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, 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
May 1, 1996, 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 March 31, 1996 and
December 31, 1995 1
Consolidated Statement of Income for the
Three Months Ended March 31, 1996 and 1995 2
Consolidated Statement of Cash Flows for the Three months Ended
March 31, 1996 and 1995 3
Notes to Consolidated Financial Statements 4
Item 2-Management's Discussion and Analysis of Financial Condition
and Results of Operations 4-11
Part II OTHER INFORMATION AND SIGNATURES
Item 1-Legal Proceedings 12
Item 2-Changes in Securities 12
Item 3-Defaults upon Senior Securities 12
Item 4-Submission of Matters to a Vote of Security Holders 12
Item 5-Other Information 12
Item 6-Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31, December 31,
1996 1995
ASSETS:
Cash and due from banks:
Noninterest-bearing $ 5,442,663 $ 5,535,712
Interest-bearing 2,030,934 36,949
Total cash and cash equivalents 7,473,597 5,572,661
Available-for-sale securities 22,171,582 21,444,353
Held-to-maturity securities (estimated
market value 1996,$52,462,000;
December 31, 1995, $53,539,000) 52,075,609 52,271,151
Loans (net of allowance for possible loan
losses 1996, $1,879,509; December 31, 1995,
$1,833,115) 159,780,130 159,793,794
Foreclosed assets held for sale 151,674 207,959
Premises and equipment 4,132,523 4,175,459
Accrued interest receivable and other assets 4,047,746 3,629,072
TOTAL ASSETS $249,832,861 $247,094,449
LIABILITIES:
Deposits:
Noninterest-bearing $ 16,033,672 $ 15,140,360
Interest-bearing 201,859,329 198,175,933
Total deposits 217,893,001 213,316,293
Borrowed funds 7,148,757 8,855,044
Accrued interest payable 1,591,934 2,106,036
Dividends payable 0 579,349
Other liabilities 1,393,713 940,461
TOTAL LIABILITIES 228,027,405 225,797,183
STOCKHOLDERS' EQUITY:
Common Stock
$1.00 par value; authorized 5,000,000
shares; issued and outstanding
1,347,323 shares 1,347,323 1,347,323
Additional paid-in capital 6,512,129 6,512,129
Retained earnings 13,814,334 13,089,281
TOTAL 21,673,786 20,948,733
Unrealized holding gains on
available-for-sale securities 131,670 348,533
TOTAL STOCKHOLDERS' EQUITY 21,805,456 21,297,266
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $249,832,861 $247,094,449
The accompanying notes are an integral part of these financial statements.
<PAGE>
1
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended
March 31,
1996 1995
INTEREST INCOME:
Interest and fees on loans $3,791,274 $3,551,640
Interest on interest-bearing deposits
with banks 36,816 495
Interest and dividends on investments:
Taxable 1,140,013 1,005,650
Nontaxable 19,442 52,425
Dividends 17,306 17,165
Total interest and dividends on investments 1,176,761 1,075,240
TOTAL INTEREST INCOME 5,004,851 4,627,375
INTEREST EXPENSE:
Interest on deposits 2,414,438 2,109,416
Interest on borrowed funds 113,678 203,737
TOTAL INTEREST EXPENSE 2,528,116 2,313,153
NET INTEREST INCOME 2,476,735 2,314,222
Provision for possible loan losses 47,500 50,000
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 2,429,235 2,264,222
OTHER OPERATING INCOME:
Service charge income 179,802 163,339
Trust income 68,268 76,542
Other income 53,494 48,340
Realized securities gains, net 19,264 4,700
TOTAL OTHER OPERATING INCOME 320,828 292,921
OTHER OPERATING EXPENSES:
Salaries and employee benefits 806,788 807,990
Occupancy expenses 113,955 108,250
Furniture and equipment expenses 136,209 139,747
FDIC insurance expense 29,929 110,849
Other expenses 586,339 542,094
TOTAL OTHER OPERATING EXPENSES 1,673,220 1,708,930
Income before provision for income taxes 1,076,843 848,213
Provision for income taxes 351,789 240,000
NET INCOME $ 725,054 $ 608,213
Earnings per share $0.54 $0.45
Cash dividend declared $0.00 $0.00
Weighted average number of shares outstanding 1,347,323 1,347,323
The accompanying notes are an integral part of these financial statements.
<PAGE>
2
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three months Ended
March 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995
Net income $ 725,054 $ 608,213
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 47,500 50,000
Provision for depreciation 92,100 107,388
Amortization and accretion of investment
securities 75,971 55,609
Deferred income taxes 28,449 (8,229)
Realized gains on securities (19,264) (4,700)
Realized gains on loans sold (435) (2,155)
Gain on sale of foreclosed assets held for sale (10,315) 0
Increase in accrued
interest receivable and other assets (335,405) (323,149)
(Decrease) increase in accrued
interest payable and other liabilities (60,851) 59,531
Net cash provided by operating activities 542,804 542,508
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Proceeds from sales of securities 16,047 0
Proceeds from maturity of securities 0 0
Purchase of securities (1,080,625) 0
Held-to-maturity securities:
Proceeds from maturity and principal
repayments of securities 2,316,040 941,068
Purchase of securities (2,168,438) (40,700)
Net increase in loans (33,401) (443,615)
Capital expenditures (49,163) (48,865)
Proceeds from sales of premises and equipment 0 0
Proceeds from sale of foreclosed assets held
for sale 66,600 0
Net cash (used by) provided by
investing activities (922,940) 407,888
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 4,576,708 6,259,934
Proceeds from long-term borrowings 79,200 440,358
Repayments of long-term borrowings (42,705) (75,369)
Net decrease in short-term borrowed funds (1,742,782) (7,223,602)
Dividends paid (579,349) (547,163)
Net cash provided by (used by)
financing activities 2,291,072 (1,145,842)
Net increase (decrease) in cash and cash
equivalents 1,900,936 (195,446)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,572,661 5,511,300
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,473,597 $ 5,315,854
The accompanying notes are an integral part of these financial statements.
<PAGE>
3
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 March 31, 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.
Information contained herein should be read in conjunction with the Form
10-K for the year ended December 31, 1995.
The results of operations for the three months ended March 31, 1996
and 1995 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 1996 and 1995.
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 three month period ended March 31, 1996, the assets of the
Company have increased by $2.7 million or 1.1% versus a decrease of $.3
million for the same period in 1995.
Cash and cash equivalents increased $1.9 million in 1996 compared to a
decrease of $.2 million for the same period in 1995.
Total security investments increased $.5 million in 1996 compared to an
increase of $5.1 million for the same period in 1995.
During the first three months of 1996, securities totaling $2.3 million
matured. During the same period $3.2 million U. S Treasury securities were
purchased with maturities of five years ($2.1 million classified as
held-to-maturity and $1.1 million as available-for-sale).
Net loan balances remained the same for the current period as compared to
a slight increase of $.3 million increase for the first three months of 1995.
Lower loan demand continues to be the primary reason for the stagnant loan
growth.
The Bank's mortgage loan growth was lower during 1995 because of less
demand in our local market area. 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.
<PAGE>
4
During the remainder of 1996, management expects that loan demand will
improve as the result of the attractive interest rates the Bank is currently
promoting. The Bank also expects to be successful in lending to local state
and political subdivisions during the first half of 1996.
The loan portfolio consists of the following (in thousands):
March 31, December 31, March 31,
1996 1995 1995
Real estate loans - residential $ 97,177 $ 97,612 $ 97,522
Real estate loans - commercial 24,607 24,167 22,729
Real estate loans - agricultural 7,525 8,027 7,020
Loans to individuals for household,
family and other purchases 13,425 13,198 12,430
Commercial and other loans 11,024 10,535 10,220
State and political subdivision
loans 8,122 8,347 7,500
Total 161,880 161,886 157,421
Less: unearned income on loans 220 259 490
Loans, net of unearned income $161,660 $161,627 $156,931
Deposit growth continues to be strong increasing by $4.6 million or 9%
following an increase of $6.3 million during the first three months of 1995 as
the result of competitive pricing of certificates of deposit.
During 1995, as the result of a nearly flat yield curve, the Company
priced its certificates of deposit competitively resulting in the interest
cost of certificates of deposit to remain high while the interest rate paid on
interest-bearing transaction and savings accounts declined. The Company has
experienced a decline of net interest income as the result of declining
spreads. Recently, however, long-term rates have begun to rise resulting in a
more normal (steeper) yield curve. Management expects to be able to continue
to attract deposits at a reasonable interest cost during 1996.
Borrowed funds decreased by a repayment of $1.7 million during the first
three months of 1996 (made possible by the deposit growth discussed above)
compared to a decrease of $6.9 million in 1995. 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 or short-term investments 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.
Capital
The Company has computed its risk-based capital ratios as follows
(dollars
in thousands):
March 31, December 31,
1996 1995
Tier I - Total stockholders' equity $ 21,806 $ 21,297
Less: Unrealized holding gains (losses)
on available-for-sale securities 132 349
Tier I, net 21,674 20,948
Tier II - Allowance for loan losses(1) 1,722 1,719
Total qualifying capital $ 23,396 $ 22,667
Risk-adjusted on-balance sheet assets $131,147 $131,247
Risk-adjusted off-balance sheet
exposure (2) 6,607 6,242
Total risk-adjusted assets $137,754 $137,489
<PAGE>
5
March 31, December 31,
Ratios: 1996 1995
Tier I risk-based capital ratio 15.7% 15.2%
Federal minimum required 4.0 4.0
Total risk-based capital ratio 17.0% 16.5%
Federal minimum required 8.0 8.0
Leverage ratio (3) 8.8% 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.
Management does not anticipate that any of the equipment purchase
discussed below will have a material negative impact on stockholder's equity
during 1996.
Results of Operations
Net income for the three month period ending March 31, 1996 was
$725,000 an increase of $117,000 over the 1995 related period, an increase of
19.2%. Earnings per share was $.54 during the first three months of 1996
compared to $.45 during the 1995 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 1996 period, after
provision for possible loan losses, was $2,429,000 an increase of $165,000 or
7.3% compared to an increase of $88,000 or 4% during the same time period
in 1995.
<PAGE>
6
<TABLE>
Analysis of Average Balances and Interest Rates (1)
March 31 March 31,
1996 1995
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 2,743 37 5.43 36 1 5.59
Total short-term investments 2,743 37 5.43 36 1 5.59
Investment securities:
Taxable 71,192 1,157 6.54 61,644 1,023 6.73
Tax-exempt (3) 931 29 12.53 2,533 79 12.61
Total investments 72,123 1,186 6.61 64,177 1,102 6.96
Loans:
Residential mortgage loans 97,206 2,251 9.31 97,275 2,193 9.14
Commercial and farm loans 41,017 1,012 9.92 38,055 911 9.71
Loans to State & Political
Subdivisions 8,267 181 8.81 7,368 155 8.55
Other loans 14,161 395 11.22 14,066 399 9.76
Loans-net of
discount (2)(3)(4) 160,651 3,839 9.61 156,764 3,598 9.31
Total interest-earning
assets 235,517 5,062 8.64 220,977 4,701 8.63
Cash and due for banks 4,991 4,825
Bank premises and equipment 4,162 4,115
Available-for-sale securities
adjustment 482 (370)
Other assets 3,312 2,875
Total non-interest bearing
assets 12,947 11,445
Total assets 248,464 232,422
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts 24,255 126 2.09 23,788 148 2.52
Savings accounts 25,919 144 2.23 25,957 170 2.66
Money Market accounts 24,288 267 4.44 21,302 248 4.72
Certificates of deposit 126,476 1,877 5.97 111,982 1,545 5.60
Total interest-bearing
deposits 200,938 2,414 4.83 183,029 2,111 4.68
Other borrowed funds 7,284 114 6.29 13,422 203 6.13
Total interest-bearing
liabilities 208,222 2,528 4.88 196,451 2,314 4.78
Demand deposits 15,178 14,150
Other liabilities 3,513 2,489
Total non-interest-bearing
liabilities 18,691 16,639
Stockholders' equity 21,551 19,332
Total liabilities and
stockholders' equity 248,464 232,422
Net interest income 2,534 2,387
Net interest spread (5) 3.76 3.85
Net interest income as a
percentage of average
interest-earning assets 4.33 4.38
Ratio of interest-earning
assets to interest-bearing
liabilities 1.13 1.12
</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.
<PAGE>
7
The yield on earning assets, on a tax-equivalent basis, was nearly
unchanged 8.64% and 8.63% in the first three months of 1996 and 1995,
respectively. The cost of funds was 4.88% and 4.78%, in the first three
months of 1996 and 1995, respectively, as the cost of funds increased 10 basis
points. During the first three months of 1996, the interest rate on money
market accounts declined by 30 basis points, however, the interest rate on
certificates of deposit increased by 37 basis points and continued to be most
effected by the upward pressure in interest rates. This trend reflects the
significant increase in interest rates that occurred during 1994. The decline
in market interest rates during 1995 did not reduce this pressure on interest
margin and is reflected in the net interest spread decline of 5 basis points
during the current period.
As described above, the Company has continued to experience a slight
narrowing of it's margin during the three months of 1996. The Company
continues to review various pricing strategies to enhance deposit growth while
maintaining or expanding the current interest margin.
Provision for possible loan losses decreased $2,500 to $47,500 in 1996,
compared to a provision of $50,000 in the same three month period of 1995.
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.
Total other operating income increased by $28,000 compared to the same
period in 1995. Trust income was down $8,000, service charge income was up
$16,000, and other income was up $5,000 as was realized securities gains of
$15,000 resulting for the sale of some stock of Federal Home Loan Mortgage
Corporation.
Total other operating expense was $1,673,000 in the first three months of
1996 which reflected a decrease of $36,000 or 2% over the 1995 period.
Salaries and benefits expense was virtually unchanged for the current three
month period reflecting normal merit increases offset by a reduction of full
time equivalent employees(FTE). FTEs were reduced as a result of the
operational efficiencies created from electronic check imaging. Occupancy
expense increased by $6,000 or 5.3% and furniture and equipment expenses
decreased 2.5% or $4,000. Federal Deposit Insurance Corporation(FDIC)
insurance expense decreased $81,000 or 73% during the first three months of
1995. The Company currently is paying the minimum FDIC premium, however, the
premium may increase in the future.
Other expenses increased $44,000 or 8.2% in the first three months of
1996 over the 1995 related period representing an increase in marketing costs,
other professional fees, printing expenses offset by reductions in postage (as
result of the implementation of check imaging).
The Company currently pays a premium to the FDIC for the Savings
Association Insurance Fund (SAIF) as a result of the deposits obtained with
the acquisition of Star Savings and Loan Association. Congress is currently
evaluating proposals to recapitalize SAIF and, although it appears that no
agreement will be reached between the House and Senate regarding
recapitalization of the SAIF fund, the Company, as well as other financial
institutions with SAIF deposits may be required, in the future, to pay a
one-time special assessment that could approximate 85 basis points of SAIF
deposits held or ($463,000). The special assessment, should it occur, will
adversely effect earnings and liquidity.
The provision for income taxes was $352,000 during the first three months
of 1996 compared to $240,000 during the 1995 related period. Income before
taxes increased $229,000 in the 1996 period as compared to the same time
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. 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.
<PAGE>
8
Funds received from increase deposits (primarily certificates of deposit)
were used to reduce the short-term borrowings at the Federal Home Loan Bank.
The remaining funds were then used to invest in securities there being little
increase in loans.
Management projected that capital expenditures for 1996 would increase
approximately $100,000 for repairs and improvements to branches and capital
expenditures to keep pace with current technology needs. During the first
three months of 1996 $49,000 was expended, the same as the capital
acquisitions during 1995.
Management is currently renting two properties as a temporary solution
to the space limitations it has experienced at the main office. Efforts are
continuing to evaluate various long term alternative solutions.
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 $8.5 million (currently with no balance) with the Federal Home
Loan Bank as an additional source of liquidity.
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 have the option to change), money market deposits,
savings deposits, N.O.W. accounts and short-term borrowing.
The Company's six to twelve-month asset/liability position at March 31,
1996, was again liability sensitive, with a negative dollar gap of $7.7
million or .93 (at December 31, 1995 the Company's liability sensitivity was a
negative $9.8 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.
<PAGE>
9
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 (dollars in thousands).
<TABLE>
March 31, December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Nonaccruing loans $ 814 $ 763 $ 1,557 $ 1,566 $ 689
Impaired loans 696 696
Accrual loans - 90 days or
more past due 366 689 267 418 439
Total non-performing loans $ 1,876 $ 2,148 $ 1,824 $ 1,984 $ 1,128
Other real estate owned $ 152 $ 208 $ 168 $ 231 $ 330
Loans outstanding at end of
period $161,880 $161,886 $157,144 $143,218 $132,033
Unearned income 220 259 575 1,311 2,506
Loans, net of unearned income $161,660 $161,627 $156,569 $141,907 $129,527
Non-performing loans as percent
of loans, net of unearned
income 1.16% 1.33% 1.17% 1.40% .87%
Total nonperforming assets as a
percent loans of net unearned
income 1.25% 1.46% 1.27% 1.56% 1.13%
Transactions in the allowance for possible loan losses were as follows (in
thousands):
At March 31, Years Ended
December 31,
1996 1995 1994 1993 1992
Balance, beginning of period $1,833 $1,721 $1,516 $1,201 $ 996
Charge-offs (8) (69) (68) (71) (151)
Recoveries 7 18 18 71 32
Provision for loan losses 48 163 255 315 324
Balance, end of period $1,880 $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 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 currently believes that the allowance is adequate to
offset any exposure that may exist for under-collateralized or uncollectible
loans.
The Company has two loans as of March 31, 1996 that it considers
impaired. Management believes that the liquidation of the collateral would
exceed principal, plus interest and fees, thus no allowance reserve is
required. Management continues to monitor the impaired loans and will
liquidate the collateral as soon as legal constraints are past.
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.
<PAGE>
10
Branch Acquisition
On April 20, 1996, the Bank purchased two branch offices of Meridian Bank
of Pennsylvania (Canton and Gillett) comprising approximately $16.5 million of
deposit liabilities; $3.5 million of loans and other assets. 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 that after a modest negative impact on
earnings for 1996, a positive impact on future earning is expected from the
acquisition.
The branch acquisition has had a net positive impact to liquidity by the
addition of deposits from the proceeds of the settlement discussed above.
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.
Except as previously discussed in the section on result of operations,
management believes that the effect of the provisions of this legislation on
liquidity, capital resources, and the results of operations of the company
will not be material.
Aside from those matters described above, management does not currently
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.
<PAGE>
11
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:
Results of the voting at the Annual Meeting of Shareholders April 16,
1996 held at 12:00 p.m. at the Tioga County Fairgrounds Youth Building,
Whitneyville, Pennsylvania, 16901:
1. Election of Class 1 Directors whose term will expire in 1999
For Withhold Authority
Carol J. Bond 914,384 22,553
R. Lowell Coolidge 914,384 22,553
Richard E. Wilber 913,958 22,979
John M. Thomas, M.D. 913,796 23,141
Larry J. Croft 914,384 22,553
Item 5 - Other Information - Nothing to report.
Item 6 - Exhibits and reports on Form 8-K.
(a) Exhibits - None.
(b) Reports - None.
<PAGE>
12
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)
May 10, 1996 /s/ Richard E. Wilber
_______________________
By: Richard E. Wilber
President and Chief Financial Officer
(Principal Executive Officer)
May 10, 1996 /s/ Thomas C. Lyman
_______________________
By: Thomas C. Lyman
Treasurer
(Principal Financial &
Accounting Officer)
<PAGE>
13
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