<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1995
------------------
Commission file number 2-96144
-------
CITIZENS FINANCIAL CORP.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 55-0666598
------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
213 Third Street, Elkins, West Virginia 26241
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(304)636-4095
-------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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
----- ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class September 30, 1995
----- ------------------
Common Stock ($2.00 par value) 688,288
This report contains 20 pages.
<PAGE>
FORM 10-Q
CITIZENS FINANCIAL CORP.
Quarter Ended September 30, 1995
INDEX
Page No.
--------
Part I. Financial Information
Condensed Consolidated Balance Sheets
September 30, 1995 and December 31, 1994......................3
Condensed Consolidated Statements of Income
Three Months Ended
September 30, 1995 and September 30, 1994
and Nine Months Ended
September 30, 1995 and September 30, 1994...................4-5
Condensed Consolidated Statements of
Changes in Shareholders' Equity
Nine Months Ended
September 30, 1995 and September 30, 1994.....................6
Condensed Consolidated Statements of
Cash Flows
Nine Months Ended
September 30, 1995 and September 30, 1994.....................7
Notes to Condensed Consolidated
Financial Statements.......................................8-12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.............................................13-18
Part II. Other Information and Index to Exhibits........................19
Signatures....................................................20
2
<PAGE>
PART I - FINANCIAL INFORMATION
CITIZENS FINANCIAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
-------------- ------------
(Unaudited) *
<S> <C> <C>
ASSETS
- ------
Cash and due from banks $ 2,947 $ 3,184
Federal funds sold 350 0
Securities available for sale (Note 2) 513 539
Securities held to maturity (estimated fair
value $42,163 and $47,712, respectively) (Note 2) 42,081 49,008
Loans, less allowance for loan losses of
$1,041 and $1,000, respectively (Notes 3 and 4) 78,453 67,716
Premises and equipment 1,381 1,534
Accrued interest receivable 1,164 1,241
Other assets 718 705
-------- --------
Total Assets $127,607 $123,927
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest bearing $ 14,893 $ 14,544
Interest bearing 95,030 93,519
-------- --------
Total Deposits 109,923 108,063
Short-term borrowings 2,845 2,131
Long-term borrowings 239 203
Other liabilities 749 554
-------- --------
Total liabilities 113,756 110,951
-------- --------
Commitments and contingencies (Note 5)
SHAREHOLDERS' EQUITY
- --------------------
Common Stock, authorized 1,250,000 shares of
$2.00 par value; issued 750,000 shares 1,500 1,500
Additional paid in capital 2,100 2,100
Retained earnings 11,102 10,151
Treasury stock, at cost, 61,712 and 58,080
shares, respectively (851) (775)
-------- --------
Total shareholders' equity 13,851 12,976
-------- --------
Total Liabilities and Shareholders' Equity $127,607 $123,927
======== ========
</TABLE>
*From audited financial statements.
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CITIZENS FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------
1995 1994 1995 1994
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
- ---------------
Interest and fees on loans $1,832 $1,459 $5,069 $4,196
Interest and dividends on
securities:
Taxable 531 600 1,669 1,891
Tax-exempt 70 36 220 135
Interest on federal funds sold 3 43 15 70
------ ------ ------ ------
Total interest income 2,436 2,138 6,973 6,292
------ ------ ------ ------
INTEREST EXPENSE
- ----------------
Interest on deposits 894 756 2,497 2,313
Interest on short-term borrowings 53 20 83 53
Interest on long-term borrowings 0 0 4 0
------ ------ ------ ------
Total interest expense 947 776 2,584 2,366
------ ------ ------ ------
Net interest income 1,489 1,362 4,389 3,926
Provision for loan losses 15 0 45 0
------ ------ ------ ------
Net interest income after
provision for loan losses 1,474 1,362 4,344 3,926
------ ------ ------ ------
OTHER INCOME
- ------------
Trust department income 9 24 40 44
Service fees 67 57 178 159
Insurance commissions 6 7 21 21
Securities gains, net 7 3 7 3
Other 13 9 83 28
------ ------ ------ ------
Total other income 102 100 329 255
------ ------ ------ ------
OTHER EXPENSES
- --------------
Salaries and employee benefits 504 496 1,484 1,485
Net occupancy expense 72 72 207 199
Equipment rentals, depreciation
and maintenance 71 71 212 209
Data processing 86 81 234 233
Advertising 21 20 63 60
FDIC insurance (6) 61 115 185
Other 208 195 632 639
------ ------ ------ ------
Total other expense 956 996 2,947 3,010
------ ------ ------ ------
Income before income taxes 620 466 1,726 1,171
Income tax expense 182 171 569 414
------ ------ ------ ------
Net income $ 438 $ 295 $1,157 $ 757
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CITIZENS FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars, except per share data)
(Continued)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- -------------------
1995 1994 1995 1994
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Earnings per common share (Note 6) $ .64 $ .43 $ 1.68 $ 1.09
====== ====== ====== ======
Weighted average shares outstanding 688,828 691,920 688,699 691,920
Dividends per common share $ .10 $ .10 $ .30 $ .30
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CITIZENS FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1995 and 1994
---------------------------------------------------
(Unaudited)
Additional Total
Common Stock Paid In Retained Treasury Shareholders'
Shares Amount Capital Earnings Stock Equity
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 750,000 $1,500 $2,100 $ 9,457 $(775) $12,282
Net income 757 757
Cash dividends declared
($.30 per share) (208) (208)
-------------------------------------------------------------------
Balance, September 30, 1994 750,000 $1,500 $2,100 $10,006 $(775) $12,831
===================================================================
Balance, January 1, 1995 750,000 $1,500 $2,100 $10,151 $(775) $12,976
Net income 1,157 1,157
Cost of 3,632 shares
acquired as treasury stock (76) (76)
Cash dividends declared
($.30 per share) (206) (206)
-------------------------------------------------------------------
Balance September 30, 1995 750,000 $1,500 $2,100 $11,102 $(851) $13,851
===================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
CITIZENS FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1995 1994
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 1,157 $ 757
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for loan losses 45 0
Depreciation and amortization 237 237
Amortization and accretion on securities 463 553
Gain on sales and calls of securities (7) (3)
Gain on sale of loans (24) 0
Decrease (increase) in accrued interest receivable 77 (10)
(Increase) decrease in other assets (61) 18
Increase in other liabilities 195 22
-------- --------
Cash provided by operating activities $ 2,082 $ 1,574
-------- --------
Cash flows from investing activities:
Proceeds from principal payments received
on securities held to maturity 221 706
Proceeds from calls of securities available
for sale 26 0
Proceeds from maturities and calls of
securities held to maturity 6,766 7,958
Purchases of securities available for sale 0 (63)
Purchases of securities held to maturity (516) (9,123)
Purchases of premises and equipment (36) (68)
Proceeds from sale of loans 2,511 0
Increase in loans (13,269) (673)
-------- --------
Cash used by investing activities (4,297) ( 1,263)
-------- --------
Cash flows from financing activities:
Cash dividends paid (206) (208)
Acquisition of treasury stock (76) 0
Increase in short-term borrowing 714 1,215
Increase in long-term borrowing 36 57
Increase (decrease) in time deposits 3,924 (467)
Decrease in other deposits (2,064) (1,966)
-------- --------
Cash provided (used) by financing activities 2,328 (1,369)
-------- --------
Net increase (decrease) in cash and cash equivalents 113 (1,058)
Cash and cash equivalents at beginning of period 3,184 7,129
-------- --------
Cash and cash equivalents at end of period $ 3,297 $ 6,071
======== ========
Supplemental disclosure of noncash investing
and financing activities:
Cash paid during the period for:
Interest $ 2,501 $ 2,404
Income Taxes 580 431
Acquisition of other real estate owned and
other repossessed assets $ 52 $ 0
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
CITIZENS FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accounting and reporting policies of Citizens Financial Corp. and
Subsidiary ("Citizens" or "the Company") conform to generally accepted
accounting principles and to general policies within the financial services
industry. The consolidated statements include the accounts of Citizens
Financial Corp. and its wholly-owned subsidiary Citizens National Bank. All
significant intercompany balances and transactions have been eliminated.
The information contained in the financial statements is unaudited except
where indicated. In the opinion of management, all adjustments for a fair
presentation of the results of the interim periods have been made. All such
adjustments were of a normal, recurring nature. The results of operations for
the three months ended September 30, 1995 and the nine months then ended are not
necessarily indicative of the results to be expected for the full year.
The financial statements and notes included herein should be read in
conjunction with those included in Citizens' 1994 Annual Report to Shareholders
and Form 10-K.
RECLASSIFICATIONS
Certain amounts in the financial statements for 1994, as previously
presented, have been reclassified to conform to current period classifications.
8
<PAGE>
NOTE 2 - SECURITIES
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at September 30, 1995 and December 31, 1994 are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
September 30, 1995
------------------------------------------------
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------
(Unaudited)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury securities............. $12,076 $ 54 $ 16 $12,114
U.S. Government agencies and
corporations........................ 8,077 30 19 8,088
Mortgage backed securities -
U.S. Government agencies
corporations........................ 2,728 25 31 2,722
Corporate debt securities............ 14,139 18 63 14,094
------- ---- ------ -------
Total taxable....................... 37,020 127 129 37,018
------- ---- ------ -------
Tax-exempt state and political
subdivisions........................ 5,061 101 17 5,145
------- ---- ------ -------
Total securities
held to maturity................... $42,081 $228 $ 146 $42,163
======= ==== ====== =======
</TABLE>
<TABLE>
<CAPTION>
Carrying
Value
(Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Federal Reserve Bank stock........... $ 108 $ 0 $ 0 $ 108
Federal Home Loan Bank stock......... 405 0 0 405
------- ---- ---- -------
Total securities available for sale.. $ 513 $ 0 $ 0 $ 513
======= ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
-------------------------------------------------
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------
*
-------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury securities............. $15,208 $ 5 $ 301 $14,912
U.S. Government agencies and
corporations........................ 9,146 4 325 8,825
Mortgage backed securities -
U.S. Government agencies
and corporations.................... 2,946 0 136 2,810
Corporate debt securities............ 16,427 1 468 15,960
------- ---- ------ -------
Total taxable....................... 43,727 10 1,230 42,507
------- ---- ------ -------
Tax-exempt state and political
subdivisions........................ 5,281 48 124 5,205
------- ---- ------ -------
Total securities
held to maturity................... $49,008 $ 58 $1,354 $47,712
======= ==== ====== =======
</TABLE>
*From audited financial statements.
9
<PAGE>
<TABLE>
December 31, 1994
----------------------------------------------
Carrying
Value
(Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value)
----------------------------------------------
*
----------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Federal Reserve Bank stock........... $108 $0 $0 $108
Federal Home Loan Bank stock......... 431 0 0 431
---- -- -- ----
Total securities available for sale.. $539 $0 $0 $539
==== == == ====
</TABLE>
The maturities, amortized cost and estimated fair values of the Bank's
securities at September 30, 1995 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Held to maturity Available for sale
--------------------- ---------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Due within 1 year $25,468 $25,432 $ 0 $ 0
Due after 1 but within 5 years 13,731 13,799 0 0
Due after 5 but within 10 years 2,882 2,932 0 0
Due after 10 years 0 0 513 513
------- ------- ---- ----
$42,081 $42,163 $513 $513
======= ======= ==== ====
</TABLE>
Mortgage backed and other securities not due at a single maturity date have
been allocated in the above maturity categories based on their anticipated
average lives to maturity. The available for sale securities are equity
securities which have no maturity date. These securities have been placed in
the longest maturity category since they are required to be held for membership
in the Federal Reserve and Federal Home Loan Bank; memberships which are
expected to continue indefinitely.
The proceeds from sales, calls and maturities of securities, including
principal payments received on mortgage backed securities, and the related gross
gains and losses realized for the nine month periods ended September 30, 1995
and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
Proceeds From Gross Realized
--------------------------------- --------------
Calls and Principal
Sales Maturities Payments Gains Losses
-------------------------------- --------------
<S> <C> <C> <C> <C> <C>
September 30, 1995:
Securities held to maturity $ 0 $ 6,766 $ 221 $ 7 $ 0
Securities available for sale 0 26 0 0 0
----- -------- -------- ----- ------
$ 0 $ 6,792 $ 221 $ 7 $ 0
===== ======== ======== ===== ======
September 30, 1994:
Securities held to maturity $ 0 $ 7,958 $ 706 $ 3 $ 0
Securities available for sale 0 0 0 0 0
----- -------- -------- ----- ------
$ 0 $ 7,958 $ 706 $ 3 $ 0
===== ======== ======== ===== ======
</TABLE>
At September 30, 1995 and December 31, 1994 securities carried at
$5,130,000 and $5,158,000, respectively, with estimated fair values of
$5,152,000 and $5,027,000 respectively, were pledged to secure public deposits,
securities sold under agreements to repurchase, and for other purposes required
or permitted by law.
*From audited financial statements.
10
<PAGE>
NOTE 3 - LOANS
Total loans are summarized as follows (in thousands):
<TABLE>
<CAPTION>
September 30, 1995 December 31,1994
------------------- ----------------
(Unaudited) *
<S> <C> <C>
Commercial, financial and agricultural $ 9,877 $ 6,856
Real estate - construction 2,459 734
Real estate - mortgage 49,070 49,444
Installment loans to individuals 17,650 11,639
Other 477 49
------- -------
Total loans 79,533 68,722
Less unearned income 39 6
------- -------
Total loans net of unearned income 79,494 68,716
Less allowance for loan losses 1,041 1,000
------- -------
Loans, net $78,453 $67,716
======= =======
</TABLE>
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Analyses of the allowance for loan losses are presented below (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
------------------ -----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Balance at beginning of period $1,029 $1,017 $1,000 $1,043
Loans charged off:
Commercial and industrial 0 0 0 4
Real estate - mortgage 3 0 3 6
Consumer and other 7 12 20 29
------ ------ ------ ------
Total charge-offs 10 12 23 39
------ ------ ------ ------
Recoveries:
Commercial and industrial 0 0 3 0
Real estate - mortgage 0 0 6 0
Consumer and other 7 2 10 3
------ ------ ------ ------
Total recoveries 7 2 19 3
------ ------ ------ ------
Net losses 3 10 4 36
Provision for loan losses 15 0 45 0
------ ------ ------ ------
Balance at end of period $1,041 $1,007 $1,041 $1,007
====== ====== ====== ======
</TABLE>
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
(SFAS No. 114). Under SFAS No. 114, certain impaired loans are required to be
reported at the present value of expected future cash flows discounted using
the loan's original effective interest rate or, alternatively, at the loan's
observable market price or at the fair value of the loan's collateral if the
loan is collateral dependent. The adoption of SFAS No. 114 did not materially
impact the Company's financial condition or results of operations.
*From audited financial statements
11
<PAGE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company is not aware of any commitments or contingencies which may
reasonably be expected to have a material impact on operating results, liquidity
or capital resources. Known commitments and contingencies include the
maintenance of reserve balances with the Federal Reserve, various legal actions
arising in the normal course of business and commitments to extend credit.
NOTE 6 - EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares
outstanding during the period. For the nine month periods ended September 30,
1995 and 1994 the weighted average number of shares outstanding were 688,699 and
691,920, respectively, while 688,828 shares were outstanding during the three
month period ended September 30, 1995 and 691,920 were outstanding for the three
months ended September 30, 1994.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis presents the significant changes in
financial condition and the results of operations of Citizens Financial Corp.
and Subsidiary for the periods indicated. This discussion and analysis should
be read in conjunction with the Company's 1994 Annual Report to Shareholders and
Form 10-K. Since the primary business activities of Citizens Financial Corp.
are conducted through the Bank, this discussion focuses primarily on the
financial condition and operations of the Bank.
EARNINGS SUMMARY
- ----------------
Net income for the first nine months of 1995 was $1,157,000 or $1.68
per share. This represents a 52.8% increase over the first nine months of 1994
when net income was $757,000, or $1.09 per share. Third quarter net income also
improved from $295,000 in 1994 to $438,000 in 1995.
The Company's annualized return on average assets for the first three
quarters of 1995 of 1.24% is much improved from the .81% achieved in the first
three quarters of 1994. Similarly, the year-to-date return on average equity of
11.61% is well in excess of the 8.12% recorded in the same period of 1994.
The improved quarterly and year-to-date results primarily reflect an
improvement in net interest income. This and other factors relating to the
results of operations are more fully addressed in the following sections of this
report.
NET INTEREST INCOME
- -------------------
Net interest income represents the primary component of Citizens' earnings.
For the third quarter of 1995 net interest income totaled $1,489,000, up 9.3%
from the $1,362,000 earned in the third quarter of 1994. The tax equivalent net
interest margin for the quarter also increased to 5.04% from 4.63%.
This improvement reflects both greater volumes and improved yields within
the Company's loan portfolio. Average loan volumes of $77,445,000 during the
quarter were $8,013,000 greater than the third quarter 1994 average of
$69,432,000. On an annual basis this increase in volume would produce some
$712,000 in additional interest income. This is commonly referred to as the
volume variance. Equally important, however, has been the rate variance
resulting from higher loan yields. With the yield on the loan portfolio rising
from 8.41% in the third quarter of 1994 to 9.43% in the third quarter of 1995,
the annual impact on interest income, or rate variance, is some $748,000.
Total loan growth in the third quarter was $2,737,000; the majority of
which was in the area of consumer auto lending. This reflects the Company's
efforts to more aggressively seek loan business by means of improved marketing.
Also contributing to loan growth was the Company's new credit card product which
was introduced at the close of the first quarter and now accounts for $657,000
in total outstanding loans. The Company intends to continue to seek responsible
loan growth without accepting undue credit risk and has established a loan to
deposit ratio goal of 75%. Currently this ratio stands at 72.4%.
13
<PAGE>
Higher loan volumes have required additional funding primarily by the
utilization of maturing securities and liquid funds, although some short-term
borrowings have been made. This has caused average earning assets for the
quarter to rise to $121,215,000, $1,967,000 above the average level for the
third quarter of 1994.
As noted previously, improved yields also helped increase net interest
income. This improvement reflects not only the shifting of funds from lower
yielding securities to higher yielding loans but also the repricing of variable
rate real estate loans to higher levels over the past year. Variable rate real
estate loans comprise approximately $46,000,000 of the total loan portfolio and
typically contain provisions limiting both upward and downward interest rate
movements. The yield on real estate loans improved to 9.15% during the quarter
from 7.86% in the third quarter of 1994.
Management has strategically limited the growth of the Company's
deposit base throughout 1995 instead emphasizing margin improvements and
reaching the targeted loan to deposit ratio.
On a year-to-date basis 1995's net interest income of $4,389,000
exceeds 1994's $3,926,000 by $463,000, or 11.8%. The tax equivalent net
interest margin also shows an improvement from 4.48% to 5.03%. These
improvements reflect many of the same factors noted in the quarterly analysis
including higher loan volumes, improved loan yields and the limiting of deposit
growth and cost of funds.
Management does not attempt to forecast interest rates but does employ
various asset/liability management practices to reduce interest rate risk and
protect earnings from the effects of changing interest rates. Among these
practices is gap management. The Bank's gap is measured as the difference
between rate sensitive assets and rate sensitive liabilities during a given time
period. When rate sensitive assets exceed rate sensitive liabilities the gap is
positive; a condition which is usually favorable in rising interest rate
environments. The opposite case, a negative gap, is normally beneficial in
falling interest rate environments.
Currently the bank maintains nearly $48,000,000 of liabilities which
could immediately reprice in response to interest rate changes. However,
management does not feel this is likely due to various competitive factors.
Therefore, such funds are viewed as carrying a fixed rate over the next six to
twelve months. Conversely, approximately $24,000,000 of securities carrying an
average yield of 5.16% will mature during the next twelve months, including more
than $12,000,000 in the next five months. Management's assessment of
reinvestment opportunities, including the funding of additional loans and
acquisition of additional securities, indicates the overall yield on these
assets is more likely than not to improve. This would lessen the effect of any
downward pressure on loan yields which could occur in the event interest rates
decline.
PROVISION FOR LOAN LOSSES
- -------------------------
In order to maintain a balance in the allowance for loan losses which is
sufficient to absorb potential loan losses, a charge to operating expense is
made. This charge is known as the provision for loan losses. Various factors
are considered when determining the amount of the provision for loan losses
including trends in loan volume, delinquencies, economic conditions, past
experience and other relevant factors.
Based on the factors noted above, a provision for loan losses of
$45,000 was made in the first nine months of 1995. No provision was made during
the
14
<PAGE>
same time period in 1994. At $1,041,000, or 1.31% of gross loans, the allowance
is considered adequate to absorb potential loan losses. Net charge-offs during
the first nine months of 1995 totaled only $4,000. Loans past due 30 or more
days, which comprise 2.28% of total loans, and nonaccrual loans of $8,000 are
adequately addressed within the allowance. Management will continue to evaluate
the adequacy of the allowance for loan losses in light of the inherent risk of
the loan portfolio.
NONINTEREST INCOME AND EXPENSE
- ------------------------------
Noninterest income totaled $102,000 in the third quarter, nearly level with
the third quarter 1994 total of $100,000. Differences in trust department
income during the two quarters are due to timing as trust income is reported on
the cash basis. Service fees increased $10,000 during the quarter mostly due to
new commercial account fees instituted in July, 1995. All securities gains in
both years are the result of calls at a premium over book value as the Company
does not engage in securities trading.
On a year-to-date basis noninterest income of $329,000 exceeds last
year's $255,000 by 29%. This is the result of greater fee income and a gain
$24,000 on the sale of student loans. Among the fees now included in the
Company's fee schedule are minimum balance fees, more stringent overdraft
penalties, returned item fees and the commercial account fees cited earlier.
Noninterest expense for the third quarter totaled $956,000, down
$40,000, or 4%, from the third quarter of 1994. This is attributable to a
refund of FDIC insurance costs of $66,000 in response to a significant reduction
in the assessment rates for the strongest banks. The reduction in this cost is
expected to save the Company approximately $200,000 annually as the Company has
earned the FDIC's most favorable insurance rating. The largest item of
noninterest expense, salaries and benefits, increased $8,000 to $504,000 in the
quarter. This may be traced to the costs of the newly established executive
supplemental income plan described in the Company's previous quarterly filing.
Such costs totaled $21,000 during the quarter and is expected to approximate
$61,000 for fiscal 1995.
On a year-to-date basis total noninterest expense of $2,947,000 is
$63,000 less than in 1994, very nearly equaling the amount of the FDIC insurance
reduction. All categories of noninterest expense remain well controlled.
Nonetheless, management believes that reducing, rather than controlling,
overhead represents a key to future success and has established it as a major
goal for 1996.
Income tax expense for the first nine months of 1995 was $569,000, up
37% from 1994's $414,000. The Company's effective tax rate, however, has fallen
slightly from 35.3% of pretax income to 33.0%.
FINANCIAL CONDITION
- -------------------
Total assets at September 30, 1995 of $127,607,000 are $3,680,000 or
3.0%, in excess of the December 31, 1994 total of $123,927,000. This growth is
consistent with management's desires to limit asset and deposit growth at this
time and instead focus on increasing the loan to deposit ratio and net interest
margin. In fact, management has been very successful in its execution of this
strategy as total loans have risen $10,800,000 since year-end despite the sale
of $2,400,000 of student loans. Most of this growth has occurred in commercial
and consumer lending. Commercial loans have risen 44% since year-end to
$9,877,000 and now comprise over 12% of the portfolio. Consumer loans,
meanwhile, have risen over $6,000,000, or 51.6%, since year-end and now
15
<PAGE>
represent over 22% of the portfolio. These improvements reflect better business
development efforts and easier accessibility to nearby communities via a
recently completed highway extension. Still, real estate mortgage lending
continues to be the dominant component of the loan portfolio comprising 61.7% of
the total at September 30, 1995 and 71.9% at December 31, 1994. In terms of
dollar volume, mortgage loans have remained stable totaling $49,070,000 and
$49,444,000 at the respective measurement dates.
It is the Company's policy to place loans on a nonaccrual status when full
collection of principal and interest are unlikely or when a loan is 90 or more
days past due as to principal or interest and is not both well secured and in
the process of collection. Both nonaccrual and past due loans have historically
been low due to continual monitoring and enforcement of high credit standards.
A summary of past due loans and nonperforming assets is provided in the
following table.
Summary of Past Due Loans and Nonperforming Assets
--------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
September 30 December 31
-------------------------- -----------
1995 1994 1994
(Unaudited) *
<S> <C> <C> <C>
Loans past due 90 or more days
still accruing interest $ 21 $ 73 $ 143
===== ===== =====
Nonperforming assets:
Nonaccruing loans $ 8 $ 359 $ 282
Other real estate owned 26 75 75
Other repossessed assets 14 0 0
----- ----- -----
$ 48 $ 434 $ 357
===== ===== =====
</TABLE>
* From the Company's Form 10-K filing dated December 31, 1994
Management performs a comprehensive loan evaluation quarterly in order
to identify all potential problem credits, including but not limited to past due
and nonaccrual loans. Based on this review management is unaware of any trends
or uncertainties which it reasonably expects may materially impact future
operating results, liquidity or capital resources.
Management has determined that it can fund the desired loan growth and
reach its goals without significantly increasing the deposit base. Instead,
needed funds are being provided by the securities portfolio. As such, total
securities have decreased $6,953,000 during the first nine months of the year.
The portfolio currently reflects the Bank's conservative investment philosophy
and is expected to continue to do so. As of September 30, 1995, 47.31% of the
portfolio is in U. S. Treasury and agency obligations with another 33.19% in
corporate debt which carries a rating of A3 or higher and matures within three
years.
Effective January 1, 1994 the Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities (SFAS 115). With the exception of its two equity securities,
those of the Federal Reserve Bank and the Federal Home Loan Bank, the Company
elected to classify all of its securities as held to maturity. These equity
securities are not actively traded and are held as requirements for membership
in the Federal Reserve Bank and Federal Home Loan Bank. Because there is no
active market for these issues book value approximates market value. Hence, no
16
<PAGE>
unrealized holding gains or losses have been recognized. The Company maintains
no trading account. Classification of securities purchased subsequent to the
adoption date is determined at the time of the purchase.
The Bank does plan to further establish its available for sale portfolio in
the near future. Such action could help reduce the need for short-term funding,
which has been experienced at times in 1995, and provide greater flexibility in
product delivery, asset/liability management and liquidity management.
Management's current philosophy relative to deposit levels can be seen
by examination of total deposits. As of September 30, 1995 total deposits of
$109,923,000 exceeded the year-end level by $1,860,000, or just 1.72%.
Noninterest bearing deposits now comprise 13.54% of the total, slightly more
than at year-end.
While total deposits have been generally stable changes among the different
types of deposits have occurred. Both savings and money market accounts
decreased during the first nine months of the year, savings by 7.88% to
$28,674,000 and money markets by 9.76% to $7,545,000. These reductions appear
to be related to continuing low interest rates of 2.75% and 2.50%, respectively.
Offsetting this, certificates of deposit and checking plus accounts have
increased a combined $4,023,000 or 9.00%. This too appears to be rate related
as certificates of deposit have been subject to upward rate movements throughout
the year. They have also become a preferred source of short-term funding as
depositors have replaced savings balances with more attractive short-term
certificates of deposit. Nonetheless, management does not attempt to maintain
deposit levels by implementing overly aggressive pricing mechanisms which are
likely to impair profitability.
Total shareholders' equity of $13,851,000 at September 30, 1995 is 10.85%
of total assets. This compares to $12,976,000, or 10.47%, at year-end 1994.
Cash dividends declared and paid totaled $.30 per share in the first nine months
of 1995 and 1994, representing dividend payout ratios of approximately 18% and
30%, respectively. Dividends are determined quarterly by the board of
directors.
The Federal Reserve's risk based capital guidelines provide for the
relative weighting of both on-balance-sheet and off-balance-sheet items based on
their degree of risk. The Company continues to exceed all regulatory capital
requirements as shown in the following table:
<TABLE>
<CAPTION>
Minimum Capital Standard Ratios
- -----------------------------------------------------------------------------------------
Citizens Regulatory
Financial Corp. Requirements
----------------- -------------
<S> <C> <C>
Total capital to risk weighted assets 17.68% 8.0%
Tier I capital to risk weighted assets 16.43% 4.0%
Tier I capital to adjusted total assets 10.77% 3.0%
</TABLE>
The Company is unaware of any trends or uncertainties, nor do any
plans exist, which may materially impair its capital position.
The Bank assures that there is sufficient cash flow to meet the
requirements of customers who may be either depositors wanting to withdraw funds
or borrowers needing to satisfy their credit needs through a system of liquidity
management. Historically, the Bank has generated sufficient liquidity through
17
<PAGE>
internal operations to satisfy these needs. Due to the Bank's strategic
decisions to seek loan growth without significant increases in deposits, short-
term borrowings have sometimes been utilized in 1995 to provide needed
liquidity. This situation is seen as a temporary one as the held to maturity
portfolio will provide approximately $12,400,000 in liquidity from October, 1995
through February, 1996. At that time maturing securities will be used to retire
short-term borrowings , fund additional loan growth and establish an available
for sale securities portfolio. Projections indicate that this strategy will
permit the achievement of a 75% loan to deposit ratio which is desired in the
long-term.
At the present time the Bank has available to it over $17,000,000 in lines
of credit with correspondent banks as well as the ability to utilize reverse
repurchase agreements totaling $6,000,000.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
-----------------
As of September 30, 1995 Citizens Financial Corp. was not
involved in any material legal proceedings. The Bank is currently
involved, in the normal course of business, in various legal
proceedings. After consultation with legal counsel, management
believes that all such litigation will be resolved without materially
effecting on the financial position or results of operations. In
addition, there are no material proceedings known to be threatened or
contemplated against the Company or the Bank.
Item 2. Changes in Securities: None.
---------------------
Item 3. Defaults upon Senior Securities: None.
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders: None
---------------------------------------------------
Item 5. Other Information: None.
-----------------
Item 6. Exhibits and Reports on Form 8-K:
--------------------------------
(a) Exhibits: None
(b) Reports on Form 8-K: None
19
<PAGE>
SIGNATURES
Pursuant to the requirements 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 CORP.
Date: October , 1995 /s/ Robert J. Schoonover
-------------------- -------------------------------
Robert J. Schoonover
President
Chief Executive Officer
Date: October , 1995 /s/ Thomas K. Derbyshire
-------------------- -------------------------------
Thomas K. Derbyshire
Treasurer
Principal Financial Officer
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEPT.
30, 1995 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<PERIOD-TYPE> 9-MOS
<CASH> 2,947
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 513
<INVESTMENTS-CARRYING> 42,081
<INVESTMENTS-MARKET> 42,163
<LOANS> 79,533
<ALLOWANCE> 1,041
<TOTAL-ASSETS> 127,607
<DEPOSITS> 109,923
<SHORT-TERM> 2,845
<LIABILITIES-OTHER> 749
<LONG-TERM> 239
<COMMON> 1,500
0
0
<OTHER-SE> 12,351
<TOTAL-LIABILITIES-AND-EQUITY> 127,607
<INTEREST-LOAN> 5,069
<INTEREST-INVEST> 1,889
<INTEREST-OTHER> 15
<INTEREST-TOTAL> 6,973
<INTEREST-DEPOSIT> 2,497
<INTEREST-EXPENSE> 2,584
<INTEREST-INCOME-NET> 4,389
<LOAN-LOSSES> 45
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 2,947
<INCOME-PRETAX> 1,726
<INCOME-PRE-EXTRAORDINARY> 1,726
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,157
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.68
<YIELD-ACTUAL> 5.04
<LOANS-NON> 8
<LOANS-PAST> 21
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,000
<CHARGE-OFFS> 23
<RECOVERIES> 19
<ALLOWANCE-CLOSE> 1,041
<ALLOWANCE-DOMESTIC> 1,041
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 284
</TABLE>
