EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
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THE SPIRIT
OF INDEPENDENCE
CITIZENS
FINANCIAL SERVICES
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INCORPORATED
Annual Report 1994
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A VISION FOR THE FUTURE
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Our new image represents the principles and ideals that
were important to America's first citizens more than 200
years ago: dedication, hard work, and ultimately,
independence.
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It was over two centuries ago. America's first citizens rode hard into
the night to sound the call to freedom, and a new nation was born. Now that
same "Spirit of Independence" lives on at First Citizens National Bank.
Today, First Citizens operates in an emerging new banking era. Bank
deregulation is accelerating the trend toward merger and acquisition. As a
result, our region's banking customers increasingly find themselves treated
much like the English Crown treated America's early colonists. Major
competitors now deal with customers distantly and impersonally. And major
banking decisions by these same competitors are now being forced far from our
rolling Endless Mountains. We believe their policies run counter to the
needs and expectations of the fiercely independent citizens who inhabit this
region.
Meanwhile, First Citizens is still doing business the way we've always
done it. Fairly. Honestly. And personally. Ready to extend a helping
hand. With local control and local decisions. And we believe ours is the
correct vision for this region--the true vision of the future.
And so First Citizens enters this new banking era with pride for our
past achievements, confidence in our future, and a renewed strategic
commitment to the revolutionary idea of banking independence.
As we begin 1995, it is with great pride that we unveil our new
corporate identity--a bold new symbol of strength, energy, and dedication to
the Spirit of Independence which we believe holds the real key to the
tremendous new and emerging opportunities for our banking growth in this
region, and beyond.
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At First Citizens we are committed to taking the Twin
Tiers into the 21st century of banking. Our plan
includes the introduction of innovative products while
capitalizing on the great service our customers have come
to expect from First Citizens.
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TO OUR SHAREHOLDERS, CUSTOMERS AND EMPLOYEES:
It is a pleasure to present this 1994 annual report and to review some of our
achievements. Although we have set new records in assets, earnings and
dividends in recent years, let's not lose sight of the individuals who work
hard to produce this consistent success.
Let me first acknowledge the wisdom and guidance of the Board of Directors.
Their personal involvement and dedication to your interests have been
exemplary. Phrases like "good judgment" and "common sense" are often
overused, but truly characterize each and every member. In addition, the
contribution of local board members is invaluable, not only for support of
office managers and employees, but also to the customers and communities we
serve. Few banks have such a unique grass roots support structure. Unlike
First Citizens, many competitors are consolidating decision-making away from
their customers and community.
I believe our employees are the reason customers select and maintain their
loyalty with this bank. There is no doubt that customer confidence and
satisfaction is built on the quality service First Citizens' employees
provide each day. Our employees understand how critical high-quality,
personalized service is to this bank's long term success.
All of these groups are devoted to a singular purpose--service to our
customers and communities that distinguishes us from the others. In so
doing, new milestones can be achieved with greater regularity.
FINANCIAL PERFORMANCE
Over the past twelve months, total assets have grown $16.3 million to $232.5
million. Deposits and loans grew $3.5 million and $14.5 million to $194.5
and $154.8 million respectively. Of significance was $3.3 million growth in
commercial loans, $2.9 agricultural real estate loans and a $5.2 million
increase in residential mortgage loans. Certificates of deposit were the
main source of deposit growth, especially in the 15 month and 27 month "roll-
up" instruments. Because loan growth outpaced deposit growth, we achieved
the necessary funding from Federal Home Loan Bank borrowings. Assets managed
in our Trust and
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quarter of page]
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A MESSAGE FROM THE PRESIDENT
We work hard for our customers' financial independence.
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Investment Services Department grew $7.8 million to $35.6 million with the
majority of growth in investment management accounts for local school
districts.
The quality of our loan portfolio remains strong. Total past due loans
declined $583 thousand to $3.2 million and represents 2% of total loans, the
lowest yearend past due percentage in many, many years. Loans not accruing
interest total $1.6 million and, although higher than desired, are composed
of loans in which underlying collateral is sufficient to avoid significant
loss. Our allowance for possible loan losses total $1.7 million representing
1.1% of the loan portfolio. Net loan losses in 1994 were a very moderate $50
thousand.
New income grew 8.3% to a record $2.6 million versus $2.4 million in 1993.
Major influences were a $690 thousand increase in net interest income, a $60
thousand decline in the provision for possible loan losses, and a very modest
2% increase in other operating expenses. Although we did not add full-time
equivalent employees in 1994, our salary and benefit expense grew $300
thousand as a result of hirings in 1993.
Total stockholders' equity was $18.9 million, reflecting a $560 thousand
increase over 1993. Such growth was a result of $2.6 million ($1.97 per
share) in net income less dividends declared (81 cents per share) and an
after-tax reduction of $974 thousand caused by the market value decline in
the available-for-sale investment portfolio. This investment portfolio
adjustment was a direct result of interest rate increases experienced in
1994. Stockholders' equity represents 8.13% of total assets--well above the
5% ratio recognized by regulatory agencies as "well-capitalized."
The per share market price of our common stock carries a recent bid price of
$22.63 and ask price of approximately $24.00. This represents a 22% increase
over the $17.75 and $20.50 respective prices at yearend 1993.
OPERATING AND STRATEGIC INITIATIVES
We have undertaken a number of actions to enhance customer service and foster
continued growth of our corporation. In early 1994, we completed the
installation of our eighth MAC automated teller machine. Our machines are
part of the MAC regional and PLUS national networks.
Added improvement in customer service came on April 9, 1994 when the Sayre
office expanded hours to include Saturday morning--becoming the only
commercial bank in Sayre to offer this important convenience.
Considerable attention was devoted to examining new technology and how to
enhance our service delivery and internal efficiency. After careful
evaluation, we decided to invest in a new processing and imaging system.
This investment will not only allow more efficient process of daily work, but
also the evaluation of uncollected funds within each deposit account. The
by-product is better protection against checks drawn on non-sufficient funds
and reduced interest expense on funds not yet cleared through the Federal
Reserve system. Furthermore, we will have the ability to offer the return of
check images rather than physical checks. This investment will substantially
lessen statement preparation cost and ever-increasing postage expense.
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We're part of the region; our intimate knowledge of the
people, the businesses, and the unique character of the
Twin Tiers means we're there with the right
products...the right services.
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New products were introduced to broaden the financial services available to
consumers. We now provide confirming mortgage programs (including "jumbo" and
specialized mortgages for low to moderate income home buyers), a full range
of mutual fund services from the Fidelity Mutual Fund family and a unique
program for financing small business accounts receivable. We believe these
services will be well received and support further growth.
We have also engaged a professional firm to enhance our marketing
effectiveness. We believe even greater growth can be achieved with more
distinctive advertising and a more definitive image.
HUMAN RESOURCES
As mentioned before, any corporation's success depends on the quality of its
directors and employees. In April 1994, Mr. Robert G. Messinger retired as
Chairman of this corporation. He served as a director of our holding company
since its formation in 1984, and director of First Citizens National Bank
since 1960. His dedication and support were always exemplary, and his
service will be greatly missed.
New local board members joined our bank--Mr. Rob Carleton (Wellsboro) and Mr.
Russell Knight (Sayre). Mr. Carleton is the owner and business manager of
the Carleton Home, a 26-bed skilled care nursing facility in Wellsboro. Mr.
Knight is President of Robert Packer Hospital. These gentlemen joined us due
to retirements of Dr. Michael Bowser, Mr. Hayward Coldiron and Dr. Richard
Ganley, whose service was greatly appreciated.
THE FUTURE
At first Citizens we are committed to taking the Northern Tier into the 21st
century of banking. Our plan includes the introduction of innovative
products while capitalizing on the great service our customers have come to
expect from First Citizens. As we look to 1995 and beyond, many challenges
and opportunities may confront us. The surge in interest rates during 1994
will likely dampen credit demand. Consumers who invested in non-bank
products (mutual funds, etc.) have suffered through a poor performance year
and may return to bank investments without market value risk. If interest
rates continue to rise, net interest income could deteriorate as our cost of
funds increase and loan demand declines.
The recent passage of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 may be the most significant banking legislation in
many years. The key provisions pertain to interstate banking and interstate
branching. In September 1995, bank holding companies may acquire banks in
other states without regard to state law. Furthermore, banks can merge with
banks in another state beginning in June 1997. States may adopt laws
preventing interstate branching but, if so, no out-of-state bank can
establish a branch in such state and no bank in such state may branch outside
the state. The ramifications are expected to be dramatic as banks branch
across state lines and collapse existing affiliates into single bank charters
producing massive branch
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plaque to an employee of the corporation, center right third of page, approx.
2.5 inch square]
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President Richard Wilber presents Linda L. Nowak,
Teleservices Supervisor at First Citizens, Mansfield,
with a plaque commemorating her Employee of the Year
honor. Employed since 1971, Nowak continues to show her
dedication and concern to all First Citizens employees
and customers.
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networks. It is predicted that unprecedented consolidation will occur as the
industry strives for greater cost efficiency and market share expansion.
From First Citizens' viewpoint, such consolidation by competitors may well
enhance our competitive position--customers do not prefer to become a
"number" in very large banking corporations. Further, the larger banks may
pursue branch acquisitions in markets believed to possess greater growth
potential and shed branches in existing markets. Here again, greater
opportunities may result for our corporation's market growth.
Another major influence on bank earnings over the next year is the probable
reduction in F.D.I.C insurance premiums. You may recall that minimum
premiums were 8 cents per hundred in 1990 and rose to 23 cents per hundred
over the past few years. The F.D.I.C has reported that insurance reserves
are near the desired level and may soon allow premium reductions back to
earlier levels.
As you can see, we remain optimistic that our success can be continued in a
rapidly changing environment. We look forward to the opportunities that seem
evident in a somewhat uncertain environment.
Sincerely,
/s/ Richard E. Wilber
Richard E. Wilber
President
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Local decisions. Local control. Like the nation's first
citizens, the people of this region are fiercely
independent. They expect the same from their bank.
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THE POWER OF INDEPENDENCE BANKING
With offices stretching across the Twin Tiers, our independent "community
banking system" bears resemblance to the original thirteen American states of
more than 200 years ago--united by a common purpose, but organized to serve
the unique interests of the citizens of each community office.
Local decisions. Local control. Like the nation's first citizens, the
people of this region are fiercely independent. They expect the same from
their bank. It comes down to knowing our customers. And letting them know
us. Because they appreciate our knowledge of this region and our ability to
quickly react to their opportunities and help them achieve their financial
goals.
People, performance and personal service all are First Citizens hallmarks.
Our reputation as a friendly and knowledgeable hometown banker is evident in
all First Citizens operations.
This philosophy of independent banking evolved from our long-standing
strength and success of our local office operations. Their ability to meet
the needs of their distinct communities with efficient, personal service make
them the key part of the First Citizens system. By investing in their
respective communities, our local offices have strengthened both the region
and their own stature.
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The Statue of Liberty is recognized worldwide as a symbol
of American political and economic freedom. This symbol
stands as an inspiration for First Citizens in our quest
for financial freedom for our customers and shareholders.
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INDEPENDENCE...THE KEY TO MARKET PENETRATION
One common thread links our entire banking system.
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Today, First Citizens operates under a "balanced approach" management
philosophy rooted firmly in three guiding principles:
SOUND STRATEGIC DIRECTION
The role of First Citizens' strategic decision-making involves participation
of all divisions of the corporation working together as a management team.
This enables the entire system to constantly keep abreast of the shifting and
emerging marketing opportunities.
OPERATIONAL INDEPENDENCE
The authority for implementing these strategies is placed squarely in the
hands of our community offices, whose directors and managers are fundamental
to operational results. This concept maximizes the system's ability to
respond quickly and immediately to local markets while providing true "close-
to-the-customer" banking services.
AN OBSESSION WITH CUSTOMER SERVICE
Every First Citizens product, program, and service reflects our driving
ambition to not only meet but exceed our customers' banking expectations.
This commitment results in key competitive advantages in products, systems,
employee training, and technological support.
Our philosophy is evident in everything we do. And it's paying off.
The marketplace is demonstrating that consumers, who face a multitude of
choices in both financial services and suppliers, will seek the banking
system providing consistently excellent service at competitive rates.
Through the pursuit of these goals, First Citizens is staying close to its
market, anticipating and responding to our consumers' needs.
The challenge of communicating our values to the marketplace will be felt for
years to come in First Citizens' new positioning and advertising campaigns.
As we deliver our message of Independence Banking across the Twin Tiers, our
office managers, armed with thorough, up-to-date training, can present their
customers the products and services that will help them realize their
financial goals.
Though steeped in traditional service objectives, today technology is an
integral part of this institution's present and future growth. It's playing
a vital role in daily operations, improving the quality of our services,
reducing our costs, giving us a competitive market advantage.
As First Citizens is preparing now to introduce exciting new technologies
which provide innovative new services, it is always with a commitment to
provide methods for still greater financial freedom and choices for our
customers.
New products, services and technologies will reaffirm our position as the
Twin Tier's leading banking system dedicated to customer independence. We
will continue to explore new market opportunities, creating banking
convenience for our customers while increasing profitability for our
shareholders.
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As hometown bankers, our customers and employees get to
know each other on a first-name-basis. The future growth
of our bank depends on these invaluable relationships we
are developing now with our customers.
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From the earliest stages of American history, Pennsylvania and New York
played historic roles in the political and economic development of the United
States. Today the Twin Tiers is projected to play a new and important
emerging role in the growth of both states as the nation looks ahead now
toward the 21st Century.
Current economic forecasts point toward substantial new growth in America's
rural heartland. As a leading natural resource renowned for its dramatic
outdoor recreational features, the Twin Tiers region is expected to become a
growing center of economic development in the Northeast. And as a result,
the region stands to profit from the related business growth that will
accompany this development in the years to come.
With a productive, stable workforce, available industrial sites, abundant,
low-cost utilities, and easy access to America's great urban markets, the
Twin Tiers provide the opportunity for the high-quality and low-cost
lifestyle favored by so many of America's new generation of business leaders,
the big-spending "baby boomers." The heritage of small-town values is
preserved in the intimate, close-knit communities, which also offer a scenic
outdoor playground for hunters, hikers, fisherman, sailors, golfers, skiers,
and nature enthusiasts. Today First Citizens enjoys the competitive
advantage of having already established itself as a regional banking leader,
able to build on the cornerstone of community support laid through a strong
system of independent community offices.
As a result, our tradition of corporate banking leadership combined with
competitive banking products and services has perfectly positioned First
Citizens to ride the expected future growth wave of development across the
region.
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small silhouettes of a colonial rider on horseback marking the bank's branch
locations, from left to right, at Genesee, Ulysses, Wellsboro, Blossburg,
Mansfield, Troy, and Sayre, across center third of page.]
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MAPPING THE PATH TO GROWTH
Local decisions...local control.
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Today we anticipate emerging new markets not only through our continued
geographic penetration--but through our expansion into emerging economic
sectors as well. One example: we view the Small Business segment as an
important and growing opportunity for First Citizens. Growth in economic
performance from new and existing small businesses leads all business
segments nationally; at First Citizens, we see that trend extending to the
Twin Tiers, as well.
First Citizens will lead the region in promoting Small Business growth
through special banking services tailored to these companies via products
like flexible loan packages, employee investment and pension plans, mutual
fund investing, and more. We believe that such a commitment to Small
Business growth can help assure both the region's and our own financial
future.
The opening of the Twin Tiers is underway. And today, First Citizens is in
a leading position to profit from the region's emerging new importance and
economic expansion. As an institution valued for our approach to "Hometown
Banking" and intense customer service, our commitment to building "one-to-
one" banking relationships with our growing base of banking customers assures
our continued growth for years to come.
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The nation's symbol of freedom, the American Bald Eagle
has made its way back from the brink of extinction.
Naturalists have now reported that this magnificent bird
of prey, indigenous to our region, has returned to the
Twin Tiers' scenic highlands.
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1994 Annual Report
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FINANCIAL HIGHLIGHTS
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(dollars in thousands, except per share data)
1994 1993
BALANCE SHEET
Assets........................ $232,537 $216,237
Deposits...................... 194,478 191,013
Net Loans..................... 154,848 140,391
Stockholders' Equity.......... 18,903 18,340
STATEMENT OF INCOME
Interest Income............... 17,336 16,551
Interest Expense.............. 7,944 7,853
Net Interest Income........... 9,392 8,698
Net Income.................... 2,625 2,424
PER SHARE DATA
Net Income.................... 1.97 1.82
Cash Dividends................ 0.81 0.77
TRUST DEPARTMENT
Trust Assets Managed.......... 35,596 27,789
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income, (3) stockholders' equity, (4) deposits, (5) net loans, and (6) cash
dividends declared, each from 1990 through 1994. Tabular representations of
those graphs are set forth as follows:
TOTAL ASSETS
(Dollars in Thousands)
1990 1991 1992 1993 1994
$172,537 $186,079 $202,155 $216,237 $232,537
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NET INCOME
(Dollars in Thousands)
1990 1991 1992 1993 1994
$1,247 $1,318 $2,248 $2,424 $2,625
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STOCKHOLDERS' EQUITY
(Dollars in Thousands)
1990 1991 1992 1993 1994
$14,240 $14,898 $16,329 $18,340 $18,903
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DEPOSITS
(Dollars in Thousands)
1990 1991 1992 1993 1994
$153,585 $164,402 $178,033 $191,013 $194,478
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NET LOANS
(Dollars in Thousands)
1990 1991 1992 1993 1994
$111,198 $120,747 $128,326 $140,391 $154,848
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CASH DIVIDENDS DECLARED
(Dollars in Thousands)
1990 1991 1992 1993 1994
$800 $908 $960 $1,023 $1,088
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Citizens Financial Services, Inc.
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CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
December 31, 1994 and 1993
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(in thousands) 1994 1993
ASSETS:
Cash and due from banks:
Noninterest-bearing.............................................. $ 5,479 $ 4,819
Interest-bearing................................................. 32 793
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Total cash and cash equivalents.................................... 5,511 5,612
Available-for-sale securities...................................... 14,640 16,171
Held-to-maturity securities (estimated market value 1994,
$47,897; 1993, $48,821)......................................... 49,617 46,474
Loans (net of allowance for possible loan losses
1994, $1,721; 1993, $1,516)..................................... 154,848 140,391
Foreclosed assets held for sale.................................... 168 231
Premises and equipment............................................. 4,124 3,964
Accrued interest receivable and other assets....................... 3,629 3,394
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TOTAL ASSETS....................................................... $232,537 $216,237
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LIABILITIES:
Deposits:
Noninterest-bearing.............................................. $ 14,495 $ 14,779
Interest-bearing................................................. 179,983 176,234
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Total deposits..................................................... 194,478 191,013
Borrowed funds..................................................... 16,030 3,872
Accrued interest payable........................................... 1,692 1,718
Dividends payable.................................................. 547 516
Other liabilities.................................................. 887 778
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TOTAL LIABILITIES.................................................. 213,634 197,897
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STOCKHOLDERS' EQUITY:
Common Stock
$1.00 par value; authorized 2,000,000 shares;
issued and outstanding 1,334,543 and 1,321,887 shares
in 1994 and 1993, respectively................................... 1,335 1,322
Additional paid-in capital......................................... 6,224 5,976
Retained earnings.................................................. 11,708 10,432
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TOTAL.............................................................. 19,267 17,730
Unrealized holding (losses) gains on
available-for-sale securities...................................... (364) 610
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TOTAL STOCKHOLDERS' EQUITY......................................... 18,903 18,340
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $232,537 $216,237
==========================
See notes to consolidated financial statements.
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1994 Annual Report
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CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
Years Ended December 31, 1994, 1993 and 1992
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(in thousands, except per share data) 1994 1993 1992
INTEREST INCOME:
Interest and fees on loans......................................... $12,918 $12,053 $12,218
Interest on federal funds sold..................................... 0 1 64
Interest on interest-bearing deposits with banks................... 25 54 22
Interest and dividends on investments:
Taxable.......................................................... 4,046 4,045 3,934
Nontaxable....................................................... 281 324 381
Dividends........................................................ 66 74 65
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TOTAL INTEREST INCOME.............................................. 17,336 16,551 16,684
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INTEREST EXPENSE:
Interest on deposits............................................... 7,521 7,670 8,651
Interest on federal funds purchased and
and other borrowings........................................... 423 183 244
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TOTAL INTEREST EXPENSE............................................. 7,944 7,853 8,895
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NET INTEREST INCOME................................................ 9,392 8,698 7,789
Provision for possible loan losses................................. 255 315 324
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NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES............................................. 9,137 8,383 7,465
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OTHER OPERATING INCOME:
Service charge income.............................................. 707 685 644
Trust income....................................................... 204 191 191
Other income....................................................... 162 140 156
Realized securities gains, net..................................... 63 50 35
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TOTAL OTHER OPERATING INCOME....................................... 1,136 1,066 1,026
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OTHER OPERATING EXPENSES:
Salaries and employee benefits..................................... 3,088 2,782 2,383
Occupancy expenses................................................. 391 363 352
Furniture and equipment expenses................................... 599 600 548
FDIC insurance expense............................................. 406 405 356
Other expenses..................................................... 2,006 1,967 1,784
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TOTAL OTHER OPERATING EXPENSES..................................... 6,490 6,117 5,423
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Income before provision for income taxes........................... 3,783 3,332 3,068
Provision for income taxes......................................... 1,158 908 820
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NET INCOME......................................................... $ 2,625 $ 2,424 $ 2,248
==================================
EARNINGS PER SHARE................................................. $ 1.97 $ 1.82 $ 1.68
==================================
See notes to consolidated financial statements.
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Citizens Financial Services, Inc.
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CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1994, 1993 and 1992
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Unrealized
Additional Holding
Common Stock Paid-in Retained Gains/(Losses)
(in thousands, except share data) Shares Amount Capital Earnings on Securities Total
Balance, December 31, 1991................ 1,296,938 $1,297 $5,589 $8,155 ($142) $14,899
Net income................................ 2,248 2,248
Stock dividend............................ 12,425 12 181 (193)
Cash dividends, $.72 per share
($.73 per share on a historical basis). (960) (960)
Reversal of unrealized losses in equity
securities sold........................ 142 142
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Balance, December 31, 1992................ 1,309,363 1,309 5,770 9,250 0 16,329
Net income................................ 2,424 2,424
Stock dividend............................ 12,524 13 206 (219)
Cash dividends, $.77 per share
($.77 per share on a historical basis). (1,023) (1,023)
Unrealized gains on available-for-sale
securities............................. 610 610
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Balance, December 31, 1993................ 1,321,887 1,322 5,976 10,432 610 18,340
Net income................................ 2,625 2,625
Stock dividend............................ 12,656 13 248 (261)
Cash dividends, $.81 per share............ (1,088) (1,088)
Unrealized losses on available-for-sale
securities............................. (974) (974)
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Balance, December 31, 1994................ 1,334,543 $1,335 $6,224 $11,708 ($364) $18,903
=========================================================================
See notes to consolidated financial statements.
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1994 Annual Report
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CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31, 1994, 1993 and 1992
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(in thousands) 1994 1993 1992
Cash Flows from Operating Activities:
Net income....................................................... $ 2,625 $ 2,424 $ 2,248
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses........................... 255 315 324
Provision for depreciation................................... 440 438 437
Amortization and accretion of investment securities.......... 190 194 130
Deferred income taxes........................................ 20 (189) (143)
Realized gains on securities................................. (63) (50) (35)
Realized gains on loans sold................................. (12) (20) 0
Gain on sales or disposals of premises and equipment......... (2) 0 (8)
(Gain) losses on sales of foreclosed assets held for sale.... (24) 7 11
(Increase) decrease in accrued interest receivable
and other assets........................................... 247 (418) (216)
Increase (decrease) in accrued interest payable and other
liabilities................................................ 82 (91) (655)
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Net cash provided by operating activities................ 3,758 2,610 2,093
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Cash Flows from Investing Activities:
Available-for-sale securities:
Proceeds from sale of securities............................... 3,063 0 0
Purchases of securities........................................ (3,003) 0 0
Held-to-maturity securities:
Proceeds from sale of securities............................... 0 39 3,353
Proceeds from maturity and principal repayments of securities.. 3,203 10,072 11,178
Purchases of securities........................................ (6,478) (12,234) (23,320)
Net increase in loans............................................ (14,713) (12,432) (8,334)
Capital expenditures............................................. (602) (460) (171)
Proceeds from sale of premises and equipment..................... 4 0 8
Proceeds from sale of foreclosed assets held for sale............ 100 164 278
------------------------------------------------
Net cash used in investing activities.................... (18,426) (14,851) (17,008)
------------------------------------------------
Cash Flows from Financing Activities:
Net increase in deposits......................................... 3,465 12,980 13,631
Proceeds from long-term borrowings............................... 2,844 1,335 0
Repayments of long-term borrowings............................... (390) 0 0
Net increase (decrease) in short-term borrowed funds............. 9,704 (2,184) 1,638
Dividends paid................................................... (1,056) (992) (929)
------------------------------------------------
Net cash provided by financing activities................ 14,567 11,139 14,340
------------------------------------------------
Net decrease in cash and cash equivalents................ (101) (1,102) (575)
Cash and Cash Equivalents at Beginning of Year..................... 5,612 6,714 7,289
------------------------------------------------
Cash and Cash Equivalents at End of Year........................... $ 5,511 $ 5,612 $ 6,714
================================================
Supplemental Disclosures of Cash Flow Information:
Interest paid................................................ $ 7,970 $ 7,905 $ 9,129
=========== ============ ============
Income taxes paid............................................ $ 1,097 $ 1,311 $ 1,155
=========== ============ ============
See notes to consolidated financial statements.
____
14
Citizens Financial Services, Inc.
____________________________________________________________________________
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________________________________________________________________________
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and financial reporting of Citizens Financial Services, Inc.
and subsidiary conform with generally accepted accounting principles and with
general practice within the financial institution industry. The following is
a description of the more significant of those policies.
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.
INVESTMENT SECURITIES
As of December 31, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for
Certain Investments in Debt and Equity Securities," for accounting and
reporting for investment securities. In accordance with SFAS No. 115, such
investments are accounted for as follows:
Held-to-Maturity Securities - includes securities that the Company has the
positive intent and ability to hold to maturity. These securities are
reported at amortized cost.
Trading Securities - includes debt and equity securities bought and held
principally for the purpose of selling them in the near term. Such
securities are reported at fair value with unrealized holding gains and
losses included in earnings. The Company had no trading securities as
of December 31, 1994 and 1993.
Available-for-Sale Securities - includes debt and equity securities not
classified as held-to-maturity or trading securities. Such securities
are reported at fair value, with unrealized holding gains and losses
excluded from earnings and reported as a separate component of
stockholders' equity, net of estimated income tax effect.
The amortized cost of investment debt securities are adjusted for
amortization of premiums and accretion of discounts, computed by a method
that approximates the effective interest method. Gains and losses on the
sale of investment securities are computed on the basis of specific
identification of the adjusted cost of each security.
Common stock of the Federal Reserve Bank and Federal Home Loan Bank
represents ownership in institutions which are wholly-owned by other
financial institutions. These equity securities are accounted for at cost,
and are classified as restricted equity securities held to maturity.
The fair value of investments, except certain state and municipal
securities, is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. The fair
value of certain state and municipal securities is not readily available
through market sources other than dealer quotations, so fair value estimates
are based on quoted market prices of similar instruments, adjusted for
differences between the quoted instruments and the instruments being valued.
LOANS
Interest on installment loans originated after 1992 is recognized on the
accrual basis based upon the principal amount outstanding. Interest on
installment loans originated before 1993 is recognized on the accrual basis
using a method which approximates the interest method. Interest income on
all other loans is recognized on the accrual basis based upon the principal
amount outstanding. The accrual of interest income on loans is discontinued
when, in the opinion of management, there exists doubt as to the ability to
collect such interest. Loans are returned to the accrual status when factors
indicating doubtful collectibility cease to exist.
The Company recognizes nonrefundable loan origination fees and certain
direct loan origination costs over the life of the related loan as an
adjustment of loan yield using the interest method.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is established through a provision
for possible loan losses charged to expense. The allowance represents an
amount which, in management's judgment, will be adequate to absorb probable
losses on existing loans which may become uncollectible. Management's
judgment in determining the adequacy of the allowance is based on evaluations
of the collectibility of loans. These evaluations take into consideration
such factors as changes in the nature and volume of the loan portfolio,
current economic conditions which may affect the borrowers' ability to pay,
overall portfolio quality, and review of specific problem loans. Loans are
charged against the allowance for possible loan losses when management
believes that the collection of the principal is unlikely.
FORECLOSED ASSETS HELD FOR SALE
Foreclosed assets held for sale are carried at the lower of fair value
minus estimated costs to sell or cost. Prior to foreclosure, the value of
the underlying loan is written down to fair market value of the real estate
or other assets to be acquired by a charge to the allowance for loan losses,
if necessary. Any subsequent write-downs are charged against operating
expenses. Operating expenses of such properties, net of related income and
losses on disposition are included in other expenses and gains are included
in other income.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Repair and maintenance expenditures which extend the useful life of an asset
are capitalized and other repair expenditures are expensed as incurred.
When premises or equipment are retired or sold, the remaining cost and
accumulated depreciation are removed from the accounts and any gain or loss
is credited or charged to income. Depreciation expense is computed on the
straight-line method.
INCOME TAXES
During 1993, the Company changed its method of accounting for income taxes
to conform with the requirements of Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes." SFAS No.
109 requires an asset and liability approach for accounting and reporting for
income taxes. The cumulative effect of the adoption of SFAS No. 109 as of
January 1, 1993 was not material.
EMPLOYEE BENEFIT PLANS
The Company has a noncontributory pension plan covering substantially all
employees. It is the Company's policy to fund pension costs on a current
basis to the extent deductible under existing tax regulations. Such
contributions are intended to provide not only for benefits attributed to
service to date, but also for those expected to be earned in the future. The
Company's net periodic pension cost is based on the provisions of Statement
of Financial Accounting Standards No. 87.
The Company also has a profit-sharing plan which provides tax deferred
salary savings to plan participants.
STATEMENT OF CASH FLOWS
Cash equivalents include amounts due from banks and federal funds sold.
TRUST ASSETS AND INCOME
Assets held by the Bank in a fiduciary or agency capacity for its customers
are not included in the consolidated financial statements since such items
are not assets of the Bank.
Trust income is reported on a cash basis, which is not materially different
from the accrual basis.
____
15
1994 Annual Report
____________________________________________________________________________
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
____________________________________________________________________________
EARNINGS PER SHARE
Earnings per share calculations give retroactive effect to the issuances of
stock dividends declared by the Company. The number of shares used in the
earnings per share and dividends per share calculation was 1,334,543 for
1994, 1993, and 1992.
RECLASSIFICATION
Certain of the 1993 and 1992 amounts have been reclassified to conform with
the 1994 presentation.
2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserves, in the form of cash and balances
with the Federal Reserve Bank, against its deposit liabilities. The amount
of such reserves was $939,000 and $1,025,000 at December 31, 1994 and 1993,
respectively.
Deposits with one financial institution are insured up to $100,000. The
Company maintains cash and cash equivalents with other financial institutions
in excess of the insured amount.
3 - INVESTMENT SECURITIES
As of December 31, 1993, the effect of the adoption of SFAS No. 115
resulted in an increase in stockholders' equity of $610,000 (unrealized
holding gains on available-for-sale securities of $923,000 less estimated
income tax effect of $313,000).
The amortized cost and estimated fair value of investment securities at
December 31, 1994 and 1993 were as follows (in thousands):
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Fair
December 31, 1994 Cost Gains Losses Value
Held-to-Maturity Securities:
U. S Treasury securities.................... $36,042 $10 ($1,671) $34,381
Obligations of other U. S. governmental
agencies and corporations................. 500 6 0 506
Obligations of state and
political subdivisions.................... 2,735 97 0 2,832
Corporate obligations....................... 6,729 59 (1) 6,787
Mortgage-backed securities.................. 2,513 1 (221) 2,293
----------------------------------------------------------------
Total debt securities..................... 48,519 173 (1,893) 46,799
Restricted equity securities................ 1,098 0 0 1,098
----------------------------------------------------------------
Total Held-to-Maturity.................... $49,617 $173 ($1,893) $47,897
================================================================
Available-for-Sale Securities:
U.S. Treasury securities.................... $15,188 $23 ($617) $14,594
Equity securities........................... 4 42 0 46
----------------------------------------------------------------
Total Available-for-Sale $15,192 $65 ($617) $14,640
================================================================
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Fair
December 31, 1993 Cost Gains Losses Value
Held-to-Maturity Securities:
U.S. Treasury securities.................. $30,686 $1,495 ($1) $32,180
Obligations of other U. S. governmental
agencies and corporations............... 502 38 0 540
Obligations of state and
political subdivisions.................. 3,498 286 0 3,784
Corporate obligations..................... 7,715 545 0 8,260
Mortgage-backed securities................ 3,066 18 (34) 3,050
----------------------------------------------------------------
Total debt securities................... 45,467 2,382 (35) 47,814
Restricted equity securities.............. 1,007 0 0 1,007
----------------------------------------------------------------
Total Held-to-Maturity..................... $46,474 $2,382 ($35) $48,821
================================================================
Available-for-Sale Securities:
U.S. Treasury securities.................. $15,244 $882 $0 $16,126
Equity securities......................... 4 41 0 45
-----------------------------------------------------------------
Total Available-for-Sale.................. $15,248 $923 $0 $16,171
=================================================================
Proceeds from the sale of available-for-sale debt securities during 1994
amounted to $3,063,000, with a gain of $59,000 realized on sales. There were
no sales of debt securities in 1993. In 1994, 1993 and 1992 gains of $4,000,
$14,000 and $33,000, respectively, resulted from early calls of debt
securities.
There were no sales of equity securities in 1994. Net realized gains of
$36,000 and $2,000 on sales of equity securities were recorded in 1993 and
1992, respectively.
Investment securities with an approximate carrying value of $28,728,000 and
$25,585,000 at December 31, 1994 and 1993, were pledged to secure public
funds and certain other deposits as provided by law.
The amortized cost and estimated carrying value of debt securities at
December 31, 1994, by contractual maturity, are shown below (in thousands).
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Estimated
Amortized Cost Fair Value
Held-to-Maturity Securities:
Due in one year or less............................ $ 4,266 $ 4,274
Due after one year through five years.............. 27,994 27,445
Due after five years through ten years............. 13,746 12,787
-----------------------------------
46,006 44,506
Mortgage-backed securities 2,513 2,293
-----------------------------------
Total............................................. $48,519 $46,799
===================================
Estimated
Amortized Cost Fair Value
Available-for-Sale Securities:
Due in one year or less............................ $ 1,009 $ 1,010
Due after one year through five years.............. 12,105 11,704
Due after five years through ten years............. 2,074 1,880
-----------------------------------
Total............................................. $15,188 $14,594
===================================
____
16
Citizens Financial Services, Inc.
____________________________________________________________________________
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
____________________________________________________________________________
4 - LOANS
The Company grants commercial, industrial, residential, and consumer loans
primarily to customers throughout Northcentral Pennsylvania and Southern New
York. Although the Company has a diversified loan portfolio, a substantial
portion of its debtors' ability to honor their contracts is dependent on the
economic conditions within this region.
Major classifications of loans are as follows (in thousands):
December 31,
1994 1993
Real estate loans - residential........... $ 97,359 $ 92,149
Real estate loans - commercial............ 21,915 19,926
Real estate loans - agricultural.......... 7,125 4,216
Real estate loans - construction.......... 1,271 1,102
Loans to individuals for household,
family and other purchases............. 11,886 11,696
Commercial and other loans................ 10,285 8,959
State and political subdivision loans..... 7,303 5,170
--------------------------------
157,144 143,218
Less unearned income on loans............. 575 1,311
Less allowance for possible loan losses... 1,721 1,516
--------------------------------
Loans, net.............................. $154,848 $140,391
================================
At December 31, 1994 and 1993, net unamortized loan fees and costs of
$857,000 and $818,000, respectively, have been deducted from the carrying
value of loans.
Loans on which the accrual of interest has been discontinued or reduced
amounted to $1,557,000 and $1,566,000 at December 31, 1994 and 1993,
respectively. If interest had been recorded at the original rate on those
loans, such income would have approximated $131,000 and $147,000 for the
years ended December 31, 1994 and 1993, respectively. Interest income on
such loans, which is recorded as received, amounted to approximately $40,000
and $77,000 for the years ended December 31, 1994 and 1993, respectively.
Transactions in the allowance for possible loan losses were as follows (in
thousands):
Years Ended December 31,
1994 1993 1992
Balance, beginning of year................ $1,516 $1,201 $ 996
Provision charged to income............ 255 315 324
Recoveries on loans previously
charged against the allowance........ 18 71 32
------------------------------------------------
1,789 1,587 1,352
Loans charged against the allowance.... (68) (71) (151)
------------------------------------------------
Balance, end of year...................... $1,721 $1,516 $1,201
================================================
The following is a summary of the past due and nonaccrual loans as of
December 31, 1994 and 1993 (in thousands):
December 31, 1994
Past Due Past Due
30 - 89 days 90 days or more Nonaccrual
Real estate loans..................... $1,193 $215 $1,437
Installment loans.............. ...... 33 0 0
Credit cards and related loans........ 5 2 0
Commercial and all other loans........ 124 50 120
------------------------------------------------
Total................................. $1,355 $267 $1,557
================================================
December 31, 1993
Past Due Past Due
30 - 89 days 90 days or more Nonaccrual
Real estate loans..................... $ 987 $243 $1,358
Installment loans..................... 358 98 43
Credit cards and related loans........ 16 0 0
Commercial and all other loans........ 417 77 165
------------------------------------------------
Total................................. $1,778 $418 $1,566
================================================
5 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
December 31,
1994 1993
Land........................................ $ 897 $ 853
Buildings .................................. 3,615 3,486
Furniture, fixtures and
equipment ............................... 3,541 3,209
--------------------------------
8,053 7,548
Less accumulated depreciation............... 3,929 3,584
--------------------------------
Premises and equipment, net............... $4,124 $3,964
================================
Depreciation expense amounted to $440,000, $438,000, and $437,000 for 1994,
1993 and 1992, respectively.
6 - DEPOSITS
Certificates of deposit of $100,000 or more amounted to $16,378,000 and
$14,686,000 at December 31, 1994 and 1993, respectively. Interest expense on
certificates of deposit of $100,000 or more amounted to $861,000, $732,000,
and $705,000 for the years ended December 31, 1994, 1993 and 1992,
respectively.
____
17
1994 Annual Report
____________________________________________________________________________
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
____________________________________________________________________________
7 - BORROWED FUNDS
Borrowed funds include the following (in thousands):
December 31,
1994 1993
Securities sold under agreements
to repurchase(a)........................ $ 4,756 $ 3,872
FlexLine(b)............................... 9,400 0
Other borrowed funds (c).................. 1,874 0
--------------------------------
Total borrowed funds(d)................... $16,030 $ 3,872
================================
(a) Securities sold under agreements to repurchase mature within one year
to five years. The weighted average interest rate for the periods ended
December 31, 1994, 1993 and 1992 was 4.5%, 4.5% and 6.0%, respectively. The
carrying value of the underlying securities at December 31, 1994 and 1993 was
$5,967,000 and $4,820,000, respectively. The respective market values were
$5,664,000 and $5,078,000. The maximum outstanding balance was $5,224,000
and $4,067,000 for those same periods.
(b) FlexLine is a line of credit with the Federal Home Loan Bank of
Pittsburgh used on an overnight basis. The total amount available under the
line is approximately 10% of qualifying assets or $21,502,000 at December 31,
1994. The weighted average interest rate for the periods ended December 31,
1994, 1993 and 1992 was 5.2%, 3.3% and 3.5%, respectively. The maximum
outstanding balance was $9,400,000 in 1994 and $3,260,000 in 1993.
(c) Other borrowed funds consist of advances from the Federal Home Loan
Bank of Pittsburgh as follows (in thousands):
Fixed Rate Maturity December 31, 1994
7.25% May 15, 2000 $ 166
7.40% May 15, 2001 245
7.52% May 15, 2002 229
7.60% May 15, 2003 216
7.56% May 17, 2004 201
7.61% May 16, 2005 188
7.65% May 15, 2006 175
7.68% May 15, 2007 163
7.72% May 15, 2008 151
7.76% May 15, 2009 140
-------------------
Total other borrowed funds $1,874
===================
The Bank has pledged, as collateral for advances from the Federal Home Loan
Bank of Pittsburgh (the FHLB), all stock in the FHLB and certain other
qualifying investment securities held at the FHLB, equal to 100% of the
unpaid amount of the outstanding advances.
(d) The aggregate average borrowed funds for the years ended December 31,
1994 and 1993 was $8,440,000 and $4,129,000, respectively. The weighted
average interest rate was 5.0%, 4.4% and 5.9% for 1994, 1993 and 1992,
respectively. Following are maturities of borrowed funds as of December 31,
1994 (in thousands):
1995........................ $12,605
1996........................ 35
1997........................ 572
1998........................ 659
1999........................ 285
Thereafter.................. 1,874
-------
Total borrowed funds $16,030
=======
8 - EMPLOYEE BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan (the "Plan")
for all employees meeting certain age and length of service requirements.
Benefits are based primarily on years of service and the average annual
compensation during the highest five consecutive years within the final ten
years of employment. The Company's funding policies are consistent with the
funding requirements of federal law and regulations. Plan assets are
comprised of common stock, U.S. government and corporate debt securities.
Plan assets included 4,888 and 4,840 shares of the Company's common stock at
December 31, 1994 and 1993, respectively.
Pension cost (income) for 1994, 1993 and 1992 include the following
components (in thousands):
Years Ended December 31,
1994 1993 1992
Service cost benefits earned during the period... $ 70 $ 63 $ 48
Interest cost on projected benefit obligation.... 83 75 59
Return on assets................................. (26) (93) (102)
Net amortization and deferral.................... (117) (45) (19)
------------------------------------------------
Net pension cost (income)........................ $ 10 $ 0 $(14)
================================================
As of December 31, 1994, the Plan's total accumulated benefit obligation
was $804,000 including vested benefits of $719,000.
The funded status of the Plan and amount recognized in the Company's
consolidated balance sheet are summarized as follows (in thousands):
December 31,
1994 1993
Projected benefit obligation....................................... $(1,180) $(1,149)
Plan assets at fair value.......................................... 1,536 1,541
--------------------------------
Excess of assets over projected benefit obligation................. 356 392
Unrecognized net gain from past experience different from that
assumed and effects of changes in assumptions.................... (145) (157)
Unrecognized net transition gain................................... (159) (173)
--------------------------------
Prepaid pension cost............................................... $ 52 $ 62
================================
The projected benefit obligation for the Plan at December 31, 1994, 1993,
and 1992 were determined using an assumed discount rate of 8%, 7%, and 8%,
respectively, and an assumed long-term rate of compensation increase of 5%.
The assumed long-term rate of return on Plan assets was 8% at December 31,
1994 and 1993 and 7% at December 31, 1992.
The Company also has a profit-sharing plan, covering substantially all
employees, which provides tax deferred salary savings to plan participants.
The Company's contributions to the profit-sharing plan are allocated to the
participants based upon a percentage of their compensation. The Company's
profit-sharing contribution is determined by management on a discretionary
basis. The Company's contributions for 1994, 1993 and 1992 were $120,000,
$112,000, and $86,000, respectively.
____
18
Citizens Financial Services, Inc.
____________________________________________________________________________
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
____________________________________________________________________________
9 - INCOME TAXES
The provision for income taxes consists of the following (in thousands):
Years Ended December 31,
1994 1993 1992
Currently payable
Federal...................... $1,138 $1,157 $ 963
State........................ 0 (60) 0
-----------------------------------------------
1,138 1,097 963
Deferred liability (benefit)... 20 (189) (143)
------------------------------------------------
Provision for income taxes... $1,158 $ 908 $ 820
================================================
The following temporary differences gave rise to the net deferred tax asset
at December 31, 1994 and 1993 (in thousands):
Deferred tax assets: 1994 1993
Allowance for loan losses.................................... $402 $332
Unrealized losses on available-for-sale securities........... 188 0
Deferred compensation........................................ 163 144
Loan fees and costs.......................................... 137 278
---------------------------
Total...................................................... 890 754
---------------------------
Deferred tax liabilities:
Depreciation................................................. (91) (92)
Bond accretion............................................... (58) (81)
Pension expense.............................................. (18) (21)
Unrealized gains on available-for-sale securities............ 0 (314)
Dividends.................................................... 0 (5)
---------------------------
Total...................................................... (167) (513)
---------------------------
Deferred tax asset, net....................................... $723 $241
===========================
Deferred income tax results from income and expense items recognized for
financial reporting purposes in different periods than for income tax
reporting purposes. The source and tax effect of these differences is as
follows for the years ended December 31, 1992 (in thousands):
1992
Provision for loan losses.............. $ (70)
Bond accretion......................... (1)
Depreciation........................... (7)
Deferred compensation.................. (17)
Pension expense........................ 9
Loan fees and costs.................... (57)
---------------
Deferred benefit..................... $(143)
===============
The total provision for income taxes is different from that computed at the
statutory rates due to the following items (in thousands):
Years Ended December 31,
1994 1993 1992
Provision at statutory rates on
pre-tax income.......................... $1,286 $1,133 $1,043
Effect of tax-exempt income............... (170) (182) (247)
Nondeductible interest.................... 19 21 31
State tax................................. 0 (60) 0
Other items............................... 23 (4) (7)
------------------------------------------------
Provision for income taxes.............. $1,158 $ 908 $ 820
================================================
Statutory tax rates....................... 34% 34% 34%
Effective tax rates....................... 30.6% 27.3% 26.7%
The 1993 credit for state income taxes represents the reversal of an
overaccrual in a prior year.
10 - RELATED PARTY TRANSACTIONS
Certain executive officers, corporate directors or companies in which they
have 10 percent or more beneficial ownership were indebted to the Bank.
A summary of loan activity with officers, directors, stockholders and
associates of such persons is listed below (in thousands):
Beginning Ending
Balance Additions Repayments Balance
1994 $1,541 $ 618 $ 658 $1,501
1993 1,341 602 402 1,541
1992 1,636 226 521 1,341
Such loans were made in the ordinary course of business at the Bank's
normal credit terms and do not present more than a normal risk of collection.
11 - REGULATORY MATTERS
The approval of the Comptroller of the Currency is required for a national
bank to pay dividends up to the Company if the total of all dividends
declared, in any calendar year exceeds the Bank's net income (as defined) for
that year combined with its retained net income for the preceding two
calendar years. Under this formula, the Bank can declare dividends in 1995
without approval of the Comptroller of the Currency of approximately
$2,949,000, plus the Bank's net income for 1995.
The Bank is subject to regulatory restrictions which limit its ability to
loan funds to the Company. At December 31, 1994, the regulatory lending
limit amounted to approximately $2,059,000.
In 1990, the Company acquired Star Savings and Loan Association (the
"Association") in a business combination accounted for as a pooling of
interest. Effective December 31, 1991, the Bank acquired the Association
from the Company and retired the Association's stock. This transaction
terminated the Association's separate operations as a savings and loan
association.
On March 27, 1986, the Association converted from a mutual savings and loan
association to a capital stock savings and loan association. A liquidation
account was established at the time of conversion in an amount equal to the
total net worth ($1,287,845) of the Association. Each eligible deposit
account holder is entitled to a
____
19
1994 Annual Report
____________________________________________________________________________
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
____________________________________________________________________________
proportionate share of this account in the event of a complete liquidation of
the Association, and only in such event. This share is reduced if the
account holders' savings deposits fall below the amount on the dates of
record and will cease to exist if the account is closed. The liquidation
will never be increased despite any increase after conversion in the related
savings deposit account of an account holder. The restriction has not been
altered by the acquisition of the Association by the Company.
This annual report has not been reviewed, or confirmed for accuracy or
relevance, by the Federal Deposit Insurance Corporation.
12 - OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit. These instruments involve to varying degrees
elements of credit and interest rate or liquidity risk in excess of the
amount recognized in the consolidated balance sheet.
The Company's exposure to credit loss from nonperformance by the other
party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual amount of these
instruments. The Company uses the same credit polices in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk at
December 31, 1994 and 1993 are as follows (in thousands):
1994 1993
Commitments to extend credit.......................$15,057 $10,809
Standby letters of credit......................... $ 1,117 $ 727
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity
requirements. The Company evaluates each customer's credit-worthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary by
the Company on extension of credit is based on management's credit assessment
of the counter party.
Standby letters of credit are conditional commitments issued by the Company
guaranteeing performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending normal loan commitments to customers. The Company
generally holds collateral supporting standby letters of credit.
13 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires that the Company disclose estimated fair values for its financial
instruments. Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire holdings
of a particular financial instrument. Also, it is the Company's general
practice and interest to hold its financial instruments to maturity and not
to engage in trading or sales activities. Because no market exists for a
significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions can
significantly affect the estimates.
Estimated fair values have been determined by the Company using historical
data, as generally provided in the Company's regulatory reports, and an
estimation methodology suitable for each category of financial instruments.
The estimated fair value of the Company's investment securities is described
in Note 3. The Company's fair value estimates, methods and assumptions are
set forth below for the Company's other financial instruments.
Cash and due from banks:
The carrying amounts for cash and due from banks approximate fair value
because they mature in 90 days or less and do not present unanticipated
credit concerns.
Loans:
Fair values are estimated for portfolios of loans with similar financial
characteristics.
The fair value of performing loans has been estimated by discounting
expected future cash flows. The discount rate used in these calculations is
derived from the Treasury yield curve adjusted for credit quality, operating
expense and prepayment option price and is calculated by discounting
scheduled cash flows through the estimated maturity using estimated market
discount rates that reflect the credit and interest rate risk inherent in the
loan. The estimate of maturity is based on the Company's historical
experience with repayments for each loan classification, modified, as
required, by an estimate of the effect of current economic and lending
conditions.
Fair value for significant nonperforming loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are
discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined using available market information
and specific borrower information.
The following table presents information for loans (in thousands):
AT DECEMBER 31, 1994 AT DECEMBER 31, 1993
BOOK ESTIMATED BOOK ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
Net loans..........$154,848 $152,317 $140,391 $141,481
____
20
Citizens Financial Services, Inc.
____________________________________________________________________________
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
____________________________________________________________________________
Deposits:
The fair value of deposits with no stated maturity, such as noninterest
bearing demand deposits, savings and NOW accounts, and money market and
checking accounts, is equal to the amount payable on demand as of December
31, 1994 and 1993. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is estimated
using the rates currently offered for deposits of similar remaining
maturities (in thousands).
AT DECEMBER 31, 1994 AT DECEMBER 31, 1993
BOOK ESTIMATED BOOK ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
Noninterest-bearing demand...................... $14,495 $14,495 $14,779 $14,779
Interest-bearing deposits:
Savings and NOW............................... 50,065 50,065 54,619 54,619
Money market savings.......................... 20,799 20,799 20,392 20,392
Certificates of deposit less than $100,000.... 92,742 91,894 86,537 89,722
Certificates of deposit more than $100,000.... 16,377 16,087 14,686 14,994
The fair value estimates above do not include the benefit that results from
the low-cost funding provided by the deposit liabilities compared to the cost
of borrowing funds in the market, commonly referred to as the core deposit
intangible.
Borrowed Funds:
Rates available to the Company for borrowed funds with similar terms and
remaining maturities are used to estimate the fair value of borrowed funds
(in thousands).
AT DECEMBER 31, 1994 AT DECEMBER 31, 1993
ESTIMATED ESTIMATED
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
Securities sold under agreements to repurchase..... $4,756 $4,756 $3,872 $3,872
FlexLine........................................... 9,400 9,400 0 0
Other borrowed funds............................... 1,874 1,802 0 0
Commitments to Extend Credit and Standby Letters of Credit:
There is no material difference between the notional amount and the
estimated fair value of off-balance sheet items which are primarily comprised
of unfunded loan commitments which are generally priced at market at the time
of funding (see Note 12).
14 - LOAN IMPAIRMENT
In May, 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan", which must be adopted by the Company by 1995. SFAS
114 applies to loans other than groups of smaller-balance homogenous loans
(generally consumer loans) that are collectively evaluated for impairment.
The standard requires that impairment of such loans be measured generally
based on the present value of expected future principal and interest cash
flows, discounted at the loan's effective interest rate, and that a valuation
allowance related to those impaired loans be established. Under SFAS 114, a
loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect all amounts due.
Presently, credit losses on all loans are accounted for through the allowance
for credit losses, which is maintained at a level adequate to absorb losses
inherent in the portfolio.
In October, 1994, the Financial Account Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures" an amendment of
SFAS No. 114. This statement amends SFAS 114 to allow a creditor to use
existing methods for recognizing interest income on impaired loans and the
disclosure requirements regarding the recorded investment in certain impaired
loans and how a creditor recognizes interest income related to those impaired
loans. The Company does not anticipate a material increase in the allowance
due to adopting the new standards effective January 1, 1995.
____
21
1994 Annual Report
____________________________________________________________________________
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
____________________________________________________________________________
15 - CONDENSED FINANCIAL INFORMATION -
PARENT COMPANY ONLY
CITIZENS FINANCIAL SERVICES, INC.
CONDENSED BALANCE SHEET
December 31, 1994 and 1993
(in thousands) 1994 1993
Assets
Cash............................................................. $ 31 $ 35
Dividends receivable -
subsidiary..................................................... 547 516
Prepaid expenses................................................. 0 13
Investment in subsidiary,
First Citizens National Bank................................... 18,872 18,292
--------------------------------
Total assets................................................. $19,450 $18,856
================================
Liabilities and stockholders equity
Dividends payable................................................ $ 547 $ 516
Stockholders' equity............................................. 18,903 18,340
--------------------------------
Total liabilities and
stockholders' equity......................................... $19,450 $18,856
================================
CITIZENS FINANCIAL SERVICES, INC.
CONDENSED STATEMENT OF INCOME
Years Ended December 31, 1994, 1993 and 1992
(in thousands) 1994 1993 1992
Dividend income.................................................... $1,136 $1,073 $1,031
Expenses........................................................... 65 43 45
---------------------------------------------
Income before equity
in undistributed earnings
of subsidiary.................................................... 1,071 1,030 986
Equity in undistributed
earnings - First Citizens National Bank.......................... 1,554 1,394 1,262
---------------------------------------------
Net income................................................... $2,625 $2,424 $2,248
=============================================
CITIZENS FINANCIAL SERVICES, INC.
CONDENSED STATEMENT OF CASH FLOWS
Years Ended December 31, 1994, 1993 and 1992
1994 1993 1992
Cash Flows from Operating Activities:
Net income....................................................... $2,625 $2,424 $2,248
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiary............... (1,554) (1,394) (1,262)
Increase in other assets..................................... (18) (31) (31)
----------------------------------------------
Net cash provided by operating activities.................. 1,053 999 955
Cash Flows Used in Financing Activities,
Cash dividends paid.............................................. (1,057) (992) (929)
----------------------------------------------
Net (decrease) increase in cash.......................... (4) 7 26
Cash at Beginning of Year.......................................... 35 28 2
----------------------------------------------
Cash at End of Year................................................ $ 31 $ 35 $ 28
==============================================
____
22
Citizens Financial Services, Inc.
____________________________________________________________________________
REPORT OF INDEPENDENT AUDITORS
____________________________________________________________________________
SNODGRASS
Certified Public Accountants
[LOGO OMITTED]
To the Stockholders and Board of Directors of
Citizens Financial Services, Inc.
We have audited the consolidated balance sheet of Citizens Financial
Services, Inc. and subsidiary as of December 31, 1994, and the related
consolidated statement of income, changes in stockholders' equity and cash
flow for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The
consolidated financial statements of Citizens Financial Services, Inc., and
subsidiary as of December 31, 1993 and for each of the years in the two year
period then ended, were audited by other auditors whose report dated February
11, 1994, expressed an unqualified opinion on those consolidated financial
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Citizens
Financial Services, Inc. and subsidiary as of December 31, 1994, and the
consolidated results of their operations and their cash flows for the year
then ended, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for income taxes and its method of
accounting for investment securities in 1993.
/s/ S. R. Snodgrass, A.C.
Wexford, PA
February 10, 1995
S.R. Snodgrass, A.C.
101 Bradford Road, Wexford, PA 15090-6909 Phone: 412-934-0344
Facsimile: 412-934-0345
____
23
1994 Annual Report
____________________________________________________________________________
SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY OF OPERATIONS
____________________________________________________________________________
(dollar amount in thousands)
1994 1993 1992 1991 1990
Interest Income............................. $17,336 $16,551 $16,684 $17,017 $16,808
Interest Expense............................ 7,944 7,853 8,895 10,347 10,443
-----------------------------------------------------
Net Interest Income......................... 9,392 8,698 7,789 6,670 6,365
Provision for Possible Loan Losses.......... 255 315 324 170 174
-----------------------------------------------------
Net Interest Income After Provision
for Possible Loan Losses.................. 9,137 8,383 7,465 6,500 6,191
Other Operating Income...................... 1,073 1,016 991 839 733
Realized Securities Gains (Losses), Net..... 63 50 35 (46) (3)
Other Operating Expenses.................... 6,490 6,117 5,423 5,195 5,135
------------------------------------------------------
Income Before Provision for Income Taxes.... 3,783 3,332 3,068 2,098 1,786
Provision for Income Taxes.................. 1,158 908 820 780 539
------------------------------------------------------
Net Income.................................. $ 2,625 $ 2,424 $ 2,248 $1,318 $ 1,247
======================================================
Per Share Data:
Net Income.................................. $1.97 1.82 $1.68 $0.99 $0.93
Cash Dividends.............................. 0.81 0.77 0.72 0.68 0.60
Book Value.................................. 14.16 13.74 12.24 11.16 10.67
Total Investments........................... $ 64,257 $ 62,645 $ 59,742 $ 50,906 $ 41,226
Loans, net.................................. 154,848 140,391 128,326 120,747 111,198
Total Assets................................ 232,537 216,237 202,155 186,079 172,537
Total Deposits.............................. 194,478 191,013 178,033 164,402 153,585
Stockholders' Equity........................ 18,903 18,340 16,329 14,898 14,240
________________________________________________________________________________________________________________________
COMMON STOCK
Common stock issued by Citizens Financial Services, Inc. is traded in the
local over-the-counter market, primarily in Pennsylvania and New York.
Prices presented in the table below are bid prices between broker-dealers
published by the National Association of Securities Dealers through the NASD
OTC "Bulletin Board" its automated system for reporting non-NASDAQ quotes and
the National Quotation Bureau's "Pink Sheets". The prices do not include
retail mark-ups or mark-downs or any commission to the broker-dealer. The
bid prices do not necessarily reflect prices in actual transactions. Cash
dividends are declared on a semi-annual basis and the effects of stock
dividends have been stated retroactively in the table below (also see
dividend restrictions in Note 11).
Dividends Dividends
declared declared
1994 per share 1993 per share
High Low High Low
First quarter..... $18.25 $17.00 First quarter..... $16.50 $15.50
Second quarter.... 20.00 17.75 $0.40 Second quarter.... 17.00 15.50 $0.38
Third quarter..... 22.25 19.25 Third quarter..... 17.25 16.50
Fourth quarter.... 22.63 21.75 $0.41 Fourth quarter.... 17.75 17.00 $0.39
____
24
Citizens Financial Services, Inc.
____________________________________________________________________________
CONSOLIDATED QUARTERLY DATA
____________________________________________________________________________
(dollar amount in thousands)
Three Months Ended
1994 March 31 June 30 Sept 30 Dec 31
Interest income.............................. $4,081 $4,167 $4,477 $4,611
Interest expense............................. 1,829 1,878 2,052 2,185
------------------------------------------------
Net interest income.......................... 2,252 2,289 2,425 2,426
Provision for possible loan losses........... 75 60 60 60
Other operating income....................... 277 293 259 244
Realized securities gains, net............... 43 20 0 0
Other operating expenses..................... 1,605 1,598 1,634 1,653
------------------------------------------------
Income before provision for income taxes..... 892 944 990 957
Provision for income taxes................... 270 290 303 295
================================================
Net income................................... $ 622 $ 654 $ 687 $ 662
================================================
Net Income Per Share......................... $0.47 $0.49 $0.51 $0.50
Three Months Ended
1993 March 31 June 30 Sept 30 Dec 31
Interest income.............................. $4,051 $4,096 $4,236 $4,168
Interest expense............................. 1,968 1,954 2,013 1,918
------------------------------------------------
Net interest income.......................... 2,083 2,142 2,223 2,250
Provision for possible loan losses........... 90 75 75 75
Other operating income....................... 252 254 239 271
Realized securities gains, net............... 3 36 11 0
Other operating expenses..................... 1,422 1,475 1,565 1,655
------------------------------------------------
Income before provision for income taxes..... 826 882 833 791
Provision for income taxes................... 225 240 218 225
================================================
Net income................................... $ 601 $ 642 $ 615 $ 566
================================================
Net Income Per Share......................... $0.45 $0.48 $0.46 $0.43
____
25
1994 Annual Report
____________________________________________________________________________
TRUST AND INVESTMENT SERVICES
STATEMENT OF CONDITION
____________________________________________________________________________
1994 1993
INVESTMENTS:
Bonds.......................................... $15,957 $ 7,392
Stock.......................................... 8,312 7,713
Savings and Money Market Funds................. 7,294 8,845
Mutual Funds................................... 3,061 2,733
Mortgages...................................... 526 628
Real Estate.................................... 405 273
Miscellaneous.................................. (10) 102
Cash........................................... 51 103
---------------------------
TOTAL.......................................... $35,596 $27,789
===========================
ACCOUNTS:
Estates........................................ $ 684 $ 216
Trusts......................................... 18,450 18,793
Guardianships.................................. 142 137
Pension/Profit Sharing......................... 5,905 4,634
Investment Management.......................... 5,577 4,009
Custodial...................................... 4,838 0
--------------------------
TOTAL.......................................... $35,596 $27,789
==========================
The following graph shows personal trust asset growth over the past five
years.
____________________________________________________________________________
[GRAPHICS OMITTED: A bar chart depicting personal trust assets from 1990
through 1994. A tabular representation of the graph is set forth as follows:
PERSONAL TRUST ASSETS
(Dollars in Thousands)
1990 1991 1992 1993 1994
$20,539 $21,827 $23,706 $26,085 $27,781
____________________________________________________________________________
____
26
Citizens Financial Services, Inc.
____________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
____________________________________________________________________________
This narrative is provided to assist in the understanding and evaluation of
the financial condition and results of operations of Citizens Financial
Services, Inc. and its subsidiary (the "Company") and should be read in
conjunction with the preceding consolidated financial statements and related
footnotes. Such financial condition and results of operations are not
intended to be indicative of future performance. Except as noted, tabular
information is presented in thousands of dollars.
Financial Condition
The following table presents the growth (dollars in millions) during the
past two years:
Growth in: 1994 1993
$ % $ %
_______________________________________________________________________________________
Total Assets 16.3 7.5 14.1 7.0
Total Deposits 3.5 1.8 13.0 7.3
Total Loans 14.5 10.3 12.1 9.4
Total Investments
(including avaliable-for-sale
and held-to-maturity) 1.6 2.6 2.9 4.9
Total Stockholders'
Equity 0.6 3.1 2.0 12.3
Deposits
Deposit growth was modest in 1994 with a $3.5 million or 1.8% increase while
1993 was an increase of $13 million or 7.3%. Transaction accounts declined
$3.9 million in 1994, or 9.1% while total certificates of deposit increased
$7.9 million or 7.8%. Certificates of deposit growth in 1993 was $5.6
million or 5.8%. During 1994, the rate paid on certificates of deposit
increased more rapidly than the rates paid on savings accounts. This trend
increased the growth of certificates of deposit and helped to offset the
decrease in transaction and savings accounts.
The following table shows the composition of deposit accounts over the last
three years as of December 31:
Deposits by Major Classification
1994 1993 1992
Amount Percent Amount Percent Amount Percent
Non-interest bearing deposits $ 14,495 7.5 $ 14,779 7.7 $ 10,793 6.1
NOW accounts 23,963 12.3 27,537 14.4 24,746 14.0
Savings deposits 26,102 13.4 27,081 14.2 26,490 15.0
Money market deposit accounts 20,799 10.7 20,392 10.7 18,896 10.7
Certificates of deposit 109,119 56.1 101,224 53.0 95,651 54.2
----------------------------------------------------------
Total deposits $194,478 100.0 $191,013 100.0 $176,576 100.0
==========================================================
Remaining maturities of certificates of deposit of $100,000 or more:
1994 1993 1992
3 months or less $ 4,339 $ 2,549 $ 4,412
3 through 6 months 3,813 3,108 698
6 through 12 months 2,323 3,039 3,109
Over 12 months 5,903 5,990 4,216
---------------------------------------
Total $16,378 $14,686 $12,435
As a percent of total
certificates of deposit 15.01% 14.51% 13.00%
Deposits by Type of Depositor
1994 1993 1992
Amount Percent Amount Percent Amount Percent
Individual, Partnerships
and Corporations $173,879 89.4 $170,430 89.2 $161,952 91.7
United States Government 214 0.1 255 0.1 49 0.0
State and Political
Subdivisions 18,868 9.7 17,554 9.2 13,528 7.7
Other 1,517 0.8 2,774 1.5 1,047 0.6
-----------------------------------------------------------
Total deposits $194,478 100.0 $191,013 100.0 $176,576 100.0
===========================================================
Over the last few years, the Company responding to the demand for new
competitive products in the market area, began to tier interest-bearing
transaction and savings accounts by deposit size (larger balances receive
higher rates). The Company has also been offering a wide variety of deposit
instruments, as have its competitors. Limited transaction deposit accounts
with interest rates that vary as often as daily, unlimited transaction
interest-bearing accounts, Premier 55, Premier 55 Plus, Gold Club, individual
retirement accounts (5 year IRA CDs grew by $2.6 million in 1994), longer-
term certificates of deposit (generally of five-year maturity), and Roll-Up
Certificate of Deposit (which resulted in a $4.9 million growth in 1994) were
some of the deposit product variations.
During 1994, the favorable interest rate environment that has existed during
the past several years, began to diminish. The Company, as well as its other
bank competitors, began to experience pressure on net interest income as the
result of declining spreads lead management to price interest-bearing
liabilities lower than its normal spread to short-term Treasury indexes.
The reduced deposit growth in 1994, as the result of the increased
competition in a rising interest rate environment, required the Company to
increase its short term borrowing from the Federal Home Loan Bank (which grew
by $9.4 million in 1994), however, management's long term objective is to
fund local loan growth with local deposits.
The methods used by the Company to attract and retain deposits( in addition
to competitive interest rates) have been increased marketing and business
development efforts, continuous emphasis on quality personal service,
expanded trust and investment management services and more convenient hours.
In six community offices, lobby hours were expanded in late 1992 to include
Wednesday afternoons (when they were traditionally closed). Currently, all
seven offices offer Saturday hours. Early in 1994, the Company completed the
installation of the eight MAC automated teller machine, which are part of the
MAC regional and PLUS national network.
____
27
1994 Annual Report
____________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
____________________________________________________________________________
Late in 1994, the Company contracted with a professional marketing firm to
improve communication with current and prospective customers and enhance the
Company's identity beginning in 1995.
Loans
Net loans grew by $14.5 million in 1994, a strong 10.3% increase that
continued the positive 9.4% trend of 1993. The residential mortgage loan
portfolio increased 5.7%, primarily as a result of lower interest rates
during the first half of 1994. In addition, $1.1 million in conforming
mortgage loans were originated and sold on the secondary market through the
Federal Home Loan Mortgage Corporation (providing over $22,000 of income in
origination fees and premiums on loans sold). Residential mortgage lending
is a principal business activity and one the Company expects to continue by
providing a full compliment of conforming, non-conforming and home equity
mortgages.
Total commercial and other loans increased by a strong $3.3 million or 11.5%
(up from the 7.1% gain in 1993). Commercial lending activity is primarily
focused on small businesses and the Company's commercial lending officers
have been very successful in attracting new loan business.
Loans to individuals increased a modest $.2 million or 1.6% during 1994
compared to an increase of $.8 million in 1993.
State and political subdivision loans increased $2.1 million or 41.2%
compared to an increase of $1.6 million in 1993. Over the last few years,
management has been successful in obtaining tax-exempt loans from local
municipalities and school districts to replace the maturing tax-exempt
securities in the investment portfolio.
Historically, the majority of lending activity has been mortgage loans
secured by one-to-four family residential property. The Company does offer
a 25 year fixed rate mortgage product; however, since 1987 the growth in the
mortgage portfolio has been in the area of one-to-five-year adjustable rate
mortgages. As of December 31, 1994, real estate and real estate construction
loans made up 62.8% of the Company's total loan portfolio.
In 1995 the Company's goal is to be the premier mortgage lender in its
market area by expanding its menu of conforming mortgages (including "jumbo"
and low to moderate income home buyer mortgages) through North American
Mortgage Company, Farmers Home Administration (FmHA) and Pennsylvania Housing
Finance Agency (PHFA). Continued training of branch office personnel and the
focus on flexibility and fast "turn around time" will aid in meeting this
goal.
Five Year Breakdown of Loans by Type
December 31,
1994 1993 1992 1991 1990
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
________ _______ ________ _______ ________ _______ ________ _______ ________ _______
Real estate, residential $ 97,359 62.0 $ 92,149 64.3 $85,196 64.5 $71,714 57.9 $69,766 61.1
Real estate, agricultural 7,125 4.5 4,216 2.9 5,011 3.8 2,920 2.4 2,066 1.8
Real estate, construction 1,271 0.8 1,102 0.8 803 0.6 1,505 1.2 1,739 1.5
Loans to individuals for
family and other purchases 11,886 7.6 11,696 8.2 12,637 9.6 16,420 13.3 23,591 20.6
Commercial and other 32,200 20.5 28,885 20.2 24,805 18.8 25,992 21.0 14,353 12.6
State and political
subdivision loans 7,303 4.6 5,170 3.6 3,581 2.7 5,213 4.2 2,773 2.4
_________ ______ _________ ______ _________ ______ _________ ______ _________ ______
Total loans 157,144 100.0 143,218 100.0 132,033 100.0 123,764 100.0 114,288 100.0
Unearned income 575 1,311 2,506 2,021 2,176
Allowance for possible
loan losses 1,721 1,516 1,201 996 914
_________ _________ _________ _________ _________
Net loans $154,848 $140,391 $128,326 $120,747 $111,198
========= ========= ========= ========= =========
____
28
Citizens Financial Services, Inc.
____________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
____________________________________________________________________________
The measurement of sensitivity to interest rate change in both earning
assets and funding sources is crucial to the process of asset/liability
management. The predominant source of earning assets is from the loan
portfolio. The following table shows the maturity of commercial and
agricultural loans and commercial loans secured by real estate as of December
31, 1994, classified according to the sensitivity to changes in interest
rates within various time intervals:
Commercial,
financial, Real estate
Maturity of loans: agricultural construction Total
One Year or less $ 7,406 $ 354 $ 7,760
Over one year but less than five years 10,353 0 10,353
Over five years 21,566 917 22,483
------------------------------------
Total $39,325 $1,271 $40,596
====================================
Sensitivity of loans to changes in
interest rates - loans due after one year:
Predetermined interest rate $10,910 $ 561 $11,471
Floating or adjustable interest rate 21,009 356 21,365
------------------------------------
Total $31,919 $ 917 $32,836
====================================
Investments
The investment portfolio, including available-for-sale and held-to-maturity
securities, increased by $1.6 million or 2.6% in 1994 as compared to growth
of $2.9 million in 1993. The primary growth in the investment portfolio
occurred in U. S. Treasury securities of $3.8 million or a 8.2% increase as
compared to an increase of $7.9 million in 1993. Investments in obligations
of state and political subdivisions declined $.8 million, and other debt
investments declined $1.5 million during 1994.
The following table shows the year-end composition of the investment
portfolio for the five years ended December 31, 1994.
Book Value at December 31,
1994 % of 1993 % of 1992 % of 1991 % of 1990 % of
________ Total ________ Total ________ Total ________ Total ________ Total
Available-for-sale:
U.S. Treasury securities $14,594 22.7 16,126 25.7
Equity securities 46 0.1 45 0.1
Held-to-maturity:
U.S. Treasury securities $36,042 56.1 $30,686 49.0 $38,942 65.2 $19,441 38.2 $ 9,861 23.9
Federal agency obligations 500 0.8 502 0.8 1,000 1.7 5,089 10.0 7,138 17.3
Obligations of state and
political subdivisions 2,735 4.3 3,498 5.6 4,106 6.9 4,915 9.7 5,917 14.4
Corporate obligations 6,729 10.4 7,715 12.3 10,108 16.9 11,334 22.3 9,640 23.4
Mortgage-backed securities 2,513 3.9 3,066 4.9 4,606 7.7 6,829 13.4 4,638 11.2
Restricted equity securities 1,098 1.7 1,007 1.6 980 1.6 3,298 6.4 4,032 9.8
________ _______ ________ _______ ________ _______ ________ _______ ________ ______
Total $64,257 100.0 $62,645 100.0 $59,742 100.0 $50,906 100.0 $41,226 100.0
======== ======= ======== ======= ======= ======= ======= ======= ======= ======
____
29
1994 Annual Report
____________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
____________________________________________________________________________
Maturities and Average Weighted Yields of Investment Securities
Expected maturities and average weighted yields for the above investment
portfolio as of December 31, 1994. Yields on tax-exempt securities are
presented on a fully taxable equivalent basis assuming a 34% tax rate:
Within One- Five- After
One Five Ten Ten
Year Yield(%) Years Yield(%) Years Yield(%) Years Yield(%) Total Yield(%)
------------------------------------------------------------------------------------------------------------------------------
Held-to-maturity securities:
U.S. Rreasury $1,514 5.68 $20,958 6.64 $13,570 6.16 $ 0 0.00 $36,042 6.42
Federal agency 500 8.73 0 0.00 0 0.00 0 0.00 500 8.73
State and political
subdivisions, general
obligation 736 13.22 262 12.98 10 8.33 0 0.00 1,008 13.11
State and political
subdivisions, revenue 655 13.25 822 12.86 0 0.00 0 0.00 1,477 13.03
State and political
subdivisions, indus-
trial development
authority 250 13.07 0 0.00 0 0.00 0 0.00 250 13.07
Corporate obligations 2,002 8.79 4,727 8.80 0 0.00 0 0.00 6,729 8.80
Mortgage-backed securities 235 6.24 2,278 5.64 0 0.00 0 0.00 2,513 5.70
Restricted equity securities 0 0.00 0 0.00 0 0.00 1,098 6.86 1,098 6.86
------------------------------------------------------------------------------------------------
Total Held-to-Maturity $5,892 9.12 $29,047 7.02 $13,580 6.45 $1,098 6.86 $49,617 7.10
================================================================================================
Available-for-sale
securities:
U.S. Treasury $1,011 7.39 $11,703 6.76 $ 1,880 5.53 $ 0 0.00 $14,594 6.64
Equity securities 0 0.00 0 0.00 0 0.00 46 2.10 46 2.10
------------------------------------------------------------------------------------------------
Total Available-for-Sale $1,011 7.39 $11,703 6.76 $ 1,880 5.53 $ 46 2.10 $14,640 6.63
================================================================================================
During 1990 through 1994, the concentration of the Company's investment
portfolio has shifted dramatically as U.S. Treasury securities now comprise
79% of the total portfolio. No new investments have been made in state and
political subdivisions since 1985, nor investments in corporate obligations
since 1991. This trend reflects management's conservative investment
philosophy and its reluctance to pursue other types of securities that carry
more interest rate and credit risk but offer only a marginally higher rate of
return. Further, the average expected maturity of the entire portfolio as of
December 31, 1994 is relatively short-term (3.3 years).
Approximately 70% of the amortized cost of debt securities are scheduled to
mature within five years or less, as evidenced in footnote 3.
As discussed in footnote 1, as of December 31, 1993 the Company implemented
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." In accordance with SFAS
No. 115, investment securities have been segregated between the "available-
for-sale" and "held-to-maturity" categories. The available-for-sale
portfolio is "marked to market" and adjusted against stockholders' equity
monthly (net of tax effect). The accounting for held-to-maturity securities
remains the same (amortized cost method) as in prior years.
It is management's intention to hold substantially all debt securities
purchased to maturity. Further, the Company expects that earnings from
operations, the high liquidity level of the securities, growth of deposits
and the availability of borrowings from the Federal Home Loan Bank is
sufficient to meet future liquidity needs and management does not anticipate
selling securities for liquidity requirements. Accordingly, the majority of
the securities portfolio is classified as held-to-maturity.
The Company has no securities from a single issuer representing more than
10% of stockholders' equity.
Results of Operations
Net income during 1994 increased to $2.6 million (net income per share of
$1.97), an increase of $201,000 or 8.3% over the $2.4 million reported in
1993 (net income per share of $1.82).
The following table sets forth certain performance ratios of the Company for
the periods indicated:
1994 1993 1992
Return on Assets
(net income to average total assets) 1.17% 1.16% 1.15%
Return on Equity
(net income to average total equity) 14.06% 14.22% 14.43%
Dividend Payout Ratio
(dividends declared divided by net income) 41.45% 42.20% 42.69%
Equity to Asset Ratio
(average equity to average total assets) 8.33% 8.13% 7.99%
Net income is influenced by five key elements: net interest income, other
operating income, other operating expenses, provision for income taxes and
the provision for possible loan losses. A discussion of these five elements
follows.
____
30
Citizens Financial Services, Inc.
____________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
____________________________________________________________________________
Net Interest Income
The most significant source of revenue is net interest income, the amount
by which interest earned on interest-bearing assets exceeds interest expense
on liabilities. Net interest income in 1994 was $9.4 million (an increase of
$ .7 million or 8%) as compared to $8.7 million in 1993 and $7.8 million in
1992.
Factors which influence net interest income are changes in volume of
interest-bearing assets and liabilities as well as changes in the associated
interest rates. The following tables set forth the Company's average
balances of, and the interest earned or incurred on, each principal category
of assets, liabilities and stockholders' equity, the related rates, net
interest income and rate "spread" created:
Analysis of Average Balances and Interest Rates (1)
1994 1993 1992
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
$ $ % $ $ % $ $ %
_____________________________________________________________________________________________________________________________
ASSETS
Short-term investments:
Interest-bearing deposits
at banks 605 25 4.13 1,790 54 3.02 683 22 3.22
Federal funds sold 0 0 0.00 34 1 2.94 1,647 64 3.89
Total short-term investments 605 25 4.13 1,824 55 3.02 2,330 86 3.69
Investment securities:
Taxable 61,215 4,111 6.72 58,071 4,119 7.09 51,818 3,998 7.72
Tax-exempt (3) 2,997 427 14.26 3,791 491 12.95 4,614 577 12.51
Total investment securities 64,212 4,538 7.07 61,862 4,610 4.45 56,432 4,575 8.11
Loans:
Residential mortgage loans 93,697 8,229 8.78 85,703 7,690 8.97 75,123 7,618 10.14
Commercial and farm loans 32,937 2,887 8.77 27,238 2,179 8.00 24,229 1,940 8.01
Loans to State & Political
Subdivisions 6,427 482 7.50 4,027 355 8.82 5,509 525 9.53
Other loans 13,833 1,448 10.47 19,057 1,964 10.31 21,743 2,319 10.67
Loans, net of
discount (2)(3)(4) 146,894 13,046 8.88 136,025 12,188 8.96 126,604 12,402 9.80
Total interest-earning assets 211,711 17,609 8.32 199,711 16,853 8.44 185,366 17,063 9.21
Cash and due from banks 4,694 4,295 2,882
Bank premises and equipment 3,999 3,887 4,099
FASB 115 Adjustment 125
Other assets 3,419 1,860 2,588
Total noninterest-bearing
assets 12,237 10,042 9,569
Total assets 223,948 209,753 194,935
=============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts 26,052 593 2.28 26,252 678 2.58 23,705 824 3.48
Savings accounts 27,388 635 2.32 26,743 746 2.79 23,730 859 3.62
Money Market accounts 21,363 728 3.41 21,187 676 3.19 14,429 563 3.90
Certificates of deposit 105,455 5,565 5.28 98,735 5,570 5.64 99,484 6,405 6.44
Total interest-bearing
deposits 180,258 7,521 4.17 172,917 7,670 4.44 161,348 8,651 5.36
Other borrowed funds 8,440 423 5.01 4,129 183 4.43 4,606 244 5.30
Total interest-bearing
liabilities 188,698 7,944 4.21 177,046 7,853 4.44 165,954 8,895 5.36
Demand deposits 14,318 12,166 11,248
Other liabilities 2,268 3,495 2,150
Total noninterest-bearing
liabilities 16,586 15,661 13,398
Stockholders' equity 18,664 17,046 15,583
Total liabilities and
stockholders'equity 223,948 209,753 194,935
Net interest income 9,665 9,000 8,168
Net interest spread (5) 4.11 4.00 3.85
Net interest income as a
percentage of average
interest-earning assets 4.57 4.51 4.41
Ratio of interest-earning
assets to interest-
bearing liabilities 1.12 1.13 1.12
(1) Averages are based on daily balances.
(2) Includes loan origination and commitment fees of $180,000, $114,000 and
$120,000 for 1994, 1993 and 1992, respectively
(3) Tax exempt interest revenue is shown on a tax equivalent basis for proper
comparison using a statutory federal income tax rate of 34%.
(4) Income on nonaccrual loans is accounted for on a cash basis, and the loan
balances are included in interest-earning assets.
(5) Interest rate spread represents the difference between the average rate
earned on interest-earning assets and the average rate paid on
interest-bearing liabilities.
____
31
1994 Annual Report
____________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
____________________________________________________________________________
The following table shows the effect of changes in volume and rates on
interest income and expense. Rate/Volume variances are allocated to rate and
volume variances based upon the absolute change in each. Tax exempt interest
revenue is shown on a tax equivalent basis for proper comparison using a
statutory federal income tax rate of 34%.
Analysis of Changes in Net Interest Income on a Tax-Equivalent Basis
1994 vs. 1993 1993 vs. 1992
Change in Change Change in Total Change in Change Change in Total
Volume in Rate Rate & Volumes Change Volume in Rate Rate & Volumes Change
Interest income:
Short-term investments:
Interest-bearing deposits
at banks $(36) $ 20 $ (13) $ (29) $ 36 $ (1) $ (2) $ 32
Federal funds sold (1) (1) 1 (1) (63) (16) 15 (63)
Total short-term investments (37) 19 (12) (30) (27) (17) 13 (31)
Investment securities:
Taxable 223 (219) (12) (8) 483 (323) (39) 121
Tax-exempt (103) 50 (11) (64) (103) 20 (3) (86)
Total investments 120 (169) (23) (72) 380 (303) (42) 35
Loans:
Residential mortgage loans 717 (163) (15) 539 1,073 (877) (124) 72
Commercial and farm loans 456 208 44 708 241 (2) (0) 239
Loans to State & Political
Subdivisions 212 (53) (32) 127 (141) (39) 10 (170)
Other loans (538) 30 (8) (516) (287) (78) 10 (355)
Total loans - net of
discount (2)(3)(4) 847 22 (11) 858 886 (996) (104) (214)
Total interest income 930 (128) (46) 756 1,239 (1,316) (133) (210)
Interest expense:
Interest bearing deposits:
NOW accounts (5) (81) 1 (85) 89 (212) (23) (146)
Savings accounts 18 (126) (3) (111) 109 (197) (25) (113)
Money market accounts 6 46 0 52 264 (103) (48) 113
Certificates of deposit 379 (360) (24) (5) (48) (793) 6 (835)
Total interest-bearing deposits 398 (521) (26) (149) 414 (1,305) (90) (981)
Other borrowed funds 191 24 25 240 (25) (40) 4 (61)
Total interest expense 589 (497) (1) 91 389 (1,345) (86) (1,042)
Net interest income $341 $369 $ (45) $665 $850 $ 29 $ (47) $ 832
As can be seen from the preceding tables, tax equivalent net interest income
rose from $8,168,000 in 1992 to $9,000,000 in 1993 to $9,665,000 in 1994. In
1994, net interest income grew $665,000 as overall spread increased from
4.00% to 4.11%. The increased volume of interest-earning assets generated an
increase in income of $930,000 while increased interest-bearing liabilities
produced $589,000 of interest expense. Ending the trend from the past few
years, the yield on interest-earning assets declined a modest 12 basis points
from 8.44% to 8.32% and the average interest rate on interest-bearing
liabilities declined 23 basis points from 4.44% to 4.21%. This decline does
not reflect the nearly 300 basis point increase in short term interest rates
during 1994. That impact will be felt during 1995 as the normal loan and
deposit rate lag takes effect. Analysis of the Company's current net
interest income in early 1995 indicates that the effects of recent interest
rate increases and the effect of the yield curve becoming more level, are
beginning to have a slightly negative effect on interest margin. Management
is currently evaluating alternatives to mitigated this decline of interest
spread.
The 1994 changes due to rate were represented by a decline of $128,000 for
interest revenue vs. a $497,000 decline in interest expense largely due to
the prior year decline in national interest rate levels coupled with the
Company's asset/liability management and the tiered pricing of its interest-
bearing transaction and saving accounts.
Between 1992 and 1993, interest on earning assets decreased $210,000 while
interest expense declined a much greater $1,042,000. Of this $832,000 net
interest income growth, $850,000 was due to changes in volume and $29,000 was
due to change in interest rates.
Other Operating Income
The Company achieved other operating income of $1,136,000 in 1994 which was
an increase of $70,000 or 6.6% from $1,066,000 in 1993, ($22,000 occurring in
service charges on deposit accounts). Also in 1994, $63,000 in gains were
realized on the sale and maturity of securities (causing $21,000 of
additional taxes) as compared to $50,000 ($17,000 of additional taxes) in
1993. Other operating income increased $36,000 in 1993 or 3.8% over that of
1992.
Trust income of $204,000 increased 6.8% from the $191,000 earned during
1993. In 1995, management plans to increase sales of a recently established
mutual fund program and increase growth in traditional trust business.
Expanding small business relationships by working with the community offices
and the commercial lending staff is also expected to increase new business.
____
32
Citizens Financial Services, Inc.
____________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
____________________________________________________________________________
Other Operating Expenses
Salaries and employee benefits, the largest form of noninterest expense,
increased $306 thousand or 11% from $2.8 million in 1993 to $3.1 million in
1994. The 1994 increase was primarily the result of the culmination of a
restructuring plan begun in 1993. The restructuring included the hiring of
five highly qualified officers in the Banking Services, Data Processing,
Audit, Finance/Control and Trust and Investment Services Departments. In
addition, specialized departments were created for loan processing and
collection and tele-services. In comparing 1993 to 1992, salaries and
employee benefits expense increased $399 thousand or 16.7%. Management
believes that additional productivity and continued asset growth will offset
these expenses.
Occupancy expense increased $28,000 in 1994, or 7.7%, as compared to an
increase of $11,000 in 1993. Furniture and equipment expense was virtually
unchanged from 1994 compared to 1993. An increase of $52,000 was experienced
in 1993 compared to 1992 as the result of providing equipment, office
furniture and office space for the additional staff from the restructuring
described above.
FDIC insurance costs (currently billed at the lowest possible rate of .23
per hundred of deposits)have remained high at $406,000 in 1994 and $405,000
in 1993 . The FDIC is currently evaluating a significant premium reduction
that may begin as early as September of 1995.
Other expenses increased slightly in 1994 by $39,000 or 2% compared to an
increase of $183,000 in 1993.
The implementation of an optical check imaging and proof system in the
second half of 1995 is expected to reduce payroll expense slightly in 1995
with greater reductions anticipated for 1996. Other operating expenses that
are expected to decline are postage costs by approximately $20,000 in 1995
and $50,000 during 1996. Additionally, management expects check imaging to
have other cost savings in computer supplies and microfilm expenses. In
light of this change in operating technology, management currently is
reviewing its strategic technology plan and is in the process of determining
which specific activities to pursue in the near term.
It is management's intention that (based upon current expectations and
market conditions) none of the proposed strategic technology projects will
have a material impact on liquidity of the Company and any capital
expenditures will be offset by improved operating efficiency.
Provision for Income Taxes
The provision for income taxes for 1994 increased by $250,000 or 27.6% to
$1.2 million and as with the $88,000 increase in 1993, was due to increased
earnings and less tax-free interest income.
An additional variance was the impact of a 1993 credit for state income tax
not applicable in 1994, resulting in a net variance of $119,000.
Loan Quality and Provision for Possible Loan Loss
As discussed above, the loan portfolio contains a large portion of real
estate secured loans (generally residential home mortgages, mortgages on
small business properties, etc.), and consumer installment loans and other
commercial loans. Footnote 4 provides further details on the composition of
the loan portfolio.
Management follows quality credit underwriting policies and collection
practices and is supplemented by an internal loan review program. In
addition, as part of the restructuring discussed above, a separate
collections department was established in 1993 to focus on the collection and
workout of problem loans. The board of directors and management believe all
of these initiatives have led to relatively low levels of non-performing
loans and loan chargeoffs. The following tables indicate the level of non-
performing loans, net chargeoffs and charges against the allowance for losses
on real estate owned over the past five years ending December 31:
1994 1993 1992 1991 1990
Nonperforming loans $1,824 $1,984 $1,128 $1,131 $ 982
Net chargeoffs (recoveries)
for loan losses 50 0 119 88 98
Net chargeoffs (recoveries)
for real estate owned losses 0 0 0 26 (14)
The following table shows the summary of non-performing loans:
1994 1993 1992 1991 1990
Nonaccruing loans $1,557 $1,566 $ 689 $ 154 $ 251
Accrual loans - 90 days or
more past due 267 418 439 977 731
------------------------------------------------------------
Total nonperforming loans $1,824 $1,984 $1,128 $1,131 $ 982
============================================================
Another way to view the credit quality exposure of the loan portfolio is by
reviewing the "watch list" categories used by management (and as required by
the regulatory agencies). This monitoring process is reviewed and reported
monthly to identify problems or potential problems.
Loan Classified on the "watch list" as of December 31:
1994 1993 1992
Special mention $1,106 $1,856 $2,140
Substandard 2,781 2,250 2,388
Doubtful 10 16 24
Loss 0 0 1
----------------------------------------
Total $3,897 $4,122 $4,553
========================================
Percent of total loans 2.52% 2.94% 3.52%
____
33
1994 Annual Report
____________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
____________________________________________________________________________
The following table presents an analysis of the allowance for possible loan
losses for the five years ending December 31:
Summary of Loan Loss Experience
1994 1993 1992 1991 1990
Balance at beginning
of period $1,516 $1,201 $ 996 $ 914 $ 838
------------------------------------------
Charge-offs (domestic
loans only):
Real estate-construction 0 0 0 0 0
Real estate-mortgage 31 25 1 11 2
Installment and credit plans 28 43 63 40 90
Commercial, financial,
agricultural 9 3 87 103 28
Lease financing 0 0 0 0 0
------------------------------------------
Total loans charged-off 68 71 151 154 120
Recoveries (domestic only):
Real estate-construction 0 0 0 0 0
Real estate-mortgage 0 3 30 0 21
Installment and credit plans 14 60 1 45 1
Commercial, financial,
agricultural 4 8 1 21 0
Lease financing 0 0 0 0 0
------------------------------------------
Total loans recovered 18 71 32 66 22
Net loans charged-off 50 0 119 88 98
Provision charged to expense 255 315 324 170 174
------------------------------------------
Balance at end of year $1,721 $1,516 $1,201 $ 996 $ 914
==========================================
Loans outstanding at
end of year $156,569 $141,907 $129,527 $121,743 $112,112
Average loans outstanding,
net $146,894 $136,025 $126,604 $116,911 $110,537
Net charge-offs to average
loans 0.03% 0.00% 0.09% 0.08% 0.09%
Year-end allowance to
total loans 1.10% 1.07% 0.93% 0.82% 0.82%
As detailed in Footnote 4 and the above tables, total past due (90 days or
more) and non-performing loans decreased 8% from December 31, 1993 to
December 31, 1994. Nonaccural loans continue to be at the same level as
1993. The majority of these loans are well collateralized by real estate or
guaranteed by the Small Business Administration or Farmers Home
Administration. Total charge-offs for 1995 are still expected to approximate
the moderate historic levels.
Allowance for Possible Loan Losses
The allowance is maintained at a level to absorb potential future loan
losses. The allowance is increased by provisions charged to operating
expense and reduced by net charge-offs. Management's basis for the level of
the allowance and the annual provision is its evaluation of the loan
portfolio, current and projected economic conditions, the historical loan
loss experience, present and prospective financial condition of the
borrowers, the level of nonperforming assets, and other relevant factors.
While management evaluates all of this information, future adjustments to the
allowance may be necessary if economic conditions differ substantially from
the assumptions used in making the evaluation. In addition, various
regulatory agencies, as an integral part of their examination process, review
the Company's allowance for loan losses. Such agencies may require the
Company to recognize additions to the allowance based on their evaluation of
information available to them at the time of their examination. Based on
this process, management believes that the current allowance is adequate to
offset any exposure that may exist for under-collateralized or uncollectible
loans.
The allowance for possible loan losses has steadily increased as a
percentage of total loans, amounting to .93%, 1.07%, and 1.10% as of December
31, 1992, 1993, and 1994, respectively. The 1994 growth is the combined
result of a $255,000 charge to earnings and $50,000 in net loan losses.
Although the level of charge-offs was nearly the same as 1993, fewer
recoveries of loans previously charged off raised the total net charge-off
amount.
____
34
Citizens Financial Services, Inc.
____________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
____________________________________________________________________________
Allocation of the Allowance for Loan Losses
Balance at end of period applicable to:
1994 1993 1992 1991 1990
Commercial, financial,
agricultural $ 765 $ 688 $ 518 $ 474 $ 400
Real estate-construction 0 0 0 0 0
Real estate-mortgage 641 496 370 265 268
Installment loans to
individuals 315 332 313 257 246
______________________________________________
Total allowance for
possible loan losses $1,721 $1,516 $1,201 $ 996 $ 914
==============================================
As described in footnote 14, in 1995 the Company will implement SFAS 114 as
amended by SFAS 118, which will impact management's method for determining
the allowance for loan losses. Management does not believe any material
impact on earnings will occur as a result of the implementation of SFAS 114.
Stockholders' Equity
Stockholders' equity is evaluated in relation to total assets and the risk
associated with those assets. The greater the capital resources, the more
likely a corporation is to meet its cash obligations and absorb unforeseen
losses. For these reasons capital adequacy has been, and will continue to
be, of paramount importance.
Stockholders' equity has grown by 3.1% in 1994, 12.3% in 1993 and 9.6% in
1992 to the current level of $18.9 million. In 1994 $364,000 was deducted
from equity as unrealized losses on available-for-sale securities compared to
1993 when $610,000 was added to equity. Total equity has represents a
consistent and strong level - approximately 8.1% of total assets at December
31, 1994 as compared to 8.5% at December 31, 1993.
Management does not anticipate that any of the equipment purchase discussed
above will have a negative impact on stockholder's equity during 1995.
The Company pays cash dividends on a semiannual basis. The dividend rate
is determined by the Board of Directors after considering the Company's
capital requirements, current and projected net income, and other factors.
In 1994 and 1993, 41.5% and 42.2% of net income was paid out in dividends,
respectively.
The Company paid a one percent stock dividend in July 1994. The one percent
stock dividend resulted in a 12,656 increase in the number of common shares
outstanding. For the year ended December 31, 1994 the total number of common
shares outstanding was 1,334,543. For comparative purposes, outstanding
shares for prior periods were adjusted for the 1994 stock dividend in
computing earnings and cash dividends per share.
There are currently three federal regulatory definitions of capital adequacy
that take the form of minimum ratios. The table below presents these ratios
and clearly depicts that the Company's ratios exceeds all federal minimum
regulatory standards. The Company has computed its risk-based capital ratios
as follows (dollars in thousands):
December 31,
1994 1993 1992
Tier I - Total stockholders' equity $18,903 $18,340 $16,329
Less: Unrealized holding gains (losses)
on securities available-for-sale (364) 609
_______________________________
Tier I, net 19,267 17,731 16,329
Tier II - Allowance for loan losses (1) 1,625 1,467 1,201
_______________________________
Total qualifying capital $20,892 $19,198 $17,530
===============================
Risk-adjusted
on-balance sheet assets $123,077 $112,271 $104,712
Risk-adjusted off-balance sheet
exposure (2) 6,956 5,079 3,535
_______________________________
Total risk-adjusted assets $130,033 $117,350 $108,247
================================
December 31,
Ratios: 1994 1993 1992
Tier I risk-based capital ratio 14.8% 15.1% 15.1%
Federal minimum required 4.0 4.0 4.0
Total capital ratio - actual 16.1% 16.4% 16.2%
Federal minimum required 8.0 8.0 8.0
Leverage ratio (3) 8.6% 8.5% 8.4%
Federal minimum required 4.0 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.
Liquidity
In order to maintain proper liquidity, the Company uses asset/liability
management policies along with its investment policies to assure it can meet
its liquidity requirements to depositors, credit customers and shareholders.
There are seasonal and cyclical timing differences between growth in loans
and core deposits. A basic objective of liquidity management is to
accommodate these timing differences by ensuring the availability of funds to
meet customers' loan and deposit withdrawal needs in a cost efficient manner.
A further objective is to minimize the adverse impact of loan and core
deposit activity in the event of a disruption in normal funding sources,
whether such disruption is market-wide or specific to the Company.
____
35
1994 Annual Report
____________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
____________________________________________________________________________
Liquidity is managed through both the asset and liability sides of the
balance sheet. Asset-based liquidity is liquidity that has been created in
advance by building a stable funding base greater than what is currently used
to fund less liquid assets, with the excess stored in the form of short-term
investments. Liability-based liquidity is liquidity that is created through
access to wholesale funding markets (short-term borrowings), where volume can
be rapidly increased to accommodate loan demand. At year-end 1994, the
Company had short-term borrowings of $9.4 million. It is managements intent
to reduce the short term borrowing by increasing the volume of core deposits
and the funding of some future loan demand by selling conforming mortgages as
previously discussed.
To assure the maintenance of liquidity reserves, the Company monitors and
places various internal constraints on the level of loans relative to core
deposits and other stable funding sources; the liquidity characteristics of
investments; and the volume and maturity structure of wholesale funding.
The following table shows the maturity or repricing of the Company's assets
and liabilities at December 31, 1994, based on amortized cost.
0-3 months 3-6 months 6-12 months 1-3 years 3-5 years
Investment securities and ------------ ------------ ------------- ----------- -----------
interest-bearing deposits $ 1,308 $ 1,743 $ 3,850 $ 20,353 $ 20,799
Loans, net of unearned income and
deferred loan fees 47,847 16,245 26,253 30,499 18,518
------------ ------------ ------------- ----------- -----------
Total interest-earning assets $ 49,155 $ 17,988 $ 30,103 $ 50,852 $ 39,317
============ ============ ============= =========== ===========
Interest-bearing demand and savings deposits $ 22,254 $ 4,565 $ 9,129 $ 29,018 $ 5,900
Certificates of deposit 21,012 18,355 19,039 27,734 22,175
Short-term borrowings 9,400 0 0 0 0
long-term borrowings 2,558 500 147 607 944
------------ ------------ ------------- ----------- -----------
Total interest-bearing liabilities $ 55,224 $ 23,420 $ 28,315 $ 57,359 $ 29,019
============ ============ ============= =========== ===========
Excess interest-earning
assets (liabilities) $ (6,069) $ (5,432) $ 1,788 $ (6,507) $ 10,298
Cumulative interest-earning assets $ 49,155 $ 67,143 $ 97,246 $148,098 $187,415
Cumulative interest-bearing liabilities 55,224 78,644 106,959 164,318 193,337
------------ ------------ ------------- ----------- -----------
Cumulative gap $ (6,069) $(11,501) $ (9,713) $(16,220) $ (5,922)
============ ============ ============= =========== =========== ===========
Cumulative interest rate sensitivity ratio (1) 0.89 0.85 0.91 0.90 0.97
(1) Cumulative interest-earning assets divided by interest-bearing
liabilities.
This table 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. While placing the balances in the various time
intervals may reflect the contractual right or ability to change interest
rate on these items, it does not reflect the actual pricing behavior nor does
it capture rate-volume interactions. This is one of the limitations of gap
analysis as an interest rate risk management tool.
An additional tool used by management to evaluate interest rate risk is
simulation analysis of future net interest income under various interest rate
scenarios, incorporating assumptions relating to loan and deposit pricing,
investment and loan prepayments and other customer behavior.
Capital expenditures of $602 thousand in 1994 exceeded 1993 by $142,000 of
which $121,000 was an initial payment on the check imaging system to be
installed during the second half of 1995. Management expects that normal
equipment replacements of about $100,000 plus the balance remaining on the
imaging system of approximately $395,000 will require $495,000 for capital
expenditures in 1995. These purchases will allow greater operating
efficiencies and provide the customer with a higher quality product.
Management has begun the process to find a solution to the space issue it
is experiencing at its main office. As the result of recent growth and
related needs to hire personnel, the Company is currently renting office
space in three separate buildings as a temporary solution. In January 1994,
the Company entered into an agreement whereby approximately five acres south
of Mansfield would be acquired for development of a central
operations/administration facility. In January 1995, because of limitations
on the proposed site, the Company terminated the option. Management is
continuing to evaluate alternative sites for construction of the new
facility. Preliminary estimates are that the earliest start of any
construction will be in 1996.
____
36
Citizens Financial Services, Inc.
____________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
____________________________________________________________________________
General
The majority of assets and liabilities of a financial institution are
monetary in nature and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. However, inflation does have an important impact on the growth
of total assets and on non-interest expenses, which tend to rise during
periods of general inflation. The level of inflation over the last few years
has been declining.
The Federal Deposit Insurance Corporation Improvement Act of 1991 was signed
into law on December 19, 1991 (the "Act"). The Act addresses the
recapitalization of the bank insurance fund and is designed to limit risk
within the banking industry. Much of the impact of the legislation has taken
place and management does not believe that full implementation of the Act
will have a material impact on liquidity, capital resources or reported
results of operations in future periods.
On September 29, 1994, President Clinton signed into law the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Banking and Branch Act"). The legislation permits interstate banking twelve
months after its enactment into law. Bank holding companies, pursuant to an
amendment to the Bank Holding Company Act, can acquire a bank located in any
state, as long as the acquisition does not result in the bank holding company
controlling more than 10% or the deposits in the United States, or 30% of the
deposits in the target bank's state. The legislation permits states to waive
the concentration limits and require that the target institution be in
existence for up to five years before it can be acquired by an out-of-state
bank or bank holding company. Interstate branching and merging of existing
banks is permitted after three years from enactment, if the bank is
adequately capitalized and demonstrates good management. Branch merging will
be permitted earlier if a state undertakes to enact a law which allows it and
states may also enact a law to permit banks to branch de novo. As a national
bank, the Company currently can relocate its main office across state lines
by utilizing a provision in the National Bank Act which permits such
relocation to a location not more than thirty miles from its existing main
office. In effect, a national bank can thereby move across state lines as
long as the relocation does not exceed thirty miles, and also retain as
branches the offices located in the original state.
Various congressional bills and other proposals have proposed sweeping
overhaul of the banking system, including provisions for: 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.
Management has no way of anticipating whether any of these measures will be
enacted or if enacted, their impact on the Company's financial position and
reported results of operation.
Normal examinations of the Company by the Comptroller of the Currency
occurred during 1994. The last Community Reinvestment Act performance
evaluation by the same agency during 1993 resulted in a rating of
"Satisfactory Record of Meeting Community Credit Needs".
Aside from those matters described above, management does not believe that
there are any trends 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.
____
37
[GRAPHIC OMITTED: Silhouette of a colonial rider on horseback, approximately
1 inch square, top center of page]
____________________________________________________________________________
FIRST CITIZENS NATIONAL BANK
Full Service Community Banking Hours
Mansfield*
M,T,W,Th: 8:30 am - 4:30 pm
Fri.: 8:30 am - 6:00 pm
Sat.: 8:30 am - Noon
Blossburg*
M,T,W,Th: 8:30 am - 4:30 pm
Fri.: 8:30 am - 6:00 pm
Sat.: 8:30 am - Noon
Ulysses*
M,T,W,Th: 8:30 am - 4:30 pm
Fri.: 8:30 am - 6:00 pm
Sat.: 8:30 am - Noon
Genesee
M,T,W,Th: 8:30 am - 4:30 pm
Fri.: 8:30 am - 6:00 pm
Sat.: 8:30 am - Noon
Sayre*
M,T,W,Th: 8:30 am - 4:30 pm
Fri.: 8:30 am - 6:00 pm
Sat.: 8:30 am - Noon
Wellsboro*
M,T,W,Th: 8:30 am - 4:30 pm
Fri.: 8:30 am - 6:00 pm
Sat.: 8:30 am - Noon
Troy*
M,T,W,Th: 8:30 am - 4:30 pm
Fri.: 8:30 am - 6:00 pm
Sat.: 8:30 am - Noon
*Drive-up opens at 8:00 am
DIRECTORS
Robert E. Dalton, Chairman of the Board
Bruce L. Adams
Carol J. Bond
R. Lowell Coolidge, Esquire
Larry J. Croft
Robert J. Landy, Esquire
John E. Novak
John M. Thomas, MD
Rudolph J. van der Hiel, Esquire
William D. VanEtten
Richard E. Wilber, President, Chief Executive Officer
OFFICERS
Administrative Services
Cynthia T. Pazzaglia, Human Resources Manager
Thomas A. Gridley, Security Officer
Audit/Compliance
V. Guy Abell, Auditor
Robert D. Wrisley, Vice President, Loan Compliance and Review
Karen R. Jacobson, Deposit Compliance and Review
Banking Services
Terry B. Osborne, Executive Vice President, Secretary, Citizens Financial
Services, Inc.
Jerald J. Rumsey, Senior Vice President, Credit Services Manager
Isabelle D. Case, Assistant Vice President, Marketing Manager
Robert L. Champion, Commercial Services Officer
Pamela A. Hazelton, Appraiser
Kathleen A. White, Resource Recovery Manager
Finance/Control
Thomas C. Lyman, Treasurer, Citizens Financial Services, Inc.
Finance/Control Division Manager
Randall E. Black, Controller
Operations
William W. Wilson, Vice President, Operations Division Manager
Michael D. Miller, Data Operations Manager
Joanne W. Marvin, Banking Operaitons Manager
Trust and Investment Services
Deborah E. Scott, Vice President, Trust and Investment Services Manager
Douglas P. Smith, Trust Investment Officer
Jean A. Knapp, Trust Administrator
Sara J. Roupp, Trust Administrator
CITIZENS FINANCIAL SERVICES INCORPORATED
15 South Main Street
Mansfield, PA 16933
717-662-2121
800-326-9486
FAX 717-662-2365
DIRECTORS
Robert E. Dalton, Chairman of the Board
Bruce L. Adams
Carol J. Bond
R. Lowell Coolidge, Esquire
Larry J. Croft
Robert J. Landy, Esquire
John E. Novak
John M. Thomas, MD
Rudolph J. van der Hiel, Esquire
Wuilliam D. VanEtten
Richard E. Wilber
DIRECTORS EMERITI
Robert M. Jones
Leslie H. Kimble
Edward Kosa
Constantine Kurzejewski
John G. Kuster
Robert G. Messinger
Wilber Wagner
____
38
[GRAPHIC OMITTED: Silhouette of a colonial rider on horseback, approximately
1 inch square, top right of page]
____________________________________________________________________________
MISSION STATEMENT
We Recognize That Our Customers Are The Reason For Our Existence.
Our mission is to be the dominant financial services provider in
our market place. We will establish ourselves apart from other
financial vendors by providing service excellence to our customers
through satisfied, motivated, professional employees and a
profitable range of financial services ot meet the customers'
changing needs. It is also our mission to profitably satisfy
shareholder performance expectations and to be an active citizen of
the communities we serve.
____________________________________________________________________________
COMMUNITY OFFICES
Toll free to all locations: 800-326-9486
----------------------------------------
Mansfield
15 South Main Street
Mansfield, PA 16933
717-662-2121
FAX 717-662-3278
Local Board
William J. Waldman, Chairman
Anthony D. Fiamingo
Allan K. Reed
Stephen A. Saunders
William J. Smith
Officers
Allan K. Reed, Assistant Vice President, Office Manager
James T. Hepp, Assistant Office Manager
Shari L. Bolt, Customer Service Counselor
Kristina M. Payne, Customer Service Counselor
----------------------------------------
Blossburg
300 Main Street
Blossburg, PA 16912
717-638-2115
FAX 717-638-3178
Local Board
Mark L. Dalton, Chairman
Terrance M. Asalone
Harold K. House
George D. Lloyd
Thomas Phinney
Officers
Terrance M. Asalone
Michele E. Litzelman, Customer Service Counselor
----------------------------------------
Ulysses
502 Main Street
Ulysses, PA 16948
814-848-7572
FAX 814-848-7633
Local Board
Ronald G. Bennett, Chairman
Lloyd R. Dugan
D. Thomas Eggler
Phillip D. Vaughn
James A. Wagner
Officers
Phillip D. Vaughn, Assistant Vice President
L. Abbie Lerch, Customer Service Counselor
----------------------------------------
Genesee
RD 1, Box 58
Genesee, PA 16923
814-228-3201
FAX 814-228-3395
Local Board
Gene E. Kosa, Chairman
William R. Austin
John K. Hyslip
Stephen B. Richard
Dennis C. Smoker
Officers
William R. Austin, Assistant Vice President
Christine M. Miller, Customer Service Counselor
----------------------------------------
Sayre
306 West Lockhart Street
Sayre, PA 18840
717-888-6602
FAX 717-888-3198
Local Board
Joseph Burkhart, Chairman
Blaine W. Cobb, MD
Robert Elsbree
Russel Knight
Chester L. Reed
Officers
Chester L. Reed, Assistant Vice President
Toni Tracy, Customer Service Counselor
----------------------------------------
Troy
303 West Main Street
Troy, PA 16947
717-297-4131
FAX 717-297-4133
Local Board
Lyle Haflett, Chairman
Thomas Calkins, III
Richard Packard
David E. Carlson
Donald White
Office Manager
David E. Carlson
----------------------------------------
Wellsboro
99 Main Street
Wellsboro, PA 16901
717-724-2600
FAX 717-724-4381
Local Board
William A. Hebe, Esquire, Chairman
Oliver Richard Bartlett
Robin K. Carleton
Wilson Gridley, III
Jeffrey L. Wilson
Office Manager
Jeffrey L. Wilson, Assistant Vice President
MAC
Money Access Card
[LOGO OMITTED]
24 Hour Automated Teller
*Mansfield *Mansfield University
*Mansfield WalMart
*Soldiers and Sailors Memorial Hospital
Wellsboro *Genesee *Ulysses *Sayre
____
39
THE BUSINESS OF CITIZENS FINANCIAL SERVICES, INC.
____________________________________________________________________________
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting and Luncheon for the shareholders of Citizens Financial
Services, Inc. will be held at the Tioga County Fairgrounds Youth building in
Whitneyville, PA on Tuesday, April 18, 1995 at 12:00 noon.
FORM 10-K
The Annual Report to the Securities and Exchange Commission, Form 10-K, will
be made available upon request.
Contact:
Thomas C. Lyman, Treasurer
Citizens Financial Services, Inc.
15 South Main Street
Mansfield, PA 16933
TRANSFER AGENT
Citizens Financial Services, Inc.
15 South Main Street
Mansfield, PA 16933
Telephone: 717-662-2121/800-326-9486
SHAREHOLDER SERVICES
Shareholder inquiries nad requests for assistance should be directed to the
Transfer Agent listed above.
____________________________________________________________________________
MONEY MAKERS
Anthony Misciagna & Co., Inc.
6 Bird Cage Walk
Hollidaysburg, PA 16648
Telephone: 800-343-5149
Ryan, Beck & Co.
80 Main Street
West Orange, NJ 07052
Telephone: 800-342-2325
W H Newbolds Son & Co.
1500 Walnut Street
Philadelphia, PA 19102
Telephone: 800-441-4132
Janney Montgomery Scott
1601 Market Street
Philadelphia, PA 19103
Telephone: 800-JANNEYS
Paine Webber Incorporated
111 S.W. 5th Avenue, #1200
Portland, OR 97204
Telephone: 800-541-5171
____
40
CITIZENS
FINANCIAL SERVICES
________________
INCORPORATED
15 South Main Street, Mansfield, PA 16933
Tel. 717-662-2121/800-326-9486
copyright 1995, All Rights Reserved. Printed in USA.