UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________________ to ___________________
Commission file number 0-13222
CITIZENS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2265045
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 South Main Street, Mansfield, Pennsylvania 16933
(Address of principal executive offices ) (Zip Code)
Registrant's telephone number, including area code: (717) 662-2121
Indicate by checkmark whether the registrant (1) has filed all reports
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes__X___ No_____
The number of shares outstanding of the Registrant's Common Stock, as of
August 1, 1996, 1,360,228 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 June 30, 1996 and
December 31, 1995 1
Consolidated Statement of Income for the
Three Months and Six Months Ended June 30, 1996 and 1995 2
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 1996 and 1995 3
Notes to Consolidated Financial Statements 4
Item 2-Management's Discussion and Analysis of Financial Condition
and Results of Operations 4-12
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)
June 30, December 31,
1996 1995
ASSETS:
Cash and due from banks:
Noninterest-bearing $ 5,936,403 $ 5,535,712
Interest-bearing 37,681 36,949
Total cash and cash equivalents 5,974,084 5,572,661
Available-for-sale securities 30,611,957 21,444,353
Held-to-maturity securities (estimated
market value 1996,$60,745,000;
December 31, 1995, $53,589,000) 61,848,332 52,271,151
Loans (net of allowance for possible loan
losses 1996, $1,911,726; December 31, 1995,
$1,833,115) 170,508,604 159,793,794
Foreclosed assets held for sale 228,413 207,959
Premises and equipment 4,167,051 4,175,459
Accrued interest receivable and other assets 5,712,226 3,629,072
TOTAL ASSETS $279,050,667 $247,094,449
LIABILITIES:
Deposits:
Noninterest-bearing $ 17,572,973 $ 15,140,360
Interest-bearing 223,582,967 198,175,933
Total deposits 241,155,940 213,316,293
Borrowed funds 11,887,369 8,855,044
Accrued interest payable 1,584,127 2,106,036
Dividends payable 607,315 579,349
Other liabilities 1,894,866 940,461
TOTAL LIABILITIES 257,129,617 225,797,183
STOCKHOLDERS' EQUITY:
Common Stock
$1.00 par value; authorized 5,000,000
shares; issued and outstanding
1,360,228 and 1,347,323 shares
in 1996 and 1995, respectively 1,360,228 1,347,323
Additional paid-in capital 6,828,302 6,512,129
Retained earnings 13,687,222 13,089,281
TOTAL 21,875,752 20,948,733
Unrealized holding gains on
available-for-sale securities 45,298 348,533
TOTAL STOCKHOLDERS' EQUITY 21,921,050 21,297,266
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $279,050,667 $247,094,449
The accompanying notes are an integral part of these financial statements.
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
INTEREST INCOME:
Interest and fees on loans $3,872,352 $3,662,519 $ 7,663,626 $ 7,215,279
Interest on interest-bearing deposits
with banks 108,904 24,045 145,720 24,539
Interest and dividends on investments:
Taxable 1,285,528 1,020,337 2,425,541 2,025,988
Nontaxable 17,945 49,756 37,388 102,180
Dividends 17,861 19,355 35,166 36,521
Total interest and dividends on investments 1,321,334 1,089,448 2,498,095 2,164,689
TOTAL INTEREST INCOME 5,302,590 4,776,012 10,307,441 9,404,507
INTEREST EXPENSE:
Interest on deposits 2,569,282 2,337,035 4,983,720 4,446,451
Interest on borrowed funds 117,800 98,753 231,478 302,490
TOTAL INTEREST EXPENSE 2,687,082 2,435,788 5,215,198 4,748,941
NET INTEREST INCOME 2,615,508 2,340,224 5,092,243 4,655,566
Provision for possible loan losses 52,500 37,500 100,000 87,500
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 2,563,008 2,302,724 4,992,243 4,568,066
OTHER OPERATING INCOME:
Service charge income 214,262 184,748 394,063 348,087
Trust income 66,441 49,071 134,709 125,613
Other income 52,311 100,136 105,806 147,357
Realized securities gains, net 0 0 19,264 4,700
TOTAL OTHER OPERATING INCOME 333,014 333,955 653,842 625,757
OTHER OPERATING EXPENSES:
Salaries and employee benefits 839,389 801,136 1,646,176 1,609,126
Occupancy expenses 114,719 106,968 228,673 215,218
Furniture and equipment expenses 155,601 150,064 291,810 289,812
FDIC insurance expense 29,929 110,849 59,859 221,698
Other expenses 614,715 564,455 1,201,054 1,106,549
TOTAL OTHER OPERATING EXPENSES 1,754,353 1,733,472 3,427,572 3,442,403
Income before provision for income taxes 1,141,669 903,207 2,218,513 1,751,420
Provision for income taxes 332,388 256,554 684,178 496,554
NET INCOME $ 809,281 $ 646,653 $ 1,534,335 1,254,866
Earnings per share $0.59 $0.48 $1.13 $0.92
Cash dividend declared $0.44 $0.42 $0.44 $0.42
Weighted average number of shares outstanding 1,360,228 1,360,228 1,360,228 1,360,228
The accompanying notes are an integral part of these financial statements.
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six months Ended
June 30,
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995
Net income $ 1,534,335 $ 1,254,866
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 100,000 87,500
Provision for depreciation and amortization 203,942 224,456
Amortization and accretion of investment
securities 166,912 113,622
Deferred income taxes 12,556 (19,461)
Realized gains on securities (19,264) (4,700)
Realized gains on loans sold (6,204) (13,377)
Gain on sale of foreclosed assets held for sale (10,315) (45,306)
(Increase) in accrued interest receivable
and other assets (939,912) (390,195)
Increase (decrease) in accrued interest
payable and other liabilities 432,495 (126,817)
Net cash provided by operating activities 1,474,545 1,080,588
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Proceeds from sales of securities 16,047 0
Purchase of securities (9,681,671) (1,074,688)
Held-to-maturity securities:
Proceeds from maturity and principal
repayments of securities 3,708,853 2,467,973
Purchase of securities (13,395,108) (2,153,200)
Net increase in loans (7,226,277) (114,557)
Purchase of loans (3,659,068) 0
Capital expenditures (177,406) (308,320)
Proceeds from sale of foreclosed assets held
for sale 66,600 152,400
Deposit acquisition premium (1,017,714) 0
Net cash used by
investing activities (31,365,744) (1,030,392)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 10,709,707 11,200,211
Proceeds from long-term borrowings 101,232 739,098
Repayments of long-term borrowings (47,913) (75,369)
Net increase (decrease) in short-term
borrowed funds 2,979,006 (10,630,641)
Dividends paid (579,349) (547,163)
Deposits of acquired branches 17,129,939 0
Net cash provided by
financing activities 30,292,622 686,136
Net increase in cash and cash
equivalents 401,423 736,332
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,572,661 5,511,300
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,974,084 $ 6,247,632
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 5,737,107 $ 5,090,228
Income taxes paid $ 710,000 $ 535,000
The accompanying notes are an integral part of these financial statements.
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated financial statements include the accounts of Citizens
Financial Services, Inc. and its wholly-owned subsidiary, First Citizens
National Bank (the "Bank"), (collectively, the "Company"). All material
intercompany balances and transactions have been eliminated in consolidation.
The accompanying interim financial statements have been prepared by the
Company without audit and, in the opinion of management, reflect all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the Company's financial position as of June 30, 1996, and
the results of operations for the interim periods presented. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period.
Actual results could differ significantly from those estimates. For further
information refer to the consolidated financial statements and footnotes thereto
incorporated by reference in the Company's Annual Report on Form 10-K for the
year ended December 31, 1995.
The results of operations for the three months and six months ended June
30, 1996 and 1995 are not necessarily indicative of the results to be expected
for the full year.
Note 2 - Earnings per Share
Earnings per share calculations give retroactive effect to stock dividends
Declared by the Company. The number of shares used in the earnings per share
and dividends per share calculation was 1,360,228 for 1996 and 1995. The
number of shares used for prior periods reflect the one percent stock
dividend declared on May 21, 1996.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors that have affected the Company's financial position and
operating results during the periods indicated in the accompanying
consolidated financial statements. The results of operations for the three
months and six months ended June 30, 1996 and 1995 are not necessarily
indicative of the results to be expected for the full year.
Financial Condition
For the six month period ended June 30, 1996, the assets of the Company
have increased by $32 million or 12.9% compared with an increase of $2.4
million for the same period in 1995. This growth was primarily the result of
the acquisition of the Canton and Gillett offices of Meridian Bancorp, Inc.
on April 19, 1996 of $17.1 million.
Cash and cash equivalents increased $.4 million in 1996 compared with an
increase of $.7 million for the same period in 1995.
Total investment securities increased $18.7 million or 25.4% in 1996
compared with an increase of $1.5 million for the same period in 1995. The
primary reason for the increase was the assumptions of the deposits of the
above-mentioned branches that resulted in a payment of cash that was then
invested in investment securities.
During the first six months of 1996, securities totaling $3.7 million
matured. During the same period $18.3 million U. S Treasury securities were
purchased with maturities of five years ($10.2 million classified as
held-to-maturity and $8.1 million as available-for-sale). Additionally, $4.8
million in investment grade corporate bonds were purchased.
Net loan balances increased a strong $10.7 million or 6.7% for the
current period as compared with a slight decrease of $.2 million for the
first six months of 1995. Increased loan demand during 1996 was the primary
reason for the increase. The acquisition of the Canton and Gillett branches
accounted for the $3.7 million of the loan growth.
During the remainder of 1996, management expects that loan demand will
continue as the result of the attractive interest rates that the Bank is
currently promoting combined with a healthy local economy. The major
concentrations of loans continue to be in residential real estate-consisting
of loans to purchase and improve real estate, debt consolidation and home
equity lines of credit. Because of the local loan demand, the Bank also
expects to be successful in lending to local state and political subdivisions
during the remainder of 1996.
The loan portfolio consists of the following (in thousands):
June 30, December 31, June 30,
1996 1995 1995
Real estate loans - residential $103,833 $ 97,612 $ 97,076
Real estate loans - commercial 25,576 24,167 23,490
Real estate loans - agricultural 7,121 8,027 6,529
Loans to individuals for household,
family and other purchases 13,673 13,198 12,409
Commercial and other loans 11,531 10,535 10,533
State and political subdivision
loans 10,914 8,347 6,840
Total 172,648 161,886 156,877
Less: unearned income on loans 227 259 419
Loans, net of unearned income $172,421 $161,627 $156,458
Deposit growth continues to be strong increasing by $27.8 million or 13%
as the result of the acquisition of the two branches ($17.1 million) and the
competitive pricing of certificates of deposit. The first six months of 1995
saw an increase of $11.2 million.
Borrowed funds increased by $3.1 million during the first six months of
1996 compared with a decrease of $10 million in 1995. This increase was the
result of additional short-term borrowing from the Federal Home Loan Bank.
The Company's daily cash requirements or short-term investments are now being
met by using the financial instruments available through the Federal Home
Loan Bank rather than using federal funds market. The strong increase in
loan demand and additional security investments during the first six months
of 1996 required an increase in short-term borrowing.
Capital
The Company has computed its risk-based capital ratios as follows (dollars
in thousands):
June 30, December 31,
1996 1995
Tier I - Total stockholders' equity $ 21,921 $ 21,297
Less: Unrealized holding gains (losses)
on available-for-sale securities 45 349
Goodwill and core deposit intangible 1,000 0
Tier I, net 20,876 20,948
Tier II - Allowance for loan losses(1) 1,882 1,719
Total qualifying capital $ 22,758 $ 22,667
Risk-adjusted on-balance sheet assets $142,972 $131,247
Risk-adjusted off-balance sheet
exposure (2) 7,601 6,242
Total risk-adjusted assets $150,573 $137,489
June 30, December 31,
Ratios: 1996 1995
Tier I risk-based capital ratio 13.9% 15.2%
Federal minimum required 4.0 4.0
Total risk-based capital ratio 15.1% 16.5%
Federal minimum required 8.0 8.0
Leverage ratio (3) 7.9% 8.7%
Federal minimum required 4.0 4.0
(1) Allowance for loan losses is limited to 1.25% of total risk-adjusted
assets.
(2) Off-balance sheet exposure is caused primarily by standby letters of
credit and loan commitments with a remaining maturity exceeding one year.
These obligations have been converted to on-balance sheet credit equivalent
amounts and adjusted for risk.
(3) Tier I capital divided by average total assets.
See the discussion of liquidity below for details regarding future expansion
plans and the impact on capital.
Results of Operations
Net income for the three month period ending June 30, 1996 was $809,000 an
increase of $163,000 or 25.2% over the 1995 related period. Earnings per
share was $.59 during the second quarter of 1996 compared with $.48 during
the comparable 1995 period. Net income for the current six months of 1996
was $1,534,000 compared with $1,255,000 in 1995, an increase of $280,000 or
22.3% discussed in more detail below.
Net interest income, the most significant component of earnings, is the
amount by which interest generated from earning assets exceeds interest
expense on liabilities. Net interest income for the current six month 1996
period, after provision for possible loan losses was $4,992,000, an increase
of $424,000 or 9.3% compared with an increase of $162,000 or 3.7% during the
same period in 1995.
Analysis of Average Balances and Interest Rates (1)
June 30, 1996 June 30, 1995 June 30, 1994
Average Average Average Average Average
Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
$ $ % $ $ % $ $ %
ASSETS
Short-term investments:
Interest-bearing deposits at banks 5,556 146 5.28 811 25 6.22 1,209 23 3.80
Investment securities:
Taxable 76,067 2,461 6.51 61,935 2,063 6.72 61,209 2,019 6.65
Tax-exempt(3) 895 56 12.60 2,433 155 12.85 3,133 241 15.51
Total investment securities 76,962 2,517 6.58 64,368 2,218 6.95 64,342 2,260 7.08
Loans:
Residential mortgage loans 99,183 4,563 9.25 97,092 4,438 9.22 91,056 3,898 8.63
Commercial & farm loans 41,123 2,022 9.89 38,256 1,863 9.82 31,214 1,292 8.35
Loans to state & political
subdivisions 8,700 382 8.83 7,242 307 8.55 5,468 186 6.86
Other loans 14,161 818 11.62 13,980 697 10.05 14,809 714 9.72
Loans, net of discount (2)(3)(4) 163,167 7,785 9.59 156,570 7,305 9.41 142,547 6,090 8.62
Total interest-earning assets 245,685 10,448 8.55 221,749 9,548 8.68 208,098 8,373 8.11
Cash and due from banks 5,264 4,769 4,011
Bank premises and equipment 4,173 4,083 3,959
FASB 115 adjustment 275 (186) (72)
Other assets 7,676 3,295 3,185
Total noninterest-bearing assets 17,388 11,961 11,083
Total assets 263,073 233,710 219,181
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts 26,849 295 2.21 23,772 286 2.43 26,760 286 2.16
Savings accounts 27,206 301 2.22 25,988 330 2.56 27,615 303 2.21
Money market accounts 26,111 566 4.36 21,660 510 4.75 20,882 311 3.00
Certificates of deposit 130,159 3,823 5.91 115,844 3,321 5.78 103,364 2,692 5.25
Total interest-bearing deposits 210,325 4,985 4.77 187,264 4,447 4.79 178,621 3,592 4.06
Other borrowed funds 7,461 231 6.23 9,722 302 6.26 5,489 115 4.22
Total interest-bearing liabilities 217,786 5,216 4.82 196,986 4,749 4.86 184,110 3,707 4.06
Demand deposits 16,500 14,189 13,874
Other liabilities 7,178 3,025 2,830
Total noninterest-bearing liabilities 23,678 17,214 16,704
Stockholders' equity 21,609 19,510 18,367
Total liabilities & stockholders'
equity 263,073 233,710 219,181
Net interest income 5,232 4,799 4,666
Net interest spread (5) 3.74% 3.82% 4.05%
Net interest income as a percentage
of average interest-earning assets 4.28% 4.36% 4.52%
Ratio of interest-earning assets
to interest-bearing liabilities 1.13 1.13 1.13
(1) Averages are based on daily balances.
(2) Includes loan origination and commitment fees.
(3) Tax exempt interest revenue is shown on a tax equivalent basis for proper
comparison using a statutory federal income tax rate of 34%.
(4) Income on non-accrual loans is accounted for on a cash basis, and the loan
balances are included in interest-earning assets.
(5) Interest rate spread represents the difference between the average rate
earned on interest-earning assets and the average rate paid on interest-bearing
liabilities.
As described in the table above the yield on earning assets, on a
tax-equivalent basis, declined from 8.68% to 8.55% (13 basis points) in the
first six months of 1996 and 1995, respectively. The cost of funds was 4.82%
and 4.86% during the six months ended 1996 and 1995, respectively (a decrease
of 4 basis points).
In comparing the average interest cost of 1996 versus 1995, NOW accounts
decreased 22 basis points, savings accounts decreased by 34 basis points and
interest rate on money market accounts decreased by 39 basis points. The
interest rate on certificates of deposit, however, increased by 13 basis points
and continued to be most affected by the upward pressure in interest rates.
As described above, the Company has continued to experience a slight
narrowing of its margin percentage during the six months of 1996. The Company
continues to review various pricing strategies to enhance deposit growth
while maintaining or expanding the current interest margin.
1996 vs. 1995 1995 vs. 1994
Change in Change Change in Total Change in Change Change in Total
Volume in Rate Rate & Change Volume in Rate Rate & Change
Volumes Volumes
Interest income:
Short-term investments:
Interest-bearing deposits
at banks $ 148 $ (4) $ (22) $ 122 $ (8) $ 14 $ (5) $ 1
Investment securities:
Taxable 475 (62) (15) 398 24 20 0 44
Tax-exempt (99) (2) 2 (99) (54) (41) 10 (85)
Total investments 376 (64) (13) 299 (30) (21) 10 (41)
Loans:
Residential mortgage loans 96 28 0 124 261 262 18 540
Commercial and farm loans 141 17 1 159 294 225 52 571
Loans to state & political
subdivisions 62 11 2 75 61 45 15 121
Other loans 9 111 1 121 (41) 25 (2) (18)
Total loans - net of
discount (2)(3)(4) 308 167 4 479 575 557 83 1,215
Total interest income 832 99 (31) 900 537 550 88 1,175
Interest expense:
Interest bearing deposits:
NOW accounts 37 (25) (3) 9 (32) 36 (4) 0
Savings accounts 16 (43) (2) (29) (18) 48 (3) 27
Money market accounts 106 (41) (8) 57 12 181 7 200
Certificates of deposit 414 79 9 502 328 268 33 629
Total interest-bearing
deposits 573 (30) (4) 539 290 533 33 856
Other borrowed funds (71) (1) 0 (72) 89 54 43 186
Total interest expense 502 (31) (4) 467 379 587 76 1,042
Net interest income $ 330 $ 130 $ (27) $ 433 $ 158 $ (37) $ 12 $ 133
The above table detailing the change in net interest income clearly shows
the impact ($475,000) resulting from volume increases in taxable investment
securities (proceeds from the assumptions of Canton and Gillett deposits and
normal deposit growth) being more than offset by the increase in total interest-
bearing deposits ($573,000). The net positive gain in volume of $330,000
combined with a net positive increase due to rate of $130,000 resulted in a
very substantial increase of $433,000.
Provision for possible loan losses increased $12,500 to $100,000 in 1996,
compared with a provision of $87,500 in the same six month period of 1995. This
increase was appropriate given management's quarterly review of the allowance
for loan losses that is based on the following information; migration analysis
of delinquent and non accrual loans, estimated future losses on loans, recent
review of large problem credits, local economic conditions, historical loss
experience, OCC qualitative adjustments, purchase of loans through acquisitions
(as occurred in the second quarter of 1996) and peer comparisons.
Total other operating income increased $28,000 compared with the same
period in 1995. Trust income was up $9,000, service charge income was up
$46,000, and other income was down $42,000 (1995 reflected gains of $45,000
on the sale of other real estate owned). Realized securities gain of $15,000
resulting primarily from the sale of some Federal Home Loan Mortgage
Corporation stock.
Total other operating expense was $3,428,000 in the first six months of
1996 reflecting a decrease of $15,000 over the 1995 period. Salaries and
benefit's expense increased by $37,000 for the current six month period
reflecting normal merit increases offset by a reduction of full time equivalent
employees(FTE) during the first 4 months of 1996. FTEs were reduced because
of the operational efficiencies created from electronic check imaging, however,
the acquisition of the two new branches increased the FTEs by six to 116.
Occupancy expense increased by $13,500 or 6.3% and furniture and equipment
expenses increased by $2,000.
FDIC expense declined $162,000 or 73%, as the Bank Insurance Fund ("BIF")
reached its statutorily mandated reserve limit and deposit premiums being
reduced to a minimum of $2,000 per year while the Savings Association Fund
("SAIF") deposit balances continues to pay a premium of $.23 per hundred.
The Company currently pays a premium to the SAIF because of the deposits
obtained with the acquisition of Star Savings and Loan Association in 1991.
Congress is currently considering a variety of proposals to remedy the large
disparity of insurance premiums paid by savings and loan associations for
deposit insurance under the SAIF in comparison to the BIF. In order to
recapitalize SAIF and remedy the disparity of premiums for deposit insurance,
the following has been proposed: the payment of a one-time special assessment,
a merger of SAIF and the BIF, and sharing of FICO cost (the cost representing
the bonds which were floated in connection with the bailout) pro-rata among
all FDIC-insured institutions and credit unions. Management in unable to assess
the exact cost associated with any of these proposals, but one or more of these
proposals could result in an increase of FDIC premiums in the future and/or
the payment of some type of assessment.
Other expenses increased $95,000 or 8.5% in the first six months of 1996
over the 1995 related period representing an increase in marketing costs,
other professional fees, printing expenses (an impact of new branch
acquisitions) offset by reductions in postage from the implementation of check
imaging.
The provision for income taxes was $684,000 during the first six months
of 1996 compared with $497,000 during the 1995 related period. Income before
taxes increased $467,000 in the 1996 period over the same period in 1995.
Liquidity
Liquidity is a measure of the Company's ability efficiently to meet normal
cash flow requirements of both borrowers and depositors. To maintain proper
liquidity, the Company uses funds management policies along with its investment
policies to assure it can meet its financial obligations to depositors, credit
customers and shareholders. Liquidity is needed to meet depositors' withdrawal
demands, extend credit to meet borrowers' needs, provide funds for normal
operating expenses and cash dividends, and fund other capital expenditures.
During the first six months of 1996 $177,000 was expended ($40,000 for the
branch acquisition), $131,000 less than the capital acquisitions during the same
period in 1995. Management projected that capital expenditure for the remainder
of 1996 will be approximately $724,000. $50,000 is anticipated for repairs,
new equipment and improvements to branches. The newly acquired Canton office
that is currently being leased, will be purchased for $194,000 in the third
quarter of 1996 completing the acquisition. Additionally, approximately
$230,000 for leasehold improvements and equipment to the supermarket branch
currently under construction and $250,000 for the acquisition of the building
and lot discussed below will be funded during 1996.
Management is currently renting two properties as a temporary solution to
the space limitations it has experienced at the main office. On July 17, 1996,
the Bank purchased a building and lot adjoining the Mansfield branch location.
The Company plans to use this area for the new operations/administration center
and 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 estimated cost of approximately $1.75 million.
Management believes that it has sufficient resources to complete these
projects from its normal operations and that they will have a long term
positive effect on revenues, efficiency and the capacity for future growth.
Liquidity is achieved primarily by temporary or short-term investments in
the Federal Home Loan Bank of Pittsburgh, PA, and investments that mature in a
short time (maturities less than one year). The Company also has a maximum
borrowing capacity at the Federal Home Loan Bank of approximately $85 million
(currently using $6.6 million in use)as an additional source of liquidity.
Asset / Liability Management
The objective of interest rate sensitivity management is to maintain an
appropriate balance between the stable growth of income and the risks associated
with maximizing income through interest sensitivity imbalances. An asset or
liability is considered interest-sensitive if the rate it yields or bears is
subject to change within a predetermined time. When interest-sensitive assets
exceed interest-sensitive liabilities during a prescribed time, a positive gap
is the result. Conversely, when interest-sensitive liabilities exceed interest-
sensitive assets during a time, a negative gap is the result.
A positive gap suggests that earnings will be affected favorably if
interest rates rise during the period and negatively when interest rates fall
a while. A negative gap suggests that earnings will be effected inversely to
interest rate changes. In other words, as interest rates fall, a negative gap
should produce a positive effect on earnings and when interest rates rise, a
negative gap should 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 of changing), money market deposits, savings deposits,
NOW accounts and short-term borrowing.
The Company's six to twelve-month asset/liability position at June 30,
1996, was again liability sensitive, with a negative dollar gap of $22.6
million or .82 (at December 31, 1995 the Company's liability sensitivity was a
negative $9.8 million or .91). The $12.8 million change was primarily the
result of the branch acquisition of interest-bearing transactions accounts and
new investments being purchased in the three to five year maturity range.
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 show the precise impact of specific
interest rate movements on the Company's net interest income because the
repricing of certain assets and liabilities is discretionary and is subject to
competitive and other pressures. In addition, assets and liabilities within
the same period may, in fact, reprise at different times and at different rate
levels.
Another method used with increasing frequency and confidence 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. Management intends to use the model as part of its risk
management process that will effectively identify, measure, and monitor the
bank's risk exposure.
Credit Quality Risk
The following table identifies amounts of loan losses and nonperforming
loans. Past due loans are those that were contractually past due 90 days or
more as to interest or principal payments (dollars in thousands).
June 30, December 31,
1996 1995 1994 1993 1992
Non accruing loans $ 621 $ 763 $ 1,557 $ 1,566 $ 689
Impaired loans 696 696
Accrual loans - 90 days or
more past due 192 689 267 418 439
Total nonperforming loans $ 1,509 $ 2,148 $ 1,824 $ 1,984 $ 1,128
Other real estate owned $ 228 $ 208 $ 168 $ 231 $ 330
Loans outstanding at end of
period $172,648 $161,886 $157,144 $143,218 $132,033
Unearned income 227 259 575 1,311 2,506
Loans, net of unearned income $172,421 $161,627 $156,569 $141,907 $129,527
Nonperforming loans as percent
of loans, net of unearned
income .88% 1.33% 1.17% 1.40% .87%
Total nonperforming assets as a
percent loans of net unearned
income 1.01% 1.46% 1.27% 1.56% 1.13%
Transactions in the allowance for possible loan losses were as follows (in
thousands):
At June 30, Years Ended December 31,
1996 1995 1994 1993 1992
Balance, beginning of period $1,833 $1,721 $1,516 $1,201 $ 996
Charge-offs (35) (69) (68) (71) (151)
Recoveries 14 18 18 71 32
Provision for loan losses 100 163 255 315 324
Balance, end of period $1,912 $1,833 $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 establishes the level of the
allowance and the quarterly provision is its basis for evaluation of the loan
portfolio, current and projected economic conditions, the historical loan loss
experience, present and prospective financial condition of the borrowers, the
level of nonperforming assets, and other relevant factors. While management
evaluates all of this information quarterly, future adjustments to the
allowance may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. In addition, various regulatory
agencies, as an integral part of their examination process, review the
Company's allowance for loan losses. Such agencies may require the Company to
recognize additions to the allowance based on their evaluation of information
available to them at the time of their examination. Based on this process,
management currently believes that the allowance is adequate to offset any
exposure that may exist for under collateralized or uncollectable loans.
The Company has two loans as of June 30, 1996 that it considers impaired.
Management believes that the liquidation of the collateral would exceed
principal. Thus, no allowance reserve is required. Management continues to
monitor the impaired loans and will liquidate the collateral when legal
constraints are past.
The Company does not accrue interest income on impaired loans. Subsequent
cash payments received are applied to the outstanding principal balance or
recorded as interest income, depending upon management's assessment of its
ultimate ability to collect principal and interest.
Branch Expansion
On April 20, 1996, the Bank purchased two branch offices of Meridian Bancorp
Inc. (Canton and Gillett) comprising approximately $17.1 million of deposit
liabilities; $3.7 million of loans. In consideration for the assumption of
the deposit liabilities the Bank paid a premium of approximately $1 million.
Loans were priced at fair value plus accrued but unpaid interest. Management
believes that after a modest negative impact on earnings for 1996, a positive
impact on future earning is expected from the acquisition.
Supermarket Banking
On April 11, 1996, the Bank entered a license agreement with Weis Markets,
Inc. for exclusive rights to operate a branch bank within the new supermarket
being constructed in Wellsboro, PA. Management has contracted with a consulting
firm to provide support in the construction and development of the branch and
expects that it will be in operation by the fall of 1996.
General
In May of 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 122, "Accounting for Mortgage
Servicing Rights," an amendment of SFAS No. 65. This Statement, which is
required to be adopted during the first quarter of 1996, allows enterprises
engaging in mortgage banking activities to recognize as separate assets rights
to service mortgage loans for loans originated for sale by the enterprise. As
the Company does not significantly engage in the sale of mortgage loans, the
impact of this Statement has not had a material impact on the Company's
results of operations or financial position.
Various congressional bills have been passed and other proposals have been
made for significant changes to the banking system, including provisions for:
recapitalization by the FDIC of the SAIF as discussed previously; limitations on
deposit insurance coverage; changing the timing and method financial
institutions use to pay for deposit insurance; expanding the power of banks by
removing restrictions on bank underwriting activities; tightening the
regulation of bank derivatives activities; allowing commercial enterprises to
own banks; and permitting bank holding companies or the bank to own or control
affiliates that engage in securities, mutual funds and insurance activities.
Apart from those matters described above, management does not currently
believe that there are any trends or uncertainties that would have a material
impact on future operating results, liquidity or capital resources nor is it
aware of any current recommendations by the regulatory authorities that if they
were to be carried out would have such an effect, although the general cost of
compliance with numerous and multiple federal and state laws and regulations
does have and in the future may have a negative impact on the company's
results of operations.
Except as previously discussed in the section on the result of operations,
management believes that the effect of the provisions of future legislation on
liquidity, capital resources, and the results of operations of the company will
not be material.
PART II - OTHER INFORMATION AND SIGNATURES
Item 1 - Legal Proceedings
Management is not aware of any litigation that would have a material
adverse effect on the consolidated financial position of the Company. Any
pending proceedings are ordinary, routine litigation incidental to the
business of the Company and its subsidiary. In addition, no material
proceedings are pending or are known to be threatened or contemplated against
the Company and its subsidiary by government authorities.
Item 2 - Changes in Securities - Nothing to report.
Item 3 - Defaults Upon Senior Securities - Nothing to report.
Item 4 - Submission of Matters to a Vote of Security Holders - None
Item 5 - Other Information - Nothing to report.
Item 6 - Exhibits and reports on Form 8-K.
(a) Exhibits - None.
(b) Reports - None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
undersigned Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
Citizens Financial Services, Inc.
(Registrant)
August 12, 1996 /s/ Richard E. Wilber
_______________________
By: Richard E. Wilber
President and Chief Financial Officer
(Principal Executive Officer)
August 12, 1996 /s/ Thomas C. Lyman
_______________________
By: Thomas C. Lyman
Treasurer
(Principal Financial &
Accounting Officer)