<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number 000-23277
CITIZENS BANCORP/OR
(Exact name of registrant as specified in its charter)
Oregon 91-1841688
(State of Incorporation) (I.R.S. Employer Identification Number)
275 Southwest Third Street
Corvallis, Oregon 97339
(Address of principal executive offices)
(541) 752-5161
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
3,927,706 shares as of April 30, 1999, no par.
<PAGE> 2
CITIZENS BANCORP
FORM 10-Q
MARCH 31,1999
INDEX
<TABLE>
<CAPTION>
PART I. Page
Reference
<S> <C>
ITEM 1. - FINANCIAL INFORMATION - UNAUDITED
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 1
Consolidated Statements of Income and Comprehensive Income for the three
months ended March 31, 1999 and 1998 2
Consolidated Statements of Changes in Shareholders' Equity 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5
ITEM 2. - Management's Discussion and Analysis of Financial Condition
and Results of Operations 6 - 12
ITEM 3. - Quantitative and Qualitative Disclosure about Market Risk 12
PART II. - OTHER INFORMATION
ITEM 1. - Legal Proceedings 13
ITEM 2. - Changes in Securities 13
ITEM 3. - Defaults Upon Senior Securities 13
ITEM 4. - Submission of Matters to a Vote of Security Holders 13
ITEM 5. - Other Information 13
ITEM 6. - Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</TABLE>
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1
CITIZENS BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ---------
<S> <C> <C>
Assets
Cash and due from banks $ 9,554 $ 12,771
Interest bearing deposits in banks 19,129 23,406
Federal funds sold 0 0
Securities available for sale 51,156 50,855
Securities held to maturity 9,993 9,733
Loans, net of unearned discount and prepaid fees 134,789 132,126
Allowance for credit losses (1,454) (1,419)
--------- ---------
NET LOANS $ 133,335 $ 130,707
Premises and equipment 4,383 3,435
Accrued interest receivable 1,937 1,853
Other assets 1,192 1,218
TOTAL ASSETS $ 230,679 $ 233,978
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 38,229 $ 42,025
Savings and interest bearing demand 83,786 81,015
Time 64,353 65,195
--------- ---------
TOTAL DEPOSITS $ 186,368 $ 188,235
Repurchase agreements 15,077 16,299
Other borrowings 4,536 4,556
Accrued interest and other liabilities 903 2,303
TOTAL LIABILITIES $ 206,884 $ 211,393
--------- ---------
SHAREHOLDERS' EQUITY
Common stock (no par value); authorized 5,000,000 shares;
issued and outstanding: 1999 - 3,927,706 shares;
1998 - 3,891,136 shares 16,676 16,069
Retained Earnings 7,065 6,271
Accumulated other comprehensive income 54 245
TOTAL SHAREHOLDERS' EQUITY $ 23,795 $ 22,585
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 230,679 $ 233,978
========= =========
</TABLE>
See accompanying notes
1
<PAGE> 4
CITIZENS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousand, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1999 1998
----------- -----------
<S> <C> <C>
INTEREST INCOME:
Loans $ 3,073 $ 3,155
Interest on deposits and federal funds sold 240 256
Securities available for sale 691 550
Securities held to maturity 92 119
----------- -----------
TOTAL INTEREST INCOME $ 4,096 $ 4,080
INTEREST EXPENSE:
Deposits 1,296 1,224
Borrowed funds 72 16
Repurchase agreements 114 140
----------- -----------
TOTAL INTEREST EXPENSE $ 1,482 $ 1,380
NET INTEREST INCOME $ 2,614 $ 2,700
Provisions for credit losses (66) (45)
Net interest income after provision for credit losses $ 2,548 $ 2,655
NON-INTEREST INCOME:
Service charges on deposit accounts 273 204
Origination fees and gains on loans sold 0 17
Gain(loss) on sales of securities available for sale 0 19
Other 297 247
----------- -----------
TOTAL NON-INTEREST INCOME $ 570 $ 487
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,055 923
Occupancy and equipment 248 229
Other 596 566
----------- -----------
TOTAL NON-INTEREST EXPENSE $ 1,899 $ 1,718
INCOME BEFORE INCOME TAXES $ 1,219 $ 1,424
----------- -----------
Income taxes (425) (483)
Net income $ 794 $ 941
=========== ===========
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gain (loss) on AFS securities, net (191) 2
Reclassification for gain included in net income 0 (10)
COMPREHENSIVE INCOME $ 603 $ 933
=========== ===========
Per share data:
Basic earnings per share $ 0.20 $ 0.24
Weighted average number of common
shares outstanding 3,922,830 3,889,608
</TABLE>
2
<PAGE> 5
CITIZENS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
-----------------------------------------------------------------------------------
NUMBER OF ACCUMULATED
COMMON COMMON OTHER
SHARES STOCK RETAINED COMPREHENSIVE
OUTSTANDING AMOUNT EARNINGS INCOME TOTAL
----------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Balance, at December 31, 1997 1,922,321 $15,517 $3,832 $ 62 $19,411
Net Income -- -- 941 -- 941
Valuation adjustment, net -- -- -- (8) (8)
Issuance of common stock 23,247 552 -- -- 552
--------- ------- ------ ----- -------
BALANCE, AT MARCH 31, 1998 1,945,568 $16,069 $4,773 $ 54 $20,896
Balance, at December 31, 1998 3,891,137 $16,069 $6,271 $ 245 $22,585
Net Income -- -- 794 -- 794
Valuation adjustment, net -- -- -- (191) (191)
Issuance of common stock 36,569 607 -- -- 607
--------- ------- ------ ----- -------
BALANCE, AT MARCH 31, 1999 3,927,706 $16,676 $7,065 $ 54 $23,795
</TABLE>
3
<PAGE> 6
CITIZENS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 794 $ 941
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 66 45
Depreciation and amortization 121 103
Stock dividends received (13) (12)
(Increase) decrease in accrued interest receivable (84) 46
Increase (decrease) in accrued interest payable 4 5
Other 165 538
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,053 $ 1,666
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits in banks 4,277 3,981
Net (increase) decrease in federal funds sold 0 2,600
Proceeds from maturities of available for sale securities 6,500 1,000
Proceeds from sales of available for sale securities 0 9,519
Proceeds from maturities of securities held to maturity 0 2,455
Purchases of securities available for sale (7,140) (13,122)
Purchases of securities held to maturity (266) (367)
(Increase) decrease in loans made to customers, net of principal collections (2,698) (4,563)
Purchases of premises and equipment and other (1,040) (22)
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES $ (367) $ 1,481
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (1,867) (1,621)
Net increase (decrease) in repurchase agreements and other borrowings (1,242) (1,021)
Payment of dividends (794) (755)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES $ (3,903) $ (3,397)
NET DECREASE IN CASH AND DUE FROM BANKS (3,217) (260)
CASH AND DUE FROM BANKS
Beginning of year 12,771 9,268
END OF YEAR $ 9,554 $ 9,018
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid 1,478 1,375
Income taxes paid 370 --
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Fair value adjustment of available for sale, net of tax (191) (8)
Issuance of common stock through dividend reinvestment plan 607 552
</TABLE>
4
<PAGE> 7
CITIZENS BANCORP
Notes to Consolidated Financial Statements (unaudited)
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements include the accounts
of Citizens Bancorp ("Bancorp"), a bank holding company and its wholly owned
subsidiary, Citizens Bank ("Bank") after elimination of intercompany
transactions and balances. Substantially all activity of Citizens Bancorp is
conducted through its subsidiary bank.
The interim financial statements are unaudited but have been prepared in
accordance with generally accepted accounting principles for interim
condensed financial statements. Accordingly, the condensed interim financial
statements do not include all of the information and footnotes required by
generally accepted financial statements. In the opinion of management, all
adjustments including operations for the interim periods included herein
have been made.
The interim condensed consolidated financial statements should be read in
conjunction with the December 31, 1998 consolidated financial statements,
including notes there to, included in Bancorp's 1998 Annual Report to
shareholders.
2. USE OF ESTIMATES IN THE PREPARATION OF FINANCIALS
The preparation of financial statements, in conformity with general
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
3. SHAREHOLDERS EQUITY AND NET INCOME PER COMMON SHARE
The Board of Directors declared a $.36 per share dividend on December 15,
1998, to Bancorp shareholders of record on that date payable on January 11,
1999. Through the Dividend Reinvestment Plan (DRIP) 36,569 shares were
purchased at a price of $16.60 per share. The DRIP resulted in an increase
of shares outstanding from 3,891,137 to 3,927,706.
All per share amounts have been restated to retroactively reflect stock
dividends, stock purchased and stock splits previously reported.
4. CONTINGENCIES
Unfunded loan commitments totaled $21.1 million as of March 31, 1999 and
$19.0 million as of December 31, 1998.
5. ACCOUNTING CHANGES
In the quarter ended March 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
No. 130), which was effective for years beginning after December 15, 1997.
SFAS No. 130 requires that an entity report and display comprehensive income
with the same prominence as other financial statements. Comprehensive income
is defined as the change in equity of a business enterprise during a period
from transactions and other events and circumstances from non-owner sources.
It includes all changes in equity during a period except those resulting
from investments by owners and distributions to owners. With regard to the
Company, currently the only items of comprehensive income are changes in the
fair value of its available for sale securities portfolio. Accordingly,
changes in the value of that portfolio during the period, net of tax, are
reported as "Other Comprehensive Income" in the accompanying Consolidated
Statement of Income and Comprehensive Income. Changes in the fair value of
the available for sale securities portfolio for the three months ended March
31, 1999, which were previously reported in the Consolidated Statement of
Shareholders' Equity, have been reclassified and retroactively reported as
Other Comprehensive Income. The cumulative adjustment, net of taxes, to
record the available for sale securities portfolio at fair value at period
end was previously reported as "Net unrealized gain (loss) on securities
available for sale, net of tax" in the Company's consolidated balance
sheets. That cumulative adjustment is now termed 'Accumulated other
comprehensive income". There was no effect on previously reported net income
as a result of this reporting change.
5
<PAGE> 8
ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
OVERVIEW
Citizens Bancorp ("Bancorp"), an Oregon corporation, is the parent corporation
and holding company of Citizens Bank ("the Bank"), which is its sole subsidiary.
The Bank is an Oregon State-chartered banking corporation headquartered in
Corvallis, Oregon. The Bank was incorporated in 1957, Bancorp in 1996.
The Bank recently opened two new full service branches located in the
communities of Albany, Oregon and McMinnville, Oregon.
The new West Albany branch is the second branch in Albany for the Bank. The new
branch opened February 1999 in a newly constructed building of approximately
4,000 feet on leased land. The land lease is for a term of fifty years. The
manager for the new West Albany branch was the Bank's assistant manager at its
East Albany branch and has strong lending and management expertise.
The new McMinnville branch opened April 1999 in a temporary modular building
while a permanent facility is being constructed. The modular building is owned
by the Bank and will be used for future branch expansion projects or sold. The
McMinnville branch building is the same design as the new West Albany branch
with minor modifications to fit the property, saving the Bank costs relative to
plans and design. The Bank purchased the land for the branch which is in a prime
location in the downtown area. The McMinnville branch manager has over 25 years
experience in the banking industry with long term ties to the community.
Both Albany and McMinnville are fast growing markets for small to medium size
businesses. The Bank specializes in loans to small and medium sized businesses
and is well positioned to meet the needs for business loans in these
communities. The bank's strategic focus is relationship banking and anticipates
substantial opportunity for both deposit and loan growth for these new branches.
The Bank believes that expansion into these markets will enhance shareholder
value, contribute to its goal of strong financial performance, and provide
superior financial and customer service to these communities.
The Bank is in the final stages of installing a local and wide area network
("LAN/WAN") throughout its branch's and departments. Management believes that
the system will enhance productivity, efficiency, customer service, and
communication as well as its franchise value. The LAN/WAN will be the building
block for future technological enhancements and customer products.
Bancorp reported net income of $794,000, or $.20 per share for the three months
ending March 31, 1999, compared to net income of $941,000, or $.24 per share for
the same period in 1998. The net decrease is attributable to a decrease in
interest income from loans due to lower overall interest rates on loans and an
6
<PAGE> 9
increase in expenses related to the opening of two new branches, improvements to
the technology infrastructure, and expenses related to Y2K readiness.
LOAN PORTFOLIO
The composition of the loan portfolio was as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
Commercial $ 27,190 $ 26,234
Agriculture 12,074 12,402
Real Estate
Construction 9,822 $ 7,900
1-4 Family 30,892 31,390
Other 51,327 50,421
Consumer Loans 4,102 4,393
Less: unearned income and deferred fees (618) (614)
TOTAL LOANS $ 134,789 $ 132,126
Less: allowance for credit losses (1,454) (1,419)
--------- ---------
NET LOANS $ 133,335 $ 130,707
========= =========
</TABLE>
Transactions in the reserve for credit losses were as follows for the three
months ended March 31, 1999:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Balance at beginning of period $1,419 $1,201
Provision charged to operations 66 45
Loans recovered 0 0
Loans charged off 31 0
------ ------
$1,454 $1,246
====== ======
</TABLE>
It is the policy of the Bank to place loans on nonaccrual after they become 90
days past due unless waived by management when collectability is deemed eminent.
The Bank may place loans that are not contractually past due or that are deemed
fully collateralized on nonaccrual status as a management tool to actively
oversee specific loans.
Loans on nonaccrual status as of March 31, 1999 and December 31, 1998 were
approximately $283,000 and $173,000 respectively. Loans past due 90 days or more
on which the Bank continued to accrue interest were approximately $305,000 at
March 31, 1999 and $447,000 at December 31, 1998. There were no loans with
modified terms as of March 31, 1999 and December 31, 1998.
INVESTMENT SECURITIES
The amortized cost and estimated book value of the investment securities held by
the Bank, including unrealized gains and losses, at March 31, 1999 and December
31, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 AMORTIZED ESTIMATED UNREALIZED
COST FAIR VALUE GAINS, NET
--------- ---------- -----------
<S> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury Securities
(Including securities of government agencies
and corporations) $50,372 $50,454 $82
Other 702 702 0
------- ------- ---
$51,074 $51,156 $82
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
March 31, 1999 AMORTIZED ESTIMATED UNREALIZED
COST FAIR VALUE GAINS, NET
--------- ---------- -----------
<S> <C> <C> <C>
HELD TO MATURITY
U.S. Treasury Securities
(Including securities of government agencies
and corporations) $ 2,010 $ 2,024 $ 14
Obligations of State and Political Subdivisions 7,983 8,088 105
------- ------- -------
$ 9,993 $10,112 $ 119
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999 AMORTIZED ESTIMATED UNREALIZED
COST FAIR VALUE GAINS, NET
--------- ---------- -----------
<S> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury Securities
(Including securities of government
agencies and corporations) $49,816 $50,198 $ 382
Other 657 657 0
------- ------- -------
$50,473 $50,855 $ 382
HELD TO MATURITY
U.S. Treasury Securities
(Including securities of government agencies
and corporations) $ 2,014 $ 2,036 $ 22
Obligations of State and Political Subdivisions 7,719 7,821 102
------- ------- -------
$ 9,733 $ 9,857 $ 124
</TABLE>
MATERIAL CHANGES IN FINANCIAL CONDITION
Changes in the balance sheet for the three months ended March 31, 1999 include a
decrease in total assets. The decrease is primarily in cash and balances due
from depository institutions.
At March 31, 1999 total assets decreased 1.41% or approximately $3.3 million
over total assets at December 31, 1998. Major components of the change in total
assets were:
- $.9 million increase in premises and fixed assets
- $2.6 million increase in loans
- $.6 million increase in investments
- $7.2 million decrease in cash and cash equivalents
The increase in loans was primarily due to loan demand as a result of favorable
economic conditions, increased calling activity by the Bank's loan officers and
marketing of the Bank's personalized loan services. Loans increased from $130.7
million at December 31, 1998 to $133.3 million for the three month period ending
March 31, 1999. An increase of $2.6 million or 1.97 percent.
The increase in investments was a result of management's decision to place
excess funds into the investment portfolio. The timing of the maturities are
determined by using the Bank's asset/liability model. The Bank increased its
investments in tax-exempt municipal bonds, US Treasuries, and Government
Agencies.
At March 31, 1999 and December 31, 1998 the Bank kept its liquid funds in an
interest bearing account held at the Federal Home Loan Bank due to a more
favorable interest rate. The majority of the Banks liquid funds are held in its
interest bearing account at the Federal Home Loan Bank (FHLB). The balance at
the FHLB at March 31, 1999 was $14.1 million in an interest bearing demand
account. This account represents the Bank's surplus funds which can fluctuate
widely on a day to day basis.
The Bank experienced a net decrease in total deposits to $186.4 million at March
31, 1999 from $188.2 million at December 31, 1998 which represents a decrease of
$1.9 million or .99 percent. The net decrease in total deposits was the result
of an overall decrease in the balances in demand accounts and time deposits.
Demand deposits were approximately $38.2 million at March 31, 1999 and
approximately
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<PAGE> 11
$42.0 million at December 31, 1998. This fluctuation in demand account balances
is normal for the Bank. Average total deposits for three months ending March 31,
1999 was $184.1 million compared to $169.3 million for the year ending December
31, 1998.
Long-term borrowings from the Federal Home Loan Bank were utilized to fund and
match large long-term customer loans. Long term borrowings decreased by $.8
million for the quarter ending March 31, 1999 as compared to year end December
31, 1998. This reduction was a result of the monthly amortization of these
loans.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
The Company reported net income of $794,000 or $.20 per share, for the three
months ended March 31, 1999, compared to net income of approximately $941,000,
or $.24 per share for the same period in 1998. This represents a decrease in net
income of $147,000 or 15.6 percent. The net decrease was attributable to a
decrease in interest income from loans, expenses relative to the opening of the
new West Albany Branch in a newly completed building in February 1999, the
opening of the new McMinnville Branch in April 1999 in a modular building while
the permanent building is constructed, the installation of a local and wide area
computer network and expenses related to Y2K readiness.
Total interest income increased approximately $16,000 for the three months ended
March 31, 1999 as compared to the same 1998 period. This increase was primarily
due to increases in interest income on security investments.
Net interest income decreased $86,000 or 3.2 percent for the three months ending
March 31, 1999. The net decrease during this period resulted from decreases in
interest income and an increase in interest expense on deposits from growth. The
decrease in interest income from loans is primarily due to declining rates on
prime based loans, refinancing of existing loans and repricing of maturing
loans.
Non-interest income increased approximately $83,000 for the three months ended
March 31, 1999 as compared to the same three month period in 1998. These
increases are attributable to an increase in service charge income as a result
of deposit growth, service charge increases, and increases in the volume of
bankcard services over last year for the same period.
Salaries and employee benefits increased approximately $132,000 for the three
month period ending March 31, 1999 compared to the same three month period in
1998. These increases were primarily due to routine adjustments in officer and
staff salaries, staff increases due to the new West Albany Branch and
McMinnville Branch, and technical support staff.
Other non-interest expense excluding salaries and employee benefits increased
approximately $49,000 for the three months ended March 31, 1999 as compared to
the same three month period in 1998. This increase was primarily due to
increases in expense relative to growth of the merchant bankcard and debit card
products, an increase in depreciation expense due to the continuous updating of
equipment relative to technology and computers.
CREDIT LOSS PROVISION
The Bank maintains an allowance for credit losses on loans that occur from time
to time as an incidental part of the business of banking. Loans are charged
against this allowance for credit losses which is adjusted periodically to
reflect changing loan volumes, risk potential in the portfolio and general
economic conditions. Additions to the allowance for credit losses are made
through a charge against income.
During the first three months ended March 31, 1999 the Bank funded the allowance
for credit losses $66,000 from operations and $45,000 for the same three month
period during 1998. The increase in the provision for credit losses was incurred
to match the increased loan growth. The Bank experienced $31,000 in credit
losses for the three months ended March 31, 1999 and no credit losses for the
same period ended March 31, 1998. The historical level of loan charge offs has
been very low for the Bank.
9
<PAGE> 12
Management's assessment of the reserve for credit losses includes various
factors such as current delinquent and non-performing loans, historical analysis
of industry credit loss experience, knowledge of the present and anticipated
economic future of its market area and loan grades. The Bank is satisfied that
the allowance for credit losses at March 31, 1999 of $1,454,000 or 1.08% of
total loans is an appropriate amount.
YEAR 2000 ISSUES
Citizens Bancorp first became aware of the Year 2000 (Y2K) problem through a
combination of industry contacts and the Federal Financial Institutions
Examination Council (FFIEC) statement "The Effect of Year 2000 on Computer
Systems" issued in June 1996. The problem, as it is commonly defined, arose out
of a shortage of disk space in the early 1960's and 1970's. Instead of storing
dates as four digits (1997), they were shortened to two digits (97). However,
when the clock rolls over to 2000, many systems will think "00" is 1900, rather
than 2000. Hardware or software that runs on a time schedule or involves
calculations based on dates can be seriously affected. Without correction, the
expanded date formats of the new millennium will cause many operating systems to
produce incorrect data or cause them to fail completely.
At Citizens Bancorp we recognize this problem as one of more than just a
technological/mechanical risk. We see the Y2K problem representing a regulatory
and ongoing business operations challenge not only to our business but to those
that we interact with as well.
The Y2K challenge is a particular problem for financial institutions, since many
financial transactions, such as interest accruals and payments, are date
sensitive. It also may affect the operations of third parties with whom Citizens
Bancorp and its subsidiary Citizens Bank (collectively, the "Company") do
business, including the Company's vendors, suppliers, utility companies, and
customers.
The Company is committed to addressing these Y2K challenges in a prompt and
responsible manner. The Company's year 2000 compliance plan ("Y2K Plan") follows
the five-step approach outlined by the FFIEC of Awareness, Assessment,
Renovation, Validation, and Implementation in mitigating this risk on all
fronts. The Company has substantially completed the awareness and assessment
phases, although appropriate follow-up activities are continuing to occur. The
Company is currently involved in the testing phase of the Y2K Plan. Validation
will take place after each piece of testing is completed and renovation will
continue to be done on an "as needed" basis.
The Company has assigned primary responsibility for the Y2K project to its Chief
Operating Officer. The Company has also formed a Y2K committee, consisting of
appropriate representatives from its critical operational areas. In addition,
the Company provides periodic reports to its Board of Directors in order to
assist them in overseeing the Company's Y2K Readiness.
During the Assessment phase of our Y2K preparation, an individual analysis of
each hardware, software and time sensitive environmental application used by the
Company was completed. This assessment included a risk evaluation, which
measured the criticality of the application, a rating of confidence of the
Company to achieve a compliant status, and a determination of the level of
control the Company has in effecting change in the compliance process. The
designation "Mission Critical", meaning those systems that should they fail
would have a significant adverse impact on the Company's operations and
financial condition as well as those of its customers, and "Non Mission
Critical", meaning those system which are less essential to functionality of the
Company, were then assigned to each application.
The Company has also requested documentation of compliance from the vendor of
each application. In addition, a primary solution for on site compliance of each
application as used was selected and a testing approach was established. An
individual contingency plan was then written for each application should testing
fail or functionality be effected after the date change.
Well in advance of all federally mandated time frames, the Company has
internally established and is currently on track with the following tables:
10
<PAGE> 13
<TABLE>
<S> <C>
Mission Critical testing completed 12/31/98
Mission Critical process validation completed 3/31/99
Mission Critical remediation as necessary completed 3/31/99
Non-Mission Critical testing complete 5/31/99
Non-Mission Critical process validation complete 6/30/99
Non-Mission Critical remediation as necessary complete 6/30/99
</TABLE>
The Company has established a budget for extraordinary expenses related to Y2K
of approximately $300,000. The budget includes an estimation of both real costs
and lost opportunities relative to investments and loans. Approximately
$38,000.00 of this amount has already been incurred.
The potential risk involved with issues brought about by the advent of Y2K are
extensive and could be serious in nature. The possible interruption of business
operations for the Company, its customers, and vendors has the potential to
impact financial condition, liquidity, and create a material loss of revenue.
Based on the Company's extensive investment of resources, both human and
financial, in preparing for the issues surrounding Y2K and the highly regulated
nature of the business, management anticipates that the Company will be well
prepared to avoid any significant detrimental effects. Since the Company has
drawn specific contingency plans for each application it uses that could be
impacted by Y2K, the worst case scenario is believed to stem from the potential
of environmental Y2K failures, such as power or telecommunications, the
preparation for which are generally out of the Company's control. The Company
continues to monitor the progress of these entities toward Y2K compliance and by
June of 1999 will more fully develop the contingency plans for environmental
failure as more specifics of readiness for these vendors are available. The
Company also anticipates the possible scenario of several borrowing customers
experiencing short term Y2K cash flow problems and a pre-Y2K increase in cash
demand by all customers. If the Company has borrowers that experience Y2K cash
flow problems, they will be dealt with in the same routine manner by which
normal cash flow interruptions experienced by borrowers are addressed. Any
increase in cash demand will be funded by the Company's normal currency ordering
procedures funded by deposits held at the Federal Reserve Bank and investments
maturing in 1999. The Company has sufficient liquidity to cover anticipated
withdrawals. In summary, the Company believes it will be Y2K compliant by its
internally established timelines which are well ahead of the actual century date
change and will have sufficient contingency plans in place to maintain a
satisfactory level of business operations.
LIQUIDITY AND CAPITAL RESOURCES
Bancorp's subsidiary, the Bank, has adopted policies to maintain a relatively
liquid position to enable it to respond to changes in the Bank's financial
environment. Generally, the Bank's major sources of liquidity are customer
deposits, sales and maturities of securities, the use of borrowing lines with
correspondent banks including Federal Home Loan bank borrowings, loan repayments
and net cash provided by operating activities.
The analysis of liquidity should also include a review of the changes that
appear in the consolidated statement of cash flows for the first three months of
1999. The statement of cash flows includes operating, investing and financing
categories. Operating activities include net income which is adjusted for
non-cash items and increases or decreases in cash due to certain changes in
assets and liabilities. Investing activities consisted primarily of both
proceeds from and purchases of securities, and the net growth in loans.
Financing activities present the cash flows associated with the Bank's deposit
accounts.
Management believes that the Bank's existing sources of liquidity will enable
the Bank to fund its requirements in the normal course of business.
As of March 31, 1999, shareholders' equity totaled $23,795,000 as compared to
$22,585,000 for the same three month period in 1998, an increase of 5.36%. This
increase in equity was primarily due to the Company's net income.
11
<PAGE> 14
Capital ratios for the Company were as follows as of the dates indicated:
<TABLE>
<CAPTION>
BANCORP
ADEQUATELY WELL ------------------------
CAPITALIZED CAPITALIZED MARCH 31, DECEMBER 31,
STANDARDS STANDARDS 1999 1998
----------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Tier 1 Leverage Ratio 4% 5% 10.31% 9.79%
Tier 1 Risk Based Capital Ratio 4% 6% 16.44% 15.53%
Total Risk Based Capital Ratio 8% 10% 17.46% 16.53%
</TABLE>
ITEM 3. QUANTITATIVE & QUALITATIVE ANALYSIS ABOUT MARKET RISK
No material changes have occurred in market risk since reported on December 31,
1998.
12
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibit is filed as part of this report.
27.0 Financial Data Schedule for the three months ended March 31,
1999.
(b) Reports on Form 8-K
None
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 13, 1999 /s/ William V. Humphreys
----------------------------------
By: William V. Humphreys
President and
Chief Executive Officer
Date: May 13, 1999 /s/ Lark E. Wysham
----------------------------------
By: Lark E. Wysham
Senior Vice President and
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
FINANCIAL DATA SCHEDULE - THIS EXHIBIT IS INCLUDED ONLY IN THE ELECTRONIC EDGAR
FILING VERSION OF THIS FORM 10-K. THE FINANCIAL DATA SCHEDULE IS NOT A SEPARATE
FINANCIAL STATEMENT, BUT A SCHEDULE THAT SUMMARIZES CERTAIN STANDARD FINANCIAL
INFORMATION EXTRACTED DIRECTLY FROM THE FINANCIAL STATEMENTS IN THIS FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,554
<INT-BEARING-DEPOSITS> 19,129
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 51,156
<INVESTMENTS-CARRYING> 9,993
<INVESTMENTS-MARKET> 10,112
<LOANS> 134,789
<ALLOWANCE> 1,454
<TOTAL-ASSETS> 230,678
<DEPOSITS> 186,368
<SHORT-TERM> 15,480
<LIABILITIES-OTHER> 903
<LONG-TERM> 4,133
0
0
<COMMON> 16,676
<OTHER-SE> 7,119
<TOTAL-LIABILITIES-AND-EQUITY> 230,679
<INTEREST-LOAN> 3,073
<INTEREST-INVEST> 783
<INTEREST-OTHER> 240
<INTEREST-TOTAL> 4,096
<INTEREST-DEPOSIT> 1,296
<INTEREST-EXPENSE> 1,482
<INTEREST-INCOME-NET> 2,614
<LOAN-LOSSES> 66
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,899
<INCOME-PRETAX> 1,219
<INCOME-PRE-EXTRAORDINARY> 1,219
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 794
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
<YIELD-ACTUAL> 0<F1>
<LOANS-NON> 283
<LOANS-PAST> 301
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,419
<CHARGE-OFFS> 31
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,454
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,454
<FN>
<F1>INFORMATION NOT CALCULATED FOR INTERIM REPORTS.
</FN>
</TABLE>
