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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 000-23277
CITIZENS BANCORP/OR
(Name of registrant in its charter)
91-1841688
Oregon (I.R.S. Employer
(State of incorporation) Identification No.)
275 Southwest Third Street
P. O. Box 30
Corvallis, Oregon 97339
(Address of principal executive offices)
Registrant's telephone number: (541) 752-5161
Securities registered under Section 12(b) of the Exchange Act: none
Securities registered under Section 12(g) of the Exchange Act: common stock, no
par value
Indicate by check mark whether registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate 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. [ ].
The approximate aggregate market value of registrant's voting and
non-voting common equity held by non-affiliates is $43,162,440 based on the
most recent reported sale of registrant's common stock on March 17, 2000 at a
price of $12.00 per share. As of March 17, 2000 there were 4,137,630 shares of
registrant's common stock issued and outstanding, of which 3,210,531 were held
by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE. Part III of this Form 10-K
incorporates by reference portions of the definitive 2000 Annual Meeting Proxy
Statement sent to Bancorp's shareholders in connection with its April 18, 2000
Annual Meeting of Shareholders.
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INDEX
PAGE
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS 1
PART I
ITEM 1 - BUSINESS 1
ITEM 2 - PROPERTIES 11
ITEM 3 - LEGAL PROCEEDINGS 13
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 13
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 13
ITEM 6 - SELECTED FINANCIAL DATA 16
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 33
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 35
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 61
ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10 -DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT 61
ITEM 11 -EXECUTIVE COMPENSATION AND REPORT OF COMMITTEES 61
ITEM 12 -SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 61
ITEM 13 -CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 61
PART IV
ITEM 14 -EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K 61
SIGNATURES 63
EXHIBIT INDEX 64
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DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
In addition to historical information, this report contains certain "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. This statement is included for the purpose of availing
Bancorp the protection of the safe harbor provisions of this Act. The forward
looking statements contained in this report are subject to factors, risks and
uncertainties that may cause actual results to differ materially from those
projected. Factors that might result in such material difference include, but
are not limited to economic conditions, the regulatory environment, rapidly
changing technology, new legislation, competitive factors, the interest rate
environment and the overall condition of the banking industry. Forward looking
statements can be identified by such words as "estimate", "believe", "expect",
"intend", "anticipate", "should", "may", "will", or other similar words or
phrases. Although Bancorp believes that the expectations reflected in such
forward looking statements are reasonable, it can give no assurances that such
expectations will prove to have been correct. Readers are therefore cautioned
not to place undue reliance on such forward looking statements, which reflect
management's analysis only as of the date of the statement. Bancorp does not
intend to update these forward looking statements other than in its periodic
filings under applicable security laws.
PART I
ITEM 1. BUSINESS
Citizens Bancorp ("Bancorp"), an Oregon Corporation and bank holding company,
was formed in 1996 for the purpose of becoming the holding company of Citizens
Bank. Bancorp is headquartered in Corvallis, Oregon. Its principal business
activities are conducted through its full-service, commercial bank subsidiary,
Citizens Bank.
ORGANIZATIONAL STRUCTURE OF BANCORP
Bancorp operates through a two-tiered corporate structure. At the holding
company level the affairs of Bancorp are overseen by a Board of Directors
elected by the shareholders of Bancorp at the annual meeting of shareholders.
The business of the Bank is overseen by a Board of Directors elected by Bancorp,
the sole owner of the Bank. As of the date of this Form 10-K the respective
members of the Board of Directors of the Bank and the Board of Directors of
Bancorp are identical.
Bancorp is authorized to issue up to 10,000,000 shares of common stock, no par
value. Bancorp has registered 750,000 shares for issuance under its Dividend
Reinvestment Plan, of which 59,816 shares had been issued thereunder as of
December 31, 1999. As of December 31, 1999 there were a total of 4,124,091
shares of Bancorp common stock issued and outstanding. Citizens Bank is the
registered transfer agent for Bancorp's common stock.
THE BANK
Citizens Bank ("the Bank") was chartered October 1, 1957 (charter #333) by the
State of Oregon as a commercial bank. Since its beginning with a single office
in Corvallis, Citizens Bank has expanded to an additional eight locations in the
four counties of Benton, Linn, Lane, and
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Yamhill. Branches are located in the communities of Corvallis, Philomath,
Albany, Junction City, Veneta, and McMinnville.
Bancorp's culture focuses on the tenets of collaborative leadership, branch
autonomy, assertive business development, a positive working environment, a
commitment to the community, outstanding customer service, and relationship
banking. Management believes that a healthy culture together with a progressive
management style will result in constantly improved shareholder value.
Bancorp's primary goal is to improve shareholder value through increased
earnings while maintaining a high level of safety and soundness. Bancorp is
committed to independence and long-term performance strategies. As a result of
its corporate culture Bancorp continues to show good growth as evidenced by the
five-year history of growth in the following selected areas:
(THOUSANDS) 1999 1998 1997 1996 1995
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Net Income $ 3,254 $ 3,840 $ 3,341 $ 3,138 $ 2,659
Return on Average Equity 13.22% 17.64% 17.53% 19.27% 19.05%
Return on Average Assets 1.36% 1.83% 1.79% 1.81% 1.66%
Average Assets to
Average Equity 10.29% 10.36% 10.21% 9.42% 8.85%
Dividend Payout Ratio 45.64% 36.48% 39.11% 34.38% 39.75%
Total Loans (net) $ 139,123 $ 130,707 $ 120,269 $ 114,648 $ 100,715
Total Deposits $ 194,350 $ 188,235 $ 161,700 $ 161,834 $ 138,694
Total Assets $ 239,606 $ 233,978 $ 200,117 $ 191,887 $ 162,907
The long-term benefit to Bancorp of its cultural and management style is
consistent growth and development of the Bank over time. Risk levels have been
greatly reduced because of expertise in loan, investment, operational, and human
resource management.
Bancorp's primary market focus is to provide commercial bank services to
businesses, professionals, and individuals. Bancorp emphasizes the development
of meaningful customer relationships and a high level of service. Its employees
are well-trained banking professionals who are committed to these objectives.
The Bank offers deposit accounts, safe-deposit boxes, consumer loans, commercial
loans, agricultural loans, and commercial and residential real estate loans.
Commercial loans include operating lines of credit, equipment and real estate
financing, capital needs, and other traditional financing products.
The Bank has a growing emphasis in financing farm operations, equipment, and
property. The Bank has also emphasized loans to professionals with its
professional line of credit products.
The Bank's loan portfolio has some concentrations in real estate secured loans,
primarily commercial properties.
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Deposit products include regular and "package" checking accounts, savings
accounts, certificates of deposit, money market accounts, and IRA accounts.
The Bank offers a debit card, check guarantee card, ATM card as well as a
MasterCard and VISA card as part of its retail banking services. The Bank also
operates a small residential mortgage loan origination department that
originates loans and sells them into the secondary market. The Bank offers
extended banking hours in selected locations as well as Saturday banking. ATM
machines are also available at nine (9) locations offering 24-hour transaction
services, including cash withdrawals, deposits, account transfers, and balance
inquiries.
The Bank also offers its customers a 24-hour automated telephone service that
offers account transfers and balance inquiries.
MANAGEMENT DEVELOPMENTS
Daniel E. Wybenga, Executive Vice President and Loan Administration for Citizens
Bank, retired on June 30, 1999. Steve R. Terjeson was hired to replace Mr.
Wybenga. Mr. Terjeson is a Senior Vice President and Chief Lending Officer. His
responsibilities include managing the loan portfolio of Citizens Bank. He joined
Citizens Bank in 1996 and served as a Senior Commercial Lender and Manager of
the Albany area offices. He has over 18 years of experience in the banking
industry.
EMPLOYEES
At December 31, 1999 the Bank had 119 full-time equivalent employees. None of
these employees are represented by labor unions. A number of benefit programs
are available to eligible employees including group medical insurance plans,
paid vacation, paid sick leave, group life insurance, and a 401(A) plan.
COMPETITION
At December 31, 1999, Citizens Bank was among the top 10 largest commercial
banks headquartered in the State of Oregon as measured by the State of Oregon's
division of Finance and Corporate Securities. The Bank competes with other
commercial banks as well as savings and loan associations, credit unions,
mortgage companies, insurance companies, investment banks, securities brokerages
and other non-bank financial service providers. Banking in the State of Oregon
has been substantially dominated by several very large banking institutions
whose headquarters are not in Oregon. They include Wells Fargo Bank, US Bank,
Key Bank, Washington Mutual Bank, First Security Bank, and Bank of America.
Together these large organizations hold a majority of the deposit and loan
balances held by banks in the State of Oregon. Citizens Bank attempts to offset
some of the advantages of these larger competitors through superior relationship
building with the customer, better service, quicker response to the customers'
needs, and local decision-making. We rely on the fact that many businesses and
individuals within small Oregon communities want to see their money stay within
the local economy, rather than see it used to fund loans in distant places.
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GOVERNMENTAL POLICIES
The earnings and growth of Bancorp and its subsidiary, Citizens Bank, as well as
their existing and future business activities, are affected not only by general
economic conditions, but also by the fiscal and monetary policies of the Federal
government and its agencies, particularly the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"). The Federal Reserve Board
implements monetary policies (intended to curb inflation and combat recession)
by its open-market operations in United States Government securities, by
adjusting the required level of reserves for financial institutions subject to
its reserve requirements, and by varying the discount rates applicable to
borrowings by banks from the Federal Reserve Bank. The actions of the Federal
Reserve Board in these areas influence the growth of bank loans, investments and
deposits, and also affect interest rates charged on loans and paid on deposits.
As banking is a business which depends largely on interest rate differentials
(in general, the difference between the interest rates received by the banks on
loans extended to their customers and interest paid on customer deposits), the
influence of economic conditions and monetary policies on interest rates will
directly affect earnings. The nature and impact of any future changes in
monetary policies cannot be predicted.
SUPERVISION AND REGULATION - GENERAL
The following generally refers to certain statutes and regulations affecting the
banking industry. These references provide brief summaries only and are not
intended to be complete. These references are qualified in their entirety by the
referenced statutes and regulations. In addition, some statutes and regulations
which apply to and regulate the operation of the banking industry might exist
which are not referenced below. Changes in applicable statutes and regulations
may have a material effect on the business of Bancorp and its subsidiary.
BANCORP
As a bank holding company, Bancorp is subject to the Bank Holding Company Act of
1956 ("BHCA"), as amended, which places Bancorp under the supervision of the
Board of Governors of the Federal Reserve System ("FRB"). In general, the BHCA
limits the business of bank holding companies to owning or controlling banks and
engaging in other activities related to banking. Certain recent legislation
commonly referred to as "Financial Modernization - The Gramm-Leach-Bliley Act"
was designed to expand opportunities for banks and bank holding companies. The
opportunities of this legislation for Bancorp are unclear at this time.
HOLDING COMPANY STRUCTURE
FRB Regulation. Bancorp must obtain the approval of the FRB: (1) before
acquiring direct or indirect ownership or control of any voting shares of any
bank if, after such acquisition, it would own or control, directly or
indirectly, more than 5% of the voting shares of such a bank; (2) before merging
or consolidating with another bank holding company; and (3) before acquiring
substantially all of the assets of any additional banks.
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Bancorp is required by the BHCA to file annual and quarterly reports and such
other reports as may be required from time to time by the FRB. In addition, the
FRB conducts periodic examinations of Bancorp.
SUPPORT OF SUBSIDIARIES. Under FRB policy, a bank holding company is expected to
act as a source of financial and managerial strength to, and commit resources to
support, each of its subsidiaries. Any capital loans Bancorp makes to its
subsidiary are subordinate to deposits and to certain other indebtedness of the
subsidiary. The Crime Control Act of 1990 provides that, in the event of a bank
holding company's bankruptcy, the bankruptcy trustee will assume any commitment
the bank holding company has made to a federal bank regulatory agency to
maintain the capital of a subsidiary and this obligation will be entitled to a
priority of payment.
TIE-IN ARRANGEMENTS. Bancorp and the subsidiary are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, sale or
lease of property or furnishing of services. For example, with certain
exceptions, neither Bancorp nor its subsidiary may condition an extension of
credit to a customer on either (1) a requirement that the customer obtain
additional services provided by it or (2) an agreement by the customer to
refrain from obtaining other services from a competitor. Until recently, the FRB
extended its bank-tying restrictions to bank holding companies and their
non-bank subsidiaries. However, effective April 21, 1997, the bank anti-tying
rules will no longer apply to the non-bank subsidiaries of a bank holding
company.
STATE LAW RESTRICTIONS. As a corporation chartered under the laws of the State
of Oregon, Bancorp is also subject to certain limitations and restrictions under
applicable Oregon corporate law. For example, these include limitations and
restrictions relating to: indemnification of directors, distributions to
shareholders, transactions involving directors, officers or interested
shareholders, maintenance of books, records, and minutes, and observance of
certain corporate formalities.
SECURITIES REGISTRATION AND REPORTING. Bancorp is subject to the registration
and reporting requirements of the Federal Securities Laws. The periodic reports,
Proxy Statements, and other information filed by Bancorp with the Securities and
Exchange Commission ("SEC") can be inspected and copied or obtained from the
Washington, D.C., office of the SEC. In addition, the securities issued by
Bancorp are subject to the registration requirements of the Securities Act of
1933 and applicable state securities laws unless exceptions to registrations are
available.
CONTROL TRANSACTIONS. The Change in Bank Control Act of 1978, as amended,
prohibits a person or group of persons from acquiring "control" of a bank
holding company unless the FRB has been given 60 days prior written notice of
the proposed acquisition, and within that time period, the FRB has not issued a
notice disapproving the proposed acquisition, or extended for up to another 30
days the period during which such a disapproval may be issued. An acquisition
may be made prior to the expiration of the disapproval period of the FRB issues
written notice of its intent not to disapprove the action. Under a rebuttable
resumption established by the FRB, the acquisition of 10% or more of a class of
voting stock of a bank holding company with a class of securities registered
under Section 12 of the Exchange Act would, under the circumstances set forth in
the presumption, constitute the acquisition of control.
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In addition, any "Company" would be required to obtain the approval of the FRB
under the BHCA before acquiring 25% (5% if the company is a bank holding
company) or more of the outstanding shares of Bancorp, or obtain control over
Bancorp.
BANKING
Despite some recent legislative initiatives to reduce regulatory burdens,
banking remains a highly regulated industry. Legislation enacted from time to
time may increase the cost of doing business, limit or expand permissible
activities, or affect the competitive balance between banks and other financial
and non-financial institutions. Proposals to change the laws and regulations
governing the operations and taxations of banks and other financial institutions
are frequently made in Congress, in the Oregon State Legislature, and before
various bank regulatory agencies. In addition, there continue to be proposals in
Congress to restructure the banking system.
Some of the significant areas of bank regulation, including significant federal
legislation affecting state-chartered banks, are generally discussed below.
REGULATION OF STATE BANKS
Oregon state-chartered banks are subject to primary regulation and examination
by the Oregon Department of Consumer and Business Services Division of Finance
and Corporate Securities. The Bank is also subject to supervision, examination,
and regulation by certain federal banking agencies. The Bank is insured (to
applicable limits) by, and therefore is subject to regulation by, the FDIC.
Applicable federal and state statutes and regulations governing a bank's
operations relate, among other matters, to capital requirements, required
reserves against deposits, investments, loans, legal lending limits, certain
interest rates payable, mergers and consolidations, borrowings, issuance of
securities, payment of dividends (see below), establishment of branches, and
dealings with affiliated persons. The FDIC has authority to prohibit banks under
their supervision from engaging in what they consider to be an unsafe and
unsound practice in conducting their business. Depository institutions, such as
the Bank, are affected significantly by the actions of the FRB as it attempts to
control the money supply and credit availability in order to influence the
economy.
DIVIDEND RESTRICTIONS
Dividends paid by the Bank to Bancorp are a material source of all of Bancorp's
cash flow. Various federal and state statutory provisions limit the amount of
dividends the Bank is permitted to pay to Bancorp without regulatory approval.
FRB policy further limits the circumstances under which the bank holding
companies may declare dividends. For example, a bank holding company should not
continue its existing rate of cash dividends on its common stock unless its net
income is sufficient to fully fund each dividend and its prospective rate of
earnings retention appears consistent with its capital needs, asset quality, and
overall financial condition.
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If, in the opinion of the applicable federal banking agency, a depository
institution under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
institution could include the payment of dividends), the agency may require,
after notice and hearing, that such institution cease and desist from such
practice. In addition, the FRB and the FDIC have issued policy statements which
provide that insured banks and bank holding companies should generally pay
dividends only out of current operating earnings.
Under Oregon law, the Oregon regulatory authorities have the authority to
suspend payment of any dividend of an Oregon institution if it is determined
that the payment would result in the stockholders' equity in the institution,
after payment of the dividend, to be inadequate for the safe and sound operation
of the institution.
REGULATION OF MANAGEMENT
Federal law: (1) sets forth circumstances under which officers or directors of a
bank may be removed by the institution's federal supervisory agency; (2) places
restraints on lending by a bank to its executive officers, directors, principal
shareholders, and their related interests; and (3) prohibits management
personnel of a bank from serving as a director or in other management positions
of another financial institution whose assets exceed a specified amount or which
has an office within a specified geographic area.
CONTROL OF FINANCIAL INSTITUTIONS
No person may acquire "control" of a bank unless the appropriate federal agency
has been given 60 days prior written notice and within that time the agency has
not disapproved the acquisition. Substantial monetary penalties may be imposed
for violation of the change in control or other provisions of banking laws.
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was
enacted into law in late 1991. As required by FDICIA, numerous regulations have
been adopted by federal bank regulatory agencies, including the following: (1)
federal bank regulatory authorities have established five different capital
levels for banks and, as a general matter, enable banks with higher capital
levels to engage in a broader rage of activities; (2) the FRB has issued
regulations requiring standardized disclosures with respect to interest paid on
deposits; (3) the FDIC has imposed restrictions on the acceptance of brokered
deposits by weaker banks; (4) the FDIC has implemented risk-based insurance
premiums; and (5) the FDIC has issued regulations requiring state-chartered
banks to comply with certain restrictions with respect to equity investments and
activities in which the banks act as a principal.
FDICIA recapitalized the Bank Insurance Fund ("BIF") and required the FDIC to
maintain the BIF and Savings Association Insurance Fund ("SAIF") at 1.25% of
insured deposits by increasing deposit insurance premiums as necessary to
maintain such ratio. FDICIA also
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required federal bank regulatory authorities to prescribe, by December 1, 1998,
(1) non-capital standards of safety and soundness; (2) operational and
managerial standards for banks; (3) asset and earnings standards for banks and
bank holding companies addressing such areas as classified assets, capital, and
stock price, and (4) standards for compensation of executive officers and
directors of banks. However, this provision was modified by recent legislation
to allow federal regulatory agencies to implement these standards through either
guidelines or regulations.
FIRREA
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") became effective on August 9, 1989. Among other things, this
far-reaching legislation (1) phased in significant increases in the FDIC
insurance premiums paid by commercial banks; (2) created two deposit insurance
pools within the FDIC, one to insure commercial banks and savings bank deposits
and the other to insure savings association deposits; (3) for the first time,
permitted bank holding companies to acquire healthy savings associations; (4)
permitted commercial banks that meet certain housing-related asset requirements
to secure advances and other federal services from their local Federal Home Loan
Banks; and (5) greatly enhanced the regulators' enforcement powers by removing
procedural barriers and sharply increasing the civil and criminal penalties for
violating statutes and regulations.
INTERSTATE BANKING AND BRANCHING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Act") generally authorizes interstate branching and relaxes federal
law restrictions on interstate banking. Individual states had the authority to
"opt out" of certain of these provisions. The Interstate Act allowed states to
enact "opting-in" legislation that (i) permitted interstate mergers within their
own borders before June 1, 1997, and (ii) permitted out-of-state banks to
establish de novo branches within the state. As of September 29, 1996, bank
holding companies could purchase banks in any state, and states may not prohibit
such purchases. Additionally, beginning June 1, 1997, banks were permitted to
merge with banks in other states as long as the home state of neither merging
bank has opted out. The Interstate Act requires regulators to consult with
community organizations before permitting an interstate institution to close a
branch in a low-income area.
Oregon, effective February 27, 1995, enacted "opting in" legislation generally
permitting interstate mergers, subject to certain restrictions. Given that
Oregon permitted interstate banking for a number of years, this legislation was
not expected to have profound impact on banking in Oregon or on Bancorp or the
Bank's operations in particular.
GRAMM-LEACH-BLILEY ACT
The Gramm-Leach-Bliley Act ("GLBA") was signed into law on November 12, 1999,
and became effective March 11, 2000. The GLBA establishes the legal ability and
regulatory framework to banking organizations to provide broad-based financial
services to meet its expanding customer needs. The GLBA establishes three types
of financial activities that are
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permissible for banking organizations: those that are financial in nature; those
that are incidental to financial activity; and those that are complimentary to
financial activity.
The GLBA sets forth a list of activities deemed financial in nature. Such
activities include lending, exchanging, transferring, investing for others, or
safeguarding money or securities; insurance underwriting and sales (brokerage)
activities; investment or economic advisory services; securitizations;
securities underwriting and dealing activities; all "closely related to banking"
activities previously approved for bank holding companies by the Federal Reserve
Board; certain products offered overseas, such as travel agency services; and
merchant banking/equity investment activities.
In general, these expanded powers are reserved to bank holding companies, to be
known as financial holding companies ("FHC") and banks, where all depository
institutions affiliated with them are well capitalized, well managed based on
applicable banking regulations, and meet specified Community Reinvestment Act
ratings. GLBA authorizes the Federal Reserve Bank and the United States
Treasury, in cooperation with one another, to determine what additional
activities are permissible as financial in nature. Such activities will require
FHCs and banks to continue to satisfy applicable well capitalized and well
managed requirements. Bank holding companies which do not qualify for FHC status
are limited to non-banking activities deemed closely related to banking prior to
GLBA.
To become a FHC, a declaration of intent to engage in activities permissible for
a FHC must be filed with the Federal Reserve Bank certifying that all
requirements for eligibility have been met. Bancorp filed such a letter of
intent with the Federal Reserve Board on February 15, 2000. At this time,
Bancorp has no plans to expand into any of the activities approved under the
GLBA, but may wish to do so in the future.
In addition to the creation of FHCs, GLBA establishes a primacy of oversight
regulation of financial service businesses by the regulators routinely
responsible for such activities and entities. This applies both in allocating
responsibility for supervising different companies within a FHC and in
supervising different activities within the same company. GLBA clarifies the
regulation by the States of insurance products sold by depository institutions,
and repeals some of the exemptions for banks under federal securities laws in
relation to securities offered by banks and the licensing of broker-dealers and
investments.
The GLBA also changed the membership requirements to join the Federal Home Loan
Bank ("FHLB") for banks with $500 million or less in assets. The GLBA defines a
"community financial institution" as a depository institution insured by the
Federal Deposit Insurance Corporation ("FDIC") with less than $500 million in
average total assets during the three years immediately proceeding the date of
the membership application. These community financial institutions will not be
required to hold at least 10 percent of their assets in residential mortgages in
order to join the FHLB system. The section of the GLBA will not affect Bancorp's
subsidiary, Citizens Bank, as it already holds membership in the FHLB.
The GLBA also adopts restrictions on financial institutions regarding the
sharing of customer non-public personal information with non-affiliated third
parties unless the customer has had an
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opportunity to opt out of the disclosure. The GLBA also imposes periodic
disclosure requirements concerning financial institution policies and practices
regarding data sharing with affiliated and non-affiliated parties.
The GLBA will be the subject of extensive rule making by federal banking
regulators and others. The effects and/or benefits of the GLBA on Bancorp and
its subsidiary Citizens Bank are unknown at this time.
CAPITAL ADEQUACY REQUIREMENTS
The FRB, the FDIC, and the OCC (collectively, the "Federal Banking Agencies")
have established uniform capital requirements for all commercial banks. Bank
holding companies are also subject to certain minimum capital requirements. A
bank that does not achieve and maintain required capital levels may be subject
to supervisory action through the issuance of a capital directive to ensure the
maintenance of adequate capital levels. In addition, banks are required to meet
certain guidelines concerning the maintenance of an adequate allowance for loan
and lease losses.
The Federal Banking Agencies' "risk-based" capital guidelines establish a
systematic, analytical framework that makes regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations, takes
off-balance sheet exposures into explicit account in assessing capital adequacy,
and minimizes disincentives to holding liquid, low-risk assets. The risk-based
ratio is determined by allocating assets and specified off-balance sheet
commitments into several categories, with high levels of capital being required
for the categories perceived as representing greater risk. The risk weights
assigned to assets and credit equivalent amounts of off-balance sheet items are
based primarily on credit risk. Other types of exposure, such as interest rate,
liquidity and funding risks, as well as asset quality problems, are not factored
into the risk-based ratio. Such risks, however, will be taken into account in
determining a final assessment of an organization's capital adequacy. Under
these regulations, banks were required to achieve a minimum total risk-based
capital ratio of 8% and a minimum Tier 1 risk-based capital ratio of 4%.
The Federal Banking Agencies also have adopted leverage ratio standards that
require commercial banks to maintain a minimum ratio of core capital to total
assets (the "Leverage Ratio") of 3%. Any institution operating at or near this
level is expected to have well-diversified risk, including no undue interest
rate risk exposure, excellent asset quality , high liquidity and good earnings,
and in general, to be a strong banking organization without any supervisory,
financial, or operational weaknesses or deficiencies. Any institutions
experiencing or anticipating significant growth would be expected to maintain
capital ratios, including tangible capital positions, well above the minimum
levels (e.g., an additional cushion of at least 100 to 200 basis points,
depending upon the particular circumstances and risk profile).
Regulations adopted by the Federal Banking Agencies as required by FDICIA impose
even more stringent capital requirements. The regulators require the OCC and
other Federal Banking Agencies to take certain "prompt corrective action" when a
bank fails to meet certain capital requirements. The regulations establish and
define five capital levels at which an institution is
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deemed to be "well-capitalized," "adequately capitalized," "undercapitalized,"
significantly undercapitalized" or "critically undercapitalized." In order to be
"well-capitalized," an institution must maintain, at least 10% total risk-based
capital, 6% Tier 1 risk-based capital, and a 5% Leverage Ratio. Increasingly
sever restrictions are imposed on the payment of dividends and mortgage fees,
asset growth and other aspects of the operations of institutions that fall below
the category of "adequately capitalized" (which requires at least 8% total
risk-based capital, 4% Tier 1 risk-based capital, and a 4% Leverage Ratio).
Undercapitalized institutions are required to develop and implement capital
plans acceptable to the appropriate federal regulatory agency. Such plans must
require that any company that controls the undercapitalized institution must
provide certain guarantees that the institution will comply with the plan until
it is adequately capitalized. As of December 31, 1999, the Bank was not subject
to any regulatory order, agreement, or directive to meet and maintain a specific
capital level for any capital measure.
Under Oregon law, an Oregon commercial bank may reduce its paid-in capital to
eliminate or reduce deficits in retained earnings arising from losses, or in
order to redeem shares. Prior approval of the Oregon Director is required in
either case, and may be refused if the Oregon Director determines that the
remaining paid-in capital of the bank would be inadequate for its safe and sound
operation.
The minimum ratio of total capital to risk-adjusted assets (including certain
off-balance sheet items, such as stand-by letters of credit) required by the FRB
for bank-holding companies is 8%. At least one-half of the total capital must be
Tier 1 capital; the remainder may consist of Tier 2 capital. Bancorp is also
subject to minimum Leverage Ratio guidelines. These guidelines provide for a
minimum Leverage Ratio of 3% for bank holding companies meeting certain
specified criteria, including achievement of the highest supervisory rating. All
other bank holding companies are required to maintain a Leverage Ratio which is
at least 100 to 200 basis points higher (4% to 5%). These guidelines provide
that banking organizations experiencing internal growth or making acquisitions
are expected to maintain strong capital positions substantially above the
minimum supervisory levels, without significant reliance on intangible assets.
In August of 1995, the Federal Banking Agencies adopted a final rule
implementing the portion of Section 305 of FDICIA that requires the banking
agencies to revise their risk-based capital standards to ensure that those
standards take adequate account of interest rate risk. Effective September 1,
1995, when evaluating the capital adequacy of a bank, the Federal Banking
Agencies' examiners stated considering exposure to declines in the economic
value of the bank's capital due to changes in interest rates. A bank may be
required to hold additional capital for interest rate risk if it has a
significant exposure or a weak interest rate risk management process. Concurrent
with the publication of this final rule, the Federal Banking Agencies proposed
for comment a joint policy statement describing the process the Federal Banking
Agencies will use to measure and assess a bank's interest rate risk.
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This joint policy statement was superseded by an updated Joint Policy Statement
in June of 1996. Any impact the joint final rules and the Joint Policy Statement
may have on Bancorp or its subsidiary cannot be predicted at this time.
In addition, the Federal Banking Agencies published a joint final rule on
September 6, 1996, amending their respective risk-based capital standards to
incorporate a measure for market risk to cover all positions located in an
institution's trading account and foreign exchange and commodity positions
wherever located. This final rule, effective January 1, 1997, implements an
amendment to the Basle Capital Accord that sets forth a supervisory framework
for measuring market risk. The final rule effectively requires banks and bank
holding companies with significant exposure to market risk to measure that risk
using its own internal value-at-risk model, subject to the parameters of the
final rule, and to hold a sufficient amount of capital to support the
institution's risk exposure.
Institutions subject to this final rule must be in compliance with it by January
1, 1998. This final rule applies to any bank or bank holding company, regardless
of size, whose trading activity equals 10% or more of its total assets or
amounts to $1 billion or more. The Federal Banking Agencies may require an
institution not otherwise subject to the final rule to comply with it for safety
and soundness reasons and, under certain circumstances, also may exempt an
institution otherwise subject to the final rule from compliance.
FDIC INSURANCE
Generally, customer deposit accounts in banks are insured by the Federal Deposit
Insurance Corporation (FDIC) for up to a maximum amount of $100,000. The FDIC
has adopted a risk-based insurance assessment system. Under this system,
depository institutions, such as the Bank with BIF-insured deposits, are
required to pay an assessment to the BIF ranging from $.0 to $.27 per $100 of
deposits based on the institution's risk classification. On September 30, 1996,
the Deposit Insurance Funds Act of 1996 ("Funds Act") was enacted. The Funds Act
provides, among other things, for the recapitalization of the SAIF through a
special assessment on all depository institutions that hold SAIF-insured
deposits. The one-time assessment is designed to place the SAIF at its 1.25
reserve ratio goal.
The Funds Act, for the three-year period beginning in 1997, subjects BIF-insured
deposits to a Financing Corporation ("FICO") premium assessment on domestic
deposits at one-fifth the premium rate (roughly 1.3 basis points) imposed on
SAIF-imposed deposits (roughly 6.5 basis points). In addition, service debt
funding on FICO bonds for the first half of 1997 resulted in BIF insured
institutions paying .64 cents for each $100 of assessed deposits, and SAIF
insured institutions paying 3.2 cents on each $100 of deposits. Beginning in the
year 2000, BIF insured institutions will be required to pay the FICO obligations
on a pro-rata basis with all thrift institutions; annual assessments are
expected to equal approximately 2.4 basis points until 2017, to be phased out
completely by 2019.
Banking regulators are empowered under the Funds Act to prohibit insured
institutions and their holding companies from facilitating or encouraging the
shifting deposits from the SAIF to the BIF in order to avoid higher assessment
rates. Accordingly, the FDIC recently proposed a rule
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that would, if adopted as proposed, impose entrance and exit fees on depository
institutions attempting to shift deposits from the SAIF to the BIF as
contemplated by the Funds Act. The Funds Act also provides for the merger of the
BIF and SAIF on January 1, 1999, only if not thrift institutions exist on that
date. It is expected that Congress will address comprehensive legislation on the
merger of the funs and elimination of the thrift charter during the 1998
session.
The risk classification is based on an assignment of the institution by the FDIC
to one of three capital groups and to one of three supervisory subgroups. The
capital groups are "well capitalized," "adequately capitalized," and
"undercapitalized." The three supervisory subgroups are Group "A" (for
financially sound institutions with only a few minor weaknesses), Group "B" (for
those institutions with weaknesses which, if uncorrected, could cause
substantial deterioration of the institution and increase risk to the deposit
insurance fund), and Group "C" (for those institutions with a substantial
probability of loss to the fund absent effective corrective action).
ITEM 2. PROPERTIES
The principal properties of Bancorp and its subsidiary, Citizens Bank, are
comprised of banking facilities owned by the subsidiary.
The main office of Citizens Bank is located in the heart of the business and
retail center in Corvallis, Oregon. The building was constructed in 1977 and has
approximately 30,000 square feet of space on two levels above ground and a full
basement. The second floor is occupied by the administrative support team, which
includes the President/Chief Executive Officer, the Chief Financial Officer, the
Chief Operating Officer, the Senior Operations Officer, the Loan Administrator,
Administrative Assistants, the Financial Officer, and the Loan Service Center.
The first floor serves as the main banking office for the Bank. It is occupied
by a manager, a lending staff, an operations staff, tellers, marketing officer,
new accounts staff, and mortgage department staff.
The basement is occupied by the Accounts Service Center. It includes a manager,
two operations officers, proof and data processing staff, inventory, wire
transfer, telephone, and courier staff. All of the Bank's centralized functions,
i.e., management, proof and data information, loan documentation, loan
administration, cash services, mail services, accounting and human resources,
occur in this building. The Bank owns this building.
The Bank also operates eight (8) other branches, of which five (5) are owned and
three (3) are leased. These buildings range in size from 2500 square feet to
approximately 9,000 square feet. Their primary function and use is to provide
banking service to the Bank's customers. The Bank has a lease on the land on
which the West Albany branch is located. The aggregate monthly rental of leased
buildings and land is $11,220. The following sets forth all branch offices of
the Bank.
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Main Office Junction City Office East Albany Office
275 SW Third Street 955 Ivy Street 2315 14th Ave SE
Corvallis, Oregon Junction City, Oregon Albany, Oregon
Circle Office(1) Philomath Office West Albany Office(4)
978 NW Circle Blvd. 1224 Main Street 2230 Pacific Blvd SE
Corvallis, Oregon Philomath, Oregon Albany, Oregon
University Office(2) Veneta Office(3) McMinnville Office
855 NW Kings Blvd. 88312 Territorial Road 455 NE Baker Street
Corvallis, Oregon Veneta, Oregon McMinnville, Oregon 97128
(1) Premises leased under an original lease agreement dated May 1, 1970
and a supplemental lease agreement dated August 16, 1994. The lease
expires January 1, 2020.
(2) Premises leased under a lease agreement dated August 1, 1998. The
lease expires July 31, 2003.
(3) Premises leased under a supplemental lease agreement dated October
30, 1998. The lease expires on December 31, 2003 which the right to
renew for two additional periods of five years each.
(4) Ground lease under ground lease agreement dated May 29, 1998. The
lease expires in year 2048.
ITEM 3. LEGAL PROCEEDINGS
As of the date of filing this Form 10-K neither Bancorp nor its subsidiary were
a party to any material legal proceedings. Further, management is not aware of
any threatened or pending lawsuits or other proceedings against Bancorp or its
subsidiary which, if determined adversely, would have a material effect on the
business or financial position of either of them. Bancorp or the Bank may from
time to time become a party to litigation in the ordinary course of business,
such as debt collection litigation or through an appearance as a creditor in a
bankruptcy case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 1999, no matters were
submitted to Bancorp's security holders through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no established market for Bancorp's common stock, and the stock is not
listed on and does not trade on or through any exchange or quotation system.
There is no expectation that an established market will develop for Bancorp's
common stock. As the transfer agent for Bancorp
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common stock, Citizens Bank keeps an informal record of persons expressing an
interest in buying or selling Bancorp common stock and introduces prospective
buyers and sellers. Citizens Bank also keeps some informal records of prices
paid and received for Bancorp common stock by certain persons. Neither Bancorp
nor Citizens Bank does or will recommend prices for Bancorp common stock.
The following table sets forth certain transaction prices per share for shares
of Citizens Bank (years 1995 and 1996) and Bancorp common stock for the periods
shown. This information is based solely on prices and information reported to
Citizens Bank by those persons whose transactions have come to its attention.
The reported prices do not represent all transactions in Bancorp and Citizens
Bank stock, and Citizens Bank can give no assurances as to the accuracy of the
reported prices or the completeness of this information.
HIGH LOW
---- ---
1995 $ 7.25 $ 5.63
1996 $15.00 $ 9.00
1997 $15.00 $ 9.00
1998 $15.00 $14.50
1999 $16.60 $12.90
Per share information for the current and prior periods reflect the effect of
the stock dividends and stock splits.
The following table sets forth certain transaction prices per share for shares
of Bancorp common stock for the quarterly periods shown. This information is
subject to the qualifications set forth above.
HIGH LOW
---- ---
First quarter 1998 $14.25 $10.93
Second quarter 1998 $14.25 $13.78
Third quarter 1998 $17.10 $16.39
Fourth quarter 1998 $17.10 $15.44
First quarter 1999 $16.60 $15.92
Second quarter 1999 $16.60 $15.20
Third quarter 1999 $16.00 $15.00
Fourth quarter 1999 $15.25 $12.90
CITIZENS BANK/BANCORP, COMMON EQUITY HOLDING. As of December 31, 1999, there
were 4,124,090.927 shares outstanding, held by 824 shareholders of record. As of
February 9, 2000, there were 831 holders of Citizens Bancorp and 4,137,629.927
shares outstanding. All of the shares issued since December 31, 1999 were issued
under the terms of the dividend reinvestment plan.
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Holders are determined on the basis of ownership. Each entity that owns one or
more shares is determined to be a holder. Holders can be individuals,
partnerships, corporations, trusts, or any entity that can legally hold assets
in the State of Oregon. Two or more individuals together can also be a holder,
such as a husband and wife or a parent and child.
Bancorp has no formal dividend policy. The amount of any dividend is determined
by the Bancorp Board of Directors and depends on the amount of profits generated
and the growth objectives of Bancorp and the Bank, together with other factors
considered by the Board in its discretion. Under Oregon law certain restrictions
on the payment of dividends apply. Under these restrictions, a bank or holding
company may not declare or pay any dividend in an amount greater than its
retained earnings.
The following sets forth, for the calendar years shown, the cash and stock
dividends per share of common stock declared by Citizens Bancorp in 1997, 1998
and 1999 and by Citizens Bank for the preceding years.
CASH DIVIDEND STOCK DIVIDEND STOCK SPLIT
------------- -------------- -----------
1995 $ .29 -- 1 for 5 stock split
1996 $ .29 -- 2 for 1 stock split
1997 $ .32 5% --
1998 $ .34 -- 2 for 1 stock split
1999 $ .36 5% --
Per share information for the current and prior periods reflect the effect of
the stock dividends and stock splits.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's consolidated financial statements and accompanying notes presented
herein.
Year ended December 31,
(In thousands except share data)
% increase
1999 1998 (decrease) 1997 1996 1995
1998 to
1999
-------- -------- ----------- -------- -------- --------
EARNINGS
Total interest income $ 17,023 $ 16,947 .45% $ 15,152 $ 13,704 $ 12,732
Total interest expense 6,046 5,917 2.18% 5,286 5,034 4,725
Net interest income 10,977 11,030 (.48%) 9,866 8,670 8,007
Provision for possible credit
losses 264 236 11.86% 165 135 100
Net interest income after
provision for possible credit
losses 10,713 10,794 (.75%) 9,701 8,535 7,907
Total other operating income 2,403 2,226 7.95% 1,857 1,569 1,503
Total other operating
expense 8,079 7,153 12.95% 6,194 5,306 5,212
Income before taxes 5,037 5,867 (14.15%) 5,364 4,798 4,198
Income taxes 1,783 2,027 (12.04%) 2,023 1,660 1,539
Net income $ 3,254 $ 3,840 (15.26%) $ 3,341 $ 3,138 $ 2,659
PER COMMON SHARE(1)
Net income $ .79 $ .94 (20.20%) $ .83 $ .79 $ .69
Cash dividends .36 .34 5.88% .32 .29 .29
Book value 5.90 5.53 6.69% 4.81 4.24 3.20
PERIOD END BALANCES
Total assets $239,606 $233,978 2.41% $200,117 $191,887 $162,907
Net loans 139,123 130,707 6.44% 120,269 114,648 100,715
Deposits 194,350 188,235 3.25% 161,700 161,834 138,694
Repurchase agreements 13,425 16,299 (17.63%) 14,086 10,040 7,891
Shareholders' equity 24,342 22,585 7.78% 19,411 16,805 14,269
PERFORMANCE RATIOS
Return on Average Assets 1.36% 1.83% 1.79% 1.81% 1.66%
Return on Average Equity 13.22% 17.64% 17.53% 19.27% 19.05%
Average Assets to Average
Equity 10.29% 10.36% 10.21% 9.42% 8.85%
(1) Per share amounts and the average number of shares outstanding have been
restated for, stock dividends of 5% in 1999 and 5% in 1997, a 2-for-1 stock
split in 1998, a 2-for-1 stock split in 1996, and a 1 for 5 stock split in 1995.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997.
NET INCOME. For the three years ended December 31, Bancorp's net income was
$3.254 million, $3.840 million, and $3.341 million, respectively. 1999 net
income decreased $.6 million or 15.3% as compared to 1998 which increased $.5
million or 14.9% over 1997. Bancorp's decreased net income in 1999 is primarily
due to the opening of two new branches, technology upgrades, expenses relative
to Y2K, and a decrease in interest income from loans due to interest rate
reductions.
The average rate on loans for 1999, 1998, and 1997 was 9.3%, 10.2%, and 10.3%
respectively. The net decrease in the average loan yield was due to the overall
market rate reduction in effect the first half of the year, which resulted in
lower rates earned on loans originated and then in the refinancing of commercial
real estate loans at a lower rate of interest.
The decrease in net income was also affected by a decrease in earning assets to
total assets. Average earning assets to total assets for the years 1999, 1998,
and 1997 were 91.1%, 92.6%, and 93.3%, respectively. Cash set aside for Y2K
planning and the investment in new branches negatively impacted average earning
assets in 1999, especially in the fourth quarter. Average yields on earnings
assets for 1999, 1998, and 1997 were 7.9%, 8.8%, and 8.9%, respectively.
Management believes the two new branches opened in 1999 added value to the
franchise and will contribute positively to the overall net income through the
production of quality loans. Management anticipates that with the addition of
newly hired experienced loan officers, the implementation of a continuing
education program for all lending staff and new loan administration, that loan
income will improve in 2000. Further, management believes that the technological
additions and improvements made in 1999 will ensure that the Bank remains
competitive as advancements are made in communications, e-commerce, and online
banking.
INTEREST INCOME. Interest income totaled $17.0 million for the year ended
December 31, 1999, a .45% increase over the $16.9 million for 1998 which was an
11.9% increase over the $15.1 million generated in 1997. The 1999 increase was
due to increased investment volume, while 1998 increased due to both loan and
investment volume increases.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1999 was
$6.0, a 2.2% increase over the $5.9 million, expense for 1998, and an 11.9%
increase over the $5.3 million expense in 1997. The 1999 increase was due to
deposit volume increases and rate decreases, while the 1998 increase was due
primarily to volume increases.
NET INTEREST INCOME. Net interest income for the years 1999, 1998, and 1997 was
$11.0 million, $11.0 million, and $9.9 million, respectively. Additionally, for
the same periods beginning with 1999, net interest margins were 5.1%, 5.8%, and
5.9%, respectively. The decrease in the net interest margin from 1998 to 1999
was primarily due to the decreased average interest rate on loans, and the
reduced percentage of earning assets represented by loans (62% versus 67%). The
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increase in the net interest margin from 1997 to 1998 were primarily
due to increased volumes and the changing interest rate environment.
The following table sets forth, for the periods indicated, interest
income and interest expense with the resulting average yield or rate by
category of average earning assets and average interest bearing
liabilities.
AVERAGE BALANCES AND TAX-EQUIVALENT NET INTEREST MARGIN
1999 1998
YEAR ENDED DECEMBER 31, -------------------------------------- ---------------------------------------
Average Int. Avg. Rate Average Int. Avg. Rate
Balance Income Earned/ Balance Income Earned/
(In thousands) (Expense) Paid (Expense) Paid
---------- ---------- --------- ---------- ---------- ---------
ASSETS
Loans(2) $ 135,032 $ 12,614 9.34% $ 130,895 $ 13,167 10.05%
INVESTMENT SECURITIES:
Taxable 58,142 3,139 5.40% 5,022 2,693 5.98%
Tax-exempt(1) 8,986 533 5.93% 5,787 373 6.45%
TOTAL
INVESTMENT
SECURITIES 67,128 3,672 5.47% 50,809 3,066 6.03%
Interest bearing deposits
in banks and federal
funds sold 15,820 866 5.47% 14,937 843 5.64%
TOTAL EARNING ASSETS 217,980 17,152 7.87% 196,722 17,076 8.68%
Cash and due from banks 12,388 8,357
Premises and equipment 4,689 2,904
Other assets 5,707 3,424
Allowance for possible credit losses (1,417) (1,299)
TOTAL $ 239,377 $ 210,198
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Savings, MMDA, NOW $ 100,438 (2,336) 2.33% $ 74,518 (1,960) 2.63%
Time 56,127 (2,865) 5.10% 60,014 (3,226) 5.38%
TOTAL INTEREST-
BEARING DEPOSITS 156,565 (5,201) 3.32% 134,532 (5,186) 3.85%
Repurchase agreements 15,935 (505) 3.17% 14,225 (525) 3.69%
Other borrowings 5,603 (340) 6.07% 3,961 (206) 5.20%
TOTAL INTEREST-BEARING
LIABILITIES 178,103 (6,046) 3.39% 152,718 (5,917) 3.87%
Demand deposits 33,565 34,792
Other liabilities 3,088 918
Shareholders' equity 24,621 21,770
TOTAL $ 239,377 $ 210,198
Net interest margin(1) $ 11,106 $ 11,159
Interest income as a % of avg. earning assets 7.87% 8.68%
Interest expense as a % of avg. earning assets 2.77% 3.01%
Net interest margin 5.10% 5.67%
--------------------------------------
1997
--------------------------------------
Average Int. Avg. Rate
Balance Income Earned/
(Expense) Paid
--------------------------------------
ASSETS
Loans(2) $ 119,157 $ 11,992 10.06%
INVESTMENT SECURITIES:
Taxable 39,265 2,386 6.08%
Tax-exempt(1) 3,918 330 8.43%
TOTAL
INVESTMENT
SECURITIES 43,183 2,716 6.29%
Interest bearing deposits
in banks and federal
funds sold 11,915 557 4.67%
TOTAL EARNING ASSETS 174,255 15,265 8.76%
Cash and due from banks 7,548
Premises and equipment 2,717
Other assets 3,393
Allowance for possible credit losses (1,128)
TOTAL $ 186,785
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Savings, MMDA, NOW $ 68,601 (1,903) 2.77%
Time 53,673 (2,872) 5.35%
TOTAL INTEREST-
BEARING DEPOSITS 122,274 (4,775) 3.91%
Repurchase agreements 11,361 (450) 3.96%
Other borrowings 1,349 (61) 4.60%
TOTAL INTEREST-BEARING
LIABILITIES 134,984 (5,286) 3.92%
Demand deposits 31,713
Other liabilities 1,022
Shareholders' equity 19,066
TOTAL $ 186,785
Net interest margin(1) $ 9,979
Interest income as a % of avg. earning assets 8.76%
Interest expense as a % of avg. earning assets 3.03%
Net interest margin 5.73%
(1) Includes taxable equivalent adjustments related to income on securities that
is exempt form federal income taxes. The federal statutory rate was 34%
(2) For purposes of these calculations, nonaccrual loans are included in the
average loan balance outstanding. Loan fees and late charges of $486, $971, and
$812 are included in interest income for 1999, 1998 and 1997.
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The following table sets forth, on a tax-equivalent basis, a summary of the
changes in net interest income resulting from changes in volumes and rates.
Changes not due solely to volume or rate changes are allocated to volume and
rate in proportion to the relationship of the absolute dollar amounts of the
change in each.
--------------------------------------------------------------
1999 versus 1998 1998 versus 1997
--------------------------------------------------------------
Increase (decrease) Increase (decrease)
Due to change in due to change in
--------------------------------------------------------------
Average Average Net Average Average Net
Volume Rate Change Volume Rate Change
--------------------------------------------------------------
(in thousands)
INTEREST INCOME
Loans $ 407 $ (960) $ (553) $ 1,181 $ (6) $ 1,175
Investment securities 914 (308) 606 430 (80) 350
Interest-bearing deposits in
banks and federal funds sold
47 (24) 23 157 129 286
TOTAL INTEREST INCOME 1,368 (1,292) 76 1,768 43 1,811
INTEREST EXPENSE
Savings deposits 623 (247) 376 159 (102) 57
Time deposits (203) (158) (361) 341 13 354
Repurchase agreements 59 (79) (20) 107 (32) 75
Other borrowings 96 38 134 135 10 145
TOTAL INTEREST EXPENSE 575 (446) 129 742 (111) 631
CHANGES IN NET
INTEREST INCOME $ 793 $ (846) $ 53 $ 1,026 $ 154 $ 1,180
The following chart further reflects changes in average balances and rates from
December 31, 1999 to December 31, 1998.
- ----------------------------------------- --------------------------------------------
INCREASE (DECREASE) IN AVERAGE BALANCE: INCREASE (DECREASE) IN AVERAGE RATE:
- ----------------------------------------- --------------------------------------------
Loans 3.16% Loans (7.06)%
Investments 32.09% Investments (9.29)%
Fed Funds & Deposits 5.92% Fed Funds & Deposits (3.01)%
TOTAL EARNING ASSETS 10.82% TOTAL EARNING ASSETS (9.33)%
Savings, NOW, MMDA 34.78% Savings, NOW, MMDA (11.41)%
Time (6.48)% Time (5.20)%
Repurchase Agreements 12.02% Repurchase Agreements (14.09)%
Other Borrowings 41.45% Other Borrowings 16.73%
TOTAL INT BEAR LIABILITIES 16.62% TOTAL INT BEAR LIABILITIES (12.40)%
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The following table further reflects changes in average balances and rates from
December 31, 1998 to December 31, 1997.
- ----------------------------------------- --------------------------------------------
INCREASE (DECREASE) IN AVERAGE BALANCE: INCREASE (DECREASE) IN AVERAGE RATE:
- ----------------------------------------- --------------------------------------------
Loans 9.85% Loans (.10)%
Investments 17.63% Investments (4.13)%
Fed Funds & Deposits 25.36% Fed Funds & Deposits 20.77%
TOTAL EARNING ASSETS 12.85% TOTAL EARNING ASSETS (.91)%
Savings, NOW, MMDA 8.63% Savings, NOW, MMDA (5.05)%
Time 11.81% Time .56%
Repurchase Agreements 25.21% Repurchase Agreements (6.82)%
Other Borrowings 293.62% Other Borrowings 13.04%
TOTAL INT BEAR LIABILITIES 13.14% TOTAL INT BEAR LIABILITIES (1.29)%
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE CREDIT LOSSES. Net interest
income after provision for possible credit losses was $10.7 million at December
31, 1999, $10.8 million at December 31, 1998, and $9.7 million at December 31,
1997. Total provision for possible credit loss expense for the three years
ending December 31, 1999 was $264,000, $236,000, and $165,000 respectively.
Total provision expense was increased due to loan volume increases. Recoveries
were $20,000, $14,000, and $0 in 1999, 1998, and 1997. Charge-offs of $632,000,
$32,000, and $2,000 were realized during the same periods. Historically, the
Bank's loan charge-off levels have been very low compared to its peers. The
$32,000 in credit losses in 1998 and $2,000 in 1997 were exceptionally low.
Although the year-over-year increase to $632,000 is large in dollars and
percentage terms, management has no present reason to believe the increase is a
trend in the quality of the overall loan portfolio. Management attributes part
of the increase to what would be expected as a result of growth in the Bank's
loan portfolio. In addition, more than half of the increase is attributable to
the charge-off of a single commercial loan. The Bank's management will continue
to monitor and analyze charge-off levels closely. Management's assessment of the
allowance for credit losses includes various factors such as current delinquent
and non-performing loans, historical analysis of industry credit loss
experience, knowledge of the present and anticipated economic future of its
market area, and loan grades. Management believes the quality of the loan
portfolio is outstanding due to strong internal controls, good loan policy
standards, experienced loan officers, and the strong economy in Oregon.
Management believes the allowance for credit losses at December 31, 1999 of $1.1
million is adequate. The allowance for possible credit losses to total loans at
December 31, 1999, 1998, and 1997 respectively was .77%, 1.07%, and .88%.
NON-INTEREST INCOME. Non-interest income (total other operating income) was $2.4
million for the year ended December 31, 1999, an 8.0% increase from $2.2 million
for 1998, which was 19.9% higher than the $1.8 million in 1997. These increases
are due to increased service charges, customer fee income, and Bankcard income,
which is primarily a function of increased volumes of accounts. Income from
Merchant Bankcard processing and fees associated with ATM and debit cards were
primarily behind the increase in non-interest income. This increase was the
result of increased volumes.
NON-INTEREST EXPENSE. Non-interest expense (other operating expenses) have
increased during the last three years ending December 31, 1999 to $8.1 million
from $7.2 million in 1998 and $6.2 million in 1997.
21
24
A 13.0% increase or $.9 million increase occurred from 1998 to 1999 and 15.5% or
a $1 million increase occurred from 1997 to 1998.
Non-interest expense consist primarily of employee salaries and benefits,
occupancy, data processing, bankcard services, office supplies, professional
services, and other non-interest expenses. The specific areas of increases
occurred in increased salaries and benefits, occupancy, bankcard processing and
equipment. Overall increases are a result of the Bank's increased volume and
number of branches, management's emphasis on business development, technology
improvements, marketing and staff training.
Opening the two new offices in Albany and McMinnville in 1999 resulted in higher
operating costs, which are not offset until a certain level of deposits and
loans is achieved. Initially, new branch offices will increase non-interest
expenses, thus having an adverse effect on net income for Bancorp. Management
anticipates that the new branches will add value to the Citizens Bank franchise.
At the end of 1999, the Bank employed 119 full time equivalent employees
compared to 111 at the end of 1998 and 108 at the end of 1997. The increase from
1998 to 1999 was primarily due to the staffing of the two new branch offices.
The Bank has continued to increase staff productivity through training,
education, and hiring practices.
INCOME TAXES. Income tax expense for 1999 was $1.8 million or 35.4% of income
before taxes, 1998 was $2.0 million or 34.5% of income before taxes, and 1997
was $2.0 million or 37.7% of income before taxes.
ASSET/LIABILITY MANAGEMENT. Bancorp uses an asset/liability modeling system
called ALX to estimate the degree of interest rate risk and market risk inherent
in its mix of interest earning assets and interest bearing liabilities. Bancorps
profitability is dependent to a large extent on net interest income. Bancorp is
very slightly asset sensitive, meaning that interest earning assets mature or
are otherwise subject to repricing at a slightly faster rate than interest
bearing liabilities. A significant decrease in market rates could adversely
impact the net earnings of Bancorp. In contrast, an inclining interest rate
environment could have a positive affect on net interest income. Bancorps
strategy is to keep a position that is very close to "balanced". That is, the
repricing of assets and liabilities would move much at the same rate. Because
the current position is only slightly asset sensitive the net interest margin
should increase slightly when rates increase and decrease slightly when rates
fall.
LIQUIDITY AND SOURCES OF FUNDS. Bancorp's primary sources of funds for liquidity
purposes are customer deposits, maturities of investment securities, sales of
"available for sale" securities, loan repayments, advances on lines of credit
from correspondent banks and from the Federal Home Loan Bank of Seattle, and the
purchase of federal funds. Bancorp can anticipate the availability of funds from
scheduled loan repayments, maturities of securities and from borrowed funds.
Customer deposits and unscheduled payments of loans are influenced by the
interest rate environment, the condition of the economy, competition and other
factors.
Deposits are Bancorp's primary source of new funds. At December 31, 1999, total
deposits were $194.4 million, $188.2 million at December 31, 1998, and $161.7
million at December 31, 1997. The Bank also had REPO'S (securities sold under
agreements to repurchase) for the periods of December 31, 1999, 1998, and 1997
of $13.4 million, $16.2 million, and $14.1 million, respectively. The overall
cost of funds was as follows:
22
25
COST OF FUNDS
-----------------------------
1999 1998 1997
-----------------------------
3.4% 3.9% 3.9%
Management anticipates that Bancorp will rely primarily on deposit growth,
maturities of investment securities, sales of available for sale securities, and
loan repayments to meet its liquidity needs. Borrowings can be used to provide
liquidity for short-term needs but it is the practice of Bancorp to attempt to
fund long-term loans and investments with core deposits and earnings, not
short-term borrowings. A limited amount of borrowings may be used on a long-term
basis to fund lending activities and to match maturities or repricing intervals
of assets.
The average daily amount of deposits and rates paid on deposits is summarized
for the periods indicated in the following table:
----------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------
(In Thousands) Amount $ Rate % Amount $ Rate % Amount $ Rate %
----------------------------------------------------------------------------
DEPOSITS
Demand $ 33,565 -- $ 34,792 -- $ 31,713 --
Savings $ 100,438 2.33% $ 74,518 2.63% $ 68,601 2.77%
Time $ 56,127 5.10% $ 60,014 5.38% $ 53,673 5.35%
TOTAL $ 190,130 $ 169,324 $ 153,987
The following table indicates the amount of the Bank's certificates of deposits
with balances equal to or greater than $100,000 classified by time remaining
until maturity as of December 31, 1999.
--------------------------------------------------
Maturity Period Certificates of Deposit
--------------------------------------------------
In Thousands
--------------------------------------------------
3 months or less 10,694
3 months through 6 months 2,772
6 months through 12 months 2,219
Over 12 months 4,012
TOTAL $19,697
23
26
The following table is a summary of securities sold under repurchase agreement
(REPO) for each of the last three years.
- --------------------------------------------------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Securities sold under agreement to repurchase:
Average interest rate
At year end 3.26% 3.10% 3.28%
For the year 3.17% 3.69% 3.96%
Average amount outstanding
during the year $15,935 $14,225 $11,361
Maximum amount outstanding
at any month end $18,124 $16,299 $14,086
Amount outstanding at year end $13,425 $16,299 $14,086
CAPITAL RESOURCES. Bancorp is subject to various capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators, that if undertaken, could have a direct
material effect on Bancorp's financial statements. Under capital adequacy
guidelines that involve quantitative measures of Bancorp's assets, and certain
off-balance-sheet items as calculated under regulatory accounting practices,
Bancorp's capital classification is also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
As of December 31, 1999 the most recent notification from the Bank's regulator
categorized the Bank as well-capitalized under the applicable regulations. To be
categorized as "well-capitalized," the Bank must maintain at least 10% total
risk based capital, 6% Tier 1 risk based capital and 5% Tier 1 leverage capital.
There are no conditions or events since that notification that management
believes have changed the institution's category.
Shareholder equity increased to $24.3 million at December 31, 1999 from $22.6
million in 1998 and $19.4 million in 1997. Citizens shareholder average equity,
as a percentage of average assets was 10.3% for the year ended December 31,
1999, 10.4% for the year ended December 31, 1998, and 10.2% for the year ended
December 31, 1997.
In a changing interest rate environment the value of the Bank's available for
sale portfolio may be negatively impacted and therefore may cause a reduction in
reported shareholder equity. Equity grew at 7.8% over the period between
December 31, 1998 and December 31, 1999, while assets grew by 2.4% over the same
period.
At December 31, 1999, Bancorp had no material commitment for capital
expenditures that would negatively impact Bancorp's capital position
24
27
The following table indicates Citizens Bancorp capital adequacy position at
December 31, 1999 and at December 31, 1998 and compares those positions to
capital adequacy requirements.
- --------------------------------------------------------------------------------
CITIZENS BANCORP
- --------------------------------------------------------------------------------
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
- --------------------------------------------------------------------------------
(IN THOUSANDS)
AS OF DECEMBER 31, 1999: AMOUNT RATIO AMOUNT RATIO
- --------------------------------------------------------------------------------
Total Risk-Based Capital
(to Risk-Weighted Assets) $25,531 17.1% $11,963 >=8%
Tier 1 Capital (to Risk-
Weighted Assets) $24,460 16.4% $ 5,982 >=4%
Tier 1 Capital (to average
Total Assets) $24,460 10.1% $ 9,677 >=4%
- --------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998:
- --------------------------------------------------------------------------------
Total Risk-Based Capital
(to Risk-Weighted Assets) $23,448 16.5% $11,346 >=8%
Tier 1 Capital (to Risk-
Weighted Assets) $22,029 15.5% $ 5,673 >=4%
Tier 1 Capital (to average
Total Assets) $22,029 9.8% $ 9,012 >=4%
Shareholders equity increased to $24.3 million at December 31, 1999 from $22.6
million in 1998 and $19.4 million in 1997.
25
28
INVESTMENT PORTFOLIO
The following table shows Investments Held to Maturity.
- --------------------------------------------------------------------------------------------
In Thousands
Outstanding Balance at December 31,
1999
- --------------------------------------------------------------------------------------------
Estimated Fair Value Amortized Cost % of Portfolio
- --------------------------------------------------------------------------------------------
Federal Agency
Obligations 487 485 .70%
Obligations of State and
Political Subdivisions 7,720 7,937 11.49%
TOTAL $8,207 $8,422 12.19%
- --------------------------------------------------------------------------------------------
In Thousands
Outstanding Balance at December 31,
1998
- --------------------------------------------------------------------------------------------
Estimated Fair Value Amortized Cost % of Portfolio
- --------------------------------------------------------------------------------------------
U.S. Treasury Securities $2,036 $2,014 3.33%
Federal Agency
Obligations 501 484 .80%
Obligations of State and
Political Subdivisions 7,320 7,235 11.94%
TOTAL $9,857 $9,733 16.07%
- --------------------------------------------------------------------------------------------
In Thousands
Outstanding Balance at December 31,
1997
- --------------------------------------------------------------------------------------------
Estimated Fair Value Amortized Cost % of Portfolio
- --------------------------------------------------------------------------------------------
U.S. Treasury Securities $6,036 $6,000 12.98%
Federal Agency
Obligations 500 482 1.04%
Obligations of State and
Political Subdivisions 3,561 3,501 7.57%
TOTAL $10,097 $9,983 21.59%
26
29
The following table sets forth the maturities and weighted average yields of
securities held to maturity at December 31, 1999.
- -------------------------------------------------------------------------------------------------
IN THOUSANDS
- -------------------------------------------------------------------------------------------------
After 1 year, but After 5 years, but
Amount Within 1 year before 5 years before 10 years After 10 years
- -------------------------------------------------------------------------------------------------
Federal Agency
Obligations 0 265 220 0
Obligations of State and
Political Subdivisions 605 2,762 3,209 1,096
TOTAL $ 605 $ 3,027 $ 3,694 $ 1,096
- -------------------------------------------------------------------------------------------------
Weighted Average Yield(*)
Federal Agency
Obligations 0 4.38% 4.50% 0
Obligations of State and
Political Subdivisions 4.49% 4.43% 4.26% 4.81%
TOTAL 4.49% 4.42% 4.28% 4.81%
(*) Yield on tax exempt obligations have not been computed on a tax equivalent basis
The following tables show Investments Available for Sale.
- -------------------------------------------------------------------------------------------------
In Thousands
Outstanding Balance at December 31,
1999
- -------------------------------------------------------------------------------------------------
Estimated Fair Value Amortized Cost % of Portfolio
- -------------------------------------------------------------------------------------------------
U.S. Treasury Securities $30,485 $30,711 44.12%
Federal Agency
Obligations 29,452 29,900 43.30%
Other Securities 741 741 1.08%
TOTAL $60,678 $61,352 87.81%
27
30
- -------------------------------------------------------------------------------------------------
In Thousands
Outstanding Balance at December 31,
1998
- -------------------------------------------------------------------------------------------------
Estimated Fair Value Amortized Cost % of Portfolio
- -------------------------------------------------------------------------------------------------
U.S. Treasury Securities $26,864 $26,679 44.34%
Federal Agency
Obligations 23,334 23,137 38.51%
Obligations of State and
Political Subdivisions 0 0 0%
Other Securities 657 657 1.08%
TOTAL $50,855 $50,473 83.93%
- -------------------------------------------------------------------------------------------------
In Thousands
Outstanding Balance at December 31,
1997
- -------------------------------------------------------------------------------------------------
Estimated Fair Value Amortized Cost % of Portfolio
- -------------------------------------------------------------------------------------------------
U.S. Treasury Securities $22,075 $22,027 47.73%
Federal Agency
Obligations 13,570 13,527 29.35%
Obligations of State and
Political Subdivisions 0 0 0
Other Securities 613 613 1.33%
TOTAL $36,258 $36,167 78.41%
The following table sets forth the maturities, weighted average maturities, and
weighted average yields of securities available for sale.
- -------------------------------------------------------------------------------------------------
After 1 year, but After 5 years, but
Amount Within 1 year before 5 years before 10 years After 10 years
- -------------------------------------------------------------------------------------------------
U.S. Treasury Securities $14,992 $15,493 0 0
Federal Agency
Obligations 4,918 24,534 0 0
Obligations of State and
Political Subdivisions 0 0 0 0
Other Securities 741 0 0 0
TOTAL $20,651 $40,027 0 0
28
31
- -------------------------------------------------------------------------------------------------
Investments Available For Sale
- -------------------------------------------------------------------------------------------------
After 1 year, but After 5 years, but
Amount Within 1 year before 5 years before 10 years After 10 years
- -------------------------------------------------------------------------------------------------
Weighted Average Yield(*)
U.S. Treasury Securities 5.75% 6.01% 0 0
Federal Agency
Obligations 5.03% 5.75% 0 0
Obligations of State and
Political Subdivisions 0 0 0 0
Other Securities 7.26% 0 0 0
TOTAL 5.63% 5.85% 0 0
(*) Yield information is computed using amortized cost balances and does not
give effect to changes in fair value that are reflected as a component of
shareholders equity.
LENDING AND CREDIT MANAGEMENT. Interest on loans is the primary source of income
for Bancorp. Net loans represented 58.1 of total assets as of December 31, 1999
as compared to 55.9% at December 31, 1998. The Bank's goal is to serve the
credit needs of the communities in which its offices are located. The primary
focus for lending is small-to-medium sized businesses, professionals, and
individuals. The Bank offers a broad base of loan products. Substantially all of
the Bank's loans are to customers located within the Bank's service areas.
Although the risk of non-payment always exists, type and level of risk changes
with different types of loans. The primary source of repayment is the income
generated by a business or by an individual. Loan risk is mitigated by lending
to borrowers with proven credit histories and demonstrated ability to repay.
Collateral provides an additional measure of security. The Bank manages risk in
the loan portfolio through its loan policies, underwriting practices and
continuing education for the lending professionals it employs.
29
32
At December 31, the following table sets forth the composition of the
Bank's Loan Portfolio by type of loan as of the dates indicated.
----------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------------------------
Type of Loan Amount % Amount % Amount % Amount % Amount %
----------------------------------------------------------------------------------------------------------------
Commercial $ 26,520 19% $ 26,234 20% $ 23,507 20% $ 21,975 19% $ 21,169 21%
Agriculture 13,875 10% 12,402 9% 10,992 9% 9,072 8% 8,834 9%
Real Estate
Construction 7,352 5% 7,900 6% 5,459 4% 3,865 3% 4,065 4%
1-4 Family 29,776 20% 31,390 24% 34,625 28% 34,322 29% 30,993 31%
Other 59,537 43% 50,421 38% 42,142 35% 40,300 35% 31,833 32%
Other -- -- -- -- -- -- -- -- 105 --
Consumer 3,718 3% 4,393 3% 5,423 4% 6,861 6% 5,240 4%
TOTAL LOANS $140,778 $132,740 $122,148 $116,395 $102,239
Less Deferred
Loan Fees (584) (614) (678) (709) (628)
Less
Allowance for
Credit Losses (1,071) (1,419) (1,201) (1,038) (896)
NET LOANS $139,123 100% $130,707 100% $120,269 100% $114,648 100% $100,715 100%
Interest income on loans is accrued daily on the principal balance
outstanding. Generally, no interest is accrued on loans deemed to be
uncollectible, or when the principal or interest payment becomes 90
days past due. At December 31, 1999 the Bank had loans totaling $73,000
that were 90 days or more past due and still accruing interest because
in management's judgement the loans were well secured and in the
process of collection.
The following table shows the contractual maturity of the Bank's gross
loans at December 31, 1999. Loans having no stated schedule of
repayments and no stated maturity, demand loans, and overdrafts are
reported as due in one year or less. Loan balances do not include
undisbursed loan proceeds, deferred loan fees and discounts and
allowance for losses on loans. The table does not reflect any estimate
of prepayments, which significantly shorten the average life of all
loans and may cause the Bank's actual repayment experience to differ
from that shown below.
- -------------------------------------------------------------------------------------------------
IN THOUSANDS
- -------------------------------------------------------------------------------------------------
After 1 year, but After 5 years, but
Within 1 year before 5 years before 10 years After 10 years
- -------------------------------------------------------------------------------------------------
Commercial $10,464 $ 8,245 $5,073 $2,736
Agriculture 11,283 2,484 93 15
Real Estate
Construction 7,210 0 0 142
1-4 Family 3,227 1,611 6,265 18,675
Other 3,405 7,514 12,959 35,658
Consumer 1,127 2,032 459 101
TOTAL $36,716 $21,886 $24,849 $57,327
30
33
The following table sets forth the dollar amount of all loans due one year or
more after December 31, 1999, which have fixed interest rates and have floating
or adjustable interest rates.
- --------------------------------------------------------------------------------
In Thousands
- --------------------------------------------------------------------------------
Fixed Rates Floating or Adjustable Rates
- --------------------------------------------------------------------------------
Commercial $ 8,026 $ 8,092
Agriculture 1,679 1,596
Real Estate
Construction 0 142
1-4 Family 10,692 13,682
Other 25,080 32,479
Consumer 2,462 132
TOTAL $47,939 $56,123
PROVISION FOR POSSIBLE CREDIT LOSSES. The provision for credit losses represents
charges made to operating expenses to maintain an appropriate allowance for
credit losses. Management considers various factors in establishing an
appropriate allowance. These factors include an assessment of the financial
condition of the borrower, a determination of the borrowers ability to service
the debt from cash flow, a conservative assessment of the value of the
underlying collateral, the condition of the specific industry of the borrower,
the economic health of the local community, a comprehensive analysis of the
levels and trends of loan types, and a review of past due and classified loans.
It is Bank policy that once each quarter, Bank management makes recommendations
to the Board regarding the adequacy of the Bank's allowance for credit losses
and the amount of the provision that should be charged against earnings for the
next three months. Management's recommendations are based on an internal loan
review process to determine specific potential loss factors on classified loans,
risk factor of loan grades, historical loss factors derived from actual net
charge-off experience, trends in non-performing loans and other potential risks
in the loan portfolio such as industry concentration, the local economy and the
volume of loans.
Management uses a loan grading system wherein loan officers assign a risk grade
to each of their loans at inception and at intervals based on receipt of
financial information, renewal, or when there is an indication that a credit may
have improved or weakened. The risk grades in the loan portfolio are used in
determining a factor that is used in analyzing the adequacy of the reserve for
credit losses.
Bancorp's policy is to charge off loans when, in management's opinion, the loan
or a portion of the loan is deemed uncollectible following a concerted
collection effort. Management continues to pursue collection after a loan is
charged-off until all possibilities for collection have been exhausted.
For the years ended December 31, 1997 through 1999, the provision for credit
losses was $165,000, $236,000, and $264,000 respectively. The increases to the
allowance for possible credit losses were a result of the growth in the loan
portfolio. The loan portfolio increased at December 31, 1999 by $8.1 million or
6.1% as compared to December 31, 1998, which increased $10.7 million, or 8.8%
from December 31, 1997.
31
34
As of December 31, 1999, the Bank held in its reserve for possible credit
losses a total of $1.1 million. The total reserve for possible credit
losses represents the Boards' opinion at December 31, of each year as to
an amount that would meet the Bank's needs in the event of an economic
downturn or unforeseen event.
It is the opinion of management that the allowance for possible credit
loss at December 31, 1999 of $1.1 million is adequate.
The following table represents information with respect to non-performing
loans and other assets:
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Loans on non-accrual status $ 654 $ 173 $ 0 $ 4 $ 106
Loans past due greater than 90 days 73 447 438 23 273
------ ------ ------ ------ ------
Total non-performing loans 727 620 438 27 379
Other real estate owned 0 0 240 59 0
------ ------ ------ ------ ------
Total non-performing assets $ 727 $ 620 $ 678 $ 86 $ 379
====== ====== ====== ====== ======
Allowance for loan losses $1,071 $1,419 $1,201 $1,039 $ 896
Allowance for loan losses/non-performing assets 147% 229% 177% 1,208% 236%
Non-performing loans/total loans .51% .47% .36% .02% .38%
Non-performing assets/total assets .30% .27% .34% .04% .23%
Bancorp has a policy that places loans on nonaccrual status after they
become 90 days past due unless the loan is well secured and in the
process of collection. Bancorp may place loans that are not contractually
past due or that are fully collateralized on nonaccrual status as a
management tool to actively oversee specific loans. Loans on nonaccrual
status at December 31, 1999 were approximately $654,000, $173,000 at
December 31, 1998, and $0 at December 31, 1997. Of the $654,000 on
non-accrual status as of December 31, 1999 approximately $458,000
represents the SBA guaranteed balance on two commercial loans. Bancorp
anticipates that these loans will be paid-off by the SBA sometime in
2000.
32
35
The following table summarizes transactions in the reserve for possible credit
losses and details the charge-offs, recoveries, and net credit losses by loan
category for the last five years.
----------------------------------------------
IN THOUSANDS
----------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
ALLOWANCE AT
BEGINNING OF PERIOD: $1,419 $1,201 $1,038 $ 896 $ 844
Provision for Possible
Credit Losses 264 236 165 134 100
CHARGE-OFFS:
Commercial 560 28 0 0 44
Agriculture 0 0 0 0 0
Real Estate 0 0 0 0 0
Construction 0 0 0 0 0
1-4 Family 61 0 0 0 0
Other 0 0 0 0 0
Consumer 11 4 2 8 10
TOTAL CHARGE-OFFS: $ 632 $ 32 $ 2 $ 8 $ 53
RECOVERIES:
Commercial 1 14 0 15 5
Agriculture 0 0 0 0 0
Real Estate 0 0 0 0 0
Construction 0 0 0 0 0
1-4 Family 0 0 0 0 0
Other 0 0 0 0 0
Consumer 19 0 0 0 0
TOTAL
RECOVERIES $ 20 $ 14 $ 0 $ 15 $ 5
NET RECOVERIES
(CHARGE-OFFS) (612) (18) (2) 7 (48)
BALANCE AT
END OF PERIOD $1,071 $1,419 $1,201 $1,038 $ 896
RATIO OF NET CHARGE-
OFFS TO AVG. LOANS
OUTSTANDING .45% .01% .00% .00% .05%
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No.
114, "Accounting by Creditors for Impairment of a Loan" and in October 1996
issued SFAS No. 118," "Accounting by Creditors for Impairment of a Loan--Income
Recognition Disclosures, an amendment to SFAS No. 114."
33
36
The Bank measures impaired loans based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or as a practical
expedient, at the loan's observable market price or the fair market value of the
collateral if the loan is collateral dependent. The Bank excludes loans that are
currently measured at fair value or at lower of cost or fair value, and certain
large groups of smaller balance homogeneous loans that are collectively measured
for impairment. At December 31, 1999 and 1998, the Bank had no materially
impaired loans.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET-LIABILITY MANAGEMENT AND INTEREST RATE SENSITIVITY
Bancorp's results of operations are largely dependent on its ability to manage
net interest income. The principal purpose of asset-liability management is to
manage the Bank's sources and uses of funds under various interest rate and
economic conditions in order to stabilize net income and minimize risk.
The Bank analyzes its interest rate risk by simulation modeling and by
traditional interest rate gap analysis. The model analyzes the Bank's current
position and anticipated future results based on assumptions and estimations
that management deems reasonable, although actual results may vary
substantially.
The main component of asset-liability management is the management of the Bank's
interest rate sensitivity and market risk. Interest-rate sensitivity is defined
as the volatility in earnings resulting from changes in interest rates and/or
the mismatch of repricing intervals between assets and liabilities. The Bank's
management attempts to manage its assets and liabilities to maximize earnings
growth by minimizing the effects of changing market rates, asset and liability
mix and prepayment trends. This is a "balanced position" strategy which lessens
the volatility in interest income. Management actively manages the relationship
between its interest rate sensitive assets and interest rate sensitive
liabilities.
If assets and liabilities do not mature or reprice simultaneously, and in equal
amounts, a gap is present and exposure to interest rate risk exists. An interest
rate sensitivity gap occurs when there is a different amount of rate sensitive
assets than rate sensitive liabilities scheduled to reprice over the same period
of time. The gap is considered positive when rate sensitive assets exceed rate
sensitive liabilities, and negative when rate sensitive liabilities exceed rate
sensitive assets. During a period of rising interest rates, a negative gap would
generally tend to adversely impact net interest income while a positive gap
would generally tend to result in an increase in net interest income. During a
period of declining interest rates, a negative gap would generally tend to
result in increased net interest income, while a positive gap would generally
tend to adversely affect net interest income.
34
37
The following table sets forth the interest rate sensitivity of Citizens assets
and liabilities over various contracted repricing periods and maturities as of
December 31, 1999. Certain shortcomings are inherent in the traditional gap
analysis presented in the table. For instance, although certain assets and
liabilities may have similar repricing periods or maturities, historically they
have been proven to react in different timings and degree to changes in market
interest rates. Additionally, loan repayments and early withdrawals of
certificates of deposits could cause the interest sensitivities to vary from
those which appear in the table.
December 31, 1999 (in thousands)
0 - 3 3 - 6 6 - 12 1 - 5 Over 5 Total
months months months years years
INTEREST EARNING -
ASSETS
Interest Bearing Deposits
2,870 -- -- -- -- 2,870
Loans 43,296 8,969 7,329 49,477 32,766 141,837
Investments 5,860 4,189 11,207 43,054 4,790 69,100
------------------------------------------------------------------------------
TOTAL INTEREST - $ 52,026 $ 13,158 $ 18,536 $ 92,531 $ 37,556 $ 213,807
EARNING ASSETS
INTEREST BEARING -
LIABILITIES
Demand Deposits 24,530 -- -- -- -- 24,530
Savings Deposits 73,350 -- -- -- -- 73,350
Time Deposits 26,650 12,719 11,317 12,925 16 63,627
REPO'S 13,425 -- -- -- -- 13,425
Other Borrowings 2,152 -- -- -- 2,973 5,125
------------------------------------------------------------------------------
TOTAL INTEREST-
BEARING LIABILITIES $ 140,107 $ 12,719 $ 11,317 $ 12,925 $ 2,989 $ 180,057
$ (88,081) $ 439 $ 7,219 $ 79,606 $ 34,497 $ 33,750
CUMULATIVE INTEREST
RATE SENSITIVITY GAP
$ (88,081) $ (87,642) $ (80,423) $ (817) $ 33,680
========= ========= ========= ========= =========
CUMULATIVE GAP AS A
PERCENT OF ASSETS
(36.8)% (36.6)% (33.6)% (.3%) 14.1%
On a straight gap measurement of interest rate sensitivity, Bancorp is asset
sensitive. Using the financial model with historical timings and degree of
market rate change effecting the components of the balance sheet, Bancorp is
very slightly asset sensitive. Bancorp will see little effect on its equity in
either a rising or declining interest rate environment based on the balance
sheet as of December 31, 1999. Management strives to maintain a balanced
interest sensitivity position.
Citizens sensitivity to gains or losses in future earnings due to hypothetical
increases or decreases in the Fed Funds rate as measured by its financial model
are as follows.
Increase in Net Interest Decrease in Net Interest
Interest Rates Margin Change Interest Rates Margin Change
+1% $(25,000) -1% $49,000
+2% $ 59,000 -2% $42,000
35
38
A 1% rate increase represents a .1% decrease in Bancorp's equity, while a 1%
rate decrease represents a .2% increase in Bancorp's equity. A 2% rate increase
represents a .2% increase in Bancorp's equity, while a 2% rate decrease
represents a .2% increase in Bancorp's equity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements and related documents
are set forth in this Annual Report on Form 10-K on the pages indicated:
Pages
Report of Independent Certified Public Accountants...........................36
Consolidated Balance Sheets..................................................37
Consolidated Statements of Income............................................38
Consolidated Statements of Shareholders' Equity..............................39
Consolidated Statements of Cash Flows........................................41
Notes to Consolidated Financial Statements...................................43
36
39
INDEPENDENT AUDITORS' REPORT
Board of Directors
CITIZENS BANCORP
Corvallis, Oregon
We have audited the accompanying consolidated balance sheets of CITIZENS BANCORP
AND SUBSIDIARY as of December 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. The consolidated
financial statements of CITIZENS BANCORP AND SUBSIDIARY as of and for the year
ended December 31, 1997 were audited by other auditors whose report, dated
February 27, 1998, expressed an unqualified opinion on those consolidated
statements.
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CITIZENS BANCORP AND
SUBSIDIARY as of December 31, 1999 and 1998, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ Knight Vale & Gregory PLLC
Tacoma, Washington
January 12, 2000
37
40
CONSOLIDATED BALANCE SHEETS
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(Dollars in Thousands)
Citizens Bancorp and Subsidiary
December 31, 1999 and 1998
1999 1998
ASSETS
Cash and due from banks $ 17,990 $ 12,771
Interest bearing deposits in banks 2,870 23,406
Securities available for sale 60,678 50,855
Securities held to maturity (fair value $8,207 and $9,857) 8,422 9,733
Loans held for sale 1,643 --
Loans 140,194 132,126
Allowance for credit losses 1,071 1,419
NET LOANS 139,123 130,707
Premises and equipment 5,283 3,435
Accrued interest receivable 2,032 1,853
Other assets 1,565 1,218
TOTAL ASSETS $ 239,606 $ 233,978
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 32,843 $ 42,025
Savings and interest-bearing demand 97,880 81,015
Time 63,627 65,195
TOTAL DEPOSITS 194,350 188,235
Short-term borrowings 15,577 16,644
Long-term borrowings 2,973 4,211
Accrued interest payable 207 227
Other liabilities 2,157 2,076
TOTAL LIABILITIES 215,264 211,393
SHAREHOLDERS' EQUITY
Common stock (no par value); authorized 10,000,000 shares;
issued and outstanding: 1999 - 4,124,091 shares; 1998 - 3,891,137 shares 19,868 16,069
Retained earnings 4,849 6,271
Accumulated other comprehensive income (loss) (375) 245
TOTAL SHAREHOLDERS' EQUITY 24,342 22,585
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 239,606 $ 233,978
See notes to consolidated financial statements.
38
41
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)
Citizens Bancorp and Subsidiary
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
INTEREST INCOME
Loans $12,614 $13,167 $11,992
Federal funds sold and deposits in banks 866 843 557
Securities available for sale - taxable 3,111 2,578 1,811
Securities held to maturity:
Taxable 80 115 574
Tax-exempt 352 244 218
TOTAL INTEREST INCOME 17,023 16,947 15,152
INTEREST EXPENSE
Deposits 5,201 5,186 4,775
Short-term borrowings 555 580 511
Long-term borrowings 290 151 --
TOTAL INTEREST EXPENSE 6,046 5,917 5,286
NET INTEREST INCOME 10,977 11,030 9,866
PROVISION FOR CREDIT LOSSES 264 236 165
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 10,713 10,794 9,701
NON-INTEREST INCOME
Service charges on deposit accounts 1,048 934 820
Gains on sales of securities available for sale -- 20 1
BankCard income 1,047 797 610
Other 308 475 426
TOTAL NON-INTEREST INCOME 2,403 2,226 1,857
NON-INTEREST EXPENSE
Salaries 3,225 2,736 2,304
Employee benefits 1,056 998 851
Occupancy 623 555 511
Furniture and equipment 599 529 471
BankCard expense 864 673 481
Office supplies 172 179 182
Other 1,540 1,483 1,394
TOTAL NON-INTEREST EXPENSE 8,079 7,153 6,194
INCOME BEFORE INCOME TAXES 5,037 5,867 5,364
INCOME TAXES 1,783 2,027 2,023
NET INCOME $ 3,254 $ 3,840 $ 3,341
EARNINGS PER SHARE
Basic and diluted $ .79 $ .94 $ .83
See notes to consolidated financial statements.
39
42
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Citizens Bancorp and Subsidiary
Years Ended December 31, 1999, 1998 and 1997
ACCUMULATED
SHARES OF OTHER
COMMON COMMON RETAINED COMPREHENSIVE
STOCK STOCK EARNINGS INCOME (LOSS) TOTAL
Balance at December 31, 1996 1,798,397 $ 13,341 $ 3,436 $ 28 $ 16,805
Comprehensive income:
Net income -- -- 3,341 -- 3,341
Other comprehensive income,
net of tax:
Change in unrealized gain
on securities -- -- -- 34 34
COMPREHENSIVE INCOME 3,375
Prior period adjustment -- -- 9 -- 9
5% stock dividend 91,539 1,648 (1,648) -- --
Cash dividend reinvestment
($7.40 per share) 32,385 528 -- -- 528
Cash dividends declared
($.32 per share) -- -- (1,306) -- (1,306)
BALANCE AT DECEMBER 31, 1997 1,922,321 15,517 3,832 62 19,411
Comprehensive income:
Net income -- -- 3,840 -- 3,840
Other comprehensive income,
net of tax:
Change in unrealized gain
on securities -- -- -- 183 183
COMPREHENSIVE INCOME 4,023
Two-for-one stock split 1,945,569 -- -- -- --
Cash dividend reinvestment
($11.31 per share) 23,247 552 -- -- 552
Cash dividends declared
($.34 per share) -- -- (1,401) -- (1,401)
BALANCE AT DECEMBER 31, 1998 3,891,137 16,069 6,271 245 22,585
(continued)
See notes to consolidated financial statements.
40
43
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(concluded) (Dollars in Thousands)
Citizens Bancorp and Subsidiary
Years Ended December 31, 1999, 1998 and 1997
ACCUMULATED
SHARES OF OTHER
COMMON COMMON RETAINED COMPREHENSIVE
STOCK STOCK EARNINGS INCOME (LOSS) TOTAL
Balance at December 31, 1998 3,891,137 $ 16,069 $ 6,271 $ 245 $ 22,585
Comprehensive income:
Net income -- -- 3,254 -- 3,254
Other comprehensive income,
net of tax:
Change in unrealized loss
on securities -- -- -- (620) (620)
COMPREHENSIVE INCOME 2,634
5% stock dividend 196,385 3,191 (3,191) -- --
Cash dividend reinvestment
($16.60 per share) 36,569 608 -- -- 608
Cash dividends declared
($.36 per share) -- -- (1,485) -- (1,485)
BALANCE AT DECEMBER 31, 1999 4,124,091 $ 19,868 $ 4,849 $ (375) $ 24,342
See notes to consolidated financial statements.
41
44
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Dollars in Thousands)
Citizens Bancorp and Subsidiary
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,254 $ 3,840 $ 3,341
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 264 236 165
Depreciation and amortization 487 396 347
Deferred income tax (benefit) 77 (30) 58
Loans originated for sale (1,643) -- --
Gains on sales of securities available for sale -- (20) (1)
Stock dividends received (52) (48) (40)
Increase in interest receivable (179) (186) (53)
Increase (decrease) in interest payable (20) 27 16
Other 97 373 (1,474)
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,285 4,588 2,359
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits in banks 20,537 (8,107) 1,081
Net (increase) decrease in federal funds sold -- 2,800 (2,800)
Activity in securities available for sale:
Sales 4,983 11,521 2,000
Maturities, prepayments and calls 25,630 7,000 21,000
Purchases (41,581) (32,868) (24,337)
Activity in securities held to maturity:
Maturities, prepayments and calls 2,590 5,444 6,205
Purchases (1,303) (5,182) (449)
Increase in loans made to customers,
net of principal collections (8,669) (10,623) (5,755)
Purchases of premises and equipment (2,276) (1,041) (46)
Other 6 236 (2,999)
NET CASH USED IN INVESTING ACTIVITIES (83) (30,820) (6,100)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) deposits 6,115 26,535 (135)
Net increase (decrease) in short-term borrowings (1,067) (256) 5,279
Net increase (decrease) in long-term borrowings (1,238) 4,211 --
Cash dividends paid (793) (755) (778)
Other -- -- 227
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,017 29,735 4,593
NET INCREASE IN CASH AND DUE FROM BANKS 5,219 3,503 852
CASH AND DUE FROM BANKS
Beginning of year 12,771 9,268 8,416
END OF YEAR $ 17,990 $ 12,771 $ 9,268
(continued)
See notes to consolidated financial statements.
42
45
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(concluded) (Dollars in Thousands)
Citizens Bancorp and Subsidiary
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 6,065 $ 5,890 $ 5,270
Income taxes paid 1,705 2,351 2,195
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Fair value adjustment of assets available for sale, net of tax ($ 620) $ 183 $ 34
Stock dividend 3,191 -- 1,648
Dividend reinvestment 608 552 528
See notes to consolidated financial statements.
43
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Citizens Bancorp and Subsidiary
December 31, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Citizens Bancorp
(the Company) and its wholly owned subsidiary, Citizens Bank (the Bank). All
significant intercompany transactions and balances have been eliminated.
NATURE OF OPERATIONS
The Company is a holding company which operates primarily through its
subsidiary, the Bank. The Bank operates nine branches in Western Oregon in
Benton, Lane, Linn, and Yamhill Counties. The Bank's primary source of revenue
is providing loans with a focus on small- to medium-sized businesses. The
principal source of the Bank's funds is deposits by customers in its market
area.
CONSOLIDATED FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry. The preparation of consolidated 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 the disclosure of contingent assets and liabilities, as of the
date of the balance sheet, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ significantly from
those estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for credit losses and the valuation of deferred tax assets.
Certain prior year amounts have been reclassified to conform to the 1999
presentation. All dollar amounts, except per share information, are stated in
thousands.
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of debt securities which may be sold to
implement the Bank's asset/liability management strategies and in response to
changes in interest rates and similar factors, and certain equity securities.
Securities available for sale are reported at fair value. Unrealized gains and
losses, net of the related deferred tax effect, are reported as a net amount in
a separate component of shareholders' equity entitled "accumulated other
comprehensive income (loss)." Realized gains and losses on securities available
for sale, determined using the specific identification method, are included in
earnings. Amortization of premiums and accretion of discounts are recognized in
interest income over the period to maturity.
SECURITIES HELD TO MATURITY
Debt securities for which the Bank has the positive intent and ability to hold
to maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts, which are recognized in interest income over the period
to maturity.
(continued)
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47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Citizens Bancorp and Subsidiary
December 31, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
LOANS HELD FOR SALE
Government guaranteed mortgage loans originated for sale in the secondary market
are carried at the lower of cost or estimated market value. Net unrealized
losses are recognized through a valuation allowance established by charges to
income.
LOANS
Loans are stated at the amount of unpaid principal, reduced by deferred loan
fees and an allowance for credit losses. Interest on loans is accrued daily
based on the principal amount outstanding.
Generally the accrual of interest on loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due or when
they are past due 90 days as to either principal or interest, unless they are
well secured and in the process of collection. When interest accrual is
discontinued, all unpaid accrued interest is reversed against current income. If
management determines that the ultimate collectibility of principal is in doubt,
cash receipts on nonaccrual loans are applied to reduce the principal balance.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and amortized as an adjustment of the yield of the related loan.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operations and reduced by loans charged off,
net of recoveries. The allowance is based on management's periodic evaluation of
potential losses in the loan portfolio after consideration of historical loss
experience, adverse situations that may affect the borrowers' ability to repay,
the estimated value of any underlying collateral, economic conditions, the
results of examination of individual loans, the evaluation of the overall
portfolio by senior credit personnel and federal and state regulatory agencies,
and other risks inherent in the portfolio. This evaluation is inherently
subjective, as it requires the use of current estimates, which may vary from the
ultimate collectibility experienced in the future. The estimates used are
reviewed periodically; as adjustments become necessary, they are charged to
operations in the period in which they become known.
When management determines it is possible that a borrower will be unable to
repay all amounts due according to the terms of the loan agreement, including
scheduled interest payments, the loan is considered impaired. Loans that
experience insignificant payment delays and payment shortfalls are generally not
classified as impaired. Management determines the significance of payment delays
and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower's prior payment record, and
the amount of shortfall in relation to the principal and interest owed. The
amount of impairment is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, when the primary
source of repayment is provided by real estate collateral, at the fair value of
the collateral less estimated selling costs. The amount of impairment and any
subsequent charges are recorded through the provision for credit losses as an
adjustment to the allowance for credit losses.
(continued)
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48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Citizens Bancorp and Subsidiary
December 31, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
TRANSFERS OF FINANCIAL ASSETS
Transfers of financial assets are accounted for as sales when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Bank, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Bank does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation, which
is computed on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the term of the lease or the
estimated useful life of the improvement, whichever is less. Gains or losses on
dispositions are reflected in earnings.
INCOME TAXES
Deferred tax assets and liabilities result from differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities, and are reflected at currently enacted income tax rates applicable
to the period in which the deferred tax assets or liabilities are expected to be
realized or settled. The deferred tax provision represents the difference
between the net deferred tax asset/liability at the beginning and end of the
year. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
CASH EQUIVALENTS
The Company considers all amounts included in the balance sheet caption "Cash
and due from banks" to be cash equivalents.
The Bank maintains its cash in depository institution accounts which, at times,
may exceed federally insured limits. The Bank has not experienced any losses in
such accounts.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating the
fair values of financial instruments disclosed in these financial statements:
CASH AND SHORT-TERM INSTRUMENTS
The carrying amounts of cash and short-term instruments approximate
their fair value.
SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
Fair values for securities, excluding restricted equity securities, are
based on quoted market prices. The carrying values of restricted equity
securities approximate fair values.
(continued)
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49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Citizens Bancorp and Subsidiary
December 31, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
FAIR VALUES OF FINANCIAL INSTRUMENTS (concluded)
LOANS
For variable rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. Fair
values for fixed rate loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values for
impaired loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable.
DEPOSIT LIABILITIES
The fair values disclosed for demand deposits are, by definition, equal
to the amounts payable on demand at the reporting date (that is, their
carrying amounts). The carrying amounts of variable rate, fixed term
money market accounts and certificates of deposit approximate their
fair values at the reporting date. Fair values for fixed rate
certificates of deposit are estimated using a discounted cash flow
calculation based on interest rates currently being offered on similar
certificates.
SHORT-TERM AND LONG-TERM BORROWINGS
The carrying amounts of repurchase agreements and other short-term
borrowings maturing within 90 days approximate their fair values. Fair
values of other borrowings are estimated using discounted cash flow
analyses based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
EARNINGS PER SHARE
Basic earnings per share exclude dilution and are computed by dividing net
income by the weighted average number of common shares outstanding. Diluted
earnings per share reflect the potential dilution that could occur if common
shares were issued pursuant to the exercise of options under the Company's stock
option plans. In 1999, the options did not have a dilutive effect on earnings
per share.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in its balance sheet and measure those instruments at fair value.
Under this statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk. This statement is
effective for all fiscal years beginning after June 15, 2000. The Bank had no
derivatives as of December 31, 1999, nor does the Bank engage in any hedging
activities. The Company does not anticipate that the adoption of SFAS No. 133
will have a material effect on its financial position or results of operations.
47
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Citizens Bancorp and Subsidiary
December 31, 1999 and 1998
NOTE 2 - RESTRICTED ASSETS
Federal Reserve Board regulations require that the Bank maintain certain minimum
reserve balances on deposit with the Federal Reserve Bank. The amounts of such
balances for the years ended December 31, 1999 and 1998 were approximately $100
and $1,733, respectively.
NOTE 3 - DEBT AND RESTRICTED EQUITY SECURITIES
Debt and restricted equity securities have been classified according to
management's intent. The carrying amount of securities and their approximate
fair values were as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUES
SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1999
U.S. Government and agency securities $ 60,611 $ 2 $ (676) $ 59,937
Restricted equity securities 741 -- -- 741
Total $ 61,352 $ 2 $ (676) $ 60,678
DECEMBER 31, 1998
U.S. Government and agency securities $ 49,816 $ 394 $ (12) $ 50,198
Restricted equity securities 657 -- -- 657
Total $ 50,473 $ 394 $ (12) $ 50,855
SECURITIES HELD TO MATURITY
DECEMBER 31, 1999
State and municipal securities $ 8,422 $ 14 $ (229) $ 8,207
DECEMBER 31, 1998
U.S. Government and agency securities $ 2,014 $ 22 $ -- $ 2,036
State and municipal securities 7,719 119 (17) 7,821
TOTAL $ 9,733 $ 141 $ (17) $ 9,857
(continued)
48
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Citizens Bancorp and Subsidiary
December 31, 1999 and 1998
NOTE 3 - DEBT AND RESTRICTED EQUITY SECURITIES (concluded)
The contractual maturities of debt securities held to maturity and available for
sale at December 31, 1999 are as follows:
HELD TO MATURITY AVAILABLE FOR SALE
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
Due in one year or less $ 605 $ 606 $ 19,965 $ 19,910
Due from one year to five years 3,027 3,002 40,646 40,027
Due from five to ten years 4,098 3,952 -- --
Due after ten years 692 647 -- --
Total $ 8,422 $ 8,207 $ 60,611 $ 59,937
Securities carried at approximately $30,910 at December 31, 1999 and $26,271 at
December 31, 1998 were pledged to secure public deposits and for other purposes
required or permitted by law.
Gross realized gains on sales of securities available for sale were $1, $20 and
$1 for the years ended December 31, 1999, 1998 and 1997, respectively.
Gross realized losses on sales of securities available for sale were $1 in 1999;
no realized losses occurred in 1998 or 1997.
NOTE 4 - LOANS
Loans at December 31 consist of the following:
1999 1998
Agriculture $ 13,875 $ 12,402
Commercial 26,520 26,234
Real estate:
Residential 1-4 family 29,776 31,390
Construction 7,352 7,900
Other 59,537 50,421
Consumer 3,718 4,393
140,778 132,740
Less net deferred loan fees 584 614
TOTAL LOANS $140,194 $132,126
(continued)
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52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Citizens Bancorp and Subsidiary
December 31, 1999 and 1998
NOTE 4 - LOANS (concluded)
Changes in the allowance for credit losses for the years ended December 31 are
as follows:
1999 1998 1997
Balance at beginning of year $ 1,419 $ 1,201 $ 1,038
Provision for credit losses 264 236 165
Charge-offs (632) (32) (2)
Recoveries 20 14 --
NET CHARGE-OFFS (612) (18) (2)
BALANCE AT END OF YEAR $ 1,071 $ 1,419 $ 1,201
Following is a summary of information pertaining to impaired loans:
1999 1998
DECEMBER 31
Impaired loans without a valuation allowance $499 $173
Impaired loans with a valuation allowance 65 --
TOTAL IMPAIRED LOANS $564 $173
VALUATION ALLOWANCE RELATED TO IMPAIRED LOANS $ 59 $--
YEARS ENDED DECEMBER 31
Average investment in impaired loans $477 $ 17
Interest income recognized on a cash basis on impaired loans -- --
At December 31, 1999, there were no commitments to lend additional funds to
borrowers whose loans have been modified. Loans 90 days and over past due still
accruing interest were $73 and $447 at December 31, 1999 and 1998, respectively.
Certain related parties of the Company, principally Company directors, their
associates and key officers, were loan customers of the Bank in the ordinary
course of business during 1999 and 1998. Total loans outstanding at December 31,
1999 and 1998 to key officers and directors were $2,124 and $2,004,
respectively. During 1999, advances totaled $1,869, and repayments totaled
$1,749 on these loans.
50
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Citizens Bancorp and Subsidiary
December 31, 1999 and 1998
NOTE 5 - PREMISES AND EQUIPMENT
The components of premises and equipment at December 31 are as follows:
1999 1998
Land and buildings $5,536 $4,058
Furniture and equipment 2,664 2,135
Construction in progress 842 700
9,042 6,893
Less accumulated depreciation and amortization 3,759 3,458
TOTAL PREMISES AND EQUIPMENT $5,283 $3,435
The Bank leases branch premises under operating leases which expire at various
dates through January 31, 2020. Rental expense for leased premises was $134,
$111 and $99 for 1999, 1998 and 1997, respectively, which is included in
occupancy expense.
Minimum net rental commitments under noncancellable leases having an original or
remaining term of more than one year are as follows at December 31, 1999:
2000 $ 118
2001 118
2002 118
2003 98
2004 53
Thereafter 1,436
TOTAL MINIMUM PAYMENTS REQUIRED $1,941
Certain leases contain renewal options from five to ten years and escalation
clauses based on increases in property taxes and other costs.
NOTE 6 - DEPOSITS
The aggregate amount of certificates of deposit with balances in excess of one
hundred thousand dollars was approximately $19,697 and $20,967 at December 31,
1999 and 1998, respectively.
At December 31, 1999, the scheduled maturities of certificates of deposit are as
follows:
2000 $50,686
2001 9,127
2002 2,528
2003 896
2004 390
$63,627
51
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Citizens Bancorp and Subsidiary
December 31, 1999 and 1998
NOTE 7 - SHORT-TERM BORROWINGS
Securities sold under agreements to repurchase, and treasury tax and loan
deposits represent short-term borrowings with maturities which do not exceed 120
days. The following is a summary of such short-term borrowings for the years
ended December 31:
1999 1998
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Average balance during the year $15,935 $14,225
Average interest rate during the year 3.17% 3.69%
Maximum month-end balance during the year 18,124 16,299
Balance at December 31 13,425 16,299
TREASURY TAX AND LOAN DEPOSITS
Average balance during the year $ 1,046 $ 1,116
Average interest rate during the year 4.73% 4.76%
Maximum month-end balance during the year 2,301 2,580
Balance at December 31 2,152 345
NOTE 8 - LONG-TERM BORROWINGS
The Bank has agreements with commercial banks for lines of credit totaling
$21,208, none of which was used at December 31, 1999 and 1998. The Bank also has
a line of credit with the Federal Home Loan Bank of Seattle (FHLB) totaling 15%
of assets, of which $2,973 was used at December 31, 1999, which represents the
Bank's outstanding long-term borrowings. The FHLB advances are due $240
annually, bear interest at 6.06%, and mature in June 2010 and April 2013. Future
minimum payment obligations are as follows:
2000 $ 240
2001 240
2002 240
2003 240
2004 240
Thereafter 1,773
52
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Citizens Bancorp and Subsidiary
December 31, 1999 and 1998
NOTE 9 - EMPLOYEE BENEFITS
The Bank has a 401(a) profit sharing plan covering substantially all employees
who have completed one year or more of service. Contributions to the 401(a)
profit sharing plan consist of employer contributions (up to a maximum of 15% of
employee salaries), which are at the discretion of the Board of Directors. Total
contributions by the Bank to this plan in 1999, 1998 and 1997 were $335, $339
and $281, respectively.
NOTE 10 - INCOME TAXES
Income taxes are comprised of the following for the years ended December 31:
1999 1998 1997
Current:
Federal $ 1,386 $ 1,657 $ 1,752
State 320 400 213
Deferred (benefit) 77 (30) 58
TOTAL INCOME TAXES $ 1,783 $ 2,027 $ 2,023
The following is a reconciliation between the statutory and the effective
federal income tax rates for the years ended December 31:
1999 1998 1997
PERCENT PERCENT PERCENT
OF PRE-TAX OF PRE-TAX OF PRE-TAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
Income tax at statutory rates $ 1,713 34.0% $ 1,995 34.0% $ 1,823 34.0%
Increase (decrease) resulting from:
Tax-exempt income (105) (2.1) (74) (1.3) (59) (1.0)
State income taxes, net of
federal income tax effect 211 4.2 264 4.5 140 2.5
Other (36) (.7) (158) (2.7) 119 2.2
TOTAL INCOME TAX EXPENSE $ 1,783 35.4% $ 2,027 34.5% $ 2,023 37.7%
(continued)
53
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Citizens Bancorp and Subsidiary
December 31, 1999 and 1998
NOTE 10 - INCOME TAXES (concluded)
The tax effect of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31 are:
1999 1998 1997
DEFERRED TAX ASSETS
Allowance for credit losses $ 475 $ 494 $ 414
Other 54 51 51
Unrealized loss on securities available for sale 299 -- --
TOTAL DEFERRED TAX ASSETS 828 545 465
DEFERRED TAX LIABILITIES
Accumulated depreciation (42) (31) (32)
Deferred income (120) (70) (19)
Unrealized gain on securities available for sale -- (137) (29)
TOTAL DEFERRED TAX LIABILITIES (162) (238) (80)
NET DEFERRED TAX ASSETS $ 666 $ 307 $ 385
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Bank is 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. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. A summary of the Bank's
commitments at December 31 is as follows:
1999 1998
Commitments to extend credit:
Real estate secured $ 3,896 $ 1,575
Other 29,564 17,468
TOTAL COMMITMENTS TO EXTEND CREDIT $33,460 $19,043
Standby letters of credit $ 2,206 $ 2,366
(continued)
54
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Citizens Bancorp and Subsidiary
December 31, 1999 and 1998
NOTE 11 - COMMITMENTS AND CONTINGENCIES (concluded)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank's experience has been that approximately 70% of loan commitments are drawn
upon by customers. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the party. Collateral held varies, but may include accounts receivable,
inventory, property and equipment, residential real estate, and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above, and is required in instances where the Bank deems necessary.
Because of the nature of its activities, the Company is subject to various
pending and threatened legal actions which arise in the ordinary course of
business. In the opinion of management, liabilities arising from these claims,
if any, will not have a material effect on the financial position of the
Company.
NOTE 12 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
Most of the Bank's business activity is with customers located in the State of
Oregon. Investments in state and municipal securities involve governmental
entities primarily within the State. Loans are generally limited, by federal and
state banking regulations, to 15% of the Bank's shareholders' equity, excluding
accumulated other comprehensive income (loss) for loans not fully secured by a
first lien on real estate and 25% for loans fully secured by a first lien on
real estate.
NOTE 13 - CASH DIVIDEND REINVESTMENT PLAN
In July 1997, the Company instituted a dividend reinvestment plan which allows
for 50% or 100% of the cash dividends to be reinvested in shares of Company
common stock based upon shareholder election. Under the plan, 1,575,000 shares
are authorized for dividend reinvestment, of which 87,216 shares have been
issued through December 31, 1999.
NOTE 14 - STOCK SPLITS AND STOCK DIVIDENDS
In 1999, the Board of Directors declared a 5% stock dividend, and 196,385 shares
were issued. In 1998, the Board of Directors declared a two-for-one stock split,
and 1,945,569 shares were issued. In 1997, the Board of Directors declared a 5%
stock dividend, and 91,539 shares were issued. Per share information for the
current and prior periods and share information under the dividend reinvestment
plan have been adjusted to reflect the effect of the stock dividends and stock
split.
55
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Citizens Bancorp and Subsidiary
December 31, 1999 and 1998
NOTE 15 - STOCK OPTIONS
In 1999, the Company's shareholders approved a stock option plan, which is
described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for the plan. Accordingly, no compensation cost
has been recognized for the plan. Had compensation cost for the Company's stock
option plan been determined based on the fair value at the grant dates under the
plan, consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to these pro forma amounts at
December 31, 1999:
Net income:
As reported $ 3,254
Pro forma 3,253
Earnings per share:
Basic and diluted:
As reported $ .79
Pro forma .79
EMPLOYEE STOCK OPTION PLAN
Under the Company's qualified incentive stock option plan, the Company may grant
incentive options for up to 1% of the issued and outstanding shares of its
common stock to certain key employees. The exercise price of each option equals
the fair market value of the Company's stock on the date of grant, and an
option's maximum term is ten years. Options granted during 1999 vest over a
four-year period at 25% per year. During 1999, options for 14,500 shares were
granted at $13.00 per share. None of the options granted were vested at December
31, 1999.
The fair value of each option grant is estimated on the date of grant, based on
the Black-Scholes option-pricing model and using the following weighted-average
assumptions: dividend yield of 2.77% for all years; risk-free interest rates of
6.55% for 1999; and expected lives of ten years. The weighted average fair value
of options granted during 1999 was $3.04.
NOTE 16 - REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines on the regulatory framework for prompt corrective action, the Bank
must meet specific capital adequacy guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital
classification is also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
(continued)
56
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Citizens Bancorp and Subsidiary
December 31, 1999 and 1998
NOTE 16 - REGULATORY MATTERS (concluded)
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of Tier 1 capital (as defined in the regulations) to
total average assets (as defined), and minimum ratios of Tier 1 and total
capital (as defined) to risk-weighted assets (as defined). Management believes,
as of December 31, 1999, that the Company and the Bank meet all capital
requirements to which they are subject.
As of December 31, 1999, the most recent notification from the Bank's regulator
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table:
TO BE WELL CAPITALIZED
UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
DECEMBER 31, 1999
Tier 1 capital (to average assets):
Consolidated $24,460 10.11% $ 9,677 4.00% N/A N/A
Bank 24,298 10.05 9,673 4.00 $ 12,091 5.00%
Tier 1 capital (to risk-weighted assets):
Consolidated 24,460 16.36 5,982 4.00 N/A N/A
Bank 24,298 16.26 5,977 4.00 8,966 6.00
Total capital (to risk-weighted assets):
Consolidated 25,531 17.07 11,963 8.00 N/A N/A
Bank 25,369 16.98 11,954 8.00 14,943 10.00
DECEMBER 31, 1998
Tier 1 capital (to average assets):
Consolidated $22,029 9.79% $ 9,012 4.00% N/A N/A
Bank 21,937 9.74 9,003 4.00 $ 11,264 5.00%
Tier 1 capital (to risk-weighted assets):
Consolidated 22,029 15.53 5,673 4.00 N/A N/A
Bank 21,937 15.52 5,654 4.00 8,480 6.00
Total capital (to risk-weighted assets):
Consolidated 23,448 16.53 11,346 8.00 N/A N/A
Bank 23,356 16.52 11,307 8.00 14,134 10.00
RESTRICTIONS ON RETAINED EARNINGS
At December 31, 1999, there were no restrictions on the Company's or the Bank's
retained earnings regarding payment of dividends.
57
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Citizens Bancorp and Subsidiary
December 31, 1999 and 1998
NOTE 17 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS - DECEMBER 31
1999 1998
ASSETS
Cash $ 1,487 $ 1,401
Investment in subsidiary 24,180 22,493
Other 160 92
TOTAL ASSETS $25,827 $23,986
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Dividends payable $ 1,485 $ 1,401
SHAREHOLDERS' EQUITY 24,342 22,585
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $25,827 $23,986
CONDENSED STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31
1999 1998 1997
INCOME
Dividend income from subsidiary $ 1,640 $ 1,520 $ 1,407
EXPENSES
Amortization and other expense 130 142 59
Interest expense -- -- 1
INCOME BEFORE INCOME TAX BENEFIT 1,510 1,378 1,347
INCOME TAX BENEFIT 44 51 24
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY 1,554 1,429 1,371
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 1,700 2,411 1,970
NET INCOME $ 3,254 $ 3,840 $ 3,341
(continued)
58
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Citizens Bancorp and Subsidiary
December 31, 1999 and 1998
NOTE 17 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (concluded)
CONDENSED STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,254 $ 3,840 $ 3,341
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 5 5 3
Equity in undistributed income of subsidiary (1,700) (2,411) (1,970)
Other (67) (52) 1,272
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,492 1,382 2,646
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of software (6) -- (15)
Investment in Bank (607) (552) (528)
NET CASH USED IN INVESTING ACTIVITIES (613) (552) (543)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (793) (755) (778)
NET INCREASE IN CASH 86 75 1,325
CASH
Beginning of year 1,401 1,326 1
End of year $ 1,487 $ 1,401 $ 1,326
NOTE 18 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December 31
were as follows:
1999 1998
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
FINANCIAL ASSETS
Cash and due from banks,
interest bearing deposits with
banks, and federal funds sold $ 19,347 $ 19,347 $ 36,177 $ 36,177
Securities available for sale 60,678 60,678 50,855 50,855
Securities held to maturity 8,422 8,207 9,733 9,857
Loans receivable, net 140,766 141,096 130,707 130,668
FINANCIAL LIABILITIES
Deposits $194,350 $199,177 $188,235 $188,523
Short-term borrowings 15,577 15,577 16,644 16,644
Long-term borrowings 2,973 2,973 4,211 4,211
59
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Citizens Bancorp and Subsidiary
December 31, 1999 and 1998
NOTE 19 - COMPREHENSIVE INCOME
Net unrealized gains are as follows:
BEFORE-TAX TAX NET-OF-TAX
AMOUNT EXPENSE AMOUNT
1999
Unrealized holding losses arising during the year $ 1,057 $ 437 $ 620
Less reclassification adjustments for gains realized
in net income -- -- --
NET UNREALIZED LOSS $ 1,057 $ 437 $ 620
1998
Unrealized holding gains arising during the year $ 311 $ 115 $ 196
Less reclassification adjustments for gains realized
in net income 20 7 13
NET UNREALIZED GAIN $ 291 $ 108 $ 183
1997
Unrealized holding gains arising during the year $ 51 $ 16 $ 35
Less reclassification adjustments for gains realized
in net income 1 -- 1
NET UNREALIZED GAIN $ 50 $ 16 $ 34
NOTE 20 - EARNINGS PER SHARE DISCLOSURES
Following is information regarding the calculation of basic and diluted earnings
per share for the year indicated.
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
YEAR ENDED DECEMBER 31, 1999
Basic earnings per share:
Net income $ 3,254 4,122,989 $ .79
Effect of dilutive securities:
Options -- 2,896 --
Diluted earnings per share:
NET INCOME $ 3,254 4,125,884 $ .79
60
63
SUPPLEMENTARY INFORMATION
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Citizens Bancorp and Subsidiary
December 31, 1999 and 1998
1999 1998
INTEREST INTEREST
AVERAGE INCOME AVERAGE AVERAGE INCOME AVERAGE
BALANCE (EXPENSE) RATE BALANCE (EXPENSE) RATE
ASSETS
Earning assets:
Loans $ 135,032 $ 12,614 9.3% $ 130,895 $ 13,396 10.2%
Federal funds sold and
interest bearing deposits 15,820 866 5.5 14,937 843 5.6
Investment securities 67,128 3,543 5.3 50,809 2,936 5.8
TOTAL EARNING ASSETS/
INTEREST INCOME 217,980 17,023 7.8% 196,641 17,175 8.7%
Cash and due from banks 12,388 8,356
Premises and equipment - net 4,689 2,904
Other assets 5,690 5,849
Allowance for credit losses (1,417) (1,299)
TOTAL ASSETS $ 239,377 $ 212,451
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Savings and interest-bearing
demand $ 100,438 (2,336) 2.3% $ 82,242 (2,368) 2.9%
Time 56,127 (2,865) 5.1 52,292 (2,821) 5.4
Short-term borrowings 16,993 (555) 3.3 15,341 (580) 3.8
FHLB borrowings 4,545 (290) 6.4 2,845 (151) 5.3
TOTAL INTEREST BEARING
LIABILITIES/INTEREST EXPENSE 178,103 (6,046) 3.4% 152,720 (5,920) 3.9%
Demand deposits 33,565 34,793
Other liabilities 3,088 3,166
Shareholders' equity 24,621 21,772
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 239,377 $ 212,451
NET INTEREST INCOME $ 10,977 $ 11,255
NET INTEREST INCOME AS A PERCENTAGE OF
AVERAGE EARNING ASSETS
Interest income 7.8% 8.7%
Interest expense 2.8 3.0
NET INTEREST INCOME 5.0% 5.7%
61
64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included in Bancorp's definitive proxy
statement for its annual meeting of shareholders scheduled for April 18, 2000
and is incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION AND REPORT OF COMMITTEES
The information required by this item is included in Bancorp's definitive proxy
statement for its annual meeting of shareholders scheduled for April 18, 2000
and is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is included in Bancorp's definitive proxy
statement for its annual meeting of shareholders scheduled for April 18, 2000
and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in Bancorp's definitive proxy
statement for its annual meeting of shareholders scheduled for April 18, 2000
and is incorporated herein by this reference.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) Exhibits.
Pursuant to Item 601 of Regulation S-K, the following exhibits are attached
hereto or are incorporated herein by reference.
(Note: The per share earnings computation statement required by Item 601(b)(11)
of Regulation S-K is contained in Note 20 to the consolidated financial
statements contained in Part II, Item 8 of this Form 10-K, and are hereby
incorporated herein by this reference.)
3(i) Articles of Incorporation. (Regulation S-K, Item 601, Exhibit Table Item
(3)). Bancorp's Articles of Incorporation, as amended, are attached as
Exhibit 3(i) to Bancorp's Form 10-Q for the period ending June 30, 1999
and are incorporated herein by this reference.
62
65
3(ii) Bylaws. (Regulation S-K, Item 601, Exhibit Table Item (3)). Bancorp's
Bylaws are attached as Exhibit 3(ii) to Bancorp's Form 10-K for the year
ending December 31, 1997 and are incorporated herein by this reference.
10.1 Incentive Stock Option Plan. (Regulation S-K, Item 601, Exhibit Table
Item (10)). Bancorp's Incentive Stock Option Plan is attached as Exhibit
99.1 to Bancorp's Form S-8 filed with the Securities and Exchange
Commission on June 23, 1999 and is incorporated herein by this reference.
10.2 Stock Bonus Plan. (Regulation S-K, Item 601, Exhibit Table Item (10)).
Bancorp's Stock Bonus Plan is attached as Exhibit 99.2 to Bancorp's Form
S-8 filed with the Securities and Exchange Commission on June 23, 1999
and is incorporated herein by this reference.
21.1 List of Subsidiaries. (Regulation S-K, Item 601, Exhibit Table Item
(21)). Attached hereto is a list of Bancorp's subsidiaries as of
December 31, 1999.
27.1 Financial Data Schedule. (Regulation S-K, Item 601, Exhibit Table Item
(27)). Bancorp's Financial Data Schedule is attached hereto.
(b) Financial Statements.
Bancorp's consolidated financial statements and related documents are set forth
in Item 8 of this Form 10-K and are filed as part of this report. All other
schedules to the consolidated financial statements referenced in Regulation S-X
are omitted because they are not applicable or are not material, or because the
information is already included in Bancorp's consolidated financial statements
and the notes thereto.
(c) Reports on Form 8-K.
Bancorp filed no reports on Form 8-K in the fourth quarter of 1999.
63
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned; thereunto duly authorized, on the 17th day of
March, 2000.
CITIZENS BANCORP
(Registrant)
By: /s/ WILLIAM V. HUMPHREYS
------------------------------------------
William V. Humphreys
President and Chief Executive Officer
Each person whose individual signature appears below hereby authorizes and
appoints William V. Humphreys and Lark E. Wysham, and each of them, with full
power of substitution and full power to act without the other, as his/her true
and lawful attorney-in-fact and agent to act in his name, place and stead and to
execute in the name and on behalf of each person individually and in each
capacity stated below, and to file any and all amendments to this Registration
Statement, including any and all post-effective amendments.
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 indicated on the 17th day of March 2000.
PRINCIPAL EXECUTIVE OFFICER:
/s/ WILLIAM V. HUMPHREYS
- ---------------------------------
William V. Humphreys
PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER:
/s/ LARK E. WYSHAM
- ---------------------------------
Lark E. Wysham
DIRECTORS:
/s/ JOCK GIBSON /s/ WILLIAM V. HUMPHREYS
- --------------------------------- ---------------------------------
Jock Gibson William V. Humphreys
/s/ ROSETTA C. VENELL /s/ JAMES E. RICHARDS
- --------------------------------- ---------------------------------
Rosetta C. Venell James E. Richards
/s/ JOHN TRUAX /s/ SCOTT A. FEWEL
- --------------------------------- ---------------------------------
John Truax Scott A. Fewel
/s/ DUANE L. SORENSEN /s/ ERIC C. THOMPSON
- --------------------------------- ---------------------------------
Duane L. Sorensen Eric C. Thompson
64
67
EXHIBIT INDEX
EXHIBIT PAGE
1. Exhibits Incorporated Reference.
The following exhibits are incorporated in this Form 10-K
by reference as described in Part IV above.
3(i) Articles of Incorporation, as amended.
3(ii) Bylaws.
10.1 Incentive Stock Option Plan.
10.2 Stock Bonus Plan.
2. Exhibits Attached.
21.1 List of Subsidiaries. 66
27.1 Financial Data Schedule. 67
65