UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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
Securities registered pursuant to section 12 (b) of the Act:
Title of each class Name of each exchange on
which registered
NOT APPLICABLE NOT APPLICABLE
Securities registered pursuant to section 12 (g) of the Act:
Common Stock, par value $1.00 per share.
(Title of class)
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 total market value of the voting stock of the Registrant
held by non-affiliates (for this purpose, persons or entities
other than executive officers, directors, or 5% or more
shareholders) of the Registrant, as of March 10, 1997, is
estimated to have been approximately $32,000,000.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 or Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
The number of shares outstanding of the Registrant's Common
Stock, as of March 10, 1997, 1,360,228 shares of Common Stock,
par value $1.00.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, III and IV - Definitive Proxy Statement for the Annual
Meeting of Shareholders to be held April 15, 1997.
Parts II and IV - Annual Report to Shareholders for the Year
Ended December 31, 1996.
<PAGE>
Citizens Financial Services, Inc.
Form 10-K
INDEX
Part I Page
Item 1-Business 1-8
Item 2-Properties 9
Item 3-Legal Proceedings 9
Item 4-Submission of Matters to a Vote of Shareholders 10
Part II
Item 5-Market for Registrant's Common Stock and Related
Shareholder Matters 10
Item 6-Selected Financial Data 10
Item 7-Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 8-Financial Statements and Supplementary Data 10
Item 9-Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 11
Part III
Item 10-Directors and Executive Officers of the Registrant 11
Item 11-Executive Compensation 11
Item 12-Security Ownership of Certain Beneficial Owners and
Management 11
Item 13-Certain Relationships and Related Transactions 11
Part IV
Item 14-Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 12
Signatures 14
<PAGE>
Part I
Item 1-Business
Citizens Financial Services, Inc. (the "Company") is a
Pennsylvania business corporation, incorporated April 30, 1984
for the purpose of forming a bank holding company. On April 30,
1984, First Citizens National Bank (the "Bank") became a
wholly-owned subsidiary of the Company by means of a merger in
which the shareholders of the Bank became shareholders of the
Company.
In 1932, First National Bank opened for business in
Mansfield, Pennsylvania. In 1970 the First National Bank in
Mansfield merged with Citizens National Bank of Blossburg,
Pennsylvania to form First Citizens National Bank. In 1971, the
Bank expanded into Potter County through the acquisition of
the Grange National Bank, which had offices in Ulysses and
Genesee, Pennsylvania.
On November 16, 1990, the Company acquired Star Savings and
Loan Association (the "Association"), originally organized as a
Pennsylvania-chartered mutual savings and loan association in
1899 and converted to a Pennsylvania-chartered permanent reserve
fund stock savings and loan association on March 27, 1986. On
December 31, 1991, the Association merged with the Bank
terminating the Association's separate operations as a savings
and loan association.
On April 20, 1996 the Bank purchased two branch offices of
Meridian Bank in Canton and Gillett, Pennsylvania.
On October 31, 1996, the Bank opened a branch office in the new
Weis supermarket in Wellsboro, Pennsylvania.
As of December 31, 1996, the Bank employed 127 full time
equivalent employees at its ten banking facilities.
The Bank currently engages in the general business of
banking throughout its service area of Potter, Tioga and Bradford
counties in North Central Pennsylvania and Allegany, Steuben,
Chemung and Tioga counties in Southern New York. The Bank
maintains its central office in Mansfield, Pennsylvania and
presently operates banking facilities in the communities of
Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre,
Canton and Gillett. Automatic teller machines are 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.
COMPETITION
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 changes to the 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.
<PAGE>
REGULATION AND SUPERVISION
The operations of the Bank are subject to federal and state
statutes applicable to banks chartered under the banking laws of
the United States, to members of the Federal Reserve System and
to banks whose deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC"). Bank operations are also subject
to regulations of the Comptroller of the Currency ("Comptroller").
The primary supervisory authority of the Bank is the
Comptroller, who regularly examines the Bank. The Comptroller
has the authority under the Financial Institutions Supervisory
Act to prevent a national bank from engaging in unsafe or unsound
practice while conducting its business.
The Company is subject to regulation under the Bank Holding
Company Act of 1956, as amended (the "Act"), and is registered
with the Board of Governors of the Federal Reserve System
("Federal Reserve"). Under the Act, bank holding companies are
not permitted, with certain exceptions, to acquire direct or
indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank and are prohibited from
engaging in any business other than that of banking, managing and
controlling banks or furnishing services to its subsidiary banks,
except that they may, upon application, engage in, and may own
shares of companies engaged in, certain businesses found by the
Federal Reserve to be so closely related to banking as to be a
proper incident thereto (if the Federal Reserve determines that
such acquisition will be, on balance, beneficial to the public).
The Act does not place territorial restrictions on the activities
of non-bank subsidiaries of bank holding companies. The Act
requires prior approval by the Federal Reserve of the acquisition
by the Company of more than 5% of the voting stock of any
additional bank. The Company is required by the Act to file
annual reports of its operations with the Federal Reserve
and of any additional information that the Federal Reserve may
require. The Federal Reserve may also make examinations of the
Company and any or all of its subsidiaries. Further, under
Section 106 of the 1970 amendments to the Act and the Federal
Reserve's regulations, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or
provision of credit or provision of any property or service. The
so-called "anti-tie-in" provisions state generally that a bank
may not extend credit, lease property, sell property or furnish
any service to a customer on the condition that the customer
provide additional credit or service to the bank, to its bank
holding company or to any other subsidiary of its bank holding
company or on the condition that the customer not obtain other
credit or service from a competitor of the bank, its bank holding
company or any subsidiary of its bank holding company.
Subsidiary banks of a bank holding company are subject to
certain restrictions imposed by the Federal Reserve Act on any
extensions of credit to the bank holding company or any of its
subsidiaries, or investments in the stock or other securities of
the bank holding company and on taking of such stock or
securities as collateral for loans to any borrower.
PERMITTED NON-BANKING ACTIVITIES
The Federal Reserve permits bank holding companies to
engage in non-banking activities so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
The Company presently does not engage in any such activities nor
does it intend to in the near future.
<PAGE>
The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 is discussed in detail on page 45 of Management's
Discussion and Analysis of the 1996 Annual Report to the
shareholders, which information is included at Exhibit 13, here
of and incorporated berein by reference.
Neither the Company nor its subsidiary anticipates that
compliance with environmental laws and regulations will have any
material effect on capital expenditures, earnings, or on its
competitive position.
The Company is a legal entity, separate and distinct from
the Bank. All of the Company's revenues, including funds
available for payment of dividends and for operating expenses,
are provided by dividends from the Bank. Certain
limitations exist on the availability of the Bank's
undistributed net assets for the payment of dividends to its
parent without prior approval of the bank regulatory authorities
as further described in Footnote 12 of the 1996 Annual Report to
the shareholders, which information is included at Exhibit 13,
here of and incorporated berein by reference.
LEGISLATION AND REGULATORY CHANGES
From time to time, legislation is enacted which has the
effect of increasing the cost of doing business, limiting or
expanding permissible activities or affecting the competitive
balance between banks and other financial institutions.
Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and
other financial institutions are frequently made in Congress, and
before various bank regulatory agencies. Accurate predictions
are difficult to make as to the likelihood of any major changes
or the impact such changes might have on the Company and its
subsidiary. Certain changes of potential significance to the
Company which have been enacted recently and others which are
currently under consideration by Congress or various regulatory
or professional agencies are discussed below.
Risk-Based Capital Guidelines. The Federal Reserve,
the FDIC and the Comptroller have issued certain risk-based
capital guidelines, which supplement existing capital
requirements and have been discussed in the Management Discussion
and Analysis section on page 43 and Footnote 12 of the 1996
Annual Report to the shareholders, which information is included
at Exhibit 13, here of and incorporated berein by reference.
Under the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") enacted December 19,1991, institutions
must be classified in one of five defined categories as
illustrated below (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized).
Total Tier 1 Under a
Risk- Risk- Tier I Capital
Based Based Leverage Order or
Ratio Ratio Ratio Directive
CAPITAL CATEGORY
Well capitalized >10.0 >6.0 >5.0 No
Adequately capitalized > 8.0 >4.0 >4.0*
Undercapitalized < 8.0 <4.0 <4.0*
Significantly undercapitalized < 6.0 <3.0 <3.0
Critically undercapitalized <2.0
*3.0 for those banks having the highest available regulatory
rating.
<PAGE>
In the event an institution's capital deteriorates to the
undercapitalized category or below, FDICIA prescribes an
increasing amount of regulatory intervention, including: (1) the
implementation by a bank of a capital restoration plan and a
guarantee of the plan by a parent institution; and (2) the
placement of a hold on increases in assets, number of branches or
lines of business. If capital has reached the significantly or
critically undercapitalized levels, further material restrictions
can be imposed, including restrictions on interest payable on
accounts, dismissal of management and (in critically
undercapitalized situations) appointment of a receiver. For well
capitalized institutions, FDICIA provides authority for
regulatory intervention where the institution is deemed to be
engaging in unsafe or unsound practices or receives a less than
satisfactory examination report rating for asset quality,
management, earnings or liquidity. All but well capitalized
institutions are prohibited from accepting brokered deposits
without prior regulatory approval.
Under FDICIA, financial institutions are subject to
increased regulatory scrutiny and must comply with certain
operational, managerial and compensation standards to be
developed by Federal Reserve regulations. FDICIA also requires
the regulators to issue new rules establishing certain minimum
standards to which an institution must adhere including standards
requiring a minimum ratio of classified assets to capital,
minimum earnings necessary to absorb losses and minimum ratio of
market value to book value for publicly held institutions.
Additional regulations are required to be developed relating to
internal controls, loan documentation, credit underwriting,
interest rate exposure, asset growth and excessive compensation,
fees and benefits.
From time to time, various types of federal and state
legislation have been proposed that could result in additional
regulation of, and restrictions on, the business of the Company
or the Bank. It cannot be predicted whether any such legislation
will be adopted or, if adopted, how such legislation would affect
the business of the Company or the Bank. As a consequence of the
extensive regulation of commercial banking activities in the
United States, the Company and the Bank's business is
particularly susceptible to being affected by federal
legislation and regulations that may increase the costs of doing
business.
EFFECT OF GOVERNMENT MONETARY POLICIES
The earnings of the Company are and will be affected by
domestic economic conditions and the monetary and fiscal policies
of the United States government and its agencies.
The monetary policies of the Federal Reserve Board have had
and will likely continue to have, an important impact on the
operating results of commercial banks through its power to
implement national monetary policy in order, among other things,
to curb inflation or combat a recession. The Federal Reserve
Board has a major effect upon the levels of bank loans,
investments and deposits through its open market operations in
United States securities and through its regulation of, among
other things, the discount rate on borrowings of member banks and
the reserve requirements against member bank deposits. It is not
possible to predict the nature and impact of future changes in
monetary and fiscal policies (also see page 45 of Management's
Discussion and Analysis of the 1996 Annual Report to the
shareholders, which information is included at Exhibit 13, here
of and incorporated berein by reference).
INVESTMENT PORTFOLIO
The investment portfolio is discussed in detail in Footnote 3,
page 18 and pages 33 and 34 of Management's Discussion and
Analysis of the 1996 Annual Report to the shareholders, which
information is included at Exhibit 13, here of and incorporated
berein by reference.
Investments which have been subject to Moody or Standard and
Poor rating changes are reviewed with the investment committee,
the board of directors and an independent investment advisor.
<PAGE>
Particular attention is given to any security whose rating falls
below "A" by either rating agency at which time the security is
evaluated and a decision is made as to the possible disposition
of the investment (if in compliance with the regulation
concerning held-to-maturity securities).
The investment policy, as described above, has enabled the
Company to effectively manage the portfolio for increased
profits, satisfy liquidity needs and provide adequate
asset/liability management.
LOAN PORTFOLIO
The loan portfolio is discussed in detail in the Annual Report,
page 19 and 20 Footnote 4, and pages 35 and 36 of Management's
Discussion and Analysis.
Authorized lending limits are assigned to each of the Bank's
loan officers based on experience and performance. In addition,
all commercial loans are reviewed by the loan committee
(established by the board of directors) and loans with aggregate
loan relationships over $100,000 are reviewed and approved by the
full board of directors.
Loans which do not meet the Bank's lending policies but
which have merit may be made with U. S. Small Business
Administration or Farmer's Home Administration guarantee.
The Bank, as part of its commitment to the local
communities, makes loans to the municipalities and political
subdivisions in its area of service. These loans are
for local services such as education, water, sewer, solid waste,
and health services. The Bank, prior to the Tax Reform Act of
1986, was also active in local business activity bonds through
the local industrial development authority although at present
there is little demand for this type of loan. Local municipal
loans are made on their individual merits and based on each
municipality's financial strength and capacity to service its
debt.
It is the Bank's policy that when a borrower fails to make a
required payment on a loan, the Bank attempts to cure the
deficiency by contacting the borrower and seeking payment. A
late charge is assessed after 15 days. Notice is sent to the
borrower after a payment is 7 to 15 days past due, depending on
the type of loan. Contact by telephone or in person is made
between 15 and 59 days delinquent. Once the loan is 60 days
delinquent and cannot be cured through normal collection
procedures, the Bank will institute measures to remedy the
default, including commencement of foreclosure action, accepting
from the mortgagor a voluntary deed of security in lieu of
foreclosure or repossession of collateral in the case of consumer
loans.
If foreclosure is effected, the property is sold at public
auction in which the Bank may participate as a bidder. If the
Bank is the successful bidder the acquired asset is then included
in the Bank's "foreclosed assets held for sale" account until it
is sold. When property is acquired it is recorded at the lower
of the loan balance or market value at the date of acquisition
and any write-down resulting therefrom is charged to the
allowance for loan losses. Interest accrual, if any, ceases on
the date of acquisition and all costs incurred in maintaining the
related property from the date of acquisition forward are
expended.
Management believes the Bank's lending policies have been
very successful over the past five years and plans to continue
these practices, giving due consideration to any future
economic changes.
<PAGE>
The Bank's lending policy is to make loans to individuals
with a proven credit history, and minimum of one year at their
present employment, and, for installment and credit line loans, a
monthly debt payment to gross income ratio of less than 40%.
Consumer loans are made primarily on a secured basis, which
collateral normally consists of motor vehicles and liens on real
property. Unsecured loans are made on a limited basis and in
amounts of usually less than $5,000.
The Bank is an active originator of guaranteed student loans
in conjunction with the Pennsylvania Higher Education Assistance
Agency. It is the Bank's policy to sell these loans to the
Student Loan Marketing Association. The total guaranteed student
loans outstanding as of December 31, 1996 was $2,786,000.
Adjustable rate mortgages are fully indexed when originated.
The yearly cap for the one-year adjustable rate mortgage is 2.0%
on any change date and a maximum of 5.0% over the life of the
loan. The yearly cap on the five-year adjustable rate mortgage
is 3.0% on any change date and 5.0% over the life of the loan.
The Bank also has a bi-weekly mortgage payment plan available.
The Bank's commercial and agricultural loans consist of real
estate, equipment, and inventory/accounts receivable/working
capital loans. Real estate, equipment and working capital loans
are made for terms of 15, 7, and 5 years, respectively. These
loans are primarily tied to the Bank's prime rate and are
adjusted at least annually. Commercial and agricultural lending
consists of loans to sole proprietors, partnerships and closely
held corporations typically with sales of less than $2,000,000
annually. In underwriting these loans, consideration is given to
the quality of management, profitability, cash flow, secondary
sources of repayment in the form of owner's capital and
collateral and micro- and macro-economic conditions.
Other consumer loans granted by the Bank consist of single
payment, personal lines of credit, installment loans to finance
vehicles, home improvements and other personal property loans.
The Bank is not dependent for deposits or exposed by loan
concentration to a single customer or to a single industry the
loss of any one or more of which would have a materially adverse
effect on the financial condition of the Bank.
RISK ELEMENTS IN LOAN PORTFOLIO
Business loans are generally placed on nonaccrual status
when principal and interest payments are past due 90 days or more
unless well-secured and in the process of collection. Loans to
individuals that are secured by first or second liens on
residential real estate are placed on nonaccrual status if past
due 90 days or more and a current appraisal indicates that the
value of the collateral is less than the loan balance. Consumer
installment loans are generally charged-off when they become 90 -
120 days delinquent and collection efforts have failed to prompt
payment and/or the security has been repossessed. The risk
elements of the loan portfolio are discussed in detail in the
Annual Report, page 19 and 20 Footnote 4, and pages 35 and 36 of
Management's Discussion and Analysis.
ALLOWANCE AND PROVISION FOR POSSIBLE LOAN LOSSES
The provision for loan losses is used to increase the
allowance for possible loan losses and is influenced by the
growth and quality of loans. In each accounting period, the
allowance for possible loan losses is adjusted to the amount
deemed necessary to maintain the allowance at adequate levels.
In determining the adequacy of the allowance for possible loan
losses, management considers the financial strength of borrowers,
past loan loss experience, loan collateral, changes in volume and
composition of the loan portfolio and current and projected
economic conditions. The Company regularly monitors the
creditworthiness and financial condition of its larger borrowers.
See further discussion in the annual report, page 19 and 20,
footnote 4, and pages 40 through 43 of Management's Discussion and Analysis.
The following table gives a five year comparison of the allowance
for loan losses and the percentage of total loans in each
category:
<TABLE>
Allocation of the Allowance for Loan Losses
December 31,
By percent of loans in each category to total loans
1996 1995 1994 1993 1992
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate - residential $ 143 59.4 $ 165 59.6 $ 185 62.0 $ 181 64.2 $ 193 64.5
Real estate - commercial,
agricultural 325 18.5 328 19.9 323 18.5 253 16.9 147 15.9
Real estate - construction 0 2.3 0 0.6 0 0.8 0 0.8 0 0.6
Loans to individuals for
family and other purchases 164 8.0 181 8.2 140 7.6 174 8.2 159 9.6
Commercial and other 108 6.3 110 6.5 114 6.5 94 6.3 63 6.7
State and political
subdivision loans 3 5.5 3 5.2 2 4.6 2 3.6 1 2.7
Unallocated 1,252 N/A 1,046 N/A 957 N/A 812 N/A 638 N/A
Total loans $1,995 100.0 $1,833 100.0 $1,721 100.0 $1,516 100.0 $1,201 100.0
</TABLE>
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
Management in any financial institution is required
to ensure that liquidity is adequate to satisfy contractual
liabilities, meet withdrawal requirements of depositors, fund
operations and provide for customers' credit needs. The adequacy
of such liquidity is measured by examining the balance sheet
components of the Company's statement of condition.
Asset liquidity is provided through receipt of loan payments and
the conversion of investments and similar assets into cash.
Liability liquidity results from the ability to attract funds
from diversified funding sources at reasonable costs. While
providing for liquidity, however, management must be aware of the
need to monitor the rate sensitivity of interest-earning assets
and interest-bearing liabilities which will provide for continued
profitability in changing interest rate environments. See
further discussion in the Annual Report pages 43 and 44 of
Management's Discussion and Analysis.
The Asset/Liability Management ("ALM") Committee of the
Company manages rate sensitivity to enhance net
interest income and margin while maintaining an asset/liability
mix balances liquidity needs and interest rate risk and is
discussed in further detail on pages 37 through 39 in the
Management's Discussion and Analysis section of the 1996 Annual
Report. The ALM Committee endeavors to control interest rate risk
through management of rate sensitive assets and rate
sensitive liabilities and by balancing the maturity and pricing
of the Company's loan and deposit products. Interest rate risk
arises when an interest-earning asset or interest-bearing
liability matures at different intervals or its interest rate
changes during a different time frame. The difference between
assets subject to rate change over a specific period and
liabilities subject to change over the same period is referred to
as the interest rate sensitivity gap. A gap is considered
positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate
sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income
while a positive gap would tend to result in increased net
interest income. Based on the ALM Committee's perception as to
the trend of interest rates, it may adjust the maturities and
pricing of the Company's loan and deposit products in order to
achieve or maintain a desired level of net interest revenue. The
level of interest rate risk which the ALM Committee determines is
acceptable may change periodically in an effort to attain a
consistent level of profits while remaining within the Company's
loan and investment policy guidelines.
<PAGE>
It has been management's policy to maintain a conservative gap
interest rate sensitivity position (i.e., an interest rate
sensitivity ratio in the range of positive 1.25 to negative .75).
This is because assets and liabilities with similar contractual
repricing characteristics or with out stated maturities may not
reprice at the same time or to the same degree. In particular
the repricing of the non-maturity core deposits represented by
NOW, savings, and money market investor accounts, have
characteristics that are difficult to measure using gap analysis.
In addition to gap analysis, management now simulates the
potential effects of changing interest rates through computer
modeling. The Company is better able to implement strategies
which would include an acceleration of interest rates and the
effect on non-maturity deposits. Some of the key assumptions of
this model, as established by the history are that: since the
non-maturity core deposits are tiered they do not reprice
immediately, except for the top tier money (over $100,000) money
market investor funds, which are priced at current market rates;
non-maturity core deposits will decay based on industry
experience (also used for gap analysis); 65% of IRA certificates
of deposit (most are 5 year maturities) reprice within one year
if the new rate is higher but do not reprice if the new rate is
lower (65% of the IRA customers are over 59 and one-half years of age);
prepayment speeds are established within the model that are
adjusted to reflect the degree of change in interest rates and
the impact on loans and certificates of deposit.
Computer model simulations have been generated using 200 basis
point parallel shocks to the yield curve (up and down) over one
year and simulations using a step up of interest rates over a two
year period (300 basis points). No simulations to date have
indicated a major impact to the earnings or the market value of
portfolio equity. However, management and the board of director
are currently evaluating these simulations, and others to
establish appropriate guidelines and procedures to implement when
earnings or equity value appear to be at risk.
Analysis of the Consolidated Statement of Cash Flows (refer to
annual report to shareholders) indicates funds from operating
activities continues to be a stable source of funds. Even after
deducting for dividends, there are adequate funds being added to
equity capital (consistent with asset growth). This is further
discussed on pages 43 through 45 of Management's Discussion and
Analysis section of the 1996 Annual Report to the shareholders,
which information is included at Exhibit 13, here of and
incorporated berein by reference.
CAPITAL ADEQUACY
A description of the Company's capital adequacy is presented
on page 25, Footnote 12 and on page 43 of the Management's
Discussion and Analysis section of the 1996 Annual Report to the
shareholders, which information is included at Exhibit 13, here
of and incorporated berein by reference.
<PAGE>
Item 2-Properties
The headquarters of the Company is located in Mansfield,
Pennsylvania. The building contains the central offices of the
Company and the Bank. The Bank also owns six other banking
facilities. All buildings are owned by the Bank in fee and are
free of any liens or encumbrances.
PROPERTIES Current Building
Construction Date
Main office:
15 South Main St.
Mansfield, PA 16933 1971
Branch offices:
320 Main St.
Blossburg, PA 16912 1988
502 Main St.
Ulysses, PA 16948 1977
Main St.
Genesee, PA 16923 1985
306 West Lockhart St.
Sayre, PA 18840 1989
99 Main St.
Wellsboro, PA 16901 1979
103 West Main St.
Troy, PA 16947 1988
29 West Main St.
Canton, PA 17724 1974
Main St.
Gillett, PA 16925 1970
The net book value for the above properties as of December
31, 1996 was $3,256,000. The properties are adequate to meet the
needs of the employees and customers. The Mansfield office
includes the corporate headquarters and is in need of
expansion which is currently being reviewed by management and the
board of directors as discussed further in Management's
Discussion and Analysis on page 44 of the 1996 Annual Report to
the shareholders, which information is included at Exhibit 13,
here of and incorporated berein by reference. Additionally, the
Canton and Gillett offices are expected to receive approximately
$150,000 in improvements during 1997. All of the facilities are
equipped with current technological improvements for data and
word processing.
Inflation has impact on the Company's operating costs, however,
unlike many industrial companies, substantially all of the
Company's assets and liabilities are monetary in nature. As a
result, interest rates have a more significant impact on the
Company's performance than the general level of inflation. Over
short periods of time, interest rates may not necessarily move in
the same direction or in the same magnitude as prices of goods
and services.
Item 3-Legal Proceedings
Management is not aware of any litigation that would have a
material adverse effect on the consolidated financial position of
the Company. There are no proceedings pending other than
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.
<PAGE>
Item 4-Submission of Matters to a Vote of Shareholders
There were no matters submitted to a vote of security
holders in the fourth quarter of 1996.
Part II
Item 5-Market for the Registrant's Common Stock and Related
Shareholder Matters
The Company's common stock is traded by local brokerage
firms and is not listed on any stock exchange.
Market and dividend information is incorporated by reference to
pages 31 and 48 of the Company's 1996 Annual Report to the
Shareholders which pages are included in Exhibit 13 hereto.
The Company has paid dividends since, April 30, 1984, the
effective date of its formation as a bank holding company. The
Company's Board of Directors intends to continue the dividend
payment policy; however, future dividends
necessarily depend upon earnings, financial condition,
appropriate legal restrictions and other factors as in existence
at the time the Board of Directors considers dividend policy.
Cash available for dividend distributions to shareholders of the
Company comes from dividends paid to the Company by the Bank.
Therefore, restrictions on the ability of the Bank to make
dividend payments are directly applicable to the Company.
Under the Pennsylvania Business Corporation Law of 1988,
the Company may pay dividends only if, after payment, the Company
would be able to pay its debts as they become due in the usual
course of its business and it's total assets are greater than the
sum of its total liabilities.
As of March 10, 1997, the Company has approximately 1,408
shareholders of record.
Item 6-Selected Financial Data
The information required by this item is incorporated by
reference to page 31 of the 1996 Annual Report to the
shareholders, which information is included at Exhibit 13, here
of and incorporated berein by reference.
Item 7-Management's Discussion and Analysis of Financial
Condition and Results of Operations
The information required by this item is incorporated by
reference to pages 33 - 45 of the 1996 Annual Report to the
shareholders, which information is included at Exhibit 13, here
of and incorporated berein by reference.
Item 8-Financial Statements and Supplementary Data
The information required by this item is incorporated by
reference to pages 11 - 29 and 32 of the 1996 Annual Report to
the shareholders, which information is included at Exhibit 13,
here of and incorporated berein by reference.
Financial Statements:
Consolidated Balance Sheet as of December 31, 1996 and 1995
Consolidated Statement of Income for the Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
<PAGE>
Item 9-Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None
Part III
Item 10-Directors and Executive Officers of the Registrant
Information appearing in the definitive Proxy Statement under the
caption "Information as to Nominees, Directors and Executive
Officers" and "Principal Officers" to the Annual Meeting of
Shareholders to be held April 15, 1997, is incorporated herein by
reference in response to this item.
Item 11-Executive Compensation
Information appearing in the definitive Proxy Statement under the
caption "Remuneration of Officers and Directors" related to the
Annual Meeting of Shareholders to be held April 15, 1997, is
incorporated herein by reference in response to this item.
Item 12-Security Ownership of Certain Beneficial Owners and
Management
Information appearing in the definitive Proxy Statement at under
the caption "Principal Beneficial Owners of the Corporation's
Stock" related to the Annual Meeting of Shareholders to be held
April 15, 1997, is incorporated herein by reference in response
to this item.
Item 13-Certain Relationships and Related Transactions
Information appearing in the definitive Proxy Statement under the
caption "Certain Transactions" related to the Annual Meeting of
Shareholders to be held April 15, 1997, is incorporated herein by
reference in response to this item.
<PAGE>
Part IV
Item 14-Exhibits, Financial Statement Schedules and Reports on
Form 8-K Documents Filed as Part of this Report:
14(a)1-Financial Statements. The following consolidated
financial statements of Citizens Financial Services, Inc. and
subsidiary included in the 1996 Annual Report are incorporated by reference
in Item 8:
Consolidated Balance Sheet as of December 31, 1996 and 1995
Consolidated Statement of Income for the Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
14(a)2-Financial Statement Schedules. Financial Statement
Schedules are omitted because the required information is either
not applicable, not required or is shown in the respective
financial statement or in the notes thereto.
14(a)3-Exhibits:
(3)(i) - Articles of Incorporation of the Corporation, as
amended incorporated by reverence to Exhibit
(3)(i) to the Annual Report of Form 10-K for the
fiscal year ended December 31, 1995, as filed with
the Commission on March 26, 1996.
(3)(ii)- By-laws of the Corporation, as amended incorporated
by reverence to Exhibit (3)(ii) to the Annual
Report of Form 10-K for the fiscal year ended
December 31, 1995, as filed with the Commission on
March 26, 1996.
(4) - Instruments Defining the Rights of Shareholders as
filed in the registration statement on Form S-14
are incorporated herein by reference thereto.
(Incorporated by reference to the Registrant's
Registration Statement No.2-89103 on Form S-14,
as filed with the Commission on February 17,
1984.)
(10) - Material Contracts. Employment Agreement between the
Company and Richard E. Wilber.
(11) - Computation of Earnings Per Share. In the 1996 Annual
Report to the shareholders, which information is
included at page 17, Exhibit 13, here of and
incorporated berein by reference.
(13) - Annual Report to Shareholders for the year ended
December 31, 1996.
(21) - Subsidiaries of Citizens Financial Services, Inc.
(27) - Financial Data Schedule
14(b)-No current report on Form 8-K was filed by the Registrant
during the fourth quarter of the 1996 fiscal year.
14(c)-The exhibits required by this Item are listed under Item
14(a) above.
14(d)-Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, there
unto duly authorized.
Citizens Financial Services, Inc.
(Registrant)
/s/ Richard E. Wilber /s/ Thomas C. Lyman
By: Richard E. Wilber By: Thomas C. Lyman
President, Chief Executive Officer Treasurer
(Principal Executive Officer) (Principal Financial &
Accounting Officer)
Date: March 18, 1997 Date: March 18, 1997
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature and Capacity Date
/s/ Richard E. Wilber March 18, 1997
Richard E. Wilber, President,
Chief Executive Officer, Director
(Principal Executive Officer)
_________________________
Robert E. Dalton, Director
/s/ Carol J. Tama March 18, 1997
Carol J. Tama, Director
/s/ Lowell Coolidge March 18, 1997
Lowell Coolidge, Director
/s/ Rudolph J. van der Hiel March 18, 1997
Rudolph J. van der Hiel, Director
/s/ John Novak March 18, 1997
John Novak, Director
/s/ Bruce L. Adams March 18, 1997
Bruce L. Adams, Director
/s/ William D. Van Ettan March 18, 1997
William D. Van Ettan, Director
/s/ Larry Croft March 18, 1997
Larry Croft, Director
/s/ Thomas C. Lyman March 18, 1997
Thomas C. Lyman, Treasurer
(Principal Financial and Accounting Officer)
<PAGE>
EXHIBITS INDEX
(3)(i) - Articles of Incorporation of the Corporation, as amended
incorporated by reverence to Exhibit (3)(i) to the Annual
Report of Form 10-K for the fiscal year ended December 31,
1995, as filed with the Commission on March 26, 1996.
(3)(ii)- By-laws of the Corporation, as amended incorporated by
reverence to Exhibit (3)(ii) to the Annual Report of Form 10-K
for the fiscal year ended December 31, 1995, as filed with the
Commission on March 26, 1996.
(4) - Instruments Defining the Rights of Shareholders as filed in
the registration statement on Form S-14 are incorporated
herein by reference thereto. (Incorporated by reference to
the Registrant's Registration Statement No.2-89103 on Form S-14, as filed
with the Commission on February 17, 1984.)
(10) - Material Contracts. Employment Agreement between the
Company and Richard E. Wilber.
(11) - Computation of Earnings Per Share. In the 1996 Annual Report
To the shareholders, which information is included at page 17,
Exhibit 13, here of and incorporated berein by reference.
(13) - Annual Report to Shareholders for the year ended December
31, 1996.
(21) - Subsidiaries of Citizens Financial Services, Inc.
(27) - Financial Data Schedule
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT ("Agreement"), dated April 16, 1996 by and between
CITIZENS FINANCIAL SERVICES, INC. (the "Corporation"), and Richard
E. Wilber ("Executive").
WITNESSETH THAT:
WHEREAS, Executive presently is the duly elected and acting
President of the Corporation and First Citizens National Bank (the
"Bank"); and
WHEREAS, the Corporation recognizes the valuable services that
Executive has rendered and desires to be assured that Executive
will continue his active participation in the business of the
Corporation and the Bank; and
WHEREAS, the Corporation and Executive desire to set forth the
benefits to which Executive would be entitled in the event that
Executive's employment by the Corporation is terminated, as outlined
herein;
NOW THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the Corporation and Executive hereby
agree as follows:
1. Termination.
The Executive's employment hereunder may be terminated without
any breach of the Agreement only under the following circumstances.
(a) Death. The Executive's employment shall be
terminated upon his death.
(b) Retirement. Corporation may terminate the
Executive's employment upon his retirement in accordance with
the Corporation's retirement policies, including early
retirement, generally applicable to its salaried employees,
provided, however, that after Executive attains the age of
sixty-five (65) this Agreement may be extended annually on a
year-to-year basis by written consent of both parties.
<PAGE>
(c) Cause. Termination by the Corporation of
Executive's employment for "Cause" shall mean termination
because of misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, or regulation (other than
traffic violations or similar offenses), or final cease-and-desist
order, or material breach of any provision of any
employment contract between the Corporation and the Executive,
including this Agreement, the willful engaging of the
Executive in misconduct injurious to Corporation, monetarily
or otherwise, or the commission of any act involving moral
turpitude or other conduct on the part of Executive which
brings public discredit to Corporation or Bank. For purposes
of this paragraph, no act or failure to act, on Executive's
part shall be considered "willful" unless done, or omitted to
be done, by Executive not in good faith and without reasonable
belief that Executive's action or omission was in the best
interest of the Corporation. Notwithstanding the foregoing,
Executive shall not be deemed to have been terminated for
Cause unless and until there shall have been delivered to
Executive a copy of a Notice of Termination, after reasonable
notice to Executive and an opportunity for Executive, together
with Executive's counsel, to be heard before the Board of
Directors of the Corporation, and a finding that in the good
faith opinion of such Board, Executive was guilty of conduct
set forth above in the first sentence of this Section 1 (c),
such finding specifying the particulars thereof in detail.
(d) Termination by Executive for Good Reason. Termination by
Executive of his employment for "Good Reason"
shall mean termination by Executive based on a change in
control of the Corporation. For purposes of the Agreement, a
"change in control" of Corporation shall mean a change in
control of the nature that would be required to be reported in
response to item 6(e) of Schedule 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange
Act') or any successor thereto; provided that, without
limitation, such a change in control shall be deemed to have
occurred if any person (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act), other than a person or persons
who are directors or offices of the Corporation or the Bank,
is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities
of the Corporation representing twenty-five percent (25%) or
more of the combined voting power of Corporation's then
outstanding securities; or during any period of two (2) or
more consecutive years, individuals who at the beginning of
such period constitute the Board of Directors of Corporation
cease for any reason to constitute at least a majority thereof
unless the election, or the nomination for election by
Corporation's stockholders, or each new director was approved
by a vote of at least two-thirds (2/3) of the directors then
still in office who were directors at the beginning of the
period.
<PAGE>
(i) Executive may terminate his employment with
Corporation within twenty four (24) months of a change in
control of Corporation if the Corporation assigns to
Executive, without Executive's express written consent,
any duties inconsistent with Executive's positions,
duties, responsibilities and status with the Corporation
immediately prior to a change in control, or changes the
Executive's reporting responsibilities, titles or offices
as in effect immediately prior to a change in control, or
removes the Executive from or fails to re-elect Executive
to any such positions, titles, or offices, except in
connection with the termination of Executive's employment
for Cause, Disability or Retirement or as a result of
Executive's death or by Executive other than for Good
Reason.
(ii) Executive may terminate his employment with
Corporation within twenty four (24) months of a change in
control of Corporation, if the Corporation reduces the
Executive's base salary as in effect on the date of the
change in control or as the same may be increased from
time to time thereafter.
(iii) Executive may terminate his employment
with the Corporation within twenty four (24) months of a
change in control of Corporation, if the Corporation
fails to continue in effect any benefit or compensation
plan, stock ownership plan, stock purchase plan, stock
option plan, life insurance plan, health-and-accident
plan, disability plan or any other benefit plan in which
Executive is participating at the time of a change in
control of Corporation, the Corporation takes any action
which would adversely affect Executive's participation in
or materially reduce Executive's benefits under any of
such plan or the Corporation deprives Executive of any
material fringe benefit enjoyed by Executive at the time
of a change in control of Corporation.
(iv) Subsequent to a change in control of
Corporation or Bank, any purported termination of
Executive's employment which is not effected pursuant to
a Notice of Termination satisfying the requirements of
paragraph (2) below (and, if applicable, paragraph 1(c)
above); and for purposes of this Agreement, no such
purported termination shall be effective.
(e) Disability. The Executive's employment may be
terminated by the Executive upon his disability as defined
herein, provided that the Executive shall provide prior
written notice, if reasonably possible, of such disability
termination at least fourteen (14) days in advance of the
planned termination date and, if requested by the Corporation,
shall furnish Corporation with a written statement from a
qualified doctor to such effect and provided, further, that at
Corporation's request, the Executive shall have concurred with
the conclusion of the Executive's doctor with respect to the
disability.
The Executive's employment may be terminated by the
Corporation upon Executive's disability, as set forth below.
<PAGE>
"Disability" shall mean the Executive's inability to
perform the essential functions of his job with or without a
reasonable accommodation for a period longer than the
following: (1) after Executive has exhausted all accumulated
sick leave days as a result of Executive's absence from his
duties due to physical or mental illness, unless within thirty
(30) days after Notice of Termination (as hereinafter defined)
is given following such absence, Executive shall have returned
to the full time performance of his duties; or (2) after
Executive's absence from his duties on a full time basis for
ninety (90) consecutive business days with such absence being
due to Executive's incapacity as a result of physical or
mental illness; unless within thirty (30) days after Notice of
Termination (as hereinafter defined) is given following such
absence, Executive shall have returned to the full time
performance of his duties.
2. Notice of Termination.
Any purported termination by the Corporation to paragraphs
1(b), (c) or (e) above or by Executive pursuant to paragraph (d)
above shall be communicated by a written "Notice of Termination" to
the other party hereto. For purposes of this Agreement, a "Notice
of Termination" shall mean a notice which shall indicate the
specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment
under the provision so indicated.
(a) Date of Termination. "Date of Termination" shall
mean:
(i) if Executive's employment is terminated for
Disability, thirty (30) days after Notice of Termination
is given provided that Executive shall not have returned
to the performance of Executive's duties on a full-time
basis during such thirty (30) day period'
(ii) if Executive's employment is terminated
pursuant to paragraph (c) above, the date specified in
the Notice of Termination; and
(iii) if Executive's employment is terminated
for any other reason, the date on which a Notice of
Termination is given or as specified in such Notice;
provided such date shall not be less than thirty (30)
days nor more than ninety (90) days after such Notice of
Termination is given.
<PAGE>
3. Benefits Upon Termination.
(a) If Executive's employment by the Corporation shall
be terminated by the Corporation for any reason other than the
Executive's Retirement, Disability or Death as described in
paragraph 1(a), (b) or (e) or for cause as described in
paragraph 1(c), the Executive or his designee as defined in
Section 7(b) shall be entitled to receive from Corporation,
within thirty (30) business days of the Date of Termination,
a lump-sum payment in cash in an amount equal to one hundred
percent (100%) of the Base Amount (as defined herein) of the
Executive.
In addition, the Executive shall be entitled to remain a
participant in any health and accident, disability and life
insurance plan of Corporation or Bank in which Executive was
a participant at the Date of Termination, provided such
continued participation does not violate the provisions or
conditions of such plan or policies or does not violate any
state or federal law, rule or regulation. If Executive's
participation in such plans amounts to a violation of the
plans or policies or of state or federal laws or regulations,
the Corporation shall pay the Executive on a monthly basis
those sums equal to premiums which the Corporation would have
paid on behalf of the Executive if he had been permitted to
continue participating in the applicable health and accident,
disability and/or life insurance plan. These payments shall
terminate on the twelve-month anniversary of the date of
Termination, or the first date of employment by the Executive
in a full-time position with any other company, whichever
occurs first.
Executive shall be entitled to only those pension and
profit sharing benefits as shall have accrued prior to the
Date of Termination.
In addition to the amounts listed above, if a Change in
Control occurs as defined in paragraph 1(d) above within
twelve months of the termination of the Executive, the
Corporation shall pay to Executive an additional lump-sum cash
payment of seventy-five percent (75%) of the Base Amount.
This sum shall be paid within thirty (30) days of the Change
in Control.
(b) If Executive's employment by the Corporation shall
be terminated due to a Change in Control of the Corporation or
if Executive terminates his employment for Good Reason as
defined in 1(d), then Executive will receive within 30
business days of the Date of Termination, a lump-sum benefit
in cash equal to one hundred seventy-five percent (175%) of
the Base Amount. In addition, Executive shall be entitled to
remain a participant in any health and accident, disability
and life insurance plan of employer in which Executive was a
participant at the Date of Termination provided such
continuation as a plan participant does not violate provisions
or conditions of such plan or policies or does not violate any
federal or state law, rule or regulation.
<PAGE>
If Executive's participation in such plans amounts to
violation of the plans or policies or of state or federal laws
or regulations, the Corporation shall pay Executive, on a
monthly basis, those sums equal to premiums which the
Corporation would have paid on behalf of the Executive if he
had been permitted to continue participating in the applicable
health and accident, disability and/or life insurance plan.
These payments shall terminate on the twelve-month anniversary
of the date of termination, or the first date of employment by
the Executive in a full-time position for any other company,
whichever occurs first.
(c) In the event the lump-sum severance payment made
pursuant to this Section 3 hereof, either alone or together
with other payments which the Executive has the right to
receive from Corporation, would constitute a Parachute
Payment, such lump-sum severance payment shall be reduced to
the largest amount as will result in no portion of the lump-sum
severance payment under Section 3 hereof being subject to
the excise tax imposed by Section 4999 of the Internal Revenue
Code of 1954, as amended (the "Code"). The determination of
any reduction in the lump-sum severance payment under Section
3 hereof pursuant to the foregoing provision shall be made
independent counsel to the Corporation in consultation with
the Independent Certified Public Accountants of the
Corporation.
(d) The Corporation and the Executive recognize that
this Agreement may have to be amended in order to reflect any
future regulations promulgated under Section 280G of the Code
to assure that no Excess Parachute Payments would be paid to
the Executive by the Corporation upon termination of
employment pursuant to the Section 3, and hereby agree in good
faith negotiate such an amendment and to not unreasonably
withhold consent thereto upon the promulgation of any such
regulations.
4. Base Amount, Parachute Payments and Present Value.
"Base Amount", "Parachute Payments", "Excess Parachute
Payments", and "Present Value" shall each have the meanings
attributed to them under the Code and any regulations which may be
promulgated after the date hereof as necessary or appropriate to
carry out the purposes of this section.
5. Relocation Expenses.
In the event Executive is transferred by or at the request of
Corporation at any time during the term of this Agreement to a new
principle place of work, Corporation shall reimburse Executive:
(a) All reasonable expenses paid or incurred for the
moving of the personal effects and household goods of
Executive and Executive's family to Executive's new residence.
(b) Any reasonable loss incurred by Executive in the
sale of Executive's residence at Executive's home in Mansfield,
which loss shall be determined by the long term capital loss
incurred by Executive in the sale of his residence for federal
income tax purposes under the Code.
<PAGE>
6. Mitigation.
Executive shall not be required to mitigate the amount of any
payment provided for in Section 3 hereof by seeking other
employment or otherwise, nor, with the exception of those
limitations regarding payments for health and accident disability
life insurance policies found in Section 3(a) and (b) above, shall
the amount of any payment provided for in Section 3 be reduced by
any compensation earned by Executive as a result of employment by
another employer after the Date of Termination, or otherwise.
7. Successors; Binding Agreement.
(a) The Corporation will require any successor (whether
direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or
assets of the Corporation, by agreement in form and substance
satisfactory to Executive, to expressly assume and agree to
perform this Agreement in the same manner and to the same
extent that Corporation would be required to perform it if no
such succession had taken place. Failure of the Corporation
to obtain such agreement prior to the effectiveness of any
such succession shall be a breach of this Agreement and shall
entitle Executive to compensation from the Corporation in the
same amount and on the same terms as Executive would be
entitled hereunder if Executive terminated his employment for
Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes
effective shall be deemed the Date of Termination. As used in
the Agreement, "Corporation" shall mean the Corporation as
hereinbefore defined and any successor to its business and/or
assets as aforesaid which executes and delivers the Agreement
provided for in this paragraph 7 or which otherwise becomes
bound by all other terms and provisions of this Agreement by
operation of law.
(b) This Agreement shall inure to the benefit of and be
enforceable by Executive's personal and legal representatives,
executors, administrators, successors, heirs, distributees,
devisees and legatees. If Executive should die while any
amount would still be payable to Executive hereunder if
Executive had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to Executive's devisee, legatee or
other designee or, if there be no such person, to Executive's
estate.
8. Notice. For purposes of this Agreement, notices and all
other communications provided for in this Agreement shall be in
writing and shall be deemed to have been duly given when delivered
or mailed by Unites States certified or registered mail, return
receipt requested, postage prepaid, addressed to the respective
addresses set forth below:
To Corporation: Chairman of the Board
Citizens Financial Services, Inc.
15 South Main Street
Mansfield, PA 16933
To Executive: Richard E. Wilber
20 Wakefield Terrace
Mansfield, PA 16933
<PAGE>
9. Miscellaneous. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing signed by Executive and such
officer as may be specifically designated by the Board of Directors
of the Corporation to sign on behalf of the Corporation. No waiver
by either party hereto at any time of any breach by the other party
hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a
waiver of similar or dissimilar provisions or conditions at the
same or at any prior to, or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by any party
which are not expressly set forth in the Agreement; provided,
however, that this Agreement shall not supersede or in any way
limit the rights, duties or obligations the Executive may have
under any other written agreement with the Corporation. The
validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the Commonwealth of
Pennsylvania.
10. Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
unenforceability of any other provision of this Agreement, which
shall remain in full force and effect.
11. Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original
but all of which together will constitute one and the same
instrument.
12. Arbitration. Any dispute or controversy arising under
or in connection with this Agreement shall be settled exclusively
by arbitration in Mansfield, Pennsylvania, or at any other mutually
acceptable location in accordance with the rules of the American
Arbitration Association then in effect. Judgement may be entered
on the arbitrator's award in any court having jurisdiction.
13. Regulatory and Other Proceedings. The provisions of this
Section 13 shall control as to the continuing rights and
obligations under this Agreement for as long as they are required
to be included in employment contracts for officers of an
institution insured by the Federal Deposit Insurance Corporation
("FDIC"), and so long as the Bank is an insured institution.
(a) The Executive is suspended and/or temporarily
prohibited from participating in the conduct of the Bank's
affairs by a Notice served under 12 U.S.C.S. 1818(e)(4) and
(g)(1)[the Federal Deposit Insurance Act of September 21,
1950, Chapter 967], the Corporation's obligations under this
Agreement shall be suspended as of the date of service, unless
stayed by appropriate proceedings. If the charges in the
notice are dismissed, the Corporation shall pay the Executive
all of the compensation withheld while its obligations
hereunder were suspended and reinstate its obligations.
(b) If the Executive is removed and/or permanently
prohibited from participating in the conduct of the Bank's
affairs by any order issued under 12 U.S.C.S. 1818(e)(1)(2)(3)
and (g)(1)[the Federal Deposit Insurance Act of September 21,
1950, Chapter 967] all obligations of the Corporation under
this Agreement shall terminate as of the effective date of the
order, provided that vested rights of the contracting parties
shall not be affected.
<PAGE>
(c) If the Bank becomes in default (as defined in
Section 401 (d) of the National Housing Act), or any other
similar United States Statute regulating national banks, all
obligations under this Agreement shall terminate as of the
date of default, provided that this paragraph shall not affect
any vested rights of the contracting parties.
(d) All obligations under this Agreement shall be
terminated, except to the extent determined that continuation
thereof is necessary for the continued operation of the Bank,
by the FDIC at the time the FDIC enters into an agreement to
provide assistance to or on behalf of the Bank, under the
authority of any United States Statue or regulations adopted
pursuant thereto, at the time such Board of its principal
supervisory agent approves a supervisory merger to resolve
problems related to the operation of Bank or when Bank is
determined by the Board to be in an unsafe or unsound
condition, provided that any rights of the parties that have
already vested shall not be affected by such action.
IN WITNESS WHEREOF, this Agreement has been executed as of the
date first above written.
ATTEST: CITIZENS FINANCIAL SERVICES, INC.
/s/ Terry B. Osborne By /s/ Robert Dalton
Secretary Robert Dalton, Chairman of the
Board of Directors
WITNESS:
/s/ William Van Etten By /s/ Richard E. Wilber
Richard E. Wilber, President
<PAGE>
EXHIBIT "A"
[Presently, First Citizens does not have a policy regarding
termination of employment for employees with long-term
disabilities; however, one is being considered. Any termination
provision will incorporate FMLA requirements if applicable, and
First Citizens short and long-term disability plans. Decisions
need to be made regarding employment return to work cutoff as it
relates to disability, benefits accrual during disability and
whether benefits will also terminate if employment is terminated
due to long-term disability. Disability "retirement" should be
considered. The absolute minimum time frame should be six months.
Many employers use six months to one year as the cutoff. To my
knowledge, none have extended the cutoff beyond two years.]
<PAGE>
CITIZENS
FINANCIAL SERVICES
INCORPORATED
ANNUAL REPORT
1996
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To our Shareholders, Customers and Employees:
As you review this 1996 annual report, you will quickly become
aware of the tremendous success we enjoyed this past year. It is
a pleasure to issue this report because it represents another
year of record achievement. The directors and employees deserve
recognition for their enthusiastic pursuit of many new strategic
initiatives undertaken this year. You would be proud of their
superb dedication in stepping up to these challenges. The end
result whether measured in asset growth, customer and community
service, or earnings and return on shareholder investment is
continued success!
Allow me to summarize some of this year's highlights.
new community offices
On April 20, 1996, we welcomed two more communities to our
corporation. The Canton and Gillett offices were acquired from
Meridian Bancorp, Inc. (subsequently purchased by CoreStates).
As a result of this transaction, we added $17.1 million in
deposits and $3.7 million in loans. More importantly, we had the
opportunity to bring our "community banking" philosophy back to
these customers and communities.
Supermarket banking has recently become a significant national
trend, however this trend had not reached our area until now!
On October 31, 1996, we were delighted to open our first
supermarket office, a 660 square-foot section within the Weis
Market "superstore" just east of the borough of Wellsboro. At
this facility, we offer 62 hours of service weekly (including
Saturday and Sunday hours). The public reception of the new Weis
Market has been tremendous and we are pleased with the deposit
and loan growth in the early stages.
financial performance
During 1996 we saw total assets grow $35.7 million (14.5%) from
$247.1 million to $282.8 million. Deposits and loans grew $26.9
million (12.6%) and $20.6 million (12.9%), respectively. A
considerable portion of the deposit growth occurred because of
the Canton and Gillett office acquisition as mentioned above.
Loan demand in 1996 was very strong as evidenced by the $75
million of credit extended as compared to $50 million in 1995.
The quality of our loan portfolio remains very high. Net loan
charge-offs in 1996 were $43 thousand as compared to $51 thousand
in 1995. The allowance for possible loan losses was $2 million
at year-end 1996, representing 1.1% of gross loans nearly the
same relationship as the 1995 allowance to gross loans. Loans
not accruing interest totaled $1.3 million versus $1.5 million at
year-end 1996 and 1995, respectively. The largest loans among
this group are secured by mortgage liens and we therefore expect
minimal loss exposure.
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being recognized for years of service, bottom left of page,
approximately 3.5 inches by 2 inches]
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First Citizens National Bank employees were recognized for
five-year intervals of service. Shown from left are: Judy Wetzel
(10), Allan Reed (15), Gina Boor (5), Dick Wilber (15), Lynett
Myers (10), Bill Austin (5) and Pam King (10). Not shown: Kathy
Brooks (5), Wendy Southard (5), Katie Brown (10), Deb Scott (15),
Gail Gunther (15), and Bob Wrisley (20).
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presenting a plaque to an employee of the Corporation, center top
of page, approximately 2.5 inches by 3 inches]
_________________________________________________________________
Shari L. Johnson, Customer Service Counselor and Terry B.
Osborne, Executive Vice President, receive Employee of the Year
awards from Richard E. Wilber, President. Shari joined First
Citizens in 1992 and Terry in 1975. They were honored at this
year's annual Christmas party for their outstanding professional
contributions.
_________________________________________________________________
Net income grew 6% to a record $3 million. In the third quarter
we incurred a one-time assessment of $274 thousand for Federal
Deposit Insurance Corporation (FDIC) premiums as a result of
congressional action to rescue the ailing Savings Association
Insurance Fund. This special assessment was applied to deposits
we obtained in the 1989 acquisition of Star Savings and Loan
Association. Had it not been for this one-time assessment, net
income would have approximated $3.2 million for an annual
increase of 12%.
Total stockholders' equity grew to $22.9 million or 7.5% over the
$21.3 million at year-end 1995. Stockholders' equity now
represents 8.1% of year-end assets well in excess of ratios
defined as "well capitalized" by regulatory agencies.
Earnings per share was $2.21 compared to $2.08 for 1995. Had it
not been for the one-time FDIC assessment, 1996 earnings per
share would have been $2.33. Dividends declared in 1996 were 89
cents or 4.7% over the 85 cents; in 1995. At year-end, our
common shares carried an average bid/ask price of $26.38 or 7.7%
greater than $24.50 one year ago.
operating and strategic initiatives
Aside from the significant efforts that went into the acquisition
of Canton and Gillett offices and the creation of the Weis
supermarket office, we were very busy with a number of other
important strategies.
We saw continued success in controlling costs as we had the full
- -year benefit of check imaging technology (implemented in mid
1995). Furthermore, as a result of this technology, we incurred
very minor incremental costs for processing Canton and Gillett
account activity and statement preparation. In addition,
"computer output to laser disc" technology reduced our computer
paper cost by 50%! These technology investments have proved even
more beneficial than initially expected.
Although growth in assets and the number of community offices are
important, our overriding commitment is to assure we do not
diminish the high-quality, personal service that has been our
hallmark. Toward this end, management support was increased in
order to keep up with customers' increasing product and service
expectations.
human resources
With the addition of the Canton and Gillett offices, we were
fortunate to welcome many dedicated and customer-sensitive
employees. These employees were instrumental in easing the
transitional inconvenience that many customers experience in this
situation. Furthermore, consistent with our philosophy in other
community offices, we were fortunate to add very competent local
board members with a diversity of experience in Gillett, Forest
"Woody" Oldroyd (owner of Woody's Country Store) and in Canton,
David Wright (dairy and veal farmer), Marilyn Scott (contracted
school bus driver and Borough Council president), Roger Graham
(self-employed excavating contractor) and Lester Hilfiger (Canton
Borough Authority manager).
A new local board member was also added in Wellsboro James
Stager (president and operator of Joker's Coal and Morris Block).
We continue to be blessed with employees committed to enhancing
their professional skills. Evidence of this is the fact that 82
employees attended some form of education or training during
1996.
the future
We are about to embark on a future that appears extremely
challenging yet promising. Although our industry changed greatly
during the past decade, it is expected that the next decade will
experience accelerated evolution. The consolidation trend
continues unabated (keep in mind that over the past ten years,
the number of commercial banks declined over 30% to less than
10,000). This should continue as full interstate banking and
branching is avail able effective September 1997 (regardless of
differing state banking rules).
The uncertainties regarding Federal Deposit Insurance Corporation
reserve levels are now behind us. Future premium costs will
return to the more modest levels that we last recall from the
70's.
Recent decisions by our regulatory agencies along with decisions
of the Supreme Court have laid the foundation for expanded
products and services. Of great significance was the provision
allowing national banks to offer a full range of insurance
products and that such services be offered "from a place with a
population not exceeding 5,000."
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approximately 10 inches in length by 3.5 inches width on right
side of page]
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A Message from the President
_________________________________________________________________
In a separate yet critically important decision by the Supreme
Court, restrictions have been imposed on credit union expansion.
This decision will soon be subject to a re-hearing by the Court
and could create more meaningful restrictions reducing or
eliminating the unfair competitive advantages that credit unions
enjoy.
Various members of Congress are now touting legislation whereby
banks may be allowed to enter a host of non-traditional areas
currently prohibited by the Glass-Steagall Act. The dialogue in
Washington now is for "financial modernization" but we must
remember that we've anxiously awaited such modernization for many
years. Will this be the year?
With this being the landscape for our industry, the question is
how it affects (and how soon) the direction of our bank. Our
focus during 1997 and into 1998 will be the following:
Further utilization of technology to both enhance customer
service and restrain the growth of our cost structure.
Expand the variety and appeal of products and services
(especially as it relates to mortgage loan programs).
Sustain a strong marketing, promotions, and business development
program to continue our strong growth.
Finalize the headquarters and Mansfield community office building
plans which have been contemplated for many years.
Convert to a new hardware and software system that will enhance
and improve customer service, as well as expand the delivery
methods available to customers.
We recognize this is an aggressive set of plans which will
require us to be extremely focused. I am very pleased with our
preparation thus far and believe your board of directors and
employees are poised to meet these challenges head-on. We are
working very hard to sustain the success we have enjoyed and
prepare ourselves for the year 2000 and beyond.
/s/ Richard E. Wilber
Richard E. Wilber
President
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_________________________________________________________________
First Citizens' Scrap Book
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page, approximately 2 inches by 2.5 inches]
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Allan K. Reed
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photograph of Allan K. Reed, approximately 2 inches by 2.5
inches]
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Chester L. Reed
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William R. Richetti
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inches]
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Christopher S. Landis
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Allan K. Reed
In November, Allan Reed was promoted to Branch Administrator.
Allan was previously office manager of the Mansfield community
office. In his new position, Allan is responsible for the
operation and profitability of eight community offices in order
to meet the financial and credit services needs of their
customers.
Allan and his family attend the Covington Baptist church. He is
active with the Boy Scouts of America, AWANA, Greater Mansfield
Area Chamber of Commerce, Mansfield Men's Chorus, Kiwanis Club of
Mansfield, Human Service Providers, and Lambs Creek Sportsmen's
Club.
Chester L. Reed
Allan's replacement as Mansfield community office manager was
Chet Reed. Chet was most recently office manager of the Sayre
community office. Chet has many diplomas from the PBA School of
Banking and the Central Atlantic School of Banking.
Chet and his family are looking forward to becoming active
residents of the Mansfield Area.
William A. Richetti
Chet's replacement in the Sayre community office is Bill
Richetti. Bill most recently was branch manager of the
Horseheads office of First Federal Savings and Loan Association
of Rochester. As branch manager, Bill earned several honors
including 1990, 1992 and 1993 Branch of the Year!
Bill, who has been in banking for 19 years, is a graduate of
Jamestown Community College and has attended many professional
educational seminars. He and his family look forward to becoming
active residents of the Sayre area.
Christopher S. Landis
Introducing Chris Landis, office manager of the Canton community
office. A resident of Mansfield, Chris most recently was a loan
officer at Northeastern Farm Credit, ACA, in Wellsboro.
Chris is a graduate of Lycoming College and has attended several
credit-related professional educational seminars. Chris is
currently the Youth Director at the New Life Church in Canton.
He is looking forward to moving back to the Canton area and
becoming an active resident of the
community.
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of page, approximately 2 inches by 2.5 inches
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[GRAPHIC OMITTED: Photograph of employees of the Corporation
donating food to local food banks]
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From left: Ruth Wilkinson, Tammy Goodreau, Gina Boor, Abbie
Lerch, Cindy Pazzaglia, and Sara Roupp.
_________________________________________________________________
Jennifer L. Snyder
In October 1996, First Citizens opened its first supermarket
branch at Weis Market in Wellsboro. Selected to be Sales Manager
was Jennifer L. Snyder of Mansfield. Jennifer's most recent
position was as Assistant Manager of the Lewisburg WalMart.
Jennifer is a graduate of Pennsylvania State University, where
she received a B.S. degree in Management and International
Business.
In 1997, Jennifer looks forward to the challenge of making First
Citizens' first supermarket office a success. With the team
effort used by Jennifer and the rest of the Weis office staff,
First Citizens can look forward to a successful 1997.
Helen Kay Shedden
Helen Kay Shedden, office manager of the Gillett community
office, joined the First Citizens family when the Gillett office
was purchased from Meridian Bancorp in April of 1996. Helen Kay
has been manager of the Gillett community office since 1983.
She is active with the Gillett Baptist Church, South Creek
Ambulance Association, and the South Creek Lions Club.
In October, a committee of First Citizens' employees organized a
health fair for all employees. The event, which took place on
Columbus Day, was attended by: Project Concern from Soldiers and
Sailors Memorial Hospital, Mansfield Fire Company, American
Cancer Society, Criss Natural Foods, representatives from Charles
Cole Memorial Hospital, MARS Fitness Service, Employee Services,
Inc., a certified massage therapist, Blue Cross of Northeastern
Pennsylvania, and AFLAC. With the help of these organizations,
employees were able to have a wellness check, a stress test, and
a massage, as well as receiving nutritional information, diet
information, exercise information, and insurance information.
Attendees also had the option of learning about adult and infant
CPR, Carpal Tunnel Syndrome, and Lite Cooking.
As part of this event, each employee brought two nonperishable
food items. These items were donated to local food pantries in
each of First Citizens' market areas. Pictured above with these
items are the committee members.
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globe]
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VOLUNTEERISM
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of the Wellsboro office, middle center of page, approximately 3
inches by 4.5 inches]
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Shown above is the new clock which was installed in front of the
Wellsboro office. The clock was designed to match Wellsboro's
existing gaslight image of a time gone by.
_________________________________________________________________
Community banking means more than just having a bank located
within your community; it means having a bank which makes a
contribution to the community, is active in local organizations
and works to make the area a better place to live. First
Citizens National Bank is doing just that. It has always been
and will continue to be a concerned, active corporate citizen
here in the Twin Tiers.
Recently, President Clinton asked retired General Colin Powell to
head a committee to promote volunteerism in America. First
Citizens is proud to say that this concept isn't new to us.
Rather, it's a legacy that has existed since the bank began
operations in 1932. As you can see, the theme of our annual
report is volunteerism. As you read this report, you will agree
that we have reason to be proud of our people and the many ways
in which they commit themselves to improving our communities.
In 1996, the bank demonstrated its commitment to the communities
it serves by donating more than $60,000 to many worthwhile
causes. To the people of First Citizens National Bank,
reinvesting in the community means more than just providing
capital to growing businesses and families. It entails a much
deeper, personal commitment. In 1996, First Citizens employees
and directors not only lived up to the exemplary standards of the
model volunteer, they redefined them.
The commitment of which we speak is a commitment of time, money,
knowledge and labor. During 1996, the employees and directors
donated more than 13,000 hours to all levels of community
service. We have forged a partnership with our communities by
making this commitment. The result of this partnership is an
accomplishment of various goals that would be unachievable alone.
In a recent employee survey, we found there were many volunteers
among the organization. In fact, many are active in their
churches as committee members, Sunday School teachers and
organizers of various outreach programs. Many are devoted to
the youth in the Twin Tiers through organizations such as Little
League, Junior Bowling, AYSO Soccer, Boy Scouts and Girl Scouts
of America, just to name a few.
We are also proud of two women who are actively involved in
efforts of the American Cancer Society. These women have battled
the disease themselves and have chosen to share their experience
with others in hopes of saving lives. They are to be commended
for their courage and selflessness, not only in beating this
disease, but in donating their time, knowledge and experiences to
help others. Not only do they help support women who have been
diagnosed with cancer, they also teach women the importance of
self exams and early diagnosis. These women are Judy Wetzel,
TeleServices Representative and Dot Rakoski, Customer Service
Representative, Blossburg. They have earned our admiration and
respect and we are very proud of the job they do.
Several other individuals should be commended for the remarkable
amount of time and energy they donate to many different
organizations. As you read the following, you will agree that
these individuals are indeed special. The definition of
volunteer is "one who offers service of his own free will." That
accurately describes the following individuals:
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[GRAPHIC OMITTED: Photograph of a bank employee at Dickens of a
Christmas, middle top of page, approximately 5 inches by 3
inches]
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Karen, dressed in Victorian costume, is shown at the Community
Concert information booth at an annual Dickens of a Christmas
celebration in Wellsboro.
_________________________________________________________________
Karen is President of the Community Concert Association dedicated
to promoting the Arts.
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[GRAPHIC OMITTED: Photograph of two bank employees presenting an
award to the winner of the Laurel Festival 10-K Race, bottom
right side of page 2.5 inches by 3 inches]
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Tim is proud of his association with the Laurel Festival 10-K
race. Shown above are Rob Carleton (left), also a Wellsboro local
board member, and Debbie Callahan, Wellsboro Customer Service
Counselor, during a 10-K winners' awards presentation.
_________________________________________________________________
Tim has devoted some of his most valuable time to children.
_________________________________________________________________
Karen Jacobson
Karen Jacobson, a 27-year veteran of First Citizens, is our
Assistant Auditor and Security Officer. Karen continually
demonstrates the spirit of volunteerism in several of our
communities.
Karen is on the Financial Advisory Board of Martha Lloyd
Community Services. Martha Lloyd provides care and training for
mentally challenged women and men. As past treasurer of the main
board, Karen still works to ensure quality of care and financial
strength for Martha Lloyd so its programs will be available in
Troy for a long time to come.
For the past 26 years Karen has been Mansfield University chapter
advisor for Delta Zeta Sorority, and has also served on the
national level. Delta Zeta provides an opportunity for young
women to assume leadership roles and participate in philanthropic
activities while emphasizing academic excellence and the social
skills necessary to be successful.
The Wellsboro Presbyterian Church, of which Karen is a member,
provides for the spiritual well-being of members of the Wellsboro
and surrounding communities through many programs. Karen's
involvement also includes Bell Choir, Chancel Choir, Lay Reader,
and Member Care & Outreach "Fellowship Friend".
Last, but not least, Karen is also involved in the musical arena.
She is president of the Community Concert Association, a
49-year-old local organization dedicated to promoting the arts in
the Potter-Tioga-Bradford area. She is an officer of and plays
in the Wellsboro Town Band, an organization for area musicians of
all ages from all over the Twin Tiers. They join together for
six weeks each summer to provide a bit of small-town Americana
for their audience.
Timothy J. Gooch, CPA
Tim has been a board member for the Wellsboro community office of
First Citizens since 1995. He is also a stockholder in the
certified public accounting firm, Pennypacker and Zeigler, P.C.
Through his involvement, Tim continually exhibits his concern for
the continued growth of the Wellsboro area and its residents.
The Wellsboro area Chamber of Commerce unites its 260 business
and individual members for the betterment of the Wellsboro area
business community. Tim serves as vice president of the Chamber
as well as serving on several committees. His work with the
committees includes organizing efforts to increase the membership
of the Chamber, assisting in the preparation and monitoring of
the annual budget and working with the area businesses for the
development and enhancement of the Wellsboro community. Tim also
volunteers in various Chamber activities including Homecoming
Harvest, Winterfest '97, Dickens of a Christmas, and the Laurel
Classic Bicycle Race.
Tim has devoted some of his most valuable time to children. He
serves on the board of directors of the Wellsboro Area Little
League, which in 1996 enrolled 596 youngsters age 5-18 on 46
teams. In 1996, through the Wellsboro Area Little League
program, Tim helped develop a new tee-ball league for five-olds,
in which 29 players participated. Continuing with his sports
enthusiasm, Tim has been the Race Director for the PA State
Laurel Festival 10K Race since 1987. As race director, Tim is
responsible for organizing the event in its entirety. From
mapping out the course and designing tee-shirts to arranging the
prizes and the corporate sponsor, Tim volunteers the time
necessary to make this a successful event each year.
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[GRAPHIC OMITTED: Photograph of Carol J. Tama, Corporate Board
member, top right side of page, approximately 2.5 inches by 3.5
inches]
_________________________________________________________________
Carol is proud of her involvement with organizations whose
mission is to better the life of local children.
_________________________________________________________________
[GRAPHIC OMITTED: Photograph of Phillip D. Vaughn, bottom right
of page, approximately 2.5 inches by 3.5 inches]
_________________________________________________________________
Phil helps guide the church regarding community outreach and
missions.
_________________________________________________________________
Carol J. Tama
Carol has been a director on the Corporate Board of First
Citizens National Bank since 1984 and Citizens Financial
Services, Inc. since 1986. Carol donates her time to many worthy
organizations.
As a trustee for the First United Methodist Church in Blossburg,
Carol helps to oversee the regular maintenance of the building
and grounds as well as various improvement projects. The most
recent projects included the restoration of the stained glass
windows and the restoration of the sanctuary.
The Blossburg Public Library is open to the residents of the
Blossburg borough and surrounding communities. As treasurer,
Carol oversees the $60,000 budget of the library, $10,000 of
which is used each year to purchase new books.
Carol also donates time to North Penn Comprehensive Health
Services. NPCHS was founded because the community wanted to keep
medical care available in Blossburg after the hospital closed in
1972. Many valuable programs which fall under the NPCHS umbrella
include Headstart, Northern Tier Youth Services, Home Health, and
Home and Center. All of these programs offer a valuable service
to the community. Carol also serves on the Laurel Health
Services Board of Directors which is comprised of board members
from NPCHS, Soldiers & Sailors Memorial Hospital, and the Green
Home. This board strives to ensure that the mission of each
separate entity is being followed while also following the
mission of Laurel Health Services.
Carol also serves as a trustee for Mansfield University. The
trustees meet quarterly to review the state of the university and
to ensure the university's philosophies are being followed in
order to maintain the respectable reputation it has earned as an
education facility.
Carol is proud of her involvement with organizations whose
mission is to better the life of local children. She does this
through the Blossburg Area Swimming Association and the Jones
Foundation. The swimming association controls the funds which
are used to maintain the community pool at Island Park. Although
another organization sees to the day-to-day running of the pool,
this association sees that funds are available for maintenance
and improvements. In 1997, a $60,000 renovation is planned to
make the bath house and pool handicapped accessible. The Jones
Foundation donates approximately $35,000 each year to North Penn
student activities including sending kids to camps, assembly
programs, various Boy Scout and Girl Scout groups, and summer
programs at Island Park.
Phillip D. Vaughn
Phil, who has been office manager of the Ulysses community office
since 1990, is very involved with his local church as well as
several community improvement committees and outreach programs.
As Elder and a Sunday School teacher with the Zion Christian
Assembly, Phil helps guide the church regarding community
outreach and missions, as well as budget and building
maintenance. He is also a licensed minister who often speaks at
his own church as well as other churches throughout the area.
His community improvement efforts include serving on the boards
of the Potter County Housing Authority and the Redevelopment
Authority. The Housing Authority is the local channel for
HUD-subsidized housing, which helps approved renters with the
rental fee of HUD-approved housing. It also owns several housing
units including those for low-income families and for retired
persons. The Redevelopment Authority focuses on the development
of industry in Potter County including industrial parks and
incubator projects. These efforts include building property to
the customer's specifications and then selling the property to
these businesses as well as providing space for new businesses
until they are secure enough to locate their own facilities.
As a member of the Charles Cole Memorial Hospital Auxiliary, Phil
helps his wife, Jessie, who is the gift shop manager. He also
serves on the Funds Development Council, which was designed to
get feedback from the community regarding what the hospital could
do to better provide for their needs. Ultimately, the focus is
then on raising funds to implement new programs which would serve
those needs.
Phil is also part of the Potter County Habitat for Humanity. In
1996, after becoming a Habitat affiliate, the Potter County
organization selected a site for their first house to be
constructed. A family for the house is soon to be selected and
building is slated to begin this summer.
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_________________________________________________________________
[GRAPHIC OMITTED: Photograph of Jim Wagner, Ulysses Local Board
member, top right of page, approximately 2.5 inches by 3 inches]
_________________________________________________________________
Jim is proud of his involvement in the improvement of the sewer
and water systems, as these improvements help ensure the future
growth and vitality of the community.
_________________________________________________________________
[GRAPHIC OMITTED: Photograph of bank employee, Claudia Steadman,
bottom right of page, approximately 2.5 inches by 3 inches]
_________________________________________________________________
Claudia is always eager to help her community.
_________________________________________________________________
Jim Wagner
Jim is a local board member of the Ulysses community office. For
the past 18 years, he has served on the Ulysses Municipal
Authority and is its Chairman. The Municipal Authority owns the
water and sewer systems in Ulysses. During his term, the
authority has changed from dumping raw sewage directly into the
streams to treating the sewage prior to discharge. They are
currently working on a $500,000 project which will further treat
the sewage to lower the high concentration of ammonia nitrates.
Jim is proud of his involvement in the improvement of the sewer
and water systems, as these improvements help ensure the future
growth and vitality of the community.
Jim is also a director for the Northeast Potter County Industrial
Development Corporation. His service to this organization
includes aiding in the development of an industrial park. This
park now has sewer and water access, and efforts are being made
to bring new industry to the park. This, of course, would result
in increased revenue and jobs in the Potter County area.
Jim is a trustee and choir member of the First Baptist Church.
Trustees of the church handle the funding and decision making
regarding the church building and property. As a choir member,
Jim enjoys singing each Sunday as well as performing during
special events, both at the church and elsewhere. He feels
especially blessed when he, his wife Carol, and their three sons
are able to present special music together for their church.
Jim also serves as a board member of Human Service Providers,
Inc. Human Service Providers is a non-profit organization which
sells its services to county governments in Potter, Tioga and
Bradford counties. As a board member, Jim ensures that programs
are in place and working to fulfill the mission of the
organization. This mission is to strengthen and improve the
lives of mentally challenged individuals.
Claudia Steadman
Claudia, a Senior Customer Service Representative in our Genesee
community office, is the area representative for the Salvation
Army. As such, she organizes ways in which families in the area
are provided with food and clothing when there is a loss from a
fire or other natural disaster. She has served as liaison
between Potter County and the Salvation Army headquarters in
Philadelphia for four years.
She is also a member of the Genesee United Methodist Church,
where she is a choir member and a Pastor/Parish Relations
Committee member. She enjoys singing in the choir and has done
so for the past 25 years. In her role with the Pastor/Parish
Relations Committee, Claudia acts as a liaison between the
congregation and the minister.
Claudia also serves as bookkeeper for the Genesee Township Water
Authority. She en joys this position as it allows her to serve
the community, but also because as bookkeeper, she works with her
husband who is the treasurer. Together, they handle the
accounting procedures for the Authority.
Claudia is always eager to help her community. When asked to
donate money or items for many different community fundraisers,
she is quick to respond. This is a characteristic which she
shares with many of First Citizens employees and directors.
With individuals like these, our communities are much richer, not
necessarily in a monetary way, but because of the invaluable
knowledge, energy and experiences which the communities receive
from them. First Citizens has a diverse group of employees who
are active in all areas of their communities, serving in every
imaginable capacity, from giving blood to working with children
to raising funds for the needy. We are very proud to have these
individuals as part of our family.
<PAGE>
<10>
_________________________________________________________________
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upper left had corner of page .5 inches square]
_________________________________________________________________
FINANCIAL HIGHLIGHTS
_________________________________________________________________
Citizens Financial Services, Inc.
_________________________________________________________________
in thousands, except
per share data
1996 1995
BALANCE SHEET
Assets $282,810 $247,094
Deposits 240,177 213,316
Net Loans 180,418 159,794
Investments 86,057 73,715
Stockholders' Equity 22,904 21,297
STATEMENT OF INCOME
Interest Income 21,341 19,422
Interest Expense 10,867 9,851
Net Interest Income 10,474 9,571
Net Income 3,003 2,834
PER SHARE DATA
Net Income 2.21 2.08
Cash Dividends 0.89 0.85
TRUST AND INVESTMENT SERVICES
Trust Assets Managed 43,311 41,172
_________________________________________________________________
[GRAPHICS OMITTED: Seven bar charts depicting 1. total assets,
2. net income, 3. stockholders' equity, 4. deposits, 5. net
loans, 6. cash dividends declared, and 7. investments, each from
1992 to 1996 (except for investments which are presented from
1993 to 1996). Tabular representation of those graphs are set
forth as follows:
TOTAL ASSETS:
(Dollars in Thousands)
1992 1993 1994 1995 1996
$202,155 $216,237 $232,537 $247,094 $282,810
NET INCOME
(Dollars in Thousands)
1992 1993 1994 1995 1996
$2,248 $2,424 $2,625 $2,834 $3,003
STOCKHOLDERS' EQUITY
(Dollars in Thousands)
1992 1993 1994 1995 1996
$16,329 $18,340 $18,903 $21,297 $22,904
DEPOSITS
(Dollars in Thousands)
1992 1993 1994 1995 1996
$178,033 $191,013 $194,478 $213,316 $240,177
NET LOANS
(Dollars in Thousands)
1992 1993 1994 1995 1996
$128,326 $140,391 $154,848 $159,794 $180,418
CASH DIVIDENDS DECLARED
(Dollars in Thousands)
1992 1993 1994 1995 1996
$960 $1,023 $1,088 $1,153 $1,219
INVESTMENTS
(Dollars in Thousands)
1993 1994 1995 1996
$62,645 $64,257 $73,715 $86,057
_________________________________________________________________
<PAGE>
<11>
_________________________________________________________________
CONSOLIDATED BALANCE SHEET
December 31, 1996 and 1995
_________________________________________________________________
Nineteen hundred ninety-six Annual Report
_________________________________________________________________
(in thousands) 1996 1995
ASSETS:
Cash and due from banks:
Noninterest-bearing $ 6,407 $ 5,536
Interest-bearing 52 37
Total cash and cash equivalents 6,459 5,573
Available-for-sale securities 28,736 21,444
Held-to-maturity securities (estimated market
value 1996, $57,587; 1995, $53,589) 57,321 52,271
Loans (net of allowance for possible loan losses
1996, $1,995; 1995, $1,833) 180,418 159,794
Foreclosed assets held for sale 164 208
Premises and equipment 4,345 4,175
Accrued interest receivable 2,930 2,607
Other assets 2,437 1,022
TOTAL ASSETS $282,810 $247,094
LIABILITIES:
Deposits:
Noninterest-bearing $ 17,924 $ 15,140
Interest-bearing 222,253 198,176
Total deposits 240,177 213,316
Borrowed funds 15,817 8,855
Accrued interest payable 2,293 2,106
Dividends payable 612 579
Other liabilities 1,007 941
TOTAL LIABILITIES 259,906 225,797
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 1,347
Additional paid-in capital 6,828 6,512
Retained earnings 14,544 13,089
TOTAL 22,732 20,948
Unrealized holding gains on
available-for-sale securities 172 349
TOTAL STOCKHOLDERS' EQUITY 22,904 21,297
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $282,810 $247,094
See notes to consolidated financial statements.
<PAGE>
<12>
_________________________________________________________________
[GRAPHIC OMITTED: Silhouette of a colonial rider horseback,
upper left hand corner of page .5 inches square]
_________________________________________________________________
CONSOLIDATED STATEMENT OF INCOME
Years Ended December 31, 1996, 1995 and 1994
_________________________________________________________________
Citizens Financial Services, Inc.
_________________________________________________________________
<TABLE>
(in thousands, except per share data) 1996 1995 1994
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $15,817 $14,799 $12,918
Interest-bearing deposits with banks 148 135 25
Investment Securities:
Taxable 5,238 4,233 4,046
Nontaxable 66 179 281
Dividends 72 76 66
TOTAL INTEREST INCOME 21,341 19,422 17,336
INTEREST EXPENSE:
Deposits 10,276 9,340 7,521
Borrowed funds 591 511 423
TOTAL INTEREST EXPENSE 10,867 9,851 7,944
NET INTEREST INCOME 10,474 9,571 9,392
Provision for possible loan losses 205 163 255
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 10,269 9,408 9,137
OTHER OPERATING INCOME:
Service charges 844 732 707
Trust 270 255 204
Realized securities gains, net 19 10 63
Other 258 255 162
TOTAL OTHER OPERATING INCOME 1,391 1,252 1,136
OTHER OPERATING EXPENSES:
Salaries and employee benefits 3,418 3,150 3,088
Occupancy 466 413 391
Furniture and equipment 599 574 599
Federal deposit insurance premiums 372 289 406
Other 2,495 2,239 2,006
TOTAL OTHER OPERATING EXPENSES 7,350 6,665 6,490
Income before provision for income taxes 4,310 3,995 3,783
Provision for income taxes 1,307 1,161 1,158
NET INCOME $ 3,003 $ 2,834 $ 2,625
EARNINGS PER SHARE $ 2.21 $ 2.08 $ 1.93
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<13>
_________________________________________________________________
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995, and 1994
_________________________________________________________________
Nineteen hundred ninety-six Annual Report
_________________________________________________________________
<TABLE>
Unrealized
Additional Holding
(in thousands, except per share data) Common Stock Paid-in Retained Gains/(Losses)
Shares Amount Capital Earnings on Securities Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 1,321,887 $1,321 $5,976 $10,433 $610 $18,340
Net income 2,625 2,625
Stock dividend 12,656 13 248 (261)
Cash dividends, $.80 per share (1,088) (1,088)
($.81 per share on a historical basis)
Unrealized losses on available-for-sale securities (974) (974)
Balance, December 31, 1994 1,334,543 1,334 6,224 11,709 (364) 18,903
Net income 2,834 2,834
Stock dividend 12,780 13 288 (301)
Cash dividends, $.85 per share (1,153) (1,153)
($.85 per share on a historical basis)
Unrealized gains on available-for-sale securities 713 713
Balance, December 31, 1995 1,347,323 1,347 6,512 13,089 349 21,297
Net income 3,003 3,003
Stock dividend 12,905 13 316 (329)
Cash dividends, $.89 per share (1,219) (1,219)
Unrealized losses on available-for-sale securities (177) (177)
Balance, December 31, 1996 1,360,228 $1,360 $6,828 $14,544 $172 $22,904
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<14>
_________________________________________________________________
[GRAPHIC OMITTED: Silhouette of a colonial rider horseback,
upper left hand corner of page .5 inches square]
_________________________________________________________________
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
_________________________________________________________________
Citizens Financial Services, Inc.
_________________________________________________________________
<TABLE>
(in thousands) 1996 1995 1994
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 3,003 $ 2,834 $ 2,625
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for possible loan losses 205 163 255
Provision for depreciation and amortization 442 412 440
Amortization and accretion on investment securities 362 248 190
Deferred income taxes 36 25 20
Realized gains on securities (19) (10) (63)
Realized gains on loans sold (23) (37) (12)
Gain on sales or disposals of premises and equipment - - (2)
Gain on sales of foreclosed assets held for sale (50) (45) (24)
(Increase) decrease in accrued interest receivable and other assets (487) (393) 247
Increase in accrued interest payable and other liabilities 253 468 82
Net cash provided by operating activities 3,722 3,665 3,758
Cash Flows from Investing Activities:
Available-for-sale securities:
Proceeds from sales of securities 16 - 3,063
Proceeds from maturities of securities 2,000 1,000 -
Purchases of securities (9,682) (6,797) (3,003)
Held-to-maturity securities:
Proceeds from maturities and principal repayments of securities 8,108 5,556 3,203
Purchases of securities (13,395) (8,375) (6,478)
Net increase in loans (17,338) (5,250) (14,713)
Purchase of loans (3,659) - -
Capital expenditures (539) (463) (602)
Proceeds from sale of premises and equipment - - 4
Proceeds from sale of foreclosed assets held for sale 285 184 100
Property purchased for future expansion (250) - -
Deposit acquisition premium (1,018) - -
Net cash used in investing activities (35,472) (14,145) (18,426)
Cash Flows from Financing Activities:
Net increase in deposits 9,731 18,838 3,465
Proceeds from long-term borrowings 1,166 1,844 2,844
Repayments of long-term borrowings (1,050) (186) (390)
Net increase (decrease) in short-term borrowed funds 6,846 (8,833) 9,704
Dividends paid (1,187) (1,121) (1,056)
Deposits of acquired branches 17,130 - -
Net cash provided by financing activities 32,636 10,542 14,567
Net increase (decrease) in cash and cash equivalents 886 62 (101)
Cash and Cash Equivalents at Beginning of Year 5,573 5,511 5,612
Cash and Cash Equivalents at End of Year $ 6,459 $ 5,573 $ 5,511
Supplemental Disclosures of Cash Flow Information:
Interest paid $10,680 $ 9,437 $ 7,970
Income taxes paid $ 1,310 $ 1,135 $ 1,097
Noncash activities:
Real estate acquired in settlement of loans $ 191 $ 179 $ 13
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<15>
_________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________
Nineteen hundred ninety-six Annual Report
_________________________________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Citizens Financial Services, Inc. (individually and collectively,
the "Company") is a Pennsylvania corporation organized as the
holding company of its wholly-owned subsidiary, First Citizens
National Bank (the "Bank"). The Bank is a national banking
association headquartered in Mansfield, Pennsylvania and
operating ten full-service banking offices in Potter, Tioga and
Bradford counties. The Bank provides a comprehensive range of
services including consumer loans, residential real estate loans,
commercial loans, and loans to various state and municipal
entities. Deposit pro grams encompass the full range of consumer
as well as commercial checking and savings accounts. Deposit
products also include certificates of deposit and individual
retirement accounts. A comprehensive menu of trust and
investment services are also available. The Company's principal
sources of revenue are derived from its loan and investment
portfolios. The Company is supervised by the Board of Governors
of the Federal Reserve System, while the Bank is subject to
regulation and supervision by the Office of the Comptroller of
the Currency.
A summary of significant accounting and reporting policies
applied in the presentation of the accompanying financial
statements follows:
BASIS OF PRESENTATION
The accounting policies followed by the Company and the methods
of applying these principles conform with generally accepted
accounting principles and with general practice within the
banking industry. All material intercompany balances and
transactions have been eliminated in consolidation. 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.
INVESTMENT SECURITIES
Investment securities are classified as one of the three
following types:
Held-to-Maturity Securities - includes securities that the
Company has the positive intent and ability to hold to maturity.
These securities are reported at amortized cost.
Trading Securities - includes debt and equity securities bought
and held principally for the purpose of selling them in the near
term. Such securities are reported at fair value with unrealized
holding gains and losses included in earnings. The Company had no
trading securities as of December 31, 1996 and 1995.
Available-for-Sale Securities - includes debt and equity
securities not classified as held-to-maturity or trading
securities. Such securities are reported at fair value, with
unrealized holding gains and losses excluded from earnings and
reported as a separate component of stockholders' equity, net of
estimated income tax effect.
The amortized cost of investment in debt securities is adjusted
for amortization of premiums and accretion of discounts, computed
by a method that approximates the effective interest method.
Gains and losses on the sale of investment securities are
computed on the basis of specific identification of the adjusted
cost of each security.
Common stock of the Federal Reserve Bank and Federal Home Loan
Bank represents ownership in institutions which are wholly owned
by other financial institutions. These equity securities are
accounted for at cost, and are classified as restricted equity
securities held-to-maturity.
The fair value of investments, except certain state and municipal
securities, is estimated based on bid prices published in
financial newspapers or bid quotations received from securities
dealers. The fair value of certain state and municipal securities
is not readily available through market sources other than dealer
quotations, so fair value estimates are based on quoted market
prices of similar instruments, adjusted for differences between
the quoted instruments and the instruments being valued.
<PAGE>
<16>
_________________________________________________________________
[GRAPHIC OMITTED: Silhouette of a colonial rider horseback,
upper left hand corner of page .5 inches square]
_________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - continued
_________________________________________________________________
Citizens Financial Services, Inc.
_________________________________________________________________
LOANS
Interest on installment loans originated after 1992 is recognized
on the accrual basis based upon the principal amount outstanding.
Interest on installment loans originated before 1993 is
recognized on the accrual basis using a method which approximates
the interest method. Interest income on all other loans is
recognized on the accrual basis based upon the principal amount
outstanding. The accrual of interest income on loans is
discontinued when, in the opinion of management, there exists
doubt as to the ability to collect such interest. Loans are
returned to the accrual status when factors indicating doubtful
collectibility cease to exist.
The Company recognizes nonrefundable loan origination fees and
certain direct loan origination costs over the life of the
related loan as an adjustment of loan yield using the interest
method.
ALLOWANCE FOR LOAN LOSSES
Effective January 1, 1995, the Company adopted Statement of
Financial Accounting Standards No. 114 ("SFAS No. 114"),
"Accounting by Creditors for Impairment of a Loan," as amended by
SFAS No. 118. Under this Standard, the Company estimates credit
losses on impaired loans based on the present value of expected
cash flows or fair value of the underlying collateral if the loan
repayment is expected to come from the sale or operation of such
collateral. Prior to 1995, the credit losses related to these
loans were estimated based on undiscounted cash flows or the fair
value of the underlying collateral. SFAS No. 118 amends SFAS No.
114 to permit a creditor to use existing methods for recognizing
interest income on impaired loans, eliminating the income
recognition provisions of SFAS No. 114. The adoption of these
statements did not have a material effect on the Company's
financial position or results of operations.
Impaired loans are commercial and commercial real estate loans
for which it is probable that the Company will not be able to
collect all amounts due according to the contractual terms of the
loan agreement. The Company individually evaluates such loans for
impairment and does not aggregate loans by major risk
classifications. The definition of "impaired loans" is not the
same as the definition of "nonaccrual loans," although the two
categories overlap. The Company may choose to place a loan on
nonaccrual status due to payment delinquency or uncertain
collectibility, while not classifying the loan as impaired if the
loan is not a commercial or commercial real estate loan. Factors
considered by management in determining impairment include
payment status and collateral value. The amount of impairment for
these types of impaired loans is determined by the difference
between the present value of the expected cash flows related to
the loan, using the original interest rate and its recorded
value, or, as a practical expedient in the case of collateralized
loans, the difference between the fair value of the collateral
and the recorded amount of the loans. When foreclosure is
probable, impairment is measured based on the fair value of the
collateral.
Mortgage loans on one- to four-family properties and all consumer
loans are large groups of smaller balance homogeneous loans and
are measured for impairment collectively. Loans that experience
insignificant payment delays, which is defined as 90 days or
less, generally are not classified as impaired. Management
determines the significance of payment delays on a case-by-case
basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of
the delay, the borrower's prior payment record, and the amount of
shortfall in relation to the principal and interest owed.
The allowance for loan losses represents the amount which
management estimates is adequate to provide for potential losses
in its loan portfolio. The allowance method is used in providing
for loan losses. Accordingly, all loan losses are charged to the
allowance and all recoveries are credited to it. The allowance
for loan losses is established through a provision for loan
losses which is charged to operations. The provision is based
upon management's periodic evaluation of individual loans, the
overall risk characteristics of the various portfolio segments,
past experience with losses, the impact of economic conditions on
borrowers, and other relevant factors. The estimates used in
determining the adequacy of the allowance for loan losses are
particularly susceptible to significant change in the near term.
FORECLOSED ASSETS HELD FOR SALE
Foreclosed assets acquired in settlement of foreclosed loans are
carried at the lower of fair value minus estimated costs to sell
or cost. Prior to foreclosure, the value of the underlying loan
is written down to fair market value of the real estate or other
assets to be acquired by a charge to the allowance for loan
losses, if necessary. Any subsequent write-downs are charged
against operating expenses. Operating expenses of such
properties, net of related income and losses on disposition, are
included in other expenses and gains are included in other
income.
<PAGE>
<17>
_________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - continued
_________________________________________________________________
Nineteen hundred ninety-six Annual Report
_________________________________________________________________
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated
depreciation. Repair and maintenance expenditures which extend
the useful life of an asset are capitalized and other repair
expenditures are expensed as incurred.
When premises or equipment are retired or sold, the remaining
cost and accumulated depreciation are removed from the accounts
and any gain or loss is credited or charged to income.
Depreciation expense is computed on the straight-line and
accelerated methods over the estimated useful lives of the
assets.
OTHER ASSETS
Goodwill is the excess of the purchase price over the fair value
of net assets of companies acquired through business combinations
accounted for as purchases. Included in other assets is $581,000
of goodwill that is being amortized using the straight-line
method over 15 years.
Core deposit intangibles are a measure of the value of consumer
demand and savings deposits acquired in business combinations
accounted for as purchases. Included in other assets is $364,000
of core deposit intangibles which are being amortized on a
straight-line basis over 6 years.
The recoverability of the carrying value of intangible assets is
evaluated on an ongoing basis and permanent declines in value, if
any, are charged to expense.
INCOME TAXES
The Company and its subsidiary file a consolidated federal income
tax return. Deferred tax assets and liabilities are computed
based on the difference between the financial statement and
income tax basis of assets and liabilities using the enacted
marginal tax rates. Deferred income tax expenses or benefits are
based on the changes in the net deferred tax asset or liability
from period to period.
EMPLOYEE BENEFIT PLANS
The Company has a noncontributory pension plan covering
substantially all employees. It is the Company's policy to fund
pension costs on a current basis to the extent deductible under
existing tax regulations. Such contributions are intended to
provide not only for benefits attributed to service to date, but
also for those expected to be earned in the future. The Company's
net periodic pension cost is based on the provisions of Statement
of Financial Accounting Standards No. 87.
The Company also has a profit-sharing plan which provides
tax-deferred salary savings to plan participants.
CASH FLOWS
The Company utilizes the net reporting of cash receipts and cash
payments for deposit and lending activities. The Company
considers amounts due from banks and the demand deposit portion
of interest-bearing deposits in banks as cash equivalents.
TRUST ASSETS AND INCOME
Assets held by the Bank in a fiduciary or agency capacity for its
customers are not included in the consolidated financial
statements since such items are not assets of the Bank.
Trust income is reported on a cash basis, which is not materially
different from the accrual basis.
EARNINGS PER SHARE
Earnings per share calculations give retroactive effect to the
issuances of 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, 1995, and 1994.
RECLASSIFICATION
Certain of the 1995 and 1994 amounts have been reclassified to
conform with the 1996 presentation. Such reclassifications had no
effect on net income.
2. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserves, in the form of cash
and balances with the Federal Reserve Bank, against its deposit
liabilities. The amount of such reserves was $1,262,000 and
$937,000 at December 31, 1996 and 1995, respectively.
Deposits with one financial institution are insured up to
$100,000. The Company maintains cash and cash equivalents with
other financial institutions in excess of the insured amount.
<PAGE>
<18>
_________________________________________________________________
[GRAPHIC OMITTED: Silhouette of a colonial rider horseback,
upper left hand corner of page .5 inches square]
_________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - continued
_________________________________________________________________
Citizens Financial Services, Inc.
_________________________________________________________________
3. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment
securities at December 31, 1996 and 1995, were as follows (in
thousands):
<TABLE>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
<S> <C> <C> <C> <C>
Held-to-Maturity Securities:
U.S. Treasury securities $49,169 $449 $(179) $49,439
Obligations of state and
political subdivisions 606 14 - 620
Corporate obligations 4,694 22 (4) 4,712
Mortgage-backed securities 1,724 1 (37) 1,688
Total debt securities 56,193 486 (220) 56,459
Restricted equity securities 1,128 - - 1,128
Total Held-to-Maturity $57,321 $486 $ (220) $57,587
Available-for-Sale Securities:
U.S. Treasury securities $21,239 $238 $ (71) $21,406
Corporate obligations 7,235 21 (3) 7,253
Equity securities 3 74 77
Total Available-for-Sale $28,477 $333 $ (74) $28,736
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
Held-to-Maturity Securities:
U.S. Treasury securities $42,700 $1,209 $ (4) $43,905
Obligations of state and
political subdivisions 1,311 37 - 1,348
Corporate obligations 4,744 103 (2) 4,845
Mortgage-backed securities 2,377 2 (27) 2,352
Total debt securities 51,132 1,351 (33) 52,450
Restricted equity securities 1,139 - - 1,139
Total Held-to-Maturity $52,271 $1,351 $(33) $53,589
Available-for-Sale Securities:
U.S. Treasury securities $15,201 $390 $ - $15,591
Corporate obligations 5,711 67 - 5,778
Equity securities 4 71 - 75
Total Available-for-Sale $20,916 $528 $ - $21,444
</TABLE>
There were no sales of debt securities in 1996 and 1995. Proceeds
from the sale of available-for-sale debt securities during 1994
amounted to $3,063,000, with a gain of $59,000 realized on sales.
In 1996, 1995, and 1994 gains of $4,000, $10,000 and $4,000,
respectively, resulted from early calls of debt securities.
Net realized gains of $15,000 on sales of equity securities were
recorded in 1996. There were no sales of equity securities in
1995 and 1994.
<PAGE>
<19>
_________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - continued
_________________________________________________________________
Nineteen hundred ninety-six Annual Report
_________________________________________________________________
Investment securities with an approximate carrying value of
$48,103,000 and $40,615,000 at December 31, 1996 and 1995, were
pledged to secure public funds and certain other deposits as
provided by law.
The amortized cost and estimated carrying value of debt
securities at December 31, 1996, by contractual maturity, are
shown below (in thousands). Expected maturities will differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
Estimated
Amortized Cost Fair Value
<S> <C> <C>
Held-to-Maturity Securities:
Due in one year or less $ 5,767 $ 5,785
Due after one year through five years 44,109 44,324
Due after five years through ten years 4,594 4,663
Due after ten years 1,723 1,687
Total $56,193 $56,459
Estimated
Amortized Cost Fair Value
Available-for-Sale Securities:
Due in one year or less $ 5,927 $ 5,959
Due after one year through five years 17,024 17,062
Due after five years through ten years 5,523 5,638
Total $28,474 $28,659
</TABLE>
4. LOANS
The Company grants commercial, industrial, residential, and
consumer loans primarily to customers throughout Northcentral
Pennsylvania and Southern New York. Although the Company has a
diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent on the economic
conditions within this region.
Major classifications of loans are as follows (in thousands):
<TABLE>
December 31,
1996 1995
<S> <C> <C>
Real estate loans:
Residential $108,416 $ 96,594
Commercial 27,670 24,167
Agricultural 6,134 8,027
Construction 4,262 1,018
Loans to individuals for household, family and other purchases 14,465 13,198
Commercial and other loans 11,529 10,535
State and political subdivision loans 10,105 8,347
182,581 161,886
Less unearned income on loans 168 259
Less allowance for possible loan losses 1,995 1,833
Loans, net $180,418 $159,794
</TABLE>
<PAGE>
<20>
_________________________________________________________________
[GRAPHIC OMITTED: Silhouette of a colonial rider horseback,
upper left hand corner of page .5 inches square]
_________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - continued
_________________________________________________________________
Citizens Financial Services, Inc.
_________________________________________________________________
At December 31, 1996 and 1995, net unamortized loan fees and
costs of $874,000 and $850,000, respectively, have been deducted
from the carrying value of loans.
At December 31, 1996 and 1995, the recorded investment in loans
that are considered to be impaired in accordance with SFAS No.114
was $414,000, and $696,000, respectively, all of which were on a
nonaccrual basis. At December 31, 1996 and 1995, all of the
$414,000 and $696,000, respectively, of impaired loans do not
have an allowance for loan losses allocated as a result of the
loans being collateral dependent and the value of the collateral
exceeding the recorded investment in the loan.
The average recorded investment in impaired loans during the year
ended December 31, 1996 and 1995, was approximately $696,000.
For the year ended December 31, 1996 and 1995, the Company
recognized interest income on impaired loans of $2,000 and
$3,000, respectively, all of which was recognized using the cash
basis method of income recognition.
Loans on which the accrual of interest has been discontinued or
reduced amounted to $1,258,000 and $1,459,000 (which included the
impaired loans in accordance with SFAS No. 114) at December 31,
1996 and 1995, respectively. If interest had been recorded at the
original rate on those loans, such income would have approximated
$127,000, $147,000, and $131,000 for the years ended December 31,
1996, 1995, and 1994, respectively. Interest income on such
loans, which is recorded as received, amounted to approximately
$40,000, $58,000, and $40,000 for the years ended December 31,
1996, 1995, and 1994, respectively.
Transactions in the allowance for possible loan losses were as
follows (in thousands):
<TABLE>
Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Balance, beginning of year $1,833 $1,721 $1,516
Provisions charged to income 205 163 255
Recoveries on loans previously charged against the allowance 21 18 18
2,059 1,902 1,789
Loans charged against the allowance (64) (69) (68)
Balance, end of year $1,995 $1,833 $1,721
The following is a summary of the past due and nonaccrual loans
as of December 31, 1996 and 1995 (in thousands):
</TABLE>
<TABLE>
December 31, 1996
Past Due Past Due
30-89 days 90 days ormore Nonaccrual
<S> <C> <C> <C>
Real estate loans $2,283 $716 $1,229
Installment loans 12 - -
Credit cards and related loans 26 1 -
Commercial and all other loans 356 6 29
Total $2,677 $723 $1,258
December 31, 1995
Past Due Past Due
30-89 days 90 days ormore Nonaccrual
Real estate loans $1,875 $622 $1,442
Installment loans 13 19 -
Credit cards and related loans 35 4 -
Commercial and all other loans 430 44 17
Total $2,353 $689 $1,459
</TABLE>
<PAGE>
<21>
_________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - continued
_________________________________________________________________
Nineteen hundred ninety-six Annual Report
_________________________________________________________________
5. PREMISES & EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
December 31,
1996 1995
Land $ 907 $ 897
Buildings 3,926 3,694
Furniture, fixtures and equipment 3,914 3,624
8,747 8,215
Less accumulated depreciation 4,402 4,040
Premises and equipment, net $4,345 $4,175
Depreciation expense amounted to $370,000, $412,000, and $440,000
for 1996, 1995, and 1994, respectively.
6. DEPOSITS
Certificates of deposit of $100,000 or more amounted to $19,280,000
and $18,542,000 at December 31, 1996 and 1995, respectively. Interest
expense on certificates of deposit of $100,000 or more amounted to $1,172,000,
$1,089,000, and $861,000 for the years ended December 31, 1996,
1995, and 1994, respectively.
Following are maturities of certficates of deposit as of December
31, 1996 (in thousands):
1997 $ 72,182
1998 21,566
1999 11,447
2000 21,395
2001 9,972
Thereafter 672
Total certificates of deposit $137,234
7. BORROWED FUNDS
<TABLE>
Securities
Sold Under Other Total
Agreements to FHLB Borrowed Borrowed
(dollars in thousands) Repurchase(a) Advances(b) Funds(c) Funds
<S> <C> <C> <C> <C>
1996
Balance at December 31 $ 5,018 $ 8,925 $ 1,874 $15,817
Highest balance at any month-end 5,367 9,800 1,874 17,041
Average balance 5,263 2,599 1,874 9,736
Weighted average interest rate:
Paid during year 5.80% 5.54% 7.56% 6.07%
As of year-end 5.90 6.76 7.56 6.58
1995
Balance at December 31 $ 5,331 $ 1,650 $ 1,874 $ 8,855
Highest balance at any month-end 5,331 10,400 1,874 17,605
Average balance 4,257 1,900 1,874 8,031
Weighted average interest rate:
Paid during year 5.91% 6.20% 7.56% 6.36%
As of year-end 5.91 6.05 7.56 6.29
1994
Balance at December 31 $4,756 $ 9,400 $ 1,874 $16,030
Highest balance at any month-end 5,224 9,400 1,874 16,498
Average balance 4,964 2,629 847 8,440
Weighted average interest rate:
Paid during year 4.47% 5.18% 7.61% 5.01%
As of year-end 5.28 6.61 7.61 6.33
</TABLE>
<PAGE>
<22>
_________________________________________________________________
[GRAPHIC OMITTED: Silhouette of a colonial rider horseback,
upper left hand corner of page .5 inches square]
_________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - continued
_________________________________________________________________
Citizens Financial Services, Inc.
_________________________________________________________________
(a) Securities sold under agreements to repurchase mature within
one to five years. The Company has pledged U.S. Treasury
securities with a carrying value at December 31, 1996 and 1995,
of $6,494,000 and $6,615,000, respectively. The respective market
values were $6,513,000 and $6,786,000.
(b) FHLB Advances are comprised of two types of borrowings with
the Federal Home Loan Bank of Pittsburgh. FHLB "Open RepoPlus"
advances are short-term borrowings maturing within one year, bear
a fixed rate of interest and are subject to prepayment penalty.
The Company has a borrowing limit of $20,000,000, exclusive of
any outstanding advances. As of December 31, 1996, total FHLB
advances were comprised of Open RepoPlus borrowings. The Company
also has an avail able line of credit with the FHLB ("Flexline"),
with a borrowing limit of approximately $8,500,000. Flexline
advances also mature within one year and bear a variable rate of
interest that adjusts daily. There are no prepayment penalties
for these borrowings. As of December 31, 1995 and 1994, total
FHLB advances were comprised of Flexline borrowings. There were
no outstanding borrowings on this line of credit as of December
31, 1996. Although no specific collateral is required to be
pledged for Open RepoPlus or Flexline borrowings, FHLB advances
are secured by a blanket security agreement that includes the
Company's FHLB stock, as well as investment and mortgage-backed
securities held in safekeeping at the FHLB.
(c) Other borrowed funds consist of separate loans with the
Federal Home Loan Bank of Pittsburgh as follows (in thousands):
December 31,
Fixed Rate Maturity 1996 1995
7.25% May 15, 2000 $ 166 $ 166
7.40% May 15, 2001 245 245
7.52% May 15, 2002 229 229
7.60% May 15, 2003 216 216
7.56% May 17, 2004 201 201
7.61% May 16, 2005 188 188
7.65% May 15, 2006 175 175
7.68% May 15, 2007 163 163
7.72% May 15, 2008 151 151
7.76% May 15, 2009 140 140
Total borrowed funds $1,874 $1,874
Following are maturities of borrowed funds as of December 31,
1996 (in thousands):
1997 $12,557
1998 822
1999 288
2000 442
2001 245
Thereafter 1,463
Total borrowed funds $15,817
8. LEASES
The Company is committed under two noncancellable operating
leases for facilities with initial or remaining terms in excess
of one year. The minimum annual rental commitments under these
leases at December 31, 1996, are as follows (in thousands):
1997 $ 50
1998 50
1999 35
2000 30
2001 30
Thereafter 56
Total minimum lease payments $251
Total rental expense for all operating leases for 1996, 1995, and
1994 amounted to $52,000, $31,000, and $28,000, respectively.
<PAGE>
<23>
_________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - continued
_________________________________________________________________
Nineteen hundred ninety-six Annual Report
_________________________________________________________________
9. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory, defined-benefit pension plan
(the "Plan") for all employees meeting certain age and length of
service requirements. Benefits are based primarily on years of
service and the average annual compensation during the highest
five consecutive years within the final ten years of employment.
The Company's funding policies are consistent with the funding
requirements of federal law and regulations. Plan assets are
comprised of common stock, U.S. government and corporate debt
securities. Plan assets included 5,905 and 4,936 shares of the
Company's common stock at December 31, 1996 and 1995,
respectively.
Pension cost for 1996, 1995, and 1994 include the following
components (in thousands):
<TABLE>
Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Service cost benefits earned during the period $101 $ 85 $ 70
Interest cost on projected benefit obligation 111 104 83
Return on assets (229) (331) (26)
Net amortization and deferral 54 189 (117)
Net pension cost $ 37 $ 47 $ 10
</TABLE>
As of December 31, 1996, the Plan's total accumulated benefit
obligation was $1,235,000, including vested benefits of
$1,196,000.
The funded status of the Plan and amount recognized in the
Company's consolidated balance sheet are summarized as follows
(in thousands):
<TABLE>
December 31,
1996 1995
<S> <C> <C>
Projected benefit obligation $(1,782) $(1,699)
Plan assets at fair value 2,242 1,937
Excess of assets over projected benefit obligation 460 238
Prior service costs (69) (76)
Unrecognized net (loss) gain from past experience different
from that assumed and effects of changes in assumptions (74) 92
Unrecognized net transition gain (129) (144)
Prepaid pension cost $ 188 $ 110
</TABLE>
The projected benefit obligation for the Plan at December 31,
1996, 1995, and 1994, were determined using an assumed discount
rate of 7%, 7%, and 8%, respectively, and an assumed long-term
rate of compensation increase of 4.0%, 4.5%, and 5%,
respectively. The assumed long-term rate of return on Plan assets
was 8% at December 31, 1996, 1995, and 1994.
The Company also has a profit-sharing plan, covering
substantially all employees, which provides tax-deferred salary
savings to plan participants. The Company's contributions to the
profit-sharing plan are allocated to the participants based upon
a percentage of their compensation. The Company's profit-sharing
contribution is determined by the board of directors on a
discretionary basis. The Company's contributions for 1996, 1995,
and 1994 were $131,000, $86,000, and $120,000, respectively.
10. INCOME TAXES
The provision for income taxes consists of the following (in
thousands):
Years Ended December 31,
1996 1995 1994
Currently payable $1,271 $1,136 $1,138
Deferred liability 36 25 20
Provision for income taxes $1,307 $1,161 $1,158
<PAGE>
<24>
_________________________________________________________________
[GRAPHIC OMITTED: Silhouette of a colonial rider horseback,
upper left hand corner of page .5 inches square]
_________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - continued
_________________________________________________________________
Citizens Financial Services, Inc.
_________________________________________________________________
The following temporary differences gave rise to the net deferred
tax asset at December 31, 1996 and 1995 (in thousands):
1996 1995
Deferred tax assets:
Allowance for loan losses $495 $440
Deferred compensation 194 184
Loan fees and costs 53 99
Goodwill and core deposit intangibles 9 -
Capital loss carryforward - 5
Total 751 728
Deferred tax liabilities:
Unrealized gains on available-for-sale
securities (88) (180)
Premises and equipment (147) (108)
Bond accretion (67) (74)
Prepaid pension cost (64) (37)
Total (366) (399)
Deferred tax asset, net $385 $329
The total provision for income taxes is different from that
computed at the statutory rates due to the following items (in
thousands):
<TABLE>
Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Provision at statutory rates on pre-tax income $1,465 $1,358 $1,286
Effect of tax-exempt income (198) (188) (170)
Nondeductible interest 27 23 19
Other items 13 32 23
Provision for income taxes $1,307 $1,161 $1,158
Statutory tax rates 34% 34% 34%
Effective tax rates 30.3% 29.1% 30.6%
</TABLE>
Income taxes applicable to realized security gains at December
31, 1996, 1995, and 1994, were $1,000, $3,000, and $21,000,
respectively.
11. RELATED PARTY TRANSACTIONS
Certain executive officers, corporate directors or companies in
which they have 10 percent or more beneficial ownership were
indebted to the Bank.
A summary of loan activity with officers, directors, stockholders
and associates of such persons is listed below (in thousands):
<TABLE>
Beginning Ending
Balance Additions Repayments Balance
<S> <C> <C> <C> <C>
1996 $1,379 $ 156 $ 261 $1,274
1995 1,501 181 303 1,379
1994 1,541 618 658 1,501
</TABLE>
Such loans were made in the ordinary course of business at the
Bank's normal credit terms and do not present more than a normal
risk of collection.
<PAGE>
<25>
_________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - continued
_________________________________________________________________
Nineteen hundred ninety-six Annual Report
_________________________________________________________________
12. REGULATORY MATTERS
Dividend Restrictions:
The approval of the Comptroller of the Currency is required for a
national bank to pay dividends up to the Company if the total of
all dividends declared in any calendar year exceeds the Bank's
net income (as defined) for that year combined with its retained
net income for the preceding two calendar years. Under this
formula, the Bank can declare dividends in 1997 without approval
of the Comptroller of the Currency of approximately $3,463,000,
plus the Bank's net income for 1997.
Loans:
The Bank is subject to regulatory restrictions which limit its
ability to loan funds to the Company. At December 31, 1996, the
regulatory lending limit amounted to approximately $2,487,000.
Regulatory Capital Requirements:
The Company and the Bank are subject to various regulatory
capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary
actions by the regulators that, if undertaken, could have a
direct material effect on the Company's and Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank
must meet specific capital guidelines that involve quantitative
measures of their assets, liabili ties, and certain off-balance
sheet items as calculated under regulatory accounting practices.
The Company's and Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by the regulation to ensure
capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios of Total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital to average assets (as de fined).
Management believes, as of December 31, 1996, that the Company
and the Bank meet all capital adequacy requirements to which they
(the Company and the Bank) are subject.
As of December 31, 1996, the most recent notifications from the
Federal Reserve Board and the Office of the Comptroller of the
Currency categorized the Company and the Bank as well capital
ized under the regulatory framework for prompt corrective action.
To be categorized as well capi talized they must maintain minimum
Total risk-based, Tier I risk-based and Tier I leverage ratios at
least 100 to 200 basis points above those ratios set forth in the
table. There have been no conditions or events since that
notification that management believes have changed the Company's
or the Bank's category.
The following table reflects the Company's and the Bank's capital
ratios at December 31 (in thousands):
<TABLE>
1996 1995
Amount Ratio Amount Ratio
<S> <C> <C> <C> <C>
Total capital (to risk-weighted assets)
Company $23,764 15.03% $22,666 16.52%
Bank 23,731 15.01 22,616 16.48
For capital adequacy purposes 12,649 8.00 10,979 8.00
To be well capitalized 15,811 10.00 13,724 10.00
Tier I capital (to risk-weighted assets)
Company $21,787 13.78% $20,949 15.26%
Bank 21,754 13.76 20,899 15.23
For capital adequacy purposes 6,324 4.00 5,490 4.00
To be well capitalized 9,486 6.00 8,234 6.00
Tier I capital (to average assets)
Company $21,787 7.76% $20,949 8.54%
Bank 21,754 7.75 20,899 8.52
For capital adequacy purposes 8,424 3.00 7,359 3.00
To be well capitalized 14,041 5.00 12,265 5.00
</TABLE>
This annual report has not been reviewed, or confirmed for
accuracy or relevance, by the Federal Deposit Insurance
Corporation.
<PAGE>
<26>
_________________________________________________________________
[GRAPHIC OMITTED: Silhouette of a colonial rider horseback,
upper left hand corner of page .5 inches square]
_________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - continued
_________________________________________________________________
Citizens Financial Services, Inc.
_________________________________________________________________
13. OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of
credit. These instruments involve, to varying degrees, elements
of credit and interest rate or liquidity risk in excess of the
amount recognized in the consolidated balance sheet.
The Company's exposure to credit loss from nonperformance by the
other party to the financial instruments for commitments to
extend credit and standby letters of credit is represented by the
contractual amount of these instruments. The Company uses the
same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit
risk at December 31, 1996 and 1995, are as follows (in
thousands):
1996 1995
Commitments to extend credit $16,740 $13,228
Standby letters of credit $ 660 $ 863
Commitments to extend credit are legally binding agreements to
lend to customers. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of
fees. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not
necessarily represent future liquidity requirements. The Company
evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by
the Company on extension of credit is based on management's
credit assessment of the counter party.
Standby letters of credit are conditional commitments issued by
the Company guaranteeing performance by a customer to a third
party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending normal loan
commitments to customers. The Company generally holds collateral
supporting standby letters of credit.
14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107,
"Disclosures about Fair Value of Financial Instruments," requires
that the Company disclose estimated fair values for its financial
instruments. Fair value estimates are made at a specific point in
time, based on relevant market information and information about
the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at
one time the Company's entire holdings of a particular financial
instrument. Also, it is the Company's general practice and
interest to hold its financial instruments to maturity and not to
engage in trading or sales activities. Because no market exists
for a significant portion of the Company's financial instruments,
fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore
cannot be deter mined with precision. Changes in assumptions can
significantly affect the estimates.
Estimated fair values have been determined by the Company using
historical data, as generally provided in the Company's
regulatory reports, and an estimation methodology suitable for
each category of financial instruments. The Company's fair value
estimates, methods and assumptions are set forth below for the
Company's financial instruments.
Cash and due from banks:
The carrying amounts for cash and due from banks approximate fair
value because they mature in 90 days or less and do not present
unanticipated credit concerns.
Investment Securities:
The fair values of investments are based on quoted market prices
as of the balance sheet date. For certain instruments, fair value
is estimated by obtaining quotes from independent dealers.
<PAGE>
<27>
_________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - continued
_________________________________________________________________
Nineteen hundred ninety-six Annual Report
_________________________________________________________________
In accordance with SFAS No. 115, available-for-sale securities
are marked to-market for financial reporting purposes and
therefore already approximate fair value (in thousands):
<TABLE>
DECEMBER 31, 1996 DECEMBER 31, 1995
BOOK ESTIMATED BOOK ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
<S> <C> <C> <C> <C>
Available-for-sale securities $28,736 $28,736 $21,444 $21,444
Held-to-maturity securities 57,321 57,587 52,271 53,589
Total investment securities $86,057 $86,323 $73,715 $75,033
</TABLE>
Loans:
Fair values are estimated for portfolios of loans with similar
financial characteristics.
The fair value of performing loans has been estimated by
discounting expected future cash flows. The discount rate used in
these calculations is derived from the Treasury yield curve
adjusted for credit quality, operating expense and prepayment
option price, and is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market
discount rates that reflect the credit and interest rate risk
inherent in the loan. The estimate of maturity is based on the
Company's historical experience with repayments for each loan
classification, modified as required by an estimate of the effect
of current economic and lending conditions.
Fair value for significant nonperforming loans is based on recent
external appraisals. If appraisals are not available, estimated
cash flows are discounted using a rate commensurate with the risk
associated with the estimated cash flows. Assumptions regarding
credit risk, cash flows, and discount rates are judgmentally
determined using available market information and specific
borrower information.
The following table presents information for loans (in
thousands):
<TABLE>
DECEMBER 31, 1996 DECEMBER 31, 1995
BOOK ESTIMATED BOOK ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
<S> <C> <C> <C> <C>
Net loans $180,418 $180,586 $159,794 $160,681
</TABLE>
Deposits:
The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings and NOW accounts,
and money market accounts, is equal to the amount payable on
demand as of December 31, 1996 and 1995. The fair value of
certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate is estimated using the
rates currently offered for deposits of similar remaining
maturities (in thousands).
<TABLE>
DECEMBER 31, 1996 DECEMBER 31, 1995
BOOK ESTIMATED BOOK ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
<S> <C> <C> <C> <C>
Noninterest-bearing demand $ 17,924 $17,924 $ 15,140 $ 15,140
Interest-bearing deposits:
Savings and NOW 59,168 59,168 48,998 48,998
Money market investors 25,851 25,851 24,096 24,096
Certificates of deposit less than $100,000 117,954 119,504 106,540 107,929
Certificates of deposit more than $100,000 19,280 19,388 18,542 18,636
</TABLE>
<PAGE>
<28>
_________________________________________________________________
[GRAPHIC OMITTED: Silhouette of a colonial rider horseback,
upper left hand corner of page .5 inches square]
_________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - continued
_________________________________________________________________
Citizens Financial Services, Inc.
_________________________________________________________________
The fair value estimates above do not include the benefit that
results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the
market, commonly referred to as the core deposit intangible.
Borrowed Funds
Rates available to the Company for borrowed funds with similar
terms and remaining maturities are used to estimate the fair
value of borrowed funds (in thousands):
<TABLE>
DECEMBER 31, 1996 DECEMBER 31, 1995
BOOK ESTIMATED BOOK ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
<S> <C> <C> <C> <C>
Securities sold under agreements to repurchase $5,018 $5,018 $5,331 $5,331
FHLB Advances 8,925 8,925 1,650 1,650
Other borrowed funds 1,874 1,975 1,874 1,976
</TABLE>
Commitments to Extend Credit and Standby Letters of Credit:
There is no material difference between the notional amount and
the estimated fair value of off-balance-sheet items which are
primarily comprised of unfunded loan commitments which are
generally priced at market at the time of funding (see Note 13).
15. BRANCH ACQUISITIONS
On April 20, 1996, the Bank completed the acquisition of the
Canton and Gillett, Pennsylvania banking offices of Meridian Bank
of Pennsylvania with total assets of $3,845,000 and retail core
deposits of $17,130,000. The transaction was accounted for under
the purchase method and the Bank received approximately
$12,270,000 in cash.
16. SUBSEQUENT EVENT
On February 24, 1997, the Bank reached an arbitration settlement
with a vendor. The settlement was for legal remedies associated
with relationships with this vendor. The Bank received $884,000
in cash and $250,000 in credits to be applied to future
expenditures, which if unused will expire within two years. The
amount received by the Bank is net of fees associated with the
arbitration.
<PAGE>
<29>
_________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - continued
_________________________________________________________________
Nineteen hundred ninety-six Annual Report
_________________________________________________________________
17. CONDENSED FINANCIAL INFORMATION PARENT COMPANY ONLY
CITIZENS FINANCIAL SERVICES, INC.
CONDENSED BALANCE SHEET
December 31, 1996 and 1995
<TABLE>
(in thousands) 1996 1995
<S> <C> <C>
Assets
Cash $ 33 $ 49
Dividends receivable - subsidiary 612 579
Investment in subsidiary,
First Citizens National Bank 22,871 21,248
Total assets $23,516 $21,876
Liabilities & stockholders' equity
Dividends payable $ 612 $ 579
Stockholders' equity 22,904 21,297
Total liabilities and stockholders' equity $23,516 $21,876
</TABLE>
CITIZENS FINANCIAL SERVICES, INC.
CONDENSED STATEMENT OF INCOME
Years Ended December 31, 1996, 1995, and 1994
<TABLE>
(in thousands) 1996 1995 1994
<S> <C> <C> <C>
Dividend income $1,265 $1,235 $1,136
Expenses 62 64 65
Income before equity in undistributed earnings of subsidiary 1,203 1,171 1,071
Equity in undistributed
earnings - First Citizens National Bank 1,800 1,663 1,554
Net income $3,003 $2,834 $2,625
CITIZENS FINANCIAL SERVICES, INC.
CONDENSED STATEMENT OF CASH FLOWS
Years Ended December 31, 1996, 1995, and 1994
(in thousands) 1996 1995 1994
Cash Flows from operating activities:
Net income $3,003 $2,834 $2,625
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiary (1,800) (1,663) (1,554)
Increase in other assets (32) (32) (19)
Net cash provided by operating activities 1,171 1,139 1,052
Cash flows used in financing activities:
Cash dividends paid (1,187) (1,121) (1,056)
Net (decrease) increase in cash (16) 18 (4)
Cash at beginning of year 49 31 35
Cash at end of year $ 33 $ 49 $ 31
</TABLE>
<PAGE>
<30>
_________________________________________________________________
[GRAPHIC OMITTED: Silhouette of a colonial rider horseback,
upper left hand corner of page .5 inches square]
_________________________________________________________________
REPORT OF INDEPENDENT AUDITORS
_________________________________________________________________
Citizens Financial Services, Inc.
_________________________________________________________________
SNODGRASS
Certified Public Accountants
[LOGO OMITTED]
To the Stockholders and Board of Directors of Citizens Financial
Services, Inc.
We have audited the consolidated balance sheet of Citizens
Financial Services, Inc. and subsidiary as of December 31, 1996
and 1995, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Citizens Financial Services, Inc. and subsidiary as
of December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
As discussed in the notes to the consolidated financial
statements, effective January 1, 1995, the Company changed its
method of accounting for impairment of loans and related
allowance for loan losses.
/s/ S.R. Snodgrass, A.C.
Wexford, PA
February 28, 1997
S.R. Snodgrass, A.C.
101 Bradford Road Wexford, PA 15090-6909
Phone: 412-934-0344 Faxsimile: 412-934-0345
<PAGE>
<31>
_________________________________________________________________
SELECTED FINANCIAL DATA
FIVE YEARS SUMMARY OF OPERATIONS
_________________________________________________________________
Nineteen hundred ninety-six Annual Report
_________________________________________________________________
<TABLE>
(dollar amounts in thousands) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Interest income $ 21,341 $ 19,422 $ 17,336 $ 16,551 $ 16,684
Interest expense 10,867 9,851 7,944 7,853 8,895
Net interest income 10,474 9,571 9,392 8,698 7,789
Provision for possible loan losses 205 163 255 315 324
Net interest income after provision
for possible loan losses 10,269 9,408 9,137 8,383 7,465
Other operating income 1,372 1,242 1,073 1,016 991
Realized securities gains (losses), net 19 10 63 50 35
Other operating expenses 7,350 6,665 6,490 6,117 5,423
Income before provision for income taxes 4,310 3,995 3,783 3,332 3,068
Provision for income taxes 1,307 1,161 1,158 908 820
Net income $ 3,003 $ 2,834 $ 2,625 $ 2,424 $ 2,248
Per share data:
Net income $ 2.21 $ 2.08 $ 1.93 $ 1.78 $ 1.65
Cash dividends .89 .85 .81 .77 .73
Book value 16.84 15.66 13.90 13.48 12.00
Total investments $ 86,057 $ 73,715 $ 64,257 $ 62,645 $ 59,742
Loans, net 180,418 159,794 154,848 140,391 128,326
Total assets 282,810 247,094 232,537 216,237 202,155
Total deposits 240,177 213,316 194,478 191,013 178,033
Stockholders' equity 22,904 21,297 18,903 18,340 16,329
</TABLE>
COMMON STOCK
Common stock issued by Citizens Financial Services, Inc. is
traded in the local over-the-counter market, primarily in
Pennsylvania and New York. Prices presented in the table below
are bid/ask prices between broker-dealers published by the
National Association of Securities Dealers through the NASD OTC
"Bulletin Board", its automated quotation system for non-NASDAQ
quoted stocks and the National Quotation Bureau's "Pink Sheets."
The prices do not include retail markups or markdowns or any
commission to the broker-dealer. The bid prices do not
necessarily reflect prices in actual transactions. Cash dividends
are declared on a semiannual basis and the effects of stock
dividends have been stated retroactively in the table below (also
see dividend restrictions in Note 12).
<TABLE>
Dividends Dividends
1996 declared 1995 declared
High Low per share High Low per share
<S> <C> <C> <C> <S> <C> <C> <C>
First quarter $25.88 $25.88 First quarter $23.00 $20.50
Second quarter 25.25 24.75 $ .44 Second quarter 23.00 20.50 $ .42
Third quarter 25.50 25.00 Third quarter 22.75 22.50
Fourth quarter 25.88 25.50 $ .45 Fourth quarter 23.50 21.50 $ .43
</TABLE>
<PAGE>
<32>
_________________________________________________________________
[GRAPHIC OMITTED: Silhouette of a colonial rider horseback,
upper left hand corner of page .5 inches square]
_________________________________________________________________
CONSOLIDATED QUARTERLY DATA
TRUST AND INVESTMENT SERVICES STATEMENT OF CONDITION
_________________________________________________________________
Citizens Financial Services, Inc.
_________________________________________________________________
<TABLE>
CONSOLIDATED QUARTERLY DATA
(dollar amounts in thousands) Three Months Ended
1996 March 31 June 30 Sept 30 Dec 31
<S> <C> <C> <C> <C>
Interest income $5,005 $5,302 $5,512 $5,522
Interest expense 2,528 2,687 2,816 2,836
Net interest income 2,477 2,615 2,696 2,686
Provision for possible loan losses 48 53 52 52
Other operating income 302 333 374 363
Realized securities gains, net 19 - - -
Other operating expenses 1,673 1,754 2,024 1,899
Income before provision for income taxes 1,077 1,141 994 1,098
Provision for income taxes 352 332 284 339
Net income $ 725 $ 809 $ 710 $ 759
Earnings Per Share $ 0.53 $ 0.59 $ 0.52 $ 0.56
Three Months Ended
1995 March 31 June 30 Sept 30 Dec 31
Interest income $4,628 $4,783 $4,964 $5,047
Interest expense 2,313 2,436 2,515 2,587
Net interest income 2,315 2,347 2,449 2,460
Provision for possible loan losses 50 38 38 37
Other operating income 287 335 291 329
Realized securities gains, net 5 - 5 -
Other operating expenses 1,709 1,740 1,582 1,634
Income before provision for income taxes 848 904 1,125 1,118
Provision for income taxes 240 257 324 340
Net income $ 608 $ 647 $ 801 $ 778
Earnings Per Share $ 0.45 $ 0.47 $ 0.59 $ 0.57
</TABLE>
TRUST AND INVESTMENT SERVICES STATEMENT OF CONDITION
The following graph shows personal trust asset growth over the
past five years.
1996 1995
INVESTMENTS:
Bonds $14,770 $19,161
Stock 10,284 8,713
Savings and money market funds 10,554 8,666
Mutual funds 6,756 3,556
Mortgages 491 578
Real estate 285 236
Miscellaneous 127 96
Cash 44 166
TOTAL $43,311 $41,172
ACCOUNTS:
Estates $ 413 $ 314
Trusts 25,458 20,751
Guardianships 197 116
Pension/profit sharing 8,611 7,412
Investment management 4,911 3,884
Custodial 3,721 8,695
TOTAL $43,311 $41,172
[GRAPH OMITTED: One bar chart depicting personal trust assets
from 1992 to 1996. Tabular representation of those graphs are
set forth as follows:
PERSONAL TRUST ASSETS
(Dollars in Thousands)
1992 1993 1994 1995 1996
$23,706 $26,085 $27,781 $31,786 $39,776
_________________________________________________________________
<PAGE>
<33>
_________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
_________________________________________________________________
Nineteen hundred ninety-six Annual Report
_________________________________________________________________
This narrative is provided to assist in the understanding and
evaluation of the financial condition and results of operations
of Citizens Financial Services, Inc. and its subsidiary (the
"Company") and should be read in conjunction with the preceding
consolidated financial statements and related footnotes. Such
financial condition and results of operations are not intended to
be indicative of future performance. Except as noted, tabular
information is presented in thousands of dollars.
In addition to historical information, this report contains
forward-looking statements. The 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.
Financial Condition
The following table presents the growth (dollars in millions)
during the past two years:
Growth in: 1996 1995
$ % $ %
Total assets 35.7 14.5 14.5 6.3
Total deposits 26.9 12.6 18.8 9.7
Total loans 20.6 12.9 4.9 3.2
Total investments
(including available-for-sale
and held-to-maturity) 12.3 16.7 9.5 14.7
Total stockholders'
equity 1.6 7.5 2.4 12.7
Investments
The investment portfolio, including available-for-sale and
held-to-maturity securities, increased by $12.3 million or 16.7%
in 1996 as compared to growth of $9.5 million in 1995. The
primary growth in the investment portfolio occurred in U.S.
Treasury securities, with a $12.3 million or a 21.1% increase as
compared to an increase of $7.7 million in 1995. Corporate
obligations increased by $1.4 million during 1996.
The 1996 growth in the investment portfolio was the result of
strong deposit growth and the addition of the banking offices
described later in this Management's Discussion and Analysis
section and in Footnote 15 of the Consolidated Financial
Statements.
The funds that are not used to fund loans are placed in
investments which are of less risk and, therefore, lower yield.
The impact on net interest income is discussed later in the Net
Interest Income section.
The following table shows the year-end composition of the
investment portfolio for the five years ended December 31, 1996:
<PAGE>
<34>
_________________________________________________________________
[GRAPHIC OMITTED: Silhouette of a colonial rider horseback,
upper left hand corner of page .5 inches square]
_________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
_________________________________________________________________
Citizens Financial Services, Inc.
_________________________________________________________________
<TABLE>
Book Value at December 31,
% of % of % of % of % of
1996 Total 1995 Total 1994 Total 1993 Total 1992 Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities $21,406 24.9 $15,591 21.2 $14,594 22.7 $16,126 25.7
Corporate obligations 7,253 8.4 5,778 7.8 - - - -
Equity securities 77 .1 75 .1 46 .1 45 .1
Held-to-maturity:
U.S. Treasury securities 49,169 57.1 42,700 57.9 36,042 56.1 30,686 49.0 $38,942 65.2
Federal agency obligations - - - - 500 .8 502 .8 1,000 1.7
Obligations of state & political
subdivisions 606 .7 1,311 1.8 2,735 4.3 3,498 5.6 4,106 6.9
Corporate obligations 4,694 5.5 4,744 6.4 6,729 10.4 7,715 12.3 10,108 16.9
Mortgage-backed securities 1,724 2.0 2,377 3.2 2,513 3.9 3,066 4.9 4,606 7.7
Restricted equity
securities 1,128 1.3 1,139 1.6 1,098 1.7 1,007 1.6 980 1.6
Total $86,057 100.0 $73,715 100.0 $64,257 100.0 $62,645 100.0 $59,742 100.0
</TABLE>
Maturities and Average Weighted Yields of Investment Securities
The expected maturities and average weighted yields for the above
investment portfolio as of December 31, 1996, as shown below.
Yields on tax-exempt securities are presented on a fully-taxable
equivalent basis assuming a 34% tax rate:
<TABLE>
Within One- Five- After
One Yield Five Yield Ten Yield Ten Yield Yield
Year (%) Years (%) Years (%) Years (%) Total (%)
<S> <C> <C> <C> <C> <C> <C> <C> <S> <C> <C>
Held-to-maturity securities:
U.S. Treasury $ 4,014 6.28 $43,187 6.33 $1,968 6.72 $ - - $49,169 6.34
State & political subdivisions,
general obligation 2 8.33 9 8.33 4 8.33 - - 15 8.33
State & political subdivisions,
revenue 251 13.18 340 12.31 - - - - 591 12.68
Corporate obligations 1,500 9.16 3,194 6.53 - - - - 4,694 7.37
Mortgage-backed securities 1,065 5.73 659 5.68 - - - - 1,724 5.71
Restricted equity securities - - - - - - 1,128 6.00 1,128 6.00
Total held-to-maturity $ 6,832 7.08 $47,389 6.38 $1,972 6.72 $ 1,128 6.00 $57,321 6.47
Available-for-sale securities:
U.S. Treasury $ 3,030 7.61 $12,738 6.19 $5,638 6.55 $ - - $21,406 6.49
Corporate obligations 2,929 6.11 4,324 6.43 - - - - 7,253 6.30
Equity securities - - - - - - 77 1.50 77 1.50
Total available-for-sale $ 5,959 6.87 $17,062 6.25 $5,638 6.55 $ 77 1.50 $28,736 6.43
</TABLE>
During 1990 through 1996, the concentration of the Company's
investment portfolio has shifted dramatically as U.S. Treasury
securities now comprise 82% of the total portfolio. No new
investments have been made in state and political subdivisions
since 1985. In 1996, the Company invested $4.8 million in
corporate obligations (investment-grade securities). This
investment strategy reflects management's conservative investment
philosophy and its reluctance to pursue other types of securities
that carry more interest rate and credit risk but offer only a
marginally higher rate of return.
Approximately 86% of the amortized cost of debt securities are
expected to mature within five years or less (average expected
maturity 3.2 years), as evidenced in Footnote 3 of the
Consolidated Financial Statements.
It is management's intention to hold substantially all debt
securities purchased to maturity. Further, the Company expects
that earnings from operations, the high liquidity level of the
securities, growth of deposits and the availability of borrowings
from the Federal Home Loan Bank are sufficient to meet future
liquidity needs, and management does not anticipate selling
securities for liquidity requirements. Accordingly, the majority
of the securities portfolio is classified as held-to-maturity.
The Company has no securities from a single issuer representing
more than 10% of stockholders' equity.
<PAGE>
<35>
_________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
_________________________________________________________________
Nineteen hundred ninety-six Annual Report
_________________________________________________________________
Loans
Historically, loans have been originated by the Company 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 Company also
does a limited amount of indirect loans through new and used car
dealers in the primary lending area.
All lending is governed by a lending policy which is developed
and maintained by management and approved by the board of
directors. The Company's lending policy regarding real estate
loans is that generally 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 generally originated subject to maximum
mortgage liens against the property of 80% 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.
As shown in the following table, total loans grew by $20.7
million in 1996, or 12.8%, a strong increase from the 3.0%
increase during 1995. The residential mortgage loan portfolio
increased 12.2% as a result of higher demand during 1996. In
addition, $1.6 million in conforming mortgage loans were
originated and sold on the secondary market through the Federal
Home Loan Mortgage Corporation, providing over $23,000 of income
in origination fees and premiums on loans sold, compared to $1.7
million in loans originated and $37,000 of income in 1995.
Residential mortgage lending is a principal business activity and
one the Company expects to continue by providing a full
complement of conforming, nonconforming and home equity mortgages
priced competitively.
Total commercial real estate increased by $3.5 million or 14.5%
(up from the 10.5% gain in 1995). Commercial lending activity is
primarily focused on small businesses and the Company's
commercial lending officers have been very successful in
attracting new business loans.
Loans to individuals increased $1.3 million or 9.6% during 1996
compared to an increase of $1.3 million in 1995.
State and political subdivision loans increased $1.8 million or
21.1% compared to an increase of $1.0 million in 1995. Over the
last few years, management has been successful in obtaining
tax-exempt loans from local municipalities and school districts
to replace the maturing tax-exempt securities in the investment
portfolio.
The acquisition of the offices at Canton and Gillett accounted
for $3.7 million of the loan growth. (See Footnote 15 of the
Consolidated Financial Statements and discussion to follow.)
The majority of lending activity has been mortgage loans secured
by one- to four-family residential property. The Company does
offer a 25-year fixed-rate mortgage product; however, since 1987
the growth in the mortgage portfolio has been in the area of one-
to five-year adjustable rate mortgages. As of December 31, 1996,
residential real estate and real estate construction loans made
up 61.7% of the Company's total loan portfolio.
Continuing in 1997, the Company's primary goal is to be the
premier mortgage lender in its market area, with its large menu
of conforming mortgages (including "jumbo" and low- to
moderate-income home buyer mortgages) through Farmers Home
Administration (FmHA) and Pennsylvania Housing Finance Agency
(PHFA). Continued training of branch office personnel and the
focus on flexibility and fast "turn around time" will aid in
meeting this goal. (Also see the discussion in Footnote 4.)
<TABLE>
Five Year Breakdown of Loans by Type
December 31,
1996 1995 1994 1993 1992
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Residential $ 108,416 59.4 $ 96,594 59.7 $ 97,359 62.0 $ 92,149 64.3 $ 85,196 64.5
Commercial 27,670 15.2 24,167 14.9 21,915 13.9 19,926 13.9 15,994 12.1
Agricultural 6,134 3.4 8,027 5.0 7,125 4.5 4,216 2.9 5,011 3.8
Construction 4,262 2.3 1,018 0.6 1,271 0.8 1,102 0.8 803 0.6
Loans to individuals
for family and other
purchases 14,465 7.9 13,198 8.1 11,886 7.7 11,696 8.2 12,637 9.6
Commercial and other 11,529 6.3 10,535 6.5 10,285 6.5 8,959 6.3 8,811 6.7
State and political
subdivision loans 10,105 5.5 8,347 5.2 7,303 4.6 5,170 3.6 3,581 2.7
Total loans 182,581 100.0 161,886 100.0 157,144 100.0 143,218 100.0 132,033 100.0
Unearned income 168 259 575 1,311 2,506
Allowance for possible
loan losses 1,995 1,833 1,721 1,516 1,201
Net loans $ 180,418 $159,794 $154,848 $140,391 $128,326
</TABLE>
<PAGE>
<36>
_________________________________________________________________
[GRAPHIC OMITTED: Silhouette of a colonial rider horseback,
upper left hand corner of page .5 inches square]
_________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
_________________________________________________________________
Citizens Financial Services, Inc.
_________________________________________________________________
The predominant source of earning assets is from the loan
portfolio. The following table shows the maturity of commercial
and agricultural loans and commercial loans secured by real
estate as of December 31, 1996, classified according to the
sensitivity to changes in interest rates within various time
intervals:
<TABLE>
Commercial,
financial, Real estate
agricultural construction Total
<S> <C> <C> <C>
Maturity of loans:
One year or less $ 6,761 $ - $ 6,761
Over one year but less than five years 10,871 - 10,871
Over five years 37,806 4,262 42,068
Total $55,438 $4,262 $59,700
Sensitivity of loans to changes in
interest rates - loans due after one year:
Predetermined interest rate $16,217 $2,547 $18,764
Floating or adjustable interest rate 32,460 1,715 34,175
Total $48,677 $4,262 $52,939
</TABLE>
Deposits
Over the last several 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. Some of the deposit product variations were limited
transaction deposit accounts with interest rates that vary as
often as daily, unlimited transaction interest-bearing accounts,
Premier 50, Premier 50 Plus, Gold Club, individual retirement
accounts, longer-term certificates of deposit (generally of
five-year maturity), promotional 30-month, 66-month and Roll-Up
certificates of deposit (which allows the customer to adjust the
interest rate up once during the term by a maximum of 100 basis
points).
During 1996, the Company moved to expand and consolidate its
market share by the acquisition of two offices and the start of
its first supermarket office at Weis Market in Wellsboro.
Deposit growth of $26.9 million or 12.6% was the result of the
acquisition of the offices at Canton and Gillett ($17.1 million)
and the competitive pricing of certificates of deposit. Deposit
growth in 1995 was an increase of $18.8 million or 9.7%.
Transaction accounts (noninterest-bearing and interest-bearing)
increased $10.9 million or 20% in 1996, while total certificates
of deposit increased $12 million or 9.7%. Certificates of
deposit growth in 1995 was $16 million or 14.6%.
During 1996, the interest cost of certificates of deposit
remained high while the interest rate paid on Money Market
Investors and savings accounts declined. This rate environment
(high rates for certificates of deposit and lower rates for
interest-bearing transaction and savings accounts) resulted in
substantial growth in certificates of deposit. Money market
deposit accounts (which are paid a higher interest rate than
savings and NOW accounts) had growth of $1.8 million or 7.3%.
The following table shows the composition of deposit accounts
over the last three years as of December 31:
<TABLE>
Deposits by Major Classification
1996 1995 1994
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits $ 17,924 7.5 $15,140 7.1 $ 14,495 7.5
NOW accounts 31,836 13.2 23,681 11.1 23,963 12.3
Savings deposits 27,332 11.4 25,317 11.9 26,102 13.4
Money market deposit accounts 25,851 10.8 24,096 11.3 20,799 10.7
Certificates of deposit 137,234 57.1 125,082 58.6 109,119 56.1
Total deposits $240,177 100.0 $213,316 100.0 $194,478 100.0
</TABLE>
<PAGE>
<37>
_________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
_________________________________________________________________
Nineteen hundred ninety-six Annual Report
_________________________________________________________________
Remaining maturities of certificates of deposit of $100,000 or
more:
<TABLE>
1996 1995 1994
<C> <C> <C> <C>
3 months or less $ 1,962 $2,708 $ 4,339
3 through 6 months 2,788 2,474 3,813
6 through 12 months 6,051 4,538 2,323
Over 12 months 8,479 8,822 5,903
Total $19,280 $18,542 $16,378
As a percent of total
certificates of deposit 14.05% 14.82% 15.01%
</TABLE>
<TABLE>
Deposits by Type of Depositor
1996 1995 1994
Amount % Amount % Amount %
<C> <C> <C> <C> <C> <C> <C>
Individual, partnerships
& corporations $212,398 88.4 $188,471 88.4 $173,879 89.4
United States government 148 .1 132 .1 214 .1
State & political subdivisions 25,794 10.7 23,279 10.9 18,868 9.7
Other 1,837 .8 1,434 .6 1,517 .8
Total deposits $240,177 100.0 $213,316 100.0 $194,478 100.0
</TABLE>
The methods used by the Company to attract and retain deposits
(in addition to competitive interest rates) have been increased
marketing and business development efforts, continuous emphasis
on quality personal service, expanded trust and investment
management services and more convenient hours. In all of our
community offices, lobby and drive-up hours now include Wednesday
afternoons (when they were traditionally closed) as well as
Saturday hours. The supermarket office is open seven days a week
with extended hours on weekdays. The Company currently provides
nine MAC automated teller machines, which are part of the MAC
regional and PLUS national network.
Results of Operations
Net income during 1996 increased to $3 million (net income per
share of $2.21), an increase of $169,000 or 6% over the $2.8
million reported in 1995 (net income per share of $2.08).
The following table sets forth certain performance ratios of the
Company for the periods indicated:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Return on assets (net income to average total assets) 1.11% 1.18% 1.17%
Return on equity (net income to average total equity) 13.59% 14.10% 14.06%
Dividend payout ratio (dividends declared divided by net income) 40.12% 40.22% 41.45%
Equity to asset ratio (average equity to average total assets) 8.18% 8.45% 8.33%
</TABLE>
Net income is influenced by five key elements: net interest
income, other operating income, other operating expenses,
provision for income taxes and the provision for possible loan
losses. A discussion of these five elements follows.
Net Interest Income
The most significant source of revenue is net interest income,
the amount by which interest earned on interest-bearing assets
exceeds interest expense on interest-bearing liabilities. Net
interest income (tax adjusted) in 1996 was $10.8 million (an
increase of $ .9 million or 9.4%) as compared to $9.9 million in
1995 and $9.7 million in 1994.
Factors which influence net interest income are changes in volume
of interest-bearing assets and liabilities as well as changes in
the associated interest rates. The following tables set forth
the Company's average balances of, and the interest earned or
incurred on, each principal category of assets, liabilities and
stockholders' equity, the related rates, net interest income and
rate "spread" created:
<PAGE>
<38>
_________________________________________________________________
[GRAPHIC OMITTED: Silhouette of a colonial rider horseback,
upper left hand corner of page .5 inches square]
_________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
_________________________________________________________________
Citizens Financial Services, Inc.
_________________________________________________________________
Analysis of Average Balances and Interest Rates (1)
<TABLE>
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 at banks 2,782 147 5.28 2,334 135 5.78
Total short-term investments 2,782 147 5.28 2,334 135 5.78
Investment securities:
Taxable 82,163 5,310 6.46 64,990 4,309 6.63
Tax-exempt (3) 792 100 12.63 2,150 271 12.61
Total investment securities 82,955 5,410 6.52 67,140 4,580 6.82
Loans:
Residential mortgage loans 104,176 9,699 9.31 96,998 9,018 9.30
Commercial & farm loans 41,896 4,121 9.84 38,615 3,829 9.92
Loans to state & political
subdivisions 9,631 829 8.61 7,152 644 9.00
Other loans 14,401 1,435 9.96 13,989 1,501 10.73
Loans, net of discount (2)(3)(4) 170,104 16,084 9.46 156,754 14,992 9.56
Total interest-earning assets 255,841 21,641 8.46 226,228 19,707 8.71
Cash and due from banks 5,920 4,737
Bank premises and equipment 4,311 4,128
FASB 115 adjustment 218 46
Other assets 3,828 2,653
Total noninterest-bearing assets 14,277 11,564
Total assets 270,118 237,792
Liabilities and Stockholders' Equity
Interest-bearing deposits:
NOW accounts 29,752 688 2.31 24,152 556 2.30
Savings accounts 27,541 612 2.22 25,722 628 2.44
Money market accounts 27,189 1,192 4.38 23,003 1,089 4.73
Certificates of deposit 133,071 7,784 5.85 119,260 7,067 5.93
Total interest-bearing deposits 217,553 10,276 4.72 192,137 9,340 4.86
Other borrowed funds 9,730 591 6.07 8,031 511 6.36
Total interest-bearing liabilities 227,283 10,867 4.78 200,168 9,851 4.92
Demand deposits 17,550 14,647
Other liabilities 3,184 2,837
Total noninterest-bearing liabilities 20,734 17,484
Stockholders' equity 22,101 20,140
Total liabilities&stockholders' equity 270,118 237,792
Net interest income 10,774 9,856
Net interest spread (5) 3.68% 3.79%
Net interest income as a percentage
of average interest-earning assets 4.21% 4.36%
Ratio of interest-earning assets
to interest-bearing liabilities 1.13 1.13
</TABLE>
Analysis of Average Balances and Interest Rates (1) - continued
1994
Average Average
Balance Interest Rate
$ $ %
Assets
Short-term investments:
Interest-bearing deposits at bank 605 25 4.13
Total short-term investments 605 25 4.13
Investment securities:
Taxable 61,215 4,111 6.72
Tax-exempt (3) 2,997 427 14.26
Total investment securities 64,212 4,538 7.07
Loans:
Residential mortgage loans 93,697 8,229 8.78
Commercial & farm loans 32,937 2,887 8.77
Loans to state & political
subdivisions 6,427 482 7.50
Other loans 13,833 1,448 10.47
Loans, net of discount (2)(3)(4) 146,894 13,046 8.88
Total interest-earning assets 211,711 17,609 8.32
Cash and due from banks 4,694
Bank premises and equipment 3,999
FASB 115 adjustment 125
Other assets 3,419
Total noninterest-bearing assets 12,237
Total assets 223,948
Liabilities and Stockholders' Equity
Interest-bearing deposits:
NOW accounts 26,052 593 2.28
Savings accounts 27,388 635 2.32
Money market accounts 21,363 728 3.41
Certificates of deposits 105,455 5,565 5.28
Total interest-bearing deposits 180,258 7,521 4.17
Other borrowed funds 8,440 423 5.01
Total interest-bearing liabilities 188,698 7,944 4.21
Demand deposits 14,318
Other liabilities 18,664
Total noninterest-bearing liabilities 16,586
Stockholder's equity 18,664
Total liabilities & stockholders'
equity 223,948
Net interest income 9,665
Net interest spread (5) 4.11%
Net interest income as a percentage
of average interest-earning assets 4.57%
Ratio of interest-earning assets
to interest-bearing liabilities 1.12
(1) Averages are based on daily balances.
(2) Includes loan origination and commitment fees of $155, $155,
and $180 for 1996, 1995, and 1994, respectively.
(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 nonaccrual 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>
<39>
_________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
_________________________________________________________________
Nineteen hundred ninety-six Annual Report
_________________________________________________________________
The following table shows the effect of changes in volume and
rates on interest income and expense. Rate/Volume variances are
allocated to rate and volume variances based upon the absolute
change in each. Tax-exempt interest revenue is shown on a
tax-equivalent basis for proper comparison using a statutory
federal income tax rate of 34%.
<TABLE>
Analysis of Changes in Net Interest Income on a Tax-Equivalent Basis
1996 vs. 1995 1995 vs. 1994
Change in Change Total Change in Change Total
Volume in Rate Change Volume in Rate Change
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Short-term investments:
Interest-bearing deposits at banks $ 22 $ (10) $ 12 $ 96 $ 14 $ 110
Investment securities:
Taxable 1,107 (106) 1,001 250 (52) 198
Tax-exempt (172) 1 (171) (111) (45) (156)
Total investments 935 (105) 830 139 (97) 42
Loans:
Residential mortgage loans 668 13 681 96 493 789
Commercial and farm loans 323 (31) 292 535 407 942
Loans to state & political subdivisions 212 (27) 185 58 104 162
Other loans 46 (112) (66) 17 36 53
Total loans - net of discount 1,249 (157) 1,092 906 1,040 1,946
Total interest income 2,206 (272) 1,934 1,141 957 2,098
Interest expense:
Interest bearing deposits:
NOW accounts 129 2 131 (44) 8 (36)
Savings accounts 59 (75) (16) (55) 48 (7)
Money market accounts 174 (71) 103 60 301 361
Certificates of deposit 807 (90) 717 775 727 1,502
Total interest-bearing deposits 1,169 (234) 935 736 1,084 1,820
Other borrowed funds 102 (21) 81 (19) 106 87
Total interest expense 1,271 (255) 1,016 717 1,190 1,907
Net interest income $ 935 $ (17) $ 918 $ 424 $ 233 $ 191
</TABLE>
As can be seen from the preceding tables, tax equivalent net
interest income rose from $9,665,000 in 1994 to $9,856,000 in
1995 and increased to $10,774,000 in 1996. In 1996, net interest
income increased $918,000 as overall spread decreased from 3.79%
to 3.68%. The increased volume of interest-earning assets
generated an increase in income of $2,206,000 while increased
volume of interest-bearing liabilities produced $1,271,000 of
interest expense. The change in volume resulted in an increase
of $935,000 in interest income. The net change in rate was
$17,000 resulting in a total positive net change of $918,000.
The yield on interest-earning assets decreased 25 basis points
from 8.71% to 8.46% and the average interest rate on
interest-bearing liabilities decreased 14 basis points from 4.92%
to 4.78%. Analysis of the Company's current net interest income
in 1996 indicates that the effects of recent interest rate
changes and the effect of the yield curve remaining relatively
level, continued to have a negative effect on interest margin.
Management is currently evaluating alter natives to improve the
interest spread.
Other Operating Income
The Company achieved other operating income of $1,391,000 in 1996
which was an increase of $139,000 or 11.1% from $1,252,000 in
1995. An increase of $112,000 occurred in service charges on
deposit accounts, primarily the result of additional accounts
obtained by the two branches discussed previously. The sale and
maturity of securities resulted in $19,000 in gains compared to
$10,000 in 1995. Other operating income increased $3,000 in 1996
or 1.2% over that of 1995.
Trust income of $270,000 increased 5.9% from the $255,000 earned
during 1995, primarily as the result of growth in traditional
trust and investment business and estate settlements through a
recently instituted employee referral program. In 1997,
management plans to continue to expand small business
relationships by working with the community offices and
commercial lending staff.
<PAGE>
<40>
_________________________________________________________________
[GRAPHIC OMITTED: Silhouette of a colonial rider horseback,
upper left hand corner of page .5 inches square]
_________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
_________________________________________________________________
Citizens Financial Services, Inc.
_________________________________________________________________
Other Operating Expenses
Salaries and employee benefits, the largest category of
noninterest expense, increased $268,000 or 8.5% to $3.4 million
in 1996 from $3.2 million in 1995.
Occupancy expense increased $53,000 in 1996, or 12.8%, as
compared to an increase of $22,000 in 1995. Furniture and
equipment expense increased $25,000 or 4.4%.
Other expenses increased in 1996 by $256,000 or 11.4% compared to
an increase of $233,000 in 1995.
All of the above other operating expenses have been impacted by
the increased staff, buildings and equipment expenses related to
the acquisition of the two offices in the spring of 1996 and the
new supermarket office started during the fourth quarter of 1996.
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 States
Treasury Department. The FDIC levied a one-time assessment on
the SAIF deposits equal to 65.7 cents per $100 of the SAIF-assess
able 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. Qualifying Oakar institutions
(BIF-insured banks that have acquired SAIF deposits and continue
to pay SAIF assessments on a 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 because of the acquisition of Star Savings and Loan
Association in 1991.
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 for 1997, Management expects
that the FDIC assessment will be approximately $67,000 or
$305,000 less than the FDIC expense for 1996.
Provision for Income Taxes
The provision for income taxes for 1996 increased by $146,000 to
$1.3 million, compared to the $3,000 increase in 1995, due to
increased earnings adjusted by tax-free interest income.
Loan Quality and Provision for Possible Loan Losses
As discussed previously, the loan portfolio contains a large
portion of real estate secured loans (generally residential home
mortgages, mortgages on small business properties, etc.),
consumer installment loans and other commercial loans. Footnote
4 of the Consolidated Financial Statements provides further
details on the composition of the loan portfolio and is
incorporated herein.
Management follows quality credit underwriting policies and
collection practices and is supplemented by an internal loan
review program. In addition, a separate collections department
was established to focus on the collection and workout of problem
loans. The board of directors and management believe all of
these initiatives have led to relatively low levels of
nonperforming loans and loan chargeoffs. The following tables
indicate the level of nonperforming loans, net chargeoffs and
charges against the allowance for losses on real estate owned
over the past five years ending December 31:
<PAGE>
<41>
_________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
_________________________________________________________________
Nineteen hundred ninety-six Annual Report
_________________________________________________________________
<TABLE>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Nonaccruing loans $ 844 $ 762 $ 1,557 $ 1,566 $ 689
Impaired loans 414 697 - - -
Accrual loans - 90 days
or more past due 723 689 267 418 439
Total nonperforming
loans $ 1,981 $ 2,148 $ 1,824 $ 1,984 $ 1,128
Foreclosed assets
held for sale 164 208 168 231 330
Total nonperforming
assets $ 2,145 $ 2,356 $ 1,992 $ 2,215 $ 1,458
Total loans $182,581 $161,886 $157,144 $143,218 $132,033
Unearned income 168 259 575 1,311 2,506
Loans, net of unearned
income $182,413 $161,627 $156,569 $141,907 $129,527
Nonperforming loans as a percent of loans, net
of unearned income 1.09% 1.33% 1.17% 1.40% 0.87%
Total nonperforming
assets as a percent
of loans, net of
unearned income 1.18% 1.46% 1.27% 1.56% 1.13%
</TABLE>
The composition of nonaccrual loans at December 31, 1996,
consists predominately of one- to four-family residential loans
where the accrual of interest has been discontinued.
Another way to view the credit quality exposure of the loan
portfolio is by reviewing the "watch list" categories used by
management (and as required by the regulatory agencies). This
monitoring process is reviewed and reported monthly to identify
problems or potential problems.
Loans classified on the "watch list" as of December 31:
1996 1995 1994
Special mention $ 216 $ 232 $1,106
Substandard 3,740 4,093 2,781
Doubtful 23 41 10
Loss - - -
Total $3,979 $4,366 $3,897
Percent of total loans, net of unearned income 2.18% 2.70% 2.49%
Based upon current information available and upon measures taken
to maintain the allowance for loan losses at an appropriate
level, management does not believe there are any loans classified
for regulatory purposes as loss, doubtful, substandard, special
mention or otherwise which will result in losses which would
reasonably be expected to have a material impact on future
operations, liquidity or capital reserves. At December 31, 1996,
there were no loans which were not included as past due,
nonaccrual or restructured troubled debt, where known information
about possible credit problems of borrowers causes management to
have serious doubts as to the ability of such borrowers to comply
over the next six months with present loan repayment terms.
Management is not aware of any other information which causes it
to have serious doubts as to the ability of borrowers in general
to comply with repayment terms.
<PAGE>
<42>
_________________________________________________________________
[GRAPHIC OMITTED: Silhouette of a colonial rider horseback,
upper left hand corner of page .5 inches square]
_________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
_________________________________________________________________
Citizens Financial Services, Inc.
_________________________________________________________________
The following table presents an analysis of the allowance for
possible loan losses for the five years ending December 31:
<TABLE>
Summary of Loan Loss Experience
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Balance at
beginning of period $1,833 $1,721 $1,516 $1,201 $ 996
Charge-offs
Real estate - construction - - - - -
Real estate - mortgage 8 23 31 25 1
Loans to individuals for household,
family and other purchases 56 42 28 43 63
Commercial and other loans - 4 9 3 87
Total loans charged-off 64 69 68 71 151
Recoveries
Real estate - construction - - - - -
Real estate - mortgage 1 - - 3 30
Loans to individuals for household,
family and other purchases 19 15 14 60 1
Commercial and other loans 1 3 4 8 1
Total loans recovered 21 18 18 71 32
Net loans charged-off 43 51 50 - 119
Provisions charged to expense 205 163 255 315 324
Balance at end of year $1,995 $1,833 $1,721 $1,516 $1,201
Loans outstanding at end of year $182,413 $161,627 $156,569 $141,907 $129,527
Average loans outstanding, net $170,104 $156,754 $146,894 $136,025 $126,604
Net charge-offs to average loans 0.03% 0.03% 0.03% 0.00% 0.09%
Year-end allowance to total loans 1.09% 1.13% 1.10% 1.07% 0.93%
Year-end allowance to total
nonperforming loans 100.71% 85.34% 94.35% 76.41% 106.47%
</TABLE>
As detailed in Footnote 4 and the above tables, total past due
(90 days or more) and nonperforming loans decreased 7% from
December 31, 1995, to December 31, 1996. Nonaccrual loans
decreased by 14% from 1995. The majority of the loan volume is
well-collateralized by real estate. Total charge-offs for 1997
are still expected to approximate the moderate historic levels.
Allowance For Possible Loan Losses
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 annual 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 nonperforming assets, and other relevant factors. While
management evaluates all of this information, 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
possible 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 allowance for possible loan losses as a percentage of total
loans was 1.10%, 1.13%, and 1.09% as of December 31, 1994, 1995,
and 1996, respectively. The 1996 growth in the allowance is the
combined result of a $205,000 charge to earnings and $43,000 in
net loan losses. The level of charge-offs and recoveries were
relatively the same as 1995.
<PAGE>
<43>
_________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
_________________________________________________________________
Nineteen hundred ninety-six Annual Report
_________________________________________________________________
Allocation of the Allowance for Possible Loan Losses
The following table provides the percentage distribution of the
allowance for possible loan losses and the various loan
categories:
<TABLE>
1996 1995 1994 1993 1992
$ % $ % $ % $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 143 7.2 165 9.0 185 10.8 181 11.9 193 16.1
Commercial, agricultural 325 16.3 328 17.9 323 18.8 253 16.7 147 12.2
Construction - - - - - - - - - -
Loans to individuals for household,
family and other purchases 164 8.2 181 9.9 140 8.1 174 11.5 159 13.2
Commercial and other loans 108 5.4 110 6.0 114 6.6 94 6.2 63 5.3
State and political subdivision loans 3 0.1 3 0.1 2 0.1 2 0.1 1 0.1
Unallocated 1,252 62.8 1,046 57.1 957 55.6 812 53.6 638 53.1
Total Allowance for Possible
Loan Losses 1,995 100.0 1,833 100.0 1,721 100.0 1,516 100.0 1,201 100.0
</TABLE>
As described in Footnote 1 and Footnote 4, in 1995 the Company
implemented SFAS 114 as amended by SFAS 118, which impacted
management's method for determining the allowance for loan
losses. Management does not believe any material impact on
earnings will occur as a result of the implementation of SFAS 114
in the future.
Stockholders' Equity
Stockholders' equity is evaluated in relation to total assets and
the risk associated with those assets. The greater the capital
resources, the more likely a corporation is to meet its cash
obligations and absorb unforeseen losses. For these reasons
capital adequacy has been, and will continue to be, of paramount
importance.
Stockholders' equity has grown by 7.6% in 1996, 12.7% in 1995,
and 3.1% in 1994 to the current level of $22.9 million.
Adjustments made to equity for gains and losses on
available-for-sale securities resulted in a decrease of $177,000
in 1996 compared to an increase of $349,000 in 1995. Total
equity was approximately 8.1% of total assets at December 31,
1996, as compared to 8.6% at December 31, 1995.
The Company pays cash dividends on a semiannual basis. The
dividend rate is determined by the Board of Directors after
considering the Company's capital requirements, current and
projected net income, and other factors. In 1996 and 1995, 40.1%
and 40.2% of net income was paid out in dividends, respectively.
The Company paid a one percent stock dividend in July 1996. The
one percent stock dividend resulted in 12,905 additional common
shares outstanding. For the year ended December 31, 1996, the
total number of common shares outstanding was 1,360,228. For
comparative purposes, outstanding shares for prior periods were
adjusted for the 1996 stock dividend in computing earnings and
cash dividends per share.
There are currently three federal regulatory measures of capital
adequacy. The Company's ratios substantially exceed all federal
regulatory standards as detailed in Footnote 12 of the
Consolidated Financial Statements.
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.
The Company's historical activity in this area can be seen in the
Consolidated Statement of Cash Flows from investing and financing
activities.
Liquidity management is influenced by cash generated by operating
activities, investing activities and financing activities. The
most important source of funds is the deposits which are
primarily core deposits (deposits from customers with other
relationships). In 1996, an additional source of funds was $17.1
million in deposits from acquired offices. Short-term debt from
the Federal Home Loan Bank supplements the Company's need for
funds.
The Company's use of funds is shown in the investing activities
where the net increase in loans is detailed. Other significant
uses of funds are capital expenditures, purchase of loans and
acquisition premiums. Surplus funds are then invested in
investment securities.
The recent reorganization by the Company's current computer
application software vendor has made it necessary for the Company
to evaluate new computer software and hardware alternatives.
This evaluation process began during 1996 with the actual
implementation of the new processing to occur in 1997. The
associated costs have yet to be determined but it may adversely
impact future short-term earnings. Management anticipates that
increased productivity and additional customer services will help
mitigate an adverse impact over the long term.
<PAGE>
<44>
_________________________________________________________________
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upper left hand corner of page .5 inches square]
_________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
_________________________________________________________________
Citizens Financial Services, Inc.
_________________________________________________________________
In addition, the Company expects to evaluate a number of other
strategic technology issues such as a call center, voice response
system and computer networking during 1997. It is management's
intention that (based upon current expectations and market
conditions) none of the proposed strategic technology projects
will have a material impact on liquidity of the Company, and
capital expenditures will be offset by improved operating
efficiency.
Capital expenditures of $539,000 in 1996 was more than 1995 by
$76,000. In addition to the computer hardware and software
purchases discussed above, management expects normal equipment
replacements of approximately $250,000 for 1997. These purchases
will allow greater operating efficiency and provide the customer
with a higher quality product.
On July 17, 1996, the Company purchased a building and lot
adjacent to the Mansfield office location for future expansion in
the amount of $250,000. The Company plans to use this area as
part of the new operations/administration center that 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
$2 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.
The deposit acquisition premium represents the cost to acquire
the deposits of the Canton and Gillett offices. (See Footnote 1
of the Consolidated Financial Statements.)
To assure the maintenance of liquidity reserves, the Company
monitors and places various internal constraints on the level of
loans relative to core deposits and other stable funding sources;
the liquidity characteristics of investments; and the volume and
maturity structure of wholesale funding.
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 and one half have the option of changing their interest
rate annually) and short-term borrowings. Savings deposits, NOW
accounts and money market investor accounts are considered core
deposits and are not short-term interest sensitive (except for
the top-tier money market investor accounts which are paid
current market interest rates).
The following table shows the cumulative static GAP for various
time intervals:
Maturity or Repricing of Company Assets and Liabilities at December
31, 1996
<TABLE>
(in thousands) 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years Over 10 years Total
<S> <C> <C> <C> <C> <C> <C> <C>
Investment securities and
interest-bearing deposits $ 3,513 $ 9,456 $ 32,861 $ 29,031 $ 11,248 $ - $ 86,109
Loans, net of unearned income
and deferred loan fees 47,678 48,208 38,972 23,557 19,729 4,269 182,413
Total interest-earning assets $ 51,191 $ 57,664 $ 71,833 $ 52,588 $ 30,977 $ 4,269 $268,522
Interest-bearing demand
and savings deposits $ 21,998 $ 12,481 $ 26,873 $ 23,667 $ - $ - $ 85,019
Certificates of deposit 25,260 64,593 28,831 17,878 672 - 137,234
Borrowed funds 9,621 2,760 1,110 688 1,009 629 15,817
Total interest-bearing
liabilities $ 56,879 $ 79,834 $ 56,814 $ 42,233 $ 1,681 $ 629 $238,245
Excess interest-earning
assets (liabilities) $ (5,688) $ (22,170) $ 15,019 $ 10,355 $ 29,296 $ 3,640
Cumulative interest-earning
assets $ 51,191 $ 108,855 $ 180,688 $ 233,276 $ 264,253 $268,522
Cumulative interest-bearing
liabilities 56,879 136,713 193,527 235,760 237,441 238,070
Cumulative gap $ (5,688) $ (27,858) $ (12,839) $ (2,484) $ 26,812 $ 30,452
Cumulative interest rate
sensitivity ratio (1) 0.90 0.80 0.93 0.99 1.11 1.13
</TABLE>
(1) Cumulative interest-earning assets divided by
interest-bearing liabilities
<PAGE>
<45>
_________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
_________________________________________________________________
Nineteen hundred ninety-six Annual Report
_________________________________________________________________
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, be repaid at different times and at
different rate levels. The Company has not experienced the kind
of earnings volatility that might be indicated from gap analysis.
The Company currently uses a computer simulation model to better
measure the impact of interest rate changes on net interest
income. Management uses the model as part of its risk management
process that will effectively identify, measure, and monitor the
Company's risk exposure.
Numerous interest rate simulations using a variety of assumptions
are used by management to evaluate its interest rate risk
exposure. A shock analysis at December 31, 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.
Community Office 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 and $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 the acquisition will have a positive impact
on future earnings and will consider future acquisitions as the
opportunities arise. (See Footnote 15 of the Consolidated
Financial Statements.)
Supermarket Banking
On April 11, 1996, the Bank entered a license agreement with Weis
Market, Inc. for exclusive rights to operate a bank office within
the new supermarket in Wellsboro, PA. Management is using a
consulting firm to provide support in the development of the
office that was opened in October 1996. Management will be
considering other supermarket office possibilities in the future.
General
The majority of assets and liabilities of a financial institution
are monetary in nature and, therefore, differ greatly from most
commercial and industrial companies that have significant
investments in fixed assets or inventories. However, inflation
does have an important impact on the growth of total assets and
on noninterest expenses, which tend to rise during periods of
general inflation. The level of inflation over the last few
years has been declining.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(the "Act") was signed into law on December 19, 1991. The Act
addresses the recapitalization of the bank insurance fund and is
designed to limit risk within the banking industry. Much of the
impact of the legislation has taken place and management does not
believe that full implementation of the Act will have a material
impact on liquidity, capital resources or reported results of
operations in future periods.
The passage of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 and the Riegle Community Development and
Regulatory Improvement Act may have a significant impact upon the
Company. The key provisions pertain to interstate banking and
interstate branching as well as a reduction in the regulatory
burden on the banking industry. Since September 1995, bank
holding companies have been able to acquire banks in other states
without regard to state law. In addition, banks can merge with
other banks in another state beginning in June 1997. States may
adopt laws preventing interstate branching but, if so, no
out-of-state bank can establish a branch in such state and no
bank in such state may branch outside the state. Pennsylvania
amended the provisions of its banking code to authorize full
interstate banking and branching under Pennsylvania law and to
facilitate the operations of interstate banks in Pennsylvania.
Various congressional bills have been passed and other proposals
have been made for significant changes to the banking system,
including provisions for: limitation on deposit insurance
coverage; changing the timing and method financial institutions
use to pay for deposit insurance; expanding the power of banks by
removing restrictions on bank underwriting activities; tightening
the regulation of bank derivatives activities; allowing
commercial enterprises to own banks; and permitting bank holding
companies or the bank to own or control affiliates that engage in
securities, mutual funds and insurance activities.
Normal examinations of the Company by the Comptroller of the
Currency occurred during 1996. The last Community Reinvestment
Act performance evaluation by the same agency during 1996
resulted in a rating of "Satisfactory Record of Meeting Community
Credit Needs."
Aside from those matters described above, management does not
believe that there are any trends, events or uncertainties which
would have a material adverse impact on future operating results,
liquidity or capital resources, nor is it aware of any current
recommendations by the regulatory authorities (except as
described herein) which, if they were to be implemented, would
have such an effect although the general cost of compliance with
numerous and multiple federal and state laws and regulations does
have, and in the future may have, a negative impact on the
Company's results of operations.
Subsequent Event
On February 24, 1997, the Bank reached an arbitration settlement
with a vendor. The settlement was for legal remedies associated
with relationships with this vendor. The Bank received $884,000
in cash and $250,000 in credits to be applied to future
expenditures, which if unused will expire within two years. The
amount received by the Bank is net of fees associated with the
arbitration. The source of income from the settlement is a
nonrecurring event which will have a favorable impact on 1997
income.
<PAGE>
<46>
_________________________________________________________________
[GRAPHIC OMITTED: Silhouette of a colonial rider horseback,
approximately 1 inch square, top left of page]
_________________________________________________________________
FIRST
CITIZENS
NATIONAL BANK
_________________________________________________________________
CITIZENS
FINANCIAL SERVICES
INCORPORATED
_________________________________________________________________
15 SOUTH MAIN STREET 717-662-2121
MANSFIELD, PA 16933 800-326-9486
FAX 717-662-2365
DIRECTORS
Robert E. Dalton
Chairman of the Board
Bruce L. Adams
Carol J. Tama
R. Lowell Coolidge, Esquire
Larry J. Croft
John E. Novak
John M. Thomas, MD
Rudolph J. van der Hiel, Esquire
William D. VanEtten
Richard E. Wilber
President
Chief Executive Officer
OFFICERS
Administrative Services
Cynthia T. Pazzaglia
Assistant Vice President
Administrative Division Manager
Human Resources Manager
Audit/Compliance
V. Guy Abell
Auditor
Robert D. Wrisley
Vice President
Loan Compliance and Review
Karen R. Jacobson
Assistant Auditor/Security Officer
Banking Services
Terry B. Osborne
Executive Vice President
Secretary, Citizens Financial Services, Inc.
Jerald J. Rumsey
Senior Vice President
Credit Services Manager
Allan K. Reed
Assistant Vice President
Branch Administrator
Robert L. Champion
Commercial Services Officer
Pamela A. Hazelton
Appraiser
Wendy L. Southard
Marketing Coordinator
Finance/Control
Thomas C. Lyman
Assistant Vice President
Treasurer, Citizens Financial Services, Inc.
Finance/Control Division Manager
Randall E. Black
Controller
Operations
William W. Wilson
Vice President
Operations Division Manager
Robert J. Jackson
Data Operations Manager
Joanne W. Marvin
Banking Operations Manager
Trust and Investment Services
Deborah E. Scott
Vice President
Trust and Investment Services Division Manager
Jean A. Knapp
Trust Administrator
Sara J. Roupp
Trust Administrator
FULL SERVICE
COMMUNITY BANKING HOURS
MANSFIELD*
M,T,W,Th: 8:30 am - 4:30 pm
Fri.: 8:30 am - 6:00 pm
Sat.:8:30 am - Noon
BLOSSBURG*
M,T,W,Th: 8:30 am - 4:30 pm
Fri.:8:30 am - 6:00 pm
Sat.: 8:30 am - Noon
ULYSSES*
M,T,W,Th: 8:30 am - 4:30 pm
Fri.: 8:30 am - 6:00 pm
Sat.: 8:30 am - Noon
GENESEE*
M,T,W,Th: 8:30 am - 4:30 pm
Fri.: 8:30 am - 6:00 pm
Sat.: 8:30 am - Noon
SAYRE*
M,T,W,Th: 8:30 am - 4:30 pm
Fri.: 8:30 am - 6:00 pm
Sat.: 8:30 am - Noon
WELLSBORO*
M,T,W,Th: 8:30 am - 4:30 pm
Fri.: 8:30 am - 6:00 pm
Sat.: 8:30 am - Noon
TROY*
M,T,W,Th: 8:30 am - 4:30 pm
Fri.: 8:30 am - 6:00 pm
Sat.: 8:30 am - Noon
* Drive-up opens at 8:00 am
CANTON
Lobby Hours:
Mon, Tues: 9:00 am - 3:00 pm
Wed, Sat:: 9:00 am - Noon
Thurs: 9:00 am - 4:30 pm
Fri: 9:00 am - 6:00 pm
Drive-Up Hours:
Mon, Tues, Thurs: 9:00 am - 4:30 pm
Wed: 9:00 am - 3:00 pm
Fri: 9:00 am - 6:00 pm
Sat: 9:00 am - Noon
GILLETT
Lobby Hours:
Mon, Thurs: 10:00 am - 5:00 pm
Tues, Wed: 10:00 am - 2:00 pm
Fri: 10:00 am - 6:00 pm
Sat: 9:00 am - Noon
Drive-Up Hours:
Mon, Thurs: 9:30 am - 5:00 pm
Tues, Wed: 9:30 am - 2:00 pm
Fri: 9:30 am - 6:00 pm
Sat: 9:00 am - Noon
WEIS MARKET, WELLSBORO
Mon - Fri: 10:00 am - 8:00 pm
Sat & Sun: 10:00 am - 4:00 pm
DIRECTORS
Robert E. Dalton
Chairman of the Board
Bruce L. Adams
Carol J. Tama
R. Lowell Coolidge, Esquire
Larry J. Croft
John E. Novak
John M. Thomas, MD
Rudolph J. van der Hiel, Esquire
William D. VanEtten
Richard E. Wilber
DIRECTORS EMERITI
Edward Kosa
John G. Kuster
Robert J. Landy, Esquire
Robert G. Messinger
Wilber Wagner
<PAGE>
<47>
COMMUNITY OFFICES
Toll free to all locations: 800-326-9486
MANSFIELD 717-662-2121
15 South Main Street
Mansfield, PA 16933 FAX 717-662-3278
Local Board
William J. Waldman
Chairman
Anthony D. Fiamingo
Chester L. Reed
Stephen A. Saunders
William J. Smith
Officers
Chester L. Reed
Assistant Vice President
Office Manager
James T. Hepp
Assistant Office Manager
Shari L. Johnson
Customer Service Counselor
Kristina M. Payne
Customer Service Counselor
BLOSSBURG 717-638-2115
300 Main Street
Blossburg, PA 16912 FAX 717-638-3178
Local Board
Mark L. Dalton
Chairman
Terrance M. Asalone
Harold K. House
George D. Lloyd
Thomas Phinney
Officers
Terrance M. Asalone
Assistant Vice President
Office Manager
Michele E. Litzelman
Customer Service Counselor
ULYSSES 814-848-7572
502 Main Street
Ulysses, PA 16948 FAX 814-848-7633
Local Board
Ronald G. Bennett
Chairman
Lloyd R. Dugan
D. Thomas Eggler
Phillip D. Vaughn
James A. Wagner
Officers
Phillip D. Vaughn
Assistant Vice President
L. Abbie Lerch
Customer Service Counselor
WELLSBORO 717-724-2600
99 Main Street
Wellsboro, PA 16901 FAX 717-724-4381
Local Board
William A. Hebe, Esquire
Chairman
Robin K. Carleton
Timothy J. Gooch, CPA
James K. Stager
Jeffrey L. Wilson
Office Manager
Jeffrey L. Wilson
Assistant Vice President
GENESEE 814-228-3201
RR 1 Box 58
Genesee, PA 16923 Fax 814-228-3395
Local Board
Gene E. Kosa
Chairman
William R. Austin
John K. Hyslip
Stephen B. Richard
Dennis C. Smoker
Officers
William R. Austin
Assistant Vice President
Christine M. Miller
Customer Service Counselor
CANTON 717-673-3103
29 West Main Street
Canton, PA 17724 FAX 717-673-4573
Local Board
Roger Graham, Jr.
Chairman
Lester Hilfiger
Christopher S. Landis
Marilyn Scott
Dave Wright
Office Manager
Christopher S. Landis
GILLETT 717-596-2679
P.O. Box 125
Gillett, PA 16925 FAX 717-596-4888
Local Board
Forest Oldroyd
Office Manager
Helen Kay Shedden
WEIS MARKET 800-326-9486
99 Main Street
Wellsboro, PA 16901 FAX 717-724-1842
Officers
Jennifer L. Snyder
Sales Manager
Carol L. Strong
Assistant Sales Manager
SAYRE 717-888-6602
306 West Lockhart Street
Sayre, PA 18840 FAX 717-888-3198
Local Board
Joseph Burkhart
Chairman
Blaine W. Cobb, MD
Robert Elsbree
Russel Knight
Chester L. Reed
Officers
William A. Richetti
Office Manager
Toni Tracy
Customer Service Counselor
TROY 717-297-4131
303 West Main Street
Troy, PA 16947 FAX 717-297-4133
Local Board
Lyle A. Haflett
Chairman
Thomas A. Calkins, III
Richard H. Packard
David E. Carlson
Donald D. White
Office Manager
David E. Carlson
Assistant Vice President
_________________________________________________________________
[MAC LOGO OMITTED
_________________________________________________________________
MAC
Money Access Card
_________________________________________________________________
24 Hour Automated Teller
Blossburg
Mansfield; Mansfield University
Mansfield WalMart, Weis Market
Soldiers and Sailors Memorial Hospital
Wellsboro; Genesee; Ulysses; Sayre
<PAGE>
<48>
_________________________________________________________________
[GRAPHIC OMITTED: Silhouette of a colonial rider on horseback,
approximately two inches square, top left one-third of page]
_________________________________________________________________
MISSION
STATEMENT
We Recognize That Our Customers Are The Reason For Our Existence.
Our mission is to be the dominant financial services provider in
our marketplace. We will establish ourselves apart from other
financial vendors by providing service excellence to our
customers through satisfied, motivated, professional employees
and a profitable range of financial services to meet the
customers' changing needs. It is also our mission to profitably
satisfy shareholder performance expectations and to be an active
citizen of the communities we serve.
_________________________________________________________________
[LOGO OMITTED: F.D.I.C. Equal Housing Lender]
_________________________________________________________________
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting and Luncheon for the shareholders of Citizens
Financial Services, Inc. will be held at the Tioga County
Fairgrounds Youth Building in Whitneyville, PA on Tuesday, April
15, 1997, at 12:00 noon.
FORM 10-K
The Annual Report to the Securities and Exchange Commission, Form
10-K, will be made available upon request.
Contact:
Thomas C. Lyman
Treasurer
Citizens Financial Services, Inc.
15 South Main Street
Mansfield, PA 16933
The Annual Report and other Company reports are also filed
electronically through the Electronic Data Gathering, Analysis,
and Retrieval System ("EDGAR") which performs automated
collection, validation, indexing, acceptance, and forwarding of
submissions to the Securities and Exchange Commission (SEC) and
is accessible by the public using the Internet at
http://www.sec.gov./edgarhp.htm.
TRANSFER AGENT
Citizens Financial Services, Inc.
15 South Main Street
Mansfield, PA 16933
Telephone: 717-662-2121 / 800-326-9486
SHAREHOLDER SERVICES
Shareholder inquiries and requests for assistance should be
directed to the Transfer Agent listed above.
STOCK PURCHASING INFORMATION
The stock symbol for Citizens Financial Services, Inc. is "CZFS".
Citizens Financial Services, Inc. stock is quoted Over the
Counter ("OTC") through the following Market Makers:
Market Makers
Ferris-Baker-Watts Fahnestock & Co.
6 Bird Cage Walk 1500 Walnut Street
Hollidaysburg, PA 16648 Philadelphia, PA 19102
Telephone: 800-343-5149 Telephone: 800-722-2294
Ryan, Beck & Co. Janney Montgomery Scott
80 Main Street 1601 Market Street
West Orange, NJ 07052 Philadelphia, PA 19103
Telephone: 800-342-2325 Telephone: 800-JANNEYS
Hopper Soliday & Co., Inc. PaineWebber Incorporated
1703 Oregon Pike 10 Park Street, P.O. Box
2636
Lancaster, PA 17601-4201 Concord, NH 03302
Telephone: 800-646-8647 Telephone: 800-678-0619
We invite you to mail any comments or questions to us at our
E-Mail address, which is [email protected].
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
____________________
First Citizens National Bank of Mansfield, Pennsylvania is the
Company's sole subsidiary.
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<PERIOD-END> DEC-31-1996
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