SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended
For the fiscal year ended September 30, 1998
Commission File No.: 1-12141
DELPHOS CITIZENS BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE 34-1840187
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
114 EAST 3RD STREET, DELPHOS, OHIO 45833
(Address of principal executive offices)
Registrant's telephone number, including area code: (419) 692-2010
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
------ -----
Indicate 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K.[ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, I.E., persons other than the directors and executive officers
of the registrant, was $29,315,862, based upon the last sales price as quoted on
The Nasdaq Stock Market for December 9, 1998.
The number of shares of Common Stock outstanding as of December 9, 1998:
1,755,991.
INDEX
PAGE
PART I
Item 1. Business..........................................................................................3
Item 2. Properties.......................................................................................30
Item 3. Legal Proceedings................................................................................30
Item 4. Submission of Matters to a Vote of Security Holders..............................................30
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................31
Item 6. Selected Financial Data..........................................................................32
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................................34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................................42
Item 8. Financial Statements and Supplementary Data......................................................44
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..........................................................72
PART III
Item 10. Directors and Executive Officers of the Registrant...............................................72
Item 11. Executive Compensation...........................................................................72
Item 12. Security Ownership of Certain Beneficial Owners and Management...................................72
Item 13. Certain Relationships and Related Transactions...................................................72
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K......................................................................................73
PART I
ITEM 1. BUSINESS.
GENERAL
Delphos Citizens Bancorp, Inc. (the "Company") completed its initial
public offering of 2,047,631 shares of common stock on November 20, 1996, in
connection with the conversion of Citizens Federal Savings and Loan Association
of Delphos, now known as Citizens Bank of Delphos (the "Bank"). The Company
received $20,476,310 from this initial public offering before offering expenses
of approximately $672,482. The Company utilized $9,940,000 of the net proceeds
of the initial public offering to acquire all of the issued and outstanding
stock of the Bank. The Company, as a unitary savings and loan holding company,
is subject to regulation by the Office of Thrift Supervision (the "OTS"), the
Federal Deposit Insurance Corporation (the "FDIC") and the Securities and
Exchange Commission (the "SEC"). The Company's executive offices are located at
the home office of the Bank at 114 East 3rd Street, Delphos, Ohio 45833.
The Bank's principal business is to operate a community-oriented
savings bank. The Bank attracts retail deposits from the general public in the
area surrounding its office and invests those deposits, together with funds
generated from operations, primarily in fixed-rate one- to four-family
residential mortgage loans and investment and mortgage-backed securities. The
Bank invests, on a limited basis, in multi-family mortgage, commercial real
estate, construction and land and consumer loans. The Bank's revenues are
derived principally from interest on its mortgage loans, and interest and
dividends on its investment and mortgage-backed securities. The Bank's primary
sources of funds are deposits and principal and interest payments on loans and
securities.
MARKET AREA AND COMPETITION
The Bank's primary deposit gathering area is concentrated in Delphos
and the other communities surrounding its office, while its lending activities
primarily include areas throughout Allen, Putnam and Van Wert Counties in
Northwestern Ohio. The tri-county area includes the city of Lima, Ohio, which
has a population of approximately 45,000 and is located approximately 15 miles
southeast of Delphos in Allen County.
The Bank's market area is located within 250 miles of several of the
largest metropolitan areas in the United States, including, Chicago, Detroit,
Pittsburgh, Cleveland, Cincinnati, and Indianapolis. There are approximately 150
manufacturing firms located in the tri-county area and manufacturing accounts
for one-third of the employment sector. Wholesale and retail trade is the second
largest employment sector in the tri-county area, accounting for 24% of
employment. The City of Lima has experienced increases in unemployment in recent
years due to the closing of several large industrial plants.
The Bank's primary market area is a competitive market for financial
services and the Bank faces significant competition both in making loans and in
attracting deposits. The Bank faces direct competition from a number of
financial institutions operating in its market area, many with a state-wide or
regional presence, and in some cases, a national presence. Many of these
financial institutions are significantly larger and have greater financial
resources than the Bank. The Bank's competition for loans comes principally from
savings institutions, mortgage banking companies, commercial banks and credit
unions. Its most direct
3
competition for deposits has historically come from savings institutions and
commercial banks. In addition, the Bank faces increasing competition for
deposits and other financial products from non-bank institutions such as
brokerage firms and insurance companies in such areas as short-term money market
funds, corporate and government securities funds, mutual funds and annuities.
Competition may also increase as a result of the lifting of restrictions on the
interstate operations of financial institutions.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists
primarily of conventional first mortgage loans secured by one- to four-family
residences. At September 30, 1998, the Bank had gross loans receivable of $104.9
million, of which $87.6 million were one- to four-family, residential mortgage
loans, or 83.5% of the Bank's gross loans receivable. The remainder of the
portfolio consists of: $1.9 million of multi-family mortgage loans, or 1.8% of
gross loans receivable; $7.0 million of commercial real estate loans, or 6.6% of
gross loans receivable; $6.2 million of construction and land loans, or 5.8% of
gross loans receivable; and consumer loans of $2.3 million, or 2.2% of gross
loans receivable. At that same date, 82.0% of the Bank's loan portfolio had
fixed interest rates. The Bank had no loans held for sale at September 30, 1998.
The types of loans that the Bank may originate are subject to federal
and state law and regulations. Interest rates charged by the Bank on loans are
affected by the demand for such loans and the supply of money available for
lending purposes and the rates offered by competitors. These factors are, in
turn, affected by, among other things, economic conditions, fiscal policies of
the federal government, the monetary policies of the Federal Reserve Board, and
legislative tax policies.
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
AT SEPTEMBER 30,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- ---------------- -------------- ---------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ------ ------- ----- ------ ------ ------ ----- ------ ------
(DOLLARS IN THOUSANDS)
Real estate:
One-to four family $87,614 83.54% $13,716 84.10% $62,282 82.33% $56,556 83.28% $49,424 83.32%
Multi-family 1,881 1.79 1,288 1.47 1,506 1.99 1,521 2.24 1,276 2.15
Commercial real estate 6,959 6.64 6,273 7.16 4,969 6.57 3,901 5.74 3,706 6.25
Construction and land 6,119 5.83 3,781 4.31 4,871 6.44 3,808 5.61 3,081 5.19
Consumer 2,306 2.20 2,593 2.96 2,024 2.67 2,128 3.13 1,833 3.09
------- ------ ------- ------ ------ ----- ------ ------- ----- -----
Gross loans receivable 104,879 100.00% 87,651 100.00% 75,652 100.00% 67,914 100.00% 59,320 100.00%
====== ====== ====== ====== ======
Undisbursed loan funds (6,224) (3,188) (4,718) (3,732) (2,728)
Deferred loan origination
fees (51) (72) (53) (47) (49)
Allowance for
estimated loan losses (118) (106) (94) (92) (92)
---- ----- --- ---- ----
Loans receivable, net $ 98,486 $ 84,285 $ 70,787 $64,043 56,451
======= ======= ======= ====== =======
4
LOAN MATURITY. The following table shows the contractual maturity of
the Bank's gross loans receivable September 30, 1998. There were no loans held
for sale at September 30, 1998. The table does not include principal
prepayments.
AT SEPTEMBER 30, 1998
------------------------------------------------------------------------
ONE- TO COMMERCIAL GROSS
FOUR- MULTI- REAL CONSTRUCTION LOANS
FAMILY FAMILY ESTATE AND LAND CONSUMER RECEIVABLE
---------- ----------- ------------ ------------------------ -----------
(IN THOUSANDS)
Amounts due:
One year or less $ 6,251 $ 149 $3,092 $ 155 $1,480 $ 11,127
After one year:
More than one year to three years 9,208 272 2,647 350 286 12,763
More than three years to five years 1,133 76 288 18 250 1,765
More than five years to 10 years 9,427 299 453 -- 193 10,372
More than 10 years to 20 years 32,581 376 216 853 97 34,123
More than 20 years 29,014 709 263 4,743 -- 34,729
------- -------- -------- ------- --------- ----------
Total due after September 30, 1998 81,363 1,732 3,867 5,964 826 93,752
------- ------ ------ ------ ------- ---------
Gross loans receivable $87,614 $1,881 $6,959 $6,119 $2,306 $104,879
======= ====== ====== ====== ====== ========
The following table sets forth at September 30, 1998, the dollar amount
of gross loans receivable contractually due after September 30, 1998, and
whether such loans have fixed interest rates or adjustable interest rates.
DUE AFTER SEPTEMBER 30, 1998
-----------------------------------------------
FIXED ADJUSTABLE TOTAL
-------------- -------------- --------------
(IN THOUSANDS)
Real estate loans:
Residential:
One- to four-family $72,231 $ 9,132 $81,363
Multi-family 1,460 272 1,732
Commercial real estate 1,240 2,627 3,867
Construction and land 5,964 -- 5,964
Consumer 826 -- 826
------- ------- --------
Total $81,721 $12,031 $93,752
======= ======== ========
5
ORIGINATION AND PURCHASE OF LOANS. The Bank's mortgage lending
activities are conducted through its home office. Although the Bank may
originate both adjustable-rate and fixed-rate mortgage loans, a substantial
majority of the Bank's loan originations have been fixed-rate mortgage loans.
The Bank's ability to originate loans is dependent upon the relative customer
demand for fixed-rate or adjustable-rate mortgage loans, which is affected by
the current and expected future level of interest rates. The Bank has not
emphasized the origination of adjustable-rate mortgage loans due to the
relatively low demand for such loans in the Bank's primary market area. The Bank
retains for its portfolio all of the mortgage loans that it originates. At
September 30, 1998, there were no loans categorized as held for sale. In
addition, the Bank also emphasizes the origination of construction loans secured
primarily by owner-occupied properties. From time to time the Bank has
participated in loans originated by other institutions based upon the Bank's
investment needs and market opportunities.
The following tables set forth the Bank's loan originations and
principal repayments for the periods indicated:
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------
1998 1997 1996
---------------- ------------------ ------------------
(IN THOUSANDS)
Beginning balance, net $84,285 $70,787 $64,043
Loans originated:
One- to four-family 36,092 19,706 17,787
Multi-family 666 -- 155
Commercial real estate 2,762 1,815 2,011
Construction and land 9,635 5,736 5,816
Consumer 1,996 2,954 2,341
------- ------- -------
Total loans originated 51,151 30,211 28,110
Principal prepayments (33,923) (18,212) (20,394)
Transfer to REO -- -- --
Change in undisbursed loan funds(1) (3,035) 1,530 (985)
Change in unearned origination fees 20 (19) 15
Change in allowance for estimated loan losses (12) (12) (2)
-------- -------- -------
Ending balance, net $ 98,486 $84,285 $70,787
======== ======= =======
- --------------------
(1) Represents change in loans in process from first day to last day of the
period.
6
ONE- TO FOUR-FAMILY MORTGAGE LENDING. The primary lending activity of the
Bank has been and continues to be the origination of permanent
conventional mortgage loans secured by one- to four-family residences
located in the Bank's primary market area, which the Bank retains in its
portfolio. The Bank's loans generally do not conform to secondary market
standards because the Bank does not require title insurance or a survey.
Management believes that the Bank's policy of not selling the loans that
it originates provides the Bank with a competitive advantage in the
origination of loans in its primary market area. Loan originations are
obtained from the Bank's loan officers and their contacts with the local
real estate industry, existing or past customers, and members of the
local communities. The Bank primarily originates fixed-rate loans, but
also offers adjustable-rate mortgage ("ARM") loans. At September 30,
1998, one- to four-family mortgage loans totalled $87.6 million, or 83.5%
of total loans at such date. Of the Bank's mortgage loans secured by one-
to four-family residences, $73.1 million, or 83.5%, were fixed-rate
loans.
The Bank's policy is to originate one- to four-family residential
mortgage loans in amounts up to 80% of the appraised value of the property
securing the loan, up to 85% of the appraised value if the loan is co-signed by
a person approved by the Board of Directors and up to 90% of the appraised value
if private mortgage insurance is obtained. Mortgage loans originated by the Bank
generally include due-on-sale clauses which provide the Bank with the
contractual right to deem the loan immediately due and payable in the event the
borrower transfers ownership of the property without the Bank's consent.
Due-on-sale clauses are an important means of adjusting the rates on the Bank's
fixed-rate mortgage loan portfolio and the Bank exercises its rights under these
clauses. The residential mortgage loans originated by the Bank are generally for
terms to maturity of up to 30 years.
The Bank offers several adjustable rate loan programs with terms of up
to 30 years and interest rates that adjust either annually or every three years.
Of the Bank's mortgage loans secured by one- to four-family residences, $14.5
million, or 16.5%, had adjustable rates. The Bank's one year ARM loan has a
maximum adjustment limitation of 1.5% per year and a 5.0% lifetime cap on
adjustments. The Bank's three-year ARM loan has a maximum adjustment limitation
of 2.0% per change and a 5.0% lifetime cap. The index for substantially all of
the Bank's ARM loans is the Federal Home Loan Bank System's National Average
Mortgage Rate for Previously-Occupied Homes.
The volume and types of ARM loans originated by the Bank have been
affected by such market factors as the level of interest rates, consumer
preferences, competition and the availability of funds. In recent years, demand
for ARM loans in the Bank's primary market area has been weak due to the low
interest rate environment and consumer preference for fixed-rate loans.
Consequently, in recent years the Bank has not originated a significant amount
of ARM loans as compared to its originations of fixed-rate loans. The ARM loans
offered by the Bank do not provide for initial deep discount interest rates or
for negative amortization. Although the Bank will continue to offer ARM loans,
there can be no assurance that in the future the Bank will be able to originate
a sufficient volume of ARM loans to constitute a significant portion of the
Bank's loan portfolio.
MULTI-FAMILY LENDING. On a limited basis, the Bank originates
multi-family mortgage loans generally secured by properties located in the
Bank's primary market area. In reaching its decision on whether to make a
multi-family loan, the Bank considers a number of factors including: the net
operating income of the mortgaged premises before debt service and depreciation;
the debt service ratio (the ratio of net operating income to debt service); and
the ratio of loan amount to appraised value. Pursuant to the Bank's current
underwriting policies, a multi-family mortgage loan may be made in an amount up
to 80%
7
of the appraised value of the underlying property. In addition, the Bank
generally requires a debt service ratio of 120%. Properties securing a
multi-family loan are appraised by an independent appraiser.
When evaluating a multi-family loan, the Bank also considers the
financial resources and income level of the borrower, the borrower's experience
in owning or managing similar property, and the Bank's lending experience with
the borrower. The Bank's underwriting policies require that the borrower be able
to demonstrate strong management skills and the ability to maintain the property
from current rental income. The borrower is required to present evidence of the
ability to repay the mortgage and a satisfactory credit history. In making its
assessment of the creditworthiness of the borrower, the Bank generally reviews
the financial statements, employment and credit history of the borrower, as well
as other related documentation.
Loans secured by multi-family residential properties generally involve
a greater degree of risk than one- to four-family residential mortgage loans.
Because payments on loans secured by multi-family properties are often dependent
on successful operation or management of the properties, repayment of such loans
may be subject to a greater extent to adverse conditions in the real estate
market or the economy. The Bank seeks to minimize these risks through its
underwriting policies, which require such loans to be qualified at origination
on the basis of the property's income and debt coverage ratio.
The Bank's multi-family loan portfolio at September 30, 1998 totalled
$1.9 million or 1.8% of gross loans receivable. The Bank's largest multi-family
loan at September 30, 1998, had an outstanding balance of $440,000 is secured by
fifteen units and is current as to the repayment of principal and interest.
COMMERCIAL REAL ESTATE LENDING. On a limited basis, the Bank originates
and participates in commercial real estate loans that are generally secured by
properties used for business or religious purposes such as farms, churches,
nursing homes, small office buildings or retail facilities located in its
primary market area. The Bank's underwriting procedures provide that commercial
real estate loans may be made in amounts up to 80% of the appraised value of the
property. The Bank's underwriting standards and procedures are similar to those
applicable to its multi-family loans, whereby the Bank considers the net
operating income of the property, the debt service ratio and the borrower's
expertise, credit history and profitability. The largest commercial real estate
loan in the Bank's portfolio at September 30, 1998 was a $2.0 million
participation loan and is secured by a nursing home. The loan was current and
performing in accordance with its contractual terms at September 30, 1998. At
September 30, 1998 the Bank's commercial real estate loan portfolio was $7.0
million, or 6.6% of gross loans receivable.
Loans secured by commercial real estate properties, similar to
multi-family loans, are generally larger and involve a greater degree of risk
than one- to four-family residential mortgage loans. Because payments on loans
secured by commercial real estate properties are often dependent on successful
operation or management of the properties, repayment of such loans may be
subject to a great extent to adverse conditions in the real estate market or the
economy. The Bank seeks to minimize these risks through its underwriting
standards.
CONSTRUCTION AND LAND LENDING. The Bank generally originates
construction and land development loans to contractors and individuals in its
primary market area. The Bank's construction loans primarily are made to finance
the construction of owner-occupied one- to four-family residential properties
and to a significantly lesser extent, real estate developments. The Bank's
construction loans to individuals are primarily fixed-rate loans with maturities
of six months which, upon completion of construction, convert to permanent loans
with maturities of up to 30 years. The Bank's policies provide that construction
loans may
8
be made in amounts up to 80% of the appraised value of the property for
construction of one- to four-family residences. The Bank requires an independent
appraisal of the property. Loan proceeds are disbursed in increments as
construction progresses and as inspections warrant. The Bank requires regular
inspections to monitor the progress of construction. Land loans are determined
on an individual basis, but generally they do not exceed 75% of the actual cost
or current appraised value of the property, whichever is less. The largest
construction and land loan in the Bank's portfolio at September 30, 1998 had a
balance of $350,000 and is secured by a single family residence. This loan is
currently performing in accordance with its terms. At September 30, 1998, the
Bank has $6.1 million of construction and land loans totaling 5.8% of the Bank's
gross loans receivable.
Construction and land financing is considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development compared to the estimated cost (including interest)
of construction. If the estimate of value proves to be inaccurate, the Bank may
be confronted with a project, when completed, having a value which is
insufficient to assure full repayment.
CONSUMER AND OTHER LENDING. The Bank's originated consumer loans
generally consist of automobile loans, second mortgage loans, home equity loans,
mobile home loans and loans secured by deposits. At September 30, 1998, the
Bank's consumer loan portfolio was $2.3 million, or 2.2% of gross loans
receivable.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors
establishes the lending policies of the Bank. Loans in amounts up to $50,000 may
be approved by the Bank's loan officers. Loans in excess of $50,000 and up to
$250,000 must be approved by the Loan Committee, which consists of two senior
officer/directors and one outside director. Loans in excess of $250,000 must be
approved by the Board of Directors. Pursuant to OTS regulations, loans to one
borrower cannot exceed 15% of the Bank's unimpaired capital and surplus. The
Bank will not make loans to one borrower that are in excess of regulatory
limits.
DELINQUENCIES AND CLASSIFIED ASSETS. The Board of Directors performs a
monthly review of all delinquent loans thirty days or more past due. The
procedures taken by the Bank with respect to delinquencies vary depending on the
nature of the loan and period of delinquency. When a borrower fails to make a
required payment on a loan, the Bank takes a number of steps to have the
borrower cure the delinquency and restore the loan to current status. The Bank
sends the borrower a written notice of non-payment after the loan is first past
due. In the event payment is not then received, additional letters are sent and
phone calls are made. If management believes that the loan is well-secured, the
Bank generally will try to work with the borrower to have the loan brought
current. If the loan is still not brought current and it becomes necessary for
the Bank to take legal action, the Bank will commence foreclosure proceedings
against any real property that secures the loan. If a foreclosure action is
instituted and the loan is not brought current, paid in full, or refinanced
before the foreclosure sale, the real property securing the loan is foreclosed
upon and sold at sheriff's sale.
Federal regulations and the Bank's Classification of Assets Policy
require that the Bank utilize an internal asset classification system as a means
of reporting problem and potential problem assets. The Bank has incorporated the
OTS internal asset classifications as a part of its credit monitoring system.
The Bank currently classifies problem and potential problem assets as
"Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard"
if it is inadequately protected by the current net worth and paying capacity
9
of the obligor or of the collateral pledged, if any. "Substandard" assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
Assets classified as "Doubtful" have all of the weaknesses inherent in those
classified "Substandard" with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as "Loss" are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss allowance is not warranted. Assets which do not currently expose
the insured institution to sufficient risk to warrant classification in one of
the aforementioned categories but possess weaknesses are required to be
designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, under current OTS policy the Bank is
required to consider establishing a general valuation allowance in an amount
deemed prudent by management. The general valuation allowance, which is a
regulatory term, represents a loss allowance which has been established to
recognize the inherent credit risk associated with lending and investing
activities, but which, unlike specific allowances, has not been allocated to
particular problem assets. When an insured institution classifies one or more
assets, or portions thereof, as "Loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation allowances. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
As a result of the declines in local and regional real estate market values and
the significant losses experienced by many financial institutions, there has
been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions undertaken as part of the examination of
institutions by the OTS and the FDIC. While the Bank believes that it has
established an adequate allowance for estimated loan losses, there can be no
assurance that regulators, in reviewing the Bank's loan portfolio, will not
request the Bank to materially increase its allowance for loan losses, thereby
negatively affecting the Bank's financial condition and earnings. Although
management believes that an adequate allowance for loan losses has been
established, actual losses are dependent upon future events and, as such,
further additions to the level of allowances for estimated loan losses may
become necessary.
The Bank's management reviews and classifies the Bank's assets
quarterly and reports the results of its review to the Board of Directors. The
Bank classifies assets in accordance with the management guidelines described
above. REO is classified as Substandard. At September 30, 1998, the Bank had
$113,000 of assets classified as Special Mention, $999,000 of assets classified
as Substandard, and no assets classified as Doubtful or Loss.
10
NON-PERFORMING ASSETS. The following table sets forth information
regarding non-accrual loans, accruing loans which are contractually past due 90
days or more and REO. For the years ended September 30, 1998, 1997, 1996, 1995
and 1994, respectively, the amount of interest income that would have been
recognized on nonaccrual loans if such loans had continued to perform in
accordance with their contractual terms was $0, $0, $5,280, $5,780, and $15,142
none of which was recognized.
AT SEPTEMBER 30,
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ----------- ------------ -----------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
Residential real estate:
One- to four-family $ -- $ -- $567 $226 $169
Multi-family -- -- -- -- --
Commercial real estate -- -- 11 117 100
Construction and land -- -- 5 -- --
Consumer -- -- -- 12 1
------ ------ ------ ------ -------
Total non-accrual loans -- -- 583 355 270
Loans contractually past due more
than 90 days and accruing interest 825 572 -- -- --
----- ------ ------ ------
Total non-performing loans 825 572 583 355 270
REO, net -- -- -- -- --
----- ------ ------ ------ ------
Total non-performing assets $825 $572 $583 $355 $270
==== ===== ===== ===== =====
Allowance for loan losses as a
percent of gross loans receivable .11% .13% .13% .14% .16%
Allowance for loan losses as a percent of
total non-performing loans(1) 14.30 18.60 16.19 26.02 34.17
Non-performing loans as a percent of
gross loans receivable(1) 0.79 o.69 0.82 0.55 0.46
Non-performing assets as a percent of total
assets(1) 0.71 0.53 0.63 0.40 0.33
- ------------------------
(1) Non-performing assets consist of non-performing loans and REO.
Non-performing loans consist of all accruing loans 90 days or more past
due and all non-accrual loans.
11
The following table sets forth delinquencies in the Bank's loan
portfolio as of the dates indicated:
AT SEPTEMBER 30, 1998 AT SEPTEMBER 30, 1997
------------------------------------------------- ----------------------------------------------
60-89 DAYS 90 DAYS OR MORE (1) 60-89 DAYS 90 DAYS OR MORE (1)
---------------------- -----------------------
------------------------ ------------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
----------- ------------ ------------ ----------- ---------- ----------- ---------- ------------
(DOLLARS IN THOUSANDS)
One- to four-family ............ -- $ -- 20 $783 4 $36 15 $476
Multi-family ................... -- -- -- -- -- -- -- --
Commercial real estate ......... -- -- 2 38 -- -- 1 10
Construction and land .......... -- -- -- -- -- -- -- --
Consumer ....................... 7 31 1 4 -- -- 2 86
--- --- --- ------- -- -- -- --
Total .......................... 7 $31 23 $825 4 $36 18 $572
=== === == ==== === === == ====
Delinquent loans to gross
loans receivable ............... .03% .79% .04% .68%
AT SEPTEMBER 30, 1996
------------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE (1)
----------------------------- -----------------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
------------- -------------- -------------- -------------
(DOLLARS IN THOUSANDS)
One- to four-family 12 $450 16 $567
Multi-family -- -- -- --
Commercial real estate 2 9 1 11
Construction and land -- -- 1 5
Consumer loans -- -- -- --
-- -- -- --
Total 14 $459 18 $583
== ==== == ====
Delinquent loans to gross
loans receivable .61% .77%
- --------------------
(1) Loans 90 days or more past due are included in non-accrual loans. See
"Non-Performing Assets."
12
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of
the risks inherent in the Bank's loan portfolio and the general economy.
The allowance for loan losses is maintained at an amount management
considers adequate to cover estimated losses in loans receivable which
are deemed probable and estimable. The allowance is based upon a number
of factors, including current economic conditions, actual loss experience
and industry trends. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Bank's allowance for loan losses. Such agencies may require the Bank to
make additional provisions for loan losses based upon information
available at the time of the review. As of September 30, 1998, the Bank's
allowance for loan losses was .11% of gross loans receivable. The Bank
had non-performing loans of $825,000 and $572,000 at September 30, 1998
and September 30, 1997, respectively. At September 30, 1998, the Bank had
no loans classified as "impaired." The Bank will continue to monitor and
modify its allowances for loan losses as conditions dictate.
The following table sets forth activity in the Bank's allowance for
loan losses for the periods set forth in the table.
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- -------------- ------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Balance at beginning of period ......... $106 $ 94 $ 92 $ 92 $ 32
Provision for loan losses .............. 12 12 2 -- 60
Charge-offs:
Real Estate:
One- to four-family ............... -- -- -- -- --
Multi-family ...................... -- -- -- -- --
Commercial real estate ............ -- -- -- -- --
Construction and land ............. -- -- -- -- --
Consumer ............................ -- -- -- -- --
Recoveries ............................. -- -- -- -- --
------ ------ ---- ---- ----
Balance at end of period ............... $118 $106 $94 $92 $92
==== ==== === === ===
Net charge-offs to average
gross loans receivable ................ -- -- -- -- --
13
The following tables set forth the amount of the Bank's allowance for
loan losses, the percent of the allowance for loan losses to the total allowance
and the percent of gross loans to gross loans receivable in each of the
categories listed at the dates indicated.
AT SEPTEMBER 30,
---------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT
OF GROSS OF GROSS OF GROSS
PERCENT LOANS IN PERCENT LOANS IN PERCENT LOANS IN PERCENT
OF EACH OF EACH OF EACH OF
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE
TO TOTAL TO GROSS TO TOTAL TO GROSS TO TOTAL TO GROSS TO TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS AMOUNT ALLOWANCE
AMOUNT RECEIVABLE AMOUNT RECEIVABLE AMOUNT RECEIVABLE
---------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
One- to four-
family ............ $ 82 69.47% 83.54% $75 70.75% 84.10% $65 70.66% 82.33% $63 68.21%
Multi-family ......... 5 4.24 1.79 5 4.72 1.47 2 2.18 1.99 3 3.25
Commercial real estate 10 8.47 6.64 10 9.43 7.16 5 5.43 6.57 4 5.03
Construction and land 7 5.84 5.83 6 5.66 4.31 5 5.43 6.44 6 6.25
Consumer ............. 3 2.54 2.20 -- -- 2.96 5 5.43 2.67 5 5.26
Unallocated .......... 11 9.44 -- 10 9.44 -- 10 10.87 -- 11 12.00
---- ------ ------ ---- ------ ------ --- ------ ------ --- ------
Total allowance
for loan losses ..... $118 100.00% 100.00% $106 100.00% 100.00 $92 100.00% 100.00 $92 100.00%
==== ====== ====== ==== ====== ====== === ====== ====== === ======
-----------------------------------------
1994
-----------------------------------------
PERCENT PERCENT
OF GROSS OF GROSS
LOANS IN PERCENT LOANS IN
EACH OF EACH
CATEGORY ALLOWANCE CATEGORY
TO GROSS TO TOTAL TO GROSS
LOANS ALLOWANCE LOANS
RECEIVABLE AMOUNT RECEIVABLE
-----------------------------------------
One- to four-
family ............ 83.28% $62 67.58% 83.32%
Multi-family ......... 2.24 4 4.36 2.15
Commercial real estate 5.74 4 4.75 6.25
Construction and land 5.61 5 5.75 5.19
Consumer ............. 3.13 5 5.20 3.09
Unallocated .......... -- 12 12.36 --
------ --- ----- -----
Total allowance
for loan losses ..... 100.00% $92 100.00% 100.00%
====== === ====== ======
14
REAL ESTATE OWNED
At September 30, 1998, the Bank had no REO. If the Bank acquires any
REO, it is initially recorded at fair value less costs to sell and thereafter
REO is recorded at the lower of the recorded investment in the loan or the fair
value of the related assets at the date of foreclosure, less costs to sell.
Thereafter, REO is valued at the lower of the recorded investment or the fair
value of the property less costs to sell. If there is a further deterioration in
value, the Bank provides for a specific valuation allowance.
INVESTMENT ACTIVITIES
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured banks
and savings institutions, bankers' acceptances and federal funds. Subject to
various restrictions, federally chartered savings institutions may also invest
their assets in commercial paper, investment-grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally chartered
savings institution is otherwise authorized to make directly. Additionally, the
Bank must maintain minimum levels of investments that qualify as liquid assets
under OTS regulations. See "Regulation and Supervision - Federal Savings
Institution Regulation - Liquidity." Historically, the Bank has maintained
liquid assets above the minimum OTS requirements and at a level considered to be
more than adequate to meet its normal daily activities.
The investment policy of the Company as established by the Board of
Directors attempts to provide and maintain liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk, and
complement the Company's lending activities. The Company's policies generally
limit investments to government and federal agency securities. The Company's
policies provide the authority to invest in U.S. Treasury and federal agency
securities meeting the Company's guidelines and in mortgage-backed securities
guaranteed by the U.S. government and agencies thereof. At September 30, 1998,
the Company had investment and mortgage-backed securities with a carrying value
of $13.6 million and a market value of $14.0 million. At September 30, 1998, the
Company had $4.6 million in mortgage-backed securities classified as available
for sale and $9.0 million in investment and mortgage-backed securities
classified as held to maturity. At September 30, 1998, $7.9 million of the
Company's mortgage-backed securities had adjustable rates.
At September 30, 1998, all of the Company's mortgage-backed securities
were insured or guaranteed by either the GNMA, FNMA or FHLMC. Investments in
mortgage-backed securities involve a risk that actual prepayments will be
greater than estimated prepayments over the life of the security which may
require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby reducing or increasing,
respectively, the net yield on such securities. There is also the risk
associated with the necessity to reinvest the cash flows from such securities at
market interest rates which may be lower than the interest rates received on
such securities. In addition, the market value of such securities may be
adversely affected by changes in interest rates.
15
The following table sets forth certain information regarding the
carrying and fair values of the Company's investment securities and
mortgage-backed securities at the dates indicated:
AT SEPTEMBER 30,
-------------------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------------ -----------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
----------- ----------- -------------- --------------- ---------- -----------
(IN THOUSANDS)
Securities:
Available for sale:
FNMA certificates .................. 3,915 3,889 -- -- -- --
------- ------- ------- ------- ------- -------
GNMA certificates .................. $ 690 $ 711 739 739 777 777
Total available for sale ....... 4,605 4,600 739 739 777 777
------- ------- ------- ------- ------- -------
Held to maturity:
U.S. Treasury ...................... $ -- $ -- $ 4,996 $ 4,999 -- --
FHLB debt securities ............... -- -- -- -- 500 500
GNMA certificates .................. 8,897 9,256 11,218 11,634 13,223 13,448
FHLMC certificates ................. 107 112 149 156 214 225
------- ------- ------- ------- ------- -------
Total held to maturity......... 9,004 9,368 16,363 16,789 13,937 14,173
------- ------- ------- ------- ------- -------
FHLB stock ......................... 922 922 834 834 778 778
------- ------- ------- ------- ------- -------
Total securities ................... $14,531 $14,890 $17,936 $18,362 $15,492 $15,728
======= ======= ======= ======= ======= =======
16
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Company's
investment securities and mortgage-backed securities as of September 30, 1998.
AT SEPTEMBER 30, 1998
---------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS
--------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
----------- --------- ------------------- -------- -----------
(DOLLARS IN THOUSANDS)
Mortgage-backed securities:
Available for sale:
FNMA ..................................... -- -- -- -- -- --
GNMA ..................................... -- -- -- -- -- --
------ --------
Total available for sale ............... -- -- -- -- -- --
Held to maturity:
GNMA ..................................... -- -- $ 3 8.00% $ 13 8.19%
FHLMC .................................... -- -- 84 8.32
------ -------- ------
Total held to maturity ................. -- -- 3 8.00 97 8.30
------ -------- ------
Total mortgage-backed securities ..... -- -- $ 3 8.00 $ 97 8.30%
====== ========
-----------------------------------------
MORE THAN TEN YEARS TOTAL
-------------------- --------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
--------- ---------- ---------- ---------
Mortgage-backed securities:
Available for sale:
FNMA ..................................... $ 3,889 5.29% $ 3,889 5.29%
GNMA ..................................... 711 6.97 711 6.97
------ -----
Total available for sale ............... 4,600 5.55 4,600 5.55
----- -----
Held to maturity:
GNMA ..................................... 8,881 7.38 8,897 7.38
FHLMC .................................... 23 12.32 107 9.17
------ -----
Total held to maturity ................. 8,904 7.39 9,004 7.40
------ -----
Total mortgage-backed securities ..... $13,504 6.76 13,604 6.77
======= ======
17
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments and prepayments and cash flows
generated from operations are the primary sources of the Bank's funds for use in
lending, investing and for other general purposes. The Bank has historically not
used FHLB advances or other borrowings as a source of funds.
DEPOSITS. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of savings and club
accounts, NOW accounts, money market accounts and certificates of deposit. For
the year ended September 30, 1998, certificates of deposit constituted 75.2% of
total average deposits. The term of the certificates of deposit offered by the
Bank vary from six months to five years and the offering rates are established
by the Bank on a weekly basis. Once a certificate account is established, no
additional amounts are permitted to be deposited in that account, with the
exception of Individual Retirement Account certificates. Specific terms of an
individual account vary according to the type of account, the minimum balance
required, the time period funds must remain on deposit and the interest rate,
among other factors. The flow of deposits is influenced significantly by general
economic conditions, changes in money market rates, prevailing interest rates
and competition. At September 30, 1998, the Bank had $47.3 million of
certificate accounts maturing in less than one year. The Bank's deposits are
obtained predominantly from the area in which its banking office is located. The
Bank relies primarily on a willingness to pay market-competitive interest rates
to attract and retain these deposits. Accordingly, rates offered by competing
financial institutions significantly affect the Bank's ability to attract and
retain deposits. See Note 5 to the Consolidated Financial Statements under Item
8 hereof for a summary of the types of deposit accounts offered by the Bank.
The following table presents the deposit activity of the Bank for the
periods indicated:
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
(IN THOUSANDS)
Beginning balance .................................... $77,373 $79,831 $76,664
Net deposits (withdrawals) ........................... (2,138) (5,235) (819)
Interest credited on deposit accounts ................ 3,839 2,777 3,986
------- ------- -------
Ending balance ....................................... $79,074 $77,373 $79,831
======= ======= =======
At September 30, 1998, the Bank had approximately $6.0 million in
certificate accounts in amounts of $100,000 or more maturing as follows:
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
- ---------------------------------------------------- --------------------- -----------------
(DOLLARS
IN THOUSANDS)
Three months or less ................................. $ 309 5.91%
Over three through six months ........................ 1,458 5.47
Over six through 12 months ........................... 2,372 5.54
Over 12 months ....................................... 1,835 5.52
------- ----
Total ................................................ $5,974 5.54%
====== ====
18
The following table sets forth the distribution of the Bank's deposit
accounts for the periods indicated.
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------
1998 1997 1996
-------------------------- --------------------------- ---------------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------------ ------------ ------------ ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Savings and club accounts ...................... $ 8,553 10.82% $ 7,810 10.09% $ 8,275 10.37%
Money market accounts .......................... 5,329 6.74 5,802 7.50 7,422 9.30
NOW accounts ................................... 4,765 6.02 4,690 6.06 5,052 6.33
Non-interest bearing accounts .................. 689 0.87 1,397 1.81 42 0.04
------- ------ ------- ------ ------- ------
Total ....................................... 19,336 24.45 19,699 25.46 20,791 26.04
Certificate accounts:
4.00% to 4.99% .............................. 2,070 2.62 3.89 3,109
5.00% to 5.99% .............................. 52,404 66.27 43,757 56.55 34,698 43.47
6.00% to 6.99% .............................. 5,214 6.60 13,814 17.85 17,233 21.59
7.00% to 7.99% .............................. 10 0.01 66 0.09 3,966 4.97
8.00% to 8.99% .............................. 40 0.05 37 0.05 34 .04
------- ------ ------- ------ ------- ------
Total certificate accounts ................ 59,738 75.55 57,674 74.54 59,040 73.96
------- ------ ------- ------ ------- ------
Total deposits .............................. $79,074 100.00% $77,373 100.00% $79,831 100.00%
======= ====== ======= ====== ======= ======
19
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at September 30, 1998.
PERIOD TO MATURITY FROM SEPTEMBER 30, 1998 AT SEPTEMBER 30,
-----------------------------------------------------------------------------------------------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO MORE THAN
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS FIVE YEARS TOTAL 1997 1996
--------- ------------ ----------- ---------- ---------- ---------- ----- ------ ---------
(IN THOUSANDS)
Certificate accounts:
4.00 to 4.99% ............ $ 2,070 $ -- $ -- $-- $ -- $-- $ 2,070 -- $ 3,109
5.00 to 5.99% ............ 40,387 10,494 935 71 517 -- 52,404 $43,757 34,698
6.00 to 6.99% ............ 4,874 340 -- -- -- -- 5,214 13,814 17,233
7.00 to 7.99% ............ 1 5 -- -- 4 -- 10 66 3,966
8.00 to 8.99% ............ -- -- -- -- 40 -- 40 37 34
------- ------- ------- ------- ------- ----- ------- ------- -------
Total ............ $47,332 $10,839 $ 935 $ 71 $ 561 $-- $59,738 $57,675 $59,040
======= ======= ======= ======= ======= ===== ======= ======= =======
20
SUBSIDIARY ACTIVITIES
The Bank has one wholly-owned subsidiary, Delphos Service Corporation,
which currently does not conduct any activities.
PERSONNEL
As of September 30, 1998, the Company had 18 full-time employees and
five part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
good.
REGULATION AND SUPERVISION
GENERAL
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
Office of Thrift Supervision ("OTS") under the Home Owners' Loan Act, as amended
(the "HOLA"). In addition, the activities of savings institutions, such as the
Bank, are governed by the HOLA and the Federal Deposit Insurance Act ("FDI
Act").
The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. The Bank is a member of the Federal Home Loan Bank ("FHLB")
System and its deposit accounts are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Bank must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and/or the FDIC conduct periodic examinations to test the
Bank's safety and soundness and compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulatory requirements and policies, whether by the OTS, the FDIC or the
Congress, could have a material adverse impact on the Company, the Bank and
their operations. Certain of the regulatory requirements applicable to the Bank
and to the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings institutions and
their holding companies set forth in this Form 10-K does not purport to be a
complete description of such statutes and regulations and their effects on the
Bank and the Company.
HOLDING COMPANY REGULATION
The Company is a non-diversified unitary savings and loan holding
company within the meaning of the HOLA. As a unitary savings and loan holding
company, the Company generally is not restricted under existing laws as to the
types of business activities in which it may engage, provided that the Bank
continues to be a qualified thrift lender ("QTL"). See "Federal Savings
Institution Regulation - QTL Test." Upon any non-supervisory acquisition by the
Company of another savings institution or savings bank that meets the
21
QTL test and is deemed to be a savings institution by the OTS, the Company would
become a multiple savings and loan holding company (if the acquired institution
is held as a separate subsidiary) and would be subject to extensive limitations
on the types of business activities in which it could engage. The HOLA limits
the activities of a multiple savings and loan holding company and its
non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the Bank Holding Company Act
("BHC Act"), subject to the prior approval of the OTS, and certain activities
authorized by OTS regulation, and no multiple savings and loan holding company
may acquire more than 5% of the voting stock of a company engaged in
impermissible activities.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof
without prior written approval of the OTS or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
FEDERAL SAVINGS INSTITUTION REGULATION
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio. In
addition, the prompt corrective action standards discussed below also establish,
in effect, a minimum 2% tangible capital standard, a 4% leverage (core) capital
ratio (3% for institutions receiving the highest rating on the CAMEL financial
institution rating system), and, together with the risk-based capital standard
itself, a 4% Tier I risk-based capital standard. Core capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The OTS regulations
also require that, in meeting the tangible, leverage (core) and risk-based
capital standards, institutions must generally deduct investments in and loans
to subsidiaries engaged in activities as principal that are not permissible for
a national bank.
22
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, as assigned by the OTS capital regulation based on the
risks OTS believes are inherent in the type of asset. The components of Tier I
(core) capital are equivalent to those discussed earlier. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The OTS regulatory capital requirements also incorporate an interest
rate risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (I.E., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. At September 30, 1998, the
Bank met each of its capital requirements and it is anticipated that the Bank
will not be subject to the interest rate risk component.
The following table presents the Bank's capital position at September
30, 1998.
EXCESS CAPITAL
----------------------------------
ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
---------------- --------------- ----------------- --------------- -----------------
(DOLLARS IN THOUSANDS)
Tangible ............ $12,367 $1,738 $10,629 10.67% 1.50%
Core (Leverage) ..... $12,367 3,477 8,890 10.67 3.00
Risk-based .......... $12,485 4,795 7,690 20.83 8.00
23
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution is
considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). A savings institution that has a
ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier
I (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the OTS within 45 days of the date a
savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS. Deposits of the Bank are presently
insured by the SAIF. On September 30, 1996, the President signed into law the
Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other things,
imposed a special one-time assessment on SAIF member institutions, including the
Bank, to recapitalize the SAIF. The SAIF was undercapitalized primarily due to a
statutory requirement that SAIF members make payments on bonds issued in the
late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor
to the SAIF. As required by the Funds Act, the FDIC imposed a special assessment
of 65.7 basis points on SAIF assessable deposits held as of March 31, 1995,
payable November 27, 1996 (the "SAIF Special Assessment"). The SAIF Special
Assessment was recognized by the Bank as an expense in the quarter ended
September 30, 1996. The SAIF Special Assessment recorded by the Bank amounted to
$486,000 on a pre-tax basis and $321,000 on an after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO
bonds across all SAIF and Bank Insurance Fund ("BIF") members. The BIF covers
most commercial bank deposits. Beginning on January 1, 1997, BIF deposits were
assessed for a FICO payment of approximately 1.3 basis points, while SAIF
deposits pay approximately 6.4 basis points. Full pro rata sharing of the FICO
payments between BIF and SAIF members will occur on the earlier of January 1,
2000 or the date the BIF and SAIF are merged. The Funds Act specifies that the
BIF and SAIF will be merged on January 1, 1999, provided no savings associations
remain as of that time.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members. The FDIC reviews the assessment
24
rate semi-annually and currently has maintained the 0 to 27 basis point range.
SAIF members will also continue to make the FICO payments described above.
Management cannot predict the level of FDIC insurance assessments on an on-going
basis, whether the savings association charter will be eliminated or whether the
BIF and SAIF will eventually be merged.
The Bank's assessment rate for fiscal 1998 ranged from 5.82 to 6.28
basis points and the premium paid for this period was $52,000. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
THRIFT RECHARTERING LEGISLATION. The Funds Act provides that the BIF
and SAIF will merge on January 1, 1999 if there are no more savings associations
as of that date. Various proposals to eliminate the federal thrift charter,
create a uniform financial institutions charter and abolish the OTS have been
introduced in Congress. Some bills would require federal savings institutions to
convert to a national bank or some type of state charter by a specified date
under some bills, or they would automatically become national banks. Under the
same proposals, converted federal thrifts would generally be required to conform
their activities to those permitted for the charter selected and divestiture of
nonconforming assets would be required over a two year period, subject to two
possible one year extensions. State chartered thrifts would become subject to
the same federal regulation as applies to state commercial banks. Also, some
bills provide that holding companies for savings institutions would become
subject to the same regulation as holding companies that control commercial
banks, with a limited grandfather provision for unitary savings and loan holding
company activities. The Bank is unable to predict whether such legislation will
be enacted or the extent to which the legislation would restrict or disrupt its
operations.
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. Generally, savings institutions may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if such loan is secured by readily-marketable collateral,
which is defined to include certain financial instruments and bullion. At
September 30, 1998, the Bank's limit on loans to one borrower was $2.1 million.
At September 30, 1998, the Bank's largest aggregate outstanding balance of loans
to one borrower was $2.0 million.
QTL TEST. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings and loan association is required to either
maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12 month period or qualify as a "domestic building and loan
association" under the Internal Revenue Code of 1986, as amended.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
September 30, 1998, the Bank maintained 96.03% of its
25
portfolio assets in qualified thrift investments and, therefore, met the QTL
test. Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered "qualified thrift
investments."
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (ii) 75% of its net income for the previous
four quarters. Any additional capital distributions would require prior
regulatory approval. In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice. In January 1998, the OTS proposed amendments to its capital
distribution regulation that would generally authorize the payment of capital
distributions without OTS approval provided that the payment does not cause the
institution to be undercapitalized within the meaning of the prompt corrective
action regulation. However, institutions in a holding company structure would
still have a prior notice requirement. At September 30, 1998, the Bank was a
Tier 1 Bank.
LIQUIDITY. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 4%. The Bank's liquidity ratio for
September 30, 1998 was 16.19%, which exceeded the applicable requirements. The
Bank has never been subject to monetary penalties for failure to meet its
liquidity requirements.
ASSESSMENTS. Savings institutions are required to pay assessments to
the OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank for the fiscal year
ended September 30, 1998 totaled $34,000.
BRANCHING. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with related parties or "affiliates" (E.G., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of
26
covered transactions with all affiliates is limited to 20% of the savings
institution's capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B generally provides that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders ("insiders"), as well as entities such persons control, is
governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and to not involve more
than the normal risk of repayment. Recent legislation created an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees. Regulation O also places individual and aggregate
limits on the amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality; earnings; and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans when such plans are required.
27
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for that portion of transaction accounts
aggregating $47.8 million or less (subject to adjustment by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts aggregating greater than
$47.8 million, the reserve requirement is $1.43 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that portion
of total transaction accounts in excess of $47.8 million. The first $4.7 million
of otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Bank report their income on a consolidated
basis and the accrual method of accounting, and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Bank has not been audited by the IRS recently, and
therefore the 1994 through 1996 returns are open for audit. For its 1998 taxable
year, the Bank is subject to a maximum federal income tax rate of 34%.
BAD DEBT RESERVES. For fiscal years beginning prior to December 31,
1995, thrift institutions which qualified under certain definitional tests and
other conditions of the Internal Revenue Code of 1986 (the "Code") were
permitted to use certain favorable provisions to calculate their deductions from
taxable income for annual additions to their bad debt reserve. A reserve could
be established for bad debts on qualifying real property loans (generally
secured by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for nonqualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which
was enacted on August 20, 1996, requires savings institutions to recapture
(I.E., take into income) certain portions of their accumulated bad debt
reserves. The 1996 Act repeals the reserve method of accounting for bad debts
effective for tax years beginning after 1995. Thrift institutions that would be
treated as small banks are allowed to utilize the Experience Method applicable
to such institutions, while thrift institutions that are treated as large banks
(those generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing
reserves for bad debts will treat such change as a change in method of
accounting, initiated by the taxpayer, and having been made with the consent of
the IRS. Any Section 481(a) adjustment required to be taken into income with
respect to such change generally will be taken into income ratably over a
six-taxable year period, beginning with the first taxable year beginning after
1995, subject to the residential loan requirement.
28
Under the residential loan requirement provision, the recapture
required by the 1996 Act will be suspended for each of two successive taxable
years, beginning with the Bank's current taxable year, in which the Bank
originates a minimum of certain residential loans based upon the average of the
principal amounts of such loans made by the Bank during its six taxable years
preceding its current taxable year.
Under the 1996 Act, for its current and future taxable years, the Bank
is not permitted to make additions to its tax bad debt reserves. In addition,
the Bank is required to recapture (I.E., take into income) over a six year
period the excess of the balance of its tax bad debt reserves as of December 31,
1995 over the balance of such reserves as of December 31, 1987. As a result of
such recapture, the Bank will incur an additional tax liability of approximately
$211,000 which is generally expected to be taken into income beginning in 1998
over a four-year period.
DISTRIBUTIONS. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from the Bank's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the Bank's income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not be so included in the Bank's income.
The amount of additional taxable income triggered by a non-dividend is
an amount that, when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if the Bank makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 34% federal
corporate income tax rate. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves.
SAIF RECAPITALIZATION ASSESSMENT. The Funds Act levied a 65.7-cent fee
on every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize SAIF under this legislation
is deductible under Section 162 of the Code in the year of payment.
STATE AND LOCAL TAXATION
STATE OF OHIO. The Bank is a "financial institution" for State of Ohio
tax purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of the
Bank's book net worth determined in accordance with GAAP. As a "financial
institution," the Bank is not subject to any tax based upon net income or net
profits imposed by the State of Ohio.
The Company is subject to the Ohio corporation franchise tax, which, as
applied to the Company, is a tax measured by both net earnings and net worth.
The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.9% of computed Ohio taxable income in excess of $50,000 or
(ii) 0.582% times taxable net worth.
29
In computing its tax under the net worth method, the Company may
exclude 100% of its investment in the capital stock and indebtedness of the Bank
after the Conversion, as reflected on the balance sheet of the Company, as long
as it owns at least 25% of the issued and outstanding capital stock of the Bank.
The calculation of the exclusion from net worth is based on the ratio of the
excludable investment (net of any appreciation or goodwill included in such
investment) to total assets multiplied by the net value of the stock. As a
holding company, the Company may be entitled to various other deductions in
computing taxable net worth that are not generally available to operating
companies.
A special litter tax is also applicable to all corporations, including
the Company, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to 0.11% of the first $50,000 of computed Ohio taxable income and
0.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to 0.014% times taxable
net worth.
DELAWARE TAXATION. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
ITEM 2. PROPERTIES.
The Bank conducts its business through a single banking office located
at 114 East 3rd Street in Delphos, Ohio. The Company believes that the current
facilities are adequate to meet the present and immediately foreseeable needs of
the Bank and the Company. The Bank's office was constructed in 1955 and was most
recently remodeled in 1993. The Bank's office had a net book value of $554,000
at September 30, 1998.
ITEM 3. LEGAL PROCEEDINGS.
At September 30, 1998, the Company was not involved in any pending
legal proceedings. However, from time to time, the Company is involved in legal
proceedings occurring in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
30
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "DCBI." The stock began trading on November 21, 1996. As of
December 21, 1998, there were 1,391 recordholders of the Common Stock of the
Company, which includes shares held in street name. The following table
discloses the high and low bids for the Common Stock for each quarterly period
indicated.
HIGH LOW
September 30, 1998 $ 19.44 $ 15.38
June 30, 1998 $ 22.25 $ 19.00
March 31, 1998 $ 24.25 $ 19.63
December 31, 1997 $ 20.75 $ 17.00
September 30, 1997 $ 17.50 $ 14.75
June 30, 1997 $ 15.00 $ 12.44
March 31, 1997 $ 14.50 $ 12.00
December 31, 1996 $ 12.50 $ 11.75
The following table lists the dividends declared and paid by the
Company.
DIVIDEND (1) DECLARED PAID
- ---------------- ----------- -----------
$.06 10-28-97 11-18-97
.06 01-27-98 02-19-98
.06 04-30-98 05-21-98
.06 08-05-98 08-26-98
.06 10-29-98 11-24-98
- ----------
(1) Per share.
31
ITEM. 6 SELECTED FINANCIAL DATA.
The selected consolidated financial and other data of the Company set
forth below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and Notes thereto. See Item 8
"Financial Statements and Supplementary Data."
AT SEPTEMBER 30,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ----------- ----------- ----------- -------------
(IN THOUSANDS)
SELECTED BALANCE SHEET DATA:
Total assets ............................... $115,901 $107,796 $92,235 $ 88,022 $ 82,613
Cash and cash equivalents .................. 1,618 4,400 4,695 4,257 6,331
Investment securities(1) ................... -- 4,996 500 500 500
Mortgage-backed securities(1) .............. 13,605 12,107 14,214 17,421 17,755
FHLB stock - at cost ....................... 922 834 778 726 570
Loans receivable, net(2) ................... 98,486 84,285 70,787 64,043 56,451
Deposits ................................... 79,074 77,373 79,831 76,664 72,255
FHLB advances .............................. 10,000 1,000 -- -- --
Total equity ............................... 26,060 28,716 11,425 10,799 9,855
FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ---------- ------------ ----------- -----------
(IN THOUSANDS)
Selected Operating Data:
Interest income ............................ $8,284 $7,638 $6,697 $ 6,217 $ 5,424
Interest expense ........................... 4,040 3,772 3,996 3,601 2,952
------- ------- ------- ------- -------
Net interest income ........................ 4,244 3,866 2,701 2,616 2,472
Provision for loan losses .................. 12 12 2 -- 60
--------- ------- ------- ------- -------
Net interest income after
provision for loan losses .............. 4,232 3,854 2,699 2,616 2,412
Non-interest income ........................ 432 229 232 151 261
Non-interest expense ....................... 1,927 1,871 1,954 1,342 1,284
------- ------- ------- ------- -------
Income before income taxes ................. 2,737 2,212 977 1,425 1,389
Income taxes ............................... 1,085 686 333 481 477
------- ------- ------- ------- -------
Net income ................................. $1,652 $1,526 $ 644 $ 944 $ 912
====== ====== ====== ======= =======
32
AT OR FOR THE YEAR ENDED
SEPTEMBER 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------- ------------- -------------
SELECTED FINANCIAL RATIOS AND OTHER
DATA(3):
PERFORMANCE RATIOS:
Return on average assets ............................ 1.50% 1.42% 0.71% 1.10% 1.14%
Return on average equity ............................ 5.87 5.31 5.59 8.94 9.84
Average equity to average assets .................... 25.48 25.37 12.68 12.30 11.62
Equity to total assets at end of
period ............................................ 22.48 26.64 12.39 12.27 11.93
Average interest rate spread(4) ..................... 2.72 2.67 2.51 2.54 2.68
Net interest margin(5) .............................. 3.94 3.83 3.06 3.10 3.15
Average interest-earning assets to
average interest-bearing
liabilities ....................................... 132.61 131.00 112.32 112.20 112.61
Efficiency ratio(6) ................................. 41.21 45.68 66.61 51.29 51.93
Non-interest expense to average
assets ............................................ 1.75 1.71 2.15 1.56 1.61
REGULATORY CAPITAL RATIOS(7):
Tangible capital .................................... 10.67 13.89 12.40 12.27 11.93
Core capital ........................................ 10.67 13.89 12.40 12.27 11.93
Risk-based capital .................................. 20.83 28.63 27.25 27.90 28.45
ASSET QUALITY RATIOS:
Non-performing loans as a percent
of gross loans receivable(8)(9) ................... 0.79 0.68 0.82 0.55 0.46
Non-performing assets as a percent
of total assets(9) ............................... 0.71 0.53 0.63 0.40 0.33
Allowance for loan losses as a
percent of gross loans receivable(8) .............. 0.11 0.13 0.13 0.14 0.16
Allowance for loan losses as a
percent of non-performing loans(9) ................ 14.30 18.60 16.19 26.02 34.17
- ----------------------------
(1) The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS No. 115"), effective as of October 1, 1995. Prior to the adoption of
SFAS No. 115, investment securities and mortgage-backed securities held for
sale were carried at the lower of amortized cost or market value, as
adjusted for amortization of premiums and accretion of discounts over the
remaining terms of the securities from the dates of purchase.
(2) Loans receivable are shown net of loans in process, net deferred loan
origination fees and the allowance for loan losses.
(3) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods and are annualized
where appropriate.
(4) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(6) The efficiency ratio represents non-interest expense as a percent of net
interest income before provision for loan losses and non-interest income.
(7) For definitions and further information relating to the Bank's regulatory
capital requirements, See "Regulation and Supervision - Federal Savings
Institution Regulation - Capital Requirements."
(8) Gross loans receivable are stated at unpaid principal balances.
(9) Non-performing assets consist of non-performing loans and real estate owned
("REO"). Non-performing loans consist of all loans 90 days or more past due
and all other non-accrual loans. See "Lending Activities - Non-Performing
Assets" and "- Real Estate Owned."
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
AVERAGE BALANCE SHEETS. The following table sets forth certain
information relating to the Company at September 30, 1998, and for the years
ended September 30, 1998, 1997 and 1996. The yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods shown. Average balances are derived from average
month-end balances. Management does not believe that the use of average monthly
balances instead of average daily balances has caused any material differences
in the information presented. Average balances of loans receivable include loans
on which the Company has discontinued accruing interest. The yields and costs
include amortized and deferred fees and costs which are considered adjustments
to yields.
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------
AT SEPTEMBER 30,
1998 1998 1997
--------------------- ------------------------------ ----------------------
AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST
---------- -------- --------- --------- -------- --------- ------------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Interest-earning deposits in
other banks .................... $ 425 5.74% $ 2,427 $ 159 6.55% $7,993 $452
Investment securities, net(1) ... 922 6.78 884 62 7.01 2,975 242
Loans receivable, net (2) ....... 98,486 7.54 91,126 7,049 7.74 76,727 5,944
Mortgage-backed securities,
net(1) ......................... 13,605 6.77 13,291 1,014 7.63 13,181 1,000
-------- ------- ------- ------- --------
Total interest-earning assets.. 113,438 7.43 107,728 8,284 7.69 100,876 7,638
Non-interest-earning assets ............. 2,463 2,646 3,488
-------- ------- -------
Total assets .................. $115,901 $110,374 $104,364
======== ======= =======
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Passbook savings accounts ....... $ 8,553 2.94 8,147 232 2.85 $ 8,470 $ 237
Money market accounts ........... 5,329 3.06 5,516 168 3.05 6,218 192
NOW accounts .................... 4,765 2.37 5,527 84 1.52 5,439 84
Certificate accounts ............ 59,738 5.59 58,275 3,362 5.77 56,876 3,259
------- ------
FHLB advances ................... 10,000 5.12 3,773 194 5.14
------ ------ ----
Total interest-bearing
liabilities ................ 88,385 4.96 81,238 4,040 4.97 77,003 3,772
Non-interest-bearing liabilities ....... 1,456 $ 1,014 886
------ ------- -------
Total liabilities ............ 89,841 82,252 77,889
Equity .................................. 26,060 28,122 26,475
------ ------- -------
Total liabilities and equity ....... 115,901 110,374 104,364
======= ======= =======
Net interest income before provision .... $ 4,244 3,866
===== ======
Net interest rate spread(3) ............. 2.72%
======
Net interest margin(4) .................. 3.94%
======
Ratio of interest-earning assets to
interest-bearing liabilities .......... 126.24% 132.61% 131.00%
======= ====== ======
-------------------------------------------
1996
-------------------------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/
COST BALANCE INTEREST COST
-------- --------- ---------- ----------
ASSETS:
Interest-earning assets:
Interest-earning deposits in
other banks .................... 5.65%$ 3,584 $ 227 6.33%
Investment securities, net(1) ... 8.13 1,255 76 6.06
Loans receivable, net (2) ....... 7.75 67,919 5,228 7.70
Mortgage-backed securities,
net(1) ......................... 7.54 15,547 1,166 7.50
-------- --------
Total interest-earning assets.. 7.57 88,305 6,697 7.59
Non-interest-earning assets ............. 2,505
--------
Total assets .................. $ 90,810
========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Passbook savings accounts ....... 2.80 $ 8,522 250 2.93
Money market accounts ........... 3.09 8,464 262 3.10
NOW accounts .................... 1.54 4,552 88 1.93
Certificate accounts ............ 5.73 57,081 3,396 5.95
------ -----
FHLB advances ...................
Total interest-bearing
liabilities ................ 4.90 78,619 3,996 5.08
Non-interest-bearing liabilities ....... 675
-------
Total liabilities ............ 79,294
Equity .................................. 11,516
-------
Total liabilities and equity ....... 90,810
=======
Net interest income before provision
for estimated loan losses ............. 2,701
=====
Net interest rate spread(3) ............. 2.67% 2.51%
===== =====
Net interest margin(4) .................. 3.83% 3.06%
===== =====
Ratio of interest-earning assets to
interest-bearing liabilities .......... 112.32%
======
- ------------------------
(1) Includes unamortized discounts and premiums.
(2) Amount is net of loans in process, net deferred loan origination fees
and allowance for loan losses and includes non-performing loans.
(3) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
34
RATE/VOLUME ANALYSIS. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
YEAR ENDED SEPTEMBER 30, 1998 YEAR ENDED SEPTEMBER 30, 1997
COMPARED TO COMPARED TO
YEAR ENDED SEPTEMBER 30, 1997 YEAR ENDED SEPTEMBER 30, 1996
---------------------------------- ----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
----------------------- ----------------------
VOLUME RATE NET VOLUME RATE NET
----------- ----------- ---------- ---------- ----------- -----------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
Interest-earning deposits in other banks ...... $ (355) $ 62 $ (293) $252 $ (27) $ 225
Investment securities, net .................... (150) (30) (180) 133 33 166
Loans receivable, net ......................... 1,114 (9) 1,105 682 34 716
Mortgage-backed securities, net ............... 8 6 14 (179) 13 (166)
---------- ------- --------- -------- -------- --------
Total change in interest income ........... 617 29 646 888 53 941
-------- ------- --------- -------- -------- --------
INTEREST-BEARING LIABILITIES:
Passbook savings accounts ..................... (9) 4 (5) (2) (11) (13)
Money market accounts ......................... (21) (3) (24) (69) (1) (70)
NOW accounts .................................. 1 (1) 0 15 (19) (4)
Certificate accounts .......................... 81 22 103 (12) (125) (137)
FHLB advances ................................. 194 -- 194
-------- ------ --------
Total change in interest expense .......... 245 23 268 (68) (156) (224)
-------- ------ -------- ------- ------- -------
Net change in net interest income ................ $ 372 $ 6 $ 378 $956 $ 209 $1,165
======= ====== ======== ======= ======= =======
YEAR ENDED SEPTEMBER 30, 1996
COMPARED TO
YEAR ENDED SEPTEMBER 30, 1995
-----------------------------------
INCREASE (DECREASE)
DUE TO
-----------------------
VOLUME RATE NET
----------- ----------- -----------
INTEREST-EARNING ASSETS:
Interest-earning deposits in other banks ............... $(123) $ 56 $(67)
Investment securities, net ............................. 6 10 16
Loans receivable, net .................................. 623 18 641
Mortgage-backed securities, net ........................ (172) 62 (110)
-------- ------- -------
Total change in interest income .................... 334 146 480
-------- ------- -------
INTEREST-BEARING LIABILITIES:
Passbook savings accounts .............................. (2) (35) (37)
Money market accounts .................................. (109) (29) (138)
NOW accounts ........................................... 2 (23) (21)
Certificate accounts ................................... 429 162 591
FHLB advances ..........................................
Total change in interest expense ................... 320 75 395
------- ------- -------
Net change in net interest income ......................... $ 14 $ 71 $ 85
======= ======= =======
35
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND
SEPTEMBER 30, 1997
GENERAL
Net earnings for the year ended September 30, 1998 were $1,652,000, an
increase of $126,000, or 8.3% from $1,526,000 for the year ended September 30,
1997. The increase in net earnings between the two years resulted from a
$378,000 increase in net interest income and a $203,000 increase in other income
which were partially offset by increases of $57,000 and $399,000 in other
expenses and tax expense, respectively.
INTEREST INCOME
Interest income increased by $646,000, or 8.5%, from $7.6 million for
the year ended September 30, 1997 to $8.3 million for the year ended September
30, 1998. The increase in interest income resulted primarily from the $6.9
million increase in average interest earnings assets. The increase in average
earning assets is due to the increase in the loan portfolio which was partially
offset by a decrease in the average balance of interest-earning deposits in
banks and mortgage-backed securities.
INTEREST EXPENSE
Interest expense increased $268,000, or 7.1%, from $3.8 million for the
year ended September 30, 1997 to $4.0 million for the year ended September 30,
1998. The increase in interest expense was due primarily to a $4.2 million
increase in the average balance of interest-bearing liabilities. The increase in
average balances was primarily from an increase in the use of Federal Home Loan
Bank Advances as an alternative funding source and to a lesser extent an
increase in the average balance of certificates of deposits. While the increase
in interest expense was primarily volume related, interest expense also
increased due to an increase in rates paid on interest bearing liabilities,
primarily certificates of deposit.
NET INTEREST INCOME
Net interest income increased by $378,000 from $3.9 million for the
year ended September 30, 1997 to $4.2 million for the year ended September 30,
1998. The increase in net interest income reflects continued growth in the
Bank's average balance of interest-earning assets and partially offset by an
increase in the average balance of interest-bearing liabilities. The net
interest margin increased from 3.83% for the year ended September 30, 1997 to
3.94% for the year ended September 30, 1998, due primarily to the increase in
the ratio of interest-earning assets to interest-bearing liabilities.
PROVISION FOR LOAN LOSSES
The Bank made a $12,000 provision for loan losses during both the year
ended September 30, 1998 and 1997. The amount of the Bank's provision for loan
losses is based upon management's periodic analysis of the adequacy of the
allowance for loan losses. The Bank has historically experienced very low levels
of loan losses and had no charge-off's during 1998 or 1997.
36
NON-INTEREST INCOME
Non-interest income increased by $203,000 from $229,000 for the year
ended September 30, 1997 to $432,000 for the year ended September 30, 1998. The
increase in non-interest income between the two periods resulted primarily from
an increase in service charges and fees on loans. The increase in loan fee
income was significantly influenced by the increased volume of loan origination
activity experienced during the year. The increased loan volume was
significantly influenced by the historically low long term interest rates which
influenced both new home purchases and mortgage refinancing activity. Management
anticipates that fee income from loans will decrease when loan refinancing
activity returns to more historically lower levels.
NON-INTEREST EXPENSE
Non-interest expense increased by $57,000, or 3.0% from, $1.87 million
for the year ended September 30, 1997 to $1.93 million for the year ended
September 30, 1998. The increase was primarily due to a $62,000 increase in
franchise tax expense resulting from the increased equity of the company and
bank subsidiary and a $54,000 increase in data processing expense. The decrease
in compensation and benefits is due to the higher ESOP expense in 1997 because
of the additional ESOP contribution in fiscal 1997. The decrease in ESOP expense
was partially offset by an increase in salary expense from annual merit
increases and an increase in RRP expense due to the full year impact of the RRP
plan.
INCOME TAXES
The Company's income tax expense increased from $686,000 for the year
ended September 30, 1997 to $1,085,000 for the year ended September 30, 1998.
The increase in income tax expense between the two fiscal years resulted
primarily from an increase in income before taxes.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND
SEPTEMBER 30, 1996
GENERAL
Net earnings for the year ended September 30, 1997 were $1,526,000, an
increase of $882,000, or 136.9% from $644,000 for the year ended September 30,
1996. The increase in net earnings between the two years resulted from a $1.16
million increase in net interest income which was partially offset by an
increase of $353,000 tax expense.
INTEREST INCOME
Interest income increased by $941,000, or 14.1%, from $6.7 million for
the year ended September 30, 1996 to $7.6 million for the year ended September
30, 1997. The increase in interest income resulted primarily from $12.6 million
increase in average interest-earnings assets. The increase in average earning
assets is due to the use of the proceeds from the conversion to fund increases
in the loan portfolio.
INTEREST EXPENSE
Interest expense decreased $224,000, or 5.6%, from $4.0 million for the
year ended September 30, 1996 to $3.8 million for the year ended September 30,
1997. The decrease in interest expense was due
37
primarily to a $1.6 million decrease in the average balance of interest-bearing
liabilities between the two fiscal years. The decrease also reflects an 18 basis
point decrease in the average cost of interest-bearing liabilities from 5.08%
for the year ended September 30, 1996 to 4.90% for the year ended September 30,
1997.
NET INTEREST INCOME
Net interest income increased by $1.2 million from $2.7 million for the
year ended September 30, 1996 to $ 3.9 million for the year ended September 30,
1997. The increase in net interest income reflects continued growth in the
Bank's average balance of interest-earning assets complimented by a decrease in
the average balance of interest-bearing liabilities. The net interest margin
increased from 3.06% for the year ended September 30, 1996 to 3.83% for the year
ended September 30, 1997, due primarily to the increase in the ratio of
interest-earning assets to interest-bearing liabilities and partially due to a
16 basis point increase in the net interest rate spread.
PROVISION FOR LOAN LOSSES
The Bank made a $12,000 provision for loan losses for the year ended
September 30, 1997 as compared to a $2,000 provision for the year ended
September 30, 1996. The amount of the Bank's provision for loan losses is based
upon management's periodic analysis of the adequacy of the allowance for loan
losses. The Bank has historically experienced very low levels of loan losses and
has no charge-off's during 1997 or 1996. Based upon recent growth in the size of
the Bank's loan portfolio, and the resultant increased risk of loss inherent in
a larger portfolio, management has begun to make additional provisions for loan
losses.
NON-INTEREST INCOME
Non-interest income decreased by $3,000 from $232,000 for the year
ended September 30, 1996 to $229,000 for the year ended September 30, 1997. The
decrease in non-interest income between the two periods resulted primarily from
a decline in the gain on sale of securities and service charges and fees which
was partially offset by an increase in other income.
NON-INTEREST EXPENSE
Non-interest expense decreased by $84,000, or 4.3% from, $2.0 million
for the year ended September 30, 1996 to $1.9 million for the year ended
September 30, 1997. The decrease was primarily due to the $590,000 decrease in
FDIC insurance due to the special assessment on all SAIF-insured deposits in the
year ended September 30, 1996. This decrease was partially offset by an increase
in compensation of benefits of $326,000 and an increase in other non-interest
expenses of $213,000. The increase in compensation and benefits is primarily
related to the expense associated with the Stock-Based Incentive Plan
implemented May 28, 1997. The increase in other non-interest expenses is
primarily related to the conversion and name change of the subsidiary bank.
38
INCOME TAXES
The Company's income tax expense increased $353,000, or 10%, from
$333,000 for the year ended September 30, 1996 to $686,000 for the year ended
September 30, 1997. The increase in income tax expense between the two fiscal
years resulted from an increase in income before taxes.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
The Company's total assets grew by $8.1 million or 7.5% from $107.8
million at September 30, 1997 to $115.9 million at September 30, 1998. The
increase in total assets was due to a $14.2 million increase in loans receivable
and a $1.5 million increase in mortgage backed securities a which was partially
offset by a $2.8 million decrease in cash and cash equivalents and a $5.0
million decrease in investment securities held to maturity. The increase in
loans was primarily due to a $13.9 million increase in one- to four-family
residential mortgage loans. See "Business-Lending Activities - Originations and
Purchase of Loans". The increase in assets was primarily funded by an increase
in deposits of $1.7 million in addition to the $9.0 million increase in advances
from the Federal Home Loan Bank. Total liabilities increased $10.8 million from
$79.1 million at September 30, 1997 to $89.9 million at September 30, 1998.
Total equity decreased $2.7 million from $28.7 million at September 30, 1997 to
$26.1 million at September 30, 1998. The decrease was due primarily to $4.2
million of treasury shares repurchased which was partially offset by $1.7
million of earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and
interest payments on loans and securities, and proceeds from the maturation of
securities. While maturities and scheduled amortization of loans and securities
are predictable sources of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and
competition. The Bank maintains a liquidity ratio above the regulatory
requirement. This requirement, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required ratio is currently 4%. The
Bank's average regulatory liquidity ratios were 16.2%, 7.74%, 6.60%, 7.68% and
11.26%, for the years ended September 30, 1998, 1997, 1996, 1995, and 1994,
respectively. The Bank's regulatory liquidity ratio increased immediately after
the consummation of the Conversion because the bulk of the net conversion
proceeds were initially invested in short-term investment securities and
subsequently decreased as the proceeds were used to fund loan growth.
The Bank's cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities and financing
activities. Cash flows provided by operating activities were $1.9 million, $1.6
million and $805,000 for the years ended September 30, 1998, 1997 and 1996,
respectively. Net cash from investing activities consisted primarily of
disbursements for loan originations and the purchase of investments and
mortgage-backed securities, offset by principal collections on loans and
proceeds from maturation of investments and paydowns on mortgage-backed
securities. Net cash from financing activities consisted primarily of activity
in deposit accounts, increases in FHLB advances, cash dividends paid and
treasury stock transactions. The net increase in deposits was $1.7 million for
the fiscal year ended September 30, 1998, while there was a net decrease in
deposits of $2.5 million for the fiscal year ended September 30, 1997 and a net
increase in deposits of $3.2 million for the fiscal year ended September 30,
1996.
39
At September 30, 1998, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $12.4 million, or 10.7%, of
adjusted total assets, which is above the required level of $1.7 million, or
1.5%; core capital of $12.4 million, or 10.7%, of adjusted total assets, which
is above the required level of $3.5 million, or 3.0%; and risk-based capital of
$12.5 million, or 20.8%, of risk-weighted assets, which is above the required
level of $4.8 million, or 8.0%.
The Bank's most liquid assets are cash and short-term investments. The
levels of these assets are dependent on the Bank's operating, financing, lending
and investing activities during any given period. At September 30, 1998, cash
and short-term investments totalled $1.6 million. The Bank has other sources of
liquidity if a need for additional funds arises, including securities maturing
within one year and the repayment of loans. The Bank may also utilize FHLB
advances or the sale of securities available for sale as a source of funds. At
September 30, 1998, the Bank had $10.0 million of advances outstanding from the
FHLB and $4.6 million of mortgage-backed securities available for sale.
At September 30, 1998, the Bank had outstanding commitments to
originate mortgage loans of $5.1 million compared to $4.0 million at September
30, 1997. The Bank anticipates that it will have sufficient funds available to
meet its current loan origination commitments. Certificate accounts which are
scheduled to mature in less than one year from September 30, 1998 totalled $47.3
million. The Bank expects that a substantial portion of the maturing certificate
accounts will be retained by the Bank at maturity. However, if a substantial
portion of these deposits are not retained, the Bank may utilize Federal Home
Loan Bank advances, or raise interest rates on deposits to attract new accounts,
which may result in higher levels of interest expense.
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results in terms of historical dollar amounts without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Bank's operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Bank are monetary in nature. As a result, interest rates have
a greater impact on the Bank's performance than do the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
Recent pronouncements by the Financial Accounting Standards Board
("FASB") will have an impact on financial statements issued in subsequent
periods. Set forth below are summaries of such pronouncements.
SFAS No. 125, "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL
ASSETS AND EXTINGUISHMENTS OF LIABILITIES," was issued in 1996. It revises the
accounting for transfers of financial assets, such as loans and securities, and
for distinguishing between sales and secured borrowings. SFAS No. 125 was
originally effective for some transactions occurring after December 31, 1996,
and was effective for others in 1998. SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125," which was issued in
December 1996, defers for one year the effective date of provisions relating to
securities lending, repurchase agreements and other similar transactions. The
impact of partial adoption in 1997 was
40
not material to the 1997 financial statements and the impact of the complete
adoption in 1998 was not material to the 1998 financial statements.
In June 1997, the FASB issued SFAS No. 130, "REPORTING COMPREHENSIVE
INCOME." This Statement establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general-purpose financial statements. This Statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Income tax
effects must also be shown. This Statement is effective for fiscal years
beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments
of an Enterprise and RELATED INFORMATION." SFAS No. 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This statement is effective for financial statements for periods beginning after
December 15, 1997.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 addresses the accounting for
derivative instruments and certain derivative instruments embedded in other
contracts, and hedging activities. The statement standardizes the accounting for
derivative instruments by requiring that an entity recognize those items as
assets or liabilities in the statement of financial position and measure them at
fair value. This statement is effective for all fiscal years beginning after
June 15, 1999.
These statements are not expected to have a material effect on the
Company's consolidated financial position or results of operation.
YEAR 2000
The Year 2000 issue is the result of many computer programs being
written using two digits rather than four to define an applicable year. The
Company's hardware, data-driven automated equipment, or computer programs that
have date sensitive software, may recognize a date using "00" as the year 1900
rather than the year 2000. This faulty recognition could result in a system
failure or miscalculation causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in normal
business activities.
The Company is in the process of conducting a comprehensive review of
all of its information technology and non-information technology systems to
identify potential Year 2000 problems and to test hardware and software for
compliance. The Company has identified mission-critical applications. An
application, system or vendor is considered mission-critical if it is vital to
the successful continuance of core business activity or is an application that
interfaces with a mission-critical system. The Company evaluates its Year 2000
preparedness based on the guidelines issued by the Federal Financial
Institutions Examination Council (FFIEC) outline. The following 5 phases were
identified by the FFIEC: Awareness, Assessment, Renovation, Validation and
Implementation. At September 30,1998, the Awareness and Assessment phases have
been completed. The Company is in various stages of Renovation, Validation and
Implementation on
41
those applications or systems identified as mission-critical. Year 2000
compliance testing for the Company's primary outsourced information systems
application was completed during August 1998. The test determined the system to
be Year 2000 compliant.
The Company is currently developing contingency plans and anticipates
completion of such plans sometime in early 1999. Based on current information,
the Company anticipates that all systems, applications and vendors will be Year
2000 compliant by mid-year 1999, either through the modification of existing
hardware and software or through the purchase of new hardware and software. The
company currently anticipates that it will spend approximately $60,000 related
to Year 2000 issues. At this time, management does not believe that there will
be a significant negative impact to earnings due to this issue. The Year 2000
problem could have a material impact on the operation of the Company if not
properly addressed, but management anticipates that the problem will be resolved
and thus will not have a significant impact on the Company's delivery of
products and services, or its core operations.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report that are not historical
facts are forward looking statements that are subject to certain risks and
uncertainties. When used herein, the terms "anticipates", "plans", "expects",
"believes", and similar expressions as they relate to the Company or its
management are intended to identify such forward looking statements. The
Company's actual results, performance or achievements may materially differ from
those expressed or implied in the forward looking statements. Risks and
uncertainties that could cause or contribute to such material differences
include, but are not limited to, general economic conditions, interest rate
environment, competitive conditions in the financial services industry, changes
in law, unforeseen business risks related to year 2000 computer systems issues,
government policies and regulations, and rapidly changing technology affecting
financial services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company, like other financial institutions, is subject to direct
and indirect market risk. Direct market risk exists from changes in interest
rates. To the extent that interest-bearing assets and interest-bearing
liabilities mature at different intervals, changes in market interest rates can
result in increases or decreases in net interest income. This is also known as
interest rate risk. Indirect market risk exists to the extent that the Company
has a concentration of loans secured by similar assets and the market for those
assets deteriorates. The Company's primary risk of decline in the value of
collateral relates to the fact that a substantial portion of the Company's loans
are secured by residential real estate located within the local market area of
the Company. The Company manages the risk of decline in the value of the
collateral by requiring minimum loan to value ratios for the real estate loans
it originates. In addition, the Company always gives consideration to the credit
worthiness of the borrower in addition to depending on the value of the
collateral when underwriting loans. Direct exposure to interest rate risk is
more significant than indirect market risk and the Company monitors this risk
through a periodic quantitative analysis.
The principal objective of the Bank's interest rate risk management
function is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the level of risk appropriate given the Bank's business
focus, operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with Board approved guidelines.
Through such management, the Bank seeks to reduce the vulnerability of its
operations to changes in interest rates. The Bank monitors its interest rate
risk as such risk relates to its operating strategies. The Bank's Board of
Directors reviews on a quarterly basis the
42
Bank's asset/liability position, including simulations of the effect on the
Bank's capital of various interest rate scenarios.
NET PORTFOLIO VALUE. The Bank's interest rate sensitivity is monitored
by management through the use of a model which estimates the change in net
portfolio value ("NPV") over a range of interest rate scenarios. NPV is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. An NPV Ratio, in any interest rate scenario, is defined as the
NPV in that scenario divided by the market value of assets in the same scenario.
The Sensitivity Measure is the decline in the NPV Ratio, in basis points, caused
by a 200 basis point (one basis point equals 0.01%) increase or decrease in
rates, whichever produces a larger decline. The higher an institution's
Sensitivity Measure is, the greater its exposure to interest rate risk is
considered to be. The Bank utilizes a market value model prepared by the OTS
(the "OTS NPV model"), which is prepared quarterly, based on the Bank's
quarterly Thrift Financial Reports filed with the OTS. The OTS NPV model
measures the Bank's interest rate risk by approximating the Bank's NPV under
various market interest rate scenarios which range from a 400 basis point
increase to a 400 basis point decrease in market interest rates.
The following table shows the NPV and projected change in the NPV of
the Bank at September 30, 1998 assuming an instantaneous and sustained change in
market interest rates of 100, 200, 300 and 400 basis points, as calculated by
the OTS. The table indicates that the structure of the Bank's assets and
liabilities would result in a decline in the Bank's NPV in a rising rate
environment. Specifically, the table indicates that, at September 30, 1998, the
Bank's NPV was $15.3 million (or 12.8% of the market value of portfolio
assets)and that, based upon the assumptions utilized, an immediate increase in
market interest rates of 200 basis points would result in a $4.5 million or 12%
decline in the Bank's NPV and would result in a 203 basis point or 26.2% decline
in the Bank's NPV ratio to 9.5%.
NPV AS % OF PORTFOLIO
NET PORTFOLIO VALUE VALUE OF ASSETS
----------------------------- -----------------------------
CHANGE NPV
IN RATES $ AMOUNT $ CHANGE % CHANGE RATIO % CHANGE
- ------------ ------------- -------------- ----------- ---------- ---------------
400 bp $ 4,989 $(10,323) (67)% 4.64% 63.8%
300 bp 7,907 (7,404) (48) 7.13 44.3
200 bp 10,805 (4,506) (29) 9.46 26.2
100 bp 13,405 (1,906) (12) 11.43 10.8
Static 15,311 12.81
(100) bp 16,271 959 6 13.46 5.1
(200) bp 17,205 1,894 12 14.08 9.9
(300) bp 18,547 3,235 21 14.97 16.9
(400) bp 20,076 4,764 31 15.98 24.7
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV requires the making of
certain assumptions that may tend to oversimplify the manner in which actual
yields and costs respond to changes in market interest rates. First, the models
assume that the composition of the Bank's interest sensitive assets and
liabilities existing at the beginning of a period remains constant over the
period being measured. Second, the models assume that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
duration to maturity or repricing of specific assets and liabilities. Third, the
models do not take into account the impact
43
of the Bank's business or strategic plans on the structure of interest-earning
assets and interest-bearing liabilities. Accordingly, although the NPV
measurement provides an indication of the Bank's interest rate risk exposure at
a particular point in time, such measurement is not intended to and does not
provide a precise forecast of the effect of changes in market interest rates on
the Bank's net interest income and will differ from actual results. The results
of this modeling are monitored by management and presented to the Board of
Directors quarterly.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
DELPHOS CITIZENS BANCORP, INC.
Delphos, Ohio
Delphos, Ohio
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
CONTENTS
REPORT OF INDEPENDENT AUDITORS....................................... 46
FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition................. 47
Consolidated Statements of Income.............................. 48
Consolidated Statements of Shareholders' Equity................ 49
Consolidated Statements of Cash Flows.......................... 50
Notes to Consolidated Financial Statements..................... 52
45.
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Delphos Citizens Bancorp, Inc.
Delphos, Ohio
We have audited the accompanying consolidated statements of financial condition
of Delphos Citizens Bancorp, Inc. (Company), Delphos, Ohio, as of September 30,
1998 and 1997 and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years ended September 30, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Delphos Citizens Bancorp, Inc.
as of September 30, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years ended September 30, 1998, in conformity
with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Columbus, Ohio
October 29, 1998
46.
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1998 and 1997
- --------------------------------------------------------------------------------
September 30,
1998 1997
ASSETS ---- ----
Cash and due from banks $ 1,193,373 $ 1,315,950
Interest-bearing deposits in other banks 424,953 3,084,500
----------- -----------
Total cash and cash equivalents 1,618,326 4,400,450
Investment securities held to maturity
(Estimated fair value of $4,999,000 in 1997) 4,996,139
Mortgage-backed securities available
for sale 4,600,317 739,366
Mortgage-backed securities held to maturity
(Estimated fair value of $9,368,774 in 1998
and $11,789,418 in 1997) 9,004,455 11,367,191
Loans receivable, net 98,485,733 84,285,038
FHLB stock, at cost 921,600 833,800
Premises and equipment 656,229 660,703
Accrued interest receivable 505,510 445,461
Other assets 108,615 67,808
----------- -----------
Total assets $115,900,785 $107,795,956
============= ============
LIABILITIES
Deposits $79,074,391 $77,372,969
Federal Home Loan Bank Advances 10,000,000 1,000,000
Escrow accounts 266,287 236,090
Accrued interest payable 38,682 33,193
Accrued expenses and other liabilities 461,527 437,327
----------- -----------
Total liabilities 89,840,887 79,079,579
SHAREHOLDERS' EQUITY
Preferred Stock, authorized 1,000,000
shares, no shares issued and outstanding
Common stock, $.01 par value, 4,000,000
shares authorized, 2,047,631 shares issued 20,476 20,476
Additional paid-in capital 19,968,236 19,854,707
Retained earnings, substantially restricted 14,166,061 12,969,205
Treasury stock (291,640 and 87,936 shares in
1998 and 1997) (5,637,646) (1,479,065)
Unearned employee stock ownership plan shares (1,367,136) (1,463,076)
Unearned recognition and retention plan shares (1,087,120) (1,186,019)
Unrealized gain (loss) on securities available
for sale, net (2,973) 149
----------- ----------
Total shareholders' equity 26,059,898 28,716,377
----------- ----------
Total liabilities and shareholders' equity $115,900,785 $107,795,956
============ ============
- --------------------------------------------------------------------------------
See accompanying notes to consolidated Financial Statements.
47.
- -------------------------------------------------------------------------------------------------------------
DELPHOS CITIZENS BANCORP, INC CONSOLIDATED
STATEMENTS OF INCOME
Years ended September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------------------------------------
Years Ended September 30,
1998 1997 1996
INTEREST INCOME ---- ---- -----
First mortgage loans $ 6,921,182 $ 5,830,456 $ 5,128,744
Consumer and other loans 127,797 113,171 99,927
Investment securities 185,383 23,305
Mortgage-backed and related securities 1,013,701 1,000,051 1,166,095
Dividends on FHLB stock 62,495 56,309 52,212
Interest bearing deposits in banks 158,662 452,155 227,073
----------- ----------- -----------
Total interest income 8,283,837 7,637,525 6,697,356
INTEREST EXPENSE
Deposits 3,846,120 3,771,889 3,996,351
FHLB advances 194,214
----------- ----------- ----------
Total interest expense 4,040,334 3,771,889 3,996,351
NET INTEREST INCOME 4,243,503 3,865,636 2,701,005
Provision for loan losses 12,000 12,000 2,000
----------- ----------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,231,503 3,853,636 2,699,005
----------- ----------- ----------
NON-INTEREST INCOME
Service charges and fees 381,092 186,162 193,632
Gain on sale of mortgage-backed
securities available for sale 8,259
Other non-interest income 51,004 42,591 30,580
----------- ------------ -----------
Total non-interest income 432,096 228,753 232,471
----------- ------------ -----------
NON-INTEREST EXPENSE
Compensation and benefits 938,888 953,502 627,107
Occupancy and equipment 91,713 87,077 90,429
Deposit insurance 52,005 74,379 664,031
Data processing and maintenance 175,430 120,668 158,417
Franchise taxes 236,907 174,849 167,262
Other non-interest expense 431,847 459,741 246,684
------------ ------------ ----------
Total non-interest expense 1,926,790 1,870,216 1,953,930
------------ ------------ ----------
INCOME BEFORE INCOME TAXES 2,736,809 2,212,173 977,546
Income tax expense 1,084,678 686,150 333,250
------------ ------------ ----------
NET INCOME $ 1,652,131 $ 1,526,023 $ 644,296
============ =========== =========
Earnings per share
Basic $ .97 $ .75 N/A
Diluted $ .95 .75 N/A
- --------------------------------------------------------------------------------
See accompanying notes to consolidated Financial Statements
48.
DELPHOS CITIZENS BANCORP, INC
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended September 30, 1998, 1997 and 1996
- ---------------------------------------------------------------------------------------------------------
Additional
Common Paid-in Retained Treasury
Stock Capital Earnings Stock
----- ------- -------- -----
Balance at October 1, 1995 $ 10,798,886
Net income
Unrealized loss on securities 644,296
available for sale, net of tax -------------
Balance at September 30, 1996 11,443,182
Net income 1,526,023
Proceeds from sale of stock, net of
issuance costs $ 20,476 $ 19,783,352
Employee stock ownership plan
obligation
Reduction of obligation under
employee stock ownership plan 71,355
Shares purchased under
recognition and retention plan
Compensation expense with respect to
recognition and retention plan
Purchase of treasury stock, 87,936 shares $ (1,479,065)
Change in unrealized loss on securities
available for sale, net of tax
------------- -------------- ------------- ------------
Balance at September 30, 1997 20,476 19,854,707 12,969,205 (1,479,065)
Net income 1,652,131
Cash dividends (455,275)
Reduction of obligation under
employee stock ownership plan 95,041
Shares purchased under recognition
and retention plan
Compensation expense with respect to
recognition and retention plan
Tax benefit related to recognition and
retention plan 18,488
Purchase of treasury stock, 203,704 shares (4,158,581)
Change in unrealized loss on securities
available for sale, net of tax
------------- -------------- ------------- ------------
Balance at September 30, 1998 $ 20,476 $ 19,968,236 $14,166,061 $ (5,637,646)
============== ============== =========== ============
Unrealized
Gains (Losses)
Obligation on Securities Total
Under Unearned Available for Shareholders'
ESOP Compensation Sale, Net Equity
---- ------------ --------- ------
Balance at October 1, 1995 $10,798,886
Net income 644,296
Unrealized loss on securities
available for sale, net of tax $ (17,736) (17,736)
Balance at September 30, 1996 (17,736) 11,425,446
Net income 1,526,023
Proceeds from sale of stock, net of
issuance costs 19,803,828
Employee stock ownership plan
obligation $ (1,630,970) (1,630,970)
Reduction of obligation under
employee stock ownership plan 167,894 239,249
Shares purchased under
recognition and retention plan (1,270,735) (1,270,735)
Compensation expense with respect to
recognition and retention plan 84,716 84,716
Purchase of treasury stock, 87,936 shares (1,479,065)
Change in unrealized loss on securities
available for sale, net of tax 17,885 17,885
------------- ------------- ------------- -----------
Balance at September 30, 1997 (1,463,076) (1,186,019) 149 28,716,377
Net income 1,652,131
Cash dividends (455,275)
Reduction of obligation under
employee stock ownership plan 95,940 190,981
Shares purchased under recognition
and retention plan (30,357) (30,357)
Compensation expense with respect to
recognition and retention plan 129,256 129,256
Tax benefit related to recognition and
retention plan 18,488
Purchase of treasury stock, 203,704 share (4,158,581)
Change in unrealized loss on securities
available for sale, net of tax (3,122) (3,122)
------------- ------------- ------------- -------------
Balance at September 30, 1998 $ (1,367,136) $ (1,087,120) $ (2,973) $ 26,059,898
============= ============= =========== ===============
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
49.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1998, 1997 and 1996
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income$ $ 1,652,131 $ 1,526,023 $ 644,296
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred fees on loans (20,042) 17,800 (14,696)
Premiums and discounts on investment
and mortgage-backed securities (23,649) (30,820) (24,772)
Provision for loan losses 12,000 12,000 2,000
Stock dividends from FHLB (46,900) (56,100) (52,100)
Gain on sale of securities (8,259)
Depreciation and amortization of
premises and equipment 39,292 49,298 50,985
Deferred taxes 22,359 126,133 (140,005)
Compensation expense on
ESOP shares 190,981 239,249
Amortization of unearned compensation 129,256 84,716
Tax benefit realized on vesting of RRP shares 18,488
Change in:
Accrued interest receivable (60,049) (152,415) (38,308)
Other assets (40,807) 215,385 (186,123)
Interest payable 5,489 1,898 7,759
Accrued expenses and
other liabilities 3,449 (439,999) 563,743
------------ ------------- -----------
Net cash from operating activities 1,881,998 1,593,168 804,520
------------ ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Mortgage-backed securities available
for sale
Proceeds from sales 763,370
Proceeds from paydowns 831,779 65,345 48,379
Purchases (4,698,308)
Investment and mortgage-backed
securities held to maturity
Purchases (4,985,938)
Proceeds from maturities
and paydowns 7,383,372 2,590,730 2,400,546
Purchases of FHLB stock (40,900)
Loan originations net of principal
payment on loans (14,192,653) (13,527,987) (6,731,466)
Purchases of premises and equipment (34,818) (25,247) (11,031)
------------ ------------ ------------
Net cash used in investing activities (10,751,528) (15,883,097) (3,530,202)
------------ ------------ ------------
- ------------------------------------------------------------------------------------------------------------------------------------
(continued)
50.
DELPHOS CITIZENS BANCORP, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended September 30, 1998, 1997 and 1996
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts $ 1,701,422 $ (2,457,866) $ 3,166,393
Net change in mortgage escrow funds 30,197 29,910 (2,506)
Net proceeds from FHLB advances 9,000,000 1,000,000
Net proceeds from sale of stock 18,172,858
Shares purchased under RRP (30,357) (1,270,735)
Cash dividends (455,275)
Purchase of treasury stock (4,158,581) (1,479,065)
----------- ------------ -----------
Net cash from financing activities 6,087,406 13,995,102 3,163,887
----------- ------------ -----------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS (2,782,124) (294,827) 438,205
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 4,400,450 4,695,277 4,257,072
----------- ------------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,618,326 $ 4,400,450 $ 4,695,277
============ ============= ===========
SUPPLEMENTAL DISCLOSURES Cash paid for:
Interest on deposits $ 4,034,845 $ 3,773,787 $ 3,988,592
============ ============= ===========
Income taxes $ 890,000 $ 502,000 $ 455,741
============ ============= ===========
NONCASH TRANSACTIONS:
Transfer of mortgage-backed
securities to available for sale $ 1,607,975
============
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated Financial Statements.
51.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of Delphos Citizens Bancorp, Inc. (Company) and its wholly owned
subsidiary Citizens Bank of Delphos (Bank). All significant intercompany
balances and transactions have been eliminated in consolidation.
Industry Segment Information: The Company is engaged in the business of banking
with operations conducted through its office located in Delphos, Ohio. The
Company originates and holds primarily residential and consumer loans to
customers throughout the Allen and Van Wert County area in Northwest Ohio which
generates the majority of the Company's income. The Company's primary deposit
products are interest-bearing checking accounts and certificates of deposit.
There are no branch operations.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures 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. The estimate
that is particularly susceptible to a significant change relates to the
determination of the allowance for losses on loans.
Cash and Cash Equivalents: For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, deposits with financial institutions and
overnight deposits. The Company reports net cash flows for customer loan and
deposit transactions.
Investment and Mortgage-backed Securities: The Company classifies investment and
mortgage-backed securities as held to maturity, trading or available for sale.
Securities classified as held to maturity are those that management has the
positive intent and ability to hold to maturity. Securities held to maturity are
stated at cost, adjusted for amortization of premiums and accretion of
discounts.
Securities classified as available for sale are those that management intends to
sell or that could be sold for liquidity, investment management, or similar
reasons, even if there is not a present intention for such a sale. Securities
available for sale are carried at fair value with unrealized gains and losses
included as a separate component of shareholders' equity, net of tax. Gains or
losses on dispositions are based on net proceeds and the adjusted carrying
amount of securities sold, using the specific identification method.
Securities are written down to fair value when a decline in fair value is not
temporary.
- --------------------------------------------------------------------------------
(Continued)
52.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Receivable: Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses, and net deferred loan origination fees. Interest
income on loans is accrued over the term of the loans based upon the principal
outstanding. The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the collateral, and current economic conditions.
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued and unpaid, and income is subsequently recognized only to the
extent that cash payments are received until, in management's judgment, the
borrower demonstrates the ability to make periodic interest payments in which
case the loan is returned to accrual status.
Loans considered to be impaired, as identified according to internal loan review
standards, are reduced to the present value of expected future cash flows or to
the fair value of collateral by allocating a portion of the allowance for loan
losses to such loans. If these allocations cause the allowance for loan losses
to require an increase, such an increase will be reported as a provision for
loan losses charged to operations.
Management analyzes loans on an individual basis and classifies a loan as
impaired when an analysis of the borrower's operating results and financial
condition indicates that underlying cash flows are not adequate to meet its debt
service requirements. Often this is associated with a delay or shortfall in
payments of 30 days or more. Smaller balance homogeneous loans are evaluated for
impairment in total. Such loans include residential first mortgage loans secured
by one to four family residences, residential construction loans, home equity,
and other consumer loans, with balances less than $200,000. Loans are generally
moved to non-accrual status when 90 days or more past due. These loans may also
be considered impaired.
Impaired loans, or portions thereof, are charged off when deemed uncollectible.
The nature of the disclosures for impaired loans is considered generally
comparable to prior nonaccrual loans and non-performing and past due asset
disclosures.
Loan Fees and Costs: Loan origination fees and costs are deferred, and are
recognized as an adjustment to interest income using the interest method over
the contractual life of the loans, adjusted for estimated prepayments based on
the Company's historical prepayment experience.
- --------------------------------------------------------------------------------
(Continued)
53.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Real Estate: Other real estate owned is recorded at the lower of cost or
fair value, less estimated costs to sell. Any reduction in fair value is
reflected in a valuation allowance account established by a charge to income.
Costs incurred to carry the real estate are charged to expense.
Premises and Equipment: Land is carried at cost. Buildings, furniture and
fixtures, and equipment are carried at cost, less accumulated depreciation.
Buildings, furniture and fixtures, and equipment are depreciated using
straight-line and accelerated methods over the estimated useful lives of the
respective assets, which range from five to forty years.
Income Taxes: The Company follows the liability method in accounting for income
taxes. The liability method provides that deferred tax assets and liabilities
are recorded based on the difference between the tax basis of assets and
liabilities and their carrying amounts for financial reporting purposes,
referred to as "temporary differences."
Earnings Per Share: Basic earnings per share have been computed by dividing the
period earnings by the weighted average shares outstanding. Employee Stock
Ownership Plan (ESOP) shares are considered outstanding for earnings per common
share calculations as they are committed to be released; unearned shares are not
considered outstanding. Recognition and retention plan (RRP) shares are
considered outstanding for earnings per common share as they become vested.
Diluted earnings per common share has been computed assuming the exercise of
stock options less the treasury shares assumed to be purchased from the proceeds
using the average market price of the Company's stock. The earnings for the
period November 20, 1996 (conversion date) through September 30, 1997 was
$1,406,783. The basic weighted average shares outstanding was 1,710,894 and
1,873,242 for the years ended September 30, 1998 and 1997, respectively. The
diluted weighted average shares outstanding was 1,740,342 and 1,873,242 for the
years ended September 30, 1998 and 1997, respectively. Earnings per share
information for the year ended September 30, 1996 is not applicable since the
mutual to stock conversion was not consummated until November 20, 1996.
Stock Options: The excess of the option price over the par value of the shares
issued is added to additional paid-in capital when exercised. Any tax benefit
realized by the Company from the exercise of non-qualified stock options is
added to paid-in capital. Expense for employee compensation under the stock
option plan is based on APB No. 25, with expense reported only if options are
granted below market price at grant date. Pro forma disclosures of net income
and earnings per share are provided as if the fair value method of SFAS No. 123
were used for stock-based compensation.
- --------------------------------------------------------------------------------
(Continued)
54.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration of Credit Risk: Most of the Company's business activity is with
customers located within northwest Ohio, specifically Allen and Van Wert
counties. Although the Company has a diversified loan portfolio, a substantial
portion of its debtors' ability to repay their loans is dependent on the economy
in Allen and Van Wert counties.
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates. The fair value estimates of existing on- and off-balance sheet
financial instruments do not include the value of anticipated future business or
the values of assets and liabilities not considered financial instruments.
Financial Statement Presentation: Certain previously reported consolidated
financial statement amounts have been reclassified to conform to the 1998
presentation.
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The carrying values and estimated fair values of investment and mortgage-backed
securities are summarized as follows:
September 30, 1998
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
---- ----- ---- -----
MORTGAGE-BACKED SECURITIES
AVAILABLE FOR SALE:
Ginnie Mae Certificates $ 690,113 $ 21,140 $ 711,253
Fannie Mae Certificates 3,914,708 $ 25,644 3,889,064
------------------ ----------------- --------------- ------------------
4,604,821 21,140 25,644 4,600,317
MORTGAGE-BACKED SECURITIES
HELD TO MATURITY:
Ginnie Mae Certificates 8,896,968 359,445 9,256,413
Freddie Mac Certificates 107,487 4,874 112,361
------------------ ----------------- ---------------- ------------------
9,004,455 364,319 9,368,774
------------------ ----------------- ---------------- ------------------
Total investment and
mortgage-backed securities $ 13,609,276 $ 385,459 $ 25,644 $ 13,969,091
================== ================= ================ ==================
- --------------------------------------------------------------------------------
(Continued)
55.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES (Continued)
September 30, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
---- ----- ---- -----
INVESTMENT SECURITIES
HELD TO MATURITY:
U.S. Treasury security $ 4,996,139 $ 2,861 $ 4,999,000
MORTGAGE-BACKED SECURITIES
AVAILABLE FOR SALE:
Ginnie Mae Certificates 739,141 7,081 $ 6,856 739,366
MORTGAGE-BACKED SECURITIES
HELD TO MATURITY:
Ginnie Mae Certificates 11,218,082 420,972 5,565 11,633,489
Freddie Mac Certificates 149,109 6,820 155,929
------------------ ----------------- ---------------- ------------------
11,367,191 427,792 5,565 11,789,418
------------------ ----------------- ---------------- ------------------
Total investment and
mortgage-backed securities $ 17,102,471 $ 437,734 $ 12,421 $ 17,527,784
================== ================= ================ ==================
The scheduled maturities of investment and mortgaged backed securities held to
maturity and available for sale at September 30, 1998, were as follows:
Held to maturity Available for sale
Amortized Fair Amortized Fair
Cost Value Cost Value
Due from one to five years $ 2,897 $ 2,897
Due from five to ten years 97,490 99,300
Due after ten years 8,904,068 9,266,577 $ 4,604,821 $ 4,600,317
------------------ ----------------- ---------------- ------------------
$ 9,004,455 $ 9,368,774 $ 4,604,821 $ 4,600,317
================== ================= ================ ==================
Expected maturities may differ from the contractual maturities because borrowers
may have the right to call or prepay the obligations with or without prepayment
penalties. Mortgage-backed securities are reported above at their contractual
maturity date.
- --------------------------------------------------------------------------------
(Continued)
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES (Continued)
During the year ended September 30, 1996, the Company reclassified
mortgage-backed securities with an amortized cost of $1,607,975 from held to
maturity to available for sale. The securities were transferred on November 21,
1995, as allowed by the Statement of Financial Accounting Standards No. 115
implementation guide issued by the Financial Accounting Standards Board, with
the related unrealized gain of $6,818 recorded net of tax as an increase in
retained earnings.
There were no sales of investment or mortgage-backed securities during the years
ended September 30, 1998 and 1997. Proceeds from the sale of mortgage-backed
securities available for sale during the year ended September 30, 1996 were
$763,370. Gross gains of $8,259 were realized on these sales. There were no
sales of investment securities during the year ended September 30, 1996.
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
September 30,
1998 1997
---- ----
Real estate loans
One- to four-family $ 87,613,784 $ 73,716,294
Multi-family 1,880,756 1,288,236
Commercial real estate 6,958,869 6,272,532
Construction and land 6,119,065 3,780,811
------------ ------------
102,572,474 85,057,873
Less:
Mortgage loans in process (6,215,469) (3,162,366)
Net deferred loan origination fees (51,075) (71,117)
------------- -------------
96,305,930 81,824,390
------------- -------------
Consumer and other loans
Manufactured homes 113,623 111,657
Home equity loans 1,061,317 1,215,545
Unsecured loans 268,197 324,817
Other consumer loans 863,100 940,972
------------- -------------
2,306,237 2,592,991
Less: Non-mortgage loans in process (8,074) (25,983)
------------- -------------
2,298,163 2,567,008
------------- -------------
Less: Allowance for loan losses (118,360) (106,360)
------------- -------------
$ 98,485,733 $ 84,285,038
============= =============
- --------------------------------------------------------------------------------
(Continued)
57.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE (Continued)
Activity in the allowance for loan losses is summarized as follows:
Years ended September 30,
1998 1997 1996
---- ---- ----
Balance at beginning of period $ 106,360 $ 94,360 $ 92,360
Provision charged to income 12,000 12,000 2,000
Charge-offs
------------- ------------- -------------
Balance at end of period $ 118,360 $ 106,360 $ 94,360
============= ============= =============
As of and for the years ended September 30, 1998, 1997 and 1996, there were no
impaired loans.
In the ordinary course of business, the Company has and expects to continue to
have transactions, including borrowings, with its officers, directors and their
affiliates. In the opinion of management, such transactions were on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and did
not involve more than a normal risk of collectibility or present any other
unfavorable features to the Company. Loans to such borrowers during the year
ended September 30, 1998 are summarized as follows:
1998
----
Balance at beginning of period $ 274,518
New loans 6,500
Payments (20,325)
---------
Balance at end of period $ 260,693
=========
NOTE 4 - PREMISES AND EQUIPMENT
Premises and equipment is summarized as follows:
September 30,
1998 1997
---- ----
Land and parking lot $ 175,654 $ 175,654
Building and improvements 643,190 643,190
Furniture and equipment 355,519 320,701
----------- ---------
1,174,363 1,139,545
Accumulated depreciation (518,134) (478,842)
----------- ----------
$ 656,229 $ 660,703
=========== ==========
- --------------------------------------------------------------------------------
(Continued)
.58
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 5 - DEPOSITS
Deposits are summarized as follows:
September 30,
1998 1997
---- ----
Demand and NOW accounts $ 5,454,642 $ 6,052,634
Money market 5,329,269 5,802,264
Savings and club accounts 8,552,628 7,844,378
Certificates 59,737,852 57,673,693
----------- ------------
$79,074,391 $ 77,372,969
============ ============
The aggregate amount of short-term certificates of deposits with a minimum
denomination of $100,000 was approximately $5,975,000 at September 30, 1998
and $5,292,000 at September 30, 1997.
At September 30, 1998, the scheduled maturities of certificates of deposits are
as follows:
1999 $ 47,332,269
2000 10,838,895
2001 934,570
2002 71,069
2003 561,049
------------
$ 59,737,852
============
Interest expense on deposits is summarized as follows:
Years Ended September 30,
1998 1997 1996
---- ---- ----
Demand and NOW accounts $ 83,596 $ $ 83,999 $ 87,826
Money market 168,061 191,449 261,944
Savings and club accounts 232,625 237,414 249,804
Certificates 3,361,838 3,259,027 3,396,777
--------- --------- ---------
$ 3,846,120 $3,771,889 $3,996,351
=========== =========== ==========
- --------------------------------------------------------------------------------
(Continued)
59.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK
At September 30, 1998, the Bank had the ability to borrow up to $18,432,000 with
the Federal Home Loan Bank ("FHLB"). The Company had the following outstanding
FHLB advances at September 30:
Maturity Rate 1998 1997
-------- ---- ---- ----
1997 6.53% $ 1,000,000
1999 5.60-5.83% $ 5,000,000
2008 5.12% $ 5,000,000
------------------ -------------
$ 10,000,000 $ 1,000,000
================== =============
Pursuant to a collateral agreement with the FHLB, the advances are secured by
all stock invested in the FHLB and certain qualifying first mortgage loans.
Qualifying first mortgage loans pledged to secure FHLB advances totaled
$15,000,000 at September 30, 1998.
NOTE 7 - INCOME TAXES
The provision for income taxes consists of the following:
Years Ended September 30,
1998 1997 1996
Current expense $ 1,062,339 $ 560,017 $ 473,255
Deferred expense 22,339 126,133 (140,005)
--------------- -------------- ------------
$ 1,084,678 $ 686,150 $ 333,250
=============== ============== ============
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate as follows:
Years Ended September 30,
1998 1997 1996
---- ---- ----
Statutory rate 34.0% 34.0% 34.0%
Effective tax rate 39.6% 31.0% 34.0%
Tax expense at statutory
rate $ 930,515 $ 752,139 $ 332,366
Other 154,163 (65,898) 884
--------------- --------------- ------------
$ 1,084,678 $ 686,150 $ 333,250
=============== ============== ============
- --------------------------------------------------------------------------------
(Continued)
60.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 7 - INCOME TAXES (Continued)
Deferred income taxes are provided for temporary differences. The components of
the Company's net deferred tax liability at September 30, 1998 and 1997, are as
follows:
1998 1997
---- ----
Deferred tax assets
Deferred loan fees $ 5,732 $ 7,880
Non-accrual interest 7,112 6,033
ESOP Expense 24,465 24,465
Recognition and retention plan 14,299 28,803
Unrealized loss on securities
available for sale 1,532
--------------- --------------
53,140 67,181
Deferred tax liabilities
Bad debt deduction (206,743) (210,823)
FHLB stock dividends (164,220) (143,038)
Depreciation expense (7,822) (18,158)
Unrealized gain on securities
available for sale (77)
--------------- --------------
(378,785) (372,096)
--------------- --------------
Net deferred tax liability $ (325,645) $ (304,915)
=============== ==============
No valuation allowance for deferred tax assets was provided at September 30,
1998 and 1997, because the Company had sufficient net deferred tax liabilities
and taxes paid in prior years and available for recovery to warrant recording
the full deferred tax asset.
Retained earnings at September 30, 1998 and 1997, includes approximately
$1,860,000 for which no federal income tax liability has been recorded. These
amounts represent an allocation of income to bad debt deductions for tax
purposes alone. Reduction of amounts so allocated for purposes other than tax
bad debt losses or adjustments from carryback of net operating losses would
create income for tax purposes only, which would be subject to current tax. The
unrecorded deferred tax liability on the above amounts at September 30, 1998 and
1997 was approximately $631,000.
There were no taxes attributable to securities gains for the years ended
September 30, 1998 and 1997.
- --------------------------------------------------------------------------------
(Continued)
61.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 8 - DEPOSIT INSURANCE EXPENSE
The Company was affected by the undercapitalization of the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
On September 30, 1996, the President signed legislation which required federally
insured institutions such as the Company to pay a one-time assessment of $0.657
per $100 of deposits held by the institution at March 31, 1995 to bring the SAIF
to the required 1.25% reserve level.
The special assessment required the Bank to record an additional liability of
$485,803, at September 30, 1996 which reduced net income for the year ended
September 30, 1996 by approximately $321,000 after applicable income taxes.
NOTE 9 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financial needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and interest-rate caps and
floors written in connection with variable rate loans the Company has
originated. Those instruments involve, to varying degrees, elements of credit
and interest-rate risk in excess of the amount recognized in the statement of
financial position. The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit is represented by the contractual notional amount of those
instruments. The Company uses the same credit policies in making commitments as
it does for on-balance sheet instruments.
As of September 30, 1998, the Company had commitments to make loans at market
rates of $5,074,000. Of these commitments, $3,803,000 had fixed rates ranging
from 6.50% to 8.50%, and $1,271,000 had variable rates. The commitment period
ranged from 30 to 90 days. As of September 30, 1997, the Company had commitments
to make loans at market rates of $4,021,000. Since loan commitments may expire
without being used, the amount does not necessarily represent future cash
commitments.
NOTE 10 - PROFIT SHARING
The Company provides a 401(k) profit sharing plan for all eligible employees.
Employees are eligible to participate in the plan if they have been employed by
the Company for one-half year and have attained age twenty and one-half.
Generally, employees can defer up to 10% of their compensation into the plan,
not to exceed the Internal Revenue Service limits. The Company can make a
matching discretionary contribution equal to a percentage of up to 6% of the
employee's salary reduction. The Company may also make special discretionary
contributions equal to a percentage of the employee's compensation.
The expense related to the profit sharing plan was $5,474, $13,365, and
$32,026 for the years ending September 30, 1998, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
(Continued)
62.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 11 - EMPLOYEE STOCK OWNERSHIP PLAN
Effective January 1, 1996, the Company established an Employee Stock Ownership
Plan ("ESOP") for the benefit of employees 21 and older and who have completed
at least one year of service and 1,000 hours of work. Contributions under the
ESOP are conditioned upon the ESOP being qualified under Sections 401 and 501 of
the Internal Revenue Code of 1986, as amended (the "Code").
To fund the plan, the ESOP borrowed $1,630,970 from the Company for the purposes
of purchasing 163,097 shares of stock at $10 per share in the conversion.
Principal and interest payments on the loan are due in annual installments which
began December 31, 1996, with the final payments of principal and interest being
due and payable at maturity on December 31, 2013. Interest is payable during the
term of the loan at a fixed rate of 8.25%. The loan is collateralized by the
shares of the Company's common stock purchased with the proceeds. As the Bank
periodically makes contributions to the ESOP to repay the loan, shares will be
allocated to participants on the basis of the ratio of each year's principal
payments to the total of all principal payments.
The shares pledged as collateral are reported as unearned ESOP shares in the
consolidated balance sheet. As shares are committed to be released from
collateral, the company reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for earnings-per-share
computations. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings, while dividends on unallocated ESOP shares are recorded as a
reduction of debt. ESOP compensation was $190,981 and $239,249 for 1998 and
1997, respectively.
The ESOP shares were as follows at September 30, 1998:
1998 1997
---- ----
Allocated shares 19,188 9,594
Shares committed to be released 7,196 7,196
Unreleased shares 136,713 146,307
------------- ---------------
Total ESOP shares 163,097 163,097
============= ===============
Fair value of unreleased shares $ 2,204,497 $ 2,523,796
=============== ===============
NOTE 12 - STOCK OPTION AND INCENTIVE PLAN
In 1997, the shareholders approved a Stock Option plan reserving 203,871 shares
of common stock for the granting of options to certain officers and directors of
the Bank and Company. One-fifth of the options awarded become first exercisable
on each of the first five anniversaries of the date of grant. The option period
expires 10 years from the date of grant.
- --------------------------------------------------------------------------------
(Continued)
63.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 12 - STOCK OPTION AND INCENTIVE PLAN (Continued)
The Company sponsors a shareholder approved stock option plan that authorizes
the Board of Directors to grant options to directors, officers and employees of
the Company or its subsidiaries. A total of 203,871 common shares were reserved
for issuance under the Plan. No options were exercised during the years ended
September 30, 1998 or 1997. Activity regarding the plan is as follows:
Available Exercise Range of option
for grant Outstanding Price price per share
--------- ----------- -------- ----------------
Inception of plan - 1997 203,871 -
Granted (112,128) 112,128 $14.00 $14.00- $14.00
-------- -------
Balance, September 30, 1997 91,743 112,128 $14.00- $14.00
Granted (5,097) 5,097 $20.75 $20.75- $20.75
------------ -----------
Balance, September 30, 1998 86,646 117,225 $14.00- $20.75
============ =======
The proforma impact on net income and earnings per share for the options granted
is as follows for the year ended September 30:
1998 1997
---- ----
Net income as reported $ 1,652,131 $ 1,526,023
Proforma net income 1,593,977 1,507,127
Basic earnings per share as reported .97 .75
Proforma basic earnings per share .93 .74
Diluted earnings per share as reported .95 .75
Proforma diluted earnings per share .92 .73
In future years, the proforma effect is expected to increase as additional
options are granted.
For options granted during 1998 and 1997, the weighted average fair value at the
grant date was as follows:
1998 1997
---- ----
Exercise price $ 20.75 $ 14.00
Fair value 5.14 3.83
The fair value of options granted during the year are estimated using the
following information:
1998 1997
---- ----
Risk free interest rate 5.72% 6.67%
Expected life 7 years 7 years
Expected volatility of stock price 37.52% 8.40%
Expected dividends 1.50% 1.50%
- --------------------------------------------------------------------------------
(Continued)
64.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 13 - RECOGNITION AND RETENTION PLAN
A Recognition and Retention Plan ("RRP") was approved by the shareholders of the
Company and the Board of Directors on May 28, 1997. The RRP is being used as a
means of providing directors and certain key employees of the Bank with an
ownership interest in the Company in a manner designed to reward and retain such
directors and key employees. The Company contributed $1,270,735 to enable the
RRP to purchase 81,549 shares in the open market during the year ended September
30, 1997. The Board granted 43,222 shares to directors, officers and employees
on May 28, 1997. The shares vest at a rate of 20% per year on the anniversary
date of the grant. The Board granted an additional 2,378 shares in 1998 and
those shares vest at a rate of 25% per year on the anniversary date of the
grant. Compensation expense, which is based on the cost of the shares, was
$129,256 and $84,716 for the years ended September 30, 1998 and 1997,
respectively. The unamortized unearned compensation value of the RRP is shown as
a reduction to shareholders' equity in the Consolidated Balance Sheets.
NOTE 14 - RESTRICTIONS ON RETAINED EARNINGS AND CAPITAL
REQUIREMENTS
Related to its conversion from a mutual to stock savings and loan association,
the Bank established a liquidation account which was equal to its total net
worth as of the date of the latest balance sheet appearing in the final
conversion prospectus. The liquidation account will be maintained for the
benefit of eligible depositors who continue to maintain their accounts at the
Bank after the Conversion. The liquidation account will be reduced annually to
the extent that eligible depositors have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. The Bank may not pay dividends that would reduce
shareholders' equity below the required liquidation account balance.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory actions that, if undertaken, could have a direct
material effect on the Company's and Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital 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 amounts
and classifications are also subject to qualitative judgments by the regulators
about the Bank's components, risk weightings and other factors. At September 30,
1998, management believes the Bank is in compliance with all regulatory capital
requirements. Based on the Bank's computed regulatory capital ratios, the Bank
is considered well capitalized under Section 38 of the Federal Deposit Insurance
Act at September 30, 1998.
- --------------------------------------------------------------------------------
(Continued)
65.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 14 - RESTRICTIONS ON RETAINED EARNINGS AND CAPITAL
REQUIREMENTS (Continued)
At September 30, 1998 and 1997, the Bank's actual capital levels (in thousands)
and minimum required levels were:
Minimum Required
Minimum Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
-------------------------- ------------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------ ----- ------ -----
1998
Total capital
(to risk weighted assets) $ 12,485 20.83% $ 4,795 8.00% $ 5,994 10.00%
Tier 1 (core) capital
(to risk weighted assets) $ 12,367 20.63% $ 2,397 4.00% $ 3,596 6.00%
Tier 1 (core) capital
(to adjusted total assets) $ 12,367 10.67% $ 3,477 3.00% $ 5,795 5.00%
Tangible capital
(to adjusted total assets) $ 12,367 10.67% $ 1,738 1.50% N/A N/A
1997
Total capital
(to risk weighted assets) $ 14,372 28.63% $ 4,016 8.00% $ 5,020 10.00%
Tier 1 (core) capital
(to risk weighted assets) $ 14,266 28.42% $ 2,008 4.00% $ 3,012 6.00%
Tier 1 (core) capital
(to adjusted total assets) $ 14,266 13.89% $ 3,082 3.00% $ 5,137 5.00%
Tangible Capital
(to adjusted total assets) $ 14,266 13.89% $ 1,541 1.50% N/A N/A
As of September 30, 1998, the most recent notification from the Office of Thrift
Supervision 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 risk-based, Tier 1 risk based and Tier 1 leverage
ratios as set forth in the table. No conditions or events have occurred
subsequent to September 30, 1998 that management believes would change the
Bank's capital category.
Federal regulations limit all capital distributions, including cash dividends,
by savings banks. The regulation establishes a tiered system of restrictions,
with the greatest flexibility afforded to thrifts which are both
well-capitalized and given favorable qualitative examination ratings.
- --------------------------------------------------------------------------------
(Continued)
66.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Short-term Investments: For those short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Investments and Mortgage-Backed Securities: For investment and
mortgage-backed securities, fair values are based on quoted market prices
or dealer quotes.
Loans: The fair value of loans is estimated by discounting future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Deposit Liabilities: The fair value of demand deposits and savings accounts is
the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated by discounting future cash
flows using the rates currently offered for deposits of similar remaining
maturities.
Federal Home Loan Bank Advances: The fair value of Federal Home Loan Bank
Advances is estimated by discounting future cash flows using the rates currently
offered for similar borrowings of similar remaining maturities.
Accrued Interest Receivable and Accrued Interest Payable: For these assets
and liabilities, the carrying amount is a reasonable estimate of fair value.
Off Balance Sheet Commitments: The fair value of off balance sheet
commitments to extend credit is not material.
- --------------------------------------------------------------------------------
(Continued)
67.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following table shows the estimated fair value at September 30, 1998 and
1997 and the related carrying value of financial instruments:
1998 1997
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
------- --------- -------- ----------
>
Financial Assets:
Cash and cash equivalents $ 1,618,326 $ 1,618,000 $ 4,400,450 $ 4,400,000
Investment securities -- -- 4,996,139 4,999,000
Mortgage-backed securities 13,604,772 13,969,000 12,106,557 12,529,000
Loans, net 98,485,733 98,530,000 84,285,038 84,550,000
FHLB Stock 921,600 922,000 833,800 834,000
Accrued interest receivable 505,510 506,000 445,461 445,000
Financial Liabilities:
Demand and savings
deposits (19,336,539) (19,337,000) (19,699,276) (19,699,000)
Time deposits (59,737,852) (59,984,000) (57,673,693) (57,744,000)
Federal Home Loan Bank
advances (10,000,000) (10,000,000) (1,000,000) (1,000,000)
Accrued interest payable (38,682) (39,000) (33,193) (33,000)
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Company to have
disposed of such items at September 30, 1998 the estimated fair values would
necessarily have been achieved at that date, since market values may differ
depending on various circumstances. The estimated fair values at September 30,
1998 should not necessarily be considered to apply at subsequent dates.
Other assets and liabilities of the Company may have value, but are not included
in the above disclosures, such as property and equipment. Also, nonfinancial
instruments typically not recognized in these financial statements nevertheless
may have value, but are not included in the above disclosures. These include,
among other items, the estimated earnings power of core deposit accounts, the
earnings potential of loan servicing rights, the value of a trained work force,
customer goodwill and similar items.
- --------------------------------------------------------------------------------
(Continued)
68.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 16 - PARENT COMPANY
Condensed financial information of Delphos Citizens Bancorp, Inc. (parent
company only) follows:
Condensed Balance Sheets
September 30, 1998 and 1997
---------------------------
Assets 1998 1997
---- ----
Cash and due from banks $ 12,130,709 $ 752,028
Investment securities held to maturity 4,996,139
Investment in bank subsidiary 12,366,331 12,997,721
Loans to bank subsidiary 1,439,091 8,535,031
Receivable from subsidiary bank 1,270,734
Accrued interest receivable and other assets 123,767 164,724
------------- ----------
Total assets $ 26,059,898 $28,716,377
============ ===========
Shareholders' equity 26,059,898 28,716,377
---------- -----------
Total Shareholders' equity $ 26,059,898 $28,716,377
========== ===========
Condensed Statements of Income
For the year ended September 30, 1998 and the Period ended September 30, 1997
- --------------------------------------------------------------------------------
1998 1997
---- ----
Dividend from subsidiary bank $ 2,500,000 $ 7,000,000
Interest on deposits in subsidiary bank 110,524 100,492
Interest on investment securities 69,486 185,322
Interest on loans to subsidiary bank 165,581 109,931
------------- ------------
Total interest and dividend income 2,845,591 7,395,745
Other expenses 95,467 30,723
Income before federal income tax and equity
in undistributed net income of bank
subsidiary 2,750,124 7,365,022
Federal income tax expense 179,845 30,000
--------------- ------------
Income before equity in undistributed net
income of bank subsidiary 2,570,279 7,335,022
Equity in undistributed net income of
(excess distribution from) bank subsidiary (918,148) (5,928,239)
--------------- -------------
Net income $ 1,652,131 $ 1,406,783
============== ============
- --------------------------------------------------------------------------------
(Continued)
69.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 16 - PARENT COMPANY (Continued)
Condensed Statements of Cash Flows
For the year ended September 30, 1998 and the period ended September 30, 1997
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 1,652,131 $ 1,406,783
Undistributed net income of subsidiaries 918,149 5,928,239
Other 85,940 (174,925)
---------------- ---------------
Net cash from operating activities 2,656,220 7,160,097
Cash flows from investing activities:
Purchase of investment security held to maturity (4,985,938)
Maturity of investment security held to maturity 5,000,000
Net change in receivable from subsidiary bank 1,270,734
Net change in loans to subsidiary bank 7,095,940 (8,535,031)
Injection of capital into subsidiary bank (8,310,158)
---------------- ------------
Net cash used in investing activities 13,366,674 (21,831,127)
Cash flows from financing activities:
Net proceeds from sale of stock 18,172,858
Cash dividends (455,275)
Shares purchased under RRP (30,357) (1,270,735)
Purchase treasury stock (4,158,581) (1,479,065)
---------------- -----------------
Net cash from financing activities (4,644,213) 15,423,058
Net increase in cash and cash equivalents 11,378,681 752,028
Cash and cash equivalents at beginning of year 752,028 -
---------------- ---------------
Cash and cash equivalents at end of year $ 12,130,709 $ 752,028
================ ===============
- --------------------------------------------------------------------------------
(Continued)
70.
NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a consolidated summary of quarterly information:
Quarter Ended
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
(Dollars in thousands, except per share data)
1998
----
Interest income $ 2,061 $ 2,027 $ 2,081 $ 2,115
Net interest income 1,073 1,054 1,055 1,062
Provision for loan losses 3 3 3 3
Net income 400 410 400 442
Earnings per share
Basic $ .22 $ .24 $ .24 $ .26
Diluted .22 .23 .23 .27
Quarter Ended
December 31 March 31 June 30 September 30
----------- --------- -------- ------------
(Dollars in thousands, except per share data)
1997
----
Interest income $ 1,753 $ 1,934 $ 1,959 $ 1,992
Net interest income 759 1,040 1,035 1,032
Provision for loan losses 3 3 3 3
Net income 197 497 449 468
Earnings per share:
Basic $ 0.04 $ 0.27 $ 0.24 $ 0.20
Diluted 0.04 0.27 0.24 0.19
- --------------------------------------------------------------------------------
(Continued)
71.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None
PART II
Item 10. Directors and Executive Officers of the Registrant.
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on February 3, 1999
on pages 5 and 6. Gary Ricker, who is an executive officer, but not a director,
joined the Bank in 1987 as Secretary and Treasurer. He is also a Loan Officer
for the Bank. He is 44 years old.
Item 11. Executive Compensation.
The information relating to executive compensation is incorporated by
reference to the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on February 3, 1999, on pages 8 through 14 (excluding
the Report of the Compensation Committee on pages 8 through 9 and the Stock
Performance Graph on page 10).
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrants Proxy
Statement for the Annual Meeting of Stockholders to be held on February 3, 1999,
on Pages 3 and 5 through 6.
Item 13. Certain Relationships and Related Transactions.
The information relating to certain relationships and related transactions
is incorporated by reference to the Registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held on February 3, 1999 on page 14.
72.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements
These documents are listed in the Index to Consolidated Financial
Statements under Item 8.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are
not applicable or the required information is shown in the
Consolidated Financial Statements or Notes thereto.
Exhibits Required by Securities and Exchange Commission Regulation
S-K:
3.1 Certificate of Incorporation of Delphos Citizens Bancorp, Inc.
(1)
3.2 Bylaws of Delphos Citizens Bancorp, Inc. (1)
4.0 Stock Certificate of Delphos Citizens Bancorp, Inc. (1)
10.1 Form of Employment Agreement between Citizens Bank of Delphos and
the President and Chief Executive Officer (1)
10.2 Form of Employment Agreement between Delphos Citizens Bancorp,
Inc. and the President and Chief Executive Officer (1)
10.3 1998 Stock-Based Incentive Plan (2)
21.0 Subsidiary information is incorporated herein by reference to
"Part I - Subsidiary Activities."
23.0 Consent of Crowe, Chizek and Company LLP (filed herewith)
27.0 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K Filed During the Quarter Ended September 30, 1998
None
- -------------------------
(1) Incorporated herein by reference from the Exhibits to the Registration
Statement on Form S-1, as amended, filed on August 22, 1997, Registration
No. 333-10639.
(2) Incorporated by reference from the Registrant's Proxy Statement for the
Registrant's 1997 Annual Meeting of Stockholders filed with the Commission
on April 16, 1997.
CONFORMED SIGNATURES
Pursuant to the requirements of Section 13 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.
DELPHOS CITIZENS BANCORP, INC.
By: /s/ Joseph R. Reinemeyer
-----------------------------
Joseph R. Reinemeyer
Dated: December 22, 1998 Chairman of the Board,
President, and Chief Executive
Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
Name Title Date
------ ----- -----
/s/ Joseph R. Reinemeyer December 22, 1998
- ------------------------
Joseph R. Reinemeyer Chairman of the Board,
and Chief Executive Officer
(Principal Executive and
Accounting Officer)
/s/ Nancy C. Rumschlag December 22, 1998
- ------------------------
Nancy C. Rumschlag Vice President and Director December 22, 1998
/s/ P. Douglas Harter
- ------------------------
P. Douglas Harter Director December 22, 1998
/s/ Robert L. Dillhoff December 22, 1998
- ------------------------
Robert L. Dillhoff Director
/s/ David Roach December 22, 1998
- ------------------------
David Roach Director
Exhibit 23.0 Consent of Crowe, Chizek and Company LLP
Consent of Independent Certified Public Accounts
We consent to the incorporation by reference in the Registration Statement
(No. 333-41085) on Form S-8 of Delphos Citizens Bancorp, Inc. of our report,
dated October 29, 1998, related to the consolidated statements of financial
condition of Delphos Citizens Bancorp, Inc. as of September 30, 1998 and 1997
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
September 30, 1998, which report is incorporated by reference in the Annual
Report on Form 10-K for the year ended September 30, 1998.
/s/ Crowe, Chizek and Company LLP
Columbus, Ohio
December 22, 1998