<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 JUNE 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 June 30, 1996
----- ------------------
Common Stock ($2.00 par value) 683,788
This report contains 19 pages.
1
<PAGE>
FORM 10-Q
CITIZENS FINANCIAL CORP.
Quarter Ended June 30, 1996
INDEX
Page No.
--------
Part I. Financial Information
Condensed Consolidated Balance Sheets
June 30, 1996 and December 31, 1995................3
Condensed Consolidated Statements of Income
Three Months Ended
June 30, 1996 and June 30, 1995
and Six Months Ended
June 30, 1996 and June 30, 1995....................4
Condensed Consolidated Statements of
Changes in Shareholders' Equity
Six Months Ended
June 30, 1996 and June 30, 1995....................5
Condensed Consolidated Statements of
Cash Flows
Six Months Ended
June 30, 1996 and June 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>
June 30, December 31,
1996 1995
----------- ------------
(Unaudited) *
<S> <C> <C>
ASSETS
- ------
Cash and due from banks $ 3,320 $ 2,923
Federal funds sold 0 3,025
Securities available for sale (Note 2) 16,756 5,758
Securities held to maturity (estimated fair value
$19,432 and $28,871, respectively) (Note 2) 19,425 28,615
Loans, less allowance for loan losses of
$1,063 and $1,036, respectively (Notes 3 and 4) 85,406 82,781
Premises and equipment 1,673 1,323
Accrued interest receivable 1,217 1,131
Other assets 901 794
-------- --------
Total Assets $128,698 $126,350
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest bearing $ 14,487 $ 14,556
Interest bearing 95,598 95,115
-------- --------
Total deposits 110,085 109,671
Short-term borrowings 3,038 1,590
Long-term borrowings 332 334
Other liabilities 782 803
-------- --------
Total liabilities 114,237 112,398
-------- --------
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 11,951 11,297
Net unrealized (loss)/gain on available for
sale securities (135) 10
Treasury stock, at cost, 66,212 shares (955) (955)
-------- --------
Total shareholders' equity 14,461 13,952
-------- --------
Total Liabilities and Shareholders' Equity $128,698 $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 Six Months Ended
June 30, June 30,
-------------- ----------------
1996 1995 1996 1995
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
- ---------------
Interest and fees on loans $1,967 $1,695 $3,917 $3,235
Interest and dividends on
securities:
Taxable 463 552 894 1,138
Tax-exempt 69 75 150 150
Interest on federal funds sold 16 2 59 12
------ ------ ------ ------
Total interest income 2,515 2,324 5,020 4,535
------ ------ ------ ------
INTEREST EXPENSE
- ----------------
Interest on deposits 921 830 1,843 1,601
Interest on short-term borrowings 30 20 52 31
Interest on long-term borrowings 2 2 5 3
------ ------ ------ ------
Total interest expense 953 852 1,900 1,635
------ ------ ------ ------
Net interest income 1,562 1,472 3,120 2,900
Provision for loan losses 42 15 84 30
------ ------ ------ ------
Net interest income after
provision for loan losses 1,520 1,457 3,036 2,870
------ ------ ------ ------
NONINTEREST INCOME
- ------------------
Trust department income 20 30 21 31
Service fees 68 62 137 120
Insurance commissions 6 8 15 15
Other 30 44 68 64
------ ------ ------ ------
Total other income 124 144 241 230
------ ------ ------ ------
NONINTEREST EXPENSES
- --------------------
Salaries and employee benefits 569 511 1,088 980
Net occupancy expense 67 69 136 135
Equipment rentals, depreciation
and maintenance 48 70 109 141
Data processing 86 76 167 138
Advertising 20 21 39 42
Other 243 252 494 558
------ ------ ------ ------
Total other expense 1,033 999 2,033 1,994
------ ------ ------ ------
Income before income taxes 611 602 1,244 1,106
Income tax expense 226 225 454 387
------ ------ ------ ------
Net income $ 385 $ 377 $ 790 $ 719
====== ====== ====== ======
Earnings per common share (Note 6) $ .57 $ .54 $ 1.16 $ 1.04
======== ======== ======== ========
Weighted average shares outstanding 683,788 688,288 683,788 688,907
Dividends per common share $ .10 $ .10 $ .20 $ .20
======== ======== ======== ========
</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)
<TABLE>
<CAPTION>
Six Months Ended June 30, 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) $12,976
Net income 719 719
Cost of 3,632 shares acquired
as treasury stock (76) (76)
Cash dividends declared
($.20 per share) (138) (138)
-------------------------------------------------------------------------
Balance, June 30, 1995 750,000 $1,500 $2,100 $10,732 $ 0 $(851) $13,481
=========================================================================
Balance, January 1, 1996 750,000 $1,500 $2,100 $11,297 $ 10 $(955) $13,952
Net income 790 790
Net change in unrealized gain/
(loss) on securities (145) (145)
Cash dividends declared
($.20 per share) (136) (136)
-------------------------------------------------------------------------
Balance, June 30, 1996 750,000 $1,500 $2,100 $11,951 $(135) $(955) $14,461
=========================================================================
</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>
Six Months Ended
June 30,
--------------------
1996 1995
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 790 $ 719
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for loan losses 84 30
Depreciation and amortization 136 157
Amortization and accretion on securities 121 308
Gain on sale of loans 0 (24)
(Increase) decrease in accrued interest receivable (86) 99
Increase in other assets (139) (97)
Increase in other liabilities 57 48
-------- --------
Cash provided by operating activities 963 1,240
-------- --------
Cash flows from investing activities:
Proceeds from principal payments received
on securities available for sale 207 0
Proceeds from principal payments received
on securities held to maturity 79 164
Proceeds from calls of securities
available for sale 1,000 26
Proceeds from maturities and calls of
securities held to maturity 10,160 5,675
Purchases of securities available for sale (12,483) 0
Purchases of securities held to maturity (1,115) (515)
Purchases of premises and equipment (454) (35)
Proceeds from sale of loans 0 2,511
Increase in loans (2,709) (10,531)
-------- --------
Cash used by investing activities (5,315) (2,705)
-------- --------
Cash flows from financing activities:
Cash dividends paid (136) (138)
Acquisition of treasury stock 0 (76)
Increase in short-term borrowing 1,448 1,452
(Decrease) increase in long-term borrowing (2) 37
Increase in time deposits 2,386 2,060
Decrease in other deposits (1,972) (1,872)
-------- --------
Cash provided by financing activities 1,724 1,463
-------- --------
Net decrease in cash and cash equivalents (2,628) (2)
Cash and cash equivalents at beginning of period 5,948 3,184
-------- --------
Cash and cash equivalents at end of period $ 3,320 $ 3,182
======== ========
Supplemental disclosure of non cash investing
and financing activities:
Cash paid during the period for:
Interest $ 1,885 $ 1,607
Income Taxes $ 504 $ 380
Acquisition of other real estate owned and
other repossessed assets $ 108 $ 3
</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 preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
The consolidated statements 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 six months ended June 30, 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.
7
<PAGE>
NOTE 2 - SECURITIES
----------
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at June 30, 1996 and December 31, 1995 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
June 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............. $ 6,012 $ 31 $ 1 $ 6,042
U.S. Government agencies
and corporations.................... 3,015 9 1 3,023
Mortgage backed securities-
U.S. Government agencies
and corporations.................... 1,429 14 0 1,443
Corporate debt securities............ 3,993 11 5 3,999
------- ---- ---- -------
Total taxable....................... 14,449 65 7 14,507
------- ---- ---- -------
Tax-exempt state and political
subdivisions........................ 4,976 59 110 4,925
------- ---- ---- -------
Total securities
held to maturity................... $19,425 $124 $117 $19,432
======= ==== ==== =======
</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............. $ 2,044 $ 6 $ 0 $ 2,050
U.S. Government agencies
and corporations.................... 7,539 0 99 7,440
Mortgage backed securities-
U.S. Government agencies
and corporations.................... 979 0 32 947
Corporate debt securities............ 4,736 0 118 4,618
Obligations of state and political
subdivisions-taxable................ 1,133 35 0 1,168
Federal Reserve Bank stock........... 108 0 0 108
Federal Home Loan Bank stock......... 425 0 0 425
------- ---- ---- -------
Total securities available
for sale........................... $16,964 $ 41 $249 $16,756
======= ==== ==== =======
</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>
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 June 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 $11,743 $11,762 $ 1,016 $ 1,014
Due after 1 but within 5 years 5,604 5,649 13,203 12,976
Due after 1 but within 10 years 2,078 2,021 1,504 1,490
Due after 10 years 0 0 1,241 1,276
------- ------- ------- -------
$19,425 $19,432 $16,964 $16,756
======= ======= ======= =======
</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 six month periods ended June 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>
June 30, 1996:
Securities held to maturity $ 0 $ 10,160 $ 79 $ 0 $ 0
Securities available for sale 0 1,000 207 0 0
----- ---------- --------- ----- -----
$ 0 $ 11,160 $ 286 $ 0 $ 0
===== ========== ========= ===== =====
June 30, 1995:
Securities held to maturity $ 0 $ 5,675 $ 164 $ 0 $ 0
Securities available for sale 0 26 0 0 0
----- ---------- --------- ----- -----
$ 0 $ 5,701 $ 164 $ 0 $ 0
===== ========== ========= ===== =====
</TABLE>
At June 30, and December 31, 1995 securities carried at $6,477,000 and
$6,523,000, respectively, with estimated fair values of $6,515,000 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>
June 30, 1996 December 31, 1995
-------------- -----------------
(Unaudited) *
<S> <C> <C>
Commercial, financial and agricultural $11,206 $10,644
Real estate - construction 1,000 1,734
Real estate - mortgage 53,609 51,897
Installment loans to individuals 19,265 18,119
Credit card loans 818 810
Other 408 455
------- -------
Total loans 86,306 83,659
Net deferred loan origination costs 201 196
Less unearned income 38 38
------- -------
Total loans net of unearned income and
net deferred loan origination costs 86,469 83,817
Less allowance for loan losses 1,063 1,036
------- -------
Loans, net $85,406 $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 Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Balance at beginning of period $1,053 $1,013 $1,036 $1,000
Loans charged off:
Commercial and industrial 0 0 0 0
Real estate - mortgage 0 0 1 0
Consumer and other 24 1 39 13
Credit card 11 0 22 0
------ ------ ------ ------
Total 35 1 62 13
------ ------ ------ ------
Recoveries:
Commercial and industrial 1 0 1 3
Real estate - mortgage 0 0 0 6
Consumer and other 2 2 4 3
Credit card 0 0 0 0
------ ------ ------ ------
Total recoveries 3 2 5 12
------ ------ ------ ------
Net (recoveries) losses 32 (1) 57 1
Provision for loan losses 42 15 84 30
------ ------ ------ ------
Balance at end of period $1,063 $1,029 $1,063 $1,029
====== ====== ====== ======
</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 six month periods ended June 30, 1996
and 1995 the weighted average number of shares were 683,788 and 688,907,
respectively. The weighted average number of shares outstanding during the
three month periods then ended were 683,788 and 688,288, respectively.
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 second quarter of 1996 was $385,000 bringing year-to-
date net income to $790,000. This compares to $377,000 and $719,000 for the
second quarter and first half of 1995, respectively. The quarterly improvement
of 2.1% and year-to-date improvement of 9.9% are more fully addressed in the
following sections of this report.
On a year-to-date basis return on average assets of 1.24% and return on
average equity of 11.17% are both improved from 1995's 1.17% and 11.03%,
respectively. Likewise, year-to-date earnings per share of $1.16 is up $.12
from $1.04 in the first half of 1995.
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 second quarter of 1996 net interest income of $1,562,000 was up
$90,000, or 6.1%, from $1,472,000 in the second quarter of 1995. The quarterly
net interest margin also improved to 5.20% from 5.08%. These improvements
reflect a $3.85 million increase in average earning assets as well as an
increase in the yield on earning assets of 36 basis points to 8.30%. The higher
level of earning assets is due to growth of the loan portfolio, especially
consumer real estate and installment loans. Average loans during the quarter of
$85,622,000 were $11,605,000 greater than in the second quarter of 1995.
Funding for these loans came primarily from the securities portfolio which
averaged $8.9 million less than a year earlier. This shifting of assets into
loans also produced the higher yield on earning assets as the yield on average
loans of 9.19% easily exceeded the yield on average securities of 6.30%.
These positive effects were reduced by a $2.7 million increase in average
interest bearing liabilities and an increase in their cost of 31 basis points to
3.87%.
On a year-to-date basis net interest income is up $220,000, or 7.6%, to
$3,120,000 while the net interest margin also improved 19 basis points to 5.24%.
These improvements are due to factors similar to those described above. A $4.3
million increase in average earning assets and a 52 basis point increase in the
yield on these assets both resulted in increased interest income. A $2.5
million increase in average interest bearing liabilities and a 45 basis point
rise in their cost to 3.87%, however, produced higher levels of interest
expense. On an annualized basis, the rise in tax-equivalent interest income of
$968,000 exceeded
12
<PAGE>
the annualized increase in interest expense of $530,000 by $438,000.
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.
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
second quarter of 1996 of $124,000 was down $20,000 from $144,000 in the second
quarter of 1995. This decrease resulted from lower levels of trust income of
$10,000 and the recording of a gain on the sale of student loans totaling
$24,000 during the second quarter of 1995. Several items helped to partly
offset these decreases including $13,000 of credit card fees earned during the
second quarter of 1996. No such fees were recorded during the second quarter of
1995 since the Bank's credit card program did not begin until that time.
For the year-to-date period noninterest income increased $11,000 to
$241,000. The primary contributor to this increase is service fees, which are up
$17,000, due largely to $16,000 of commercial account fees. These fees were
implemented during the third quarter of 1995. The remaining components of other
income were generally stable. Trust revenues are below their 1995 levels as
noted above. The category of other totaled $68,000 during the first half of
1996, up $4,000. However, of the year-to-date 1995 total of $64,000
approximately $24,000 was from a one time gain on the sale of student loans.
All of the 1996 revenue is recurring in nature. Of particular note is $31,000
of credit card related 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 second quarter of 1996 was $1,033,000, up $34,000 or 3.4%, from
$999,000 in the second quarter of 1995. This increase is primarily due to a
$58,000 rise in salaries and employee benefits, the largest component of other
expense. Contributing to this were an $8,000 increase in group insurance costs
and a $64,000 increase in salaries. Salaries increased as a result of a lump
sum payment made to a former officer upon separation from service, and annual
officer increases which are granted in April of each year. Offsetting these two
increases was a $15,000 reduction in pension costs. Among the other components
of noninterest expense equipment rentals, depreciation and maintenance decreased
by $22,000, or 31.4%, as the result ongoing of cost cutting efforts while data
processing increased $10,000 due to fees related to the new credit card program
and the renegotiation of a contract with the Bank's external data processing
servicer. The category of other decreased $9,000 to $243,000. This was due to
a reduction in FDIC insurance costs of $60,000. Offsetting this decrease
however were increases in professional fees, credit card expenses and other
miscellaneous items.
Year-to-date noninterest expense rose by $39,000 to $2,033,000, a 2.0%
increase. Once again the majority of the increase is due to higher personnel
costs including $83,000 in salaries, $22,000 in group insurance and $20,000
related to an executive supplemental income plan initiated in the second quarter
of 1995. Helping to offset these costs was a $26,000 reduction in pension
expense. As noted previously cost cutting efforts have been focused on
equipment rentals, depreciation and maintenance. As a result these costs were
reduced by $32,000 in the first half of the year. A rise in data processing
expense of $29,000 resulted from the credit card program and renewals of certain
contracts as explained above. Finally, other expense improved by $64,000 as a
result of approximately $120,000 of FDIC insurance savings. Such savings,
however, were reduced by increases in stationery, professional fees, credit card
expenses, OREO expenses and other miscellaneous items.
13
<PAGE>
INCOME TAXES
- ------------
The Company's provision for income taxes of $226,000 in the second quarter
of 1996 was nearly unchanged from $225,000 in the second quarter of 1995.
Included in these figures are both federal and state income taxes. Year-to-date
taxes total $454,000 in 1996 and $387,000 in 1995. This $67,000 increase
primarily reflects a higher level of pre-tax earnings. The effective tax rates
for the first six months of 1996 and 1995 were 36.5% and 35.0%, respectively.
The Company is not subject to the federal alternative minimum tax.
FINANCIAL CONDITION
- -------------------
Total assets at June 30, 1996 of $128,698,000 are up $2,348,000, or 1.8%,
from year-end 1995. Management believes the level of growth is reflective of
the economic activity found within the Bank's primary market area and the
competitive pressures it faces. A discussion of the Bank's major assets,
deposits and equity follows.
LOAN PORTFOLIO
- --------------
Gross loans totaled $86,306,000, up $2,647,000 or 3.2% since year-end 1995.
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. Projections for the remainder of 1996, as well as established
strategic plans, call for a loan to deposit ratio of less than 80%. As of mid-
year this ratio stood at 78.4%.
Loan growth during the first half of 1996 included $1.7 million in mortgage
loans, $1.1 million in installment loans to individuals and slightly more than
$500,000 in commercial, financial and agricultural loans. The Bank's newest
portfolio, credit cards, has remained nearly unchanged since year-end while real
estate construction loans decreased by more than $700,000.
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, the
area of largest growth during 1995, comprise 22% while commercial, financial and
agricultural loans represent another 13%.
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. However, based on quarterly loan loss analyses, management does
not believe this increase 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>
June 30 December 31
------------------- -----------
1996 1995 1995
(Unaudited) *
<S> <C> <C> <C>
Loans past due 90 or more days
still accruing interest $ 378 $ 79 $ 144
===== ===== =====
Nonperforming assets:
Nonaccruing loans $ 14 $ 43 $ 214
Other Real Estate Owned 56 75 0
----- ----- -----
$ 70 $ 118 $ 214
===== ===== =====
</TABLE>
* From the Company's Form 10-K filing dated December 31, 1994
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 $1,063,000 or 1.23% of gross loans at June 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 $84,000 in the first half of 1996 compared to $30,000 in the first half
of 1995. Net charge-offs during the two periods totaled $57,000 and $1,000,
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
$16,756,000 or 46% of the total portfolio. The remaining 54% 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 significant increase in market interest rates which occurred during
that time had the effect of reducing the fair value of the portfolio. At June
30, 1996 such value was $208,000 or 1.2% 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 3.03 years to maturity. 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 June 30, 1996 the Bank had borrowed $335,000 in overnight federal
funds from a correspondent bank in order to finance its earning asset portfolio.
Although such borrowings are necessary from time to time the Bank is typically a
net seller of federal funds. In managing its federal funds position the Bank
generally tries to minimize federal funds sold by favoring investing in other
higher yielding assets. The execution of specific investing strategies,
however, may result in exceptions to this general procedure.
DEPOSITS AND OTHER FUNDING SOURCES
- ----------------------------------
Total deposits of $110,085,000 at June 30, 1996 exceed the December
31, 1995 total of $109,671,000 by $414,000, which is less than 1%. Average
deposits for the first six months of 1996 of $111,198,000, however, are up
$1,987,000 from the 1995 average of $109,211,000, a 1.8% increase. 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
15
<PAGE>
core depositors. In addition new products and marketing efforts are developed.
The Bank does not, however, engage in what it considers irrational pricing
instead electing to focus on the maintenance of its net interest margin.
The most significant change within the deposit base involved
certificates of deposit. Total certificates increased $1,823,000 to
$39,543,000, a 4.8% increase. Approximately one half of the total CD increase
can be found in the Bank's 13 month certificate. This product, which was
offered for one month in early 1996, generated $957,000 of deposit growth.
Large CD's of $100,000 or more also increased significantly from $3.0 million to
$4.6 million while short-term CD's of six months or less decreased. Many of
these shorter-term CD's, however, were retained as 13 month certificates.
Contrasting the growth in certificates of deposit were decreases in
money market and checking plus accounts totaling $1,813,000. 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 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 June 30,
1996 these borrowing totaled $3,370,000. 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 $14,461,000 at June 30, 1996 is 11.24%
of total assets. This compares with $13,952,000, 11.04%, at year-end 1995.
Included in equity are 66,212 shares of treasury stock carried at a cost of
$955,000 and $135,000 of unrealized losses on available for sale securities.
Such unrealized losses are net of deferred tax benefits of $73,000.
Cash dividends of $.20 were paid during the first half representing a
dividend payout ratio of 17.24%. 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 18.27% 8.0%
Tier I capital to risk weighted assets 17.02% 4.0%
Tier I capital to adjusted total assets 11.24% 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 June
30, 1996 these sources totaled $28,499,000 or 22% 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 June 30,
1996, the Company's cumulative one year gap was a negative .51% 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 $11 million of
securities which were called or matured during the first half 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 $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.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings :
-------------------
As of June 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:
----------------------------------------------------
The annual meeting of stockholders of Citizens Financial Corp. was
held on April 20, 1996. The stockholders determined that the maximum
number of directors will continue at nine and that directors Armentrout,
Fair, Harris and Williams will serve additional three year terms ending in
April, 1999.
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: July 30, 1996 /s/ Robert J. Schoonover
--------------------- --------------------------------
Robert J. Schoonover
President
Chief Executive Officer
Date: July 30, 1996 /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 June
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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,320
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,756
<INVESTMENTS-CARRYING> 19,425
<INVESTMENTS-MARKET> 19,432
<LOANS> 86,306
<ALLOWANCE> 1,063
<TOTAL-ASSETS> 128,698
<DEPOSITS> 110,085
<SHORT-TERM> 3,038
<LIABILITIES-OTHER> 782
<LONG-TERM> 332
0
0
<COMMON> 1,500
<OTHER-SE> 12,961
<TOTAL-LIABILITIES-AND-EQUITY> 128,698
<INTEREST-LOAN> 3,917
<INTEREST-INVEST> 1,044
<INTEREST-OTHER> 59
<INTEREST-TOTAL> 5,020
<INTEREST-DEPOSIT> 1,843
<INTEREST-EXPENSE> 1,900
<INTEREST-INCOME-NET> 3,120
<LOAN-LOSSES> 84
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,033
<INCOME-PRETAX> 1,244
<INCOME-PRE-EXTRAORDINARY> 1,244
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 790
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.16
<YIELD-ACTUAL> 5.24
<LOANS-NON> 14
<LOANS-PAST> 378
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,036
<CHARGE-OFFS> 62
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 1,063
<ALLOWANCE-DOMESTIC> 1,063
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 200
</TABLE>
