UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period ended December 31, 1998
Commission File Number 333-10639
DELPHOS CITIZENS BANCORP, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 34-1840187
- -------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
114 East 3rd Street, Delphos, Ohio 45833
----------------------------------------
(Address of principal executive offices)
(419) 692-2010
--------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the issuer was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date.
Class: Outstanding at January 31, 1999
Common stock, $0.01 par value 1,755,991 common shares
1
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DELPHOS CITIZENS BANCORP, INC.
FORM 10-Q
Quarter ended December 31, 1998
Part I - Financial Information
Page
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition as of December 31,
1998 and September 30, 1998 ...................................... 3
Consolidated Statements of Income for the three months ended
December 31, 1998 and 1997........................................ 4
Consolidated Statements of Comprehensive Income for the three months
ended December 31, 1998 and 1997.................................. 5
Condensed Consolidated Statements of Cash Flows for the three
months ended December 31, 1998 and 1997........................... 6
Notes to Consolidated Financial Statements ....................... 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 13
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ........................................................ 16
Part II - Other Information
OTHER INFORMATION..................................................... 17
SIGNATURES ........................................................... 18
2
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PART I. FINANCIAL INFORMATION
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
- --------------------------------------------------------------------------------
December 31, September 30,
1998 1998
---- ----
ASSETS
Cash and due from banks $ 1,248,449 $ 1,193,373
Interest-bearing deposits in other banks 1,567,945 424,953
----------- -----------
Cash and cash equivalents 2,816,394 1,618,326
Mortgage-backed securities available for sale 3,658,575 4,600,317
Mortgage-backed securities held to maturity 8,233,550 9,004,455
Loans receivable, net 103,646,124 98,485,733
Federal Home Loan Bank stock 938,400 921,600
Premises and equipment 687,560 656,229
Accrued interest receivable 518,114 505,510
Other assets 44,290 108,615
----------- -----------
Total assets $120,543,007 $115,900,785
============ ============
LIABILITIES
Deposits $79,926,763 $79,074,391
Federal Home Loan Bank Advances 13,000,000 10,000,000
Escrow accounts 436,180 266,287
Accrued interest payable 36,823 38,682
Accrued expenses and other liabilities 680,987 461,527
----------- -----------
Total liabilities 94,080,753 89,840,887
----------- -----------
SHAREHOLDERS' EQUITY
Preferred Stock, authorized 1,000,000 shares, no shares
issued and outstanding
Common stock, $.01 par value, 4,000,000 shares
authorized, 2,047,631 shares issued 20,476 20,476
Additional paid-in capital 19,991,321 19,968,236
Retained earnings, substantially restricted 14,502,380 14,166,061
Treasury stock (291,640 shares) (5,637,646) (5,637,646)
Obligation under employee stock ownership plan (1,343,152) (1,367,136)
Unearned recognition and retention plan (1,053,262) (1,087,120)
Unrealized loss on securities available for sale, net (17,863) (2,973)
----------- ----------
Total shareholders' equity 26,462,254 26,059,898
----------- ----------
Total liabilities and shareholders' equity $120,543,007 $115,900,785
============ ============
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See accompanying notes to financial statements.
3
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PART I. FINANCIAL INFORMATION
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three Months Ended
December 31,
------------
1998 1997
---- ----
Interest income
First mortgage loans $1,851,994 $1,674,398
Consumer and other loans 56,818 33,612
Mortgage-backed securities 202,886 294,645
FHLB stock dividends 16,841 15,237
Interest bearing deposits in banks 12,977 42,974
---------- ---------
Total interest income 2,141,516 2,060,866
---------- ---------
Interest expense
Deposits 952,443 968,899
FHLB advances 151,265 18,909
---------- ---------
Total interest expense 1,103,708 987,808
Net interest income 1,037,808 1,073,058
Provision for loan losses 3,000 3,000
---------- ---------
Net interest income after provision for loan losses 1,034,808 1,070,058
---------- ---------
Non-interest income
Service charges and fees 146,882 75,206
Other non-interest income 11,654 14,147
---------- ---------
Total non-interest income 158,536 89,353
---------- ---------
Non-interest expense
Compensation and benefits 263,796 252,574
Occupancy and equipment 20,703 19,683
Deposit insurance 12,951 12,372
Franchise taxes 57,470 57,058
Other non-interest expense 157,095 144,577
---------- ---------
Total non-interest expense 512,015 486,264
---------- ---------
Income before income tax 681,329 673,147
Income tax expense 239,650 273,405
---------- ---------
Net income $ 441,679 $ 399,742
========== =========
Earnings per share:
Basic $ .29 $ .23
========== ==========
Diluted $ .28 $ .23
========== ==========
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See accompanying notes to financial statements.
4
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DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
December 31,
------------
1998 1997
---- ----
Net income $ 441,679 $ 399,742
Other comprehensive income, net of tax
Unrealized gain (loss) on securities:
Unrealized gains/(losses) arising during
the period (14,890) 4,147
---------- ---------
Comprehensive income $ 426,789 $ 403,889
========== =========
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See accompanying notes to financial statements.
5
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DELPHOS CITIZENS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended
December 31,
------------
1998 1997
---- ----
Net cash from operating activities $ 799,724 $ 665,192
++
Cash flows from investing activities
Proceeds from principal payments on mortgage-
backed securities available for sale 919,182 12,525
Proceeds from principal payments on mortgage-
backed securities held to maturity 770,905 5,501,969
Loan originations net of principal payment on loans (5,163,391) (2,092,073)
Purchases of premises and equipment (45,258)
----------- ----------
Net cash used in investing activities (3,518,562) 3,422,421
----------- ----------
Cash flows from financing activities
Net change in deposits 852,372 572,006
Net increase in mortgage escrow funds 169,893 156,746
Net FHLB advance proceeds (repayments) 3,000,000 (1,000,000)
Cash dividends (105,359) (116,742)
Purchase of treasury stock (250,250)
----------- ----------
Net cash from financing activities 3,916,906 (638,240)
----------- ----------
Net change in cash and cash equivalents 1,198,068 3,449,373
Cash and cash equivalents at beginning of period 1,618,326 4,400,450
----------- ----------
Cash and cash equivalents at end of period $ 2,816,394 $7,849,823
=========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 1,105,567 $ 984,956
Taxes 10,702 160,000
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See accompanying notes to financial statements.
6
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DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: These interim financial statements are prepared without
audit and reflect all adjustments which, in the opinion of management, are
necessary to present fairly the financial position of Delphos Citizens Bancorp,
Inc. (Company) and its sole subsidiary, Citizens Bank of Delphos (Bank) at
December 31, 1998, and its results of operations and cash flows for the periods
presented. All such adjustments are normal and recurring in nature. The
accompanying financial statements do not purport to contain all the necessary
financial disclosures required by generally accepted accounting principles that
might otherwise be necessary in the circumstances. The annual report for the
Company for the year ended September 30, 1998, contains financial statements and
related notes which should be read in conjunction with the accompanying
unaudited consolidated financial statements.
Effective November 20, 1996, Citizens Federal Savings & Loan Association,
(Association) converted from a federally chartered mutual savings and loan
association to a federally chartered stock savings bank (Citizens Bank of
Delphos) with the concurrent formation of a holding company (Delphos Citizens
Bancorp, Inc.). The conversion was accomplished through an amendment of the
Association's articles of incorporation and the sale of the Company's common
stock in an amount equal to the pro forma market value of the Association after
giving effect to the conversion.
Consolidation Policy: The consolidated financial statements include the accounts
of the Company and the Bank. All significant intercompany transactions and
balances have been eliminated.
Industry Segment Information: The Company is engaged in the business of banking
with operations conducted through its office located in Delphos, Ohio. The
Company originates and holds primarily residential and consumer loans to
customers throughout the Allen and Van Wert County area in Northwest Ohio. The
Company's primary deposit products are interest-bearing checking and
certificates of deposit. There are no branch operations.
Use of Estimates in Preparation of Financial Statements: In preparing financial
statements, management must make estimates and assumptions. These estimates and
assumptions affect the amounts reported for assets, liabilities, revenues and
expenses as well as affecting the disclosures provided. Future results could
differ from current estimates.
Areas involving the use of management's estimates and assumptions primarily
include the allowance for loan losses, the realization of deferred tax assets,
fair value of certain securities and the determination and carrying value of
impaired loans.
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(Continued)
7
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DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: The Company 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 shareholders' equity, net of tax. Gains or
losses on dispositions are based on net proceeds and the adjusted carrying
amount of securities sold, using the specific identification method.
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 Company's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the collateral and current economic conditions.
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued and unpaid, and income is subsequently recognized only to the
extent that cash payments are received until, in management's judgment, the
borrower demonstrates the ability to make periodic interest payments in which
case the loan is returned to accrual status.
In accordance with SFAS No.114, certain 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.
Allocations which require an increase in the allowance for loan losses are
reported as a provision for loan losses charged to operations.
Management analyzes loans on an individual basis and classifies a loan as
impaired when an analysis of the borrower's operating results and financial
condition indicates that underlying cash flows are not adequate to meet its debt
service requirements. Often this is associated with a delay or shortfall in
payments of 30 days or more. Smaller balance homogeneous loans are
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(Continued)
8
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DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 considered for 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 December 31, 1998 or September 30, 1998 allowance for loan losses to prior
periods.
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 Company's
historical prepayment experience.
Other Real Estate: Other real estate owned is recorded at the lower of cost or
fair value, less estimated costs to sell. Any reduction in fair value is
reflected in a valuation allowance account established by a charge to income.
Costs incurred to carry the real estate are charged to expense.
Premises and Equipment: Land is carried at cost. Buildings, furniture and
fixtures, and equipment are carried at cost, less accumulated depreciation.
Buildings, furniture and fixtures, and equipment are depreciated using
straight-line and accelerated methods over the estimated useful lives of the
respective assets, which range from five to forty years.
Income Taxes: The Company follows the liability method in accounting for income
taxes. The liability method provides that deferred tax assets and liabilities
are recorded based on the difference between the tax basis of assets and
liabilities and their carrying amounts for financial reporting purposes,
referred to as "temporary differences."
Statement of Cash Flows: For purposes of this statement, cash and cash
equivalents are defined to include the Company's cash on hand, due from banks
and interest-bearing deposits in other banks. The Company reports net cash flows
for customer loan transactions, deposit transactions and interest-bearing
deposits made with other financial institutions.
Earnings Per Share: On March 3, 1997, the Financial Accounting Standards Board
(FASB) issued SFAS No. 128, "Earnings Per Share," which is effective for
financial statements beginning with the quarter ended December 31, 1997. SFAS
No. 128 simplifies the calculation of earnings per share (EPS) by replacing
primary EPS with basic EPS. It also requires dual presentation of basic EPS and
diluted EPS for entities with complex capital structures. Basic EPS includes no
dilution and is computed by dividing income available to common shareholders by
the weighted-
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(Continued)
9
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DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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average common shares outstanding for the period. Diluted EPS reflect the
potential dilution of securities that could share in earnings, such as stock
options, warrants or other common stock equivalents.
Basic earnings per common share for the three months ended December 31, 1998 and
1997 was based on earnings for the three months then ended, divided by the
weighted average number of common shares outstanding for the period. Diluted
earnings per common share represents the additional dilution related to the
stock options. The basis and diluted weighted average shares outstanding was
1,548,696 and 1,568,931, respectively for the three months ended December 31,
1998. The basic and diluted weighted average shares outstanding was 1,725,638
and 1,746,382, respectively for the three months ended December 31, 1997.
- --------------------------------------------------------------------------------
(Continued)
10
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DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The carrying values and estimated fair values of investment and mortgage-backed
securities are summarized as follows:
December 31, 1998
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
---- ----- ---- -----
Mortgage-backed securities
available for sale
Ginnie Mae Certificates $ 644,577 $ 13,481 $ 658,058
Fannie Mae Certificates 3,041,062 $ 40,545 3,000,517
----------- ---------- --------- -----------
3,685,639 13,481 40,545 3,658,575
Mortgage-backed securities
held to maturity:
Ginnie Mae Certificates 8,137,254 283,985 8,421,239
Freddie Mac Certificates 96,296 3,380 99,676
----------- ---------- --------- -----------
8,233,550 287,365 8,520,915
----------- ---------- --------- -----------
Total mortgage-backed
securities $11,919,189 $ 300,846 $ 40,545 $12,179,490
=========== ========== ========= ===========
September 30, 1998
------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
---- ----- ---- -----
Mortgage-backed securities
available for sale:
Ginnie Mae Certificates $ 690,113 $ 21,140 $ 711,253
Fannie Mae Certificates 3,914,708 $ 25,644 3,889,064
----------- ---------- --------- -----------
4,604,821 21,140 25,644 4,600,317
Mortgage-backed securities
held to maturity:
Ginnie Mae Certificates 8,896,968 359,445 9,256,413
Freddie Mac Certificates 107,487 4,874 112,361
----------- ---------- --------- -----------
9,004,455 364,319 9,368,774
----------- ---------- --------- -----------
Total mortgage-backed
securities $13,609,276 $ 385,459 $ 25,644 $13,969,091
=========== ========== ========= ===========
There were no sales of mortgage-backed securities during the three months ended
December 31, 1998 or 1997.
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(Continued)
11
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DELPHOS CITIZENS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
December 31, September 30,
1998 1998
---- ----
Real estate loans
One- to four-family $92,705,594 $87,613,784
Multi-family 1,857,288 1,880,756
Commercial real estate 6,567,907 6,958,869
Construction and land 5,829,755 6,119,065
----------- ----------
106,960,544 102,572,474
Less:
Mortgage loans in process (5,578,257) (6,215,469)
Net deferred loan origination fees (44,574) (51,075)
----------- ----------
101,337,713 96,305,930
----------- ----------
Consumer and other loans
Manufactured homes 107,413 113,623
Home equity loans 1,224,160 1,061,317
Unsecured loans 228,415 268,197
Other consumer loans 877,653 863,100
----------- ----------
2,437,641 2,306,237
Less: Non-mortgage loans in process (7,870) (8,074)
----------- ----------
2,429,771 2,298,163
----------- ----------
Less: Allowance for loan losses (121,360) (118,360)
----------- ----------
$103,646,124 $98,485,733
============ ===========
Activity in the allowance for loan losses is summarized as follows:
Three months ended
December 31,
------------
1998 1997
Balance at beginning of period $118,360 $106,360
Provision charged to income 3,000 3,000
Charge-offs - -
-------- -------
Balance at end of period $121,360 $109,360
======== ========
As of and for the periods ended December 31, 1998 and September 30, 1998, there
were no impaired loans.
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12
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DELPHOS CITIZENS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The following discussion compares the financial condition of Delphos Citizens
Bancorp, Inc. (Company) and its sole subsidiary Citizens Savings Bank (Bank) at
December 31, 1998 to September 30, 1998 and the results of operations for the
three months ended December 31, 1998 and 1997. This discussion should be read in
conjunction with the interim financial statements and footnotes included herein.
FINANCIAL CONDITION
Total assets as of December 31, 1998 were $120.54 million compared with $115.90
million at September 30, 1998. Cash and cash equivalents increased $1.20 million
to $2.82 million at December 31, 1998 compared to $1.62 million at September 30,
1998. Net loans receivable increased $5.16 million from $98.49 million at
September 30, 1998 to $103.65 million at December 31, 1998. The increase was
primarily due to the increase in one- to four-family real estate loans.
At December 31, 1998, the Company's mortgage-backed securities portfolio was
comprised of Ginnie Mae, Fannie Mae and Freddie Mac fixed and adjustable rate
securities. The net unrealized gain on these securities totaled $260 thousand at
December 31, 1998. Approximately 31% of the mortgage-backed securities portfolio
was classified as available for sale. The remainder of the mortgage-backed
securities portfolio was classified as held to maturity as the Company does not
anticipate the need to sell these securities due to the Company's liquidity
position and ability to obtain alternative sources of funds through the use of
Federal Home Loan Bank (FHLB) borrowing. Management's strategy emphasizes
investment in mortgage-backed securities guaranteed by U.S.
government agencies in order to minimize credit risk.
Loans receivable increased $5.16 million, or 5.2%, from $98.49 million at
September 30, 1998 to $103.65 million at December 31, 1998. The increase was
primarily due to the increase in one- to four-family real estate loans which
grew $5.09 million, or 5.8% during the period.
Deposits increased $852 thousand, or 1.1%, from $79.07 million at September 30,
1998 to $79.93 million at December 31, 1998. The borrowings from the FHLB
totaled $13.0 million at December 31, 1998, an increase of $3.0 million from
September 30, 1998. Management has increased its use of FHLB advances as an
alternative source of funds in order to continue to meet loan demand and greater
leverage the capital of the company.
Shareholders equity totaled $26.46 million at December 31, 1998, an increase of
$400 thousand from the $26.06 million at September 30, 1998. Equity as a
percentage of assets decreased slightly from 22.48% at September 30, 1998 to
21.95% at December 31, 1998.
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(Continued)
13
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DELPHOS CITIZENS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
Net income increased $42,000 from $400,000 for the quarter ended December 31,
1997 to $442,000 for the same period in 1998. The 1998 increase was primarily
due to the $69,000 increase in non-interest income which was partially offset by
the $35,000 decline in net interest income and the $26,000 increase in
non-interest expense.
Net interest income decreased $35,000, or 3.3%, during the period ended December
31, 1998 as compared to the same period in 1997. The net interest margin
decreased from 4.1% for the three months ended December 31, 1997 to 3.5% for the
three months ended December 31, 1998. The decrease in net interest income and
net interest margin was primarily due to the decrease in yields on interest
earning assets which was partially offset by the increase in interest earning
assets in excess of the increase in interest bearing liabilities. In addition,
the decline in net interest margin is due to the use of higher cost FHLB
advances to fund loan growth. The ratio of interest earning assets to interest
bearing liabilities increased from 126.3% at December 31, 1997 to 127.0% at
December 31, 1998. The increase in loan interest income was partially offset by
a reduction in interest income from mortgage-backed securities due to the
decrease in the average balance of mortgage-backed securities during the 1998
period as compared to the 1997 period, as management used the paydowns in
mortgage-backed securities to partially fund loan growth. Interest expense
increased in the three months ended December 31, 1998 compared to the same
period in 1997, due to the use of FHLB advances to fund loan growth. The
interest expense on deposits decreased slightly from 1997 to 1998 due to a
decrease in the rates paid on deposits.
A provision for loan losses of $3,000 was recorded for both the quarters ended
December 31, 1998 and 1997, respectively, based on management's assessment of
risk factors affecting the allowance for loan losses. The allowance for loan
losses was approximately .12% of loans, net of deferred and unearned income, as
of December 31, 1998 and September 30, 1998. Management believes the allowance
for loan loss is adequate to absorb potential losses; however, future additions
to the allowance may be necessary based on changes in economic conditions.
Service charges and fee income increased $72,000 from $75,000 for the quarter
ended December 31, 1997 to $147,000 for the same period in 1998. Non-interest
expense increased $26,000, or 5.3%, for the quarter ended December 31, 1998
compared to the same period in 1997, primarily due to increases in compensation
and benefits expense and other non-interest expense. Compensation and benefits
increased $11,000 or 4.44% for the three months ended December 31, 1998 compared
to the same period in 1997 primarily due to inflationary salary and benefit
adjustments.
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(Continued)
14
<PAGE>
DELPHOS CITIZENS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
LIQUIDITY
Federally insured banks are required to maintain minimum levels of liquid
assets. The Bank is currently required to maintain an average daily balance of
liquid assets of at least 4% of the sum of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less. At
December 31, 1998, the Bank was in compliance with this requirement with a
liquidity ratio of 15.7%. Management considers this liquidity position adequate
to meet its expected needs for the foreseeable future.
CAPITAL RESOURCES
Savings institutions insured by the Federal Deposit Insurance Corporation are
required by federal law to meet three regulatory capital requirements. If a
requirement is not met, regulatory authorities may take legal or administrative
actions, including restrictions on growth or operations or, in extreme cases,
placing the institution in receivership or conservatorship.
The following table presents the Bank's compliance with its capital requirements
at December 31, 1998:
(Dollars in thousands)
Tangible Capital Core Capital Risk Based Capital
---------------- ------------ ------------------
Amount % Amount % Amount %
------ - ------ - ------ -
Actual $ 12,894 10.7% $ 12,894 10.7% $ 13,015 20.5%
Required 1,808 1.5 3,617 3.0 5,067 8.0
---------- ------ ----------- ------ ---------- ------
Excess $ 11,086 9.2% $ 9,277 7.7% $ 7,948 12.5%
========== ====== =========== ====== ========== ======
The Bank's tangible and core capital consists solely of shareholders' equity.
Risk based capital consists of core capital plus general loan loss allowances
less certain assets required to be deducted.
At December 31, 1998 the Bank was considered well capitalized under Prompt
Corrective Action Regulations.
YEAR 2000
The Year 2000 issue is the result of many computer programs being written using
two digits rather than four to define an applicable year. The Company's
hardware, data-driven automated equipment, or computer programs that have date
sensitive software, may recognize a date using "00" as the year 1900 rather than
the year 2000. This faulty recognition could result in a
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(Continued)
15
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DELPHOS CITIZENS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
system failure or miscalculation causing disruptions of operations, including,
among other things, a temporary inability to process transactions or engage in
normal business activities.
The Company has conducted a comprehensive review of all of its information
technology and non information technology systems to identify potential Year
2000 problems and is in the process of testing hardware and software for
compliance. The Company has identified mission-critical applications. An
application, system or vendor is considered mission critical if it is vital to
the successful continuance of core business activity or is an application that
interfaces with a mission-critical system. The Company evaluates its Year 2000
preparedness based on the guidelines issued by the Federal Financial
Institutions Examination Council (FFIEC) outline. The following 5 phases were
identified by the FFIEC: Awareness, Assessment, Renovation, Validation and
Implementation. At December 31, 1998, the Awareness and Assessment phases have
been completed. The Company is in various stages of Renovation, Validation and
Implementation on those applications or systems identified as mission critical.
Year 2000 compliance testing for the Company's primary outsourced information
systems application was completed during August, 1998. Based on this testing,
management believes that this system is year 2000 ready.
The Company is currently developing contingency plans and anticipates completion
some time in early 1999. The Company anticipates that all systems will be Year
2000 compliant by mid year 1999 either through the modification of existing
hardware and software or through the purchase of new hardware and software. The
company currently anticipates that it will spend approximately $60,000 related
to Year 2000 issues. At this time, management does not believe that there will
be a significant negative impact to earnings due to this issue. The Year 2000
problem could have a material impact on the operation of the Company if not
properly addressed, but management anticipates that the problem will be resolved
and thus will hot have a significant impact on the Company's delivery of
products and services, or its core operations.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts are
forward looking statements that are subject to certain risks and uncertainties.
When used herein, the terms "anticipates", "plans", "expects", "believes", and
similar expressions as they relate to the Company or its management are intended
to identify such forward looking statements. The Company's actual results,
performance or achievements may materially differ from those expressed or
implied in the forward looking statements. Risks and uncertainties that could
cause or contribute to such material differences include, but are not limited
to, general economic conditions, interest rate environment, competitive
conditions in the financial services industry, changes in law, governmental
policies and regulations, and rapidly changing technology affecting financial
services.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in information regarding quantitative
and qualitative disclosures about market risk as of December 31, 1998 from the
information as of September 30, 1998, which was disclosed in the Company's 1998
Form 10-K.
16
<PAGE>
DELPHOS CITIZENS BANCORP, INC.
FORM 10-Q
Quarter ended December 31, 1997
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Items 1-5 are not applicable.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibits
Exhibit
Number Description
- ------ -----------
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)
27 Financial Data Schedule (2)
(b) No current reports on Form 8-K were filed by the Company during
the quarter ended December 31, 1998.
(1) Incorporated herein by reference from the Exhibits to the Registration
Statement on Form S-1, as amended, filed on August 22, 1996, Registration
No. 333-10639
(2) Filed only in electronic format pursuant to Item 601(b)(27) of Regulation
S-K.
17
<PAGE>
DELPHOS CITIZENS BANCORP, INC.
SIGNATURES
Pursuant to the requirement 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.
(Registrant)
Date: February 12, 1999 /s/ Joseph R. Reinemeyer
------------------------------ ----------------------------
Joseph R. Reinemeyer
President and Chief Executive Officer
(Principal Executive Officer)
18
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the
quarterly report on Form 10-Q for the fiscal quarter and is qualified in its
entirety by reference to such quarterly report.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-1-1998
<PERIOD-END> DEC-31-1998
<CASH> $1,248,449
<INT-BEARING-DEPOSITS> 1,567,945
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,658,575
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<INVESTMENTS-MARKET> 8,520,915
<LOANS> 103,646,124
<ALLOWANCE> 121,360
<TOTAL-ASSETS> 120,543,007
<DEPOSITS> 79,926,763
<SHORT-TERM> 3,000,000
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<LONG-TERM> 10,000,000
0
0
<COMMON> 20,476
<OTHER-SE> 26,441,778
<TOTAL-LIABILITIES-AND-EQUITY> 120,543,007
<INTEREST-LOAN> 1,908,812
<INTEREST-INVEST> 219,727
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<INTEREST-EXPENSE> 1,103,708
<INTEREST-INCOME-NET> 1,037,808
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<EXPENSE-OTHER> 512,015
<INCOME-PRETAX> 681,329
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