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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended JUNE 30, 2002
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Commission file number 2-96144
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CITIZENS FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Delaware 55-0666598
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
213 Third Street, Elkins, West Virginia 26241
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(Address of principal executive offices) (Zip Code)
(304) 636-4095
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No_____
-----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class June 30, 2002
----- -------------
Common Stock ($2.00 par value) 647,873
This report contains 22 pages.
1
FORM 10-Q
CITIZENS FINANCIAL CORP.
Quarter Ended June 30, 2002
INDEX
Page No.
--------
Part I. Financial Information
Condensed Consolidated Balance Sheets
June 30, 2002 and December 31, 2001 ..................... 3
Condensed Consolidated Statements of Income
Three Months Ended
June 30, 2002 and June 30, 2001
and Six Months Ended
June 30, 2002 and June 30, 2001 ......................... 4
Statements of Comprehensive Income
Three Months Ended
June 30, 2002 and June 30, 2001
and Six Months Ended
June 30, 2002 and June 30, 2001 ......................... 5
Condensed Consolidated Statements of
Changes in Shareholders' Equity
Six Months Ended
June 30, 2002 and June 30, 2001 ......................... 6
Condensed Consolidated Statements of
Cash Flows
Six Months Ended
June 30, 2002 and June 30, 2001 ......................... 7
Notes to Condensed Consolidated
Financial Statements .................................... 8 - 11
Management's Discussion and Analysis
of Financial Condition and Results
of Operations ........................................... 12 - 20
Part II. Other Information and Index to Exhibits ................... 21
Signatures ................................................ 22
2
PART I - FINANCIAL INFORMATION
CITIZENS FINANCIAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
June 30, December 31,
2002 2001
------------ -------------
(Unaudited) *
ASSETS
- ------
Cash and due from banks $ 17,687 $ 4,735
Federal funds sold 2,100 0
Securities available for sale 50,222 48,964
Loans, less allowance for loan losses of
$1,306 and $1,397, respectively 110,852 107,075
Premises and equipment 2,883 2,658
Accrued interest receivable 1,202 1,208
Other assets 1,962 2,179
-------- --------
Total Assets $186,908 $166,819
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest bearing $ 19,213 $ 17,207
Interest bearing 135,384 114,545
-------- --------
Total deposits 154,597 131,752
Short-term borrowings 8,911 13,922
Long-term borrowings 2,200 788
Other liabilities 1,508 1,335
-------- --------
Total liabilities 167,216 147,797
-------- --------
Commitments and contingencies
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 17,419 16,891
Accumulated other comprehensive income 780 606
Treasury stock at cost 102,127 and 101,127
shares, respectively (2,107) (2,075)
-------- --------
Total shareholders' equity 19,692 19,022
-------- --------
Total Liabilities and Shareholders' Equity $186,908 $166,819
======== ========
*From audited financial statements.
The accompanying notes are an integral part of these financial statements.
3
CITIZENS FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2002 2001 2002 2001
(Unaudited) (Unaudited)
INTEREST INCOME
- ---------------
Interest and fees on loans $ 2,209 $ 2,323 $ 4,380 $ 4,640
Interest and dividends on
securities:
Taxable 552 555 1,122 1,152
Tax-exempt 80 62 155 127
Interest on federal funds sold 17 8 19 11
-------- -------- -------- --------
Total interest income 2,858 2,948 5,676 5,930
-------- -------- -------- --------
INTEREST EXPENSE
- ----------------
Interest on deposits 931 1,065 1,871 2,140
Interest on short-term borrowings 65 104 138 222
Interest on long-term borrowings 16 11 23 23
-------- -------- -------- --------
Total interest expense 1,012 1,180 2,032 2,385
-------- -------- -------- --------
Net interest income 1,846 1,768 3,644 3,545
Provision for loan losses 63 88 126 172
-------- -------- -------- --------
Net interest income after
provision for loan losses 1,783 1,680 3,518 3,373
-------- -------- -------- --------
NONINTEREST INCOME
- ------------------
Trust department income 85 47 139 91
Brokerage fees 19 49 20 96
Service fees 152 137 290 268
Insurance commissions 17 17 23 25
Security gains/(losses) 0 0 0 1
Secondary market loan fees 40 0 79 0
Other 14 23 53 78
-------- -------- -------- --------
Total noninterest income 327 273 604 559
-------- -------- -------- --------
NONINTEREST EXPENSE
- -------------------
Salaries and employee benefits 754 677 1,474 1,367
Net occupancy expense 66 65 132 127
Equipment rentals, depreciation
and maintenance 108 97 211 194
Data processing 113 88 238 198
Director fees 46 48 90 90
Postage 37 33 67 66
Legal and professional 35 23 69 66
Stationery 34 31 68 62
Other 231 212 462 387
-------- -------- -------- --------
Total noninterest expense 1,424 1,274 2,811 2,557
-------- -------- -------- --------
Income before income taxes 686 679 1,311 1,375
Income tax expense 251 202 459 467
-------- -------- -------- --------
Net income $ 435 $ 477 $ 852 $ 908
======== ======== ======== ========
Basic and fully diluted earnings
per common share $ .67 $ .73 $ 1.31 $ 1.40
======== ======== ======== ========
Weighted average shares outstanding 648,378 650,612 648,624 650,612
Dividends per common share $ .25 $ .25 $ .50 $ .50
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
4
CITIZENS FINANCIAL CORP.
STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of dollars)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
2002 2001 2002 2001
(Unaudited) (Unaudited)
Net income $ 435 $ 477 $ 852 $ 908
Other comprehensive income:
Gross unrealized gains/(losses)
arising during the period 622 159 340 859
Adjustment for income tax
(expense)/benefit (237) (54) (166) (292)
----- ----- ------- ------
385 105 174 567
Less: Reclassification adjustment
for (gains)/losses included in
net income 0 0 0 (1)
Adjustment for income tax
expense/(benefit) 0 0 0 0
----- ----- ------- -------
0 0 0 (1)
Other comprehensive income,
net of tax 385 105 174 566
----- ----- ------- -------
Comprehensive income $ 820 $ 582 $ 1,026 $ 1,474
===== ===== ======= =======
The accompanying notes are an integral part of these financial statements.
5
CITIZENS FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of dollars)
Six Months Ended June 30, 2002 and 2001
-----------------------------------------------------
(Unaudited)
Accumulated Total
Additional Other Share-
Common Stock Paid In Retained Comprehensive Treasury holders'
------------
Shares Amount Capital Earnings Income Stock Equity
- -----------------------------------------------------------------------------------------------------------------
Balance, January 1, 2001 750,000 $1,500 $2,100 $15,831 $ (16) $(2,025) $17,390
Net income 908 908
Net change in unrealized gain/
(loss) on securities 566 566
Cash dividends declared
($.50 per share) (325) (325)
-----------------------------------------------------------------------------
Balance, June 30, 2001 750,000 $1,500 $2,100 $16,414 $ 550 $(2,025) $18,539
=============================================================================
Balance, January 1, 2002 750,000 $1,500 $2,100 $16,891 $ 606 $(2,075) $19,022
Net income 852 852
Net change in unrealized gain
on securities 174 174
Cash dividends declared
($.50 per share) (324) (324)
Purchase of 1,000 shares
of treasury stock (32) (32)
-----------------------------------------------------------------------------
Balance, June 30, 2002 750,000 $1,500 $2,100 $17,419 $ 780 $(2,107) $19,692
=============================================================================
The accompanying notes are an integral part of these financial statements.
6
CITIZENS FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Six Months Ended
June 30,
----------------------
2002 2001
(Unaudited)
Cash flows from operating activities:
Net Income $ 852 $ 908
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for loan losses 126 172
Depreciation and amortization 183 150
Amortization and accretion on securities 19 (21)
(Gain)/loss on sale of securities 0 (1)
(Gain)/loss on sale of assets 11 (4)
(Increase)/decrease in accrued interest receivable 7 83
(Increase)/decrease in other assets 184 199
Increase/(decrease) in other liabilities 6 (244)
-------- --------
Cash provided by operating activities 1,388 1,242
-------- --------
Cash flows from investing activities:
Proceeds from principal payments received
on securities available for sale 425 140
Proceeds from maturities and calls of
securities available for sale 5,341 7,610
Proceeds from sales of securities
available for sale 0 506
Purchases of securities available for sale (6,703) (7,274)
Purchases of premises and equipment (398) (496)
Increase in loans (3,948) (3,682)
Proceeds from sale of other real estate 57 90
-------- --------
Cash used by investing activities (5,226) (3,106)
-------- --------
Cash flows from financing activities:
Cash dividends paid (324) (325)
Acquisition of treasury stock (32) 0
Increase/(decrease) in short-term borrowing (5,011) (40)
Increase/(decrease) in long-term borrowing 1,412 (1,683)
Increase in time deposits 2,568 3,496
Increase/(decrease) in other deposits 20,277 (347)
-------- --------
Cash provided by financing activities 18,890 1,101
-------- --------
Net increase/(decrease) in cash and cash equivalents 15,052 (763)
Cash and cash equivalents at beginning of period 4,735 4,540
-------- --------
Cash and cash equivalents at end of period $ 19,787 $ 3,777
======== ========
Cash paid during the period for:
Interest $ 2,093 $ 2,388
Income taxes $ 503 $ 452
Other real estate and other assets
acquired in settlement of loans $ 45 $ 30
The accompanying notes are an integral part of these financial statements.
7
CITIZENS FINANCIAL CORP. AND SUBSIDIARIES
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 accounting principles
generally accepted in the Unites States of America and to general policies
within the financial services industry. The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from these
estimates.
The condensed consolidated financial statements contained herein 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 six months
ended June 30, 2002 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' 2001 Annual Report to
Shareholders and Form 10-K.
NOTE 2 - RECLASSIFICATIONS
Certain accounts in the condensed consolidated financial statements for
2001, as previously presented, have been reclassified to conform with current
year classifications.
NOTE 3 - SECURITIES
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at June 30, 2002 and December 31, 2001 are summarized as
follows (in thousands):
June 30, 2002
---------------------------------------------------
Carrying
Value
(Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value)
- --------------------------------------------------------------------------------------
Available for sale:
U.S. Government agencies
and corporations .................. $ 25,000 $ 677 $ 10 $25,667
Mortgage backed securities-
U.S. Government agencies
and corporations .................. 3,225 21 2 3,244
Corporate debt securities ........... 11,899 429 0 12,328
State and political subdivisions .... 8,215 150 6 8,359
Federal Reserve Bank stock .......... 108 0 0 108
Federal Home Loan Bank stock ........ 516 0 0 516
-------- ------- ------- -------
Total securities available
for sale ........................ $ 48,963 $ 1,277 $ 18 $50,222
======== ======= ======= =======
8
December 31, 2001*
----------------------------------------------------
Carrying
Value
(Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value)
- -------------------------------------------------------------------------------------------
Available for sale:
U.S. Government agencies
and corporations ................. $ 21,539 $ 576 $ 70 $ 22,045
Mortgage-backed securities -
U.S. Government
agencies and corporations ........ 3,659 9 53 3,615
Corporate debt securities .......... 14,897 480 21 15,356
Tax exempt state and political
subdivisions ..................... 7,219 76 79 7,216
Federal Reserve Bank stock ......... 108 0 0 108
Federal Home Loan Bank stock ....... 624 0 0 624
----------- ---------- -------- -----------
Total securities available for
sale ............................. $ 48,046 $ 1,141 $ 223 $ 48,964
=========== ========== ======== ===========
*From audited financial statements.
The maturities, amortized cost and estimated fair values of the Bank's
securities at June 30, 2002 are summarized as follows (in thousands):
Available for sale
------------------
Amortized Estimated
Cost Fair Value
--------- ------------
Due within 1 year $ 9,760 $ 9,934
Due after 1 but within 5 years 32,706 33,703
Due after 5 but within 10 years 5,873 5,961
Due after 10 years 0 0
Equity securities 624 624
------- --------
$48,963 $ 50,222
======= ========
Mortgage backed securities have remaining contractual maturities ranging
from 3 to 14 years and are reflected in the maturity distribution schedule shown
above based on their anticipated average life to maturity, which ranges from 1
to 4 years. The Company's equity securities are required to be held for
membership in the Federal Reserve and Federal Home Loan Bank and are shown at
cost since they may only be sold to the respective issuer of another member at
par.
The proceeds from sales, calls and maturities of securities, including
principal payments received on mortgage backed securities, and the related gross
gains and losses realized for the six month periods ended June 30, 2002 and 2001
are as follows (in thousands):
Proceeds From Gross Realized
------------------------------- -------------------
Calls and Principal
Sales Maturities Payments Gains Losses
------------------------------- -------------------
June 30, 2002:
Securities available for sale $ 0 $ 5,341 $ 425 $ 0 $ 0
====== ========== ========= ===== ======
June 30, 2001:
Securities available for sale $ 506 $ 7,610 $ 140 $ 1 $ 0
====== ========== ========= ===== ======
At June 30, 2002 and December 31, 2001 securities carried at $20,816,000
and $19,209,000 respectively, with estimated fair values of $21,427,000 and
$19,761,000 respectively, were pledged to secure public deposits and for other
purposes required or permitted by law.
9
At June 30, 2002, the company has a concentration within its corporate
debt securities classification which included obligations of financial services
industry companies having an approximate amortized cost of $3,737,000 and an
estimated fair value of $3,902,000. There were no concentrations with any one
issuer.
NOTE 4 - LOANS
Total loans are summarized as follows (in thousands):
June 30, 2002 December 31, 2001
----------------- -----------------
(Unaudited) *
Commercial, financial and agricultural $ 18,952 $ 16,741
Real estate - construction 2,154 3,753
Real estate - mortgage 74,204 70,242
Installment loans to individuals 14,720 16,025
Other 2,254 1,815
-------- ---------
Total loans 112,284 108,576
Net deferred loan origination costs (124) (102)
Less unearned income (2) (2)
-------- --------
Total loans net of unearned income and
net deferred loan origination costs 112,158 108,472
Less allowance for loan losses 1,306 1,397
-------- --------
Loans, net $110,852 $107,075
======== ========
*From audited financial statements.
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
Analyses of the allowance for loan losses are presented below (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
Balance at beginning of period $1,413 $1,203 $1,397 $1,151
Loans charged off:
Commercial and industrial 134 1 134 2
Real estate - mortgage 17 0 36 0
Consumer and other 24 28 54 67
------ ------ ------ ------
Total 175 29 224 69
------ ------ ------ ------
Recoveries:
Commercial and industrial 3 0 3 3
Real estate - mortgage 0 0 0 0
Consumer and other 2 4 4 9
------ ------ ------ ------
Total 5 4 7 12
------ ------ ------ ------
Net losses 170 25 217 57
Provision for loan losses 63 88 126 172
------ ------ ------ ------
Balance at end of period $1,306 $1,266 $1,306 $1,266
====== ====== ====== ======
NOTE 6 - 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.
10
NOTE 7 - 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 June 30, 2002 December 31, 2001
amounts represent credit risk (unaudited) *
(in thousands)
- ------------------------------------ ------------- -----------------
Commitments to extend credit $23,638 $20,977
Standby letters of credit 651 427
------- -------
Total $24,289 $21,404
======= =======
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.
*From audited financial statements.
NOTE 8 - EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares
outstanding during the period. For the six month periods ended June 30, 2002 and
2001 the weighted average number of shares were 648,624 and 650,612,
respectively. The weighted average number of shares outstanding during the three
month periods then ended were 648,378 and 650,612, respectively.
NOTE 9 - NEW ACCOUNTING STANDARDS
In 2001, the FASB issued Statement of Financial Accounting Standards
Number 142-Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 requires
the Company to periodically recalculate the value of goodwill previously
acquired and recognize any decline in value immediately as a charge to income.
An exception to this accounting treatment is provided for in SFAS 142 when the
fair value of liabilities assumed are greater than the fair value of assets
acquired. In this situation, the Company must follow the original guidance in
Statement of Financial Accounting Standards Number 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions (SFAS 72). Under the guidance
provided by SFAS 72, the Company will continue to amortize the goodwill over the
original term, unless subsequent recalculations determine a shorter period is
warranted or an impairment has occurred.
The Company has completed the first step of its impairment testing as
required. The Company has concluded that as of January 1, 2002, there was no
impairment of goodwill and that SFAS 142 has not had a material impact on the
Company's financial condition or results of operations. Further impairment
testing will be performed on an annual basis as required.
11
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 2001 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 on 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. The Company does not undertake to update any such
forward looking statements that may be made. When provided, forward looking
information is intended to assist readers in understanding anticipated future
operations and are included pursuant to applicable safe harbor provisions of the
Private Securities Litigation Reform Act of 1995; actual results may differ.
Amounts and percentages used in this discussion have been rounded.
RESULTS OF OPERATIONS
EARNINGS SUMMARY
Net income for the second quarter of 2002 of $435,000 was $42,000 less
than in the second quarter of 2001 while on a year-to-date basis net income of
$852,000 was $56,000 less than in the first half of 2001. These decreases
primarily reflect higher levels of noninterest expense. For the year-to-date
period return on average assets was 1.02% in 2002 and 1.19% in 2001. Additional
details concerning the Company's results of operations are discussed in the
following sections of this report.
NET INTEREST INCOME
Net interest income represents the primary component of Citizens'
earnings. It is the difference between interest and fee income generated by
interest earning assets and interest expense incurred to carry interest bearing
liabilities. Net interest income is affected by changes in balance sheet
composition and interest rates. The Bank attempts to maximize net interest
income by determining the optimal product mix in light of current and expected
yields on assets, cost of funds and economic conditions while maintaining an
acceptable degree of risk.
For the second quarter of 2002 net interest income totaled $1,846,000
compared to $1,768,000 in the same period of 2001. In both periods a decrease in
interest income was more than offset by lower interest expense. A similar
pattern is observed in the year-to-date numbers as net interest income in 2002
of $3,644,000 exceeded the 2001 year-to-date total of $3,545,000 with a drop in
interest income being overcome by lower interest expense. Expressed on a
tax-equivalent basis, net interest income for the year-to-date periods was
$3,751,000 in 2002 and $3,628,000 in 2001, an increase of $123,000 or 3.4%.
Falling interest rates have certainly impacted both interest income and
interest expense. For the six month period ended June 30, 2002, the
tax-equivalent yield on earning assets of 7.31% is 100 basis points below the
12
June 30, 2001 level due to decreases in the general interest rate environment
and lower yields on commercial and real estate loans, and investment securities,
specifically. On an annualized basis, these lower yields are estimated to have
resulted in a $1.4 million reduction in interest income. However, these same low
rate conditions have allowed the Company to reduce its interest expense. The
cost of interest bearing liabilities for the first half of 2002 of 3.13% is 97
basis points lower than for the same period of 2001. The annualized impact of
these lower costs on interest expense approximates $1.2 million. Thus, the net
annualized effect of the lower interest rates is estimated to have resulted in a
$200,000 decrease in net interest income.
Growth in earning assets and interest bearing liabilities have also
impacted net interest income, however. The opening of a new branch facility in
2002, as well as efforts to increase market share in several locations, have
enabled the Bank to increase its average interest bearing liabilities from
$117.4 million in the first half of 2001 to $130.9 million in the first half of
this year. This increase in funding has permitted a similar rise in the earning
asset base. The addition of these funds is estimated to have caused annualized
interest expense to increase by $492,000. But, with the larger earning asset
base estimated to add approximately $947,000 to annual interest income, the net
impact of the Company's growth is estimated to have improved net interest income
by $455,000.
With the positive net effect of growth exceeding the negative net
effect of lower rates, tax-equivalent net interest income has, in fact, risen.
However, when expressed as a percentage of average earning assets, the resultant
net interest margin has fallen from 5.01% in the first half of 2001 to 4.74% in
the first half of 2002. Despite this drop, the Company's net interest margin
remains well in excess of peer average data. With many economists calling for
interest rates to fall over the near term, some further reduction in the margin
is possible as assets reprice at lower rates more quickly than liabilities.
However, management does not anticipate a material decline. Additional
information concerning interest rate sensitivity is presented later in this
report.
PROVISION FOR LOAN LOSSES
The provision for loan losses represents management's estimate of the
amount to be charged against current earnings in order to maintain the allowance
for loan losses at a level considered adequate to provide for losses that can be
reasonably anticipated based on quarterly evaluations of the loan portfolio.
Provisions for the first half and second quarter of 2002 were $126,000 and
$63,000, respectively. This is a decrease from $172,000 and $88,000,
respectively, in 2001 reflecting lower levels of past due and nonaccrual loans.
These and other factors which are considered in establishing the provision for
loan losses, and in analyzing the allowance for loan losses, are discussed later
in this report.
NONINTEREST INCOME
The Bank realizes that with pressure on net interest margins and
increased competition for loan and deposit dollars, noninterest income is
becoming a more important component of income. With noninterest income levels
historically below peer levels, the Bank has worked for several years to improve
its performance in this area to equal the peer average. In 2001 the Bank made
great improvements. In 2002, continued improvement has
13
brought the Bank very close to realizing this goal.
For the second quarter of 2002 noninterest income totaled $327,000, an
improvement of $54,000, or 19.8%, over the second quarter of 2001. Trust
revenues increased by more than 80% due to the settlement of several estates
while the addition of several ATMs helped increase service fees. The Bank's
secondary market mortgage program, which was started in the fourth quarter of
2001, also produced $40,000 of revenue during the quarter. In this program, the
Bank processes loan applications for a fee while loan approval decisions,
underwriting, and loan funding are done by unrelated mortgage brokers. Brokerage
income, however, trails last year as sales activity has fallen in light of
developments in the financial markets and declining investor confidence.
For the year-to-date period noninterest income of $604,000 is up 8.1%
from $559,000. Similar to the quarterly situation, trust revenues have increased
$48,000, ATM fees have risen by $22,000 and fees from the mortgage program are
up $79,000 while brokerage revenue has fallen $76,000. With the exception of the
mortgage and brokerage programs, noninterest income has generally been
consistent with management's expectations and no significant changes are
expected for the remainder of the year.
NONINTEREST EXPENSE
Noninterest expense includes all items of expense other than interest
expense, the provision for loan losses, and income taxes. Noninterest expenses
for the quarterly and year-to-date periods have increased by $150,000 and
$254,000, respectively. In part this reflects the opening of a new facility in
2002 located in Marlinton, West Virginia. Noninterest expense associated with
that facility totaled $109,000 through the report date.
The largest increase during the second quarter was personnel expense
which rose $77,000. This is primarily a result of an increase in officer
salaries which are adjusted annually each April. Equipment costs rose due to
higher depreciation while an increase in other noninterest expense largely
reflects a $17,000 increase in charitable contributions made during the quarter.
Because the Bank's core data processing costs are based on the number of
accounts, branch and customer base growth contributed to higher data processing
costs, as did the expansion of the Bank's ATM network. The remaining categories
of noninterest expense did not change significantly from the second quarter of
2001.
The year-to-date period shows many of the same changes as the quarterly
data. Personnel costs increased $107,000 due to the addition of branch staff,
personnel related to the mortgage and brokerage operations, and the adjustment
to officer salaries noted above. Equipment and data processing costs increased
for the reasons cited previously while other noninterest expense increased by
$75,000, or 19.4%. This increase reflects not only the higher contributions
noted above, but also increases in public relations expense, telephone costs,
correspondent bank fees and recurring FDIC and OCC fees. Many of these increases
are a result of the Bank's branching activity. Taken together, their increase
totals $51,000. In addition, expenses related to the sale and upkeep of
foreclosed properties were up $17,000.
In June 2002, the Bank purchased real estate adjacent to its main
14
facility at a cost of $126,000. Current plans call for the demolition of the
building now on that site and the construction of a new facility to be used as
additional office space. Such activity, however, is not likely to occur until
late 2002 or 2003. Because this project is in it's early planning phase, the
total cost and resulting impact on earnings cannot be accurately estimated at
this time. However, no significant changes in noninterest expense are
anticipated during the remainder of 2002.
INCOME TAXES
The Company's provisions for state and federal income taxes during the
second quarters of 2002 and 2001 were $251,000 and $202,000, respectively. For
the year-to-date period income tax expense was $459,000 in 2002 and $467,000 in
2001 representing effective tax rates of 35.0% and 34.0%, respectively. The
Company was not subject to the federal alternative minimum tax during any of the
periods covered by this report and does not expect to become subject to it in
the foreseeable future.
FINANCIAL CONDITION
SUMMARY
On Friday, June 28, 2002, the last business day of the second quarter,
the Bank received a wire transfer on behalf of a customer totaling $11,962,000.
This unusual transaction had the effect of increasing total assets and interest
bearing deposits at the report date. Further, since the funds were received too
late in the day for the Bank to invest them in an earning asset, they are
recorded as noninterest earning cash at the balance sheet date. The funds were
invested as federal funds sold on Monday, July 1, 2002 and remained so invested
until they were withdrawn from the Bank two weeks later. Such a transaction is
extremely rare and no further transactions of this type are expected.
Absent this transaction, total assets at June 30, 2002 were
$174,946,000, an increase of $8,127,000, or 4.9%, since year-end while deposits
of $142,635,000 were up $10,883,000 or 8.3% during the same time period. Average
assets and deposits during the period were $169,044,000 and $137,037,000,
respectively. A further discussion of the Bank's major balance sheet categories,
as well as liquidity, interest rate sensitivity, and the impact of inflation,
follow.
LOAN PORTFOLIO
Gross loans at June 30, 2002 were $112,284,000, up $3,708,000, or 3.4%,
from year-end. The Company's mortgage loan portfolio, which is its largest, has
increased $3,962,000 during the period while commercial loans are up $2,211,000.
Demand for these types of loans remains steady. Some commercial borrowers,
however, are seeking to refinance their loans to take advantage of the current
low interest rate environment. While this activity, together with the Bank's
entry into the Marlinton, WV market, helped boost commercial lending early in
the year, the Bank has also lost several commercial loans due to interest rate
competition and overall loan growth during second quarter was minimal. Consumer
lending continues to be quite slow as a result of the financing programs being
offered by auto manufacturers, and the Bank's tightening of auto lending
standards. Total consumer loans at June 30, 2002 of $14,720,000 are down 8.1%
since year-end.
15
Due to the level of economic uncertainty within our economy, the Bank
expects loans to continue to grow at a modest pace during the remainder of the
year. Additional information concerning the Company's loan portfolio is
presented in Note 4.
ALLOWANCE FOR LOAN LOSSES
Citizens maintains an allowance for loan losses at a level considered
adequate to provide for losses that can be reasonably anticipated based on
quarterly evaluations of its loan portfolio. This evaluation considers the
potential loss in specifically identified loans and homogeneous pools of loans
as well as other factors such as delinquency levels, historical loss experience,
current and anticipated economic conditions, concentrations of credit, changes
in lending policies or staff, and others. Loans specifically analyzed include
larger-balance loans and those included on the Bank's watch list as a result of
possible weaknesses regarding collectibility, performance or collateral as
identified by the Bank's internal loan review function. In addition, the
allowance also contains an amount not allocated to the specific loans, or pools
of loans, for inherent losses which may exist as of the evaluation date but are
not otherwise identified due to imprecisions in the objective process used to
estimate losses. The assumptions and methods used to evaluate the allowance for
loan losses have been consistently applied for all periods covered by this
report.
At June 30, 2002, Citizen's allowance for loan losses totaled
$1,306,000, or 1.16% of total loans which is considered adequate to cover losses
inherent in the loan portfolio based on management's quarterly review as
described above. Net charge offs for the first half of 2002 totaled $217,000
with the majority, $134,000, relating to one commercial loan. This loan was
specifically analyzed and the loss was identified in management's loan review
process. Loan quality is judged to be good with past due and nonaccrual loans,
which are illustrated in the following table, below peer averages and recent
levels within the Bank.
Summary of Past Due Loans and Nonperforming Assets
(in thousands)
June 30 December 31
------------------- -----------
2002 2001 2001
(Unaudited) *
Loans past due 90 or more days
still accruing interest $ 21 $159 $337
==== ==== ====
Nonperforming assets:
Nonaccruing loans $ 15 $122 $ 30
Other real estate owned 509 498 683
---- ---- ----
$524 $620 $713
==== ==== ====
* From the Company's Form 10-K filing dated December 31, 2001
The balance in other real estate owned includes $399,000 of covered
transactions all of which are current in terms of their performance. At June 30,
2002, management is not aware of any trends or uncertainties involving the loan
portfolio which are likely to materially impair credit quality, capital, or
earnings.
16
SECURITIES PORTFOLIO AND FEDERAL FUNDS SOLD
The Bank's securities portfolio uses funds not needed to satisfy loan
demand to improve earnings while at the same time providing liquidity and
balancing interest sensitivity concerns. All securities are classified as
available for sale.
Unlike the first quarter of the year, when available funds were used to
satisfy loan demand and the security portfolio decreased, total securities
increased to $50,222,000 during the second quarter. This is $1,258,000 more than
at December 31, 2001.
The tax equivalent yield on the security portfolio of 5.76% at June 30,
2002, is down slightly from 5.91% at year-end while the average life remains
short at 2.44 years.
Despite this drop in yield, the Company plans to continue its approach
of utilizing fixed rate debt instruments to construct a laddered portfolio over
a time horizon approximating five years in order to minimize interest rate risk
and provide a steady source of liquidity. U.S. Agency securities, which have
been the largest component of the portfolio, may take on increasing importance
as the use of investment grade corporate securities is expected to decline as a
result of the current conditions surrounding some large corporate enterprises
and the perceived potential for risk they may entail. The Bank also expects to
continue to purchase bank qualified municipal securities and government agency
mortgage backed securities in accordance with its policy. Please refer to Note 3
for additional information about the Company's investment security portfolio.
The Bank generally tries to minimize its involvement in the overnight
federal funds sold market preferring to fully utilize available funds for higher
yielding loan and security alternatives while relying on maturing securities,
loan repayments and deposit growth for liquidity. 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. As of the report date the Bank had $2,100,000 in
federal funds sold and no overnight borrowings. For the six months ended June
30, 2002, federal funds sold averaged $2,302,000 while federal funds purchased
averaged $308,000.
DEPOSITS AND OTHER FUNDING SOURCES
Excluding the unusual transaction of June 28, 2002 described earlier,
total deposits of $142,635,000 were up $10,883,000, or 8.3%, since year-end.
This growth has occurred consistently throughout the first half of the year but
has been centered primarily in the Bank's main office and Marlinton facility
each of which have recorded deposit growth in excess of $4 million. Over the
past year deposits have grown by nearly $18 million, or 14.4%, despite falling
interest rates as the equity markets have declined and the Bank has exploited
new market areas.
Noninterest bearing deposits have increased slightly more than $2
million, or 11.66%, during the first half of the year while interest bearing
deposits grew by $8,877,000, or 7.75% excluding the unusual item. Among the
interest bearing items, interest bearing checking accounts offer a highly liquid
alternative to equity investments and have risen $5.1 million or
17
21.2%, over the last six months. Time deposits, which provide an insured
alternative to noninsured investments, rose by $2.6 million, or 4.7%. The Bank
has made a concerted effort to attract longer-term time deposits in 2002,
including IRA accounts. While customers have been hesitant to invest in five
year certificates of deposit, two and three year certificates have increased by
$2.9 million while IRA accounts increased $600,000. The promotion of two and
three-year certificates of deposit not only allows the Bank to attract low cost
funds, it also gives customers good choices for the investment of maturing 13
and 25 month certificates issued in earlier promotions.
The Bank's short-term borrowings include overnight funds purchased, if
any, and repurchase agreements. At June 30, 2002, repurchase agreements totaled
$8,911,000, down from $11,091,000 at December 31, 2001. Long-term borrowings,
however, increased to $2,200,000 as the Bank acquired $2,000,000 in fixed rate
debt from the Federal Home Loan Bank of Pittsburgh in order to fund a commercial
loan. While no future borrowings are anticipated, the Bank will consider the
benefits of doing so when appropriate lending opportunities exist.
CAPITAL RESOURCES
The Company's capital remains very strong at $19,692,000, or 10.54% of
total assets, 11.26% excluding the transaction of June 28, 2002. As shown in the
Statement of Changes in Shareholders' Equity, capital was increased by earnings
of $852,000 and reduced by the payment of $324,000, or $.50 per share, in
dividends and the purchase of 1,000 shares of treasury stock for $32,000. All
purchases of treasury stock are made on the open market pursuant to Company
policy when determined by the Board of Directors to be beneficial to the
institution and the impact of doing so does not impair capital or liquidity.
The Company's capital also continues to exceed all regulatory
requirements as shown in the following table. Further, management knows of no
trends or uncertainties which may materially impair or alter its capital
position.
Minimum Capital Standard Ratios
- -------------------------------------------------------------------------------------------------------------------
Citizens Regulatory
Financial Corp. Requirements
- -------------------------------------------------------------------------------------------------------------------
Total capital to risk weighted assets 16.27% 8.00%
Tier I capital to risk weighted assets 15.21% 4.00%
Tier I capital to adjusted total assets 10.89% 4.00%
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
customers, the credit needs of borrowers, and to provide for other operational
needs. Liquidity is provided by various internal sources including unpledged
investment securities, federal funds sold, loan repayments and the ability to
maintain a stable or growing deposit base. In addition, external sources of
liquidity are also available from correspondent banks. Unused lines of credit
with these banks approximate
18
$61,000,000.
Tests utilizing expected loan, deposit, and investment security levels
are regularly performed to project liquidity needs. These tests indicate the
Bank has sufficient liquidity to satisfy anticipated needs over the next twelve
months and, as noted earlier, there are no plans to acquire additional debt.
Further, the Company has not, and does not expect to, raise funds through
brokered deposits, wholesale certificates of deposit, internet services, or
other nontraditional sources.
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. The Bank uses several techniques to monitor and control
interest rate risk including gap analysis, interest rate shock testing and other
forms of simulation modeling.
At June 30, 2002, the Company's gap analysis indicates that it is
negatively gapped. In this situation, the amount of interest bearing liabilities
that could reprice over the next year exceeds the amount of interest earning
assets that could also reprice. Typically, this is beneficial when interest
rates are expected to fall. Currently, many economists are calling for interest
rates to fall slightly over the near term. If this does occur, the gap analysis
indicates the Bank could see improved levels of net interest income. The change
in net interest income is tested each quarter under the assumption rates change
by 100, 200, and 300 basis points. All of these tests indicate the risk to net
interest income presented by changing interest rates is within the Company's
allowable limits of a 5% increase or decrease in net interest income for each
100 basis point change in rates.
While gap analysis and interest rate shock testing help set and monitor
interest rate risk limits, simulation modeling is more dynamic and can often
more closely follow actual conditions. Based on the economic forecasts for a
decrease in interest rates, the Bank's simulations indicate net interest income
may fall as interest sensitive assets, such as loans tied to the prime rate or
some other index, could reprice more quickly than interest sensitive liabilities
such as savings accounts, money market accounts, and interest bearing checking
accounts. However, should management reduce the rates it pays on these
liabilities, net interest income could rise with lower rates.
IMPACT OF INFLATION
The consolidated financial statements and related data included in this
report were prepared in accordance with accounting principles generally accepted
in the United States of America, 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
However, inflation does affect noninterest expenses such as personnel
costs and the cost of services and supplies used by the Company. Management
attempts to offset such increases by controlling the level of noninterest
expenditures and increasing levels of noninterest income. Because inflation
rates have generally been low during the time covered by the accompanying
financial statements, the impact of inflation on the Company's earnings has not
been significant.
20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings :
As of June 30, 2002 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 financial
position or results of operations. In addition, there are no material
proceedings known to be threatened or contemplated against the Company or
the Bank.
Item 2. Changes in Securities: None.
Item 3. Defaults upon Senior Securities: None.
Item 4. Submission of Matters to a Vote of Security Holders:
The annual meeting of shareholders of Citizens Financial Corp. was held
on April 20, 2002. The shareholders determined that the maximum number of
directors would be fixed at nine and that directors Armentrout, Fair,
Harris, and Williams will serve three year terms ending in April, 2005.
Each of these directors were unopposed.
In addition to the foregoing nominees, the following five (5) persons
presently are serving as members of the Board of Directors, for terms to
expire in the year indicated for each member: Robert N. Alday (2003);
William J. Brown (2004); Edward L. Campbell (2004); Cyrus K. Kump (2003);
and Robert J. Schoonover (2004).
Item 5. Other Information: None.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits: None
(b) Reports on Form 8-K: None
21
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: 8/6/02 /s/ Robert J. Schoonover
--------------------- -------------------------------
Robert J. Schoonover
President
Chief Executive Officer
Date: 8/6/02 /s/ Thomas K. Derbyshire
--------------------- -------------------------------
Thomas K. Derbyshire
Vice President, Treasurer and
Principal Accounting Officer
22