UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended
For the fiscal year ended September 30, 2000
Commission File No.: 1-12141
DELPHOS CITIZENS BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE 34-1840187
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
114 East 3rd Street, Delphos, Ohio 45833
(Address of principal executive offices)
Registrant's telephone number, including area code: (419) 692-2010
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No ____.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of the Form
10-K or any amendment to this Form 10-K. X
---
The aggregate market value of the voting stock held by non-affiliates
of the registrant, i.e., persons other than the directors and executive
officers of the registrant, was $16,991,181, based upon the last sales
price as quoted on The Nasdaq Stock Market for November 16, 2000.
The number of shares of Common Stock outstanding as of November 16,
2000: 1,584,783.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Joint Proxy Statement/Prospectus for the Annual
Meeting of Shareholders are incorporated herein by reference to Part III of
this Form 10-K.
<PAGE>
<TABLE>
<CAPTION>
INDEX
PART I
PAGE
<S> <C>
Item 1. Business.......................................................................... 3
Item 2. Properties........................................................................ 28
Item 3. Legal Proceedings................................................................. 28
Item 4. Submission of Matters to a Vote of Security Holders............................... 28
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters............. 29
Item 6. Selected Financial Data........................................................... 30
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................ 32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................ 39
Item 8. Financial Statements and Supplementary Data....................................... 41
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................................... 65
PART III
Item 10. Directors and Executive Officers of the Registrant................................ 65
Item 11. Executive Compensation............................................................ 65
Item 12. Security Ownership of Certain Beneficial Owners and Management.................... 65
Item 13. Certain Relationships and Related Transactions.................................... 66
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K...................................................................... 66
</TABLE>
2
<PAGE>
PART I
Item 1. Business.
-----------------
General
Delphos Citizens Bancorp, Inc. (the "Company") completed its
initial public offering of 2,047,631 shares of common stock on November 20,
1996, in connection with the conversion of Citizens Federal Savings and
Loan Association of Delphos, now known as Citizens Bank of Delphos (the
"Bank"). The Company received $20,476,310 from this initial public offering
before offering expenses of $672,482. The Company utilized $9,940,000 of
the net proceeds of the initial public offering to acquire all of the
issued and outstanding stock of the Bank. The Company, as a unitary savings
and loan holding company, is subject to regulation by the Office of Thrift
Supervision (the "OTS"), the Federal Deposit Insurance Corporation (the
"FDIC") and the Securities and Exchange Commission (the "SEC"). The
Company's executive offices are located at the home office of the Bank at
114 East 3rd Street, Delphos, Ohio 45833.
The Bank's principal business is to operate a community-oriented
savings bank. The Bank attracts retail deposits from the general public in
the area surrounding its office and invests those deposits, together with
funds generated from operations, primarily in fixed-rate one- to four-
family residential mortgage loans and investment and mortgage-backed
securities. The Bank invests, on a limited basis, in multi-family mortgage,
commercial real estate, construction and land and consumer loans. The
Bank's revenues are derived principally from interest on its mortgage
loans, and interest and dividends on its investment and mortgage-backed
securities. The Bank's primary sources of funds are deposits and principal
and interest payments on loans and securities.
On August 25, 2000 the Company entered into an Affiliation
Agreement with United Bancshares, Inc., a corporation organized and
existing under the laws of the state of Ohio. Pursuant to the Affiliation
Agreement, subject to many conditions set forth in the Affiliation
Agreement, the Company would merge with and into United Bancshares, with
United Bancshares as the resulting entity ("Merger"). Following
consummation of the Merger, the Bank would be held as a wholly owned
subsidiary of United Bancshares. The Merger is subject to the
satisfaction of many conditions, including but not limited to receipt of
all applicable regulatory approvals and the approval of the shareholders of
each of the Company and United Bancshares.
Market Area and Competition
The Bank's primary deposit gathering area is concentrated in
Delphos and the other communities surrounding its office, while its lending
activities primarily include areas throughout Allen, Putnam and Van Wert
Counties in
Northwestern Ohio. The tri-county area includes the city of Lima, Ohio,
which has a population of approximately 45,000 and is located approximately
15 miles southeast of Delphos in Allen County.
The Bank's market area is located within 250 miles of several of
the largest metropolitan areas in the United States, including, Chicago,
Detroit, Pittsburgh, Cleveland, Cincinnati, and Indianapolis. There are
approximately 150 manufacturing firms located in the tri-county area and
manufacturing accounts for one-third of the employment sector. Wholesale
and retail trade is the second largest employment sector in the tri-county
area, accounting for 24% of employment.
The Bank's primary market area is a competitive market for
financial services and the Bank faces significant competition both in
making loans and in attracting deposits. The Bank faces direct competition
from a number of financial institutions operating in its market area, many
with a state-wide or regional presence, and in some cases, a national
presence. Many of these financial institutions are significantly larger and
have greater financial resources than the Bank. The Bank's competition for
loans comes principally from savings institutions, mortgage banking
companies, commercial banks and credit unions. Its most direct competition
for deposits has historically come from savings institutions and commercial
banks. In addition, the Bank faces increasing competition for deposits and
other financial
3
<PAGE>
products from non-bank institutions such as brokerage firms and insurance
companies in such areas as short-term money market funds, corporate and
government securities funds, mutual funds and annuities. Competition may
also increase as a result of the lifting of restrictions on the interstate
operations of financial institutions.
Lending Activities
Loan Portfolio Composition. The Bank's loan portfolio consists
primarily of conventional first mortgage loans secured by one- to four-
family residences. At September 30, 2000, the Bank had gross loans
receivable of $127.2 million, of which $106.4 million were one- to four-
family, residential mortgage loans, or 83.61% of the Bank's gross loans
receivable. The remainder of the portfolio consists of: $1.9 million of
multi-family mortgage loans, or 1.50% of gross loans receivable; $6.6
million of commercial real estate loans, or 5.20% of gross loans
receivable; $6.9 million of construction and land loans, or 5.45% of gross
loans receivable; and consumer loans of $5.4 million, or 4.24% of gross
loans receivable. At that same date, 86.1% of the Bank's loan portfolio had
fixed interest rates. The Bank had no loans held for sale at September 30,
2000.
The types of loans that the Bank may originate are subject to
federal and state law and regulations. Interest rates charged by the Bank
on loans are affected by the demand for such loans and the supply of money
available for lending purposes and the rates offered by competitors. These
factors are, in turn, affected by, among other things, economic conditions,
fiscal policies of the federal government, the monetary policies of the
Federal Reserve Board and legislative tax policies.
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and as a percentage of the portfolio at the
dates indicated.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ----------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
-------- ------- -------- -------- -------- ------- ------- ------- -------- -------
(Dollars in thousands)
Real estate:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family..... $106,363 83.61% $ 99,540 84.97% $ 87,614 83.54% $73,716 84.10% $62,282 82.33%
Multi-family............ 1,902 1.50 2,276 1.94 1,881 1.79 1,288 1.47 1,506 1.99
Commercial real estate.. 6,621 5.20 6,562 5.60 6,959 6.64 6,273 7.16 4,969 6.57
Construction and land... 6,938 5.45 5,413 4.62 6,119 5.83 3,781 4.31 4,871 6.44
Consumer ............... 5,396 4.24 3,360 2.87 2,306 2.20 2,593 2.96 2,024 2.76
-------- ------- -------- -------- -------- ------- ------- ------- -------- -------
Gross loans receivable.. 127,220 100.00% 117,151 100.00% 104,879 100.00% 87,651 100.00% 75,652 100.00%
====== ====== ====== ====== ======
Undisbursed loan funds.. (4,137) (3,717) (6,224) (3,188) (4,718)
Deferred loan origination
fees................. (30) (28) (51) (72) (53)
Allowance for estimated
loan losses.......... (165) (133) (118) (106) (94)
-------- -------- ------- ------- -------
Loans receivable, net... $122,888 $113,273 $98,486 $84,285 $70,787
======== ======== ======= ======= =======
</TABLE>
4
<PAGE>
Loan Maturity. The following table shows the contractual
maturity of the Bank's gross loans receivable at September 30,
2000. There were no loans held for sale at September 30, 2000.
The table does not include any principal prepayment assumptions.
<TABLE>
<CAPTION>
At September 30, 2000
----------------------------------------------------------------------
One- to Commercial Gross
Four- Multi- Real Construction Loans
Family Family Estate and Land Consumer Receivable
---------- -------- ----------- ------------ ---------- ----------
(In thousands)
Amounts due:
<S> <C> <C> <C> <C> <C> <C>
One year or less....................... $5,870 $723 $1,302 $6,102 $4,773 $18,680
After one year:
More than one year to three years... 6,982 141 2,488 531 214 10,356
More than three years to five
years............................. 1,037 32 123 179 295 1,666
More than five years to 10 years.... 8,096 306 296 17 38 8,753
More than 10 years to 20 years...... 44,817 180 27 -- 76 45,100
More than 20 years.................. 39,561 520 2,385 199 -- 42,665
-------- ------ ------ ------ ------ --------
Total due after September 30,
2001........................... 100,493 1,179 5,319 926 623 108,540
-------- ------ ------ ------ ------ --------
Gross loans receivable........... $106,363 $1,902 $6,621 $6,938 $5,396 $127,220
======== ====== ====== ====== ====== ========
</TABLE>
The following table sets forth at September 30, 2000, the dollar amount
of gross loans receivable contractually due after September 30, 2001, and
whether such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due After September 30, 2001
-------------------------------------
Fixed Adjustable Total
--------- -------------- ----------
(In thousands)
Real estate loans:
Residential:
<S> <C> <C> <C>
One- to four-family.................... $93,852 $6,641 $100,493
Multi-family........................... 1,038 141 1,179
Commercial real estate................... 715 4,604 5,319
Construction and land.................... 876 50 926
Consumer.................................... 623 -- 623
------- ------- --------
Total ............................... $97,104 $11,436 $108,540
======= ======= ========
</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, the majority
of the Bank's loan originations have been fixed-rate mortgage loans. The
Bank's ability to originate loans is dependent upon the relative customer
demand for fixed-rate or adjustable-rate mortgage loans, which is affected
by the current and expected future level of interest rates. The Bank has
not emphasized the origination of adjustable-rate mortgage loans due to the
relatively low demand for such loans in the Bank's primary market area. The
Bank retains for its portfolio all of the mortgage loans that it
originates. At September 30, 2000, there were no loans categorized as held
for sale. In addition, the Bank also emphasizes the origination of
construction loans secured primarily by owner-occupied properties. From
time to time the Bank has participated in loans originated by other
institutions based upon the Bank's investment needs and market
opportunities.
The following tables set forth the Bank's loan originations and
principal repayments for the periods indicated:
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------------------
2000 1999 1998
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Beginning balance, net............................................. $113,273 $ 98,486 $84,285
Loans originated:
One- to four-family........................................... 15,150 36,487 36,092
Multi-family.................................................. 160 917 666
Commercial real estate........................................ 838 3,026 2,762
Construction and land......................................... 9,334 7,857 9,635
Consumer...................................................... 4,661 3,684 1,996
-------- ------- -------
Total loans originated...................................... 30,143 51,971 51,151
Principal repayments............................................ (20,074) (39,652) (33,923)
Transfer to REO................................................. -- (46) --
Change in undisbursed loan funds (1)............................ (420) 2,506 (3,035)
Change in unearned origination fees............................. (2) 23 20
Change in allowance for estimated loan losses................... (32) (15) (12)
-------- -------- -------
Ending balance, net................................................ $122,888 $113,273 $98,486
======== ======== =======
</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, 2000, one-
to four-family mortgage loans totaled $106.4 million, or 83.61% of total
loans at such date. Of the Bank's mortgage loans secured by one- to four-
family residences, $95.5 million or 89.76%, were fixed-rate loans.
The Bank's policy is to originate one- to four-family residential
mortgage loans in amounts up to 80% of the appraised value of the property
securing the loan, up to 85% of the appraised value if the loan is co-
signed by a person approved by the Board of Directors and up to 95% of the
appraised value if private mortgage insurance is obtained. Mortgage loans
originated by the Bank generally include due-on-sale clauses which provide
the Bank with the contractual right to deem the loan immediately due and
payable in the event the borrower transfers ownership of the property
without the Bank's consent. Due-on-sale clauses are an important means of
adjusting the rates on the Bank's fixed-rate mortgage loan portfolio and
the Bank exercises its rights under these clauses. The residential mortgage
loans originated by the Bank are generally for terms to maturity of up to
30 years.
The Bank offers several adjustable rate loan programs with terms
of up to 30 years and interest rates that adjust either annually or every
three years. Of the Bank's mortgage loans secured by one- to four-family
residences, $10.9 million, or 10.24%, had adjustable rates. The Bank's one
year ARM loan has a maximum adjustment limitation of 1.5% per year and a
5.0% lifetime cap on adjustments. The Bank's three-year ARM loan has a
maximum adjustment limitation of 2.0% per change and a 5.0% lifetime cap.
The index for substantially all of the Bank's ARM loans is the Federal Home
Loan Bank System's National Average Mortgage Rate for Previously-Occupied
Homes.
The volume and types of ARM loans originated by the Bank have been
affected by such market factors as the level of interest rates, consumer
preferences, competition and the availability of funds. In recent years,
demand for ARM loans in the Bank's primary market area has been weak due to
the low interest rate environment and consumer preference for fixed-rate
loans. Consequently, in recent years the Bank has not originated a
significant amount of ARM loans as compared to its originations of fixed-
rate loans. The ARM loans offered by the Bank do not provide for initial
deep discount interest rates or for negative amortization. Although the
Bank will continue to offer ARM loans, there can be no assurance that in
the future the Bank will be able to originate a sufficient volume of ARM
loans to constitute a significant portion of the Bank's loan portfolio.
Multi-Family Lending. On a limited basis, the Bank originates
multi-family mortgage loans generally secured by properties located in the
Bank's primary market area. In reaching its decision on whether to make a
multi-family loan, the Bank considers a number of factors including: the
net operating income of the mortgaged premises before debt service and
depreciation; the debt service ratio (the ratio of net operating income to
debt service); and the ratio of loan amount to appraised value. Pursuant to
the Bank's current underwriting policies, a multi-family mortgage loan may
be made in an amount up to 80% of the appraised value of the underlying
property. In addition, the Bank generally requires a debt service ratio of
120%. Properties securing a multi-family loan are appraised by an
independent appraiser.
When evaluating a multi-family loan, the Bank also considers the
financial resources and income level of the borrower, the borrower's
experience in owning or managing similar property, and the Bank's lending
experience with the borrower. The Bank's underwriting policies require that
the borrower be able to demonstrate strong management skills and the
ability to maintain the property from current rental income. The borrower
is required to present evidence of the ability to repay the mortgage and a
satisfactory credit history. In making its assessment of the
creditworthiness of the borrower, the Bank generally reviews the financial
statements, employment and credit history of the borrower, as well
as other related documentation.
7
<PAGE>
Loans secured by multi-family residential properties generally
involve a greater degree of risk than one- to four-family residential
mortgage loans. Because payments on loans secured by multi-family
properties are often dependent on successful operation or management of the
properties, repayment of such loans may be subject to a greater extent to
adverse conditions in the real estate market or the economy. The Bank seeks
to minimize these risks through its underwriting policies, which require
such loans to be qualified at origination on the basis of the property's
income and debt coverage ratio.
The Bank's multi-family loan portfolio at September 30, 2000
totaled $1.9 million or 1.50% of gross loans receivable. The Bank's largest
multi-family loan at September 30, 2000, had an outstanding balance of
$416,000 that is secured by 15 units and is current as to the repayment of
principal and interest.
Commercial Real Estate Lending. On a limited basis, the Bank
originates and participates in commercial real estate loans that are
generally secured by properties used for business or religious purposes
such as farms, churches, nursing homes, small office buildings or retail
facilities located in its primary market area. The Bank's underwriting
procedures provide that commercial real estate loans may be made in amounts
up to 80% of the appraised value of the property. The Bank's underwriting
standards and procedures are similar to those applicable to its multi-
family loans, whereby the Bank considers the net operating income of the
property, the debt service ratio and the borrower's expertise, credit
history and profitability. The largest commercial real estate loan in the
Bank's portfolio at September 30, 2000 was a $2.0 million participation
loan and is secured by a nursing home. The loan was current and performing
in accordance with its contractual terms at September 30, 2000. At
September 30, 2000 the Bank's commercial real estate loan portfolio was
$6.6 million, or 5.20% of gross loans receivable.
Loans secured by commercial real estate properties, similar to
multi-family loans, are generally larger and involve a greater degree of
risk than one- to four-family residential mortgage loans. Because payments
on loans secured by commercial real estate properties are often dependent
on successful operation or management of the properties, repayment of such
loans may be subject to a great extent to adverse conditions in the real
estate market or the economy. The Bank seeks to minimize these risks
through its underwriting standards.
Construction and Land Lending. The Bank generally originates
construction and land development loans to contractors and individuals in
its primary market area. The Bank's construction loans primarily are made
to finance the construction of owner-occupied one- to four-family
residential properties and to a significantly lesser extent, real estate
developments. The Bank's construction loans to individuals are primarily
fixed-rate loans with maturities of six months which, upon completion of
construction, convert to permanent loans with maturities of up to 30 years.
The Bank's policies provide that construction loans may be made in amounts
up to 80% of the appraised value of the property for construction of one-
to four-family residences and up to 90% of the appraisal value if private
mortgage insurance is obtained. Loan proceeds are disbursed in increments
as construction progresses and as inspections warrant. The Bank requires
regular inspections to monitor the progress of construction. Land loans are
determined on an individual basis, but generally they do not exceed 80% of
the actual cost or current appraised value of the property, whichever is
less. The largest construction and land loan in the Bank's portfolio at
September 30, 2000 had a balance of $410,000 and is secured by a single-
family residence. This loan is currently performing in accordance with its
terms. At September 30, 2000, the Bank had $6.9 million of construction and
land loans totaling 5.45% of the Bank's gross loans receivable.
Construction and land financing is considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied
real estate. Risk of loss on a construction loan is dependent largely upon
the accuracy of the initial estimate of the property's value at completion
of construction or development compared to the estimated cost (including
interest) of construction. If the estimate of value proves to be
inaccurate, the Bank may be confronted with a project, when completed,
having a value which is insufficient to assure full repayment.
Consumer and Other Lending. The Bank's originated consumer loans
generally consist of automobile loans, second mortgage loans, home equity
loans, mobile home loans and loans secured by deposits. At September 30,
2000, the Bank's consumer loan portfolio was $5.4 million, or 4.24% of
gross loans receivable.
8
<PAGE>
Loan Approval Procedures and Authority. The Board of Directors
establishes the lending policies of the Bank. Loans in amounts up to
$25,000 may be approved by the Bank's loan officers. Loans in excess of
$25,000 and up to $200,000 must be approved by the Loan Committee, which
consists of two senior officer/directors and one outside director. Loans in
excess of $200,000 must be approved by the Board of Directors. Pursuant to
OTS regulations, loans to one borrower cannot exceed 15% of the Bank's
unimpaired capital and surplus. The Bank will not make loans to one
borrower that are in excess of regulatory limits.
Delinquencies and Classified Assets. The Board of Directors
performs a monthly review of all delinquent loans 30 days or more past due.
The procedures taken by the Bank with respect to delinquencies vary
depending on the nature of the loan and period of delinquency. When a
borrower fails to make a required payment on a loan, the Bank takes a
number of steps to have the borrower cure the delinquency and restore the
loan to current status. The Bank sends the borrower a written notice of
non-payment after the loan is first past due. In the event payment is not
then received, additional letters are sent and phone calls are made. If
management believes that the loan is well-secured, the Bank generally will
try to work with the borrower to have the loan brought current. If the loan
is still not brought current and it becomes necessary for the Bank to take
legal action, the Bank will commence foreclosure proceedings against any
real property that secures the loan. If a foreclosure action is instituted
and the loan is not brought current, paid in full, or refinanced before the
foreclosure sale, the real property securing the loan is foreclosed upon
and sold at a sheriff's sale.
Federal regulations and the Bank's Classification of Assets Policy
require that the Bank utilize an internal asset classification system as a
means of reporting problem and potential problem assets. The Bank has
incorporated the OTS internal asset classifications as a part of its credit
monitoring system. The Bank currently classifies problem and potential
problem assets as "Substandard" or "Loss" assets. An asset is considered
"Substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct
possibility" that the insured institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "Loss" are those
considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss allowance is not
warranted.
When an insured institution classifies one or more assets, or
portions thereof, as Substandard, under current OTS policy the Bank is
required to consider establishing a general valuation allowance in an
amount deemed prudent by management. The general valuation allowance, which
is a regulatory term, represents a loss allowance which has been
established to recognize the inherent credit risk associated with lending
and investing activities, but which, unlike specific allowances, has not
been allocated to particular problem assets. When an insured institution
classifies one or more assets, or portions thereof, as "Loss," it is
required either to establish a specific allowance for losses equal to 100%
of the amount of the asset so classified or to charge off such amount.
A savings institution's determination as to the classification of
its assets and the amount of its valuation allowances is subject to review
by the OTS which can order the establishment of additional general or
specific loss allowances. The OTS, in conjunction with the other federal
banking agencies, has adopted an interagency policy statement on the
allowance for loan and lease losses. The policy statement provides guidance
for financial institutions on both the responsibilities of management for
the assessment and establishment of adequate allowances and guidance for
banking agency examiners to use in determining the adequacy of general
valuation allowances. Generally, the policy statement recommends that
institutions have effective systems and controls to identify, monitor and
address asset quality problems; that management has analyzed all
significant factors that affect the collectibility of the portfolio in a
reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy
statement. As a result of the declines in local and regional real estate
market values and the significant losses experienced by many financial
institutions, there has been a greater level of scrutiny by regulatory
authorities of the loan portfolios of financial institutions undertaken as
part of the examination of institutions by the OTS and the FDIC. While the
Bank believes that it has established an adequate allowance for estimated
loan losses, there can be no assurance that regulators, in reviewing the
Bank's loan portfolio, will not request the Bank to materially increase its
allowance for loan losses, thereby negatively affecting the Bank's
financial condition and earnings. Although management believes that an
adequate allowance for loan losses has been established, actual losses
9
<PAGE>
are dependent upon future events and, as such, further additions to the
level of allowances for estimated loan losses may become necessary.
The Bank's management reviews and classifies the Bank's assets
quarterly and reports the results of its review to the Board of Directors.
The Bank classifies assets in accordance with the management guidelines
described above. Real estate owned ("REO") is classified as Substandard. At
September 30, 2000, the Bank had $997,000 of assets classified as
Substandard and no assets classified as Loss.
Non-performing Assets. The following table sets forth information
regarding non-accrual loans, accruing loans which are contractually past
due 90 days or more and REO. For the years ended September 30, 2000, 1999,
1998, 1997 and 1996, respectively, the amount of interest income that would
have been recognized on nonaccrual loans if such loans had continued to
perform in accordance with their contractual terms was $0, $0, $0, $0 and
$5,280, none of which was recognized.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- -------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential real estate:
One- to four-family............................... $ -- $ -- $ -- $ -- $ 567
Multi-family...................................... -- -- -- -- --
Commercial real estate................................ -- -- -- -- 11
Construction and land................................. -- -- -- -- 5
Consumer.............................................. -- -- -- -- --
------ ------ ------- ------- ------
Total non-accrual loans........................... -- -- -- -- 583
Loans contractually past due more
than 90 days and accruing interest................. 582 379 825 572 --
------ ------ ------- ------- ------
Total non-performing loans........................ 582 379 825 572 583
REO, net................................................. -- -- -- -- --
------ ------ ------- ------- ------
Total non-performing assets....................... $ 582 $ 379 $ 825 $ 572 $ 583
====== ====== ======= ======= ======
Allowance for loan losses as a
percent of gross loans receivable..................... 0.13% 0.11% 0.11% 0.13% 0.13%
Allowance for loan losses as a percent of
total non-performing loans(1)......................... 28.35 35.09 14.30 18.60 16.19
Non-performing loans as a percent of
gross loans receivable(1)............................. 0.46 0.32 0.79 0.68 0.82
Non-performing assets as a percent of total assets (1)... 0.43 0.30 0.71 0.53 0.63
</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.
Loans now current but where some concerns exist as to the ability
of the borrower to comply with present loan repayment terms, exclusive of
nonperforming loans, were not significant at September 30, 2000 and 1999.
These loans are closely monitored by management and the classification of
these loans does not imply that management expects losses on the loans, but
believes that a higher level of scrutiny is prudent under the
circumstances.
At September 30, 2000 and 1999, the Company had no interest-
bearing assets other than loans which would have been reported as
nonaccrual or delinquent.
10
<PAGE>
The following table sets forth delinquencies in the Bank's loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
At September 30, 2000 At September 30, 1999
--------------------------------------- ----------------------------------------
60-89 Days 90 Days or More (1) 60-89 Days 90 Days or More (1)
------------------ ------------------- ------------------ --------------------
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------- -------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family.............. 3 $162 11 $570 6 $186 9 $335
Multi-family..................... -- -- -- -- -- -- -- --
Commercial real estate........... -- -- 1 2 -- -- 1 30
Construction and land............ -- -- -- -- -- -- -- --
Consumer ........................ -- -- 2 10 2 7 2 14
------ ----- ----- ----- ----- ----- ----- -----
Total............................ 3 $162 14 $582 8 $193 12 $379
====== ===== ===== ===== ===== ===== ===== =====
Delinquent loans to gross
loans receivable.............. 0.13% 0.46% 0.16% 0.32%
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1998
---------------------------------------------------
60-89 Days 90 Days or More (1)
-------------------- ------------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
---------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One- to four-family.............. -- $ -- 20 $783
Multi-family..................... -- -- -- --
Commercial real estate........... -- -- 2 38
Construction and land............ -- -- -- --
Consumer......................... 7 $31 1 4
----- ----- -- ----
Total............................ 7 $ 31 23 $825
===== ===== == ====
Delinquent loans to gross
loans receivable.............. 0.03% 0.79%
</TABLE>
(1) Loans 90 days or more past due are included in non-accrual
loans. See "Non-performing Assets."
11
<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, 2000, the Bank's allowance
for loan losses was 0.13% of gross loans receivable. The Bank had non-
performing loans of $582,000 and $379,000 at September 30, 2000 and
September 30, 1999, respectively. At September 30, 2000, the Bank had no
loans classified as "impaired." The Bank will continue to monitor and
modify its allowances for loan losses as conditions dictate.
The following table sets forth activity in the Bank's allowance for
loan losses for the periods set forth in the table.
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
--------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.......................... $133 $118 $106 $ 94 $92
Provision for loan losses............................... 36 30 12 12 2
Charge-offs:
Real Estate:
One-to four-family................................ -- -- -- -- --
Multi-family....................................... -- -- -- -- --
Commercial real estate............................. -- -- -- -- --
Construction and land.............................. -- -- -- -- --
Consumer............................................. (4) (15) -- -- --
Recoveries.............................................. -- -- -- -- --
------ ---- ---- ---- -----
Balance at end of period................................ $165 $133 $118 $106 $94
====== ==== ==== ==== =====
Net charge-offs to average gross loans receivable....... -- 0.01% -- -- --
</TABLE>
12
<PAGE>
The following table sets forth the amount of the Bank's allowance
for loan losses, the percent of the allowance for loan losses to the total
allowance and the percent of gross loans to gross loans receivable in each
of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ ------------------------------ -------------------------------
Percent Percent Percent
of Gross of Gross of Gross
Loans in Loans in Loans in
Percent Each Percent Each Percent Each
of Category of Category of Category
Allowance to Gross Allowance to Gross Allowance to Gross
to Total Loans to Total Loans to Total Loans
Amount Allowance Receivable Amount Allowance Receivable Amount Allowance Receivable
------ --------- ---------- ------- --------- ---------- ------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-
family............... $115 69.70% 83.61 $ 93 69.92% 84.97% $ 82 69.47% 83.54%
Multi-family............ 6 3.64 1.50 6 4.51 1.94 5 4.24 1.79
Commercial real estate.. 12 7.27 5.20 9 6.77 5.60 10 8.47 6.64
Construction and land... 9 5.45 5.45 6 4.51 4.62 7 5.84 5.83
Consumer................ 4 2.42 4.24 4 3.01 2.87 3 2.54 2.20
Unallocated............. 19 11.52 -- 15 11.28 -- 11 9.44 --
---- ------ ------ ---- ------ ------ ---- ------ -------
Total allowance
for loan losses........ $165 100.00% 100.00% $133 100.00% 100.00% $118 100.00% 100.00%
==== ====== ====== ==== ====== ====== ==== ====== =======
---------------------------------------------------------------
1997 1996
------------------------------ -------------------------------
Percent Percent
of Gross of Gross
Loans in Loans in
Percent Each Percent Each
of Category of Category
Allowance to Gross Allowance to Gross
to Total Loans to Total Loans
Amount Allowance Receivable Amount Allowance Receivable
------ --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
One- to four-
family................. $ 75 70.75% 84.10% $65 69.15% 82.33%
Multi-family............ 5 4.72 1.47 2 2.13 1.99
Commercial real estate 10 9.43 7.16 5 5.32 6.57
Construction and land... 6 5.66 4.31 5 5.32 6.44
Consumer................ -- -- 2.96 5 5.32 2.67
Unallocated............. 10 9.44 -- 12 12.76 --
---- ------- ----- -- ------ ------
Total allowance
for loan losses........ $106 100.00% 100.00% $94 100.00% 100.00%
==== ======= ====== === ====== ======
</TABLE>
13
<PAGE>
Real Estate Owned
At September 30, 2000, the Bank had no REO. If the Bank acquires
any REO, it is initially recorded at fair value less costs to sell and
thereafter REO is recorded at the lower of the recorded investment in the
loan or the fair value of the related assets at the date of foreclosure,
less costs to sell. Thereafter, REO is valued at the lower of the recorded
investment or the fair value of the property less costs to sell. If there
is a further deterioration in value, the Bank provides for a specific
valuation allowance.
Investment Activities
Federally chartered savings institutions have the authority to
invest in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies, certificates of
deposit of insured banks and savings institutions, bankers' acceptances and
federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment-
grade corporate debt securities and mutual funds whose assets conform to
the investments that a federally chartered savings institution is otherwise
authorized to make directly. Additionally, the Bank must maintain minimum
levels of investments that qualify as liquid assets under OTS regulations.
See "Regulation and Supervision--Federal Savings Institution Regulation--
Liquidity." Historically, the Bank has maintained liquid assets above the
minimum OTS requirements and at a level considered to be more than adequate
to meet its normal daily activities.
The investment policy of the Company as established by the Board
of Directors attempts to provide and maintain liquidity, generate a
favorable return on investments without incurring undue interest rate and
credit risk, and complement the Company's lending activities. The Company's
policies generally limit investments to government and federal agency
securities. The Company's policies provide the authority to invest in U.S.
Treasury and federal agency securities meeting the Company's guidelines and
in mortgage-backed securities guaranteed by the U.S. government and
agencies thereof. At September 30, 2000, the Company had investment and
mortgage-backed securities with a carrying value of $7.1 million and a
market value of $7.2 million. At September 30, 2000, the Company had $1.3
million in mortgage-backed securities classified as available for sale and
$5.8 million in investment and mortgage-backed securities classified as
held to maturity. At September 30, 2000, $3.2 million of the Company's
mortgage-backed securities had adjustable rates.
At September 30, 2000, all of the Company's mortgage-backed
securities were insured or guaranteed by either the GNMA, FNMA or FHLMC.
Investments in mortgage-backed securities involve a risk that actual
prepayments will be greater than estimated prepayments over the life of the
security which may require adjustments to the amortization of any premium
or accretion of any discount relating to such instruments thereby reducing
or increasing, respectively, the net yield on such securities. There is
also the risk associated with the necessity to reinvest the cash flows from
such securities at market interest rates which may be lower than the
interest rates received on such securities. In addition, the market value
of such securities may be adversely affected by changes in interest rates.
14
<PAGE>
The following table sets forth certain information regarding the
carrying and fair values of the Company's investment securities and
mortgage-backed securities at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------
2000 1999 1998
--------------------- ---------------------- ----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- -------- -------- ---------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities:
Available for sale:
FNMA certificates................. $ 784 $ 750 $1,302 $ 1,261 $ 3,915 $ 3,889
GNMA certificates................. 567 560 613 603 690 711
------ ------ ------ ------- ------- -------
Total available for sale....... 1,351 1,310 1,915 1,864 4,605 4,600
------ ------ ------ ------- ------- -------
Held to maturity:
GNMA certificates................. 5,745 5,823 6,752 6,878 8,897 9,256
FHLMC certificates................ 27 28 53 55 107 112
------ ------ ------ ------- ------- -------
Total held to maturity......... 5,772 5,851 6,805 6,933 9,004 9,368
FHLB stock........................ 1,631 1,631 1,250 1,250 922 922
------ ------ ------ ------- ------- -------
Total securities............... $8,754 $8,792 $9,970 $10,047 $14,531 $14,890
====== ====== ====== ======= ======= =======
</TABLE>
As of September 30, 2000, the Company did not have any security
concentrations which exceeded 10% of total securities.
15
<PAGE>
The table below sets forth certain information regarding
the carrying value, weighted average yields and contractual
maturities of the Company's mortgage-backed securities as of
September 30, 2000.
<TABLE>
<CAPTION>
At September 30, 2000
--------------------------------------------------------------------
More than One More than Five
One Year or Less Year to Five Years Years to 10 Years
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- -------- --------- -------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Available for sale:
FNMA.................................. $ -- --% $ -- --% $ -- --%
GNMA.................................. -- -- -- -- -- --
-------- -------- -------- ------- -------- --------
Total available for sale........... -- -- -- -- -- --
Held to maturity:
GNMA.................................. -- -- 7 8.18 1 12.50
FHLMC................................. -- -- 18 8.25 3 12.50
-------- -------- -------- ------- -------- --------
Total held to maturity............. -- -- 25 8.23 4 12.50
-------- -------- -------- ------- -------- --------
Total mortgage-backed securities... -- -- $ 25 8.23% $ 4 12.50%
======== ======== ======== ======= ======== ========
--------------------------------------------
More than 10 Years Total
-------------------- -------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Available for sale:
FNMA.................................. $ 750 7.38% $ 750 7.38%
GNMA.................................. 560 6.97 560 6.97
------ ----- ------ ------
Total available for sale........... 1,310 7.21 1,310 7.21
Held to maturity:
GNMA.................................. 5,738 7.40 5,746 7.40
FHLMC................................. 5 12.50 26 9.55
------ ----- ------ ------
Total held to maturity............. 5,742 7.40 5,772 7.41
------ ----- ------ ------
Total mortgage-backed securities... $7,052 7.37% $7,082 7.37%
====== ===== ====== ======
</TABLE>
16
<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.
Deposits. The Bank offers a variety of deposit accounts with a
range of interest rates and terms. The Bank's deposits consist of savings
accounts, NOW accounts, money market accounts and certificates of deposit.
For the year ended September 30, 2000, certificates of deposit constituted
74.56% of total average deposits. The term of the certificates of deposit
offered by the Bank vary from six months to five years and the offering
rates are established by the Bank on a weekly basis. Once a certificate
account is established, no additional amounts are permitted to be deposited
in that account, with the exception of Individual Retirement Account
certificates. Specific terms of an individual account vary according to the
type of account, the minimum balance required, the time period funds must
remain on deposit and the interest rate, among other factors. The flow of
deposits is influenced significantly by general economic conditions,
changes in money market rates, prevailing interest rates and competition.
At September 30, 2000, the Bank had $39.9 million of certificate accounts
maturing in less than one year. The Bank's deposits are obtained
predominantly from the area in which its banking office is located. The
Bank relies primarily on a willingness to pay market-competitive interest
rates to attract and retain these deposits. Accordingly, rates offered by
competing financial institutions significantly affect the Bank's ability to
attract and retain deposits.
At September 30, 2000, the Bank had approximately $5.4 million in
certificate accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
Weighted
Maturity Period Amount Average Rate
------------------ ------------------- --------------
(Dollars in thousands)
<S> <C> <C>
Three months or less............................ $ -- --%
Over three through six months................... 1,516 6.33
Over six through 12 months...................... 2,062 6.13
Over 12 months.................................. 1,867 6.77
------ ----
Total..................................... $5,445 6.41%
====== ====
</TABLE>
17
<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,
-----------------------------------------------------------------------
2000 1999 1998
--------------------- ---------------------- ----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
--------- --------- ---------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings accounts.......................... $ 8,402 10.54% $ 8,898 11.58% $ 8,553 10.82%
Money market accounts..................... 4,049 5.08 5,178 6.74 5,329 6.74
NOW accounts.............................. 5,384 6.75 5,006 6.52 4,765 6.02
Non-interest bearing accounts............. 626 .79 446 0.58 689 0.87
--------- --------- ---------- -------- --------- ----------
Total............................... 18,461 23.16 19,528 25.42 19,336 24.45
Certificate accounts:
3.00% to 3.99%......................... 103 .13 -- -- -- --
4.00% to 4.99%......................... 3,625 4.55 24,449 31.82 2,070 2.62
5.00% to 5.99%......................... 20,999 26.34 32,473 42.26 52,404 66.27
6.00% to 6.99%......................... 20,919 27.49 342 0.44 5,214 6.60
7.00% to 7.99%......................... 14,580 18.28 5 0.01 10 0.01
8.00% to 8.99%......................... 47 .05 43 0.05 40 0.05
--------- --------- ---------- -------- --------- ----------
Total certificate accounts.......... 61,273 76.84 57,312 74.58 59,738 75.55
--------- --------- ---------- -------- --------- ----------
Total deposits...................... $ 79,734 100.00% $ 76,841 100.00% $ 79,074 100.00%
========= ========= ========== ======== ========= ==========
</TABLE>
18
<PAGE>
<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, 2000.
<TABLE>
<CAPTION>
Period to Maturity from September 30, 2000 At September 30,
----------------------------------------------------------------- ------------------
One to Two to Three to Four to More than
Less than Two Three Four Five Five
One Year Years Years Years Years Years Total 1999 1998
-------- --------- ---------- ---------- --------- --------- -------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
3.00 to 3.99%....... $ 103 $ -- $ -- $ -- $ -- $ -- $ 103 $ -- $ --
4.00 to 4.99%....... 2,796 698 131 -- -- -- 3,625 24,449 2,070
5.00 to 5.99%....... 19,218 639 381 754 7 -- 20,999 32,473 52,404
6.00 to 6.99%....... 11,425 10,048 277 -- 169 -- 21,919 342 5,214
7.00 to 7.99%....... 6,311 8,269 -- -- -- -- 14,580 5 10
8.00 to 8.99%....... -- -- 47 -- -- -- 47 43 40
------- -------- -------- ------- ----- ------ ------- ------- -------
Total............ $39,853 $ 14,654 $ 836 $ 754 $ 176 $ -- $61,273 $57,312 $59,738
======= ======== ======== ======= ===== ====== ======= ======= =======
</TABLE>
19
<PAGE>
Borrowings. The Bank utilizes borrowings from the FHLB as an
alternative to retail deposits to fund its operations as part of its
operating strategy. These FHLB borrowings are collateralized primarily by
certain of the Bank's 1-4 family real estate loans secondarily by the
Bank's investment in capital stock of the FHLB. FHLB borrowings are made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLB
will advance to member institutions, including the Bank, fluctuates from
time to time in accordance with the policies of the FHLB. See "Regulation
and Supervision--Federal Home Loan Bank System." At September 30, 2000, the
Bank had $30.0 million in outstanding FHLB borrowings, compared to $25.0
million at September 30, 1999.
The following table sets forth certain information regarding the
Bank's borrowed funds at or for the periods ended on the dates indicated.
<TABLE>
<CAPTION>
At or For the Years
Ended September 30,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Average balance outstanding.............................. $27,655 $16,307 $ 3,773
Maximum amount outstanding at any
month-end during the period.......................... 30,000 25,000 10,000
Balance outstanding at end of period..................... 30,000 25,000 10,000
Weighted average interest rate
during the period..................................... 5.95% 5.28% 5.14%
Weighted average interest rate at
end of period......................................... 6.45% 5.19% 5.40%
</TABLE>
Subsidiary Activities
The Company's sole subsidiary is the Bank. The Bank has one
subsidiary, Delphos Service Corporation, which currently does not conduct
any activities.
Personnel
As of September 30, 2000, the Company had 18 full-time employees
and 9 part-time employees. The employees are not represented by a
collective bargaining unit and the Bank considers its relationship with its
employees to be good.
20
<PAGE>
REGULATION AND SUPERVISION
General
The Company, as a savings and loan holding company, is required to
file certain reports with, and otherwise comply with the rules and
regulations of the Office of Thrift Supervision ("OTS") under the Home
Owners' Loan Act, as amended (the "HOLA"). In addition, the activities of
savings institutions, such as the Bank, are governed by the HOLA and the
Federal Deposit Insurance Act ("FDI Act").
The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as
the deposit insurer. The Bank is a member of the Federal Home Loan Bank
("FHLB") System and its deposit accounts are insured up to applicable
limits by the Savings Association Insurance Fund ("SAIF") managed by the
FDIC. The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with,
or acquisitions of, other savings institutions. The OTS and/or the FDIC
conduct periodic examinations to test the Bank's safety and soundness and
compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment
of adequate loan loss reserves for regulatory purposes. Any change in such
regulatory requirements and policies, whether by the OTS, the FDIC or the
Congress, could have a material adverse impact on the Company, the Bank and
their operations. Certain of the regulatory requirements applicable to the
Bank and to the Company are referred to below or elsewhere herein. The
description of statutory provisions and regulations applicable to savings
institutions and their holding companies set forth in this Form 10-K does
not purport to be a complete description of such statutes and regulations
and their effects on the Bank and the Company.
Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding
company within the meaning of the HOLA. As a unitary savings and loan
holding company, the Company generally is not restricted under existing
laws as to the types of business activities in which it may engage,
provided that the Bank continues to be a qualified thrift lender ("QTL").
See "Federal Savings Institution Regulation--QTL Test." Upon any non-
supervisory acquisition by the Company of another savings institution or
savings bank that meets the QTL test and is deemed to be a savings
institution by the OTS, the Company would become a multiple savings and
loan holding company (if the acquired institution is held as a separate
subsidiary) and would be subject to extensive limitations on the types of
business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-
insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the Bank Holding Company
Act ("BHC Act"), subject to the prior approval of the OTS, and certain
activities authorized by OTS regulation, and no multiple savings and loan
holding company may acquire more than 5% of the voting stock of a company
engaged in impermissible activities.
Recently enacted federal legislation designed to modernize the
regulation of the financial services industry expands the ability of bank
holding companies to affiliate with other types of financial services
companies such as insurance companies and investment banking companies.
However, the legislation provides that companies that acquire control of a
single savings association after May 4, 1999 (or that filed an application
for that purpose after that date) are not entitled to the unrestricted
activities formerly allowed for a unitary savings and loan holding company.
Rather, these companies will have authority to engage in the activities
permitted "a financial holding company" under the new legislation,
including insurance and securities-related activities, and the activities
currently permitted for multiple savings and loan holding companies, but
generally not in commercial activities. The authority for unrestricted
activities is grandfathered for unitary savings and loan holding companies,
such as the Company, that existed before May 4, 1999. However, the
authority for unrestricted activities would not apply to any company that
acquired the Company.
21
<PAGE>
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than
5% of the voting stock of another savings institution or holding company
thereof without prior written approval of the OTS or acquiring or retaining
control of a depository institution that is not insured by the FDIC. In
evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources
and future prospects of the company and institution involved, the effect of
the acquisition on the risk to the insurance funds, the convenience and
needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would
result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions: (i) the
approval of interstate supervisory acquisitions by savings and loan holding
companies and (ii) the acquisition of a savings institution in another
state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to
which they permit interstate savings and loan holding company acquisitions.
Although savings and loan holding companies are not subject to
specific capital requirements or specific restrictions on the payment of
dividends or other capital distributions, HOLA does prescribe such
restrictions on subsidiary savings institutions as described below. The
Bank must notify the OTS 30 days before declaring any dividend to the
Company. In addition, the financial impact of a holding company on its
subsidiary institution is a matter that is evaluated by the OTS and the
agency has authority to order cessation of activities or divestiture of
subsidiaries deemed to pose a threat to the safety and soundness of the
institution.
Federal Savings Institution Regulation
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible
capital ratio, a 4% leverage (core) capital ratio (3% for savings
associations that receive the highest examination rating on the CAMELS
financial institution rating system) and an 8% risk-based capital ratio. In
addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2% tangible capital standard, and, together
with the risk-based capital standard itself, a 4% Tier I risk-based capital
standard. Core capital is defined as common shareholders' equity (including
retained earnings), certain noncumulative perpetual preferred stock and
related surplus, and minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain mortgage servicing rights
and credit card relationships. The OTS regulations also require that, in
meeting the tangible, leverage (core) and risk-based capital standards,
institutions must generally deduct investments in and loans to subsidiaries
engaged in activities as principal that are not permissible for a national
bank.
The risk-based capital standard for savings institutions requires
the maintenance of Tier I (core) and total capital (which is defined as
core capital and supplementary capital) to risk-weighted assets of at least
4% and 8%, respectively. In determining the amount of risk-weighted assets,
all assets, including certain off-balance sheet assets, are multiplied by a
risk-weight factor of 0% to 100%, as assigned by the OTS capital regulation
based on the risks OTS believes are inherent in the type of asset. The
components of Tier I (core) capital are equivalent to those discussed
earlier. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock,
the allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets, and up to 45% of unrealized gains on available-for-
sale equity securities with readily determinable fair market values.
Overall, the amount of supplementary capital included as part of total
capital cannot exceed 100% of core capital.
The OTS regulatory capital requirements also incorporate an
interest rate risk component. Savings institutions with "above normal"
interest rate risk exposure are subject to a deduction from total capital
for purposes of calculating their risk-based capital requirements. A
savings institution's interest rate risk is measured by the decline in the
net portfolio value of its assets (i.e., the difference between incoming
and outgoing discounted cash flows from assets, liabilities and off-balance
sheet contracts) that would result from a hypothetical 200 basis point
increase or decrease in market interest rates divided by the estimated
economic value of the institution's assets. In calculating its total
capital under the risk-based capital rule, a savings institution whose
measured interest rate risk exposure exceeds 2% must deduct an amount equal
to one-half of the difference between the institution's measured interest
rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a
22
<PAGE>
savings institution's interest rate risk component on a case-by-case basis.
A savings institution with assets of less than $300 million and risk-based
capital ratios in excess of 12% is not subject to the interest rate risk
component, unless the OTS determines otherwise. For the present time, the
OTS has deferred implementation of the interest rate risk component. At
September 30, 2000, the Bank met each of its capital requirements and it is
anticipated that the Bank will not be subject to the interest rate risk
component.
The following table presents the Bank's capital
position at September 30, 2000.
<TABLE>
<CAPTION>
Capital
-------------------------
Excess
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
---------- ---------- ------------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible.................................. $16,234 $2,049 $14,185 11.88% 1.50%
Core (Leverage)........................... 16,234 4,099 12,135 11.88 3.00
Risk-based................................ 16,399 5,934 10,465 22.11 8.00
</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 that has a ratio of total capital to risk
weighted assets of less than 8%, a ratio of Tier I (core) capital to risk-
weighted assets of less than 4% or a ratio of core capital to total assets
of less than 4% (3% or less for institutions with the highest examination
rating) is considered to be "undercapitalized." A savings institution that
has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio
of less than 3% or a leverage ratio that is less than 3% is considered to
be "significantly undercapitalized" and a savings institution that has a
tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also
provides that a capital restoration plan must be filed with the OTS within
45 days of the date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any
parent holding company. In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution,
including, but not limited to, increased monitoring by regulators and
restrictions on growth, capital distributions and expansion. The OTS could
also take any one of a number of discretionary supervisory actions,
including the issuance of a capital directive and the replacement of senior
executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently
insured by the Savings Association Insurance Fund. The Federal Deposit
Insurance Corporation maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings
and other supervisory information. An institution's assessment rate depends
upon the categories to which it is assigned. Assessment rates for Savings
Association Insurance Fund member institutions are determined semiannually
by the Federal Deposit Insurance Corporation and currently range from zero
basis points for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions
are assessed to pay bonds issued in the late 1980s by the Financing
Corporation to recapitalize the predecessor to the Savings Association
Insurance Fund. During 1999, Financing Corporation payments for Savings
Association Insurance Fund members approximated 6.10 basis points, while
Bank Insurance Fund members paid 1.22 basis points. By law, there was equal
sharing of Financing Corporation payments between the members of both
insurance funds beginning January 1, 2000.
23
<PAGE>
The Bank's assessment rate for fiscal 2000 ranged from 2.02 to
2.12 basis points and the premium paid for this period was $26,000. A
significant increase in SAIF insurance premiums would likely have an
adverse effect on the operating expenses and results of operations of the
Bank.
Under the FDI Act, insurance of deposits may be terminated by the
FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or
has violated any applicable law, regulation, rule, order or condition
imposed by the FDIC or the OTS. The management of the Bank does not know of
any practice, condition or violation that might lead to termination of
deposit insurance.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the limits on loans to one borrower applicable to
national banks. Generally, savings institutions may not make a loan or
extend credit to a single or related group of borrowers in excess of 15% of
its unimpaired capital and surplus. An additional amount may be lent, equal
to 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain
financial instruments and bullion. At September 30, 2000, the Bank's limit
on loans to one borrower was $2.4 million. At September 30, 2000, the
Bank's largest aggregate outstanding balance of loans to one borrower was
$2.0 million.
QTL Test. The HOLA requires savings institutions to meet a QTL
test. Under the QTL test, a savings and loan association is required to
either maintain at least 65% of its "portfolio assets" (total assets less:
(i) specified liquid assets up to 20% of total assets; (ii) intangibles,
including goodwill; and (iii) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily residential
mortgages and related investments, including certain mortgage-backed
securities) in at least 9 months out of each 12 month period or qualify as
a "domestic building and loan association" under the Internal Revenue Code
of 1986, as amended.
A savings institution that fails the QTL test is subject to
certain operating restrictions and may be required to convert to a bank
charter. As of September 30, 2000, the Bank maintained 96.59% of its
portfolio assets in qualified thrift investments and, therefore, met the
QTL test.
Limitation on Capital Distributions. OTS regulations impose
limitations upon all capital distributions by a savings institution,
including cash dividends, payments to repurchase its shares and payments to
Shareholders of another institution in a cash-out merger.
OTS adopted new rules governing capital distributions, effective
April 1, 1999. Under the new regulation, an application to and the prior
approval of the OTS is required before any capital distribution if the
institution does not meet the criteria for "expedited treatment" of
applications under OTS regulations (generally, compliance with all capital
requirements and examination ratings in one of two top categories), the
total capital distributions for the calendar year exceed net income for
that year plus the amount of retained net income for the preceding two
years, the institution would be undercapitalized following the distribution
or the distribution would otherwise be contrary to a statute, regulation or
agreement with OTS. If an application is not required, the institution must
still give advance notice to OTS of the capital distribution. If the Bank's
capital fell below its regulatory requirements or if the OTS notified it
that it was in need of more than normal supervision, the Bank's ability to
make capital distributions could be restricted. In addition, the OTS could
prohibit a proposed capital distribution, which would otherwise be
permitted by the regulation if the OTS determines that the distribution
would be an unsafe or unsound practice.
Liquidity. The Bank is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less
than a specified percentage of its net withdrawable deposit accounts plus
short-term borrowings. This liquidity requirement is currently 4%. The
Bank's liquidity ratio for September 30, 2000 was 9.15%, which exceeded the
applicable requirements. The Bank has never been subject to monetary
penalties for failure to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments
to the OTS to fund the agency's operations. The general assessments, paid
on a semi-annual basis, are computed upon the savings institution's total
assets, including
24
<PAGE>
consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank for the fiscal
year ended September 30, 2000 totaled $36,000.
Branching. OTS regulations permit nationwide branching by
federally chartered savings institutions to the extent allowed by federal
statute. This permits federal savings institutions to establish interstate
networks and to geographically diversify their loan portfolios and lines of
business. The OTS authority preempts any state law purporting to regulate
branching by federal savings institutions.
Transactions with Related Parties. The Bank's authority to engage
in transactions with related parties or "affiliates" (e.g., any company
that controls or is under common control with an institution, including the
Company and its non-savings institution subsidiaries) is limited by
Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A limits
the aggregate amount of covered transactions with any individual affiliate
to 10% of the capital and surplus of the savings institution. The aggregate
amount of covered transactions with all affiliates is limited to 20% of the
savings institution's capital and surplus. Certain transactions with
affiliates are required to be secured by collateral in an amount and of a
type described in Section 23A and the purchase of low quality assets from
affiliates is generally prohibited. Section 23B generally provides that
certain transactions with affiliates, including loans and asset purchases,
must be on terms and under circumstances, including credit standards, that
are substantially the same or at least as favorable to the institution as
those prevailing at the time for comparable transactions with non-
affiliated companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not
permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such
persons control, is governed by Sections 22(g) and 22(h) of the FRA and
Regulation O thereunder. Among other things, such loans are required to be
made on terms substantially the same as those offered to unaffiliated
individuals and to not involve more than the normal risk of repayment.
Recent legislation created an exception for loans made pursuant to a
benefit or compensation program that is widely available to all employees
of the institution and does not give preference to insiders over other
employees. Regulation O also places individual and aggregate limits on the
amount of loans the Bank may make to insiders based, in part, on the Bank's
capital position and requires certain board approval procedures to be
followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
actions against the institution and all institution-affiliated parties,
including shareholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an
adverse effect on an insured institution. Formal enforcement action may
range from the issuance of a capital directive or cease and desist order to
removal of officers and/or directors to institution of receivership,
conservatorship or termination of deposit insurance. Civil penalties cover
a wide range of violations and can amount to $25,000 per day, or even $1
million per day in especially egregious cases. Under the FDI Act, the FDIC
has the authority to recommend to the Director of the OTS enforcement
action to be taken with respect to a particular savings institution. If
action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances. Federal law also establishes criminal
penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies
have adopted Interagency Guidelines Prescribing Standards for Safety and
Soundness ("Guidelines") and a final rule to implement safety and soundness
standards required under the FDI Act. The Guidelines set forth the safety
and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital
becomes impaired. The standards set forth in the Guidelines address
internal controls and information systems; internal audit system; credit
underwriting; loan documentation; interest rate risk exposure; asset
growth; asset quality; earnings; and compensation, fees and benefits. If
the appropriate federal banking agency determines that an institution fails
to meet any standard prescribed by the Guidelines, the agency may require
the institution to submit to the agency an acceptable plan to achieve
compliance with the standard, as required by the FDI Act. The final rule
establishes deadlines for the submission and review of such safety and
soundness compliance plans when such plans are required.
25
<PAGE>
Federal Reserve System
The Federal Reserve Board regulations require savings institutions
to maintain non-interest earning reserves against their transaction
accounts (primarily NOW and regular checking accounts). The Federal Reserve
Board regulations generally require that reserves be maintained against
aggregate transaction accounts as follows: for that portion of transaction
accounts aggregating $44.3 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $44.3 million, the reserve requirement is $1.33
million plus 10% (subject to adjustment by the Federal Reserve Board
between 8% and 14%) against that portion of total transaction accounts in
excess of $44.3 million. The first $5.0 million of otherwise reservable
balances (subject to adjustments by the Federal Reserve Board) are exempted
from the reserve requirements. The Bank is in compliance with the foregoing
requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements imposed by the OTS.
Community Reinvestment Act
Under the Community Reinvestment Act, as implemented by OTS
regulations, a savings association has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The Community Reinvestment Act does not establish specific
lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and
services that it believes are best suited to its particular community,
consistent with the Community Reinvestment Act. The Community Reinvestment
Act requires the OTS, in connection with its examination of an institution,
to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of
applications by such institution. The Community Reinvestment Act requires
public disclosure of an institution's Community Reinvestment Act rating.
Citizens Bank of Delphos' latest Community Reinvestment Act rating,
received from the OTS was "Satisfactory."
26
<PAGE>
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only
as a summary and does not purport to be a comprehensive description of the
tax rules applicable to the Bank or the Company. The Bank has not been
audited by the IRS recently, and therefore the 1996 through 1999 returns
are open for audit. For its 2000 taxable year, the Bank is subject to a
maximum federal income tax rate of 34%.
Bad Debt Reserves. For fiscal years beginning prior to December
31, 1995, thrift institutions which qualified under certain definitional
tests and other conditions of the Internal Revenue Code of 1986 (the
"Code") were permitted to use certain favorable provisions to calculate
their deductions from taxable income for annual additions to their bad debt
reserve. A reserve could be established for bad debts on qualifying real
property loans (generally secured by interests in real property improved or
to be improved) under (i) the Percentage of Taxable Income Method (the "PTI
Method") or (ii) the Experience Method. The reserve for nonqualifying loans
was computed using the Experience Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"),
which was enacted on August 20, 1996, requires savings institutions to
recapture (i.e., take into income) certain portions of their accumulated
bad debt reserves. The 1996 Act repeals the reserve method of accounting
for bad debts effective for tax years beginning after 1995. Thrift
institutions that would be treated as small banks are allowed to utilize
the experience method applicable to such institutions, while thrift
institutions that are treated as large banks (those generally exceeding
$500 million in assets) are required to use only the specific charge-off
method. Thus, the PTI Method of accounting for bad debts is no longer
available for any financial institution.
Under the 1996 Act, for its current and future taxable years, the
Bank is not permitted to make additions to its tax bad debt reserves under
the PTI Method. In addition, the Bank is required to recapture (i.e., take
into income) over a six year period the excess of the balance of its tax
bad debt reserves as of December 31, 1995 over the balance of such reserves
as of December 31, 1987. As a result of such recapture, the Bank will incur
an additional tax liability of approximately $211,000 which is generally
expected to be taken into income beginning in 1998 over a six-year period.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to
have been made from the Bank's unrecaptured tax bad debt reserves
(including the balance of its reserves as of December 31, 1987) to the
extent thereof, and then from the Bank's supplemental reserve for losses on
loans, to the extent thereof, and an amount based on the amount distributed
(but not in excess of the amount of such reserves) will be included in the
Bank's taxable income. Non-dividend distributions include distributions in
excess of the Bank's current and accumulated earnings and profits, as
calculated for federal income tax purposes, distributions in redemption of
stock, and distributions in partial or complete liquidation. Dividends paid
out of the Bank's current or accumulated earnings and profits will not be
so included in the Bank's income.
The amount of additional taxable income triggered by a non-
dividend is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if the Bank makes
a non-dividend distribution to the Company, approximately one and one-half
times the amount of such distribution (but not in excess of the amount of
such reserves) would be includable in income for federal income tax
purposes, assuming a 34% federal corporate income tax rate. The Bank does
not intend to pay dividends that would result in a recapture of any portion
of its bad debt reserves.
State and Local Taxation
The Company is subject to the Ohio corporation franchise tax,
which, as applied to the Company, is a tax measured by both net earnings
and net worth. The rate of tax is the greater of (i) 5.1% on the first
$50,000 of computed
27
<PAGE>
Ohio taxable income and 8.5% of computed Ohio taxable income in excess of
$50,000 and (ii) 0.4% times taxable net worth. Under these alternative
measures of computing tax liability, the states to which a taxpayer's
adjusted total net income and adjusted total net worth are apportioned or
allocated are determined by complex formulas. The minimum tax is $50 per
year.
A special litter tax is also applicable to all corporations,
including the Company, subject to the Ohio corporation franchise tax other
than "financial institutions." If the franchise tax is paid on the net
income basis, the litter tax is equal to .11% of the first $50,000 of
computed Ohio taxable income and .22% of computed Ohio taxable income in
excess of $50,000. If the franchise tax is paid on the net worth basis, the
litter tax is equal to .014% times taxable-net-worth.
Certain holding companies, such as the Company, will qualify for
complete exemption from the net worth tax if certain conditions are met.
The Company will most likely meet these conditions, and thus, calculate its
Ohio franchise tax on the net income basis.
The Bank is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.4% for
1999 and 1.3% for 2000 and thereafter of the Bank's apportioned book net
worth, determined in accordance with Generally Accepted Accounting
Principles ("GAAP"), less any statutory deduction. As a "financial
institution," the Bank is not subject to any tax based upon net income or
net of its imposed by the State of Ohio.
Item 2. Properties.
--------------------
The Bank conducts its business through a single banking office
located at 114 East 3rd Street in Delphos, Ohio. The Company believes that
the current facilities are adequate to meet the present and immediately
foreseeable needs of the Bank and the Company. The Bank's office was
constructed in 1955 and was most recently remodeled in 1993. The Bank's
office had a net book value of $516,000 at September 30, 2000.
Item 3. Legal Proceedings.
---------------------------
At September 30, 2000, the Company was not involved in any pending
legal proceedings. However, from time to time, the Company is involved in
legal proceedings occurring in the ordinary course of business.
Item 4. Submission of Matters to a Vote of Security Holders.
-------------------------------------------------------------
None.
28
<PAGE>
PART II
Item 5. Market for Registrants Common Equity and Related Shareholder
Matters.
---------------------------------------------------------------------------
The Common Stock of the Company is traded on the Nasdaq National
Market under the symbol "DCBI." The stock began trading on November 21,
1996. As of November 16, 2000, there were approximately 1,202 recordholders
of the Common Stock of the Company, which includes shares held in street
name. The following table discloses the high and low sales prices for the
Common Stock for each quarterly period indicated.
High Low
---- ---
September 30, 2000 $14.13 $11.50
June 30, 2000 $15.13 $12.00
March 31, 2000 $17.50 $12.63
December 31, 1999 $18.00 $16.50
September 30, 1999 $18.50 $17.00
June 30, 1999 $18.50 $13.38
March 31, 1999 $18.75 $16.00
December 31, 1998 $19.00 $15.63
The following table lists the dividends declared and paid by the
Company.
2000 Dividend (1) Declared Paid
-------------- ---------- ----------
$.07 10-16-99 11-22-99
.07 1-25-00 2-23-00
.07 4-24-00 5-25-00
.07 7-25-00 8-25-00
1999 Dividend (1) Declared Paid
-------------- ---------- ----------
$.06 10-29-98 11-24-98
.06 01-27-99 02-24-99
.06 04-27-99 05-24-99
.06 07-28-99 08-25-99
___________________
(1) Per share.
29
<PAGE>
Item. 6 Selected Financial Data.
---------------------------------
The selected consolidated financial and other data of the Company
set forth below is derived in part from, and should be read in conjunction
with, the Consolidated Financial Statements of the Company and Notes
thereto. See Item 8 "Financial Statements and Supplementary Data."
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- --------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Total assets..................................... $136,627 $128,228 $115,901 $107,796 $92,235
Cash and cash equivalents........................ 3,687 3,700 1,618 4,400 4,695
Investment securities ........................... -- -- -- 4,996 500
Mortgage-backed securities....................... 7,082 8,669 13,605 12,107 14,214
FHLB stock--at cost.............................. 1,631 1,250 922 834 778
Loans receivable, net (1)........................ 122,888 113,273 98,486 84,285 70,787
Deposits ........................................ 79,734 76,841 79,074 77,373 79,831
FHLB advances.................................... 30,000 25,000 10,000 1,000 --
Total equity..................................... 25,985 25,487 26,060 28,716 11,425
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended September 30,
---------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- --------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income.................................. $9,724 $9,122 $8,665 $7,824 $6,891
Interest expense................................. 5,345 4,484 4,040 3,772 3,996
------- ------- ------- ------- -------
Net interest income.............................. 4,379 4,638 4,625 4,052 2,895
Provision for loan losses........................ 36 30 12 12 2
------- ------- ------- ------- -------
Net interest income after
provision for loan losses.................. 4,343 4,608 4,613 4,040 2,893
Non-interest income.............................. 49 55 51 43 38
Non-interest expense............................. 2,248 2,025 1,927 1,871 1,954
------- ------- ------- ------- -------
Income before income taxes....................... 2,143 2,640 2,737 2,212 977
Income taxes .................................... 750 937 1,085 686 333
------- ------- ------- ------- -------
Net income ...................................... $1,394 $1,703 $1,652 $1,526 $ 644
======= ======= ======= ======= =======
Earnings per common share (2):
Basic......................................... 0.99 1.14 0.97 0.75 --
Diluted....................................... 0.98 1.12 0.95 0.75 --
Cash dividends declared per common 0.28 0.24 0.24 -- --
share (2).....................................
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended
September 30,
-----------------------------------------------------------
2000 1999 1998 1997 1996
--------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other
Data(3):
Performance Ratios:
Return on average assets......................... 1.06% 1.40% 1.50% 1.42% 0.71%
Return on average equity......................... 5.44 6.57 5.87 5.31 5.59
Average equity to average assets................. 19.48 21.27 25.48 25.37 12.68
Equity to total assets at end of period.......... 19.02 19.88 22.48 26.64 12.39
Dividend payout ratio (2)........................ 31.96 24.12 27.56 -- --
Average interest rate spread (4)................. 2.49 2.94 3.07 2.67 2.51
Net interest margin (5).......................... 3.43 3.90 4.29 3.83 3.06
Average interest-earning assets to
average interest-bearing liabilities.......... 122.48 125.37 132.61 131.00 112.32
Efficiency ratio (6)............................. 50.78 43.12 41.21 45.68 66.61
Non-interest expense to average assets........... 1.71 1.66 1.75 1.71 2.15
Regulatory Capital Ratios (7):
Tangible capital................................. 11.88 9.60 10.67 13.89 12.40
Core capital..................................... 11.88 9.60 10.67 13.89 12.40
Risk-based capital............................... 22.11 18.06 20.83 28.63 27.25
Asset Quality Ratios:
Non-performing loans as a percent of
gross loans receivable (8)(9)................. 0.46 0.32 0.79 0.68 0.82
Non-performing assets as a percent of
total assets (9).............................. 0.43 0.30 0.71 0.53 0.63
Allowance for loan losses as a percent of
gross loans receivable (8).................... 0.13 0.11 0.11 0.13 0.13
Allowance for loan losses as a percent of
non-performing loans (9)...................... 28.35 35.09 14.30 18.60 16.19
</TABLE>
__________________________
(1) Loans receivable are shown net of loans in process, net deferred loan
origination fees and the allowance for loan losses.
(2) Earnings per common share and cash dividends per common share are not
applicable for years prior to the conversion on November 20, 1996.
(3) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods and are annualized
where appropriate.
(4) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(6) The efficiency ratio represents non-interest expense as a percent of net
interest income before provision for loan losses and non-interest income.
(7) For definitions and further information relating to the Bank's regulatory
capital requirements, See "Regulation and Supervision--Federal Savings
Institution Regulation--Capital Requirements."
(8) Gross loans receivable are stated at unpaid principal balances.
(9) Non-performing assets consist of non-performing loans and real estate owned
("REO"). Non-performing loans consist of all loans 90 days or more past due
and all other non-accrual loans. See "Lending Activities--Non-Performing
Assets" and "--Real Estate Owned."
31
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
----------------------------------------------------------------------------
Average Balance Sheets. The following table sets forth certain
information relating to the Company at September 30, 2000, and for the years
ended September 30, 2000, 1999 and 1998. The yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods shown. Average balances are derived from
average month-end balances. Management does not believe that the use of
average monthly balances instead of average daily balances has caused any
material differences in the information presented. Average balances of loans
receivable include loans on which the Company has discontinued accruing
interest. The yields and costs include amortized and deferred fees and costs
which are considered adjustments to yields.
<TABLE>
<CAPTION>
-----------------------------
At September 30, 2000 2000
--------------------- -----------------------------
Average
Yield/ Average Yield/
Balance Cost Balance Interest Cost
---------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-earning deposits in other banks.... $ 1,495 6.35% $ 796 $ 58 7.29%
Investment securities, net(1)............... 1,631 6.25 1,550 102 6.58
Loans receivable, net (2)................... 122,888 7.39 117,681 8,994 7.64
Mortgage-backed securities, net(1).......... 7,082 7.37 7,762 570 7.34
----------- ---- --------- -------- ----
Total interest-earning assets........... 133,096 7.36 127,789 9,724 7.61
Non-interest-earning assets................... 3,531 3,766
----------- ---------
Total assets............................ $ 136,627 $ 131,555
=========== =========
Liabilities and Equity:
Interest-bearing liabilities:
Passbook savings accounts................... $ 8,402 2.69 $ 8,856 233 2.63
Money market accounts....................... 4,049 3.06 4,776 143 2.99
NOW accounts................................ 5,384 1.79 5,476 96 1.75
Certificate accounts........................ 61,273 6.12 57,570 3,227 5.61
FHLB advances............................... 30,000 6.45 27,655 1,646 5.95
----------- ---- --------- -------- ----
Total interest-bearing liabilities........ 109,108 5.62 104,333 5,345 5.12
--------
Non-interest-bearing liabilities.............. 1,534 1,599
----------- ---------
Total liabilities....................... 110,642 105,932
Equity........................................ 25,985 25,623
----------- ---------
Total liabilities and equity............ $ 136,627 $ 131,555
=========== =========
Net interest income before provision
for estimated loan losses................. $ 4,379
========
Net interest rate spread(3)................... 2.49%
====
Net interest margin(4)........................ $ 121.99% 122.48% 3.43%
=========== ====== ====
Ratio of interest-earning assets to
interest-bearing liabilities................
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------------------
1999 1998
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------- -------- -------- -------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-earning deposits in other banks.. $ 620 $ 50 8.06% $ 2,427 $ 159 6.55%
Investment securities, net(1)............. 1,017 68 6.69 884 62 7.01
Loans receivable, net (2)................. 106,619 8,200 7.75 91,126 7,430 8.15
Mortgage-backed securities, net(1)........ 10,662 744 6.98 13,291 1,014 7.63
--------- -------- -------- -------- -------- -------
Total interest-earning assets......... 118,918 9,122 7.67 107,728 8,665 8.04
Non-interest-earning assets................. 2,965 2,646
--------- --------
Total assets.......................... $ 121,883 $110,374
========= ========
Liabilities and Equity:
Interest-bearing liabilities:
Passbook savings accounts................. $ 8,791 231 2.63 $ 8,147 232 2.85
Money market accounts..................... 5,366 160 2.98 5,516 168 3.05
NOW accounts.............................. 5,974 91 1.52 5,527 84 1.52
Certificate accounts...................... 58,419 3,141 5.28 58,275 3,362 5.77
FHLB advances............................. 16,307 861 5.28 3,773 194 5.14
--------- -------- -------- -------- ------- ------
Total interest-bearing liabilities...... 94,857 4,484 4.73 81,238 4,040 4.97
-------- -------
Non-interest-bearing liabilities............ 1,097 1,014
--------- --------
Total liabilities..................... 95,954 82,252
Equity...................................... 25,929 28,122
--------- --------
Total liabilities and equity.......... $ 121,883 $110,374
========= ========
Net interest income before provision
for estimated loan losses............... $ 4,638 $ 4,625
======== =======
Net interest rate spread(3)................. 2.94% 3.07%
==== ====
Net interest margin(4)...................... 3.90% 4.29%
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities.............. 125.37% 132.61%
====== ======
</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.
32
<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 Company's
interest income and interest expense during the periods indicated.
Information is provided in each category with respect to: (i) changes
attributable to changes in volume (changes in volume multiplied by prior
rate); (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume); and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year Ended September 30, 2000 Year Ended September 30, 1999
Compared to Compared to
Year Ended September 30, 1999 Year Ended September 30, 1998
--------------------------------- ----------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------- ----------------------
Volume Rate Net Volume Rate Net
--------- ---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits in other banks............. $ 13 $ (5) $ 8 $(139) $ 30 $(109)
Investment securities, net........................... 35 (1) 34 9 (3) 6
Loans receivable, net................................ 847 (113) 734 1,215 (385) 830
Mortgage-backed securities, net...................... (211) 37 (174) (189) (81) (270)
---- ------ ------ ------ ------- ------
Total change in interest income................... 684 (82) 602 896 (439) 457
Interest-bearing liabilities:
Passbook savings accounts............................ 2 -- 2 18 (19) 1
Money market accounts................................ (18) 1 (17) (5) (3) (8)
NOW accounts......................................... (8) 13 5 7 -- 7
Certificate accounts................................. (46) 132 86 8 (229) (221)
FHLB advances........................................ 664 121 785 662 5 667
----- ----- ----- ------- --------- -------
Total change in interest expense.................. 594 267 861 690 (246) 444
----- ----- ----- ------- ------ ------
Net change in net interest income........................ $ 90 $(349) $(259) $ 206 $(193) $ 13
====== ===== ====== ====== ===== =======
</TABLE>
33
<PAGE>
Comparison of Operating Results for the Years Ended September 30, 2000 and
September 30, 1999
General
Operating results of the Company are affected by general economic
conditions, monetary and fiscal policies of federal agencies and policies of
agencies regulating financial institutions. The Company's cost of funds is
influenced by interest rates on competing investments and general market
rates of interest. Lending activities are influenced by demand for real
estate loans and other types of loans which, in turn, is affected by the
interest rates at which such loans are made, general economic conditions and
availability of funds for lending activities.
The Company's net income is primarily dependent on its net interest
income (the difference between interest income generated on interest-earning
assets and interest expense incurred on interest-bearing liabilities). Net
income is also affected by provisions for loan losses, service charges,
gains on sale of assets and other income, noninterest expense and income
taxes. The Company's net income was $1,394,000 and $1,703,000 for the years
ended September 30, 2000 and 1999.
Interest Income
Interest income increased $602,000, or 6.2%, from $9.1 million for
the year ended September 30, 1999 to $9.7 million for the year ended
September 30, 2000. The increase in interest income resulted primarily from
an increase in interest and fees on loans. Such increase was due to higher
average loan balances related to the origination of new one- to four-family
real estate loans. This increase was partially offset by a decrease in
interest and dividends on securities. The decrease in these investments
resulted from a decrease in the volume of securities in the current year as
the majority of the proceeds from principal payments have been reinvested in
higher yielding loans.
Interest Expense
Interest expense increased $861,000, or 19.2%, from $4.5 million
for the year ended September 30, 1999 to $5.3 million for the year ended
September 30, 2000. The increase in interest expense was primarily due to an
increase in the volume of FHLB advances during 2000 along with an overall
increase in interest rates. The Company began using FHLB advances in fiscal
1998 to fund the Bank's loan growth.
Net Interest Income
Net interest income is the largest component of the Company's
income and is affected by the interest rate environment and volume and
composition of interest-earning assets and interest-bearing liabilities. Net
interest income decreased slightly by $259,000 to $4.4 million for the year
ended September 30, 2000. The decrease reflects the increase in market rates
as the interest-bearing liabilities have repriced more quickly than
interest-earning assets. This trend is evidenced by the decrease in the net
interest rate spread from 2.94% for the year ended September 30, 1999 to
2.49% for the year ended September 30, 2000.
The Company remains liability sensitive, whereby its interest-
bearing liabilities will generally reprice more quickly than its interest-
earning assets. Therefore, the Company's net interest margin will generally
increase in periods of falling interest rates in the market and will
decrease in periods of increasing interest rates. Accordingly, in a rising
interest rate environment, the Company may need to increase rates to attract
and retain deposits. Due to the negative gap position, the rise in interest
rates may not have such an immediate impact on interest-earning assets. This
lag could negatively affect net income.
Provision for Loan Losses
The Company maintains an allowance for loan losses in an amount,
which, in management's judgment, is adequate to absorb probable losses
inherent in the loan portfolio. While management utilizes its best judgment
and information available, ultimate adequacy of the allowance is dependent
on a variety of factors, including performance
34
<PAGE>
of the Company's loan portfolio, the economy, changes in real estate values
and interest rates and the view of the regulatory authorities toward loan
classifications. The provision for loan losses is determined by management
as the amount to be added to the allowance for loan losses after net charge-
offs have been deducted to bring the allowance to a level considered
adequate to absorb probable losses in the loan portfolio. The amount of the
provision is based on management's regular review of the loan portfolio and
consideration of such factors as historical loss experience, general
prevailing economic conditions, changes in size and composition of the loan
portfolio and specific borrower considerations, including ability of the
borrower to repay the loan and the estimated value of the underlying
collateral.
Provisions for loan losses totaled $36,000 for the year ended
September 30, 2000 compared to $30,000 for the year ended September 30,
1999. The provision for loan losses is based on management's assessment of
risk factors affecting the allowance for loan losses. The allowance for loan
losses was approximately .13% and .11% of total loans as of September 30,
2000 and 1999.
Non-Interest Income
Non-interest income totaled $49,000 for the year ended September
30, 2000 as compared to $55,000 for the year ended September 30, 1999. Non-
interest income decreased slightly due to a gain recognized on the sale of
real estate owned in fiscal 1999.
Non-Interest Expense
Non-interest expense increased $224,000, or 11.1% , from $2.0
million for the year ended September 30, 1999 to $2.2 million for the year
ended September 30, 2000. The increase was primarily due to an increase in
compensation and benefits and professional services. The increase in salary
and benefits was due to annual merit raises and additional recognition and
retention plan ("RRP") expense recognize for additional shares earned in
2000. The Company has incurred approximately $292,000 in professional fees
related to the proposed sale.
Income Taxes
The change in income tax expense is primarily attributable to the
change in net income before income taxes. Income tax expense totaled
$750,000, or an effective rate of 35.0% for the year ended September 30,
2000, compared to $937,000, or an effective rate of 35.5% for the year ended
September 30, 1999.
Comparison of Operating Results for the Years Ended September 30, 1999 and
September 30, 1998
General
The Company's net income is primarily dependent on its net interest
income (the difference between interest income generated on interest-earning
assets and interest expense incurred on interest-bearing liabilities). Net
income is also affected by provisions for loan losses, service charges,
gains on sale of assets and other income, noninterest expense and income
taxes. The Company's net income was $1,703,000 and $1,652,000 for the years
ended September 30, 1999 and 1998.
Interest Income
Interest income increased $457,000, or 5.3%, from $8.7 million for
the year ended September 30, 1998 to $9.1 million for the year ended
September 30, 1999. The increase in interest income resulted primarily from
an increase in interest and fees on loans. Such increase was due to higher
average loan balances related to the origination of new one- to four-family
real estate loans. This increase was partially offset by a decrease in
interest and dividends on securities and interest-bearing deposits. The
decrease in these investments resulted from a decrease in the volume of
securities and deposits in the current year as the majority of the proceeds
from principal payments have been reinvested in higher yielding loans.
35
<PAGE>
Interest Expense
Interest expense increased $444,000, or 11.0%, from $4.0 million
for the year ended September 30, 1998 to $4.5 million for the year ended
September 30, 1999. The increase in interest expense was primarily due to an
increase in the volume of FHLB advances during 1999. The Company began using
FHLB advances in fiscal 1998 to fund the Bank's loan growth. This increase
was partially offset by a decrease in interest expense on deposits due to a
lower cost of funds on certificates of deposit.
Net Interest Income
Net interest income is the largest component of the Company's
income and is affected by the interest rate environment and volume and
composition of interest-earning assets and interest-bearing liabilities. Net
interest income increased slightly by $13,000 to $4.6 million for the year
ended September 30, 1999. The Bank's continued growth is reflected by an
increase in average interest-earning assets. However, net interest income
does not correspond to this growth as interest-bearing liabilities have
repriced more quickly than their interest-earning assets. This trend is
evidenced by the decrease in the net interest rate spread from 3.07% for the
year ended September 30, 1998 to 2.94% for the year ended September 30,
1999.
Provision for Loan Losses
Provisions for loan losses totaled $30,000 for the year ended
September 30, 1999 compared to $12,000 for the year ended September 30,
1998. The provision for loan losses is based on management's assessment of
risk factors affecting the allowance for loan losses. The allowance for loan
losses was approximately 0.11% and 0.12% of total loans as of September 30,
1999 and 1998. Management believes the allowance for loan loss is adequate
to absorb probable losses; however, future additions to the allowance may be
necessary based on changes in economic conditions.
Non-Interest Income
Non-interest income totaled $55,000 for the year ended September
30, 1999 as compared to $51,000 for the year ended September 30, 1998. Non-
interest income increased slightly due to a gain recognized on the sale of
real estate owned.
Non-Interest Expense
Non-interest expense increased $96,000, or 5.0%, from $1.9 million
for the year ended September 30, 1998 to $2.0 million for the year ended
September 30, 1999. The increase was primarily due to an increase in
compensation and benefits and data processing services, partially offset by
a decrease in franchise taxes. The increase in salary and benefits was due
to annual merit raises and additional RRP expense recognized from an
increase in stock prices. The decrease in franchise taxes for fiscal 1999
resulted from a decrease in equity of the Company due to the stock
repurchase.
Income Taxes
The change in income tax expense is primarily attributable to the
change in net income before income taxes. Income tax expense totaled
$937,000, or an effective rate of 35.5% for the year ended September 30,
1999, compared to $1,085,000, or an effective rate of 39.6% for the year
ended September 30, 1998.
36
<PAGE>
Comparison of Financial Condition at September 30, 2000 and September 30,
1999
General
The Company's assets totaled $136.6 million at September 30, 2000,
an increase of $8.4 million, or 6.6%, from $128.2 million at September 30,
1999. The growth in assets was primarily in loans, partly offset by a
decrease in securities. Such loan growth was funded by borrowed funds and
the decrease in securities.
Securities
Total securities decreased $1.6 million from $8.7 million at
September 30, 1999, to $7.1 million at September 30, 2000. The decrease was
due to maturities and principal payments being reinvested in higher yielding
loans.
Loans
Net loans increased $9.6 million, or 8.5%, from $113.3 million at
September 30, 1999 to $122.9 million at September 30, 2000. The growth in
loans was primarily in one- to four-family real estate loans, which
increased $6.9 million, or 6.9%, during the period. Growth in real estate
loans is primarily related to growth in the Company's market area. Changes
in other types of loans were not significant.
Deposits
Total deposits increased $2.9 million, or 3.8%, from $76.8 million
at September 30, 1999 to $79.7 million at September 30, 2000. The increase
primarily resulted from an increase in certificates of deposit of $4.0
million.
Borrowings
Borrowings from the FHLB totaled $30.0 million at September 30,
2000, an increase of $5.0 million from September 30, 1999. Management has
increased its use of FHLB advances as an alternative source of funds in
order to continue to meet loan demand and greater leverage the capital of
the Company.
Equity
Shareholders' equity totaled $26.0 million at September 30, 2000,
an increase of $500,000 from $25.5 million at September 30, 1999. Equity as
a percentage of assets decreased from 19.9% at September 30, 1999 to 19.0%
at September 30, 2000. The decrease was primarily the result of the overall
growth of the Company and the purchase of 53,409 shares of its common stock
on the secondary market.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and
interest payments on loans and securities, and proceeds from the maturation
of securities. While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Company's bank subsidiary maintains a
liquidity ratio above the regulatory requirement. This requirement, which
may be varied at the direction of the OTS depending upon economic conditions
and deposit flows, is based upon a percentage of deposits and short-term
borrowings. The required ratio is currently 4%. The Bank's average
regulatory liquidity ratios were 10.30% and 12.2%, for the years ended
September 30, 2000 and 1999, respectively. The Bank's regulatory liquidity
ratio increased immediately after the consummation of the Conversion because
the bulk of the net conversion proceeds was initially invested in short-term
investment securities and subsequently decreased as the proceeds were used
to fund loan growth.
37
<PAGE>
The Company's cash flows are comprised of three primary
classifications: cash flows from operating activities, investing activities
and financing activities. Cash flows provided by operating activities were
$1.7 million, $2.0 million and $1.9 million for the years ended September
30, 2000, 1999 and 1998, respectively. Net cash from investing activities
consisted primarily of disbursements for loan originations and the purchase
of investments and mortgage- backed securities, offset by principal
collections on loans and proceeds from maturation of investments and
paydowns on mortgage-backed securities. Net cash from financing activities
consisted primarily of activity in deposit accounts, increases in FHLB
advances, cash dividends paid and treasury stock transactions. The net
increase in deposits was $2.9 million for the fiscal year ended September
30, 2000, while there was a net increase in deposits of $2.2 million for the
fiscal year ended September 30, 1999 and a net decrease in deposits of $1.7
million for the fiscal year ended September 30, 1998.
At September 30, 2000, the Company's bank subsidiary exceeded all
of its regulatory capital requirements with a tangible capital level of
$16.2 million, or 11.9%, of adjusted total assets, which is above the
required level of $2.0 million, or 1.5%; core capital of $16.2 million, or
11.9%, of adjusted total assets, which is above the required level of $4.1
million, or 3.0%; and risk-based capital of $16.4 million, or 22.1%, of
risk-weighted assets, which is above the required level of $5.9 million, or
8.0%.
The Bank's most liquid assets are cash and short-term investments.
The levels of these assets are dependent on the Bank's operating, financing,
lending and investing activities during any given period. At September 30,
2000, cash and short-term investments totaled $3.7 million. The Bank has
other sources of liquidity if a need for additional funds arises, including
securities maturing within one year and the repayment of loans. The Bank may
also utilize FHLB advances or the sale of securities available for sale as a
source of funds. At September 30, 2000, the Bank had $30.0 million of
advances outstanding from the FHLB and $1.3 million of mortgage-backed
securities available for sale.
At September 30, 2000, the Bank had outstanding commitments to
originate mortgage loans of $4.7 million compared to $2.9 million at
September 30, 1999. The Bank anticipates that it will have sufficient funds
available to meet its current loan origination commitments. Certificate
accounts which are scheduled to mature in less than one year from September
30, 2000 totaled $39.9 million. The Bank expects that a substantial portion
of the maturing certificate accounts will be retained by the Bank at
maturity. However, if a substantial portion of these deposits are not
retained, the Bank may utilize Federal Home Loan Bank advances, or raise
interest rates on deposits to attract new accounts, which may result in
higher levels of interest expense.
Impact of Inflation and Changing Prices
The Financial Statements and Notes thereto presented herein have
been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollar
amounts without considering the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in
the increased cost of the Bank's operations. Unlike industrial companies,
nearly all of the assets and liabilities of the Bank are monetary in nature.
As a result, interest rates have a greater impact on the Bank's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the price of
goods and services.
Impact of New Accounting Standards
Recent pronouncements by the Financial Accounting Standards Board
("FASB") will have an impact on financial statement issued in subsequent
periods. Set forth below are summaries of such pronouncements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by
SFAS Nos. 137 and 138, addresses the accounting for derivative instruments
and certain derivative instruments embedded in other contracts, and hedging
activities. The statement standardizes the accounting for derivative
instruments by requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. This is not expected to have a material effect as the Company does
not currently maintain any derivative holdings.
38
<PAGE>
Forward-Looking Statements
This report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions.
Certain statements contained in this report that are not historical
facts are forward-looking statements that are subject to certain risks and
uncertainties. When used herein, the terms "anticipates", "plans",
"expects", "believes", and similar expressions as they relate to the Company
or its management are intended to identify such forward-looking statements.
The Company's actual results, performance or achievements may materially
differ from those expressed or implied in the forward looking statements.
Risks and uncertainties that could cause or contribute to such material
differences include, but are not limited to, general economic conditions,
interest rate environment, competitive conditions in the financial services
industry, changes in law, government policies and regulations, and rapidly
changing technology affecting financial services.
The Company does not undertake -- and specifically disclaims any
obligation -- to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
---------------------------------------------------------------------
The Company, like other financial institutions, is subject to
direct and indirect market risk. Direct market risk exists from changes in
interest rates. To the extent that interest-bearing assets and interest-
bearing liabilities mature at different intervals, changes in market
interest rates can result in increases or decreases in net interest income.
This is also known as interest rate risk. Indirect market risk exists to the
extent that the Company has a concentration of loans secured by similar
assets and the market for those assets deteriorates. The Company's primary
risk of decline in the value of collateral relates to the fact that a
substantial portion of the Company's loans are secured by residential real
estate located within the local market area of the Company. The Company
manages the risk of decline in the value of the collateral by requiring
minimum loan to value ratios for the real estate loans it originates. In
addition, the Company always gives consideration to the credit worthiness of
the borrower in addition to depending on the value of the collateral when
underwriting loans. Direct exposure to interest rate risk is more
significant than indirect market risk and the Company monitors this risk
through a periodic quantitative analysis.
The principal objective of the Bank's interest rate risk management
function is to evaluate the interest rate risk included in certain balance
sheet accounts, determine the level of risk appropriate given the Bank's
business focus, operating environment, capital and liquidity requirements
and performance objectives, and manage the risk consistent with Board
approved guidelines. Through such management, the Bank seeks to reduce the
vulnerability of its operations to changes in interest rates. The Bank
monitors its interest rate risk as such risk relates to its operating
strategies. The Bank's Board of Directors reviews on a quarterly basis the
Bank's asset/liability position, including simulations of the effect on the
Bank's capital of various interest rate scenarios.
Net Portfolio Value. The Bank's interest rate sensitivity is
monitored by management through the use of a model which estimates the
change in net portfolio value ("NPV") over a range of interest rate
scenarios. NPV is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. An NPV Ratio, in any interest
rate scenario, is defined as the NPV in that scenario divided by the market
value of assets in the same scenario. The Sensitivity Measure is the decline
in the NPV Ratio, in basis points, caused by a 200 basis point (one basis
point equals 0.01%) increase or decrease in rates, whichever produces a
larger decline. The higher an institution's Sensitivity Measure is, the
greater its exposure to interest rate risk is considered to be. The Bank
utilizes a market value model prepared by the OTS (the "OTS NPV model"),
which is prepared quarterly, based on the Bank's quarterly Thrift Financial
Reports filed with the OTS. The OTS NPV model measures the Bank's interest
rate risk by approximating the
39
<PAGE>
Bank's NPV under various market interest rate scenarios which range from a
300 basis point increase to a 300 basis point decrease in market interest
rates.
The following table shows the NPV and projected change in the NPV
of the Bank at September 30, 2000 assuming an instantaneous and sustained
change in market interest rates of 100, 200 and 300 basis points, as
calculated by the OTS. The table indicates that the structure of the Bank's
assets and liabilities would result in a decline in the Bank's NPV in a
rising rate environment. Specifically, the table indicates that, at
September 30, 2000, the Bank's NPV was $16.6 million (or 12.5% of the market
value of portfolio assets) and that, based upon the assumptions utilized, an
immediate increase in market interest rates of 200 basis points would result
in a $7.2 million or 44% decline in the Bank's NPV and would result in a 500
basis point or 39.9% decline in the Bank's NPV ratio to 7.5%.
<TABLE>
<CAPTION>
2000 NPV as % of Portfolio
Net Portfolio Value Value of Assets
----------------------------------- -----------------------------
(Dollars in thousands)
Change NPV
in Rates $ Amount $ Change % Change Ratio % Change
----------- ------------- ------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
300 bp $ 5,896 $(10,721) 65% 4.90% 60.9%
200 bp 9,357 (7,259) 44 7.52 39.9
100 bp 12,981 (3,635) 22 10.10 19.3
Static 16,616 12.52
(100) bp 19,774 3,158 19 14.50 15.8
(200) bp 21,600 4,984 30 15.58 24.4
(300) bp 22,840 6,224 37 16.27 30.0
</TABLE>
<TABLE>
<CAPTION>
1999 NPV as % of Portfolio
Net Portfolio Value Value of Assets
----------------------------------- -----------------------------
(Dollars in thousands)
Change NPV
in Rates $ Amount $ Change % Change Ratio % Change
----------- ------------- ------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
300 bp $ 6,310 $(8,768) 58% 5.34% 54.1%
200 bp 9,328 (5,750) 38 7.64 34.4
100 bp 12,349 (2,730) 18 9.81 15.7
Static 15,079 11.64
(100) bp 16,934 1,856 12 12.79 9.9
(200) bp 17,829 2,750 18 13.28 14.1
(300) bp 18,475 3,396 23 13.59 16.8
</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.
40
<PAGE>
Item 8. Financial Statements and Supplementary Data.
-----------------------------------------------------
41
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Delphos Citizens Bancorp, Inc.
Delphos, Ohio
We have audited the accompanying consolidated statements of financial
condition of Delphos Citizens Bancorp, Inc. as of September 30, 2000 and
1999, and the related consolidated statements of income, comprehensive
income, changes in shareholders' equity, and cash flows for each of the
three years in the period ended September 30, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Delphos
Citizens Bancorp, Inc. as of September 30, 2000 and 1999, and the results of
its operations and its cash flows for each of the three years in the period
ended September 30, 2000, in conformity with generally accepted accounting
principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Columbus, Ohio
October 20, 2000
42
<PAGE>
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 2000 and 1999
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 2,191,658 $ 2,853,171
Interest-bearing deposits in other financial institutions 1,494,893 847,106
--------------- ----------------
Total cash and cash equivalents 3,686,551 3,700,277
Securities available for sale 1,309,631 1,864,283
Securities held to maturity (Estimated fair value of
$5,850,415 in 2000 and $6,932,862 in 1999) 5,772,169 6,804,708
Federal Home Loan Bank stock 1,631,300 1,250,000
Loans, net of allowance of $164,881 in 2000
and $133,493 in 1999 122,888,483 113,272,857
Premises and equipment, net 614,292 662,283
Accrued interest receivable 653,799 573,048
Other assets 71,208 100,110
--------------- ----------------
Total assets $ 136,627,433 $ 128,227,566
=============== ================
LIABILITIES
Deposits
Demand and NOW accounts $ 6,010,276 $ 5,452,072
Money market accounts 4,049,361 5,177,858
Savings and club 8,401,619 8,898,411
Certificates of deposit 61,272,630 57,312,249
--------------- ----------------
Total deposits 79,733,886 76,840,590
Federal Home Loan Bank advances 30,000,000 25,000,000
Escrow accounts 323,968 306,750
Accrued interest payable 206,091 52,734
Other liabilities 378,289 540,085
--------------- ----------------
Total liabilities 110,642,234 102,740,159
SHAREHOLDERS' EQUITY
Preferred Stock, no par value, 1,000,000 shares authorized,
none outstanding -- --
Common stock, $.01 par value, 4,000,000 shares authorized,
2,047,631 shares issued 20,476 20,476
Additional paid-in capital 20,161,428 20,055,178
Retained earnings 16,390,549 15,458,050
Treasury stock, at cost - 462,848 shares in 2000
and 409,439 shares in 1999 (8,681,160) (7,746,503)
Unearned employee stock ownership plan shares (1,175,257) (1,271,197)
Unearned recognition and retention plan shares (703,817) (995,176)
Accumulated other comprehensive income (loss) (27,020) (33,421)
--------------- ----------------
Total shareholders' equity 25,985,199 25,487,407
--------------- ----------------
Total liabilities and shareholders' equity $ 136,627,433 $ 128,227,566
=============== ================
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
43
<PAGE>
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans, including fees $ 8,994,002 $ 8,260,000 $ 7,430,071
Securities 569,603 744,504 1,013,701
FHLB stock dividends 101,976 68,230 62,495
Interest-bearing deposits 58,379 49,676 158,662
-------------- -------------- ---------------
9,723,960 9,122,410 8,664,929
Interest expense
Deposits 3,699,487 3,622,880 3,846,120
FHLB advances 1,645,509 861,185 194,214
-------------- -------------- ---------------
5,344,996 4,484,065 4,040,334
-------------- -------------- ---------------
Net interest income 4,378,964 4,638,345 4,624,595
Provision for loan losses 36,000 30,000 12,000
-------------- -------------- ---------------
Net interest income after
provision for loan losses 4,342,964 4,608,345 4,612,595
Non-interest income
Service charges and fees 38,585 39,967 39,429
Gain on sale of real estate owned -- 8,532 --
Other income 10,281 6,393 11,575
-------------- -------------- ---------------
48,866 54,892 51,004
Non-interest expense
Compensation and benefits 1,077,312 981,175 938,888
Occupancy expense 110,126 110,887 91,713
Data processing services 230,882 208,267 175,430
Professional fees 324,513 148,772 170,742
State franchise taxes 187,189 214,284 236,907
Other expenses 318,402 360,561 313,110
-------------- -------------- ---------------
2,248,424 2,023,946 1,926,790
-------------- -------------- ---------------
Income before income taxes 2,143,406 2,639,291 2,736,809
Income tax expense 749,759 936,700 1,084,678
-------------- -------------- ---------------
Net income $ 1,393,647 $ 1,702,591 $ 1,652,131
============== ============== ===============
Earnings per common share
Basic $ .99 $ 1.14 $ .97
Diluted $ .98 $ 1.12 $ .95
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
44
<PAGE>
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended September 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net income $1,393,647 $1,702,591 $1,652,131
Other comprehensive income (loss)
Unrealized holding gains (losses) on
available for sale securities
arising during the period 9,698 (46,134) (4,730)
Tax effect (3,297) 15,686 1,608
---------- ---------- ----------
Other comprehensive income (loss) 6,401 (30,448) (3,122)
---------- ---------- ----------
Comprehensive income $1,400,048 $1,672,143 $1,649,009
========== ========== ==========
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
45
<PAGE>
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
Years ended September 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Additional Unearned Unearned Other
Common Paid-in Retained Treasury ESOP RRP Comprehensive
Stock Capital Earnings Stock Shares Shares Income (Loss) Total
----- ------- -------- ----- ------ ------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1997 $20,476 $19,854,707 $12,969,205 $(1,479,065) $(1,463,076) $(1,186,019) $ 149 $28,716,377
Net income for the year
ended September 30, 1998 1,652,131 1,652,131
Cash dividends - $.24 per
share (455,275) (455,275)
Commitment to release
employee stock ownership
plan shares 95,041 95,940 190,981
Shares purchased under
recognition and retention
plan 18,488 (30,357) (30,357)
Shares earned under
recognition and retention
plan 129,256 147,744
Purchase 203,704 shares
of treasury stock at cost (4,158,581) (4,158,581)
Change in other
comprehensive income
(loss) (3,122) (3,122)
------- ----------- ----------- ----------- ----------- ----------- ---------- -----------
Balance at
September 30, 1998 $20,476 $19,968,236 $14,166,061 $(5,637,646) $(1,367,136) $(1,087,120) $ (2,973) $26,059,898
======= =========== =========== =========== =========== =========== ========== ===========
</TABLE>
--------------------------------------------------------------------------------
(Continued)
46
<PAGE>
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
Years ended September 30, 2000, 1999 and 1998
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Additional Unearned Unearned Other
Common Paid-in Retained Treasury ESOP RRP Comprehensive
Stock Capital Earnings Stock Shares Shares Income (Loss) Total
----- ------- -------- ----- ------ ------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1998 $20,476 $19,968,236 $14,166,061 $(5,637,646) $(1,367,136) $(1,087,120) $ (2,973) $26,059,898
Net income for the year
ended September 30, 1999 1,702,591 1,702,591
Cash dividends - $.24 per
share (410,602) (410,602)
Commitment to release
employee stock ownership
plan shares 73,453 95,939 169,392
Shares purchased under
recognition and retention
plan (43,488) (43,488)
Shares earned under
recognition and retention
plan 13,489 135,432 148,921
Purchase 117,799 shares
of treasury stock at cost (2,108,857) (2,108,857)
Change in other
comprehensive income
(loss) (30,448) (30,448)
------- ----------- ----------- ----------- ----------- ----------- ---------- -----------
Balance at
September 30, 1998 $20,476 $20,055,178 $15,458,050 $(7,746,503) $(1,271,197) $ (995,176) $ (33,421) $25,487,407
======= =========== =========== =========== =========== =========== ========== ===========
</TABLE>
--------------------------------------------------------------------------------
(Continued)
47
<PAGE>
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
Years ended September 30, 2000, 1999, 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Additional Unearned Unearned Other
Common Paid-in Retained Treasury ESOP RRP Comprehensive
Stock Capital Earnings Stock Shares Shares Income (Loss) Total
----- ------- -------- ----- ------ ------ ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1999 $20,476 $20,055,178 $15,458,050 $(7,746,503) $(1,271,197) $ (995,176) $(33,421) $25,487,407
Net income for the year
ended September 30, 2000 1,393,647 1,393,647
Cash dividends - $.28 per
share (445,378) (445,378)
Commitment to release
employee stock ownership
plan shares 43,923 95,940 139,863
Dividends on unallocated
ESOP shares 62,327 62,327
Shares earned under
recognition and retention
plan (15,770) 291,359 275,589
Purchase 53,409 shares
of treasury stock at cost (934,657) (934,657)
Change in other
comprehensive income (loss) 6,401 6,401
------- ----------- ----------- ----------- ----------- ---------- -------- -----------
Balance at
September 30, 2000 $20,476 $20,161,428 $16,390,549 $(8,681,160) $(1,175,257) $ (703,817) $(27,020) $25,985,199
======= =========== =========== =========== =========== ========== ======== ===========
</TABLE>
--------------------------------------------------------------------------------
(Continued)
48
<PAGE>
DELPHOS CITIZENS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,393,647 $ 1,702,591 $ 1,652,131
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of deferred loan
origination fees and costs (12,696) (16,319) (20,042)
Net accretion of securities (10,688) (14,310) (23,649)
Provision for loan losses 36,000 30,000 12,000
Depreciation 50,134 53,048 39,292
Gain on sale of real estate owned -- (8,532) --
Federal Home Loan Bank stock dividends (101,800) (68,000) (46,900)
Compensation expense on ESOP shares 139,863 169,392 190,981
Compensation expense on RRP shares 275,589 135,432 129,256
Tax benefit realized on vesting of RRP shares -- 13,489 18,488
Deferred income taxes (25,224) (20,936) 22,339
Net change in:
Accrued interest receivable other assets (51,849) (59,033) (100,856)
Accrued interest payable and other liabilities 13,488 129,232 12,809
--------------- ---------------- ----------------
Net cash from operating activities 1,706,464 2,046,054 1,881,998
--------------- --------------- ----------------
Cash flows from investing activities
Securities available for sale
Purchases -- -- (4,698,308)
Principal payments 562,852 2,688,402 831,779
Securities held to maturity
Maturities and principal payments 1,044,725 2,215,555 7,383,372
Purchases of Federal Home Loan Bank stock (279,500) (260,400) (40,900)
Net change in loans (9,638,930) (14,847,272) (14,192,653)
Proceeds from sale of real estate owned -- 54,999 --
Premises and equipment expenditures (2,143) (59,102) (34,818)
--------------- --------------- ----------------
Net cash from investing activities (8,312,996) (10,207,818) (10,751,528)
--------------- --------------- ----------------
</TABLE>
--------------------------------------------------------------------------------
(Continued)
49
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended September 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities
Net change in deposits $ 2,893,296 $ (2,233,801) $ 1,701,422
Net change in escrow accounts 17,218 40,463 30,197
Proceeds from FHLB advances 95,000,000 23,000,000 10,000,000
Repayments of FHLB advances (90,000,000) (8,000,000) (1,000,000)
Dividends on unallocated ESOP shares 62,327 -- --
RRP shares purchased -- (43,488) (30,357)
Cash dividends paid (445,378) (410,602) (455,275)
Purchase of treasury stock (934,657) (2,108,857) (4,158,581)
--------------- --------------- ---------------
Net cash from financing activities 6,592,806 10,243,715 6,087,406
--------------- --------------- ---------------
Net change in cash and cash equivalents (13,726) 2,081,951 (2,782,124)
Cash and cash equivalents at beginning of year 3,700,277 1,618,326 4,400,450
--------------- --------------- ---------------
Cash and cash equivalents at end of year $ 3,686,551 $ 3,700,277 $ 1,618,326
=============== =============== ===============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 5,191,639 $ 4,470,013 $ 4,034,845
Income taxes 782,000 936,702 890,000
Noncash activities
Transfers of loans to real estate owned -- 46,467 --
</TABLE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of Delphos Citizens Bancorp, Inc. (Delphos) and its wholly-
owned subsidiary, Citizens Bank of Delphos (Bank), together referred to as
the Company. All significant intercompany accounts and transactions have
been eliminated.
Nature of Operations: The Company, through the Bank, is engaged in the
business of banking with operations conducted through its office located in
Delphos, Ohio. The Company originates and holds primarily residential and
consumer loans to customers throughout the Allen and Van Wert County area in
Northwest Ohio, which generates the majority of the Company's income. The
Company's primary deposit products are interest-bearing checking accounts
and certificates of deposit. There are no branch operations.
Use of Estimates: To prepare financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and future results could differ. The allowance for loan losses,
fair values of financial instruments and status of contingencies are
particularly subject to change.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand,
amounts due from depository institutions and interest bearing deposits in
other financial institutions. Net cash flows are reported for loan and
deposit transactions.
50
<PAGE>
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold
them to maturity. Securities are classified as available for sale when they
might be sold before maturity. Securities available for sale are carried at
fair value, with unrealized holding gains and losses reported in other
comprehensive income. Other securities such as Federal Home Loan Bank stock
are carried at cost.
Interest income includes amortization of purchase premiums and discounts.
Gains and losses on sales are based on the amortized cost of the security
sold. Securities are written down to fair value when a decline in fair value
is not temporary.
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balances outstanding, net of deferred loan fees and costs, loans in process
and an allowance for loan losses.
Interest income is reported on the interest method and includes the
amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt,
typically when the loan is impaired or payments are past due over 90 days
(180 days for residential mortgages). Payments received on such loans are
reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision
for loan losses and decreased by charge-offs less recoveries. Management
estimates the allowance balance required based on past loan loss experience,
the nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions and other
factors. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in management's
judgment, should be charged-off.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer and credit card loans, and on an
individual basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loans are reported net, at the present
value of estimated future cash flows using the loan's existing rate or at
the fair value of collateral if repayment is expected solely from the
collateral.
Foreclosed Assets: Assets acquired through or in lieu of loan foreclosure
are initially recorded at fair value when acquired, establishing a new cost
basis. If fair value declines, a valuation allowance is recorded through
expense. Costs after acquisition are expensed.
Premises and Equipment: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. Depreciation is computed over
the assets useful lives on a straight line basis. These assets are reviewed
for impairment when events indicate the carrying amount may not be
recoverable. Maintenance and repairs are expensed and major improvements are
capitalized.
Stock Compensation: Employee compensation expense under the stock option
plans is reported if options are granted below market price at grant date.
Pro forma disclosures of net income and earnings per share are shown using
the fair value method of SFAS No. 123 to measure expense using an option
pricing model to estimate fair value.
Income Taxes: Income tax expense is the total of the current year income tax
due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax amounts of
temporary differences between the carrying amounts and tax basis of assets
and liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
51
<PAGE>
Financial Instruments: Financial instruments include off-balance sheet
credit instruments, such as commitments to make loans and standby letters
of credit, issued to meet customer financing needs. The face amount of these
items represents the exposure to loss, before considering customer
collateral or ability to repay. Such financial instruments are recorded when
they are funded.
Earnings Per Common Share: Basic earnings per common share is net income
divided by the weighted average number of shares outstanding during the
period. Employee Stock Ownership Plan ("ESOP") shares are considered to be
outstanding for this calculation unless unearned. Recognition and Retention
Plan ("RRP") shares are considered outstanding as they become vested.
Diluted earnings per common share includes the dilutive effect of RRP shares
and the additional potential common shares issuable under stock options.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains
and losses on securities available for sale, which is also recognized as a
separate component shareholders' equity.
New Accounting Pronouncement: Beginning October 1, 2000, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be
recorded by offsetting gains and losses on the hedge and on the hedged item,
even if the fair value of the hedged item is not otherwise recorded. This is
not expected to have a material effect, but the effect will depend on
derivative holdings when this standard applies.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when
the likelihood of loss is probable and an amount or range of loss can be
reasonably estimated. Management does not believe there now are such matters
that will have a material effect on the financial statements.
Restrictions on Cash: The Company was required to have $591,000 and $653,000
of cash on hand or on deposit with the Federal Reserve Bank to meet
regulatory reserve and clearing balance requirements at year end 2000 and
1999. These balances do not earn interest.
Dividend Restriction: Banking regulations require maintaining certain
capital levels that may limit the amount of dividends paid by the Bank to
Delphos or by Delphos to shareholders.
Fair Value of Financial Instruments: Fair values of financial instruments
are estimated using relevant market information and other assumptions, as
more fully disclosed in a separate note. Fair value estimates involve
uncertainties and matters of significant judgement regarding interest rates,
credit risk, prepayments and other factors, especially in the absence of
broad markets for particular items. Changes in assumptions or in market
conditions could significantly affect the estimates.
Concentration of Credit Risk: The Bank grants loans to customers located
primarily in Allen and Van Wert counties. Although the Company has a
diversified loan portfolio, a substantial portion of its debtors' ability to
repay their loans is dependent on the economy in Allen and Van Wert
counties.
Business Segment: Internal financial information is primarily reported and
aggregated solely in the line of the business of banking.
Reclassifications: Certain reclassification have been made to amounts
previously reported to conform to the current financial statement
presentation.
52
<PAGE>
NOTE 2 - SECURITIES
Year end securities were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
September 30, 2000
Available for sale
Ginnie Mae Certificates $ 567,110 $ 1,725 $ (9,319) $ 559,516
Fannie Mae Certificates 783,461 -- (33,346) 750,115
--------------- -------------- --------------- ---------------
Total $ 1,350,571 $ 1,725 $ (42,665) $ 1,309,631
=============== ============== =============== ===============
Held to maturity
Ginnie Mae Certificates $ 5,745,376 $ 100,005 $ (22,778) $ 5,822,603
Freddie Mac Certificates 26,793 1,019 -- 27,812
--------------- -------------- --------------- ---------------
Total $ 5,772,169 $ 101,024 $ (22,778) $ 5,850,415
=============== ============== =============== ===============
September 30, 1999
Available for sale
Ginnie Mae Certificates $ 612,628 $ 1,928 $ (11,486) $ 603,070
Fannie Mae Certificates 1,302,293 -- (41,080) 1,261,213
--------------- -------------- --------------- ---------------
Total $ 1,914,921 $ 1,928 $ (52,566) $ 1,864,283
=============== ============== =============== ===============
Held to maturity
Ginnie Mae Certificates $ 6,751,603 $ 156,048 $ (29,891) $ 6,877,760
Freddie Mac Certificates 53,105 1,997 -- 55,102
--------------- -------------- --------------- ---------------
Total $ 6,804,708 $ 158,045 $ (29,891) $ 6,932,862
=============== ============== =============== ===============
</TABLE>
There were no sales of securities during the years ended September 30, 2000,
1999 and 1998.
53
<PAGE>
DELPHOS CITIZENS BANCORP, INC.
NOTE 3 - LOANS
Loans at year end were as follows:
2000 1999
---- ----
Real estate loans
One- to four-family $106,362,753 $ 99,540,099
Multi-family 1,901,537 2,276,434
Commercial real estate 6,621,302 6,562,409
Construction and land 6,937,929 5,413,046
------------ ------------
121,823,521 113,791,988
Less:
Mortgage loans in process (4,137,097) (3,717,498)
Net deferred loan origination fees (28,980) (28,205)
------------ ------------
117,657,444 110,046,285
Consumer and other loans
Manufactured homes 97,966 116,985
Home equity loans 4,474,024 2,326,539
Unsecured loans 76,078 133,286
Other consumer loans 747,852 783,255
------------ ------------
5,395,920 3,360,065
Less: Allowance for loan losses (164,881) (133,493)
------------ ------------
$122,888,483 $113,272,857
============ ============
Activity in the allowance for loan losses for the year was as follows:
2000 1999 1998
---- ---- ----
Balance at beginning of period $133,493 $118,360 $106,360
Provision charged to income 36,000 30,000 12,000
Charge-offs (4,862) (14,867) --
Recoveries 250 -- --
-------- -------- --------
Balance at end of period $164,881 $133,493 $118,360
======== ======== ========
As of and for the years ended September 30, 2000, 1999 and 1998,
there were no impaired loans.
Certain directors and executive officers of the Company and the
Bank and their related interests were loan customers of the Bank.
A summary of activity on related party loans during fiscal 2000
was as follows:
Beginning balance $ 302,381
New loans 63,500
Repayments (116,805)
------------
Ending balance $ 249,076
============
54
<PAGE>
DELPHOS CITIZENS BANCORP, INC.
NOTE 4 - PREMISES AND EQUIPMENT
Year end premises and equipment were as follows:
2000 1999
---- ----
Land $ 175,654 $ 175,654
Building and improvements 643,190 643,190
Furniture and equipment 323,950 321,807
---------- ----------
1,142,794 1,140,651
Accumulated depreciation (528,502) (478,368)
---------- ----------
$ 614,292 $ 662,283
========== ==========
NOTE 5 - DEPOSITS
Time deposits of $100,000 or more were $5,445,000
and $4,978,000 at year end 2000 and 1999.
Scheduled maturities of time deposits for the next
five years were as follows:
Year Ending September 30:
2001 $39,920,818
2002 19,586,099
2003 835,359
2004 754,176
2005 176,178
-----------
$61,272,630
===========
NOTE 6 - FEDERAL HOME LOAN BANK ADVANCES
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Cincinnati.
As a member, the Bank has the ability to obtain advances from the FHLB. The
Bank had variable rate borrowings totaling $20,000,000, with interest rates
of 6.90% at September 30, 2000 and $15,000,000 at September 30, 1999, with
interest rates ranging from 5.15% to 5.77%. The Bank had fixed rate
borrowings totaling $10,000,000, with interest rates ranging from 4.61% to
6.49% at September 30, 2000 and $10,000,000 at September 30, 1999, with an
interest rates ranging from 4.61% to 5.12%.
The maximum month-end balance of FHLB advances outstanding was $30,000,000
in 2000 and $25,000,000 in 1999. Average balances of borrowings outstanding
during fiscal 1999 and 1998 were $27,655,000 and $16,307,000. Qualifying
first mortgage loans and FHLB stock owned by the Bank totaling $45,000,000
and $1,631,000 at September 30, 2000 and $37,500,000 and $1,250,000 at
September 30, 1999 were pledged as collateral for FHLB advances.
Principal payments of $20,000,000 are due in fiscal 2000, $5,000,000 in
fiscal 2009 and $5,000,000 in fiscal 2010.
55
<PAGE>
DELPHOS CITIZENS BANCORP, INC.
NOTE 7 - INCOME TAXES
Income tax expense was as follows:
2000 1999 1998
---- ---- ----
Current $ 774,983 $ 944,147 $ 1,043,851
Tax effect of vesting RRP shares -- 13,489 18,488
Deferred (25,224) (20,936) 22,339
--------- --------- -----------
$ 749,759 $ 936,700 $ 1,084,678
========= ========= ===========
Year end deferred tax assets and liabilities were due to the following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Deferred tax assets
Deferred loan fees $ 3,604 $ 4,283
Non-accrual interest 3,385 4,531
ESOP expense 24,465 24,465
Recognition and retention plan 25,556 14,299
Unrealized loss on securities available for sale 13,920 17,217
--------- ---------
70,930 64,795
Deferred tax liabilities
Bad debt deduction (108,597) (160,433)
FHLB stock dividends (221,952) (187,340)
Depreciation (7,478) (6,046)
--------- ---------
(338,027) (353,819)
--------- ---------
Net deferred tax liability $(267,097) $(289,024)
========= =========
</TABLE>
Effective tax rates differ from federal statutory rates applied
to financial statement income due to the following:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Income tax computed at the
statutory rate $ 728,758 $ 897,359 $ 930,515
Tax effect of other items 21,001 39,341 154,163
------------- ------------- -------------
$ 749,759 $ 936,700 $ 1,084,678
============= ============= =============
Statutory tax rate 34.0% 34.0% 34.0%
============= ============= =============
Effective tax rate 35.0% 35.5% 39.6%
============= ============= =============
</TABLE>
Prior to enactment of legislation discussed below, thrifts which met certain
test relating to the composition of assets had been permitted to establish
reserves for bad debts and to make annual additions thereto which could,
within specified formula limits, be taken as a deduction in computing
taxable income for federal income tax purposes. The amount of the bad debt
reserve deduction for "nonqualifying loans" was computed under the
experience method. The amount of bad debt reserve deduction for "qualifying
real property loans" could be computed under either the experience method or
the percentage of taxable income method, based on an annual election.
56
<PAGE>
DELPHOS CITIZENS BANCORP, INC.
NOTE 7 - INCOME TAXES (Continued)
In August 1996, legislation was enacted that repeals the percentage of
taxable income method of accounting used by many thrifts to calculate their
bad debt reserve for federal income tax purposes. As a result, thrifts such
as the Bank must recapture that portion of the reserve that exceeds the
amount that could have been taken under the experience method for tax years
beginning after December 31, 1987. The legislation also requires thrifts to
account for bad debts for federal income tax purposes on the same basis as
commercial banks for tax years beginning after December 31, 1995. The
recapture occurs over a six-year period, the commencement of which was
delayed until the first taxable-year beginning after December 31, 1998,
provided the institution meets certain residential lending requirements. At
September 30, 2000 and 1999, the Bank had $484,285 and $605,357 in bad debt
reserves subject to recapture for federal income tax purposes. The deferred
tax liability related to the recapture has been previously established. In
fiscal 2000 and 1999, $121,072 bad debt reserves were recaptured.
Retained earnings at September 30, 2000 and 1999, include approximately
$1,860,000 for which no provision for federal income taxes has been made.
This amount represents the qualifying and nonqualifying tax bad debt reserve
as of December 31, 1987, the Company's base year for calculating the bad
debt deduction for tax purposes. The related amount of unrecognized deferred
tax liability was $631,000 at September 30, 2000 and 1999. If this portion
of retained earnings is used in the future for any purpose other than to
absorb bad debts, it will be added to future taxable income.
NOTE 8 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
Some financial instruments, such as loan commitments, credit lines, letters
of credit and overdraft protection are issued to meet customer financing
needs. These are arrangements to provide credit or to support the credit of
others, as long as conditions established in the contract are met, and
usually have expiration dates. Commitments may expire without being used.
Off-balance sheet risk to credit losses exists up to the face amount of
these instruments, although material losses are not anticipated. The same
credit policies are used to make such commitments as are used for loans,
including obtaining collateral at exercise of the commitment.
As of September 30, 2000, the Company had commitments to make loans at
market rates of $4,748,000. Of these commitments, $1,207,000 had fixed rates
ranging from 8.00% to 8.875%, and $3,541,000 had variable rates. The
commitment period ranged from 30 to 90 days. As of September 30, 1999, the
Company had commitments to make loans at market rates of $2,945,000. Of
these commitments, $688,000 had fixed rates ranging from 7.50% to 8.50%, and
$2,257,000 had variable rates. Since loan commitments may expire without
being used, the amount does not necessarily represent future cash
commitments.
The Company and the Bank have entered an employment agreement with the chief
executive officer of the Company and the Bank. The agreement provides for a
term of three years and a salary and performance review by the Board of
Directors not less than annually, as well as inclusion of the employee in
any formally established employee benefit, bonus, pension and profit-sharing
plans for which management personnel are eligible.
57
<PAGE>
DELPHOS CITIZENS BANCORP, INC.
NOTE 8 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES (Continued)
During fiscal 2000, the Board of Directors approved the Citizens Bank of
Delphos Employee Severance Compensation Plan to provide benefits to eligible
employees in the event of a change in control. Generally, eligible employees
are those employees who have completed twelve consecutive moths of service
with the Bank. Under the Plan, participants terminated in conjunction with a
change in control will be entitled to receive a severance benefit equal to
1/26/th/ of their annual compensation for each year of service up to a
maximum of 100% of the participant's annual compensation. Pursuant to the
Affiliation Agreement by and between United Bancshares, Inc. and Delphos
Citizens Bancorp, Inc. dated August 25, 2000, the Delphos Employee Severance
Compensation Plan was terminated as of August 25, 2000.
NOTE 9 - PROFIT SHARING
The Company sponsors a 401(k) profit sharing plan for eligible employees.
Under the plan, employees who are at least 21 1/2 years of age and have
completed six months of service are eligible to participate. Employees may
contribute up to 10% of their annual pre-tax compensation. The Bank may
contribute as a matching contribution, a discretionary percentage of up to
6% of the employees' contribution. The Company may also make special
discretionary contributions equal to a percentage of the employees'
compensation. Participants become 100% vested as to the Bank's contributions
after five years of service. The contribution expense included in
compensation and benefits was $5,801, $18,543, and $5,474 for 2000, 1999 and
1998.
NOTE 10 - EMPLOYEE STOCK OWNERSHIP PLAN
Effective December 31, 1996, the Company established an Employee Stock
Ownership Plan ("ESOP") for the benefit of employees 21 and older and who
have completed at least one year of service and 1,000 hours of work.
Contributions under the ESOP are conditioned upon the ESOP being qualified
under Sections 401 and 501 of the Internal Revenue Code of 1986, as amended
(the "Code").
To fund the plan, the ESOP borrowed $1,630,970 from the Company for the
purposes of purchasing 163,097 shares of stock at $10 per share when the
Company converted to stock. Principal and interest payments on the loan are
due in annual installments that began December 31, 1996, with the final
payments of principal and interest being due and payable at maturity on
December 31, 2013. Interest is payable during the term of the loan at a
fixed rate of 8.25%. The loan is collateralized by the shares of the
Company's common stock purchased with the proceeds. As the Bank periodically
makes contributions to the ESOP to repay the loan, shares will be allocated
to participants on the basis of the ratio of each year's principal and
interest payments to the total of all principal and interest payments.
The shares pledged as collateral are reported as unearned ESOP shares in the
consolidated balance sheet. As shares are committed to be released from
collateral, the Company reports compensation expense equal to the current
market price of the shares, and the shares become outstanding for earnings
per share computations. Dividends on allocated ESOP shares are recorded as a
reduction of retained earnings, while dividends on unallocated ESOP shares
are recorded as a reduction of debt. ESOP compensation was $139,862,
$169,392, and $190,981 for 2000, 1999 and 1998.
58
<PAGE>
DELPHOS CITIZENS BANCORP, INC.
NOTE 10 - EMPLOYEE STOCK OWNERSHIP PLAN (Continued)
The ESOP shares at September 30, 2000 and 1999 were as follows:
2000 1999
---- ----
Allocated shares 35,978 28,782
Shares committed to be released 7,196 7,196
Unreleased shares 119,923 127,119
----------- -----------
Total ESOP shares 163,097 163,097
=========== ===========
Fair value of unreleased shares $ 1,454,066 $ 2,161,023
=========== ===========
NOTE 11 - STOCK OPTION AND INCENTIVE PLAN
In 1997, the shareholders approved a Stock Option plan reserving 203,871
shares of common stock for the granting of options to certain officers and
directors of the Bank and Company. The option period expires 10 years from
the date of grant. Vesting of options granted to officers and directors is
determined at the time of the grant, generally four to five years after the
date of the grant.
A summary of activity in the plan is as follows.
<TABLE>
<CAPTION>
2000 1999 1998
------------------------ ------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- --------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 117,225 $ 14.29 117,225 $ 14.29 112,128 $ 14.00
Granted 3,823 13.00 -- -- 5,097 20.75
Exercised -- -- -- -- -- --
Forfeited -- -- -- -- -- --
----------- --------- ----------- ------- ----------- ---------
Outstanding at end of year 121,048 $ 14.25 117,225 $ 14.29 117,225 $ 14.29
=========== ========= =========== ======= =========== =========
Options exercisable at year end 71,100 $ 14.22 46,125 $ 14.19 22,426 $ 14.00
=========== ========= =========== ======= =========== =========
Options outstanding at year-end 2000 were as follows.
</TABLE>
Weighted Average
Remaining
Exercise Shares Contract Shares
Price Outstanding Life (Months) Exercisable
----------- ------------ ----------------- -----------
$ 13.00 3,823 114 1,274
14.00 112,128 80 67,277
20.75 5,097 92 2,549
----------- ----- ----------
121,048 82 71,100
=========== ===== ==========
59
<PAGE>
DELPHOS CITIZENS BANCORP, INC.
The following table presents the fair value of options granted using the
Black-Scholes options pricing model along with the assumptions used in the
computation:
Expected
Fair Value Risk-Free Expected Expected Stock Price
Date of Grant of Options Interest Rate Life Dividends Volatility
------------- ---------- ------------- ---- --------- ----------
May 1997 $ 3.83 6.67% 7 years 1.50% 8.40%
May 1998 5.14 5.72 7 years 1.50 37.52
March 2000 4.62 6.40 7 years 2.11 27.59
SFAS No. 123 requires pro forma disclosures for companies not adopting its
fair value of accounting method for stock-based compensation. Accordingly,
the following pro forma information presents net income had the fair value
method been used to measure compensation cost for stock option plans. No
compensation expense was recognized for the years ended September 30, 2000,
1999 and 1998.
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net income as reported $ 1,393,647 $ 1,702,591 $ 1,652,131
Pro forma net income 1,299,211 1,636,274 1,593,977
Basic earnings per common share as reported .99 1.14 .97
Pro forma basic earnings per common share .92 1.09 .93
Diluted earnings per common share as reported .98 1.12 .95
Pro forma diluted earnings per common share .92 1.08 .92
</TABLE>
NOTE 12 - RECOGNITION AND RETENTION PLAN
A Recognition and Retention Plan ("RRP") was approved by the shareholders of
the Company and the Board of Directors on May 28, 1997. The RRP is being
used as a means of providing directors and certain key employees of the Bank
with an ownership interest in the Company in a manner designed to reward and
retain such directors and key employees. The Company contributed $1,270,735
to enable the RRP to purchase 81,549 shares in the open market during the
year ended September 30, 1997. The Board granted 43,222 shares to directors,
officers and employees on May 28, 1997. The shares vest at a rate of 20% per
year on the anniversary date of the grant. The Board granted an additional
21,317 and 2,378 shares in 2000 and 1998 and those shares vest at a rate of
33 1/3% per year for the 2000 grant and 25% per year for the 1998 grant on
the anniversary date of the grant. Compensation expense, which is based on
the cost of the shares, was $275,591, $135,432 and $129,256 for 2000, 1999
and 1998. The unamortized unearned compensation value of the RRP is shown as
a reduction to shareholders' equity.
NOTE 13 - REGULATORY MATTERS
Banks are subject to regulatory capital requirements administered by federal
regulatory agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities and
certain off-balance sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to
qualitative judgments by the regulators. Failure to meet capital
requirements can initiate regulatory action.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are
not used to represent overall financial condition. If adequately
60
<PAGE>
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
Actual and required capital amounts (in thousands) and ratios are presented
below at year end:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
2000
----
Total capital to
risk weighted assets $ 16,399 22.11% $ 5,934 8.00% $ 7,417 10.0%
Tier 1 (core) capital to
risk weighted assets 16,234 21.89 2,967 4.00 4,450 6.00
Tier 1 (core) capital to
adjusted total assets 16,234 11.88 4,099 3.00 6,831 5.00
Tangible capital to
adjusted total assets 16,234 11.88 2,049 1.50 N/A N/A
1999
----
Total capital to
risk weighted assets $ 12,444 18.06% $ 5,512 8.00% $ 6,890 10.00%
Tier 1 (core) capital to
risk weighted assets 12,311 17.87 2,756 4.00 4,134 6.00
Tier 1 (core) capital to
adjusted total assets 12,311 9.60 3,848 3.00 6,413 5.00
Tangible capital to
adjusted total assets 12,311 9.60 1,924 1.50 N/A N/A
</TABLE>
Banking regulations limit capital distributions by banks. Generally, capital
distributions are limited to the current year to date undistributed net
income and prior two years' undistributed net income, as long as the
institution remains well capitalized after the proposed distribution. At
September 30, 2000 and 1999, approximately $177,000 was available to pay
dividends to Delphos.
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as
follows at year end:
<TABLE>
<CAPTION>
2000 1999
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 3,686,551 $ 3,687,000 $ 3,700,277 $ 3,700,000
Securities available for sale 1,309,631 1,310,000 1,864,283 1,864,000
Securities held to maturity 5,772,169 5,850,000 6,804,708 6,933,000
FHLB Stock 1,631,300 1,631,000 1,250,000 1,250,000
Loans, net 122,888,483 120,347,000 113,272,857 112,278,000
Accrued interest receivable 653,799 654,000 573,048 573,000
Financial Liabilities
Deposits $ (79,733,886) $ (79,369,000) $ (76,840,590) $ (76,843,000)
FHLB advances (30,000,000) (28,361,000) (25,000,000) (24,712,000)
Accrued interest payable (206,091) (206,000) (52,734) (53,000)
</TABLE>
61
<PAGE>
The methods and assumptions used to estimate fair value are described as
follows:
Carrying amount is the estimated fair value for cash and cash equivalents,
short-term borrowings, Federal Home Loan Bank stock, accrued interest
receivable and payable, demand deposits, short-term debt and variable-rate
loans or deposits that reprice frequently and fully. Security fair values
are based on market prices or dealer quotes and, if no such information is
available, on the rate and term of the security and information about the
issuer. For fixed-rate loans or deposits and for variable rate loans or
deposits with infrequent repricing or repricing limits, fair value is based
on discounted cash flows using current market rates applied to the estimated
life and credit risk. Fair values for impaired loans are estimated using
discounted cash flow analyses or underlying collateral values. Fair value of
debt is based on current rates for similar financing. The fair value of off-
balance sheet items is based on current fees or cost that would be charged
to enter into or terminate such arrangements.
While these estimates of fair value are based on management's judgment of
the most appropriate factors as of the balance sheet date, there is no
assurance that the estimated fair values would have been realized if the
assets had been disposed of or the liabilities settled at that date, since
market values may differ depending on various circumstances. The estimated
fair values would also not apply to subsequent dates.
In addition, other assets and liabilities that are not financial
instruments, such as property and equipment, are not included in the above
disclosures. Also, nonfinancial instruments typically not recognized on the
balance sheet may have value but are not included in the above disclosures.
These include, among other items, the estimated earnings power of core
deposits, the trained workforce, customer goodwill and similar items.
NOTE 15 - EARNINGS PER COMMON SHARE
The factors used in the earnings per share computation were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Basic earnings per common share
-------------------------------
Net income $ 1,393,647 $ 1,702,591 $ 1,652,131
============== ============== ==============
Weighted average common shares
outstanding 1,590,246 1,689,988 1,927,432
Less: Average unallocated ESOP
shares (122,698) (127,119) (141,883)
Less: Average nonvested RRP shares (53,848) (63,001) (74,655)
-------------- -------------- --------------
Average shares 1,413,700 1,499,868 1,710,894
============== ============== ==============
Basic earnings per common share $ .99 $ 1.14 $ .97
============== ============== ==============
Diluted earnings per common share
Net income $ 1,393,647 $ 1,702,591 $ 1,652,131
============== ============== ==============
Weighted average common shares
outstanding for basic earnings per
common shares 1,413,700 1,499,868 1,710,894
Add: Dilutive effects of average
nonvested RRP shares -- 5,190 --
Add: Dilutive effects of stock options 4,416 14,354 29,448
-------------- -------------- --------------
Average shares and dilutive potential
common shares 1,418,116 1,519,412 1,740,342
============== ============== ==============
Diluted earnings per common share $ .98 $ 1.12 $ .95
============== ============== ==============
</TABLE>
62
<PAGE>
Stock options for 5,097 shares of common stock were not considered in
computing diluted earnings per common share for the years ended September
30, 2000, 1999 and 1998, as they were antidilutive.
NOTE 16 - PROPOSED SALE
On August 25, 2000, the Company entered into an Affiliation Agreement with
United Bancshares, Inc. in which each share of Delphos' common stock, $.01
par value per share, issued and outstanding will be converted into the right
to receive .8749 of a share of United Bancshares, Inc. common stock, without
par value or cash in lieu thereof for fractional shares, if any, and $5.41
in cash. The transaction will be accounted for as a purchase and is expected
to close in January 2001. The proposed sale is contingent upon shareholder
and regulatory approval. Professional fees of approximately $290,000
directly related to the proposed sale are included in fiscal 2000 net
income.
NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed Balance Sheets
September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Assets
Cash and due from banks $ 8,423,956 $ 11,740,735
Investment in subsidiary 16,208,721 12,293,855
Loan receivable from ESOP 1,247,212 1,343,152
Accrued interest receivable and other assets 105,310 109,665
--------------- ----------------
Total assets $ 25,985,199 $ 25,487,407
=============== ================
Total shareholders' equity $ 25,985,199 $ 25,487,407
=============== ================
</TABLE>
Condensed Statements of Income
Years Ended September 30, 2000 and 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income
Dividends from subsidiary bank $ -- $ 2,000,000 $ 2,500,000
Deposits in subsidiary bank 2,816 39,263 110,524
Securities -- -- 69,486
Loan to ESOP 104,874 112,789 165,581
-------------- -------------- ---------------
107,690 2,152,052 2,845,591
Other expenses 155,230 91,420 95,467
-------------- -------------- ---------------
Income(loss) before taxes and equity in
undistributed earnings of subsidiary (47,540) 2,060,632 2,750,124
Income tax expense (benefit) (10,500) 22,700 179,845
--------------- -------------- ---------------
Income before equity in undistributed
earnings of subsidiary (37,040) 2,037,932 2,570,279
Undistributed earnings (Distributions in excess
of earnings) of subsidiary 1,430,687 (335,341) (918,148)
-------------- -------------- ---------------
Net income $ 1,393,647 $ 1,702,591 $ 1,652,131
============== ============== ===============
</TABLE>
63
<PAGE>
Condensed Statements of Cash Flows
Years Ended September 30, 2000 and 1999 and 1998
<TABLE>
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,393,647 $ 1,702,591 $ 1,652,131
Adjustments to reconcile net income to cash
provided by operations:
(Undistributed earnings) distributions in excess
of earnings of subsidiary (1,430,687) 335,341 918,149
Other 4,357 39,102 85,940
-------------- -------------- ----------------
Net cash from operating activities (32,683) 2,077,034 2,656,220
Cash flows from investing activities
Net change in receivable from subsidiary -- -- 1,270,734
Net change in loan to ESOP 95,940 95,939 7,095,940
Injection of capital into subsidiary (2,000,000) -- --
-------------- -------------- ----------------
Net cash from investing activities (1,904,060) 95,939 13,366,674
Cash flows from financing activities
Cash dividends paid (445,378) (410,602) (455,275)
RRP shares purchased -- (43,488) (30,357)
Purchase of treasury stock (934,658) (2,108,857) (4,158,581)
-------------- -------------- ----------------
Net cash from financing activities (1,380,036) (2,562,947) (4,644,213)
-------------- -------------- ----------------
Net change in cash and cash equivalents (3,316,779) (389,974) 11,378,681
Cash and cash equivalents at beginning of year 11,740,735 12,130,709 752,028
-------------- -------------- ----------------
Cash and cash equivalents at end of year $ 8,423,956 $ 11,740,735 $ 12,130,709
============== ============== ================
</TABLE>
NOTE 18 - QUARTERLY FINANCIAL DATA (Unaudited)
The following is a consolidated summary of quarterly information:
<TABLE>
<CAPTION>
Quarter Ended
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
2000
----
Interest income $ 2,352 $2,377 $2,474 $2,521
Net interest income 1,112 1,122 1,115 1,030
Provision for loan losses 9 9 9 9
Net income 424 347 365 258
Earnings per share
Basic $ .30 $ .25 $ .26 $ .18
Diluted .29 .25 .26 .18
1999
----
Interest income $ 2,289 $2,277 $2,261 $2,295
Net interest income 1,185 1,185 1,152 1,116
Provision for loan losses 3 9 9 9
Net income 441 424 440 398
Earnings per share
Basic $ .29 $ .28 $ .30 $ .27
Diluted .29 .28 .29 .27
</TABLE>
64
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
-----------------------------------------------------------------------
Financial Disclosure.
--------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
-------------------------------------------------------------
The name, age, position, term of office as officer and period
during which he or she has served as an officer is provided below for each
executive officer of the Registrant and the Bank.
Joseph R. Reinemeyer, Chairman of the Board, President, Chief
Executive Officer of the Registrant and the Bank; joined the Bank in 1975.
Prior to holding these positions, Mr. Reinemeyer served as Executive Vice
President and Managing Officer of the Bank from 1982 to 1996, and he is 51
years old.
Nancy C. Rumschlag has served as Vice President of the Registrant
and the Bank since 1991. Ms. Rumschlag has served as a director since 1987,
and she is 50 years old.
David Roach, an outside director, is President of Vogel Roach
Corp., a radio broadcast company. Mr. Roach has served as a director since
1997. He has worked at Vogel Roach Corp. since 1972, and he is 50 years old.
P. Douglas Harter, an outside director, is Associate of Harter and
Son Funeral Home. Mr. Harter has served as director since 1969, and he is 53
years old.
Robert L. Dillhoff, an outside director, is the District Highway
Management Administrator for the Ohio Department of Transportation. Mr.
Dillhoff has served as a director since 1991, and he is 53 years old.
Gary Ricker, who is an executive officer, but not a director,
joined the Bank in 1987 as Secretary and Treasurer. He is also a Loan
Officer for the Bank. He is 46 years old.
Other information relating to Directors and Executive Officers of
the Registrant is incorporated herein by reference to the Joint Proxy
Statement/Prospectus for the Annual Meeting of Shareholders, in the Election
of Directors of Delphos Citizens Bancorp Section.
Item 11. Executive Compensation.
--------------------------------
The information relating to executive compensation is incorporated
by reference to the Joint Proxy Statement/Prospectus for the Annual Meeting
of Shareholders, in the Election of Directors of Delphos Citizens Bancorp
Section (excluding the Report of the Compensation Committee in the Election
of Directors of Delphos Citizens Bancorp Section and the Stock Performance
Graph).
Item 12. Security Ownership of Certain Beneficial Owners and Management.
-------------------------------------------------------------------------
The information relating to security ownership of certain
beneficial owners and management is incorporated herein by reference to the
Joint Proxy Statement/Prospectus for the Annual Meeting of Shareholders, in
the Election of Directors of Delphos Citizens Bancorp Section.
65
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Item 13. Certain Relationships and Related Transactions.
--------------------------------------------------------
The information relating to certain relationships and related
transactions is incorporated by reference to the Registrant's Joint Proxy
Statement/Prospectus for the Annual Meeting of Shareholders, in the Election
of Directors of Delphos Citizens Bancorp section.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
--------------------------------------------------------------------------
(a) 1. Financial Statements
These documents are listed in the Index to
Consolidated Financial Statements under Item 8.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted
because they are not applicable or the required information is shown in the
Consolidated Financial Statements or Notes thereto.
Exhibits Required by Securities and Exchange Commission Regulation
S-K
3.1 Certificate of Incorporation of Delphos Citizens Bancorp,
Inc.(1)
3.2 Bylaws of Delphos Citizens Bancorp, Inc. (1)
4.0 Stock Certificate of Delphos Citizens Bancorp, Inc. (1)
10.1 Form of Employment Agreement between Citizens Bank of
Delphos and the President and Chief Executive Officer (1)
10.2 Form of Citizens Bank of Delphos Employee Stock Ownership
Plan(1)
10.3 Delphos Citizens Bancorp, Inc. Employment Agreement dated
April 21, 1997 and First Amendment dated December 20, 1999
(2)
10.4 Amended and Restated Delphos Citizens Bancorp, Inc. Stock-
Based Incentive Plan (3)
21.0 Subsidiary information is incorporated herein by reference
to "Part I--Subsidiary Activities."
23.0 Consent of Crowe, Chizek and Company LLP (filed herewith)
27.0 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K Filed During the Quarter Ended
September 30, 2000
On August 29, 2000, a report on Form 8-K was filed to
announce the Affiliation Agreement by and between United Bancshares, Inc.
and Delphos Citizens Bancorp, Inc. dated August 25, 2000, in which each
share of Delphos Citizens Bancorp, Inc. common stock, $.01 par value per
share, issued and outstanding will be converted into the right to receive
.8749 of a share of United Bancshares, Inc. common stock, without par value
or cash in lieu thereof for fractional shares, if any, and $5.41 in cash.
___________________________
(1) Incorporated herein by reference from the Exhibits to the
Registration Statement on Form S-1, as amended, filed on August 22, 1996,
Registration No. 333-10639.
(2) Incorporated herein by reference from the Exhibits to the Quarterly
Report on Form 10-Q filed on August 14, 2000.
(3) Incorporated herein by reference from the Registrant's Proxy
Statement for the Registrant's 1999 Annual Meeting of Shareholders filed
with the Commission on December 31, 1998.
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DELPHOS CITIZENS BANCORP, INC.
By: /s/ Joseph R. Reinemeyer
--------------------------------
Joseph R. Reinemeyer
Dated: November 20, 2000 Chairman of the Board, President,
and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons in the capacities
and on the dates indicated.
Name Title Date
---- ----- ----
/s/Joseph R. Reinemeyer November 20, 2000
-----------------------
Joseph R. Reinemeyer Chairman of the Board, President
and Chief Executive Officer
(Principal Executive and
Accounting Officer)
/s/Nancy C. Rumschlag November 20, 2000
----------------------
Nancy C. Rumschlag Vice President and Director
/s/P. Douglas Harter November 20, 2000
-----------------------
P. Douglas Harter Director
/s/Robert L. Dillhoff November 20, 2000
-----------------------
Robert L. Dillhoff Director
/s/David P. Roach November 20, 2000
-----------------------
David Roach Director
