<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
[ ] 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 000-23277
CITIZENS BANCORP
(Exact name of registrant as specified in its charter)
Oregon 91-1841688
(State of Incorporation) (I.R.S. Employer Identification Number)
275 Southwest Third Street
Corvallis, Oregon 97339
(Address of principal executive offices)
(541) 752-5161
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
3,891,137 shares as of October 30, 1998, no par.
<PAGE> 2
CITIZENS BANCORP
FORM 10-Q
September 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
Reference
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<S> <C>
PART I.
ITEM 1. - FINANCIAL INFORMATION - UNAUDITED
Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 1
Consolidated Statements of Income and Comprehensive Income for the three
months and nine months ended September 30, 1998 and 1997 2
Consolidated Statements of Changes in Shareholders' Equity 3
Consolidated Statements of Cash Flows for nine months ended September 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
ITEM 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 6 - 12
ITEM 3. - Quantitative and Qualitative Disclosure about Market Risk 12
PART II. - OTHER INFORMATION
ITEM 1. - Legal Proceedings 13
ITEM 2. - Changes in Securities 13
ITEM 3. - Defaults Upon Senior Securities 13
ITEM 4. - Submission of Matters to a Vote of Security Holders 13
ITEM 5. - Other Information 13
ITEM 6. - Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</TABLE>
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1
CITIZENS BANCORP
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,979 $ 9,268
Interest bearing deposits in banks 14,835 15,299
Federal funds sold 0 2,800
Securities available for sale 47,853 36,258
Securities held to maturity 8,564 9,984
Loans, net of unearned discount and prepaid fees 134,570 121,470
Allowance for credit losses (1,343) (1,201)
--------- ---------
NET LOANS 133,227 120,269
Premises and equipment 3,181 2,756
Accrued interest receivable 2,171 1,667
Other assets 1,318 1,816
TOTAL ASSETS $ 221,128 $ 200,117
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 40,367 $ 35,683
Savings and interest bearing demand 75,600 70,562
Time 63,089 55,455
--------- ---------
TOTAL DEPOSITS 179,056 161,700
Repurchase agreements 13,389 14,086
Other borrowings 4,839 2,814
Dividends declared 0 1,307
Accrued interest and other liabilities 764 799
TOTAL LIABILITIES 198,048 180,706
--------- ---------
SHAREHOLDERS' EQUITY
Common stock (no par value); authorized 5,000,000 shares;
issued and outstanding: 1998 - 3,891,137 shares;
1997 - 1,922,321 shares 9,798 9,245
Surplus 4,715 4,715
Undivided Profits 8,295 5,388
Unrealized gain (loss) on AFS securities, net of tax 272 63
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 23,080 19,411
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 221,128 $ 200,117
========= =========
</TABLE>
See accompanying notes
1
<PAGE> 4
CITIZENS BANCORP AND CITIZENS BANK
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousand, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 3,469 $ 3,095 $ 10,004 $ 9,056
Interest on deposits and federal funds sold 227 151 628 356
Securities available for sale 620 431 1,738 1,227
Securities held to maturity 146 209 385 705
----------- ----------- ----------- -----------
TOTAL INTEREST INCOME 4,462 3,886 12,755 11,344
INTEREST EXPENSE:
Deposits 1,345 1,199 3,838 3,536
Short term borrowings 89 16 137 45
Repurchase agreements 133 130 402 326
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE 1,567 1,345 4,377 3,907
NET INTEREST INCOME 2,895 2,541 8,378 7,437
PROVISIONS FOR CREDIT LOSSES 66 45 170 135
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 2,829 2,496 8,208 7,302
NON-INTEREST INCOME:
Service charges on deposit accounts 241 215 672 626
Origination fees and gains on loans sold 10 0 39 83
Gain(loss) on sales of securities available for sale 0 0 20 1
Other 313 234 925 722
----------- ----------- ----------- -----------
TOTAL NON-INTEREST INCOME 564 449 1,656 1,432
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,009 863 2,843 2,507
Occupancy and equipment 255 236 736 703
Other 624 308 1,821 1,444
----------- ----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE 1,888 1,407 5,400 4,654
INCOME BEFORE INCOME TAXES $ 1,505 $ 1,538 $ 4,464 $ 4,080
----------- ----------- ----------- -----------
INCOME TAXES (499) (523) (1,557) (1,573)
NET INCOME $ 1,006 $ 1,015 $ 2,907 $ 2,507
=========== =========== =========== ===========
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gain (loss) on AFS securities, net 224 70 219 (24)
Reclassification for gain included in net income 0 0 (10) 0
----------- ----------- ----------- -----------
224 70 209 (24)
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME $ 1,230 $ 1,085 $ 3,116 $ 2,483
=========== =========== =========== ===========
Per share data:
Basic earnings per share $ 0.26 $ 0.26 $ 0.75 $ 0.65
Weighted average number of common
shares outstanding 3,889,607 3,842,868 3,889,607 3,842,868
</TABLE>
2
<PAGE> 5
CITIZENS BANCORP AND CITIZENS BANK
CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NET UNREALIZED
NUMBER OF GAINS (LOSSES)
COMMON COMMON SECURITIES
SHARES STOCK UNDIVIDED AVAILABLE
OUTSTANDING AMOUNT SURPLUS PROFITS FOR SALE TOTAL
----------- --------- --------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, at December 31, 1996 1,798,397 $ 8,992 $ 4,349 $ 3,436 $ 28 $ 16,805
Net Income -- -- -- 2,507 -- 2,507
Valuation adjustment, net -- -- -- -- 24 24
Issuance of common stock 32,385 162 366 -- -- 528
--------- --------- --------- --------- --------- ---------
BALANCE, AT SEPTEMBER 30, 1997 1,830,782 $ 9,154 $ 4,715 $ 5,943 $ 52 $ 19,864
Balance, at December 31, 1997 1,922,321 $ 9,245 $ 4,715 $ 5,388 $ 63 $ 19,411
Net Income -- -- -- 2,907 -- 2,907
Valuation, Net -- -- -- -- 209 209
Issuance of common stock 23,247 553 -- -- -- 553
2 for 1 stock split (April 21, 1998) 1,945,569 -- -- -- -- --
--------- --------- --------- --------- --------- ---------
BALANCE, AT SEPTEMBER 30, 1998 3,891,137 $ 9,798 $ 4,715 $ 8,295 $ 272 $ 23,080
</TABLE>
3
<PAGE> 6
CITIZENS BANCORP AND CITIZENS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
----------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,907 $ 2,507
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 170 135
Depreciation and amortization 310 178
Stock dividends received (36) (30)
Increase in interest receivable (504) (438)
Decrease in interest payable 10 6
Other 25 30
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,882 $ 2,388
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits in banks 464 7,230
Net (increase) decrease in federal funds sold 2,800 (1,200)
Proceeds from maturities of available for sale securities 3,000 18,000
Proceeds from sales of available for sale securities 11,521 0
Proceeds from maturities of securities held to maturity 5,074 1,076
Purchases of securities available for sale (25,781) (15,499)
Purchases of securities held to maturity (3,636) (223)
(Increase) decrease in loans made to customers, net of principal collections (13,079) (6,601)
Purchases of premises and equipment and other (463) (296)
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES ($20,100) $ 2,487
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 17,356 (3,580)
Net increase (decrease) in repurchase agreements and other borrowings 1,328 392
Payment of dividends (755) (526)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES $ 17,929 ($ 3,714)
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 711 1,161
CASH AND DUE FROM BANKS
Beginning of year 9,268 8,416
END OF YEAR $ 9,979 $ 9,577
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid 4,367 3,901
Income taxes paid 1,575 1,661
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Unrealized losses on securities available for sale, net of tax 210 40
Issuance of common stock through dividend reinvestment plan 553 528
</TABLE>
4
<PAGE> 7
CITIZENS BANCORP
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements include the accounts of
Citizens Bancorp ("Bancorp"), a bank holding company and its wholly owned
subsidiary, Citizens Bank ("Bank") after elimination of intercompany
transactions and balances. Substantially all activity of Citizens Bancorp is
conducted through its subsidiary bank.
The interim financial statements are unaudited but have been prepared in
accordance with generally accepted accounting principles for interim condensed
financial statements. Accordingly, the condensed interim financial statements do
not include all of the information and footnotes required by generally accepted
financial statements. In the opinion of management, all adjustments including
operations for the interim periods included herein have been made.
The interim condensed consolidated financial statements should be read in
conjunction with the December 31, 1997 consolidated financial statements,
including notes there to, included in Bancorp's 1997 Annual Report to
shareholders.
2. USE OF ESTIMATES IN THE PREPARATION OF FINANCIALS
The preparation of financial statements, in conformity with general 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 revenues and expenses during the reporting period. Actual results
could differ from those estimates.
3. SHAREHOLDERS EQUITY AND NET INCOME PER COMMON SHARE
The Board of Directors declared a 2 for 1 stock split on April 21, 1998, to
Bancorp shareholders of record on that date. The weighted average sale price of
Bancorp's stock for the month of April was $29.00 per share. The split resulted
in an increase of shares outstanding from 1,945,568 to 3,891,137.
All per share amounts have been restated to retroactively reflect stock
dividends, stock purchased and stock splits previously reported.
4. CONTINGENCIES
Unfunded loan commitments totaled $19.6 million as of September 30, 1998 and
$18.7 million as of December 31, 1997.
5. ACCOUNTING CHANGES
In the quarter ended March 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No. 130),
which was effective for years beginning after December 15, 1997. SFAS No. 130
requires that an entity report and display comprehensive income with the same
prominence as other financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners. With regard to the Company, currently the only items of
comprehensive income are changes in the fair value of its available for sale
securities portfolio. Accordingly, changes in the value of that portfolio during
the period, net of tax, are reported as "Other Comprehensive Income" in the
accompanying Consolidated Statement of Income and Comprehensive Income. Changes
in the fair value of the available for sale securities portfolio for the nine
months ended September 30, 1998, which were previously reported in the
Consolidated Statement of Shareholders' Equity, have been reclassified and
retroactively reported as Other Comprehensive Income. The cumulative adjustment,
net of taxes, to record the available for sale securities portfolio at fair
value at period end was previously reported as "Net unrealized gain (loss) on
securities available for sale, net of tax" in the Company's consolidated balance
sheets. That cumulative adjustment is now termed 'Accumulated other
comprehensive income". There was no effect on previously reported net income as
a result of this reporting change.
5
<PAGE> 8
ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ORGANIZATION
Citizens Bancorp ("Bancorp"), an Oregon Corporation, is the parent corporation
and holding company of Citizens Bank (the "Bank"), which is its sole subsidiary.
The Bank is an Oregon State-chartered banking corporation with headquarters in
Corvallis, Oregon. Bancorp was incorporated on September 18, 1996 and became the
holding company of the Bank effective July 1, 1997.
OVERVIEW OF FINANCIAL RESULTS
Bancorp reported net income of $2,907,000, or $0.75 per share for the nine
months ended September 30, 1998. This was a 15.9% increase in net income as
compared to $2,507,000 or $0.65 per share for the nine months ended September
30, 1997. The foregoing per share information is adjusted for an increase in
outstanding shares acquired through the Dividend Reinvestment Plan, stock
dividends and stock splits.
The increased earnings described above were primarily the result of growth in
the Bank's interest earning assets and net interest income.
LOAN PORTFOLIO
The composition of the loan portfolio was as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 19977
--------- ---------
<S> <C> <C>
Commercial $ 26,890 $ 23,507
Agriculture 12,867 10,992
Real Estate
Construction 8,562 $ 5,459
1-4 Family 32,629 34,625
Other 49,602 42,142
Consumer Loans 4,649 5,423
Less: unearned income and deferred fees (629) (678)
TOTAL LOANS $ 134,570 $ 121,470
Less: allowance for credit losses (1,343) (1,201)
--------- ---------
NET LOANS $ 133,227 $ 120,269
========= =========
</TABLE>
Transactions in the reserve for credit losses were as follows for the nine
months ended September 30, 1998:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Balance at beginning of period $1,201 $1,038
Provision charged to operations 170 135
Loans recovered 0 0
Loans charged off 28 0
------ ------
$1,343 $1,173
====== ======
</TABLE>
6
<PAGE> 9
INVESTMENT SECURITIES
The amortized cost and estimated book value of the investment securities held by
the Bank, including unrealized gains and losses, at September 30, 1998 and
December 31, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Estimated Unrealized
September 30, 1998 Cost Fair Value Gains, net
<S> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury Securities
(Including securities of government agencies
and corporations) $46,764 $47,208 $ 444
Other 645 645 0
------- ------- -------
$47,409 $47,853 $ 444
</TABLE>
<TABLE>
<CAPTION>
Amortized Estimated Unrealized
September 30, 1998 Cost Fair Value Gains, net
<S> <C> <C> <C>
HELD TO MATURITY
U.S. Treasury Securities
(Including securities of government agencies
and corporations) $ 2,019 $ 2,043 $ 24
Obligations of State and Political Subdivisions 6,545 6,678 133
------- ------- -------
$ 8,564 $ 8,721 $ 157
</TABLE>
<TABLE>
<CAPTION>
Amortized Estimated Unrealized
December 31, 1997 Cost Fair Value Gains, net
<S> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury Securities
(Including securities of government agencies
and corporations) $35,554 $35,645 $ 91
Other 613 613 0
------- ------- -------
$36,167 $36,258 $ 91
December 31, 1997
HELD TO MATURITY
U.S. Treasury Securities
(Including securities of government agencies
and corporations) $ 6,482 $ 6,536 $ 54
Obligations of State and Political Subdivisions 3,502 3,561 59
------- ------- -------
$ 9,984 $10,097 $ 113
</TABLE>
7
<PAGE> 10
MATERIAL CHANGES IN FINANCIAL CONDITION
Changes in the balance sheet for the nine months ended September 30, 1998
include an increase in total assets. The increase is primarily in loans and
investments. These increases were mostly funded by an increase in total deposits
and notes payable.
At September 30, 1998 total assets increased 10.5% or approximately $21.0
million over total assets at December 31, 1997. Major components of the change
in total assets were:
- $2.8 million decrease in federal funds sold
- $13.1 million increase in loans
- $10.2 million increase in investments
- $1.2 million decrease in cash and cash equivalents
The increase in loans was primarily due to loan demand as a result of favorable
economic conditions, increased calling activity by the Bank's loan officers and
marketing of the Bank's personalized loan services. Loans increased from $121.4
million at December 31, 1997 to $134.5 million for the nine month period ending
September 30, 1998. An increase of $13.1 million or 10.8 percent.
The increase in investments was a result of management's decision to place
excess funds from growth in deposits into the investment portfolio. The timing
of the maturities are determined by using the Bank's asset/liability model. The
Bank increased its investments in tax-exempt municipal bonds, US Treasuries, and
Government Agencies.
At September 30, 1998 the Bank had no federal funds sold in comparison to $2.8
million for the period ending December 31, 1997. The decrease was due to the
placement of funds in to the interest bearing account held at the Federal Home
Loan Bank due to a more favorable interest rate. The majority of the Banks
liquid funds are held in its interest bearing account at the Federal Home Loan
Bank. The balance at the FHLB at September 30, 1998 was $14.8 million in an
interest bearing demand account. This account represents the Bank's surplus
funds which can fluctuate widely on a day to day basis.
The Bank experienced a net increase in total deposits to $179.0 million at
September 30, 1998 from $161.7 million at December 31, 1997 which represents an
increase of $17.3 million or 10.7 percent. The increase was primarily due to a
growth in the number of deposit accounts. The net increase in the number of
deposit accounts was approximately 475 over the number of deposit accounts at
December 31, 1997. Average total deposits for nine months ending September 30,
1998 was $165.9 million compared to $154.0 million for the year ending December
31, 1997.
Management believes deposit increases are a result of the Banks strategy to
emphasize personal service and long-term customer relationships. The Bank
strives to increase and retain core non-interest bearing accounts and does not
rely on large, rate sensitive deposits.
Long-term borrowings from the Federal Home Loan Bank were utilized to fund and
match large long-term customer loans. Long term borrowings increased by $4.8
million for the quarter ending September 30, 1998 as compared to year end
December 31, 1997.
8
<PAGE> 11
MATERIAL CHANGES IN RESULTS OF OPERATIONS
The Company reported net income of $2,907,000 or $.75 per share, for the nine
months ended September 30, 1998, compared to net income of approximately
$2,507,000, or $.65 per share for the same period in 1997. This represents an
increase in net income of 15.9 percent. Net income for the quarter ended
September 30, 1998 was approximately $1,006,000, or $.26 per share, compared to
net income of approximately $1,015,000, or $.26 per share, for the same period
in 1997, down .9 percent.
Total interest income increased approximately $1,411,000 for the nine months and
approximately $576,000 for the quarter ended September 30, 1998 as compared to
the same 1997 periods. These increases are primarily due to increases in loan
volume.
Net interest income increased $941,000 or 12.7 percent for the nine months
ending September 30, 1998 and $354,000 or 13.9 percent for the three months
ended September 30, 1998. The net increases during these periods resulted from
increases in interest income exceeding the increases in interest expense. This
increase is primarily due to the increase in loans and investments in 1998 as
compared to 1997.
Non-interest income increased approximately $224,000 for the nine months ended
September 30, 1998 as compared to the same nine month period in 1997. For the
quarter ending September 30, 1998 non-interest income increase approximately
$115,000 as compared to the same quarter in 1997. These increases are
attributable to the growth in service charge income as a result of deposit
growth and increases in the volume of bankcard services over last year for the
same periods.
Earnings per share increased to $.75 per share for the period ending September
30, 1998 as compared to $.65 for the same period in 1997. For the quarter ending
September 30, 1998 earnings per share remained the same for the same period in
1997.
Salaries and employee benefits increased approximately $336,000 for the nine
month period ending September 30, 1998 compared to the same nine month period in
1997. These increases were primarily due to routine adjustments in officer and
staff salaries and staff increases in the areas of loan officers, calling
officers, and operational staff.
Other non-interest expense excluding salaries and employee benefits increased
approximately $410,000 for the nine months ended September 30, 1998 as compared
to the same nine month period in 1997. This increase was primarily due to
increases in expense relative to growth of the merchant bankcard and debit card
products, an increase in depreciation expense due to the continuous updating of
equipment relative to technology and computers.
9
<PAGE> 12
CREDIT LOSS PROVISION
The Bank maintains an allowance for credit losses on loans that occur from time
to time as an incidental part of the business of banking. Loans are charged
against this allowance for credit losses which is adjusted periodically to
reflect changing loan volumes, risk potential in the portfolio and general
economic conditions. Additions to the allowance for credit losses are made
through a charge against income.
During the first nine months ended September 30, 1998 the Bank funded the
allowance for credit losses $170,000 from operations and $135,000 for the same
nine month period during 1997. The increase in the provision for credit losses
was incurred to match the increased loan growth. The Bank experienced $28,000 in
credit losses for the nine months ended September 30, 1998 and no credit losses
for the same period ended September 30, 1997. The historical level of charge
offs has been very low for the Bank. Management's assessment of the reserve for
credit losses includes various factors such as current delinquent and
non-performing loans, historical analysis of industry credit loss experience,
knowledge of the present and anticipated economic future of its market area and
loan grades. The Bank is satisfied that the allowance for credit losses at
September 30, 1998 of $1,343,000 or .99% of total loans is an appropriate
amount.
YEAR 2000 ISSUES
Citizens Bancorp first became aware of the Year 2000 (Y2K) problem through a
combination of industry contacts and the Federal Financial Institutions
Examination Council (FFIEC) statement "The Effect of Year 2000 on Computer
Systems" issued in June 1996. The problem, as it is commonly defined, arose out
of a shortage of disk space in the early 1960's and 1970's. Instead of storing
dates as four digits (1997), they were shortened to two digits (97). However,
when the clock rolls over to 2000, many systems will think "00" is 1900, rather
than 2000. Hardware or software that runs on a time schedule or involves
calculations based on dates can be seriously affected. Without correction, the
expanded date formats of the new millennium will cause many operating systems to
produce incorrect data or cause them to fail completely.
At Citizens Bancorp we recognize this problem as one of more than just a
technological/mechanical risk. We see the Y2K problem representing a regulatory
and ongoing business operations challenge not only to our business but to those
that we interact with as well.
The Y2K challenge is a particular problem for financial institutions, since many
financial transactions, such as interest accruals and payments, are date
sensitive. It also may affect the operations of third parties with whom Citizens
Bancorp and its subsidiary Citizens Bank (collectively, the "Company") do
business, including the Company's vendors, suppliers, utility companies, and
customers.
The Company is committed to addressing these Y2K challenges in a prompt and
responsible manner. The Company's year 2000 compliance plan ("Y2K Plan") follows
the five-step approach outlined by the FFIEC of Awareness, Assessment,
Renovation, Validation, and Implementation in mitigating this risk on all
fronts. The Company has substantially completed the awareness and assessment
phases, although appropriate follow-up activities are continuing to occur. The
Company is currently involved in the testing phase of the Y2K Plan. Validation
will take place after each piece of testing is completed and renovation will
continue to be done on an "as needed" basis.
The Company has assigned primary responsibility for the Y2K project to its Chief
Operating Officer. The Company has also formed a Y2K committee, consisting of
appropriate representatives from its critical operational areas. In addition,
the Company provides periodic reports to its Board of Directors in order to
assist them in overseeing the Company's Y2K Readiness.
During the Assessment phase of our Y2K preparation, an individual analysis of
each hardware, software and time sensitive environmental application used by the
Company was completed. This assessment included a risk evaluation, which
measured the criticality of the application, a rating of confidence of the
Company to achieve a compliant status, and a determination of the level of
control the Company has in
10
<PAGE> 13
effecting change in the compliance process. The designation "Mission Critical",
meaning those systems that should they fail would have a significant adverse
impact on the Company's operations and financial condition as well as those of
its customers, and "Non Mission Critical", meaning those system which are less
essential to functionality of the Company, were then assigned to each
application.
The Company has also requested documentation of compliance from the vendor of
each application. In addition, a primary solution for on site compliance of each
application as used was selected and a testing approach was established. An
individual contingency plan was then written for each application should testing
fail or functionality be effected after the date change.
Well in advance of all federally mandated time frames, the Company has
internally established and is currently on track with the following tables:
<TABLE>
<S> <C>
Mission Critical testing complete 12/31/98
Mission Critical process validation complete 3/31/99
Mission Critical remediation as necessary complete 3/31/99
Non-Mission Critical testing complete 3/31/99
Non-Mission Critical process validation complete 6/30/99
Non-Mission Critical remediation as necessary complete 6/30/99
</TABLE>
The Company has established a budget for extraordinary expenses related to Y2K
of approximately $300,000. The budget includes an estimation of both real costs
and lost opportunities relative to investments and loans. Approximately
$37,000.00 of this amount has already been incurred.
The potential risk involved with issues brought about by the advent of Y2K are
extensive and could be serious in nature. The possible interruption of business
operations for the Company, its customers, and vendors has the potential to
impact financial condition, liquidity, and create a material loss of revenue.
Based on the Company's extensive investment of resources, both human and
financial, in preparing for the issues surrounding Y2K and the highly regulated
nature of the business, management anticipates that the Company will be well
prepared to avoid any significant detrimental effects. Since the Company has
drawn specific contingency plans for each application it uses that could be
impacted by Y2K, the worst case scenario is believed to stem from the potential
of environmental Y2K failures, such as power or telecommunications, the
preparation for which are generally out of the Company's control. The Company
continues to monitor the progress of these entities toward Y2K compliance and by
June of 1999 will more fully develop the contingency plans for environmental
failure as more specifics of readiness for these vendors are available. The
Company also anticipates the possible scenario of several borrowing customers
experiencing short term Y2K cash flow problems and a pre-Y2K increase in cash
demand by all customers. If the Company has borrowers that experience Y2K cash
flow problems, they will be dealt with in the same routine manner by which
normal cash flow interruptions experienced by borrowers are addressed. Any
increase in cash demand will be funded by the Company's normal currency ordering
procedures funded by deposits held at the Federal Reserve Bank and investments
maturing in 1999. The Company has sufficient liquidity to cover anticipated
withdrawals. In summary, the Company believes it will be Y2K compliant by its
internally established timelines which are well ahead of the actual century date
change and will have sufficient contingency plans in place to maintain a
satisfactory level of business operations.
11
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
Bancorp's subsidiary, Citizens Bank, has adopted policies to maintain a
relatively liquid position to enable it to respond to changes in the Bank's
financial environment. Generally, the Bank's major sources of liquidity are
customer deposits, sales and maturities of securities, the use of borrowing
lines with correspondent banks including Federal Home Loan Bank borrowings, loan
repayments and net cash provided by operating activities.
The analysis of liquidity should also include a review of the changes that
appear in the consolidated statement of cash flows for the first nine months of
1998. The statement of cash flows includes operating, investing and financing
categories. Operating activities include net income which is adjusted for
non-cash items and increases or decreases in cash due to certain changes in
assets and liabilities. Investing activities consisted primarily of both
proceeds from and purchases of securities, and the net growth in loans.
Financing activities present the cash flows associated with the Bank's deposit
accounts.
Management believes that the Bank's existing sources of liquidity will enable
the Bank to fund its requirements in the normal course of business.
As of September 30, 1998, shareholders' equity totaled $23,080,000 as compared
to $19,411,000 for the same nine month period in 1997, an increase of $3,669,000
or 18.9%. This increase in equity was primarily due to the Company's increased
net income.
The Federal Reserve Board and the Federal Deposit Insurance Corporation have
established minimum requirements for capital adequacy for member banks and bank
holding companies. The requirements address both risk-based capital and
leveraged capital.
Capital ratios for the Company were as follows as of the dates indicated:
<TABLE>
<CAPTION>
Bancorp
Adequately Well
Capitalized Capitalized September 30, 1998 December 31, 1997
Standards Standards
<S> <C> <C> <C> <C>
Tier 1 Leverage Ratio 4% 5% 10.40% 9.69%
Tier 1 Risk Based Capital Ratio 4% 6% 16.16% 15.60%
Total Risk Based Capital Ratio 8% 10% 17.12% 16.30%
</TABLE>
FORWARD LOOKING STATEMENTS
Certain statements in this report may constitute forward-looking statements
within the definition of the "safe-harbor" provisions of the Private Securities
Reform Act of 1995. Such forward-looking statements are based on reasonable
assumptions by the Company's management within its current knowledge of the
Company's business and operations. These forward-looking statements are subject
to significant uncertainties which could cause actual results to differ
materially from those set forth in such statements. Forward-looking statements
can be identified by words such as "believe," "estimate," "anticipate,"
"expect," "intend," "will," may," "should," or other similar phrases or words.
Readers are cautioned not to place undue reliance on forward-looking statements.
The Company does not intend to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date of
the report or to reflect the occurrence of unanticipated events other than in
its periodic filings with the SEC.
ITEM 3. QUANTITATIVE & QUALITATIVE ANALYSIS ABOUT MARKET RISK
No material changes have occurred in market risk since reported on December 31,
1997.
12
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibit is filed as part of this report.
27.0 Financial Data Schedule for the six months ended September
30, 1998.
(b) Reports on Form 8-K
None
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 9,1998 /s/ William V. Humphreys
-------------------------
By: William V. Humphreys
President and
Chief Executive Officer
Date: November 9,1998 /s/ Lark E. Wysham
-------------------------
By: Lark E. Wysham
Senior Vice President and
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
Financial Data Schedule - This exhibit is included only in the electronic EDGAR
filing version of this Form 10-Q. The financial data schedule is not a separate
financial statement, but a schedule that summarizes certain standard financial
information extracted directly from the financial statements in this filing.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,979
<INT-BEARING-DEPOSITS> 14,835
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47,853
<INVESTMENTS-CARRYING> 8,564
<INVESTMENTS-MARKET> 8,721
<LOANS> 134,570
<ALLOWANCE> 1,343
<TOTAL-ASSETS> 221,128
<DEPOSITS> 179,056
<SHORT-TERM> 551
<LIABILITIES-OTHER> 14,153
<LONG-TERM> 4,288
0
0
<COMMON> 14,513
<OTHER-SE> 8,295
<TOTAL-LIABILITIES-AND-EQUITY> 221,128
<INTEREST-LOAN> 10,004
<INTEREST-INVEST> 2,123
<INTEREST-OTHER> 628
<INTEREST-TOTAL> 12,755
<INTEREST-DEPOSIT> 3,838
<INTEREST-EXPENSE> 4,377
<INTEREST-INCOME-NET> 8,378
<LOAN-LOSSES> 170
<SECURITIES-GAINS> 20
<EXPENSE-OTHER> 5,400
<INCOME-PRETAX> 4,464
<INCOME-PRE-EXTRAORDINARY> 4,464
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,907
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.75
<YIELD-ACTUAL> 0<F1>
<LOANS-NON> 19
<LOANS-PAST> 4
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,201
<CHARGE-OFFS> 28
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,343
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,343
<FN>
<F1>Information not calculated for Interim reports.
</FN>
</TABLE>
