<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the fiscal year ended December 31, 1999
---------------------
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No: 2-96144
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CITIZENS FINANCIAL CORP.
---------------------------------------------------------------
(exact name of registrant as specified in its charter)
Delaware 55-0666598
- -------------------------------- ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
213 Third St.
Elkins, West Virginia 26241
- -------------------------------- ---------------------------------------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's Telephone Number, (304) 636-4095
---------------------------------------
Including Area Code:
Securities Registered Pursuant to Section 12(b) of the Act: None
----
Securities Registered Pursuant to Section 12(g) of the Act: None
----
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes X No _______
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The aggregate market value of Citizens Financial Corp. common stock,
representing all of its voting stock that was held by nonaffiliates on February
29, 2000, was approximately $20,834,894.
As of February 29, 2000, Citizens Financial Corp. had 750,000 shares of
common stock outstanding with a par value of $2.00.
This report contains 116 pages.
1
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DOCUMENTS INCORPORATED BY REFERENCE
(1) The Company's Form S-4, dated February 19, 1987, is incorporated by
reference in Item 1 of Part I and Item 14(c) of Part IV of this report to the
extent stated herein.
(2) The Bank's Executive Supplemental Income Agreement, previously filed as an
Exhibit to the Company's Form 10-K dated December 31, 1996, and amended as filed
in the December 31, 1997 Form 10-K, is also incorporated by reference in Item 11
of Part IV of this report.
(3) The Company's Bylaws, which were previously filed on pages 64-71 of its
Form 10-K dated December 31, 1998, are incorporated by reference in Item 14(c)
of Part IV of this report.
(4) The Company's Form 8-K, dated December 22, 1999, is incorporated herein by
reference in Part I, Item 1 and Part IV, Item (b) of this report.
CITIZENS FINANCIAL CORP.
FORM 10-K INDEX
Page
----
Part I Item 1 Business................................................. 3
Item 2 Properties............................................... 3
Item 3 Legal Proceedings........................................ 7
Item 4 Submission of Matters to a Vote of Security Holders...... 7
Part II Item 5 Market for the Registrant's Common Stock and Related
Shareholders Matters..................................... 7
Item 6 Selected Financial Data.................................. 9
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 16
Item 8 Financial Statements and Supplementary Data.............. 29
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 55
Part III Item 10 Directors and Executive Officers of the Registrant....... 55
Item 11 Executive Compensation................................... 57
Item 12 Security Ownership of Certain Beneficial Owners and
Management............................................... 59
Item 13 Certain Relationships and Related Transactions........... 60
Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................. 62
2
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Citizens Financial Corp.
Form 10-K, Part I
- -----------------
Item 1. Business
- -----------------
Item 2. Properties
- -------------------
The following discussion satisfies the reporting requirements of Items
1 and 2.
Description of Citizens
-----------------------
Organizational History and Subsidiaries
- ---------------------------------------
Citizens Financial Corp., ("Citizens" or "the Company"), was organized as a
Delaware business corporation on September 29, 1986, and its Certificate of
Incorporation was filed with the Delaware Secretary of State on October 2, 1986.
Citizens Financial Corp. was formed at the request of the Board of Directors of
Citizens National Bank of Elkins, Randolph County, West Virginia, for the
purpose of becoming a bank holding company within the meaning of applicable
statutory and regulatory authority.
Citizens National Bank, ("the Bank"), the sole subsidiary of Citizens
Financial Corp., was organized on November 19, 1923 and has operated in Elkins,
Randolph County, West Virginia, as a national banking association continuously
since that time. On March 21, 1987, the stockholders of Citizens National Bank
approved an Agreement and Plan of Reorganization whereby Citizens National Bank
would become the wholly-owned subsidiary of Citizens Financial Corp. This
reorganization became effective on April 30, 1987. To date, Citizens National
Bank is the sole subsidiary of Citizens Financial Corp.
Pending Acquisition
- -------------------
As further disclosed in Note 12 to the Consolidated Financial Statements,
which may be found on page 50 of this report, the Bank has entered into an
agreement to purchase and operate a branch facility in Petersburg, West
Virginia. This transaction is expected to be completed during the first half of
2000 and provide the Bank with the opportunity to offer its products and
services in a new market. This transaction was previously reported by the
filing of Form 8-K on December 22, 1999 which is incorporated herein by
reference.
Employees
- ---------
As of December 31, 1999 Citizens Financial Corp. had no employees.
Citizens National Bank employed 77 full-time equivalent employees at that date.
The Bank's employees are not represented by any union or other collective
bargaining agreement and the Bank believes its employee relations are good.
Business of Citizens and Citizens National Bank
- -----------------------------------------------
As a bank holding company registered under the Bank Holding Company Act of
1956, as amended, Citizens' present business is the operation of its bank
subsidiary. As of December 31, 1999 Citizens' consolidated assets approximated
$137,297,000 and total shareholders' equity approximated $15,954,000.
Citizens National Bank is a full-service commercial bank and, as such,
engages in most types of business permitted by law or regulation. Among these
services are the acceptance of time, demand and savings deposits including NOW
accounts, regular savings accounts, money market deposit accounts, fixed-rate
certificates of deposit and club accounts. In addition safe deposit box
rentals, wire transfer services and 24-hour Automated Teller Machine (ATM)
services
3
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through a regional network known as MPACT are provided. MPACT is a participant
in the nationwide Cirrus and Plus networks.
The Bank offers a full spectrum of lending services to its customers,
including commercial loans and lines of credit, residential real estate loans,
consumer installment loans and other personal loans. Commercial loans are
generally secured by various collateral, including commercial real estate,
accounts receivable and business machinery and equipment. Residential real
estate loans consist primarily of mortgages on the borrower's personal
residence, and are typically secured by a first lien on the subject property.
Consumer and personal loans are generally secured, often by first liens on
automobiles, consumer goods or depository accounts. A special effort is made to
keep loan products as flexible as possible within the guidelines of prudent
banking practices in terms of interest rate risk and credit risk. Bank lending
personnel adhere to established lending limits and authorities based on each
individual's lending expertise and experience.
When considering loan requests, the primary factors taken into
consideration by the Bank are the cash flow and financial condition of the
borrower, the value of the underlying collateral, if any, and the character and
integrity of the borrower. These factors are evaluated in a number of ways
including an analysis of financial statements, credit reviews and visits to the
borrower's place of business.
The Bank also maintains a trust department which acts as trustee under
wills, as executor and administrator of estates, as guardian for estates of
minors and incompetents and serves in various corporate trust capacities.
As a bank holding company Citizens is permitted to engage in certain
nonbanking activities which are closely related to banking under the provisions
of the Bank Holding Company Act and the Federal Reserve Boards' Regulation Y. In
addition, the Bank may engage, directly or indirectly, in certain nonbanking
activities as permitted by its regulatory authorities. Beginning in January,
1999, the Bank began providing brokerage services through a contractual
agreement with PrimeVest Financial Services, Inc. Products and services offered
through PrimeVest includes stocks, bonds, mutual funds and annuities. These
services are not bank deposits and do not carry FDIC insurance. As such, they do
carry a risk of loss and are intended only for those customers who understand
and accept such risk. In addition to this venture, management is also evaluating
other nonbanking opportunities.
Statistical Information
- -----------------------
The disclosures required by Securities Act Guide 3 - "Statistical
Disclosure by Bank Holding Companies", are included in Item 6 - Selected
Financial Data, on pages 9 through 16 of this report.
Properties
- ----------
The services described above are offered from offices owned by the Bank
including its approximately 16,940 square foot main office located at 213 Third
Street, Elkins, West Virginia. In addition the Bank owns a drive-in facility
directly across from its main office on Third Street and it has owned and
operated a 5,000 square foot full service branch in Parsons, West Virginia since
1984. In 1992 an additional branch facility was opened in Beverly, West
Virginia which contains approximately 1,840 square feet. This facility, which
is also owned, provides drive-in and ATM service in addition to traditional
deposit and teller services. Loan services, however, are not provided at the
Beverly branch. All of these facilities are fully utilized for banking purposes
except the Parsons branch which leases approximately 1,800 square feet as a
dental office.
4
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Citizens Financial Corp. does not own or lease any property. To date it has
utilized the Bank's facilities and has not occupied more than a minimal amount
of space. Citizens does not compensate the Bank in any way for such usage as it
is deemed to be insignificant. Management believes the existing facilities are
adequate and suitable to conduct the Company's and Bank's business.
Competition
- -----------
Citizens faces a high degree of competition for all of its services from
local banks. Within its market area of Randolph and Tucker counties in West
Virginia there exists seven competing commercial banks operating numerous
branches. As of June 30, 1999, the most recent date for which data is available,
the Bank had deposits representing approximately 28.2% of total deposits of the
commercial banks serving its primary market area, which is comparable to its
market share at June 30, 1998. With regard to the upcoming opening of a branch
in Petersburg, West Virginia, the Bank expects to enter the market with
approximately 5.3% of the deposit market share. Two other banks will also
operate in that market.
Nonbank competition has increased in recent years locally by the
establishment of brokerage companies and the expansion of insurance operations
and credit unions as well as from mutual funds located throughout the country.
The Company expects its brokerage unit will help it better meet this
competition.
West Virginia banks are allowed unlimited branch banking throughout the
State. The Interstate Banking and Branch Efficiency Act of 1994 also authorizes
interstate branching by acquisition and consolidation nationwide. These and
similar provisions impacting both the banking and thrift industries may serve to
intensify future competition within Citizens' market.
Supervision and Regulation
- --------------------------
Citizens, as a bank holding company, is subject to the restrictions of the
Bank Holding Company Act of 1956, as amended, and is registered pursuant to its
provisions. As such, Citizens is subject to the reporting requirements of and
examination by the Board of Governors of the Federal Reserve System ("Board of
Governors").
The Bank Holding Company Act prohibits the acquisition by a bank holding
company of direct or indirect ownership of more than five percent of the voting
shares of any bank within the United States without prior approval of the Board
of Governors. With certain exceptions, a bank holding company also is
prohibited from acquiring direct or indirect ownership or control of more than
five percent of the voting shares of any company which is not a bank, and from
engaging directly or indirectly in business unrelated to the business of
banking, or managing or controlling banks.
As a bank holding company doing business in West Virginia, Citizens is also
subject to regulation and examination by the West Virginia Department of Banking
and must submit annual reports to the Department. Further, any acquisition
application which Citizens must submit to the Board of Governors must also be
submitted to the West Virginia Banking Board for approval.
In 1994, Congress passed the Reigle-Neal Interstate Banking Bill (the
"Interstate Bill"). The Interstate Bill permits certain interstate banking
activities through a holding company structure, effective September 30, 1995. It
permits interstate branching by merger effective June 1, 1997 unless states
"opt-in" sooner, or "opt-out" before that date. States may elect to permit de
novo branching by specific legislative election. In March, 1996, West Virginia
adopted changes to its banking laws so as to permit interstate banking and
branching to the fullest extent permitted by the Interstate Bill. The Interstate
5
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Bill will permit consolidation of banking institutions across state lines and,
perhaps, de novo entry. As its provisions become effective, it is likely that
the resulting restructurings and interstate activities will result in the
realization of economies of scale within those institutions with entities in
more than one state. One result could be increased competitiveness, due to the
realization of economies of scale and/or, where permitted, due to de novo market
entrants.
Under West Virginia banking law, an acquisition or merger is not permitted
if the resulting depository institution or its holding company, including any
depository institutions affiliated therewith, would assume additional deposits
to cause it to control deposits in the State of West Virginia in excess of
twenty five percent (25%) of such total amount of all deposits held by insured
depository institutions in West Virginia. This limitation may be waived by the
Commissioner of Banking for good cause shown.
Citizens National Bank, as a national banking association, is subject to
supervision, examination and regulation by the Office of the Comptroller of the
Currency. It is also a member of the Federal Reserve System, and as such is
subject to applicable provisions of the Federal Reserve Act and regulations
issued thereunder.
The deposits of the Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC") to the extent provided by law. Accordingly, the Bank is
also subject to regulation by the FDIC.
Under the Community Reinvestment Act of 1977, the Comptroller of the
Currency is required to assess the record of all financial institutions
regulated by it to determine if such institutions meet the credit needs of the
community (including low-to-moderate income neighborhoods) served by them and to
take this record into account in its evaluation of any application made by any
such institution for, among other things, approval of a branch or other deposit
facility, office relocation, or the merger with or acquisition of assets of
another bank. The state of West Virginia has a similar statutory regulation. In
its most recent examination the Bank received a satisfactory CRA rating.
The Bank is subject to various capital requirements under federal banking
regulations including the Federal Deposit Insurance Corporation Improvement Act
of 1991 (FDICIA). Quantitative measures established by those regulations ensure
minimum capital levels are maintained. Those measures are summarized in Note 13
to the Consolidated Financial Statements which begins on page 50 of this report.
Also contained in that Note are the Bank's regulatory capital ratios at December
31, 1999. Those ratios show that the Bank satisfied the requirements necessary
to be categorized as well capitalized which is the highest category established
under the regulations. As a well capitalized institution Citizens is permitted
to engage in a wider range of banking activities than may be permitted
otherwise.
Another requirement of FDICIA is that federal banking agencies must
prescribe regulations relating to various operational areas of banks and bank
holding companies. These include standards for internal audit systems, loan
documentation, information systems, internal controls, credit underwriting,
interest rate exposure, asset growth, compensation, and such other standards as
the agency deems appropriate.
As a subsidiary bank of a bank holding company, Citizens National Bank is
also subject to certain restrictions imposed by the Federal Reserve Act upon any
extensions of credit to Citizens Financial Corp. or, if such existed, any of its
other subsidiaries, on investments in the stock or other securities of that bank
holding company or its subsidiaries, and on the taking of such stock or
securities as collateral for loans to any borrower.
6
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Item 3. Legal Proceedings
- --------------------------
As of December 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 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders of Citizens
Financial Corp. during the fourth quarter of 1999.
Part II
- -------
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
- -----------------------------------------------------------------------------
Historically, the stock of Citizens Financial Corp. and, prior to its
formation, the stock of Citizens National Bank, has traded only sporadically.
The stock is not listed on any security exchange, however, regional brokerage
firms provide an efficient and orderly market for transactions involving its
shares. There are no further plans, understandings, arrangements or agreements
to list the stock on any exchange at this time.
Citizens has only one class of stock, that being common stock, and all
voting rights are vested in its holders. The shareholders of Citizens are
entitled to one vote for each share of common stock owned on all matters subject
to a vote of shareholders. At February 28, 1999 shareholders of record numbered
470. The Company has no plans to issue senior securities.
Citizens maintains a policy under which it may purchase shares of its' own
stock for treasury, subject to certain limitations, when it is deemed to be in
the best interest of the Company to do so. Such shares are purchased on the open
market through independent brokers. At December 31, 1998 and 1999 the number of
treasury shares was 88,433 and 94,168, respectively. These shares are included
in the total number of shares issued, as disclosed above, and no plans currently
exist regarding their use and there are no plans regarding future purchases. An
additional 3,220 shares of treasury stock were purchased subsequent to December
31, 1999 and prior to the filing of this report.
The following table presents the high and low market prices for Citizens'
common stock for the periods indicated.
High Low
------ ------
First Quarter through
February 29, 2000 $40.00 $35.50
1999
----
First Quarter $54.00 $45.00
Second Quarter $50.00 $44.00
Third Quarter $45.00 $41.00
Fourth Quarter $46.00 $40.00
1998
----
First Quarter $33.00 $27.75
Second Quarter $37.50 $33.00
Third Quarter $38.12 $36.75
Fourth Quarter $54.00 $38.00
7
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The prices listed above are based upon information available to Citizens'
management through those brokers which deal in the Company's stock as well as
through certain Internet quotation services and are believed to accurately
represent the amount at which its stock was traded during the periods indicated.
Prices reflect amounts paid by purchasers of the stock and, therefore, may
include commissions or fees paid to brokers. The amounts of such commissions or
fees, if any, are not known to management. No attempt was made by management to
ascertain the prices for every sale made during these periods. The decrease in
stock price which occurred in 1999 is discussed in the management's discussion
and analysis section of this report.
Citizens shareholders are entitled to receive dividends when and as
declared by its Board of Directors. Dividends are typically paid quarterly.
Aggregate dividends were $1.10 per share in 1999 and $1.00 per share in 1998.
Dividends are paid out of funds legally available for the payment of dividends
as set forth in the West Virginia Corporation Act.
Payment of dividends by Citizens is dependent upon payment of dividends to
it by the subsidiary bank. The ability of the Bank to pay dividends is subject
to certain limitations imposed by national banking laws as outlined in Note 13
to the Consolidated Financial Statements on page 50 of this report.
8
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Item 6. Selected Financial Data
- --------------------------------
Selected financial data for the five years ended December 31, 1999 is
presented in the following table. This summary should be read in conjunction
with the consolidated financial statements and related notes included in Item 8
of this report.
Citizens Financial Corp.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Selected Financial Data Five Year Summary
(in thousands of dollars, except per share data)
- ----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................. $ 137,297 $136,701 $132,132 $128,760 $126,350
Securities................... 41,562 43,812 38,519 34,134 34,374
Loans, net................... 85,665 85,709 86,400 88,235 82,781
Deposits..................... 110,232 113,464 110,401 109,570 109,671
Short-term borrowings........ 6,029 4,627 3,597 2,965 1,590
Long-term borrowings......... 4,087 1,013 1,078 330 334
Total shareholders' equity... 15,954 16,649 16,095 14,943 13,952
SUMMARY OF OPERATIONS:
Total interest income........ $ 10,058 $ 10,336 $ 10,314 $ 10,145 $ 9,475
Total interest expense....... 3,963 4,108 4,014 3,880 3,530
--------- -------- -------- -------- --------
Net interest income......... 6,095 6,228 6,300 6,265 5,945
Provision for loan losses.... 714 120 236 168 60
--------- -------- -------- -------- --------
Net interest income after
provision for loan losses... 5,381 6,108 6,064 6,097 5,885
Noninterest income........... 701 555 563 546 476
Noninterest expense.......... 4,491 4,242 4,052 4,178 3,912
--------- -------- -------- -------- --------
Income before income taxes... 1,591 2,421 2,575 2,465 2,449
Income taxes................. 490 821 934 834 823
--------- -------- -------- -------- --------
Net income................... $ 1,101 $ 1,600 $ 1,641 $ 1,631 $ 1,626
========= ======== ======== ======== ========
PER SHARE DATA:
Net income:
Basic....................... $ 1.67 $ 2.41 $ 2.40 $ 2.39 $ 2.36
========= ======== ======== ======== ========
Cash dividends............... $ 1.10 $ 1.00 $ .90 $ .80 .70
========= ======== ======== ======== ========
</TABLE>
Additional information required under Securities Act Industry Guide 3 for
Bank Holding Companies follows:
9
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Distribution of Assets, Liabilities & Shareholders' Equity;
Interest Rates and Interest Differential
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------- -------------------------------- -------------------------------
Avg Bal Interest Yield/Rate Avg Bal Interest Yield/Rate Avg Bal Interest Yield/Rate
------------------------------- -------------------------------- -------------------------------
(in thousands of dollars) (in thousands of dollars) (in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Federal funds sold $ 1,432 $ 73 5.10% $ 1,261 $ 69 5.47% $ 1,336 $ 74 5.54%
Securities:
Taxable 35,438 2,117 5.97 33,545 2,061 6.14 29,686 1,859 6.26
Tax-exempt (1) 7,543 551 7.31 7,474 559 7.48 5,381 426 7.92
Loans (net of unearned
interest) (1) (2) 86,630 7,521 8.68 85,670 7,837 9.15 87,980 8,109 9.22
------------------------------- -------------------------------- -------------------------------
Total interest earning
assets (1) 131,043 10,262 7.83 127,950 10,526 8.23 124,383 10,468 8.42
Nonearning assets:
Cash and due from banks 4,153 2,914 3,131
Bank premises and
equipment, net 1,445 1,530 1,595
Other assets 1,955 2,309 1,901
Allowance for loan
losses (1,001) (1,101) (1,026)
-------- -------- --------
Total assets $137,595 $133,602 $129,984
======== ======== ========
Interest Bearing
Liabilities:
Savings deposits $ 26,857 707 2.63 $ 26,096 756 2.90 $ 27,083 780 2.88
Time deposits 52,294 2,546 4.87 51,796 2,622 5.06 50,502 2,600 5.15
NOW accounts 14,515 242 1.67 13,561 282 2.08 11,583 255 2.20
Money market accounts 5,780 116 2.01 5,984 145 2.42 6,159 152 2.47
Borrowings 6,903 352 5.10 5,426 303 5.58 4,075 227 5.57
------------------------------- -------------------------------- -------------------------------
Total interest bearing
liabilities 106,349 3,963 3.73 102,863 4,108 3.99 99,402 4,014 4.04
Noninterest bearing
liabilities:
Demand deposits 13,923 13,424 13,922
Other liabilities 767 1,029 1,006
Shareholders' equity 16,556 16,286 15,654
-------- -------- --------
Total liabilities and
shareholder's equity $137,595 $133,602 $129,984
======== ======== ========
Net interest income (1) $ 6,299 $ 6,418 $ 6,454
======= ======= =======
Net interest income to average
earning assets (1) 4.81% 5.02% 5.19%
==== ==== ====
</TABLE>
(1) Yields on tax-exempt holdings are expressed on a tax equivalent basis using
a 34% tax rate.
(2) For the purpose of these computations, nonaccruing loans are included in
the amounts of average loans outstanding.
10
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Rate Volume Analysis
The following table sets forth a summary on the changes in interest earned and
interest expense detailing the amounts attributable to (i) changes in volume
(change in the average volume times the prior year's average rate), (ii) changes
in rate (change in the average rate times the prior year's average volume). The
changes in rate/volume (change in the average volume times the change in the
average rate), has been allocated to the changes in volume and changes in rate
in proportion to the relationship of the absolute dollar amounts of the change
in each.
<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------- ---------------------------
(in thousands of dollars)
Volume Rate Total Volume Rate Total
-------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Federal funds sold $ 9 $ (5) $ 4 $ (4) $ (1) $ (5)
Taxable securities 116 (60) 56 235 (33) 202
Tax-exempt securities 5 (13) (8) 157 (23) 134
Loans 88 (403) (315) (211) (62) (273)
-------------------------- ---------------------------
Total interest earned 218 (481) (263) 177 (119) 58
-------------------------- ---------------------------
Interest expense on:
Savings deposits 22 (71) (49) (29) 5 (24)
Time deposits 25 (101) (76) 67 (45) 22
NOW accounts 19 (59) (40) 42 (14) 28
Money market accounts (5) (24) (29) (4) (3) (7)
Other borrowing 77 (27) 50 75 (1) 74
-------------------------- ---------------------------
Total interest expense 138 (282) (144) 151 (58) 93
-------------------------- ---------------------------
Net interest income $ 80 (199) (119) $ 26 $ (61) $ (35)
========================== ===========================
</TABLE>
11
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Securities Portfolio
Presentation of the amortized cost of securities as of December 31, 1999
and 1998 may be found in Note 3 to the Consolidated Financial Statements which
begins on page 37 of this report.
The following table sets forth the maturities of securities as of December
31, 1999 and the weighted average yields of such securities (calculated on the
basis of the amortized cost and effective yields weighted for the scheduled
maturity of each security).
<TABLE>
<CAPTION>
Within One After One but After Five but After Ten
Year Within Five Years Within Ten Years Years Total
-------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------------------------------------------------------------------------------------------------------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. government
agencies and
corporations $ 5,998 5.78% $14,766 5.70% $ - -% $ - -% $20,764 5.72%
State and political
subdivisions (1) 1,312 7.62 5,017 6.76 854 7.09 - - 7,183 6.96
Other securities 3,599 6.39 10,079 6.15 - - 732 6.69 14,410 6.23
------- ---- ------- ---- ------ ---- ------ ---- ------- ----
Total $10,909 6.20% $29,862 6.03% $ 854 7.09% $ 732 6.69% $42,357 6.11%
======= ======= ====== ====== =======
</TABLE>
The portfolio contains no securities of any single issuer in which the aggregate
amortized cost of such securities exceeds ten percent of shareholders' equity.
(1) Tax-equivalent adjustments, using a rate of 34%, have been made in
calculating yields on obligations of state and political subdivisions.
12
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Loan Portfolio
- --------------
Types of Loans
- --------------
The distribution of loans by major category as of December 31, 1999 and
1998 may be found in Note 4 to the Consolidated Financial Statements which
begins on page 40 of this report. All loans in the portfolio are domestic in
nature.
Loan Maturities and Interest Rate Sensitivity
- ---------------------------------------------
Note 4 to the Consolidated Financial Statements also provides data
concerning the contractual maturities of loans, including commercial, financial
and agricultural loans as well as real estate construction loans, as of December
31, 1999. Also provided are the amounts due after one year classified as fixed
rate and variable rate loans.
Risk Elements
- -------------
Nonperforming Loans
- -------------------
Nonperforming loans consist of loans in nonaccrual status, loans which are
past due 90 days or more and still accruing interest and restructured loans.
The following table sets forth the amounts of such loans as of the dates
indicated:
<TABLE>
<CAPTION>
December 31
-------------------------
1999 1998
-------------------------
(in thousands of dollars)
<S> <C> <C>
Nonaccrual loans $ 57 $ 53
Loans past due 90 days or more
still accruing interest 51 21
Restructured loans - -
----- -----
Total $ 108 $ 74
===== =====
</TABLE>
Loans are generally placed on nonaccrual status when they are past due 90
days as to principal or interest unless they are both well secured and in the
process of collection. The following table provides a summary of information
pertaining to nonaccrual loans as of December 31, 1999:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Total nonaccrual loans $57
Interest income which would have been
recorded under original terms 4
Interest income recorded during the year 7
</TABLE>
Potential Problem Loans
- -----------------------
As of December 31, 1999, the Company identified approximately $661,000 of
loans which it classified as impaired due to doubts about the borrowers ability
to repay as called for in the loan documents. These loans are further discussed
in Note 5 to the Consolidated Financial Statements found on page 41 of this
report.
13
<PAGE>
Loan Concentrations
- -------------------
Information concerning loan concentrations is provided in Note 4 to the
Consolidated Financial Statements which begins on page 40 of this report.
Summary of Loan Loss Experience
- -------------------------------
Note 5 to the Consolidated Financial Statements, which begins on page 46 of
this report, presents an analysis of the allowance for loan losses for the years
ended December 31, 1999, 1998 and 1997.
The amount charged to the provision for loan losses and the related balance
in the allowance for loan losses is based upon periodic evaluations of the loan
portfolio by management. These evaluations consider several factors including,
but not limited to, its analysis of overall loan quality, changes in the mix and
size of the loan portfolio, previous loss experience, general economic
conditions and information about specific borrowers.
The ratio of net losses to average loans outstanding was .94% in 1999, .12%
in 1998 and .15% in 1997.
The following table shows an allocation of the allowance for loan losses
for the two years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
December 31
--------------------------------------------
1999 1998
--------------------------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
--------------------------------------------
(in thousands of dollars)
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 283 16% $ 732 15%
Real estate - construction 20 2 1 2
Real estate - mortgage 191 70 24 68
Installment and other 71 12 100 15
Unallocated 446 N/A 253 N/A
------ --- ------ ---
Total $1,011 100% $1,110 100%
====== === ====== ===
</TABLE>
Deposits
- --------
The average daily amount of deposits and the rates paid on those deposits
for the years ended December 31, 1999, 1998 and 1997 were previously presented
in the Distribution of Assets, Liabilities and Shareholders' Equity; Interest
Rates and Interest Differential. That table may be found on page 10 of this
report.
A table summarizing the maturities of time certificates of deposit,
including individual retirement accounts, of $100,000 or more as of December 31,
1999 may be found in Note 7 to the Consolidated Financial
14
<PAGE>
Statements which begins on page 42 of this report. There were no other time
deposits of $100,000 or more at that date.
15
<PAGE>
Return on Equity and Assets
- ---------------------------
The following table shows consolidated operating and capital ratios for the
periods indicated.
Year Ended December 31
-------------------------
1999 1998 1997
-------------------------
Return on average assets .80% 1.20% 1.27%
Return on average equity 6.65 9.86 10.51
Dividend payout ratio 65.87 41.49 37.50
Average equity to assets ratio 12.03 12.19 12.04
Short-term Borrowing
- --------------------
Information concerning the Company's short-term borrowing is presented in
Note 10 to the Consolidated Financial Statements which begins on page 48 of this
report.
Item 7. Management's Discussion and Analysis of Financial Condition and
- -------------------------------------------------------------------------
Results of Operations
---------------------
The following discussion and analysis presents the significant changes in
the financial condition and 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 1999 Annual Report to Shareholders as
well as the rest of this 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. This
discussion may contain forward looking statements based upon management's
current expectations. Such forward looking information may involve
uncertainties including those associated with interest rate and general economic
environments, regulations, competitive changes, and other risks. When provided,
forward looking information is intended to assist readers in understanding
anticipated future operations and are included pursuant to applicable safe
harbor provisions; actual results may differ. Amounts and percentages used in
this discussion have been rounded.
Earnings Summary
- ----------------
Net income for the year 1999 of $1,101,000 was down considerably from both
1998 and 1997 when net income totaled $1,600,000 and $1,641,000, respectively.
On a per share basis earnings were $1.67 in 1999, $2.41 in 1998, $2.40 in 1997.
The return on average assets for the three years respectively was .80%, 1.20%
and 1.27% while the return on average equity was 6.65%, 9.86% and 10.51%. The
1999 results were suppressed due to the charge-off of certain commercial loans
and the consequent need to increase the year's provision for loan losses. This
and other factors influencing the Company's results of operations and financial
condition are addressed in the following sections of this report.
16
<PAGE>
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
risk 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 1999 net interest income fell 2.14% to $6,095,000 from $6,228,000 in
1998. On a tax-equivalent basis, the results show a similar decrease of 1.85%
to $6,299,000 despite a $3,093,000 rise in earning assets. This is primarily
the result of a 40 basis point decline in the yield on those earning assets to
7.83%. Most significant was a 47 basis point drop in the yield on the Company's
loan portfolio to 8.68% largely due to the need to place several loans on a
nonaccrual status prior to their eventual charge-off. Specifically this action
was applied to three commercial loans. The effect of these lower yields, or
rate variance, was to reduce loan income by $403,000 which far exceeded the
increase in loan income from higher balances, the volume variance, of just
$88,000.
The Company's other earning assets, investment securities and federal funds
sold, also experienced lower yields but to a far lesser extent. In fact, the
reduction in earnings due to these lower yields was more than offset by the
positive effect of higher balances. Both of these factors, yield and balance
outstanding, were negatively impacted by the Company's decision to forego
reinvesting available funds during the second half of the year as a
precautionary Y2K measure. This decision caused the Bank to miss several
reinvestment opportunities at a time when investment yields were generally
rising.
In total, the factors discussed above resulted in a $278,000 decrease in
interest income. However, interest expense for the year was reduced by $145,000
which helped reduce the impact on earnings. Although higher levels of interest
bearing liabilities were maintained, management was able to control the rates
paid on those liabilities in a manner which allowed the reduction in interest
expense to be realized. Overall, the cost of the Company's interest bearing
liabilities fell 26 basis points to 3.73% in 1999. This compares favorably with
the peer group average of 4.23% and is a major reason the Company's 1999 net
interest margin of 4.81% remains very high despite falling from 5.02% in 1998.
Net interest income also decreased in 1998 but by the lesser total of just
$71,000, or 1.13%, to $6,228,000. On a tax-equivalent basis the decrease was
just $36,000. While the Company's earning asset base increased by more than
$3.5 million from 1997 a 19 basis point reduction in the yield on earning assets
was observed as the earning asset mix became
17
<PAGE>
more heavily weighted toward investment securities and less toward the higher
yielding loan portfolio. As a result, interest income did not change
significantly rising just $22,000 to $10,336,000.
Like the earning asset base, the Company's interest bearing liabilities
carried a lower yield, or cost to the Bank, in 1998 than in 1997. This decrease
of 5 basis points, however, was less than the 19 basis point decrease in the
yield on earning assets and also less than the added expense needed to carrying
the higher level of interest bearing liabilities. Consequently, interest
expense increased by $93,000 and net interest income fell to the $6,228,000
level. The net interest margin for the year also fell from 5.19% to 5.02% in
1998.
Noninterest Income
- ------------------
Noninterest income includes all revenues not included in interest and fee
income related to earning assets. Total noninterest income for 1999 of $701,000
is $145,000, or 26.16% greater than in 1998. This is the highest level of
noninterest income the Bank has achieved. Among the reasons for the increase
are a $39,000 increase in trust fees which was made possible by the settlement
of several estates during the fourth quarter of the year. A revised trust fee
schedule is expected to provide even higher income levels in the year 2000.
Another area of improvement during 1999 was overdraft fees which increased by
$72,000 as a result of the Bank changing its overdraft policy. This new policy
is more like that of the Bank's primary competitors than was previously the
case. Overdraft fees are included in the category of service fees on the
Company's statement of income. Other noninterest income also increased rising
from $132,000 in 1998 to $155,000 in 1999. This reflects the recognition of
$58,000 of fees from the Company's new brokerage operation and the loss of
$38,000 of merchant income due to the sale of the Bank's credit card operations.
The Bank expects brokerage fees to approach $100,000 in 2000.
The remaining components of noninterest income, insurance commissions and
security gains, also increased in 1999. The increase in insurance commission,
while nearly 39%, was relatively minor in dollar terms totaling just under
$8,000. Nonetheless, it does reflect an increase in insurance policies written
in connection with loans. The $16,000 gain on security sales is the result of
Y2K preparations in which all securities maturing in the first quarter of 2000
were sold. Although it is possible additional security sales may occur in the
future, such sales are not typical and none are planned at this time.
While clearly not up to the 1999 level, 1998's noninterest income of
$555,000 represented a very good year in fee income when compared to previous
years. This is especially true when one considers that absent two unusual items
in 1997, the 1998 total would have surpassed the 1997 total by $42,000. As was
the case in 1999, this improvement was largely due to trust and overdraft fees.
Trust fees increased by approximately $21,000 in 1998, again reflecting several
large estates. Overdraft fees increased $17,000 but, unlike 1999 when there was
a change in the fee structure, the
18
<PAGE>
increase was simply due to an increase in the number of overdrafts occurring.
Noninterest Expenses
- --------------------
Noninterest expense includes all items of expense other than interest
expense, the provision for loan losses, and income taxes. During 1999
noninterest expense increased significantly rising $249,000, or 5.87%, to
$4,491,000. This increase was centered in two areas, personnel expense and
other noninterest expense.
In the case of personnel expense an increase of $190,000, or 8.86%, was
incurred as the result of several items. Salaries increased by $94,000, or
5.53%, reflecting the retention of an investment broker and a new trust officer
as well as a general 2.5% pay increase. Group insurance rose nearly $50,000 in
1999 reflecting not only increases in premium and administrative costs, but also
an increase in the cost of the Company's partially self-funded medical plan.
The Company provides two retirement plans for all eligible employees. The
pension plan is overfunded and provides a benefit rather than an expense
annually. That benefit approximated $77,000 in 1999, down from $111,000 in
1998. This was partly offset by a reduction in 401(k) expense of $16,000 as the
Company contributed $23,000 to the plan in 1999 compared to $39,000 in 1998.
Finally, the cost of the Company's executive supplemental income plan, a
nonqualified plan, increased $13,000 in 1999.
Other noninterest expenses of $1,208,000 were up almost 15% from 1998 due
to a number of factors. Among them costs related to the upkeep and sale of
foreclosed assets increased $110,000 to $120,000. Partly as a result of those
foreclosures and partly as a result of retaining consultants in the areas of
trust services and operational efficiency, legal and professional fees also
increased by $53,000. The Company also experienced increases in stationery,
computer software, education expense and business franchise tax totaling
approximately $48,000. Amortization expense related to the Company's 1984
acquisition of its Parsons, West Virginia office, however, decreased during the
year. All of the goodwill related to that purchase has now been fully
amortized.
Among the other components of noninterest expense equipment costs
increased. This increase of more than $24,000 reflects increased depreciation
on newly purchased furniture and equipment as well as higher maintenance costs
particularly to the Bank's air conditioning system. Otherwise, occupancy, data
processing and advertising costs all decreased during the year. Unlike
equipment expense, the near $70,000 reduction in occupancy expense reflects
lower depreciation related to the Company's buildings. Data processing costs
were reduced by $42,000 as a result of the discontinuance of the Bank's credit
card program.
Noninterest expense also increased in 1998 by $190,000 or 4.70%. Similar to
1999, salaries and benefits registered an increase of $94,000, or 4.58%, due to
the retention of several employees to improve the Bank's sales efforts as well
as the payment of $28,000 of outplacement benefits.
19
<PAGE>
Equipment costs again increased, by $41,000, due to increased depreciation on
new computer equipment, teller machines and an ATM. Also like 1999, other
noninterest expense increased due to approximately $38,000 of various legal and
professional fees relating to Y2K, revising the Company's articles of
incorporation, and auditing of the Bank's trust operations. Net occupancy
expense and advertising both decreased in 1998. Unlike 1999, however, data
processing costs increased by almost $68,000 to $412,000 in 1998. This was the
result of Y2K testing, higher fees with the Bank's primary external processor,
and higher fees following the installation of a new trust processing system.
Year 2000 Compliance
- --------------------
The Year 2000 issue received much attention over the past several years.
As a result of the diligent efforts of the Bank and it's vendors, the Company
encountered no known Y2K problems. The Bank's Y2K task team continues to
monitor it's data processing and computing systems and remains prepared to
utilize it's contingency plans in the event they are needed.
Over the past two years the Bank incurred significant expenditures while
preparing for Y2K in addition to the dedication of significant labor resources
to the issue. During 1999 expenditures totaled $185,000, including $36,000 in
capital expenditures. In 1998, some $132,000 were expended of which $80,000
were capital expenditures.
While the Bank believes the risk of an undetected Y2K error or of future
Y2K errors is minimal, it cannot quantify the potential impact of any such
failures which may have, or might, occur either internally or from external
third parties.
Income Taxes
- ------------
The Company's provision for income taxes, which totaled $490,000 in 1999,
$821,000 in 1998, and $934,000 in 1997, includes both federal and state income
taxes. Included in these amounts are deferred tax benefits of $22,000, and
$42,000 in 1998 and 1997, respectively, and deferred tax expense of $16,000 in
1999. The effective tax rates for the years 1999, 1998, and 1997 were 30.8%,
33.9%, and 36.2%, respectively. Additional information regarding the Company's
income taxes is contained in Note 8 to the consolidated financial statements.
Financial Condition
- -------------------
Total assets at December 31, 1999 of $137,297,000 are up approximately
$596,000, less than one half of one percent, from December 31, 1998. On
average, however, assets increased $3,993,000, or 2.99%, to $137,595,000. A
further discussion of the Bank's major balance sheet categories follows.
Loan Portfolio
- --------------
The loan portfolio is Citizens' largest earning asset. Loan growth during
1999, however, was minimal with year-end loans of $86,812,000
20
<PAGE>
actually $64,000 less than at year-end 1998. This is partly due to the sale of
the Bank's credit card portfolio during the year. Begun in 1995, and having a
year-end 1998 balance of $904,000, management determined that this portfolio
lacked the growth potential required for profitability. No gain or loss was
realized on this sale.
Mortgage lending is the Bank's largest single portfolio. During 1999 this
portfolio continued to grow increasing approximately $1,940,000 to $61,243,000.
Of this total some $41.2 million are variable rate loans secured primarily by
single family homes. Another $2.1 million of residential mortgages are held as
fixed rate loans. This total of $43.3 million in residential loans is up $2.2
million, or 5.35%, from year-end 1998.
While residential mortgage lending will surely continue to be the Bank's
largest single portfolio, management believes that commercial lending may
increase in coming years due to improved local infrastructure. However, during
1999 the need to charge-off two loans to local auto dealers, as well as an
additional loan to a mining concern, limited the success of this portfolio.
Although these three charge-offs totaled $755,000, commercial loans of
$14,035,000 at December 31, 1999 were $669,000 greater than at December 31,
1998. In addition, the Bank held approximately $17.8 million of loans to
commercial entities which were secured by real estate, down slightly from $17.9
million at December 31, 1998. Due to the nature of the collateral held these
loans are classified as mortgage loans in the accompanying financial statements.
The Bank will continue to seek growth in its' commercial lending business.
The Bank's consumer, or installment, loan portfolio decreased for the third
consecutive year from $11.6 million at December 31, 1998 to $10.1 million at
December 31, 1999. As has been the case historically, the majority of this
portfolio consists of loans made to consumers for the purchase of automobiles.
Over the past several years competition for such loans has greatly increased
which has caused pricing to decrease to levels which are not sufficient to
compensate for the risk inherent in the product. Loans priced below prime,
rebates, manufacturers incentives and requests for loans in excess of collateral
value have all become common. The Bank does not believe engaging in such
practices is in the best interest of its shareholders. Instead it will continue
with its current approach of providing sensibly priced and structured loans to
creditworthy consumers and will attempt to expand its' relationship with those
customers.
Additional information on the composition of the loan portfolio is
presented in Note 4 to the financial statements.
As noted previously, the Bank experienced unusually large charge-offs in
1999 which led to a reduction in earnings. In fact, total net charge-offs for
the year of $812,000 exceeded the total of the previous eight years combined.
This unexpected increase was due to the three commercial loans already
discussed. In addition to resulting in the need to increase the provision for
loan losses to $714,000 in 1999, these three loans caused
21
<PAGE>
the Bank to charge back approximately $34,000 in interest income. Also lost were
an additional $107,000 in earnings that would have accrued through year-end had
the loans performed as contractually called for. Provisions for loan losses
totaled $120,000 in 1998 and $236,000 in 1997.
Management is pursing all available legal avenues to recover these loan
losses. With regard to two of the three aforementioned loans, federal banking
authorities have been notified of the possibility of fraudulent activities. The
Bank has also begun legal proceedings against the borrowers. The outcome of
such proceedings cannot be determined at this time.
By increasing the provision for loan losses the allowance for loan losses
totaled $1,011,000 at December 31, 1999, which is 1.17% of gross loans.
Management believes this allowance adequately addresses the risks now inherent
in the loan portfolio and which may be reasonably anticipated. The allowance for
loan losses, as well as overall loan quality, changes in the mix and size of the
portfolio, general economic conditions, information about specific borrowers,
and other factors are all analyzed quarterly.
Loans which are 90 or more days past due are placed on nonaccrual status
unless they are both well secured and in the process of collection. At year-end
1999 such loans approximated $57,000. Loans past due 90 days or more still
accruing interest totaled $51,000.
As a result of the loan losses incurred in 1999, management has undertaken
a thorough review of its lending policies and procedures. Among the areas being
reviewed are the supervision and control of the lending function, the adequacy
of credit analysis and underwriting standards, and the effectiveness of loan
monitoring and reporting systems. By analyzing these systems and implementing
improvements where needed, management hopes future losses will be reduced.
Securities Portfolio and Federal Funds Sold
- -------------------------------------------
The Bank's securities portfolio is used to improve earnings by employing
funds not needed to meet loan demand while at the same time providing liquidity
and balancing interest rate sensitivity concerns. In its efforts to do so both
available for sale and held to maturity accounts have traditionally been
maintained. During the fourth quarter of 1999 management determined it might
better achieve these objectives by eliminating the held to maturity account.
Consequently, that account, which consisted solely of tax-exempt municipal
obligations, was made a part of the available for sale account. This transfer,
which was made at the fair value of the securities involved, had no impact on
earnings. As in the past the Bank has no plans to engage in securities trading
thus no trading account is maintained.
As interest rates increased during 1999, particularly during the second
half of the year, the value of fixed rate debt obligations such as those held in
the Bank's securities portfolio, decreased. At December 31, 1999 the fair value
of the securities portfolio of $41,562,000 was $795,000
22
<PAGE>
less than its' amortized cost. This unrealized loss, which has no income effect,
compares to an unrealized gain on securities available for sale of $441,000 at
year-end 1998. This type of change was common among fixed income investors
during 1999 and is not expected to impact the manner in which the portfolio is
managed in the future. The amount of the unrealized loss totals just 1.88% of
the portfolio and is somewhat limited by the short nature of the securities
held. Additional interest rate increases could, however, increase the unrealized
loss.
Another factor impacting the security portfolio during the second half of
1999 was the preparation for Y2K. During that time approximately $5.7 million
of securities matured. Typically these securities would have been reinvested.
Instead nearly $5 million was converted into cash in order to satisfy any
withdrawal demands of customers who may have had Y2K concerns. As already
explained, the Bank experienced no Y2K problems and relatively little cash was
withdrawn by customers. By not investing these securities as normal the Bank
was forced to forego approximately $48,000 of interest income based on probable
reinvestment opportunities. All excess cash balances were returned to an
earning capacity in January 2000.
Although the relative composition of the security portfolio has changed,
the overall makeup of the portfolio and the types of securities held remains the
same as in prior years. U.S. government agency securities are the largest
component of the portfolio with fair value of $18.5 million representing
approximately 44% of the total. Investment grade corporate debt securities of
$13.3 million and tax-exempt municipal securities of $7.2 million comprise 32%
and 17% of the total, respectively. The remainder of the portfolio consists of
mortgage backed securities as well as stock which the Bank is required to hold
for membership in the Federal Reserve Bank and Federal Home Loan Bank.
The Bank generally tries to minimize its involvement in the overnight
federal funds sold market, instead relying on the securities portfolio to
provide the liquidity needed to fund loans or meet deposit withdrawal 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 December 31, 1999 and December 31, 1998 no balances were maintained in
federal funds sold. The average federal funds sold balance during 1999,
however, was $1,432,000 compared to $1,261,000 in 1998.
Deposits and Other Funding Sources
- ----------------------------------
Comparing year-end 1999 to year-end 1998, total deposits are down
$3,231,000 to $110,232,000. The majority of this decrease, $2,396,000, is in
noninterest bearing deposits. However, as noted at December 31, 1998,
noninterest bearing deposits at that time of $15.3 million were approximately
$1.8 million higher than usual. When considering this the year-end to year-end
comparison shows a change approximating just $596,000.
23
<PAGE>
And, although no major Y2K withdrawals were observed, it is likely that some
withdrawals were in fact made thus causing year-end deposit totals to be lower.
Although deposit growth in the Bank's market has not been particularly
strong, comparing average balances for 1999 to 1998 shows some success in
attracting funds during the year. On average, deposits totaled $113,369,000 in
1999, up $2,508,000, or 2.26%, from $110,861,000 in 1998. Only average money
market deposits decreased during the year from $5,984,000 to $5,780,000.
Average noninterest bearing deposits increased $499,000 to $13,923,000.
Likewise, average savings deposits grew $761,000 to $26,857,000. The change in
savings balances may be attributed to a handful of large commercial customers
with savings sweep accounts. These accounts allow the customer to sweep
balances from noninterest bearing demand deposits to interest bearing savings
accounts on a daily basis. NOW, or interest bearing checking accounts, showed
the largest average balance increase of $954,000, or 7.03%. Average time
deposits also increased, by $498,000, to $52,294,000. Within the time deposit
group a clear pattern emerged in which customers moved their funds from long-
term certificates to short-term certificates. The Bank also experienced a
decrease in certificates of $100,000 or more. These "jumbo" certificates fell
by $1,617,000, more than 14%, during the year to $9,623,000. As is the case at
many banks the rate on such certificates is typically determined through
negotiation with the customer. While the Bank does not actively seek this type
of deposit it does attempt to remain competitive and in so doing monitors the
rates paid for them on a local, regional and national basis weekly. If
necessary, the Bank attempts to retain its relationship with these customers by
directing them to it's brokerage center. During 1999 approximately one third,
or $1.7 million, of the brokerage center's sales were obtained in this manner.
In addition to deposits, the Bank may generate funding by the use of
borrowings. Short-term borrowings include both overnight borrowings from the
Federal Home Loan Bank and repurchase agreements having maturities of less than
one year. The balance in any of these instruments fluctuates daily depending on
the Bank's, or the customers', particular needs. Overnight borrowings, which
increased from $239,000 to $2,016,000 averaged just $231,000 during 1999.
Short-term repurchase agreements averaged $1,646,000 and totaled $4,013,000 and
$4,388,000 at December 31, 1999 and 1998, respectively.
Long-term borrowings also increased in 1999 due to the renegotiation of an
existing two-year repurchase agreement. That repurchase agreement totaled
$3,144,000 at year-end 1999. The Bank also had outstanding $943,000 of long-
term debt used to fund specific loan projects. The Bank has no plans to acquire
or issue any additional debt at this time.
Capital Resources
- -----------------
Total capital at December 31, 1999 of $15,954,000, or 11.62% of total
24
<PAGE>
assets, is down from $16,649,000, 12.18%, at December 31, 1998 but still remains
very strong and well in excess of peer averages. The decrease is mostly due to
the decline in the value of the available for sale securities portfolio, which
must be reflected net of tax as a component of capital. This net of tax effect
totaled $812,000 in 1999. Also contributing to the lower capital level was the
acquisition of 5,735 shares of treasury stock at a cost of approximately
$261,000. Currently, no specific plans exist for the use of these treasury
shares. Capital expenditures for the year totaled $134,000.
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 Note 13 to the financial statements and bolstered its
capital position with the additions to the provision for losses as discussed
earlier. Management is unaware of any trends or uncertainties, nor do any plans
exist, which may materially impair or alter its capital position.
The Company's stock trades over the counter under the symbol CIWV. Like
many bank stocks, the Company's stock price declined in 1999. This general
trend toward lower bank stock prices is attributed in part to the market fears
as to the potential negative impact on bank earnings as the result of
anticipated interest rate increases. It is also likely the decline, from $54 at
year-end 1998 to $40 at year-end 1999, reflects the lower earnings performance
for the year. At $40 per share the stock was priced at 23.95 times 1999 earnings
and 1.64 times book value. Although trading volume continues to be light,
several trades occurring in January, 2000 have pushed the price down to $36 per
share.
While several reasons for the decrease in the stock price in 1999 may be
offered one must also remember that as of September 30, 1998 the stock traded at
a price of $38.12. During the fourth quarter of 1998 three trades, increased
the price to $54. These trends, which did not constitute a large volume of
shares, appear to have been speculative in nature as neither management nor the
board of directors can offer any reason for the increase in price. At $36 per
share then, the current stock price is $2.12 below its third quarter 1998 level,
a decrease of 5.56%.
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 unpledged available for sale securities and short-term funds such as
federal funds sold. At December 31, 1999 these sources totaled $23,551,000, or
17.15% of total assets. In addition, liquidity may be generated through loan
repayments and borrowing arrangements with correspondent banks. Each quarter
management tests the Banks' ability to satisfy it's anticipated liquidity needs
over the next twelve months including in such analysis the dividend requirements
and limitations as
25
<PAGE>
well as the other operational funding needs. This analysis indicates the Bank
has ample liquidity to meet anticipated needs and management is unaware of any
trends, events or uncertainties which are likely to affect the Company's
liquidity.
As alluded to in the discussions of Year 2000 Compliance as well as the
Securities Portfolio, the Bank experienced no Y2K problems, including liquidity
problems, and excess cash accumulated for Y2K has been returned to an earning
capacity.
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 the difference between
rate sensitive assets and rate sensitive liabilities. A positive gap occurs
when rate sensitive assets exceed rate sensitive liabilities. This tends to be
beneficial in rising interest rate environments. A negative gap refers to the
opposite situation and tends to be beneficial in declining interest rate
environments. However, the gap is a static measure and does not consider future
changes in the volume of rate sensitive assets or liabilities or the possibility
that interest rates of various products may not change by the same amount or at
the same time. In addition, certain assumptions must be made in constructing
the gap. The Company monitors its gap on a monthly basis and the following
table represents the gap analysis at December 31, 1999.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
GAP ANALYSIS
December 31, 1999
One to Over
(in thousands of dollars) 0-90 91-180 181-365 Five Five
Days Days Days Years Years
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest sensitive assets
Federal funds sold.............. $ - $ - $ - $ - $ -
Securities...................... - 3,567 7,353 29,510 1,132
Loans, net of unearned
interest....................... 21,722 14,150 27,255 19,406 4,143
-------- -------- -------- -------- --------
Total interest
sensitive assets............ 21,722 17,717 34,608 48,916 5,275
Interest sensitive
liabilities
Deposits........................ 58,935 9,166 9,560 19,626 -
Other borrowings................ 8,532 678 38 862 6
-------- -------- -------- -------- --------
Total interest
sensitive
liabilities................ 67,467 9,844 9,598 20,488 6
-------- -------- -------- -------- --------
GAP............................. $(45,745) $ 7,873 $ 25,010 $ 28,428 $ 5,269
======== ======== ======== ======== ========
Cumulative GAP.................. $(45,745) $(37,872) $(12,862) $ 15,566 $ 20,835
======== ======== ======== ======== ========
GAP to total
assets ratio................... (33.32)% 5.73% 18.22% 20.71% 3.84%
Cumulative GAP to
total assets ratio............ (33.32)% (27.59)% (9.37)% 11.34% 15.18%
</TABLE>
26
<PAGE>
As the table shows, the Bank's cumulative one year gap is a negative 9.37%
of total assets. Thus, the Bank is considered to be negatively gapped, which
traditional theory tells us is beneficial in falling interest rate environments.
By contrast, the current and generally accepted near future interest rate
environments are rising. However, a significant portion of the immediately
sensitive deposit base, some $47.6 million, are administered rate deposits.
Such deposits do not reprice based upon a contractual maturity. Rather, they
are repriced by management. Historically, these deposits are not highly
sensitive to interest rate changes. For this reason the Bank is unlikely to
experience the type of earnings volatility the gap table seems to indicate.
Further, the negative gap is overstated as a result of the Bank's Y2K
preparations which reduced the level of interest sensitive assets and increased
the level of federal funds purchased, an interest sensitive liability. This,
however, is a temporary condition.
Another measure used to assess changes in earnings resulting from changing
interest rates is income simulation. Under income simulation assumptions are
made regarding loan and deposit growth, pricing and interest sensitivity based
on historical analysis and future expectations to project income. Some
simulations, known as rate shock tests, assume an immediate and sustained change
in interest rates. The Bank regularly performs such tests. At December 31,
1999, the Bank expects an immediate and sustained increase in interest rates of
200 basis points would cause net interest income over the next twelve months to
fall $642,000 and net income to fall $423,000. A similar decrease in interest
rates would produce an increase in net interest income of $581,000 and an
increase in net income of $384,000.
While such shock tests are useful in defining boundaries of interest rate
risk exposure, like the gap, they fail to consider that interest rates on
various products, such as administered rate deposits, may change by different
amounts and at different times. As a result, they can also tend to overstate
risk. Therefore, the Bank also utilizes simulation models which do consider
such possibilities. By doing so more accurate predictions of future earnings
levels are achieved.
Impact of Inflation
- -------------------
The results of operations and financial position of the Company have been
presented based on historical cost, unadjusted for the effects of inflation,
except for the recording of unrealized gains and losses on securities available
for sale. Inflation could significantly impact the value of the Company's
interest rate sensitive assets and liabilities and the cost of noninterest
expenses, such as salaries, benefits and other operating expenses. Management
of the money supply by the Federal Reserve to control the rate of inflation may
have an impact on the earnings of the Company. Further, changes in interest
rates to control inflation may have a corresponding impact on the ability of
certain borrowers to repay loans granted by the Company.
27
<PAGE>
As a financial intermediary, the Company holds a high percentage of
interest rate sensitive assets and liabilities. Consequently, the estimated
fair value of a significant portion of the Company's assets and liabilities
change more frequently than those of nonbanking entities. The Company's
policies attempt to structure its mix of financial instruments and manage its
interest rate sensitivity in order to minimize the potential adverse effects of
market forces on its net interest income, earnings and capital. A comparison of
the carrying value of the Company's financial instruments to their estimated
fair value as of December 31, 1999 is disclosed in Note 14 to the accompanying
consolidated financial statements.
28
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Financial statements required by this item are presented below. The Company
does not meet the requirements for disclosure of supplementary quarterly
financial data.
CITIZENS FINANCIAL CORP.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Cash and due from banks $ 5,698,937 $ 3,498,972
Securities available for sale 41,561,821 35,439,225
Securities held to maturity (estimated fair value
$0 and $8,533,757, respectively) - 8,372,564
Loans, less allowance for loan losses of $1,011,479 and
$1,109,595, respectively 85,664,538 85,708,661
Bank premises and equipment, net 1,391,128 1,455,385
Accrued interest receivable 1,035,183 1,261,593
Other assets 1,945,326 964,364
------------ ------------
Total assets $137,296,933 $136,700,764
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 12,945,480 $ 15,341,441
Interest bearing 97,286,833 98,122,204
------------ ------------
Total deposits 110,232,313 113,463,645
Short-term borrowings 6,028,683 4,626,689
Long-term borrowings 4,086,923 1,012,741
Other liabilities 994,722 948,373
------------ ------------
Total liabilities 121,342,641 120,051,448
------------ ------------
Commitments and contingencies
Shareholders' equity
Common stock, $2.00 par value, authorized
2,250,000 shares, issued 750,000 shares 1,500,000 1,500,000
Additional paid-in capital 2,100,000 2,100,000
Retained earnings 14,722,747 14,345,301
Accumulated other comprehensive income (524,873) 286,909
Treasury stock at cost, 94,168 and
88,433 shares, respectively (1,843,582) (1,582,894)
------------ ------------
Total shareholders' equity 15,954,292 16,649,316
------------ ------------
Total liabilities and shareholders' equity $137,296,933 $136,700,764
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
29
<PAGE>
CITIZENS FINANCIAL CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For The Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Interest income
Interest and fees on loans $ 7,504,063 $ 7,836,571 $ 8,099,914
Interest and dividends on securities:
Taxable 2,117,266 2,061,442 1,859,467
Tax-exempt 363,941 369,216 280,086
Interest on federal funds sold 72,919 69,008 74,403
----------- ----------- -----------
Total interest income 10,058,189 10,336,237 10,313,870
----------- ----------- -----------
Interest expense
Interest on deposits 3,610,532 3,805,054 3,786,061
Interest on short-term borrowings 340,047 242,813 171,938
Interest on long-term borrowings 12,351 59,967 56,375
----------- ----------- -----------
Total interest expense 3,962,930 4,107,834 4,014,374
----------- ----------- -----------
Net interest income 6,095,259 6,228,403 6,299,496
Provision for loan losses 714,152 120,000 236,000
----------- ----------- -----------
Net interest income after provision
for loan losses 5,381,107 6,108,403 6,063,496
----------- ----------- -----------
Noninterest income
Trust income 176,014 136,995 116,134
Service fees 324,449 264,447 247,144
Insurance commissions 28,629 20,641 30,009
Securities gains (losses) 16,437 900 (9,922)
Other 155,062 132,344 179,264
----------- ----------- -----------
Total noninterest income 700,591 555,327 562,629
----------- ----------- -----------
Noninterest expense
Salaries and employee benefits 2,334,317 2,144,275 2,050,297
Net occupancy expense 177,417 247,279 293,769
Equipment rentals, depreciation and maintenance 314,808 290,224 249,197
Data processing 369,590 411,782 344,179
Advertising 73,859 82,637 102,679
FDIC insurance 13,091 13,086 13,783
Other 1,207,989 1,052,757 997,878
----------- ----------- -----------
Total noninterest expense 4,491,071 4,242,040 4,051,782
----------- ----------- -----------
Income before income taxes 1,590,627 2,421,690 2,574,343
Income tax expense 489,970 821,284 933,602
----------- ----------- -----------
Net income $ 1,100,657 $ 1,600,406 $ 1,640,741
=========== =========== ===========
Basic earnings per common share $ 1.67 $ 2.41 $ 2.40
=========== =========== ===========
Average common shares outstanding 658,910 663,487 683,544
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
30
<PAGE>
CITIZENS FINANCIAL CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Net Income $ 1,100,657 $1,600,406 $1,640,741
----------- ---------- ----------
Other comprehensive income:
Gross unrealized gains/(losses) arising during the period (1,220,223) 299,044 262,596
Adjustment for income tax (expense)/benefit 419,290 (104,960) (91,595)
----------- ---------- ----------
(800,933) 194,084 171,001
----------- ---------- ----------
Less: Reclassification adjustment for (gains)/losses
included in net income (16,437) (98) (1,794)
Adjustment for income tax expense/(benefit) 5,588 33 610
----------- ---------- ----------
(10,849) (65) (1,184)
----------- ---------- ----------
Other comprehensive income, net of tax (811,782) 194,019 169,817
----------- ---------- ----------
Comprehensive income $ 288,875 $1,794,425 $1,810,558
=========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
31
<PAGE>
CITIZENS FINANCIAL CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Other Total
Additional Compre- Share-
Common Stock Paid-In Retained hensive Treasury holders'
------------------------
Shares Amount Capital Earnings Income Stock Equity
------------ ---------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 750,000 $1,500,000 $2,100,000 $12,381,430 $ (76,927) $ (961,355) $14,943,148
Net income - - - 1,640,741 - - 1,640,741
Cost of 1,600 shares acquired
as treasury stock - - - - - (43,600) (43,600)
Cash dividends declared
($.90 per share) - - - (615,198) - - (615,198)
Net change in unrealized
gain (loss) on available
for sale securities - - - - 169,817 - 169,817
------------ ---------- ---------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 750,000 1,500,000 2,100,000 13,406,973 92,890 (1,004,955) 16,094,908
------------ ---------- ---------- ----------- ----------- ----------- -----------
Net income - - - 1,600,406 - - 1,600,406
Cost of 20,386 shares acquired
as treasury stock - - - - - (577,939) (577,939)
Cash dividends declared
($1.00 per share) - - - (662,078) - - (662,078)
Net change in unrealized
gain (loss) on available
for sale securities - - - - 194,019 - 194,019
------------ ---------- ---------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 750,000 1,500,000 2,100,000 14,345,301 286,909 (1,582,894) 16,649,316
------------ ---------- ---------- ----------- ----------- ----------- -----------
Net income - - - 1,100,657 - - 1,100,657
Cost of 5,735 shares acquired
as treasury stock - - - - - (260,688) (260,688)
Cash dividends declared
($1.10 per share) - - - (723,211) - - (723,211)
Net change in unrealized
gain (loss) on available
for sale securities - - - - (811,782) - (811,782)
------------ ---------- ---------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 750,000 $1,500,000 $2,100,000 $14,722,747 $(524,873) $(1,843,582) $15,954,292
============ ========== ========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
32
<PAGE>
CITIZENS FINANCIAL CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,100,657 $ 1,600,406 $ 1,640,741
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 194,079 246,664 250,325
Provision for loan losses 714,152 120,000 236,000
Deferred income tax expense (benefits) 16,224 (21,849) (41,962)
Amortization of security premiums, net
of accretion of security discounts 158,118 184,139 131,891
Amortization of organization costs 5,283 63,400 63,400
Securities (gains) losses (16,437) (900) 9,922
Other losses 36,441 5,285 36,336
Decrease (increase) in accrued interest receivable 226,410 (64,495) (92,580)
Increase in other assets (314,246) (117,570) (133,349)
Increase (decrease) in other liabilities 46,349 (11,807) 8,245
------------ ------------ ------------
Net cash provided by operating activities 2,167,030 2,003,273 2,108,969
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities
held to maturity 1,190,000 1,045,000 4,040,000
Principal payments received on securities
held to maturity - - 976,407
Purchases of securities held to maturity - (3,138,101) (500,000)
Proceeds from sales of securities available for sale 3,527,373 502,225 2,059,392
Proceeds from maturities and calls of securities
available for sale 9,470,000 5,773,120 3,500,000
Principal payments received on securities available for sale 370,338 406,439 172,216
Purchases of securities available for sale (13,686,085) (10,089,633) (14,512,857)
Loans made to customers, net (2,043,858) 809,455 1,408,818
Purchases of bank premises and equipment (134,030) (117,375) (257,793)
Proceeds from sale of other real estate and other assets 1,078,252 6,110 190,086
------------ ------------ ------------
Net cash used in investing activities (228,010) (4,802,760) (2,923,731)
------------ ------------ ------------
</TABLE>
(Continued)
33
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in demand deposit, NOW, money
market and savings accounts (2,395,961) 2,178,799 636,866
Net (decrease) increase in time deposits (835,371) 883,379 194,661
Net increase in short-term borrowings 1,401,994 1,029,335 632,797
Proceeds from long-term borrowings 3,144,278 - 800,000
Repayments of long-term borrowings (70,096) (65,549) (52,058)
Dividends paid (723,211) (662,078) (615,198)
Acquisition of treasury stock (260,688) (577,939) (43,600)
----------- ---------- ----------
Net cash provided by financing activities 260,945 2,785,947 1,553,468
Increase (decrease) in cash and cash equivalents 2,199,965 (13,540) 738,706
Cash and cash equivalents:
Beginning 3,498,972 3,512,512 2,773,806
----------- ---------- ----------
Ending $ 5,698,937 $3,498,972 $3,512,512
=========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest on deposits and on other
borrowings $ 3,984,921 $4,127,529 $4,025,381
=========== ========== ==========
Income taxes $ 530,975 $ 835,183 $1,019,228
=========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Other real estate and other assets acquired in
settlement of loans $ 1,373,829 $ 84,620 $ 190,580
=========== ========== ==========
Transfer of securities from held to maturity to available
for sale $ 7,180,676 $ - $ -
=========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
34
<PAGE>
CITIZENS FINANCIAL CORP.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 1. Significant Accounting Policies
Nature of business: Citizens Financial Corp. is a one bank holding company
which was incorporated on April 30, 1987. The wholly owned subsidiary, Citizens
National Bank, is a commercial bank with operations in Randolph and Tucker
Counties of West Virginia. The Bank provides retail and commercial loans,
deposit and trust services principally to customers in Randolph County, West
Virginia and the surrounding counties.
Basis of financial statement presentation and accounting estimates: The
accounting and reporting policies of Citizens Financial Corp. and its wholly
owned subsidiary conform to generally accepted accounting principles and to
general practices within the banking industry. The preparation of financial
statements in conformity with 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 reporting period. Actual results could differ from those
estimates.
Principles of consolidation: The accompanying consolidated financial
statements include the accounts of Citizens Financial Corp. and its wholly owned
subsidiary, Citizens National Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Presentation of cash flows: For purposes of reporting cash flows, cash and
cash equivalents includes cash on hand, balances due from banks (including cash
items in process of clearing) and federal funds sold. Cash flows from demand
deposits, NOW accounts and savings accounts are reported net since their
original maturities are less than three months. Cash flows from loans and
certificates of deposit and other time deposits are also reported net.
Securities: Debt and equity securities are classified as "held to
maturity", "available for sale" or "trading" according to management's intent.
The appropriate classification is determined at the time of purchase of each
security and re-evaluated at each reporting date.
Securities held to maturity - Debt securities for which the Company has the
---------------------------
positive intent and ability to hold to maturity are reported at cost, adjusted
for amortization of premiums and accretion of discounts. During 1999, the
Company transferred $7,180,676 of securities with a fair value of $7,187,778
from "securities held to maturity" to "available for sale". The Company does
not anticipate the purchase or transfer of any held to maturity securities in
the future.
Securities available for sale - Securities not classified as "held to
-----------------------------
maturity" or as "trading" are classified as "available for sale". Securities
classified as "available for sale" are those securities the Company intends to
hold for an indefinite period of time, but not necessarily to maturity.
"Available for sale" securities are reported at fair value. Unrealized gains or
losses, adjusted for applicable income taxes, are reported as a separate
component of shareholders' equity.
Trading securities - There are no securities classified as "trading" in the
------------------
accompanying financial statements.
Realized gains and losses on sales of securities are recognized on the
specific identification method. Amortization of premiums and accretion of
discounts are computed using the interest method.
Loans and allowance for loan losses: Loans are stated at the amount of
unpaid principal, reduced by unearned discount and an allowance for loan losses.
Interest is recognized on an amortized basis.
The allowance for loan losses is maintained at a level considered adequate
to provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operating expense and reduced by net charge-
offs. The subsidiary bank makes continuous credit reviews of the loan portfolio
and considers current economic conditions, historical loan loss experience,
review of specific problem loans and other factors in determining the adequacy
of the allowance for loan losses. Loans are charged against the allowance for
loan losses when management believes that the collectibility of the principal is
unlikely.
35
<PAGE>
A loan is impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due in
accordance with the contractual terms of the specific loan agreement. Impaired
loans, other than certain large groups of smaller-balance homogeneous loans that
are collectively evaluated for impairment, are reported at the present value of
expected future cash flows discounted using the loan's original effective
interest rate or, alternatively, at the loan's observable market price, or at
the fair value of the loan's collateral if the loan is collateral dependent.
The method selected to measure impairment is made on a loan-by-loan basis,
unless foreclosure is deemed to be probable, in which case the fair value of the
collateral method is used.
Interest is accrued daily on impaired loans unless the loan is placed on
non-accrual status. Impaired loans are placed on non-accrual status when the
payments of principal and interest are in default for a period of 90 days,
unless the loan is both well-secured and in the process of collection. Interest
on non-accrual loans is recognized primarily using the cost-recovery method.
Loan origination fees and certain direct loan origination costs are
deferred and amortized as adjustments of the related loan yield over its
contractual life.
Bank premises and equipment: Bank premises and equipment are stated at cost
less accumulated depreciation. Depreciation is computed primarily by the
straight-line method over the estimated useful lives of the assets. Repairs and
maintenance expenditures are charged to operating expense as incurred. Major
improvements and additions to premises and equipment are capitalized.
Other real estate: Other real estate consists of real estate held for
resale which was acquired through foreclosure on loans secured by such real
estate. At the time of acquisition, these properties are recorded at fair value
with any writedown being charged to the allowance for loan losses. After
foreclosure, valuations are periodically performed by management and the real
estate is carried at the lower of carrying amount or fair value less cost to
sell. Expenses incurred in connection with operating these properties are
charged to operating expenses as incurred. Charging such expenses to income
rather than including them in loss on foreclosed real estate does not materially
affect financial statement reporting. Gains and losses on the sales of these
properties are credited or charged to operating income in the year of the
transaction.
Sales of these properties which are financed by the subsidiary bank and
meet the criteria of covered transactions remain classified as other real estate
until such time as principal payments have been received to warrant
classification as a real estate loan.
Organization costs: Organization costs are being amortized on a straight-
line basis over a period of fifteen years. Unamortized organization costs
totaled $0 and $5,283 at December 31, 1999 and 1998.
Pension plan: The subsidiary bank has a defined benefit pension plan
covering substantially all employees. Pension costs are actuarially determined
and charged to expense. During 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 132 "Employers Disclosures about
Pensions and Other Postretirement Benefits" (SFAS No. 132), which changed the
presentation in the footnote disclosures of these plans. Under SFAS No. 132, the
Company is required to present a reconciliation of the plans' assets in
conjunction with the components of the plans' expenses.
Postretirement benefits: The subsidiary bank provides certain health care
and life insurance benefits for all retired employees that meet certain
eligibility requirements. The Company's share of the estimated costs that will
be paid after retirement is generally being accrued by charges to expense over
the employees' active service periods to the dates they are fully eligible for
benefits, except that the Company's unfunded cost at January 1, 1993 is being
accrued primarily on a straight-line basis through the year ending 2013. As
previously mentioned, the Company also adopted SFAS No. 132 for this plan during
1998.
Income taxes: Deferred tax assets and liabilities are determined based on
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
36
<PAGE>
Valuation allowances are established when deemed necessary to reduce deferred
tax assets to the amount expected to be realized.
The consolidated provision for income taxes includes federal and state income
taxes and is based on pretax income reported in the consolidated financial
statements, adjusted for transactions that may never enter into the computation
of income taxes payable.
Basic earnings per share: Basic earnings per common share is computed based
upon the weighted average shares outstanding. The weighted average shares
outstanding were 658,910, 663,487 and 683,544 for the years ended December 31,
1999, 1998 and 1997, respectively. During the years ended December 31, 1999,
1998 and 1997, the Company did not have any potentially dilutive securities.
Trust department: Assets held in an agency or fiduciary capacity by the
subsidiary Bank's trust department are not assets of the Bank and are not
included in the accompanying balance sheets. Trust department income is
recognized on the cash basis in accordance with customary banking practice.
Reporting such income on a cash basis rather than the accrual basis does not
affect net income materially.
Comprehensive Income: During 1998, the Company adopted the Financial
Accounting Standards Board Statement No. 130, Reporting Comprehensive Income
(SFAS No. 130). This Statement requires an entity to include a statement of
comprehensive income in their full set of general-purpose financial statements.
Emerging accounting standards: In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, which is required to be adopted in years beginning after
June 15, 2000. The statement permits early adoption as of the beginning of any
fiscal quarter after its issuance. The Bank expects to adopt the new statement
effective December 31, 2000. The statement will require the Bank to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. Since the subsidiary bank has not historically invested
in derivatives, as defined, management does not anticipate that the adoption of
the new statement will have a significant impact on the Company's earnings or
financial position.
Note 2. Cash Concentrations
At December 31, 1999 and 1998, the subsidiary bank had no cash concentrations.
Note 3. Securities
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at December 31, 1999 and 1998, are summarized as follows:
1999
------------------------------------------
Carrying
Value Unrealized Estimated
(Amortized ---------------- Fair
Cost) Gains Losses Value
----------- --------- --------- ---------
Held to maturity:
Total securities held to maturity $ - $ _ $ - $ -
=========== ========= ========= =========
37
<PAGE>
<TABLE>
<CAPTION>
Carrying
Value
Unrealized (Estimated
Amortized ------------------ Fair
Cost Gains Losses Value)
----------- --------- -------- -------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities $ 500,844 $ 721 $ - $ 501,565
U.S. Government agencies and corporations 18,820,952 - 367,623 18,453,329
Mortgage-backed securities - U.S. Government
agencies and corporations 1,441,649 - 63,321 1,378,328
Federal Reserve Bank stock 108,000 - - 108,000
Federal Home Loan Bank stock 623,800 - - 623,800
Corporate debt securities 13,678,016 970 355,270 13,323,716
State and political subdivisions 7,183,822 38,203 48,942 7,173,083
----------- --------- --------- -----------
Total securities available for sale $42,357,083 $ 39,894 $ 835,156 $41,561,821
=========== ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------
Carrying
Value Unrealized Estimated
(Amortized ------------------ Fair
Cost) Gains Losses Value
------------- --------- -------- ------------
<S> <C> <C> <C> <C>
Held to maturity:
Tax-exempt state and political subdivisions $ 8,372,564 $ 161,193 $ - $ 8,533,757
------------- --------- -------- ------------
Total securities held to maturity $ 8,372,564 $ 161,193 $ - $ 8,533,757
============= ========= ======== ============
</TABLE>
<TABLE>
<CAPTION>
Carrying
Value
Unrealized (Estimated
Amortized ------------------ Fair
Cost Gains Losses Value)
------------ --------- -------- -------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities $ 3,027,754 $ 42,246 $ - $ 3,070,000
U.S. Government agencies and corporations 11,313,079 166,228 18,182 11,461,125
Mortgage-backed securities - U.S. Government
agencies and corporations 1,818,813 108 6,202 1,812,719
Federal Reserve Bank stock 108,000 - - 108,000
Federal Home Loan Bank stock 436,000 - - 436,000
Corporate debt securities 17,250,192 253,649 - 17,503,841
Taxable state and political subdivisions 1,043,988 3,552 - 1,047,540
------------ --------- -------- ------------
Total securities available for sale $ 34,997,826 $ 465,783 $ 24,384 $ 35,439,225
============ ========= ======== ============
</TABLE>
38
<PAGE>
The maturities, amortized cost and estimated fair values of the Company's
securities at December 31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
----------------------------------- -----------------------
Carrying
Carrying Value
Value Estimated (Estimated
(Amortized Fair Amortized Fair
(Cost) Value Cost Value)
----------------- ------------------ ------------ ------------
<S> <C> <C> <C> <C>
Due within one year $ $ $ 10,909,220 $ 10,877,560
Due after one through five years - - 29,861,755 29,105,338
Due after five through ten years - - 854,308 847,123
Due after ten years - - - -
Equity securities - - 731,800 731,800
---------------- ------------------ ------------ ------------
Total $ - $ - $ 42,357,083 $ 41,561,821
================ ================== ============ ============
</TABLE>
Mortgage-backed securities have remaining contractual maturities ranging from 6
to 6.5 years and are reflected in the maturity distribution schedule based on
their anticipated average life to maturity, which ranges from 2 to 4 years.
Accordingly, discounts are accreted and premiums are amortized over the
anticipated life to maturity of the specific obligation.
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 are as follows:
<TABLE>
<CAPTION>
Proceeds From Gross Realized
------------------------------------------------ -------------------------------
Years Ended Calls and Principal
December 31, Sales Maturities Payments Gains Losses
- ------------------------------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
1999
Securities held to maturity $ - $ 1,190,000 $ - $ - $ -
Securities available for sale 3,527,373 9,470,000 370,338 16,437 -
-------------- -------------- -------------- -------------- --------------
$ 3,527,373 $ 10,660,000 $ 370,338 $ 16,437 $ -
============== ============== ============== ============== ==============
1998
Securities held to maturity $ - $ 1,045,000 $ - $ - $ -
Securities available for sale 502,225 5,773,120 406,439 900 -
-------------- -------------- -------------- -------------- --------------
$ 502,225 $ 6,818,120 $ 406,439 $ 900 $ -
============== ============== ============== ============== ==============
1997
Securities held to maturity $ - $ 4,040,000 $ 976,407 $ - $ -
Securities available for sale 2,059,392 3,500,000 172,216 9,921 19,843
============== ============== ============== ============== ==============
$ 2,059,392 $ 7,540,000 $ 1,148,623 $ 9,921 $ 19,843
============== ============== ============== ============== ==============
</TABLE>
At December 31, 1999 and 1998, securities carried at $17,573,740 and
$11,563,189, respectively, with estimated fair values of $17,078,942 and
$11,768,397, respectively, were pledged to secure public deposits, securities
sold under agreements to repurchase, and for other purposes required or
permitted by law.
39
<PAGE>
At December 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 carrying value
of $6,021,522 and an estimated fair value of $5,967,697. There were no
concentrations with any one issuer.
Federal Reserve Bank stock and Federal Home Loan Bank stock are equity
securities which are included in securities available for sale in the
accompanying financial statements. Such securities are carried at cost, since
they may only be sold back to the respective issuer or another member at par
value.
Note 4. Loans
Loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Commercial, financial and agricultural $ 14,035,319 $ 13,365,982
Real estate - construction 1,368,664 1,680,649
Real estate - mortgage 61,242,583 59,302,908
Installment loans 10,146,898 11,598,732
Credit card loans - 903,974
Other 18,324 23,525
-------------- -------------
Total loans 86,811,788 86,875,770
Net deferred loan origination fees and costs (105,599) (20,364)
Less unearned income (30,172) (37,150)
-------------- -------------
Total loans net of unearned income and net
deferred loan origination fees and costs 86,676,017 86,818,256
Less allowance for loan losses 1,011,479 1,109,595
-------------- -------------
Loans, net $ 85,664,538 $ 85,708,661
============== =============
</TABLE>
Included in the above balance of net loans are nonaccrual loans amounting to
$56,938 and $52,662 at December 31, 1999 and 1998, respectively. If interest on
nonaccrual loans had been accrued, such income would have approximated $3,777,
$5,107, and $120 for the years ended December 31, 1999, 1998 and 1997,
respectively.
In the past, the subsidiary bank has made loans, in the normal course of
business, to its directors, executive officers and their related interests, and
will continue to make such loans in the future. At December 31, 1999 and 1998,
outstanding loans of this nature totaled $4,355,969 and $3,213,470,
respectively.
The following presents the activity with respect to related party loans
aggregating $60,000 or more to directors, executive officers, and their related
interests of Citizens Financial Corp. and subsidiary during the years ended
December 31, 1999 and 1998:
1999 1998
------------ ------------
Balance, beginning $ 3,200,057 $ 3,274,761
Additions 5,259,579 3,320,439
Amounts collected (4,120,651) (3,395,143)
------------ ------------
Balance, ending $ 4,338,985 $ 3,200,057
============ ============
The following represents contractual loan maturities at December 31, 1999
without regard to scheduled periodic principal repayments on amortizing loans:
40
<PAGE>
<TABLE>
<CAPTION>
Due Due After 1 But Due
Within 1 Yr Within 5 Yrs After 5 Yrs Total
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 9,625,573 $ 2,806,366 $ 1,603,380 $ 14,035,319
Real estate - construction 1,368,664 - - 1,368,664
Real estate - mortgage 34,334,446 6,952,836 19,955,301 61,242,583
Net installment loans 1,474,287 8,331,805 340,806 10,146,898
Other 15,913 2,411 - 18,324
------------- --------------- -------------- -------------
$ 46,818,883 $ 18,093,418 $ 21,899,487 $ 86,811,788
============= =============== ============== =============
Loans due after one year with:
Variable rates $ 26,232,896
Fixed rates 13,760,009
-------------
Total $ 39,992,905
=============
</TABLE>
Concentrations of credit risk: The Company's subsidiary, Citizens National
Bank, grants installment, commercial and residential loans to customers in
Randolph County, West Virginia, and surrounding counties in striving to maintain
a diversified loan portfolio.
As of December 31, 1999, Citizens National Bank had direct and indirect
extensions of credit to automobile dealers totaling approximately $6,840,000
These loans consist of automobile floor plan loans and commercial loans which
are generally secured by liens on the pledges of accounts receivable,
inventories or personal guarantees. The Bank evaluates each such customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained is
based upon management's credit evaluation.
Note 5. Allowance for Loan Losses
An analysis of the allowance for loan losses for the years ended December 31,
1999, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Balance, beginning of year $ 1,109,595 $ 1,094,185 $ 989,716
------------- ------------- -------------
Losses:
Commercial, financial and agricultural 760,374 2,864 -
Real estate - mortgage 88,526 12,204 2,851
Installment 76,363 81,502 86,542
Credit cards 51,713 57,210 70,115
------------- ------------- -------------
Total 976,976 153,780 159,508
------------- ------------- -------------
Recoveries:
Commercial, financial and agricultural 99,476 3,731 2,510
Real estate - mortgage 43,680 20,314 10,234
Installment 14,762 14,817 13,200
Credit cards 6,790 10,328 2,033
------------- ------------- -------------
Total 164,708 49,190 27,977
------------- ------------- -------------
Net losses 812,268 104,590 131,531
Provision for loan losses 714,152 120,000 236,000
------------- ------------- -------------
Balance, end of year $ 1,011,479 $ 1,109,595 $ 1,094,185
============= ============= =============
</TABLE>
41
<PAGE>
The Company's total recorded investment in impaired loans at December 31, 1999
and 1998 approximated $661,341 and $1,897,430, for which the required allowance
for loan losses was $100,000 and $457,000 as determined in accordance with
generally accepted accounting principles. The Company's average investment in
such loans was $686,671 for the year ended December 31, 1999. All impaired loans
at December 31, 1999, were collateral dependent, and accordingly, the fair value
of the loan's collateral was used to measure the impairment of each.
For purposes of SFAS Nos. 114 and 118, the Company considers groups of
smaller-balance, homogeneous loans to include: mortgage loans secured by
residential property, other than those which significantly exceed the subsidiary
bank's typical residential mortgage loan amount (currently those in excess of
$100,000); small balance commercial loans (currently those less than $50,000);
and installment and credit card loans to individuals, exclusive of those loans
in excess of $50,000.
For the years ended December 31, 1999, 1998, and 1997, the Company recognized
approximately $59,060, $144,602 and $0, respectively, in interest income on
impaired loans. Using the cash basis-method of accounting, the Company would
have recognized approximately the same amount of interest income on such loans.
Note 6. Bank Premises and Equipment
The major categories of bank premises and equipment and accumulated
depreciation at December 31, 1999 and 1998, are summarized as follows:
1999 1998
----------- -----------
Land $ 309,029 $ 309,029
Buildings and improvements 2,658,299 2,658,299
Furniture and equipment 1,623,703 1,570,055
----------- -----------
4,591,031 4,537,383
Less accumulated depreciation 3,199,903 3,081,998
----------- -----------
Bank premises and equipment, net $ 1,391,128 $ 1,455,385
=========== ===========
Depreciation expense for the years ended December 31, 1999, 1998 and 1997,
totaled $194,079, $246,664 and $250,325, respectively.
Note 7. Deposits
The following is a summary of interest bearing deposits by type as of December
31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
NOW and Super NOW accounts $ 13,737,203 $ 13,642,641
Money market accounts 6,457,709 5,378,755
Savings accounts 27,507,009 26,661,128
Certificates of deposit under $100,000 38,968,294 40,066,094
Certificates of deposit of $100,000 or more 10,616,618 12,373,586
---------------- ----------------
Total $ 97,286,833 $ 98,122,204
================ ================
Interest expense on deposits is summarized below:
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
NOW and Super NOW accounts $ 241,943 $ 281,897 $ 254,658
Money market accounts 115,536 145,026 151,992
Savings accounts 707,127 760,135 783,367
Certificates of deposit under $100,000 1,924,776 2,003,196 2,190,756
Certificates of deposit of $100,000 or more 621,150 614,800 405,288
---------------- ---------------- ----------------
Total $ 3,610,532 $ 3,805,054 $ 3,786,061
================ =============== ================
</TABLE>
42
<PAGE>
The following is a summary of the maturity distribution of certificates of
deposit in amounts of $100,000 or more as of December 31, 1999:
Amount Percent
------------ -----------
Three months or less $ 3,088,148 29%
Three through six months 1,903,696 18%
Six through twelve months 2,267,108 21%
Over twelve months 3,357,666 32%
------------ -----------
Total $ 10,616,618 100%
============ ===========
A summary of the maturities for all time deposits as of December 31, 1999,
follows:
Year Amount
---- ------------
2000 $ 29,958,267
2001 14,044,889
2002 2,837,948
2003 1,472,497
2004 1,271,311
------------
$ 49,584,912
============
At December 31, 1999, deposits of related parties including directors,
executive officers, and their related interests of Citizens Financial Corp. and
subsidiary approximated $4,400,000.
Note 8. Income Taxes
The components of applicable income tax expense (benefit) for the years ended
December 31, 1999, 1998 and 1997, are as follows:
Current: 1999 1998 1997
------------ ------------ ------------
Federal $ 390,037 $ 717,630 $ 835,600
State 83,709 125,503 139,964
------------ ------------ ------------
473,746 843,133 975,564
------------ ------------ ------------
Deferred
Federal 14,517 (20,834) (37,057)
State 1,707 (1,015) (4,905)
------------ ------------ ------------
16,224 (21,849) (41,962)
------------ ------------ ------------
Total $ 489,970 $ 821,284 $ 933,602
============ ============ ============
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured for tax purposes. Deferred tax assets and liabilities
represent the future tax return consequences of temporary differences, which
will either be taxable or deductible when the related assets and liabilities are
recovered or settled.
43
<PAGE>
The tax effects of temporary differences which give rise to the Company's
deferred tax assets and liabilities as of December 31, 1999 and 1998, are as
follows:
1999 1998
--------- ---------
Deferred tax assets:
Allowance for loan losses $ 234,735 $ 266,409
Employee benefit plans 27,485 31,211
Accrued income and expenses 19,008 21,970
Depreciation 29,930 29,064
Net loan origination fees and costs 40,128 8,195
Net unrealized loss on securities 270,389 -
---------- ----------
621,675 356,849
---------- ----------
Deferred tax liabilities:
Accretion on securities (60,413) (49,752)
Net unrealized gain on securities - (154,489)
---------- ----------
(60,413) (204,241)
---------- ----------
Net deferred tax asset $ 561,262 $ 152,608
========== ==========
A reconciliation between the amount of reported income tax expense and the
amount computed by multiplying the statutory income tax rate by book pretax
income for the years ended December 31, 1999, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Computed tax at applicable statutory rate $ 540,823 34.0 $ 823,374 34.0 $ 875,277 34.0
Increase (decrease) in taxes resulting from:
Tax-exempt interest (135,043) (8.5) (132,395) (5.5) (101,553) (3.9)
Amortization of organization costs 1,796 .1 21,556 0.9 21,556 0.8
State income taxes, net of federal
tax benefit 55,248 3.5 82,832 3.4 87,501 3.4
Postretirement benefit plan accruals 23,966 1.5 22,391 0.9 21,281 0.8
Other, net 3,180 .2 3,526 0.2 29,540 1.1
---------- -------- ---------- -------- ---------- --------
Applicable income taxes $ 489,970 30.8 $ 821,284 33.9 $ 933,602 36.2
========== ======== ========== ======== ========== ========
</TABLE>
Note 9. Employee Benefit Plans
Pension Plan: Citizens National Bank has a defined benefit pension plan
covering all employees who meet the eligibility requirements. To be eligible, an
employee must be 21 years of age and have completed one year of continuous
service. The Plan provides benefits based on the participant's years of service
and highest consecutive five year average annual earnings. The Bank's funding
policy is to make the minimum annual contribution that is required by applicable
regulations. As described in Note 1, The Company changed its presentation of
this plan in 1998, accordingly, other information relative to this plan follows:
44
<PAGE>
<TABLE>
<CAPTION>
Pension Pension Pension
Benefit Benefit Benefit
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $3,091,266 $2,654,130 $2,367,643
Service cost 97,536 81,678 67,057
Interest cost 214,210 201,790 178,024
Change in discount rate (385,160) 98,203 42,771
Experience loss/(gain) 37,578 196,399 121,759
Benefits paid (137,692) (140,934) (123,124)
---------- ---------- ----------
Benefit obligation at end of year $2,917,738 $3,091,266 $2,654,130
========== ========== ==========
Change in plan assets
Fair value of plan assets at beginning of year $4,150,004 $4,046,829 $3,504,113
Actual return on plan assets 215,480 244,109 665,840
Employer contribution - - -
Plan participants' contributions - - -
Benefits paid (137,692) (140,934) (123,124)
---------- ---------- ----------
Fair value of plan assets at end of year $4,227,792 $4,150,004 $4,046,829
========== ========== ==========
Funded status $1,310,054 $1,058,738 $1,392,699
Unrecognized net actuarial gain (612,407) (396,256) (799,956)
Unrecognized prior service benefit (167,895) (186,263) (204,631)
Unrecognized net obligation at transition (93,172) (116,293) (139,414)
---------- ---------- ----------
Prepaid benefit cost $ 436,580 $ 359,926 $ 248,698
========== ========== ==========
Weighted-average assumptions as of
December 31
Discount rate 8.00% 7.00% 7.25%
Expected return on plan assets 8.50% 8.50% 8.50%
Rate of compensation increase 5.00% 5.00% 5.00%
Components of net periodic benefit cost
Service cost $ 97,536 $ 81,678 $ 67,057
Interest cost 214,210 201,790 178,024
Expected return on plan assets (346,911) (335,969) (292,380)
Net amortization and deferral (41,489) (58,727) (61,922)
---------- ---------- ----------
Net periodic benefit cost $ (76,654) $ (111,228) $ (109,221)
========== ========== ==========
</TABLE>
401(k) Plan: The Bank has a 401(k) profit-sharing plan for the benefit of all
employees who have attained the age of 21 and completed one year of continuous
service. The Plan as amended allows participating employees to contribute up to
15% of their annual compensation and permits the Bank to make discretionary non-
matching contributions to the Plan in such amount as the Board may determine to
be appropriate. Contributions made to the Plan by the Bank for the years ended
December 31, 1999, 1998 and 1997, were $23,000, $39,139 and $38,517,
respectively.
45
<PAGE>
Postretirement Benefit Plans: Citizens National Bank sponsors a
postretirement healthcare plan and a postretirement life insurance plan for all
retired employees that meet certain eligibility requirements. Both plans are
contributory with retiree contributions that are adjustable based on various
factors, some of which are discretionary. The plans are unfunded. As described
in Note 1, the Company changed its presentation of these plans during 1998.
Other information relative to these plans follows:
<TABLE>
<CAPTION>
Health Care Health Care Health Care
Plan Plan Plan
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 399,876 $ 371,424 $ 362,382
Service cost 16,119 14,916 13,823
Interest cost 25,201 24,152 23,771
Change in discount rate - - -
Experience loss/(gain) (25,245) 12,184 (8,152)
Net amortization and deferral - - -
Benefits paid (28,258) (22,800) (20,400)
--------- --------- ---------
Benefit obligation at end of year $ 387,693 $ 399,876 $ 371,424
========= ========= =========
Change in plan assets
Fair value of plan assets at beginning of year $ - $ - $ -
Actual return on plan assets - - -
Employer contribution - - -
Plan participants contributions 28,258 22,800 20,400
Experience (loss)/gain - - -
Benefits paid (28,258) (22,800) (20,400)
--------- --------- ---------
Fair value of plan assets at end of year $ - $ - $ -
========= ========= =========
Funded status $(387,693) $(399,876) $(371,424)
Unrecognized net actuarial gain (89,860) (66,277) (81,281)
Unrecognized prior service benefit - - -
Unrecognized net obligation at transition 222,438 239,549 256,660
--------- --------- ---------
Prepaid (accrued) benefit cost $(255,115) $(226,604) $(196,045)
========= ========= =========
Weighted-average assumptions as of
December 31
Discount rate 6.75% 7.00% 7.00%
Expected return on plan assets 7.00% 7.00% 7.00%
Rate of compensation increase - - -
Components of net periodic benefit cost
Service cost $ 16,119 $ 14,916 $ 13,823
Interest cost 25,201 24,152 23,771
Expected return on plan assets (1,662) (2,820) (2,440)
Net amortization and deferral 17,111 17,111 17,111
Recognized net actuarial loss - - -
--------- --------- ---------
Net periodic benefit cost $ 56,769 $ 53,359 $ 52,265
========= ========= =========
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Life Life Life
Insurance Insurance Insurance
Plan Plan Plan Total Total Total
1999 1998 1997 1999 1998 1997
- ----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 93,697 $ 84,724 $ 73,201 $ 493,573 $ 456,148 $ 435,583
3,860 3,373 2,510 19,979 18,289 16,333
6,048 5,648 4,886 31,249 29,800 28,657
- - - - - -
(6,854) 3,898 6,905 (32,099) 16,082 (1,247)
- - - - - -
(3,420) (3,946) (2,778) (31,678) (26,746) (23,178)
- ----------- ----------- ---------- ---------- ---------- ----------
$ 93,331 $ 93,697 $ 84,724 $ 481,024 $ 493,573 $ 456,148
=========== =========== ========== ========== ========== ==========
$ - $ - $ - $ - $ - $ -
- - - - - -
3,420 3,946 2,778 31,678 26,746 23,178
- - - - - -
(3,420) (3,946) (2,778) (31,678) (26,746) (23,178)
- ----------- ----------- ---------- ---------- ---------- ----------
$ - $ - $ - $ - $ - $ -
=========== =========== ========== ========== ========== ==========
$ (93,331) $ (93,697) $ (84,724) $ (481,024) $ (493,573) $ (456,148)
(16,592) (9,763) (14,015) (106,452) (76,040) (95,296)
- - - - - -
49,847 53,682 57,517 272,285 293,231 314,177
- ----------- ----------- ---------- ---------- ---------- ----------
$ (60,076) $ (49,778) $ (41,222) $ (315,191) $ (276,382) $ (237,267)
=========== =========== ========== ========== ========== ==========
6.75% 7.00% 7.00%
7.00% 7.00% 7.00%
4.00% 4.00% 4.00%
$ 3,860 $ 3,373 $ 2,510 $ 19,979 18,289 $ 16,333
6,048 5,648 4,886 31,249 29,800 28,657
(25) (354) (900) (1,687) (3,174) (3,340)
3,835 3,835 3,835 20,946 20,946 20,946
- - - - - -
- ----------- ----------- ---------- ---------- ---------- ----------
$ 13,718 $ 12,502 $ 10,331 $ 70,487 $ 65,861 $ 62,596
=========== =========== ========== ========== ========== ==========
</TABLE>
47
<PAGE>
For measurement purposes, the maximum monthly benefit of $100 payable per
eligible retiree under the postretirement health care plan was assumed with no
future increases. Accordingly, an assumed 1 percentage point annual increase or
decrease in health care cost trend rates would not impact the health care plan's
accumulated postretirement benefit obligation at December 31, 1999 or the
aggregate of the service and interest cost components of the health care plan's
net postretirement benefit cost for the year ended December 31, 1999.
Executive Supplemental Income Plan The liability accrued for the Executive
Supplemental Income Plan at December 31, 1999 and 1998 was $197,838 and
$173,147, respectively, which is included in other liabilities. In addition, the
Bank has purchased certain insurance contracts to fund the liabilities arising
under this plan. At December 31, 1999 and 1998, the cash surrender value of
these insurance contracts was $196,568 and $157,605. Expenses associated with
the Plan at December 31, 1999, 1998 and 1997 were $27,842, $14,760 and $28,103,
respectively.
Note 10. Other Borrowings
Short-Term Borrowings: During 1999 and 1998, the Company's short-term
borrowings consisted of securities sold under agreements to repurchase
(repurchase agreements) and advances under a line of credit with the Federal
Home Loan Bank of Pittsburgh (FHLB). Interest is paid on the repurchase
agreements based on either fixed or variable rates as determined upon
origination. At December 31, 1999 and 1998, securities with an amortized cost of
$7,508,567 and $6,557,000 and estimated fair values of $7,414,358 and
$6,673,000, respectively, were pledged to secure the repurchase agreements.
As a member of the FHLB, the subsidiary bank has access to various lines of
credit under programs administered by the FHLB. Borrowings under these
arrangements bear interest at the interest rate posted by the FHLB on the day of
the borrowing and are subject to change daily. The lines of credit are secured
by a blanket lien on all unpledged and unencumbered assets.
The following information is provided relative to these obligations:
<TABLE>
<CAPTION>
1999 1998
------------------------- ----------------------
Repurchase Line of Repurchase Line of
Agreement Credit Agreement Credit
------------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
Amount outstanding at December 31 $4,012,683 $2,016,000 $4,387,689 $239,000
Weighted average interest rate at December 31 4.99% 5.65% 5.19% 5.05%
Maximum month-end amount outstanding $5,265,792 $2,016,000 $5,724,649 $343,000
Average daily amount outstanding $1,645,791 $ 231,112 $4,236,611 $139,603
Weighted average interest rate for the year 4.71% 5.34% 5.55% 5.40%
</TABLE>
Long-Term Borrowings: At December 31, 1999, the Company's long-term borrowings
of $4,086,923 consisted of $942,645 of advances from the FHLB used to finance
specific lending activities and $3,144,278 in repurchase agreements maturing
June 30, 2001. Interest is paid on the FHLB borrowings at the rate of 5.66%
while the repurchase agreement carries an interest rate which is variable at 62%
of the Wall Street Journal prime rate.
At December 31, 1998, all of the Company's long-term borrowings consisted of
FHLB advances.
48
<PAGE>
A summary of the maturities of the Company's long-term borrowings for the next
five years is as follows:
Year Amount
---- ----------
2000 $ 74,960
2001 3,224,440
2002 486,093
2003 5,719
2004 289,700
2005 and thereafter 6,011
----------
$4,086,923
==========
Note 11. Commitments and Contingencies
At December 31, 1999 and 1998, the subsidiary bank maintained required reserve
balances with the Federal Reserve Bank of Richmond approximating $854,000 and
$789,000, respectively. The Bank does not earn interest on such reserve
balances.
Litigation: The Company is involved in various legal actions arising in the
ordinary course of business. In the opinion of counsel, the outcome of these
matters will not have a significant adverse effect on the Company.
Financial Instruments With Off-Balance-Sheet Risk: The subsidiary bank is 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 standby 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.
The contract amounts of those instruments reflect the extent of involvement the
Bank has in particular classes of financial instruments.
Financial instruments whose contract Contract Amount
------------------------
amounts represent credit risk 1999 1998
------------------------------------------------------------- -----------
Commitments to extend credit $12,252,622 $17,619,824
Standby letters of credit 247,852 310,000
----------- -----------
$12,500,474 $17,929,824
=========== ===========
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The Bank evaluates each customer's credit worthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies but may include accounts receivable,
inventory, equipment or real estate.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans. These letters of credit are generally uncollateralized.
49
<PAGE>
Year 2000 Compliance
--------------------
The Company has evaluated the impact of the Year 2000 issue and is not aware
of any system failures or any problems encountered by vendors, customers, or
other third parties that would have a significant impact on the Company's
financial condition. The Company believes it has taken the necessary steps to
be Year 2000 compliant, however, there may be unforeseen external or internal
issues which could impact the Company's status in the future.
Note 12. Other Events
On December 17, 1999, Citizens National Bank of Elkins, a wholly-owned
subsidiary of Citizens Financial Corp., entered into an agreement to acquire a
branch banking facility in Petersburg, West Virginia from South Branch Valley
National Bank, a subsidiary of South Branch Valley Bancorp, Inc. The
acquisition stems from the divestiture of the branch required by federal
regulators to avoid market concentration in loans and deposits with regards to
South Branch's acquisition of Potomac Valley Bank also located in Petersburg,
West Virginia. The transaction is anticipated to be completed during the first
half of 2000, subject to regulatory approval, and will include the facilities
and equipment, deposits and selected loans. It is anticipated that the
transaction will be accounted for as a purchase for accounting purposes. The
office will be operated as a branch of Citizens National Bank of Elkins. The
total deposits of the branch currently approximate $10,000,000 and the
approximated amount of the loans to be acquired are $4,500,000. The total
consideration to be paid will depend upon the balances at the time of closing.
Note 13. Shareholders' Equity and Restrictions on Dividends
The primary source of funds for the dividends paid by Citizens Financial Corp.
is dividends received from its subsidiary, Citizens National Bank. Dividends
paid by the subsidiary bank are subject to restrictions by banking regulations.
The most restrictive provision requires approval by the Office of the
Comptroller of the Currency if dividends declared in any year exceed the year's
net income, as defined, plus the retained net profits of the two preceding
years. During 2000, the net retained profits available for distribution to
Citizens Financial Corp. as dividends without regulatory approval approximate
$476,400 plus net income of the subsidiary bank for the interim periods through
the date of declaration.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1999, that the
Bank meets all capital adequacy requirements to which it is subject.
The most recent notification from the Office of the Comptroller of the
Currency categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized the Bank
must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table below. There are no conditions or events since
that notification that management believes have changed the institution's
category.
The Bank's actual capital amounts and ratios are presented in the following
table (in thousands).
50
<PAGE>
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital $17,486 19.10% $7,525 8.00% $9,157 10.00%
(to Risk Weighted Assets)
Tier I Capital 16,475 17.99% 3,663 4.00% 5,464 6.00%
(to Risk Weighted Assets)
Tier I Capital 16,475 11.82% 5,576 4.00% 8,364 6.00%
(to Average Assets)
As of December 31, 1998:
Total Capital $17,463 18.44% $7,575 8.00% $9,469 10.00%
(to Risk Weighted Assets)
Tier I Capital 16,354 17.27% 3,788 4.00% 5,682 6.00%
(to Risk Weighted Assets)
Tier I Capital 16,354 11.94% 4,008 3.00% 6,680 5.00%
(to Average Assets)
</TABLE>
Note 14. Fair Value of Financial Instruments
The following summarizes the methods and significant assumptions used by the
Company in estimating its fair value disclosures for financial instruments.
Cash and due from banks: The carrying values of cash and due from banks
approximate their estimated fair values.
Federal funds sold: The carrying values of federal funds sold approximate
their estimated fair values.
Securities: Estimated fair values of securities are based on quoted market
prices, where available. If quoted market prices are not available, estimated
fair values are based on quoted market prices of comparable securities.
Loans: The estimated fair values for loans are computed based on scheduled
future cash flows of principal and interest, discounted at interest rates
currently offered for loans with similar terms to borrowers of similar credit
quality. No prepayments of principal are assumed.
Accrued interest receivable and payable: The carrying values of accrued
interest receivable and payable approximate their estimated fair values.
Deposits: The estimated fair values of demand deposits (i.e. noninterest
bearing checking, NOW, Super NOW) money market, savings and other variable rate
deposits approximate their carrying values. Fair values of fixed maturity
deposits are estimated using a discounted cash flow methodology at rates
currently offered for deposits with similar remaining maturities. Any
intangible value of long-term relationships with depositors is not considered in
estimating the fair values disclosed.
Short-term borrowings: The carrying values of short-term borrowings
approximate their estimated fair values.
51
<PAGE>
Long-term borrowings: The fair values of long-term borrowings are estimated
by discounting scheduled future payments of principal and interest at current
rates available on borrowings with similar terms.
Off-balance sheet instruments: The fair values of commitments to extend credit
and standby letters of credit are estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit standing of the counterparties. The amounts
of fees currently charged on commitments and standby letters of credit are
deemed insignificant, and therefore, the estimated fair values and carrying
values are not shown below.
The carrying values and estimated fair values of the Company's financial
instruments are summarized below:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-------------------------- --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 5,698,937 $ 5,698,937 $ 3,498,972 $ 3,498,972
Federal funds sold - - - -
Securities available for sale 41,561,821 41,561,821 35,439,225 35,439,225
Securities held to maturity - - 8,372,564 8,533,757
Loans 85,664,538 80,742,640 85,708,661 84,676,743
Accrued interest receivable 1,035,183 1,035,183 1,261,593 1,261,593
------------ ------------ ------------ ------------
$133,960,479 $129,038,581 $134,281,015 $133,410,290
============ ============ ============ ============
Financial liabilities:
Deposits $110,232,313 $110,484,231 $113,463,645 $113,882,660
Short-term borrowings 6,028,683 6,028,683 4,626,689 4,626,689
Long-term borrowings 4,086,923 4,086,923 1,012,741 1,012,741
Accrued interest payable 350,502 350,502 372,493 372,493
------------ ------------ ------------ ------------
$120,698,421 $120,950,339 $119,475,568 $119,894,583
============ ============ ============ ============
</TABLE>
Note 15. Condensed Financial Statements of Parent Company
Information relative to the Parent Company's balance sheets at December 31,
1999 and 1998, and the related statements of income and cash flows for the years
ended December 31, 1999, 1998 and 1997, are presented below.
December 31,
--------------------------
1999 1998
------------ ------------
Balance Sheets
--------------
Assets
Cash $ 3,724 $ 2,976
Investment in subsidiary 15,950,568 16,646,340
----------- -----------
Total assets $15,954,292 $16,649,316
=========== ===========
Shareholders' equity
Common stock, $2.00 par value, 2,250,000
shares authorized, issued 750,000 shares $ 1,500,000 $ 1,500,000
Additional paid-in capital 2,100,000 2,100,000
Retained earnings 14,722,747 14,345,301
Accumulated other comprehensive income (524,873) 286,909
Treasury stock at cost, 94,168 and
88,433 shares, respectively (1,843,582) (1,582,894)
----------- -----------
Total shareholders' equity $15,954,292 $16,649,316
=========== ===========
52
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
Statements of Income 1999 1998 1997
- -------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Income - dividends from subsidiary $ 989,047 $1,244,881 $ 664,000
Expenses - operating 4,400 4,894 4,763
---------- ---------- ----------
Income before equity in undistributed
income of subsidiary 984,647 1,239,987 659,237
Equity in undistributed income of subsidiary 116,010 360,419 981,504
---------- ---------- ----------
Net income $1,100,657 $1,600,406 $1,640,741
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
Statements of Cash Flows 1999 1998 1997
- ------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $1,100,657 $1,600,406 $1,640,741
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of subsidiary (116,010) (360,419) (981,504)
---------- ---------- ----------
Cash provided by operating activities 984,647 1,239,987 659,237
---------- ---------- ----------
Cash Flows from Financing Activities
Dividends paid to shareholders (723,211) (662,078) (615,198)
Acquisition of treasury stock (260,688) (577,939) (43,600)
---------- ---------- ----------
Cash used in financing activities (983,899) 1,240,017 (658,798)
---------- ---------- ----------
Increase (decrease) in cash 748 (30) 439
Cash:
Beginning 2,976 3,006 2,567
---------- ---------- ----------
Ending $ 3,724 $ 2,976 $ 3,006
========== ========== ==========
</TABLE>
53
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Citizens Financial Corp.
and Subsidiary
Elkins, West Virginia
We have audited the accompanying consolidated balance sheets of Citizens
Financial Corp. and its subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Citizens
Financial Corp. and its subsidiary as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
January 14, 2000
54
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure
--------------------
No reportable items.
PART III
- --------
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The number of directors of the Company may consist of not less than five
nor more than twenty-five persons in accordance with the Company's Articles of
Incorporation. The number of directors is fixed by resolution of a majority
vote of the shareholders. Currently, the number of directors of the Company is
fixed at nine. Directors are divided into three classes and serve a staggered
three year term. The following table sets forth the names of the persons who
have served as directors of Citizens Financial Corp. for the year ended December
31, 1999, as well as those appointed to serve in that capacity subsequent to
December 31, 1999, their ages and principal occupations, the length of their
service to Citizens Financial Corp. and the expiration of their present term.
<TABLE>
<CAPTION>
Principal
Occupation Present
During Past Director Term
Name and Age Five Years Since (1) Expires
- ------------ ---------------- --------------- ----------------
<S> <C> <C> <C>
Robert N. Alday President, September, 1986 April, 2000 (2)
84 Phil Williams
Coal Company
Max L. Armentrout President, and September, 1986 April, 2002
62 Chairman of the Board
Laurel Lands Corp.;
Chairman of the
Board, Citizens
Financial Corp.
William J. Brown President, Hess February, 2000 April, 2001 (3)
53 Oil Co., Inc.
Edward L. Campbell Co-Owner, February, 2000 April, 2001 (3)
60 Campbell's Market
Virginia C. Chabut Retired, September, 1986 April, 2001 (3)
79 Randolph-
Elkins Public
Health Nurse
Raymond L. Fair Attorney-at-Law September, 1986 April, 2002
72
John F. Harris Retired, September, 1986 April, 2002
72 Transportation
Industry; Senior
Vice President,
Citizens National Bank
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Principal
Occupation Present
During Past Director Term
Name and Age Five Years Since (1) Expires
- ------------ ---------------- --------------- ---------------
<S> <C> <C> <C>
Cyrus K. Kump President, June, 1992 April, 2000 (2)
53 Kump Enterprises
Broker, Kerr
Real Estate
Robert J. Schoonover President and April, 1998 April 2001
60 Chief Executive
Officer, Citizens
Financial Corp.
and Citizens
National Bank
L. T. Williams Consultant, September, 1986 April, 2002
69 Elkins Builders
Supply
</TABLE>
(1) All of the above named directors, with the exception of Mr. Alday, have
also served as directors of Citizens National Bank for the past five years
on a continuous basis. Mr. Alday has not served Citizens National Bank in
any official capacity.
(2) Messrs. Alday and Kump have been nominated to stand for reelection to an
additional 3 year term expiring in April, 2003.
(3) Mrs. Chabut became deceased in January 2000. Another director, Mr. Emery
Thompson, Jr., passed away during 1999 and has been omitted from this
table. Their unexpired terms through April, 2001, were filled in February,
2000, by the appointment of Messrs. William Brown and Edward Campbell. Both
of these gentlemen previously served as directors of Citizens National
Bank.
Set forth below are the executive officers of Citizens Financial Corp.,
their age, present position and relations that have existed with affiliates and
others during the past five years.
<TABLE>
<CAPTION>
Principal Occupation and
Present Banking Experience During
Name and Age Position the Last Five Years
- ------------ -------- -------------------------
<S> <C> <C>
Max L. Armentrout Chairman of President and Chairman of
62 the Board the Board, Laurel Lands Corp.;
Chairman of the Board,
Citizens Financial Corp.
Robert J. Schoonover President and President and Chief Executive
60 Chief Executive Officer, Citizens National Bank
Officer
Raymond L. Fair Vice President Attorney-at-Law; Director,
72 and Secretary Citizens Financial Corp.
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation and
Present Banking Experience During
Name and Age Position the Last Five Years
- -------------- --------------- --------------------------------
<S> <C> <C>
Thomas K. Derbyshire Vice President Vice President and Chief Financial
41 and Treasurer Officer, Citizens National Bank
</TABLE>
Item 11. Executive Compensation
- --------------------------------
The executive officers of Citizens Financial Corp. serve without
compensation from the Company. They are, however, compensated by Citizens
National Bank for serving as Bank officers with the exception of Messrs.
Armentrout and Fair who are not employed by the Bank. The following table sets
forth the compensation of the Company's CEO for the years 1999, 1998 and 1997.
No executive officers received total annual salary and bonus exceeding $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
<S> <C> <C> <C> <C>
Other Annual
Name and Salary Compensation
Principal Position Year $ Bonus $
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert J. Schoonover, 1999 85,077 - 13,377 (1) (2)
President & CEO (1) 1998 81,308 - 10,766 (1) (2)
1997 76,269 - 9,217 (1) (2)
</TABLE>
(1) The Bank's group life and health insurance program, which is paid for by
the Bank, is made available to all full-time employees and does not
discriminate in favor of directors or officers; however, in accordance with
IRS Code Section 79, the cost of group term life insurance coverage for an
individual in excess of $50,000 is added to the individual's earnings and
is included in this figure. Also included in this figure are board fees
earned and the Company's contributions to the individuals 401(k) retirement
savings program to which the individual has a vested interest.
(2) The Bank's contributions to the pension plan, a defined benefit plan, are
not and cannot be calculated separately for specific participants. No
contributions were made by the Bank in the years presented. The Bank's
executive supplemental income plan provides retirement benefits conditioned
upon continued employment until retirement or the satisfaction of early
retirement criteria. Participants are deemed to receive no compensation
until such conditions are satisfied.
Neither the Company nor the Bank maintain any form of stock option, stock
appreciation rights, or other long-term compensation plans. Directors of the
registrant are compensated for meetings attended in the amount of $100 per
meeting. Directors of the Bank receive $400 per meeting. Under normal
circumstances, the Board of Citizens Financial Corp. meets quarterly while the
Citizens National Bank Board meets monthly. Directors who are members of the
Bank's loan committee, which meets weekly, receive $400 per month. In addition,
the chairman of Citizens Financial Corp. receives $1,350 per month for service
in that capacity, while the vice-president receives $550. The senior vice-
president of the Bank receives $1,100 monthly for his services. No employment
contracts or change in control arrangements exist between any executive
officer and the registrant, or it's subsidiary.
Compensation of the bank's executive officers, including its president, is
57
<PAGE>
determined by the personnel committee. The committee is comprised of five
outside directors. Compensation levels are determined after consideration is
given to net income objectives and cost of living factors. This process is
consistent with that used to determine the compensation levels of all other
employees. No specific criteria exist which relates executive compensation to
corporate performance and executives receive no preferential consideration in
the establishment of compensation.
Pension Benefits
- ----------------
Citizens Financial Corp., having no employees, has no retirement program,
but Citizens National Bank has a pension program for its eligible employees.
This pension plan is a qualified retirement plan and is available to all full-
time employees, including officers, who meet the eligibility requirements.
Directors do not participate in this plan. Pensions for all participants are
based on five-year average final compensation. Annual compensation for the
pension plan includes overtime pay and bonuses. Credits are received for each
year of participation at the following rates: 1 percent of the first $9,600.00
of the 5-year average final compensation and 1.5 percent of such average final
compensation in excess of $9,600.00, all multiplied by years of service up to a
25-year maximum.
The annual pension payable on retirement is the total of the pension
credits for each year of service after age twenty-one and the completion of one
year of service. The pension benefits are payable to participants on a monthly
basis in the form of a joint and 50 percent survivor annuity for all married
participants who do not elect otherwise, or in the form of a single life annuity
for all other participants or survivors. Joint and 100 percent survivorship,
single life annuity or 120 payments guaranteed are other optional forms of
distribution. Contributions made to the pension plan are on an actuarial basis,
with the plan year ending October 31. Pension benefits are not subject to a
deduction for Social Security.
An amendment to the pension plan was adopted by the Citizens National Bank
Board of Directors on July 20, 1988. This amendment modified the existing plan
by the addition of two early retirement options. The options provide a change
from actuarial method to straight 4 percent per year below normal retirement
age, and retirement at age sixty-two with 30 years of service with no reduction
in benefits. A subsequent amendment was adopted by the directors on October 31,
1994. This amendment changed the plan from a contributory plan to a
noncontributory plan and reduced the credit formula from 1.5 percent of the
first $9,600 of the 5-year average final compensation and 2 percent of such
final average compensation in excess of $9,600 to the current 1 percent and 1.5
percent. Concurrent with this amendment the Bank established a 401(k) profit-
sharing plan.
58
<PAGE>
The following table represents the normal pension, beginning at age sixty-
five based upon assumed final pay and years of credited services:
<TABLE>
<CAPTION>
Annual Benefits
-----------------------------------------------
15 yrs. 20 yrs. 25 yrs.
Assumed Credited Credited Credited
Remuneration Service Service Service
- ------------------------------------------------------------------
<S> <C> <C> <C>
$20,000 $ 3,780 $ 5,040 $ 6,300
40,000 8,280 11,040 13,800
60,000 12,780 17,040 21,300
80,000 17,280 23,040 28,800
100,000 21,780 29,040 36,300
120,000 26,280 35,040 43,800
</TABLE>
The estimated credited years of service for the executive officers of
Citizens Financial Corp. in the pension plan of Citizens National Bank are as
follows:
Years of Credited Service*
--------------------------
Robert J. Schoonover 26
Thomas K. Derbyshire 8
* Max L. Armentrout and Raymond L. Fair are not participants in the pension
plan of Citizens National Bank.
401-(k) Plan
- ------------
The Bank has established a 401-(k) plan for the benefit of all employees
who meet eligibility requirements. A description of the Plan, the eligibility
requirements and the contributions made to the Plan by the Bank for the years
ended December 31, 1999, 1998 and 1997 may be found in Note 9 to the
Consolidated Financial Statements which begins on page 44 of this report.
Executive Supplemental Income Plan
- ----------------------------------
The Bank has entered into a nonqualified supplemental income plan with
certain senior officers as described in Note 9 to the Consolidated Financial
Statements which begins on page 44 of this report. A copy of the Plan, and the
amendments thereto, are incorporated herein by reference to the exhibits
contained in the Company's Forms 10-K dated December 31, 1997 and 1996.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The following table lists each shareholder who is the beneficial owner of
more than 5% of the Company's common stock, the only class of stock outstanding,
as of February 28, 2000.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
- ------------------- --------------------- --------
<S> <C> <C>
Cede & Co. 96,172 14.73%
P. O. Box 20
Bowling Green Station
New York, NY 10004
</TABLE>
59
<PAGE>
The following table sets forth the amount and percentage of stock of
Citizens Financial Corp. beneficially owned by each director and executive
officer of the Company, and by all directors and executive officers as a group,
as of February 28, 2000.
<TABLE>
<CAPTION>
Shares of Stock Beneficially Owned Percent of
----------------------------------
Name Direct Indirect Total Ownership
- ---- --------- ------------- -------- -----------
<S> <C> <C> <C> <C>
Robert N. Alday 500 22,600 (1) 23,100 3.54
Max L. Armentrout 22,100 4,000 (2) 26,100 4.00
William J. Brown 750 750 (3) 1,500 .23
Edward L. Campbell 450 200 (4) 650 .10
Raymond L. Fair 3,800 4,200 (5) 8,000 1.22
John F. Harris 500 5,500 (6) 6,000 .92
Cyrus K. Kump 500 2,000 (7) 2,500 .38
Robert J. Schoonover 500 100 (8) 600 .09
L. T. Williams 1,750 - 1,750 .27
Thomas K. Derbyshire 70 - 70 .01
Other directors and
executive officers of
the Bank 4,438 7,085 11,523 (9) 1.77
All Directors and
executive officers
as a group 35,358 46,535 81,793 12.53
</TABLE>
(1) Mr. Alday's indirect ownership includes 9,200 shares owned by his wife and
13,400 shares which he votes for the Phil Williams Coal Company.
(2) These 4,000 shares are owned by Mr. Armentrout's wife.
(3) Includes 250 shares owned jointly with his wife and 500 shares held in
custody for their children.
(4) Includes 150 shares owned jointly with his wife and 50 shares owned by his
wife.
(5) These 4,200 shares are owned by Mr. Fair's wife.
(6) These 5,500 shares are owned jointly with his wife.
(7) Includes 1,000 shares owned by his wife and 1,000 shares held in custody
for their children.
(8) These 100 shares are owned jointly with his wife.
(9) This figure represents the ownership of persons who are directors or
officers of the subsidiary bank but not of the Company. Such persons number
eleven.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Management personnel of Citizens Financial Corp. have had and expect to
continue to have banking transactions with Citizens National Bank in the
ordinary course of business. Extensions of credit to such persons are made in
the ordinary course of business on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons. It is the opinion of management that these
transactions do not involve more than a normal risk of collectibility or present
other unfavorable features.
60
<PAGE>
During the year 1999, the highest aggregate indebtedness of all executive
officers and directors of the holding company, its subsidiary, and their related
interest was $6,282,000 or 39.37 percent of the equity capital of Citizens
Financial Corp. As of December 31, 1999, outstanding loan balances to related
parties totaled $6,025,000 or 33.76 percent of equity capital with unused lines
of credit of $1,216,000 or 7.62 percent of the equity capital of Citizens
Financial Corp. outstanding to these parties.
Other than loans originated in the normal course of business by the Bank,
none of the directors, executive officers, 5 percent or more beneficial
stockholders or their immediate family members have an interest or are involved
in any transactions with Citizens Financial Corp. or Citizens National Bank in
which the amount involved exceeds $60,000, or was not subject to the usual terms
or conditions, or was not determined by competitive bids. Information related
to loans granted to related parties in excess of $60,000 is contained in Note 4
to the Consolidated Financial Statements, which begins on page 40 of this
report. Similarly, no director, executive officer or 5 percent or more
beneficial stockholder has an equity interest in excess of 10 percent in a
business or professional entity that has made payments to or received payments
from Citizens Financial Corp. or Citizens National Bank in 1999 which exceeds 5
percent of either party's gross revenue.
61
<PAGE>
Part IV
- -------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- ------------------------------------------------------------------------
(a) (1) and (2) Financial Statements and Financial Statement Schedules.
All financial statements and financial statement schedules required to be
filed by Item 8 of this Form or by Regulation S-X which are applicable to
the registrant have been presented in the financial statements, notes
thereto, in management's discussion and analysis of financial condition and
results of operations or elsewhere where appropriate.
(3) Listing of Exhibits - see Index to Exhibits on page 62.
(b) Reports on Form 8-K - The Company's Form 8-K, dated December 22, 1999 which
discloses the Bank's agreement to purchase a branch banking facility in
Petersburg, WV from South Branch Valley National Bank, is incorporated
herein by reference.
(c) Exhibits - see index to Exhibits on page 62 of this Form 10-K.
(d) Consolidated Financial Statement Schedules - All other schedules for which
provision is made in the applicable accounting regulation of the Securities
and Exchange Commission are not required under the related instructions or
are inapplicable or pertain to items as to which the required disclosures
have been made elsewhere in the financial statements and notes thereto, and
therefore have been omitted.
Item 14(c) Index to Exhibits
- -----------------------------
<TABLE>
<CAPTION>
S-K 601 Sequential
Description Table Reference Page Number
- ----------- --------------- ------------
<S> <C> <C>
Plan of acquisition, reorganization,
arrangement, liquidation or succession 2 N/A
Articles or incorporation and bylaws: 3 N/A
(a) Articles of Incorporation 66-70
(b) Bylaws (d)
Instruments defining the rights of security
holders including indentures 4 N/A
Voting trust agreements 9 N/A
Material contracts 10 71-113 (c)
Statement Re: Computation of per
share earnings 11 (a)
Statements Re: Computation of ratios 12 (a)
Letter re: change in certifying accountant 16 N/A
Letter re: change in accounting principles 18 N/A
Subsidiaries of the registrant 21 114
Published report regarding matters submitted
to vote of security holders 22 N/A
Consents of experts and counsel 23 115
Power of attorney 24 N/A
Financial data schedules 27 116
Additional exhibits 99 (b)
</TABLE>
(a) The computation of minimum standard capital ratios, which are shown on page
51 of this filing, was done as specified in applicable regulatory
guidelines. All other ratios presented may be clearly determined from the
material contained in this filing.
(b) List of permitted nonbanking activities previously filed on pages 47-49 of
Form S-4 Registration Statement of Citizens Financial Corp., SEC File No.
33-11423, dated February 19, 1987 is incorporated by reference into this
filing.
62
<PAGE>
(c) The Bank's Executive Supplemental Income Agreement as previously filed on
pages 74 -80 of its Form 10-K dated December 31, 1995 and thereafter
amended and filed on page 62 of the Company's Form 10-K dated December 31,
1996, is incorporated by reference into this filing.
(d) The Company's Bylaws which were previously filed on pages 64-71 of its Form
10-K dated December 31, 1998, are incorporated by reference into this
filing.
63
<PAGE>
Signatures
Pursuant to the requirements of Section 15(d) 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.
By /s/ Robert J. Schoonover
-----------------------------------------
Robert J. Schoonover
President and Chief Executive Officer
By /s/ Thomas K. Derbyshire
-----------------------------------------
Thomas K. Derbyshire
Treasurer and Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Max L. Armentrout Chairman of the Board 3/8/00
- --------------------------- ------
Max L. Armentrout and Director
Director ______
___________________________
Robert N. Alday
/s/ William J. Brown Director 3/8/00
- --------------------------- ------
William J. Brown
/s/ Edward L. Campbell Director 3/8/00
- --------------------------- ------
Edward L. Campbell
/s/ Raymond L. Fair Director 3/8/00
- --------------------------- ------
Raymond L. Fair
/s/ John F. Harris Director 3/8/00
- --------------------------- ------
John F. Harris
/s/ Cyrus K. Kump Director 3/8/00
- --------------------------- ------
Cyrus K. Kump
/s/ Robert J. Schoonover Director 3/8/00
- --------------------------- ------
Robert J. Schoonover
Director ______
___________________________
L. T. Williams
64
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15 (d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT
---------------------------------
The entire annual report and proxy materials mailed to the Company's
stockholders has been furnished to the Commission for its information under
separate cover, in paper format, concurrent with submission to stockholders on
March 17, 2000.
65
<PAGE>
Exhibit 3(a)
CERTIFICATE OF INCORPORATION
OF
CITIZENS FINANCIAL CORP.
The undersigned incorporators do hereby incorporate or organize a
corporation under the General Corporation Law of Delaware, for the purpose and
on the terms hereinafter set forth:
FIRST. The name of this corporation shall be CITIZENS FINANCIAL CORP.
SECOND. The corporation's registered office in the State of Delaware shall
be 4305 Lancaster Pike, in the City of Wilmington, New Castle County, Delaware.
The corporation's registered agent at such address shall be Corporation Service
Company, whose mailing address is P.O. Box 591, Wilmington, Delaware 19899.
THIRD. The purpose of this corporation are, primarily, to purchase, own and
hold the stock of national banking associations, state banking institutions and
other corporations, subject to such regulatory approval as may be required, to
perform such actions as may be usual and customary in directing the operations
of the entities so acquired, and, generally, to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH. The corporation shall have the authority to issue two million two
hundred fifty thousand (2,250,000) shares of stock, and the par value of each
such share shall be two dollars ($2.00).
FIFTH. The names and mailing addresses of the incorporators are as follows:
Max L. Armentrout Route 1, Box 306A
Chenoweth Creek Road
Elkins, WV 26241
Raymond L. Fair Route 1
Chenoweth Creek Road
Elkins, WV 26241
John F. Harris 1008 South Davis Avenue
Elkins, WV 26241
66
<PAGE>
Exhibit 3 (a) (cont.)
Emery Thompson, Jr. 317 Wilson Street
Elkins, WV 26241
L. T. Williams Route 2, Box 6
Elkins, WV 26241
SIXTH. The powers of the incorporators shall terminate upon the filing of
this Certificate of Incorporation, and the names and mailing addresses of the
persons who are to serve as directors until the first annual meeting of
stockholders or until their successors are elected and qualified are as follows:
Max L. Armentrout Route 1, Box 306A
Chenoweth Creek Road
Elkins, WV 26241
Raymond L. Fair Route 1
Chenoweth Creek Road
Elkins, WV 26241
John F. Harris 1008 South Davis Avenue
Elkins, WV 26241
W. H. Scheel, Jr. Box 2207
Elkins, WV 26241
Emery Thompson, Jr. 317 Wilson Street
Elkins, WV 26241
L. T. Williams Route 2, Box 6
Elkins, WV 26241
SEVENTH. The following provisions shall apply to the management of the
business and to the conduct of the affairs of the corporation:
(A) Directors. The board of directors shall consist of not less than five
---------
(5) nor more than twenty-five (25) stockholders, the exact number to be
fixed and determined from time to time by resolution of a majority of
the stockholders at any annual or special meeting thereof. The
directors shall be divided into three classes, as nearly equal in
number as possible, to be designated as Class 1, consisting of not more
than eight (8) directors; Class 2, consisting of nor more than eight
(8) directors; and Class 3, consisting of not more than nine (9)
directors.
. The term of office of the initial director of Class 1 shall expire at the
first annual meeting of stockholders following their election and their
successors shall be elected for three-year
67
<PAGE>
Exhibit 3(a) (cont.)
terms. The term of office of the initial directors of Class 2 shall expire at
the second annual meeting of stockholders following their election, and their
successors shall be elected to three-year terms. The term of office of the
initial directors of Class 3 shall expire at the third annual meeting of
stockholders following their election, and their successors shall be elected
to three-year terms. Thereafter, all directors shall be elected to three-year
terms. Each director shall serve until his or her successor shall have been
elected and shall qualify or until her or her earlier resignation or removal.
(B) Cumulative Voting. Each stockholder shall be entitled to one vote for
-----------------
each share of stock held by such stockholder. No stockholder shall have the
right to cumulate his or her votes with respect to any election of directors.
(C) Preemptive Rights. No stockholder shall have any preemptive right to
-----------------
subscribe to any additional issue of stock of the corporation or to any security
convertible into such stock.
(D) Directors' Personal Liability. No director shall be personally liable to
-----------------------------
the corporation or its stockholders for monetary damages for any breach of duty
by such directors as a director. Notwithstanding the foregoing sentence, a
director shall be liable to the extent provided by applicable law (i) for breach
of the director's duty of loyalty to the corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) pursuant to Section 174 of the Delaware
General Corporation Law or (iv) for any transaction from which the director
derived an improper personal benefit. No amendment to or repeal of this Article
SEVENTH (E) shall apply to or have any effect on the liability or alleged
liability of any director of the corporation for or with respect to any acts or
omissions of such director occurring prior to such amendment. The bylaws of the
corporation shall govern the implementation of the provision and related matters
consistent herewith.
(E) Directors' and Officers' Liability Insurance. The corporation shall use
--------------------------------------------
its best efforts to purchase and maintain insurance, on behalf of any person who
is or was a director or officer of the corporation, or is or was serving at the
request of the corporation as a director or officer of another corporation or
other enterprise, in such amounts or limits as may from time to time be
determined to be reasonable as provided in the by-laws, against any liability
asserted against such person and incurred by him or her in any such capacity, or
arising out of his or her status as such director or officer, whether or not the
corporation would have the power to indemnify him or her against such liability
under law. This provision for directors' and officers' liability insurance is in
addition to and not exclusive of all other rights to which directors or officers
seeking indemnification may be entitled under any law, by-law, agreement, vote
of stockholders or disinterested directors, or otherwise.
(F) Acquisition Transactions.
------------------------
(1) Board of Directors Considerations. The board of directors, if it deems
---------------------------------
it advisable, may oppose or decline an acquisition transaction (defined
below). When considering whether to oppose or decline an acquisition
transaction, the board of directors shall consider all pertinent issues
which, by way of illustration and not of limitation, may include any and
all of the following:
68
<PAGE>
Exhibit 3 (a) (cont.)
(a) Whether the price is acceptable based on the historical and present
operating results or financial condition of the corporation;
(b) Whether a more favorable price could be obtained for the corporation's
securities in the future;
(c) The impact which an acquisition transaction would have on employees,
depositors, or customers of the corporation and its subsidiaries in
the community which they serve;
(d) The reputation and business practices of the offeror and its
management and affiliates as they would affect the employees,
depositors and customers of the corporation and its subsidiaries and
the future value of the corporation's stock;
(e) The value of the securities, if any, which the offeror is offering in
exchange for the corporation's securities, based on an analysis of the
worth of the corporation as compared to the corporation or other
entity whose securities are being offered; and
(f) Any antitrust or other legal or regulatory issues that are raised by
the offeror. If the board of directors upon consideration of all
pertinent issues, determines that an acquisition should be declined or
opposed, it may take any lawful action to accomplish such purpose,
including, but not limited to any and all of the following: advising
stockholders not to accept; litigation against the offeror; filing
complaints with all governmental and regulatory authorities; issuing
the authorized but unissued securities or treasury stock of the
corporation or granting options with respect thereto; or obtaining a
more favorable offer from an individual or other entity.
(2) Vote Required. For and acquisition transaction requiring the approval of
-------------
the shareholders, the following shall apply:
(a) If a majority of the members of the board of directors shall have
approved the acquisition transaction and submitted it for the approval
of the shareholders with a recommendation that the shareholders vote
in favor of the acquisition transaction, then the approval of a
majority of the issued and outstanding shares entitled to vote shall
be sufficient to approve the acquisition transaction; or
(b) If a majority of the members of the board of directors has not
approved an acquisition transaction, or a majority of the board of
directors has declined or objected to an acquisition transaction, then
the approval of sixty-six percent (66%) of the issued and outstanding
shares entitled to vote shall be required to approve the acquisition
transaction.
(3) Acquisition Transactions. The term "acquisition transaction" shall include
------------------------
every type of acquisition, whether effected by purchase, exchange, merger,
consolidation, tender, operation of law or other means, of all or a
substantial part of the corporation's issued or outstanding stock or assets.
A "substantial part" shall mean (i) more than 25% of the issued or
outstanding shares of the corporation or of any subsidiary of subsidiaries
which comprise more than 25% of the consolidated assets of the corporation,
of (ii) assets of the corporation
69
<PAGE>
Exhibit 3 (a) (cont.)
or any subsidiary having a value of more than 25% of the total
consolidated assets of the corporation as of the end of the most
recent fiscal year of the corporation; provided, however, that the
term shall not apply to the merger, consolidation, reorganization or
other similar transactions of and among subsidiaries of the
corporation which are approved by the corporation as shareholder.
(4) Any amendment to this Article SEVENTH, Section (f) shall require the
approval of 66% of the issued and outstanding shares.
(G) By-laws. All other provisions, not inconsistent with law or with this
-------
Certificate of Incorporation, relating to the business of the corporation, the
conduct of its affairs and its rights or powers or the rights or powers of its
stockholders, directors, or officer, shall be established by the by-laws. The
power to adopt, amend or repeal by-laws is hereby conferred upon the directors
to the extent permitted by law.
THE UNDERSIGNED INCORPORATORS, for the purpose of forming a corporation
under the laws of the State of Delaware, do make, file and record this
Certificate of Incorporation and to certify that the facts herein are true; and
we have accordingly set our respective hands to duplicate originals hereof this
29/th/ day of September, 1986.
/s/ Max L. Armentrout
--------------------------------
Max L. Armentrout, Incorporator
/s/ Raymond L. Fair
--------------------------------
Raymond L. Fair, Incorporator
/s/ John F. Harris
---------------------------------
John F. Harris, Incorporator
/s/ Emery Thompson, Jr.
----------------------------------
Emery Thompson, Jr., Incorporator
/s/ L. T. Williams
----------------------------------
L. T. Williams, Incorporator
70
<PAGE>
Exhibit 10
PURCHASE AND ASSUMPTION AGREEMENT
This Purchase and Assumption Agreement (this "Agreement") dated as of
December 17, 1999 by and between South Branch Valley National Bank, a national
banking association having its principal place of business at 310 North Main
Street, Moorefield, West Virginia 26836 ("Seller") and Citizens National Bank of
Elkins, a national banking association, having its principal place of business
at 211 Third Street, Elkins, West Virginia 26241 ("Buyer").
W I T N E S S E T H:
WHEREAS, Seller desires to sell certain assets and transfer certain
deposits and other liabilities of the branch office listed on Schedule A hereto
----------
(the "Branch"); and
WHEREAS, Buyer desires to purchase such assets and assume such
deposits and other liabilities, upon the terms and conditions provided in this
Agreement.
NOW, THEREFORE, in consideration of the representations, warranties,
mutual covenants and agreements contained in this Agreement, Buyer and Seller
hereby agree as follows:
ARTICLE I
DEFINITIONS
l.1. Certain Defined Terms.
---------------------
Some of the capitalized terms appearing in this Agreement are defined
below. The definition of a term expressed in the singular also applies to that
term as used in the plural in this Agreement and vice versa.
"Affiliate" means a Person that directly or indirectly, through one or
---------
more intermediaries, controls, is controlled by, or is under common control
with, a specified Person, except in those cases where the controlling Person
exercises control solely in a fiduciary capacity.
"Applicable Percentage" shall mean 3.25%.
---------------------
"Assets" has the meaning set forth in Section 2.1 of this Agreement.
------
"Banking Day" means any day other than a Saturday, Sunday or other day
-----------
on which Seller is closed.
71
<PAGE>
"Benefit Plans" includes, without limitation, any pension, profit-
-------------
sharing, or other employee benefit, fringe benefit, severance or welfare plan
maintained by or with respect to which contributions are made by Seller or any
of Seller's Affiliates with respect to Seller's employees.
"Borrowers" means those persons who are borrowers or obligors under
---------
the Loans.
"Branch" means the branch office of Seller listed on Schedule A
------ ----------
hereto.
"Cash on Hand" means the amount of all actual currency and coinage on
------------
hand at the Branch as of the close of business on the Closing Date.
"Closing" means the transfer of the Assets to Buyer and the assumption
-------
of the Liabilities by Buyer on the Closing Date.
"Closing Date" has the meaning set forth in Section 9.1 of this
------------
Agreement.
"Customers" means the Borrowers and the Depositors.
---------
"Depositors" means account holders having Deposits.
----------
"Deposits" means all deposits (as defined in 12 U.S.C. Section
--------
1813(1)) of Seller shown on the books and records of the Branch, including but
not limited to all interest posted thereon, accrued but unpaid interest and both
collected and uncollected funds (including overdrawn accounts), together with
Seller's rights and responsibilities under any customer agreement evidencing or
relating thereto, but excluding (i) deposits securing loans or other extensions
of credit by Seller where such loans or other extensions of credit are not being
transferred under this Agreement, (ii) deposits held in accounts for which
Seller acts as fiduciary (other than deposits held by Retirement Plans), (iii)
deposits subject to legal process, (iv) deposits which have been reported as
abandoned property under the abandoned property laws of any jurisdiction, (v)
deposits held in any Retirement Plan where the account holder has notified
Seller or Buyer of his, her or its objection to Buyer acting as custodian or
trustee of such Retirement Plan, (vi) deposits by Seller or its Affiliates;
(vii) deposits constituting official checks, travelers checks, money orders, or
certified checks of Seller and (viii) accounts designated as "closed" on the
books and records of Seller.
"Deposit Premium" shall mean the Applicable Percentage multiplied by
---------------
the Deposits as of the Closing Date.
"Environmental Law" means, but is not limited to, all of the laws and
-----------------
implementing regulations of the United States Government, State of West
Virginia, and its local governments or agencies whether currently in existence
or hereinafter enacted that govern: (i) the existence, cleanup and/or remedy of
hazardous substance contamination or property, (ii) the protection of the
environment from released, spilled, deposited or otherwise emplaced hazardous
substance contamination, (iii) the control of hazardous substances and hazardous
waste, (iv) the reporting of releases, use, generation, transport, treatment and
removal of hazardous substances, (v) the protection and preservation of
sensitive lands, (e.g., wetlands), endangered species and historic sites, and
(vi) the control and regulation of underground storage tanks.
"ERISA Affiliate" means any entity that is considered one employer
---------------
with Seller under Section 4001 of ERISA or Section 414 of the Internal Revenue
Code of 1986, as amended.
"FDIC" means the Federal Deposit Insurance Corporation.
----
72
<PAGE>
"Fixed Assets" means those furnishings, equipment, and fixtures and
------------
other personal property owned or leased by Seller (other than proprietary
signage and equipment), together with manufacturer's warranties thereon which
are assignable and in effect at Closing, which are used or located at the Branch
and are described in the attached Schedule B.
----------
"Hazardous Substance" means, without limitation, any substance which
-------------------
at any time is toxic, ignitable, reactive or corrosive and is regulated by any
Environmental Law or is detrimental to the environment or health of living
organisms. "Hazardous Substance" includes any and all material or substance
that is defined as "Hazardous Waste," "Extremely Hazardous Waste" or a
"Hazardous Substance" pursuant to any Environmental Law. "Hazardous Substance,"
includes but is not restricted to asbestos, polychlorinated biphenyls ("PCBs"),
radon, nuclear materials, petroleum and petroleum products and products
processed with formaldehyde.
"Liabilities" has the meaning set forth in Section 2.5 of this
-----------
Agreement.
"Loans" means all extensions of credit of, and agreements to extend
-----
credit by, Seller associated with the Branch, but excluding all loans secured by
residential real estate having a fixed interest rate throughout their term, as
identified in Schedule C hereto, including the accrued interest thereon,
----------
collateral security, guarantees, security interests and other property or
contract rights securing repayment of the obligations, as well as all
agreements, correspondence and other documentation relating to the loans
transferred hereunder.
"Loan Purchase Price" means the aggregate outstanding principal
-------------------
balance (including credit balances resulting from overpayment) and all accrued
and unpaid interest and accrued but unpaid credit protection insurance premiums
of all Loans at the time of the Closing (not including the unfunded portion of
all outstanding lines of credit or loan commitments) less prepaid interest
thereon at the time of the Closing.
"Mediator" means the firm of Sommerville & Company, or if such firm
--------
shall decline to perform the function of the Mediator specified in Section 12.5
thereof, then such other certified public accounting firm as shall be mutually
agreeable to Seller and Buyer.
"Person" means any association, corporation, individual, partnership,
------
trust, limited liability company or any other entity or organization.
"Operation and Maintenance Contracts" means the contracts listed on
-----------------------------------
Schedule D hereto which relate to the operation and maintenance of certain of
- ----------
the Fixed Assets and the Real Property.
"Real Property" means real property more particularly described on
-------------
Schedule E, together with the structures located thereon.
- ----------
"Retirement Plans" means those non-discretionary individual retirement
----------------
accounts and qualified retirement plan accounts relating to the Deposits for
which Seller acts as custodian or trustee but which are not administered by
Seller's trust department.
"Transferred Employees" shall have the meaning set forth in Section
---------------------
8.1 of this Agreement.
1.2. Accounting Terms.
----------------
73
<PAGE>
To the extent that any accounting terms used in this Agreement are not
defined in Section 1.1 or elsewhere herein, they shall be defined according to
generally accepted accounting principles.
ARTICLE II
TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES
2.1. Transfer of Assets.
------------------
At the Closing, subject to the satisfaction or waiver of the
conditions set forth in Sections 9.3 and 9.4 hereof, Seller shall sell, convey,
assign and transfer to Buyer, and Buyer shall purchase from Seller, without
recourse against Seller except as provided in this Agreement, all of Seller's
right, title, and interest in and to the following assets (referred to herein
collectively as the "Assets"):
(a) the Loans;
(b) the Fixed Assets;
(c) the Real Property;
(d) the Cash on Hand;
(e) Seller's rights under the Operation and Maintenance Contracts;
and
(f) the Records (as defined in Section 2.2 hereof).
THE ASSETS ARE TRANSFERRED WITHOUT ANY EXPRESS OR IMPLIED WARRANTIES (INCLUDING
THE IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR USE)
EXCEPT TO THE EXTENT OTHERWISE EXPRESSLY REPRESENTED BY SELLER IN THIS
AGREEMENT. NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, NO COMPUTER
SOFTWARE OF ANY TYPE SHALL BE TRANSFERRED AS PART OF THE ASSETS.
2.2. Buyer's "Due Diligence" With Respect to the Loans.
-------------------------------------------------
Although Seller is not specifically aware of any incomplete loan
files, the Buyer acknowledges that some of the files maintained by Seller with
respect to the Loans may be incomplete. Buyer will be given the opportunity for
a period of 30 days following the execution hereof to examine each of the files
maintained by Seller in connection with the Loans to determine if such files are
sufficiently complete to permit Buyer to include such Loans in the transfer of
Assets contemplated by this agreement ("Buyer Due Diligence"). Provided Buyer
gives Seller written notice within seven business days after completion of the
Buyer Due Diligence listing those Loans that Buyer has decided to reject, such
rejected Loans shall not be a part of the Assets transferred hereunder. To the
extent that the Buyer shall choose to accept transfer of the Loans, such
transfer shall be "as is" with respect to the Loan documentation included in
such files and Seller shall have no obligation to Buyer whether by indemnity or
otherwise with respect to any documents which are missing from or not otherwise
included in the Loan files.
In addition to the foregoing, Buyer shall have the opportunity to
examine Loans on the Closing
74
<PAGE>
Date to determine if any Loan is more than sixty (60) days past due as of the
Closing Date. If any Loan is more than sixty (60) days past due as of the
Closing Date, Buyer may reject such Loans and such rejected Loans shall not be
part of the Assets transferred hereunder.
2.3. Additional Due Diligence By Buyer.
---------------------------------
In addition to the Buyer Due Diligence, the Buyer will be given the
opportunity to conduct such reasonable investigations and inspections of the
other Assets being transferred including the Real Property as Buyer may deem
appropriate. Except for representations made by Seller under Article 4, all
such Assets shall be transferred without representation or warranty by Seller,
express or implied (including implied warranties of merchantability or fitness
for any particular use).
2.4. Transfer of Records.
-------------------
(a) Seller will deliver to Buyer at the Closing (i) all records and
files that are in Seller's possession (whether in electronic image or paper
form) that can be transferred to Buyer without undue expense, relating to the
Loans, the Deposits, and the other Assets to be assumed or purchased by Buyer,
including but not limited to, signature cards and any pending stop payment order
instructions in Seller's possession; and (ii) all maintenance records in
Seller's possession of repairs of and warranties relating to the Fixed Assets
and the Branch, (collectively referred to as the "Records"). Buyer acknowledges
that any of the Records provided may not be originals but may be copies
retrieved from Seller's electronic records system, but Seller shall provide
originals of the Notes relating to the Loans and any other document, paper or
writing for which the original is necessary for enforcement of any rights
relating thereto or to any Assets transferred hereunder.
(b) Any books and records relating to the Assets or the Liabilities
(including historical information on the Loans and the Deposits) held by either
Seller or Buyer after the Closing shall be maintained in accordance with and for
the period provided in that party's standard record keeping policies and
procedures and shall be available for inspection and copying by the other party
at the other party's expense during regular business hours upon reasonable
notice; provided, however, that, notwithstanding the foregoing, in the case of
disputes between the parties relating to this Agreement the parties agree to
follow and be bound by the procedures set forth in Section 12.5.
2.5. Assumption of Liabilities.
-------------------------
(a) At the Closing, subject to the satisfaction or waiver of the
conditions set forth in Sections 9.3 and 9.4, Buyer shall assume, without
recourse against Seller except as provided in this Agreement, the following, and
only the following, liabilities of Seller (referred to herein collectively as
the "Liabilities") as at the close of business on the Closing Date:
(i) the Deposits (including overdrawn accounts);
(ii) Seller's duties, obligations and responsibilities under
the Operation and Maintenance Contracts;
(iii) Seller's duties, obligations and responsibilities with
respect to the Retirement Plans, except for those Retirement Plans not included
in the Deposits.
(b) Except for those liabilities expressly assumed by Buyer pursuant
to this Section 2.5, Buyer is not assuming any other liabilities or obligations.
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2.6. Sales, Use and Transfer Taxes.
-----------------------------
Buyer shall pay any sales, use and recordation taxes which are payable
or arise as a result of the consummation of the transactions contemplated by
this Agreement, regardless of whether those taxes are imposed upon Buyer or
Seller. Seller shall pay real property transfer taxes. The parties shall
cooperate in preparing and filing any real property transfer tax forms which may
be required to be filed.
2.7. Proration of Certain Expenses.
-----------------------------
All wages and salaries of the Transferred Employees (as defined in
Section 8.1(a) hereof), all rents, real estate taxes, personal property taxes,
utility payments, the most recent semi-annual assessment payable to the FDIC
relating to the Deposits, any social security and unemployment taxes and any
workers' compensation payments relating to the Transferred Employees shall be
prorated between the parties as of the Closing Date. To the extent that any such
item has been prepaid by Seller for a period extending beyond the Closing Date,
Buyer shall pay Seller a proportionate amount of such item for such period; and
to the extent that any such item has been deferred by Seller to a time extending
beyond the Closing Date, Seller shall pay Buyer a proportionate amount of such
item allocated for the period prior to the Closing Date. Within thirty (30)
calendar days after the Closing Date, Seller shall provide Buyer with a
statement, together with supporting documentation and certified by an authorized
officer of Seller, calculating the amounts due Seller or Buyer, as the case may
be, under this Section 2.7. The parties shall use their reasonable best efforts
to agree upon the amounts in such statement promptly. Prior to 2:00 p.m.
(Eastern Time) on the third Banking Day following the date that Buyer notifies
Seller that it agrees with the amounts set forth in such statement, Buyer shall
pay to Seller, or Seller shall pay to Buyer, as appropriate, in immediately
available funds to an account designated in writing by such party at least two
Banking Days prior to the date of such payment, the amount calculated under this
Section as being due to such party.
2.8. Notice to Customers.
-------------------
Prior to the Closing, Seller may, at its sole cost and expense, notify
the Customers that, subject to the conditions to Closing, Buyer will be
purchasing the Loans and assuming the Deposits. Within thirty (30) calendar days
prior to the Closing Date, Buyer shall, at its sole cost and expense, notify the
Customers that, subject to the conditions to Closing, Buyer will be purchasing
the Loans and assuming the Deposits. Buyer's notification letter shall also set
forth the details of Buyer's administration of the Loans to be purchased and the
Deposits to be assumed. Seller shall provide Buyer with a list of Customers to
whom such notice shall be sent. Each party shall consult with the other as to
the substance of its notification letter and shall furnish a copy of such letter
to the other prior to sending it. Persons who become Customers subsequent to
such notifications and prior to the Closing shall be given a copy of Buyer's
notification letter and Seller's notification brochure at the time they become
Customers. Seller shall post a notice at the Branch at least thirty (30)
calendar days prior to the Closing to the effect that any Deposits or Loans not
assumed by Buyer shall be transferred to another of Seller's branches.
2.9 Conversion.
----------
Seller and Buyer shall cooperate with each other and shall use their
reasonable best efforts (as consistent with their internal day-to-day
operations) in order to cause the timely transfer of information concerning the
Deposits and the Loans which is maintained on Seller's data processing systems
(the "Conversion"). Within fifteen (15) Banking Days after the date of this
Agreement, Seller and Buyer shall each designate an appropriate officer or
officers to be responsible for the necessary cooperation of the parties and to
act as an initial contact for responding to questions and requests for
information. The parties acknowledge that
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the goal of such cooperation is to enable Buyer to obtain and confirm data prior
to the Closing Date so that such back office conversion is completed and Buyer
is processing all data relating to the operations of the Branches on the Banking
Day after the Closing Date.
2.10. Demand Deposit Account Owners and Borrowers.
-------------------------------------------
Not less than five (5) nor more than thirty (30) Banking Days prior
to Closing, Buyer shall notify all Depositors and all Borrowers with the ability
to access their Deposits or Loans that, after the Closing Date, access to such
Deposits or Loans through the Seller will not be honored after a certain date to
be agreed upon by Seller and Buyer, but no later than sixty (60) days from
closing or conversion. Such notice may be included in the notification letter
sent by Buyer to the Depositors pursuant to Section 2.8.
2.11. Seller Collecting Duties.
------------------------
For a period not to exceed 90 calendar days after the Closing Date,
Seller agrees to act as Buyer's collecting bank for the receipt of drafts,
checks, negotiable orders of withdrawal and electronic fund transfers drawn
before or after the Closing on forms provided by Seller on any accounts of
Deposits assumed, home equity lines of credit or any other loan account
accessible by check or draft purchased by, Buyer hereunder. Seller agrees in
this regard that it shall:
(a) maintain a mechanism to receive such items on a daily basis;
(b) provide a daily listing of all such items received by it by
12:00 noon on the following Banking Day to Buyer, in such form as shall be
agreed to by Buyer and Seller; and
(c) make available for pickup by Buyer no earlier than 3:00 p.m.
(Eastern Time) at a location to be designated by Seller, all physical items
received by Seller the following Banking Day by such means as agreed to by the
parties.
Buyer and Seller agree that any reasonable courier or telephone costs associated
with paragraphs (b) and (c) shall be borne by Buyer. Seller further agrees that
it shall notify Buyer of any information received regarding the settlement and
clearance of any domestic or foreign checks, savings bonds or coupons deposited
with it prior to the Closing Date. In executing its duties under this Section
2.11, Seller is acting only as agent for the collection of items drawn on Buyer.
Seller shall not supply any missing endorsements, or act as collecting bank for
returned deposits, or, except as provided in Section 2.13 hereof, act as
returning bank for any items not paid by Buyer. Unless caused by the gross
negligence or willful or intentional misconduct of Seller, any risks of loss
associated with the interim servicing, including any risk of loss associated
with insufficient funds, shall be the responsibility of Buyer.
2.12. Buyer Processing Obligations.
----------------------------
During the period set out in Section 2.11, Buyer agrees to honor and
pay all properly payable drafts, checks, negotiable orders of withdrawal or
electronic fund transfers delivered to it by Seller pursuant to Section 2.11,
provided the same are not stale, are not the subject of stop payment orders, or
are not drawn on insufficient funds.
2.13. Return of Items During Processing Period.
----------------------------------------
(a) Buyer further agrees to be solely responsible for the return of
any drafts, checks,
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negotiable orders of withdrawal or electronic fund transfers delivered by Seller
to Buyer pursuant to Section 2.11 and return of any federal recurring payments
or ACH transactions processed pursuant to Section 2.11.
(b) Seller agrees to notify Buyer of the return to it of any items
deposited in, or cashed at, the Branch prior to the Closing Date and shall
expeditiously forward any such items to Buyer. If Buyer cannot recover on the
items referred to in this subsection (b) after making a good faith effort to do
so, Seller shall reimburse Buyer for such return items upon assignment of such
items by Buyer to Seller.
2.14. Payment.
-------
In settlement of the transactions described in Section 2.11 and
Section 2.12, Buyer and Seller agree that Seller shall provide Buyer with a
daily net settlement figure for all such transactions from the immediately
preceding Calendar Day by 12:00 noon Eastern Time on each banking Day and that
the party obligated to remit any funds thereunder shall do so in immediately
available funds by wire transfer by 2:00 p.m. Eastern Time on such day; any such
settlement shall be provisional pending receipt by Buyer of the physical items
relating to such settlement; Buyer shall adjust the next daily settlement to
reflect any adjustments resulting from its receipt and examination of the
physical items. Adjustments by Buyer pursuant to the immediately preceding
sentence shall be limited to adjustments to correct errors made by Seller in the
calculation of the amounts represented by the transactions received by it on
Buyer's behalf, and no adjustments shall be made for the effect of any improper
or missing signatures or endorsements, alterations, stale dates or other
irregularities with regard to a transaction or as a consequence of fraud,
insufficient funds, closed account or any other reason, except as provided in
Section 2.11 hereof.
2.15. Post-Closing Deposits.
---------------------
Seller agrees that it will transfer, convey, and assign to Buyer
without recourse all deposits received by Seller after the Closing for credit to
any of the Deposits, and all payments received by Seller after the Closing for
application to or on account of any of the Assets, but Seller shall be under no
duty to accept any such deposit or payment.
2.16. Deposit Histories.
-----------------
In case of any dispute with or inquiry by an account holder whose
Deposit is subject to this Agreement, which dispute or inquiry relates to the
servicing of such Deposit prior to the date for which a Deposit history has been
provided to Buyer, Seller will make a good faith effort to provide Buyer with
the appropriate information regarding the Deposit and copies of pertinent
documents or instruments with respect to such dispute or inquiry so as to permit
Buyer to respond to the account holder within a period of time and in a manner
which would comply with standard banking practices and customs. Seller shall
provide such information to Buyer at no charge for the first 90 calendar days
after Closing, and thereafter may charge Buyer standard industry rates for such
information.
2.17. Interest Reporting.
------------------
With respect to the reporting requirements of federal and state tax
laws, Seller shall report through the Closing Date, and Buyer shall report from
the day after the Closing Date through the end of the calendar year, all
interest credited to, interest withheld from and early withdrawal penalties
charged to Deposits assumed by Buyer pursuant to this Agreement and all interest
paid on Loans purchased by Buyer pursuant to this Agreement. Such reports shall
be made to the Customers to whose accounts such reports relate and to the
applicable federal and state tax and/or regulatory authorities.
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2.18. Stop Payment Items.
------------------
Buyer shall honor all stop payment orders relating to the Deposits or
the Loans initiated prior to the Closing and reflected in stop payment documents
delivered to Buyer on the Closing Date or immediately thereafter. If following
receipt of appropriate stop order documentation, Buyer makes any payment in
violation of any such order, Buyer shall be solely liable for any such payment
and shall indemnify, hold harmless and defend Seller from and against all
claims, losses and liabilities, including reasonable attorneys' fees and
expenses, arising out of any such payment. In the event that Buyer shall make
any payment in violation of a stop payment order initiated prior to the Closing
but not reflected in stop payment documents delivered to Buyer prior to such
payment, Seller shall indemnify, hold harmless and defend Buyer from and against
all claims, losses and liabilities, including reasonable attorneys' fees and
expenses, arising out of any such payment. Buyer's and Seller's indemnification
obligations under this Section 2.18 shall not be subject to the limitations set
forth in Section 10.4 hereof.
2.19. Payments on Loans.
-----------------
During the period set out in Section 2.11, Seller shall remit promptly to
Buyer all payments on Loans which may be received by Seller after the Closing.
If the balance due on any Loan has been reduced by Seller as a result of a
payment by check or other instrument received prior to the Closing, and if such
instrument is returned to Seller after the Closing as uncollectible, an amount
in cash equal to such reduction shall be paid by Buyer to Seller promptly upon
demand, and Seller shall assign promptly all rights, title and interest in such
uncollectible item to Buyer.
2.20. Possession and Risk of Loss.
---------------------------
From and after the Closing, Buyer shall be entitled to possession of
the Assets and the Liabilities, and all risk of loss with respect thereto shall
pass to Buyer as of the Closing.
ARTICLE III
PURCHASE PRICE
3.1. Amount of Purchase Price.
------------------------
(a) In consideration of the transfer of the Assets and the
Liabilities provided for in Sections 2.1 and 2.5 hereof, respectively, Buyer
shall pay to Seller the sum of the following:
(i) the Loan Purchase Price;
(ii) the Deposit Premium;
(iii) the unamortized portion of prepaid expenses associated
with any of the Assets sold;
(iv) the net book value of the Fixed Assets and Real Property
as shown on Seller's records as of the last calendar day
of the month immediately preceding the month in which the
Closing occurs; and
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(v) the total of Cash on Hand and cash items held by Seller as
of the date of Closing.
The items set forth in (i) through (v) are hereinafter sometimes
collectively referred to as the "Purchase Price".
(b) Buyer shall pay Seller the Purchase Price by deducting the
Purchase Price from the Deposit Amount payable by Seller to Buyer, as provided
for in Section 3.2.
3.2. Payment by Seller.
-----------------
In consideration of Buyer's assumption of the Liabilities, Seller
shall pay to Buyer an amount equal to the principal amount of the Deposits, plus
accrued interest, as at the close of business on the Closing Date (the "Deposit
Amount"), less the Purchase Price (such calculated amount, the "Payment
Amount").
3.3. Settlement.
----------
(a) Not less than three (3) Banking Days prior to the Closing Date,
Seller shall deliver to Buyer a proposed Preliminary Closing Statement, which
shall set forth the basis for calculating a preliminary Payment Amount completed
as of the close of business five (5) Banking Days prior to the Closing Date,
together with supporting documentation reasonably satisfactory to Buyer, and
which shall be certified by an authorized officer of Seller. Such Preliminary
Closing Statement shall be the basis of a preliminary payment to be made to
Buyer's account on the Closing Date (the "Preliminary Payment").
(b) Within fifteen (15) calendar days after the Closing Date (or on a
different date agreed upon by the parties), Seller shall provide Buyer with a
proposed Final Closing Statement, which shall set forth the basis for
calculating the final Payment Amount completed as of the close of business on
the Closing Date, together with supporting documentation reasonably satisfactory
to Buyer, certified by an authorized officer of Seller. The parties shall use
their best efforts to agree upon the Final Closing Statement promptly. Prior to
2:00 p.m. (Eastern Time) on the third Banking Day following the date that Buyer
agrees to the Final Closing Statement or the date that Seller is notified of any
determination of the Final Closing Statement under Subsection (d), Seller shall
pay to Buyer (or Buyer shall pay to Seller, as the case may be) an amount equal
to the amount due stated on the Final Closing Statement (the "Adjustment
Payment"), plus interest from the day after the Closing Date until the calendar
day before the Adjustment Payment is made at a rate per annum (calculated daily
---------
base on a 360-day year) equal to the Federal Home Loan Bank of Pittsburgh's
overnight RepoPlus Advance rate, as announced on the Closing Date.
(c) Both the Preliminary Payment and the Adjustment Payment shall be
made by wire transfer of immediately available funds to the account of the party
receiving the payment, which account shall be designated in writing by such
party at least two Banking Days prior to the date of such payment.
(d) If the parties are unable to agree on a Final Closing Statement
within thirty (30) calendar days after the Closing, or within ten (10) Banking
Days after Buyer's receipt of the proposed Final Closing Statement, whichever is
later, then either party may submit the matter to the Mediator, who shall
finally determine all disputed portions of the Final Closing Statement in
accordance with the terms and conditions of this Agreement within thirty (30)
calendar days after the submission. Each party agrees to accept the decision of
the Mediator as final and shall pay one-half of the fees and expenses of the
Mediator. The Final Closing Statement, as agreed upon by the parties and/or
determined under this subsection (d), shall be final and binding upon the
parties.
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3.4. Allocation of Consideration.
---------------------------
Buyer and Seller agree to use their reasonable best efforts to agree
on an appropriate allocation of the Purchase Price before the Closing Date.
Seller and Buyer shall each report the transfer of the Assets and the assumption
of the Liabilities for tax purposes in accordance with such allocation. Seller
and Buyer each agree to complete Federal Form 8594, "Acquisition Statement Under
Section 1060" ("Form 8594"), consistent with this allocation of consideration.
Notwithstanding the foregoing, either party may change any such report in the
event of a dispute with any taxing authority or take any other step to settle or
resolve such a dispute.
ARTICLE IV
SELLER'S REPRESENTATIONS AND WARRANTIES
Seller makes the following representations and warranties to Buyer as
of the date of this Agreement and as of the Closing.
4.1. Power and Authority.
-------------------
(a) Seller is a national banking association duly organized, validly
existing and in good standing under the laws of the United States of America and
has the full power and authority to enter into and perform this Agreement.
(b) Upon the approval of this Agreement by Seller's Board of
Directors or an authorized committee thereof, the execution and delivery of this
Agreement by Seller will have been duly authorized by all necessary corporate
action by Seller and this Agreement will be the legal, valid and binding
obligation of Seller, enforceable in accordance with its terms, except as such
enforcement may be limited by bankruptcy, insolvency, reorganization,
conservatorship, receivership, moratorium or other laws affecting creditors'
rights generally and a court's right under general principles of equity to
refuse to direct specific performance.
(c) Neither the execution of this Agreement nor the consummation of
the transactions contemplated hereby will result in (i) a violation of Seller's
charter or bylaws, (ii) a breach of or constitute a default under any material
contract, agreement or other instrument to which it is a party or by which it is
bound or (iii) a violation of any outstanding judgment, order, injunction, law,
rule or regulation to which it is subject, excluding from the foregoing clauses
(ii) and (iii) breaches, defaults or violations which, either individually or in
the aggregate, would have a material adverse effect on the Assets and the
Liabilities or impede Seller's ability to perform its obligations hereunder.
4.2. Litigation and Regulatory Proceedings.
-------------------------------------
Except as disclosed in Schedule 4.2 hereof, there are no actions
------------
pending against Seller which alone, or taken in the aggregate, reasonably would
be expected to have any material adverse effect upon the Assets, the Liabilities
or the consummation of the transactions contemplated by this Agreement. No
governmental agency has notified Seller that it would oppose or not approve or
consent to the transactions contemplated by this Agreement.
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4.3. Consents and Approvals.
----------------------
Except as disclosed in Schedule 4.3, no consents or approvals of, or
------------
filings or registrations with, any third party or any public body, agency, or
authority are necessary in connection with Seller's consummation of the
transactions contemplated by this Agreement.
4.4. No Broker's or Finder's Fees.
----------------------------
No agent, broker, investment banker, person or firm acting on behalf
of or under authority of Seller or any of its Affiliates is or will be entitled
to any broker's or finder's fee or any other commission or similar fee, directly
or indirectly, in connection with any of the transactions contemplated herein.
4.5. Title to Real Property.
----------------------
Except as set forth in Schedule 4.5 hereto and subject to statutory
------------
liens securing payments not yet due or which are being contested by Seller in
good faith and zoning restrictions, easements, licenses, covenants and other
restrictions affecting the use of the Real Property and such other imperfections
and irregularities of title, claims, liens, charges, security interests or
encumbrances which do not materially affect the use or value of the Real
Property, Seller has good and marketable title to the Real Property, free and
clear of all liens and encumbrances
4.6. Title to Fixed Assets.
---------------------
Except as specified in Schedule 4.6 hereto and except for liens for
------------
current taxes or assessments which are not yet due and payable or are being
contested by Seller in good faith and statutory and other similar liens which
are not yet due and payable and which do not materially affect the value of or
interfere with the use of the Fixed Assets, Seller is the lawful owner of and
has good and marketable title to the Fixed Assets, free and clear of any
mortgage, pledge, lien, security instrument, conditional sales agreement, lease
or encumbrances.
4.7. Deposit Insurance.
-----------------
The Deposits are insured by the FDIC up to the maximum extent
permitted by law. Seller has filed all reports and paid all premiums required
under the Federal Deposit Insurance Act, as amended, with respect to the
Deposits.
4.8. Withholding.
-----------
Seller has timely complied, and will continue to timely comply
through the Closing, in all material respects with the requirement of Section
3406 of the Internal Revenue Code of 1986, as amended, and the regulations
thereunder.
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4.9. Loans.
-----
Subject to the limitations set out in Section 2.2 hereof, each Loan
being purchased by Buyer is a valid loan in conformity with applicable laws and
regulations; its principal balance as shown on Seller's books and records is
true and correct as of the last date shown thereon; to the knowledge of Seller,
all purported signatures on and executions of any documents in connection with
such Loan are genuine. No such Loan is subject to any asserted defense, offer
or counterclaim. Subject to the limitations of Section 2.2 hereof, Seller shall
provide microfilm or comparable copies of any documents relating to Loans in
Seller's possession to Buyer upon request.
4.10 Deposit Liabilities.
-------------------
All Deposit accounts have been administered by Seller to date, and
will continue to be administered by Seller to the Closing date, in material
compliance with applicable law and regulation.
4.11 Compliance with Laws.
--------------------
Seller holds all material permits, licenses, certificates of
authority, orders and approvals of, and has made all material filings,
applications and registrations with, all governmental or regulatory bodies that
are required in order to permit it to carry on the business of the Branch as it
is presently conducted. Seller has conducted the Branch's business so as to
comply in all material respects with all applicable statutes, regulations, rules
and orders.
4.12 Restraints on Closing.
---------------------
Seller is not aware of any reason that Buyer will be unable to obtain
the regulatory approvals required as a condition to consummation of the
transactions contemplated herein, other than the possibility of an adverse
determination upon the anti-competitive effects of the proposed transactions.
4.13 Contracts, Leases and Other Agreements.
--------------------------------------
Seller has provided Buyer, or will provide Buyer in connection with
Buyer's due diligence, with true and accurate copies of all material leases,
agreements, arrangements, deeds and other relevant material documents relating
to the Assets that are in Seller's possession.
4.14 Taxes.
-----
(a) Seller has timely filed all federal, state and local (and, if
applicable, foreign) tax returns required by applicable law to be filed by it
(including, without limitation, estimated tax returns, income tax returns,
information returns and withholdings and employment tax returns) and has paid,
or where payment is not required to have been made, in accordance with generally
accepted accounting principles, have set up an adequate reserve or accrual for
the payment of, all taxes and penalties, if any, required to be paid in respect
of the periods covered by such returns.
(b) All federal, state and local (and, if applicable, foreign) tax
returns filed by Seller are complete and accurate in all material respects.
Seller is not delinquent in the payment of any tax, assessment or governmental
charge, and has not requested any extension of time within which to file any tax
returns in respect of any fiscal year or portion thereof which have not since
been filed. No deficiencies for any tax, assessment or governmental charge have
been proposed, asserted or assessed (tentatively or otherwise) against Seller
which
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have not been settled and paid. There are currently no agreements in effect to
extend the period of limitations for the assessments or collection of any tax.
4.15 Environmental Matters.
---------------------
(a) Seller has not contaminated the Real Estate with any
Hazardous Substances as of the date of this Agreement, and to Seller's
knowledge, Seller has not permitted any Hazardous Substance to be brought upon,
kept or used in, or about the Real Estate. Seller has operated the Real Estate
in accordance with Environmental Laws. Except for the underground storage tanks
formerly located on the property, which are addressed in the letter from the
West Virginia Department of Environmental Protection dated April 5, 1999, a copy
of which is included at Schedule 4.15(a) ("DEP Letter"), Seller is not aware of
----------------
any issues relating to the Real Property under Environmental Laws. To Seller's
knowledge, the DEP Letter is current and has not been revised, amended or
rescinded.
(b) There are no pending or threatened claims, actions,
investigations, notices of non-compliance, information requests or notices of
potential responsibility or proceedings involving Seller relating to and there
is no reasonable basis for the assertion of any claims, actions,
investigations, notices or proceedings with respect to:
(1) an asserted liability of under any Environmental
authority, settlement, Environmental Law; Seller or any
prior owner, Law or the terms and agreement, decree or
occupier or user of the real conditions of any permit,
other obligation estate license, arising under any
(2) the handling, storage, use, Substances; transportation,
removal or disposal of Hazardous
(3) the actual or threatened from on or under or ground
water, land discharge, release or within any such
property surface or subsurface emission of Hazardous
into the air, water, strata; or Substances surface
water,
(4) personal injuries or damage Hazardous Substances. to
property related to or arising out of exposure to
ARTICLE V
BUYER'S REPRESENTATIONS AND WARRANTIES
Buyer makes the following representations and warranties to Seller as
of the date of this Agreement and as of the Closing Date:
5.1. Power and Authority.
-------------------
(a) Buyer is a national banking association duly organized, validly
existing and in good standing under the laws of the United States of America,
and has the full power and authority to enter into and perform this Agreement.
(b) The execution and delivery of this Agreement by Buyer has been
duly authorized by all necessary corporate action by Buyer, and this Agreement
is the legal, valid and binding obligation of Buyer,
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enforceable in accordance with its terms, except as such enforcement may be
limited by bankruptcy, insolvency, reorganization, conservatorship,
receivership, moratorium or other laws affecting creditors' rights generally and
a court's right under general principles of equity to refuse to direct specific
performance.
(c) Neither the execution of this Agreement nor the consummation of
the transactions contemplated hereby will result in a violation of Buyer's
charter or bylaws, or result in a breach of or constitute a default under any
material contract, agreement or other instrument to which it is a party or by
which it is bound and will not violate any outstanding judgment, order,
injunction, law, rule or regulation to which it is subject.
5.2. Litigation and Regulatory Proceedings.
-------------------------------------
There are no actions pending or, to Buyer's knowledge, threatened
against Buyer which alone, or taken in the aggregate, reasonably would be
expected to have any material adverse effect upon the consummation of the
transactions contemplated by this Agreement. No governmental agency has notified
Buyer that it would oppose or not approve or consent to the transactions
contemplated by this Agreement.
5.3. Consents and Approvals.
----------------------
Except for the regulatory approvals described in Section 9.3(a) of
this Agreement, no consents or approvals, or filings or registrations with any
third party or any public body, agency, or authority are necessary in connection
with Buyer's consummation of the transactions contemplated by this Agreement.
5.4. Deposit Insurance.
-----------------
Buyer's deposits (as defined in 12 U.S.C. Section 1813(1)) are
insured by the FDIC up to the maximum extent permitted by law. Buyer has filed
all reports and paid all premiums required under the Federal Deposit Insurance
Act, as amended.
5.5. No Broker's or Finder's Fees.
----------------------------
No agent, broker, investment banker, person or firm acting on behalf
of or under authority of Buyer or any of its Affiliates is or will be entitled
to any broker's or finder's fee or any other commission or similar fee, directly
or indirectly, in connection with any of the transactions contemplated herein.
ARTICLE VI
ADDITIONAL AGREEMENTS OF SELLER
6.1. Access to Seller's Premises Records, Personnel.
----------------------------------------------
Upon execution of this Agreement, Seller shall give Buyer and its
representatives and counsel, upon reasonable advance notice, reasonable access
during normal business hours, unless otherwise expressly consented to by Seller,
to the Branch, the Records and appropriate personnel of Seller. Seller shall
not be required to provide access to or to disclose information where such
access or disclosure would unduly disrupt the operation of the Branch, violate
or prejudice the rights of any customer or employee of Seller or be contrary to
law or any legal or regulatory order or process.
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6.2. Regulatory Approvals.
--------------------
Seller shall reasonably cooperate with Buyer in obtaining any
regulatory approval which Buyer must obtain prior to the Closing.
6.3. Conduct of Business.
-------------------
Except as provided in this Agreement and as may be agreed upon
otherwise with Buyer and except as may be required by applicable law or industry
wide practice, Seller shall continue to carry on the business of banking at the
Branch and offer interest rates, or charge fees only as permitted under
contracts and agreements (as applicable) with customers of the Branch and
otherwise as is consistent with its normal operating procedures in the State of
West Virginia. Subject to the foregoing, Seller shall use its reasonable efforts
to maintain its customer relationships, except for any pricing policies not
targeted at the Branch. Between the date hereof and the Closing, Seller shall
not, without the prior consent of Buyer:
(a) acquire or dispose of any Fixed Assets, other than pursuant to
commitments made on or before the date of this Agreement and except for
replacement of furniture, furnishings and equipment and normal maintenance and
refurbishing in the ordinary course of business of the Branches; or
(b) increase or agree to increase the salary, remuneration or
compensation of persons employed at the Branch other than in accordance with
Seller's customary policies and/or bank-wide changes consistent with past
practices, or pay or agree to pay any uncommitted bonus to any such employees
other than regular bonuses granted based on historical practice.
6.4. Retirement Plan Accounts.
------------------------
Seller shall notify each of its customers holding Deposits under a
Retirement Plan account in a timely fashion of the proposed assumption of their
Retirement Plan accounts by Buyer, as contemplated by the plan documents.
6.5. Maintenance and Insurance.
-------------------------
Seller shall maintain the Real Property and the Fixed Assets in
customary repair, order and condition, reasonable wear and tear and damage by
fire or other unavoidable casualty excepted. Until the effectiveness of the
Closing, Seller shall maintain insurance on the Real Property and the Fixed
Assets in an amount sufficient to cover the replacement cost thereof.
6.6. Confidentiality.
---------------
Seller shall, and shall cause its Affiliates, directors, officers,
employees, and agents to, take all reasonable and appropriate steps to keep
confidential all information obtained or furnished to any of them with respect
to Buyer and its business, operations, and financial condition, and any
information maintained by Seller with respect to the Branch and/or to operations
at the Branch; provided, however, that any such information may be disclosed by
Seller to the extent required by law, as determined in a written opinion of
counsel to Seller (which counsel may be an employee of Seller). In the event
such disclosure is required, Seller shall provide Buyer written notice of the
information to be disclosed, together with a copy of the written opinion
referred to in the immediately preceding sentence, as far in advance of such
disclosure as is practicable. At Buyer's request, Seller will use its best
efforts to obtain assurances that confidential treatment will be afforded to
such information and will disclose only such information as is necessary to
comply with its legal obligations as
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advised in such written opinion. Seller acknowledges that Buyer will suffer
irreparable harm as a result of a breach of this Section and that, therefore,
Buyer will be entitled to injunctive and other appropriate equitable relief in
addition to damages as a result of a breach or imminent breach of this Section.
Seller's obligations under this Section 6.6 shall survive both the termination
of this Agreement and the Closing.
ARTICLE VII
ADDITIONAL AGREEMENTS OF BUYER
7.1. Solicitation of Seller's Customers and Employees.
------------------------------------------------
Buyer shall not specifically solicit business from any customer of
the Branch or solicit for employment any employee of the Branch prior to the
Closing where such customer or employee becomes known to Buyer as a result of
the transactions contemplated by this Agreement, including without limitation
the Buyer Due Diligence; provided, however, these restrictions shall not
restrict general mass mailings, telemarketing calls, statement stuffers and
other similar communications directed to all the current customers of Buyer or
to the public, or newspaper, radio, or television advertisements of a general
nature or otherwise prevent Buyer from taking such actions as may be required to
comply with any applicable federal or state laws, rules, or regulations. The
foregoing restrictions notwithstanding, Buyer may continue to solicit Customers
of the Branch with whom Buyer has existing business relationships which are
normally established and maintained in offices other than the Branch, and Buyer
may continue to solicit such business relationships without restriction prior to
the Closing Date.
7.2. Regulatory Approvals.
--------------------
Buyer agrees to use its best efforts to obtain as soon as reasonably
practicable any regulatory approval required to consummate the transactions
contemplated by this Agreement. Buyer shall notify Seller promptly of any
significant development with respect to any regulatory application made under
this Section. Buyer also shall provide Seller with a copy of any regulatory
approval it receives under this Section, promptly upon its receipt thereof.
7.3. Confidentiality.
---------------
Buyer shall, and shall cause its Affiliates, directors, officers,
employees, and agents to, take all reasonable and appropriate steps to keep
confidential all information obtained or furnished to any of them with respect
to Seller and its business, operations, and financial condition, and any
information maintained by Buyer with respect to the Branch and/or to operations
at the Branch; provided, however, that any such information may be disclosed by
Buyer to the extent required by law, as determined in a written opinion of
counsel to Buyer (which counsel may be an employee of Buyer). In the event such
disclosure is required, Buyer shall provide Seller written notice of the
information to be disclosed, together with a copy of the written opinion
referred to in the immediately preceding sentence, as far in advance of such
disclosure as is practicable. At Seller's request, Buyer will use its best
efforts to obtain assurances that confidential treatment will be afforded to
such information and will disclose only such information as is necessary to
comply with its legal obligations as advised in such written opinion. Buyer
acknowledges that Seller will suffer irreparable harm as a result of a breach of
this Section and that, therefore, Seller will be entitled to injunctive and
other appropriate equitable relief in addition to damages as a result of a
breach or imminent breach of this Section. Buyer's obligations under this
Section 7.3 shall survive both the termination of this Agreement and the
Closing.
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7.4. Change of Name, Etc.
--------------------
Immediately after the Closing, Buyer will (a) change the name on all
documents and facilities relating to the Branch to Buyer's name, (b) notify all
Customers as of the Closing Date of the consummation of the transactions
contemplated by this Agreement, and (c) provide all appropriate notices to the
FDIC and the OCC and any other appropriate regulatory authorities required from
Buyer as a result of the consummation of these transactions. As soon as
practicable and, in any event, no later than seven (7) calendar days after the
Closing Date, Buyer will issue new checks, draft forms, loan coupon books and
deposit slips reflecting its transit and routing number to Customers of the
Branch able to access accounts through either checks or drafts. Buyer shall use
its best efforts to encourage these customers to begin using these checks and
cease using checks bearing Seller's name.
7.5. Continued Operation of the Branches.
-----------------------------------
Subject to Buyer obtaining any necessary regulatory approval under
Section 7.2 of this Agreement, Buyer shall establish a branch at the present
location of the Branch and shall continue to operate the Branch after the
Closing for at least as long as necessary to comply with any branch closing
notice requirements. No notice with respect to any such closing shall be made
or given until after the Closing Date. In no event shall Seller be required to
participate in the closing of the Branch or in any notice to customers relating
to such closing.
7.6. Collateral for Government Deposits.
----------------------------------
Buyer shall assume Seller's responsibilities under any agreement
regarding the pledge of collateral with respect to any Deposit of a customer
that is a governmental entity or school district or make other arrangements
acceptable to such customer prior to the Closing Date. All such deposits are
specified in Schedule 7.6 hereto. Any collateral required to secure the
------------
Deposits of any such customer shall be pledged by Buyer no later than the
Closing Date.
ARTICLE VIII
EMPLOYEES OF THE BRANCHES
8.1. Hiring of Branch Employees. Buyer shall extend offers of employment
--------------------------
to branch employees on the payroll of the Branch on the Closing Date (the
"Transferred Employees"). Each offer of employment shall be effective as of the
Closing Date and shall provide a salary or hourly wage equal to that being paid
to such Transferred Employee by Seller as of the Closing Date, except that Buyer
may adjust such Transferred Employee's salary if necessary so that it is
comparable to the salaries of other employees of the Buyer in similar positions.
8.2. Employee Benefits.
-----------------
(a) Following the Closing, Buyer shall not have any liability or
obligation under any Benefit Plans or any other program or arrangement of Seller
or an ERISA Affiliate thereof under which any current or former employee of
Seller or any of its Affiliates has any right to any benefits. The Seller shall
reserve the right to settle the benefit obligations of the Retirement Plan in a
manner that it so chooses subject to the regulatory and statutory requirements
imposed upon the plans by the Internal Revenue Service (the "IRS") and
Department of Labor (the "DOL").
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(b) Upon the Closing, the participation of Transferred Employees in
the Benefit Plans of the Seller shall cease in accordance with the terms of such
plans. The Seller shall have no further obligation to provide employee benefits
to the Transferred Employees.
(c) From and after the Closing Date, Buyer shall provide the
Transferred Employees with the employee benefits, if any, provided to employees
of Buyer and its Affiliates.
8.3. Training.
--------
Seller shall permit Buyer to train the Transferred Employees with
regard to Buyer's operations, policies and procedures before the Closing Date at
the Buyer's sole cost and expense. This training shall take place outside of
business hours and may, at Buyer's option, take place at the Branch.
ARTICLE IX
CLOSING
9.l Time and Place of Closing.
-------------------------
(a) Subject to the conditions to Closing set forth in Sections 9.3
and 9.4, the Closing shall take place on such date, mutually agreed upon by the
parties hereto after the conditions set forth in Section 9.3(a) and 9.4(a) have
been satisfied in full (the "Closing Date"); provided, however, that the Closing
shall occur no later than June 30, 2000. The Closing shall take place at the
offices of Seller, at 10 a.m. on the Closing Date, or at such other time and
place as may be mutually agreed upon by the parties. The Closing shall be
effective as of 2:00 p.m. (Eastern Time) on the Closing Date.
(b) Simultaneously with the occurrence of the Closing, Seller and
Buyer shall convert all other assets and liabilities from Seller's data
processing system to Buyer's data processing system, in accordance with the
procedures established pursuant to Section 2.9.
9.2. Closing Documents.
-----------------
On the Closing Date, the following actions shall be taken:
(a) Seller shall deliver to Buyer the following:
(i) the Bill of Sale in substantially the form of Exhibit 9.2A
attached hereto (the "Bill of Sale") and all other bills
of sale, assignments and other documents of transfer and
instruments (which documents and instruments shall be
satisfactory in form and substance to legal counsel of
Seller and Buyer) necessary to convey to Buyer all its
right, title and interest in and to the Assets hereunder;
(ii) the Assignment and Assumption Agreement in substantially
the form of Exhibit 9.2B attached hereto (the "Assignment
and Assumption Agreement");
(iii) a general warranty deed transferring title to the Real
Property from Seller to Buyer in form and content
reasonably acceptable to Buyer;
(iv) the Loans purchased by Buyer duly and properly endorsed to
Buyer by Seller,
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together with all notes, guarantees, agreements and other
evidence thereof and all collateral and security interests
securing the Loans in the possession of Seller and all
necessary assignments, endorsements and other instruments
of conveyance as may be reasonably necessary under the
circumstances; provided that all such assignments,
endorsements and other instruments of conveyance shall be
without recourse as to collection to Seller;
(v) a certificate, signed by a duly authorized officer of
Seller, certifying that (A) the representations and
warranties of Seller in this Agreement are true in all
material respects as of the Closing Date and (B) the
covenants of Seller to be performed on or before the
Closing Date have been performed in all material respects;
(vi) copies of resolutions of Seller's Board of Directors or
other appropriate governing committee, certified by
Seller's secretary or assistant secretary, authorizing the
execution of this Agreement and the transactions
contemplated hereby, and a certificate of Seller's
secretary or assistant secretary as to the incumbency of
each officer of Seller executing this Agreement and all
instruments, certificates and documents required to be
executed and delivered by Seller at the Closing; and
(vii) updated Schedules to this Agreement.
(b) Buyer shall execute and deliver to Seller the following:
(i) the Assignment and Assumption Agreement;
(ii) such other instruments as may be necessary for Buyer to
validly acquire the Real Property;
(iii) a certificate, signed by a duly authorized officer of
Buyer, certifying that (A) the representations and
warranties of Buyer under this Agreement are true in all
material respects as of the Closing Date and (3) the
covenants of Buyer to be performed on or before the
Closing Date have been performed in all material respects;
and
(iv) copies of resolutions of Buyer's Board of Directors or
other appropriate governing committee, certified by
Buyer's secretary or assistant secretary, authorizing the
execution of this Agreement and the transactions
contemplated hereby, and a certificate of Buyer's
secretary or assistant secretary as to the incumbency of
each officer of Buyer executing this Agreement and all
instruments, certificates and documents required to be
executed and delivered by Buyer at the Closing; and
(v) a copy of Form 8594 completed pursuant to Section 3.4
hereof.
9.3. Buyer's Conditions to Closing.
-----------------------------
Unless waived in writing by Buyer in its sole discretion, Buyer's
obligations to purchase the Assets and assume the Liabilities shall be
contingent upon and subject to the fulfillment on or prior to the Closing of the
following conditions in all material respects:
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(a) Regulatory Approvals. Buyer shall have received all regulatory
--------------------
approvals which are required by law or otherwise to consummate the transactions
contemplated by this Agreement, including without limitation the approval of the
OCC and any required approvals of the Federal Reserve Board or the FDIC, and any
required waiting period with respect to such regulatory approvals shall have
expired without the commencement of adverse proceedings by any governmental
authority with jurisdiction over the transactions contemplated by this
Agreement;
(b) Representations, Warranties and Covenants. Each of Seller's
-----------------------------------------
representations and warranties set forth in this Agreement shall be true and
correct in all material respects as of the Closing Date and all material
covenants to be performed by Seller on or before the Closing Date shall have
been performed or met in all material respects;
(c) Closing Documents. Seller shall have delivered to Buyer the
-----------------
documents set forth in Section 9.2(a); and
(d) Preliminary Payment. Buyer shall have received the Preliminary
-------------------
Payment as provided in Section 3.3(a).
(e) No Material Adverse Changes. There shall have been no material
---------------------------
adverse changes in the Assets or the Liabilities.
(f) Due Diligence. Buyer shall have completed the Buyer Due
-------------
Diligence as provided in paragraph 2.2 of this Agreement.
Buyer shall also have completed to its reasonable satisfaction
the additional due diligence review as provided in paragraph 2.3 of the
Agreement, which review shall be completed no later than forty-five (45) days
after execution of this Agreement.
9.4. Seller's Condition's to Closing.
-------------------------------
Unless waived in writing by Seller in its sole discretion, Seller's
obligation to sell the Assets and transfer the Liabilities to Buyer is
contingent upon and subject to the fulfillment of the following conditions in
all material respects:
(a) Board Approval. The Board of Directors of Seller, or an
--------------
authorized committee thereof, shall have approved the execution and delivery of
this Agreement by Seller and Seller's performance of its obligations
contemplated hereby;
(b) Regulatory Approvals. Buyer shall have received all regulatory
--------------------
approvals which are required by law or otherwise to consummate the transactions
contemplated by this Agreement, including without limitation the approval of the
OCC and any required approvals of the Federal Reserve Board or the FDIC, and any
required waiting period with respect to such regulatory approvals shall have
expired without the commencement of adverse proceedings by any governmental
authority with jurisdiction over the transactions contemplated by this
Agreement;
(c) Representations, Warranties and Covenants. Each of Buyer's
-----------------------------------------
representations and warranties set forth in this Agreement shall be true and
correct in all material respects as of the Closing Date and all material
covenants to be performed by Buyer on or before the Closing Date shall have been
performed in all material respects; and
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(d) Closing Documents. Buyer shall have delivered to Seller the
-----------------
documents set forth in Section 9.2 (b).
(e) Closing of South Branch/Potomac Merger. The merger of South
--------------------------------------
Branch Valley Bancorp, Inc. and subsidiary Potomac Interim Bank, Inc. with and
into Potomac Valley Bank pursuant to an Agreement and Plan of Merger dated as of
July 16, 1999, shall have been consummated.
ARTICLE X
INDEMNIFICATION
10.1. Indemnification of Seller.
-------------------------
Subject to the limitations set forth in Section 10.4 hereof, Buyer
shall indemnify, defend, and hold harmless Seller and its Affiliates and each of
their respective officers, directors and employees from and against any and all
liability, damages, claims, suits, judgments, fines, costs, penalties, and
expenses (including attorneys' fees and disbursements) (together, "Damages")
suffered or incurred by Seller which arise out of or result from Buyer's
ownership of the Assets or failure after the Closing to perform, pay, discharge,
or satisfy any of the Liabilities in any material respect, to perform any
obligation under this Agreement, or which arise out of any breach by Buyer of
any representation or warranty of Buyer set forth in this Agreement.
10.2. Indemnification of Buyer.
------------------------
Subject to the limitations set forth in Section 10.4 hereof, Seller
shall indemnify, defend, and hold harmless Buyer and its Affiliates and each of
their respective officers, directors and employees from and against any and all
Damages suffered or incurred by Buyer which arise out of Seller's ownership of
the Assets or failure prior to the Closing to perform, pay, discharge, or
satisfy any of the Liabilities (to the extent required prior to the Closing) in
any material respect, to perform any obligation under this Agreement, or which
arise out of any breach by Seller of any representation or warranty of Seller
set forth in this Agreement.
l0.3. Notice.
------
Promptly after the service of process by any third person in any
litigation or proceeding, or the receipt of any claim or demand in respect of
which a party may have any claim for indemnification under this Agreement, or as
soon as reasonably practicable after such party shall have acquired notice of
any other matter with respect to which indemnity may be so sought, such party
will notify the indemnifying party thereof. The indemnifying party shall have
the right within ten (10) Banking Days of receipt of such notice to assume the
defense, settlement or compromise (as to settlements or compromise only with the
prior written consent of the indemnified party, which shall not be withheld
unreasonably) of any such claim, action, suit or proceeding at its own expense,
including the retention of counsel reasonably satisfactory to the indemnified
party, and the indemnified party shall cooperate with the indemnifying party as
provided in Section 10.5 below. In such event, the indemnified party shall have
the right, upon prompt written notice to the indemnifying party, to retain
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the indemnified party's own
expense. If the indemnifying party does not notify the indemnified party that it
will assume the defense, settlement or compromise of any such claim, action,
suit or proceeding within ten (10) Banking Days upon receipt of notice thereof,
the indemnified party shall have the full and sole right to defend, settle or
compromise such claim, action, suit or proceeding with the consent of the
indemnifying party.
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10.4. Limitation on Indemnification.
-----------------------------
No indemnification shall be payable under Section 10.1 or Section
10.2 unless the amount of the Damages for which indemnification is being sought
or could be sought shall exceed, in the aggregate, $35,000, and then only to the
extent of such excess. No party hereto shall be entitled to indemnification to
the extent that Damages, singly or in the aggregate, shall exceed $1,500,000. No
party hereto shall be entitled to indemnification for Damages unless claim for
indemnification is made within two (2) years of the date of this Agreement;
provided, that this two year limitation shall not apply to claims relating to
breaches of the representations and warranties set forth in Sections 4.1 and
5.1.
10.5. Cooperation.
-----------
Seller shall give prompt notice to Buyer of any facts coming to its
attention that may give rise to a claim for indemnification. Seller shall
cooperate with Buyer in any investigation, or in the defense of any litigation
or proceeding that might give rise to a claim for indemnification or that would
give rise to a claim for indemnification if brought against Seller. Such
cooperation shall include providing witnesses, files, documents and records that
Seller is uniquely in a position to provide.
10.6 Exclusive Remedy.
----------------
The rights established by this Article X shall be the exclusive
remedy available to each party hereto in the event of a claim for Damages by
such party other than claims for fraud.
ARTICLE XI
TERMINATION
11.1. Termination by Either Party.
---------------------------
(a) This Agreement may be terminated prior to closing as follows:
(i) By either party, if the other party fails to cure any
material breach of any representation, warranty, or covenant within thirty (30)
calendar days after being notified in writing of the breach by the party
terminating this Agreement; or
(ii) By either party, upon the expiration of thirty (30)
calendar days after the FDIC, the Banking Commission or any other governmental
agency or regulatory authority issues a decision denying or refusing to grant
the approvals or consents required to be obtained pursuant to this Agreement,
unless within said 30-day period Seller and Buyer agree to submit an application
to or appeal the decision of the regulatory authority which has denied or
refused to grant said approval;
(iii) By either party, if the Closing does not occur on or
before June 30, 2000, provided that the party terminating this Agreement has
used its best efforts to perform its obligations hereunder; or
(iv) By both parties upon their mutual agreement in writing to
terminate this Agreement.
(b) In the event this Agreement is terminated, it shall be of no
further force or effect and the
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parties shall be released from all further obligations hereunder except as
otherwise specified herein and except that the termination of this Agreement
under subsection (a)(i) above shall not absolve the breaching party from any
liability to the other party arising out of such breach.
ARTICLE XII
MISCELLANEOUS
12.1. Further Assurances.
------------------
(a) On and after the Closing Date, Seller agrees to give such
further reasonable assurances and to execute, acknowledge and deliver such bills
of sale, deeds, acknowledgments and other instruments of conveyance and transfer
as in Buyer's judgment are reasonably necessary and appropriate to vest
effectively in Buyer the full legal and equitable title to all the Assets and
Liabilities.
(b) On and after the Closing Date, Buyer shall execute, acknowledge
and deliver any documents or instruments as may be necessary and appropriate to
relieve and discharge Seller from its obligations with respect to the
Liabilities.
(c) Seller and Buyer shall cooperate fully with each other in
connection with any examination conducted by any tax authority subsequent to the
Closing Date by promptly providing to the other, upon written request,
information relating to the tax liability of any business operated by Seller or
Buyer with respect to the Branch.
12.2. Survival of Representations and Warranties.
------------------------------------------
Each and every one of Buyer's and Seller's representations and
warranties under this Agreement or contained in any certificate or instrument
delivered by either party at Closing shall survive for a period of two (2) years
from the Closing Date, except that the representations and warranties set forth
in Sections 4.1 and 5.1 shall survive indefinitely following the Closing Date.
12.3. Non-Solicitation of Business.
----------------------------
(a) For a period of eighteen (18) months after the Closing Date,
Seller will not specifically target and solicit customers of the Branch
utilizing any customer or mailing list which consists primarily of Customers of
the Branch; provided, however, these restrictions shall not restrict general
mass mailings, telemarketing calls, statement stuffers and other similar
communications directed to all the current customers of Seller or to the public,
or newspaper, radio, or television advertisements of a general nature or
otherwise prevent Seller from taking such actions as may be required to comply
with any applicable federal or state laws, rules, or regulations. The foregoing
restrictions notwithstanding, Seller may continue to solicit Customers of the
Branch with whom Seller has existing business relationships which are normally
established and maintained in offices other than the Branch, and Seller may
continue to solicit such business relationships without restriction after the
Closing Date.
(b) Each of Seller and Buyer acknowledges that the restrictions and
agreements contained in this Section 12.3 are reasonable and necessary to
protect the legitimate interests of the parties hereto, and that any violation
of this Section 12.3 by one party will cause substantial and irreparable harm to
the other party that would not be quantifiable and for which no adequate remedy
would exist at law and agrees that injunctive relief, in addition to all other
remedies, shall be available therefor.
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(c) It is the intent and understanding of each party hereto that
if, in any action before any court or agency legally empowered to enforce this
Section 12.3, any term, restriction, covenant, or promise is found to be
unreasonable and for that reason unenforceable, then such term, restriction,
covenant, or promise shall not thereby be terminated but that it shall be deemed
modified to the extent necessary to make it enforceable by such court or agency
and, if it cannot be so modified, that it shall be deemed amended to delete
therefrom such provision or portion adjudicated to be invalid or unenforceable,
such modification or amendment in any event to apply only with respect to the
operation of this Section 12.3 in the particular jurisdiction in which such
adjudication is made.
12.4. Entire Agreement and Amendment.
------------------------------
This Agreement sets out the complete agreement of the parties with
respect to the matters discussed herein, and supersedes all prior agreements
between the parties, whether written or oral, with respect to such matters. No
provision of this Agreement may be amended or waived except as expressly stated
in writing and executed by both parties.
12.5. Dispute Resolution.
------------------
(a) Seller and Buyer each agree to submit all matters of
disagreement, dispute, or controversy between Seller and Buyer under this
Agreement to binding arbitration (except for matters to be resolved by the
Mediator concerning the Preliminary Closing Statement and the Final Closing
Statement pursuant to Section 3.3 hereof) before the American Arbitration
Association (the "AAA"). All arbitration proceedings shall be conducted by three
arbitrators in Charleston, West Virginia, under the rules of the AAA, except as
otherwise provided in this Section 12.5. The party submitting a matter to
arbitration shall include in the submission the name and address of the
arbitrator selected by it, and the non-submitting party shall submit the name
and address of the arbitrator selected by it within twenty (20) calendar days
after receipt of notice of the submission. The two arbitrators selected by
Seller and Buyer shall be instructed to appoint a third arbitrator as soon as
practicable. If they fail to do so within twenty (20) calendar days after the
appointment of the non-submitting party's arbitrator, the AAA may appoint the
third arbitrator and shall appoint the third arbitrator within thirty (30)
calendar days after the appointment of the non-submitting party's arbitrator.
(b) The fees and expenses of each arbitrator and all other costs
and expenses incurred in the arbitration, including reasonable attorneys' fees,
shall be borne as specified in the arbitrators' award.
(c) Notwithstanding subsection (a) of this Section 12.5 either
party shall be entitled to commence a suit at law for the purpose of (i)
obtaining appropriate equitable relief in the event of a violation, or imminent
violation, of Section 6.6 or 7.3 of this Agreement or (ii) enforcing the
indemnification obligation under Article X of this Agreement. Neither party
shall prejudice any right to seek arbitration of any dispute arising with
respect to Section 6.6 or 7.3 or Article X by commencing such a suit at law.
12.6. Counterparts.
------------
This Agreement may be executed in any number of counterparts, each
of which shall constitute an original, but all of which taken together shall
constitute one and the same instrument.
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12.7. Severability.
------------
If any portion of this Agreement is declared by a court of
competent jurisdiction to be invalid or unenforceable, such declaration shall
not affect the validity of the remaining provisions.
12.8. Applicable Law.
--------------
This Agreement shall be governed by the laws of the State of West
Virginia, without regard to principles of conflicts of laws thereof, except to
the extent that the laws of the United States of America are applicable.
12.9. Exhibits and Schedules.
----------------------
All exhibits and schedules referred to herein shall constitute a
part of this Agreement.
12.10. Assignment.
----------
This Agreement is not assignable by either party without the prior
written consent of the other party.
12.11. Headings.
--------
The headings contained in this Agreement are inserted for
convenience only and shall not affect the meaning of this Agreement or any of
its provisions.
12.12. Notices.
-------
Any notice under this Agreement shall be made in writing and shall
be deemed received when either received or delivered in person, by facsimile
transmission, or by first class mail, postage prepaid, to the parties at the
address set forth below or at such other addresses as each party shall inform
the other in writing:
If to Seller to:
South Branch Valley National Bank
310 North Main Street
P.O. Box 680
Moorefield, West Virginia 26836
Fax: (304) 538-7053
Phone: (304) 538-1000
ATTN: H. Charles Maddy, III, President and CEO
with a copy to:
Sandra M. Murphy, Esq.
Bowles Rice McDavid Graff & Love, PLLC
600 Quarrier Street
P.O. Box 1386
Charleston, West Virginia 25325-1386
Fax: (304) 343-3058
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Phone: (304) 347-1131
If to Buyer to:
Citizens National Bank of Elkins
211-213 Third Street
P. O. Box 1519
Elkins, West Virginia 26241
Fax: (304) 636-6924
Phone: (304) 636-4095
ATTN: Robert J. Schoonover, President and CEO
with a copy to:
Charles D. Dunbar, Esq.
Jackson & Kelly, PLLC
1600 Laidley Tower (Zip 25301)
P. O. Box 553
Charleston, West Virginia 25322
Fax: (304) 340-1080
Phone: (304) 340-1196
12.13. Expenses.
--------
Unless specifically stated to the contrary in this Agreement, each
party shall assume and pay for the expenses it incurs with respect to the
purchase and sale of the Assets and assumption of the Liabilities under this
Agreement.
12.14. Public Announcements.
--------------------
Prior to making any press release relating to this Agreement or the
transactions contemplated hereby, Seller and Buyer shall agree with each other
as to the form and substance of such press release. Prior to making any other
public disclosures relating to this Agreement or the transactions contemplated
hereby, Seller and Buyer shall consult with each other as to the form and
substance of such disclosure and shall furnish a copy of the text of such
disclosure to the other party, provided, however, that nothing herein shall
prohibit either party from making any disclosure which its legal counsel
reasonably deems necessary to comply with applicable law.
12.15. No Third Party Beneficiary.
--------------------------
The parties agree that they are the sole intended beneficiaries of
this Agreement and that there are no intended third party beneficiaries of this
Agreement.
97
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to
be executed by its respective authorized representatives, as of the date first
above written.
SELLER
SOUTH BRANCH VALLEY NATIONAL BANK
[ SEAL ]
By: /s/ H. Charles Maddy, III
-----------------------------------
H. Charles Maddy, III
President and CEO
BUYER
CITIZENS NATIONAL BANK OF ELKINS
[ SEAL ]
By: /s/ Robert J. Schoonover
-----------------------------------
Robert J. Schoonover
President and CEO
98
<PAGE>
STATE OF WEST VIRGINIA
COUNTY OF HARDY, to-wit:
I, _____________________________, a notary public in and for said
state and county, do hereby certify that H. Charles Maddy, III, whose name is
signed to the above writing as President of South Branch Valley National Bank,
has this day acknowledged the same before me.
Given under my hand this _________day of December, 1999.
My commission expires ________________________________.
_________________________________
Notary Public
STATE OF WEST VIRGINIA
COUNTY OF ____________, to-wit:
I, _____________________________, a notary public in and for said
state and county, do hereby certify that Robert J. Schoonover, whose name is
signed to the above writing as President of Citizens National Bank of Elkins,
has this day acknowledged the same before me.
Given under my hand this _________day of December, 1999.
My commission expires ________________________________.
_________________________________
Notary Public
99
<PAGE>
SOUTH BRANCH VALLEY BANCORP, INC.
DISCLOSURE SCHEDULE
PURCHASE AND ASSUMPTION AGREEMENT
BY AND BETWEEN
SOUTH BRANCH VALLEY NATIONAL BANK
AND
CITIZENS NATIONAL BANK OF ELKINS
This disclosure schedule (this "Disclosure Schedule") is being
furnished by South Branch Valley National Bank ("South Branch") to Citizens
National Bank of Elkins ("Citizens") in connection with the execution and
delivery of that certain Purchase and Assumption Agreement dated as of December
17, 1999 (the "Agreement"), by and between South Branch and Citizens. Unless the
context otherwise requires, all capitalized terms used in this Disclosure
Schedule shall have the respective meanings assigned to them in the Agreement.
No reference to or disclosure of any item or other matter in this
Disclosure Schedule shall be construed as an admission or indication that such
item or other matter is material or that such item or other matter is required
to be referred to or disclosed in this Disclosure Schedule.
This Disclosure Schedule and the information and disclosures contained
in this Disclosure Schedule are intended only to qualify and limit the
representations, warranties and covenants of South Branch contained in the
Agreement and shall not be deemed to expand in any way the scope or effect of
any of such representations, warranties and covenants.
100
<PAGE>
List of Schedules and Exhibits
------------------------------
Schedules:
- ---------
Schedule A -- The Branch
Schedule B -- Fixed Assets
Schedule C -- The Loans
Schedule D -- Operation and Maintenance Contracts
Schedule E -- Real Property
Seller's Disclosure Schedules:
- -----------------------------
Schedule 4.2 -- Actions Pending Against Seller - None
Schedule 4.3 -- Consents and Approvals - None
Schedule 4.5 -- Real Property Title Exceptions - None
Schedule 4.6 -- Fixed Assets Title Exceptions - None
Schedule 4.15(a) -- Environmental Matters - See attached
Schedule 7.6 -- Government Deposits - See attached
Exhibits:
- --------
Exhibit 9.2A -- Form of Bill of Sale
Exhibit 9.2B -- Form of Assignment and Assumption Agreement
101
<PAGE>
Schedule A
Petersburg Branch of South Branch Valley National Bank
102 Virginia Avenue
Petersburg, WV 26847
102
<PAGE>
Schedule B
SOUTH BRANCH VALLEY BANCORP, INC.
SOUTH BRANCH VALLEY NATIONAL BANK, PETERSBURG BRANCH
GRANT COUNTY
102 Virginia Avenue
Petersburg, WV 26847
Owned
Fixed Assets:
Net Book Value (land, building, FF&E) $ 242,179.03
Facilities:
Type: Stand Alone Brick
Night deposit/ATM/Drive-thru/Safe Deposit Y/N/Y/N
See detail attached
Buyer and Seller will mutually agree before Closing as to which of the listed
Fixed Assets will be purchased by Buyer. Buyer and Seller acknowledge that no
computer software is being transferred hereunder.
103
<PAGE>
Schedule B (cont.)
SOUTH BRANCH VALLEY NATIONAL BANK - PETERSBURG BRANCH
FIXED ASSET BOOK VALUES AT NOVEMBER 30, 1999
<TABLE>
<CAPTION>
Acquisition Accumulated
Date Cost Depreciation NBV
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
2 lots Virginia Avenue 11/15/95 $ 35,000.00 $ - $ 35,000.00
Building, Virginia Avenue 11/15/95 200,309.86 20,239.65 180,070.21
Carpeting, building 9/12/96 2,408.74 782.82 1,625.92
Pentium II server 3/10/99 4,081.00 612.15 3,468.85
Novell tape drive 8/25/99 2,122.54 126.35 1,996.19
4 desks 11/15/95 1,015.00 828.91 186.09
Chairs and credenzas 11/15/95 722.00 589.63 132.37
Miscellaneous furniture 11/15/95 453.00 369.95 83.05
Diebold safe 11/15/95 1,598.00 652.51 945.49
Diebold security system 11/15/95 705.00 575.75 129.25
Branch sign 12/20/95 2,200.00 861.66 1,338.34
Internet/Intranetware between loc. 8/11/97 3,452.54 1,611.18 1,841.36
Kitchen appliances 11/15/95 432.00 432.00 -
Pictures 11/15/95 486.00 394.59 91.41
Typewriters and calculators 11/15/95 591.00 591.00 -
3 Sharp 3520 teller machines 11/15/95 3,861.32 3,153.39 707.93
9 teller cabinets 11/15/95 571.00 463.60 107.40
Laserjet 4 plus printer 11/27/95 2,626.84 2,101.47 525.37
4 dr. lateral filing cabinet 2/23/96 2,242.70 841.01 1,401.69
Phone system 2/07/96 2,320.88 1,665.38 655.50
EZ teller machines 9/10/97 15,386.54 6,923.94 8,462.60
EZ teller software 9/10/97 6,200.00 2,789.99 3,410.01
----------- ---------- -----------
$288,785.96 $46,606.93 $242,179.03
=================================================
</TABLE>
104
<PAGE>
Schedule C
SOUTH BRANCH VALLEY BANCORP, INC.
SOUTH BRANCH VALLEY NATIONAL BANK, PETERSBURG BRANCH
LOAN DISTRIBUTION SCHEDULE AS OF NOVEMBER 30, 1999
<TABLE>
<CAPTION>
CURRENT % of WEIGHTED
LOAN TYPE BALANCE TOTAL RATE
- --------- ------- ----- ----
<S> <C> <C> <C>
Installment $4,299,943 68.94% 9.33%
Credit Line 163,514 2.62% 7.45%
Business 251,097 4.03% 8.97%
Variable rate mortgages 1,522,388 24.41% 7.43%
--------------------------------------
TOTAL LOANS $6,236,942 100.00% 8.80%
======================================
</TABLE>
105
<PAGE>
Schedule D
SOUTH BRANCH VALLEY NATIONAL BANK-PETERSBURG BRANCH
PACKARD BUSINESS SYSTEMS (Teller machines) maintenance from 7/15/99 thru
7/15/00; annual cost $1,886.80
GRANT COUNTY OFFICE EMERGENCY SERVICES (alarm monitoring) 1/1/99 thru 12/31/99;
annual cost $300.00
106
<PAGE>
Schedule E
Book 192 Page 647
Last ____________________ DEED
NO. 42006
---------------------
THIS DEED, made and entered into this 14/th/ day of NOVEMBER 1995, by and
between BLUE RIDGE BANK, a West Virginia corporation, Grantor and party of the
first part, and SOUTH BRANCH VALLEY NATIONAL BANK, a national association,
Grantee and party of the second part.
WITNESSETH: That for and in consideration of the sum of Ten Dollars
($10.00), cash in hand paid, receipt of which is hereby acknowledged, and other
good and valuable consideration, receipt of which is also hereby acknowledged,
the party of the first part does hereby grant, bargain, sell and convey unto the
party of the second part, with covenants of general warranty and against all
liens and encumbrances the following described parcel of real estate together
with all rights, privileges, improvements, rights-of-way and appurtenances
thereunto belonging or in anywise appertaining, situate in Milroy District,
Grant County, West Virginia and more particularly described as follows:
All that certain real estate being identified on the Land
Books of said County as "two lots, Virginia Avenue, Service
Station, Map 4, Parcel 118." The Real estate is further
identified by a plat of survey recorded along with and made a
part of corrective deed from Ralph J. Bean, et ux., to General
Telephone Company of the Southeast, by deed dated September 5,
1975, and of record in the Grant County Clerk's Office in Deed
Book 111, at Page 313, said plat being recorded at pages 321 and
328. On said plat, the real estate herein described fronts on
Virginia Avenue 156.13 feet; fronts on Grove Street 94.73 feet;
joins General Telephone Company 152.32 feet; and John Edgar and
Roseannah Glover 100 feet.
AND BEING that same parcel of real estate as was conveyed from Resolution
Trust Corporation, as Receiver of Shenandoah Federal Savings Association, to
Blue Ridge Bank, a West Virginia corporation, by deed dated the 21/st/ day of
June 1995, of record in the Office of the Clerk of the County Commission of
Grant County, West Virginia, in Deed Book 190, at page 625.
107
<PAGE>
Schedule 4.15 (a)
[SEAL]
Office of Environmental Remediation
116 Industrial Drive
Oak Hill, WV 25901
Telephone Number 304-465-1911
Fax Number 304-465-0031
West Virginia Division of Environmental Protection
- --------------------------------------------------------------------------------
Cecil H. Underwood Michael P. Miano
Governor Director
April 5, 1999
City Holding Company
P.O. Box 7520
Cross Lanes, WV 26313
Attn: Matthew B. Call
Re: Review of Request for No Further Action
Blue Ridge Bank 102 Virginia Ave., Petersburg, WV
Leak No. 95-105 / WV.ID.No. 1207265
Dear Mr. Call:
A review of the reports submitted by your company have been reviewed along
with other file information. In addition we have received documentation of the
abandonment of the monitoring wells associated with your site. Based on the
information which you have submitted the Leaking Underground Storage Tank
Section of the Office of Environmental Remediation is requiring "No Further
Action at This Time" for the above referenced site. Should you have any
questions regarding this matter please contact Mr. Michael Sutphin at (304) 465-
1911.
Sincerely,
Michael Sutphin, Geologist
Office of Environmental Remediation
cc: Don Martin (WVDEP)
Charleston file No. 95-105
OFFICE OF ENVIROMENTAL REMEDIATION
TELEPHONE: (304) 465-1911 FAX: (304) 465-0031 TDD: 1-800-422-5700
108
<PAGE>
Schedule 7.6
---------------------------------------------------------------------
---------------------------------------------------------------------
Petersburg Branch Government Deposits
---------------------------------------------------------------------
Name Balance as of 11/30/99
---------------------------------------------------------------------
City of Petersburg $ 15,591.94
---------------------------------------------------------------------
Grant County Board of Education $ 26,792.08
---------------------------------------------------------------------
Woodland Terrace Apartments $223,293.44
---------------------------------------------------------------------
Total $265,677.46
---------------------------------------------------------------------
109
<PAGE>
Exhibit 9.2A
PURCHASE AND ASSUMPTION AGREEMENT
Between
SOUTH BRANCH VALLEY NATIONAL BANK
and
CITIZENS NATIONAL BANK OF ELKINS
BILL OF SALE AND ASSIGNMENT OF LOANS
THIS BILL OF SALE AND ASSIGNMENT OF LOANS is dated this _____ day of
_________________, 1999, by South Branch Valley National Bank, a national
banking association ("Seller").
W I T N E S S E T H:
WHEREAS, Seller and Citizens National Bank of Elkins, a national
banking association, ("Buyer") have entered into a Purchase and Assumption
Agreement dated as of , 1999, (the
"Agreement") which provides for the sale by Seller to Buyer of certain personal
property and loans related to certain of Seller's branch offices (the "Branch"),
all as set forth in the Agreement;
NOW, THEREFORE, Seller, for good and valuable consideration, receipt
of which is hereby acknowledged, does hereby grant, bargain, sell, assign, set
over, convey and transfer to Buyer all of its right, title and interest in and
to the following assets (the "Assets"):
1. All furniture, fixtures and tangible personal property located in the
Branch, except for:
a. any rights to the name "South Branch Valley National Bank" and any
of Seller's corporate logos, trademarks, trade names, signs, paper
stock, forms and other supplies containing any such logos,
trademarks or trade names; and
b. the assets listed on Exhibit 1(b) hereto.
2. All of the Loans maintained, serviced and listed in Seller's general
ledger as loans of the Branch (except for those Loans that Buyer
rejects in accordance with the provisions of Section 2.2 of the
Agreement), a list of such specific loans to be attached hereto on the
date of the Final Closing Statement to be delivered by Seller in
accordance with Section 3.3(b) of the Agreement (the "Loans");
3. All of Seller's Records (as defined in Section 2.4(a) of the
Agreement).
110
<PAGE>
Seller, for itself and its successors and assigns, does hereby
covenant and agree to and with Buyer and its successors and assigns that it (i)
is seized of, and has the right to convey to Buyer, such title to the Assets as
is provided in the Agreement, (ii) will warrant and defend said title to the
Assets in the manner provided in the Agreement, and (iii) shall, from time to
time, at the request of Buyer, execute, acknowledge and deliver to Buyer any and
all further instruments, documents, endorsements, assignments, information,
materials and other papers that may be reasonably required to transfer the
Assets to Buyer, to enable Buyer to bill, collect, service and administer the
Loans and to give full force and effect to the full intent and purposes of this
Bill of Sale.
IN WITNESS WHEREOF, Seller has caused this Bill of Sale to be duly
executed by its duly authorized officers and its corporate seal to be affixed
hereto, all as of the day and year first above written.
_________________________________
By: ___________________________
Its: ___________________________
[Corporate Seal]
ATTEST:
________________________
Secretary
111
<PAGE>
Exhibit 9.2BA
PURCHASE AND ASSUMPTION AGREEMENT
Between
SOUTH BRANCH VALLEY NATIONAL BANK
and
CITIZENS NATIONAL BANK OF ELKINS
ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT is entered into this _____
day of _______________, 1999, by and between South Branch Valley National Bank,
a national banking association ("Seller"), and Citizens National Bank of Elkins,
a national banking association ("Buyer").
W I T N E S S E T H:
WHEREAS, Seller and Buyer have entered into a Purchase and Assumption
Agreement dated as of ______________, 1999 (the "Agreement"), which provides for
the assignment by Seller of all of its rights and interests in and to certain
leases, contracts, deposit accounts and other liabilities related to Seller's
branch offices as more specifically described in the Agreement (the "Branch"),
and the assumption by Buyer of all of Seller's liabilities and obligations
thereunder, all as set forth in the Agreement;
NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, receipt of which is hereby acknowledged by Seller
and Buyer, Seller hereby assigns, transfers and sets over to Buyer all of
Seller's rights and interest to, and Buyer does hereby assume all of Seller's
liabilities and obligations in connection with, the following assets (the
"Assets");
1. All equipment leases for equipment located at the Branch (the
"Equipment Leases") and operation and maintenance contracts relating to the
fixed assets at the Branch;
2. All deposit accounts located at the Branch (the "Deposit
Liabilities");
3. Safe deposit box contracts or leases; and
4. Seller's duties, obligations and responsibilities with respect to
the Retirement Plans (as defined in the Agreement), except for
those Retirement Plans not included in the Deposit Liabilities.
This Assignment and Assumption Agreement shall be binding upon, and
shall inure to the benefit of, Seller, Buyer, and each of their successors and
assigns and shall be subject to the terms and conditions of the Agreement. In
the event of a conflict between any of the terms and provisions hereof and the
Agreement, the Agreement shall be deemed to control.
112
<PAGE>
This Assignment and Assumption Agreement, and the rights and
obligations of the parties hereunder, shall be governed by and construed in
accordance with the laws of the State of West Virginia.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment and
Assumption Agreement to be executed by their duly authorized officers and their
corporate seals to be affixed hereto, all as of the day and year first above
written.
_________________________________
By: ___________________________
Its: ___________________________
[ Corporate Seal]
ATTEST:
________________________
Secretary
_________________________________
By: ___________________________
Its: ___________________________
[ Corporate Seal]
ATTEST:
________________________
Secretary
113
<PAGE>
Exhibit 21
LIST OF SUBSIDIARIES OF CITIZENS FINANCIAL CORP.
Citizens Financial Corp., the registrant herein, certifies that its
sole subsidiary as of December 31, 1999 is Citizens National Bank of Elkins,
Randolph County, West Virginia, a national banking association incorporated in
the state of West Virginia.
114
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
Securities and Exchange Commission
Washington, D. C.
We hereby consent to the inclusion in this Annual Report on Form 10-K of our
report dated January 14, 2000, on our audit of the consolidated financial
statements of Citizens Financial Corp. as of December 31, 1999 and 1998, and for
each of the three years in the period ended December 31, 1999, appearing in Part
II, Item 8 of the 1999 Form 10-K of Citizens Financial Corp.
ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
March 14, 2000
115
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1998
<PERIOD-START> JAN-01-2000 JAN-01-1998
<PERIOD-END> DEC-31-2000 DEC-01-1998
<CASH> 5,699 3,499
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 41,562 35,439
<INVESTMENTS-CARRYING> 0 8,373
<INVESTMENTS-MARKET> 0 8,534
<LOANS> 86,676 86,818
<ALLOWANCE> 1,011 1,110
<TOTAL-ASSETS> 137,297 136,701
<DEPOSITS> 110,232 113,464
<SHORT-TERM> 6,029 4,627
<LIABILITIES-OTHER> 995 948
<LONG-TERM> 4,087 1,013
1,500 1,500
0 0
<COMMON> 0 0
<OTHER-SE> 14,454 15,149
<TOTAL-LIABILITIES-AND-EQUITY> 137,297 136,701
<INTEREST-LOAN> 7,504 7,836
<INTEREST-INVEST> 2,481 2,431
<INTEREST-OTHER> 73 69
<INTEREST-TOTAL> 10,058 10,336
<INTEREST-DEPOSIT> 3,611 3,805
<INTEREST-EXPENSE> 3,963 4,108
<INTEREST-INCOME-NET> 6,095 6,228
<LOAN-LOSSES> 714 120
<SECURITIES-GAINS> 16 1
<EXPENSE-OTHER> 4,491 4,242
<INCOME-PRETAX> 1,591 2,422
<INCOME-PRE-EXTRAORDINARY> 1,591 2,422
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,101 1,600
<EPS-BASIC> 1.67 2.41
<EPS-DILUTED> 1.67 2.41
<YIELD-ACTUAL> 4.81 5.02
<LOANS-NON> 57 53
<LOANS-PAST> 51 21
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 661 1,897
<ALLOWANCE-OPEN> 1,109 1,094
<CHARGE-OFFS> 977 154
<RECOVERIES> 165 49
<ALLOWANCE-CLOSE> 1,011 1,109
<ALLOWANCE-DOMESTIC> 1,011 1,109
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 446 253
</TABLE>
