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Exhibit 13.0
[Cover]
Fidelity Financial of Ohio, Inc.
Annual Report 1997
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CONTENTS
LETTER TO STOCKHOLDERS.......................... 1
BUSINESS OF THE CORPORATION..................... 2
MARKET PRICE OF STOCK AND RELATED INFORMATION... 3
SELECTED CONSOLIDATED FINANCIAL AND OTHER
DATA.......................................... 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................... 6
INDEPENDENT AUDITORS' REPORT.................... 16
CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION..................................... 17
CONSOLIDATED STATEMENTS OF EARNINGS............. 18
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY........................................ 19
CONSOLIDATED STATEMENTS OF CASH FLOWS........... 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...... 22
DIRECTORS AND OFFICERS.......................... 40
LOCATIONS....................................... 40
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- --------------------------------------------------------------------------------
TO OUR STOCKHOLDERS
- --------------------------------------------------------------------------------
Dear Stockholders,
It is my pleasure to report to you on the operations of Fidelity Financial
of Ohio, Inc. for the year ended December 31, 1997. Net earnings for the year
were a record $4.9 million, or $.90 per share, as compared to $1.6 million, or
$.38 per share, for the year ended December 31, 1996, representing an increase
of 203.2%.
Net earnings for 1996 were impacted by two non-recurring events: a $749,000
after-tax charge for the FDIC special assessment and $646,000 in after-tax
charges as a result of the merger with Circle Financial Corporation. Absent
these two charges, net earnings for the year ended December 31, 1996 would have
been approximately $3.0 million, or $.71 per share.
In 1997, total assets grew to $535.1 million as compared to $499.9 million
at December 31, 1996, an increase of $35.2 million, or 7.04%. Loans receivable
totaled $436.9 million at December 31, 1997, an increase of $40.3 million over
the balance at year end 1996.
Stockholders' equity totaled $64.3 million at December 31, 1997, as compared
to $66.7 million at December 31, 1996. The decrease in stockholders' equity was
attributable to cash distributions of over $7.0 million, including a $1.00 per
share special distribution paid in December 1997. We were very pleased to have
received a Private Letter Ruling from the Internal Revenue Service concerning
the income tax consequences of our cash distributions paid to stockholders,
wherein one hundred percent of all cash distributions paid in 1997 have been
deemed a return of capital. Fidelity still maintains a healthy tangible capital
ratio of 10.74% and we will continue to explore opportunities that will enable
us to profitably leverage our capital position.
Fidelity expanded its full service branch network in 1997 by establishing
two new offices to serve the communities of Loveland and Anderson Township. This
now brings our branch total to 12 facilities strategically located throughout
the greater Cincinnati marketplace. All offices are equipped with ATMs which
will further enhance our ability to better serve our customers' needs.
We appreciate the commitment made by our directors and staff for Fidelity's
success and want to thank our stockholders for your continued support.
Sincerely,
/s/ John R. Reusing
John R. Reusing
President
Fidelity Financial of Ohio, Inc.
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BUSINESS OF THE CORPORATION
Fidelity Financial of Ohio, Inc. (the "Corporation") is an Ohio corporation
which is the holding company for Fidelity Federal Savings Bank (the "Savings
Bank"). The Corporation was organized by the Savings Bank for the purpose of
acquiring all of the capital stock of the Savings Bank in connection with the
conversion of Fidelity Federal Mutual Holding Company, the former federally
chartered, mutual holding company parent of the Savings Bank, and the
reorganization of the Savings Bank to the stock holding company form, which was
completed on March 4, 1996 (the "Conversion and Reorganization"). The only
significant assets of the Corporation are the capital stock of the Savings Bank
and the net proceeds of the Conversion and Reorganization retained by the
Corporation.
On October 11, 1996, following receipt of all regulatory and stockholder
approvals, the Corporation completed the acquisition of Circle Financial
Corporation ("Circle") pursuant to the merger of Circle with and into a
subsidiary of the Corporation, and the subsequent merger of People's Savings
Association ("Peoples"), an Ohio-chartered savings association and a wholly
owned subsidiary of Circle, with and into the Savings Bank (collectively, the
"Merger"). The Merger was accounted for under the purchase method of accounting.
Consequently, the financial information and data presented herein excludes
Circle and Peoples for all periods prior to 1996.
The Savings Bank is a federally chartered savings bank which conducts
business through 12 full-service offices located in the Cincinnati, Ohio
metropolitan area. The Savings Bank is primarily engaged in attracting deposits
from the general public through its offices and using those and other available
sources of funds to originate loans secured by single-family residences located
primarily in southwestern Ohio. Such loans amounted to $341.6 million, or 77.1%
of the Savings Bank's total loan portfolio at December 31, 1997. To a lesser
extent, the Savings Bank originates loans secured by existing multi-family
residential and non-residential real estate, which amounted to $76.7 million, or
17.3% of the total loan portfolio at December 31, 1997, as well as construction
loans and consumer loans, which respectively amounted to $15.3 million, or 3.4%
of the total loan portfolio and $9.3 million, or 2.1% of the total loan
portfolio at such date. The Savings Bank also invests in U.S. Government and
federal agency obligations and mortgage-backed securities which are insured by
federal agencies.
As a savings and loan holding company, the Corporation is subject to
regulation, supervision and examination by the Office of Thrift Supervision of
the United States Department of the Treasury ("OTS"). The Savings Bank is
subject to regulation and examination by the OTS as its chartering authority and
primary regulator, and by the Federal Deposit Insurance Corporation ("FDIC"),
which, through the Savings Association Insurance Fund ("SAIF") administered by
it, insures the Savings Bank's deposits up to applicable limits. The Savings
Bank is a member of the Federal Home Loan Bank ("FHLB") of Cincinnati, which is
one of the 12 banks which comprise the FHLB System. The Savings Bank is further
subject to regulations of the Board of Governors of the Federal Reserve System
("Federal Reserve Board") governing reserves to be maintained against deposits
and certain other matters.
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MARKET PRICE OF STOCK AND RELATED INFORMATION
Shares of Fidelity Financial of Ohio, Inc.'s common stock are traded under
the symbol "FFOH" on the Nasdaq National Market. At March 13, 1998, the
Corporation had 5,595,058 shares of common stock outstanding and had
approximately 979 stockholders of record. The number of stockholders does not
reflect the number of persons or entities who may hold stock in nominee or
"street" name through brokerage firms or others.
The following table sets forth the reported high and low sales prices of a
share of the Corporation's common stock as reported by Nasdaq (the Corporation's
common stock commenced trading on the Nasdaq National Market on March 4, 1996).
For the year ended December 31, 1997 High Low
----------------------------------------------------------------------------------
1997 SALES PRICES
Quarter ending December 31, 1997 $16.25 $14.25
Quarter ending September 30, 1997 16.50 14.50
Quarter ending June 30, 1997 15.00 12.38
Quarter ending March 31, 1997 13.75 11.50
For the year ended December 31, 1996 High Low
----------------------------------------------------------------------------------
1996 SALES PRICES
Quarter ending December 31, 1996 $11.88 $ 9.75
Quarter ending September 30, 1996 10.25 9.63
Quarter ending June 30, 1996 10.63 9.63
Quarter ending March 31, 1996 11.00 9.75
Prior to March 4, 1996, there was no active and liquid public trading market
for the Corporation's common stock. The Corporation has been informed by brokers
who have executed trades in the Corporation's common stock that there were a
number of trades for the year ended December 31, 1995. The transactions for
which the Corporation has information took place at prices that range from $6.67
to $10.89 for the year ended December 31, 1995 (as adjusted to reflect the 2.25
to 1 exchange ratio which was utilized to convert the Savings Bank's common
stock into common stock of the Corporation in connection with the Conversion and
Reorganization).
Distributions with respect to the Corporation's common stock (including the
Savings Bank's common stock prior to the Conversion and Reorganization) for the
years ended December 31, 1997, 1996 and 1995 are set forth below.
Cash
For the year ended December 31, 1997 Distributions
-------------------------------------------------------------------------------
Quarter ending December 31, 1997 $1.070
Quarter ending September 30, 1997 0.070
Quarter ending June 30, 1997 0.070
Quarter ending March 31, 1997 0.070
Cash
For the year ended December 31, 1996 Distributions
-------------------------------------------------------------------------------
Quarter ending December 31, 1996 $0.050
Quarter ending September 30, 1996 0.050
Quarter ending June 30, 1996 0.050
Quarter ending March 31, 1996 0.094
Cash
For the year ended December 31, 1995 Distributions
-------------------------------------------------------------------------------
Quarter ending December 31, 1995 $0.075
Quarter ending September 30, 1995 0.075
Quarter ending June 30, 1995 0.075
Quarter ending March 31, 1995 0.075
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SELECTED CONSOLIDATED FINANCIAL
AND OTHER DATA
The following tables set forth certain financial and other data of the
Corporation at the date and for the periods indicated. For additional financial
information about the Corporation, reference is made to "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of the Corporation and related notes included
elsewhere herein.
At December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------
(In thousands)
SELECTED CONSOLIDATED FINANCIAL CONDITION DATA:
Total assets $535,100 $499,918 $231,137 $216,168 $202,991
Federal funds sold and interest-bearing deposits 27,730 20,489 2,784 1,766 6,002
Investment securities available for sale--at market
(1) 6,020 16,120 6,044 4,267 --
Investment securities--at cost -- -- -- -- 4,023
Mortgage-backed securities available for sale--at
market (1) 25,827 30,760 29,378 6,280 --
Mortgage-backed securities--at cost 13,527 10,744 -- 20,792 23,873
Loans receivable--net (2) 436,852 396,541 185,132 175,222 162,392
Goodwill and other intangible assets 7,628 8,322 -- -- --
Deposits 432,024 408,159 180,697 173,198 157,642
FHLB advances 34,233 20,186 17,653 12,089 15,954
Stockholders' equity -- net 64,274 66,712 30,113 28,540 26,905
Year Ended December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------
(In thousands, except share data)
SELECTED OPERATING DATA:
Total interest income $ 38,151 $ 22,738 $ 17,001 $ 15,748 $ 16,310
Total interest expense 22,562 12,656 10,167 8,331 8,106
----------------------------------------------------
Net interest income 15,589 10,082 6,834 7,417 8,204
Provision for losses on loans 101 129 71 44 52
----------------------------------------------------
Net interest income after provision for losses on
loans 15,488 9,953 6,763 7,373 8,152
Other income 1,415 165 355 347 250
General, administrative and other expenses (9,369) (7,638) (4,385) (4,172) (4,000)
----------------------------------------------------
Earnings before income taxes 7,534 2,480 2,733 3,548 4,402
Federal income taxes (2,658) (872) (919) (1,176) (1,464)
----------------------------------------------------
Net earnings $ 4,876 $ 1,608 $ 1,814 $ 2,372 $ 2,938
====================================================
Earnings per share
Basic $0.90 $0.38 $0.45 $0.58 $0.73
====================================================
Diluted $0.89 $0.38 $0.44 $0.58 $0.73
====================================================
Footnote explanations on following page.
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At or for the year ended December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------
SELECTED OPERATING RATIOS (3):
Return on average assets (4) 0.94% 0.53% 0.82% 1.14% 1.47%
Return on average equity (4) 7.22% 3.16% 6.17% 8.51% 11.41%
Tangible equity to tangible assets at end of period 10.74% 11.88% 13.03% 13.20% 13.25%
Interest rate spread (5) 2.58% 2.59% 2.44% 3.04% 3.63%
Net interest margin (5) 3.11% 3.40% 3.13% 3.63% 4.20%
Non-performing loans to total loans at end of period (6) 0.22% 0.28% 0.54% 0.47% 0.88%
Non-performing assets to total assets at end of period
(6) 0.18% 0.23% 0.44% 0.43% 0.77%
Allowance for loan losses to non-performing loans at end
of period 167.81% 137.88% 81.23% 95.71% 51.50%
Average interest-earning assets to average
interest-bearing liabilities 111.88% 118.89% 114.74% 114.49% 113.91%
General, administrative and other expenses to average
total assets (4) 1.80% 2.51% 1.97% 2.00% 2.01%
Full service offices 12 10 4 4 3
(1) The Corporation adopted SFAS No. 115 as of January 1, 1994. In connection
therewith, the Corporation classified certain of its debt securities as
available for sale. For additional information, see Notes A-2 and B of Notes
to Consolidated Financial Statements.
(2) At December 31, 1997 and 1995, included $438,000 and $646,000 of loans
classified as held for sale, respectively.
(3) With the exception of end of period ratios, all ratios are based on average
monthly balances during the period.
(4) Before consideration of non-recurring charges incurred in 1996, including
the SAIF recapitalization assessment and merger related expenses, the ratios
set forth below would have been as follows:
Return on average assets 0.92%
Return on average equity 5.52%
General, administrative and
other expenses to average total assets 1.91%
(5) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average rate on
interest-bearing liabilities. Net interest margin represents net interest
income as a percentage of average interest-earning assets.
(6) Non-performing loans consist of non-accrual loans and accruing loans that
are contractually past due 90 days or more, and non-performing assets
consist of non-performing loans and real estate acquired by foreclosure or
deed-in-lieu thereof.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Since its formation, the Corporation's activities have been primarily
limited to holding the stock of the Savings Bank. As a result, the discussion
that follows focuses largely on the operations of the Savings Bank.
The operating results of the Savings Bank depend primarily upon its net
interest income, which is determined by the difference between interest and
dividend income on interest-earning assets, principally loans, mortgage-backed
securities and investment securities, and interest expense on interest-bearing
liabilities, which principally consist of customer deposits and borrowings. The
Savings Bank's net earnings is also affected by its provision for losses on
loans, as well as the level of its other income, including gains and losses on
sales of loans, investment securities and real estate acquired through
foreclosure, rental income and other miscellaneous operating income, and its
general, administrative and other expenses, such as employee compensation and
benefits, occupancy and equipment expense, federal deposit insurance premiums,
franchise taxes and miscellaneous other operating expenses, and federal income
tax expense.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Corporation's operations and actual
results could differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and the Corporation's general market area. The
forward-looking statements contained herein include, but are not limited to,
those with respect to the following matters:
1. Management's determination of the amount and adequacy of the allowance
for loan losses;
2. The effect of changes in interest rates;
3. Management's opinion as to the effects of recent accounting
pronouncements on the Corporation's consolidated financial statements;
4. Management's determination of the effects of the year 2000 on its
information technology systems.
ASSET AND LIABILITY MANAGEMENT
In general, financial institutions are vulnerable to an increase in interest
rates to the extent that interest-bearing liabilities mature or reprice more
rapidly than interest-earning assets. The lending activities of the Savings Bank
have historically emphasized the origination of long-term, fixed-rate loans
secured by single-family residences, and the primary source of funds of such
institutions has been deposits, which largely mature or are subject to repricing
within a short period of time. This factor, in combination with substantial
investments in long-term, fixed-rate loans, has historically caused the income
earned by the Savings Bank on its loan portfolio to adjust more slowly to
changes in interest rates than its cost of funds. While having liabilities that
reprice more frequently than assets is generally beneficial to net interest
income in times of declining interest rates, such an asset/liability mismatch is
generally detrimental during periods of rising interest rates.
The Savings Bank has established an Asset and Liability Management
Committee, which generally meets at least weekly in order to structure and price
the Savings Bank's assets and liabilities so as to maintain an acceptable
interest rate spread while reducing the effects of changes in interest rates.
The Committee reports monthly to the Board of Directors on interest rate risks
and trends, as well as with respect to the Savings Bank's liquidity and capital
ratios as compared to the respective regulatory requirements.
The Savings Bank's Asset and Liability Management Committee has in recent
periods implemented asset and liability management policies designed to better
match the maturities and repricing terms of the Savings Bank's interest-earning
assets and interest-bearing liabilities in order to minimize the adverse effects
on the Savings Bank's results of operations of material and prolonged increases
in interest rates. The Savings Bank has undertaken a variety of strategies to
reduce its exposure to interest rate fluctuations, including (i) subject to
market conditions, emphasizing the origination and purchase of adjustable-rate
mortgage loans and balloon loans (which amortize over a fifteen to thirty-year
period but are payable at the end of five, seven or ten years); (ii) continuing
to invest excess cash in adjustable-rate and medium-term (primarily five years
or less) mortgage-backed securities; (iii) maintaining high levels of capital
and strong asset quality; (iv) attempting to attract, to the extent possible,
longer-term, fixed-rate deposit accounts; (v) utilization of longer-term FHLB
advances; and (vi) the sale of certain long-term fixed-rate mortgage loans in
the secondary market.
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As a result of implementing these asset and liability initiatives, at
December 31, 1997, $254.7 million, or 57.5% of the Savings Bank's total loan
portfolio consisted of adjustable-rate or balloon loans. As of such date, $175.3
million, or 50.3% of the Savings Bank's portfolio of single-family residential
mortgage loans consisted of adjustable-rate or balloon loans. In addition, at
December 31, 1997, $39.4 million, or 100.0% of the Savings Bank's
mortgage-backed securities portfolio consisted of adjustable-rate securities or
had scheduled maturities of five years or less.
Management presently monitors and evaluates the potential impact of interest
rate changes upon the market value of the Savings Bank's portfolio equity and
the level of net interest income on a quarterly basis. The OTS adopted a final
rule in August 1993 incorporating an interest rate risk component into the
risk-based capital rules. Under the rule, an institution with a greater than
"normal" level of interest rate risk will be subject to a deduction of its
interest rate risk component from total capital for purposes of calculating the
risk-based capital requirement. An institution with a greater than "normal"
interest rate risk is defined as an institution that would suffer a loss of net
portfolio value ("NPV") exceeding 2.0% of the estimated market value of its
assets in the event of a 200 basis point increase or decrease in interest rates.
NPV is the difference between incoming and outgoing discounted cash flows from
assets, liabilities, and off-balance sheet contracts. A resulting change in NPV
of more than 2% of the estimated market value of an institution's assets will
require the institution to deduct from its capital 50% of that excess change.
The rule provides that the OTS will calculate the interest rate risk component
quarterly for each institution. The OTS has indicated that no institution will
be required to deduct an interest rate risk component from capital for purposes
of computing the risk-based capital requirement until further notice.
At December 31, 1997, 2% of the present value of the Savings Bank's assets
was approximately $10.6 million. Because the interest rate risk of a 200 basis
point increase in market interest rates (which was greater than the interest
rate risk of a 200 basis point decrease) was $15.9 million at December 31, 1997,
the Savings Bank would have been required to deduct $2.7 million (50% of the
$5.3 million difference) from its capital in determining whether the Savings
Bank met its risk-based capital requirement. Despite such reduction, however,
the Savings Bank's risk-based capital at December 31, 1997, would still have
exceeded the regulatory requirement by approximately $29.4 million.
The following table presents the Savings Bank's NPV as of December 31, 1997,
as calculated by the OTS, based on information provided to the OTS by the
Savings Bank.
NET PORTFOLIO VALUE
Change in Estimated NPV
Interest Rates Estimated as a Percentage Amount
(Basis Points) NPV of Assets of Change Percent
- ------------------------------------------------------------------
+400 $21,527 4.47% $(36,253) (63)%
+300 31,845 6.43 (25,935) (45)
+200 41,830 8.23 (15,950) (28)
+100 50,776 9.76 (7,004) (12)
-- 57,780 10.89 -- --
-100 61,775 11.48 3,995 7
-200 62,699 11.55 4,919 9
-300 64,467 11.76 6,687 12
-400 68,403 12.30 10,623 18
CHANGES IN FINANCIAL CONDITION FROM DECEMBER 31, 1996 TO DECEMBER 31, 1997
The Corporation's consolidated total assets amounted to $535.1 million at
December 31, 1997, an increase of $35.2 million, or 7.0%, over the $499.9
million total at December 31, 1996. The growth in assets was funded primarily
through growth in deposits of $23.9 million and an increase of $14.0 million in
FHLB advances, which were partially offset by a decline in stockholders' equity
of $2.4 million.
Cash and cash equivalents, comprised of cash and due from banks, federal
funds sold and interest-bearing deposits in other financial institutions,
amounted to $30.5 million at December 31, 1997, an increase of $7.9 million, or
35.0%, over the total in 1996. The increase in cash and cash equivalents
generally reflects funds received in December upon sale of mortgage-backed
securities. Such proceeds were held to fund commitments to originate loans at
December 31, 1997.
Investment securities totaled $6.0 million at December 31, 1997, a decrease
of $10.1 million, or 62.7%, from 1996 levels. The decrease was due primarily to
sales and maturities totaling $16.0 million and $7.7 million, respectively,
which were partially offset by purchases totaling $13.5 million. Proceeds from
sales of investment securities included $6.0 million which were sold to
partially fund the $1.00 per share return of capital distribution paid in
December 1997, while approximately $7.5 million in proceeds were redeployed into
purchases of short-term balloon maturity mortgage-backed securities.
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Mortgage-backed securities (including securities classified as available
for sale) totaled $39.4 million at December 31, 1997, a decrease of $2.2
million, or 5.2%, from the total in 1996. The decrease in mortgage-backed
securities was due primarily to sales of $22.7 million and principal repayments
of $6.8 million, which were partially offset by purchases totaling $19.2
million. Sales of mortgage-backed securities totaling $4.2 million during
January 1997, reflected management's completion of restructuring the portfolio
acquired in the merger with Circle in order to achieve an interest rate risk
position in accordance with the operating policies of the Savings Bank. Proceeds
from these sales were redeployed into purchases of $5.1 million of
adjustable-rate thirty year term mortgage-backed securities. Additionally, $10.3
million of mortgage-backed securities were sold in May to fund growth in the
loan portfolio, while $8.2 million of securities were sold in December, as
previously discussed.
Loans receivable increased by $40.3 million, or 10.2%, to a total of $436.9
million at December 31, 1997, as compared to $396.5 million at December 31,
1996. The increase resulted primarily from loan disbursements of $131.8 million,
which were partially offset by principal repayments totaling $79.0 million and
sales of $4.1 million. Loan originations during 1996 increased by $72.4 million,
or 121.7%, over 1996 totals, which reflects the effects of the combined
companies for a full year following the completion of the Merger in October
1996. The Savings Bank's loan originations during 1997 were primarily comprised
of one-to four-family and multi-family loans, which totaled $95.2 million, or
72.2%, of total loan originations.
The Savings Bank's allowance for loan losses totaled $1.7 million at
December 31, 1997, an increase of $100,000, or 6.4%, over the total at December
31, 1996. The allowance represented .37% and .39% of total loans at December 31,
1997 and 1996, respectively, and 172.9% and 137.9% of nonperforming loans, which
totaled $1.0 million and $1.1 million at those respective dates. While
management believes the Savings Bank's allowance for loan losses is adequate at
December 31, 1997, based upon the available facts and circumstances, there can
be no assurance that additions to the allowance will not be necessary in future
periods, which could adversely affect future operating results.
Deposits totaled $432.0 million at December 31, 1997, an increase of $23.9
million, or 5.8%, over 1996 levels. Deposits subject to daily repricing totaled
$91.4 million, or 21.2% of total deposits at December 31, 1997, as compared to
22.6% of total deposits at December 31, 1996. Certificates of deposit totaled
$340.6 million, or 78.8% of total deposits at December 31, 1997, as compared to
77.4% in 1996.
Advances from the Federal Home Loan Bank totaled $34.2 million at December
31, 1997, an increase of $14.0 million, or 69.6%, over 1996 levels. The increase
resulted primarily from $21.5 million in borrowings during 1997, which were
partially offset by repayments of $7.5 million. During 1997, management elected
to utilize FHLB advances to fund originations of nonresidential loans, including
loan participations, totaling $13.5 million, which provided for an initial
interest rate spread of approximately 2.30%.
Stockholders' equity totaled $64.3 million at December 31, 1997, a decrease
of $2.4 million, or 3.7%, from the total at December 31, 1996. The decrease
resulted primarily from the $7.0 million, or $1.28 per share in distributions
paid on common stock during the year, which were partially offset by net
earnings of $4.9 million.
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AVERAGE BALANCE, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates, and the net interest margin. The table does
not reflect any effect of income taxes. All average balances are based on
average monthly balances during the period.
Year Ended December 31,
-------------------------------------------------------------------
1997(1) 1996
-------------------------------------------------------------------
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
-------------------------------------------------------------------
(Dollars in thousands)
Interest-earnings assets:
Loans receivable (2) $427,912 $33,433 7.81% $234,133 $18,872 8.06%
Mortgage-backed securities (3) 40,245 2,651 6.59% 32,263 2,103 6.52%
Investment securities (3) 15,082 1,006 6.67% 13,087 833 6.37%
Other interest-earning assets 18,318 1,061 5.79% 16,896 930 5.50%
-------------------------------------------------------------------
Total interest-earning assets 501,557 38,151 7.61% 296,379 22,738 7.67%
Non-interest earning assets 19,902 8,377
-------- --------
Total assets $521,459 $304,756
======== ========
Interest-bearing liabilities:
Deposits:
NOW accounts $ 22,184 $ 322 1.45% $ 14,100 $ 280 1.99%
Passbook and club accounts 42,712 859 2.01% 23,673 516 2.18%
Money market deposit accounts 24,839 796 3.20% 13,198 415 3.14%
Certificates of deposit accounts 332,370 18,946 5.70% 180,521 10,343 5.73%
Borrowings (4) 26,208 1,639 6.25% 17,794 1,102 6.19%
-------------------------------------------------------------------
Total interest-bearing liabilities 448,313 22,562 5.03% 249,286 12,656 5.08%
Non-interest-bearing liabilities 5,590 4,612
-------------------------------------------------------------------
Total liabilities 453,903 253,898
Stockholders' equity 67,556 50,858
-------- --------
Total liabilities and stockholders'
equity $521,459 $304,756
======== ========
Net interest income/ interest rate
spread $15,589 2.58% $10,082 2.59%
===================================================================
Net interest margin(5) 3.11% 3.40%
===================================================================
Average interest-earning assets to
average interest-bearing liabilities 111.88% 118.89%
===================================================================
Year Ended December 31,
--------------------------------
1995
--------------------------------
Average Interest Average
Outstanding Earned/ Yield/
Balance Paid Rate
--------------------------------
(Dollars in thousands)
Interest-earnings assets:
Loans receivable (2) $180,935 $14,697 8.12%
Mortgage-backed securities (3) 27,178 1,695 6.24%
Investment securities (3) 5,020 307 6.12%
Other interest-earning assets 5,071 302 5.96%
-----------------------------------------
Total interest-earning assets 218,204 17,001 7.79%
Non-interest earning assets 4,284
--------
Total assets $222,488
========
Interest-bearing liabilities:
Deposits:
NOW accounts $ 9,213 $ 267 2.90%
Passbook and club accounts 16,297 432 2.65%
Money market deposit accounts 12,953 417 3.22%
Certificates of deposit accounts 137,564 8,151 5.93%
Borrowings (4) 14,146 900 6.36%
---------------------------------------------------------
Total interest-bearing liabilities 190,173 10,167 5.35%
Non-interest-bearing liabilities 2,912
-------------------------------------------------------------------
Total liabilities 193,085
Stockholders' equity 29,403
--------
Total liabilities and stockholders'
equity $222,488
========
Net interest income/ interest rate
spread $ 6,834 2.44%
===================================================================
Net interest margin(5) 3.13%
===================================================================
Average interest-earning assets to
average interest-bearing liabilities 114.74%
===================================================================
(1) At December 31, 1997, the yields earned and rates paid were as follows:
loans receivable, 7.82%; mortgage-backed securities, 6.83%; investment
securities, 6.92%; other interest-earning assets, 5.68%; total
interest-earning assets, 7.60%; deposits, 5.08%; borrowings, 6.21%; total
interest-bearing liabilities, 5.16%; interest rate spread, 2.44%.
(2) Includes loans classified as held for sale.
(3) Includes mortgage-backed and investment securities classified as available
for sale.
(4) Includes FHLB advances and a loan from a third-party financial institution
to the Savings Bank's Employee Stock Ownership Plan for the year ended
December 31, 1996 and 1995.
(5) Net interest margin is net interest income divided by average
interest-earning assets.
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RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities have affected
the Corporation's interest income and interest expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume), and (iii) total change in rate
and volume. The combined effect of changes in both rate and volume, which cannot
be separately identified, has been allocated proportionately to the change due
to rate and the change due to volume.
Year ended December 31,
1997 vs. 1996 1996 vs. 1995
---------------------------------------------------------------
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
Rate Volume (Decrease) Rate Volume (Decrease)
---------------------------------------------------------------
(In thousands)
Interest-earning assets:
Loans receivable $(658) $15,219 $14,561 $(110) $4,285 $4,175
Mortgage-backed and related securities 23 525 548 81 327 408
Investment securities 42 131 173 15 511 526
Interest-earning deposits and other 50 81 131 (19) 647 628
---------------------------------------------------------------
Total $(543) $15,956 $15,413 $ (33) $5,770 $5,737
===============================================================
Interest-bearing liabilities:
Deposits $(185) $ 9,554 $ 9,369 $(496) $2,783 $2,287
Borrowings 11 526 537 (25) 227 202
---------------------------------------------------------------
Total $(174) $10,080 9,906 $(521) $3,010 2,489
===============================================================
Increase in net interest income $ 5,507 $3,248
===============================================================
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
1996
Net earnings amounted to $4.9 million for the year ended December 31, 1997,
an increase of $3.3 million, or 203%, over the $1.6 million in net earnings
recorded in 1996. The increase in net earnings resulted primarily from a $5.5
million increase in net interest income and a $1.3 million increase in other
income, which were partially offset by a $1.7 million increase in general,
administrative and other expense and a $1.8 million increase in the provision
for federal income taxes. The increases in overall income and expense components
for the year ended December 31, 1997, as compared to the year ended December 31,
1996, generally reflect the effects of a full year of combined operations
following the merger of Circle Financial Corporation which was consummated on
October 11, 1996. The merger was accounted for using the purchase method of
accounting, which does not provide for a restatement of prior period results of
operations to give effect to the combination.
The increase in net earnings also resulted from a non-recurring $749,000
after-tax charge for the FDIC special assessment to recapitalize the Savings
Association Insurance Fund ("SAIF"), in accordance with the legislation enacted
into law on September 30, 1996. In addition, the increase in earnings also
resulted from two non-recurring events related to the merger of Circle: a
$196,000 after-tax loss on the sale of investment and mortgage-backed securities
incurred as a result of restructuring Circle's portfolio and after-tax
restructuring expenses of approximately $450,000 incurred relating to employee
compensation and benefits, occupancy and equipment, and general, administrative
and other expenses. Absent the special assessment and merger related expenses,
net earnings for the year ended December 31, 1996, would have been approximately
$3.0 million.
Net interest income totaled $15.6 million for the year ended December 31,
1997, an increase of $5.5 million, or 54.6%, over 1996. Interest income
increased by $15.4 million, or 67.8%, for the year ended December 31, 1997, as
compared to 1996. Interest income on loans and mortgage-backed securities
increased by $15.1 million, or 72.0%, due primarily to a $201.8 million, or
75.7%, increase in the average balance outstanding year to year, which was
partially offset by a 16 basis point decline in the weighted-average yield, from
7.87% in 1996 to 7.71% in 1997. Interest income on investment securities and
interest-bearing deposits increased by $304,000, or 17.2%, during 1997 due
primarily to a $3.4 million, or 11.4%, increase in the average balance
outstanding, coupled with a 31 basis point increase in the average yield, to
6.19% during 1997.
Interest expense on deposits increased by $9.4 million, or 81.1%, for the
year ended December 31, 1997, as compared to 1996. The increase was due
primarily to a $190.6 million, or 82.3%, increase in the average balance
outstanding, which was partially offset by a 3 basis point decline in the
average cost of deposits, to 4.96% for the year ended December 31, 1997, as
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compared to 4.99% for 1996. Interest expense on borrowings increased by
$537,000, or 48.7%, due to an $8.4 million increase in the average balance of
outstanding borrowings during 1997, coupled with a 6 basis point increase in the
weighted-average cost of borrowings, to a rate of 6.25% for 1997.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $5.5 million, or 54.6%, for the year
ended December 31, 1997 as compared to 1996. The interest rate spread amounted
to 2.58% during 1997 and 2.59% in 1996, while the net interest margin declined
to 3.11% from 3.40% for the years ended December 31, 1997 and 1996,
respectively.
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the
Savings Bank, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Savings
Bank's market area, and other factors related to the collectibility of the
Savings Bank's loan portfolio. As a result of such analysis, management recorded
a $101,000 provision for losses on loans during the year ended December 31,
1997, a decrease of $28,000 from the amount recorded in 1996. There can be no
assurance that the allowance for loan losses of the Savings Bank will be
adequate to cover losses on nonperforming assets in the future.
Other income increased by $1.2 million to a total of $1.4 million for the
year ended December 31, 1997, as compared to $165,000 in 1996. The increase was
due primarily to a $562,000 increase in gains on sales of investment and
mortgage-backed securities, coupled with a $39,000, or 23.2%, increase in rental
income and a $610,000 increase in other operating income, which consisted
primarily of service charges and fees directly related to the increase in
transaction accounts as a result of the merger.
General, administrative and other expense totaled $9.4 million for the year
ended December 31, 1997, an increase of $1.7 million, or 22.7%, over the 1996
total. The increase resulted primarily from a $1.0 million, or 32.1%, increase
in employee compensation and benefits, a $624,000, or 73.2%, increase in
occupancy and equipment, a $230,000, or 44.1%, increase in franchise taxes, a
$551,000 increase in amortization of goodwill and other intangible assets, a
$208,000, or 77.6%, increase in data processing and a $457,000, or 40.3%,
increase in other operating expenses, all of which were partially offset by a
$1.3 million, or 84.0%, decrease in federal deposit insurance premiums. The
decrease in federal deposit insurance premiums resulted from the $1.1 million
one-time pre-tax charge recorded in 1996 to recapitalize the SAIF, coupled with
the corresponding decline in premium rates in 1997.
The increase in employee compensation and benefits resulted primarily from
an increase in staffing levels due to the Merger. The increase in amortization
of goodwill and other intangible assets was due to goodwill recorded as a result
of the Merger.
Increases in occupancy and equipment, franchise taxes, data processing and
other operating expenses generally resulted from the effects of the Merger,
which was consummated in 1996. As previously discussed, operating expenses
reflect the increased size of the Corporation, as compared to the prior year.
The provision for federal income taxes totaled $2.7 million for the year
ended December 31, 1997, an increase of $1.8 million, or 205%, over the
provision recorded in 1996. The increase resulted primarily from a $5.1 million,
or 204%, increase in pretax earnings year to year. The Corporation's effective
tax rates were 35.3% and 35.2% for the years ended December 31, 1997 and 1996,
respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
1995
Net earnings amounted to $1.6 million for the year ended December 31, 1996,
a decrease of $206,000, or 11.4%, from the $1.8 million in net earnings recorded
in 1995. The decline in net earnings resulted primarily from a non-recurring
$749,000 after-tax charge for the FDIC special assessment to recapitalize the
Savings Association Insurance Fund ("SAIF") in accordance with the legislation
enacted into law on September 30, 1996. In addition, the decline in earnings
also resulted from two non-recurring events related to the merger of Circle
during the fourth quarter of 1996: a $196,000 after-tax loss on the sale of
investment and mortgage-backed securities incurred as a result of restructuring
Circle's portfolio and after-tax restructuring expenses of approximately
$450,000 relating to employee compensation and benefits, occupancy and
equipment, and general, administrative and other expenses. Absent the special
assessment and merger related expenses, net earnings for the year ended December
31, 1996 would have been approximately $3.0 million.
Net interest income totaled $10.1 million for the year ended December 31,
1996, an increase of $3.2 million, or 47.5%, over 1995. Interest income
increased by $5.7 million, or 33.7%, for the year ended December 31, 1996, as
compared to 1995. Interest income on loans and mortgage-backed securities
increased by $4.6 million, or 28.0%, due primarily to a $58.3 million, or 28.0%,
increase in the average balance outstanding year to year. Interest income on
investment securities and interest-bearing deposits increased by $1.2 million,
or 189.5%, during 1996 due primarily to a $19.9 million, or 197.1%, increase in
the average balance outstanding, which was partially offset by a 16 basis point
decline in the average yield, to 5.88% during 1996. The increases in
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the average balances of interest-earning assets during 1996 over 1995 primarily
reflect the effects of the Merger which was consummated on October 11, 1996.
Interest expense on deposits increased by $2.3 million, or 24.7%, for the
year ended December 31, 1996, as compared to 1995. The increase was due
primarily to a $55.5 million, or 31.5%, increase in the average balance
outstanding, which was partially offset by a 27 basis point decline in the
average cost of deposits, to 4.99% for the year ended December 31, 1996, as
compared to 5.26% for 1995. Interest expense on borrowings increased by
$202,000, or 22.4%, due to a $3.6 million increase in the average balance of
outstanding borrowings during 1996, which was partially offset by a 17 basis
point decline in the cost of borrowings, to a rate of 6.19% for 1996. The
increases in the average balances of interest-bearing liabilities during 1996
over 1995 were primarily due to the effects of the Merger which was consummated
on October 11, 1996.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $3.2 million, or 47.5%, for the year
ended December 31, 1996 as compared to 1995. The interest rate spread increased
to 2.59% during 1996 from 2.44% in 1995, while the net interest margin increased
to 3.40% from 3.13% for the years ended December 31, 1996 and 1995,
respectively.
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the
Savings Bank, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Savings
Bank's market area, and other factors related to the collectibility of the
Savings Bank's loan portfolio. As a result of such analysis, management recorded
a $129,000 provision for losses on loans during the year ended December 31,
1996, an increase of $58,000 over the amount recorded in 1995. There can be no
assurance that the allowance for loan losses of the Savings Bank will be
adequate to cover losses on nonperforming assets in the future.
Other income decreased by $190,000, or 53.5%, to a total of $165,000 for the
year ended December 31, 1996, as compared to $355,000 in 1995. The decrease was
due primarily to a $274,000 increase in loss on sales of investment and
mortgage-backed securities, as previously discussed, which was partially offset
by a $30,000, or 21.7%, increase in rental income and a $54,000, or 23.0%,
increase in other operating income, which consisted primarily of service charges
and fees on deposit accounts.
General, administrative and other expense totaled $7.6 million for the year
ended December 31, 1996, an increase of $3.3 million, or 74.2%, over the 1995
total. The increase resulted primarily from a $1.2 million increase in federal
deposit insurance premiums due to the one-time assessment to recapitalize the
SAIF, coupled with a $1.0 million, or 48.2%, increase in employee compensation
and benefits, a $231,000, or 37.1%, increase in occupancy and equipment, a
$93,000, or 21.7%, increase in franchise taxes, a $143,000 increase in
amortization of goodwill and other intangible assets, an $80,000, or 42.6%,
increase in data processing and a $488,000, or 75.7%, increase in other
operating expenses.
Legislation enacted to recapitalize the SAIF in September 1996 provided for
a special assessment of $.657 per $100 of SAIF deposits held at March 31, 1995,
in order to increase SAIF reserves to the level required by law. The Savings
Bank had $173.1 million in SAIF deposits at March 31, 1995, resulting in an
assessment of approximately $1.1 million, or $749,000 after tax.
The legislation also provided for reduced premium rates for healthy savings
associations beginning in 1997, which amounted to $.064 per $100 of SAIF insured
deposits.
A component of the recapitalization plan provided for the merger of the SAIF
and BIF on January 1, 2000, assuming all federal savings associations have
become banks. Legislation introduced in late September 1996 proposed the
elimination of the federal thrift charter or of the separate federal regulation
of thrifts. As a result, the Savings Bank would be regulated as a bank under
federal laws which would subject it to the more restrictive activity limits
imposed on national banks. In the opinion of management, such restrictions would
not have a material adverse effect on the Savings Bank's results of operations.
Under separate but related legislation, the Savings Bank is required to
recapture as taxable income approximately $2.7 million of its bad debt reserve,
which represents the post-1987 additions to the reserve, and will be unable to
utilize the percentage of earnings method to compute its reserve in the future.
The Savings Bank has provided deferred taxes for this amount and, as a result,
repayment of the reserve will not result in a charge to operations in future
years. The Savings Bank is permitted by such legislation to amortize the
recapture of its bad debt reserve over six years.
The increase in employee compensation and benefits resulted primarily from
an increase in staffing levels, an increase in costs associated with employee
stock benefit plans and Merger-related severance benefits. The increase in
amortization of goodwill and other intangible assets was due to goodwill
recorded as a result of the Merger.
Increases in occupancy and equipment, franchise taxes, data processing and
other operating expenses generally resulted from the effects of the Merger,
which was consummated on October 11, 1996. From that date through the end of the
year, operating expenses reflect the increased size of the Corporation, as
compared to the prior year.
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The provision for federal income taxes totaled $872,000 for the year ended
December 31, 1996, a decrease of $47,000, or 5.1%, from the provision recorded
in 1995. The decline resulted primarily from a $253,000, or 9.3%, decrease in
pretax earnings year to year. The Corporation's effective tax rates were 35.2%
and 33.6% for the years ended December 31, 1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Savings Bank is required under applicable federal regulations to
maintain specified levels of "liquid" investments in qualifying types of United
States Government and government agency obligations and other similar
investments. Such investments are intended to provide a source of relatively
liquid funds upon which the Savings Bank may rely if necessary to fund deposit
withdrawals and for other short-term funding needs. The required level of such
liquid investments is currently 4% of certain liabilities as defined by the OTS
and is changed from time to time to reflect economic conditions.
The liquidity of the Savings Bank, as measured by the ratio of cash, cash
equivalents, (not committed, pledged or required to liquidate specific
liabilities), investment and qualifying mortgage-backed securities to the sum of
withdrawable deposit accounts and borrowings payable on demand or with unexpired
maturities of one year or less, was 23.1% at December 31, 1997. At December 31,
1997 the Savings Bank's "liquid" assets totaled approximately $73.8 million,
which was $61.0 million in excess of the current OTS minimum requirement.
The Savings Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Savings Bank's
primary sources of funds are deposits, borrowings, amortization, prepayments and
maturities of outstanding loans and mortgage-backed securities, maturities of
investment and mortgage-backed securities and other short-term investments,
sales of loans and investment and mortgage-backed securities and funds provided
from operations. While scheduled loan and mortgage-backed securities
amortization and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. The Savings Bank manages the pricing of its deposits to maintain a
steady deposit balance. In addition, the Savings Bank invests excess funds in
overnight deposits and other short-term interest-earning assets which provides
liquidity to meet lending requirements. The Savings Bank generates cash through
the retail deposit market and, to the extent deemed necessary, utilizes
borrowings for liquidity purposes (primarily consisting of advances from the
FHLB of Cincinnati). At December 31, 1997, the Savings Bank had $34.2 million of
outstanding advances from the FHLB of Cincinnati. Furthermore, the Savings Bank
has access to the Federal Reserve Bank discount window.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, the Savings Bank maintains a
strategy of investing in various loans, mortgage-backed securities and
investment securities. The Savings Bank uses its sources of funds primarily to
meet its ongoing commitments, to pay maturing savings certificates and savings
withdrawals, fund loan commitments and maintain a portfolio of investment and
mortgage-backed securities. At December 31, 1997, the total approved loan
commitments outstanding amounted to $9.2 million. At the same date, commitments
under unused lines of credit secured by one- to four-family residential property
amounted to $6.6 million, commitments under unused lines of credit secured by
multi-family and non-residential real estate totaled $4.9 million and the
unadvanced portion of construction loans approximated $5.1 million. The Savings
Bank also has outstanding commitments of $1.7 million to purchase and $336,000
to sell residential real estate loans as of December 31, 1997. Certificates of
deposit scheduled to mature in one year or less at December 31, 1997, totaled
$251.3 million. The Savings Bank believes that it has adequate resources to fund
all of its commitments and that it can adjust the rate of certificates of
deposit in order to retain deposits in changing interest rate environments.
The Savings Bank is subject to minimum capital standards promulgated by the
OTS. Such capital standards generally require the maintenance of regulatory
capital sufficient to meet each of the following three requirements: a tangible
capital requirement, a core capital requirement and a risk-based capital
requirement. At December 31, 1997, the Savings Bank's tangible and core capital
amounted to $53.2 million, or 10.1%, of total adjusted assets, which exceeded
the minimum requirements of 1.5% and 3.0% at that date by approximately $45.3
million and $37.4 million, or 8.6% and 7.1% of adjusted total assets,
respectively. The Savings Bank's risk-based capital totaled $54.8 million at
December 31, 1997, or 19.3% of risk-weighted assets, which exceeded the current
requirement of 8% of risk-weighted assets by approximately $32.1 million, or
11.3% of risk-weighted assets.
The OTS has proposed an amendment to the core capital requirement that would
increase the minimum requirement to 4% of adjusted total assets for
substantially all savings associations. Management anticipates no material
change to the Savings Bank's excess regulatory capital position if the proposal
is adopted in its present form.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
that
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provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, referred to
as the financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include, among
others, transfers involving repurchase agreements, securitizations of financial
assets, loan participations, factoring arrangements, and transfers of
receivables with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or liability
that is purchased or assumed is initially recognized at its fair value.
Servicing assets and liabilities are amortized in proportion to and over the
period of estimated net servicing income or net servicing loss and are subject
to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet
only if the debtor either pays the creditor and is relieved of its obligation
for the liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishment of liabilities occurring after December 31, 1997, and is to
be applied prospectively. Earlier or retroactive application is not permitted.
Management adopted SFAS No. 125 effective January 1, 1998, as required, without
material effect on the Corporation's consolidated financial position or results
of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. It does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial condition. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. SFAS No. 130 is not expected to
have a material impact on the Corporation's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 significantly changes the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about reportable segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
uses a "management approach" to disclose financial and descriptive information
about the way that management organizes the segments within the enterprise for
making operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and also requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 is not expected to have a material impact on the
Corporation's financial statements.
OTHER MATTERS
As with all providers of financial services, the Savings Bank's operations
are heavily dependent on information technology systems. The Savings Bank is
addressing the potential problems associated with the possibility that the
computers that control or operate the Savings Bank's information technology
system and infrastructure may not be programmed to read four-digit date codes
and, upon arrival of the year 2000, may recognize the two-digit code "00" as the
year 1900, causing systems to fail to function or to generate erroneous data.
The Savings Bank is working with the companies that supply or service its
information technology systems to identify and remedy any year 2000 related
problems.
As of the date of this Annual Report, the Savings Bank has not identified
any specific expenses that are reasonably likely to be incurred by the Savings
Bank in connection with this issue and does not expect to incur significant
expense to implement the necessary corrective measures. No assurance can be
given, however, that significant expense will not be incurred in future periods.
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In the event that the Savings Bank is ultimately required to purchase
replacement computer systems, programs and equipment, or incur substantial
expense to make the Savings Bank's current systems, programs and equipment year
2000 compliant, the Savings Bank's net earnings and financial condition could be
adversely affected.
In addition to possible expense related to its own systems, the Savings Bank
could incur losses if loan payments are delayed due to year 2000 problems
affecting any major borrowers in the Savings Bank's primary market area. Because
the Savings Bank's loan portfolio is highly diversified with regard to
individual borrowers and types of businesses and the Savings Bank's primary
market area is not significantly dependent upon one employer or industry, the
Savings Bank does not expect any significant or prolonged difficulties that will
affect net earnings or cash flow.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Corporation and related
consolidated financial data presented herein have been prepared in accordance
with generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Corporation's operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Corporation are monetary in nature. As a result,
interest rates have a greater impact on the Corporation'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 prices of goods and
services.
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GRANT THORNTON LETTERHEAD
Board of Directors
Fidelity Financial of Ohio, Inc.
We have audited the accompanying consolidated statements of financial
condition of Fidelity Financial of Ohio, Inc. as of December 31, 1997 and 1996,
and the related consolidated statements of earnings, stockholders' equity, and
cash flows for each of the three years ended December 31, 1997, 1996 and 1995.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Fidelity
Financial of Ohio, Inc. as of December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years ended
December 31, 1997, 1996 and 1995, in conformity with generally accepted
accounting principles.
/s/ Grant Thornton LLP
Cincinnati, Ohio
February 12, 1998
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CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA)
1997 1996
--------------------
ASSETS
Cash and due from banks $ 2,801 $ 2,121
Federal funds sold 22,646 13,820
Interest-bearing deposits in other financial institutions 5,084 6,669
- ----------------------------------------------------------------------------------
Cash and cash equivalents 30,531 22,610
Investment securities available for sale--at market 6,020 16,120
Mortgage-backed securities available for sale--at market 25,827 30,760
Mortgage-backed securities--at cost, approximate market
value of $13,706 and $10,831 at December 31, 1997 and
1996, respectively 13,527 10,744
Loans receivable--net 436,414 396,541
Loans held for sale--at lower of cost or market 438 --
Office premises and equipment--at depreciated cost 7,462 7,371
Federal Home Loan Bank stock--at cost 4,157 3,781
Accrued interest receivable on loans 2,110 1,950
Accrued interest receivable on mortgage-backed securities 245 310
Accrued interest receivable on investments 132 284
Prepaid expenses and other assets 289 371
Goodwill and other intangible assets, net of accumulated
amortization 7,628 8,322
Prepaid federal income taxes 320 754
- ----------------------------------------------------------------------------------
Total assets $535,100 $499,918
==================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $432,024 $408,159
Advances from the Federal Home Loan Bank 34,233 20,186
Advances by borrowers for taxes and insurance 2,134 2,005
Accrued interest and other liabilities 1,826 2,706
Deferred federal income taxes 609 150
- ----------------------------------------------------------------------------------
Total liabilities 470,826 433,206
Commitments -- --
Stockholders' equity
Preferred stock--authorized, 5,000,000 shares at $.10 par
value; none issued -- --
Common stock--authorized, 15,000,000 shares at $.10 par
value; 5,593,969 issued at December 31, 1997 and 1996 559 559
Additional paid-in capital 41,548 41,608
Retained earnings--restricted 24,147 26,311
Less shares acquired by Employee Stock Ownership Plan
(ESOP) (1,785) (1,938)
Less shares of common stock held in treasury--at cost (20) --
Less shares acquired by Management Recognition Plan (MRP) (292) --
Unrealized gains on securities designated as available for
sale, net of related tax effects 117 172
- ----------------------------------------------------------------------------------
Total stockholders' equity 64,274 66,712
- ----------------------------------------------------------------------------------
Total liabilities and stockholders' equity $535,100 $499,918
==================================================================================
The accompanying notes are an integral part of these statements.
17
20
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA)
1997 1996 1995
-----------------------------
Interest income
Loans $33,433 $18,872 $14,697
Mortgage-backed securities 2,651 2,103 1,695
Investment securities 1,006 833 307
Interest-bearing deposits and other 1,061 930 302
- -------------------------------------------------------------------------------------------
Total interest income 38,151 22,738 17,001
Interest expense
Deposits 20,923 11,554 9,267
Borrowings 1,639 1,102 900
- -------------------------------------------------------------------------------------------
Total interest expense 22,562 12,656 10,167
- -------------------------------------------------------------------------------------------
Net interest income 15,589 10,082 6,834
Provision for losses on loans 101 129 71
- -------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans 15,488 9,953 6,763
Other income
Gain (loss) on sale of investment and mortgage-backed
securities 267 (295) (21)
Gain on sale of loans 36 3 8
Gain on sale of real estate 6 -- --
Loss on sale of real estate acquired through foreclosure -- -- (5)
Rental 207 168 138
Other operating 899 289 235
- -------------------------------------------------------------------------------------------
Total other income 1,415 165 355
General, administrative and other expense
Employee compensation and benefits 4,125 3,122 2,107
Occupancy and equipment 1,477 853 622
Federal deposit insurance premiums 256 1,598 395
Franchise taxes 751 521 428
Amortization of goodwill and other intangible assets 694 143 --
Data processing 476 268 188
Other operating 1,590 1,133 645
- -------------------------------------------------------------------------------------------
Total general, administrative and other expense 9,369 7,638 4,385
- -------------------------------------------------------------------------------------------
Earnings before income taxes 7,534 2,480 2,733
Federal income taxes
Current 2,177 916 774
Deferred 481 (44) 145
- -------------------------------------------------------------------------------------------
Total federal income taxes 2,658 872 919
- -------------------------------------------------------------------------------------------
Net earnings $ 4,876 $ 1,608 $ 1,814
===========================================================================================
Earnings per share
Basic $ .90 $ .38 $ .45
===========================================================================================
Diluted $ .89 $ .38 $ .44
===========================================================================================
The accompanying notes are an integral part of these statements.
18
21
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
Unrealized
Gains (Losses)
Additional Shares Shares on Securities
Common Paid-In Retained Treasury Acquired Acquired Available
stock capital Earnings Stock by ESOP by MRP for Sale Total
- -----------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1995 $181 $ 4,834 $24,218 $ -- $ (257) $ (42) $(394) $28,540
Net earnings for the year ended
December 31, 1995 -- -- 1,814 -- -- -- -- 1,814
Exercise of 3,335 stock options -- 14 -- -- -- -- -- 14
Principal payments on loans to
ESOP/ amortization of expense
related to employee stock
benefit plans -- -- -- -- 67 -- -- 67
Proceeds on additional borrowings
on loans to ESOP -- -- -- -- (146) 22 -- (124)
Unrealized gains on securities
designated as available for
sale, net of related tax
effects -- -- -- -- -- -- 337 337
Cash distributions of $.30 per
share -- -- (535) -- -- -- -- (535)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 181 4,848 25,497 -- (336) (20) (57) 30,113
Net earnings for the year ended
December 31, 1996 -- -- 1,608 -- -- -- -- 1,608
Proceeds from issuance of common
stock 226 21,893 137 -- (1,822) -- -- 20,434
Issuance of shares in connection
with merger 151 14,792 -- -- -- -- -- 14,943
Exercise of 6,750 stock options 1 32 -- -- -- -- -- 33
Principal payments on loans to
ESOP/ amortization of expense
related to employee stock
benefit plans -- 43 -- -- 220 20 -- 283
Unrealized gains on securities
designated as available for
sale, net of related tax
effects -- -- -- -- -- -- 229 229
Cash distributions of $.24 per
share -- -- (931) -- -- -- -- (931)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 559 41,608 26,311 -- (1,938) -- 172 66,712
Net earnings for the year ended
December 31, 1997 -- -- 4,876 -- -- -- -- 4,876
Purchase of treasury shares -- -- -- (229) -- -- -- (229)
Stock acquired for MRP -- -- -- -- -- (292) -- (292)
Exercise of 14,350 stock options -- (142) -- 209 -- -- -- 67
Principal payments on loans to
ESOP/ amortization of expense
related to employee stock
benefit plans -- 82 117 -- 153 -- -- 352
Unrealized losses on securities
designated as available for
sale, net of related tax
effects -- -- -- -- -- -- (55) (55)
Cash distributions of $1.28 per
share -- -- (7,157) -- -- -- -- (7,157)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $559 $41,548 $24,147 $(20) $(1,785) $ (292) $ 117 $64,274
=============================================================================================================================
The accompanying notes are an integral part of these statements.
19
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
1997 1996 1995
---------------------------------
Cash flows from operating activities:
Net earnings for the year $ 4,876 $ 1,608 $ 1,814
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Depreciation and amortization 630 335 265
Amortization of premiums on investments and
mortgage-backed securities 46 47 34
Amortization of deferred loan origination (fees)
costs 277 (117) (222)
Amortization expense of employee stock benefit plans 235 63 22
Amortization of goodwill and other intangible assets 694 143 --
Amortization of purchase accounting adjustments (755) (480) --
(Gain) loss on sale of investment and mortgage-backed
securities (267) 295 21
(Gain) loss on sale of mortgage loans 41 (3) (8)
Loans disbursed for sale in the secondary market (4,599) (71) (1,811)
Proceeds from sale of mortgage loans 4,120 550 1,173
Gain on sale of real estate (6) -- --
Federal Home Loan Bank stock dividends (283) (165) (120)
Provision for losses on loans 101 129 71
Loss on sale of real estate acquired through
foreclosure -- -- 5
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (160) (328) (6)
Accrued interest receivable on mortgage-backed
securities 65 338 (38)
Accrued interest receivable on investments 152 (65) (20)
Prepaid expenses and other assets 82 837 (270)
Accrued interest and other liabilities (880) (499) 133
Federal income taxes
Current 434 -- 37
Deferred 481 (44) 145
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,284 2,573 1,225
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available
for sale (13,506) (13,540) (2,511)
Proceeds from sale of investment securities designated as
available for sale 16,002 6,966 979
Maturities of investment securities designated as
available for sale 7,651 4,079 4
Purchase of mortgage-backed securities designated as
available for sale (14,095) (3,173) (2,049)
Proceeds from sale of mortgage-backed securities
designated as available for sale 22,664 28,943 --
Principal repayments on mortgage-backed securities
designated as available for sale 4,560 6,182 1,389
Purchase of mortgage-backed securities designated as held
to maturity (5,078) -- (4,538)
Principal repayments on mortgage-backed securities
designated as held to maturity 2,285 344 3,098
Loan disbursements (115,855) (59,394) (34,947)
Purchase of loan participations (11,368) -- (3,409)
Sale of loan participations 261 -- 320
Principal repayments on loans 79,023 37,106 28,923
Purchase of Federal Home Loan Bank stock (93) (28) (38)
Proceeds from sale of real estate 135 -- --
Purchases and additions to office premises and equipment (856) (1,284) (257)
Proceeds from sale of real estate acquired through
foreclosure -- -- 91
Additions to real estate acquired through foreclosure -- -- (11)
Acquisition of Circle Financial Corporation common
stock--net -- (5,359) --
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (28,270) 842 (12,956)
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in) operating and investing
activities (subtotal carried forward) (22,986) 3,415 (11,731)
===============================================================================================
20
23
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
1997 1996 1995
-----------------------------------
Net cash provided by (used in) operating and investing
activities (subtotal brought forward) $ (22,986) $ 3,415 $ (11,731)
Cash provided by (used in) financing activities:
Net increase in deposit accounts 24,234 19,880 7,499
Proceeds from Federal Home Loan Bank advances 21,500 15,000 10,000
Repayment of Federal Home Loan Bank advances (7,462) (39,970) (4,436)
Proceeds from issuance of common stock, net -- 20,434 --
Purchase of treasury shares (229) -- --
Purchase of stock for management recognition plan (292) -- --
Proceeds from the exercise of stock options 67 33 14
Distributions on common stock (7,040) (931) (535)
Advances by borrowers for taxes and insurance 129 263 78
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities 30,907 14,709 12,620
- -------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 7,921 18,124 889
Cash and cash equivalents at beginning of year 22,610 4,486 3,597
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 30,531 $ 22,610 $ 4,486
=================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 1,743 $ 755 $ 737
=================================================================================================
Interest on deposits and borrowings $ 22,886 $ 12,574 $ 10,155
=================================================================================================
Supplemental disclosure of noncash investing and financing
activities:
Securitization of loans $ 8,099 $ -- $ --
=================================================================================================
Transfer of investment and mortgage-backed securities to
an available for sale classification $ -- $ -- $ 22,215
=================================================================================================
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects $ (55) $ 229 $ 337
=================================================================================================
Nonmonetary exchange of office premises and equipment for
similar assets $ -- $ 61 $ --
=================================================================================================
Recognition of mortgage servicing rights in accordance
with SFAS No. 122 $ 77 $ -- $ --
=================================================================================================
Liabilities assumed and stock and cash paid in acquisition
of Circle Financial Corporation $ -- $ 265,904 $ --
Less fair value of assets received -- 258,175 --
- -------------------------------------------------------------------------------------------------
Amount assigned to goodwill $ -- $ 7,729 $ --
=================================================================================================
The accompanying notes are an integral part of these statements.
21
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE A--SUMMARY OF ACCOUNTING POLICIES
Prior to 1996, Fidelity Federal Savings and Loan Association ("Fidelity")
had operated as a federally-chartered, mutual holding company. Fidelity had
capitalized Fidelity Federal Savings Bank (the "Savings Bank"), a
federally-chartered stock savings bank, by transferring substantially all of its
assets and liabilities to the Savings Bank in exchange for shares of common
stock and reorganized from a federally-chartered mutual savings and loan
association to a federally-chartered mutual holding company known as Fidelity
Federal Mutual Holding Company (the "Mutual Holding Company"). Concurrent with
the Reorganization, the Savings Bank had issued additional shares of its common
stock to certain members of the public.
In 1995, the Boards of Directors of the Savings Bank and the Mutual Holding
Company adopted a Plan of Conversion (the "Plan") and in October 1995, the
Savings Bank incorporated Fidelity Financial of Ohio, Inc. (the "Corporation")
under Ohio law as a first-tier wholly owned subsidiary of the Savings Bank. The
Corporation completed its stock offering in connection with the Savings Bank's
conversion from the mutual to stock form of ownership. Pursuant to the Plan (i)
2,278,100 shares of the Corporation's common stock were sold at $10 per share;
(ii) the Mutual Holding Company converted to an interim federal stock savings
institution and simultaneously merged with and into the Savings Bank and the
outstanding shares of Savings Bank common stock held by the Mutual Holding
Company were canceled; and (iii) an interim savings bank ("Interim") formed as a
wholly-owned subsidiary of the Corporation solely for such purpose, was merged
with and into the Savings Bank (the "Conversion and Reorganization"). As a
result of the merger of Interim with and into the Savings Bank, the Savings Bank
became a wholly-owned subsidiary of the Corporation and the outstanding public
Savings Bank's shares were converted into shares of the Corporation pursuant to
an exchange ratio of 2.25 shares for one, which resulted in the holders of such
shares owning in the aggregate approximately the same percentage of the common
stock to be outstanding upon the completion of the Conversion and Reorganization
as the percentage of Savings Bank common stock owned in the aggregate
immediately prior to consummation of the Conversion and Reorganization. The
costs of issuing the common stock were deducted from the sale proceeds of the
offering. The offering resulted in net capital proceeds totaling $20.4 million.
Future references to the Corporation or Savings Bank are utilized herein as the
context requires.
In April 1996, the Corporation entered into an Agreement of Merger with
Circle Financial Corporation ("Circle"), a savings and loan holding company,
pursuant to which Circle and its wholly owned subsidiary, Peoples Savings
Association ("Peoples"), would merge with and into the Corporation (the
"Merger"). The transaction was consummated in October 1996, and was accounted
for using the purchase method of accounting. The Corporation effected the
acquisition through cash payments totaling $12.2 million and issuance of
1,513,967 shares of its common stock at a fair value of $9.87 per share. The
acquisition resulted in the Savings Bank recording goodwill totaling $5.4
million, which is being amortized over a fifteen year term using the straight-
line method.
Presented below are pro-forma condensed consolidated statements of earnings
and earnings per share which have been prepared as if the acquisition had been
consummated as of the beginning of each of the respective years ended December
31, 1996 and 1995.
1996 1995
------------------
(In thousands,
except share data)
(Unaudited)
Total interest income $35,313 $31,837
Total interest expense 19,924 18,049
- --------------------------------------------------------------------------------
Net interest income 15,389 13,788
Provision for losses on loans 129 71
Other income 555 1,030
General, administrative and other expense 12,645 9,07
- --------------------------------------------------------------------------------
Earnings before income taxes 3,170 5,670
Federal income taxes 1,170 2,051
- --------------------------------------------------------------------------------
Net earnings $ 2,000 $ 3,619
================================================================================
Basic earnings per share $ .38 $ .65
================================================================================
22
25
The Corporation is a savings and loan holding company whose activities are
primarily limited to holding the stock of the Savings Bank.
The Savings Bank conducts a general banking business in southwestern Ohio
which consists of attracting deposits from the general public and applying those
funds to the origination of loans for residential, consumer and nonresidential
purposes. The Savings Bank's profitability is significantly dependent on its net
interest income, which is the difference between interest income generated from
interest-earning assets (i.e. loans and investments) and the interest expense
paid on interest-bearing liabilities (i.e. customer deposits and borrowed
funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or received
by the Savings Bank can be significantly influenced by a number of environmental
factors, such as governmental monetary policy, that are outside of management's
control.
The financial information presented herein has been prepared in accordance
with generally accepted accounting principles ("GAAP") and general accounting
practices within the financial services industry. In preparing financial
statements in accordance with GAAP, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from such estimates.
The following is a summary of significant accounting policies which have
been consistently applied in the preparation of the accompanying consolidated
financial statements.
1. PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the Corporation and the
Savings Bank. All significant intercompany balances and transactions have been
eliminated.
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES
The Corporation accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities". SFAS No. 115
requires that investments be categorized as held-to-maturity, trading, or
available for sale. Securities classified as held to maturity are carried at
cost only if the Corporation has the positive intent and ability to hold these
securities to maturity. Trading securities and securities available for sale are
carried at fair value with resulting unrealized gains or losses charged to
operations or stockholders' equity, respectively.
In November 1995, the Financial Accounting Standards Board (the "FASB")
issued a Special Report on Implementation of SFAS No. 115, which provided for
the reclassification of securities between the held-to-maturity, available for
sale and trading portfolios during a forty-five day period, without calling into
question management's prior intent with respect to such securities. Management
elected to restructure the Corporation's securities portfolio pursuant to the
Special Report, and transferred approximately $22.2 million of mortgage-backed
securities from the held-to-maturity portfolio to an available for sale
portfolio. As a result of the transfer, the Corporation recorded an unrealized
loss, net of related tax effects, of approximately $83,000 to stockholders'
equity.
At December 31, 1997 and 1996, the Corporation's equity accounts reflected
unrealized gains, net of related tax effects, of $117,000 and $172,000,
respectively.
Realized gains and losses on sales of securities are recognized using the
specific identification method.
3. LOANS RECEIVABLE
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for deferred loan origination fees, the allowance for loan losses and
premiums and discounts on loans purchased and sold. Premiums and discounts on
loans purchased and sold are amortized and accreted to operations using the
interest method over the average life of the underlying loans. Interest is
accrued as earned, unless the collectibility of the loan is in doubt.
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued, and income is subsequently recognized only to the extent
that cash payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments has returned to normal,
in which case the loan is returned to accrual status. If the ultimate
collectibility of the loan is in doubt, in whole or in part, all payments
received on nonaccrual loans are applied to reduce principal until such doubt is
eliminated.
Loans held for sale are carried at the lower of cost or market, determined
in the aggregate. In computing cost, deferred loan origination fees are deducted
from the principal balances of the related loans. At December 31, 1997, loans
held for sale were carried at cost. The Savings Bank had not identified any
loans as held for sale at December 31, 1996.
23
26
4. LOAN ORIGINATION AND COMMITMENT FEES
The Savings Bank accounts for loan origination fees in accordance with the
provisions of SFAS No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases". Pursuant to the provisions of SFAS No. 91, origination fees received
from loans, net of certain direct origination costs, are deferred and amortized
to interest income using the interest method, giving effect to actual loan
prepayments. Additionally, SFAS No. 91 generally limits the definition of loan
origination costs to the direct costs attributable to originating a loan, i.e.
principally actual personnel costs. Fees received for loan commitments that are
expected to be drawn upon, based on the Savings Bank's experience with similar
commitments, are deferred and amortized over the life of the loan using the
level-yield method. Fees for other loan commitments are deferred and amortized
over the loan commitment period on a straight-line basis.
5. ALLOWANCE FOR LOSSES ON LOANS
It is the Savings Bank's policy to provide valuation allowances for
estimated losses on loans based on past loan loss experience, changes in the
composition of the loan portfolio, trends in the level of delinquent and problem
loans, adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral and current and anticipated
economic conditions in the primary lending area. When the collection of a loan
becomes doubtful, or otherwise troubled, the Savings Bank records a loan loss
provision equal to the difference between the fair value of the property
securing the loan and the loan's carrying value. Major loans (including
development projects) and major lending areas are reviewed periodically to
determine potential problems at an early date. The allowance for loan losses is
increased by charges to earnings and decreased by charge-offs (net of
recoveries).
The Savings Bank accounts for impaired loans in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan". SFAS No. 114 requires
that impaired loans be measured based upon the present value of expected future
cash flows discounted at the loan's effective interest rate or, as an
alternative, at the loans observable market price or fair value of the
collateral.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
applying the provisions of SFAS No. 114, the Savings Bank considers its
investment in one-to-four family residential loans and consumer installment
loans to be homogeneous and therefore excluded from separate identification for
evaluation of impairment. With respect to the Savings Bank's investment in
multi-family and nonresidential loans, and its evaluation of any impairment
thereon, such loans are collateral dependent and as a result are carried as a
practical expedient at the lower of cost or fair value.
It is the Savings Bank's policy to charge off unsecured credits that are
more than ninety days delinquent. Similarly, collateral dependent loans which
are more than ninety days delinquent are considered to constitute more than a
minimum delay in repayment and are evaluated for impairment under SFAS No. 114
at that time.
At December 31, 1997, the Savings Bank had one loan for $376,000 that was
defined as impaired under SFAS No. 114, while no loans were defined as impaired
at December 31, 1996.
6. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. A loan charge-off is recorded for any
writedown in the loan's carrying value to fair value at the date of acquisition.
Real estate loss provisions are recorded if the properties' fair value
subsequently declines below the value determined at the recording date. In
determining the lower of cost or fair value at acquisition, costs relating to
development and improvement of property are considered. Costs relating to
holding real estate acquired through foreclosure, net of rental income, are
charged against earnings as incurred.
7. OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and minor
renewals are expensed as incurred. For financial reporting, depreciation and
amortization are provided on the straight-line and accelerated methods over the
useful lives of the assets, estimated to be thirty to forty years for buildings,
five to fifteen years for building improvements, three to ten years for
furniture and equipment and five years for automobiles. An accelerated method is
used for tax reporting purposes.
8. FEDERAL INCOME TAXES
The Corporation accounts for federal income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 establishes financial accounting and
reporting standards for the effects of income taxes that result from the
Corporation's activities within the current and previous years. Pursuant to the
provisions of SFAS No. 109, a deferred tax liability or deferred tax asset is
computed by applying the current statutory tax rates to net taxable or
deductible temporary differences between the tax basis of an asset or liability
and its reported amount in the consolidated financial statements that will
result in taxable or deductible amounts in future periods. Deferred tax assets
are recorded only to the extent that the amount of net deductible temporary
differences or carryforward attributes may be utilized against current period
earnings, carried back against prior years'
24
27
earnings, offset against taxable temporary differences reversing in future
periods, or utilized to the extent of management's estimate of future taxable
income. A valuation allowance is provided for deferred tax assets to the extent
that the value of net deductible temporary differences and carryforward
attributes exceeds management's estimates of taxes payable on future taxable
income. Deferred tax liabilities are provided on the total amount of net
temporary differences taxable in the future.
The Corporation's principal temporary differences between pretax financial
income and taxable income result primarily from the different methods of
accounting for deferred loan origination fees, Federal Home Loan Bank stock
dividends, the general loan loss allowance, percentage of earnings bad debt
deductions and certain components of retirement expense. A temporary difference
is also recognized for depreciation expense computed using accelerated methods
for federal income tax purposes.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill resulting from the acquisition of Circle totaled approximately $7.7
million, and is being amortized over a fifteen year period using the
straight-line method. Specifically identifiable intangible assets totaling
$703,000 related to core deposit intangible assets is being amortized over an
estimated useful life of seven and a half years using an accelerated method.
Management periodically evaluates the carrying value of these intangible assets
in relation to the continuing earnings capacity of such acquired net assets.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
provides guidance on when to recognize and how to measure impairment losses of
long-lived assets and certain identifiable intangibles and how to value
long-lived assets to be disposed of. The Corporation adopted SFAS No. 121 in
1996, as required, without material effect on consolidated financial condition
or results of operations.
10. RETIREMENT AND INCENTIVE PLANS
The Savings Bank has several retirement and incentive plans covering the
directors and substantially all employees. Such plans are more fully described
as follows.
The Savings Bank has a 401(k) profit-sharing plan whereby employees may make
voluntary tax deferred contributions up to 15% of their base annual
compensation. The Savings Bank will provide, at its discretion, matching funds
of each participant's contribution, subject to a maximum of 8% of compensation.
The Savings Bank's 401(k) profit-sharing plan expense for the years ended
December 31, 1997, 1996 and 1995 amounted to $101,000, $45,000 and $46,000,
respectively.
The Savings Bank maintains an unfunded retirement plan for the specific
benefit of four retired outside directors. The directors' retirement plan
expense totaled approximately $18,000 for each of the years ended December 31,
1997, 1996 and 1995, respectively.
The Savings Bank has an Employee Stock Ownership Plan ("ESOP"), which
provides retirement benefits for all employees who have completed one year of
service and have attained the age of 21. The Savings Bank recognized expense
totaling $234,000, $187,000 and $93,000 related to the ESOP for the years ended
December 31, 1997, 1996 and 1995, respectively.
Additionally, the Savings Bank had a Management Recognition Plan ("MRP")
that commenced in 1992. The MRP purchased 50,625 shares (exchange and split
adjusted) of the Corporation's common stock. All of the shares available under
the MRP were granted to executive officers of the Savings Bank during 1992, with
such shares vesting ratably over a five-year period. In April 1997, the
Corporation's shareholders approved the 1997 Management Recognition Plan and
Trust (the "Plan") which provided for up to 91,124 shares to be awarded to
members of the Board of Directors and officers of the Corporation. During 1997,
the Corporation granted 20,000 shares to outside members of the Board of
Directors which vest ratably over a five year period. A provision of $35,000,
$20,000 and $23,000 was charged to MRP expense for the years ended December 31,
1997, 1996 and 1995, respectively.
11. EARNINGS PER SHARE AND DIVIDENDS PER SHARE
Effective December 31, 1997, the Corporation began presenting earnings per
share pursuant to the provisions of SFAS No. 128. In accordance with the
Statement, the 1996 and 1995 earnings per share presentation has been revised to
conform to SFAS No. 128.
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period, less shares in the ESOP that are unallocated and
not committed to be released. Weighted-average common shares outstanding, which
gives effect to 191,115, 200,810 and 20,843 unallocated ESOP shares, totaled
5,395,878, 4,207,788 and 4,053,980 for the years ended December 31, 1997, 1996
and 1995, respectively. Weighted-average shares outstanding in 1995 have been
adjusted to give effect to the 2.25-for-1 stock exchange ratio utilized in the
Conversion and Reorganization.
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under the
Corporation's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share totaled
5,449,727, 4,240,638 and 4,077,331 for the years ended December 31, 1997, 1996
and 1995, respectively. There were 53,849, 32,850, and 23,351 incremental shares
related to the assumed exercise of stock
25
28
options included in the computation of diluted earnings per share for the years
ended December 31, 1997, 1996 and 1995, respectively.
During 1997 and 1996, the Corporation declared capital distributions of
$1.28 and $.24 per common share, respectively. Management has obtained a Private
Letter Ruling from the Internal Revenue Service which states that the
Corporation's dividend payments in excess of accumulated earnings and profits
are considered a tax-free return of capital for federal income tax purposes. As
a result, management believes that all of the 1997 distributions and $.09 of the
1996 capital distributions constituted a tax-free return of capital.
12. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents includes
cash and due from banks, federal funds sold and interest-bearing deposits in
other financial institutions with original maturities of less than 90 days.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value of financial instruments, both assets and
liabilities, whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair values
are based on estimates using present value and other valuation methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair values
presented may not represent amounts that could be realized in an exchange for
certain financial instruments.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at December 31,
1997 and 1996:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in the
consolidated statements of financial condition for cash and cash
equivalents are deemed to approximate fair value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES: For investment and
mortgage-backed securities, fair value is deemed to equal the quoted
market price.
LOANS RECEIVABLE: The loan portfolio has been segregated into categories
with similar characteristics, such as one-to-four family residential,
multi-family residential, nonresidential real estate and consumer. These
loan categories were further delineated into fixed-rate and
adjustable-rate loans. The fair values for the resultant loan categories
were computed via discounted cash flow analysis, using current interest
rates offered for loans with similar terms to borrowers of similar
credit quality.
FEDERAL HOME LOAN BANK STOCK: The carrying amount presented in the
consolidated statements of financial condition is deemed to approximate
fair value.
DEPOSITS: The fair value of NOW accounts, passbook and club accounts,
and money market deposits is deemed to approximate the amount payable on
demand at December 31, 1997 and 1996. Fair values for fixed-rate
certificates of deposit have been estimated using a discounted cash flow
calculation using the interest rates currently offered for deposits of
similar remaining maturities.
FEDERAL HOME LOAN BANK ADVANCES: The fair value of Federal Home Loan
Bank advances has been estimated using discounted cash flow analysis,
based on the interest rates currently offered for advances of similar
remaining maturities.
COMMITMENTS TO EXTEND CREDIT: For fixed-rate and adjustable-rate loan
commitments, the fair value estimate considers the difference between
current levels of interest rates and committed rates. At December 31,
1997 and 1996, the difference between the fair value and notional amount
of loan commitments was not material.
26
29
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments are as follows at December 31:
1997 1996
--------------------------------------------
Carrying Fair Carrying Fair
value value value value
--------------------------------------------
(In thousands)
Financial assets
Cash and cash equivalents $ 30,531 $ 30,531 $ 22,610 $ 22,610
Investment securities 6,020 6,020 16,120 16,120
Mortgage-backed securities 39,354 39,533 41,504 41,591
Loans receivable 436,852 440,741 396,541 398,771
Federal Home Loan Bank stock 4,157 4,157 3,781 3,781
--------------------------------------------
$516,984 $520,982 $480,556 $482,873
============================================
Financial liabilities
Deposits $432,024 $432,235 $408,159 $408,894
Advances from Federal Home Loan Bank 34,233 34,359 20,186 20,207
Advances by borrowers for taxes and insurance 2,134 2,134 2,005 2,005
--------------------------------------------
$468,391 $468,728 $430,350 $431,106
============================================
14. ADVERTISING
Advertising costs are expensed when incurred.
15. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1997
consolidated financial statement presentation.
NOTE B--INVESTMENT AND MORTGAGE-BACKED SECURITIES
Amortized cost and estimated fair values of investment securities designated
as available for sale at December 31, 1997 and 1996 consist of the following:
1997 1996
------------------------------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
------------------------------------------------
(In thousands)
U. S. Government agency obligations $5,869 $5,908 $ 8,502 $ 8,530
U. S. Government obligations -- -- 7,482 7,500
Corporate equity securities 84 112 64 90
-----------------------------------------------
$5,953 $6,020 $16,048 $16,120
===============================================
At December 31, 1997, the market value appreciation of the Corporation's
investment securities in excess of amortized cost, totaling $67,000, was
comprised solely of gross unrealized gains.
At December 31, 1996, the market value appreciation of the Corporation's
investment securities in excess of amortized cost, totaling $72,000, was
comprised of gross unrealized gains of $87,000 and gross unrealized losses of
$15,000.
27
30
The amortized cost and market value of U.S. Government and agency
obligations by contractual terms to maturity at December 31, 1997 and 1996, are
shown below:
1997 1996
------------------------------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
------------------------------------------------
(In thousands)
Due within two years $1,000 $1,000 $ 8,490 $ 8,498
Due in two to five years 998 999 3,581 3,585
Due in five to ten years 2,997 3,027 2,987 3,021
More than ten years 874 882 926 926
-----------------------------------------------
$5,869 $5,908 $15,984 $16,030
===============================================
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at December 31, 1997 and
1996 (including those designated as available for sale) are shown below.
1997
--------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------------------------------------------
(In thousands)
Available for sale:
Federal Home Loan Mortgage Corporation participation
certificates $12,610 $ 77 $ 4 $12,683
Government National Mortgage Association participation
certificates 4,707 48 3 4,752
Federal National Mortgage Association participation
certificates 7,160 22 36 7,146
Collateralized mortgage obligations of government agencies 1,240 6 -- 1,246
-------------------------------------------------
Total available for sale 25,717 153 43 25,827
Held to maturity:
Federal Home Loan Mortgage Corporation participation
certificates 574 1 -- 575
Government National Mortgage Association participation
certificates 11,632 165 -- 11,797
Federal National Mortgage Association participation
certificates 236 10 -- 246
Collateralized mortgage obligations of government agencies 1,085 3 -- 1,088
-------------------------------------------------
Total held to maturity 13,527 179 -- 13,706
-------------------------------------------------
Total mortgage-backed securities $39,244 $332 $43 $39,533
=================================================
1996
--------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------------------------------------------
(In thousands)
Available for sale:
Federal Home Loan Mortgage Corporation participation
certificates $19,767 $186 $27 $19,926
Government National Mortgage Association participation
certificates 6,028 43 9 6,062
Federal National Mortgage Association participation
certificates 4,776 50 54 4,772
-------------------------------------------------
Total available for sale 30,571 279 90 30,760
Held to maturity:
Federal Home Loan Mortgage Corporation participation
certificates 696 -- 7 689
Government National Mortgage Association participation
certificates 8,354 80 -- 8,434
Federal National Mortgage Association participation
certificates 306 13 -- 319
Collateralized mortgage obligations of government agencies 1,388 1 -- 1,389
-------------------------------------------------
Total held to maturity 10,744 94 7 10,831
-------------------------------------------------
Total mortgage-backed securities $41,315 $373 $97 $41,591
=================================================
28
31
The amortized cost and estimated fair value of mortgage-backed securities at
December 31, 1997 and 1996, by contractual terms to maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may generally prepay obligations without prepayment penalties.
1997 1996
------------------------------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
------------------------------------------------
(In thousands)
Available for sale:
Due within one year $ 3,762 3,774 $ 1,790 $ 1,795
Due after one to three years 8,326 8,352 4,001 4,012
Due after three years to five years 4,323 4,337 2,445 2,465
Due after five years to ten years 1,144 1,151 7,898 7,966
Due after ten years to twenty years 3,981 4,006 9,033 9,095
Due after twenty years 4,181 4,207 5,404 5,427
-----------------------------------------------
25,717 25,827 30,571 30,760
Held to maturity:
Due within one year 209 212 193 194
Due after one to three years 463 469 426 429
Due after three years to five years 530 536 486 489
Due after five years to ten years 1,682 1,703 1,536 1,547
Due after ten years to twenty years 5,620 5,692 4,569 4,606
Due after twenty years 5,023 5,094 3,534 3,566
-----------------------------------------------
13,527 13,706 10,744 10,831
-----------------------------------------------
Total mortgage-backed securities $39,244 $39,533 $41,315 $41,591
===============================================
NOTE C--LOANS RECEIVABLE
The composition of the loan portfolio at December 31, including loans held
for sale, is as follows:
1997 1996
--------------------
(In thousands)
Residential real estate
One-to-four family residential $341,636 $321,701
Multi-family residential 26,125 25,580
Construction 9,016 11,039
Nonresidential real estate and land 50,613 33,055
Nonresidential construction 6,248 2,800
Consumer and other 9,266 7,850
--------------------
442,904 402,025
Undisbursed portion of loans in process (5,127) (4,055)
Unamortized yield adjustments 733 129
Allowance for loan losses (1,658) (1,558)
--------------------
$436,852 $396,541
====================
The Savings Bank's lending efforts have historically focused on residential
and multi-family residential real estate loans, which comprised approximately
$376.8 million, or 85%, of the total loan portfolio at December 31, 1997, and
$358.3 million, or 89% of the total portfolio at December 31, 1996. Generally,
such loans have been underwritten on the basis of no more than an effective 80%
loan-to-value ratio, which has historically provided the Savings Bank with
adequate collateral coverage in the event of default. Nevertheless, the Savings
Bank, as with any lending institution, is subject to the risk that real estate
values could deteriorate in its primary lending area of southwestern Ohio,
thereby impairing collateral values. However, management is of the belief that
real estate values in the Savings Bank's primary lending area are presently
stable.
29
32
The Savings Bank has sold participating interests in loans in the secondary
market, retaining servicing on the loans sold. Loans sold and serviced for
others totaled approximately $18.7 million and $7.3 million at December 31, 1997
and 1996, respectively.
In 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage Servicing
Rights," which requires that the Savings Bank recognize as separate assets,
rights to service mortgage loans for others, regardless of how those servicing
rights are acquired. An institution that acquires mortgage servicing rights
through either the purchase or origination of mortgage loans and sells those
loans with servicing rights retained would allocate some of the cost of the
loans to the mortgage servicing rights. SFAS No. 122 requires that
securitization of mortgage loans be accounted for as sales of mortgage loans and
acquisitions of mortgage-backed securities. Additionally, SFAS No. 122 requires
that capitalized mortgage servicing rights and capitalized excess servicing
receivables be assessed for impairment. Impairment is measured based on fair
value. SFAS No. 122 was to be applied prospectively to fiscal years beginning
after December 15, 1995, (1996, as to the Savings Bank) to transactions in which
an entity acquires mortgage servicing rights and to impairment evaluations of
all capitalized mortgage servicing rights and capitalized excess servicing
receivables whenever acquired. Management adopted SFAS No. 122, as required,
without material effect on consolidated financial condition or results of
operations. The Savings Bank recorded mortgage servicing rights totaling
$77,000, and amortization of $3,000 for the year ended December 31, 1997.
A director of the Corporation is a broker and general manager of a local
real estate agency. The agency received approximately $159,000 in real estate
commissions during 1997 which were the result of customers of the agency who
were also borrowers of the Savings Bank.
NOTE D--ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the year ended December 31
is as follows:
1997 1996 1995
------------------------
(In thousands)
Beginning balance $1,558 $ 818 $783
Allowance for loan losses of Circle -- 640 --
Provision for loan losses 101 129 71
Charge-offs of loans (1) (29) (36)
------------------------
Ending balance $1,658 $1,558 $818
========================
At December 31, 1997, the Savings Bank's allowance for loan losses was
comprised of a general loan loss allowance of $1.65 million, which is includible
as a component of regulatory risk-based capital, and a specific loan loss
allowance of $8,000.
At December 31, 1997, 1996 and 1995, the Savings Bank had loans of $1.0
million, $1.1 million and $1.0 million, respectively, which had been placed on
nonaccrual status due to concerns as to borrowers' ability to pay. Interest
income that would have been recognized had nonaccrual loans performed pursuant
to contractual terms totaled approximately $25,000, $59,000 and $12,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
NOTE E--OFFICE PREMISES AND EQUIPMENT
Office premises and equipment is comprised of the following at December 31:
1997 1996
------------------
(In thousands)
Land $ 1,790 $ 1,826
Buildings and improvements 6,269 6,262
Furniture and equipment 3,501 3,630
Automobiles 14 38
------------------
11,574 11,756
Less accumulated depreciation and amortization 4,112 4,385
------------------
$ 7,462 $ 7,371
==================
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33
NOTE F--DEPOSITS
Deposits consist of the following major classifications at December 31:
DEPOSIT TYPE AND WEIGHTED AVERAGE INTEREST RATE 1997 1996
--------------------
(In thousands)
NOW accounts
December 31, 1997--1.44% $ 25,296
December 31, 1996--1.77% $ 22,871
Passbook and club accounts
December 31, 1997--1.79% 40,374
December 31, 1996--2.11% 44,798
Money market deposit accounts
December 31, 1997--3.32% 25,730
December 31, 1996--3.19% 24,721
--------------------
Total demand, transaction and passbook deposits 91,400 92,390
Certificates of deposit
Original maturities of:
Less than 12 months
December 31, 1997--5.59% 91,221
December 31, 1996--5.57% 108,602
12 months to 18 months
December 31, 1997--5.87% 151,965
December 31, 1996--5.65% 109,668
18 months to 36 months
December 31, 1997--5.94% 60,819
December 31, 1996--6.07% 51,925
36 months to 48 months
December 31, 1997--5.91% 8,862
December 31, 1996--5.75% 11,996
More than 48 months
December 31, 1997--6.57% 27,757
December 31, 1996--6.49% 33,578
--------------------
Total certificates of deposit 340,624 315,769
--------------------
Total deposits $432,024 $408,159
====================
At December 31, 1997 and 1996, the Corporation had certificates of deposit
accounts with balances of $100,000 or greater totaling $44.1 million and $46.9
million, respectively.
Interest expense on deposits for the years ended December 31 is summarized
as follows:
1997 1996 1995
-----------------------------
(In thousands)
Passbook and money market deposit accounts $ 1,655 $ 931 $ 849
NOW accounts 322 280 267
Certificates of deposit 18,946 10,343 8,151
-----------------------------
$20,923 $11,554 $ 9,267
=============================
Maturities of outstanding certificates of deposit at December 31 are
summarized as follows:
1997 1996
--------------------
(In thousands)
Less than one year $251,254 $225,024
One to two years 70,680 60,533
Two to three years 12,937 15,213
Over three years 5,753 14,999
--------------------
$340,624 $315,769
====================
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34
NOTE G--ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at December 31,
1997 by pledges of certain residential mortgage loans totaling $51.3 million and
the Savings Bank's investment in Federal Home Loan Bank stock, are summarized as
follows:
December 31,
1997 1996
------------------
(In thousands)
Due within one year $10,495 $ 2,147
Due after one to three years 14,946 8,405
Due after three to five years 3,647 4,851
Due after five to ten years 3,041 2,422
Due after ten to twenty years 2,104 2,361
------------------
$34,233 $20,186
==================
Weighted-average interest rate 6.21% 6.22%
==================
NOTE H--LOAN TO EMPLOYEE STOCK OWNERSHIP PLAN
As discussed previously in Note A-10, the Savings Bank established an
Employee Stock Ownership Plan (the "ESOP") which initially acquired 135,000
shares of common stock of the Savings Bank in the initial common stock offering
in 1992. In order to fund the acquisition of stock, the ESOP borrowed $400,000
from an independent third-party lender, payable over a seven year period. During
1995, the ESOP borrowed an additional $146,000 from an independent third-party
lender, payable over a seven year period, to acquire approximately 21,950 shares
of common stock. During 1996, in connection with the Corporation's common stock
offering, the ESOP acquired 182,248 shares through funding from the Corporation,
payable over a fifteen year period. Additionally, the $146,000 ESOP loan was
repaid by a loan from the Corporation. At December 31, 1997, the ESOP held
319,520 shares of the Corporation's common stock, with approximately 136,321
shares allocated to participants as of that date.
NOTE I--FEDERAL INCOME TAXES
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate for the years ended December 31 as follows:
1997 1996 1995
--------------------------
(In thousands)
Federal income taxes computed at the statutory rate $2,562 $ 843 $ 929
Increase (decrease) in taxes resulting from:
Amortization of goodwill 123 26 --
Other (27) 3 (10)
--------------------------
Federal income tax provision per consolidated financial
statements $2,658 $ 872 $ 919
==========================
32
35
The composition of the Corporation's net deferred tax liability at December
31 is as follows:
1997 1996
------------------
(In thousands)
Taxes (payable) refundable on temporary differences at
statutory rate:
Deferred tax assets:
Deferred loan origination fees $ 136 $ 175
Retirement expense 195 388
General loan loss allowance 561 527
Purchase price adjustments from Circle acquisition 116 375
Other 167 164
------------------
Total deferred tax assets 1,175 1,629
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (630) (533)
Percentage of earnings bad debt deduction (908) (908)
Unrealized gains on securities designated as available for
sale (60) (89)
Book vs. tax depreciation (126) (126)
Purchase price adjustments from Circle acquisition (60) (123)
------------------
Total deferred tax liabilities (1,784) (1,779)
------------------
Net deferred tax liability $ (609) $ (150)
==================
The Savings Bank was allowed a special bad debt deduction based on a
percentage of earnings, generally limited to 8% of otherwise taxable income, or
the amount of qualifying and nonqualifying loans outstanding and subject to
certain limitations based on aggregate loans and savings account balances at the
end of the year. This percentage of earnings bad debt deduction had accumulated
to approximately $14.2 million as of December 31, 1997. If the amounts that
qualify as deductions for federal income taxes are later used for purposes other
than bad debt losses, including distributions in liquidation, such distributions
will be subject to federal income taxes at the then current corporate income tax
rate. The approximate amount of unrecognized deferred tax liability relating to
the cumulative bad debt deduction is approximately $3.9 million at December 31,
1997. See Note L for additional information regarding future percentage of
earnings bad debt deductions.
NOTE J--COMMITMENTS
The Savings Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers including commitments to extend credit. Such commitments involve, to
varying degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the statement of financial condition. The contract or
notional amounts of the commitments reflect the extent of the Savings Bank's
involvement in such financial instruments.
The Savings Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Savings
Bank uses the same credit policies in making commitments and conditional
obligations as those utilized for on-balance-sheet instruments.
At December 31, 1997, the Savings Bank had total outstanding commitments of
approximately $7.1 million to originate residential one- to four-family and
multi-family real estate loans on the basis of an 80% loan to value ratio, of
which $2.9 million was comprised of adjustable rate loans at rates ranging from
6.88% to 8.50%, and $4.2 million was comprised of fixed rate loans at rates
ranging from 7.00% to 8.75%. The Savings Bank also had outstanding commitments
of approximately $2.1 million to originate nonresidential real estate loans.
Additionally, the Savings Bank had unused lines of credit under home equity
loans of approximately $6.6 million and unused lines of credit under
multi-family and nonresidential real estate loans of $4.9 million. The Savings
Bank also has outstanding commitments of $1.7 million to purchase and $336,000
to sell residential real estate loans as of December 31, 1997. In the opinion of
management, all loan commitments equaled or exceeded prevalent market interest
rates as of December 31, 1997, and such commitments have been underwritten on
the same basis as that of the existing loan portfolio. Management believes that
all commitments are able to be funded through cash flow from operations and
excess liquidity. Fees received in connection with loan commitments have not
been recognized in earnings.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Savings Bank evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if it is deemed
necessary by the Savings Bank upon extension of credit, is based on
33
36
management's credit evaluation of the counterparty. Collateral on loans may vary
but the preponderance of loans granted generally include a mortgage interest in
real estate as security.
NOTE K--REGULATORY CAPITAL
The Savings Bank is subject to minimum capital requirements promulgated by
the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Savings Bank must meet specific capital guidelines that involve quantitative
measures of the Savings Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Savings Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Such minimum capital standards generally require the maintenance
of regulatory capital sufficient to meet each of three tests, hereinafter
described as the tangible capital requirement, the core capital requirement and
the risk-based capital requirement. The tangible capital requirement provides
for minimum tangible capital (defined as stockholders' equity less all
intangible assets) equal to 1.5% of adjusted total assets. The core capital
requirement provides for minimum core capital (tangible capital plus certain
forms of supervisory goodwill and other qualifying intangible assets) equal to
3.0% of adjusted total assets. An OTS proposal, if adopted in present form,
would increase the core capital requirement to a range of 4.0%--5.0% of adjusted
total assets for substantially all savings associations. Management anticipates
no material change to the Savings Bank's excess regulatory capital position as a
result of this proposed change to the regulatory capital requirement. The
risk-based capital requirement currently provides for the maintenance of core
capital plus general loan loss allowances equal to 8.0% of risk-weighted assets.
In computing risk-weighted assets, the Savings Bank multiplies the value of each
asset on its statement of financial condition by a defined risk-weighting
factor, e.g., one-to-four family residential loans carry a risk-weighted factor
of 50%.
As of December 31, 1997 and 1996, management believes that the Savings Bank
met all capital adequacy requirements to which it was subject.
To Be
"Well-Capitalized"
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
---------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------
(Dollars in thousands)
1997:
Tangible capital $53,194 10.1% *$ 7,887 *1.5% *$ 26,289 * 5.0%
Core capital $53,194 10.1% *$ 15,773 *3.0% *$ 26,289 * 5.0%
Risk-based capital $54,844 19.3% *$ 22,701 *8.0% *$ 28,376 *10.0%
1996:
Tangible capital $47,427 9.8% *$ 7,234 *1.5% *$ 24,113 * 5.0%
Core capital $47,427 9.8% *$ 14,468 *3.0% *$ 24,113 * 5.0%
Risk-based capital $48,337 19.2% *$ 20,189 *8.0% *$ 25,236 *10.0%
*=greater than or equal to
At December 31, 1997, the Savings Bank met all regulatory requirements for
classification as a "well-capitalized" institution. A "well-capitalized"
institution must have risk-based capital of 10.0%, and core capital of 5.0%. The
Savings Bank's capital exceeded the minimum required amounts for classification
as a "well-capitalized" institution by $26.5 million and $26.9 million,
respectively.
Regulations of the Office of Thrift Supervision ("OTS") impose limitations
on the payment of dividends and other capital distributions by savings
associations. Under such regulations, a savings association that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital requirement is
generally permitted without OTS approval (but subsequent to 30 days prior notice
to the OTS of the planned dividend) to make capital distributions during a
calendar year in an amount not to exceed the greater of (i) up to 100% of its
net earnings to date during the year plus an amount equal to one-half of the
amount by which its total capital to assets ratio exceeded its fully phased-in
capital to assets ratio at the beginning of the year, or (ii) 75% of its net
earnings for the most recent four quarters. Pursuant to such OTS dividend
regulations, the Savings Bank had the ability to pay dividends of approximately
$13.1 million to the Corporation at December 31, 1997.
34
37
NOTE L--LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Savings Bank and of other savings associations
are insured by the FDIC through the Savings Association Insurance Fund ("SAIF").
The reserves of the SAIF were below the level required by law, because a
significant portion of the assessments paid into the fund are used to pay the
cost of prior thrift failures. The deposit accounts of commercial banks are
insured by the FDIC through the Bank Insurance Fund ("BIF"), except to the
extent such banks have acquired SAIF deposits. The reserves of the BIF met the
level required by law in May 1995. As a result of the respective reserve levels
of the funds, deposit insurance assessments paid by healthy savings associations
exceeded those paid by healthy commercial banks by approximately $.19 per $100
in deposits in 1995. In 1996, no BIF assessments were required for healthy
commercial banks except for a $2,000 minimum fee.
During 1996, legislation was enacted to recapitalize the SAIF that provided
for a special assessment of $.657 per $100 of SAIF deposits held at March 31,
1995. The Savings Bank had $173.1 million in deposits at March 31, 1995,
resulting in an assessment of approximately $1.1 million, or $749,000 after tax,
which was recorded during 1996.
A component of the recapitalization plan provides for the merger of the SAIF
and BIF on January 1, 2000, assuming the elimination of the thrift charter or of
the separate federal regulation of thrifts prior to the merger of the deposit
insurance funds. This legislation would require the Savings Bank to be regulated
as a bank under federal laws which would subject it to the more restrictive
activity limits imposed on national banks. In the opinion of management, such
restrictions would not materially affect the Corporation's operations. Under
separate legislation, the Savings Bank is required to recapture approximately
$2.7 million of its bad debt reserve as taxable income, which represents the
post-1987 additions to the reserve, and will be unable to utilize the percentage
of earnings method to compute its reserve in the future. The Savings Bank has
provided deferred taxes for this amount and will be permitted to amortize the
recapture of its bad debt reserve over six years.
NOTE M--STOCK OPTION PLAN
In connection with Fidelity's Reorganization to mutual holding company form,
the Savings Bank had adopted the 1992 Stock Option Plan that provided for the
issuance of 168,750 shares of authorized, but unissued shares of common stock.
All of the shares issued under that Plan have been granted.
In April 1997, the Corporation adopted the 1997 Stock Option Plan that
provides for the issuance of 227,810 shares of common stock. Options to purchase
171,500 shares were granted during 1997 at an exercise price equal to the fair
value at the date of grant.
In 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair value-based method for valuing stock-based
compensation that entities may use, which measures compensation cost at the
grant date based on the fair value of the award. Compensation is then recognized
over the service period, which is usually the vesting period. Alternatively,
SFAS No. 123 permits entities to continue to account for employee stock options
and similar equity instruments under Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees." Entities that continue to
account for stock options using APB Opinion No. 25 are required to make pro
forma disclosures of net earnings and earnings per share, as if the fair
value-based method of accounting defined in SFAS No. 123 had been applied.
The Corporation applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for the plan. Had compensation cost for
the Corporation's stock option plan been determined based on the fair value at
the grant dates for awards under the plan consistent with the accounting method
utilized in SFAS No. 123, the Corporation's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below:
1997 1996 1995
--------------------------
Net earnings
(In thousands) As reported $4,876 $1,608 $1,814
==========================
Pro-forma $4,826 $1,608 $1,802
==========================
Earnings per share
Basic As reported $ .90 $ .38 $ .45
==========================
Pro-forma $ .89 $ .38 $ .44
==========================
Diluted As reported $ .89 $ .38 $ .45
==========================
Pro-forma $ .88 $ .38 $ .44
==========================
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The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in fiscal 1997 and 1995: dividend
yield of 4.0%, expected volatility of 20.0%, a risk-free interest rate of 5.5%
and expected lives of ten years.
A summary of the status of the Corporation's stock option plan as of
December 31, 1997, 1996 and 1995, and changes during the periods ending on those
dates is presented below:
1997 1996 1995
-------------------------------------------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
-------------------------------------------------------------
Outstanding at beginning of year 54,265 $ 4.41 61,015 $ 4.46 47,475 $ 3.65
Granted 171,500 $13.00 -- $ -- 16,875 $ 6.67
Adjustment for return of capital distribution 8,334 $ .44 -- $ -- -- $ --
Exercised (14,350) $ 5.21 (6,750) $ 4.81 (3,335) $ 4.20
Forfeited (6,400) $13.00 -- $ -- -- $ --
-------------------------------------------------------------
Outstanding at end of year 213,349 $10.86 54,265 $ 4.41 61,015 $ 4.46
=============================================================
Options exercisable at year-end 77,314 54,265 61,015
=============================================================
Weighted-average fair value of options granted during
the year $ 2.63 N/A $ 1.35
=============================================================
The following information applies to options outstanding at December 31,
1997:
Number outstanding 213,349
Range of exercise prices $2.84-$12.49
Weighted-average exercise price $10.86
Weighted-average remaining contractual life 8.62 years
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NOTE N--CONDENSED FINANCIAL STATEMENTS OF FIDELITY FINANCIAL OF OHIO, INC.
The following condensed financial statements summarize the financial
position of Fidelity Financial of Ohio, Inc. as of December 31, 1997 and 1996,
and the results of its operations for the periods then ended.
FIDELITY FINANCIAL OF OHIO, INC.
STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands)
1997 1996
------------------
ASSETS
Cash and due from banks $ 198 $ 189
Interest-bearing deposits in other financial institutions -- 5,550
Investment securities available for sale--at market 1,112 3,080
Loan receivable from ESOP 1,785 1,938
Investment in subsidiary 61,463 56,458
Prepaid expenses and other 151 215
- --------------------------------------------------------------------------------
Total assets $64,709 $67,430
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 435 $ 718
Stockholders' equity
Common stock and additional paid-in capital 42,107 42,167
Retained earnings 24,147 26,311
Less shares acquired by Management Recognition Plan (292) --
Less shares held in treasury (20) --
Shares acquired by ESOP (1,785) (1,938)
Unrealized gains on securities designated as available for
sale, net 117 172
- --------------------------------------------------------------------------------
Total stockholders' equity 64,274 66,712
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $64,709 $67,430
================================================================================
FIDELITY FINANCIAL OF OHIO, INC.
STATEMENTS OF EARNINGS
For the period ended December 31,
(In thousands)
1997 1996
------------------
Income
Interest income $ 462 $ 524
Equity in earnings of subsidiary 4,818 1,208
- --------------------------------------------------------------------------------
Total revenue 5,280 1,732
General and administrative expenses 390 421
- --------------------------------------------------------------------------------
Earnings before income taxes 4,890 1,311
Federal income taxes 14 35
- --------------------------------------------------------------------------------
NET EARNINGS $ 4,876 $ 1,276
================================================================================
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FIDELITY FINANCIAL OF OHIO, INC.
STATEMENTS OF CASH FLOWS
For the period ended December 31,
(In thousands)
1997 1996
-------------------
Cash provided by (used in) operating activities:
Net earnings for the year $ 4,876 $ 1,276
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities
Undistributed earnings of consolidated subsidiary (4,818) (1,208)
Increase (decrease) in cash due to changes in:
Loss on sale of investment securities 8 --
Prepaid expenses and other assets 95 (250)
Other liabilities (283) 709
- ---------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities (122) 527
Cash flows provided by (used in) investing activities:
Proceeds from repayment of loan to ESOP 93 10
Proceeds from sale of investment securities 9,982 3,000
Purchase of investment securities (8,000) (6,080)
Issuance of loan to ESOP -- (1,948)
Acquisition of Circle Financial Corporation common
stock--net -- (5,359)
Effect of corporate reorganization -- (3,914)
- ---------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 2,075 (14,291)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock -- 20,434
Payment of dividends on common stock (7,040) (931)
Purchase of treasury stock (229) --
Purchase of stock for management recognition plan (292) --
Proceeds from exercise of stock options 67 --
- ---------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (7,494) 19,503
- ---------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (5,541) 5,739
Cash and cash equivalents at beginning of year 5,739 --
- ---------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 198 $ 5,739
=================================================================================
NOTE O--REORGANIZATION AND CHANGE OF CORPORATE FORM
Prior to 1996, Fidelity Federal Savings ("Fidelity") operated as a 55.9%
owned subsidiary of Fidelity Federal Mutual Holding Company (the "Mutual Holding
Company"). In 1995, the Boards of Directors of the Savings Bank and the Mutual
Holding Company adopted a Plan of Conversion (the "Plan") and in October 1995,
the Savings Bank incorporated Fidelity Financial of Ohio, Inc. (the
"Corporation") under Ohio law as a first-tier wholly owned subsidiary of the
Savings Bank. Pursuant to the Plan, (i) the Mutual Holding Company converted to
an interim federal stock savings institution and simultaneously merged with and
into the Savings Bank, pursuant to which the Mutual Holding Company ceased to
exist and the 1,012,500 shares, or 55.9%, of the outstanding Savings Bank common
stock held by the Mutual Holding Company were canceled, and (ii) an interim
savings bank ("Interim") formed as a wholly-owned subsidiary of the Corporation
solely for such purpose was merged with and into the Savings Bank. As a result
of the merger of Interim with and into the Savings Bank, the Savings Bank became
a wholly-owned subsidiary of the Corporation and the outstanding public Savings
Bank shares, which amounted to 797,880 shares, or 44.1%, of the outstanding
Savings Bank common stock at December 31, 1995, were converted into the exchange
shares pursuant to the exchange ratio of 2.25 shares to one, which resulted in
the holders of such shares owning in the aggregate approximately the same
percentage of the common stock to be outstanding upon the completion of the
Conversion and Reorganization (i.e., the conversion stock and the exchange
shares) as the percentage of Savings Bank common stock owned by them in the
aggregate immediately prior to consummation of the conversion and
reorganization, before giving effect to (a) the payment of cash in lieu of
issuing fractional exchange shares, (b) any shares of conversion stock purchased
by the Savings Bank's stockholders in the offerings or the ESOP thereafter, and
(c) any exercise of dissenters' rights. The costs of issuing the common stock
were deducted from the sale proceeds of the offering. The offering was completed
in March 1996, and resulted in capital proceeds totaling $20.4 million, after
consideration of offering expenses and shares acquired by the ESOP.
38
41
The rights of Fidelity's depositors in liquidation in the conversion to
stock form are maintained by the Savings Bank in an amount equal to the retained
earnings of the Savings Bank reflected in the statement of financial condition
used in the conversion offering circular. The liquidation account will be
maintained for the benefit of eligible savings account holders who maintained
deposit accounts in the Savings Bank after conversion.
NOTE P--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Corporation's quarterly results for the
years ended December 31, 1997 and 1996.
Three Months Ended
March 31, June 30, September 30, December 31,
------------------------------------------------------
(In thousands, except per share data)
1997:
Total interest income $9,286 $9,510 $9,652 $9,703
Total interest expense 5,365 5,577 5,765 5,855
-----------------------------------------------------
Net interest income 3,921 3,933 3,887 3,848
Provision for losses on loans 25 25 25 26
Other income 367 286 327 435
General, administrative and other expense 2,384 2,285 2,340 2,360
-----------------------------------------------------
Earnings before income taxes 1,879 1,909 1,849 1,897
Federal income taxes 671 688 633 666
-----------------------------------------------------
Net earnings $1,208 $1,221 $1,216 $1,231
=====================================================
Earnings per share:
Basic $ 0.22 $ 0.23 $ 0.22 $ 0.23
=====================================================
Diluted $ 0.22 $ 0.22 $ 0.22 $ 0.23
=====================================================
1996:
Total interest income $4,508 $4,652 $4,692 $8,886
Total interest expense 2,649 2,603 2,618 4,786
-----------------------------------------------------
Net interest income 1,859 2,049 2,074 4,100
Provision for losses on loans 17 15 16 81
Other income (expense) 114 102 104 (155)
General, administrative and other expense 1,119 1,184 2,379 2,956
-----------------------------------------------------
Earnings (loss) before income taxes (credits) 837 952 (217) 908
Federal income taxes (credits) 282 323 (71) 338
-----------------------------------------------------
Net earnings (loss) $ 555 $ 629 $ (146) $ 570
=====================================================
Earnings (loss) per share:
Basic $ 0.14 $ 0.16 $(0.04) $ 0.12
=====================================================
Diluted $ 0.14 $ 0.16 $(0.04) $ 0.12
=====================================================
39
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DIRECTORS
JOHN R. REUSING President and Chief Executive Officer of Fidelity Financial
of Ohio, Inc. and Fidelity Federal Savings Bank.
JOSEPH D. HUGHES Executive Vice President and Chief Lending Officer of
Fidelity Financial of Ohio, Inc. and Fidelity Federal
Savings Bank.
MICHAEL W. JORDAN General Manager of Jordan Realtors, Cincinnati, Ohio.
DAVID A. LUECKE President and Chief Executive Officer of Riemeier Lumber
Company, Cincinnati, Ohio.
CONSTANTINE N. PAPADAKIS President of Drexel University, Philadelphia, Pennsylvania.
THOMAS N. SPAETH Chief Financial Officer, Champion Window Manufacturing &
Supply, Inc.
PAUL D. STAUBACH Senior Vice President, Chief Financial Officer and
Secretary of Fidelity Financial of Ohio, Inc. and Fidelity
Federal Savings Bank.
ROBERT W. ZUMBIEL President of C.W. Zumbiel Company, Norwood, Ohio.
OFFICERS
JOHN R. REUSING President and Chief Executive Officer
JOSEPH D. HUGHES Executive Vice President, Chief Lending Officer
PAUL D. STAUBACH Senior Vice President, Chief Financial Officer
M. ROBIN RUHOLL-CASSADY Vice President, Retail Banking
ANITA C. GLASMEIER Vice President, Marketing
KARAN KISER Vice President, Loan Servicing
RUTH A. MYERS Vice President, Loan Escrow Manager
JOHN P. OWENS Vice President, Loan Development and Production
DAVID R. PERSOHN Vice President, Internal Audit
DEBORAH A. PETER Vice President, Loan Operations
LOCATIONS
ANDERSON 474-1141
7944 Beechmont Avenue
Cincinnati, OH 45255
BLUE ASH 793-5196
4144 Hunt Road
Cincinnati, OH 45236
DELHI 451-5353
5030 Delhi Road
Cincinnati, OH 45238
GROESBECK 521-3385
8045 Colerain Avenue
Cincinnati, OH 45239
HARTWELL 821-8880
8434 Vine Street
Cincinnati, OH 45216
LOVELAND 697-2442
10640 Loveland-Madeira Road
Loveland, OH 45140
MADEIRA 272-4200
7136 Miami Avenue
Cincinnati, OH 45243
NORWOOD 351-6666
4555 Montgomery Road
Cincinnati, OH 45212
ROSS 738-1111
3777 Hamilton Cleves Road
Hamilton, OH 45013
SHARONVILLE 733-9300
11100 Reading Road
Cincinnati, OH 45241
TRI COUNTY MALL 671-0866
11700 Princeton Road
Cincinnati, OH 45246
WESTWOOD 481-2481
3316 Glenmore Avenue
Cincinnati, OH 45211
40
43
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
Fidelity Financial of Ohio, Inc.
4555 Montgomery Road
Cincinnati, Ohio 45212
(513) 351-6666
STOCK LISTING
The Nasdaq National Market
Symbol: FFOH
TRANSFER AGENT AND REGISTRAR
Fifth Third Bank
Corporate Trust Services
Mail Location 1090F5
38 Fountain Square Plaza
Cincinnati, Ohio 45263
(513) 579-5320
(800) 837-2755
INDEPENDENT AUDITORS
Grant Thornton LLP
625 Eden Park Drive, Suite 900
Cincinnati, Ohio 45202-4181
SPECIAL LEGAL COUNSEL
Elias, Matz, Tiernan & Herrick LLP
734 15th Street, N.W., 12th Floor
Washington, DC 20005
ANNUAL MEETING
April 28, 1998, 2:00 P.M.
Quality Hotel Central
4747 Montgomery Road
Cincinnati, Ohio 45212
FORM 10-K
Fidelity Financial of Ohio, Inc. is required to file an Annual Report on Form
10-K, for its year ended December 31, 1997. Copies of this Annual Report and
Quarterly Reports on Form 10-Q may be obtained without charge by contacting:
Paul D. Staubach
Senior Vice President,
Chief Financial Officer and Secretary
Fidelity Financial of Ohio, Inc.
4555 Montgomery Road
Cincinnati, Ohio 45212
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