Back to GetFilings.com



 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

     
x   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2003

     
o   Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from __________ to __________

Commission file number 000-23277

CITIZENS BANCORP/OR

(Exact name of registrant as specified in its charter)
     
Oregon
(State of Incorporation)
  91-1841688
(I.R.S. Employer Identification Number)

275 Southwest Third Street
Corvallis, Oregon 97339
(Address of principal executive offices)

(541) 752-5161
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES    x    NO    o

Indicate whether the Registrant is an accelerated filer as defined by Exchange Act Rule 12b-2. YES    o    NO    x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

4,150,275 shares as of April 30, 2003, no par value.

 


 

CITIZENS BANCORP
FORM 10-Q
MARCH 31, 2003
INDEX

               
          Page
          Reference
         
PART I
       
 
ITEM 1. – FINANCIAL INFORMATION – UNAUDITED
       
 
Condensed Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002
    1  
 
Condensed Consolidated Statements of Income for the three months ended March 31, 2003 and 2002
    2  
 
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2003 and 2002
    3  
 
Condensed Consolidated Statements of Cash Flows for three months ended March 31, 2003 and 2002
    4  
 
Notes to Consolidated Financial Statements
    5 – 6  
 
ITEM 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations
    7 – 12  
 
ITEM 3. – Quantitative and Qualitative Disclosure about Market Risk
    12  
 
ITEM 4. – Controls and Procedures
    13  
PART II. – OTHER INFORMATION
       
 
ITEM 1. — Legal Proceedings
    14  
 
ITEM 2. – Changes in Securities
    14  
 
ITEM 3. – Defaults Upon Senior Securities
    14  
 
ITEM 4. – Submission of Matters to a Vote of Security Holders
    14  
 
ITEM 5. — Other Information
    14  
 
ITEM 6. – Exhibits and Reports on Form 8-K
    14  
 
SIGNATURES
    15  
 
CERTIFICATIONS
    16  

 


 

PART I FINANCIAL INFORMATION

ITEM 1

CITIZENS BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)

                   
      March 31, 2003   December 31, 2002
Assets
               
 
Cash and due from banks
  $ 17,433     $ 17,722  
 
Interest bearing deposits in banks
    12,785       16,834  
 
Securities available for sale
    65,630       74,178  
 
Securities held to maturity
    11,041       11,037  
 
Federal Home Loan Bank stock
    380       373  
 
Loans held for sale
    781       1,927  
 
Loans, net
    184,460       176,406  
 
Premises and equipment
    6,253       5,948  
 
Accrued interest receivable
    2,203       2,356  
 
Cash surrender value of life insurance
    3,813       3,769  
 
Other assets
    2,228       2,089  
 
 
   
     
 
 
   Total assets
  $ 307,007     $ 312,639  
 
 
   
     
 
Liabilities and Shareholders’ Equity
               
Liabilities
               
 
Deposits:
               
 
   Demand, non-interest bearing
  $ 43,851     $ 42,589  
 
   Savings and interest bearing demand
    132,457       128,827  
 
   Time
    53,797       55,947  
 
 
   
     
 
 
Total deposits
    230,105       227,363  
 
Repurchase agreements
    40,704       48,059  
 
Other borrowings
    620       1,871  
 
Accrued interest payable
    89       94  
 
Other liabilities
    1,172       2,922  
 
 
   
     
 
 
   Total liabilities
    272,690       280,309  
Shareholders’ Equity
               
 
Common stock (no par value); authorized 10,000,000 shares; Issued and outstanding:
2003 – 4,150,275 shares; 2002 – 4,084,210 shares;
    20,263       19,459  
 
Retained earnings
    13,741       12,498  
 
Accumulated other comprehensive income
    313       373  
 
 
   
     
 
 
   Total shareholders’ equity
    34,317       32,330  
 
   Total liabilities and shareholders’ equity
  $ 307,007     $ 312,639  
 
 
   
     
 

See accompanying notes

1


 

CITIZENS BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)

                   
      Three Months Ended
      March 31,
      2003   2002
Interest Income:
               
 
Loans
  $ 3,501     $ 3,464  
 
Interest bearing deposits
    36       70  
 
Securities available for sale
    524       594  
 
Securities held to maturity—tax-exempt
    104       107  
 
Other interest income
    17       15  
 
 
   
     
 
 
Total interest income
    4,182       4,250  
Interest Expense:
               
 
Deposits
    426       821  
 
Borrowed funds
    2       6  
 
Repurchase agreements
    203       73  
 
 
   
     
 
 
Total interest expense
    631       900  
 
Net Interest Income
    3,551       3,350  
Provision for credit losses
    (91 )     (63 )
 
Net interest income after provision for credit losses
    3,460       3,287  
Non-interest Income:
               
 
Service charges on deposit accounts
    410       395  
 
Gain on sales of investments available for sale
    76       0  
 
Other
    538       471  
 
 
   
     
 
 
Total non-interest income
    1,024       866  
Non-interest Expense:
               
 
Salaries and employee benefits
    1,421       1,316  
 
Occupancy and equipment
    335       328  
 
Other
    745       634  
 
 
   
     
 
 
Total non-interest expense
    2,501       2,278  
 
Income before income taxes
    1,983       1,875  
 
 
   
     
 
Income taxes
    (740 )     (753 )
 
Net income
  $ 1,243     $ 1,122  
 
 
   
     
 
Per share data:
               
Basic and diluted earnings per share
  $ 0.30     $ 0.27  
Weighted average number of common shares outstanding
    4,142,934       4,153,265  
Return on average assets
    1.64 %     1.61 %

See accompanying notes

2


 

CITIZENS BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars in Thousands)

                                           
      Three Months Ended March 31, 2003 and 2002
      Number of                   Accumulated        
      Common   Common           Other        
      Shares   Stock   Retained   Comprehensive        
      Outstanding   Amount   Earnings   Income (Loss)   Total
Balance, at December 31, 2001
    4,105,308     $ 19,785     $ 9,478     $ 261     $ 29,524  
COMPREHENSIVE INCOME:
                                       
Net Income
                1,122             1,122  
Other comprehensive income, net of tax:
                                       
 
Unrealized loss on securities
                      (173 )     (173 )
Comprehensive Income
                            949  
Issuance of common stock
    61,589       644                   644  
Repurchase of common stock
    (27,523 )     (309 )                 (309 )
Stock options exercised
    45       1                   1  
 
   
     
     
     
     
 
Balance, at March 31, 2002
    4,139,419     $ 20,121     $ 10,600     $ 88     $ 30,809  
Balance, at December 31, 2002
    4,084,210     $ 19,459     $ 12,498     $ 373     $ 32,330  
COMPREHENSIVE INCOME:
                                       
Net Income
                1,243             1,243  
Other comprehensive income, net of tax:
                                       
 
Unrealized loss on securities
                      (60 )     (60 )
Comprehensive Income
                            1,183  
Issuance of common stock
    66,065       804                   804  
 
   
     
     
     
     
 
Balance, at March 31, 2003
    4,150,275     $ 20,263     $ 13,741     $ 313     $ 34,317  

See accompanying notes

3


 

CITIZENS BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited), (Dollars in thousands)

                     
        Three Months Ended
        March 31,
        2003   2002
Cash Flows from Operating Activities
               
 
Net income
  $ 1,243     $ 1,122  
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
   
Provision for credit losses
    91       63  
   
Depreciation and amortization
    134       162  
   
Gains on sales of securities available for sale
    (76 )     0  
   
Stock dividends received
    (6 )     (15 )
   
(Increase) decrease in accrued interest receivable
    153       (186 )
   
Decrease in accrued interest payable
    (5 )     (29 )
   
Other
    33       (307 )
 
 
   
     
 
 
Net cash provided by operating activities
    1,567       1,424  
Cash Flows from Investing Activities
               
 
Net (increase) decrease in interest bearing deposits in banks
    4,049       (11,900 )
 
Proceeds from maturities of available for sale securities
    29,000       8,000  
 
Proceeds from sales of available for sale securities
    2,079       0  
 
Proceeds from maturities of securities held to maturity
    0       0  
 
Purchases of securities available for sale
    (22,693 )     (9,275 )
 
Purchases of securities held to maturity
    0       (253 )
 
Increase in loans made to customers, net of principal collections
    (6,978 )     1,021  
 
Purchases of premises and equipment and other
    (415 )     (125 )
 
 
   
     
 
 
Net cash provided by (used in) investing activities
    5,042       (12,532 )
Cash Flows from Financing Activities
               
 
Net increase in deposits
    2,742       1,701  
 
Net increase (decrease) in repurchase agreements and other borrowings
    (8,606 )     7,505  
 
Payment of dividends, net of dividends reinvested
    (1,034 )     (877 )
 
Repurchase of common stock
    0       (309 )
 
Exercised stock options
    0       1  
 
 
   
     
 
 
Net cash provided by (used in) financing activities
    (6,898 )     8,021  
 
Net (decrease) increase in cash and due from banks
    ($289 )     ($3,087 )
Cash and Due from Banks
               
 
Beginning of period
    17,722       15,054  
 
End of period
  $ 17,433     $ 11,967  
 
 
   
     
 
Supplemental Disclosure of Cash Flow Information
               
 
Interest paid
    636       929  
 
Income taxes paid
    0       0  
Supplemental Schedule of Non-cash Investing and Financing Activities
               
 
Fair value adjustment of securities available for sale, net of tax
    (60 )     (173 )
 
Issuance of common stock through dividend reinvestment plan
    804       644  

See accompanying notes

4


 

CITIZENS BANCORP
Notes to Consolidated Financial Statements (unaudited)

1.   BASIS OF PRESENTATION
 
    The interim condensed consolidated financial statements include the accounts of Citizens Bancorp (“Bancorp”), a bank holding company and its wholly owned subsidiary, Citizens Bank (“Bank”) after elimination of intercompany transactions and balances. Substantially all activity of Citizens Bancorp is conducted through its subsidiary bank.
 
    The interim financial statements are unaudited but have been prepared in accordance with accounting principles generally accepted in the United States of America for interim condensed financial information and with instructions to form 10-Q. Accordingly, the condensed interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments consisting only of normal recurring accruals necessary for a fair presentation for the interim periods included herein have been made.
 
    The interim condensed consolidated financial statements should be read in conjunction with the December 31, 2002 consolidated financial statements, including notes there to, included in Bancorp’s 2002 Annual Report to shareholders. The results of operations for the three months ended March 31, 2003, are not necessarily indicative of the results which may be obtained for the full year ending December 31, 2003.
 
2.   STOCK-BASED COMPENSATION
 
    The Company has a stock-based employee compensation plan. The Company applies the recognition and measurement principles of APB No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, no stock-based compensation cost is reflected in net income as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation to stock based employee compensation.

(Unaudited), (Dollars in thousands)

                   
      Three Months Ended
      March 31,
      2003   2002
Net income, as reported
  $ 1,243     $ 1,122  
 
Less total stock-based compensation expense determined under fair value method for all qualifying awards
    (33 )     (26 )
Pro forma net income
  $ 1,210     $ 1,096  
Earnings per share:
               
Basic and diluted:
               
 
As reported
  $ 0.30     $ 0.27  
 
Pro forma
  $ 0.29     $ 0.26  

3.   USE OF ESTIMATES IN THE PREPARATION OF FINANCIALS
 
    The preparation of financial statements, in conformity with general accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

5


 

4.   SHAREHOLDERS EQUITY AND NET INCOME PER COMMON SHARE
 
    The Board of Directors declared a $.45 per share dividend to Bancorp shareholders of record on November 19, 2002, payable on January 10, 2003. Through the Dividend Reinvestment Plan (DRIP) 66,065 shares were purchased at a price of $12.18 per share.
 
    Basic earnings per share are based on the average number of common shares outstanding, assuming no dilution. Diluted earnings per common share are computed assuming the exercise of stock options.

                           
      Net Income   Shares   Per Share
      (Numerator)   (Denominator)   Amount
Three months ended March 31, 2003
                       
Basic earnings per share:
                       
 
Net Income
  $ 1,243       4,142,934     $ 0.30  
Effect of dilutive securities:
                       
 
Options
          1,943       -0-  
Diluted earnings per share:
                       
 
Net Income
  $ 1,243       4,144,877     $ 0.30  
Three months ended March 31, 2002
                       
Basic earnings per share:
                       
 
Net Income
  $ 1,122       4,154,634     $ 0.27  
Effect of dilutive securities:
                       
 
Options
          2,202       -0-  
Diluted earnings per share:
                       
 
Net Income
  $ 1,122       4,156,836     $ 0.27  

5.   CONTINGENCIES
 
    Unfunded loan commitments totaled $31.0 million as of March 31, 2003 and $34.2 million as of December 31, 2002.
 
6.   RECENT ACCOUNTING PRONOUNCEMENTS
 
    In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. It also expands and clarifies the disclosure requirements to make those disclosures more prominent and to require such disclosures in interim as well as annual financial statements. While the Company plans to continue to account for stock-based compensation under APB Opinion 25, the disclosure requirements of SFAS No. 148 have been implemented for interim reporting beginning with the quarter ended March 31, 2003. The Company does not expect adoption of SFAS No. 148 to have a material impact on its financial statements.

6


 

ITEM 2

MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

In addition to historical information, this report contains certain “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. This statement is included for the purpose of availing Bancorp the protection of the safe harbor provisions of this Act. The forward looking statements contained in this report are subject to factors, risks and uncertainties that may cause actual results to differ materially from those projected. Factors that might result in such material difference include, but are not limited to economic conditions, the regulatory environment, rapidly changing technology, new legislation, competitive factors, the interest rate environment and the overall condition of the banking industry. Forward looking statements can be identified by such words as “estimate”, “believe”, “expect”, “intend”, “anticipate”, “should”, “may”, “will”, or other similar words or phrases. Although Bancorp believes that the expectations reflected in such forward looking statements are reasonable, it can give no assurances that such expectations will prove to have been correct. Readers are therefore cautioned not to place undue reliance on such forward looking statements, which reflect management’s analysis only as of the date of the statement. Bancorp does not intend to update these forward-looking statements other than in its periodic filings under applicable security laws.

OVERVIEW

Citizens Bank (“the Bank”) was chartered October 1, 1957 (charter #333) by the State of Oregon as a commercial bank. Since its beginning with a single office in Corvallis, Citizens Bank has expanded to an additional nine locations in the five counties of Benton, Linn, Lane, Polk, and Yamhill. Branches are located in the communities of Corvallis, Philomath, Albany, Junction City, Veneta, McMinnville, Harrisburg and Dallas. At the April 2003 Board of Directors meeting, the Board approved a plan to expand our branch network into Springfield, Oregon. We are excited about our potential to do business in Springfield and believe that our market penetration will be strong. We have hired an experienced bank manager from the Springfield area. The Bank is currently in lease negotiations for a site that is vacant but at one time had been a large bank branch. We believe the site will be conducive to building a successful branch in Springfield. If the lease negotiations are successful, the Bank predicts an opening date for late summer 2003.

Management and the Board of Directors approved the closure of the Bank’s University Office located at 855 NW Kings Blvd., Corvallis, Oregon, on January 31, 2003. The leased facility in which the branch had been operating was in disrepair. The Bank was unable to re-negotiate the lease terms in order to economically support the extensive and necessary repairs. Additionally, parking was inadequate and unsafe for customers. Alternative sites in the vicinity of the University branch were pursued to no avail. Two other existing branches located within a 1.6 mile radius of the University branch are fully servicing the University branch customers. All existing staff was reassigned within the Bank. The Bank experienced no significant loss of customer relationships due to the closure. The Bank attributes this to its corporate culture of strong customer relationships.

Citizens Bancorp (“Bancorp”), an Oregon Corporation and financial holding company, was formed in 1996 for the purpose of becoming the holding company of Citizens Bank. Bancorp is headquartered in Corvallis, Oregon. Its principal business activities are conducted through its full-service, commercial bank subsidiary, Citizens Bank.

Bancorp operates through a two-tiered corporate structure. At the holding company level the affairs of Bancorp are overseen by a Board of Directors elected by the shareholders of Bancorp at the annual meeting of shareholders. The business of the Bank is overseen by a Board of Directors elected by Bancorp, the sole owner of the Bank. As of the date of this Form 10-Q the respective members of the Board of Directors of the Bank and the Board of Directors of Bancorp are identical.

Bancorp’s culture focuses on the tenets of collaborative leadership, branch autonomy, assertive business development, a positive working environment, a commitment to the community, outstanding customer service, and relationship banking. Management believes that a healthy culture together with a progressive management style will result in constantly improved shareholder value.

Bancorp’s primary goal is to improve shareholder value through increased earnings while maintaining a high level of safety and soundness. Bancorp is committed to independence and long-term performance strategies.

7


 

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. The Bank also operates a small residential mortgage loan origination department that originates loans and sells them into the secondary market.

Deposit products include regular and “package” checking accounts, savings accounts, certificates of deposit, money market accounts, and IRA accounts. The Bank offers debit cards, check guarantee cards, and ATM cards as well as credit cards as part of its retail banking services.

The Bank offers extended banking hours in selected locations as well as Saturday banking. ATM machines are also available at ten (10) locations offering 24-hour transaction services, including cash withdrawals, deposits, account transfers, and balance inquiries. The Bank also offers its customers a 24-hour automated telephone service that offers account transfers and balance inquiries. The Bank’s on-line banking product offers services to both individuals and business account customers. Business customers have a comprehensive cash management option. All online users have the availability of the “bill payment” feature. The Bank expects to continually enhance its on-line banking product while maintaining its quality “people to people” customer service. Citizens on-line banking can be reached at www.CitizensEBank.com.

Bancorp reported net income of $1,243,000 for the three months ended March 31, 2003, or $.30 per common share, compared to net income of $1,122,000, or $.27 per share for the same period in 2002. The biggest factor affecting the improved earnings is the decrease in interest expense on deposits.

LOAN PORTFOLIO

The composition of the loan portfolio was as follows (in thousands):

                   
      March 31, 2003   December 31, 2002
Commercial
  $ 23,249     $ 21,377  
Agriculture
    17,954       16,196  
Real Estate
               
 
Construction
    16,103       15,474  
 
1-4 Family
    28,860       28,503  
 
Other
    97,831       93,990  
Consumer Loans
    3,536       3,882  
 
   
     
 
 
    187,533       179,422  
Less: net deferred loan fees
    (450 )     (470 )
Total Loans
    187,083       178,952  
Less: allowance for credit losses
    (2,623 )     (2,546 )
 
   
     
 
Net Loans
  $ 184,460     $ 176,406  
 
   
     
 

8


 

Transactions in the allowance for credit losses were as follows for the three months ended March 31:

                 
    2003   2002
   
 
Balance at beginning of period
  $ 2,546     $ 2,146  
Provision charged to operations
    91       63  
Loans recovered
    1       3  
Loans charged off
    (15 )     (6 )
 
   
     
 
Balance at end of period
  $ 2,623     $ 2,206  
 
   
     
 

It is the policy of the Bank to place loans on nonaccrual after they become 90 days past due unless the loans are well secured and in the process of collection. The Bank may place loans that are not contractually past due or that are deemed fully collateralized on nonaccrual status as a management tool to actively oversee specific loans.

Loans on nonaccrual status as of March 31, 2003 and December 31, 2002 were approximately $131,000 and $130,000 respectively. Loans past due 90 days or more on which the Bank continued to accrue interest were approximately $32,000 at March 31, 2003 and $0 at December 31, 2002. There were no loans with modified terms as of March 31, 2003.

INVESTMENT SECURITIES

The amortized cost and estimated book value of the investment securities held by the Bank, including unrealized gains and losses, at March 31, 2003 and December 31, 2002, are as follows (in thousands):

                           
      Amortized Cost   Estimated Fair Value   Unrealized Gain, net
     
 
 
March 31, 2003
                       
Available for Sale
                       
U.S. Treasury Securities (Including securities of government agencies and corporations)
                       
Total
  $ 65,117     $ 65,630     $ 513  
 
Held to Maturity
                       
 
Obligations of States and Political Subdivisions
  $ 11,041     $ 11,591     $ 550  
                         
    Amortized Cost   Estimated Fair Value   Unrealized Gain, net
   
 
 
December 31, 2002
                       
Available for Sale
                       
U.S. Treasury Securities (Including securities of government agencies and corporations)
                       
Total
  $ 73,566     $ 74,178     $ 612  
Held to Maturity
                       
Obligations of States and Political Subdivisions
  $ 11,037     $ 11,571     $ 534  

9


 

MATERIAL CHANGES IN FINANCIAL CONDITION

Changes in the balance sheet for the three months ended March 31, 2003 include a decrease in total assets, primarily in securities available for sale and interest bearing deposits in banks, and a decrease in liabilities primarily in repurchase agreements, other borrowings, and other liabilities. The Bank experienced an increase in loans and deposits.

At March 31, 2003, total assets decreased 1.8% or approximately $5.6 million as compared to total assets at December 31, 2002. Major components of the change in assets were:

    $4.0 million decrease in interest bearing deposits in banks
 
    $8.5 million decrease in securities available for sale
 
    $8.1 million increase in net loans

Loans were generally made to customers within the Company’s market area. The increases were primarily funded by proceeds from securities maturities and sales, increased deposits and the use of cash. Funds from securities maturities and sales were invested in loan originations instead of reinvesting in securities, since loans have a significantly higher yield than investments in the current interest rate environment.

The Company experienced an increase in deposits, and a decrease in repurchase agreements, and other borrowings which represent treasury tax and loan deposits during the three months ended March 31, 2003, specifically as follows:

    $1.3 million increase in demand deposits
 
    $3.6 million increase in savings and interest bearing deposits
 
    $2.2 million decrease in time certificates of deposits
 
    $7.3 million decrease in repurchase agreements
 
    $1.3 million decrease in other borrowings, consisting of the treasury tax and loan deposits

Management believes the growth in deposits is a result of continuing penetration into the market area as a result of its emphasis on customer service, its relationship style of banking and continuing difficulties in the stock market. The decrease in repurchase agreements was the settlement (and closure) of one large estate account. The decrease in time certificates of deposits was a result of management’s decision not to pay above-market rates for time deposits in competition with other financial institutions when liquidity was well within its established asset-liability management guidelines. The decrease in other borrowings is attributable to a decrease in tax deposits.

MATERIAL CHANGES IN RESULTS OF OPERATIONS

The Company reported net income of approximately $1,243,000 or $.30 per common share, for the three months ended March 31, 2003, compared to net income of approximately $1,122,000 or $.27 per common share, for the same period in 2002. This represents an increase in net income of 10.8 percent. The increase during this period was largely attributable to a decrease in interest expense.

Total interest income decreased approximately $68,000 or 1.6% for the three months ended March 31, 2003 as compared to the same period in 2002. The change for the three-month period was primarily a result of a decrease in interest income on interest bearing deposits and security investments. The decrease is directly related to the overall decrease in market interest rates from the comparable period in 2002 and a change in the composition of these assets. Income on loans was up from the comparable period due to increases in the loan portfolio.

Total interest expense decreased approximately $269,000 or 29.9 percent for the three months ended March 31, 2003 as compared to the same periods in 2002. Interest on deposits was down $395,000, a combination of lower rates and lower average deposit balances, which were down about 4%. Interest on repurchase agreements was up $170,000, as a result of average balances being up 2.5 higher than the average in the first quarter of 2002. The Bank increased its emphasis of repurchase agreements to selected customers as a primary source of funds during 2002.

10


 

Total non-interest income increased approximately $158,000 or 18.2% for the three months ended March 31, 2003 as compared to the same period in 2002. The primary increases resulted from gains on the sales of securities available for sale, and from continuing increases in Bankcard and service charge income, which are primarily a function of increased volumes of accounts. The Bank’s mortgage loan origination activities also provided higher revenue from a year earlier.

Total non-interest expense increased $223,000 or 9.8 percent for the three months ended March 31, 2003, as compared to the same period in 2002. Non-interest expense increased as a result of routine adjustments in staff salaries and benefits along with the increase in staff relative to the new Dallas branch, start up costs associated with the new Dallas branch, and the recently enhanced phone system.

CREDIT LOSS PROVISION

The Bank maintains an allowance for credit losses on loans that occur from time to time as an incidental part of the business of banking. The allowance is increased by provisions charged to earnings and by recoveries on loans previously charged off, and is reduced by loan charge offs.

During the first three months ended March 31, 2003, the Bank funded the allowance for credit losses $91,000 from operations as compared to $63,000 for the same three-month period of 2002. The Bank increased the provision for credit losses based on its analysis of delinquencies, loan types, loan classifications, and other factors affecting the loan portfolio at March 31, 2003. The Bank experienced $15,000 in credit losses and $1,000 in recoveries for the three months ended March 31, 2003 and $6,000 in net losses for the same period ended March 31, 2002. Historically, the Bank’s loan charge-off levels have been very low compared to its peers. Management believes that the allowance for credit losses at March 31, 2003 of $2,623,000 or 1.40% of total loans is adequate.

The provision for credit losses represents charges made to operating expenses to maintain an appropriate allowance for credit losses. Management considers various factors in establishing an appropriate allowance. These factors include an assessment of the financial condition of the borrower, a determination of the borrower’s 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 at quarter end and the amount of the provision that should be charged against earnings for the next three months. Management’s recommendations are based on an internal loan review process to determine specific potential loss factors on classified loans, risk factor of loan grades, historical loss factors derived from actual net charge-off experience, trends in non-performing loans and other potential risks in the loan portfolio such as industry concentration, the local economy and the volume of loans.

Management uses a loan grading system wherein loan officers assign a risk grade to each of their loans at inception and at intervals based on receipt of financial information, renewal, or when there is an indication that a credit may have improved or weakened. The risk grades in the loan portfolio are used in determining a factor that is used in analyzing the adequacy of the reserve for credit losses.

The Bank’s policy is to charge off loans when, in management’s opinion, the loan or a portion of the loan is deemed uncollectible following a concerted collection effort. Management continues to pursue collection after a loan is charged-off until all possibilities for collection have been exhausted.

LIQUIDITY AND CAPITAL RESOURCES

Bancorp’s subsidiary, the Bank, has adopted policies to maintain a relatively liquid position to enable it to respond to changes in the Bank’s financial environment. Generally, the Bank’s major sources of liquidity are customer deposits, sales and maturities of securities, the use of borrowing lines with correspondent banks including Federal Home Loan bank borrowings, loan repayments and net cash provided by operating activities.

The analysis of liquidity should also include a review of the changes that appear in the consolidated statement of cash flows for the first three months of 2003. The statement of cash flows includes operating, investing and financing categories. Operating activities include net income that is adjusted for non-cash items and increases or

11


 

decreases in cash due to certain changes in assets and liabilities. Investing activities consist primarily of both proceeds from maturities and purchases of securities, and the net growth in loans. Financing activities present the cash flows associated with the Bank’s deposit accounts.

Management believes that the Bank’s existing sources of liquidity will enable the Bank to fund its requirements in the normal course of business.

As of March 31, 2003, shareholders’ equity totaled $34,317,000 as compared to $32,330,000 at December 31, 2002, an increase of 6.1%. This increase in equity was primarily due to the Company’s net income.

The total number of shares of Bancorp’s common stock that may be issued upon the exercise of all options granted under the Incentive Stock Option Plan may not exceed in the aggregate four percent (4%) of Bancorp’s issued and outstanding shares of common stock. As of April 30, 2003 Bancorp’s issued and outstanding shares totaled 4,150,275, so the maximum number of shares issuable under the Incentive Stock Option Plan was 166,011 on that date. As of April 30, 2003, options for 122,625 shares had been granted, options for 124 shares exercised, and options for 5,025 shares expired under this Plan.

The total number of shares of Bancorp’s common stock that may be issued under the Stock Bonus Plan may not exceed in the aggregate one percent (1%) of Bancorp’s issued and outstanding shares of common stock. As of April 30, 2003 Bancorp’s issued and outstanding shares totaled 4,150,275, so the maximum number of shares issuable under the Stock Bonus Plan was 41,503 on that date. As of April 30, 2003, no stock had been issued under this Plan.

Capital ratios for the Company were as follows as of the dates indicated:

                                 
                    Bancorp
    Adequately   Well    
    Capitalized   Capitalized                
    Standards   Standards   March 31, 2003   December 31, 2002
Tier 1 Leverage Ratio
    4 %     5 %     11.19 %     10.25 %
Tier 1 Risk Based Capital Ratio
    4 %     6 %     15.86 %     15.24 %
Total Risk Based Capital Ratio
    8 %     10 %     17.09 %     16.46 %

ITEM 3. QUANTITATIVE & QUALITATIVE ANALYSIS ABOUT MARKET RISK

Interest rate, credit, and operations risks are the most significant market risks impacting the Bank’s performance. The Bank relies on loan review, prudent loan underwriting standards and an adequate allowance for credit losses to mitigate credit risk.

The Bank uses an asset/liability management simulation model to measure interest rate risk. The model quantifies interest rate risk through simulating forecasted net interest income over a 12 month time period under various rate scenarios, as well as monitoring the change in the present value of equity under the same rate scenarios. The present value of equity is defined as the difference between the market value of current assets less current liabilities. By measuring the change in the present value of equity under different rate scenarios, management is able to identify interest rate risk that may not be evident in simulating changes in forecasted net interest income.

The Bank is currently slightly liability sensitive, meaning that interest bearing liabilities mature or reprice more quickly than interest earning assets in a given period. An increase or decrease in market rates of interest will not materially impact net interest income.

It should be noted that the simulation model does not take into account future management actions that could be undertaken if there were a change in actual market interest rate during the year. Also, certain assumptions are required to perform modeling simulations that may have significant impact on the results. These include assumptions regarding the level of interest rates and balance changes on deposit products that do not have stated maturities. These assumptions have been developed through a combination of industry standards and future expected pricing behavior. The model also includes assumptions about changes in the composition or mix of the balance sheet. The results derived from the simulation model could vary significantly by external factors such as changes in the prepayment assumptions, early withdrawals of deposits and competition. Management has assessed these risks and believes that there has been no material change since December 31, 2003.

12


 

ITEM 4. CONTROLS AND PROCEDURES

Based on their most recent evaluation which was completed within 90 days of the filing of this Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer believe the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) are effective. There were not any significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

13


 

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     None

ITEM 2. CHANGES IN SECURITIES

     None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

     None

ITEM 5. OTHER INFORMATION

     None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

  (a)   Exhibits
 
      99.1 Certifications pursuant to 18 U.S.C. Section 1350
 
  (b)   Reports on Form 8-K
 
      None

14


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

             
    Date: May 13, 2003   By:   /s/ William V. Humphreys
William V. Humphreys
President and
Chief Executive Officer
             
    Date: May 13, 2003   By:   /s/ Lark E. Wysham
Lark E. Wysham
Executive Vice President and
Chief Financial Officer

15


 

     CERTIFICATIONS

     I, William V. Humphreys, President and Chief Executive Officer of Citizens Bancorp (the “Company”), certify that:

     1.     I have reviewed this quarterly report on Form 10-Q of the Company;

     2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

     3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;

     4.     The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including any consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

     5.     The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and

     6.     The Company’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 13, 2003.

     
/s/ William V. Humphreys
William V. Humphreys
President and Chief Executive Officer
   

16


 

     I, Lark E. Wysham, Executive Vice President and Chief Financial Officer of Citizens Bancorp (the “Company”), certify that:

     1.     I have reviewed this quarterly report on Form 10-Q of the Company;

     2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

     3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;

     4.     The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including any consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

     5.     The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and

     6.     The Company’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 13, 2003.

     
/s/ Lark E. Wysham
Lark E. Wysham
Executive Vice President and Chief Financial Officer
   

17