<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, 2000
[ ] 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)
<TABLE>
<S> <C>
Oregon 91-1841688
(State of Incorporation) (I.R.S. Employer Identification Number)
</TABLE>
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.
4,137,630 shares as of November 1, 2000, no par.
<PAGE> 2
CITIZENS BANCORP
FORM 10-Q
September 30, 2000
INDEX
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<CAPTION>
Page
PART I. Reference
<S> <C>
ITEM 1. - FINANCIAL INFORMATION - UNAUDITED
Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 1
Condensed Consolidated Statements of Income for the nine months ended
September 30, 2000 and 1999 2
Condensed Consolidated Statements of Changes in Shareholders' Equity 3
Condensed Consolidated Statements of Cash Flows for nine months ended
September 30, 2000 and 1999 4
Notes to Condensed Consolidated Financial Statements 5
ITEM 2. - Management's Discussion and Analysis of Financial Condition and Results of 6
Operations
ITEM 3. - Quantitative and Qualitative Disclosure about Market Risk 11
PART II. - OTHER INFORMATION
ITEM 1. - Legal Proceedings 12
ITEM 2. - Changes in Securities 12
ITEM 3. - Defaults Upon Senior Securities 12
ITEM 4. - Submission of Matters to a Vote of Security Holders 12
ITEM 5. - Other Information 12
ITEM 6. - Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1
CITIZENS BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,314 $ 17,990
Interest bearing deposits with other banks 4,636 2,870
Securities available for sale 54,853 60,678
Securities held to maturity 8,456 8,422
Loans held for sale 1,471 1,643
Loans, net of allowance and unearned loan fees 154,014 139,123
Premises and equipment 5,296 5,283
Foreclosed real estate 205 0
Accrued interest receivable 2,681 2,032
Other assets 1,813 1,565
-------- --------
TOTAL ASSETS $242,739 $239,606
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 29,874 $ 32,843
Savings and interest bearing demand 105,368 97,880
Time 62,655 63,627
-------- --------
TOTAL DEPOSITS $197,897 $194,350
Repurchase agreements 12,797 13,425
Other borrowings 3,939 5,125
Accrued interest payable 228 207
Other liabilities 499 2,156
-------- --------
TOTAL LIABILITIES $215,360 $215,263
-------- --------
SHAREHOLDERS' EQUITY
Common stock (no par value); authorized 10,000,000
shares; issued and outstanding: 2000 - 4,137,630;
1999 - 4,124,091 shares; 20,085 19,868
Retained earnings 7,587 4,850
Accumulated other comprehensive loss (293) (375)
TOTAL SHAREHOLDERS' EQUITY $ 27,379 $ 24,343
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $242,739 $239,606
======== ========
</TABLE>
See accompanying notes
<PAGE> 4
CITIZENS BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousand, except per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 10,608 $ 9,353 $ 3,757 $ 3,155
Interest on deposits and federal funds sold 168 758 54 271
Securities available for sale 2,541 2,339 823 929
Securities held to maturity 323 263 109 31
--------------------------------------------------------------------
TOTAL INTEREST INCOME $ 13,640 $ 12,713 $ 4,743 $ 4,386
INTEREST EXPENSE:
Deposits 4,071 3,884 1,422 1,310
Borrowed funds 129 279 74 129
Repurchase agreements 396 373 118 139
--------------------------------------------------------------------
TOTAL INTEREST EXPENSE $ 4,596 $ 4,536 $ 1,614 $ 1,578
NET INTEREST INCOME $ 9,044 $ 8,177 $ 3,129 $ 2,808
PROVISIONS FOR CREDIT LOSSES (315) (198) (137) (66)
NET INTEREST INCOME AFTER PROVISION FOR CREDIT $ 8,729 $ 7,979 $ 2,992 $ 2,742
LOSSES
NON-INTEREST INCOME:
Service charges on deposit accounts 911 800 355 263
Other 1,093 978 374 338
--------------------------------------------------------------------
TOTAL NON-INTEREST INCOME $ 2,004 $ 1,778 $ 729 $ 601
NON-INTEREST EXPENSE:
Salaries and employee benefits 3,274 3,105 1,111 1,038
Occupancy and equipment 895 809 300 290
Other 2,114 1,916 711 651
--------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE $ 6,283 $ 5,830 $ 2,122 $ 1,979
INCOME BEFORE INCOME TAXES $ 4,450 $ 3,927 $ 1,599 $ 1,364
--------------------------------------------------------------------
INCOME TAXES 1,713 1,425 700 552
NET INCOME $ 2,737 $ 2,502 $ 899 $ 812
====================================================================
Per share data:
Basic and diluted earnings per share $ 0.66 $ 0.61 $ 0.22 $ 0.20
Weighted average number of common
shares outstanding 4,133,884 4,122,989 4,137,630 4,124,091
Return on Average Assets 1.53% 1.40% 1.50% 1.32%
</TABLE>
See accompanying notes
2
<PAGE> 5
CITIZENS BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
NUMBER OF ACCUMULATED
COMMON COMMON OTHER
SHARES STOCK RETAINED COMPREHENSIVE
OUTSTANDING AMOUNT EARNINGS INCOME (LOSS) TOTAL
<S> <C> <C> <C> <C> <C>
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 loss on securities, net -- -- -- (535) (535)
of reclassification adjustment
COMPREHENSIVE INCOME -- -- -- -- 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
BALANCE, AT DECEMBER 31, 1999 4,124,091 $ 19,868 $ 4,850 $ (375) $ 24,343
COMPREHENSIVE INCOME:
Net Income -- -- 2,737 -- 2,737
Other comprehensive income, net of tax:
Unrealized loss on securities, net -- -- -- 82 82
of reclassification adjustment
COMPREHENSIVE INCOME -- -- -- -- 2,819
Issuance of common stock 13,539 217 -- -- 217
-----------------------------------------------------------------------
BALANCE, AT SEPTEMBER 30, 2000 4,137,630 $ 20,085 $ 7,587 $ (293) $ 27,379
</TABLE>
See accompanying notes
3
<PAGE> 6
CITIZENS BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited), (Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------
SEPTEMBER 30,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,737 $ 2,502
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 315 198
Depreciation and amortization 457 567
Stock dividends received (38) (38)
Increase in accrued interest receivable (649) (558)
Increase in accrued interest payable 21 (31)
Other (571) (688)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,272 $ 1,952
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits in banks (1,767) 13,098
Proceeds from maturities of available for sale securities 11,000 22,630
Proceeds from sales of available for sale securities 2,000 2,981
Proceeds from maturities of securities held to maturity 455 2,385
Purchases of securities available for sale (6,964) (37,551)
Purchases of securities held to maturity (496) (1,253)
Increase in loans made to customers, net of principal collections (15,222) (5,212)
Purchases of premises and equipment and other (419) (1,968)
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES $(11,413) $ (4,890)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 3,547 6,508
Net decrease in repurchase agreements and other borrowings (1,814) 1,345
Payment of dividends, net of dividends reinvested (1,268) (794)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES $ 465 $ 7,059
NET (DECREASE) INCREASE IN CASH AND DUE FROM BANKS $ (8,676) $ (4,121)
CASH AND DUE FROM BANKS
Beginning of period 17,990 12,771
END OF PERIOD $ 9,314 $ 16,892
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid 4,575 4,567
Income taxes paid 1,575 1,455
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Foreclosed real estate acquired in settlement of loans 205 108
Fair value adjustment of available for sale, net of tax 82 (553)
Issuance of common stock through dividend reinvestment plan 217 607
Stock dividend 0 3,192
</TABLE>
See accompanying notes
4
<PAGE> 7
CITIZENS BANCORP
Notes to Condensed 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
only of normal recurring accruals) necessary for a fair presentation for the
interim periods included herein have been made.
The interim condensed consolidated financial statements should be read
in conjunction with the December 31, 1999 consolidated financial statements,
including notes there to, included in Bancorp's 1999 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 to Bancorp
shareholders of record on December 10, 1999, payable on January 10, 2000.
Through the Dividend Reinvestment Plan (DRIP) 13,539 shares were purchased at a
price of $16.08 per share. The DRIP resulted in an increase of shares
outstanding from 4,124,091 to 4,137,630.
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 $25.9 million as of September 30, 2000
and $33.0 million as of December 31, 1999.
5. ACCOUNTING CHANGES
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, 2000. The Bank had no
derivatives as of September 30, 2000, nor does the Bank 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.
5
<PAGE> 8
ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In addition to historical information, this report contains certain "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. This statement is included for the purpose of availing
Bancorp the protection of the safe harbor provisions of this Act. The forward
looking statements contained in this report are subject to factors, risks and
uncertainties that may cause actual results to differ materially from those
projected. Factors that might result in such material difference include, but
are not limited to economic conditions, the regulatory environment, rapidly
changing technology, new legislation, competitive factors, the interest rate
environment and the overall condition of the banking industry. Forward looking
statements can be identified by such words as "estimate", "believe", "expect",
"intend", "anticipate", "should", "may", "will", or other similar words or
phrases. Although Bancorp believes that the expectations reflected in such
forward looking statements are reasonable, it can give no assurances that such
expectations will prove to have been correct. Readers are therefore cautioned
not to place undue reliance on such forward looking statements, which reflect
management's analysis only as of the date of the statement. Bancorp does not
intend to update these forward looking statements other than in its periodic
filings under applicable security laws.
OVERVIEW
Citizens Bank ("the Bank") was chartered October 1, 1957 (charter #333) by the
State of Oregon as a commercial bank. Since its beginning with a single office
in Corvallis, Citizens Bank has expanded to an additional eight locations in the
four counties of Benton, Linn, Lane, and Yamhill. Branches are located in the
communities of Corvallis, Philomath, Albany, Junction City, Veneta, and
McMinnville.
Citizens Bancorp ("Bancorp"), an Oregon Corporation and bank holding company,
was formed in 1996 for the purpose of becoming the holding company of Citizens
Bank. Bancorp is headquartered in Corvallis, Oregon. Its principal business
activities are conducted through its full-service, commercial bank subsidiary,
Citizens Bank.
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 business of the Bank is overseen by a Board of Directors elected by Bancorp,
the sole owner of the Bank. As of the date of this Form 10-Q the respective
members of the Board of Directors of the Bank and the Board of Directors of
Bancorp are identical.
Bancorp's culture focuses on the tenets of collaborative leadership, branch
autonomy, assertive business development, a positive working environment, a
commitment to the community, outstanding customer service, and relationship
banking. Management believes that a healthy culture together with a progressive
management style will result in constantly improved shareholder value.
Bancorp's primary goal is to improve shareholder value through increased
earnings while maintaining a high level of safety and soundness. Bancorp is
committed to independence and long-term performance strategies.
The long-term benefit to Bancorp 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.
Bancorp's primary market focus is to provide commercial bank services to
businesses, professionals, and individuals. Bancorp emphasizes the development
of meaningful customer relationships and a high level of service. Its employees
are well-trained banking professionals who are committed to these objectives.
The Bank offers deposit accounts, safe-deposit boxes, consumer loans, commercial
loans, agricultural loans, and commercial and residential real estate loans.
Commercial loans include operating lines of credit, equipment and real estate
financing, capital needs, and other traditional financing products.
The Bank has a growing emphasis in financing farm operations, equipment, and
property. The Bank has also emphasized loans to professionals with its
professional line of credit products.
6
<PAGE> 9
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 debit cards, check guarantee cards, ATM cards as well as a
MasterCard and VISA cards as part of its retail banking services. The Bank also
operates a 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 nine (9) locations offering 24-hour transaction services, including
cash withdrawals, deposits, account transfers, and balance inquiries. The Bank
also offers its customers a 24-hour automated telephone service that offers
account transfers and balance inquiries.
The Bank, in a continuing effort to meet its customer's needs, has successfully
released its new on-line banking product. The on-line banking product offers
services to both individuals and business account customers. Business customers
have a comprehensive cash management option. All online users have the
availability of the "bill payment" feature. The Bank expects to continually
enhance its on-line banking product while maintaining its quality "people to
people" customer service. Citizens on-line banking can be reached at
www.CitizensEBank.com.
Bancorp provided the Federal Reserve Board of San Francisco its declaration to
elect to become a financial holding company, pursuant to the Gramm-Leach-Bliley
Act (GLBA) of 1999, on February 15, 2000. Bancorp received notice of approval
from the Board of Governors of the Federal Reserve System on March 13, 2000.
Bancorp has no current plan to engage in any of the financial activities
permissible for a financial holding company under the GLBA. Bancorp made its
declaration only to be prepared to take advantage of any future business
opportunities.
Bancorp reported net income of $899,000 in the third quarter ending September
30, 2000, or $.22 per common share, an increase of 10.7 percent from third
quarter net income of $812,000 in 1999 or $.20 per common share. For the first
nine months of 2000, Bancorp earned $2,737, or $.66 per common share, an
increase of 9.4 percent from the nine month 1999 earnings of $2,502 or $.61 per
common share. The net increase is primarily attributable to an increase in
interest income from loans due to an increase in overall interest rates and
growth in loans.
LOAN PORTFOLIO
The composition of the loan portfolio was as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Commercial $ 30,586 $ 26,520
Agriculture 14,786 13,875
Real Estate
Construction 7,498 7,352
1-4 Family 28,409 29,776
Other 70,456 59,537
Consumer Loans 4,261 3,718
--------- ---------
155,996 140,778
Less: net deferred loan fees (567) (584)
TOTAL LOANS $ 155,429 $ 140,194
Less: allowance for credit losses (1,415) (1,071)
--------- ---------
NET LOANS $ 154,014 $ 139,123
========= =========
</TABLE>
7
<PAGE> 10
Transactions in the allowance for credit losses were as follows for the nine
months ended September 30, 2000:
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Balance at beginning of period $ 1,071 $ 1,419
Provision charged to operations 315 198
Loans recovered 62 20
Loans charged off (33) (106)
------- -------
Balance at end of period $ 1,415 $ 1,531
======= =======
</TABLE>
It is the policy of the Bank to place loans on nonaccrual after they become 90
days past due unless the loans are well secured and in the process of
collection. 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, 2000 and December 31, 1999 were
approximately $574,000 and $654,000 respectively. Loans past due 90 days or more
on which the Bank continued to accrue interest were approximately $275,000 at
September 30, 2000 and $73,000 at December 31, 1999. Of the $574,000 on
non-accrual, $465,000 is the guaranteed portion on one commercial loan. The Bank
charged off its portion of the loan in 1999. The Bank is actively pursuing all
avenues of collection on its collateral of inventory, accounts receivable and
real estate. Payment of the guaranteed portion is expected by year-end 2000.
There were no loans with modified terms as of September 30, 2000.
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, 2000 and
December 31, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED UNREALIZED
September 30, 2000 COST FAIR VALUE LOSS, NET
--------- ---------- ---------
<S> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury Securities
(Including securities of government agencies
and corporations) $54,553 $54,074 $ (479)
Other 779 779 0
------- ------- -------
TOTAL $55,332 $54,853 $ (479)
Held to Maturity
Obligations of State and Political Subdivisions $ 8,456 $ 8,351 $ (105)
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED UNREALIZED
December 31, 1999 COST FAIR VALUE LOSS, NET
--------- ---------- ---------
<S> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury Securities
(Including securities of government
agencies
and corporations) $60,611 $59,937 $ (674)
Other 741 741 0
------- ------- -------
TOTAL $61,352 $60,678 $ (674)
HELD TO MATURITY
Obligations of State and Political Subdivisions $ 8,422 $ 8,207 $ (215)
</TABLE>
MATERIAL CHANGES IN FINANCIAL CONDITION
At September 30, 2000 total assets increased 1.3% or approximately $3.1 million
from total assets at December 31, 1999. Major components of the change in total
assets were:
- $14.9 million increase in total loans
- $5.8 million decrease in investments
- $6.9 million decrease in cash and cash equivalents
8
<PAGE> 11
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 $139.1 million
at December 31, 1999 to $154.0 million for the nine-month period ending
September 30, 2000. An increase of $14.9 million or 10.7 percent.
The decrease in investments was a result of management's decision to use funds
from investment maturities to fund loan growth.
Cash and due from banks decreased $6.9 million from December 31, 1999 to
September 30, 2000. Funds which had been accumulated for Y2K purposes were not
needed and have been redeployed into loans during the nine-month period. At
September 30, 2000 and December 31, 1999 the Bank kept its liquid excess funds
in an interest bearing demand account held at the Federal Home Loan Bank of
Seattle (FHLB). The balance at the FHLB at September 30, 2000 was $4.6 million.
This account balance can fluctuate widely on a day to day basis.
The Bank experienced a net increase in total deposits to $197.9 million at
September 30, 2000 from $194.4 million at December 31, 1999 which represents an
increase of $3.5 million or 1.8 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 interest bearing demand accounts. The increase in
new account relationships is a result of the Bank's business development
activities.
Long-term borrowings from the FHLB are utilized to fund and match large
long-term commercial loans. Net long-term borrowings decreased by $3.0 million
for the period ending September 30, 2000 as compared to year-end December 31,
1999. This decrease was a result of the early payoff of loans at the FHLB
without a prepayment penalty. The Bank currently has $3.9 million in other
short-term borrowings and $12.8 in repurchase agreements, a decrease of $1.8
million from December 31, 1999.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
The Company reported net income of approximately $2,737,000 or $.66 net income
per common share, for the nine months ended September 30, 2000, compared to net
income of approximately $2,502,000 or $.61 net income per common share, for the
same period in 1999. This represents an increase in net income of 9.4 percent.
Net income for the quarter ended September 30, 2000, was approximately $899,000
or $.22 net income per common share, compared to net income of approximately
$812,000, or $.20 net income per common share, for the same period in 1999. This
represents an increase in net income of 10.7 percent. The increase during these
periods were primarily attributable to strong growth in the Company's loan
portfolio resulting in an increase in net interest income.
Total interest income increased approximately $927,000 or 7.3% for the nine
months and $357,000 or 8.1% for the three months ended September 30, 2000 as
compared to the same periods in 1999. These increases for both the nine-month
and three-month periods were primarily the result of an increase in loan volume
and higher rates on loans compared to the same periods in 1999.
Total interest expense increased approximately $60,000 or 1.3 percent for the
nine months and $36,000 or 2.3 percent for the three months ended September 30,
2000 as compared to the same periods in 1999. The increases in interest expense
for these periods were primarily a result of volume increases.
Total non-interest income increased approximately $226,000 or 12.7% for the nine
months and $128,000 or 21.3 percent for the three months ended September 30,
2000 as compared to the same periods in 1999. The primary increases were a
result of rate and volume increases in the Company's bankcard business and an
increase in overdraft fees as a result of the new bounce protection overdraft
program on individual checking accounts.
Total non-interest expense increased $453,000 or 7.8 percent for the nine months
and $143,000 or 7.2 percent for the three months ended September 30, 2000, as
compared to the same periods in 1999. Non-interest expense increased as a result
of routine adjustments in staff salaries, expenses related to branch start-ups
in West Albany and McMinnville, and expenses associated with technology
enhancements and products.
9
<PAGE> 12
CREDIT LOSS PROVISION
The Bank maintains an allowance for credit losses on loans that occur from time
to time as an incidental part of the business of banking. Loans are charged
against this allowance for credit losses which is adjusted periodically to
reflect changing loan volumes, risk potential in the portfolio and general
economic conditions. Additions to the allowance for credit losses are made
through a charge against income.
During the first nine months ended September 30, 2000, the Company funded the
allowance for credit losses $315,000 from operations as compared to $198,000 for
the same nine month period in 1999. For the three month period ending September
30, 2000 the Bank funded the allowance for credit losses $137,000 as compared to
$66,000 for the same three month period in 1999. The Company is increasing the
monthly provision for credit losses based on its loan loss reserve analysis of
the loan portfolio derived from the loan grading system. The Company experienced
$33,000 in credit losses and $62,000 in credit recoveries for the nine-month
period ended September 30, 2000 and $106,000 in credit losses with $20,000 in
credit recoveries for the same period in 1999. Historically, the Company's loan
charge-off levels have been very low compared to its peers. Management believes
that the allowance for credit losses at September 30, 2000 of $1,415,000 or .91
percent of total loans is adequate.
The provision for credit losses represents charges made to operating expenses to
maintain an appropriate allowance for credit losses. Management considers
various factors in establishing an appropriate allowance. These factors include
an assessment of the financial condition of the borrower, a determination of the
borrowers ability to service the debt from cash flow, a conservative assessment
of the value of the underlying collateral, the condition of the specific
industry of the borrower, the economic health of the local community, a
comprehensive analysis of the levels and trends of loan types, and a review of
past due and classified loans.
It is Bank policy that once each quarter, Bank management makes recommendations
to the Board regarding the adequacy of the Bank's allowance for credit losses
and the amount of the provision that should be charged against earnings for the
next three months. Management's recommendations are based on an internal loan
review process to determine specific potential loss factors on classified loans,
risk factor of loan grades, historical loss factors derived from actual net
charge-off experience, trends in non-performing loans and other potential risks
in the loan portfolio such as industry concentration, the local economy and the
volume of loans.
Management uses a loan grading system wherein loan officers assign a risk grade
to each of their loans at inception and at intervals based on receipt of
financial information, renewal, or when there is an indication that a credit may
have improved or weakened. The risk grades in the loan portfolio are used in
determining a factor that is used in analyzing the adequacy of the allowance for
credit losses.
The Bank's policy is to charge off loans when, in management's opinion, the loan
or a portion of the loan is deemed uncollectible following a concerted
collection effort. Management continues to pursue collection after a loan is
charged-off until all possibilities for collection have been exhausted.
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
2000. 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 consist primarily of both proceeds
from maturities 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.
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The Company's shareholders equity at September 30, 2000 was $27.4 million as
compared to $24.3 million at December 31, 1999 an increase of 12.5 percent.
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 September 30, 2000 Bancorp's issued and
outstanding shares totaled 4,137,630, so the maximum number of shares issuable
under the Incentive Stock Option Plan was 165,505 on that date. As of September
30, 2000, options for 17,000 shares had been granted and none exercised 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 September 30,
2000 Bancorp's issued and outstanding shares totaled 4,137,630, so the maximum
number of shares issuable under the Stock Bonus Plan was 41,376 on that date. As
of September 30, 2000 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
Capitalized Capitalized Bancorp
Standards Standards September 30, 2000 December 31, 1999
<S> <C> <C> <C> <C>
Tier 1 Leverage Ratio 4% 5% 11.42% 10.11%
Tier 1 Risk Based Capital Ratio 4% 6% 16.58% 16.36%
Total Risk Based Capital Ratio 8% 10% 17.44% 17.07%
</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 credit losses to
mitigate credit risk.
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, 1999.
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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
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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 6, 2000 /s/ William V. Humphreys
-----------------------------------------
By: William V. Humphreys
President and
Chief Executive Officer
Date: November 6, 2000 /s/ Lark E. Wysham
-----------------------------------------
By: Lark E. Wysham
Senior Vice President and
Chief Financial Officer
13
