UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________________ to ___________________
Commission file number 0-13222
CITIZENS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2265045
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 South Main Street, Mansfield, Pennsylvania 16933
(Address of principal executive offices ) (Zip Code)
Registrant's telephone number, including area code: (717) 662-2121
Indicate by checkmark whether the registrant (1) has filed all reports
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes__X___ No_____
The number of shares outstanding of the Registrant's Common Stock, as of
November 4, 1996, 1,360,228 shares of Common Stock, par value $1.00.
<PAGE>
<PAGE>
Citizens Financial Services, Inc.
Form 10-Q
INDEX
Page
Part I FINANCIAL INFORMATION (UNAUDITED)
Item 1-Financial Statements
Consolidated Balance Sheet as of September 30, 1996 and
December 31, 1995 1
Consolidated Statement of Income for the
Three Months and Nine months Ended September 30, 1996 and 1995 2
Consolidated Statement of Cash Flows for the Nine months Ended
September 30, 1996 and 1995 3
Notes to Consolidated Financial Statements 4
Item 2-Management's Discussion and Analysis of Financial Condition
and Results of Operations 4-13
Part II OTHER INFORMATION AND SIGNATURES
Item 1-Legal Proceedings 14
Item 2-Changes in Securities 14
Item 3-Defaults upon Senior Securities 14
Item 4-Submission of Matters to a Vote of Security Holders 14
Item 5-Other Information 14
Item 6-Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, December 31,
1996 1995
ASSETS:
Cash and due from banks:
Noninterest-bearing $ 7,061,973 $ 5,535,712
Interest-bearing 43,518 36,949
Total cash and cash equivalents 7,105,491 5,572,661
Available-for-sale securities 29,610,214 21,444,353
Held-to-maturity securities (estimated
market value 1996,$58,405,000;
December 31, 1995, $53,589,000) 58,454,075 52,271,151
Loans (net of allowance for possible loan
losses 1996, $1,955,216; December 31, 1995,
$1,833,115) 174,706,152 159,793,794
Foreclosed assets held for sale 97,136 207,959
Premises and equipment 4,561,073 4,175,459
Accrued interest receivable and other assets 5,486,652 3,629,072
TOTAL ASSETS $280,020,793 $247,094,449
LIABILITIES:
Deposits:
Noninterest-bearing $ 18,300,001 $ 15,140,360
Interest-bearing 224,239,922 198,175,933
Total deposits 242,539,923 213,316,293
Borrowed funds 11,154,676 8,855,044
Accrued interest payable 2,001,844 2,106,036
Dividends payable 0 579,349
Other liabilities 1,672,611 940,461
TOTAL LIABILITIES 257,369,054 225,797,183
STOCKHOLDERS' EQUITY:
Common Stock
$1.00 par value; authorized 5,000,000
shares; issued and outstanding
1,360,228 and 1,347,323 shares
in 1996 and 1995, respectively 1,360,228 1,347,323
Additional paid-in capital 6,828,302 6,512,129
Retained earnings 14,396,885 13,089,281
TOTAL 22,585,415 20,948,733
Unrealized holding gains on
available-for-sale securities 66,324 348,533
TOTAL STOCKHOLDERS' EQUITY 22,651,739 21,297,266
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $280,020,793 $247,094,449
The accompanying notes are an integral part of these financial statements.
<PAGE>
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
Three Months Ended Nine months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $4,039,128 $3,781,262 $11,702,755 $11,002,363
Interest on interest-bearing deposits
with banks 881 71,114 146,600 95,654
Interest and dividends on investments:
Taxable 1,436,657 1,050,648 3,862,198 3,076,635
Nontaxable 16,246 42,620 53,634 144,800
Dividends 18,940 19,183 54,106 55,704
Total interest and dividends on investments 1,471,843 1,112,451 3,969,938 3,277,139
TOTAL INTEREST INCOME 5,511,852 4,964,827 15,819,293 14,375,156
INTEREST EXPENSE:
Interest on deposits 2,642,152 2,414,280 7,625,872 6,860,731
Interest on borrowed funds 173,340 100,557 404,819 403,046
TOTAL INTEREST EXPENSE 2,815,492 2,514,837 8,030,691 7,263,777
NET INTEREST INCOME 2,696,360 2,449,990 7,788,602 7,111,379
Provision for possible loan losses 52,500 37,500 152,500 125,000
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 2,643,860 2,412,490 7,636,102 6,986,379
OTHER OPERATING INCOME:
Service charge income 226,487 185,397 620,551 533,484
Trust income 55,181 55,206 189,890 180,819
Other income 92,507 49,503 198,313 198,659
Realized securities gains, net 0 5,000 19,264 9,700
TOTAL OTHER OPERATING INCOME 374,175 295,106 1,028,018 922,662
OTHER OPERATING EXPENSES:
Salaries and employee benefits 852,406 811,005 2,498,583 2,420,131
Occupancy expenses 112,560 94,415 341,233 309,633
Furniture and equipment expenses 144,443 145,439 436,254 435,251
FDIC insurance expense 312,601 21,769 372,459 243,467
Other expenses 602,388 508,876 1,803,164 1,623,048
TOTAL OTHER OPERATING EXPENSES 2,024,398 1,581,504 5,451,693 5,031,530
Income before provision for income taxes 993,637 1,126,092 3,212,427 2,877,511
Provision for income taxes 284,252 324,712 968,430 821,265
NET INCOME $ 709,385 $ 801,380 $ 2,243,997 2,056,246
Earnings per share $0.52 $0.59 $1.65 $1.51
Cash dividend declared $0.00 $0.00 $0.44 $0.42
Weighted average number of shares outstanding 1,360,228 1,360,228 1,360,228 1,360,228
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine months Ended
September 30,
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995
Net income $ 2,243,997 $ 2,056,246
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 152,500 125,000
Provision for depreciation and amortization 321,720 327,213
Amortization and accretion of investment
securities 264,181 175,171
Deferred income taxes 6,974 (33,228)
Realized gains on securities (19,264) (9,700)
Realized gains on loans sold (13,089) (26,164)
Gain on sale of foreclosed assets held for sale (50,106) (46,040)
(Increase) in accrued interest receivable
and other assets (747,086) (438,505)
Increase in accrued interest
payable and other liabilities 627,959 441,941
Net cash provided by operating activities 2,787,786 2,571,934
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Proceeds from sales of securities 16,047 0
Proceeds from maturity of securities 1,000,000 0
Purchase of securities (9,681,671) (6,797,231)
Held-to-maturity securities:
Proceeds from maturity and principal
repayments of securities 7,039,747 4,493,551
Purchase of securities (13,395,108) (2,153,200)
Net increase in loans (11,516,872) (961,982)
Purchase of loans (3,659,068) 0
Capital expenditures (662,014) (358,938)
Proceeds from sale of foreclosed assets held
for sale 285,100 161,400
Deposit acquisition premium (1,017,714) 0
Net cash used by
investing activities (31,591,553) (5,616,400)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 12,093,690 17,440,252
Proceeds from long-term borrowings 143,206 783,594
Repayments of long-term borrowings (49,650) (102,213)
Net increase (decrease) in short-term
borrowed funds 2,206,076 (10,507,639)
Dividends paid (1,186,664) (1,120,961)
Deposits of acquired branches 17,129,939 0
Net cash provided by
financing activities 30,336,597 6,493,033
Net increase in cash and cash
equivalents 1,532,830 3,448,567
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,572,661 5,511,300
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,105,491 $ 8,959,867
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 8,134,883 $ 7,174,962
Income taxes paid $ 1,040,000 $ 775,000
The accompanying notes are an integral part of these financial statements.
<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 September 30, 1996, 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, 1995.
The results of operations for the three months and nine months ended
September 30, 1996 and 1995 are not necessarily indicative of the results to be
expected for the full year.
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 full service banking facilities in Mansfield, Blossburg,
Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton and Gillett as well as an
automatic teller machine located in Soldiers and Sailors Memorial Hospital in
Wellsboro, Mansfield Wal-Mart and Mansfield University. The Bank's lending and
deposit products are offered primarily within the vicinity of its service area.
In addition, a new supermarket branch was opened October 31, 1996 in the Weis
Market, Wellsboro.
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.
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.
<PAGE>
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 second mortgage loans are
originated subject to maximum mortgage liens against the property of 75% of
the current appraised value. The maximum term for mortgage loans is 25 years
for one-to four- family residential property and 15 years for commercial and
vacation property.
DEPOSITS
Over the last few years the Company, responding to the demand for new
competitive products in the market area, began to tier 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 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) were some of the deposit product variations.
TRUST SERVICES
Traditional trust and investment business and estate settlements are
offered by the Bank.
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 1,360,228 for 1996 and 1995. The
number of shares used for prior periods reflect the one percent stock dividend
declared on May 21, 1996.
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 three
months and nine months ended September 30, 1996 and 1995 are not necessarily
indicative of the results to be expected for the full year.
In addition to historical information, this quarterly report contains
forward-looking statements. The forward-looking statements contained herein
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected in the forward-looking statements.
Important factors that might cause such a material difference include, but are
not limited to, those discussed in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date thereof.
The Company undertakes no obligation to publicly revise or update these forward-
looking statements to reflect events or circumstances that arise after the
date hereof. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the Securities
and Exchange Commission, including the quarterly reports on Form 10-Q to be
filed by the Company and any current reports on Form 8-K filed by the Company.
<PAGE>
Financial Condition
For the nine month period ended September 30, 1996, the assets of the
Company have increased by $32.9 million or 13.3% compared with an increase of
$9.5 million for the same period in 1995. This growth was primarily the result
of the acquisition of the Canton and Gillett offices of Meridian Bancorp, Inc.
on April 19, 1996 of $17.1 million and corresponding loan growth.
Cash and cash equivalents increased $1.5 million in 1996 compared with an
increase of $3.5 million for the same period in 1995.
Total investment securities increased $14.3 million or 25.4% during the
first nine months of 1996 compared with an increase of $5.1 million for the same
period in 1995. The Company purchased $23 million securities ($13.4 million
classified as held-to-maturity and $9.7 million as available-for-sale). A
major reason for the increase was the assumption of the deposits of the
above-mentioned branches that resulted in a payment of cash that was then
invested in investment securities. Also during this period, securities totaling
$8 million matured.
Net loan balances increased a strong $14.9 million or 9.3% for the
current period as compared with a slight increase of $.6 million for the
first nine months of 1995. Increased demand for home equity, installment,
commercial and municipal loans during 1996 was the reason for the increase. The
acquisition of the Canton and Gillett branches accounted for $3.7 million of the
loan growth.
During the remainder of 1996, management expects that loan demand will
continue as the result of the attractive interest rates that the Bank is
currently promoting combined with a generally healthy local economy. The major
concentrations of loans continue to be in residential real estate-consisting
of loans to purchase and improve real estate, debt consolidation and home
equity lines of credit. Because of the local loan demand, the Bank also
expects to be successful in lending to local state and political subdivisions
during the remainder of 1996.
The loan portfolio consists of the following (in thousands):
September 30, December 31, September 30,
1996 1995 1995
Real estate loans - residential $108,403 $ 97,612 $ 96,846
Real estate loans - commercial 25,411 24,167 25,254
Real estate loans - agricultural 6,545 8,027 6,279
Loans to individuals for household,
family and other purchases 13,931 13,198 13,069
Commercial and other loans 12,016 10,535 9,111
State and political subdivision
loans 10,546 8,347 7,082
Total 176,852 161,886 157,641
Less: unearned income on loans 191 259 335
Loans, net of unearned income $176,661 $161,627 $157,306
Deposit growth continues to be strong increasing by $29.2 million or 13.7%
as the result of the acquisition of the two branches ($17.1 million) and the
competitive pricing of certificates of deposit. The first nine months of 1995
saw an increase of $17.4 million.
Borrowed funds increased by $2.3 million during the first nine months of
1996 compared with a decrease of $9.8 million in 1995. This increase was the
result of additional short-term borrowing from the Federal Home Loan Bank.
The Company's daily cash requirements or short-term investments are met by using
the financial instruments available through the Federal Home Loan Bank. The
strong increase in loan demand and additional security investments during the
first nine months of 1996 required an increase in short-term borrowing.
<PAGE>
Capital
The Company has computed its risk-based capital ratios as follows (dollars
in thousands):
September 30, December 31,
1996 1995
Tier I - Total stockholders' equity $ 22,652 $ 21,297
Less: Unrealized holding gains (losses)
on available-for-sale securities 66 349
Goodwill and core deposit intangible 972 0
Tier I, net 21,614 20,948
Tier II - Allowance for loan losses(1) 1,903 1,719
Total qualifying capital $ 23,517 $ 22,667
Risk-adjusted on-balance sheet assets $145,128 $131,247
Risk-adjusted off-balance sheet
exposure (2) 7,036 6,242
Total risk-adjusted assets $152,164 $137,489
September 30, December 31,
Ratios: 1996 1995
Tier I risk-based capital ratio 14.2% 15.2%
Federal minimum required 4.0 4.0
Total risk-based capital ratio 15.5% 16.5%
Federal minimum required 8.0 8.0
Leverage ratio (3) 8.1% 8.7%
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 September 30, 1996 was
$709,000 a decrease of $92,000 or 11.5% over the 1995 related period. Earnings
per share was $.52 during the third quarter of 1996 compared with $.59 during
the comparable 1995 period. Net income for the current nine months of 1996
was $2,244,000 compared with $2,056,000 in 1995, an increase of $188,000 or
9.1%. Had it not been for a one-time assessment by the Federal Deposit
Insurance Corporation ("FDIC")discussed in more detail below, our net income
for the current three month and nine month periods would have been
approximately $875,000 and $2,400,000, respectively.
Net interest income, the most significant component of earnings, is the
amount by which interest generated from earning assets exceeds interest
expense on liabilities. Net interest income for the current nine month 1996
period, after provision for possible loan losses was $7,636,000, an increase
of $650,000 or 9.3% compared with an increase of $224,000 or 3.3% during the
same period in 1995.
<PAGE>
<TABLE>
Analysis of Average Balances and Interest Rates (1)
September 30, 1996 September 30, 1995 September 30,1994
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
$ $ % $ $ % $ $ %
<S> <C> <C> <C> <C> <c <C> <C> <C> <C>
ASSETS
Short-term investments:
Interest-bearing deposits at banks 3,704 147 5.30 2,202 96 5.83 812 23 3.79
Investment securities:
Taxable 80,751 3,917 6.48 62,818 3,132 6.67 60,734 3,069 6.76
Tax-exempt(3) 854 81 12.67 2,305 219 12.70 3,069 338 14.72
Total investment securities 81,605 3,998 6.54 65,123 3,351 6.88 63,803 3,407 7.14
Loans:
Residential mortgage loans 101,744 6,980 9.16 96,903 6,719 9.27 92,508 6,013 8.69
Commercial & farm loans 41,553 3,071 9.87 38,391 2,829 9.85 32,102 2,055 8.56
Loans to state & political
subdivisions 9,391 613 8.72 7,192 487 8.05 6,031 329 7.29
Other loans 14,337 1,235 11.51 14,003 1,093 10.44 14,514 1,100 10.23
Loans, net of discount (2)(3)(4) 167,025 11,899 9.52 156,489 7,305 9.51 145,155 9,497 8.75
Total interest-earning assets 252,334 16,044 8.49 223,814 11,128 8.71 209,770 12,927 8.24
Cash and due from banks 3,317 3,029 2,889
Bank premises and equipment 4,260 4,119 3,985
FASB 115 adjustment 179 (51) 292
Other assets 6,046 6,375 6,407
Total noninterest-bearing assets 13,802 13,472 13,573
Total assets 266,136 237,286 223,343
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts 28,735 491 2.28 24,007 419 2.33 26,359 438 2.22
Savings accounts 27,628 460 2.22 25,898 482 2.49 27,747 470 2.26
Money market accounts 27,074 884 4.36 22,304 788 4.72 21,135 503 3.18
Certificates of deposit 131,774 5,792 5.87 118,003 5,173 5.86 104,321 4,093 5.25
Total interest-bearing deposits 215,211 7,627 4.73 190,212 6,862 4.82 179,562 5,504 4.10
Other borrowed funds 8,830 405 6.13 8,501 402 6.32 7,283 255 4.68
Total interest-bearing liabilities 224,041 8,032 4.79 198,713 7,264 4.89 186,845 5,759 4.12
Demand deposits 17,114 14,444 14,112
Other liabilities 3,118 4,231 3,724
Total noninterest-bearing liabilities 20,232 18,675 17,836
Stockholders' equity 21,863 19,898 18,662
Total liabilities & stockholders'
equity 266,136 237,286 223,343
Net interest income 8,012 7,311 7,168
Net interest spread (5) 3.70% 3.82% 4.12%
Net interest income as a percentage
of average interest-earning assets 4.24% 4.37% 4.57%
Ratio of interest-earning assets
to interest-bearing liabilities 1.13 1.13 1.12
</TABLE>
(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 8.49% and 8.71% during the first nine months of 1996
and 1995, respectively (a decline of 22 basis points). The cost of funds was
4.79% and 4.89% during the same nine month period (a decrease of 10 basis
points).
<PAGE>
In comparing the average interest cost of 1996 versus 1995, NOW accounts
decreased 5 basis points, savings accounts decreased by 27 basis points and
interest rate on money market accounts decreased by 36 basis points. The
interest rate on certificates of deposit, however, increased by 1 basis point.
As described above, the Company has continued to experience a slight
narrowing of its margin percentage during the nine months of 1996. The Company
continues to review various pricing strategies to enhance deposit growth
while maintaining or expanding the current interest margin.
Analysis of Changes in Net Interest Income of a equivalent Basis (in
thousands)
<TABLE>
1996 vs. 1995 (1) 1995 vs. 1994 (1)
Change in Change Total Change in Change Total
Volume in Rate Change Volume in Rate Change
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Short-term investments:
Interest-bearing deposits
at banks $ 59 $ (8) $ 51 $ 55 $ 18 $ 73
Investment securities:
Taxable 864 (79) 785 103 (40) 63
Tax-exempt (137) (1) (138) (77) (43) (120)
Total investments 727 (80) 647 26 (83) (57)
Loans:
Residential mortgage loans 330 (69) 261 293 414 707
Commercial and farm loans 233 9 242 435 339 774
Loans to state & political
subdivisions 142 (16) 126 70 88 158
Other loans 26 116 142 (46) 39 (7)
Total loans - net of
discount (2)(3)(4) 732 40 771 752 880 1,632
Total interest income 1,517 (48) 1,469 833 815 1,648
Interest expense:
Interest bearing deposits:
NOW accounts 80 (8) 72 (43) 24 (19)
Savings accounts 38 (60) (22) (25) 37 12
Money market accounts 148 (52) 96 29 256 285
Certificates of deposit 603 16 619 568 512 1,080
Total interest-bearing
deposits 869 (104) 765 529 829 1,358
Other borrowed funds 13 (10) 3 47 100 147
Total interest expense 882 (114) 768 576 929 1,505
Net interest income $ 635 $ 66 $ 701 $ 257 $ (114) $ 143
</TABLE>
(1)The portion of the total change attributable to both volume and rate
changes during the year has been allocated to volume an rate components based
upon the absolute dollar amount of the change in each component prior to
allocation
The above table detailing the change in net interest income clearly shows
the impact ($727,000) resulting from volume increases in taxable investment
securities (proceeds from the assumptions of Canton and Gillett deposits and
normal deposit growth). The growth in loan volume added a additional $732,000.
The volume of interest expense increased total interest-bearing deposits by
$869,000. The net positive gain in volume of $635,000 combined with a net
positive increase due to rate of $66,000 resulted in a very substantial
increase of $701,000.
<PAGE>
Provision for possible loan losses increased $27,500 to $152,500 in the
nine month period of 1996, compared with a provision of $125,000 in the same
period of 1995. This increase 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 (as occurred in the
second quarter of 1996) and peer comparisons.
Total other operating income increased $105,000 compared with the same
period in 1995. Trust income increased $9,000, service charge income increased
$87,000, and other income was nearly unchanged. Net realized securities gains
increased by $10,000, during the current nine month period compared to 1995,
resulting primarily from the sale of some Federal Home Loan Mortgage Corporation
stock.
Total other operating expense was $5,452,000 in the first nine months of
1996 reflecting an increase of $420,000 over the 1995 period. Salaries and
benefit's expense increased by $79,000 for the current nine month period
reflecting normal merit increases offset by a reduction of full time equivalent
employees(FTE). FTEs were reduced because of the operational efficiencies
created from electronic check imaging, however, the acquisition of the two new
branches and preliminary staffing for the future supermarket branch increased
the FTEs by ten to 120.
Occupancy expense increased by $32,000 or 10.2% while furniture and
equipment expenses nearly remained the same.
FDIC expense increased $129,000 or 53%. The Company currently pays a
premium to the SAIF because of the deposits obtained with the acquisition of
Star Savings and Loan Association in 1991.
On September 30,1996, the President signed into law the Deposit Insurance
Funds Act of 1996 to recapitalize the SAIF administered by the FDIC and to
provide repayment of Financial Institution Collateral Obligation ("FICO") Bonds
issued by the United State Treasury Department. The FDIC will levy a one-time
assessment on the SAIF deposits equal to 65.7 cents per $100 of the SAIF-
assessable deposit base as of March 31, 1995. During the years 1997, 1998 and
1999, the BIF will pay $322 million of FICO debt service and SAIF will pay
$458 million. [Note - qualifying Oakar institutions (BIF-insured banks the
acquired SAIF deposits and continue to pay SAIF assessments on portion of their
deposits) are entitled to reduce their SAIF assessment base by 20% for purposes
of calculating this special assessment.] The Bank is a qualified Oakar bank.
During 1997, 1998 and 1999, the average regular annual deposit insurance
assessment is estimated to be about 1.29 cents per $100 of deposits for BIF
deposits and 6.44 cents per $100 of deposits for SAIF deposits. Individual
institutions assessments will continue to vary according to their capital and
management ratings. As always, the FDIC will be able to raise the assessments
as necessary to maintain the funds at their target capital ratios provided by
law. After 1999, BIF and SAIF will share the FICO costs equally. Under
current estimates, BIF and SAIF assessment bases would each be assessed at the
rate of approximately 2.43 cents per $100 of deposits. The FICO bonds will
mature in 2018-2019, ending the interest payment obligation.
The law also provides that BIF and SAIF are to merge to form the Deposit
Insurance Fund ("DIF") at the beginning of 1999, provided that there are no SAIF
institutions in existence at that time. Merger of the funds will require
state laws to be amended in those states authorizing savings associations to
eliminate that authorization (state chartered savings banks will not be
affected). The provision reflects Congress's apparent intent to merge thrift
and commercial bank charters by January 1999; however, no law has yet been
enacted to achieve that purpose.
Based on projected deposit levels projected for 1997, Management expects
that the FDIC assessment will be approximately $67,000 or $305,000 less than
the FDIC expense projected for 1996.
<PAGE>
Other expenses increased $180,000 or 11.1% in the first nine months of 1996
over the 1995 related period representing an increase in marketing costs,
other professional fees, printing expenses (an impact of new branch
acquisitions) offset by reductions in postage and computer supplies from the
implementation of check imaging.
The provision for income taxes was $968,000 during the first nine months
of 1996 compared with $821,000 during the 1995 related period. Income before
taxes increased $335,000 in the 1996 period over the same period in 1995.
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.
During the first nine months of 1996 there was $662,000 of capital
expenditures, $303,000 more than the capital acquisitions during the same
period in 1995 (more than $100,000 was the result of the acquisition of the
Canton and Gillett offices). Management projects that capital expenditures
for the remainder of 1996 will be approximately $250,000. During the fourth
quarter $25,000 is anticipated for repairs, new equipment and improvements to
branches. The newly acquired Canton office that is currently being leased,
will be purchased for $194,000 in the fourth quarter of 1996. Additionally,
approximately $30,000 for leasehold improvements and equipment for a
supermarket branch to finish construction.
Management is currently renting two properties as a temporary solution to
the space limitations it has experienced at the main office. On July 17, 1996,
the Bank purchased a building and lot adjoining the Mansfield branch location
for $255,000. The Company plans to use this area for the new operations/
administration center and than has been in the early planning stages for more
than six years. Management anticipates that the construction will take place
in 1997 or early 1998 with a total current estimated cost of approximately
$1.75 million.
Management believes that it has sufficient resources to complete these
projects from its normal operations and that they will have a long term
positive effect on revenues, efficiency and the capacity for future growth.
Liquidity is achieved primarily by temporary or short-term investments in
the Federal Home Loan Bank of Pittsburgh, PA, and investments that mature in a
short time (maturities less than one year). The Company also has a maximum
borrowing capacity at the Federal Home Loan Bank of approximately $85 million
(using $7.7 million at September 30, 1996)as an additional source of
liquidity.
Asset / Liability Management
The objective of interest rate sensitivity management is to maintain an
appropriate balance between the stable growth of income and the risks associated
with maximizing income through interest sensitivity imbalances.
The primary components of interest-sensitive assets include adjustable rate
loans and investments, loan repayments, investment maturities and money market
investments. The primary components of interest-sensitive liabilities include
maturing certificates of deposit, IRA certificates of deposit (individuals over
59 1/2 have the option of changing), money market deposits, savings deposits,
NOW accounts and short-term borrowing.
Gap analysis, the method previously used by the Company to analyze interest
rate risk, does not necessarily show the precise impact of specific interest
rate movements on the Company's net interest income because the repricing of
certain assets and liabilities is discretionary and is subject to competitive
and other pressures. In addition, assets and liabilities within the same period
may, in fact, reprise at different times and at different rate levels.
<PAGE>
The Company has not experienced the kind of earnings volatility indicated
from gap analysis. The Company currently uses a simulation model to better
measure the impact of interest rate changes on net interest income to simulate
the potential effects of changing interest rates through computer modeling.
Management uses the model as part of its risk management process that will
effectively identify, measure, and monitor the bank's risk exposure.
The analysis at September 30, 1996 indicated that a 200 basis point
parallel movement in interest rates in either direction would not have a
significant adverse impact on the Company's anticipated net interest income
over the next twelve months.
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).
<TABLE>
September 30, December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Non accruing loans $ 605 $ 763 $ 1,557 $ 1,566 $ 689
Impaired loans 696 696
Accrual loans - 90 days or
more past due 88 689 267 418 439
Total nonperforming loans $ 1,389 $ 2,148 $ 1,824 $ 1,984 $ 1,128
Other real estate owned $ 97 $ 208 $ 168 $ 231 $ 330
Loans outstanding at end of
period $176,852 $161,886 $157,144 $143,218 $132,033
Unearned income 191 259 575 1,311 2,506
Loans, net of unearned income $176,661 $161,627 $156,569 $141,907 $129,527
Nonperforming loans as percent
of loans, net of unearned
income .79% 1.33% 1.17% 1.40% .87%
Total nonperforming assets as a
percent loans of net unearned
income .84% 1.46% 1.27% 1.56% 1.13%
</TABLE>
Transactions in the allowance for possible loan losses were as follows (in
thousands):
<TABLE>
At September 30, Years Ended December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $1,833 $1,721 $1,516 $1,201 $ 996
Charge-offs (50) (69) (68) (71) (151)
Recoveries 20 18 18 71 32
Provision for loan losses 152 163 255 315 324
Balance, end of period $1,955 $1,833 $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 establishes the level of the
allowance and the quarterly provision is its basis for evaluation of the loan
portfolio, current and projected economic conditions, the historical loan loss
experience, present and prospective financial condition of the borrowers, the
level of nonperforming assets, and other relevant factors. While management
evaluates all of this information 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 uncollectable loans.
<PAGE>
The Company has two loans as of September 30, 1996 that it considers
impaired. Management believes that the liquidation of the collateral would
equal or exceed principal based on the current or last appraisal. Thus, no
allowance reserve is required. Management continues to monitor the impaired
loans and will liquidate the collateral when legal constraints are past.
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.
Branch Expansion
On April 20, 1996, the Bank purchased two branch offices of Meridian Bank
(Canton and Gillett) comprising approximately $17.1 million of deposit
liabilities; $3.7 million of loans. In consideration for the assumption of
the deposit liabilities the Bank paid a premium of approximately $1 million.
Loans were priced at fair value plus accrued but unpaid interest. Management
believes there will be a positive impact on future earning is expected from the
acquisition.
Supermarket Banking
On April 11, 1996, the Bank entered a license agreement with Weis Markets,
Inc. for exclusive rights to operate a branch bank within the new supermarket
being constructed in Wellsboro, PA. Management has contracted with a consulting
firm to provide support in the construction and development of the branch that
was recently opened.
General
In May of 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 122, "Accounting for Mortgage
Servicing Rights," an amendment of SFAS No. 65. This Statement, which is
required to be adopted during the first quarter of 1996, allows enterprises
engaging in mortgage banking activities to recognize as separate assets rights
to service mortgage loans for loans originated for sale by the enterprise. As
the Company does not significantly engage in the sale of mortgage loans, the
impact of this Statement has not had a material impact on the Company's
results of operations or financial position.
Various congressional bills have been passed and other proposals have been
made for significant changes to the banking system, including provisions for:
recapitalization by the FDIC of the SAIF as discussed previously; 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 or the bank to own or control
affiliates that engage in securities, mutual funds and insurance activities.
Apart from those matters described above, management does not currently
believe that there are any trends or uncertainties that would have a material
impact on future operating results, liquidity or capital resources nor is it
aware of any current recommendations by the regulatory authorities that if they
were to be carried out would have such an effect, although the general cost of
compliance with numerous and multiple federal and state laws and regulations
does have and in the future may have a negative impact on the company's
results of operations.
Except as previously discussed in the section on the result of operations,
management believes that the effect of the provisions of future legislation on
liquidity, capital resources, and the results of operations of the company will
not be material.
<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 - None
Item 5 - Other Information - Nothing to report.
Item 6 - Exhibits and reports on Form 8-K.
(a) Exhibits - None.
(b) Reports - None.
<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)
November 12, 1996 /s/ Richard E. Wilber
_______________________
By: Richard E. Wilber
President and Chief Financial Officer
(Principal Executive Officer)
November 12, 1996 /s/ Thomas C. Lyman
_______________________
By: Thomas C. Lyman
Treasurer
(Principal Financial &
Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 7062
<INT-BEARING-DEPOSITS> 44
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26610
<INVESTMENTS-CARRYING> 58454
<INVESTMENTS-MARKET> 58405
<LOANS> 174706
<ALLOWANCE> 1955
<TOTAL-ASSETS> 280021
<DEPOSITS> 242540
<SHORT-TERM> 9281
<LIABILITIES-OTHER> 3675
<LONG-TERM> 1874
0
0
<COMMON> 1360
<OTHER-SE> 21292
<TOTAL-LIABILITIES-AND-EQUITY> 280021
<INTEREST-LOAN> 11703
<INTEREST-INVEST> 3970
<INTEREST-OTHER> 147
<INTEREST-TOTAL> 15819
<INTEREST-DEPOSIT> 7626
<INTEREST-EXPENSE> 8031
<INTEREST-INCOME-NET> 7789
<LOAN-LOSSES> 153
<SECURITIES-GAINS> 19
<EXPENSE-OTHER> 5452
<INCOME-PRETAX> 3212
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2244
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.65
<YIELD-ACTUAL> 4.24
<LOANS-NON> 1389
<LOANS-PAST> 88
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1833
<CHARGE-OFFS> 50
<RECOVERIES> 20
<ALLOWANCE-CLOSE> 1955
<ALLOWANCE-DOMESTIC> 1955
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
