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 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
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 20, 1995, is estimated to have been approximately $27,262,000.
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 15, 1994, 1,334,543 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 18, 1995.
Parts II and IV - Annual Report to Shareholders for the Year Ended December
31, 1994.
Citizens Financial Services, Inc.
Form 10-K
INDEX
Part I Page
Item 1-Business 1-11
Item 2-Properties 12
Item 3-Legal Proceedings 12-13
Item 4-Submission of Matters to a Vote of Security Holders 13
Part II
Item 5-Market for Registrant's Common Stock and Related Stockholder
Matters 13
Item 6-Selected Financial Data 13
Item 7-Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 8-Financial Statements and Supplementary Data 13-14
Item 9-Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 14
Part III
Item 10-Directors and Executive Officers of the Registrant 14
Item 11-Executive Compensation 14
Item 12-Security Ownership of Certain Beneficial Owners and
Management 14
Item 13-Certain Relationships and Related Transactions 14
Part IV
Item 14-Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 14-16
Signatures 17
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. First Citizens National Bank (the "Bank")
then 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 was 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") that was 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 and the
Company retired the Association's stock. This transaction terminated the
Association's separate operations as a savings and loan association.
The Bank employs 111 full time equivalent employees at its seven full
service 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 full service banking facilities in
Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy and Sayre as well
as an automatic teller machine located in Soldiers and Sailors Memorial
Hospital in Wellsboro, Mansfield Wal-Mart and Mansfield University. The
Bank's lending and deposit products are offered primarily within the
vicinity of its service area.
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 change to competitive barriers between bank and non-bank
institutions. The Company not only must compete with traditional financial
institutions, but also with other business corporations that have begun to
deliver competing financial services. Competition for banking services is
1
based on price, nature of product, quality of service, and in the case of
certain activities, convenience of location.
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 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 Board and any additional
information that the Federal Reserve Board may require pursuant to the
Bank. The Federal Reserve Board 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 Board'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.
2
PERMITTED NON-BANKING ACTIVITIES
The Federal Reserve Board 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. While the types of
permissible activities are subject to change by the Federal Reserve Board,
the principal non-banking activities that presently may be conducted by a
bank holding company are:
1. Making, acquiring or servicing loans and other extensions of
credit for its own account or for the account of others, such as would be
made by the following types of companies: consumer finance, credit card,
mortgage, commercial finance and factoring.
2. Operating as an industrial bank, Morris Plan or industrial loan
company in the manner authorized by state law as long as the institution
does not both accept demand deposits and make commercial loans.
3. Operating as a trust company in the manner authorized by federal
or state law as long as the institution does not make certain types of
loans or investments or accept deposits, except as may be permitted by the
Federal Reserve Board.
4. Subject to certain limitations, acting as an investment or
financial advisor to investment companies and other persons.
5. Leasing personal and real property or acting as agent, broker, or
advisor in leasing property, provided that it is reasonably anticipated
that the transaction will compensate the lessor for not less that the
lessor's full investment in the property.
6. Making equity and debt investments in corporations or projects
designed primarily to promote community welfare.
7. Providing to others financially oriented data processing or
bookkeeping services.
8. Subject to certain limitations, acting as an insurance agent or
broker in relation to insurance for itself and its subsidiaries or for
insurance directly related to extensions of credit by the bank holding
company system.
9. Subject to certain limitations, acting as underwriter for credit
life insurance and credit accident and health insurance that is directly
related to extensions of credit by the bank holding company system.
10. Providing courier services of a limited character.
11. Subject to certain limitations, providing management consulting
advice to nonaffiliated banks and nonbank depository institutions.
12. Selling money orders having a face value of $1,000 or less,
travelers' checks and United States savings bonds.
13. Performing appraisals of real estate.
14. Subject to certain conditions, acting as intermediary for the
financing of commercial or industrial income-producing real estate by
3
arranging for the transfer of the title, control and risk of such a real
estate project to one or more investors.
15. Providing securities brokerage services, related securities
credit activities pursuant to Federal Reserve Board Regulation T and
incidental activities such as offering custodial services, individual
retirement accounts and cash management services, if the securities
brokerage services are restricted to buying and selling securities solely
as agent for the account of customers and do not include securities
underwriting or dealing or investment advice or research services.
16. Underwriting and dealing in obligations of the United States
general obligations of states and their political subdivisions and other
obligations such as bankers' acceptances and certificates of deposit.
17. Subject to certain limitations, providing by any means, general
information and statistical forecasting with respect to foreign exchange
markets; advisory services designed to assist customers in monitoring,
evaluating and managing their foreign exchange exposures; and certain
transactional services with respect to foreign exchange.
18. Subject to certain limitations, acting as a future commission
merchant in the execution and clearance on major commodity exchanges of
futures contracts and options on future contracts for bullion, foreign
exchange, government securities, certificates of deposit and other money
market instruments.
19. Performing personal property appraisals that require expertise
regarding all types of personal and business property, including intangible
property such as corporate securities.
20. Subject to certain limitations, providing commodity trading and
futures commission merchant advice.
21. Providing consumer financial counseling that involves counseling,
educational courses and distribution of the instructional materials to
individuals on consumer-oriented financial management matters, including
debt consolidation, mortgage applications, bankruptcy, budget management,
real estate tax shelters, tax planning, retirement and estate planning,
insurance and general investment management, as long as this activity does
not include the sale of specific products or investments.
22. Providing tax planning and preparation advice such as strategies
designed to minimize tax liabilities and includes, for individuals,
analysis of the tax implications of retirement plans, estate planning and
family trusts. For corporations, tax planning includes the analysis of the
tax implications of mergers and acquisitions, portfolio mix, specific
investments, previous tax payments and year-end planning. Tax preparation
involves the preparation of tax forms and advice concerning liability based
on records and receipts supplied by the client.
23. Providing check guaranty services to subscribing merchants.
24. Subject to certain limitations, operating a collection agency and
credit bureau.
4
25. Acquiring and operating thrift institutions, including savings
and loan associations, building and loan associations and FDIC-insured
savings banks.
The Bank operating in the state of Pennsylvania is also subject to the
Banking Code of 1965, as amended, ("Code") under the supervision of the
Pennsylvania Department of Banking. The Company is permitted by the Code,
after March 4, 1990, to control an unlimited number of banks. However, the
Company would be required under the Act to obtain the prior approval of the
Federal Reserve Board before it could acquire all or substantially all of
the assets of any bank, or acquire ownership or control of any voting
shares of any bank other than the Bank, if, after such acquisition, it
would own or control more than five percent (5%) of the voting shares of
such bank. The Bank Holding Company Act does not permit the Federal
Reserve Board to approve the acquisition by the Company or any subsidiary
of any voting shares of, or interest in, or all or substantially all of the
assets of, any bank located outside the Commonwealth of Pennsylvania,
unless the acquisition is specifically authorized by the laws of the state
in which that bank is located.
In addition, after March 4, 1990, the Code authorizes reciprocal
interstate banking without any geographical limitation. Reciprocity
between states exists when a foreign state's law authorizes Pennsylvania
bank holding companies to acquire banks or bank holding companies located
in that state on terms and conditions substantially no more restrictive
than those applicable to such an acquisition by a bank holding company
located in that state. After March 4, 1990, assuming that the state
banking statutes in Alaska, Delaware, Idaho, Indiana, Kentucky, Maine,
Maryland, Michigan, New Jersey, Ohio, New York, Oregon, Rhode Island, Utah,
Vermont, Washington, West Virginia and Wyoming are not amended, interstate
ownership of banks and bank holding companies in each of those states and
Pennsylvania will be authorized. Other states are also considering
legislation to authorize reciprocal interstate banking. Congress has
passed interstate banking legislation that will accelerate the
authorization for interstate banking.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 is discussed in detail on page 37 of Management's Discussion and
Analysis of the 1994 Annual Report.
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
subsidiary. Certain limitations exist on the availability of the
subsidiary'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 11 of the 1994 Annual Report.
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
5
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 Board, the FDIC
and the Comptroller have issued certain risk-based capital guidelines,
which supplement existing capital requirements and have been discussed on
page 35 of the 1994 Annual Report to the shareholders.
The Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA") was a major reform and financing legislation enacted into
law in order to restructure the regulation of the thrift industry and to
address the financial condition of the Federal Saving and Loan Insurance
Corporation ("FSLIC"). FIRREA, among other things, eliminates many of the
distinctions between commercial banks and thrift institutions and holding
companies thereof, reinforces certain competitive advantages of commercial
banks over thrift institutions and allows bank holding companies to acquire
savings and loan institutions.
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.
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 institution 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
6
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 Board
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.
The FDIC Board of Directors has adopted the final rule implementing
statutory requirements for external audits and audit committees of insured
banks and thrifts. The final rule, which was effective July 2, 1993,
implements Section 112 of the FDICIA. These new audit and reporting
requirements apply only to an institution with $500 million or more in
total assets as of the beginning of each fiscal year after December 31,
1992. The Company is currently below $500 million in total assets.
FDICIA also requires that banking agencies reintroduce loan-to-value
("LTV") ratio regulations which were previously repealed by the 1982 Act.
LTV's will limit the amount of money a financial institution may lend to a
borrower, when the loan is secured by real estate, to no more than a
percentage to be set by regulation of the value of the real estate.
A separate subtitle within FDICIA, called the "Bank Enterprise Act of
1991", requires "truth-in-savings" on consumer deposit accounts so that
consumers can make meaningful comparisons between the competing claims of
banks with regard to deposit accounts and products. Beginning on March 23,
1993, the Bank was required to provide information to depositors concerning
the terms of their deposit accounts, and in particular, to disclose the
annual percentage yield. There has been some minor operational cost of
complying with the Truth-In-Savings law.
Management believes that full implementation of FDICIA will have no
material impact on liquidity, capital resources or reported results of
operation in future periods.
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 Bank. It cannot be predicted whether
any such legislation will be adopted or, if adopted, how such legislation
would affect the business of the Bank. As a consequence of the extensive
regulation of commercial banking activities in the United States, 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.
7
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.
INVESTMENT PORTFOLIO
The investment portfolio is discussed in detail in Footnote 3, page 16
and pages 29 and 30 of Management's Discussion and Analysis of the 1994
Annual Report.
Investments which have been subject to Moody or Standard and Poor
rating changes are reviewed with the investment committee, board of
directors and an independent investment advisor. 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.
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
Historically loans have been originated by the Bank to customers in
North Central Pennsylvania and the Southern Tier of New York. Loans have
been originated primarily through direct loans to our existing customer
base with new customers generated by referrals from real estate brokers,
building contractors, attorneys, accountants and existing customers. The
Bank also does a limited amount of indirect loans though new and used car
dealers in the primary lending area.
All lending is governed by a lending policy which is developed and
maintained by management and approved by the board of directors. The
Bank's lending policy regarding real estate loans is that the maximum
mortgage granted on owner occupied residential property is 80% of the
appraised value or purchase price (whichever is lower) when secured by the
first mortgage on the property. Home equity lines of credit or second
mortgage loans are originated subject to maximum mortgage liens against the
property of 75% of the current appraised value. The maximum term for
mortgage loans is 25 years for one-to four- family residential property and
15 years for commercial and vacation property.
The Company has begun to sell more conforming mortgage loans as
discussed in Management's Discussion and Analysis page 28. These loans are
made for various terms at competitive interest rates.
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.
8
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 have been made for local services such as education,
water, sewer, solid waste, and health services. The Bank prior to the Tax
Reform Act of 1986 also was 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
with due consideration being given any future economic changes.
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 normally consists of motor vehicles and liens on real
property. Unsecured loans are made on a limited basis and in amounts
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, 1994 was $2,675,946.
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%
9
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 nor 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.
See further discussion in the Annual Report, page 17 Footnote 4, and
pages 28 and 29 of Management's Discussion and Analysis.
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.
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.
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 pages 33
and 34 of Management's Discussion and Analysis.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
A requirement of management in any financial institution is to ensure
liquidity is maintained to satisfy contractual liabilities, meet withdrawal
requirements of depositors, fund operations and provide for customers'
10
credit needs. The adequacy of such liquidity is measured by examining the
asset and liability 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. A table indicating the Company's current gap position is in
the Management's Discussion and Analysis section page 36 of the 1994 Annual
Report.
It is management's policy to maintain a balanced interest rate
sensitivity position (i.e., an interest rate sensitivity ratio in the range
of positive 1.25 to negative .75), although certain deviations may occur at
given points in time. Management believes that such a policy provides the
basis for achieving stability in interest earnings regardless of interest
rate volatility.
The Asset/Liability Management ("ALM") Committee of the Company is
charged with managing rate sensitivity to enhance net interest income and
margin while maintaining an asset/liability mix which balances liquidity
needs and interest rate risk and is discussed in further detail on pages 35
and 36 in the Management's Discussion and Analysis section of the 1994
Annual Report. The ALM Committee endeavors to control interest rate risk
through proper 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.
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).
CAPITAL ADEQUACY
A description of the Company's capital adequacy is presented on pages
19 and 20, Footnote 11 and in pages 35 of the Management's Discussion and
Analysis section of the 1994 Annual Report.
11
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
The net book value for the above properties as of December 31, 1994
was $3,159,000. The properties are recently constructed and, with the
exception of the Mansfield office, 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 36 of the 1994 Annual Report.
All of the facilities are equipped with current technological improvements
for data and word processing.
Inflation does have some 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
12
contemplated against the Company and its subsidiary by government
authorities.
Item 4-Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders.
Part II
Item 5-Market for the Registrant's Common Stock and Related Stockholder
Matters
The Company's common stock is traded by local brokerage firms and is
not listed on any stock exchange.
Market and dividend information can be found on page 24 and 40 of the
Company's 1994 Annual Report to the Stockholders which is filed as Exhibit
13 hereto and is incorporated in its entirety by reference under this Item
5.
The Company has paid dividends since the effective date of its
formation as a bank holding company. It is the present intention of the
Company's Board of Directors to continue the dividend payment policy;
however, future dividends must necessarily depend upon earnings, financial
condition, and appropriate legal restrictions and other factors relevant at
the time the Board of Directors of the Company considers dividend policy.
Cash available for dividend distributions to shareholders of the Company
must initially come from dividends paid by the Bank to the Company.
Therefore, the restrictions on the Bank's 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 the
total assets are greater than the sum of its total liabilities.
As of March 20, 1995, the Company has approximately 1,394
shareholders of record.
Item 6-Selected Financial Data
The information required by this item is incorporated by reference to
page 24 of the 1994 Annual Report.
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 27 - 37 of the 1994 Annual Report.
Item 8-Financial Statements and Supplementary Data
The information required by this item is incorporated by reference to
pages 11 - 22 of the 1994 Annual Report.
Financial Statements:
Consolidated Balance Sheet as of December 31, 1994 and 1993
13
Consolidated Statement of Income for the Years Ended
December 31, 1994, 1993 and 1992
Consolidated Statement of Changes in Stockholders' Equity for the
Years Ended December 31, 1994, 1993 and 1992
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
Item 9-Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Information appearing in the definitive Proxy Statement at Exhibit 99
under the caption "Independent Public Accountants" to the Annual Meeting of
Security Holders to be held April 18, 1995 is incorporated herein by
reference in response to this item.
Part III
Item 10-Directors and Executive Officers of the Registrant
Information appearing in the definitive Proxy Statement at Exhibit 99
under the caption "Information as to Nominees, Directors and
Executive Officers" and "Principal Officers" to the Annual
Meeting of Security Holders to be held April 18, 1995 is
incorporated herein by reference in response to this item.
Item 11-Executive Compensation
Information appearing in the definitive Proxy Statement at Exhibit 99
under the caption "Remuneration of Officers and Directors"
related to the Annual Meeting of Security Holders to be held
April 18, 1995 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 Exhibit 99
under the caption "Principal Beneficial Owners of the
Corporation's Stock" related to the Annual Meeting of Security
Holders to be held April 18, 1995 is incorporated herein by
reference in response to this item.
Item 13-Certain Relationships and Related Transactions
Information appearing in the definitive Proxy Statement at Exhibit 99
under the caption "Certain Transactions" related to the Annual
Meeting of Security Holders to be held April 18, 1995 is
incorporated herein by reference in response to this item.
Part IV
Item 14-Exhibits, Financial Statement Schedules and Reports on Form 8-K
Documents Filed as Part of this Report:
14
14(a)1-Financial Statements. The following consolidated financial
statements of Citizens Financial Services, Inc. and subsidiary included in
the 1994 Annual Report are incorporated by reference in Item 8:
Consolidated Balance Sheet as of December 31, 1994 and 1993
Consolidated Statement of Income for the Years Ended
December 31, 1994, 1993 and 1992
Consolidated Statement of Changes in Stockholders' Equity for the
Years Ended December 31, 1994, 1993 and 1992
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
14(a)2-Financial Statement Schedules. The following consolidated financial
statement schedules of Citizens Financial Services, Inc. and subsidiary are
incorporated by reference in Item 8:
None
All other schedules for which provision is made in applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions and are inapplicable, and therefore
have been omitted.
14(a)3-Exhibits:
(3)(i) - Articles of Incorporation of the Corporation, filed as
Exhibit 3A of the registration statement on Form S-14 and
have not changed, incorporated herein by reference
(3)(ii)(a) - By-laws of the Corporation, filed as Exhibit 3B of
the registration statement on Form S-14, incorporated
herein by reference
(3)(ii)(b) - By-laws of the Corporation, as amended and filed with
December 31, 1991 Form 10-K, incorporated herein by
reference
(4) - Instruments Defining the Rights of Security Holders as
filed in the registration statement on Form S-14 are
incorporated herein by reference thereto.
(13) - Annual Report to Stockholders for the year ended December
31, 1994.
(16) - Letter re: change in certifying accountants - Information
appearing in the definitive Proxy Statement at Exhibit 99
under the caption "Independent Public Accountants" to the
Annual Meeting of Security Holders to be held April 18, 1995
is incorporated herein by reference in response to this
item.
(21) - Subsidiaries of Citizens Financial Services, Inc.
(23) - Opinions of Independent Accountants
15
(27) - Financial Data Schedule
(99) - Definitive Proxy Statement, notice of meeting, and form of
proxy for the Annual Meeting to be held April 18, 1995,
previously filed with the Commission and incorporated herein
by reference.
14(b)-No current report on Form 8-K was filed by the Registrant during the
fourth quarter of the 1994 fiscal year.
14(c)-The exhibits required by this Item are listed under Item 14(a) above.
14(d)-Not applicable.
16
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, thereunto 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 21, 1995 Date: March 21, 1995
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 21, 1995
Richard E. Wilber, President, Chief Executive Officer, Director
(Principal Executive Officer)
___________________________________
Robert E. Dalton, Director
/s/ Carol J. Bond March 21, 1995
Carol J. Bond, Director
/s/ Lowell Coolidge March 21, 1995
Lowell Coolidge, Director
/s/ Rudolph J. van der Hiel March 21, 1995
Rudolph J. van der Hiel, Director
/s/ John Novak March 21, 1995
John Novak, Director
/s/ Bruce L. Adams March 21, 1995
Bruce L. Adams, Director
/s/ William D. Van Ettan March 21, 1995
William D. Van Ettan, Director
/s/ Larry Croft March 21, 1995
Larry Croft, Director
/s/ Robert J. Landy March 21, 1995
Robert J. Landy, Director
/s/ Thomas C. Lyman March 21, 1995
Thomas C. Lyman, Treasurer
(Principal Financial and Accounting Officer)
17
LIST OF ATTACHED EXHIBITS
13 Annual Report to Stockholders for the year ended December 31, 1994.
21 Subsidiaries of Citizens Financial Services, Inc.
23 Opinions of Independent Accountants
27 Financial Data Schedule