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............................................... 22
Consolidated Statements of Financial Condition............................. 23
Consolidated Statements of Earnings........................................ 24
Consolidated Statements of Comprehensive Income............................ 25
Consolidated Statements of Stockholders' Equity............................ 26
Consolidated Statements of Cash Flows...................................... 27
Notes to Consolidated Financial Statements................................. 29
Directors and Executive Officers........................................... 57
Locations.................................................................. 57
Corporate Information...................................................... 58
Annual Meeting............................................................. 58
Dear Shareholders,
Enclosed is the 1998 Annual Report of Fidelity Financial of Ohio, Inc.
This report, which covers the year ended December 31, 1998, does not reflect the
results of the merger of equals of FFOH and Glenway Financial Corporation. As a
result of the merger, which was just completed on March 19, 1999, your company
looks very different than it did at the end of 1998.
FFOH now has consolidated assets in excess of $800 million and our
savings bank subsidiary, Centennial Bank, has 15 branches throughout Greater
Cincinnati. We have 180 total employees and a seasoned management team that
combines a long tradition of service to the thrift industry with the commercial
banking expertise that will be so important to our future. We have a board of 12
directors, a blend of talented people who will provide forward-looking
leadership without abandoning the heritage of the past.
We are very busy guiding our combined staff through the many
transitions that accompany a merger of this size. Our immediate goal is to make
the operational transitions transparent to our customers, who can now transact
their banking business at any one of our 15 offices and 19 ATMs, regardless of
where their accounts were held before the merger. We believe we are achieving
that goal, as a result of careful planning and the efforts of our talented and
dedicated personnel.
Our longer term goal is one we know our customers will notice - an
expanded offering of products and services that will meet more of their
financial services needs. The resources and economies of scale that we have
achieved through the merger position us to serve our existing customers better
and to establish relationships with new customers.
Our most important goal is for our shareholders to see the benefits of
this merger. Management will work diligently to implement the cost-savings
opportunities that the merger presents to ensure that our efforts achieve value
for our shareholders. A more immediate benefit is the enhanced liquidity of FFOH
stock. FFOH now has approximately 9.1 million common shares outstanding, held of
record by approximately 1,500 shareholders.
We appreciate the confidence our shareholders demonstrated by approving
this merger. We are very excited about the future for FFOH, and we are pleased
to have you with us as we pursue new opportunities.
/s/ John R. Reusing /s/ Robert R. Sudbrook
John R. Reusing Robert R. Sudbrook
Chairman President and Chief Executive Officer
1
BUSINESS OF THE CORPORATION
Fidelity Financial of Ohio, Inc. (the "Corporation") is an Ohio
corporation which is the holding company for Centennial Bank ("Centennial"). The
Corporation was originally organized by Fidelity Federal Savings Bank (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 asset of the Corporation is the capital
stock of the Savings Bank.
On September 28, 1998, the Corporation entered into an agreement of
merger with Glenway Financial Corporation ("Glenway") and its wholly-owned
subsidiary Centennial Savings Bank ("Centennial"), which provided for a
merger-of-equals between the Corporation and Glenway, and the Savings Bank and
Centennial. The transaction was consummated on March 19, 1999, and accounted for
using the pooling-of-interests method of accounting.
As a result of the merger, Centennial is an Ohio chartered savings bank
which conducts business through 15 full-service offices located in the
Cincinnati, Ohio metropolitan area. Centennial 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. In addition, Centennial
originates loans secured by existing multi-family residential and
non-residential real estate, as well as commercial, construction and consumer
loans. Centennial 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"). Centennial is subject to
regulation and examination by the Ohio Department of Commerce, Division of
Financial Institutions 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 Centennial's
deposits up to applicable limits. Centennial is a member of the Federal Home
Loan Bank ("FHLB") of Cincinnati, which is one of the 12 banks which comprise
the FHLB System. Centennial 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.
2
MARKET PRICE OF STOCK AND RELATED INFORMATION
Shares of the Corporation's common stock are traded under the symbol "FFOH"
on the Nasdaq National Market. At March 25, 1999, the Corporation had 9,119,707
shares of common stock outstanding and had approximately 1,472 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 National Market.
For the year ended December 31, 1998 High Low
-----------------------------------------------------------------------------
1998 Sales Prices
Quarter ending December 31, 1998 $14.25 $12.38
Quarter ending September 30, 1998 16.38 11.88
Quarter ending June 30, 1998 19.88 15.19
Quarter ending March 31, 1998 18.25 15.50
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
Distributions with respect to the Corporation's common stock for the years
ended December 31, 1998 and 1997 are set forth below.
Cash
For the year ended December 31, 1998 Distributions
----------------------------------------------------------------------
Quarter ending December 31, 1998 $0.08
Quarter ending September 30, 1998 0.08
Quarter ending June 30, 1998 0.08
Quarter ending March 31, 1998 0.08
Cash
For the year ended December 31, 1997 Distributions
----------------------------------------------------------------------
Quarter ending December 31, 1997 $1.07
Quarter ending September 30, 1997 0.07
Quarter ending June 30, 1997 0.07
Quarter ending March 31, 1997 0.07
3
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. For information with respect to the merger of equals with
Glenway, see Note O of the Notes to Consolidated Financial Statements.
Selected Consolidated Financial Condition Data:
At December 31,
1998 1997 1996 1995 1994
(In thousands)
Total assets $519,219 $535,100 $499,918 $231,137 $216,168
Federal funds sold and interest-bearing deposits 18,323 27,730 20,489 2,784 1,766
Investment securities available for sale - at market (1) 838 6,020 16,120 6,044 4,267
Mortgage-backed securities available for sale - at market (1) 25,205 25,827 30,760 29,378 6,280
Mortgage-backed securities held to maturity - at cost 29,682 13,527 10,744 - 20,792
Loans receivable - net (2) 419,436 436,852 396,541 185,132 175,222
Goodwill and other intangible assets 6,949 7,628 8,322 - -
Deposits 412,122 432,024 408,159 180,697 173,198
FHLB advances 34,735 34,233 20,186 17,653 12,089
Stockholders' equity, net 67,618 64,274 66,712 30,113 28,540
Selected Operating Data:
Year Ended December 31,
1998 1997 1996 1995 1994
(In thousands, except share data)
Total interest income $37,645 $38,151 $22,738 $17,001 $15,748
Total interest expense 22,695 22,562 12,656 10,167 8,331
------ ------ ------ ------ ------
Net interest income 14,950 15,589 10,082 6,834 7,417
Provision for losses on loans 107 101 129 71 44
------ ------ ------ ------ ------
Net interest income after provision for losses on loans 14,843 15,488 9,953 6,763 7,373
Other income 1,474 1,415 165 355 347
General, administrative and other expense (9,204) (9,369) (7,638) (4,385) (4,172)
------ ------ ------ ------ ------
Earnings before income taxes 7,113 7,534 2,480 2,733 3,548
Federal income taxes (2,557) (2,658) (872) (919) (1,176)
------ ------ ------ ------ ------
Net earnings $ 4,556 $ 4,876 $ 1,608 $ 1,814 $ 2,372
====== ====== ====== ====== ======
Earnings per share
Basic $0.84 $0.90 $0.38 $0.45 $0.58
==== ==== ==== ==== ====
Diluted $0.83 $0.89 $0.38 $0.44 $0.58
==== ==== ==== ==== ====
Footnote explanations on following page.
4
Selected Operating Ratios (3):
At or for the year ended December 31,
1998 1997 1996 1995 1994
Return on average assets (4) 0.86% 0.94% 0.53% 0.82% 1.14%
Return on average equity (4) 6.89% 7.22% 3.16% 6.17% 8.51%
Dividend payout ratio (4) 34.61% 144.38% 57.90% 29.49% 18.47%
Tangible equity to tangible assets at end of period 11.85% 10.74% 11.88% 13.03% 13.20%
Interest rate spread (5) 2.41% 2.58% 2.59% 2.44% 3.04%
Net interest margin (5) 2.92% 3.11% 3.40% 3.13% 3.63%
Non-performing loans to total loans at end of period (6) 0.42% 0.22% 0.28% 0.54% 0.47%
Non-performing assets to total assets at end of period (6) 0.35% 0.18% 0.23% 0.44% 0.43%
Allowance for loan losses to non-performing loans at
end of period 94.20% 167.81% 137.88% 81.23% 95.71%
Average interest-earning assets to average interest-bearing
liabilities 111.55% 111.88% 118.89% 114.74% 114.49%
General, administrative and other expense to average
total assets (4) 1.73% 1.80% 2.51% 1.97% 2.00%
Full service offices 12 12 10 4 4
(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 the
Notes to Consolidated Financial Statements.
(2) At December 31, 1998, 1997 and 1995, included $236,000, $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 above would have been as follows:
Return on average assets 0.92%
Dividend payout ratio 39.50%
Return on average equity 5.52%
General, administrative and other expense
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.
5
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 analysis of the interest rate risk of the Corporation as set
forth under "Asset and Liability Management;"
2. Management's discussion of the liquidity of the Savings Bank's assets and
the regulatory capital of the Savings Bank as set forth under "Liquidity
and Capital Resources;"
3. Management's determination of the amount and adequacy of the allowance for
loan losses as set forth under "Discussion of Changes in Financial
Condition from December 31, 1997 to December 31, 1998," "Comparison of
Results of Operations for the Fiscal Years Ended December 31, 1998 and
1997" and "Comparison of Results of Operations for the Fiscal Years Ended
December 31, 1997 and 1996;"
4. Management's determination of the effects of the year 2000 on the
Corporation's information technology systems as set forth under "Year 2000
Compliance Issues;" and
5. Management's estimate as to the effects of recent accounting pronouncements
as set forth under "Effects of Recent Accounting Pronouncements".
ASSET AND LIABILITY MANAGEMENT
The Corporation's earnings depend primarily upon its net interest
income, which is the difference between its interest income on interest-earning
assets, such as mortgage loans, investment securities and mortgage-backed
securities, and its interest expense paid on interest-bearing liabilities,
consisting of deposits and borrowings. As market interest rates change, asset
yields and liability costs do not change simultaneously. Due to maturity,
repricing and timing differences between such interest-earning assets and such
interest-bearing liabilities, the Corporation's earnings will be affected
differently under various interest rate scenarios. Management believes that the
steps which have been taken in asset/liability management may reduce the overall
vulnerability of the Corporation to interest rate risk.
6
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 quarterly 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 or seven 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.
As a result of implementing these asset and liability initiatives, at
December 31, 1998, $178.9 million, or 42.6% of the Savings Bank's total loan
portfolio consisted of adjustable-rate or balloon loans. In addition, at
December 31, 1998, $234.5 million, or 45.2% of the Savings Bank's
interest-earning assets consisted of adjustable rate loans or securities,
balloon notes 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. As a part of
its efforts to monitor its interest rate risk, the Savings Bank reviews the
reports of the OTS which set forth the application of the "net portfolio value"
("NPV") methodology, adopted by the OTS as part of its capital regulations, to
the assets and liabilities of the Savings Bank. Although the Savings Bank is not
currently subject to the NPV regulation, because its implementation has been
delayed by the OTS, the application of the NPV methodology may illustrate the
Savings Bank's level of interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing liabilities. The application of the methodology attempts to
quantify interest rate risk as the change in the NPV which would result from a
theoretical 200 basis point (100 basis points equals 1%) change in market
interest rates. Both a 200 basis point increase in market interest rates and a
200 basis point decrease in market interest rates are considered. If the NPV
would decrease more than 2% of the present value of the institution's assets
with either an increase or a decrease in market rates, the institution would
have to deduct 50% of the amount of the decrease in excess of such 2% in the
calculation of the institution's risk-based capital, if the regulations were in
effect. Even before the regulation is in effect, the OTS could increase the
Savings Bank's risk-based capital requirement on an individualized basis to
address excess interest rate risk.
At December 31, 1998, 2% of the present value of the Savings Bank's
assets was approximately $10.4 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 $18.3 million at December
31, 1998, the Savings Bank would have been required to deduct $4.0 million (50%
of the $7.9 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, 1998, would still
have exceeded the regulatory requirement by approximately $33.8 million.
7
The following tables present the Savings Bank's NPV as of December 31,
1998 and 1997, as calculated by the OTS, based on information provided to the
OTS by the Savings Bank.
Net Portfolio Value
December 31, 1998
Estimated
Change in NPV as a
interest rates Estimated percentage Amount
(basis points) NPV of assets of change Percent
+300 $36,502 7.54% $(29,148) (44)%
+200 47,336 9.52 (18,314) (28)
+100 57,489 11.27 (8,161) (12)
-- 65,650 12.60 - -
-100 69,663 13.20 4,013 6
-200 72,490 13.58 6,840 10
-300 76,404 14.13 10,754 16
Net Portfolio Value
December 31, 1997
Estimated
Change in NPV as a
interest rates Estimated percentage Amount
(basis points) NPV of assets of change Percent
+300 $33,170 6.68% $(29,873) (47)%
+200 44,029 8.63 (19,014) (30)
+100 54,374 10.38 (8,669) (14)
-- 63,043 11.76 - -
-100 68,407 12.56 5,364 9
-200 70,244 12.76 7,201 11
-300 72,449 13.02 9,406 15
As illustrated in the tables, NPV is more sensitive to rising rates than
declining rates. Such difference in sensitivity occurs principally because, as
rates rise, borrowers do not prepay fixed-rate loans as quickly as they do when
interest rates are declining. Thus, in a rising interest rate environment, the
amount of interest the Savings Bank would receive on its loans would increase
relatively slowly as loans are slowly prepaid and new loans at higher rates are
made. Moreover, the interest the Savings Bank would pay on its deposits would
increase rapidly because the Savings Bank's deposits generally have shorter
periods to repricing. Assumptions used in calculating the amounts in the above
tables are OTS assumptions.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations.
8
In the event that interest rates rise, the Savings Bank's net interest income
could be expected to be negatively affected. Moreover, rising interest rates
could negatively affect the Savings Bank's earnings due to diminished loan
demand.
CHANGES IN FINANCIAL CONDITION FROM DECEMBER 31, 1997 TO DECEMBER 31, 1998
The Corporation's consolidated total assets amounted to $519.2 million
at December 31, 1998, a decrease of $15.9 million, or 3.0%, from the $535.1
million total at December 31, 1997. This decline in assets was primarily the
result of a strategy put in place by management to allow the outflow of
higher-yielding certificates of deposit in order to lower the Corporation's
funding costs, resulting in a decrease in deposits of $19.9 million and a
decrease in the Corporation's cost of funds from 5.16% at December 31, 1997 to
4.73% at December 31, 1998. The decrease in deposits was partially offset by an
increase in stockholders' equity of $3.3 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 $22.2 million at December 31, 1998, a decrease of $8.3
million, or 27.2%, from the total at December 31, 1997. The decrease in cash and
cash equivalents resulted from the decrease in deposits as discussed above.
Investment securities totaled $838,000 at December 31, 1998, a decrease
of $5.2 million, or 86.1%, from 1997 levels. The decrease was due primarily to
sales and maturities totaling $1.1 million and $5.0 million, respectively, which
were partially offset by purchases totaling $1.0 million. Proceeds from sales of
investment securities were redeployed into purchases of mortgage-backed
securities.
Mortgage-backed securities (including securities classified as
available for sale) totaled $54.9 million at December 31, 1998, an increase of
$15.5 million, or 39.5%, over the total at December 31, 1997. The increase in
mortgage-backed securities was due primarily to purchases of $35.5 million,
which were partially offset by principal repayments of $19.6 million. Purchases
of mortgage-backed securities during 1998 consisted of $26.3 million of
fixed-rate securities and $9.2 million of adjustable-rate securities. These
purchases were funded primarily by loan repayments, excess liquidity and
proceeds from the maturity of investment securities.
Loans receivable (including loans held for sale) decreased by $17.4
million, or 4.0%, to a total of $419.4 million at December 31, 1998, as compared
to $436.9 million at December 31, 1997. The decrease resulted primarily from
loan repayments of $141.2 million and sales of $18.7 million, which exceeded
loan disbursements and purchases totaling $143.3 million. Loan originations and
purchases during 1998 increased by $11.5 million, or 8.7%, over 1997 totals. The
Savings Bank's loan originations during 1998 were primarily comprised of one- to
four-family and multi-family loans, which totaled $105.0 million, or 74.3%, of
total loan originations.
The Savings Bank's allowance for loan losses totaled $1.7 million at
December 31, 1998, an increase of $45,000, or 2.7%, over the total at December
31, 1997. The allowance represented .40% and .37% of total loans at December 31,
1998 and 1997, respectively, and 94.2% and 167.8% of nonperforming loans, which
totaled $1.8 million and $1.0 million at those respective dates. While
management believes the Savings Bank's allowance for loan losses is adequate at
December 31, 1998, 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 $412.1 million at December 31, 1998, a decrease of
$19.9 million, or 4.6%, from December 31, 1997. Deposits subject to daily
repricing totaled $94.5 million, or 22.9% of total deposits at December 31,
1998, as compared to 21.2% of total deposits at December 31, 1997. Certificates
of deposit totaled $317.6 million, or 77.1% of total deposits at December 31,
1998, as compared to 78.8% at December 31, 1997. Certificates of deposits
decreased $23.0 million, or 6.7%, as a result of management's strategy to allow
the outflow of higher-yielding certificates in order to reduce the Corporation's
funding cost.
9
Advances from the Federal Home Loan Bank ("FHLB") totaled $34.7 million
at December 31, 1998, an increase of $502,000, or 1.5%, over December 31, 1997.
The increase resulted primarily from $13.0 million in borrowings during 1998,
which were partially offset by repayments of $12.5 million.
Stockholders' equity totaled $67.6 million at December 31, 1998, an
increase of $3.3 million, or 5.2%, over the total at December 31, 1997. The
increase resulted primarily from net earnings of $4.6 million which was
partially offset by distributions paid on common stock totaling $1.6 million
during the year.
10
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,
1998 (1) 1997 1996
-------------------------- ----------------------------- ----------------------------
Average Interest Average Average Interest Average Average Interest Average
standing earned/ yield/ outstanding earned/ yield/ outstanding earned/ yield/
balance paid rate balance paid rate balance paid rate
(Dollars in thousands)
Interest-earnings assets:
Loans receivable (2) $426,420 $32,413 7.60% $427,912 $33,433 7.81% $234,133 $18,872 8.06%
Mortgage-backed securities (3) 55,490 3,464 6.24 40,245 2,651 6.59 32,263 2,103 6.52
Investment securities (3) 3,556 250 7.03 15,082 1,006 6.67 13,087 833 6.37
Other interest-earning assets 26,744 1,518 5.68 18,318 1,061 5.79 16,896 930 5.50
------- ------ ------ ------- ------ ------ -------- ------ -----
Total interest-earning assets 512,210 37,645 7.35 501,557 38,151 7.61 296,379 22,738 7.67
Non-interest earning assets 19,523 19,902 8,377
------- ------- -------
Total assets $531,733 $521,459 $304,756
======= ======= =======
Interest-bearing liabilities:
Deposits:
NOW accounts 28,095 270 0.96 $ 22,184 $ 322 1.45 $ 14,100 $ 280 1.99
Passbook and club accounts 38,164 688 1.80 42,712 859 2.01 23,673 516 2.18
Money market deposit accounts 25,993 769 2.96 24,839 796 3.20 13,198 415 3.14
Certificate of deposit accounts 327,545 18,574 5.67 332,370 18,946 5.70 180,521 10,343 5.73
Borrowings (4) 39,378 2,394 6.08 26,208 1,639 6.25 17,794 1,102 6.19
------- ------ ------ ------- ------ ------ ------- ------ -----
Total interest-bearing liabilities 459,175 22,695 4.94 448,313 22,562 5.03 249,286 12,656 5.08
------ ------ ------
Non-interest-bearing liabilities 6,448 5,590 4,612
------- ------- -------
Total liabilities 465,623 453,903 253,898
Stockholders' equity 66,110 67,556 50,858
------- ------- -------
Total liabilities and stockholders'
equity $531,733 $521,459 $304,756
======= ======= =======
Net interest income/interest rate spread $14,950 2.41% $15,589 2.58% $10,082 2.59%
====== ====== ====== ====== ====== =====
Net interest margin (5) 2.92% 3.11% 3.40%
====== ====== =====
Average interest-earning assets to average
interest-bearing liabilities 111.55% 111.88% 118.89%
====== ====== ======
- -----------------------------------
(1) At December 31, 1998, the yields earned and rates paid were as follows:
loans receivable, 7.57%; mortgage-backed securities, 6.32%; investment
securities, 6.15%; other interest-earning assets, 5.14%; total
interest-earning assets, 7.31%; deposits, 4.62%; borrowings, 6.02%; total
interest-bearing liabilities, 4.73%; interest rate spread, 2.58%.
(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.
(5) Net interest margin is net interest income divided by average
interest-earning assets.
11
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,
1998 vs. 1997 1997 vs. 1996
------------------------------------ -----------------------------------
Increase Total Increase Total
(decrease) due to increase (decrease) due to increase
Rate Volume (decrease) Rate Volume (decrease)
(In thousands)
Interest-earning assets:
Loans receivable $ (902) $(118) $(1,020) $(658) $15,219 $14,561
Mortgage-backed and related
securities (147) 960 813 23 525 548
Investment securities and
interest-earning deposits and other (111) (188) (299) 92 212 304
------ ---- ------ ---- ------ ------
Total $(1,019) $ 513 (506) $(543) $15,956 15,413
====== ==== ==== ======
Interest-bearing liabilities:
Deposits $ (506) $(116) (622) $(185) $ 9,554 9,369
Borrowings (47) 802 755 11 526 537
------ ---- ------- ----- ------ ------
Total $ (553) $ 686 (133) $(174) $10,080 9,906
====== ==== ------- ==== ====== ------
Increase (decrease) in net interest income $ (639) $ 5,507
======= ======
12
Comparison of Results of Operations for the Years Ended December 31, 1998 and
1997
Net earnings amounted to $4.6 million for the year ended December 31,
1998, a decrease of $320,000, or 6.6%, from the $4.9 million in net earnings
recorded in 1997. The decrease in net earnings resulted primarily from a
$639,000 decrease in net interest income, which was partially offset by a
$59,000 increase in other income, a $165,000 decrease in general, administrative
and other expense and a $101,000 decrease in the provision for federal income
taxes.
Net interest income totaled $15.0 million for the year ended December
31, 1998, a decrease of $639,000, or 4.1%, as compared to 1997. Total interest
income decreased by $506,000, or 1.3%, for the year ended December 31, 1998, as
compared to 1997. Interest income on loans decreased by $1.0 million, or 3.1%,
due primarily to a 21 basis point decline in the weighted-average yield, from
7.81% in 1997 to 7.60% in 1998, coupled with a $1.5 million decrease in the
average balance outstanding year to year. Interest income on mortgage-backed
securities increased by $813,000, or 30.7%, due primarily to a $15.2 million, or
37.9%, increase in the average balance outstanding year to year, which was
partially offset by a 35 basis point decline in the weighted-average yield, from
6.59% in 1997 to 6.24% in 1998. Interest income on investment securities and
interest-bearing deposits decreased by $299,000, or 14.5%, during 1998 due
primarily to a $3.1 million, or 9.3%, decrease in the average balance
outstanding, coupled with a 36 basis point decrease in the average yield, to
5.83% during 1998. The decrease in the average balance of investments reflected
the Corporation's utilization of the proceeds from sales of investment
securities to fund the purchase of higher yielding mortgage-backed securities.
Interest expense on deposits decreased by $622,000, or 3.0%, for the
year ended December 31, 1998, as compared to 1997. The decrease was due
primarily to a 12 basis point decline in the average cost of deposits, to 4.84%
for the year ended December 31, 1998, as compared to 4.96% for 1997, coupled
with a $2.3 million decrease in the average balance outstanding from year to
year. The decline in the average balance of deposits and the weighted average
rate paid thereon reflected management's strategy to allow the outflow of
higher-yielding certificates in order to reduce the Corporation's funding cost.
Interest expense on borrowings increased by $755,000, or 46.1%, due to a $13.2
million increase in the average balance of outstanding borrowings during 1998,
which was partially offset by a 17 basis point decrease in the weighted-average
cost of borrowings, to a rate of 6.08% for 1998.
As a result of the foregoing changes in interest income and interest
expense, net interest income decreased by $639,000, or 4.1%, for the year ended
December 31, 1998 as compared to 1997. The interest rate spread amounted to
2.41% during 1998 and 2.58% in 1997, while the net interest margin declined to
2.92% from 3.11% for the years ended December 31, 1998 and 1997, 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 $107,000 provision for losses on loans during the year ended December 31,
1998, an increase of $6,000 from the amount recorded in 1997. The provision for
1998 was predicated upon an increase in nonperforming loans year to year, from
$1.0 million at December 31, 1997 to $1.8 million at December 31, 1998, coupled
with an increase in loan charge-offs during 1998 to $62,000. Nonperforming loans
and loans charged-off primarily relate to loans secured by one- to four-family
residential real estate. It is management's opinion that such nonperforming
loans at December 31, 1998 was adequately collateralized. In addition, the
largest loan classified as nonperforming at December 31, 1998, totaling
$430,000, was brought current by the borrower in 1999. 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.
13
Other income increased by $59,000, or 4.2%, to a total of $1.5 million
for the year ended December 31, 1998, as compared to $1.4 million in 1997. The
increase was due primarily to a $143,000 increase in gains on sale of real
estate and real estate acquired through foreclosure, coupled with a $90,000
increase on gain on sale of loans and a $40,000 increase in other operating
income, which consisted primarily of service charges and fees, which were
partially offset by a $205,000 decrease in gains on sale of securities year to
year.
General, administrative and other expense totaled $9.2 million for the
year ended December 31, 1998, a decrease of $165,000, or 1.8%, as compared to
1997. The decrease resulted primarily from a $336,000, or 8.1%, decrease in
employee compensation and benefits, and a $15,000, or 2.2%, decrease in
amortization of goodwill and other intangible assets, which were partially
offset by a $77,000, or 5.2%, increase in occupancy and equipment, a $49,000, or
6.5%, increase in franchise taxes, a $27,000, or 5.7%, increase in data
processing and a $31,000, or 1.9%, increase in other operating expense.
The decrease in employee compensation and benefits resulted primarily
from an increase in deferred loan origination costs associated with the increase
in loan volume year to year. The increase in occupancy and equipment expense
resulted primarily from a $64,000 increase in depreciation expense due to the
purchase of new computer equipment. The increase in franchise taxes resulted
from the increase in equity. The increase in data processing represented a cost
of living increase coupled with an increase related to greater transaction
volume. The small increase in other operating expense reflects management's
continuing efforts to control such operating costs.
The provision for federal income taxes totaled $2.6 million for the
year ended December 31, 1998, a decrease of $101,000, or 3.8%, from the
provision recorded in 1997. The decrease resulted primarily from a $421,000, or
5.6%, decrease in pretax earnings year to year. The Corporation's effective tax
rates were 35.9% and 35.3% for the years ended December 31, 1998 and 1997,
respectively.
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 ("Circle") 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.
14
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
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.
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 with Circle.
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 with Circle. The increase
in amortization of goodwill and other intangible assets was due to goodwill
recorded as a result of the merger with Circle.
15
Increases in occupancy and equipment, franchise taxes, data processing
and other operating expenses generally resulted from the effects of the merger
with Circle, 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.
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 15.9% at December 31, 1998. At December 31,
1998 the Savings Bank's "liquid" assets totaled approximately $56.4 million,
which was $42.2 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, 1998, the Savings Bank
had $34.7 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, 1998, the total approved loan
commitments outstanding amounted to $14.0 million. At the same date, commitments
under unused lines of credit secured by one- to four-family residential property
amounted to $4.7 million, commitments under unused lines of credit secured by
multi-family, non-residential real estate and commercial loans totaled $7.2
million and the unadvanced portion of construction loans approximated $9.2
million. The Savings Bank also has outstanding commitments of $196,000 to
purchase and $1.1 million to sell nonresidential real estate loans as of
December 31, 1998.
16
Certificates of deposit scheduled to mature in one year or less at
December 31, 1998, totaled $254.3 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, 1998, the Savings Bank's tangible and core capital
amounted to $58.5 million, or 11.4%, of total adjusted assets, which exceeded
the minimum requirements of 1.5% and 3.0% at that date by approximately $50.9
million and $43.2 million, or 9.9% and 8.4% of adjusted total assets,
respectively. The Savings Bank's risk-based capital totaled $60.3 million at
December 31, 1998, or 21.5% of risk-weighted assets, which exceeded the current
requirement of 8% of risk-weighted assets by approximately $37.8 million, or
13.5% of risk-weighted assets.
The OTS has amended the core capital requirement and increased the
minimum requirement to 4% of adjusted total assets for all but the most
highly-rated savings associations. Management anticipates no material change to
the Savings Bank's excess regulatory capital position.
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 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.
17
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. 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.
Management adopted SFAS No. 130 effective January 1, 1998, as required, without
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. Management adopted SFAS No. 131
effective January 1, 1998, as required, without material impact on the
Corporation's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
The definition of a derivative financial instrument is complex, but in
general, it is an instrument with one or more underlyings, such as an interest
rate or foreign exchange rate, that is applied to a notional amount, such as an
amount of currency, to determine the settlement amount(s). It generally requires
no significant initial investment and can be settled net or by delivery of an
asset that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. On adoption, entities are permitted to transfer held-to-maturity debt
securities to the available-for-sale or trading category without calling into
question their intent to hold other debt securities to maturity in the future.
SFAS No. 133 is not expected to have a material impact on the Corporation's
financial position or results of operations.
The foregoing discussion of the effects of recent accounting
pronouncements contains forward-looking statements that involve risks and
uncertainties. Changes in economic circumstances, interest rates or the balance
of loan servicing rights sold and retained by the Savings Bank could cause the
effects of the accounting pronouncements to differ from management's foregoing
assessment.
18
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.
Year 2000 Compliance Matters
The Year 2000 (or Y2K) issue is a serious operational problem which is
widespread and complex, affecting all industries. The Federal Financial
Institution Examination Council (the "FFIEC"), representing the views of each of
the primary financial institution regulators, has focused on the risk that
programming codes in existing computer systems may fail to properly recognize
the new millennium when it occurs in the year 2000. The Savings Bank has
addressed the potential problems associated with the possibility that the
computers which control or operate the Corporation's operating systems 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. Other concerns have been raised
regarding February 29, 2000, as well as September 9, 1999, which are new
calculation challenges that may result in further problems.
During 1997, the Savings Bank had identified a Year 2000 compliance
committee, which has worked throughout 1998 to develop and implement a Year 2000
action plan in accordance with the guidelines established by the FFIEC. The
committee had substantially completed all phases of the action plan during 1998,
including Year 2000 awareness, assessment, renovation and implementation, and
validation and testing.
During 1998 the Savings Bank's internal hardware and software had been
upgraded in accordance with the Savings Bank's normal course of operations. Most
of the computer equipment replaced was fully depreciated and upgrades would have
been necessary in the near future. To date, the cost incurred has been
approximately $325,000. This cost has been capitalized and will be amortized
over a three year period.
On September 28, 1998, the Corporation entered into an agreement of
merger with Glenway and its wholly-owned subsidiary Centennial, which provided
for a merger-of-equals between the Corporation and Glenway, and the Savings Bank
and Centennial. The transaction was consummated on March 19, 1999.
In connection with the merger, the Savings Bank was merged with and
into Centennial. As a result, the discussion that follows will focus on
Centennial's progress on the Year 2000 issue.
Centennial has been working for the last several years to resolve the
potential impact of Year 2000 on the ability of the computerized information
system to accurately process information that may be date sensitive. It may also
affect the operations of third parties with which Centennial does business,
including the vendors, suppliers, utility companies, and customers. Centennial's
Year 2000 compliance plan has five phases. These phases are (1) project
19
management and awareness, (2) assessment, (3) renovation and implementation, (4)
validation and testing, and (5) development of a contingency plan. Centennial
has substantially completed phases one through four with respect to the core
application systems related to deposit and loan processing, although appropriate
follow-up activities continue to occur. Centennial is proceeding with additional
testing of ancillary processes, including system interfaces, and implementation
phases of the Y2K Plan.
Project Management and Awareness
Centennial has assigned primary responsibility for Year 2000 project
management to its Chief Operations Officer. Several projects have been
designed to promote awareness of Year 2000 issues throughout Centennial
and the customer base. These procedures include providing information
brochures to deposit and loan customers, training internal staff, and
responding to customer, vendor and shareholder inquiries.
Assessment
Assessment is the process of identifying all mission critical
applications that could potentially be impacted by the Year 2000.
Centennial's assessment phase is complete. The scope of this
examination included core-processing applications for loans and
deposits, telecommunications systems, vendor supplied software, PC
hardware and firmware, and other software and hardware used in daily
operations.
Centennial's operations are dependent upon vendors of both computer
hardware and computer software for most applications. Centennial has
identified and contacted those vendors to receive Year 2000 compliance
assurance from its primary mission critical vendors, and is continuing
to monitor the progress/status of each.
Centennial's main core processing application (loans and deposits) is
processed on Data Communications, Inc. ("DCI") in-house client server
software. Centennial converted to DCI in 1998. All screens and reports
show 4-digit fields, and DCI has tested internal programming codes to
ensure Y2K compliance.
Validation and Testing
Centennial participated with DCI in testing for Y2K compliance. DCI's
validation and testing was completed by December 31, 1998. Centennial
staff monitored DCI testing and certification progress by review of DCI
Y2K update documentation, which has been provided to DCI users, and via
contact with designated DCI Y2K project and executive staff. Internal
testing by Centennial staff was completed using actual databases which
were future-dated to validate FFIEC Y2K test dates recommended. No
system errors were found.
Renovation and Implementation
This phase involves obtaining and implementing renovated software
applications provided by vendors. As these applications are received
and implemented, Centennial will test them for Year 2000 compliance as
noted above. This phase also involves upgrading and replacing software
and hardware where appropriate and should be substantially complete by
the end of March 1999.
Centennial's anticipated direct expenses are less than $50,000,
primarily for Y2K upgrades to existing user PC's. Additional expense
could be incurred if PC's, ATM's, and phone systems require further
modifications. This expense would be capitalized and depreciated over
differing periods resulting in an immaterial effect to the
Corporation's financial statements.
20
Contingency Plan
Contingency planning will include assessment of account off-line
procedures, staffing requirements, security, cash needs, etc. The plan
will consider the resources needed and available to resume normal
operations following a disaster.
Centennial and DCI are on schedule to meet Y2K project dates set forth
by the FFIEC for remediation testing and contingency planning. Bank
management believes that all other mission critical systems and
hardware will be Year 2000 ready by June 30, 1999. Contingency plans
will be made for elements outside of management's control or ability to
test, such as power, water or telephone failure, which could affect
operations.
21
Report of Independent Certified Public Accountants
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, 1998 and 1997, and the
related consolidated statements of earnings, comprehensive income, stockholders'
equity, and cash flows for each of the three years ended December 31, 1998, 1997
and 1996. 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, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years ended December 31,
1998, 1997 and 1996, in conformity with generally accepted accounting
principles.
/s/GRANT THORNTON LLP
Cincinnati, Ohio
February 10, 1999
22
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands, except share data)
ASSETS 1998 1997
Cash and due from banks $ 3,898 $ 2,801
Federal funds sold 17,619 22,646
Interest-bearing deposits in other financial institutions 704 5,084
------- -------
Cash and cash equivalents 22,221 30,531
Investment securities available for sale - at market 838 6,020
Mortgage-backed securities available for sale - at market 25,205 25,827
Mortgage-backed securities held to maturity - at cost, approximate market value
of $29,728 and $13,706 at December 31, 1998 and
1997, respectively 29,682 13,527
Loans receivable - net 419,200 436,414
Loans held for sale - at lower of cost or market 236 438
Office premises and equipment - at depreciated cost 7,186 7,462
Real estate acquired through foreclosure 32 -
Federal Home Loan Bank stock - at cost 4,464 4,157
Accrued interest receivable on loans 2,046 2,110
Accrued interest receivable on mortgage-backed securities 318 245
Accrued interest receivable on investments 21 132
Prepaid expenses and other assets 483 289
Goodwill and other intangible assets, net of accumulated amortization 6,949 7,628
Prepaid federal income taxes 338 320
------- -------
Total assets $519,219 $535,100
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $412,122 $432,024
Advances from the Federal Home Loan Bank 34,735 34,233
Advances by borrowers for taxes and insurance 2,426 2,134
Accrued interest and other liabilities 1,519 1,826
Deferred federal income taxes 799 609
------- -------
Total liabilities 451,601 470,826
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; 5,613,107
and 5,593,969 issued at December 31, 1998 and 1997 561 559
Additional paid-in capital 41,824 41,548
Retained earnings - restricted 27,126 24,147
Less shares acquired by Employee Stock Ownership Plan (ESOP) (1,633) (1,785)
Less shares of common stock held in treasury - at cost - (20)
Less shares acquired by Management Recognition Plan (MRP) (234) (292)
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects (26) 117
------- -------
Total stockholders' equity 67,618 64,274
------- -------
Total liabilities and stockholders' equity $519,219 $535,100
======= =======
The accompanying notes are an integral part of these statements.
23
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
For the year ended December 31,
(In thousands, except share data)
1998 1997 1996
Interest income
Loans $32,413 $33,433 $18,872
Mortgage-backed securities 3,464 2,651 2,103
Investment securities 250 1,006 833
Interest-bearing deposits and other 1,518 1,061 930
------ ------ ------
Total interest income 37,645 38,151 22,738
Interest expense
Deposits 20,301 20,923 11,554
Borrowings 2,394 1,639 1,102
------ ------ ------
Total interest expense 22,695 22,562 12,656
------ ------ ------
Net interest income 14,950 15,589 10,082
Provision for losses on loans 107 101 129
------ ------ ------
Net interest income after provision for losses on loans 14,843 15,488 9,953
Other income
Gain (loss) on sale of investment and mortgage-backed securities 62 267 (295)
Gain on sale of loans 126 36 3
Gain on sale of real estate 141 6 -
Gain on sale of real estate acquired through foreclosure 8 - -
Rental 198 207 168
Other operating 939 899 289
------ ------ ------
Total other income 1,474 1,415 165
General, administrative and other expense
Employee compensation and benefits 3,789 4,125 3,122
Occupancy and equipment 1,554 1,477 853
Federal deposit insurance premiums 258 256 1,598
Franchise taxes 800 751 521
Amortization of goodwill and other intangible assets 679 694 143
Data processing 503 476 268
Other operating 1,621 1,590 1,133
------ ------ ------
Total general, administrative and other expense 9,204 9,369 7,638
------ ------ ------
Earnings before income taxes 7,113 7,534 2,480
Federal income taxes
Current 2,292 2,177 916
Deferred 265 481 (44)
------ ------ ------
Total federal income taxes 2,557 2,658 872
------ ------ ------
NET EARNINGS $ 4,556 $ 4,876 $ 1,608
====== ====== ======
EARNINGS PER SHARE
Basic $.84 $.90 $.38
=== === ===
Diluted $.83 $.89 $.38
=== === ===
The accompanying notes are an integral part of these statements.
24
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31,
(In thousands)
1998 1997 1996
Net earnings $4,556 $4,876 $1,608
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
designated as available for sale, net of tax of $53,
$62 and $18 in 1998, 1997 and 1996, respectively (102) 121 34
Reclassification adjustment for (gains) losses included
in net earnings, net of tax of $21, $91 and $100 in
1998, 1997 and 1996, respectively (41) (176) 195
----- ----- -----
Comprehensive income $4,413 $4,821 $1,837
===== ===== =====
The accompanying notes are an integral part of these statements.
25
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY For the years ended December 31, 1998, 1997 and 1996
(In thousands, except share data)
Unrealized
gains
(losses) on
Additional Shares Shares securities
Common paid-in Retained Treasury acquired acquired available
stock capital earnings stock by ESOP by MRP for sale Total
Balance at January 1, 1996 $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
Net earnings for the year ended December 31, 1998 - - 4,556 - - - - 4,556
Exercise of 20,442 stock options 2 173 - 20 - - - 195
Principal payments on loans to ESOP/amortization of
expense related to employee stock benefit plans - 103 215 - 152 58 - 528
Unrealized losses on securities designated as
available for sale, net of related tax effects - - - - - - (143) (143)
Cash distributions of $.32 per share - - (1,792) - - - - (1,792)
--- ------ ------ --- ------ --- -- ------
Balance at December 31, 1998 $561 $41,824 $27,126 $ - $(1,633) $(234) $ (26) $67,618
=== ====== ====== === ====== ==== ==== ======
The accompanying notes are an integral part of these statements.
26
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31,
(In thousands)
1998 1997 1996
Cash flows from operating activities:
Net earnings for the year $ 4,556 $ 4,876 $ 1,608
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 694 630 335
Amortization of premiums on investments and mortgage-backed securities 178 46 47
Amortization of deferred loan origination (fees) costs 431 277 (117)
Amortization expense of employee stock benefit plans 313 235 63
Amortization of goodwill and other intangible assets 679 694 143
Amortization of purchase accounting adjustments - net (191) (755) (480)
(Gain) loss on sale of investment and mortgage-backed securities (62) (267) 295
(Gain) loss on sale of mortgage loans 82 41 (3)
Loans disbursed for sale in the secondary market (16,461) (4,599) (71)
Proceeds from sale of mortgage loans 16,584 4,120 550
Gain on sale of real estate (141) (6) -
Federal Home Loan Bank stock dividends (307) (283) (165)
Provision for losses on loans 107 101 129
Gain on sale of real estate acquired through foreclosure (8) - -
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans 64 (160) (328)
Accrued interest receivable on mortgage-backed securities (73) 65 338
Accrued interest receivable on investments 111 152 (65)
Prepaid expenses and other assets (194) 82 837
Accrued interest and other liabilities (307) (880) (499)
Federal income taxes
Current (18) 434 -
Deferred 265 481 (44)
------- ------- ------
Net cash provided by operating activities 6,302 5,284 2,573
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale (1,000) (13,506) (13,540)
Proceeds from sale of investment securities designated as available for sale 1,146 16,002 6,966
Maturities of investment securities designated as available for sale 5,040 7,651 4,079
Purchase of mortgage-backed securities designated as available for sale (11,323) (14,095) (3,173)
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 11,662 4,560 6,182
Purchase of mortgage-backed securities designated as held to maturity (24,156) (5,078) -
Principal repayments on mortgage-backed securities designated as held
to maturity 7,953 2,285 344
Loan disbursements (124,861) (115,855) (59,394)
Purchase of loan participations (1,999) (11,368) -
Sale of loan participations 2,120 261 -
Principal repayments on loans 141,217 79,023 37,106
Purchase of Federal Home Loan Bank stock - (93) (28)
Proceeds from sale of real estate 213 135 -
Purchases and additions to office premises and equipment (496) (856) (1,284)
Proceeds from sale of real estate acquired through foreclosure 237 - -
Additions to real estate acquired through foreclosure (13) - -
Acquisition of Circle Financial Corporation common stock - net - - (5,359)
------- ------- ------
Net cash provided by (used in) investing activities 5,740 (28,270) 842
------- ------- ------
Net cash provided by (used in) operating and investing activities
(subtotal carried forward) 12,042 (22,986) 3,415
------- ------- ------
27
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the year ended December 31,
(In thousands)
1998 1997 1996
Net cash provided by (used in) operating and investing activities
(subtotal brought forward) $12,042 $(22,986) $ 3,415
Cash provided by (used in) financing activities:
Net increase (decrease) in deposit accounts (19,754) 24,234 19,880
Proceeds from Federal Home Loan Bank advances 13,000 21,500 15,000
Repayment of Federal Home Loan Bank advances (12,508) (7,462) (39,970)
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 195 67 33
Distributions on common stock (1,577) (7,040) (931)
Advances by borrowers for taxes and insurance 292 129 263
------ ------- -------
Net cash provided by (used in) financing activities (20,352) 30,907 14,709
------ ------- -------
Net increase (decrease) in cash and cash equivalents (8,310) 7,921 18,124
Cash and cash equivalents at beginning of year 30,531 22,610 4,486
------ ------- -------
Cash and cash equivalents at end of year $22,221 $ 30,531 $ 22,610
====== ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 2,310 $ 1,743 $ 755
====== ======= =======
Interest on deposits and borrowings $22,841 $ 22,886 $ 12,574
====== ======= =======
Supplemental disclosure of noncash investing and financing activities:
Securitization of loans $ - $ 8,099 $ -
====== ======= =======
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ (143) $ (55) $ 229
====== ======= =======
Nonmonetary exchange of office premises and equipment for similar assets $ - $ - $ 61
====== ======= =======
Recognition of mortgage servicing rights in accordance with SFAS No. 125 $ 208 $ 77 $ -
====== ======= =======
Transfers from loans to real estate acquired through foreclosure $ 261 $ - $ -
====== ======= =======
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 and other intangible assets $ - $ - $ 7,729
====== ======= =======
The accompanying notes are an integral part of these statements.
28
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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
and other intangible assets totaling $7.7 million.
29
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Presented below are pro-forma condensed consolidated statements of earnings
and earnings per share which have been prepared as if the acquisition of
Circle had been consummated as of the beginning of the year ended December
31, 1996.
(In thousands, except share data)
(Unaudited)
Total interest income $35,313
Total interest expense 19,924
Net interest income 15,389
Provision for losses on loans 129
Other income 555
General, administrative and other expense 12,645
------
Earnings before income taxes 3,170
Federal income taxes 1,170
Net earnings $ 2,000
======
Basic earnings per share $.38
===
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.
30
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
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.
At December 31, 1998 and 1997, the Corporation's equity accounts reflected
unrealized losses and gains on securities designated as available for sale,
net of related tax effects, of $26,000 and $117,000, 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,
1998 and 1997, loans held for sale were carried at cost.
31
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
3. Loans Receivable (continued)
The Savings Bank accounts for mortgage servicing rights pursuant to the
provisions of SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," 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. 125 requires that securitization of mortgage loans be accounted
for as sales of mortgage loans and acquisitions of mortgage-backed
securities. Additionally, SFAS No. 125 requires that capitalized mortgage
servicing rights and capitalized excess servicing receivables be assessed
for impairment. Impairment is measured based on fair value.
The mortgage servicing rights recorded by the Savings Bank, calculated in
accordance with the provisions of SFAS No. 125, were segregated into pools
for valuation purposes, using as pooling criteria the loan term and coupon
rate. Once pooled, each grouping of loans was evaluated on a discounted
earnings basis to determine the present value of future earnings that a
purchaser could expect to realize from each portfolio. Earnings were
projected from a variety of sources including loan servicing fees, interest
earned on float, net interest earned on escrows, miscellaneous income, and
costs to service the loans. The present value of future earnings is the
"economic" value for the pool, i.e., the net realizable present value to an
acquirer of the acquired servicing.
The Savings Bank recorded amortization related to mortgage servicing rights
totaling approximately $39,000 and $3,000 for the years ended December 31,
1998 and 1997, respectively. At December 31, 1998 and 1997, the fair value
of the Savings Bank's mortgage servicing rights totaled approximately
$243,000 and $74,000, respectively.
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.
32
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
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 evaluate all unsecured credits that are
more than ninety days delinquent and charge off such credits as deemed
necessary. 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, 1998 and 1997, the Savings Bank had one loan for $371,000
and $376,000, respectively, that was defined as impaired under SFAS No.
114.
33
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
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". 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' 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.
34
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
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.
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, 1998, 1997 and 1996 amounted to $90,000, $101,000
and $45,000, 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, 1998, 1997 and 1996, 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 $258,000, $234,000 and $187,000 related to the ESOP for the
years ended December 31, 1998, 1997 and 1996, 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
members of the Board of Directors which vest ratably over a five year
period. A provision of $60,000, $35,000 and $20,000 was charged to MRP
expense for the years ended December 31, 1998, 1997 and 1996, respectively.
35
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
11. Earnings Per Share and Dividends Per Share
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 175,047, 191,115 and 200,810 unallocated
ESOP shares, totaled 5,423,383, 5,395,878 and 4,207,788 for the years ended
December 31, 1998, 1997 and 1996, respectively.
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
5,484,091, 5,449,727 and 4,240,638 for the years ended December 31, 1998,
1997 and 1996, respectively. There were 60,708, 53,849 and 32,850
incremental shares related to the assumed exercise of stock options included
in the computation of diluted earnings per share for the years ended
December 31, 1998, 1997 and 1996, respectively.
During 1998, 1997 and 1996, the Corporation declared capital distributions
of $.32, $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 $.25 of the 1998
distributions, 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.
36
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
13. Fair Value of Financial Instruments (continued)
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at December
31, 1998 and 1997:
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, 1998 and 1997.
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, 1998 and 1997, the
difference between the fair value and notional amount of loan
commitments was not material.
37
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
13. Fair Value of Financial Instruments (continued)
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:
1998 1997
Carrying Fair Carrying Fair
value value value value
(In thousands)
Financial assets
Cash and cash equivalents $ 22,221 $ 22,221 $ 30,531 $ 30,531
Investment securities 838 838 6,020 6,020
Mortgage-backed securities 54,887 54,933 39,354 39,533
Loans receivable 419,436 424,405 436,852 440,741
Federal Home Loan Bank stock 4,464 4,464 4,157 4,157
------- ------- ------- -------
$501,846 $506,861 $516,914 $520,982
======= ======= ======= =======
Financial liabilities
Deposits $412,122 $414,695 $432,024 $432,235
Advances from Federal Home Loan Bank 34,735 35,054 34,233 34,359
Advances by borrowers for taxes and
insurance 2,426 2,426 2,134 2,134
------- ------- ------- -------
$449,283 $452,175 $468,391 $468,728
======= ======= ======= =======
14. Comprehensive Income
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," as
of January 1, 1998. The Statement established standards for reporting and
presentation of comprehensive income and its components in a full set of
general-purpose financial statements. It 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 presented
with the same prominence as other financial statements. SFAS No. 130
requires that companies (i) classify items of other comprehensive income by
their nature in a financial statement and (ii) display the components of
other comprehensive income separately from retained earnings and additional
paid-in capital. Financial statements for earlier periods have been
reclassified for comparative purposes.
15. Advertising
Advertising costs are expensed when incurred.
16. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1998
consolidated financial statement presentation.
38
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES
Amortized cost and estimated fair values of investment securities designated
as available for sale at December 31, 1998 and 1997 consist of the
following:
1998 1997
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
U. S. Government agency obligations $835 $838 $5,869 $5,908
Corporate equity securities - - 84 112
--- --- ----- -----
$835 $838 $5,953 $6,020
=== === ===== =====
At December 31, 1998 and 1997, the market value appreciation of the
Corporation's investment securities in excess of amortized cost, totaling
$3,000 and $67,000, respectively, was comprised solely of gross unrealized
gains.
The amortized cost and estimated fair value of U.S. Government agency
obligations by contractual terms to maturity at December 31, 1998 and 1997,
are shown below:
1998 1997
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
Due within two years $ - $ - $1,000 $1,000
Due in two to five years - - 998 999
Due in five to ten years 835 838 2,997 3,027
More than ten years - - 874 882
--- --- ----- -----
$835 $838 $5,869 $5,908
=== === ===== =====
39
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at December 31, 1998 and
1997 (including those designated as available for sale) are shown below.
1998
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Available for sale:
Federal Home Loan Mortgage
Corporation participation certificates $ 8,418 $ 30 $ 14 $ 8,434
Government National Mortgage
Association participation certificates 8,055 6 48 8,013
Federal National Mortgage
Association participation certificates 6,217 12 48 6,181
Collateralized mortgage obligations 2,557 20 - 2,577
------ ---- -- ------
Total available for sale 25,247 68 110 25,205
Held to maturity:
Federal Home Loan Mortgage
Corporation participation certificates 451 - 6 445
Government National Mortgage
Association participation certificates 7,248 20 20 7,248
Federal National Mortgage
Association participation certificates 221 9 - 230
Collateralized mortgage obligations 21,762 59 16 21,805
------ ---- ---- ------
Total held to maturity 29,682 88 42 29,728
------ ---- ---- ------
Total mortgage-backed securities $54,929 $156 $152 $54,933
====== === === ======
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 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 1,085 3 - 1,088
------ ---- -- ------
Total held to maturity 13,527 179 - 13,706
------ --- -- ------
Total mortgage-backed securities $39,244 $332 $ 43 $39,533
====== === ==== ======
40
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost and estimated fair value of mortgage-backed securities at
December 31, 1998 and 1997, by contractual terms to maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may generally prepay obligations without prepayment penalties.
1998 1997
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
Available for sale:
Due within one year $ 2,938 $ 2,943 $ 3,762 $ 3,774
Due after one to three years 6,509 6,520 8,326 8,352
Due after three years to five years 2,004 2,006 4,323 4,337
Due after five years to ten years 2,099 2,094 1,144 1,151
Due after ten years to twenty years 6,617 6,597 3,981 4,006
Due after twenty years 5,080 5,045 4,181 4,207
------ ------ ------ ------
25,247 25,205 25,717 25,827
Held to maturity:
Due within one year 927 929 209 212
Due after one to three years 2,051 2,055 463 469
Due after three years to five years 2,345 2,349 530 536
Due after five years to ten years 7,435 7,448 1,682 1,703
Due after ten years to twenty years 14,490 14,512 5,620 5,692
Due after twenty years 2,434 2,435 5,023 5,094
------ ------ ------ ------
29,682 29,728 13,527 13,706
------ ------ ------ ------
Total mortgage-backed securities $54,929 $54,933 $39,244 $39,533
====== ====== ====== ======
41
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio, including loans held for sale, is as
follows at December 31:
1998 1997
(In thousands)
Residential real estate
One-to-four family residential $325,398 $341,636
Multi-family residential 23,803 26,125
Construction 12,722 9,016
Nonresidential real estate and land 49,172 50,613
Nonresidential construction 8,605 6,248
Consumer and other 9,813 9,266
-------- --------
429,513 442,904
Undisbursed portion of loans in process (9,233) (5,127)
Unamortized yield adjustments 859 733
Allowance for loan losses (1,703) (1,658)
-------- --------
$419,436 $436,852
======= =======
The Savings Bank's lending efforts have historically focused on residential
and multi-family residential real estate loans, which comprised
approximately $352.7 million, or 84%, of the total loan portfolio at
December 31, 1998, and $371.7 million, or 85%, of the total portfolio at
December 31, 1997. 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.
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 $27.1 million and $18.7 million at December 31,
1998 and 1997, respectively.
A director of the Corporation is a broker and general manager of a local
real estate agency. The agency received approximately $113,000 in real
estate commissions during 1998 as a result of sales of real estate financed
by the Savings Bank.
42
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the year ended December 31
is as follows:
1998 1997 1996
(In thousands)
Beginning balance $1,658 $1,558 $ 818
Allowance for loan losses of Circle - - 640
Provision for loan losses 107 101 129
Charge-offs of loans (62) (1) (29)
----- ----- -----
Ending balance $1,703 $1,658 $1,558
===== ===== =====
At December 31, 1998, the Savings Bank's allowance for loan losses was
solely general in nature, which is includible as a component of regulatory
risk-based capital.
At December 31, 1998, 1997 and 1996, the Savings Bank had loans of $1.8
million, $1.0 million and $1.1 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 $57,000,
$25,000 and $59,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment is comprised of the following at December 31:
1998 1997
(In thousands)
Land $ 1,786 $ 1,790
Buildings and improvements 6,174 6,269
Furniture and equipment 3,994 3,501
Automobiles 14 14
------ ------
11,968 11,574
Less accumulated depreciation and amortization 4,782 4,112
------ ------
$ 7,186 $ 7,462
====== ======
43
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE F - DEPOSITS
Deposits consist of the following major classifications at December 31:
Deposit type and weighted average
interest rate 1998 1997
(In thousands)
NOW accounts
December 31, 1998 - 0.86% $ 32,634
December 31, 1997 - 1.44% $ 25,296
Passbook and club accounts
December 31, 1998 - 1.81% 36,526
December 31, 1997 - 1.79% 40,374
Money market deposit accounts
December 31, 1998 - 2.71% 25,324
December 31, 1997 - 3.32% 25,730
------- -------
Total demand, transaction and passbook deposits 94,484 91,400
Certificates of deposit
Original maturities of:
Less than 12 months
December 31, 1998 - 5.00% 87,126
December 31, 1997 - 5.59% 91,221
12 months to 18 months
December 31, 1998 - 5.50% 170,082
December 31, 1997 - 5.87% 151,965
18 months to 36 months
December 31, 1998 - 5.62% 31,182
December 31, 1997 - 5.94 % 60,819
36 months to 48 months
December 31, 1998 - 5.63% 6,274
December 31, 1997 - 5.91% 8,862
More than 48 months
December 31, 1998 - 6.48% 22,974
December 31, 1997 - 6.57% 27,757
------- -------
Total certificates of deposit 317,638 340,624
------- -------
Total deposits $412,122 $432,024
======= =======
At December 31, 1998 and 1997, the Savings Bank had certificate of deposit
accounts with balances of $100,000 or greater totaling $44.2 million and
$44.1 million, respectively.
44
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE F - DEPOSITS (continued)
Interest expense on deposits for the years ended December 31 is summarized
as follows:
1998 1997 1996
(In thousands)
Passbook and money market deposit accounts $ 1,457 $ 1,655 $ 931
NOW accounts 270 322 280
Certificates of deposit 18,574 18,946 10,343
------ ------ ------
$20,301 $20,923 $11,554
====== ====== ======
Maturities of outstanding certificates of deposit at December 31 are
summarized as follows:
1998 1997
(In thousands)
Less than one year $254,261 $251,254
One to two years 53,935 70,680
Two to three years 5,944 12,937
Over three years 3,498 5,753
--------- ---------
$317,638 $340,624
======= =======
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at December 31,
1998 by pledges of certain residential mortgage loans totaling $52.2 million
and the Savings Bank's investment in Federal Home Loan Bank stock, are
summarized as follows:
December 31,
1998 1997
(Dollars in thousands)
Due within one year $ 7,262 $10,495
Due after one to three years 20,889 14,946
Due after three to five years 2,241 3,647
Due after five to ten years 2,290 3,041
Due after ten to twenty years 2,053 2,104
------- -------
$34,735 $34,233
====== ======
Weighted-average interest rate 6.02% 6.21%
==== ====
45
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
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, 1998, the ESOP held 327,575 shares of the
Corporation's common stock, with approximately 160,681 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:
1998 1997 1996
(In thousands)
Federal income taxes computed at the statutory rate $2,418 $2,562 $843
Increase (decrease) in taxes resulting from:
Amortization of goodwill 123 123 26
Other 16 (27) 3
------- ------- -----
Federal income tax provision per consolidated
financial statements $2,557 $2,658 $872
===== ===== ===
46
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE I - FEDERAL INCOME TAXES (continued)
The composition of the Corporation's net deferred tax liability at December
31 is as follows:
Taxes (payable) refundable on temporary 1998 1997
differences at statutory rate: (In thousands)
Deferred tax assets:
Deferred loan origination fees $ 87 $ 136
Retirement expense 183 195
General loan loss allowance 579 561
Purchase price adjustments from Circle acquisition 43 116
Unrealized losses on securities designated as available for sale 13 -
Other 157 167
------ ------
Total deferred tax assets 1,062 1,175
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (734) (630)
Percentage of earnings bad debt deduction (757) (908)
Unrealized gains on securities designated as available for sale - (60)
Book versus tax depreciation (236) (126)
Mortgage servicing rights (83) -
Purchase price adjustments from Circle acquisition (51) (60)
----- -----
Total deferred tax liabilities (1,861) (1,784)
----- -----
Net deferred tax liability $ (799) $ (609)
===== =====
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, 1998. 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, 1998. 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 consolidated 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.
47
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE J - COMMITMENTS (continued)
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, 1998, the Savings Bank had total outstanding commitments of
approximately $12.1 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 $4.3 million was comprised of adjustable rate loans at rates
ranging from 6.125% to 7.75%, and $7.8 million was comprised of fixed rate
loans at rates ranging from 6.25% to 8.25%. The Savings Bank also had
outstanding commitments of approximately $1.9 million to originate
nonresidential real estate loans. Additionally, the Savings Bank had unused
lines of credit under home equity loans of approximately $4.7 million and
unused lines of credit under multi-family, nonresidential real estate loans
and commercial loans of $7.2 million. The Savings Bank also has outstanding
commitments of $196,000 to purchase and $1.1 million to sell non-residential
real estate loans as of December 31, 1998. In the opinion of management, all
loan commitments equaled or exceeded prevalent market interest rates as of
December 31, 1998, 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 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
48
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE K - REGULATORY CAPITAL (continued)
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, 1998 and 1997, management believes that the Savings Bank
met all capital adequacy requirements to which it was subject.
1998: To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Tangible capital $58,548 11.4% =>$ 7,693 =>1.5% =>$25,643 => 5.0%
Core capital $58,548 11.4% =>$15,386 =>3.0% =>$30,771 => 6.0%
Risk-based capital $60,251 21.5% =>$22,402 =>8.0% =>$28,003 =>10.0%
1997: To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Tangible capital $53,194 10.1% =>$ 7,887 =>1.5% =>$26,289 => 5.0%
Core capital $53,194 10.1% =>$15,773 =>3.0% =>$31,547 => 6.0%
Risk-based capital $54,844 19.3% =>$22,701 =>8.0% =>$28,376 =>10.0%
At December 31, 1998, 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 6.0%.
The Savings Bank's capital exceeded the minimum required amounts for
classification as a "well-capitalized" institution by $32.2 million and
$27.8 million, respectively.
49
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE K - REGULATORY CAPITAL (continued)
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 $22.2 million to the
Corporation at December 31, 1998.
NOTE L - LEGISLATIVE MATTERS
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 provided 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 amortize the recapture of its bad debt reserve over six years
commencing in 1998.
50
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE M - STOCK OPTION PLANS
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 provided for 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 4,000 and 171,500 shares were granted during 1998 and 1997,
respectively, 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 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 APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized for the plans. Had compensation cost for the Corporation's
stock option plans been determined based on the fair value at the grant
dates for awards under the plans 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:
1998 1997 1996
Net earnings (In thousands) As reported $4,556 $4,876 $1,608
===== ===== =====
Pro-forma $4,551 $4,826 $1,608
===== ===== =====
Earnings per share
Basic As reported $.84 $.90 $.38
=== === ===
Pro-forma $.84 $.89 $.38
=== === ===
Diluted As reported $.83 $.89 $.38
=== === ===
Pro-forma $.83 $.88 $.38
=== === ===
51
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE M - STOCK OPTION PLANS (continued)
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 1998 and 1997: 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 plans as of
December 31, 1998, 1997 and 1996, and changes during the periods ending on
those dates is presented below:
1998 1997 1996
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at beginning of year 213,349 $10.86 54,265 $ 4.41 61,015 $4.46
Granted 4,000 15.50 171,500 13.00 - -
Adjustment for return of capital
distribution - - 8,334 (.44) - -
Exercised (20,442) 9.50 (14,350) 5.21 (6,750) 4.81
Forfeited (8,742) 12.49 (6,400) 13.00 - -
--------- ----- --------- ----- ------- ----
Outstanding at end of year 188,165 $11.03 213,349 $10.86 54,265 $4.41
======= ===== ======= ===== ====== ====
Options exercisable at year-end 91,617 77,314 54,265
======== ====== ======
Weighted-average fair value of
options granted during the year $ 3.14 $ 2.63 N/A
====== ====== ===
The following information applies to options outstanding at December 31,
1998:
Number outstanding 188,165
Range of exercise prices $2.84 - $15.50
Weighted-average exercise price $11.03
Weighted-average remaining contractual life 8.01 years
52
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
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, 1998 and
1997, and the results of its operations and its cash flows for the periods
then ended.
Fidelity Financial of Ohio, Inc.
STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands)
ASSETS 1998 1997
Cash and due from banks $ 285 $ 198
Investment securities available for sale - at market - 1,112
Loan receivable from ESOP 1,755 1,785
Investment in subsidiary 65,505 61,463
Prepaid expenses and other 551 151
------ ------
Total assets $68,096 $64,709
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 478 $ 435
Stockholders' equity
Common stock and additional paid-in capital 42,385 42,107
Retained earnings 27,126 24,147
Less shares acquired by Management Recognition Plan (234) (292)
Less shares held in treasury - (20)
Shares acquired by ESOP (1,633) (1,785)
Unrealized gains (losses) on securities designated as
available for sale, net (26) 117
------ ------
Total stockholders' equity 67,618 64,274
------ ------
Total liabilities and stockholders' equity $68,096 $64,709
====== ======
Fidelity Financial of Ohio, Inc.
STATEMENTS OF EARNINGS
For the period ended December 31,
(In thousands)
1998 1997 1996
Income
Interest income $ 153 $ 462 $ 524
Gain on sale of investment securities 62 - -
Equity in earnings of subsidiary 4,650 4,818 1,208
----- ----- -----
Total revenue 4,865 5,280 1,732
General and administrative expenses 358 390 421
----- ----- -----
Earnings before income taxes (credits) 4,507 4,890 1,311
Federal income taxes (credits) (49) 14 35
----- ----- -----
NET EARNINGS $4,556 $4,876 $1,276
===== ===== =====
53
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE N - CONDENSED FINANCIAL STATEMENTS OF FIDELITY FINANCIAL OF
OHIO, INC. (continued)
Fidelity Financial of Ohio, Inc.
STATEMENTS OF CASH FLOWS
For the period ended December 31,
(In thousands)
1998 1997 1996
Cash provided by (used in) operating activities:
Net earnings for the period $4,556 $4,876 $ 1,276
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Undistributed earnings of consolidated subsidiary (3,922) (4,818) (1,208)
Increase (decrease) in cash due to changes in:
(Gain) loss on sale of investment securities (62) 8 -
Prepaid expenses and other assets (400) 95 (250)
Other liabilities 51 (283) 709
----- ----- ------
Net cash provided by (used in) operating activities 223 (122) 527
Cash flows provided by (used in) investing activities:
Proceeds from repayment of loan to ESOP 100 93 10
Proceeds from sale of investment securities 1,146 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 1,246 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 (1,577) (7,040) (931)
Purchase of treasury stock - (229) -
Purchase of stock for management recognition plan - (292) -
Proceeds from exercise of stock options 195 67 -
----- ----- ------
Net cash provided by (used in) financing activities (1,382) (7,494) 19,503
----- ----- ------
Net increase (decrease) in cash and cash equivalents 87 (5,541) 5,739
Cash and cash equivalents at beginning of period 198 5,739 -
----- ----- ------
Cash and cash equivalents at end of period $ 285 $ 198 $ 5,739
===== ===== ======
54
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE O - BUSINESS COMBINATION
On September 28, 1998, the Corporation's Board of Directors approved a
business combination whereby Glenway Financial Corporation ("Glenway") would
merge with and into Fidelity Financial of Ohio, Inc. The merger was
completed on March 19, 1999. The business combination was accounted for as a
pooling-of-interests and, accordingly, the assets, liabilities and capital
of the respective combining companies were added together at historic
carrying value. Unaudited pro-forma condensed, combined financial
information of the Corporation and Glenway as of and for the year ended
December 31, 1998, is as follows:
Fidelity Pro-forma
Financial Glenway combined
(unaudited) (unaudited)
(In thousands, except share data)
Total assets $519,219 $295,467 $814,686
======= ======= =======
Total liabilities $451,601 $264,785 $716,386
======= ======= =======
Stockholders' equity $ 67,618 $ 30,682 $ 98,300
======= ======= =======
Total revenue $ 39,119 $ 23,543 $ 62,662
Total expense 34,563 20,624 55,187
------- ------- -------
Net earnings $ 4,556 $ 2,919 $ 7,475
======= ======= =======
Basic earnings per share $.84 $1.28 $.84
=== ==== ===
55
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE P - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Corporation's quarterly results for the
years ended December 31, 1998 and 1997.
Three Months Ended
March 31, June 30, September 30, December 31,
1998: (In thousands, except per share data)
Total interest income $9,567 $9,527 $9,427 $9,124
Total interest expense 5,842 5,740 5,683 5,430
----- ----- ----- -----
Net interest income 3,725 3,787 3,744 3,694
Provision for losses on loans 20 27 30 30
Other income 505 306 355 308
General, administrative and other expense 2,330 2,279 2,343 2,252
----- ----- ----- -----
Earnings before income taxes 1,880 1,787 1,726 1,720
Federal income taxes 677 653 611 616
----- ----- ----- -----
Net earnings $1,203 $1,134 $1,115 $1,104
===== ===== ===== =====
Earnings per share:
Basic $.22 $.21 $.21 $.20
=== === === ===
Diluted $.22 $.21 $.20 $.20
=== === === ===
Three Months Ended
March 31, June 30, September 30, December 31,
1997: (In thousands, except per share data)
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 $.22 $.23 $.22 $.23
=== === === ===
Diluted $.22 $.22 $.22 $.23
=== === === ===
56
DIRECTORS
JOHN R. REUSING Chairman of the Board of Fidelity Financial of
Ohio, Inc. and President of Centennial Bank.
ROBERT R. SUDBROOK President and Chief Executive Officer of Fidelity
Financial of Ohio, Inc. and Chairman of the Board
and Chief Executive Officer of Centennial Bank.
DANIEL W. GEEDING Professor of Management and the Director of the
Center for International Business at Xavier
University.
JOSEPH D. HUGHES Executive Vice President and Chief Lending Officer
of Fidelity Financial of Ohio, Inc. and Centennial
Bank.
MICHAEL W. JORDAN Executive Vice President of Jordan Realtors,
Cincinnati, Ohio.
KENNETH C. LICHTENDAHL President of Hudepohl-Schoenling Brewing Company.
DAVID A. LUECKE President and Chief Executive Officer of Riemeier
Lumber Company, Cincinnati, Ohio.
CONSTANTINE N. PAPADAKIS President of Drexel University, Philadelphia,
Pennsylvania.
EDGAR A. RUST Retired President and Chief Executive Officer of
Glenway Financial Corporation.
THOMAS N. SPAETH Chief Financial Officer, Champion Window
Manufacturing & Supply, Inc.
JOHN L. TORBECK President of Torbeck Homes, Inc.
ROBERT W. ZUMBIEL President of C.W. Zumbiel Company, Norwood, Ohio.
OFFICERS
ROBERT R. SUDBROOK President and Chief Executive Officer of Fidelity
Financial of Ohio, Inc. and Chairman of the Board
and Chief Executive Officer of Centennial Bank.
JOHN R. REUSING Chairman of the Board of Fidelity Financial of
Ohio, Inc. and President of Centennial Bank.
JOSEPH D. HUGHES Executive Vice President and Chief Lending Officer
of Fidelity Financial of Ohio, Inc. and Centennial
Bank.
GREGORY P. NIESEN Senior Vice President and Treasurer of Fidelity
Financial of Ohio, Inc. and Centennial Bank.
THOMAS N. SCHILLER Executive Vice President Commercial Banking of
Fidelity Financial of Ohio, Inc. and Centennial
Bank.
ELAINE M. SCHMIDT Senior Vice President and Chief Operations Officer
of Fidelity Financial of Ohio, Inc. and Centennial
Bank.
PAUL D. STAUBACH Senior Vice President and Chief Financial Officer
of Fidelity Financial of Ohio, Inc. and Centennial
Bank.
LOCATIONS
Main Office/Glencrossing 5535 Glenway Avenue 922-5959
Anderson 7944 Beechmont Avenue 474-1141
Blue Ash 4144 Hunt Road 793-5196
Cheviot 3916 Harrison Avenue 661-5997
Delhi 5030 Delhi Pike 451-5353
Delhi/Rapid Run 5681 Rapid Run (at Neeb) 451-7575
Hartwell 8434 Vine Street 821-8880
Loveland 10640 Loveland-Madeira Road 683-1124
Madeira 7136 Miami Avenue 272-4200
Northgate 9090 Colerain Avenue 385-8148
Norwood 4555 Montgomery Road 351-6666
Price Hill 4221 Glenway Avenue 921-5505
Ross 3777 Hamilton Cleves Road 738-1111
Sharonville 11100 Reading Road 733-9300
Tri County 11700 Princeton Road 671-0866
57
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
Fidelity Financial of Ohio, Inc.
5535 Glenway Avenue
Cincinnati, Ohio 45238
(513) 922-5959
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
May 18, 1999, 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, 1998. 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
Fidelity Financial of Ohio, Inc.
5535 Glenway Avenue
Cincinnati, Ohio 45238
MARKET MAKERS
Ernst & Company
Friedman, Billings, Ramsey & Co., Inc.
S. J. Wolfe and Company, as a subsidiary of
McDonald & Co. Securities
Herzog, Heine, Geduld, Inc.
Knight Securities, Inc.
Sandler, O'Neill & Partners, LP
Stifel, Nicholas & Company, Inc.
Trident Securities Inc.
58