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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended June 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission File Number 333-29031
CITIZENS BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-2017500
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
60 South Main Street
P.O. Box 635
Frankfort, Indiana 46041
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:
(765) 654-8533
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (N/A)
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of September 10, 1998 was $8,624,701.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of September 10, 1998, was 1,058,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June 30, 1998,
are incorporated by reference into Part II. Portions of the Proxy Statement for
the 1998 Annual Meeting of Shareholders are incorporated in Part III.
Exhibit Index on Page E-1
Page 1 of 30 Pages
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<PAGE>
CITIZENS BANCORP
Form 10-K
INDEX
Page
PART I
Item 1 Business.................................................... 3
Item 2. Properties..................................................25
Item 3. Legal Proceedings...........................................26
Item 4. Submission of Matters to a Vote of Security Holders.........26
Item 4.5. Executive Officers of the Registrant........................26
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.....................................27
Item 6. Selected Financial Data.....................................27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..27
Item 8. Financial Statements and Supplementary Data.................27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.....................27
PART III
Item 10. Directors and Executive Officers of Registrant..............27
Item 11. Executive Compensation......................................27
Item 12. Security Ownership of Certain Beneficial
Owners and Management...................................27
Item 13. Certain Relationships and Related Transactions..............27
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.................................28
SIGNATURES ........................................................29
<PAGE>
Item 1. Business
General
Citizens Bancorp, an Indiana corporation (the "Holding Company"), was
organized in June, 1997. On September 18, 1997, the Holding Company acquired the
common stock of Citizens Savings Bank of Frankfort ("Citizens") upon the
conversion of Citizens from a federal mutual savings bank to a federal stock
savings bank.
Citizens was organized as a state-chartered building and loan
association in 1916 and currently conducts its business from one full-service
office located in Frankfort, Indiana. Citizens' principal business consists of
attracting deposits from the general public and originating fixed-rate and
adjustable-rate loans secured primarily by first mortgage liens on one- to
four-family residential real estate. Citizens' deposit accounts are insured up
to applicable limits by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC"). Citizens offers a number of
consumer and commercial financial services. These services include: (i)
residential real estate loans; (ii) multi-family loans; (iii) construction
loans; (iv) nonresidential real estate loans; (v) home equity loans; (vi)
single-pay loans; (vii) installment loans; (viii) automobile loans; (ix) NOW
accounts; (x) money market demand accounts ("MMDAs"); (xi) passbook savings
accounts; (xii) certificates of deposit; and (xiii) individual retirement
accounts.
Loan Portfolio Data. The following table sets forth the composition of
Citizens' loan portfolio by loan type and security type as of the dates
indicated, including a reconciliation of gross loans receivable after
consideration of the allowance for loan losses and loans in process.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------
1998 1997 1996
------------------ ----------------- -----------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------- -------- ------ -------- ------ --------
(Dollars in thousands)
TYPE OF LOAN Real estate mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
Residential.......................... $35,928 76.54% $29,888 77.77% $26,240 76.30%
Non-residential...................... 1,770 3.77 824 2.14 695 2.02
Multi-family......................... 1,887 4.02 1,551 4.04 1,596 4.64
Construction loans:..................... 611 1.30 1,420 3.69 870 2.53
Consumer loans:
Single pay........................... 2,815 6.00 1,854 4.82 2,110 6.14
Installment ......................... 2,219 4.73 1,696 4.41 1,288 3.74
Share ............................... --- --- 15 .04 63 .18
Home equity.......................... 2,176 4.64 2,095 5.45 1,949 5.67
Home improvement..................... 5 .01 8 .02 11 .03
------- ------ ------- ------ ------- ------
Gross loans receivable........... $47,411 101.01% $39,351 102.38% $34,822 101.25%
======= ====== ======= ====== ======= ======
TYPE OF SECURITY
Residential real estate ................ $40,612 86.53% $35,153 91.45% $30,860 89.73%
Non-residential real estate............. 2,143 4.57 1,037 2.70 1,072 3.12
Multi-family real estate................ 2,267 4.83 1,551 4.04 1,596 4.64
Deposits................................ 150 .32 193 .50 165 .48
Auto ................................. 1,415 3.01 1,176 3.06 832 2.42
Other security.......................... 405 .86 111 .29 214 .62
Unsecured .............................. 419 .89 130 .34 83 .24
------- ------ ------- ------ ------- ------
Gross loans receivable............. 47,411 101.01 39,351 102.38 34,822 101.25
Deduct:
Deferred loan fees...................... 110 .23 101 .26 95 .28
Allowance for loan losses............... 269 .57 212 .55 138 .40
Loans in process........................ 96 .21 603 1.57 197 .57
------- ------ ------- ------ ------- ------
Net loans receivable................. $46,936 100.00% $38,435 100.00% $34,392 100.00%
======= ====== ======= ====== ======= ======
Mortgage Loans (1):
Adjustable-rate...................... $11,502 28.99% $ 9,595 29.68% $ 9,241 32.30%
Fixed-rate........................... 28,178 71.01 22,734 70.32 19,368 67.70
------- ------ ------- ------ ------- ------
Total.............................. $39,680 100.00% $32,329 100.00% $28,609 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
(1) Balances in this category include escrows and reserves for uncollected
interest.
<PAGE>
The following table sets forth certain information at June 30, 1998,
regarding the dollar amount of loans maturing in Citizens' loan portfolio based
on the contractual terms to maturity. Demand loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one year
or less. This schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses. Management expects prepayments will cause
actual maturities to be shorter.
<TABLE>
<CAPTION>
Balance Due During Years Ended June 30,
Outstanding at 2002 2004 2009 2014
June 30, to to to and
1998 1999 2000 2001 2003 2008 2013 following
------- ------ ---- ----- ------ ------ ------- -------
(In thousands)
Real estate mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential loans.................. $35,928 $ 10 $ 47 $ 51 $ 235 $3,864 $15,180 $16,541
Multi-family loans................. 1,887 --- --- --- --- 239 1,648 ---
Non-residential loans.............. 1,770 --- 9 --- --- 307 464 990
Construction loans.................... 611 611 --- --- --- --- --- ---
Installment loans.................... 2,219 84 280 450 1,116 284 --- 5
Single pay loans...................... 2,815 2,709 105 1 --- --- --- ---
Home equity loans..................... 2,176 --- --- --- --- --- --- 2,176
Home improvement loans................ 5 1 --- 4 --- --- --- ---
------- ------ ---- ----- ------ ------ ------- -------
Total............................ $47,411 $3,415 $441 $ 506 $1,351 $4,694 $17,292 $19,712
======= ====== ==== ===== ====== ====== ======= =======
</TABLE>
The following table sets forth, as of June 30, 1998, the dollar amount of
all loans due after one year that have fixed interest rates and floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Due After June 30, 1999
-------------------------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Real estate mortgage loans:
<S> <C> <C> <C>
Residential loans............. $28,052 $ 7,866 $35,918
Multi-family loans............ --- 1,887 1,887
Non-residential loans......... 38 1,732 1,770
Construction loans............... --- --- ---
Installment loans................ 2,135 --- 2,135
Single pay loans................. 42 64 106
Share loans...................... --- --- ---
Home equity loans................ --- 2,176 2,176
Home improvement loans........... 4 --- 4
------- ------- -------
Total......................... $30,271 $13,725 $43,996
======= ======= =======
</TABLE>
One- to Four-Family Residential Loans. Citizens' primary lending activity
consists of originating one- to four-family residential mortgage loans secured
by property located in its primary market area. Citizens generally originates
one- to four-family residential mortgage loans in amounts up to 95% of the
lesser of the appraised value or purchase price, with private mortgage insurance
required on loans with a loan-to-value ratio in excess of 80%. The cost of such
insurance is factored into the annual percentage rate on such loans. Citizens
originates and retains fixed rate loans which provide for the payment of
principal and interest over a 15- or 20-year period, or balloon loans having
terms of up to 20 years with principal and interest payments calculated using a
30-year amortization period.
Citizens also offers adjustable-rate mortgage ("ARM") loans. The interest
rate on ARM loans is indexed to the one-year U.S. Treasury securities yield
adjusted to a constant maturity. Citizens may offer discounted initial interest
rates on ARM loans, but requires that the borrower qualify for the ARM loan at
the fully-indexed rate (the index rate plus the margin). A substantial portion
of the ARM loans in Citizens' portfolio at June 30, 1998 provide for maximum
rate adjustments per year and over the life of the loan of 1% and 6%,
respectively. Citizens' residential ARMs are amortized for terms up to 25 years.
ARM loans decrease the risk associated with changes in interest rates by
periodically repricing, but involve other risks because as interest rates
increase, the underlying payments by the borrower increase, thus increasing the
potential for default by the borrower. At the same time, the marketability of
the underlying collateral may be adversely affected by higher interest rates.
Upward adjustment of the contractual interest rate is also limited by the
maximum periodic and lifetime interest rate adjustment permitted by the loan
documents, and, therefore, is potentially limited in effectiveness during
periods of rapidly rising interest rates. At June 30, 1998, approximately 21% of
Citizens' one- to four-family residential loans had adjustable rates of
interest.
All of the one- to four-family residential mortgage loans that Citizens
originates include "due-on-sale" clauses, which give Citizens the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid. However, Citizens occasionally permits
assumptions of existing residential mortgage loans on a case-by-case basis.
At June 30, 1998, approximately $35.9 million, or 76.5% of Citizens'
portfolio of loans, consisted of one- to four-family residential loans.
Approximately $84,000, or .23% of total residential loans, were included in
non-performing assets as of that date. See "--Non-Performing and Problem
Assets."
Multi-Family Loans. At June 30, 1998, approximately $1.9 million, or 4.0%
of Citizens' total loan portfolio, consisted of mortgage loans secured by
multi-family dwellings (those consisting of more than four units). Citizens'
multi-family loans are generally written as one-year adjustable rate loans
indexed to the one-year U.S. Treasury rate or to its internal loan rate which is
established from time-to-time. Citizens writes multi-family loans with maximum
Loan-to-Value ratios of 80%. Citizens' largest multi-family loan as of June 30,
1998 was $1.3 million and was secured by an apartment complex in Frankfort. On
the same date, there were no multi-family loans included in non-performing
assets.
Multi-family loans, like nonresidential real estate loans, involve a
greater risk than do residential loans. See "-- Nonresidential Real Estate
Loans" below.
Construction Loans. Citizens offers construction loans with respect to
residential and nonresidential real estate and, in certain cases, to builders or
developers constructing such properties on a speculative basis (i.e., before the
builder/developer obtains a commitment from a buyer). At June 30, 1998,
approximately $611,000, or 1.3% of Citizens' total loan portfolio, consisted of
construction loans. The largest construction loan at June 30, 1998, totaling
$210,000, was secured by a single-family residence near Frankfort. Citizens had
no construction loans included in non-performing assets on that date.
Construction loans are generally written as six-month, fixed-rate loans
with interest calculated on the amount disbursed under the loan and payable
monthly. Citizens generally requires an 80% Loan-to-Value Ratio for its
construction loans. Inspections are made prior to any disbursement under a
construction loan, and Citizens does not normally charge commitment fees for
construction loans.
While providing Citizens with a comparable, and in some cases higher,
yield than a conventional mortgage loan, construction loans involve a higher
level of risk. For example, if a project is not completed and the borrower
defaults, Citizens may have to hire another contractor to complete the project
at a higher cost. Also, a project may be completed, but may not be salable,
resulting in the borrower defaulting and Citizens taking title to the project.
Nonresidential Real Estate Loans. Citizens' nonresidential real estate
loans are secured by churches, office buildings, and other commercial
properties. Citizens generally originates non-residential real estate loans as
one-year adjustable rate loans indexed to the one-year U.S. Treasury securities
yield adjusted to a constant maturity, and which are written for maximum terms
of 20 years with maximum Loan-to-Value ratios of 75%. At June 30, 1998,
Citizens' largest nonresidential loan was $990,000 and was secured by an
extended stay motel in Columbus, Indiana. At June 30, 1998, approximately $1.8
million, or 3.8% of Citizens' total loan portfolio, consisted of nonresidential
real estate loans. On the same date, approximately $37,000 in nonresidential
real estate loans were included in non-performing assets.
Loans secured by nonresidential real estate generally are larger than one-
to four-family residential loans and involve a greater degree of risk.
Nonresidential real estate loans often involve large loan balances to single
borrowers or groups of related borrowers. Payments on these loans depend to a
large degree on results of operations and management of the properties and may
be affected to a greater extent by adverse conditions in the real estate market
or the economy in general. Accordingly, the nature of the loans makes them more
difficult for management to monitor and evaluate.
Consumer Loans. Citizens' consumer loans, consisting primarily of home
equity loans, personal installment loans and "single pay" loans aggregated
approximately $7.2 million at June 30, 1998, or 15.4% of its total loan
portfolio. Citizens consistently originates consumer loans to meet the needs of
its customers and to assist in meeting its asset/liability management goals. All
of Citizens' consumer loans, except loans secured by deposits and home equity
loans, are fixed-rate loans with terms that vary from six months (for unsecured
installment loans) to 60 months (for home improvement loans and loans secured by
new automobiles). At June 30, 1998, 94.2% of Citizens' consumer loans were
secured by collateral. Citizens' loans secured by deposits are made up to 90% of
the original account balance and, at June 30, 1998, accrued at a rate of 8.50%.
This rate may change but will always be at least 1% over the underlying passbook
or certificate of deposit rate. Interest on loans secured by deposits is paid
semi-annually.
Citizens also offers home equity lines of credit and home improvement
loans secured by real estate. The interest rate on a home equity line of credit
is ordinarily tied to the prime rate with a margin of positive 2.0% and a
maximum interest rate of 18%. Citizens does not always hold a first mortgage on
its home equity lines of credit, although it does hold a first mortgage with
respect to approximately 90% of such loans in its portfolio. Citizens ordinarily
offers fixed-rate home improvement loans secured by real estate with a term not
to exceed five years. Citizens restricts the amount that a customer may borrow
under an equity line of credit to $100,000, subject to the general restriction
applicable to all second mortgage loans that limits the amount it may loan to a
borrower to an amount that, when added to any existing mortgage loans, does not
exceed 80% of the appraised value of the collateral property.
At June 30, 1998, Citizens had outstanding approximately $2.2 million
of home equity loans, with unused lines of credit totaling approximately $2.65
million. Home equity loans in the amount of $5,000 were included in
non-performing assets on that date.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or are secured by
rapidly depreciable assets, such as automobiles. Further, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance. In addition, consumer loan
collections depend on the borrower's continuing financial stability, and thus
are more likely to be affected by adverse personal circumstances. Furthermore,
the application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans. At
June 30, 1998, consumer loans amounting to $48,000 were included in
non-performing assets. See "-- Non-Performing and Problem Assets."
Single-Pay Loans. Citizens offers single-pay loans, which are short-term
loans secured by real estate, automobiles or other types of collateral that are
payable with a single payment rather than by installment. Typically, single-pay
loans secured by real estate are written with terms of one year or less, while
single-pay loans secured by other types of collateral are written for terms of
90 days to six months. Of the approximately $2.8 million of single-pay loans in
Citizens' portfolio as of June 30, 1998, approximately $1.3 million were secured
by residential mortgages and $271,000 were secured by land. The remaining
approximately $1.2 million of loans in this category were consumer loans,
typically secured by automobiles or subordinate liens on real estate. At June
30, 1998, Citizens had one delinquent single-pay loan in the amount of $1,500 in
its portfolio.
Origination, Purchase and Sale of Loans. Citizens historically has
originated its mortgage loans pursuant to its own underwriting standards which
do not conform with the standard criteria of the Federal Home Loan Mortgage
Corporation ("FHLMC") or the Federal National Mortgage Association ("FNMA")
because Citizens does not require current property surveys in most cases.
Citizens may begin originating fixed-rate residential mortgage loans for sale to
the FHLMC on a servicing-retained basis in the future. In the event that
Citizens originates loans for sale to the FHLMC in the secondary market, such
loans will be originated in accordance with the guidelines established by the
FHLMC and will be sold promptly after they are originated.
Citizens confines its loan origination activities primarily to Clinton
County. At June 30, 1998, Citizens had one loan totaling approximately $66,000
secured by property located outside of Indiana. Citizens loan originations are
generated from referrals from existing customers, real estate brokers, and
newspaper and periodical advertising. Loan applications are underwritten and
processed at Citizens' office.
Citizens' loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. To assess the borrower's
ability to repay, Citizens studies the employment and credit history and
information on the historical and projected income and expenses of its
mortgagors. All mortgage loans are approved by Citizens' Loan Committee.
Consumer loans up to $15,000 may be approved by a Loan Officer. Consumer loans
for more than $15,000 must be approved by the senior loan officer or the
President.
Citizens generally requires appraisals on all real property securing its
loans and requires an attorney's opinion and a valid lien on the mortgaged real
estate. Appraisals for all real property securing mortgage loans are performed
by independent appraisers who are state-licensed. Citizens requires fire and
extended coverage insurance in amounts at least equal to the principal amount of
the loan and also requires flood insurance to protect the property securing its
interest if the property is in a flood plain. Citizens also generally requires
private mortgage insurance for all residential mortgage loans with Loan-to-Value
Ratios of greater than 80%. Citizens requires escrow accounts for insurance
premiums and taxes for loans that require private mortgage insurance.
Citizens' underwriting standards for consumer loans are intended to
protect against some of the risks inherent in making consumer loans. Borrower
character, paying habits and financial strengths are important considerations.
The following table shows Citizens' loan origination and repayment
activity during the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------
1998 1997 1996
------- -------- --------
(In thousands)
Loans Originated:
Real estate mortgage loans:
<S> <C> <C> <C>
Residential loans...................... $14,353 $9,253 $ 8,738
Nonresidential loans................... 122 202 175
Multi-family loans..................... 1,563 102 ---
Construction loans....................... 2,385 2,503 1,603
Installment loans........................ 1,993 1,434 1,076
Single pay loans......................... 4,082 2,818 2,834
Share loans.............................. --- 5 63
Home equity loans........................ 1,265 1,156 930
Home improvement loans................... --- --- ---
------- -------- --------
Total originations................... 25,763 17,473 15,419
Loans purchased.......................... 2,494 --- 64
Reductions:
Principal loan repayments................ (19,696) (13,251) (10,279)
Loans sold............................... --- (91) ---
Transfers from loans to real estate owned --- --- ---
------- -------- --------
Total reductions..................... (19,696) (13,342) (10,279)
Decrease in other items (1).............. (60) (88) (88)
------- -------- --------
Net increase (decrease) ................. $ 8,501 $ 4,043 $ 5,116
======= ======== ========
</TABLE>
(1) Other items consist of amortization of deferred loan origination costs and
the provision for losses on loans.
Citizens' residential loan originations during the year ended June 30,
1998 totaled $14.4 million, compared to $9.3 million and $8.7 million in the
years ended June 30, 1997 and 1996, respectively.
Origination and Other Fees. Citizens realizes income from late charges,
checking account service charges, and fees for other miscellaneous services.
Citizens currently charges origination fees on its mortgage loans of 1% of the
loan amount, up to $100,000, and .5% of the amount of the loan that exceeds
$100,000. Citizens also may charge points on a mortgage loan as consideration
for a lower interest rate, although it does so infrequently. Late charges are
generally assessed if payment is not received within a specified number of days
after it is due. The grace period depends on the individual loan documents.
Non-Performing and Problem Assets
After a mortgage loan becomes 15 days past due, Citizens delivers a
delinquency notice to the borrower. When loans are 30 to 60 days in default,
Citizens sends additional delinquency notices and makes personal contact by
telephone with the borrower to establish acceptable repayment schedules. When
loans become 60 days in default, Citizens again contacts the borrower, this time
in person, to establish acceptable repayment schedules. When a mortgage loan is
90 days delinquent, Citizens will have either entered into a workout plan with
the borrower or referred the matter to its attorney for collection. Management
is authorized to commence foreclosure proceedings for any loan upon making a
determination that it is prudent to do so.
Citizens reviews mortgage loans on a regular basis and places such loans
on a non-accrual status when they become 90 days delinquent. Generally, when
loans are placed on a non-accrual status, unpaid accrued interest is written
off, and further income is recognized only to the extent received.
Non-performing Assets. At June 30, 1998, $170,000, or .32% of total
assets, were non-performing (non-performing loans and non-accruing loans)
compared to $344,000, or .74% of total assets at June 30, 1997. At June 30,
1998, residential loans and consumer loans accounted for $84,000 and $48,000,
respectively, of non-performing assets. Citizens had no Real Estate Owned
("REO") properties as of June 30, 1998.
The table below sets forth the amounts and categories of Citizens'
non-performing assets (non-performing loans, foreclosed real estate and troubled
debt restructurings) for the last three years. It is Citizens' policy that all
earned but uncollected interest on all loans be reviewed monthly to determine if
any portion thereof should be classified as uncollectible for any loan past due
in excess of 90 days. Delinquent loans that are 90 days or more past due are
considered non-performing assets.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------
1998 1997 1996
(Dollars in thousands)
Non-performing assets:
<S> <C> <C> <C>
Non-performing loans................ $131 $303 $181
Troubled debt restructurings........ 39 41 41
---- ---- ----
Total non-performing loans........ 170 344 222
Foreclosed real estate.............. --- --- ---
---- ---- ----
Total non-performing assets....... $170 $344 $222
==== ==== ====
Non-performing loans to total loans.... 0.36% 0.89% 0.64%
Non-performing assets to total assets.. 0.32% 0.74% 0.50%
</TABLE>
Interest on loans was $4,000, $8,000, and $4,000 less than would have been
reported for the years ended June 30, 1998, 1997 and 1996, respectively, if the
non-performing loans summarized above had been current in accordance with their
original terms. Citizens received $3,000 in interest on non-performing loans
during the year ended June 30, 1998.
At June 30, 1998, Citizens held loans delinquent from 30 to 59 days
totaling approximately $817,000. Other than these loans and the other delinquent
loans disclosed elsewhere in this section, Citizens was not aware of any other
loans, the borrowers of which were experiencing financial difficulties.
<PAGE>
Delinquent Loans. The following table sets forth certain information at
June 30, 1998, 1997, and 1996, relating to delinquencies in Citizens's
portfolio. Delinquent loans that are 90 days or more past due are considered
non-performing assets.
<TABLE>
<CAPTION>
At June 30, 1998 At June 30, 1997
----------------------------------------------- ----------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
----------------------- ----------------------- --------------------- -----------------------
Principal Principal Principal Principal
Number Balance of Number Balance of Number Balance of Number Balance of
of Loans Loans of Loans Loans of Loans Loans of Loans Loans
-------- --------- -------- ---------- -------- --------- -------- -----------
(Dollars in thousands)
Residential
<S> <C> <C> <C> <C> <C> <C> <C> <C>
mortgage loans.......... 8 $244 6 $84 1 $10 5 $130
Nonresidential
mortgage loans.......... --- --- --- --- 1 24 --- ---
Installment loans.......... 7 35 8 40 2 16 6 37
Single pay loans........... --- --- 1 2 --- --- 1 84
Home equity loans.......... 3 40 1 5 --- --- 5 52
Home improvement loans..... --- --- --- --- --- --- --- ---
-- ---- -- ---- - --- -- ----
Total................... 18 $319 16 $131 4 $50 17 $303
== ==== == ==== = === == ====
Delinquent loans to
total loans............. .96% 1.92%
=== ====
</TABLE>
At June 30, 1996
-------------------------------------------
60-89 Days 90 Days or More
-------------------- ----------------------
Principal Principal
Number Balance of Number Balance of
of Loans Loans of Loans Loans
-------- ----- -------- -----
Residential
mortgage loans.................. 7 $158 8 $ 89
Nonresidential
mortgage loans.................. --- --- --- ---
Installment loans.................. 6 16 8 35
Single pay loans................... 4 24 2 12
Home equity loans.................. 1 6 3 45
Home improvement loans............. --- --- --- ---
---- ---- ---- ----
Total........................... 18 $204 21 $181
==== ==== ==== ====
Delinquent loans to
total loans..................... 1.12%
<PAGE>
Classified assets. Federal regulations and Citizens' Asset Classification
Policy provide for the classification of loans and other assets such as debt and
equity securities considered by the OTS to be of lesser quality as
"substandard," "doubtful" or "loss" assets. An asset is considered "substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted.
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
At June 30, 1998, the aggregate amount of Citizens' classified assets, and
of its general and specific loss allowances were as follows:
At June 30, 1998
----------------
(In thousands)
Substandard assets..................................... $125
Doubtful assets........................................ ---
Loss assets............................................ ---
----
Total classified assets............................ $125
====
General loss allowances................................ $269
Specific loss allowances............................... ---
----
Total allowances................................... $269
====
Citizens regularly reviews its loan portfolio to determine whether any
loans require classification in accordance with applicable regulations.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for loan
losses, which is charged to earnings. The provision for loan losses is
determined in conjunction with Citizens' review and evaluation of current
economic conditions (including those of its lending area), changes in the
character and size of the loan portfolio, loan delinquencies (current status as
well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and other pertinent
information derived from a review of the loan portfolio. In the opinion of
management, Citizens' allowance for loan losses is adequate to absorb probable
losses inherent in the loan portfolio at June 30, 1998. However, there can be no
assurance that regulators, when reviewing Citizens' loan portfolio in the
future, will not require increases in its allowances for loan losses or that
changes in economic conditions will not adversely affect its loan portfolio.
Summary of Loan Loss Experience. The following table analyzes changes in
the allowance during the past three fiscal years ended June 30, 1998.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period................. $212 $138 $ 46
Charge-offs:
Residential mortgage loans.................. --- --- ---
Nonresidential mortgage loans............... --- --- ---
Multi-family loans.......................... --- --- ---
Construction loans.......................... --- --- ---
Installment loans........................... (12) (11) ---
Single pay loans............................ (5) --- ---
Share loans................................. --- --- ---
Home equity loans........................... --- --- ---
Home improvement loans...................... --- --- ---
---- ---- ----
Total charge-offs......................... (17) (11) ---
---- ---- ----
Recoveries:
Residential mortgage........................ --- --- 2
Single pay.................................. --- 2 1
Installment................................. 2 --- 9
---- ---- ----
Total recoveries.......................... 2 2 12
---- ---- ----
Net (charge-offs) recoveries................... (15) (9) 12
Provision for losses on loans.................. 72 83 80
---- ---- ----
Balance at end of period....................... $269 $212 $138
==== ==== ====
Allowance for loan losses as a percent of
total loans outstanding........................ 0.57% 0.55% 0.40%
Ratio of net (charge-offs) recoveries
to average loans outstanding................... (.03) (.03) .04
</TABLE>
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of Citizens' allowance for loan losses at the dates
indicated. The allocation of the allowance to each category is not necessarily
indicative of future loss in any particular category and does not restrict
Citizens' use of the allowance to absorb losses in other categories.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
Percent Percent Percent
of loans of loans of loans
in each in each in each
category category category
to total to total to total
Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Balance at end of
period applicable to:
Real estate mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
Residential...................... $105 75.78% $81 75.96% $49 75.35%
Nonresidential................... 4 3.73 3 2.09 1 2.00
Multi-family..................... 6 3.98 4 3.94 3 4.58
Construction loans................. 14 1.29 27 3.61 11 2.50
Installment loans.................. 66 4.68 53 4.31 41 3.70
Share loans........................ --- --- --- .04 --- .18
Home equity loans.................. 9 4.59 8 5.32 6 5.60
Home improvement loans............. --- .01 --- .02 --- .03
Single pay loans................... 65 5.94 36 4.71 27 6.06
---- ------ ---- ------ ---- ------
Total.............................. $269 100.00% $212 100.00% $138 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
Investments
Investments. Citizens' investment portfolio consists of equity securities
and Federal Home Loan Bank ("FHLB") stock. At June 30, 1998, approximately
$667,000, or 1.2%, of Citizens' total assets consisted of such investments.
Citizens also had $2.2 million in interest-earning deposits as of that date.
The following table sets forth the amortized cost and the market value of
Citizens' investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------ --------- ------
(In thousands)
Available for Sale:
<S> <C> <C> <C> <C> <C> <C>
Equity securities.................. $309 $315 $161 $161 $3,087 $3,003
FHLB stock............................ 352 352 332 332 332 332
---- ---- ---- ---- ------ ------
Total investments................ $661 $667 $493 $493 $3,419 $3,335
==== ==== ==== ==== ====== ======
</TABLE>
Sources of Funds
General. Deposits have traditionally been Citizens' primary source of
funds for use in lending and investment activities. In addition to deposits,
Citizens derives funds from scheduled loan payments, investment maturities, loan
prepayments, retained earnings, income on earning assets and borrowings. While
scheduled loan payments and income on earning assets are relatively stable
sources of funds, deposit inflows and outflows can vary widely and are
influenced by prevailing interest rates, market conditions and levels of
competition. The deposits shown below include approximately $800,000 in public
funds deposited by various state, county and local governments which may
fluctuate depending upon prevailing interest rates and the rates offered by
Citizens' competitors. Borrowings from the FHLB of Indianapolis may be used in
the short-term to compensate for reductions in deposits or deposit inflows at
less than projected levels.
Deposits. Citizens attracts deposits principally from within Clinton
County, Indiana through the offering of a broad selection of deposit
instruments, including fixed-rate passbook accounts, NOW accounts, variable rate
money market accounts, fixed-term certificates of deposit, individual retirement
accounts and savings accounts. Citizens does not actively solicit or advertise
for deposits outside of Clinton County, and substantially all of its depositors
are residents of that county. Deposit account terms vary, with the principal
differences being the minimum balance required, the amount of time the funds
remain on deposit and the interest rate. Citizens does not pay broker fees for
any deposits it receives.
Citizens establishes the interest rates paid, maturity terms, service fees
and withdrawal penalties on a periodic basis. Determination of rates and terms
are predicated on funds acquisition and liquidity requirements, rates paid by
competitors, growth goals, and applicable regulations. Citizens relies, in part,
on customer service and long-standing relationships with customers to attract
and retain its deposits. Citizens also closely prices its deposits to the rates
offered by its competitors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and other prevailing interest rates and
competition. The variety of deposit accounts that Citizens offers has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. Citizens has become more susceptible to short-term
fluctuations in deposit flows as customers have become more interest rate
conscious. Citizens manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, management believes that Citizens' passbook, NOW and MMDAs are
relatively stable sources of deposits. However, the ability to attract and
maintain certificates of deposit, and the rates Citizens pays on these deposits,
have been and will continue to be significantly affected by market conditions.
An analysis of Citizens' deposit accounts by type, maturity, and rate at
June 30, 1998, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening June 30, % of Average
Type of Account Balance 1998 Deposits Rate
- - -----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C>
Fixed rate, passbook accounts...... $ 50 $6,421 18.85% 3.28%
Variable rate, money market........ 2,500 2,919 8.57 3.29
NOW accounts....................... 50 4,570 13.41 2.22
------- ------
Total withdrawable............... 13,910 40.83 2.93
Certificates (original terms):
3 months or less................... 1,000 698 2.05 5.31
6 months........................... 1,000 1,734 5.09 4.71
12 months.......................... 1.000 576 1.69 4.79
13 months.......................... 5,000 2,517 7.39 5.48
18 months.......................... 1,000 417 1.22 4.96
23 months.......................... 5,000 4,422 12.98 5.82
30 months ......................... 1,000 876 2.57 5.11
36 months.......................... 1,000 924 2.71 5.22
Other certificates................. 1,000 4,711 13.83 6.15
------- ------
Total certificates.................... 16,875 49.53 5.60
IRA's:
Variable rate, money market........ 50 163 0.48 3.39
6 months........................... 1,000 30 0.09 4.49
12 months.......................... 1.000 121 0.36 4.76
18 months.......................... 1,000 16 0.05 4.89
23 months.......................... 1,000 1,918 5.63 5.82
36 months.......................... 1,000 887 2.60 5.18
Other certificates................. 1,000 147 0.43 5.99
------- ------
Total IRA's........................... 3,282 9.64 5.48
------- ------
Total deposits........................ $34,067 100.00% 4.50%
======= ======
</TABLE>
The following table sets forth by various interest rate categories the
composition of Citizens' time deposits at the dates indicated:
At June 30,
1998 1997 1996
------------------------------------------------
(In thousands)
4.00 to 4.99%...... $ 2,483 $ 3,593 $ 5,173
5.00 to 5.99%...... 13,961 15,702 10,629
6.00 to 6.99%...... 3,440 2,604 5,283
7.00 to 7.99%...... 105 120 484
8.00 to 8.99%...... 5 5 5
------- ------- -------
Total........... $19,994 $22,024 $21,574
======= ======= =======
The average amount of, and average interest rate paid on, the following
deposits categories which were in excess of ten percent of average total
deposits are as follows:
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------------------------------------------------
1998 1997 1996
---------------------- --------------------- -----------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $6,687 3.23% $6,679 3.24% $ 6,867 3.25%
NOW accounts 4,433 2.17 4,081 2.12 3,843 2.06
Money market accounts 3,217 3.30 3,303 3.30 3,233 3.30
Time deposit accounts 21,799 5.58 22,374 5.49 20,513 5.47
</TABLE>
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following June
30, 1998. Matured certificates, which have not been renewed as of June 30, 1998,
have been allocated based upon certain rollover assumptions.
Amounts at June 30, 1998
-------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
------- ------ ------ ------------
(In thousands)
4.00 to 4.99%..... $2,229 $ 216 $ 38 $ ---
5.00 to 5.99%..... 8,114 4,678 678 491
6.00 to 6.99%..... 241 281 877 2,041
7.00 to 7.99%..... --- 5 100 ---
8.00 to 8.99%..... --- --- --- 5
------- ------ ------ ------
Total.......... $10,584 $5,180 $1,693 $2,537
======= ====== ====== ======
The following table indicates the amount of Citizens' other certificates
of deposit of $100,000 or more by time remaining until maturity as of June 30,
1998.
At June 30, 1998
----------------
Maturity Period (In thousands)
Three months or less................................... $1,080
Greater than three months through six months........... 304
Greater than six months through twelve months.......... 202
Over twelve months..................................... 728
------
Total............................................. $2,314
======
The following table sets forth the dollar amount of savings deposits in
the various types of deposits that Citizens offers at the dates indicated, and
the amount of increase or decrease in such deposits as compared to the previous
period.
<TABLE>
<CAPTION>
DEPOSIT ACTIVITY
Balance Increase Balance Increase
at (Decrease) at (Decrease)
June 30, % of from June 30, % of from
1998 Deposits 1997 1997 Deposits 1996
---------------------------------------------------------------------------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C> <C> <C>
Fixed rate, passbook accounts................. $6,421 18.85% $(484) $6,905 18.99% $ 207
Variable rate, money market................... 2,919 8.57 (251) 3,170 8.72 139
NOW accounts.................................. 4,570 13.41 498 4,072 11.20 (2)
------- ------ ------- ------- ------ -----
Total withdrawable.......................... 13,910 40.83 (237) 14,147 38.91 344
Certificates (original terms):
3 months...................................... 698 2.05 (376) 1,074 2.95 (1,788)
6 months...................................... 1,734 5.09 (2,400) 4,134 11.37 1,591
12 months..................................... 576 1.69 (390) 966 2.66 23
13 months..................................... 2,517 7.39 147 2,370 6.52 360
18 months..................................... 417 1.22 (170) 587 1.61 286
23 months..................................... 4,422 12.98 268 4,154 11.43 470
30 months .................................... 876 2.57 (270) 1,146 3.15 (184)
36 months..................................... 924 2.71 (23) 947 2.61 (292)
Other certificates............................ 4,711 13.83 1,145 3,566 9.81 (189)
------- ------ ------- ------- ------ -----
Total certificates............................... 16,875 49.53 (2,069) 18,944 52.11 277
IRA's
Variable rate, money market................... 163 0.48 (21) 184 0.51 (40)
6 months...................................... 30 0.09 (4) 34 0.09 (2)
12 months..................................... 121 0.36 (30) 151 0.42 (12)
18 months..................................... 16 0.05 (3) 19 0.05 19
23 months..................................... 1,918 5.63 340 1,578 4.34 632
36 months .................................... 887 2.60 (270) 1,157 3.18 (472)
Other certificates............................ 147 0.43 6 141 0.39 9
------- ------ ------- ------- ------ -----
Total IRA's................................... 3,282 9.64 18 3,264 8.98 134
------- ------ ------- ------- ------ -----
Total deposits................................... $34,067 100.00% $(2,288) $36,355 100.00% $ 755
======= ====== ======= ======= ====== =====
</TABLE>
Total deposits at June 30, 1998 were approximately $34.1 million, compared
to approximately $36.4 million at June 30, 1997. Citizens' deposit base depends
somewhat upon the manufacturing sector of Clinton County's economy. Although
Clinton County's manufacturing sector is relatively diversified and not
significantly dependent upon any industry, a loss of a material portion of the
manufacturing workforce could adversely affect Citizens' ability to attract
deposits due to the loss of personal income attributable to the lost
manufacturing jobs and the attendant loss in service industry jobs.
In the unlikely event of Citizens' liquidation after the Conversion, all
claims of creditors (including those of deposit account holders, to the extent
of their deposit balances) would be paid first followed by distribution of the
liquidation account to certain deposit account holders, with any assets
remaining thereafter distributed to the Holding Company as the sole shareholder
of Citizens.
Borrowings. Citizens' focuses on generating high quality loans and then
seeking the best source of funding from deposits, investments or borrowings. At
June 30, 1998, Citizens had borrowings in the amount of $3.5 million from the
FHLB of Indianapolis which bear fixed and variable interest rates and are due at
various dates through December, 1998. Citizens is required to maintain eligible
loans in its portfolio of at least 170% of outstanding advances as collateral
for advances from the FHLB of Indianapolis. Citizens does not anticipate any
difficulty in obtaining advances appropriate to meet its requirements in the
future.
The following table presents certain information relating to Citizens'
borrowings at or for the years ended June 30, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
At or for the Year
Ended June 30,
1998 1997 1996
-------------------------------------------
(Dollars in thousands)
FHLB Advances:
<S> <C> <C> <C>
Outstanding at end of period............. $3,500 $4,000 $3,000
Average balance outstanding for period... 1,731 3,212 1,923
Maximum amount outstanding at any
month-end during the period............ 3,500 5,000 3,000
Weighted average interest rate
during the period...................... 4.96% 5.41% 5.94%
Weighted average interest rate
at end of period....................... 6.21 6.51 5.82
</TABLE>
Service Corporation Subsidiaries
OTS regulations permit federal savings associations to invest in the
capital stock, obligations or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of the association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special purpose finance subsidiaries) in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations. A savings association that acquires a non-savings
association subsidiary, or that elects to conduct a new activity within a
subsidiary, must give the FDIC and the OTS at least 30 days advance written
notice. The FDIC may, after consultation with the OTS, prohibit specified
activities if it determines such activities pose a serious threat to the SAIF.
Moreover, a savings association must deduct from capital, for purposes of
meeting the core capital, tangible capital and risk-based capital requirements,
its entire investment in and loans to a subsidiary engaged in activities not
permissible for a national bank (other than exclusively agency activities for
its customers or mortgage banking subsidiaries).
Citizens currently owns one subsidiary, Citizens Loan and Service
Corporation ("CLSC"), which primarily engages in the purchase and development of
tracts of undeveloped land. Because CLSC engages in activities that are not
permissible for a national bank, OTS regulations prohibit Citizens from
including its investment in CLSC in its calculation of regulatory capital. CLSC
purchases undeveloped land, constructs improvements and infrastructure on the
land, and then sells lots to builders, who construct homes for sale to
homebuyers. CLSC ordinarily receives payment when title is transferred.
CLSC owns a 104-acre tract of contiguous land on which it is presently
developing 59 acres. CLSC intends to complete the development of the remainder
of the property in approximately ten years. The 59 acres that are presently
being developed will include 64 building lots known as the Southridge Addition,
and 89 building lots known as the Meadow Brook Addition. Both of these Additions
have been annexed into the Town of Frankfort. Citizens purchased this land in
1989 intending to develop these housing additions. However, following enactment
of the Financial Institutions Reform Recovery and Enforcement Act of 1989, the
FDIC directed Citizens to transfer its interest in these developments to CLSC,
which Citizens did, effective June 30, 1994. Phase I of the development includes
33 completed lots in the Southridge Addition, of which 22 lots have been sold
and on which 22 houses have been completed, and 26 lots in the Meadow Brook
Addition, of which 5 lots have been sold and on which 5 houses have been
completed. The Southridge lots have been priced generally at $19,000 to $22,000
each, with completed homes selling generally for $90,000 to $120,000, and the
Meadow Brook lots have been priced generally at $23,000 to $26,000 with
completed homes expected to sell generally for $100,000 to $150,000. CLSC
intends to develop the remaining 31 lots in the Southridge Addition beginning in
1999. Phase II and Phase III of the Meadow Brook development, consisting of
approximately 63 lots, are still in the design stage. CLSC also intends to
develop a 25-acre tract located in Frankfort, with homes generally selling for
$175,000 to $300,000. This project is in the early stages of development.
CLSC intends ultimately to develop the remaining 20-acre parcel of land,
known as the Mann tract, that it presently owns. The development of this land,
which is part of the 104-acre tract discussed above, likely will not be
completed for approximately 10 years. The Mann tract is presently being leased
for farming purposes. CLSC has no present intentions to acquire additional land
for development purposes.
During the year ended June 30, 1998, a plot of land not included in the
above development was sold for proceeds equaling $177,000, resulting in a gain
from the sale of $172,000.
CLSC earned a profit of $164,000 for the year ended June 30, 1998, $11,000
for the year ended June 30, 1997 and $24,000 for the year ended June 30, 1996.
At June 30, 1998, Citizens had an investment in CLSC of $633,000 and loans
outstanding to CLSC of approximately $320,000 with an interest rate set at the
prime rate plus 1 percent. The Holding Company's consolidated statements of
income included elsewhere herein include the operations of CLSC. All
intercompany balances and transactions have been eliminated in the
consolidation.
Employees
As of June 30, 1998, Citizens employed 12 persons on a full-time basis and
four persons on a part-time basis. None of Citizens' employees is represented by
a collective bargaining group and management considers its employee relations to
be good.
Citizens' employee benefits for full-time employees include, among other
things, a Pentegra Group (formerly known as Financial Institutions Retirement
Fund) defined benefit pension plan, a noncontributory, multiple-employer
comprehensive pension plan (the "Pension Plan"), and hospitalization/major
medical, long-term disability insurance and life insurance.
Management considers its employee benefits to be competitive with those
offered by other financial institutions and major employers in its area.
COMPETITION
Citizens originates most of its loans to and accepts most of its deposits
from residents of Clinton County, Indiana. Citizens is subject to competition
from various financial institutions, including state and national banks, state
and federal savings associations, credit unions, and certain nonbanking consumer
lenders that provide similar services in Clinton County with significantly
larger resources than are available to Citizens. In total, there are five other
financial institutions located in Clinton County. Citizens also competes with
money market funds with respect to deposit accounts and with insurance companies
with respect to individual retirement accounts.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. Citizens competes for loan
originations primarily through the efficiency and quality of the services that
it provides borrowers and through interest rates and loan fees charged.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels, and other factors that Citizens cannot readily predict.
REGULATION
General
As a federally chartered, SAIF-insured savings association, Citizens is
subject to extensive regulation by the OTS and the FDIC. For example, Citizens
must obtain OTS approval before it may engage in certain activities and must
file reports with the OTS regarding its activities and financial condition. The
OTS periodically examines Citizens' books and records and, in conjunction with
the FDIC in certain situations, has examination and enforcement powers. This
supervision and regulation are intended primarily for the protection of
depositors and federal deposit insurance funds. Citizens' semi- annual
assessment owed to the OTS, which is based upon a specified percentage of
assets, is approximately $9,200.
Citizens is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
securities, and limitations upon other aspects of banking operations. In
addition, Citizens' activities and operations are subject to a number of
additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and antitrust
laws.
The United States Congress is considering legislation that would require
all federal savings associations, such as Citizens, to either convert to a
national bank or a state-chartered bank by a specified date to be determined. In
addition, under the legislation, the Holding Company likely would not be
regulated as a savings and loan holding company but rather as a bank holding
company. This proposed legislation would abolish the OTS and transfer its
functions among the other federal banking regulators. Certain aspects of the
legislation remain to be resolved and, therefore, no assurance can be given as
to whether or in what form the legislation will be enacted or its effect on the
Holding Company and Citizens.
Savings and Loan Holding Company Regulation
As the holding company for Citizens, the Holding Company is regulated as a
"non-diversified savings and loan holding company" within the meaning of the
Home Owners' Loan Act of 1933, as amended ("HOLA"), and subject to regulatory
oversight of the Director of the OTS. As such, the Holding Company is registered
with the OTS and thereby subject to OTS regulations, examinations, supervision
and reporting requirements. As a subsidiary of a savings and loan holding
company, Citizens is subject to certain restrictions in its dealings with the
Holding Company and with other companies affiliated with the Holding Company.
In general, the HOLA prohibits a savings and loan holding company, without
prior approval of the Director of the OTS, from acquiring control of another
savings association or savings and loan holding company or retaining more than
5% of the voting shares of a savings association or of another holding company
which is not a subsidiary. The HOLA also restricts the ability of a director or
officer of the Holding Company, or any person who owns more than 25% of the
Holding Company's stock, from acquiring control of another savings association
or savings and loan holding company without obtaining the prior approval of the
Director of the OTS.
The Holding Company's Board of Directors presently intends to operate the
Holding Company as a unitary savings and loan holding company. OTS regulations
generally do not restrict the permissible business activities of a unitary
savings and loan holding company.
Notwithstanding the above rules as to permissible business activities of
unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply.) At June 30, 1998,
Citizens' asset composition was in excess of that required to qualify as a
Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings
association other than through a merger or other business combination with
Citizens, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
association meets the QTL test, the activities of the Holding Company and any of
its subsidiaries (other than Citizens or other subsidiary savings associations)
would thereafter be subject to further restrictions. The HOLA provides that,
among other things, no multiple savings and loan holding company or subsidiary
thereof which is not a savings association shall commence or continue for a
limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof, any business activity other than (i) furnishing
or performing management services for a subsidiary savings association, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings association,
(iv) holding or managing properties used or occupied by a subsidiary savings
association, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by the FSLIC by regulation as of March 5, 1987,
to be engaged in by multiple holding companies, or (vii) those activities
authorized by the Federal Reserve Board (the "FRB") as permissible for bank
holding companies, unless the Director of the OTS by regulation prohibits or
limits such activities for savings and loan holding companies. Those activities
described in (vii) above must also be approved by the Director of the OTS before
a multiple holding company may engage in such activities.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the association to be acquired is located
specifically permit associations to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings associations). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings association holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period or without
giving notice shall be invalid.
Federal Home Loan Bank System
Citizens is a member of the FHLB of Indianapolis, which is one of twelve
regional FHLBs. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from funds deposited by
savings associations and proceeds derived from the sale of consolidated
obligations of the FHLB system. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the Board of Directors of
the FHLB. All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. The Federal Housing Finance Board ("FHFB"), an
independent agency, controls the FHLB System, including the FHLB of
Indianapolis.
As a member, Citizens is required to purchase and maintain stock in the
FHLB of Indianapolis in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year. At June 30, 1998, Citizens' investment in stock of
the FHLB of Indianapolis was $352,000. The FHLB imposes various limitations on
advances such as limiting the amount of certain types of real estate-related
collateral to 30% of a member's capital and limiting total advances to a member.
Interest rates charged for advances vary depending upon maturity, the cost of
funds to the FHLB of Indianapolis and the purpose of the borrowing.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended June 30, 1998, dividends paid by the
FHLB of Indianapolis to Citizens totaled approximately $27,000, for an annual
rate of 8.07%.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of banks and thrifts and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the Bank Insurance Fund (the
"BIF") for commercial banks and state savings banks and the SAIF for savings
associations such as Citizens and banks that have acquired deposits from savings
associations. The FDIC is required to maintain designated levels of reserves in
each fund. As of September 30, 1996, the reserves of the SAIF were below the
level required by law, primarily because a significant portion of the
assessments paid into the SAIF have been used to pay the cost of prior thrift
failures, while the reserves of the BIF met the level required by law in May,
1995. However, on September 30, 1996, provisions designed to recapitalize the
SAIF and eliminate the premium disparity between the BIF and SAIF were signed
into law. See "-- Assessments" below.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease these rates if the target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital level and the FDIC's level of supervisory
concern about the institution.
On September 30, 1996, President Clinton signed into law legislation which
included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and the SAIF. Under the new law,
Citizens was charged a one-time special assessment equal to $.657 per $100 in
assessable deposits at March 31, 1995. Citizens recognized this one-time
assessment as a non-recurring operating expense of $211,000 ($127,000 after tax)
during the three-month period ending September 30, 1996, and Citizens paid this
assessment on November 27, 1996. The assessment was fully deductible for both
federal and state income tax purposes. Beginning January 1, 1997, Citizens'
annual deposit insurance premium was reduced from .23% to .0644% of total
assessable deposits. BIF institutions pay lower assessments than comparable SAIF
institutions because BIF institutions pay only 20% of the rate being paid by
SAIF institutions on their deposits with respect to obligations issued by the
federally-chartered corporation which provided some of the financing to resolve
the thrift crisis in the 1980's ("FICO"). The 1996 law also provides for the
merger of the SAIF and the BIF by 1999, but not until such time as bank and
thrift charters are combined. Until the charters are combined, savings
associations with SAIF deposits may not transfer deposits into the BIF system
without paying various exit and entrance fees, and SAIF institutions will
continue to pay higher FICO assessments. Such exit and entrance fees need not be
paid if a SAIF institution converts to a bank charter or merges with a bank, as
long as the resulting bank continues to pay applicable insurance assessments to
the SAIF, and as long as certain other conditions are met.
Savings Association Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common shareholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill, purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) less nonqualifying intangibles.
Under the tangible capital requirement, a savings association must maintain
tangible capital (core capital less all intangible assets except purchased
mortgage servicing rights which may be included after making the above-noted
adjustment in an amount up to 100% of tangible capital) of at least 1.5% of
total assets. Under the risk-based capital requirements, a minimum amount of
capital must be maintained by a savings association to account for the relative
risks inherent in the type and amount of assets held by the savings association.
The risk-based capital requirement requires a savings association to maintain
capital (defined generally for these purposes as core capital plus general
valuation allowances and permanent or maturing capital instruments such as
preferred stock and subordinated debt less assets required to be deducted) equal
to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four
categories (0-100%). A credit risk-free asset, such as cash, requires no
risk-based capital, while an asset with a significant credit risk, such as a
non-accrual loan, requires a risk factor of 100%. Moreover, a savings
association must deduct from capital, for purposes of meeting the core capital,
tangible capital and risk-based capital requirements, its entire investment in
and loans to a subsidiary engaged in activities not permissible for a national
bank (other than exclusively agency activities for its customers or mortgage
banking subsidiaries). At June 30, 1998, Citizens was in compliance with all
capital requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework. If the OTS were to implement this regulation,
Citizens would be exempt from its provisions because it has less than $300
million in assets and its risk-based capital ratio exceeds 12%. Citizens
nevertheless measures its interest rate risk in conformity with the OTS
regulation and, as of June 30, 1998, Citizens' interest rate risk was slightly
outside the parameters set forth in the regulation.
If an association is not in compliance with the capital requirements, the
OTS is required to prohibit asset growth and to impose a capital directive that
may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operations activities of
the association, imposing a capital directive, cease and desist order, or civil
money penalties, or imposing harsher measures such as appointing a receiver or
conservator or forcing the association to merge into another institution.
Prompt Corrective Regulatory Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FedICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At June 30,
1998, Citizens was categorized as "well capitalized," meaning that its total
risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio
exceeded 6%, its leverage ratio exceeded 5%, and it was not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
The FDIC may order savings associations which have insufficient capital to
take corrective actions. For example, a savings association which is categorized
as "undercapitalized" would be subject to growth limitations and would be
required to submit a capital restoration plan, and a holding company that
controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Dividend Limitations
An OTS regulation imposes limitations upon all "capital distributions" by
savings associations, including cash dividends, payments by an association to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized associations. A
savings association which has total capital (immediately prior to and after
giving effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier 1 institution ("Tier 1
Institution"). An association that has total capital at least equal to its
minimum capital requirements, but less than its fully phased-in capital
requirements, would be a Tier 2 institution ("Tier 2 Institution"). An
institution having total capital that is less than its minimum capital
requirements would be a Tier 3 institution ("Tier 3 Institution"). However, an
institution which otherwise qualifies as a Tier 1 Institution may be designated
by the OTS as a Tier 2 or Tier 3 Institution if the OTS determines that the
institution is "in need of more than normal supervision." Citizens is currently
a Tier 1 Institution.
A Tier 1 Institution may, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year up to the greater of
(a) 100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" at the beginning of the
calendar year (the smallest excess over its capital requirements), or (b) 75% of
its net income over the most recent four-quarter period. Any additional amount
of capital distributions would require prior regulatory approval. Accordingly,
at June 30, 1998, Citizens had available approximately $4,012,000 for
distribution.
The OTS has proposed revisions to these regulations which would permit a
savings association, without filing a prior notice or application with the OTS,
to make a capital distribution to its shareholders in a maximum amount that does
not exceed the association's undistributed net income for the prior two years
plus the amount of its undistributed income from the current year. This proposed
rule would require a savings association, such as Citizens, that is a subsidiary
of a savings and loan holding company to file a notice with the OTS before
making a capital distribution up to the "maximum amount" described above. The
proposed rule would also require all savings associations, whether under a
holding company or not, to file an application with the OTS prior to making any
capital distribution where the association is not eligible for "expedited
processing" under the OTS "Expedited Processing Regulation," or where the
proposed distribution, together with any other distributions made in the same
year, would exceed the "maximum amount" described above.
Pursuant to the Plan of Conversion, Citizens established a liquidation
account for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders. Citizens may not pay dividends to the Holding Company if its
net worth would be reduced below the amount required for the liquidation
account. Citizens must also file a notice with the OTS 30 days before declaring
a dividend to the Holding Company.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA place limitations
on the ability of insured depository institutions to accept, renew or roll over
deposits by offering rates of interest which are significantly higher than the
prevailing rates of interest on deposits offered by other insured depository
institutions having the same type of charter in the institution's normal market
area. Under these regulations, "well-capitalized" depository institutions may
accept, renew or roll such deposits over without restriction, "adequately
capitalized" depository institutions may accept, renew or roll such deposits
over with a waiver from the FDIC (subject to certain restrictions on payments of
rates) and "undercapitalized" depository institutions may not accept, renew or
roll such deposits over. The regulations contemplate that the definitions of
"well capitalized," "adequately capitalized" and "undercapitalized" will be the
same as the definition adopted by the agencies to implement the corrective
action provisions of FedICIA. Citizens does not believe that these regulations
will have a materially adverse effect on its current operations.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety and
soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. On August 27, 1996, the federal banking agencies added asset
quality and earning standards to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies. The association's written real
estate lending policies must be reviewed and approved by the association's Board
of Directors at least annually. Further, each association is expected to monitor
conditions in its real estate market to ensure that its lending policies
continue to be appropriate for current market conditions.
Loans to One Borrower
Under OTS regulations, Citizens may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired
capital and surplus, if such loans or extensions of credit are fully secured by
readily marketable collateral, including certain debt and equity securities but
not including real estate. In some cases, a savings association may lend up to
30 percent of unimpaired capital and surplus to one borrower for purposes of
developing domestic residential housing, provided that the association meets its
regulatory capital requirements and the OTS authorizes the association to use
this expanded lending authority. At June 30, 1998, Citizens did not have any
loans or extensions of credit to a single or related group of borrowers in
excess of its lending limits. Citizens does not believe that the
loans-to-one-borrower limits will have a significant impact on its business
operations or earnings.
Qualified Thrift Lender
Savings associations must meet a QTL test. If Citizens maintains an
appropriate level of qualified thrift investments ("QTIs") (primarily
residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL, Citizens will
continue to enjoy full borrowing privileges from the FHLB of Indianapolis. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the association in conducting its
business and liquid assets equal to 10% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA, and FHLMC
as QTIs. Compliance with the QTL test is determined on a monthly basis in nine
out of every twelve months. As of June 30, 1998, Citizens was in compliance with
its QTL requirement, with approximately 90% of its assets invested in QTIs.
A savings association which fails to meet the QTL test must either convert
to a bank (but its deposit insurance assessments and payments will be those of
and paid to the SAIF) or be subject to the following penalties: (i) it may not
enter into any new activity except for those permissible for a national bank and
for a savings association; (ii) its branching activities shall be limited to
those of a national bank; (iii) it shall not be eligible for any new FHLB
advances; and (iv) it shall be bound by regulations applicable to national banks
respecting payment of dividends. Three years after failing the QTL test the
association must (i) dispose of any investment or activity not permissible for a
national bank and a savings association and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to the
extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss.7701(a)(19) of the Code or the asset
composition test of ss.7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.
Finally, the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks
in other states and, with state consent and subject to certain limitations,
allows banks to acquire out-of-state branches either through merger or de novo
expansion. The State of Indiana enacted legislation establishing interstate
branching provisions for Indiana state-chartered banks consistent with those
established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana
Branching Law authorizes Indiana banks to branch interstate by merger or de novo
expansion, provided that such transactions are not permitted to out-of-state
banks unless the laws of their home states permit Indiana banks to merge or
establish de novo banks on a reciprocial basis. The Indiana Branching Law became
effective March 15, 1996.
Transactions with Affiliates
Citizens is subject to Sections 22(h), 23A and 23B of the Federal Reserve
Act, which restrict financial transactions between banks and affiliated
companies. The statute limits credit transactions between a bank or savings
association and its executive officers and its affiliates, prescribes terms and
conditions for bank affiliate transactions deemed to be consistent with safe and
sound banking practices, and restricts the types of collateral security
permitted in connection with a bank's extension of credit to an affiliate.
Federal Securities Law
The shares of Common Stock of the Holding Company have been registered
with the SEC under the Securities Exchange Act of 1934, as amended (the "1934
Act"). The Holding Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the 1934 Act and the
rules of the SEC thereunder. After three years following Citizens' conversion to
stock form, if the Holding Company has fewer than 300 shareholders, it may
deregister its shares under the 1934 Act and cease to be subject to the
foregoing requirements.
Shares of Common Stock held by persons who are affiliates of the Holding
Company may not be resold without registration unless sold in accordance with
the resale restrictions of Rule 144 under the 1933 Act. If the Holding Company
meets the current public information requirements under Rule 144, each affiliate
of the Holding Company who complies with the other conditions of Rule 144
(including those that require the affiliate's sale to be aggregated with those
of certain other persons) would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the
average weekly volume of trading in such shares during the preceding four
calendar weeks.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory, needs to
improve, and substantial noncompliance -- and a written evaluation of an
institution's performance. Each FHLB is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the FHLBs. The standards take into account a
member's performance under the CRA and its record of lending to first-time home
buyers. The OTS has designated Citizens' record of meeting community credit
needs as outstanding, which is the highest available designation.
TAXATION
Federal Taxation
Historically, savings associations, such as Citizens, have been permitted
to compute bad debt deductions using either the bank experience method or the
percentage of taxable income method. However, for years beginning after December
31, 1995, no savings association may use the percentage of taxable income method
of computing its allowable bad debt deduction for tax purposes. Instead, all
savings associations are required to compute their allowable deduction using the
experience method. As a result of the repeal of the percentage of taxable income
method, reserves taken after 1987 using the percentage of taxable income method
generally must be included in future taxable income over a six-year period,
although a two-year delay may be permitted for associations meeting a
residential mortgage loan origination test. Citizens will recapture
approximately $3,000 with each tax return filed through the June 30, 2002
federal tax return. In addition, the pre-1988 reserve, for which no deferred
taxes have been recorded, need not be recaptured into income unless (i) the
savings association no longer qualifies as a bank under the Code, or (ii) the
savings association pays out excess dividends or distributions.
Depending on the composition of its items of income and expense, a savings
association may be subject to the alternative minimum tax. A savings association
must pay an alternative minimum tax on the amount (if any) by which 20% of
alternative minimum taxable income ("AMTI"), as reduced by an exemption varying
with AMTI, exceeds the regular tax due. AMTI equals regular taxable income
increased or decreased by certain tax preferences and adjustments, including
depreciation deductions in excess of that allowable for alternative minimum tax
purposes, tax-exempt interest on most private activity bonds issued after August
7, 1986 (reduced by any related interest expense disallowed for regular tax
purposes), the amount of the bad debt reserve deduction claimed in excess of the
deduction based on the experience method and 75% of the excess of adjusted
current earnings over AMTI (before this adjustment and before any alternative
tax net operating loss). AMTI may be reduced only up to 90% by net operating
loss carryovers, but alternative minimum tax paid can be credited against
regular tax due in later years.
For federal income tax purposes, Citizens has been reporting its income
and expenses on the accrual method of accounting. Citizens' federal income tax
returns have not been audited in recent years.
State Taxation
Citizens is subject to Indiana's Financial Institutions Tax ("FIT"), which
is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross
income," for purposes of FIT, begins with taxable income as defined by Section
63 of the Code and, thus, incorporates federal tax law to the extent that it
affects the computation of taxable income. Federal taxable income is then
adjusted by several Indiana modifications. Other applicable state taxes include
generally applicable sales and use taxes plus real and personal property taxes.
Citizens' state income tax returns have not been audited in recent years.
Current Accounting Issues
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). This Statement
establishes standards for reporting and displaying comprehensive income and its
components in the financial statements. Comprehensive income consists of the net
income or loss of the entity, plus or minus the change in equity of the entity
during the period from transactions, other events, and circumstances resulting
from nonowner sources. SFAS 130 is effective for years beginning after December
15, 1997, and will require financial statements of earlier periods that are
presented for comparative purposes to be reclassified. The adoption of SFAS 130
is not expected to have a material effect on the Company's financial condition.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 established
information about operating segments of their business in both their annual and
interim financial reports provided to shareholders. SFAS 131 is effective for
financial statement periods beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years is to be
restated, unless impracticable. In addition, the provisions of SFAS 131 need not
be applied to interim financial statements issued in the initial year of
application. The adoption of SFAS 131 is not expected to have a material effect
on the Company's financial condition.
Item 2. Properties.
The following table provides certain information with respect to
Citizens' office as of June 30, 1998:
<TABLE>
<CAPTION>
Net Book
Value of
Property, Approximate
Description Owned or Year Total Furniture & Square
and Address leased Opened Deposits Fixtures Footage
(Dollars in thousands)
<C> <C> <C> <C> <C> <C>
60 South Main Street Owned 1977 $34,067 $565 13,924
Frankfort, IN 46041
</TABLE>
Citizens owns computer and data processing equipment which it uses for
transaction processing, loan origination, and accounting. The net book value of
Citizens' electronic data processing equipment was approximately $35,000 at June
30, 1998.
Citizens operates one automated teller machine ("ATM"), which is located
in the vestibule of its office. Citizens' ATM participates in the Cirrus(R) and
MagicLine(R) networks.
Citizens has also contracted for the data processing and reporting
services of BISYS, Inc. in Houston, Texas. The cost of these data processing
services is approximately $9,700 per month.
Citizens has contracted with the FHLB of Indianapolis for item processing
for a fee of approximately $3,000 per month.
Item 3. Legal Proceedings.
Neither the Holding Company nor Citizens is a party to any pending legal
proceedings, other than routine litigation incidental to the Holding Company's
or Citizens' business.
Item 4. Submission of Matters to a Vote of Security Holders.
On March 24, 1998, Citizens Bancorp held its Annual Meeting of
Shareholders. Two directors were elected to terms expiring in 1998 by the
following votes:
Perry W. Lewis For: 863,603 Withheld: 1,700
John J. Miller For: 864,103 Withheld: 1,200
Two directors were elected to terms expiring in 1999 by the following
votes:
Robert F. Ayres For: 864,103 Withheld: 1,200
Billy J. Wray For: 864,103 Withheld: 1,200
One director was elected to a term expiring in 2000 by the following
votes:
Fred W. Carter For: 864,103 Withheld: 1,200
Two other matters were submitted to the shareholders, for which the
following votes were cast:
1) Approval and ratification of Citizens Bancorp Stock Option Plan.
For: 780,385 Against: 41,702 Abstain: 15,450
2) Approval and ratification of Citizens Savings Bank Recognition and
Retention Plan and Trust.
For: 676,785 Against: 43,792 Abstain: 13,950
Item 4.5. Executive Officers of the Registrant.
The executive officers of the Holding Company are identified below. The
executive officers of the Holding Company are elected annually by the Holding
Company's Board of Directors.
Name Position with Holding Company
Fred W. Carter Chairman of the Board, President
and Chief Executive Officer
Stephen D. Davis Treasurer
Cindy S. Chambers Secretary
Fred W. Carter (age 66) has served as President and Chief Executive
Officer of Citizens and CLSC since 1972, and of the Holding Company since 1997.
Mr. Carter has been an employee of Citizens since 1966 and is the father of
Cindy S. Chambers, Citizens' Secretary and Customer Service Manager.
Cindy S. Chambers (age 44) has served as Citizens' Corporate Secretary
since 1988 and as Citizens' Customer Service Manager since 1982. She has served
as the Holding Company's Secretary since 1997 and is the daughter of Fred W.
Carter, Citizens' President and Chief Executive Officer.
Stephen D. Davis (age 42) has served as Citizens' Controller since 1989
and as the Holding Company's Treasurer since 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The information required by this item is incorporated by reference to the
material under the heading "Shareholder Information--Market Information" on page
41 of the Holding Company's Annual Report to Shareholders for the year ended
June 30, 1998 (the "Shareholder Annual Report").
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference to the
material under the heading "Summary of Selected Consolidated Financial Data" on
page 2 of the Shareholder Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The information required by this item is incorporated by reference on
pages 3 to 13 of the Shareholder Annual Report.
Item 7A. Quantitative and Qualitative Analysis of Financial Condition and
Results of Operations.
The information required by this item is incorporated by reference on
pages 13 to 15 of the Shareholder Annual Report.
Item 8. Financial Statements and Supplementary Data.
The Holding Company's Consolidated Financial Statements and Notes thereto
contained on pages 16 to 38 of the Shareholder Annual Report are incorporated
herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no such changes or disagreements during the applicable period.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is
incorporated by reference to pages 2 to 4 of the Holding Company's Proxy
Statement for its 1998 annual shareholder meeting (the "1998 Proxy Statement").
Information concerning the Holding Company's executive officers who are not also
directors is included in Item 4.5 in Part I of this report.
The information required by this item with respect to the Holding
Company's compliance with Section 16(a) of the Securities Exchange Act of 1934
is incorporated by reference to page 8 of the 1998 Proxy Statement.
Item 11. Executive Compensation.
The information required by this item with respect to executive
compensation is incorporated by reference to pages 5 to 6 of the 1998 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to
pages 1 to 4 of the 1998 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
pages 7 to 8 of the 1998 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List the following documents filed as part of the report:
Page in 1998
Shareholder
Financial Statements Annual Report
Consolidated Balance Sheets as of June 30, 1998 and 1997 17
Consolidated Statements of Income for each of the years
in the three year period ended June 30, 1998 18
Consolidated Statements of Shareholders' Equity
for the years in the three year period ended June 30, 1998 19
Consolidated Statements of Cash Flows for each
of the years in the three year period ended June 30, 1998 20
Notes to Consolidated Financial Statements 21
Report of Ernst & Young LLP Independent Auditors 16
(b) Reports on Form 8-K.
The Holding Company filed no reports on Form 8-K during the quarter ended
June 30, 1998.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page E-1.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
CITIZENS BANCORP
Date: September 18, 1998 By: /s/ Fred W. Carter
-----------------------------
Fred W. Carter, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 18th day of September,
1998.
Signatures Title Date
(1) Principal Executive Officer:
/s/ Fred W. Carter )
-------------------------- )
Fred W. Carter President and )
Chief Executive Officer)
)
)
(2) Principal Financial )
and Accounting Officer: )
)
)
/s/ Stephen D. Davis Treasurer )
-------------------------- )
Stephen D. Davis )
)
)September 18, 1998
)
(3) The Board of Directors: )
)
)
/s/ Robert F. Ayres Director )
-------------------------- )
Robert F. Ayres )
)
)
Director )
-------------------------- )
Fred W. Carter )
)
)
/s/ Perry W. Lewis Director )
-------------------------- )
Perry W. Lewis )
)
)
/s/ John J. Miller )
-------------------------- )
John J. Miller Director )
)September 18, 1998
)
/s/ Billy J. Wray Director )
-------------------------- )
Billy J. Wray )
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
3(1) Registrant's Articles of Incorporation are incorporated by
reference to Exhibit 3(1) to the Registration Statement on Form
S-1 (Registration No. 333-29031) (the "Registration Statement")
(2) Registrant's Code of By-Laws are incorporated by reference to
Exhibit 3(2) to the Registration Statement
10(4) Citizens Bancorp Employee Stock Ownership Plan and Trust
Agreement is incorporated by reference to Exhibit 10(4) to the
Registrant's Form 10-K for the period ended June 30, 1997 (the
"1997 Form 10-K")
(5) Employment Agreement between Citizens Savings Bank of Frankfort
and Fred W. Carter is incorporated by reference to Exhibit 10(5)
to the Registration Statement
(6) Director Deferred Compensation Agreement -- Fred W. Carter is
incorporated by reference to Exhibit 10(6) to the Registration
Statement
(7) Executive Supplemental Retirement Agreement -- Fred W. Carter is
incorporated by reference to Exhibit 10(7) to the Registration
Statement
(8) Executive Supplemental Retirement Agreement -- Stephen D. Davis
is incorporated by reference to Exhibit 10(8) to the Registration
Statement
(9) Executive Supplemental Retirement Agreement -- Cindy S. Chambers
is incorporated by reference to Exhibit 10(9) to the Registration
Statement
(10) Exempt Loan and Share Purchase Agreement between Trust under
Citizens Bancorp Employee Stock Ownership Plan and Trust
Agreement and Citizens Bancorp is incorporated by reference to
Exhibit 10(10) of the 1997 Form 10-K
13 Registrant's Annual Report to Shareholders for its 1998 annual
shareholders meeting
21 Subsidiaries of the Registrant
23 Consent of Independent Auditor
27 Financial Data Schedule
Message to Shareholders.................................................. 1
Selected Consolidated Financial Data..................................... 2
Management's Discussion and Analysis..................................... 3
Report of Independent Auditors........................................... 16
Consolidated Statements of Condition..................................... 17
Consolidated Statements of Income........................................ 18
Consolidated Statements of Changes in
Shareholders' Equity................................................ 19
Consolidated Statements of Cash Flows.................................... 20
Notes to Consolidated Financial Statements............................... 21
Directors and Officers................................................... 39
Shareholder Information.................................................. 41
================================================================================
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, Indiana. 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, Indiana. 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:
It gives me great pleasure to present the 1998 Fiscal Year Report of
Citizens Bancorp and its subsidiary, Citizens Savings Bank of Frankfort,
Indiana. This report also presents our first nine-months of experience as a
public company.
The past twelve months have certainly been a busy time for all of us at
Citizens. On September 18, 1997, we converted from a mutual to a stock savings
bank, and our stock began trading on the OTC Electronic Bulletin Board under the
ticker symbol "CIBC." In the initial public offering, we sold 1,058,000 shares
of common stock at $10 per share.
We reported net income for the fiscal year ended June 30, 1998 of
$874,000, which is an increase of $503,000 over the $371,000 earned during the
same period last year. This increase in earnings is attributable, in part, to a
net pre-tax gain of $172,000 during 1998 on the sale of a parcel of real estate
owned and to increased interest income from loans and investments we made with
the proceeds from the sale of common stock. Net income during the 1997 fiscal
year was reduced as the result of the one-time assessment of $127,000
(after-tax) by the Federal Deposit Insurance Corporation in connection with the
replenishment of the Savings Association Insurance Fund, and from a loss of
$60,000 from our sale of investment securities during that period.
During fiscal year 1998, our total assets increased from $46.4 million
to $53.4 million, an increase of 15.3%, and our net loans receivable increased
from $38.4 million to $46.9 million, an increase of 22.1%. Also during fiscal
year 1998, our deposits decreased by 6.3%, from $36.4 million to $34.1 million.
As of June 30, 1998, our total shareholders' equity was $15.2 million, an
increase of $9.5 million from $5.7 million at June 30, 1997. This increase is
attributable to our receipt of the net proceeds from the sale of common stock
and from our net income of $874,000 for the year. Our Return on Assets (ROA) for
the twelve months ended June 30, 1998 was 1.69% and our Return on Equity (ROE)
was 6.65%. The Board of Directors of Citizens Bancorp declared a $0.05 per share
dividend for each of the March and June, 1998 quarters, amounting to total
dividend of $105,800 paid to our shareholders for the two quarters.
Again this year, Citizens Savings Bank received the Bauer Financial
Reports "Five Star Superior" rating for the 39th consecutive quarter and the
Sheshunoff "Highest Rated Bank" designation. Both Bauer & Sheshunoff are
independent rating companies. The success of our conversion to a stock
institution and of our performance during the past year was the result of
dedicated and knowledgeable Directors, Officers and Staff working together to
serve our customers' needs in a courteous and professional manner.
We thank you for your business, your support and your confidence in
Citizens Savings Bank, and encourage you to recommend Citizens to your friends
and associates.
Sincerely,
/s/ Fred W. Carter
Fred W. Carter
President, Chief Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF
CITIZENS BANCORP AND SUBSIDIARIES
The following selected consolidated financial data of the Company is
qualified in its entirety by, and should be read in conjunction with, the
consolidated financial statements, including notes thereto, included elsewhere
in this Annual Report. In the opinion of management of the Company, all
adjustments necessary for a fair presentation of results for such periods, which
consisted only of normal, recurring adjustments, have been included.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
- - --------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Summary of Selected Consolidated
Financial Condition Data:
Total assets....................................... $53,442 $46,353 $44,235 $39,727 $38,523
Loans receivable, net (1).......................... 46,936 38,435 34,391 29,275 26,141
Cash on hand and in other institutions (2)......... 2,533 4,125 3,308 4,310 7,210
Investment securities available for sale........... 315 161 3,003 2,832 2,677
Cash surrender value of life insurance contract.... 1,119 1,076 1,035 991 943
FHLB advances...................................... 3,500 4,000 3,000 1,500 ---
Deposits........................................... 34,067 36,355 35,600 33,175 34,037
Total shareholders equity.......................... 15,168 5,691 5,320 4,841 4,435
Unrealized gain (loss) on investment securities
available for sale (net)........................ 3 --- (51) (49) (50)
Year Ended June 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
- - ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Summary of Selected Consolidated Operating Data:
Total interest income.............................. $ 4,052 $3,509 $3,186 $2,742 $2,424
Total interest expense............................. 1,738 1,814 1,653 1,370 1,273
-------- ------- ------- ------- --------
Net interest income............................. 2,314 1,695 1,533 1,372 1,151
Provision for loan losses.......................... 72 83 80 32 12
-------- ------- ------- ------- --------
Net interest income after
provision for loan losses..................... 2,242 1,612 1,453 1,340 1,139
Other income:
Fees and service charges........................ 142 138 152 151 120
Loss on sale of investments..................... --- (60) --- --- ---
Gain on sale of real estate..................... 180 17 33 2 ---
Other........................................... 62 64 61 68 77
-------- ------- ------- ------- --------
Total other income............................ 384 159 246 221 197
Other expense:
Salaries and employee benefits.................. 565 485 415 387 331
Occupancy expense............................... 119 114 118 109 105
Data processing expense......................... 122 108 101 105 98
Federal insurance premiums...................... 23 259 77 75 71
Other........................................... 343 251 256 248 258
-------- ------- ------- ------- --------
Total other expense........................... 1,172 1,217 967 924 863
-------- ------- ------- ------- --------
Income before income taxes......................... 1,454 554 732 637 473
Income taxes....................................... 580 183 253 231 166
-------- ------- ------- ------- --------
Income before cumulative effect of
change in accounting principle.................. 874 371 479 406 307
Cumulative effect of change in
accounting for income taxes..................... --- --- --- --- (26)
-------- ------- ------- ------- --------
Net income...................................... $ 874 $ 371 $ 479 $ 406 $ 281
======== ======= ======= ======= ========
</TABLE>
Table continued on following page
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Supplemental Data:
Interest rate spread during period................. 3.77% 3.75% 3.75% 3.69% 3.14%
Net yield on interest-earning assets (3)........... 4.78 4.02 3.99 3.92 3.38
Return on assets (4)............................... 1.69 .82 1.15 1.07 .77
Return on equity (5)............................... 6.65 6.81 9.52 8.89 6.58
Net income per share of Common Stock (6)........... $ .94 --- --- --- ---
Equity to assets (7)............................... 28.38% 12.28 11.91 12.06 11.38
Average interest-earning assets to average
interest-bearing liabilities.................... 127.93 106.31 105.61 105.84 106.54
Non-performing assets to total assets (7).......... .32 .74 .50 .35 .61
Allowance for loan losses to total loans
outstanding (7)................................. .57 .55 .40 .16 .19
Allowance for loan losses to
non-performing loans (7)........................ 158.53 61.57 62.51 33.19 20.89
Net (charge-offs) recoveries to average
total loans outstanding ........................ (.03) (.03) .04 (.12) (.004)
Other expenses to average assets (8).............. 2.27 2.67 2.32 2.44 2.38
Number of full service offices (7)................. 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) Pro forma earnings per share. See Note 1 to the Consolidated
Financial Statements.
(7) At end of period.
(8) Other expenses divided by average total assets.
<PAGE>
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. The following discussion and analysis of
Citizens' financial condition as of June 30, 1998 and 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:
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
Average Balances and Interest Rates and Yields
The following tables present at the fiscal years ended June 30, 1998,
1997 and 1996, 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.
AVERAGE BALANCE SHEET/YIELD ANALYSIS
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ----------------------------- -------------------------------
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....... $4,557 $292 6.40% $ 3,446 $ 179 5.21% $ 3,109 $ 182 5.85%
FHLB stock...................... 336 27 8.07 332 26 7.84 332 26 7.91
Investment securities
available for sale (1)........ 232 10 4.23 1,527 94 6.14 3,001 174 5.81
Loans receivable (2)............ 43,318 3,723 8.60 36,843 3,210 8.71 31,980 2,804 8.77
------- ----- ------- ------ ------- ------
Total interest-earning assets. 48,443 4,052 8.36 42,148 3,509 8.33 38,422 3,186 8.29
======= ===== ======= ====== ======= ======
Interest-bearing liabilities:
Deposits........................ 36,137 1,653 4.57 36,436 1,641 4.50 34,456 1,539 4.47
FHLB advances................... 1,731 86 4.96 3,212 173 5.41 1,923 114 5.94
------- ----- ------- ------ ------- ------
Total interest-bearing
liabilities.............. 37,868 1,739 4.59 39,648 1,814 4.58 36,379 1,653 4.54
------- ----- ------- ------ ------- ------
Net interest-earning assets........$10,575 $ 2,500 $ 2,043
======= ======= =======
Net interest income................ $2,313 $1,695 $1,533
====== ====== ======
Interest rate spread (3)........... 3.77% 3.75% 3.75%
==== ==== ====
Net yield on weighted average
interest-earning assets (4)..... 4.78% 4.02% 3.99%
==== ==== ====
Average interest-earning assets
to average interest-
bearing liabilities............. 127.93% 106.31% 105.61%
====== ====== ======
</TABLE>
<PAGE>
(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.
Year Ended June 30,
-------------------------
1998 1997 1996
---- ---- ----
Weighted average interest rate earned on:
Interest-bearing deposits................... 6.40% 5.21% 5.85%
FHLB stock.................................. 8.07 7.84 7.91
Investment securities....................... 4.23 6.14 5.81
Loans receivable............................ 8.60 8.71 8.77
Total interest-earning assets............. 8.36 8.33 8.29
Weighted average interest rate cost of:
Deposits.................................... 4.57 4.50 4.47
FHLB advances............................... 4.96 5.41 5.94
Total interest-bearing liabilities........ 4.59 4.58 4.54
Interest rate spread (1)....................... 3.77% 3.75% 3.75%
==== ==== ====
Net yield on weighted average
interest-earning assets (2)................. 4.78% 4.02% 3.99%
==== ==== ====
(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.
Increase (Decrease) in
Net Interest Income
--------------------------------
Total
Due to Due to Net
Rate Volume Change
---- ------ ------
(In thousands)
Year ended June 30, 1998 compared
to year ended June 30, 1997
- - --------------------------------------------------------------------------------
Interest-earning assets:
Interest-bearing deposits ............. $ 46 $ 66 $ 112
FHLB stock ............................ 1 -- 1
Investment securities ................. (22) (62) (84)
Loans receivable ...................... (41) 555 514
----- ----- -----
Total ............................... (16) 559 543
----- ----- -----
Interest-bearing liabilities:
Deposits .............................. 25 (13) 12
FHLB advances ......................... (13) (75) (88)
----- ----- -----
Total ............................... 12 (88) (76)
----- ----- -----
Net change in net interest income ....... $ (28) $ 647 $ 619
===== ===== =====
Year ended June 30, 1997 compared
to year ended June 30, 1996
- - --------------------------------------------------------------------------------
Interest-earning assets:
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
===== ===== =====
<PAGE>
Financial Condition at June 30, 1998 Compared to Financial Condition at June 30,
1997
Total consolidated assets of the Company increased by $7.0 million, or 15.3%, to
$53.4 million at June 30, 1998 from $46.4 million at June 30, 1997. Net loans
receivable increased $8.5 million, or 22.1%, to $46.9 million at June 30, 1998.
The increase in loans was funded primarily with the net proceeds from the sale
of the Holding Company's common stock on September 18, 1997. Cash decreased by
$555,000, while interest-bearing deposits decreased by $1.0 million during the
year.
Deposits decreased by $2.3 million primarily as a result of a decrease in the
amount of public funds on deposit. Borrowings at the Federal Home Loan Bank
decreased by $500,000 as a result of net repayments during the period.
Shareholders' equity increased $9.5 million primarily as a result of stock
issued by the Holding Company in the conversion, less the conversion expenses
and the ESOP shares, plus the net profit for the year. Shareholders' equity
decreased by $667,000 as a result of Citizens' purchase of shares of the Holding
Company's common stock for the Recognition and Retention Plan. Shareholders'
equity also decreased by $97,000 as a result of the declaration of dividends on
the Holding Company's common stock during the year.
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.
Comparison of Operating Results For Fiscal Years Ended June 30, 1998 and 1997
Net Income. Net income increased $503,000, or 135.6%, to $874,000 in 1998 from
$371,000 in 1997. The increase primarily resulted from Citizens' recognition of
the one-time, non-recurring SAIF special assessment of $211,000 ($127,000 net of
tax) and the sale of an investment at a loss of approximately $60,000 during
1997, as well as the sale of a tract of real estate for a profit of $172,000
($103,000 net of tax) during 1998. There was also an increase of $619,000 in net
interest income for 1998, offset by an increase in other expenses, excluding the
SAIF assessment, of $167,000. Excluding the gain on the sale of real estate, the
SAIF assessment and the loss on the sale of the investment, net income would
have increased $236,000, or 44.2%, to $770,000 for the year ended June 30, 1998
from $534,000 in 1997.
Net Interest Income. Net interest income increased $619,000, or 36.5%, to $2.3
million in 1998 from $1.7 million in 1997. The increase resulted primarily from
an increase in earning assets and a decrease in costing liabilities in 1998 due
to the sale of the Holding Company's common stock.
Provisions for Loan Losses. Provisions for loan losses for 1998 and 1997 were
$72,000 and $83,000, respectively. Citizens had charge-offs of $12,000 and
recoveries of $2,000 in 1997. Citizens had charge-offs of $17,000 and recoveries
of $2,000 in 1998 and its allowance for loan loss as of June 30, 1998 was
$269,000.
Other Income. Other income increased approximately $226,000, or 142.1%, in 1998
as compared to 1997. This increase resulted from an increase in the gain on the
sale of real estate of $163,000 in 1998 and the $60,000 loss on the sale of an
investment in 1997, plus an increase of $3,000 in 1998 in fees and service
charges and miscellaneous income.
Other Expense. Other expenses decreased $44,000, or 3.7%, in 1998. The decrease
was primarily due to a $236,000 decrease in SAIF insurance premiums offset by an
$80,000 increase in salaries and benefits due to compensation expense related to
the ESOP and the RRP. Office occupancy and data processing expenses increased by
$19,000 during 1998 and other expenses, consisting primarily of legal and
accounting expenses, increased by $93,000 due to the increased reporting
requirements of public companies. Income Tax Expense.
Income tax expense increased $397,000, or 216.6%, to $580,000 in 1998 from
$183,000 in 1997. This primarily resulted from the gain on the sale of real
estate, which increased non-interest income in 1998, and from the FDIC special
assessment, which decreased non-interest income in 1997, as well as the increase
in net interest income for 1998.
Comparison of Operating Results For Fiscal 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 decreased gains on sales of real estate.
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).
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.
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.
Citizens' primary investing activity is the origination of loans. During
the years ended June 30, 1998, 1997 and 1996, it originated total loans in the
amounts of $25.8 million, $17.5 million and $15.4 million, respectively.
Citizens purchased loans totaling $2.5 million in the fiscal year ended June 30,
1998. Loan principal repayments totaled $19.7 million, $13.3 million and $10.3
million during the respective periods.
During the years ended June 30, 1998, 1997, and 1996, Citizens purchased
securities in the amounts of $148,000, $65,000 and $169,000, respectively.
Citizens did not receive any proceeds for the sale of securities during 1998 or
1996. 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 $309,000 and unused lines of
credit of approximately $2.65 million at June 30, 1998. The unused lines
primarily 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, 1998 totaled $10.6 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
$3.5 million at June 30, 1998.
The following is a summary of Citizens' cash flows, which are of three
major types. Cash flows from operating activities consist primarily of net
income generated by cash. Investing activities generate cash flows through the
origination and principal collection on loans as well as purchases and sales of
securities. Investing activities will generally result in negative cash flows
when Citizens experiences loan growth. Cash flows from financing activities
include savings deposits, withdrawals and maturities and changes in borrowings.
The following table summarizes cash flows for each year in the three-year period
ended June 30, 1998.
Year Ended June 30,
--------------------------------
1998 1997 1996
-------- -------- --------
(Dollars in thousands)
Operating activities ........................$ 1,427 $ 266 $ 518
Investing activities:
Purchases of FHLB stock .................. (20) -- --
Purchases of
investment securities .................. (148) (65) (169)
Sales of investment securities ........... -- 2,932 --
Principal collected on loans ............. 19,696 13,251 10,279
Loans originated ......................... (25,763) (17,474) (15,419)
Loans sold ............................... -- 91 --
Loans purchased .......................... (2,494) -- (64)
Change in land held
for development ........................ 31 77 (3)
Purchases of equipment ................... (30) (16) (69)
-------- -------- --------
Total from investing activities ............. (8,728) (1,204) (5,445)
Financing activities:
Increase/(decrease) in NOW,
MMDA and passbook deposits ............. (258) 305 460
Increase/(decrease) in certificates
of deposit ............................. (2,030) 450 1,965
Advances from FHLB ....................... 3,500 14,500 4,500
Payments to FHLB ......................... (4,000) (13,500) (3,000)
Sale of common stock, net of costs ....... 9,216 -- --
Purchase of RRP shares ................... (667) -- --
Dividend paid on common stock ............ (53) -- --
-------- -------- --------
Total from financing activities ............. 5,708 1,755 3,925
-------- -------- --------
Net increase/(decrease) in cash
and cash equivalents .....................$ (1,593) $ 817 $ (1,002)
======== ======== ========
Federal law requires that savings associations maintain a minimum
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, 1998, Citizens had
liquid assets of $4.4 million, and a regulatory liquidity ratio of 10.2%.
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, 1998, Citizens' tangible capital ratio was 17.7%, its core capital
ratio was 17.7%, and its risk-based capital to risk-weighted assets ratio was
29.2%. Therefore, at June 30, 1998, 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, 1998:
<TABLE>
<CAPTION>
At June 30, 1998
----------------------------------------------------------------------------
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% $ 787 17.7% $9,285 $8,498
Core capital (2)........... 3.0 1,574 17.7 9,285 7,711
Risk-based capital......... 8.0 2,614 29.2 9,554 6,940
</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, 1998, 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.
Current Accounting Issues
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). This Statement
establishes standards for reporting and displaying comprehensive income and its
components in the financial statements. Comprehensive income consists of the net
income or loss of the entity, plus or minus the change in equity of the entity
during the period from transactions, other events, and circumstances resulting
from nonowner sources. SFAS 130 is effective for years beginning after December
15, 1997, and will require financial statements of earlier periods that are
presented for comparative purposes to be reclassified. The adoption of SFAS 130
is not expected to have a material effect on the Company's financial condition.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 established
information about operating segments of their business in both their annual and
interim financial reports provided to shareholders. SFAS 131 is effective for
financial statement periods beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years is to be
restated, unless impracticable. In addition, the provisions of SFAS 131 need not
be applied to interim financial statements issued in the initial year of
application. The adoption of SFAS 131 is not expected to have a material effect
on the Company's financial condition.
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.
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.
Year 2000 Compliance
Because computer memory was so expensive on early mainframe computers,
some computer programs used only the final two digits for the year in the date
field while maintaining the first two digits of each year constant. As a result,
some computer applications may be unable to interpret the change from year 1999
to year 2000. The Holding Company is actively monitoring its year 2000 computer
compliance issues. The bulk of the Holding Company's computer processing is
provided under contract by BISYS, Inc. in Houston, Texas ("BISYS"). BISYS
expects to be in year 2000 compliance by June, 1999. BISYS will assist the
Holding Company with other phases of year 2000 compliance throughout the
remainder of 1998 and 1999.
Citizens' loan documentation system is provided by Banker's Systems and is
also expected to be in year 2000 compliance within the next year. The Holding
Company has also appointed one of its executive officers to address all aspects
of year 2000 compliance. The Holding Company's expense in connection with year
2000 compliance is not expected to exceed $50,000.
Asset/Liability Management
An important component of Citizens' asset/liability management policy
includes examining the interest rate sensitivity of its assets and liabilities
and monitoring the expected effects of interest rate changes on its net
portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If Citizens' assets
mature or reprice more quickly or to a greater extent than its liabilities,
Citizens' net portfolio value and net interest income would tend to increase
during periods of rising interest rates but decrease during periods of falling
interest rates. Conversely, if Citizens' assets mature or reprice more slowly or
to a lesser extent than its liabilities, its net portfolio value and net
interest income would tend to decrease during periods of rising interest rates
but increase during periods of falling interest rates. Citizens' policy has been
to mitigate the interest rate risk inherent in the historical business of
savings associations, the origination of long-term loans funded by short-term
deposits, by pursuing certain strategies designed to decrease the vulnerability
of its earnings to material and prolonged changes in interest rates.
Because of the lack of customer demand for adjustable rate loans in its
market area, Citizens primarily originates fixed-rate real estate loans, which
accounted for approximately 59% of its loan portfolio at June 30, 1998. To
manage the interest rate risk of this type of loan portfolio, Citizens limits
maturities of fixed-rate loans to no more than 20 years. In addition, Citizens
continues to offer and attempts to increase its volume of adjustable rate loans
when market interest rates make these loans more attractive to customers.
Management believes it is critical to manage the relationship between
interest rates and the effect on Citizens' 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.
It is estimated that at June 30, 1998, NPV would decrease 9.8% and
22.6% in the event of 200 and 400 basis point increases in market interest
rates, respectively, compared to 14.9% and 32.6% for the same increases at June
30, 1997. Citizens' NPV at June 30, 1998 would increase 3.1% and 8.2% in the
event of 200 and 400 basis point decreases in market rates respectively. A year
earlier, 200 and 400 basis point decreases in market rates would have increased
NPV 2.5% and 3.1%, respectively.
Presented below, as of June 30, 1998 and 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 200 basis
point increments, up and down 400 basis points.
<TABLE>
<CAPTION>
June 30, 1998
Net Portfolio Value Summary Performance
NPV as % of
Present Value
Net Portfolio Value of Assets
Change ----------------------------------------------------- ------------------------------
In Rates $ Amount $ Change % Change NPV Ratio Change
- - --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+ 400 bp* $9,193 $(2,690) (22.64)% 17.82% (371) bp
+ 200 bp 10,725 (1,158) (9.79)% 20.03% (151) bp
0 bp 11,883 --- ---% 21.54% --- bp
- 200 bp 12,251 368 3.10% 21.86% 32 bp
- 400 bp 12,859 976 8.21% 22.49% 95 bp
</TABLE>
Interest Rate Risk Measures: 200 Basis Point Rate Shock
Pre-Shock NPV Ratio: NPV as % of PV of Assets.....................21.54%
Exposure Measure: Post-Shock NPV Ratio............................20.03%
Sensitivity Measure: Change in NPV Ratio..........................151 bp
Change in NPV as % of PV of Assets................................7.0%
<TABLE>
<CAPTION>
June 30, 1997
Net Portfolio Value Summary Performance
NPV as % of
Present Value
Net Portfolio Value of Assets
Change ----------------------------------------------------- ------------------------------
In Rates $ Amount $ Change % Change NPV Ratio Change
- - --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 bp* $4,933 $(2,387) (32.61)% 11.02% (422) bp
+200 bp 6,232 (1,088) (14.86)% 13.40% (184) bp
0 bp 7,320 --- ---% 15.24% --- bp
-200 bp 7,504 184 2.51% 15.40% 16 bp
-400 bp 7,543 223 3.05% 15.30% 6 bp
</TABLE>
Interest Rate Risk Measures: 200 Basis Point Rate Shock
Pre-Shock NPV Ratio: NPV as % of PV of Assets..................... 15.24%
Exposure Measure: Post-Shock NPV Ratio............................ 13.40%
Sensitivity Measure: Change in NPV Ratio.......................... 184 bp
Change in NPV as % of PV of Assets................................ 12.07%
* Basis points
<PAGE>
Report of Independent Auditors
To the Board of Directors and Shareholders
Citizens Bancorp
We have audited the accompanying consolidated statements of condition of
Citizens Bancorp and subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended June 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Citizens Bancorp
and subsidiaries at June 30, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Indianapolis, Indiana
August 19, 1998, except for Note 14,
as to which the date is September 3, 1998
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
June 30,
------------------------------
1998 1997
------------------------------
Assets
<S> <C> <C>
Cash on hand and in other institutions $ 305,908 $ 861,360
Interest-bearing deposits 2,226,658 3,263,687
Investment securities available for sale 315,041 160,995
Stock in Federal Home Loan Bank of Indianapolis 351,600 331,600
Loans receivable, net 46,936,403 38,435,416
Land held for development 964,582 995,908
Cash surrender value of life insurance contracts 1,118,883 1,075,840
Property and equipment 564,638 578,343
Other assets 657,956 650,161
------------------------------
Total assets $ 53,441,669 $ 46,353,310
==============================
Liabilities and Shareholders' Equity
Liabilities
Deposits $ 34,067,481 $ 36,355,213
Federal Home Loan Bank advances 3,500,000 4,000,000
Other liabilities 706,162 307,303
------------------------------
Total liabilities 38,273,643 40,662,516
Shareholders' Equity
Preferred stock (no par value);
2,000,000 shares authorized, no shares issued -- --
Common stock (no par value); 5,000,000 shares
authorized;1,058,000shares outstanding 10,062,369 --
Additional paid-in capital 41,100 --
Unearned Employee Stock Ownership Plan ("ESOP") shares (765,060) --
Unearned Recognition and Retention Plan ("RRP") (641,117) --
Retained income - substantially restricted 6,467,337 5,690,794
Unrealized gain on investment
securities available for sale, net of tax 3,397 --
------------------------------
15,168,026 5,690,794
------------------------------
Total liabilities and shareholders' equity $ 53,441,669 $ 46,353,310
==============================
</TABLE>
See accompanying notes.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended June 30,
--------------------------------------------
1998 1997 1996
--------------------------------------------
Interest income:
<S> <C> <C> <C>
Interest and fees on loans $ 3,723,529 $ 3,210,018 $ 2,803,774
Other interest income 328,592 299,370 382,453
--------------------------------------------
4,052,121 3,509,388 3,186,227
Interest expense:
Interest on deposits 1,652,668 1,640,868 1,538,886
Interest on borrowings 85,921 173,668 114,253
--------------------------------------------
1,738,589 1,814,536 1,653,139
--------------------------------------------
Net interest income 2,313,532 1,694,852 1,533,088
Provision for loan losses 72,000 83,000 80,000
--------------------------------------------
Net interest income after provision
for loan losses 2,241,532 1,611,852 1,453,088
Other income:
Fees and service charges 141,983 138,342 152,379
Loss on sale of investments -- (60,243) --
Gain on sale of real estate 180,174 17,307 32,941
Other 62,443 63,426 61,156
--------------------------------------------
384,600 158,832 246,476
Other expense:
Salaries and employee benefits 564,693 485,151 414,730
Occupancy expense 118,646 114,449 117,967
Data processing expense 122,584 107,764 101,675
Federal insurance premium 23,115 258,685 76,868
Other 343,037 250,468 256,137
--------------------------------------------
1,172,075 1,216,517 967,377
--------------------------------------------
Income before income taxes 1,454,057 554,167 732,187
Income taxes 580,179 183,225 253,257
--------------------------------------------
Net income $ 873,878 $ 370,942 $ 478,930
============================================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
Unrealized
Gain/(Loss)
Retained Investment
Additional Income Securities Unearned
Common Paid-In Substantially Available for Sale, ESOP
Stock Capital Restricted Net of Tax Shares
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance as of June 30, 1995 $ --- $ --- $4,840,922 $(48,962) $ ---
Net income --- --- 478,930 --- ---
Net change in unrealized gain/
(loss) on investment securities
available for sale, net of tax --- --- --- (1,891) ---
-------------------------------------------------------------------------------
Balance as of June 30, 1996 --- --- 5,319,852 (50,853) ---
Net income --- --- 370,942 --- ---
Net change in unrealized gain/
(loss) on investment securities
available for sale, net of tax --- --- --- 50,853 ---
- - --------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 1997 --- --- 5,690,794 --- ---
Net income --- --- 873,878 --- ---
Net change in unrealized gain/
(loss) on investment securities
available for sale, net of tax --- --- --- 3,397 ---
Dividends declared
($.10 per share) --- --- (97,335) --- ---
Sale of common stock 9,215,969 --- --- --- ---
Common stock acquired by ESOP 846,400 --- --- --- (846,400)
Release of ESOP shares --- 41,100 --- --- 81,340
Purchase of 42,320 shares for RRP --- --- --- --- ---
Allocation of RRP shares --- --- --- --- ---
- - --------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 1998 $ 10,062,369 $41,100 $ 6,467,337 $ 3,397 $ (765,060)
====================================================================================================================
</TABLE>
Unearned
Recognition Total
and Retention Shareholders'
Plan Equity
- - ---------------------------------------------------------------------
Balance as of June 30, 1995 $ --- $4,791,960
Net income --- 478,930
Net change in unrealized gain/
(loss) on investment securities
available for sale, net of tax --- (1,891)
-----------------------------
Balance as of June 30, 1996 --- 5,268,999
Net income --- 370,942
Net change in unrealized gain/
(loss) on investment securities
available for sale, net of tax --- 50,853
- - ---------------------------------------------------------------------
Balance as of June 30, 1997 --- 5,690,794
Net income --- 873,878
Net change in unrealized gain/
(loss) on investment securities
available for sale, net of tax --- 3,397
Dividends declared
($0.10 per share) --- (97,335)
Sale of common stock --- 9,215,969
Common stock acquired by ESOP --- ---
Release of ESOP shares --- 122,440
Purchase of 42,320 shares for RRP (666,957) (666,957)
Allocation of RRP shares 25,840 25,840
- - ----------------------------------------------------------------------
Balance as of June 30, 1998 $ (641,117) $ 15,168,026
======================================================================
See accompanying notes.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------------------
1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------
Operating activities
<S> <C> <C> <C>
Net income $ 873,878 $ 370,942 $ 478,930
Adjustments to reconcile net income to net cash provided by operating
activities:
Loss on sale of investments -- 60,243 --
Provision for loan losses 72,000 83,000 80,000
Depreciation and amortization 30,519 45,587 48,055
Deferred federal income tax credit (101,594) (76,326) (74,473)
Increase (decrease) in other assets and cash
surrender value of life insurance contract 59,219 (158,418) (140,525)
Increase (decrease) in other liabilities 344,731 (58,854) 126,311
Release of ESOP/RRP shares 148,280 -- --
------------------------------------------------
Net cash provided by operating activities 1,427,033 266,174 518,298
Investing activities
Purchase of stock in Federal Home Loan Bank (20,000) -- --
Purchases of investment securities (148,420) (65,481) (169,304)
Proceeds from sale of investment securities -- 2,931,693 --
Principal collected on loans 19,696,267 13,251,130 10,279,567
Loans originated (25,762,982) (17,473,565) (15,419,000)
Loans purchased (2,494,252) -- (64,000)
Proceeds from sale of loans -- 91,455 --
(Increase) decrease in land held for development 31,326 76,892 (3,342)
Purchases of property and equipment (29,833) (16,498) (69,117)
------------------------------------------------
Net cash used by investing activities (8,727,894) (1,204,374) (5,445,196)
Financing activities
Increase (decrease) in NOW, MMDA and
passbook deposits (257,971) 304,545 460,126
Increase (decrease) in certificates of deposit (2,029,761) 450,528 1,965,007
Advances from Federal Home Loan Bank 3,500,000 14,500,000 4,500,000
Payments to Federal Home Loan Bank (4,000,000) (13,500,000) (3,000,000)
Sale of common stock, net of costs 9,215,969 -- --
Purchase of RRP shares (666,957) -- --
Dividend paid on common stock (52,900) -- --
------------------------------------------------
Net cash provided by financing activities 5,708,380 1,755,073 3,925,133
------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,592,481) 816,873 (1,001,765)
Cash and cash equivalents at beginning of year 4,125,047 3,308,174 4,309,939
------------------------------------------------
Cash and cash equivalents at end of year $ 2,532,566 $ 4,125,047 $ 3,308,174
================================================
</TABLE>
See accompanying notes.
<PAGE>
1. Significant Accounting Policies
Organization
Citizens Bancorp ("Citizens") was formed in June, 1997 and purchased all of the
stock of Citizens Savings Bank of Frankfort ("Bank") with the proceeds of a
subscription stock offering completed in September, 1997. Simultaneous to the
stock offering, the Bank converted from a federally-chartered mutual savings
bank to a federally-chartered capital stock savings bank. Prior to June, 1997,
Citizens had no assets or liabilities. All financial information prior to fiscal
year 1998 related to the Bank only.
Citizens issued 1,058,000 shares of common stock following the subscription
stock offering. Net proceeds to Citizens were $9,215,969 of which $5,031,185 was
paid to the Bank in exchange for all of the common stock of the Bank. Expenses
related to the offering totaled $517,631 and $846,400 was loaned by Citizens to
the Employee Stock Ownership Plan.
The significant accounting and reporting policies for Citizens Bancorp and its
subsidiaries (collectively, the "Company") follow:
Principles of Consolidation
The consolidated financial statements include the accounts of Citizens, its
wholly-owned subsidiary, the Bank and the Bank's wholly-owned subsidiary
Citizens Loan and Service Corporation ("Service Corp."). Citizens is a unitary
savings and loan holding company engaged in the business of managing its
investments and directing, planning, and coordinating the business activities of
the Bank. The Bank operates as a traditional savings bank in Clinton County, IN.
The Service Corp. develops land for residential housing. All significant
intercompany accounts and transactions have been eliminated in consolidation.
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, 1998 and 1997, investment securities, which consist of equity
securities, are classified as available-for-sale and carried at fair value with
the unrealized gain as a separate component of equity, net of tax. At June 30,
1998, 1997, and 1996, the cost basis of investment securities available for sale
was $309,416, $160,995 and $3,087,450, respectively and the gross unrealized
gain (loss) was $5,625, $0, and ($84,208) 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.
1. Significant Accounting Policies (continued)
Loans Receivable
The Company 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 Company 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 Company 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.
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 1998, 1997 or
1996.
Property and Equipment
Property and equipment are 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.
1. Significant Accounting Policies (continued)
Pro Forma Earnings Per Share (Unaudited)
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" (SFAS 128). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share.
Historical earnings per share is not presented on the consolidated statements of
income because it is not meaningful due to the stock offering occurring and the
formation of the ESOP in September, 1997. Both pro forma basic earnings per
share and pro forma diluted earnings per share would have been $ 0.94 in 1998.
Earnings per share on a pro forma basis assumes the stock offering and the
formation of the ESOP had occurred on July 1, 1997 and includes the increase in
earnings associated with the investment of the net proceeds raised in regard to
the issuance of common stock in the subscription stock offering.
Pro forma basic earnings per share is computed by dividing pro forma net income
by the weighted average number of common shares outstanding during the year
assuming the stock offering occurred on July 1, 1997. Pro forma diluted earnings
per share is computed by dividing pro forma net income, by the weighted average
number of common shares outstanding during the year assuming the stock offering
and the formation of the ESOP occurred on July 1, 1997. The weighted average
shares used in the computation of both pro forma basic earnings per share and
the pro forma diluted earnings per share were 978,648 shares in 1998. Earnings
per share information for 1997 and 1996 is not applicable as no shares were
issued or outstanding prior to the subscription stock offering in 1998.
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 1997 and 1996 consolidated financial statements have
been reclassified to conform with the 1998 presentation herein.
Recent Accounting Pronouncements
Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). This Statement establishes
standards for reporting and displaying comprehensive income and its components
in the financial statements. Comprehensive income consists of the net income or
loss of the entity, plus or minus the change in equity of the entity during the
period from transactions, other events, and circumstances resulting from
nonowner sources. SFAS 130 is effective for years beginning after December 15,
1997, and will require financial statements of earlier periods that are
presented for comparative purposes to be reclassified. The adoption of SFAS 130
is not expected to have a material effect on the Company's financial condition.
1. Significant Accounting Policies (continued)
Disclosures about Segments of an Enterprise and Related Information
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 established
information about operating segments of their business in both their annual and
interim financial reports provided to shareholders. SFAS 131 is effective for
financial statement periods beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years is to be
restated, unless impracticable. In addition, the provisions of SFAS 131 need not
be applied to interim financial statements issued in the initial year of
application. The adoption of SFAS 131 is not expected to have a material effect
on the Company's financial condition.
2. Loans Receivable
Loans receivable consist of the following:
June 30
1998 1997
- - --------------------------------------------------------------------------------
Real estate mortgage loans:
One-to-four family residential $35,928,334 $29,887,850
Commercial 3,656,862 2,375,245
Construction loans 611,000 1,419,800
Installment loans 7,064,802 5,475,168
Loans secured by deposits 149,973 193,111
---------------------------
47,410,971 39,351,174
Less:
Allowance for loan losses 268,837 211,635
Deferred loan fees 109,376 101,140
Undisbursed portion of loan proceeds 96,355 602,983
---------------------------
474,568 915,758
---------------------------
$46,936,403 $38,435,416
===========================
Changes in the allowance for loan losses are as follows:
Years ended June 30,
---------------------------------------
1998 1997 1996
- - ------------------------------------------------------------------------
Balance at beginning of year $ 211,635 $ 138,606 $ 46,416
Provision for losses 72,000 83,000 80,000
Charge-offs (16,443) (11,597) --
Recoveries 1,645 1,626 12,190
---------------------------------------
Balance at end of year $ 268,837 $ 211,635 $ 138,606
=======================================
<PAGE>
2. Loans Receivable (continued)
At June 30, 1998 the Company had loan commitments of approximately $309,000. Of
the $309,000 loan commitments, $205,000 are fixed rate commitments at 7.27%. The
Company also had approximately $2,650,000 of unused lines of credit at June 30,
1998.
The Company'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 Company's market area primarily includes some
diversified industries and agriculture. At June 30, 1998 and June 30, 1997, and
for the years then ended, the Company 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 Company's one-to-four family residential
mortgage loans (see Note 7).
3. Loans to Related Parties
The Company 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
$2,766,000 and $2,211,000 at June 30, 1998 and 1997, respectively. During the
year ended June 30, 1998, related party loans were increased $2,686,000 by loan
advances and reduced $2,131,000 by loan repayments. During 1997, related party
loans were increased $890,000 by loan advances and reduced $323,000 by loan
repayments.
4. Land Held for Development
The Company, 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, 1998, 1997, and 1996,
approximately $34,000, $68,000, and $240,000, respectively, were expended to
create the infrastructure for the development, to provide further improvements
to the first and second phase of the project, and to capitalize interest. During
the years ended June 30, 1998, 1997, and 1996 approximately $69,000, $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 $9,000, $17,000, and
$33,000 for each year, respectively. The Service Corp. owns an additional 45
acres of land for future development.
During the year ended June 30, 1998, a plot of land not included in the above
development was sold for proceeds equaling $177,000 resulting in a gain from the
sale of $172,000.
5. Property and Equipment
Property and equipment consists of the following:
June 30
-------------------------
1998 1997
- - ---------------------------------------------------------------
Land $ 137,307 $ 137,307
Office building 647,154 647,154
Furniture, fixtures and equipment 274,796 255,327
-------------------------
1,059,257 1,039,788
Less accumulated depreciation 494,619 461,445
-------------------------
$ 564,638 $ 578,343
=========================
6. Deposits
Deposits consist of the following:
June 30
---------------------------
1998 1997
- - --------------------------------------------------------------------
Savings accounts:
Fixed rate, passbook $ 6,421,631 $ 6,904,561
Variable rate, money market 3,081,666 3,354,231
---------------------------
9,503,297 10,258,792
Negotiable order of withdrawal (NOW)
accounts 4,569,764 4,072,240
Certificates 19,994,420 22,024,181
---------------------------
$34,067,481 $36,355,213
===========================
<PAGE>
6. Deposits (continued)
The following table presents interest expense on deposits for the years ended
June 30, 1998, 1997 and 1996.
Years ended June 30,
1998 1997 1996
- - -------------------------------------------------------------------------
Fixed rate, passbooks $ 216,059 $ 216,388 $ 224,314
Variable rate, money markets 106,756 108,991 107,232
NOWs 106,303 86,551 79,569
Certificates 1,223,550 1,228,938 1,127,771
-----------------------------------------
Total interest on deposits $1,652,668 $1,640,868 $1,538,886
=========================================
Accrued interest payable, which relates primarily to certificate accounts,
totaled $31,000 and $69,000 at June 30, 1998 and 1997, respectively, and is
included in other liabilities. Cash paid for interest on deposits was
$1,691,000, $1,611,000, and $1,539,000 for the years ended June 30, 1998, 1997,
and 1996, respectively. Deposit accounts with balances in excess of $100,000
totaled $4,526,000 with a weighted average interest rate of 4.45% as of June 30,
1998. Deposits over $100,000 are not federally insured.
Contractual maturities of certificates of deposit at June 30, 1998 were:
Certificates over All other
Year ended June 30, $100,000 Certificates Total
- - -----------------------------------------------------------------------------
1999 $ 1,585,993 $ 8,998,109 $10,584,102
2000 306,397 4,874,223 5,180,620
2001 303,228 1,389,689 1,692,917
2002 118,456 2,087,285 2,205,741
2003 - 267,981 267,981
Thereafter - 63,059 63,059
-----------------------------------------------
$2,314,074 $17,680,346 $19,994,420
===============================================
7. Advances from Federal Home Loan Bank of Indianapolis
Advances from the Federal Home Loan Bank of Indianapolis totaling $3,500,000 at
June 30, 1998 bear fixed and variable interest rates and are due at various
dates through December 1998. The Company 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.
The following table presents certain information relating to advances at or for
the years ended June 30, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Years ended June 30,
---------------------------------------------
1998 1997 1996
- - ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
FHLB Advances:
Outstanding at end of period $3,500,000 $4,000,000 $3,000,000
Average balance outstanding for period 1,730,769 3,212,000 1,923,000
Maximum amount outstanding at any
month-end during the period 3,500,000 5,000,000 3,000,000
Weighted average interest rate
during the period 4.96% 5.41% 5.94%
Weighted average interest rate
at end of period 6.21 6.51 5.82
</TABLE>
8. Income Taxes
Income tax expense is summarized as follows:
Years ended June 30,
1998 1997 1996
- - ---------------------------------------------------------------
Federal:
Current $ 550,558 $ 204,275 $ 255,830
Deferred (80,259) (62,054) (58,491)
---------------------------------------
470,299 142,221 197,339
State:
Current 131,215 55,276 71,900
Deferred (21,335) (14,272) (15,982)
---------------------------------------
109,880 41,004 55,918
---------------------------------------
Income tax expense $ 580,179 $ 183,225 $ 253,257
=======================================
<PAGE>
8. Income Taxes (continued)
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
Company's effective income tax is as follows:
Years ended June 30,
--------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------
Tax rate of federal statutory rate 34.0% 34.0% 34.0%
State franchise tax, net of federal benefit 5.0 4.9 5.0
Income on cash surrender value of life
insurance policy (1.0) (7.5) (5.9)
Other 1.9 1.7 1.5
-------------------------------
Effective tax rate 39.9% 33.1% 34.6%
===============================
The components of the Company's net deferred tax asset included in other assets
as of June 30 are as follows:
1998 1997 1996
- - --------------------------------------------------------------------------------
Deferred tax assets:
Deferred loan origination fees $137,596 $ 124,563 $ 118,904
Unrealized loss on investment -- -- 35,698
Officer supplemental retirement plan 106,362 99,263 67,681
Allowance for loan losses 114,256 89,945 58,908
Capital loss carryover 25,604 -- --
RRP compensation expense 10,982 -- --
ESOP compensation expense 34,248 -- --
Other 24,336 21,484 15,621
------------------------------------
453,384 335,255 296,812
Deferred tax liabilities:
FHLB stock dividend (27,132) (27,132) (27,132)
Deferred loan origination costs (91,112) (81,579) (78,680)
Percentage bad debt deduction (4,345) (49,107) (58,915)
Other (24,844) (15,669) (13,116)
------------------------------------
(147,433) (173,487) (177,843)
------------------------------------
Net deferred tax asset $ 305,951 $ 161,768 $ 118,969
====================================
The Company and the Bank file separate federal income tax returns. The Bank and
its wholly owned subsidiary file a consolidated federal income tax return. The
Company paid $262,538, $431,009 and $248,646 of federal and state income taxes
in 1998, 1997 and 1996, respectively.
9. Shareholders' Equity
Citizens has authorized the issuance of 2,000,000 shares of preferred stock with
no par value. Preferred stock may be issued by the Board of Directors from time
to time on terms set by the Board of Directors without further authorization
from the shareholders.
The Board of Directors may declare dividends to be paid on the Company's common
stock. Such payments may depend on dividends paid by the Bank to the Company.
The amount the Bank can pay in dividends is limited by Office of Thrift
Supervision rules that generally allow for capital distributions in any calendar
year equal to the higher of net income for the calendar year to date plus an
amount that would reduce by one-half the surplus capital ratio at the beginning
of the calendar year or 75% of the net income over the previous four quarters.
As of June 30, 1998, the Bank's allowable capital distribution amount was
approximately $4,012,000.
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.
9. Shareholders' Equity (continued)
<TABLE>
<CAPTION>
Capital
Requirements Actual Capital Amount
% $ % $ of Excess
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
June 30, 1998:
Risk-based 8.0% $2,614,000 29.2% $9,554,000 $6,940,000
Leverage 3.0 1,574,000 17.7 9,285,000 7,711,000
Tangible 1.5 787,000 17.7 9,285,000 8,498,000
June 30, 1997:
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
</TABLE>
At June 30, 1998 and 1997, the Bank had approximately $953,000 and $993,000,
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, 1998 and 1997. 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:
<TABLE>
<CAPTION>
Capital
Requirements Actual Capital
% $ % $
- - ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
June 30, 1998:
Risk-based 10.0% $3,267,000 29.2% $9,554,000
Tier 1 risk-based 6.0 1,960,000 28.4 9,285,000
Tier 1 leverage 5.0 2,624,000 17.7 9,285,000
June 30,1997:
Risk-based 10.0% $2,717,000 18.1% $4,910,000
Tier 1 risk-based 6.0 1,630,000 17.3 4,698,000
Tier 1 leverage 5.0 2,276,000 10.3 4,698,000
</TABLE>
<PAGE>
9. Shareholders' Equity (continued)
The Bank 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.
The Bank established a liquidation account at the time of conversion from a
mutual savings bank to a capital stock savings bank. The account balance was
equal to the amount of the Bank's net worth on June 30, 1997. The account will
be maintained for the benefit of eligible deposit account holders and
supplemental eligible account holders who continue to maintain deposit accounts
following the conversion. In the unlikely event of a complete liquidation, each
eligible deposit account holder and supplemental eligible account holder will be
entitled to receive a liquidation distribution of any assets remaining after
payment of all valid creditor's claims, including the claims of all depositors
to the withdrawal values of their deposit accounts, but before any liquidation
distribution may be made with respect to the Company's common stock. Eligible
deposit account holders have a subaccount in the liquidation account for each
deposit account as of December 31, 1995. Supplemental eligible account holders
have a subaccount in the liquidation account for each deposit account as of June
30, 1997. The liquidation account balance will gradually decrease as eligible
deposit account holders' and supplemental eligible account holders' subaccount
balances are required or cease to exist. Dividends cannot be paid from the
liquidation account.
10. Employee and Director Benefit Plans
Pension Plan - 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 Company as an individual entity within the multi-employer
group. Pension expense which includes plan administration costs amounted to
approximately $1,649, $20,556, and $1,300 in 1998, 1997, and 1996, respectively.
Supplemental Non-qualified Pension Plan - The Company 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 Company 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 $1,119,000 and $1,076,000 at June 30,
1998 and 1997, respectively. During the years ended June 30, 1998, 1997, and
1996, $16,700, $74,300, and $69,000, respectively, were charged to expense under
this plan.
Employee Stock Ownership Plan ("ESOP") - In conjunction with Citizens'
subscription stock offering, an ESOP was created and 84,640 shares of Citizens'
stock were purchased for future allocation to employees. The purchase was funded
with a loan from Citizens. Shares will be allocated to all eligible employees
annually on the last day of the fiscal year based on a pro rata share of total
compensation for the year. Employees with at least one year of employment with
the Company and who have attained age 21 are eligible to participate. Benefits
vest in full upon completion of ten years of qualified service. The ESOP shares
are released in proportion to the annual principal and interest payments on the
loan. The Company recognizes expense based upon the fair value of the shares as
they are released. Compensation expense for the ESOP was $122,000 for the year
ended June 30, 1998. The shares are considered outstanding for earnings per
share purposes once they are released.
10. Employee and Director Benefit Plans (continued)
The following table reflects the shares held by the ESOP:
June 30, 1998
-------------
Shares allocated to participants 8,134
Unallocated shares 76,506
Total 84,640
----------
Fair value of unallocated shares $1,099,774
==========
The Bank will make minimum contributions to the ESOP sufficient to meet annual
principal and interest obligations on the loan from Citizens. Contributions in
excess of this amount may be made at the Bank's discretion. Cash dividends
received with respect to unallocated shares, if any, will be applied to
principal and interest due on the loan.
Recognition and Retention Plan - The Recognition and Retention Plan ("RRP") was
approved with an effective date of March 24, 1998. The RRP purchased, with funds
contributed by the Company, 42,320 shares in the open market during the fourth
quarter of fiscal 1998. Directors and officers become vested in the shares of
common stock awarded to them under the RRP at a rate of 20 percent per year,
commencing one year after the grant date, and 20 percent on each anniversary
date thereof for the following four years. As of June 30, 1998, 32,798 shares
have been awarded to officers and directors. RRP compensation expense was
$26,000 for the year ended June 30, 1998. The Bank accounts for its RRP in
accordance with Accounting Principle Board Statement 25 (APB No.25).
Compensation expense is recognized over the vesting period for shares awarded
under the plan.
Stock Option Plans - At a special shareholders' meeting on March 24, 1998, the
1998 Stock Option Plan ("SOP") was approved. The Board of Directors reserved an
amount of stock equal to 105,800 shares, or 10 percent of the common stock sold
in the conversion for issuance under the SOP. The options will be granted by a
Committee, comprised of directors, to key employees and directors based on their
services. The exercise price of options granted must be at least equal to the
fair market value of the common stock on the date the option is granted. Options
granted will vest over a five year period and become exercisable over a ten year
period.
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is required.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Sholes
option pricing model with the following weighted average assumptions:
1998
-------
Number of options granted 81,995
Risk-free interest rate 5.38%
Expected life, in years 8
Expected volatility 19.9%
Expected dividend yield 1.31%
<PAGE>
10. Employee and Director Benefit Plans (continued)
The Black-Sholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had
compensation cost for the Company's stock options been determined based on the
fair market value consistent with the method of SFAS 123, the Company's net
income for 1998 would have been reduced by $12,969. Both pro forma basic and
diluted earnings per share, which assumes that the stock offering and the
formation of the ESOP occurred on July 1, 1997, would have been $0.93
(unaudited) for 1998.
A summary of the Company's stock option activity, and the related information
for the year ended June 30, 1998 follow:
1998
Weighted-
average
Options Exercise Price
- - --------------------------------------------------------------------
Outstanding at beginning of year -- $ --
Granted 81,995 15.25
Exercised -- --
Outstanding at end of year 81,995 15.25
Exercisable at end of year -- --
Weighted-average fair value per option
of options granted during the year $ 4.86
The exercise price for the options outstanding as of June 30, 1998 was $15.25.
The weighted-average remaining contractual life of those options is almost 10
years.
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 Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and interest bearing deposits: The carrying amounts 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.
<PAGE>
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.
11. Fair Value of Financial Instruments (continued)
The estimated fair values of the Company's financial instruments at June 30,
1998 are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
- - ---------------------------------------------------------------------------------------
Assets:
<S> <C> <C>
Cash on hand and in other institutions $ 305,908 $ 305,908
Interest bearing deposits 2,226,658 2,226,658
Investment securities available for sale 315,041 315,041
Stock in Federal Home Loan Bank of Indianapolis 351,600 351,600
Loans receivable 46,936,403 49,410,000
Liabilities:
Deposits 34,067,481 34,219,000
Federal Home Loan Bank advances 3,500,000 3,500,000
</TABLE>
12. Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for 1998:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income $ 940,672 $1,016,436 $1,030,593 $1,064,419
Interest Expense 466,234 412,866 422,213 437,276
Net Interest Income 474,438 603,570 608,380 627,143
Provision for loan losses 12,000 28,000 17,000 15,000
Net income 266,888 197,795 217,512 191,683
Pro forma basic earnings per share $0.32 $0.20 $0.22 $0.20
Pro forma diluted earnings per share $0.32 $0.20 $0.22 $0.20
</TABLE>
13. Parent Company Information
The condensed financial information for Citizens Bancorp, prepared on a parent
company unconsolidated basis, is presented as follows:
June 30, 1998
-------------
Condensed statement of condition Assets:
Cash on deposit with Citizens Savings Bank $ 4,014,235
Investment securities available for sale at market
value, cost $139,375 145,000
Investment in Citizens Savings Bank 10,237,433
ESOP loan receivable 825,240
Other assets 43,248
-----------
Total assets $15,265,156
===========
Liabilities and shareholders' equity
Liabilities $ 97,128
Shareholders' Equity 15,168,028
-----------
Total liabilities and shareholders' equity $15,265,156
===========
Year ended
June 30
1998
---------
Condensed statement of income
Interest income on investments $ 53,683
Interest income on ESOP loan 55,481
---------
Total interest income 109,164
Expenses 115,814
---------
Loss before income tax expense (6,650)
Income tax expense --
---------
Loss before equity in undistributed net income
of subsidiary (6,650)
Equity in undistributed net income of Citizens
Savings Bank 880,528
---------
Net income $ 873,878
=========
<PAGE>
13. Parent Company Information (continued)
Year ended
June 30
1998
------------
Condensed statement of cash flows
Operating activities
Net income $ 873,878
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed Net income of Citizens Savings Bank (880,528)
Increase in other assets (34,784)
Increase in other liabilities 42,000
------------
Net cash provided by operating activities 566
Investing activities
Purchases of available for sale securities (139,375)
Loan to ESOP for stock purchase (846,400)
ESOP loan repayment 21,160
------------
Net cash provided by investing activities (964,615)
Financing activities:
Dividend paid on common stock (52,900)
Proceeds from sale of common stock 10,062,369
Purchase of Citizens Savings Bank common stock (5,031,185)
------------
Net cash provided by financing activities 4,978,284
------------
Increase in cash and cash equivalents 4,014,235
Cash and cash equivalents as beginning of year --
------------
Cash and cash equivalents at end of year $ 4,014,235
============
14. Subsequent Event
The Board of Directors has authorized the Company to repurchase up to 5% of its
outstanding 1,058,000 shares of common stock, or 52,900 shares, in the open
market. On August 21, 1998, notice of the proposed repurchase program was sent
to the OTS for their approval. As OTS regulations restrict stock repurchases in
the first year after conversion, on September 2, 1998, the Company applied for a
waiver of regulatory requirements so the repurchase program may commence
immediately. On September 3, 1998, the Company received approval from the OTS of
both the repurchase plan and the waiver of the one year restriction on
repurchases. The repurchases will be executed in open market or block
transactions and will be subject to market conditions. Management does not
believe the repurchases will have any adverse effect on the financial position
of the Company.
<PAGE>
Directors and Officers
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 66) 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 73) 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 44) has served as the Bank's Corporate Secretary
since 1988 and Customer Service Manager since 1982.
Stephen D. Davis (age 42) has served as the Bank's Controller since 1989.
Perry W. Lewis (age 77) 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 59) 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 49) has served as the Bank's senior Loan Officer
since 1989.
Billy J. Wray (age 66) 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 June 30, 1998, there were approximately 657 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 $ ---
January 31, 1998 15 3/8 14 7/8 $ ---
February 28, 1998 15 1/2 15 $ ---
March 31, 1998 16 15 1/4 $ .05
April 30, 1998 16 15 1/4 $ ---
May 31, 1998 16 15 $ ---
June 30, 1998 15 14 $ .05
* Based upon high and low daily closing prices for the Holding Company's
Common Stock as reported on the OTC Electronic Bulletin Board during each
indicated month.
<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 LLP
One Indiana Square, Suite 3400
Indianapolis, Indiana 46204
SHAREHOLDERS AND GENERAL INQUIRIES
On or before September 28, 1998, the Company will file an Annual Report on
Form 10-K for its fiscal year ended June 30, 1998 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
Exhibit 21
SUBSIDIARIES OF CITIZENS BANCORP
Subsidiaries of Citizens Bancorp:
Name Jurisdiction of Incorporation
Citizens Savings Bank of Frankfort Federal
Citizens Loan and Service Corporation Indiana
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Citizens Bancorp of our report dated August 19, 1998, except for Note 14, as
to which the date is September 3, 1998, included in the 1998 Annual Report to
Shareholders of Citizens Bancorp.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-61157) pertaining to the Citizens Bancorp Stock Option Plan of
our report dated August 19, 1998, except for Note 14, as to which the date is
September 3, 1998, with respect to the consolidated financial statements of
Citizens Bancorp incorporated by reference in the Annual Report (Form 10-K) for
the year ended June 30, 1998.
/s/ Ernst & Young LLP
Ernst & Young LLP
Indianapolis, Indiana
September 25, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED JUNE
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001040734
<NAME> Citizens Bancorp
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 306
<INT-BEARING-DEPOSITS> 2,227
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 315
<INVESTMENTS-CARRYING> 352
<INVESTMENTS-MARKET> 352
<LOANS> 46,936
<ALLOWANCE> 269
<TOTAL-ASSETS> 53,442
<DEPOSITS> 34,067
<SHORT-TERM> 3,500
<LIABILITIES-OTHER> 706
<LONG-TERM> 0
<COMMON> 10,062
0
0
<OTHER-SE> 5,106
<TOTAL-LIABILITIES-AND-EQUITY> 53,442
<INTEREST-LOAN> 3,723
<INTEREST-INVEST> 37
<INTEREST-OTHER> 292
<INTEREST-TOTAL> 4,052
<INTEREST-DEPOSIT> 1,653
<INTEREST-EXPENSE> 1,739
<INTEREST-INCOME-NET> 2,313
<LOAN-LOSSES> 72
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,172
<INCOME-PRETAX> 1,454
<INCOME-PRE-EXTRAORDINARY> 874
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 874
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.78
<LOANS-NON> 83
<LOANS-PAST> 48
<LOANS-TROUBLED> 39
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 212
<CHARGE-OFFS> 17
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 269
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 269
</TABLE>
