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Previous: SOUTHERN MICHIGAN BANCORP INC, 10-K405, 1996-03-27 |
Next: BLUE DIAMOND COAL CO, 8-K, 1996-03-27 |
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark one)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Fiscal year ended December 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE
REQUIRED)
Commission file number 0-10680
CITIZENS BANCORP
(Exact name of registrant as specified in its charter)
Maryland 52-1239452
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
14401 Sweitzer Lane,
Laurel, Maryland 20707
(Address of principal executive offices)
(301) 206-6129
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class Name of each exchange on which registered
Common Stock NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $2.50 per share
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (X)
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, and (2) has been subject to such filing
requirements for the past 90 days. (X)
State the aggregate market value of voting stock held by non-affiliates of
the registrant. Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practicable date.
Common Stock, $2.50 par value --- 15,080,746 shares as of February 12, 1996
Portions of the proxy statement for use at the Annual Meeting of Stockholders
on May 8, 1996 are incorporated by reference in Part III and Part IV of the
Form 10-K. Total number of pages of this report: 42
<PAGE>
TABLE OF CONTENTS
Page
PART I
Item 1 - Business 3
Item 2 - Properties 6
Item 3 - Legal Proceedings 6
Item 4 - Submission of Matters to a Vote of Security Holders 6
PART II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 6
Item 6 - Selected Consolidated Financial Data 7
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 8 - Financial Statements and Supplementary Data:
Consolidated Statements of Financial Condition 22
Consolidated Statements of Income 23
Consolidated Statements of Changes in
Stockholders' Equity 24
Consolidated Statements of Cash Flows 25
Notes to Consolidated Financial Statements 26
Management's Report of Responsibility for
Financial Reporting 38
Independent Auditors' Report 39
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 40
PART III
Item 10 - Directors and Executive Officers of the Registrant 40
Item 11 - Executive Compensation 40
Item 12 - Security Ownership of Certain Beneficial Owners
and Management 40
Item 13 - Certain Relationships and Related Transactions 40
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 40
Signatures
PAGE
<PAGE>
PART I
Item 1. Business
Citizens Bancorp (the "Corporation") is a Maryland corporation incorporated on
May 19, 1982 and is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act").
At December 31, 1995, the Corporation had consolidated total assets of $4.0
billion, total deposits of $3.0 billion and total stockholders' equity of
$334.2 million. Its principal subsidiaries are Citizens Bank of Maryland,
Citizens Bank of Virginia and Citizens Bank of Washington. These banks provide
comprehensive commercial and retail banking services which include lending,
depository, trust and investment related financial services to individuals,
businesses, governmental units and non-profit associations primarily in the
Washington D.C. metropolitan area. The assets of these banks at December 31,
1995 accounted for approximately 99% of the Corporation's consolidated total
assets and the banks contributed approximately 100% of the consolidated net
income of the Corporation for each of the three years ended December 31, 1995,
1994 and 1993, respectively.
Citizens Bank of Maryland, the Corporation's largest subsidiary, is a state bank
chartered under the laws of Maryland. It commenced operations in Riverdale,
Maryland in 1923. At December 31, 1995, Citizens Bank of Maryland was the
second largest locally owned bank headquartered in Maryland in terms of assets,
loans and deposits, with assets of $3.6 billion, net loans of $1.9 billion and
deposits of $2.7 billion. Its assets at such date comprised 90% of the
consolidated assets of the Corporation. Citizens Bank of Maryland operates 89
facilities in Maryland including 86 full service branch banking offices, 2 loan
production offices and a brokerage and insurance office. In addition, it
operates 3 loan production offices in Williamsburg, Tysons Corner, and
Chesapeake, Virginia. It offers investment, insurance and residential
mortgages through its brokerage, insurance and mortgage-banking subsidiaries,
respectively.
McLachlen Bancshares was acquired by the Corporation on August 31,1988. It is
a bank holding company incorporated on October 14, 1986 under the laws of the
State of Delaware. Its sole subsidiary is Citizens Bank of Washington, N.A.,
formerly known as McLachlen National Bank, NA, a national banking association
originally chartered by the Commonwealth of Virginia on November 26, 1891. At
December 31, 1995, Citizens Bank of Washington had assets of $281.9 million,
net loans of $206.5 million, deposits of $213.9 million and 7 full-service
offices in Washington, D.C. It is the 5th largest banking institution in the
District of Columbia, a market contiguous to Citizens' primary market.
Citizens Bank of Virginia was acquired by the Corporation on May 30, 1989. It is
a state member bank chartered by the Commonwealth of Virginia on January 1,
1980. At December 31, 1995, Citizens Bank of Virginia had assets of $227.7
million, net loans of $121.6 million, deposits of $192.3 million and 10 full-
service offices in the northern Virginia area. It is the 50th largest banking
institution in the state of Virginia, a highly affluent market contiguous to
Citizens' primary market.
Competition
The market for banking and financial services is highly competitive. The
Corporation and its subsidiaries compete with other providers of financial
services such as commercial banks, savings banks, savings and loan associations,
credit unions, money market and other mutual funds, mortgage companies,
insurance companies, pension funds, broker/dealers and a host of other local,
regional and national institutions which offer financial services.
Mergers between financial institutions within Maryland, D.C. and Virginia have
intensified the competitive pressure. Interstate banking laws enacted in 1994
are expected to add to the competitive pressure. Federal law now provides that:
(1) effective September 29, 1995, bank holding companies will be permitted,
subject to certain conditions, to acquire banks and bank holding companies
across state lines without regard to whether such acquisition is prohibited
by state law; and (2) effective June 1, 1997, sooner if both states opt-in to
interstate branching, banks will be permitted to merge across state lines
provided neither state has opted-out of interstate branching. During 1995,
both the State of Maryland and the Commonwealth of Virginia have opted-in
early to allow mergers across state lines. Legislation in the District of
Columbia was still pending at December 31, 1995. The Corporation and its
subsidiaries compete by offering a comprehensive line of products as well as
providing quality/convenient service that consistently meets and exceeds our
customers expectations.
Supervision and Regulation
The information contained in this section summarizes portions of the applicable
laws and regulations governing the supervision and regulation of the
Corporation and its subsidiaries.
Bank Holding Company Regulations
The Corporation, as a registered bank holding company registered under the
Bank Holding Company Act, is required to file with the Federal Reserve Board
quarterly and annual reports and such additional information as the Federal
Reserve Board may require, and is subject to regular examinations by the
staff of the Federal Reserve Bank of Richmond.
<PAGE>
The Bank Holding Company Act requires the approval of the Federal Reserve Board
before Citizens Bancorp may acquire substantially all of the assets of any
bank, or ownership or control of any voting shares of any bank, if after such
acquisition, it will own or control, directly or indirectly, more than 5% of
the voting shares of such bank. Consistent with the provisions of the Bank
Holding Company Act which became effective September 29, 1995, Citizens
Bancorp may now acquire banks in any state in the United States. Commencing
on September 29, 1995, the Federal Reserve Board may now approve the
acquisition by the Corporation of any bank located outside the State of Maryland
without regard to whether such acquisition is prohibited under the laws of any
state.
The Bank Holding Company Act also generally prohibits a bank holding company
from engaging in nonbanking activities or acquiring direct or indirect control
of voting shares of any company engaged in such activities. The Bank Holding
Company Act generally restricts activities which may be engaged in by the
Corporation and its subsidiaries to those of banking and the business of
managing and controlling banks, and to nonbanking activities which the Federal
Reserve Board may find to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. The approval of the
Federal Reserve Board is required prior to engaging in nonbanking activities.
The Banks
Citizens Bank of Maryland, a Maryland state chartered bank is supervised,
regulated and examined by the Bank Commissioner of Maryland and the FDIC.
Citizens Bank of Washington, as a national banking association, is subject to
the supervision of, and regulation and examination by the Comptroller of the
Currency. Citizens Bank of Virginia is a state member bank of the Federal
Reserve System and as such, is supervised, regulated and examined by the Federal
Reserve Board and the Commonwealth of Virginia.
Deposits, reserves, investments, loans, consumer law compliance, issuance of
securities, payment of dividends, mergers and consolidations, electronic funds
transfers, management practices and other aspects of the Banks' operations are
subject to regulation. The approval of the appropriate bank regulatory agency
is required for the establishment of additional branch offices by any of the
Banks.
The deposits of all of the Banks are insured by the FDIC. Some of the aspects
of the lending and deposit business of the Banks which are subject to regulation
by the Federal Reserve Board or the FDIC include disclosure requirements in
connection with personal and mortgage loans, interest on deposits and reserve
requirements. In addition, the Banks are subject to numerous federal, state and
local laws which set forth specific restrictions and requirements with respect
to extensions of credit, credit practices, disclosure of credit terms and
discrimination in credit transactions.
The Banks are subject to restrictions under federal law which limit the transfer
of funds by any of the Banks to the Corporation, whether in the form of loans,
extensions of credit, investments, asset purchases or otherwise. Such transfers
by any Bank to the Corporation are limited in amount to 10% of such Bank's
capital and surplus and, with respect to the Corporation, to an aggregate of
20% of the Corporation's capital and surplus. Furthermore, such loans and
extensions of credit are required to be secured in specified amounts.
As a result of the enactment of the Financial Institutions Reform, Recovery and
Enforcement Act ("FIRREA") on August 9, 1989, a depository institution insured
by the FDIC can be held liable for any loss incurred by, or reasonably expected
to be incurred by, the FDIC after August 9, 1989 in which (1) the default of a
commonly controlled FDIC-insured depository institution or (2) any assistance
provided by the FDIC to a commonly controlled FDIC-insured depository
institution in danger of default.
As a consequence of the extensive regulation of the commercial banking industry,
the business of Banks is particularly susceptible to changes in Federal and
state legislation and regulations which may increase the cost of doing business.
Dividends
The Corporation is a legal entity separate and distinct from the Banks and their
subsidiaries, although the principal source of the Corporation's cash revenues
is dividends from the Banks. Various federal and state laws and regulations
limit the amount of dividends the Banks can pay to the Corporation without
regulatory approval.
The Federal Reserve Board and the Comptoller of the Currency have issued
guidelines that require bank holding companies and national banks to evaluate
continuously the level of cash dividends in relation to the organization's net
income, capital needs, asset quality and overall financial condition. These
guidelines state that the total of all dividends declared by the Banks in any
calendar year shall not exceed the total of its net profits for that year. As a
result, the level of dividends from the Banks to the Corporation in 1996 are not
expected to exceed the earnings of the Banks.
Capital Requirements
The Federal Reserve Board adopted risk-based capital guidelines for bank holding
companies. As of December 31, 1995, the minimum ratio for capital to risk-
adjusted assets, including certain off-balance sheet items, such as standby
letters of credit, was 8%. At least half of the total
<PAGE>
capital must be comprised of common equity, retained earnings and a limited
amount of perpetual preferred stock, after subtracting goodwill and certain
other adjustments ("Tier 1 capital"). The remainder may consist of perpetual
debt, mandatory convertible debt securities, a limited amount of subordinated
debt, other preferred stock and a limited amount of loan loss reserves ("Tier
2 capital"). The Federal Reserve Board also adopted a minimum leverage ratio
(Tier 1 capital to average total assets) of 3% for bank holding companies that
meet certain specified criteria, including having the highest regulatory rating.
The Corporation's national and state chartered banking companies are subject to
similar risk-based and leverage capital requirements adopted by the Comptroller
and the FDIC. On December 31, 1995, the Corporation had a Tier 1 capital to
risk-adjusted assets ratio of 12.30%, a total capital ratio of 13.54% (Tier 1
plus Tier 2), and a leverage ratio of 8.77%.On December 31, 1995, Citizens Bank
of Maryland had a Tier 1 capital to risk-adjusted assets ratio of 12.05%, a
total capital ratio of 13.25%, and a leverage ratio of 8.26%. On December 31,
1995, Citizens Bank of Washington had a Tier 1 capital to risk-adjusted assets
ratio of 12.80%, a total capital ratio of 14.05%, and a leverage ratio of
10.01%. On December 31, 1995, Citizens Bank of Virginia had a Tier 1 capital to
risk-adjusted assets ratio of 13.13%, a total capital ratio of 14.37%, and a
leverage ratio of 8.56%.
Failure to meet the capital requirements could subject a banking institution to
a variety of enforcement remedies available to federal regulatory authorities,
including the termination of deposit insurance by the FDIC, and the appointment
of a conservator or receiver of the appropriate federal regulatory authority.
In September 1995, the federal bank regulatory agencies issued a revised
proposed revisions to their capital adequacy guidelines to incorporate the
consideration of interest rate risk in the overall determination of a bank's
minimum capital requirements. The intended effect of the proposal would be to
ensure that banking institutions effectively measure and monitor their
interest rate risk and that they maintain adequate capital for the risk. Under
the proposal, an institution's exposure to interest rate risk would be measured
using a supervisory model developed by the federal bank regulatory agencies.
With examiner approval, the institution could subsitute its own internal model.
Measured exposure to interest rate risk that exceeds a prescribed supervisory
threshold would require additional capital. Current federal regulation requires
that examiners evaluate the institution's interest rate risk management
processes for managing, monitoring and controlling interest rate risk as part
of their evaluation of capital adequacy. The proposed supervisory model has been
postponed for 1996 implementation and will probably not take effect until 1997.
The Corporation does not believe that the proposed revisions, if adopted, would
have an adverse impact on the Corporation.
FDICIA
On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") was enacted. Among other things, FDICIA provides increased
funding for the Bank Insurance Fund ("BIF") of the FDIC and provides for
expanded regulation of depository institutions and their affiliates, including
parent holding companies. The following is a brief summary of certain provisions
of FDICIA.
Pursuant to FDICIA, the Federal Reserve Board, the Comptroller and the FDIC have
adopted regulations, effective December 19, 1992, setting forth a five-tier
scheme for measuring the capital adequacy of the financial institutions they
supervise. Under the regulations, an institution is placed in one of the
following capital categories: (1) well capitalized (an institution that has a
total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital
ratio of at least 6% and a leverage ratio of at least 5%); (2) adequately
capitalized (an institution that has a total risk-based capital ratio of at
least 8%, a Tier 1 risk-based capital ratio of at least 4%, and a leverage ratio
of at least 4%); (3) undercapitalized (an institution that has a total risk-
based capital ratio of under 8% or a Tier 1 risk-based ratio under 4% or a
leverage ratio under 4%); (4) significantly undercapitalized (an institution
that has a total risk-based capital ratio of under 6% or a Tier 1 risk-based
capital ratio under 3% or a leverage ratio under 3%); and (5) critically
undercapitalized (an institution that has a ratio of tangible equity to total
assets of 2% or less). The regulations permit the appropriate Federal banking
regulator to downgrade an institution to the next lower category if the
regulator determines: (1) after notice and opportunity for hearing or response,
that the institution is in an unsafe or unsound condition or (2) that the
institution has received (and not corrected) a less-than-satisfactory rating for
any of the categories of asset quality, management, earnings or liquidity in its
most recent exam. All institutions are generally prohibited from declaring a
dividend, making any other capital distribution or paying a management fee to a
controlling person, if such payment would cause the institution to become
undercapitalized. As of December 31, 1995, each of the Banks met the
requirements of a "well-capitalized" institution.
The FDIC issued a rule, effective June 16, 1992, regarding the ability of
depository institutions to accept brokered deposits. Under the rule, (1) an
undercapitalized institution is prohibited from accepting, renewing or rolling
over brokered deposits, (2) an adequately capitalized institution must obtain a
waiver from the FDIC before accepting, renewing or rolling over brokered
deposits and (3) a well capitalized institution may accept, renew or roll over
brokered deposits without restrictions. In addition, both undercapitalized and
adequately capitalized institutions are subject to restrictions on the rates of
interest they may pay on any deposits.
The FDIC has also issued regulations implementing, effective for the semi-annual
assessment period which commenced January 1, 1993, a system of risk-based FDIC-
insurance premiums. Under this system, each depository institution is assigned
to one of nine risk classifications based upon certain capital and supervisory
measures and, depending upon its classification, will be assessed premiums
ranging from 23 basis points to 31 basis points per $100 of domestic deposits.
Effective May 1, 1995, the FDIC amended this regulation to provide for an
<PAGE>
assessment schedule ranging from 4 basis points to 31 basis points, thus
reducing premiums for banks in the lowest risk classification from 23 basis
points to 4 basis points. Effective January 1, 1996 the FDIC further reduced
premiums for the lowest risk classification to 0 basis points per $100 of
deposit with a minimum assessment payment for a 6 month period of $1,000 per
institution. All of the Corporation's Banks carry the lowest risk rating and
have therefore benefitted by approximately $3.1 million from reduced premium
assessments in 1995.
The full year effect of the 1995 premium assessment reduction coupled with the
additional 4 basis point per $100 of deposit reduction in 1996 will continue to
provide a positive benefit to the Corporation's results of operations.
Monetary Policy
All commercial banking operations are affected by the policies of monetary
authorities, including the Federal Reserve System, and these policies change
from time to time. A function of the Federal Reserve System is to regulate the
national supply of bank credit in order to achieve economic results deemed
appropriate by its Board of Governors, including efforts to combat unemployment,
recession or inflationary pressures. Among the instruments of monetary policy
used to implement these objectives are open market operations in U.S. Government
securities and changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth of bank
loans, investments and deposits. The monetary policies of bank regulatory and
other authorities have affected the operating results of commercial banks in the
past and are expected to continue to do so in the future. In view of changing
conditions in the national economy, in the money market, as well as the effect
of actions by monetary and fiscal authorities, no prediction can be made as to
possible future changes in interest rates, deposit levels, loan demand or the
business and earnings of the subsidiary banks.
Item 2. Properties
The following describes the location and general character of the principal
offices and other materially important physical properties of the Corporation
and its subsidiaries.
The Corporation owns the headquarters building located at 14401 Sweitzer Lane,
Laurel, Maryland. The building contains 145,500 square feet of office space and
houses certain lending, staff and operations functions of the Corporation and
Citizens Bank of Maryland.
The Corporation also owns a Riverdale office building located at 6200 Baltimore
Blvd., Riverdale, Maryland. The building contains 53,166 square feet of office
space and is being renovated to house consumer loan functions of Citizens Bank
of Maryland. In addition, office buildings in Aspen Hill, Maryland and Wheaton,
Maryland are also owned. The Corporation collects $385,000 rental income after
paying management fees of 8% of gross monthly rentals on the 27,077 square feet
office facility in Aspen Hill of which 100% is leased. The Corporation collects
$618,000 rental income after paying a 2.5% leasing agent fee and $19,200 per
annum in management expenses on the 51,810 square feet Wheaton office facility
of which 49,505 square feet (96%) is leased.
Of the 103 offices of the Corporation's subsidiaries, 24 are owned and 79 are
leased. Rental expense totaled $6.2 million for the year ended December 31,
1995.
Item 3. Legal Proceedings
The Corporation and its subsidiaries are defendants in various matters of
litigation generally incidental to their respective businesses. In the opinion
of Management, based upon the advice of counsel, the disposition of all pending
litigation will not materially affect the consolidated financial position or
results of operations of the Corporation or its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted during the fourth quarter of 1995 to security
holders' vote, through the solicitation of proxies.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Corporation's common stock is listed on the NASDAQ system and carries a
symbol of "CIBC". The transfer agent and registrar of the stock is Citizens
Bancorp. As of March 4, 1996, there were 5,098 registered holders of the common
stock. Common stock market prices and dividends are included in Table 16 on
page 20 of this report.
<PAGE>
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data is derived from the financial
statements of the Corporation. It should be read in conjunction with the
detailed information and financial statements of the Corporation included
elsewhere herein.
Table 1
<TABLE>
Five-year Summary of Selected Financial Data
<CAPTION>
Year ended December 31,
1995
1994
1993
1992
1991
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Results of Operations
Interest income - taxable equivalent
Interest expense
Net interest income - taxable equivalent
Taxable equivalent adjustment
Net interest income
Provision for loan losses
Net interest income after provision
for loan losses
Other income
Compensation and employee benefits
Other expenses
Total other expenses
Income before income taxes
Income taxes
Net income
$ 261,166
123,857
137,309
1,194
136,115
6,695
129,420
40,449
57,149
54,615
111,764
58,105
22,015
$ 36,090
$ 218,141
84,969
133,172
1,314
131,858
6,167
125,691
35,705
54,106
57,603
111,709
49,687
18,647
$ 31,040
$ 208,137
84,519
123,618
2,187
121,431
11,465
109,966
35,630
53,058
51,692
104,750
40,846
14,016
$ 26,830
$ 219,999
103,203
116,796
1,904
114,892
14,514
100,378
33,351
51,956
47,482
99,438
34,291
10,993
$ 23,298
$ 234,097
129,570
104,527
2,688
101,839
15,044
86,795
27,268
45,786
39,385
85,171
28,892
8,623
$ 20,269
Per Share of Common Stock
Net income
Cash dividends paid
Book value
Selected Average Balances
Total assets
Loans - net of unearned discount
Investment securities
Total interest-earning assets
Interest-bearing deposits
Short-term borrowings
Total interest-bearing liabilities
Noninterest-bearing deposits
Total deposits
Stockholders' equity
$ 2.40
1.12
22.20
$3,800,363
2,060,345
1,492,820
3,553,165
2,251,807
579,934
2,831,741
627,455
2,879,262
320,703
$ 2.09
1.08
20.52
$3,445,176
1,826,563
1,347,864
3,184,683
2,173,131
321,844
2,494,975
633,581
2,806,712
299,376
$ 1.82
1.08
19.63
$3,258,570
1,708,470
1,178,145
2,996,265
2,240,859
125,525
2,366,384
590,100
2,830,959
285,130
$ 1.62
1.08
18.84
$3,112,616
1,724,667
995,055
2,872,641
2,194,347
119,433
2,313,780
515,778
2,710,125
270,029
$ 1.44
1.08
18.25
$2,809,624
1,752,413
756,018
2,596,902
1,939,623
139,308
2,078,931
459,726
2,399,349
259,148
Ratios
Capital to assets
Loans to deposits
Net interest margin
Net charge-offs to average total loans
Return on assets
Return on equity
Dividend payout
8.44%
71.56
3.86
.23
.95
11.25
46.62
8.69%
58.38
4.18
.17
.90
10.37
51.78
8.75%
60.35
4.13
.38
.82
9.41
59.41
8.68%
63.64
4.07
.55
.75
8.63
66.67
9.22%
73.04
4.03
.94
.72
7.82
75.00
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction. The purpose of this discussion is to focus on information about
the Corporation's financial condition and results of operations which is not
otherwise apparent from the consolidated financial statements included in this
annual report. Reference should be made to those statements and the selected
financial data presented elsewhere in this report for an understanding of the
following discussion and analysis.
Earnings Summary. Citizens Bancorp's consolidated net income for 1995 totaled a
record $36.1 million or $2.40 per share compared with $31.0 million or $2.09
per share in 1994. Increased operating results for the year reflected strong
loan growth in all major categories, good deposit growth, excellent expense
control and reduced credit costs. Net income represented returns of 11.25% on
shareholders' equity and .95% on assets versus 10.37% and .90%, respectively
in 1994.
Reflecting the Corporation's continued profitability and balance sheet strength,
the Board of Directors declared the 140th consecutive quarterly cash dividend
for the fourth quarter of 1995. The total 1995 cash dividend of $1.12 per
share represents a new record high payment. The significant items affecting
earnings per share for the years ended 1995, 1994 and 1993 are presented in
Table 2.
<TABLE>
Table 2
Components of Earnings per Share
<CAPTION>
1995
1994
1993
Change
1995/1994
Change
1994/1993
<S>
<C>
<C>
<C>
<C>
<C>
Interest income - taxable equivalent
Interest expense
Net interest income - taxable equivalent
Taxable equivalent adjustment
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Compensation and employee benefits
Other expenses
Total other expenses
Income before income taxes
Income taxes
Net income
$ 17.40
8.25
9.15
.08
9.07
.45
8.62
2.70
3.81
3.64
7.45
3.87
1.47
$ 2.40
$ 14.66
5.71
8.95
.09
8.86
.41
8.45
2.40
3.64
3.87
7.51
3.34
1.25
$ 2.09
$ 14.11
5.73
8.38
.15
8.23
.77
7.46
2.41
3.60
3.50
7.10
2.77
.95
$ 1.82
$ 2.74
2.54
.20
.01
.21
(.04)
.17
.30
(.17)
.23
.06
.53
(.22)
$ .31
$ .55
.02
.57
.06
.63
.36
.99
(.01)
(.04)
(.37)
(.41)
.57
(.30)
$ .27
</TABLE>
Income Statement Analysis. The year to year comparison of most categories of
the income statement are described in Tables 3 and 4, concerning net interest
income. Table 5 compares the categories of other income and other expense.
Net Interest Income. Net interest income is defined as the difference between
the total of interest and amortized fees on loans, securities and other earning
assets, and the interest expense on deposits and borrowed funds. Net interest
income for 1995 was a record $136.1 million, up $4.3 million or 3.2% from 1994.
Taxable equivalent net interest income for 1995 was a record $137.3 million, an
increase of $4.1 million or 3.1% from $133.2 million in 1994.
The increase reflected strong gains in interest-earning assets, principally
loans as well as a modestly improving average earning asset yield. Greater
levels of interest-bearing liabilities and a higher average cost of funds
partially reduced the increase.
In Table 3, net interest income is presented on a "taxable equivalent" basis.
The income on obligations of state and local governments, industrial revenue
bonds and equity securities is reflected as though such income was fully
taxable. This is accomplished by adjusting the income earned on these assets
based on the statutory federal income tax rate of 35%. Table 3 also includes
nonaccrual loans in total loan balances, lowering the effective yield for the
loan portfolio in the aggregate.
The net interest yield on earning assets (net interest income as a percentage of
average earning assets) declined 32 basis points for the year as increased rates
on funding sources offset gains in earning asset yields. The average rate paid
rose 96 basis points, led by short-term borrowing costs which increased in
response to Federal Reserve actions. The average yield on interest-earning
assets was up a more modest 50 basis points for the year.
<PAGE>
<TABLE>
Table 3
Three-Year Average Consolidated Statements of Condition and Rate
<CAPTION>
1995 1994 1993
Average
Balance
Interest
Rate
Average
Balance
Interest
Rate
Average
Balance
Interest
Rate
<S>
(Taxable equivalent basis, dollars in thousands)
Assets
Loans - Net of
Unearned Income:
Commercial
Real estate
Consumer
Total loans, net
Securities:
Available for sale
Taxable held to maturity
Tax-exempt held to
maturity
Total securities
Federal funds sold and
securities purchased
under resale agreements
Total interest -
earning assets
Cash and cash equivalents
Allowance for loan losses
Other assets
Total assets
<C>
$ 354,290
1,018,002
688,053
2,060,345
365,162
1,098,259
29,399
1,492,820
-
3,553,165
160,791
(33,722)
120,129
$3,800,363
<C>
$ 31,867
90,064
49,663
171,594
23,363
62,797
3,412
89,572
-
261,166
<C>
8.99%
8.85
7.22
8.33
6.40
5.72
11.61
6.00
-
7.35
<C>
$ 329,558
865,619
631,386
1,826,563
224,578
1,090,064
33,222
1,347,864
10,256
3,184,683
162,655
(30,719)
128,557
$3,445,176
<C>
$ 25,209
73,311
44,598
143,118
10,837
59,828
3,755
74,420
603
218,141
<C>
7.65%
8.47
7.06
7.84
4.83
5.49
11.30
5.52
5.88
6.85
<C>
$ 307,893
818,558
582,019
1,708,470
-
1,092,744
85,401
1,178,145
109,650
2,996,265
164,174
(26,167)
124,298
$3,258,570
$ 22,119
68,051
46,736
136,906
-
60,600
6,745
67,345
3,886
208,137
7.18%
8.31
8.03
7.42
-
5.55
7.90
5.72
3.54
6.95
</TABLE>
<TABLE>
<CAPTION>
Liabilities and
Stockholders' Equity
<S>
<C>
<C>
<C>
<C>
<C>
<C>
<C>
<C>
<C>
Interest-bearing liabilities:
Deposits:
Savings and demand
Money market
Time certificates
Total
Short-term borrowings
Total interest-
bearing liabilities
Demand deposits
Other liabilities
Stockholders' equity
Total liabilities and
stockholders' equity
Net interest income
Net interest yield on
earning assets
$ 909,924
424,211
917,672
2,251,807
579,934
2,831,741
627,455
20,464
320,703
$3,800,363
24,638
14,536
51,219
90,393
33,464
123,857
$ 137,309
2.71
3.43
5.58
4.01
5.77
4.37
3.86%
$ 995,387
510,779
666,965
2,173,131
321,844
2,494,975
633,581
17,244
299,376
$3,445,176
26,634
13,616
30,363
70,613
14,356
84,969
$133,172
2.68
2.67
4.55
3.25
4.46
3.41
4.18%
$ 936,205
570,436
734,218
2,240,859
125,525
2,366,384
590,100
16,956
285,130
$3,258,570
27,297
16,119
37,597
81,013
3,506
84,519
$123,618
2.92
2.83
5.12
3.62
2.79
3.57
4.13%
</TABLE>
<PAGE>
Interest Income. Taxable equivalent interest income rose $43.0 million or
19.7%, primarily the result of good growth in average interest-earning assets
outstanding supplemented by a higher average yield. Average interest-earning
assets increased by $368.5 million or 11.6% for the year with the average rate
earned up by 50 basis points.
Strong loan demand drove the interest-earning asset growth, with average loans
rising $233.8 million or 12.8% for the year versus $118.1 or 6.9% in 1994. All
categories of loans were up, with growth led by the real estate sector which
includes home equity and residential mortgages.
Average real estate loans, including home equity and residential mortgage loans,
grew $152.4 million or 17.6% versus a gain of $47.1 million or 5.7% in 1994.
This increase was led by interim commercial loans, up $60.9 million or 15.4%,
residential mortgage loans up $51.6 million or 140.8%, and by home equity loans
up $48.9 million or 37.9%.
Average consumer loans grew by $56.7 million or 9.0% compared with $49.4 million
or 8.5% in 1994. All major categories were up with gains concentrated in
indirect automobile sales financing which rose $35.1 million or 6.2% and marine
lending which was up $23.8 million or 154.6%. The marine lending product line
was established in 1994 and has been a strong area of growth in both years.
Continued strong loan growth throughout 1995 moderated the need for increases in
investment securities which were up $145.0 million or 10.8% for the year
compared with an increase of $169.7 million or 14.4% in 1994.
Table 4 analyzes the changes in net interest income between the two most recent
years.
<TABLE>
Table 4
Net Interest Income Variance Analysis 1
<CAPTION>
1995 Compared to 1994
Increase (Decrease)
Due to
1994 Compared to 1993
Increase (Decrease)
Due to
Volume
Rate
Net
Volume
Rate
Net
(Taxable equivalent basis, dollars in thousands)
<S>
<C>
<C>
<C>
<C>
<C>
<C>
Interest Income
Loans:
Commercial
Real estate
Consumer
Total loans
Securities:
Available for sale
Taxable held to maturity
Tax-exempt held to maturity
Total securities
Federal funds sold and securities
purchased under resale agreements
Total interest income
Interest Expense
Deposits:
Savings and demand
Money market
Time certificates
Total deposits
Short-term borrowings
Total interest expense
Net Interest Income
$ 2,225
13,482
4,090
19,470
8,995
469
(444)
8,698
(603)
27,084
2,314
2,966
(13,993)
(3,158)
(14,893)
(14,730)
$ 14,240
$ 4,433
3,271
975
9,006
3,531
2,500
101
6,454
-
15,941
(318)
(3,886)
(6,863)
(16,622)
(4,215)
(24,158)
$(10,103)
$ 6,658
16,753
5,065
28,476
12,526
2,969
(343)
15,152
(603)
43,025
1,996
(920)
(20,856)
(19,780)
(19,108)
(38,888)
$ 4,137
$ 1,657
3,985
3,487
9,253
10,837
(147)
(5,898)
9,370
(5,844)
12,906
(1,584)
1,591
3,062
2,201
(8,757)
(4,379)
$ 7,879
$ 1,433
1,275
(5,625)
(3,041)
-
(625)
2,908
(2,295)
2,561
(2,902)
2,247
912
4,172
8,199
(2,093)
3,929
$ 1,675
$ 3,090
5,260
(2,138)
6,212
10,837
(772)
(2,990)
7,075
(3,283)
10,004
663
2,503
7,234
10,400
(10,850)
(450)
$ 9,554
<FN>
1 The detail of rate and volume variances does not sum to the respective totals
because of changes in the mix of interest-earning assets and interest-bearing
liabilities from year to year.
</TABLE>
<PAGE>
Interest Expense
Interest expense grew $38.9 million or 45.8%, reflecting an increase in interest
- -bearing liabilities outstanding and a higher average cost of funds. Average
interest-bearing liabilities increased $336.8 million or 13.5%, primarily in
certificates of deposits and short-term borrowings. The average rate paid rose
96 basis points for the year, primarily due to a shift in customer preference
for higher rate certificates of deposits and higher short-term borrowing costs
as the Federal Reserve policy maintained the higher rates incurred in the 4th
quarter of 1994 throughout most of 1995.
Total average time certificates increased $250.7 million or 37.6% compared to a
decline of $67.3 million or 9.2% in 1994. Average savings and demand declined
$85.5 million or 8.6%. Money market declined $86.6 million or 16.9% after a
decline of $59.7 million or 10.5% in 1994. Our innovative time certificate
products resulted in the migration of customers from these traditional products.
Average short-term borrowings increased $258.1 million or 80.2%. Federal funds
purchased and repurchase agreements accounted for almost all of the growth,
rising $248.1 million or 77.2%. Commercial paper borrowings increased $9.9
million or 199.9%.
Gross deposits for the year averaged $2.9 billion, an increase of $72.6 million
or 2.6% from 1994. Non-interest bearing demand deposits in 1995 averaged $627.5
million versus $633.6 million the year earlier.
Table 5 summarizes the remaining maturities of certificates of deposits of
$100,000 or more outstanding at December 31, 1995.
<TABLE>
Table 5
<CAPTION>
Maturities of Certificates of Deposit Greater than $100,000
(Dollars in thousands)
<S>
<C>
Less than three months
Three months to six months
Six months to twelve months
More than twelve months
Total
$ 33,435
19,782
51,155
16,105
$120,477
</TABLE>
Other Income. One of the Corporation's key strategies is to grow new sources of
fee-based revenues. This strategy provides for a further diversification and
utilization of the Corporation's significant retail branch network. Other
income totaled $40.4 million and $35.7 million in 1995 and 1994, respectively.
Table 6 reflects the components of other income.
Trust income achieved a record $1.2 million reflecting a strong 28.6% increase
from 1994. Service charges on deposit accounts increased $358 thousand from the
depressed 1994 levels. The first full year of operations of CitizensBanc
Mortgage Company contributed $1.1 million to 1995 revenues which reflected an
$829 thousand increase from 1994. Insurance and brokerage fees declined $574
thousand, which resulted from increased competition from our certificate of
deposit products. Other income of $8.2 million includes a $1.9 million gain
on the sale of the residual value of railroad boxcars that had previously been
leased.
<PAGE>
<TABLE>
Table 6
<CAPTION>
Other Income and Other Expense
Year ended December 31,
1995
1994
1993
1992
1991
(Dollars in thousands)
<S>
<C>
<C>
<C>
<C>
<C>
Other Income
Trust income
Service charges on deposit accounts
Other service charges and fees
Mortgage servicing and related fees
Insurance/brokerage fees
Other
Total
$ 1,152
20,226
7,269
1,055
2,555
8,192
$ 40,449
$ 896
19,868
6,189
226
3,129
5,397
$ 35,705
$ 925
20,741
6,056
-
3,393
4,515
$ 35,630
$ 547
19,330
5,393
-
2,369
5,712
$33,351
$ 499
18,159
4,957
-
191
3,462
$27,268
Other Expense
Compensation
Employee benefits
Net occupancy
Equipment
Advertising
Legal fees
FDIC assessments
Check clearing fees
Postage
Travel, dues and subscriptions
Stationery and supplies
Telephone
Credit card operations
Amortization of intangible assets
Real estate acquired in settlement of loans
Other
Total
$ 47,461
9,688
14,199
7,534
4,537
1,659
3,161
996
1,991
900
1,186
1,858
3,942
1,482
1,033
10,137
$111,764
$ 45,327
8,779
16,366
6,818
4,160
956
6,361
962
1,788
852
1,032
1,672
3,672
1,423
3,572
7,969
$111,709
$ 47,531
5,527
13,694
5,931
3,390
1,206
6,300
896
1,741
801
1,567
1,737
3,131
1,396
2,875
7,027
$104,750
$44,342
7,614
14,039
5,053
1,830
713
5,875
565
2,238
908
1,282
1,965
2,333
1,395
2,336
6,950
$99,438
$38,882
6,904
12,365
5,160
1,367
905
4,662
571
2,105
858
1,196
1,843
1,966
1,389
(1,142)
6,140
$85,171
</TABLE>
Other Expense. Other expense is also reflected on Table 6. Other expense for
1995 totaled $111.8 million which mirrored 1994's $111.7 million level of
expenses.
Compensation and employee benefits, which represented 51.1% of total other
expense, increased 5.6% to $57.1 million in 1995 compared to $54.1 million in
1994. Compensation costs increased $2.1 million or 4.7% primarily as a result
of normal merit increases as well as additional staffing of new business
ventures. Employee benefit costs increased $909 thousand or 16.4% from 1994
primarily due to increases in retiree and other medical costs as well as
retirement plan expenses.
Net occupancy costs declined $2.2 million or 13.2% as the benefits of branch
closings and reconfiguration efforts in 1994 were realized in 1995. Also
included in this category is a one-time reduction in rental expense of $907
thousand due to the renegotiation of a lease.
Effective May 1,1995, the FDIC reduced its premium assessment from 23 basis
points to 4 basis points per $100 of deposit with a minimum assessment payment
for a 6 month period of $1,000 per institution. This reduction benefitted the
Corporation by $3.1 million in FDIC assessments in 1995.
Expense relating to property foreclosures by the Corporation declined by $2.5
million as credit quality continued to improve and required lower provisions
in 1995. While there have been signs of an improving market, the $21.4 million
in real estate acquired in settlement of loans is expected to be a sustained
work out process.
Income Taxes. Income tax expense totalled $22.0 million in 1995 compared with
$18.6 million in 1994. The increase in income tax expense resulted from the
growth in taxable earnings. The effective tax rate was 37.9% in 1995 and 37.5%
in 1994.
<PAGE>
BALANCE SHEET REVIEW. The Corporation's balance sheet management approach is
intended to provide for proper management of interest rate risk, credit risk,
liquidity and capital.
Investment Portfolio. The investment portfolio of $1.5 billion at December 31,
1995 consisted of securities held to maturity totalling $1.0 billion and
securities available for sale of $472.0 million.
On January 1, 1994 the Corporation adopted Statement of Financial Accounting
Standards No. (SFAS) 115, "Accounting for Certain Investments in Debt and Equity
Securities." This statement is more fully discussed in Notes 1 and 2 to the
Consolidated Financial Statements.
The available for sale portfolio (AFS) is managed from an interest income and
liquidity perspective. As such, securities may be sold out of the AFS portfolio
when management deems that a greater return can be earned in another security
type, to fund loan growth or depositor withdrawals or the interest rate risk in
the balance sheet is not appropriate for the the prevailing economic climate.
All of the Corporation's adjustable rate mortgage-backed obligations and equity
securities are carried in the AFS portfolio. Selected fixed rate Treasury and
agency notes with short average lives are also held in this portfolio.
Securities that the Corporation has the intent and ability to hold to maturity
are placed in the held to maturity (HTM) portfolio. These securities are held
to maturity because they are funded with liabilities of comparable average
lives. The high levels of liquidity maintained by the Corporation eliminates
any need to sell these securities prior to their maturity. Securities will not
be sold out of the HTM portfolio in response to changes in loan demand, interest
rates or prepayment speeds. The Corporation's investments in longer-term
Treasury and agency securities, municipal and corporate bonds and collateralized
mortgage obligations of Federal agencies are held in this portfolio.
<TABLE>
Table 7
<CAPTION>
Investment Portfolio Maturity Analysis at December 31,1995
Within 1 Year
1-5 Years
5-10 Years
Over 10 Years
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
(Dollars in thousands)
<S>
<C>
<C>
<C>
<C>
<C>
<C>
<C>
<C>
Available for Sale
U.S. Treasury and
government agencies
Mortgage-backed securities
Other securities
Held to Maturity
U.S. Treasury and
government agencies
State and municipal securities
Mortgage-backed securities
Corporate obligations
$107,318
-
-
$107,318
$ 52,088
12,543
-
9,982
$ 74,613
6.72%
-
-
6.72%
6.14%
11.88
-
5.75
7.05%
$ 51,768
-
-
$ 51,768
$158,598
6,322
40,038
10,020
$214,978
5.24%
-
-
5.24%
5.09%
10.24
5.84
6.05
5.43%
$ -
-
8,260
$ 8,260
$ -
4,863
242,007
100
$246,970
- %
-
7.12
7.12%
- %
12.80
5.71
4.28
5.85%
$ -
304,643
-
$304,643
$ -
4,765
477,379
1,003
$483,147
- %
5.96
-
5.96%
- %
10.31
5.94
7.25
5.99%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio Carrying Values for Years Ended December 31,
1995
1994
1993
Amount
Yield
Amount
Yield
Amount
Yield
(Dollars in thousands)
<S>
<C>
<C>
<C>
<C>
<C>
<C>
Available for Sale
U.S. Treasury and
government agencies
Mortgage-backed securities
Other securities
Held to Maturity
U.S. Treasury and
government agencies
State and muncipal securities
Mortgage-backed
Corporate obligations
Other securities
$ 159,086
304,643
8,260
$ 471,989
$ 210,686
28,493
759,423
21,106
-
$1,019,708
6.39%
5.96
7.12
6.13%
5.46%
11.41
5.55
5.96
-
5.70%
$ 95,843
135,181
1,126
$ 232,150
$ 251,257
32,799
889,815
21,348
-
$1,195,219
5.43%
4.90
7.49
5.13%
5.07%
11.59
5.78
6.53
-
5.64%
$ -
56,524
1,000
$ 57,524
$ 300,373
35,441
782,751
31,997
608
$1,151,170
- %
4.98
3.35
5.02%
5.01%
11.31
5.59
4.74
6.00
5.51%
</TABLE>
Risk Management
The Corporation employs many tools to manage and control the various risks to
which it is exposed. The strategies for managing the primary risks (credit,
interest rate and liquidity risk) are discussed in the following sections.
Loans and Leases
Table 8 shows the Corporation's loan distribution at the end of each of the last
five years.
<TABLE>
Table 8
<CAPTION>
Loans and Leases
Year ended December 31,
1995
1994
1993
1992
1991
(Dollars in thousands)
<S>
<C>
<C>
<C>
<C>
<C>
Consumer
Real Estate:
Mortgage
Construction and land development
Commercial, financial and agricultural
Lease financing
Less:
Unearned income
Allowance for loan losses
Net loans and leases
$ 741,256
959,535
144,234
380,807
5,899
2,231,731
5,332
34,145
$2,192,254
$ 660,977
815,234
121,982
360,401
7,173
1,965,767
12,556
32,249
$1,920,962
$ 624,158
739,335
112,955
319,806
5,250
1,801,504
27,986
29,099
$1,744,419
$ 678,530
673,229
133,528
278,586
5,967
1,769,840
69,904
24,058
$1,675,878
$ 753,693
680,772
117,536
294,437
9,862
1,856,300
101,235
18,979
$1,736,086
</TABLE>
<PAGE>
Allowance for Loan Losses. The allowance for loan losses is maintained at a
level believed adequate by management to absorb potential losses in the loan
portfolio. In evaluating the adequacy of the reserve for loan losses,
management relies on a disciplined credit review and approval process. The
Corporation's determination of the level of the reserve and, correspondingly,
the provision for loan losses utilizes various judgements and assumptions,
including the Washington/Baltimore economic conditions, loan portfolio
composition, prior loan loss experience and the Corporation's ongoing
examination process and that of its regulators. The Corporation has an
internal credit review function and continuously reviews loan quality. The
Corporation uses an allocation approach which relies on historical loss
experience allocations, specific allocations for individual loan categories,
and specific allocations for individual loans.
The Corporation considers the allowance for loan losses of $34.1 million
adequate to cover losses inherent in loans, loan commitments and standby letters
of credit at December 31, 1995. Therefore, there are no loan transactions that
have not been considered in the allowance for loan losses which would have a
material impact on operating results, liquidity or capital resources.
Table 9 summarizes Citizens' loan loss experience for each of the five years in
the period ended December 31, 1995.
<TABLE>
Table 9
<CAPTION>
Summary of Loan Loss Experience
Year ended December 31,
1995
1994
1993
1992
1991
(Dollars in thousands)
<S>
<C>
<C>
<C>
<C>
<C>
Balance, beginning of year
Provision for loan losses
Charge-offs:
Real estate - mortgage
Real estate - construction and land development
Commercial, financial, and agricultural
Consumer
Total charge-offs
Recoveries:
Real estate - mortgage
Real estate - construction and land development
Commercial, financial, and agricultural
Consumer
Total recoveries
Net charge-offs
Balance, end of year
Historical Statistics
Balances:
Average total loans
Total loans at year end
Ratios:
Net charge-offs to average total loans
Allowance for loan losses to
total loans at year end
$ 32,249
6,695
(3,227)
-
(1,000)
(1,856)
(6,083)
108
-
422
754
1,284
(4,799)
$ 34,145
$2,060,345
2,226,399
.23%
1.53
$ 29,099
6,167
(3,562)
-
(1,095)
(1,590)
(6,247)
815
-
1,842
573
3,230
(3,017)
$ 32,249
$1,826,563
1,953,211
.17%
1.65
$ 24,058
11,465
(6,435)
-
(2,022)
(1,673)
(10,130)
17
985
2,038
666
3,706
(6,424)
$ 29,099
$ 1,708,470
1,773,518
.38%
1.64
$ 18,979
14,514
(761)
(25)
(7,313)
(2,066)
(10,165)
12
-
243
475
730
(9,435)
$ 24,058
$1,724,667
1,699,936
.55%
1.42
$ 20,471
15,044
(2,875)
-
(12,065)
(2,082)
(17,022)
-
-
121
365
486
(16,536)
$ 18,979
$1,752,413
1,755,065
.94%
1.08
</TABLE>
The provision for loan losses was $6.7 million in 1995, exceeding net charge-
offs by $1.9 million but higher than 1994 by $528 thousand or 8.6%. The higher
provision amount resulted from the strong loan growth that occurred in 1995.
Net charge-offs for the year totaled $4.8 million or .23% of average loans
compared with $3.0 million or .17% in 1994. Loan recoveries represented
21.1% of gross charge-offs, down from 48.3% in the prior year, with recoveries
decreasing in commercial loans. Real estate mortgage loans had net charge-offs
of $3.1 million versus $2.7 million in 1994. Commercial loans had net charge-
offs of $578 thousand versus net recoveries of $747 thousand in 1994. Consumer
loans had net charge-offs of $1.1 million or .16% of average consumer loans
versus $1.0 million or .16% of average consumer loans in 1994.
<PAGE>
The allowance for loan losses at December 31, 1995 was $34.1 million,
representing 1.53% of year-end loans and 239.1% coverage of non-accrual loans.
Comparable amounts a year earlier were $32.2 million, 1.65% and 169.0%,
respectively.
The Corporation adopted SFAS 114, "Accounting by Creditors for Impairment of a
Loan" effective January 1, 1995. This new accounting standard requires that a
loan which meets the definition of impairment be measured at the present value
of expected future cash flows using the loans' effective interest rate, or as a
practical expedient, at the loans' observable market price or the fair value of
the underlying collateral if the loan is collateral dependent. The adoption of
this standard did not have a material impact on the Corporation's financial
position or results of operations.
As of December 31, 1995, there are no loans classified for regulatory purposes
which the Corporation has not disclosed.
Table 10 shows an allocation of the allowance for loan losses as of the end of
each of the last five years.
<TABLE>
Table 10
<CAPTION>
Allowance for Loan Losses by Category of Loans
Year ended December 31,
1995
1994
1993
1992
1991
<S>
<C>
<C>
<C>
<C>
<C>
Consumer
Real estate - mortgage
Real estate - construction and land
development
Commercial, financial, and agricultural
Lease financing
Total allowance for loan losses
14%
50
9
27
-
100%
18%
49
9
24
-
100%
18%
39
19
24
-
100%
11%
40
17
32
-
100%
13%
27
16
44
-
100%
</TABLE>
The above allocation is based on estimates and subjective judgements and is not
necessarily indicative of the specific amounts or loan categories in which
losses may ultimately occur.
Non-performing Assets. A loan is classified as non-accrual when full
collectibility of principal and interest is in doubt or a loan becomes 90 days
past due as to principal or interest, except for certain guaranteed loans and
other limited exceptions. A loan is classified as restructured if the
original interest rate, repayment terms, or both are restructured due to the
deterioration in the financial condition of the borrower. Real estate acquired
in settlement of loans represents collateral on loans to which the Corporation
has taken title. The property which is held for resale is carried at the lower
of cost or fair value less estimated costs to sell.
Non-performing assets at December 31, 1995 totaled $35.7 million or 1.59% of
loans and real estate acquired in settlement of loans. This represents a drop
of $1.4 million or 3.8% from a year earlier, when comparable amounts were $37.1
million or 1.88%.
<PAGE>
Table 11 reflects the non-performing assets by type of loan.
<TABLE>
Table 11
<CAPTION>
Distribution of Non-Performing Assets
Year ended December 31,
1995
1994
1993
1992
1991
(Dollars in thousands)
<S>
<C>
<C>
<C>
<C>
<C>
Commercial, financial and agricultural
Real estate - construction and land development
Real estate - mortgage
Consumer
Total non-accrual loans
Real estate acquired in settlement of loans
Total non-performing assets
$ 5,015
1,384
7,421
458
14,278
21,399
$35,677
$ 6,548
1,345
10,954
234
19,081
18,003
$ 37,084
$ 2,630
6,939
10,451
3,109
23,129
25,951
$ 49,080
$ 4,050
9,606
12,321
2,847
28,824
27,494
$56,318
$ 7,929
3,773
9,377
-
21,079
24,775
$45,854
Non-performing loans to total loans
.64%
.99%
1.33%
1.70%
1.20%
Non-performing assets to year-end loans
and real estate acquired in settlement of loans
Accruing loans past due 90 days or more
Restructured loans
1.59
$ 5,303
13,227
1.88
$ 786
14,166
2.77
$ 4,282
16,725
3.31
$ 4,772
17,095
2.61
$10,956
8,392
</TABLE>
The Corporation has not made loans on highly leveraged transactions.
At December 31, 1995 the Corporation has commitments to lend additional funds
with respect to non-performing loans amounting to $618 thousand. At December
31, 1995 all nonaccrual and restructured loans are collateralized.
Liquidity and Interest Rate Sensitivity Management
The primary objectives of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest-earning assets
and interest-bearing liabilities. Interest rate sensitivity managment seeks to
avoid fluctuating net interest margins and to enhance consistent growth of net
interest income through periods of changing interest rates.
Interest rate sensitivity refers to the inherent rate risk that exists in the
Corporation's balance sheet which causes earnings to fluctuate with the level
of interest rates. To the extent that interest income and interest expense do
not respond equally to interest rate changes, earnings will be impacted.
As shown in Table 12, Citizens' asset and liability rate repricings are
generally matched in all time periods with liabilities repricing slightly faster
than assets. This means that liabilities will respond slightly faster to
changes in interest rates and net interest income would be impacted $1.2
million positively if interest rates declined 100 basis points, and negatively
if interest rates rose 100 basis points. This table shows the sensitivity of
the balance sheet at one point in time and is not necessarily indicative of the
position on other dates.
<PAGE>
<TABLE>
Table 12
<CAPTION>
Interest Rate Sensitivity Analysis at December 31, 1995
Interest Sensitivity Period
0-90
days
91-180
days
181-365
days
Total
one year
Over 1 year &
stable rate
Total
(Dollars in thousands)
<S>
<C>
<C>
<C>
<C>
<C>
<C>
Assets:
Securities:
Available for sale
Taxable held to maturity
Tax-exempt held to maturity
Loans and lease receivables, net
Other assets
Total assets
$ 371,684
90,244
12,058
972,083
-
$1,446,069
$ 30,008
58,635
789
116,239
-
$ 205,671
$ 15,149
227,821
6,037
181,347
-
$ 430,354
$ 416,841
376,700
18,884
1,263,669
-
$2,082,094
$ 55,148
614,515
9,609
956,730
321,591
$1,957,593
$ 471,989
991,215
28,493
2,226,399
321,591
$4,039,687
Liabilities and Stockholders' Equity:
Noninterest-bearing deposits
Interest-bearing deposits
Short-term borrowings
Other liabilities
Stockholders' equity
Total liabilities and
stockholders' equity
$ -
859,071
644,183
-
-
$1,503,254
$ -
186,770
-
-
-
$ 186,770
$ -
514,838
-
-
-
$ 514,838
$ -
1,560,679
644,183
-
-
$2,204,862
$ 639,667
846,509
-
14,458
334,191
$1,834,825
$ 639,667
2,407,188
644,183
14,458
334,191
$4,039,687
Interest sensitivity gap:
Dollar amount
$ (57,185)
$ 18,901
$(84,484)
$(122,768)
$ 122,768
Percent of total assets
(1.42)%
0.47%
(2.09)%
(3.04)%
3.04%
</TABLE>
Management believes that rate risk is best measured by simulation modeling
which can incorporate changes in asset and liability volumes and changes in
interest rates, as well as the associated timing of the rate change in interest
rates of various categories of assets and liabilities. The Corporation policy
limit for the maximum negative impact on net interest income from a 100 basis
point rate change over 12 months is 5%. Management has generally maintained a
risk position well within the policy guideline level. As of December 31, 1995,
the current impact of a 100 basis rate increase in rates over 12 months would
be a reduction of approximately 1.5% in net interest income.
The scheduled repayments and maturities of loans also represent a substantial
source of liquidity for the Corporation. Table 13 shows the loan maturities
of selected categories of loans at December 31, 1995.
<TABLE>
Table 13
<CAPTION>
Loan Maturity at December 31, 1995
Within
1 year
1-5 years
After
5 years
Total
(Dollars in thousands)
<S>
<C>
<C>
<C>
<C>
Commercial, financial and agricultural
Real estate-construction and land development
Total
Loans maturing after one year with:
Fixed interest rates
Variable interest rates
Total
$ 314,989
76,259
$ 391,248
$ 64,651
52,554
$ 117,205
$ 55,859
61,346
$ 117,205
$ 1,167
15,421
$ 16,588
$ 16,376
212
$ 16,588
$ 380,807
144,234
$ 525,041
$ 72,235
61,558
$ 133,793
</TABLE>
<PAGE>
Capital Resources. The Corporation maintains a strong capital base to merit
the confidence of clients, shareholders, bank regulators and the investing
public. A strong capital position enables the Corporation to withstand
unforeseen adverse developments and take advantage of profitable investment
opportunities when they arise.
The Federal Reserve Board sets standards for measuring capital adequacy for U.S.
banking organizations. In general, the standards require banks and bank holding
companies to maintain capital based on "risk-adjusted" assets so that categories
of assets with potentially higher credit risk will require more capital backing
than assets with lower risk. In addition, banks and bank holding companies are
required to maintain capital to support certain off-balance-sheet activities.
The Federal Reserve Board standards classify capital into two tiers, referred
to as Tier 1 and Tier 2. Tier 1 capital consists of common stockholders'
equity, non-cumulative and cumulative perpetual preferred stock and minority
interests less goodwill. Tier 2 capital consists of the allowance for loan and
lease losses, perpetual preferred stock, hybrid capital instruments, term
subordinated debt, and intermediate term preferred stock. As of December 31,
1995 the Corporation's Tier 1 capital and total capital ratios were 12.30% and
13.54% of risk-adjusted assets, respectively. These risk-based capital ratios
are well above the minimums required of 4% for Tier 1 and 8% for total risk-
based capital ratios. The Corporation's leverage ratio (Tier 1 capital to
fourth quarter average assets) of 8.77% at December 31, 1995 was also well in
excess of the 3% minimum requirement. The Corporation and all of its bank
subsidiaries were in compliance with their specific regulatory capital
requirements.
Table 14 below illustrates the Corporation's regulatory capital ratios at
December 31:
<TABLE>
Table 14
<CAPTION>
Risk-Based Capital
1995
1994
(Dollars in thousands)
<S>
<C>
<C>
Tier 1 capital
Tier 2 capital
Total qualifying capital
Risk adjusted total assets
(including off-balance-sheet exposures)
$ 333,150
33,897
$ 367,047
$2,711,547
$ 304,495
29,745
$ 334,240
$2,379,587
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Leverage ratio
12.30%
13.54
8.77
12.80%
14.05
8.84
</TABLE>
In addition to these regulatory requirements, a certain level of capital growth
is necessary in order to maintain appropriate ratios of equity to total assets.
As shown in Table 1 on selected financial data, growth in total average assets
was 10.3% in 1995 and 5.7% in 1994. However, capital growth was 7.1% in 1995
as compared to 5.0% in 1994. At December 31, 1995, common stockholders' equity
increased $27.8 million over 1994. The primary source of common equity growth
was retained earnings, which increased $24.3 million or 15.9%. Total dividends
paid in 1995 amounted to $16.8 million compared to $16.1 million in 1994.
<TABLE>
Table 15
<CAPTION>
Relationship Between Significant Equity Ratios
1995 1994 1993
<S> <C> <C> <C>
Return on equity 11.25% 10.37% 9.41%
Earnings retained 53.38 48.22 40.59
Internal capital growth 6.01 5.01 3.82
</TABLE>
Regulatory Matters
During 1995, federal and state regulatory agencies completed examinations at all
subsidiary banks. The Corporation's level and classification of identified
potential problem loans were not significantly revised. Examination procedures
require individual judgements as to the borrower's ability to repay, sufficiency
of collateral values and the impacts of changing economic conditions. These
procedures are similar to management's methodology in determining the adequacy
of the allowance for loan losses and in classification of loans. Judgements
made by regulators may differ from those made by management.
<PAGE>
Management and the Boards of Directors of the Bancorp and its subsidiaries
evaluate existing practices and procedures on an ongoing basis. In addition,
regulators make recommendations during the course of their examinations.
Management and the Boards of Directors of the Bancorp and its subsidiaries
consider such recommendations promptly. There were no current recommendations
by the regulatory authorities which, if they were to be implemented, would have
a material effect on liquidity, capital resources or operations.
Quarterly Results of Operations
Table 16 is a summary of the quarterly results of operations for the years ended
December 31, 1995 and 1994.
<TABLE>
Table 16
<CAPTION>
Consolidated Quarterly Summary of Operations
1995
1994
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
(Dollars in thousands, except per share data)
<S>
<C>
<C>
<C>
<C>
<C>
<C>
<C>
<C>
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for
loan losses
Other income
Other expenses
Income before income taxes
Income taxes
Net income
Per share data:
Average common shares outstanding
Net income
Dividends
Market price:
High
Low
Close
$66,457
33,202
33,255
1,575
31,680
11,718
28,441
14,957
5,694
$ 9,263
15,007
$ .62
.28
34.75
31.75
32.25
$65,139
30,980
34,159
1,825
32,334
10,126
27,228
15,232
5,783
$ 9,449
14,992
$ .63
.28
33.25
29.00
33.25
$65,972
31,492
34,480
1,575
32,905
9,743
28,450
14,198
5,422
$ 8,776
14,979
$ .59
.28
30.50
25.25
29.25
$62,404
28,183
34,221
1,720
32,501
8,862
27,645
13,718
5,116
$ 8,602
14,958
$ .58
.28
27.00
25.00
25.50
$58,659
24,317
34,342
1,347
32,995
8,786
29,044
12,737
4,726
$ 8,011
14,879
$ .54
.27
30.25
25.00
26.75
$55,843
22,255
33,588
1,590
31,998
9,292
28,275
13,015
4,955
$ 8,060
14,863
$ .54
.27
31.50
29.50
30.25
$52,847
19,936
32,911
1,715
31,196
9,117
27,820
12,493
4,691
$ 7,802
14,847
$ .53
.27
29.25
27.25
28.50
$49,478
18,461
31,017
1,515
29,502
8,510
26,570
11,442
4,275
$ 7,167
14,931
$ .48
.27
30.50
26.00
28.50
</TABLE>
Net income for the fourth quarter of 1995 was $9.3 million, an increase of
$1.3 million over the 1994 fourth quarter. The principal factors responsible
for the 1995 fourth quarter increase included:
Net interest income of $33.3 million was $1.1 million less than the comparable
1994 quarter due to a 49 basis point decline in the net interest margin as
deposit rates increased at a faster rate than earning asset rates.
The provision for loan losses of $1.6 million was $228 thousand (16.9%) greater
than the 1994 fourth quarter due to a higher volume of loan outstandings.
Other income of $11.7 million was $2.9 million (33.3%) greater than the
comparable 1994 quarter due to a $1.9 million gain on sale of lease residuals
and a $1.0 million increase in revenue contribution from mortgage banking
activities.
Other expenses of $28.4 million were flat to the comparable 1994 quarter as $1.3
million in reduced FDIC premiums were offset by higher spending levels in
advertising, consulting, legal and general operating expenses.
Income taxes of $5.7 million were $968 thousand greater than the 1994 fourth
quarter due to higher levels of taxable earnings.
<PAGE>
RESULTS OF OPERATIONS
1994 VS. 1993
Net income for 1994 totaled $31.0 million and represented returns of 10.37% on
stockholders' equity and .90% on assets versus net income of $26.8 million and
returns of 9.41% and .82%, respectively, in 1993.
Taxable equivalent net interest income increased 7.7%, the result of $188.4
million in additional interest-earning assets outstanding during 1994. The net
yield on interest-earning assets rose 5 basis points.
Taxable equivalent interest income increased 4.8%, reflecting a 10 basis point
drop in the average rate earned which was offset by a 6.3% increase in average
interest-earning assets. Loans grew $118.1 million, with gains in real estate,
commercial and consumer loans. Investment securities were higher by 14.4%.
Interest expense increased only .5%, primarily the result of higher average
balances in short-term borrowings. Average noninterest-bearing demand deposits
were higher by 7.4%, offsetting the expense increase. Total interest-bearing
deposits declined 3.0% with savings and demand up 6.3%, while money market
savings and time certificates declined a combined 9.7%.
Non-performing assets at year-end 1994 dropped 24.4% from a year earlier to
$37.0 million or 1.88% of loans and real estate acquired in settlement of loans.
Net loan losses were lower by 53.0% and totaled $3.0 million or .17% of loans
compared with $6.4 million or .38% of loans in 1993. The provision for loan
losses declined 46.2% to $6.2 million and exceeded net charge-offs by $3.2
million. The allowance for loan losses at December 31, 1994 totaled $32.2
million or 1.65% of loans and 169.0% coverage of non-accrual loans versus
$29.1 million or 1.64% of loans and 125.8% coverage a year earlier.
Higher levels of provision and charge-offs in 1993 relative to 1994 were related
to the recession and general softness in the Washington and Baltimore Common
Market. Moderate economic activity in 1994, while less robust than previous
business cycles, provided some relief to borrowers and losses declined.
Other income was essentially flat year to year. Deposit account service
revenues were down 4.2% due to lower transaction volume related to severe
winter weather. Mortgage banking revenues and point of sale transaction fees
offset the decline.
Other expense for the year increased 6.6% from 1993. Total personnel expense
increased 2.0%. Modest growth occurred in new business areas of insurance,
brokerage, cash management, and mortgage banking, offset by reductions in the
branch network due to branch consolidations. Expenses related to foreclosed
property, credit card processing costs and occupancy increased from the previous
year by $697 thousand, $541 thousand, and $2.7 million, respectively.
<PAGE>
<TABLE>
Item 8. Financial Statements and Supplementary Data
<CAPTION>
Consolidated Statements of Financial Condition
December 31,
1995
1994
(Dollars in thousands)
<S>
<C>
<C>
Assets
Cash and cash equivalents
Securities available for sale (at fair value, amortized cost of
$468,614 and $236,637, respectively)
Securities held to maturity (at amortized cost, fair value of
$1,019,600 and $1,132,082, respectively)
Loans and leases, net of unearned income
Less allowance for loan losses
Net loans and leases
Premises and equipment, net
Accrued income and other assets
Total assets
$ 199,001
471,989
1,019,708
2,226,399
34,145
2,192,254
55,497
101,238
$4,039,687
$ 215,114
232,150
1,195,219
1,953,211
32,249
1,920,962
57,872
66,811
$3,688,128
</TABLE>
<TABLE>
<CAPTION>
Liabilities
<S>
Deposits:
Noninterest-bearing
Demand
Money market
Savings
Time certificates
Total deposits
Short-term borrowings
Other liabilities
Total liabilities
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $10.00 par value; 2,500,000 shares authorized; none issued
Common stock, $2.50 par value; 125,000,000 shares authorized;
shares issued, 15,056,981 (1995) and 14,931,843 (1994)
Capital surplus
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
<FN>
See notes to consolidated financial statements.
<C>
$ 639,667
372,218
402,728
550,670
1,081,572
3,046,855
644,183
14,458
3,705,496
37,642
120,185
176,364
334,191
$4,039,687
<C>
$ 692,025
349,229
465,850
629,566
645,605
2,782,275
588,295
11,179
3,381,749
37,330
116,939
152,110
306,379
$3,688,128
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
Year ended December 31,
1995
1994
1993
(Dollars in thousands, except per share data)
<S>
<C>
<C>
<C>
Interest Income
Interest and fees on loans and leases
Interest and dividends on:
Securities available for sale
Securities held to maturity
Interest on federal funds sold and securities
purchased under resale agreements
Total interest income
Interest Expense
Interest on deposits
Interest on short-term borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
$ 171,594
23,363
65,015
-
259,972
90,393
33,464
123,857
136,115
6,695
129,420
$ 143,118
10,837
62,269
603
216,827
70,613
14,356
84,969
131,858
6,167
125,691
$ 136,906
-
65,158
3,886
205,950
81,013
3,506
84,519
121,431
11,465
109,966
Other Income
Service charges on deposits
Other service charges and fees
Insurance and brokerage fees
Other
Total other income
Other Expenses
Compensation and employee benefits
Occupancy and equipment
Other
Total other expenses
Income before income taxes
Income taxes
Net income
Per Share of Common Stock
Net income
<FN>
20,226
8,324
2,555
9,344
40,449
57,149
21,733
32,882
111,764
58,105
22,015
$ 36,090
$ 2.40
19,868
6,415
3,129
6,293
35,705
54,106
23,184
34,419
111,709
49,687
18,647
$ 31,040
$ 2.09
20,741
6,056
3,393
5,440
35,630
53,058
9,625
32,067
104,750
40,846
14,016
$ 26,830
$ 1.82
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1995, 1994 and 1993
Common Stock
Shares
Amount
Capital
Surplus
Retained
Earnings
Total
(Dollars in thousands except per share data)
<S>
<C>
<C>
<C>
<C>
<C>
Balance, January 1, 1993
Net income
Cash dividends paid on
common stock ($1.08 per share)
Shares of common stock sold
Balance, December 31, 1993
Net income
Effect of adopting SFAS 115
at Jan. 1, 1994
Cash dividends paid on
common stock ($1.08 per share)
Shares of common stock sold
Net change in unrealized loss on
securities available for sale
Balance, December 31, 1994
Net income
Cash dividends paid on
common stock ($1.12 per share)
Shares of common stock sold
Net change in unrealized gain on
securities available for sale
Balance, December 31, 1995
<FN>
See notes to consolidated financial statements.
14,666,382
138,363
14,804,745
127,098
14,931,843
125,138
15,056,981
$36,666
346
37,012
318
37,330
312
$37,642
$110,583
3,101
113,684
3,255
116,939
3,246
$120,185
$129,090
26,830
(15,940)
139,980
31,040
603
(16,072)
(3,441)
152,110
36,090
(16,825)
4,989
$176,364
$276,339
26,830
(15,940)
3,447
290,676
31,040
603
(16,072)
3,573
(3,441)
306,379
36,090
(16,825)
3,558
4,989
$334,191
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Year ended December 31,
1995
1994
1993
(Dollars in thousands)
<S>
<C>
<C>
<C>
Operating Activities
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Loans originated for sale
Loans sold
Provision for loan losses
Provision for losses on real estate acquired in
settlement of loans
Depreciation and amortization
Amortization of intangible assets
Net amortization/accretion of premium/discount on securities
Increase in accrued income and other assets
Increase (decrease) in other liabilities
Other
Net cash provided by operating activities
$ 36,090
(114,791)
100,188
6,695
1,781
7,225
1,481
296
(33,520)
2,054
(1,410)
6,089
$ 31,040
(63,421)
57,959
6,167
3,750
6,505
1,424
3,880
(6,510)
(4,010)
(123)
36,661
$ 26,830
-
-
11,465
3,108
5,195
1,395
6,741
(5,623)
651
768
50,530
Investing Activities
Proceeds from maturities and sales of investment securities:
Available for sale
Held to maturity
Purchases of investment securities:
Available for sale
Held to maturity
Net decrease in federal funds sold and securities purchased under
resale agreements
Net increase in loans and lease receivables
Purchases of premises and equipment
Proceeds from sale of real estate acquired in
settlement of loans
Development costs of real estate acquired in
settlement of loans
Other
Net cash used in investing activities
157,846
196,538
(388,989)
(22,159)
-
(272,225)
(4,960)
7,158
(2,687)
75
(329,403)
230,406
427,035
(410,700)
(474,779)
6,038
(177,116)
(8,840)
7,215
(2,877)
57
(403,561)
-
754,160
-
(912,919)
156,962
(85,963)
(8,984)
5,317
(994)
216
(92,205)
Financing Activities
Net (decrease) increase in noninterest-bearing deposits
Net increase (decrease) in interest-bearing deposits
Net increase in short-term borrowings
Sale of common stock
Cash dividends paid on common stock
Net cash provided by (used in) financing activities
Net (Decrease) Increase in Cash and Cash Equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
(52,358)
316,938
55,888
3,558
(16,825)
307,201
(16,113)
215,114
$ 199,001
64,189
(123,497)
465,130
3,573
(16,072)
393,323
26,423
188,691
$ 215,114
35,288
(31,908)
9,039
3,447
(15,940)
(74)
(41,749)
230,440
$ 188,691
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Note 1
Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the
accounts of Citizens Bancorp and its subsidiaries (the Corporation) after
elimination of all material intercompany balances and transactions. No segment
of its business, other than commercial banking, is significant in relation to
consolidated total assets and revenues.
Pervasiveness of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and 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.
Cash and Cash Equivalents. Cash on hand, cash items in process of collection
and amounts due from correspondent banks and the Federal Reserve Bank are
included in cash and cash equivalents.
Investment Securities. Effective January 1, 1994, the Corporation adopted
Statement of Financial Accounting Standards No. (SFAS) 115, "Accounting for
Certain Investments in Debt and Equity Securities." Investments in debt and
equity securities designated as held to maturity are carried at amortized cost
and require the Corporation to have both the intent and ability to hold those
securities until maturity. Investments classified as available for sale are
reported at fair value, with unrealized gains and losses reported as a separate
component of stockholders' equity. Realized gains or losses on the sale of
securities are reported in earnings and determined using the adjusted cost of
the specific security sold. The Corporation does not carry any trading account
securities.
Prior to the adoption of SFAS 115, the Corporation carried securities with the
intention to be held to maturity at amortized cost. All securities intended
for sale were carried at the lower of cost or fair value. Changes in the
carrying value of securities held for sale were reflected in earnings as
security gains or losses.
Loans and Lease Receivables. Loans and lease receivables are stated at the
principal amount outstanding, net of deferred loan fees and unearned income on
certain consumer loans and leases made on a discounted basis. Interest on
loans, except for certain installment loans, is computed using the simple
interest method. Interest income on consumer loans made on a discounted basis
is calculated using methods which provide approximately level rates of return
over the terms of such loans. Direct lease transactions are accounted for using
the financing method of accounting for financial reporting purposes and the
operating method for tax reporting purposes.
Loan fees and related direct loan origination costs are deferred and recognized
as an adjustment of yield over the life of the loan or currently upon the sale
or repayment of the loans.
The accrual of interest income is discontinued on loans which are past due
ninety or more days as to principal or interest payments, except for certain
guaranteed loans and other limited exceptions. When loans are placed on
nonaccrual status, interest accrued in the current year is charged against
interest income, and interest accrued in prior years is charged to the
allowance for loan losses. Loans may be reinstated to accrual status when all
payments are brought current and, in the opinion of management, collection of
the remaining balance can reasonably be expected. The classification of a loan
as nonaccrual is not necessarily indicative of a potential loan loss.
The allowance for loan losses is maintained at a level believed by management to
be adequate to absorb potential losses inherent in the loan portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of past loan loss experience, current economic conditions, volume,
growth and composition of the loan portfolio and other relevant factors. The
allowance is increased by provisions for loan losses charged against income.
The amounts the Corporation will ultimately realize could differ from those
estimates.
Effective January 1, 1995, the Corporation adopted SFAS 114, "Accounting By
Creditors for Impairment of a Loan." This Statement required the Corporation
to measure the value of each impaired loan based on the present value of its
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, the loan's observable market price or the fair value
of the collateral if the loan is collateral dependent. Effective January 1,
1995, the Corporation adopted SFAS 118, "Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosures." This Statement amends SFAS 114,
to allow creditors to use existing methods for recognizing interest income on
impaired loans. The Corporation's adoption of these Statements did not have a
material impact on its financial position or results of operations.
Premises and Equipment. Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of
the assets. Expenditures for repairs and maintenance are charged to other
expenses as incurred. Expenditures for improvements which extend the life of an
asset are capitalized and amortized over the individual asset's remaining
useful life or the lease term, if shorter.
<PAGE>
Intangible Assets. The excess of purchase price paid over the fair value of the
net assets of banks acquired and the value of core deposits assigned are being
amortized over periods of five to twelve years using the straight-line method.
Real Estate Acquired in Settlement of Loans. Real estate acquired in settlement
of loans represents properties acquired through foreclosures or other
proceedings in satisfaction of indebtedness. At the date of acquisition, such
property is recorded at fair value. Write-downs to fair value at the date of
acquisition are charged to the allowance for loan losses. Subsequent to
acquisition, the property is adjusted to the lower of cost or fair value less
estimated costs to sell. Valuation reserves have been provided as necessary to
adjust the properties to the lower of cost or fair value less estimated costs
to sell. Increases or decreases in the valuation reserves, operating expenses,
and gains or losses on disposition of real estate are recognized in other
expense in the period in which they are incurred.
Real estate acquired in settlement of loans include management's best estimates
of the amounts to be realized on the sale of the property. The amounts the
Corporation will ultimately realize could differ materially from the amounts
assumed in arriving at the fair value of the property.
Income Taxes. The Corporation files a consolidated Federal income tax return
with its subsidiaries. The Corporation recognizes the amount of taxes payable
or refundable in the current year and deferred tax liabilities and assets for
the future tax consequences of events that have been recognized in the
Corporation's financial statements or tax returns. In addition, the
Corporation is required to reduce any deferred tax assets by the amount of any
tax benefit that more than likely will not be realized.
Postretirement Benefits. The Corporation accrues the estimated cost of retiree
benefit payments during the years the employee provides services. The
Corporation has elected to amortize the accumulated benefit obligation existing
at the January 1,1993 adoption date over a period of 20 years.
Postemployment Benefits. Effective January 1, 1994, the Corporation adopted SFAS
112, "Employers' Accounting for Postemployment Benefits." The Corporation
accrues expenses for benefits provided to former or inactive employees after
employment but before retirement if the obligation is attributable to employee
services already rendered, if employees' rights to those benefits accumulate or
vest, if payment of the benefits is probable and if the amount of benefits can
be reasonably estimated. The Corporation's adoption of this Statement did not
have a material impact on its financial position or results of operations.
Earnings Per Share. Earnings per share are based on a weighted average number
of shares outstanding of 15,007,371 in 1995, 14,878,708 in 1994 and 14,748,482
in 1993. The dilutive effect of stock options is not material for any of the
three years.
Statement of Cash Flows. Cash paid for interest and income taxes for the years
presented was as follows (Dollars in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1995
1994
1993
<S>
<C>
<C>
<C>
Interest paid
Income taxes paid
Non-cash transfers from loans receivable to real
estate acquired in settlement of loans
$122,385
$ 21,091
$ 8,842
$ 87,190
$ 22,938
$ (132)
$ 85,974
$ 15,622
$ 5,957
</TABLE>
New Accounting Pronouncements. In March 1995, the Financial Accounting
Standards Board issued SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets Disposed Of." This Statement prescribes the
accounting for the impairment of long-lived assets, such as property, plant and
equipment, identifiable intangible assets and goodwill related to those assets.
An impairment loss is recorded when the undiscounted cashflows from the use and
eventual disposal of the asset is less than the carrying value of the asset.
The Corporation does not believe that the adoption of this Statement will have a
material impact on its financial position or results of operations. The
Corporation plans to adopt this Statement effective January 1,1996.
In May 1995, the Financial Accounting Standards Board issued SFAS 122,
"Accounting for Mortgage Servicing Rights." This Statement, among other items,
will require the Corporation to capitalize the fair value of mortgage servicing
rights for loans originated at the time a loan is sold with the servicing
retained by the seller. The Corporation does not believe that the adoption of
this Statement will have a material impact on its financial position or results
of operations. The Corporation plans to adopt this Statement effective January
1, 1996.
In October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock-Based Compensation." This Statement gives the Corporation
the option of either 1) continuing to account for stock options and other forms
of stock compensation under the current accounting rules (APB No. 25,
"Accounting for Stock Issued to Employees") while providing the disclosures
required under SFAS 123 or 2) adopting SFAS 123 accounting for all stock
compensation arrangements. The Corporation plans to continue to account for
stock options under the current accounting rules and provide the additional
disclosures as of January 1, 1996. The Corporation does not believe that the
adoption of this Statement will have a material impact on its financial
condition or results of operations.
<PAGE>
Note 2
Investment Securities
On January 1, 1994, the Corporation adopted SFAS 115 related to accounting for
investments in debt and equity securities. The adoption of SFAS 115 resulted
in an increase in stockholders' equity of $603 thousand for the unrealized gain,
net of income taxes, of securities classified as available for sale at January
1, 1994. At December 31, 1995 and 1994, the securities available for sale
portfolio was marked to fair value resulting in a net unrealized gain/(loss) of
approximately $3.4 million and $(4.5) million, respectively, which was included
in stockholders' equity at $2.2 million and $(2.8) million on an after-tax
basis.
Securities at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale:
(Dollars in thousands)
U.S. Treasury and government agencies
Mortgage-backed securities
Other
Held to Maturity:
U.S. Treasury and government agencies
State and municipal securities
Mortgage-backed securities
Other
$ 158,551
301,803
8,260
$ 468,614
$ 210,686
28,493
759,423
21,106
$1,019,708
$ 560
2,919
-
$3,479
$ 821
1,349
2,581
71
$4,822
$ (25)
(79)
-
$ (104)
$ (1,274)
- -
(3,644)
(12)
$(4,930)
$ 159,086
304,643
8,260
$ 471,989
$ 210,233
29,842
758,360
21,165
$1,019,600
$ 97,048
138,463
1,126
$ 236,637
$ 251,257
32,799
889,815
21,348
$1,195,219
$ 1
10
-
$ 11
$ 11
662
134
-
$807
$ (1,206)
(3,292)
-
$ (4,498)
$(14,219)
(22)
(49,667)
(36)
$(63,944)
$ 95,843
135,181
1,126
$ 232,150
$ 237,049
33,439
840,282
21,312
$1,132,082
</TABLE>
Mortgage-backed securities are all issued and guaranteed by various government
agencies and are composed of pass-through certificates representing interests
in pools of fixed and variable interest rate single family mortgage loans
originated for terms of 15 or 30 years. However, very few of these loans have
historically remained outstanding for their entire term and management
anticipates similar repayments will occur in the future. Generally scheduled
payments gradually reduce the outstanding balance until the underlying property
is sold and the loan paid off.
At December 31, 1995, obligations of state and political subdivisions and other
corporate obligations had the following ratings, according to Standard and
Poor's and/or Moody's Investors Service: 9.3% are triple A or double A; 40.3%
are single A and 50.4% are below A or not rated. In the opinion of management,
there was no investment in securities at either December 31, 1995 or 1994 which
would constitute a material credit risk for the Corporation. All of these
securities trade in liquid markets with the exception of not rated local
municipalities which represented less than 1.0% of investment securities.
At December 31, 1995 and 1994, securities with a carrying value of $380,462,659
and $376,799,000, respectively, were pledged primarily for securities sold
under agreements to repurchase and for public deposits, as required or permitted
by law. Securities available for sale with a carrying value of $15,508,475 were
sold in 1995 for $15,641,906, resulting in a net gain of $133,431. There were
no sales of investment securities in 1994 or 1993.
The contractual maturities of securities at December 31, 1995 are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Included in the due after five and ten year categories
are mortgage-backed securities which were purchased with initital expected
maturities of one to six years.
<PAGE>
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
(Dollars in thousands)
<S>
<C>
<C>
<C>
<C>
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Equity securities
$ 107,105
51,446
-
301,803
460,354
8,260
$ 468,614
$ 107,318
51,768
-
304,643
463,729
8,260
$ 471,989
$ 74,613
214,978
246,970
483,147
1,019,708
-
$1,019,708
$ 75,442
214,380
247,213
482,565
1,019,600
-
$1,019,600
</TABLE>
Note 3
Loans and Allowance for Loan Losses
Loans at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1995
1994
(Dollars in thousands)
<S>
<C>
<C>
Consumer
Real estate - mortgage
Real estate - construction and land development
Commercial, financial and other
Lease financing
Less: Unearned income
Allowance for loan losses
Net loan and lease receivables
$ 741,256
959,535
144,234
380,807
5,899
2,231,731
5,332
34,145
$2,192,254
$ 660,977
815,234
121,982
360,401
7,173
1,965,767
12,556
32,249
$1,920,962
</TABLE>
In 1995, consumer loans included $635.5 million (28.5% of total loans) of
automobile loans purchased from automobile dealers. To the extent that
automobile manufacturers slow production or there is a slowdown in consumer
auto purchases, operating results could be adversely affected.
Real estate mortgage loans at December 31, 1995 included $248.3 million (11.0%
of total loans) of owner-occupied commercial mortgages. These loans carry
greater risk than residential mortgages and contribute a higher percentage of
the Corporation's operating results.
Commercial, financial and other loans at December 31, 1995 included $103.8
million (4.7% of total loans) of floor plan loans to automobile dealers. These
loans fund the automobile inventory of the dealership. The Corporation's
operating results could be adversely affected by a slowdown in automobile sales.
Approximately 95% of the Corporation's loans were made to customers in the
Washington metropolitan market. Therefore, the Corporation's operating results
are related to the overall economic activity in this geographic market.
Loans, net of amounts charged-off, on which the accrual of interest has been
discontinued are summarized below:
<TABLE>
<CAPTION>
Year ended December 31,
1995
1994
1993
(Dollars in thousands)
<S>
<C>
<C>
<C>
Nonaccrual loans
Gross interest income which would have
been recorded on nonaccrual loans
Interest income on these loans
actually included in income
$ 14,278
$ 1,094
$ 75
$ 19,081
$ 1,481
$ 163
$ 23,129
$ 1,430
$ 319
</TABLE>
At December 31, 1995 the Corporation had no significant outstanding commitments
to lend additional funds to borrowers on nonaccrual loans.
<PAGE>
Activity in the Allowance for Loan Losses is summarized as follows:
<TABLE>
Year ended December 31,
1995
1994
1993
(Dollars in thousands)
<S>
<C>
<C>
<C>
Balance, begining of year
Loans charged-off
Recoveries on loans charged-off
Provision for loans losses
Balance, end of year
$ 32,249
(6,083)
1,284
6,695
$ 34,145
$ 29,099
(6,247)
3,230
6,167
$ 32,249
$ 24,058
(10,130)
3,706
11,465
$ 29,099
</TABLE>
It is the policy of the Corporation to review and evaluate each individual loan
request to determine an appropriate level of security or collateral to obtain
prior to making the loan. The type of collateral will vary based on the
specific request and may range from liquid assets to real estate. The
Corporation protects its access to collateral, in the event of a default by the
borrower, by complying with all state lending laws and adhering to sound lending
practices and credit monitoring procedures. The Corporation closely monitors
its nonperforming assets and routinely reviews the loan portfolio for
concentrations based on loan purpose, industry and collateral type.
Loans that became impaired after January 1, 1995 averaged $2.2 million. A
specific allowance of $300,000 for impaired loans has been set aside for these
loans, as management's best estimate of their fair value is less than the
recorded investment in the loans. During 1995, there were no charges to
operations, direct write-downs charged against an impaired loan allowance, or
previously charged-off amounts to recover. The amounts the Corporation will
ultimately realize on these impaired loans could differ from these estimates
in the near term.
Real estate acquired in settlement of loans included in other assets amounted to
$21.4 million, $18.0 million and $26.0 million on December 31, 1995, 1994 and
1993, respectively, which is net of reserves of $6.1 million, $6.3 million and
$3.9 million. Expenses related to real estate acquired in settlement of loans
are included in other expenses, net of any gains recognized on the sale of such
properties. These expenses totalled $1.0 million, $3.6 million and $2.9 million
in 1995, 1994 and 1993, respectively.
The subsidiary banks, in the normal course of banking business, have granted
loans and extended letters of credit to certain directors and executive
officers, as well as to companies and individuals affiliated with those officers
and directors. In the opinion of management, these loans are consistent with
banking practices, are made on terms similar to comparable transactions with
unrelated parties, are within regulatory lending limitations, and do not
involve more than normal risk of collectibility. The aggregate amount of
loans was $66.5 million and $72.1 million at December 31, 1995 and 1994,
respectively. During 1995, $15.2 million in new loans were made, and repayments
totaled $20.8 million.
Loans held for sale at December 31, along with activity during the period, are
summarized as follows:
<TABLE>
1995
1994
(Dollars in thousands)
<S>
<C>
<C>
Balance, beginning of year
Originations/purchases
Sales/transfers
Balance, end of year
$ 5,462
114,791
(100,188)
$ 20,065
$ -
63,421
(57,959)
$ 5,462
</TABLE>
<TABLE>
Note 4
Premises, Equipment and Lease Commitments
<CAPTION>
Premises and equipment is summarized as follows:
December 31,
1995
1994
(Dollars in thousands)
<S>
<C>
<C>
Buildings and leasehold improvements
Equipment
Land
Accumulated depreciation and amortization
Net premises and equipment
$ 61,225
36,739
6,273
104,237
(48,740)
$ 55,497
$ 60,546
35,550
6,503
102,599
(44,727)
$ 57,872
</TABLE>
<PAGE>
The banking subsidiaries conduct a major part of their operation from leased
facilities. At December 31, 1995, the minimum future noncancellable operating
leases aggregated to $31.5 million, and for the next five years were $5.5
million, $5.0 million, $4.4 million, $3.6 million, $2.8 million and $10.2
million thereafter.
The net rental expense charged to operating expenses in 1995, 1994 and 1993 was
approximately $6.3 million, $6.9 million and $6.5 million, respectively.
Certain leases have various renewal options and require increased rentals
under cost of living escalation clauses.
<TABLE>
Note 5
Short-Term Borrowings
Short-term borrowings with maturities of less than one year are summarized as
follows:
<CAPTION>
Year ended December 31,
1995
1994
1993
Amount
Rate
Amount
Rate
Amount
Rate
(Dollars in thousands)
<S>
<C>
<C>
<C>
<C>
<C>
<C>
Average for the year:
Securities sold under agreement to repurchase
Federal funds purchased
$ 268,450
297,929
5.49%
5.97
$ 203,785
116,488
4.05%
4.95
$ 119,967
1,719
2.74%
3.13
At year-end:
Securities sold under agreement to repurchase
Federal funds purchased
Commercial paper
Total
$ 260,987
360,000
23,196
$ 644,183
5.06%
5.81
5.06
5.48%
$ 268,829
310,000
9,466
$ 588,295
5.30%
6.29
4.96
5.82%
$ 119,152
-
4,013
$ 123,165
2.61%
-
2.72
2.61%
Maximum month-end balance:
Securities sold under agreement to repurchase
Federal funds purchased
$ 313,995
405,000
$ 280,862
340,000
$162,802
-
</TABLE>
<TABLE>
Note 6
Employee Benefit Plans
The Corporation has a noncontributory defined benefit pension plan, a deferred
compensation plan and a postretirement medical benefits plan covering
substantially all of its employees meeting age and length-of-service
requirements. The Corporation's policy is to fund not less than the minimum
funding amount required by the Employee Retirement Income Security Act (ERISA).
The following sets forth the funded status of the pension plan amounts as of
December 31:
<CAPTION>
1995
1994
(Dollars in thousands)
<S>
<C>
<C>
Actuarial present value of accumulated benefit obligation:
Vested
Nonvested
Total
Projected benefit obligation for services rendered to date
Plan assets at fair value, primarily listed stocks, fixed income securities and
mutual funds (including 56,092 shares of Citizens common stock)
Plan assets in excess of projected benefit obligation
Unrecognized net asset from transition, amortized over 15 years
Unrecognized prior service cost
Unrecognized net loss
Prepaid pension costs included in other assets
$15,047
394
$15,441
$19,372
20,862
1,490
(957)
(174)
4,010
$ 4,369
$12,876
575
$13,451
$16,390
16,817
427
(1,148)
(196)
4,243
$ 3,326
</TABLE>
<PAGE>
<TABLE>
Net periodic pension expense includes the following:
<CAPTION>
Year ended December 31,
1995
1994
1993
(Dollars in thousands)
<S>
<C>
<C>
<C>
Service cost benefits earned during the period
Interest cost on the projected benefit obligation
Actual return on plan assets
Net amortization and deferral
Net periodic pension expense
$ 751
1,233
(3,065)
1,753
$ 673
$ 701
1,123
148
(1,607)
$ 365
$ 648
1,038
(1,147)
(182)
$ 357
</TABLE>
The rates used in determining the actuarial present value of the projected
benefit obligation were as follows:
<TABLE>
<CAPTION>
1995
1994
1993
<S>
<C>
<C>
<C>
Discount rates
Rates of increase in compensation levels
Expected long-term rates of return on plan assets
7.0%
5.0%
8.0%
7.5%
5.0%
8.0%
7.5%
5.0%
8.0%
</TABLE>
Effective January 1, 1994, the plan changed the definition of compensation and
limited the amount of compensation used to determine benefits to $150,000 per
year. These changes increased the net periodic cost and decreased the funded
status.
The Corporation has a deferred compensation plan pursuant to Section 401(k) of
the Internal Revenue Code. The Corporation matches a portion of the
contribution made by the participant to the plan, based on a percent of the
participant's annual compensation. The Corporation's matching contribution
to the compensation plan aggregated $628,000, $794,000 and $743,000 in 1995,
1994 and 1993, respectively.
The Corporation and its subsidiaries provide certain health care benefits for
retired employees. Substantially all of the employees may become eligible for
these benefits if they reach early retirement age while employed by the
Corporation and they have the required number of years of service. The
Corporation made benefit payments totaling $186,000, $124,000 and $143,000 in
1995, 1994 and 1993 respectively. The plan is not funded and the following
table sets forth the plan's status, reconciled with amounts recognized in the
Consolidated Statement of Financial
Condition at December 31:
<TABLE>
1995
1994
(Dollars in thousands)
<S>
<C>
<C>
Accumulated postretirement benefit obligation:
Retirees
Fully eligible active plan participants
Other active plan participants
Accumulated postretirement benefit obligation
in excess of plan assets
Unrecognized net loss (gain)
Unrecognized transition obligation
Accrued postretirement benefit cost
$(2,564)
(696)
(1,098)
(4,358)
482
2,564
$(1,312)
$(1,992)
(439)
(585)
(3,016)
(501)
2,715
$ (802)
Net periodic postretirement benefit includes the following components:
Service cost
Interest cost on accumulated postretirement benefit obligation
Net amortization and deferral
Net periodic postretirement benefit cost
$ 244
291
160
$ 695
$ 182
201
134
$ 517
</TABLE>
The assumed health care cost rate used in measuring the accumulated
postretirement benefit obligation was 11.0% and 11.5% for 1995 and 1994,
respectively, decreasing annually thereafter 1/2% per year until the ultimate
trend rate of 6% is reached in 2005. The weighted-average assumed discount rate
in determining the accumulated postretirement benefit obligation was 7.5%. If
the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefit obligation as of December 31, 1995 would be
increased by $523,824 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost would increase by
$83,252.
<PAGE>
Note 7
Stockholders' Equity
Stockholder Rights Plan. During May 1989, the stockholders of the Corporation
approved a Stockholder Rights Plan (the Plan), which provides protection to
the stockholders in the event of an unsolicited attempt to acquire the
Corporation. Under the terms of the Plan, each issued and outstanding share of
common stock will receive a dividend of one Right. Each Right entitles the
stockholder to purchase ten shares of common stock of the Corporation for an
aggregate price of $25.
Stock Option Plans. The Corporation has reserved 850,000 shares of common stock
in 1995 and 1994, for issuance under its stock option plans. Options to
purchase shares of common stock are granted at a price equal to the fair
market value of the stock at the date of grant and must be exercised within
ten years. The following summarizes stock option transactions:
<TABLE>
<CAPTION>
Total
Options
Options Price
Per share
<S>
<C>
<C>
Outstanding, January 1, 1993
Granted
Exercised
Forfeited
Outstanding, January 1, 1994
Granted
Exercised
Forfeited
Outstanding, January 1, 1995
Granted
Exercised
Forfeited
Outstanding, December 31, 1995
Exercisable, December 31, 1995
365,000
105,750
(2,625)
(1,000)
467,125
96,500
(4,750)
(2,125)
556,750
79,000
(4,188)
(2,062)
629,500
498,005
$14.25 to $27.00
$22.38
$14.80 to $26.75
$14.25 to $27.00
$26.75
$14.80 to $26.75
$18.88 to $26.75
$14.25 to $27.00
$26.50 to $29.75
$18.88 to $26.75
$20.00 to $26.75
$14.25 to $29.75
$14.25 to $29.75
</TABLE>
<TABLE>
Note 8
Income Taxes
The provision for income taxes is summarized as follows:
<CAPTION>
Year ended December 31,
1995
1994
1993
(Dollars in thousands)
<S>
<C>
<C>
<C>
Current:
Federal
State
Total current
$ 19,424
2,829
22,253
$ 19,405
3,041
22,446
$ 15,015
2,264
17,279
Deferred:
Federal
State
Total deferred
Total tax expense
(219)
(19)
(238)
$ 22,015
(3,128)
(671)
(3,799)
$ 18,647
(2,672)
(591)
(3,263)
$ 14,016
</TABLE>
<PAGE>
The following reconciles the federal statutory income tax rate of 35% to the
consolidated effective income tax rate:
<TABLE>
<CAPTION>
Year ended December 31,
1995
1994
1993
(Dollars in thousands)
<S>
<C>
<C>
<C>
Tax expense at statutory rate
Increase (decrease) resulting from:
State income taxes, net of federal income tax effect
Non-taxable earnings
Dividends
Intangible assets
Change in enacted tax rate
Other
Effective tax rate
$ 20,336
1,839
(596)
- -
432
- -
4
$ 22,015
37.9%
$17,390
1,541
(733)
- -
411
- -
38
$18,647
37.5%
$ 14,296
1,099
(1,095)
(251)
390
(204)
(219)
$ 14,016
34.3%
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of items
comprising the Corporation's deferred tax assets and deferred tax liabilities at
December 31, 1995 and 1994 are as follows:
<TABLE>
Year ended December 31,
1995
1994
(Dollars in thousands)
<S>
<C>
<C>
Deferred tax assets:
Loan loss provision
Deferred fees
OREO provision
Employee benefits
Other
Gross deferred tax assets
Deferred tax liabilities:
Depreciation
Leases
Retirement plan
Investment valuation allowance
Gross deferred tax liabilities
Net deferred tax asset
$ 12,500
223
2,389
2,331
1,024
18,647
(1,014)
(585)
(1,709)
(1,208)
(4,516)
$ 13,951
$ 11,765
668
2,482
2,038
989
17,942
(1,046)
(678)
(1,297)
1,649
(1,372)
$ 16,570
</TABLE>
Note 9
Financial Instruments with Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit and financial guarantees. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statement of financial condition. The contract or
notional amounts of those instruments reflect the extent of involvement the
Corporation has in particular classes of financial instruments.
The Corporation's exposure to credit losses in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit and financial guarantees written is represented
by the contractual notional amount of those instruments. The Corporation uses
the same credit policies in making commitments and conditional obligations as
it does for on-balance-sheet instruments. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Since many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements.
Unless noted otherwise, the Corporation does not require collateral or other
security to support financial instruments with credit risk.
<PAGE>
Financial instruments whose contract or notional amounts represent credit risk
are as follows (dollars in thousands):
<TABLE>
<S> <C>
Commitments to extend credit
Standby letters of credit and financial guarantees written
$ 398,755
18,717
</TABLE>
Note 10
Fair Value of Financial Instruments
The following disclosures of the estimated fair value of financial instruments
are made in accordance with the requirements of SFAS 107, "Disclosures about
Fair Value of Financial Instruments." The estimated fair value amounts have
been determined by the Corporation using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Corporation could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
For financial instruments not described below, generally short-term financial
instruments, including borrowing positions and deposits with no maturities,
carrying amounts approximate fair value. These financial instruments generally
expose the Corporation to limited credit risk and have no stated maturities, or
have an average maturity of less than 30 days and carry interest rates which
approximate fair value.
<TABLE>
<CAPTION>
December 31,
1995
1994
(Dollars in thousands)
Carrying
Amount
Estimated Fair
Value
Carrying
Amount
Estimated Fair
Value
<S>
<C>
<C>
<C>
<C>
Financial Assets:
Securities available for sale
Securities held to maturity
Loans and lease receivables, net
Financial liabilities:
Time certificates
$ 471,989
1,019,708
2,192,254
1,081,572
$ 471,989
1,019,600
2,218,619
1,085,128
$ 232,150
1,195,219
1,920,962
645,605
$ 232,150
1,132,082
1,901,345
638,454
</TABLE>
The fair value of marketable securities is based on quoted market prices, dealer
quotes and prices obtained from independent pricing services. The fair value of
loans, time deposits and other financial instruments is estimated based on
present values using applicable risk-adjusted spreads to the U.S. Treasury
curve to approximate current entry-value interest rates applicable to each
category of such financial instruments. No adjustment was made to the entry-
value interest rates for changes in credit of performing loans for which there
are no known credit concerns. Management segregates loans into appropriate risk
categories. Management believes that the risk factor embedded in the entry-
value interest rates, along with the general reserves applicable to the
performing loan portfolios for which there are no known credit concerns,
result in a fair valuation of such loans on an entry-value basis. The fair
value of nonperforming loans was adjusted for risk factors utilizing
management's best estimates regarding potential foreclosure and subsequent sale
of collateral and the borrower's plan for the continuance of principal and
interest payments. Loan commitments are conditional and subject to market
pricing and therefore do not reflect a gain or loss of market value. The fair
value estimates presented herein are based on pertinent information available to
management as of December 31, 1995. Although management is not aware of any
factors that would significantly affect the estimated fair value amounts, such
amounts have not been comprehensively revalued for purposes of these financial
statements since that date and, therefore, current estimates of fair value may
differ significantly from the amounts presented herein.
Note 11
Requirements and Contingencies
The Corporation's banking subsidiaries are subject to Federal and State statutes
which prohibit or restrict certain activities, including the transfer of funds
to the parent company. There are restrictions on loans from the subsidiary
banks to the parent company and the subsidiary banks are limited as to the
amount of cash dividends which they can pay. The amount available for payment
of dividends in 1996 to the Corporation by its banks will be the banks' net
profits of 1996 plus the total available to dividend at December 31, 1995 of
approximately $124.5 million.
The Corporation's banking subsidiaries are required to maintain minimum average
reserve balances with the Federal Reserve Bank. During 1995 the average amount
of these required reserves was $40.9 million.
<PAGE>
In the normal course of business there are various commitments, legal
proceedings and contingencies which are not reflected in the accompanying
consolidated financial statements. Management believes, based on the opinion of
counsel, that the actions and liability or loss, if any, resulting from the
final outcome of these proceedings, will not be material in the aggregate.
Federal bank regulatory agencies set and monitor capital requirements applicable
to banking institutions. The capital framework defines elements of capital and
provides a system for relating capital to banking risk. As of December 31,
1995, 1994 and 1993, each of the Corporation's banking subsidiaries exceeded all
applicable capital requirements and were considered to be well-capitalized.
Note 12
Parent Corporation Financial Statements
Condensed financial statements of Citizens Bancorp (parent corporation only) are
as follows:
<TABLE>
Condensed Statements of Financial Condition
<CAPTION>
December 31,
1995
1994
(Dollars in thousands)
<S>
<C>
<C>
Assets
Cash in demand deposit with bank subsidiaries
Interest-bearing bank balances with bank subsidiaries
Securities available for sale
Investment in subsidiaries
Other assets
Total assets
$ 1,632
23,196
999
331,287
350
$ 357,464
$ 5,123
9,465
2,488
298,665
180
$ 315,921
</TABLE>
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity
<S>
Liabilities
Parent company commercial paper
Other liabilities
Total liabilities
Stockholders' equity
Common stock
Capital surplus
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
<C>
$ 23,196
77
23,273
37,642
120,185
176,364
334,191
$ 357,464
<C>
$ 9,465
77
9,542
37,330
116,939
152,110
306,379
$ 315,921
</TABLE>
<PAGE>
<TABLE>
Condensed Statements of Income
<CAPTION>
Year ended December 31,
1995
1994
1993
(Dollars in thousands)
<S>
<C>
<C>
<C>
Income
Dividends received from banking subsidiaries
Interest income
Total income
Expense
Interest on short-term borrowed funds
Other expenses
Total expenses
Income before taxes and equity in undistributed income of subsidiaries
Income tax benefit
Income before equity in undistributed income of subsidiaries
Equity in undistributed income of subsidiaries
$ 16,295
933
17,228
809
673
1,482
15,746
(192)
15,938
20,152
$ 15,922
394
16,316
194
640
834
15,482
(154)
15,636
15,404
$ 15,920
227
16,147
94
504
598
15,549
(130)
15,679
11,151
Net income
$ 36,090
$ 31,040
$ 26,830
</TABLE>
<TABLE>
Condensed Statements of Cash Flows
<CAPTION>
Year ended December 31,
1995
1994
1993
(Dollars in thousands)
<S>
<C>
<C>
<C>
Operating Activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiaries
Other
Net cash provided by operating activities
Investing Activities
Purchases of securities available for sale
Proceeds from maturities of securities available for sale
Capital investment in subsidiary
Purchases of equipment
Net decrease (increase) in securities purchased under resale agreements
Net cash (used in) provided by investing activities
Financing Activities
Cash dividends paid on common stock
Sale of common stock
Net increase in short-term borrowings
Net cash provided by (used in) financing activities
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
$ 36,090
(20,152)
(131)
15,807
(995)
2,500
(7,500)
(36)
-
(6,031)
(16,825)
3,558
13,731
464
10,240
14,588
$ 24,828
$ 31,040
(15,404)
143
15,779
(4,476)
5,500
(1,000)
(11)
5,800
5,813
(16,072)
3,573
5,452
(7,047)
14,545
43
$ 14,588
$ 26,830
(11,151)
3,879
19,558
(3,469)
500
(2,000)
(150)
(2,800)
(7,919)
(15,940)
3,447
842
(11,651)
(12)
55
$ 43
</TABLE>
<PAGE>
Management's Report on Responsibility for Financial Reporting
Financial Statements
The Management of Citizens Bancorp ("the Corporation") is responsible for the
preparation, integrity and fair presentation of its published financial
statements and all other information presented in this annual report. The
financial statements have been prepared in accordance with generally accepted
accounting principles and, as such, include amounts based on informed judgments
and estimates made by Management.
Internal Control
Management is responsible for establishing and maintaining an effective internal
control structure over financial reporting, including safeguarding of assets,
presented in conformity with both generally accepted accounting principles and
the Federal Financial Institutions Examination Council instructions for
Consolidated Reports of Condition and Income (Call Report instructions). The
structure contains monitoring mechanisms, and actions are taken to correct
deficiencies identified.
There are inherent limitations in the effectiveness of any structure of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control structure may vary over time.
Management assessed Citizens Bank of Maryland's ("the Bank", a wholly owned
subsidiary of the Corporation), internal control structure over financial
reporting, including safeguarding of assets, presented in conformity with
both generally accepted accounting principles and Call Report instructions as
of December 31, 1995. This assessment was based on criteria for effective
internal control over financial reporting as described in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this assessment, Management believes that
the Bank maintained an effective internal control structure over financial
reporting, including safeguarding of assets, presented in conformity with both
generally accepted accounting principles and Call Report instructions, as of
December 31, 1995.
The Audit Committee of the Board of Directors of Citizens Bancorp is comprised
entirely of outside directors who are independent of the Corporation's
Management. The Committee meets periodically with Management, the independent
auditors, and the internal auditors to ensure that they are carrying out
their responsibilities. The Committee is also responsible for performing an
oversight role by reviewing and monitoring the financial, accounting and
auditing procedures of the Corporation. The independent auditors and the
internal auditors have full and free access to the Audit Committee, with or
without the presence of Management, to discuss the adequacy of the internal
control structure for financial reporting and any other matters which they
believe should be brought to the attention of the Committee.
Compliance with Laws and Regulations
Management is also responsible for ensuring compliance with the federal laws and
regulations concerning loans to insiders and the federal and state laws and
regulations concerning dividend restrictions, both of which are designated by
the FDIC as safety and soundness laws and regulations.
Management assessed the Bank's compliance with these designated safety and
soundness laws and regulations, and has maintained records of its determination
and assessments as required by the FDIC. Based on this assessment, Management
believes that the Bank has complied, in all material respects, with the
designated safety and soundness laws and regulations for the year ended
December 31, 1995.
/S/ ALFRED H SMITH, JR. /S/ JEFFREY R. SPRINGER /S/ KAYE A. SIMMONS
(Alfred H. Smith, Jr.) (Jeffrey R. Springer) (Kaye A. Simmons)
Chairman of the Board President Treasurer
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
Citizens Bancorp
Laurel, Maryland
We have audited the accompanying consolidated statements of financial condition
of Citizens Bancorp and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Citizens Bancorp and
Subsidiaries at December 31, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, effective January 1, 1993,
the Corporation changed its method of accounting for postretirement benefits and
income taxes and, effective January 1, 1994, changed its method of accounting
for investment securities.
Deloitte & Touche LLP
Washington, D.C.
January 19, 1996
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained on pages 3, 4, and 5 of Citizens Bancorp's Proxy
Statement dated April 5, 1996, with respect to directors and executive officers
of the Corporation, is incorporated by reference in response to this item.
Item 11. Executive Compensation
The information contained on pages 7 through 12 of Citizens Bancorp's Proxy
Statement dated April 5, 1996, with respect to executive compensation and
transactions, is incorporated by reference in response to this item. See item
14 regarding attachments for agreements and understandings relating to
compensation and termination for executive officers.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained on pages 2 through 5 of Citizens Bancorp's Proxy
Statement dated April 5, 1996, with respect to security ownership of certain
beneficial owners and management, is incorporated herein by reference in
response to this item.
Item 13. Certain Relationships and Related Transactions
The information contained on page 13 of Citizens Bancorp's Proxy Statement dated
April 5, 1996, with respect to certain relationships and related transactions,
is incorporated by reference in response to this item.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements: See Item 8
2. Financial Statement Schedules: None.
3. Exhibits:
(3.1) Articles of Incorporation and By Laws. (Incorporated by reference
to Exhibit 3 of the Corporation's 1982 Form 10-K)
(10) Material contracts. (Incorporated by reference to Exhibit 3,
Agreements and Understandings relating to Executive Compensation
and Termination to the Corporation's 1993 Form 10-K)
(21) Subsidiaries of the Registrant
Name
Citizens Bank of Maryland
Citizens Bank of Washington, N.A.
Citizens Bank of Virginia
Citizens Bank Mortgage Company, Inc.
Citizens Brokerage Services, Inc.
Citizens Insurance Services, Inc.
State of Incorporation
Maryland
Washington, D.C.
Virginia
Maryland
Maryland
Maryland
(b) Reports on Form 8-K
None
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CITIZENS BANCORP
By: /S/ ALFRED H. SMITH, JR.
(Alfred H. Smith, Jr.)
Chairman of the Board and CEO
Date: March 29, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Principal Executive Officers
By: /S/ ALFRED H. SMITH, JR.
(Alfred H. Smith, Jr.)
Chairman of the Board and CEO
Date: March 29, 1996
By: /S/ JAMES D. WARD
(James D. Ward)
Vice Chairman of the Board
Date: March 29, 1996
By: /S/ JEFFREY R. SPRINGER
(Jeffrey R. Springer)
President
Date: March 29, 1996
Principal Financial and Accounting Officer
By: /S/ KAYE A. SIMMONS
(Kaye A. Simmons)
Treasurer
Date: March 29, 1996
<PAGE>
Signatures (Continued)
Entire Board of Directors
By: /S/ ROBERT M. BEALL
(Robert M. Beall)
Director
Date: March 29, 1996
By: /S/ GORDON T. WELLS, II.
(Gordon T. Wells, II)
Director
Date: March 29, 1996
By: /S/ FREEMAN A. HRABOWSKI, III.
(Freeman A. Hrabowski, III)
Director
Date: March 29, 1996
By: /S/ FRED W. MAIER
(Fred W. Maier)
Director
Date: March 29,1996
By: /S/ SUSAN O'MALLEY
(Susan O'Malley)
Director
Date: March 29, 1996
By: /S/ ALFRED H. SMITH, JR.
(Alfred H. Smith, Jr.)
Director
Date: March 29, 1996
By: /S/ HARRY R. SMITH
(Harry R. Smith)
Director
Date: March 29, 1996
By: /S/ ALBERT W. TURNER
(Albert W. Turner)
Director
Date: March 29, 1996
By: /S/ JAMES D. WARD
(James D. Ward)
Director
Date: March 29, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 199001
<INT-BEARING-DEPOSITS> 2407188
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 471989
<INVESTMENTS-CARRYING> 1019600
<INVESTMENTS-MARKET> 1132082
<LOANS> 2226399
<ALLOWANCE> 34145
<TOTAL-ASSETS> 4039687
<DEPOSITS> 3046855
<SHORT-TERM> 644183
<LIABILITIES-OTHER> 14458
<LONG-TERM> 0
0
0
<COMMON> 37642
<OTHER-SE> 296549
<TOTAL-LIABILITIES-AND-EQUITY> 4039687
<INTEREST-LOAN> 171594
<INTEREST-INVEST> 88378
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 259972
<INTEREST-DEPOSIT> 90393
<INTEREST-EXPENSE> 123857
<INTEREST-INCOME-NET> 136115
<LOAN-LOSSES> 6695
<SECURITIES-GAINS> 144
<EXPENSE-OTHER> 111764
<INCOME-PRETAX> 58105
<INCOME-PRE-EXTRAORDINARY> 58105
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36090
<EPS-PRIMARY> 2.40
<EPS-DILUTED> 2.40
<YIELD-ACTUAL> 3.86
<LOANS-NON> 14278
<LOANS-PAST> 5303
<LOANS-TROUBLED> 13227
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 32249
<CHARGE-OFFS> 6083
<RECOVERIES> 1284
<ALLOWANCE-CLOSE> 34145
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
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