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, 1997
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 $32,148,840.88, based upon the last sales price as quoted
on The Nasdaq Stock Market for December 16, 1997.
The number of shares of Common Stock outstanding as of December 16,
1997: 1,945,696.
INDEX
PAGE
PART I
Item 1. Business.................................................................................... 3
Item 2. Properties.................................................................................. 30
Item 3. Legal Proceedings........................................................................... 31
Item 4. Submission of Matters to a Vote of Security Holders......................................... 31
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................... 31
Item 6. Selected Financial Data....................................................................... 32
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................... 34
Item 8. Financial Statements and Supplementary Data................................................... 44
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................................................ 73
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 73
Item 11. Executive Compensation........................................................................ 73
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 73
Item 13. Certain Relationships and Related Transactions................................................ 73
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................................................... 73
PART I
Item 1. Business.
General
Delphos Citizens Bancorp, Inc. (the "Company") completed its initial
public offering of 2,047,631 shares of common stock on November 20, 1996, in
connection with the conversion of Citizens Federal Savings and Loan Association
of Delphos, now known as Citizens Bank of Delphos (the "Bank"). The Company
received $20,476,310 from this initial public offering before offering expenses
of approximately $672,482. The Company utilized $9,940,000 of the net proceeds
of the initial public offering to acquire all of the issued and outstanding
stock of the Bank. The Company, as a unitary savings and loan holding company,
is subject to regulation by the Office of Thrift Supervision (the "OTS"), the
Federal Deposit Insurance Corporation (the "FDIC") and the Securities and
Exchange Commission (the "SEC"). The Company's executive offices are located at
the home office of the Bank at 114 East 3rd Street, Delphos, Ohio 45833.
The Bank's principal business is to operate a community-oriented
savings bank. The Bank attracts retail deposits from the general public in the
area surrounding its office and invests those deposits, together with funds
generated from operations, primarily in fixed-rate one- to four-family
residential mortgage loans and investment and mortgage-backed securities. The
Bank invests, on a limited basis, in multi-family mortgage, commercial real
estate, construction and land and consumer loans. The Bank's revenues are
derived principally from interest on its mortgage loans, and interest and
dividends on its investment and mortgage-backed securities. The Bank's primary
sources of funds are deposits and principal and interest payments on loans and
securities.
Market Area and Competition
The Bank's primary deposit gathering area is concentrated in Delphos
and the other communities surrounding its office, while its lending activities
primarily include areas throughout Allen, Putnam and Van Wert Counties in
Northwestern Ohio. The tri-county area includes the city of Lima, Ohio, which
has a population of approximately 45,000 and is located approximately 15 miles
southeast of Delphos in Allen County.
The Bank's market area is located within 250 miles of several of the
largest metropolitan areas in the United States, including, Chicago, Detroit,
Pittsburgh, Cleveland, Cincinnati, and Indianapolis. There are approximately
150 manufacturing firms located in the tri-county area and manufacturing
accounts for one-third of the employment sector. Wholesale and retail trade is
the second largest employment sector in the tri-county area, accounting for 24%
of employment. The City of Lima has experienced increases in unemployment in
recent years due to the closing of several large industrial plants.
The Bank's primary market area is a competitive market for financial
services and the Bank faces significant competition both in making loans and in
attracting deposits. The Bank faces direct competition from a number of
financial institutions operating in its market area, many with a state-wide or
regional presence, and in some cases, a national presence. Many of these
financial institutions are significantly larger and have greater financial
resources than the Bank. The Bank's competition for loans comes principally
from savings institutions, mortgage banking companies, commercial banks and
credit unions. Its most direct competition for deposits has historically come
from savings institutions and commercial banks. In addition,
3
the Bank faces increasing competition for deposits and other financial products
from non-bank institutions such as brokerage firms and insurance companies in
such areas as short-term money market funds, corporate and government securities
funds, mutual funds and annuities. Competition may also increase as a result of
the lifting of restrictions on the interstate operations of financial
institutions.
Lending Activities
Loan Portfolio Composition. The Bank's loan portfolio consists
primarily of conventional first mortgage loans secured by one- to four-family
residences. At September 30, 1997, the Bank had gross loans receivable of $87.7
million, of which $73.7 million were one- to four-family, residential mortgage
loans, or 84.1% of the Bank's gross loans receivable. The remainder of the
portfolio consists of: $1.3 million of multi-family mortgage loans, or 1.5% of
gross loans receivable; $6.3 million of commercial real estate loans, or 7.2% of
gross loans receivable; $3.8 million of construction and land loans, or 4.3% of
gross loans receivable; and consumer loans of $2.6 million, or 2.9% of gross
loans receivable. At that same date, 73.0% of the Bank's loan portfolio had
fixed interest rates. The Bank had no loans held for sale at September 30,
1997.
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,
---------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------------------------------------
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 $73,716 84.10% $62,282 82.33% $56,556 83.28% $49,424 83.32% $41,793 82.78%
Multi-family 1,288 1.47 1,506 1.99 1,521 2.24 1,276 2.15 771 1.53
Commercial real estate 6,273 7.16 4,969 6.57 3,901 5.74 3,706 6.25 3,720 7.37
Construction and land 3,781 4.31 4,871 6.44 3,808 5.61 3,081 5.19 2,780 5.51
Consumer 2,593 2.96 2,024 2.67 2,128 3.13 1,833 3.09 1,422 2.81
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Gross loans receivable 87,651 100.00% 75,652 100.00% 67,914 100.00% 59,320 100.00% 50,486 100.00%
====== ====== ====== ====== ======
Undisbursed loan funds (3,188) (4,718) (3,732) (2,728) (2,659)
Deferred loan origination fees (72) (53) (47) (49) (48)
Allowance for
estimated loan losses (106) (94) (92) (92) (32)
------- ------- ------- ------- -------
Loans receivable, net $84,285 $70,787 $64,043 $56,451 $47,747
======= ======= ======= ======= =======
4
Loan Maturity. The following table shows the contractual maturity of the
Bank's gross loans receivable September 30, 1997. There were no loans held for
sale at September 30, 1997. The table does not include principal prepayments.
At September 30, 1997
------------------------------------------------------------------------
One- to Commercial Gross
Four- Multi- Real Construction Loans
Family Family Estate and Land Consumer Receivable
---------- ----------- ------------ ------------- ---------- -----------
(In thousands)
Amounts due:
One year or less $ 6,071 $ 90 $1,339 $ 15 $1,702 $ 9,217
After one year:
More than one year to three years 12,050 -- 2,104 33 296 14,483
More than three years to five years 1,374 44 -- 249 311 1,978
More than five years to 10 years 7,075 432 597 -- 196 8,300
More than 10 years to 20 years 28,383 308 11 1,197 88 29,987
More than 20 years 18,763 414 2,222 2,287 -- 23,686
------- ------ ------ ------ ------ -------
Total due after
September 30, 1997 67,645 1,198 4,934 3,766 891 78,434
------- ------ ------ ------ ------ -------
Gross loans receivable $73,716 $1,288 $6,273 $3,781 $2,593 $87,651
======= ====== ====== ====== ====== =======
The following table sets forth at September 30, 1997, the dollar amount
of gross loans receivable contractually due after September 30, 1997, and
whether such loans have fixed interest rates or adjustable interest rates.
Due After September 30, 1997
---------------------------------------------
Fixed Adjustable Total
-------------- -------------- -------------
(In thousands)
Real estate loans:
Residential:
One- to four-family $55,373 $12,272 $67,645
Multi-family 743 455 1,198
Commercial real estate 1,027 3,907 4,934
Construction and land 3,611 155 3,766
Consumer 891 -- 891
------- ------- -------
Total $61,645 $16,789 $78,434
======= ======= =======
5
Origination and Purchase of Loans. The Bank's mortgage lending
activities are conducted through its home office. Although the Bank may
originate both adjustable-rate and fixed-rate mortgage loans, a substantial
majority of the Bank's loan originations have been fixed-rate mortgage loans.
The Bank's ability to originate loans is dependent upon the relative customer
demand for fixed-rate or adjustable-rate mortgage loans, which is affected by
the current and expected future level of interest rates. The Bank has not
emphasized the origination of adjustable-rate mortgage loans due to the
relatively low demand for such loans in the Bank's primary market area. The
Bank retains for its portfolio all of the mortgage loans that it originates. At
September 30, 1997, 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,
---------------------------------------------------------
1997 1996 1995
---------------- ------------------ ------------------
(In thousands)
Beginning balance, net $70,787 $64,043 $56,451
Loans originated:
One- to four-family 19,706 17,787 12,116
Multi-family -- 155 423
Commercial real estate 1,815 2,011 733
Construction and land 5,736 5,816 5,033
Consumer 2,954 2,341 2,608
------- ------- -------
Total loans originated 30,211 28,110 20,913
Principal prepayments (18,212) (20,394) (12,319)
Transfer to REO -- -- --
Change in undisbursed loan funds(1) 1,530 (985) (1,004)
Change in unearned origination fees (19) 15 2
Change in allowance for estimated loan losses (12) (2) --
------- ------- -------
Ending balance, net $84,285 $70,787 $64,043
======= ======= =======
___________
(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, 1997, one- to
four-family mortgage loans totalled $73.7 million, or 84.1% of total loans at
such date. Of the Bank's mortgage loans secured by one- to four-family
residences, $55.8 million, or 75.7%, were fixed-rate loans.
The Bank's policy is to originate one- to four-family residential
mortgage loans in amounts up to 80% of the appraised value of the property
securing the loan, up to 85% of the appraised value if the loan is co-signed by
a person approved by the Board of Directors and up to 90% of the appraised value
if private mortgage insurance is obtained. Mortgage loans originated by the
Bank generally include due-on-sale clauses which provide the Bank with the
contractual right to deem the loan immediately due and payable in the event the
borrower transfers ownership of the property without the Bank's consent.
Due-on-sale clauses are an important means of adjusting the rates on the Bank's
fixed-rate mortgage loan portfolio and the Bank exercises its rights under these
clauses. The residential mortgage loans originated by the Bank are generally
for terms to maturity of up to 30 years.
The Bank offers several adjustable rate loan programs with terms of up
to 30 years and interest rates that adjust either annually or every three years.
Of the Bank's mortgage loans secured by one- to four-family residences, $17.9
million, or 24.3%, 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.
7
When evaluating a multi-family loan, the Bank also considers the
financial resources and income level of the borrower, the borrower's experience
in owning or managing similar property, and the Bank's lending experience with
the borrower. The Bank's underwriting policies require that the borrower be
able to demonstrate strong management skills and the ability to maintain the
property from current rental income. The borrower is required to present
evidence of the ability to repay the mortgage and a satisfactory credit history.
In making its assessment of the creditworthiness of the borrower, the Bank
generally reviews the financial statements, employment and credit history of the
borrower, as well as other related documentation.
Loans secured by multi-family residential properties generally involve
a greater degree of risk than one- to four-family residential mortgage loans.
Because payments on loans secured by multi-family properties are often dependent
on successful operation or management of the properties, repayment of such loans
may be subject to a greater extent to adverse conditions in the real estate
market or the economy. The Bank seeks to minimize these risks through its
underwriting policies, which require such loans to be qualified at origination
on the basis of the property's income and debt coverage ratio.
The Bank's multi-family loan portfolio at September 30, 1997 totalled
$1.3 million or 1.5% of gross loans receivable. The Bank's largest multi-family
loan at September 30, 1997, had an outstanding balance of $215,000, is secured
by eleven 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, 1997 was a
$1.48 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,
1997. At September 30, 1997 the Bank's commercial real estate loan portfolio
was $6.3 million, or 7.2% 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. The Bank
requires an independent appraisal of the property. Loan proceeds are disbursed
in increments as construction progresses and as inspections warrant. The Bank
requires regular inspections to monitor the progress of construction. Land
loans are determined on an individual basis, but generally they
8
do not exceed 75% of the actual cost or current appraised value of the property,
whichever is less. The largest construction and land loan in the Bank's
portfolio at September 30, 1997 had a balance of $248,000 and is secured by a
single family residence. This loan is currently performing in accordance with
its terms. At September 30, 1997, the Bank has $3.8 million of construction and
land loans totaling 4.3% 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, 1997, the
Bank's consumer loan portfolio was $2.6 million, or 2.9% of gross loans
receivable.
Loan Approval Procedures and Authority. The Board of Directors
establishes the lending policies of the Bank. Loans in amounts up to $50,000
may be approved by the Bank's loan officers. Loans in excess of $50,000 and up
to $250,000 must be approved by the Loan Committee which consists of two senior
officer/directors and one outside director. Loans in excess of $250,000 must be
approved by the Board of Directors. Pursuant to OTS regulations, loans to one
borrower cannot exceed 15% of the Bank's unimpaired capital and surplus. The
Bank will not make loans to one borrower that are in excess of regulatory
limits.
Delinquencies and Classified Assets. The Board of Directors performs a
monthly review of all delinquent loans thirty days or more past due. The
procedures taken by the Bank with respect to delinquencies vary depending on the
nature of the loan and period of delinquency. When a borrower fails to make a
required payment on a loan, the Bank takes a number of steps to have the
borrower cure the delinquency and restore the loan to current status. The Bank
sends the borrower a written notice of non-payment after the loan is first past
due. In the event payment is not then received, additional letters are sent and
phone calls are made. If management believes that the loan is well-secured, the
Bank generally will try to work with the borrower to have the loan brought
current. If the loan is still not brought current and it becomes necessary for
the Bank to take legal action, the Bank will commence foreclosure proceedings
against any real property that secures the loan. If a foreclosure action is
instituted and the loan is not brought current, paid in full, or refinanced
before the foreclosure sale, the real property securing the loan is foreclosed
upon and sold at sheriff's sale.
Federal regulations and the Bank's Classification of Assets Policy
require that the Bank utilize an internal asset classification system as a means
of reporting problem and potential problem assets. The Bank has incorporated
the OTS internal asset classifications as a part of its credit monitoring
system. The Bank currently classifies problem and potential problem assets as
"Substandard," "Doubtful" or "Loss" assets. An asset is considered
"Substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "Doubtful" have all of the weaknesses
inherent in those classified "Substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as
9
"Loss" are those considered "uncollectible" and of such little value that their
continuance as assets without the establishment of a specific loss allowance is
not warranted. Assets which do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "Special
Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, under current OTS policy the Bank is
required to consider establishing a general valuation allowance in an amount
deemed prudent by management. The general valuation allowance, which is a
regulatory term, represents a loss allowance which has been established to
recognize the inherent credit risk associated with lending and investing
activities, but which, unlike specific allowances, has not been allocated to
particular problem assets. When an insured institution classifies one or more
assets, or portions thereof, as "Loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies,
has adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation allowances. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
As a result of the declines in local and regional real estate market values and
the significant losses experienced by many financial institutions, there has
been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions undertaken as part of the examination of
institutions by the OTS and the FDIC. While the Bank believes that it has
established an adequate allowance for estimated loan losses, there can be no
assurance that regulators, in reviewing the Bank's loan portfolio, will not
request the Bank to materially increase its allowance for loan losses, thereby
negatively affecting the Bank's financial condition and earnings. Although
management believes that an adequate allowance for loan losses has been
established, actual losses are dependent upon future events and, as such,
further additions to the level of allowances for estimated loan losses may
become necessary.
The Bank's management reviews and classifies the Bank's assets
quarterly and reports the results of its review to the Board of Directors. The
Bank classifies assets in accordance with the management guidelines described
above. REO is classified as Substandard. At September 30, 1997, the Bank had
$761,000 of assets classified as Special Mention, $620,000 of assets classified
as Substandard, and no assets classified as Doubtful or Loss.
10
Non-performing Assets. The following table sets forth information
regarding non-accrual loans, accruing loans which are contractually past due 90
days or more and REO. For the years ended September 30, 1997, 1996, 1995, 1994
and 1993, 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, $5,280, $5,780, $15,142 and
$15,158, none of which was recognized.
At September 30,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ----------- ------------ -----------
(Dollars in thousands)
Non-accrual loans:
Residential real estate:
One- to four-family $ -- $567 $226 $169 $239
Multi-family -- -- -- -- --
Commercial real estate -- 11 117 100 76
Construction and land -- 5 -- -- --
Consumer -- -- 12 1 4
------ ---- ---- ---- ----
Total non-accrual loans 583 355 270 319
Loans contractually past due more
than 90 days and accruing interest 572 -- -- -- --
------ ---- ---- ---- ----
Total non-performing loans 572 583 355 270 319
REO, net -- -- -- -- --
------ ---- ---- ---- ----
Total non-performing assets $572 $583 $355 $270 $319
====== ==== ==== ==== ====
Allowance for loan losses as a
percent of gross loans receivable 0.13% 0.13% 0.14% 0.16% 0.06%
Allowance for loan losses as a percent of
total non-performing loans(1) 18.60 16.19 26.02 34.17 10.16
Non-performing loans as a percent of
gross loans receivable(1) 0.68 0.82 0.55 0.46 0.63
Non-performing assets as a percent of total assets(1) 0.53 0.63 0.40 0.33 0.41
________________________
(1) Non-performing assets consist of non-performing loans and REO.
Non-performing loans consist of all accruing loans 90 days or more past
due and all non-accrual loans.
11
The following table sets forth delinquencies in the Bank's loan
portfolio as of the dates indicated:
At September 30, 1997
------------------------------------------------------------
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 4 $36 15 $476
Multi-family -- -- -- --
Commercial real estate -- -- 1 10
Construction and land -- -- -- --
Consumer -- -- 2 86
---- --- --- ----
Total 4 $36 18 $572
==== === === ====
Delinquent loans to gross
loans receivable .04% .68%
At September 30, 1996
-------------------------------------------------------------
60-89 Days 90 Days or More (1)
----------------------------- ------------------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
------------- ------------- -------------- --------------
One- to four-family 12 $450 16 $567
Multi-family -- -- -- --
Commercial real estate 2 9 1 11
Construction and land -- -- 1 5
Consumer -- -- -- --
---- ---- --- ----
14 $459 18 $583
==== ==== === ====
Total
Delinquent loans to gross
loans receivable .61% .77%
At September 30, 1995
------------------------------------------------------------
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 2 $31 10 $226
Multi-family -- -- -- --
Commercial real estate -- -- 2 117
Construction and land -- -- -- --
Consumer loans -- -- 1 12
---- ---- --- ----
Total 2 $31 13 $355
==== ==== === ====
Delinquent loans to gross
loans receivable .06% .55%
___________
(1) Loans 90 days or more past due are included in non-accrual loans. See
"Non-Performing Assets."
12
Allowance for Loan Losses. The allowance for loan losses is
established through a provision for loan losses based on management's evaluation
of the risks inherent in the Bank's loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management considers
adequate to cover estimated losses in loans receivable which are deemed probable
and estimable. The allowance is based upon a number of factors, including
current economic conditions, actual loss experience and industry trends. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to make additional provisions for loan losses
based upon information available at the time of the review. As of September 30,
1997, and 1996 the Bank's allowance for loan losses was .13% of gross loans
receivable. The Bank had non-performing loans of $572,000 and $583,000 at
September 30, 1997 and September 30, 1996, respectively. At September 30,
1997, 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,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- -------------- ------------- -------------- --------------
(Dollars in thousands)
Balance at beginning of period $ 94 $92 $92 $32 $29
Provision for loan losses 12 2 -- 60 25
Charge-offs:
Real Estate:
One- to four-family -- -- -- -- 22
Multi-family -- -- -- -- --
Commercial real estate -- -- -- -- --
Construction and land -- -- -- -- --
Consumer -- -- -- -- --
Recoveries -- -- -- -- --
---- --- --- --- ---
Balance at end of period $106 $94 $92 $92 $32
==== === === === ===
Net charge-offs to average
gross loans receivable -- -- -- -- .04%
13
The following tables set forth the amount of the Bank's allowance
for loan losses, the percent of the allowance for loan losses to the total
allowance and the percent of gross loans to gross loans receivable in each of
the categories listed at the dates indicated.
At September 30,
-------------------------------------------------------------------------------------------------------
1997 1996 1995 1994
-------------------------------------------------------------------------------------------------------
Percent Percent Percent
of Gross of Gross of Gross
Loans in Loans in Loans in
Percent Each Percent Each Percent Each Percent
of Category of Category of Category of
Allowance to Gross Allowance to Gross Allowance to Gross Allowance
to Total Loans to Total Loans to Total Loans to Total
Amount Allowance Receivable Amount Allowance Receivable Amount Allowance Receivable Amount Allowance
-------------------------------------------------------------------------------------------------------
(Dollars in thousands)
One- to four-
family $ 75 70.75% 84.10% $65 70.66% 82.33% $ 63 68.21% 83.28% $62 67.58%
Multi-family 5 4.72 1.47 2 2.18 1.99 3 3.25 2.24 4 4.36
Commercial real estate 10 9.43 7.16
5 5.43 6.57 4 5.03 5.74 4 4.75
Construction and land 6 5.66 4.31
5 5.43 6.44 6 6.25 5.61 5 5.75
Consumer -- -- 2.96 5 5.43 2.67 5 5.26 3.13 5 5.20
Unallocated 10 9.44 -- 10 10.87 -- 11 12.00 -- 12 12.36
---- ------ ------ --- ------ ------ ---- ------ ------ --- ------
Total allowance
for loan losses $106 100.00% 100.00% $92 100.00% 100.00% $ 92 100.00% 100.00% $92 100.00%
==== ====== ====== === ====== ====== ==== ====== ====== === ======
--------------------------------------
1993
--------------------------------------
Percent Percent
of Gross of Gross
Loans in Loans in
Each Percent Each
Category of Category
to Gross Allowance to Gross
Loans to Total Loans
Receivable Amount Allowance Receivable
--------------------------------------
One- to four-
family 83.32% $ 23 70.24% 82.78%
Multi-family 2.15 1 2.78 1.53
Commercial real estate 6.25 3 7.75 7.37
Construction and land 5.19 1 3.80 5.51
Consumer 3.09 1 4.84 2.81
Unallocated -- 3 10.59 --
------ --- ------ ------
Total allowance
for loan losses 100.00% $32 100.00% 100.00%
====== === ====== ======
14
Real Estate Owned
At September 30, 1997, 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, 1997,
the Company had investment and mortgage-backed securities with a carrying value
of $17.9 million and a market value of $18.4 million. At September 30, 1997,
the Company had $739,000 in mortgage-backed securities classified as available
for sale and $16.4 million in investment and mortgage-backed securities
classified as held to maturity. $5.5 million of the Company's mortgage-backed
securities had adjustable rates at September 30, 1997.
At September 30, 1997, all of the Company's mortgage-backed securities
were insured or guaranteed by either the GNMA or FHLMC. Investments in
mortgage-backed securities involve a risk that actual prepayments will be
greater than estimated prepayments over the life of the security which may
require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby reducing or increasing,
respectively, the net yield on such securities. There is also the risk
associated with the necessity to reinvest the cash flows from such securities at
market interest rates which may be lower than the interest rates received on
such securities. In addition, the market value of such securities may be
adversely affected by changes in interest rates.
15
The following table sets forth certain information regarding the
carrying and fair values of the Company's investment securities and
mortgage-backed securities at the dates indicated:
At September 30,
---------------------------------------------------------------------------
1997 1996 1995
------------------------ ----------------------- ------------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
Securities:
Available for sale:
GNMA certificates $ 739 $ 739 $ 777 $ 777 -- --
--------- --------- -------- ------- --------- ---------
Total available for sale 739 739 777 777 -- --
--------- --------- -------- ------- --------- ---------
Held to maturity:
U.S. Treasury $ 4,996 $ 4,999 -- -- -- --
FHLB debt securities -- -- 500 500 $ 500 $ 505
GNMA certificates 11,218 11,634 13,223 13,448 17,133 17,529
FHLMC certificates 149 156 214 225 287 300
--------- --------- -------- ------- --------- ---------
Total held to maturity 16,363 16,789 13,937 14,173 17,920 18,334
--------- --------- -------- ------- --------- ---------
FHLB stock 834 834 778 778 726 726
--------- --------- -------- ------- --------- ---------
Total securities $17,936 $18,362 $15,492 $15,728 $18,646 $19,060
========= ========= ======== ======= ========= =========
16
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Company's
investment securities and mortgage-backed securities as of September 30, 1997.
At September 30, 1997
---------------------------------------------------------------------
More than One More than Five
One Year or Less Year to Five Years Years to Ten Years
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
----------- ---------- ---------------------- ---------- -----------
(Dollars in thousands)
Securities:
Held to maturity:
U.S. Treasury securities $4,996 5.25% -- -- $ -- --
====== ==== ====
Total U.S. Treasury securities $4,996 5.25 -- -- -- --
====== ==== ====
Mortgage-backed securities:
Available for sale:
GNMA
Total available for sale
Held to maturity:
GNMA -- -- $ 4 8.00% $ 16 8.20%
FHLMC -- -- -- -- 119 8.31
====== ==== ====
Total held to maturity -- -- 4 8.00 135 8.30
====== ==== ====
Total mortgage-backed securities -- -- 4 8.00% $135 8.30%
====== ==== ====
---------------------------------------------
More than Ten Years Total
---------------------------------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
---------- ---------------------- -----------
Securities:
Held to maturity:
U.S. Treasury securities $ -- -- $ 4,996 5.25%
======= ========
Total U.S. Treasury securities -- $ 4,996 5.25
======= ========
Mortgage-backed securities:
Available for sale:
GNMA $ 739 6.95% $ 739 6.95%
------- -------- ----
Total available for sale 739 6.95 739 6.95
------- -------- ----
Held to maturity:
GNMA $11,198 7.35% $11,218 7.35%
FHLMC 30 12.31 149 9.12
======= ========
Total held to maturity 11,228 7.36 11,367 7.37
======= ========
Total mortgage-backed securities $11,967 7.33% $12,106 7.34%
======= ========
17
Sources of Funds
General. Deposits, loan repayments and prepayments and cash flows
generated from operations are the primary sources of the Bank's funds for use in
lending, investing and for other general purposes. The Bank has historically
not used FHLB advances or other borrowings as a source of funds.
Deposits. The Bank offers a variety of deposit accounts with a range
of interest rates and terms. The Bank's deposits consist of savings and club
accounts, NOW accounts, money market accounts and certificates of deposit. For
the year ended September 30, 1997, certificates of deposit constituted 75.9% 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, 1997, the Bank had $43.5 million of
certificate accounts maturing in less than one year. The Bank's deposits are
obtained predominantly from the area in which its banking office is located.
The Bank relies primarily on a willingness to pay market-competitive interest
rates to attract and retain these deposits. Accordingly, rates offered by
competing financial institutions significantly affect the Bank's ability to
attract and retain deposits. See Note 5 to the Consolidated Financial
Statements under Item 8 hereof for a summary of the types of deposit accounts
offered by the Bank.
The following table presents the deposit activity of the Bank for the
periods indicated:
For the Year Ended September 30,
------------------------------------------------
1997 1996 1995
--------------- ------------------ ----------
(In thousands)
Beginning balance $79,831 $76,664 $72,255
Net deposits (withdrawals) (5,235) (819) 809
Interest credited on deposit accounts 2,777 3,986 3,600
------- ------- -------
Ending balance $77,373 $79,831 $76,664
======= ======= =======
At September 30, 1997, the Bank had approximately $5.3 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 $ 423 5.49%
Over three through six months 1,676 5.86
Over six through 12 months 2,320 5.74
Over 12 months 873 5.99
------
Total $5,292 5.80
======
18
The following table sets forth the distribution of the Bank's deposit
accounts for the periods indicated.
For the Year Ended September 30,
-----------------------------------------------------------------------------------
1997 1996 1995
-------------------------- --------------------------- ---------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------------ ------------ ------------ ------------- ------------- -------------
(Dollars in thousands)
Savings and club accounts $ 7,810 10.09% $ 8,275 10.37% $ 8,303 10.83%
Money market accounts 5,802 7.50 7,422 9.30 9,493 12.38
NOW accounts 4,690 6.06 5,052 6.33 4,718 6.15
Non-interest bearing accounts 1,397 1.81 42 0.04 185 0.24
------- ------ ------- ------- -------- ------
Total 19,699 25.46 20,791 26.04 22,699 29.60
Certificate accounts:
3.00% to 3.99% 14 .02
4.00% to 4.99% 3,109 3.89 3,595 4.69
5.00% to 5.99% 43,757 56.55 34,698 43.47 16,711 21.80
6.00% to 6.99% 13,814 17.85 17,233 21.59 29,403 38.35
7.00% to 7.99% 66 0.09 3,966 4.97 4,205 5.49
8.00% to 8.99% 37 0.05 34 .04 37 0.05
------- ------ ------- ------- -------- ------
Total certificate
accounts 57,674 74.54 59,040 73.96 53,965 70.40
------- ------ ------- ------- -------- ------
Total deposits $77,373 100.00% $79,831 100.00% $76,664 100.00%
======= ====== ======= ====== ======= ======
19
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at September 30, 1997.
Period to Maturity from September 30, 1997
-----------------------------------------------------------------------------------------------------
Less than One to Two to Three to Four to More than
One Year Two years Three years Four years Five years Five years Total
------------- ------------- -------------- ------------- ------------- -------------- -------------
(In thousands)
Certificate accounts:
0 to 3.99% -- -- -- -- -- -- --
4.00 to 4.99% -- -- -- -- -- -- --
5.00 to 5.99% $35,830 $ 7,112 $580 $162 $73 $43,757
6.00 to 6.99% 7,571 5,909 334 -- -- -- 13,814
7.00 to 7.99% 56 1 5 -- -- $ 4 66
8.00 to 8.99% -- -- -- -- 37 37
-------- ------- ---- ---- --- --- -------
Total $43,457 $13,022 $919 $162 $73 $41 $57,674
======== ======= ==== ==== === === =======
At September 30,
---------------------------
1996 1995
------------- -------------
Certificate accounts:
0 to 3.99% -- $ 14
4.00 to 4.99% $ 3,109 3,595
5.00 to 5.99% 34,698 16,711
6.00 to 6.99% 17,233 29,403
7.00 to 7.99% 3,966 4,205
8.00 to 8.99% 34 37
------- -------
Total $59,040 $53,965
======= =======
20
Subsidiary Activities
The Bank has one wholly-owned subsidiary, Delphos Service Corporation,
which currently does not conduct any activities.
Personnel
As of September 30, 1997, the Company had 18 full-time employees and 5
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
good.
REGULATION AND SUPERVISION
General
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
Office of Thrift Supervision ("OTS") under the Home Owners' Loan Act, as amended
(the "HOLA"). In addition, the activities of savings institutions, such as the
Bank, are governed by the HOLA and the Federal Deposit Insurance Act ("FDI
Act").
The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. The Bank is a member of the Federal Home Loan Bank ("FHLB")
System and its deposit accounts are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Bank must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and/or the FDIC conduct periodic examinations to test the
Bank's safety and soundness and compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulatory requirements and policies, whether by the OTS, the FDIC or the
Congress, could have a material adverse impact on the Company, the Bank and
their operations. Certain of the regulatory requirements applicable to the Bank
and to the Company are referred to below or elsewhere herein. The description
of statutory provisions and regulations applicable to savings institutions and
their holding companies set forth in this Form 10-K does not purport to be a
complete description of such statutes and regulations and their effects on the
Bank and the Company.
Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding
company within the meaning of the HOLA. As a unitary savings and loan holding
company, the Company generally is not restricted under existing laws as to the
types of business activities in which it may engage, provided that the Bank
continues to be a qualified thrift lender ("QTL"). See "Federal Savings
Institution Regulation - QTL Test." Upon any non-supervisory acquisition by the
Company of another savings institution or savings bank that meets the QTL test
and is deemed to be a savings institution by the OTS, the Company would become a
multiple
21
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% the voting stock of a company engaged in impermissible activities.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
Federal Savings Institution Regulation
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio.
In addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
(core) capital ratio (3% for institutions receiving the highest rating on the
CAMEL financial institution rating system), and, together with the risk-based
capital standard itself, a 4% Tier I risk-based capital standard. Core capital
is defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus, and minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights and credit card relationships. The OTS
regulations also require that, in meeting the tangible, leverage (core) and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank.
22
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, as assigned by the OTS capital regulation based on the
risks OTS believes are inherent in the type of asset. The components of Tier I
(core) capital are equivalent to those discussed earlier. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The OTS regulatory capital requirements also incorporate an interest
rate risk component. Savings institutions with "above normal" interest rate
risk exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. At September 30, 1997, 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, 1997.
Capital
Excess ----------------------------------
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
------------------ --------------- ----------------- --------------- -----------------
(Dollars in thousands)
Tangible $14,266 $1,541 $12,725 13.89% 1.50%
Core (Leverage) $14,266 $3,082 $11,184 13.89% 3.00%
Risk-based $14,372 $4,016 $10,356 28.63% 8.00%
23
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution
is considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). A savings institution that has
a ratio of total capital to risk weighted assets of less than 8%, a ratio of
Tier I (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the OTS within 45 days of the date a
savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently
insured by the SAIF. Both the SAIF and the Bank Insurance Fund ("BIF"), (the
deposit insurance fund that covers most commercial bank deposits), are
statutorily required to be recapitalized to a 1.25% of insured reserve deposits
ratio. Until recently, members of the SAIF and BIF were paying average deposit
insurance premiums of between 24 and 25 basis points. The BIF met the required
reserve in 1995, whereas the SAIF was not expected to meet or exceed the
required level until 2002 at the earliest. This situation was primarily due to
the statutory requirement that SAIF members make payments on bonds issued in the
late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor
to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately
adopted a new assessment rate schedule of from 0 to 27 basis points under which
92% of BIF members paid an annual premium of only $2,000. With respect to SAIF
member institutions, the FDIC adopted a final rule retaining the previously
existing assessment rate schedule applicable to SAIF member institutions of
23 to 31 basis points. As long as the premium differential continued, it may
have had adverse consequences for SAIF members, including reduced earnings and
an impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Bank were placed at a substantial competitive disadvantage
to BIF members with respect to pricing of loans and deposits and the ability to
achieve lower operating costs.
On September 30, 1996, the President signed into law the Deposit
Insurance Funds Act of 1996 (the "Funds Act") which, among other things, imposed
a special one-time assessment on SAIF member institutions, including the Bank,
to recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a
special assessment of 65.7 basis points on SAIF assessable deposits held as of
March 31, 1995, payable November 27, 1996 (the "SAIF Special Assessment"). The
SAIF Special Assessment was recognized by the
24
Bank as an expense in the quarter ended September 30, 1996 and is generally tax
deductible. The SAIF Special Assessment recorded by the Bank amounted to
$486,000 on a pre-tax basis and $321,000 on an after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO
bonds across all SAIF and BIF members. Beginning on January 1, 1997, BIF
deposits were assessed for a FICO payment of approximately 1.3 basis points,
while SAIF deposits pay approximately 6.4 basis points. Full pro rata sharing
of the FICO payments between BIF and SAIF members will occur on the earlier of
January 1, 2000 or the date the BIF and SAIF are merged. The Funds Act
specifies that the BIF and SAIF will be merged on January 1, 1999, provided no
savings associations remain as of that time.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members. SAIF members will also continue to make the FICO payments
described above. The FDIC also lowered the SAIF assessment schedule for the
third quarter of 1997 to 18 to 27 basis points. Management cannot predict the
level of FDIC insurance assessments on an on-going basis, whether the savings
association charter will be eliminated or whether the BIF and SAIF will
eventually be merged.
The Bank's assessment rate for fiscal 1997 ranged from 6.28 to
6.5 basis points and the premium paid for this period was $74,000. A
significant increase in SAIF insurance premiums would likely have an adverse
effect on the operating expenses and results of operations of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. The Funds Act provides that the BIF
and SAIF will merge on January 1, 1999 if there are no more savings associations
as of that date. That legislation also required that the Department of Treasury
submit a report to Congress that makes recommendations regarding a common
financial institutions charter, including whether the separate charters for
thrifts and banks should be abolished. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress. The bills would require
federal savings institutions to convert to a national bank or some type of state
charter by a specified date under some bills, or they would automatically become
national banks. Under the same proposals, converted federal thrifts would
generally be required to conform their activities to those permitted for the
charter selected and divestiture of nonconforming assets would be required over
a two year period, subject to two possible one year extensions. State chartered
thrifts would become subject to the same federal regulation as applies to state
commercial banks. A more recent bill passed by the House Banking Committee
would allow savings institutions to continue to exercise activities being
conducted when they convert to a bank regardless of whether a national bank
could engage in the activity. Holding companies for savings institutions would
become subject to the same regulation as holding companies that control
commercial banks, with a limited grandfather provision for savings and loan
holding company activities. The Bank is unable to predict whether such
legislation would be enacted or the extent to which the legislation would
restrict or disrupt its operations.
25
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, 1997, the Bank's limit on loans to one borrower was
$2.1 million. At September 30, 1997, the Bank's largest aggregate outstanding
balance of loans to one borrower was $1.48 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 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.
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, 1997, the Bank maintained 96.1% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test. Recent
legislation has expanded the extent to which education loans, credit card loans
and small business loans may be considered "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose
limitations upon all capital distributions by savings institutions, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger and other distributions
charged against capital. The rule establishes three tiers of institutions,
which are based primarily on an institution's capital level. An institution
that exceeds all fully phased-in capital requirements before and after a
proposed capital distribution ("Tier 1 Bank") and has not been advised by the
OTS that it is in need of more than normal supervision, could, after prior
notice but without obtaining approval of the OTS, make capital distributions
during a calendar year equal to the greater of (i) 100% of its net earnings to
date during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year or (ii) 75% of its net
income for the previous four quarters. Any additional capital distributions
would require prior regulatory approval. In the event the Bank's capital fell
below its regulatory requirements or the OTS notified it that it was in need of
more than normal supervision, the Bank's ability to make capital distributions
could be restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice. In December 1994, the OTS proposed amendments to
its capital distribution regulation that would generally authorize the payment
of capital distributions without OTS approval provided that the payment does not
cause the institution to be undercapitalized within the meaning of the prompt
corrective action regulation. However, institutions in a holding company
structure would still have a prior notice requirement. At September 30, 1997,
the Bank was a Tier 1 Bank.
Liquidity. The Bank is required to maintain an average daily balance
of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 5% but may be changed from
time to time by the OTS to any amount within the range of 4% to 10% depending
upon economic conditions and the savings flows of member institutions. OTS
regulations also require each member savings institution to maintain an average
daily balance of short-term liquid assets at a specified percentage (currently
1%) of the total of its
26
net withdrawable deposit accounts and borrowings payable in one year or less.
The OTS has recently proposed to lower the liquidity requirement from 5% to 4%
and eliminate the 1% short term liquid asset requirement. Monetary penalties
may be imposed for failure to meet these liquidity requirements. The Bank's
liquidity and short-term liquidity ratios for September 30, 1997 were 5.71% and
5.66%, respectively, which exceeded the applicable requirements. The Bank has
never been subject to monetary penalties for failure to meet its liquidity
requirements.
Assessments. Savings institutions are required to pay assessments to
the OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank for the fiscal year
ended September 30, 1997 totaled $31,215.
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
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers
27
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.
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 accounts aggregating $49.3 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts aggregating greater than $49.3 million, the reserve
requirement is $1.48 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 $49.3 million. The first $4.4 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve Board) are
exempted from the reserve requirements. The Bank is in compliance with the
foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company. The Bank has not been audited by the IRS
recently, and therefore the 1994 through 1996 returns are open for audit. For
its 1997 taxable year, the Bank is subject to a maximum federal income tax rate
of 34%.
28
Bad Debt Reserves. For fiscal years beginning prior to December 31,
1995, thrift institutions which qualified under certain definitional tests and
other conditions of the Internal Revenue Code of 1986 (the "Code") were
permitted to use certain favorable provisions to calculate their deductions from
taxable income for annual additions to their bad debt reserve. A reserve could
be established for bad debts on qualifying real property loans (generally
secured by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for nonqualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which
was enacted on August 20, 1996, requires savings institutions to recapture
(i.e., take into income) certain portions of their accumulated bad debt
reserves. The 1996 Act repeals the reserve method of accounting for bad debts
effective for tax years beginning after 1995. Thrift institutions that would be
treated as small banks are allowed to utilize the Experience Method applicable
to such institutions, while thrift institutions that are treated as large banks
(those generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing
reserves for bad debts will treat such change as a change in method of
accounting, initiated by the taxpayer, and having been made with the consent of
the IRS. Any Section 481(a) adjustment required to be taken into income with
respect to such change generally will be taken into income ratably over a
six-taxable year period, beginning with the first taxable year beginning after
1995, subject to the residential loan requirement.
Under the residential loan requirement provision, the recapture
required by the 1996 Act will be suspended for each of two successive taxable
years, beginning with the Bank's current taxable year, in which the Bank
originates a minimum of certain residential loans based upon the average of the
principal amounts of such loans made by the Bank during its six taxable years
preceding its current taxable year.
Under the 1996 Act, for its current and future taxable years, the Bank
is not permitted to make additions to its tax bad debt reserves. In addition,
the Bank is required to recapture (i.e., take into income) over a six year
period the excess of the balance of its tax bad debt reserves as of December 31,
1995 over the balance of such reserves as of December 31, 1987. As a result of
such recapture, the Bank will incur an additional tax liability of approximately
$211,000 which is generally expected to be taken into income beginning in 1998
over a four-year period.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from the Bank's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the Bank's income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not be so included in the Bank's income.
The amount of additional taxable income triggered by a non-dividend is
an amount that, when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if the Bank makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal
29
income tax purposes, assuming a 34% federal corporate income tax rate. The Bank
does not intend to pay dividends that would result in a recapture of any portion
of its bad debt reserves.
SAIF Recapitalization Assessment. The Funds Act levied a 65.7-cent fee
on every $100 of thrift deposits held on March 31, 1995. For financial
statement purposes, this assessment was reported as an expense for the quarter
ended September 30, 1996. The Funds Act includes a provision which states that
the amount of any special assessment paid to capitalize SAIF under this
legislation is deductible under Section 162 of the Code in the year of payment.
State and Local Taxation
State of Ohio. The Bank is a "financial institution" for State of Ohio
tax purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of the
Bank's book net worth determined in accordance with GAAP. As a "financial
institution," the Bank is not subject to any tax based upon net income or net
profits imposed by the State of Ohio.
The Company is subject to the Ohio corporation franchise tax, which, as
applied to the Company, is a tax measured by both net earnings and net worth.
The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.9% of computed Ohio taxable income in excess of $50,000 or
(ii) 0.582% times taxable net worth.
In computing its tax under the net worth method, the Company may
exclude 100% of its investment in the capital stock and indebtedness of the Bank
after the Conversion, as reflected on the balance sheet of the Company, as long
as it owns at least 25% of the issued and outstanding capital stock of the Bank.
The calculation of the exclusion from net worth is based on the ratio of the
excludible investment (net of any appreciation or goodwill included in such
investment) to total assets multiplied by the net value of the stock. As a
holding company, the Company may be entitled to various other deductions in
computing taxable net worth that are not generally available to operating
companies.
A special litter tax is also applicable to all corporations, including
the Company, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to 0.11% of the first $50,000 of computed Ohio taxable income and
0.22% of computed Ohio taxable income in excess of $50,000. If the franchise
tax is paid on the net worth basis, the litter tax is equal to 0.014% times
taxable net worth.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
Item 2. Properties.
- --------------------
The Bank conducts its business through a single banking office located
at 114 East 3rd Street in Delphos, Ohio. The Company believes that the current
facilities are adequate to meet the present and immediately foreseeable needs of
the Bank and the Company. The Bank's office was constructed in 1955 and was
most recently remodeled in 1993. The Bank's office had a net book value of
$573,000 at September 30, 1997.
30
Item 3. Legal Proceedings.
- ---------------------------
At September 30, 1997, 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.
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters.
- ------------------------------------------------------------------------------
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "DCBI." The stock began trading on November 21, 1996. The
Company declared a dividend of $.06 per share on October 28, 1997 payable on
November 20, 1997 to shareholders of record November 7, 1997. This dividend is
the only dividend declared and paid since the formation of the Company. As of
December 23, 1997, there were 2,152 recordholders of the Common Stock of the
Company, which includes shares held in street name.
31
Item. 6 Selected Financial Data.
- ---------------------------------
The selected consolidated financial and other data of the Company set
forth below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and Notes thereto. See Item 8
"Financial Statements and Supplementary Data."
At September 30,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ----------- ----------- ----------- -------------
(In thousands)
Selected Balance Sheet Data:
Total assets $107,796 $92,235 $ 88,022 $ 82,613 $ 77,608
Cash and cash equivalents 4,400 4,695 4,257 6,331 16,969
Investment securities(1) 4,996 500 500 500 500
Mortgage-backed securities(1) 12,107 14,214 17,421 17,755 10,875
FHLB stock - at cost 834 778 726 570 543
Loans receivable, net(2) 84,285 70,787 64,043 56,451 47,747
Deposits 77,373 79,831 76,664 72,255 68,241
Total equity 28,716 11,425 10,799 9,855 8,943
For the Year Ended September 30,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ---------- ------------ ----------- -----------
(In thousand)
Selected Operating Data:
Interest income $7,638 $6,697 $ 6,217 $ 5,424 $ 5,382
Interest expense 3,772 3,996 3,601 2,952 3,027
------ ------ ------- ------- ------
Net interest income 3,866 2,701 2,616 2,472 2,355
Provision for loan losses 12 2 -- 60 25
------ ------ ------- ------- ------
Net interest income after
provision for loan losses 3,854 2,699 2,616 2,412 2,330
Non-interest income 229 232 151 261 335
Non-interest expense 1,871 1,954 1,342 1,284 1,230
------ ------ ------- ------- ------
Income before income taxes 2,212 977 1,425 1,389 1,435
Income taxes 686 333 481 477 464
------ ------ ------- ------- ------
Net income $1,526 $ 644 $ 944 $ 912 $ 971
====== ====== ======= ======= =======
32
At or for the Year Ended
September 30,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------- ------------- -------------
Selected Financial Ratios and Other
Data(3):
Performance Ratios:
Return on average assets 1.42% 0.71% 1.10% 1.14% 1.32%
Return on average equity 5.31 5.59 8.94 9.84 12.77
Average equity to average assets 25.37 12.68 12.30 11.62 10.30
Equity to total assets at end of period 26.64 12.39 12.27 11.93 11.52
Average interest rate spread(4) 2.67 2.51 2.54 2.68 2.75
Net interest margin(5) 3.83 3.06 3.10 3.15 3.25
Average interest-earning assets to
average interest-bearing liabilities 131.00 112.32 112.20 112.61 111.98
Efficiency ratio(6) 45.68 66.61 51.29 51.93 52.21
Non-interest expense to average assets 1.71 2.15 1.56 1.61 1.67
Regulatory Capital Ratios(7):
Tangible capital 13.89 12.40 12.27 11.93 11.52
Core capital 13.89 12.40 12.27 11.93 11.52
Risk-based capital 28.63 27.25 27.90 28.45 27.57
Asset Quality Ratios:
Non-performing loans as a percent of
gross loans receivable(8)(9) 0.68 0.82 0.55 0.46 0.63
Non-performing assets as a percent of
total assets(9) 0.53 0.63 0.40 0.33 0.41
Allowance for loan losses as a percent of
gross loans receivable(8) 0.13 0.13 0.14 0.16 0.06
Allowance for loan losses as a percent of
non-performing loans(9) 18.60 16.19 26.02 34.17 10.16
___________
(1) The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS No. 115"), effective as of October 1, 1995. Prior to
the adoption of SFAS No. 115, investment securities and mortgage-backed
securities held for sale were carried at the lower of amortized cost or
market value, as adjusted for amortization of premiums and accretion of
discounts over the remaining terms of the securities from the dates of
purchase.
(2) Loans receivable are shown net of loans in process, net deferred loan
origination fees and the allowance for loan losses.
(3) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are
based on average monthly balances during the indicated periods and are
annualized where appropriate.
(4) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(6) The efficiency ratio represents non-interest expense as a percent of net
interest income before provision for loan losses and non-interest
income.
(7) For definitions and further information relating to the Bank's
regulatory capital requirements, See "Regulation and Supervision -
Federal Savings Institution Regulation - Capital Requirements."
(8) Gross loans receivable are stated at unpaid principal balances.
(9) Non-performing assets consist of non-performing loans and real estate
owned ("REO"). Non-performing loans consist of all loans 90 days or
more past due and all other non-accrual loans. See "Lending Activities
- Non-Performing Assets" and "-Real Estate Owned."
33
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
--------------
Management of Interest Rate Risk
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 Bank's NPV under
various market interest rate scenarios which range from a 400 basis point
increase to a 400 basis point decrease in market interest rates. The OTS has
incorporated an interest rate risk component into its regulatory capital rule.
Under the rule, an institution whose sensitivity measure exceeds 200 basis
points would be required to deduct an interest rate risk component in
calculating its total capital for purpose of the risk-based capital requirement.
See "Regulation and Supervision - Federal Savings Institution Regulation."
The following table shows the NPV and projected change in the NPV of
the Bank at September 30, 1997 assuming an instantaneous and sustained change in
market interest rates of 100, 200, 300 and 400 basis points, as calculated by
the OTS. The table indicates that the structure of the Bank's assets and
liabilities would result in a decline in the Bank's NPV in a rising rate
environment. Specifically, the table indicates that, at September 30, 1997, the
Bank's NPV was $16.4 million (or 15.6% 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 $5.1 million or 15% decline
in the Bank's NPV and would result in a 423 basis point or 27.2% decline in the
Bank's NPV ratio to 11.3%.
34
NPV as % of Portfolio Value of
Net Portfolio Value Assets
-------------------------------------------------- ---------------------------------
Change in Rates $ Amount $ Change % Change NPV Ratio % Change
- ----------------------------- --------------- --------------- --------------- --------------- ---------------
400 bp $5,824 $(10,528) (64)% 6.25% 59.8%
300 bp 8,502 (7,849) (48) 8.84 43.2
200 bp 11,253 (5,098) (31) 11.33 27.2
100 bp 13,945 (2,406) (15) 13.63 12.4
Static 16,351 15.56
(100) bp 18,030 1,679 10 16.84 8.2
(200) bp 18,797 2,445 15 17.37 11.6
(300) bp 19,474 3,123 19 17.83 14.6
(400) bp 20,640 4,288 26 18.65 19.9
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.
35
Average Balance Sheets. The following table sets forth certain
information relating to the Company at September 30, 1997, and for the years
ended September 30, 1997, 1996 and 1995. The yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods shown. Average balances are derived from average
month-end balances. Management does not believe that the use of average monthly
balances instead of average daily balances has caused any material differences
in the information presented. Average balances of loans receivable include
loans on which the Company has discontinued accruing interest. The yields and
costs include amortized and deferred fees and costs which are considered
adjustments to yields.
Year Ended September 30,
--------------------------------------------------------------
At September 30, 1997 1996
1997
--------------------- ------------------------------ -------------------------------
Average Average
Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
---------- ---------- --------------------------------------------------------------
(Dollars in thousands)
Assets:
Interest-earning assets:
Interest-earning deposits in other banks $ 3,085 5.95% $ 7,993 $ 452 5.65% $ 3,584 $ 227 6.33%
Investment securities, net(1) 5,830 5.47 2,975 242 8.13 1,255 76 6.06
Loans receivable, net(2) 84,285 7.76 76,727 5,944 7.75 67,919 5,228 7.70
Mortgage-backed securities, net(1) 12,107 7.34 13,181 1,000 7.54 15,547 1,166 7.50
-------- -------- ------ ------- ------
Total interest-earning assets 105,307 7.53 100,876 7,638 7.57 88,305 6,697 7.59
Non-interest-earning assets 2,489 3,488 2,505
-------- -------- -------
Total assets $107,796 $104,364 $90,810
======== ======== =======
Liabilities and Equity:
Interest-bearing liabilities:
Passbook savings accounts $ 7,810 2.94 $ 8,470 $ 237 2.80 $ 8,522 250 2.93
Money market accounts 5,802 3.17 6,218 192 3.09 8,464 262 3.10
NOW accounts 4,690 3.18 5,439 84 1.54 4,552 88 1.93
Certificate accounts 57,674 5.78 56,876 3,259 5.73 57,081 3,396 5.95
-------- -------- ------- ------- ------
Total interest-bearing liabilities 75,976 5.13 77,003 3,772 4.90 78,619 3,996 5.08
Non-interest-bearing liabilities 3,104 886 675
-------- -------- -------
Total liabilities 79,080 77,889 79,294
Equity 28,716 26,475 11,516
-------- -------- -------
Total liabilities and equity $107,796 $104,364 $90,810
======== ======== =======
Net interest income before provision
for estimated loan losses $3,866 $2,701
====== ======
Net interest rate spread(3) 2.67% 2.51%
==== ====
Net interest margin(4) 3.83% 3.06%
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities 138.61% 131.00% 112.32%
====== ====== ======
------------------------------------
1995
------------------------------------
Average
Average Yield/
Balance Interest Cost
------------------------------------
(In thousands)
Assets:
Interest-earning assets:
Interest-earning deposits in other banks $ 5,658 $ 294 5.20%
Investment securities, net(1) 1,154 60 5.20
Loans receivable, net(2) 59,832 4,587 7.67
Mortgage-backed securities, net(1) 17,872 1,276 7.14
-------- ------
Total interest-earning assets 84,516 6,217 7.36
Non-interest-earning assets 1,372
--------
Total assets $85,888
========
Liabilities and Equity:
Interest-bearing liabilities:
Passbook savings accounts $ 8,582 287 3.34
Money market accounts 11,933 400 3.35
NOW accounts 4,470 109 2.44
Certificate accounts 49,770 2,805 5.64
-------- ------
Total interest-bearing liabilities 74,755 3,601 4.82
------
Non-interest-bearing liabilities 572
--------
Total liabilities 75,327
Equity 10,561
--------
Total liabilities and equity $85,888
========
Net interest income before provision
for estimated loan losses $2,616
======
Net interest rate spread(3) 2.54%
====
Net interest margin(4) 3.10%
====
Ratio of interest-earning assets to
interest-bearing liabilities 112.20%
======
_______________________
(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.
36
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, 1997 Year Ended September 30, 1996
Compared to Compared to
Year Ended September 30, 1996 Year Ended September 30, 1995
---------------------------------- ----------------------------------
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 $252 $ (27) $ 225 $ (123) $ 56 $ (67)
Investment securities, net 133 33 166 6 10 16
Loans receivable, net 682 34 716 623 18 641
Mortgage-backed securities, net (179) 13 (166) (172) 62 (110)
----- ------- ------ ------ ---- -----
Total change in interest income 888 53 941 334 146 480
----- ------- ------ ------ ---- -----
Interest-bearing liabilities:
Passbook savings accounts (2) (11) (13) (2) (35) (37)
Money market accounts (69) (1) (70) (109) (29) (138)
NOW accounts 15 (19) (4) 2 (23) (21)
Certificate accounts (12) (125) (137) 429 162 591
----- ------- ------ ------ ---- -----
Total change in interest expense (68) (156) (224) 320 75 395
----- ------- ------ ------ ---- -----
Net change in net interest income $ 956 $ 209 $1,165 $ 14 $ 71 $ 85
===== ======= ====== ====== ==== =====
Year Ended September 30, 1995
Compared to
Year Ended September 30, 1994
-----------------------------------
Increase (Decrease)
Due to
-----------------------
Volume Rate Net
----------- ----------- -----------
(In thousands)
Interest-earning assets:
Interest-earning deposits in other banks $ (259) $ 165 $ (94)
Investment securities, net 5 11 16
Loans receivable, net 591 (4) 587
Mortgage-backed securities, net 316 (32) 284
------ ----- ------
Total change in interest income 653 140 793
------ ----- ------
Interest-bearing liabilities:
Passbook savings accounts (26) (16) (42)
Money market accounts (278) (83) (361)
NOW accounts 11 (18) (7)
Certificate accounts 722 337 1,059
------ ----- ------
Total change in interest expense 429 220 649
------ ----- ------
Net change in net interest income $ 224 $ (80) $ 144
====== ===== ======
37
Comparison of Operating Results for the Years Ended September 30, 1997 and
September 30, 1996
General
Net earnings for the year ended September 30, 1997 were $1,526,000, an
increase of $882,000 or 136.9% from $644,000 for the year ended September 30,
1996. The increase in net earnings between the two years resulted from a
$1.16 million increase in net interest income which was partially offset by an
increase of $353,000 in tax expense.
Interest income
Interest income increased by $941,000, or 14.1%, from $6.7 million for
the year ended September 30, 1996 to $7.6 million for the year ended
September 30, 1997. The increase in interest income resulted primarily from
$12.6 million increase in average interest-earning assets. The increase in
average earning assets is due to the use of the proceeds from the conversion to
fund increases in the loan portfolio.
Interest expense
Interest expense decreased $224,000, or 5.6%, from $4.0 million for the
year ended September 30, 1996 to $3.8 million for the year ended September 30,
1997. The decrease in interest expense was due primarily to a $1.6 million
decrease in the average balance of interest-bearing liabilities between the two
fiscal years. The decrease also reflects an 18 basis point decrease in the
average cost of interest-bearing liabilities from 5.08% for the year ended
September 30, 1996 to 4.90% for the year ended September 30, 1997.
Net interest income
Net interest income increased by $1.2 million from $2.7 million for the
year ended September 30, 1996 to $3.9 million for the year ended September 30,
1997. The increase in net interest income reflects continued growth in the
Company's average balance of interest-earning assets complimented by a decrease
in the average balance of interest-bearing liabilities. The net interest margin
increased from 3.06% for the year ended September 30, 1996 to 3.83% for the year
ended September 30, 1997, due primarily to the increase in the ratio of
interest-earning assets to interest-bearing liabilities and partially due to a
16 basis point increase in the net interest rate spread.
Provision for Loan Losses
The Bank made a $12,000 provision for loan losses for the year ended
September 30, 1997 as compared to a $2,000 provision for the year ended
September 30, 1996. The amount of the Bank's provision for loan losses is based
upon management's periodic analysis of the adequacy of the allowance for loan
losses. The Bank has historically experienced very low levels of loan losses
and has no charge-offs during 1997 or 1996. Based upon recent growth in the
size of the Bank's loan portfolio, and the resultant increased risk of loss
inherent in a larger portfolio, management has begun to make additional
provisions for loan losses.
38
Non-Interest Income
Non-interest income decreased by $3,000 from $232,000 for the year
ended September 30, 1996 to $229,000 for the year ended September 30, 1997. The
decrease in non-interest income between the two periods resulted primarily from
a decline in the gain on sale of securities and service charges and fees which
was partially offset by an increase in other income.
Non-Interest Expense
Non-interest expense decreased by $84,000, or 4.3%, from $2.0 million
for the year ended September 30, 1996 to $1.9 million for the year ended
September 30, 1997. The decrease was primarily due to the $590,000 decrease in
FDIC insurance due to the special assessment on all SAIF-insured deposits in the
year ended September 30, 1996. This decrease was partially offset by an
increase in compensation and benefits of $326,000 and an increase in other
non-interest expenses of $213,000. The increase in compensation and benefits is
primarily related to the expense associated with the ESOP plan implemented in
conjunction with the conversion and the Stock-Based Incentive Plan implemented
May 28, 1997. The increase in other non-interest expenses is primarily related
to the conversion and name change of the subsidiary bank.
Income Taxes
The Company's income tax expense increased $353,000, or 10%, from
$333,000 for the year ended September 30, 1996 to $686,000 for the year ended
September 30, 1997. The increase in income tax expense between the two fiscal
years resulted from an increase in income before taxes.
Comparison of Operating Results for the Years Ended September 30, 1996 and
September 30, 1995
General
Net earnings for the year ended September 30, 1996 were $644,000, a
decrease of $300,000, or 31.8%, from $944,000 for the year ended September 30,
1995. The decrease in net earnings between the two years resulted from a
$321,000 charge (after taxes) to reflect the effect of a recently enacted
statute imposing a special assessment on all SAIF-insured deposits. See
"Regulation and Supervision - Federal Savings Institution Regulation - Insurance
of Deposit Accounts." The adverse effect of the special assessment on the
Bank's earnings more than offset an $85,000 increase in net interest income and
an $82,000 increase in non-interest income between the two fiscal years.
Interest Income
Interest income increased by $480,000, or 7.7%, from $6.2 million for
the year ended September 30, 1995 to $6.7 million for the year ended September
30, 1996. The increase in interest income resulted primarily from a $3.8
million increase in the average balance of interest-earning assets, combined
with a 23 basis point increase in the average yield of interest-earning assets.
Interest income in future periods is expected to be benefitted from interest
income earned on the $19.8 million of net proceeds of the Bank's conversion from
mutual-to-stock form, which was completed on November 20, 1996.
39
Interest Expense
Interest expense increased by $395,000, or 11.0%, from $3.6 million for
the year ended September 30, 1995 to $4.0 million for the year ended September
30, 1996. The increase in interest expense was due primarily to an increase of
$3.9 million in the average balance of interest-bearing liabilities between the
two fiscal years. The increase also reflected an increase of 26 basis points in
the average cost of interest-bearing liabilities from 4.82% for the year ended
September 30, 1995 to 5.08% for the year ended September 30, 1996. A
significant factor in this increase was a continued increase in the average cost
of the Bank's certificate accounts, which more than offset decreases in the
average cost of the Bank's passbook savings, money market and now accounts.
Net Interest Income
Net interest income increased by $86,000 from $2.6 million for the year
ended September 30, 1995 to $2.7 million for the year ended September 30, 1996.
The increase in net interest income reflects continued growth in the Bank's
average balance of interest-earning assets, which more than counter balanced the
effect of a 3 basis point decline in the Bank's net interest rate spread and a 4
basis point decline in the Bank's net interest margin from the year ended
September 30, 1995 to the year ended September 30, 1996.
Provision for Loan Losses
The Bank made a $2,000 provision for loan losses for the year ended
September 30, 1996 as compared to no provision for loan losses for the year
ended September 30, 1995. The amount of the Bank's provision for loan losses is
based upon management's periodic analysis of the adequacy of the allowance for
loan losses. The Bank has historically experienced very low levels of loan
losses. Based upon recent growth in the size of the Bank's loan portfolio, and
the resultant increased risk of loss inherent in a larger portfolio, management
has begun to make additional provisions for loan losses.
Non-interest Income
Non-interest income increased by $81,000 from $151,000 for the year
ended September 30, 1995 to $232,000 for the year ended September 30, 1996. The
increase in non-interest income between the two periods resulted primarily from
a $70,000 increase in service charges and fees and an $8,000 gain on the sale of
mortgage-backed securities available for sale during the year ended September
30, 1996.
Non-interest Expense
Non-interest expense increased by $612,000, or 45.6%, from $1.3 million
for the year ended September 30, 1995 to $2.0 million for the year ended
September 30, 1996. As discussed above, the most significant factor in this
increase was the special assessment on all SAIF-insured deposit, which amounted
to $486,000 (before taxes). The cost of federal deposit insurance is expected
to be significantly reduced in future periods due to changes made by the FDIC in
the schedule of deposit insurance rates as a result of the statute which
provided for the imposition of the special assessment. See "Regulation and
Supervision - Federal Savings Institution Regulation - Insurance of Deposit
Account." Management expects the Company's level of non-interest expense to
increase following the conversion due to increased legal, accounting and other
operating expenses resulting from operating as a public company. In addition,
management anticipates the Company's compensation and benefits expense will
increase following the Conversion as a result of the Employee Stock Ownership
Plan recently implemented and other proposed benefit plans.
40
Income Taxes
The Bank's income tax expense decreased by $147,000, or 30.7%, from
$481,000 for the year ended September 30, 1995 to $333,000 for the year ended
September 30, 1996. The decrease in income tax expense between the two fiscal
years resulted from a decrease in income before income taxes.
Comparison of Financial Condition at September 30, 1997 and September 30, 1996
The Company's total assets grew by $15.7 million, or 16.9%, from
$92.2 million at September 30, 1996 to $107.8 million at September 30, 1997.
The primary component in the increase in total assets was a $13.5 million
increase in loans receivable and a $4.5 million increase in investment
securities held to maturity which was partially offset by a $2.1 million
reduction in mortgage-backed securities held to maturity. The increase in loans
was primarily due to a $11.4 million increase in one- to four-family residential
mortgage loans and a $1.3 million increase in multi-family loans. See
"Business--Lending Activities--Originations and Purchase of Loans." The
increase in assets was primarily funded by the $19.8 million net proceeds from
the conversion. Total liabilities decreased $1.7 million from $80.8 million at
September 30, 1996 to $79.1 million at September 30, 1997. The decrease was due
to a $2.5 million decline in deposits which was partially offset by a
$1.0 million increase in borrowings from the Federal Home Loan Bank. Total
equity increased $17.3 million from $11.4 million at September 30, 1996 to
$28.7 million at September 30, 1997. The increase was due primarily to the
$19.8 million net proceeds from the issuance of stock and $1.6 million of
earnings which was partially offset by $2.7 million of treasury shares
repurchased and $1.6 million of stock reserved for the employee stock ownership
plan.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, principal and
interest payments on loans and securities, and proceeds from the maturation of
securities. While maturities and scheduled amortization of loans and securities
are predictable sources of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and
competition. The Bank maintains a liquidity ratio above the regulatory
requirement. This requirement, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required ratio is currently 5%. The
Bank's average regulatory liquidity ratios were 7.74%, 6.60%, 7.68%, 11.26%, and
26.20% for the years ended September 30, 1997, 1996, 1995, 1994, and 1993,
respectively. The Bank's regulatory liquidity ratio increased immediately after
the consummation of the Conversion because the bulk of the net conversion
proceeds were initially invested in short-term investment securities and
subsequently decreased as the proceeds were used to fund loan growth.
The Bank's cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities and financing
activities. Cash flows provided by operating activities were $1.6 million,
$805,000 and $904,000 for the years ended September 30, 1997, 1996 and 1995,
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. The net decrease in deposits was $2.5 million for the year
ended September 30, 1997, and increase in deposits of $3.2 million and $4.4
million for the years ended September 30, 1996 and 1995, respectively.
41
At September 30, 1997, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $14.3 million, or 13.9%, of
adjusted total assets, which is above the required level of $1.5 million, or
1.5%; core capital of $14.3 million, or 13.9%, of adjusted total assets, which
is above the required level of $3.1 million, or 3.0%; and risk-based capital of
$14.4 million, or 28.6%, of risk-weighted assets, which is above the required
level of $4.0 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, 1997, cash
and short-term investments totalled $9.4 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, 1997, the Bank had $1.0 million of advances outstanding from the
FHLB and $739,000 of mortgage-backed securities available for sale.
At September 30, 1997, the Bank had outstanding commitments to
originate mortgage loans of $2.7 million compared to $2.4 million at September
30, 1996. 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, 1997 totalled
$43.5 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.
42
Impact of New Accounting Standards
In May 1994, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No.
114"), which has been amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure (SFAS No. 118")."
Under the provisions of SFAS No. 114, as amended, a loan is considered impaired
when, based on current information and events, it is probable that a creditor
will be unable to collect all amounts due according to the contractual terms of
the loan agreement. SFAS No. 114 requires creditors to measure impairment of a
loan based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. If the measure of the impaired loan is less than the
recorded investment in the loan, a creditor shall recognize an impairment by
recording a valuation allowance with a corresponding charge to the provision for
loan losses. The Bank adopted the provisions of SFAS No. 114 and SFAS No. 118
effective October 1, 1996. The adoption of SFAS No. 114 and SFAS No. 118 did
not have a material impact on the results of operations or financial condition
of the Bank.
In May 1996, the FASB issued Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights ("SFAS No. 122")."
SFAS No. 122 requires an institution that purchases or originates mortgage loans
and sells or securitizes those loans with servicing rights retained to allocate
the total cost of the mortgage loans to the mortgage servicing rights and the
loans (without the mortgage servicing rights) based on their relative fair
values. In addition, institutions are required to assess impairment of the
capitalized mortgage servicing portfolio based on the fair value of those
rights. SFAS No. 122 is effective for fiscal years beginning after December 15,
1996. Adoption of this statement did not have a material impact on the Bank's
net income or financial condition.
In November 1996, the FASB issued SFAS No. 123, "Accounting for Stock
Based Compensation" ("SFAS No. 123"). This statement establishes financial
accounting standards for stock-based employee compensation plans. SFAS No. 123
permits the Bank to choose either a new fair value based method or the current
APB Opinion 25 intrinsic value based method of accounting for its stock-based
compensation arrangements. SFAS No. 123 requires pro forma disclosures of net
earnings and earnings per share computed as if the fair value based method had
been applied in financial statements of companies that continue to follow
current practice in accounting for such arrangements under Opinion 25. The
disclosure provisions of SFAS No. 123 are effective for fiscal years beginning
after December 15, 1996.
In June 1997 the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"). This Statement, which supersedes SFAS No. 122, provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. If a transfer does not
meet the criteria for a sale, the transfer is accounted for as a secured
borrowing with a pledge of collateral. The Statement is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1997, and should be applied prospectively. Earlier or
retroactive application of this Statement is not permitted. Adoption of this
statement is not expected to have a material impact on the Bank's net income or
financial condition.
On March 3, 1997, the FASB issued SFAS No. 128, "Earnings Per Share,"
which is effective for financial statements beginning with the quarter ended
December 31, 1997. SFAS No. 128 simplifies the calculation of earnings per
share ("EPS") by replacing primary EPS with basic EPS. It also requires dual
presentation of basic EPS and diluted EPS for entities with complex capital
structures. Basic EPS includes
43
no dilution and is computed by dividing income available to common shareholders
by the weighted-average common shares outstanding for the period. Diluted EPS
will reflect the potential dilution of securities that could share in earnings,
such as stock options, warrants or other common stock equivalents. All prior
period EPS data will be restated to conform with the new presentation methods.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for the reporting and displaying
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This Statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This Statement is effective for fiscal years beginning after
December 15, 1997. The adoption of SFAS No. 130 is not expected to have a
material impact on the results of operations or financial condition of the
Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This Statement is effective for financial statements for periods beginning after
December 15, 1997. The adoption of SFAS No. 131 is not expected to have a
material impact on the results of operations or financial condition of the
Company.
Item 8. Financial Statements and Supplementary Data.
- -----------------------------------------------------
44
DELPHOS CITIZENS BANCORP, INC.
Delphos, Ohio
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
CONTENTS
REPORT OF INDEPENDENT AUDITORS.......................................... 46
FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition..................... 47
Consolidated Statements of Income.................................. 48
Consolidated Statements of Shareholders' Equity.................... 49
Consolidated Statements of Cash Flows.............................. 50
Notes to Consolidated Financial Statements......................... 52
45.
[Crowe Chizek Logo]
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Delphos Citizens Bancorp, Inc.
Delphos, Ohio
We have audited the accompanying consolidated statement of financial condition
of Delphos Citizens Bancorp, Inc. (Company), Delphos, Ohio, as of September 30,
1997 and 1996 and the related consolidated statements of income, shareholders'
equity, and cash flows for the fiscal years ended September 30, 1997 and 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. The September 30, 1995 financial statements were audited by other
auditors whose report dated November 15, 1995 and July 2, 1996 expressed an
unqualified opinion.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Delphos Citizens Bancorp, Inc.
as of September 30, 1997 and 1996, and the results of its operations and its
cash flows for the two years ended September 30, 1997, in conformity with
generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
_________________________________
Crowe, Chizek and Company LLP
Columbus, Ohio
October 30, 1997
- --------------------------------------------------------------------------------
46.
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1997 and 1996
- --------------------------------------------------------------------------------
September 30,
1997 1996
---- ----
ASSETS
Cash and due from banks $ 1,315,950 $ 1,585,654
Interest-bearing deposits in other banks 3,084,500 3,109,623
--------------- ----------------
Total cash and cash equivalents 4,400,450 4,695,277
Investment securities held to maturity
(Estimated fair value of $4,999,000 in 1997 and
$500,000 in 1996) (Note 2) 4,996,139 500,000
Mortgage-backed securities available
for sale (Note 2) 739,366 777,174
Mortgage-backed securities held to maturity
(Estimated fair value of $11,789,418 in 1997
and $13,672,721 in 1996) (Note 2) 11,367,191 13,437,301
Loans receivable, net (Note 3) 84,285,038 70,786,851
FHLB stock, at cost 833,800 777,700
Premises and equipment (Note 4) 660,703 684,754
Accrued interest receivable 445,461 293,046
Other assets 67,808 283,194
--------------- ----------------
Total assets $ 107,795,956 $ 92,235,297
=============== ================
LIABILITIES
Deposits (Note 5) $ 77,372,969 $ 79,830,835
Federal Home Loan Bank Advances (Note 6) 1,000,000
Escrow accounts 236,090 206,180
Accrued interest payable 33,193 31,295
Accrued expenses and other liabilities 437,327 741,541
--------------- ----------------
Total liabilities 79,079,579 80,809,851
SHAREHOLDERS' EQUITY
Preferred Stock, authorized 1,000,000 shares, no shares
issued and outstanding
Common stock, $.01 par value, 4,000,000 shares
authorized, 2,047,631 shares issued 20,476
Additional paid-in capital 19,854,707
Retained earnings, substantially restricted (Note 14) 12,969,205 11,443,182
Treasury stock (87,936 shares) (1,479,065)
Obligation under employee stock ownership plan (Note 11) (1,463,076)
Unearned recognition and retention plan (Note 13) (1,186,019)
Unrealized gain (loss) on securities available for sale, net 149 (17,736)
--------------- ----------------
Total shareholders' equity 28,716,377 11,425,446
--------------- ----------------
Total liabilities and shareholders' equity $ 107,795,956 $ 92,235,297
=============== ================
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
47.
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
Years Ended September 30,
1997 1996 1995
---- ---- ----
Interest income
First mortgage loans $ 5,830,456 $ 5,128,744 $ 4,503,056
Consumer and other loans 113,171 99,927 83,978
Investment securities 185,383 23,305 21,133
Mortgage-backed and related securities 1,000,051 1,166,095 1,276,199
Dividends on FHLB stock 56,309 52,212 39,344
Interest bearing deposits in banks 452,155 227,073 293,674
-------------- -------------- ---------------
Total interest income 7,637,525 6,697,356 6,217,384
Interest expense
Deposits (Note 5) 3,771,889 3,996,351 3,601,490
-------------- -------------- ---------------
Net interest income 3,865,636 2,701,005 2,615,894
Provision for loan losses (Note 3) 12,000 2,000
-------------- -------------- ---------------
Net interest income after
provision for loan losses 3,853,636 2,699,005 2,615,894
-------------- -------------- ---------------
Non-interest income
Service charges and fees 186,162 193,632 123,623
Gain on sale of mortgage-backed
securities available for sale 8,259
Other non-interest income 42,591 30,580 27,290
-------------- -------------- ---------------
Total non-interest income 228,753 232,471 150,913
-------------- -------------- ---------------
Non-interest expense
Compensation and benefits (Notes 10, 11, 13) 953,502 627,107 552,215
Occupancy and equipment 87,077 90,429 88,042
Deposit insurance (Note 8) 74,379 664,031 166,347
Data processing and maintenance 120,668 158,417 146,234
Franchise taxes 174,849 167,262 150,438
Other non-interest expense 459,741 246,684 238,574
-------------- -------------- ---------------
Total non-interest expense 1,870,216 1,953,930 1,341,850
-------------- -------------- ---------------
Income before income taxes 2,212,173 977,546 1,424,957
Income tax expense (Note 7) 686,150 333,250 480,752
-------------- -------------- ---------------
Net income $ 1,526,023 $ 644,296 $ 944,205
============== =============== ===============
Earnings per share (Note 1)
Primary $ .75 N/A N/A
Fully diluted $ .74 N/A N/A
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
48.
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
Additional Obligation
Common Paid-in Retained Treasury Under Unearned
Stock Capital Earnings Stock ESOP Compensation
----- ------- -------- ----- ---- ------------
Balance at October 1, 1994 $ 9,854,681
Net income 944,205
-----------
Balance at September 30, 1995 10,798,886
Net income 644,296
Unrealized loss on securities available
for sale, net of tax of $9,137
-----------
Balance at September 30, 1996 11,443,182
Net income 1,526,023
Proceeds from sale of stock, net of
issuance costs $ 20,476 $ 19,783,352
Employee stock ownership plan
obligation $(1,630,970)
Reduction of obligation under
employee stock ownership plan 71,355 167,894
81,548 shares purchased under
recognition and retention plan $(1,270,735)
Compensation expense with respect to
recognition and retention plan 84,716
Purchase of treasury stock, 87,936 shares $(1,479,065)
Change in unrealized loss on securities
available for sale, net
----------- ------------- ----------- ----------- ----------- -----------
Balance at September 30, 1997 $ 20,476 $ 19,854,707 $12,969,205 $(1,479,065) $(1,463,076) $(1,186,019)
=========== ============= =========== =========== =========== ===========
Unrealized
Gains (Losses)
on Securities Total
Available for Shareholders
Sale, Net Equity
--------- ------
Balance at October 1, 1994 $ 9,854,681
Net income 944,205
-----------
Balance at September 30, 1995 10,798,886
Net income 644,296
Unrealized loss on securities available
for sale, net of tax of $9,137 $ (17,736) (17,736)
----------- -----------
Balance at September 30, 1996 (17,736) 11,425,446
Net income 1,526,023
Proceeds from sale of stock, net of
issuance costs 19,803,828
Employee stock ownership plan
obligation (1,630,970)
Reduction of obligation under
employee stock ownership plan 239,249
81,548 shares purchased under
recognition and retention plan (1,270,735)
Compensation expense with respect to
recognition and retention plan 84,716
Purchase of treasury stock, 87,936 shares (1,479,065)
Change in unrealized loss on securities
available for sale, net 17,885 17,885
----------- -----------
Balance at September 30, 1997 $ 149 $28,716,377
=========== ===========
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
49.
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
Years Ended September 30,
1997 1996 1995
---- ---- ----
Cash flows from operating activities
Net income $ 1,526,023 $ 644,296 $ 944,205
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred fees on loans 17,800 (14,696) (7,237)
Premiums and discounts on investment
and mortgage-backed securities (30,820) (24,772) (21,904)
Provision for loan losses 12,000 2,000
Stock dividends from FHLB (56,100) (52,100) (39,100)
Gain on sale of securities (8,259)
Depreciation and amortization of
premises and equipment 49,298 50,985 51,570
Deferred taxes 126,133 (140,005) 27,340
Compensation expense on
ESOP shares 239,249
Amortization of unearned compensation 84,716
Increase (decrease) in:
Accrued interest receivable (152,415) (38,308) (81,280)
Other assets 215,385 (186,123) (17,424)
Interest payable 1,898 7,759 (4,367)
Accrued expenses and
other liabilities (439,999) 563,743 52,656
---------------- --------------- ----------------
Net cash from operating activities 1,593,168 804,520 904,459
--------------- --------------- ----------------
Cash flows from investing activities
Mortgage-backed securities available
for sale
Proceeds from sales 763,370
Proceeds from paydowns 65,345 48,379
Investment and mortgage-backed
securities held to maturity
Purchases (4,985,938) (990,000)
Proceeds from maturities
and paydowns 2,590,730 2,400,546 1,285,001
Purchases of FHLB stock (116,700)
Loan originations net of principal
payment on loans (13,527,987) (6,731,466) (7,570,243)
Purchases of premises and equipment (25,247) (11,031) (19,995)
---------------- --------------- ----------------
Net cash used in investing activities (15,883,097) (3,530,202) (7,411,937)
---------------- --------------- ----------------
- --------------------------------------------------------------------------------
(Continued)
50.
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
Years Ended September 30,
1997 1996 1995
---- ---- ----
Cash flows from financing activities
Net change in deposit accounts $ (2,457,866) $ 3,166,393 $ 4,409,416
Net change in mortgage escrow funds 29,910 (2,506) 24,640
Proceeds from FHLB advances 1,000,000
Net proceeds from sale of stock 18,172,858
Shares purchased under RRP (1,270,735)
Purchase of treasury stock (1,479,065)
--------------- --------------- ----------------
Net cash from financing activities 13,995,102 3,163,887 4,434,056
--------------- --------------- ----------------
Net increase/(decrease) in cash and
cash equivalents (294,827) 438,205 (2,073,422)
Cash and cash equivalents at beginning
of period 4,695,277 4,257,072 6,330,494
--------------- --------------- ----------------
Cash and cash equivalents at end of period $ 4,400,450 $ 4,695,277 $ 4,257,072
=============== =============== ================
Supplemental disclosures
Cash paid for:
Interest on deposits $ 3,773,787 $ 3,988,592 $ 3,605,857
=============== =============== ================
Income taxes $ 502,000 $ 455,741 $ 442,954
=============== =============== ================
Noncash transactions:
Transfer of mortgage-backed
securities to available for sale $ 1,607,975
===============
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
51.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Delphos Citizens Bancorp, Inc. (Company) and its wholly owned
subsidiary Citizens Bank of Delphos (Bank). All significant intercompany
balances and transactions have been eliminated in consolidation.
INDUSTRY SEGMENT INFORMATION: The Company is engaged in the business of banking
with operations conducted through its office located in Delphos, Ohio. The
Company originates and holds primarily residential and consumer loans to
customers throughout the Allen and Van Wert County area in Northwest Ohio which
generates the majority of the Company's income. The Company's primary deposit
products are interest-bearing checking accounts and certificates of deposit.
There are no branch operations.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The estimate
that is particularly susceptible to a significant change relates to the
determination of the allowance for losses on loans.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, deposits with financial institutions and
overnight deposits. The Company reports net cash flows for customer loan and
deposit transactions.
INVESTMENT AND MORTGAGE-BACKED SECURITIES: The Company classifies investment and
mortgage-backed securities as held to maturity, trading or available for sale.
Securities classified as held to maturity are those that management has the
positive intent and ability to hold to maturity. Securities held to maturity are
stated at cost, adjusted for amortization of premiums and accretion of
discounts.
Securities classified as available for sale are those that management intends to
sell or that could be sold for liquidity, investment management, or similar
reasons, even if there is not a present intention for such a sale. Securities
available for sale are carried at fair value with unrealized gains and losses
included as a separate component of retained earnings, net of tax. Gains or
losses on dispositions are based on net proceeds and the adjusted carrying
amount of securities sold, using the specific identification method. Securities
are written down to fair value when a decline in fair value is not temporary.
- --------------------------------------------------------------------------------
(Continued)
52.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOANS RECEIVABLE: Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses, and net deferred loan origination fees. Interest
income on loans is accrued over the term of the loans based upon the principal
outstanding. The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the collateral, and current economic conditions.
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued and unpaid, and income is subsequently recognized only to the
extent that cash payments are received until, in management's judgment, the
borrower demonstrates the ability to make periodic interest payments in which
case the loan is returned to accrual status.
On October 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures." Under these
standards, loans considered to be impaired, as identified according to internal
loan review standards, are reduced to the present value of expected future cash
flows or to the fair value of collateral by allocating a portion of the
allowance for loan losses to such loans. If these allocations cause the
allowance for loan losses to require an increase, such an increase will be
reported as a provision for loan losses charged to operations. The effect of
adopting these standards did not materially affect the allowance for loan losses
at October 1, 1995 or at September 30, 1996 and 1997.
Management analyzes loans on an individual basis and classifies a loan as
impaired when an analysis of the borrower's operating results and financial
condition indicates that underlying cash flows are not adequate to meet its debt
service requirements. Often this is associated with a delay or shortfall in
payments of 30 days or more. Smaller balance homogeneous loans are evaluated for
impairment in total. Such loans include residential first mortgage loans secured
by one to four family residences, residential construction loans, home equity,
and other consumer loans, with balances less than $200,000. Loans are generally
moved to non-accrual status when 90 days or more past due. These loans may also
be considered impaired.
Impaired loans, or portions thereof, are charged off when deemed uncollectible.
The nature of the disclosures for impaired loans is considered generally
comparable to prior nonaccrual loans and non-performing and past due asset
disclosures.
- --------------------------------------------------------------------------------
(Continued)
53.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOAN FEES AND COSTS: Loan origination fees and costs are deferred, and are
recognized as an adjustment to interest income using the interest method over
the contractual life of the loans, adjusted for estimated prepayments based on
the Company's historical prepayment experience.
OTHER REAL ESTATE: Other real estate owned is recorded at the lower of cost or
fair value, less estimated costs to sell. Any reduction in fair value is
reflected in a valuation allowance account established by a charge to income.
Costs incurred to carry the real estate are charged to expense.
PREMISES AND EQUIPMENT: Land is carried at cost. Buildings, furniture and
fixtures, and equipment are carried at cost, less accumulated depreciation.
Buildings, furniture and fixtures, and equipment are depreciated using
straight-line and accelerated methods over the estimated useful lives of the
respective assets, which range from five to forty years.
INCOME TAXES: The Company follows the liability method in accounting for income
taxes. The liability method provides that deferred tax assets and liabilities
are recorded based on the difference between the tax basis of assets and
liabilities and their carrying amounts for financial reporting purposes,
referred to as "temporary differences."
EARNINGS PER SHARE: Primary and fully diluted earnings per common share for the
year ended September 30, 1997 were computed based on earnings from the period
November 20, 1996 (conversion date), to September 30, 1997, divided by the
weighted average number of common shares outstanding for the period. Primary
earnings per common share has been computed assuming the exercise of stock
options less the treasury shares assumed to be purchased from the proceeds using
the average market price of the Company's stock for the period November 20, 1996
through September 30, 1997. Fully diluted earnings per common share represents
the additional dilution related to the stock options due to the use of the
market price as of year end. The earnings for the period November 20, 1996
(conversion date) through September 30, 1997 was $1,406,783. The primary
weighted average shares outstanding was 1,887,889 for the year ended September
30, 1997. The fully diluted weighted average shares outstanding was 1,894,677
for the year ended September 30, 1997. Earnings per share information for the
years ended September 30, 1996 and 1995 is not meaningful since the mutual to
stock conversion was not consummated until November 20, 1996.
STOCK OPTIONS: The excess of the option price over the par value of the shares
issued is added to additional paid-in capital when exercised. Any tax benefit
realized by the Company from the exercise of non-qualified stock options is
added to paid-in capital. Expense for employee compensation under the stock
option plan is based on APB No. 25, with expense reported only if options are
granted below market price at grant date. Pro forma disclosures of net income
and earnings per share are provided as if the fair value method of SFAS No. 123
were used for stock-based compensation.
- --------------------------------------------------------------------------------
(Continued)
54.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CONCENTRATION OF CREDIT RISK: Most of the Company's business activity is with
customers located within northwest Ohio, specifically Allen and Van Wert
counties. Although the Company has a diversified loan portfolio, a substantial
portion of its debtors' ability to repay their loans is dependent on the economy
in Allen and Van Wert counties.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates. The fair value estimates of existing on- and off-balance sheet
financial instruments do not include the value of anticipated future business or
the values of assets and liabilities not considered financial instruments.
FINANCIAL STATEMENT PRESENTATION: Certain previously reported consolidated
financial statement amounts have been reclassified to conform to the 1997
presentation.
- --------------------------------------------------------------------------------
(Continued)
55.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The carrying values and estimated fair values of investment and mortgage-backed
securities are summarized as follows:
September 30, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
---- ----- ---- -----
Investment securities
held to maturity:
U.S. Treasury security $ 4,996,139 $ 2,861 $ 4,999,000
Mortgage-backed securities
available for sale:
GNMA Certificates 739,141 7,081 $ 6,856 739,366
Mortgage-backed securities
held to maturity:
GNMA Certificates 11,218,082 420,972 5,565 11,633,489
FHLMC Certificates 149,109 6,820 155,929
--------------- -------------- --------------- ---------------
11,367,191 427,792 5,565 11,789,418
--------------- -------------- --------------- ---------------
Total investment and
mortgage-backed securities $ 17,102,471 $ 437,734 $ 12,421 $ 17,527,784
=============== ============== =============== ===============
September 30, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
---- ----- ---- -----
Investment securities
held to maturity:
FHLB Debt security $ 500,000 $ 500,000
Mortgage-backed securities
available for sale:
GNMA Certificates 804,047 $ 26,873 777,174
Mortgage-backed securities
held to maturity:
GNMA Certificates 13,222,722 $ 337,200 111,858 13,448,064
FHLMC Certificates 214,579 10,078 224,657
--------------- -------------- --------------- ---------------
13,437,301 347,278 111,858 13,672,721
--------------- -------------- --------------- ---------------
Total investment and
mortgage-backed securities $ 14,741,348 $ 347,278 $ 138,731 $ 14,949,895
=============== ============== =============== ===============
- --------------------------------------------------------------------------------
(Continued)
56.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES (Continued)
The scheduled maturities of investment and mortgaged backed securities held to
maturity and available for sale at September 30, 1997, were as follows:
Held to maturity Available for sale
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Due in one year or less $ 4,996,139 $ 4,999,000
Due from one to five years 4,179 4,179
Due from five to ten years 135,041 137,808
Due after ten years 11,227,971 11,647,431 $ 739,141 $ 739,366
--------------- -------------- --------------- ---------------
$ 16,363,330 $ 16,788,418 $ 739,141 $ 739,366
=============== ============== =============== ===============
Expected maturities may differ from the contractual maturities because borrowers
may have the right to call or prepay the obligations with or without prepayment
penalties. Mortgage-backed securities are reported above at their contractual
maturity date.
During the year ended September 30, 1996, the Company reclassified
mortgage-backed securities with an amortized cost of $1,607,975 from held to
maturity to available for sale. The securities were transferred on November 21,
1995, as allowed by the Statement of Financial Accounting Standards No. 115
implementation guide issued by the Financial Accounting Standards Board, with
the related unrealized gain of $6,818 recorded net of tax as an increase in
retained earnings.
There were no sales of investment or mortgage-backed securities during the years
ended September 30, 1997 and 1995. Proceeds from the sale of mortgage-backed
securities available for sale during the year ended September 30, 1996 were
$763,370. Gross gains of $8,259 were realized on these sales. There were no
sales of investment securities during the year ended September 30, 1996.
- --------------------------------------------------------------------------------
(Continued)
57.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
September 30,
1997 1996
---- ----
Real estate loans
One- to four-family $ 73,716,294 $ 62,282,192
Multi-family 1,288,236 1,505,896
Commercial real estate 6,272,532 4,969,530
Construction and land 3,780,811 4,871,181
--------------- ----------------
85,057,873 73,628,799
Less:
Mortgage loans in process (3,162,366) (4,709,495)
Net deferred loan origination fees (71,117) (53,316)
---------------- ----------------
81,824,390 68,865,988
--------------- ----------------
Consumer and other loans
Manufactured homes 111,657 63,331
Home equity loans 1,215,545 1,038,780
Unsecured loans 324,817 241,314
Other consumer loans 940,972 680,254
--------------- ----------------
2,592,991 2,023,679
Less: Non-mortgage loans in process (25,983) (8,456)
---------------- ----------------
2,567,008 2,015,223
--------------- ----------------
Less: Allowance for loan losses (106,360) (94,360)
---------------- ----------------
$ 84,285,038 $ 70,786,851
=============== ================
Activity in the allowance for loan losses is summarized as follows:
September
1997 1996 1995
---- ---- ----
Balance at beginning of period $ 94,360 $ 92,360 $ 92,360
Provision charged to income 12,000 2,000 -
Charge-offs - -
----------- ----------- -----------
Balance at end of period $ 106,360 $ 94,360 $ 92,360
=========== =========== ===========
As of and for the years ended September 30, 1997 and 1996, there were no
impaired loans.
- --------------------------------------------------------------------------------
(Continued)
58.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE (Continued)
In the ordinary course of business, the Company has and expects to continue to
have transactions, including borrowings, with its officers, directors and their
affiliates. In the opinion of management, such transactions were on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and did
not involve more than a normal risk of collectibility or present any other
unfavorable features to the Company. Loans to such borrowers are summarized as
follows:
September 30,
1997 1996
---- ----
Balance at beginning of period $ 227,632 $ 350,722
New loans 45,750
Payments (9,864) (123,090)
------------ ------------
Balance at end of period $ 263,518 $ 227,632
============ ============
NOTE 4 - PREMISES AND EQUIPMENT
Premises and equipment is summarized as follows:
September 30,
1997 1996
---- ----
Land and parking lot $ 175,654 $ 175,654
Building and improvements 643,190 643,190
Furniture and equipment 320,701 295,454
------------ ------------
1,139,545 1,114,298
Accumulated depreciation (478,842) (429,544)
------------- ------------
$ 660,703 $ 684,754
============ ============
- --------------------------------------------------------------------------------
(Continued)
59.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 5 - DEPOSITS
Deposits are summarized as follows:
September 30,
1997 1996
---- ----
Demand and NOW accounts $ 6,052,634 $ 5,060,554
Money market 5,802,264 7,421,874
Savings and club accounts 7,844,378 8,308,769
Certificates 57,673,693 59,039,638
--------------- ----------------
$ 77,372,969 $ 79,830,835
=============== ================
The aggregate amount of short-term certificates of deposits with a minimum
denomination of $100,000 was approximately $5,292,000 at September 30, 1997 and
$4,495,000 at September 30, 1996.
At September 30, 1997, the scheduled maturities of certificates of deposits are
as follows:
1998 $ 43,457,389
1999 13,022,335
2000 918,332
2001 162,237
2002 and thereafter 113,400
---------------
$ 57,673,693
===============
Interest expense on deposits is summarized as follows:
September 30,
1997 1996 1995
---- ---- ----
Demand and NOW accounts $ 83,999 $ 87,826 $ 109,163
Money market 191,449 261,944 399,912
Savings and club accounts 237,414 249,804 286,943
Certificates 3,259,027 3,396,777 2,805,472
--------------- --------------- ----------------
$ 3,771,889 $ 3,996,351 $ 3,601,490
=============== =============== ================
- --------------------------------------------------------------------------------
(Continued)
60.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 6 - ADVANCE FROM FEDERAL HOME LOAN BANK
At September 30, 1997, the Bank had a line of credit enabling it to borrow up
to $16,676,000 with the Federal Home Loan Bank ("FHLB"). The Company had the
following outstanding FHLB advance at September 30, 1997:
Maturity Rate Amount
-------- ---- ------
December 29, 1997 6.53% $1,000,000
The Company had no FHLB advances at September 30, 1996.
Pursuant to a collateral agreement with the FHLB, the advance is secured by all
stock invested in the FHLB and certain qualifying first mortgage loans.
Qualifying first mortgage loans pledged to secure FHLB advances totaled
$1,500,000 at September 30, 1997.
NOTE 7 - INCOME TAXES
The provision for income taxes consists of the following:
September 30,
1997 1996 1995
---- ---- ----
Current expense $ 560,017 $ 473,255 $ 453,412
Deferred expense 126,133 (140,005) 27,340
------------ ------------ ------------
$ 686,150 $ 333,250 $ 480,752
============ ============ ============
- --------------------------------------------------------------------------------
(Continued)
61.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 7 - INCOME TAXES (Continued)
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate as follows:
September 30,
1997 1996 1995
---- ---- ----
Statutory rate 34.0% 34.0% 34.0%
Effective tax rate 31.0% 34.0% 33.7%
Tax expense at statutory rate $ 752,139 $ 332,366 $ 484,485
Other (65,989) 884 (3,733)
------------- ------------ ------------
$ 686,150 $ 333,250 $ 480,752
============ ============ ============
Deferred income taxes are provided for temporary differences. The components of
the Company's net deferred tax liability at September 30, 1997 and 1996, are as
follows:
1997 1996
---- ----
Deferred tax assets
Deferred loan fees $ 7,880 $ 11,113
Non-accrual interest 6,033 1,796
ESOP Expense 24,465
Recognition and retention plan 28,803
SAIF assessment 165,172
Unrealized loss on investment
securities available for sale 9,137
------------ ------------
67,181 187,218
Deferred tax liabilities
Bad debt deduction (210,823) (214,903)
FHLB stock dividends (143,038) (123,964)
Depreciation expense (18,158) (17,919)
Unrealized gain on investment
securities available for sale (77)
------------ ------------
(372,096) (356,786)
------------ ------------
Net deferred tax liability $ (304,915) $ (169,568)
============ ============
No valuation allowance for deferred tax assets was provided at September 30,
1997 and 1996, because the Company had sufficient net deferred tax liabilities
and taxes paid in prior years and available for recovery to warrant recording
the full deferred tax asset.
- --------------------------------------------------------------------------------
(Continued)
62.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 7 - INCOME TAXES (Continued)
Retained earnings at September 30, 1997 and 1996, includes approximately
$1,860,000 for which no federal income tax liability has been recorded. These
amounts represent an allocation of income to bad debt deductions for tax
purposes alone. Reduction of amounts so allocated for purposes other than tax
bad debt losses or adjustments from carryback of net operating losses would
create income for tax purposes only, which would be subject to current tax. The
unrecorded deferred tax liability on the above amounts at September 30, 1997 and
1996 was approximately $631,000.
There were no taxes attributable to securities gains for the years ended
September 30, 1997 and 1995. Taxes attributable to securities gains
approximated $3,000 for the year ended September 30, 1996.
NOTE 8 - DEPOSIT INSURANCE EXPENSE
The Company was affected by the undercapitalization of the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
On September 30, 1996, the President signed legislation which required federally
insured institutions such as the Company to pay a one-time assessment of $0.657
per $100 of deposits held by the institution at March 31, 1995 to bring the SAIF
to the required 1.25% reserve level.
The special assessment required the Bank to record an additional liability of
$485,803, at September 30, 1996 which reduced net income for the year ended
September 30, 1996 by approximately $321,000 after applicable income taxes.
NOTE 9 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financial needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and interest-rate caps and
floors written in connection with variable rate loans the Company has
originated. Those instruments involve, to varying degrees, elements of credit
and interest-rate risk in excess of the amount recognized in the statement of
financial position. The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit is represented by the contractual notional amount of those
instruments. The Company uses the same credit policies in making commitments as
it does for on-balance sheet instruments.
As of September 30, 1997, the Company had commitments to make loans at market
rates of $2,696,000. Of these commitments, $1,371,000 had fixed rates ranging
from 7.38% to 8.13%, and $1,325,000 had variable rates. The commitment period
ranged from 30 to 90 days. As of September 30, 1996, the Company had commitments
to make loans at market rates of $2,351,000. Since loan commitments may expire
without being used, the amount does not necessarily represent future cash
commitments.
- --------------------------------------------------------------------------------
(Continued)
63.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 10 - PROFIT SHARING
The Company provides a 401(k) profit sharing plan for all eligible employees.
Employees are eligible to participate in the plan if they have been employed by
the Company for one-half year and have attained age twenty and one-half.
Generally, employees can defer up to 10% of their compensation into the plan,
not to exceed $9,500 for 1997 and 1996. The Company can make a matching
discretionary contribution equal to a percentage of up to 6% of the employee's
salary reduction. The Company may also make special discretionary contributions
equal to a percentage of the employee's compensation.
The expense related to the profit sharing plan was $13,365, $32,026 and $30,758
for the years ending September 30, 1997, 1996 and 1995, respectively.
NOTE 11 - EMPLOYEE STOCK OWNERSHIP PLAN
Effective January 1, 1996, the Company established an Employee Stock Ownership
Plan ("ESOP") for the benefit of employees 21 and older and who have completed
at least one year of service and 1,000 hours of work. Contributions under the
ESOP are conditioned upon the ESOP being qualified under Sections 401 and 501 of
the Internal Revenue Code of 1986, as amended (the "Code").
To fund the plan, the ESOP borrowed $1,630,970 from the company for the purposes
of purchasing 163,097 shares of stock at $10 per share in the conversion.
Principal and interest payments on the loan are due in annual installments which
began December 31, 1996, with the final payments of principal and interest being
due and payable at maturity on December 31, 2013. Interest is payable during the
term of the loan at a fixed rate of 8.25%. The loan is collateralized by the
shares of the company's common stock purchased with the proceeds. As the Bank
periodically makes contributions to the ESOP to repay the loan, shares will be
allocated to participants on the basis of the ratio of each years principal and
interest payments to the total of all principal and interest payments.
- --------------------------------------------------------------------------------
(Continued)
64.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 11 - EMPLOYEE STOCK OWNERSHIP PLAN (Continued)
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 $239,249 for 1997.
The ESOP shares were as follows at September 30, 1997:
Allocated shares 9,594
Shares committed to be released 7,196
Unreleased shares 146,307
---------------
Total ESOP shares 163,097
==============
Fair value of unreleased shares $ 2,523,796
==============
NOTE 12 - STOCK OPTION AND INCENTIVE PLAN
On May 28, 1997, the Incentive Plan Committee of the Board of Directors granted
options to purchase 112,128 shares of common stock at an exercise price of
$14.00 to certain officers and directors of the Bank and Company. One-fifth of
the options awarded become first exercisable on each of the first five
anniversaries of the date of grant. The option period expires 10 years from the
date of grant. There were no options exercisable at September 30, 1997. In
addition, 91,743 shares of authorized but unissued common stock are reserved for
which no options have been granted.
For options granted during 1997, the fair value at the grant date was $3.83. The
exercise price of $14.00 per share equaled the market price at the date of
grant. The fair value of options granted during the year are estimated using the
following information: risk-free interest rate 6.67%, expected life of 7 years,
expected volatility of stock price of 8.4% and expected dividends of 1.5% per
year.
The proforma impact on net income and earnings per share for the options granted
is as follows for the year ended September 30, 1997:
As reported Proforma
----------- --------
Net income $ 1,526,023 $ 1,507,127
Primary earnings per share $ .75 $ .74
Fully diluted earnings per share .74 .73
In future years, the proforma effect is expected to increase as additional
options are granted.
- --------------------------------------------------------------------------------
(Continued)
65.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 13 - RECOGNITION AND RETENTION PLAN
A Recognition and Retention Plan ("RRP") was approved by the shareholders of the
Company and the Board of Directors on May 28, 1997. The RRP is being used as a
means of providing directors and certain key employees of the Bank with an
ownership interest in the Company in a manner designed to reward and retain such
directors and key employees. The Company contributed $1,270,735 to enable the
RRP to purchase 81,549 shares in the open market during the year ended September
30, 1997. The Board granted 43,222 shares to directors, officers and employees
on May 28, 1997. The shares vest at a rate of 20% per year on the anniversary
date of the grant. Compensation expense, which is based on the cost of the
shares, was $84,716 for the year ended September 30, 1997.
NOTE 14 - RESTRICTIONS ON RETAINED EARNINGS AND
CAPITAL REQUIREMENTS
Related to its conversion from a mutual to stock savings and loan association,
the Bank established a liquidation account which was equal to its total net
worth as of the date of the latest balance sheet appearing in the final
conversion prospectus. The liquidation account will be maintained for the
benefit of eligible depositors who continue to maintain their accounts at the
Bank after the Conversion. The liquidation account will be reduced annually to
the extent that eligible depositors have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. The Bank may not pay dividends that would reduce
shareholders' equity below the required liquidation account balance.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory actions that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about the Bank's components, risk weightings and other factors. At September 30,
1997, management believes the Company and the Bank are in compliance with all
regulatory capital requirements. Based on the Bank's computed regulatory capital
ratios, the Bank is considered well capitalized under Section 38 of the Federal
Deposit Insurance Act at September 30, 1997.
- --------------------------------------------------------------------------------
(Continued)
66.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 14 - RESTRICTIONS ON RETAINED EARNINGS AND
CAPITAL REQUIREMENTS (Continued)
At September 30, 1997 and 1996, the Bank's actual capital levels (in thousands)
and minimum required levels were:
Minimum Required
Minimum Required To Be Well Capitalized
For Capital Under Prompt Corrective
Adequacy Purposes Action Regulations
Actual ---------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
1997
- ----
Total capital
(to risk weighted assets) $ 14,372 28.63% $ 4,016 8.00% $ 5,020 10.00%
Tier 1 (core) capital
(to risk weighted assets) $ 14,266 28.42% $ 2,008 4.00% $ 3,012 6.00%
Tier 1 (core) capital
(to adjusted total assets) $ 14,266 13.89% $ 3,082 3.00% $ 5,137 5.00%
Tangible Capital
(to adjusted total assets) $ 14,266 13.89% $ 1,541 1.50% N/A N/A
1996
- ----
Total capital
(to risk weighted assets) $ 11,537 27.25% $ 3,387 8.00% $ 4,233 10.00%
Tier 1 (core) capital
(to risk weighted assets) $ 11,441 27.03% $ 1,693 4.00% $ 2,540 6.00%
Tier 1 (core) capital
(to adjusted total assets) $ 11,441 12.40% $ 2,767 3.00% $ 4,612 5.00%
Tangible capital
(to adjusted total assets) $ 11,441 12.40% $ 1,384 1.50% N/A N/A
As of September 30, 1997, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum risk-based, Tier 1 risk based and Tier 1 leverage
ratios as set forth in the table. No conditions or events have occurred
subsequent to September 30, 1997 that management believes would change the
Bank's capital category.
- --------------------------------------------------------------------------------
(Continued)
67.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Federal regulations limit all capital distributions, including cash dividends,
by savings banks. The regulation establishes a tiered system of restrictions,
with the greatest flexibility afforded to thrifts which are both
well-capitalized and given favorable qualitative examination ratings.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND SHORT-TERM INVESTMENTS: For those short-term instruments, the carrying
amount is a reasonable estimate of fair value.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES: For investment and mortgage-backed
securities, fair values are based on quoted market prices or dealer quotes.
LOANS: The fair value of loans is estimated by discounting future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
DEPOSIT LIABILITIES: The fair value of demand deposits and savings accounts is
the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated by discounting future cash
flows using the rates currently offered for deposits of similar remaining
maturities.
FEDERAL HOME LOAN BANK ADVANCES: The fair value of Federal Home Loan Bank
Advance is estimated by discounting future cash flows using the rates currently
offered for similar borrowings of similar remaining maturities.
ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE: For these assets and
liabilities, the carrying amount is a reasonable estimate of fair value.
OFF BALANCE SHEET COMMITMENTS: The fair value of off balance sheet commitments
to extend credit is not material.
- --------------------------------------------------------------------------------
(Continued)
68.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following table shows the estimated fair value at September 30, 1997 and
1996 and the related carrying value of financial instruments:
1997 1996
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial Assets:
Cash and cash equivalents $ 4,400,450 $ 4,400,000 $ 4,695,277 $ 4,695,000
Investment securities 4,996,139 4,999,000 500,000 500,000
Mortgage-backed securities 12,106,557 12,529,000 14,214,475 14,450,000
Loans, net 84,285,038 84,550,000 70,786,851 69,968,000
FHLB Stock 833,800 834,000 777,700 778,000
Accrued interest receivable 445,461 445,000 293,046 293,000
Financial Liabilities:
Demand and savings
deposits (19,699,276) (19,699,000) (20,791,197) (20,791,000)
Time deposits (57,673,693) (57,744,000) (59,039,638) (59,063,000)
Federal Home Loan Bank
advances (1,000,000) (1,000,000)
Accrued interest payable (33,193) (33,000) (31,295) (31,000)
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Company to have
disposed of such items at September 30, 1997 the estimated fair values would
necessarily have been achieved at that date, since market values may differ
depending on various circumstances. The estimated fair values at September 30,
1997 should not necessarily be considered to apply at subsequent dates.
Other assets and liabilities of the Company may have value, but are not included
in the above disclosures, such as property and equipment. Also, nonfinancial
instruments typically not recognized in these financial statements nevertheless
may have value, but are not included in the above disclosures. These include,
among other items, the estimated earnings power of core deposit accounts, the
earnings potential of loan servicing rights, the value of a trained work force,
customer goodwill and similar items.
- --------------------------------------------------------------------------------
(Continued)
69.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 16 - PARENT COMPANY
Condensed financial information of Delphos Citizens Bancorp, Inc. (parent
company only) follows:
Condensed Balance Sheet
September 30, 1997
------------------
Assets
Cash and due from banks $ 752,028
Investment securities held to maturity 4,996,139
Investment in bank subsidiary 14,268,455
Loans to bank subsidiary 8,535,031
Accrued interest receivable 164,724
-----------------
Total assets $ 28,716,377
=================
Shareholders' equity $ 28,716,377
=================
Statement of Income
Period November 20,1996 (inception of Company)
through September 30, 1997
--------------------------
Dividend from subsidiary bank $ 7,000,000
Interest on deposits in subsidiary bank 100,492
Interest on investment securities 185,322
Interest on loans to subsidiary bank 109,931
-----------------
Total interest and dividend income 7,395,745
Other expenses 30,723
Income before federal income tax and equity
in undistributed net income of bank
subsidiary 7,365,022
Federal income tax expense 30,000
-----------------
Income before equity in undistributed net
income of bank subsidiary 7,335,022
Equity in undistributed net income of
bank subsidiary (5,928,239)
-----------------
Net income $ 1,406,783
=================
- --------------------------------------------------------------------------------
(Continued)
70.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 16 - PARENT COMPANY (Continued)
Condensed statement of Cash Flows
Period November 20,1996 (inception of Company)
through September 30, 1997
--------------------------
Cash flows from operating activities:
Net income $ 1,406,783
Undistributed net income of subsidiaries 5,928,239
Other (174,925)
-----------------
Net cash from operating activities 7,160,097
Cash flows from investing activities:
Purchase of investment security held to maturity (4,985,938)
Net increase in loans to subsidiary bank (8,535,031)
Injection of capital into subsidiary bank (8,310,158)
------------------
Net cash used in investing activities (21,831,127)
Cash flows from financing activities:
Net proceeds from sale of stock 18,172,858
Purchase treasury stock (2,749,800)
------------------
Net cash from financing activities 15,423,058
Net increase in cash and cash equivalents 752,028
Cash and cash equivalents at beginning of year -
-----------------
Cash and cash equivalents at end of year $ 752,028
=================
- --------------------------------------------------------------------------------
(Continued)
71.
DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 17 - QUARTERLY FINANCIAL DATA (Unaudited)
The following is a consolidated summary of quarterly information:
Quarter Ended
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
(Dollars in thousands, except per share data)
1997
----
Interest income $ 1,753 $ 1,934 $ 1,959 $ 1,992
Net interest income 759 1,040 1,035 1,032
Provision for loan losses 3 3 3 3
Net income 197 497 449 468
Earnings per share:
Primary $ 0.04 $ 0.27 $ 0.24 $ 0.20
Fully diluted 0.04 0.27 0.24 0.19
1996
----
Interest income $ 1,653 $ 1,662 $ 1,678 $ 1,704
Net interest income 653 653 689 706
Provision for loan losses - - - 2
Net income 186 278 290 (110)
Earnings per share N/A N/A N/A N/A
The loss in the fourth quarter of 1996 was substantially due to the SAIF
assessment which reduced net income for the quarter ended September 30, 1996
by approximately $321,000 after applicable income taxes.
- --------------------------------------------------------------------------------
72.
Item 9. Changes in and Disagreements With Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure.
---------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
- -------------------------------------------------------------
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on January 28, 1998
on pages 5 and 6. Gary Ricker, who is an executive officer who is not a
director, joined the Bank in 1987 as Secretary and Treasurer. He is also a Loan
Officer for the Bank. He is 43 years old.
Item 11. Executive Compensation.
- ---------------------------------
The information relating to executive compensation is incorporated by
reference to the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on January 28, 1998, on pages 8 through 16 (excluding
the Report of the Compensation Committee on pages 8 through 9 and the Stock
Performance Graph on page 10).
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------------------------------------------------------------------------
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on January 28,
1998, on pages 3 and 5 through 6.
Item 13. Certain Relationships and Related Transactions.
- ---------------------------------------------------------
The information relating to certain relationships and related
transactions is incorporated by reference to the Registrant's Proxy Statement
for the Annual Meeting of Stockholders to be held on January 28, 1998 on
page 16.
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.
73
(b) Reports on Form 8-K Filed During the Quarter Ended September
30, 1997
None
(c) Exhibits Required by Securities and Exchange Commission
Regulation S-K:
3.1 Certificate of Incorporation of Delphos Citizens
Bancorp, Inc. (1)
3.2 Bylaws of Delphos Citizens Bancorp, Inc. (1)
4.0 Stock Certificate of Delphos Citizens Bancorp,
Inc. (1)
10.1 Form of Employment Agreement between Citizens Bank of
Delphos and the President and Chief Executive
Officer (1)
10.2 Form of Employment Agreement between Delphos Citizens
Bancorp, Inc. and The President and Chief Executive
Officer (1)
10.3 1997 Stock-Based Incentive Plan (2)
21.0 Subsidiary information is incorporated herein by
reference to "Part I - Subsidiary Activities."
23.0 Consent of Crowe, Chizek and Company LLP (filed
herewith)
27.0 Financial Data Schedule (filed herewith)
(b) Report on Form 8-K
None.
- --------------
(1) Incorporated herein by reference from the Exhibits to the Registration
Statement on Form S-1, as amended, filed on August 22, 1997, Registration
No. 333-10639.
(2) Incorporated by reference from the Registrant's Proxy Statement for the
Registrant's 1997 Annual Meeting of Stockholders filed with the
Commission on April 16, 1997.
74
CONFORMED SIGNATURES
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
DELPHOS CITIZENS BANCORP, INC.
By: /s/ Joseph R. Reinemeyer
________________________________
Joseph R. Reinemeyer
Dated: December 18, 1997 Chairman of the Board, President,
and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons in the capacities
and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Joseph R. Reinemeyer December 18, 1997
__________________________
Joseph R. Reinemeyer Chairman of the Board, President and
Chief Executive Officer
(Principal Executive and
Accounting Officer)
/s/ Nancy C. Rumschlag December 18, 1997
__________________________
Nancy C. Rumschlag Vice President and Director
/s/ P. Douglas Harter December 18, 1997
__________________________
P. Douglas Harter Director
/s/ Robert L. Dillhoff December 18, 1997
__________________________
Robert L. Dillhoff Director
/s/ David Roach December 18, 1997
__________________________
David Roach Director
75