SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________________ to____________________
Commission File No.: 0-26242
Fort Thomas Financial Corporation
(Exact name of registrant as specified in its charter)
Ohio 61-1278396)
--------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
25 North Fort Thomas Avenue
Fort Thomas, Kentucky 41075
--------------------------- ----------------------
(Address) (Zip Code)
Registrant's telephone number, including area code: (606) 441-3302
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act
Common Stock (par value $.01 per share)
------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes_X__ No___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. /X/
As of December 22, 1997, the aggregate value of the 1,378,147 shares of
Common Stock of the Registrant issued and outstanding on such date, which
excludes 100,319 shares held by all directors and officers of the Registrant
as a group, was approximately $20.5 million. This figure is based on the last
sales price of $14.875 per share of the Registrant's Common Stock on December
18, 1997.
Number of shares of Common Stock outstanding as of December 22, 1997:
1,478,466
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended
September 30, 1997 are incorporated into Part II, Items 5 through 8 of this
Form 10-K.
(2) Portions of the definitive proxy statement for the 1997 Annual Meeting of
Stockholders are incorporated into Part III, Items 9 through 13 of this Form
10-K.
PART I
ITEM 1. BUSINESS
GENERAL
FORT THOMAS FINANCIAL CORPORATION
Fort Thomas Financial Corporation (the "Company") is an Ohio corporation
organized in March 1995 by Fort Thomas Savings Bank, F.S.B. (the "Bank") for
the purpose of becoming a unitary holding company of the Bank. The only
significant assets of the Company are the capital stock of the Bank, the
Company's loan to the Employee Stock Ownership Plan ("ESOP"), and the portion
of the net proceeds retained by the Company in connection with the Bank's
conversion to stock form (the "Conversion"). The business and management of
the Company consists of the business and management of the Bank. The Company
does not own or lease any property, but instead uses the premises, equipment
and furniture of the Bank. At the present time, the Company does not employ
any persons other than officers of the Bank, and the Company utilizes the
support staff of the Bank from time to time. Additional employees will be
hired as appropriate to the extent the Company expands or changes its
business in the future.
The Company's executive office is located at the home office of the Bank
at 25 North Fort Thomas Avenue, Fort Thomas, Kentucky 41075, and its
telephone number is (606) 441-3302.
FORT THOMAS SAVINGS BANK, F.S.B.
The Bank is a federally chartered stock savings bank which conducts
business through two full service offices located in Campbell County,
Kentucky. The Bank was originally chartered under Kentucky law in 1910 as a
building and loan association and, as of September 29, 1994, converted itself
into a federally chartered mutual savings and loan association known as "Fort
Thomas Federal Savings and Loan Association." In connection with the
Conversion, the Bank became known as "Fort Thomas Savings Bank, F.S.B."
The Bank is primarily engaged in attracting deposits from the general
public through its branch offices and using such deposits primarily to
originate loans secured by first liens on single-family (one-to-four units)
residential properties and to a significantly lesser extent, multi-family
(over four units) residential properties, construction loans on primarily
residential properties and consumer loans. To a limited extent, the Bank also
invests in securities issued by the United States ("U.S.") Government and
agencies thereof. The Bank derives its income principally from interest
earned on loans and investments and, to a lesser extent, from fees received
in connection with the origination of loans and for other services. The
Bank's primary expenses are interest expense on deposits and general
operating expenses. Funds for activities are provided primarily by deposits,
borrowing, amortization and prepayments of outstanding loans and other
sources.
The Bank is subject to regulation by the Office of Thrift Supervision
(the "OTS"), as its chartering authority and primary regulator, and by the
Federal Deposit Insurance Corporation (the "FDIC"), which insures the Bank's
deposits up to applicable limits. The Bank also is subject to certain reserve
requirements established by the Federal Reserve Board and is a member of the
Federal Home Loan Bank ("FHLB") of Cincinnati, which is one of the 12 banks
which comprise the FHLB System.
The Bank's executive offices are located at 25 North Fort Thomas Avenue,
Fort Thomas, Kentucky 41075, and its telephone number is (606) 441-3302.
LENDING ACTIVITIES
GENERAL. At September 30, 1997, the Bank's total portfolio of loans
receivable ("total loan portfolio"), amounted to $90.6 million or 92.5% of
the Bank's $97.9 million of total assets at such time. The Bank has
traditionally concentrated its lending activities on conventional first
mortgage loans secured by single-family residential property. At September
30, 1997, $74.5 million or 82.2% of the Bank's total loan portfolio consisted
of one-to-four family residential loans, including second mortgage loans. To
a much lesser extent, the Bank also originates multi-family residential
loans, land and construction loans and consumer loans. At September 30, 1997,
such loan categories amounted to $11.0 million, $3.9 million and $1.2
million, respectively, or 12.2%, 4.3% and 1.4% of the total loan portfolio,
respectively. The Bank does not offer loans which are insured by the Federal
Housing Administration ("FHA") nor partially guaranteed by the Office of
Veterans Affairs ("VA").
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LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Bank's loan portfolio by type of loan at the dates indicated.
SEPTEMBER 30,
-------------------------------------------------------------------
1996 1996 1995
-------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Real estate loans:
One-to-four family residential............................ $ 74,471 82.20% $ 62,632 77.41% $ 57,775 77.81%
Multi-family residential.................................. 11,015 12.16 11,138 13.77 7,915 10.67
Land and construction:
Residential............................................. 3,885 4.29 5,737 7.09 7,140 9.62
Commercial.............................................. -- -- 255 0.32 255 0.34
--------- --------- --------- --------- --------- ---------
Total real estate loans................................. 89,371 98.64 79,762 98.58 73,085 98.44
--------- --------- --------- --------- --------- ---------
Consumer:
Savings account........................................... 702 0.77 632 0.78 651 0.88
Other..................................................... 528 0.58 516 0.64 503 0.68
--------- --------- --------- --------- --------- ---------
Total consumer loans.................................... 1,230 1.36 1,148 1.42 1,154 1.56
--------- --------- --------- --------- --------- ---------
Total loans............................................. 90,601 100.00% 80,910 100.00% 74,217 100.00%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Less:
Loans in process.......................................... 1,048 1,884 2,191
Unearned discounts........................................ -- -- --
Deferred loan fees........................................ 625 673 631
Allowance for loan losses................................. 476 366 239
--------- --------- ---------
Loans receivable, net................................... $ 88,452 $ 77,987 $ 71,156
--------- --------- ---------
--------- --------- ---------
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CONTRACTUAL MATURITIES. The following table sets forth the scheduled
contractual maturities of the Bank's loans at September 30, 1997. Demand
loans, loans having no stated schedule of repayments and no stated maturity
and overdraft loans are reported as due in one year or less. Adjustable-rate
loans are reported on a repricing basis rather than on a contractual basis.
The amounts shown for each period do not take into account loan prepayments
and normal amortization of the Bank's loan portfolio.
REAL ESTATE LOANS
------------------------------------
ONE-TO-FOUR MULTI- LAND AND CONSUMER
FAMILY(1) FAMILY CONSTRUCTION LOANS TOTAL
----------- --------- ------------- ----------- ---------
(IN THOUSANDS)
Amounts due in:
One year or less................................... $ 44,876 $ 7,188 $ 3,885 $ 1,042 $ 56,991
After one year through three years................. 12,343 1,982 -- 56 14,381
After three years through five years............... 3,339 746 -- 62 4,147
After five years through ten years................. 3,883 691 -- 57 4,631
After ten years through fifteen years.............. 7,119 408 -- 13 7,540
Over fifteen years................................. 2,911 -- -- -- 2,911
----------- --------- ---------- ----------- ---------
Total............................................ $ 74,471 $ 11,015 $ 3,885 $ 1,230 $ 90,601
----------- --------- ---------- ----------- ---------
----------- --------- ---------- ----------- ---------
Interest rate terms on amounts due after one year:
Fixed.............................................. $ 16,356 $ 1,220 $ -- $ 188 $ 17,764
Adjustable......................................... 13,239 2,607 -- -- 15,846
----------- --------- ---------- --------- ---------
Total............................................ $ 29,595 $ 3,827 $ -- $ 188 $ 33,610
----------- ---------- ---------- --------- ----------
----------- ---------- ---------- --------- ----------
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(1) Includes second mortgages on one-to-four family residential loans.
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of the
Bank are subject to the written, non-discriminatory, underwriting standards
and loan origination procedures established by the Bank's Board of Directors
and management. Loan originations are obtained by a variety of sources,
including builders, existing customers, and walk-in customers. Property
valuations are always performed by independent outside appraisers approved by
the Bank's Board of Directors. Hazard insurance is required on all security
property. The entire Board of Directors meets on a weekly basis to approve
all new loans.
Historically, the Bank has not been an active purchaser of loans. The
Bank did not purchase any loans during fiscal 1996, 1995 or 1994. Although
the Bank emphasizes the origination of ARMs, the Bank also offers fixed rate
loans with terms up to 15 years. The Bank does not originate 30 year fixed
rate loans. With the exception of certain loans sold in 1993 which have an
aggregate outstanding principal balance at September 30, 1997 of $442,000,
all fixed rate loans sold by the Bank have been sold without any recourse to
the Bank by the purchaser in the event of default on the loan by the
borrower. Loans are sold by the Bank primarily to the Federal Home Loan
Mortgage Corporation ("FHLMC").
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Loans are sold to the FHLMC pursuant to forward sales commitments and,
therefore, an increase or decrease in interest rates after loan origination
and prior to sale does not adversely affect the Bank's income at the time of
sale. The Bank did not sell any loans during fiscal 1997, 1996 or fiscal 1995.
The following table shows origination and sale activity of the Bank with
respect to its loans during the periods indicated. The Bank has not purchased
any loans during the periods reported.
YEAR ENDED SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
Real estate loan originations:
One-to-four family residential................................................. $ 17,528 $ 14,668 $ 14,711
Multi-family residential....................................................... 1,495 3,679 889
Land and construction:
Residential.................................................................. 5,125 4,242 5,193
Commercial................................................................... 1,136 824 --
--------- --------- ---------
Total real estate loan originations.......................................... 25,284 23,413 20,793
--------- --------- ---------
Total consumer loan originations................................................. 470 343 345
--------- --------- ---------
Total loan originations...................................................... 25,754 23,756 21,138
--------- --------- ---------
Less:
Principal loan repayments...................................................... 15,814 16,588 13,699
Sales of whole loans........................................................... -- -- --
Transferred to other real estate owned......................................... 64 -- --
Loans in process............................................................... (836) (307) 401
Other, net(1).................................................................. 247 644 32
--------- --------- ---------
Net increase (decrease)........................................................ $ 10,465 $ 6,831 $ 7,006
--------- --------- ---------
--------- --------- ---------
- ------------------------
(1) Includes changes related to amortization of deferred loan fees, the
allowance for loan losses and other miscellaneous adjustments.
-5-
LOANS-TO-ONE BORROWER. A savings institution generally may not make loans
to one borrower and related entities in an amount which exceeds 15% of its
unimpaired capital and surplus, although loans in an amount equal to an
additional 10% of unimpaired capital and surplus may be made to a borrower if
the loans are fully secured by readily marketable securities. At September
30, 1997, the Bank's limit on loans-to-one borrower was approximately $2.4
million.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LOANS. The Bank has
historically concentrated its lending activities on the origination of loans
secured by first mortgage liens on existing one-to-four family residences. At
September 30, 1997, $74.5 million or 82.2% of the Bank's total loan portfolio
consisted of one-to-four family residential real estate loans. The Bank
originated $17.5 million, $14.7 million and $14.7 million of one-to-four
family residential loans in fiscal 1997, 1996 and 1995, respectively, and
intends to continue to emphasize the origination of permanent loans secured
by first mortgage liens on one-to-four family residential properties in the
future. Of the $74.5 million of such loans at September 30, 1997, $55.2
million or 74.1% had adjustable-rates of interest and $19.3 million or 25.9%
had fixed-rates of interest.
The Bank currently originates for its portfolio one-to-four family
residential mortgage loans which typically provide for an interest rate which
adjusts every year in accordance with a designated index (the weekly average
yield on U.S. Treasury securities adjusted to a constant comparable maturity
of one year) plus a margin. Such loans are typically based on a 25 or 30-year
amortization schedule. The Bank does not offer "teaser" rates, and the amount
of any increase or decrease in the interest rate after the initial one year
period is presently limited to 1% per year, with a limit of 5% over the life
of the loan. The Bank also originates residential mortgage loans with an
interest rate which is fixed for three years and adjusts every year after the
initial three-year period. The amount of any increase or decrease in the
interest rate after the initial three-year period is presently limited to 2%
per year, with a limit of 5% over the life of the loan. The Bank's
adjustable-rate loans currently being originated are not assumable and do not
contain prepayment penalties. The Bank underwrites its adjustable rate loans
on the basis of the borrowers ability to pay at the initial rate or at the
rate after the first adjustment.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms
of the loan, thereby increasing the potential for default. At the same time,
the marketability of the underlying property may be adversely affected by
higher interest rates. The Bank believes that these risks, which have not had
a material adverse effect on the Bank to date, generally are less than the
risks associated with holding fixed-rate loans in an increasing interest rate
environment.
The Bank's fixed rate loans are originated primarily with terms of 15
years and the Bank does not originate fixed rate loans with a term exceeding
20 years. The Bank also offers, but does not emphasize, second mortgage loans
with fixed rates of interest and terms of one to 15 years. The Bank does not
require that it hold the first mortgage on the secured property, however, the
balance on all mortgages on the secured property generally cannot
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exceed 80% of the value of the secured property. At September 30, 1997,
second mortgage loans amounted to $4.7 million or 5.4% of the total loan
portfolio.
The Bank is permitted to lend up to 100% of the appraised value of the
real property securing a residential loan; however, if the amount of a
residential loan originated or refinanced exceeds 90% of the appraised value,
the Bank is required by federal regulations to obtain private mortgage
insurance on the portion of the principal amount that exceeds 80% of the
appraised value of the security property. Pursuant to underwriting guidelines
adopted by the Board of Directors, the Bank will lend up to 95% of the
appraised value of the property securing a one-to-four family residential
loan, and generally requires borrowers to obtain private mortgage insurance
on the portion of the principal amount of the loan that exceeds 80% of the
appraised value of the security property. However, the Bank's residential
mortgage loans typically do not exceed 80% of the appraised value of the
security property. At September 30, 1997, the Bank had $4.9 million of loans
with a loan-to-value ratio in excess of 80% of appraised value.
MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS. The Bank originates mortgage
loans for the acquisition and refinancing of existing multi-family
residential properties. At September 30, 1997, $11.0 million or 12.2% of the
Bank's total loan portfolio consisted of loans secured by existing
multi-family residential real estate properties. The majority of the Bank's
multi-family residential loans are secured by apartment buildings. All of the
Bank's multi-family real estate loans are secured by property located in the
Bank's primary market area.
Multi-family loans are made on terms up to 25 years. Although the Bank
will originate these loans with fixed interest rates, the majority of these
loans have interest rates which adjust in accordance with a designated index
(the weekly average yield on U.S. Treasury securities adjusted to a constant
comparable maturity of one year). Loan to value ratios on the Bank's
multi-family real estate loans are currently limited to 75%. It is also the
Bank's general policy to obtain corporate or personal guarantees, as
applicable, supported by financial statements, on its multi-family
residential real estate loans from the principals of the borrower.
Multi-family real estate lending entails significant additional risks as
compared with one-to-four family residential property lending. Such loans
typically involve large loan balances to single borrowers or groups of
related borrowers. The payment experience on such loans is typically
dependent on the successful operation of the real estate project. The success
of such projects is sensitive to changes in supply and demand conditions in
the market for multi-family real estate as well as economic conditions
generally. At September 30, 1997, the Bank had $360,000 of nonperforming
multi-family real estate loans. See "-- Asset Quality."
LAND AND CONSTRUCTION LENDING. The Bank also originates residential land
and construction loans, although the Bank has originated multi-family
construction and land acquisition and development loans to a limited degree.
Land and construction loans are classified as either residential or multi-family
at the time of origination, depending on the
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nature of the property securing the loan. The Bank's construction lending
activities are limited to the Bank's primary market area. At September 30,
1997, land and construction loans amounted to $3.9 million or 4.3% of the
Bank's total loan portfolio, all of which consisted of residential
construction loans. The Bank's residential and multi-family construction
loans generally have fixed interest rates for a term of one year, with
payments being made monthly on an interest-only basis. Construction loans are
made with a maximum loan to value ratio of 80%.
With limited exceptions, the Bank's construction loans are made to
individual homeowners and a limited number of local real estate builders and
developers for the purpose of constructing primarily one-to-four family
residential homes. Upon application, credit review and analysis of personal
and corporate financial statements, the Bank will make loans to local
builders. These loans may be used for the purpose of construction of
speculative (or unsold) residential properties. Once approved for a
construction loan, draws are granted on a percentage of completion basis. The
Bank also inspects construction projects as draws are requested.
Construction lending is generally considered to involve a higher level of
risk as compared to one-to-four family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on developers and builders. Moreover,
a construction loan can involve additional risks because of the inherent
difficulty in estimating both a property's value at completion of the project
and the estimated cost (including interest) of the project. The nature of
these loans is such that they are generally more difficult to evaluate and
monitor. In addition, speculative construction loans to a builder involve
projects which are not pre-sold and thus pose a greater potential risk to the
Bank than construction loans to individuals on their personal residences.
The Bank has attempted to minimize the foregoing risks by, among other
things, limiting the extent of its construction lending generally and by
limiting its construction lending to primarily residential properties. In
addition, the Bank has adopted underwriting guidelines which impose stringent
loan-to-value, debt service and other requirements for loans which are
believed to involve higher elements of credit risk, by limiting the
geographic area in which the Bank will do business and by working with
builders with whom it has established relationships. At September 30, 1997,
the Bank had $309,000 of nonperforming land and construction loans. See
"--Asset Quality."
CONSUMER LOANS. The Bank offers consumer loans in order to provide a
full range of financial services to its customers. The consumer loans offered
by the Bank include deposit account secured loans and unsecured loans.
Consumer loans amounted to $1.2 million or 1.4% of the total loan portfolio
at September 30, 1997, $702,000 of which consisted of loans secured by
deposit accounts. Such loans are originated for up to 90% of the account
balance, with a hold placed on the account restricting the withdrawal of the
account balance.
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LOAN FEE INCOME. In addition to interest earned on loans, the Bank
receives income from fees in connection with loan originations, loan
modifications, late payments, prepayments and for miscellaneous services
related to its loans. Income from these activities varies from period to
period depending upon the volume and type of loans made and competitive
conditions.
The Bank charges loan origination fees which are calculated as a
percentage of the amount borrowed. Loan origination and commitment fees and
all incremental direct loan origination costs are deferred and recognized
over the contractual remaining lives of the related loans on a level yield
basis. Discounts and premiums on loans purchased are accreted and amortized
in the same manner. In accordance with FASB No. 91, the Bank recognized
approximately $292,000 during fiscal 1997 in connection with loan
refinancing, payoffs and ongoing amortization of outstanding loans.
ASSET QUALITY
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest
income. The Bank does not accrue interest on real estate loans past due 90
days or more. Loans may be reinstated to accrual status when all payments are
brought current and, in the opinion of management, collection of the
remaining balance can be reasonably expected.
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as other real estate owned until
sold. Pursuant to a statement of position ("SOP 92-3") issued by the American
Institute of Certified Public Accountants in April 1992, which provides
guidance on determining the balance sheet treatment of foreclosed assets in
annual financial statements for periods ending on or after December 15, 1992,
there is a rebuttable presumption that foreclosed assets are held for sale
and such assets are recommended to be carried at the lower of fair value
minus estimated costs to sell the property, or cost (generally the balance of
the loan on the property at the date of acquisition). After the date of
acquisition, all costs incurred in maintaining the property are expensed and
costs incurred for the improvement or development of such property are
capitalized up to the extent of their net realizable value. The Bank's
accounting for its real estate acquired by foreclosure complies with the
guidance set forth in SOP 92-3.
The Bank is required to account for certain loan modifications or
restructurings as "troubled debt restructurings." In general, the
modification or restructuring of a debt constitutes a troubled debt
restructuring if the Bank for economic or legal reasons related to the
borrower's financial difficulties grants a concession to the borrower that
the Bank would not otherwise consider. Debt restructurings or loan
modifications for a borrower do not necessarily always constitute troubled
debt restructurings, however, and troubled debt restructurings do not
necessarily result in non-accrual loans. The Bank did not have any troubled
debt restructurings as of September 30, 1997.
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DELINQUENT LOANS. The following table sets forth information concerning
delinquent loans at September 30, 1997 in dollar amounts and as a percentage
of each category of the Bank's loan portfolio at such date. The amounts
presented represent the total outstanding principal balances of the related
loans, rather than the actual payment amounts which are past due.
ONE-TO-FOUR
FAMILY LAND AND
RESIDENTIAL MULTI-FAMILY CONSTRUCTION CONSUMER TOTAL
------------ ------------- ------------- ------------ --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ ---- ------ ---- ------ ---- ------ ---- ------ ------
(DOLLARS IN THOUSANDS)
Loans delinquent for:
30--89 days $1,641 2.20% $598 5.43% $ 96 2.47% $-- --% $2,335 2.58%
90 days and over 1,266 1.70 360 3.27 309 7.95 2 0.16 1,937 2.14
------- ----- ---- ----- ------
Total delinquent loans $2,907 $958 $405 $ 2 $4,272
------- ----- ---- ----- ------
------- ----- ---- ----- ------
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The following table sets forth the amounts and categories of the Bank's
non-performing assets at the dates indicated.
SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Nonaccruing loans:
One-to-four family residential..................................................... $ 1,266 $ 917 $ 911
Multi-family residential........................................................... 360 56 --
Land and construction.............................................................. 309 90 334
Consumer........................................................................... -- -- --
Accruing consumer loans 90 days or more delinquent:.................................. 2 117 --
--------- --------- ---------
Total nonperforming loans........................................................ 1,937 1,180 1,245
--------- --------- ---------
Real estate acquired through foreclosure........................................... -- -- --
--------- --------- ---------
Total nonperforming assets........................................................... $ 1,937 $ 1,180 $ 1,245
--------- --------- ---------
--------- --------- ---------
Total nonperforming loans as a percentage of total net loans......................... 2.19% 1.51% 1.75%
--------- --------- ---------
--------- --------- ---------
Total nonperforming assets as a percentage of total assets........................... 1.98% 1.34% 1.44%
--------- --------- ---------
--------- --------- ---------
The $1.3 million of nonaccruing one-to-four family residential loans at
September 30, 1997 consisted of 38 loans secured by one-to-four family
residential property located in the Bank's market area. The largest of such
loans at such date amounted to approximately $134,000 and the average loan
balance was approximately $51,000. Substantially all of such loans are
extended to separate borrowers.
CLASSIFIED ASSETS. Federal regulations require that each insured savings
association classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them.
There are three classifications for problem assets: "substandard," "doubtful"
and "loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that
the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset classified loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. At September 30, 1997, the Bank had $2.6
million of classified assets, $2.6 million of which were classified
substandard and $2,000 of which were classified loss.
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ALLOWANCE FOR LOAN LOSSES. It is management's policy to maintain an
allowance for estimated losses based on the perceived risk of loss in the
loan portfolio. In assessing risk, management considers historical loss
experience, the volume and type of lending conducted by the Bank, industry
standards, past due loans, general economic conditions and other factors
related to the collectibility of the loan portfolio. The allowance is
increased by provisions for loan losses which are charged against income.
Although management uses the best information available to make
determinations with respect to the provisions for loan losses, additional
provisions for loan losses may be required to be established in the future
should economic or other conditions change substantially. In addition, the
OTS and the FDIC, as an integral part of their examination process,
periodically review the Bank's allowance for possible loan losses. Such
agencies may require the Bank to recognize additions to such allowance based
on their judgments about information available to them at the time of their
examination.
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The following table summarizes changes in the allowance for loan losses and
other selected statistics for the periods presented.
YEAR ENDED SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
Average loans receivable, net.................................................... $ 83,912 $ 73,875 $ 67,248
--------- --------- ---------
--------- --------- ---------
Allowance for possible loan losses, beginning of year............................ $ 366 $ 239 $ 233
Charge-offs(1)................................................................... (27) -- (19)
Recoveries(1).................................................................... -- 1 --
Provision for loan losses........................................................ 137 126 25
--------- --------- ---------
Allowance for loan losses, end of period......................................... $ 476 $ 366 $ 239
--------- --------- ---------
--------- --------- ---------
Net loans (charged-off) recovered to average loans, net.......................... (0.03)% --% (0.03)%
--------- --------- ---------
--------- --------- ---------
Allowance for loan losses to total loans......................................... 0.53% 0.45% 0.32%
--------- --------- ---------
--------- --------- ---------
Allowance for loan losses to total nonperforming loans........................... 24.57% 31.02% 19.20%
--------- --------- ---------
--------- --------- ---------
Net loans (charged-off) recovered to allowance for loan losses................... (5.67)% 0.27% (7.95)%
--------- --------- ---------
--------- --------- ---------
- ------------------------
(1) All charge-offs and recoveries relate to single-family loans.
-13-
The following table presents the allocation of the allowance for loan losses
to the total amount of loans in each category listed at the dates indicated.
SEPTEMBER 30,
------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
% OF LOANS % OF LOANS % OF LOANS
IN EACH IN EACH IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
One-to-four family residential...... $316 82.2% $226 78.5% $154 64.4%
Multi-family real estate............ 100 12.2 80 14.0 50 21.0
Land and construction............... 50 4.3 25 7.2 25 10.5
Consumer............................ 10 1.4 35 0.3 10 4.1
------ ----- ------ ----- ------ -----
Total............................. $476 100.0% $366 100.0% $239 100.0%
------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ -----
INVESTMENT SECURITIES. The investment policy of the Bank, as established by
the Board of Directors, is designed primarily to provide and maintain liquidity
and to generate a favorable return on investments without incurring undue
interest rate risk, credit risk, and investment portfolio asset concentrations.
The Bank's investment policy is currently implemented by Larry N. Hatfield, the
Bank's President and reviewed and evaluated by the Board of Directors.
The Bank is authorized to invest in obligations issued or fully guaranteed
by the U.S. Government, certain federal agency obligations, certain time
deposits, negotiable certificates of deposit issued by commercial banks and
other insured financial institutions, investment grade corporate debt securities
and other specified investments.
The following table sets forth certain information relating to the Company's
investment securities portfolio at the dates indicated.
SEPTEMBER 30,
----------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
CARRYING MARKET CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE VALUE VALUE
----------- --------- ----------- --------- ----------- ---------
U.S. Government and agency securities................ $ 2,990 2,984 $ 4,003 $ 3,980 $ 5,001 $ 5,000
Mortgage-backed securities........................... 797 798 818 816 972 971
FHLB stock........................................... 785 785 700 700 651 651
----------- --------- ----------- --------- ----------- ---------
Total............................................ $ 4,572 $ 4,567 $ 5,521 $ 5,497 $ 6,624 $ 6,622
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
-14-
Information regarding the contractual maturities and weighted average
yield of the Company's investment securities portfolio at September 30, 1997
is presented below. The actual maturity of the Company's investment
securities may differ from contractual maturity since certain of the
Company's investment securities are subject to call provisions which allow
the issuer to accelerate the maturity date of the security.
AT SEPTEMBER 30, 1997
-------------------------------------------------------------------
AFTER FIVE
ONE YEAR AFTER ONE TO TO OVER 10
OF LESS FIVE YEARS 10 YEARS YEARS TOTAL
------------- ------------- ------------- ----------- ---------
(DOLLARS IN THOUSANDS)
U.S. Government and agency securities, excluding FHLB
stock................................................... $ -- $ 2,990 $ -- $ -- $ 2,990
Mortgage-backed securities................................ -- 798 -- -- 798
-------- -------- -------- -------- ---------
Total................................................... $ -- $ 3,788 $ -- $ -- $ 3,788
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Weighted average yield.................................... --% 6.45% --% --% 6.45%
The Company generally holds its investments to maturity. The Bank
acquires investment securities with the intent and has the ability to hold
such investment securities to maturity. Investment securities are carried at
cost (as adjusted for amortization of premiums and discounts) because it is
management's intention to hold them to maturity. The Bank to date has not
engaged and does not intend to engage in the immediate future in trading
investment securities. As of September 30, 1997, the Company had no
investment securities classified as available for sale and $798,000 of
mortgage-backed securities classified as available for sale. The Company had
aggregate net unrealized gains of approximately $1,000 as of September 30,
1997 with respect to its mortgage-backed securities classified as available
for sale. At September 30, 1997, investments in the debt and/or equity
securities of any one issuer did not exceed more than 10% of the Company's
stockholders' equity.
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments, prepayments and advances from the FHLB
of Cincinnati. Loan repayments are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term
basis to compensate for reductions in the availability of funds from other
sources. They may also be used on a longer term basis for general business
purposes.
DEPOSITS. The Bank's deposit products include a broad selection of deposit
instruments, including NOW accounts, money market accounts, regular savings
accounts and
-15-
term certificate accounts. Deposit account terms vary, with the principal
differences being the minimum balance required, the time periods the funds
must remain on deposit and the interest rate.
The Bank considers its primary market area to be Campbell County,
Kentucky. The Bank utilizes traditional marketing methods to attract new
customers and savings deposits. The Bank does not advertise for deposits
outside of its primary market area or utilize the services of deposit
brokers, and management believes that an insignificant number of deposit
accounts were held by non-residents of Kentucky at September 30, 1997.
The Bank has been competitive in the types of accounts and in interest
rates it has offered on its deposit products but does not necessarily seek to
match the highest rates paid by competing institutions. Although market
demand generally dictates which deposit maturities and rates will be accepted
by the public, the Bank intends to continue to promote longer term deposits
to the extent possible and consistent with its asset and liability management
goals.
The following table shows the distribution of, and certain other
information relating to, the Bank's deposits by type of deposit as of the
dates indicated.
SEPTEMBER 30,
----------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Passbook and statement savings accounts..................... $ 7,563 10.52% $ 8,393 13.17% $ 7,859 13.10%
Money market accounts....................................... 2,685 3.74 2,691 4.22 3,002 5.00
Certificates of deposit..................................... 58,660 81.63 49,647 77.90 46,682 77.81
NOW and Super NOW accounts.................................. 2,950 4.11 3,000 4.71 2,455 4.09
--------- --------- --------- --------- --------- ---------
Total deposits at end of period........................... $ 71,858 100.00% $ 63,731 100.00% $ 59,998 100.00%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
-16-
The following table sets forth the net savings flows of the Bank during the
periods indicated.
YEAR ENDED SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
Increase (decrease) before interest credited......................................... $ 4,919 $ 1,291 $ 2,585
Interest credited.................................................................... 3,208 2,442 2,286
--------- --------- ---------
Net savings increase (decrease)...................................................... $ 8,127 $ 3,733 $ 4,871
--------- --------- ---------
--------- --------- ---------
The following table sets forth maturities of the Bank's certificates of
deposit of $100,000 or more at September 30, 1997 by time remaining to
maturity.
AMOUNTS IN
THOUSANDS
-----------
Three months or less................................................................................. $ 1,450
Over three months through six months................................................................. 754
Over six months through 12 months.................................................................... 1,602
Over 12 months....................................................................................... 3,619
-----------
Total.............................................................................................. $ 7,425
-----------
-----------
The following table presents, by various interest rate categories, the
amount of certificates of deposit at September 30, 1997 and 1996, and the
amounts at September 30, 1997 which mature during the periods indicated.
AMOUNTS AT SEPTEMBER 30, 1997
September 30, MATURING WITHIN
------------- ------------------------------------------------
CERTIFICATES OF
DEPOSIT 1997 1996 ONE YEAR TWO YEARS THREE YEARS THEREAFTER
- ---------------- --------- --------- --------- ----------- ----------- -----------
(IN THOUSANDS)
4.0% or less $ 82 $ 55 $ 82 $ -- $ -- $ --
4.01% to 6.0% 24,478 25,816 21,201 2,110 346 821
6.01% to 8.0% 34,100 23,776 13,172 11,871 5,923 3,134
8.01% to 10.0% -- -- -- -- -- --
--------- --------- --------- ----------- ----------- -----
Total certificate
accounts.......... $ 58,660 $ 49,647 $ 34,455 $ 13,981 $ 6,269 $ 3,955
--------- --------- --------- ----------- ----------- -----
--------- --------- --------- ----------- ----------- -----
-17-
The following table presents the average balance of each deposit type and
the average rate paid on each deposit type for the periods indicated.
SEPTEMBER 30,
------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
AVERAGE AVERAGE AVERAGE
AVERAGE RATE AVERAGE RATE AVERAGE RATE
BALANCE PAID BALANCE PAID BALANCE PAID
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Passbook and statement savings accounts...... $7,888 2.73% $8,074 2.78% $8,938 2.78%
Money market accounts........................ 2,638 2.74 2,797 2.74 3,737 2.74
Certificates of deposit...................... 54,312 6.01 48,096 6.11 42,205 5.43
NOW and Super NOW accounts................... 2,732 2.27 2,521 2.16 2,409 2.21
Noninterest-bearing deposits................. 193 -- 157 -- 136 --
------- ------- ------- ------- ------- -------
Total deposits............................. $67,763 5.40% $61,644 5.35% $57,425 4.69%
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
BORROWING. The Bank may obtain advances from the FHLB upon the security of
the common stock it owns in that bank and certain of its residential mortgage
loans, provided certain standards related to creditworthiness have been met.
Such advances are made pursuant to several credit programs, each of which has
its own interest rate and range of maturities. Such advances are generally
available to meet seasonal and other withdrawals of deposit accounts and to
permit increased lending. At September 30, 1997, the Bank had $8.8 million of
advances from the FHLB of Cincinnati.
The following table sets forth certain information regarding borrowed funds
at or for the dates indicated:
AT OR FOR THE YEAR ENDED
SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
FHLB advances:
Average balance outstanding........................................................ $ 8,937 $ 3,926 $ 7,650
Maximum amount outstanding at any month-end during the period...................... $ 9,701 $ 4,504 $ 9,526
Balance outstanding at end of period............................................... $ 8,846 $ 4,454 $ 3,651
Weighted average interest rate during the period................................... 5.85% 5.46% 5.74%
Weighted average interest rate at end of period.................................... 5.76% 5.51% 5.42%
-18-
AT OR FOR THE YEAR ENDED
SEPTEMBER 30,
---------------------------------
1997 1996 1995
--------- --------- -----
(DOLLARS IN THOUSANDS)
Other borrowings:
Average balance outstanding....................... $ 192 $ 265 $ --
Maximum amount outstanding at any
month-end during the period..................... $ -- $ 2,300 $ --
Balance outstanding at end of period.............. $ -- $ 2,300 $ --
Weighted average interest rate
during the period............................... 8.25% 8.25% --%
Weighted average interest rate at
end of period................................... --% 8.25% --%
EMPLOYEES
The Bank had 18 full-time employees and four part-time employees at
September 30, 1997. None of these employees is represented by a collective
bargaining agent, and the Bank believes that it enjoys good relations with its
personnel.
SUBSIDIARIES
The Bank had no subsidiaries as of September 30, 1997.
COMPETITION
The Bank faces strong competition both in attracting deposits and making
real estate loans. Its most direct competition for deposits has historically
come from other savings associations, credit unions and commercial banks located
in northern Kentucky, including many large financial institutions which have
greater financial and marketing resources available to them. In addition, during
times of high interest rates, the Bank has faced additional significant
competition for investors' funds from short-term money market securities, mutual
funds and other corporate and government securities. The ability of the Bank to
attract and retain savings deposits depends on its ability to generally provide
a rate of return, liquidity and risk comparable to that offered by competing
investment opportunities.
The Bank experiences strong competition for real estate loans principally
from other savings associations, commercial banks and mortgage banking
companies. The Bank
-19-
competes for loans principally through the interest rates and loan fees it
charges and the efficiency and quality of services it provides borrowers.
Competition may increase as a result of the continuing reduction of
restrictions on the interstate operations of financial institutions.
REGULATION
Set forth below is a brief description of those laws and regulations which,
together with the descriptions of laws and regulations contained elsewhere
herein, are deemed material to an investor's understanding of the extent to
which the Company and the Bank are regulated. The description of the laws and
regulations hereunder and elsewhere herein does not purport to be complete and
is qualified in its entirety by reference to applicable laws and regulations.
THE COMPANY
GENERAL. The Company, as a savings and loan holding company within the
meaning of the HOLA, has registered with the OTS and is subject to OTS
regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, the Bank is subject to
certain restrictions in its dealings with the Company and affiliates thereof.
ACTIVITIES RESTRICTIONS. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings institution. Such financial institution holding companies are the only
such companies which may engage in any commercial, securities and insurance
activities. However, Congressional legislative proposals, which have been
introduced and are under consideration, would either limit unitary savings and
loan holding companies to the same activity limits as are imposed on other
financial institution holding companies or would permit certain bank holding
companies to engage in commercial activities and expanded securities and
insurance activities. The Company cannot predict if, and in what form, these
proposals might become law. However, the broad latitude to engage in activities
under current law is restricted if the Director of the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution. If this is
the case, the Director may impose such restrictions as deemed necessary to
address such risk, including limiting (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the above
rules as to permissible business activities of unitary savings and loan holding
companies, if the savings institution subsidiary of such a holding company fails
to meet the QTL test, as discussed under "--The Bank--Qualified Thrift Lender
Test," then such unitary holding company also shall become subject to the
activities restrictions applicable to multiple savings and loan
-20-
holding companies and, unless the savings institution requalifies as a QTL
within one year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company. See "--The Bank--
Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution, other
than through merger or other business combination with the Bank, the Company
would thereupon become a multiple savings and loan holding company. Except where
such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings institution meets the QTL test,
as set forth below, the activities of the Company and any of its subsidiaries
(other than the Bank or other subsidiary savings institutions) would thereafter
be subject to further restrictions. Among other things, no multiple savings and
loan holding company or subsidiary thereof which is not a savings institution
shall commence or continue for a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof any business
activity, upon prior notice to, and no objection by the OTS, other than: (i)
furnishing or performing management services for a subsidiary savings
institution; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution; (iv) holding or managing properties used or occupied by a
subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi)
those activities authorized by regulation as of March 5, 1987 to be engaged in
by multiple savings and loan holding companies; or (vii) unless the Director of
the OTS by regulation prohibits or limits such activities for savings and loan
holding companies, those activities authorized by the FRB as permissible for
bank holding companies. Those activities described in (vii) above also must be
approved by the Director of the OTS prior to being engaged in by a multiple
savings and loan holding company.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between
savings institutions and any affiliate are governed by Sections 23A and 23B
of the Federal Reserve Act. An affiliate of a savings institution is any
company or entity which controls, is controlled by or is under common control
with the savings institution. In a holding company context, the parent
holding company of a savings institution (such as the Company) and any
companies which are controlled by such parent holding company are affiliates
of the savings institution. Generally, Sections 23A and 23B (i) limit the
extent to which the savings institution or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of
such institution's capital stock and surplus, and contain an aggregate limit
on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus and (ii) require that all affiliate
transactions be on terms substantially the same, or at least as favorable, to
the institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets,
issuance of a guarantee and other similar transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings institution may (i)
loan or otherwise extend credit to an affiliate, except for any affiliate
which engages only in activities which are permissible for bank holding
companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes
or
-21-
similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders of savings institutions and their holding companies. Under Section
22(h), loans to a director, an executive officer and to a greater than 10%
stockholder of a savings institution, and certain affiliated interests of
either, may not exceed, together with all other outstanding loans to such person
and affiliated interests, the savings institution's loans to one borrower limit.
Section 22(h) also requires that loans to directors, executive officers and
principal stockholders be made on terms substantially the same as offered in
comparable transactions to other persons and also requires prior board approval
for certain loans. In addition, the aggregate amount of extensions of credit by
a savings institution to all insiders cannot exceed the institution's unimpaired
capital and surplus. Furthermore, Section 22(g) places additional restrictions
on loans to executive officers. At September 30, 1997, the Bank was in
compliance with the above restrictions.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings and loan holding
company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if (i) the multiple savings and loan holding
company involved controls a savings institution which operated a home or branch
office located in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions).
Under the Bank Holding Company Act of 1956, the FRB is authorized to approve
an application by a bank holding company to acquire control of a savings
institution. In addition, a bank holding company that controls a savings
institution to merge or consolidate the assets and liabilities of the savings
institution with, or transfer assets and liabilities to,
-22-
any subsidiary bank which is a member of the BIF with the approval of the
appropriate federal banking agency and the FRB. As a result of these
provisions, there have been a number of acquisitions of savings institutions
by bank holding companies in recent years.
THE BANK
GENERAL. The OTS has extensive authority over the operations of federally
chartered savings institutions. As part of this authority, savings
institutions are required to file periodic reports with the OTS and are
subject to periodic examinations by the OTS and the FDIC. The investment and
lending authority of savings institutions are prescribed by federal laws and
regulations, and such institutions are prohibited from engaging in any
activities not permitted by such laws and regulations. Those laws and
regulations generally are applicable to all federally chartered savings
institutions and may also apply to state-chartered savings institutions. Such
regulation and supervision is primarily intended for the protection of
depositors.
The OTS' enforcement authority over all savings institutions and their
holding companies was substantially enhanced by FIRREA. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and for engaging in unsafe or unsound
practices. Other actions or inactions may provide the basis for an enforcement
action, including misleading or untimely reports filed with the OTS. FIRREA
significantly increased the amount of and grounds for civil money penalties.
INSURANCE OF ACCOUNTS. The deposits of the Bank are insured to the maximum
extent permitted by the SAIF, which is administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the OTS an opportunity to take such
action.
The deposits of the Bank are currently insured by the SAIF. Both the SAIF
and the BIF, the federal deposit insurance fund that covers commercial bank
deposits, are required by law to attain and thereafter maintain a reserve ration
of 1.25% of insured deposits. The BIF had achieved a fully funded status in
contrast to the SAIF and, therefore, the FDIC substantially reduced the average
deposit insurance premium paid by commercial banks to a level significantly
below the average premium paid by savings institutions.
The underfunded status of the SAIF resulted in the introduction of federal
legislation intended to, among other things, recapitalize the SAIF and address
the resulting premium disparity. On September 30, 1997, The Omnibus
Appropriations Act was signed into law.
-23-
The legislation authorized a one-time charge on SAIF insured deposits at a
rate of 65.7 basis points per $100.00 of March 31, 1995 deposits. As a
result, the Bank's assessment amounted to $375,000 ($248,000 net of tax).
Additional provisions of the Act include new BIF and SAIF premiums and the
merger of BIF and SAIF. The new BIF and SAIF premiums will include a premium
for repayment of the Financing Corporation("FICO") bonds plus any regular
insurance assessment, currently nothing for the lowest risk category
institutions. Until full pro-rata FICO sharing is in effect, the FICO
premiums for BIF and SAIF will be 1.3 and 6.4 basis points, respectively,
beginning January 1, 1997. Full pro-rata FICO sharing is to begin no later
than January 1, 2000. The BIF and SAIF are to be merged on January 1, 1999,
provided the bank and savings association charters are merged by that date.
While the one-time special assessment had a significant impact on the fiscal
1996 earnings, the resulting lower annual premiums will benefit future
earnings.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals,
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings institutions are
required to maintain minimum levels of regulatory capital. The OTS has
established capital standards applicable to all savings institutions. These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks. The OTS also is authorized to impose capital
requirements in excess of these standards on individual institutions on a
case-by-case basis.
Current OTS capital standards require savings institutions to satisfy three
different capital requirements. Under these standards, savings institutions must
maintain "tangible" capital equal to at least 1.5% of adjusted total assets,
"core" capital equal to at least 3.0% of adjusted total assets and "total"
capital (a combination of core and "supplementary" capital) equal to at least
8.0% of "risk-weighted" assets. For purposes of the regulation, core capital
generally consists of common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Tangible capital is given the same definition as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount of
all the savings institution's intangible assets, with a limited exception for
purchased mortgage servicing rights. The Bank had no goodwill or other
intangible assets at September 30, 1997. Both core and tangible capital are
further reduced by an amount
-24-
equal to a savings institution's debt and equity investments in subsidiaries
engaged in activities not permissible for national banks (other than
subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or their
holding companies). These adjustments do not affect the Bank's regulatory
capital.
In determining compliance with the risk-based capital requirement, a savings
institution is allowed to include both core capital and supplementary capital in
its total capital, provided that the amount of supplementary capital included
does not exceed the savings institution's core capital. Supplementary capital
generally consists of hybrid capital instruments; perpetual preferred stock
which is not eligible to be included as core capital; subordinated debt and
intermediate-term preferred stock; and general allowances for loan losses up to
a maximum of 1.25% of risk-weighted assets. In determining the required amount
of risk-based capital, total assets, including certain off-balance sheet items,
are multiplied by a risk weight based on the risks inherent in the type of
assets. The risk weights assigned by the OTS for principal categories of assets
are (i) 0% for cash and securities issued by the U.S. Government or
unconditionally backed by the full faith and credit of the U.S. Government; (ii)
20% for securities (other than equity securities) issued by U.S.
Government-sponsored agencies and mortgage-backed securities issued by, or fully
guaranteed as to principal and interest by, the FNMA or the FHLMC, except for
those classes with residual characteristics or stripped mortgage-related
securities; (iii) 50% for prudently underwritten permanent one- to four-family
first lien mortgage loans not more than 90 days delinquent and having a
loan-to-value ratio of not more than 80% at origination unless insured to such
ratio by an insurer approved by the FNMA or the FHLMC, qualifying residential
bridge loans made directly for the construction of one- to four-family
residences and qualifying multi-family residential loans; and (iv) 100% for all
other loans and investments, including consumer loans, commercial loans, and
one- to four-family residential real estate loans more than 90 days delinquent,
and for repossessed assets.
-25-
At September 30, 1997, the Bank exceeded all of its regulatory capital
requirements, with tangible, core and risk-based capital ratios of 16.94%,
16.94% and 24.32%, respectively. The following table sets forth the Bank's
compliance with each of the above-described capital requirements as of
September 30, 1997.
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL(1)
--------- --------- -----------
(DOLLARS IN THOUSANDS)
Regulatory capital................. $ 14,509 $ 14,509 $ 14,509
Additional Capital Items:.......... -- -- 476
--------- --------- -----------
A regulatory capital
Regulatory Capital............... 14,509 14,509 14,985
Minimum required
regulatory capital............... 1,285 2,569 4,929
--------- --------- -----------
Excess regulatory capital.......... $ 13,224 $ 11,940 $ 10,056
--------- --------- -----------
--------- --------- -----------
Regulatory capital as a
percentage..................... 16.94% 16.94% 24.32%
Minimum capital required
as a percentage................ 1.50 3.00 8.00
--------- --------- -----------
Regulatory capital as a
percentage in excess of
requirements.................... 15.44% 13.94% 16.32%
--------- --------- -----------
--------- --------- -----------
LIQUIDITY REQUIREMENTS. All savings institutions are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At the present time, the required minimum
liquid asset ratio is 5%. At September 30, 1997, the Bank's liquidity ratio was
5.45%.
CAPITAL DISTRIBUTIONS. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt and
other transactions charged to the capital account of a savings institution to
make capital distributions. Generally, the regulation creates a safe harbor for
specified levels of capital distributions from institutions meeting at least
their minimum capital requirements, so long as such institutions notify the OTS
and receive no objection to the distribution from the OTS. Savings institutions
and
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distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.
Generally, a savings institution that before and after the proposed
distribution meets or exceeds its fully phased-in capital requirements (Tier 1
institutions) may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the institution's ratio of total
capital to assets exceeds the ratio of its fully phased-in capital requirement
to assets. "Fully phased-in capital requirement" is defined to mean an
institution's capital requirement under the statutory and regulatory standards
applicable on September 30, 1996, as modified to reflect any applicable
individual minimum capital requirement imposed upon the institution. Failure to
meet fully phased-in or minimum capital requirements will result in further
restrictions on capital distributions, including possible prohibition without
explicit OTS approval. At September 30, 1997, the Bank was a Tier 1 institution
for purposes of this regulation. See "--Regulatory Capital Requirements."
In order to make distributions under these safe harbors, Tier 1 and Tier 2
institutions must submit written notice to the OTS 30 days prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 institution deemed
to be in need of more than normal supervision by the OTS may be downgraded to a
Tier 2 or Tier 3 institution as a result of such a determination.
QUALIFIED THRIFT LENDER TEST. In general , savings associations are
required to maintain at least 65% of their portfolio assets in certain qualified
thrift investments (which consist primarily of loans and other investments
related to residential real estate and certain other assets). A savings
association that fails the qualified thrift lender test is subject to
substantial restrictions on activities and to other significant penalties.
Recent legislation permits a savings association to qualify as a qualified
thrift lender not only by maintaining 65% of portfolio assets in qualified
thrift investments (the "QTL test") but also in the alternative, by qualifying
under the Code as a "domestic building and loan association." The Bank is a
domestic building and loan association as defined in the Code.
Recent legislation also expands the QTL test to provide savings associations
with greater authority to lend and diversify their portfolios. In particular,
credit card and educational loans may now be made by savings associations
without regard to any percentage-of-assets limit, and commercial loans may be
made in an amount up to 10 percent of total assets, plus an additionally 10
percent for small business loans. Loans for personal, family and household
purposes (other than credit card, small business and educational loans) are now
included without limit with other assets that, in the aggregate,
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may account for up to 20% of total assets. At September 30, 1997, under the
expanded QTL test, approximately 93.6% of the Bank's portfolio assets were
qualified thrift investments.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs that administers the home
financing credit function of savings institutions. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB. At
September 30, 1997, the Bank had $8.8 million of FHLB advances.
As a member, the Bank is required to purchase and maintain stock in the FHLB
of Cincinnati in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At September 30, 1997, the Bank had $785,000 in FHLB
stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. These contributions also could have an adverse effect on the
value of FHLB stock in the future.
TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Bank are subject to the generally applicable
corporate tax provisions of the Code, and the Bank is subject to certain
additional provisions of the Code which apply to thrift and other types of
financial institutions. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters
material to the taxation of the Company and the Bank and is not a
comprehensive discussion of the tax rules applicable to the Company and the
Bank.
FISCAL YEAR. The Company and the Bank file a federal income tax return on
the basis of a fiscal year ending on September 30.
BAD DEBT RESERVES. Savings institutions, such as the Bank, which meet
certain definitional tests primarily relating to their assets and the nature of
their businesses, historically were permitted to establish a reserve for bad
debts and to make annual additions to the reserve. Under new legislation passed
in August 1996, the special bad debt deduction was repealed for thrift
institutions. The legislation also requires thrifts to recapture, over
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a six-year period, bad debt reserves added since 1988. As the Bank has provided
for a deferred tax liability for special bad debt deductions since 1988, the
legislation is not expected to have a material effect on the results of its
operations.
DISTRIBUTIONS. If the Bank were to distribute cash or property to its sole
stockholder, and the distribution was treated as being from its accumulated bad
debt reserves, the distribution will cause the Bank to have additional taxable
income. A distribution is deemed to have been made from accumulated bad debt
reserves to the extent that (a) the reserves exceed the amount that would have
been accumulated on the basis of actual loss experience, and (b) the
distribution is a "non-qualified distribution." A distribution with respect to
stock is a non-qualified distribution to the extent that, for federal income tax
purposes, (i) it is in redemption of shares, (ii) it is pursuant to a
liquidation of the institution, or (iii) in the case of a current distribution,
together with all other such distributions during the taxable year, it exceeds
the institution's current and post-1951 accumulated earnings and profits. The
amount of additional taxable income created by a non-qualified distribution is
an amount that when reduced by the tax attributable to it is equal to the amount
of the distribution.
MINIMUM TAX. The Code imposes an alternative minimum tax at a rate of 20%.
The alternative minimum tax generally applies to a base of regular taxable
income plus certain tax preferences ("alternative minimum taxable income" or
"AMTI") and is payable to the extent such AMTI is in excess of an exemption
amount. The Code provides that an item of tax preference is the excess of the
bad debt deduction allowable for a taxable year pursuant to the percentage of
taxable income method over the amount allowable under the experience method.
Other items of tax preference that constitute AMTI include (a) tax-exempt
interest on newly issued (generally, issued on or after August 8, 1986) private
activity bonds other than certain qualified bonds and (b) 75% of the excess (if
any) of (i) adjusted current earnings as defined in the Code, over (ii) AMTI
(determined without regard to this preference and prior to reduction by net
operating losses).
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back net
operating losses ("NOLs") to the preceding three taxable years and forward to
the succeeding 15 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At September 30, 1997, the Bank had no NOL
carryforwards for federal income tax purposes.
CAPITAL GAINS AND CORPORATE DIVIDENDS-RECEIVED DEDUCTION. Corporate net
capital gains are taxed at a maximum rate of 34%. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return, and corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received or accrued on
their behalf. However, a corporation may deduct 100% of dividends from a member
of the same affiliated group of corporations.
-29-
OTHER MATTERS. Federal legislation is introduced from time to time that
would limit the ability of individuals to deduct interest paid on mortgage
loans. Individuals are currently not permitted to deduct interest on consumer
loans. Significant increases in tax rates or further restrictions on the
deductibility of mortgage interest could adversely affect the Bank.
The Bank's federal income tax returns for the tax years ended September 30,
1992 forward are open under the statute of limitations and are subject to review
by the IRS.
STATE TAXATION
The State of Kentucky imposes no income or franchise taxes on savings
institutions. However, the Company (on an unconsolidated basis) must pay a
Kentucky state income tax, as well as a tax on capital. The tax on income is
4.0% for the first $25,000 of taxable income, 5.0% for the next $25,000, 6.0%
for the next $50,000, 7.0% for the next $150,000 and 8.25% for all income over
$250,000. The tax on capital is .0021 times the capital employed.
The Bank is subject to an annual Kentucky ad valorem tax. Assessed at the
beginning of each calendar year, this tax is 0.1% of the Bank's savings
accounts, common stock, capital and retained income with certain deductions
allowed for amounts borrowed by depositors and for securities guaranteed by the
U.S. government or certain of its agencies. During the year ended September 30,
1997, the amount of such expense for the Bank was $73,000.
The Company is subject to an Ohio franchise tax based on its net worth plus
certain reserve amounts. Total net worth for this purpose is reduced by certain
exempted assets. The resultant net worth is taxed at a rate of 1.5% for the 1997
return, which is based on net worth as of December 31, 1997.
ITEM 2. PROPERTIES.
At September 30, 1997, the Bank conducted its business from its executive
offices in Fort Thomas, Kentucky and one full service branch office, both of
which are located in Campbell County, Kentucky.
-30-
The following table sets forth certain information with respect to the
Bank's office properties at September 30, 1995.
NET BOOK ASSESSED
VALUE OF VALUE
PREMISES AND FOR
FIXED ASSETS, PROPERTY AMOUNT OF
DESCRIPTION/ADDRESS LEASED/OWNED NET TAXES DEPOSITS
- ----------------------- ------------- ------------- -------- ---------
(IN THOUSANDS)
Main Office
(2 Buildings)
Fort Thomas, KY Owned $ 228 $ 904 $ 49,737
Branch Office
Alexandria, KY Owned 342 347 22,121
------ ------ --------
Totals $ 570 $1,251 $ 71,858
------ ------ --------
------ ------ --------
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings other than
nonmaterial legal proceedings occurring in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The information required herein, to the extent applicable, is incorporated
by reference from page 51 of the Company's 1997 Annual Report to Stockholders
("1997 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from page 3 of
the 1997 Annual Report.
-31-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OF OPERATIONS.
The information required herein is incorporated by reference from pages 4 to
17 of the 1997 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages 18
to 50 of the 1997 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not Applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from pages 2 to
4 of the definitive proxy statement of the Company for the Annual Meeting of
Stockholders to be held on January 26, 1998 ("Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from pages 6 to
9 of the Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required herein is incorporated by reference from pages 4
and 5 of the Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from page 9 of
the Definitive Proxy Statement.
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PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) The following financial statements are incorporated by reference
from Item 8 hereof (see Exhibit 13):
Independent Auditors' Report
Consolidated Statements of Financial Condition at September 30,
1997 and 1996
Consolidated Statements of Income for the years ended
September 30, 1997, September 30, 1996 and September 30,
1995
Consolidated Statements of Changes in Stockholders' Equity for
the years ended September 30, 1997, September 30, 1996 and
September 30, 1995.
Consolidated Statements of Cash Flows for the years ended
September 30, 1997, September 30, 1996 and September 30, 1995.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the absence of
conditions under which they are required or because the required
information is included in the financial statements and related notes
thereto.
(3) The following exhibits are filed as part of this Form 10-K and
this list includes the Exhibit Index.
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EXHIBIT INDEX
PAGE
----
2.1 Plan of Conversion *
3.1 Amended and Restated Articles of Incorporation of Fort Thomas
Financial Corporation **
3.2 Code of Regulations of Fort Thomas Financial Corporation *
3.3 Bylaws of Fort Thomas Financial Corporation *
4.0 Stock Certificate of Fort Thomas Financial Corporation ***
10.5 Employment Agreement between Fort Thomas Financial Corporation and
Larry N. Hatfield *
10.6 Employment Agreement between Fort Thomas Financial Corporation and
J. Michael Lonnemann *
13.0 1997 Annual Report to Stockholders ****
22.0 Subsidiaries of the Registrant--Reference is made to
"Item 1 Business--Subsidiaries" for the required information
- ------------------------
(*) Incorporated herein by reference from the Company's Registration Statement
on Form S-1 filed with the SEC on March 7, 1995.
(**) Incorporated herein by reference from the Company's Registration Statement
on Form 8-A filed with the SEC on June 14, 1995.
(***) Incorporated herein by reference from the Company's Form 10-K for fiscal
1995.
(****)Filed with the Company's Definitive Proxy Statement.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FORT THOMAS FINANCIAL CORPORATION
BY: /s/ Larry N. Hatfield
-----------------------------------------
Larry N. Hatfield
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Larry N. Hatfield
- ------------------------------ December 27, 1997
Larry N. Hatfield
President and Chief
Executive Officer
/s/ Robert L. Grimm
- ------------------------------ December 27, 1997
Robert L. Grimm
Chairman of the Board
/s/ Harold A. Luersen
- ------------------------------ December 27, 1997
Harold A. Luersen
Director
/s/ Don J. Beckmeyer
- ------------------------------ December 27, 1997
Don J. Beckmeyer
Director
/s/ J. Steven Mclane
- ------------------------------ December 27, 1997
J. Steven Mclane
Director
/s/ J. Michael Lonnemann
- ------------------------------ December 27, 1997
J. Michael Lonnemann
Vice President and Secretary
(Principal accounting officer)