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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSACTIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission File No. 000-23277
CITIZENS BANCORP/OR
(Name of registrant in its charter)
91-1841688
Oregon (I.R.S. Employer
(State of incorporation) Identification No.)
275 Southwest Third Street
P.O. Box 30
Corvallis, Oregon 97339
(Address of principal executive offices)
Registrant's telephone number: (541) 752-5161
Agent for service: Lark E. Wysham, CFO
275 Southwest Third Street
Telephone number: (541) 752-5161
Securities registered under Section 12(b) of the Exchange Act: none
Securities registered under Section 12(g) of the Exchange Act: common stock, no
par value
Indicate by check mark whether registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 122 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ].
The aggregate market value of registrant's voting and non-voting common
equity held by non-affiliates is $52,296,335 based on the most recent reported
sale of registrant's common stock on March 26, 1999 at a price of $17.00 per
share. As of March 26, 1999 there were 3,927,706 shares of registrant's common
stock issued and outstanding, of which 3,076,255 were held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE. Part III of this Form 10-K
incorporates by reference the 1999 Annual Meeting Proxy Statement sent to
registrant's shareholders in connection with the April 21, 1999 Annual Meeting
of Shareholders.
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INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS 1
PART I
ITEM 1 - BUSINESS: GENERAL RECENT DEVELOPMENTS 1
ITEM 2 - PROPERTIES 12
ITEM 3 - LEGAL PROCEEDINGS 14
ITEM 4 - SUBMISSIONS OF MATTERS TO A VOTE OF
SECURITY HOLDERS 14
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 14
ITEM 6 - SELECTED FINANCIAL DATA 17
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 36
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 38
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 65
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT 65
ITEM 11 - EXECUTIVE COMPENSATION 66
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 66
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 66
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K 66
SIGNATURES 68
EXHIBIT INDEX 69
</TABLE>
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PART I
DISCLOSURE REGARDING 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 1. BUSINESS
Citizens Bancorp ("Bancorp"), an Oregon Corporation, was organized under an
agreement and plan of reorganization and merger for formation of one-bank
holding company dated October 15, 1996. Bancorp was formed at the direction of
the Board of Directors of Citizens Bank for the sole and express purpose of
becoming the holding company of the Bank.
ORGANIZATIONAL STRUCTURE OF BANCORP
Bancorp operates through a two-tiered corporate structure. At the holding
company level the affairs of Bancorp are overseen by a Board of Directors
elected by the shareholders of Bancorp at the annual meeting of shareholders.
The affairs of the Bank are overseen by a Board of Directors elected by Bancorp,
the sole owner of the Bank. As of the date of this report, the respective
members of the Board of Directors of the Bank and of the Board of Directors of
Bancorp are identical.
Bancorp authorized the issuance of 5,000,000 no par shares of common stock.
750,000 shares have been set aside for the purposes of the dividend reinvestment
plan of which 23,247 shares have been issued as of December 31, 1998. As of
December 31, 1998 there were 3,891,137 shares of common stock issued and
outstanding. Citizens Bank is the transfer agent for Citizens Bancorp's stock.
Bancorp plans no business at this time other than the supervision of its only
subsidiary Citizens Bank.
THE BANK
Citizens Bank was chartered October 1, 1957 (charter #333) by the State of
Oregon as a commercial bank. The Bank has seven branches located in Oregon doing
business in the counties of Benton, Linn, and Lane. The Bank's main office and
two other branches are located in Corvallis, Oregon. The other branches are in
Albany, Junction City, Philomath, and Veneta, Oregon.
The Bank has its second Albany branch office under construction. Planned opening
date is mid-February 1999. The branch is located at 2230 SW Pacific Blvd. With
the opening of this branch, the bank will have locations in East and West
Albany. Albany is a fast growing market place for small to medium size
businesses. The Bank specializes in loans to small and medium size businesses
and is well positioned to meet the need for business loans in Albany. The Bank's
strategic focus is relationship banking and anticipates substantial opportunity
for both deposit and loan growth in Albany. The manager for the new West Albany
branch is currently the assistant manager of the East Albany branch and has
lending experience and expertise. The Bank is currently negotiating the purchase
of land in McMinnville, Oregon for a new branch. The Bank anticipates opening
the McMinnville branch in a temporary facility by late spring 1999 and a
permanent building by year-end 1999.
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The Bank's culture focuses on collaborative decision making, human resources,
branch autonomy, business development, and relationship banking. The Bank
continuously strives for outstanding customer service, quality of products,
operational efficiency, and collaborative management. As a result of its culture
the Bank continues to show good growth as evidenced by the five-year history of
growth in the following selected areas.
<TABLE>
<CAPTION>
(THOUSANDS) 1998 1997 1996 1995 1994
----------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Income $ 3,840 $ 3,341 $ 3,138 $ 2,659 $ 2,208
Return on Average Equity 17.64% 17.53% 19.27% 19.05% 18.27%
Return on Average Assets 1.83% 1.79% 1.81% 1.66% 1.45%
Average Assets to Average
Equity 10.36% 10.21% 9.42% 8.85% 7.99%
Dividend Payout Ratio 35.63% 39.11% 34.38% 39.75% 39.18%
-------- -------- -------- -------- --------
Total Loans (net) 130,707 120,269 114,648 100,715 89,396
======== ======== ======== ======== ========
Total Deposits 188,235 161,700 161,834 138,694 134,924
======== ======== ======== ======== ========
Total Assets 233,978 200,117 191,887 162,907 155,600
======== ======== ======== ======== ========
</TABLE>
The long-term benefit to the Bank of its cultural and management style is
consistent growth and development of the Bank over time. Risk levels have been
greatly reduced because of expertise in loan, investment, operational, and human
resource management.
The primary business strategy of the Bank is to provide community banking and
related services to individuals, professionals, and small and medium-sized
businesses. The Bank emphasizes customer relationships, attention to the needs
of the customer, and a high level of service. The Bank's primary marketing focus
is on small to medium-sized businesses and commercial customers.
The Bank offers deposit accounts, safe-deposit boxes, consumer lending,
commercial lending, and commercial and residential real estate lending.
Commercial loans include operating lines of credit, equipment and real estate
financing, capital needs, and other traditional financing products.
The Bank also has a growing emphasis in financing farm operations, equipment,
and property.
The Bank's loan portfolio has some concentrations in real estate secured loans,
primarily commercial properties.
Deposit products include regular and "package" checking accounts, savings
accounts, certificates of deposit, money market accounts, and IRA accounts.
The Bank offers a debit card, check guarantee card, ATM card as well as a
MasterCard and VISA card as part of its retail banking services. The Bank also
operates a small residential mortgage loan origination department that
originates loans and sells them into the secondary market. The Bank offers
extended banking hours in selected locations as well as Saturday banking. ATM
machines are also available at seven (7) locations offering 24-hour transaction
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services, including cash withdrawals, deposits, account transfers, and balance
inquiries. The new West Albany branch will have a 24-hour drive-up ATM, giving
the Bank a total of eight ATM locations.
The Bank also offers its customers a 24-hour automated telephone service that
offers account transfers and balance inquiries.
EMPLOYEES
At December 31, 1998 Citizens Bank had approximately 111 full-time equivalent
employees. None of these employees are represented by labor unions. A number of
benefit programs are available to eligible employees including group medical
insurance plans, paid vacation, paid sick leave, group life insurance, and a
401(A) plan.
COMPETITION
At December 31, 1998, Citizens Bank was among the top 10 largest commercial
banks headquartered in the State of Oregon as measured by the State of Oregon's
division of Finance and Corporate Securities. The Bank competes with other
commercial banks as well as savings and loan associations, credit unions,
mortgage companies, insurance companies, investment banks, securities brokerages
and other non-bank financial service providers. Banking in the State of Oregon
has been substantially dominated by several very large banking institutions
whose headquarters are out of state. They include Wells Fargo Bank, U. S. Bank,
Key Bank, Washington Mutual Bank, First Security Bank, and Bank of America.
Together these large organizations hold a majority of the deposit and loan
balances held by banks in the State of Oregon. Citizens Bank attempts to offset
some of the advantages of these larger competitors through superior relationship
building with the customer, better service, quicker response to the customers'
needs, and local decision-making. We rely on the fact that many businesses and
individuals within small Oregon communities want to see their money stay within
the local economy, rather than see it used to fund properties in distant places.
GOVERNMENTAL POLICIES
The earnings and growth of Bancorp and its subsidiary, Citizens Bank, as well as
their existing and future business activities, are affected not only by general
economic conditions, but also by the fiscal and monetary policies of the Federal
government and its agencies, particularly the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"). The Federal Reserve Board
implements monetary policies (intended to curb inflation and combat recession)
by its open-market operations in United States Government securities, by
adjusting the required level of reserves for financial institutions subject to
its reserve requirements, and by varying the discount rates applicable to
borrowings by banks from the Federal Reserve Banks. The actions of the Federal
Reserve Board in these areas influence the growth of bank loans, investments and
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deposits, and also affect interest rates charged on loans and deposits. As
banking is a business which depends largely on interest rate differentials (in
general, the difference between the interest rates received by the banks on
loans extended to their customers and on securities held in the banks'
investment portfolios), the influence of economic conditions and monetary
policies on interest rates will directly affect earnings. The nature and impact
of any future changes in monetary policies cannot be predicted.
SUPERVISION AND REGULATION - GENERAL
The following generally refers to certain statutes and regulations affecting the
banking industry. These references provide brief summaries only and are not
intended to be complete. These references are qualified in their entirety by the
referenced statutes and regulations. In addition, some statutes and regulations
which apply to and regulate the operation of the banking industry might exist
which are not referenced below. Changes in applicable statutes and regulations
may have a material effect on the business of Bancorp and its subsidiary.
BANCORP
As a bank holding company, Bancorp is subject to the Bank Holding Company Act of
1956 ("BHCA"), as amended, which places Bancorp under the supervision of the
Board of Governors of the Federal Reserve System ("FRB"). In general, the BHCA
limits the business of bank holding companies to owning or controlling banks and
engaging in other activities related to banking. Certain recent legislation
designed to expand interstate branching and relax federal restrictions on
interstate banking may expand opportunities for bank holding companies (for
additional information see below under the heading "The Bank - Interstate
Banking and Branching"). However, the full impact of this legislation on Bancorp
is unclear at this time.
HOLDING COMPANY STRUCTURE
FRB REGULATION. Bancorp must obtain the approval of the FRB: (1) before
acquiring direct or indirect ownership or control of any voting shares of any
bank if, after such acquisition, it would own or control, directly or
indirectly, more than 5% of the voting shares of such a bank; (2) before merging
or consolidating with another bank holding company; and (3) before acquiring
substantially all of the assets of any additional banks.
Bancorp is required by the BHCA to file annual and quarterly reports and such
other reports as may be required from time to time by the FRB. In addition, the
FRB periodic examinations of Bancorp and its subsidiary Bank.
HOLDING COMPANY CONTROL OF NON-BANKS. With certain exceptions, the BHCA
prohibits bank holding companies from acquiring direct or indirect ownership or
control of voting shares in any company which is not a bank or a bank holding
company unless the FRB determines that the activities of such company are so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. In making such determinations, the FRB considers whether the
performance of such activities by a bank holding company would offer to the
public that would outweigh possible adverse effects. The Economic Growth and
Regulatory Paperwork Reduction
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Act of 1996 ("Economic Growth Act) amended to BHCA to eliminate the requirement
that bank holding companies seek FRB approval before engaging de novo in
permissible non-banking activities if the holding company is well capitalized
and meets certain other specified criteria. A bank holding company meeting the
specifications is now required only to notify the FRB within 10 business days
after the activity has begun. The Economic Growth Act also established an
expedited procedure for well-capitalized bank holding companies meeting the
criteria to obtain the FRB approval to acquire smaller companies that engage in
permissible non-banking activities as well as to engage in non-banking
activities that the FRB has approved by order.
On February 28, 1997, the FRB issued a final rule incorporating the changes
enacted by the Economic Growth Act. Effective April 1, 1997, a well-run bank
holding company, without any prior notice or FRB approval, may commence
immediately any activity that is currently or at the commencement included in
the FRB's list of acceptable non-banking activities.
TRANSACTIONS WITH AFFILIATES. Bancorp and its subsidiary will be deemed
affiliated within the meaning of the Federal Reserve Act and transactions
between affiliates are subject to certain restrictions. Covered transactions
include, subject to specific exceptions, loans by banking subsidiaries to
affiliates, investments by bank subsidiaries in securities issued by an
affiliate, the taking of such securities as collateral, and the purchase of
assets by a bank subsidiary from an affiliate. Bancorp and its subsidiary are
also subject to certain restrictions with respect to engaging in the
underwriting, public sale and distribution of securities.
SUPPORT OF SUBSIDIARIES. Under FRB policy, a bank holding company is expected to
act as a source of financial and managerial strength to, and commit resources to
support, each of its subsidiaries. Any capital loans Bancorp makes to its
subsidiary are subordinate to deposits and to certain other indebtedness of the
subsidiary. The Crime Control Act of 1990 provides that, in the event of a bank
holding company's bankruptcy, the bankruptcy trustee will assume any commitment
the bank holding company has made to a federal bank regulatory agency to
maintain the capital of a subsidiary and this obligation will be entitled to a
priority of payment.
TIE-IN ARRANGEMENTS. Bancorp and the subsidiary are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, sale or
lease of property or furnishing of services. For example, with certain
exceptions, neither Bancorp nor its subsidiary may condition an extension of
credit to a customer on either (1) a requirement that the customer obtain
additional services provided by it or (2) an agreement by the customer to
refrain from obtaining other services from a competitor. Until recently, the FRB
extended its bank-tying restrictions to bank holding companies and their
non-bank subsidiaries. However, effective April 21, 1997, the bank anti-tying
rules will no longer apply to the non-bank subsidiaries of a bank company.
STATE LAW RESTRICTIONS. As a corporation chartered under the laws of the State
of Oregon, Bancorp is also subject to certain limitations and restrictions under
applicable Oregon corporate law. For example, these include limitations and
restrictions relating to: indemnification of directors, distributions to
shareholders, transactions involving directors, officers or interested
shareholders, maintenance of books, records, and minutes, and observance of
certain corporate formalities.
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SECURITIES REGISTRATION AND REPORTING. Bancorp is subject to the registration
and reporting requirements of the Federal Securities Laws. The periodic reports,
Proxy Statements, and other information filed by Bancorp with the Securities
and Exchange Commission ("SEC") can be inspected and copied or obtained from
the Washington, D.C., office of the SEC. In addition, the securities issued by
Bancorp are subject to the registration requirements of the Securities Act of
1933 and applicable state securities laws unless exceptions to registrations are
available.
CONTROL TRANSACTIONS
The Change in Bank Control Act of 1978, as amended, prohibits a person or group
of persons from acquiring "control" of a bank holding company unless the FRB has
been given 60 days prior written notice of the proposed acquisition, and within
that time period, the FRB has not issued a notice disapproving the proposed
acquisition, or extended for up to another 30 days the period during which such
a disapproval may be issued. An acquisition may be made prior to the expiration
of the disapproval period of the FRB issues written notice of its intent not to
disapprove the action. Under a rebuttable resumption established by the FRB, the
acquisition of 10% or more of a class of voting stock of a bank holding company
with a class of securities registered under Section 12 of the Exchange Act
would, under the circumstances set forth in the presumption, constitute the
acquisition of control.
In addition, any "Company" would be required to obtain the approval of the FRB
under the BHCA before acquiring 25% (5% if the company is a bank holding
company) or more of the outstanding shares of Bancorp, or obtain control over
Bancorp.
BANKING
Despite some recent legislative initiatives to reduce regulatory burdens,
banking remains a highly regulated industry. Legislation enacted from time to
time may increase the cost of doing business, limit or expand permissible
activities, or affect the competitive balance between banks and other financial
and non-financial institutions. Proposals to change the laws and regulations
governing the operations and taxations of banks and other financial institutions
are frequently made in Congress, in the Oregon State Legislature, and before
various bank regulatory agencies. In addition, there continue to be proposals in
Congress to restructure the banking system.
Some of the significant areas of bank regulation, including significant federal
legislation affecting state-chartered banks, are generally discussed below.
REGULATION OF STATE BANKS
Oregon state-chartered banks are subject to primary regulation and examination
by the Oregon Director of Consumer and Business Services. The Bank is also
subject to supervision, examination, and regulation by certain federal banking
agencies. The Bank is insured (to applicable limits) by, and therefore is
subject to regulation by, the FDIC.
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Applicable federal and state statutes and regulations governing a bank's
operations relate, among other matters, to capital requirements, required
reserves against deposits, investments, loans, legal lending limits, certain
interest rates payable, mergers and consolidations, borrowings, issuance of
securities, payment of dividends (see below), establishment of branches, and
dealings with affiliated persons. The FDIC has authority to prohibit banks under
their supervision from engaging in what they consider to be an unsafe and
unsound practice in conducting their business. Depository institutions, such as
the Banks, are affected significantly by the actions of the FRB as it attempts
to control the money supply and credit availability in order to influence the
economy.
DIVIDEND RESTRICTIONS
Dividends paid by the Bank to Bancorp are a material source of all of Bancorp's
cash flow. Various federal and state statutory provisions limit the amount of
dividends the Bank is permitted to pay to Bancorp without regulatory approval.
FRB policy further limits the circumstances under which the bank holding
companies may declare dividends. For example, a bank holding company should not
continue its existing rate of cash dividends on its common stock unless its net
income is sufficient to fully fund each dividend and its prospective rate of
earnings retention appears consistent with its capital needs, asset quality, and
overall financial condition.
If, in the opinion of the applicable federal banking agency, a depository
institution under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
institution could include the payment of dividends), the agency may require,
after notice and hearing, that such institution cease and desist from such
practice. In addition, the FRB and the FDIC have issued policy statements which
provide that insured banks and bank holding companies should generally pay
dividends only out of current operating earnings.
Under Oregon law, the Oregon regulatory authorities have the authority to
suspend payment of any dividend of an Oregon institution if it is determined
that the payment would result in the stockholders' equity in the institution,
after payment of the dividend, to be inadequate for the safe and sound operation
of the institution.
REGULATION OF MANAGEMENT
Federal law: (1) sets forth circumstances under which officers or directors of a
bank may be removed by the institution's federal supervisory agency; (2) places
restraints on lending by a bank to its executive officers, directors, principal
shareholders, and their related interests; and (3) prohibits management
personnel of a bank from serving as a director or in other management positions
of another financial institution whose assets exceed a specified amount or which
has an office within a specified geographic area.
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CONTROL OF FINANCIAL INSTITUTIONS
No person may acquire "control" of a bank unless the appropriate federal agency
has been given 60 days prior written notice and within that time the agency has
not disapproved the acquisition. Substantial monetary penalties may be imposed
for violation of the change in control or other provisions of banking laws.
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was
enacted into law in late 1991. As required by FDICIA, numerous regulations have
been adopted by federal bank regulatory agencies, including the following: (1)
federal bank regulatory authorities have established five different capital
levels for banks and, as a general matter, enable banks with higher capital
levels to engage in a broader rage of activities; (2) the FRB has issued
regulations requiring standardized disclosures with respect to interest paid on
deposits; (3) the FDIC has imposed restrictions on the acceptance of brokered
deposits by weaker banks; (4) the FDIC has implemented risk-based insurance
premiums; and (5) the FDIC has issued regulations requiring state-chartered
banks to comply with certain restrictions with respect to equity investments and
activities in which the banks act as a principal.
FDICIA recapitalized the Bank Insurance Fund ("BIF") and required the FDIC to
maintain the BIF and Savings Association Insurance Fund ("SAIF") at 1.25% of
insured deposits by increasing deposit insurance premiums as necessary to
maintain such ratio. FDICIA also required federal bank regulatory authorities to
prescribe, by December 1, 1998, (1) non-capital standards of safety and
soundness; (2) operational and managerial standards for banks; (3) asset and
earnings standards for banks and bank holding companies addressing such areas as
classified assets, capital, and stock price, and (4) standards for compensation
of executive officers and directors of banks. However, this provision was
modified by recent legislation to allow federal regulatory agencies to implement
these standards through either guidelines or regulations.
FIRREA
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") became effective on August 9, 1989. Among other things, this
far-reaching legislation (1) phased in significant increases in the FDIC
insurance premiums paid by commercial banks; (2) created two deposit insurance
pools within the FDIC, one to insure commercial banks and savings bank deposits
and the other to insure savings association deposits; (3) for the first time,
permitted bank holding companies to acquire healthy savings associations; (4)
permitted commercial banks that meet certain housing-related asset requirements
to secure advances and other federal services from their local Federal Home Loan
Banks; and (5) greatly enhanced the regulators' enforcement powers by removing
procedural barriers and sharply increasing the civil and criminal penalties for
violating statutes and regulations.
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INTERSTATE BANKING AND BRANCHING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Act") will, over the next few months, permit nationwide interstate
banking and branching under certain circumstances. This legislation generally
authorizes interstate branching and relaxes federal law restrictions on
interstate banking. Individual states have the authority to "opt out" of certain
of these provisions. The Interstate Act currently allows states to enact
"opting-in" legislation that (I) permits interstate mergers within their own
borders before June 1, 1997, and (ii) permits out-of-state banks to establish de
novo branches within the state. As of September 29, 1996, bank holding companies
may purchase banks in any state, and states may not prohibit such purchases.
Additionally, beginning June 1, 1997, banks will be permitted to merge with
banks in other states as long as the home state of neither merging bank has
opted out. The Interstate Act requires regulators to consult with community
organizations before permitting an interstate institution to close a branch in a
low-income area.
Oregon, effective February 27, 1995, enacted "opting in" legislation generally
permitting interstate mergers, subject to certain restrictions. Given that
Oregon permitted interstate banking for a number of years, this legislation is
not expected to have profound impact on banking in Oregon or on Bancorp or the
Bank's operations in particular. Nevertheless, the impact that the Interstate
Act might have on Bancorp is impossible to predict.
CAPITAL ADEQUACY REQUIREMENTS
The FRB, the FDIC, and the OCC (collectively, the "Federal Banking Agencies")
have established uniform capital requirements for all commercial banks. Bank
holding companies are also subject to certain minimum capital requirements. A
bank that does not achieve and maintain required capital levels may be subject
to supervisory action through the issuance of a capital directive to ensure the
maintenance of adequate capital levels. In addition, banks are required to meet
certain guidelines concerning the maintenance of an adequate allowance for loan
and lease losses.
The Federal Banking Agencies' "risk-based" capital guidelines establish a
systematic, analytical framework that makes regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations, takes
off-balance sheet exposures into explicit account in assessing capital adequacy,
and minimizes disincentives to holding liquid, low-risk assets. The risk-based
ratio is determined by allocating assets and specified off-balance sheet
commitments into several categories, with high levels of capital being required
for the categories perceived as representing greater risk. The risk weights
assigned to assets and credit equivalent amounts of off-balance sheet items are
based primarily on credit risk. Other types of exposure, such as interest rate,
liquidity and funding risks, as well as asset quality problems, are not factored
into the risk-based ratio. Such risks, however, will be taken into account in
determining a final assessment of an organization's capital adequacy. Under
these regulations, banks were required to achieve a minimum total risk-based
capital ratio of 8% and a minimum Tier 1 risk-based capital ratio of 4%.
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The Federal Banking Agencies also have adopted leverage ratio standards that
require commercial banks to maintain a minimum ratio of core capital to total
assets (the "Leverage Ratio") of 3%. Any institution operating at or near this
level is expected to have well-diversified risk, including no undue interest
rate risk exposure, excellent asset quality , high liquidity and good earnings,
and in general, to be a strong banking organization without any supervisory,
financial, or operational weaknesses or deficiencies. Any institutions
experiencing or anticipating significant growth would be expected to maintain
capital ratios, including tangible capital positions, well above the minimum
levels (e.g., an additional cushion of at least 100 to 200 basis points,
depending upon the particular circumstances and risk profile).
Regulations adopted by the Federal Banking Agencies as required by FDICIA impose
even more stringent capital requirements. The regulators require the OCC and
other Federal Banking Agencies to take certain "prompt corrective action" when a
bank fails to meet certain capital requirements. The regulations establish and
define five capital levels at which an institution is deemed to be
"well-capitalized," "adequately capitalized," "undercapitalized," significantly
undercapitalized" or "critically undercapitalized." In order to be
"well-capitalized," an institution must maintain, at least 10% total risk-based
capital, 6% Tier 1 risk-based capital, and a 5% Leverage Ratio. Increasingly
sever restrictions are imposed on the payment of dividends and mortgage fees,
asset growth and other aspects of the operations of institutions that fall below
the category of "adequately capitalized" (which requires at least 8% total
risk-based capital, 4% Tier 1 risk-based capital, and a 4% Leverage Ratio).
Undercapitalized institutions are required to develop and implement capital
plans acceptable to the appropriate federal regulatory agency. Such plans must
require that any company that controls the undercapitalized institution must
provide certain guarantees that the institution will comply with the plan until
it is adequately capitalized. As of December 31, 1998, the Bank was not subject
to any regulatory order, agreement, or directive to meet and maintain a specific
capital level for any capital measure.
Under Oregon law, an Oregon commercial bank may reduce its paid-in capital to
eliminate or reduce deficits in retained earnings arising from losses, or in
order to redeem shares. Prior approval of the Oregon Director is required in
either case, and may be refused if the Oregon Director determines that the
remaining paid-in capital of the bank would be inadequate for its safe and sound
operation.
The minimum ratio of total capital to risk-adjusted assets (including certain
off-balance sheet items, such as stand-by letters of credit) required by the FRB
for bank-holding companies is 8%. At least one-half of the total capital must be
Tier 1 capital; the remainder may consist of Tier 2 capital. Bancorp is also
subject to minimum Leverage Ratio guidelines. These guidelines provide for a
minimum Leverage Ratio of 3% for bank holding companies meeting certain
specified criteria, including achievement of the highest supervisory rating. All
other bank holding companies are required to maintain a Leverage Ratio which is
at least 100 to 200 basis points higher (4% to 5%). These guidelines provide
that banking organizations experiencing internal growth or making acquisitions
are expected to maintain strong capital positions substantially above the
minimum supervisory levels, without significant reliance on intangible assets.
11
<PAGE> 13
In August of 1995, the Federal Banking Agencies adopted a final rule
implementing the portion of Section 305 of FDICIA that requires the banking
agencies to revise their risk-based capital standards to ensure that those
standards take adequate account of interest rate risk. Effective September 1,
1995, when evaluating the capital adequacy of a bank, the Federal Banking
Agencies' examiners stated considering exposure to declines in the economic
value of the bank's capital due to changes in interest rates. A bank may be
required to hold additional capital for interest rate risk if it has a
significant exposure or a weak interest rate risk management process. Concurrent
with the publication of this final rule, the Federal Banking Agencies proposed
for comment a joint policy statement describing the process the Federal Banking
Agencies will use to measure and assess a bank's interest rate risk.
This joint policy statement was superseded by an updated Joint Policy Statement
in June of 1996. Any impact the joint final rules and the Joint Policy Statement
may have on Bancorp or its subsidiary cannot be predicted at this time.
In addition, the Federal Banking Agencies published a joint final rule on
September 6, 1996, amending their respective risk-based capital standards to
incorporate a measure for market risk to cover all positions located in an
institution's trading account and foreign exchange and commodity positions
wherever located. This final rule, effective January 1, 1997, implements an
amendment to the Basle Capital Accord that sets forth a supervisory framework
for measuring market risk. The final rule effectively requires banks and bank
holding companies with significant exposure to market risk to measure that risk
using its own internal value-at-risk model, subject to the parameters of the
final rule, and to hold a sufficient amount of capital to support the
institution's risk exposure.
Institutions subject to this final rule must be in compliance with it by January
1, 1998. This final rule applies to any bank or bank holding company, regardless
of size, whose trading activity equals 10% or more of its total assets or
amounts to $1 billion or more. The Federal Banking Agencies may require an
institution not otherwise subject to the final rule to comply with it for safety
and soundness reasons and, under certain circumstances, also may exempt an
institution otherwise subject to the final rule from compliance.
FDIC INSURANCE
Generally, customer deposit accounts in banks are insured by the Federal Deposit
Insurance Corporation (FDIC) for up to a maximum amount of $100,000. The FDIC
has adopted a risk-based insurance assessment system. Under this system,
depository institutions, such as the Bank with BIF-insured deposits, are
required to pay an assessment to the BIF ranging from $.0 to $.27 per $100 of
deposits based on the institution's risk classification. On September 30, 1996,
the Deposit Insurance Funds Act of 1996 ("Funds Act") was enacted. The Funds Act
provides, among other things, for the recapitalization of the SAIF through a
special assessment on all depository institutions that hold SAIF-insured
deposits. The one-time assessment is designed to place the SAIF at its 1.25
reserve ratio goal.
12
<PAGE> 14
The Funds Act, for the three-year period beginning in 1997, subjects BIF-insured
deposits to a Financing Corporation ("FICO") premium assessment on domestic
deposits at one-fifth the premium rate (roughly 1.3 basis points) imposed on
SAIF-imposed deposits (roughly 6.5 basis points). In addition, service debt
funding on FICO bonds for the first half of 1997 resulted in BIF insured
institutions paying .64 cents for each $100 of assessed deposits, and SAIF
insured institutions paying 3.2 cents on each $100 of deposits. Beginning in the
year 2000, BIF insured institutions will be required to pay the FICO obligations
on a pro-rata basis with all thrift institutions; annual assessments are
expected to equal approximately 2.4 basis points until 2017, to be phased out
completely by 2019.
Banking regulators are empowered under the Funds Act to prohibit insured
institutions and their holding companies from facilitating or encouraging the
shifting deposits from the SAIF to the BIF in order to avoid higher assessment
rates. Accordingly, the FDIC recently proposed a rule that would, if adopted as
proposed, impose entrance and exit fees on depository institutions attempting to
shift deposits from the SAIF to the BIF as contemplated by the Funds Act. The
Funds Act also provides for the merger of the BIF and SAIF on January 1, 1999,
only if not thrift institutions exist on that date. It is expected that Congress
will address comprehensive legislation on the merger of the funs and elimination
of the thrift charter during the 1998 session.
The risk classification is based on an assignment of the institution by the FDIC
to one of three capital groups and to one of three supervisory subgroups. The
capital groups are "well capitalized," "adequately capitalized," and
"undercapitalized." The three supervisory subgroups are Group "A" (for
financially sound institutions with only a few minor weaknesses), Group "B" (for
those institutions with weaknesses which, if uncorrected, could cause
substantial deterioration of the institution and increase risk to the deposit
insurance fund), and Group "C" (for those institutions with a substantial
probability of loss to the fund absent effective corrective action).
ITEM 2. PROPERTIES
The principal properties of Bancorp and its subsidiary, Citizens Bank, are
comprised of banking facilities owned by the subsidiary.
The main office of Citizens Bank is located in the heart of the business and
retail center ("downtown") Corvallis, Oregon. The building was built in 1977 and
has approximately 30,000 square feet of space on two levels above ground and a
full basement. The upper (2nd) floor is occupied by the administrative support
team, which includes the President/Chief Executive Officer, the Chief Financial
Officer, the Human Resources Officer, the Chief Operations Officer, the
Compliance Officer, the Loan Administrator, Administrative Assistant's, Payroll
Clerk, and the Loan Service Center.
The 1st floor serves as the main banking office for the Bank. It is occupied by
a manager, a lending staff, an operations staff, tellers, marketing officer, new
accounts staff, and mortgage department staff.
13
<PAGE> 15
The basement is occupied by the Accounts Service Center. It includes a manager,
two operations officers, proof and data processing staff, inventory, wire
transfer, telephone, and courier staff. All of the Bank's centralized functions,
i.e., management, proof and data information, loan documentation, loan
administration, cash services, mail services, accounting and human resources,
occur in this building. The Bank owns this building.
The Bank also operates six (6) other branches, of which three (3) are owned and
three (3) are leased. These buildings range in size from 2500 square feet to
approximately 9,000 square feet. Their primary function and use is to provide
banking service to the Bank's customers. The Bank has a lease on the land for
the new West Albany branch for which it began paying in July of 1998. The
aggregate monthly rental of leased buildings and land is $9,870. The following
sets forth all branch offices of the Bank.
<TABLE>
<S> <C>
Main Office Tri-County Office
275 SW Third Street 955 Ivy Street
Corvallis, Oregon Junction City, Oregon
Circle Office(1) Philomath Office
978 NW Circle Blvd. 1224 Main Street
Corvallis, Oregon Philomath, Oregon
University Office(2) Applegate Office(3)
855 NW Kings Blvd. 88312 Territorial Road
Corvallis, Oregon Veneta, Oregon
East Albany Office West Albany Office(4)
2315 14th Ave SE (opening February 1999)
Albany, Oregon 2230 Pacific Blvd SE
Albany, Oregon
</TABLE>
(1) Premises leased under an original lease agreement dated May 1, 1970
and a supplemental lease agreement dated August 16, 1994. The lease
expires January 1, 2020.
(2) Premises leased under a lease agreement dated August 1, 1998. The
lease expires July 31, 2003.
(3) Premises leased under a supplemental lease agreement dated October
30, 1998. The lease expires on December 31, 2003 which the right to
renew for two additional periods of five years each.
(4) Ground lease under ground lease agreement dated May 29, 1998. The
lease expires in year 2048.
ITEM 3. LEGAL PROCEEDINGS
As of the date of filing this Form 10K neither Bancorp nor its subsidiary were a
party to any material legal proceedings. Further, management is not aware of any
threatened or pending lawsuits or other proceedings against Bancorp or its
subsidiary which, if determined adversely,
14
<PAGE> 16
would have a material effect on the business or financial position of either of
them. Bancorp or the Bank may from time to time become a party to litigation in
the ordinary course of business, such as debt collection litigation or an
appearance as a creditor in a bankruptcy case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 1998, no matters were
submitted to the security holders through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established market for Bancorp's common stock, and the stock is not
listed on and does not trade on or through any exchange or quotation system.
There is no expectation that an established market will develop for Bancorp's
common stock. As the transfer agent for Bancorp common stock, Citizens Bank
keeps an informal record of persons expressing an interest in buying or selling
Bancorp common stock and introduces prospective buyers and sellers. Citizens
Bank also keeps some informal records of prices paid and received for Bancorp
common stock by certain persons. Neither Bancorp nor Citizens Bank does or will
recommend prices for Bancorp common stock.
The following table sets forth certain transaction prices per share for shares
of Citizens Bank and Bancorp common stock for the periods shown. This
information is based solely on prices and information reported to Citizens Bank
by those persons whose transactions have come to its attention. The reported
prices do not represent all transactions in Bancorp and Citizens Bank stock, and
Citizens Bank can give no assurances as to the accuracy of the reported prices
or the completeness of this information.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1993 6.00 4.50
1994 7.25 6.07
1995 7.25 5.63
1996 15.00 9.00
1997 15.00 9.00
1998 15.00 14.50
Per share information for the current and prior periods reflect the
effect of the stock dividends and stock splits.
</TABLE>
15
<PAGE> 17
The following table sets forth certain transaction prices per share for shares
of Citizens Bank and Bancorp common stock for the quarterly periods shown. This
information is subject to the qualifications set forth above.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FIRST QUARTER 1997 $10.88 $ 9.00
SECOND QUARTER 1997 $11.50 $10.50
THIRD QUARTER 1997 $11.75 $11.50
FOURTH QUARTER 1997 $15.00 $12.50
FIRST QUARTER 1998 $15.00 $11.50
SECOND QUARTER 1998 $15.00 $14.50
THIRD QUARTER 1998 $18.00 $17.25
FOURTH QUARTER 1998 $18.00 $16.25
</TABLE>
CITIZENS BANK/BANCORP, COMMON EQUITY HOLDING. As of December 31, 1998, there
were 3,891,136.608 shares outstanding, held by 775 shareholders of record. As of
February 28, 1999, there were 782 holders of Citizens Bancorp and 3,927,705.608
shares outstanding. All of the shares issued since December 31, 1998 were issued
under the terms of the dividend reinvestment plan.
Holders are determined on the basis of ownership. Each entity that owns one or
more shares is determined to be a holder. Holders can be individuals,
partnerships, corporations, trusts, or any entity that can legally hold assets
in the State of Oregon. Two or more individuals together can also be a holder,
such as a husband and wife, or a parent and child.
Bancorp has no formal dividend policy. The amount of any dividend is determined
by the Bancorp Board of Directors and depends on the amount of profits generated
and the growth objectives of Bancorp and the Bank, together with other factors
considered by the Board in its discretion. Under Oregon law certain restrictions
on the payment of dividends apply. Under these restrictions, a bank or holding
company may not declare or pay any dividend in an amount greater than its
retained earnings, without prior approval from the State Division of Finance and
Corporate Securities.
16
<PAGE> 18
Bancorp's management intends to follow the same practices and methods for
declaring dividends that were followed by Citizens Bank, and expects to pay
yearly dividends. The following sets forth, for the calendar years shown, the
cash and stock dividends per share of common stock declared by Citizens Bancorp
in 1998 and by Citizens Bank for the preceding years.
<TABLE>
<CAPTION>
CASH DIVIDEND STOCK DIVIDEND STOCK SPLIT
------------- -------------- --------------------
<S> <C> <C> <C>
1992 $.25 10% --
1993 .275 10% --
1994 .30 10% --
1995 .30 -- 1 for 5 stock split
1996 .30 -- 2 for 1 stock split
1997 .34 5% --
1998 .36 -- 2 for 1 stock split
Per share information for the current and prior periods reflect the
effect of the stock dividends and stock splits.
</TABLE>
17
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's consolidated financial statements and accompanying notes presented
herein.
<TABLE>
<CAPTION>
Year ended December 31,
(In thousands except share data)
% increase
(decrease)
1997 to
1998 1997 1998 1996 1995 1994
---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Total interest income ....................... $ 16,947 $ 15,152 11.9% $ 13,704 $ 12,732 $ 10,928
Total interest expense ...................... 5,917 5,286 11.9% 5,034 4,725 3,655
Net interest income ......................... 11,030 9,866 11.8% 8,670 8,007 7,273
---------- ---------- ----------- ---------- ---------- ----------
Provision for possible credit
losses ...................................... 236 165 43.0% 135 100 72
---------- ---------- ----------- ---------- ---------- ----------
Net interest income after
provision for possible credit
losses ...................................... 10,794 9,701 11.3% 8,535 7,907 7,201
---------- ---------- ----------- ---------- ---------- -----------
Total other operating income ................ 2,226 1,857 19.9% 1,569 1,503 1,311
========== ========== =========== ========== ========== ==========
Total other operating expense 7,153 6,194 15.5% 5,306 5,212 5,132
========== ========== =========== ========== ========== ==========
Income before taxes ......................... 5,867 5,364 9.4% 4,798 4,198 3,380
Income taxes ................................ 2,027 2,023 .2% 1,660 1,539 1,172
Net income .................................. $ 3,840 $ 3,341 14.9% $ 3,138 $ 2,659 $ 2,208
========== ========== =========== ========== ========== ==========
PER COMMON SHARE(1)
Net income .................................. $ .99 $ .87 13.8% $ .83 $ .72 $ .61
Cash dividends .............................. .36 0.34 5.9% 0.30 0.30 0.30
Book value .................................. 5.81 5.05 15.0% 4.45 3.36 3.38
---------- ---------- ----------- ---------- ---------- ----------
Weighted average number of
common shares outstanding ................... 3,889,607 3,844,642 3,776,578 3,699,146 3,631,314
---------- ---------- ----------- ---------- ---------- ----------
PERIOD END BALANCES
Total assets ................................ $ 233,978 $ 200,117 16.9% $ 191,887 $ 162,907 $ 155,600
Net loans ................................... 130,707 120,269 8.7% 114,648 100,715 89,396
Deposits .................................... 188,235 161,700 16.4% 161,834 138,694 134,924
Repurchase agreements ....................... 16,299 14,086 15.7% 10,040 7,891 5,774
Shareholders' equity ........................ 22,585 19,411 16.4% 16,805 14,269 12,274
---------- ---------- ----------- ---------- ---------- ----------
PERFORMANCE RATIOS
Return on Average Assets .................... 1.83% 1.79% 1.81% 1.66% 1.45%
Return on Average Equity .................... 17.64% 17.53% 19.27% 19.05% 18.27%
Average Assets to Average
Equity ...................................... 10.36% 10.21% 9.42% 8.85% 7.99%
---------- ---------- ----------- ---------- ---------- ----------
</TABLE>
(1) Per share amounts and the average number of shares outstanding have been
restated for, stock dividends of 10% in 1994 and 5% in 1997, a 2-for-1 stock
split in 1998, a 2-for-1 stock split in 1996, and a 1 for 5 stock split in 1995.
18
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996.
Earnings per share for the three years ended 1998, 1997, and 1996 was $.99, $.87
and $.83, respectively.
NET INCOME. For the three years ended December 31, 1998, Citizens Bancorp's (in
year's 1998 and 1997) and Citizens Bank's (in year 1996) net income was $3.840
million, $3.341 million, and $3.138 million, respectively. 1998 net income
increased $.499 million or 14.9% over 1997, which increased $.203 million or
6.5% over 1996. Bancorp's increased net income in 1998 is primarily due to
increased income from loans, loan fees, and investment income. This increase was
due to volume increases. Average yield on loans remained relatively constant
over the year. Net income was assisted by an increase in earning assets to total
assets and a decrease in the average yield paid on average interest-bearing
liabilities. Average earning assets to average total assets for the years 1998,
1997 and 1996 are 93.6%, 93.2%, and 93.3%, respectively. Average yield on
earning assets for the same periods was 8.8%, 8.9% and 8.7%, respectively.
Bancorp's 1998 net income was negatively impacted by increased expenses in
salary and benefits, costs associated with the planning of two new branches, and
investment in a computer network (LAN/WAN). Management sees these expenditures
as investments in increased productivity and capacity and should result in
consistent year-to-year future earnings growth.
INTEREST INCOME. Interest income totaled $16.9 million for the year ended
December 31, 1998, an 11.9% increase over the $15.1 million for 1997, which was
10.6% over the $13.7 million generated in 1996. This increase in income was due
primarily to increased loan and investment volume.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1998 was $5.9
million, an 11.9% increase over the $5.3 million expense for 1997, and a 5.0%
increase over the $5.0 million expense in 1997. These increases are due to
deposit volume increases.
NET INTEREST INCOME. Net interest income during the years 1998, 1997, and 1996
grew to $11.0 million from $9.9 million and $8.7 million, respectively.
Additionally, for the same periods beginning with 1998, net interest margins
were 5.8%, 5.9% and 5.6%, respectively. Changes in the net interest margins were
primarily due to increased volumes and the changing interest rate environment.
19
<PAGE> 21
The following table presents for the periods indicated, information regarding
average balances of assets and liabilities as well as the total dollar amounts
of interest income from average interest-bearing liabilities, resulting yield
and cost ratios, interest rate spread, ratio of interest-earning assets to
interest-bearing liabilities and net interest margin for Bancorp. Average
balances for the period have been calculated using daily average balances.
<TABLE>
<CAPTION>
AVERAGE BALANCES AND TAX-EQUIVALENT NET INTEREST MARGIN
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 1998 1997 1996
31,
(In thousands) ----------------------------------------------------------------------------------------
Average Int. Avg. Average Int. Avg. Rate Average Int. Avg.
Balance Income Rate Balance Income Earned/ Balance Income Rate
(Expense) Earned/ (Expense) Paid (Expense) Earned/
Paid Paid
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (2) .............................. $130,895 $13,396 10.23% $119,157 $12,250 10.28% $107,718 $10,850 10.07%
INVESTMENT SECURITIES:
Taxable ............................ 45,193 2,645 5.86% 39,265 2,386 6.08% 38,610 2,315 6.00%
Tax-exempt (1) ..................... 5,787 373 6.45% 3,918 330 8.43% 5,603 455 8.11%
-------- ------- ----- -------- -------- ------ -------- ------- -----
TOTAL
INVESTMENT
SECURITIES 50,980 3,018 5.93% 43,183 2,716 6.29% 44,213 2,770 6.26%
======== ======= ===== ======== ======== ====== ======== ======= =====
Interest bearing
deposits in banks and
federal funds sold ..................... 14,937 843 5.64% 11,915 557 4.67% 9,430 464 4.92%
TOTAL EARNING ASSETS ................... 196,722 17,257 8.77% 174,255 15,523 8.91% 161,361 14,084 8.73%
======== ======= ===== ======== ======== ====== ======== ======= =====
Cash and due from banks 8,357 7,548 8,367
Premises and equipment ................. 2,904 2,717 2,694
Other assets ........................... 3,424 3,393 1,469
Reserve for possible
credit losses .......................... (1,299) (1,128) (962)
-------- -------- --------
TOTAL .................................. $210,198 $186,785 $172,929
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Savings, MMDA, NOW ................... $ 74,518 (1,960) 2.63% $ 68,601 (1,903) 2.77% $ 64,358 (1,798) 2.79%
Time ................................. 60,014 (3,226) 5.38% 53,673 (2,872) 5.35% 52,130 (2,798) 5.37%
-------- ------- ----- -------- -------- ------ -------- ------- -----
TOTAL INTEREST-
BEARING DEPOSITS ................... 134,532 (5,186) 3.85% 122,274 (4,775) 3.91% 116,488 (4,596) 3.95%
======== ======= ===== ======== ======== ====== ======== ======= =====
Repurchase agreements .................. 14,225 (525) 3.69% 11,361 (450) 3.96% 9,883 (390) 3.95%
Other borrowings ....................... 3,961 (206) 5.20% 1,349 (61) 4.60% 1,123 (48) 4.27%
-------- ------- ----- -------- -------- ------ -------- ------- -----
TOTAL INTEREST-BEARING
LIABILITIES ............................ 152,718 (5,917) 3.87% 134,984 (5,286) 3.92% 127,494 (5,034) 3.95%
======== ======= ===== ======== ======== ====== ======== ======= =====
Demand deposits ........................ 34,792 31,713 28,299
Other liabilities ...................... 918 1,022 850
Shareholders' equity ................... 21,770 19,066 16,286
-------- -------- --------
TOTAL .................................. $210,198 $186,785 $172,929
======== ======= ===== ======== ======== ====== ======== ======= =====
Net interest margin (1) ................ $11,340 $10,236 $ 9,050
Interest income as a % of avg. earning . 8.78% 8.91% 8.73%
assets
Interest expense as a % of avg. earning 3.01% 3.03% 3.12%
assets
Net interest margin .................... 5.77% 5.88% 5.60%
</TABLE>
(1) Includes taxable equivalent adjustments related to income on securities that
is exempt form federal income taxes. The federal statutory rate was 34%
(2) For purposes of these calculations, nonaccrual loans are included in the
average loan balance outstanding. Loan fees and late charges of $971, $812 and
$572 are included in interest income for 1998, 1997 and 1996.
20
<PAGE> 22
The following table sets forth, on a tax-equivalent basis, a summary of the
changes in net interest income resulting from changes in volumes and rates.
CHANGES NOT DUE SOLELY TO VOLUME OR RATE CHANGES ARE ALLOCATED TO VOLUME AND
RATE IN PROPORTION TO THE RELATIONSHIP OF THE ABSOLUTE DOLLAR AMOUNTS OF THE
CHANGE IN EACH.
<TABLE>
<CAPTION>
1998 versus 1997 1997 versus 1996
-----------------------------------------------------------------
Increase (decrease) Increase (decrease)
due to change in Due to change in
-----------------------------------------------------------------
Average Average Net Average Average Net
Volume Rate Change Volume Rate Change
------- ------- ------ ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans ...................... $1,207 $ (61) $1,146 $1,172 $228 $1,400
Investment securities ...... 397 (95) 302 (65) 11 (54)
Interest-bearing deposits in
banks and federal funds sold 258 28 286 117 (24) 93
------ ------ ------ ------ ---- ------
TOTAL INTEREST INCOME ...... 1,862 (128) 1,734 1,224 215 1,439
====== ===== ====== ====== ==== ======
INTEREST EXPENSE
Savings deposits ........... 84 (27) 57 118 (13) 105
Time deposits .............. 345 9 354 83 (9) 74
Repurchase agreements ...... 87 (12) 75
Other borrowings ........... 141 4 145 69 5 74
------ ------ ------ ------ ---- ------
TOTAL INTEREST EXPENSE ..... 518 (32) 631 270 (17) 253
====== ===== ====== ====== ==== ======
CHANGES IN NET
INTEREST INCOME ............ $1,344 $ (96) $1,103 $ 954 $232 $1,186
====== ===== ====== ====== ==== ======
</TABLE>
The following table further reflects changes in average balances and rates from
December 31, 1998 to December 31, 1997.
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN AVERAGE BALANCE: INCREASE (DECREASE) IN AVERAGE RATE:
- --------------------------------------- ------------------------------------
<S> <C> <C> <C>
Loans 9.85% Loans (.49)%
Investments 17.63% Investments (5.89)%
Fed Funds & Deposits 25.36% Fed Funds & Deposits 20.77%
------ -----
TOTAL EARNING ASSETS 12.85% TOTAL EARNING ASSETS (1.48)%
====== ======
Savings, NOW, MMDA 8.63% Savings, NOW, MMDA (5.32)%
Time 11.81% Time .56%
Repurchase Agreements 25.21% Repurchase Agreements (7.32)%
Other Borrowings 293.62% Other Borrowings 13.04%
------ -----
TOTAL INT BEAR LIABILITIES 13.14% TOTAL INT BEAR LIABILITIES (1.29)%
====== =====
</TABLE>
21
<PAGE> 23
The following chart further reflects changes in average balances and rates from
December 31, 1997 to December 31, 1996.
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN AVERAGE BALANCE: INCREASE (DECREASE) IN AVERAGE RATE:
- --------------------------------------- ------------------------------------
<S> <C> <C> <C>
Loans 10.62% Loans 2.06%
Investments (2.33)% Investments 0.39%
Fed Funds & Deposits 26.35% Fed Funds & Deposits (4.99)%
------ -----
TOTAL EARNING ASSETS 7.99% TOTAL EARNING ASSETS 2.06%
====== =====
Savings, NOW, MMDA 6.59% Savings, NOW, MMDA (0.71)%
Time 2.96% Time (0.31)%
Repurchase Agreements & Repurchase Agreements &
Other Borrowings 15.48% Other Borrowings 1.22%
------ -----
TOTAL INT BEAR LIABILITIES 5.87% TOTAL INT BEAR LIABILITIES (0.80)%
====== =====
</TABLE>
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE CREDIT LOSSES. Net interest
income after provision for possible credit losses was $10.8 million at December
31, 1998, $9.7 million at December 31, 1997, and $8.5 million at December 31,
1996. Total provision for possible credit loss expense for the three years
ending December 31, 1998, was $236,000, $165,000, and $135,000 respectively.
Total provision expense was increased due to loan volume increases. Recoveries
were $14,000, $0, and $15,000 in 1998, 1997, and 1996. Charge-offs of $32,000,
$2,000, and $8,000 were realized during the same periods. The Bank has a history
of very low credit loss experience. Management believes the quality of the loan
portfolio is outstanding due to strong internal controls, good loan policy
standards, experienced loan officers, and the strong economy in Oregon. The
reserve for possible credit losses to total loans for the years ended December
31, 1998, 1997, and 1996, respectively, were 1.07%, .99%, and .88%.
NON-INTEREST INCOME. Non-interest income (total other operating income) was $2.2
million for the year ended December 31, 1998, an 19.9% increase from $1.8
million for 1997, and an 18.4% increase from $1.6 million in 1996. These
increases are due to increased service charges and customer fee income which is
primarily a function of increased volumes of accounts. Very few rate increases
have been made in service charges and fees during this period. During 1997 and
1998, the low and declining interest rate environment on term loans generated
refinance activity and new home purchases, resulting in an increased volume of
home loans made for sale into the secondary market. Gains on the sale of these
loans represented a substantial portion of the increase the Bank experienced in
other operating income.
NON-INTEREST EXPENSE. Non-interest expenses (other operating expenses) have
increased during the last three years ending December 31, 1998 to $7.2 million
from $6.2 million in 1997 and $5.3 million in 1996. A 15.5% increase or a $1
million increase occurred from 1997 to 1998 and a 16.6% or a $.9 million
increase occurred from 1996 to 1997. These increases in non-interest expense are
in correlation and are a direct result of increased non-interest income. The
specific areas of increase occurred in increased salaries and benefits,
equipment, occupancy, professional fees, marketing, printing, office supplies,
communications, and other expenses. At the end of 1998 the Bank had the staff
for its new West Albany branch hired and trained for the early
22
<PAGE> 24
1999 opening. The Bank had also hired a manager and assistant manager to plan
the branch in McMinnville due to open early Spring 1999. This added to the
increase in salary and benefits expense. Overall increases are a result of the
Bank's increased volume, and management's increased emphasis on business
development, marketing, auditing, and human resource management.
Opening new offices results in higher operating costs, which are not offset
until a certain level of growth in loans and deposits is achieved. Initially,
new branch offices will increase non-interest expenses, thus having an adverse
effect on net income for Bancorp. At the end of 1998, Bancorp employed 111
full-time equivalent employees compared to 108 at year end 1997 and 99 at year
end 1996. The Bank has been able to increase staff productivity through
training, education, and improved hiring practices.
Increases in non-interest expense is generally caused by higher operating levels
associated with growth in business volume. Bancorps total assets at December 31,
1998, were 21.9% greater than total assets of the Bank at December 31, 1996.
INCOME TAXES. Income tax expense for 1998 was $2,027 or 34.5% of net income
before taxes, 1997 was $2,023 or 37.7% of net income before taxes. In 1996 the
tax provision was $1,660 or 34.6% of net income before taxes. Bancorp's tax rate
of 34.6% is lower than in 1997 due to an increased percentage of Bancorp's
income being generated by tax exempt items primarily in the Bank's investment
portfolio.
ASSET/LIABILITY MANAGEMENT. Bancorp uses an asset/liability modeling system
called ALX to estimate the degree of interest rate risk and market risk inherent
in its mix of interest earning assets and interest bearing liabilities. Bancorps
profitability is dependent to a large extent on net interest income. Bancorp is
very slightly asset sensitive, meaning that interest earning assets mature or
are otherwise subject to repricing at a slightly faster rate than interest
bearing liabilities. A significant decrease in market rates could adversely
impact the net earnings of Bancorp. In contrast, an inclining interest rate
environment could have a positive affect on net interest income. Bancorps
strategy is to keep a position that is very close to "balanced". That is, the
repricing of assets and liabilities would move much at the same rate. Because
the current position is only slightly asset sensitive the net interest margin
should increase slightly when rates increase and decrease slightly when rates
fall.
LIQUIDITY AND SOURCES OF FUNDS. Bancorp's primary sources of funds for liquidity
purposes are customer deposits, maturities of investment securities, sales of
"available for sale" securities, loan repayments, advances on lines of credit
from correspondent banks and from the Federal Home Loan Bank of Seattle, and the
purchase of federal funds. Bancorp can anticipate the availability of funds from
scheduled loan repayments, maturities of securities and from borrowed funds.
Customer deposits and unscheduled payments of loans are influenced by the
interest rate environment, the condition of the economy, competition and other
factors.
Deposits are Bancorp's primary source of new funds. At December 31, 1998, total
deposits were $188.2 million, $161.7 million at December 31, 1997, and $161.8
million at December 31, 1996. The Bank also had REPO'S (securities sold under
agreements to repurchase) for the periods of
23
<PAGE> 25
December 31, 1998, 1997, and 1996 of $16.2 million, $14.1 million, and $10.0
million, respectfully. The overall cost of funds was as follows:
<TABLE>
<CAPTION>
COST OF FUNDS
------------------------------
1998 1997 1996
------ ------ -----
<S> <C> <C>
3.87% 3.92% 3.95%
</TABLE>
Management anticipates that Bancorp will rely primarily on deposit growth,
maturities of investment securities, sales of available for sale securities, and
loan repayments to meet its liquidity needs. Borrowings can be used to provide
liquidity for short-term needs but it is the practice of Bancorp to attempt to
fund long-term loans and investments with core deposits and earnings, not
short-term borrowings. A limited amount of borrowings may be used on a long-term
basis to fund lending activities and to match maturities or repricing intervals
of assets.
The average daily amount of deposits and rates paid on deposits is summarized
for the periods indicated in the following table:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------------------------
(In Thousands) Amount $ Rate % Amount $ Rate % Amount $ Rate %
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DEPOSITS
Demand $ 34,758 -- $ 31,713 -- $ 28,299 --
Savings $ 74,518 2.63% $ 68,601 2.77% $ 64,358 2.79%
Time $ 60,014 5.38% $ 53,673 5.35% 52,130 5.37%
-------- -------- --------
TOTAL $169,290 $153,987 $144,787
======== ======== ========
</TABLE>
The following table indicates the amount of the Bank's certificates of deposits
with balances equal to or greater than $100,000 classified by time remaining
until maturity as of December 31, 1998.
<TABLE>
<CAPTION>
Maturity Period Certificates of Deposit
-------------------------------------------------------------
In Thousands
<S> <C>
3 months or less 9,786
3 months through 6 months 3,418
6 months through 12 months 2,888
Over 12 months 4,875
------
TOTAL 20,967
======
</TABLE>
24
<PAGE> 26
The following table is a summary of securities sold under repurchase agreement
(REPO) for each of the last three years.
<TABLE>
<CAPTION>
(Dollars in Thousands)
----------------------
1998 1997 1996
----------- ------- --------
<S> <C> <C> <C>
Securities sold under agreement to repurchase:
Average interest rate
At year end ............................ 3.10% 3.28% 3.24%
For the year ........................... 3.69% 3.96% 3.95%
Average amount outstanding
during the year .............................. $ 14,225 $11,361 $ 9,883
Maximum amount outstanding at
any month end ................................ $ 16,299 $14,086 $11,231
Amount outstanding at year end ............... $ 16.299 $14,086 $10,040
</TABLE>
CAPITAL RESOURCES. The Bank is subject to various capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators, that if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines that involve quantitative measures of the Bank's assets, and certain
off-balance-sheet items as calculated under regulatory accounting practices, the
Bank's capital classification is also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
As of December 31, 1998, the most recent notification from the Bank's regulator
categorized the Bank as well-capitalized under the applicable regulations. To be
categorized as "well-capitalized," the Bank must maintain at least 10% total
risk based capital, 6% Tier 1 risk based capital and 5% Tier 1 leverage capital.
There are no conditions or events since that notification that management
believes have changed the institution's category.
25
<PAGE> 27
The following table indicates Citizens Bancorp capital adequacy position at
December 31, 1998, and at December 31, 1997, and compares those positions to
capital adequacy requirements.
<TABLE>
<CAPTION>
Citizens Bancorp
---------------- For Capital
Actual Adequacy Purposes
(in thousands) ------ -----------------
AS OF DECEMBER 31, 1998: Amount Ratio Amount Ratio
- ------------------------------ ------- ----- ------ -----
<S> <C> <C> <C> <C>
Total Risk-Based Capital (to
Risk-Weighted Assets) 23,448 16.5 11,346 =>8%
Tier 1 Capital (to
Risk-Weighted Assets) 22,029 15.5 5,673 =>4%
Tier 1 Capital (to average
Total Assets) 22,029 9.8 9,012 =>4%
AS OF DECEMBER 31, 1997:
Total Risk-Based Capital (to
Risk-Weighted Assets) $20,185 16.6% $9,735 >8%
-
Tier 1 Capital (to
Risk-Weighted Assets) $18,984 15.6% $4,868 >4%
-
Tier 1 Capital (to Average
Total Assets) $18,984 9.7% $7,855 >4%
-
</TABLE>
Shareholders equity increased to $22.6 million at December 31, 1998 from $19.4
million in 1997 and $16.8 million in 1996. Bancorp's (Citizens Bank in 1996)
shareholders average equity, as a percentage of average assets were 10.4% at
December 31, 1998, 10.2% at December 31, 1997, and 9.4% at December 31, 1996.
In a changing interest rate environment the value of the Bank's available for
sale portfolio may be negatively impacted and therefore may cause a reduction in
reported shareholders equity. Equity grew at 16.4% over the period between
December 31, 1997 and December 31, 1998, while assets grew by 16.9% over the
same period.
At December 31, 1998, the Bank had no material commitment for capital
expenditures that would negatively impact Bancorp's capital position.
26
<PAGE> 28
INVESTMENT PORTFOLIO
The following table shows Investments Held to Maturity.
<TABLE>
<CAPTION>
In Thousands
-------------------------------------
Outstanding Balance at December 31,
1998
-------------------------------------
Estimated Fair Value Amortized Cost % of Portfolio
-------------------- -------------- --------------
<S> <C> <C> <C>
U.S. Treasury Securities $2,036 $2,014 3.33%
Federal Agency
Obligations ............ 501 484 .80%
Obligations of State and
Political Subdivisions . 7,320 7,235 11.94%
------ ------ -----
TOTAL .................. $9,857 $9,733 16.07%
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
In Thousands
------------------------------------------
Outstanding Balance at December 31,
1997
------------------------------------------
Estimated Fair Value Amortized Cost % of Portfolio
-------------------- -------------- --------------
<S> <C> <C> <C>
U.S. Treasury Securities $6,036 $6,000 12.98%
Federal Agency
Obligations 500 482 1.04%
Obligations of State and
Political Subdivisions 3,561 3,501 7.57%
------- ------ -----
TOTAL $10,097 $9,983 21.59%
======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
In Thousands
------------------------------------------
Outstanding Balance at December 31,
1996
------------------------------------------
Estimated Fair Value Amortized Cost % of Portfolio
-------------------- -------------- --------------
<S> <C> <C> <C>
U.S. Treasury Securities $10,066 $10,007 21.21%
Federal Agency
Obligations 657 650 1.38%
Obligations of State and
Political Subdivisions 5,042 5,078 9.72%
------- ------- -----
TOTAL $15,765 $15,735 32.31%
======= ======= =====
</TABLE>
27
<PAGE> 29
The following table sets forth the maturities and weighted average yields of
securities held to maturity at December 31, 1998.
<TABLE>
<CAPTION>
IN THOUSANDS
----------------------------------------------------
After 1 year, but After 5 years, but
Amount Within 1 year before 5 years before 10 years After 10 years
- ------ ------------- ----------------- ------------------ --------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities ...................... 2,014 0 0 0
Federal Agency
Obligations ................................... 0 0 0 0
Obligations of State and
Political Subdivisions ........................ 591 2,355 3,724 1,049
----- ----- ----- -----
TOTAL ......................................... 2,605 2,355 3,724 1,049
===== ===== ===== =====
Weighted Average Yield(*)
U.S. Treasury Securities ...................... 6.03% 0 0 0
Federal Agency
Obligations ................................... 0 0 0 0
Obligations of State and
Political Subdivisions ........................ 5.69% 4.44% 4.28% 4.45%
----- ----- ----- -----
TOTAL ......................................... 5.95% 4.44% 4.28% 4.45%
===== ===== ===== =====
</TABLE>
(*) Yield on tax exempt delegations have not been computed on a tax equivalent
basis
The following tables show Investments Available for Sale.
<TABLE>
<CAPTION>
In Thousands
------------------------------------------
Outstanding Balance at December 31,
1998
------------------------------------------
Estimated Fair Value Amortized Cost % of Portfolio
-------------------- -------------- --------------
<S> <C> <C> <C>
U.S. Treasury Securities 26,864 26,679 44.34
Federal Agency
Obligations 23,334 23,137 38.51
Obligations of State and
Political Subdivisions 0 0 0
Other Securities 657 657 1.08
------ ------ -----
TOTAL 50,855 50,473 83.93
====== ====== =====
</TABLE>
28
<PAGE> 30
<TABLE>
<CAPTION>
In Thousands
------------------------------------------
Outstanding Balance at December 31,
1997
------------------------------------------
Estimated Fair Value Amortized Cost % of Portfolio
-------------------- -------------- --------------
<S> <C> <C> <C>
U.S. Treasury Securities $22,075 $22,027 47.73%
Federal Agency
Obligations 13,570 13,527 29.35%
Obligations of State and
Political Subdivisions 0 0 0
Other Securities 613 613 1.33%
------- ------- ------
TOTAL $36,258 $36,167 78.41%
======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
In Thousands
------------------------------------------
Outstanding Balance at December 31,
1996
------------------------------------------
Estimated Fair Value Amortized Cost % of Portfolio
-------------------- -------------- --------------
<S> <C> <C> <C>
U.S. Treasury Securities $23,564 $23,540 50.42%
Federal Agency
Obligations 7,535 7,517 16.12%
Obligations of State and
Political Subdivisions 0 0 0
Other Securities 0 0 1.15%
------- ------- ------
TOTAL $31,099 $31,057 66.54%
======= ======= ======
</TABLE>
The following table sets forth the maturities, weighted average maturities, and
weighted average yields of securities available for sale.
<TABLE>
<CAPTION>
After 1 year, but After 5 years, but
Amount Within 1 year before 5 years before 10 years After 10 years
- ------ ------------- ----------------- ------------------ --------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities 13,604 13,260 0 0
Federal Agency
Obligations 7,556 15,778 0 0
Obligations of State and
Political Subdivisions 0 0 0 0
Other Securities 657 0 0 0
------ ------ -- --
TOTAL 21,817 29,038 0 0
====== ====== == ==
</TABLE>
29
<PAGE> 31
<TABLE>
<CAPTION>
Investments Available For Sale
------------------------------------------------------------------------
After 1 year, but After 5 years, but
Within 1 Year before 5 years before 10 years After 10 years
------------- ------------------ ------------------ --------------
Weighted Average Yield(*)
- -------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities 5.43 5.28 0 0
Federal Agency
Obligations 6.05 5.69 0 0
Obligations of State and
Political Subdivisions 0 0 0 0
Other Securities 7.58 0 0 0
---- ---- -- --
TOTAL 5.71 5.50 0 0
==== ==== == ==
</TABLE>
(*) Yield information is computed using amortized cost balances and does not
give effect to changes in fair value that are reflected as a component of
shareholders equity.
LENDING AND CREDIT MANAGEMENT. Interest on loans is the primary source of income
for Bancorp. Net loans represented 55.9% of total assets as of December 31,
1998. The Bank works to serve the credit needs of the entire community, however
its primary focus for lending is small-to-medium sized businesses,
professionals, and individuals for commercial and real estate related financing
needs. Substantially all of the Bank's loans are to customers located within the
Bank's service areas.
Although the risk of non-payment always exists, type and level of risk changes
with different types of loans. In the Bank's loan portfolio, real estate is
frequently used as collateral. The primary source of repayment is the income
generated by a business or by an individual, but real estate as collateral
provides an additional measure of security. There are risks associated with
taking real estate as collateral. The risks are changing property values,
changes in property tax laws, and changes in economic conditions.
Loan risk is mitigated by lending to borrowers with proven credit histories and
demonstrated ability to repay. The Bank manages risk in the loan portfolio by
following loan policies and underwriting practices designed to result in minimal
risk.
30
<PAGE> 32
At December 31, the following table sets forth the composition of the Bank's
Loan Portfolio by type of loan as of the dates indicated.
<TABLE>
<CAPTION>
In Thousands
------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Type of Loan Amount % Amount % Amount % Amount % Amount %
- ------------ -------- -- -------- -- -------- -- -------- -- ------- --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 26,234 20% $ 23,507 20% $ 21,975 19% $ 21,169 21% $21,858 24%
Agriculture 12,402 9% 10,992 9% 9,072 8% 8,834 9% 7,742 9%
Real Estate
Construction 7,900 6% 5,459 4% 3,865 3% 4,065 4% 2,543 3%
1-4 Family 31,390 24% 34,625 28% 34,322 29% 30,993 31% 25,080 28%
Other 50,421 38% 42,142 35% 40,300 35% 31,833 32% 25,317 28%
Other -- -- -- -- -- -- 105 -- 9 --
Consumer 4,393 3% 5,423 4% 6,861 6% 5,240 4% 8,187 8%
-------- ---- -------- ---- -------- ---- -------- ---- ------- ----
TOTAL LOANS 132,740 $122,148 $116,395 $102,239 $90,736
======== ==== ======== ==== ======== ==== ======== ==== ======= ====
Less Deferred
Loan Fees (614) (678) (709) (628) (496)
Less Allowance
for Credit Loss
Reserve
(1,419) (1,201) (1,038) (896) (844)
-------- ---- -------- ---- -------- ---- -------- ---- ------- ----
NET LOANS $130,707 100% $120,269 100% $114,648 100% $100,715 100% $89,396 100%
======== ==== ======== ==== ======== ==== ======== ==== ======= ====
</TABLE>
Interest income on loans is accrued daily on the principal balance outstanding.
Generally, no interest is accrued on loans deemed to be uncollectable, or when
the principal or interest payment becomes 90 days past due. At December 31,
1998, the Bank had loans totaling $447,000 that were 90 days or more past due
and still accruing interest because in management's judgement all of the
principal and accrued interest was deemed collectable and not subject to loss.
The following table shows the contractual maturity of the Bank's gross loans at
December 31, 1998. Loans having no stated schedule of repayments and no stated
maturity, demand loans, and overdrafts are reported as due in one year or less.
Loan balances do not include undisbursed loan proceeds, deferred loan fees and
discounts and allowance for losses on loans. The table does not reflect any
estimate of prepayments, which significantly shorten the average life of all
loans and may cause the Bank's actual repayment experience to differ from that
shown below.
<TABLE>
<CAPTION>
In Thousands
------------
After 1 year, but After 5 years, but
Within 1 year before 5 years before 10 years After 10 years
------------- ----------------- ------------------ --------------
<S> <C> <C> <C> <C>
Commercial 9,860 8,068 2,012 2,904
Agriculture 8,375 2,385 262 0
Real Estate
Construction 8,106 0 0 0
1-4 Family 3,080 1,813 5,269 20,970
Other 3,630 6,163 7,134 37,414
Consumer 1,260 2,644 628 149
------ ------ ------ ------
TOTAL 34,311 21,073 15,305 61,437
====== ====== ====== ======
</TABLE>
31
<PAGE> 33
The following table sets forth the dollar amount of all loans due one year or
more after December 31, 1998, which have fixed interest rates and have floating
or adjustable interest rates.
<TABLE>
<CAPTION>
In Thousands
------------
Fixed Rates Floating or Adjustable Rates
----------- ----------------------------
<S> <C> <C>
Commercial 7,313 5,671
Agriculture 1,094 1,553
Real Estate
Construction 97 2,991
1-4 Family 11,540 16,511
Other 20,667 30,044
Consumer 3,290 132
------ ------
TOTAL 44,001 56,902
====== ======
</TABLE>
PROVISION FOR POSSIBLE CREDIT LOSSES
The provision for credit losses charged to operating expense is based on the
Bank's credit loss experience and certain other factors determined by management
that deserve recognition in estimating credit losses. Management monitors the
loan portfolio to ensure that the reserve for possible credit losses is adequate
to cover outstanding loans.
It is Bank policy that once each quarter, (in January, April, July, and October)
Bank management makes recommendations to the Board regarding the adequacy of the
Bank's credit loss reserves and the amount of the provision that should be
charged against earnings for the next three months. The Board then makes a
decision regarding these amounts and these decisions are communicated to the
Banks' Lending Officers.
When determining loan reserve amounts the Board is given information divided
into the following categories.
1. Specific. Specific reserves are for loans graded substandard or doubtful
to cover the amount of exposure the Bank has calculated for each loan.
2. General. For all loans graded higher than substandard or doubtful, the
Bank uses estimates based on its previous experience for each category
of loans.
3. Special. From time to time special reserves will be established to
facilitate a change in bank strategy. This happens only when the Bank
intentionally embarks on a strategy that has more than a normal amount
of credit risk associated with it. Special allocations are also made to
cover suspected shortfalls in other real estate owned (OREO) or to
establish a reserve for some other form of special asset.
4. Unallocated. The Board may from time to time increase the credit loss
reserve to an amount that is larger than is needed to meet specific,
general, and special reserves requirements. The Board does this by
adding unallocated reserves. The Board does
32
<PAGE> 34
this when it is uncomfortable with the amount of the calculated
allocation, when it foresees an economic downturn, or it otherwise
sees a need for additional reserves.
Management also uses a loan grading system wherein officers grade each of their
commercial loans at inception, annually thereafter when financial statements are
received if the loan has an annual maturity, and at other times when there is an
indication that a credit may have weakened or improved. It is the responsibility
of the loan review officer to ensure the integrity of the loan grading system.
Loans graded substandard or doubtful, either by the Bank or by a regulator,
receive special attention in the analysis and specific reserve amounts are set
aside for each loan based upon the total principal dollar amount of the loan.
Specific reserves for doubtful and substandard loans are 50% and 25%,
respectively. Estimated loss percentages are used for all other loans by type as
follows: installment (consumer loans to individual) .57%, real estate mortgage
loans .23%, and all other loans (general) .55%. These loss percentage factors
establish the required reserve amount by multiplying the factor times the total
of loans in each category.
As of December 31, 1998, the Bank held in its reserve for possible credit losses
a total of $1.4 million.
The following table presents the relationship of the reserve for possible credit
loss to the loan portfolio as of December 31, 1998, 1997, 1996, 1995, and 1994.
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
BALANCE AT END OF PERIOD:
-------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
% of % of % of % of % of
Loans Loans Loans Loans to Loans
to Total to Total to Total Total to Total
$ Amount Loans $ Amount Loans $ Amount Loans $ Amount Loans $ Amount Loans
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DOMESTIC:
Commercial,
Financial, &
Agricultural 482 32% 403 28% 216 27% 207 29% 211 33%
Real Estate -
Construction 31 3% 27 5% 89 3% 94 4% 58 3%
Real Estate -
Mortgage 126 60% 107 63% 170 64% 143 62% 115 55%
Installment
Loans to
Individuals 64 5% 46 4% 39 6% 30 5% 46 9%
UNALLOCATED 716 N/A 618 N/A 524 N/A 422 N/A 414 N/A
Total Allowance
for Possible
Credit Losses 1,419 100% 1,201 100% 1,038 100% 896 100% 844 100%
</TABLE>
The total reserve for possible credit losses represents the Boards' opinion at
December 31, of each year as to an amount that would meet the Bank's needs in
the event of an economic downturn or unforeseen event.
It is the opinion of management that the total reserve for possible credit loss
at December 31, 1998 was adequate to meet the policy portfolio requirements of
the Bank. Total allowance represented 1.07% of total loans at that date.
33
<PAGE> 35
The following table summarizes transactions in the reserve for possible credit
losses and details the charge-offs, recoveries, and net credit losses by loan
category for the last five years.
<TABLE>
<CAPTION>
IN THOUSANDS
------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
ALLOWANCE AT
BEGINNING OF PERIOD: . $1,201 $1,038 $ 896 $ 844 $ 779
====== ====== ====== ====== ======
Provision for Possible
Credit Losses ........ 236 165 134 100 72
CHARGE-OFFS:
Commercial ........... 28 0 0 44 0
Agriculture .......... 0 0 0 0 0
Real Estate .......... 0 0 0 0 0
Construction ..... 0 0 0 0 0
1-4 Family ....... 0 0 0 0 0
Other ............ 0 0 0 0 0
Consumer ............. 4 2 8 10 7
------ ------ ------ ------ ------
TOTAL CHARGE-OFFS: ... $ 32 $ 2 $ 8 $ 53 $ 7
====== ====== ====== ====== ======
RECOVERIES:
Commercial ........... 14 0 15 5 0
Agriculture .......... 0 0 0 0 0
Real Estate .......... 0 0 0 0 0
Construction ..... 0 0 0 0 0
1-4 Family ....... 0 0 0 0 0
Other ............ 0 0 0 0 0
Consumer ............. 0 0 0 0 0
------ ------ ------ ------ ------
TOTAL
RECOVERIES ........... $ 14 $ 0 $ 15 $ 5 $ 0
====== ====== ====== ====== ======
NET RECOVERIES
(CHARGE-OFFS) ........ (18) (2) 7 (48) (7)
====== ====== ====== ====== ======
BALANCE AT
END OF PERIOD ........ $1,419 $1,201 $1,038 $ 896 $ 844
====== ====== ====== ====== ======
RATIO OF NET CHARGE-
OFFS TO AVG. LOANS
OUTSTANDING .......... .00% .00% .00% .05% .01%
====== ====== ====== ====== ======
</TABLE>
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No.
114, "Accounting by Creditors for Impairment of a Loan" and in October 1996
issued SFAS No. 118," "Accounting by Creditors for Impairment of a Loan--Income
Recognition Disclosures, an
34
<PAGE> 36
amendment to SFAS No. 114." The Bank measures impaired loans based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or as a practical expedient, at the loan's observable market
price or the fair market value of the collateral if the loan is collateral
dependent. The Bank excludes loans that are currently measured at fair value or
at lower of cost or fair value, and certain large groups of smaller balance
homogeneous loans that are collectively measured for impairment. At December 31,
1998 and 1997, the Bank had no materially impaired loans.
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 does business, including its vendors, suppliers, utility companies, and
customers.
Bancorp is committed to addressing these Y2K challenges in a prompt and
responsible manner. Bancorp'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. Bancorp
has substantially completed the awareness and assessment phases, although
appropriate follow-up activities are continuing to occur. Bancorp 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.
Bancorp has assigned primary responsibility for the Y2K project to its Chief
Operating Officer. Bancorp has also formed a Y2K committee, consisting of
appropriate representatives from its critical operational areas. In addition,
Bancorp provides periodic reports to its Board of Directors in order to assist
them in overseeing its Y2K readiness.
35
<PAGE> 37
During the Assessment phase of our Y2K preparation, an individual analysis of
each hardware, software and time sensitive environmental application used by
Bancorp was completed. This assessment included a risk evaluation, which
measured the criticality of the application, a rating of confidence of Bancorp
to achieve a compliant status, and a determination of the level of control
Bancorp has in effecting change in the compliance process. The designation
"Mission Critical", meaning those systems that should they fail would have a
significant adverse impact on Bancorp'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 Bancorp, were then assigned to each
application.
Bancorp 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, Bancorp 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>
Bancorp 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 Bancorp, its customers, and vendors has the potential to impact
financial condition, liquidity, and create a material loss of revenue. Based on
the Bancorp'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 Bancorp will be well prepared to avoid any
significant detrimental effects. Since Bancorp 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 Bancorp's control. Bancorp 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. Bancorp 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 Bancorp has borrowers that
experience Y2K cash flow problems, they will be dealt with in the same routine
manner by which normal cash flow
36
<PAGE> 38
interruptions experienced by borrowers are addressed. Any increase in cash
demand will be funded by Bancorp's normal currency ordering procedures funded by
deposits held at the Federal Reserve Bank and investments maturing in 1999.
Bancorp has sufficient liquidity to cover anticipated withdrawals. In summary,
Bancorp presently 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET-LIABILITY MANAGEMENT AND INTEREST RATE SENSITIVITY
Bancorp's results of operations are largely dependent on its ability to manage
net interest income. The principal purpose of asset-liability management is to
manage the Bank's sources and uses of funds under various interest rate and
economic conditions in order to stabilize net income and minimize risk.
The Bank analyzes its interest rate risk by simulation modeling and by
traditional interest rate gap analysis. The model analyzes the Bank's current
position and anticipated future results based on assumptions and estimations
that management deems reasonable, although actual results may vary
substantially.
The main component of asset-liability management is the management of the Bank's
interest rate sensitivity and market risk. Interest-rate sensitivity is defined
as the volatility in earnings resulting from changes in interest rates and/or
the mismatch of repricing intervals between assets and liabilities. The Bank's
management attempts to manage its assets and liabilities to maximize earnings
growth by minimizing the effects of changing market rates, asset and liability
mix and prepayment trends. This is a "balanced position" strategy which lessens
the volatility in interest income. Management actively manages the relationship
between its interest rate sensitive assets and interest rate sensitive
liabilities.
37
<PAGE> 39
If assets and liabilities do not mature or reprice simultaneously, and in equal
amounts, a gap is present and exposure to interest rate risk exists. An interest
rate sensitivity gap occurs when there is a different amount of rate sensitive
assets than rate sensitive liabilities scheduled to reprice over the same period
of time. The gap is considered positive when rate sensitive assets exceed rate
sensitive liabilities, and negative when rate sensitive liabilities exceed rate
sensitive assets. During a period of rising interest rates, a negative gap would
generally tend to adversely impact net interest income while a positive gap
would generally tend to result in an increase in net interest income. During a
period of declining interest rates, a negative gap would generally tend to
result in increased net interest income, while a positive gap would generally
tend to adversely affect net interest income.
The following table sets forth the interest rate sensitivity of Bancorp's assets
and liabilities over various contracted repricing periods and maturities as of
December 31, 1998. Certain shortcomings are inherent in the traditional gap
analysis presented in the table. For instance, although certain assets and
liabilities may have similar repricing periods or maturities, historically they
have been proven to react in different timings and degree to changes in market
interest rates. Additionally, loan repayments and early withdrawals of
certificates of deposits could cause the interest sensitivities to vary from
those which appear in the table.
<TABLE>
<CAPTION>
December 31, 1998
(in thousands)
0 - 3 3 - 6 6 - 12 1 - 5 years Over 5 Total
months months months years
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING -
ASSETS
Interest Bearing Deposits 23,406 -- -- -- -- 23,406
Loans ................... 38,015 14,060 12,684 44,325 23,483 132,567
Investments ............. 3,007 10,163 10,595 31,393 4,773 59,931
----------------------------------------------------------------------------------
TOTAL INTEREST - ..........
EARNING ASSETS $ 64,428 $ 24,223 $ 23,279 $ 75,718 $ 28,256 $ 215,904
========= ========= ========= ========= ========= =========
INTEREST BEARING -
LIABILITIES
Interest-Bearing Demand -
Deposits .............. 32,600 -- -- -- -- 32,600
Savings Deposits ........ 48,415 -- -- -- -- 48,415
Time Deposits ........... 22,886 14,292 12,969 15,048 -- 65,195
REPO'S .................. 16,299 -- -- -- -- 16,299
Other Borrowings ........ 345 -- -- -- 4,211 4,556
----------------------------------------------------------------------------------
TOTAL INTEREST-
BEARING LIABILITIES ..... $ 120,545 $ 14,292 $ 12,969 $ 15,048 $ 4,211 $ 167,065
========= ========= ========= ========= ========= =========
$ (56,117) $ 9,931 $ 10,310 $ 60,670 $ 24,045 $ 48,839
==================================================================================
CUMULATIVE INTEREST
RATE SENSITIVITY GAP .... $ (56,117) $ (46,186) $ (35,876) $ 24,794 $ 48,839
========= ========= ========= ========= ========= =========
CUMULATIVE GAP AS A
PERCENT OF ASSETS ....... (23.9)% (19.7)% (15.3)% 10.6% 20.9%
</TABLE>
On a straight gap measurement of interest rate sensitivity the Bank is asset
sensitive. Using the financial model with historical timings and degree of
market rate change effecting the
38
<PAGE> 40
components of the balance sheet, the Bank is very slightly asset sensitive. The
Bank will see little effect on equity in either a rising or declining interest
rate environment based on the balance sheet as of December 31, 1998. Management
strives to maintain a balanced interest sensitivity position.
The Bank's sensitivity to gains or losses in future earnings due to hypothetical
increases or decreases in the Fed Funds rate as measured by its financial model
are as follows.
<TABLE>
<CAPTION>
Increase in Interest Net Interest Margin Decrease in Interest Net Interest Margin
Rates Change Rates Change
- -------------------- ------------------- -------------------- -------------------
<S> <C> <C> <C>
+1% $109,000 -1% $78,000
+2% $330,000 -2% $200,000
</TABLE>
A 1% rate increase represents a .5% increase in the Bank's equity while a 1%
rate decrease represents a .3% decrease in the Bank's equity. A 2% rate increase
represents a 1.5% increase in the Bank's equity while a 2% rate decrease
represents a .9% decrease in the Bank's equity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements and related documents
are set forth in this Annual Report on Form 10-K on the pages indicated:
<TABLE>
<CAPTION>
Pages
<S> <C>
Report of Independent Certified Public Accountants......................40
Consolidated Balance Sheets.............................................41
Consolidated Statements of Income.......................................42
Consolidated Statements of Shareholders' Equity.........................43
Consolidated Statements of Cash Flows...................................45
Notes to Consolidated Financial Statements..............................47
</TABLE>
39
<PAGE> 41
INDEPENDENT AUDITORS' REPORT
Board of Directors
CITIZENS BANCORP
Corvallis, Oregon
We have audited the accompanying consolidated balance sheet of CITIZENS BANCORP
AND SUBSIDIARY as of December 31, 1998, 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 consolidated financial statements
of CITIZENS BANCORP AND SUBSIDIARY as of December 31, 1997 and for the years
ended December 31, 1997 and 1996 were audited by other auditors whose report,
dated February 27, 1998, expressed an unqualified opinion on those consolidated
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 consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 referred to above present
fairly, in all material respects, the financial position of CITIZENS BANCORP AND
SUBSIDIARY as of December 31, 1998, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/
Knight, Vale & Gregory, Inc. P.S.
January 15, 1999
Tacoma, Washington
40
<PAGE> 42
CONSOLIDATED BALANCE SHEETS
- ---------------------------
(Dollars in Thousands)
Citizens Bancorp and Subsidiary
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks ................................. $ 12,771 $ 9,268
Interest bearing deposits in banks ...................... 23,406 15,299
Federal funds sold ...................................... -- 2,800
Securities available for sale ........................... 50,855 36,258
Securities held to maturity ............................. 9,733 9,983
Loans ................................................... 132,126 121,470
Allowance for credit losses ............................. 1,419 1,201
-------- --------
NET LOANS ............................................... 130,707 120,269
======== ========
Premises and equipment .................................. 3,435 2,756
Foreclosed real estate .................................. -- 240
Accrued interest receivable ............................. 1,853 1,667
Other assets ............................................ 1,218 1,577
-------- --------
TOTAL ASSETS ............................................ $233,978 $200,117
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand ................................................ $ 42,025 $ 35,683
Savings and interest-bearing demand ................... 81,015 70,562
Time .................................................. 65,195 55,455
-------- --------
TOTAL DEPOSITS .......................................... 188,235 161,700
======== ========
Short-term borrowings (repurchase agreements) ........... 16,644 16,900
Long-term borrowings .................................... 4,211 --
Accrued interest payable ................................ 227 200
Other liabilities ....................................... 2,076 1,906
-------- --------
TOTAL LIABILITIES ....................................... 211,393 180,706
======== ========
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 ............................... 16,069 15,517
Retained earnings ....................................... 6,271 3,832
Accumulated other comprehensive income .................. 245 62
-------- --------
TOTAL SHAREHOLDERS' EQUITY .............................. 22,585 19,411
======== ========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............. $233,978 $200,117
======== ========
</TABLE>
See notes to consolidated financial statements.
41
<PAGE> 43
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------
(Dollars in Thousands, Except Per Share Amounts)
Citizens Bancorp and Subsidiary
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME
Loans ............................................... $ 13,167 $ 11,992 $ 10,625
Federal funds sold and deposits in banks ............ 843 557 464
Securities available for sale ....................... 2,578 1,811 1,323
Securities held to maturity:
Taxable ........................................... 115 574 992
Tax-exempt ........................................ 244 218 300
---------- ---------- ----------
TOTAL INTEREST INCOME ............................... 16,947 15,152 13,704
---------- ---------- ----------
INTEREST EXPENSE
Deposits ............................................ 5,186 4,775 4,596
Other borrowings .................................... 731 511 438
---------- ---------- ----------
TOTAL INTEREST EXPENSE .............................. 5,917 5,286 5,034
---------- ---------- ----------
NET INTEREST INCOME ................................. 11,030 9,866 8,670
---------- ---------- ----------
PROVISION FOR CREDIT LOSSES ............................. 236 165 135
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 10,794 9,701 8,535
---------- ---------- ----------
NON-INTEREST INCOME
Service charges on deposit accounts ................. 934 820 691
Gains on sales of securities available for sale ..... 20 1 12
BankCard income ..................................... 797 610 503
Other non-interest income ........................... 475 426 363
---------- ---------- ----------
TOTAL NON-INTEREST INCOME ........................... 2,226 1,857 1,569
---------- ---------- ----------
NON-INTEREST EXPENSE
Salaries ............................................ 2,736 2,304 2,081
Employee benefits ................................... 998 851 670
Occupancy ........................................... 555 511 502
Furniture and equipment ............................. 529 471 438
BankCard expense .................................... 673 481 391
Office supplies ..................................... 179 182 151
Other non-interest expense .......................... 1,483 1,394 1,073
---------- ---------- ----------
TOTAL NON-INTEREST EXPENSE .......................... 7,153 6,194 5,306
---------- ---------- ----------
INCOME BEFORE INCOME TAXES .......................... 5,867 5,364 4,798
---------- ---------- ----------
INCOME TAXES ............................................ 2,027 2,023 1,660
---------- ---------- ----------
NET INCOME .......................................... $ 3,840 $ 3,341 $ 3,138
========== ========== ==========
EARNINGS PER SHARE DATA
Basic earning per share ............................. $ .99 $ .87 $ .83
========== ========== ==========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING ............. 3,889,607 3,844,642 3,776,578
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
42
<PAGE> 44
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -----------------------------------------------
(Dollars in Thousands)
Citizens Bancorp and Subsidiary Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME TOTAL
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ........ 880,749 $ 9,884 $ 4,377 $ 9 $ 14,270
Comprehensive income:
Net income ...................... -- -- 3,138 -- 3,138
Other comprehensive income,
net of tax:
Unrealized gain on
securities, net of
reclassification adjustment -- -- -- 19 19
COMPREHENSIVE INCOME ............ -- -- 3,138 19 3,157
Transfer from retained earnings ..... -- 3,000 (3,000) -- --
Two-for-one stock split ............. 899,199 -- -- -- --
Cash dividend reinvestment
($24.80 per share) ............... 18,449 457 -- -- 457
Cash dividends declared
($.60 per share) ................. -- -- (1,079) -- (1,079)
BALANCE AT DECEMBER 31, 1996 .... 1,798,397 $ 13,341 $ 3,436 $ 28 $ 16,805
Comprehensive income:
Net income ...................... -- -- 3,341 -- 3,341
Other comprehensive income,
net of tax:
Unrealized gain on
securities, net of
reclassification adjustment -- -- -- 34 34
COMPREHENSIVE INCOME ............ -- -- 3,341 34 3,375
Prior period adjustment ............. -- -- 9 -- 9
5% stock dividend ................... 91,539 1,648 (1,648) -- --
Cash dividend reinvestment
($16.31 per share) ............... 32,385 528 -- -- 528
Cash dividends declared
($.68 per share) ................. -- -- (1,306) -- (1,306)
BALANCE AT DECEMBER 31, 1997 .... 1,922,321 $ 15,517 $ 3,832 $ 62 $ 19,411
</TABLE>
(continued)
See notes to consolidated financial statements.
43
<PAGE> 45
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -----------------------------------------------
(concluded) (Dollars in Thousands)
Citizens Bancorp and Subsidiary
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME TOTAL
<S> <C> <C> <C> <C> <C>
Comprehensive income:
Net income ...................... -- $ -- $ 3,840 $ -- $ 3,840
Other comprehensive income,
net of tax:
Unrealized gain on
securities, net of
reclassification adjustment -- -- -- 183 183
COMPREHENSIVE INCOME ............ -- -- 3,840 183 4,023
Two-for-one stock split ............. 1,945,569 -- -- -- --
Cash dividend reinvestment
($23.76 per share) .............. 23,247 552 -- -- 552
Cash dividends declared
($.36 per share) ................ -- -- (1,401) -- (1,401)
BALANCE AT DECEMBER 31, 1998 .... 3,891,137 $ 16,069 $ 6,271 $ 245 $ 22,585
</TABLE>
See notes to consolidated financial statements.
44
<PAGE> 46
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
(Dollars in Thousands)
Citizens Bancorp and Subsidiary Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ......................................................... $ 3,840 $ 3,341 $ 3,138
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses .................................... 236 165 135
Depreciation and amortization .................................. 396 347 420
Deferred income tax (benefit) .................................. (30) 58 (86)
Gains on sales of securities available for sale ................ (20) (1) (12)
Stock dividends received ....................................... (48) (40) (40)
(Increase) decrease in interest receivable ..................... (186) (53) 239
Increase in interest payable ................................... 27 16 4
Other .......................................................... 467 (1,474) (57)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......................... 4,682 2,359 3,741
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale7,000 ..... 21,000 9,000
Proceeds from sales of securities available for sale ............... 11,521 2,000 6,053
Proceeds from maturities of securities held to maturity ............ 5,444 6,205 10,435
Purchases of securities available for sale ......................... (32,868) (24,337) (21,391)
Purchases of securities held to maturity ........................... (5,182) (449) (201)
Net (increase) decrease in interest bearing deposits in banks(8,107) 1,081 (15,272)
Net (increase) decrease in federal funds sold ...................... 2,800 (2,800) --
Increase in loans made to customers,
net of principal collections ..................................... (10,623) (5,755) (14,536)
Purchases of premises and equipment ................................ (1,041) (46) (54)
Other .............................................................. 236 (2,999) (3,951)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES .............................. (30,820) (6,100) (29,917)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, savings
and interest-bearing demand deposits ............................. 16,795 (4,182) 21,705
Net increase in time deposits ...................................... 9,740 4,047 1,436
Net increase (decrease) in short-term borrowings ................... (256) 5,279 3,134
Net increase in long-term borrowings ............................... 4,211 -- --
Cash dividends paid ................................................ (849) (778) (622)
Other .............................................................. -- 227 355
NET CASH PROVIDED BY FINANCING ACTIVITIES .......................... 29,641 4,593 26,008
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS ................. 3,503 852 (168)
-------- -------- --------
CASH AND DUE FROM BANKS
Beginning of year .................................................. 9,268 8,416 8,584
END OF YEAR ........................................................ $ 12,771 $ 9,268 $ 8,416
======== ======== ========
</TABLE>
(continued)
See notes to consolidated financial statements.
45
<PAGE> 47
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
(concluded) (Dollars in Thousands)
Citizens Bancorp and Subsidiary
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid ................................................ $5,890 $5,270 $5,030
Income taxes paid ............................................ 2,351 2,195 1,792
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Fair value adjustment of assets available for sale, net of tax $ 183 $ 34 $ 19
Stock dividend ............................................... -- 1,648 --
Dividend reinvestment ........................................ 552 528 457
</TABLE>
See notes to consolidated financial statements.
46
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Citizens Bancorp
(the Company) and its wholly owned subsidiary, Citizens Bank (the Bank). All
significant intercompany transactions and balances have been eliminated.
NATURE OF OPERATIONS
The Company is a holding company which operates primarily through its major
subsidiary, the Bank. The Bank operates seven branches in Western Oregon in
Benton, Lane and Linn Counties. The Bank's primary source of revenue is
providing loans with a focus on small to medium size businesses.
CONSOLIDATED FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry. The preparation of consolidated 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 the disclosure of contingent assets and liabilities, as of the
date of the balance sheet, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ significantly from
those estimates.
Certain prior year amounts have been reclassified to conform to the 1998
presentation. All dollar amounts, except per share information, are stated in
thousands.
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of debt securities, which may be sold to
implement the Company's asset/liability management strategies and in response to
changes in interest rates and similar factors, and certain restricted equity
securities. Securities available for sale are reported at fair value. Unrealized
gains and losses, net of the related deferred tax effect, are reported as a net
amount in accumulated other comprehensive income, which is a separate component
of shareholders' equity. Realized gains and losses on securities available for
sale, determined using the specific identification method, are included in
earnings. Amortization of premiums and accretion of discounts are recognized in
interest income over the period to maturity.
SECURITIES HELD TO MATURITY
Debt securities for which the Company has the positive intent and ability to
hold to maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts, which are recognized in interest income over the period
to maturity.
(continued)
47
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
LOANS
Loans are stated at the amount of unpaid principal, reduced by deferred loan
fees and an allowance for credit losses. Interest on loans is accrued daily
based on the principal amount outstanding.
Generally the accrual of interest on loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due or when
they are past due 90 days as to either principal or interest. When interest
accrual is discontinued, all unpaid accrued interest is reversed against current
income. If management determines that the ultimate collectibility of principal
is in doubt, cash receipts on nonaccrual loans are applied to reduce the
principal balance.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and amortized as an adjustment of the yield of the related loan.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operations and reduced by loans charged off,
net of recoveries. The allowance is based on management's periodic evaluation of
potential losses in the loan portfolio after consideration of historical loss
experience, adverse situations that may affect the borrowers' ability to repay,
the estimated value of any underlying collateral, economic conditions, the
results of examination of individual loans, the evaluation of the overall
portfolio by senior credit personnel and federal and state regulatory agencies,
and other risks inherent in the portfolio. This evaluation requires the use of
current estimates, which may vary from the ultimate collectibility experienced
in the future. The estimates used are reviewed periodically; as adjustments
become necessary, they are charged to operations in the period in which they
become known.
When management determines it is possible that a borrower will be unable to
repay all amounts due according to the terms of the loan agreement, including
scheduled interest payments, the loan is considered impaired. The amount of
impairment is measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, when the primary source of
repayment is provided by real estate collateral, at the fair value of the
collateral less estimated selling costs. The amount of impairment and any
subsequent charges are recorded through the provision for credit losses as an
adjustment to the allowance for credit losses.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation, which
is computed on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the term of the lease or the
estimated useful life of the improvement, whichever is less. Gains or losses on
dispositions are reflected in earnings.
(continued)
48
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, foreclosure are to be
sold and are initially recorded at fair value of the properties less estimated
costs of disposal. Any write-down to fair value at the time of transfer to
foreclosed real estate is charged to the allowance for credit losses. Properties
are evaluated regularly to ensure that the recorded amounts are supported by
their current fair values, and that valuation allowances to reduce the carrying
amounts to fair value less estimated costs to dispose are recorded as necessary.
Additions to or reductions from valuation allowances are recorded in income.
INCOME TAXES
Deferred tax assets and liabilities result from differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities, and are reflected at currently enacted income tax rates applicable
to the period in which the deferred tax assets or liabilities are expected to be
realized or settled. The deferred tax provision represents the difference
between the net deferred tax asset/liability at the beginning and end of the
year. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
CASH EQUIVALENTS
The Company considers all amounts included in the balance sheet caption "Cash
and due from banks" to be cash equivalents.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating the
fair values of financial instruments disclosed in these financial statements:
CASH AND SHORT-TERM INSTRUMENTS
The carrying amounts of cash and short-term instruments approximate
their fair value.
SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
Fair values for securities, excluding restricted equity securities, are
based on quoted market prices. The carrying values of restricted equity
securities approximate fair values.
LOANS
For variable rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. Fair
values for fixed rate loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values for
impaired loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable.
(continued)
49
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
FAIR VALUES OF FINANCIAL INSTRUMENTS (concluded)
DEPOSIT LIABILITIES
The fair values disclosed for demand deposits are, by definition, equal
to the amounts payable on demand at the reporting date (that is, their
carrying amounts). The carrying amounts of variable rate, fixed term
money market accounts and certificates of deposit approximate their fair
values at the reporting date. Fair values for fixed rate certificates of
deposit are estimated using a discounted cash flow calculation based on
interest rates currently being offered on similar certificates.
SHORT-TERM AND LONG-TERM BORROWINGS
The carrying amounts of repurchase agreements and other short-term
borrowings maturing within 90 days approximate their fair values. Fair
values of other borrowings are estimated using discounted cash flow
analyses based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
EARNINGS PER SHARE
Basic earnings per share exclude dilution and are computed by dividing net
income by the weighted average number of common shares outstanding.
COMPREHENSIVE INCOME
Effective January 1, 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 in a financial statement
that is displayed 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, comprehensive income includes net income reported on the
consolidated statements of income, and changes in fair value of its securities
available for sale, reported as a component of shareholders' equity. There was
no effect on previously reported net income as a result of this reporting
change.
(continued)
50
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in its balance sheet and measure those instruments at fair value.
Under this statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk. This statement is
effective for all fiscal years beginning after June 15, 1999. The Company had no
derivatives as of December 31, 1998, nor does the Company engage in any hedging
activities. The Company does not anticipate that the adoption of SFAS No. 133
will have a material effect on its financial position or results of operations.
NOTE 2 - RESTRICTED ASSETS
Federal Reserve Board regulations require that the Bank maintain certain minimum
reserve balances on deposit with the Federal Reserve Bank. The amounts of such
balances for the years ended December 31, 1998 and 1997 were approximately
$1,733 and $2,023, respectively.
NOTE 3 - DEBT AND RESTRICTED EQUITY SECURITIES
Debt and restricted equity securities have been classified according to
management's intent. The carrying amount of securities and their approximate
fair values were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUES
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1998
U.S. Government and agency securities $49,816 $394 $(12) $50,198
Restricted equity securities ........ 657 -- -- 657
------- ---- ---- -------
TOTAL ............................... $50,473 $394 $(12) $50,855
======= ==== ==== =======
DECEMBER 31, 1997
U.S. Government and agency securities $35,554 $ 97 $ (6) $35,645
Restricted equity securities ........ 613 -- -- 613
------- ---- ---- -------
TOTAL ............................... $36,167 $ 97 $ (6) $36,258
======= ==== ==== =======
</TABLE>
(continued)
51
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary
December 31, 1998 and 1997
NOTE 3 - DEBT AND RESTRICTED EQUITY SECURITIES (concluded)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUES
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY
DECEMBER 31, 1998
U.S. Government and agency securities $2,014 $ 22 $ -- $ 2,036
State and municipal securities 7,719 119 (17) 7,821
------ ---- ---- ------
TOTAL $9,733 $141 $(17) $ 9,857
====== ==== ==== ======
DECEMBER 31, 1997
U.S. Government and agency securities $6,000 $ 36 $ -- $ 6,036
State and municipal securities 3,983 78 -- 4,061
------ ---- ---- ------
TOTAL $9,983 $114 $ -- $10,097
====== ==== ==== ======
</TABLE>
The scheduled maturities of debt securities held to maturity and available for
sale at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in one year or less $2,605 $2,636 $21,065 $21,160
Due from one year to five years 2,355 2,408 28,751 29,038
Due from five to ten years 3,724 3,761 -- --
Due after ten years 1,049 1,052 -- --
------ ------ ------- -------
TOTAL $9,733 $9,857 $49,816 $50,198
====== ====== ======= =======
</TABLE>
Securities carried at approximately $26,271 at December 31, 1998 and $28,738 at
December 31, 1997 were pledged to secure public deposits and for other purposes
required or permitted by law.
Gross realized gains on sales of securities available for sale were $20, $1 and
$15 for the years ended December 31, 1998, 1997 and 1996, respectively.
Gross realized losses on sales of securities available for sale were $3 in 1996;
no realized losses occurred in 1997 or 1998.
52
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary
December 31, 1998 and 1997
NOTE 4 - LOANS
Loans at December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Agriculture $ 12,402 $ 10,992
Commercial 26,234 23,507
Real estate:
Construction 7,900 5,459
1-4 family 31,390 35,659
Other 50,421 41,108
Consumer 4,393 5,423
132,740 122,148
Less unearned income and deferred loan origination fees 614 678
-------- --------
TOTAL LOANS $132,126 $121,470
======== ========
</TABLE>
Changes in the allowance for credit losses for the years ended December 31 are
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Balance at beginning of year $1,201 $1,038 $ 896
Provision for credit losses 236 165 135
Charge-offs (32) (2) (8)
Recoveries 14 -- 15
------ ------ ------
NET (CHARGE-OFFS) RECOVERIES (18) (2) 7
------ ------ ------
BALANCE AT END OF YEAR $1,419 $1,201 $1,038
====== ====== ======
</TABLE>
The recorded investment in impaired loans, which were all on nonaccrual status,
was $173 at December 31, 1998. There were no impaired loans at December 31,
1997. No allocation of the allowance for credit losses was considered necessary
for impaired loans. The average recorded investment in impaired loans during the
years ended December 31, 1998 and 1997 was $17 and $66, respectively. Interest
income recognized on impaired loans, which was collected in cash, totaled $13 in
1997. No interest income was recognized on impaired loans in 1998.
(continued)
53
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary
December 31, 1998 and 1997
NOTE 4 - LOANS (concluded)
At December 31, 1998, there were no commitments to lend additional funds to
borrowers whose loans have been modified. Loans 90 days and over past due still
accruing interest were $447 and $438 at December 31, 1998 and 1997,
respectively.
Certain related parties of the Company, principally Company directors, their
associates and key officers, were loan customers of the Bank in the ordinary
course of business during 1998 and 1997. Total loans outstanding at December 31,
1998 and 1997 to key officers and directors were $2,004 and $2,237,
respectively. During 1998, advances totaled $824, and repayments totaled $1,057
on these loans.
NOTE 5 - PREMISES AND EQUIPMENT
The components of premises and equipment at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land and buildings $4,058 $3,935
Furniture and equipment 2,135 2,100
Construction in progress 700 34
6,893 6,069
Less accumulated depreciation and amortization 3,458 3,313
------ ------
TOTAL PREMISES AND EQUIPMENT $3,435 $2,756
====== ======
</TABLE>
At December 31, 1998, the Company was in the process of constructing a new West
Albany branch. Costs incurred as of December 31, 1998 for branch construction,
furniture and equipment were $650, with total costs estimated at $950. The
branch opened in February 1999. Subsequent to December 31, 1998, the Company
also purchased land in McMinnville for a future branch facility at a cost of
$593. The Company plans to open a temporary facility in McMinnville in late
spring 1999, with a permanent facility opening by year-end 1999. The Company has
entered into no contracts for the McMinnville facilities.
The Bank leases premises under operating leases. Rental expense for leased
premises was $111, $99 and $96 for 1998, 1997 and 1996, respectively, which is
included in occupancy expense.
Minimum net rental commitments under noncancellable leases having an original or
remaining term of more than one year are as follows at December 31, 1998:
<TABLE>
<S> <C>
1999 $ 118
2000 118
2001 118
2002 118
2003 9
8
Thereafter 1,489
------
TOTAL MINIMUM PAYMENTS REQUIRED $2,059
======
</TABLE>
Certain leases contain renewal options from five to ten years and escalation
clauses based on increases in property taxes and other costs.
54
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary
December 31, 1998 and 1997
NOTE 6 - DEPOSITS
The aggregate amount of certificates of deposit with balances in excess of one
hundred thousand dollars was approximately $20,967 and $14,300 at December 31,
1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<S> <C>
1999 $50,146
2000 8,630
2001 4,189
2002 1,514
2003 716
-------
$65,195
=======
</TABLE>
NOTE 7 - SHORT-TERM BORROWINGS
Securities sold under agreements to repurchase, and treasury tax and loan
deposits represent short-term borrowings with maturities which do not exceed 120
days. The following is a summary of such short-term borrowings for the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Average balance during the year .......... $14,225 $11,361
Average interest rate during the year .... 3.69% 3.96%
Maximum month-end balance during the year 16,299 14,086
Balance at December 31 ................... 16,299 14,086
TREASURY TAX AND LOAN DEPOSITS
Average balance during the year .......... $ 1,116 $ 1,349
Average interest rate during the year .... 4.76% 4.60%
Maximum month-end balance during the year 2,580 2,814
Balance at December 31 ................... 345 2,814
</TABLE>
55
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary
December 31, 1998 and 1997
NOTE 8 - LONG-TERM BORROWINGS
The Bank has agreements with commercial banks for lines of credit totaling
$13,000, none of which was used at December 31, 1998 and 1997. The Bank also has
a line of credit with the Federal Home Loan Bank (FHLB) totaling 15% of assets,
$4,211 of which was used at December 31, 1998, which represents the Bank's
outstanding long-term borrowings. The FHLB advances bear interest at rates
ranging from 6.06% to 6.24%, and mature in June 2010, April 2013 and May 2013.
Future minimum payment obligations are as follows:
<TABLE>
<S> <C>
1999 $ 309
2000 309
2001 309
2002 309
2003 309
Thereafter 2,666
</TABLE>
NOTE 9 - EMPLOYEE BENEFITS
The Bank has a 401(a) profit sharing plan covering substantially all employees
who have completed one year or more of service. Contributions to the 401(a)
profit sharing plan consist of employer contributions (up to a maximum of 15% of
employee salaries), which are at the discretion of the Board of Directors. Total
contributions by the Bank to this plan in 1998, 1997 and 1996 were $339, $281
and $252, respectively.
NOTE 10 - INCOME TAXES
Income taxes are comprised of the following for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current:
Federal ........... $ 1,657 $ 1,752 $ 1,415
State ............. 400 213 331
Deferred (benefit) ... (30) 58 (86)
------- ------- -------
TOTAL INCOME TAXES $ 2,027 $ 2,023 $ 1,660
======= ======= =======
</TABLE>
(continued)
56
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary
December 31, 1998 and 1997
NOTE 10 - INCOME TAXES (concluded)
The following is a reconciliation between the statutory and the effective
federal income tax rates for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
PERCENT PERCENT PERCENT
OF PRE-TAX OF PRE-TAX OF PRE-TAX
AMOUNT INCOME AMOUNT INCOME....AMOUNT INCOME
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory rates .......... $ 1,995 34.0% $ 1,823 34.0% $ 1,631 34.0%
Increase (decrease) resulting from:
Tax-exempt income .................... (74) (1.3) (59) (1.0) (90) (1.8)
State income taxes,
net of federal income tax effects .. 264 4.5 140 2.5 218 4.5
Other ................................ (158) (2.7) 119 2.2 (99) (2.1)
------- ---- ------ ---- ------- ----
TOTAL INCOME TAX EXPENSE ........... $ 2,027 34.5% $ 2,023 37.7% $ 1,660 34.6%
======= ==== ====== ==== ======= ====
</TABLE>
The tax effect of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31 are:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Allowance for credit losses .................... $ 494 $ 414 $ 525
Other .......................................... 51 51 --
----- ----- -----
TOTAL DEFERRED TAX ASSETS ...................... 545 465 525
DEFERRED TAX LIABILITIES
Accumulated depreciation ....................... (31) (32) (54)
Other .......................................... (70) (19) (54)
Unrealized gain on securities available for sale (137) (29) (13)
----- ----- -----
TOTAL DEFERRED TAX LIABILITIES ................. (238) (80) (121)
----- ----- -----
NET DEFERRED TAX ASSETS ........................ $ 307 $ 385 $ 404
===== ===== =====
</TABLE>
57
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary
December 31, 1998 and 1997
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. A summary of the Bank's
commitments at December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Commitments to extend credit:
Real estate secured ................. $ 1,575 $ 2,204
Other ............................. 17,468 16,512
------- -------
TOTAL COMMITMENTS TO EXTEND CREDIT $19,043 $18,716
======= =======
Standby letters of credit ............ $ 2,366 $ 2,165
======= =======
</TABLE>
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. 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's experience has been that approximately 70% of loan commitments are drawn
upon by customers. The Bank evaluates each customer's creditworthiness 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 of
the party. Collateral held varies, but may include accounts receivable,
inventory, property and equipment, residential real estate, and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above, and is required in instances where the Bank deems necessary.
Because of the nature of its activities, the Company is subject to various
pending and threatened legal actions which arise in the ordinary course of
business. In the opinion of management, liabilities arising from these claims,
if any, will not have a material effect on the financial position of the
Company.
58
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary
December 31, 1998 and 1997
NOTE 12 - CASH DIVIDEND REINVESTMENT PLAN
The Bank established a cash dividend reinvestment plan in 1990 and the Company
adopted a revised plan on July 15, 1997. The revised reinvestment plan allows
for 50% or 100% of the cash dividends to be reinvested based upon shareholder
election; 750,000 shares are authorized for dividend reinvestment of which
23,247 shares have been issued. The plan allows shareholders who elect to
reinvest their cash dividends to receive shares of additional stock.
NOTE 13 - STOCK SPLITS AND STOCK DIVIDENDS
In 1998, the Board of Directors declared a two-for-one stock split, and
1,945,569 shares were issued. In 1997, the Board of Directors declared a 5%
stock dividend, and 91,539 shares were issued. In 1996, the Board of Directors
declared a two-for-one stock split, and 899,199 shares were issued.
Per share information for the current and prior periods has been adjusted to
reflect the effect of the stock dividends and stock splits. Management considers
the amounts transferred from retained earnings to common stock and surplus to be
in accordance with Bank regulatory requirements reflecting an appropriate
capitalization on a cumulative basis of the market value of the stock dividend
shares.
NOTE 14 - REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines on the regulatory framework for prompt corrective action, the Bank
must meet specific capital adequacy guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital
classification is also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of Tier 1 capital (as defined in the regulations) to
total average assets (as defined), and minimum ratios of Tier 1 and total
capital (as defined) to risk-weighted assets (as defined). Under the regulatory
framework for prompt corrective action, the Bank must maintain minimum Tier 1
leverage, Tier 1 risk-based, and total risk-based ratios as set forth in the
table. Management believes, as of December 31, 1998, that the Company and the
Bank meet all capital requirements to which they are subject.
As of December 31, 1998, the most recent notification from the Bank's regulator
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
(continued)
59
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary
December 31, 1998 and 1997
NOTE 14 - REGULATORY MATTERS (concluded)
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Tier 1 capital (to average assets):
Consolidated .......................... $22,029 9.79% $ 9,012 4.00% N/A N/A
Bank .................................. 21,937 9.74 9,003 4.00 $11,264 5.00%
Tier 1 capital (to risk-weighted assets):
Consolidated .......................... 22,029 15.53 5,673 4.00 N/A N/A
Bank .................................. 21,937 15.52 5,654 4.00 8,480 6.00
Total capital (to risk-weighted assets):
Consolidated .......................... 23,448 16.53 11,346 8.00 N/A N/A
Bank .................................. 23,356 16.52 11,307 8.00 14,134 10.00
DECEMBER 31, 1997
Tier 1 capital (to average assets):
Consolidated .......................... $18,984 9.67% $ 7,855 4.00% N/A N/A
Bank .................................. 18,919 9.62 7,869 4.00 $ 9,836 5.00%
Tier 1 capital (to risk-weighted assets):
Consolidated .......................... 18,984 15.60 4,868 4.00 N/A N/A
Bank .................................. 18,919 15.67 4,831 4.00 7,246 6.00
Total capital (to risk-weighted assets):
Consolidated .......................... 20,185 16.59 9,735 8.00 N/A N/A
Bank .................................. 20,120 16.66 9,662 8.00 12,077 10.00
</TABLE>
RESTRICTIONS ON RETAINED EARNINGS
At December 31, 1998, there were no restrictions on retained earnings regarding
payment of dividends.
60
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary
December 31, 1998 and 1997
NOTE 15 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS - DECEMBER 31
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Cash ..................................... $ 1,401 $ 1,326
Investment in subsidiary ................. 22,493 19,346
Other .................................... 92 46
------- -------
TOTAL ASSETS ............................. $23,986 $20,718
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Dividends payable ........................ $ 1,401 $ 1,307
======= =======
SHAREHOLDERS' EQUITY
Common stock ............................. 16,069 15,517
Retained earnings ........................ 6,271 3,832
Accumulated other comprehensive income ... 245 62
------- -------
TOTAL SHAREHOLDERS' EQUITY ............... 22,585 19,411
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $23,986 $20,718
======= =======
</TABLE>
CONDENSED STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
INCOME
Dividend income from subsidiary ............ $ 1,520 $ 100 $ --
EXPENSES
Amortization and other expense ............. 142 59 9
Interest expense ........................... -- 1 --
INCOME (LOSS) BEFORE INCOME TAX BENEFIT .... 1,378 40 (9)
INCOME TAX BENEFIT ............................. 51 24 4
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY ....................... 1,429 64 (5)
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY ... 2,411 3,277 3,143
------- ------- -------
NET INCOME ................................. $ 3,840 $ 3,341 $ 3,138
======= ======= =======
</TABLE>
(continued)
61
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary
December 31, 1998 and 1997
NOTE 15 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (concluded)
CONDENSED STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................... $ 3,840 $ 3,341 $ 3,138
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization .................................. 5 3 --
Equity in undistributed income of subsidiary .. (2,411) (3,277) (3,143)
Increase in dividends payable ................. 94 1,307 --
Other ......................................... (604) (34) 6
NET CASH PROVIDED BY OPERATING ACTIVITIES ..... 924 1,340 1
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of software .......................... -- (15) --
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid ........................... (849) -- --
NET INCREASE IN CASH .......................... 75 1,325 1
CASH
Beginning of year ............................. 1,326 1 --
END OF YEAR ................................... $ 1,401 $ 1,326 $ 1
</TABLE>
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December 31
were as follows:
<TABLE>
<CAPTION>
1998 1997
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks,
interest bearing deposits with
banks, and federal funds sold $ 36,177 $ 36,177 $ 27,367 $ 27,367
Securities available for sale .. 50,855 50,855 36,258 36,258
Securities held to maturity .... 9,733 9,857 9,983 10,097
Loans receivable, net .......... 130,707 130,668 120,269 120,237
FINANCIAL LIABILITIES
Deposits ....................... $188,235 $188,523 $161,700 $161,654
Short-term borrowings .......... 16,644 16,644 16,900 16,900
Long-term borrowings ........... 4,211 4,211 -- --
</TABLE>
62
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary
December 31, 1998 and 1997
NOTE 17 - COMPREHENSIVE INCOME
Net unrealized gains are as follows:
<TABLE>
<CAPTION>
BEFORE-TAX TAX NET-OF-TAX
AMOUNT EXPENSE AMOUNT
<S> <C> <C> <C>
1998
Unrealized holding gain arising during the year ... $311 $115 $196
Less reclassification adjustments for gain realized
in net income .................................. 20 7 13
NET UNREALIZED GAIN ........................... $291 $108 $183
1997
Unrealized holding gain arising during the year ... $ 51 $ 16 $ 35
Less reclassification adjustments for gain realized
in net income .................................. 1 -- 1
NET UNREALIZED GAIN ........................... $ 50 $ 16 $ 34
1996
Unrealized holding gain arising during the year ... $ 39 $ 12 $ 27
Less reclassification adjustments for gain realized
in net income .................................. 12 4 8
NET UNREALIZED GAIN ........................... $ 27 $ 8 $ 19
</TABLE>
NOTE 18 - YEAR 2000 ISSUES
As the year 2000 approaches, business issues are emerging regarding how existing
software programs and operating systems can accommodate the date value. 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 (1900), they
were stored as two digits (00). However, when the clock rolls over to 2000, many
systems will think "00" is 1900 rather than 2000. Hardware and/or software that
run on a time schedule or involve 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.
(continued)
63
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary
December 31, 1998 and 1997
NOTE 18 - YEAR 2000 ISSUES (concluded)
The Company has been actively working for well over one and one-half years
toward addressing that its systems and people will be ready to serve its
customers in the new century and beyond. The Company has closely followed the
Federal Financial Institutions Examination Council's recommended approach of: 1)
awareness, 2) assessment, 3) renovation, 4) validation, and 5) implementation.
Currently, the Company has completed the assessment, renovation and testing of
the bulk of the Company's hardware and software. The Company has also contacted
all of its service suppliers to obtain some assurance of their year 2000
readiness status. The Company will spend the balance of 1999 validating its
testing results, planning for any remaining contingencies, and ensuring its
customer's awareness of the Company's year 2000 readiness status.
The costs incurred to date on year 2000 compliance issues have not been
material. While it is impossible to estimate the potential impact on the
Company's business after January 1, 2000, management presently believes that the
costs the Company will incur prior to that date relating to its activities
necessary to ensure year 2000 readiness will not have a significant effect on
its financial position or results of operations.
64
<PAGE> 66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
In December of 1997 Bancorp's management recommended to the Audit Committee of
the Board of Directors that Bancorp solicit bids from independent certified
public accountants to perform its accounting and auditing work beginning in the
1998 fiscal year. The Audit Committee approved the recommendation, and directed
management to schedule interviews to evaluate qualified candidates to serve as
Bancorp's independent accountant.
The Audit Committee scheduled interviews with three accounting firms as part of
its review and evaluation process. David O. Christensen, C.P.A., Bancorp's
outside accounting firm at the time of the bidding process, was invited to be
considered as a candidate for Bancorp's accounting and auditing work and to be
included among firms interviewed. Mr. Christensen notified Bancorp on January
9, 1998 that he declined to stand for consideration or for re-election as
Bancorp's independent accountant. The Audit Committee held its interviews on
February 11,1998, and thereafter recommended that the accounting firm of
Knight, Vale and Gregory, Inc., P.S. ("KVG") be retained as Bancorp's
independent accountant. The recommendation was approved by the Board of
Directors on February 17, 1998.
The recommendation did not arise from any disagreements, within the meaning of
Item 304 of Regulation S-K, between Bancorp and Bancorp's prior independent
accountant, David O. Christensen, and there have been no such disagreements, or
any "reportable events" under paragraph (a)(1)(v) of Item 304, with respect to
any Company financial statement, audit, report or tax return or any matters
relating thereto for Bancorp's 1996 or 1997 fiscal years or any subsequent
interim period through January 9, 1998. In particular, with respect to such
financial statements, Mr. Christensen's report did not contain an adverse
opinion or a disclaimer of opinion, and was not qualified or modified as to
uncertainty, audit scope or accounting principles.
Beginning on February 18, 1998 KVG commenced providing accounting and audit
services to Bancorp for matters arising in fiscal 1998, and served as Bancorp's
independent auditor to audit Bancorp's financial statements for the fiscal year
1998. A representative of KVG will be present at the Annual Meeting, will have
an opportunity to make a statement if he or she so desires and will be
available to respond to appropriate questions.
Bancorp retained the firm of Shiraishi and Kitchen, Inc. to perform the
internal operational audit of Citizens Bank for fiscal 1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is included in Bancorp's definitive proxy
materials for its Annual Meeting of Shareholders scheduled for April 20, 1999.
These definitive proxy materials were filed with the Securities Exchange
Commission on or about March 28, 1999, and are hereby incorporated herein by
this reference.
65
<PAGE> 67
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in Bancorp's definitive proxy
materials for its Annual Meeting of Shareholders scheduled for April 20, 1999.
These definitive proxy materials were filed with the Securities Exchange
Commission on or about March 28, 1999, and are hereby incorporated herein by
this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included in Bancorp's definitive proxy
materials for its Annual Meeting of Shareholders scheduled for April 20, 1999.
These definitive proxy materials were filed with the Securities Exchange
Commission on or about March 28, 1999, and are hereby incorporated herein by
this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in Bancorp's definitive proxy
materials for its Annual Meeting of Shareholders scheduled for April 20, 1999.
These definitive proxy materials were filed with the Securities Exchange
Commission on or about March 28, 1999, and are hereby incorporated herein by
this reference.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements:
Bancorp's consolidated financial statements and related documents are listed in
the index set forth in Item 8 of this report and are filed as part of this
report. All other schedules to the consolidated financial statements referenced
in Regulation S-X are omitted because they are not applicable or are not
material, or because the information is already included in Bancorp's
consolidated financial statements and the notes thereto.
Pursuant to Item 601 of Regulation S-K, the following exhibits are attached
hereto or are incorporated herein by reference.
(Note: The per share earnings computation statement required by Item 601(b)(11)
of Regulation S-K is contained in Note 1 to the Consolidated Financial
Statements included in Bancorp's 1998 Annual Report to Shareholders. A copy of
this Annual Report is attached hereto as an exhibit.)
1. Article of Incorporation and Bylaws. (Regulation S-K, Item 601, Exhibit
Table Item (3)). A copy of Bancorp's Articles of Incorporation and Bylaws
are attached as Exhibits (3)(i) and (3)(ii) to its Form 10-K for the year
ending December 31, 1997 filed with the SEC on March 31, 1998, and are
incorporated herein by this reference.
2. Annual Report to Shareholders. (Regulation S-K, Item 601, Exhibit Table
Item (13)). A copy of Bancorp's 1998 Annual Report to Shareholders is
attached hereto.
66
<PAGE> 68
3. List of Subsidiaries. (Regulation S-K, Item 601, Exhibit Table Item (21)).
Attached hereto is a list of Bancorp's subsidiaries as of December 31,
1998.
4. Financial Data Schedule. (Regulation S-K, Item 601, Exhibit Table Item
(27)). Bancorp's Financial Data Schedule is attached hereto.
(b) Reports on Form 8-K.
Bancorp filed no reports on Form 8-K in the fourth quarter of 1998.
Upon written request's to Bancorp's Chief Financial Officer, Lark E. Wysham,
P.O. Box 30, Corvallis, Oregon 97339 a copy of any exhibit referenced herein
will be provided to the requesting party upon payment of Bancorp's reasonable
copying expense of $.25 per page.
67
<PAGE> 69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 29th day of March,
1999.
CITIZENS BANCORP
(Registrant)
By: /s/
--------------------------------------------
William V. Humphreys
President and Chief Executive Officer
Each person whose individual signature appears below hereby authorizes and
appoints William V. Humphreys and Lark Wysham, and each of them, with full power
of substitution and full power to act without the other, as his/her true and
lawful attorney-in-fact and agent to act in his name, place and stead and to
execute in the name and on behalf of each person individually and in each
capacity stated below, and to file any and all amendments to this Registration
Statement, including any and all post-effective amendments.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 29th day of March, 1999.
PRINCIPAL EXECUTIVE OFFICER:
/s/ William V. Humphreys, President and Chief Executive Officer
- -------------------------------------------------
William V. Humphreys
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ Lark E. Wysham, Senior Vice President and Chief Financial Officer
- ----------------------------------------
Lark E. Wysham
DIRECTORS:
<TABLE>
<S> <C>
/s/ /s/
- ---------------------------------------- ---------------------------------------
Gene N. Thompson Jock Gibson
/s/ /s/
- ---------------------------------------- ---------------------------------------
Rosetta C. Venell Jim E. Richards
/s/ /s/
- ---------------------------------------- ---------------------------------------
John Truax Scott A. Fewel
/s/ /s/
- ---------------------------------------- ---------------------------------------
Duane L. Sorensen William V. Humphreys
</TABLE>
68
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
<S> <C> <C>
13.1 1998 Annual Report to Shareholders. 1
21.1 Bancorp's subsidiaries as of December 31, 1998. 33
27.1 Financial Data Schedule. 35
</TABLE>
69
<PAGE> 1
1998
CITIZEN BANCORP ANNUAL REPORT
<PAGE> 2
Citizens Bank, the wholly-owned subsidiary of Citizens Bancorp, is a trusted
strategic partner to the businesses, farmers, individuals and professionals who
make up the economic backbone of Oregon's burgeoning and rapidly diversifying
Mid-Willamette Valley. Citizens Bank believes in neighbor helping neighbor, so
the money our local customers deposit is the money we lend to other local
customers. The Bank supports the long-term success and prosperity of its
customers with flexible general banking services, as well as financial help in
the form of commercial, agricultural, real estate, and consumer loans. With an
administrative office in Corvallis and branches in Albany, Corvallis, Junction
City, Philomath, Veneta and McMinnville (opening Spring 1999), Citizens Bank
serves Benton, Lane, Linn, and Yamhill Counties.
CONTENTS
<TABLE>
<S> <C>
A Message from the President 3
A Message from the Chairman 5
Community Involvement 6-7
The Executive Team 8
The Board of Directors 9
Financial Highlights 10
Consolidated Balance Sheets 11
Consolidated Statements of Income 12
Consolidated Statements of Shareholders' Equity 13
Consolidated Statements of Cash Flows 14
Notes to the Financials 15-23
Accountant's Report 23
Selected Financial Data 24
Dividends & Market Price of Common Stock 25
Management's Discussion & Analysis 26-31
Corporate Information 32
</TABLE>
<PAGE> 3
[PHOTOGRAPH]
harvesting near Tangent
<PAGE> 4
A MESSAGE FROM THE PRESIDENT AND CHIEF EXECUTIVE OFFICER
Nineteen ninety-eight was an exceptionally positive year for Citizens Bancorp
and its subsidiary Citizens Bank. Net income increased to $.99 per share. Assets
reached $233,978,000, a 16.9% increase over December 31, 1997. Our return on
average assets (ROAA) for 1998 was 1.83%, and our return on average shareholder
equity (ROAE) was 17.64%. These are all record financial performance results.
I am very proud of these results because they indicate that the corporate
culture we introduced three years ago is working. Our employees understand the
mission of this organization, and they see themselves actively engaged in
contributing to the success of Citizens Bank. They are clearly focused on our
goals and objectives, and they are committed to continuous improvement in every
aspect of management.
As competition increases and positive net returns become more difficult to
generate, banks must find ways to differentiate themselves from other players in
the marketplace. I believe the answer for Citizens Bank is its unique corporate
culture. People can accomplish extraordinary things if they are uncommonly
committed, if they work as a team, if they share positive attitudes about
problem solving and about change, and if they share core values that distinguish
them as honest, fair and caring.
Citizens Bank is better prepared than most to meet future challenges because
of the strengths of our corporate culture and the company's overall financial
condition. Although we embrace change as a value, one thing that remains
constant is our focus on safety and soundness, and our dedication to protecting
the interest of our shareholders.
As we start into the New Year, I extend personal thanks to each shareholder,
employee and customer for supporting the goals of Citizens Bancorp. Working
together, we can experience another excellent year in 1999.
Respectfully yours,
/s/ WILLIAM V. HUMPHREYS
William V. Humphreys
President and CEO
3
<PAGE> 5
[PHOTOGRAPH]
covered bridge in Scio
<PAGE> 6
A MESSAGE FROM THE CHAIRMAN
Without doubt, it becomes more difficult each year to write this message for the
Annual Report. I always wait for a sunny day to inspire me because I feel
challenged to convey the same good news in a different new way. In each of the
past seven years, we have reported increased growth in assets, deposits,
earnings and stockholders value. Year after year we have broken records --
repeatedly. This year, 1998, follows the same pattern. It was one more
outstanding year in our ongoing series of successes.
Success like this comes not by accident. It is accomplished by the Citizens
Bank Management Team and our loyal, hardworking employees. Each member of the
Citizens Bancorp and Citizens Bank Team is working harder and smarter to prepare
for the next century of continued community banking prosperity.
The Board of Directors strives to represent the best interests of our
stockholders. As of January 1, 1999 we have 774 shareholders, and 60% of them
are enrolled in our Dividend Reinvestment Plan. We appreciate this shareholder
confidence in our management and in the continued success of the Bank.
New Board member Duane Sorensen, who has been with Corvallis Disposal for
many years, replaced retiring Larry Hunter in early 1998. Duane has added new
experience and foresight to our Citizens Bancorp and Citizens Bank Boards.
Please come to our Annual Stockholders Meeting on April 20, 1999 at 7:00 p.m.
in the main office lobby. I will make my usual long speech and hope to see all
of you there nonetheless.
Respectfully,
/s/ GENE N. THOMPSON
Gene N. Thompson
Chairman of the Board
5
<PAGE> 7
COMMUNITY INVOLVEMENT
The newspaper headline read, "Bank Volunteers Staff Desk at Senior Center," but
the accompanying story was just one among dozens of examples of Citizens Bank
employees rolling up their sleeves and getting involved in their local
communities.
When the Veneta branch of Citizens Bank answered a plea for help from the
Tony Garcia Community Center, they were just doing what comes naturally. The
staff filled in for an outreach worker who needed a much deserved vacation. In
her absence, Citizens Bank tellers helped seniors apply for a broad range of
help, such as energy assistance and Meals On Wheels. "As a community bank, we're
always trying to become more involved in local projects, and this was a unique
way of helping," explains Frankie Hiatt, bank operations manager for Veneta.
"Our success as a community bank is linked directly to the overall health of the
communities we serve."
From senior management to entry-level staff, the people of Citizens Bank
embrace this spirit of community banking. They work hard to make their
communities better places to live, work and play. They do it because their
customers are more than just account numbers or business relationships. They do
it because their customers are friends and neighbors.
[PHOTOGRAPH]
Benton County
Courthouse in
Corvallis.
6
<PAGE> 8
Steve Terjeson, Albany Branch Manager, helps children at Takena Elementary
School build strong math skills.
[PHOTOGRAPH]
You'll find Citizens Bank employees volunteering time and resources helping
to educate our future leaders. In Albany, many work with the Business/School
Partnership so children at Takena Elementary School can learn the importance of
developing strong math skills. Others are helping raise over $5 million for the
Benton County Foundation or volunteering time in support of SMART, a program
geared to making children better readers. We're involved in raising funds for
Linn-Benton Community College and offering college scholarships to graduating
seniors. One member of our team even teaches at the OSU Professional Management
Institute.
But besides education and senior services, employees help serve in programs
geared to the arts, healthcare, low income housing, youth programs, and area
chambers of commerce. From serving on the State of Oregon Economic Development
Council and the OSU Presidents Roundtable, to the Community Outreach Foundation
and the S.A.N.T.A. Project. From Food for Lane County to the Corvallis
Neighborhood Housing Services. Through the American Cancer Society, American Red
Cross, and United Way, we're helping to make the Mid-Willamette Valley a place
we can all participate in and be proud of.
Good Business. Good Friends. At Citizens Bank, these words are more than a
marketing slogan, they're a way of life.
7
<PAGE> 9
THE EXECUTIVE TEAM
In the three years since Citizens Bank adopted a new corporate culture, the
positive benefits have been reflected in our consistently outstanding
performance. Citizens Bank is among the strongest community banking institutions
in the Northwest. Our Executive Team is instrumental in supporting and nurturing
the corporate culture that continues to fuel our success into the next century.
The committed individuals who make up the Executive Team lead by example and
empower employees to call on them as a resource. Consequently, change is
embraced, not feared, and it is driven from the bottom up. Problems are viewed
as opportunities. Every employee plays an important role, working as a team to
define objectives, resolve conflicts and build consensus.
The Executive Team manifests our core values on a daily basis: honesty and
integrity in personal behavior, fairness to employees and customers, the highest
degree of professional- ism,personal growth and continuous improvement.
[PHOTOGRAPH]
From left to right: Scott Zimbrick, Lark Wysham, Bill Hubel, Dan Wybenga and
William Humphreys.
SCOTT M. ZIMBRICK, Senior Vice President and Manager. Citizens' marketer, Scott
communicates our business messages to customers and prospects. He brings new
products to the marketplace and creates awareness of the Bank's range of
products and services, building the Citizens Bank brand.
LARK WYSHAM, Senior Vice President and Chief Financial Officer. Lark serves as
our "numbers person." But her strength lies in the ability to give numbers real
meaning, providing an understanding of where they come from and what they
indicate. She devotes herself to the bottom line, serving as a gatekeeper of the
Bank's financial performance.
BILL HUBEL, Senior Vice President and Chief Operating Officer. Responsible for
all branch operations, Bill is also our Y2K point man. He oversees the Y2K
readiness activities of Citizens Bank and strives for tighter operational
efficiencies. He is uncompromising in his quest for operational soundness.
DAN WYBENGA, Executive Vice President of Loan Administration. As our chief
lending officer, Dan possesses an unfailing instinct for spotting opportunity.
With a reputation for being tirelessly thorough, he focuses a sharp eye on the
details, building a strong and diverse loan portfolio.
WILLIAM V. HUMPHREYS, President and Chief Executive Officer. With a gentle hand
on the rudder, Bill serves as Executive Team facilitator. His intuitive
understanding of community banking, visionary mentoring, nurturing and
empowering style cast him as a key figure in Citizens Bank's financial
performance.
8
<PAGE> 10
THE BOARD OF DIRECTORS
DUANE L. SORENSEN, President of Waste Control Systems, Inc., a solid
waste management company, Corvallis, Oregon.
JOHN TRUAX, President of Truax Corporation, a distributor of petroleum
products, Corvallis, Oregon.
JAMES E. RICHARDS, general manager of Fisher Implement Company, a farm implement
distributor, Albany, Oregon.
WILLIAM V. HUMPHREYS, President and Chief Executive Officer of Citizens Bancorp
and Citizens Bank, Corvallis, Oregon.
GENE N. THOMPSON, co-owner and operator of Thompson Timber Company, Corvallis,
Oregon.
SCOTT A. FEWEL, attorney in private practice in the law firm of Scott A.
Fewel, Corvallis, Oregon.
JOCK GIBSON, President of Lochmead Dairy, Inc., a dairy food processing company,
and the Vice President of Dari Mart Stores, a retail grocery, Junction City,
Oregon.
ROSETTA C. VENELL, secretary-treasurer of Venell Farms, Inc., Venell Pellets,
Inc. and Mid-Valley Agricultural Products, Inc., Corvallis, Oregon.
[PHOTOGRAPH]
From top, left to right: Duane Sorensen, John Truax, James Richards,
William Humphreys, Gene Thompson, Scott Fewel, Jock Gibson and Rosetta Venell.
9
<PAGE> 11
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
==============================================================================================
<S> <C> <C> <C> <C> <C>
Total Assets $233,978 $200,117 $191,887 $162,907 $155,600
Total Deposits $188,235 $161,700 $161,834 $138,694 $134,924
Total Loans (net) $130,707 $120,269 $114,648 $100,715 $89,396
Shareholders' Equity $22,585 $19,411 $16,805 $14,269 $12,274
For The Year:
Net Income $3,840 $3,341 $3,138 $2,659 $2,208
Income Per Share .99 .87 .83 .72 .61
</TABLE>
TOTAL ASSETS (in thousands)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C>
$155,600 $162,907 $191,887 $200,117 $233,978
</TABLE>
TOTAL LOANS (in thousands)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C>
$89,396 $100,715 $114,648 $120,269 $130,707
</TABLE>
NET INCOME (in thousands)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C>
$2,208 $2,659 $3,138 $3,341 $3,840
</TABLE>
TOTAL DEPOSITS (in thousands)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C>
$134,924 $138,694 $161,834 $161,700 $188,235
</TABLE>
SHAREHOLDERS' EQUITY (in thousands)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C>
$12,274 $14,269 $16,805 $19,141 $22,585
</TABLE>
10
<PAGE> 12
CONSOLIDATED BALANCE SHEETS
Citizens Bancorp and Subsidiary, December 31, 1998 and 1997.
ASSETS
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash and due from banks $ 12,771 $ 9,268
Interest bearing deposits in banks 23,406 15,299
Federal funds sold -- 2,800
Securities available for sale 50,855 36,258
Securities held to maturity 9,733 9,983
Loans 132,126 121,470
Allowance for credit losses 1,419 1,201
NET LOANS 130,707 120,269
Premises and equipment 3,435 2,756
Foreclosed real estate -- 240
Accrued interest receivable 1,853 1,667
Other assets 1,218 1,577
TOTAL ASSETS $233,978 $200,117
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 42,025 $ 35,683
Savings and interest-bearing demand 81,015 70,562
Time 65,195 55,455
TOTAL DEPOSITS 188,235 161,700
Short-term borrowings (repurchase agreements) 16,644 16,900
Long-term borrowings 4,211 --
Accrued interest payable 227 200
Other liabilities 2,076 1,906
TOTAL LIABILITIES 211,393 180,706
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 16,069 15,517
Retained earnings 6,271 3,832
Accumulated other comprehensive income 245 62
TOTAL SHAREHOLDERS' EQUITY 22,585 19,411
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $233,978 $200,117
</TABLE>
See notes to consolidated financial statements.
11
<PAGE> 13
CONSOLIDATED STATEMENTS OF INCOME
Citizens Bancorp and Subsidiary, December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Years Ended December 31
(Dollars in thousands, except per share amounts) 1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 13,167 $ 11,992 $ 10,625
Federal funds sold and deposits in banks 843 557 464
Securities available for sale 2,578 1,811 1,323
Securities held to maturity:
Taxable 115 574 992
Tax-exempt 244 218 300
TOTAL INTEREST INCOME 16,947 15,152 13,704
INTEREST EXPENSE
Deposits 5,186 4,775 4,596
Other borrowings 731 511 438
TOTAL INTEREST EXPENSE 5,917 5,286 5,034
NET INTEREST INCOME 11,030 9,866 8,670
PROVISION FOR CREDITLOSSES 236 165 135
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 10,794 9,701 8,535
NON-INTEREST INCOME
Service charges on deposit accounts 934 820 691
Gains on sales of securities available for sale 20 1 12
BankCard income 797 610 503
Other non-interest income 475 426 363
TOTAL NON-INTEREST INCOME 2,226 1,857 1,569
NON-INTEREST EXPENSE
Salaries 2,736 2,304 2,081
Employee benefits 998 851 670
Occupancy 555 511 502
Furniture and equipment 529 471 438
BankCard expense 673 481 391
Office supplies 179 182 151
Other non-interest expense 1,483 1,394 1,073
TOTAL NON-INTEREST EXPENSE 7,153 6,194 5,306
Income before income taxes 5,867 5,364 4,798
INCOME TAXES 2,027 2,023 1,660
Net income $ 3,840 $ 3,341 $ 3,138
EARNINGS PER SHARE DATA
Basic earning per share $ .99 $ .87 $ .83
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 3,889,607 3,844,642 3,776,578
</TABLE>
See notes to consolidated financial statements.
12
<PAGE> 14
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Citizens Bancorp and Subsidiary, December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
Retained Comprehensive
(Dollars in thousands) Shares Amount Earnings Income Total
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 880,749 $ 9,884 $ 4,377 $ 9 $ 14,270
COMPREHENSIVE INCOME:
Net income -- -- 3,138 -- 3,138
Other comprehensive income, net of tax:
Unrealized gain on securities, net of
reclassification adjustment -- -- -- 19 19
COMPREHENSIVE INCOME -- -- 3,138 19 3,157
Transfer from retained earnings -- 3,000 (3,000) -- --
Two-for-one stock split 899,199 -- -- -- --
Cash dividend reinvestment
($24.80 per share) 18,449 457 -- -- 457
Cash dividends declared
($.60 per share) -- -- (1,079) -- (1,079)
BALANCE AT DECEMBER 31, 1996 1,798,397 $ 13,341 $ 3,436 $ 28 $ 16,805
COMPREHENSIVE INCOME:
Net income -- -- 3,341 -- 3,341
Other comprehensive income, net of tax:
Unrealized gain on securities, net of
reclassification adjustment -- -- -- 34 34
COMPREHENSIVE INCOME -- -- 3,341 34 3,375
Prior period adjustment -- -- 9 -- 9
5% stock dividend 91,539 1,648 (1,648) -- --
Cash dividend reinvestment
($16.31 per share) 32,385 528 -- -- 528
Cash dividends declared
($.68 per share) -- -- (1,306) -- (1,306)
BALANCE AT DECEMBER 31, 1997 1,922,321 $ 15,517 $ 3,832 $ 62 $ 19,411
COMPREHENSIVE INCOME:
Net income -- -- 3,840 -- 3,840
Other comprehensive income, net of tax:
Unrealized gain on securities, net of
reclassification adjustment -- -- -- 183 183
COMPREHENSIVE INCOME -- -- 3,840 183 4,023
Two-for-one stock split 1,945,569 -- -- -- --
Cash dividend reinvestment
($23.76 per share) 23,247 552 -- -- 552
Cash dividends declared
($.36 per share) -- -- (1,401) -- (1,401)
BALANCE AT DECEMBER 31, 1998 3,891,137 $ 16,069 $ 6,271 $ 245 $ 22,585
</TABLE>
See notes to consolidated financial statements.
13
<PAGE> 15
CONSOLIDATED STATEMENTS OF CASH FLOWS
Citizens Bancorp and Subsidiary, December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Years Ended December 31
(Dollars in thousands) 1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,840 $ 3,341 $ 3,138
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 236 165 135
Depreciation and amortization 396 347 420
Deferred income tax (benefit) (30) 58 (86)
Gains on sales of securities available for sale (20) (1) (12)
Stock dividends received (48) (40) (40)
(Increase) decrease in interest receivable (186) (53) 239
Increase in interest payable 27 16 4
Other 467 (1,474) (57)
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,682 2,359 3,741
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 7,000 21,000 9,000
Proceeds from sales of securities available for sale 11,521 2,000 6,053
Proceeds from maturities of securities held to maturity 5,444 6,205 10,435
Purchases of securities available for sale (32,868) (24,337) (21,391)
Purchases of securities held to maturity (5,182) (449) (201)
Net (increase) decrease in interest bearing deposits
in banks (8,107) 1,081 (15,272)
Net (increase) decrease in federal funds sold 2,800 (2,800) --
Increase in loans made to customers,
net of principal collections (10,623) (5,755) (14,536)
Purchases of premises and equipment (1,041) (46) (54)
Other 236 (2,999) (3,951)
NET CASH USED IN INVESTING ACTIVITIES (30,820) (6,100) (29,917)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, savings and
interest-bearing demand deposits 16,795 (4,182) 21,705
Net increase in time deposits 9,740 4,047 1,436
Net increase (decrease) in short-term borrowings (256) 5,279 3,134
Net increase in long-term borrowings 4,211 -- --
Cash dividends paid (849) (778) (622)
Other -- 227 355
Net cash provided by financing activities 29,641 4,593 26,008
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 3,503 852 (168)
CASH AND DUE FROM BANKS
Beginning of year 9,268 8,416 8,584
END OF YEAR $ 12,771 $ 9,268 $ 8,416
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 5,890 $ 5,270 $ 5,030
Income taxes paid 2,351 2,195 1,792
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Fair value adjustment of assets available for sale,
net of tax $ 183 $ 34 $ 19
Stock dividend -- 1,648 --
Dividend reinvestment 552 528 457
</TABLE>
See notes to consolidated financial statements.
14
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary, December 31, 1998 and 1997.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of Citizens Bancorp (the Company) and its wholly owned subsidiary,
Citizens Bank (the Bank). All significant inter-company transactions and
balances have been eliminated.
NATURE OF OPERATIONS. The Company is a holding company which operates primarily
through its major subsidiary, the Bank. The Bank operates seven branches in
Western Oregon in Benton, Lane and Linn Counties. The Bank's primary source of
revenue is providing loans with a focus on small to medium size businesses.
CONSOLIDATED FINANCIAL STATEMENT PRESENTATION. The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles and practices within the banking industry. The preparation of
consolidated 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 the disclosure of
contingent assets and liabilities, as of the date of the balance sheet, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ significantly from those estimates.
Certain prior year amounts have been reclassified to conform to the 1998
presentation. All dollar amounts, except per share information, are stated in
thousands.
SECURITIES AVAILABLE FOR SALE. Securities available for sale consist of debt
securities, which may be sold to implement the Company's asset/liability
management strategies and in response to changes in interest rates and similar
factors, and certain restricted equity securities. Securities available for sale
are reported at fair value. Unrealized gains and losses, net of the related
deferred tax effect, are reported as a net amount in accumulated other
comprehensive income, which is a separate component of shareholders' equity.
Realized gains and losses on securities available for sale, determined using the
specific identification method, are included in earnings. Amortization of
premiums and accretion of discounts are recognized in interest income over the
period to maturity.
SECURITIES HELD TO MATURITY. Debt securities for which the Company has the
positive intent and ability to hold to maturity are reported at cost, adjusted
for amortization of premiums and accretion of discounts, which are recognized in
interest income over the period to maturity.
LOANS. Loans are stated at the amount of unpaid principal, reduced by deferred
loan fees and an allowance for credit losses. Interest on loans is accrued daily
based on the principal amount outstanding.
Generally the accrual of interest on loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due or when they are past due 90 days as to either principal or interest. When
interest accrual is discontinued, all unpaid accrued interest is reversed
against current income. If management determines that the ultimate
collectibility of principal is in doubt, cash receipts on nonaccrual loans are
applied to reduce the principal balance.
Loan origination and commitment fees and certain direct loan origination
costs are deferred and amortized as an adjustment of the yield of the related
loan.
ALLOWANCE FOR CREDIT LOSSES. The allowance for credit losses is maintained
at a level considered adequate to provide for losses that can be reasonably
anticipated. The allowance is increased by provisions charged to operations and
reduced by loans charged off, net of recoveries. The allowance is based on
management's periodic evaluation of potential losses in the loan portfolio after
consideration of historical loss experience, adverse situations that may affect
the borrowers' ability to repay, the estimated value of any underlying
collateral, economic conditions, the results of examination of individual loans,
the evaluation of the overall portfolio by senior credit personnel and federal
and state regulatory agencies, and other risks inherent in the portfolio. This
evaluation requires the use of current estimates, which may vary from the
ultimate collectibility experienced in the future. The estimates used are
reviewed periodically; as adjustments become necessary, they are charged to
operations in the period in which they become known.
When management determines it is possible that a borrower will be unable to
repay all amounts due
15
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary, December 31, 1998 and 1997.
according to the terms of the loan agreement, including scheduled interest
payments, the loan is considered impaired. The amount of impairment is measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, when the primary source of repayment is
provided by real estate collateral, at the fair value of the collateral less
estimated selling costs. The amount of impairment and any subsequent charges are
recorded through the provision for credit losses as an adjustment to the
allowance for credit losses.
PREMISES AND EQUIPMENT. Premises and equipment are stated at cost less
accumulated depreciation, which is computed on the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized over
the term of the lease or the estimated useful life of the improvement, whichever
is less. Gains or losses on dispositions are reflected in earnings.
FORECLOSED REAL ESTATE. Real estate properties acquired through, or in lieu of,
foreclosure are to be sold and are initially recorded at fair value of the
properties less estimated costs of disposal. Any write-down to fair value at the
time of transfer to foreclosed real estate is charged to the allowance for
credit losses. Properties are evaluated regularly to ensure that the recorded
amounts are supported by their current fair values, and that valuation
allowances to reduce the carrying amounts to fair value less estimated costs to
dispose are recorded as necessary. Additions to or reductions from valuation
allowances are recorded in income.
INCOME TAXES. Deferred tax assets and liabilities result from differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities, and are reflected at currently enacted income tax rates applicable
to the period in which the deferred tax assets or liabilities are expected to be
realized or settled. The deferred tax provision represents the difference
between the net deferred tax asset/liability at the beginning and end of the
year. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
CASH EQUIVALENTS. The Company considers all amounts included in the balance
sheet caption "Cash and due from banks" to be cash equivalents.
FAIR VALUES OF FINANCIAL INSTRUMENTS. The following methods and assumptions were
used by the Company in estimating the fair values of financial instruments
disclosed in these financial statements:
CASH AND SHORT-TERM INSTRUMENTS
The carrying amounts of cash and short-term instruments approximate their
fair value.
SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
Fair values for securities, excluding restricted equity securities, are
based on quoted market prices. The carrying values of restricted equity
securities approximate fair values.
LOANS
For variable rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. Fair values
for fixed rate loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying collateral
values, where applicable.
DEPOSIT LIABILITIES
The fair values disclosed for demand deposits are, by definition, equal to
the amounts payable on demand at the reporting date (that is, their carrying
amounts). The carrying amounts of variable rate, fixed term money market
accounts and certificates of deposit approximate their fair values at the
reporting date. Fair values for fixed rate certificates of deposit are
estimated using a discounted cash flow calculation based on interest rates
currently being offered on similar certificates.
SHORT-TERM AND LONG-TERM BORROWINGS
The carrying amounts of repurchase agreements and other borrowings maturing
within 90 days approximate their fair values. Fair values of other
borrowings are estimated using discounted cash flow analyses based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements.
16
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary, December 31, 1998 and 1997.
EARNINGS PER SHARE. Basic earnings per share exclude dilution and are computed
by dividing net income by the weighted average number of common shares
outstanding.
COMPREHENSIVE INCOME. Effective January 1, 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 in a
financial statement that is displayed 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, comprehensive income includes net income
reported on the consolidated statements of income, and changes in fair value of
its securities available for sale, reported as a component of
shareholders' equity. There was no effect on previously reported net income as a
result of this reporting change.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in its balance sheet and measure those instruments
at fair value. Under this statement, an entity that elects to apply hedge
accounting is required to establish at the inception of the hedge the method it
will use for assessing the effectiveness of the hedging derivative and the
measurement approach for determining the ineffective aspect of the hedge. Those
methods must be consistent with the entity's approach to managing risk. This
statement is effective for all fiscal years beginning after June 15, 1999. The
Company had no derivatives as of December 31, 1998, nor does the Company engage
in any hedging activities. The Company does not anticipate that the adoption of
SFAS No. 133 will have a material effect on its financial position or results of
operations.
NOTE 2. RESTRICTED ASSETS
Federal Reserve Board regulations require that the Bank maintain certain minimum
reserve balances on deposit with the Federal Reserve Bank. The amounts of such
balances for the years ended December 31, 1998 and 1997 were approximately
$1,733 and $2,023, respectively.
NOTE 3. DEBT AND RESTRICTED EQUITY SECURITIES Debt and restricted equity
securities have been classified according to management's intent. The carrying
amount of securities and their approximate fair values were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
December 31, 1998
U.S. Government and agency
securities $49,816 $ 394 ($12) $50,198
Restricted equity securities 657 -- -- 657
Total $50,473 $ 394 ($12) $50,855
December 31, 1997
U.S. Government and agency
securities $35,554 $ 97 ($6) $35,645
Restricted equity securities 613 -- -- 613
Total $36,167 $ 97 ($6) $36,258
SECURITIES HELD TO MATURITY
December 31, 1998
U.S. Government and agency
securities $ 2,014 $ 22 -- $ 2,036
State and municipal securities 7,719 119 (17) 7,821
Total $ 9,733 $ 141 ($17) $ 9,857
December 31, 1997
U.S. Government and agency
securities $ 6,000 $ 36 -- $ 6,036
State and municipal securities 3,983 78 -- 4,061
Total $ 9,983 $ 114 -- $10,097
</TABLE>
The scheduled maturities of debt securities held to maturity and available for
sale at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
---------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ 2,605 $ 2,636 $21,065 $21,160
Due from one year to five years 2,355 2,408 28,751 29,038
Due from five to ten years 3,724 3,761 -- --
Due after ten years 1,049 1,052 -- --
Total $ 9,733 $ 9,857 $49,816 $50,198
</TABLE>
17
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary, December 31, 1998 and 1997.
Securities carried at approximately $26,271 at Decem- ber 31, 1998 and $28,738
at December 31, 1997 were pledged to secure public deposits and for other
purposes required or permitted by law.
Gross realized gains on sales of securities available for sale were $20, $1
and $15 for the years ended December 31, 1998, 1997 and 1996, respectively.
Gross realized losses on sales of securities available for sale were $3 in
1996; no realized losses occurred in 1997 or 1998.
NOTE 4. LOANS
Loans at December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Agriculture $ 12,402 $ 10,992
Commercial 26,234 23,507
Real estate:
Construction 7,900 5,459
1-4 family 31,390 35,659
Other 50,421 41,108
Consumer 4,393 5,423
132,740 122,148
Less unearned income and
deferred loan origination fees 614 678
Total loans $132,126 $121,470
</TABLE>
Changes in the allowance for credit losses for the years ended December 31 are
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $ 1,201 $ 1,038 $ 896
Provision for credit losses 236 165 135
Charge-offs (32) (2) (8)
Recoveries 14 -- 15
Net (charge-offs) recoveries (18) (2) 7
Balance at end of year $ 1,419 $ 1,201 $ 1,038
</TABLE>
The recorded investment in impaired loans, which were all on nonaccrual status,
was $173 at December 31, 1998. There were no impaired loans at December 31,
1997. No allocation of the allowance for credit losses was considered necessary
for impaired loans. The average recorded investment in impaired loans during the
years ended December 31, 1998 and 1997 was $17 and $66, respectively. Interest
income recognized on impaired loans, which was collected in cash, totaled $13 in
1997. No interest income was recognized on impaired loans in 1998.
At December 31, 1998, there were no commitments to lend additional funds to
borrowers whose loans have been modified. Loans 90 days and over past due still
accruing interest were $447 and $438 at December 31, 1998 and 1997,
respectively.
Certain related parties of the Company, principally Company directors, their
associates and key officers, were loan customers of the Bank in the ordinary
course of business during 1998 and 1997. Total loans outstanding at December 31,
1998 and 1997 to key officers and directors were $2,004 and $2,237,
respectively. During 1998, advances totaled $824, and repayments totaled $1,057
on these loans.
NOTE 5. PREMISES AND EQUIPMENT
The components of premises and equipment at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land and buildings $4,058 $3,935
Furniture and equipment 2,135 2,100
Construction in progress 700 34
6,893 6,069
Less accumulated depreciation
and amortization 3,458 3,313
Total premises and equipment $3,435 $2,756
</TABLE>
At December 31, 1998, the Company was in the process of constructing a new West
Albany branch. Costs incurred as of December 31, 1998 for branch construction,
furniture and equipment were $650, with total costs estimated at $950. The
branch opened in February 1999. Subsequent to December 31, 1998, the Company
also purchased land in McMinnville for a future branch facility at a cost of
$593. The Company plans to open a temporary facility in McMinnville in late
spring 1999, with a permanent facility opening by year end 1999. The Company has
entered into no contracts for the McMinnville facilities.
The Bank leases premises under operating leases. Rental expense for leased
premises was $111, $99 and $96 for 1998, 1997 and 1996, respectively, which is
included in occupancy expense.
Minimum net rental commitments under noncancellable leases having an original
or remaining term of more than one year are as follows at December 31, 1998:
<TABLE>
<S> <C>
1999 $118
2000 118
2001 118
2002 118
2003 98
Thereafter 1,489
Total minimum payments required $2,059
</TABLE>
18
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary, December 31, 1998 and 1997.
Certain leases contain renewal options from five to ten years and escalation
clauses based on increases in property taxes and other costs.
NOTE 6. DEPOSITS
The aggregate amount of certificates of deposit with balances in excess of one
hundred thousand dollars was approximately $20,967 and $14,300 at December 31,
1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<S> <C>
1999 $50,146
2000 8,630
2001 4,189
2002 1,514
2003 716
$65,195
</TABLE>
NOTE 7. SHORT-TERM BORROWINGS
Securities sold under agreements to repurchase, and treasury tax and loan
deposits represent short-term borrowings with maturities which do not exceed 120
days. The following is a summary of such short-term borrowings for the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Average balance during the year $14,225 $11,361
Average interest rate during the year 3.69% 3.96%
Maximum month-end balance during the year 16,299 14,086
Balance at December 31 16,299 14,086
TREASURY TAX AND LOAN DEPOSITS
Average balance during the year $ 1,116 $ 1,349
Average interest rate during the year 4.76% 4.60%
Maximum month-end balance during the year 2,580 2,814
Balance at December 31 345 2,814
</TABLE>
NOTE 8. LONG-TERM BORROWINGS
The Bank has agreements with commercial banks for lines of credit totaling
$13,000, none of which was used at December 31, 1998 and 1997. The Bank also has
a line of credit with the Federal Home Loan Bank (FHLB) totaling 15% of assets,
$4,211 of which was used at December 31, 1998, which represents the Bank's
outstanding long-term borrowings. The FHLB advances bear interest at rates
ranging from 6.06% to 6.24%, and mature in June 2010, April 2013 and May 2013.
Future minimum payment obligations are as follows:
<TABLE>
<S> <C>
1999 $309
2000 309
2001 309
2002 309
2003 309
Thereafter 2,666
</TABLE>
NOTE 9. EMPLOYEE BENEFITS
The Bank has a 401(a) profit sharing plan covering substantially all employees
who have completed one year or more of service. Contributions to the 401(a)
profit sharing plan consist of employer contributions (up to a maximum of 15% of
employee salaries), which are at the discretion of the Board of Directors. Total
contributions by the Bank to this plan in 1998, 1997 and 1996 were $339, $281
and $252, respectively.
NOTE 10. INCOME TAXES
Income taxes are comprised of the following for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $ 1,657 $ 1,752 $ 1,415
State 400 213 331
Deferred (benefit) (30) 58 (86)
Total income taxes $ 2,027 $ 2,023 $ 1,660
</TABLE>
The following is a reconciliation between the statutory and the effective
federal income tax rates for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
Percent Percent Percent
of Pre-tax of Pre-tax of Pre-tax
Amount Income Amount Income Amount Income
<S> <C> <C> <C> <C> <C> <C>
Income tax at
statutory rates $ 1,995 34.0% $ 1,823 34.0% $ 1,631 34.0%
Increase (decrease)
resulting from:
Tax-exempt income (74) (1.3) (59) (1.0) (90) (1.8)
State income taxes,
net of federal income
tax effects 264 4.5 140 2.5 218 4.5
Other (158) (2.7) 119 2.2 (99) (2.1)
Total income tax expense $ 2,027 34.5% $ 2,023 37.7% $ 1,660 34.6%
</TABLE>
19
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary, December 31, 1998 and 1997.
The tax effect of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31 are:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Allowance for credit losses $ 494 $ 414 $ 525
Other 51 51 --
Total deferred tax assets 545 465 525
DEFERRED TAX LIABILITIES
Accumulated depreciation (31) (32) (54)
Other (70) (19) (54)
Unrealized gain on securities
available for sale (137) (29) (13)
Total deferred tax liabilities (238) (80) (121)
Net deferred tax assets $ 307 $ 385 $ 404
</TABLE>
NOTE 11. COMMITMENTS AND CONTINGENCIES
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
stand-by letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. A summary
of the Bank's commitments at December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Commitments to extend credit:
Real estate secured $ 1,575 $ 2,204
Other 17,468 16,512
Total commitments to extend credit $19,043 $18,716
Standby letters of credit $ 2,366 $ 2,165
</TABLE>
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. 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's experience has been that approximately 70% of loan commitments are drawn
upon by customers. The Bank evaluates each customer's creditworthiness 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 of
the party. Collateral held varies, but may include accounts receivable,
inventory, property and equipment, residential real estate, and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above, and is required in instances where the Bank deems necessary.
Because of the nature of its activities, the Company is subject to various
pending and threatened legal actions which arise in the ordinary course of
business. In the opinion of management, liabilities arising from these claims,
if any, will not have a material effect on the financial position of the
Company.
NOTE 12. CASH DIVIDEND REINVESTMENT PLAN
The Bank established a cash dividend reinvestment plan in 1990 and the Company
adopted a revised plan on July 15, 1997. The revised reinvestment plan allows
for 50% or 100% of the cash dividends to be reinvested based upon shareholder
election; 750,000 shares are authorized for dividend reinvestment of which
23,247 shares have been issued. The plan allows shareholders who elect to
reinvest their cash dividends to receive shares of additional stock.
NOTE 13. STOCK SPLITS AND STOCK DIVIDENDS
In 1998, the Board of Directors declared a two-for-one stock split, and
1,945,569 shares were issued. In 1997, the Board of Directors declared a 5%
stock dividend, and 91,539 shares were issued. In 1996, the Board of Directors
declared a two-for-one stock split, and 899, 199 shares were issued.
Per share information for the current and prior periods has been adjusted to
reflect the effect of the stock dividends and stock splits. Management considers
the amounts transferred from retained earnings to common stock and surplus to be
in accordance with
20
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary, December 31, 1998 and 1997.
Bank regulatory requirements reflecting for an appropriate capitalization on a
cumulative basis of the market value of the shares.
NOTE 14. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines on the regulatory framework for prompt corrective action, the Bank
must meet specific capital adequacy guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital
classification is also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of Tier 1 capital (as defined in the regulations) to
total average assets (as defined), and minimum ratios of Tier 1 and total
capital (as defined) to risk-weighted assets (as defined). Under the regulatory
framework for prompt corrective action, the Bank must maintain minimum Tier 1
leverage, Tier 1 riskbased, and total risk-based ratios as set forth in the
table. Management believes, as of December 31, 1998, that the Company and the
Bank meet all capital requirements to which they are subject.
As of December 31, 1998, the most recent notification from the Bank's
regulator categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table:
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
Capital Corrective
Adequacy Action
Actual Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
TIER 1 CAPITAL
(to average assets):
Consolidated $22,029 9.79% $ 9,012 4.00% N/A N/A
Bank 21,937 9.74 9,003 4.00 $11,264 5.00%
TIER 1 CAPITAL
(to risk-weighted assets):
Consolidated 22,029 15.53 5,673 4.00 N/A N/A
Bank 21,937 15.52 5,654 4.00 8,480 6.00
TOTAL CAPITAL
(to risk-weighted assets):
Consolidated 23,448 16.53 11,346 8.00 N/A N/A
Bank 23,356 16.52 11,307 8.00 14,134 10.00
December 31, 1997
TIER 1 CAPITAL
(to average assets):
Consolidated $18,984 9.67% $ 7,855 4.00% N/A N/A
Bank 18,919 9.62 7,869 4.00 $ 9,836 5.00%
TIER 1 CAPITAL
(to risk-weighted assets):
Consolidated 18,984 15.60 4,868 4.00 N/A N/A
Bank 18,919 15.67 4,831 4.00 7,246 6.00
TOTAL CAPITAL
(to risk-weighted assets):
Consolidated 20,185 16.59 9,735 8.00 N/A N/A
Bank 20,120 16.66 9,662 8.00 12,077 10.00
</TABLE>
Restrictions on Retained Earnings
At December 31, 1998, there were no restrictions on retained earnings regarding
payment of dividends.
NOTE 15. CONDENSED FINANCIAL INFORMATION PARENT COMPANY ONLY
Condensed Balance Sheets -- December 31
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Cash $ 1,401 $ 1,326
Investment in subsidiary 22,493 19,346
Other 92 46
Total assets $23,986 $20,718
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Dividends payable $ 1,401 $ 1,307
SHAREHOLDERS' EQUITY
Common stock 16,069 15,517
Retained earnings 6,271 3,832
Accumulated other comprehensive income 245 62
Total shareholders' equity 22,585 19,411
Total liabilities and shareholders' equity $23,986 $20,718
</TABLE>
21
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary, December 31, 1998 and 1997.
Condensed Statements of Income -- Years Ended December 31
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C>
INCOME
Dividend income from subsidiary $ 1,520 $ 100 --
EXPENSES
Amortization and other expense 142 59 9
Interest expense -- 1 --
Income (loss) before income tax benefit 1,378 40 (9)
INCOME TAX BENEFIT 51 24 4
Income (loss) before equity in
undistributed income of subsidiary 1,429 64 (5)
EQUITYIN UNDISTRIBUTED INCOME
OF SUBSIDIARY 2,411 3,277 3,143
Net income $ 3,840 $ 3,341 $ 3,138
</TABLE>
Condensed Statements of Cash Flows -- Years Ended December 31
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,840 $ 3,341 $ 3,138
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization 5 3 --
Equity in undistributed income
of subsidiary (2,411) (3,277) (3,143)
Increase in dividends payable 94 1,307 --
Other (604) (34) 6
Net cash provided by operating activities 924 1,340 1
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of software -- (15) --
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (849) -- --
Net increase in cash 75 1,325 1
CASH
Beginning of year 1,326 1 --
End of year $ 1,401 $ 1,326 $ 1
</TABLE>
NOTE 16. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December 31
were as follows:
<TABLE>
<CAPTION>
1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks,
interest bearing deposits
with banks, and federal
funds sold $ 36,177 $ 36,177 $ 27,367 $ 27,367
Securities available for sale 50,855 50,855 36,258 36,258
Securities held to maturity 9,733 9,857 9,983 10,097
Loans receivable, net 130,707 130,668 120,269 120,237
FINANCIAL LIABILITIES
Deposits $188,234 $188,523 $161,700 $161,654
Short-term borrowings 16,644 16,644 16,900 16,900
Long-term borrowings 4,211 4,211 -- --
</TABLE>
NOTE 17. COMPREHENSIVE INCOME
Net unrealized gain are as follows:
<TABLE>
<CAPTION>
Before-Tax Tax Net-of-Tax
Amount Expense Amount
<S> <C> <C> <C>
1998
Unrealized holding gain arising
during the year $311 $115 $196
Less reclassification adjustments
for gain realized in net income 20 7 13
Net unrealized gain $291 $108 $183
1997
Unrealized holding gain arising
during the year $ 51 $ 16 $ 35
Less reclassification adjustments
for gain realized in net income 1 -- 1
Net unrealized gain $ 50 $ 16 $ 34
1996
Unrealized holding gain arising
during the year $ 39 $ 12 $ 27
Less reclassification adjustments
for gain realized in net income 12 4 8
Net unrealized gain $ 27 $ 8 $ 19
</TABLE>
NOTE 18. YEAR 2000 ISSUES
As the year 2000 approaches, business issues are emerging regarding how existing
software programs and operating systems can accommodate the date value. 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 (1900), they
were stored as two digits (00). However, when the clock rolls over to 2000, many
systems will think "00" is 1900 rather than 2000. Hardware and/or software that
run on a time schedule or involve 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.
The Company has been actively working for well over one and one-half years
toward ensuring that its systems and people will be ready to serve its customers
in the new century and beyond. The Company has closely followed the Federal
Financial Institutions Examination Council's recommended approach of: 1)
awareness, 2) assessment, 3) renovation, 4) validation, and 5) implementation.
Currently, the Company has completed the assessment, renovation and testing of
the bulk of the Company's hardware and software. The Company has also contacted
all of its service suppliers
22
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary, December 31, 1998 and 1997.
to obtain some assurance of their year 2000 readiness status. The Company will
spend the balance of 1999 validating its testing results, planning for any
remaining contingencies, and ensuring its customers awareness of the Company's
year 2000 readiness status.
The costs incurred to date on year 2000 compliance issues have not been
material. While it is impossible to estimate the potential impact on the
Company's business after January 1, 2000, management presently believes that the
costs the Company will incur prior to that date relating to its activities
necessary to ensure year 2000 readiness, will not have a significant effect on
its financial position or results of operations.
Board of Directors
Citizens Bancorp
Corvallis, Oregon
We have audited the accompanying consolidated balance sheet of Citizens
Bancorp and Subsidiary as of December 31, 1998, 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 consolidated financial
statements of Citizens Bancorp and Subsidiary for the years ended December 31,
1997 and 1996 were audited by other auditors whose report, dated February 27,
1998, expressed an unqualified opinion on those consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 referred to above
present fairly, in all material respects, the financial position of Citizens
Bancorp and Subsidiary as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ KNIGHT, VALE & GREGORY, INC. P.S.
Knight, Vale & Gregory, Inc. P.S.
January 15, 1999
Tacoma, Washington
23
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Citizens Bancorp and Subsidiary, December 31, 1998 and 1997.
The following selected financial data should be read in conjunction with the
Company's consolidated financial statements and accompanying notes presented
herein.
================================================================================
<TABLE>
<CAPTION>
% increase
(decrease)
Year ended December 31, 1998 1997 1997-1998 1996 1995 1994
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Total interest income $ 16,947 $ 15,152 11.9% $ 13,704 $ 12,732 $ 10,928
Total interest expense 5,917 5,286 11.9% 5,034 4,725 3,655
Net interest income 11,030 9,866 11.8% 8,670 8,007 7,273
Provision for possible credit losses 236 165 43.0% 135 100 72
Net interest income after provision for
possible credit losses 10,794 9,701 11.3% 8,535 7,907 7,201
Total other operating income 2,226 1,857 19.9% 1,569 1,503 1,311
Total other operating expense 7,153 6,194 15.5% 5,306 5,212 5,132
Income before taxes 5,867 5,364 9.4% 4,798 4,198 3,380
Income taxes 2,027 2,023 .2% 1,660 1,539 1,172
Net income $ 3,840 $ 3,341 14.9% $ 3,138 $ 2,659 $ 2,208
PER COMMON SHARE (1)
Net income $ .99 $ .87 13.8% $ .83 $ .72 $ .61
Cash dividends .36 .34 5.9% .30 .30 .30
Book value 5.81 5.05 15.0% 4.45 3.36 3.38
Weighted average number of common
shares outstanding 3,889,607 3,844,642 3,776,578 3,699,146 3,631,314
PERIOD END BALANCES
Total assets $ 233,978 $ 200,117 16.9% $ 191,887 $ 162,907 $ 155,600
Net loans 130,707 120,269 8.7% 114,648 100,715 89,396
Deposits 188,235 161,700 16.4% 161,834 138,694 134,924
Repurchase agreements 16,299 14,086 15.7% 10,040 7,891 5,774
Shareholders' equity 22,585 19,411 16.4% 16,805 14,269 12,274
PERFORMANCE RATIOS
Return on average assets 1.83% 1.79% 1.81% 1.66% 1.45%
Return on average equity 17.64% 17.53% 19.27% 19.05% 18.27%
Average assets to average equity 10.36% 10.21% 9.42% 8.85% 7.99%
</TABLE>
(1) Per share amounts and the average number of shares outstanding have been
restated for, stock dividends of 10% in 1994 and 5% in 1997, a 2-for-1 stock
split in 1998, a 2-for-1 stock split in 1996, and a 1 for 5 stock split in 1995.
24
<PAGE> 26
DIVIDENDS AND MARKET PRICE
OF COMMON STOCK
Citizens Bancorp and Subsidiary.
Bancorp was formed in 1997 to serve as the holding company of Citizens Bank. The
creation of Bancorp as the holding company of Citizens Bank became effective
July 1, 1997. There were 774 shareholders of record holding Bancorp common stock
as of December 31, 1998.
The following sets forth, for the calendar years shown, the cash and stock
dividends per share of common stock declared by Citizens Bancorp in 1998 and
1997, and by Citizens Bank for the preceding years.
<TABLE>
<CAPTION>
Cash Dividend Stock Dividend Stock Split
<S> <C> <C> <C>
1992 $.25 10% --
1993 .275 10% --
1994 .30 10% --
1995 .30 -- 1 for 5 stock split
1996 .30 -- 2 for 1 stock split
1997 .34 5%
1998 .36 -- 2 for 1 stock split
</TABLE>
Per share information for the current and prior periods have been adjusted to
reflect the effect of the stock dividends and stock splits.
As was the case with the common stock of Citizens Bank, there is no established
market for Bancorp's common stock, and the stock is not listed on and does not
trade on any exchange or quotation system. There is no expectation that an
established market will develop for Bancorp's common stock.
As it did for its own stock prior to the creation of Bancorp, Citizens Bank
will keep an informal record of persons expressing an interest in buying or
selling Bancorp common stock and will introduce prospective buyers and sellers.
Citizens Bank will also keep some informal records of prices paid and received
for Bancorp common stock by certain persons, and will serve as the transfer
agent for Bancorp common stock. Citizens Bank does not and will not recommend
prices for Bancorp common stock.
The following table sets forth certain transaction prices per share for
shares of Citizens Bank and Bancorp common stock for the periods shown. This
information is based solely on prices and information reported to Citizens Bank
by those persons whose transactions have come to its attention. The reported
prices do not represent all transactions in Bancorp and Citizens Bank stock, and
Citizens Bank can give no assurances as to the accuracy of the reported prices
or the completeness of this information.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
1993 $6.00 $4.50
1994 $7.25 $6.07
1995 $7.25 $5.63
1996 $15.00 $9.00
1997 $15.00 $9.00
1998 $15.00 $14.50
</TABLE>
Per share information for the current and prior periods have been adjusted to
reflect the effect of the stock dividends and stock splits.
The following table sets forth certain transaction prices per share for shares
of Citizens Bank and Bancorp common stock for the quarterly periods shown. This
information is subject to the qualifications set forth above.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
First quarter 1997 $10.88 $9.00
Second quarter 1997 $11.50 $10.50
Third quarter 1997 $11.75 $11.50
Fourth quarter 1997 $15.00 $12.50
First quarter 1998 $15.00 $11.50
Second quarter 1998 $15.00 $14.50
Third quarter 1998 $18.00 $17.25
Fourth quarter 1998 $18.00 $16.25
</TABLE>
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
Citizens Bancorp and Subsidiary.
RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996.
Earnings per share for the three years ended 1998, 1997, and 1996 were $.99,
$.87 and $.83, respectively.
Net Income. For the three years ended December 31, 1998, Citizens Bancorp's (in
year's 1998 and 1997) and Citizens Bank's (in year 1996) net income was $3.840
million, $3.341 million, and $3.138 million, respectively. 1998 net income
increased $.499 million or 14.9% over 1997, which increased $.203 million or
6.5% over 1996. Bancorp's increased net income in 1998 is primarily due to
increased income from loans, loan fees, and investment income. This increase was
due to volume increases. Average yield on loans remained relatively constant
over the year. Net income was assisted by an increase in earning assets to total
assets and a decrease in the average yield paid on average interest-bearing
liabilities. Average earning assets to average total assets for the years 1998,
1997 and 1996 are 93.6%, 93.2%, and 93.3%, respectively. Average yield on
earning assets for the same periods was 8.8%, 8.9% and 8.7%, respectively.
Bancorp's 1998 net income was negatively impacted by increased expenses in
salary and benefits, costs associated with the planning of two new branches, and
investment in a computer network (LAN/WAN). Management sees these expenditures
as investments in increased productivity and capacity and should result in
consistent year-to-year future earnings growth.
INTEREST INCOME. Interest income totaled $16.9 million for the year ended
December 31, 1998, an 11.9% increase over the $15.1 million for 1997, which was
10.6% over the $13.7 million generated in 1996. This increase in income was due
primarily to increased loan and investment volume.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1998 was $5.9
million, an 11.9% increase over the $5.3 million expense for 1997, and a 5.0%
increase over the $5.0 million expense in 1997. These increases are due to
deposit volume increases.
NET INTEREST INCOME. Net interest income during the years 1998, 1997, and 1996
grew to $11.0 million from $9.9 million and $8.7 million, respectively.
Additionally, for the same periods beginning with 1998, net interest margins
were 5.8%, 5.9% and 5.6%, respectively. Changes in the net interest margins were
primarily due to increased volumes and the changing interest rate environment.
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE CREDIT LOSSES. Net interest
income after provision for possible credit losses was $10.8 million at December
31, 1998, $9.7 million at December 31, 1997, and $8.5 million at December 31,
1996. Total provision for possible credit loss expense for the three years
ending December 31, 1998, was $236,000, $165,000, and $135,000 respectively.
Total provision expense was increased due to loan volume increases. Recoveries
were $14,000, $0, and $15,000 in 1998, 1997, and 1996. Charge-offs of $32,000,
$2,000, and $8,000 were realized during the same periods. The Bank has a history
of very low credit loss experience. Management believes the quality of the loan
portfolio is outstanding due to strong internal controls, good loan policy
standards, experienced loan officers, and the strong economy in Oregon. The
reserve for possible credit losses to total loans for the years ended December
31, 1998, 1997, and 1996, respectively, were 1.07%, .99%, and .88%.
NON-INTEREST INCOME. Non-interest income (total other operating income) was $2.2
million for the year ended December 31, 1998, an 19.9% increase from $1.8
million for 1997, and an 18.4% increase from $1.6 million in 1996. These
increases are due to increased service charges and customer fee income which is
primarily a function of increased volumes of accounts. Very few rate increases
have been made in service charges and fees during this period. During 1997 and
1998, the low and declining interest rate environment on term loans generated
refinance activity and new home purchases, resulting in an increased volume of
home loans made for sale into the secondary market. Gains on the sale of these
loans represented a substantial portion of the increase the Bank experienced in
other operating income.
NON-INTEREST EXPENSE. Non-interest expenses (other operating expenses) have
increased during the last three years ending December 31, 1998 to $7.2 million
from $6.2 million in 1997 and $5.3 million in 1996. A15.5% increase or a $1
million increase occurred from 1997 to 1998 and a 16.6% or a $.9 million
increase occurred from 1996 to 1997. These increases in non-interest expense are
in correlation and are a direct result of increased non-interest income. The
specific areas of increase occurred in increased salaries and benefits,
equipment, occupancy, professional fees, marketing, printing, office supplies,
communications, and other expenses. At the end of 1998 the Bank had the staff
for its new West Albany branch hired and trained for the early 1999 opening. The
Bank had also hired a manager and
26
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS
Citizens Bancorp and Subsidiary.
assistant manager to plan the branch in McMinnville due to open early spring
1999. This added to the increase in salary and benefits expense. Overall
increases are a result of the Bank's increased volume, and management's
increased emphasis on business development, marketing, auditing, and human
resource management.
Opening new offices results in higher operating costs, which are not offset
until a certain level of growth in loans and deposits is achieved. Initially,
new branch offices will increase non-interest expenses, thus having an adverse
effect on net income for Bancorp. At the end of 1998, Bancorp employed 111
full-time equivalent employees compared to 108 at year end 1997 and 99 at year
end 1996. The Bank has been able to increase staff productivity through
training, education, and improved hiring practices.
Increases in non-interest expense is generally caused by higher operating
levels associated with growth in business volume. Bancorps total assets at
December 31, 1998, were 21.9% greater than total assets of the Bank at December
31, 1996.
INCOME TAXES. Income tax expense for 1998 was $2,027 or 34.5% of net income
before taxes, 1997 was $2,023 or 37.7% of net income before taxes. In 1996 the
tax provision was $1,660 or 34.6% of net income before taxes. Bancorp's tax rate
of 34.6% is lower than in 1997 due to an increased percentage of Bancorp's
income being generated by tax exempt items primarily in the Bank's investment
portfolio.
ASSET-LIABILITY MANAGEMENT & INTEREST RATE SENSITIVITY. Bancorp's results of
operations are largely dependent on its ability to manage net interest income.
The principal purpose of asset-liability management is to manage the Bank's
sources and uses of funds under various interest rate and economic conditions in
order to stabilize net income and minimize risk.
The Bank analyzes its interest rate risk by simulation modeling and by
traditional interest rate gap analysis. The model analyzes the Bank's current
position and anticipated future results based on assumptions and estimations
that management deems reasonable, although actual results may vary
substantially.
The main component of asset-liability management is the management of the
Bank's interest rate sensitivity and market risk. Interest-rate sensitivity is
defined as the volatility in earnings resulting from changes in interest rates
and/or the mismatch of repricing intervals between assets and liabilities. The
Bank's management attempts to manage its assets and liabilities to maximize
earnings growth by minimizing the effects of changing market rates, asset and
liability mix and prepayment trends. This is a "balanced position" strategy
which lessens the volatility in interest income. Management actively manages the
relationship between its interest rate sensitive assets and interest rate
sensitive liabilities.
If assets and liabilities do not mature or reprice simultaneously, and in
equal amounts, a gap is present and exposure to interest rate risk exists. An
interest rate sensitivity gap occurs when there is a different amount of rate
sensitive assets than rate sensitive liabilities scheduled to reprice over the
same period of time. The gap is considered positive when rate sensitive assets
exceed rate sensitive liabilities, and negative when rate sensitive liabilities
exceed rate sensitive assets. During a period of rising interest rates, a
negative gap would generally tend to adversely impact net interest income while
a positive gap would generally tend to result in an increase in net interest
income. During a period of declining interest rates, a negative gap would
generally tend to result in increased net interest income, while a positive gap
would generally tend to adversely affect net interest income.
The following table sets forth the interest rate sensitivity of Bancorp's
assets and liabilities over various contracted repricing periods and maturities
as of December 31, 1998. Certain shortcomings are inherent in the traditional
gap analysis presented in the table. For instance, although certain assets and
liabilities may have similar repricing periods or maturities, historically they
have been proven to react in different timings and degree to changes in market
interest rates. Additionally, loan repayments and early withdrawals of
certificates of deposits could cause the interest sensitivities to vary from
those which appear in the table.
December 31, 1998 (in thousands)
<TABLE>
<CAPTION>
0 - 3 3 - 6 6 - 12 1 - 5 Over 5
months months months years years Total
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING
ASSETS
Interest Bearing
Deposits 23,406 -- -- -- -- 23,406
Loans 38,015 14,060 12,684 44,325 23,483 132,567
Investments 3,007 10,163 10,595 31,393 4,773 59,931
TOTAL INTEREST
EARNING ASSETS $64,428 $ 24,223 $ 23,279 $ 75,718 $ 28,256 $215,904
</TABLE>
Continued on next page.
27
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS
Citizens Bancorp and Subsidiary.
Continued from page 27
<TABLE>
<CAPTION>
0 - 3 3 - 6 6 - 12 1 - 5 Over 5
months months months years years Total
<S> <C> <C> <C> <C> <C> <C>
INTEREST BEARING
LIABILITIES
Interest-Bearing
Demand 32,600 -- -- -- -- 32,600
Savings 48,415 -- -- -- -- 48,415
Time 22,886 14,292 12,969 15,048 -- 65,195
REPO'S 16,299 -- -- -- -- 16,299
Other-
Borrowings 345 -- -- -- 4,211 4,556
TOTAL INTEREST
BEARING LIABILITIES
$ 120,545 $ 14,292 $ 12,969 $ 15,048 $ 4,211 $ 167,065
$ (56,117) $ 9,931 $ 10,310 $ 60,670 $ 24,045 $ 48,839
CUMULATIVE INTEREST RATE SENSITIVITY GAP
$(56,117) $(46,186) $(35,876) $24,794 $48,839
CUMULATIVE GAP AS A PERCENT OF ASSETS
(23.9)% (19.7)% (15.3)% 10.6% 20.9%
</TABLE>
On a straight gap measurement of interest rate sensitivity the Bank is asset
sensitive. Using the financial model with historical timings and degree of
market rate change effecting the components of the balance sheet, the Bank is
very slightly asset sensitive. The Bank will see little effect on equity in
either a rising or declining interest rate environment based on the balance
sheet as of December 31, 1998. Management strives to maintain a balanced
interest sensitivity position.
The Bank's sensitivity to gains or losses in future earnings due to
hypothetical increases or decreases in the Fed Funds rate as measured by its
financial model are as follows.
<TABLE>
<CAPTION>
Increase in Net Interest Decrease in Net Interest
Interest Rates Margin Change Interest Rates Margin Change
<S> <C> <C> <C>
+1% $109,000 -1% $78,000
+2% $330,000 -2% $200,000
</TABLE>
A 1% rate increase represents a .5% increase in the Bank's equity while a 1%
rate decrease represents a .3% decrease in the Bank's equity. A 2% rate increase
represents a 1.5% increase in the Bank's equity while a 2% rate decrease
represents a .9% decrease in the Bank's equity.
LIQUIDITY AND SOURCES OF FUNDS. Bancorp's primary sources of funds for liquidity
purposes are customer deposits, maturities of investment securities, sales of
"available for sale" securities, loan repayments, advances on lines of credit
from correspondent banks and from the Federal Home Loan Bank of Seattle, and the
purchase of federal funds. Bancorp can anticipate the availability of funds from
scheduled loan repayments, maturities of securities and from borrowed funds.
Customer deposits and unscheduled payments of loans are influenced by the
interest rate environment, the condition of the economy, competition and other
factors.
Deposits are Bancorp's primary source of new funds. At December 31, 1998,
total deposits were $188.2 million, $161.7 million at December 31, 1997, and
$161.8 million at December 31, 1996. The Bank also had REPO's (securities sold
under agreements to repurchase) for the periods of December 31, 1998, 1997, and
1996 of $16.2 million, $14.1 million, and $10.0 million, respectfully. The
overall cost of funds was as follows:
<TABLE>
<CAPTION>
COST OF FUNDS
<S> <C> <C>
1998 1997 1996
3.87% 3.92% 3.95%
</TABLE>
Management anticipates that Bancorp will rely primarily on deposit growth,
maturities of investment securities, sales of available for sale securities, and
loan repayments to meet its liquidity needs. Borrowings can be used to provide
liquidity for short-term needs, but it is the practice of Bancorp to attempt to
fund long-term loans and investments with core deposits and earnings, not
short-term borrowings. A limited amount of borrowings may be used on a long-term
basis to fund lending activities and to match maturities or repricing intervals
of assets.
CAPITAL RESOURCES. The Bank is subject to various capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators, that if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines that involve quantitative measures of the Bank's assets, and certain
off-balance-sheet items as calculated under regulatory accounting practices, the
Bank's capital classification is also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
As of December 31, 1998, the most recent notification from the Bank's
regulator categorized the Bank as well-capitalized under the applicable
regulations. To be categorized as "well-capitalized," the Bank must maintain at
least 10% total risk based capital, 6% Tier 1 risk based capital and 5% Tier 1
leverage capital. There are no conditions or events
28
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS
Citizens Bancorp and Subsidiary.
since that notification that management believes have changed the institution's
category.
Shareholders equity increased to $22.6 million at December 31, 1998 from
$19.4 million in 1997 and $16.8 million in 1996. Bancorp's (Citizens Bank in
1996) shareholders average equity, as a percentage of average assets were 10.4%
at December 31, 1998, 10.2% at December 31, 1997, and 9.4% at December 31, 1996.
In a changing interest rate environment the value of the Bank's available for
sale portfolio may be negatively impacted and therefore, may cause a reduction
in reported shareholders equity. Equity grew at 16.4% over the period between
December 31, 1997 and December 31, 1998, while assets grew by 16.9% over the
same period.
At December 31, 1998, the Bank had no material commitment for capital
expenditures that would negatively impact Bancorp's capital position.
LENDING AND CREDIT MANAGEMENT. Interest on loans is the primary source of income
for Bancorp. Net loans represented 55.9% of total assets as of December 31,
1998. The Bank works to serve the credit needs of the entire community, however
its primary focus for lending is small-to-medium sized businesses,
professionals, and individuals for commercial and real estate related financing
needs. Substantially all of the Bank's loans are to customers located within the
Bank's service areas.
Although the risk of non-payment always exists, type and level of risk
changes with different types of loans. In the Bank's loan portfolio, real estate
is frequently used as collateral. The primary source of repayment is the income
generated by a business or by an individual, but real estate as collateral
provides an additional measure of security. There are risks associated with
taking real estate as collateral. The risks are changing property values,
changes in property tax laws, and changes in economic conditions.
Loan risk is mitigated by lending to borrowers with proven credit histories
and demonstrated ability to repay. The Bank manages risk in the loan portfolio
by following loan policies and underwriting practices designed to result in
minimal risk.
Interest income on loans is accrued daily on the principal balance
outstanding. Generally, no interest is accrued on loans deemed to be
uncollectable, or when the principal or interest payment becomes 90 days past
due. At December 31, 1998, the Bank had loans totaling $447,000 that were 90
days or more past due and still accruing interest because in management's
judgement all of the principal and accrued interest was deemed collectable and
not subject to loss.
PROVISION FOR POSSIBLE CREDIT LOSSES. The provision for credit losses charged to
operating expense is based on the Bank's credit loss experience and certain
other factors determined by management that deserve recognition in estimating
credit losses. Management monitors the loan portfolio to ensure that the reserve
for possible credit losses is adequate to cover outstanding loans.
It is Bank policy that once each quarter, (in January, April, July, and
October) Bank management makes recommendations to the Board regarding the
adequacy of the Bank's credit loss reserves and the amount of the provision that
should be charged against earnings for the next three months. The Board then
makes a decision regarding these amounts and these decisions are communicated to
the Banks' Lending Officers.
When determining loan reserve amounts the Board is given information divided
into the following categories.
1. Specific. Specific reserves are for loans graded sub-standard or doubtful
to cover the amount of exposure the Bank has calculated for each loan.
2. General. For all loans graded higher than substandard or doubtful, the
Bank uses estimates based on its previous experience for each category of
loans.
3. Special. From time to time special reserves will be established to
facilitate a change in bank strategy. This happens only when the Bank
intentionally embarks on a strategy that has more than a normal amount of
credit risk associated with it. Special allocations are also made to cover
suspected shortfalls in other real estate owned (OREO) or to establish a
reserve for some other form of special asset.
4. Unallocated. The Board may from time to time increase the credit loss
reserve to an amount that is larger than is needed to meet specific, general,
and special reserves requirements. The Board does this by adding unallocated
reserves. The Board does this when it is uncomfortable with the amount of the
calculated allocation, when it foresees an economic downturn, or it otherwise
sees a need for additional reserves.
29
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
Citizens Bancorp and Subsidiary.
Management also uses a loan grading system wherein officers grade each of
their commercial loans at inception, annually thereafter when financial
statements are received if the loan has an annual maturity, and at other times
when there is an indication that a credit may have weakened or im proved. It is
the responsibility of the loan review officer to ensure the integrity of the
loan grading system.
Loans graded substandard or doubtful, either by the Bank or by a regulator,
receive special attention in the analy sis and specific reserve amounts are set
aside for each loan based upon the total principal dollar amount of the loan.
Specific reserves for doubtful and substandard loans are 50% and 25%,
respectively. Estimated loss percentages are used for all other loans by type as
follows: installment (consumer loans to individual) .57%, real estate mortgage
loans .23%, and all other loans (general) .55%. These loss percentage factors
establish the required reserve amount by multiplying the factor times the total
of loans in each catego ry.
As of December 31, 1998, the Bank held in its reserve for possible credit
losses a total of $1.4 million.
The total reserve for possible credit losses represents the Boards' opinion
at December 31, of each year, as to an amount that would meet the Bank's needs
in the event of an economic downturn or unforeseen event.
It is the opinion of management that the total reserve for possible credit
loss at December 31, 1998 was adequate to meet the policy portfolio requirements
of the Bank. Total allowance represented 1.07% of total loans at that date.
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No.
114, "Accounting by Creditors for Impairment of a Loan" and in October 1996
issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition Disclosures, an amendment to SFAS No. 114." The Bank measures
impaired loans based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or as a practical expedient,
at the loan's observable market price or the fair market value of the collateral
if the loan is collateral dependent. The Bank excludes loans that are currently
measured at fair value or at lower of cost or fair value, and certain large
groups of smaller balance homogeneous loans that are collectively measured for
impairment. At December 31, 1998 and 1997, the Bank had no materially impaired
loans.
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 does business, including Bancorp's vendors, suppliers, utility
companies, and customers.
Bancorp is committed to addressing these Y2K challenges in a prompt and
responsible manner. Bancorp'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. Bancorp
has substantially completed the awareness and assessment phases, although
appropriate follow-up activities are continuing to occur. Bancorp 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.
Bancorp has assigned primary responsibility for the Y2K project to its Chief
Operating Officer. Bancorp has also formed a Y2K committee, consisting of
appropriate representatives from its critical operational areas. In addition,
Bancorp provides periodic reports to its Board of Directors in order to assist
them in overseeing Bancorp's Y2K readiness.
30
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS
Citizens Bancorp and Subsidiary.
During the Assessment phase of our Y2K preparation, an individual analysis
of each hardware, software and time sensitive environmental application used by
Bancorp was completed. This assessment included a risk evaluation, which
measured the criticality of the application, a rating of confidence of Bancorp
to achieve a compliant status, and a determination of the level of control
Bancorp has in effecting change in the compliance process. The designation
"Mission Critical", meaning those systems that should they fail would have a
significant adverse impact on Bancorp'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 Bancorp, were then assigned to each
application.
Bancorp 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, Bancorp has
internally established and is currently on track with the following tables:
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
Bancorp 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 Bancorp, its customers, and vendors has the potential to
impact financial condition, liquidity, and create a material loss of revenue.
Based on Bancorp'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 Bancorp will be well prepared to avoid
any significant detrimental effects. Since Bancorp 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 Bancorp's control. Bancorp 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. Bancorp 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 Bancorp 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 Bancorp's normal
currency ordering procedures funded by deposits held at the Federal Reserve Bank
and investments maturing in 1999. Bancorp has sufficient liquidity to cover
anticipated withdrawals. In summary, Bancorp believes it will be Y2K ready 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.
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 Bancorp's management within its current
knowledge of Bancorp'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. Bancorp 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.
31
<PAGE> 33
CORPORATE INFORMATION
CITIZENS BANK
CITIZENS BANCORP
BOARD OF DIRECTORS
GENE N. THOMPSON
Chairman: Thompson Timber Company
Corvallis, Oregon
WILLIAM V. HUMPHREYS
President and CEO:
Citizens Bank, Corvallis, Oregon
SCOTT A. FEWEL
Law Office of Scott A. Fewel
Corvallis, Oregon
JOCK GIBSON
Lochmead Dairy & Dari Mart Stores
Junction City, Oregon
JAMES E. RICHARDS
Fisher Implement Company
Albany, Oregon
DUANE L. SORENSEN
Waste Control Systems, Inc.
Corvallis, Oregon
JOHN TRUAX
Truax Corporation
Corvallis, Oregon
ROSETTA C. VENELL
Venell Farms, Inc., Venell Pellets, Inc.,
Mid-Valley Agricultural Products, Inc.
Corvallis, Oregon
EMERITUS DIRECTORS
JAMES EICKELBERG
LARRY C. HUNTER
EXECUTIVE OFFICERS
WILLIAM V. HUMPHREYS
President and Chief Executive Officer
DANIEL E. WYBENGA
Executive Vice President
of Loan Administration
LARK E. WYSHAM
Senior Vice President
and Chief Financial Officer
WILLIAM F. HUBEL JR.
Senior Vice President
and Chief Operating Officer
SCOTT M. ZIMBRICK
Senior Vice President
and Branch Manager
BRANCHES
EAST ALBANY OFFICE
PO Box 249
2315 14(th)Avenue SE
Albany, OR 97321
(541) 967-1992
Steve Terjeson, Manager
WEST ALBANY OFFICE
PO Box 1007
2230 Pacific Blvd SE
Albany, OR 97321
(541) 812-6178
Loren Roth, Manager
MAIN OFFICE
PO Box 30
275 SWThird Street
Corvallis, OR 97339
(541) 752-5161
Scott Zimbrick, Manager
CIRCLE OFFICE
PO Box 30
978 NWCircle Blvd
Corvallis, OR 97339
(541) 752-5161
Doug Ingalls, Manager
UNIVERSITY OFFICE
PO Box 30
855 NWKings Blvd
Corvallis, OR 97339
(541) 752-5161
Scott Zimbrick, Manager
TRI-COUNTY OFFICE
PO Box 399
955 Ivy Street
Junction City, OR 97448
(541) 998-8734
Greg Duff, Manager
PHILOMATH OFFICE
PO Box 1629
1224 Main Street
Philomath, OR 97370
(541) 929-3228
Ron Yechout, Manager
APPLEGATE OFFICE
PO Box 129
88312 Territorial Road
Veneta, OR 97487
(541) 935-4141
Barbara J. Hodgson, Manager
MCMINNVILLE OFFICE
Tentative opening Spring of 1999
PO Box 647
411 NE Baker Street
McMinnville, OR 97128
(503) 550-6707
Todd Caster, Manager
DEPARTMENTS
ACCOUNT SERVICE CENTER
PO Box 30
275 SW Third Street
Corvallis, OR 97339
(541) 752-5161
Jub Leelaamornvichet, Manager
MORTGAGE DEPARTMENT
PO Box 30
275 SW Third Street
Corvallis, OR 97339
(541) 752-5161
Jan Cowan, Manager
LOAN SERVICE CENTER
PO Box 30
275 SW Third Street
Corvallis, OR 97339
(541) 752-5161 Samantha Vaughan, Supervisor
KEITH FINANCIAL SERVICES
Bill Keith, Financial Advisor
PO Box 1007
Albany, OR 97321 (541) 812-6147
TRANSFER AGENT
Shareholder Relations
Citizens Bank
PO Box 30
Corvallis, OR 97339
(541) 752-5161
CITIZENS BANCORP
<PAGE> 1
EXHIBIT 21.1
As of December 31, 1998 Citizens Bancorp's only subsidiary was Citizens Bank,
which is wholly-owned by Citizens Bancorp.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,771
<INT-BEARING-DEPOSITS> 23,406
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,855
<INVESTMENTS-CARRYING> 9,733
<INVESTMENTS-MARKET> 9,857
<LOANS> 132,126
<ALLOWANCE> 1,419
<TOTAL-ASSETS> 233,978
<DEPOSITS> 188,235
<SHORT-TERM> 16,644
<LIABILITIES-OTHER> 2,303
<LONG-TERM> 4,211
0
0
<COMMON> 16,069
<OTHER-SE> 6,516
<TOTAL-LIABILITIES-AND-EQUITY> 233,978
<INTEREST-LOAN> 13,167
<INTEREST-INVEST> 2,937
<INTEREST-OTHER> 843
<INTEREST-TOTAL> 16,947
<INTEREST-DEPOSIT> 5,186
<INTEREST-EXPENSE> 5,917
<INTEREST-INCOME-NET> 11,030
<LOAN-LOSSES> 236
<SECURITIES-GAINS> 20
<EXPENSE-OTHER> 7,153
<INCOME-PRETAX> 5,867
<INCOME-PRE-EXTRAORDINARY> 5,867
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,840
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.99
<YIELD-ACTUAL> 8.77
<LOANS-NON> 173
<LOANS-PAST> 447
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,201
<CHARGE-OFFS> 32
<RECOVERIES> 14
<ALLOWANCE-CLOSE> 1,419
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,419
</TABLE>
