<PAGE>
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, 1996
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 $21,486,100, based upon the last sales price as quoted on
The Nasdaq Stock Market for December 16, 1996.
The number of shares of Common Stock outstanding as of December 16, 1996:
2,038,719.
<PAGE>
INDEX
PAGE
PART I
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1. Business........................................... 3
Item 2. Properties......................................... 30
Item 3. Legal Proceedings.................................. 30
Item 4. Submission of Matters to a Vote of Security Holders 30
</TABLE>
PART II
<TABLE>
<CAPTION>
<S> <C> <C>
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters........................ 31
Item 6. Selected Financial Data............................ 31
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 34
Item 8. Financial Statements and Supplementary Data........ 43
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............. 67
</TABLE>
PART III
<TABLE>
<CAPTION>
<S> <C> <C>
Item 10. Directors and Executive Officers of
the Registrant.................................... 67
Item 11. Executive Compensation............................ 68
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................. 74
Item 13. Certain Relationships and Related Transactions.... 75
</TABLE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K......................................... 75
<PAGE>
PART I
ITEM 1. BUSINESS.
- ------------------
GENERAL
Delphos Citizens Bancorp, Inc. (the "Company") completed its initial public
offering of 2,038,719 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
$20,387,190 from this initial public offering before offering expenses of
approximately $520,000. The Company utilized $9,400,000 of the net proceeds of
the initial public offering to acquire all of the issued and outstanding stock
of the Bank. The Company had no operations prior to November 20, 1996, and
accordingly, the results of operations reflect only those 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 and
loan association. 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
3
<PAGE>
banks. In addition, the Bank faces increasing competition for deposits and
other financial products from non-bank institutions such as brokerage firms and
insurance companies in such areas as short-term money market funds, corporate
and government securities funds, mutual funds and annuities. Competition may
also increase as a result of the lifting of restrictions on the interstate
operations of financial institutions.
LENDING ACTIVITIES
Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
conventional first mortgage loans secured by one- to four-family residences. At
September 30, 1996, the Bank had gross loans receivable of $75.7 million, of
which $62.3 million were one- to four-family, residential mortgage loans, or
82.33% of the Bank's gross loans receivable. The remainder of the portfolio
consists of: $1.5 million of multi-family mortgage loans, or 1.99% of gross
loans receivable; $5.0 million of commercial real estate loans, or 6.57% of
gross loans receivable; $4.9 million of construction and land loans, or 6.44% of
gross loans receivable; and consumer loans of $2.0 million, or 2.67% of gross
loans receivable. At that same date, 69.08% of the Bank's loan portfolio had
fixed interest rates. The Bank had no loans held for sale at September 30,
1996.
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.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------------------
1996 1995 1994
------------------- --------------------- ----------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- -------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Real estate:
One- to four-family....... $62,282 82.33% $56,556 83.28% $49,424 83.32%
Multi-family.............. 1,506 1.99 1,521 2.24 1,276 2.15
Commercial real estate.... 4,969 6.57 3,901 5.74 3,706 6.25
Construction and land..... 4,871 6.44 3,808 5.61 3,081 5.19
Consumer................... 2,024 2.67 2,128 3.13 1,833 3.09
------- ------ ------- ------ ------- ------
Gross loans receivable... 75,652 100.00% 67,914 100.00% 59,320 100.00%
====== ====== ======
Undisbursed loan funds.... (4,718) (3,732) (2,728)
Deferred loan origination
fees..................... (53) (47) (49)
Allowance for estimated
loan losses.............. (94) (92) (92)
------- ------- -------
Loans receivable, net...... $70,787 $64,043 $56,451
======= ======= =======
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------
1993 1992
---------------------- ---------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
-------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Real estate:
One- to four-family....... $41,793 82.78% $41,315 84.57%
Multi-family.............. 771 1.53 729 1.49
Commercial real estate.... 3,720 7.37 3,856 7.89
Construction and land..... 2,780 5.51 1,473 3.02
Consumer................... 1,422 2.81 1,478 3.03
------- ------ ------- ------
Gross loans receivable... 50,486 100.00% 48,851 100.00%
====== ======
Undisbursed loan funds.... (2,659) (2,167)
Deferred loan origination
fees..................... (48) (92)
Allowance for estimated
loan losses.............. (32) (29)
------- -------
Loans receivable, net...... $47,747 $46,563
======= =======
</TABLE>
4
<PAGE>
Loan Maturity. The following table shows the contractual maturity of the
Bank's gross loans receivable September 30, 1996. There were no loans held for
sale at September 30, 1996. The table does not include principal prepayments.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
-----------------------------------------------------------------
ONE- TO COMMERCIAL GROSS
FOUR- MULTI- REAL CONSTRUCTION LOANS
FAMILY FAMILY ESTATE AND LAND CONSUMER RECEIVABLE
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Amounts due:
One year or less.................... $12,166 $ 230 $1,201 $ 43 $1,292 $14,932
After one year:
More than one year to three years.. 12,788 209 1,647 140 273 15,057
More than three years to
five years....................... 853 164 -- -- 257 1,274
More than five years to 10 years... 6,033 255 375 -- 151 6,814
More than 10 years to 20 years..... 25,397 448 247 926 51 27,069
More than 20 years................. 5,045 200 1,499 3,762 -- 10,506
------- ------ ------ ------ ------ -------
Total due after
September 30, 1997............... 50,116 1,276 3,768 4,828 732 60,720
------- ------ ------ ------ ------ -------
Gross loans receivable.......... $62,282 $1,506 $4,969 $4,871 $2,024 $75,652
======= ====== ====== ====== ====== =======
</TABLE>
The following table sets forth at September 30, 1996, 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.
<TABLE>
<CAPTION>
DUE AFTER SEPTEMBER 30, 1997
------------------------------
FIXED ADJUSTABLE TOTAL
------------------------------
<S> <C> <C> <C>
(IN THOUSANDS)
Real estate loans:
Residential:
One- to four-family.... $44,035 $ 6,081 $50,116
Multi-family........... 912 364 1,276
Commercial real estate.. 485 3,283 3,768
Construction and land... 4,029 799 4,828
Consumer................... 732 -- 732
------- ------- -------
Total................. $50,193 $10,527 $60,720
======= ======= =======
</TABLE>
5
<PAGE>
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, 1996,
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:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------
1996 1995 1994
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Beginning balance, net.......................... $ 64,043 $ 56,451 $ 47,747
Loans originated:
One- to four-family........................... 17,787 12,116 20,788
Multi-family.................................. 155 423 862
Commercial real estate........................ 2,011 733 862
Construction and land......................... 5,816 5,033 4,788
Consumer...................................... 2,341 2,608 2,068
-------- -------- --------
Total loans originated...................... 28,110 20,913 29,368
Principal prepayments.......................... (20,394) (12,319) (20,534)
Transfer to REO................................ -- -- --
Change in undisbursed loan funds(1)............ (985) (1,004) (69)
Change in unearned origination fees............ 15 2 (1)
Change in allowance for estimated loan losses.. (2) -- (60)
-------- -------- --------
Ending balance, net............................. $ 70,787 $ 64,043 $ 56,451
======== ======== ========
</TABLE>
____________________
(1) Represents change in loans in process from first day to last day of the
period.
6
<PAGE>
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, 1996, one- to
four-family mortgage loans totalled $62.3 million, or 82.33% of total loans at
such date. Of the Bank's mortgage loans secured by one- to four-family
residences, $44.7 million, or 71.69%, 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, $17.6
million, or 28.31%, 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
<PAGE>
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, 1996 totalled $1.5
million or 1.99% of gross loans receivable. The Bank's largest multi-family
loan at September 30, 1996, had an outstanding balance of $231,000, 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, 1996 was a $1.5 million
participation in a $5.0 million mortgage and is secured by a nursing home. The
loan was current and performing in accordance with its contractual terms at
September 30, 1996. At September 30, 1996 the Bank's commercial real estate
loan portfolio was $5.0 million, or 6.57% 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
8
<PAGE>
property. Loan proceeds are disbursed in increments as construction progresses
and as inspections warrant. The Bank requires regular inspections to monitor
the progress of construction. Land loans are determined on an individual basis,
but generally they do not exceed 75% of the actual cost or current appraised
value of the property, whichever is less. The largest construction and land
loan in the Bank's portfolio at September 30, 1996 had a balance of $296,000 and
is secured by a single family residence. This loan is currently performing in
accordance with its terms. At September 30, 1996, the Bank has $4.9 million of
construction and land loans totalling 6.44% 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, 1996, the Bank's
consumer loan portfolio was $2.0 million, or 2.67% 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
9
<PAGE>
classified "Substandard" with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as "Loss" are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss allowance is not warranted. Assets which do not currently expose
the insured institution to sufficient risk to warrant classification in one of
the aforementioned categories but possess weaknesses are required to be
designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, under current OTS policy the Bank is
required to consider establishing a general valuation allowance in an amount
deemed prudent by management. The general valuation allowance, which is a
regulatory term, represents a loss allowance which has been established to
recognize the inherent credit risk associated with lending and investing
activities, but which, unlike specific allowances, has not been allocated to
particular problem assets. When an insured institution classifies one or more
assets, or portions thereof, as "Loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies,
has adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation allowances. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
As a result of the declines in local and regional real estate market values and
the significant losses experienced by many financial institutions, there has
been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions undertaken as part of the examination of
institutions by the OTS and the FDIC. While the Bank believes that it has
established an adequate allowance for estimated loan losses, there can be no
assurance that regulators, in reviewing the Bank's loan portfolio, will not
request the Bank to materially increase its allowance for loan losses, thereby
negatively affecting the Bank's financial condition and earnings. Although
management believes that an adequate allowance for loan losses has been
established, actual losses are dependent upon future events and, as such,
further additions to the level of allowances for estimated loan losses may
become necessary.
The Bank's management reviews and classifies the Bank's assets quarterly
and reports the results of its review to the Board of Directors. The Bank
classifies assets in accordance with the management guidelines described above.
REO is classified as Substandard. At September 30, 1996, the Bank had $208,000
of assets classified as Special Mention, $543,000 of assets classified as
Substandard, and no assets classified as Doubtful or Loss.
10
<PAGE>
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. The Bank generally ceases accruing interest on loans 90
days or more past due. For the years ended September 30, 1996, 1995, 1994, 1993
and 1992, 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 $5,280, $5,780, $15,142, $15,158 and
$10,302, none of which was recognized.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential real estate:
One- to four-family...................... $ 567 $ 226 $ 169 $ 239 $ 253
Multi-family............................. -- -- -- -- --
Commercial real estate..................... 11 117 100 76 76
Construction and land...................... 5 -- -- -- --
Consumer.................................. -- 12 1 4 12
------ ------ ------ ------ -----
Total non-accrual loans.................. 583 355 270 319 341
Loans contractually past due more
than 90 days and accruing interest...... -- -- -- -- --
------ ------ ------ ------ -----
Total non-performing loans............... 583 355 270 319 341
REO, net................................... -- -- -- -- --
------ ------ ------ ------ -----
Total non-performing
assets............................. $ 583 $ 355 $ 270 $ 319 $ 341
===== ===== ===== ===== =====
Allowance for loan losses as a
percent of gross loans receivable.......... 0.13% 0.14% 0.16% 0.06% 0.06%
Allowance for loan losses as a percent of
total non-performing loans(1).............. 16.19 26.02 34.17 10.16 8.43
Non-performing loans
as a percent of gross loans
receivable(1)............................ 0.82 0.55 0.46 0.63 0.70
Non-performing assets
as a percent of total
assets(1).................................. 0.63 0.40 0.33 0.41 0.50
</TABLE>
- ------------------------
(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
<PAGE>
The following table sets forth delinquencies in the Bank's loan portfolio
as of the dates indicated:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996 AT SEPTEMBER 30, 1995
------------------------------------------------- -----------------------------------------------
60-89 DAYS 90 DAYS OR MORE (1) 60-89 DAYS 90 DAYS OR MORE (1)
--------------------- ------------------------- ----------------------- ----------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
---------- --------- -------- ---------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
One- to four-family........ 12 $450 16 $567 2 $ 31 10 $226
Multi-family............... -- -- -- -- -- -- -- --
Commercial real estate..... 2 9 1 11 -- -- 2 117
Construction and land...... -- -- 1 5 -- -- -- --
Consumer................... -- -- -- -- -- -- 1 12
---- ---- ---- ---- ---- ---- ---- -----
Total...................... 14 $459 18 $583 2 $ 31 13 $ 355
==== ==== ==== ==== ==== ==== ==== =====
Delinquent loans to gross
loans receivable.......... .61% .77% .06% .55%
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1994
--------------------------------------------------
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)
<S> <C> <C> <C> <C>
One- to four-family........ 4 $ 92 7 $169
Multi-family............... -- -- -- --
Commercial real estate..... -- -- 1 100
Construction and land...... -- -- -- --
Consumer loans............. 1 1 1 1
---- ---- ---- -----
Total...................... 5 $ 93 9 $ 270
==== ==== ==== =====
Delinquent loans to gross
loans receivable.......... .16% .46%
- --------------------
</TABLE>
(1) Loans 90 days or more past due are included in non-accrual loans. See "Non-
Performing Assets."
12
<PAGE>
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,
1996, the Bank's allowance for loan losses was 0.13% of gross loans receivable
as compared to 0.14% as of September 30, 1995. The Bank had non-accrual loans
of $583,000 and $355,000 at September 30, 1996 and September 30, 1995,
respectively. At September 30, 1996, 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.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
SEPTEMBER 30,
-----------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period................... $ 92 $ 92 $ 32 $ 29 $ 29
Provision for loan losses... 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.... $ 94 $ 92 $ 92 $ 32 $ 29
===== ===== ===== ===== =====
Net charge-offs to average
gross loans receivable... -- -- -- .04% --
</TABLE>
13
<PAGE>
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.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------------------------------------------------
PERCENT OF PERCENT OF PERCENT OF
GROSS LOANS GROSS LOANS GROSS LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO
TO TOTAL GROSS LOANS TO TOTAL GROSS LOANS TO TOTAL GROSS LOANS
AMOUNT ALLOWANCE RECEIVABLE AMOUNT ALLOWANCE RECEIVABLE AMOUNT ALLOWANCE RECEIVABLE
------ --------- ------------ ------ --------- ------------ ------ --------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-
family.................. $ 65 70.66% 82.33% $ 63 68.21% 83.28% $ 62 67.58% 83.32%
Multi-family............... 2 2.18 1.99 3 3.25 2.24 4 4.36 2.15
Commercial real estate..... 5 5.43 6.57 4 5.03 5.74 4 4.75 6.25
Construction and land...... 5 5.43 6.44 6 6.25 5.61 5 5.75 5.19
Consumer................... 5 5.43 2.67 5 5.26 3.13 5 5.20 3.09
Unallocated................ 10 10.87 -- 11 12.00 -- 12 12.36 --
---- ------ ------ ---- ------ ------ ---- ------ ------
Total allowance
for loan losses......... $ 92 100.00% 100.00% $ 92 100.00% 100.00% $ 92 100.00% 100.00%
==== ====== ====== ==== ====== ====== ==== ====== ======
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------------------------
1993 1992
----------------------------------------------------------------
PERCENT OF PERCENT OF
GROSS GROSS
LOANS IN LOANS IN
PERCENT OF EACH PERCENT OF EACH
ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO
TO TOTAL GROSS LOANS TO TOTAL GROSS LOANS
AMOUNT ALLOWANCE RECEIVABLE AMOUNT ALLOWANCE RECEIVABLE
------ --------- ------------ ------ --------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-
family.................. $ 23 70.24% 82.78% $ 20 68.28% 84.57%
Multi-family............... 1 2.78 1.53 1 2.94 1.49
Commercial real estate..... 3 7.75 7.37 2 8.26 7.89
Construction and land...... 1 3.80 5.51 1 3.75 3.02
Consumer................... 1 4.84 2.81 2 5.41 3.03
Unallocated................ 3 10.59 -- 3 11.36 --
Total allowance ---- ------ ------ --- ------ ------
for loan losses......... $ 32 100.00% 100.00% $ 29 100.00% 100.00%
==== ====== ====== ==== ====== ======
</TABLE>
14
<PAGE>
REAL ESTATE OWNED
At September 30, 1996, 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 Bank 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 Bank's lending activities. The Bank's policies generally limit
investments to government and federal agency securities. The Bank's policies
provide the authority to invest in U.S. Treasury and federal agency securities
meeting the Bank's guidelines and in mortgage-backed securities guaranteed by
the U.S. government and agencies thereof. At September 30, 1996, the Bank had
investment and mortgage-backed securities with a carrying value of $14.7 million
and a market value of $14.9 million. At September 30, 1996, the Bank had
$777,000 in mortgage-backed securities classified as available for sale and
$13.9 million in investment and mortgage-backed securities classified as held to
maturity. $6.9 million of the Bank's mortgage-backed securities had adjustable
rates at September 30, 1996.
At September 30, 1996, all of the Bank'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
<PAGE>
The following table sets forth certain information regarding the carrying
and fair values of the Bank's investment securities and mortgage-backed
securities at the dates indicated:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------------
1996 1995 1994
---------------- ------------------- -------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities:
Available for sale:
GNMA certificates............... $ 777 $ 777 -- -- -- --
------- ------- ------- ------- ------- -------
Total available for sale....... 777 777 -- -- -- --
------- ------- ------- ------- ------- -------
Held to maturity:
FHLB debt securities............. 500 500 $ 500 $ 505 $ 500 $ 503
GNMA certificates................ 13,223 13,448 17,133 17,529 17,404 16,803
FHLMC certificates............... 214 225 287 300 351 361
------- ------- ------- ------- ------- -------
Total held to maturity......... 13,937 14,173 17,920 18,334 18,255 17,667
------- ------- ------- ------- ------- -------
FHLB stock....................... 778 778 726 726 570 570
------- ------- ------- ------- ------- -------
Total securities................. $15,492 $15,728 $18,646 $19,060 $18,825 $18,237
======= ======= ======= ======= ======= =======
</TABLE>
16
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Bank's
investment securities and mortgage-backed securities as of September 30, 1996.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
------------------------------------------
MORE THAN ONE
ONE YEAR OR LESS YEAR TO FIVE YEARS
------------------ ---------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
------------------ -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities:
Held to maturity:
FHLB debt securities....... $500 4.42% -- --
----- ------
Total debt securities... $500 4.42 -- --
===== ======
Mortgage-backed securities:
Available for sale:
GNMA.......................
Total available for sale..
Held to maturity:
GNMA....................... -- -- $ 6 8.00%
FHLMC...................... -- -- -- --
----- ------
Total held to maturity.... -- -- 6 8.00
----- ------
Total mortgage-backed
securities.............. -- -- $ 6 8.00%
===== ======
<CAPTION>
AT SEPTEMBER 30, 1996
----------------------------------------------------------------
MORE THAN FIVE
YEARS TO TEN YEARS MORE THAN TEN YEARS TOTAL
---------- -------- --------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Securities:
Held to maturity:
FHLB debt securities....... -- -- -- -- $ 500 4.42%
---- ------- -------
Total debt securities... -- -- -- -- $ 500 4.42
==== ======= =======
Mortgage-backed securities:
Available for sale:
GNMA....................... $ 777 6.97% $ 777 6.97%
------- -------
Total available for sale.. 777 6.97 777 6.97
------- ----- ------- ----
Held to maturity:
GNMA....................... $ 20 8.20% $13,197 7.36 13,223 7.36
FHLMC...................... 175 8.32 39 12.30 214 9.05
---- ------- -------
Total held to maturity.... 195 8.31 13,236 7.37 13,437 7.39
---- ------- -------
Total mortgage-backed $195 8.31% $14,013 7.35% $14,214 7.36%
securities.............. ==== ======= =======
</TABLE>
17
<PAGE>
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, 1996, certificates of deposit constituted 72.6% 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, 1996, the Bank had $41.4 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 6 to the 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:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------
1996 1995 1994
----------- -------- -------
(In thousands)
<S> <C> <C> <C>
Beginning balance...................... $76,664 $72,255 $68,241
Net deposits (withdrawals)............. (819) 809 1,057
Interest credited on deposit accounts.. 3,986 3,600 2,957
------- ------- -------
Ending balance......................... $79,831 $76,664 $72,255
======= ======= =======
</TABLE>
At September 30, 1996, the Bank had approximately $4.5 million in
certificate accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
------------------------------- --------------- ------------
(Dollars
in thousands)
<S> <C> <C>
Three months or less........... $ 794 6.69%
Over three through six months.. 1,490 5.98
Over six through 12 months..... 1,000 5.49
Over 12 months................. 1,211 5.69
------
Total.......................... $4,495 5.92
======
</TABLE>
18
<PAGE>
The following table sets forth the distribution of the Bank's deposit
accounts for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------
1996 1995 1994
-------------------- ---------------------- ---------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Savings and club accounts...... $ 8,275 10.37% $ 8,303 10.83% $ 8,832 12.22%
Money market accounts.......... 7,422 9.30 9,493 12.38 15,387 21.30
NOW accounts................... 5,052 6.33 4,718 6.15 4,148 5.74
Non-interest bearing accounts.. 42 0.04 185 0.24 39 0.06
------- ------ ------- ------ ------- ------
Total......................... 20,791 26.04 22,699 29.60 28,406 39.32
Certificate accounts:
3.00% to 3.99%................. 14 .02 6,636 9.18
4.00% to 4.99%................. 3,109 3.89 3,595 4.69 7,084 9.80
5.00% to 5.99%................. 34,698 43.47 16,711 21.80 22,842 31.61
6.00% to 6.99%................. 17,233 21.59 29,403 38.35 6,903 9.55
7.00% to 7.99%................. 3,966 4.97 4,205 5.49 275 0.38
8.00% to 8.99%................. 34 .04 37 0.05 109 0.16
------- ------ ------- ------ ------- ------
Total certificate accounts.... 59,040 73.96 53,965 70.40 43,849 60.68
------- ------ ------- ------ ------- ------
Total deposits................. $79,831 100.00% $76,664 100.00% $72,255 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
19
<PAGE>
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, 1996.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM SEPTEMBER 30, 1996 AT SEPTEMBER 30,
------------------------------------------------------------------------------ -----------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO MORE THAN
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS FIVE YEARS TOTAL 1995 1994
--------- ---------- ------------ ----------- ----------- ----------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 3.99%............. $ -- $ -- $ -- $ -- $ -- $-- $ -- $ 14 $ 6,636
4.00 to 4.99%.......... 3,109 -- -- -- -- -- 3,109 3,595 7,084
5.00 to 5.99%.......... 19,894 10,574 3,962 60 208 -- 34,698 16,711 22,842
6.00 to 6.99%.......... 14,526 2,088 388 231 -- -- 17,233 29,403 6,903
7.00 to 7.99%.......... 3,907 53 1 5 -- -- 3,966 4,205 275
8.00 to 8.99%.......... -- -- -- -- -- 34 34 37 109
------- ------- ------ ---- ---- --- ------- ------- -------
Total................ $41,436 $12,715 $4,351 $296 $208 $34 $59,040 $53,965 $43,849
======= ======= ====== ==== ==== === ======= ======= =======
</TABLE>
20
<PAGE>
SUBSIDIARY ACTIVITIES
The Bank has one wholly-owned subsidiary, Delphos Service Corporation, which
currently does not conduct any activities.
PERSONNEL
As of September 30, 1996, the Bank had 19 full-time employees and 3 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
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 Bank
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 nondiversified 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
21
<PAGE>
become a multiple savings and loan holding company (if the acquired institution
is held as a separate subsidiary) and would be subject to extensive limitations
on the types of business activities in which it could engage. The HOLA limits
the activities of a multiple savings and loan holding company and its non-
insured institution subsidiaries primarily to activities permissible for bank
holding companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC
Act"), subject to the prior approval of the OTS, and certain activities
authorized by OTS regulation.
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; acquiring or retaining, with certain exceptions,
more than 5% of a nonsubsidiary company engaged in activities other than those
permitted by the HOLA; 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. See "Federal Savings Institution Regulation -- Thrift
Rechartering Legislation."
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 purchased 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 not permissible for a
national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of
22
<PAGE>
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, 1996, the
Bank met each of its capital requirements, in each case on a fully phased-in
basis and it is anticipated that the Bank will not be subject to the interest
rate risk component.
<TABLE>
<CAPTION>
Excess Capital
------------------
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
--------- --------- ------------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible......... $11,441 $1,384 $10,057 12.40% 1.50%
Core (Leverage).. $11,441 $2,768 $ 8,673 12.40% 3.00%
Risk-based....... $11,537 $3,387 $ 8,150 27.25% 8.00%
</TABLE>
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%
23
<PAGE>
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 could have been 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 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 will
be assessed for FICO payment of 1.3 basis points, while SAIF deposits will pay
an estimated 6.5 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.
24
<PAGE>
As a result of the Funds Act, the FDIC recently voted to effectively lower
SAIF assessments to 0 to 27 basis points effective January 1, 1997, a range
comparable to that of BIF members. However, SAIF members will continue to make
the FICO payments described above. The FDIC also lowered the SAIF assessment
schedule for the fourth quarter of 1996 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 1996 was 23 basis points and the premium
paid for this period (excluding the Special SAIF Assessment) was $178,000. 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 requires that the Department of Treasury submit
a report to Congress by March 31, 1999 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 were introduced in the 104th Congress. It is likely that
legislation will be introduced in the new Congress addressing the elimination of
the savings association charter. However, the Bank is unable to predict whether
such legislation would be enacted and, if so, the extent to which the
legislation would restrict or disrupt its operation.
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,
1996, the Bank's limit on loans to one borrower was $1.7 million. At September
30, 1996, the Bank's largest aggregate outstanding balance of loans to one
borrower was $1.5 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, 1996, the Bank maintained 99.1% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test.
25
<PAGE>
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, 1996, 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 net withdrawable deposit accounts and borrowings payable in one year or
less. Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's liquidity and short-term liquidity ratios for September
30, 1996 were 6.60% and 6.59% 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, 1996 totalled $29,000.
Branching. OTS regulations permit nationwide branching by federally chartered
savings institutions to the extent allowed by federal statute. This permits
federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (e.g.., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions
26
<PAGE>
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, 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. Regulation O also places individual and aggregate
limits on the amount of loans the Bank may make to such persons based, in part,
on the Bank's capital position and requires certain board approval procedures to
be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; 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). During fiscal 1996, the Federal
Reserve Board regulations generally required that reserves be maintained against
aggregate transaction accounts as follows: for accounts aggregating $52.0
million or less (subject to
27
<PAGE>
adjustment by the Federal Reserve Board) the reserve requirement is 3%; and for
accounts aggregating greater than $52.0 million, the reserve requirement is $1.6
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 $52.0
million. The first $4.3 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 Company has not been audited
recently by the IRS and therefore the 1993 through 1995 returns are open for
audit. For its 1996 taxable year, the Bank is subject to a maximum federal
income tax rate of 34%.
Bad Debt Reserves. For fiscal years beginning prior to December 31,
1995, thrift institutions which qualified under certain definitional tests and
other conditions of the Internal Revenue Code of 1986 (the "Code") were
permitted to use certain favorable provisions to calculate their deductions from
taxable income for annual additions to their bad debt reserve. A reserve could
be established for bad debts on qualifying real property loans (generally
secured by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for nonqualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which
was enacted on August 20, 1996, requires savings institutions to recapture
(i.e., take into income) certain portions of their accumulated bad debt
reserves. The 1996 Act repeals the reserve method of accounting for bad debts
effective for tax years beginning after 1995. Thrift institutions that would be
treated as small banks are allowed to utilize the Experience Method applicable
to such institutions, while thrift institutions that are treated as large banks
(those generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
Use of the PTI Method had the effect of reducing the marginal rate of
federal tax on the Bank's income to 31.28%, exclusive of any minimum or
environmental tax, as compared to the maximum corporate federal income tax rate
of 35%.
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
28
<PAGE>
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 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. Since the Bank had
previously recorded a deferred tax liability for this tax obligation, as a
result of such recapture, the Bank will incur no additional tax liability.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from the Bank's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the Bank's income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not be so included in the Bank's income.
The amount of additional taxable income triggered by a non-dividend is
an amount that, when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if the Bank makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Banks 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 levies a 65.7-cent
fee on every $100 of thrift deposits held on March 31, 1995. For financial
statement purposes, this assessment must be 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.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986,
as amended (the "Code") imposes a tax on alternative minimum taxable income
("AMTI") at a rate of 20%. The excess of the bad debt reserve deduction using
the percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating
loss carryovers of which the Bank currently has none. AMTI is increased by an
amount equal to 75% of the amount by which the Bank's adjusted current earnings
exceeds its AMTI (determined without regard to the reduction for net operating
losses). The Bank does not expect to be subject to the AMTI.
Dividends Received Deduction and Other Matters. The Company may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Bank will not file a consolidated
tax return, except that if the Company or the Bank own more than 20% of the
stock of a corporation distributing a dividend then 80% of any dividends
received may be deducted.
29
<PAGE>
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
excludable investment (net of any appreciation or goodwill included in such
investment) to total assets multiplied by the net value of the stock. As a
holding company, the Company may be entitled to various other deductions in
computing taxable net worth that are not generally available to operating
companies.
A special litter tax is also applicable to all corporations, including
the Company, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to 0.11% of the first $50,000 of computed Ohio taxable income and
0.22% of computed Ohio taxable income in excess of $50,000. If the franchise
tax is paid on the net worth basis, the litter tax is equal to 0.014% times
taxable net worth.
Delaware Taxation. As a Delaware holding company not earning income
in Delaware, the Company is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
ITEM 2. PROPERTIES
- -------------------
The Bank conducts its business through a single banking office located
at 114 East 3rd Street in Delphos, Ohio. The Company believes that the current
facilities are adequate to meet the present and immediately foreseeable needs of
the Bank and the Company. The Bank's office was constructed in 1955 and was
most recently remodelled in 1992. The Bank's office had a net book value of
$592,000 at September 30, 1996.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
At September 30, 1996, the Bank was not involved in any pending legal
proceedings. However, from time to time, the Bank is involved in legal
proceedings occurring in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
30
<PAGE>
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.
To date, the Company has not paid a dividend to its stockholders. In the
future, the Board of Directors may consider a policy of paying cash dividends on
the Common Stock. As of December 23, 1996, there were 1,455 record holders of
the Common Stock of the Company, which includes shares held in street name.
ITEM. 6 SELECTED FINANCIAL DATA
- --------------------------------
The selected consolidated financial and other data of the Bank set
forth below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Bank and Notes thereto. See Item 8
"Financial Statements and Supplementary Data."
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets................... $92,235 $88,022 $82,613 $77,608 $68,322
Cash and cash equivalents...... 4,695 4,257 6,331 16,969 9,628
Investment securities(1)....... 500 500 500 500 1,000
Mortgage-backed securities(1).. 14,214 17,421 17,755 10,875 9,705
FHLB stock - at cost........... 778 726 570 543 516
Loans receivable, net(2)....... 70,787 64,043 56,451 47,747 46,563
Deposits....................... 79,831 76,664 72,255 68,241 59,973
Total equity................... 11,425 10,799 9,855 8,943 7,972
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSAND)
SELECTED OPERATING DATA:
Interest income.................. $6,697 $6,217 $5,424 $5,382 $5,682
Interest expense................. 3,996 3,601 2,952 3,027 3,391
------ ------ ------ ------ ------
Net interest income.............. 2,701
2,616 2,472 2,355 2,291
Provision for loan losses........ 2 -- 60 25 --
------ ------ ------ ------ ------
Net interest income after
provision for loan losses........ 2,699 2,616 2,412 2,330 2,291
Non-interest income.............. 232 151 261 335 285
Non-interest expense............. 1,954 1,342 1,284 1,230 1,057
------ ------ ------ ------ ------
Income before income taxes....... 977 1,425 1,389 1,435 1,519
Income taxes..................... 333 481 477 464 610
------ ------ ------ ------ ------
Net income....................... $ 644 $ 944 $ 912 $ 971 $ 909
====== ====== ====== ====== ======
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
SEPTEMBER 30,
-------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND
OTHER
DATA(3):
PERFORMANCE RATIOS:
Return on average assets.................. 0.71% 1.10% 1.14% 1.32% 1.36%
Return on average equity.................. 5.59 8.94 9.84 12.77 13.61
Average equity to average assets.......... 12.68 12.30 11.62 10.30 10.01
Equity to total assets at end of period... 12.39 12.27 11.93 11.52 11.67
Average interest rate spread(4)........... 2.51 2.54 2.68 2.75 2.86
Net interest margin(5).................... 3.06 3.10 3.15 3.25 3.49
Average interest-earning assets to
average interest-bearing................ 112.32 112.20 112.61 111.98 112.18
liabilities.....................
Efficiency ratio(6)....................... 66.61 51.29 51.93 52.21 46.12
Non-interest expense to average assets.... 2.15 1.56 1.61 1.67 1.58
REGULATORY CAPITAL RATIOS(7):
Tangible capital.......................... 12.40 12.27 11.93 11.52 11.67
Core capital.............................. 12.40 12.27 11.93 11.52 11.67
Risk-based capital........................ 27.25 27.90 28.45 27.57 26.98
ASSET QUALITY RATIOS:
Non-performing loans as a percent of
gross loans receivable(8)(9)............ 0.82 0.55 0.46 0.63 0.70
Non-performing assets as a percent of
total assets(9)......................... 0.63 0.40 0.33 0.41 0.50
Allowance for loan losses as a percent of
gross loans receivable(8)............... 0.13 0.14 0.16 0.06 0.06
Allowance for loan losses as a percent of
non-performing loans(9)................. 16.19 26.02 34.17 10.16 8.43
</TABLE>
- ----------------------------
(1) The Bank 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, 1994. 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. The Bank generally ceases accruing interest
on loans 90 days or more past due. See "Lending Activities - Non-Performing
Assets" and "- Real Estate Owned."
33
<PAGE>
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, 1996 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, 1996, the Bank's NPV
was $12.4 million (or 13.27% of the market value of portfolio assets) and that,
based upon the assumptions utilized, an immediate increase in market interest
rates of 200 basis points would result in a $4.6 million or 37% decline in the
Bank's NPV and would result in a 447 basis point or 33.61% decline in the Bank's
NPV ratio to 8.81%.
34
<PAGE>
<TABLE>
<CAPTION>
NPV AS % OF PORTFOLIO VALUE
NET PORTFOLIO VALUE OF ASSETS
------------------------------- ----------------------------
CHANGE IN
RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO % CHANGE
- ----------- -------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
400 $ 3,118 $(9,293) (75)% 3.74% (71.82)%
300 5,408 (7,003) (56) 6.30 (52.52)
200 7,794 (4,617) (37) 8.81 (33.61)
100 10,178 (2,233) (18) 11.17 (15.83)
Static 12,411 -- -- 13.27 --
(100) 14,271 1,860 15 14.94 12.58
(200) 15,385 2,974 24 15.90 19.82
(300) 16,120 3.709 30 16.52 24.49
(400) 17,108 4,697 38 17.36 30.80
</TABLE>
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
<PAGE>
Average Balance Sheets. The following table sets forth certain
information relating to the Bank at September 30, 1996, and for the years ended
September 30, 1996, 1995 and 1994. 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 Bank has discontinued accruing interest. The yields and costs include
amortized and deferred fees and costs which are considered adjustments to
yields.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------
AT SEPTEMBER 30, 1996 1996 1995 1994
--------------------- -------------------------- ---------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- ------ --------- -------- ------- --------- -------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
ASSETS:
Interest-earning assets:
Interest-earning 3,110 5.57% $ 3,584 $ 227 6.33% $ 5,658 $ 294 5.20% $11,867 $ 388 3.27%
deposits in other banks
Investment securities, 1,278 5.82 1,255 76 6.06 1,154 60 5.20 1,058 44 4.16
net(1).................
Loans receivable, net 70,787 7.74 67,919 5,228 7.70 59,832 4,587 7.67 52,119 4,000 7.67
(2)....................
Mortgage-backed 14,214 7.36 15,547 1,166 7.50 17,872 1,276 7.14 13,465 992 7.37
securities, net(1)..... ------- ------- ------ ------- ------ ------- ------
Total
interest-earning
assets.............. 89,389 7.57 88,305 6,697 7.59 84,516 6,217 7.36 78,509 5,424 6.91
------
Non-interest-earning assets 2,846 2,505 1,372 1,267
------- ------- ------- -------
Total assets........ $92,235 $90,810 $85,888 $79,776
======= ======= ======= =======
LIABILITIES AND EQUITY:
Interest-bearing
liabilities:
Passbook savings $ 8,275 2.90 $ 8,522 250 2.93 $ 8,582 287 3.34 $ 9,358 329 3.52
accounts...............
Money market accounts... 7,422 3.17 8,464 262 3.10 11,933 400 3.35 19,981 761 3.81
NOW accounts............ 5,052 3.14 4,552 88 1.93 4,470 109 2.44 4,044 116 2.87
Certificate accounts.... 59,040 5.88 57,081 3,396 5.95 49,770 2,805 5.64 36,332 1,746 4.81
------- ------- ------ ------- ------ ------- ------
Total 79,789 5.15 78,619 3,996 5.08 74,755 3,601 4.82 69,715 2,952 4.23
interest-bearing ------ ------
liabilities.........
Non-interest-bearing 1,021 675 572 788
liabilities............... ------- ------- ------- -------
Total liabilities... 80,810 79,294 75,327 70,503
Equity..................... 11,425 11,516 10,561 9,273
------- ------- ------- -------
Total liabilities $92,235 $90,810 $85,888 $79,776
and equity.......... ======= ======= ======= =======
Net interest income before $2,616 $2,472
provision from estimated ====== ======
loan losses............... $2,701
======
Net interest rate spread(3) 2.42% 2.51% 2.54% 2.68%
==== ==== ==== ====
Net interest margin(4)..... 3.06% 3.10% 3.15%
==== ==== ====
Ratio of interest-earning
assets to interest-bearing
liabilities.............. 112.32% 112.20% 112.61%
======= ======= =======
- ------------------------
</TABLE>
(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
<PAGE>
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 Bank'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.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
1996 COMPARED TO 1995 COMPARED TO 1994 COMPARED TO
YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
1995 1994 1993
------------------------------- ------------------------------- -------------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
Due to Due to Due to
-------------------- ---------------------- ------------------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
--------- ------- ------ ------- -------- ----- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
INTEREST-EARNING ASSETS:
Interest-earning deposits
in other banks............ $(123) $ 56 $ (67) $(259) $165 $ (94) $(36) $ 92 $ 56
Investment securities,
net..................... 6 10 16 5 11 16 (13) (12) (25)
Loans receivable, net.... 623 18 641 591 (4) 587 377 (427) (50)
Mortgage-backed (172) 62 (110) 316 (32) 284 232 (171) 61
securities, net......... ----- ---- ----- ----- ---- ------ ---- ----- -----
Total change in 334 146 480 653 140 793 560 (518) 42
interest income...... ----- ---- ----- ----- ---- ------ ---- ----- -----
INTEREST-BEARING
LIABILITIES:
Passbook savings accounts (2) (35) (37) (26) (16) (42) 48 (42) 6
Money market accounts.... (109) (29) (138) (278) (83) (361) 181 (65) 116
NOW accounts............. 2 (23) (21) 11 (18) (7) 9 (25) (16)
Certificate accounts..... 429 162 591 722 337 1,059 (63) (118) (181)
----- ---- ----- ----- ---- ------ ---- ----- -----
Total change in 320 75 395 429 220 649 175 (250) (75)
interest expense..... ----- ---- ----- ----- ---- ------ ---- ----- -----
Net change in net interest $ 14 $ 71 $ 85 $ 224 $(80) $ 144 $385 $(268) $ 117
income.................... ===== ==== ===== ===== ==== ====== ==== ===== =====
</TABLE>
37
<PAGE>
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.
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.
38
<PAGE>
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 30,1 996. 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.
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 OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND
SEPTEMBER 30, 1994
GENERAL
Net income for the year ended September 30, 1995 increased by $32,000,
or 3.5%, to $944,000 from $912,000 for the year ended September 30, 1994. The
increase in net income resulted primarily from a $203,000 increase in net
interest income after provision for loan losses, which more than offset a
$110,000 decrease in non-interest income and a $58,000 increase in non-interest
expense between the two periods.
INTEREST INCOME
Total interest income for the year ended September 30, 1995 increased by
$793,000, or 14.6%, to $6.2 million from $5.4 million for the year ended
September 30, 1994. The increase in total interest income was due primarily to
a $6.0 million increase in the average balance of interest-earning assets and a
45 basis point increase in the average yield on interest-earning assets between
the two years. The increase in the average balance of interest-earning assets
reflected a $7.7 million increase in net loans receivable and a $4.4 million
increase in mortgage-backed securities, net, which more than offset a $6.2
million decrease in the average balance of interest-bearing deposits in other
banks. The increase in the average balance of net loans receivable resulted
primarily from a year-to-year decline in loan refinancing activity as the level
of principal repayments on loans fell by $8.2 million from $20.5 million for the
year
39
<PAGE>
ended September 30, 1994 to $12.3 million for the year ended September 30, 1995.
The increase in the average balance of mortgage-backed securities reflects the
purchase of $10.0 million of mortgage-backed securities during the year ended
September 30, 1994 and $1.0 million of such securities during the year ended
September 30, 1995 as management redeployed funds invested in relatively lower-
yielding interest-earning deposits and other investments into mortgage-backed
securities.
INTEREST EXPENSE
The Bank's total interest expense increased by $650,000, or 22.0%, from
$3.0 million for the year ended September 30, 1994 to $3.6 million for the year
ended September 30, 1995. The increase in total interest expense reflects the
combined effect of a $5.0 million increase in the average balance of interest-
bearing liabilities and a 59 basis point increase in the average cost of
interest-bearing liabilities. A significant factor in the increase in total
interest expense was a $13.4 million increase in the average balance of
certificate accounts, which was responsible for the increase in the Bank's cost
of funds, because certificate accounts generally are a higher-cost source of
funds than other types of deposit accounts and because the average cost of the
Bank's certificate accounts increased by 83 basis points between the two years.
The increase in the average balance of certificate accounts resulted primarily
from promotional activities undertaken by the Bank to retain maturing
certificate accounts. The increase in the average cost of the Bank's certificate
accounts was due primarily to an increase in market interest rates paid on
certificate accounts. The average cost of the Bank's other types of deposit
accounts declined by varying amounts between the two years.
NET INTEREST INCOME
Net interest income increased by $144,000, or 5.8%, from $2.5 million
for the year ended September 30, 1994 to $2.6 million for the year ended
September 30, 1995. The increase reflected an increase in the average balance of
interest-earning assets that was $1.0 million larger than the increase in the
average balance of interest-bearing liabilities between the two years. The
Bank's average interest rate spread declined by 14 basis points from 2.68% to
2.54% and net interest margin declined by 5 basis points from 3.15% to 3.10%
between the year ended September 30, 1994 to the year ended September 30, 1995.
PROVISION FOR LOAN LOSSES
The Bank did not make a provision for loan losses for the year ended
year ended September 30, 1994. The amount of the provision for loan losses, if
any, 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. See "Business of the Bank - Lending Activities - Allowance for
Loan Losses."
NON-INTEREST INCOME
Non-interest income decreased by $110,000, or 42.2%, from $261,000 for
the year ended September 30, 1994 to $151,000 for the year ended September 30,
1995. The decrease in non-interest income was due primarily to a $97,000
decrease in service charges and fee income between the two years, which
reflected a decrease in the volume of activity from the year ended September 30,
1994 to the year ended September 30, 1995.
40
<PAGE>
NON-INTEREST EXPENSE
Total non-interest expense increased by $58,000, or 4.5%, from $1.28
million for the year ended September 30, 1994 to $1.34 million for the year
ended September 30, 1995. The primary component of this increase was a $28,000
increase in compensation and benefits expense with the remaining $30,000 of the
increase spread over several categories of non-interest expense.
INCOME TAXES
The Bank's income tax expense was essentially unchanged for the year
ended September 30, 1994 to the year ended September 30, 1995. The Bank's
effective tax rate was 33.7% for the year ended September 30, 1995, as compared
to 34.4% for the year ended September 30, 1994.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
The Bank's total assets grew by $4.2 million 4.8% from $88.0 million at
September 30, 1995 to $92.2 million at September 30, 1996. The primary
component in the increase in total assets was a $7.8 million increase in real
estate loans, which more than offset the $3.2 million decrease in mortgage-
backed securities. The increase in loans was primarily due to the $5.7 million
increase in one- to four-family residential mortgage loans which reflected a
$5.7 million increase in the one- to four-family loans originated during 1996
compared to 1995. See "Business - Lending Activities - Originations and
Purchase of Loans". Total liabilities increased by $3.6 million, or 4.6%, from
$77.2 million at September 30, 1995 to $80.8 million at September 30, 1996.
Almost the entire increase represented an increase in total deposits, which, in
turn, resulted from a $5.1 million increase in certificate accounts.
Promotional activities undertaken to retain maturing certificate accounts were
the primary factor in the increase in total certificate accounts. Total equity
increased by $627,000 from $10.8 million at September 30, 1995 to $11.4 million
at September 30, 1996, which represented the Bank's net income for the year
ended September 30, 1996, net of the net unrealized loss on securities available
for sale.
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 6.60%, 7.68%, 11.26%, 26.20% and
18.40% for the years ended September 30, 1996, 1995, 1994, 1993, and 1992,
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.
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 $805,000, $904,000
and $968,000 for the years ended September 30, 1996, 1995 and 1994,
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
41
<PAGE>
financing activities consisted primarily of activity in deposit accounts. The
net increase in deposits was $3.2 million, $4.4 million and $4.0 million for the
years ended September 30, 1996, 1995 and 1994, respectively.
At September 30, 1996, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $11.4 million, or 12.4%, of
adjusted total assets, which is above the required level of $1.4 million, or
1.50%; core capital of $11.4 million, or 12.4%, of adjusted total assets, which
is above the required level of $2.8 million, or 3.00%; and risk-based capital of
$11.5 million, or 27.3%, of risk-weighted assets, which is above the required
level of $3.4 million, or 8.00%.
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, 1996, cash
and short-term investments totalled $5.2 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, 1996, the Bank had no advances outstanding from the FHLB and
$777,000 of mortgage-backed securities available for sale.
At September 30, 1996, the Bank had outstanding commitments to originate
mortgage loans of $2.4 million compared to $2.0 million at September 30, 1995.
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, 1996 totalled $41.4 million.
The Bank expects that a substantial portion of the maturing certificate accounts
will be retained by the Bank at maturity. However, if a substantial portion of
these deposits are not retained, the Bank may utilize Federal Home Loan Bank
advances, or raise interest rates on deposits to attract new accounts, which may
result in higher levels of interest expense.
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results in terms of historical dollar amounts without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Bank's operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Bank are monetary in nature. As a result, interest rates have
a greater impact on the Bank's performance than do the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In May 1993, 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
42
<PAGE>
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, 1995. 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 November 1993, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 93-6, "Employers' Accounting For Employee
Stock Ownership Plans" ("SOP 93-6"). SOP 93-6 addresses the accounting for
shares of stock issued to employees by an employee stock ownership plan
("Employee Plan"). SOP 93-6 requires that the employer record compensation
expense in an amount equal to the fair value of shares committed to be released
to employees from the Employee Plan to employees. Assuming shares of Common
Stock appreciate in value over time, the adoption of SOP 93-6 will likely
increase compensation expense relative to the Employee Plan to be established in
the Conversion, as compared with prior guidance which required the recognition
of compensation expense based on the cost of shares acquired by the Employee
Plan. However, the amount of the increase has not been determined as the
expense will be based on the fair value of the shares committed to be released
to employees, which is not yet determinable.
In May 1995, 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, 1995. Adoption of
this statement is not expected to have a material impact on the Bank's net
income or financial condition.
In June 1996 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,
1996, 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.
In November 1995, 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, 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
43
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
Delphos, Ohio
FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS FOR THE YEAR
ENDED SEPTEMBER 30, 1996................................. 45
FINANCIAL STATEMENTS
Statements of Financial Condition........................ 46
Statements of Income..................................... 47
Statements of Retained Earnings.......................... 48
Statements of Cash Flows................................. 49
Notes to Financial Statements............................ 51
REPORT OF INDEPENDENT ACCOUNTANTS FOR THE YEARS
ENDED SEPTEMBER 30, 1995 AND 1994........................ EXHIBIT 99.0
</TABLE>
44
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Citizens Federal Savings
and Loan Association
Delphos, Ohio
We have audited the accompanying statement of financial condition of Citizens
Federal Savings and Loan Association (the Association), Delphos, Ohio, as of
September 30, 1996 and the related statements of income, retained earnings, and
cash flows for the fiscal year then ended. These financial statements are the
responsibility of the Association's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
September 30, 1995 and 1994 financial statements were audited by other auditors
whose report dated November 15, 1995 and July 2, 1996 expressed an unqualified
opinion.
We conducted our audit 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 audit provides 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 Citizens Federal Savings and
Loan Association as of September 30, 1996, and the results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Columbus, Ohio
October 30, 1996
- --------------------------------------------------------------------------------
45
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF FINANCIAL CONDITION
September 30, 1996 and 1995
________________________________________________________________________________
<TABLE>
<CAPTION>
September 30,
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,585,654 $ 334,045
Interest-bearing deposits in other banks 3,109,623 3,923,027
----------- -----------
Total cash and cash equivalents 4,695,277 4,257,072
Investment securities held to maturity
(Estimated fair value of $500,000 in 1996 and
$505,313 in 1995) (Note 2) 500,000 500,000
Mortgage-backed securities available
for sale (Note 3) 777,174
Mortgage-backed securities held to maturity
(Estimated fair value of $13,672,721 in 1996
and $17,828,745 in 1995) (Note 3) 13,437,301 17,420,613
Loans receivable, net (Note 4) 70,786,851 64,042,689
FHLB stock, at cost 777,700 725,600
Accrued interest receivable 293,046 254,738
Premises and equipment (Note 5) 684,754 724,708
Other assets 283,194 97,070
----------- -----------
Total assets $92,235,297 $88,022,490
=========== ===========
LIABILITIES
Deposits (Note 6) $79,830,835 $76,664,442
Escrow accounts 206,180 208,686
Accrued interest payable 31,295 23,536
Accrued expenses and other liabilities 741,541 326,940
----------- -----------
Total liabilities 80,809,851 77,223,604
Commitments and contingencies (Note 9)
RETAINED EARNINGS
Retained earnings - substantially
restricted (Notes 8 and 10) 11,443,182 10,798,886
Unrealized loss on securities available
for sale, net of tax (17,736)
----------- -----------
Total retained earnings 11,425,446 10,798,886
----------- -----------
Total liabilities and retained earnings $92,235,297 $88,022,490
=========== ===========
</TABLE>
________________________________________________________________________________
See accompanying notes to financial statements.
46
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF INCOME
Years ended September 30, 1996 and 1995
________________________________________________________________________________
<TABLE>
<CAPTION>
Years Ended September 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
First mortgage loans $5,128,744 $4,503,056 $3,870,470
Consumer and other loans 99,927 83,978 129,731
Investment securities 23,305 21,133 17,162
Mortgage-backed and related securities 1,166,095 1,276,199 991,911
Dividends on FHLB stock 52,212 39,344 26,945
Interest bearing deposits in banks 227,073 293,674 387,880
---------- ---------- ----------
Total interest income 6,697,356 6,217,384 5,424,099
INTEREST EXPENSE
Deposits (Note 6) 3,996,351 3,601,490 2,951,663
---------- ---------- ----------
NET INTEREST INCOME 2,701,005 2,615,894 2,472,436
Provision for loan losses 2,000 60,000
---------- --------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,699,005 2,615,894 2,412,436
---------- ---------- ----------
NON-INTEREST INCOME
Service charges and fees 193,632 123,623 220,662
Gain on sale of mortgage-backed
securities available for sale 8,259
Other non-interest income 30,580 27,290 40,404
---------- ---------- ----------
Total non-interest income 232,471 150,913 261,066
---------- ---------- ----------
NON-INTEREST EXPENSE
Compensation and benefits (Note 7) 627,107 552,215 524,240
Occupancy and equipment 90,429 88,042 78,784
Deposit insurance (Note 11) 664,031 166,347 156,096
Data processing and maintenance 158,417 146,234 147,898
Franchise taxes 167,262 150,438 134,861
Other non-interest expense 246,684 238,574 242,075
---------- ---------- ----------
Total non-interest expense 1,953,930 1,341,850 1,283,954
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 977,546 1,424,957 1,389,548
Income tax expense (Note 8) 333,250 480,752 477,504
---------- ---------- ----------
NET INCOME $ 644,296 $ 944,205 $ 912,044
========== ========== ==========
</TABLE>
________________________________________________________________________________
See accompanying notes to financial statements.
47
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF RETAINED EARNINGS
Years ended September 30, 1996, 1995 and 1994
________________________________________________________________________________
<TABLE>
<CAPTION>
Unrealized Loss Total
Retained on Securities Retained
Earnings Available for Sale Earnings
-------- ------------------ --------
<S> <C> <C> <C>
Balance, October 1, 1993 $8,942,637 $8,942,637
Net income 912,044 912,044
---------- ----------
Balance, September 30, 1994 9,854,681 9,854,681
Net income 944,205 944,205
---------- ---------
Balance, September 30, 1995 10,798,886 10,798,886
Unrealized loss on securities
available for sale, net of tax
of $9,137 $ (17,736) (17,736)
Net income for the year ended
September 30, 1996 644,296 644,296
---------- ----------- ---------
Balance, September 30, 1996 $11,443,182 $(17,736) $11,425,446
=========== =========== ===========
</TABLE>
________________________________________________________________________________
See accompanying notes to financial statements.
48
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF CASH FLOWS
Years ended September 30, 1996, 1995 and 1994
________________________________________________________________________________
<TABLE>
<CAPTION>
Years Ended September 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 644,296 $ 944,205 $ 912,044
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of deferred loan
origination fees (14,696) (7,237) (24,848)
Premiums and discounts on investment
and mortgage-backed securities (24,772) (21,904) (16,669)
Provision for loan losses 2,000 60,000
Stock dividends from FHLB (52,100) (39,100) (26,800)
Gain on sale of securities (8,259)
Depreciation and amortization of
premises and equipment 50,985 51,570 49,147
Deferred taxes (140,005) 27,340 47,654
Increase (decrease) in:
Accrued interest receivable (38,308) (81,280) (30,142)
Other assets (186,123) (17,424) (6,028)
Interest payable 7,759 (4,367) (7,136)
Accrued expenses and
other liabilities 563,743 52,656 10,332
----------- ----------- ------------
Net cash from operating activities 804,520 904,459 967,554
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Mortgage-backed securities available
for sale
Proceeds from sales 763,370
Proceeds from paydowns 48,379
Investment and mortgage-backed
securities held to maturity
Purchases (990,000) (9,962,011)
Proceeds from calls, maturities
and paydowns 2,400,546 1,285,001 3,055,928
Purchases of FHLB stock (116,700)
Loan originations net of principal
payment on loans (6,731,466) (7,570,243) (8,696,265)
Purchases of premises and equipment (11,031) (19,995) (45,609)
----------- ----------- ------------
Net cash used in investing activities (3,530,202) (7,411,937) (15,647,957)
----------- ----------- ------------
</TABLE>
________________________________________________________________________________
(Continued)
49
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended September 30, 1996, 1995 and 1994
________________________________________________________________________________
<TABLE>
<CAPTION>
Years Ended September 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts $3,166,393 $ 4,409,416 $ 4,014,187
Net increase/(decrease) in mortgage
escrow funds (2,506) 24,640 27,718
---------- ----------- ------------
Net cash from financing activities 3,163,887 4,434,056 4,041,905
---------- ----------- ------------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS 438,205 (2,073,422) (10,638,498)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 4,257,072 6,330,494 16,968,992
---------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,695,277 $ 4,257,072 $ 6,330,494
========== =========== ============
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest on deposits $3,988,592 $ 3,605,857 $ 2,958,799
========== =========== ============
Income taxes $ 455,741 $ 442,954 $ 436,500
========== =========== ============
NONCASH TRANSACTIONS:
Transfer of mortgage-backed
securities to available for sale $1,607,975
==========
</TABLE>
________________________________________________________________________________
See accompanying notes to financial statements.
50
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: Citizens Federal Savings and Loan Association is a federally-
- ------------
chartered mutual thrift association located in Delphos, Ohio. The Association
originates and holds primarily residential and consumer loans to customers
throughout the Allen and Van Wert County area in Northwest Ohio. The
Association'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. Material
estimates that are particularly susceptible to significant change relate 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 Association reports net cash flows for customer loan and
deposit transactions. The Association considers all highly liquid debt
instruments with original maturities when purchased of three months or less to
be cash equivalents.
Securities: The Association classifies 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.
________________________________________________________________________________
(Continued)
51
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
________________________________________________________________________________
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. 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 Association'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 Association 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.
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. The adoption of SFAS No. 114 had no impact on the comparability of
the September 30, 1996 allowance for loan losses to prior periods.
________________________________________________________________________________
(Continued)
52
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan Fees and Costs: Loan 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 Association'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 Association 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."
Concentration of Credit Risk: Most of the Association's business activity is
- ----------------------------
with customers located within northwest Ohio, specifically Allen and Van Wert
counties. Although the Association 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.
NOTE 2 - INVESTMENT SECURITIES
The carrying values and estimated fair values of investment securities held-to-
maturity at September 30 are summarized as follows:
<TABLE>
<CAPTION>
------1996------ ------1995-------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
FHLB debt security $500,000 $500,000 $500,000 $505,313
======== ========= ======== =========
</TABLE>
At September 30, 1996, the Association held one FHLB variable rate bond with a
maturity date of October 1, 1996.
There were no sales of investment securities or transfers between
classifications during the years ended September 30, 1996 and 1995.
________________________________________________________________________________
(Continued)
53
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
________________________________________________________________________________
NOTE 3 - MORTGAGE-BACKED SECURITIES
The carrying values and estimated fair values of mortgage-backed securities are
summarized as follows:
<TABLE>
<CAPTION>
September 30, 1996
---------------------------------------------------------------------
Net Estimated
Principal Unamortized Unearned Amortized Fair
Balance Premiums Discounts Balance Value
------- -------- --------- ------- -----
<S> <C> <C> <C> <C> <C>
HELD TO MATURITY
GNMA certificates $13,331,364 $2,467 $(111,109) $13,222,722 $13,448,064
FHLMC certificates 214,673 (94) 214,579 224,657
----------- ------ --------- ----------- -----------
$13,546,037 $2,467 $(111,203) $13,437,301 $13,672,721
=========== ====== ========= =========== ===========
AVAILABLE FOR SALE
GNMA certificates $ 804,486 $ $ (439) $ 804,047 $ 777,174
=========== ====== ========= =========== ===========
<CAPTION>
September 30, 1995
------------------------------------------------------------------------
Net Estimated
Principal Unamortized Unearned Amortized Fair
Balance Premiums Discounts Balance Value
------- -------- ---------- ------- -----
<S> <C> <C> <C> <C> <C>
HELD TO MATURITY
GNMA certificates $17,266,599 $3,416 $(136,791) $17,133,224 $17,529,325
FHLMC certificates 287,960 (571) 287,389 299,420
----------- ------ --------- ----------- -----------
$17,554,559 $3,416 $(137,362) $17,420,613 $17,828,745
=========== ====== ========= =========== ===========
</TABLE>
________________________________________________________________________________
(Continued)
54
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
________________________________________________________________________________
NOTE 3 - MORTGAGE-BACKED SECURITIES (Continued)
Unrealized gains and losses on mortgage-backed securities are summarized as
follows:
<TABLE>
<CAPTION>
September 30, 1996
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ---- ------ -----
<S> <C> <C> <C> <C>
Held to maturity $ 13,437,301 $ 347,278 $ (111,858) $ 13,672,721
Available for sale 804,047 (26,873) 777,174
------------ --------- ----------
$ 14,241,348 $ 347,278 $ (138,731) $ 14,449,895
============ ========= ========== ============
<CAPTION>
September 30, 1995
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Held to maturity $ 17,420,613 $ 468,851 $ 60,719 $ 17,828,745
============ ========= ========== ============
</TABLE>
During the year ended September 30, 1996, the Association 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.
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 mortgage-backed securities
during the year ended September 30, 1995.
________________________________________________________________________________
(Continued)
55
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
________________________________________________________________________________
NOTE 4 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
September 30,
1996 1995
---- ----
<S> <C> <C>
Real estate loans
One-to four-family $ 62,282,192 $ 56,556,082
Multi-family 1,505,896 1,521,058
Commercial real estate 4,969,530 3,900,984
Construction and land 4,871,181 3,808,903
------------ ------------
73,628,799 65,787,027
Less:
Mortgage loans in process (4,709,495) (3,712,057)
Net deferred loan origination fees (53,316) (47,110)
------------ ------------
68,865,988 62,027,860
------------ ------------
Consumer and other loans
Manufactured homes 63,331 90,005
Home equity loans 1,038,780 1,012,926
Unsecured loans 241,314 237,085
Other consumer loans 680,254 787,619
------------ ------------
2,023,679 2,127,635
Less: Non-mortgage loans in process (8,456) (20,446)
------------ ------------
2,015,223 2,107,189
------------ ------------
Less: Allowance for loan losses (94,360) (92,360)
------------ ------------
$ 70,786,851 $ 64,042,689
============ ============
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
September 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ 92,360 $ 92,360 $ 32,360
Provision charged to income 2,000 - 60,000
Charge-offs - - -
-------- -------- --------
Balance at end of period $ 94,360 $ 92,360 $ 92,360
======== ======== ========
</TABLE>
As of and for the year ended September 30, 1996, there were no impaired loans.
________________________________________________________________________________
(Continued)
56
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
________________________________________________________________________________
NOTE 4 - LOANS RECEIVABLE (Continued)
In the ordinary course of business, the Association 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 Association. Loans to such borrowers, which in the
aggregate exceeded $60,000, are summarized as follows:
<TABLE>
<CAPTION>
September 30,
1996 1995
---- ----
<S> <C> <C>
Balance at beginning of period $ 350,722 $ 104,926
New loans 260,288
Payments (123,090) (14,492)
--------- ---------
Balance at end of period $ 227,632 $ 350,722
========= =========
</TABLE>
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment is summarized as follows:
<TABLE>
<CAPTION>
September 30,
1996 1995
---- ----
<S> <C> <C>
Land and parking lot $ 175,654 $ 175,654
Building and improvements 643,190 643,190
Furniture and equipment 295,454 284,423
---------- ----------
1,114,298 1,103,267
Accumulated depreciation (429,544) (378,559)
---------- ----------
$ 684,754 $ 724,708
========== ==========
</TABLE>
Depreciation expense charged to earnings was $50,985, $51,570 and $49,147 for
the years ended September 30, 1996, 1995 and 1994, respectively.
________________________________________________________________________________
(Continued)
57
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
________________________________________________________________________________
NOTE 6 - DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
September 30,
1996 1995
---- ----
<S> <C> <C>
Demand and NOW accounts $ 5,060,554 $ 4,779,806
Money market 7,421,874 9,492,767
Savings and club accounts 8,308,769 8,426,231
Certificates 59,039,638 53,965,638
----------- -----------
$79,830,835 $76,664,442
=========== ===========
</TABLE>
The aggregate amount of short-term certificates of deposits with a minimum
denomination of $100,000 was approximately $4,495,000 at September 30, 1996 and
$4,150,000 at September 30, 1995.
At September 30, 1996, the scheduled maturities of certificates of deposits are
as follows:
<TABLE>
<S> <C>
1997 $41,436,044
1998 12,714,508
1999 4,350,949
2000 296,361
2001 and thereafter 241,776
-----------
$59,039,638
===========
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
September 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Money market $ 261,944 $ 399,912 $ 760,718
Savings accounts 247,878 285,078 327,246
NOW and demand accounts 87,826 109,163 115,713
Club accounts 1,926 1,865 1,803
Certificates of deposit 3,396,777 2,805,472 1,746,183
---------- ----------- ----------
$3,996,351 $ 3,601,490 $2,951,663
========== =========== ==========
</TABLE>
________________________________________________________________________________
(Continued)
58
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
________________________________________________________________________________
NOTE 7 - PENSION PLAN
The Association participated in a defined benefit pension plan for the benefit
of all eligible employees until the plan was terminated by the Board on May 31,
1994. The insurance policies that were used to fund the plan were cashed in on
their anniversary date, August 1, 1994. The cash value of policies were
transferred to the Huntington National Bank Trust Department where they are
earning interest until the assets can be distributed, upon approval of
termination by the Internal Revenue Service.
During 1994, the Association implemented 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 Association 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 1996 and $9,240 for 1995
and 1994. The Association can make a matching discretionary contribution equal
to a percentage of up to 6% of the employee's salary reduction. The Association
may also make special discretionary contributions equal to a percentage of the
employee's compensation.
The expense related to the profit sharing and defined benefit pension plans was
$32,026, $30,758 and $26,348 for the years ending September 30, 1996, 1995 and
1994, respectively.
NOTE 8 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
September 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current expense $ 473,255 $453,412 $429,850
Deferred expense (140,005) 27,340 47,654
--------- -------- --------
$ 333,250 $480,752 $477,504
========= ======== ========
</TABLE>
________________________________________________________________________________
(Continued)
59
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
________________________________________________________________________________
NOTE 8 - INCOME TAXES (Continued)
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
September 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
Effective tax rate 34.0% 33.7% 34.4%
Tax expense at statutory rate $332,366 $484,485 $472,446
Other 884 (3,733) 5,058
-------- -------- --------
$333,250 $480,752 $477,504
======== ======== ========
</TABLE>
Deferred income taxes are provided for temporary differences. The components of
the Association's net deferred tax liability at September 30, 1996 and 1995, are
as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets
Deferred loan fees $ 11,113 $ 16,017
Non-accrual interest 1,796 1,965
SAIF assessment 165,172
Unrealized loss on investment
securities available for sale 9,137
---------
187,218 17,982
--------- ---------
Deferred tax liabilities
Bad debt deduction (214,903) (215,583)
FHLB stock dividends (123,964) (106,250)
Depreciation expense (17,919) (14,859)
--------- ---------
(356,786) (336,692)
--------- ---------
Net deferred tax liability $(169,568) $(318,710)
========= =========
</TABLE>
No valuation allowance for deferred tax assets was provided at September 30,
1996 and 1995, because the Association 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)
60
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
________________________________________________________________________________
NOTE 8 - INCOME TAXES (Continued)
Retained earnings at September 30, 1996 and 1995, includes approximately
$1,907,000 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, 1996 and
1995 was approximately $648,000.
Taxes attributable to securities gains approximated $2,808 for the year ended
September 30, 1996.
NOTE 9 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Association 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 Association
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 Association'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 Association uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
As of September 30, 1996, the Association had commitments to make loans at
market rates of $2,351,000. Of these commitments, $1,086,000 had fixed rates
ranging from 7.75% to 10.50%, and $1,265,000 had variable rates. The commitment
period ranged from 30 to 90 days. As of September 30, 1995, the Association had
commitments to make loans at market rates of $2,049,000. Since loan commitments
may expire without being used, the amount does not necessarily represent future
cash commitments.
________________________________________________________________________________
(Continued)
61
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
________________________________________________________________________________
NOTE 10 - REGULATORY CAPITAL
The following is a reconciliation of generally accepted accounting principles
(GAAP) capital to regulatory capital for the Association. The following
reconciliation also compares the capital requirements as computed to the minimum
capital requirements for the Association.
<TABLE>
<CAPTION>
September 30, 1996
----------------------------------------
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Total capital per GAAP $11,425 $11,425 $11,425
General valuation allowance and
nondeductible subsidiaries (2) (2) 94
Unrealized loss on securities available
for sale, net of tax 18 18 18
------- ------- -------
Regulatory capital 11,441 11,441 11,537
Regulatory capital requirements 1,384 2,768 3,387
------- ------- -------
Excess capital $10,057 $ 8,673 $ 8,150
======= ======= =======
Total assets $92,235 $92,235
======= =======
Risk-weighted assets $42,333
=======
Capital ratio 12.40% 12.40% 27.25%
======= ======= =======
</TABLE>
________________________________________________________________________________
(Continued)
62
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
________________________________________________________________________________
NOTE 10 - REGULATORY CAPITAL (Continued)
<TABLE>
<CAPTION>
September 30, 1995
----------------------------------
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Total Capital per GAAP $10,799 $10,799 $10,799
General valuation allowance and
nondeductible subsidiaries (2) (2) 92
------- ------- -------
Regulatory capital 10,797 10,797 10,891
Regulatory capital requirements 1,320 2,641 3,122
------- ------- -------
Excess capital $ 9,477 $ 8,156 $ 7,769
======= ======= =======
Total assets $88,022 $88,022
======= =======
Risk-weighted assets $39,031
=======
Capital ratio 12.27% 12.27% 27.90%
======= ======= =======
</TABLE>
NOTE 11 - DEPOSIT INSURANCE EXPENSE
The Association 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 Association 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 Association to record an additional
liability of $485,803, which reduced net income by approximately $321,000 after
applicable income taxes.
________________________________________________________________________________
(Continued)
63
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
________________________________________________________________________________
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Short-term Investments: For those short-term instruments, the carrying
- -------------------------------
amount is a reasonable estimate of fair value.
Investments and Mortgage-Backed Securities: For investment and mortgage-backed
- ------------------------------------------
securities, fair values are based on quoted market prices or dealer quotes.
Loans: The fair value of loans is estimated by discounting future cash flows
- -----
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Deposit Liabilities: The fair value of demand deposits and savings accounts is
- -------------------
the amount payable on demand at the reporting date. The fair value of fixed-
maturity certificates of deposit is estimated by discounting future cash flows
using the rates currently offered for deposits of similar remaining maturities.
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.
The following table shows the estimated fair value at September 30, 1996 and the
related carrying value of the financial statements:
<TABLE>
<CAPTION>
Estimated
Carrying Fair
Value Value
------------- -------------
<S> <C> <C>
Financial Assets:
Cash and cash equivalents $ 4,695,277 $ 4,695,000
Investment securities 500,000 500,000
Mortgage-backed securities 14,214,475 14,450,000
Loans, net 70,786,851 69,968,000
FHLB Stock 777,700 778,000
Accrued interest receivable 293,046 293,046
Financial Liabilities:
Demand and savings deposits (20,791,197) (20,791,000)
Time deposits (59,039,638) (59,063,000)
Accrued interest payable (31,295) (31,000)
</TABLE>
________________________________________________________________________________
(Continued)
64
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
________________________________________________________________________________
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Association to
have disposed of such items at September 30, 1996 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, 1996 should not necessarily be considered to apply at subsequent
dates.
Other assets and liabilities of the Association 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.
NOTE 13 - PLAN OF CONVERSION
On June 11, 1996, the Board of Directors of the Association, subject to
regulatory approval and approval by the members of the Association, unanimously
adopted a Plan of Conversion to convert from a federally chartered mutual
savings and loan association to a federally chartered stock savings bank with
the concurrent formation of a holding company. The conversion is expected to be
accomplished through amendment of the Association's articles of incorporation
and the sale of the holding company's common stock in an amount equal to the pro
forma market value of the Association after giving effect to the conversion. A
subscription offering of the shares of the holding company's common stock is
being offered to the Association's depositors, then to an employee stock benefit
plan and other members. Any shares of the holding company's common stock not
sold in the subscription offering may be offered for sale to the general public.
At the time of conversion, the Association will establish a liquidation account
in an amount equal to its regulatory capital as of the latest practicable date
prior to the conversion at which such regulatory capital can be determined. The
liquidation account will be maintained for the benefit of eligible depositors
who continue to maintain their accounts at the Association 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 Association may not pay dividends that would reduce stockholders'
equity below the required liquidation account balance.
________________________________________________________________________________
(Continued)
65
<PAGE>
CITIZENS FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
________________________________________________________________________________
NOTE 13 - PLAN OF CONVERSION (Continued)
Under Office of Thrift Supervision (OTS) regulations, limitations have been
imposed on all "capital distributions" by savings institutions including cash
dividends. The regulation establishes a three-tiered system of restrictions,
with the greatest flexibility afforded to thrifts which are both well-
capitalized and given favorable qualitative examination ratings by the OTS.
Conversion costs will be deferred and deducted from the proceeds of the shares
sold in the conversion. If the conversion is not completed, all costs will be
charged to expense. No costs have been deferred as of September 30, 1996.
________________________________________________________________________________
66
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
The Bank's independent auditors for the fiscal year ended September 30,
1996 were Crowe, Chizek & Company LLP. Lentol, Violet, Kienitz & Company were
dismissed as the auditors for the fiscal year ended September 30, 1996 on August
20, 1996. Crowe, Chizek & Company LLP, were appointed to replace Lentol, Violet,
Kienitz & Company on August 20, 1996. Lentol, Violet, Kienitz & Company's
reports on the financial statements for the year ended September 30, 1995 did
not contain an adverse opinion or a disclaimer of opinion, and were not
qualified as to uncertainty, audit scope, or accounting principles. The
decision to change accountants was approved by the Board of Directors of the
Bank. During the Bank's two most recent fiscal years, the Bank has not had any
disagreements with the former accountant on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure
which if not resolved to the satisfactions of Lentol, Violet, Kienitz & Company
would have caused it to make a reference to the subject matter of such a
disagreement in connection with its reports.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The following table sets forth certain information regarding the Board
of Directors, and executive officers of the Company.
<TABLE>
<CAPTION>
SHARES OF OWNERSHIP
EXPIRATION OF COMMON STOCK AS A
DIRECTOR TERM AS BENEFICIALLY PERCENT
NAME AGE(1) SINCE(2) DIRECTOR OWNED(3) OF CLASS
- --------------------------- ---------- ------------ ------------------- -------------- -------------
<S> <C> <C> <C> <C>
DIRECTORS
Nancy C. Rumschlag 46 1987 1997 17,824 *
John F. Helmkamp 83 1936 1998 10,000 *
Joseph R. Reinemeyer 47 1977 1998 7,706 *
P. Douglas Harter 49 1969 1999 17,824 *
Robert L. Dillhoff 49 1991 1999 12,150 *
EXECUTIVE OFFICERS WHO ARE
NOT DIRECTORS
Gary G. Ricker 42 -- -- 3,600 *
Stock Ownership of all 69,004 3.4%
Directors and Executive
Officers as a Group (6
persons) 69,104
</TABLE>
- --------------------------
* Represents less than 1.0% of the Company's voting securities.
(1) As of September 30, 1996
(2) Includes years of service as a director of the Bank
(3) Each person or relative of such person whose shares are included herein,
exercise sole (or shared with spouse, relative or affiliate) voting or
dispositive power as to shares reported. Ownership is as of November 20,
1996, the date of completion of the conversion.
67
<PAGE>
BIOGRAPHICAL INFORMATION
DIRECTORS
Joseph R. Reinemeyer is President, Chief Executive Officer and Chairman
of the Board. From 1982, through July, 1996, Mr. Reinemeyer served as Executive
Vice President and Managing Officer of the Bank. Mr. Reinemeyer was an employee
of the Bank from 1975 to 1982, during which time he held various positions. Mr.
Reinemeyer has been a Director of the Bank since 1977 and is a member of the
Loan Committee.
John F. Helmkamp is a Director of the Bank. Mr. Helmkamp was elected to
the Board of Directors in 1936 and served as President and Chairman of the Board
from 1976 through July, 1996. Mr. Helmkamp retired from day-to-day management of
the Bank's affairs after Mr. Reinemeyer became Managing Officer in 1982. Mr.
Helmkamp is a member of the Loan Committee on a rotational basis.
Nancy C. Rumschlag has served as a Director of the Bank since 1987 and
has been Vice President of the Bank since 1991. Ms. Rumschlag serves as a member
of the Loan Committee. Prior to joining the Bank, Ms. Rumschlag managed the H&R
Block office located in Delphos, Ohio.
P. Douglas Harter has served on the Board of Directors of the Bank since
1969. He is also a member of the Loan Committee on a rotational basis. Mr.
Harter is an associate of Harter and Son Funeral Home, located in Delphos, Ohio.
Robert L. Dillhoff was elected a Director of the Bank in 1991 and serves
on the Loan Committee on a rotational basis. Mr. Dillhoff is District Highway
Management Administrator for the Ohio Department of Transportation.
EXECUTIVE OFFICER WHO IS NOT A DIRECTOR
Gary G. Ricker joined the Bank in 1987 as Secretary and Treasurer. Mr.
Ricker also is a loan officer for the Bank.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
DIRECTORS' COMPENSATION
Fee Arrangements. All outside Directors of the Bank are currently paid
an annual retainer of $5,000 and receive a fee of $400 for each regular monthly
Board meeting held. Each director also receives a fee of $400 for each Special
Board meeting held. There were two Special Board meetings for the year ended
December 31, 1995. Outside Director members of the Loan Committee receive a fee
of $100 for each regular meeting attended. From time to time, members of the
Board will perform inspections of real property for which the Board member
receives a fee that ranges from $20 to $30, depending upon the location of the
inspected property. All of the outside directors have received an annual bonus
equal to the average bonus paid to the officers and employees of the Bank for
that year as calculated pursuant to the profit-sharing component of the Bank's
401(k) Plan. The Board of Directors has determined that the outside directors
will not receive such a bonus in future years.
68
<PAGE>
EXECUTIVE COMPENSATION
Cash Compensation. The following table sets forth the cash compensation paid
by the Bank for services rendered in all capacities during the year ended
September 30, 1996, to the chief executive officer. No executive officer of the
Bank received compensation in excess of $100,000 during the year ended
September 30, 1996.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
LONG-TERM COMPENSATION
------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------------------------------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION STOCK AWARDS OPTIONS PAYOUTS COMPENSATION
POSITIONS YEAR SALARY($)(1) BONUS($) ($)(2) ($)(3) (#)(4) ($)(5) ($)(6)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph R. Reinemeyer 1996 $56,400 $ -- $8,140 -- -- -- $4,514
Executive Vice President 1995 52,569 7,670 8,029 -- -- -- 4,404
(chief executive officer)(7)
===================================================================================================================================
</TABLE>
- ------------------------
(1) Under Annual Compensation, the column titled "Salary" includes base salary
only.
(2) "Other Annual Compensation" includes meeting, valuation and inspection fees
received as a Director of the Bank and remuneration for unused "sick
leave." For 1996 and 1995, there were no (a) perquisites over the lesser of
$50,000 or 10% of the individual's total salary and bonus for the year; (b)
payments of above-market preferential earnings on deferred compensation;
(c) payments of earnings with respect to long-term incentive plans prior to
settlement or maturation; (d) tax payment reimbursements; or (e)
preferential discounts on stock.
(3) Does not include awards pursuant to the Stock Programs, which may be
granted in conjunction with a meeting of stockholders of the Company, as
such awards were not earned, vested or granted in fiscal 1995. For a
discussion of the terms of the Stock Programs, see "Stock Programs." For
1996 and 1995, the Bank had no restricted stock plans in existence.
(4) Does not include options, which may be granted in conjunction with a
meeting of stockholders of the Company, as such options were not earned or
granted in 1996. For a discussion of the terms of the grants and vesting
of options, see "Stock Option Plans."
(5) For 1996 and 1995, there were no long-term incentive plans in existence.
(6) Includes $4,514 and $4,405 contributed by the Bank pursuant to the Bank's
401(k) Plan for the years ended September 30, 1996 and 1995, respectively.
(7) Mr. Reinemeyer became President of the Bank on August 1, 1996.
69
<PAGE>
EMPLOYMENT AGREEMENTS
The Bank and the Company intend to enter into employment agreements with
Mr. Reinemeyer (the "Executive"). These agreements are subject to the review
and approval of the OTS and may be amended as a result of such OTS review.
These employment agreements are intended to ensure that the Bank and the Company
will be able to maintain a stable and competent management base after the
Conversion. The continued success of the Bank and the Company depends to a
significant degree on the skills and competence of Mr. Reinemeyer.
The proposed employment agreements provide for a three-year term for Mr.
Reinemeyer. The Bank employment agreements provide that, commencing on the
first anniversary date and continuing each anniversary date thereafter, the
Board of Directors may extend the agreement for an additional year so that the
remaining term shall be three years, unless written notice of non-renewal is
given by the Board of Directors after conducting a performance evaluation of the
Executive. The terms of the Company employment agreements shall be extended on
a daily basis unless written notice of non-renewal is given by the Board of the
Company. The agreements provide that the Executive's base salary will be
reviewed annually. The current base salary for Mr. Reinemeyer as President and
Chief Executive Officer of the Company and President and Chief Executive Officer
of the Bank is $70,000. In addition to the base salary, the agreements provide
for, among other things, participation in stock benefits plans and other fringe
benefits applicable to executive personnel. The agreements provide for
termination by the Bank or the Company for cause as defined in the agreements
at any time. In the event the Bank or the Company chooses to terminate the
Executive's employment for reasons other than for cause, or in the event of
the Executive's resignation from the Bank and the Company upon: (i) failure
to re-elect the Executive to his current offices; (ii) a material change in
the Executive's functions, duties or responsibilities; (iii) a relocation
of the Executive's principal place of employment by more than 25 miles;
(iv) liquidation or dissolution of the Bank or the Company; or (v) a breach of
the agreement by the Bank or the Company, the Executive or, in the event of
death, his beneficiary would be entitled to receive an amount equal to the
remaining base salary payments due to the Executive and the contributions that
would have been made on the Executive's behalf to any employee benefit plans of
the Bank or the Company during the remaining term of the agreement. The Bank
and the Company would also continue and pay for the Executive's life, health
and disability coverage for the remaining term of the Agreement. Upon any
termination of the Executive, the Executive is subject to a one year non-
competition agreement.
Under the agreements, if voluntary or involuntary termination follows a
change in control of the Bank or the Company, the Executive or, in the event of
the Executive's death, his beneficiary, would be entitled to a severance payment
equal to the greater of: (i) the payments due for the remaining terms of the
agreement; or (ii) three times the average of the five preceding taxable years'
annual compensation. The Bank and the Company would also continue the
Executive's life, health, and disability coverage for thirty-six months.
Notwithstanding that both agreements provide for a severance payment in the
event of a change in control, the Executive would only be entitled to receive a
severance payment under one agreement.
Payments to the Executive under the Bank's agreement will be guaranteed by
the Company in the event that payments or benefits are not paid by the Bank.
Payment under the Company's agreement would be made by the Company. All
reasonable costs and legal fees paid or incurred by the Executive pursuant to
any dispute or question of interpretation relating to the Agreements shall be
paid by the Bank or Company, respectively, if the Executive is successful on the
merits pursuant to a legal judgment, arbitration or settlement. The employment
agreements also provide that the Bank and Company shall indemnify the Executive
to the fullest extent allowable under federal and Delaware law, respectively.
In
70
<PAGE>
the event of a change in control of the Bank or Company, the total amount of
payments due under the Agreements, based solely on the current salary of Mr.
Reinemeyer and excluding any benefits under any employee benefit plan which may
be payable, would be approximately $210,000 in the aggregate.
STOCK OPTION PLANS
The Board of Directors of the Company intends to adopt stock-based benefit
plans which would provide for the granting of stock options to eligible
officers, key employees and non-employee directors of the Company and the Bank.
Stock options are intended to be granted under either a separate stock option
plan for officers and employees (the "Incentive Option Plan") and a separate
option plan for non-employee directors (the "Directors' Option Plan")
(collectively, the "Option Plans") or under a single Master Stock-Based Benefit
Plan which would incorporate the benefits and features of the Incentive Option
Plan and Directors' Option Plan. At a meeting of stockholders of the Company
following the Conversion, which under applicable OTS regulations, may be held no
earlier than six months after the completion of the Conversion, the Board of
Directors intends to present the Option Plans or the Master Stock-Based Benefit
Plan to stockholders for approval and has reserved an amount equal to 10% of the
shares of Common Stock issued in the Conversion or 203,872 shares (based upon
the issuance of 2,038,719 shares), for issuance under the Option Plans or the
Master Stock-Based Benefit Plan. OTS regulations provide that, with respect to
stock-based benefit plans adopted within one year after the completion of the
Conversion, no individual officer or employee of the Bank may receive more than
25% of the options granted and non-employee directors may not receive more than
5% individually, or 30% in the aggregate of the options granted.
The stock option benefits provided under the Incentive Option Plan or
Master Stock-Based Benefit Plan will be designed to attract and retain qualified
personnel in key positions, provide officers and key employees with a propriety
interest in the Company as an incentive to contribute to the success of the
Company and reward such employees for outstanding performance. All employees of
the Company and its subsidiaries will be eligible to participate in such plans.
The Incentive Option Plan or Master Stock-Based Benefit Plan will provide for
the grant of: (i) options to purchase the Company's Common Stock intended to
qualify as incentive stock options under Section 422 of the Code ("Incentive
Stock Options"); (ii) options that do not so qualify ("Non-Statutory Stock
Options"); and (iii) Limited Rights (discussed below) which will be exercisable
only upon a change in control of the Bank or the Company. Unless sooner
terminated, the Incentive Option Plan or Master Stock-Based Benefit Plan will be
in effect for a period of ten years from the earlier of adoption by the Board of
Directors or approval by the Company's Stockholders. Subject to stockholder
approval, the Company intends to grant options with Limited Rights under the
Incentive Option Plan or Master Stock-Based Benefit Plan at an exercise price
equal to the fair market value of the underlying Common Stock on the date of
grant. Upon exercise of "Limited Rights" in the event of a change in control,
the employee will be entitled to receive a lump sum cash payment equal to the
difference between the exercise price of the related option and the fair market
value of the shares of common stock subject to the option on the date of
exercise of the right in lieu of purchasing the stock underlying the option. It
is anticipated that all options granted to officers and employees
contemporaneously with stockholder approval of such plans will be intended to be
Incentive Stock Options to the extent permitted under Section 422 of the Code.
Under the Incentive Option Plan or Master Stock-Based Benefit Plan, it is
expected that the Compensation Committee of the Company's Board of Directors
will determine which officers and employees will be granted options and Limited
Rights, whether such options will be incentive or non-statutory stock options,
the number of shares subject to each option, the exercise price of each non-
statutory stock option, whether such options may be exercised by delivering
other shares of Common
71
<PAGE>
Stock and when such options become exercisable. The per share exercise price of
an incentive stock option will be required to be at least equal to the fair
market value of a share of Common Stock on the date the option is granted.
If the Incentive Option Plan or Master Stock-Based Benefit Plan is adopted
in the form described above, an employee will not be deemed to have received
taxable income upon grant or exercise of any Incentive Stock Option, provided
that such shares received through the exercise of such option are not disposed
of by the employee for at least one year after the date the stock is received in
connection with the option exercise and two years after the date of grant of the
option. No compensation deduction would be able to be taken by the Company as a
result of the grant or exercise of Incentive Stock Options, provided such shares
are not disposed of before the expiration of the period described above (a
"disqualifying disposition"). In the case of a Non-Statutory Stock Option and
in the case of a disqualifying disposition of an Incentive Stock Option, an
employee will be deemed to receive ordinary income upon exercise of the stock
option in an amount equal to the amount by which the exercise price is exceeded
by the fair market value of the Common Stock purchased by exercising the option
on the date of exercise. The amount of any ordinary income deemed to be
received by an optionee upon the exercise of a Non-Statutory Stock Option or due
to a disqualifying disposition of an Incentive Stock Option would be a
deductible expense for tax purposes for the Company. In the case of Limited
Rights, upon exercise, the option holder would have to include the amount paid
to him or her upon exercise in his gross income for federal income tax purposes
in the year in which the payment is made and the Company would be entitled to a
deduction for federal income tax purposes of the amount paid.
If the Incentive Option Plan or Master Stock-Based Benefit Plan is adopted
in the form described above, stock options would become vested and exercisable
in the manner specified by the Company, and, if such plans are adopted within
one year following the completion of the Conversion, subject to applicable OTS
regulations, which require that options begin vesting no earlier than one year
from the date of shareholder approval of the Incentive Option Plan or Master
Stock-Based Benefit Plan and thereafter vest at a rate of no more than 20% per
year. Options granted in connection with the Incentive Option Plan or Master
Stock-Based Benefit Plan could be exercisable for three months following the
date on which the employee ceases to perform services for the Bank or the
Company, except that in the event of death or disability, options accelerate and
become fully vested and may be exercisable for up to one year thereafter or such
longer period as determined by the Company. However, any Incentive Stock
Options exercised more than three months following the date the employee ceases
to perform services as an employee shall be treated as a Non-Statutory Stock
Option as described above. In the event of retirement, any unvested stock
options shall be terminated and remain unearned unless the optionee continues to
perform services on behalf of the Bank, the Company or an affiliate, in which
case unvested options would continue to vest in accordance with their original
vesting schedule. If the Incentive Option Plan or Master Stock-Based and
Benefit Plan is adopted in the form described above, in the event of death,
disability or normal retirement, the Company, if requested by the optionee,
could elect, in exchange for vested options, to pay the optionee, or beneficiary
in the event of death, the amount by which the fair market value of the Common
Stock exceeds the exercise price of the options on the date of the employee's
termination of employment.
Under the Directors' Option Plan or Master Stock-Based Benefit Plan
contemplated, the exercise price per share of each option granted may be equal
to the fair market value of the shares of Common Stock on the date the option is
granted. All Options granted to outside directors under the Directors' Option
Plan would be Non-Statutory Stock Options and, if such plan is adopted within
one year following the completion of the Conversion, pursuant to applicable OTS
regulations, would vest and become exercisable commencing one year after the
date of shareholder approval of the Directors Option Plan at
72
<PAGE>
the rate of 20% per year, and would expire upon the earlier of ten years
following the date of grant or one year following the date the optionee ceases
to be a director or consulting director. In the event of the death or
disability of a participant, all previously granted options would immediately
vest and become fully exercisable.
STOCK PROGRAMS
The Company or the Bank intends to establish performance based Stock
Programs as a method of providing non-employee directors, officers and key
employees of the Bank and Company with a proprietary interest in the Company in
a manner designed to encourage such persons to remain with the Bank or the
Company. The benefits intended to be granted under the Stock Programs may be
provided for under either a separate plan for officers and employees and a
separate plan for outside directors or under the Master Stock-Based Benefit Plan
which would incorporate the benefits and features of such separate Stock Program
plans and the previously discussed Stock Option Plans. The Company intends to
present the Stock Programs or Master Stock-Based Benefit Plan for stockholder
approval at a meeting of stockholders, which pursuant to applicable OTS
regulations, may be held no earlier than six months after the completion of the
Conversion.
Subject to stockholder approval, the Bank or the Company expects to
contribute funds to the Stock Programs or Master Stock-Based Benefit Plan to
enable such plans to acquire, in the aggregate, an amount equal to 4% of the
shares of common Stock issued in the Conversion, or 81,549 shares (based upon
the issuance of 2,038,719 shares). These shares would be acquired through open
market purchases by a trustee for the plan or from authorized but unissued
shares. Although no specific award determinations have been made, the Company
anticipates that, if stockholder approval is obtained, it would provide awards
to its directors and employees to the extent permitted by applicable
regulations. OTS regulations provide that, with respect to any such stock-based
benefit plans adopted within one year following the completion of the
Conversion, no individual employee may receive more than 25% of the shares of
any plan and non-employee directors may not receive more than 5% of any plan
individually or 30% in the aggregate for all directors.
The Compensation Committee of the Company's Board of Directors would
administer the Stock Programs or Master Stock-Based Benefit Plan described
above. The Stock Programs or Master Stock-Based Benefit Plan are expected to be
self-administered for grants or allocations made to non-employee directors,
which would not be performance-based. Under the Stock Programs or Master Stock-
Based Benefit Plan, awards would be granted in the form of shares of Common
Stock held by such plans. Awards will be non-transferable and non-assignable.
Allocations and grants to officers and employees under the Stock Programs or
Master Stock-Based Benefit Plan may be made in the form of base grants and
allocations based on performance goals established by the Compensation
Committee. In establishing such goals, the Committee may utilize the annual
financial results of the Company and the Bank, actual performance of the Company
and the Bank as compared to targeted goals such as the ratio of the Company and
the Bank's net worth to total assets, the Company's and the Bank's return on
average assets, or such other performance standard as determined by the
Committee with the approval of the Board of Directors. Performance allocations
would be granted upon the achievement of performance goals and base grants and
performance allocations would vest in annual installments established by the
Committee. Pursuant to applicable OTS regulations, base grants and allocations
granted under a plan adopted within one year following the completion of the
Conversion may commence vesting no sooner than one year after the date of
shareholder approval of the plan and thereafter at the rate of 20% per year.
73
<PAGE>
In the event of death, grants would be 100% vested. In the event of
disability, grants would be 100% vested upon termination of employment of an
officer or employee, or upon termination of service as a director. In the event
of retirement, if the participant continues to perform services on behalf of the
Bank, the Company or an affiliate or, in the case of a retiring director,
continues to perform services, as a consulting director, unvested grants would
continue to vest in accordance with their original vesting schedule until the
recipient ceases to perform such services at which time any unvested grants
would lapse.
When shares become vested in accordance with the Stock Programs or Master
Stock-Based Benefit Plan described above, the participants would recognize
income equal to the fair market value of the Common Stock at that time. The
amount of income recognized by the participants would be a deductible expense
for tax purposes for the Bank and the Company. When shares become vested and
are actually distributed in accordance with the Stock Programs or Master Stock-
Based Benefit Plan, the participants would receive amounts equal to any accrued
dividends with respect thereto. Prior to vesting, shares subject to grants and
shares allocated subject to the achievement of performance and high performance
goals will be voted by the trustee of the Stock Programs or Master Stock-Based
Benefit Plan. Vested shares will be distributed to recipients as soon as
practicable following the day on which they are vested.
In the event that additional authorized but unissued shares are acquired by
the Stock Programs or Master Stock-Based Benefit Plan, the interests of existing
shareholders would be diluted.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------------------------------------------------------------------------
The following table sets forth certain information as to those persons
believed by the Company to be beneficial owners of more than 5% of the Company's
outstanding shares of Common Stock as disclosed in certain reports regarding
such ownership filed with the Company and with the Securities and Exchange
Commission ("SEC") in accordance with Sections 13(d) or 13(g) of the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") by such persons. Other
than those persons listed below, the Company is not aware of any person or
group, as such term is defined in the Exchange Act, that owns more than 5% of
the Common Stock as of September 30, 1996.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER SHARES CLASS
- ------------------------ ---------------------------------------- ----------- ------------
<S> <C> <C> <C>
Common Stock Citizens Federal Savings and Loan 163,097(1) 8.0%
Bank of Delphos
Employee Stock Ownership Plan and Trust ("ESOP")
114 East 3rd Street, Delphos, Ohio 45833
</TABLE>
_____________________
(1) Shares of Common Stock were acquired by the ESOP in the conversion of the
Bank from mutual to stock form and the formation of the Company, which was
completed on November 20, 1996. The ESOP Committee of the Board of Directors
and administers the ESOP. California Central Trust Bank Corporation has been
appointed to corporate trustee for the ESOP.
See Item 10 for information regarding security ownership of management.
74
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Applicable Federal law requires that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features. In
addition, loans made to a director or executive officer in excess of the greater
of $25,000 or 5% of the Bank's capital and surplus (up to a maximum of $500,000)
must be approved in advance by a majority of the disinterested members of the
Board of Directors.
The Bank currently makes loans to executive officers and directors on the
same terms and conditions offered to the general public. The Bank's policy
provides that all loans made by the Bank to its executive officers and directors
be made in the ordinary course of business, on substantially the same terms,
including collateral, as those prevailing at the time for comparable
transactions with other persons and may not involve more than the normal risk of
collectibility or present other unfavorable features. The Bank makes loans to
its other employees which are made on substantially the same terms and
conditions offered to the general public except that employees are eligible to
receive a one time 25 basis point discount on the interest rate offered to the
general public. All loans outstanding at May 31, 1996 to a director or
executive officer of the Bank were made by the Bank in the ordinary course of
business, with no favorable terms and such loans do not involve more than the
normal risk of collectibility or present other unfavorable features.
The Company intends that all transactions in the future between the Company
and its executive officers, directors, holders of 10% or more of the shares of
any class of its common stock and affiliates thereof, will contain terms no less
favorable to the Company than could have been obtained by it in arm's-length
negotiations with unaffiliated persons and will be approved by a majority of
independent outside directors of the Company not having any interest in the
transaction.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
- -------------------------------------------------------------------------
(a)(3) Exhibits
(a) The following exhibits are filed as part of this report:
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 Federal Savings and
Loan 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)
21.0 Subsidiary information is incorporated herein by reference to
"Part I- Subsidiary Activities."
27.0 Financial Data Schedule
99.0 Independent Auditors Report of Lentol, Violet, Kienitz & Company
for the years ended September 30, 1995 and 1994
(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, 1996, Registration
No. 333-10639.
75
<PAGE>
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 26, 1996 President, Chief Executive Officer
---------------- and Director
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 Date Date
---- ----- ----
/s/Joseph R. Reinemeyer December 26, 1996
- ----------------------- -----------------
Joseph R. Reinemeyer President, Chief Executive
Officer and Director
(Principal Executive and
Accounting Officer)
/s/Nancy C. Rumschlag December 26, 1996
- ---------------------- -----------------
Nancy C. Rumschlag Vice President and Director
/s/John F. Helmkamp December 26, 1996
- --------------------- -----------------
John F. Helmkamp Director
/s/P. Douglas Harter December 26, 1996
- ----------------------- -----------------
P. Douglas Harter Director
/s/Robert L. Dillhoff December 26, 1996
- ----------------------- -----------------
Robert L. Dillhoff Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FORM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 1,585,654
<INT-BEARING-DEPOSITS> 3,109,623
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 777,174
<INVESTMENTS-CARRYING> 13,937,301
<INVESTMENTS-MARKET> 14,172,721
<LOANS> 70,881,211
<ALLOWANCE> 94,360
<TOTAL-ASSETS> 92,235,297
<DEPOSITS> 79,830,835
<SHORT-TERM> 0
<LIABILITIES-OTHER> 979,016
<LONG-TERM> 0
0
0
<COMMON> 0<F1>
<OTHER-SE> 11,425,446
<TOTAL-LIABILITIES-AND-EQUITY> 92,235,297
<INTEREST-LOAN> 5,228,671
<INTEREST-INVEST> 1,241,612
<INTEREST-OTHER> 227,073
<INTEREST-TOTAL> 6,697,356
<INTEREST-DEPOSIT> 3,996,351
<INTEREST-EXPENSE> 3,996,351
<INTEREST-INCOME-NET> 2,701,005
<LOAN-LOSSES> 2,000
<SECURITIES-GAINS> 8,259
<EXPENSE-OTHER> 1,953,930
<INCOME-PRETAX> 977,546
<INCOME-PRE-EXTRAORDINARY> 977,546
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 644,296
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<YIELD-ACTUAL> 3.06
<LOANS-NON> 583,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 543,000
<ALLOWANCE-OPEN> 92,000
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 94,000
<ALLOWANCE-DOMESTIC> 84,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 10,000
<FN>
<F1>The Association converted from mutual to stock form on November 20, 1996,
after the end of the fiscal year.
</FN>
</TABLE>
<PAGE>
Exhibit 99.0
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Citizens Federal Savings
and Loan Association
Delphos, Ohio
We have audited the accompanying statements of financial condition of Citizens
Federal Savings and Loan Association (the Association), Delphos, Ohio, as of
September 30, 1995 and 1994, and the related statements of income,
retained earnings, and cash flows for each of the three fiscal years in the
period ended September 30, 1995. These financial statements are the
responsibility of the Association's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Citizens Federal Savings and
Loan Association as of September 30, 1995 and 1994, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended September 30, 1995, in conformity with generally accepted accounting
principles.
/s/ Lentol, Violet, Kienitz & Company
LENTOL, VIOLET, KIENITZ & COMPANY
Lima, Ohio
November 15, 1995,
except for Note 1, as to
which the date is July 2, 1996.
