<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, 1999
------------------------------------------------
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, 1999
----- ---------------
Common Stock ($2 par value) 661,567
This report contains 23 pages.
1
<PAGE>
FORM 10-Q
CITIZENS FINANCIAL CORP.
Quarter Ended March 31, 1999
INDEX
Page No.
--------
Part I. Financial Information
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998.............. 3
Condensed Consolidated Statements of Income
Three Months Ended
March 31, 1999 and March 31, 1998................. 4, 5
Condensed Consolidated Statements of
Changes in Shareholders' Equity
Three Months Ended
March 31, 1999 and March 31, 1998................. 6
Condensed Consolidated Statements of
Cash Flows
Three Months Ended
March 31, 1999 and March 31, 1998................. 7
Statements of Comprehensive Income
Three Months Ended
March 31, 1999 and March 31, 1998................. 8
Notes to Condensed Consolidated
Financial Statements.............................. 9 - 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................................... 14 - 21
Part II. Other Information and Index to Exhibits........ 22
Signatures......................................... 23
2
<PAGE>
PART I - FINANCIAL INFORMATION
CITIZENS FINANCIAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
<TABLE>
<CAPTION>
March 31, Dec. 31,
1999 1998
----------- --------
(Unaudited) *
ASSETS
- --------
<S> <C> <C>
Cash and due from banks $ 2,686 $ 3,499
Federal funds sold 1,875 -
Securities available for sale (Note 2) 35,587 35,439
Securities held to maturity (estimated fair
value $7,933 and $8,534, respectively) (Note 2) 7,774 8,373
Loans, less allowance for loan losses of
$1,110 and $1,109, respectively (Notes 3 and 4) 85,561 85,709
Premises and equipment 1,414 1,455
Accrued interest receivable 1,098 1,262
Other assets 1,107 964
-------- --------
Total Assets $137,102 $136,701
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest bearing $ 13,521 $ 15,342
Interest bearing 100,258 98,122
-------- --------
Total deposits 113,779 113,464
Short-term borrowings 4,500 4,627
Long-term borrowings 996 1,013
Other liabilities 1,080 948
-------- --------
Total liabilities 120,355 120,052
-------- --------
Commitments and contingencies (Note 5)
SHAREHOLDERS' EQUITY
- --------------------
Common stock, $2.00 par value, authorized
2,250,000 issued 750,000 shares 1,500 1,500
Additional paid in capital 2,100 2,100
Retained earnings 14,607 14,345
Accumulated other comprehensive income 123 287
Treasury stock at cost, 88,433 shares (1,583) (1,583)
-------- --------
Total shareholders' equity 16,747 16,649
-------- --------
Total Liabilities and Shareholders' Equity $137,102 $136,701
======== ========
</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,
-------------------------
1999 1998
(Unaudited)
<S> <C> <C>
INTEREST INCOME
- ---------------
Interest and fees on loans $1,887 $1,956
Interest and dividends on
securities:
Taxable 530 507
Tax-exempt 100 75
Interest on federal funds sold 7 16
------ ------
Total interest income 2,524 2,554
------ ------
INTEREST EXPENSE
- ----------------
Interest on deposits 904 952
Interest on short-term borrowing 55 50
Interest on long-term borrowing 14 15
------ ------
Total interest expense 973 1,017
------ ------
Net interest income 1,551 1,537
Provision for loan losses 43 30
------ ------
Net interest income after
provision for loan losses 1,508 1,507
------ ------
NONINTEREST INCOME
- ------------------
Trust department income 27 27
Service fees 56 65
Insurance commissions 5 6
Other 38 39
------ ------
Total noninterest income 126 137
------ ------
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 571 513
Net occupancy expense 43 71
Equipment rentals, depreciation
and maintenance 79 75
Data processing 108 101
Advertising 19 24
Other 287 249
------ ------
Total noninterest expenses 1,107 1,033
------ ------
Income before income taxes 527 611
Income tax expense 166 201
------ ------
Net income $ 361 $ 410
====== ======
</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>
Basic earnings per common share (Note 6) $ .55 $ .61
======== ========
Weighted average shares outstanding 661,567 666,981
Dividends per common share $ .15 $ .15
======== ========
</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, 1999 and 1998
-----------------------------------------------------
(unaudited)
Accumulated Total
Common Stock Additional Other Share-
--------------- Paid-in Retained Comprehensive Treasury holders'
Shares Amount Capital Earnings Income Stock Equity
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 750,000 $1,500 $2,100 $13,407 $ 93 $(1,005) $16,095
Net income 410 410
Net change in unrealized
gain on securities 0 0
Purchase of 19,250 shares
of treasury stock (534) (534)
Cash dividends declared
($.15 per share) (100) (100)
---------------------------------------------------------------------------
Balance March 31, 1998 750,000 $1,500 $2,100 $13,717 $ 93 $ (1,539) $15,871
===========================================================================
Balance, January 1, 1999 750,000 $1,500 $2,100 $14,345 $287 $(1,583) $16,649
Net income 361 361
Net change in unrealized
gain on securities (164) (164)
Cash dividends declared
($.15 per share) (99) (99)
---------------------------------------------------------------------------
Balance March 31, 1999 750,000 $1,500 $2,100 $14,607 $123 $(1,583) $16,747
===========================================================================
</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,
--------------------
1999 1998
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 361 $ 410
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for loan losses 43 30
Depreciation and amortization 53 86
Amortization and accretion on securities 55 40
Decrease in accrued interest
receivable 164 157
Increase in other assets (148) (134)
Increase in other liabilities 220 198
------- -------
Cash provided by operating activities 748 787
------- -------
Cash flows from investing activities:
Principal payments, available for sale
securities 93 24
Proceeds from maturities and calls,
available for sale securities 2,500 1,000
Purchases of available for sale securities (3,048) (2,029)
Proceeds from maturities and calls, held
to maturity securities 599 1,045
Purchases of held to maturity securities 0 (1,219)
Purchases of premises and equipment (7) (43)
Decrease in loans 105 2,302
------- -------
Cash provided by investing
activities 242 1,080
------- -------
Cash flows from financing activities:
Cash dividends paid (99) (100)
Acquisition of treasury stock 0 (534)
(Decrease) increase in short-term borrowing (17) 250
Decrease in long-term borrowing (127) (16)
Increase in time deposits 445 634
Decrease in other deposits (130) (2,004)
------- -------
Cash used by financing activities 72 (1,770)
------- -------
Net increase in cash and cash equivalents 1,062 97
Cash and cash equivalents at beginning of period 3,499 3,512
------- -------
Cash and cash equivalents at end of period $ 4,561 $ 3,609
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 993 $ 1,040
Income Taxes $ 3 $ 0
Supplemental Schedule of Noncash Investing
and Financing Activities:
Other real estate and other assets acquired in
settlement of loans $ 0 $ 0
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
CITIZENS FINANCIAL CORP.
STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------
1999 1998
(Unaudited)
<S> <C> <C>
Net income $ 361 $410
Other comprehensive income, net of tax:
Unrealized gains/(losses) on securities
Gain/(loss) arising during the period (164) 0
Reclassification adjustment 0 0
----- ----
Other comprehensive income, net of tax (164) 0
----- ----
Comprehensive income $ 197 $410
===== ====
</TABLE>
8
<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 condensed 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, 1999 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'
1998 Annual Report to Shareholders and Form 10-K.
For the period ended March 31, 1998, the Company was required to adopt
Statement of Financial Accounting Standards No. 130, (SFAS No. 130) "Reporting
of Comprehensive Income". Comprehensive income includes any change in equity of
the Company during the period resulting from transactions and other events and
circumstances from nonowner sources. A Statement of Comprehensive Income has
been included in these condensed consolidated financial statements to comply
with SFAS No. 130. Prior interim periods have been reclassified to provide
comprehensive information.
9
<PAGE>
NOTE 2 - SECURITIES
----------
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at March 31, 1999 and December 31, 1998 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1999
------------------------------------------------
Carrying
Value Estimated
(Amortized Unrealized Unrealized Fair
Cost) Gains Losses Value
- ---------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Held to maturity:
Tax-exempt state and political
subdivisions.................. $ 7,774 $ 159 $ 0 $ 7,933
-------- -------- -------- -------
Total securities
held to maturity............ $ 7,774 $ 159 $ 0 $ 7,933
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Carrying
Value
(Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value)
- -------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities..... $ 2,522 $ 27 $ 0 $ 2,549
U.S. Government agencies
and corporations........... 12,354 114 48 12,420
Mortgage backed securities-
U.S. Government agencies
and corporations.............. 1,725 0 15 1,710
Corporate debt securities....... 17,219 134 24 17,329
Taxable state and political
subdivisions.................. 1,034 1 0 1,035
Federal Reserve Bank stock...... 108 0 0 108
Federal Home Loan Bank stock.... 436 0 0 436
-------- ------- ------- --------
Total securities available
for sale.................... $ 35,398 $ 276 $ 87 $ 35,587
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998*
--------------------------------------------------
Carrying
Value Estimated
(Amortized Unrealized Unrealized Fair
Cost) Gains Losses Value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
Tax-exempt state and political
subdivisions.................. $ 8,373 $ 161 $ - $ 8,534
-------- -------- -------- --------
Total securities
held to maturity............ $ 8,373 $ 161 $ - $ 8,534
======== ======== ======== ========
</TABLE>
*From audited financial statements.
10
<PAGE>
<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........ $ 3,028 $ 42 $ 0 $ 3,070
U.S. Government agencies
and corporations.............. 11,313 166 18 11,461
Mortgage-backed securities -
U.S. Government
agencies and corporations..... 1,819 0 6 1,813
Corporate debt securities....... 17,250 254 0 17,504
Taxable state and
political subdivisions........ 1,044 3 0 1,047
Federal Reserve Bank stock...... 108 0 0 108
Federal Home Loan Bank stock.... 436 0 0 436
------- ---- --- -------
Total securities available for
sale . . . . . . . . . . . . . . $ 34,998 $465 $24 $35,439
======== ==== === =======
</TABLE>
The maturities, amortized cost and estimated fair values of the Bank's
securities at March 31, 1999 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 $ 589 $ 591 $ 8,056 $ 8,118
Due after 1 but within 5 years 6,484 6,613 24,083 24,224
Due after 5 but within 10 years 701 729 2,225 2,210
Due after 10 years - - 490 491
Equity securities - - 544 544
------ ------ ------- -------
$7,774 $7,933 $35,398 $35,587
====== ====== ======= =======
</TABLE>
Mortgage backed securities included above carry a maturity date of less than
one year. The Company's equity securities 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, 1999 and
1998 are as follows (in thousands):
<TABLE>
Proceeds From Gross Realized
------------------------------- ---------------
Calls and Principal
Sales Maturities Payments Gains Losses
------------------------------- ----------------
<S> <C> <C> <C> <C> <C>
March 31, 1999:
Securities held to maturity $ 0 $ 599 $ 0 $ 0 $ 0
Securities available for sale 0 2,500 93 0 0
------ -------- -------- ------ ----
$ 0 $ 3,099 $ 93 $ 0 $ 0
====== ======== ======== ====== ====
March 31, 1998:
Securities held to maturity $ 0 $ 1,045 $ 0 $ 0 $ 0
Securities available for sale 0 1,000 24 0 0
------ -------- -------- ------ ----
$ 0 $ 2,045 $ 24 $ 0 $ 0
====== ======== ======== ====== ====
</TABLE>
At March 31, 1999 and December 31, 1998 securities with an amortized cost of
$11,602,000 and $11,563,000, respectively, with estimated fair values of
$11,721,000 and $11,768,000, respectively, were pledged to secure public
deposits, securities sold under agreements to repurchase, and for other purposes
required or permitted by law.
At March 31, 1999, the company had a concentration within its corporate debt
securities classification which included obligations of financial services
industry companies with global operations having an approximate amortized cost
of $8,556,000 and an estimated fair value of $8,617,000. There were no
concentrations with any one issuer.
*From audited financial statements.
11
<PAGE>
NOTE 3 - LOANS
-----
Total loans are summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(Unaudited) *
<S> <C> <C>
Commercial, financial and agricultural $14,195 $13,366
Real estate - construction 1,445 1,680
Real estate - mortgage 59,132 59,303
Installment loans to individuals 10,862 11,599
Credit card loans 859 904
Other 241 23
------- -------
Total loans 86,734 86,875
Net deferred loan origination costs (29) (20)
Less unearned income 34 37
------- -------
Total loans net of unearned income and
net deferred loan origination costs 86,671 86,818
Less allowance for loan losses 1,110 1,109
------- -------
Loans, net $85,561 $85,709
------- -------
</TABLE>
* From audited financial statements
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,
-------------------
1999 1998
<S> <C> <C>
Balance at beginning of period $ 1,109 $ 1,094
------- -------
Loans charged off:
Commercial and industrial 18 3
Real estate - mortgage 0 0
Consumer and other 9 30
Credit card 24 19
------- -------
Total 51 52
------- -------
Recoveries:
Commercial and industrial 0 1
Real estate - mortgage 0 0
Consumer and other 5 3
Credit card 4 4
------- -------
Total recoveries 9 8
------- -------
Net losses 42 44
Provision for loan losses 43 30
------- ------
Balance at end of period $ 1,110 $ 1,080
======= =======
</TABLE>
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
12
<PAGE>
actions arising in the normal course of business and commitments to extend
credit.
NOTE 6 - EARNINGS PER SHARE
------------------
Basic earnings per share is based on the weighted average number of shares
outstanding during the period. For the three months ended March 31, 1999 and
1998 the weighted average number of shares were 661,567 and 666,981,
respectively. During the periods ended March 31, 1999 and 1998 the Company did
not have any dilutive securities.
13
<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 1998 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. Included in this discussion are forward
looking statements based on management's current expectations, actual results,
however, may differ. Amounts and percentages used in this discussion have been
rounded.
EARNINGS SUMMARY
- ----------------
Net income for the first quarter of 1999 was $361,000, down $49,000 from
$410,000 in the first quarter of 1998. On a per share basis earnings registered
a similar decrease from $.61 to $.55. These levels of income represent
annualized returns on average assets of 1.08% and 1.27%, respectively. Return
on average equity also decreased from 10.48% to 8.82%. Details concerning the
Company's results of operations are discussed 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 1999 totaled $1,551,000, up
fractionally from $1,537,000 in the first quarter of 1998. When viewed on a
tax-equivalent basis the increase was similar, rising $13,000 to $1,603,000.
Tax-equivalent interest income, the first of the two components comprising net
interest income, decreased $31,000 when compared to the first quarter of 1998 to
$2,576,000. In large part this is due to the placement of a specific commercial
loan on nonaccrual status. Had this loan been accruing interest the quarterly
total would have been $2,604,000 which is just $3,000 below the first quarter
1998 total. A further discussion of the circumstances surrounding this loan is
presented later in this report.
In addition to the nonaccural loan, interest income is being impacted by both
increased levels of earning assets and a lower interest rate environment.
Average earning assets for the quarter of $130.6 million are $4.4 million in
excess of the first quarter 1998 average. These funds are primarily being
invested in the securities portfolio. As a result, tax-equivalent security
income of $682,000 is $58,000, or 9.3%, more than in the first quarter of 1998.
The lower rate environment, however, has caused tax-
14
<PAGE>
equivalent loan income to decrease $80,000 from $1,967,000 in the first quarter
of 1998 to $1,887,000 in the first quarter of 1999. This drop reflects the
downward repricing of the Bank's substantial portfolio of one year adjustable
rate mortgages. In total, the tax-equivalent yield on earning assets of 8.01% is
36 basis points lower than in the first quarter of 1998.
Interest expense, the other component of net interest income, decreased
$44,000 when compared to the first quarter of last year despite the fact that
the average balance of interest bearing liabilities was up $3.2 million. This
is the result of lower interest rates. The overall cost of interest bearing
liabilities for the quarter of 3.76% is 29 basis points lower than in the first
quarter of 1998 reflecting several rate reductions implemented in late 1998.
This combination of higher average balances and lower rates produced a tax-
equivalent net interest margin of 4.99% for the quarter, down from 5.11% in the
first quarter of last year but still significantly above the peer average.
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
quarter of $126,000 was $11,000, or 8.0%, below last year's $137,000. Nearly
all of this decrease may be attributed to lower service fees, particularly
overdraft fees and fees on commercial deposit accounts. Overdrafts decreased
approximately 10% from $33,000 to $30,000. Commercial account fees, however,
fell nearly 90% from $6,600 to $700. This decrease is due to the loss of one
specific commercial deposit customer subsequent to the first quarter of 1998.
At that time management determined that the fees generated by the account were
not sufficient to cover the related costs and the deposit relationship ceased.
Future commercial account fees are expected to continue to approximate their
current levels.
During the quarter the Bank began offering brokerage services, including
stocks, bonds, mutual funds and annuities, to its customers. This venture has
thus far exceeded expectations in terms of sales activity and has generated net
brokerage fees of $5,000. The effect on the deposit base has been limited as
less than one quarter of the total sales have come from Bank deposits. In the
long-term, management believes this service will actually increase deposits. As
of March 31, 1999, it is estimated that second quarter brokerage activity will
exceed first quarter levels.
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 first quarter of 1999 of $1,107,000 was $74,000, or 7.2%, greater than
during the first quarter of 1998.
The majority of this increase was due to higher salary and benefit costs, up
$58,000 to $571,000. Salaries have increased approximately $35,000 as a result
of the retention of a full-time broker and a new trust officer in addition to
regular compensation adjustments. As a consequence of this, payroll related
taxes also increased. Increases were also experienced in group insurance and
pension expense. Group insurance costs, including the Company's partially self-
funded medical plan, increased 6% during the quarter to $105,000. The cost of
the medical plan is borne
15
<PAGE>
entirely by the Company. The pension plan continues to enjoy an overfunded
status but the net periodic pension benefit decreased by $7,000 during the
quarter.
Smaller increases were experienced in equipment costs and data processing
while other noninterest expense increased by $38,000 to $287,000 for the
quarter. This reflects increases in a number of items including postage,
stationery and supplies, professional fees, educational expense, software costs
and directors fees. Management expects several of these items, including
stationery, professional fees and educational expense, to be reduced during the
remainder of the year. The increase in director fees is due solely to an
increase in the number of directors.
Two categories of noninterest expense, occupancy expense and advertising,
decreased during the quarter. Net occupancy expense fell by $28,000, or 39.4%,
for the quarter as a major building addition became fully depreciated during
1998. The decrease in advertising, which was $5,000, reflects a more focused
approach to marketing the Bank's products and services.
INCOME TAXES
- ------------
The Company's provision for income taxes, which totaled $166,000 in the first
quarter of 1999 and $201,000 in the first quarter of 1998, includes both federal
and state income taxes. Included in these amounts are deferred tax benefits of
$17,000 and $22,000, respectively. The effective tax rates during the two
periods were 31.5% in 1999 and 32.9% in 1998.
FINANCIAL CONDITION
- -------------------
Average total assets during the first quarter of 1999 were $136,296,000, up
$4.6 million from the first quarter of 1998. A detailed discussion of the
Bank's financial condition, and its various balance sheet components follows.
LOAN PORTFOLIO
- --------------
The loan portfolio, which represents Citizens' largest asset, was nearly
steady during the first quarter decreasing by just $141,000 to $86,734,000. The
biggest change among the various loan portfolios was in the commercial loan
portfolio. This portfolio increased $829,000, or 6.2%, during the quarter to
$14,195,000. Competitive pressures from auto manufactures and a variety of
mortgage providers continue to make loan growth at acceptable yields and risk
levels difficult for those types of loans. However, management believes that
with both the recent and expected improvements to the local economy, there
exists a good opportunity to expand and develop the commercial loan portfolio.
In the year since March 31, 1998 this portfolio increased by more than 26%.
Over the past two years the portfolio has increased by nearly 34%.
This emphasis on commercial development can also be found in the mortgage
portfolio, which includes loans to commercial enterprises secured by real
property, in addition to traditional residential mortgage loans. Of the
$59,132,000 in total mortgage loans outstanding at quarter-end, $18,531,000 are
to commercial enterprises and $38,121,000 are for traditional residential
mortgages. The commercial portion is up $579,000 since year-end, $2.3 million
over the past year, and $3.8 million over the prior two years. In contrast,
residential lending has fallen $883,000 during the quarter and is down $1.5
million and $5.0 million over the
16
<PAGE>
previous one and two year periods, respectively. During this time many
homeowners changed from adjustable rate mortgages, which were very popular in
Citizens marketplace, to long-term fixed rate mortgages typically offered
through mortgage brokers and sold on the secondary market. To date, the Banks'
involvement in this type of product has not been extensive although several
strategies designed to improve competitiveness are being considered.
The Bank's third major loan portfolio is the installment portfolio. This
portfolio decreased $737,000 during the first quarter of 1999 to $10,862,000.
This is similar to the pattern in both 1997 and 1998. For several years prior
to 1997 the Bank successfully sought auto loans. Now, as these loans amortize
and manufacturers offer special financing incentives, the Bank finds itself
unable to maintain these higher loan balances at acceptable yields and risk
levels.
The Bank's remaining loan portfolios, including construction and credit cards,
are relatively small and have not exhibited changes which are material to the
overall portfolio. However, the credit card portfolio, which had a quarter-end
balance of $859,000, will be sold during the second quarter due to an inability
to increase the size of the portfolio and the relatively high level of charge-
offs which have been experienced. Net credit card charge-offs during the first
quarter of 1999 were $20,000. Over the past three years, net credit card charge
offs have averaged $61,000 per year.
The Bank is also a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and letters of
credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
balance sheets. At March 31, 1999 commitments to extend credit, including
unused lines of credit, totaled $11,745,000 while letters of credit totaled
$198,000.
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. The following table provides a summary of past due loans and
nonperforming assets.
Summary of Past Due Loans and Nonperforming Assets
--------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
March 31 December 31
------------------------ -----------
1999 1998 1998
(unaudited) *
<S> <C> <C> <C>
Loans past due 90 or more days
still accruing interest $ 14 $ 18 $ 21
===== ===== =====
Nonperforming assets:
Nonaccruing loans $1,218 $ 85 $ 53
Other real estate owned 42 0 75
----- ----- ------
$1,260 $ 85 $ 128
====== ====== ======
</TABLE>
* From the Company's Form 10-K filing dated December 31, 1998
The large increase in nonaccrual loans may be attributed to one specific
credit totaling $1,185,000 involving a customer engaged in the
17
<PAGE>
extractive industry. Due to production setbacks this customer is experiencing
cash flow problems and was 110 days past due at quarter-end. Foreclosure
proceedings are being initiated. Potential losses are estimated at $450,000 as
certain forms of collateral, particularly equipment, have decreased in value.
Such loss, and any others which may be reasonably anticipated, has been provided
for in the allowance for loan losses. Management makes this determination by its
analysis of overall loan quality, changes in the mix and size of the loan
portfolio, previous loss experience, general economic conditions, information
about specific borrowers and other factors. At March 31, 1999, the allowance for
loan losses was $1,110,000, or 1.28% of gross loans. Given the inherent risk
contained in the portfolio, including the nonaccrual loan described above as
well as commitments to extend credit, this level is considered adequate.
Management is not aware of any trends, uncertainties or other information
relating to the loan portfolio which it expects will materially impact future
operating results, liquidity or capital resources.
The provision for loan losses is a charge to earnings which is made to
maintain the allowance for loan losses at a sufficient level. The provision
totaled $43,000 during the first quarter of 1999 and $30,000 during the first
quarter of 1998. An analysis of the allowance for loan losses may be found in
Note 4 to the financial statements.
SECURITIES PORTFOLIO AND FEDERAL FUNDS SOLD
- -------------------------------------------
The Bank's securities portfolio consists of available for sale and held to
maturity securities while no securities are maintained in a trading account. At
March 31, 1999, the held to maturity portfolio totaled $7,774,000 consisting
solely of tax-exempt municipal securities which are expected to be held until
they mature in order to benefit from their tax advantaged status. Management is
attempting to take full advantage of such tax saving opportunities when
available although no such securities were purchased during the first quarter.
Management also attempts to emphasize the available for sale portfolio due to
the flexibility it allows in managing the balance sheet structure and addressing
asset/liability issues. At March 31, 1999 this portfolio had an estimated fair
value of $35,587,000, $189,000 in excess of the amortized cost. Such excess
represents an unrealized gain.
This portfolio, which represents 82% of the total securities portfolio, is
invested primarily in U.S. Treasury and agency obligations and investment grade
corporate debt instruments. The treasury and agency portion of the portfolio,
including agency backed mortgage securities, total $16,679,000 at quarter-end or
46.9% of the available for sale portfolio. Corporate debt securities totaling
$17,329,000 comprised 48.7%. The remainder of the portfolio, which totals
$1,579,000, consists of taxable municipal obligations and stock which the Bank
is required to hold for membership in the Federal Reserve Bank and the Federal
Home Loan Bank.
The Bank has typically favored investments with maturities of five years or
less which have known cash flow patterns. Such instruments typically provide
greater safety, less market value fluctuation and more simplified
asset/liability issues. However, some callable securities and mortgage backed
securities may be purchased from time to time for their increased yield. As of
the report date, callable securities totaled $4,920,000 while mortgage backed
securities were $1,710,000.
The Bank generally tries to minimize its involvement in the overnight
18
<PAGE>
federal funds sold market, instead relying on the continually maturing
securities portfolio to provide the liquidity needed to fund loans or meet
deposit withdraw demands. Nonetheless, at any given time the execution of
specific investing or funding strategies, or normal fluctuations in deposit and
loan balances, may require the bank to sell, or buy, funds on an overnight
basis.
At March 31, 1999 the balance of federal funds sold was $1,875,000. The
average federal funds sold balance during the quarter was $563,000. There were
no federal funds sold at year-end 1998.
DEPOSITS AND OTHER FUNDING SOURCES
- ----------------------------------
Total deposits at March 31, 1999 of $113,779,000 were little changed from
their year-end total of $113,464,000. Average quarterly deposits of
$113,266,000 also provides an indication of deposit stability. However, while
first quarter deposits have been stable, they are well above the first quarter
1998 average of $110,130,000.
Noninterest bearing deposits decreased $1,821,000 to $13,521,000 during the
quarter. The year-end level, however, was unusually high while the current
level more closely approximates expected levels. In contrast to this interest
bearing deposits grew $2,136,000, or 2.2%, to $100,258,000 during the quarter.
The area of greatest growth was passbook savings which increased by $1,038,000
to $22,153,000 despite the lower interest rates which have been in effect since
the fourth quarter of 1998. Lesser increases were also experienced in all of
the Bank's other major deposit categories. Interest bearing checking accounts
increased by $604,000, money market accounts increased by $222,000, and
certificates of deposit increased by $455,000.
At quarter-end all of the Bank's major deposit categories are equal to or in
excess of budgeted levels and management is pleased with the total deposit
growth over the last year of $4.7 million, or 4.4%. The Bank's $11 million
portfolio of jumbo certificates, which increased dramatically during 1998's
stock market volatility, has been very stable to date. During the first quarter
virtually all such maturing securities were retained by the Bank. Management is
aware, that approximately $7.4 million of such certificates will mature before
year-end. Efforts to retain such deposits will be based on competitive pricing
but management does not intend to engage in above market pricing practices in
order to retain deposits.
In addition to deposits the Bank may generate funding by the use of
borrowings. Neither the Bank's short-term borrowings, which consist of
repurchase agreements, nor its' long-term borrowings from the Federal Home Loan
Bank of Pittsburgh, changed significantly during the first quarter.
CAPITAL RESOURCES
- -----------------
The Company continues to maintain a strong capital base. Total capital at
March 31, 1999 of $16,747,000 is $98,000 more than at year-end and represents
12.2% of assets. Capital levels increased during the quarter as a result of
earnings. Dividends of $99,000 and a decrease in the unrealized gain on
available for sale securities of $164,000 had the opposite effect.
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 table below and is unaware
19
<PAGE>
of any trends or uncertainties, nor do any plans exist, which may materially
impair or alter its capital position.
<TABLE>
<CAPTION>
Minimum Capital Standard Ratios
- ----------------------------------------------------------------------
Citizens Regulatory
Financial Corp. Requirements
- ----------------------------------------------------------------------
<S> <C> <C>
Total capital to risk weighted assets 18.56% 8.0%
Tier I capital to risk weighted assets 17.40% 4.0%
Tier I capital to adjusted total assets 12.19% 3.0%
</TABLE>
No changes in the Company's capital structure occurred during the first
quarter and capital expenditures were minimal. For the remainder of 1999
capital expenditures are expected to approach $150,000, mostly to upgrade
computers and proof machines and to install high speed communications lines
required by the Bank's third party data processor. The Company's stock
continues to be thinly traded and ranged in price from $50 to $54 per share
during the quarter.
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, 1999
these sources totaled $26,381,000 or 19.2% of total assets. In addition,
liquidity may be generated through loan repayments and over $52,000,000 of
available borrowing arrangements with correspondent banks. Each quarter
management tests the Bank's ability to satisfy its anticipated liquidity needs
over the next twelve months. At March 31, 1999 this test indicates the Bank is
well positioned and has ample liquidity to satisfy normal business needs.
Details on both the sources and uses of cash are presented in the Statements of
Cash Flows contained in the financial statements.
The Company is also actively planning to meet any liquidity requirements which
may, or may not, occur as a result of the Year 2000 issue. Such plans extend
beyond the more usual planning as described above and will continue to evolve as
the year-end approaches.
The Objective of the Company's interest rate sensitivity management program,
also know 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, 1999, the
Company's cumulative one year gap to total assets ratio was a negative 3.74%
negative which is little changed from negative 4.15% at December 31, 1998. This
indicates the Bank may experience a reduction in net interest income in the
event interest rates rise. However, because of certain assumptions inherent in
gap theory, the Bank also utilizes financial modeling programs to measure and
control its interest rate risk. In such programs changes in net interest income
are forecast under various interest rate scenarios. Instantaneous shifts in
interest rates of up to 200 basis points are
20
<PAGE>
regularly tested.
YEAR 2000 COMPLIANCE
- --------------------
Historically, certain computerized systems have had two digits rather than
four digits to define the applicable year, which could result in recognizing a
date using 00 as the year 1900 rather than the year 2000. This could result in
failures or miscalculations and is generally referred to as the Year 2000 issue.
Because the Bank, as well as some of its suppliers, customers and service
providers, is heavily dependent on computers to conduct its business operations
it recognizes and seeks to responsibly address the Year 2000 issue. Failure to
address Year 2000 issues could result in business disruption that could
materially affect the Company's operations, liquidity or capital resources. A
Year 2000 Task Team has been assembled to study, test and remedy Year 2000
issues. This team includes members of senior management and reports regularly
to the Board of Directors. The team has inventoried all computer related or
dependent hardware and software, identified those which are critical, and
assessed the Year 2000 compliance of each component. Testing of critical items,
which involve a third party processor, are being jointly conducted with that
processor. During 1998 such tests of the processors' major functions were
successful. Additional testing is scheduled for the second quarter of 1999.
Backup systems for noncritical functions have also been identified and are also
subject to testing. The Bank also has contingency plans which will be
implemented in the event of a Year 2000 failure. In addition, the Bank has
contacted those customers and vendors, who, if unable to cope with the Year 2000
issue may negatively impact the Bank, to attempt to determine their degree of
readiness.
Through March 31, 1999, the Bank has incurred expenditures in excess of
$135,000 in preparation for the Year 2000. Of this amount, just $3,000 was
incurred during the first quarter. Included in the total are capital
expenditures approximating $82,000. It is not expected that additional capital
expenditures of a significant amount will be needed.
While the Bank believes the tests and procedures in place should minimize the
Year 2000 risks and enable it to meet the needs of its customers in the Year
2000, the Bank cannot quantify the potential impact of any unforeseen Year 2000
failures that might occur either internally or from external third parties.
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, except for the available for sale
securities portfolio. 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.
21
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
-----------------
As of March 31, 1999 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
affecting 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.
22
<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: 5/4/99 /s/ Robert J. Schoonover
-------------------- -------------------------------
Robert J. Schoonover
President
Chief Executive Officer
Date: 5/4/99 /s/ Thomas K. Derbyshire
-------------------- -------------------------------
Thomas K. Derbyshire
Treasurer
Principal Financial Officer
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1999 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-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,686
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,875
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 35,587
<INVESTMENTS-CARRYING> 7,774
<INVESTMENTS-MARKET> 7,933
<LOANS> 86,734
<ALLOWANCE> 1,110
<TOTAL-ASSETS> 137,102
<DEPOSITS> 113,779
<SHORT-TERM> 4,500
<LIABILITIES-OTHER> 1,080
<LONG-TERM> 996
0
0
<COMMON> 1,500
<OTHER-SE> 15,247
<TOTAL-LIABILITIES-AND-EQUITY> 137,102
<INTEREST-LOAN> 1,887
<INTEREST-INVEST> 630
<INTEREST-OTHER> 7
<INTEREST-TOTAL> 2,524
<INTEREST-DEPOSIT> 904
<INTEREST-EXPENSE> 973
<INTEREST-INCOME-NET> 1,551
<LOAN-LOSSES> 43
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,107
<INCOME-PRETAX> 527
<INCOME-PRE-EXTRAORDINARY> 527
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 166
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
<YIELD-ACTUAL> 4.99
<LOANS-NON> 1,218
<LOANS-PAST> 14
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,109
<CHARGE-OFFS> 52
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 1,110
<ALLOWANCE-DOMESTIC> 1,110
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 100
</TABLE>
