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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________to_____________________
Commission file number 0-13222
CITIZENS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2265045
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 South Main Street, Mansfield, Pennsylvania 16933
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717)662-2121
Securities registered pursuant to section 12 (b) of the Act:
Title of each class Name of each exchange on
which registered
NOT APPLICABLE NOT APPLICABLE
Securities registered pursuant to section 12 (g) of the Act:
Common Stock, par value $1.00 per share.
(Title of class)
Indicate by checkmark whether the registrant (1) has filed
all reports to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes__X___ No_____
The total market value of the voting stock of the Registrant
held by non-affiliates (for this purpose, persons or entities
other than executive officers, directors, or 5% or more
shareholders) of the Registrant, as of March 10, 1997, is
estimated to have been approximately $32,000,000.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 or Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
The number of shares outstanding of the Registrant's Common
Stock, as of March 10, 1997, 1,360,228 shares of Common Stock,
par value $1.00.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, III and IV - Definitive Proxy Statement for the Annual
Meeting of Shareholders to be held April 15, 1997.
Parts II and IV - Annual Report to Shareholders for the Year
Ended December 31, 1996.
Citizens Financial Services, Inc.
Form 10-K
INDEX
Part I Page
Item 1-Business 1-8
Item 2-Properties 9
Item 3-Legal Proceedings 9
Item 4-Submission of Matters to a Vote of Shareholders 10
Part II
Item 5-Market for Registrant's Common Stock and Related
Shareholder Matters 10
Item 6-Selected Financial Data 10
Item 7-Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 8-Financial Statements and Supplementary Data 10
Item 9-Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 11
Part III
Item 10-Directors and Executive Officers of the Registrant 11
Item 11-Executive Compensation 11
Item 12-Security Ownership of Certain Beneficial Owners and
Management 11
Item 13-Certain Relationships and Related Transactions 11
Part IV
Item 14-Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 12
Signatures 14
Part I
Item 1-Business
Citizens Financial Services, Inc. (the "Company") is a
Pennsylvania business corporation, incorporated April 30, 1984
for the purpose of forming a bank holding company. On April 30,
1984, First Citizens National Bank (the "Bank") became a
wholly-owned subsidiary of the Company by means of a merger in
which the shareholders of the Bank became shareholders of the
Company.
In 1932, First National Bank opened for business in
Mansfield, Pennsylvania. In 1970 the First National Bank in
Mansfield merged with Citizens National Bank of Blossburg,
Pennsylvania to form First Citizens National Bank. In 1971, the
Bank expanded into Potter County through the acquisition of
the Grange National Bank, which had offices in Ulysses and
Genesee, Pennsylvania.
On November 16, 1990, the Company acquired Star Savings and
Loan Association (the "Association"), originally organized as a
Pennsylvania-chartered mutual savings and loan association in
1899 and converted to a Pennsylvania-chartered permanent reserve
fund stock savings and loan association on March 27, 1986. On
December 31, 1991, the Association merged with the Bank
terminating the Association's separate operations as a savings
and loan association.
On April 20, 1996 the Bank purchased two branch offices of
Meridian Bank in Canton and Gillett, Pennsylvania.
On October 31, 1996, the Bank opened a branch office in the new
Weis supermarket in Wellsboro, Pennsylvania.
As of December 31, 1996, the Bank employed 127 full time
equivalent employees at its ten banking facilities.
The Bank currently engages in the general business of
banking throughout its service area of Potter, Tioga and Bradford
counties in North Central Pennsylvania and Allegany, Steuben,
Chemung and Tioga counties in Southern New York. The Bank
maintains its central office in Mansfield, Pennsylvania and
presently operates banking facilities in the communities of
Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre,
Canton and Gillett. Automatic teller machines are located in
Soldiers and Sailors Memorial Hospital in Wellsboro, Mansfield
Wal-Mart and Mansfield University. The Bank's lending and
deposit products are offered primarily within the vicinity of
its service area.
COMPETITION
The Company faces strong competition in the communities it
serves from other commercial banks, savings banks, and savings
and loan associations, some of which are substantially larger
institutions than the Company's subsidiary. In addition,
personal and corporate trust services are offered by insurance
companies, investment counseling firms, and other business firms
and individuals. The Company also competes with credit unions,
issuers of money market funds, securities brokerage firms,
consumer finance companies, mortgage brokers and insurance
companies. These entities are strong competitors for virtually
all types of financial services.
In recent years, the financial services industry has
experienced tremendous changes to the competitive barriers
between bank and non-bank institutions. The Company not only must
compete with traditional financial institutions, but also with
other business corporations that have begun to deliver competing
financial services. Competition for banking services is based on
price, nature of product, quality of service, and in the case of
certain activities, convenience of location.
REGULATION AND SUPERVISION
The operations of the Bank are subject to federal and state
statutes applicable to banks chartered under the banking laws of
the United States, to members of the Federal Reserve System and
to banks whose deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC"). Bank operations are also subject
to regulations of the Comptroller of the Currency ("Comptroller").
The primary supervisory authority of the Bank is the
Comptroller, who regularly examines the Bank. The Comptroller
has the authority under the Financial Institutions Supervisory
Act to prevent a national bank from engaging in unsafe or unsound
practice while conducting its business.
The Company is subject to regulation under the Bank Holding
Company Act of 1956, as amended (the "Act"), and is registered
with the Board of Governors of the Federal Reserve System
("Federal Reserve"). Under the Act, bank holding companies are
not permitted, with certain exceptions, to acquire direct or
indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank and are prohibited from
engaging in any business other than that of banking, managing and
controlling banks or furnishing services to its subsidiary banks,
except that they may, upon application, engage in, and may own
shares of companies engaged in, certain businesses found by the
Federal Reserve to be so closely related to banking as to be a
proper incident thereto (if the Federal Reserve determines that
such acquisition will be, on balance, beneficial to the public).
The Act does not place territorial restrictions on the activities
of non-bank subsidiaries of bank holding companies. The Act
requires prior approval by the Federal Reserve of the acquisition
by the Company of more than 5% of the voting stock of any
additional bank. The Company is required by the Act to file
annual reports of its operations with the Federal Reserve
and of any additional information that the Federal Reserve may
require. The Federal Reserve may also make examinations of the
Company and any or all of its subsidiaries. Further, under
Section 106 of the 1970 amendments to the Act and the Federal
Reserve's regulations, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or
provision of credit or provision of any property or service. The
so-called "anti-tie-in" provisions state generally that a bank
may not extend credit, lease property, sell property or furnish
any service to a customer on the condition that the customer
provide additional credit or service to the bank, to its bank
holding company or to any other subsidiary of its bank holding
company or on the condition that the customer not obtain other
credit or service from a competitor of the bank, its bank holding
company or any subsidiary of its bank holding company.
Subsidiary banks of a bank holding company are subject to
certain restrictions imposed by the Federal Reserve Act on any
extensions of credit to the bank holding company or any of its
subsidiaries, or investments in the stock or other securities of
the bank holding company and on taking of such stock or
securities as collateral for loans to any borrower.
PERMITTED NON-BANKING ACTIVITIES
The Federal Reserve permits bank holding companies to
engage in non-banking activities so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
The Company presently does not engage in any such activities nor
does it intend to in the near future.
The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 is discussed in detail on page 45 of Management's
Discussion and Analysis of the 1996 Annual Report to the
shareholders, which information is included at Exhibit 13, here
of and incorporated berein by reference.
Neither the Company nor its subsidiary anticipates that
compliance with environmental laws and regulations will have any
material effect on capital expenditures, earnings, or on its
competitive position.
The Company is a legal entity, separate and distinct from
the Bank. All of the Company's revenues, including funds
available for payment of dividends and for operating expenses,
are provided by dividends from the Bank. Certain
limitations exist on the availability of the Bank's
undistributed net assets for the payment of dividends to its
parent without prior approval of the bank regulatory authorities
as further described in Footnote 12 of the 1996 Annual Report to
the shareholders, which information is included at Exhibit 13,
here of and incorporated berein by reference.
LEGISLATION AND REGULATORY CHANGES
From time to time, legislation is enacted which has the
effect of increasing the cost of doing business, limiting or
expanding permissible activities or affecting the competitive
balance between banks and other financial institutions.
Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and
other financial institutions are frequently made in Congress, and
before various bank regulatory agencies. Accurate predictions
are difficult to make as to the likelihood of any major changes
or the impact such changes might have on the Company and its
subsidiary. Certain changes of potential significance to the
Company which have been enacted recently and others which are
currently under consideration by Congress or various regulatory
or professional agencies are discussed below.
Risk-Based Capital Guidelines. The Federal Reserve,
the FDIC and the Comptroller have issued certain risk-based
capital guidelines, which supplement existing capital
requirements and have been discussed in the Management Discussion
and Analysis section on page 43 and Footnote 12 of the 1996
Annual Report to the shareholders, which information is included
at Exhibit 13, here of and incorporated berein by reference.
Under the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") enacted December 19,1991, institutions
must be classified in one of five defined categories as
illustrated below (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized).
Total Tier 1 Under a
Risk- Risk- Tier I Capital
Based Based Leverage Order or
Ratio Ratio Ratio Directive
CAPITAL CATEGORY
Well capitalized >10.0 >6.0 >5.0 No
Adequately capitalized > 8.0 >4.0 >4.0*
Undercapitalized < 8.0 <4.0 <4.0*
Significantly undercapitalized < 6.0 <3.0 <3.0
Critically undercapitalized <2.0
*3.0 for those banks having the highest available regulatory
rating.
In the event an institution's capital deteriorates to the
undercapitalized category or below, FDICIA prescribes an
increasing amount of regulatory intervention, including: (1) the
implementation by a bank of a capital restoration plan and a
guarantee of the plan by a parent institution; and (2) the
placement of a hold on increases in assets, number of branches or
lines of business. If capital has reached the significantly or
critically undercapitalized levels, further material restrictions
can be imposed, including restrictions on interest payable on
accounts, dismissal of management and (in critically
undercapitalized situations) appointment of a receiver. For well
capitalized institutions, FDICIA provides authority for
regulatory intervention where the institution is deemed to be
engaging in unsafe or unsound practices or receives a less than
satisfactory examination report rating for asset quality,
management, earnings or liquidity. All but well capitalized
institutions are prohibited from accepting brokered deposits
without prior regulatory approval.
Under FDICIA, financial institutions are subject to
increased regulatory scrutiny and must comply with certain
operational, managerial and compensation standards to be
developed by Federal Reserve regulations. FDICIA also requires
the regulators to issue new rules establishing certain minimum
standards to which an institution must adhere including standards
requiring a minimum ratio of classified assets to capital,
minimum earnings necessary to absorb losses and minimum ratio of
market value to book value for publicly held institutions.
Additional regulations are required to be developed relating to
internal controls, loan documentation, credit underwriting,
interest rate exposure, asset growth and excessive compensation,
fees and benefits.
From time to time, various types of federal and state
legislation have been proposed that could result in additional
regulation of, and restrictions on, the business of the Company
or the Bank. It cannot be predicted whether any such legislation
will be adopted or, if adopted, how such legislation would affect
the business of the Company or the Bank. As a consequence of the
extensive regulation of commercial banking activities in the
United States, the Company and the Bank's business is
particularly susceptible to being affected by federal
legislation and regulations that may increase the costs of doing
business.
EFFECT OF GOVERNMENT MONETARY POLICIES
The earnings of the Company are and will be affected by
domestic economic conditions and the monetary and fiscal policies
of the United States government and its agencies.
The monetary policies of the Federal Reserve Board have had
and will likely continue to have, an important impact on the
operating results of commercial banks through its power to
implement national monetary policy in order, among other things,
to curb inflation or combat a recession. The Federal Reserve
Board has a major effect upon the levels of bank loans,
investments and deposits through its open market operations in
United States securities and through its regulation of, among
other things, the discount rate on borrowings of member banks and
the reserve requirements against member bank deposits. It is not
possible to predict the nature and impact of future changes in
monetary and fiscal policies (also see page 45 of Management's
Discussion and Analysis of the 1996 Annual Report to the
shareholders, which information is included at Exhibit 13, here
of and incorporated berein by reference).
INVESTMENT PORTFOLIO
The investment portfolio is discussed in detail in Footnote 3,
page 18 and pages 33 and 34 of Management's Discussion and
Analysis of the 1996 Annual Report to the shareholders, which
information is included at Exhibit 13, here of and incorporated
berein by reference.
Investments which have been subject to Moody or Standard and
Poor rating changes are reviewed with the investment committee,
the board of directors and an independent investment advisor.
Particular attention is given to any security whose rating falls
below "A" by either rating agency at which time the security is
evaluated and a decision is made as to the possible disposition
of the investment (if in compliance with the regulation
concerning held-to-maturity securities).
The investment policy, as described above, has enabled the
Company to effectively manage the portfolio for increased
profits, satisfy liquidity needs and provide adequate
asset/liability management.
LOAN PORTFOLIO
The loan portfolio is discussed in detail in the Annual Report,
page 19 and 20 Footnote 4, and pages 35 and 36 of Management's
Discussion and Analysis.
Authorized lending limits are assigned to each of the Bank's
loan officers based on experience and performance. In addition,
all commercial loans are reviewed by the loan committee
(established by the board of directors) and loans with aggregate
loan relationships over $100,000 are reviewed and approved by the
full board of directors.
Loans which do not meet the Bank's lending policies but
which have merit may be made with U. S. Small Business
Administration or Farmer's Home Administration guarantee.
The Bank, as part of its commitment to the local
communities, makes loans to the municipalities and political
subdivisions in its area of service. These loans are
for local services such as education, water, sewer, solid waste,
and health services. The Bank, prior to the Tax Reform Act of
1986, was also active in local business activity bonds through
the local industrial development authority although at present
there is little demand for this type of loan. Local municipal
loans are made on their individual merits and based on each
municipality's financial strength and capacity to service its
debt.
It is the Bank's policy that when a borrower fails to make a
required payment on a loan, the Bank attempts to cure the
deficiency by contacting the borrower and seeking payment. A
late charge is assessed after 15 days. Notice is sent to the
borrower after a payment is 7 to 15 days past due, depending on
the type of loan. Contact by telephone or in person is made
between 15 and 59 days delinquent. Once the loan is 60 days
delinquent and cannot be cured through normal collection
procedures, the Bank will institute measures to remedy the
default, including commencement of foreclosure action, accepting
from the mortgagor a voluntary deed of security in lieu of
foreclosure or repossession of collateral in the case of consumer
loans.
If foreclosure is effected, the property is sold at public
auction in which the Bank may participate as a bidder. If the
Bank is the successful bidder the acquired asset is then included
in the Bank's "foreclosed assets held for sale" account until it
is sold. When property is acquired it is recorded at the lower
of the loan balance or market value at the date of acquisition
and any write-down resulting therefrom is charged to the
allowance for loan losses. Interest accrual, if any, ceases on
the date of acquisition and all costs incurred in maintaining the
related property from the date of acquisition forward are
expended.
Management believes the Bank's lending policies have been
very successful over the past five years and plans to continue
these practices, giving due consideration to any future
economic changes.
The Bank's lending policy is to make loans to individuals
with a proven credit history, and minimum of one year at their
present employment, and, for installment and credit line loans, a
monthly debt payment to gross income ratio of less than 40%.
Consumer loans are made primarily on a secured basis, which
collateral normally consists of motor vehicles and liens on real
property. Unsecured loans are made on a limited basis and in
amounts of usually less than $5,000.
The Bank is an active originator of guaranteed student loans
in conjunction with the Pennsylvania Higher Education Assistance
Agency. It is the Bank's policy to sell these loans to the
Student Loan Marketing Association. The total guaranteed student
loans outstanding as of December 31, 1996 was $2,786,000.
Adjustable rate mortgages are fully indexed when originated.
The yearly cap for the one-year adjustable rate mortgage is 2.0%
on any change date and a maximum of 5.0% over the life of the
loan. The yearly cap on the five-year adjustable rate mortgage
is 3.0% on any change date and 5.0% over the life of the loan.
The Bank also has a bi-weekly mortgage payment plan available.
The Bank's commercial and agricultural loans consist of real
estate, equipment, and inventory/accounts receivable/working
capital loans. Real estate, equipment and working capital loans
are made for terms of 15, 7, and 5 years, respectively. These
loans are primarily tied to the Bank's prime rate and are
adjusted at least annually. Commercial and agricultural lending
consists of loans to sole proprietors, partnerships and closely
held corporations typically with sales of less than $2,000,000
annually. In underwriting these loans, consideration is given to
the quality of management, profitability, cash flow, secondary
sources of repayment in the form of owner's capital and
collateral and micro- and macro-economic conditions.
Other consumer loans granted by the Bank consist of single
payment, personal lines of credit, installment loans to finance
vehicles, home improvements and other personal property loans.
The Bank is not dependent for deposits or exposed by loan
concentration to a single customer or to a single industry the
loss of any one or more of which would have a materially adverse
effect on the financial condition of the Bank.
RISK ELEMENTS IN LOAN PORTFOLIO
Business loans are generally placed on nonaccrual status
when principal and interest payments are past due 90 days or more
unless well-secured and in the process of collection. Loans to
individuals that are secured by first or second liens on
residential real estate are placed on nonaccrual status if past
due 90 days or more and a current appraisal indicates that the
value of the collateral is less than the loan balance. Consumer
installment loans are generally charged-off when they become 90 -
120 days delinquent and collection efforts have failed to prompt
payment and/or the security has been repossessed. The risk
elements of the loan portfolio are discussed in detail in the
Annual Report, page 19 and 20 Footnote 4, and pages 35 and 36 of
Management's Discussion and Analysis.
ALLOWANCE AND PROVISION FOR POSSIBLE LOAN LOSSES
The provision for loan losses is used to increase the
allowance for possible loan losses and is influenced by the
growth and quality of loans. In each accounting period, the
allowance for possible loan losses is adjusted to the amount
deemed necessary to maintain the allowance at adequate levels.
In determining the adequacy of the allowance for possible loan
losses, management considers the financial strength of borrowers,
past loan loss experience, loan collateral, changes in volume and
composition of the loan portfolio and current and projected
economic conditions. The Company regularly monitors the
creditworthiness and financial condition of its larger borrowers.
See further discussion in the annual report, page 19 and 20,
footnote 4, and pages 40 through 43 of Management's Discussion and Analysis.
The following table gives a five year comparison of the allowance
for loan losses and the percentage of total loans in each
category:
Allocation of the Allowance for Loan Losses
December 31,
By percent of loans in each category to total loans
1996 1995 1994 1993 1992
Amount % Amount % Amount % Amount % Amount %
Real estate - residential $ 143 59.4 $ 165 59.6 $ 185 62.0 $ 181 64.2 $ 193 64.5
Real estate - commercial,
agricultural 325 18.5 328 19.9 323 18.5 253 16.9 147 15.9
Real estate - construction 0 2.3 0 0.6 0 0.8 0 0.8 0 0.6
Loans to individuals for
family and other purchases 164 8.0 181 8.2 140 7.6 174 8.2 159 9.6
Commercial and other 108 6.3 110 6.5 114 6.5 94 6.3 63 6.7
State and political
subdivision loans 3 5.5 3 5.2 2 4.6 2 3.6 1 2.7
Unallocated 1,252 N/A 1,046 N/A 957 N/A 812 N/A 638 N/A
Total loans $1,995 100.0 $1,833 100.0 $1,721 100.0 $1,516 100.0 $1,201 100.0
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
Management in any financial institution is required
to ensure that liquidity is adequate to satisfy contractual
liabilities, meet withdrawal requirements of depositors, fund
operations and provide for customers' credit needs. The adequacy
of such liquidity is measured by examining the balance sheet
components of the Company's statement of condition.
Asset liquidity is provided through receipt of loan payments and
the conversion of investments and similar assets into cash.
Liability liquidity results from the ability to attract funds
from diversified funding sources at reasonable costs. While
providing for liquidity, however, management must be aware of the
need to monitor the rate sensitivity of interest-earning assets
and interest-bearing liabilities which will provide for continued
profitability in changing interest rate environments. See
further discussion in the Annual Report pages 43 and 44 of
Management's Discussion and Analysis.
The Asset/Liability Management ("ALM") Committee of the
Company manages rate sensitivity to enhance net
interest income and margin while maintaining an asset/liability
mix balances liquidity needs and interest rate risk and is
discussed in further detail on pages 37 through 39 in the
Management's Discussion and Analysis section of the 1996 Annual
Report. The ALM Committee endeavors to control interest rate risk
through management of rate sensitive assets and rate
sensitive liabilities and by balancing the maturity and pricing
of the Company's loan and deposit products. Interest rate risk
arises when an interest-earning asset or interest-bearing
liability matures at different intervals or its interest rate
changes during a different time frame. The difference between
assets subject to rate change over a specific period and
liabilities subject to change over the same period is referred to
as the interest rate sensitivity gap. A gap is considered
positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate
sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income
while a positive gap would tend to result in increased net
interest income. Based on the ALM Committee's perception as to
the trend of interest rates, it may adjust the maturities and
pricing of the Company's loan and deposit products in order to
achieve or maintain a desired level of net interest revenue. The
level of interest rate risk which the ALM Committee determines is
acceptable may change periodically in an effort to attain a
consistent level of profits while remaining within the Company's
loan and investment policy guidelines.
It has been management's policy to maintain a conservative gap
interest rate sensitivity position (i.e., an interest rate
sensitivity ratio in the range of positive 1.25 to negative .75).
This is because assets and liabilities with similar contractual
repricing characteristics or with out stated maturities may not
reprice at the same time or to the same degree. In particular
the repricing of the non-maturity core deposits represented by
NOW, savings, and money market investor accounts, have
characteristics that are difficult to measure using gap analysis.
In addition to gap analysis, management now simulates the
potential effects of changing interest rates through computer
modeling. The Company is better able to implement strategies
which would include an acceleration of interest rates and the
effect on non-maturity deposits. Some of the key assumptions of
this model, as established by the history are that: since the
non-maturity core deposits are tiered they do not reprice
immediately, except for the top tier money (over $100,000) money
market investor funds, which are priced at current market rates;
non-maturity core deposits will decay based on industry
experience (also used for gap analysis); 65% of IRA certificates
of deposit (most are 5 year maturities) reprice within one year
if the new rate is higher but do not reprice if the new rate is
lower (65% of the IRA customers are over 59 and one-half years of age);
prepayment speeds are established within the model that are
adjusted to reflect the degree of change in interest rates and
the impact on loans and certificates of deposit.
Computer model simulations have been generated using 200 basis
point parallel shocks to the yield curve (up and down) over one
year and simulations using a step up of interest rates over a two
year period (300 basis points). No simulations to date have
indicated a major impact to the earnings or the market value of
portfolio equity. However, management and the board of director
are currently evaluating these simulations, and others to
establish appropriate guidelines and procedures to implement when
earnings or equity value appear to be at risk.
Analysis of the Consolidated Statement of Cash Flows (refer to
annual report to shareholders) indicates funds from operating
activities continues to be a stable source of funds. Even after
deducting for dividends, there are adequate funds being added to
equity capital (consistent with asset growth). This is further
discussed on pages 43 through 45 of Management's Discussion and
Analysis section of the 1996 Annual Report to the shareholders,
which information is included at Exhibit 13, here of and
incorporated berein by reference.
CAPITAL ADEQUACY
A description of the Company's capital adequacy is presented
on page 25, Footnote 12 and on page 43 of the Management's
Discussion and Analysis section of the 1996 Annual Report to the
shareholders, which information is included at Exhibit 13, here
of and incorporated berein by reference.
Item 2-Properties
The headquarters of the Company is located in Mansfield,
Pennsylvania. The building contains the central offices of the
Company and the Bank. The Bank also owns six other banking
facilities. All buildings are owned by the Bank in fee and are
free of any liens or encumbrances.
PROPERTIES Current Building
Construction Date
Main office:
15 South Main St.
Mansfield, PA 16933 1971
Branch offices:
320 Main St.
Blossburg, PA 16912 1988
502 Main St.
Ulysses, PA 16948 1977
Main St.
Genesee, PA 16923 1985
306 West Lockhart St.
Sayre, PA 18840 1989
99 Main St.
Wellsboro, PA 16901 1979
103 West Main St.
Troy, PA 16947 1988
29 West Main St.
Canton, PA 17724 1974
Main St.
Gillett, PA 16925 1970
The net book value for the above properties as of December
31, 1996 was $3,256,000. The properties are adequate to meet the
needs of the employees and customers. The Mansfield office
includes the corporate headquarters and is in need of
expansion which is currently being reviewed by management and the
board of directors as discussed further in Management's
Discussion and Analysis on page 44 of the 1996 Annual Report to
the shareholders, which information is included at Exhibit 13,
here of and incorporated berein by reference. Additionally, the
Canton and Gillett offices are expected to receive approximately
$150,000 in improvements during 1997. All of the facilities are
equipped with current technological improvements for data and
word processing.
Inflation has impact on the Company's operating costs, however,
unlike many industrial companies, substantially all of the
Company's assets and liabilities are monetary in nature. As a
result, interest rates have a more significant impact on the
Company's performance than the general level of inflation. Over
short periods of time, interest rates may not necessarily move in
the same direction or in the same magnitude as prices of goods
and services.
Item 3-Legal Proceedings
Management is not aware of any litigation that would have a
material adverse effect on the consolidated financial position of
the Company. There are no proceedings pending other than
ordinary, routine litigation incidental to the business of the
Company and its subsidiary. In addition, no material proceedings
are pending or are known to be threatened or contemplated against
the Company and its subsidiary by government authorities.
Item 4-Submission of Matters to a Vote of Shareholders
There were no matters submitted to a vote of security
holders in the fourth quarter of 1996.
Part II
Item 5-Market for the Registrant's Common Stock and Related
Shareholder Matters
The Company's common stock is traded by local brokerage
firms and is not listed on any stock exchange.
Market and dividend information is incorporated by reference to
pages 31 and 48 of the Company's 1996 Annual Report to the
Shareholders which pages are included in Exhibit 13 hereto.
The Company has paid dividends since, April 30, 1984, the
effective date of its formation as a bank holding company. The
Company's Board of Directors intends to continue the dividend
payment policy; however, future dividends
necessarily depend upon earnings, financial condition,
appropriate legal restrictions and other factors as in existence
at the time the Board of Directors considers dividend policy.
Cash available for dividend distributions to shareholders of the
Company comes from dividends paid to the Company by the Bank.
Therefore, restrictions on the ability of the Bank to make
dividend payments are directly applicable to the Company.
Under the Pennsylvania Business Corporation Law of 1988,
the Company may pay dividends only if, after payment, the Company
would be able to pay its debts as they become due in the usual
course of its business and it's total assets are greater than the
sum of its total liabilities.
As of March 10, 1997, the Company has approximately 1,408
shareholders of record.
Item 6-Selected Financial Data
The information required by this item is incorporated by
reference to page 31 of the 1996 Annual Report to the
shareholders, which information is included at Exhibit 13, here
of and incorporated berein by reference.
Item 7-Management's Discussion and Analysis of Financial
Condition and Results of Operations
The information required by this item is incorporated by
reference to pages 33 - 45 of the 1996 Annual Report to the
shareholders, which information is included at Exhibit 13, here
of and incorporated berein by reference.
Item 8-Financial Statements and Supplementary Data
The information required by this item is incorporated by
reference to pages 11 - 29 and 32 of the 1996 Annual Report to
the shareholders, which information is included at Exhibit 13,
here of and incorporated berein by reference.
Financial Statements:
Consolidated Balance Sheet as of December 31, 1996 and 1995
Consolidated Statement of Income for the Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
Item 9-Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None
Part III
Item 10-Directors and Executive Officers of the Registrant
Information appearing in the definitive Proxy Statement under the
caption "Information as to Nominees, Directors and Executive
Officers" and "Principal Officers" to the Annual Meeting of
Shareholders to be held April 15, 1997, is incorporated herein by
reference in response to this item.
Item 11-Executive Compensation
Information appearing in the definitive Proxy Statement under the
caption "Remuneration of Officers and Directors" related to the
Annual Meeting of Shareholders to be held April 15, 1997, is
incorporated herein by reference in response to this item.
Item 12-Security Ownership of Certain Beneficial Owners and
Management
Information appearing in the definitive Proxy Statement at under
the caption "Principal Beneficial Owners of the Corporation's
Stock" related to the Annual Meeting of Shareholders to be held
April 15, 1997, is incorporated herein by reference in response
to this item.
Item 13-Certain Relationships and Related Transactions
Information appearing in the definitive Proxy Statement under the
caption "Certain Transactions" related to the Annual Meeting of
Shareholders to be held April 15, 1997, is incorporated herein by
reference in response to this item.
Part IV
Item 14-Exhibits, Financial Statement Schedules and Reports on
Form 8-K Documents Filed as Part of this Report:
14(a)1-Financial Statements. The following consolidated
financial statements of Citizens Financial Services, Inc. and
subsidiary included in the 1996 Annual Report are incorporated by reference
in Item 8:
Consolidated Balance Sheet as of December 31, 1996 and 1995
Consolidated Statement of Income for the Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
14(a)2-Financial Statement Schedules. Financial Statement
Schedules are omitted because the required information is either
not applicable, not required or is shown in the respective
financial statement or in the notes thereto.
14(a)3-Exhibits:
(3)(i) - Articles of Incorporation of the Corporation, as
amended incorporated by reverence to Exhibit
(3)(i) to the Annual Report of Form 10-K for the
fiscal year ended December 31, 1995, as filed with
the Commission on March 26, 1996.
(3)(ii)- By-laws of the Corporation, as amended incorporated
by reverence to Exhibit (3)(ii) to the Annual
Report of Form 10-K for the fiscal year ended
December 31, 1995, as filed with the Commission on
March 26, 1996.
(4) - Instruments Defining the Rights of Shareholders as
filed in the registration statement on Form S-14
are incorporated herein by reference thereto.
(Incorporated by reference to the Registrant's
Registration Statement No.2-89103 on Form S-14,
as filed with the Commission on February 17,
1984.)
(10) - Material Contracts. Employment Agreement between the
Company and Richard E. Wilber.
(11) - Computation of Earnings Per Share. In the 1996 Annual
Report to the shareholders, which information is
included at page 17, Exhibit 13, here of and
incorporated berein by reference.
(13) - Annual Report to Shareholders for the year ended
December 31, 1996.
(21) - Subsidiaries of Citizens Financial Services, Inc.
(27) - Financial Data Schedule
14(b)-No current report on Form 8-K was filed by the Registrant
during the fourth quarter of the 1996 fiscal year.
14(c)-The exhibits required by this Item are listed under Item
14(a) above.
14(d)-Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, there
unto duly authorized.
Citizens Financial Services, Inc.
(Registrant)
/s/ Richard E. Wilber /s/ Thomas C. Lyman
By: Richard E. Wilber By: Thomas C. Lyman
President, Chief Executive Officer Treasurer
(Principal Executive Officer) (Principal Financial &
Accounting Officer)
Date: March 18, 1997 Date: March 18, 1997
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature and Capacity Date
/s/ Richard E. Wilber March 18, 1997
Richard E. Wilber, President,
Chief Executive Officer, Director
(Principal Executive Officer)
_________________________
Robert E. Dalton, Director
/s/ Carol J. Tama March 18, 1997
Carol J. Tama, Director
/s/ Lowell Coolidge March 18, 1997
Lowell Coolidge, Director
/s/ Rudolph J. van der Hiel March 18, 1997
Rudolph J. van der Hiel, Director
/s/ John Novak March 18, 1997
John Novak, Director
/s/ Bruce L. Adams March 18, 1997
Bruce L. Adams, Director
/s/ William D. Van Ettan March 18, 1997
William D. Van Ettan, Director
/s/ Larry Croft March 18, 1997
Larry Croft, Director
/s/ Thomas C. Lyman March 18, 1997
Thomas C. Lyman, Treasurer
(Principal Financial and Accounting Officer)
EXHIBITS INDEX
(3)(i) - Articles of Incorporation of the Corporation, as amended
incorporated by reverence to Exhibit (3)(i) to the Annual
Report of Form 10-K for the fiscal year ended December 31,
1995, as filed with the Commission on March 26, 1996.
(3)(ii)- By-laws of the Corporation, as amended incorporated by
reverence to Exhibit (3)(ii) to the Annual Report of Form 10-K
for the fiscal year ended December 31, 1995, as filed with the
Commission on March 26, 1996.
(4) - Instruments Defining the Rights of Shareholders as filed in
the registration statement on Form S-14 are incorporated
herein by reference thereto. (Incorporated by reference to
the Registrant's Registration Statement No.2-89103 on Form S-14, as filed
with the Commission on February 17, 1984.)
(10) - Material Contracts. Employment Agreement between the
Company and Richard E. Wilber.
(11) - Computation of Earnings Per Share. In the 1996 Annual Report
To the shareholders, which information is included at page 17,
Exhibit 13, here of and incorporated berein by reference.
(13) - Annual Report to Shareholders for the year ended December
31, 1996.
(21) - Subsidiaries of Citizens Financial Services, Inc.
(27) - Financial Data Schedule