<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 June 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/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.
4,137,630 shares as of July 31, 2000, no par.
<PAGE> 2
CITIZENS BANCORP
FORM 10-Q
JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I. Page
Reference
<S> <C>
ITEM 1. - FINANCIAL INFORMATION - UNAUDITED
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 1
Consolidated Statements of Income for the six months ended
June 30, 2000 and 1999 2
Consolidated Statements of Changes in Shareholders' Equity 3
Consolidated Statements of Cash Flows for six months ended
June 31, 2000 and 1999 4
Notes to Consolidated Financial Statements 5
ITEM 2. - Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
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
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,046 $ 17,990
Interest bearing deposits with other banks 2,429 2,870
--------- ---------
TOTAL CASH AND CASH EQUIVALENTS 11,475 20,860
Securities available for sale 58,522 60,678
Securities held to maturity 8,558 8,422
--------- ---------
TOTAL INVESTMENT SECURITIES 67,080 69,100
Loans held for sale 2,692 1,643
Loans, net of allowance and unearned loan fees 151,792 139,123
Premises and equipment 5,118 5,283
Accrued interest receivable 2,173 2,032
Other assets 1,976 1,565
--------- ---------
TOTAL ASSETS $ 242,306 $ 239,606
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 32,709 $ 32,843
Savings and interest bearing demand 102,130 97,880
Time 61,085 63,627
--------- ---------
TOTAL DEPOSITS $ 195,924 $ 194,350
Repurchase agreements 14,497 13,425
Other borrowings 5,057 5,125
Accrued interest payable 176 207
Other liabilities 378 2,157
--------- ---------
TOTAL LIABILITIES $ 216,032 $ 215,264
--------- ---------
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 6,688 4,849
Accumulated other comprehensive loss (499) (375)
TOTAL SHAREHOLDERS' EQUITY $ 26,274 $ 24,342
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 242,306 $ 239,606
========= =========
</TABLE>
See accompanying notes
1
<PAGE> 4
CITIZENS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousand, except per share amounts)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 6,851 $ 6,198 $ 3,497 $ 3,125
Interest on deposits and federal funds sold 114 58 247
Securities available for sale 1,718 858 719
Securities held to maturity 214 232 58 140
--------------------------------------------------------------------
TOTAL INTEREST INCOME $ 8,897 $ 8,327 $ 4,473 $ 4,231
INTEREST EXPENSE:
Deposits 2,649 2,574 1,340 1,278
Borrowed funds 55 150 19 78
Repurchase agreements 278 234 147 120
--------------------------------------------------------------------
TOTAL INTEREST EXPENSE $ 2,982 $ 2,958 $ 1,506 $ 1,476
NET INTEREST INCOME $ 5,915 $ 5,369 $ 2,967 $ 2,755
PROVISIONS FOR CREDIT LOSSES (178) (132) (120) (66)
NET INTEREST INCOME AFTER PROVISION FOR CREDIT $ 5,737 $ 5,237 $ 2,847 $ 2,689
LOSSES
NON-INTEREST INCOME:
Service charges on deposit accounts 556 537 303 264
Other 719 640 374 343
--------------------------------------------------------------------
TOTAL NON-INTEREST INCOME $ 1,275 $ 1,177 $ 677 $ 607
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,163 2,067 991 1,012
Occupancy and equipment 595 519 299 271
Other 1,403 1,265 741 669
--------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE $ 4,161 $ 3,851 $ 2,031 $ 1,952
INCOME BEFORE INCOME TAXES $ 2,851 $ 2,563 $ 1,493 $ 1,344
--------------------------------------------------------------------
INCOME TAXES 1,013 873 620 448
NET INCOME $ 1,838 $ 1,690 $ 873 $ 896
====================================================================
Per share data:
Basic and diluted earnings per share $ 0.44 $ 0.41 $ 0.21 $ 0.22
Weighted average number of common
shares outstanding 4,133,809 4,122,989 4,137,630 4,124,091
Return on Average Assets 1.56% 1.45% 1.48% 1.52%
</TABLE>
See accompanying notes
2
<PAGE> 5
CITIZENS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 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 $ 6,271 $ 245 $ 22,585
COMPREHENSIVE INCOME:
Net Income -- -- 1,690 -- 1,690
Other comprehensive income, net of tax:
Unrealized loss on securities, net -- -- -- (553) (553)
of reclassification adjustment
COMPREHENSIVE INCOME -- -- 1,690 (553) 1,137
Issuance of common stock 36,569 607 -- -- 607
5% stock dividend (June 1, 1999) 196,385 3,192 (3,191) -- --
---------------------------------------------------------------------------
BALANCE, AT JUNE 30, 1999 $4,124,091 $ 19,868 $ 4,770 $ (308) $ 24,330
BALANCE, AT DECEMBER 31, 1999 $4,124,091 $ 19,868 $ 4,850 $ (375) $ 24,343
COMPREHENSIVE INCOME:
Net Income -- -- 1,838 -- 1,838
Other comprehensive income, net of tax:
Unrealized loss on securities, net -- -- -- (124) (124)
of reclassification adjustment
COMPREHENSIVE INCOME -- -- -- -- 1,714
Issuance of common stock 13,539 217 -- -- 217
---------------------------------------------------------------------------
BALANCE, AT JUNE 30, 2000 $4,137,630 $ 20,085 $ 6,688 $ (499) $ 26,274
</TABLE>
See accompanying notes
3
<PAGE> 6
CITIZENS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited), (Dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,838 $ 1,690
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 178 132
Depreciation and amortization 322 550
Stock dividends received (26) (26)
Increase in accrued interest receivable (141) (429)
Decrease in accrued interest payable (31) (34)
Other (731) (534)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,409 $ 1,349
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest bearing deposits in banks 441 274
Proceeds from maturities of available for sale securities 7,000 17,630
Proceeds from sales of available for sale securities 2,000 0
Proceeds from maturities of securities held to maturity 355 100
Purchases of securities available for sale (6,964) (27,579)
Purchases of securities held to maturity (492) (1,048)
Increase in loans made to customers, net of principal collections (13,898) (1,872)
Purchases of premises and equipment and other (105) (1,505)
---------- ----------
NET CASH PROVIDED BY INVESTING ACTIVITIES $ (11,663) $ (14,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 1,574 3,672
Net increase in repurchase agreements and other borrowings 1,004 6,638
Payment of dividends, net of dividends reinvested (1,268) (793)
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES $ 1,310 $ 9,517
NET DECREASE IN CASH AND DUE FROM BANKS $ (8,944) $ (3,134)
CASH AND DUE FROM BANKS
Beginning of period 17,990 12,771
END OF PERIOD $ 9,046 $ 9,637
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid 3,013 2,993
Income taxes paid 930 840
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Fair value adjustment of available for sale, net of tax (124) (553)
Issuance of common stock through dividend reinvestment plan 217 607
</TABLE>
See accompanying notes
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 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 $24.7 million as of June 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 June 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 small residential mortgage loan origination department that
originates loans and sells them into the secondary market. The Bank offers
extended banking hours in selected locations as well as Saturday banking. ATM
machines are also available at 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 customer demand, has signed a contract
with QUP Corporation for on-line banking software. A committee of Bank employees
including senior management interviewed potential software vendors in an effort
to choose an internet banking software product that was both user friendly and
offered up to date options for customers. The Bank is in the process of
installing the hardware and software. All employees are being trained on the
product to enable them to assist customers in using on-line banking. The on-line
banking product will offer services to both individuals and business account
customers. Business customers will have a comprehensive cash management option.
All online users will have the availability of the "bill payment" feature. The
Bank expects to have on-line banking available to its customers by fourth
quarter of 2000.
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 $1,838,000, or $.44 per share for the six months
ending June 30, 2000, compared to net income of $1,690,000, or $.41 per share
for the same period in 1999. 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>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Commercial $ 29,727 $ 26,520
Agriculture 13,384 13,875
Real Estate
Construction 5,573 7,352
1-4 Family 31,691 29,776
Other 69,446 59,537
Consumer Loans 3,843 3,718
---------- ----------
153,664 140,778
Less: net deferred loan fees (586) (584)
TOTAL LOANS $ 153,078 $ 140,194
Less: allowance for credit losses (1,286) (1,071)
---------- ----------
NET LOANS $ 151,792 $ 139,123
========== ==========
</TABLE>
7
<PAGE> 10
Transactions in the allowance for credit losses were as follows for the three
months ended June 30, 2000:
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Balance at beginning of period $ 1,071 $ 1,419
Provision charged to operations 178 66
Loans recovered 62 0
Loans charged off (25) (31)
======= =======
Balance at end of period $ 1,286 $ 1,454
======= =======
</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 June 30, 2000 and December 31, 1999 were
approximately $552,000 and $654,000 respectively. Loans past due 90 days or more
on which the Bank continued to accrue interest were approximately $153,000 at
June 30, 2000 and $73,000 at December 31, 1999. Of the $552,000 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 June 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 June 30, 2000 and December
31, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, 2000 Amortized Cost Estimated Fair Value Unrealized Loss, net
-------------- -------------------- ---------------------
<S> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury Securities
(Including securities of government agencies
and corporations) $ 58,572 $ 57,755 $ (817)
Other 767 767 0
--------------- --------------- ---------------
TOTAL $ 59,339 $ 58,522 $ (817)
HELD TO MATURITY
Obligations of State and Political Subdivisions $ 8,558 $ 8,340 $ (218)
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999 Amortized Cost Estimated Fair Value Unrealized 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 June 30, 2000 total assets decreased 1.1% or approximately $2.7 million from
total assets at December 31, 1999. Major components of the change in total
assets were:
- $12.7 million increase in total loans
- $2.0 million decrease in investments
- $9.4 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 $151.8 million for the six-month period ending June 30,
2000. An increase of $12.7 million or 9.1 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 $8.9 million from December 31, 1999 to June
30, 2000. Funds which had been accumulated for Y2K purposes were not needed and
have been redeployed into loans during the six month period. At June 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 June 30, 2000 was $2.4 million. This account balance can
fluctuate widely on a day to day basis.
The Bank experienced a net increase in total deposits to $195.9 million at June
30, 2000 from $194.4 million at December 31, 1999 which represents an increase
of $1.5 million or .81 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 June 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 $3.0 million in overnight borrowings
from the FHLB and $16.5 in repurchase agreements and other short term
borrowings, an increase of $1.0 million from December 31, 1999.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
The Company reported net income of $1,838,000 or $.44 per share, for the six
months ended June 30, 2000, compared to net income of approximately $1,690,000,
or $.41 per share for the same period in 1999. This represents an increase in
net income of $148,000 or 8.8 percent. The net increase was primarily
attributable to an increase in interest income from loans.
Total interest income increased approximately $570,000 for the six months ended
June 30, 2000 as compared to the same 1999 period. This increase was due to
increases in interest income on loans due to volume and higher net interest
rates on the loan portfolio.
Net interest income after provision for credit losses increased $500,000 or 9.5
percent for the six months ending June 30, 2000. The increase in net interest
income is primarily from loan volume and higher interest rates on loans compared
to the same period in 1999. The increase in interest expense is due to the
volume of interest bearing liabilities as the Bank's cost of funds decreased
from the comparable period in 1999.
Non-interest income increased approximately $98,000 for the six months ended
June 30, 2000 as compared to the same six-month period in 1999. These increases
are mainly attributable to an increase in the volume of bankcard services over
last year for the same period.
Salaries and employee benefits increased approximately $96,000 (4.6%) for the
six-month period ending June 30, 2000 compared to the same six-month period in
1999. These increases were primarily due to routine adjustments in officer and
staff salaries, staff increases due to the new West Albany and McMinnville
Branches, and technical support staff.
Other non-interest expense excluding salaries and employee benefits increased
approximately $214,000 (12.0%) for the six months ended June 30, 2000 as
compared to the same six-month period in 1999. 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.
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 six months ended June 30, 2000 the Bank funded the allowance
for credit losses $178,000 from operations as compared to $132,000 for the same
six-month period of 1999. The Bank is increasing the monthly provision for
credit losses based on its loan loss reserve analysis derived from the loan
grading system. The Bank experienced $25,000 in credit losses and $62,000 in
recoveries for the six months ended June 30, 2000 and $31,000 in credit losses
for the same period ended June 30, 1999. Historically, the Bank's loan
charge-off levels have been very low compared to its peers. Management believes
that the allowance for credit losses at June 30, 2000 of $1,286,000 or .84% 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 reserve 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 six 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.
As of June 30, 2000, shareholders' equity totaled $26,274,000 as compared to
$24,342,000 at December 31, 1999, an increase of 7.9%. This increase in equity
was primarily due to the Company's net income.
10
<PAGE> 13
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 June 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 June 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 June 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
June 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 Bancorp
Capitalized Capitalized -----------------------------------
Standards Standards June 30, 2000 December 31, 1999
----------- ----------- ------------- -----------------
<S> <C> <C> <C> <C>
Tier 1 Leverage Ratio 4% 5% 11.20% 10.11%
Tier 1 Risk Based Capital Ratio 4% 6% 16.50% 16.36%
Total Risk Based Capital Ratio 8% 10% 17.30% 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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<PAGE> 14
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
(a) April 18, 2000, Annual Meeting
(b) Need not be completed
(c) The following matters were voted upon at the Annual Meeting of
Shareholders on April 18, 2000
(1) The re-election of three (3) Directors for terms expiring in
2003 or until their successors have been elected and qualified.
<TABLE>
<CAPTION>
Director:
<S> <C>
Jock Gibson
Votes cast for: 3,013,410
Votes withheld: 363
Eric C. Thompson
Votes cast for: 2,980,242
Votes withheld: 33,530
James E Richards
Votes cast for: 3,012,409
Votes withheld: 1,363
</TABLE>
Directors continuing in office are John Truax (term expires
2001), William V. Humphreys (term expires 2001), Rosetta C.
Venell (term expires 2002), Scott A. Fewel (term expires 2002),
and Duane L. Sorensen (term expires 2002).
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 six months ended June 30,
1999.
(b) Reports on Form 8-K
None
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<PAGE> 15
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: August 9, 2000 /s/ William V. Humphreys
-------------------------------
By: William V. Humphreys
President and
Chief Executive Officer
Date: August 9, 2000 /s/ Lark E. Wysham
-------------------------------
By: Lark E. Wysham
Senior Vice President and
Chief Financial Officer
13
