<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 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
(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.
4,124,091 shares as of November 1, 1999, no par.
<PAGE> 2
CITIZENS BANCORP
FORM 10-Q
September 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
PART I. Reference
<S> <C>
ITEM 1. - FINANCIAL INFORMATION - UNAUDITED
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 1
Consolidated Statements of Income for the three months and nine months 2
ended September 30, 1999 and 1998
Consolidated Statements of Changes in Shareholders' Equity 3
Consolidated Statements of Cash Flows for nine months ended September 30, 1999 and 1998 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 12-13
PART II. - OTHER INFORMATION
ITEM 1. - Legal Proceedings 14
ITEM 2. - Changes in Securities 14
ITEM 3. - Defaults Upon Senior Securities 14
ITEM 4. - Submission of Matters to a Vote of Security Holders 14
ITEM 5. - Other Information 14
ITEM 6. - Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1
CITIZENS BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
<S> <C> <C>
ASSETS
Cash and due from banks $ 16,892 $ 12,771
Interest bearing deposits in banks 10,308 23,406
Securities available for sale 61,884 50,855
Securities held to maturity 8,579 9,733
Loans, net of unearned discount and prepaid fees 137,148 132,126
Allowance for credit losses (1,531) (1,419)
--------- ---------
NET LOANS $ 135,617 $ 130,707
Premises and equipment 5,068 3,435
Accrued interest receivable 2,411 1,853
Other real estate owned 108 0
Other assets 1,837 1,218
TOTAL ASSETS $ 242,704 $ 233,978
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 33,436 $ 42,025
Savings and interest bearing demand 96,811 81,015
Time 64,496 65,195
--------- ---------
TOTAL DEPOSITS $ 194,743 $ 188,235
Repurchase agreements 17,141 16,299
Other borrowings 5,059 4,556
Accrued interest and other liabilities 602 2,303
TOTAL LIABILITIES $ 217,545 $ 211,393
--------- ---------
SHAREHOLDERS' EQUITY
Common stock (no par value); authorized 10,000,000 shares;
issued and outstanding: 1999 - 4,124,091 shares;
1998 - 3,891,137 shares 19,868 16,069
Retained Earnings 5,583 6,273
Accumulated other comprehensive income (292) 243
--------- ---------
TOTAL SHAREHOLDERS' EQUITY $ 25,159 $ 22,585
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 242,704 $ 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>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans 9,353 10,004 3,155 3,469
Interest on deposits and federal funds sold 758 628 271 227
Securities available for sale 2,339 1,738 929 620
Securities held to maturity 263 385 31 146
----------------------------------------------------------------
TOTAL INTEREST INCOME 12,713 12,755 4,386 4,462
INTEREST EXPENSE:
Deposits 3,884 3,838 1,310 1,345
Borrowed funds 279 137 129 89
Repurchase agreements 373 402 139 133
----------------------------------------------------------------
TOTAL INTEREST EXPENSE 4,536 4,377 1,578 1,567
NET INTEREST INCOME 8,177 8,378 2,808 2,895
PROVISIONS FOR CREDIT LOSSES (198) (170) (66) (66)
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 7,979 8,208 2,742 2,829
NON-INTEREST INCOME:
Service charges on deposit accounts 800 672 263 241
Origination fees and gains on loans sold 28 39 3 10
Gain on sales of securities available for sale 0 20 0 0
Other 950 925 335 313
----------------------------------------------------------------
TOTAL NON-INTEREST INCOME 1,778 1,656 601 564
NON-INTEREST EXPENSE:
Salaries and employee benefits 3,105 2,843 1,038 1,009
Occupancy and equipment 809 736 290 255
Other 1,916 1,821 651 624
----------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 5,830 5,400 1,979 1,888
INCOME BEFORE INCOME TAXES 3,927 4,464 1,364 1,505
----------------------------------------------------------------
INCOME TAXES (1,425) (1,557) (552) (499)
NET INCOME 2,502 2,907 812 1,006
================================================================
Per share data:
Basic earnings per share $ 0.61 $ 0.71 $ 0.20 $ 0.25
Weighted average number of common
shares outstanding 4,122,829 4,084,088 4,124,091 4,085,693
</TABLE>
2
<PAGE> 5
CITIZENS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NUMBER OF
COMMON COMMON ACCUMULATED 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
COMPREHENSIVE INCOME:
Net Income -- -- 2,907 -- 2,907
Other comprehensive income, net of tax:
Unrealized gain on securities, net of
reclassification adjustment -- -- -- 209 209
COMPREHENSIVE INCOME -- -- 2,907 209 3,116
Issuance of common stock 23,247 552 -- -- 552
2 for 1 stock split (April 21, 1998) 1,945,569 -- -- -- --
------------------------------------------------------------------------
BALANCE, AT SEPTEMBER 30, 1998 3,891,137 $ 16,069 $ 6,739 $ 271 $ 23,079
BALANCE, AT DECEMBER 31, 1998 3,891,137 $ 16,069 $ 6,273 $ 243 $ 22,585
COMPREHENSIVE INCOME:
Net Income -- -- 2,502 -- 2,502
Other comprehensive income, net of tax:
Unrealized gain on securities, net of
reclassification adjustment -- -- -- (535) (535)
COMPREHENSIVE INCOME -- -- 2,502 (535) 1,967
Issuance of common stock 36,569 607 -- -- 607
5% stock dividend (June 1, 1999) 196,385 3,192 (3,192) -- --
------------------------------------------------------------------------
BALANCE, AT SEPTEMBER 30, 1999 4,124,091 $ 19,868 $ 5,583 $ (292) $ 25,159
</TABLE>
3
<PAGE> 6
CITIZENS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,502 $ 2,907
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 198 170
Depreciation and amortization 567 310
Stock dividends received (38) (36)
Increase in accrued interest receivable (558) (504)
Decrease in accrued interest payable (31) 10
Other (688) 25
----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,952 $ 2,882
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest bearing deposits in banks 13,098 464
Net decrease in federal funds sold 0 2,800
Proceeds from maturities of available for sale securities 22,630 3,000
Proceeds from sales of available for sale securities 2,981 11,521
Proceeds from maturities of securities held to maturity 2,385 5,074
Purchases of securities available for sale 37,551) (25,781)
Purchases of securities held to maturity (1,253) (3,636)
Increase in loans made to customers, net of principal collections (5,212) (13,079)
Purchases of premises and equipment and other (1,988) (463)
Other 20 0
----------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES $( 4,890) $(20,100)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase decrease in deposits 6,508 17,356
Net increase decrease in repurchase agreements and other borrowings 1,345 1,328
Payment of dividends (794) (755)
----------------------
NET CASH USED IN FINANCING ACTIVITIES $ 7,059 $ 17,929
NET DECREASE IN CASH AND DUE FROM BANKS 4,121 711
CASH AND DUE FROM BANKS
Beginning of period 12,771 9,268
END OF PERIOD $ 16,892 $ 9,979
======================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid 4,567 4,367
Income taxes paid 1,455 1,575
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Foreclosed real estate acquired in settlement of loans 108 0
Fair value adjustment of available for sale, net of tax (535) 209
Issuance of common stock through dividend reinvestment plan 607 552
Stock Dividend 3,192 0
</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 consisting of normal recurring accruals considered necessary for
a fair presentation of 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.
At the April 20, 1999 shareholders meeting the shareholders approved an
increase of 5,000,000 shares bringing the total authorized shares to
10,000,000 of which 4,124,091 are issued and outstanding.
The Board of Directors declared a 5% stock dividend to Bancorp shareholders
of record on May 10, 1999, payable June 1, 1999. The dividend resulted in an
increase of shares outstanding from 3,927,706 to 4,124,091, an increase of
196,385 shares. The per share basis for the dividend was $16.25 resulting in
a transfer from retained earnings of $3,192,000 to common stock.
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 $22.3 million as of September 30, 1999 and
$19.0 million as of December 31, 1998.
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.
In 1999, the Bank 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 square 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 for three years. He has 17 years of lending experience
and has lived in the Albany community for many years.
The new McMinnville branch opened April 1999 in a temporary modular building
while a permanent facility is being constructed. The permanent building is
expected to be completed in Mid October of this year. 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 of McMinnville. 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. Management
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 completed the installation of a local and wide area network ("LAN/WAN")
throughout its branches and departments in August of this year. 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 $2,502,000, or $.61 per share for the nine months
ending September 30, 1999, compared to net income of $2,907,000, or $.71 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 increase in expenses related to the opening of two new branches,
improvements to the technology infrastructure, and expenses related to Y2K
readiness.
6
<PAGE> 9
LOAN PORTFOLIO
The composition of the loan portfolio was as follows (in thousands):
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Commercial $ 24,065 $ 26,234
Agriculture 15,355 12,402
Real Estate
Construction 6,941 $ 7,900
1-4 Family 30,296 31,390
Other 57,172 50,421
Consumer Loans 3,909 4,393
Less: unearned income and deferred fees (590) (614)
TOTAL LOANS $ 137,148 $ 132,126
Less: allowance for credit losses (1,531) (1,419)
--------- ---------
NET LOANS $ 135,617 $ 130,707
========= =========
</TABLE>
Transactions in the allowance for credit losses were as follows for the nine
months ended September 30, 1999:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Balance at beginning of period $1,419 $1,201
Provision charged to operations 198 170
Loans recovered 20 0
Loans charged off 106 28
------ ------
$1,531 $1,343
====== ======
</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 September 30, 1999 and December 31, 1998 were
approximately $888,000 and $173,000 respectively. Loans past due 90 days or more
on which the Bank continued to accrue interest were approximately $291,000 at
September 30, 1999 and $447,000 at December 31, 1998. Of the $888,000 on
nonaccrual, $854,000 is to one commercial borrower that the Bank is closely
monitoring. A portion of the loan is guaranteed and the balance collateralized
with inventory, accounts receivable and real estate. The Bank is currently
evaluating its collateral position on this loan, and expects such analysis to be
completed in the fourth quarter of 1999. Based on its initial analysis,
management anticipates that up to $515,000 of the principal balance may be
uncollectible. That amount has been specifically allocated in the allowance for
credit losses at September 30, 1999 in accordance with the requirements of SFAS
No. 114. Once the collateral analysis is completed the uncollectible portion
will be charged to the allowance for credit losses. There were no loans with
modified terms as of September 30, 1999 and December 31, 1998.
7
<PAGE> 10
INVESTMENT SECURITIES
The amortized cost and estimated book value of the investment securities held by
the Bank, including unrealized gains and losses, at September 30, 1999 and
December 31, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
Estimated Unrealized Gains
September 30, 1999 Amortized Cost Fair Value (Losses), net
- ------------------ -------------- ---------- ----------------
<S> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury Securities
(Including securities of government agencies
and corporations) $ 61,598 $ 61,156 $ (442)
Other 728 728 0
-------- -------- --------
$ 62,326 $ 61,884 $ (442)
HELD TO MATURITY
Obligations of State and Political Subdivisions 8,579 8,413 (166)
-------- -------- --------
$ 8,579 $ 8,413 $ (166)
</TABLE>
<TABLE>
<CAPTION>
Estimated Unrealized
December 31, 1998 Amortized 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 nine months ended September 30, 1999
include an increase in total assets funded by deposit growth.
At September 30, 1999 total assets increased 3.73% or approximately $8.7 million
over total assets at December 31, 1998. Major components of the change in total
assets were:
- $1.6 million increase in premises and fixed assets
- $4.9 million increase in net loans
- $9.9 million increase in investments
- $9.0 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 business development by the Bank's loan officers,
marketing of the Bank's personalized loan services and loans booked at the new
branches in West Albany and McMinnville. Net loans increased from $130.7 million
at December 31, 1998 to $135.6 million for the nine-month period ending
September 30, 1999. An increase of $4.9 million or 3.76 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 US Government
Agencies.
At September 30, 1999 and December 31, 1998 the Bank kept its liquid funds in an
interest bearing demand account held at the Federal Home Loan Bank (FHLB) due to
a more favorable interest rate. The majority of the
8
<PAGE> 11
Bank's liquid funds are held in its interest bearing account at the FHLB. The
balance at the FHLB at September 30, 1999 was $10.3 million. This account
balance can fluctuate widely on a day to day basis.
The Bank experienced a net increase in total deposits to $194.7 million at
September 30, 1999 from $188.2 million at December 31, 1998 which represents an
increase of $6.5 million or 3.46 percent. The net increase in total deposits was
the result of an overall increase in the number of account relationships and
increases in the balances in demand and interest bearing demand accounts. The
increase in new account relationships is a result of the Bank's business
development activities. Average total deposits for nine months ending September
30, 1999 were $188.4 million compared to $169.3 million for the year ending
December 31, 1998.
Additionally, the Bank reclassified a portion of its demand deposits under
regulatory guidelines to money market accounts for reserve purposes. This
represents a decrease in demand deposits from $42.0 million at December 31, 1998
to $33.3 million at September 30, 1999. This decrease is reflected in the
increase in savings and interest bearing demand from $81.0 at December 31, 1998
to $96.8 at September 30, 1999, an increase of $15.8 million.
Long-term borrowings from the Federal Home Loan Bank were utilized to fund and
match large long-term commercial loans. Net long-term borrowings decreased by
$1.2 million for the period ending September 30, 1999 as compared to year-end
December 31, 1998. This decrease was a result of the early payoff of two loans
without a prepayment penalty along with the regular monthly amortization.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
The Company reported net income of $2,502,000 or $.61 per share, for the nine
months ended September 30, 1999, compared to net income of approximately
$2,907,000, or $.71 per share for the same period in 1998. This represents a
decrease in net income of $405,000 or 13.9 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 February 1999 and the new
McMinnville Branch in April 1999, the installation of a local and wide area
computer network, and expenses related to Y2K readiness.
Net income for the quarter ended September 30, 1999 was approximately $812,000
or $.20 per share compared to net income of approximately $1,006,000 or $.25 per
share as compared to the same quarter in 1998.
Total interest income decreased approximately $42,000 for the nine months ended
September 30, 1999 as compared to the same 1998 period. This decrease was
primarily due to decreases in interest income on loans due to an overall lower
net interest rate on the loan portfolio.
Net interest income decreased $201,000 or 2.5 percent for the nine months ending
September 30, 1999. Net interest income decreased for the quarter ending
September 30, 1999 approximately $87,000 or 3.1% as compared to the same quarter
in 1998. The net decrease during this nine-month period resulted from decreases
in interest income and an increase in interest expense. The decrease in interest
income is primarily from overall lower interest rates on loans compared to the
same period in 1998. The increase in interest expense is primarily due to growth
in deposits, repurchase agreements, and an increase in rates on deposit
accounts.
Non-interest income increased approximately $122,000 for the nine months ended
September 30, 1999 as compared to the same nine-month period in 1998. For the
quarter ending September 30, 1999 non-interest income had an increase of $37,000
as compared to the same quarter 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 $262,000 for the
nine-month period ending September 30, 1999 compared to the same nine-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 and
McMinnville Branch's, and technical support staff.
Other non-interest expense excluding salaries and employee benefits increased
approximately $168,000 for the
9
<PAGE> 12
nine months ended September 30, 1999 as compared to the same nine-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 for the new branch buildings, furniture and equipment, and
the computer network.
CREDIT LOSS PROVISION
The Bank maintains an allowance for credit losses on loans that occur from time
to time as an incidental part of the business of banking. Loans are charged
against this allowance for credit losses which is adjusted periodically to
reflect changing loan volumes, risk potential in the portfolio and general
economic conditions. Additions to the allowance for credit losses are made
through a charge against income.
During the first nine months ended September 30, 1999 the Bank funded the
allowance for credit losses $198,000 from operations and $170,000 for the same
nine-month period during 1998. The increase in the provision for credit losses
was incurred to match the increased loan growth. The Bank experienced $106,000
in credit losses for the nine months ended September 30, 1999 and $11,000 in
credit losses for the same period ended September 30, 1998. Historically, the
Bank's loan charge-off levels have been very low compared to its peers. The
$11,000 in credit losses for the nine months ending September 30, 1998 was
exceptionally low. Although the year-over-year increase to $106,000 is large in
percentage terms, management has no present reason to believe the increase is
significant. Management attributes part of the increase to what would be
expected as a result of growth in the Bank's loan portfolio. In addition, more
than half of the increase is attributable to the charge-off of one particular
real estate loan. The Bank's management will continue to monitor and analyze
charge-off levels closely. Management's assessment of the allowance 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. At
September 30, 1999 approximately $400,000 of the allowance for credit losses has
been specifically allocated to one impaired loan. Management believes that the
allowance for credit losses at September 30, 1999 of $1,531,000 or 1.12% of
total loans is adequate.
YEAR 2000 ISSUES
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.
Bancorp recognizes 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 Bancorp
and its subsidiary Citizens Bank (collectively, the "Company") do business,
including the Company's vendors, suppliers, utility companies, and customers.
The Company committed to addressing Y2K challenges in a prompt and responsible
manner. The Company's year 2000 readiness plan ("Y2K Plan") followed 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 all phases of awareness, assessment,
testing, and validation, although appropriate follow-up activities are
continuing to occur through yearend.
The Company has assigned primary responsibility for the Y2K project to its Chief
Operating Officer. The Company also has a Y2K committee, consisting of
appropriate representatives from its critical operational
10
<PAGE> 13
areas. In addition, the Company regularly 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 ready status, and a determination of the level of control
the Company has in effecting change in the readiness 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 received documentation of readiness from the vendor of each
application. In addition, a primary solution for on site readiness 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 completed each phase within the following tables:
<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 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. The Company incurred
approximately $6,000 in expenses in 1998. Approximately $15,000 in expenses and
approximately $100,000 in lost opportunity cost have been incurred year to date
1999. The Company expects the majority of the remaining budget to be income lost
on overnight invested federal funds as a result of an increase in vault cash.
The Company has further developed a Y2K Business Resumption Contingency Plan.
This addresses the resumption of business by core business process. This plan is
separate from but related to the Company's testing and contingency plan. In
addition to outlining backup plans for each core business process, this plan
also speaks to the Company's plan for liquidity and communication outreach to
its customers.
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 readiness and
believes those utilities to be Y2K ready to deliver service without
interruption. 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 believes it has sufficient
liquidity to cover anticipated withdrawals. In summary, the Company believes it
will be Y2K ready by its internally established timelines which are well
11
<PAGE> 14
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 nine 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 September 30, 1999, shareholders' equity totaled $25,159,000 as compared
to $22,585,000 at December 31, 1998, an increase of 11.40%. This increase in
equity was primarily due to the Company's net income.
At the 1999 Annual Meeting of Shareholders, a majority of Bancorp shareholders
approved an Incentive Stock Option Plan authorizing Bancorp to issue incentive
compensation in the form of stock options, and a Stock Bonus Plan authorizing
Bancorp to issue incentive compensation in the form of stock bonuses.
The total number of shares of Bancorp's common stock that may be issued upon the
exercise of all options granted under the Incentive Stock Option Plan may not
exceed in the aggregate four percent (4%) of Bancorp's issued and outstanding
shares of common stock. As of October 29, 1999 Bancorp's issued and outstanding
shares totaled 4,124,091, so the maximum number of shares issuable under the
Incentive Stock Option Plan was 164,963 on that date. As of October 29, 1999 no
options had been granted or shares issued under this Plan.
The total number of shares of Bancorp's common stock that may be issued under
the Stock Bonus Plan may not exceed in the aggregate one percent (1%) of
Bancorp's issued and outstanding shares of common stock. As of October 29, 1999
Bancorp's issued and outstanding shares totaled 4,124,091, so the maximum number
of shares issuable under the Stock Bonus Plan was 41,241 on that date. As of
October 29, 1999 no stock had been issued under this Plan.
Capital ratios for the Company were as follows as of the dates indicated:
<TABLE>
<CAPTION>
Adequately Well Bancorp
Capitalized Capitalized September 30, December 31,
Standards Standards 1999 1998
<S> <C> <C> <C> <C>
Tier 1 Leverage Ratio 4% 5% 10.37% 9.79%
Tier 1 Risk Based Capital Ratio 4% 6% 18.12% 15.53%
Total Risk Based Capital Ratio 8% 10% 19.22% 16.53%
</TABLE>
ITEM 3. QUANTITATIVE & QUALITATIVE ANALYSIS ABOUT MARKET RISK
Interest rate, credit, and operations risks are the most significant market
risks impacting the Bank's performance. The Bank relies on loan review, prudent
loan underwriting standards and an adequate allowance for possible credit losses
to mitigate credit risk.
12
<PAGE> 15
The Bank uses an asset/liability management simulation model to measure interest
rate risk. The model quantifies interest rate risk through simulating forecasted
net interest income over a 12 month time period under various rate scenarios, as
well as monitoring the change in the present value of equity under the same rate
scenarios. The present value of equity is defined as the difference between the
market value of current assets less current liabilities. By measuring the change
in the present value of equity under different rate scenarios, management is
able to identify interest rate risk that may not be evident in simulating
changes in forecasted net interest income.
The Bank is currently slightly asset sensitive, meaning that interest earning
assets mature or reprice more quickly than interest-bearing liabilities in a
given period. An increase or decrease in market rates of interest will not
materially impact net interest income.
It should be noted that the simulation model does not take into account future
management actions that could be undertaken if there were a change in actual
market interest rate during the year. Also, certain assumptions are required to
perform modeling simulations that my have significant impact on the results.
These include assumptions regarding the level of interest rates and balance
changes on deposit products that do not have stated maturities. These
assumptions have been developed through a combination of industry standards and
future expected pricing behavior. The model also includes assumptions about
changes in the composition or mix of the balance sheet. The results derived from
the simulation model could vary significantly by external factors such as
changes in the prepayment assumptions, early withdrawals of deposits and
competition. Management has assessed these risks and believes that there has
been no material change since December 31, 1998.
13
<PAGE> 16
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 exhibits are filed as part of this report.
27.0 Financial Data Schedule for the nine months ended September
30, 1999.
(b) Reports on Form 8-K
None
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 8, 1999 /s/ William V. Humphreys
---------------------------------
By: William V. Humphreys
President and
Chief Executive Officer
Date: November 8, 1999 /s/ Lark E. Wysham
---------------------------------
By: Lark E. Wysham
Senior Vice President and
Chief Financial Officer
15
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 16,892
<INT-BEARING-DEPOSITS> 10,308
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 61,884
<INVESTMENTS-CARRYING> 8,579
<INVESTMENTS-MARKET> 8,413
<LOANS> 137,148
<ALLOWANCE> 1,531
<TOTAL-ASSETS> 242,704
<DEPOSITS> 194,743
<SHORT-TERM> 19,167
<LIABILITIES-OTHER> 602
<LONG-TERM> 3,033
0
0
<COMMON> 19,868
<OTHER-SE> 5,583
<TOTAL-LIABILITIES-AND-EQUITY> 242,704
<INTEREST-LOAN> 9,353
<INTEREST-INVEST> 2,602
<INTEREST-OTHER> 758
<INTEREST-TOTAL> 12,713
<INTEREST-DEPOSIT> 3,884
<INTEREST-EXPENSE> 4,536
<INTEREST-INCOME-NET> 8,177
<LOAN-LOSSES> 198
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,830
<INCOME-PRETAX> 3,927
<INCOME-PRE-EXTRAORDINARY> 3,927
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,502
<EPS-BASIC> .61
<EPS-DILUTED> .61
<YIELD-ACTUAL> 0<F1>
<LOANS-NON> 892
<LOANS-PAST> 3,379
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,419
<CHARGE-OFFS> 106
<RECOVERIES> 20
<ALLOWANCE-CLOSE> 1,531
<ALLOWANCE-DOMESTIC> 1,531
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Information not calculated for interim reports.
</FN>
</TABLE>
