-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LGX6SJ9R6N+V9/rKXKRp2Jl73I4oloLrPkMW/e5v8lbbVXg06TpHpqRdmXlkEJQC vEvSYv+TJB8br6gZtJglUA== 0000739421-96-000002.txt : 19960327 0000739421-96-000002.hdr.sgml : 19960327 ACCESSION NUMBER: 0000739421-96-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960326 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0000739421 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232265045 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13222 FILM NUMBER: 96538557 BUSINESS ADDRESS: STREET 1: 15 S MAIN ST CITY: MANSFIELD STATE: PA ZIP: 16933 BUSINESS PHONE: 7176622121 MAIL ADDRESS: STREET 1: 15 S MAIN ST CITY: MANSFIELD STATE: PA ZIP: 16933 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the transition period from ___________________ to _____________________ Commission file number 0-13222 CITIZENS FINANCIAL SERVICES, INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2265045 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 15 South Main Street, Mansfield, Pennsylvania 16933 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (717) 662-2121 Securities registered pursuant to section 12 (b) of the Act: Title of each class Name of each exchange on which registered NOT APPLICABLE NOT APPLICABLE Securities registered pursuant to section 12 (g) of the Act: Common Stock, par value $1.00 per share. (Title of class) Indicate by checkmark whether the registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes__X___ No_____ The total market value of the voting stock of the Registrant held by non-affiliates (for this purpose, persons or entities other than executive officers, directors, or 5% or more shareholders) of the Registrant, as of March 13, 1996, is estimated to have been approximately $30,070,000. 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 13, 1996, 1,347,323 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 16, 1996. Parts II and IV - Annual Report to Shareholders for the Year Ended December 31, 1995. Citizens Financial Services, Inc. Form 10-K INDEX Part I Page Item 1-Business 1-8 Item 2-Properties 8 Item 3-Legal Proceedings 8-9 Item 4-Submission of Matters to a Vote of Security Holders 9 Part II Item 5-Market for Registrant's Common Stock and Related Stockholder Matters 9 Item 6-Selected Financial Data 9 Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 8-Financial Statements and Supplementary Data 9 Item 9-Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 10 Part III Item 10-Directors and Executive Officers of the Registrant 10 Item 11-Executive Compensation 10 Item 12-Security Ownership of Certain Beneficial Owners and Management 10 Item 13-Certain Relationships and Related Transactions 10 Part IV Item 14-Exhibits, Financial Statement Schedules, and Reports on Form 8-K 11-12 Signatures 13 Part I Item 1-Business Citizens Financial Services, Inc. (the "Company") is a Pennsylvaniabusiness corporation, incorporated April 30, 1984 for the purpose of forming a bank holding company. First Citizens National Bank (the "Bank") then became a wholly-owned subsidiary of the Company by means of a merger in which the shareholders of the Bank became shareholders of the Company. In 1932, First National Bank opened for business in Mansfield, Pennsylvania. In 1970 the First National Bank in Mansfield merged with Citizens National Bank of Blossburg, Pennsylvania to form First Citizens National Bank. In 1971, the Bank was expanded into Potter County through the acquisition of the Grange National Bank which had offices in Ulysses and Genesee, Pennsylvania. On November 16, 1990, the Company acquired Star Savings and Loan Association (the "Association") that was originally organized as a Pennsylvania-chartered mutual savings and loan association in 1899 and converted to a Pennsylvania-chartered permanent reserve fund stock savings and loan association on March 27, 1986. On December 31, 1991, the Association merged with the Bank. This transaction terminated the Association's separate operations as a savings and loan association. On November 28, 1995 the Company and Meridian Bank, a wholly-owned subsidiary of Meridian Bancorp, Inc., signed a definitive agreement whereby the Company will purchase two retail banking offices located at Canton and Gillett, Pennsylvania. The sale is subject to obtaining all regulatory approvals and, therefore, the final closing of the transaction is not expected until April 1996. As of December 31, 1995, the Bank employed 108 full time equivalent employees at its seven full service banking facilities. The Bank currently engages in the general business of banking throughout its service area of Potter, Tioga and Bradford counties in North Central Pennsylvania and Allegany, Steuben, Chemung and Tioga counties in Southern New York. The Bank maintains its central office in Mansfield, Pennsylvania and presently operates full service banking facilities in Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy and Sayre as well as an automatic teller machine located in Soldiers and Sailors Memorial Hospital in Wellsboro, Mansfield Wal-Mart and Mansfield University. The Bank's lending and deposit products are offered primarily within the vicinity of its service area. COMPETITION The Company faces strong competition in the communities it serves from other commercial banks, savings banks, and savings and loan associations, some of which are substantially larger institutions than the Company's subsidiary. In addition, personal and corporate trust services are offered by insurance companies, investment counseling firms, and other business firms and individuals. The Company also competes with credit unions, issuers of money market funds, securities brokerage firms, consumer finance companies, mortgage brokers and insurance companies. These entities are strong competitors for virtually all types of financial services. Page 1 In recent years, the financial services industry has experienced tremendous change to competitive barriers between bank and non-bank institutions. The Company not only must compete with traditional financial institutions, but also with other business corporations that have begun to deliver competing financial services. Competition for banking services is based on price, nature of product, quality of service, and in the case of certain activities, convenience of location. REGULATION AND SUPERVISION The operations of the Bank are subject to federal and state statutes applicable to banks chartered under the banking laws of the United States, to members of the Federal Reserve System and to banks whose deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). Bank operations are also subject to regulations of the Comptroller of the Currency ("Comptroller"). The primary supervisory authority of the Bank is the Comptroller, who regularly examines the Bank. The Comptroller has the authority under the Financial Institutions Supervisory Act to prevent a national bank from engaging in unsafe or unsound practice while conducting its business. The Company is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "Act"), and is registered with the Federal Reserve. Under the Act, bank holding companies are not permitted, with certain exceptions, to acquire direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and are prohibited from engaging in any business other than that of banking, managing and controlling banks or furnishing services to its subsidiary banks, except that they may, upon application, engage in, and may own shares of companies engaged in, certain businesses found by the Federal Reserve to be so closely related to banking as to be a proper incident thereto (if the Federal Reserve determines that such acquisition will be, on balance, beneficial to the public). The Act does not place territorial restrictions on the activities of non-bank subsidiaries of bank holding companies. The Act requires prior approval by the Federal Reserve of the acquisition by the Company of more than 5% of the voting stock of any additional bank. The Company is required by the Act to file annual reports of its operations with the Federal Reserve Board and any additional information that the Federal Reserve Board may require pursuant to the Bank. The Federal Reserve Board may also make examinations of the Company and any or all of its subsidiaries. Further, under Section 106 of the 1970 amendments to the Act and the Federal Reserve Board's regulations, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of credit or provision of any property or service. The so-called "anti-tie-in" provisions state generally that a bank may not extend credit, lease property, sell property or furnish any service to a customer on the condition that the customer provide additional credit or service to the bank, to its bank holding company or to any other subsidiary of its bank holding company or on the condition that the customer not obtain other credit or service from a competitor of the bank, its bank holding company or any subsidiary of its bank holding company. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or any of its subsidiaries, or investments in the stock or other securities of the bank holding company and on taking of such stock or securities as collateral for loans to any borrower. Page 2 PERMITTED NON-BANKING ACTIVITIES The Federal Reserve Board permits bank holding companies to engage in non-banking activities so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Company presently does not engage in any such acitivies 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 37 of Management's Discussion and Analysis of the 1995 Annual Report. Neither the Company nor its subsidiary anticipates that compliance with environmental laws and regulations will have any material effect on capital expenditures, earnings, or on its competitive position. The Company is a legal entity, separate and distinct from the Bank. All of the Company's revenues, including funds available for payment of dividends and for operating expenses, are provided by dividends from the subsidiary. Certain limitations exist on the availability of the subsidiary's undistributed net assets for the payment of dividends to its parent without prior approval of the bank regulatory authorities as further described in Footnote 11 of the 1995 Annual Report. LEGISLATION AND REGULATORY CHANGES From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, and before various bank regulatory agencies. Accurate predictions are difficult to make as to the likelihood of any major changes or the impact such changes might have on the Company and its subsidiary. Certain changes of potential significance to the Company which have been enacted recently and others which are currently under consideration by Congress or various regulatory or professional agencies are discussed below. Risk-Based Capital Guidelines. The Federal Reserve Board, the FDIC and the Comptroller have issued certain risk-based capital guidelines, which supplement existing capital requirements and have been discussed in the Management Discussion and Analysis section on page 35 of the 1995 Annual Report to the shareholders. 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. Page 3 In the event an institution's capital deteriorates to the undercapitalized category or below, FDICIA prescribes an increasing amount of regulatory intervention, including: (1) the institution by a bank of a capital restoration plan and a guarantee of the plan by a parent institution; and (2) the placement of a hold on increases in assets, number of branches or lines of business. If capital has reached the significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and (in critically undercapitalized situations) appointment of a receiver. For well capitalized institutions, FDICIA provides authority for regulatory intervention where the institution is deemed to be engaging in unsafe or unsound practices or receives a less than satisfactory examination report rating for asset quality, management, earnings or liquidity. All but well capitalized institutions are prohibited from accepting brokered deposits without prior regulatory approval. Under FDICIA, financial institutions are subject to increased regulatory scrutiny and must comply with certain operational, managerial and compensation standards to be developed by Federal Reserve Board regulations. FDICIA also requires the regulators to issue new rules establishing certain minimum standards to which an institution must adhere including standards requiring a minimum ratio of classified assets to capital, minimum earnings necessary to absorb losses and minimum ratio of market value to book value for publicly held institutions. Additional regulations are required to be developed relating to internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth and excessive compensation, fees and benefits. From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restrictions on, the business of the Bank. It cannot be predicted whether any such legislation will be adopted or, if adopted, how such legislation would affect the business of the Bank. As a consequence of the extensive regulation of commercial banking activities in the United States, the Bank's business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business. EFFECT OF GOVERNMENT MONETARY POLICIES The earnings of the Company are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. 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 37 of Management's Discussion and Analysis of the 1995 Annual Report). INVESTMENT PORTFOLIO The investment portfolio is discussed in detail in Footnote 3, page 16 and pages 29 and 30 of Management's Discussion and Analysis of the 1995 Annual Report. Page 4 Investments which have been subject to Moody or Standard and Poor rating changes are reviewed with the investment committee, board of directors and an independent investment advisor. Particular attention is given to any security whose rating falls below "A" by either rating agency at which time the security is evaluated and a decision is made as to the possible disposition of the investment. The investment policy as described above has enabled the Company to effectively manage the portfolio for increased profits, satisfy liquidity needs and provide adequate asset/liability management. LOAN PORTFOLIO Historically loans have been originated by the Bank to customers in North Central Pennsylvania and the Southern Tier of New York. Loans have been originated primarily through direct loans to our existing customer base with new customers generated by referrals from real estate brokers, building contractors, attorneys, accountants and existing customers. The Bank also does a limited amount of indirect loans though new and used car dealers in the primary lending area. All lending is governed by a lending policy which is developed and maintained by management and approved by the board of directors. The Bank's lending policy regarding real estate loans is that the maximum mortgage granted on owner occupied residential property is 80% of the appraised value or purchase price (whichever is lower) when secured by the first mortgage on the property. Home equity lines of credit or second mortgage loans are originated subject to maximum mortgage liens against the property of 75% of the current appraised value. The maximum term for mortgage loans is 25 years for one-to four- family residential property and 15 years for commercial and vacation property. The Company has begun to sell more conforming mortgage loans as discussed in Management's Discussion and Analysis page 28 and 29. These loans are made for various terms at competitive interest rates. Authorized lending limits are assigned to each of the Bank's loan officers based on experience and performance. In addition, all commercial loans are reviewed by the loan committee (established by the board of directors) and loans with aggregate loan relationships over $100,000 are reviewed and approved by the full board of directors. Loans which do not meet the Bank's lending policies but which have merit may be made with U. S. Small Business Administration or Farmer's Home Administration guarantee. The Bank, as part of its commitment to the local communities, makes loans to the municipalities and political subdivisions in its area of service. These loans have been made for local services such as education, water, sewer, solid waste, and health services. The Bank prior to the Tax Reform Act of 1986 also was active in local business activity bonds through the local industrial development authority although at present there is little demand for this type of loan. Local municipal loans are made on their individual merits and based on each municipality's financial strength and capacity to service its debt. It is the Bank's policy that when a borrower fails to make a required payment on a loan, the Bank attempts to cure the deficiency by contacting the borrower and seeking payment. A late charge is assessed after 15 days. Notice is sent to the borrower after a payment is 7 to 15 days past due, depending on the type of loan. Contact by telephone or in person is made between 15 and 59 days delinquent. Once the loan is 60 days delinquent and cannot be cured through normal collection procedures, the Bank will institute measures to remedy the default, including commencement of foreclosure action, accepting from the mortgagor a voluntary deed of security in lieu of foreclosure or repossession of collateral in the case of consumer loans. Page 5 If foreclosure is effected, the property is sold at public auction in which the Bank may participate as a bidder. If the Bank is the successful bidder the acquired asset is then included in the Bank's "foreclosed assets held for sale" account until it is sold. When property is acquired it is recorded at the lower of the loan balance or market value at the date of acquisition and any write-down resulting therefrom is charged to the allowance for loan losses. Interest accrual, if any, ceases on the date of acquisition and all costs incurred in maintaining the related property from the date of acquisition forward are expended. Management believes the Bank's lending policies have been very successful over the past five years and plans to continue these practices with due consideration being given any future economic changes. The Bank's lending policy is to make loans to individuals with a proven credit history, and minimum of one year at their present employment, and, for installment and credit line loans, a monthly debt payment to gross income ratio of less than 40%. Consumer loans are made primarily on a secured basis which normally consists of motor vehicles and liens on real property. Unsecured loans are made on a limited basis and in amounts usually less than $5,000. The Bank is an active originator of guaranteed student loans in conjunction with the Pennsylvania Higher Education Assistance Agency. It is the Bank's policy to sell these loans to the Student Loan Marketing Association. The total guaranteed student loans outstanding as of December 31, 1995 was $2,710,000. 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 nor exposed by loan concentration to a single customer or to a single industry the loss of any one or more of which would have a materially adverse effect on the financial condition of the Bank. See further discussion in the Annual Report, page 17 Footnote 4, and pages 28 and 29 of Management's Discussion and Analysis. RISK ELEMENTS IN LOAN PORTFOLIO Business loans are generally placed on nonaccrual status when principal and interest payments are past due 90 days or more unless well-secured and in the process of collection. Loans to individuals that are secured by first or second liens on residential real estate are placed on nonaccrual status if past due 90 days or more and a current appraisal indicates that the value of the collateral is less than the loan balance. 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. Page 6 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 17, footnote 4, and pages 34 and 35 of Management's Discussion and Analysis. LIQUIDITY AND ASSET/LIABILITY MANAGEMENT A requirement of management in any financial institution is to ensure liquidity is maintained to satisfy contractual liabilities, meet withdrawal requirements of depositors, fund operations and provide for customers' credit needs. The adequacy of such liquidity is measured by examining the asset and liability components of the Company's statement of condition. Asset liquidity is provided through receipt of loan payments and the conversion of investments and similar assets into cash. Liability liquidity results from the ability to attract funds from diversified funding sources at reasonable costs. While providing for liquidity, however, management must be aware of the need to monitor the rate sensitivity of interest-earning assets and interest-bearing liabilities which will provide for continued profitability in changing interest rate environments. See further discussion in the Annual Report page 36 of Management's Discussion and Analysis. The Asset/Liability Management ("ALM") Committee of the Company is charged with managing rate sensitivity to enhance net interest income and margin while maintaining an asset/liability mix which balances liquidity needs and interest rate risk and is discussed in further detail on pages 36 and 37 in the Management's Discussion and Analysis section of the 1995 Annual Report. The ALM Committee endeavors to control interest rate risk through proper management of rate sensitive assets and rate sensitive liabilities and by balancing the maturity and pricing of the Company's loan and deposit products. Interest rate risk arises when an interest-earning asset or interest-bearing liability matures at different intervals or its interest rate changes during a different time frame. The difference between assets subject to rate change over a specific period and liabilities subject to change over the same period is referred to as the interest rate sensitivity gap. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in increased net interest income. Based on the ALM Committee's perception as to the trend of interest rates, it may adjust the maturities and pricing of the Company's loan and deposit products in order to achieve or maintain a desired level of net interest revenue. The level of interest rate risk which the ALM Committee determines is acceptable may change periodically in an effort to attain a consistent level of profits while remaining within the Company's loan and investment policy guidelines. It is 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), although certain deviations may occur at given points in time. Management believes that such a policy provides the basis for achieving stability in interest earnings regardless of interest rate volatility. Page 7 Analysis of the Consolidated Statement of Cash Flows (refer to annual report to shareholders) indicates funds from operating activities continues to be a stable source of funds. Even after deducting for dividends, there are adequate funds being added to equity capital (consistent with asset growth). CAPITAL ADEQUACY A description of the Company's capital adequacy is presented on page 20, Footnote 11 and in page 35 of the Management's Discussion and Analysis section of the 1995 Annual Report. Item 2-Properties The headquarters of the Company is located in Mansfield, Pennsylvania. The building contains the central offices of the Company and the Bank. The Bank also owns six other banking facilities. All buildings are owned by the Bank in fee and are free of any liens or encumbrances. PROPERTIES Current Building Construction Date Main office: 15 South Main St. Mansfield, PA 16933 1971 Branch offices: 320 Main St. Blossburg, PA 16912 1988 502 Main St. Ulysses, PA 16948 1977 Main St. Genesee, PA 16923 1985 306 West Lockhart St. Sayre, PA 18840 1989 99 Main St. Wellsboro, PA 16901 1979 103 West Main St. Troy, PA 16947 1988 The net book value for the above properties as of December 31, 1995 was $3,121,000. The properties are recently constructed and, with the exception of the Mansfield office, are adequate to meet the needs of the employees and customers. The Mansfield office includes the corporate headquarters and is in need of expansion which is currently being reviewed by management and the board of directors as discussed further in Management's Discussion and Analysis on page 37 of the 1995 Annual Report. All of the facilities are equipped with current technological improvements for data and word processing. Inflation does have some impact on the Company's operating costs, however, unlike many industrial companies, substantially all of the Company's assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services. Item 3-Legal Proceedings Page 8 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 Security Holders There were no matters submitted to a vote of security holders. Part II Item 5-Market for the Registrant's Common Stock and Related Stockholder Matters The Company's common stock is traded by local brokerage firms and is not listed on any stock exchange. Market and dividend information can be found on page 24 and 40 of the Company's 1995 Annual Report to the Stockholders which is filed as Exhibit 13 hereto and is incorporated in its entirety by reference under this Item 5. The Company has paid dividends since the effective date of its formation as a bank holding company. It is the present intention of the Company's Board of Directors to continue the dividend payment policy; however, future dividends must necessarily depend upon earnings, financial condition, and appropriate legal restrictions and other factors relevant at the time the Board of Directors of the Company considers dividend policy. Cash available for dividend distributions to shareholders of the Company must initially come from dividends paid by the Bank to the Company. Therefore, the restrictions on the Bank's dividend payments are directly applicable to the Company. Under the Pennsylvania Business Corporation Law of 1988, the Company may pay dividends only if after payment the Company would be able to pay its debts as they become due in the usual course of its business and the total assets are greater than the sum of its total liabilities. As of March 13, 1996, the Company has approximately 1,410 shareholders of record. Item 6-Selected Financial Data The information required by this item is incorporated by reference to page 24 of the 1995 Annual Report. Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this item is incorporated by reference to pages 27 - 37 of the 1995 Annual Report. Page 9 Item 8-Financial Statements and Supplementary Data The information required by this item is incorporated by reference to pages 11 - 22 and 25 of the 1995 Annual Report. Financial Statements: Consolidated Balance Sheet as of December 31, 1995 and 1994 Consolidated Statement of Income for the Years Ended December 31, 1995, 1994 and 1993 Consolidated Statement of Changes in Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 Consolidated Statement of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements Report of Independent Certified Public Accountants Item 9-Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Information appearing in the definitive Proxy Statement at Exhibit 99 under the caption "Independent Public Accountants" to the Annual Meeting of Security Holders to be held April 16, 1996 is incorporated herein by reference in response to this item. Part III Item 10-Directors and Executive Officers of the Registrant Information appearing in the definitive Proxy Statement at Exhibit 99 under the caption "Information as to Nominees, Directors and Executive Officers" and "Principal Officers" to the Annual Meeting of Security Holders to be held April 16, 1996 is incorporated herein by reference in response to this item. Item 11-Executive Compensation Information appearing in the definitive Proxy Statement at Exhibit 99 under the caption "Remuneration of Officers and Directors" related to the Annual Meeting of Security Holders to be held April 16, 1996 is incorporated herein by reference in response to this item. Item 12-Security Ownership of Certain Beneficial Owners and Management Information appearing in the definitive Proxy Statement at Exhibit 99 under the caption "Principal Beneficial Owners of the Corporation's Stock" related to the Annual Meeting of Security Holders to be held April 16, 1996 is incorporated herein by reference in response to this item. Item 13-Certain Relationships and Related Transactions Information appearing in the definitive Proxy Statement at Exhibit 99 under the caption "Certain Transactions" related to the Annual Meeting of Security Holders to be held April 16, 1996 is incorporated herein by reference in response to this item. Page 10 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 1995 Annual Report are incorporated by reference in Item 8: Consolidated Balance Sheet as of December 31, 1995 and 1994 Consolidated Statement of Income for the Years Ended December 31, 1995, 1994 and 1993 Consolidated Statement of Changes in Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 Consolidated Statement of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements Report of Independent Certified Public Accountants 14(a)2-Financial Statement Schedules. The following consolidated financial statement schedules of Citizens Financial Services, Inc. and subsidiary are incorporated by reference in Item 8: None All other schedules for which provision is made in applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions and are inapplicable, and therefore have been omitted. 14(a)3-Exhibits: (3)(i) - Articles of Incorporation of the Corporation, as amended. (3)(ii)- By-laws of the Corporation, as amended. (4) - Instruments Defining the Rights of Security Holders as filed in the registration statement on Form S-14 are incorporated herein by reference thereto. (13) - Annual Report to Stockholders for the year ended December 31, 1995. (16) - Letter re: change in certifying accountants - Information appearing in the definitive Proxy Statement at Exhibit 99 under the caption "Independent Public Accountants" to the Annual Meeting of Security Holders to be held April 16, 1996 is incorporated herein by reference in response to this item. (21) - Subsidiaries of Citizens Financial Services, Inc. (23) - Consent of Independent Accountant Parente, Randolph, Orlando, Carey & Associates (27) - Financial Data Schedule (99) - Definitive Proxy Statement, notice of meeting, and form of proxy for the Annual Meeting to be held April 16, 1996, previously filed with the Commission and incorporated herein by reference. Page 11 14(b)- On December 11, 1995 a report on Form 8-K was filed by the Registrant. Stating that on November 28, 1995 the Company and Meridian Bank, a wholly-owned subsidiary of Meridian Bancorp, Inc., signed a definitive agreement whereby the Company will purchase two retail banking offices located at Canton and Gillett, Pennsylvania. 14(c)-The exhibits required by this Item are listed under Item 14(a) above. 14(d)-Not applicable. Page 12 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Citizens Financial Services, Inc. (Registrant) /s/ Richard E. Wilber /s/ Thomas C. Lyman By: Richard E. Wilber By: Thomas C. Lyman President, Chief Executive Officer Treasurer (Principal Executive Officer) (Principal Financial & Accounting Officer) Date: March 19, 1996 Date: March 19, 1996 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 19, 1996 Richard E. Wilber, President, Chief Executive Officer, Director (Principal Executive Officer) _________________________ Robert E. Dalton, Director /s/ Carol J. Bond March 19, 1996 Carol J. Bond, Director /s/ Lowell Coolidge March 19, 1996 Lowell Coolidge, Director /s/ Rudolph J. van der Hiel March 19, 1996 Rudolph J. van der Hiel, Director /s/ John Novak March 19, 1996 John Novak, Director /s/ Bruce L. Adams March 19, 1996 Bruce L. Adams, Director /s/ William D. Van Ettan March 19, 1996 William D. Van Ettan, Director /s/ Larry Croft March 19, 1996 Larry Croft, Director /s/ Robert J. Landy March 19, 1996 Robert J. Landy, Director /s/ Thomas C. Lyman March 19, 1996 Thomas C. Lyman, Treasurer (Principal Financial and Accounting Officer) Page 13 LIST OF ATTACHED EXHIBITS 3 (i) Articles of Incorporation, as amended. 3 (ii) By-laws of the Corporation, as amended. 13 Annual Report to Stockholders for the year ended December 31, 1995. 21 Subsidiaries of Citizens Financial Services, Inc. 23 Consents of Independent Accountant 27 Financial Data Schedule 99 Definitive Proxy Statement, notice of meeting, and form of proxy for the Annual Meeting to be held April 16, 1996. Page 14 EX-3 2 EXHIBIT 3 (i) ARTICLES OF INCORPORATION CITIZENS FINANCIAL SERVICES, INC. 1. Name of Corporation (Must contain a corporate indicator unless exempt under 15 P.S. 2908 8) Citizens Financial Services, Inc. 2. Address of Registered Office in Pennsylvania (P.O. Box not acceptable) 15 South Main Street Mansfield, Pennsylvania 16933 3. Explain the Purpose or Purposes of the Corporation To have unlimited power to engage in and do any lawful act concerning any or all lawful business for which corporations may be incorporated under the provisions of the Business Corporation Law of the Commonwealth of Pennsylvania. The corporation is incorporated under the provisions of the Business Corporation Law of the Commonwealth of Pennsylvania (Act of May 5, 1993, P.L. 364, as amended). 4. Aggregate Number Shares, Classes of Shares and Par Value of Shares which the Corporation shall have Authority to Issues: Number and Class of Shares: 2,000,000 Stated Par Value Per Share (if any): $1.00 Total Authorized Capital: $2,000,000 Term of Existence: Perpetual 5. Name and Address of Each Incorporator, and the Number of Class and Shares Subscribed to by each Incorporator: Name Address # and class of shares Richard E. Wilber 255 Wakefield Terrace 1 share of common Mansfield, PA 16933 stock Robert M. Jones 307 Granger Street 1 share of common Blossburg, PA 16912 stock Rudolph J. 2 E. Wellsboro St. 1 share of common van der Hiel Mansfield, PA 16912 stock 6. IN TESTIMONY WHEREOF, THE INCORPORATOR (S) HAS (HAVE) SIGNED AND SEALED THE ARTICLES OF INCORPORATION THIS SEVENTEENTH DAY OF NOVEMBER, 1983. /s/ Richard E. Wilber /s/ Robert M. Jones /s/ Rudolph J. van der Hiel -1- 7. Cumulative Voting Rights Cumulative voting rights shall not exist with respect to the election of directors. 8. Opposition of Tender (or other offer) A. The Board of Directors may, if it deems it advisable, oppose a tender, or other offer for the corporation's securities, whether the offer is in cash or in securities of a corporation or otherwise. When considering whether to oppose an offer, the Board of Directors may, but it is not legally obligated to, consider any pertinent issues; by way of illustration, but not of limitation, the Board of Directors may, but shall not be legally obligated to, consider any and all of the following: (1) Whether the offer price is acceptable based on the historical and present operating results or financial condition of the corporation. (2) Whether a more favorable price could be obtained for the corporation's securities in the future. (3) The impact which an acquisition of the corporation would have on its employees, depositors and customers of the corporation and its subsidiaries in the community which they serve. (4) The reputation and business practices of the offeror and its management and affiliates as they would affect the employees, depositors and customers of the corporation and its subsidiaries and the future value of the corporation's stock. (5) The value of the securities, if any, which the offeror is offering in exchange for the corporation's securities, based on an analysis of the worth of the corporation as compared to the corporation or other entity whose securities are being offered. (6) Any antitrust or other legal and regulatory issues that are raised by the offer. B. If the Board of Directors determines that an offer should be rejected, it may take any lawful action to accomplish its purpose including, but not limited to, any and all of the following: advising shareholders -2- not to accept the offer; litigation against the offeror; filing complaints with all governmental and regulatory authorities; acquiring the authorized but unissued securities or treasury stock or granting options with respect thereto; acquiring a company to create an antitrust or other regulatory problem for the offeror; and obtaining a more favorable offer from another individual or entity. 9. Classification of Directors The Directors shall be divided into three (3) classes, as nearly equal in number as possible, known as Class 1, consisting of not more than eight (8) Directors; Class 2, consisting of not more than eight (8) Directors; and Class 3, consisting of not more than nine (9) Directors. The initial Directors of Class 1 shall serve until the third (3rd) annual meeting of shareholders. At the third (3rd) annual meeting of the shareholders, the Directors of Class 1 shall be elected for a term of three (3) years and, after expiration of such term, shall thereafter be elected every three (3) years for three (3) year terms. The initial Directors of Class 2 shall serve until the second (2nd) annual meeting of shareholders. At the second annual meeting of the shareholders, the Directors of Class 2 shall be elected for a term of three (3) years and, after the expiration of such term, shall thereafter be elected every three (3) years for three (3) terms. The initial Directors of Class 3 shall serve until the first (1st) annual meeting of shareholders. At the first (1st) annual meeting of the shareholders the Directors of Class 3 shall be elected for a term of three (3) years and, after the expiration of such term, shall thereafter be elected every three (3) years for three (3) year terms. Each director shall serve until his/her successor shall have been elected and shall qualify, even though his/her term of office as herein provided has otherwise expired, except in the event of his/her earlier resignation, removal or disqualification. 10. Number of Directors The Board shall consist of not less than five nor more than twenty-five shareholders, the exact number within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the full Board or by resolution of the shareholders at any meeting thereof; provided, however, that a majority of the full Board of Directors may not increase the number of directors to a number which; (i) exceeds by more than two, the number of directors last elected by shareholder, (ii) in no event shall the number of directors exceed twenty five. -3- 11. Filling of Vacancies in Board of Directors Caused by Increase in Number of Directors Any directorship to be filled by reason of an increase in the number of directors may be filled by the Board of Directors. The Board of Directors shall specify the class in which a director so elected shall serve. Any director elected by the Board of Directors shall hold office only until the next annual meeting of the shareholders and until his successor shall have been elected and qualified, notwithstanding that the term of office of the other directors in the class of which he is a member does not expire at the time of such meeting. His successor shall be elected by the shareholders to a term of office which shall expire at the same time as the term of office of the other directors in the class to which he is elected. 12. Eligibility and Mandatory Retirement Commencing with the annual meeting of shareholders of 1984, no person shall be eligible to be newly elected or appointed as a Director as he/she shall have attained the age of sixty-eight (68) years on or prior to December 31 of the year prior to the date of his/her election. 13. Pre-Emptive Rights In the event of any increase in the common stock of this Corporation by the sale of additional shares thereof, each shareholder shall be entitled to subscribe to such additional shares of common stock in proportion to the number of shares authorized by the shareholders, unless another time subsequent to the date of the shareholders' meeting is specified in a resolution adopted by the shareholders at the time the increase is authorized. 14. Indebtedness The Corporation shall have authority to borrow money and the Board of Directors, without the approval of the shareholders and acting within their sole discretion, shall have the authority to issue debt instruments of the Corporation upon such terms and conditions and with such limitation as the Board of Directors deems advisable. The authority of the Board of Directors shall include, but not be limited to, the power to issue convertible debentures. -4- 15. Indemnification A. To the extent permitted by Section 410 of the Pennsylvania Business Corporation Law, and any amendments thereto, and sections relating thereto, Including the Directors' Liability Act, subject to Federal regulatory restrictions, the Board of Directors of the Corporation shall cause the Corporation to indemnify any person who was or is or is threatened to be made a party to any threatened, pending, or completed actions, suit, or proceeding, whether civil, criminal, administrative, or investigative by reason of the fact that he or she is or was a director, officer, employee or agent of the Corporation against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit, or proceeding, including any amount paid to the institution itself as a result of an action or suit by or in the right of the Corporation. To the extent permitted by law, the Board of Directors of the Corporation shall cause the Corporation to purchase and maintain insurance on behalf of any person who is or was against any liability asserted against him or her and incurred by him or her in any such capacity, and arising out of his or her status as such. B. A director of the Corporation shall not be personally liable for monetary damages as such for any action taken, or any failure to take any action, unless: (1) the director has breached or failed to perform the duties of his or her office under Section 8363 of the Directors' Liability Act (relating to standard of care and justifiable reliance); and (2) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. Exception. The provisions of this section shall not apply to: (1) the responsibility or liability of a director pursuant to any criminal statute; or (2) the liability of a director for the payment of taxes pursuant to local, State or Federal law. -5- 16. Shareholder Action No merger, consolidation, liquidation or dissolution of the Corporation nor any action that would result in the sale of other disposition of all or substantially all of the assets of the Corporation shall be valid unless first approved by the affirmative vote of the holders of at least sixty six and two thirds percent (66 2/3%) of the outstanding shares of Common Stock. This Article may not be amended unless first approved by the affirmative vote of the holders of at least sixty six and two thirds percent (66 2/3%) of the outstanding shares of Common Stock. Reflects Amendment to Article 15 as approved by Shareholders at the April 19, 1988, Annual Meeting. Amendment to Article 4 as approved by Shareholders at the Annual Meeting on April 18, 1995: 4. The aggregate number of shares which the Corporation shall have authority to issue is 5,000,000 shares of the Common Stock of the par value of $1.00 per share (the "Common Stock"). -6- BYLAWS OF CITIZENS FINANCIAL SERVICES, INC. These Bylaws are supplemental to the Pennsylvania Business Corporation Law and other applicable provisions of law, as the same shall from time to time be in effect. ARTICLE I. MEETINGS OF SHAREHOLDERS. Section 101. Place of Meetings. All meetings of the shareholders shall be held at such place or places, within or without the Commonwealth of Pennsylvania, as shall be determined by the Board of Directors from time to time. Section 102. Annual Meetings. The annual meeting of the shareholders for the election of Directors and the transaction of such other business as may properly come before the meeting shall be held at such date or hour as may be fixed by the Board of Directors. Any business which is a proper subject for shareholder action may be transacted at the annual meeting, irrespective of whether the notice of said meeting contains any reference thereto, except as otherwise provided by applicable law. Section 103. Special Meetings. Special meetings of the shareholders may be called at any time by the Board of Directors, or by any three or more shareholders owning, in the aggregate, not less than twenty-five percent of the stock of the Corporation. Section 104. Conduct of Shareholders' Meetings. The Board of Directors shall appoint an officer to preside at all shareholders' meetings. The officer presiding over the shareholders' meeting may establish such rules and regulations for the conduct of the meeting as he/she may deem to be reasonably necessary or desirable for the orderly and expeditious conduct of the meeting. Unless the officer presiding over the shareholders' meeting otherwise requires, shareholders need not vote by ballot on any question. ARTICLE II. DIRECTORS AND BOARD MEETINGS. Section 201. Management by Board of Directors. The business and affairs of the Corporation shall be managed by its Board of Directors. The Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, regulation, the Articles of Incorporation or these Bylaws directed or required to be exercised or done by the shareholders. -1- Section 202. Nomination for Directors. Any shareholder who intends to nominate or to cause to have nominated any candidate for election to the Board of Directors (other than any candidate proposed by the Corporation's then existing Board of Directors) shall so notify the Secretary of the Corporation in writing not less than 90 days nor more than 120 days prior to the date of any meeting of shareholders called for the election of directors. Such notification shall contain the following information to the extent known by the notifying shareholder: (a) the name and address of each proposed nominee; (b) the age of each proposed nominee; (c) the principal occupation of each proposed nominee; (d) the number of shares of the Corporation owned by each proposed nominee; (e) the total number of shares that to the knowledge of the notifying shareholder will be voted for each proposed nominee; (f) the name and residence address of the notifying shareholder; and (g) the number of shares of the Corporation owned by the notifying shareholder. Any nomination for director not made in accordance with this Section shall be disregarded by the Chairman of the meeting, and votes cast for each such nominee shall be disregarded by the judges of election. In the event that the same person is nominated by more than one shareholder, if at least one nomination for such person complies with this Section, the nomination shall be honored and all votes cast for such nomine shall be counted. Section 203. Directors Must Be Shareholders. Every Director must be a shareholder of the Corporation and shall own in his/her own right the number of shares (if any) required by law in order to qualify as such Director. Any Director shall forthwith cease to be a Director when he/she no longer holds such shares, which fact shall be reported to the Board of Directors by the Secretary, whereupon the Board of Directors shall declare the seat of such Directors vacated. Section 204. Resignations. Any Director may resign at any time. Such resignation shall be in writing, but the acceptance thereof shall not be necessary to make it effective. Section 205. Compensation of Directors. No Director shall be entitled to any salary as such; but the Board of Directors may fix, from time to time, a reasonable annual fee for acting as a Director and a reasonable fee to be paid each Director for his/her services in attending meetings of the Board and meetings of committees appointed by the Board. The Corporation may reimburse Directors for expenses related to their duties as a member of the Board. Section 206. Organizational Meeting. The Directors elected shall meet at the main office of the Corporation for the purpose of organizing the new Board and electing and appointing Officers of the Corporation for the succeeding year. Such meeting shall be held on the day of election or as soon as practicable thereafter and in any event within thirty days thereof. A quorum of Directors elected must be present at such meeting. -2- Section 207. Regular Meetings. Regular meetings of the Board of Directors shall be held on such day, at such hour, and at such place, consistent with applicable law, as the Board shall, from time to time, designate or as may be designated in any notice from the Secretary calling the meeting. The Board of Directors shall meet for reorganization at the first regular meeting following the annual meeting of shareholders at which the Directors are elected. Notice need not be given of regular meetings of the Board of Directors which are held at the time and place designated by the Board of Directors. If a regular meeting is not to be held at the time and place designated by the Board of Directors, notice of such meeting, which need not specify the business to be transacted thereat and which may be either verbal or in writing, shall be given by the Secretary to each member of the Board at least twenty-four (24) hours before the time of the meeting. A majority of the members of the Board of Directors shall constitute a quorum for the transaction of business. If at the time fixed for the meeting, including the meeting to organize the new Board following the annual meeting of shareholders, a quorum is not present, the directors in attendance may adjourn the meeting from time to time until a quorum is obtained. Except as otherwise provided herein, a majority of those directors present and voting at any meeting of the Board of Directors, shall decide each matter considered. A director cannot vote by proxy, or otherwise act by proxy at a meeting of the Board of Directors. Section 208. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, the President or at the request of three (3) or more members of the Board of Directors. A special meeting of the Board of Directors shall be deemed to be any meeting other than the regular meeting of the Board of Directors. Notice of the time and place of every special meeting, which need not specify the business to be transacted thereat and which may be either verbal or in writing, shall be given by the Secretary to each member of the Board at least twenty-four (24) hours before the time of such meeting excepting the Organization Meeting following the election of Directors. Section 209. Chairman of the Board. The Board of Directors shall appoint one of its members to be a Chairman of the Board to serve at the pleasure of the Board. He shall preside at all meetings of the Board of Directors. The Chairman of the Board shall supervise the carrying out of the policies adopted or approved by the Board. He shall have general executive powers, as well as the specific powers conferred by these Bylaws. He shall also have and may exercise such further powers and duties as from time to time may be conferred upon or assigned to him by the Board of Directors. -3- Section 210. Vice Chairmen of the Board. The Board of Directors may elect one (1) or more Vice Chairmen of the Board as the Board of Directors may, from time to time, deem advisable. The Vice Chairmen of the Board shall have such duties as are prescribed by the Board of Directors or the Chairman of the Board. Section 211. Reports and Records. The reports of Officers and Committees and the records of the proceedings of all Committees shall be filed with the Secretary of the Corporation and presented to the Board of Directors, if practicable, at its next regular meeting. The Board of Directors shall keep complete records of its proceedings in a minute book kept for that purpose. The minutes of each meeting shall be signed by the Secretary or other Officer appointed to act as Secretary of the meeting. When a Director shall request it, the vote of each Director upon a particular question shall be recorded in the minutes. ARTICLE III. COMMITTEES. Section 301. Committees. The following two (2) Committees of the Board of Directors shall be established by the Board of Directors: Executive Committee and Audit Committee. Section 302. Executive Committee. The Executive Committee shall consist of the Chairman of the Board, the President, and no less than two (2) other directors. A majority of the members of the Executive Committee shall constitute a quorum, and actions of a majority of those present at a meeting at which a quorum is present shall be actions of the Committee. Meetings of the Committee may be called at any time by the Chairman or Secretary of the Committee. The Executive Committee shall have and exercise the authority of the Board of Directors in the management of the business of the Corporation between the dates of regular meetings of the Board. Section 303. Audit Committee. The Audit Committee shall consist of one (1) or more Directors, none of whom shall be Officers of the Corporation. Meetings of the Committee may be called at any time by the Chairman or Secretary of the Committee. A majority of the members of the Committee shall constitute a quorum, and actions of a majority of those present at a meeting at which a quorum is present shall be actions of the Committee. The Committee shall supervise the audit of the books of the Corporation and recommend for approval by the Board the services of a reputable Certified Public Accounting firm to examine the affairs of the Corporation. Section 304. Other Committees. The Board of Directors may appoint, from time to time, from its own members, other committees of one or more persons, for such purposes and with such powers as the Board may determine. -4- ARTICLE IV. OFFICERS. Section 401. Officers. The Officers of the Corporation shall be a President, one (1) or more Vice Presidents, a Secretary, a Treasurer, and such other Officers and Assistant Officers as the Board of Directors may, from time to time, deem advisable. Except for the President, Secretary, and Treasurer, the Board may refrain from filling any of the said offices at any time and from time to time. The same individual may hold any two (2) or more offices except both the offices of President and Treasurer. All Officers shall be elected by the Board of Directors at the time, in the manner and for such terms as the Board of Directors shall determine from time to time. Any Officer may be removed at any time, with or without cause, and regardless of the term for which such Officer was elected. Each Officer shall hold his office for the current year for which he was elected or appointed by the Board, unless he shall resign, becomes disqualified, or be removed at the pleasure of the Board of Directors. Section 402. President. The President shall have general supervision of all of the departments and business of the Corporation and shall prescribe the duties of the other Officers and Employees and see to the proper performance thereof. The President shall be responsible for having all orders and resolutions of the Board of Directors carried into effect. The President shall execute on behalf of the Corporation and may affix or cause to be affixed a seal to all authorized documents and instruments requiring such execution, except to the extent that signing and execution thereof shall have been delegated to some other Officer or Agent of the Corporation by the Board of Directors or by the President. The President shall be a member of the Board of Directors. In general, the President shall perform all the duties and exercise all the powers and authorities incident to such office or as prescribed by the Board of Directors. Section 403. Vice Presidents. The Vice Presidents shall perform such duties, do such acts and be subject to such supervision as may be prescribed by the Board of Directors or the President. In the event of the absence or disability of the President or his/her refusal to act, one Vice President, shall perform the duties and have the powers and authorities of the President, except to the extent inconsistent with applicable law. Section 404. Secretary. The Secretary shall act under the supervision of the Board of Directors. Unless a designation to the contrary is made at a meeting, the Secretary shall attend all meetings of the Board of Directors and all meetings of the shareholders and record all of the proceedings of such meetings in a book to be kept for that purpose. The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors. The Secretary shall keep a seal -5- of the Corporation and when authorized by the Board of Directors or the President, cause it to be affixed to any documents and instruments requiring it. An assistant Secretary may be designated to serve in the event of absence or disability of the Secretary. Section 405. Treasurer. The Treasurer shall act under the supervision of the President or such other Officer as the President may designate. The Treasurer shall have custody of the Corporation's funds and such other duties as may be prescribed by the Board of Directors, President or such other Supervising Officer as the President may designate. Section 406. Other Officers. All other Officers shall perform such duties as shall be prescribed by the Board of Directors or the President. Section 407. Compensation. Unless otherwise provided by the Board of Directors, the salaries and compensation of all Officers, except the President, shall be fixed by or in the manner designated by the President. Section 408. General Powers. The Officers are authorized to do and perform such corporate acts as are necessary in the carrying on of the business of the Corporation, subject always to the direction of the Board of Directors. ARTICLE V. INDEMNIFICATION. Section 501. To the extent permitted by Section 410 of the Pennsylvania Business Corporation Law, and any amendments thereto, and sections relating thereto, Including the Directors' Liability Act, subject to Federal regulatory restrictions, the Board of Directors of the Corporation shall cause the Corporation to indemnify any person who was or is or is threatened to be made a party to any threatened, pending, or completed actions, suit, or proceeding, whether civil, criminal, administrative, or investigative by reason of the fact that he or she is or was a director, officer, employee or agent of the Corporation against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit, or proceeding, including any amount paid to the institution itself as a result of an action or suit by or in the right of the Corporation. To the extent permitted by law, the Board of Directors of the Corporation shall cause the Corporation to purchase and maintain insurance on behalf of any person who is or was against any liability asserted against him or her and incurred by him or her in any such capacity, and arising out of his or her status as such. -6- Section 502. A director of the Corporation shall not be personally liable for monetary damages as such for any action taken, or any failure to take any action, unless: (1) the director has breached or failed to perform the duties of his or her office under Section 8363 of the Directors' Liability Act (relating to standard of care and justifiable reliance); and (2) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. Exception. The provisions of this section shall not apply to: (1) the responsibility or liability of a director pursuant to any criminal statute; or (2) the liability of a director for the payment of taxes pursuant to local, State or Federal law. ARTICLE VI. SHARES OF CAPITAL STOCK. Section 601. Authority to Sign Share Certificates. Every share certificate of the Corporation shall be signed by the President and by the Secretary or one of the Assistant Secretaries. Certificates may be signed by a facsimile signature of the President and the Secretary or one of the Assistant Secretaries of the Corporation. Section 602. Lost or Destroyed Certificates. Any person claiming a share certificate to be lost, destroyed or wrongfully taken shall receive a replacement certificate if such person shall have: (a) requested such replacement certificate before the Corporation has notice that the shares have been acquired by a bona fide purchaser; (b) provided the Corporation with an indemnity agreement satisfactory in form and substance to the Board of Directors, or the President or the Secretary; and (c) satisfied any other reasonable requirements (including providing an affidavit and a surety bond) fixed by the Board of Directors, or the President or the Secretary. Section 603. Transfers. Shares of stock shall be transferable on the books of the Corporation, and a transfer book shall be kept in which all transfers of stock shall be recorded. Section 604. Control-Share Acquisitions. Subchapter G of Chapter 25 of the Pennsylvania Corporation Law of 1988 (Title 15 of the Pennsylvania Consolidated Statues) as enacted by Act 36 of 1990, approved April 27, 1990 shall not be applicable to this corporation. -7- ARTICLE VII. GENERAL. Section 701. Fiscal Year. The fiscal year of the Corporation shall begin on the first (1st) day of January in each year and end on the thirty-first (31st) day of December in each year. Section 702. Record Date. The Board of Directors may fix any time whatsoever (whether or not the same is more than fifty (50) days prior to the date of any meeting of shareholders, or the date for the payment of any dividend or distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or will go into effect, as a record date for the determination of the shareholders entitled to notice of, or to vote at any such meetings, or entitled to receive payment of any such dividend or distribution, or to receive any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares. Section 703. Absentee Participation in Meetings. One (1) or more Directors may participate in a meeting of the Board of Directors, or of a Committee of the Board, by means of a conference telephone or similar communications equipment, by means of which all persons participating in the meeting can hear each other. Section 704. Emergency Bylaws. In the event of any emergency resulting from a nuclear attack or similar disaster, and during the continuance of such emergency, the following Bylaw provisions shall be in effect, notwithstanding any other provisions of the Bylaws: (a) A meeting of the Board of Directors or of any Committee thereof may be called by any Officer or Director upon one (1) hour's notice to all persons entitled to notice whom, in the sole judgment of the notifier, it is feasible to notify; (b) The Director or Directors in attendance at the meeting of the Board of Directors or of any Committee thereof shall constitute a quorum; and (c) These Bylaws may be amended or repealed, in whole or in part, by a majority vote of the Directors attending any meeting of the Board of Directors, provided such amendment or repeal shall only be effective for the duration of such emergency. Section 705. Severability. If any provision of these Bylaws is illegal or unenforceable as such, such illegality or unenforceability shall not affect any other provision of these Bylaws and such other provisions shall continue in full force and effect. -8- ARTICLE VIII. AMENDMENT OR REPEAL. Section 801. Amendment or Repeal by the Board of Directors. These Bylaws may be amended or repealed, in whole or in part, by a majority vote of members of the Board of Directors at any regular or special meeting of the Board duly convened. Notice need not be given of the purpose of the meeting of the Board of Directors at which the amendment or repeal is to be considered. Section 802. Recording Amendments and Repeals. The text of all amendments and repeals to these Bylaws shall be attached to the Bylaws with a notation of the date and vote of such amendment or repeal. ARTICLE IX. APPROVAL OF AMENDED BYLAWS AND RECORD OF AMENDMENTS AND REPEALS. Section 901. Approval and Effective Date. These Bylaws have been approved as the Bylaws of the Corporation this 20th day of December, 1983, and shall be effected as of said date. /s/ Robert G. Messinger Robert G. Messinger, Secretary Section 902. Amendments or Repeals. Date Amended Section Involved or Repealed Approved By ARTICLE V April 19, 1988 Shareholders Section 604 July 23, 1990 Board of Directors Section 202 May 28, 1991 Board of Directors EX-13 3 EXHIBIT 13 ANNUAL REPORT TO SHAREHOLDERS _________________________ The Spirit of Community Banking CITIZENS FINANCIAL SERVICES __________________ INCORPORATED Annual Report 1995 ______________________________________________________________________________ [GRAPHIC OMITTED: Fireworks bursting, approximately 10 inches in length by 2.5 inches width on right side of cover page] ______________________________________________________________________________ [GRAPHIC OMITTED: Silhouette of colonial rider on horseback, upper left hand corner of page, one inch square] ______________________________________________________________________________ [GRAPHIC OMITTED: Photograph of building with American flag and balloons, approximately 10 inches in length by 2.5 inches width on right side of page] ______________________________________________________________________________ THE STRATEGY FOR FINANCIAL GROWTH ______________________________________________________________________________ "In this new era of bank mergers and acquisitions, First Citizens remains dedicated to our goal of leading the Twin Tiers as the region's premier community banking system." ______________________________________________________________________________ THE YEAR 1995 was an historic one for banking customers across the Twin Tiers. In a series of successive shock waves that rolled across the region during one of the hottest summers on record, customers of several of the region's largest banking institutions were advised that, once again, their banks were being sold to even larger and even more impersonal big-market banks. But not First Citizens' customers. Today the differences between First Citizens' philosophies and the strategies of our largest competitors have never been greater. In stark contrast to the others, we remain resolutely close to our customers. Intensely focused on the communities we serve. And, like our own customers, fiercely independent. Today, as never before, First Citizens sees unfolding opportunity in our steadfast commitment to our principles of true community banking. The signs of our strategic success are all around us. And as we review the successful year just completed, we look ahead with great anticipation to a future of even greater opportunity-- and even greater growth. _____ 1 [GRAPHIC OMITTED: Silhouette of a colonial rider on horseback, upper left hand corner of page, one inch square] ______________________________________________________________________________ "Nearly 76% of our deposits are directly loaned within our market, which we believe is a tremendous method to support the economic development of the Twin Tiers." ______________________________________________________________________________ TO OUR SHAREHOLDERS, CUSTOMERS AND EMPLOYEES: It is with a great sense of accomplishment that we end this annual report for 1995. The following narrative is designed to cover only a few of the "highlights" of the past year, but cannot do justice to the many achievements we are so proud of. Needless to say, the record performance of 1995 is a culmination of outstanding effort and devotion by all directors and employees to serve our customers, communities, and shareholders. FINANCIAL PERFORMANCE In the twelve months since year-end 1994, we have seen assets grow 6.3% from $232.5 million to $247.1 million. Deposits grew 9.7% from $194.5 million to $213.3 million. This strong deposit growth substantially diminished our reliance on the "borrowed funds" utilized in late 1994. Loan growth was a more modest 3.2%, increasing $5.1 million to $161.6 million. Nearly 76% of our deposits are loaned within our market to meet consumer and commercial credit needs. We believe this is a tremendous method to support the economic development of our area. Assets managed by the Trust and Investment Services division grew a dramatic 15% to surpass $41 million. This outstanding growth was the result of hiring an experienced business development officer and implementing an employee referral program. This making the growth during the past two years nearly 50%. The quality of the loan portfolio remains quite good with past due loans equal to 2.76% of total loans, up from the 2.03% at year-end 1994. Loans not accruing interest were down from $l.6 million to $1.5 million at year-end 1994 and 1995 respectively. The more loans, either classified as non-actual or over 90 days past due, are collateralized by mortgage liens and, therefore, any significant loss exposure is minimized. Net loan losses in 1995 were $51 thousand. The allowance for possible loan losses grew by 6.5% during 1995 to $1.8 million and represents 1.13% of outstanding loans. Net income was a record $2.8 million or 8% over the prior year with earnings per share equaling $2.10 versus $1.95 for 1994.The primary factors influencing the earnings growth were a moderate 2% ($179 thousand) growth in net interest income, a $92 thousand decline in the provision for possible loan losses, a 25% increase in trust income and very modest growth in salary and benefit expense, as well as other operating expense. During 1995 the insurance premiums paid into the Bank Insurance Fund of the Federal Deposit Insurance Corporation were reduced from 23 cents per hundred of deposits to 4 cents per hundred. Even with this premium reduction, this component of the FDIC fund became fully capitalized and prompted a refund to First Citizens of $91 thousand in September. In total, our FDIC insurance expense declined $117 thousand from that paid in 1994. Total stockholders' equity was $21.3 million, an increase of 12.7%. This Strong growth was due to the earnings of $2.8 million, minus a $1.1 million declaration of cash dividends plus a $713 thousand improvement (net of tax) in the market value of available-for-sale securities. The improvement in the market value of available-for-sale securities was a direct result of the decline in national interest rates during 1995 Stockholders' equity now represents 8.6% of total assets versus 8.1% at year-end 1994. This substantially exceeds the 5% ratio defined by regulatory agencies as "well capitalized." The bid and ask price of our common shares were $23.50 and $25.50 at December 31,1995, averaging 5% over the prior year. ______________________________________________________________________________ [GRAPHIC OMITTED: Photograph of the Corporation's President presenting a plaque to an employee of the Corporation, center right third of page, approximately 4 inches square] ______________________________________________________________________________ _____ 2 _____________________________________________________________________________ Opposite: Gina M Boor, secretary to the president, receives the Employee of the Year award from Richard Wilber, President. Gina joined First Citizens in 1991 and was honored at the annual Christmas Party for her outstanding professional contributions. ______________________________________________________________________________ [GRAPHIC OMITTED: Photograph of a gaslight in the town of Wellsboro, Pennsylvania, top right one third of page, approximately 2.5 inches square] ______________________________________________________________________________ Above: The warm glow of gaslights in downtown Wellsboro is reflective of the close hometown relationship we share With our communities. ______________________________________________________________________________ [GRAPHIC OMITTED: Photograph of a farmer's field, top left one third of page, approximately two inches by 4 inches] ______________________________________________________________________________ Left: Our agricultural industries are a major factor in our region's growth. ______________________________________________________________________________ [GRAPHIC OMITTED: Photograph of the Corporation's President, approximately 10 inches in length by 2.5 inches width on right side of page] ______________________________________________________________________________ A MESSAGE FROM THE PRESIDENT ______________________________________________________________________________ OPERATING AND STRATEGIC INITIATIVES In early 1995, we engaged a professional marketing firm to generate creatively that would perpetuate our outstanding growth in this increasingly competitive business. We were delighted to adopt an exciting new logo ("The Spirit of Independence Lives On"), as well as a very appealing radio jingle. This highly focused marketing has been very effective not only in strengthening our corporation's name recognition, but also emphasizing our philosophy of hometown community banking--a style that is rapidly disappearing as bank mergers and acquisitions accelerate. A revolutionary new form of technology known as "check imaging" was implemented in mid 1995 and has had a profound impact on our ability to deliver cost- effective checking account services. This technology has allowed us to reduce postage expense, while eliminating the need for three positions in statement preparation and the related "back-office" area of the bank. Customer acceptance of this service has been outstanding. We continue to closely examine additional technology applications and recently completed a comprehensive assessment culminating in a clearly defined technology plan. We recognize that changing consumer expectations and preferences will dictate changes in our delivery of banking services. Our challenge will be to select cost effective technology that will allow us to satisfy both customer demands and shareholder performance expectations. _____ 3 [GRAPHIC OMITTED: Silhouette of a colonial rider on horseback, upper left hand corner of page, one inch square] ______________________________________________________________________________ "The opportunity to expand our community of office network to nine locations has created tremendous excitement and enthusiasm." ______________________________________________________________________________ On November 28,1995 we signed an agreement to acquire the Gillett and Canton community offices from Meridian Bank, headquartered in Reading, Pennsylvania. This opportunity to expand our community office network to nine locations has created tremendous excitement and enthusiasm. Our initial reception by these customers and communities has been very heartwarming and gives us a great deal of confidence as we move beyond the $250 million asset milestone. HUMAN RESOURCES This corporation's strength and success depends on the quality of its directors and employees. Although there were no changes in our corporate board of directors, there were two Wellsboro local board members who resigned due to relocating out of the area. The contributions of Mr. Oliver Richard Bartlett and Wilson Gridley, III will be sorely missed. In September 1995, Timothy Gooch was appointed to the Wellsboro local board. Mr. Gooch is a CPA at Pennypacker and Ziegler, P.C., Wellsboro. He is a director of the Wellsboro Area Chamber of Commerce and has served both the Wellsboro Area United Way and the American Cancer Society. He is also treasurer and part-owner of Laurel Racquetball Club. Employees of this corporation have been working very hard to further their professional knowledge. ln 1995, over 50% of employees attended educational programs away from the bank. In August Phillip Vaughn, Assistant Vice President and Office Manager in Ulysses, completed the three year Advanced School of Banking conducted by the Pennsylvania Bankers Association (PBA). Other individuals are working through this three year program or have completed various one-week "academies" also available through the PBA. We are fortunate to have employees willing to invest more of their personal time to enhance their banking skills. THE FUTURE With the year 2000 in sight, it seems clear that dramatic changes in the banking industry will continue unabated. The long-predicted industry consolidation is in full swing. Fifteen of the country's fifty largest banks were involved with mergers or acquisitions. Even smaller banks are buying each other, as evidenced by a 10% decline in Pennsylvania bank charters (from 261 to 235). Liberalized legislation, such as the Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 and early "opt-in" legislation by the Commonwealth of Pennsylvania, allowing for reciprocal interstate banking and branching, will encourage further consolidation. We continue to believe opportunities will arise from these trends. Consumers finding their accounts taken over by acquiring banks with higher fees and less personal service will search anew for a true community bank with an independent spirit like First Citizens. In addition, large bank acquisitions of other large banks cause, in some cases, regulatory mandates to shed duplicate branches within the same markets. Furthermore, large ______________________________________________________________________________ [GRAPHIC OMITTED: Photograph of employees of the Corporation be recognized for years of service, bottom middle of page, approximately 3.5 inches by 5.5 inches] ______________________________________________________________________________ First Citizens employees were recognized for their five-year intervals of service. Standing from left: Irene Douglass (10), Linda Nowak (15), Jean Knapp (15), Paula Johnson (15), Joanne Marvin (25), and Kathy Swain (10). Seated from left: Terry Osborne (20), Dot Rakoski (10), Jerry Rumsey (30), Karen Jacobson (25) and Phillip Vaughn (5). Not shown: Valerie Davis (5), Jennifer Heath (5), Sandra Harris (5), Beth Pfleegor (15), and Jane McGee (30). ______________________________________________________________________________ _____ 4 banks in metropolitan areas may decide to dispose of entire geographic markets that may be desirable to us. New technologies are being introduced at a dizzying pace. Some believe electronic banking (through personal computers, telephones, and even more sophisticated ATM cards) will evolve so rapidly that "brick and mortar" branch networks will be obsolete. They further say banks will become indistinguishable from each other in the electronic environment all products will be come commodities in the eyes of consumers. They warn that the "technologically challenged" banks will not succeed while those who invested heavily in technology will flourish. In my judgement, these scenarios seem somewhat extreme and do not do justice to the customer who demands high quality personal service. We will, however, be sensitive to the customer's increasing demand for convenience and cost-effective delivery of financial services in an increasingly technological age. One matter which is yet to be resolved, but will impact 1996 in a potentially significant way, pertains to actions by the Federal Deposit Insurance Corporation (FDIC"). Our premiums are paid into two different funds under the administration by the FDIC. As mentioned previously, the Bank Insurance Fund became fully funded in 1995. Because the Savings Association Insurance Fund is not fully Funded, the premium remains at 23 cents per hundred in deposits and applies to approximately $52 million of our deposits. Congress is considering a one-time assessment to fully capitalize this fund which, if implemented, would reduce net income by $290 thousand after tax in 1996. Further impacting net income will be the uncertainty of interest rates, an expected weakness in loan demand, and uncertainties with rising unemployment levels. We hope to formulate definitive plans on a new operations and administration center. Our substantial growth during the first half of the nineties ($75 million growth in five years) has renewed our conviction to see this project to a conclusion. Although there are many uncertainties and challenges confronting us, we also look forward to the numerous opportunities. We will work very hard to meet these challenges and capitalize on opportunities and continue the success this corporation has been accustomed to. Sincerely, /s/ Richard E. Wilber Richard E. Wilber President ______________________________________________________________________________ [GRAPHIC OMITTED: Photograph of the Corporation's President, center of page, approximately 2.5 inches square] ______________________________________________________________________________ _____ 5 [GRAPHIC OMITTED: Silhouette of colonial rider on horseback, upper left hand corner of page, one inch square] ______________________________________________________________________________ "A bright new day is dawning for the future of First Citizens in communities all across the Twin Tiers--and beyond." ______________________________________________________________________________ [GRAPHIC OMITTED: Photograph of a house with American flags, approximately 2 inches by 5.5 inches on top third center of page] ______________________________________________________________________________ THE YEAR 1995 was an historic one for First Citizens National Bank. Following months of careful analysis and development, in March of this past year First Citizens introduced our new corporate identity--an American patriot riding confidently into the future on horseback--to symbolize the strength, dedication and independence we represent as our region's leading community banking system. Accompanying our new identity was our new corporate position: The Spirit Of Independence. Today, just one year later, this bold new campaign has captured the imagination of the public and of our customers. In communities all across the Twin Tiers, citizens are discovering the true power of Independence Banking and the impact it can make on their lives--and in their communities. COMMUNITY VALUES REFLECT OUR SYSTEM'S STRENGTHS. Throughout 1995, First Citizens National Bank again demonstrated, as we have over so many years in the past, that as a truly independent bank we not only can compete successfully against our more distant big-market competitors we can thrive. In the harsh business climate of today, sudden and unexpected reorganizations at other area institutions have often left their employees and their customers alike bitter and resentful of the resulting changes. But at First Citizens, for generations we've nurtured the subtle and delicate balance of offering national caliber products while delivering services with the helping hand of a true community banking institution. CUSTOMER SATISFACTION: OUR PATH TO THE FUTURE. The image of neighbor helping neighbor is both a welcome and a powerful one for the citizens of the Twin Tiers. And at First Citizens, with our intense focus on community involvement, it's an image which we have both carefully sought and diligently earned with our customers. Our success has established us as the premier community banking system in the region and points the way to a bright future of expanding growth and opportunity. For example, as a result of our newest efforts over the past year, in early 1996 we will proudly add two new Patriot Riders to join the original seven which ride across our system maps (see pages 8-9). In late 1995 we announced the acquisition of our two newest community offices in Canton and Gillett. Already these two communities are applauding our plans to return local financial independence to their citizens as we've done for decades for the thousands of other citizens all across the Twin Tiers. And that's only the beginning. We believe that the future of banking in the Twin Tiers belongs to that institution which remains closest to the many unique communities which dot our rolling landscapes. This is precisely why our special relationship with the citizens and the communities of our region provide the keys to renewed and ongoing growth and prosperity as, day by day, First Citizens works to further establish our leadership in community banking throughout our region. Three stars light our path into the future at First Citizens National Bank. And as we have for generations, we continue to grow with a special focus on our flexibility, financial stability, and service reliability. In addition to demanding superior customer service, our customers today increasingly place their trust and confidence in those financial institutions which embody these three attributes. FLEXIBILITY For First Citizens' customers, flexibility has always mean the convenience of banking with an institution which offers an array of programs, options and top-flight banking products combined with personal banking choices. In 1995, new programs built on our reputation for offering customer flexibility. Powerful new checking products featuring low-cost customer options have met with tremendous acceptance. Our move to Image-Checking exemplifies convenience banking for our customers. And new checking account alternatives now allow _____ 6 ______________________________________________________________________________ [GRAPHIC OMITTED: Photograph of barn with horses, on left top third of page, approximately 2.5 inches by 1.5 inches] ______________________________________________________________________________ "Our growth as a banking institution is directly tied to the strength of our rural farming communities." ______________________________________________________________________________ [GRAPHIC OMITTED: Man selling balloons and cotton candy, approximately 10 inches in length by 2.5 inches width on right side of page] ______________________________________________________________________________ WHERE LOCAL DECISIONS STILL COUNT ______________________________________________________________________________ our customers to design their own programs with popular no-cost features like free checks, interest-bearing checking, direct-deposit, and more. But our service flexibility extends far beyond mere products. Today at First Citizens, key lending decisions are reviewed directly by our board members who are intimately involved with our local communities. When special lending considerations are called for, they are reflected in our approval processes. Across the Twin Tiers, no institution is closer to its customers than First Citizens. STABILITY. In today's volatile business climate, change is the only certain constant. Yet at First Citizens, our long-standing success is anchored in our commitment to promote and to protect the core financial strength of our institution at all times. We recognize, after all, that the true basis of our financial independence is our own financial self-reliance. That is why, in the face of massive corporate downsizing and the banking mergers and acquisitions appearing regularly in regional and national headlines, the citizens of the Twin Tiers have grown to depend on the steady leadership of First Citizens as the premier banking system in our region. Our community-based business philosophy has proven to be vital because it means that the decisions by our Board of Directors continually reflect the inherent strengths of the citizens of our communities. RELIABILITY. At First Citizens, we're right here, ready for the long haul. "When you need us... we'll be here!" is more than just another bank slogan at First Citizens. Our customers recognize that it reflects our special confidence in them and the communities we serve. As their community's bank, they know they can count on us--and so increasingly, they do. Market leadership. It's a constant, ongoing challenge. But every day the results prove to be worth the effort. We are succeeding at providing the region's finest banking products with a level of friendly service the citizens of our area have grown to depend on from First Citizens. Today more than ever, all across the Twin Tiers, First Citizens customers in every station of life "Just Ask Us" for the financial counsel and service they rely upon. _____ 7 ______________________________________________________________________________ [GRAPHIC OMITTED: Silhouette of colonial rider on horseback, upper left hand corner of page, one inch square] ______________________________________________________________________________ "We proudly support the quality community organizations and programs which enrich the lives of our area's citizens." ______________________________________________________________________________ "Everywhere you look, First Citizens is here: supporting local fire companies, hospitals, schools, little leagues and so much more. We are proud to be an integral part of our communities." ______________________________________________________________________________ [GRAPHIC OMITTED: Roadmap of upper Pennsylvania and lower New York, with small silhouettes of a colonial rider on horseback marking the bank's branch locations from left to right, at Genesee, Ulysses, Wellsboro, Blossburg, Mansfield, Gillett (shaded), Troy, Canton (shaded), and Sayre, across center of page. The roadmap has photographs adjacent to the branch locations. They are: 1. man skiing, 2. barn, 3. band, 4. Victorian homes, 5. town, 6. First Citizens signage, 7. sail boat, and 8. Victorian home] ______________________________________________________________________________ THE FIRST CITIZENS of this region demonstrated the spirit of neighbor helping neighbor. From colonial days, the determination and dedication of our earliest settlers enabled them to conquer a new territory which stretched across the pristine forests of the Twin Tiers. As citizens increasingly populated the area, the established settlers welcomed newer visitors. Soon, industrialization brought the emerging railroading industry as our communities grew and prospered. Today, throughout the rolling endless mountains, our citizens still join together in events that have become as traditional as the changing seasons of the region. Everywhere you look, First Citizens is here: supporting local fire companies, hospitals, schools, little leagues and so much more. And we are proud to play such a key role in the lives of the citizens of our region. A PART OF COMMUNITY LIFE "Giving something back" to our communities is of great importance in keeping the communication lines open between ourselves and the communities we serve. We proudly support the quality organizations and programs which enrich the lives of our area's residents. Among our many other routine commitments to community charities and volunteer efforts throughout the region, in _____ 8 ______________________________________________________________________________ Genesee--Situated directly on the New York boarder, this scenic, pastoral community is home to the Lumber Museum and the gateway to Pennsylvania's Twin Tiers for hundreds of thousands of New York's visitors each year. Ulysses--Centered in the heart of one of Pennsylvania's key northern agricultural regions, this small agrarian community lies within easy reach of the area's most popular winter play land, Denton hill Family Ski Resort, Inc. Wellsboro--Gateway to The Pennsylvania Grand Canyon, this gaslight-era tourist community is renowned for its charming turn-of-the-century Victorian homes and architecture. Mansfield--Nationally acclaimed as the site of America's first night football game, this community is home for Mansfield University and serves as First Citizens' corporate headquarters. Blossburg--This attractive rural community boasts one of America's leading historic and industrial events, the annual Blossburg Coal Festival. Troy--Each summer, the region's most spectacular outdoor event, The Troy Fair, features big-name country singers, award-winning livestock, rides, and other special family events. Sayre--Home of First Citizens' oldest branch (chartered 1899) and Guthrie Health Services, one of America's premier health care stems; Guthrie's Life Flight air support operation serves all of the Twin Tiers. ______________________________________________________________________________ 1995 First Citizens made substantial contributions to the North Penn Hospice Care Program. In addition, ongoing programs such as "Adopt-A-Highway," and annual programs like "The FCNB Scholarship" and "A" programs serve to encourage environmental and educational awareness in the region. And while some area banks keep moving farther away from their customers, First Citizens continues to grow stronger right here at home. A majority of our own directors and officers--as well as nearly all of our 1,400 shareholders--have vested interests in the communities we serve. After all, we live here. And every decision we make as an institution reflects that important fact. MAPPING THE FUTURE: A GROWING SERVICE AREA Building on the successes of our past, First Citizens National Bank remains dedicated to the future growth of every community throughout the Twin Tiers. We look forward in 1996 to adding our newest offices in the communities of Gillett and Canton to our service map. We're proud to be strengthening our commitment to this important region. And we look forward to playing a continuous role in leading our region to a new era of prosperous growth. ______________________________________________________________________________ [GRAPHIC OMITTED: Marching bank, approximately 10 inches in length by 2.5 inches width on right side of page] ______________________________________________________________________________ SEVEN COMMUNITIES...ONE BANKING SYSTEM ______________________________________________________________________________ _____ 9 ______________________________________________________________________________ FINANCIAL HIGHLIGHTS ______________________________________________________________________________ (dollars in thousands, except per share data) 1995 1994 BALANCE SHEET Assets $247,094 $232,537 Deposits 213,316 194,478 Net Loans 159,794 154,848 Stockholders' Equity 21,297 18,903 STATEMENT OF INCOME Interest Income 19,422 17,336 Interest Expense 9,851 7,944 Net Interest Income 9,571 9,392 Net Income 2,834 2,625 PER SHARE DATA Net Income 2.10 1.95 Cash Dividends 0.85 0.81 TRUST DEPARTMENT Trust Assets Managed 41,172 35,596
______________________________________________________________________________ [GRAPHICS OMITTED: Six bar charts depicting 1. total assets, 2. net income, 3. stockholders' equity, 4. deposits, 5. net loans, and 6. cash dividends declared, each from 1991 to 1995. Tabular representation of those graphs are set forth as follows: TOTAL ASSETS (Dollars in Thousands) 1991 1992 1993 1994 1995 $186,079 $202,155 $216,237 $232,537 $247,094 __________ NET INCOME (Dollars in Thousands) 1991 1992 1993 1994 1995 $1,318 $2,248 $2,424 $2,625 $2,834 __________ STOCKHOLDERS' EQUITY (Dollars in Thousands) 1991 1992 1993 1994 1995 $14,898 $16,329 $18,340 $18,903 $21,297 __________ DEPOSITS (Dollars in Thousands) 1991 1992 1993 1994 1995 $164,402 $178,033 $191,013 $194,478 $213,316 __________ NET LOANS (Dollars in Thousands) 1991 1992 1993 1994 1995 $120,747 $128,326 $140,391 $154,848 $159,794 __________ CASH DIVIDENDS DECLARED (Dollars in Thousands) 1991 1992 1993 1994 1995 $908 $960 $1,023 $1,088 $1,153 ______________________________________________________________________________ _____ 10 Citizens Financial Services, Inc. ______________________________________________________________________________ CITIZENS FINANCIAL SERVICES, INC. CONSOLIDATED BALANCE SHEET December 31, 1995 and 1994 ______________________________________________________________________________ (in thousands) 1995 1994 ASSETS: Cash and due from banks: Noninterest-bearing $ 5,536 $ 5,479 Interest-bearing 37 32 Total cash and cash equivalents 5,573 5,511 Available-for-sale securities 21,444 14,640 Held-to-maturity securities (estimated market value 1995, $53,589; 1994, $47,897) 52,271 49,617 Loans (net of allowance for possible loan losses 1995, $1,833;1994, $1,721) 159,794 154,848 Foreclosed assets held for sale 208 168 Premises and equipment 4,175 4,124 Accrued interest receivable and other assets 3,629 3,629 TOTAL ASSETS $247,094 $232,537 LIABILITIES: Deposits: Noninterest-bearing $ 15,140 $ 14,495 Interest-bearing 198,176 179,983 Total deposits 213,316 194,478 Borrowed funds 8,855 16,030 Accrued interest payable 2,106 1,692 Dividends payable 579 547 Other liabilities 941 887 TOTAL LIABILITIES 225,797 213,634 STOCKHOLDERS' EQUITY: Common Stock $1.00 par value; authorized 5,000,000 shares in 1995 and 2,000,000 shares in 1994; issued and outstanding 1,347,323 and 1,334,543 shares in 1995 and 1994, respectively 1,347 1,334 Additional paid-in capital 6,512 6,224 Retained earnings 13,089 11,709 TOTAL 20,948 19,267 Unrealized holding gains (losses) on available-for-sale securities 349 (364) TOTAL STOCKHOLDERS' EQUITY 21,297 18,903 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $247,094 $232,537
See notes to consolidated financial statements. _____ 11 1995 Annual Report ______________________________________________________________________________ CITIZENS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF INCOME Years Ended December 31, 1995 1994, and 1993 ______________________________________________________________________________ (in thousands, except per share data) 1995 1994 1993 INTEREST INCOME: Interest and fees on loans $14,799 $12,918 $12,053 Interest on federal funds sold -- -- 1 Interest on interest-bearing deposits with banks 135 25 54 Interest and dividends on investments: Taxable 4,233 4,046 4,045 Nontaxable 179 281 324 Dividends 76 66 74 TOTAL INTEREST INCOME 19,422 17,336 16,551 INTEREST EXPENSE: Interest on deposits 9,340 7,521 7,670 Interest on borrowed funds 511 423 183 TOTAL INTEREST EXPENSE 9,851 7,944 7,853 NET INTEREST INCOME 9,571 9,392 8,698 Provision for possible loan losses 163 255 315 NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 9,408 9,137 8,383 OTHER OPERATING INCOME: Service charge income 732 707 685 Trust income 255 204 191 Realized securities gains, net 10 63 50 Other income 255 162 140 TOTAL OTHER OPERATING INCOME 1,252 1,136 1,066 OTHER OPERATING EXPENSES: Salaries and employee benefits 3,150 3,088 2,782 Occupancy expenses 413 391 363 Furniture and equipment expenses 574 599 600 FDIC insurance expense 289 406 405 Other expenses 2,239 2,006 1,967 TOTAL OTHER OPERATING EXPENSES 6,665 6,490 6,117 Income before provision for income taxes 3,995 3,783 3,332 Provision tor income taxes 1,161 1,158 908 NET INCOME $ 2,834 $ 2,625 $ 2,424 EARNINGS PER SHARE $ 2.10 $ 1.95 $ 1.80
See notes to consolidated financial statements. _____ 12 Citizens Financial Services, Inc. ______________________________________________________________________________ CITIZENS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 1995, 1994 and 1993 ______________________________________________________________________________ Unrealized Additional Holding Common Stock Paid-in Retained Gains/(Losses) (in thousands, except per share data) Shares Amount Capital Earnings on Securities Total Balance, December 31,1992 1,309,363 $1,309 $5,770 $ 9,250 $16,329 Net income 2,424 2,424 Stock dividend 12,524 12 206 (218) Cash dividends, $.76 per share ($.77 per share on an historical basis) (1,023) (1,023) Unrealized gains on available-for-sale securities $610 610 Balance, December 31,1993 1,321,887 1,321 5,976 10,433 610 18,340 Net income 2,625 2,625 Stock dividend 12,656 13 248 (261) Cash dividends, $.81 per share (1,088) (1,088) ($.81 per share on an historical basis) Unrealized losses on available-for-sale securities (974) (974) Balance, December 31,1994 1,334,543 1,334 6,224 11,709 (364) 18,903 Net income 2,834 2,834 Stock dividend 12,780 13 288 (301) Cash dividends, $.85 per share (1,153) (1,153) Unrealized gains on available-for-sale securities 713 713 Balance, December 31,1995 $1,347,323 $1,347 $6,512 $13,089 $349 $21,297
See notes to consolidated financial statements. _____ 13 1995 Annual Report ______________________________________________________________________________ CITIZENS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Years Ended December 31, 1995, 1994 and 1993 ______________________________________________________________________________ (in thousands) 1995 1994 1993 Cash Flows from Operating Activities: Net income $ 2,834 $ 2,625 $ 2,424 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses 163 255 315 Provision for depreciation 412 440 438 Amortization and accretion of investment securities 248 190 194 Deferred income taxes 25 20 (189) Realized gains on securities (10) (63) (50) Realized gains on loans sold (37) (12) (20) Gain on sales or disposals of premises and equipment -- (2) -- (Gain) loss on sales of foreclosed assets held for sale (45) (24) 7 (Increase) decrease in accrued interest receivable and other assets (393) 247 (418) Increase (decrease) in accrued interest payable and other liabilities 468 82 (91) Net cash provided by operating activities 3,665 3,758 2,610 Cash Flows from Investing Activities: Available-for-sale securities: Proceeds from sale of securities -- 3,063 -- Proceeds from maturity of securities 1,000 -- -- Purchases of securities (6,797) (3,003) -- Held-to-maturity securities: Proceeds from sale of securities -- -- 39 Proceeds from maturity and principal repayments of securities 5,556 3,203 10,072 Purchases of securities (8,375) (6,478) (12,234) Net increase in loans (5,250) (14,713) (12,432) Capital expenditures (463) (602) (460) Proceeds from sale of premises and equipment -- 4 -- Proceeds from sale of foreclosed assets held for sale 184 100 164 Net cash used in investing activities (14,145) (18,426) (14,851) Cash Flows from Financing Activities: Net increase in deposits 18,838 3,465 12,980 Proceeds from long-term borrowings 1,844 2,844 1,335 Repayments of long-term borrowing (186) (390) -- Net increase (decrease) in short-term borrowed funds (8,833) 9,704 (2,184) Dividends paid (1,121) (1,056) (992) Net cash provided by financing activities 10,542 14,567 11,139 Net increase (decrease) in cash and cash equivalents 62 (101) (1,102) Cash and Cash Equivalents at Beginning of Year 5,511 5,612 6,714 Cash and Cash Equivalents at End of Year $ 5,573 $ 5,511 $ 5,612 Supplemental Disclosures of Cash Flow Information: Interest paid $ 9,437 $ 7,970 $ 7,905 Income taxes paid $ 1,135 $ 1,097 $ 1,311
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: ______________________________________________________________________________ Citizens Financial Services, Inc. (individually and collectively, the "Company") is a Pennsylvania corporation organized as the holding company of its wholly-owned subsidiary, First Citizens National Bank (the "Bank"). The Bank is a national banking association headquartered in Mansfield, Pennsylvania and operating seven full-service banking offices in Potter, Tioga and Bradford counties. The Bank provides a comprehensive range of services including consumer loans, residential real estate loans, commercial loans, and loans to various state and municipal entities. Deposit programs encompass the full range of consumer as well as commercial checking and savings accounts. Deposit products also include certificates of deposit and individual retirement accounts. A comprehensive menu of trust and investment services are also available. The Company's principal sources of revenue are derived from its loan and investment portfolios. The Company is supervised by the Board of Governors of the Federal Reserve System, while the Bank is subject to regulation and supervision by the Office of the Comptroller of the Currency. A summary of significant accounting and reporting policies applied in the presentation of the accompanying financial statements follows: BASIS OF PRESENTATION The accounting policies followed by the Company and the methods of applying these principles conform with generally accepted accounting principles and with general practice within the banking industry. All material intercompany balances and transactions have been eliminated in consolidation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. 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, 1995 and 1994. 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 Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114, ("SFAS No. 114") "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118. Under this Standard, the Company estimates credit losses on impaired loans based on the present value of expected cash flows or the fair value of the underlying collateral if the loan repayment is expected to come from the sale or operation of such collateral. For purposes of this Standard, nonaccrual commercial, commercial real estate and restructured loans are considered to be impaired. Prior to 1995, the loan losses related to these loans were estimated based on undiscounted cash flows or the fair value of the underlying collateral. The allowance is maintained at a level believed by management to be sufficient to absorb estimated potential loan losses. Management's determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of expected future cash flows on impaired loans, which may be susceptible to significant change. The allowance for loan losses on impaired loans pursuant to SFAS No. 114 is one component of the methodology for determining the allowance for loan losses. The remaining components of the allowance for loan losses provide for estimated losses on consumer loans and residential real estate mortgages, and general amounts for historical loss experience, uncertainties in estimating losses and inherent risks in the various loan portfolios. 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 _____ 15 1995 Annual Report ______________________________________________________________________________ CITIZENS FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued ______________________________________________________________________________ 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. 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 1,347,323 for 1995, 1994, and 1993. RECLASSIFICATION Certain of the 1994 and 1993 amounts have been reclassified to conform with the 1995 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 $937,000 and $939,000 at December 31, 1995 and 1994, 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 ______________________________________________________________________________ The amortized cost and estimated fair value of investment securities at December 31, 1995 and 1994 were as follows (in thousands): Gross Gross Unrealized Unrealized Estimated Amortized Holding Holding Fair December 31,1995 Cost Gains Losses Value Held-to-Maturity Securities: U.S. Treasury securities $42,700 $1,209 $ (4) $43,905 Obligations of state and political subdivisions 1,311 37 -- 1,348 Corporate obligations 4,744 103 (2) 4,845 Mortgage-backed securities 2,377 2 (27) 2,352 Total debt securities 51,132 1,351 (33) 52,450 Restricted equity securities 1,139 -- -- 1,139 Total Held-to-Maturity $52,271 $1,351 $ (33) $53,589 Available-for-Sale Securities: U.S. Treasury securities $15,201 $390 $ -- $15,591 Corporate obligations 5,711 67 -- 5,778 Equity securities 4 71 -- 75 Total Available-for-Sale $20,916 $528 $ -- $21,444
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 -- 506 Obligations of state and political subdivisions 2,735 97 -- 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 -- -- 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 -- 46 Total Available-for-Sale $15,192 $ 65 $ (617) $14,640
There were no sales of debt securities in 1995. 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. In 1995, 1994 and 1993 gains of $10,000, $4,000 and $14,000, respectively, resulted from early calls of debt securities. There were no sales of equity securities in 1995 and 1994. Net realized gains of $36,000 on sales of equity securities were recorded in 1993. _____ 16 Citizens Financial Services, Inc. ______________________________________________________________________________ CITIZENS FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued ______________________________________________________________________________ Investment securities with an approximate carrying value of $40,615,000 and $28,728,000 at December 31, 1995 and 1994, 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, 1995, 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 $ 7,266 $ 7,330 Due after one year through five years 36,182 37,245 Due after five years through ten years 5,307 5,523 48,755 50,098 Mortgage-backed securities 2,377 2,352 Total $51,132 $52,450 Estimated Amortized Cost Fair Value Available-for-Sale Securities: Due in one year or less $ 2,006 $ 2,029 Due after one year through five years 17,838 18,223 Due after five years through ten years 1,068 1,117 Total $20,912 $21,369
______________________________________________________________________________ 4. LOANS ______________________________________________________________________________ The Company grants commercial, industrial, residential, and consumer loans primarily to customers throughout North central 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, 1995 1994 Real estate loans - residential $ 96,594 $ 97,359 Real estate loans - commercial 24,167 21,915 Real estate loans - agricultural 8,027 7,125 Real estate loans - construction 1,018 1,271 Loans to individuals for household, family and other purchases 13,198 11,886 Commercial and other loans 10,535 10,285 State and political subdivision loans 8,347 7,303 161,886 157,144 Less unearned income on loans 259 575 Less allowance for possible loan losses 1,833 1,721 Loans, net $159,794 $154,848
At December 31, 1995 and 1994, net unamortized loan fees and costs of $850,000 and $857,000, respectively, have been deducted from the carrying value of loans. At December 31, 1995, the recorded investment in loans that are considered to be impaired in accordance with SFAS No. 114 was $696,000, all of which were on a nonaccrual basis. All of the $696,000 of impaired loans do not have an allowance for loan losses allocated as a result of the loans being collateral dependent, and the value of the collateral exceeding the recorded investment in the loan. The average recorded investment in impaired loans during the year ended December 31, 1995, was approximately $696,000. For the year ended December 31, 1995, the Company recognized interest income on impaired loans of $3,000, all of which was recognized using the cash basis method of income recognition. Loans on which the accrual of interest has been discontinued or reduced amounted to $1,459,000 (which included the impaired loans in accordance with SFAS No. 114) and $1,557,000 at December 31, 1995 and 1994, respectively. If interest had been recorded at the original rate on those loans, such income would have approximated $147,000, $131,000, and $147,000 for the years ended December 31, 1995, 1994, and 1993 respectively. Interest income on such loans, which is recorded as received, amounted to approximately $58,000, $40,000, and $77,000 for the years ended December 31, 1995, 1994, and 1993, respectively. Transactions in the allowance for possible loan losses were as follows (in thousands): Years Ended December 31, 1995 1994 1993 Balance, beginning of year $1,721 $1,516 $1,201 Provisions charged to income 163 255 315 Recoveries on loans previously charged against the allowance 18 18 71 1,902 1,789 1,587 Loans charged against the allowance (69) (68) (71) Balance, end of year $1,833 $1,721 $1,516
The following is a summary of the past due and nonaccrual loans as of December 31, 1995 and 1994 (in thousands): December 31, 1995 Past Due Past Due 30-89 days 90 days or more Nonaccrual Real estate loans $1,875 $622 $1,442 Installment loans 13 19 -- Credit cards and related loans 35 4 -- Commercial and all other loans 430 44 17 Total $2,353 $689 $1,459 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 -- -- Credit cards and related loans 5 2 -- Commercial and all other loans 124 50 120 Total $1,355 $267 $1,557
_____ 17 1995 Annual Report ______________________________________________________________________________ CITIZENS FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued ______________________________________________________________________________ 5. PREMISES & EQUIPMENT ______________________________________________________________________________ Premises and equipment are summarized as follows (in thousands): December 31, 1995 1994 Land $ 897 $ 897 Buildings 3,694 3,615 Furniture, fixtures and equipment 3,624 3,541 8,215 8,053 Less accumulated depreciation 4,040 3,929 Premises and equipment, net $4,175 $4,124
Depreciation expense amounted to $412,000, $440,000, and $438,000 for 1995, 1994 and 1993, respectively. ______________________________________________________________________________ 6. DEPOSITS ______________________________________________________________________________ Certificates of deposit of $100,000 or more amounted to $18,542,000 and $16,378,000 at December 31, 1995 and 1994, respectively. Interest expense on certificates of deposit of $100,000 or more amounted to $1,089,000, $861,000, and $732,000 for the years ended December 31, 1995, 1994 and 1993, respectively. ______________________________________________________________________________ 7. BORROWED FUNDS ______________________________________________________________________________ Borrowed funds include the following (in thousands): December 31, 1995 1994 Securities sold under agreements to repurchase (a) $ 5,331 $ 4,756 FlexLine (b) 1,650 9,400 Other borrowed funds 1,874 1,874 Total borrowed funds (d) $ 8,855 $16,030
(a) Securities sold under agreements to repurchase mature within one to five years. The weighted average interest rate for the periods ended December 31, 1995, 1994 and 1993 was 5.9%, 4.5% and 4.5%, respectively. The carrying value of the underlying securities at December 31, 1995 and 1994 was $6,615,000 and $5,967,000, respectively. The respective market values were $6,786,000 and $5,664,000. The maximum outstanding balance was $5,331,000 and $5,224,000 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 $23,045,000 at December 31, 1995. The weighted average interest rate for the periods ended December 31, 1995, 1994, and 1993 was 6.2%, 5.2% and 3.3%, respectively. The maximum outstanding balance was $10,400,000 in 1995 and $9,400,000 in 1994. (c) Other borrowed funds consist of advances from the Federal Home Loan Bank of Pittsburgh as follows (in thousands): December 31, Fixed Rate Maturity 1995 1994 7.25% May 15, 2000 $ 166 $ 166 7.40% May 15, 2001 245 245 7.52% May 15, 2002 229 229 7.60% May 15, 2003 216 216 7.56% May 17, 2004 201 201 7.61% May 16, 2005 188 188 7.65% May 15, 2006 175 175 7.68% May 15, 2007 163 163 7.72% May 15, 2008 151 151 7.76% May 15, 2009 140 140 Total borrowed funds $1,874 $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, 1995 and 1994 was $8,031,000 and $8,440,000, respectively. The weighted average interest rate was 6.4%, 5.0%, and 4.4% for 1995, 1994, and 1993, respectively. Following are maturities of borrowed funds as of December 31, 1995 (in thousands): 1996 $4,662 1997 1,049 1998 728 1999 272 2000 436 Thereafter 1,708 Total borrowed funds $8,855 ______________________________________________________________________________ 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 4,936 and 4,888 shares of the Company's common stock at December 31, 1995 and 1994, respectively. Pension cost for 1995, 1994, and 1993 include the following components (in thousands): Years Ended December 31, 1995 1994 1993 Service cost benefits earned during the period $ 85 $ 70 $ 63 Interest cost on projected benefit obligation 104 83 75 Return on assets (331) (26) (93) Net amortization and deferral 18 (117) (45) Net pension cost $ 47 $ 10 $ --
_____ 18 Citizens Financial Services, Inc. ______________________________________________________________________________ CITIZENS FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued ______________________________________________________________________________ As of December 31, 1995, the Plan's total accumulated benefit obligation was $1,087,000 including vested benefits of $1,063,000. The funded status of the Plan and amount recognized in the Company's consolidated balance sheet are summarized as follows (in thousands): December 31, 1995 1994 Projected benefit obligation $(1,699) $(1,180) Plan assets at fair value 1,937 1,536 Excess of assets over projected benefit obligation 238 356 Prior service costs (76) (82) Unrecognized net (loss) gain from past experience different from that assumed and effects of changes in assumptions 92 (63) Unrecognized net transition gain (144) (159) Prepaid pension cost $ 110 $ 52 The projected benefit obligation for the Plan at December 31, 1995, 1994 and 1993 were determined using an assumed discount rate of 7%, 8% and 7%, respectively, and an assumed long-term rate of compensation increase of 4.5% at December 31, 1995 and 5% at December 31, 1994 and 1993. The assumed long-term rate of return on Plan assets was 8% at December 31, 1995, 1994 and 1993. 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 1995, 1994 and 1993 were $86,000, $120,000, and $112,000, respectively. ______________________________________________________________________________ 9. INCOME TAXES ______________________________________________________________________________ The provision for income taxes consists of the following (in thousands):
Years Ended December 31, 1995 1994 1993 Currently payable Federal $1,136 $1,138 $1,157 State -- -- (60) 1,136 1,138 1,097 Deferred liability (benefit) 25 20 (189) Provision for income taxes $1,161 $1,158 $ 908
The following temporary differences gave rise to the net deferred tax asset at December 31, 1995 and 1994 (in thousands): 1995 1994 Deferred tax assets: Allowance for loan losses $440 $402 Deferred compensation 184 163 Loan fees and costs 99 137 Unrealized losses on available-for-sale securities -- 188 Capital loss carry forward 5 -- Total 728 890 Deferred tax liabilities: Unrealized gains on available-for-sale securities (180) -- Depreciation (108) (91) Bond accretion (73) (58) Pension expense (37) (18) Total (398) (167) Deferred tax asset, net $330 $723
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, 1995 1994 1993 Provision at statutory rates on pre-tax income $1,358 $1,286 $1,133 Effect of tax - exempt income (188) (170) (182) Nondeductible interest 23 19 21 State tax -- -- (60) Other items (32) 23 (4) Provision for income taxes $1,161 $1,158 $ 908 Statutory tax rates 34% 34% 34% Effective tax rates 29.1% 30.6% 27.3%
The 1993 credit for state income taxes represents the reversal of an over accrual 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 1995 $1,501 $ 181 $ 303 $1,379 1994 1,541 618 658 1,501 1993 1,341 602 402 1,541
Such loans were made in the ordinary course of business at the Banks normal credit terms and do not present more than a normal risk of collection. _____ 19 1995 Annual Report ______________________________________________________________________________ CITIZENS FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued ______________________________________________________________________________ 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 Banks 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 1996 without approval of the Comptroller of the Currency of approximately $3,217,000, plus the Bank's net income for 1996. The Bank is subject to regulatory restrictions which limit its ability to loan funds to the Company. At December 31, 1995, the regulatory lending limit amounted to approximately $2,308,000. 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 policies 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, 1995 and 1994 are as follows (in thousands): 1995 1994 Commitments to extend credit $13,228 $15,057 Standby letters of credit $ 863 $ 1,117
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 customers 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: ______________________________________________________________________________ Statement of Financial Accounting Standards (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): DECEMBER 31, 1995 DECEMBER 31, 1994 BOOK ESTIMATED BOOK ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE Net loans $159,794 $160,681 $154,848 $152,317 _____ 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, 1995 and 1994. 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). DECEMBER 31, 1995 DECEMBER 31, 1994 BOOK ESTIMATED BOOK ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE Noninterest-bearing demand $ 15,140 $ 15,140 $14,495 $14,495 Interest-bearing deposits: Savings and NOW 48,998 48,998 50,065 50,065 Money market investors 24,096 24,096 20,799 20,799 Certificates of deposit less than $100,000 106,540 107,929 92,742 91,894 Certificates of deposit more than $100,000 18,542 18,636 16,378 16,087 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): DECEMBER 31, 1995 DECEMBER 31, 1994 BOOK ESTIMATED BOOK ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE Securities sold under agreements to repurchase $5,331 $5,331 $4,756 $4,756 FlexLine 1,650 1,650 9,400 9,400 Other borrowed funds 1,874 1,976 1,874 1,802 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. MORTGAGE SERVICING RIGHTS ______________________________________________________________________________ In May of 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 122, "Accounting for Mortgage Servicing Rights," an amendment of SFAS No. 65. This Statement, which is required to be adopted during the first quarter of 1996, allows enterprises engaging in mortgage banking activities to recognize as separate assets rights to service mortgage loans for loans originated for sale by the enterprise. As the Company does not significantly engage in the sale of mortgage loans, the impact of this Statement is not anticipated to have a material impact on the Company's results of operations or financial position. ______________________________________________________________________________ 15. BRANCH ACQUISITIONS ______________________________________________________________________________ On November 28, 1995, the Bank and Meridian Bank of Pennsylvania (Seller) entered into a Purchase and Assumption Agreement (Agreement) pursuant to which the Bank has agreed to purchase certain assets and assume certain liabilities of the Seller's Canton and Gillett, Pennsylvania branch offices. Pursuant to the agreement, and subject to certain conditions set forth therein, the Bank has agreed to: (i) assume approximately $16,000,000 of deposit liabilities; (ii) purchase approximately $3,600,000 of loans, comprised of consumer residential mortgages, commercial, home equity, and installment loans; (iii) purchase all real estate, with improvements thereon; (iv) purchase furniture, fixtures and equipment owned by Seller and located at each branch office; (v) purchase the safe deposit box business conducted at the branches; (vi) assume any contracts that relate to the operation of the branch offices, and; (vii) purchase all cash funds on hand at each office. In consideration for the assumption of the deposit liabilities, the Bank will pay the Seller a deposit premium of 8.25% or approximately $1,000,000. Loans are being purchased at a price commensurate with fair value plus accrued but unpaid interest, and real estate will be purchased at a price equal to its market value as of the effective date. _____ 21 1995 Annual Report ______________________________________________________________________________ CITIZENS FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued ______________________________________________________________________________ 16. CONDENSED FINANCIAL INFORMATION PARENT COMPANY ONLY ______________________________________________________________________________ CITIZENS FINANCIAL SERVICES, INC. CONDENSED BALANCE SHEET December 31, 1995 and 1994 (in thousands) 1995 1994 Assets Cash $ 49 $ 31 Dividends receivable - subsidiary 579 547 Investment in subsidiary, First Citizens National Bank 21,248 18,872 Total assets $21,876 $19,450 Liabilities & stockholder' equity Dividends payable $ 579 $ 547 Stockholders' equity 21,297 18,903 Total liabilities and stockholders' equity $21,876 $19,450
CITIZENS FINANCIAL SERVICES, INC. CONDENSED STATEMENT OF INCOME Years Ended December 31, 1995, 1994 and 1993 (in thousands) 1995 1994 1993 Dividend income $1,235 $1,136 $1,073 Expenses 64 65 43 Income before equity in undistributed earnings of subsidiary 1,171 1,071 1,030 Equity in undistributed earnings - First Citizens National Bank 1,663 1,554 1,394 Net income $2,834 $2,625 $2,424
CITIZENS FINANCIAL SERVICES, INC. CONDENSED STATEMENT OF CASH FLOWS Years Ended December 31, 1995, 1994 and 1993 (in thousands) 1995 1994 1993 Cash Flows from Operating Activities: Net income $2,834 $2,625 $2,424 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiary (1,663) (1,554) (1,394) Increase in other assets (32) (19) (31) Net cash provided by operating activities 1,139 1,052 999 Cash Flows Used in Financing Activities: Cash dividends paid (1,121) (1,056) (992) Net (decrease) increase in cash 18 (4) 7 Cash at Beginning of Year 31 35 28 Cash at End of Year $ 49 $ 31 $ 35
_____ 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, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the years 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 audits. The consolidated financial statements of Citizens Financial Services, Inc. and subsidiary for the year ended December 31, 1993, were audited by other auditors whose report dated February 11, 1994, expressed an unqualified opinion on those consolidated financial statements. We conducted our audits 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 audits provide 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, 1995 and 1994, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in the notes to the consolidated financial statements, effective January 1, 1995, the Company changed its method of accounting for impairment of loans and related allowance for loan losses, and changed its method of accounting for income taxes and investment securities in 1993. ______________________________________________________________________________ /s/ S. R. Snodgrass, A.C. ______________________________________________________________________________ Wexford, PA February 16, 1996 S.R. Snodgrass, A.C. 101 Bradford Road Wexford, PA 15090-6909 Phone: 412-934-0344 Facsimile: 412-934-0345 _____ 23 1995 Annual Report ______________________________________________________________________________ SELECTED FINANCIAL DATA FIVE YEAR SUMMARY OF OPERATIONS ______________________________________________________________________________ (dollar amounts in thousands) 1995 1994 1993 1992 1991 Interest Income $ 19,422 $ 17,336 $ 16,551 $ 16,684 $ 17,017 Interest Expense 9,851 7,944 7,853 8,895 10,347 Net Interest Income 9,571 9,392 8,698 7,789 6,670 Provision for Possible Loan Losses 163 255 315 324 170 Net Interest Income After Provision for Possible Loan Losses 9,408 9,137 8,383 7,465 6,500 Other Operating Income 1,242 1,073 1,016 991 839 Realized Securities Gains (Losses), Net 10 63 50 35 (46) Other Operating Expenses 6,665 6,490 6,117 5,423 5,195 Income Before Provision for Income Taxes 3,995 3,783 3,332 3,068 2,098 Provision for Income Taxes 1,161 1,158 908 820 780 Net Income $ 2,834 $ 2,625 $ 2,424 $ 2,248 $ 1,318 Per Share Data: Net Income $ 2.10 $ 1.95 $ 1.80 $ 1.67 $ 0.98 Cash Dividends 0.85 0.81 0.77 0.73 0.70 Book Value 15.81 14.03 13.61 12.12 11.06 Total Investments $ 73,715 $ 64,257 $ 62,645 $ 59,742 $ 50,906 Loans, Net 159,794 154,848 140,391 128,326 120,747 Total Assets 247,094 232,537 216,237 202,155 186,079 Total Deposits 213,316 194,478 191,013 178,033 164,402 Stockholders' Equity 21,297 18,903 18,340 16,329 14,898
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 1995 declared 1994 declared High Low per share High Low per share First quarter $23.00 $20.50 First quarter $18.25 $17.00 Second quarter 23.00 20.50 $0.42 Second quarter 20.00 17.75 $0.40 Third quarter 22.75 22.50 Third quarter 22.25 19.25 Fourth quarter 23.50 21.50 $0.43 Four quarter 22.63 21.75 $0.41
_____ 24 Citizens Financial Services, Inc. ______________________________________________________________________________ CONSOLIDATED QUARTERLY DATA ______________________________________________________________________________ (dollar amounts in thousands) Three Months Ended 1995 March 31 June 30 Sept 30 Dec 31 Interest income $4,628 $4,783 $4,964 $5,047 Interest expense 2,313 2,436 2,515 2,587 Net interest income 2,315 2,347 2,449 2,460 Provision for possible loan losses 50 38 38 37 Other operating income 287 335 291 329 Realized securities gains, net 5 -- 5 -- Other operating expenses 1,709 1,740 1,582 1,634 Income before provision for income taxes 848 904 1,125 1,118 Provision for income taxes 240 257 324 340 Net income $ 608 $ 647 $ 801 $ 778 Net Income Per Share $ 0.45 $ 0.48 $ 0.59 $0.58 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 61 60 Other operating income 277 293 259 244 Realized securities gains, net 43 20 -- -- 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 $ 0.46 $ 0.49 $ 0.51 $0.49
_____ 25 1995 Annual Report ______________________________________________________________________________ TRUST AND INVESTMENT SERVICES STATEMENT OF CONDITION ______________________________________________________________________________ 1995 1994 INVESTMENTS: Bonds $19,161 $15,957 Stock 8,713 8,312 Savings and Money Market Funds 8,666 7,294 Mutual Funds 3,556 3,061 Mortgages 578 526 Real Estate 236 405 Miscellaneous 96 (10) Cash 166 51 TOTAL $41,172 $35,596 ACCOUNTS: Estates $ 314 $ 684 Trusts 20,751 18,450 Guardianships 116 142 Pension/Profit Sharing 7,412 5,905 Investment Management 3,884 5,577 Custodial 8,695 4,838 TOTAL $41,172 $35,596
The following graph shows personal trust asset growth over the past five years. ______________________________________________________________________________ [GRAPHIC OMITTED: A bar chart depicting personal trust assets from 1991 to 1995. A tabular presentation of the graph is set forth as follows: PERSONAL TRUST ASSETS (Dollars in Thousands) 1991 1992 1993 1994 1995 $21,827 $23,706 $26,085 $27,781 $31,786 ______________________________________________________________________________ _____ 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: 1995 1994 $ % $ % Total Assets 14.5 6.3 16.3 7.5 Total Deposits 18.8 9.7 3.5 1.8 Total Loans 4.9 3.2 14.5 10.3 Total Investments (including available-for-sale and held-to-maturity) 9.5 14.7 1.6 2.6 Total Stockholders' Equity 2.4 12.7 0.6 3.1
Deposits Deposit growth was strong in 1995 with an $18.8 million or 9.7% increase while 1994 had an increase of $3.5 million or 1.8%. Transaction accounts increased $381,000 or 1% in 1995, while total certificates of deposit increased $16 million or 14.6%. Certificates of deposit growth in 1994 was $7.9 million or 7.8%. During 1995, the interest cost of certificates of deposit remained high while the interest rate paid on interest-bearing transaction and savings accounts declined. This rate environment (high rates for certificates of deposit and lower rates for interest-bearing transaction and savings accounts) resulted in substantial growth in certificates of deposit and a modest reduction in NOW and savings deposit volume. Money market deposit accounts (which are paid a higher interest rate than savings and NOW accounts) had strong growth of $3.3 million or 15.9%. The net result was a substantial growth in total deposits. The following table shows the composition of deposit accounts over the last three years as of December 31: Deposits by Major Classification: 1995 1994 1993 Amount % Amount % Amount % Noninterest- bearing deposits $ 15,140 7.1 $ 14,495 7.5 $ 14,779 7.7 NOW accounts 23,681 11.1 23,963 12.3 27,537 14.4 Savings deposits 25,317 11.9 26,102 13.4 27,081 14.2 Money market deposit accounts 24,096 11.3 20,799 10.7 20,392 10.7 Certificates of deposit 125,082 58.6 109,119 56.1 101,224 53.0 Total deposits $213,316 100.0 $194,478 100.0 $191,013 100.0
Remaining maturities of certificates of deposit of $100,000 or more: 1995 1994 1993 3 months or less $ 2,708 $ 4,339 $ 2,549 3 through 6 months 2,474 3,813 3,108 6 through 12 months 4,538 2,323 3,039 Over 12 months 8.822 5.903 5.990 Total $18,542 $16,378 $14,686 As a percent of total certificates of deposit 14.82% 15.01% 14.51%
Deposits by Type of Depositor: 1995 1994 1993 Amount % Amount % Amount % Individual, Partnerships & Corporations $188,471 88.4 $173,879 89.4 $170,430 89.2 United States Government 132 0.1 214 0.1 255 0.1 State & Political Subdivisions 23,279 10.9 18,868 9.7 17,554 9.2 Other 1,434 0.6 1,517 0.8 2,774 1.5 Total deposits $213,316 100.0 $194,478 100.0 $191,013 100.0
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 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 Club, Premier 55 Plus Club, Gold Club, individual retirement accounts (5-year IRA CDS grew by $2 million in 1995), longer-term certificates of deposit (generally of five-year maturity), promotional 30-month and Roll-Up certificates of deposit (allows the customer to adjust the interest rate up once during the term by a maximum of 100 basis points) were some of the deposit product variations. Growth in deposits of state and political subdivisions ($4.4 million or 23.4%) was significant, which was the result of marketing specifically designed savings products (money market and NOW accounts) priced at current market rates for large balance (greater than $100,000) accounts. Deposit growth increased during 1995 as a result of the previously mentioned market priced certificates of deposit. This deposit growth enabled the reduction in its short-term borrowing from the Federal Home Loan Bank (a reduction of $7.7 million). During 1994 and 1995, interest rates have moved upward particularly in the short-term, resulting in a nearly flat yield curve. The Company, as well as its other bank competitors, has experienced a decline of net interest income as the result of declining spreads. This resulted in management having to price interest-bearing liabilities and interest-bearing assets with a more narrow than normal spread to the yield curve. Further discussion in this area is provided later in the net interest income section of the management discussion and analysis. 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 _____ 27 1995 Annual Report ______________________________________________________________________________ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued ______________________________________________________________________________ and more convenient hours. In the seven community offices, lobby hours now include Wednesday afternoons (when they were traditionally closed) as well as Saturday hours. The Company currently provides eight MAC automated teller machines, which are part of the MAC regional and PLUS national network. On November 28, 1995, the Bank and Meridian Bank, a wholly-owned subsidiary of Meridian Bancorp, Inc., signed a definitive agreement whereby the Bank will purchase two retail banking offices located at Canton and Gillett, Pennsylvania, with deposits totaling approximately $16 million. The sale is subject to obtaining all regulatory approvals and, therefore, the final closing of the transaction is not expected until April 1996 (see footnote 15). The impact of this acquisition is discussed later in the loan and liquidity sections of the management discussion and analysis. The Company, in the later half of 1994, engaged a professional marketing firm to improve communication with current and prospective customers and enhance the Company's identity. The Company expects to continue this marketing effort into 1996. Loans Total loans grew by $4.9 million in 1995, or 3.2%, slowing the strong 10.3% increase during 1994. The residential mortgage loan portfolio decreased 0.8% as a result of lower demand during 1995. In addition, $1.7 million in conforming mortgage loans were originated and sold on the secondary market through the Federal Home Loan Mortgage Corporation, providing over $37,000 of income in origination fees and premiums on loans sold, compared to $1.1 million in loans originated and $22,000 of income in 1994. Residential mortgage lending was down during 1995 because of fewer properties being sold, less debt being consolidated using mortgage refinancing, and the Company's interest rates being somewhat higher than its competitors. However, residential mortgage lending is a principal business activity and one the Company expects to continue by providing a full compliment of competitively-priced conforming, nonconforming and home equity mortgage programs. Total commercial real estate, commercial and other loans increased by a strong $2.5 million or 7.8% (down slightly from the 11.5% gain in 1994). Commercial lending activity is primarily focused on small businesses and the Company's commercial lending officers have been very successful in attracting new business loans. Loans to individuals increased $1.3 million or 11% during 1995 compared to an increase of $.2 million in 1994. This growth was the result of fewer consumer loans being combined and refinanced with residential mortgage loans in 1995, as discussed above. State and political subdivision loans increased $1 million or 14.3% compared to an increase of $2.1 million in 1994. 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, 1995, residential real estate and real estate construction loans made up 60.3% of the Company's total loan portfolio. Management expects that when the acquisition of the two branches of Meridian Bank is completed during the second quarter of 1996, the result will be the acquisition of approximately $3.6 million in loans. In addition, a strong effort to increase loan growth by marketing and competitive pricing will be implemented to utilize the funds provided by the new deposit base. In 1996 the Company's primary 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. (Also see the discussion in footnote 4). Five Year Breakdown of Loans by Type December 31, 1995 1994 1993 1992 1991 Amount % Amount % Amount % Amount % Amount % Real estate - residential $ 96,594 59.7 $ 97,359 62.0 $ 92,149 64.3 $ 85,196 64.5 $ 71,714 57.9 Real estate - commercial 24,167 14.9 21,915 13.9 19,926 13.9 15,994 12.1 13,430 10.9 Real estate - agricultural 8,027 5.0 7,125 4.5 4,216 2.9 5,011 3.8 2,920 2.4 Real estate - construction 1,018 0.6 1,271 0.8 1,102 0.8 803 0.6 1,505 1.2 Loans to individuals for family and other purchases 13,198 8.1 11,886 7.7 11,696 8.2 12,637 9.6 16,420 13.3 Commercial and other 10,535 6.5 10,285 6.5 8,959 6.3 8,811 6.7 12,227 9.9 State and political subdivision loans 8,347 5.2 7,303 4.6 5,170 3.6 3,581 2.7 5,548 4.4 Total loans 161,886 100.0 157,144 100.0 143,218 100.0 132,033 100.0 123,764 100.0 Unearned income 259 575 1,311 2,506 2,021 Allowance for possible loan losses 1,833 1,721 1,516 1,201 996 Net loans $159,794 $154,848 $140,391 $128,326 $120.747
_____ 28 Citizens Financial Services, Inc. ______________________________________________________________________________ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued ______________________________________________________________________________ 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, 1995, classified according to the sensitivity to changes in interest rates within various time intervals: Commercial, financial, Real estate agricultural construction Total Maturity of loans: One year or less $ 5,943 $ 29 $5,972 Over one year but less than five years 8,418 -- 8,418 Over five years 28,368 989 29,357 Total $42,729 $1,018 $43,747 Sensitivity of loans to changes in interest rates - loans due after one year: Predetermined interest rate $ 7,667 $ 564 $8,231 Floating or adjustable interest rate 29,119 425 29,544 Total $36,786 $ 989 $37,775
Investments The investment portfolio, including available-for-sale and held-to-maturity securities, increased by $9.5 million or 14.7% in 1995 as compared to growth of $1.6 million in 1994. The primary growth in the investment portfolio occurred in U. S. Treasury securities of $7.7 million or a 15.1% increase as compared to an increase of $3.8 million in 1994. Corporate obligations increased by $3.8 million and investments in obligations of state and political subdivisions declined $1.4 million during 1995. The 1995 growth in the investment portfolio was the result of strong deposit growth and slow loan growth described above. The funds that are not used to fund loans are placed in investments which are of less risk and, therefore, lower yield. The impact on net interest income is discussed later in the net interest income section. The following table shows the year-end composition of the investment portfolio for the five years ended December 31, 1995: Book Value at December 31, % of % of % of % of % of 1995 Total 1994 Total 1993 Total 1992 Total 1991 Total Available-for-sale: U.S. Treasury securities $15,591 21.2 $14,594 22.7 $16,126 25.7 Corporate obligations 5,778 7.8 -- -- -- -- Equity securities 75 0.1 46 0.1 45 0.1 Held-to-maturity: U.S. Treasury securities 42,700 57.9 36,042 56.1 30,686 49.0 $38,942 65.2 $19,441 38.2 Federal agency obligations -- -- 500 0.8 502 0.8 1,000 1.7 5,089 10.0 Obligations of state & political subdivisions 1,311 1.8 2,735 4.3 3,498 5.6 4,106 6.9 4,915 9.7 Corporate obligations 4,744 6.4 6,729 10.4 7,715 12.3 10,108 16.9 11,334 22.3 Mortgage-backed securities 2,377 3.2 2,513 3.9 3,066 4.9 4,606 7.7 6,829 13.4 Restricted equity securities 1,139 1.6 1,098 1.7 1,007 1.6 980 1.6 3,298 6.4 Total $73,715 100.0 564,257 100.0 $62,645 100.0 $59,742 100.0 $50,906 100.0
_____ 29 1995 Annual Report ______________________________________________________________________________ MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - continued ______________________________________________________________________________ Maturities and Average Weighted Yields of Investment Securities Expected maturities and average weighted yields for the above investment portfolio as of December 31, 1995. 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. Treasury $ 3,517 6.60 $33,884 6.33 $ 5,299 6.33 $ -- -- $42,700 6.35 State & political subdivisions, general obligation 254 13.02 7 8.33 8 8.33 -- -- 269 12.76 State & political subdivisions, revenue 200 12.88 592 12.68 -- -- -- -- 792 12.73 State & political subdivisions, industrial development authority 250 13.07 -- -- -- -- -- -- 250 13.07 Corporate obligations 3,245 8.67 1,499 9.24 -- -- -- -- 4,744 8.85 Mortgage-backed securities 271 6.89 2,106 5.70 -- -- -- -- 2,377 5.83 Restricted equity securities -- -- -- -- -- -- 1,139 6.00 1,139 6.00 Total held-to-maturity $ 7,737 8.06 $38,088 6.51 $ 5,307 6.33 $1,139 6.00 $52,271 6.71 Available-for-sale securities: U.S. Treasury $ 2,029 6.73 $12,445 7.26 $ 1,117 6.42 $ -- -- $15,591 7.13 Corporate obligations -- -- 5,778 6.27 -- -- -- -- 5,778 6.27 Equity securities -- -- -- -- -- -- 75 1.50 75 1.50 Total available-for-sale $ 2,029 6.73 $18,223 6.94 $ 1,117 6.42 $ 75 1.50 $21,444 6.88
During 1990 through 1995, the concentration of the Company's investment portfolio has shifted dramatically, as U.S. Treasury securities now comprise 79.1% of the total portfolio. No new investments have been made in state and political subdivisions since 1985. In 1995 the Company invested $5.7 million in corporate obligations (investment grade securities). This investment strategy 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. Approximately 88% of the amortized cost of debt securities are scheduled to mature within five years or less (average expected maturity 3.4 years), 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 1995 increased to $2.8 million (net income per share of $2.10), an increase of $209,000 or 8% over the $2.6 million reported in 1994 (net income per share of $1.95). The following table sets forth certain performance ratios of the Company for the periods indicated: 1995 1994 1993 Return on Assets (net income to average total assets) 1.18% 1.17% 1.16% Return on Equity (net income to average total equity) 14.10% 14.06% 14.22% Dividend Payout Ratio (dividends declared divided by net income) 40.69% 41.45% 42.20% Equity to Asset Ratio (average equity to average total assets) 8.38% 8.33% 8.13%
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 - continued ______________________________________________________________________________ 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 interest-bearing liabilities. Net interest income in 1995 was $9.6 million (an increase of $ .2 million or 1.9%) as compared to $9.4 million in 1994 and $8.7 million in 1993. 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) 1995 1994 1993 Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate $ $ % $ $ % $ $ % ASSETS Short-term investments: Interest-bearing deposits at banks 2,334 135 5.78 605 25 4.13 1,790 54 3.02 Federal funds sold -- -- -- -- -- -- 34 1 2.94 Total short-term investments 2,334 135 5.78 605 25 4.13 1,824 55 3.02 Investment securities: Taxable 64,990 4,309 6.63 61,215 4,111 6.72 58,071 4,119 7.09 Tax-exempt(3) 2,150 271 12.61 2,997 427 14.26 3,791 491 12.95 Total investment securities 67,140 4,580 6.82 64,212 4,538 7.07 61,862 4,610 7.45 Loans: Residential mortgage loans 96,998 9,018 9.30 93,697 8,229 8.78 85,703 7,690 8.97 Commercial & farm loans 38,615 3,829 9.92 32,937 2,887 8.77 27,238 2,179 8.00 Loans to state & political subdivisions 7,152 644 9.00 6,427 482 7.50 4,027 355 8.82 Other loans 13,989 1,501 10.73 13,833 1,448 10.47 19,057 1,964 10.31 Loans, net of discount (2)(3)(4) 156,754 14,992 9.56 146,894 13,046 8.88 136,025 12,188 8.96 Total interest-earning assets 226,228 19,707 8.71 211,711 17,609 8.32 199,711 16,853 8.44 Cash and due from banks 4,737 4,694 4,295 Bank premises and equipment 4,128 3,999 3,887 FASB 115 adjustment 46 125 Other assets 2,653 3,419 1,860 Total noninterest-bearing assets 11,564 12,237 10,042 Total assets 237,792 233,948 209,753 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: NOW accounts 24,152 557 2.31 26,052 593 2.28 26,252 678 2.58 Savings accounts 25,722 628 2.44 27,388 635 2.32 26,743 746 2.79 Money market accounts 23,003 1,089 4.73 21,363 728 3.41 21,187 676 3.19 Certificates of deposit 119,260 7,067 5.93 105,455 5,565 5.28 98,735 5,570 5.64 Total interest-bearing deposits 192,137 9,341 4.86 180,258 7,521 4.17 172,917 7,670 4.44 Other borrowed funds 8,031 510 6.35 8,440 423 5.01 4,129 183 4.43 Total interest-bearing liabilities 200,168 9,851 4.92 188,698 7,944 4.21 177,046 7,853 4.44 Demand deposits 14,647 14,318 12,166 Other liabilities 2,837 2,268 3,495 Total noninterest-bearing liabilities 17,484 16,586 15,661 Stockholders' equity 20,140 18,664 17,046 Total liabilities & stockholders' equity 237,792 223,948 209,753 Net interest income 9,856 9,665 9,000 Net interest spread (5) 3.79% 4.11% 4.00% Net interest income as a percentage of average interest-earning assets 4.36% 4.57% 4.51% Ratio of interest-earning assets to interest-bearing liabilities 1.13 1.12 1.13
(1) Averages are based on daily balances. (2) Includes loan origination and commitment fees of $155, $180, and $114 for 1995, 1994 and 1993, 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 1995 Annual Report ______________________________________________________________________________ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued ______________________________________________________________________________ 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%. 1995 vs. 1994 1994 vs. 1993 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 $ 71 $ 10 $ 29 $ 110 $ (36) $ 20 $ (13) $ (29) Federal funds sold -- -- -- -- (1) (1) 1 (1) Total short-term investments 71 10 29 110 (37) 19 (12) (30) Investment securities: Taxable 254 (55) (1) 198 223 (219) (12) (8) Tax-exempt (121) (49) 14 (156) (103) 50 (11) (64) Total investments 133 (104) 13 42 120 (169) (23) (72) Loans: Residential mortgage loans 290 487 12 789 717 (163) (15) 539 Commercial and farm loans 498 379 65 942 456 208 44 708 Loans to state & political subdivisions 54 96 12 162 212 (53) (32) 127 Other loans 16 36 1 53 (538) 30 (8) (516) Total loans - net of discount (2)(3)(4) 858 998 90 1,946 847 22 (11) 858 Total interest income 1,062 904 132 2,098 930 (128) (46) 756 Interest expense: Interest bearing deposits: NOW accounts (43) 8 (1) (36) (5) (81) 1 (85) Savings accounts (39) 33 (1) (7) 18 (126) (3) (111) Money market accounts 56 282 23 361 6 46 -- 52 Certificates of deposit 729 685 88 1,502 379 (360) (24) (5) Total interest-bearing deposits 703 1,008 109 1,820 398 (521) (26) (149) Other borrowed funds (20) 113 (6) 87 191 24 25 240 Total interest expense 683 1,121 103 1,907 589 (497) (1) 91 Net interest income $ 379 $ (217) $ 29 $ 191 $ 341 $ 369 $ (45) $ 665
As can be seen from the preceding tables, tax equivalent net interest income rose from $9,000,000 in 1993 to $9,665,000 in 1994 and increased to $9,856,000 in 1995. In 1995, net interest income increased $191,000 as overall spread decreased from 4.11% to 3.79%. The increased volume of interest-earning assets generated an increase in income of $1,062,000 while increased interest-bearing liabilities produced $683,000 of interest expense. The change in rate resulted in an increase of $904,000 in interest income, however, the change in interest expense was $1,121,000 resulting in a net change of $217,000. The yield on interest-earning assets increased 39 basis points from 8.32% to 8.71% and the average interest rate on interest-bearing liabilities increased 71 basis points from 4.21% to 4.92%. This spread decline fully reflects the nearly 300 basis point increase in short-term interest rates during 1994. The reduction in rates during 1995 will be felt during 1996 as the normal loan and deposit rate lag takes effect. Analysis of the Company's current net interest income in early 1996 indicates that the effects of recent interest rate decreases and the effect of the yield curve remaining relatively level, might continue to have a negative effect on interest margin. Management is currently evaluating alternatives to maintain or improve the interest spread. Between 1993 and 1994, total interest on earning assets increased $756,000 while interest expense increased $91,000. Of this $665,000 net interest income growth, $341,000 was due to changes in volume and $369,000 was due to changes in interest rates. Other Operating Income The Company achieved other operating income of $1,252,000 in 1995, which was an increase of $116,000 or 10.2% from $1,136,000 in 1994. An increase of $25,000 occurring in service charges on deposit accounts and $9,700 in gains were realized on the sale and maturity of securities (causing $3,300 of additional taxes) as compared to $63,000 (causing $21,000 of additional taxes) in 1994. Other operating income increased $93,000 in 1995 or 57.4% over that of 1994, primarily as a result of gains in other real estate sold of $45,000 and additional insurance fees (premiums on credit life and disability insurance) of $34,000. Trust income of $255,000 increased 25% from the $204,000 earned during 1994, primarily as the result of growth in traditional trust and investment business and estate settlements through a recently instituted employee referral program. In 1996, management plans to continue to expand small business relationships by working with the community offices and commercial lending staff. _____ 32 Citizens Financial Services, Inc. ______________________________________________________________________________ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued ______________________________________________________________________________ Other Operating Expenses Salaries and employee benefits, the largest category of noninterest expense, increased $62,000 or 2% from $3.1 million in 1994 to $3.2 million in 1995. This increase was primarily the result of normal annual salary increases offset by staff reductions made possible through implementation of check imaging and power proof operations. Management expects further savings in 1996 as the result of these operational changes. In 1994, salaries and employee benefits expense increased $306,000 or 11% as 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 in 1993 for loan processing, collections and tele-services. Occupancy expense increased $22,000 in 1995, or 5.6%, as compared to an increase of $28,000 in 1994. Furniture and equipment expense declined $25,000 or 4.2% and was virtually unchanged in 1994 compared to 1993. Reduced depreciation expense accounted for most of the decline. FDIC insurance costs declined significantly, $117,000 or 29%, as the result of the Bank Insurance Fund ("BIF") meeting its statutorily mandated reserve requirements and deposit premiums being reduced. The FDIC has authorized an additional premium reduction effective in 1996 (BIF to be reduced to a minimum of $2,000 per year while Savings Association Insurance Fund ("SAIF") deposit balances continue at a premium of $.23 per hundred). The Company also currently pays a deposit premium to the FDIC for the SAIF (a result of the deposits obtained with the acquisition of Star Savings and Loan Association in 1990). Congress is currently evaluating proposals to recapitalize SAIF and, although no agreement has been reached between the House and Senate regarding recapitalization of the SAIF fund, it appears that the Company, as well as other financial institutions with SAIF deposits, may be required to pay a one-time special assessment that could approximate 85 basis points on such deposits, possibly during the first half of 1996. The special assessment may adversely effect earnings and liquidity by approximately $290,000 when paid if the current proposals are enacted into law. Other expenses increased in 1995 by $233,000 or 11.6% compared to an increase of $39,000 in 1994. The increase during 1995 was a result of an additional $69,000 repossession foreclosure expense and increases in software maintenance and computer supply expenses relating to the implementation of check imaging. A recent reorganization by the Company's current computer application software vendor has made it necessary for the Company to begin the process of evaluating new computer software and hardware alternatives. This evaluation process will be completed during 1996 with the actual implementation of the new processing to occur in 1997. The associated costs have yet to be determined but it may adversely impact future short-term earnings. Management anticipates that increased productivity and additional customer services will help mitigate an adverse impact over the long term. In addition, the Company expects to evaluate a number of other strategic technology issues such as a call center, voice response system and computer networking during 1996. 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 capital expenditures will be offset by improved operating efficiency. Provision for Income Taxes The provision for income taxes for 1995 increased by $3,000 to $1.2 million, compared to the $250,000 increase in 1994, due to increased earnings adjusted by tax-free interest income. An additional variance between 1994 and 1993 was the impact of a 1993 credit for state income not applicable in 1994, resulting in a net increase of $119,000. Loan Quality and Provision for Possible Loan Losses 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 and is incorporated herein. 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: 1995 1994 1993 1992 1991 Nonperforming loans: Nonaccruing loans $ 763 $1,557 $1,566 $ 689 $ 154 Impaired loans 696 -- -- -- -- Accrual loans - 90 days or more past due 689 267 418 439 977 Total nonperforming loans $2,148 $1,824 $1,984 $1,128 $1,131 Net chargeoffs (recoveries) for loan losses $ 51 $ 50 $ -- $ 119 $ 88 Net chargeoffs (recoveries) for real estate owned losses $ -- $ -- $ -- $ -- $ 26
The composition of nonaccrual loans at December 31, 1995, consists predominately of one-to four-family residential loans where the accrual of interest has been discontinued. 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. Loans classified on the "watch list" as of December 31: 1995 1994 1993 Special mention $ 232 $1,106 $1,856 Substandard 4,093 2,781 2,250 Doubtful 41 10 16 Loss -- -- -- Total $4,366 $3,897 $4,122 Percent of total loans 2.73% 2.52% 2.94% _____ 33 1995 Annual Report ______________________________________________________________________________ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued ______________________________________________________________________________ Based upon current information available and upon measures taken to maintain the allowance for loan losses at an appropriate level, management does not believe there are any loans classified for regulatory purposes as loss, doubtful, substandard, special mention or otherwise which will result in losses which would reasonably be expected to have a material impact on future operations, liquidity or capital reserves. At December 31, 1995, there were no loans which were not included as past due, nonaccrual or restructured troubled debt, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply over the next six months with present loan repayment terms. Management is not aware of any other information which causes it to have serious doubts as to the ability of borrowers in general to comply with repayment terms. 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 1995 1994 1993 1992 1991 Balance at beginning of period $1,721 $1,516 $1,201 $ 996 $ 914 Charge-offs (domestic only): Real estate - construction -- -- -- -- -- Real estate - mortgage 23 31 25 1 11 Installment and credit plans 42 28 43 63 40 Commercial, financial, agricultural 4 9 3 87 103 Lease financing Total loans charged-off 69 68 71 151 154 Recoveries (domestic only): Real estate - construction -- -- -- -- -- Real estate - mortgage -- -- 3 30 -- Installment and credit plans 15 14 60 1 45 Commercial, financial, agricultural 3 4 8 1 21 Lease financing Total loans recovered 18 18 71 32 66 Net loans charged-off 51 50 -- 119 88 Provisions charged to expense 163 255 315 324 170 Balance at end of year $1,833 $1,721 $1,516 $1,201 $ 996 Loans outstanding at end of year $161,627 $156,569 $141,907 $129,527 $121,743 Average loans outstanding, net $156,754 $146,894 $136,025 $126,604 $116,911 Net charge-offs to average loans 0.03% 0.03% 0.00% 0.09% 0.08% Year-end allowance to total loans 1.13% 1.10% 1.07% 0.93% 0.82% Year-end allowance to total non-performing loans 85.38% 94.35% 76.41% 106.47% 88.06%
As detailed in footnote 4 and the above tables, total past due (90 days or more) and non-performing loans increased 18% from December 31, 1994, to December 31, 1995, primarily the result of a single large credit collateralized by real estate. Nonaccural loans decreased by 6% from 1994. The majority of the loan volume is well collateralized by real estate or guaranteed by the Small Business Administration or Farmers Home Administration. Total charge-offs for 1996 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 possible 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 1.07%, 1.10%, and 1.13% as of December 31, 1993, 1994, and 1995, respectively. The 1995 growth is the combined result of a $163,000 charge to earnings and $51,000 in net loan losses. The level of charge-offs and recoveries were relatively the same as 1994. _____ 34 Citizens Financial Services, Inc. ______________________________________________________________________________ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued ______________________________________________________________________________ Allocation of the Allowances for Loan Losses Balance at end of period applicable to: 1995 1994 1993 1992 1991 Commercial and other $ 646 $ 660 $ 546 $ 477 $ 469 Real estate- construction -- -- -- -- -- Real estate - residential, agricultural 433 542 400 344 262 Installment loans to individuals 360 264 267 289 257 Unallocated 394 255 303 91 8 Total allowance for possible loan losses $1,833 $1,721 $1,516 $1,201 $ 996
The following table provides the percentage distribution of the allowance for possible loan losses and the various loan categories: 1995 1994 1993 1992 1991 Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans Commercial and other 35.3 26.6 38.3 25.0 36.0 23.8 39.7 21.5 47.1 25.2 Real estate - construction -- 0.6 -- 0.8 -- 0.8 -- 0.6 -- 1.2 Real estate - residential, agricultural 23.6 64.7 31.6 66.5 26.4 67.2 28.6 68.3 26.3 60.3 Installment loans to individuals 19.6 8.1 15.3 7.7 17.6 8.2 24.1 9.6 25.8 13.3 Unallocated 21.5 -- 14.8 -- 20.0 -- 7.6 -- 0.8 -- Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
As described in footnote 1 and footnote 4, in 1995 the Company has implemented SFAS 114 as amended by SFAS 118, which impacted 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 in the future. 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 12.7% in 1995, 3.1% in 1994, and 12.3% in 1993, to the current level of $21.3 million. Adjustments made to equity for gains and losses on available-for-sale securities resulted in an increase of $349,000 in 1995 compared to a decrease of $364,000 in 1994. Total equity has been consistently increasing (approximately 8.6% of total assets at December 31, 1995, as compared to 8.1% at December 31, 1994). Management does not currently anticipate that any of the major equipment and software purchases discussed previously will have a material adverse effect on stockholders' equity during 1996. In addition, management expects the acquisition of two branches discussed previously will reduce the bank's leverage ratio but it is anticipated that it will remain well above federal minimums. 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 1995 and 1994, 40.7% and 41.5% of net income was paid out in dividends, respectively. The Company paid a one percent stock dividend in July 1995. The one percent stock dividend resulted in 12,780 additional common shares outstanding. For the year ended December 31, 1995, the total number of common shares outstanding was 1,347,323. For comparative purposes, outstanding shares for prior periods were adjusted for the 1995 stock dividend in computing earnings and cash dividends per share. There are currently three federal regulatory measures of capital adequacy. The following table presents ratios and shows that the Company's ratios substantially exceed all federal regulatory standards. The Company has computed its risk-based capital ratios as follows: December 31, 1995 1994 1993 Tier 1 - Total stockholders' equity $ 21,297 $ 18,903 $ 18,340 Less: Unrealized holding gains (losses) on available-for-sale securities 349 (364) 609 Tier 1, net 20,948 19,267 17,731 Tier ll - Allowance for loan losses (1) 1,719 1,625 1,467 Total qualifying capital $ 22,667 $ 20,892 $ 19,198 Risk-adjusted on-balance sheet assets $131,247 $123,077 $112,271 Risk-adjusted off-balance sheet exposure (2) 6,242 6,956 5,079 Total risk-adjusted assets $137,489 $130,033 $117,350 December 31, Ratios: 1995 1994 1993 Tier I risk-based capital ratio 15.2% 14.8% 15.1% Federal minimum required 4.0 4.0 4.0 Total capital ratio - actual 16.5% 16.1% 16.4% Federal minimum required 8.0 8.0 8.0 Leverage ratio (3) 8.7% 8.6% 8 5% 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. _____ 35 1995 Annual Report ______________________________________________________________________________ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued ______________________________________________________________________________ Liquidity The Company has implemented asset/liability management along with investment policies to assure its liquidity requirements to depositors, credit customers and shareholders can be met. 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. Liquidity is managed on both the asset and liability sides of the balance sheet. Asset-based liquidity is liquidity that is created by building a stable funding base greater than what is currently used to fund less liquid assets (primarily loans), with the excess stored in the form of short-term investments and the available-for-sale portion of the investment portfolio. 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. Management prefers to provide the Company with asset- based liquidity by building a core deposit base with strong customer relationships when possible. The Company's historical activity in this area can be seen in the Consolidated Statement of Cash Flows from investing and financing activities. Investing activity in the available-for-sale and held-to-maturity securities increased to reinvest the funds received from matured securities and additional amounts provided by increased deposit growth not utilized by loan demand. At year-end 1995, the Company had short-term borrowings, using the Federal Home Loan Bank ("FHLB") FlexLine, of $1.7 million compared to $9.4 million at year- end 1994. It is management's intent to minimize 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, 1995, based on amortized cost. 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years Over 10 years Total Investment securities and interest-bearing deposits $ 2,901 $ 6,882 $ 27,752 $28,171 $ 7,519 $ 527 $ 73,752 Loans, net 45,636 43,235 32,937 19,011 15,572 3,403 159,794 Total interest-earning assets $ 48,537 $ 50,117 $ 60,689 $47,182 $ 23,091 $ 3,930 $233,546 Interest-bearing demand and savings deposits $ 20,197 $ 10,711 $ 22,587 $19,599 $ -- $ -- $ 73,094 Certificates of deposit 23,818 49,017 36,258 15,927 62 -- 125,082 Borrowed funds 2,987 1,675 1,777 708 1,079 629 8,855 Total interest-bearing liabilities $ 47,002 $ 61,403 $ 60,622 $36,234 $ 1,141 $ 629 $207,031 Excess interest-earning assets (liabilities) $ 1,535 $(11,286) $ 67 $10,948 $ 21,950 $ 3,301 Cumulative interest-earning assets $ 48,537 $ 98,654 $159,343 $206,525 $229,616 $233,546 Cumulative interest-bearing liabilities 47,002 108,405 169,027 205,261 206,402 207,031 Cumulative gap $ 1,535 $ (9,751) $ (9,684) $ 1,264 $ 23,214 $ 26,515 Cumulative interest rate sensitivity ratio (1) 1.03 0.91 0.94 1.01 1.11 1.13
(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. _____ 36 Citizens Financial Services, Inc. ______________________________________________________________________________ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued ______________________________________________________________________________ Because of the limitations of gap reports, the Company uses a simulation model as its primary method of measuring interest rate risk. The simulation model, because of its dynamic nature, forecasts the effects of future balance sheet trends, changing slopes of the yield curve, different patterns of rate movement, and changing relationships between rates. The results of simulation analyses are used by management to evaluate possible corrective actions to reduce negative impact to net interest margin. Capital expenditures of $463,000 in 1995 was less than 1994 by $139,000, of which approximately $395,000 was a final payment on the check imaging system installed during the second half of 1995. Management expects normal equipment replacements of about $100,000 for 1996. These purchases will allow greater operating efficiencies and provide the customer with a higher quality product. The proposed acquisition of two branches discussed previously will have a net positive impact to liquidity by the addition of the proceeds from the settlement purchase of approximately $16 million in deposits, reduced by approximately $3.6 million in loans, fixed assets and a deposit premium. 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. 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 1997. 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 (the "Act") was signed into law on December 19, 1991. 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. The passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and the Riegle Community Development and Regulatory Improvement Act may have a significant impact upon the Company. The key provisions pertain to interstate banking and interstate branching as well as a reduction in the regulatory burden on the banking industry. Since September 1995, bank holding companies may acquire banks in other states without regard to state law. In addition, banks can merge with other 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. Pennsylvania recently amended the provisions of its Banking code to authorize full interstate banking and branching under Pennsylvania law and to facilitate the operations of interstate banks in Pennsylvania. As a result of legal and industry changes, management predicts that consolidations will continue as the financial services industry strives for greater cost efficiencies and market share. Management believes that such consolidation may enhance its competitive position as a community bank. There are numerous proposals before Congress to modify the financial services industry and the way commercial banks operate. However, it is difficult to determine at this time what effect such provisions may have until they are enacted into law. Normal examinations of the Company by the Comptroller of the Currency occurred during 1995. 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, events or uncertainties which would have a material adverse impact on future operating results, liquidity or capital resources, nor is it aware of any current recommendations by the regulatory authorities (except as described herein) which, if they were to be implemented, would have such an effect although the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have, a negative impact on the Company's results of operations. _____ 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 ______________________________________________________________________________ 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 William D. VanEtten Richard E. Wilber DIRECTORS EMERITI Edward Kosa Constantine Kurzejewski John G. Kuster Robert G. Messinger Wilber Wagner 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 Administrative Services Division Manager Human Resources Manager Audit/Compliance V. Guy Abell Auditor Robert D. Wrisley Vice President Loan Compliance and Review Karen R. Jacobson Assistant Auditor/Security Officer Banking Services Terry B. Osborne Executive Vice President Secretary, Citizens Financial Services, Inc. Jerald J. Rumsey Senior Vice President Credit Services Manager Robert L. Champion Commercial Services Officer Pamela A. Hazelton Appraiser Wendy L. Southard Marketing Coordinator 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 Operations Manager Trust and Investment Services Deborah E. Scott Vice President Trust/Investment Services Division Manager Douglas P. Smith Trust Investment Officer Jean A. Knapp Trust Administrator Sara J. Roupp Trust Administrator _____ 38 ______________________________________________________________________________ [GRAPHIC OMITTED: Silhouette of a colonial rider on horseback, approximately one inch square, top 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 marketplace. We will establish ourselves apart from other financial vendors by providing service excellence to our customers through satisfied, motivated, professionalemployees and a profitable range of financial services to 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. ______________________________________________________________________________ [LOGO OMITTED: F.D.I.C. EQUAL HOUSING LENDER] ______________________________________________________________________________ COMMUNITY OFFICES Toll free to all locations: 800-326-9486 ________________________________________________ MANSFIELD 717-662-2121 15 South Main Street Mansfield, PA 16933 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 717-638-2115 300 Main Street Blossburg, PA 16912 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 Office Manager Michele E. Litzelman Customer Service Counselor ________________________________________________ ULYSSES 814-848-7572 502 Main Street Ulysses, PA 16948 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/Office Manager L. Abbie Lerch Customer Service Counselor ________________________________________________ GENESEE 814-228-3201 RD 1 Box 58 Genesee, PA 16923 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/Office Manager Christine M. Miller Customer Service Counselor ________________________________________________ SAYRE 717-888-6602 306 West Lockhart Street Sayre, PA 18840 FAX 717-888-3198 Local Board Joseph Burkhart Chairman Blaine W. Cobb, MD Robert Elsbree Russell Knight Chester L. Reed Officers Chester L. Reed Assistant Vice President/Office Manager Toni Tracy Customer Service Counselor ________________________________________________ TROY 717-297-4131 303 West Main Street Troy, PA 16947 FAX 717-297-4133 Local Board Lyle A. Haflett Chairman Thomas A. Calkins, III Richard H. Packard David E. Carlson Donald D. White Officers David E. Carlson Office Manager ________________________________________________ WELLSBORO 717-724-2600 99 Main Street Wellsboro, PA 16901 FAX 717-724-4381 Local Board William A. Hebe, Esquire Chairman Robin K. Carleton Timothy J. Gooch Jeffrey L. Wilson Officers Jeffrey L. Wilson Assistant Vice President/Office Manager MAC Money Access Card ______________________________________________________________________________ [MAC 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 16, 1996 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 The Annual Report and other Company reports are also filed electronically through the Electronic Data Gathering, Analysis, and Retrieval System ("EDGAR") which performs automated collection, validation, indexing, acceptance, and forwarding of submissions to the Securities and Exchange Commission (SEC) and is accessible by the public using the Internet at http://www.sec.gov./edgarhp.htm. TRANSFER AGENT Citizens Financial Services, Inc. 15 South Main Street Mansfield, PA 16933 Telephone: 717-662-2121 / 800-326-9486 SHAREHOLDER SERVICES Shareholder inquiries and requests for assistance should be directed to the Transfer Agent listed above. STOCK PURCHASING INFORMATION The stock symbol for Citizens Financial Services, Inc. is "CZFS". Citizens Financial Services, Inc. stock is traded Over the Counter ("OTC") through the following Market Makers: Market Makers Ferris-Baker-Watts 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 Hopper Soliday & Co., Inc. 1703 Oregon Pike Lancaster, PA 17601-4201 Telephone: 800-646-8647 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 PaineWebber Incorporated 10 Park Street PO Box 2636 Concord, NH 03302 Telephone: 800-678-0619 _____ 40 EX-21 4 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT ____________________ First Citizens National Bank of Mansfield, Pennsylvania is the Company's sole subsidiary. EX-16 5 EXHIBIT 16 Change in certifying accountants - Information appearing in the definitive Proxy Statement at Exhibit 99 under the caption "Independent Public Accountants" to the Annual Meeting of Security Holders to be held April 16, 1996. EX-23 6 EXHIBIT 23 Consent of Independent Accountant Citizens Financial Services, Inc. Mansfield, Pennsylvania: We consent to the incorporation by reference in this form 10-K of Citizens Financial Services, Inc. of our report dated February 11, 1994 on the Company's financial statements for the year ended December 31, 1993 appearing in the Annual Report on Form 10-K of Citizens Financial Services, Inc. filed for the year ended December 31, 1995. /s/ Parente, Randolph, Orlando, Carey & Associates Williamsport, Pennsylvania February 29, 1996 EX-27 7
9 YEAR DEC-31-1995 DEC-31-1995 5536 37 0 0 21444 52271 53589 159794 1833 247094 213316 6981 3626 1874 0 0 1347 0 247094 14799 4488 135 19422 9340 9851 9571 163 10 6665 3995 2834 0 0 2834 2.10 2.10 4.36 1459 689 0 0 1721 69 18 1833 1833 0 394
EX-99 8 SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 Amendment No. [ ]) [xx] Filed by the Registrant [ ] Filed by a Party other than the Registrant Check the Appropriate Box: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a6(e) (2)) [xx] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Sec. 240.14a-11(c) or Sec. 240.14a-12 CITIZENS FINANCIAL SERVICES, INC. (Name of Registrant as Specified in Its Charter) __________________________________________________ (Name of Person(s) Filing Proxy Statement if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [xx] $125 per Exchange Act Rule 0-11 (c) (1) (ii), 14a-6(I) (1), 14a-6(I) (2) or Item 22(a) (2) if Schedule 14A [ ] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(I) (3) [ ] Fee computed on table below per Exchange Act Rules 14a-6(I) (4) and 0-11. 1) Title of each class of securities to which transaction applies: 2) Aggregate number of securities to which transaction applies: 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): 4) Proposed maximum aggregate value of transaction: 5) Total fee paid: [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a) (2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: 2) Form, Schedule or Registration Statement No.: 3) Filing Party: 4) Date Filed: CITIZENS FINANCIAL SERVICES, INC. NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 16, 1996 TO THE SHAREHOLDERS OF CITIZENS FINANCIAL SERVICES, INC.: Notice is hereby given that the Annual Meeting of Shareholders of CITIZENS FINANCIAL SERVICES, INC. (the "Corporation") will be held at 12:00 p.m., prevailing time, on Tuesday, April 16, 1996 at the Tioga County Fairgrounds Youth Building, Whitneyville, Pennsylvania, 16901, for the following purposes: 1. To elect five (5) Class 1 Directors to serve for a three-year term and until their successors are elected and qualified; and 2. To transact such other business as may properly come before the Annual Meeting and any adjournment or postponement thereof. In accordance with the Bylaws of the Corporation and action of the Board of Directors, only those shareholders of record at the close of business on March 13, 1996 will be entitled to notice of and to vote at the Annual Meeting and any adjournment or postponement thereof. A copy of the Corporation's Annual Report for the fiscal year ended December 31, 1995 is being mailed with this Notice. Copies of the Corporation's Annual Report for the 1994 fiscal year may be obtained at no cost by contacting Richard E. Wilber, President, 15 South Main Street, Mansfield, Pennsylvania 16933, telephone: 800-326-9486. You are urged to mark, sign, date and promptly return your Proxy in the enclosed envelope so that your shares may be voted in accordance with your wishes and in order that the presence of a quorum may be assured. The prompt return of your signed Proxy, regardless of the number of shares you hold, will aid the Corporation in reducing the expense of additional proxy solicitation. The giving of such Proxy does not affect your right to vote in person if you attend the meeting and give written notice to the Secretary of the Corporation. By Order of the Board of Directors, /s/ Richard E. Wilber Richard E. Wilber, President March 20, 1996 CITIZENS FINANCIAL SERVICES, INC. PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 16, 1996 GENERAL Introduction, Date, Time and Place of Annual Meeting This Proxy Statement is being furnished in connection with the solicitation by the Board of Directors of Citizens Financial Services, Inc. (the "Corporation"), a Pennsylvania business corporation, of proxies to be voted at the Annual Meeting of Shareholders of the Corporation to be held at 12:00 p.m., prevailing time, on Tuesday, April 16, 1996 at the Tioga County Fairgrounds Youth Building, Whitneyville, Pennsylvania 16901. The principal executive office of the Corporation is located at First Citizens National Bank (the "Bank"), 15 South Main Street, Mansfield, Pennsylvania 16933. The telephone numbers for the Corporation are 717-662-2121 or 800-326-9486. All inquiries should be directed to Richard E. Wilber, President and Chief Executive Officer of the Corporation. Solicitation and Voting of Proxies This Proxy Statement and the enclosed form of the proxy (the "Proxy") are first being sent to shareholders of the Corporation on or about March 20, 1996. Shares represented by proxies on the accompanying Proxy, if properly signed and returned, will be voted in accordance with the specifications made thereon by the shareholders. Any Proxy not specifying to the contrary will be voted FOR the election of the nominees for Class 1 Director named below to serve for a three-year term and until their successors are elected and qualified, and FOR the transaction of such other business as may properly come before the Annual Meeting and any adjournment or postponement thereof. Execution and return of the enclosed Proxy will not affect a shareholder's right to attend the Annual Meeting and vote in person, after giving written notice to the Secretary of the Corporation. The cost of preparing, assembling, printing, mailing and soliciting proxies, and any additional material which the Corporation may furnish shareholders in connection with the Annual Meeting, will be borne by the Corporation. In addition to the use of the mail, certain directors, officers and employees of the Corporation and the Bank may solicit proxies personally, by telephone, telegraph and by telecopier. Arrangements will be made with brokerage houses and other custodians, nominees and fiduciaries to forward proxy solicitation material to the beneficial owners of stock held of record by these persons, and, upon request therefore, the Corporation will reimburse them for their reasonable forwarding expenses. Revocability of Proxy A shareholder who returns a Proxy may revoke the Proxy at any time before it is voted only (1) by giving written notice of revocation to Terry B. Osborne, Secretary of Citizens Financial Services, Inc., at 15 South Main Street, Mansfield, Pennsylvania 16933, (2) by executing a later-dated proxy and giving written notice thereof to the Secretary of the Corporation or (3) by voting in person after giving written notice to the Secretary of the Corporation. Voting Securities, Record Date and Quorum At the close of business on March 13, 1996, the Corporation had outstanding 1,347,323 shares of common stock, par value $1.00 per share, the only authorized class of stock (the "Common Stock"). Page 1 Only holders of Common Stock of record at the close of business on March 13, 1996 will be entitled to notice of and to vote at the Annual Meeting. Cumulative voting rights do not exist with respect to the election of directors. On all matters to come before the Annual Meeting, each share of Common Stock is entitled to one vote and a majority of shares must be cast at the meeting in order to become binding upon the Corporation. Under Pennsylvania law and the Bylaws of the Corporation, the presence of a quorum is required for each matter to be acted upon at the Annual Meeting. Pursuant to the Bylaws of the Corporation, the presence, in person or by proxy, of shareholders entitled to cast at least a majority of the votes which all shareholders are entitled to cast shall constitute a quorum for the transaction of business at the Annual Meeting. Votes withheld and abstentions will be counted in determining the presence of a quorum for the particular matter. Broker non-votes will not be counted in determining the presence of a quorum for the particular matters as to which the broker withheld authority. Assuming the presence of a quorum, the five nominees for director receiving the highest number of votes cast by shareholders entitled to vote for the election of directors shall be elected. Votes withheld from a nominee and broker non-votes will not be cast for such nominee. PRINCIPAL BENEFICIAL OWNERS OF THE CORPORATION'S STOCK Principal Owners As of March 13, 1996, there are no persons who own of record or who are known by the Board of Directors to be the beneficial owners of more than five percent (5%) of the Corporation's outstanding Common Stock. Beneficial Ownership by Officers, Directors and Nominees The following table sets forth as of February 29, 1996, the amount and percentage of the Common Stock beneficially owned by each director, each nominee and all executive officers and directors of the Corporation and subsidiary as a group. Name of Beneficial Amount and Nature Percent of Owner Beneficial Ownership (1) (2) Class Bruce L. Adams (5) 1,501 (7) .11% Carol J. Bond (3)(6) 33,801 2.51% R. Lowell Coolidge (3) (6) 67,024 (8) 4.97% Larry J. Croft (3) (6) 11,117 (9) .83% Robert E. Dalton (4) 15,484 (10) 1.15% Robert J. Landy (4) 9,601 (11) .71% John E. Novak (4) 1,605 (12) .12% John M. Thomas, M.D. (3) (6) 22,280 (13) 1.65% William D. Van Etten (5) 2,871 (14) .21% Rudolph J. van der Hiel (4) 8,319 (15) .62% Richard E. Wilber (3) (6) 4,504 (16) .33% All Nominees, Directors and Executive Officers as a Group - 16 persons 179,577 13.33% Page 2 (1) The securities "beneficially owned" by an individual are determined in accordance with the definitions of "beneficial ownership" set forth in the General Rules and Regulations of the Securities and Exchange Commission and may include securities owned by or for the individual's spouse and minor children and any other relative who has the same home, as well as securities to which the individual has or shares voting or investment power or has the right to acquire beneficial ownership within 60 days after March 13, 1996. Beneficial ownership may be disclaimed as to certain of the securities. (2) Information furnished by the directors and the Corporation. (3) A Class 1 Director whose term expires in 1996. (4) A Class 2 Director whose term expires in 1998. (5) A Class 3 Director whose term expires in 1997. (6) A Nominee for Class 1 Director whose term expires in 1999. (7) Mr. Adams holds 1,357 shares individually, 144 shares jointly with his spouse. (8) Mr. Coolidge holds 53,426 shares individually, 13,598 shares are held by his spouse. (9) Mr. Croft holds 6,353 shares individually, 4,506 shares jointly with his spouse, 258 shares are held by his spouse. (10) Mr. Dalton holds 1,203 shares individually, 14,281 shares are held by his spouse. (11) Mr. Landy holds 7,848 shares individually, 584 shares are held under a profit sharing plan, 1,169 shares are held jointly with his spouse. (12) Mr. Novak holds 1,562 shares individually, 43 shares are held by his spouse. (13) Dr. Thomas holds 22,030 shares individually, 250 shares are held by his spouse. (14) Mr. Van Etten holds 2,443 shares individually, 428 shares are held jointly with his spouse. (15) Mr. van der Hiel holds 7,601 shares individually, 11 shares are held jointly with his spouse, 707 shares are held by his spouse. (16) Mr. Wilber holds 3,169 shares individually, 341 shares are held jointly with his spouse, 240 shares are held by his spouse, 754 shares are held by his wife as custodian. ELECTION OF DIRECTORS The Articles of Incorporation provide that the Board of Directors shall consist of not less than five (5) nor more than twenty-five (25) shareholders, the exact number to be fixed and determined from time to time by resolution of a majority of the full Board of Directors or by resolution of the shareholders at any annual or special meeting. The number of Directors is currently set at eleven (11). The Articles further provide that the Directors shall be divided into three (3) classes, as nearly equal in number as possible, known as Class 1, Class 2 and Class 3. The Class 1 Directors elected at this Annual Meeting will serve for a three (3) year term. The Class 3 and 2 Directors at this Annual Meeting will continue to serve for one and two years, respectively in order to complete their three year terms. Page 3 It is intended that the Proxies solicited hereunder will be voted FOR (unless otherwise directed) the five (5) nominees named below. The Corporation does not contemplate that any nominee will be unable to serve as Director for any reason. Each nominee has agreed to serve if elected. However, in the event one or more of the nominees should be unable to stand for election, the vote will be cast for the remaining nominees in accordance with the best judgement of the Board of Directors. There is no cumulative voting for the election of directors. Each share of Common Stock is entitled to cast only one vote for each nominee. For example, if a shareholder owns ten shares of Common Stock, he or she may cast up to ten votes for the Directors on the class to be elected. INFORMATION AS TO NOMINEES AND DIRECTORS The following table contains certain information with respect to current Class 1 Directors and nominees for Class 1 Director whose term expires in 1999 and the Class 3 Directors and Class 2 Directors whose terms expire in 1997 and 1998, respectively. The date appearing in parenthesis opposite each Director's name in the "Director Since" column represents the year in which each such nominee became a Director of the Bank, or any predecessor institution acquired by the Bank. Each nominee presently serves as Director of the Bank, as well as Director of the Corporation. All Directors have been engaged in the principal occupation indicated for five years or more, with no exceptions. Principal Occupation for Past Five Years Director Since and Position Held with Corporation/ Name Age the Corporation and the Subsidiary Subsidiary CURRENT CLASS 1 DIRECTORS WHOSE TERM EXPIRES IN 1996 AND NOMINEES FOR CLASS 1 DIRECTOR WHOSE TERM EXPIRES IN 1999 Carol J. Bond 55 President of Monaghan Transportation 1986 Company; Vice President of Keystone (1984) Parts Manufacturing, Inc. R. Lowell Coolidge 55 Attorney-at-Law with the firm of 1984 Walrath and Coolidge (1984) Richard E. Wilber 47 President of Citizens Financial 1984 Services, Inc. & First Citizens (1983) National Bank John M. Thomas, 62 Retired Executive Chairman of Guthrie 1990 M.D. Healthcare System; President of Chemung (1985) Spring Water Company Larry J. Croft 60 General Manager of Croft Ford, Inc.; 1990 Secretary of Croft Lumber Co. Inc. (1969) Page 4 CURRENT CLASS 3 DIRECTORS WHOSE TERM EXPIRES IN 1997 Bruce L. Adams 59 President of Bru-Cel Distributing 1991 Co., Inc. (1991) William D. Van 62 Dairy Farmer 1984 Etten (1978) CURRENT CLASS 2 DIRECTORS WHOSE TERM EXPIRES IN 1998 Robert E. Dalton 63 Retired President of Keystone Parts 1984 Manufacturing, Inc.; Secretary of (1957) Keystone North, Inc.; Real Estate & Insurance Broker; Chairman of the Board, First Citizens National Bank John E. Novak 59 Retired School Administrator with 1984 Southern Tioga School District; (1976) since 1993 has supervised Student Teachers at Elmira College Rudolph J. 56 Attorney-at-law with the firm of 1984 van der Hiel van der Hiel & Mansfield; Vicar at (1975) St. James Episcopal Church, Mansfield and Trinity Episcopal Church, Antrim Robert J. Landy 68 Attorney-at-Law with the firm of Landy 1990 and Landy; Retired Chairman of Board, (1960) Guthrie Healthcare System THE BOARD OF DIRECTORS AND ITS COMMITTEES During 1996, there were four (4) regular meetings of the Board of Directors of the Corporation and twenty-three (23) regular meetings of the Board of Directors of the Bank. All Directors attended at least seventy-five percent of the Corporation's Board of Directors Meetings. There is no family relationship, by blood, marriage, or adoption, between any of the Directors and any other Director, Officer, or full-time Employee, of the Corporation or the Bank. None of the Directors are involved in any legal action in his/her individual capacity which is material to an evaluation of his ability or integrity to act as a Director. The Corporation has no standing audit committee or nominating committee of the Board of Directors. Matters within the jurisdiction of these committees are considered by the Board of Directors of the Bank. NOMINATIONS FOR DIRECTORS Nominations for Directors other than those made by or on behalf of the existing Board of Directors to be elected at an annual meeting of shareholders must be submitted to the Secretary of the Corporation in writing not less than ninety (90) days nor more than one-hundred twenty (120) days prior to the date of the meeting. Such nominations must be in accordance with Section 202 of the Corporation's Bylaws and contain information specified therein. Page 5 COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Section 16(a) of the Securities and Exchange Act of 1934 requires the Corporation's officers and directors, and persons who own more than 5% of the registered class of the Corporation's equity securities, to file reports of ownership and changes of ownership with the Securities and Exchange Commission ("SEC"). Officers, directors and greater than 5% shareholders are required by SEC regulation to furnish the Corporation with copies of all Section 16(a) forms that they file. There are no 5% shareholders of the Corporation's equity securities. Based solely on its review of the copies of such forms received by it, and written representations from certain reporting persons that no Forms 5 were required for those persons, the Corporation believes that during the period January 1, 1995 through December 31, 1995, its officers and directors were in compliance with all applicable filing requirements except for two reports which covered two transactions were filed late by Mr. Bruce Adams, a director of the Corporation. EXECUTIVE COMPENSATION Shown below is information concerning the annual compensation for services in all capacities to the Corporation for the fiscal years ended December 31, 1995, 1994 and 1993 of those persons who were, as of December 31, 1995 (I) the Chief Executive Officer, and (ii) the four other most highly compensated executive officers of the Corporation to the extent that such persons' total annual salary and bonus exceeded $100,000: Summary Compensation Table Long-term Compensation Annual Compensation Awards Payout Restricted Securities Other Annual Stock Underlying LTIP All Other Name and Salary Bonus Compensation Award(s) Options/SARs Payouts Compensation Principal Position Year ($) (1) ($) ($) ($) (#) ($) ($) (2) Richard E. Wilber 1995 $119,123 $6,329 None None None None $6,329 President & CEO 1994 $109,952 $6,268 $6,268 1993 $ 95,923 $5,897 $5,897
(1) The "Salary" column includes fees paid as a director of the Corporation and Subsidiary totaling $8,475, $8,395, $8,000 for years 1995, 1994, and 1993 respectively. (2) Represents the tax deferred profit sharing contribution paid by the Bank to the Chief Executive Officer in 1995, 1994 and 1993 respectively. Retirement Plan The Bank 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 Bank's funding policy is consistent with the funding requirements of Federal Law and regulations. The First Citizens National Bank Trust Department is trustee of the pension plan. The following table sets forth the estimated annual benefits payable on retirement at age 65 by a participating employee, assuming final average earnings as shown. Although the pension plan is integrated with Social Security, this table reflects the benefit available through the pension plan exclusive of social security. Because of funding limitations by the Internal Revenue Service, no contributions were allowed in 1994 and 1993. Such funding limitations no longer applied in 1995 and the Bank therefore contributed the maximum allowed of $106,921. Page 6 Average Annual Annual Pension Benefits Upon Retirement Earnings with Years of Service Indicated 10 20 30 40 ___ ___ ___ ___ $60,000 10,056 20,111 30,167 30,167 $80,000 14,056 28,111 42,167 42,167 $100,000 18,056 36,111 54,167 54,167 $120,000 22,056 44,111 66,167 66,167 $140,000 26,056 52,111 78,167 78,167 $160,000 28,056 56,111 84,167 84,167 Richard E. Wilber, President and Chief Executive Officer of the Corporation, has 14 years of credited service to the Corporation and Subsidiary. Average salary upon which benefits would be calculated at December 31, 1995 is $103,282. Profit Sharing Plan The Bank has a profit-sharing plan, covering substantially all employees, which provides tax deferred salary savings to plan participants. Contributions to the profit-sharing plan are allocated to participants based upon a percentage of their compensation. The total amount of the profit-sharing contribution is determined by the Board of Directors annually on a discretionary basis. Total contributions for 1995, 1994, and 1993 were $86,239, $119,630, and $112,271 respectively. As reported in the Summary Compensation Table, the contributions paid by the Bank on behalf of Richard E. Wilber, President and Chief Executive Officer of the Corporation, were $6,329 in 1995, $6,268 in 1994 and $5,897 in 1993. Compensation of Directors Directors of the Corporation receive a fee of $115 per meeting. Directors of the Subsidiary, except for the Chairman, receive $460 per month plus fees for attending various committee meetings at $85 per meeting. The Chairman receives a fixed annual sum of $10,400. In addition to the above fees, each director is provided a $50,000 life insurance benefit. In the aggregate, the Board of Directors received $86,433.36 for all Board of Directors meetings and committee meetings attended in 1995. Total premiums paid in 1995 for life insurance on behalf of the directors was $1,855. Compensation Committee Interlocks and Insider Participation in Compensation Decisions Mr. Richard E. Wilber, President and Chief Executive Officer of the Corporation and the Bank, is a member of the Human Resource Committee which makes recommendations on compensation policies and practices to the Board of Directors. Mr. Wilber does not participate in conducting his review nor does he vote on his annual compensation package. Board Compensation Committee Report on Executive Compensation The Board of Directors of the Corporation is responsible for the governance of the Corporation and its subsidiary, First Citizens National Bank. In fulfilling its fiduciary duties, the Board of Directors engages competent persons who undertake to accomplish strategic goals and objectives with integrity and in a cost-effective manner. The Human Resource Committee, comprised of the President and three outside directors (Directors Novak, Croft and Adams), makes recommendations on compensation policies and practices to the Board of Directors. The fundamental philosophy of the Corporation's and the Bank's compensation program is to offer competitive compensation opportunities for all employees based on the individual's contribution and personal performance. Compensation policies are designed to attract and motivate competent and dedicated individuals to enhance the Corporation's growth and profitability and the ultimate financial return to shareholders. Page 7 The compensation of the President and the Executive Vice President is reviewed and approved in April of each year by the Board of Directors. As a basis for determining compensation, the Board of Directors examines information from a peer group of banks relative to performance and compensation. The peer group for overall bank performance analysis consists primarily of those contained within the Uniform Bank Performance Report prepared by the Office of the Comptroller of the Currency (banks with assets of $100 million to $300 million throughout the United States). The peer group for analysis of compensation paid to other bank holding company and banking institution executives is obtained primarily from L.R. Weber Associates, Inc. and Bank Administration Institute (such peer data is compiled on both a regional and asset size basis). These peer groups are different from the peer group utilized in the performance chart appearing below. The Board of Directors does not deem Section 162(m) of the Internal Revenue Code ("IRC") to be applicable to the Corporation at this time. The Board of Directors intends to monitor the future application of Section 162(m) of the IRC to the compensation paid to its executive officers and in the event that this section does become applicable it is the intent of the Board of Directors to amend the Corporation's and the Bank's compensation plans to preserve the deductibility of the compensation payable under such plans. Compensation of the President/Executive Vice President As mentioned previously, the Board of Directors evaluated the compensation of the President and the Executive Vice President in April 1995. Compensation increases were determined based on an analysis of the contribution of these individuals in achieving the Corporation's strategic goals and objectives. In determining whether strategic goals had been achieved, the Board of Directors considered among numerous factors the following: the Corporation's performance as measured by earnings, revenues, return on assets, return on equity, market share, total assets and non-performing loans. Although the performance and increases in compensation were measured in light of these factors, there was no direct correlation between any specific criterion and compensation of these executives, nor was there any specific weight provided to any such criteria. The Board of Directors believes that the President's 1995 compensation of $110,648 is appropriate in light of the of the Corporation's 1995 accomplishments (an 8.0% increase in net income; a 14.4% return on average equity; and a 6.3% increase in assets). In addition to this compensation, the President and Executive Vice President participate in the Bank's profit-sharing plan on the same basis as all other eligible employees. HUMAN RESOURCE COMMITTEE Richard E. Wilber John E. Novak Larry J. Croft Bruce L. Adams Page 8 SHAREHOLDER RETURN PERFORMANCE GRAPH Set forth below is a line graph comparing the yearly change in the cumulative total return on the Corporation's Common Stock against the cumulative total return of the S&P 500 Index and selected peer groups for the period of five (5) years commencing on January 1, 1991, and ended December 31, 1995. Shareholder return shown on the graph below is not necessarily indicative of future performance. [PERFORMANCE GRAPH OMITTED: Following is a description of the performance graph in tabular format.] 1990 1991 1992 1993 1994 1995 Peer Group Index 97.38 90.28 99.64 139.48 165.85 194.24 Citizens Financial Services, Inc. 99.70 89.68 114.16 136.22 184.73 198.32 S&P 500 Index 93.44 118.02 123.29 131.99 129.96 186.52 NOTE: Peer group information appearing above includes the following companies: CNB Financial Corporation, Citizens & Northern Corporation, Columbia Financial Corporation, Comm. Bancorp, Inc., Mid Penn Bancorp, Inc., Heritage Bancorp, Inc., Penn Security Bank & Trust Co., Penns Woods Bancorp, Inc., Pioneer American Holding Company, and Wayne Bank. Such financial institutions and bank holding companies were selected based on four criteria: total assets between $150 million and $600 million, market capitalization greater than $20 million; headquarters located in Pennsylvania; and not listed on NASDAQ national market. CERTAIN TRANSACTIONS Certain of the Corporation's Directors and Executive Officers and their associates are and have been customers of the Bank and have had transactions with the Bank in the ordinary course of business. In addition, certain Directors are and have been Directors and Officers of corporations which are customers of the Bank and have had transactions with the Bank in the ordinary course of business. All such transactions with these Directors and Officers of the Corporation and their associates referred to above were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time of such transactions. These transactions did not involve more than a normal risk of collectibility or present other unfavorable features. Page 9 During 1995, business and law firms of which Directors Rudolph J. van der Hiel, R. Lowell Coolidge and Robert J. Landy were Officers and/or Partners rendered services or sold products to the Corporation and/or the Bank in the normal course of business. Directors Rudolph J. van der Hiel and R. Lowell Coolidge each received $19,562.64 and $23,575.14, respectfully, for all legal services rendered to the Corporation and/or Bank during 1995. Also during 1995, Dalton Insurance Agency was paid $63 thousand in premiums for various insurance coverages for the Corporation and the Bank. Such agency is owned and operated by an immediate family member of Robert E. Dalton, director to the Corporation and the Bank. Total loans outstanding from the Corporation and the Bank at December 31, 1995, to the Corporation's and the Bank's officers and directors as a group and members of their immediate families and companies in which they had an ownership interest of ten percent (10%) or more was $2,037,067.20, or approximately ten percent (10%) of the total equity capital of the Bank. Loans to such persons were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectibility or present other unfavorable features. The aggregate amount of indebtedness outstanding as of the latest practicable date, February 29, 1996, to the above described group was $2,000,354.99. Principal Officers of Corporation The following table sets forth the selected information about the Executive Officers of the Corporation, as of March 13, 1996. Please refer to the footnotes below under the caption entitled "Principal Officers of First Citizens National Bank." Held Employee Number of Shares Age as of Name and Position Since Since Beneficially Owned March 13, 1996 Richard E. Wilber 1984 1984 4,504 47 President Terry B. Osborne 1984 1984 396 (2) 42 Secretary Thomas C. Lyman 1988 1988 2 50 Treasurer Each of the above Executive Officers has served in these capacities for the past five years. Page 10 Principal Officers of First Citizens National Bank The following table sets forth the selected information about the Executive Officers of First Citizens National Bank, subsidiary of the Corporation, as of March 13, 1996: Held Employee Number of Shares Age as of Name and Position Since Since Beneficially Owned March 13, 1996 Robert E. Dalton 1985 (1) 15,484 63 Chairman of the Board Richard E. Wilber 1983 1981 4,504 47 President Terry B. Osborne 1991 1975 396 42 Executive Vice President Thomas C. Lyman 1988 1988 2 50 Finance/Control Division Manager William W. Wilson 1991 1979 171 (3) 46 Vice President Operations Division Manager Deborah E. Scott 1991 1981 550 (4) 36 Vice President Trust and Investment Services Manager Cynthia T. 1985 1983 351 (5) 37 Pazzaglia Administration Services Division Manager (1) Is not an employee of First Citizens National Bank. (2) Mr. Osborne holds 306 shares jointly with his spouse, 24 shares in his name alone, 66 shares held by his spouse. (3) Mr. Wilson holds 171 shares jointly with his spouse. (4) Mrs. Scott holds 463 shares jointly with her spouse, and 87 shares as custodian. (5) Mrs. Pazzaglia holds 351 shares jointly with her spouse. Page 11 ANNUAL REPORT A copy of the Corporation's Annual Report for its fiscal year ended December 31, 1995, is enclosed with this Proxy Statement. A representative of S.R. Snodgrass, A.C., Certified Public Accountants, of Wexford, Pennsylvania, the independent auditors who prepared the Annual Report, will be present at the Annual Meeting of Shareholders. The representative will have an opportunity to make a statement, if he desires to do so, and will be available to respond to any appropriate questions concerning the Annual Report presented by shareholders at the Annual Meeting. INDEPENDENT PUBLIC ACCOUNTANTS S.R. Snodgrass, A.C. ("Snodgrass"), Certified Public Accountants, of Wexford, Pennsylvania, served as the Corporation's independent public accountants for its 1995 fiscal year. The Corporation has been advised by Snodgrass that none of its members has any financial interest in the Corporation. In addition to performing customary audit services, Snodgrass assisted the Corporation and the Bank with preparation of their federal and state tax returns, and provided assistance in connection with regulatory matters, charging the Bank for such services at its customary hourly billing rates. These non-audit services were approved by the Corporation's and the Bank's Boards of Directors after due consideration of the effect of the performance thereof on the independence of the auditors and after the conclusion by the Corporation's and the Bank's Boards of Directors that there was no effect on the independence of the auditors. Snodgrass will serve as the Corporation's independent public accountants for its 1996 fiscal year. On April 19, 1994, the Board of Directors of the Corporation approved a resolution, based upon the recommendations of the Audit Committee of the Board of Directors of the Corporation, to engage Snodgrass as the Corporation's independent accountants, replacing Parente, Randolph, Orlando, Carey & Associates ("Parente"), its prior independent accountants. Parente's report on the Corporation's consolidated financial statements for the prior two years contained no adverse opinion or disclaimer of opinion or qualification as to uncertainty, audit scope or accounting principles. In connection with the audits of the two most recent fiscal years and subsequent interim period prior to dismissal, there were no disagreements with Parente on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of the former accountants, would have caused them to reference in connection with their report to the subject matter of the disagreement. The Corporation acknowledges that disagreements required to be reported in response to the proceeding sentence include both those resolved to the former accountants' satisfaction and those not resolved to the former accountants' satisfaction. The Corporation further acknowledges that disagreements contemplated by this rule are those which occurred at the decision-making level; i.e., between personnel of the Corporation responsible for the presentation of its financial statements and personnel of the accounting firm responsible for rendering its report. There have been no "reportable events," within the meaning of Item 304 of Securities and Exchange Commission Regulation S-K. On April 26, 1994, the Corporation filed a Current Report on Form 8-K with the Securities and Exchange Commission (the "SEC") to notify the SEC of the Corporation's change in accountants. The Corporation provided Parente with a copy of the Form 8-K and requested that they furnish the Corporation with a letter addressed to the SEC stating whether such firm agreed with the statements made by the Corporation contained in the Form 8-K and, if not, stating the respects in which the firm disagreed. Parente's letter of response indicated no disagreements with the statements made, as described above. The letter was attached as an exhibit to the above-referenced Current Report on Form 8-K. Parente is not expected to be represented at the Annual Meeting. Page 12 SHAREHOLDER PROPOSALS Securities and Exchange Commission Regulations permit shareholders to submit proposals for consideration at Annual Meetings of Shareholders. Any such proposals for the Corporation's Annual Meeting of Shareholders to be held in 1997, must be submitted to the President of Citizens Financial Services, Inc., at its principal office of 15 South Main Street, Mansfield, Pennsylvania 16933 on or before Thursday, November 21, 1996, in order to be included in proxy materials relating to that Annual Meeting. OTHER MATTERS The Board of Directors of the Corporation is not aware of any other matters to be presented for action other than described in the accompanying Notice of Annual Meeting of Shareholders, but if any other matters properly come before the Meeting, and any adjournments or postponements thereof, the holder(s) of any Proxy is (are) authorized to vote thereon in accordance with their best judgment. ADDITIONAL INFORMATION Upon written request of any shareholder, a copy of the Corporation's Annual Report or SEC Form 10-K for its fiscal year ended December 31, 1995, including the financial statements and the schedules thereto, required to be filed with the Securities and Exchange Commission pursuant to Rule 13a-1 under the Securities Exchange Act of 1934, as amended, may be obtained without charge, from Thomas C. Lyman, Treasurer, Citizens Financial Services, Inc., 15 South Main Street, Mansfield, Pennsylvania 16933. Next year's Annual Meeting is scheduled to be held on Tuesday, April 15, 1997. BY ORDER OF THE BOARD OF DIRECTORS /s/ Richard E. Wilber Richard E. Wilber President Page 13 CITIZENS FINANCIAL SERVICES, INC. PROXY ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 16, 1996 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby constitutes and appoints Terry B. Osborne and Jerald J. Rumsey and each or any of them, proxies of the undersigned, with full power of substitution, to vote all of the shares of Citizens Financial Services, Inc. (the "Corporation") that the undersigned may be entitled to vote at the Annual Meeting of Shareholders of the Corporation to be held at the Tioga County Fairgrounds Youth Building, Whitneyville, Pennsylvania 16901, on Tuesday, April 16, 1996 at 12:00 p.m., prevailing time, and at any adjournment or postponement thereof as follows: 1. ELECTION OF CLASS 1 DIRECTORS TO SERVE FOR A THREE-YEAR TERM Carol J. Bond, R. Lowell Coolidge, Richard E. Wilber, John M. Thomas, M.D., Larry J. Croft For all nominees WITHHOLD AUTHORITY listed above (except to vote for all as marked to the nominees listed contrary below) above (INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE THAT NOMINEE'S NAME ON THE SPACE PROVIDED BELOW.) __________________________________________________________________ 2. In their discretion, the proxies are authorized to vote upon such other business as may properly come before the meeting and any adjournment or postponement thereof. THIS PROXY, WHEN PROPERLY SIGNED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR ALL NOMINEES LISTED ABOVE. Dated:________________, 1996 _______________________________ Number of Shares Held of Record on March 13, 1996 Indicated Above _______________________________ Signature(s) (Seal) THIS PROXY MUST BE DATED, SIGNED BY THE SHAREHOLDER AND RETURNED PROMPTLY TO THE CORPORATION IN THE ENCLOSED ENVELOPE. WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE. IF MORE THAN ONE TRUSTEE, ALL SHOULD SIGN. IF STOCK IT IS HELD JOINTLY, EACH OWNER SHOULD SIGN. -----END PRIVACY-ENHANCED MESSAGE-----