<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 March 31, 1996
------------------------------------------------
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 March 31, 1996
----- ----------------
Common Stock ($2 par value) 683,788
This report contains 20 pages.
1
<PAGE>
FORM 10-Q
CITIZENS FINANCIAL CORP.
Quarter Ended March 31, 1996
INDEX
Page No.
--------
Part I. Financial Information
Condensed Consolidated Balance Sheets
March 31, 1996 and December 31, 1995.............. 3
Condensed Consolidated Statements of Income
Three Months Ended
March 31, 1996 and March 31, 1995................. 4 & 5
Condensed Consolidated Statements of
Changes in Shareholders' Equity
Three Months Ended
March 31, 1996 and March 31, 1995................. 6
Condensed Consolidated Statements of
Cash Flows
Three Months Ended
March 31, 1996 and March 31, 1995................. 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>
March 31, December 31,
1996 1995
----------- ------------
(Unaudited) *
ASSETS
- ------
<S> <C> <C>
Cash and due from banks $ 2,979 $ 2,923
Federal funds sold 0 3,025
Securities available for sale (Note 2) 13,384 5,758
Securities held to maturity (estimated fair
value $24,667 and $28,871, respectively) (Note 2) 24,581 28,615
Loans, less allowance for loan losses of
$1,053 and $1,036, respectively (Notes 3 and 4) 84,145 82,781
Premises and equipment 1,582 1,323
Accrued interest receivable 1,110 1,131
Other assets 786 794
-------- --------
Total Assets $128,567 $126,350
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest bearing $ 15,111 $ 14,556
Interest bearing 95,866 95,115
-------- --------
Total deposits 110,977 109,671
Short-term borrowings 2,172 1,590
Long-term borrowings 333 334
Other liabilities 936 803
-------- --------
Total liabilities 114,418 112,398
-------- --------
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 11,633 11,297
Net unrealized (loss)/gain on available for
sale securities (129) 10
Treasury stock, at cost, 66,212 shares (955) (955)
-------- --------
Total shareholders' equity 14,149 13,952
-------- --------
Total Liabilities and Shareholders' Equity $128,567 $126,350
======== ========
</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 Ended
March 31,
-----------------------
1996 1995
(Unaudited)
<S> <C> <C>
INTEREST INCOME
- ---------------
Interest and fees on loans $ 1,950 $ 1,540
Interest and dividends on
securities:
Taxable 431 586
Tax-exempt 81 75
Interest on federal funds sold 43 10
-------- --------
Total interest income 2,505 2,211
-------- --------
INTEREST EXPENSE
- ----------------
Interest on deposits 922 771
Interest on short-term borrowing 22 11
Interest on long-term borrowing 3 1
-------- --------
Total interest expense 947 783
-------- --------
Net interest income 1,558 1,428
Provision for loan losses 42 15
-------- --------
Net interest income after
provision for loan losses 1,516 1,413
-------- --------
OTHER INCOME
- ------------
Trust department income 1 1
Service fees 69 58
Insurance commissions 9 7
Realized securities gains, net 0 0
Other 38 20
-------- --------
Total other income 117 86
-------- --------
OTHER EXPENSES
- --------------
Salaries and employee benefits 519 469
Net occupancy expense 69 66
Equipment rentals, depreciation
and maintenance 61 71
Data processing 81 62
Advertising 19 21
Other 251 306
-------- --------
Total other expenses 1,000 995
-------- --------
Income before income taxes 633 504
Income tax expense 228 162
-------- --------
Net income $ 405 $ 342
======== ========
</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>
<S> <C> <C>
Earnings per common share (Note 6) $.59 $.50
======== ========
Weighted average shares outstanding 683,788 689,539
Dividends per common share $.10 $.10
======== ========
</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>
Three Months Ended March 31, 1996 and 1995
-------------------------------------------------------------------------
(unaudited)
Net Total
Additional Unrealized Share-
Common Stock Paid-in Retained Gain/(Loss) on Treasury holders'
Shares Amount Capital Earnings Securities Stock Equity
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 750,000 $1,500 $2,100 $10,151 $ 0 $(775) $12,976
Net income 342 342
Cost of 3,632 shares acquired
as treasury stock (76) (76)
Cash dividends declared
($.10 per share) (69) (69)
-------------------------------------------------------------------------
Balance, March 31, 1995 750,000 $1,500 $2,100 $10,424 $ 0 $(851) $13,173
=========================================================================
Balance, January 1, 1996 750,000 $1,500 $2,100 $11,297 $ 10 $(955) $13,952
Net income 405 405
Net change in unrealized gain/
(loss) on securities (139) (139)
Cash dividends declared
($.10 per share) (69) (69)
-------------------------------------------------------------------------
Balance March 31, 1996 750,000 $1,500 $2,100 $11,633 $(129) $(955) $14,149
=========================================================================
</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>
Three Months Ended
March 31,
------------------
1996 1995
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 405 $ 342
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for loan losses 42 15
Depreciation and amortization 71 78
Amortization and accretion on securities 49 162
Decrease in accrued interest
receivable 21 40
Increase in other assets (8) (101)
Increase in other liabilities 205 175
------- -------
Cash provided by operating activities 785 711
------- -------
Cash flows from investing activities:
Principal payments, available for sale
securities 92 0
Proceeds from maturities and calls,
available for sale securities 1,000 26
Purchases of available for sale securities (8,945) 0
Principal payments, held to maturity
securities 25 133
Proceeds from maturities and calls, held
to maturity securities 3,976 4,105
Purchases of premises and equipment (314) (15)
Increase in loans (1,406) (3,764)
------- -------
Cash (used) provided by investing
activities (5,572) 485
------- -------
Cash flows from financing activities:
Cash dividends paid (69) (69)
Acquisition of treasury stock 0 (76)
Increase (decrease) in short-term borrowing 582 (1,138)
(Decrease) increase in long-term borrowing (1) 37
Increase in time deposits 2,746 1,730
Decrease in other deposits (1,440) (2,296)
------- -------
Cash provided (used) by financing activities 1,818 (1,812)
------- -------
Net decrease in cash and cash equivalents (2,969) (616)
Cash and cash equivalents at beginning of period 5,948 3,184
------- -------
Cash and cash equivalents at end of period $ 2,979 $ 2,568
======= =======
Supplemental disclosure of noncash investing
and financing activities:
Cash paid during the period for:
Interest $ 938 $ 757
Income Taxes $ 70 $ 26
</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 preparation of financial statements in conformity generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
The consolidated statements contained herein include the accounts of Citizens
Financial Corp. and its wholly-owned subsidiary Citizens National Bank ("the
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 March 31, 1996 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'
1995 Annual Report to Shareholders and Form 10-K.
RECLASSIFICATIONS
- -----------------
Certain amounts in the financial statements for 1995, 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 March 31, 1996 and December 31, 1995 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1996
---------------------------------------------
Carrying
Value Estimated
(Amortized Unrealized Unrealized Fair
Cost) Gains Losses Value
- ------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury securities............. $ 7,022 $ 48 $ 3 $ 7,067
U.S. Government agencies
and corporations.................... 3,023 20 1 3,042
Mortgage backed securities-
U.S. Government agencies
and corporations.................... 1,477 21 0 1,498
Corporate debt securities............ 7,015 17 11 7,021
------- ---- ---- -------
Total taxable....................... 18,537 106 15 18,628
------- ---- ---- -------
Tax-exempt state and political
subdivisions........................ 6,044 82 87 6,039
------- ---- ---- -------
Total securities
held to maturity................... $24,581 $188 $102 $24,667
======= ==== ==== =======
<CAPTION>
Carrying
Value
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government agencies
and corporations.................... $ 6,057 $ 2 $119 $ 5,940
Mortgage backed securities-
U.S. Government agencies
and corporations.................... 1,094 0 25 1,069
Corporate debt securities............ 4,755 0 105 4,650
Obligations of state and political
subdivisions-taxable................ 1,141 51 0 1,192
Federal Reserve Bank stock........... 108 0 0 108
Federal Home Loan Bank stock......... 425 0 0 425
------- ---- ---- -------
Total securities available
for sale........................... $13,580 $ 53 $249 $13,384
======= ==== ==== =======
<CAPTION>
December 31, 1995*
---------------------------------------------
Carrying
Value Estimated
(Amortized Unrealized Unrealized Fair
Cost) Gains Losses Value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury securities............. $10,044 $ 83 $ 5 $10,122
U.S. Government agencies
and corporations.................... 4,034 34 2 4,066
Mortgage backed securities-
U.S. Government agencies
and corporations.................... 1,499 28 0 1,527
Corporate debt securities............ 8,061 43 19 8,085
------- ---- ---- -------
Total taxable....................... 23,638 188 26 23,800
------- ---- ---- -------
Tax-exempt state and political
subdivisions........................ 4,977 111 17 5,071
------- ---- ---- -------
Total securities
held to maturity................... $28,615 $299 $ 43 $28,871
======= ==== ==== =======
</TABLE>
*From audited financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
Carrying
Value
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------
*
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government agencies
and corporations.................... $ 4,041 $ 29 $ 0 $ 4,070
Mortgage-backed securities -
U.S. Government agencies
and corporations.................... 1,189 0 14 1,175
Federal Reserve Bank stock........... 108 0 0 108
Federal Home Loan Bank stock......... 405 0 0 405
------- ---- ---- -------
Total securities available for
sale ................................ $ 5,743 $ 29 $ 14 $ 5,758
======= ==== ==== =======
</TABLE>
The maturities, amortized cost and estimated fair values of the Bank's
securities at March 31, 1996 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 $13,899 $13,914 $ 1,021 $ 1,020
Due after 1 but within 5 years 7,625 7,711 9,802 9,566
Due after 5 but within 10 years 3,057 3,042 1,487 1,478
Due after 10 years 0 0 1,270 1,320
------- ------- ------- -------
$24,581 $24,667 $13,580 $13,384
======= ======= ======= =======
</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 Company's equity 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 three month periods ended March 31,
1996 and 1995 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>
March 31, 1996:
Securities held to maturity $ 0 $ 3,976 $ 25 $ 0 $ 0
Securities available for sale 0 1,000 92 0 0
------ -------- -------- ------ ------
$ 0 $ 4,976 $ 117 $ 0 $ 0
====== ======== ======== ====== ======
March 31, 1995:
Securities held to maturity $ 0 $ 4,105 $ 133 $ 0 $ 0
Securities available for sale 0 26 0 0 0
------ -------- -------- ------ ------
$ 0 $ 4,131 $ 133 $ 0 $ 0
====== ======== ======== ====== ======
</TABLE>
At March 31, 1996 and December 31, 1995 securities carried at $6,497,000 and
$6,523,000, respectively, with estimated fair values of $6,530,000 and
$6,564,000, 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>
March 31, 1996 December 31, 1995
--------------- -----------------
(Unaudited) *
<S> <C> <C>
Commercial, financial and agricultural $10,987 $10,644
Real estate - construction 1,052 1,734
Real estate - mortgage 53,242 51,897
Installment loans to individuals 18,527 18,119
Credit Card loans 761 810
Other 431 455
-------
Total loans 85,000 83,659
Net deferred loan origination costs 234 196
Less unearned income 36 38
------- -------
Total loans net of unearned income and
net deferred loan origination costs 85,198 83,817
Less allowance for loan losses 1,053 1,036
------- -------
Loans, net $84,145 $82,781
======= =======
</TABLE>
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Analyses of the allowance for loan losses are presented below (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1996 1995
<S> <C> <C>
Balance at beginning of period $ 1,036 $ 1,000
------- -------
Loans charged off:
Commercial and industrial 0 0
Real estate - mortgage 1 0
Consumer and other 15 12
Credit Card 11 0
------- -------
Total 27 12
------- -------
Recoveries:
Commercial and industrial 0 3
Real estate - mortgage 0 6
Consumer and other 2 1
Credit Card 0 0
------- -------
Total recoveries 2 10
------- -------
Net losses 25 2
Provision for loan losses 42 15
------- -------
Balance at end of period $ 1,053 $ 1,013
======= =======
</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 three months ended March 31, 1996 and
1995 the weighted average number of shares were 683,788 and 689,539,
respectively.
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 1995 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 quarter of 1996 was $405,000, up from $342,000 in
the first quarter of 1995. These levels of income represent annualized returns
on average assets of 1.26% and 1.12%, respectively. Return on equity, meanwhile,
rose from 10.60% in the first quarter of 1995 to 11.47% in the most recent
quarter. Earnings per share also improved from $.50 to $.59.
The primary factor contributing to the 18.4% improvement in quarterly
earnings was a $130,000 increase 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.
It is the difference between interest and fee income related to earning assets
and interest expense incurred to carry interest bearing liabilities. Net
interest income is impacted by changes in the volume and mix of interest earning
assets and interest bearing liabilities, as well as by changing interest rates.
In order to manage these changes, their impact on net interest income and the
risks associated with them, the Company utilizes an ongoing asset/liability
management program. This program includes analysis of the Company's gap,
earnings sensitivity to rate changes, and sources and uses of funds. A
discussion of net interest income and the factors impacting it is presented
below.
Net interest income for the first quarter of 1996 totaled $1,558,000, up 9.1%
from 1995's first quarter total of $1,428,000. This improvement is reflective
of higher levels of earning assets, particularly loans. Average loan volumes
for the quarter of $84,559,000 were $14,619,000 over the first quarter 1995
average. In total, average earning assets of $123,355,000 exceeded the year-
earlier level by $5,654,000 generating an improvement in annualized, tax-
equivalent earnings of $705,000. An increase in interest bearing liabilities of
$2,587,000 reduced this effect to $618,000 due to an increase in annualized
interest expense of $87,000.
While increased volumes of earning assets were the primary contributors to
the improved net interest income changes in interest rates also had an effect.
However, in this case the effect of higher rates on earning assets, an
annualized $483,000, was more closely offset by the effect of higher rates on
interest bearing liabilities, $569,000, producing a net annual effect of
$(86,000).
These changes produced a yield on earning assets of 8.26% for the quarter
and a cost of interest bearing liabilities of 3.85%. This compares
13
<PAGE>
to 7.65% and 3.27%, respectively in the first quarter of 1995. Net interest
margin increased 20 basis points to 5.19%. Having restructured the Bank's
earning asset portfolio in 1995, management does not anticipate significant
changes in the volume or mix of loans, deposits or securities in the near
future.
OTHER INCOME
- ------------
Other income includes all revenues which are not included in interest and fee
income relating to earning assets. Total other income increased $31,000 to
$117,000 in the first quarter. This improvement resulted from noninterest fees
related to the Bank's VISA program, which began in the second quarter of 1995,
of nearly $13,000, increased safe deposit box income of nearly $5,000 and a
similar $5,000 increase in overdraft fees. In addition, certain fees on
commercial deposit accounts, instituted during the third quarter of 1995,
totaled $8,000.
OTHER EXPENSE
- -------------
Other expense includes all items of expense other than interest expense, the
provision for loan losses, and income taxes. Total other expense for the first
quarter of 1996 of $1,000,000 was $5,000 greater than the prior year's $995,000.
Among the components of other expense both net occupancy expense and
advertising remained nearly unchanged from the prior year. The category of other
decreased to $251,000 from $306,000, or $55,000. This is the result of a
reduction in quarterly FDIC insurance costs of $60,000. Equipment rentals,
depreciation and maintenance also decreased $10,000 to $61,000 due to a $3,000
reduction in maintenance costs and a $7,000 decrease in depreciation as certain
pieces of computer equipment became fully depreciated. Management is actively
pursuing further reductions in maintenance costs. Depreciation expense, however,
is likely to increase as efforts to remodel banking facilities and improve
technological capabilities are now underway. The estimated cost of these
projects is approximately $400,000.
Salaries and employee benefits, the largest component of other expense,
totaled $519,000 in the first quarter of 1996, $50,000, or 10.7%, greater than
the first quarter 1995 total of $469,000. Contributing to this rise are a 5.6%
increase in salaries totaling $19,000, and a 15% rise in group insurance costs
of $13,000. In addition, the cost of an executive supplemental income plan of
$22,000, which was instituted in the second quarter of 1995, also contributed to
the increase.
Data processing expense experienced a significant increase of $19,000, or
30.6%, from $62,000 to $81,000. This higher level, however, very nearly matches
the budgeted amount of $79,000. The increase was primarily attributable to fees
related to the new VISA program of $12,000 and an increase of $5,000 due to the
renegotiation of a contract with the Bank's external data processing servicer.
INCOME TAXES
- ------------
The Company's provision for income taxes, which totaled $228,000 in the first
quarter of 1996 and $162,000 in the first quarter of 1995, includes both federal
and state income taxes. Included in the 1996 amount are deferred tax benefits
of $10,000. The increase in tax expense is primarily due to the increase in
pretax earnings. The effective tax rates during the
14
<PAGE>
two periods were 36.0% in 1996, and 32.1% in 1995.
FINANCIAL CONDITION
- -------------------
Total assets at March 31, 1996 of $128,567,000 are up $2,217,000, or 1.8%,
from year-end 1995. Management believes this growth is reflective of the level
of economic activity found in the Bank's primary market area. A discussion of
the Bank's major assets, deposits and equity follows.
LOAN PORTFOLIO
- --------------
Gross loans of $85,000,000 at quarter-end are up $1,341,000 since December
31, 1995, an increase of 1.6%. During 1995 management actively sought loan
growth and increased the loan portfolio by $14.9 million. In doing so the gross
loan to deposit ratio was increased to 76.3%, slightly in excess of the 75%
target which had been established. Management has strived to maintain this
relative loan position throughout the first quarter of 1996 and has been able to
do so with the quarter-end loan to deposit ratio being 76.6%. Projections for
the remainder of 1996, as well as established strategic plans, limit the loan to
deposit ratio to less than 80%.
Like gross loans, the composition of the portfolio remained relatively
unchanged during the first quarter. Real estate mortgage loans continue to
dominate the portfolio at 62.6% of the total. Installment loans to individuals,
the area of greatest growth during 1995, comprise 21.8% while commercial,
financial and agricultural loans represent another 12.9%. The Bank's newest loan
portfolio, credit cards, has fallen $49,000 since year-end to $761,000.
While management has maintained its underwriting and credit standards at high
levels, the increased loan volumes have resulted in increased levels of past due
loans. Management does not believe this increase will result in a significant
impact on earnings however. Company policy requires those loans which are past
due 90 days or more be placed on nonaccrual status unless they are both well
secured and in the process of collection. A summary of past due loans and
nonperforming assets is provided below.
<TABLE>
<CAPTION>
Summary of Past Due Loans and Nonperforming Assets
-----------------------------------------------------------------
(in thousands)
March 31 December 31
------------ -----------
1996 1995 1995
(unaudited) *
<S> <C> <C> <C>
Loans past due 90 or more days
still accruing interest $ 358 $ 199 $144
===== ===== ===========
Nonperforming assets:
Nonaccruing loans $ 57 $ 9 $214
Other Real Estate Owned 0 75 0
----- ----- -----------
$ 57 $ 84 $ 214
===== ===== ===========
</TABLE>
* From the Company's Form 10-K filing dated December 31, 1995
15
<PAGE>
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 or capital resources and is of the opinion that the allowance
for loan losses, which totaled $1,053,000 or 1.24% of gross loans at March 31,
1996, adequately provides for any potential loan losses which may reasonably be
expected. To maintain the allowance for loan losses at an adequate level a
provision for loan losses is made monthly as deemed necessary. Such provisions
totaled $42,000 in the first quarter of 1996 compared to $15,000 in the first
quarter of 1995. Net charge-offs during the two periods totaled $25,000 and
$2,000, respectively.
SECURITIES PORTFOLIO AND FEDERAL FUNDS SOLD
- -------------------------------------------
The Bank maintains a conservative philosophy with regard to its securities
portfolio placing great importance on safety and liquidity. In order to improve
liquidity, and increase its ability to manage the structure of the balance
sheet, $3.2 million of securities were transferred from the held to maturity
portfolio to the available for sale portfolio in December, 1995 as permitted by
the Financial Accounting Standards Board's Special Report "A Guide to
Implementation of Statement 115 on Accounting for Certain Debt and Equity
Securities." This transaction had no impact on the Company's income and
resulted in an immaterial increase in shareholders' equity as reported at year
end. In practical terms this transaction marked the creation of the Bank's
available for sale portfolio.
Since that time, the available for sale portfolio has increased to
$13,384,000 or 35% of the total portfolio. The remaining 65% is comprised of
held to maturity securities as no trading portfolio is maintained. The
composition of both portfolios is presented in Note 2. Because the available for
sale portfolio primarily contains securities purchased during the first quarter
of 1996 the significant increase in market interest rates which occurred during
the quarter had the effect of reducing the fair value of the portfolio. At March
31, 1996 such value was $196,000, or 1.4% less than the amortized cost of the
securities. This represents an unrealized loss which would impact earnings only
in the event of the sale of the securities. At the current time no plans for
such a sale exist.
The average lives of the securities portfolios continue to be relatively
short averaging 2.79 years.
At quarter-end Citizens borrowed $801,000 in overnight federal funds from a
correspondent bank in order to finance its earning asset portfolio. This marked
the only time during the quarter that such borrowing was necessary and on April
1, 1996 the Company returned to its more typical position of excess funding.
Such excess funds are sold in the federal funds market in order to maximize
yield.
DEPOSITS AND OTHER FUNDING SOURCES
- ----------------------------------
Total deposits increased $1,306,000, or 1.2%, during the quarter, a rate
which appears consistent with the level of local economic activity. It also
reflects what management believes to be a stable core deposit base. The most
significant change within the deposit base involved certificates of deposit
which increased $2,473,000, or 6.6%, during the quarter. Competition for
deposits is keen within the Bank's primary market area and typically focuses on
certificates of deposit. During the quarter the Bank offered a 13 month
certificate of deposit which was responsible for
16
<PAGE>
generating $957,000 of deposit growth. This product, which was offered for only
one month, is similar to those offered by many competitors who also face limited
opportunity for deposit growth in the local market.
In contrast, savings deposits fell $1,194,000 during the quarter, much of it
being redirected toward higher yielding certificates including $368,000 which
was invested in the 13 month certificate of deposit.
The Bank's use of borrowed funds continues to be minimal. In addition to the
overnight borrowing at quarter-end, as previously noted, the Bank maintains a
floating rate repurchase agreement with one customer and a long-term borrowing
agreement with the Federal Home Loan Bank for the purpose of funding certain
housing projects. At March 31, 1996 these borrowings totaled $1,371,000 and
$333,000, respectively.
CAPITAL RESOURCES
- -----------------
Total shareholders' equity of $14,149,000 at March 31, 1996 is 11.01% of
total assets. This compares with $13,952,000, 11.04%, at year-end 1995. Included
in equity are 66,212 shared of treasury stock carried at a cost of $955,000 and
$129,000 of unrealized losses on available for sale securities. Such unrealized
losses are net of deferred tax benefits of $67,000.
Cash dividends of $.10 were paid during the first quarter representing a
dividend payout ratio of 16.9%. 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 17.58% 8.0%
Tier I capital to risk weighted assets 16.36% 4.0%
Tier I capital to adjusted total assets 10.96% 3.0%
</TABLE>
The Company is unaware of any trends or uncertainties, nor do any plans
exist, which may materially impair its capital position.
LIQUIDITY AND INTEREST RATE SENSITIVITY
- ---------------------------------------
The objective of the Company's liquidity management program is to ensure the
continuous availability of funds to meet the withdrawal demands of depositors
and the credit needs of borrowers. The basis of Citizens' liquidity comes from
the stability of its core deposits. Liquidity is also available through the
available for sale securities portfolio, held to maturity securities due within
one year, and short-term funds such as federal funds sold. At March 31, 1996
these sources totaled $14,419,000 or 11.2% of total assets. In addition,
liquidity may be generated through loan repayments and over $23,000,000 of
available borrowing arrangements with correspondent banks. Management believes
the liquidity of the Bank is sufficient to satisfy all anticipated demands.
Details on both the sources and uses of cash are presented in the Statements of
Cash Flows contained in the financial statements.
17
<PAGE>
The objective of the Company's interest rate sensitivity management program,
also known as asset/liability management, is to maximize net interest income
while minimizing the risk of adverse effects from changing interest rates. This
is done by controlling the mix and maturities of interest sensitive assets and
liabilities. The Bank has established an asset/liability committee for this
purpose.
One common interest rate risk measure is the gap, or difference between rate
sensitive assets and rate sensitive liabilities. As of March 31, 1996, the
Company's cumulative one year gap was a positive 2.28% of total assets compared
to a positive 11.19% at December 31, 1995. These measures indicate the Bank's
earnings are now less sensitive to changes in interest rates. The change in the
gap is primarily due to two factors. First, over $4.9 million of securities
which matured during the first quarter were reinvested in securities carrying
maturities of one to five years. Second, holdings of federal funds sold, which
are immediately repriceable, were reduced from $3,025,000 to $0.
IMPACT OF INFLATION
- -------------------
The consolidated financial statements and related data included in this
report were prepared in accordance with generally accepted accounting
principles, which require the Company's financial position and results of
operations to be measured in terms of historical dollars. Consequently, the
relative value of money generally is not considered. Nearly all of the Company's
assets and liabilities are monetary in nature and, as a result, interest rates
and competition in the market area tend to have a more significant impact on the
Company's performance than the effect of inflation. Such changes in interest
rates during the quarter have not had a significant impact on either the results
of operations or the fair values of the Company's financial instruments.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings: None.
------------------
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: May 8, 1996 /s/ Robert J. Schoonover
----------------- ---------------------------------------
Robert J. Schoonover
President
Chief Executive Officer
Date: May 8, 1996 /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 M ARCH
31, 1996 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,979
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,384
<INVESTMENTS-CARRYING> 24,581
<INVESTMENTS-MARKET> 24,667
<LOANS> 85,000
<ALLOWANCE> 1,053
<TOTAL-ASSETS> 128,567
<DEPOSITS> 110,977
<SHORT-TERM> 2,172
<LIABILITIES-OTHER> 936
<LONG-TERM> 333
1,500
0
<COMMON> 0
<OTHER-SE> 12,649
<TOTAL-LIABILITIES-AND-EQUITY> 128,567
<INTEREST-LOAN> 1,950
<INTEREST-INVEST> 512
<INTEREST-OTHER> 43
<INTEREST-TOTAL> 2,505
<INTEREST-DEPOSIT> 922
<INTEREST-EXPENSE> 947
<INTEREST-INCOME-NET> 1,558
<LOAN-LOSSES> 42
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,000
<INCOME-PRETAX> 633
<INCOME-PRE-EXTRAORDINARY> 633
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 405
<EPS-PRIMARY> .59
<EPS-DILUTED> .59
<YIELD-ACTUAL> 5.19
<LOANS-NON> 57
<LOANS-PAST> 358
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,036
<CHARGE-OFFS> 27
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 1,053
<ALLOWANCE-DOMESTIC> 1,053
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 100
</TABLE>
