11,358,857 11,157,428
INTEREST EXPENSE:
Interest on deposits 2,849,998 2,779,141 5,654,209 5,420,594
Interest on borrowed funds 107,110 111,574 218,176 279,495
TOTAL INTEREST EXPENSE 2,957,108 2,890,715 5,872,385 5,700,089
NET INTEREST INCOME 2,742,857 2,781,161 5,486,472 5,457,339
Provision for possible loan losses 52,500 52,500 105,000 105,000
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 2,690,357 2,728,661 5,381,472 5,352,339
OTHER OPERATING INCOME:
Service charge income 270,290 229,722 481,928 424,487
Trust income 73,715 63,437 166,230 157,800
Other income 92,490 63,486 138,036 117,634
Realized securities gains, net 77,580 0 111,548 0
Arbitration settlement 43,871 0 172,377 884,008
TOTAL OTHER OPERATING INCOME 557,946 356,645 1,070,119 1,583,929
OTHER OPERATING EXPENSES:
Salaries and employee benefits 945,607 918,309 1,872,826 2,022,280
Occupancy expenses 126,679 121,245 262,634 258,999
Furniture and equipment expenses 178,738 148,694 357,434 298,423
Other expenses 721,834 655,557 1,493,756 1,301,675
TOTAL OTHER OPERATING EXPENSES 1,972,858 1,843,805 3,986,650 3,881,377
Income before provision for income taxes 1,275,445 1,241,501 2,464,941 3,054,891
Provision for income taxes 360,631 367,897 703,411 966,426
NET INCOME $ 914,814 $ 873,604 $ 1,761,530 2,088,465
Earnings per share $0.33 $0.32 $0.64 $0.76
Cash dividend declared $0.130 $0.230 $0.255 $0.230
Weighted average number of shares outstanding 2,746,564 2,746,564 2,746,564 2,746,564
The accompanying notes are an integral part of these financial statements.
2
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Net income $ 914,814 $ 873,604 $ 1,761,530 $2,088,465
Other comprehensive income:
Unrealized gains on securities:
Gain (loss) arising during the year $ (55,365) $ 276,574 $ (46,901) $(54,927)
Reclassification adjustment (77,580) - (172,377) -
Other comprehensive income before tax (132,945) 276,574 (219,278) (54,927)
Income tax expense related to other
comprehensive income (45,201) 94,035 (74,555) (18,675)
Other comprehensive income, net of tax (87,744) 182,539 (144,723) (36,251)
Comprehensive income $ 827,070 $ 1,056,143 $ 1,616,806 $2,052,214
The accompanying notes are an integral part of these financial statements.
3
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six months Ended
June 30,
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997
Net income $ 1,761,530 $ 2,088,465
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 105,000 105,000
Provision for depreciation and amortization 379,424 252,670
Amortization and accretion of investment
securities 164,782 190,112
Deferred income taxes 12,094 (21,494)
Realized gains on securities (172,377) 0
Realized gains on loans sold (34,061) (10,016)
Originations of loans held for sale (1,963,032) (788,250)
Proceeds from sales of loans held for sale 1,997,093 798,266
Loss on sale of foreclosed assets
held for sale 6,629 136
Increase in accrued interest receivable
and other assets 182,971 (524,591)
(Decrease) increase in accrued interest
payable and other liabilities (313,988) 762,394
Net cash provided by operating activities 2,126,065 2,852,692
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Proceeds from sales of securities 9,236,406 0
Proceeds from maturity of securities 1,500,000 3,200,000
Purchase of securities (7,696,171) (1,986,875)
Held-to-maturity securities:
Proceeds from maturity and principal
repayments of securities 8,127,273 2,979,085
Purchase of securities (8,369,580) (2,109,138)
Net (increase) decrease in loans (4,118,131) (5,274,271)
Capital expenditures (260,955) (858,783)
Proceeds from sale of foreclosed assets held
for sale 54,796 72,000
Net cash provide by
investing activities (1,526,362) (3,977,982)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 6,064,811 14,097,324
Proceeds from long-term borrowings 192,873 599,471
Repayments of long-term borrowings (194,063) (536,657)
Net increase (decrease) in short-term
borrowed funds 39,275 (8,593,801)
Dividends paid (700,374) (612,103)
Net cash provided (used) by
financing activities 5,402,522 4,954,234
Net increase in cash and cash
equivalents 6,002,225 3,828,944
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,342,359 6,458,707
CASH AND CASH EQUIVALENTS AT END OF PERIOD $12,344,584 $10,287,651
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 6,473,311 $ 6,316,963
Income taxes paid $ 600,000 $ 830,000
The accompanying notes are an integral part of these financial statements.
4
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated financial statements include the accounts
of Citizens Financial Services, Inc. and its wholly-owned
subsidiary, First Citizens National Bank (the "Bank"),
(collectively, the "Company"). All material inter-company
balances and transactions have been eliminated in
consolidation.
The accompanying interim financial statements have been
prepared by the Company without audit and, in the opinion of
management, reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the Company's
financial position as of June 30, 1998, and the results of
operations for the interim periods presented. In preparing the
consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and
revenues and expenses for the period. Actual results could differ
significantly from those estimates. For further information
refer to the consolidated financial statements and footnotes
thereto incorporated by reference in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
In July 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard Statement No.
130, "Reporting Comprehensive Income". Statement No.
130 establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial
statements. It requires that all items that are required to be
recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
presented with the same prominence as other financial statements.
Statement No. 130 requires that companies (1) classify items of
other comprehensive income by their nature in a financial
statement and (2) display paid-in capital in the equity section
of the statement of financial condition. Statement No.130 is
effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods
provided for comprehensive purposes is required, as stated in the
Consolidated Statement of Comprehensive Income on page 3 of this
report.
In February 1998, the Financial Accounting Standards Board
issued Statement No. 132, (SFAS No. 132), "Employers' Disclosure
about Pensions and Other Postretirement Benefits." This
Statement revises employers' disclosures about pension and other
Postretirement benefit plans. It standardizes the disclosure
requirements for these plans to extent practicable, requires
additional information on changes in the benefit obligation and
fair values of plan assets, eliminates certain previously
required disclosures. The Company does not expect the provisions
of this statement to have a material effect on the liquidity,
results of operations, or capital resources of the Company when
it becomes effective.
In June 1998, the Financial Accounting Standards Board
issued Statement No. 133, (SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement
establishes accounting and reporting standards for derivative
instruments and for hedging activities. Because the Company is
considering restructuring it's investment portfolio between
available-for-sale and held-to-maturity, the provisions of this
statement may have a material effect on the liquidity, results of
operations, or capital resources of the Company when it becomes
effective.
Note 2 - Earnings per Share
Earnings per share calculations give retroactive effect to
stock dividends declared by the Company. The number of shares
used in the earnings per share and dividends per share
calculation was 2,746,564 for 1998 and 1997, respectively.
5
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of
certain significant factors that have affected the Company's
financial position and operating results during the periods
indicated in the accompanying consolidated financial statements.
The results of operations for the six months ended June 30, 1998
and 1997 are not necessarily indicative of the results to be
expected for the full year.
In addition to historical information, this quarterly report
contains forward-looking statements. The forward-looking
statements contained herein are subject to certain risks and
uncertainties that could cause actual results to differ
materially from those projected in the forward-looking
statements. Important factors that might cause such a material
difference include, but are not limited to, those discussed in
the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
The following items are among the factors that could cause
actual results to differ materially from the forward-looking
statements: general economic conditions, including their impact
on capital expenditures; business conditions in the banking
industry; the regulatory environment; rapidly changing technology
and evolving banking industry standards; competitive standards;
competitive factors, including increase competition with
community, regional and national financial institutions; new
service and product offerings by competitors and price pressures;
and like items. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect
management's analysis only as of the date thereof. The Company
undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances
that arise after the date hereof. Readers should carefully
review the risk factors described in other documents the Company
files from time to time with the Securities and Exchange
Commission, including the quarterly reports on Form 10-Q and any
current reports on Form 8-K filed by the Company.
The Bank currently engages in the general business of
banking throughout its service area of Potter, Tioga and Bradford
counties in North Central Pennsylvania and Allegany, Steuben,
Chemung and Tioga counties in Southern New York. The Bank
maintains its central office in Mansfield, Pennsylvania and
presently operates banking facilities in Mansfield, Blossburg,
Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton, Gillett and the
Wellsboro Weis Market store as well as automatic teller machines
located in Soldiers and Sailors Memorial Hospital in
Wellsboro, Mansfield Wal-Mart and at Mansfield University. The
Bank's lending and deposit products are offered primarily within
the vicinity of its service area.
The Company faces strong competition in the communities it
serves from other commercial banks, savings banks, and savings
and loan associations, some of which are substantially larger
institutions than the Company's subsidiary. In addition,
personal and corporate trust services are offered by insurance
companies, investment counseling firms, and other business firms
and individuals. The Company also competes with credit unions,
issuers of money market funds, securities brokerage firms,
consumer finance companies, mortgage brokers and insurance
companies. These entities are strong competitors for virtually
all types of financial services.
In recent years, the financial services industry has
experienced tremendous change to competitive barriers between
bank and non-bank institutions. The Company not only must
compete with traditional financial institutions, but also with
other business corporations that have begun to deliver competing
financial services. Competition for banking services is based on
price, nature of product, quality of service, and in the case of
certain activities, convenience of location.
6
LOANS
Historically loans have been originated by the Bank to
customers in North Central Pennsylvania and the Southern Tier of
New York. Loans have been originated primarily through
direct loans to our existing customer base with new customers
generated by referrals from real estate brokers, building
contractors, attorneys, accountants and existing customers. The
Bank also does a limited amount of indirect loans though new and
used car dealers in the primary lending area.
All lending is governed by a lending policy which is
developed and maintained by management and approved by the board
of directors. The Bank's lending policy regarding real estate
loans is that the maximum mortgage granted on owner occupied
residential property is 80% of the appraised value or purchase
price (whichever is lower) when secured by the first mortgage on
the property (home equity, lines of credit or installments).
Home equity lines of credit or second mortgage loans are normally
originated subject to maximum mortgage liens against the property
of 80% of the current appraised value. However, our recent home
equity loan promotion allowed some borrowers with outstanding
credit to borrow 100% of the appraised value. The maximum
term for mortgage loans is 25 years for one-to four- family
residential property and 20 years for commercial and vacation
property.
DEPOSITS
The Company tiers interest-bearing transaction and savings
accounts by deposit size (larger balances receive higher rates).
The Company has been offering a wide variety of deposit
instruments, as have its competitors. Limited transaction deposit
accounts with interest rates that vary as often as daily,
unlimited transaction interest-bearing accounts, Premier 55 Club,
Premier 55 Plus Club, Gold Club, individual retirement accounts,
longer-term certificates of deposit (generally of five-year
maturity), promotional 30-month, 66-month and Roll-Up certificates
of deposit (allows the customer to adjust the interest rate up
once during the term by a maximum of 100 basis points).
The Company also offers a wide variety of IRA products
including the new Roth and Educational IRA's.
In most community offices, lobby and drive-up hours include
Wednesday afternoons as well as Saturday hours. The supermarket
office is open seven days a week with extended hours on
weekdays. The Company has eleven automated teller machines,
which are part of the MAC regional and PLUS national network.
Management recently implemented a MasterMoney debit
card program.
In addition, the Company has a telephone voice response
system to provide customers a convenient method of accessing
account information and transferring funds 24 hours a day.
TRUST SERVICES
Traditional trust, investment management and estate
settlement services are offered by the Bank.
FINANCIAL CONDITION
For the six month period ended June 30, 1998, the total
assets of the Company had an increase of $4.7 million to $299.5
million compared with an increase of $7.8 million for the same
period in 1997.
Cash and cash equivalents increased $6 million in 1998
compared with an increase of $3.8 million for the same period in
1997. Surplus funds from deposit growth and investment sales and
maturities in 1998 were temporarily placed in short-term interest
bearing investments.
7
Total investment securities decreased $5 million during the
first six months of 1998 compared with a decrease of $2.3 million
for the same period in 1997. The decrease reflects $18.9 million
consisting of security sales (U S Treasury securities
available-for-sale), normal maturities and principal repayments.
The purchase of $16.1 million securities were primarily
obligations of state and political subdivisions ($5.4 million),
mortgage-backed securities ($7.7 million), and equities
($.9 million).
Net loan balances of $193.7 million increased $3.8 million
or 2% compared to an increase of $5.2 million or 2.9% for the
first six months of 1998 and 1997, respectively. This modest
growth was the result of the continued competition from local
institutions.
During the remainder of 1998, management expects that loan
demand will continue to be moderate as a result of the continued
aggressive competitions even though we are experiencing a
generally healthy local economy. This competition will be
especially evident in the Mansfield area with two new branches
being constructed by local competitors.
The major concentrations of loans continue to be in
residential real estate, primarily consisting of home equity
loans, lines of credit, installments, and first mortgages . The
Bank also expects to be active in lending to local state and
political subdivisions during the remainder of 1998.
The loan portfolio consists of the following (in thousands):
June 31, December 31, June 31,
1998 1997 1997
Real estate loans - residential $125,941 $123,054 $ 118,876
Real estate loans - commercial 26,969 27,480 25,925
Real estate loans - agricultural 8,151 8,769 10,729
Loans to individuals for household,
family and other purchases 13,557 13,905 13,399
Commercial and other loans 10,162 9,485 9,423
State and political subdivision
loans 11,182 9,457 9,451
Total 195,962 192,150 187,803
Less: unearned income on loans 68 102 132
Loans, net of unearned income $195,894 $192,048 $187,671
Deposit growth increased by $6.1 million or 2.4% compared to
the first six months of 1997 when deposits increased by $14.1
million or 5.9%. Deposit growth slowed primarily because of
the competitive interest rate environment and alternative
investment vehicles available to our customer.
Borrowed funds remained virtually the same during the first
six months of 1998 compared with a decrease of $8.5 million in
1997. The decrease in 1997 resulted from repayments of
short-term borrowing to the Federal Home Loan Bank. The
Company's daily cash requirements or short-term investments are
met by using the financial instruments available through the
Federal Home Loan Bank.
8
CAPITAL
The Company has computed its risk-based capital ratios as follows (dollars
in thousands):
June 30, December 31,
1998 1997
Tier I - Total stockholders' equity $ 26,839 $ 25,923
Less: Unrealized holding gains (losses)
on available-for-sale securities 198 343
Goodwill and core deposit intangible 782 836
Tier I, net 25,859 24,744
Tier II - Allowance for loan losses(1) 2,192 2,123
Total qualifying capital $ 28,051 $ 26,867
Risk-adjusted on-balance sheet assets $164,829 $161,940
Risk-adjusted off-balance sheet
exposure (2) 10,494 7,919
Total risk-adjusted assets $175,323 $169,859
June 30, December 31,
Ratios: 1998 1997
Tier I risk-based capital ratio 14.8% 14.6%
Federal minimum required 4.0 4.0
Total risk-based capital ratio 16.0% 15.8%
Federal minimum required 8.0 8.0
Leverage ratio (3) 8.7% 8.5%
Federal minimum required 4.0 4.0
(1) Allowance for loan losses is limited to 1.25% of total risk-adjusted
assets.
(2) Off-balance sheet exposure is caused primarily by standby letters of
credit and loan commitments with a remaining maturity exceeding one year.
These obligations have been converted to on-balance sheet credit equivalent
amounts and adjusted for risk.
(3) Tier I capital divided by average total assets.
See the discussion of liquidity below for details regarding future expansion
plans and the impact on capital.
RESULTS OF OPERATIONS
Net income for the three month period ending June 30, 1998 was $915,000
an increase of $41,000 or 4.7% over the $874,000 for the 1997 related period.
During the six months period net income was $1,762,000 a decrease of $327,000
from the 1997 related period. Earnings per share was $.64 during the first
half of 1998 compared with $.76 during the comparable 1997 period.
The large decrease was the result of an arbitration settlement realized in
the first quarter of 1997 discussed below.
Net interest income, the most significant component of earnings, is the
amount by which interest generated from earning assets exceeds interest
expense on liabilities. Net interest income for the current six month period,
after provision for loan losses, was $5,382,000, an increase of $29,000 or
.5% compared with an increase of $360,000 or 7.2% during the same period
in 1997.
9
Analysis of Average Balances and Interest Rates (1)
June 30, 1998 June 30, 1997 June 30, 1996
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
$ $ % $ $ % $ $ %
ASSETS
Short-term investments:
Interest-bearing deposits at banks 4,699 130 5.58 2,594 70 5.44 5,556 146 5.28
Investment securities:
Taxable 77,268 2,411 6.29 83,719 2,668 6.43 76,067 2,461 6.51
Tax-exempt(3) 7,152 259 7.30 605 38 12.67 895 56 12.58
Total investment securities 84,420 2,670 6.38 84,324 2,706 6.47 76,962 2,517 6.58
Loans:
Residential mortgage loans 123,353 5,479 8.96 114,416 5,220 9.20 99,183 4,563 9.25
Commercial & farm loans 45,699 2,123 9.37 43,241 2,090 9.75 41,123 2,022 9.89
Loans to state & political
subdivisions 10,520 452 8.66 9,758 410 8.47 8,700 382 8.83
Other loans 13,846 747 10.88 14,659 810 11.14 14,161 818 11.62
Loans, net of discount (2)(3)(4) 193,418 8,801 9.18 182,074 8,530 9.45 163,167 7,785 9.59
Total interest-earning assets 282,537 11,601 8.28 268,992 11,306 8.48 245,685 10,448 8.55
Cash and due from banks 6,446 6,397 5,264
Bank premises and equipment 5,753 4,789 4,173
FASB 115 adjustment 319 131 275
Other assets 1,412 4,630 7,676
Total noninterest-bearing assets 13,930 15,947 17,388
Total assets 296,467 284,939 263,073
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts 32,772 368 2.26 31,672 376 2.39 26,849 295 2.21
Savings accounts 26,576 292 2.22 27,901 307 2.22 27,206 301 2.22
Money market accounts 36,346 864 4.79 26,749 594 4.48 26,111 566 4.36
Certificates of deposit 144,994 4,130 5.74 143,610 4,143 5.82 130,159 3,823 5.91
Total interest-bearing deposits 240,688 5,654 4.74 229,932 5,420 4.75 210,325 4,985 4.77
Other borrowed funds 7,041 218 6.24 9,095 280 6.21 7,461 231 6.23
Total interest-bearing liabilities 247,729 5,872 4.78 239,027 5,700 4.81 217,786 5,216 4.82
Demand deposits 19,525 18,624 16,500
Other liabilities 2,863 3,918 7,178
Total noninterest-bearing liabilities 22,388 22,542 23,678
Stockholders' equity 26,350 23,370 21,609
Total liabilities & stockholders'
equity 296,467 284,939 263,073
Net interest income 5,729 5,606 5,232
Net interest spread (5) 3.50% 3.67% 3.74%
Net interest income as a percentage
of average interest-earning assets 4.09% 4.20% 4.28%
Ratio of interest-earning assets
to interest-bearing liabilities 1.14 1.13 1.13
(1) Averages are based on daily balances.
(2) Includes loan origination and commitment fees.
(3) Tax exempt interest revenue is shown on a tax equivalent basis for proper
comparison using a statutory federal income tax rate of 34%.
(4) Income on non-accrual loans is accounted for on a cash basis, and the loan
balances are included in interest-earning assets.
(5) Interest rate spread represents the difference between the average rate
earned on interest-earning assets and the average rate paid on interest-bearing
liabilities.
As described in the table above, the yield on earning
assets, on a tax-equivalent basis, was 8.28% and 8.48% during the
first six months of 1998 and 1997, respectively (a decline of 20
basis points). The cost of funds was 4.78% and 4.81% during the
same six month period (a decrease of 3 basis points).
10
In comparing the average interest cost of 1998 versus 1997,
NOW accounts decreased 13 basis points, savings accounts remained
the same, and money market accounts increased by 31
basis points (the result of an increase in higher balance
accounts). The interest rate on certificates of deposit
decreased by 8 basis points.
As described above, the Company has experienced a narrowing
interest margin percentage during the six months of 1998. The
current flat yield curve has limited the Company's opportunity to
increase margin with new business as the existing investments and
loans mature or repay. The Company continues to review various
pricing and investment strategies to enhance deposit growth while
maintaining or expanding the current interest margin.
Analysis of Changes in Net Interest Income of a Tax Equivalent Basis (in
thousands)
1998 vs. 1997 (1) 1997 vs. 1996 (1)
Change in Change Total Change in Change Total
Volume in Rate Change Volume in Rate Change
Interest income:
Short-term investments:
Interest-bearing deposits
at banks $ 58 $ 2 $ 60 $ (80) $ 4 $ (76)
Investment securities:
Taxable (202) (55) (257) 243 (36) 207
Tax-exempt 230 (9) 221 (18) 0 (18)
Total investments 28 (64) (36) 225 (36) 189
Loans:
Residential mortgage loans 391 (132) 259 695 (38) 657
Commercial and farm loans 104 (71) 33 102 (34) 68
Loans to state & political
subdivisions 33 9 42 43 (15) 28
Other loans (44) (19) (63) 34 (42) (8)
Total loans - net of
discount (2)(3)(4) 484 (213) 271 874 (129) 745
Total interest income 570 (275) 295 1,019 (161) 858
Interest expense:
Interest bearing deposits:
NOW accounts 14 (22) (8) 56 25 81
Savings accounts (15) 0 (15) 8 (2) 6
Money market accounts 226 44 270 14 14 28
Certificates of deposit 42 (55) (13) 387 (67) 320
Total interest-bearing
deposits 267 (33) 234 465 (30) 435
Other borrowed funds (64) 2 (62) 50 (1) 49
Total interest expense 203 (31) 172 515 (31) 484
Net interest income $ 367 $ (244) $ 123 $ 504 $ (130) $ 374
(1)The portion of the total change attributable to both volume
and rate changes during the year has been allocated to volume and
rate components based upon the absolute dollar amount of the
change in each component prior to allocation
The above table details the change in net interest income
and shows an increase of $570,000 resulting from volume changes
in investments and loans. The volume of interest expense
increased the cost of interest-bearing deposits by $203,000. The
positive gain from volume of $367,000 when combined with decrease
of income due to rate of $244,000 resulted in a net increase of
$123,000 compared to a net increase of $374,000 for the same
period in 1997.
11
There has been a reduction in both interest volume and
interest rate 1998/1997 compared to 1997/1996. Increasing
competition has resulted in lower deposit and loan volumes. The
current flat yield curve continues to provide few opportunities
to increase margin spread.
In view of the narrowing of net interest margins discussed
above, management has begun to implement a number of long term
growth strategies that are expected to increase loan volumes
and build other customer relationships.
The provision for loan losses was unchanged at $105,000 in
both of the six month periods. This provision was appropriate
given management's quarterly review of the allowance for loan
losses that is based on the following information; migration
analysis of delinquent and non accrual loans, estimated future
losses on loans, recent review of large problem credits, local
and national economic conditions, historical loss experience, OCC
qualitative adjustments, purchase of loans through acquisitions
and peer comparisons.
Total other operating income decreased $514,000 compared
with the same period in 1997. Trust income increased $8,000,
service charge income increased $57,000, and other income
increased $20,000. Net realized securities gains increased by
$172,000, during the current six month period compared to 1997,
as there were no sales during the 1997 period. On February 27,
1997, the Bank reached an arbitration settlement with a vendor.
The settlement was for legal remedies associated with
relationships with this vendor. The Bank received $884,000 in
cash and $250,000 in credits to be applied to future
expenditures, which if unused will expire within two years. The
amount received by the Bank is net of fees associated with the
arbitration. During the six months ended June 30, 1998,
arbitration settlement income was $112,000.
Total other operating expense was $3,987,000 in the first
six months of 1998 reflecting an increase of $105,000 over the
1997 period. Salaries and benefit's expense decreased by
$150,000 for the current six month period reflecting normal merit
increases offset by a reduction of profit sharing expense during
the same period in 1997 (an accrual to salaries and benefit
expense of $154,000 for profit sharing reflecting the additional
arbitration income).
Occupancy expense increased by $4,000 while furniture and
equipment expenses increased by $59,000, for the additional
expenses relating to the conversion to the new Jack Henry and
Associates application software and IBM AS\400 computer.
Other expenses increased $192,000 or 14.8% in the first six
months of 1998 over the 1997 related period. Increases in other
professional fees of $55,000 reflect management's efforts to
implement future strategic growth strategies.
Other expenses also include software maintenance and expense
$20,000, telephone and data communication expense $29,000 that
are other costs associated with the new data processing system
and network. Management expects these costs to moderate over the
remainder of 1998.
The provision for income taxes was $703,000 during the first
six months of 1998 compared with $966,000 during the 1997 related
period. Income before taxes decreased $590,000 in the
1998 period over the same period in 1997.
LIQUIDITY
Liquidity is a measure of the Company's ability to
efficiently meet normal cash flow requirements of both borrowers
and depositors. To maintain proper liquidity, the Company uses
funds management policies along with its investment policies to
assure it can meet its financial obligations to depositors,
credit customers and shareholders. Liquidity is needed to meet
depositors' withdrawal demands, extend credit to meet borrowers'
needs, provide funds for normal operating expenses and cash
dividends, and fund other capital expenditures.
12
As detailed in the Consolidated Statement of Cash Flows,
positive net cash was provided from operating, investing and
financing activities. The major components have been discussed
previously in the financial condition section relating to
investments, loans and deposits.
During the six months of 1998 there was $261,000 of capital
expenditures, $598,000 less than the capital acquisitions during
the same period in 1997
Management is currently renting two properties as a
temporary solution to the space limitations it has experienced at
the main office for the last seven years. Management is
evaluating what alternatives are available for the locations of
future new branch and/or operations center that may take place
late 1998 or early 1999 with a total estimated cost of
approximately $3.5 million.
Management believes that it has sufficient resources to
complete these projects from its normal operations. It is
anticipated that these changes will have a long-term positive
effect on revenues, efficiency and the capacity for future
growth.
Liquidity is achieved primarily from temporary or short-term
investments in the Federal Home Loan Bank of Pittsburgh, PA
("FHLB"), and investments that mature less than one year. The
Company also has a maximum borrowing capacity at the FHLB of
approximately $97.5 million as an additional source of liquidity.
There are no short-term borrowings from the FHLB as of June
30,1998.
Apart from those matters described above, management does not
currently believe that there are any current trends, events or
uncertainties that would have a material impact on capital.
CREDIT QUALITY RISK
The following table identifies amounts of loan losses and
nonperforming loans. Past due loans are those that were
contractually past due 90 days or more as to interest or
principal payments(dollars in thousands).
June 30, December 31,
1998 1997 1996 1995 1994
Non accruing loans $ 1,685 $ 1,169 $ 844 $ 762 $ 1,557
Impaired loans 382 382 414 697
Accrual loans - 90 days or
more past due 137 170 723 689 267
Total nonperforming loans $ 2,204 $ 1,721 $ 1,981 $ 2,148 $ 1,824
Other real estate owned $ 419 $ 238 $ 164 $ 208 $ 168
Loans outstanding at end of
period $195,962 $192,150 $182,581 $161,886 $157,144
Unearned income 68 102 168 259 575
Loans, net of unearned income $195,894 $192,048 $182,413 $161,627 $156,569
Nonperforming loans as percent
of loans, net of unearned
income 1.13% 0.90% 1.09% 1.33% 1.16%
Total nonperforming assets as a
percent loans of net unearned
income 1.34% 1.02% 1.18% 1.46% 1.27%
13
Transactions in the allowance for loan losses were as follows (in
thousands):
At June 30, Years Ended December 31,
1998 1997 1996 1995 1994
Balance, beginning of period $2,138 $1,995 $1,833 $1,721 $1,516
Charge-offs (45) (83) (64) (69) (68)
Recoveries 15 16 21 18 18
Provision for loan losses 105 210 205 163 255
Balance, end of period $2,213 $2,138 $1,995 $1,833 $1,721
The allowance is maintained at a level to absorb potential
future loan losses. The allowance is increased by provisions
charged to operating expense and reduced by net charge-offs.
Management establishes the level of the allowance and the
quarterly provision based on its evaluation of the loan
portfolio, current and projected economic conditions, the
historical loan loss experience, present and prospective
financial condition of borrowers, the level of nonperforming
assets, and other relevant factors. While management evaluates
all of this information quarterly, future adjustments to the
Allowance may be necessary if economic conditions differ
substantially from the assumptions used in making the evaluation.
In addition, various regulatory agencies, as an integral part of
their examination process, review the Company's allowance for
loan losses. Such agencies may require the Company to recognize
additions to the allowance based on their evaluation of
information available to them at the time of their examination.
Based on this process, management currently believes that the
allowance is adequate to offset any exposure that may exist for
under-collateralized or uncollectible loans.
The Company does not accrue interest income on impaired
loans. Subsequent cash payments received are applied to the
outstanding principal balance or recorded as interest income,
depending upon management's assessment of its ultimate ability to
collect principal and interest.
GENERAL
The majority of assets and liabilities of a financial
institution are monetary in nature and, therefore, differ greatly
from most commercial and industrial companies that have
significant investments in fixed assets or inventories. However,
inflation does have an important impact on the growth of total
assets and on noninterest expenses, which tend to rise during
periods of general inflation. The level of inflation over the
last few years has been declining.
Management is aware of the possibility of exposure by banks
to a computer problem known as the "Year 2000 Problem" or the
"Millennium Bug" (the inability of some computer programs to
distinguish between the year 1900 and the year 2000). The
Company is in the process of assessing the cost and extent of
vulnerability of the Company's computer systems to the problem.
Modifications or replacements of computer systems to attain Year
2000 compliance have begun, and the Company expects to attain
Year 2000 compliance and institute appropriate testing of its
modifications and replacements before the Year 2000 change date.
The Company's recent conversion to Jack Henry and Associates for
core banking application software and the purchase
of a new IBM AS/400 hardware system on which to run the core
processing software, has greatly minimized the exposure to these
problems as both systems are expected to be compliant. The
Company believes that, with modifications to existing software
and conversions to new software, the Year 2000 problem will not
pose a significant operational problem for the Company.
However, because most computer systems are, by their very nature,
interdependent, it is possible that non-compliant third party
computers could effect the Company's computer systems. The
Company has taken steps to communicate with the third parties
with which 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.
14
Various congressional bills have been passed and other
proposals have been made for significant changes to the banking
system, including provisions for: limitation on deposit insurance
coverage; changing the timing and method financial institutions
use to pay for deposit insurance; expanding the power of banks by
removing restrictions on bank underwriting activities; tightening
the regulation of bank derivatives' activities; allowing
commercial enterprises to own banks; and permitting bank holding
companies or the bank to own or control affiliates that engage in
securities, mutual funds and insurance activities.
Aside from those matters described above, management does
not believe that there are any trends, events or uncertainties
which would have a material adverse impact on future operating
results, liquidity or capital resources, nor is it aware of any
current recommendations by the regulatory authorities (except as
described herein) which, if they were to be implemented, would
have such an effect, although the general cost of compliance with
numerous and multiple federal and state laws and regulations does
have, and in the future may have, a negative impact on the
Company's results of operations.
Item 3-Qualitative and Quantitative Disclosure About Market Risk
In the normal course of conducting business activities, the
Company is exposed to market risk, principally interest rate
risk, through the operations of its banking subsidiary. Interest
rate risk arises from market driven fluctuations in interest
rates that affect cash flows, income, expense and values of
financial instruments. Interest rate risk is managed by a
management and a committee of the board of directors.
No material changes in market risk strategy occurred during
the current period. A detailed discussion of market risk is
provided in the SEC Form 10-K for the period ended December 31,
1997.
15
PART II - OTHER INFORMATION AND SIGNATURES
Item 1 - Legal Proceedings
Management is not aware of any litigation that would have a
material adverse effect on the consolidated financial position of
the Company. Any pending proceedings are ordinary, routine
litigation incidental to the business of the Company and its
subsidiary. In addition, no material proceedings are pending or
are known to be threatened or contemplated against
the Company and its subsidiary by government authorities.
Item 2 - Changes in Securities - Nothing to report.
Item 3 - Defaults Upon Senior Securities - Nothing to report.
Item 4 - Submission of Matters to a Vote of Security Holders -
Nothing to report.
Item 5 - Other Information - Nothing to report.
Item 6 - Exhibits and reports on Form 8-K.
(a) Exhibits.
(3)(i) - Articles of Incorporation of the Corporation, as
amended. (Incorporated by Reference to Exhibit (3)(i) to the
Annual Report of Form 10-K for the fiscal year ended December 31,
1995, as filed with the Commission on March 26, 1996.)
(3)(ii)- By-laws of the Corporation, as amended. (Incorporated
by Reference to Exhibit (3)(ii) to the Annual Report of Form 10-K
for the fiscal year ended December 31, 1995, as filed with the
Commission on March 26, 1996.)
(4) - Instruments Defining the Rights of Shareholders.
(Incorporated by reference to the Registrants Registration
Statement No.2-89103 on Form S-14, as filed with the Commission
on February 17, 1984.)
(10) - Material Contracts. Employment Agreement between the
Company and Richard E. Wilber. (Incorporated by reference to the
Registrants 1997 Form 10-K, Exhibit (10), as filed with the
Commission on March 17, 1998.)
(11) - Computation of Earnings Per Share included on page 5 of
this Form 10-Q.
(27) - Financial Data Schedules, which are submitted
electronically to the Securities and Exchange Commission for
information only and not filed.
(b) Reports on Form 8-K - None.
16
Signatures
Pursuant to the requirements of the Securities Exchange Act
of 1934, the undersigned Registrant has duly caused this report
to be signed on its behalf by the undersigned hereunto duly
authorized.
Citizens Financial Services, Inc.
(Registrant)
August 6, 1998 /s/ Richard E. Wilber
By: Richard E. Wilber
President and Chief Financial
Officer
(Principal Executive Officer)
August 6, 1998 /s/ Thomas C. Lyman
By: Thomas C. Lyman
Treasurer
(Principal Financial &
Accounting Officer
17
EXHIBITS INDEX
(3)(i) - Articles of Incorporation of the Corporation, as
amended. (Incorporated by Reference to Exhibit (3)(i) to the
Annual Report of Form 10-K for the fiscal year ended December 31,
1995, as filed with the Commission on March 26, 1996.)
(3)(ii)- By-laws of the Corporation, as amended. (Incorporated
by Reference to Exhibit (3)(ii) to the Annual Report of Form 10-K
for the fiscal year ended December 31, 1995, as filed with the
Commission on March 26, 1996.)
(4) - Instruments Defining the Rights of Shareholders.
(Incorporated by reference to the Registrants Registration
Statement No.2-89103 on Form S-14, as filed with the Commission
on February 17, 1984.)
(10) - Material Contracts. Employment Agreement between the
Company and Richard E. Wilber. (Incorporated by reference to the
Registrants 1997 Form 10-K, Exhibit (10), as filed with the
Commission on March 17, 1998.)
(11) - Computation of Earnings Per Share included on page 5 of
this Form 10-Q.
(27) - Financial Data Schedule, which are submitted
electronically to the Securities and Exchange Commission for
information only and not filed.
18