<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, 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 September 30, 1996
----- ------------------
Common Stock ($2.00 par value) 683,553
This report contains 19 pages.
1
<PAGE>
FORM 10-Q
CITIZENS FINANCIAL CORP.
Quarter Ended September 30, 1996
INDEX
Page No.
--------
Part I. Financial Information
Condensed Consolidated Balance Sheets
September 30, 1996 and December 31, 1995......................3
Condensed Consolidated Statements of Income
Three Months Ended
September 30, 1996 and September 30, 1995
and Nine Months Ended
September 30, 1996 and September 30, 1995.....................4
Condensed Consolidated Statements of
Changes in Shareholders' Equity
Nine Months Ended
September 30, 1996 and September 30, 1995.....................5
Condensed Consolidated Statements of
Cash Flows
Nine Months Ended
September 30, 1996 and September 30, 1995.....................6
Notes to Condensed Consolidated
Financial Statements.......................................7-11
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.............................................12-17
Part II. Other Information and Index to Exhibits.......................18
Signatures....................................................19
2
<PAGE>
PART I - FINANCIAL INFORMATION
CITIZENS FINANCIAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------------- ------------
(Unaudited) *
<S> <C> <C>
ASSETS
- ------
Cash and due from banks $ 4,423 $ 2,923
Federal funds sold 1,975 3,025
Securities available for sale (Note 2) 20,499 5,758
Securities held to maturity (estimated fair
value $12,168 and $28,871, respectively) (Note 2) 12,154 28,615
Loans, less allowance for loan losses of
$1,050 and $1,036, respectively (Notes 3 and 4) 87,896 82,781
Premises and equipment 1,631 1,323
Accrued interest receivable 950 1,131
Other assets 836 794
-------- --------
Total Assets $130,364 $126,350
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest bearing $ 15,549 $ 14,556
Interest bearing 96,206 95,115
-------- --------
Total Deposits 111,755 109,671
Short-term borrowings 2,656 1,590
Long-term borrowings 331 334
Other liabilities 843 803
-------- --------
Total liabilities 115,585 112,398
-------- --------
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 12,285 11,297
Net unrealized (loss)/gain on available for
sale securities (145) 10
Treasury stock, at cost, 66,447 and 66,212
shares, respectively (961) (955)
-------- --------
Total shareholders' equity 14,779 13,952
-------- --------
Total Liabilities and Shareholders' Equity $130,364 $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 Nine Months
Ended September 30, Ended September 30,
--------------------- -------------------
1996 1995 1996 1995
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
- ---------------
Interest and fees on loans $1,993 $1,832 $5,910 $5,069
Interest and dividends on
securities:
Taxable 495 531 1,389 1,669
Tax-exempt 20 70 170 220
Interest on federal funds sold 19 3 78 15
------ ------ ------ ------
Total interest income 2,527 2,436 7,547 6,973
------ ------ ------ ------
INTEREST EXPENSE
- ----------------
Interest on deposits 955 894 2,798 2,497
Interest on short-term borrowings 27 53 79 83
Interest on long-term borrowings 3 0 8 4
------ ------ ------ ------
Total interest expense 985 947 2,885 2,584
------ ------ ------ ------
Net interest income 1,542 1,489 4,662 4,389
Provision for loan losses 42 15 126 45
------ ------ ------ ------
Net interest income after
provision for loan losses 1,500 1,474 4,536 4,344
------ ------ ------ ------
NONINTEREST INCOME
- ------------------
Trust department income 26 9 47 40
Service fees 67 67 204 178
Insurance commissions 10 6 25 21
Securities gains, net 0 7 0 7
Other 38 13 106 83
------ ------ ------ ------
Total noninterest income 141 102 382 329
------ ------ ------ ------
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 542 504 1,630 1,484
Net occupancy expense 75 72 211 207
Equipment rentals, depreciation
and maintenance 69 71 178 212
Data processing 79 86 246 215
Advertising 20 21 59 63
Other 244 202 738 766
------ ------ ------ ------
Total noninterest expense 1,029 956 3,062 2,947
------ ------ ------ ------
Income before income taxes 612 620 1,856 1,726
Income tax expense 209 182 663 569
------ ------ ------ ------
Net income $ 403 $ 438 $1,193 $1,157
======= ====== ======= =======
Earnings per common share (Note 6) $ .59 $ .64 $ 1.75 $ 1.68
======= ====== ======= =======
Weighted average shares outstanding 683,580 688,828 683,718 688,699
Dividends per common share $ .10 $ .10 $ .30 $ .30
======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CITIZENS FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of dollars)
Nine Months Ended September 30, 1996 and 1995
---------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
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) $12,976
Net income 1,157 1,157
Cost of 3,632 shares
acquired as treasury stock (76) (76)
Cash dividends declared
($.30 per share) (206) (206)
------- ------ ------- ---------- -------------- -------- --------
Balance September 30, 1995 750,000 $1,500 $2,100 $11,102 $ 0 $ (851) $13,851
======= ====== ======= ========== ============== ======== ========
Balance, January 1, 1996 750,000 $1,500 $2,100 $11,297 $ 10 $ (955) $13,952
Net income 1,193 1,193
Net change in unrealized gain/
(loss) on securities (155) (155)
Cash dividends declared
($.30 per share) (205) (205)
Cost of 235 shares
acquired as treasury stock (6) (6)
------- ------ ------- ---------- -------------- -------- --------
Balance September 30, 1996 750,000 $1,500 $2,100 $12,285 $(145) $ (961) $14,779
======= ====== ======= ========== ============== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CITIZENS FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1996 1995
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 1,193 $ 1,157
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for loan losses 126 45
Depreciation and amortization 212 237
Amortization and accretion on securities 214 463
Gain on sales and calls of securities 0 (7)
Gain on sale of loans 0 (24)
Decrease in accrued interest receivable 181 77
Increase in other assets (89) (61)
Increase in other liabilities 123 195
-------- --------
Cash provided by operating activities 1,960 2,082
-------- --------
Cash flows from investing activities:
Proceeds from principal payments received
on securities available for sale 389 0
Proceeds from principal payments received
on securities held to maturity 297 221
Proceeds from maturities and calls of
securities available for sale 1,000 26
Proceeds from maturities and calls of
securities held to maturity 17,160 6,766
Purchases of securities available for sale (16,463) 0
Purchases of securities held to maturity (1,115) (516)
Purchases of premises and equipment (473) (36)
Proceeds from sale of loans 0 2,511
Increase in loans (5,241) (13,269)
-------- --------
Cash used by investing activities (4,446) (4,297)
-------- --------
Cash flows from financing activities:
Cash dividends paid (205) (206)
Acquisition of treasury stock (6) (76)
Increase in short-term borrowing 1,066 714
(Decrease) Increase in long-term borrowing (3) 36
Increase in time deposits 3,393 3,924
Decrease in other deposits (1,309) (2,064)
-------- --------
Cash provided by financing activities 2,936 2,328
-------- --------
Net increase in cash and cash equivalents 450 113
Cash and cash equivalents at beginning of period 5,948 3,184
-------- --------
Cash and cash equivalents at end of period $ 6,398 $ 3,297
======== ========
Supplemental disclosure of noncash investing
and financing activities:
Cash paid during the period for:
Interest $ 2,856 $ 2,501
Income Taxes 736 580
Acquisition of other real estate owned and
other repossessed assets $ 173 $ 52
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<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, 1996 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' 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.
7
<PAGE>
NOTE 2 - SECURITIES
----------
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at September 30, 1996 and December 31, 1995 are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
September 30, 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............. $ 3,006 $ 22 $ 0 $ 3,028
U.S. Government agencies and
corporations........................ 2,006 4 0 2,010
Mortgage backed securities -
U.S. Government agencies
and corporations.................... 1,213 15 0 1,228
Corporate debt securities............ 990 11 0 1,001
------- ---- ---- -------
Total taxable....................... 7,215 52 0 7,267
------- ---- ---- -------
Tax-exempt state and political
subdivisions........................ 4,939 62 100 4,901
------- ---- ---- -------
Total securities
held to maturity................... $12,154 $114 $100 $12,168
======= ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
Carrying
Value
(Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities............. $ 3,015 $ 11 $ 0 $ 3,026
U.S. Government agencies and
corporations........................ 9,028 6 83 8,951
Mortgage backed securities -
U.S. Government agencies
and corporations.................... 795 0 48 747
Corporate debt securities............ 6,226 7 108 6,125
Obligations of state and political
subdivisions - taxable 1,124 0 7 1,117
Federal Reserve Bank stock........... 108 0 0 108
Federal Home Loan Bank stock......... 425 0 0 425
------- ---- ---- -------
Total securities available
for sale........................... $20,721 $ 24 $246 $20,499
======= ==== ==== =======
</TABLE>
<TABLE>
<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.
8
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995 *
----------------------------------------------
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 September 30, 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 $4,649 $ 4,665 $ 1,011 $ 1,010
Due after 1 but within 5 years 5,611 5,581 17,509 17,308
Due after 5 but within 10 years 1,894 1,922 1,077 1,064
Due after 10 years 0 0 1,124 1,117
------ ------- ------- -------
$12,154 $12,168 $20,721 $20,499
======= ==== ==== =======
</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 nine month periods ended September 30, 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>
September 30, 1996:
Securities held to maturity $ 0 $ 17,160 $ 297 $ 0 $ 0
Securities available for sale 0 1,000 389 0 0
----- -------- ------ ----- ------
$ 0 $ 18,160 $ 686 $ 0 $ 0
----- -------- ------ ----- ------
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
===== ======== ====== ===== ======
</TABLE>
At September 30, 1996 and December 31, 1995 securities carried at
$6,431,000 and $6,523,000, respectively, with estimated fair values of
$6,916,000 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.
9
<PAGE>
NOTE 3 - LOANS
-----
Total loans are summarized as follows (in thousands):
<TABLE>
<CAPTION>
September 30, 1996 December 31,1995
------------------- ----------------
(Unaudited) *
<S> <C> <C>
Commercial, financial and agricultural $10,997 $10,644
Real estate - construction 1,316 1,734
Real estate - mortgage 55,378 51,897
Installment loans to individuals 19,882 18,119
Credit card loans 830 810
Other 385 455
------- -------
Total loans 88,788 83,659
Net deferred loan origination costs 200 196
Less unearned income 42 38
------- -------
Total loans net of unearned income and
net deferred loan origination costs 88,946 83,817
Less allowance for loan losses 1,050 1,036
------- -------
Loans, net $87,896 $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 Nine Months Ended
September 30 September 30
1996 1995 1996 1995
------ ------ ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Balance at beginning of period $1,063 $1,029 $1,036 $1,000
Loans charged off:
Commercial and industrial 0 0 0 0
Real estate - mortgage 29 3 30 3
Consumer and other 17 7 56 20
Credit Card 44 0 66 0
------ ------ ------ ------
Total charge-offs 90 10 152 23
------ ------ ------ ------
Recoveries:
Commercial and industrial 0 0 1 3
Real estate - mortgage 0 0 0 6
Consumer and other 13 7 17 10
Credit card 22 0 22 0
------ ------ ------ ------
Total recoveries 35 7 40 19
------ ------ ------ ------
Net losses 55 3 112 4
Provision for loan losses 42 15 126 45
------ ------ ------ ------
Balance at end of period $1,050 $1,041 $1,050 $1,041
====== ====== ====== ======
</TABLE>
*From audited financial statements.
10
<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,
1996 and 1995 the weighted average number of shares outstanding were
683,718 and 688,699, respectively, while 683,580 shares were outstanding during
the three month period ended September 30, 1996 and 688,828 were outstanding for
the three months ended September 30, 1995.
11
<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 nine months of 1996 was $1,193,000 or $1.75 per
share. This represents a 3.1% increase over the first nine months of 1995 when
net income was $1,157,000, or $1.68 per share. These earnings levels represent
an annualized return on average assets of 1.24% in both 1996 and 1995. Returns
on average equity of 11.09% and 11.61%, respectively reflect an increase in the
Company's capital base during 1996.
Third quarter net income decreased from $438,000 in 1995 to $403,000
in the current year. The factors influencing both the year-to-date and
quarterly results are 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.
For the third quarter of 1996 net interest income of $1,542,000 was up
$53,000, or 3.6%, from $1,489,000 in the third quarter of 1995. This reflects
an increase in average loan balances of $10 million and a 5 basis point
improvement in the yield on earning assets to 8.22%. Although the corresponding
cost of interest bearing liabilities rose by 10 basis points to 4.00%, the
growth in interest bearing liabilities of $1.1 million was only one half of the
$2.2 million growth in interest earning assets. As a result the quarterly net
interest margin of 5.03% nearly matched last year's 5.04%
On a year-to-date basis net interest income of $4,662,000 is $273,000
more than last year's $4,389,000. This is a 6.2% improvement. The net interest
margin also improved to 5.19% from 5.03%. These changes reflect a growth in
earning assets of nearly $3.5 million and a shift in the composition of those
assets from securities, which yielded 6.19% during the first three quarters of
1996, to loans which yielded 9.23%. In total the yield on earning assets
improved 38 basis points from 7.92% to 8.30%.
Like the yield on earning assets, the cost of interest bearing
liabilities also rose. This increase, however, was slightly less at 32 basis
points. This brought the cost of interest bearing liabilities to 3.91%.
However, the annualized increase in tax-equivalent interest income of $771,000
remains significantly greater than the $401,000 annualized increase in interest
expense.
Management does not anticipate significant changes in the relative mix
of loans, deposits or securities in the near future.
12
<PAGE>
NONINTEREST INCOME
- ------------------
Noninterest income includes all revenues which are not included in
interest and fee income relating to earning assets. Total noninterest income
for the third quarter of 1996 of $141,000 was up $39,000 from $102,000 in the
third quarter of 1995. This improvement is the result of a $17,000 increase in
trust revenues and an $18,000 increase in fees related to the growth of our
credit card program.
For the year-to-date period noninterest income increased $53,000 to
$382,000. This reflects several areas of improvement. Largest among them are
service fees which increased 14.6% to $204,000 due to a $16,000 increase in
commercial account fees and an $8,000 improvement in overdraft fees. The
commercial account fees were implemented during the third quarter of 1995 while
overdraft fees are closely monitored to avoid unnecessary waivers.
The category of other noninterest income increased 27.7% to $106,000
due to a $40,000 increase in credit card related fees. On a recurring basis
this category registered a gain of $44,000 or 70.1% as gains on the sale of
student loans totaling $24,000 are included in the 1995 total. This significant
improvement reflects the impact of a new fee structure in mid-1995 and the
continual monitoring of fee income.
NONINTEREST EXPENSE
- -------------------
Noninterest expense includes all items of expense other than interest
expense, the provision for loan losses and income taxes. Total noninterest
expense for the third quarter of 1996 was $1,029,000, up $73,000 or 7.6%, from
$956,000 in the third quarter of 1995. The cause of this increase may be found
in the salaries and employee benefits and other noninterest expense categories.
Salaries and employee benefits is the largest component of noninterest
expense and increased to $542,000 for the quarter, up $38,000, or 7.5%, from
$504,000. Contributing to this increase were a $34,000 increase in salaries, a
$13,000 increase in group insurance costs and a $6,000 increase in incentive
compensation. The increase in salaries reflects annual increases and the
accrual of certain severance benefits for a former officer. Incentive
compensation is paid to employee teams for the completion of certain projects
dealing with various customer service, product and financial concerns as
approved by senior management. The increase in group insurance costs, meanwhile,
reflects rising health care costs. Offsetting these increases was a benefit of
over $20,000 for pension costs. This benefit, which arises from the overfunded
status of the Company's pension plan, was just over $4,000 during the third
quarter of 1995.
Increases in other noninterest expenses are due to the purchase of
various supplies and standalone software products as well as costs associated
with the expansion of our credit card programs. In addition, a refund of FDIC
insurance of over $6,000 was received during the third quarter of 1995 due to
the lowering of bank insurance rates. The bank currently pays the minimum FDIC
insurance cost.
Year-to-date noninterest expense of $3,062,000 is $115,000,or 3.9%,
greater than last year's $2,947,000. Higher personnel costs as described above
and a lump sum payment made to a former officer upon separation from service are
major factors for the increase. In addition the cost of an executive
supplemental income plan initiated in the second quarter of 1995 is reflected
for the full nine months of 1996 resulting in a $16,000 increase in year-to-date
expense. An increase in data processing costs of $31,000 is the result of the
renewal of certain data processing contracts and credit card processing costs.
Other noninterest expense has decreased $28,000 as a result of approximately
$120,000 of FDIC insurance savings. Such savings, however, were reduced by
increases in stationary, purchases of software programs, higher professional
fees, OREO related expenses and credit card expenses.
13
<PAGE>
INCOME TAXES
- ------------
The Company's provision for income taxes of $209,000 in the third
quarter of 1996 includes both state and federal income taxes. This total
exceeds the third quarter 1995 total of $182,000 due to higher deferred tax
expense. The Company's effective tax rate for the quarter was 34.1%. On a
year-to-date basis total income tax expense of $663,000 represents an effective
tax rate of 35.7%. This also represents an increase over 1995 when total taxes
for the first nine months was $569,000. The increases are due to higher levels
of taxable income as well as increases in deferred tax expense. The Company is
not currently subject to federal alternative minimum tax.
FINANCIAL CONDITION
- -------------------
Total assets at September 30, 1996 of $130,364,000 are up $4,014,000,
or 3.2%, from year-end 1995. Management believes this level of growth
approximates that of the Company's primary market area and reflects the degree
of competition it faces. A discussion of the Company's major assets, funding
sources and equity follows.
LOAN PORTFOLIO
- --------------
Gross loans totaled $88,788,000 at September 30, 1996, up $5,129,000
or 6.14% since year-end 1995. During 1995 management actively sought loan
growth and increased the loan portfolio by $14.9 million. In doing so the loan
to deposit ratio increased from 63.6% to 76.3%. At quarter-end this ratio stood
at 79.4%. Current projections indicate that loan demand may become somewhat
less vigorous and that the loan to deposit ratio is expected to remain near 80%.
Loan growth during the first three quarters of 1996 was primarily
found in the mortgage loan portfolio. This portfolio grew $3.5 million during
the period to $55.4 million. Over $33 million of this total are variable rate
mortgages secured by one to four family residences. Loan growth was also
experienced in installment lending to individuals, up $1.8 million to
$19,882,000. Other forms of lending including commercial and credit card loans
remain little changed from year-end. Real estate construction loans decreased
24.1% to $1,316,000.
These changes have not significantly impacted the overall composition of
the loan portfolio however. Mortgage lending continues to make up the majority
of the portfolio at 62% of the total. Installment loans to individuals comprise
22% while commercial, financial and agricultural loans represent another 12%.
Because management has maintained its underwriting and credit
standards at high levels, the increased loan volumes have not resulted in
significantly higher levels of past due loans. Based on quarterly loan loss
analyses management does not believe loan losses will result in a significant
impact on 1996 earnings. 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:
Summary of Past Due Loans and Nonperforming Assets
--------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
September 30 December 31
-------------- -----------
1996 1995 1995
(Unaudited) *
<S> <C> <C> <C>
Loans past due 90 or more days
still accruing interest $ 73 $ 21 $ 144
===== ===== =====
Nonperforming assets:
Nonaccruing loans $ 163 $ 359 $ 214
Other Real Estate Owned 0 75 0
----- ----- -----
$ 163 $ 434 $ 214
===== ===== =====
</TABLE>
* From the Company's Form 10-K filing dated December 31, 1995
14
<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 $1,050,000 or 1.18% of gross loans at September
30, 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 $126,000 in the first three quarters of 1996 compared to $45,000 in the
first three quarters of 1995. Net charge-offs during the two periods totaled
$112,000 and $4,000, 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 December 1995, substantially all purchases of securities have been
classified available for sale. Thus, the available for sale portfolio has
increased to $20,499,000 or 63% of the total portfolio. The remaining 37% 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 half of 1996, the increase in market interest rates which occurred since
that time has had the effect of reducing the fair value of the portfolio. At
September 30, 1996 such value was $222,000 or 1.1% 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.
Over $18 million of securities have matured or were called during the first
nine months of 1996. This allowed the purchase of approximately $17.5 million
in new securities. Despite these recent purchases the average lives of the
portfolios remain short averaging 3.27 years. Future portfolio strategies will
continue to emphasize safety with U. S. government and agency securities, highly
rated corporate and municipal securities being favored. The purchase of
municipal securities depends, among other things, on the availability of
favorable tax-equivalent yields relative to taxable securities however.
At September 30, 1996 the Bank had $1,975,000 invested in overnight federal
funds sold. In managing its funds position the Bank generally tries to minimize
its involvement in either federal funds sold or federal funds purchased. The
execution of specific investing and funding strategies, however, may result in
exceptions to this general procedure.
DEPOSITS AND OTHER FUNDING SOURCES
- ----------------------------------
Total deposits of $111,755,000 at September 30, 1996 exceed the December
31, 1995 total of $109,671,000 by $2,084,000, or 1.9%. Management believes this
type of deposit growth reflects both the economic characteristics of the market
and the increasingly intense competition for deposit dollars. Such competition
involves both banks and nonbanks and originates from out-of-town as well as
local providers. In dealing with this competition management first addresses the
needs of its stable core depositors. In addition new products and marketing
efforts are developed.
15
<PAGE>
The Bank does not, however, engage in what it considers irrational pricing
instead electing to focus on the maintenance of its net interest margin.
Noninterest bearing deposits at September 30, 1996 of $15,549,000 are
$993,000 in excess of their year-end 1995 balance of $14,556,000. This 6.8%
increase is due to existing customers maintaining higher balances rather than
the acquisition of new customers. Additional deposit growth has been generated
in certificates of deposit, however. Total certificates of $40,433,000 exceed
the year-end 1995 total of $37,720,000 by $2,713,000 or 7.2%. Over one-half of
this growth was the result of two specific deposit generating efforts. One such
effort offered 13 month certificates for a period of one month and generated
$957,000 of deposit growth. The other, a six month certificate, generated
$687,000 also in one month. Of this $1,644,000 in new deposit generation
$890,000 was in CDs of $100,000 or more.
Contrasting the growth in certificates of deposit were decreases in money
market and checking plus accounts totaling $1,771,000. Although many of these
deposits were retained in the Bank, their lower yields have made them less
attractive to savers and investors. While changes within the deposit portfolio
continually occur, management believes the Bank's deposit base will remain
stable in the foreseeable future.
It is in part because of this stable deposit base that the Bank's use of
borrowed funds continues to be minimal. In addition to occasional federal funds
borrowing, the Bank maintains a floating rate repurchase agreement with one
customer and a long-term borrowing agreement with the Federal Home Loan Bank of
Pittsburgh for the purpose of funding certain housing projects. At September
30, 1996 these borrowing totaled $2,987,000. The use of additional borrowings
may occur should they provide an economical means to fund earning assets and an
acceptable degree of risk. At the current time, however, no specific plans to
engage in additional borrowing exist.
CAPITAL RESOURCES
- -----------------
Total shareholders' equity of $14,779,000 at September 30, 1996 is 11.34%
of total assets. This compares with $13,952,000, 11.04%, at year-end 1995.
Included in equity are 66,447 shares of treasury stock carried at a cost of
$961,000 and $145,000 of unrealized losses on available for sale securities.
Cash dividends of $.30 were paid during the first nine months of 1996
representing a dividend payout ratio of 17.14%. 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 18.60% 8.0%
Tier I capital to risk weighted assets 17.37% 4.0%
Tier I capital to adjusted total assets 11.46% 3.0%
</TABLE>
The Company is unaware of any trends or uncertainties, nor do any plans
exist, which may materially impair its capital position.
16
<PAGE>
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
September 30, 1996 these sources totaled $27,123,000 or 20.8% of total assets.
In addition, liquidity may be generated through loan repayments and over
$51,000,000 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.
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 September 30, 1996,
the Company's cumulative one year gap was a negative 3.31% 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 $18 million of
securities which were called or matured during the first three quarters of the
year 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 $1,975,000.
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.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings :
-----------------
As of September 30, 1996 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.
18
<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: 11/13/96 /s/ Robert J. Schoonover
---------------------- -------------------------------
Robert J. Schoonover
President
Chief Executive Officer
Date: 11/13/96 /s/ Thomas K. Derbyshire
----------------------- -------------------------------
Thomas K. Derbyshire
Treasurer
Principal Financial Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1996 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,423
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,975
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,499
<INVESTMENTS-CARRYING> 12,154
<INVESTMENTS-MARKET> 12,168
<LOANS> 88,788
<ALLOWANCE> 1,050
<TOTAL-ASSETS> 130,364
<DEPOSITS> 111,755
<SHORT-TERM> 2,656
<LIABILITIES-OTHER> 843
<LONG-TERM> 331
0
0
<COMMON> 1,500
<OTHER-SE> 13,279
<TOTAL-LIABILITIES-AND-EQUITY> 130,364
<INTEREST-LOAN> 5,910
<INTEREST-INVEST> 1,559
<INTEREST-OTHER> 78
<INTEREST-TOTAL> 7,547
<INTEREST-DEPOSIT> 2,798
<INTEREST-EXPENSE> 2,885
<INTEREST-INCOME-NET> 4,662
<LOAN-LOSSES> 126
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,062
<INCOME-PRETAX> 1,856
<INCOME-PRE-EXTRAORDINARY> 1,856
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,193
<EPS-PRIMARY> 1.75
<EPS-DILUTED> 1.75
<YIELD-ACTUAL> 5.19
<LOANS-NON> 163
<LOANS-PAST> 73
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,036
<CHARGE-OFFS> 152
<RECOVERIES> 40
<ALLOWANCE-CLOSE> 1,050
<ALLOWANCE-DOMESTIC> 1,050
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 100
</TABLE>
