UNITED STATES
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, 2000
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. X
---
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 $16,991,181, based upon the last sales price as quoted on
The Nasdaq Stock Market for November 16, 2000.
The number of shares of Common Stock outstanding as of November 16,
2000: 1,584,783.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Joint Proxy Statement/Prospectus for the Annual Meeting of
Shareholders are incorporated herein by reference to Part III of this Form 10-K.
INDEX
PART I
PAGE
Item 1. Business.............................................................................. 3
Item 2. Properties............................................................................ 28
Item 3. Legal Proceedings..................................................................... 28
Item 4. Submission of Matters to a Vote of Security Holders................................... 28
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters................. 29
Item 6. Selected Financial Data............................................................... 30
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................ 32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................ 39
Item 8. Financial Statements and Supplementary Data........................................... 41
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................... 65
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 65
Item 11. Executive Compensation................................................................ 65
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 65
Item 13. Certain Relationships and Related Transactions........................................ 66
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................................................... 66
2
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 $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.
On August 25, 2000 the Company entered into an Affiliation Agreement
with United Bancshares, Inc., a corporation organized and existing under the
laws of the state of Ohio. Pursuant to the Affiliation Agreement, subject to
many conditions set forth in the Affiliation Agreement, the Company would merge
with and into United Bancshares, with United Bancshares as the resulting entity
("Merger"). Following consummation of the Merger, the Bank would be held as a
wholly owned subsidiary of United Bancshares. The Merger is subject to the
satisfaction of many conditions, including but not limited to receipt of all
applicable regulatory approvals and the approval of the shareholders of each of
the Company and United Bancshares.
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 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 competition for deposits has historically come from
savings institutions and commercial banks. In addition, the Bank faces
increasing competition for deposits and other financial
3
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, 2000, the Bank had gross loans receivable of $127.2
million, of which $106.4 million were one- to four-family, residential mortgage
loans, or 83.61% of the Bank's gross loans receivable. The remainder of the
portfolio consists of: $1.9 million of multi-family mortgage loans, or 1.50% of
gross loans receivable; $6.6 million of commercial real estate loans, or 5.20%
of gross loans receivable; $6.9 million of construction and land loans, or 5.45%
of gross loans receivable; and consumer loans of $5.4 million, or 4.24% of gross
loans receivable. At that same date, 86.1% of the Bank's loan portfolio had
fixed interest rates. The Bank had no loans held for sale at September 30, 2000.
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,
---------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ----------------- ---------------- ---------------- ----------------
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..... $106,363 83.61% $ 99,540 84.97% $ 87,614 83.54% $73,716 84.10% $62,282 82.33%
Multi-family............ 1,902 1.50 2,276 1.94 1,881 1.79 1,288 1.47 1,506 1.99
Commercial real estate.. 6,621 5.20 6,562 5.60 6,959 6.64 6,273 7.16 4,969 6.57
Construction and land... 6,938 5.45 5,413 4.62 6,119 5.83 3,781 4.31 4,871 6.44
Consumer ............... 5,396 4.24 3,360 2.87 2,306 2.20 2,593 2.96 2,024 2.76
-------- ------- -------- -------- -------- ------- ------- ------- -------- -------
Gross loans receivable.. 127,220 100.00% 117,151 100.00% 104,879 100.00% 87,651 100.00% 75,652 100.00%
====== ====== ====== ====== ======
Undisbursed loan funds.. (4,137) (3,717) (6,224) (3,188) (4,718)
Deferred loan origination
fees................. (30) (28) (51) (72) (53)
Allowance for estimated
loan losses.......... (165) (133) (118) (106) (94)
-------- -------- ------- ------- -------
Loans receivable, net... $122,888 $113,273 $98,486 $84,285 $70,787
======== ======== ======= ======= =======
4
Loan Maturity. The following table shows the contractual maturity of
the Bank's gross loans receivable at September 30, 2000. There were no loans
held for sale at September 30, 2000. The table does not include any principal
prepayment assumptions.
At September 30, 2000
----------------------------------------------------------------------
One- to Commercial Gross
Four- Multi- Real Construction Loans
Family Family Estate and Land Consumer Receivable
---------- -------- ----------- ------------ ---------- ----------
(In thousands)
Amounts due:
One year or less....................... $5,870 $723 $1,302 $6,102 $4,773 $18,680
After one year:
More than one year to three years... 6,982 141 2,488 531 214 10,356
More than three years to five
years............................. 1,037 32 123 179 295 1,666
More than five years to 10 years.... 8,096 306 296 17 38 8,753
More than 10 years to 20 years...... 44,817 180 27 -- 76 45,100
More than 20 years.................. 39,561 520 2,385 199 -- 42,665
-------- ------ ------ ------ ------ --------
Total due after September 30,
2001........................... 100,493 1,179 5,319 926 623 108,540
-------- ------ ------ ------ ------ --------
Gross loans receivable........... $106,363 $1,902 $6,621 $6,938 $5,396 $127,220
======== ====== ====== ====== ====== ========
The following table sets forth at September 30, 2000, the dollar amount
of gross loans receivable contractually due after September 30, 2001, and
whether such loans have fixed interest rates or adjustable interest rates.
Due After September 30, 2001
-------------------------------------
Fixed Adjustable Total
--------- -------------- ----------
(In thousands)
Real estate loans:
Residential:
One- to four-family.................... $93,852 $6,641 $100,493
Multi-family........................... 1,038 141 1,179
Commercial real estate................... 715 4,604 5,319
Construction and land.................... 876 50 926
Consumer.................................... 623 -- 623
------- ------- --------
Total ............................... $97,104 $11,436 $108,540
======= ======= ========
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, the 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, 2000,
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,
--------------------------------------------
2000 1999 1998
----------- ----------- -----------
(In thousands)
Beginning balance, net............................................. $113,273 $ 98,486 $84,285
Loans originated:
One- to four-family........................................... 15,150 36,487 36,092
Multi-family.................................................. 160 917 666
Commercial real estate........................................ 838 3,026 2,762
Construction and land......................................... 9,334 7,857 9,635
Consumer...................................................... 4,661 3,684 1,996
-------- ------- -------
Total loans originated...................................... 30,143 51,971 51,151
Principal repayments............................................ (20,074) (39,652) (33,923)
Transfer to REO................................................. -- (46) --
Change in undisbursed loan funds (1)............................ (420) 2,506 (3,035)
Change in unearned origination fees............................. (2) 23 20
Change in allowance for estimated loan losses................... (32) (15) (12)
-------- -------- -------
Ending balance, net................................................ $122,888 $113,273 $98,486
======== ======== =======
___________________________________
(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, 2000, one- to
four-family mortgage loans totaled $106.4 million, or 83.61% of total loans at
such date. Of the Bank's mortgage loans secured by one- to four-family
residences, $95.5 million or 89.76%, 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 95% 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, $10.9
million, or 10.24%, 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% 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.
7
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, 2000 totaled
$1.9 million or 1.50% of gross loans receivable. The Bank's largest multi-family
loan at September 30, 2000, had an outstanding balance of $416,000 that is
secured by 15 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, 2000 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, 2000. At
September 30, 2000 the Bank's commercial real estate loan portfolio was $6.6
million, or 5.20% 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 be made in amounts up to 80% of the appraised value of the property
for construction of one- to four-family residences and up to 90% of the
appraisal value if private mortgage insurance is obtained. 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 80% of the actual cost or current appraised value of the property, which
ever is less. The largest construction and land loan in the Bank's portfolio at
September 30, 2000 had a balance of $410,000 and is secured by a single-family
residence. This loan is currently performing in accordance with its terms. At
September 30, 2000, the Bank had $6.9 million of construction and land loans
totaling 5.45% 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, 2000, the
Bank's consumer loan portfolio was $5.4 million, or 4.24% of gross loans
receivable.
8
Loan Approval Procedures and Authority. The Board of Directors
establishes the lending policies of the Bank. Loans in amounts up to $25,000 may
be approved by the Bank's loan officers. Loans in excess of $25,000 and up to
$200,000 must be approved by the Loan Committee, which consists of two senior
officer/directors and one outside director. Loans in excess of $200,000 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 30 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 a 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" or "Loss" assets. An asset is considered "Substandard" if it is
inadequately protected by the current net worth and paying capacity 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
"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.
When an insured institution classifies one or more assets, or portions
thereof, as Substandard, 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
9
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. Real estate owned ("REO") is classified as Substandard. At September 30,
2000, the Bank had $997,000 of assets classified as Substandard and no assets
classified as Loss.
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, 2000, 1999, 1998, 1997
and 1996, 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, $0, $0 and $5,280, none of
which was recognized.
At September 30,
------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- -------- --------- -------
(Dollars in thousands)
Non-accrual loans:
Residential real estate:
One- to four-family............................... $ -- $ -- $ -- $ -- $ 567
Multi-family...................................... -- -- -- -- --
Commercial real estate................................ -- -- -- -- 11
Construction and land................................. -- -- -- -- 5
Consumer.............................................. -- -- -- -- --
------ ------ ------- ------- ------
Total non-accrual loans........................... -- -- -- -- 583
Loans contractually past due more
than 90 days and accruing interest................. 582 379 825 572 --
------ ------ ------- ------- ------
Total non-performing loans........................ 582 379 825 572 583
REO, net................................................. -- -- -- -- --
------ ------ ------- ------- ------
Total non-performing assets....................... $ 582 $ 379 $ 825 $ 572 $ 583
====== ====== ======= ======= ======
Allowance for loan losses as a
percent of gross loans receivable..................... 0.13% 0.11% 0.11% 0.13% 0.13%
Allowance for loan losses as a percent of
total non-performing loans(1)......................... 28.35 35.09 14.30 18.60 16.19
Non-performing loans as a percent of
gross loans receivable(1)............................. 0.46 0.32 0.79 0.68 0.82
Non-performing assets as a percent of total assets (1)... 0.43 0.30 0.71 0.53 0.63
_____________________________________________
(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.
Loans now current but where some concerns exist as to the ability of
the borrower to comply with present loan repayment terms, exclusive of
nonperforming loans, were not significant at September 30, 2000 and 1999. These
loans are closely monitored by management and the classification of these loans
does not imply that management expects losses on the loans, but believes that a
higher level of scrutiny is prudent under the circumstances.
At September 30, 2000 and 1999, the Company had no interest-bearing
assets other than loans which would have been reported as nonaccrual or
delinquent.
10
The following table sets forth delinquencies in the Bank's loan
portfolio as of the dates indicated:
At September 30, 2000 At September 30, 1999
--------------------------------------- ----------------------------------------
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.............. 3 $162 11 $570 6 $186 9 $335
Multi-family..................... -- -- -- -- -- -- -- --
Commercial real estate........... -- -- 1 2 -- -- 1 30
Construction and land............ -- -- -- -- -- -- -- --
Consumer ........................ -- -- 2 10 2 7 2 14
------ ----- ----- ----- ----- ----- ----- -----
Total............................ 3 $162 14 $582 8 $193 12 $379
====== ===== ===== ===== ===== ===== ===== =====
Delinquent loans to gross
loans receivable.............. 0.13% 0.46% 0.16% 0.32%
===== ===== ===== =====
At September 30, 1998
---------------------------------------------------
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.............. -- $ -- 20 $783
Multi-family..................... -- -- -- --
Commercial real estate........... -- -- 2 38
Construction and land............ -- -- -- --
Consumer......................... 7 $31 1 4
----- ----- -- ----
Total............................ 7 $ 31 23 $825
===== ===== == ====
Delinquent loans to gross
loans receivable.............. 0.03% 0.79%
(1) Loans 90 days or more past due are included in non-accrual loans. See
"Non-performing Assets."
11
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, 2000, the
Bank's allowance for loan losses was 0.13% of gross loans receivable. The Bank
had non-performing loans of $582,000 and $379,000 at September 30, 2000 and
September 30, 1999, respectively. At September 30, 2000, 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,
--------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(Dollars in thousands)
Balance at beginning of period.......................... $133 $118 $106 $ 94 $92
Provision for loan losses............................... 36 30 12 12 2
Charge-offs:
Real Estate:
One-to four-family................................ -- -- -- -- --
Multi-family....................................... -- -- -- -- --
Commercial real estate............................. -- -- -- -- --
Construction and land.............................. -- -- -- -- --
Consumer............................................. (4) (15) -- -- --
Recoveries.............................................. -- -- -- -- --
------ ---- ---- ---- -----
Balance at end of period................................ $165 $133 $118 $106 $94
====== ==== ==== ==== =====
Net charge-offs to average gross loans receivable....... -- 0.01% -- -- --
12
The following table sets 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,
------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ ------------------------------ -------------------------------
Percent Percent Percent
of Gross of Gross of Gross
Loans in Loans in Loans in
Percent Each Percent Each Percent Each
of Category of Category of Category
Allowance to Gross Allowance to Gross Allowance to Gross
to Total Loans to Total Loans to Total Loans
Amount Allowance Receivable Amount Allowance Receivable Amount Allowance Receivable
------ --------- ---------- ------- --------- ---------- ------- --------- ----------
(Dollars in thousands)
One- to four-
family............... $115 69.70% 83.61 $ 93 69.92% 84.97% $ 82 69.47% 83.54%
Multi-family............ 6 3.64 1.50 6 4.51 1.94 5 4.24 1.79
Commercial real estate.. 12 7.27 5.20 9 6.77 5.60 10 8.47 6.64
Construction and land... 9 5.45 5.45 6 4.51 4.62 7 5.84 5.83
Consumer................ 4 2.42 4.24 4 3.01 2.87 3 2.54 2.20
Unallocated............. 19 11.52 -- 15 11.28 -- 11 9.44 --
---- ------ ------ ---- ------ ------ ---- ------ -------
Total allowance
for loan losses........ $165 100.00% 100.00% $133 100.00% 100.00% $118 100.00% 100.00%
==== ====== ====== ==== ====== ====== ==== ====== =======
---------------------------------------------------------------
1997 1996
------------------------------ -------------------------------
Percent Percent
of Gross of Gross
Loans in Loans in
Percent Each Percent Each
of Category of Category
Allowance to Gross Allowance to Gross
to Total Loans to Total Loans
Amount Allowance Receivable Amount Allowance Receivable
------ --------- ---------- ------- --------- ----------
One- to four-
family................. $ 75 70.75% 84.10% $65 69.15% 82.33%
Multi-family............ 5 4.72 1.47 2 2.13 1.99
Commercial real estate 10 9.43 7.16 5 5.32 6.57
Construction and land... 6 5.66 4.31 5 5.32 6.44
Consumer................ -- -- 2.96 5 5.32 2.67
Unallocated............. 10 9.44 -- 12 12.76 --
---- ------- ----- -- ------ ------
Total allowance
for loan losses........ $106 100.00% 100.00% $94 100.00% 100.00%
==== ======= ====== === ====== ======
13
Real Estate Owned
At September 30, 2000, 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, 2000,
the Company had investment and mortgage-backed securities with a carrying value
of $7.1 million and a market value of $7.2 million. At September 30, 2000, the
Company had $1.3 million in mortgage-backed securities classified as available
for sale and $5.8 million in investment and mortgage-backed securities
classified as held to maturity. At September 30, 2000, $3.2 million of the
Company's mortgage-backed securities had adjustable rates.
At September 30, 2000, 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.
14
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,
------------------------------------------------------------------------
2000 1999 1998
--------------------- ---------------------- ----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- -------- -------- ---------- --------- ----------
(In thousands)
Securities:
Available for sale:
FNMA certificates................. $ 784 $ 750 $1,302 $ 1,261 $ 3,915 $ 3,889
GNMA certificates................. 567 560 613 603 690 711
------ ------ ------ ------- ------- -------
Total available for sale....... 1,351 1,310 1,915 1,864 4,605 4,600
------ ------ ------ ------- ------- -------
Held to maturity:
GNMA certificates................. 5,745 5,823 6,752 6,878 8,897 9,256
FHLMC certificates................ 27 28 53 55 107 112
------ ------ ------ ------- ------- -------
Total held to maturity......... 5,772 5,851 6,805 6,933 9,004 9,368
FHLB stock........................ 1,631 1,631 1,250 1,250 922 922
------ ------ ------ ------- ------- -------
Total securities............... $8,754 $8,792 $9,970 $10,047 $14,531 $14,890
====== ====== ====== ======= ======= =======
As of September 30, 2000, the Company did not have any security
concentrations which exceeded 10% of total securities.
15
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Company's
mortgage-backed securities as of September 30, 2000.
At September 30, 2000
--------------------------------------------------------------------
More than One More than Five
One Year or Less Year to Five Years Years to 10 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.................................. -- -- 7 8.18 1 12.50
FHLMC................................. -- -- 18 8.25 3 12.50
-------- -------- -------- ------- -------- --------
Total held to maturity............. -- -- 25 8.23 4 12.50
-------- -------- -------- ------- -------- --------
Total mortgage-backed securities... -- -- $ 25 8.23% $ 4 12.50%
======== ======== ======== ======= ======== ========
--------------------------------------------
More than 10 Years Total
-------------------- -------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
-------- -------- -------- --------
Mortgage-backed securities:
Available for sale:
FNMA.................................. $ 750 7.38% $ 750 7.38%
GNMA.................................. 560 6.97 560 6.97
------ ----- ------ ------
Total available for sale........... 1,310 7.21 1,310 7.21
Held to maturity:
GNMA.................................. 5,738 7.40 5,746 7.40
FHLMC................................. 5 12.50 26 9.55
------ ----- ------ ------
Total held to maturity............. 5,742 7.40 5,772 7.41
------ ----- ------ ------
Total mortgage-backed securities... $7,052 7.37% $7,082 7.37%
====== ===== ====== ======
16
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.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of savings accounts, NOW
accounts, money market accounts and certificates of deposit. For the year ended
September 30, 2000, certificates of deposit constituted 74.56% 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, 2000, the Bank had $39.9 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.
At September 30, 2000, the Bank had approximately $5.4 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............................ $ -- --%
Over three through six months................... 1,516 6.33
Over six through 12 months...................... 2,062 6.13
Over 12 months.................................. 1,867 6.77
------ ----
Total..................................... $5,445 6.41%
====== ====
17
The following table sets forth the distribution of the Bank's deposit
accounts for the periods indicated.
For the Year Ended September 30,
-----------------------------------------------------------------------
2000 1999 1998
--------------------- ---------------------- ----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
--------- --------- ---------- ---------- --------- ----------
(Dollars in thousands)
Savings accounts.......................... $ 8,402 10.54% $ 8,898 11.58% $ 8,553 10.82%
Money market accounts..................... 4,049 5.08 5,178 6.74 5,329 6.74
NOW accounts.............................. 5,384 6.75 5,006 6.52 4,765 6.02
Non-interest bearing accounts............. 626 .79 446 0.58 689 0.87
--------- --------- ---------- -------- --------- ----------
Total............................... 18,461 23.16 19,528 25.42 19,336 24.45
Certificate accounts:
3.00% to 3.99%......................... 103 .13 -- -- -- --
4.00% to 4.99%......................... 3,625 4.55 24,449 31.82 2,070 2.62
5.00% to 5.99%......................... 20,999 26.34 32,473 42.26 52,404 66.27
6.00% to 6.99%......................... 20,919 27.49 342 0.44 5,214 6.60
7.00% to 7.99%......................... 14,580 18.28 5 0.01 10 0.01
8.00% to 8.99%......................... 47 .05 43 0.05 40 0.05
--------- --------- ---------- -------- --------- ----------
Total certificate accounts.......... 61,273 76.84 57,312 74.58 59,738 75.55
--------- --------- ---------- -------- --------- ----------
Total deposits...................... $ 79,734 100.00% $ 76,841 100.00% $ 79,074 100.00%
========= ========= ========== ======== ========= ==========
18
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, 2000.
Period to Maturity from September 30, 2000 At September 30,
----------------------------------------------------------------- ------------------
One to Two to Three to Four to More than
Less than Two Three Four Five Five
One Year Years Years Years Years Years Total 1999 1998
-------- --------- ---------- ---------- --------- --------- -------- -------- -------
(In thousands)
Certificate accounts:
3.00 to 3.99%....... $ 103 $ -- $ -- $ -- $ -- $ -- $ 103 $ -- $ --
4.00 to 4.99%....... 2,796 698 131 -- -- -- 3,625 24,449 2,070
5.00 to 5.99%....... 19,218 639 381 754 7 -- 20,999 32,473 52,404
6.00 to 6.99%....... 11,425 10,048 277 -- 169 -- 21,919 342 5,214
7.00 to 7.99%....... 6,311 8,269 -- -- -- -- 14,580 5 10
8.00 to 8.99%....... -- -- 47 -- -- -- 47 43 40
------- -------- -------- ------- ----- ------ ------- ------- -------
Total............ $39,853 $ 14,654 $ 836 $ 754 $ 176 $ -- $61,273 $57,312 $59,738
======= ======== ======== ======= ===== ====== ======= ======= =======
19
Borrowings. The Bank utilizes borrowings from the FHLB as an
alternative to retail deposits to fund its operations as part of its operating
strategy. These FHLB borrowings are collateralized primarily by certain of the
Bank's 1-4 family real estate loans secondarily by the Bank's investment in
capital stock of the FHLB. FHLB borrowings are made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB will advance to member
institutions, including the Bank, fluctuates from time to time in accordance
with the policies of the FHLB. See "Regulation and Supervision--Federal Home
Loan Bank System." At September 30, 2000, the Bank had $30.0 million in
outstanding FHLB borrowings, compared to $25.0 million at September 30, 1999.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated.
At or For the Years
Ended September 30,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
(In thousands)
Average balance outstanding.............................. $27,655 $16,307 $ 3,773
Maximum amount outstanding at any
month-end during the period.......................... 30,000 25,000 10,000
Balance outstanding at end of period..................... 30,000 25,000 10,000
Weighted average interest rate
during the period..................................... 5.95% 5.28% 5.14%
Weighted average interest rate at
end of period......................................... 6.45% 5.19% 5.40%
Subsidiary Activities
The Company's sole subsidiary is the Bank. The Bank has one subsidiary,
Delphos Service Corporation, which currently does not conduct any activities.
Personnel
As of September 30, 2000, the Company had 18 full-time employees and 9
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.
20
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 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.
Recently enacted federal legislation designed to modernize the
regulation of the financial services industry expands the ability of bank
holding companies to affiliate with other types of financial services companies
such as insurance companies and investment banking companies. However, the
legislation provides that companies that acquire control of a single savings
association after May 4, 1999 (or that filed an application for that purpose
after that date) are not entitled to the unrestricted activities formerly
allowed for a unitary savings and loan holding company. Rather, these companies
will have authority to engage in the activities permitted "a financial holding
company" under the new legislation, including insurance and securities-related
activities, and the activities currently permitted for multiple savings and loan
holding companies, but generally not in commercial activities. The authority for
unrestricted activities is grandfathered for unitary savings and loan holding
companies, such as the Company, that existed before May 4, 1999. However, the
authority for unrestricted activities would not apply to any company that
acquired the Company.
21
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 4% leverage (core) capital ratio (3% for savings associations that
receive the highest examination rating on the CAMELS financial institution
rating system) 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, and, together with the risk-based capital standard
itself, a 4% Tier I risk-based capital standard. Core capital is defined as
common shareholders' 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.
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, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets, and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. 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
22
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, 2000, 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, 2000.
Capital
-------------------------
Excess
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
---------- ---------- ------------- ----------- -----------
(Dollars in thousands)
Tangible.................................. $16,234 $2,049 $14,185 11.88% 1.50%
Core (Leverage)........................... 16,234 4,099 12,135 11.88 3.00
Risk-based................................ 16,399 5,934 10,465 22.11 8.00
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
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 Savings Association Insurance Fund. The Federal Deposit Insurance
Corporation maintains a risk-based assessment system by which institutions are
assigned to one of three categories based on their capitalization and one of
three subcategories based on examination ratings and other supervisory
information. An institution's assessment rate depends upon the categories to
which it is assigned. Assessment rates for Savings Association Insurance Fund
member institutions are determined semiannually by the Federal Deposit Insurance
Corporation and currently range from zero basis points for the healthiest
institutions to 27 basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are
assessed to pay bonds issued in the late 1980s by the Financing Corporation to
recapitalize the predecessor to the Savings Association Insurance Fund. During
1999, Financing Corporation payments for Savings Association Insurance Fund
members approximated 6.10 basis points, while Bank Insurance Fund members paid
1.22 basis points. By law, there was equal sharing of Financing Corporation
payments between the members of both insurance funds beginning January 1, 2000.
23
The Bank's assessment rate for fiscal 2000 ranged from 2.02 to 2.12
basis points and the premium paid for this period was $26,000. 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.
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, 2000, the Bank's limit on loans to one borrower was $2.4 million.
At September 30, 2000, 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, 2000, the Bank maintained 96.59% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to Shareholders of
another institution in a cash-out merger.
OTS adopted new rules governing capital distributions, effective April
1, 1999. Under the new regulation, an application to and the prior approval of
the OTS is required before any capital distribution if the institution does not
meet the criteria for "expedited treatment" of applications under OTS
regulations (generally, compliance with all capital requirements and examination
ratings in one of two top categories), the total capital distributions for the
calendar year exceed net income for that year plus the amount of retained net
income for the preceding two years, the institution would be undercapitalized
following the distribution or the distribution would otherwise be contrary to a
statute, regulation or agreement with OTS. If an application is not required,
the institution must still give advance notice to OTS of the capital
distribution. If the Bank's capital fell below its regulatory requirements or if
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, which would otherwise be
permitted by the regulation if the OTS determines that the distribution would be
an unsafe or unsound practice.
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, 2000 was 9.15%, 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
24
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, 2000 totaled $36,000.
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 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
shareholders, 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.
25
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 $44.3 million or less (subject to adjustment by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts aggregating greater than
$44.3 million, the reserve requirement is $1.33 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 $44.3 million. The first $5.0 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.
Community Reinvestment Act
Under the Community Reinvestment Act, as implemented by OTS
regulations, a savings association has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The
Community Reinvestment Act does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the Community
Reinvestment Act. The Community Reinvestment Act requires the OTS, in connection
with its examination of an institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of applications by such institution. The Community
Reinvestment Act requires public disclosure of an institution's Community
Reinvestment Act rating. Citizens Bank of Delphos' latest Community Reinvestment
Act rating, received from the OTS was "Satisfactory."
26
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 1996 through 1999 returns are open for audit. For its 2000 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.
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 under the PTI
Method. 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 six-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 taxable 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.
State and Local Taxation
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
27
Ohio taxable income and 8.5% of computed Ohio taxable income in excess of
$50,000 and (ii) 0.4% times taxable net worth. Under these alternative measures
of computing tax liability, the states to which a taxpayer's adjusted total net
income and adjusted total net worth are apportioned or allocated are determined
by complex formulas. The minimum tax is $50 per year.
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 .11% of the first $50,000 of computed Ohio taxable income and
.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 .014% times
taxable-net-worth.
Certain holding companies, such as the Company, will qualify for
complete exemption from the net worth tax if certain conditions are met. The
Company will most likely meet these conditions, and thus, calculate its Ohio
franchise tax on the net income basis.
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 1.4% for 1999 and 1.3% for
2000 and thereafter of the Bank's apportioned book net worth, determined in
accordance with Generally Accepted Accounting Principles ("GAAP"), less any
statutory deduction. As a "financial institution," the Bank is not subject to
any tax based upon net income or net of its imposed by the State of Ohio.
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 $516,000
at September 30, 2000.
Item 3. Legal Proceedings.
- ---------------------------
At September 30, 2000, 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.
28
PART II
Item 5. Market for Registrants Common Equity and Related Shareholder 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
November 16, 2000, there were approximately 1,202 recordholders of the Common
Stock of the Company, which includes shares held in street name. The following
table discloses the high and low sales prices for the Common Stock for each
quarterly period indicated.
High Low
---- ---
September 30, 2000 $14.13 $11.50
June 30, 2000 $15.13 $12.00
March 31, 2000 $17.50 $12.63
December 31, 1999 $18.00 $16.50
September 30, 1999 $18.50 $17.00
June 30, 1999 $18.50 $13.38
March 31, 1999 $18.75 $16.00
December 31, 1998 $19.00 $15.63
The following table lists the dividends declared and paid by the
Company.
2000 Dividend (1) Declared Paid
-------------- ---------- ----------
$.07 10-16-99 11-22-99
.07 1-25-00 2-23-00
.07 4-24-00 5-25-00
.07 7-25-00 8-25-00
1999 Dividend (1) Declared Paid
-------------- ---------- ----------
$.06 10-29-98 11-24-98
.06 01-27-99 02-24-99
.06 04-27-99 05-24-99
.06 07-28-99 08-25-99
___________________
(1) Per share.
29
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,
---------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- --------- --------- ----------
(In thousands)
Selected Balance Sheet Data:
Total assets..................................... $136,627 $128,228 $115,901 $107,796 $92,235
Cash and cash equivalents........................ 3,687 3,700 1,618 4,400 4,695
Investment securities ........................... -- -- -- 4,996 500
Mortgage-backed securities....................... 7,082 8,669 13,605 12,107 14,214
FHLB stock--at cost.............................. 1,631 1,250 922 834 778
Loans receivable, net (1)........................ 122,888 113,273 98,486 84,285 70,787
Deposits ........................................ 79,734 76,841 79,074 77,373 79,831
FHLB advances.................................... 30,000 25,000 10,000 1,000 --
Total equity..................................... 25,985 25,487 26,060 28,716 11,425
For the Year Ended September 30,
---------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- --------- --------- ----------
(In thousands)
Selected Operating Data:
Interest income.................................. $9,724 $9,122 $8,665 $7,824 $6,891
Interest expense................................. 5,345 4,484 4,040 3,772 3,996
------- ------- ------- ------- -------
Net interest income.............................. 4,379 4,638 4,625 4,052 2,895
Provision for loan losses........................ 36 30 12 12 2
------- ------- ------- ------- -------
Net interest income after
provision for loan losses.................. 4,343 4,608 4,613 4,040 2,893
Non-interest income.............................. 49 55 51 43 38
Non-interest expense............................. 2,248 2,025 1,927 1,871 1,954
------- ------- ------- ------- -------
Income before income taxes....................... 2,143 2,640 2,737 2,212 977
Income taxes .................................... 750 937 1,085 686 333
------- ------- ------- ------- -------
Net income ...................................... $1,394 $1,703 $1,652 $1,526 $ 644
======= ======= ======= ======= =======
Earnings per common share (2):
Basic......................................... 0.99 1.14 0.97 0.75 --
Diluted....................................... 0.98 1.12 0.95 0.75 --
Cash dividends declared per common 0.28 0.24 0.24 -- --
share (2).....................................
30
At or for the Year Ended
September 30,
-----------------------------------------------------------
2000 1999 1998 1997 1996
--------- ---------- ---------- --------- ----------
Selected Financial Ratios and Other
Data(3):
Performance Ratios:
Return on average assets......................... 1.06% 1.40% 1.50% 1.42% 0.71%
Return on average equity......................... 5.44 6.57 5.87 5.31 5.59
Average equity to average assets................. 19.48 21.27 25.48 25.37 12.68
Equity to total assets at end of period.......... 19.02 19.88 22.48 26.64 12.39
Dividend payout ratio (2)........................ 31.96 24.12 27.56 -- --
Average interest rate spread (4)................. 2.49 2.94 3.07 2.67 2.51
Net interest margin (5).......................... 3.43 3.90 4.29 3.83 3.06
Average interest-earning assets to
average interest-bearing liabilities.......... 122.48 125.37 132.61 131.00 112.32
Efficiency ratio (6)............................. 50.78 43.12 41.21 45.68 66.61
Non-interest expense to average assets........... 1.71 1.66 1.75 1.71 2.15
Regulatory Capital Ratios (7):
Tangible capital................................. 11.88 9.60 10.67 13.89 12.40
Core capital..................................... 11.88 9.60 10.67 13.89 12.40
Risk-based capital............................... 22.11 18.06 20.83 28.63 27.25
Asset Quality Ratios:
Non-performing loans as a percent of
gross loans receivable (8)(9)................. 0.46 0.32 0.79 0.68 0.82
Non-performing assets as a percent of
total assets (9).............................. 0.43 0.30 0.71 0.53 0.63
Allowance for loan losses as a percent of
gross loans receivable (8).................... 0.13 0.11 0.11 0.13 0.13
Allowance for loan losses as a percent of
non-performing loans (9)...................... 28.35 35.09 14.30 18.60 16.19
__________________________
(1) Loans receivable are shown net of loans in process, net deferred loan
origination fees and the allowance for loan losses.
(2) Earnings per common share and cash dividends per common share are not
applicable for years prior to the conversion on November 20, 1996.
(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."
31
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, 2000, and for the years
ended September 30, 2000, 1999 and 1998. 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.
-----------------------------
At September 30, 2000 2000
--------------------- -----------------------------
Average
Yield/ Average Yield/
Balance Cost Balance Interest Cost
---------- -------- --------- -------- --------
Assets:
Interest-earning assets:
Interest-earning deposits in other banks.... $ 1,495 6.35% $ 796 $ 58 7.29%
Investment securities, net(1)............... 1,631 6.25 1,550 102 6.58
Loans receivable, net (2)................... 122,888 7.39 117,681 8,994 7.64
Mortgage-backed securities, net(1).......... 7,082 7.37 7,762 570 7.34
----------- ---- --------- -------- ----
Total interest-earning assets........... 133,096 7.36 127,789 9,724 7.61
Non-interest-earning assets................... 3,531 3,766
----------- ---------
Total assets............................ $ 136,627 $ 131,555
=========== =========
Liabilities and Equity:
Interest-bearing liabilities:
Passbook savings accounts................... $ 8,402 2.69 $ 8,856 233 2.63
Money market accounts....................... 4,049 3.06 4,776 143 2.99
NOW accounts................................ 5,384 1.79 5,476 96 1.75
Certificate accounts........................ 61,273 6.12 57,570 3,227 5.61
FHLB advances............................... 30,000 6.45 27,655 1,646 5.95
----------- ---- --------- -------- ----
Total interest-bearing liabilities........ 109,108 5.62 104,333 5,345 5.12
--------
Non-interest-bearing liabilities.............. 1,534 1,599
----------- ---------
Total liabilities....................... 110,642 105,932
Equity........................................ 25,985 25,623
----------- ---------
Total liabilities and equity............ $ 136,627 $ 131,555
=========== =========
Net interest income before provision
for estimated loan losses................. $ 4,379
========
Net interest rate spread(3)................... 2.49%
====
Net interest margin(4)........................ $ 121.99% 122.48% 3.43%
=========== ====== ====
Ratio of interest-earning assets to
interest-bearing liabilities................
Year Ended September 30,
-----------------------------------------------------------------------
1999 1998
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------- -------- -------- -------- -------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
Interest-earning deposits in other banks.. $ 620 $ 50 8.06% $ 2,427 $ 159 6.55%
Investment securities, net(1)............. 1,017 68 6.69 884 62 7.01
Loans receivable, net (2)................. 106,619 8,200 7.75 91,126 7,430 8.15
Mortgage-backed securities, net(1)........ 10,662 744 6.98 13,291 1,014 7.63
--------- -------- -------- -------- -------- -------
Total interest-earning assets......... 118,918 9,122 7.67 107,728 8,665 8.04
Non-interest-earning assets................. 2,965 2,646
--------- --------
Total assets.......................... $ 121,883 $110,374
========= ========
Liabilities and Equity:
Interest-bearing liabilities:
Passbook savings accounts................. $ 8,791 231 2.63 $ 8,147 232 2.85
Money market accounts..................... 5,366 160 2.98 5,516 168 3.05
NOW accounts.............................. 5,974 91 1.52 5,527 84 1.52
Certificate accounts...................... 58,419 3,141 5.28 58,275 3,362 5.77
FHLB advances............................. 16,307 861 5.28 3,773 194 5.14
--------- -------- -------- -------- ------- ------
Total interest-bearing liabilities...... 94,857 4,484 4.73 81,238 4,040 4.97
-------- -------
Non-interest-bearing liabilities............ 1,097 1,014
--------- --------
Total liabilities..................... 95,954 82,252
Equity...................................... 25,929 28,122
--------- --------
Total liabilities and equity.......... $ 121,883 $110,374
========= ========
Net interest income before provision
for estimated loan losses............... $ 4,638 $ 4,625
======== =======
Net interest rate spread(3)................. 2.94% 3.07%
==== ====
Net interest margin(4)...................... 3.90% 4.29%
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities.............. 125.37% 132.61%
====== ======
______________
(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.
32
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, 2000 Year Ended September 30, 1999
Compared to Compared to
Year Ended September 30, 1999 Year Ended September 30, 1998
--------------------------------- ----------------------------------
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............. $ 13 $ (5) $ 8 $(139) $ 30 $(109)
Investment securities, net........................... 35 (1) 34 9 (3) 6
Loans receivable, net................................ 847 (113) 734 1,215 (385) 830
Mortgage-backed securities, net...................... (211) 37 (174) (189) (81) (270)
---- ------ ------ ------ ------- ------
Total change in interest income................... 684 (82) 602 896 (439) 457
Interest-bearing liabilities:
Passbook savings accounts............................ 2 -- 2 18 (19) 1
Money market accounts................................ (18) 1 (17) (5) (3) (8)
NOW accounts......................................... (8) 13 5 7 -- 7
Certificate accounts................................. (46) 132 86 8 (229) (221)
FHLB advances........................................ 664 121 785 662 5 667
----- ----- ----- ------- --------- -------
Total change in interest expense.................. 594 267 861 690 (246) 444
----- ----- ----- ------- ------ ------
Net change in net interest income........................ $ 90 $(349) $(259) $ 206 $(193) $ 13
====== ===== ====== ====== ===== =======
33
Comparison of Operating Results for the Years Ended September 30, 2000 and
September 30, 1999
General
Operating results of the Company are affected by general economic
conditions, monetary and fiscal policies of federal agencies and policies of
agencies regulating financial institutions. The Company's cost of funds is
influenced by interest rates on competing investments and general market rates
of interest. Lending activities are influenced by demand for real estate loans
and other types of loans which, in turn, is affected by the interest rates at
which such loans are made, general economic conditions and availability of funds
for lending activities.
The Company's net income is primarily dependent on its net interest
income (the difference between interest income generated on interest-earning
assets and interest expense incurred on interest-bearing liabilities). Net
income is also affected by provisions for loan losses, service charges, gains on
sale of assets and other income, noninterest expense and income taxes. The
Company's net income was $1,394,000 and $1,703,000 for the years ended September
30, 2000 and 1999.
Interest Income
Interest income increased $602,000, or 6.2%, from $9.1 million for the
year ended September 30, 1999 to $9.7 million for the year ended September 30,
2000. The increase in interest income resulted primarily from an increase in
interest and fees on loans. Such increase was due to higher average loan
balances related to the origination of new one- to four-family real estate
loans. This increase was partially offset by a decrease in interest and
dividends on securities. The decrease in these investments resulted from a
decrease in the volume of securities in the current year as the majority of the
proceeds from principal payments have been reinvested in higher yielding loans.
Interest Expense
Interest expense increased $861,000, or 19.2%, from $4.5 million for
the year ended September 30, 1999 to $5.3 million for the year ended September
30, 2000. The increase in interest expense was primarily due to an increase in
the volume of FHLB advances during 2000 along with an overall increase in
interest rates. The Company began using FHLB advances in fiscal 1998 to fund the
Bank's loan growth.
Net Interest Income
Net interest income is the largest component of the Company's income
and is affected by the interest rate environment and volume and composition of
interest-earning assets and interest-bearing liabilities. Net interest income
decreased slightly by $259,000 to $4.4 million for the year ended September 30,
2000. The decrease reflects the increase in market rates as the interest-bearing
liabilities have repriced more quickly than interest-earning assets. This trend
is evidenced by the decrease in the net interest rate spread from 2.94% for the
year ended September 30, 1999 to 2.49% for the year ended September 30, 2000.
The Company remains liability sensitive, whereby its interest-bearing
liabilities will generally reprice more quickly than its interest-earning
assets. Therefore, the Company's net interest margin will generally increase in
periods of falling interest rates in the market and will decrease in periods of
increasing interest rates. Accordingly, in a rising interest rate environment,
the Company may need to increase rates to attract and retain deposits. Due to
the negative gap position, the rise in interest rates may not have such an
immediate impact on interest-earning assets. This lag could negatively affect
net income.
Provision for Loan Losses
The Company maintains an allowance for loan losses in an amount, which,
in management's judgment, is adequate to absorb probable losses inherent in the
loan portfolio. While management utilizes its best judgment and information
available, ultimate adequacy of the allowance is dependent on a variety of
factors, including performance
34
of the Company's loan portfolio, the economy, changes in real estate values and
interest rates and the view of the regulatory authorities toward loan
classifications. The provision for loan losses is determined by management as
the amount to be added to the allowance for loan losses after net charge-offs
have been deducted to bring the allowance to a level considered adequate to
absorb probable losses in the loan portfolio. The amount of the provision is
based on management's regular review of the loan portfolio and consideration of
such factors as historical loss experience, general prevailing economic
conditions, changes in size and composition of the loan portfolio and specific
borrower considerations, including ability of the borrower to repay the loan and
the estimated value of the underlying collateral.
Provisions for loan losses totaled $36,000 for the year ended September
30, 2000 compared to $30,000 for the year ended September 30, 1999. The
provision for loan losses is based on management's assessment of risk factors
affecting the allowance for loan losses. The allowance for loan losses was
approximately .13% and .11% of total loans as of September 30, 2000 and 1999.
Non-Interest Income
Non-interest income totaled $49,000 for the year ended September 30,
2000 as compared to $55,000 for the year ended September 30, 1999. Non-interest
income decreased slightly due to a gain recognized on the sale of real estate
owned in fiscal 1999.
Non-Interest Expense
Non-interest expense increased $224,000, or 11.1% , from $2.0 million
for the year ended September 30, 1999 to $2.2 million for the year ended
September 30, 2000. The increase was primarily due to an increase in
compensation and benefits and professional services. The increase in salary and
benefits was due to annual merit raises and additional recognition and retention
plan ("RRP") expense recognize for additional shares earned in 2000. The Company
has incurred approximately $292,000 in professional fees related to the proposed
sale.
Income Taxes
The change in income tax expense is primarily attributable to the
change in net income before income taxes. Income tax expense totaled $750,000,
or an effective rate of 35.0% for the year ended September 30, 2000, compared to
$937,000, or an effective rate of 35.5% for the year ended September 30, 1999.
Comparison of Operating Results for the Years Ended September 30, 1999 and
September 30, 1998
General
The Company's net income is primarily dependent on its net interest
income (the difference between interest income generated on interest-earning
assets and interest expense incurred on interest-bearing liabilities). Net
income is also affected by provisions for loan losses, service charges, gains on
sale of assets and other income, noninterest expense and income taxes. The
Company's net income was $1,703,000 and $1,652,000 for the years ended September
30, 1999 and 1998.
Interest Income
Interest income increased $457,000, or 5.3%, from $8.7 million for the
year ended September 30, 1998 to $9.1 million for the year ended September 30,
1999. The increase in interest income resulted primarily from an increase in
interest and fees on loans. Such increase was due to higher average loan
balances related to the origination of new one- to four-family real estate
loans. This increase was partially offset by a decrease in interest and
dividends on securities and interest-bearing deposits. The decrease in these
investments resulted from a decrease in the volume of securities and deposits in
the current year as the majority of the proceeds from principal payments have
been reinvested in higher yielding loans.
35
Interest Expense
Interest expense increased $444,000, or 11.0%, from $4.0 million for
the year ended September 30, 1998 to $4.5 million for the year ended September
30, 1999. The increase in interest expense was primarily due to an increase in
the volume of FHLB advances during 1999. The Company began using FHLB advances
in fiscal 1998 to fund the Bank's loan growth. This increase was partially
offset by a decrease in interest expense on deposits due to a lower cost of
funds on certificates of deposit.
Net Interest Income
Net interest income is the largest component of the Company's income
and is affected by the interest rate environment and volume and composition of
interest-earning assets and interest-bearing liabilities. Net interest income
increased slightly by $13,000 to $4.6 million for the year ended September 30,
1999. The Bank's continued growth is reflected by an increase in average
interest-earning assets. However, net interest income does not correspond to
this growth as interest-bearing liabilities have repriced more quickly than
their interest-earning assets. This trend is evidenced by the decrease in the
net interest rate spread from 3.07% for the year ended September 30, 1998 to
2.94% for the year ended September 30, 1999.
Provision for Loan Losses
Provisions for loan losses totaled $30,000 for the year ended September
30, 1999 compared to $12,000 for the year ended September 30, 1998. The
provision for loan losses is based on management's assessment of risk factors
affecting the allowance for loan losses. The allowance for loan losses was
approximately 0.11% and 0.12% of total loans as of September 30, 1999 and 1998.
Management believes the allowance for loan loss is adequate to absorb probable
losses; however, future additions to the allowance may be necessary based on
changes in economic conditions.
Non-Interest Income
Non-interest income totaled $55,000 for the year ended September 30,
1999 as compared to $51,000 for the year ended September 30, 1998. Non-interest
income increased slightly due to a gain recognized on the sale of real estate
owned.
Non-Interest Expense
Non-interest expense increased $96,000, or 5.0%, from $1.9 million for
the year ended September 30, 1998 to $2.0 million for the year ended September
30, 1999. The increase was primarily due to an increase in compensation and
benefits and data processing services, partially offset by a decrease in
franchise taxes. The increase in salary and benefits was due to annual merit
raises and additional RRP expense recognized from an increase in stock prices.
The decrease in franchise taxes for fiscal 1999 resulted from a decrease in
equity of the Company due to the stock repurchase.
Income Taxes
The change in income tax expense is primarily attributable to the
change in net income before income taxes. Income tax expense totaled $937,000,
or an effective rate of 35.5% for the year ended September 30, 1999, compared to
$1,085,000, or an effective rate of 39.6% for the year ended September 30, 1998.
36
Comparison of Financial Condition at September 30, 2000 and September 30, 1999
General
The Company's assets totaled $136.6 million at September 30, 2000, an
increase of $8.4 million, or 6.6%, from $128.2 million at September 30, 1999.
The growth in assets was primarily in loans, partly offset by a decrease in
securities. Such loan growth was funded by borrowed funds and the decrease in
securities.
Securities
Total securities decreased $1.6 million from $8.7 million at September
30, 1999, to $7.1 million at September 30, 2000. The decrease was due to
maturities and principal payments being reinvested in higher yielding loans.
Loans
Net loans increased $9.6 million, or 8.5%, from $113.3 million at
September 30, 1999 to $122.9 million at September 30, 2000. The growth in loans
was primarily in one- to four-family real estate loans, which increased $6.9
million, or 6.9%, during the period. Growth in real estate loans is primarily
related to growth in the Company's market area. Changes in other types of loans
were not significant.
Deposits
Total deposits increased $2.9 million, or 3.8%, from $76.8 million at
September 30, 1999 to $79.7 million at September 30, 2000. The increase
primarily resulted from an increase in certificates of deposit of $4.0 million.
Borrowings
Borrowings from the FHLB totaled $30.0 million at September 30, 2000,
an increase of $5.0 million from September 30, 1999. Management has increased
its use of FHLB advances as an alternative source of funds in order to continue
to meet loan demand and greater leverage the capital of the Company.
Equity
Shareholders' equity totaled $26.0 million at September 30, 2000, an
increase of $500,000 from $25.5 million at September 30, 1999. Equity as a
percentage of assets decreased from 19.9% at September 30, 1999 to 19.0% at
September 30, 2000. The decrease was primarily the result of the overall growth
of the Company and the purchase of 53,409 shares of its common stock on the
secondary market.
Liquidity and Capital Resources
The Company'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 Company's bank subsidiary 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 10.30% and
12.2%, for the years ended September 30, 2000 and 1999, respectively. The Bank's
regulatory liquidity ratio increased immediately after the consummation of the
Conversion because the bulk of the net conversion proceeds was initially
invested in short-term investment securities and subsequently decreased as the
proceeds were used to fund loan growth.
37
The Company'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 $1.7
million, $2.0 million and $1.9 million for the years ended September 30, 2000,
1999 and 1998, 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 $2.9 million for
the fiscal year ended September 30, 2000, while there was a net increase in
deposits of $2.2 million for the fiscal year ended September 30, 1999 and a net
decrease in deposits of $1.7 million for the fiscal year ended September 30,
1998.
At September 30, 2000, the Company's bank subsidiary exceeded all of
its regulatory capital requirements with a tangible capital level of $16.2
million, or 11.9%, of adjusted total assets, which is above the required level
of $2.0 million, or 1.5%; core capital of $16.2 million, or 11.9%, of adjusted
total assets, which is above the required level of $4.1 million, or 3.0%; and
risk-based capital of $16.4 million, or 22.1%, of risk-weighted assets, which is
above the required level of $5.9 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, 2000, cash
and short-term investments totaled $3.7 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, 2000, the Bank had $30.0 million of advances outstanding from the
FHLB and $1.3 million of mortgage-backed securities available for sale.
At September 30, 2000, the Bank had outstanding commitments to
originate mortgage loans of $4.7 million compared to $2.9 million at September
30, 1999. 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, 2000 totaled $39.9
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 statement issued in subsequent
periods. Set forth below are summaries of such pronouncements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS Nos. 137
and 138, 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 is not expected to
have a material effect as the Company does not currently maintain any derivative
holdings.
38
Forward-Looking Statements
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions.
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, government policies and regulations, and rapidly changing technology
affecting financial services.
The Company does not undertake -- and specifically disclaims any
obligation -- to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
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 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
39
Bank's NPV under various market interest rate scenarios which range from a 300
basis point increase to a 300 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, 2000 assuming an instantaneous and sustained change in
market interest rates of 100, 200 and 300 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, 2000, the Bank's NPV
was $16.6 million (or 12.5% 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 $7.2 million or 44% decline in the
Bank's NPV and would result in a 500 basis point or 39.9% decline in the Bank's
NPV ratio to 7.5%.
2000 NPV as % of Portfolio
Net Portfolio Value Value of Assets
----------------------------------- -----------------------------
(Dollars in thousands)
Change NPV
in Rates $ Amount $ Change % Change Ratio % Change
- ----------- ------------- ------------- ------------- ---------- -------------
300 bp $ 5,896 $(10,721) 65% 4.90% 60.9%
200 bp 9,357 (7,259) 44 7.52 39.9
100 bp 12,981 (3,635) 22 10.10 19.3
Static 16,616 12.52
(100) bp 19,774 3,158 19 14.50 15.8
(200) bp 21,600 4,984 30 15.58 24.4
(300) bp 22,840 6,224 37 16.27 30.0
1999 NPV as % of Portfolio
Net Portfolio Value Value of Assets
----------------------------------- -----------------------------
(Dollars in thousands)
Change NPV
in Rates $ Amount $ Change % Change Ratio % Change
- ----------- ------------- ------------- ------------- ---------- -------------
300 bp $ 6,310 $(8,768) 58% 5.34% 54.1%
200 bp 9,328 (5,750) 38 7.64 34.4
100 bp 12,349 (2,730) 18 9.81 15.7
Static 15,079 11.64
(100) bp 16,934 1,856 12 12.79 9.9
(200) bp 17,829 2,750 18 13.28 14.1
(300) bp 18,475 3,396 23 13.59 16.8
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 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.
40
Item 8. Financial Statements and Supplementary Data.
- -----------------------------------------------------
41
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. as of September 30, 2000 and 1999, and the
related consolidated statements of income, comprehensive income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended September 30, 2000. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Delphos Citizens
Bancorp, Inc. as of September 30, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 2000, in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Columbus, Ohio
October 20, 2000
42
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 2000 and 1999
- --------------------------------------------------------------------------------
2000 1999
---- ----
ASSETS
Cash and amounts due from depository institutions $ 2,191,658 $ 2,853,171
Interest-bearing deposits in other financial institutions 1,494,893 847,106
--------------- ----------------
Total cash and cash equivalents 3,686,551 3,700,277
Securities available for sale 1,309,631 1,864,283
Securities held to maturity (Estimated fair value of
$5,850,415 in 2000 and $6,932,862 in 1999) 5,772,169 6,804,708
Federal Home Loan Bank stock 1,631,300 1,250,000
Loans, net of allowance of $164,881 in 2000
and $133,493 in 1999 122,888,483 113,272,857
Premises and equipment, net 614,292 662,283
Accrued interest receivable 653,799 573,048
Other assets 71,208 100,110
--------------- ----------------
Total assets $ 136,627,433 $ 128,227,566
=============== ================
LIABILITIES
Deposits
Demand and NOW accounts $ 6,010,276 $ 5,452,072
Money market accounts 4,049,361 5,177,858
Savings and club 8,401,619 8,898,411
Certificates of deposit 61,272,630 57,312,249
--------------- ----------------
Total deposits 79,733,886 76,840,590
Federal Home Loan Bank advances 30,000,000 25,000,000
Escrow accounts 323,968 306,750
Accrued interest payable 206,091 52,734
Other liabilities 378,289 540,085
--------------- ----------------
Total liabilities 110,642,234 102,740,159
SHAREHOLDERS' EQUITY
Preferred Stock, no par value, 1,000,000 shares authorized,
none outstanding -- --
Common stock, $.01 par value, 4,000,000 shares authorized,
2,047,631 shares issued 20,476 20,476
Additional paid-in capital 20,161,428 20,055,178
Retained earnings 16,390,549 15,458,050
Treasury stock, at cost - 462,848 shares in 2000
and 409,439 shares in 1999 (8,681,160) (7,746,503)
Unearned employee stock ownership plan shares (1,175,257) (1,271,197)
Unearned recognition and retention plan shares (703,817) (995,176)
Accumulated other comprehensive income (loss) (27,020) (33,421)
--------------- ----------------
Total shareholders' equity 25,985,199 25,487,407
--------------- ----------------
Total liabilities and shareholders' equity $ 136,627,433 $ 128,227,566
=============== ================
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
43
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Interest income
Loans, including fees $ 8,994,002 $ 8,260,000 $ 7,430,071
Securities 569,603 744,504 1,013,701
FHLB stock dividends 101,976 68,230 62,495
Interest-bearing deposits 58,379 49,676 158,662
-------------- -------------- ---------------
9,723,960 9,122,410 8,664,929
Interest expense
Deposits 3,699,487 3,622,880 3,846,120
FHLB advances 1,645,509 861,185 194,214
-------------- -------------- ---------------
5,344,996 4,484,065 4,040,334
-------------- -------------- ---------------
Net interest income 4,378,964 4,638,345 4,624,595
Provision for loan losses 36,000 30,000 12,000
-------------- -------------- ---------------
Net interest income after
provision for loan losses 4,342,964 4,608,345 4,612,595
Non-interest income
Service charges and fees 38,585 39,967 39,429
Gain on sale of real estate owned -- 8,532 --
Other income 10,281 6,393 11,575
-------------- -------------- ---------------
48,866 54,892 51,004
Non-interest expense
Compensation and benefits 1,077,312 981,175 938,888
Occupancy expense 110,126 110,887 91,713
Data processing services 230,882 208,267 175,430
Professional fees 324,513 148,772 170,742
State franchise taxes 187,189 214,284 236,907
Other expenses 318,402 360,561 313,110
-------------- -------------- ---------------
2,248,424 2,023,946 1,926,790
-------------- -------------- ---------------
Income before income taxes 2,143,406 2,639,291 2,736,809
Income tax expense 749,759 936,700 1,084,678
-------------- -------------- ---------------
Net income $ 1,393,647 $ 1,702,591 $ 1,652,131
============== ============== ===============
Earnings per common share
Basic $ .99 $ 1.14 $ .97
Diluted $ .98 $ 1.12 $ .95
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
44
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended September 30, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Net income $1,393,647 $1,702,591 $1,652,131
Other comprehensive income (loss)
Unrealized holding gains (losses) on
available for sale securities
arising during the period 9,698 (46,134) (4,730)
Tax effect (3,297) 15,686 1,608
---------- ---------- ----------
Other comprehensive income (loss) 6,401 (30,448) (3,122)
---------- ---------- ----------
Comprehensive income $1,400,048 $1,672,143 $1,649,009
========== ========== ==========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
45
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
Years ended September 30, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
Accumulated
Additional Unearned Unearned Other
Common Paid-in Retained Treasury ESOP RRP Comprehensive
Stock Capital Earnings Stock Shares Shares Income (Loss) Total
----- ------- -------- ----- ------ ------- ------------- -----
Balance at
September 30, 1997 $20,476 $19,854,707 $12,969,205 $(1,479,065) $(1,463,076) $(1,186,019) $ 149 $28,716,377
Net income for the year
ended September 30, 1998 1,652,131 1,652,131
Cash dividends - $.24 per
share (455,275) (455,275)
Commitment to release
employee stock ownership
plan shares 95,041 95,940 190,981
Shares purchased under
recognition and retention
plan 18,488 (30,357) (30,357)
Shares earned under
recognition and retention
plan 129,256 147,744
Purchase 203,704 shares
of treasury stock at cost (4,158,581) (4,158,581)
Change in other
comprehensive income
(loss) (3,122) (3,122)
------- ----------- ----------- ----------- ----------- ----------- ---------- -----------
Balance at
September 30, 1998 $20,476 $19,968,236 $14,166,061 $(5,637,646) $(1,367,136) $(1,087,120) $ (2,973) $26,059,898
======= =========== =========== =========== =========== =========== ========== ===========
- --------------------------------------------------------------------------------
(Continued)
46
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
Years ended September 30, 2000, 1999 and 1998
- -------------------------------------------------------------------------------
Accumulated
Additional Unearned Unearned Other
Common Paid-in Retained Treasury ESOP RRP Comprehensive
Stock Capital Earnings Stock Shares Shares Income (Loss) Total
----- ------- -------- ----- ------ ------- ------------- -----
Balance at
September 30, 1998 $20,476 $19,968,236 $14,166,061 $(5,637,646) $(1,367,136) $(1,087,120) $ (2,973) $26,059,898
Net income for the year
ended September 30, 1999 1,702,591 1,702,591
Cash dividends - $.24 per
share (410,602) (410,602)
Commitment to release
employee stock ownership
plan shares 73,453 95,939 169,392
Shares purchased under
recognition and retention
plan (43,488) (43,488)
Shares earned under
recognition and retention
plan 13,489 135,432 148,921
Purchase 117,799 shares
of treasury stock at cost (2,108,857) (2,108,857)
Change in other
comprehensive income
(loss) (30,448) (30,448)
------- ----------- ----------- ----------- ----------- ----------- ---------- -----------
Balance at
September 30, 1998 $20,476 $20,055,178 $15,458,050 $(7,746,503) $(1,271,197) $ (995,176) $ (33,421) $25,487,407
======= =========== =========== =========== =========== =========== ========== ===========
- --------------------------------------------------------------------------------
(Continued)
47
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
Years ended September 30, 2000, 1999, 1998
- --------------------------------------------------------------------------------
Accumulated
Additional Unearned Unearned Other
Common Paid-in Retained Treasury ESOP RRP Comprehensive
Stock Capital Earnings Stock Shares Shares Income (Loss) Total
----- ------- -------- ----- ------ ------ ------------- -----
Balance at
September 30, 1999 $20,476 $20,055,178 $15,458,050 $(7,746,503) $(1,271,197) $ (995,176) $(33,421) $25,487,407
Net income for the year
ended September 30, 2000 1,393,647 1,393,647
Cash dividends - $.28 per
share (445,378) (445,378)
Commitment to release
employee stock ownership
plan shares 43,923 95,940 139,863
Dividends on unallocated
ESOP shares 62,327 62,327
Shares earned under
recognition and retention
plan (15,770) 291,359 275,589
Purchase 53,409 shares
of treasury stock at cost (934,657) (934,657)
Change in other
comprehensive income (loss) 6,401 6,401
------- ----------- ----------- ----------- ----------- ---------- -------- -----------
Balance at
September 30, 2000 $20,476 $20,161,428 $16,390,549 $(8,681,160) $(1,175,257) $ (703,817) $(27,020) $25,985,199
======= =========== =========== =========== =========== ========== ======== ===========
- --------------------------------------------------------------------------------
(Continued)
48
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Cash flows from operating activities
Net income $ 1,393,647 $ 1,702,591 $ 1,652,131
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of deferred loan
origination fees and costs (12,696) (16,319) (20,042)
Net accretion of securities (10,688) (14,310) (23,649)
Provision for loan losses 36,000 30,000 12,000
Depreciation 50,134 53,048 39,292
Gain on sale of real estate owned -- (8,532) --
Federal Home Loan Bank stock dividends (101,800) (68,000) (46,900)
Compensation expense on ESOP shares 139,863 169,392 190,981
Compensation expense on RRP shares 275,589 135,432 129,256
Tax benefit realized on vesting of RRP shares -- 13,489 18,488
Deferred income taxes (25,224) (20,936) 22,339
Net change in:
Accrued interest receivable other assets (51,849) (59,033) (100,856)
Accrued interest payable and other liabilities 13,488 129,232 12,809
--------------- ---------------- ----------------
Net cash from operating activities 1,706,464 2,046,054 1,881,998
--------------- --------------- ----------------
Cash flows from investing activities
Securities available for sale
Purchases -- -- (4,698,308)
Principal payments 562,852 2,688,402 831,779
Securities held to maturity
Maturities and principal payments 1,044,725 2,215,555 7,383,372
Purchases of Federal Home Loan Bank stock (279,500) (260,400) (40,900)
Net change in loans (9,638,930) (14,847,272) (14,192,653)
Proceeds from sale of real estate owned -- 54,999 --
Premises and equipment expenditures (2,143) (59,102) (34,818)
--------------- --------------- ----------------
Net cash from investing activities (8,312,996) (10,207,818) (10,751,528)
--------------- --------------- ----------------
- --------------------------------------------------------------------------------
(Continued)
49
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended September 30, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Cash flows from financing activities
Net change in deposits $ 2,893,296 $ (2,233,801) $ 1,701,422
Net change in escrow accounts 17,218 40,463 30,197
Proceeds from FHLB advances 95,000,000 23,000,000 10,000,000
Repayments of FHLB advances (90,000,000) (8,000,000) (1,000,000)
Dividends on unallocated ESOP shares 62,327 -- --
RRP shares purchased -- (43,488) (30,357)
Cash dividends paid (445,378) (410,602) (455,275)
Purchase of treasury stock (934,657) (2,108,857) (4,158,581)
--------------- --------------- ---------------
Net cash from financing activities 6,592,806 10,243,715 6,087,406
--------------- --------------- ---------------
Net change in cash and cash equivalents (13,726) 2,081,951 (2,782,124)
Cash and cash equivalents at beginning of year 3,700,277 1,618,326 4,400,450
--------------- --------------- ---------------
Cash and cash equivalents at end of year $ 3,686,551 $ 3,700,277 $ 1,618,326
=============== =============== ===============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 5,191,639 $ 4,470,013 $ 4,034,845
Income taxes 782,000 936,702 890,000
Noncash activities
Transfers of loans to real estate owned -- 46,467 --
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
- ---------------------------
accounts of Delphos Citizens Bancorp, Inc. (Delphos) and its wholly-owned
subsidiary, Citizens Bank of Delphos (Bank), together referred to as the
Company. All significant intercompany accounts and transactions have been
eliminated.
Nature of Operations: The Company, through the Bank, 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: To prepare financial statements in conformity with generally
- ----------------
accepted accounting principles, management makes estimates and assumptions based
on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future
results could differ. The allowance for loan losses, fair values of financial
instruments and status of contingencies are particularly subject to change.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand,
- -------------------------
amounts due from depository institutions and interest bearing deposits in other
financial institutions. Net cash flows are reported for loan and deposit
transactions.
50
Securities: Securities are classified as held to maturity and carried at
- ----------
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported in other comprehensive income.
Other securities such as Federal Home Loan Bank stock are carried at cost.
Interest income includes amortization of purchase premiums and discounts. Gains
and losses on sales are based on the amortized cost of the security sold.
Securities are written down to fair value when a decline in fair value is not
temporary.
Loans: Loans that management has the intent and ability to hold for the
- -----
foreseeable future or until maturity or payoff are reported at the principal
balances outstanding, net of deferred loan fees and costs, loans in process and
an allowance for loan losses.
Interest income is reported on the interest method and includes the amortization
of net deferred loan fees and costs over the loan term. Interest income is not
reported when full loan repayment is in doubt, typically when the loan is
impaired or payments are past due over 90 days (180 days for residential
mortgages). Payments received on such loans are reported as principal
reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
- -------------------------
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required based on past loan loss experience, the nature
and volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions and other factors. Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be charged-off.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer and credit card loans, and on an
individual basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loans are reported net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.
Foreclosed Assets: Assets acquired through or in lieu of loan foreclosure are
- -----------------
initially recorded at fair value when acquired, establishing a new cost basis.
If fair value declines, a valuation allowance is recorded through expense. Costs
after acquisition are expensed.
Premises and Equipment: Land is carried at cost. Premises and equipment are
- ----------------------
stated at cost less accumulated depreciation. Depreciation is computed over the
assets useful lives on a straight line basis. These assets are reviewed for
impairment when events indicate the carrying amount may not be recoverable.
Maintenance and repairs are expensed and major improvements are capitalized.
Stock Compensation: Employee compensation expense under the stock option plans
- ------------------
is reported if options are granted below market price at grant date. Pro forma
disclosures of net income and earnings per share are shown using the fair value
method of SFAS No. 123 to measure expense using an option pricing model to
estimate fair value.
Income Taxes: Income tax expense is the total of the current year income tax due
- ------------
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts of temporary
differences between the carrying amounts and tax basis of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
51
Financial Instruments: Financial instruments include off-balance sheet credit
- ---------------------
instruments, such as commitments to make loans and standby letters of credit,
issued to meet customer financing needs. The face amount of these items
represents the exposure to loss, before considering customer collateral or
ability to repay. Such financial instruments are recorded when they are funded.
Earnings Per Common Share: Basic earnings per common share is net income divided
- -------------------------
by the weighted average number of shares outstanding during the period. Employee
Stock Ownership Plan ("ESOP") shares are considered to be outstanding for this
calculation unless unearned. Recognition and Retention Plan ("RRP") shares are
considered outstanding as they become vested. Diluted earnings per common share
includes the dilutive effect of RRP shares and the additional potential common
shares issuable under stock options.
Comprehensive Income: Comprehensive income consists of net income and other
- --------------------
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale, which is also recognized as a separate
component shareholders' equity.
New Accounting Pronouncement: Beginning October 1, 2000, a new accounting
- ----------------------------
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect, but the effect will depend on derivative holdings when
this standard applies.
Loss Contingencies: Loss contingencies, including claims and legal actions
- ------------------
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
Restrictions on Cash: The Company was required to have $591,000 and $653,000 of
- --------------------
cash on hand or on deposit with the Federal Reserve Bank to meet regulatory
reserve and clearing balance requirements at year end 2000 and 1999. These
balances do not earn interest.
Dividend Restriction: Banking regulations require maintaining certain capital
- --------------------
levels that may limit the amount of dividends paid by the Bank to Delphos or by
Delphos to shareholders.
Fair Value of Financial Instruments: Fair values of financial instruments are
- -----------------------------------
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgement 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.
Concentration of Credit Risk: The Bank grants loans to customers located
- ----------------------------
primarily in 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.
Business Segment: Internal financial information is primarily reported and
- ----------------
aggregated solely in the line of the business of banking.
Reclassifications: Certain reclassification have been made to amounts
- -----------------
previously reported to conform to the current financial statement presentation.
52
NOTE 2 - SECURITIES
Year end securities were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
---- ----- ---- -----
September 30, 2000
Available for sale
Ginnie Mae Certificates $ 567,110 $ 1,725 $ (9,319) $ 559,516
Fannie Mae Certificates 783,461 -- (33,346) 750,115
--------------- -------------- --------------- ---------------
Total $ 1,350,571 $ 1,725 $ (42,665) $ 1,309,631
=============== ============== =============== ===============
Held to maturity
Ginnie Mae Certificates $ 5,745,376 $ 100,005 $ (22,778) $ 5,822,603
Freddie Mac Certificates 26,793 1,019 -- 27,812
--------------- -------------- --------------- ---------------
Total $ 5,772,169 $ 101,024 $ (22,778) $ 5,850,415
=============== ============== =============== ===============
September 30, 1999
Available for sale
Ginnie Mae Certificates $ 612,628 $ 1,928 $ (11,486) $ 603,070
Fannie Mae Certificates 1,302,293 -- (41,080) 1,261,213
--------------- -------------- --------------- ---------------
Total $ 1,914,921 $ 1,928 $ (52,566) $ 1,864,283
=============== ============== =============== ===============
Held to maturity
Ginnie Mae Certificates $ 6,751,603 $ 156,048 $ (29,891) $ 6,877,760
Freddie Mac Certificates 53,105 1,997 -- 55,102
--------------- -------------- --------------- ---------------
Total $ 6,804,708 $ 158,045 $ (29,891) $ 6,932,862
=============== ============== =============== ===============
There were no sales of securities during the years ended September 30, 2000,
1999 and 1998.
53
DELPHOS CITIZENS BANCORP, INC.
NOTE 3 - LOANS
Loans at year end were as follows:
2000 1999
---- ----
Real estate loans
One- to four-family $106,362,753 $ 99,540,099
Multi-family 1,901,537 2,276,434
Commercial real estate 6,621,302 6,562,409
Construction and land 6,937,929 5,413,046
------------ ------------
121,823,521 113,791,988
Less:
Mortgage loans in process (4,137,097) (3,717,498)
Net deferred loan origination fees (28,980) (28,205)
------------ ------------
117,657,444 110,046,285
Consumer and other loans
Manufactured homes 97,966 116,985
Home equity loans 4,474,024 2,326,539
Unsecured loans 76,078 133,286
Other consumer loans 747,852 783,255
------------ ------------
5,395,920 3,360,065
Less: Allowance for loan losses (164,881) (133,493)
------------ ------------
$122,888,483 $113,272,857
============ ============
Activity in the allowance for loan losses for the year was as follows:
2000 1999 1998
---- ---- ----
Balance at beginning of period $133,493 $118,360 $106,360
Provision charged to income 36,000 30,000 12,000
Charge-offs (4,862) (14,867) --
Recoveries 250 -- --
-------- -------- --------
Balance at end of period $164,881 $133,493 $118,360
======== ======== ========
As of and for the years ended September 30, 2000, 1999 and 1998, there were no
impaired loans.
Certain directors and executive officers of the Company and the Bank and their
related interests were loan customers of the Bank. A summary of activity on
related party loans during fiscal 2000 was as follows:
Beginning balance $ 302,381
New loans 63,500
Repayments (116,805)
------------
Ending balance $ 249,076
============
54
DELPHOS CITIZENS BANCORP, INC.
NOTE 4 - PREMISES AND EQUIPMENT
Year end premises and equipment were as follows:
2000 1999
---- ----
Land $ 175,654 $ 175,654
Building and improvements 643,190 643,190
Furniture and equipment 323,950 321,807
---------- ----------
1,142,794 1,140,651
Accumulated depreciation (528,502) (478,368)
---------- ----------
$ 614,292 $ 662,283
========== ==========
NOTE 5 - DEPOSITS
Time deposits of $100,000 or more were $5,445,000 and $4,978,000 at year end
2000 and 1999.
Scheduled maturities of time deposits for the next five years were as follows:
Year Ending September 30:
2001 $39,920,818
2002 19,586,099
2003 835,359
2004 754,176
2005 176,178
-----------
$61,272,630
===========
NOTE 6 - FEDERAL HOME LOAN BANK ADVANCES
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Cincinnati. As a
member, the Bank has the ability to obtain advances from the FHLB. The Bank had
variable rate borrowings totaling $20,000,000, with interest rates of 6.90% at
September 30, 2000 and $15,000,000 at September 30, 1999, with interest rates
ranging from 5.15% to 5.77%. The Bank had fixed rate borrowings totaling
$10,000,000, with interest rates ranging from 4.61% to 6.49% at September 30,
2000 and $10,000,000 at September 30, 1999, with an interest rates ranging from
4.61% to 5.12%.
The maximum month-end balance of FHLB advances outstanding was $30,000,000 in
2000 and $25,000,000 in 1999. Average balances of borrowings outstanding during
fiscal 1999 and 1998 were $27,655,000 and $16,307,000. Qualifying first mortgage
loans and FHLB stock owned by the Bank totaling $45,000,000 and $1,631,000 at
September 30, 2000 and $37,500,000 and $1,250,000 at September 30, 1999 were
pledged as collateral for FHLB advances.
Principal payments of $20,000,000 are due in fiscal 2000, $5,000,000 in fiscal
2009 and $5,000,000 in fiscal 2010.
55
DELPHOS CITIZENS BANCORP, INC.
NOTE 7 - INCOME TAXES
Income tax expense was as follows:
2000 1999 1998
---- ---- ----
Current $ 774,983 $ 944,147 $ 1,043,851
Tax effect of vesting RRP shares -- 13,489 18,488
Deferred (25,224) (20,936) 22,339
--------- --------- -----------
$ 749,759 $ 936,700 $ 1,084,678
========= ========= ===========
Year end deferred tax assets and liabilities were due to the following:
2000 1999
---- ----
Deferred tax assets
Deferred loan fees $ 3,604 $ 4,283
Non-accrual interest 3,385 4,531
ESOP expense 24,465 24,465
Recognition and retention plan 25,556 14,299
Unrealized loss on securities available for sale 13,920 17,217
--------- ---------
70,930 64,795
Deferred tax liabilities
Bad debt deduction (108,597) (160,433)
FHLB stock dividends (221,952) (187,340)
Depreciation (7,478) (6,046)
--------- ---------
(338,027) (353,819)
--------- ---------
Net deferred tax liability $(267,097) $(289,024)
========= =========
Effective tax rates differ from federal statutory rates applied to financial
statement income due to the following:
2000 1999 1998
---- ---- ----
Income tax computed at the
statutory rate $ 728,758 $ 897,359 $ 930,515
Tax effect of other items 21,001 39,341 154,163
------------- ------------- -------------
$ 749,759 $ 936,700 $ 1,084,678
============= ============= =============
Statutory tax rate 34.0% 34.0% 34.0%
============= ============= =============
Effective tax rate 35.0% 35.5% 39.6%
============= ============= =============
Prior to enactment of legislation discussed below, thrifts which met certain
test relating to the composition of assets had been permitted to establish
reserves for bad debts and to make annual additions thereto which could, within
specified formula limits, be taken as a deduction in computing taxable income
for federal income tax purposes. The amount of the bad debt reserve deduction
for "nonqualifying loans" was computed under the experience method. The amount
of bad debt reserve deduction for "qualifying real property loans" could be
computed under either the experience method or the percentage of taxable income
method, based on an annual election.
56
DELPHOS CITIZENS BANCORP, INC.
NOTE 7 - INCOME TAXES (Continued)
In August 1996, legislation was enacted that repeals the percentage of taxable
income method of accounting used by many thrifts to calculate their bad debt
reserve for federal income tax purposes. As a result, thrifts such as the Bank
must recapture that portion of the reserve that exceeds the amount that could
have been taken under the experience method for tax years beginning after
December 31, 1987. The legislation also requires thrifts to account for bad
debts for federal income tax purposes on the same basis as commercial banks for
tax years beginning after December 31, 1995. The recapture occurs over a
six-year period, the commencement of which was delayed until the first
taxable-year beginning after December 31, 1998, provided the institution meets
certain residential lending requirements. At September 30, 2000 and 1999, the
Bank had $484,285 and $605,357 in bad debt reserves subject to recapture for
federal income tax purposes. The deferred tax liability related to the recapture
has been previously established. In fiscal 2000 and 1999, $121,072 bad debt
reserves were recaptured.
Retained earnings at September 30, 2000 and 1999, include approximately
$1,860,000 for which no provision for federal income taxes has been made. This
amount represents the qualifying and nonqualifying tax bad debt reserve as of
December 31, 1987, the Company's base year for calculating the bad debt
deduction for tax purposes. The related amount of unrecognized deferred tax
liability was $631,000 at September 30, 2000 and 1999. If this portion of
retained earnings is used in the future for any purpose other than to absorb bad
debts, it will be added to future taxable income.
NOTE 8 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
Some financial instruments, such as loan commitments, credit lines, letters of
credit and overdraft protection are issued to meet customer financing needs.
These are arrangements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used. Off-balance sheet
risk to credit losses exists up to the face amount of these instruments,
although material losses are not anticipated. The same credit policies are used
to make such commitments as are used for loans, including obtaining collateral
at exercise of the commitment.
As of September 30, 2000, the Company had commitments to make loans at market
rates of $4,748,000. Of these commitments, $1,207,000 had fixed rates ranging
from 8.00% to 8.875%, and $3,541,000 had variable rates. The commitment period
ranged from 30 to 90 days. As of September 30, 1999, the Company had commitments
to make loans at market rates of $2,945,000. Of these commitments, $688,000 had
fixed rates ranging from 7.50% to 8.50%, and $2,257,000 had variable rates.
Since loan commitments may expire without being used, the amount does not
necessarily represent future cash commitments.
The Company and the Bank have entered an employment agreement with the chief
executive officer of the Company and the Bank. The agreement provides for a term
of three years and a salary and performance review by the Board of Directors not
less than annually, as well as inclusion of the employee in any formally
established employee benefit, bonus, pension and profit-sharing plans for which
management personnel are eligible.
57
DELPHOS CITIZENS BANCORP, INC.
NOTE 8 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES (Continued)
During fiscal 2000, the Board of Directors approved the Citizens Bank of Delphos
Employee Severance Compensation Plan to provide benefits to eligible employees
in the event of a change in control. Generally, eligible employees are those
employees who have completed twelve consecutive moths of service with the Bank.
Under the Plan, participants terminated in conjunction with a change in control
will be entitled to receive a severance benefit equal to 1/26/th/ of their
annual compensation for each year of service up to a maximum of 100% of the
participant's annual compensation. Pursuant to the Affiliation Agreement by and
between United Bancshares, Inc. and Delphos Citizens Bancorp, Inc. dated August
25, 2000, the Delphos Employee Severance Compensation Plan was terminated as of
August 25, 2000.
NOTE 9 - PROFIT SHARING
The Company sponsors a 401(k) profit sharing plan for eligible employees. Under
the plan, employees who are at least 21 1/2 years of age and have completed six
months of service are eligible to participate. Employees may contribute up to
10% of their annual pre-tax compensation. The Bank may contribute as a matching
contribution, a discretionary percentage of up to 6% of the employees'
contribution. The Company may also make special discretionary contributions
equal to a percentage of the employees' compensation. Participants become 100%
vested as to the Bank's contributions after five years of service. The
contribution expense included in compensation and benefits was $5,801, $18,543,
and $5,474 for 2000, 1999 and 1998.
NOTE 10 - EMPLOYEE STOCK OWNERSHIP PLAN
Effective December 31, 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 when the Company
converted to stock. Principal and interest payments on the loan are due in
annual installments that 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 and interest payments to the total of all
principal and interest 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 $139,862, $169,392, and $190,981 for
2000, 1999 and 1998.
58
DELPHOS CITIZENS BANCORP, INC.
NOTE 10 - EMPLOYEE STOCK OWNERSHIP PLAN (Continued)
The ESOP shares at September 30, 2000 and 1999 were as follows:
2000 1999
---- ----
Allocated shares 35,978 28,782
Shares committed to be released 7,196 7,196
Unreleased shares 119,923 127,119
----------- -----------
Total ESOP shares 163,097 163,097
=========== ===========
Fair value of unreleased shares $ 1,454,066 $ 2,161,023
=========== ===========
NOTE 11 - 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. The option period expires 10 years from the date of grant.
Vesting of options granted to officers and directors is determined at the time
of the grant, generally four to five years after the date of the grant.
A summary of activity in the plan is as follows.
2000 1999 1998
------------------------ ------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- --------- ----------- -------- ----------- ---------
Outstanding at beginning of year 117,225 $ 14.29 117,225 $ 14.29 112,128 $ 14.00
Granted 3,823 13.00 -- -- 5,097 20.75
Exercised -- -- -- -- -- --
Forfeited -- -- -- -- -- --
----------- --------- ----------- ------- ----------- ---------
Outstanding at end of year 121,048 $ 14.25 117,225 $ 14.29 117,225 $ 14.29
=========== ========= =========== ======= =========== =========
Options exercisable at year end 71,100 $ 14.22 46,125 $ 14.19 22,426 $ 14.00
=========== ========= =========== ======= =========== =========
Options outstanding at year-end 2000 were as follows.
Weighted Average
Remaining
Exercise Shares Contract Shares
Price Outstanding Life (Months) Exercisable
----------- ------------ ----------------- -----------
$ 13.00 3,823 114 1,274
14.00 112,128 80 67,277
20.75 5,097 92 2,549
----------- ----- ----------
121,048 82 71,100
=========== ===== ==========
59
DELPHOS CITIZENS BANCORP, INC.
The following table presents the fair value of options granted using the
Black-Scholes options pricing model along with the assumptions used in the
computation:
Expected
Fair Value Risk-Free Expected Expected Stock Price
Date of Grant of Options Interest Rate Life Dividends Volatility
------------- ---------- ------------- ---- --------- ----------
May 1997 $ 3.83 6.67% 7 years 1.50% 8.40%
May 1998 5.14 5.72 7 years 1.50 37.52
March 2000 4.62 6.40 7 years 2.11 27.59
SFAS No. 123 requires pro forma disclosures for companies not adopting its fair
value of accounting method for stock-based compensation. Accordingly, the
following pro forma information presents net income had the fair value method
been used to measure compensation cost for stock option plans. No compensation
expense was recognized for the years ended September 30, 2000, 1999 and 1998.
2000 1999 1998
---- ---- ----
Net income as reported $ 1,393,647 $ 1,702,591 $ 1,652,131
Pro forma net income 1,299,211 1,636,274 1,593,977
Basic earnings per common share as reported .99 1.14 .97
Pro forma basic earnings per common share .92 1.09 .93
Diluted earnings per common share as reported .98 1.12 .95
Pro forma diluted earnings per common share .92 1.08 .92
NOTE 12 - 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 21,317 and 2,378 shares in
2000 and 1998 and those shares vest at a rate of 33 1/3% per year for the 2000
grant and 25% per year for the 1998 grant on the anniversary date of the grant.
Compensation expense, which is based on the cost of the shares, was $275,591,
$135,432 and $129,256 for 2000, 1999 and 1998. The unamortized unearned
compensation value of the RRP is shown as a reduction to shareholders' equity.
NOTE 13 - REGULATORY MATTERS
Banks are subject to regulatory capital requirements administered by federal
regulatory agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities and certain
off-balance sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
the regulators. Failure to meet capital requirements can initiate regulatory
action.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately
60
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
Actual and required capital amounts (in thousands) and ratios are presented
below at year end:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ ------ ----- ------ -----
2000
- ----
Total capital to
risk weighted assets $ 16,399 22.11% $ 5,934 8.00% $ 7,417 10.0%
Tier 1 (core) capital to
risk weighted assets 16,234 21.89 2,967 4.00 4,450 6.00
Tier 1 (core) capital to
adjusted total assets 16,234 11.88 4,099 3.00 6,831 5.00
Tangible capital to
adjusted total assets 16,234 11.88 2,049 1.50 N/A N/A
1999
- ----
Total capital to
risk weighted assets $ 12,444 18.06% $ 5,512 8.00% $ 6,890 10.00%
Tier 1 (core) capital to
risk weighted assets 12,311 17.87 2,756 4.00 4,134 6.00
Tier 1 (core) capital to
adjusted total assets 12,311 9.60 3,848 3.00 6,413 5.00
Tangible capital to
adjusted total assets 12,311 9.60 1,924 1.50 N/A N/A
Banking regulations limit capital distributions by banks. Generally, capital
distributions are limited to the current year to date undistributed net income
and prior two years' undistributed net income, as long as the institution
remains well capitalized after the proposed distribution. At September 30, 2000
and 1999, approximately $177,000 was available to pay dividends to Delphos.
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as
follows at year end:
2000 1999
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial Assets
Cash and cash equivalents $ 3,686,551 $ 3,687,000 $ 3,700,277 $ 3,700,000
Securities available for sale 1,309,631 1,310,000 1,864,283 1,864,000
Securities held to maturity 5,772,169 5,850,000 6,804,708 6,933,000
FHLB Stock 1,631,300 1,631,000 1,250,000 1,250,000
Loans, net 122,888,483 120,347,000 113,272,857 112,278,000
Accrued interest receivable 653,799 654,000 573,048 573,000
Financial Liabilities
Deposits $ (79,733,886) $ (79,369,000) $ (76,840,590) $ (76,843,000)
FHLB advances (30,000,000) (28,361,000) (25,000,000) (24,712,000)
Accrued interest payable (206,091) (206,000) (52,734) (53,000)
61
The methods and assumptions used to estimate fair value are described as
follows:
Carrying amount is the estimated fair value for cash and cash equivalents,
short-term borrowings, Federal Home Loan Bank stock, accrued interest receivable
and payable, demand deposits, short-term debt and variable-rate loans or
deposits that reprice frequently and fully. Security fair values are based on
market prices or dealer quotes and, if no such information is available, on the
rate and term of the security and information about the issuer. For fixed-rate
loans or deposits and for variable rate loans or deposits with infrequent
repricing or repricing limits, fair value is based on discounted cash flows
using current market rates applied to the estimated life and credit risk. Fair
values for impaired loans are estimated using discounted cash flow analyses or
underlying collateral values. Fair value of debt is based on current rates for
similar financing. The fair value of off-balance sheet items is based on current
fees or cost that would be charged to enter into or terminate such arrangements.
While these estimates of fair value are based on management's judgment of the
most appropriate factors as of the balance sheet date, there is no assurance
that the estimated fair values would have been realized if the assets had been
disposed of or the liabilities settled at that date, since market values may
differ depending on various circumstances. The estimated fair values would also
not apply to subsequent dates.
In addition, other assets and liabilities that are not financial instruments,
such as property and equipment, are not included in the above disclosures. Also,
nonfinancial instruments typically not recognized on the balance sheet may have
value but are not included in the above disclosures. These include, among other
items, the estimated earnings power of core deposits, the trained workforce,
customer goodwill and similar items.
NOTE 15 - EARNINGS PER COMMON SHARE
The factors used in the earnings per share computation were as follows:
2000 1999 1998
---- ---- ----
Basic earnings per common share
- -------------------------------
Net income $ 1,393,647 $ 1,702,591 $ 1,652,131
============== ============== ==============
Weighted average common shares
outstanding 1,590,246 1,689,988 1,927,432
Less: Average unallocated ESOP
shares (122,698) (127,119) (141,883)
Less: Average nonvested RRP shares (53,848) (63,001) (74,655)
-------------- -------------- --------------
Average shares 1,413,700 1,499,868 1,710,894
============== ============== ==============
Basic earnings per common share $ .99 $ 1.14 $ .97
============== ============== ==============
Diluted earnings per common share
Net income $ 1,393,647 $ 1,702,591 $ 1,652,131
============== ============== ==============
Weighted average common shares
outstanding for basic earnings per
common shares 1,413,700 1,499,868 1,710,894
Add: Dilutive effects of average
nonvested RRP shares -- 5,190 --
Add: Dilutive effects of stock options 4,416 14,354 29,448
-------------- -------------- --------------
Average shares and dilutive potential
common shares 1,418,116 1,519,412 1,740,342
============== ============== ==============
Diluted earnings per common share $ .98 $ 1.12 $ .95
============== ============== ==============
62
Stock options for 5,097 shares of common stock were not considered in computing
diluted earnings per common share for the years ended September 30, 2000, 1999
and 1998, as they were antidilutive.
NOTE 16 - PROPOSED SALE
On August 25, 2000, the Company entered into an Affiliation Agreement with
United Bancshares, Inc. in which each share of Delphos' common stock, $.01 par
value per share, issued and outstanding will be converted into the right to
receive .8749 of a share of United Bancshares, Inc. common stock, without par
value or cash in lieu thereof for fractional shares, if any, and $5.41 in cash.
The transaction will be accounted for as a purchase and is expected to close in
January 2001. The proposed sale is contingent upon shareholder and regulatory
approval. Professional fees of approximately $290,000 directly related to the
proposed sale are included in fiscal 2000 net income.
NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed Balance Sheets
September 30, 2000 and 1999
2000 1999
---- ----
Assets
Cash and due from banks $ 8,423,956 $ 11,740,735
Investment in subsidiary 16,208,721 12,293,855
Loan receivable from ESOP 1,247,212 1,343,152
Accrued interest receivable and other assets 105,310 109,665
--------------- ----------------
Total assets $ 25,985,199 $ 25,487,407
=============== ================
Total shareholders' equity $ 25,985,199 $ 25,487,407
=============== ================
Condensed Statements of Income
Years Ended September 30, 2000 and 1999 and 1998
2000 1999 1998
---- ---- ----
Interest and dividend income
Dividends from subsidiary bank $ -- $ 2,000,000 $ 2,500,000
Deposits in subsidiary bank 2,816 39,263 110,524
Securities -- -- 69,486
Loan to ESOP 104,874 112,789 165,581
-------------- -------------- ---------------
107,690 2,152,052 2,845,591
Other expenses 155,230 91,420 95,467
-------------- -------------- ---------------
Income(loss) before taxes and equity in
undistributed earnings of subsidiary (47,540) 2,060,632 2,750,124
Income tax expense (benefit) (10,500) 22,700 179,845
--------------- -------------- ---------------
Income before equity in undistributed
earnings of subsidiary (37,040) 2,037,932 2,570,279
Undistributed earnings (Distributions in excess
of earnings) of subsidiary 1,430,687 (335,341) (918,148)
-------------- -------------- ---------------
Net income $ 1,393,647 $ 1,702,591 $ 1,652,131
============== ============== ===============
63
Condensed Statements of Cash Flows
Years Ended September 30, 2000 and 1999 and 1998
Cash flows from operating activities
Net income $ 1,393,647 $ 1,702,591 $ 1,652,131
Adjustments to reconcile net income to cash
provided by operations:
(Undistributed earnings) distributions in excess
of earnings of subsidiary (1,430,687) 335,341 918,149
Other 4,357 39,102 85,940
-------------- -------------- ----------------
Net cash from operating activities (32,683) 2,077,034 2,656,220
Cash flows from investing activities
Net change in receivable from subsidiary -- -- 1,270,734
Net change in loan to ESOP 95,940 95,939 7,095,940
Injection of capital into subsidiary (2,000,000) -- --
-------------- -------------- ----------------
Net cash from investing activities (1,904,060) 95,939 13,366,674
Cash flows from financing activities
Cash dividends paid (445,378) (410,602) (455,275)
RRP shares purchased -- (43,488) (30,357)
Purchase of treasury stock (934,658) (2,108,857) (4,158,581)
-------------- -------------- ----------------
Net cash from financing activities (1,380,036) (2,562,947) (4,644,213)
-------------- -------------- ----------------
Net change in cash and cash equivalents (3,316,779) (389,974) 11,378,681
Cash and cash equivalents at beginning of year 11,740,735 12,130,709 752,028
-------------- -------------- ----------------
Cash and cash equivalents at end of year $ 8,423,956 $ 11,740,735 $ 12,130,709
============== ============== ================
NOTE 18 - 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)
2000
- ----
Interest income $ 2,352 $2,377 $2,474 $2,521
Net interest income 1,112 1,122 1,115 1,030
Provision for loan losses 9 9 9 9
Net income 424 347 365 258
Earnings per share
Basic $ .30 $ .25 $ .26 $ .18
Diluted .29 .25 .26 .18
1999
- ----
Interest income $ 2,289 $2,277 $2,261 $2,295
Net interest income 1,185 1,185 1,152 1,116
Provision for loan losses 3 9 9 9
Net income 441 424 440 398
Earnings per share
Basic $ .29 $ .28 $ .30 $ .27
Diluted .29 .28 .29 .27
64
Item 9. Changes in and Disagreements With Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure.
- --------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
- -------------------------------------------------------------
The name, age, position, term of office as officer and period during
which he or she has served as an officer is provided below for each executive
officer of the Registrant and the Bank.
Joseph R. Reinemeyer, Chairman of the Board, President, Chief Executive
Officer of the Registrant and the Bank; joined the Bank in 1975. Prior to
holding these positions, Mr. Reinemeyer served as Executive Vice President and
Managing Officer of the Bank from 1982 to 1996, and he is 51 years old.
Nancy C. Rumschlag has served as Vice President of the Registrant and
the Bank since 1991. Ms. Rumschlag has served as a director since 1987, and she
is 50 years old.
David Roach, an outside director, is President of Vogel Roach Corp., a
radio broadcast company. Mr. Roach has served as a director since 1997. He has
worked at Vogel Roach Corp. since 1972, and he is 50 years old.
P. Douglas Harter, an outside director, is Associate of Harter and Son
Funeral Home. Mr. Harter has served as director since 1969, and he is 53 years
old.
Robert L. Dillhoff, an outside director, is the District Highway
Management Administrator for the Ohio Department of Transportation. Mr. Dillhoff
has served as a director since 1991, and he is 53 years old.
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 46 years old.
Other information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Joint Proxy
Statement/Prospectus for the Annual Meeting of Shareholders, in the Election of
Directors of Delphos Citizens Bancorp Section.
Item 11. Executive Compensation.
- --------------------------------
The information relating to executive compensation is incorporated by
reference to the Joint Proxy Statement/Prospectus for the Annual Meeting of
Shareholders, in the Election of Directors of Delphos Citizens Bancorp
Section (excluding the Report of the Compensation Committee in the Election of
Directors of Delphos Citizens Bancorp Section and the Stock Performance Graph).
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 Joint Proxy
Statement/Prospectus for the Annual Meeting of Shareholders, in the Election of
Directors of Delphos Citizens Bancorp Section.
65
Item 13. Certain Relationships and Related Transactions.
- --------------------------------------------------------
The information relating to certain relationships and related
transactions is incorporated by reference to the Registrant's Joint Proxy
Statement/Prospectus for the Annual Meeting of Shareholders, in the Election of
Directors of Delphos Citizens Bancorp section.
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 Citizens Bank of Delphos Employee Stock Ownership Plan
(1)
10.3 Delphos Citizens Bancorp, Inc. Employment Agreement dated
April 21, 1997 and First Amendment dated December 20, 1999 (2)
10.4 Amended and Restated Delphos Citizens Bancorp, Inc. Stock-
Based Incentive Plan (3)
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, 2000
On August 29, 2000, a report on Form 8-K was filed to announce
the Affiliation Agreement by and between United Bancshares,
Inc. and Delphos Citizens Bancorp, Inc. dated August 25, 2000,
in which each share of Delphos Citizens Bancorp, Inc. common
stock, $.01 par value per share, issued and outstanding will
be converted into the right to receive .8749 of a share of
United Bancshares, Inc. common stock, without par value or
cash in lieu thereof for fractional shares, if any, and $5.41
in cash.
___________________________
(1) Incorporated herein by reference from the Exhibits to the Registration
Statement on Form S-1, as amended, filed on August 22, 1996,
Registration No. 333-10639.
(2) Incorporated herein by reference from the Exhibits to the Quarterly
Report on Form 10-Q filed on August 14, 2000.
(3) Incorporated herein by reference from the Registrant's Proxy Statement
for the Registrant's 1999 Annual Meeting of Shareholders filed with the
Commission on December 31, 1998.
66
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: November 20, 2000 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 November 20, 2000
- -----------------------
Joseph R. Reinemeyer Chairman of the Board, President
and Chief Executive Officer
(Principal Executive and
Accounting Officer)
/s/Nancy C. Rumschlag November 20, 2000
- ----------------------
Nancy C. Rumschlag Vice President and Director
/s/P. Douglas Harter November 20, 2000
- -----------------------
P. Douglas Harter Director
/s/Robert L. Dillhoff November 20, 2000
- -----------------------
Robert L. Dillhoff Director
/s/David P. Roach November 20, 2000
- -----------------------
David Roach Director
67