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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q



[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

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 or other jurisdiction of incorporation or organization)       (I.R.S. Employer Identification No.)


First Citizens National Bank
15 South Main Street
Mansfield, Pennsylvania 16933
(Address of principal executive offices)(Zip Code)

Registrant's telephone number, including area code: (570) 662-2121

Indicate by checkmark whether the registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes__X___ No_____

Indicate by checkmark whether the registrant is an accelerated filer (as described in Rule 12b-2 of the Exchange Act). Yes____ No __X__

The number of shares outstanding of the Registrant's Common Stock, as of May 1, 2004, 2,812,888 shares of Common Stock, par value $1.00.

 
     
 
Citizens Financial Services, Inc.
Form 10-Q

INDEX
 
PAGE
Part I   FIANCIAL INFORMATION
 
Item I -   Financial Statements (unaudited)
 
Consolidated Balance Sheet as of March 31, 2004 and
   December 31, 2003
1
Consolidated Statement of Income for the
   Three Months Ended March 31, 2004 and 2003
2
Consolidated Statement of Comprehensive Income for the
   Three Months Ended March 31, 2004 and 2003
3
Consolidated Statement of Cash Flows for the
   Three Months Ended March 31, 2004 and 2003
4
Notes to Consolidated Financial Statements
5
Item 2 -   Management’s Discussion and Analysis of Financial
   Condition and Results of Operations
6-17
Item 3 -   Quantitative and Qualitative Disclosure About Market
   Risk
18
Item 4 - Controls and Procedures
18
 
 
Part II   OTHER INFORMATION
 
Item 1 -   Legal Proceedings
19
Item 2 – Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
19
Item 3 -   Defaults upon Senior Securities
19
Item 4 -   Submission of Matters to a Vote of Security Holders
19
Item 5 -   Other Information
19
Item 6 -   Exhibits and Reports on Form 8-K
20
Signatures
21
 
 
     
 
 
CITIZENS FINANCIAL SERVICES, INC.
 
 
CONSOLIDATED BALANCE SHEET
 
 
(UNAUDITED)
 
 
 
 
 
 
March 31
December 31
(in thousands, except per share data)
2004
2003
ASSETS:
 
 
Cash and due from banks:
 
 
Noninterest-bearing
$ 8,731
$ 9,624
Interest-bearing
3,349
327
Total cash and cash equivalents
12,080
9,951
 
 
 
Available-for-sale securities
109,618
106,587
 
 
Loans (net of allowance for loan losses of $3,874 and $3,620)
313,549
314,037
 
 
Premises and equipment
10,479
10,645
Accrued interest receivable
1,790
1,703
Goodwill
6,905
6,905
Core deposit intangible
869
978
Bank owned life insurance
7,221
7,142
Other assets
6,320
5,930
 
TOTAL ASSETS
$ 468,831
$ 463,878
 
LIABILITIES:
 
 
Deposits:
 
 
Noninterest-bearing
$ 44,377
$ 46,820
Interest-bearing
342,698
338,871
Total deposits
387,075
385,691
Borrowed funds
26,444
27,796
Notes payable
7,500
7,500
Accrued interest payable
1,547
1,888
Commitment to purchase investment securities
4,094
-
Other liabilities
2,644
2,474
TOTAL LIABILITIES
429,304
425,349
STOCKHOLDERS' EQUITY:
 
 
Common Stock
 
 
$1.00 par value; authorized 10,000,000 shares;
 
 
issued 2,909,849 shares in 2004 and 2003, respectively
2,910
2,910
Additional paid-in capital
10,213
10,213
Retained earnings
27,413
26,455
TOTAL
40,536
39,578
Accumulated other comprehensive income
996
956
Less: Treasury Stock, at cost
 
 
96,962 shares for 2004 and 2003, respectively
(2,005)
(2,005)
TOTAL STOCKHOLDERS' EQUITY
39,527
38,529
TOTAL LIABILITIES AND
 
 
STOCKHOLDERS' EQUITY
$ 468,831
$ 463,878
 
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 

 
 Page 1    
 
 
CITIZENS FINANCIAL SERVICES, INC.
 
 
CONSOLIDATED STATEMENT OF INCOME
 
 
(UNAUDITED)
 
 
 
Three Months Ended
March 31,
(in thousands, except per share data)
2004
2003
INTEREST INCOME:
 
 
Interest and fees on loans
$ 5,348
$ 5,403
Interest-bearing deposits with banks
5
4
Investment securities:
 
Taxable
892
894
Nontaxable
85
137
Dividends
62
82
TOTAL INTEREST INCOME
6,392
6,520
INTEREST EXPENSE:
 
 
Deposits
1,964
2,238
Borrowed funds
213
75
TOTAL INTEREST EXPENSE
2,177
2,313
NET INTEREST INCOME
4,215
4,207
Provision for loan losses
-
135
NET INTEREST INCOME AFTER
 
 
PROVISION FOR LOAN LOSSES
4,215
4,072
NON-INTEREST INCOME:
 
 
Service charges
731
711
Trust
181
124
Gains on loans sold
9
96
Realized securities gains, net
287
259
Earnings on bank owned life insurance
79
-
Other
109
164
TOTAL NON-INTEREST INCOME
1,396
1,354
NON-INTEREST EXPENSES:
 
 
Salaries and employee benefits
1,925
1,897
Occupancy
286
278
Furniture and equipment
169
177
Professional fees
154
162
Amortization
109
109
Other
1,028
1,008
TOTAL NON-INTEREST EXPENSES
3,671
3,631
Income before provision for income taxes
1,940
1,795
Provision for income taxes
447
430
NET INCOME
$ 1,493
$ 1,365
 
 
Earnings Per Share
$ 0.53
$ 0.48
Cash Dividend Declared
$ 0.190
$ 0.180
 
 
 
Weighted average number of shares outstanding
2,812,888
2,854,688
 
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
 Page 2    

CITIZENS FINANCIAL SERVICES, INC.
 
 
 
 
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
 
 
 
 
(UNAUDITED)
 
 
 
 
 
Three Months Ended
 
March 31
(in thousands)
 
2004
 
2003
Net income
 
$ 1,493
 
$ 1,365
Other comprehensive income:
 
 
 
 
Unrealized gains (losses) on available for sale securities
348
 
(340)
 
Less: Reclassification adjustment for gains included in net income
(287)
(259)
Other comprehensive income (loss) before tax
 
61
 
(599)
Income tax expense (benefit) related to other comprehensive income
 
21
 
(203)
Other comprehensive income (loss), net of tax
 
40
 
(396)
Comprehensive income
 
$ 1,533
 
$ 969
 
The accompanying notes are an integral part of these unaudited consolidated financial statements
 Page 3    

CITIZENS FINANCIAL SERVICES, INC.
 
 
CONSOLIDATED STATEMENT OF CASH FLOWS
 
 
(UNAUDITED)
Three Months Ended
 
March 31,
(in thousands)
2004
2003
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net income
$ 1,493
$ 1,365
Adjustments to reconcile net income to net
 
 
cash provided by operating activities:
 
 
Provision for loan losses
-
135
Depreciation and amortization
229
222
Amortization of intangible assets
109
109
Amortization and accretion of investment securities
226
264
Deferred income taxes
(65)
5
Realized gains on securities
(287)
(259)
Realized gains on loans sold
(9)
(96)
Earnings on bank owned life insurance
(79)
-
Originations of loans held for sale
(535)
(5,117)
Proceeds from sales of loans held for sale
624
5,388
Loss on sale of foreclosed assets held for sale
2
-
Increase in accrued interest receivable
(87)
(2)
Increase in other assets and intangibles
(251)
(303)
Decrease in accrued interest payable
(341)
(413)
Increase in other liabilities
170
109
Net cash provided by operating activities
1,199
1,407
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Available-for-sale securities:
 
 
Proceeds from sales of available-for-sale securities
8,230
4,906
Proceeds from maturity and principal repayments of securities
5,242
11,841
Purchase of securities
(11,891)
(25,033)
Net increase in loans
(156)
(6,159)
Acquisition of premises and equipment
(38)
(164)
Proceeds from sale of foreclosed assets held for sale
45
-
Net cash provided by (used in) investing activities
1,432
(14,609)
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
Net increase in deposits
1,384
8,481
Proceeds from long-term borrowings
24
307
Net increase (decrease) in short-term borrowed funds
(1,376)
5,796
Dividends paid
(534)
(509)
Net cash provided by (used in) financing activities
(502)
14,075
 
 
 
Net increase in cash and cash equivalents
2,129
873
 
 
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
9,951
11,594
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$ 12,080
$ 12,467
 
 
 
Supplemental Disclosures of Cash Flow Information:
 
 
Interest paid
$ 2,518
$ 2,726
 
 
 
Income taxes paid
$ -
$ -
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
 
 Page 4    
 
 
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation

Citizens Financial Service, 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”), and its subsidiary, First Citizens Insurance Agency, Inc. All material inter-company balances and transactions have been eliminated in consolidation.

The accompanying interim financial statements have been prepared by the Company without audit and, in the opinion of management, reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company's financial position as of March 31, 2004, 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, 2003.

Note 2 - Earnings per Share

Earnings per share calculations give retroactive effect to a 1 percent stock dividend declared by the Company in July 2003. The number of shares used in the earnings per share and dividends per share calculation was 2,812,888 for 2004 and 2,854,688 for 2003.

Note 3 – Income Tax Expense

Income tax expense is less than the amount calculated using the statutory tax rate, primarily the result of tax-exempt income earned from state and municipal securities and loans and investment in tax credits.

Note 4 – Employee Benefit Plans

Components of Net Periodic Benefit Cost - Defined Benefit Plans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For a detailed disclosure on the Company's pension and employee benefits plans, please refer to Note 8 of the Company's
Consolidated Financial Statements included in the 2003 Annaul Report on Form 10-K.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following sets forth the components of net periodic benefit cost of the defined benefit plans for the three months
 
ended March 31, 2004 and 2003, respectively (dollars presented in thousands).
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2004
2003
 
 
 
 
 
Service cost
 
 
$ 84
 
$ 85
 
 
 
 
 
Interest cost
 
 
74
 
67
 
 
 
 
 
Expected return on plan assets
 
(83)
 
(132)
 
 
 
 
 
Net amortization and deferral
 
6
 
81
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net periodic benefit cost
 
$ 81
 
$101
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employer Contributions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Company previously disclosed in its financial statements for the year ended December 31, 2003, that
 
it expected to contribute $459,000 to its pension plan in 2004. As of March 31, 2004, no contributions have been made.

Note 5 – Pending Acquisition

On February 25, 2004 the Company entered into a definitive agreement whereby the Company has purchased two branch locations from Legacy Bank. Under the terms of the agreement, the Company will acquire approximately $24 million in loans and $21 million in deposits, in addition to assuming the lease costs of the branches and offering of employment to certain employee’s. This acquisition has been approved by the Company’s board of directors and is expected to close on June 4, 2004.
 
 
 Page 5    
 
 
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT
 
    Forward-looking statements may prove inaccurate. We have made forward-looking statements in this document, and in documents that we incorporate by reference, that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of operations of Citizens Financial Services, Inc., First Citizens National Bank, First Citizens Insurance Agency, Inc. or the combined company. When we use such words as "believes," "expects,” "anticipates," or similar expressions, we are making forward-looking statements. For a variety of reasons, actual results could differ materially from those contained in or implied by forward-looking statements:

INTRODUCTION

The following is management's discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in its accompanying consolidated financial statements for Citizens Financial Service, Inc., a bank holding company and its subsidiary (the Company). Our Company's consolidated financial condition and results of operations consist almost entirely of our wholly owned subsidiary’s (First Citizens National Bank) financial conditions and results of operations. Management’s discussion and analysis should be read in conjunction with the preceding March 31, 2004 financial information. The results of operations for the three months ended March 31, 2004 and 2003 are not necessarily indicative of the results you may expect for the full year.

Our Company currently engages in the general business of banking throughout our service area of Potter, Tioga and Bradford counties in North Central Pennsylvania and Allegany, Steuben, Chemung and Tioga counties in Southern New York. Our lending and deposit products and investment services are offered primarily within the vicinity of our service area.

Risk identification and management are essential elements for the successful management of the Company. In the normal course of business, the Company is subject to various types of risk, including interest rate, credit and liquidity risk.

Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the direction and frequency of changes in interest rates. Interest rate risk results from various re-pricing frequencies and the maturity structure of the financial instruments owned by the Company. The Company uses its asset/liability management policy to control and manage interest rate risk.

Credit risk represents the possibility that a customer may not perform in accordance with contractual terms. Credit risk results from loans with customers and purchasing of securities. The Company’s primary credit risk is in the loan portfolio. The Company manages credit risk by adhering to an established credit policy and through a disciplined evaluation of the adequacy of the allowance for loan losses. Also, the investment policy limits the amount of credit risk that may be taken in the investment portfolio.

 
 Page 6    
 
 
Liquidity risk represents the inability to generate or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers and obligations to depositors. The Company has established guidelines within its asset/liability policy to manage liquidity risk. These guidelines include contingent funding alternatives.

Readers should carefully review the risk factors described in other documents our Company files, from time to time, with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the year ended December 31, 2003, filed by our Company and any Current Reports on Form 8-K filed by our Company.

We face strong competition in the communities we serve from other commercial banks, savings banks, savings and loan associations and credit unions, some of which are substantially larger institutions than our subsidiary. In addition, insurance companies, investment-counseling firms, and other business firms and individuals offer personal and corporate trust services. We also compete with credit unions, issuers of money market funds, securities brokerage firms, consumer finance companies and mortgage brokers. These entities are strong competitors for virtually all types of financial services.

In recent years, the financial services industry has experienced tremendous change to competitive barriers between bank and non-bank institutions. We not only must compete with traditional financial institutions, but also with other business corporations that have begun to deliver competing financial services. Competition for banking services is based on price, nature of product, quality of service, and in the case of certain activities, convenience of location.

TRUST AND INVESTMENT SERVICES

Our Trust and Investment Department services range from professional estate settlement services through management of complex trust accounts to investment management and custody of securities. Our Trust and Investment Department manages retirement accounts for many area companies and individuals. We also manage many individual IRAs, both rollover and contributory.
The Investment Department offers full service brokerage services in selected locations throughout the Bank’s market area and appointments can be made in any First Citizens National Bank branch.
The Bank offers annuities and life insurance through our insurance subsidiary, First Citizens Insurance Agency, Inc.

FINANCIAL CONDITION

Total assets (shown in the Consolidated Balance Sheet) have increased 1.1% since year-end 2003 to $468.8 million. Total loans decreased .1% to $317.4 million and investment securities increased 2.8% to $109.6 million since year-end 2003. Total deposits increased .4% to $387.1 million since year-end 2003. Explanations of variances will be described within the following appropriate sections.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents totaled $12,080,000 at March 31, 2004 compared to $9,951,000 on December 31, 2003. Noninterest-bearing cash decreased $893,000 since year-end 2003, while interest-bearing cash increased $3,022,000 during that same period. We continue to experience significant monthly principal repayments from our mortgage backed securities portfolio and reinvest the proceeds back into the investment portfolio for the first quarter of 2004.

We believe the liquidity needs of the Company, are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, and the portion of the investment and loan portfolios that mature within one year. These sources of funds will enable the Company to meet cash obligations and off-balance sheet commitments as they come due.

INVESTMENTS

Our investment portfolio increased by $3,031,000 or 2.8% from December 31, 2003 to March 31, 2004. During the first quarter of 2004 we were able to increase our investments primarily as the result of a purchase of $15,841,000 of U.S. Agency Mortgage-backed securities, of which $4,094,000 was committed to purchase at quarter end, as a result of the reinvestment of investment sales proceeds and principal repayments received during the quarter.
 
 Page 7    
 
 
Management monitors the earnings performance and the effectiveness of the liquidity of the investment portfolio on a regular basis. Through active balance sheet management and analysis of the securities portfolio, the Company maintains sufficient liquidity to satisfy depositor requirements and various credit needs of its customers.

LOANS

The Company’s loan demand remained flat during the first three months of 2004. We anticipate loan demand will pickup during the remainder of 2004 as traditionally the first quarter tends to lag the rest of the year, along with signs of an improving economy, which should stimulate demand on the commercial lending side of the equation. With the pending acquisition we expect this also to enhance our ability to expand upon the new relationships being acquired. The Company’s lending is focused in the north central Pennsylvania market and the southern tier of New York. The composition of our loan portfolio consists principally of retail lending, which includes single-family residential mortgages and other consumer lending, and commercial lending primarily to locally owned small businesses. New loans are generated primarily from direct loans to our existing customer ba se, with new customers generated by referrals from real estate brokers, building contractors, attorneys, accountants and existing customers.

As shown in the following tables (dollars in thousands), the change in total loans decreased slightly by $234,000 or .1% for the period compared to December 31, 2003. Residential mortgage lending is a principal business activity and one our Company expects to continue by providing a full complement of competitively priced conforming, nonconforming and home equity mortgages.

 
March 31,
December 31,
 
2004
2003
 
Amount
%
Amount
%
Real estate:
 
 
 
 
Residential
$ 186,620
58.8
$ 186,117
58.6
Commercial
57,447
18.1
57,370
18.1
Agricultural
7,167
2.2
7,594
2.4
Loans to individuals
 
 
 
 
for household, family and other purchases
12,333
3.9
13,145
4.1
Commercial and other loans
16,530
5.2
16,219
5.1
State & political subdivision loans
37,326
11.8
37,212
11.7
Total loans
317,423
100.0
317,657
100.0
Less allowance for loan losses
3,874
 
3,620
 
Net loans
$ 313,549
 
$ 314,037
 

 
March 31, 2004/
 
December 31, 2003
 
Change
 
Amount
%
Real estate:
 
 
Residential
$ 503
0.3
Commercial
77
0.1
Agricultural
(427)
(5.6)
Loans to individuals
 
 
for household, family and other purchases
(812)
(6.2)
Commercial and other loans
311
1.9
State & political subdivision loans
114
0.3
Total loans
$ (234)
(0.1)

Although loan demand has slowed compared to the refinancing boom we have experienced over the last several years, we expect loan originations to pick up during the remainder of the year. We believe that our continued emphasis on training branch office personnel and the focus on flexibility and fast “turn around time” will continue to aid in growing our loan portfolio.

Our focus on commercial lending continues to be expanded over the past several years with the establishment of a core group of commercial lenders to handle a higher volume of small business loans.

 
 Page 8    
 
 
ALLOWANCE FOR LOAN LOSSES

As shown in the following table (dollars in thousands), the Allowance for Loan Losses as a percentage of loans increased from 1.14% to 1.22%, at December 31, 2003 and March 31, 2004, respectively. The dollar amount of the reserve increased $254,000, since year-end 2003. The increase is a result of no provision in the first three months less net recoveries. Gross charge-offs for the first three months of 2004 were $49,000, while recoveries were $303,000, of which $299,000 was related to one borrower, which was previously charged-off in the third quarter of 2003.

 
March 31,
December 31,
2004
2003
2002
2001
2000
Balance, at beginning of period
$ 3,620
$ 3,621
$ 3,250
$ 2,777
$ 2,270
Provision charged to income
-
435
435
445
610
Recoveries on loans previously
 
 
 
 
 
Charged against the allowance
303
116
115
175
55
 
3,923
4,172
3,800
3,397
2,935
Loans charged against the allowance
(49)
(552)
(179)
(147)
(158)
Balance, at end of year
$ 3,874
$ 3,620
$ 3,621
$ 3,250
$ 2,777
 
 
 
 
 
 
Allowance for loan losses as a percent
 
 
 
 
 
of total loans
1.22%
1.14%
1.21%
1.20%
1.06%
 
 
 
 
 
 
Allowance for loan losses as a percent
 
 
 
 
 
of non-performing loans
213.91%
134.62%
119.94%
149.56%
382.51%

The adequacy of the allowance for loan losses is subject to a formal analysis by management of the Company. Management deems the allowance to be adequate to absorb inherent losses probable in the portfolio, as of March 31, 2004. The Company has disclosed in its annual report on Form 10-K the process and methodology supporting the loan loss provision.

BANK OWNED LIFE INSURANCE

During the second quarter of 2003 the Company elected to purchase $7,000,000 of bank owned life insurance to offset future employee benefit costs. The use of life insurance policies will provide the bank with an asset that will generate earnings to partially offset the current costs of benefits, and eventually (at the death of the insureds) provide partial recovery of cash outflows associated with the benefits.

DEPOSITS

Traditional deposits continue to be the most significant source of funds for the Company. As shown in the following tables (dollars in thousands), deposits increased $1,384,000 or .4%, since December 31, 2003. As of March 31, 2004, non-interest-bearing deposits decreased by $2,443,000, while NOW accounts and certificates of deposit increased by $1,199,000 and $1,810,000, respectively. Non-interest-bearing deposits decreased largely due to funding needs of local school districts and the loss of a large account during the quarter. NOW accounts increased primarily as a result marketing efforts to attract new customers and balances within this category.

 
March 31,
December 31,
 
2004
2003
 
Amount
%
Amount
%
Non-interest-bearing deposits
$ 44,377
11.5
$ 46,820
12.1
NOW accounts
58,300
15.1
57,101
14.8
Savings deposits
37,646
9.7
37,629
9.8
Money market deposit accounts
43,383
11.2
42,582
11.0
Certificates of deposit
203,369
52.5
201,559
52.3
Total
$ 387,075
100.0
$ 385,691
100.0

 
March 31, 2004/
 
December 31, 2003
 
Change
 
Amount
%
Non-interest-bearing deposits
$ (2,443)
(5.2)
NOW accounts
1,199
2.1
Savings deposits
17
0.0
Money market deposit accounts
801
1.9
Certificates of deposit
1,810
0.9
Total
$ 1,384
0.4

 
 Page 9    
 
 
BORROWED FUNDS

Borrowed funds decreased $1,352,000 during the first three months of 2004. The decrease occurred primarily within our cash management repurchase agreements with one customer relationship. The Company's daily cash requirements or short-term investments are met by using the financial instruments available through the Federal Home Loan Bank.

In September 2003, the Company borrowed $1.1 million from its line of credit with an unrelated financial institution to buy back 41,800 shares of treasury stock from an estate.

NOTES PAYABLE

In December 2003, the Company formed a special purpose entity, Citizens Financial Statutory Trust I (“the Entity”), to issue $7,500,000 of floating rate obligated mandatory redeemable securities as part of a pooled offering. The rate is determined quarterly and floats based on the 3 month LIBOR plus 2.80%. At March 31, 2004, the rate was 3.91%. The Entity may redeem them, in whole or in part, at face value after December 17, 2008. The Company borrowed the proceeds of the issuance from the Entity in December 2003 in the form of a $7,500,000 note payable, which is included in the liabilities section of the Company’s balance sheet. Debt issue costs of $75,000 have been capitalized and are being amortized through the first call date. The first quarterly payment was due and made March 17, 2004.
Under current accounting rules, the Company’s minority interest in the Entity was recorded at the initial investment amount and is included in the other assets section of the balance sheet. The Entity is not consolidated as part of the Company’s consolidated financial statements.

STOCKHOLDERS’ EQUITY

We evaluate stockholders’ equity in relation to total assets and the risk associated with those assets. The greater the capital resource, 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.

Total Stockholders’ Equity was $39,527,000, at March 31, 2004 compared to $38,529,000, at December 31, 2003, an increase of $998,000 or 2.6%. In the first three months, the Company earned $1,564,000 and declared dividends of $534,000, a dividend payout ratio of 34.1% of net income.

All of the Company’s investment securities are classified as available-for-sale making this portion of the Company’s balance sheet more sensitive to the changing market value of investments. Accumulated other comprehensive income increased $40,000 compared to December 31, 2003 as result of interest rate movements.

The Company has also complied with standards of well capitalized mandated by the banking regulators. The Company’s primary regulators have established “risk-based” capital requirements designed to measure capital adequacy. Risk-based capital ratios reflect the relative risks associated with various assets entities hold in their portfolios. A weight category of 0% (lowest risk assets), 20%, 50%, or 100% (highest risk assets), is assigned to each asset on the balance sheet. The Company’s computed risk-based capital ratios are as follows (dollars in thousands):

 
March 31,
December 31,
2004
2003
Total capital (to risk-weighted assets)
Amount
 
Ratio
Amount
 
Ratio
Company
$ 41,713
 
14.32%
$ 40,655
 
14.07%
For capital adequacy purposes
23,302
 
8.00%
23,115
 
8.00%
To be well capitalized
29,128
 
10.00%
28,894
 
10.00%
 
 
 
 
 
 
 
Tier I capital (to risk-weighted assets)
 
 
 
 
 
 
Company
$ 38,067
 
13.07%
$ 37,042
 
12.82%
For capital adequacy purposes
11,651
 
4.00%
11,557
 
4.00%
To be well capitalized
17,477
 
6.00%
17,336
 
6.00%
 
 
 
 
 
 
 
Tier I capital (to average assets)
 
 
 
 
 
 
Company
$ 38,067
 
8.40%
$ 37,042
 
8.50%
For capital adequacy purposes
18,480
 
4.00%
17,437
 
4.00%
To be well capitalized
23,101
 
5.00%
21,796
 
5.00%
 
 Page 10    
 
 
 
On April 4, 2001, our Company filed a Registration Statement on Form S-3 establishing a Dividend Re-Investment Plan (DRIP), which was effective for the second quarter dividend in 2001. As of March 31, 2004 we have 405 shareholders participating representing 317,176 shares and the total number of shares purchased since the inception of the plan is 18,416.

RESULTS OF OPERATIONS

OVERVIEW OF THE INCOME STATEMENT

The Company had net income of $1,493,000, for the first three months of 2004. Earnings per share, for the respective period were $0.53. Net income was $1,365,000, for the first three months of 2003, which equates to earnings per share of $0.48. The return on assets and the return on equity, for the three months of 2004, were 1.29% and 15.72%. Details of the reasons for this change are discussed on the following pages.

NET INTEREST INCOME

Net interest income, the most significant component of earnings, is the amount by which interest generated from earning assets exceeds interest expense on interest-bearing liabilities.

Net interest income, for the first three months of 2004, after provision for loan losses, was $4,215,000, an increase of $143,000, compared to an increase of $48,000, at March 31, 2003. The Bank experienced an increase in average earning assets since March 31, 2003 of 8.4%, which came primarily from our continued efforts to grow our existing offices.

The following table sets forth the 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:   
 
 Page 11    
 

 
March 31, 2004
March 31, 2003
March 31, 2002
 
Average
 
Average
Average
 
Average
Average
 
Average
 
Balance (1)
Interest
Rate
Balance (1)
Interest
Rate
Balance (1)
Interest
Rate
(dollars in thousands)
$
$
%
$
$
%
$
$
%
ASSETS
 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
 
Interest-bearing deposits at banks
2,577
5
0.79
1,383
4
1.17
1,482
6
1.64
Total short-term investments
2,577
5
0.79
1,383
4
1.17
1,482
6
1.64
Investment securities:
 
 
 
 
 
 
 
 
 
Taxable
95,711
973
4.07
83,719
1,000
4.78
92,701
1,404
6.06
Tax-exempt (3)
7,637
128
6.70
12,200
207
6.79
16,264
280
6.89
Total investment securities
103,348
1,101
4.26
95,919
1,207
5.03
108,965
1,684
6.18
Loans:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
187,097
3,301
7.16
180,351
3,279
7.37
166,371
3,266
7.96
Commercial & farm loans
81,063
1,384
6.92
75,487
1,506
8.09
70,731
1,416
8.12
Loans to state & political subdivisions
37,015
570
6.25
29,437
470
6.48
24,520
420
6.95
Other loans
12,634
284
9.12
13,299
303
9.24
13,719
334
9.87
Loans, net of discount (2)(3)(4)
317,809
5,539
7.07
298,574
5,558
7.55
275,341
5,436
8.01
Total interest-earning assets
423,734
6,645
6.36
395,876
6,769
6.93
385,788
7,126
7.49
Cash and due from banks
8,135
 
 
8,945
 
 
8,989
 
 
Bank premises and equipment
10,592
 
 
11,168
 
 
11,818
 
 
Other assets
18,617
 
 
9,214
 
 
9,092
 
 
Total non-interest earning assets
37,344
 
 
29,327
 
 
29,899
 
 
Total assets
461,078
 
 
425,203
 
 
415,687
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
NOW accounts
58,341
48
0.33
51,981
61
0.48
50,294
74
0.60
Savings accounts
37,449
26
0.28
34,347
36
0.43
32,747
43
0.53
Money market accounts
44,273
103
0.94
45,959
142
1.25
48,596
212
1.77
Certificates of deposit
202,764
1,787
3.57
203,151
1,999
3.99
199,697
2,298
4.67
Total interest-bearing deposits
342,827
1,964
2.32
335,438
2,238
2.71
331,334
2,627
3.22
Other borrowed funds
32,805
213
2.63
11,772
75
2.58
13,458
96
2.89
Total interest-bearing liabilities
375,632
2,177
2.35
347,210
2,313
2.70
344,792
2,723
3.20
Demand deposits
43,169
 
 
37,838
 
 
35,901
 
 
Other liabilities
4,287
 
 
4,039
 
 
2,322
 
 
Total non-interest-bearing liabilities
47,456
 
 
41,877
 
 
38,223
 
 
Stockholders' equity
37,990
 
 
36,116
 
 
32,672
 
 
Total liabilities & stockholders' equity
461,078
 
 
425,203
 
 
415,687
 
 
Net interest income
 
4,468
 
 
4,456
 
 
4,403
 
Net interest spread (5)
 
 
4.01%
 
 
4.23%
 
 
4.29%
Net interest income as a percentage
 
 
 
 
 
 
 
 
 
of average interest-earning assets
 
 
4.28%
 
 
4.56%
 
 
4.63%
Ratio of interest-earning assets
 
 
 
 
 
 
 
 
 
to interest-bearing liabilities
 
 
1.13
 
 
1.14
 
 
1.12
 
 
 
 
 
 
 
 
 
 
(1) Averages are based on daily averages.
 
 
 
 
 
 
 
 
 
(2) Includes loan origination and commitment fees.
 
 
 
 
 
 
 
 
 
(3) Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using
 
 
 
 
 
a statutory federal income tax rate of 34%.
 
 
 
 
 
 
 
 
 
(4) Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets.
 
 
(5) Interest rate spread represents the difference between the average rate earned on interest-earning assets
 
 
 
and the average rate paid on interest-bearing liabilities.
 
 
 
 
 
 
 
 

 
 Page 12    
 

  We continue to experience an attractive interest margin percentage during the first three months of 2004; however our margin is starting to narrow as compared to the same time period in 2003 and 2002. Currently, the yield curve is extremely steep beyond 3 months. Most of the Company's investments, loans, deposits and borrowings are priced or re-priced along the three month to five-year portion of the yield curve and a more normal yield curve should enable us to maintain our current favorable net interest margin. We continue to review various pricing and investment strategies to enhance deposit growth while maintaining or expanding the current interest margin.

   The following table shows the effect of changes in volume and rate on interest income and expense. Tax-exempt interest revenue is shown on a tax-equivalent basis for proper comparison using a statutory federal income tax rate of 34%. Income tax adjustments of $62,000 and $94,000 for investments and $191,000 and $155,000 for loans at March 31, 2004 and March 31, 2003 have been made accordingly to the table below (dollars in thousands):

 
2004 vs. 2003 (1)
2003 vs. 2002 (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
$ 3
$ (2)
$ 1
$ -
$ (2)
$ (2)
Investment securities:
 
 
 
 
 
 
Taxable
133
(160)
(27)
(160)
(244)
(404)
Tax-exempt
(76)
(3)
(79)
(69)
(4)
(73)
Total investments
57
(163)
(106)
(229)
(248)
(477)
Loans:
 
 
 
 
 
 
Residential mortgage loans
121
(99)
22
264
(251)
13
Commercial & farm loans
106
(228)
(122)
95
(5)
90
Loans to state & political subdivisions
117
(17)
100
80
(30)
50
Other loans
(15)
(4)
(19)
(11)
(20)
(31)
Total loans, net of discount
329
(348)
(19)
428
(306)
122
Total Interest Income
389
(513)
(124)
199
(556)
(357)
Interest Expense:
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
NOW accounts
7
(20)
(13)
2
(15)
(13)
Savings accounts
3
(13)
(10)
2
(9)
(7)
Money Market accounts
(5)
(34)
(39)
(12)
(58)
(70)
Certificates of deposit
(4)
(208)
(212)
39
(338)
(299)
Total interest-bearing deposits
1
(275)
(274)
31
(420)
(389)
Other borrowed funds
137
1
138
(3)
(18)
(21)
Total interest expense
138
(274)
(136)
28
(438)
(410)
Net interest income
$ 251
$ (239)
$ 12
$ 171
$ (118)
$ 53
 
 
 
 
 
 
 
(1) The portion of the total change attributable to both volume and rate changes during the year has been allocated
 
to volume and rate components based upon the absolute dollar amount of the change in each component prior to allocation.

As can be seen from the preceding tables, tax equivalent net interest income rose from $4,403,000, in 2002, to $4,456,000, in 2003, and increased to $4,468,000, in 2004. In the period ending March 31, 2004, net interest income increased $12,000, while overall spread decreased from 4.23% to 4.01%. The increased volume of interest-earning assets generated an increase in interest income of $389,000 while increased volume of interest-bearing liabilities produced $138,000 of interest expense. The change in volume resulted in an increase of $251,000 in net interest income. The net change in rate resulted in a negative $239,000, resulting in a total positive net change of $12,000, when combined with change in volume. The yield on interest-earning assets decreased 57 basis points from 6.93% to 6.36% and the average interest rate on interest-bearing liabilities decreased 35 basis points, from 2.70% to 2.35%, because of the previously described changes to the yield curve.

 
 Page 13    
 
 
PROVISION FOR LOAN LOSSES

   For the three-month period, ended March 31, 2004 we did not provide any provision as a result of our quarterly review of the allowance for loan losses being adequately reserved, compared to $135,000, for the same period in 2003.

This provision was appropriate given management's quarterly review of the allowance for loan losses that are 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 and peer comparisons.

NON-INTEREST INCOME
Non-interest income as detailed below increased $42,000 or 3.1%, for the first three months of 2004, when compared to the same period in 2003. Service charge income continues to be the primary source of non-interest income. For the first three months, account service charges totaled $731,000 compared to $711,000 last year. Trust income increased for the three-month period as the result of estate fees in the 2004 period and partial recovery of the market. Other income decreased $55,000 for the first three months of 2004, when compared to the same period in 2003. This decrease is due to $40,000 less mortgage servicing income being booked in the first three months of 2004 as a direct result of less loans being originated for sale on the secondary market. Gains on loans sold decreased $87,000 also as a result of a slow down that we have experienced in the refinancing boom that has taken place over the last two and a half years.

The following table shows the breakdown of non-interest income for the three months ended March 31, 2004 and 2003(dollars in thousands):

 
Three months ended
 
 
 
March 31,
Change
 
2004
2003
Amount
%
Service charges
$ 731
$ 711
$ 20
2.8
Trust
181
124
57
46.0
Gains on loans sold
9
96
(87)
(90.6)
Realized securities gains, net
287
259
28
10.8
Earnings on bank owned life insurance
79
-
79
N/A
Other
109
164
(55)
(33.5)
Total
$ 1,396
$ 1,354
$ 42
3.1

In an effort to take advantage of current market conditions, we elected to sell and reinvest approximately $8,230,000 of investment securities in the first three months of 2004, which resulted in $287,000 of security gains.

We continue to evaluate means of increasing non-interest income. Our approach is to apply service charges on business transaction accounts by charging fees on transaction activity (reduced by earnings credit based on customers' balances) to more equitably recover costs. We expect to continue this analysis for our other products.

NON-INTEREST EXPENSES

Total non-interest expense, as detailed below, increased $40,000 or 1.1%, for the first three months of 2004, when compared to the same period in 2003. The increase in salaries and employee benefits is primarily the result of increased pension expense of $75,000 combined with a decrease of $54,000 of salary expense, which is the result of primarily no CEO salary for the first three months of 2004.

 
 Page 14    
 
 
The following tables reflect the breakdown of non-interest expense and professional fees as of March 31, 2004 and 2003(dollars in thousands):

 
Three months ended
 
 
 
March 31,
Change
 
2004
2003
Amount
%
Salaries and employee benefits
$ 1,925
$ 1,897
$ 28
1.5
Occupancy
286
278
8
2.9
Furniture and equipment
169
177
(8)
(4.5)
Professional fees
154
162
(8)
(4.9)
Amortization
109
109
-
-
Other
1,028
1,008
20
2.0
Total
$ 3,671
$ 3,631
$ 40
1.1


 
Three months ended
 
 
 
March 31,
Change
2004
2003
Amount
%
Other professional fees
$ 103
$ 113
$ (10)
(8.8)
Legal fees
15
23
(8)
(34.8)
Examinations and audits
36
26
10
38.5
Total
$ 154
$ 162
$ (8)
(4.9)

 PROVISION FOR INCOME TAXES

The provision for income taxes were $447,000 for the three-month period ended March 31, 2004 compared to $430,000, for the same period in 2003. The increase was primarily a result of increased taxable income.

We have entered into two limited partnership agreements to establish low-income housing projects in our market area. As a result of these agreements for tax purposes, we have recognized $319,600 out of a total $911,000 from one project and $86,600 out of a total $385,000 on the second project, which was completed in November 2001. A total of approximately $1,290,000 of tax credits is anticipated over a ten-year period.

LIQUIDITY

Liquidity is a measure of our Company's ability to efficiently meet normal cash flow requirements of both borrowers and depositors. To maintain proper liquidity, we use funds management policies along with our investment policies to assure we can meet our financial obligations to depositors, credit customers and stockholders. Liquidity is needed to meet depositors' withdrawal demands, extend credit to meet borrowers' needs, provide funds for normal operating expenses and cash dividends, and fund other capital expenditures.

Our Company's historical activity in this area can be seen in the Consolidated Statement of Cash Flows from investing and financing activities.

Cash generated by operating activities, investing activities and financing activities influences liquidity management. The most important source of funds is the deposits that are primarily core deposits (deposits from customers with other relationships). Short-term debt from the Federal Home Loan Bank supplements our Company's availability of funds. Another source of short-term liquidity is the sale of loans if needed.

Our Company's use of funds is shown in the investing activity section of the Consolidated Statement of Cash Flows, where the net loan activity is presented. Other significant uses of funds include capital expenditures, purchase of loans and acquisition premiums. Surplus funds are then invested in investment securities.

Capital expenditures during the first three months of 2004 were $38,000, $126,000 less than the same period in 2003.
 
Our Company achieves additional liquidity primarily from temporary or short-term investments in the Federal Home Loan Bank of Pittsburgh, PA, and investments that mature in less than one year. The Company also has a maximum borrowing capacity at the Federal Home Loan Bank of approximately $186 million as an additional source of liquidity.

    Apart from those matters described above, management does not currently believe that there are any current trends, events or uncertainties that would have a material impact on capital.
 
 Page 15    
 
 
CREDIT QUALITY RISK

The following table identifies amounts of loan losses and non-performing loans. Past due loans are those that were contractually past due 90 days or more as to interest or principal payments (dollars in thousands).

 
March 31,
December 31,
 
2004
2003
2002
2001
2000
Non-performing loans:
 
 
 
 
 
Non-accruing loans
$ 480
$ 578
$ 1,064
$ 985
$ 488
Impaired loans
1,204
1,926
1,916
1,077
199
Accrual loans - 90 days or
 
 
 
 
 
more past due
127
185
39
111
39
Total non-performing loans
1,811
2,689
3,019
2,173
726
Foreclosed assets held for sale
821
305
221
408
508
Total non-performing assets
$ 2,632
$ 2,994
$ 3,240
$ 2,581
$ 1,234
Non-performing loans as a percent of loans
 
 
 
 
 
net of unearned income
0.57%
0.85%
1.01%
0.80%
0.28%
Non-performing assets as a percent of loans
 
 
 
 
 
net of unearned income
0.83%
0.94%
1.09%
0.95%
0.47%

Interest does not accrue on non-accrual loans. Subsequent cash payments received are applied to the outstanding principal balance or recorded as interest income, depending upon management's assessment of its ultimate ability to collect principal and interest.

INTEREST RATE AND MARKET RISK MANAGEMENT

    The objective of interest rate sensitivity management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest sensitivity imbalances and the market value risk of assets and liabilities.

    Because of the nature of our operations, we are not subject to foreign currency exchange or commodity price risk and, since our Company has no trading portfolio, it is not subject to trading risk.

    Currently, our Company has equity securities that represent only 3.3% of our 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 and short-term borrowings. Savings deposits, NOW accounts and money market investor accounts are considered core deposits and are not short-term interest sensitive (except for the top-tier money market investor accounts which are paid current market interest rates).
 
    Gap analysis, one of the methods used by us to analyze interest rate risk, does not necessarily show the precise impact of specific interest rate movements on our Company's net interest income because the re-pricing of certain assets and liabilities is discretionary and is subject to competitive and other pressures. In addition, assets and liabilities within the same period may, in fact, be repaid at different times and at different rate levels. We have not experienced the kind of earnings volatility that might be indicated from gap analysis.

    Our Company currently uses a computer simulation model to better measure the impact of interest rate changes on net interest income. We use the model as part of our risk management process that will effectively identify, measure, and monitor our Company's risk exposure.

    We use numerous interest rate simulations employing a variety of assumptions to evaluate our interest rate risk exposure. A shock analysis during the first quarter of 2004, indicated that a 200 basis point movement in interest rates in either direction would have a minor impact on our Company's anticipated net interest income over the next twenty-four months.
 
 Page 16    
 
 
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 non-interest expenses, which tend to rise during periods of general inflation. The action by the Federal Reserve of decreasing short-term interest rates will help ensure that the level of inflation remains at a relatively low level.
 
    Various congressional bills have been passed and other proposals have been made for significant changes to the banking system, including provisions for: limitation on deposit insurance coverage; changing the timing and method financial institutions use to pay for deposit insurance; and tightening the regulation of bank derivatives' activities.
 
    Aside from those matters described above, we do not believe that there are any trends, events or uncertainties, which would have a material adverse impact on future operating results, liquidity or capital resources. We are not aware of any current recommendations by the regulatory authorities (except as described herein) which, if they were to be implemented, would have such an effect, although the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have, a negative impact on our Company's results of operations.
 
 Pag 17    
 
 
Item 3-Quantitative and Qualitative 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 and was discussed previously in this Form 10-Q. Management and a committee of the board of directors manage interest rate risk.

    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, 2003.

Item 4-Control and Procedures

We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, within 90 days prior to the filing date of this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission filings. No significant changes were made to our internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation.
 Page 18    

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 and use of Proceeds – Note applicable.   

Item 3 - Defaults Upon Senior Securities – Not applicable.

Item 4 - Submission of Matters to a Vote of Security Holders

Citizens Financial Services held its Annual Meeting of Shareholders on April 20, 2004, for the purpose of electing three directors and to transact such other business as would properly come before the meeting. Results of shareholder voting on these individuals were as follows:

1.Election of Class 3 Directors whose term will expire in 2007
 
 
 

 For    

 Withhold  Authority

 John E. Novak

 2,281,654

 56,075

 Rudolph J. van der Hiel

 2,281,419

 56,309

 Mark L. Dalton

     2,278,619    

 59,109

   
        The total shares voted at the annual meeting were 2,337,729.

Item 5 - Other Information – None
 
 Page 19    
 
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)(ii) to the Quarterly Report of Form 10-Q for the period ended December 31, 1999, as filed with the Commission on May 11,2000.)

(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, 2003, as filed with the Commission on April 29, 2004.)
(4) - Instruments Defining the Rights of Stockholders. (Incorporated by reference to the Registrant's Registration Statement No.2-89103 on Form S-14, as filed with the Commission on February 17, 1984.)

(10) - Material Contracts. Consulting and Non-Compete Agreement with Richard E. Wilber, Former Executive Officer of our company. (Incorporated by Reference to Exhibit (10) to the Annual Report of Form 10-K for the fiscal year ended December 31, 2003, as filed with the Commission on March 18, 2004.)
 
 (31.1) - 302 Certification of Principal Executive Officer/Chief Financial Officer

 (32.1) - Certification of Principal Executive Officer/Chief Financial Officer
 
 (99.1) - Independent accountant's review of financial statements for the period ended March 31, 2004.
 

(b) Reports on Form 8-K – Earnings release entitled “Citizens Financial Services, Inc. Releases 2003 Year-End Earnings” filed January 21, 2004. Press release issued by Citizens Financial Services, Inc. titled “First Citizens National Bank Purchases Bradford County Legacy Bank Offices” filed February 26, 2004. Press release issued by Citizens Financial Services, Inc. titled “Citizens Financial Services, Inc. Appoints New President” filed March 8, 2004. Earnings release issued by Citizens Financial Services, Inc. titled “Citizens Financial Services, Inc. Reports First Quarter earnings by 9.4% Over One Year Ago” filed April 15, 2004.

 
 Page 20    
 
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)
 
 		  
 		  
 
Date: May 4, 2004 By:   /s/ Randall E. Black
 
  President (Principal Executive Officer and Principal Financial Officer)

 
 Page 21