<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2000
------------------
Commission file number 2-96144
-------
CITIZENS FINANCIAL CORP.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 55-0666598
--------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
213 Third Street, Elkins, West Virginia 26241
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(304)636-4095
-------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
-----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class September 30, 2000
----- ------------------
Common Stock ($2.00 par value) 650,612
This report contains 24 pages.
1
<PAGE>
FORM 10-Q
CITIZENS FINANCIAL CORP.
Quarter Ended September 30, 2000
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
Condensed Consolidated Balance Sheets
September 30, 2000 and December 31, 1999................ 3
Condensed Consolidated Statements of Income
Three Months Ended
September 30, 2000 and September 30, 1999
and Nine Months Ended
September 30, 2000 and September 30, 1999............... 4
Statements of Comprehensive Income
Three Months Ended
September 30, 2000 and September 30, 1999
and Nine Months Ended
September 30, 2000 and September 30, 1999............... 5
Condensed Consolidated Statements of
Changes in Shareholders' Equity
Nine Months Ended
September 30, 2000 and September 30, 1999............... 6
Condensed Consolidated Statements of
Cash Flows
Nine Months Ended
September 30, 2000 and September 30, 1999............... 7
Notes to Condensed Consolidated
Financial Statements.................................... 8 - 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations........................................... 13 - 19
Part II. Other Information and Index to Exhibits.................. 20
Signatures............................................... 21
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
CITIZENS FINANCIAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ -----------
(Unaudited) *
<S> <C> <C>
ASSETS
------
Cash and due from banks $ 3,986 $ 5,699
Federal funds sold 2,450 -
Securities available for sale (Note 2) 43,044 41,562
Loans, less allowance for loan losses of
$1,139 and $1,011, respectively (Notes 3 and 4) 95,386 85,665
Premises and equipment 1,736 1,391
Accrued interest receivable 1,212 1,035
Other assets 2,566 1,945
-------- --------
Total Assets $150,380 $137,297
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest bearing $ 16,136 $ 12,945
Interest bearing 104,860 97,287
-------- --------
Total Deposits 120,996 110,232
Short-term borrowings 10,371 6,029
Long-term borrowings 887 4,087
Other liabilities 1,144 995
-------- --------
Total liabilities 133,398 121,343
-------- --------
Commitments and contingencies (Note 5)
SHAREHOLDERS' EQUITY
--------------------
Common Stock, $2.00 par value, authorized
2,250,000 shares issued 750,000 shares 1,500 1,500
Additional paid in capital 2,100 2,100
Retained earnings 15,720 14,723
Accumulated other comprehensive income (314) (525)
Treasury stock at cost, 99,388 and 94,168
shares, respectively (2,024) (1,844)
-------- --------
Total shareholders' equity 16,982 15,954
-------- --------
Total Liabilities and Shareholders' Equity $150,380 $ 137,297
======== ========
</TABLE>
*From audited financial statements.
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CITIZENS FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
---------------
Interest and fees on loans $ 2,188 $ 1,877 $ 6,143 $ 5,612
Interest and dividends on
securities:
Taxable 577 513 1,704 1,587
Tax-exempt 85 87 261 278
Interest on federal funds sold 30 36 50 58
------ ------ ------ -------
Total interest income 2,880 2,513 8,158 7,535
------ ------ ------ -------
INTEREST EXPENSE
----------------
Interest on deposits 1,018 911 2,791 2,720
Interest on short-term borrowings 136 66 368 183
Interest on long-term borrowings 12 14 38 42
------ ------ ------ -------
Total interest expense 1,166 991 3,197 2,945
------ ------ ------ -------
Net interest income 1,714 1,522 4,961 4,590
Provision for loan losses 83 554 173 639
------ ------ ------ -------
Net interest income after
provision for loan losses 1,631 968 4,788 3,951
------ ------ ------ -------
NONINTEREST INCOME
------------------
Trust department income 63 28 142 86
Service fees 115 104 304 227
Insurance commissions 3 6 13 17
Securities (losses)/gains, net (4) 3 (7) 16
Other 54 29 202 98
------ ------ ------ -------
Total noninterest income 231 170 654 444
------ ------ ------ -------
NONINTEREST EXPENSE
-------------------
Salaries and employee benefits 570 617 1,752 1,787
Net occupancy expense 54 51 147 136
Equipment rentals, depreciation
and maintenance 79 85 232 242
Data processing 83 78 259 289
Advertising 21 24 51 66
Other 314 290 969 838
------ ------ ------ -------
Total noninterest expense 1,121 1,145 3,410 3,358
------ ------ ------ -------
Income/(loss) before income taxes 741 (7) 2,032 1,037
Income tax expense 254 5 643 334
------ ------ ------ -------
Net income/(loss) $ 487 $ (12) $ 1,389 $ 703
====== ====== ====== =======
Basic earnings/(loss) per common
share (Note 6) $ .75 $ (.02) $ 2.13 $ 1.07
======= ======= ======= =======
Weighted average shares outstanding 651,574 657,239 652,459 659,947
Dividends per common share $ .20 $ .15 $ .60 $ .45
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
=
<PAGE>
CITIZENS FINANCIAL CORP.
STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- ---------------------
2000 1999 2000 1999
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income/(loss) $ 487 $ (12) $1,389 $ 703
Other comprehensive income:
Gross unrealized gains/(losses)
arising during period 412 (106) 313 (891)
Adjustment for income tax
(expense)/benefit (140) 36 (107) 303
Less: Reclassification adjustment
for (gains)/losses included in
net income 4 (3) 7 (16)
Adjustment for income tax
expense/(benefit) (2) 1 (2) 5
Other comprehensive income/(loss),
------ ----- ------ ------
net of tax 274 (72) 211 (599)
------ ----- ------ ------
Comprehensive income/(loss) $ 761 $ (84) $1,600 $ 104
====== ===== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CITIZENS FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of dollars)
Nine Months Ended September 30, 2000 and 1999
---------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Accumulated Total
Additional Other Share-
Common Stock Paid In Retained Comprehensive Treasury holders'
Shares Amount Capital Earnings Income Stock Equity
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 750,000 $1,500 $2,100 $14,345 $ 287 $(1,583) $16,649
Net income 703 703
Net change in unrealized
gain/loss on securities (595) (595)
Purchase of 5,735 shares
of treasury stock (260) (260)
Cash dividends declared
($.45 per share) (297) (297)
---------------------------------------------------------------------------------
Balance September 30, 1999 750,000 $1,500 $2,100 $14,751 $(308) $(1,843) $16,200
======= ====== ====== ======= ===== ======= =======
Balance, January 1, 2000 750,000 $1,500 $2,100 $14,723 $(525) $(1,844) $15,954
Net income 1,389 1,389
Net change in unrealized
gain/loss on securities 211 211
Purchase of 5,220 shares
of treasury stock (180) (180)
Cash dividends declared
($.60 per share) ( 392) (392)
---------------------------------------------------------------------------------
Balance September 30, 2000 750,000 $1,500 $2,100 $15,720 $(314) $(2,024) $16,982
======= ====== ====== ======= ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
CITIZENS FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
2000 1999
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 1,389 $ 703
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for loan losses 173 639
Depreciation and amortization 159 149
Amortization and accretion on securities 0 132
Loss/(Gain) on sales and calls of securities 7 (16)
(Increase)/Decrease in accrued interest receivable (177) 212
Decrease/(increase) in other assets 139 (658)
Increase in other liabilities 36 258
-------- -------
Cash provided by operating activities 1,726 1,419
-------- -------
Cash flows from investing activities:
Proceeds from principal payments received
on securities available for sale 197 296
Proceeds from maturities and calls of
securities available for sale 4,840 6,970
Proceeds from maturities and calls of
securities held to maturity 0 1,189
Purchases of securities available for sale (9,694) (9,101)
Proceeds from sale of securities available for sale 3,492 3,542
Purchases of premises and equipment (500) (131)
Increase in loans (10,658) (1,436)
Proceeds from sale of loans 0 692
-------- -------
Cash (used)/provided by investing activities (12,323) 2,021
-------- -------
Cash flows from financing activities:
Cash dividends paid (392) (297)
Acquisition of treasury stock (180) (260)
Increase in short-term borrowing 4,342 2,373
Decrease in long-term borrowing (3,200) (52)
Increase/(Decrease) in time deposits 4,634 (879)
Increase in other deposits 6,130 319
-------- -------
Cash provided by financing activities 11,334 1,204
-------- -------
Net increase in cash and cash equivalents 737 4,644
Cash and cash equivalents at beginning of period 5,699 3,499
-------- -------
Cash and cash equivalents at end of period $ 6,436 $ 8,143
======== =======
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 3,175 $ 2,973
Income Taxes 649 408
Supplemental Schedule of noncash investing and
financing activities
Acquisition of other real estate owned and
other repossessed assets $ 764 $ 1,091
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
CITIZENS FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
---------------------
The accounting and reporting policies of Citizens Financial Corp. and
Subsidiaries ("Citizens" or "the Company") conform to generally accepted
accounting principles and to general policies within the financial services
industry. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
The consolidated statements include the accounts of Citizens Financial
Corp. and its wholly-owned subsidiaries Citizens National Bank (the "Bank") and
Citizens Financial Services, LLC. All significant intercompany balances and
transactions have been eliminated. The information contained in the financial
statements is unaudited except where indicated. In the opinion of management,
all adjustments for a fair presentation of the results of the interim periods
have been made. All such adjustments were of a normal, recurring nature. The
results of operations for the nine months ended September 30, 2000 are not
necessarily indicative of the results to be expected for the full year. The
financial statements and notes included herein should be read in conjunction
with those included in Citizens' 1999 Annual Report to Shareholders and Form 10-
K.
Certain amounts in the condensed consolidated financial statements for 1999
as previously presented, have been reclassified to conform to current year
classifications.
8
<PAGE>
NOTE 2 - SECURITIES
----------
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at September 30, 2000 and December 31, 1999 are summarized
as follows (in thousands):
September 30, 2000
----------------------------------------------------
Carrying
Value
(Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value)
------------------------------------------------------------------------------
Available for sale:
U.S. Treasury securities........ $ 0 $ 0 $ 0 $ 0
U.S. Government agencies
and corporations.............. 20,223 29 230 20,022
Mortgage backed securities-
U.S. Government agencies
and corporations.............. 1,243 0 47 1,196
Corporate debt securities....... 14,493 48 259 14,282
State and political
subdivisions.................. 6,824 23 35 6,812
Federal Reserve Bank stock...... 108 0 0 108
Federal Home Loan Bank stock.... 624 0 0 624
------- ------- ------ -------
Total securities available
for sale.................... $43,515 $ 100 $ 571 $43,044
======= ======= ====== =======
December 31, 1999*
----------------------------------------------------
Carrying
Value
(Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value)
--------------------------------------------------------------------------------
Available for sale:
U.S. Treasury securities............ $ 501 $ 1 $ 0 $ 502
U.S. Government agencies
and corporations.................. 18,821 0 368 18,453
Mortgage-backed securities -
U.S. Government
agencies and corporations......... 1,441 0 63 1,378
Corporate debt securities........... 13,678 1 355 13,324
State and political subdivisions.... 7,184 38 49 7,173
Federal Reserve Bank stock.......... 108 0 0 108
Federal Home Loan Bank stock........ 624 0 0 624
------- ------- ------- -------
Total securities available for
sale.............................. $42,357 $ 40 $ 835 $41,562
======= ======= ======= =======
*From audited financial statements.
9
<PAGE>
The maturities, amortized cost and estimated fair values of the Bank's
securities at September 30, 2000 are summarized as follows (in thousands):
Available for sale
------------------
Amortized Estimated
Cost Fair Value
--------------- ------------
Due within 1 year $12,871 $12,813
Due after 1 but within 5 years 28,825 28,411
Due after 5 but within 10 years 1,087 1,088
Due after 10 years - -
Equity securities 732 732
------- -------
$43,515 $43,044
======= =======
Mortgage backed and other securities not due at a single maturity date have
been allocated in the above maturity categories based on their anticipated
average lives to maturity. The Company's equity securities are required to be
held for membership in the Federal Reserve and Federal Home Loan Bank.
The proceeds from sales, calls and maturities of securities, including
principal payments received on mortgage backed securities, and the related gross
gains and losses realized for the nine month periods ended September 30, 2000
and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Proceeds From Gross Realized
-------------------------------- -----------------
Calls and Principal
Sales Maturities Payments Gains Losses
-------------------------------- -----------------
<S> <C> <C> <C> <C> <C>
September 30, 2000:
Securities available for sale $ 3,492 $ 4,840 $ 197 $ 0 $ 7
------- ------- ------- ------ ------
$ 3,492 $ 4,840 $ 197 $ 0 $ 7
======= ======= ======= ====== ======
September 30, 1999:
Securities held to maturity $ 0 $ 1,189 $ 0 $ 0 $ 0
Securities available for sale 3,542 6,970 296 16 0
------- ------- -------- ------ -------
$ 3,542 $ 8,159 $ 296 $ 16 $ 0
======= ======= ======== ====== =======
</TABLE>
At September 30, 2000 and December 31, 1999 securities carried at
$18,217,000 and $17,574,000, respectively, with estimated fair values of
$18,043,000 and $17,079,000 respectively, were pledged to secure public
deposits, securities sold under agreements to repurchase, and for other purposes
required or permitted by law.
At September 30, 2000, the company has a concentration within its corporate
debt securities classification which include obligations of financial services
industry companies having an approximate amortized cost of $3,732,000 and an
estimated fair value of $3,678,000. There were no concentrations with any one
issuer.
10
<PAGE>
NOTE 3 - LOANS
-----
Total loans are summarized as follows (in thousands):
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------- ------------------
(Unaudited) *
<S> <C> <C>
Commercial, financial and agricultural $13,647 $14,035
Real estate - construction 1,654 1,369
Real estate - mortgage 66,838 61,243
Installment loans to individuals 13,933 10,147
Other 553 18
------- -------
Total loans 96,625 86,812
Net deferred loan origination (fees) costs (59) (106)
Less unearned income (41) (30)
------- -------
Total loans net of unearned income and
net deferred loan origination
(fees) costs 96,525 86,676
Less allowance for loan losses (1,139) (1,011)
------- -------
Loans, net $95,386 $85,665
======= =======
</TABLE>
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
-------------------------
Analyses of the allowance for loan losses are presented below (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
------------------ -----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Balance at beginning of period $1,070 $ 875 $1,011 $1,109
Loans charged off:
Commercial and industrial 0 442 0 760
Real estate - mortgage 3 1 37 18
Consumer and other 19 40 51 58
Credit card 0 0 0 24
------ ----- ------ ------
Total charge-offs 22 483 88 860
------ ----- ------ ------
Recoveries:
Commercial and industrial 1 6 23 7
Real estate - mortgage 1 0 2 43
Consumer and other 6 4 18 12
Credit card 0 1 0 7
------ ----- ------ ------
Total recoveries 8 11 43 69
------ ----- ------ ------
Net losses 14 472 45 791
Provision for loan losses 83 554 173 639
------ ----- ------ ------
Balance at end of period $1,139 $ 957 $1,139 $ 957
====== ===== ====== ======
</TABLE>
*From audited financial statements.
11
<PAGE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is not aware of any commitments or contingencies which may
reasonably be expected to have a material impact on operating results, liquidity
or capital resources. Known commitments and contingencies include the
maintenance of reserve balances with the Federal Reserve, various legal actions
arising in the normal course of business and commitments to extend credit.
NOTE 6 - EARNINGS PER SHARE
------------------
Earnings per share is based on the weighted average number of shares
outstanding during the period. For the nine month periods ended September 30,
2000 and 1999 the weighted average number of shares outstanding were 652,459 and
659,947, respectively, while 651,574 shares were outstanding during the three
month period ended September 30, 2000 and 657,239 were outstanding for the three
months ended September 30, 1999.
NOTE 7 - ADDITIONAL BRANCH FACILITY
--------------------------
On September 5, 2000, Citizens National Bank of Elkins, a wholly-owned
subsidiary of the registrant, received permission from the Office of the
Comptroller for the Company to establish a branch facility in Slatyfork, West
Virginia. The branch will offer a full line of loan and deposit services, an
ATM, two drive-in lanes and safe deposit boxes. The total cost of the facility,
including land, construction costs and banking equipment, is expected to
approximate $794,000. The facility is expected to be open for business in
November 2000.
NOTE 8 - INSURANCE OPERATIONS
--------------------
During the third quarter of 2000 Citizens Financial Corp. formed a
subsidiary known as Citizens Financial Services, LLC for the purpose of
investing in ProServ, LLC, an insurance agency operating in the State of West
Virginia selling property and casualty insurance. Along with other investors,
Citizens Financial Services will share in the profits of ProServ. As of
September 30, 2000, Citizens Financial Services has neither earned any income
nor incurred any expenses.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis presents the significant changes in
financial condition and the results of operations of Citizens Financial Corp.
and Subsidiaries for the periods indicated. This discussion and analysis should
be read in conjunction with the Company's 1999 Annual Report to Shareholders and
Form 10-K. Since the primary business activities of Citizens Financial Corp. are
conducted through the Bank, this discussion focuses primarily on the financial
condition and operations of the Bank. 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 rates 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 Company was $487,000 for the three months ended
September 30, 2000 as compared to a net loss of $12,000 for the comparable
period in 1999. For the nine months ended September 30, 2000 and 1999, net
income was $1,389,000 and $703,000, respectively. The year to date earnings
resulted in an annualized return on average assets of 1.31% and 0.68%, for 2000
and 1999, respectively. The annualized return on average equity for the nine
months ended September 30, 2000 and 1999, were 11.37% and 5.62%, respectively.
Earnings per share increased to $2.13 from $1.07 for the nine months ended
September 30, 2000 and 1999, respectively.
The improved results for the nine months ended September 30, 2000 are
primarily due to two factors. First, the Company incurred unusually high charge
offs during the first nine months of 1999. Additionally, the Company acquired
an additional branch facility in Petersburg, WV on May 27, 2000. This
acquisition has been accounted for as a purchase and earnings from the branch
have been included prospectively in the Company's results from the date of
purchase.
Additional details concerning the Company's results of operation for the
third quarter of 2000 and for the nine months ended September 30, 2000, are
addressed in the following sections.
NET INTEREST INCOME
-------------------
Net interest income represents the primary component of Citizens' earnings. It
is the difference between interest and fee income related to earning assets and
interest expense incurred to carry interest bearing liabilities. Net interest
income is impacted by changes in the volume and mix of interest earning assets
and interest bearing liabilities, as well as by changing interest rates. In
order to manage these changes, their impact on net interest income and the risks
associated with them, the Company utilizes an ongoing asset/liability management
program. This program includes analysis of the Company's gap, earnings
sensitivity to rate changes, and sources and uses of funds. A discussion of net
interest income and the factors impacting it is presented below.
Net interest income for the quarter increased $192,000 to $1,714,000 for
several reasons. Interest income increased $367,000 as the loan portfolio and
the taxable security portfolio benefited from both higher yields and increases
in volume. The increases in yield totaled 52 basis points and 64 basis points,
respectively, while average volumes rose by approximately $9.3 million in the
case of loans and $2.8 million in taxable securities. The majority of the
increase in loan volume is due to the acquisition of the Petersburg, West
Virginia branch in May of the current year. As a result of these changes the
Company's yield on earning assets for the quarter increased 46 basis points from
7.76% to 8.22%.
13
<PAGE>
Interest expense also increased during the quarter but by only $175,000.
Higher volumes of interest bearing liabilities, partly due to the Petersburg
acquisition and partly due to an increase in short-term repurchase agreements,
are primarily responsible for the increase in expense. Higher rates on time
deposits, repurchase agreements, and sweep accounts utilized by some commercial
customers were also experienced causing the Company's cost of interest bearing
liabilities to increase 37 basis points to 4.05%. Even at this level the
Company's cost of funds is well below most other banks and remains a key
financial strength. As a result the Company's net interest margin for the third
quarter of 4.95% is also well above most others; it is also 20 basis points
higher than in the same quarter of 1999.
Similar results are found on a year-to-date basis with net interest income
improving $371,000, or 8.1%, to $4,961,000. Higher loan and investment volumes,
coupled with improved yields, caused interest income to increase $623,000 and
the yield on earning assets to improve 28 basis points to 8.11%. Meanwhile the
Company's cost of interest bearing liabilities increased just 13 basis points to
3.86%. For the full nine month period the Company's tax-equivalent net interest
margin of 4.99% represents a 16 basis point improvement over the same period of
1999.
Whether the Company can maintain this favorable net interest margin in the
future may depend upon several factors including the ability to increase the
funding base at comparable rates. Competitive pressures, expansion into new
markets, and the anticipation of future loan levels may make this difficult.
Pricing considerations involving savings, money market and interest bearing
checking accounts will also play a major role in determining the Company's net
interest margin.
NONINTEREST INCOME
------------------
Noninterest income includes all revenues which are not included in interest
and fee income relating to earning assets. The Bank has made significant
improvements in this area over the past year.
For the third quarter, total noninterest income of $231,000 is $61,000, or
approximately 36%, greater than in the third quarter of 1999. The largest
factor in this improvement is a $35,000 increase in trust revenues reflecting
the settlement of several estates. Other noninterest income increased $25,000
due to improvements in brokerage fees, the sale of collectors' coins, and fees
received for originating secondary market mortgages for another institution.
Fees on deposit accounts, such as overdraft and minimum balance fees, also
increased partly due to the addition of the Petersburg facility.
On a year-to-date basis, noninterest income of $654,000 is up $210,000 from
$444,000 in the first three quarters of 1999. Once again trust revenue is up
substantially from $86,000 to $142,000. Other noninterest income increased by
$104,000 to $202,000 due mostly to an increase in brokerage fees of $28,000;
$35,000 from the sale of promotional coins; and $30,000 received when the
insurance carrier used for one of the Bank's employee benefit plans converted
from a mutual company to a stock company. Service fees increased approximately
$77,000 largely as a result of higher overdraft fees.
While all of these areas increased, total noninterest income was negatively
impacted by the sale of investment securities. During the first nine months of
2000 several securities were sold at a loss of approximately $7,000 in order to
reinvest in higher yielding instruments. This compares with 1999 when, as part
of its preparation for Y2K, the Bank sold securities at a gain of approximately
$16,000. Because such sales are not common this impact should be considered when
analyzing the data presented. All of the losses recorded in 2000 will be more
than offset by the effect of higher yields prior to year-end.
14
<PAGE>
NONINTEREST EXPENSE
-------------------
Noninterest expense includes all items of expense other than interest
expense, the provision for loan losses and income taxes. Total noninterest
expense for the quarter ended September 30, 2000 of $1,121,000 is $24,000 less
than in the third quarter of 1999.
Salaries and employee benefits, which is the largest component of
noninterest expense, decreased approximately 7.6%, or $47,000, as an increase in
the Company's pension benefit and the deferral of certain direct labor costs
under FASB 91 more than offset increases in salaries and group insurance costs
and the addition of personnel in Petersburg. Other expenses for the quarter,
including net occupancy expense, equipment costs, data processing and
advertising, exhibited only minor changes. Only other noninterest expense,
which totaled $314,000 in the quarter, up $24,000, showed a significant
increase. This is due to normal operating needs such as postage and stationery,
and the impact of the Petersburg facility.
For the year-to-date period total noninterest expense of $3,410,000 is
$52,000 more than in the same period of 1999. The majority of this increase is
in the category of other noninterest expense which increased $131,000 to
$969,000. Once again normal operating activity and the additional branch
facility have played a role in this as postage, stationery, supplies and
telephone costs have increased a combined $55,000. The cost of acquiring,
maintaining and selling foreclosed properties have also risen by $52,000 while
improperly closing a savings account resulted in a loss of approximately
$20,000, some of which may be recoverable.
Because the Bank is constructing a new branch facility noninterest expense
is expected to increase in future periods.
INCOME TAXES
------------
The Company's provision for income taxes during the third quarters of 2000
and 1999 were $254,000 and $5,000 respectively. The increase is attributable to
the increase in income before taxes of $748,000. Included in these figures are
both federal and state income taxes. For the year-to-date periods income tax
expense was $643,000 and $334,000, respectively. These figures represent
effective tax rates of 31.6% in 2000 and 32.2% in 1999. The Company was not
subject to the federal alternative minimum tax during any of the periods covered
by this report.
FINANCIAL CONDITION
-------------------
Total assets of $150,380,000 at September 30, 2000 were $13,083,000 in
excess of their year-end 1999 total of $137,297,000. Included in the Company's
balance sheet at the reporting date are approximately $6,291,000 of loans and
$7,361,000 of deposits related to its Petersburg branch which was acquired in
May 2000. Average assets for the first three quarters of 2000 were $142,294,000
compared to $136,986,000 for the first nine months of 1999. A detailed
discussion of the Bank's financial condition follows.
LOAN PORTFOLIO
--------------
Gross loans of $96,625,000 at September 30, 2000 are $9,813,000, or 11.3%,
more than at year-end 1999. Included in the September total are $6,291,000 in
loans form the Company's new Petersburg facility. Absent this facility loans
have increased $2,523,000, or 2.9%.
Loan demand throughout the first three quarters of 2000 has been good,
particularly mortgage lending. The mortgage portfolio has increased $5,595,000
since year-end to $66,838,000. Although nearly one-half of this increase is due
to the Petersburg acquisition, demand for residential mortgages continues to be
strong reaching $47,906,000 at September 30, 2000. In addition, loans secured
by commercial mortgages continue to grow reflecting the growth in area business
15
<PAGE>
activity in conjunction with and related to local highway improvements. Such
loans total $19,256,000 at September 30, 2000 up from $17,833,000 at year-end
1999. Other forms of commercial lending have remained relatively stable totaling
$13,647,000 at the reporting date and $14,035,000 at December 31, 1999.
Consumer lending, which has decreased in recent years, has leveled off in
the current year. Total consumer loans at September 30, 2000 of $13,933,000 is
$3,786,000 more than at December 31, 1999 with $3,186,000 of the increase coming
from the branch acquisition. While this does indicate growth of $600,000 aside
form the branch acquisition management does not expect significant growth in
this portfolio in the foreseeable future. However, loan growth is expected to
occur as a result of acquiring the Petersburg facility and from the upcoming
branch opening in Slatyfork; most of this growth is expected to be mortgage
related.
The Bank is also a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
letters of credit. Such instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. At September 30, 2000 commitments to extend credit,
including unused lines of credit, totaled $19,834,000 while letters of credit
totaled $421,000.
Company policy requires those loans which are past due 90 days or more be
placed on nonaccrual status unless they are both well secured and in the process
of collection. The following table provides a summary of past due and
nonperforming assets.
Summary of Past Due Loans and Nonperforming Assets
--------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
September 30 December 31
---------------------- -----------
2000 1999 1999
(Unaudited)
<S> <C> <C> <C>
Loans past due 90 or more days
still accruing interest $200 $ 64 $ 51
==== ==== ====
Nonperforming assets:
Nonaccruing loans $ 43 $ 49 $ 57
Other Real Estate Owned 904 149 -
---- ---- ----
$947 $198 % 57
==== ==== ====
</TABLE>
* From the Company's Form 10-K filing dated December 31, 1999
Included in other real estate owned is $281,000 in properties which have
been sold and which have been financed by the Bank. Known as covered
transactions, these loans will be removed from the other real estate owned
classification when the borrowers achieve a 10% equity position. Subsequent to
September 30, 2000, an additional $141,000 has likewise been sold.
Management continually evaluates loan quality and reviews the adequacy of
the allowance for loan losses quarterly. During the first nine months of the
year net charge offs totaled $45,000 while additions to the allowance in the
form of provisions for loan losses were $173,000. With a September 30, 2000
balance of $1,139,000 the allowance for loan losses is 1.18% of gross loans.
Management believes the allowance is adequate given the level of risk contained
in the loan portfolio and is not aware of any trends or uncertainties which
would cause the level of such risk to become significantly greater.
16
<PAGE>
SECURITIES PORTFOLIO AND FEDERAL FUNDS SOLD
-------------------------------------------
The Bank's security portfolio consists solely of available for sale
securities; neither held to maturity or trading portfolios are expected to be
established at any time in the foreseeable future.
By utilizing the available for sale portfolio management believes it
achieves the flexibility necessary to properly manage its balance sheet
structure and address asset/liability issues. Because the portfolio is largely
composed of fixed rate debt instruments its value may decrease during periods of
rising interest rates, such as were observed over the past year. Such reductions
in value result in unrealized losses which have no impact on income. At
September 30, 2000, the Company's unrealized loss totaled $471,000, or 1.1% of
the portfolio's amortized cost. Changes in the value of the portfolio due to
changing interest rates are limited by its short term nature. The portfolio
currently has a weighted average life of 2.35 years.
In addition to being characterized by fixed rate debt instruments, the
security portfolio is also heavily invested in instruments with known cash flow
patterns, specifically bullet U.S. Agency and corporate bonds. These
instruments, which comprise 46.5% and 33.2% of the total portfolio,
respectively, are managed using a laddered approach to provide a constant
liquidity stream. Management believes this known, and continuing, cash flow
pattern presents less interest rate risk than other types of securities such as
callable bonds and mortgage backed securities. As a result investments in these
types of instruments are generally limited.
The need for a large position in U.S. Agency securities is due to the
Bank's need to utilize those bonds for pledging purposes and for repurchase
agreements. At September 30, 2000, bonds with a fair value of $18,043,000 were
utilized for such purposes. These needs, together with strong loan demand, act
to restrict the available investment security alternatives. Investment grade
corporate bonds are typically purchased for their yield. The remainder of the
portfolio consists primarily of municipal securities.
The laddered maturity approach noted earlier generally allows the Bank to
minimize its involvement in the overnight funds market. Nonetheless, at any
given time the Bank may be required to sell, or buy, funds on an overnight
basis. At September 30, 2000 overnight funds sold totaled $2,450,000; there
were no overnight borrowings at September 30, 2000. Due to the level of loan
demand and needs created by the construction and upcoming opening of its new
branch, the Bank may temporarily experience higher than usual involvement in the
overnight funds market as a means to finance these needs.
DEPOSITS AND OTHER FUNDING SOURCES
----------------------------------
Total deposits at September 30, 2000 of $120,996,000 are $10,764,000, or
9.8%, more than at December 31, 1999. Included in the September total are
$7,361,000 in deposits from the Company's newest branch in Petersburg, West
Virginia. Intense competition for deposits among banks and nonbanks, as well as
from new delivery channels such as the internet, make deposit acquisition
particularly difficult in the Company's slow growing markets.
Noninterest bearing deposits of $16,136,000 represent 13.3% of total
deposits at the report date. This total is $3,191,000 more than at December 31,
1999 of which $994,000 may be attributed to the new branch facility. Total
interest bearing deposits of $104,860,000 are up $7,573,000 from year-end
including $6,367,000 from the new facility.
Among the various interest bearing deposits, certificates of deposit have
shown the greatest growth of $4,266,000, with $3.8 million attributable to the
branch acquisition. In order to meet competition for time deposits of less than
$100,000 the Bank has offered 13 and 25 month certificates of deposit at rates
17
<PAGE>
which exceed those on its other time deposits. At September 30, 2000 these
certificates carried balances of $1.5 million and $3.6 million, respectively.
Growth has also been evident in certificates of deposit $100,000 or more which
total $11.1 million, up $2.5 million from year-end.
A number of large corporate customers maintain savings sweep accounts with
the Bank. The balance in these accounts is largely a function of the customers
cash flow and is subject to being cyclical in nature. At September 30, 2000 the
total value of these accounts was $9.4 million, well over the nine month average
of $7.1 million.
Absent the branch acquisition, the specific certificates of deposit noted,
and the corporate sweep accounts, deposit growth has not been significant.
However, the Bank has received funding from several local entities in the form
of repurchase agreements. These instruments total $10,371,000 at quarter-end
which compares to a year-to-date average of $8,666,000 and $7,157,000 at year-
end 1999.
CAPITAL RESOURCES
-----------------
Total shareholders' equity at September 30, 2000 of $16,982,000 is
$1,028,000 more than at year-end 1999 reflecting the Company's strong earnings.
During the first nine months of 2000 the Company purchased 5,220 shares of its
stock at a cost of $180,000 and also paid $392,000, or $.60 per share, in
dividends. As shown in the table below the Company continues to exceed all
regulatory capital requirements:
Minimum Capital Standard Ratios
--------------------------------------------------------------------------------
Citizens Regulatory
Financial Corp. Requirements
--------------------------------------------------------------------------------
Total capital to risk weighted assets 18.01% 8.0%
Tier I capital to risk weighted assets 16.91% 4.0%
Tier I capital to adjusted total assets 11.71% 3.0%
Neither the Company's purchase of the Petersburg facility, or the expected
opening of the Slatyfork facility, have had, or is expected to have, a negative
impact on capital and management is not aware of any other conditions which may
negatively impact capital.
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. As noted earlier, Citizens'
liquidity has been reduced in recent months due to strong loan demand and the
high degree of competition for deposits. Liquidity is also restrained by the
need to pledge a significant amount of the security portfolio to secure the
deposits of local government units and for repurchase agreements as well as by
the demands presented by the construction of a new branch facility.
Management has prepared to meet these liquidity needs by arranging
borrowing agreements with several correspondent banks including the Federal Home
Loan Bank of Pittsburgh. In the event it becomes necessary, these agreements, or
alternative deposit pricing and gathering strategies, will be employed to meet
liquidity needs.
The objective of the Company's interest rate sensitivity management
program, also known as asset/liability management, is to maximize net interest
income while minimizing the risk of adverse effects from changing interest
rates. This is done by controlling the mix and maturities of interest sensitive
assets and liabilities. The Bank has established an asset/liability committee
for this purpose.
One common interest rate risk measure is the gap, or difference between
rate sensitive assets and rate
18
<PAGE>
sensitive liabilities. As of September 30, 2000, the Company's cumulative one
year gap to total assets ratio was a negative 7.79%. This indicates more
liabilities may reprice over the next year than assets. In a rising interest
rate environment this could cause net interest income to fall. However, because
of certain assumptions in gap theory the Bank also performs a number of other
tests to control its interest rate risk. In such tests, changes in net interest
income are forecast under various interest rate scenarios. Instantaneous shifts
in interest rates of up to 200 basis points are regularly tested. These tests
indicate that the impact of changing interest rates on net interest income is
within the limits set by management.
IMPACT ON INFLATION
-------------------
The consolidated financial statements and related data included in this
report were prepared in accordance with generally accepted accounting
principles, which require the Company's financial position and results of
operations to be measured in terms of historical dollars, except for the
available for sale securities portfolio. Consequently, the relative value of
money generally is not considered. Nearly all of the Company's assets and
liabilities are monetary in nature and, as a result, interest rates and
competition in the market area tend to have a more significant impact on the
Company's performance than the effect of inflation.
19
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings :
-----------------
As of September 30, 2000 Citizens Financial Corp. was not involved in
any material legal proceedings. The Bank is currently involved in various
legal proceedings which occur in the normal course of business. After
consultation with legal counsel, management believes that all such
litigation will be resolved without materially effecting the Company's
financial position or results of operations. In addition, there are no
material proceedings known to be threatened or contemplated against the
Company or the Bank.
Item 2. Changes in Securities: None.
---------------------
Item 3. Defaults upon Senior Securities: None.
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders: None.
---------------------------------------------------
Item 5. Other Information: None.
-----------------
Item 6. Exhibits and Reports on Form 8-K:
--------------------------------
(a) Exhibits: None.
(b) Reports on Form 8-K: On September 5, 2000 the Company filed a
Current Report on Form 8-K reporting its subsidiary bank had received
approval for the construction of a new branch facility as referred to in
Note 7 of the accompanying financial statements.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIZENS FINANCIAL CORP.
Date: 10/31/00 /s/ Robert J. Schoonover
--------------------- --------------------------------
Robert J. Schoonover
President
Chief Executive Officer
Date: 10/31/00 /s/ Thomas K. Derbyshire
---------------------- -------------------------------
Thomas K. Derbyshire
Treasurer
Principal Financial Officer
21
