---




UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





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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, 2002





Commission file number 2-96144





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CITIZENS FINANCIAL CORP.


(Exact name of registrant as specified in its charter)





Delaware

55-0666598(State or other jurisdiction of

(I.R.S. Employerincorporation 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.)





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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. Yesx    No  ̈





Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.





Class

Outstanding at September 30, 2002Common Stock ($2.00 par value)

646,523





This report contains 26 pages.





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FORM 10-Q





CITIZENS FINANCIAL CORP.





Quarter Ended September 30, 2001





INDEX





Page No.Part I.

Financial InformationItem 1.

Financial StatementsCondensed Consolidated Balance Sheets September 30, 2002 and December 31, 2001

3Condensed Consolidated Statements of Income Three Months Ended September 30, 2002 and September 30, 2001 and Nine Months Ended September 30, 2002 and September 30, 2001

4Statements of Comprehensive Income Three Months Ended September 30, 2002 and September 30, 2001 and Nine Months Ended September 30, 2002 and September 30, 2001

5Condensed Consolidated Statements of Changes in Shareholders Equity Nine Months Ended September 30, 2002 and September 30, 2001

6Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2002 and September 30, 2001

7Notes to Condensed Consolidated Financial Statements

8 -11Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

12 -18Item 3.

Quantitative and Qualitative Disclosures About Market Risk

19Item 4.

Control and Procedures

20Part II.

Other information and Index to ExhibitsItems 1 through 6

21Signatures

22Certification by Executive Officers Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

23 -24




2




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PART I Item IFINANCIAL INFORMATION





CITIZENS FINANCIAL CORP.


CONDENSED CONSOLIDATED BALANCE SHEETS


(In thousands of dollars)





September 30, 2002


December 31, 2001(Unaudited)


*ASSETSCash and due from banks

$
6,784


$
4,735Federal funds sold


1,700



Securities available for sale


55,487



48,964Loans, less allowance for loan losses of $1,336 and $1,397, respectively


114,253



107,075Premises and equipment


2,835



2,658Accrued interest receivable


1,159



1,208Other assets


4,046



2,179Total Assets

$
186,264


$
166,819LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Noninterest bearing

$
22,366


$
17,207Interest bearing


127,915



114,545Total Deposits


150,281



131,752Short-term borrowings


11,761



13,922Long-term borrowings


2,040



788Other liabilities


1,793



1,335Total liabilities


165,875



147,797Commitments and contingenciesSHAREHOLDERS EQUITYCommon Stock, $2.00 par value, authorized 2,250,000 shares issued 750,000 shares


1,500



1,500Additional paid in capital


2,100



2,100Retained earnings


17,738



16,891Accumulated other comprehensive income


1,202



606Treasury stock at cost, 103,477 and 101,127 shares, respectively


(2,151
)


(2,075
)Total shareholders equity


20,389



19,022Total Liabilities and Shareholders Equity

$
186,264


$
166,819


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|* |  | From audited financial statements.
|- |  | ----------------------------------




The accompanying notes are an integral part of these financial statements.




3




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CITIZENS FINANCIAL CORP.





CONDENSED CONSOLIDATED STATEMENTS OF INCOME


(In thousands of dollars, except per share data)





Three Months Ended September 30,

Nine Months Ended September 30,2002

2001

2002

2001(Unaudited)

(Unaudited)INTEREST INCOMEInterest and fees on loans

$
2,241

$
2,345

$
6,621

$
6,985Interest and dividends on securities:Taxable


563


550


1,685


1,702Tax-exempt


83


53


238


180Interest on federal funds sold


24


21


43


32Total interest income


2,911


2,969


8,587


8,899INTEREST EXPENSEInterest on deposits


928


1,057


2,799


3,197Interest on short-term borrowings


69


97


207


319Interest on long-term borrowings


22


11


45


34Total interest expense


1,019


1,165


3,051


3,550Net interest income


1,892


1,804


5,536


5,349Provision for loan losses


72


76


198


248Net interest income after provision for loan losses


1,820


1,728


5,338


5,101NONINTEREST INCOMETrust department income


54


39


193


130Brokerage fees


27


12


47


108Service fees


160


139


450


407Insurance commissions


10


13


33


38Securities gains/(losses), net


0


0


0


1Secondary market loan fees


81


3


160


3Other


24


19


77


97Total noninterest income


356


225


960


784NONINTEREST EXPENSESalaries and employee benefits


764


678


2,238


2,045Net occupancy expense


72


58


204


185Equipment rentals, depreciation and maintenance


111


113


322


307Data processing


107


105


345


303Director fees


47


43


137


133Postage


42


29


109


95Professional service fees


34


33


103


99Stationery


34


35


102


97Other


242


203


704


590Total noninterest expense


1,453


1,297


4,264


3,854Income before income taxes


723


656


2,034


2,031Income tax expense


242


235


701


702Net income

$
481

$
421

$
1,333

$
1,329Basic and fully diluted earnings per common share

$
.74

$
.64

$
2.06

$
2.04Weighted average shares outstanding


647,139


650,051


648,125


650,423Dividends per common share

$
.25

$
.25

$
.75

$
.75





The accompanying notes are an integral part of these financial statements.




4




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CITIZENS FINANCIAL CORP.


STATEMENTS OF COMPREHENSIVE INCOME


(In thousands of dollars)





Three Months Ended September
30


Nine Months Ended September
302002


2001


2002


2001(Unaudited)


(Unaudited)Net income

$
481


$
421


$
1,333


$
1,329Other comprehensive income:Gross unrealized gains/(losses) arising during period


680



550



1,020



1,409Adjustment for income tax benefit/(expense)


(258
)


(187
)


(424
)


(479
)Less: Reclassification adjustment for (gains)/losses included in net income


0



0



0



(1
)Adjustment for income tax expense/(benefit)


0



0



0



0Other comprehensive income net of tax


422



363



596



929Comprehensive income

$
903


$
784


$
1,929


$
2,258





The accompanying notes are an integral part of these financial statements.




5




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CITIZENS FINANCIAL CORP.





CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY


(In thousands of dollars)





Nine Months Ended September 30, 2002 and 2001Common Stock

Additional Paid
In Capital

Retained Earnings


Accumulated Other Comprehensive Income


Treasury Stock


Total Shareholders EquityShares

Amount(Unaudited)Balance, January 1, 2001

750,000

$
1,500

$
2,100

$
15,831


$
(16
)

$
(2,025
)

$
17,390Net income










1,329











1,329Net change in unrealized gain/loss on securities














929







929Purchase of 1,225 shares of treasury stock


















(34
)


(34
)Cash dividends declared ($.75 per share)










(488
)










(488
)Balance September 30, 2001

750,000

$
1,500

$
2,100

$
16,672


$
913


$
(2,059
)

$
19,126Balance, January 1, 2002

750,000

$
1,500

$
2,100

$
16,891


$
606


$
(2,075
)

$
19,022Net income










1,333











1,333Net change in unrealized gain/loss on securities














596







596Purchase of 2,350 shares of treasury stock


















(76
)


(76
)Cash dividends declared ($.75 per share)










(486
)










(486
)Balance September 30, 2002

750,000

$
1,500

$
2,100

$
17,738


$
1,202


$
(2,151
)

$
20,389





The accompanying notes are an integral part of these financial statements.




6




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CITIZENS FINANCIAL CORP.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands of dollars)





Nine Months Ended September
30,2002


2001(Unaudited)Cash flows from operating activities:Net Income

$
1,333


$
1,329Adjustments to reconcile net income to cash provided by operating activities:Provision for loan losses


198



248Depreciation and amortization


278



228Amortization and accretion on securities


33



(9
)(Gain)/loss on sales and calls of securities


0



(1
)(Gain)/loss on sales of assets


0



(4
)(Gain)/loss on sale of OREO


15



0(Increase)/decrease in accrued interest receivable


49



8(Increase)/decrease in other assets


70



212Increase/(decrease) in other liabilities


33



(310
)Cash provided by operating activities


2,009



1,701Cash flows from investing activities:Proceeds from principal payments received on securities available for sale


687



248Proceeds from maturities and calls of securities available for sale


7,421



10,530Purchases of securities available for sale


(13,643
)


(10,283
)Proceeds from sale of securities available for sale


0



506Purchases of premises and equipment


(439
)


(556
)Purchase of bank owned life insurance


(2,000
)


0Proceeds from sale of other real estate


78



90(Increase)/decrease in loans


(7,422
)


(7,983
)Cash used by investing activities


(15,318
)


(7,448
)Cash flows from financing activities:Cash dividends paid


(486
)


(488
)Acquisition of treasury stock


(76
)


(34
)Increase/(decrease) in short-term borrowing


(2,160
)


(790
)Increase/(decrease) in long-term borrowing


1,252



(60
)Increase/(decrease) in time deposits


4,454



5,240Increase/(decrease) in other deposits


14,074



3,226Cash provided by financing activities


17,058



7,094Net increase in cash and cash equivalents


3,749



1,347Cash and cash equivalents at beginning of period


4,735



4,540Cash and cash equivalents at end of period

$
8,484


$
5,887Supplemental disclosure of cash flow information:Cash payments for:Interest on deposits and other borrowings

$
3,068


$
3,536Income taxes


699



692Supplemental schedule of noncash investing and financing activities:Other real estate and other assets acquired in settlement of loans

$
45


$
179





The accompanying notes are an integral part of these financial statements.




7




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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 accounting principles generally accepted in the United 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 reported in the financial statements and accompanying notes. 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 nine months ended September 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 amounts in the condensed consolidated financial statements for 2001, as previously presented, have been reclassified to conform to current year
classifications.





NOTE 3SECURITIES





The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities at September 30, 2002 and December 31, 2001 are summarized as follows (in thousands):





September 30, 2002Amortized Cost

Unrealized Gains

Unrealized Losses

Carrying Value (Estimated
Fair Value)Available for sale:U.S. Government agencies and corporations

$
27,564

$
1,139

$
0

$
28,703Mortgage backed securitiesU.S. Government agencies and corporations


6,031


64


12


6,083Corporate debt securities


11,406


432


0


11,838State and political subdivisions


7,923


316


0


8,239Federal Reserve Bank stock


108


0


0


108Federal Home Loan Bank stock


516


0


0


516Total securities available for sale

$
53,548

$
1,951

$
12

$
55,487




8




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December 31, 2001*Amortized Cost

Unrealized Gains

Unrealized Losses

Carrying Value (Estimated Fair Value)Available for sale:U.S. Government agencies and corporations

$
21,539

$
576

$
70

$
22,045Mortgage-backed securitiesU.S. Government agencies and corporations


3,659


9


53


3,615Corporate debt securities


14,897


480


21


15,356Tax exempt state and political subdivisions


7,219


76


79


7,216Federal Reserve Bank stock


108


0


0


108Federal Home Loan Bank stock


624


0


0


624Total securities available for sale

$
48,046

$
1,141

$
223

$
48,964


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|* |  | From audited financial statements.
|- |  | ----------------------------------




The maturities, amortized cost and estimated fair values of the Banks securities at September 30, 2002 are summarized as follows (in thousands):





Available for saleAmortized Cost

Estimated Fair ValueDue within 1 year

$
8,973

$
9,169Due after 1 but within 5 years


31,478


32,924Due after 5 but within 10 years


10,896


11,150Due after 10 years


1,577


1,620Equity securities


624


624$
53,548

$
55,487





Mortgage backed securities are reflected in the above table based
on their contractual maturities which range from 3 to 19 years. Due to prepayments of the underlying mortgages, however, the expected average lives to maturity of these securities ranges from 1.08 to 6.75 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 or 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 nine month periods ended September 30, 2002 and 2001 are as follows (in thousands):





Proceeds From

Gross RealizedSales

Calls and Maturities

Principal Payments

Gains

LossesSeptember 30, 2002:Securities available for sale

$
0

$
7,421

$
687

$
0

$
0September 30, 2001:Securities available for sale

$
506

$
10,530

$
248

$
1

$
0




9




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At September 30, 2002 and December 31, 2001 securities with an amortized cost of
$18,814,000 and $19,209,000, respectively, and estimated fair values of $19,664,000 and $19,761,000 respectively, were pledged to secure public deposits, and for other purposes required or permitted by law.





At September 30, 2002, the company has a concentration within its corporate debt securities classification which includes obligations of
financial services industry companies having an approximate amortized cost of $3,738,000 and an estimated fair value of $3,909,000. There were no concentrations with any one issuer.





NOTE 4LOANS





Total loans are summarized as follows
(in thousands):





September 30, 2002


December 31, 2001(Unaudited)


*Commercial, financial and agricultural

$
20,809


$
16,741Real estateconstruction


2,943



3,753Real estatemortgage


76,218



70,242Installment loans to individuals


14,102



16,025Other


1,624



1,815Total loans


115,696



108,576Net deferred loan origination (fees) costs


(105
)


(102
)Less unearned income


(2
)


(2
)Total loans net of unearned income and net deferred loan origination (fees) costs


115,589



108,472Less allowance for loan losses


1,336



1,397Loans, net

$
114,253


$
107,075





NOTE 5ALLOWANCE FOR LOAN LOSSES





Analyses of the allowance for loan losses are presented below (in thousands):





Three Months Ended September 30

Nine Months Ended September 302002

2001

2002

2001(Unaudited)

(Unaudited)Balance at beginning of period

$
1,306

$
1,266

$
1,397

$
1,151Loans charged off:Commercial and industrial


0


25


134


27Real estatemortgage


11


12


47


12Consumer and other


35


23


89


90Total charge-offs


46


60


270


129Recoveries:Commercial and industrial


0


0


3


3Real estatemortgage


1


0


1


0Consumer and other


3


5


7


14Total recoveries


4


5


11


17Net losses


42


55


259


112Provision for loan losses


72


76


198


248Balance at end of period

$
1,336

$
1,287

$
1,336

$
1,287


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|* |  | From audited financial statements.
|- |  | ----------------------------------



10




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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.





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 amounts represent credit
risk

September 30, 2002 (unaudited)

December 31, 2001 *(in thousands)Commitments to extend credit

$
22,970

$
20,977Standby letters of credit


518


427Total

$
23,488

$
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.





NOTE 8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, 2002 and 2001 the weighted average number of shares outstanding were 648,125 and 650,423, respectively, while 647,139 shares were outstanding during the three month period ended September 30, 2002 and 650,051 were outstanding for the
three months ended September 30, 2001.





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.





---

|* |  | From audited financial statements.
|- |  | ----------------------------------






11




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Part I Item 2





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 upon managements current expectations. Such
forward looking information may involve uncertainties including those associated with the 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





The Companys net income for the third quarter of 2002 was $481,000 compared with $421,000 during the third quarter of 2001. On a year-to-date basis net income totaled $1,333,000 and $1,329,000 in
2002 and 2001, respectively. These year-to- date income levels result in annualized returns on average assets of 1.03% and 1.14%, respectively. Earnings per share for the nine month periods were $2.06 in 2002 and $2.04 in 2001.





Additional details concerning the Companys results of operations are addressed 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.





While recognizing that falling interest rates would reduce the yield on earning assets, from 8.17% in the first nine months of 2001 to 7.19% in the same period of this year, the Company has continued to seek growth in selected time
deposits, and such low cost funds as demand deposits, savings, money market and interest bearing checking accounts, particularly in its newer markets. This strategy has produced the desired growth not only in deposits but also in interest earning
assets while reducing the cost of interest bearing liabilities by 95 basis points to 3.05%. Consequently, interest expense in both the third quarter and year-to-date periods has fallen by more than interest income with the result that net interest
income is up by $88,000 and $187,000, respectively. That is, net interest income increased because the positive impact of the growth of the Companys balance sheet exceeded the negative impact of declining interest rates.





While the Company was successful in increasing its net interest income, net interest margin, which expresses net interest
income relative to average earning assets, decreased from 4.95% in the first nine months of 2001 to 4.68% in the same period of 2002. This was an expected byproduct of the Companys growth strategy at a time of falling asset yields but at
4.68%, the Companys net interest margin




12




---

remains above the most recent peer group average. Future reductions in the margin are expected to be limited in light of managements
decision to reduce interest rates on many deposit products in late August 2002.





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. The provision for loan losses totaled $72,000 and $76,000
in the third quarters of 2002 and 2001, respectively. On a year-to-date basis the provisions totaled $198,000 in 2002 and $248,000 in 2001. The factors which management considers in establishing the provision for loan losses, and in analyzing the
allowance for loan losses are discussed later in this report under the Allowance for Loan Losses section.





NONINTEREST INCOME





Noninterest income, which includes all revenues other than interest and fee income related to earning assets,
has become an increasingly important source of revenue for many banks, including Citizens. Consequently, Citizens has broadened its sources of noninterest income beyond its traditional banking and trust services, to include brokerage, secondary
market mortgage processing, and insurance. As a result, Citizens total noninterest income has risen significantly and now approximates the national peer average as a percentage of average total assets.





Total noninterest income for the third quarter 2002 of $356,000 is up 58% from $225,000 in the third quarter of last year. The majority of
this $131,000 increase is the result of fees generated from the processing of fixed rate secondary market mortgage loans which totaled $81,000 for the quarter, up $78,000. This program, which was initiated in the fourth quarter of 2001, has
benefited greatly from the historically low mortgage rates recently being offered. It should be noted that 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.





Service fees also increased by $21,000 approximately one-half of which resulted from
the addition of several ATM machines since the third quarter of 2001. Trust income and brokerage fees each increased by $15,000.





For the year-to-date period total noninterest income has increased $176,000, or 22%, to $960,000. Once again the secondary market loan program, which increased by $157,000 was the primary contributor to the improvement. The
settlement of estates tends to be a primary determinant of trust income and helped raise year-to-date trust income by $63,000 to $193,000. Service fees also improved as noted previously. Brokerage fees, which increased in the third quarter as a
result of better annuity sales, have fallen on a nine month basis from $108,000 to $47,000. This reflects not only the sluggish investment market but also the lack of a licensed broker early in 2002.





With the exception of the mortgage and brokerage programs, which appear to be countercyclical to one another, noninterest income has
generally been consistent with managements expectations and no significant changes are expected in the foreseeable future.





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 third quarter of 2002 totaled $1,453,000, up $156,000 from the third quarter of 2001 while the year-to-date total of $4,264,000 is up $410,000 from the same period
of 2001. These increases reflect the opening of a new branch in 2002 located in




13




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Marlinton, West Virginia and the associated personnel costs. Noninterest expenses attributable to the new Marlinton branch total $175,000
year-to-date and $66,000 for the third quarter.





Of the total quarterly increase of $156,000, 55%, or $86,000, is
the result of higher salaries and benefits. The increase in these costs reflects not only the need to staff the new facility, at a quarterly cost of $36,000, but also an increase in commissions earned by the Banks secondary market mortgage
personnel. Such commissions are based on total revenue recognized by the Bank and approximated $40,000 for the quarter.





The category of other noninterest expense increased by $39,000, or 19.2%, during the quarter due to higher costs for supplies, telephones, advertising and public relations all due in part to the operation of the new branch. Also, the
Bank incurred expenses approximating $12,000 in connection with specific product promotions during the quarter. Changes in the remaining items were not material in amount.





In the year-to-date analysis much of the increase is again due to higher personnel costs. Total salaries and benefits increased by $193,000 to $2,238,000 for the reasons
cited above as well as recurring salary adjustments and the need to replace the Banks investment representative. Higher utility and janitorial fees resulted in increased occupancy expense while an increase in depreciation caused equipment
expense to rise. Data processing costs for the nine month period have increased by $42,000, or 13.9%, due to an increase in the number of customer accounts being processed as well as the expansion of the Banks ATM network. An increase of
$114,000 in other noninterest expense is the result of several factors including increases of $37,000 in contributions and public relations costs, $17,000 in telephone costs including line charges in the Banks Marlinton market, $15,000 in
losses from the sale of foreclosed properties, $12,000 from product promotions as noted earlier, and $23,000 in recurring service fees from correspondent banks, the Federal Reserve and the OCC. The remaining noninterest expense items including
director fees, postage and professional fees all increased by immaterial amounts in the normal course of business. Management does not expert significant changes to noninterest expense for the remainder of the year.





INCOME TAXES





The
Companys provisions for state and federal income taxes during the third quarters of 2002 and 2001 were $242,000 and $235,000 respectively. For the year-to-date period income tax expense was $701,000 in 2002 and $702,000 in 2001 representing
effective tax rates of 34.5% and 34.6%, 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





Citizens total assets of $186,264,000 at September 30, 2002 were $19,445,000
more than at year-end 2001. This 11.7% increase reflects strong deposit growth particularly in the Marlinton and Elkins markets. Because deposit growth has been stronger than that of the loan portfolio, asset growth has been split between loans and
investment securities. The discussion which follows provides more detail concerning the Banks major balance sheet categories as well as liquidity and the impact of inflation.





LOAN PORTFOLIO





The Banks total loans of $115,696,000
at September 30, 2002 were $7,120,000, or 6.6%, more than at year-end 2001. The Banks most active loan markets have been the new Marlinton location as well as the nearby Snowshoe location. Mortgage




14




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loans, which have grown $5,976,000 this year, continue to represent the largest of the Banks loan portfolios totaling $76,218,000.
Included in this total are both residential mortgage loans and nonresidential mortgage loans. Nearly all of the Banks mortgage loans are variable rate in nature and many have reached their interest rate floor.





Commercial lending, which is also typically a variable rate product, has increased $4,068,000 to $20,809,000 since year-end. These loans
are provided to local businesses and, as has been the case with mortgage lending, demand has been generally consistent throughout 2002.





Management believes current loan demand reflects the favorable interest rate environment now available to borrowers as well as a strong local housing market. In some instances, however, existing borrowers are seeking to
refinance their debt. In the case of residential mortgage loans, many customers now prefer fixed rate mortgages which has caused them to seek loans from other providers, including the Banks own secondary market loan program. Despite the
resulting decrease in demand for the Banks own products, management is pleased with the level of loan growth and does not anticipate changing its practices as committing to long-term, fixed rate assets may present undesirable interest rate
risk.





Demand for consumer loans has been weak throughout 2002 causing the outstanding balance to fall from
$16,025,000 at December 31, 2001 to $14,102,000 at the report date. Much of this decrease has come in the area of auto lending where the Bank has tightened credit standards and manufacturers continue to offer superior financing plans.





Management expects the current level of economic uncertainty and financing competition to continue in the foreseeable future.
As a result, future loan growth may slow. Additional information concerning the Companys loan portfolio may be found 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, unused lines and letters of credit and other factors. As noted
previously, this analysis ultimately determines the amount which is expensed as provision for loan losses.





Loans
specifically analyzed include larger balance loans and those included on the Banks watch list as a result of possible weaknesses regarding collectability, performance or the adequacy of collateral as identified by the Banks internal loan
review function. For these loans, specific loss range estimates are made. Loans not specifically analyzed are grouped into pools with a separate pool existing for each of the Banks different loan portfolios such as real estate, commercial and
consumer. Loss ranges are estimated for each pool by considering the Banks own loss history over the previous 5 years as well as the loss history of the Banks peer groups. Finally, losses are assigned to those other factors identified in the
previous paragraph. The total of the losses so estimated are then compared to the Companys allowance for loan loss balance and adjustments to the balance are made as necessary.





As of September 30, 2002, Citizens allowance for loan losses of $1,336,000 was adequate when judged against the loss estimates established by the methods described. At
$1,336,000 the allowance represented 1.15% of gross loans. Net charge-offs for the first nine months of 2002 totaled $259,000 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.




15




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Among the Banks three major loan portfolios, historical data suggests the
largest portfolio, real estate loans, carries the least amount of credit risk while proportionately greater risk is found in the much smaller commercial loan portfolio. At September 30, 2002, approximately 37.8% of the allowance for loan losses is
attributed to the perceived risk within the commercial loan portfolio including the risk presented by loan concentrations to auto dealers and those in the lumber industry.





Management believes the quality of the loan portfolio remains good. Given economic conditions within the Banks markets it has raised credit standards regarding the
financing of consumer purchases of autos and reduced loan volume targets in areas experiencing particularly difficult economic conditions. As illustrated in the following table, seriously past due and nonaccrual loans are minimal:





Summary of Past Due Loans and Nonperforming Assets


(in thousands)





September 30

December 31 2001*2002

2001Loans past due 90 or more days still accruing interest

$
25

$
99

$
337Nonperforming assets:Nonaccruing loans

$
19

$
6

$
30Other Real Estate Owned


519


631


683$
538

$
637

$
713


---

|* |  | From the Companys Form 10-K filing dated December 31, 2001.
|- |  | ------------------------------------------------------------




The balance in other real estate owned includes $427,000 of covered transactions all of which are current in terms of their performance. At September 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.





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.





Through the first nine months of 2002 the securities portfolio has increased $6,523,000 to $55,487,000 as funds provided by deposit growth
have exceeded that needed to finance loans.





Given the current environment surrounding the economy and interest
rates, the Bank has followed its normal practice of constructing a short-term, laddered portfolio of U.S. government agency securities, bank-qualified municipal debt and government agency mortgage backed securities. Investment grade corporate debt
instruments are also held in the portfolio although just one such security totaling $516,000 has been purchased this year as management has chosen to focus on other investment alternatives which appear to carry less credit risk. Total purchases
during the first nine months of the year were $13,643,000. Also included in the portfolio are net unrealized gains totaling $1,939,000 at September 30, 2002, which are up from $918,000 at year-end. Please refer to Note 3 for additional detail
concerning the Companys investment portfolio.





The Bank generally tries to minimize its involvement in the
overnight federal funds market preferring to fully utilize available funds for higher yielding loan




16




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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. One such investing strategy was the Banks decision to purchase
$2,000,000 of bank owned life insurance (BOLI) during the third quarter. Funds used to make this purchase were temporarily held in federal funds sold as management analyzed several different plans and carriers. The purchase of this insurance product
was made to fund certain retirement benefits for board members and executive officers who qualify and is reflected in the other assets section of the Companys balance sheet.





As of the report date the Bank had $1,700,000 in federal funds sold and no overnight borrowings. For the nine months ended September 30, 2002, federal funds sold averaged
$3,446,000 while federal funds purchased averaged $210,000.





DEPOSITS AND OTHER FUNDING SOURCES





Deposits have grown throughout the Banks six branch network in 2002 with the strongest growth occurring in the Elkins and Marlinton
markets. Total deposits at September 30, 2002 of $150,281,000 are $18,529,000 in excess of their year-end 2001 level. This 14.1% increase is the result of aggressive marketing in new territories and, management believes, the continued shift of funds
from equity markets and equity mutual funds to the safety of insured bank deposits with known returns.





Noninterest bearing deposits have increased by $5.2 million to $22,366,000 since year-end while interest bearing deposits have risen $13.4 million to $127,915,000. Among the interest bearing deposit products offered by the Bank,
several have been quite successful in 2002. Savings accounts, money market accounts, and interest bearing checking accounts all offer stability and a high degree of liquidity and have grown by approximately $7.5 million since year-end despite the
low interest rates they now offer. Time deposits, a common alternative to equities in uncertain times, have increased by $4,454,000 since year-end. Although customers remain hesitant to invest in longer-term certificates in this low interest rate
environment, two and three year certificates have increased by $5.7 million. The Bank has been particularly successful in promoting its three year certificates which allow the customer certain benefits including the ability to add to, or withdraw
from, the account without penalty as well as the opportunity to take advantage of higher interest rates should they be offered. Management believes that two and three year certificates provide a stable source of low cost funds while also giving
customers good choices for the investment of maturing 25 month certificates issued in an earlier promotion.





The
Banks short-term borrowings include overnight funds purchased, if any, and repurchase agreements. At September 30, 2002, repurchase agreements totaled $11,761,000 compared to $13,922,000 at December 31, 2001. Long-term borrowings, however,
increased to $2,040,000 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 has historically maintained a very strong capital position and at $20,389,000, capital represents 10.9% of assets at September 30, 2002. As detailed in the
Statement of Changes in Shareholders Equity capital continues to grow as a result of earnings and the increase in the value of the available for sale securities portfolio. Dividend policy remains consistent with prior years; year-to-date
dividends have totaled $.75 per share. The Company has also purchased 2,350 shares of treasury stock in 2002. All such purchases 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.




17




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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 RatiosCitizens Financial Corp.


Regulatory RequirementsTotal capital to risk weighted assets

16.04
%

8.00
%Tier I capital to risk weighted assets

14.98
%

4.00
%Tier I capital to adjusted total assets

10.57
%

4.00
%





LIQUIDITY





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. Management believes that efficiently managing liquidity minimizes the Banks involvement in the overnight federal funds markets and enhances earnings. 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 $54,000,000.





Tests utilizing expected loan, deposit,
and investment security levels are regularly performed to project liquidity needs. At September 30, 2002, 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.





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.





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.




18




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Part I Item 3


Quantitative and Qualitative Disclosures About Market Risk





Market risk is the risk of
loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. Citizens primary market risk is interest rate risk which results from timing differences in the
repricing of assets, liabilities and off-balance-sheet instruments. Some amount of interest rate risk is inherent and appropriate in banking.





The Company controls interest rate risk through its interest rate sensitivity management program, also know as asset/liability management. The objective of this program 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 September 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 magnitude of such change 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 actually fall as interest sensitive assets, such as loan and
investment securities could reprice more quickly than interest sensitive liabilities particularly in light of managements decision to lower the rates paid on savings, money market and interest bearing checking accounts during the later part of
the third quarter. While this action will improve net interest income under current conditions, it may limit managements ability to react to further interest rate cuts. Nonetheless, as indicated by the rate shock tests described earlier, the
level of risk presented by interest rate changes is within the Companys established limits.




19




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Part I Item 4


Control and Procedures





Within 90 days prior to filing this Quarterly Report on Form
10-Q, the Company, under the supervision and with the participation of management, including the chief executive officer and principal financial officer, carried out an evaluation of the effectiveness of the design and operation of the
Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the chief executive officer and principal financial officer concluded that the Companys disclosure controls and procedures are
effective in timely alerting them to material information relating to the Company which is required to be included in the Companys periodic SEC filings. Subsequent to the date of that evaluation, there have been no significant changes in the
Companys internal controls or in other factors that could significantly offset internal controls, nor were any corrective actions required with regard to significant deficiencies or material weaknesses.




20




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PART II - OTHER INFORMATION





Item 1.    Legal Proceedings :





As of September 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 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:    The following exhibits are filed with this report:





Exhibit No.

Description of Exhibit99(a)

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 135099(b)

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350





(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./s/    ROBERT J.
SCHOONOVERRobert J. Schoonover President Chief Executive Officer





Date:  11/6/02





/s/    THOMAS K.
DERBYSHIREThomas K. Derbyshire Vice President, Treasurer and Principal Financial Officer





Date:  11/6/02




22




---




CITIZENS FINANCIAL CORP.





CERTIFICATION PURSUANT


TO SECTION 302


OF THE SARBANES-OXLEY ACT OF 2002





I, Robert J. Schoonover, President and Chief Executive Officer of Citizens
Financial Corp., certify that:





1.  I have reviewed this quarterly report on Form 10-Q
of Citizens Financial Corp;





2.  Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
quarterly report;





3.  Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;





4.  The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:





a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;





b)  evaluated the effectiveness of the registrants disclosure controls and and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the Evaluation Date); and





c)  presented in
this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;





5.  The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors
and the audit committee of registrants board of directors (or persons performing the equivalent function):





a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and





b)  any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and





6.  The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.





/s/    ROBERT J.
SCHOONOVERRobert J. Schoonover President and Chief Executive Officer





Date:  11/6/02




23




---

CITIZENS FINANCIAL CORP.





CERTIFICATION PURSUANT


TO SECTION 302


OF THE SARBANES-OXLEY ACT OF 2002





I, Thomas K. Derbyshire, Vice President,
Treasurer and Principal Financial Officer of Citizens Financial Corp., certify that:





1.  I have reviewed this quarterly report on Form 10-Q of Citizens Financial Corp;





2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this quarterly report;





3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly report;





4.  The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:





a)  designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;





b)  evaluated the effectiveness of the registrants disclosure controls and and procedures as of a date
within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and





c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;





5.  The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to
the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):





a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial
data and have identified for the registrants auditors any material weaknesses in internal controls; and





b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and





6.  The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.





By:

/s/    THOMAS K.
DERBYSHIREThomas K. Derbyshire V.P.,
Treasurer & Principal Financial Officer





Date:  11/6/02




24