UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________________ to ___________________
Commission file number 0-13222
CITIZENS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2265045
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 South Main Street, Mansfield, Pennsylvania 16933
(Address of principal executive offices ) (Zip Code)
Registrant's telephone number, including area code: (717) 662-2121
Indicate by checkmark whether the registrant (1) has filed all reports
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes__X___ No_____
The number of shares outstanding of the Registrant's Common Stock, as of
November 1, 1995, 1,347,323 shares of Common Stock, par value $1.00.
Citizens Financial Services, Inc.
Form 10-Q
INDEX
Page
Part I FINANCIAL INFORMATION (UNAUDITED)
Item 1-Financial Statements
Consolidated Balance Sheet as of September 30, 1995 and
December 31, 1994 1
Consolidated Statement of Income for the
Three Months and Nine Months Ended September 30, 1995 and 1994 2
Consolidated Statement of Cash Flows for the Nine Months Ended
September 30, 1995 and 1994 3
Notes to Consolidated Financial Statements 4
Item 2-Management's Discussion and Analysis of Financial Condition
and Results of Operations 5-12
Part II OTHER INFORMATION AND SIGNATURES
Item 1-Legal Proceedings 13
Item 2-Changes in Securities 13
Item 3-Defaults upon Senior Securities 13
Item 4-Submission of Matters to a Vote of Security Holders 13
Item 5-Other Information 13
Item 6-Exhibits and Reports on Form 8-K 13
Signatures 14
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, December 31,
1995 1994
ASSETS:
Cash and due from banks:
Noninterest-bearing $ 5,260,630 $ 5,479,295
Interest-bearing 3,699,237 32,005
Total cash and cash equivalents 8,959,867 5,511,300
Available-for-sale securities 22,158,666 14,639,874
Held-to-maturity securities (estimated market value
1995,$47,712,000;
December 31, 1994, $47,897,000) 47,159,988 49,617,504
Loans (net of allowance for possible loan
losses 1995, $1,804,220; December 31, 1994,
$1,721,343) 155,501,751 154,847,712
Foreclosed assets held for sale 261,717 167,969
Premises and equipment 4,155,383 4,123,658
Accrued interest receivable and other assets 3,838,648 3,628,671
TOTAL ASSETS $242,036,020 $232,536,688
LIABILITIES:
Deposits:
Noninterest-bearing $ 15,041,055 $ 14,494,727
Interest-bearing 196,877,094 179,983,170
Total deposits 211,918,149 194,477,897
Borrowed funds 6,204,148 16,030,406
Accrued interest payable 1,780,461 1,691,646
Dividends payable 0 547,163
Other liabilities 1,239,570 886,444
TOTAL LIABILITIES 221,142,328 213,633,556
STOCKHOLDERS' EQUITY:
Common Stock
$1.00 par value; authorized 5,000,000 shares
in 1995; and 2,000,000 in 1994; issued
and outstanding 1,347,323 and
1,334,323 shares in 1995
and 1994, respectively 1,347,323 1,334,543
Additional paid-in capital 6,512,129 6,224,579
Retained earnings 12,890,552 11,708,435
TOTAL 20,750,004 19,267,557
Unrealized holding gains (losses) on
available-for-sale securities 143,688 (364,425)
TOTAL STOCKHOLDERS' EQUITY 20,893,692 18,903,132
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $242,036,020 $232,536,688
The accompanying notes are an integral part of these financial statements.
1
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
INTEREST INCOME:
Interest and fees on loans $3,781,262 $3,362,851 $11,002,363 $ 9,404,226
Interest on interest-bearing deposits
with banks 71,114 64 95,654 23,251
Interest and dividends on investments:
Taxable 1,050,648 1,029,869 3,076,635 3,016,430
Nontaxable 42,620 63,091 144,800 222,504
Dividends 19,183 18,210 55,704 50,257
Total interest and dividends on investments 1,112,451 1,111,170 3,277,139 3,289,191
TOTAL INTEREST INCOME 4,964,827 4,474,085 14,375,156 12,716,668
INTEREST EXPENSE:
Interest on deposits 2,414,280 1,912,231 6,860,731 5,504,419
Interest on borrowed funds 100,557 139,788 403,046 254,534
TOTAL INTEREST EXPENSE 2,514,837 2,052,019 7,263,777 5,758,953
NET INTEREST INCOME 2,449,990 2,422,066 7,111,379 6,957,715
Provision for possible loan losses 37,500 60,000 125,000 195,000
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 2,412,490 2,362,066 6,986,379 6,762,715
OTHER OPERATING INCOME:
Service charge income 185,397 184,638 533,484 531,652
Trust income 55,206 38,967 180,819 141,255
Other income 49,503 37,712 198,659 163,715
Realized securities gains, net 5,000 0 9,700 63,347
TOTAL OTHER OPERATING INCOME 295,106 261,317 922,662 899,969
OTHER OPERATING EXPENSES:
Salaries and employee benefits 811,005 785,132 2,420,131 2,289,381
Occupancy expenses 94,415 88,956 309,633 293,100
Furniture and equipment expenses 145,439 150,526 435,251 444,858
FDIC insurance expense 21,769 108,145 243,467 324,666
Other expenses 508,876 501,352 1,623,048 1,485,188
TOTAL OTHER OPERATING EXPENSES 1,581,504 1,634,111 5,031,530 4,837,193
Income before provision for income taxes 1,126,092 989,272 2,877,511 2,825,491
Provision for income taxes 324,712 303,000 821,265 863,000
NET INCOME $ 801,380 $ 686,272 $ 2,056,246 $ 1,962,491
Earnings per share $0.59 $0.51 $1.53 $1.46
Cash dividend declared $0.00 $0.00 $0.42 $0.40
Weighted average number of shares outstanding 1,347,323 1,347,323 1,347,323 1,347,323
The accompanying notes are an integral part of these financial statements.
2
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine months Ended
September 30,
CASH FLOWS FROM OPERATING ACTIVITIES: 1995 1994
Net income $ 2,056,246 $ 1,962,491
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 125,000 195,000
Provision for depreciation 327,213 330,604
Amortization and accretion of investment
securities 175,171 134,752
Deferred income taxes (33,228) (44,751)
Realized gains on securities (9,700) (63,347)
Realized gains on loans sold (26,164) (12,296)
Gain on sales or disposals of premises and
equipment 0 (2,132)
Gain on sale of foreclosed assets held for sale (46,040) (34,813)
(Increase) decrease in accrued
interest receivable and other assets (438,505) 240,439
Increase (decrease) in accrued
interest payable and other liabilities 441,941 (31,212)
Net cash provided by operating activities 2,571,934 2,674,735
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Proceeds from sales of securities 0 3,063,398
Purchase of securities (6,797,231) (3,002,813)
Held-to-maturity securities:
Proceeds from maturity and principal
repayments of securities 4,493,551 2,899,784
Purchase of securities (2,153,200) (6,478,431)
Net increase in loans (961,982) (12,298,022)
Capital expenditures (358,938) (357,441)
Proceeds from sales of premises and equipment 0 3,564
Proceeds from sale of foreclosed assets held
for sale 161,400 44,341
Net cash used by investing activities (5,616,400) (16,125,620)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 17,440,252 5,619,602
Proceeds from long-term borrowings 783,594 2,231,294
Repayments of long-term borrowings (102,213) (390,236)
Net (decrease) increase in short-term borrowed
funds (10,507,639) 6,661,600
Acquisition of Treasury Stock (35,200) 0
Proceeds from the sale of Treasury Stock 35,200 0
Dividends paid (1,120,961) (1,055,903)
Net cash provided by financing activities 6,493,033 13,066,357
Net increase (decrease) in cash and cash
equivalents 3,448,567 (384,528)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,511,300 5,612,269
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,959,867 $ 5,227,741
The accompanying notes are an integral part of these financial statements.
3
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated financial statements include the accounts of Citizens
Financial Services, Inc. and its wholly-owned subsidiary, First Citizens
National Bank (the "Bank"), (collectively, the "Company"). All material
intercompany balances and transactions have been eliminated in consolidation.
The accompanying interim financial statements have been prepared by the
Company without audit and, in the opinion of management, reflect all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the Company's financial position as of September 30, 1995, and
the results of operations for the interim periods presented. For further
information refer to the consolidated financial statements and footnotes
thereto incorporated by reference in the Company's Annual Report on Form 10-K
for the year ended December 31, 1994.
The results of operations for the nine months ended September 30, 1995
and 1994 are not necessarily indicative of the results to be expected for
the full year.
Note 2 - Earnings per Share
Earnings per share calculations give retroactive effect to stock dividends
declared by the Company. The number of shares used in the earnings per share
and dividends per share calculation was 1,347,323 for 1995 and 1994.
Note 3 - Impaired Loans
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No.114 ("SFAS No. 114"), "Accounting for Certain Investments in
Debt and Equity Securities." The statement establishes accounting measurement,
recognition, and reporting standards for impaired loans. SFAS 114 provides
that a loan is impaired when, based on current information and events, it is
probable that the creditor will be unable to collect all amounts due
according to the contractual terms (both principal and interest). SFAS 114
requires that when a loan is impaired, impairment should be measured based on
the present value of the expected cash flows, discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent. The value of
the loan is adjusted through a valuation allowance created though a charge
against income. Residential mortgages, consumer installment obligations and
credit cards are excluded.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial position and
operating results during the periods indicated in the accompanying
consolidated financial statements.
Financial Condition
For the nine month period ended September 30, 1995, the assets of the
Company have increased by $9.5 million or 4.1% versus an increase of $14.2
million in 1994.
4
Net loans increased by $.7 million for the current period as compared to
the $12 million increase in 1994. Lower loan demand because of the higher
interest rates was the primary reason for the stagnant loan growth.
Loans sold and serviced in the secondary market (Freddie Mac) increased
from $2.9 million to $3.8 million at September 30, 1994 and 1995, respectively,
or a $.9 million increase.
The Company's loan growth during 1994 stemmed from generally low market
interest rates and its commitment to the local communities and servicing
their needs. The primary concentration of loans continues to be in residential
real estate-consisting of loans to purchase and improve real estate, debt
consolidation and home equity lines of credit. Loan demand was weak during
the last 6 months of 1994 because of the approximately 300 basis point
increase in market interest rates. A slight decline in interest rates during
the first nine months of 1995 has had little positive impact on the demand for
residential real estate loans.
During the remainder of 1995, management expects that loan demand will
continue to be slow as interest rates are anticipated to decline only slightly
nationwide and in the local market area.
The loan portfolio consists of the following (in thousands):
September 30, December 31, September 30,
1995 1994 1994
Real estate loans - residential $ 96,846 $ 98,630 $ 98,105
Real estate loans - commercial 25,254 21,915 21,207
Real estate loans - agricultural 6,279 7,125 6,321
Loans to individuals for household,
family and other purchases 13,069 11,886 11,434
Commercial and other loans 9,111 10,285 10,042
State and political subdivision
loans 7,082 7,303 7,658
157,641 157,144 154,767
Less: unearned income on loans 335 575 693
Loans net of unearned income $157,306 $156,569 $154,074
Total security investments increased $5.1 million compared to an increase
of $2.3 million in 1994.
During the first nine months of 1995, securities totaling $4.4 million
matured. $3.2 million U. S Treasury securities were purchased with 6 year
maturities ($2.1 million in the held-to-maturity category and $1.1 million in
the available-for-sale category). Additionally, $5.7 million corporate bonds
were purchased during the third quarter of 1995 with an average maturity of
2.3 years.
Cash and cash equivalents increased $3.5 million in 1995 compared to a
decrease of $.4 million in 1994.
Deposits increased by $17.4 million or 9% versus a modest increase of
$5.6 million in 1994. The creation of some promotional certificates of
deposit with attractive rates resulted in the deposit growth for 1995.
As discussed in the Management's Discussion and Analysis section of the
1994 annual report and the June 30, 1995 Form 10-Q, during 1994 the rate paid
on certificates of deposit increased more rapidly then the rates paid on NOW
and savings accounts. This trend, which continued into 1995, increased the
growth of certificates of deposit and offset the decrease in NOW and savings
accounts. Management expects this interest rate environment to continue for
the remainder of 1995 and a continued growth in certificates of deposit.
5
Borrowed funds decreased by a repayment of $9.8 million during 1995 (made
possible by the deposit growth discussed above) compared to an increase of
$8.5 million in 1994. This decrease was the result of a repayment of the short
term borrowing from the Federal Home Loan Bank. The Company's daily cash
requirements or short-term investments are now being met by using the financial
instruments available through the Federal Home Loan Bank rather than using
federal funds market. The modest increase in loan demand as well as a
significant increase in deposits for this period resulted in the elimination of
short term borrowings.
Capital
The Company has computed its risk-based capital ratios as follows (dollars
in thousands):
September 30, December 31,
1995 1994
Tier I - Total stockholders' equity $ 20,894 $ 18,903
Less: Unrealized holding gains (losses)
on available-for-sale securities 144 (364)
Tier I, net 20,750 19,267
Tier II - Allowance for loan losses(1) 1,706 1,625
Total qualifying capital $ 22,456 $ 20,892
Risk-adjusted on-balance sheet assets $129,181 $123,077
Risk-adjusted off-balance sheet
exposure (2) 7,317 6,956
Total risk-adjusted assets $136,498 $130,033
September 30, December 31,
Ratios: 1995 1994
Tier I risk-based capital ratio 15.2% 14.8%
Federal minimum required 4.0 4.0
Total risk-based capital ratio 16.5% 16.1%
Federal minimum required 8.0 8.0
Leverage ratio (3) 8.7% 8.6%
Federal minimum required 4.0 4.0
(1) Allowance for loan losses is limited to 1.25% of total risk-adjusted
assets.
(2) Off-balance sheet exposure is caused primarily by standby letters of
credit and loan commitments with a remaining maturity exceeding one year.
These obligations have been converted to on-balance sheet credit equivalent
amounts and adjusted for risk.
(3) Tier I capital divided by average total assets.
6
Management does not anticipate that any of the equipment purchase
discussed below will have a material negative impact on stockholder's equity
during 1995.
Results of Operations
Net income for the nine month period ending September 30, 1995 was
$2,056,000 an increase of $94,000 over the 1994 related period. Earnings per
share was $1.53 during the first nine months of 1995 compared to $1.46 during
the 1994 period.
Net interest income, the most significant component of earnings, is the
amount by which interest generated from earning assets exceeds interest
expense on liabilities. Net interest income for the 1995 period, after
provision for possible loan losses, was $7,111,000 an increase of $154,000 or
2.2% compared to an increase of $536,000 or 8.3% during the same time period
in 1994.
Analysis of Average Balances and Interest Rates (1)
September 30 September 30,
1995 1994
Average Average Average Average
Balance Interest Rate Balance Interest Rate
$ $ % $ $ %
ASSETS
Short-term investments:
Interest-bearing deposits
in other banks 2,202 96 5.83% 812 23 3.79%
Total short-term investments 2,202 96 5.83% 812 23 3.79%
Investment securities:
Taxable 62,818 3,132 6.67% 60,734 3,069 6.76%
Tax-exempt (3) 2,305 219 12.70% 3,069 338 14.72%
Total investments 65,123 3,351 6.88% 63,803 3,407 7.14%
Loans:
Residential mortgage loans 96,903 6,719 9.27% 92,508 6,013 8.69%
Commercial and farm loans 38,391 2,829 9.85% 32,102 2,055 8.56%
Loans to State & Political
Subdivisions 7,192 487 9.05% 6,031 329 7.29%
Other loans 14,003 1,093 10.44% 14,514 1,100 10.13%
Loans-net of
discount (2)(3)(4) 156,489 11,128 9.51% 145,155 9,497 8.75%
Total interest-earning
assets 223,814 14,575 8.71% 209,770 12,927 8.24%
Cash and due for banks 3,029 2,889
Bank premises and equipment 4,119 3,985
Available-for-sale securities
adjustment (51) 292
Other assets 6,375 6,407
Total non-interest bearing
assets 13,472 13,573
Total assets 237,286 223,343
7
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts 24,007 419 2.33% 26,359 438 2.22%
Savings accounts 25,898 482 2.49% 27,747 470 2.26%
Money Market accounts 22,304 788 4.72% 21,135 503 3.18%
Certificates of deposit 118,003 5,173 5.86% 104,321 4,093 5.25%
Total interest-bearing
deposits 190,212 6,862 4.82% 179,562 5,504 4.10%
Other borrowed funds 8,501 402 6.32% 7,283 255 4.68%
Total interest-bearing
liabilities 198,713 7,264 4.89% 186,845 5,759 4.12%
Demand deposits 14,444 14,112
Other liabilities 4,231 3,724
Total non-interest-bearing
liabilities 18,675 17,836
Stockholders' equity 19,898 18,662
Total liabilities and
stockholders'equity 237,286 223,343
Net interest income 7,311 7,168
Net interest spread (5) 3.82% 4.12%
Net interest income as a
percentage of average
interest-earning assets 4.37% 4.57%
Ratio of interest-earning
assets to interest-bearing
liabilities 1.13 1.12
(1) Averages are based on daily averages.
(2) Includes loan origination and commitment fees.
(3) Tax exempt interest revenue is shown on a tax equivalent basis for proper
comparison using a statutory federal income tax rate of 34%.
(4) Income on non-accrual loans is accounted for on a cash basis, and the loan
balances are included in interest-earning assets.
(5) Interest rate spread represents the difference between the average rate
earned on interest-earning assets and the average rate paid on interest-
bearing liabilities.
The yield on earning assets, on a tax-equivalent basis, was 8.71% and 8.24%
in the first nine months of 1995 and 1994, respectively, which resulted in an
increase of 47 basis points. The cost of funds was 4.89% and 4.12%, in the nine
months of 1995 and 1994, respectively, as the cost of funds increased 77 basis
points. During the first nine months of 1995, money market accounts and
certificates of deposit were most effected by the upward pressure in interest
rates. This trend reflects the significant increase in interest rates that
occurred during 1994. The decline in market interest rates since early 1995
has yet to reduce this pressure on interest margin and is reflected in the net
interest spread decline of 30 basis points during the current period.
As described above, the Company has experienced a narrowing of it's margin
during the nine months of 1995 as has a number of financial institutions
competing in the same market area. The Company continues to review various
pricing strategies to enhance deposit growth without margin compression.
8
Provision for possible loan losses decreased $70,000 to $125,000 in 1995,
compared to a provision of $195,000 in the same nine month period of 1994. This
decrease was appropriate given management's quarterly review of the allowance
for loan and lease losses which is based on the following information; migration
analysis of delinquent and non-accrual loans, estimated future losses on loans,
recent review of large problem credits, local economic conditions, historical
loss experience, OCC qualitative adjustments and peer comparisons.
Total other operating income increased by $23,000 compared to the same
period in 1994. Trust income was up $40,000, service charge income was up
$2,000, and other income was up $35,000 but realized securities gains was down
$54,000.
Total other operating expense was $5,000,000 in the first nine months of
1995 which reflected an increase of $194,000 or 4% over the 1994 period.
Salaries and benefits increased 5.7% or $131,000 for the current nine month
period reflecting normal merit increases when compared to the same period in
1994. Occupancy expense increased by $17,000 or 5.6% and furniture and
equipment expenses decreased 2.2% or $10,000. Federal Deposit Insurance
Corporation(FDIC) insurance expense decreased $81,000 or 25% during the first
nine months of 1995. $86,000 of the reduction in FDIC premium occurred during
the current three month period as the result of a refund of premiums in the
amount of $92,000. Other expenses increased $138,000 or 9.3% in the first nine
months of 1995 over the 1994 related period representing an increase in
marketing costs and various expenses related to the implementation of check
imaging.
The Company currently pays a premium to the FDIC for the Savings
Association Insurance Fund (SAIF) as a result of the deposits obtained with
the acquisition of Star Savings and Loan Association. Congress is currently
evaluating proposals to recapitalize SAIF and, although no agreement has been
reached between the House and Senate regarding recapitalization of the SAIF
fund, it appears that the Company, as well as other financial institutions
with SAIF deposits may be required to pay a one-time special assessment that
could approximate 85 basis points of SAIF deposits held or ($463,000) during
the fourth quarter of 1995 or the first quarter of 1996. The special
assessment may adversely effect earnings and liquidity when paid.
The provision for income taxes was $821,000 during the first nine months
of 1995 compared to $863,000 during the 1994 related period. Income before
taxes increased $52,000 in the 1995 period as compared to the same time period
in 1994.
Liquidity
Liquidity is a measure of the Company's ability to efficiently meet
normal cash flow requirements of both borrowers and depositors. In order to
maintain proper liquidity, the Company uses funds management policies along
with its investment policies to assure it can meet its financial obligations
to depositors, credit customers and shareholders. Liquidity is needed to meet
depositors' withdrawal demands, extend credit to meet borrowers' needs,
provide funds for normal operating expenses and cash dividends, as well as
fund other capital expenditures.
Funds received from increase deposits (primarily certificates of deposit)
were used to reduce the short-term borrowings at the Federal Home Loan Bank.
The remaining funds were then used to invest in securities there being little
increase in loans.
Management projected that capital expenditures for 1995 would increase
approximately $495,000 for optical check imaging and needed renovations to
branches and capital expenditures to keep pace with current technology needs.
During the first nine months of 1995 $359,000 was expended nearly the same as
the capital acquisitions of $357,000 during 1994.
9
Management is currently renting three properties as a temporary solution
to the space limitations it has experienced at the main office. Efforts are
continuing to evaluate various long term alternative solutions.
Liquidity is achieved primarily by having temporary or short-term
investments in the Federal Home Loan Bank of Pittsburgh, PA, federal funds
sold and investments which mature in a relatively short time period
(maturities under one year). The Company also maintains a credit line of
approximately 10% of qualifying assets with the Federal Home Loan Bank as an
additional source of liquidity.
The objective of interest rate sensitivity management is to maintain an
appropriate balance between the stable growth of income and the risks
associated with maximizing income through interest sensitivity imbalances.
An asset or liability is considered to be interest-sensitive if the rate it
yields or bears is subject to change within a predetermined time period. If
interest-sensitive assets exceeds interest-sensitive liabilities during a
prescribed time period, a positive gap results. Conversely, when interest-
sensitive liabilities exceeds interest-sensitive assets during a time period,
a negative gap results.
A positive gap tends to indicate that earnings will be impacted favorably
if interest rates rise during the period and negatively when interest rates fall
during the time period. A negative gap tends to indicate that earnings will be
effected inversely to interest rate changes. In other words, as interest rates
fall, a negative gap should tend to produce a positive effect on earnings and
when interest rates rise, a negative gap should tend to affect earnings
negatively.
The primary components of interest-sensitive assets include adjustable rate
loans and investments, loan repayments, investment maturities and money market
investments. The primary components of interest-sensitive liabilities include
maturing certificates of deposit, IRA certificates of deposit (individuals over
59 1/2 have the option to change), money market deposits, savings deposits,
N.O.W. accounts and short-term borrowing.
The Company's six to twelve-month asset/liability position at September 30,
1995, was again liability sensitive, with a dollar gap of $12.9 million or .88
(at December 31, 1994 the Company's liability sensitivity was at $(9.6) million
or .91). Management was able to move to within its policy range (positive 1.25
to negative .75) by the selection and pricing of assets and liabilities
acquired.
Gap analysis does not necessarily indicate the precise impact of specific
interest rate movements on the Company's net interest income because the
repricing of certain assets and liabilities is discretionary and is subject to
competitive and other pressures. In addition, assets and liabilities within the
same period may, in fact, reprice at different times and at different rate
levels.
Another method used by the Company to measure the impact of interest rate
changes on net interest income is to simulate the potential effects of changing
interest rates through computer modeling. The Company is then able to evaluate
strategies which would include an acceleration of a deposit rate reduction or
rate increase and the related repricing strategies for loans.
10
Credit Quality Risk
The following table identifies amounts of loan losses and non-performing
loans. Past due loans are those which were contractually past due 90 days or
more as to interest or principal payments.
September 30, December 31,
1995 1994 1993 1992 1991
(dollars in thousands)
Loans in nonaccrual status $ 1,491 $ 1,557 $ 1,566 $ 689 $ 154
Accrual loans - 90 days or
more past due 156 267 418 439 977
Total non-performing loans $ 1,647 $ 1,824 $ 1,984 $ 1,128 $ 1,131
Other real estate owned $ 262 $ 168 $ 231 $ 330 $ 188
Loans outstanding at end of
period $157,306 $156,569 $141,907 $129,527 $121,743
Non-performing loans as percent
of total loans 1.05% 1.16% 1.40% .87% .87%
Provision for possible loan
losses $ 1,804 $ 1,721 $ 1,516 $ 1,201 $ 906
Net charge-offs $ 43 $ 50 $ 0 $ 119 $ 88
Provision for possible loan
losses as percent of loans
outstanding 1.15% 1.10% 1.07% .93% .82%
Total non-performing assets as a
percent of loans, net of
unearned income, and foreclosed
assets held for sale 1.21% 1.27% 1.56% 1.12% 1.08%
Transactions in the allowance for possible loan losses were as follows
(in thousands):
At September 30, Years Ended December 31,
1995 1994 1993 1992
Balance, beginning of year $1,721 $1,516 $1,201 $ 996
Provision charged to income 125 255 315 324
Recoveries on loans previously
charged against the allowance 10 18 71 32
1,856 1,789 1,587 1,352
Loans charged against the allowance (52) (68) (71) (151)
Balance, end of year $1,804 $1,721 $1,516 $1,201
The allowance is maintained at a level to absorb potential future loan
losses. The allowance is increased by provisions charged to operating expense
and reduced by net charge-offs. Management's basis for the level of the
allowance and the quarterly provision is its evaluation of the loan portfolio,
current and projected economic conditions, the historical loan loss experience,
present and prospective financial condition of the borrowers, the level of non-
performing assets, and other relevant factors. While management evaluates all
of this information quarterly, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions used
in making the evaluation. In addition, various regulatory agencies, as an
integral part of their examination process, review the Company's allowance for
loan losses. Such agencies may require the Company to recognize additions to
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the allowance based on their evaluation of information available to them at
the time of their examination. Based on this process, management believes
that the current allowance is adequate to offset any exposure that may exist for
under-collateralized or uncollectible loans.
The following information concerns impaired loans as described in note 3:
Impaired Loans:
Nonaccrual Loans $282,480
Restructured Loans 0
$282,480
Impaired loans with specific loss allowances: $282,480
Loss allowances reserved on impaired loans: $ 0
Income recognized on impaired loans
during 1995 $ 0
The Company has one loan as of September 30, 1995 that it considers
impaired and management believes that the liquidation of the collateral would
exceed principal, plus interest and fees, thus no allowance reserve is required.
The Company does not accrue interest income on impaired loans and
subsequent cash payments received are applied to the outstanding principal
balance or recorded as interest income, depending upon management's assessment
of it's ultimate ability to collect principal and interest.
General
Various congressional bills have been passed and other proposals have been
made for significant changes to the banking system, including provisions for:
recapitalization by the FDIC of the SAIF as discussed previously; limitations on
deposit insurance coverage; changing the timing and method financial
institutions use to pay for deposit insurance; expanding the power of banks by
removing restrictions on bank underwriting activities; tightening the regulation
of bank derivatives activities; allowing commercial enterprises to own banks;
and permitting bank holding companies to own affiliates that engage in
securities, mutual funds and insurance activities.
Except as previously discussed in the section on result of operations,
management believes that the effect of the provisions of this legislation on
liquidity, capital resources, and the results of operations of the company will
be immaterial.
Aside from those matters described above, management does not believe that
there are any trends or uncertainties which would have a material impact on
future operating results, liquidity or capital resources nor is it aware of any
current recommendations by the regulatory authorities which if they were to be
implemented would have such an effect, although the general cost of compliance
with numerous and multiple federal and state laws and regulations does have and
in the future may have a negative impact on the company's results of operations.
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PART II - OTHER INFORMATION AND SIGNATURES
Item 1 - Legal Proceedings
Management is not aware of any litigation that would have a material
adverse effect on the consolidated financial position of the Company. Any
pending proceedings are ordinary, routine litigation incidental to the
business of the Company and its subsidiary. In addition, no material
proceedings are pending or are known to be threatened or contemplated against
the Company and its subsidiary by government authorities.
Item 2 - Changes in Securities - Nothing to report.
Item 3 - Defaults Upon Senior Securities - Nothing to report.
Item 4 - Submission of Matters to a Vote of Security Holders - Nothing to
report.
Item 5 - Other Information - Nothing to report.
Item 6 - Exhibits and reports on Form 8-K.
(a) Exhibits - None.
(b) Reports - None.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
undersigned Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
Citizens Financial Services, Inc.
(Registrant)
November 7, 1995 /s/ Richard E. Wilber
_______________________
By: Richard E. Wilber
President and Chief Financial Officer
(Principal Executive Officer)
November 7, 1995 /s/ Thomas C. Lyman
_______________________
By: Thomas C. Lyman
Treasurer
(Principal Financial &
Accounting Officer)
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