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, 1995
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 1, 1995, 1,347,323 shares of Common Stock, par value $1.00.
<PAGE>
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, 1995 and
December 31, 1994 1
Consolidated Statement of Income for the
Three Months and Six Months Ended June 30, 1995 and 1994 2
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 1995 and 1994 3
Notes to Consolidated Financial Statements 4
Item 2-Management's Discussion and Analysis of Financial Condition
and Results of Operations 5-12
Part II OTHER INFORMATION AND SIGNATURES
Item 1-Legal Proceedings 13
Item 2-Changes in Securities 13
Item 3-Defaults upon Senior Securities 13
Item 4-Submission of Matters to a Vote of Security Holders 13
Item 5-Other Information 13
Item 6-Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE>
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, December 31,
1995 1994
ASSETS:
Cash and due from banks:
Noninterest-bearing $ 5,446,860 $ 5,479,295
Interest-bearing 800,772 32,005
Total cash and cash equivalents 6,247,632 5,511,300
Available-for-sale securities 16,491,004 14,639,874
Held-to-maturity securities (estimated market
value 1995, $49,897,000;
December 31, 1994, $47,897,000) 49,222,794 49,617,504
Loans (net of allowance for possible loan
losses 1995, $1,780,942;
December 31, 1994, $1,721,343) 154,677,229 154,847,712
Foreclosed assets held for sale 271,794 167,969
Premises and equipment 4,207,522 4,123,658
Accrued interest receivable and other assets 3,764,481 3,628,671
TOTAL ASSETS $234,882,456 $232,536,688
LIABILITIES:
Deposits:
Noninterest-bearing $ 14,724,358 $ 14,494,727
Interest-bearing 190,953,750 179,983,170
Total deposits 205,678,108 194,477,897
Borrowed funds 6,063,494 16,030,406
Accrued interest payable 1,350,359 1,691,646
Dividends payable 573,799 547,163
Other liabilities 1,100,915 886,444
TOTAL LIABILITIES 214,766,675 213,633,556
STOCKHOLDERS' EQUITY:
Common Stock
$1.00 par value; authorized 5,000,000 shares
in 1995; and 2,000,000 in 1994; issued
and outstanding 1,347,323 and
1,334,323 shares in 1995
and 1994, respectively 1,347,323 1,334,543
Additional paid-in capital 6,512,129 6,224,579
Retained earnings 12,089,172 11,708,435
TOTAL 19,948,624 19,267,557
Unrealized holding gains (losses) on
available-for-sale securities 167,157 (364,425)
TOTAL STOCKHOLDERS' EQUITY 20,115,781 18,903,132
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $234,882,456 $232,536,688
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $3,662,519 $3,065,410 $ 7,215,279 $6,046,965
Interest on interest-bearing deposits with banks 24,045 15,074 24,539 23,187
Interest and dividends on investments
Taxable 1,020,337 1,007,692 2,025,988 1,986,561
Nontaxable 49,756 63,325 102,180 159,413
Dividends 19,355 15,514 36,521 32,047
Total interest and dividends on investments 1,089,448 1,086,531 2,164,689 2,178,021
TOTAL INTEREST INCOME 4,776,012 4,167,015 9,404,507 8,248,173
INTEREST EXPENSE:
Interest on deposits 2,337,035 1,813,499 4,446,451 3,592,188
Interest on borrowed funds 98,753 64,546 302,490 114,747
TOTAL INTEREST EXPENSE 2,435,788 1,878,045 4,748,941 3,706,935
NET INTEREST INCOME 2,340,224 2,288,970 4,655,566 4,541,238
Provision for possible loan losses 37,500 60,000 87,500 135,000
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 2,302,724 2,228,970 4,568,066 4,406,238
OTHER OPERATING INCOME:
Service charge income 184,748 192,668 348,087 347,014
Trust income 49,071 39,126 125,613 102,288
Other income 100,136 61,615 147,357 120,412
Realized securities gains, net 0 19,820 4,700 63,347
TOTAL OTHER OPERATING INCOME 333,955 313,229 625,757 633,061
OTHER OPERATING EXPENSES:
Salaries and employee benefits 801,136 743,512 1,609,126 1,504,249
Occupancy expenses 106,968 88,390 215,218 204,144
Furniture and equipment expenses 150,064 151,792 289,812 294,332
FDIC insurance expense 110,849 108,260 221,698 216,520
Other expenses 564,455 506,298 1,106,549 983,835
TOTAL OTHER OPERATING EXPENSES 1,733,472 1,598,252 3,442,403 3,203,080
Income before provision for income taxes 903,207 943,947 1,751,420 1,836,219
Provision for income taxes 256,554 290,000 496,554 560,000
NET INCOME $ 646,653 $ 653,947 $ 1,254,866 $ 1,276,219
Earnings per share $0.48 $0.49 $0.93 $0.95
Cash dividend declared $0.42 $0.40 $0.42 $0.40
Weighted average number of shares outstanding 1,347,323 1,347,323 1,347,323 1,347,323
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE)
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30
CASH FLOWS FROM OPERATING ACTIVITIES: 1995 1994
Net income $ 1,254,866 $ 1,276,219
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 87,500 135,000
Provision for depreciation 224,456 219,063
Amortization and accretion of investment
securities 113,622 82,878
Deferred income taxes (19,461) (63,992)
Realized gains on securities (4,700) (63,347)
Realized gains on loans sold (13,377) (7,310)
Gain on sales or disposals of premises
and equipment 0 (2,132)
Gain on sale of foreclosed assets held for sale (45,306) (33,619)
(Increase) decrease in accrued
interest receivable and other assets (390,195) 315,977
Decrease in accrued
interest payable and other liabilities (126,817) (430,500)
Net cash provided by operating activities 1,080,588 1,428,237
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Proceeds from sales of securities 0 3,063,398
Purchase of securities (1,074,688) (3,002,813)
Held-to-maturity securities:
Proceeds from maturity and principal
repayments of securities 2,467,973 1,839,661
Purchase of securities (2,153,200) (5,444,056)
Net increase in loans (114,557) (4,441,955)
Capital expenditures (308,320) (279,098)
Proceeds from sales of premises and equipment 0 3,564
Proceeds from sale of foreclosed assets held
for sale 152,400 33,619
Net cash used by investing activities (1,030,392) (8,227,680)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 11,200,211 782,744
Proceeds from long-term borrowings 739,098 197,693
Repayments of long-term borrowings (75,369) 0
Net (decrease) increase in short-term
borrowed funds (10,630,641) 5,260,546
Dividends paid (547,163) (515,536)
Net cash provided by financing activities 686,136 5,725,447
Net increase (decrease) in cash and
cash equivalents 736,332 (1,073,996)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,511,300 5,612,269
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,247,632 $ 4,538,273
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated financial statements include the accounts of Citizens
Financial Services, Inc. and its wholly-owned subsidiary, First Citizens
National Bank (the "Bank"), (collectively, the "Company"). All material
intercompany 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, 1995, and the
results of operations for the interim periods presented. 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, 1994.
The results of operations for the six months ended June 30, 1995 and 1994
are not necessarily indicative of the results to be expected for the full year.
Note 2 - Earnings per Share
Earnings per share calculations give retroactive effect to stock dividends
declared by the Company. The number of shares used in the earnings per share
and dividends per share calculation was 1,347,323 for 1995 and 1994.
Note 3 - Impaired Loans
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No.114 ("SFAS No. 114"), "Accounting for Certain Investments in Debt
and Equity Securities." The statement establishes accounting measurement,
recognition, and reporting standards for impaired loans. SFAS 114 provides that
a loan is impaired when, based on current information and events, it is probable
that the creditor will be unable to collect all amounts due according to the
contractual terms (both principal and interest). SFAS 114 requires that when a
loan is impaired, impairment should be measured based on the present value of
the expected cash flows, discounted at the loan's effective interest rate,
except that as a practical expedient, a creditor may measure impairment based
on a loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. The value of the loan is adjusted through a
valuation allowance created though a charge against income. Residential
mortgages, consumer installment obligations and credit cards are excluded.
4
<PAGE>
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 which have affected the Company's financial position and
operating results during the periods indicated in the accompanying consolidated
financial statements.
Financial Condition
For the six month period ended June 30, 1995, the assets of the Company
have increased by $2.4 million versus an increase of $5.9 million in 1994.
Net loans decreased by $.2 million for the current period as compared to
the $4.2 million increase in 1994. Lower loan demand because of the higher
interest rates was the primary reason for the stagnant loan growth. Total
investments increased $1.5 million compared to an increase of $2.5 million in
1994.
During 1995, corporate securities in the held-to-maturity category,
totaling $2 million, matured. $3 million U. S Treasury securities were
purchased with 6 year maturities ($2 million in the held-to-maturity category
and $1 million in the available-for-sale category).
Cash and cash equivalents increased $.7 million in 1995 compared to a
decrease of $1.1 million in 1994.
The Company's loan growth during 1994 stemmed from low interest rates and
its commitment to the local communities and servicing their needs. The primary
concentration of loans continues to be in residential real estate-consisting of
loans to purchase and improve real estate, debt consolidation and home equity
lines of credit. Loan demand was weak during the last 6 months of 1994 because
of the approximately 300 basis point increase in interest rates. A slight
decline in interest rates during the first half of 1995 has had little positive
impact on the demand for residential real estate loans.
During the remainder of 1995, management expects that loan demand will
continue to be slow as interest rates are anticipated to decline only slightly
nationwide and in the local market area.
The loan portfolio consists of the following (in thousands):
June 30, December 31, June 30,
1995 1994 1994
Real estate loans - residential $ 97,076 $ 98,630 $ 95,862
Real estate loans - commercial 23,490 21,915 18,457
Real estate loans - agricultural 6,529 7,125 5,926
Loans to individuals for household,
family and other purchases 12,409 11,886 11,427
Commercial and other loans 10,533 10,285 10,020
State and political
subdivision loans 6,840 7,303 5,415
156,877 157,144 147,107
Less: unearned income on loans 419 575 854
Loans net of unearned income $156,458 $156,569 $146,253
Deposits increased by $11.2 million or 6.1% versus a modest increase of $.8
million in 1994. The creation of some promotional certificates of deposit with
attractive rates resulted in the deposit growth for 1995.
As discussed in the Management's Discussion and Analysis section of the
1994 annual report, during 1994 the rate paid on certificates of deposit
increased more rapidly then the rates paid on NOW and savings accounts. This
trend, which continued into 1995, increased the growth of certificates of
deposit and offset the decrease in NOW and savings accounts.
Borrowed funds decreased by a repayment of $10 million during 1995 (made
possible by the deposit growth discussed above) compared to an increase of $5.5
million in 1994. This decrease was the result of a repayment of the short term
borrowing from the Federal Home Loan Bank. The Company's daily cash
requirements are now being met by using the financial instruments available
through the Federal Home Loan Bank rather than using federal funds market. The
modest increase in loan demand as well as a significant increase in deposits for
this period resulted in the elimination of short term borrowings.
5
<PAGE>
Capital
The Company has computed its risk-based capital ratios as follows (dollars
in thousands):
June 30, December 31,
1995 1994
Tier I - Total stockholders' equity $ 20,116 $ 18,903
Less: Unrealized holding gains (losses)
on available-for-sale securities 167 (364)
----------- ------------
Tier I, net 19,949 19,267
Tier II - Allowance for loan losses(1) 1,606 1,625
----------- ------------
Total qualifying capital $ 21,555 $ 20,892
=========== ============
Risk-adjusted on-balance sheet assets $122,226 $123,077
Risk-adjusted off-balance sheet
exposure (2) 6,273 6,956
----------- ------------
Total risk-adjusted assets $128,499 $130,033
=========== ============
June 30, December 31,
Ratios: 1995 1994
Tier I risk-based capital ratio 15.5% 14.8%
Federal minimum required 4.0 4.0
Total risk-based capital ratio 16.8% 16.1%
Federal minimum required 8.0 8.0
Leverage ratio (3) 8.5% 8.6%
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.
Management does not anticipate that any of the equipment purchase discussed
below will have a negative impact on stockholder's equity during 1995.
Results of Operations
Net income for the six month period ending June 30, 1995 was $1,255,000 a
decrease of $21,000 over the 1994 related period. Earnings per share was $.93
during the first six months of 1995 compared to $.95 during the 1994 period.
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 1995 period, after provision for
possible loan losses, was $4,568,000 an increase of $162,000 or 3.7% compared to
an increase of $355,000 or 8.8% during the same time period in 1994.
6
<PAGE>
<TABLE>
Analysis of Average Balances and Interest Rates (1)
June 30, 1995 June 30, 1994
Average Average Average Average
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS $ $ % $ $ %
Short-term investments:
Interest-bearing deposits
in other banks 811 25 6.17% 1,209 23 3.80%
Total short-term investments 811 25 6.17% 1,209 23 3.80%
Investment securities:
Taxable 61,935 2,063 6.66% 61,209 2,019 6.60%
Tax-exempt (3) 2,433 155 12.74% 3,133 241 15.38%
Total investments 64,368 2,218 6.89% 64,342 2,260 7.02%
Loans:
Residential mortgage
loans 97,092 4,438 9.14% 91,056 3,898 8.56%
Commercial and farm loans 38,256 1,863 9.74% 31,214 1,292 8.28%
Loans to State & Political
Subdivisions 7,242 307 8.48% 5,468 186 6.80%
Other loans 13,980 697 9.97% 14,809 714 9.64%
Loans-net of
discount (2)(3)(4) 156,570 7,305 9.33% 142,547 6,090 8.54%
Total interest-earning
assets 221,749 9,548 8.61% 208,098 8,373 8.05%
Cash and due for banks 2,951 4,011
Bank premises and equipment 4,083 3,959
Available-for-sale
securities adjustment (186) (72)
Other assets 5,113 3,185
Total non-interest
bearing assets 11,961 11,083
Total assets 233,710 219,181
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts 23,772 286 2.41% 26,760 286 2.14%
Savings accounts 25,988 330 2.54% 27,615 303 2.19%
Money Market accounts 21,660 510 4.71% 20,882 311 2.98%
Certificates of deposit 115,844 3,321 5.73% 103,364 2,692 5.21%
Total interest-bearing
deposits 187,264 4,447 4.75% 178,621 3,592 4.02%
Other borrowed funds 9,722 302 6.21% 5,489 115 4.19%
Total interest-bearing
liabilities 196,986 4,749 4.82% 184,110 3,707 4.03%
Demand deposits 14,189 13,874
Other liabilities 3,025 2,830
Total non-interest-bearing
liabilities 17,214 16,704
Stockholders' equity 19,510 18,367
Total liabilities and
stockholders' equity 233,710 219,181
Net interest income 4,799 4,666
Net interest spread (5) 3.79% 4.02%
Net interest income as
a percentage of average
interest-earning assets 4.33% 4.48%
Ratio of interest-earning
assets to interest-bearing
liabilities 1.13 1.13
</TABLE>
(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.
7
<PAGE>
The yield on earning assets, on a tax-equivalent basis, was 8.61% and 8.05%
in the first six months of 1995 and 1994, respectively, which resulted in an
increase of 56 basis points. The cost of funds was 4.82% and 4.03% in the six
months of 1995 and 1994, respectively, as deposit costs increased 79 basis
points. During the first half of 1995, savings and NOW accounts were effected
by the upward pressure in interest rates as well as certificates of deposit.
This trend reflects the general increase in interest rates that occurred during
1994 and the first half of 1995 which resulted in a decrease in the net interest
spread of 23 basis points during the current period.
As described above, the Company has experienced a narrowing of it's margin
during the first half of 1995 as has a number of the banks competing in the same
market area. Upward pressure in the cost of funds is expected in the near
future. The Company continues to review various pricing strategies to enhance
deposit growth without margin compression.
Provision for possible loan losses decreased $47,500 to $87,500 in 1995,
compared to a provision of $135,000 in the same three month period of 1994.
This decrease was appropriate given management's quarterly review of the
allowance for loan and lease losses which is based on the following information;
migration analysis of delinquent and non-accrual loans, estimated future losses
on loans, recent review of large problem credits, local economic conditions,
historical loss experience, OCC qualitative adjustments and peer comparisons.
8
<PAGE>
Total other operating income decreased by $7,000 compared to the same
period in 1994. Trust income was up $23,000 and other income was up $27,000 but
realized securities gains was down $59,000. Additionally, the lack of
securities gains was offset by a gain of $45,000 from the sale of other real
estate owned.
Total other operating expense was $3.4 million in the first six months of
1995 which reflected an increase of $239,000 or 7.5% over the 1994 period.
Salaries and benefits increased 7% or $105,000 for the current six month period
reflecting normal merit increases when compared to the same period in 1994.
Occupancy expense increased by $11,000 or 5.4% and furniture and equipment
expenses remained nearly the same as 1994. Federal Deposit Insurance
Corporation(FDIC) insurance expense increased $5,000 or 2.4%. Other expenses
increased $123,000 or 12.5% in the first six months of 1995 over the 1994
related period representing an increase in postage, recruitment and marketing
costs.
The FDIC (Federal Deposit Insurance Corporation) is currently evaluating a
significant premium reduction that may begin as early as September 1995.
Congress, on the other hand, is considering a possible one time charge to fund
the savings and loan reserve fund which may more that offset any anticipated
premium expense reduction.
The provision for income taxes was $497,000 during the first six months of
1995 compared to $560,000 during the 1994 related period. Income before taxes
decreased $63,000 in the 1995 period as compared to the same time period in 1994
because of lower taxable income and due to $56,000 of additional non-taxable
interest income along with other changes in temporary tax differences used in
federal income tax calculations.
Liquidity
Liquidity is a measure of the Company's ability to efficiently meet normal
cash flow requirements of both borrowers and depositors. In order 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, as well as fund other
capital expenditures. Management projected that capital expenditures for 1995
would increase approximately $495,000 for optical check imaging and needed
renovations to branches and capital expenditures to keep pace with current
technology needs. During the first six months of 1995 $308,000 was expended as
compared to capital acquisitions of $279,000 during the same period in 1994.
Management is currently renting three properties as a temporary solution to
the space limitations it has experienced at the main office. Efforts are
continuing to evaluate various long term alternatives.
Liquidity is achieved primarily by having temporary or short-term
investments in the Federal Home Loan Bank of Pittsburgh, PA, federal funds sold
and investments which mature in a relatively short time period (maturities under
one year). The Company also maintains a credit line of approximately 10% of
qualifying assets with the Federal Home Loan Bank as an additional source of
liquidity.
9
<PAGE>
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. An asset or
liability is considered to be interest-sensitive if the rate it yields or bears
is subject to change within a predetermined time period. If interest-sensitive
assets exceeds interest-sensitive liabilities during a prescribed time period, a
positive gap results. Conversely, when interest-sensitive liabilities exceeds
interest-sensitive assets during a time period, a negative gap results.
A positive gap tends to indicate that earnings will be impacted favorably
if interest rates rise during the period and negatively when interest rates fall
during the time period. A negative gap tends to indicate that earnings will be
effected inversely to interest rate changes. In other words, as interest rates
fall, a negative gap should tend to produce a positive effect on earnings and
when interest rates rise, a negative gap should tend to affect earnings
negatively.
The primary components of interest-sensitive assets include adjustable rate
loans and investments, loan repayments, investment maturities and money market
investments. The primary components of interest-sensitive liabilities include
maturing certificates of deposit, IRA certificates of deposit (individuals over
59 1/2), money market deposits, savings deposits, N.O.W. accounts and short-term
borrowing.
The Company's six to twelve-month asset/liability position at June 30,
1995, was again liability sensitive, with a dollar gap of $9.9 million or .91
(at December 31, 1994 the Company's liability sensitivity was at $(9.6) million
or .91). Management was able to move to within its policy range (positive 1.25
to negative .75) by the selection and pricing of assets and liabilities
acquired.
Gap analysis does not necessarily indicate the precise impact of specific
interest rate movements on the Company's net interest income because the
repricing of certain assets and liabilities is discretionary and is subject to
competitive and other pressures. In addition, assets and liabilities within the
same period may, in fact, reprice at different times and at different rate
levels.
Another method used by the Company to measure the impact of interest rate
changes on net interest income is to simulate the potential effects of changing
interest rates through computer modeling. The Company is then able to evaluate
strategies which would include an acceleration of a deposit rate reduction or
rate increase and the related repricing strategies for loans.
Credit Quality Risk
The following table identifies amounts of loan losses and non-performing
loans. Past due loans are those which were contractually past due 90 days or
more as to interest or principal payments.
<TABLE>
June 30, December 31,
1995 1994 1993 1992 1991
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans in nonaccrual status $ 1,369 $1,557 $ 1,566 $ 689 $ 154
Accrual loans - 90 days or
more past due 82 267 418 439 977
Total non-performing loans $ 1,451 $1,824 $ 1,984 $ 1,128 $ 1,131
Other real estate owned $ 272 $ 168 $ 231 $ 330 $ 188
Loans outstanding at end of
period $156,458 $156,569 $141,907 $129,527 $121,743
Non-performing loans as percent
of total loans .93% 1.16% 1.40% .87% .87%
Provision for possible loan
losses $ 1,781 $ 1,721 $ 1,516 $ 1,201 $ 906
Net charge-offs $ 28 $ 50 $ 0 $ 119 $ 88
Provision for possible loan losses as
percent of loans outstanding 1.14% 1.10% 1.07% .93% .82%
Total non-performing assets as a
percent of loans, net of unearned
income, and foreclosed assets held
for sale 1.10% 1.27% 1.56% 1.12% 1.08%
</TABLE>
Transactions in the allowance for possible loan losses were as follows (in
thousands):
<TABLE>
At June 30, Years Ended December 31,
1995 1994 1993 1992
<S> <C> <C> <C> <C>
Balance, beginning of year $1,721 $1,516 $1,201 $ 996
Provision charged to income 88 255 315 324
Recoveries on loans previously
charged against the allowance 8 18 71 32
1,817 1,789 1,587 1,352
Loans charged against the allowance (36) (68) (71) (151)
Balance, end of year $1,781 $1,721 $1,516 $1,201
</TABLE>
The allowance is maintained at a level to absorb potential future loan
losses. The allowance is increased by provisions charged to operating expense
and reduced by net charge-offs. Management's basis for the level of the
allowance and the quarterly provision is its evaluation of the loan portfolio,
current and projected economic conditions, the historical loan loss experience,
present and prospective financial condition of the borrowers, the level of
non-performing 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 believes that the
current allowance is adequate to offset any exposure that may exist for under-
collateralized or uncollectible loans.
The following information concerns impaired loans as described in note 3:
Impaired Loans:
Nonaccrual Loans $282,480
Restructured Loans 0
---------
$282,480
=========
Impaired loans with specific loss allowances: $282,480
=========
Loss allowances reserved on impaired loans: $ 0
=========
Income recognized on impaired loans
during 1995 $ 0
=========
The Company has one loan as of June 30, 1995 that it considers impaired and
management believes that the liquidation of the collateral would exceed
principal, plus interest and fees, thus no allowance reserve is required.
11
<PAGE>
The Company does not accrue interest income on impaired loans and
subsequent cash payments received are applied to the outstanding principal
balance or recorded as interest income, depending upon management's assessment
of it's ultimate ability to collect principal and interest.
General
Recently the Governor of Pennsylvania signed a bill opting into the Riegle-
Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Banking and Branch Act"). The legislation permits interstate banking twelve
months after its enactment into law. Bank holding companies, pursuant to an
amendment to the Bank Holding Company Act, can acquire a bank located in any
state, as long as the acquisition does not result in the bank holding company
controlling more than 10% or the deposits in the United States, or 30% of the
deposits in the target bank's state. The legislation permits states to waive
the concentration limits and require that the target institution be in existence
for up to five years before it can be acquired by an out-of-state bank or bank
holding company. Interstate branching and merging of existing banks is
permitted after three years from enactment, if the bank is adequately
capitalized and demonstrates good management. Branch merging will be permitted
earlier if a state undertakes to enact a law which allows it and states may also
enact a law to permit banks to branch de novo.
Various congressional bills have been passed and other proposals have been
made for significant changes to the banking system, including provisions for:
limitations 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 to own affiliates that engage
in securities, mutual funds and insurance activities.
Management believes that the effect of the provisions of this legislation
on liquidity, capital resources, and the results of operations of the company
will be immaterial.
Aside from those matters described above, management does not believe that
there are any trends or uncertainties which would have a material impact on
future operating results, liquidity or capital resources nor is it aware of any
current recommendations by the regulatory authorities 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.
12
<PAGE>
PART II - OTHER INFORMATION AND SIGNATURES
Item 1 - Legal Proceedings
Management is not aware of any litigation that would have a material
adverse effect on the consolidated financial position of the Company. Any
pending proceedings are ordinary, routine litigation incidental to the business
of the Company and its subsidiary. In addition, no material proceedings are
pending or are known to be threatened or contemplated against the Company and
its subsidiary by government authorities.
Item 2 - Changes in Securities - Nothing to report.
Item 3 - Defaults Upon Senior Securities - Nothing to report.
Item 4 - Submission of Matters to a Vote of Security Holders - Nothing to
report.
Item 5 - Other Information - Nothing to report.
Item 6 - Exhibits and reports on Form 8-K.
(a) Exhibits - None.
(b) Reports - None.
13
<PAGE>
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 9, 1995 /s/ Richard E. Wilber
------------------------------------
By: Richard E. Wilber
President and Chief Financial Officer
(Principal Executive Officer)
August 9, 1995 /s/ Thomas C. Lyman
------------------------------------
By: Thomas C. Lyman
Treasurer
(Principal Financial &
Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 6,248
<INT-BEARING-DEPOSITS> 801
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,491
<INVESTMENTS-CARRYING> 49,223
<INVESTMENTS-MARKET> 49,897
<LOANS> 154,677
<ALLOWANCE> 1,781
<TOTAL-ASSETS> 234,883
<DEPOSITS> 205,678
<SHORT-TERM> 4,190
<LIABILITIES-OTHER> 3,025
<LONG-TERM> 1,874
<COMMON> 1,347
0
0
<OTHER-SE> 18,769
<TOTAL-LIABILITIES-AND-EQUITY> 234,883
<INTEREST-LOAN> 7,215
<INTEREST-INVEST> 2,165
<INTEREST-OTHER> 25
<INTEREST-TOTAL> 9,405
<INTEREST-DEPOSIT> 4,447
<INTEREST-EXPENSE> 4,749
<INTEREST-INCOME-NET> 4,656
<LOAN-LOSSES> 88
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 3,442
<INCOME-PRETAX> 1,751
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,255
<EPS-PRIMARY> .93
<EPS-DILUTED> .93
<YIELD-ACTUAL> 4.33
<LOANS-NON> 1,451
<LOANS-PAST> 82
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,721
<CHARGE-OFFS> 36
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 1,781
<ALLOWANCE-DOMESTIC> 1,781
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
