SCHEDULE 14A
Information Required in Proxy Statement
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant: Yes.
Filed by a Party other than the Registrant: No.
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as Permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
CITIZENS BANCORP
(Name Of Registrant As Specified In Its Charter)
CITIZENS BANCORP
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11
(1) Title of each class of securities to which transaction
applies: N/A
(2) Aggregate number of securities to which transaction
applies: N/A
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth
the amount on which the filing fee is calculated and
state how it was determined): N/A
(4) Proposed maximum aggregate value of transaction: N/A
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing. N/A
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
Citizens Bancorp
60 South Main Street
P.O. Box 635
Frankfort, Indiana 46041
(765) 654-8533
----------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
----------------------------------------
To Be Held On March 24, 1998
Notice is hereby given that the Annual Meeting of Shareholders of Citizens
Bancorp (the "Holding Company") will be held at the Frankfort Community Public
Library, 208 West Clinton Street, Frankfort, Indiana, on Tuesday, March 24,
1998, at 3:00 p.m., Eastern Standard Time.
The Annual Meeting will be held for the following purposes:
1. Election of Directors. Election of all five of the directors of the
Holding Company to serve staggered terms, with terms expiring in 1998,
1999 and 2000.
2. Approval of Stock Option Plan. Approval and ratification of the
Citizens Bancorp Stock Option Plan (the "Option Plan").
3. Approval of Recognition and Retention Plan and Trust. Approval and
ratification of the Citizens Savings Bank of Frankfort Recognition and
Retention Plan and Trust (the "RRP").
4. Other Business. Such other matters as may properly come before the
meeting or any adjournment thereof.
Shareholders of record at the close of business on February 13, 1998, are
entitled to vote at the meeting or any adjournment thereof.
We urge you to read the enclosed Proxy Statement carefully so that you may
be informed about the business to come before the meeting, or any adjournment
thereof. At your earliest convenience, please sign and return the accompanying
proxy in the postage-paid envelope furnished for that purpose.
A copy of our Annual Report for the fiscal year ended June 30, 1997, is
enclosed. The Annual Report is not a part of the proxy soliciting material
enclosed with this letter.
By Order of the Board of Directors
/s/ Fred W. Carter
Fred W. Carter,
President and Chief Executive Officer
Frankfort, Indiana
February 17, 1998
IT IS IMPORTANT THAT THE PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO BE PRESENT IN PERSON AT THE ANNUAL MEETING, PLEASE SIGN, DATE AND
COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
<PAGE>
Citizens Bancorp
60 South Main Street
P.O. Box 635
Frankfort, Indiana 46041
(765) 654-8533
---------------
PROXY STATEMENT
---------------
FOR
ANNUAL MEETING OF SHAREHOLDERS
March 24, 1998
This Proxy Statement is being furnished to the holders of common stock,
without par value (the "Common Stock"), of Citizens Bancorp (the "Holding
Company"), an Indiana corporation, in connection with the solicitation of
proxies by the Board of Directors of the Holding Company to be voted at the
Annual Meeting of Shareholders to be held at 3:00 p.m., Eastern Standard Time,
on March 24, 1998, at the Frankfort Community Public Library, 208 West Clinton
Street, Frankfort, Indiana, and at any adjournment of such meeting. The
principal asset of the Holding Company consists of 100% of the issued and
outstanding shares of common stock, $.01 par value per share, of Citizens
Savings Bank of Frankfort (the "Bank"). This Proxy Statement is expected to be
mailed to the shareholders of the Holding Company on or about February 17, 1998.
The proxy solicited hereby, if properly signed and returned to the Holding
Company and not revoked prior to its use, will be voted in accordance with the
instructions contained therein. If no contrary instructions are given, each
proxy received will be voted for each of the matters described below and, upon
the transaction of such other business as may properly come before the meeting,
in accordance with the best judgment of the persons appointed as proxies.
Any shareholder giving a proxy has the power to revoke it at any time
before it is exercised by (i) filing with the Secretary of the Holding Company
written notice thereof (Cindy S. Chambers, 60 South Main Street, P.O. Box 635,
Frankfort, Indiana 46041), (ii) submitting a duly executed proxy bearing a later
date, or (iii) by appearing at the Annual Meeting and giving the Secretary
notice of his or her intention to vote in person. Proxies solicited hereby may
be exercised only at the Annual Meeting and any adjournment thereof and will not
be used for any other meeting.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Only shareholders of record at the close of business on February 13, 1998
("Voting Record Date"), will be entitled to vote at the Annual Meeting. On the
Voting Record Date, there were 1,058,000 shares of the Common Stock issued and
outstanding, and the Holding Company had no other class of equity securities
outstanding. Each share of Common Stock is entitled to one vote at the Annual
Meeting on all matters properly presented at the Annual Meeting. The holders of
over 50% of the outstanding shares of Common Stock as of the Voting Record Date
must be present in person or by proxy at the Annual Meeting to constitute a
quorum. In determining whether a quorum is present, shareholders who abstain,
cast broker non-votes, or withhold authority to vote on one or more director
nominees will be deemed present at the Annual Meeting.
<PAGE>
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of February 13, 1998, by each person who is
known by the Holding Company to own beneficially 5% or more of the Common Stock.
Unless otherwise indicated, the named beneficial owner has sole voting and
dispositive power with respect to the shares.
Number of Shares
Name and Address of Common Stock Percent
of Beneficial Owner(1) Beneficially Owned of Class
- ---------------------- ------------------ --------
The Farmers Bank, as Trustee
9 East Clinton Street
Frankfort, Indiana 46041 84,640 (2) 8.0%
Sandler O'Neill Asset Management LLC
SOAM Holdings, LLC
Malta Partners, L.P.
Malta Hedge Fund, L.P.
Terry Maltese
712 Fifth Avenue
22nd Floor
New York, New York, 10015 65,600 (3) 6.2%
- --------------
(1) The information in this chart is based on a Schedule 13G Report filed
by the above-listed person with the Securities and Exchange Commission
(the "SEC") containing information concerning shares held by it. It
does not reflect any changes in those shareholdings which may have
occurred since the date of such filing.
(2) These shares are held by the Trustee of the Citizens Bancorp Employee
Stock Ownership Plan and Trust (the "ESOP"). The Employees
participating in that Plan are entitled to instruct the Trustee how to
vote shares held in their accounts under the Plan. Unallocated shares
held in a suspense account under the Plan are required under the Plan
terms to be voted by the Trustee in the same proportion as allocated
shares are voted. Prior to the initial allocation of shares, the ESOP
shares will be voted by the ESOP committee.
(3) Malta Partners, L.P., a Delaware limited partnership ("MP"),
beneficially owns and holds 42,000 of these shares and Malta Hedge
Fund, L.P., a Delaware limited partnership("MHF"), beneficially owns
and holds 23,600 of these shares. MP and MHF are private partnerships
engaged in investment in securities for their own accounts. Sandler
O'Neill Asset Management LLC, a New York limited liability company
("SOAM"), provides administrative and management services to MP and
MHF. SOAM Holdings, LLC, a Delaware limited liability company
("Holdings"), is the general partner of each of MP and MHF. Terry
Maltese is president and managing member of Holdings and SOAM. Each of
the listed parties shares investment and dispositive power with respect
to these shares.
PROPOSAL I -- ELECTION OF DIRECTORS
The Board of Directors consists of five members. The By-Laws provide that
the Board of Directors is to be divided into three classes as nearly equal in
number as possible. The members of each class are to be elected for a term of
three years and until their successors are elected and qualified. One class of
directors is to be elected annually. Directors must have their principal
domicile in Clinton County, Indiana, must have had a loan or deposit
relationship with the Bank for a continuous period of 12 months prior to their
nomination to the Board, and non-employee directors must have served as a member
of a civic or community organization based in Clinton County, Indiana for at
least a continuous period of 12 months during the five years prior to their
nomination to the Board. Since this is the first Annual Meeting of Shareholders
following the organization of the Holding Company, it is necessary to elect all
of the directors for the terms set forth below.
Unless otherwise directed, each proxy executed and returned by a
shareholder will be voted for the election of the nominees listed below. If any
person named as a nominee should be unable or unwilling to stand for election at
the time of the Annual Meeting, the proxy holders will nominate and vote for a
replacement nominee recommended by the Board of Directors. At this time, the
Board of Directors knows of no reason why the nominees listed below may not be
able to serve as directors if elected.
<PAGE>
The following table sets forth certain information regarding the nominees
for the position of director of the Holding Company, including the number and
percent of shares of Common Stock beneficially owned by such persons as of the
Voting Record Date. Unless otherwise indicated, each nominee has sole investment
and/or voting power with respect to the shares shown as beneficially owned by
him. No nominee for director is related to any other nominee for director or
executive officer of the Holding Company by blood, marriage, or adoption, and
there are no arrangements or understandings between any nominee and any other
person pursuant to which such nominee was selected. The table also sets forth
the number of shares of Holding Company Common Stock beneficially owned by all
directors and executive officers of the Holding Company as a group.
<TABLE>
<CAPTION>
Common Stock
Expiration of Director of the Director Beneficially
Term as Holding of the Bank Owned as of Percentage
Name Director Company Since Since February 13, 1998 of Class(1)
- -------------------------------------------------------------------------------------------------------------------------
Director Nominees
<S> <C> <C> <C> <C> <C>
Fred W. Carter 2000 1997 1960-1966 22,000 (2) 2.08%
1971-Present
Robert F. Ayres 1999 1997 1979 5,000 .47
Perry W. Lewis 1998 1997 1975 22,000 2.08
John J. Miller 1998 1997 1975 37,000 (3) 3.50
Billy J. Wray 1999 1997 1995 20,000 1.89
All directors and
executive officers
as a group (8 persons) 151,000 14.27%
</TABLE>
- -------------
(1) Based upon information furnished by the respective director nominees. Under
applicable regulations, shares are deemed to be beneficially owned by a
person if he or she directly or indirectly has or shares the power to vote
or dispose of the shares, whether or not he or she has any economic power
with respect to the shares. Includes shares beneficially owned by members
of the immediate families of the directors residing in their homes.
(2) Includes 12,000 shares owned jointly by Mr. Carter and his spouse
(3) Includes 10,000 shares owned by a company deemed to be controlled by Mr.
Miller.
Presented below is certain information concerning the director nominees of
the Holding Company:
Robert F. Ayres (age 72) served as Superintendent of Community Schools of
Frankfort from 1965 until his retirement in 1989. He previously served as a high
school principal, teacher and coach at Frankfort Senior High School, in
Frankfort.
Fred W. Carter (age 66) has served as Chairman, President and Chief
Executive Officer of the Holding Company since 1997 and President and Chief
Executive Officer of the Bank since 1972, and has been an employee of Citizens
since 1966. Mr. Carter is the father of Cindy S. Chambers, Citizens' Secretary
and Customer Service Manager.
Perry W. Lewis (age 76) is retired. He formerly served as the Chairman of
Lewis Ford Sales, Inc. in Frankfort since 1984.
John J. Miller (age 58) has served as President of Goodwin Funeral Home,
Inc. in Frankfort since 1979.
Billy J. Wray (age 66) is part owner of Premium Auto Center, Inc. (a
used-car dealership), in Lebanon, Indiana. He also owns interests in various
real estate developments around Frankfort.
Citizens also has an advisory director program pursuant to which its former
directors may continue to serve as advisors to the Board of Directors upon their
retirement or resignation from the Board. Currently, Ralph C. Hinshaw and Rawl
V. Ransom serve as advisory directors.
<PAGE>
THE DIRECTORS SHALL BE ELECTED UPON RECEIPT OF A PLURALITY OF VOTES CAST AT
THE ANNUAL SHAREHOLDERS MEETING. PLURALITY MEANS THAT INDIVIDUALS WHO RECEIVE
THE LARGEST NUMBER OF VOTES CAST ARE ELECTED UP TO THE MAXIMUM NUMBER OF
DIRECTORS TO BE CHOSEN AT THE MEETING. ABSTENTIONS, BROKER NON-VOTES, AND
INSTRUCTIONS ON THE ACCOMPANYING PROXY TO WITHHOLD AUTHORITY TO VOTE FOR ONE OR
MORE OF THE NOMINEES WILL RESULT IN THE RESPECTIVE NOMINEE RECEIVING FEWER
VOTES. HOWEVER, THE NUMBER OF VOTES OTHERWISE RECEIVED BY THE NOMINEE WILL NOT
BE REDUCED BY SUCH ACTION.
The Board of Directors and its Committees
During the fiscal year ended June 30, 1997, the Board of Directors of the
Holding Company acted by written consent one time. No director attended fewer
than 75% of the aggregate total number of meetings during the last fiscal year
of the Board of Directors of the Holding Company held while he served as
director and of meetings of committees which he served during that fiscal year.
The Board of Directors of the Holding Company has an Audit Committee and a Stock
Compensation Committee, among its other Board Committees. All committee members
are appointed by the Board of Directors.
The Audit Committee, comprised of all directors except Fred W. Carter,
recommends the appointment of the Holding Company's independent accountants, and
meets with them to to outline the scope and review the results of such audit.
The Audit Committee did not meet during the fiscal year ended June 30, 1997,
because the stock conversion of the Bank did not close until September, 1997.
The Stock Compensation Committee administers the Option Plan and the RRP
which are being submitted to a vote of the shareholders at the Annual Meeting.
The members of that Committee are all directors except Fred W. Carter. It did
not meet during fiscal 1997 because the plans were not adopted until January 13,
1998.
The Board of Directors of the Holding Company nominated the slate of
directors set forth in the Proxy Statement. Although the Board of Directors of
the Holding Company will consider nominees recommended by shareholders, it has
not actively solicited recommendations for nominees from shareholders nor has it
established procedures for this purpose. Directors must satisfy certain
qualification requirements set forth in the Holding Company's By-Laws. Article
III, Section 12 of the Holding Company's By-Laws provides that shareholders
entitled to vote for the election of directors may name nominees for election to
the Board of Directors but there are certain requirements that must be satisfied
in order to do so. Among other things, written notice of a proposed nomination
must be received by the Secretary of the Holding Company not less than 120 days
prior to the Annual Meeting; provided, however, that in the event that less than
130 days' notice or public disclosure of the date of the meeting is given or
made to shareholders (which notice or public disclosure includes the date of the
Annual Meeting specified in the Holding Company's By-Laws if the Annual Meeting
is held on such date), notice must be received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made.
Management Remuneration and Related Transactions
Remuneration of Named Executive Officer
During the fiscal year ended June 30, 1997, no cash compensation was paid
directly by the Holding Company to any of its executive officers. Each of such
officers was compensated by the Bank.
<PAGE>
The following tables set forth information as to annual, long term and
other compensation for services in all capacities to the President and Chief
Executive Officer of the Holding Company for the two fiscal years ended June 30,
1997 (the "Named Executive Officer"). There were no other executive officers of
the Holding Company who earned over $100,000 in salary and bonuses during the
fiscal year ended June 30, 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Name and Principal Fiscal Other Annual All Other
Position Year Salary (1) Bonus Compensation (3) Compensation
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fred Carter, President and 1997 $91,000 $39,600 (2) -- $120 (4)
Chief Executive Officer 1996 85,200 35,667 -- 120 (4)
</TABLE>
(1) Includes fees received for service on the Bank's Board of Directors.
(2) Beginning with calendar year 1997, Mr. Carter receives a bonus equal to 10%
of the profits of the Bank in excess of $626,000 after deducting certain
expenses incurred by the Bank.
(3) Mr. Carter received certain perquisites, but the incremental cost of
providing such perquisites did not exceed the lesser of $50,000 or 10% of
his salary and bonus.
(4) This column includes amounts paid by the Bank for insurance premiums with
respect to a $10,000 term life insurance policy for the benefit of Mr.
Carter.
Stock Options
No stock options were granted during fiscal 1997 to, or held as of June 30,
1997 by, the Named Executive Officer. For information concerning grants of stock
options made in fiscal 1998, including a grant of a stock option for 26,450
shares of the Common Stock to Fred W. Carter, see "Proposal II--Stock Option
Plan."
Employment Contract
The Bank entered into a three-year employment contract with Mr. Carter. The
contract with Mr. Carter, effective as of the effective date of the Conversion,
extends annually for an additional one-year term to maintain its three-year term
if the Bank's Board of Directors determines to so extend it, unless notice not
to extend is properly given by either party to the contract. Mr. Carter receives
an initial salary under the contract equal to his salary with the Bank prior to
the Conversion, subject to increases approved by the Board of Directors. The
contract also provides, among other things, for participation in other fringe
benefits and benefit plans available to the Bank's employees. Mr. Carter may
terminate his employment upon 60 days' written notice to the Bank. The Bank may
discharge Mr. Carter for cause (as defined in the contract) at any time or in
certain specified events. If the Bank terminates Mr. Carter's employment for
other than cause or if Mr. Carter terminates his own employment for cause (as
defined in the contract), Mr. Carter will receive his base compensation under
the contract for an additional three years if the termination follows a change
of control in the Holding Company, and for the balance of the contract if the
termination does not follow a change in control. In addition, during such
period, Mr. Carter will continue to participate in the Bank's group insurance
plans and retirement plans, or receive comparable benefits. Moreover, within a
period of three months after such termination following a change of control, Mr.
Carter will have the right to cause the Bank to purchase any stock options he
holds for a price equal to the fair market value (as defined in the contract) of
the shares subject to such options minus their option price. If the payments
provided for in the contract, together with any other payments made to Mr.
Carter by the Bank, are deemed to be payments in violation of the "golden
parachute" rules of the Internal Revenue Code of 1986, as amended (the "Code"),
such payments will be reduced to the largest amount which would not cause the
Bank to lose a tax deduction for such payments under those rules. As of the date
hereof, the cash compensation which would be paid under the contract to Mr.
Carter if the contract were terminated after a change of control of the Holding
Company, without cause by the Bank, or for cause by Mr. Carter, would be
$255,000. For purposes of this employment contract, a change of control of the
Holding Company is generally an acquisition of control, as defined in
regulations issued under the Change in Bank Control Act and the Savings and Loan
Holding Company Act.
<PAGE>
The employment contract protects the Bank's confidential business
information and protects the Bank from competition by Mr. Carter should he
voluntarily terminate his employment without cause or be terminated by the Bank
for cause.
Compensation of Directors
The Bank pays its directors a monthly retainer of $300 plus $200 for each
month in which they attend one or more meetings. Rawl V. Ransom and Ralph C.
Hinshaw receive $500 per monthly meeting attended as advisory directors. Total
fees paid to its directors and advisory directors for the year ended June 30,
1997 were approximately $40,400.
The Bank's directors and advisory directors may, pursuant to a deferred
compensation agreement, defer payment of some or all of their directors fees
into a retirement account. Under this agreement, deferred directors fees are to
be paid to a director beginning upon the first day of the month following the
director's seventieth (70th) birthday, and continuing in equal installments over
a 180-month period. A director may also receive his benefits in a lump sum in
the event of financial hardship. The agreement also provides for death and
disability benefits. At present, Mr. Carter is the only director who has
executed a deferred compensation agreement with the Bank.
Directors of the Holding Company are not currently paid directors' fees.
The Holding Company may, if it believes it is necessary to attract qualified
directors or is otherwise beneficial to the Holding Company, adopt a policy of
paying directors' fees.
Transactions With Certain Related Persons
The Bank has followed a policy of offering to their directors,
officers, and employees real estate mortgage loans secured by their principal
residence and other loans. These loans are made in the ordinary course of
business with the same collateral, interest rates and underwriting criteria as
those of comparable transactions prevailing at the time and do not involve more
than the normal risk of collectibility or present other unfavorable features.
Loans to directors, executive officers and their associates totaled
approximately $2.2 million, or approximately 39% of consolidated retained
earnings at June 30, 1997. This amount includes two loans to directors Billy J.
Wray and John J. Miller, neither of whom were directors or employees of the Bank
when the loans were originated. The first loan, in the original principal amount
of approximately $1.5 million, was originated in October, 1991 to both Mr. Wray
and Mr. Miller and is secured by the 48-unit Clinton Estates apartment complex
located in Frankfort. The Bank sold a $542,000 nonrecourse participation in this
loan to reduce the loan balance to within its lending limit. At June 30, 1997,
this loan was current with a balance of approximately $1,337,000, of which
approximately $837,000 was owed to the Bank. The second loan, dated February,
1994, was a construction line of credit in the original amount of $620,000 to
Mr. Miller, secured by eight condominiums and other real estate located in
Tipton, Indiana. At June 30, 1997, this loan was also current with a balance of
approximately $395,000. The Bank is not obligated to advance additional funds
pursuant to this line of credit. In the opinion of the Bank's management, these
loans are adequately collateralized.
Current law authorizes the Bank to make loans or extensions of credit to
its executive officers, directors, and principal shareholders on the same terms
that are available with respect to loans made to its employees. At present, the
Bank's loans to executive officers, directors, principal shareholders and
employees are made on the same terms generally available to the public. The Bank
may in the future, however, adopt a program under which it may waive loan
application fees and closing costs with respect to loans made to such persons.
Loans made to a director or executive officer in excess of the greater of
$25,000 or 5% of the Bank's capital and surplus (up to a maximum of $500,000)
must be approved in advance by a majority of the disinterested members of the
Board of Directors. The Bank's policy regarding loans to directors and all
employees meets the requirements of current law.
<PAGE>
PROPOSAL II -- STOCK OPTION PLAN
The Board of Directors of the Holding Company adopted the Citizens Bancorp
Stock Option Plan (the "Option Plan") on January 13, 1998. The essential
features of the Option Plan are summarized below, but the Option Plan is set
forth in full in Exhibit A to this Proxy Statement, and all statements made in
this summary are qualified by reference to the full text of the Option Plan.
Purpose
The purpose of the Option Plan is to provide to certain directors, officers
and other key employees of the Holding Company and its subsidiaries (the
"Subsidiaries") (currently approximately ten persons) a favorable opportunity to
acquire Common Stock of the Holding Company and thereby increase the incentive
of such persons to work for the success of the Holding Company and its
subsidiaries and better enabling such entities to attract or retain capable
directors and executive personnel.
The Option Plan provides for the grant of both incentive stock options
(options that afford favorable tax treatment to recipients upon compliance with
certain restrictions and that do not normally result in tax deductions to the
Holding Company) and options that do not so qualify (non-qualified stock
options).
Administration
The Option Plan is administered, construed and interpreted by a committee
consisting of at least two members of the Holding Company's Board of Directors.
Currently, the Holding Company's Stock Compensation Committee (the "Stock
Compensation Committee") administers the Option Plan. The Stock Compensation
Committee selects the individuals to whom options will be granted and determines
the time of grant, the number of shares of stock to be covered by each option,
the option price, the period within which the option may be exercised, whether
the option is an incentive stock option or non-qualified stock option, and any
other terms and conditions of the options granted. Members of the Stock
Compensation Committee must be nonemployee directors of the Holding Company. The
current members of that Committee are set forth on page 4 of this Proxy
Statement.
Reservation of Shares
The Holding Company has reserved 105,800 shares of its Common Stock for
issuance upon exercise of options to be granted under the Option Plan, and stock
options for 81,995 of such shares have already been granted, subject to and
effective as of the date the Holding Company's shareholders approve the Option
Plan. Shares issued under the Option Plan may be authorized but unissued shares
or treasury shares of the Holding Company. In the event of corporate changes
affecting the Holding Company's Common Stock, such as reorganizations,
recapitalizations, stock splits, stock dividends, mergers, consolidations,
extraordinary distributions or liquidations, the Stock Compensation Committee
may make appropriate adjustments in the number and kind of shares reserved under
the Option Plan and in the option price under, and the number and kind of shares
covered by, outstanding options granted under the Option Plan. Any shares
subject to an option which expires or is terminated before exercise will again
be available for issuance under the Option Plan.
Options may be granted to officers (including officers who are members of
the Board of Directors), directors, directors emeritus and other key employees
of the Holding Company and its subsidiaries who are materially responsible for
the management or operation of the business of the Holding Company or its
subsidiaries and have provided valuable services to the Holding Company or its
subsidiaries. Such individuals may be granted more than one option under the
Option Plan.
<PAGE>
Since its adoption by the Board of Directors, the following incentive stock
options have been granted under the Option Plan. All such options were granted
effective as of the date the Holding Company's shareholders approve the Option
Plan, have an option price per share equal to the average between the high and
low sales prices for a share of the Holding Company's Common Stock ("Market
Value") on that date (or the closest trading date if there is no trading on that
date), and have ten-year terms. These options become exercisable at the rate of
20% per year beginning on the anniversary of the date of grant, subject to
earlier vesting in the event of the death or disability of the option holder.
Such grants of incentive stock options are as follows:
Shares Subject
Optionee To Options
-------- ----------
Fred W. Carter 26,450
All other executive officers as a group
(3 persons) 23,805
------
Total 50,255
======
In addition, non-qualified stock options were granted to the four directors
and two directors emeritus of the Holding Company who are not employees of the
Holding Company or its subsidiaries ("Outside Directors"). These options for
such Outside Directors were granted effective as of the date the Holding
Company's shareholders approve the Option Plan and are each non-qualified stock
options to purchase 5,290 shares of the Holding Company Common Stock at the
Market Value of such shares on such date. The terms of these options end ten
years and one day following the date of grant, and became exercisable at the
rate of 20% per year beginning on the anniversary of the date of the grant,
subject to earlier vesting in the event of the death or disability of the option
holder. At February 9, 1998, the average between the high asked and low bid
price for a share of the Holding Company's Common Stock was $15.0625 per share.
Terms of the Options
Stock Option Price. The price to be paid for shares of Common Stock upon
the exercise of each incentive stock option shall not be less than the fair
market value of such shares on the date on which the option is granted.
Incentive stock options granted to holders of more than 10% of the combined
voting power of all classes of stock of the Holding Company may be granted at an
option price no less than 110% of the fair market value of the stock on the date
of grant.
Option Term. No option may have a term longer than ten years and one day
from the date of grant. However, under the Code, incentive stock options may not
have terms in excess of ten years. Incentive stock options granted to holders of
more than 10% of the combined voting power of all classes of stock of the
Holding Company may not have terms in excess of five years.
Exercise of Option. The option price of each share of stock is to be paid
in full in cash at the time of exercise. Under certain circumstances, the Option
Plan permits optionees to deliver a notice to their broker to deliver to the
Holding Company the total option price in cash and the amount of any taxes to be
withheld from the optionee's compensation as a result of any withholding tax
obligation of the Holding Company. Beginning on September 19, 2000, payment of
the option price may also be effected by tendering whole shares of the Holding
Company's Common Stock owned by the Optionee and cash having a fair market value
equal to the cash exercise price of the shares with respect to which the option
is being exercised. Options may be exercisable in full at any time during their
term or in such installments, on a cumulative basis, as the Stock Compensation
Committee may determine, except that no option may be exercised at any time as
to fewer than 100 shares unless the exercise is with respect to an entire
residue of fewer than 100 shares, no option may be exercised during the first
six months of its term, and options become exercisable at the rate of 20% per
year beginning on the anniversary of the date of grant of such options.
<PAGE>
Exercise of Options by Other Than Outside Directors. Except as provided
below, upon termination of an optionholder's employment by the Holding Company
and its subsidiaries, all rights under any options granted to him but not yet
exercised terminate. In the event that an optionee retires pursuant to any then
existing pension plan of the Holding Company or its subsidiaries, his option may
be exercised by him in whole or in part within three years after his retirement
until the expiration of the option term fixed by the Committee, to the extent
the option was otherwise exercisable by him at his date of retirement; provided,
however, that if he remains a director or director emeritus of the Holding
Company or any of its subsidiaries the option granted to him continues to vest
while he serves as director or director emeritus and he may exercise such option
until the later of (a) three years after his retirement or (b) six months after
he ceases to be a director or director emeritus of the Holding Company or any of
its subsidiaries. If an optionee's employment by the Holding Company and its
subsidiaries terminates by reason of permanent and total disability, his option
may be exercised by him in whole or in part within one year after such
termination of employment, whether or not the option was otherwise exercisable
by him at the time of such termination of employment. If the optionee dies while
employed by the Holding Company or its subsidiaries, within three years after
his retirement (or, if later, six months following his termination of service as
a director or director emeritus of the Holding Company or its subsidiaries), or
within one year after his termination of employment because of permanent and
total disability, his option may be exercised by his estate or by the person or
persons entitled thereto by will or by the applicable laws of descent or
distribution at any time within one year after the date of such death, whether
or not the option was otherwise exercisable by the optionee at the date of his
death. Notwithstanding the foregoing, in no event may any option be exercised
after the expiration of the option term set by the Stock Compensation Committee.
Exercise of Options by Outside Directors. Options granted to Outside
Directors terminate six months after the date such Outside Director ceases to be
a director and director emeritus of the Holding Company and the subsidiaries for
any reason. If an optionee who is an Outside Director ceases to be a director
and a director emeritus of the Holding Company or a subsidiary by reason of
disability, any option granted to him may be exercised in whole or in part
within one year of such termination of service, whether or not the option was
otherwise exercisable by him at the time of such termination of service. In the
event of the death of an Outside Director while serving as a director or
director emeritus of the Holding Company or a subsidiary, within six months
after he ceases to be a director or a director emeritus of the Holding Company
or the subsidiaries, or within one year after he ceases to be a director and a
director emeritus of the Holding Company or a subsidiary by reason of
disability, any option granted to him may be exercised by his estate or by the
person or persons entitled thereto by will or by the applicable laws of descent
or distribution at any time within one year after the date of such death,
whether or not the option was exercisable by the optionee at the date of his
death. Notwithstanding the foregoing, in no event may any option be exercised
after the expiration of the option term set by the Stock Compensation Committee.
Nontransferability of Option. Options may not be transferred except by will
or the laws of descent and distribution or pursuant to a qualified domestic
relations order. During the lifetime of an optionee, they may be exercised only
by him or his guardian or legal representative.
Maximum Incentive Stock Options. The aggregate fair market value of stock
with respect to which incentive stock options are exercisable for the first time
by an optionee during any calendar year under the Option Plan may not exceed
$100,000. For purposes of these computations, the fair market value of the
shares is to be determined as of the date the option is granted and computed in
the manner determined by the Stock Compensation Committee consistent with the
requirements of the Code. This limitation does not apply to non-qualified stock
options granted under the Option Plan.
Other Provisions
The Stock Compensation Committee may provide for such other terms,
provisions and conditions of an option as are not inconsistent with the Option
Plan. The Stock Compensation Committee may also prescribe, and amend, waive and
rescind rules and regulations relating to the Option Plan, may accelerate the
vesting of stock options granted the Option Plan, may make amendments or
modifications in the terms and conditions (including exercisability) of the
options relating to the effect of termination of employment of the optionees,
and may waive any restrictions or conditions applicable to any option or the
exercise thereof.
<PAGE>
Amendment and Termination
The Board of Directors of the Holding Company may amend the Option Plan
from time to time, and, with the consent of the optionee, the terms and
provisions of his option, provided, however, that (1) no amendment may, without
the consent of an optionee, make any changes in any outstanding option which
would adversely affect the rights of the optionee and (2) without approval of
the holders of at least a majority of the shares of the Holding Company voting
in person or by proxy at a duly constituted meeting, or adjournment thereof, the
following changes in the Option Plan may not be made: an increase in the number
of shares reserved for issuance under the Option Plan (except as permitted by
the antidilutive provisions in the Option Plan); an extension of the option
terms to more than 10 years and one day from the date of grant of the option; or
a material modification of the class of employees eligible to receive options
under the Option Plan. The Board of Directors of the Holding Company may
terminate the Option Plan at any time. In any event, no incentive stock options
may be granted under the Stock Option Plan after March 23, 2008.
It is possible that the Option Plan will be amended after September 18,
1998, to permit stock options to vest upon a change in control of the Holding
Company or an optionee's retirement or at some earlier time. Such an amendment
could be made without seeking shareholder approval.
Federal Income Tax Consequences
The grant of incentive and non-qualified stock options will have no federal
tax consequences to the Holding Company or the optionee. Moreover, if an
incentive stock option is exercised (a) while the employee is employed by the
Holding Company or its subsidiaries, (b) within three months after the optionee
ceases to be an employee of the Holding Company or its subsidiaries, (c) after
the optionee's death, or (d) within one year after the optionee ceases to be an
employee of the Holding Company or its subsidiaries if the optionee's employment
is terminated because of permanent and total disability (within the meaning of
ss. 22(e)(3) of the Code), the exercise of the incentive stock option will
ordinarily have no federal income tax consequences to the Holding Company or the
optionee. However, the amount by which the fair market value of the shares at
the time of exercise exceeds the option price of the option will, along with
other specified items, be considered taxable income in the taxable year of the
optionee in which the option was exercised for purposes of determining the
applicability of the alternative minimum tax. As a result, the exercise of an
incentive stock option may subject an optionee to an alternative minimum tax
depending on that optionee's particular circumstances.
On the other hand, the recipient of a non-qualified stock option generally
will realize taxable ordinary income at the time of exercise of his option in an
amount equal to the excess of the fair market value of the shares acquired at
the time of such exercise over the option price. A like amount is generally
deductible by the Holding Company for federal income tax purposes as of that
date, as long as the Holding Company withholds federal income tax with respect
to that taxable amount, assuming the optionholder's income is subject to income
tax witholding by the Holding Company. The Option Plan permits, under certain
circumstances, holders of non-qualified stock options to satisfy their
withholding obligation by having shares equal in value to the applicable
withholding taxes withheld from the shares which they would otherwise receive
upon the exercise of a non-qualified stock option.
Upon the sale of the shares acquired upon the exercise of an incentive
stock option no sooner than two years after the grant of the option and no
sooner than one year after receipt of the shares by the optionee, any capital
gain recognized would be taxed to the optionee at long-term or mid-term rates.
Upon the sale of shares acquired upon the exercise of an incentive stock option
prior to two years after the grant of an option or prior to one year after
receipt of the shares by the optionee, the optionee will generally recognize, in
the year of disposition, ordinary income equal to the lesser of (a) the spread
between the fair market value of the shares on the date of exercise and the
exercise price; and (b) the gain realized upon the disposition of those shares.
The Holding Company will be entitled to a deduction equal to the amount of
income recognized as ordinary income by the optionee, so long as the Holding
Company withholds federal income tax with respect to that taxable amount
(assuming the optionholder's income is subject to income tax witholding by the
Holding Company). If the spread is the basis for determining the amount of
ordinary income realized by the optionee, there will be additional long-term,
mid-term or short-term capital gain realized if the proceeds of such sale exceed
such spread.
<PAGE>
Upon the subsequent sale of shares acquired upon exercise of a
non-qualified stock option, the optionholder will recognize long-term capital
gain or loss if the shares are deemed to have been held for more than 18-months,
mid-term capital gain or loss of the shares have been held for more than 12
months but less than 18 months, and short-term capital gain or loss in all other
cases. Currently, long-term capital gains for noncorporate taxpayers are
generally taxed at a maximum rate of 20% and mid-term capital gains for
noncorporate taxpayers are generally taxed at a maximum rate of 28%. Short-term
capital gains are taxed at the same rates as ordinary income.
Financial Accounting Consequences
At this time, neither the grant of incentive or non-qualified stock options
nor the issuance of shares upon exercise of such options will result in a
compensation expense charge to the Holding Company's earnings for financial
accounting purposes. Option proceeds from the exercise of these options and tax
savings from non-qualified stock options are credited to capital. The Financial
Accounting Standards Board (the "FASB") has adopted rules that require increased
disclosure about the value of stock options in financial statements for the
Holding Company, including their impact on earnings.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE TO APPROVE AND
RATIFY THE OPTION PLAN. SUCH ACTION REQUIRES THE APPROVAL OF THE HOLDERS OF AT
LEAST A MAJORITY OF THE SHARES OF THE HOLDING COMPANY'S COMMON STOCK ENTITLED TO
VOTE AT THE ANNUAL MEETING, OR ANY ADJOURNMENT THEREOF. ABSTENTIONS AND BROKER
NON-VOTES WILL BE INCLUDED IN THE NUMBER OF SHARES PRESENT AND ENTITLED TO VOTE
ON THE PROPOSAL AND ACCORDINGLY TREATED AS "NO" VOTES.
PROPOSAL III -- RECOGNITION AND RETENTION PLAN AND TRUST
The Boards of Directors of the Holding Company and the Bank adopted the
Recognition and Retention Plan and Trust (the "RRP") on January 13, 1998. The
central features of the RRP are summarized below, but the RRP is set forth in
full in Exhibit B to this Proxy Statement, and all statements made in this
summary are qualified by reference to the full text of the RRP.
Purpose
The purpose of the RRP is to retain directors and key employees of the
Holding Company and its subsidiaries by providing such persons with a
proprietary interest in the Holding Company, as compensation for their
contributions to the Holding Company and its subsidiaries and as an incentive to
make such contributions in the future.
Administration
The RRP is administered by the Stock Compensation Committee (the "Stock
Compensation Committee") of the Holding Company's Board of Directors, which must
at all times consist of at least two directors of the Holding Company, each of
whom is a non-employee director within the meaning of the definition of that
term contained in Rule 16b-3 promulgated under the Securities Exchange Act of
1934, as amended (the "1934 Act"). The current members of the Stock Compensation
Committee are set forth on page 4 of this Proxy Statement. The Stock
Compensation Committee selects recipients and establishes terms of awards made
under the RRP. The Stock Compensation Committee's interpretations and
constructions of the RRP provisions or any award made under the RRP are final
and binding.
The Committee may adopt rules or regulations under the RRP. The Trustee of
the RRP is Fifth Third Bank of Central Indiana. The Trustee acquires, holds and
distributes shares of Common Stock and other RRP assets in accordance with the
terms of the RRP.
The Holding Company has agreed to indemnify the Trustee, the Committee
members, and any director of the Holding Company or the Bank against liability
for good faith determinations made under the RRP. The Holding Company has also
agreed to indemnify the Trustee for actions under the RRP not constituting
negligence or willful misconduct.
<PAGE>
Eligibility
Employees of the Holding Company and its affiliated corporations who elect
to participate in the RRP ("Affiliates"), the Outside Directors, and future
directors and directors emeritus are eligible to receive awards under the RRP.
The Committee is to consider the position and responsibilities of the eligible
employees and directors, the length and value of their services, their level of
compensation, and any other factors the Committee deems relevant.
Contributions
The Boards of Directors of the Bank determine the amount or method of
computing the amount of cash contributions to be made to the RRP by the Bank. No
employee contributions are permitted.
Investment of Contributions
Contributions made to the RRP are to be invested by the Trustee in Common
Stock, to the fullest extent possible. At the time the Plan became effective,
42,320 shares of the Holding Company's Common Stock were reserved for purchase
under the RRP. Such shares may be authorized but unissued shares, treasury
shares, or issued and outstanding shares. In the event additional authorized but
unissued shares or treasury shares are acquired by the RRP, the interests of
existing shareholders will be diluted. Earnings, gains and losses with respect
to Trust assets (including dividends and distributions payable with respect to
shares of Common Stock) will be allocated to recipients of RRP awards, to the
extent allocable to awards made to those recipients, and, otherwise, to the
general account of the Trust. All expenses and costs of administering the RRP
are to be paid by the Holding Company or its Affiliates.
If the RRP is approved by shareholders, the Bank will make contributions to
the RRP in an amount necessary to purchase 42,320 shares of the Holding
Company's Common Stock on the open market to fund the RRP. Based on the market
price of such Common Stock on February 9, 1998, the amount of such contribution
is estimated to be $637,445. Effective as of the date the RRP is approved by the
Holding Company's shareholders, shares will be awarded to the following persons
in the following amounts:
Recipient of Award Number of Shares Awarded
Fred W. Carter 10,580
All other executive officers as a group (3 persons) 9,522
Total 20,102
These awards vest at a rate of 20% per year commencing with the date of the
award, subject to earlier vesting in the event of the death or disability of the
grantee.
In addition, each of the six Outside Directors of the Holding Company will
receive awards of 2,116 shares as of the date the Plan is approved by the
Holding Company's shareholders. These awards also vest at a rate of 20% per year
commencing with the date of the award, subject to earlier vesting in the event
of the death or disability of the grantee.
Awards
Under the RRP, awards are granted to eligible employees and directors in
the form of shares of Common Stock held by the RRP. Awards are nontransferable
and nonassignable, other than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order, and during the lifetime of the
recipient may only be earned by and paid to him. Unless the Committee provides
otherwise, at the time an RRP award is granted, the shares which are the subject
of the award are to vest and be earned by the recipient at the rate of 20% of
the shares awarded at the end of each full 12 months of service with the Bank
after the date of grant of the award. Awards are adjusted for capital changes
such as stock dividends and stock splits. Awards are subject to the claims of
the creditors of the Bank until distributed.
<PAGE>
Notwithstanding the foregoing, awards will be 100% vested upon termination
of employment or service as a director or director emeritus due to death or
disability. In the event that a grantee terminates employment with the Holding
Company and an Affiliate and service as a director and director emeritus for any
other reason, the nonvested awards will be forfeited. If an employee's
employment or a director's or a director emeritus' service is terminated for
cause (as defined in the RRP), or if his conduct would have justified
termination for cause, shares not already delivered to him under the RRP,
whether or not vested, may be forfeited by resolution of the Board of Directors
of the Holding Company or the Bank. Earned shares are distributed to recipients
as soon as practicable following the day on which they are earned. When shares
become vested and are actually distributed in accordance with the RRP, the
participants will also receive amounts equal to any accrued dividends and other
earnings or distributions payable with respect thereto.
Voting
Prior to vesting, shares held in the RRP will be voted by the RRP Trustee
taking into account the best interests of the award recipients.
Federal Income Tax Consequences
The Trust should be treated as a grantor trust under the Code and, thus, in
computing the taxable income and credits of the Holding Company, those items of
income, deductions and credits which are attributable to the Trust shall be
taken into account by the Holding Company. When shares become vested in
accordance with the RRP, the participants will recognize income equal to the
fair market value of the Common Stock at that time; provided however that
participants may make a ss. 83(b) election under the Code with respect to all or
part of their awards prior to vesting and in such situations restricted stock
certificates will be delivered to such participants and those participants will
be taxed on the the fair market value of the shares at the time the ss. 83(b)
election is made. The amount of income recognized by the participants will be a
deductible expense for tax purposes for the Holding Company assuming the
employer satisfies its withholding tax obligation with respect to persons
subject to such withholding.
Accounting Treatment
When the Stock Compensation Committee makes an RRP award, an amount equal
to the fair market value at the date of grant of the awarded stock is charged to
compensation expense over the period of the restriction. The unearned portion of
the award is included in the Holding Company's balance sheet as a reduction of
shareholders' equity.
Amendment or Termination
The Board of Directors of the Holding Company or the Bank may amend or
terminate the RRP. The RRP remains in effect until the earlier of 21 years from
its effective date, termination by the Board of Directors as provided above, or
the distribution of all Trust assets.
It is possible that the RRP will be amended after September 18, 1998, to
permit RRP awards to vest upon a change in control of the Holding Company or an
optionee's retirement or at some earlier time. Such an amendment could be made
without seeking shareholder approval.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE TO APPROVE THE
RRP. SUCH ACTION REQUIRES THE APPROVAL OF THE HOLDERS OF AT LEAST A MAJORITY OF
THE SHARES OF THE HOLDING COMPANY'S COMMON STOCK ENTITLED TO VOTE AT THE ANNUAL
MEETING, OR ANY ADJOURNMENT THEREOF. ABSTENTIONS AND BROKER NON-VOTES WILL BE
INCLUDED IN THE NUMBER OF SHARES PRESENT AND ENTITLED TO VOTE ON THE PROPOSAL
AND ACCORDINGLY TREATED AS "NO" VOTES.
<PAGE>
ACCOUNTANTS
Ernst & Young has served as auditors for the Bank since 1967, and for the
Holding Company since its formation in 1997. The Holding Company believes that a
representative of Ernst & Young will be present at the Annual Meeting with the
opportunity to make a statement if he so desires. He will also be available to
respond to any appropriate questions shareholders may have. The Board of
Directors of the Holding Company has not yet completed the process of selecting
an independent public accounting firm to audit its books, records and accounts
for the fiscal year ended June 30, 1998.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the 1934 Act requires that the Holding Company's officers
and directors and persons who own more than 10% of the Holding Company's Common
Stock file reports of ownership and changes in ownership with the Securities and
Exchange Commission (the "SEC"). Officers, directors and greater than 10%
shareholders are required by SEC regulations to furnish the Holding Company with
copies of all Section 16(a) forms that they file.
There were no filing requirements applicable to the Holding Company's
officers, directors and greater than 10% beneficial owners with respect to
Section 16(a) of the 1934 Act during the fiscal year ended June 30, 1997.
SHAREHOLDER PROPOSALS
Any proposal which a shareholder wishes to have presented at the next
Annual Meeting of the Holding Company must be received at the main office of the
Holding Company for inclusion in the proxy statement no later than 120 days in
advance of February 17, 1999. Any such proposal should be sent to the attention
of the Secretary of the Holding Company at 60 South Main Street, P.O. Box 635,
Frankfort, Indiana 46041.
OTHER MATTERS
Management is not aware of any business to come before the Annual Meeting
other than those matters described in the Proxy Statement. However, if any other
matters should properly come before the Annual Meeting, it is intended that the
proxies solicited hereby will be voted with respect to those other matters in
accordance with the judgment of the persons voting the proxies.
The cost of solicitation of proxies will be borne by the Holding Company.
The Holding Company will reimburse brokerage firms and other custodians,
nominees and fiduciaries for reasonable expenses incurred by them in sending
proxy material to the beneficial owners of the Common Stock. In addition to
solicitation by mail, directors, officers, and employees of the Holding Company
may solicit proxies personally or by telephone without additional compensation.
Each shareholder is urged to complete, date and sign the proxy and return
it promptly in the enclosed envelope.
By Order of the Board of Directors
/s/ Fred W. Carter
Fred W. Carter
February 17, 1998
<PAGE>
Exhibit A
CITIZENS BANCORP
STOCK OPTION PLAN
1. Purpose. The purpose of the Citizens Bancorp Stock Option Plan (the
"Plan") is to provide to directors, officers and other key employees of Citizens
Bancorp (the "Holding Company") and its majority-owned and wholly-owned
subsidiaries (individually a "Subsidiary" and collectively the "Subsidiaries"),
including, but not limited to, Citizens Savings Bank of Frankfort upon its
conversion to stock form ("Citizens"), who are materially responsible for the
management or operation of the business of the Holding Company or a Subsidiary
and have provided valuable services to the Holding Company or a Subsidiary, a
favorable opportunity to acquire Common Stock, without par value ("Common
Stock"), of the Holding Company, thereby providing them with an increased
incentive to work for the success of the Holding Company and its Subsidiaries
and better enabling each such entity to attract and retain capable directors and
executive personnel.
2. Administration of the Plan. The Plan shall be administered,
construed and interpreted by a committee (the "Committee") consisting of at
least two members of the Board of Directors of the Holding Company, each of whom
is a "Non-Employee Director" within the meaning of the definition of that term
contained in Reg. ss. 16b-3 promulgated under the Securities Exchange Act of
1934, as amended (the "1934 Act"). The members of the Committee shall be
designated from time to time by the Board of Directors of the Holding Company.
The decision of a majority of the members of the Committee shall constitute the
decision of the Committee, and the Committee may act either at a meeting at
which a majority of the members of the Committee is present or by a written
consent signed by all members of the Committee. The Committee shall have the
sole, final and conclusive authority to determine, consistent with and subject
to the provisions of the Plan:
(a) the individuals (the "Optionees") to whom options or successive
options shall be granted under the Plan;
(b) the time when options shall be granted hereunder;
(c) the number of shares of Common Stock to be covered under each
option;
(d) the option price to be paid upon the exercise of each option;
(e) the period within which each such option may be exercised;
(f) the extent to which an option is an incentive stock option or a
non-qualified stock option; and
(g) the terms and conditions of the respective agreements by which
options granted shall be evidenced.
The Committee shall also have authority to prescribe, amend, waive, and rescind
rules and regulations relating to the Plan, to accelerate the vesting of any
stock options made hereunder (subject to Office of Thrift and Supervision
regulations), to make amendments or modifications in the terms and conditions
(including exercisability) of the options relating to the effect of termination
of employment of the optionee (subject to the last sentence of Section 9
hereof), to waive any restrictions or conditions applicable to any option or the
exercise thereof, and to make all other determinations necessary or advisable in
the administration of the Plan.
<PAGE>
3. Eligibility. The Committee may, consistent with the purposes of the
Plan, grant options to officers and other key employees and directors or
directors emeritus (whether or not also employees) of the Holding Company or of
a Subsidiary who in the opinion of the Committee are from time to time
materially responsible for the management or operation of the business of the
Holding Company or of a Subsidiary and have provided valuable services to the
Holding Company or a Subsidiary; provided, however, that in no event may any
employee who owns (after application of the ownership rules in ss. 425(d) of the
Internal Revenue Code of 1986, as amended (the "Code")) shares of stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Holding Company or any of its Subsidiaries be granted an
incentive stock option hereunder unless at the time such option is granted the
option price is at least 110% of the fair market value of the stock subject to
the option and such option by its terms is not exercisable after the expiration
of five (5) years from the date such option is granted. Subject to the
provisions of Section 7 hereof, an individual who has been granted an option
under the Plan (an "Optionee"), if he is otherwise eligible, may be granted an
additional option or options if the Committee shall so determine.
4. Stock Subject to the Plan. There shall be reserved for issuance upon
the exercise of options granted under the Plan, shares of Common Stock of the
Holding Company equal to 10% of the total number of shares of Common Stock
issued by the Holding Company upon the conversion of Citizens from mutual to
stock form, which may be authorized but unissued shares or treasury shares of
the Holding Company. Subject to Section 7 hereof, the shares for which options
may be granted under the Plan shall not exceed that number. If any option shall
expire or terminate or be surrendered for any reason without having been
exercised in full, the unpurchased shares subject thereto shall (unless the Plan
shall have terminated) become available for other options under the Plan.
5. Terms of Options. Each option granted under the Plan shall be
subject to the following terms and conditions and to such other terms and
conditions not inconsistent therewith as the Committee may deem appropriate in
each case:
(a) Option Price. The price to be paid for shares of stock
upon the exercise of each option shall be determined by the Committee
at the time such option is granted, but such price in no event shall be
less than the fair market value, as determined by the Committee
consistent with Treas. Reg. ss. 20.2031-2 and any requirements of ss.
422A of the Code, of such stock on the date on which such option is
granted.
(b) Period for Exercise of Option. An option shall not be
exercisable after the expiration of such period as shall be fixed by
the Committee at the time of the grant thereof, but such period in no
event shall exceed ten (10) years and one day from the date on which
such option is granted; provided, that incentive stock options granted
hereunder shall have terms not in excess of ten (10) years. Options
shall be subject to earlier termination as hereinafter provided.
(c) Exercise of Options. The option price of each share of
stock purchased upon exercise of an option shall be paid in full at the
time of such exercise. Payment may be in (i) cash, (ii) if the Optionee
may do so in conformity with Regulation T (12 C.F.R. ss. 220.3(e)(4))
without violating ss. 16(b) or ss. 16(c) of the 1934 Act, pursuant to a
broker's cashless exercise procedure, by delivering a properly executed
exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Holding Company the total option price in cash
and, if desired, the amount of any taxes to be withheld from the
Optionee's compensation as a result of any withholding tax obligation
of the Holding Company or any of its Subsidiaries, as specified in such
notice, or (iii) beginning on a date which is three years following
Citizens' conversion from mutual to stock form and with the approval of
the Committee, by tendering whole shares of the Holding Company's
Common Stock owned by the Optionee and cash having a fair market value
equal to the cash exercise price of the shares with respect to which
the option is being exercised. For this purpose, any shares so tendered
by an Optionee shall be deemed to have a fair market value equal to the
mean between the highest and lowest quoted selling prices for the
<PAGE>
shares on the date of exercise of the option (or if there were no sales
on such date the weighted average of the means between the highest and
lowest quoted selling prices for the shares on the nearest date before
and the nearest after the date of exercise of the option as prescribed
by Treas. Reg. ss. 20-2031-2), as reported in The Wall Street Journal
or a similar publication selected by the Committee. The Committee shall
have the authority to grant options exercisable in full at any time
during their term, or exercisable in such installments at such times
during their term as the Committee may determine; provided, however,
that options shall not be exercisable during the first six (6) months
of their term, and provided further that options shall become
exercisable at the rate of 20% per year beginning on the anniversary of
the date of grant of such options. Installments not purchased in
earlier periods shall be cumulated and be available for purchase in
later periods. Subject to the other provisions of this Plan, an option
may be exercised at any time or from time to time during the term of
the option as to any or all whole shares which have become subject to
purchase pursuant to the terms of the option or the Plan, but not at
any time as to fewer than one hundred (100) shares unless the remaining
shares which have become subject to purchase are fewer than one hundred
(100) shares. An option may be exercised only by written notice to the
Holding Company, mailed to the attention of its Secretary, signed by
the Optionee (or such other person or persons as shall demonstrate to
the Holding Company his or their right to exercise the option),
specifying the number of shares in respect of which it is being
exercised, and accompanied by payment in full in either cash or by
check in the amount of the aggregate purchase price therefor, by
delivery of the irrevocable broker instructions referred to above, or,
if the Committee has approved the use of the stock swap feature
provided for above, followed as soon as practicable by the delivery of
the option price for such shares.
(d) Certificates. The certificate or certificates for the
shares issuable upon an exercise of an option shall be issued as
promptly as practicable after such exercise. An Optionee shall not have
any rights of a shareholder in respect to the shares of stock subject
to an option until the date of issuance of a stock certificate to him
for such shares. In no case may a fraction of a share be purchased or
issued under the Plan, but if, upon the exercise of an option, a
fractional share would otherwise be issuable, the Holding Company shall
pay cash in lieu thereof.
(e) Termination of Option. If an Optionee (other than a
director or director emeritus of the Holding Company or its
Subsidiaries who is not an employee of the Holding Comnpany or its
Subsidiaries ("an Outside Director") ceases to be an employee of the
Holding Company and the Subsidiaries for any reason other than
retirement, permanent and total disability (within the meaning of ss.
22(e)(3) of the Code), or death, any option granted to him shall
forthwith terminate. Leave of absence approved by the Committee shall
not constitute cessation of employment. If an Optionee (other than an
Outside Director) ceases to be an employee of the Holding Company and
the Subsidiaries by reason of retirement, any option granted to him may
be exercised by him in whole or in part within three (3) years after
the date of his retirement, to the extent the option was otherwise
exercisable at the date of his retirement; provided, however, that if
such employee remains a director or director emeritus of the Holding
Company or a Subsidiary, the option granted to him shall continue to
vest while he serves as a director or director emeritus and may be
exercised by him in whole or in part until the later of (a) three (3)
years after the date of his retirement, or (b) six months after his
service as a director or director emeritus of the Holding Company or a
Subsidiary terminates. (The term "retirement" as used herein means such
termination of employment as shall entitle such individual to early or
normal retirement benefits under any then existing pension plan of the
Holding Company or a Subsidiary.) If an Optionee (other than an Outside
Director) ceases to be an employee of the Holding Company and the
Subsidiaries by reason of permanent and total disability (within the
meaning of ss. 22(e)(3) of the Code), any option granted to him may be
exercised by him in whole or in part within one (1) year after the date
<PAGE>
of his termination of employment by reason of such disability whether
or not the option was otherwise exercisable at the date of such
termination. Options granted to Outside Directors shall cease to be
exercisable six (6) months after the date such Outside Director is no
longer a director or director emeritus of the Holding Company or its
Subsidiaries for any reason other than death or disability. If an
Optionee who is an Outside Director ceases to be a director or a
director emeritus of the Holding Company or its Subsidiaries by reason
of disability, any option granted to him may be exercised in whole or
in part within one (1) year after the date the Optionee ceases to be a
director or a director emeritus by reason of such disability, whether
or not the option was otherwise exercisable at such date. In the event
of the death of an Optionee while in the employ or service as a
director or director emeritus of the Holding Company or a Subsidiary,
or, if the Optionee is not an Outside Director, within three (3) years
after the date of his retirement (or, if later, six months following
his termination of service as a director or director emeritus of the
Holding Company or its Subsidiary) or within one (1) year after the
termination of his employment by reason of permanent and total
disability (within the meaning of ss. 22(e)(3) of the Code), or, if the
Optionee is an Outside Director, within six (6) months after he is no
longer a director or director emeritus of the Holding Company or its
Subsidiaries for reasons other than disability or, within one (1) year
after the termination of his service by reason of disability, any
option granted to him may be exercised in whole or in part at any time
within one (1) year after the date of such death by the executor or
administrator of his estate or by the person or persons entitled to the
option by will or by applicable laws of descent and distribution until
the expiration of the option term as fixed by the Committee, whether or
not the option was otherwise exercisable at the date of his death.
Notwithstanding the foregoing provisions of this subsection (e), no
option shall in any event be exercisable after the expiration of the
period fixed by the Committee in accordance with subsection (b) above.
(f) Nontransferability of Option. No option may be transferred
by the Optionee otherwise than by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order as
defined by the Code or Title I of the Employee Retirement Income
Security Act, or the rules thereunder, and during the lifetime of the
Optionee options shall be exercisable only by the Optionee or his
guardian or legal representative.
(g) No Right to Continued Service. Nothing in this Plan or in
any agreement entered into pursuant hereto shall confer on any person
any right to continue in the employ or service of the Holding Company
or its Subsidiaries or affect any rights the Holding Company, a
Subsidiary, or the shareholders of the Holding Company may have to
terminate his service at any time.
(h) Maximum Incentive Stock Options. The aggregate fair market
value of stock with respect to which incentive stock options (within
the meaning of ss. 422A of the Code) are exercisable for the first time
by an Optionee during any calendar year under the Plan or any other
plan of the Holding Company or its Subsidiaries shall not exceed
$100,000. For this purpose, the fair market value of such shares shall
be determined as of the date the option is granted and shall be
computed in such manner as shall be determined by the Committee,
consistent with the requirements of ss. 422A of the Code.
(i) Agreement. Each option shall be evidenced by an agreement
between the Optionee and the Holding Company which shall provide, among
other things, that, with respect to incentive stock options, the
Optionee will advise the Holding Company immediately upon any sale or
transfer of the shares of Common Stock received upon exercise of the
option to the extent such sale or transfer takes place prior to the
later of (a) two (2) years from the date of grant or (b) one (1) year
from the date of exercise.
<PAGE>
(j) Investment Representations. Unless the shares subject to
an option are registered under applicable federal and state securities
laws, each Optionee by accepting an option shall be deemed to agree for
himself and his legal representatives that any option granted to him
and any and all shares of Common Stock purchased upon the exercise of
the option shall be acquired for investment and not with a view to, or
for the sale in connection with, any distribution thereof, and each
notice of the exercise of any portion of an option shall be accompanied
by a representation in writing, signed by the Optionee or his legal
representatives, as the case may be, that the shares of Common Stock
are being acquired in good faith for investment and not with a view to,
or for sale in connection with, any distribution thereof (except in
case of the Optionee's legal representatives for distribution, but not
for sale, to his legal heirs, legatees and other testamentary
beneficiaries). Any shares issued pursuant to an exercise of an option
may bear a legend evidencing such representations and restrictions.
6. Incentive Stock Options and Non-Qualified Stock Options. Options
granted under the Plan may be incentive stock options under ss. 422A of the Code
or non-qualified stock options, provided, however, that Outside Directors shall
be granted only non-qualified stock options. All options granted hereunder will
be clearly identified as either incentive stock options or non-qualified stock
options. In no event will the exercise of an incentive stock option affect the
right to exercise any non-qualified stock option, nor shall the exercise of any
non-qualified stock option affect the right to exercise any incentive stock
option. Nothing in this Plan shall be construed to prohibit the grant of
incentive stock options and non-qualified stock options to the same person,
provided, further, that incentive stock options and non-qualified stock options
shall not be granted in a manner whereby the exercise of one non-qualified stock
option or incentive stock option affects the exercisability of the other.
7. Adjustment of Shares. In the event of any change after the effective
date of the Plan in the outstanding stock of the Holding Company by reason of
any reorganization, recapitalization, stock split, stock dividend, combination
of shares, exchange of shares, merger or consolidation, liquidation,
extraordinary distribution (consisting of cash, securities, or other assets), or
any other change after the effective date of the Plan in the nature of the
shares of stock of the Holding Company, the Committee shall determine what
changes, if any, are appropriate in the number and kind of shares reserved under
the Plan, and the Committee shall determine what changes, if any, are
appropriate in the option price under and the number and kind of shares covered
by outstanding options granted under the Plan. Any determination of the
Committee hereunder shall be conclusive.
8. Tax Withholding. Whenever the Holding Company proposes or is
required to issue or transfer shares of Common Stock under the Plan, the Holding
Company shall have the right to require the Optionee or his or her legal
representative to remit to the Holding Company an amount sufficient to satisfy
any federal, state and/or local withholding tax requirements prior to the
delivery of any certificate or certificates for such shares, and whenever under
the Plan payments are to be made in cash, such payments shall be net of an
amount sufficient to satisfy any federal, state and/or local withholding tax
requirements. If permitted by the Committee and pursuant to procedures
established by the Committee, an Optionee may make a written election to have
shares of Common Stock having an aggregate fair market value, as determined by
the Committee, consistent with the requirements of Treas. Reg. ss. 20.2031-2,
sufficient to satisfy the applicable withholding taxes, withheld from the shares
otherwise to be received upon the exercise of a non-qualified option.
9. Amendment. Subject to Section 13, the Board of Directors of the
Holding Company may amend the Plan from time to time and, with the consent of
the Optionee, the terms and provisions of his option, except that without the
approval of the holders of at least a majority of the shares of the Holding
Company voting in person or by proxy at a duly constituted meeting or
adjournment thereof:
(a) the number of shares of stock which may be reserved for
issuance under the Plan may not be increased except as provided in
Section 7 hereof;
<PAGE>
(b) the period during which an option may be exercised may not
be extended beyond ten (10) years and one day from the date on which
such option was granted; and
(c) the class of persons to whom options may be granted under
the Plan shall not be modified materially.
No amendment of the Plan, however, may, without the consent of the
Optionees, make any changes in any outstanding options theretofore granted under
the Plan which would adversely affect the rights of such Optionees.
10. Termination. The Board of Directors of the Holding Company may
terminate the Plan at any time and no option shall be granted thereafter. Such
termination, however, shall not affect the validity of any option theretofore
granted under the Plan. In any event, no incentive stock option may be granted
under the Plan after the date which is ten (10) years from the effective date of
the Plan.
11. Successors. This Plan shall be binding upon the successors and
assigns of the Holding Company.
12. Governing Law. The terms of any options granted hereunder and the
rights and obligations hereunder of the Holding Company, the Optionees and their
successors in interest shall, except to the extent governed by federal law, be
governed by Indiana law.
13. Government and Other Regulations. The obligations of the Holding
Company to issue or transfer and deliver shares under options granted under the
Plan shall be subject to compliance with all applicable laws, governmental rules
and regulations (including Officer of Thrift and Supervision regulations), and
administrative action. In particular, grants of stock options under the Plan
shall comply with the requirements of 12. C.F.R. ss. 563b.3(g)(4)(vi), to the
extent applicable to such grants.
14. Effective Date. The Plan shall become effective on the date it is
approved by the holders of at least a majority of the shares of the Holding
Company entitled to vote at a duly constituted meeting or adjournment thereof.
The options granted pursuant to the Plan may not be exercised until the Board of
Directors of the Holding Company has been advised by counsel that such approval
has been obtained and all other applicable legal requirements have been met.
<PAGE>
Exhibit B
CITIZENS SAVINGS BANK OF FRANKFORT
RECOGNITION AND RETENTION PLAN AND TRUST
ARTICLE I
ESTABLISHMENT OF THE PLAN AND TRUST
1.01 Citizens Savings Bank of Frankfort hereby establishes the Recognition
and Retention Plan (the "Plan") and Trust (the "Trust") upon the terms and
conditions hereinafter stated in this Recognition and Retention Plan and Trust
Agreement (the "Agreement").
1.02 The Trustee, which initially shall be Fifth Third Bank of Central
Indiana, hereby accepts this Trust and agrees to hold the Trust assets existing
on the date of this Agreement and all additions and accretions thereto upon the
terms and conditions hereinafter stated.
ARTICLE II
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to retain directors and executive officers
in key positions by providing such persons with a proprietary interest in the
Holding Company (as hereinafter defined) as compensation for their contributions
to the Holding Company and to the Bank and its Affiliates (as hereinafter
defined) and as an incentive to make such contributions and to promote the
Holding Company's and the Bank's growth and profitability in the future.
<PAGE>
ARTICLE III
DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meanings set forth below. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural.
3.01 "Affiliate" means the Holding Company and those subsidiaries or
affiliates of the Holding Company or the Bank which, with the consent of the
Board, agree to participate in this Plan.
3.02 "Bank" means Citizens Savings Bank of Frankfort and its successors,
whether in mutual or stock form.
3.03 "Beneficiary" means the person or persons designated by a Recipient to
receive any benefits payable under the Plan in the event of such Recipient's
death. Such person or persons shall be designated in writing on forms provided
for this purpose by the Committee and may be changed from time to time by
similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's surviving spouse, if any,
or, if none, his estate.
3.04 "Board" means the Board of Directors of the Bank.
3.05 "Committee" means the Stock Compensation Committee of the Board of
Directors of the Holding Company. At all times during its administration of this
Plan, the Committee shall consist of two or more directors of the Holding
Company, each of whom shall be a "Non-Employee Director" within the meaning of
the definition of that term contained in Regulation 16b-3 ("Rule 16b-3")
promulgated under the Securities Exchange Act of 1934, as amended (the "1934
Act").
3.06 "Common Stock" means shares of the common stock, without par value, of
the Holding Company.
3.07 "Conversion" shall mean the conversion of the Bank from the mutual to
stock form of organization and the simultaneous acquisition of the Bank by the
Holding Company.
3.08 "Director" means a member of the Board of Directors of the Bank or the
Holding Company.
3.09 "Director Emeritus" shall mean an honorary, non-voting member of the
Board of Directors of the Bank or the Holding Company.
3.10 "Disability" means any physical or mental impairment which qualifies
an Employee, Director or Director Emeritus for disability benefits under the
applicable long-term disability plan maintained by the Bank or an Affiliate, or,
if no such plan applies, which would qualify such Employee, Director or Director
Emeritus for disability benefits under the long-term disability plan maintained
by the Bank, if such Employee, Director or Director Emeritus were covered by
that Plan.
3.11 "Employee" means any person who is currently employed by the Bank or
an Affiliate, including officers.
3.12 "Holding Company" shall mean Citizens Bancorp.
3.13 "Outside Director" means a member of the Board of Directors of the
Bank or the Holding Company, who is not also an Employee and who may be a
Director or Director Emeritus.
3.14 "Plan Shares" means shares of Common Stock held in the Trust and
issued or issuable to a Recipient pursuant to the Plan.
3.15 "Plan Share Award" or "Award" means a right granted under this Plan to
earn Plan Shares.
<PAGE>
3.16 "Plan Share Reserve" means the shares of Common Stock held by the
Trustee pursuant to Sections 5.03 and 5.04.
3.17 "Recipient" means an Employee or Outside Director who receives a Plan
Share Award under the Plan.
3.18 "Trustee" means that person(s) or entity nominated by the Committee
and approved by the Board pursuant to Sections 4.01 and 4.02 to hold legal title
to the Plan assets for the purposes set forth herein.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 Role of the Committee. The Plan shall be administered and interpreted
by the Committee, which shall have all of the powers allocated to it in this and
other Sections of the Plan. The interpretation and construction by the Committee
of any provisions of the Plan or of any Plan Share Award granted hereunder shall
be final and binding. The Committee shall act by vote or written consent of a
majority of its members. Subject to the express provisions and limitations of
the Plan, the Committee may adopt such rules, regulations and procedures as it
deems appropriate for the conduct of its affairs. If permitted by applicable
law, the Committee, with the consent of Recipients, may change the vesting
schedule for Awards after the date of grant thereof. The Committee shall
recommend to the Board one or more persons or entities to act as Trustee in
accordance with the provisions of this Plan and Trust and the terms of Article
VIII hereof.
4.02 Role of the Board. The members of the Committee and the Trustee shall
be appointed or approved by, and will serve at the pleasure of, the Board of
Directors of the Holding Company. The Board of Directors of the Holding Company
may in its discretion from time to time remove members from, or add members to,
the Committee, and may remove, replace or add Trustees.
4.03 Limitation on Liability. Neither a Director nor the Committee nor the
Trustee shall be liable for any determination made in good faith with respect to
the Plan or any Plan Shares or Plan Share Awards granted under it. If a Director
or the Committee or any Trustee is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of anything done or
not done by him in such capacity under or with respect to the Plan, the Bank
shall indemnify such person against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in the best interests of the
Bank and its Affiliates and, with respect to any criminal action or proceeding,
if he had no reasonable cause to believe his conduct was unlawful. The
indemnification of officers and directors of the Bank pursuant to this Section
4.03 shall be subject to 12 C.F.R. ss. 545.121.
ARTICLE V
CONTRIBUTION; PLAN SHARE RESERVE
5.01 Amount and Timing of Contributions. The Bank shall be permitted to
contribute to the Trust an amount sufficient to purchase up to 4% of the shares
of Common Stock issued by the Holding Company in connection with the Conversion.
Such amounts shall be paid to the Trustee no later than the date required to
purchase shares of Common Stock for Awards made under this Plan. No
contributions by Employees or Outside Directors shall be permitted.
5.02 Initial Investment. Any amounts held by the Trust until such amounts
are invested in accordance with Section 5.03, shall be invested by the Trustee
in such interest-bearing account or accounts at the Bank as the Trustee shall
determine to be appropriate.
<PAGE>
5.03 Investment of Trust Assets; Creation of Plan Share Reserve. As soon as
practicable following the first shareholder meeting of the Holding Company
following the Conversion ("First Shareholder Meeting Date"), the Trustee shall
invest all of the Trust's assets exclusively in the number of shares of Common
Stock, designated by the Bank as subject to Awards made under the Plan, which
may be purchased directly from the Holding Company, on the open market, or from
any other source; provided, however that the Trust shall not invest in an amount
of Common Stock greater than 4.0% of the shares of the Common Stock sold in the
Conversion, which shall constitute the "Plan Share Reserve" and provided,
further that if the Trustee is required to purchase such shares on the open
market or from the Holding Company for an amount per share greater than the
price per share at which shares were trading on the date the contributions
therefor were made to the Trust, the Bank shall have the discretion to reduce
the number of shares to be awarded and purchased. The Trust may hold cash in
interest-bearing accounts pending investment in Common Stock for periods of not
more than one year after deposit. The Trustee, in accordance with applicable
rules and regulations and Section 5.01 hereof, shall purchase shares of Common
Stock in the open market and/or shall purchase authorized but unissued shares of
the Common Stock from the Holding Company sufficient to acquire the requisite
percentage of shares. Any earnings received or distributions paid with respect
to Common Stock held in the Plan Share Reserve shall be held in an
interest-bearing account. Any earnings received or distributions paid with
respect to Common Stock subject to a Plan Share Award shall be held in an
interest-bearing account on behalf of the individual Recipient.
5.04 Effect of Allocations, Returns and Forfeitures Upon Plan Share
Reserves. Upon the allocation of Plan Share Awards under Sections 6.02 and 6.03
after acquisition by the Trustee of such shares, or the decision of the
Committee to return Plan Shares to the Holding Company, the Plan Share Reserve
shall be reduced by the number of Plan Shares so allocated or returned. Any
shares subject to an Award which may not be earned because of a forfeiture by
the Recipient pursuant to Section 7.01 shall be returned (added) to the Plan
Share Reserve.
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 Eligibility. Employees and Outside Directors are eligible to receive
Plan Share Awards provided in Section 6.02.
6.02 Allocations. The Committee may determine which of the Employees and
Outside Directors referenced in Section 6.01 above will be granted Plan Share
Awards and the number of Plan Shares covered by each Award, including grants
effective upon the First Shareholder Meeting Date, provided, however, that the
number of Plan Shares covered by such Awards may not exceed the number of Plan
Shares in the Plan Share Reserve immediately prior to the grant of such Awards,
and provided further, that in no event shall any Awards be made which will
violate the Charter, Articles of Incorporation, Bylaws or Plan of Conversion of
the Holding Company or the Bank or any applicable federal or state law or
regulation and provided further that Awards may not be granted at any time in
which the Bank fails to meet its applicable minimum capital requirements. In the
event Plan Shares are forfeited for any reason and unless the Committee decides
to return the Plan Shares to the Holding Company, the Committee may, from time
to time, determine which of the Employees or Outside Directors referenced in
Section 6.01 above will be granted additional Plan Share Awards to be awarded
from forfeited Plan Shares. In selecting those Employees or Outside Directors to
whom Plan Share Awards will be granted and the number of Plan Shares covered by
such Awards, the Committee shall consider the position and responsibilities of
the eligible Employees or Outside Directors, the length and value of their
services to the Bank and its Affiliates, the compensation paid to such Employees
or Outside Directors, and any other factors the Committee may deem relevant.
6.03 Form of Allocation. As promptly as practicable after a determination
is made pursuant to Section 6.02 that a Plan Share Award is to be made, the
Committee shall notify the Recipient in writing of the grant of the Award, the
number of Plan Shares covered by the Award, and the terms upon which the Plan
Shares subject to the Award may be earned. The stock certificates for Plan Share
Awards shall be registered in the name of the Recipient or the Trustee, on
behalf of the Recipient, until forfeited or transferred to the Recipient after
such Award has been earned. The Committee shall maintain records as to all
grants of Plan Share Awards under the Plan.
<PAGE>
6.04 Allocations Not Required. Notwithstanding anything to the contrary in
Sections 6.01 and 6.02, no Employee or Outside Director shall have any right or
entitlement to receive a Plan Share Award hereunder, such Awards being at the
total discretion of the Committee, nor shall the Employees or Outside Directors
as a group have such a right. The Committee may, with the approval of the Board
(or, if so directed by the Board, shall) return all Common Stock in the Plan
Share Reserve not yet allocated to the Holding Company at any time, and cease
issuing Plan Share Awards.
6.05. Distribution Election Before Plan Shares Are Earned. Notwithstanding
anything contained in the Plan to the contrary, an Employee or an Outside
Director who has received an allocation of Plan Shares in accordance with
Article VI may request in writing that the Committee authorize the distribution
to him or her of all or a portion of the Plan Shares awarded before the date on
which the Plan Shares become earned in accordance with Article VII. The decision
as to whether to distribute to any Employee or Outside Director who requests
distribution shall be made by the Committee, in its sole discretion. In
addition, the distribution shall be subject to the following parameters:
(a) The Committee shall be required to make a separate determination
for each request received by an Employee or Outside Director for
distribution.
(b) Any Plan Shares awarded shall be required to have a legend on the
Plan Shares confirming that the Plan Shares are subject to
restriction and transfer in accordance with the terms set forth
in the Plan. This legend may not be removed until the date that
the Plan Shares become earned in accordance with Article VII.
(c) The Plan Shares distributed shall be voted by the Trustee in
accordance with Section 7.04.
(d) Any cash dividends or other cash distributions paid with respect
to the Plan Shares before the date that the Plan Shares are
earned shall be paid to the Trustee to be held for the Employee
or Outside Director, whichever is applicable, until the date that
the Plan Shares are earned.
(e) At the date on which the Plan Shares are earned, the Trustee may
withhold from any cash dividends or other cash distributions held
on behalf of such Employee or Outside Director the amount needed
to cover any applicable withholding and employment taxes arising
at the time that the Plan Shares are earned. If the amount of
such cash dividends or distributions is insufficient, the Trustee
may require the Employee or Outside Director to pay to the
Trustee the amount required to be withheld as a condition of
removing the legend on the Plan Shares.
ARTICLE VII
EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 Earning Plan Shares; Forfeitures.
(a) General Rules. Plan Shares subject to an Award shall be earned by
a Recipient at the rate of twenty percent (20%) of the aggregate
number of Shares covered by the Award at the end of each full
twelve months of consecutive service with the Bank or an
Affiliate after the date of grant of the Award. If the term of
service of a Recipient terminates as an Employee, as a Director
and as a Director Emeritus prior to the fifth anniversary (or
such later date as the Committee shall determine) of the date of
grant of an Award for any reason (except as specifically provided
in Subsection (b) below or in Section 4.01 hereof), the Recipient
shall forfeit the right to earn any Shares subject to the Award
which have not theretofore been earned.
In determining the number of Plan Shares which are earned,
fractional shares shall be rounded down to the nearest whole
number, provided that such fractional shares shall be aggregated
and earned, on the fifth anniversary of the date of grant.
<PAGE>
(b) Exception for Terminations due to Death and Disability.
Notwithstanding the general rule contained in Section 7.01(a)
above, all Plan Shares subject to a Plan Share Award held by a
Recipient whose term of service as an Employee and as a Director
or Director Emeritus with the Holding Company, Bank or an
Affiliate terminates due to death or Disability shall be deemed
earned as of the Recipient's last day of service with the Holding
Company, Bank or an Affiliate as a result of such death or
Disability. If the Recipient's service as an Employee and as a
Director or Director Emeritus terminates due to Disability within
one year of the effective date of the Conversion, the Shares
earned by the Recipient may not be disposed of by the Recipient
during the one-year period following the Conversion, and stock
certificate legends to that effect may be placed on the stock
certificates for any such shares.
(c) Revocation for Misconduct. Notwithstanding anything hereinafter
to the contrary, the Board may by resolution immediately revoke,
rescind and terminate any Plan Share Award, or portion thereof,
previously awarded under this Plan, to the extent Plan Shares
have not been delivered thereunder to the Recipient, whether or
not yet earned, in the case of an Employee who is discharged from
the employ of the Holding Company, Bank or an Affiliate for cause
(as hereinafter defined), or who is discovered after termination
of employment to have engaged in conduct that would have
justified termination for cause or, in the case of an Outside
Director, who is removed from the Board of Directors of the Bank
and the Holding Company or an Affiliate for cause (as hereinafter
defined), or who is discovered after termination of service as an
Outside Director to have engaged in conduct which would have
justified removal for cause. "Cause" is defined as personal
dishonesty, willful misconduct, any breach of fiduciary duty
involving personal profit, intentional failure to perform stated
duties, or the willful violation of any law, rule, regulation
(other than traffic violations or similar offenses) or order
which results in a loss to the Holding Company, Bank or any
Affiliate or in a final cease and desist order.
7.02 Accrual of Dividends. Whenever Plan Shares are paid to a Recipient or
Beneficiary under Section 7.03, such Recipient or Beneficiary shall also be
entitled to receive, with respect to each Plan Share paid, an amount equal to
any cash dividends or cash distributions and a number of shares of Common Stock
or other assets equal to any stock dividends and any other assets distributions
declared and paid with respect to a share of Common Stock between the date the
Plan Shares are being distributed and the date the Plan Shares were granted.
There shall also be distributed an appropriate amount of net earnings, if any,
of the Trust with respect to any cash dividends or cash distributions so paid
out. Until the Plan Shares are vested and distributed to any such Recipient or
Beneficiary, such dividends, distributions and net earnings thereon, if any,
shall be retained by the Trust.
7.03 Distribution of Plan Shares.
(a) Timing of Distributions: General Rule. Plan Shares shall be
distributed to the Recipient or his Beneficiary, as the case may
be, as soon as practicable after they have been earned.
(b) Form of Distribution. All Plan Shares, together with any shares
representing stock dividends, shall be distributed in the form of
Common Stock. One share of Common Stock shall be given for each
Plan Share earned and payable. Payments representing accumulated
cash dividends and cash or other distributions (and earnings
thereon) shall be made in cash or in the form of such non-cash
distributions.
(c) Withholding. The Trustee may withhold from any payment or
distribution made under this Plan sufficient amounts of cash or
shares of Common Stock to cover any applicable withholding and
employment taxes, and if the amount of such payment is
insufficient, the Trustee may require the Recipient or
Beneficiary to pay to the Trustee the amount required to be
withheld as a condition of delivering the Plan Shares.
Alternatively, a Recipient may pay to the Trustee that amount of
cash necessary to be withheld in taxes in lieu of any withholding
of payments or distribution under the Plan. The Trustee shall pay
over to the Holding Company, the Bank or Affiliate which employs
or employed such Recipient any such amount withheld from or paid
by the Recipient or Beneficiary.
<PAGE>
(d) Cessation of Payment. The Trustee shall cease payment of benefits
to Recipients or, if applicable, their Beneficiaries in the event
of the Bank's insolvency. The Bank shall be considered insolvent
for purposes of this RRP if the Bank is unable to pay its debts
as they become due or if a receiver is appointed for the Bank
under applicable law. If payments cease by reason of this
subsection, payments will be resumed, with appropriate make-up
payments, once the Bank ceases to be insolvent but only to the
extent the payments were not made directly by the Bank or its
Affiliates.
7.04 Voting of Plan Shares. All shares of Common Stock held by the Trust
shall be voted by the Trustee, taking into account the best interests of the
Plan Share Award recipients.
ARTICLE VIII
TRUST
8.01 Trust. The Trustee shall receive, hold, administer, invest and make
distributions and disbursements from the Trust in accordance with the provisions
of the Plan and Trust and the applicable directions, rules, regulations,
procedures and policies established by the Committee pursuant to the Plan.
8.02 Management of Trust. It is the intent of this Plan and Trust that,
subject to the provisions of this Plan, the Trustee shall have complete
authority and discretion with respect to the management, control and investment
of the Trust, and that the Trustee shall invest all assets of the Trust, except
those attributable to cash dividends paid with respect to Plan Shares, in Common
Stock to the fullest extent practicable, and except to the extent that the
Trustee determines that the holding of monies in cash or cash equivalents is
necessary to meet the obligation of the Trust. Neither the Holding Company, the
Bank, nor any Affiliate shall exercise any direct or indirect control or
influence over the time when, or the prices at which, the Trustee may purchase
such shares, the number of shares to be purchased, the manner in which the
shares are to be purchased, or the broker (if any) through whom the purchases
may be executed. In performing its duties, the Trustee shall have the power to
do all things and execute such instruments as may be deemed necessary or proper,
including the following powers:
(a) To invest up to one hundred percent (100%) of all Trust assets in
Common Stock without regard to any law now or hereafter in force
limiting investments for Trustees or other fiduciaries. The
investment authorized herein and in paragraph (b) constitutes the
only investment of the Trust, and in making such investment, the
Trustee is authorized to purchase Common Stock from the Holding
Company or an Affiliate or from any other source and such Common
Stock so purchased may be outstanding, newly issued, or treasury
shares.
(b) To invest any Trust assets not otherwise invested in accordance
with (a) above in such deposit accounts, and certificates of
deposit (including those issued by the Bank), securities of any
open-end or closed-end management investment company or
investment trust registered under the Investment Company Act of
1940, whether or not the Trustee or any affiliate of the Trustee
is being compensated for providing services to the investment
company or trust as investment advisor or otherwise, obligations
of the United States government or its agencies or such other
investments as shall be considered the equivalent of cash.
(c) To sell, exchange or otherwise dispose of any property at any
time held or acquired by the Trust.
(d) To cause stocks, bonds or other securities to be registered in
the name of a nominee, without the addition of words indicating
that such security is an asset of the Trust (but accurate records
shall be maintained showing that such security is an asset of the
Trust).
<PAGE>
(e) To hold cash without interest in such amounts as may be in the
opinion of the Trustee reasonable for the proper operation of the
Plan and Trust and to hold cash pending investment.
(f) To employ brokers, agents, custodians, consultants and
accountants.
(g) To hire counsel to render advice with respect to their rights,
duties and obligations hereunder, and such other legal services
or representation as they may deem desirable.
(h) To hold funds and securities representing the amounts to be
distributed to a Recipient or his or her Beneficiary as a
consequence of a dispute as to the disposition thereof, whether
in a segregated account or held in common with other assets of
the Trust.
Notwithstanding anything herein contained to the contrary, the Trustee
shall not be required to make any inventory, appraisal or settlement or report
to any court, or to secure any order of court for the exercise of any power
herein contained, or give bond.
8.03 Records and Accounts. The Trustee shall maintain accurate and detailed
records and accounts of all transactions of the Trust, which shall be available
at all reasonable times for inspection by any legally entitled person or entity
to the extent required by applicable law, or any other person determined by the
Committee.
8.04 Earnings. All earnings, gains and losses with respect to Trust assets
shall be allocated, in accordance with a reasonable procedure adopted by the
Committee, to bookkeeping accounts for Recipients or to the general account of
the Trust, depending on the nature and allocation of the assets generating such
earnings, gains and losses. In particular, any earnings on cash dividends or
distributions received with respect to shares of Common Stock shall be allocated
to accounts for Recipients, if such shares are the subject of outstanding Plan
Share Awards, or otherwise to the Plan Share Reserve. Recipients (or their
Beneficiaries) shall not be entitled to any such allocations until the Plan
Share Awards to which they relate are vested and distributed to those Recipients
(or their Beneficiaries).
8.05 Expenses. All costs and expenses incurred in the operation and
administration of this Plan, including those incurred by the Trustee, shall be
borne by the Bank or the Holding Company.
8.06 Indemnification. The Bank shall indemnify, defend and hold the Trustee
harmless against all claims, expenses and liabilities arising out of or related
to the exercise of the Trustee's powers and the discharge of its duties
hereunder, unless the same shall be due to its negligence or willful misconduct.
ARTICLE IX
MISCELLANEOUS
9.01 Adjustments for Capital Changes. The aggregate number of Plan Shares
available for issuance pursuant to the Plan Share Awards (which, as of the
effective date of this Plan, shall not exceed 4% of the shares of the Holding
Company's Common Stock issued in the Conversion), and the number of shares to
which any Plan Share Award relates shall be proportionately adjusted for any
increase or decrease in the total number of outstanding shares of Common Stock
issued subsequent to the effective date of the Plan resulting from any stock
dividend or split, recapitalization, merger, consolidation, spin-off,
reorganization, combination or exchange of shares, extraordinary cash or
non-cash distribution, or other similar capital adjustment, or other increase or
decrease in such shares effected without receipt or payment of consideration, by
the Committee.
<PAGE>
9.02 Amendment and Termination of Plan. The Board may, by resolution, at
any time amend or terminate the Plan. The power to amend or terminate shall
include the power to direct the Trustee to return to the Holding Company all or
any part of the assets of the Trust, including shares of Common Stock held in
the Plan Share Reserve, as well as shares of Common Stock and other assets
subject to Plan Share Awards but not yet earned by the Employees or Outside
Directors to whom they are allocated. However, the termination of the Trust
shall not affect a Recipient's right to the distribution of Common Stock
relating to Plan Share Awards already earned, including earnings thereon, in
accordance with the terms of this Plan and the grant by the Committee.
9.03 Nontransferable. Plan Share Awards and rights to Plan Shares shall not
be transferable by a Recipient other than by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order as defined by
the Internal Revenue Code of 1986, as amended, or Title I of the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder, and
during the lifetime of the Recipient, Plan Shares may only be earned by and paid
to the Recipient who was notified in writing of the Award by the Committee
pursuant to Section 6.03. The assets of the RRP, prior to the distribution of
Plan Shares to a Recipient or his or her Beneficiary, shall be subject to the
claims of creditors of the Bank. Unless Plan Shares are distributed in
accordance with Section 6.05 or 7.03 to a Recipient or his or her Beneficiary,
such Recipient or, if applicable, Beneficiary shall not have any right in or
claim to any specific assets of the RRP or Trust and shall only be an unsecured
creditor of the Bank, nor shall the Holding Company or the Bank be subject to
any claim for benefits hereunder.
9.04 Employment Rights. Neither the Plan nor any grant of a Plan Share
Award or Plan Shares hereunder nor any action taken by the Trustee, the
Committee or the Board in connection with the Plan shall create any right on the
part of any Employee to continue in the employ of, or of any Outside Director to
continue in the service of, the Bank, the Holding Company or any Affiliate
thereof.
9.05 Voting and Dividend Rights. No Recipient shall have any voting or
dividend rights or other rights of a stockholder in respect of any Plan Shares
covered by a Plan Share Award, except as expressly provided in Sections 7.02 and
7.04 above, prior to the time said Plan Shares are actually distributed to him.
9.06 Governing Laws. The Plan and Trust shall be governed by the laws of
the State of Indiana, except to the extent governed by federal law, including
regulations of the Office of Thrift Supervision. In particular, grants of Plan
Share Awards under the Plan shall comply with the requirements of 12 C.F.R. ss.
563b.3(g)(4)(vi) to the extent applicable thereto.
9.07 Effective Date. This Plan shall be effective as of the date of its
approval by the shareholders of the Holding Company.
9.08 Term of Plan. This Plan shall remain in effect until the earlier of
(1) 21 years from the effective date of its adoption, (2) termination by the
Board, or (3) the distribution of all assets of the Trust. Termination of the
Plan shall not affect any Plan Share Awards previously granted, and such Awards
shall remain valid and in effect until they have been earned and paid, or by
their terms expire or are forfeited.
9.09 Tax Status of Trust. It is intended that the trust established hereby
be treated as a grantor trust of the Bank under the provisions of Section 671,
et seq., of the Internal Revenue Code of 1986, as amended.
9.10. Compensation. The Trustee shall be entitled to receive fair and
reasonable compensation for its services hereunder, as agreed to by the Trustee
and the Bank, and shall also be entitled to be reimbursed for all reasonable
out-of-pocket expenses, including, but not by way of limitation, legal,
actuarial and accounting expenses and all costs and expenses incurred in
prosecuting or defending any action concerning the Plan or the Trust or the
rights or responsibilities of any person hereunder, brought by or against the
Trustee. Such reasonable compensation and expenses shall be paid by the Bank or
the Holding Company.
9.11. Resignation of Trustee. The Trustee may resign at any time by giving
sixty (60) calendar days' prior written notice to the Bank, and the Trustee may
be removed, with or without cause, by the Bank on sixty (60) calendar days'
prior written notice to the Trustee. Such prior written notice may be waived by
the party entitled to receive it. Upon any such resignation or removal becoming
effective, the Trustee shall render to the Bank a written account of its
administration of the Plan and the Trust for the period since the last written
accounting and shall do all necessary acts to transfer the assets of the Trust
to the successor Trustee or Trustees.
<PAGE>
REVOCABLE PROXY CITIZENS BANCORP
Annual Meeting of Shareholders
March 24, 1998
The undersigned hereby appoints Stephen D. Davis and Cindy S. Chambers, with
full powers of substitution, to act as attorneys and proxies for the undersigned
to vote all shares of common stock of Citizens Bancorp which the undersigned is
entitled to vote at the Annual Meeting of Shareholders to be held at the
Frankfort Community Public Library, 208 West Clinton Street, Frankfort, Indiana,
on Tuesday, March 24, 1998, at 3:00 p.m., and at any and all adjournments
thereof, as follows:
1. The election as directors of all nominees listed below,
except as marked to the contrary [ ] FOR [ ] AGAINST [ ] ABSTAIN
INSTRUCTIONS: To withhold authority to vote for any individual nominee, strike a
line through the nominee's name on the list below:
Perry W. Lewis John J. Miller
(each for a one year term)
Robert F. Ayres Billy J. Wray
(each for a two year term)
Fred W. Carter
(for a three year term)
2. Approval and Ratification of the Citizens Bancorp Stock Option Plan
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Approval and Ratification of the Citizens Savings Bank of Frankfort
Recognition and Retention Plan and Trust. [ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, the proxies are authorized to vote on any other business
that may properly come before the Meeting or any adjournment thereof.
The Board of Directors recommends a vote "FOR" each
of the listed propositions.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
<PAGE>
This Proxy may be revoked at any time prior to the voting thereof.
The undersigned acknowledges receipt from Citizens Bancorp, prior to the
execution of this Proxy, of a Notice of the Meeting, a Proxy Statement and an
Annual Report to Shareholders.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR EACH OF THE PROPOSITIONS STATED. IF ANY OTHER BUSINESS
IS PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS
PROXY IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS
OF NO OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
_____________, 1998
________________________ _________________________
Print Name of Shareholder Print Name of Shareholder
________________________ _________________________
Signature of Shareholder Signature of Shareholder
Please sign as your name appears on the envelope
in which this card was mailed. When signing as
attorney, executor, administrator, trustee or
guardian, please give your full title. If shares
are held jointly, each holder should sign.
Message to Shareholders.................................................. 1
Selected Consolidated Financial Data..................................... 2
Management's Discussion and Analysis..................................... 3
Report of Independent Auditors........................................... 15
Consolidated Statements of Condition..................................... 16
Consolidated Statements of Income........................................ 17
Consolidated Statements of Changes in
Retained Income..................................................... 18
Consolidated Statements of Cash Flows.................................... 19
Notes to Consolidated Financial Statements............................... 20
Directors and Officers................................................... 29
Shareholder Information.................................................. 31
================================================================================
Citizens Bancorp (the "Holding Company" and together with the Bank, as
defined below, the "Company") is an Indiana corporation organized in June, 1997,
to become a savings and loan holding company upon its acquisition of all the
issued and outstanding capital stock of Citizens Savings Bank of Frankfort
("Citizens" or the "Bank") in connection with the Bank's conversion from mutual
to stock form. The Holding Company became the Bank's holding company on
September 18, 1997; therefore, all historical financial and other data contained
for periods prior to September 18, 1997 herein relate solely to the Bank while
historical financial and other data contained herein for the period after
September 18, 1997 relate to the Company. The principal asset of the Holding
Company currently consists of 100% of the issued and outstanding shares of
capital stock, $.01 par value per share, of the Bank.
The Bank is a federal savings bank which conducts its business from a
full-service office located in Frankfort. The Bank offers a variety of lending,
deposit and other financial services to its retail and commercial customers. The
Bank's principal business consists of attracting deposits from the general
public and originating mortgage loans, most of which are secured by one- to
four-family residential real property in Clinton County. The Bank also offers
multi-family loans, construction loans, non-residential real estate loans, home
equity loans and consumer loans, including single-pay loans, loans secured by
deposits, and installment loans. The Bank derives most of its funds for lending
from deposits of its customers, which consist primarily of certificates of
deposit, demand accounts and savings accounts.
<PAGE>
TO OUR SHAREHOLDERS:
On behalf of the Board of Directors, it is my pleasure to present the
1997 Fiscal Year Report of Citizens Bancorp and its subsidiary, Citizens Savings
Bank of Frankfort, Indiana. The past twelve months have been a particularly
exciting time for all of us. On April 9, 1997, our Board of Directors adopted a
Plan of Conversion pursuant to which Citizens Savings Bank converted from a
federal mutual savings bank to a federal stock savings bank and became a
wholly-owned subsidiary of Citizens Bancorp. Under the Plan of Conversion, we
sold 1,058,000 shares of Citizens Bancorp common stock to our depositors at $10
per share. The shares of common stock began trading on the OTC Electronic
Bulletin Board on September 18, 1997.
The enclosed audited financial statements set forth our results of
operations for the fiscal year ended June 30, 1997. During that period, our
total consolidated assets increased $2.2 million, or 4.8%, to $46.4 million, our
net loans increased $4.0 million, or 11.8%, to $39.1 million, our interest
bearing deposits increased $755,000, or 2.1%, to $35.6 million and our capital
increased $371,000, or 7.0%, to $5.7 million. For the fiscal year, our Return on
Assets was 0.8% and our Return on Equity was 6.8%. At June 30, 1997, our Capital
to Assets ratio was 12.3%.
Our net income of $371,000 in fiscal year 1997 was negatively impacted
by a $127,000 after-tax charge related to recapitalization of the Savings
Association Insurance Fund ("SAIF") and by a loss of approximately $60,000 from
our sale of $2.9 million in investment securities. We chose to sell the
securities and use the proceeds to pay down advances from the Federal Home Loan
Bank of Indianapolis in order to increase Citizens' overall liquidity. Excluding
the SAIF assessment and the loss on the sale of investments, our net income for
1997 would have exceeded 1996 net income by $55,000, or 11.5%. The positive
result from the recapitalization of the SAIF is that Citizens' future deposit
insurance premiums will be significantly reduced.
Considering everything we encountered in the last 12 months, we are
very pleased with our performance. We received the Bauer Financial Reports "Five
Star Superior" rating for the 35th consecutive quarter and the Sheshunoff
"Highest Rated Bank" designation. We also received a rating of "Outstanding"
from the Office of Thrift Supervision for our lending practices, our volunteer
activity and our commitment to our community. This success is the direct result
of our dedicated Board of Directors, Officers and Staff working together to
serve our customers' needs in a courteous and professional manner. I sincerely
thank each of them for their continuing loyalty and dedication.
The Management and the Board of Directors want to thank you for your
business, your support and your confidence in Citizens Savings Bank. We
encourage you to recommend Citizens to your friends, neighbors and associates,
and we look forward to serving you with the same professional service that has
marked our performance for the last 81 years.
Sincerely,
/s/ Fred W. Carter
Fred W. Carter
President
Chief Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF
CITIZENS BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
At June 30,
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Summary of Selected Consolidated
Financial Condition Data:
Total assets....................................... $46,353 $44,235 $39,727 $38,523 $34,460
Loans receivable, net (1).......................... 38,435 34,391 29,275 26,141 23,436
Cash on hand and in other institutions (2)......... 4,125 3,308 4,310 7,210 6,962
Investment securities available for sale........... 161 3,003 2,832 2,677 1,652
Cash surrender value of life insurance contract.... 1,076 1,035 991 943 885
FHLB advances...................................... 4,000 3,000 1,500 --- ---
Deposits........................................... 36,355 35,600 33,175 34,037 30,136
Retained income.................................... 5,691 5,320 4,841 4,435 4,154
Unrealized loss on investment securities
available for sale.............................. --- (51) (49) (50) ---
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Summary of Selected Consolidated Operating Data:
<S> <C> <C> <C> <C> <C>
Total interest income.............................. $3,509 $3,186 $2,742 $2,424 $2,563
Total interest expense............................. 1,814 1,653 1,370 1,273 1,423
------- ------- ------- ------- -------
Net interest income............................. 1,695 1,533 1,372 1,151 1,140
Provision for loan losses.......................... 83 80 32 12 19
------- ------- ------- ------- -------
Net interest income after
provision for loan losses..................... 1,612 1,453 1,340 1,139 1,121
Other income:
Fees and service charges........................ 138 152 151 120 97
Other........................................... 21 94 70 77 139
------- ------- ------- ------- -------
Total other income............................ 159 246 221 197 236
Other expense:
Salaries and employee benefits.................. 485 415 387 331 319
Occupancy expense............................... 114 118 109 105 102
Data processing expense......................... 108 101 105 98 94
Federal insurance premiums...................... 259 77 75 71 66
Other........................................... 251 256 248 258 237
------- ------- ------- ------- -------
Total other expense............................ 1,217 967 924 863 818
------- ------- ------- ------- -------
Income before income taxes......................... 554 732 637 473 539
Income taxes....................................... 183 253 231 166 207
------- ------- ------- ------- -------
Income before cumulative effect of
change in accounting principle.................. 371 479 406 307 332
Cumulative effect of change in
accounting for income taxes..................... --- --- --- (26) ---
Net income...................................... $ 371 $ 479 $ 406 $ 281 $ 332
======= ======= ======= ======== ======
</TABLE>
Table continued on following page
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF
CITIZENS BANCORP AND SUBSIDIARY (continued)
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Supplemental Data:
Interest rate spread during period................. 3.75% 3.75% 3.69% 3.14% 3.29%
Net yield on interest-earning assets (3)........... 4.02 3.99 3.92 3.38 3.56
Return on assets (4)............................... .82 1.15 1.07 .77 .94
Return on equity (5)............................... 6.81 9.52 8.89 6.58 8.30
Equity to assets (6)............................... 12.28 11.91 12.06 11.38 12.05
Average interest-earning assets to average
interest-bearing liabilities.................... 106.31 105.61 105.84 106.54 106.20
Non-performing assets to total assets (6).......... .74 .50 .35 .61 1.02
Allowance for loan losses to total loans
outstanding (6)................................. .55 .40 .16 .19 .16
Allowance for loan losses to
non-performing loans (6)........................ 61.57 62.51 33.19 20.89 10.92
Net (charge-offs) recoveries to average
total loans outstanding ........................ (.03) .04 (.12) (.004) (.03)
Other expenses to average assets (7).............. 2.67 2.32 2.44 2.38 2.33
Number of full service offices (6)................. 1 1 1 1 1
</TABLE>
(1) Net of allowance for loan losses, deferred fees and escrow.
(2) Includes certificates of deposit in other financial institutions.
(3) Net interest income divided by average interest-earning assets.
(4) Net income divided by average total assets.
(5) Net income divided by average total equity.
(6) At end of period.
(7) Other expenses divided by average total assets.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Holding Company was incorporated for the purpose of owning all of
the outstanding shares of Citizens. As a result, the discussion that follows
focuses on Citizens' financial condition and results of operations prior to
September 18, 1997, the date of the Conversion. The following discussion and
analysis of the financial condition as of June 30, 1997 and Citizens' results of
operations for periods prior to that date should be read in conjunction with and
with reference to the consolidated financial statements and the notes thereto
included herein.
In addition to the historical information contained herein, the
following discussion contains forward-looking statements that involve risks and
uncertainties. The Holding Company's operations and actual results could differ
significantly from those discussed in the forward-looking statements. Some of
the factors that could cause or contribute to such differences are discussed
herein but also include changes in the economy and interest rates in the nation
and the Holding Company's general market area. The forward-looking statements
contained herein include, but are not limited to, those with respect to the
following matters:
<PAGE>
1. Management's determination of the amount of loan loss allowance;
2. The effect of changes in interest rates;
3. Changes in deposit insurance premiums; and
4. Proposed legislation that would eliminate the federal thrift
charter and the separate federal regulation of thrifts.
Asset/Liability Management
Citizens is subject to interest rate risk to the degree that its
interest-bearing liabilities, primarily deposits with short- and medium-term
maturities, mature or reprice at different rates than its interest-earning
assets. Management believes it is critical to manage the relationship between
interest rates and the effect on net portfolio value ("NPV"). This approach
calculates the difference between the present value of expected cash flows from
assets and the present value of expected cash flows from liabilities, as well as
cash flows from off-balance sheet contracts. Citizens manages assets and
liabilities within the context of the marketplace, regulatory limitations and
within limits established by its Board of Directors on the amount of change in
NPV which is acceptable given certain interest rate changes.
Interest risk exposure is monitored monthly by an Asset/Liability
Management Committee which considers various factors such as current local and
national economic conditions and interest rate outlook as well as Citizens' loan
and deposit demand, pricing and maturity structure. This Committee periodically
updates Citizens' interest rate risk strategy which primarily involves modifying
asset/liability terms and mix as considered appropriate. An increased emphasis
on consumer loans, which generally have shorter terms to maturity than
residential mortgage loans, in addition to an increase in the volume of
adjustable-rate loans, including multi-family and non-residential mortgage loans
and home equity lines of credit, have been the major strategies for asset
management. Citizens has also attempted to lengthen the average maturity of its
liabilities by offering special rates on longer term certificates of deposit.
Long term advances from the FHLB of Indianapolis are also an available source of
funds which could help Citizens with future liability management.
The OTS issued a regulation, which uses a net market value methodology to
measure the interest rate risk exposure of savings associations. Under this OTS
regulation, an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the related "normal" level of
interest rate risk) based upon certain interest rate changes (discussed below).
Associations which do not meet either of the filing requirements are not
required to file OTS Schedule CMR, but may do so voluntarily. As Citizens does
not meet either of these requirements, it is not required to file Schedule CMR,
although it does so voluntarily. Under the regulation, associations which must
file are required to take a deduction (the interest rate risk capital component)
from their total capital available to calculate their risk based capital
requirement if their interest rate exposure is greater than "normal." The amount
of that deduction is one-half of the difference between (a) the institution's
actual calculated exposure to a 200 basis point interest rate increase or
decrease (whichever results in the greater pro forma decrease in NPV) and (b)
its "normal" level of exposure which is 2% of the present value of its assets.
Presented below, as of June 30, 1997, is an analysis performed by the OTS
of Citizens' interest rate risk as measured by changes in NPV for instantaneous
and sustained parallel shifts in the yield curve, in 100 basis point increments,
up and down 400 basis points. At June 30, 1997, 2% of the present value of
Citizens' assets was approximately $961,000. Because the interest rate risk of a
200 basis point increase in market rates (which was greater than the interest
rate risk of a 200 basis point decrease) was $1.1 million at June 30, 1997,
Citizens would have been required to deduct $64,000 from its total capital
available to calculate its risk based capital requirement if Citizens had been
subject to the OTS' reporting requirements under this methodology. Citizens'
exposure to interest rate risk results from the concentration of fixed rate
mortgage loans in its portfolio.
<PAGE>
<TABLE>
<CAPTION>
NPV as % of
Present Value
Change Net Portfolio Value of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+ 400 bp* $4,933 $(2,387) (33)% 11.02% (422) bp
+ 300 bp 5,588 (1,732) (24)% 12.24% (300) bp
+ 200 bp 6,232 (1,088) (15)% 13.40% (184) bp
+ 100 bp 6,827 (493) (7)% 14.43% (81) bp
0 bp 7,320 --- --- % 15.24% --- bp
- 100 bp 7,575 255 3% 15.61% 37 bp
- 200 bp 7,504 184 3% 15.40% 16 bp
- 300 bp 7,424 104 1% 15.18% (6) bp
- 400 bp 7,543 223 3% 15.30% 6 bp
</TABLE>
* Basis points.
As with any method of measuring interest rate risk, the methods of
analysis presented above have certain shortcomings. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate loans, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Further, in
the event of a change in interest rates, expected rates of prepayments on loans
and early withdrawals from certificates could likely deviate significantly from
those assumed in calculating the table.
Average Balances and Interest Rates and Yields
The following tables present at the fiscal years ended June 30, 1997,
1996 and 1995, the average daily balances of each category of Citizens'
interest-earning assets and interest-bearing liabilities, and the interest
earned or paid on such amounts.
<PAGE>
AVERAGE BALANCE SHEET/YIELD ANALYSIS
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996 1995
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits.......$ 3,446 $ 179 5.21% $ 3,109 $ 182 5.85% $ 3,713 $ 181 4.89%
FHLB stock...................... 332 26 7.84 332 26 7.91 332 23 7.06
Investment securities
available for sale (1)........ 1,527 94 6.14 3,001 174 5.81 2,832 154 5.43
Loans receivable (2)............ 36,843 3,210 8.71 31,980 2,804 8.77 28,121 2,384 8.48
Total interest-earning assets. 42,148 3,509 8.33 38,422 3,186 8.29 34,998 2,742 7.84
------ ----- ------- ----- -------- -----
Interest-bearing liabilities:
Deposits........................ 36,436 1,641 4.50 34,456 1,539 4.47 32,605 1,341 4.12
====== ===== ======= ===== ======== =====
FHLB advances................... 3,212 173 5.41 1,923 114 5.94 462 29 6.24
------ ----- ------- ----- -------- -----
Total interest-bearing
liabilities.................. 39,648 1,814 4.58 36,379 1,653 4.54 33,067 1,370 4.15
------- ----- ------- ----- -------- -----
Net interest-earning assets........$ 2,500 $ 2,043 $ 1,931
======= ======= ========
Net interest income................ $1,695 $1,533 $1,372
====== ====== ======
Interest rate spread (3)........... 3.75% 3.75% 3.69%
==== ==== ====
Net yield on weighted average
interest-earning assets (4)..... 4.02% 3.99% 3.92%
==== ==== ====
Average interest-earning assets
to average interest
-bearing liabilities............ 106.31% 105.61% 105.84%
====== ====== ======
</TABLE>
(1) Includes securities available for sale at amortized cost prior to SFAS No.
115 adjustments.
(2) Total loans less loans in process. Average balances include non-accrual
loans.
(3) Interest rate spread is calculated by subtracting weighted average interest
rate cost from weighted average interest rate yield for the period
indicated.
(4) The net yield on weighted average interest-earning assets is calculated by
dividing net interest income by weighted average interest-earning assets
for the period indicated.
Interest Rate Spread
Citizens' results of operations have been determined primarily by net
interest income and, to a lesser extent, fee income, miscellaneous income and
general and administrative expenses. Citizens' net interest income is determined
by the interest rate spread between the yields it earns on interest-earning
assets and the rates paid on interest-bearing liabilities, and by the relative
amounts of interest-earning assets and interest-bearing liabilities.
The following table sets forth the weighted average effective interest
rate that Citizens earned on its loan and investment portfolios, the weighted
average effective cost of its deposits and advances, the interest rate spread,
and net yield on weighted average interest-earning assets for the periods and as
of the dates shown. Average balances are based on average monthly balances.
Management believes that the use of month-end average balances instead of daily
average balances has not caused any material difference in the information
presented.
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996 1995
---- ---- ----
Weighted average interest rate earned on:
<S> <C> <C> <C>
Interest-bearing deposits..................... 5.21% 5.85% 4.89%
FHLB stock.................................... 7.84 7.91 7.06
Investment securities......................... 6.14 5.81 5.43
Loans receivable.............................. 8.71 8.77 8.48
Total interest-earning assets............... 8.33 8.29 7.84
Weighted average interest rate cost of:
Deposits...................................... 4.50 4.47 4.12
FHLB advances................................. 5.41 5.94 6.24
Total interest-bearing liabilities.......... 4.58 4.54 4.15
Interest rate spread (1)......................... 3.75% 3.75% 3.69%
==== ==== ====
Net yield on weighted average
interest-earning assets (2)................... 4.02% 3.99% 3.92%
==== ==== ====
</TABLE>
(1) Interest rate spread is calculated by subtracting combined weighted
average interest rate cost from combined weighted average interest rate
earned for the period indicated. Interest rate spread figures must be
considered in light of the relationship between the amounts of
interest-earning assets and interest-bearing liabilities.
(2) The net yield on weighted average interest-earning assets is calculated
by dividing net interest income by weighted average interest-earning
assets for the period indicated.
<PAGE>
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected Citizens' interest income and expense during the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in rate (changes
in rate multiplied by old volume) and (2) changes in volume (changes in volume
multiplied by old rate). Changes attributable to both rate and volume which
cannot be segregated have been allocated proportionally to the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
Total
Due to Due to Net
Rate Volume Change
------- ------- ----
(In thousands)
Year ended June 30, 1997 compared
to year ended June 30, 1996
Interest-earning assets:
<S> <C> <C> <C>
Interest-bearing deposits.................................. $ (21) $ 19 $ (2)
FHLB stock................................................. (1) --- (1)
Investment securities...................................... 10 (90) (80)
Loans receivable........................................... (19) 425 406
------- ---- ----
Total.................................................... (31) 354 323
------- ---- ----
Interest-bearing liabilities:
Deposits................................................... 10 92 102
FHLB advances.............................................. (11) 70 59
------- ---- ----
Total.................................................... (1) 162 161
------- ---- ----
Net change in net interest income............................ $ (30) $192 $162
======= ==== ====
Year ended June 30, 1996 compared
to year ended June 30, 1995
Interest-earning assets:
Interest-bearing deposits.................................. $ 32 $ (32) $ ---
FHLB stock................................................. 3 --- 3
Investment securities...................................... 11 10 21
Loans receivable........................................... 84 336 420
------- ---- ----
Total.................................................... 130 314 444
------- ---- ----
Interest-bearing liabilities:
Deposits................................................... 118 79 197
FHLB advances.............................................. (2) 87 85
------- ---- ----
Total.................................................... 116 166 282
------- ---- ----
Net change in net interest income............................ $ 14 $ 148 $ 162
======= ===== =====
Year ended June 30, 1995 compared
to year ended June 30, 1994
Interest-earning assets:
Interest-bearing deposits.................................. $ 60 $ (130) $ (70)
FHLB stock................................................. 4 --- 4
Investment securities...................................... 29 17 46
Loans receivable........................................... 38 300 338
------- ---- ----
Total.................................................... 131 187 318
------- ---- ----
Interest-bearing liabilities:
Deposits................................................... 42 27 69
FHLB advances.............................................. --- 28 28
------- ---- ----
Total.................................................... 42 55 97
------- ---- ----
Net change in net interest income............................ $ 89 $ 132 $ 221
======= ===== =====
</TABLE>
<PAGE>
Financial Condition at June 30, 1997 Compared to Financial Condition at June 30,
1996
Citizens' total consolidated assets increased by $2.2 million, or 4.8%, to
$46.4 million at June 30, 1997 from $44.2 million at June 30, 1996. Net loans
receivable increased $4.0 million, or 11.8%, while investment securities
decreased $2.8 million and FHLB advances increased $1.0 million. Citizens funded
the increased loans primarily with the increase in interest-bearing deposits of
$755,000, the sale of investment securities and with the additional FHLB
advance. Capital increased $371,000, or 7.0%, to $5.7 million in 1997 from $5.3
million in 1996.
Financial Condition at June 30, 1996 Compared to Financial Condition at June 30,
1995
Total consolidated assets increased by $4.5 million, or 11.4%, to $44.2
million at June 30, 1996 from $39.7 million at June 30, 1995. The increase in
assets for the period was primarily attributable to the growth in Citizens' loan
portfolio of $5.1 million. This increase in loan volume was primarily due to
increased loan demand generated by economic growth in Citizens' market area, and
a more aggressive loan origination program. Loan growth was funded mainly from
an increase in deposits of approximately $2.4 million and an increase in Federal
Home Loan Bank advances of $1.5 million.
The increase in the loan portfolio was comprised primarily of mortgage
loans which increased approximately $4.0 million.
Comparison of Operating Results For Years Ended June 30, 1997 and 1996
Net Income. Net income decreased $108,000, or 22.5%, to $371,000 in 1997
from $479,000 for 1996. This decrease primarily resulted from Citizens'
recognition of the one-time, non-recurring SAIF special assessment in the amount
of $211,000, ($127,000 net of tax) and the sale of an investment at a loss of
approximately $60,000. Citizens chose to sell the investment in order to use the
proceeds to pay down FHLB advances and to increase overall liquidity. These
expenses were offset by an increase of $162,000 in net interest income to $1.7
million for 1997 from $1.5 million for 1996. Excluding the SAIF assessment and
the loss on the sale of investments, net income would have increased $55,000, or
11.5%, to $534,000 for the twelve months ended June 30, 1997 from $479,000 in
1996.
Net Interest Income. Net interest income increased $162,000, or 10.6%, to
$1.7 million in 1997 from $1.5 million in 1996. This increase primarily resulted
from the growth in net loans receivable of $4.0 million, or 11.6%, to $38.4
million in 1997 from $34.4 million in 1996.
Provisions for Loan Losses. Provisions for loan losses for 1997 and 1996
were $83,000 and $80,000, respectively. Citizens increased its provision for
1997 to recognize the increase in consumer loan losses being experienced by
financial institutions nationally, regionally and locally as well as the risks
associated with individually large multi-family and nonresidential real estate
loans. Citizens had no chargeoffs in fiscal year 1996 and experienced $12,000 in
recoveries. Citizens had chargeoffs of $12,000 in fiscal year 1997 and its
allowance for loan loss as of June 30, 1997 was $212,000.
Other Income. Other income decreased approximately $87,000, or 35.4%, in
1997 as compared to 1996. This decrease resulted from the sale of an investment
security at a loss of approximately $60,000, a decrease in fees and service
charges and decreases in other miscellaneous income.
Other Expense. Other expenses increased $250,000 or 25.9% to $1.2 million
in 1997 from $967,000 in 1996. The increase was primarily attributable to an
increase of $47,000 in salaries and benefits, an increase of $196,000 in SAIF
insurance premiums and a $9,000 increase in occupancy expense relating to the
installation of new computers, a "Loan Doc Prep" software package and a Local
Area Network (LAN).
<PAGE>
Income Tax Expense. Income tax expense decreased $70,000, or 27.7%, to
$183,000 in 1997 from $253,000 in 1996. The decrease resulted primarily from
Citizens reduced profits in 1997 caused by recognition of the one-time,
non-recurring SAIF special assessment in the amount of $211,000 ($127,000 net of
tax) and the sale of an investment at a loss of approximately $60,000.
Comparison of Operating Results For Fiscal Years Ended June 30, 1996 and 1995
Net Income. Net income increased $73,000, or 18.0%, to $479,000 for 1996
from $406,000 for 1995. The increase was primarily due to the increase in the
size of Citizens' loan portfolio and the increase in its net interest income.
Net Interest Income. Net interest income increased $161,000, or 11.7%, to
$1.5 million in 1996 from $1.4 million in 1995. This increase was due primarily
to the growth of average interest earning assets to $38.4 million in 1996 from
$35.0 million in 1995. In addition, Citizens' interest rate spread increased to
3.75% in 1996 from 3.7% in 1995 and net interest margin increased to 4.0% in
1996 from 3.9% in 1995.
The increase in average interest-earning assets of $3.4 million reflects
an increase of $3.9 million in average loans, an increase in investments of
$169,000 and a decrease in interest-bearing deposits of $604,000.
Interest rate spread and net interest margin increased in 1996 compared to
1995. This was due to the increase in the yield on average interest-earning
assets to 8.3% in 1996 from 7.8% in 1995, while interest-bearing liabilities
increased to 4.5% in 1996 from 4.2% in 1995.
The yield on average interest-earning assets increased in 1996 due to an
increase in the yield of both loans and investments. Generally positive economic
conditions resulted in sustained loan demand, which resulted in an increase in
the yield on average interest-earning assets.
The increase in the cost of average interest-bearing liabilities was due
primarily to increases in the cost of interest-bearing deposits, to 4.5% in 1996
from 4.1% in 1995. This was partially offset by the decrease in the cost of
short-term borrowings to 5.9% in 1996 from 6.2% in 1995.
Provisions for Loan Losses. Provisions for loan losses for 1996 and 1995
were $80,000 and $32,000, respectively. The increase of $48,000 in 1996 was made
to increase Citizens' allowance commensurate with an increase in residential
mortgage, construction and consumer lending and the inherent risk associated
with each type of lending. Citizens did not charge off any amounts during 1996
and experienced a $12,000 recovery during that period. The $37,000 charge off in
1995 was partially offset by a $2,000 recovery.
Allowances for loan loss for 1996 and 1995 were $138,000 and $46,000
respectively.
Other Income. Other income increased approximately $25,000, or 11.3%, in
1996 as compared to 1995. This increase was primarily the result of a profit of
$24,000 in 1996 from Citizens Loan and Service Corporation ("CLSC"), Citizens'
wholly-owned service corporation.
Other Expense. Other expense increased $43,000, or 4.7%, to $967,000 in
1996 from $924,000 in 1995. The increase was primarily attributable to an
increase of $28,000 in salaries and benefits, primarily due to hiring an
additional loan officer, and a $9,000 increase in occupancy expense in
connection with the installation of new computers, a "Loan Doc Prep" software
package and a Local Area Network ("LAN").
Income Tax Expense. Income tax expense increased $22,000, or 9.5%, to
$253,000 in 1996 from $231,000 in 1995. The increase was the result of the
increased net income earned in 1996.
Liquidity and Capital Resources
Citizens' primary sources of funds are deposits, borrowings and the
proceeds from principal and interest payments on loans. While maturities and
scheduled amortization of loans are a predictable source of funds, deposit flows
and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
<PAGE>
Citizens' primary investing activity is the origination of loans. During
the years ended June 30, 1997, 1996 and 1995, it originated total loans in the
amounts of $17.5 million, $15.4 million and $11.4 million, respectively.
Citizens purchased loans totaling $64,000 in the fiscal year ended June 30,
1996. Loan principal repayments totaled $13.3 million, $10.3 million and $8.3
million during the respective periods.
During the years ended June 30, 1997, 1996, and 1995, Citizens purchased
securities in the amounts of $65,000, $169,000 and $154,000, respectively.
Citizens did not receive any proceeds for the sale of securities during 1996 or
1995. During the year ended June 30, 1997, however, Citizens sold approximately
$2.9 million of securities for a loss of approximately $60,000.
Citizens had outstanding loan commitments of $592,000 and unused lines of
credit of approximately $2.5 million at June 30, 1997. The unused lines
represent available borrowings under existing home equity lines of credit.
Citizens anticipates that it will have sufficient funds from loan repayments and
from its ability to borrow additional funds from the FHLB of Indianapolis to
meet its current commitments. Certificates of deposit scheduled to mature in one
year or less at June 30, 1997 totaled $13.3 million. Management believes that a
significant portion of such deposits will remain with Citizens based upon
historical deposit flow data and Citizens' competitive pricing in its market
area.
Liquidity management is both a daily and long-term function of Citizens'
management strategy. In the event that Citizens should require funds beyond its
ability to generate them internally, additional funds are available through the
use of FHLB advances. Citizens had outstanding FHLB advances in the amount of
$4.0 million at June 30, 1997.
The following is a summary of Citizens' cash flows, which are of three
major types. Cash flows from operating activities consist primarily of net
income generated by cash. Investing activities generate cash flows through the
origination and principal collection on loans as well as purchases and sales of
securities. Investing activities will generally result in negative cash flows
when Citizens experiences loan growth. Cash flows from financing activities
include savings deposits, withdrawals and maturities and changes in borrowings.
The following table summarizes cash flows for each year in the three-year period
ended June 30, 1997.
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Operating activities............................. $266 $ 518 $ 494
Investing activities:
Purchases of
investment securities....................... (65) (169) (154)
Sales of investment securities................ 2,932 --- ---
Principal collected on loans.................. 13,251 10,279 8,263
Loans originated.............................. (17,474) (15,419) (11,434)
Loans sold.................................... 91 --- ---
Loans purchased............................... --- (64) ---
Change in land held
for development............................. 77 (3) (682)
Purchases of equipment........................ (16) (69) (25)
------- ------- -------
Total from investing activities.................. (1,204) (5,445) (4,032)
Financing activities:
Increase/(decrease) in NOW,
MMDA and passbook deposits.................. 305 460 (1,991)
Increase in certificates
of deposit.................................. 450 1,965 1,129
Advances from FHLB............................ 14,500 4,500 6,000
Payments to FHLB.............................. (13,500) (3,000) (4,500)
------- ------- -------
Total from financing activities.................. 1,755 3,925 638
------- ------- -------
Net increase/(decrease) in cash
and cash equivalents.......................... $817 $(1,002) $(2,900)
======= ======= =======
</TABLE>
<PAGE>
Federal law requires that savings associations maintain an average
daily balance of liquid assets in an amount not less than 4% or more than 10% of
their withdrawable accounts plus short-term borrowings. Liquid assets include
cash, certain time deposits, certain bankers' acceptances, specified U.S.
government, state or federal agency obligations, certain corporate debt
securities, commercial paper, certain mutual funds, certain mortgage-related
securities, and certain first-lien residential mortgage loans. The OTS recently
amended its regulation that implements this statutory liquidity requirement to
reduce the amount of liquid assets a savings association must hold from 5% of
net withdrawable accounts and short-term borrowings to 4%. The OTS also
eliminated the requirement that savings associations maintain short-term liquid
assets constituting at least 1% of their average daily balance of net
withdrawable deposit accounts and current borrowings. The revised OTS rule also
permits savings associations to calculate compliance with the liquidity
requirement based upon their average daily balance of liquid assets during each
quarter rather than during each month, as was required under the prior rule. The
OTS may impose monetary penalties on savings associations that fail to meet
these liquidity requirements. As of June 30, 1997, Citizens had liquid assets of
$2.6 million, and a regulatory liquidity ratio of 6.7%.
Pursuant to OTS capital regulations, savings associations must currently
meet a 1.5% tangible capital requirement, a 3% leverage ratio (or core capital)
requirement, and a total risk-based capital to risk-weighted assets ratio of 8%.
At June 30, 1997, Citizens' tangible capital ratio was 10.3%, its core capital
ratio was 10.3%, and its risk-based capital to risk-weighted assets ratio was
18.1%. Therefore, at June 30, 1997, Citizens' capital levels exceeded all
applicable regulatory capital requirements currently in effect. The following
table provides the minimum regulatory capital requirements and Citizens' capital
ratios as of June 30, 1997:
<TABLE>
<CAPTION>
At June 30, 1997
OTS Requirement Citizens' Capital Level
% of % of Amount
Capital Standard Assets Amount Assets(1) Amount of Excess
- ---------------- ------ ------ --------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible capital......... 1.5% $ 683 10.3% $4,698 $4,015
Core capital (2)......... 3.0 1,365 10.3 4,698 3,333
Risk-based capital....... 8.0 2,174 18.1 4,910 2,736
</TABLE>
(1) Tangible and core capital levels are shown as a percentage of total assets;
risk-based capital levels are shown as a percentage of risk-weighted
assets.
(2) The OTS has proposed and is expected to adopt a core capital requirement
for savings associations comparable to that adopted by the OCC for national
banks. The new regulation, as proposed, would require at least 3% of total
adjusted assets for savings associations that received the highest
supervisory rating for safety and soundness, and 4% to 5% for all other
savings associations. The final form of such new OTS core capital
requirement may differ from that which has been proposed. Citizens expects
to be in compliance with such new requirements.
As of June 30, 1997, management is not aware of any current recommendations
by regulatory authorities which, if they were to be implemented, would have, or
are reasonably likely to have, a material adverse effect on Citizens' liquidity,
capital resources or results of operations.
Impact of Inflation
The consolidated financial statements presented herein have been prepared
in accordance with generally accepted accounting principles. These principles
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
<PAGE>
Citizens' primary assets and liabilities are monetary in nature. As a
result, interest rates have a more significant impact on Citizens' performance
than the effects of general levels of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services, since such prices are affected by inflation. In a period
of rapidly rising interest rates, the liquidity and maturities structures of
Citizens' assets and liabilities are critical to the maintenance of acceptable
performance levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of noninterest expense. Such expense items as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that Citizens has made. Management is unable to determine the
extent, if any, to which properties securing Citizens' loans have appreciated in
dollar value due to inflation.
Current Accounting Issues
In November 1993, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 93-6, "Employer's Accounting for Employee
Stock Ownership Plans." The SOP, among other things, changed the measure of
compensation expense recorded by employers from the cost of employee stock
ownership plan shares allocated to employees during the period to the fair value
of employee stock ownership plan shares allocated. Assuming the acquisition of
shares of stock by the ESOP, the application of SOP 93-6 is likely to result in
fluctuations in compensation expense due to changes in the fair value of the
stock.
In October, 1995, the FASB issued SFAS No. 123 entitled "Accounting for
Stock-Based Compensation." SFAS No. 123 establishes a fair value based method of
accounting and disclosing the amount of stock-based compensation paid to
employees. Historically, Accounting Principles Board ("APB") Opinion No. 25
"Accounting for Stock Issued to Employees" has measured compensation cost using
the method based on the award's intrinsic value. Those electing to remain with
the accounting in APB Opinion No. 25 must make pro forma disclosures of net
income and, when presented, earnings per share, as if the fair value based
method of accounting defined in SFAS 123 had been applied. The disclosure
provisions of SFAS No. 123 have been adopted by Citizens. Management does not
believe that adoption of SFAS No. 123 disclosure provisions will have a material
adverse effect on Citizens' consolidated financial position or results of
operations.
In June, 1996, the FASB issued SFAS No. 125, "Accounting for Transfers of
Financial Assets, Servicing Rights and Extinguishment of Liabilities," that
provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 superseded
portions of SFAS No. 122. SFAS No. 125 introduces an approach to accounting for
transfers of financial assets that provides a means of dealing with more complex
transactions in which the seller disposes of only a partial interest in the
assets, retains rights or obligations, makes use of special purpose entities in
the transaction, or otherwise has continuing involvement with the transferred
assets. The new accounting method provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. Transactions subject to the provisions of SFAS
No. 125 include, among others, transfers involving repurchase agreements,
securitizations of financial assets, loan participations and transfers of
receivables with recourse. An entity that undertakes an obligation to service
financial assets recognizes either a servicing asset or liability for the
servicing contract. A servicing asset or liability that is purchased or assumed
is initially recognized at its fair value. Servicing assets and liabilities are
amortized in proportion to and over the period of estimated net servicing income
or net servicing loss and are subject to subsequent assessments for impairment
based on fair value. SFAS No. 125 provides that a liability is removed from the
balance sheet only if the debtor either pays the creditor and is relieved of its
obligation for the liability or is legally released from being the primary
obligor. SFAS No. 125 is effective for applicable transactions occurring after
December 31, 1996, and is to be applied prospectively. Retroactive application
is not permitted. Management does not believe that adoption of SFAS No. 125 will
have a material adverse effect on Citizens' financial position or results of
operations.
<PAGE>
Report of Independent Auditors
Board of Directors
Citizens Savings Bank of Frankfort
We have audited the accompanying consolidated statements of condition of
Citizens Savings Bank of Frankfort and subsidiary as of June 30, 1997 and 1996,
and the related consolidated statements of income and changes in retained income
and cash flows for each of the three years in the period ended June 30, 1997.
These financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Citizens Savings
Bank of Frankfort and subsidiary at June 30, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Indianapolis, Indiana
August 22, 1997
<PAGE>
CITIZENS SAVINGS BANK OF FRANKFORT AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
June 30,
1997 1996
-------------------------------------
Assets
<S> <C> <C>
Cash on hand and in other institutions $ 861,360 $ 655,488
Interest-bearing deposits 3,263,687 2,652,686
Investment securities available for sale 160,995 3,003,242
Stock in Federal Home Loan Bank of Indianapolis 331,600 331,600
Loans receivable, net 38,435,416 34,391,405
Land held for development 995,908 1,072,800
Cash surrender value of life insurance contract 1,075,840 1,034,553
Property and equipment 578,343 603,464
Other assets 650,161 490,058
-------------------------------------
Total assets $46,353,310 $44,235,296
=====================================
Liabilities and Retained Income
Deposits $36,355,213 $35,600,140
Federal Home Loan Bank advances 4,000,000 3,000,000
Other liabilities 307,303 366,157
-------------------------------------
Total liabilities 40,662,516 38,966,297
Retained income - substantially restricted 5,690,794 5,319,852
Unrealized loss on investment securities available
for sale, net of tax --- (50,853)
-------------------------------------
5,690,794 5,268,999
-------------------------------------
Total liabilities and retained income $46,353,310 $44,235,296
=====================================
</TABLE>
See accompanying notes.
<PAGE>
CITIZENS SAVINGS BANK OF FRANKFORT AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended June 30,
1997 1996 1995
------------------------------------------------------
Interest income:
<S> <C> <C> <C>
Interest on loans $3,210,018 $2,803,774 $2,383,591
Other interest income 299,370 382,453 358,661
------------------------------------------------------
3,509,388 3,186,227 2,742,252
Interest expense:
Interest on deposits 1,640,868 1,538,886 1,341,925
Interest on borrowings 173,668 114,253 28,812
------------------------------------------------------
1,814,536 1,653,139 1,370,737
------------------------------------------------------
Net interest income 1,694,852 1,533,088 1,371,515
Provision for loan losses 83,000 80,000 32,000
------------------------------------------------------
Net interest income after provision
for loan losses 1,611,852 1,453,088 1,339,515
Other income:
Fees and service charges 138,342 152,379 151,726
Loss on sale of investments (60,243) --- ---
Other 80,733 94,097 69,731
------------------------------------------------------
158,832 246,476 221,457
Other expense:
Salaries and employee benefits 485,151 414,730 387,245
Occupancy expense 114,449 117,967 109,842
Data processing expense 107,764 101,675 104,619
Federal insurance premium 258,685 76,868 75,078
Other 250,468 256,137 247,470
------------------------------------------------------
1,216,517 967,377 924,254
------------------------------------------------------
Income before income taxes 554,167 732,187 636,718
Income taxes 183,225 253,257 230,549
------------------------------------------------------
Net income $ 370,942 $ 478,930 $ 406,169
======================================================
</TABLE>
See accompanying notes.
<PAGE>
CITIZENS SAVINGS BANK OF FRANKFORT AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED INCOME
<TABLE>
<CAPTION>
Unrealized Loss on
Retained Income Investment Securities
Substantially Available for Sale, Total Retained
Restricted Net of Tax Income
----------------------------------------------------------------
<S> <C> <C> <C>
Balance as of June 30, 1994 $4,434,753 $ (49,697) $4,385,056
Net income 406,169 --- 406,169
Net change in unrealized loss on
investment securities available
for sale, net of tax --- 735 735
----------------------------------------------------------------
Balance as of June 30, 1995 4,840,922 (48,962) 4,791,960
Net income 478,930 --- 478,930
Net change in unrealized loss on
investment securities available
for sale, net of tax --- (1,891) (1,891)
----------------------------------------------------------------
Balance as of June 30, 1996 5,319,852 (50,853) 5,268,999
Net income 370,942 --- 370,942
Net change in unrealized loss on
investment securities available for
sale, net of tax --- 50,853 50,853
----------------------------------------------------------------
Balance as of June 30, 1997 $5,690,794 $ --- $5,690,794
================================================================
</TABLE>
See accompanying notes.
<PAGE>
CITIZENS SAVINGS BANK OF FRANKFORT AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended June 30,
1997 1996 1995
----------------------------------------------------------
Operating activities
<S> <C> <C> <C>
Net income $ 370,942 $ 478,930 $ 406,169
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on sale of investments 60,243 --- ---
Provision for loan losses 83,000 80,000 32,000
Depreciation and amortization 45,587 48,055 39,148
Deferred federal income tax credit (76,326) (74,473) (21,753)
Increase in other assets and cash surrender
value of life insurance contract (158,418) (140,525) (78,522)
Increase (decrease) in other liabilities (58,854) 126,311 116,650
----------------------------------------------------------
Net cash provided by operating activities 266,174 518,298 493,692
Investing activities
Purchases of investment securities (65,481) (169,304) (153,930)
Proceeds from sale of investment securities 2,931,693 --- ---
Principal collected on loans 13,251,130 10,279,567 8,262,649
Loans originated (17,473,565) (15,419,000) (11,433,731)
Loans purchased --- (64,000) ---
Proceeds from sale of loans 91,455 --- ---
(Increase) decrease in land held for development 76,892 (3,342) (681,907)
Purchases of equipment (16,498) (69,117) (24,516)
----------------------------------------------------------
Net cash used by investing activities (1,204,374) (5,445,196) (4,031,435)
Financing activities
Increase (decrease) in NOW, MMDA and
passbook deposits 304,545 460,126 (1,990,873)
Increase in certificates of deposit 450,528 1,965,007 1,128,535
Advances from Federal Home Loan Bank 14,500,000 4,500,000 6,000,000
Payments to Federal Home Loan Bank (13,500,000) (3,000,000) (4,500,000)
----------------------------------------------------------
Net cash provided by financing activities 1,755,073 3,925,133 637,662
----------------------------------------------------------
Increase (decrease) in cash and cash equivalents 816,873 (1,001,765) (2,900,081)
Cash and cash equivalents at beginning of year 3,308,174 4,309,939 7,210,020
----------------------------------------------------------
Cash and cash equivalents at end of year $ 4,125,047 $ 3,308,174 $ 4,309,939
==========================================================
</TABLE>
See accompanying notes.
<PAGE>
1. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Citizens Savings
Bank ("Bank") of Frankfort, Indiana, and its wholly owned subsidiary, Citizens
Loan and Service Corporation ("Service Corp."). The Bank operates as a
traditional savings bank in Clinton County. The Service Corp. develops land for
residential housing. All significant intercompany accounts and transactions have
been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and in other institutions and
interest-bearing deposits. Interest-bearing deposits are available on demand.
Investment Securities
At June 30, 1997 and 1996, investment securities, which consist of equity
interests in pooled investment trusts, are classified as available-for-sale and
carried at fair value with the unrealized loss as a separate component of
equity, net of tax. At June 30, 1997, 1996, and 1995, the cost basis of
investment securities was $160,995, $3,087,450 and $2,913,124, respectively and
the gross unrealized loss was $0, $84,208, and $81,077 respectively. Gains and
losses on the sale of these securities are based on the specific cost of the
individual security being sold.
Management determines the appropriate classification of investment securities at
the time of purchase. Securities classified as held to maturity are those which
management has the positive intent and ability to hold until the scheduled
maturity. Securities classified as held to maturity are stated at amortized
cost. Securities classified as available for sale are those which may be sold
for liquidity purposes, or other reasons, prior to reaching scheduled maturity.
Stock in Federal Home Loan Bank of Indianapolis
Stock in the Federal Home Loan Bank of Indianapolis is stated at cost and the
amount of stock held is determined by regulation.
Loans Receivable
The Bank has a first mortgage lien on all property securing loans classified as
residential and commercial real estate mortgage loans. Further, a portion of
certain mortgage loan balances is insured by private or government guaranty
insurance policies. Interest income is computed monthly based upon the principal
amount of the loans outstanding. The Bank discontinues the accrual of interest
on loans when, in management's opinion, the collection of all or a portion of
interest has become doubtful. Mortgage loans are placed on non-accrual status
when they become 90 days delinquent. When a loan is placed on nonaccrual, the
Bank charges all previously accrued and unpaid interest against income. Loan
origination and commitment fees and certain direct loan origination costs are
deferred and amortized as an adjustment of yield over the contractual life of
the related loans.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by
management to absorb losses in the loan portfolio. Management's determination of
the adequacy of the allowance is based on an evaluation of the portfolio
including consideration of past loan loss experience, current economic
conditions, volume, growth and composition of the loan portfolio, and other
relevant factors. The allowance is increased by provisions for loan losses
charged against income and reduced by net charge-offs.
<PAGE>
1. Significant Accounting Policies (continued)
In 1995, Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114") and Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan
- - Income Recognition and Disclosures" ("SFAS 118"), an amendment to SFAS 114,
were adopted. Any allowance for loan losses related to troubled loans identified
for evaluation in accordance with SFAS 114 is based on estimated discounted cash
flows using the loan's initial effective interest rate or the fair value of the
collateral for certain collateral dependent loans. Consumer loans and
one-to-four family residential loans are collectively evaluated for impairment
as homogeneous loan groups which are outside the scope of SFAS 114. Under SFAS
118, no interest income on loans determined to be impaired is accrued. Interest
income on such loans is recognized only upon cash receipt. SFAS 114 and SFAS 118
have not had a significant impact on results of operations in 1997, 1996 or
1995.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed principally by the straight-line method over the
estimated useful lives (5 to 40 years) of the related assets.
Income Taxes
Deferred tax assets and liabilities are established for temporary differences
between the financial reporting basis and tax basis of assets and liabilities,
at the enacted tax rates expected to be in effect when the temporary differences
reverse . The effect of a tax rate change is recognized in income in the period
of enactment.
Use of Estimates
Preparation of financial statements requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain elements of the 1996 and 1995 consolidated financial statements have
been reclassified to conform with the 1997 presentation herein.
2. Loans Receivable
Loans receivable consist of the following:
June 30,
----------------------------
1997 1996
----------- -----------
Real estate
mortgage loans:
One-to-four family
residential $29,887,850 $26,239,965
Commercial 2,375,245 2,290,739
Construction loans 1,419,800 870,000
Installment loans 5,475,168 5,358,258
Loans secured
by deposits 193,111 62,559
----------- -----------
39,351,174 34,821,521
Less:
Allowance for
loan losses 211,635 138,606
Deferred loan fees 101,140 94,665
Undisbursed portion
of loan proceeds 602,983 196,845
----------- -----------
915,758 430,116
----------- -----------
$38,435,416 $34,391,405
=========== ===========
<PAGE>
2. Loans Receivable (continued)
Changes in the allowance for loan losses are as follows:
Year Ended June 30,
1997 1996 1995
-------- -------- --------
Balance at beginning of year $138,606 $46,416 $ 49,267
Provision for losses 83,000 80,000 32,000
Charge-offs (11,597) - (36,721)
Recoveries 1,626 12,190 1,870
-------- -------- --------
Balance at end of year $211,635 $138,606 $ 46,416
======== ======== ========
At June 30, 1997 the Bank had loan commitments of approximately $592,000. Of the
$592,000 loan commitments, $488,000 are fixed rate commitments at 8.65%.
The Bank's loan portfolio consists primarily of loans originated in its
principal market area of Frankfort, Indiana, Clinton County and its contiguous
counties. The economy of the Bank's market area primarily includes some
diversified industries and agriculture. At June 30, 1997 and June 30, 1996, and
for the years then ended, the Bank had no loans considered to be impaired under
SFAS 114. Advances from the Federal Home Loan Bank of Indianapolis are secured
by a floating lien on the Bank's one-to-four family residential mortgage loans
(see Note 7).
3. Loans to Related Parties
The Bank has granted loans to certain of its directors, officers and their
associates. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated parties and do not involve more than
normal risk of collectibility. The aggregate dollar amounts of these loans were
$2,211,000 and $1,644,000 at June 30, 1997 and 1996, respectively. During the
year ended June 30, 1997, related party loans were increased $890,000 by loan
advances and reduced $323,000 by loan repayments. During 1996, related party
loans were increased $535,000 by loan advances and reduced $416,000 by loan
repayments.
4. Land Held for Development
The Bank, through its Service Corp., has been developing approximately 59 acres
of land for a three phase residential housing addition in Frankfort, Indiana. In
January 1992, the Bank received regulatory approval of a plan to develop this
land. During the years ended June 30, 1997, 1996, and 1995, approximately
$68,000, $240,000, and $654,000 was expended to create the infrastructure for
the development and provide further improvements to the first and second phase
of the project. During the years ended June 30, 1997 and 1996 approximately
$166,000 and $270,000 respectively, was received from the sale of lots in the
development resulting in gains from sale of these lots of $17,000 and $33,000,
respectively. The Service Corp. owns an additional 45 acres of land for future
development.
<PAGE>
5. Property and Equipment
Property and equipment consists of the following:
June 30,
1997 1996
-------- --------
Land $137,307 $137,307
Office building 647,154 647,154
Furniture, fixtures
and equipment 255,327 295,158
--------- ---------
1,039,788 1,079,619
Less accumulated
depreciation 461,445 476,155
-------- --------
$578,343 $603,464
======== ========
<PAGE>
6. Deposits
Deposits consist of the following:
June 30,
1997 1996
Type Amount Amount
----------- -----------
Savings accounts:
Fixed rate,
passbook $ 6,904,561 $ 6,698,172
Variable rate,
money market 3,354,231 3,252,183
----------- -----------
10,258,792 9,950,355
Negotiable order
of withdrawal
(NOW) accounts 4,072,240 4,076,132
Certificates 22,024,181 21,573,653
----------- -----------
$36,355,213 $35,600,140
=========== ===========
The following table presents interest expense on deposits for the years ended
June 30, 1997, 1996 and 1995.
Year Ended June 30,
1997 1996 1995
---------- ---------- ----------
Fixed rate, passbooks $216,388 $224,314 $230,077
Variable rate, money
markets 108,991 107,232 105,566
NOWs 86,551 79,569 84,406
Certificates 1,228,938 1,127,771 921,876
---------- ---------- ----------
Total interest
on deposits $1,640,868 $1,538,886 $1,341,925
========== ========== ==========
The average interest rates represent the weighted average interest rates in
effect at June 30 of each year. Accrued interest payable, which relates
primarily to certificate accounts, totaled $69,000 and $39,000 at June 30, 1997
and 1996, respectively, and is included in other liabilities. Cash paid for
interest was $1,611,000, $1,539,000, and $1,341,000 for the years ended June 30,
1997, 1996, and 1995, respectively. Deposit accounts with balances in excess of
$100,000 totaled $6,654,000 with a weighted average interest rate of 4.88% as of
June 30, 1997. Deposits over $100,000 are not federally insured.
Contractual maturities of certificates of deposit at June 30, 1997 were:
Certificates
Year ended over All other
June 30, $100,000 Certificates Total
- --------------------------------------------------------
1998 $4,117,330 $9,157,050 $13,274,380
1999 200,000 5,187,390 5,387,390
2000 100,246 1,455,255 1,555,501
2001 200,000 784,608 984,608
2002 111,114 661,012 772,126
Thereafter --- 50,176 50,176
---------- ----------- -----------
$4,728,690 $17,295,491 $22,024,181
========== =========== ===========
7. Advances from Federal Home Loan Bank of Indianapolis
Advances from the Federal Home Loan Bank of Indianapolis totaling $4,000,000 at
June 30, 1997 bear fixed and variable interest rates and are due at various
dates through October 1998. The Bank is required to maintain eligible loans in
its portfolio of at least 170% of outstanding advances as collateral for
advances from the Federal Home Loan Bank of Indianapolis. Advances outstanding
as of June 30, 1997 are scheduled to mature as follows:
Year ended June 30, Amount
- -----------------------------------------------
1998 $3,000,000
1999 1,000,000
<PAGE>
7. Advances from Federal Home Loan Bank of Indianapolis (continued)
The following table presents certain information relating to advances at or for
the years ended June 30, 1997, 1996 and 1995.
Year Ended June 30,
1997 1996 1995
------------------------------------
FHLB Advances:
Outstanding at
end of period $4,000,000 $3,000,000 $1,500,000
Average balance
outstanding for
period 3,212,000 1,923,000 462,000
Maximum amount
outstanding at
any month-end
during the
period: 5,000,000 3,000,000 1,500,000
Weighted average
interest rate
during the
period 5.41% 5.94% 6.24%
Weighted average
interest rate at
end of period 6.51 5.82 5.87
8. Income Taxes
Income tax expense is summarized as follows:
Year Ended June 30,
1997 1996 1995
-------- -------- --------
Federal:
Current $204,275 $255,830 $196,285
Deferred (62,054) (58,491) (17,119)
-------- -------- --------
142,221 197,339 179,166
State:
Current 55,276 71,900 56,017
Deferred (14,272) (15,982) (4,634)
-------- -------- --------
41,004 55,918 51,383
-------- -------- --------
Income tax expense $183,225 $253,257 $230,549
======== ======== ========
Federal income taxes vary from the amount computed using the corporate statutory
rate due principally to income on the cash surrender value of a life insurance
policy (see Note 10).
The reconciliation of income tax computed at the federal statutory rate to the
Bank's effective income tax is as follows:
Year Ended June 30,
1997 1996 1995
----------------------------
Tax rate of federal
statutory rate 34.0% 34.0% 34.0%
State franchise tax,
net of federal benefit 4.9 5.0 5.3
Income on cash surrender
value of life insurance
policy (7.5) (5.9) (5.0)
Other 1.7 1.5 1.9
---- ---- ----
Effective tax rate 33.1% 34.6% 36.2%
==== ==== ====
<PAGE>
The components of the Bank's net deferred tax asset included in other assets as
of June 30 are as follows:
1997 1996 1995
-------- -------- --------
Deferred tax assets:
Deferred loan
origination fees $124,563 $118,904 $ 111,442
Unrealized loss
on investment --- 35,698 34,458
Officer supplemental
retirement plan 99,263 67,681 38,347
Allowance for
loan losses 89,945 58,908 19,727
Other 21,484 15,621 7,747
-------- -------- --------
335,255 296,812 211,721
Deferred tax liabilities:
FHLB stock dividend (27,132) (27,132) (27,132)
Deferred loan
origination costs (81,579) (78,680) (74,826)
Percentage bad
debt deduction (49,107) (58,915) (58,915)
Other (15,669) (13,116) (7,592)
-------- -------- --------
(173,487) (177,843) (168,465)
-------- -------- --------
Net deferred
tax asset $161,768 $118,969 $43,256
======== ======== =======
The Bank and its wholly owned subsidiary file a consolidated federal income tax
return. The Bank paid $431,009, $248,646 and $168,539 of federal and state
income taxes in 1997, 1996 and 1995, respectively.
9. Retained Income
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. Management believes that the Bank meets all
capital adequacy requirements to which it is subject.
Pursuant to the Financial Institutions Reform Recovery and Enforcement Act of
1989 (FIRREA), as implemented by a rule promulgated by the Office of Thrift
Supervision ("OTS"), savings institutions must meet three separate minimum
capital-to-assets requirements: (i) a risk-based capital requirement of 8% of
risk-weighted assets, (ii) a leverage ratio of 3% core capital to total assets
and (iii) a tangible capital requirement of 1.5% tangible core capital to total
assets. The following table summarizes, the Bank's capital requirements under
FIRREA and its actual capital and capital ratios at June 30.
<PAGE>
<TABLE>
<CAPTION>
Capital Requirements Actual Capital Amount
% $ % $ of Excess
-----------------------------------------------------------------------------------
June 30, 1997:
<S> <C> <C> <C> <C> <C>
Risk-based 8.0% $2,174,000 18.1% $4,910,000 $2,736,000
Leverage 3.0 1,365,000 10.3 4,698,000 3,333,000
Tangible 1.5 683,000 10.3 4,698,000 4,015,000
June 30 1996:
Risk-based 8.0% $2,072,000 16.8% $4,343,000 $2,271,000
Leverage 3.0 1,298,000 9.7 4,204,000 2,906,000
Tangible 1.5 649,000 9.7 4,204,000 3,555,000
</TABLE>
At June 30, 1997 and 1996, the Bank had approximately $993,000 and $1,070,000,
respectively, invested in its Service Corp., which invests in land held for
development. Since enactment of FIRREA, regulatory capital rules require a
reduction of regulatory capital for such an investment. The amount of regulatory
capital reduction was 100% as of June 30, 1997 and 1996. The reductions were
partially offset by non-withdrawable deposits includable in regulatory capital
of $0 and $5,000 at June 30, 1997 and 1996 respectively.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act Prompt
Corrective Action regulations, for all periods presented, the Office of Thrift
Supervision categorized the Bank as "well-capitalized" under the regulatory
framework for prompt corrective action. To be categorized as well-capitalized
the Bank must maintain a total risk-based capital (as defined) ratio of 10%, a
Tier 1 risk-based capital (as defined) ratio of 6%, and a Tier 1 leverage (as
defined) ratio of 5%. The Bank's ratios were as follows:
<PAGE>
9. Retained Income (continued)
<TABLE>
<CAPTION>
Capital Requirements Actual Capital
% $ % $
------------------------------------------------------
As of June 30, 1997:
<S> <C> <C> <C> <C>
Risk-based 10.0% $2,717,000 18.1% $4,910,000
Tier I risk-based 6.0 1,630,000 17.3 4,698,000
Tier I leverage 5.0 2,276,000 10.3 4,698,000
As of June 30 1996:
Risk-based 10.0% $2,590,000 16.8% $4,343,000
Tier I risk-based 6.0 1,554,000 16.2 4,204,000
Tier I leverage 5.0 2,163,000 9.7 4,204,000
</TABLE>
Citizens has qualified under provisions of the Internal Revenue Code which
permit it to deduct from taxable income a provision for bad debts which differs
from the provision for such losses charged against income. Accordingly, retained
income includes income of approximately $1,349,000 for which no provision for
federal income taxes has been made. If, in the future, this portion of retained
income is used for any purpose other than to absorb loan losses, federal income
taxes may be imposed at the then applicable rates.
10. Employee Benefits
Substantially all full-time employees are covered by a defined benefit pension
plan administered by the Financial Institutions Retirement Fund (FIRF), a
multi-employer, industry sponsored plan. Plan information is not available for
the Bank as an individual entity within the multi-employer group. Pension
expense consisting primarily of plan administration costs amounted to
approximately $20,556, $1,300, and $16,400 in 1997, 1996, and 1995,
respectively.
In addition to the above plan, the Bank sponsors a supplemental non-qualified
pension plan that provides certain officers with defined pension benefits in
excess of those provided in the qualified plan. To fund the plan, the Bank
purchased single premium life insurance contracts on the participating
employees. The carrying value of this investment, representing the cash
surrender value of the policies, was $1,076,000 and $1,035,000 at June 30, 1997
and 1996, respectively. During the years ended June 30, 1997, 1996, and 1995,
$74,300, $69,000, and $47,400, respectively, were charged to expense under this
plan.
11. Fair Value of Financial Instruments
Statement No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Bank.
<PAGE>
11. Fair Value of Financial Instruments
(continued)
The following methods and assumptions were used by the Bank in estimating its
fair value disclosures for financial instruments:
Cash and interest bearing deposits: The carrying amounts reported in the
balance sheet for cash and short-term investments approximate those assets'
fair values.
Investment securities available for sale: Fair values for investment
securities are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Stock in Federal Home Loan Bank of Indianapolis: The amount of stock held
in the Federal Home Loan Bank is determined by regulation and is stated at
cost which approximates market.
Loans receivable: For variable-rate loans that reprice frequently, fair
values are based on carrying values. The fair values for all other loans
are estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality.
Deposit liabilities: The fair values disclosed for demand deposits,
including interest-bearing and noninterest-bearing accounts, passbook
savings, and certain types of money market accounts are, by definition,
equal to the amount payable on demand at the reporting date (i.e., their
carrying amounts). Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
Federal Home Loan Bank advances: The carrying amounts approximate their
fair values.
The estimated fair values of the Bank's financial instruments at June 30, 1997
are as follows:
Carrying Fair
Amount Value
------ -----
Assets:
Cash on hand and
in other institutions $ 861,360 $ 861,360
Interest bearing
deposits 3,263,687 3,263,687
Investment securities
available for sale 160,995 160,995
Stock in Federal Home
Loan Bank of
Indianapolis 331,600 331,600
Loans receivable 38,435,416 37,400,000
Liabilities:
Deposits 36,355,213 36,380,000
Federal Home
Loan Bank advances 4,000,000 4,000,000
12. Plan of Conversion
On April 9, 1997, the Board of Directors adopted a Plan of Conversion ("Plan"),
whereby the Bank will convert from a federally-chartered mutual savings bank to
a federally-chartered capital stock savings bank. The Plan is subject to
approval by the regulatory authorities and members at a special meeting.
Pursuant to the Plan, non-transferable subscription rights to purchase shares of
stock of the savings Bank will be offered first to eligible account holders of
the Bank, then to an ESOP to be formed, then to supplemental eligible account
holders of the Bank, and then to the extent that stock is available, to certain
other members as of a specified date, and then to members of the general public
with preference given to residents of Clinton County. The capital stock will be
offered at $10.00 per share. The exact number of shares to be offered will be
<PAGE>
12. Plan of Conversion (continued)
determined by the Board of Directors based upon an appraisal to be made by an
independent appraisal firm. At least the minimum number of shares offered in the
conversion must be sold.
The plan provides that when the conversion is completed, a "liquidation account"
will be established in an amount equal to the regulatory capital of the Bank as
of the latest practicable date prior to consummation of the conversion. The
liquidation account is established to provide a limited priority claim to the
assets of the Bank to qualifying depositors ("eligible account holders") who
continue to maintain deposits in the Bank after conversion. In the unlikely
event of a complete liquidation of the Bank, and only in such an event, eligible
account holders would receive from the liquidation account, a liquidation
distribution based on their proportionate share of the total remaining
qualifying deposits.
The Bank may pay dividends on its stock after the conversion if its regulatory
capital would not thereby be reduced below the amount then required for the
aforementioned liquidation account and if such dividends are otherwise permitted
under applicable regulations. In general regulations permit dividends within
guidelines based on current levels of net income and capital.
The OTS also has authority to prohibit an institution from paying dividends if,
in its opinion, the payment of dividends would constitute an unsafe or unsound
practice in light of the financial condition of the institution.
Costs of the conversion will be deducted from the proceeds of sale of common
stock and recorded as a reduction of common stock. If the conversion is not
completed, such costs will be charged to expense. Conversion costs of $92,000
have been incurred as of June 30, 1997.
<PAGE>
BOARD OF DIRECTORS
Fred W. Carter Robert F. Ayres
Chairman of the Board Retired Educator
President and Chief Executive Officer
Citizens Savings Bank of Frankfort
Perry W. Lewis John J. Miller
Former Chairman, Lewis Ford President, Goodwin
Sales, Inc. (Retired) Funeral Homes, Inc.
Billy J. Wray
Co-Owner, Premium Auto
Center, Inc.
OFFICERS OF CITIZENS BANCORP
Fred W. Carter Cindy S. Chambers Stephen D. Davis
Chairman of the Board Secretary Treasurer
President and
Chief Executive Officer
OFFICERS OF CITIZENS SAVINGS BANK OF FRANKFORT
Fred W. Carter Cindy S. Chambers
President and Secretary, Customer
Chief Executive Officer Service Manager
Stephen D. Davis Ralph C. Peterson, II
Controller Senior Loan Officer
<PAGE>
DIRECTORS AND OFFICERS
Fred W. Carter, (age 65) has served as a director of the Holding
Company since its formation and of the Bank since 1972. Mr. Carter has also
served as President and Chief Executive Officer of the Bank and CLSC since 1972,
and has been an employee of the Bank since 1966. Mr. Carter is the father of
Cindy S. Chambers, the Bank's Secretary and Customer Service Manager.
Robert F. Ayres (age 72) has served as a director of the Holding
Company since its formation and of the Bank since 1979. Mr. Ayres served as
Superintendent of Community Schools of Frankfort from 1965 until his retirement
in 1989. He previously served as a high school principal, teacher and coach at
Frankfort Senior High School, in Frankfort.
Cindy S. Chambers, (age 43) has served as the Bank's Corporate
Secretary since 1988 and Customer Service Manager since 1982.
Stephen D. Davis (age 41) has served as the Bank's Controller since
1989.
Perry W. Lewis (age 76) has served as a director of the Holding Company
since its formation and of the Bank since 1975. Mr. Lewis served as the Chairman
of Lewis Ford Sales, Inc. in Frankfort from 1984 until his retirement in 1997.
John J. Miller (age 58) has served as a director of the Holding Company
since its formation and of the Bank since 1995. Mr. Miller has served as
President of Goodwin Funeral Home, Inc. in Frankfort since 1979.
Ralph C. Peterson, II (age 48) has served as the Bank's Senior Loan
Officer since 1989.
Billy J. Wray (age 65) has served as a director of the Holding Company
since its formation and of the Bank since 1992. Mr. Wray is part owner of
Premium Auto Center, Inc., a used car dealership located in Lebanon, Indiana. He
also owns interests in various real estate developments around Frankfort.
<PAGE>
SHAREHOLDER INFORMATION
MARKET INFORMATION
The Bank converted from a federal mutual savings bank to a federal
stock savings bank effective September 18, 1997, and simultaneously formed a
savings and loan holding company, the Holding Company. The Holding Company's
Common Stock, is quoted on the OTC "Electronic Bulletin Board" under the symbol
"CIBC." As of December 31, 1997, there were approximately 351 record holders of
the Holding Company's Common Stock including shares held in broker accounts.
Any dividends paid by the Holding Company will be subject to
determination and declaration by the Board of Directors in its discretion. In
determining the level of any future dividends, the Board of Directors will
consider, among other factors, the following: tax considerations; industry
standards; economic conditions; capital levels; regulatory restrictions on
dividend payments by the Bank to the Holding Company; and, general business
practices.
The Holding Company is not subject to OTS regulatory restrictions on
the payment of dividends to its shareholders although the source of such
dividends will depend in part upon the receipt of dividends from the Bank. The
Holding Company is subject, however, to the requirements of Indiana law, which
generally limit the payment of dividends to amounts that will not affect the
ability of the Holding Company, after the dividend has been distributed, to pay
its debts in the ordinary course of business and will not exceed the difference
between the Holding Company's total assets and total liabilities plus
preferential amounts payable to shareholders with rights superior to those of
the holders of the Holding Company's common stock.
In addition to the foregoing, the portion of the Bank's earnings which
has been appropriated for bad debt reserves and deducted for federal income tax
purposes cannot be used by the Bank to pay cash dividends to the Holding Company
without the payment of federal income taxes by the Bank at the then current
income tax rate on the amount deemed distributed, which would include any
federal income taxes attributable to the distribution. The Holding Company does
not contemplate any distribution by the Bank that would result in a recapture of
the Bank's bad debt reserve or otherwise create federal tax liabilities.
Stock Price Dividends
Month Ended High Low Per Share
- ----------- ---- --- ---------
September 30, 1997 14 1/4 13 7/8 $ ---
October 31, 1997 15 1/2 14 1/4 $ ---
November 30, 1997 15 14 5/16 $ ---
December 31, 1997 15 1/8 14 1/2 $ ---
<PAGE>
TRANSFER AGENT AND REGISTRAR
The Fifth Third Bank
Corporate Trust Operations
38 Fountain Square Plaza, MD - 1090F5
Cincinnati, Ohio 45202
(513) 579-5320 or (800) 837-2755
GENERAL COUNSEL
Barnes & Thornburg
11 South Meridian Street
Indianapolis, Indiana 46204
INDEPENDENT AUDITORS
Ernst & Young
One Indiana Square, Suite 3400
Indianapolis, Indiana 46204
SHAREHOLDERS AND GENERAL INQUIRIES
The Company filed an Annual Report on Form 10-K for its fiscal year ended
June 30, 1997 with the Securities and Exchange Commission. Copies of this annual
report may be obtained without charge upon written request to:
Fred W. Carter
President and Chief Executive Officer
Citizens Bancorp
60 South Main Street
Frankfort, Indiana 46041
