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, 1999
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 _____ 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.
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of September 24, 1999 was $10,062,997.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of September 24, 1999, was 965,754 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June 30, 1999,
are incorporated by reference into Part II. Portions of the Proxy Statement for
the 1999 Annual Meeting of Shareholders are incorporated in Part III.
Exhibit Index on Page E-1
Page 1 of 30 Pages
<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..................................... 26
Item 6. Selected Financial Data..................................... 26
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
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<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,
--------------------------------------------------------------
1999 1998 1997
------------------ ------------------ -----------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN
Real estate mortgage loans:
Residential................................ $41,663 78.45% $35,928 76.54% $29,888 77.77%
Non-residential............................ 1,631 3.07 1,770 3.77 824 2.14
Multi-family............................... 1,711 3.22 1,887 4.02 1,551 4.04
Construction loans:........................... 1,384 2.61 611 1.30 1,420 3.69
Consumer loans:
Single pay................................. 3,538 6.66 2,815 6.00 1,854 4.82
Installment ............................... 2,329 4.39 2,219 4.73 1,696 4.41
Share ..................................... --- --- --- --- 15 .04
Home equity................................ 2,043 3.85 2,176 4.64 2,095 5.45
Home improvement........................... 3 .01 5 .01 8 .02
------- ------ ------- ------ ------- ------
Gross loans receivable................. $54,302 102.26% $47,411 101.01% $39,351 102.38%
======= ====== ======= ====== ======= ======
TYPE OF SECURITY
Residential real estate ...................... $47,516 89.48% $40,612 86.53% $35,153 91.45%
Non-residential real estate................... 2,041 3.84 2,143 4.57 1,037 2.70
Multi-family real estate...................... 2,033 3.83 2,267 4.83 1,551 4.04
Deposits...................................... 149 .28 150 .32 193 .50
Auto ....................................... 1,575 2.97 1,415 3.01 1,176 3.06
Other security................................ 483 .91 405 .86 111 .29
Unsecured .................................... 505 .95 419 .89 130 .34
------- ------ ------- ------ ------- ------
Gross loans receivable................... 54,302 102.26 47,411 101.01 39,351 102.38
Deduct:
Deferred loan fees............................ 126 .24 110 .23 101 .26
Allowance for loan losses..................... 326 .61 269 .57 212 .55
Loans in process.............................. 746 1.41 96 .21 603 1.57
------- ------ ------- ------ ------- ------
Net loans receivable....................... $53,104 100.00% $46,936 100.00% $38,435 100.00%
======= ====== ======= ====== ======= ======
Mortgage Loans:
Adjustable-rate............................ $10,427 23.17% $11,502 29.06% $ 9,595 29.74%
Fixed-rate................................. 34,578 76.83 28,083 70.94 22,668 70.26
------- ------ ------- ------ ------- ------
Total.................................... $45,005 100.00% $39,585 100.00% $32,263 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
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<PAGE>
The following table sets forth certain information at June 30, 1999,
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 2003 2005 2010 2015
June 30, to to to and
1999 2000 2001 2002 2004 2009 2014 following
---- ---- ---- ---- ---- ---- ---- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential loans.................. $41,663 $21 $24 $51 $343 $4,071 $18,304 $18,849
Multi-family loans................. 1,711 --- --- --- 236 46 1,429 ---
Non-residential loans.............. 1,631 3 61 --- 9 75 470 1,013
Construction loans.................... 1,384 1,384 --- --- --- --- --- ---
Installment loans.................... 2,329 82 321 515 1,170 203 19 19
Single pay loans...................... 3,538 3,537 --- --- 1 --- --- ---
Home equity loans..................... 2,043 --- --- --- --- --- --- 2,043
Home improvement loans................ 3 --- 3 --- --- --- --- ---
------- ------ ---- ---- ------ ------ ------- -------
Total............................ $54,302 $5,027 $409 $566 $1,759 $4,395 $20,222 $21,924
======= ====== ==== ==== ====== ====== ======= =======
</TABLE>
The following table sets forth, as of June 30, 1999, 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, 2000
-------------------------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Real estate mortgage loans:
<S> <C> <C> <C>
Residential loans............. $34,522 $ 7,120 $41,642
Multi-family loans............ --- 1,711 1,711
Non-residential loans......... 35 1,593 1,628
Construction loans............ --- --- ---
Installment loans................ 2,247 --- 2,247
Single pay loans................. 1 --- 1
Share loans...................... --- --- ---
Home equity loans................ --- 2,043 2,043
Home improvement loans........... 3 --- 3
------- ------- -------
Total......................... $36,808 $12,467 $49,275
======= ======= =======
</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, 1999 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
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<PAGE>
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, 1999, approximately 17% 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, 1999, approximately $41.7 million, or 78.5% of Citizens'
portfolio of loans, consisted of one- to four-family residential loans.
Approximately $98,000, or .24% 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, 1999, approximately $1.7 million, or 3.2%
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,
1999 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, 1999,
approximately $1.4 million, or 2.6% of Citizens' total loan portfolio, consisted
of construction loans. The largest construction loan at June 30, 1999, totaling
$250,000, 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, 1999,
Citizens' largest nonresidential loan was $966,000 and was secured by an
extended stay motel in Columbus, Indiana. At June 30, 1999, approximately $1.6
million, or 3.1% of Citizens' total loan portfolio, consisted of nonresidential
real estate loans. On the same date, approximately $35,000 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 $7.9 million at June 30, 1999, or 14.9% 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
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<PAGE>
installment loans) to 60 months (for home improvement loans and loans secured by
new automobiles). At June 30, 1999, 93.6% 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, 1999, accrued at a rate of 8.0%.
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, 1999, Citizens had outstanding approximately $2.0 million
of home equity loans, with unused lines of credit totaling approximately $2.96
million. Home equity loans in the amount of $38,000 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, 1999, consumer loans amounting to $64,000 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 $3.5 million of single-pay loans in
Citizens' portfolio as of June 30, 1999, approximately $1.8 million were secured
by residential mortgages and $392,000 were secured by land. The remaining
approximately $1.3 million of loans in this category were consumer loans,
typically secured by automobiles or subordinate liens on real estate. At June
30, 1999, Citizens had no delinquent single-pay loans 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, 1999, Citizens had loans totaling approximately $487,000 in
the aggregate 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
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<PAGE>
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,
-----------------------------------------------------
1999 1998 1997
--------- --------- --------
(In thousands)
<S> <C> <C> <C>
Loans Originated:
Real estate mortgage loans:
Residential loans.................................. $17,405 $14,353 $ 9,253
Nonresidential loans............................... 57 122 202
Multi-family loans................................. --- 1,563 102
Construction loans................................... 2,199 2,385 2,503
Installment loans.................................... 1,716 1,993 1,434
Single pay loans..................................... 7,183 4,082 2,818
Share loans.......................................... --- --- 5
Home equity loans.................................... 1,167 1,265 1,156
Home improvement loans............................... --- --- ---
Total originations............................... 29,727 25,763 17,473
Loans purchased...................................... 61 2,494 ---
Reductions:
Principal loan repayments............................ (23,578) (19,696) (13,251)
Loans sold........................................... --- --- (91)
Transfers from loans to real estate owned............ --- --- ---
--------- --------- --------
Total reductions................................. (23,578) (19,696) (13,342)
Decrease in other items (1).......................... (42) (60) (88)
--------- --------- --------
Net increase (decrease) ............................. $ 6,168 $ 8,501 $ 4,043
========= ========= ========
</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, 1999
totaled $17.4 million, compared to $14.4 million and $9.3 million in the years
ended June 30, 1998 and 1997, 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.
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<PAGE>
Non-performing Assets. At June 30, 1999, $197,000, or .33% of total
assets, were non-performing (restructured and non-accruing loans) compared to
$170,000, or .32% of total assets at June 30, 1998. At June 30, 1999,
residential loans and consumer loans accounted for $98,000 and $64,000,
respectively, of non-accruing loans. Citizens had no Real Estate Owned ("REO")
properties as of June 30, 1999.
The table below sets forth the amounts and categories of Citizens'
non-performing assets (non-accruing 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,
-------------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Non-performing assets:
<S> <C> <C> <C>
Non-accruing loans.................................. $162 $131 $303
Troubled debt restructurings........................ 35 39 41
Total non-performing loans........................ 197 170 344
Foreclosed real estate.............................. --- --- ---
---- ---- ----
Total non-performing assets....................... $197 $170 $344
==== ==== ====
Non-performing loans to total loans.................... 0.37% 0.36% 0.89%
Non-performing assets to total assets.................. 0.33% 0.32% 0.74%
</TABLE>
Interest on loans was $6,000, $4,000, and $8,000 less than would have been
reported for the years ended June 30, 1999, 1998 and 1997, 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, 1999.
At June 30, 1999, Citizens held loans delinquent from 30 to 59 days
totaling approximately $665,000. 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.
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<PAGE>
Delinquent Loans. The following table sets forth certain information at
June 30, 1999, 1998, and 1997, relating to delinquencies in Citizens' portfolio.
Delinquent loans that are 90 days or more past due are considered non-performing
assets.
<TABLE>
<CAPTION>
At June 30, 1999 At June 30, 1998
---------------------------------------------- ---------------------------------------------
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 $196 3 $98 8 $244 6 $84
Nonresidential
mortgage loans.......... --- --- --- --- --- --- --- ---
Installment loans.......... 7 41 8 26 7 35 8 40
Single pay loans........... --- --- --- --- --- --- 1 2
Home equity loans.......... --- --- 3 38 3 40 1 5
Home improvement loans..... --- --- --- --- --- --- --- ---
---- ---- ---- ---- ---- ---- ---- ----
Total................... 15 $237 14 $162 18 $319 16 $131
===== ==== ==== ==== ==== ==== ==== ====
Delinquent loans to
total loans............. .75% .96%
=== ===
</TABLE>
At June 30, 1997
----------------------------------------------
60-89 Days 90 Days or More
------------------- -----------------------
Principal Principal
Number Balance of Number Balance of
of Loans Loans of Loans Loans
-------- ----- -------- -----
Residential
mortgage loans.......... 1 $10 5 $130
Nonresidential
mortgage loans.......... 1 24 --- ---
Installment loans.......... 2 16 6 37
Single pay loans........... --- --- 1 84
Home equity loans.......... --- --- 5 52
Home improvement loans..... --- --- --- ---
---- ---- ---- ----
Total................... 4 $50 17 $303
===== ==== ==== ====
Delinquent loans to
total loans............. .92%
====
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<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, 1999, the aggregate amount of Citizens' classified assets, and
of its general and specific loss allowances were as follows:
At June 30, 1999
----------------
(In thousands)
Substandard assets........................................... $129
Doubtful assets.............................................. ---
Loss assets.................................................. ---
----
Total classified assets.................................. $129
====
General loss allowances...................................... $326
Specific loss allowances..................................... ---
----
Total allowances......................................... $326
====
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, 1999. 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.
- 10 -
<PAGE>
Summary of Loan Loss Experience. The following table analyzes changes in
the allowance during the past three fiscal years ended June 30, 1999.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1999 1998 1997
----- ------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period................. $269 $212 $138
Charge-offs:
Residential mortgage loans.................. --- --- ---
Nonresidential mortgage loans............... --- --- ---
Multi-family loans.......................... --- --- ---
Construction loans.......................... --- --- ---
Installment loans........................... (12) (12) (11)
Single pay loans............................ (1) (5) ---
Share loans................................. --- --- ---
Home equity loans........................... --- --- ---
Home improvement loans...................... --- --- ---
---- ---- ----
Total charge-offs......................... (13) (17) (11)
---- ---- ----
Recoveries:
Residential mortgage........................ --- --- ---
Single pay.................................. --- --- 2
Installment................................. 5 2 ---
---- ---- ----
Total recoveries.......................... 5 2 2
---- ---- ----
Net (charge-offs) recoveries................... (8) (15) (9)
Provision for losses on loans.................. 65 72 83
---- ---- ----
Balance at end of period....................... $326 $269 $212
==== ==== ====
Allowance for loan losses as a percent of
total loans outstanding........................ 0.61% 0.57% 0.55%
Ratio of net (charge-offs) recoveries
to average loans outstanding................... (.02) (.03) (.03)
</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,
---------------------------------------------------------------------------------
1999 1998 1997
---------------------- -------------------- --------------------
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)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of
period applicable to:
Real estate mortgage loans:
Residential...................... $119 76.73% $105 75.78% $81 75.96%
Nonresidential................... 5 3.00 4 3.73 3 2.09
Multi-family..................... 5 3.15 6 3.98 4 3.94
Construction loans................. 28 2.55 14 1.29 27 3.61
Installment loans.................. 86 4.29 66 4.68 53 4.31
Share loans........................ --- --- --- --- --- .04
Home equity loans.................. 10 3.76 9 4.59 8 5.32
Home improvement loans............. --- .01 --- .01 --- .02
Single pay loans................... 73 6.51 65 5.94 36 4.71
---- ------ ---- ------ ---- ------
Total.............................. $326 100.00% $269 100.00% $212 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
- 11 -
<PAGE>
Investments
Investments. Citizens' investment portfolio consists of equity securities
and Federal Home Loan Bank ("FHLB") stock. At June 30, 1999, approximately
$807,000, or 1.4%, of Citizens' total assets consisted of such investments.
Citizens also had $1.6 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,
----------------------------------------------------------------------------------
1999 1998 1997
--------------------- ---------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for Sale:
Equity securities.................. $419 $388 $309 $315 $161 $161
FHLB stock............................ 419 419 352 352 332 332
---- ---- ---- ---- ---- ----
Total investments................ $838 $807 $661 $667 $493 $493
==== ==== ==== ==== ==== ====
</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 $2.7 million 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, 1999, is as follows:
- 12 -
<PAGE>
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening June 30, % of Average
Type of Account Balance 1999 Deposits Rate
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C>
Fixed rate, passbook accounts.............................. $ 50 $6,473 17.51% 3.03%
Variable rate, money market................................ 2,500 2,885 7.80 3.04
NOW accounts............................................... 50 4,610 12.47 1.47
------- ------
Total withdrawable....................................... 13,968 37.78 2.52
Certificates (original terms):
3 months or less........................................... 1,000 2,481 6.71 4.89
6 months................................................... 1,000 1,806 4.88 4.26
12 months.................................................. 1.000 1,602 4.33 4.32
13 months.................................................. 5,000 422 1.14 5.39
18 months.................................................. 1,000 461 1.25 4.72
23 months.................................................. 5,000 6,344 17.16 5.23
30 months ................................................. 1,000 790 2.14 4.90
36 months.................................................. 1,000 889 2.40 5.02
Other certificates......................................... 1,000 4,693 12.69 6.12
------- ------
Total certificates............................................ 19,488 52.70 5.20
IRA's:
Variable rate, money market................................ 50 108 0.29 3.18
6 months................................................... 1,000 47 0.13 4.10
12 months.................................................. 1.000 97 0.26 4.29
18 months.................................................. 1,000 17 0.05 4.88
23 months.................................................. 1,000 2,331 6.30 5.28
36 months.................................................. 1,000 706 1.91 4.90
Other certificates......................................... 1,000 214 0.58 5.72
------- ------
Total IRA's................................................... 3,520 9.52 5.12
------- ------
Total deposits................................................ $36,976 100.00% 4.18
======= ======
</TABLE>
The following table sets forth by various interest rate categories the
composition of Citizens' time deposits at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
4.00 to 4.99%............................... $10,037 $ 2,483 $ 3,593
5.00 to 5.99%............................... 9,304 13,961 15,702
6.00 to 6.99%............................... 3,449 3,440 2,604
7.00 to 7.99%............................... 105 105 120
8.00 to 8.99%............................... 5 5 5
------- ------- -------
Total.................................... $22,900 $19,994 $22,024
======= ======= =======
</TABLE>
- 13 -
<PAGE>
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,
------------------------------------------------------------------------------
1999 1998 1997
--------------------- ---------------------- ---------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $6,283 3.05% $6,687 3.23% $6,679 3.24%
NOW accounts 4,732 1.78 4,433 2.17 4,081 2.12
Money market accounts 3,070 3.12 3,217 3.30 3,303 3.30
Time deposit accounts 22,488 5.44 21,799 5.58 22,374 5.49
</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, 1999. Matured certificates, which have not been renewed as of June 30, 1999,
have been allocated based upon certain rollover assumptions.
<TABLE>
<CAPTION>
Amounts at June 30, 1999
----------------------------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
------- ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
4.00 to 4.99%................ $6,336 $3,041 $660 $ ---
5.00 to 5.99%................ 4,860 3,435 300 709
6.00 to 6.99%................ 288 840 1,933 388
7.00 to 7.99%................ 5 100 --- ---
8.00 to 8.99%................ --- --- --- 5
------- ------ ------ ------
Total..................... $11,489 $7,416 $2,893 $1,102
======= ====== ====== ======
</TABLE>
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,
1999.
At June 30, 1999
----------------
Maturity Period (In thousands)
Three months or less..................................... $2,995
Greater than three months through six months............. 354
Greater than six months through twelve months............ 100
Over twelve months....................................... 1,524
------
Total............................................... $4,973
======
- 14 -
<PAGE>
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
1999 Deposits 1998 1998 Deposits 1997
--------- --------- --------- -------- --------- ----------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C> <C> <C>
Fixed rate, passbook accounts................. $6,473 17.51% $52 $6,421 18.85% $(484)
Variable rate, money market................... 2,885 7.80 (34) 2,919 8.57 (251)
NOW accounts.................................. 4,610 12.47 40 4,570 13.41 498
------- ------ ------ ------- ------ -------
Total withdrawable.......................... 13,968 37.78 58 13,910 40.83 (237)
Certificates (original terms):
3 months...................................... 2,481 6.71 1,783 698 2.05 (376)
6 months...................................... 1,806 4.88 72 1,734 5.09 (2,400)
12 months..................................... 1,602 4.33 1,026 576 1.69 (390)
13 months..................................... 422 1.14 (2,095) 2,517 7.39 147
18 months..................................... 461 1.25 44 417 1.22 (170)
23 months..................................... 6,344 17.16 1,922 4,422 12.98 268
30 months .................................... 790 2.14 (86) 876 2.57 (270)
36 months..................................... 889 2.40 (35) 924 2.71 (23)
Other certificates............................ 4,693 12.69 (18) 4,711 13.83 1,145
------- ------ ------ ------- ------ -------
Total certificates............................... 19,488 52.70 2,613 16,875 49.53 (2,069)
IRA's
Variable rate, money market................... 108 0.29 (55) 163 0.48 (21)
6 months...................................... 47 0.13 17 30 0.09 (4)
12 months..................................... 97 0.26 (24) 121 0.36 (30)
18 months..................................... 17 0.05 1 16 0.05 (3)
23 months..................................... 2,331 6.30 413 1,918 5.63 340
36 months .................................... 706 1.91 (181) 887 2.60 (270)
Other certificates............................ 214 0.58 67 147 0.43 6
------- ------ ------ ------- ------ -------
Total IRA's................................... 3,520 9.52 238 3,282 9.64 18
------- ------ ------ ------- ------ -------
Total deposits................................... $36,976 100.00% $2,909 $34,067 100.00% $(2,288)
======= ====== ====== ======= ====== =======
</TABLE>
- 15 -
<PAGE>
Total deposits at June 30, 1999 were approximately $37.0 million, compared
to approximately $34.1 million at June 30, 1998. 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, 1999, Citizens had borrowings in the amount of $7.0 million from the
FHLB of Indianapolis which bear fixed and variable interest rates and are due at
various dates through October, 2008. 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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
At or for the Year
Ended June 30,
-------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
FHLB Advances:
<S> <C> <C> <C>
Outstanding at end of period............................... $7,000 $3,500 $4,000
Average balance outstanding for period..................... 5,808 1,731 3,212
Maximum amount outstanding at any
month-end during the period.............................. 7,000 3,500 5,000
Weighted average interest rate
during the period........................................ 5.68% 4.96% 5.41%
Weighted average interest rate
at end of period......................................... 5.63 6.21 6.51
</TABLE>
Selected Ratios
The following table presents certain selected ratios for the years ended
June 30, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Return on assets......................... 1.43% 1.69% .82%
Return on equity......................... 5.53 6.67 6.81
Dividend payout ratio.................... 26.44 --- ---
Average equity to average assets......... 25.80 25.38 11.98
</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
- 16 -
<PAGE>
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 23 lots have been sold
and on which 23 houses have been completed, and 26 lots in the Meadow Brook
Addition, of which 8 lots have been sold and on which 8 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
2000. 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.
CLSC incurred a loss of $300 for the year ended June 30, 1999. CLSC earned
a profit of $164,000 for the year ended June 30, 1998 and $11,000 for the year
ended June 30, 1997. At June 30, 1999, Citizens had an investment in CLSC of
$633,000 and loans outstanding to CLSC of approximately $281,000 with an
interest rate set at the prime rate. 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, 1999, Citizens employed 13 persons on a full-time basis and
3 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.
- 17 -
<PAGE>
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. The OTS recently amended its
assessment regulations to require assessments to be determined generally on the
basis of an institution's size, condition and the complexity of its operations.
Citizens' semi-annual assessment owed to the OTS under this revised regulation
is approximately $10,000.
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 U.S. Congress is currently considering broad financial reform
legislation intended to modernize the financial services industry. Under the
pending legislation, bank holding companies may be authorized, subject to
certain conditions, to acquire manufacturing and other nonfinancial companies,
and nonfinancial companies may be authorized to acquire banks. Other provisions
of the pending legislation could affect the types of activities in which a
unitary savings and loan holding company, such as the Holding Company, may
engage. In addition, previous versions of banking reform legislation considered
by Congress included provisions that would require all federal savings
associations, including Citizens, to convert to either a state bank or a
national bank and would require savings and loan holding companies to become
bank holding companies. Because Congress is currently considering different
versions of the proposed legislation, it cannot be determined which of these
conflicting provisions might be included in any final legislation approved by
Congress or how such legislation, if enacted, would affect the activities of the
Holding Company or 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.
- 18 -
<PAGE>
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, 1999,
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.
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<PAGE>
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, 1999, Citizens' investment in stock of
the FHLB of Indianapolis was $419,000. 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, 1999, dividends paid by the
FHLB of Indianapolis to Citizens totaled approximately $29,000, for an annual
rate of 8.03%.
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.
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<PAGE>
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. The OTS recently adopted a regulation, which became effective
April 1, 1999, that requires savings associations that receive the highest
supervisory rating for safety and soundness to maintain "core capital" of at
least 3% of total assets. All other savings associations must maintain core
capital of at least 4% 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, 1999, 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, 1999, 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,
1999, 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.
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<PAGE>
Dividend Limitations
The OTS recently adopted a regulation, which became effective on April 1,
1999, that revised the restrictions that apply to "capital distributions" by
savings associations. The amended regulation defines a capital distribution as a
distribution of cash or other property to a savings association's owners, made
on account of their ownership. This definition includes a savings association's
payment of cash dividends to shareholders, or any payment by a savings
association to repurchase, redeem, retire, or otherwise acquire any of its
shares or debt instruments that are included in total capital, and any extension
of credit to finance an affiliate's acquisition of those shares or interests.
The amended regulation does not apply to dividends consisting only of a savings
association's shares or rights to purchase such shares.
The amended regulation exempts certain savings associations from the
requirement under the previous regulation that all savings associations file
either a notice or an application with the OTS before making any capital
distribution. As revised, the regulation requires a savings association to file
an application for approval of a proposed capital distribution with the OTS if
the association is not eligible for expedited treatment under OTS's application
processing rules, or the total amount of all capital distributions, including
the proposed capital distribution, for the applicable calendar year would exceed
an amount equal to the savings association's net income for that year to date
plus the savings association's retained net income for the preceding two years
(the "retained net income standard"). At June 30, 1999, Citizens' retained net
income standard was $1,994,000. A savings association must also file an
application for approval of a proposed capital distribution if, following the
proposed distribution, the association would not be at least adequately
capitalized under the OTS prompt corrective action regulations, or if the
proposed distribution would violate a prohibition contained in any applicable
statute, regulation, or agreement between the association and the OTS or the
FDIC.
The amended regulation requires a savings association to file a notice of a
proposed capital distribution in lieu of an application if the association or
the proposed capital distribution do not meet the conditions described above,
and: (1) the savings association will not be at least well capitalized (as
defined under the OTS prompt corrective action regulations) following the
capital distribution; (2) the capital distribution would reduce the amount of,
or retire any part of the savings association's common or preferred stock, or
retire any part of debt instruments such as notes or debentures included in the
association's capital under the OTS capital regulation; or (3) the savings
association is a subsidiary of a savings and loan holding company. Because
Citizens is a subsidiary of a savings and loan holding company, this latter
provision requires that, at a minimum, Citizens must file a notice with the OTS
30 days before making any capital distributions to the Holding Company.
In addition to these regulatory restrictions, Citizens' Plan of Conversion
imposes additional limitations on the amount of capital distributions it may
make to the Holding Company. The Plan of Conversion requires Citizens to
establish and maintain a liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders and prohibits Citizens from
making capital distributions to the Holding Company if its net worth would be
reduced below the amount required for the liquidation account.
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.
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<PAGE>
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, 1999, 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, 1999, Citizens was in compliance with
its QTL requirement, with approximately 92% 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.
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<PAGE>
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 reciprocal 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
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<PAGE>
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.
Item 2. Properties.
The following table provides certain information with respect to
Citizens' office as of June 30, 1999:
<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)
<S> <C> <C> <C> <C> <C>
60 South Main Street Owned 1977 $36,976 $567 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 $64,000 at June
30, 1999.
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<PAGE>
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 $11,500 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 October 13, 1998, Citizens Bancorp held its Annual Meeting of
Shareholders. Two directors were elected to terms expiring in 2001 by the
following votes:
Perry W. Lewis For: 791,942 Withheld: 600
John J. Miller For: 785,947 Withheld: 6,595
The terms of office of the following directors of Citizens Bancorp
continued after the Shareholder Meeting:
Name Term Expiring
---- -------------
Robert F. Ayres 1999
Billy J. Wray 1999
Fred W. Carter 2000
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 67) 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 43) 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, 1999 (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 "Selected Consolidated Financial Data" on pages 3 and
4 of the Shareholder Annual Report.
- 26 -
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The information required by this item is incorporated by reference to the
material under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 4 to 17 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 to the
material under the caption "Asset/Liability Management" on pages 15 to 17 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 18 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.
The Holding Company previously reported the information required by this
item in its interim report on Form 10-Q for the period ended March 31, 1999,
which was filed with the Commission on May 17, 1999.
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 8 of the Holding Company's Proxy
Statement for its 1999 annual shareholder meeting (the "1999 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 9 of the 1999 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 8 of the 1999 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 1999 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 1999 Proxy Statement.
- 27 -
<PAGE>
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 1999
Shareholder
Financial Statements Annual Report
-------------------- -------------
Report of Olive LLP Independent Auditors 18
Consolidated Balance Sheet as of June 30, 1999 and 1998 19
Consolidated Statement of Income for each of the years
in the three year period ended June 30, 1999 20
Consolidated Statement of Shareholders' Equity
for each of the years in the three year period
ended June 30, 1999 21
Consolidated Statement of Cash Flows for each
of the years in the three year period
ended June 30, 1999 22
Notes to Consolidated Financial Statements 23
(b) Reports on Form 8-K.
The Holding Company did not file any reports on Form 8-K during the
quarter ended June 30, 1999.
(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.
- 28 -
<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 28, 1999 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 28th day of September,
1999.
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 28, 1999
)
(3) The Board of Directors: )
)
)
/s/ Robert F. Ayres Director )
-------------------------- )
Robert F. Ayres )
)
)
/s/ Fred W. Carter Director )
-------------------------- )
Fred W. Carter )
)
)
/s/ Perry W. Lewis Director )
-------------------------- )
Perry W. Lewis )
- 29 -
<PAGE>
)
)
/s/ John J. Miller )
-------------------------- )
John J. Miller Director )
)September 28, 1999
)
/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 1999 annual
shareholders meeting
21 Subsidiaries of the Registrant
23 Consent of Independent Auditor
27 Financial Data Schedule
TABLE OF CONTENTS
Message to Shareholders.................................................... 2
Selected Consolidated Financial Data....................................... 3
Management's Discussion and Analysis....................................... 4
Independent Auditor's Report............................................... 18
Consolidated Balance Sheet................................................. 19
Consolidated Statement of Income........................................... 20
Consolidated Statement of Shareholders' Equity............................. 21
Consolidated Statement of Cash Flows....................................... 22
Notes to Consolidated Financial Statements................................. 23
Directors and Officers..................................................... 39
Shareholder Information.................................................... 41
DESCRIPTION OF BUSINESS
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:
On behalf of the Board of Directors, it is my pleasure to present the 1999
Fiscal Year Report of Citizens Bancorp and its subsidiary, Citizens Savings Bank
of Frankfort, Indiana. This report presents the results of our first full fiscal
year as a public company.
Our net income for the fiscal year ended June 30, 1999 of $832,000 was a
decrease of $42,000 from the $874,000 earned during the same period in 1998.
This decrease is due primarily to the one time pre-tax gain of $172,000 during
1998 on the sale of a parcel of real estate.
During fiscal year 1999, we initiated two separate 5.0% stock repurchase
programs under which Citizens Bancorp repurchased an aggregate amount of 92,246
shares of its common stock at a cost of $1.1 million, or an average of $11.97
per share. These share repurchases are intended to further our continuing
long-term goal of enhancing shareholder value. As the result of the share
repurchase programs and our earnings during the period, our earnings per share
for the 1999 fiscal year increased to $0.87 from $0.80 reported for fiscal year
1998. Our total shareholders' equity at year-end was $14.6 million, which is a
$400,000 decrease from $15.0 million at June 30, 1998.
During the period, our assets increased $6.1 million, or 11.3%, to $59.5
million. Our deposits increased $2.9 million, or 8.5%, to $37.0 million, and
total loans increased $6.2 million, or 13.1%, to $53.1 million. Our Return on
Assets was 1.43% and our Return on Equity was 5.53%.
The Year 2000 computer date change problem, now known as "Y2K," has been a major
topic of the media and you will continue to hear about it during the remainder
of 1999. We believe that we have taken the necessary precautions to address any
foreseeable complications that may arise in connection with the date change from
the year 1999 to the year 2000. Citizens Savings Bank's Y2K Committee has been
working on this project for over 18 months. Earlier this year we replaced
virtually all of our computer equipment with new Y2K compliant equipment. The
equipment that we did not replace was upgraded and has been tested for Y2K
compliance. We have made hundreds of test transactions with our data processing
firm, BISYS, Inc., to confirm that their systems will successfully handle the
transition to the year 2000. We also intend to send additional communications to
our customers to give them additional information on Y2K issues at various times
during the remainder of 1999. As a result of these steps that we have taken, we
believe that our systems are Year 2000 compliant.
In 1999, we again received the Bauer Financial Reports "Five Star Superior"
rating for the 44th consecutive quarter, and the Sheshunoff "Highest Rated Bank"
designation. The success of Citizens Bancorp is the direct result of our
dedicated Board of Directors, Officers and Staff working together to serve our
customers' needs in a courteous and professional manner. I sincerely thank them
for their continuing loyalty and dedication.
To our Shareholders, we thank you for your continued confidence and we encourage
you to mention Citizens Savings Bank 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,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------
(Dollars in thousands)
Summary of Selected Consolidated
Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Total assets....................................... $59,470 $53,442 $46,353 $44,235 $39,727
Loans receivable, net (1).......................... 53,104 46,936 38,435 34,391 29,275
Cash on hand and in other institutions (2)......... 2,082 2,533 4,125 3,308 4,310
Investment securities available for sale........... 388 315 161 3,003 2,832
Cash surrender value of life insurance contract.... 1,162 1,119 1,076 1,035 991
FHLB advances...................................... 7,000 3,500 4,000 3,000 1,500
Deposits........................................... 36,976 34,067 36,355 35,600 33,175
Total shareholders' equity......................... 14,640 15,046 5,691 5,320 4,841
Year Ended June 30,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------
(Dollars in thousands)
Summary of Selected Consolidated Operating Data:
Total interest income.............................. $ 4,439 $ 4,052 $3,509 $3,186 $2,742
Total interest expense............................. 1,919 1,738 1,814 1,653 1,370
--------- -------- ------ ------ ------
Net interest income............................. 2,520 2,314 1,695 1,533 1,372
Provision for loan losses.......................... 65 72 83 80 32
--------- -------- ------ ------ ------
Net interest income after
provision for loan losses..................... 2,455 2,242 1,612 1,453 1,340
Other income:
Fees and service charges........................ 136 142 138 152 151
Loss on sale of investments..................... --- --- (60) --- ---
Gain on sale of real estate..................... 16 180 17 33 2
Other........................................... 58 62 64 61 68
--------- -------- ------ ------ ------
Total other income............................ 210 384 159 246 221
Other expense:
Salaries and employee benefits.................. 669 558 479 412 402
Net occupancy expenses.......................... 71 67 65 65 68
Equipment expenses.............................. 94 82 81 81 63
Data processing fees............................ 141 122 108 101 105
Deposit insurance expense....................... 23 23 259 77 75
Legal and professional fees..................... 74 96 32 32 28
Other expenses.................................. 240 224 193 199 183
--------- -------- ------ ------ ------
Total other expense........................... 1,312 1,172 1,217 967 924
--------- -------- ------ ------ ------
Income before income taxes......................... 1,353 1,454 554 732 637
Income taxes.................................. 521 580 183 253 231
--------- -------- ------ ------ ------
Net income.........................................$ 832 $ 874 $ 371 $ 479 $ 406
========= ======== ====== ====== ======
</TABLE>
Table continued on following page
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------
Supplemental Data:
<S> <C> <C> <C> <C> <C>
Interest rate spread during period................. 3.58% 3.77% 3.75% 3.75% 3.69%
Net yield on interest-earning assets (3)........... 4.60 4.78 4.02 3.99 3.92
Return on assets (4)............................... 1.43 1.69 .82 1.15 1.07
Return on equity (5)............................... 5.53 6.67 6.81 9.52 8.89
Net income per share of Common Stock .............. $ .87 --- --- --- ---
Equity to assets (6)............................... 24.62% 28.15% 12.28% 11.91% 12.06%
Average interest-earning assets to average
interest-bearing liabilities.................... 129.16 127.93 106.31 105.61 105.84
Non-performing assets to total assets (6).......... .33 .32 .74 .50 .35
Allowance for loan losses to total loans
outstanding (6)................................. .61 .57 .55 .40 .16
Allowance for loan losses to
non-performing loans (6)........................ 165.36 158.53 61.57 62.51 33.19
Net (charge-offs) recoveries to average
total loans outstanding ........................ (.02) (.03) (.03) .04 (.12)
Other expenses to average assets (7).............. 2.25 2.27 2.67 2.32 2.44
Number of full service offices (6)................. 1 1 1 1 1
</TABLE>
(1) Net of allowance for loan losses and deferred fees.
(2) Includes certificates of deposit in other financial institutions.
(3) Net interest income divided by average interest-earning assets.
(4) Net income divided by average total assets.
(5) Net income divided by average total equity.
(6) At end of period.
(7) Other expenses divided by average total assets.
<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, 1999 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
<PAGE>
Average Balances and Interest Rates and Yields
The following tables present at the fiscal years ended June 30, 1999,
1998 and 1997, 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,
-------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- --------------------------- ---------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance InterestYield/Cost Balance Interest Yield/Cost
-------------------------------------------------------------------------------------
(Dollars in thousands)
Assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits.......$ 3,286 $168 5.12% $ 4,557 $292 6.40% $ 3,446 $ 179 5.21%
FHLB stock...................... 367 29 8.03 336 27 8.07 332 26 7.84
Investment securities
available for sale (1)........ 340 13 3.94 232 10 4.23 1,527 94 6.14
Loans receivable (2)............ 50,746 4,229 8.33 43,318 3,723 8.60 36,843 3,210 8.71
------- ----- ------- ----- -------- -----
Total interest-
earning assets........... 54,739 4,439 8.11 48,443 4,052 8.36 42,148 3,509 8.33
----- ----- -----
Noninterest-earning assets......... 3,583 3,165 3,343
------- ------- --------
Total assets................$58,322 $51,608 $ 45,491
======= ======= ========
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Deposits........................$36,573 1,589 4.35 $36,137 1,653 4.57 $ 36,436 1,641 4.50
FHLB advances................... 5,808 330 5.68 1,731 86 4.96 3,212 173 5.41
Total interest-
bearing liabilities...... 42,381 1,919 4.53 37,868 1,739 4.59 39,648 1,814 4.58
Noninterest-bearing liabilities.... 893 640 395
------- ------- --------
Total liabilities........... 43,274 38,508 40,043
Shareholders' equity............... 15,048 13,100 5,448
------- ------- --------
Total liabilities and
shareholders' equity......$58,322 $51,608 $ 45,491
======= ======= =========
Net interest-earning assets........$12,358 $10,575 $ 2,500
======= ======= =========
Net interest income................ $2,520 $2,313 $1,695
====== ====== ======
Interest rate spread (3)........... 3.58% 3.77% 3.75%
==== ==== ====
Net yield on weighted average
interest-earning assets (4)..... 4.60% 4.78% 4.02%
==== ==== ====
Average interest-earning assets
to average interest-
bearing liabilities............. 129.16% 127.93% 106.31%
====== ====== ======
</TABLE>
(1) Includes securities available for sale at amortized cost prior to SFAS No.
115 adjustments.
(2) Total loans less loans in process. Average balances include non-accrual
loans.
(3) Interest rate spread is calculated by subtracting weighted average interest
rate cost from weighted average interest rate yield for the period
indicated.
(4) The net yield on weighted average interest-earning assets is calculated by
dividing net interest income by weighted average interest-earning assets
for the period indicated.
Interest Rate Spread
Citizens' results of operations have been determined primarily by net
interest income and, to a lesser extent, fee income, miscellaneous income and
general and administrative expenses. Citizens' net interest income is determined
by the interest rate spread between the yields it earns on interest-earning
assets and the rates paid on interest-bearing liabilities, and by the relative
amounts of interest-earning assets and interest-bearing liabilities.
The following table sets forth the weighted average effective interest
rate that Citizens earned on its loan and investment portfolios, the weighted
average effective cost of its deposits and advances, the interest rate spread,
and net yield on weighted average interest-earning assets for the periods and as
of the dates shown. Average balances are based on average monthly balances.
Management believes that the use of month-end average balances instead of daily
average balances has not caused any material difference in the information
presented.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------
1999 1998 1997
---- ---- ----
Weighted average interest rate earned on:
<S> <C> <C> <C>
Interest-bearing deposits......................... 5.12% 6.40% 5.21%
FHLB stock........................................ 8.03 8.07 7.84
Investment securities............................. 3.94 4.23 6.14
Loans receivable.................................. 8.33 8.60 8.71
Total interest-earning assets................... 8.11 8.36 8.33
Weighted average interest rate cost of:
Deposits.......................................... 4.35 4.57 4.50
FHLB advances..................................... 5.68 4.96 5.41
Total interest-bearing liabilities.............. 4.53 4.59 4.58
Interest rate spread (1)............................. 3.58% 3.77% 3.75%
==== ==== ====
Net yield on weighted average
interest-earning assets (2)....................... 4.60% 4.78% 4.02%
==== ==== ====
</TABLE>
(1) Interest rate spread is calculated by subtracting combined weighted
average interest rate cost from combined weighted average interest rate
earned for the period indicated. Interest rate spread figures must be
considered in light of the relationship between the amounts of
interest-earning assets and interest-bearing liabilities.
(2) The net yield on weighted average interest-earning assets is calculated
by dividing net interest income by weighted average interest-earning
assets for the period indicated.
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected Citizens' interest income and expense during the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in rate (changes
in rate multiplied by old volume) and (2) changes in volume (changes in volume
multiplied by old rate). Changes attributable to both rate and volume which
cannot be segregated have been allocated proportionally to the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
---------------------------------------------
Total
Due to Due to Net
Rate Volume Change
---- ------ ------
(In thousands)
Year ended June 30, 1999 compared
to year ended June 30, 1998
Interest-earning assets:
<S> <C> <C> <C>
Interest-bearing deposits.................................. $ (52) $ (72) $(124)
FHLB stock................................................. (1) 3 2
Investment securities...................................... (1) 4 3
Loans receivable........................................... (119) 625 506
------- ---- ----
Total.................................................... (173) 560 387
------- ---- ----
Interest-bearing liabilities:
Deposits................................................... (83) 19 (64)
FHLB advances.............................................. 14 230 244
------- ---- ----
Total.................................................... (69) 249 180
------- ---- ----
Net change in net interest income............................ $(104) $ 311 $ 207
======= ==== ====
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
======= ==== ====
</TABLE>
<PAGE>
Financial Condition at June 30, 1999 Compared to Financial Condition at June 30,
1998
Total consolidated assets of the Company increased $6.1 million, or 11.3%, to
$59.5 million at June 30, 1999, from $53.4 million at June 30, 1998. Cash
increased $138,000 to $444,000 at June 30, 1999, from $306,000 at June 30, 1998,
while interest-bearing deposits, consisting primarily of overnight deposits at
the Federal Home Loan Bank ("FHLB") of Indianapolis and certificates of deposit
at other FDIC insured financial institutions, decreased to $1.6 million at June
30, 1999, from $2.2 million at June 30, 1998. Net loans receivable increased
$6.2 million, or 13.1%, to $53.1 million at June 30, 1999. The increase in loans
was funded by an increase in deposits and borrowings during the year.
Deposits increased $2.9 million primarily as a result of an increase in the
amount of public funds on deposit. Borrowings at the FHLB of Indianapolis
increased $3.5 million to $7.0 million as of June 30, 1999, from $3.5 million at
June 30, 1998.
Shareholders' equity decreased $406,000 during the year ended June 30, 1999.
This was primarily a result of the profit of $832,000 for the year, which
increased shareholders' equity, less the cost of the Company's repurchase of
$1.1 million of its common stock at various times and market prices during the
year. Shareholders' equity also decreased $215,000 as a result of the
declaration of dividends on the Holding Company's common stock during the year.
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 $9.4 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.
Comparison of Operating Results For Fiscal Years Ended June 30, 1999 and 1998
Net Income. Net income decreased $42,000, or 4.8%, to $832,000 in 1999 from
$874,000 in 1998. The decrease primarily resulted from the sale of a tract of
real estate for a profit of $172,000 ($103,000 net of tax) included in 1998.
There was an increase of $207,000 in net interest income in 1999, offset by an
increase in other expenses of $140,000 during the year.
Net Interest Income. Net interest income increased $207,000, or 8.9%, to $2.5
million in 1999 from $2.3 million in 1998. The increase resulted primarily from
an increase in earnings assets during 1999.
Provision for Loan Losses. The provision for loan losses was $65,000 for 1999,
compared to $72,000 for 1998. Citizens had charge-offs of $12,000 and recoveries
of $5,000 in 1999, compared to charge-offs of $17,000 and recoveries of $2,000
in 1998. At June 30, 1999, the allowance for loan losses was $326,000, or 0.61%
of total loans, compared to $269,000, or 0.57% of total loans at June 30, 1998.
Other income. Total non-interest income decreased $174,000, or 45.5%, to
$210,000 in 1999 from $385,000 in 1998. The decrease resulted primarily from a
decrease in the gain on the sale of real estate of $164,000 in 1999. Fees and
service charges decreased by $6,000 in 1999 and miscellaneous income decreased
by $4,000.
Other Expenses. Total non-interest expense increased $140,000, or 12.0%, to $1.3
million in 1999 from $1.2 million in 1998. The increase was primarily due to an
increase in salaries and benefits of $111,000 in 1999 due to compensation
expense related to the ESOP and the RRP. Office occupancy, equipment and data
processing expenses increased $35,000 in 1999, due primarily to increased
expenses related to the Year 2000 computer issue. Legal and professional fees
decreased $22,000 in 1999 due to fees incurred in 1998 related to the special
meeting of shareholders held in March of 1998. Miscellaneous other expenses
increased $16,000 in 1999.
Income Tax Expense. Income tax expense decreased $59,000, or 10.3%, to $521,000
in 1999 from $580,000 in 1998. This primarily resulted from a decrease in net
income before income taxes in 1999 as a result of the gain on the sale of real
estate that increased non-interest income in 1998.
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 a
$79,000 increase in salaries and benefits due to compensation expense related to
the ESOP and the RRP. Office occupancy, equipment and data processing expenses
increased by $17,000 during 1998 and other expenses increased by $31,000. Legal
and professional expenses increased by $64,000 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.
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, 1999, 1998 and 1997, it originated total loans in the
amounts of $29.7 million, $25.8 million and $17.5 million, respectively.
Citizens purchased loans totaling $61,000 in the fiscal year ended June 30,
1999. Loan principal repayments totaled $23.6 million, $19.7 million and $13.3
million during the respective periods.
During the years ended June 30, 1999, 1998 and 1997, Citizens purchased
securities in the amounts of $109,000, $148,000 and $65,000, respectively.
Citizens did not receive any proceeds for the sale of securities during 1999 or
1998. 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 $607,000 and unused lines of
credit of approximately $2.98 million at June 30, 1999. 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, 1999 totaled $11.5 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
$7.0 million at June 30, 1999.
<PAGE>
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, 1999.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------
1999 1998 1997
-------- ------ ----
(In thousands)
<S> <C> <C> <C>
Operating activities............................. $ 866 $ 1,522 $ 266
-------- ------ ----
Investing activities:
Net change in interest-bearing deposits....... 297 693 (695)
Purchases of investment securities........... (109) (148) (65)
Sales of investment securities................ --- --- 2,932
Net change in loans........................... (6,232) (8,655) (4,223)
Loans sold.................................... --- --- 91
Purchases of equipment........................ (55) (30) (16)
Change in land held for development........... 52 31 77
Purchases of FHLB stock....................... (67) (20) ---
-------- ------ ----
Total from investing activities.................. (6,114) (8,129) (1,899)
-------- ------ ----
Financing activities:
Increase/(decrease) in NOW,
MMDA and passbook deposits.................. 3 (258) 305
Increase/(decrease) in certificates
of deposit.................................. 2,905 (2,030) 450
Advances from FHLB............................ 7,000 3,500 14,500
Payments to FHLB.............................. (3,500) (4,000) (13,500)
Dividends paid on common stock................ (210) (53) ---
Repurchase of common stock.................... (1,104) --- ---
Sale of common stock, net of costs............ --- 9,216 ---
Purchase of RRP shares........................ --- (667) ---
-------- ------ ----
Total from financing activities.................. 5,094 5,708 1,755
-------- ------ ----
Net increase/(decrease) in cash
and cash equivalents.......................... $ (154) $ (899) $122
======== ====== ====
</TABLE>
<PAGE>
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 regulation that implements this statutory liquidity requirement provides
that a savings association must hold liquid assets in an amount not less than 4%
of the association's net withdrawable accounts and short-term borrowings. The
OTS no longer requires savings associations to maintain short-term liquid assets
constituting at least 1% of their average daily balance of net withdrawable
deposit accounts and current borrowings. In determining their compliance with
this liquidity requirement,savings associations may calculate their liquidity
requirement based upon their average daily balance of liquid assets during each
quarter rather than during each month. The OTS may impose monetary penalties on
savings associations that fail to meet these liquidity requirements. As of June
30, 1999, Citizens had liquid assets of $3.0 million, and a regulatory liquidity
ratio of 7.5%.
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, 1999, Citizens' tangible capital ratio was 17.8%, its core capital
ratio was 17.8%, and its total risk-based capital to risk-weighted assets ratio
was 29.0%. Therefore, at June 30, 1999, 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, 1999:
<TABLE>
<CAPTION>
At June 30, 1999
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% $ 876 17.8% $10,388 $9,512
Core capital (2)........................ 3.0 1,751 17.8 10,388 8,637
Risk-based capital...................... 8.0 2,957 29.0 10,714 7,757
</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 recently adopted a core capital requirement for savings
associations comparable to that adopted by the OCC for national banks. The
new regulation requires core capital of 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. Citizens is in compliance with these new requirements.
As of June 30, 1999, 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
Accounting for Derivative Instruments and Hedging Activities. Statement of
Financial Accounting Standards ("SFAS") No. 133 requires companies to record
derivatives on the balance sheet at their fair value. SFAS No. 133 also
acknowledges that the method of recording a gain or loss depends on the use of
the derivative. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
o For a derivative designated as hedging the exposure to changes in the
fair value of a recognized asset or liability or a firm commitment
(referred to as a fair value hedge), the gain or loss is recognized in
earnings in the period of change together with the offsetting loss or
gain on the hedged item attributable to the risk being hedged. The
effect of that accounting is to reflect in earnings the extent to
which the hedge is not effective in achieving offsetting changes in
fair value.
o For a derivative designated as hedging the exposure to variable cash
flows of a forecasted transaction (referred to as a cash flow hedge),
the effective portion of the derivative's gain or loss is initially
reported as a component of other comprehensive income (outside
earnings) and subsequently reclassified into earnings when the
forecasted transaction affects earnings. The ineffective portion of
the gain or loss is reported in earnings immediately.
o For a derivative designated as hedging the foreign currency exposure
of a net investment in a foreign operation, the gain or loss is
reported in other comprehensive income (outside earnings) as part of
the cumulative translation adjustment. The accounting for a fair value
hedge described above applies to a derivative designated as a hedge of
the foreign currency exposure of an unrecognized firm commitment or an
available-for-sale security. Similarly, the accounting for a cash flow
hedge described above applies to a derivative designated as a hedge of
the foreign currency exposure of a foreign-currency-denominated
forecasted transaction.
o For a derivative not designated as a hedging instrument, the gain or
loss is recognized in earnings in the period of change.
The new Statement applies to all entities. If hedge accounting is elected
by the entity, the method of assessing the effectiveness of the hedging
derivative and the measurement approach of determining the hedge's
ineffectiveness must be established at the inception of the hedge.
SFAS No. 133 amends SFAS No. 52 and supercedes SFAS Nos. 80, 105, and 119.
SFAS No. 107 is amended to include the disclosure provisions about the
concentrations of credit risk from SFAS No. 105. Several Emerging Issues Task
Force consensuses are also changed or nullified by the provisions of SFAS No.
133.
SFAS No. 133 was to be effective for all fiscal years beginning after June
15, 1999. The implementation date was deferred, and SFAS No. 133 will now be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000.
Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. SFAS No. 134
establishes accounting standards for certain activities of mortgage banking
enterprises and for other enterprises with similar mortgage operations. This
Statement amends SFAS No. 65.
SFAS No. 65, as previously amended by SFAS Nos. 115 and 125, required a
mortgage banking enterprise to classify a mortgage-backed security as a trading
security following the securitization of the mortgage loan held for sale. This
Statement further amends SFAS No. 65 to require that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
must classify the resulting mortgage-backed security or other retained interests
based on the entity's ability and intent to sell or hold those investments.
The determination of the appropriate classification for securities retained
after the securitization of mortgage loans by a mortgage banking enterprise now
conforms to SFAS No. 115. The only requirement the new SFAS No. 134 adds is that
if an entity has a sales commitment in place, the security must be classified
into trading.
This Statement is effective for the first fiscal quarter beginning after
December 15, 1998. On the date this Statement is initially applied, an entity
may reclassify mortgage-backed securities and other beneficial interest retained
after the securitization of mortgage loans held for sale from the trading
category, except for those with sales commitments in place. Those securities and
other interest shall be classified based on the entity's present ability and
intent to hold the investments.
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
The Company's lending and deposit activities, like those of most financial
institutions, depend significantly upon computer systems. The Company is
addressing the potential problems associated with the possibility that the
computers which control its operating systems, facilities and infrastructure may
not be programmed to read four-digit date codes. This could cause some computer
applications to be unable to recognize the change from the year 1999 to the year
2000, which could cause computer systems to generate erroneous data or to fail.
The Company is working with the companies that supply or service its
systems that rely on computers to identify and remedy any Year 2000 related
problems. As of June 30, 1999, the Company has completed the renovation of all
systems that could be significantly affected by Year 2000 related problems and
has begun testing its renovated systems. The Company expects to substantially
complete testing of all systems by September 30, 1999. The bulk of the Company's
computer processing is provided under contract by BISYS, Inc. in Houston, Texas
("BISYS"). BISYS has completed the renovation phase of its Year 2000 efforts and
has tested its upgraded systems and interfaces with the Company. BISYS will
assist the Company with other phases of Year 2000 compliance throughout the
remainder of 1999. Banker's Systems, which provides Citizens' loan document
preparation system, has certified that its systems are Year 2000 compliant as of
June 30, 1999. Testing of the system is expected to be complete by September 30,
1999.
The Company has contacted the approximately twenty other companies that
supply or service its material operations requesting that they certify that they
have plans to make their respective computer systems Year 2000 compliant. As of
June 30, 1999, the Company has received such certification from nearly all of
these companies. Once the Company receives certification from a service
provider, it continuously monitors the progress that it makes in meeting its
targeted schedule for becoming Year 2000 compliant. Should the Company find that
a provider is not making satisfactory progress in its Year 2000 compliance
efforts, the Company intends to identify and contract with an alternative
service provider. The Company does not expect the expense of such changes in
suppliers or servicers to be material to its operations, financial condition or
results. Notwithstanding the efforts the Company has made, no assurances can be
given that the systems of its service providers will be timely renovated to
address the Year 2000 issue.
The Company's Board of Directors reviews on a monthly basis the progress
made in addressing Year 2000 issues. Management estimates that the Company's
expenses related to upgrading its systems and software for Year 2000 compliance
will not exceed $80,000. At June 30, 1999, the Company had spent approximately
$55,000 in connection with Year 2000 compliance. Although management believes it
is taking the necessary steps to address the Year 2000 compliance issue, no
assurances can be given that some problems will not occur or that the Company
will not incur significant additional expenses in future periods. In the event
that the Company is ultimately required to purchase replacement computer
systems, programs and equipment, or to incur substantial expenses to make its
current systems, programs and equipment Year 2000 compliant, its net income and
financial condition could be adversely affected.
In addition to possible expenses related to the Company's own systems and
those of its service providers, the Company could incur losses if Year 2000
problems affect any of its depositers or borrowers. Such problems could include
delayed loan payments due to Year 2000 problems affecting any of the Company's
significant borrowers or impairing the payroll systems of large employers in its
market area. Because the Company's loan portfolio to individual borrowers is
diversified and its market area does not depend significantly on one employer or
industry, management does not expect any such Year 2000 related difficulties
that may affect the Company's depositors and borrowers to significantly affect
net earnings or cash flows.
Because the Company has only two commercial borrowers and neither loan is
of a material amount, the Company has not requested certification from those
borrowers that their computer systems are Year 2000 compliant. The Company will
require borrowers under new commercial loans in excess of $50,000 that it
originates to certify that they are aware of the Year 2000 issue and will give
all necessary attention to insure that their information technology will be Year
2000 compliant.
The Company has developed contingency plans to be implemented in the event
of the failure of all or part of its Year 2000 program or of the Year 2000
programs of any of its service providers. These contingency plans involve, among
other actions, manual workarounds, adjusting staffing strategies and temporarily
discontinuing services or products which are not considered by management to be
critical to the Company's operations. The contingency plans include business
resumption procedures, event planning and a strategy for managing cash reserves.
Additionally, management has assessed employee training needs and determined a
method for testing the viability of business resumption procedures. This testing
is expected to be completed by September 30, 1999. The Company has also
broadened its customer awareness campaign to keep customers informed of the
progress of its Year 2000 efforts.
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 65% of its loan portfolio at June 30, 1999. 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, 1999, NPV would decrease 9.0% in the
event of a 200 basis point increase in market interest rates, compared to 9.8%
for the same increase at June 30, 1998. Citizens' NPV at June 30, 1999 would
increase 0.5% in the event of a 200 basis point decrease in market rates. A year
earlier, a 200 basis point decrease in market rates would have increased NPV
3.1%.
Presented below, as of June 30, 1999 and 1998, 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 up and down 200
basis points.
<TABLE>
<CAPTION>
June 30, 1999
Net Portfolio Value Summary Performance
NPV as % of
Present Value
Change Net Portfolio Value of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
+ 200 bp* $11,973 $(1,183) (8.99)% 20.53% (115) bp
0 bp 13,156 --- --- 21.68% --- bp
- 200 bp 13,215 59 0.45% 21.28% (40) bp
</TABLE>
Interest Rate Risk Measures: 200 Basis Point Rate Shock
Pre-Shock NPV Ratio: NPV as % of PV of Assets................ 21.68%
Exposure Measure: Post-Shock NPV Ratio....................... 20.53%
Sensitivity Measure: Change in NPV Ratio..................... 115 bp
Change in NPV as % of PV of Assets........................... 5.3%
<TABLE>
<CAPTION>
June 30, 1998
Net Portfolio Value Summary Performance
NPV as % of
Present Value
Change Net Portfolio Value of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
+ 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
</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%
* Basis points
<PAGE>
Independent Auditor's Report
To the Shareholders and
Board of Directors
Citizens Bancorp
We have audited the consolidated balance sheet of Citizens Bancorp and
subsidiaries as of June 30, 1999, and the related consolidated statements of
income, shareholders' equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The financial statements as of June 30,
1998, and for the years ended June 30, 1998 and 1997, were audited by other
auditors whose report dated August 19, 1998, expressed an unqualified opinion on
those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of
Citizens Bancorp and subsidiaries as of June 30, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Olive LLP
/s/ Olive LLP
Indianapolis, Indiana
July 23, 1999
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30 1999 1998
- -----------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and due from banks $ 443,757 $ 305,908
Interest-bearing demand deposits 152,289 443,673
------------ ------------
Cash and cash equivalents 596,046 749,581
Interest-bearing time deposits 1,485,972 1,782,985
Investment securities--available for sale 388,362 315,041
Loans, net of allowance for loan losses of $326,249 and $268,837 53,103,518 46,936,403
Land held for development 912,542 964,582
Cash surrender value of life insurance contracts 1,161,519 1,118,883
Premises and equipment 567,486 564,638
Federal Home Loan Bank stock 419,100 351,600
Other assets 835,264 657,956
------------ ------------
Total assets $ 59,469,809 $ 53,441,669
============ ============
Liabilities
Interest bearing deposits $ 36,976,322 $ 34,067,481
Federal Home Loan Bank advances 7,000,000 3,500,000
Other liabilities 604,632 706,162
------------ ------------
Total liabilities 44,580,954 38,273,643
------------ ------------
Equity Received From Contributions to the ESOP 248,891 122,440
------------ ------------
Shareholders' Equity
Preferred stock, no par value
Authorized and unissued--2,000,000 shares
Common stock, no par value
Authorized--5,000,000 shares
Issued and outstanding--881,114 and 973,360 shares 8,293,509 9,215,969
Unearned Recognition and Retention Plan ("RRP") (537,762) (641,117)
Retained earnings 6,902,537 6,467,337
Accumulated other comprehensive income (18,320) 3,397
------------ ------------
Total shareholders' equity 14,639,964 15,045,586
------------ ------------
Total liabilities and shareholders' equity $ 59,469,809 $ 53,441,669
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Interest Income
<S> <C> <C> <C>
Loans receivable $ 4,228,607 $ 3,723,529 $ 3,210,018
Investment securities 42,868 36,918 119,730
Deposits with financial institutions 168,158 291,674 179,640
----------- ----------- -----------
Total interest income 4,439,633 4,052,121 3,509,388
----------- ----------- -----------
Interest Expense
Deposits 1,589,279 1,652,668 1,640,868
Borrowings 329,982 85,921 173,668
----------- ----------- -----------
Total interest expense 1,919,261 1,738,589 1,814,536
----------- ----------- -----------
Net Interest Income 2,520,372 2,313,532 1,694,852
Provision for loan losses 65,000 72,000 83,000
----------- ----------- -----------
Net Interest Income After Provision for Loan Losses 2,455,372 2,241,532 1,611,852
----------- ----------- -----------
Other Income
Service charges on deposit accounts and other 135,542 141,983 138,342
Net realized losses on sales of available-for-sale securities (60,243)
Gain on sales of land held for development 15,747 180,174 17,307
Other income 58,498 62,443 63,426
----------- ----------- -----------
Total other income 209,787 384,600 158,832
----------- ----------- -----------
Other Expenses
Salaries and employee benefits 668,818 557,509 478,566
Net occupancy expenses 70,780 66,509 65,112
Equipment expenses 93,951 82,305 81,512
Data processing fees 140,865 122,584 107,764
Deposit insurance expense 23,685 23,115 258,685
Legal and professional fees 73,751 95,839 32,197
Other expenses 240,347 224,214 192,681
----------- ----------- -----------
Total other expenses 1,312,197 1,172,075 1,216,517
----------- ----------- -----------
Income Before Income Tax 1,352,962 1,454,057 554,167
Income tax expense 520,704 580,179 183,225
----------- ----------- -----------
Net Income $ 832,258 $ 873,878 $ 370,942
=========== =========== ===========
Basic Earnings per Share $ .87
===========
Diluted Earnings per Share $ .87
===========
Weighted Average Shares Outstanding 957,389
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Unearned Accumulated
Common Stock Recognition Other
Shares Comprehensive Retained and Comprehensive
Outstanding Amount Income Earnings Retention Plan Income Total
----------- ------ ------ -------- -------------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1996 $5,319,852 $(50,853)$ 5,268,999
Comprehensive income
Net income $370,942 370,942 370,942
Other comprehensive income, net of tax
Unrealized gains on securities 50,853 50,853 50,853
---------
Comprehensive income $421,795
=========
------- -------- -------- ----------
Balances, June 30, 1997 5,690,794 5,690,794
Comprehensive income
Net income $873,878 873,878 873,878
Other comprehensive income, net of tax
Unrealized gains on securities 3,397 3,397 3,397
---------
Comprehensive income $877,275
=========
Sale of common stock 973,360 $9,215,969 9,215,969
Cash dividends ($.10 per share) (97,335) (97,335)
Purchase of shares for RRP $(666,957) (666,957)
RRP shares earned 25,840 25,840
------- -------- -------- ----------
Balances, June 30, 1998 973,360 9,215,969 6,467,337 (641,117) 3,397 15,045,586
Comprehensive income
Net income $832,258 832,258 832,258
Other comprehensive income, net of tax
Unrealized losses on securities (21,717) (21,717) (21,717)
---------
Comprehensive income $810,541
=========
Cash dividends ($.23 per share) (215,140) (215,140)
RRP shares earned 103,355 103,355
Purchase of stock (92,246) (922,460) (181,918) (1,104,378)
------- -------- -------- ----------
Balances, June 30, 1999 881,114 $8,293,509 $6,902,537 $(537,762) $(18,320) $14,639,964
======= ========== ========== ========= ======== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income $ 832,258 $ 873,878 $ 370,942
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 65,000 72,000 83,000
Depreciation and amortization 51,762 30,519 45,587
Deferred income tax (63,588) (101,594) (76,326)
Investment securities losses 60,243
ESOP and RRP shares earned 229,806 148,280
Net change in
Other assets and cash surrender value (142,110) 63,236 (158,418)
Other liabilities (106,575) 435,290 (58,854)
------------ ------------ ------------
Net cash provided by operating activities 866,553 1,521,609 266,174
------------ ------------ ------------
Investing Activities
Net change in interest-bearing deposits 297,013 693,015 (695,000)
Purchases of securities available for sale (109,284) (148,420) (65,481)
Proceeds from sales of securities available for sale 2,931,693
Net change in loans (6,232,115) (8,655,543) (4,222,435)
Proceeds from sale of loans 91,455
Purchases of premises and equipment (54,610) (29,833) (16,498)
Net change in land held for development 52,040 31,326 76,892
Purchase of FHLB stock (67,500) (20,000)
------------ ------------ ------------
Net cash used by investing activities (6,114,456) (8,129,455) (1,899,374)
------------ ------------ ------------
Financing Activities
Net change in
Interest-bearing demand and savings deposits 3,308 (257,971) 304,545
Certificates of deposit 2,905,533 (2,029,761) 450,528
Proceeds from borrowings 7,000,000 3,500,000 14,500,000
Repayment of borrowings (3,500,000) (4,000,000) (13,500,000)
Cash dividends (210,095) (52,900)
Purchase of stock (1,104,378)
Sale of stock 9,215,969
Purchase of RRP shares (666,957)
------------ ------------ ------------
Net cash provided by financing activities 5,094,368 5,708,380 1,755,073
------------ ------------ ------------
Net Change in Cash and Cash Equivalents (153,535) (899,466) 121,873
Cash and Cash Equivalents, Beginning of Year 749,581 1,649,047 1,527,174
------------ ------------ ------------
Cash and Cash Equivalents, End of Year $ 596,046 $ 749,581 $ 1,649,047
============ ============ ============
Additional Cash Flows Information
Interest paid $ 1,891,000 $ 1,781,000 $ 1,784,000
Income tax paid 910,097 262,538 431,009
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Citizens Bancorp ("Company"), its
wholly owned subsidiary, Citizens Savings Bank of Frankfort ("Bank") and the
Bank's wholly owned subsidiary, Citizens Loan and Service Corporation ("Service
Corp"), conform to generally accepted accounting principles and reporting
practices followed by the thrift industry. The more significant of the policies
are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
The Company is a thrift holding company whose principal activity is the
ownership and management of the Bank. The Bank operates under a federal thrift
charter and provides full banking services. As a federally chartered thrift, the
Bank is subject to regulation by the Office of Thrift Supervision, and the
Federal Deposit Insurance Corporation.
The Bank generates commercial mortgage, residential mortgage and consumer loans
and receives deposits from customers located primarily in Clinton County,
Indiana and surrounding counties. The Bank's loans are generally secured by
specific items of collateral including real property and consumer assets.
The Service Corp develops land for residential housing.
The Company was formed in June 1997 and purchased all of the stock of the 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, the Company had no assets or liabilities. All
financial information prior to fiscal year 1998 relate to the Bank and Service
Corp only.
The Company issued 1,058,000 shares of common stock following the subscription
stock offering. Net proceeds to the Company 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
the Company to the Employee Stock Ownership Plan ("ESOP").
Consolidation--The consolidated financial statements include the accounts of the
Company and subsidiaries after elimination of all material intercompany
transactions.
Investment Securities--Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity or included in the trading account
and marketable equity securities are classified as available for sale.
Securities available for sale are carried at fair value with unrealized gains
and losses reported separately in accumulated other comprehensive income, net of
tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans are carried at the principal amount outstanding. A loan is impaired when,
based on current information or events, it is probable that the Bank will be
unable to collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement. Loans where payments have insignificant
delays not exceeding 90 days outstanding are not considered impaired. Certain
nonaccrual and substantially delinquent loans may be considered to be impaired.
The Bank considers its investment in one-to-four family residential loans and
consumer loans to be homogeneous and therefore, excluded from separate
identification for evaluation of impairment. Interest income is accrued on the
principal balances of loans. The accrual of interest on impaired and nonaccrual
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. Mortgage loans are placed on nonaccrual
status when they become 90 days delinquent. When interest accrual is
discontinued, all unpaid accrued interest is reversed when considered
uncollectible. Interest income is subsequently recognized only to the extent
cash payments are received. Certain loan fees and direct costs are being
deferred and amortized as an adjustment of yield on the loans over the
contractual lives of the loans. When a loan is paid off or sold, any unamortized
loan origination fee balance is credited to income.
Allowance for loan losses is maintained to absorb loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the portfolio, the current condition and amount of loans
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of June
30, 1999 the allowance for loan losses is adequate based on information
currently available. A worsening or protracted economic decline in the areas
within which the Bank operates would increase the likelihood of additional
losses due to credit and market risks and could create the need for additional
loss reserves.
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is principally computed using both the straight-line method and the
declining balance method based on the estimated useful lives of the assets.
Maintenance and repairs are expensed as incurred while major additions and
improvements are capitalized. Gains and losses on dispositions are included in
current operations.
Federal Home Loan Bank ("FHLB") stock is a required investment for institutions
that are members of the Federal Home Loan Bank system. The required investment
in the common stock is based on a predetermined formula.
Stock options are granted for a fixed number of shares with an exercise price
equal to the fair value of the shares at the date of grant. The Company accounts
for and will continue to account for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly,
recognizes no compensation expense for the stock option grants.
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes.
Earnings per share have been computed based upon the weighted average common
shares outstanding during the year ended June 30, 1999. Unearned ESOP shares
have been excluded from the computation of average common shares outstanding.
Historical earnings per share information is not presented on the 1998 and 1997
consolidated statements of income because it is not meaningful due to the stock
offering occurring in September 1997.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications of certain amounts in the 1998 and 1997 consolidated financial
statements have been made to conform to the 1999 presentation.
Note 2 -- Investment Securities Available for Sale
Investment securities available for sale at June 30, 1999 and 1998 consist of
marketable equity securities. At June 30, 1999 and 1998, the securities have a
fair value of $388,362 and $315,041, and an amortized cost of $418,699 and
$309,416, respectively. The gross unrealized gain (loss) was $(30,337) and
$5,625 at June 30, 1999 and 1998, respectively.
Note 3 -- Loans and Allowance
June 30 1999 1998
- --------------------------------------------------------------------------------
Commercial real estate $ 3,341,351 $ 3,656,862
Real estate loans 41,663,334 35,928,334
Construction loans 1,383,500 611,000
Individuals' loans for household
and other personal expenditures 7,764,172 7,064,802
Other loans 149,313 149,973
------------ ------------
54,301,670 47,410,971
Allowance for loan losses (326,249) (268,837)
Deferred loan fees and costs, net (125,608) (109,376)
Undisbursed portion of loans (746,295) (96,355)
------------ ------------
Total loans $ 53,103,518 $ 46,936,403
============ ============
Year Ended June 30 1999 1998 1997
- --------------------------------------------------------------------------------
Allowance for loan losses
Balances, beginning of year $ 268,837 $ 211,635 $ 138,606
Provision for losses 65,000 72,000 83,000
Recoveries on loans 4,910 1,645 1,626
Loans charged off (12,498) (16,443) (11,597)
--------- --------- ---------
Balances, end of year $ 326,249 $ 268,837 $ 211,635
========= ========= =========
Note 4 -- Land Held for Development
The Company, through the 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, 1999, 1998 and 1997,
approximately $30,600, $34,000 and $68,000, 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, 1999, 1998 and 1997, approximately $98,000, $69,000,
and $166,000, respectively, was received from the sale of lots in the
development resulting in gains from sale of these lots of approximately $16,000,
$9,000, and $17,000, for each year, respectively. The Service Corp owns an
additional 45 acres of land for future development.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended June 30, 1998, land not included in the above development
was sold for proceeds equaling $177,000 resulting in a gain from the sale of
$172,000.
Note 5 -- Premises and Equipment
June 30 1999 1998
- --------------------------------------------------------------------------------
Land $ 137,307 $ 137,307
Buildings 647,154 647,154
Equipment 329,406 274,796
Total cost 1,113,867 1,059,257
Accumulated depreciation (546,381) (494,619)
----------- -----------
Net $ 567,486 $ 564,638
=========== ===========
Note 6 -- Deposits
June 30 1999 1998
- --------------------------------------------------------------------------------
Demand deposits $ 4,714,398 $ 4,569,764
Savings deposits 9,361,971 9,503,297
Certificates of $100,000 or more 4,973,049 2,314,074
Other certificates 17,926,904 17,680,346
----------- -----------
Total deposits $36,976,322 $34,067,481
=========== ===========
Certificates maturing in years ending June 30
2000 $11,489,597
2001 7,415,908
2002 2,892,761
2003 262,288
2004 352,339
Thereafter 487,060
-----------
$22,899,953
===========
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 -- Borrowings
June 30 1999 1998
- --------------------------------------------------------------------------------
Federal Home Loan Bank advances, at fixed
and variable rates ranging
from 4.90% to 6.06%, due at various
dates through October 7, 2008 $7,000,000 $3,500,000
========== ==========
The Federal Home Loan Bank advances are secured by first-mortgage loans totaling
$42,274,000. The Company is required to maintain eligible loans in its portfolio
of at least 170% of outstanding advances as collateral for advances from the
FHLB. Advances are subject to restrictions or penalties in the event of
prepayment.
Maturities in years ending June 30
- --------------------------------------------------------------------------------
2000 $1,000,000
2008 6,000,000
----------
$7,000,000
==========
<TABLE>
<CAPTION>
Note 8 -- Income Tax
Year Ended June 30 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense
Currently payable
Federal $ 460,153 $ 550,558 $ 204,275
State 124,139 131,215 55,276
Deferred
Federal (52,331) (80,259) (62,054)
State (11,257) (21,335) (14,272)
--------- --------- ---------
Total income tax expense $ 520,704 $ 580,179 $ 183,225
========= ========= =========
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $ 460,007 $ 494,379 $ 188,417
Effect of state income taxes 74,502 72,521 27,063
Other (13,805) 13,279 (32,255)
--------- --------- ---------
Actual tax expense $ 520,704 $ 580,179 $ 183,225
========= ========= =========
</TABLE>
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
June 30 1999 1998
- --------------------------------------------------------------------------------
Assets
Allowance for loan losses $107,796 $114,256
Loan fees 151,136 137,596
Pensions and employee benefits 193,807 151,592
Other 16,103 24,336
Capital loss carryover 25,604 25,604
-------- --------
Total assets 494,446 453,384
-------- --------
Liabilities
Loan costs 97,753 91,112
FHLB stock dividend 27,132 27,132
Other 28,184 29,189
-------- --------
Total liabilities 153,069 147,433
-------- --------
$341,377 $305,951
======== ========
Retained earnings include approximately $1,349,000 for which no deferred income
tax liability has been recognized. This amount represents an allocation of
income to bad debt deductions as of June 30, 1988 for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt losses
including redemption of bank stock or excess dividends, or loss of "bank"
status, would create income for tax purposes only, which income would be subject
to the then-current corporate income tax rate. The unrecorded deferred income
tax liability on the above amounts was approximately $459,000.
Note 9 -- Other Comprehensive Income
<TABLE>
<CAPTION>
1999
---------------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended June 30 Amount Benefit Amount
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized losses on securities
Unrealized holding losses arising during the year $(35,961) $14,244 $(21,717)
======== ======= ========
1998
---------------------------------------------------------
Before-Tax Tax Net-of-Tax
Year Ended June 30 Amount Expense Amount
- ----------------------------------------------------------------------------------------------------------------
Unrealized gains on securities
Unrealized holding gains arising during the year $5,625 $(2,228) $3,397
====== ======= ======
</TABLE>
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Year Ended June 30 Amount Benefit Amount
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains on securities
Unrealized holding gains arising during the year $23,964 $ (9,492) $14,472
Less: reclassification adjustment for losses
realized in net income (60,243) 23,862 (36,381)
------- -------- -------
Net unrealized gains $84,207 $(33,354) $50,853
======= ======== =======
</TABLE>
Note 10 -- Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit, which are not
included in the accompanying financial statements. The Bank's exposure to credit
loss in the event of nonperformance by the other party to the financial
instruments for commitments to extend credit is represented by the contractual
or notional amount of those instruments. The Bank uses the same credit policies
in making such commitments as it does for instruments that are included in the
consolidated balance sheet.
Financial instruments whose contract amount represents credit risk consist
solely of commitments to extend credit, and these commitments totalled
$3,565,000 and $2,959,000 as of June 30, 1999 and 1998, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
The Company and subsidiaries are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits will not
have a material adverse effect on the consolidated financial position of the
Company.
Note 11 -- Year 2000
Like all entities, the Company and subsidiaries are exposed to risks associated
with the Year 2000 Issue, which affects computer software and hardware;
transactions with customers, vendors, and other entities; and equipment
dependent upon microchips. The Company has begun and is continuing its efforts
to identify and remediate potential Year 2000 problems. It is not possible for
any entity to guarantee the results of its own remediation efforts or to
accurately predict the impact of the Year 2000 Issue on third parties with which
the Company and subsidiaries do business. If remediation efforts of the Company
or third parties with which the Company and subsidiaries do business are not
successful, the Year 2000 Issue could have negative effects on the Company's
financial condition and results of operations in the near term.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 -- Dividend and Capital Restrictions
Without prior approval, current regulations allow the Bank to pay dividends to
the Company not exceeding net profits (as defined) for the current calendar year
to date plus those for the previous two years which amounts to $1,994,000. The
Bank normally restricts dividends to a lessor amount because of the need to
maintain an adequate capital structure.
At the time of conversion, a liquidation account was established in an amount
equal to the Bank's net worth as reflected in the latest statement of condition
used in its final conversion offering circular. The liquidation account is
maintained for the benefit of eligible deposit account holders who maintain
their deposit account in the Bank after conversion. In the event of a complete
liquidation, and only in such event, each eligible deposit account holder will
be entitled to receive a liquidation distribution from the liquidation account
in the amount of the then current adjusted subaccount balance for deposit
accounts then held, before any liquidation distribution may be made to
shareholders. Except for the repurchase of stock and payment of dividends, the
existence of the liquidation account will not restrict the use or application of
net worth. The initial balance of the liquidation account was approximately
$5,691,000. At June 30, 1999, total shareholder's equity of the Bank was
$11,300,845.
Note 13 -- Stock Transactions
During the year ended June 30, 1999, the Company's Board of Directors approved
the repurchase of 52,900 of the Company's shares of common stock outstanding.
The Company repurchased 52,900 shares under this plan during the year ended June
30, 1999. Additionally, the Company's Board of Directors approved the repurchase
of an additional 50,255 shares of the Company's outstanding shares of common
stock. These purchases will be made subject to market conditions in the open
market or block transactions. At June 30, 1999, the Company has repurchased
39,346 shares under this plan.
Note 14 -- Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and is assigned to a capital category. The assigned
capital category is largely determined by ratios that are calculated according
to the regulations. The ratios are intended to measure capital relative to
assets and credit risk associated with those assets and off-balance sheet
exposures of the entity. The capital category assigned to an entity can also be
affected by qualitative judgments made by regulatory agencies about the risk
inherent in the entity's activities that are not part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At June 30, 1999 and 1998, the
Bank is categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since June 30, 1999 that
management believes have changed the Bank's classification.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
Required
for Adequate To Be Well
Actual Capital 1 Capitalized 1
------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999
Total risk-based capital 1
(to risk-weighted assets) $10,714,000 29.0% $2,957,000 8.0% $3,696,000 10.0%
Tier 1 risk-based capital 1
(to risk-weighted assets) 10,388,000 28.1% 2,957,000 8.0% 3,696,000 10.0%
Core capital 1
(to adjusted tangible assets) 10,388,000 17.8% 1,751,000 3.0% 3,502,000 6.0%
Core capital 1
(to adjusted total assets) 10,388,000 17.8% 1,751,000 3.0% 2,919,000 5.0%
As of June 30, 1998
Total risk-based capital 1
(to risk-weighted assets) $9,554,000 29.2% $2,614,000 8.0% $3,267,000 10.0%
Tier 1 risk-based capital 1
(to risk-weighted assets) 9,285,000 28.4% 2,614,000 8.0% 3,267,000 10.0%
Core capital 1
(to adjusted tangible assets) 9,285,000 17.7% 1,574,000 3.0% 3,149,000 6.0%
Core capital 1
(to adjusted total assets) 9,285,000 17.7% 1,574,000 3.0% 2,624,000 5.0%
</TABLE>
1 As defined by regulatory agencies
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 -- Employee Benefit Plans
The Bank provides pension benefits for substantially all of the Bank's employees
and is a participant in a pension fund known as the Pentegra Group. The plan is
a multi-employer plan; separate actuarial valuations are not made with respect
to each participating employer. Pension expense was $1,708; $1,649; and $20,556
for 1999, 1998 and 1997.
The Bank has purchased life insurance on certain officers, which insurance had a
cash value of $1,161,519 and $1,118,883 at June 30, 1999 and 1998. The Bank has
also approved arrangements that provide additional retirement benefits to
certain officers covered by the keyman policies. The benefits to be paid will be
funded primarily by the keyman policies and are being accrued over the period of
active service to eligibility dates. The accrual of benefits totaled $7,079,
$16,700, and $74,300 for 1999, 1998 and 1997.
The Bank has a Recognition and Retention Plan ("RRP"). Effective on March 24,
1998, awards of grants for 32,798 shares were issued to various directors and
officers of the Bank. These awards generally are to vest and be earned by the
recipient at a rate of 20 percent per year, commencing March 24, 1999. The
expense under the RRP was $103,355 and $26,000 for the years ended June 30, 1999
and 1998.
An ESOP covers substantially all employees of the Bank. The ESOP acquired 84,640
shares at $10.00 per share in the conversion with funds provided by a loan from
the Company. The ESOP provides for the Company to issue a put option ("option")
to any participant who receives a distribution of Company stock. The option
permits the participant to sell the stock to the Company at any time during two
option periods, as defined in the plan, at the fair market value of the stock.
Accordingly, the $846,400 of stock acquired by the ESOP was reflected as a
reduction to the ESOP equity accounts. Unearned ESOP shares totaled 66,192 and
76,506 at June 30, 1999 and 1998 and had a fair value of $835,674 at June 30,
1999 and $1,099,774 at June 30, 1998. Shares are released to participants
proportionately as the loan is repaid. Dividends on allocated shares are
recorded as dividends and charged to retained earnings. Cash dividends on
unallocated shares will be applied to principal and interest due on the loan.
Compensation expense is recorded equal to the fair market value of the stock
when contributions, which are determined annually by the Board of Directors of
the Bank, are made to the ESOP. The expense under the ESOP was $126,451 and
$122,440 for the years ended June 30, 1999 and 1998. At June 30, 1999 and 1998,
the ESOP had 13,414 and 2,855 allocated shares and 71,226 and 81,785 suspense
shares.
Below are the transactions affecting the ESOP equity accounts:
<TABLE>
<CAPTION>
Additional Unearned
Common Paid-in ESOP
Stock Capital Shares Total
----- ------- ------ -----
<S> <C> <C> <C> <C>
Common stock acquired by ESOP $846,400 $(846,400)
ESOP shares earned $41,100 81,340 $122,440
-------- ------- --------- --------
Balance, June 30, 1998 846,400 41,100 (765,060) 122,440
ESOP shares earned 23,311 103,140 126,451
-------- ------- --------- --------
Balance, June 30, 1999 $846,400 $64,411 $(661,920) $248,891
======== ======= ========= ========
</TABLE>
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 -- Related Party Transactions
The Bank has entered into transactions with certain directors, executive
officers, significant shareholders and their affiliates or associates (related
parties). Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and did not, in the opinion of management, involve more
than normal credit risk or present other unfavorable features. The aggregate
amount of loans, as defined, to such related parties were as follows:
- --------------------------------------------------------------------------------
Balances, July 1, 1998 $ 2,766,000
New loans, including renewals 710,000
Payments, etc., including renewals (382,000)
-----------
Balances, June 30, 1999 $ 3,094,000
===========
Deposits from related parties held by the Bank at June 30, 1999 totaled
$1,206,000.
Note 17 -- Stock Option Plan
Under the Company's stock option plan approved in 1998, which is accounted for
in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting
for Stock Issued to Employees, and related interpretations, the Company grants
key employees and directors stock option awards which vest and become fully
exercisable at the end of five years of continued employment. During the year
ended June 30, 1998, the Company authorized the grant of options for up to
105,800 shares of the Company's common stock. The exercise price of each option,
which has a ten-year life, must be equal to the market price of the Company's
stock on the date of grant; therefore, no compensation expense is recognized.
Although the Company has elected to follow APB No. 25, Statement of Financial
Accounting Standards (SFAS) No. 123 requires pro forma disclosures of net income
and earnings per share as if the Company had accounted for its employee stock
options under that Statement. The fair value of each option grant in 1998 was
estimated on the grant date using an option-pricing model with the following
assumptions:
1998
- --------------------------------------------------------------------------------
Risk-free interest rates 5.38%
Dividend yields 1.31%
Volatility factors of expected market price of common stock 19.9%
Weighted-average expected life of the options 8 years
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this statement are as follows:
1999 1998
- --------------------------------------------------------------------------------
Net income As reported $832,258 $873,878
Pro forma 764,779 860,909
Basic earnings per share As reported .87
Pro forma .80
Diluted earnings per share As reported .87
Pro forma .80
The following is a summary of the status of the Company's stock option plan and
changes in that plan as of and for the years ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Options Shares Exercise Price Shares Exercise Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 81,995 $15.25
Granted 81,995 $15.25
------- -------
Outstanding, end of year 81,995 $15.25 81,995 $15.25
======= =======
Options exercisable at year end 16,399
Weighted-average fair value of
options granted during the year $4.86
</TABLE>
As of June 30, 1999, the options outstanding have an exercise price of $15.25
and a weighted-average remaining contractual life of nine years.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 -- Earnings Per Share
Earnings per share (EPS) were computed as follows:
<TABLE>
<CAPTION>
Year Ended June 30, 1999
----------------------------------------------------------
Weighted-
Net Average Per-Share
Income Shares Amount
- -----------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
<S> <C> <C> <C>
Income available to common shareholders $832,258 957,389 $.87
Effect of Dilutive Securities
Stock options ---
------------------------------
Diluted Earnings Per Share
Income available to common shareholders
and assumed conversions $832,258 957,389 $.87
======== ======= =====
</TABLE>
Options to purchase 81,995 shares of common stock at $15.25 per share were
outstanding at June 30, 1999, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares.
Note 19 -- Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Interest-bearing Time Deposits--The fair value of interest-bearing time deposits
approximates carrying value.
Securities--Fair values are based on quoted market prices.
Loans--For both short-term loans and variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values. The fair value for other loans is estimated using discounted cash flow
analyses using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Cash Surrender Value Of Life Insurance Contracts--The fair value of cash
surrender value of life insurance contracts approximates carrying value.
FHLB Stock--Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deposits--The fair values of noninterest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the balance sheet
date. 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 such time deposits.
Federal Home Loan Bank Advances--The fair value of these borrowings are
estimated using a discounted cash flow calculation, based on current rates for
similar debt.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------
Carrying Fair Carrying Fair
June 30 Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C>
Cash and due from banks $443,757 $443,757 $305,908 $305,908
Interest-bearing demand deposits 152,289 152,289 443,673 443,673
Interest-bearing time deposits 1,485,972 1,482,703 1,782,985 1,782,985
Investment securities available for sale 388,362 388,362 315,041 315,041
Loans 53,103,518 53,256,987 46,936,403 49,410,000
Cash surrender value of life insurance 1,161,519 1,161,519 1,118,883 1,118,883
Stock in FHLB 419,100 419,100 351,600 351,600
Liabilities
Deposits 36,976,322 36,891,592 34,067,481 34,219,000
FHLB advances 7,000,000 6,633,200 3,500,000 3,500,000
</TABLE>
Note 20 -- Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------------------
First Second Third Fourth
June 30 Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $1,081,463 $1,142,129 $1,100,223 $1,115,818
Interest expense 456,555 513,181 472,086 477,439
Net interest income 624,908 628,948 628,137 638,379
Provision for loan losses 15,000 20,000 15,000 15,000
Net income 186,190 194,103 227,273 224,692
Basic earnings per share 0.19 0.20 0.24 0.24
Diluted earnings per share 0.19 0.20 0.24 0.24
1998
--------------------------------------------------------------------------
First Second Third Fourth
June 30 Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------
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
</TABLE>
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21 -- Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
Condensed Balance Sheet
<TABLE>
<CAPTION>
June 30 1999 1998
- ------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and due from banks $ 2,648,829 $ 4,014,235
Investment securities available for sale 209,706 145,000
ESOP loan receivable 740,600 825,240
Investment in common stock of subsidiaries 11,300,845 10,237,433
Other assets 57,321 43,248
------------ ------------
Total assets $ 14,957,301 $ 15,265,156
============ ============
Liabilities $ 68,446 $ 97,130
Equity Received from ESOP 248,891 122,440
Shareholders' Equity 14,639,964 15,045,586
------------ ------------
Total liabilities and shareholders' equity $ 14,957,301 $ 15,265,156
============ ============
Condensed Statement of Income
Year Ended June 30 1999 1998
- ------------------------------------------------------------------------------------------------
Income--interest and dividends $ 107,342 $ 109,164
Expenses 108,692 115,814
------------ ------------
Loss before income tax and equity in undistributed
income of subsidiaries (1,350) (6,650)
Income tax expense -- --
------------ ------------
Loss before equity in undistributed income of subsidiaries (1,350) (6,650)
Equity in undistributed income of subsidiaries 833,608 880,528
------------ ------------
Net Income $ 832,258 $ 873,878
============ ============
</TABLE>
<PAGE>
CITIZENS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 832,258 $ 873,878
Adjustments to reconcile net income to net cash provided
by operating activities (862,117) (873,312)
------------ ------------
Net cash provided (used) by operating activities (29,859) 566
------------ ------------
Investing Activities
Purchase of securities available for sale (100,669) (139,375)
Loan to ESOP (846,400)
ESOP loan repayment 84,640 21,160
------------ ------------
Net cash used by investing activities (16,029) (964,615)
------------ ------------
Financing Activities
Cash dividends (215,140) (52,900)
Sale of stock 10,062,369
Purchase of stock (1,104,378)
Acquisition of subsidiary stock (5,031,185)
------------ ------------
Net cash provided (used) by financing activities (1,319,518) 4,978,284
------------ ------------
Net Change in Cash and Cash Equivalents (1,365,406) 4,014,235
Cash and Cash Equivalents at Beginning of Year 4,014,235
------------ ------------
Cash and Cash Equivalents at End of Year $ 2,648,829 $ 4,014,235
============ ============
</TABLE>
<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 67) 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 74) 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 43) has served as the Bank's Controller since 1989.
Perry W. Lewis (age 78) 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 60) 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 50) has served as the Bank's senior Loan Officer
since 1989.
Billy J. Wray (age 67) 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, 1999, there were approximately 604 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
Quarter Ended High Low Per Share
September 30, 1997 $14 1/4 $13 7/8 $ ---
December 31, 1997 15 1/2 14 1/4 ---
March 31, 1998 16 14 7/8 .05
June 30, 1998 16 14 .05
September 30, 1998 14 3/4 11 1/8 .05
December 31, 1998 13 11 1/2 .06
March 31, 1999 12 11 .06
June 30, 1999 12 5/8 11 5/8 .06
* 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
quarter.
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
Olive LLP
201 North Illinois Street
Indianapolis, Indiana 46204
SHAREHOLDERS AND GENERAL INQUIRIES
On or before September 28, 1999, the Company will file an Annual Report on
Form 10-K for its fiscal year ended June 30, 1999 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
SUBSIDIARIES OF CITIZENS BANCORP
Subsidiaries of Citizens Bancorp:
Name Jurisdiction of Incorporation
Citizens Savings Bank of Frankfort Federal
Citizens Loan and Service Corporation Indiana
Consent of Independent Certified Public Accountants
We hereby consent to the incorporation by reference to Registration Statement on
Form S-8, File 333-61157, of our report dated July 23, 1999, on the consolidated
financial statements of Citizens Bancorp, which report is incorporated by
reference in the Annual Report on Form 10-K of Citizens Bancorp.
/s/ Olive LLP
Olive LLP
Indianapolis, Indiana
September 23, 1999
<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, 1999 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-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 444
<INT-BEARING-DEPOSITS> 1,638
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 388
<INVESTMENTS-CARRYING> 419
<INVESTMENTS-MARKET> 419
<LOANS> 53,104
<ALLOWANCE> 326
<TOTAL-ASSETS> 59,470
<DEPOSITS> 36,976
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 605
<LONG-TERM> 6,000
<COMMON> 8,294
0
0
<OTHER-SE> 6,346
<TOTAL-LIABILITIES-AND-EQUITY> 59,470
<INTEREST-LOAN> 4,228
<INTEREST-INVEST> 43
<INTEREST-OTHER> 168
<INTEREST-TOTAL> 4,439
<INTEREST-DEPOSIT> 1,589
<INTEREST-EXPENSE> 1,919
<INTEREST-INCOME-NET> 2,520
<LOAN-LOSSES> 65
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,312
<INCOME-PRETAX> 1,353
<INCOME-PRE-EXTRAORDINARY> 832
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 832
<EPS-BASIC> .87
<EPS-DILUTED> .87
<YIELD-ACTUAL> 4.60
<LOANS-NON> 101
<LOANS-PAST> 61
<LOANS-TROUBLED> 35
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 269
<CHARGE-OFFS> 13
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 326
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 326
</TABLE>
