<PAGE> 1
U.S. 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 DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No.: 0-27868
FIDELITY FINANCIAL OF OHIO, INC.
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(Exact name of registrant as specified in its charter)
OHIO 31-1455721
---------------------------- ----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
4555 MONTGOMERY ROAD
CINCINNATI, OHIO 45212
---------------- -----
(Address) (Zip Code)
Registrant's telephone number, including area code: (513) 351-6666
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 $.10 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
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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 March 21, 1997, the aggregate value of the 5,050,825 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
543,144 shares held by all directors and officers of the Registrant and the
Registrant's Employee Stock Ownership Plan ("ESOP") as a group, was
approximately $66.3 million. This figure is based on the last known trade price
of $13.125 per share of the Registrant's Common Stock on March 21, 1997.
Although directors and officers and the ESOP were assumed to be "affiliates" of
the Registrant for purposes of this calculation, the classification is not to be
interpreted as an admission of such status.
Number of shares of Common Stock outstanding as of March 21, 1997: 5,593,969
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 December
31, 1996 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 10 through 13 of this Form
10-K.
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<PAGE> 2
PART I
ITEM 1. BUSINESS.
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Fidelity Financial of Ohio, Inc. (the "Company") is an Ohio corporation
which is the holding company for Fidelity Federal Savings Bank ("Fidelity" or
the "Savings Bank"). The Company was organized by the Savings Bank for the
purpose of acquiring all of the capital stock of the Savings Bank in connection
with the conversion of Fidelity Federal Mutual Holding Company, the former
federally chartered, mutual holding company of the Savings Bank, and the
reorganization of the Savings Bank to the stock holding company form, which was
completed on March 4, 1996 (the "Conversion and Reorganization"). The only
significant assets of the Company are the capital stock of the Savings Bank and
the net proceeds of the Conversion and Reorganization retained by the Company.
On October 11, 1996, following receipt of all regulatory and
stockholder approvals, the Company completed the acquisition of Circle Financial
Corporation ("CFC") pursuant to the merger of CFC with and into a subsidiary of
the Company, and the subsequent merger of People's Savings Association (the
"Association"), an Ohio-chartered savings association and a wholly owned
subsidiary of CFC, with and into Fidelity (collectively, the "Merger"). The
Merger was accounted for under the purchase method of accounting. Consequently,
the financial information and data presented herein excludes CFC and the
Association for all periods prior to 1996.
Fidelity is a federally chartered savings bank which conducts business
through ten full-service offices located in the Cincinnati, Ohio metropolitan
area. Fidelity is primarily engaged in attracting deposits from the general
public through its offices and using those and other available sources of funds
to originate loans secured by single-family residences located primarily in
southwestern Ohio. Such loans amounted to $321.7 million or 80.0% of Fidelity's
total loan portfolio (including loans held for sale) at December 31, 1996. To a
lesser extent, Fidelity originates loans secured by existing multi-family
residential and nonresidential real estate, which amounted to $25.6 million or
6.4% and $33.1 million or 8.2%, respectively, of the total loan portfolio
(including loans held for sale) at December 31, 1996, as well as construction
loans and consumer loans, which respectively amounted to $13.8 million or 3.4%
and $7.8 million or 2.0% of the total loan portfolio (including loans held for
sale) at such date. Fidelity also invests in U.S. Government and federal agency
obligations and mortgage-backed securities which are insured by federal
agencies.
Fidelity is subject to extensive regulation, supervision and
examination by the Office of Thrift Supervision ("OTS"), its primary federal
regulator, and by the Federal Deposit Insurance Corporation ("FDIC"), which
insures its deposits up to applicable limits. Such regulation and supervision
establishes a comprehensive framework of activities in which an association may
engage and is intended primarily for the protection of depositors and the
Savings Association Insurance Fund ("SAIF") administered by the FDIC. Fidelity
is also a member of the Federal Home Loan Bank ("FHLB") of Cincinnati, which is
one of the 12 banks which comprise the FHLB System. Fidelity is further subject
to regulations of the
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Board of Governors of the Federal Reserve System ("Federal Reserve Board")
governing reserves required to be maintained against deposits and certain other
matters.
The Company, as a registered savings and loan holding company, is
subject to the examination and regulation by the OTS and is subject to various
reporting and other requirements of the Securities and Exchange Commission
("SEC"). At December 31, 1996, the Company had $499.9 million of total
consolidated assets, $433.2 million of total consolidated liabilities, including
$408.2 million of deposits, and $66.7 million of total consolidated
stockholders' equity.
LENDING ACTIVITIES
GENERAL. At December 31, 1996, Fidelity's net loan portfolio (including
loans held for sale) totaled $396.5 million, representing approximately 79.3% of
Fidelity's $499.9 million of total assets at that date. The principal lending
activity of Fidelity is the origination of single-family residential loans and,
to a lesser extent, multi-family residential and nonresidential real estate
loans, construction loans and limited amounts of consumer loans. Substantially
all of Fidelity's loan portfolio consists of conventional loans, which are loans
that are neither insured by the Federal Housing Administration nor partially
guaranteed by the Department of Veterans Affairs.
As a federally chartered savings institution, Fidelity has general
authority to originate and purchase loans secured by real estate located
throughout the United States. Notwithstanding this nationwide lending authority,
substantially all of the mortgage loans in Fidelity's portfolio are secured by
properties located in Ohio, with the substantial majority of the mortgage loans
in Fidelity's portfolio secured by property located in Fidelity's market area in
southwestern Ohio.
Federal regulations permit Fidelity to invest without limitation in
residential mortgage loans and up to four times its capital in loans secured by
nonresidential or commercial real estate. Fidelity is also permitted to invest
in secured and unsecured consumer loans in an amount not exceeding 30% of
Fidelity's total assets; however, such 30% limit may be exceeded for certain
types of consumer loans, such as home equity, property improvement and education
loans. In addition, Fidelity is permitted to invest up to 10% of its total
assets in secured and unsecured loans for commercial, corporate, business or
agricultural purposes. To date, Fidelity's lending activities have focused on
residential real estate and, to a lesser extent, multi-family residential and
nonresidential real estate and consumer lending.
Although Fidelity historically originated loans with lesser dollar
balances than were permitted by federal regulations, current loans-to-one
borrower limitations may restrict its ability to do business with certain
customers. Since the enactment of the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 ("FIRREA"), a savings association generally may not
make loans to one borrower and related entities in an amount
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3
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 December 31, 1996, Fidelity's limit on loans-to-one borrower was $7.3 million
and its five largest loans or groups of loans-to-one borrower, including related
entities, aggregated $4.9 million, $4.2 million, $3.9 million, $3.6 million and
$3.2 million. All five of Fidelity's largest loans or groups of loans are
secured primarily by multi-family residential and nonresidential real estate
located in Hamilton County, Ohio and were performing in accordance with their
terms at December 31, 1996.
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<TABLE>
<CAPTION>
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of Fidelity's loan portfolio by type of loan
at the dates indicated.
December 31,
--------------------------------------------------------------------------------------------------
1996(1) 1995 1994
---------------------------- ------------------------- ---------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential(2) $321,701 80.0% $142,246 75.7% $134,508 74.6%
Multi-family residential 25,580 6.4 18,833 10.0 15,443 8.6
Nonresidential real estate 33,055 8.2 20,773 11.1 23,685 13.1
Construction 13,839 3.4 4,791 2.6 6,332 3.5
--------- ----- ------- ------ ------- -----
Total real estate loans 394,175 98.0 186,643 99.4 179,968 99.8
Consumer loans:
Deposit secured 508 .1 251 .1 299 .2
Home improvement/equity 245 .1 952 .5 41 --
Other 7,097 1.8 -- -- 1 --
--------- ----- ------- ----- -------- ------
Total consumer loans 7,850 2.0 1,203 .6 341 .2
--------- ----- ------- ----- ------- ------
Total loans 402,025 100.0% 187,846 100.0% 180,309 100.0%
--------- ===== ------- ===== ------- ======
Loans in process (4,055) (1,305) (3,424)
Unamortized yield adjustments 129 (591) (880)
Allowance for loan losses (1,558) (818) (783)
--------- ------- -------
Net loans $ 396,541 $185,132 $175,222
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1993 1992
--------------------------- -------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Single-family residential(2) $120,902 72.7% $111,928 70.6%
Multi-family residential 15,434 9.3 16,030 10.1
Nonresidential real estate 26,378 15.9 24,737 15.6
Construction 3,340 2.0 5,575 3.5
------- ----- ------- -----
Total real estate loans 166,054 99.9 158,270 99.8
Consumer loans:
Deposit secured 167 .1 384 .2
Home improvement/equity 42 -- 16 --
Other 1 -- 2 --
------- ----- ------- -----
Total consumer loans 210 .1 402 .2
------- ----- ------- -----
Total loans 166,264 100.0% 158,672 100.0%
------- ===== ------- =====
Loans in process (1,927) (2,906)
Unamortized yield adjustments (1,142) (1,601)
Allowance for loan losses (803) ( 756)
--------- ---------
Net loans $162,392 $153,409
======= =======
<FN>
(1) The substantial increase in loans at December 31, 1996 as compared to
December 31, 1995 reflects the $189.4 million of net loans acquired by Fidelity
as a result of the Merger.
(2) At December 31, 1995, included $646,000 of loans classified as held for
sale. Fidelity did not have any loans classified as held for sale at any of
the other dates presented.
</TABLE>
<PAGE> 6
5
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following
table sets forth certain information at December 31, 1996 regarding the dollar
amount of loans maturing in Fidelity's portfolio, based on the contractual terms
to maturity, before giving effect to net items. Demand loans, loans having no
stated schedule of repayments and no stated maturity and overdrafts are reported
as due in one year or less.
<TABLE>
<CAPTION>
Due 3-5 Due 5-10 Due 10-15 Due more than
years after years after years after 15 years after
1997 1998 1999 12/31/96 12/31/96 12/31/96 12/31/96 Total
---- ---- ---- --------- --------- ---------- ---------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family residential $10,724 $11,531 $12,396 $27,770 $51,784 $56,854 $150,642 $321,701
Multi-family residential and
nonresidential real estate 2,380 2,390 2,522 5,070 26,456 16,875 2,942 58,635
Construction 4,170 1,665 1,674 257 851 1,340 3,882 13,839
Consumer 1,786 1,932 2,108 1,526 498 -- -- 7,850
------ ------ ------ ------ ------ ------ ------- -------
Total $19,060 $17,518 $18,700 $34,623 $79,589 $75,069 $157,466 $402,025
====== ====== ====== ====== ====== ====== ======= =======
</TABLE>
The following table sets forth the dollar amount of all loans, before
net items, due after one year from December 31, 1996 which have fixed interest
rates or which have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable-Rates Total
----------------------- ----------------------- -----------------
(In Thousands)
<S> <C> <C> <C>
Single-family residential $169,988 $140,989 $310,977
Multi-family residential and
nonresidential real estate 21,394 34,861 56,255
Construction 3,252 6,417 9,669
Consumer 3,305 2,759 6,064
------- ------- -------
Total $197,939 $185,026 $382,965
======= ======= =======
</TABLE>
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Scheduled contractual amortization of loans does not reflect the actual
term of Fidelity's loan portfolio. The average life of loans is substantially
less than their contractual terms because of prepayments and due-on-sale
clauses, which give Fidelity the right to declare a conventional loan
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of mortgage loans tends to increase when current mortgage loan
rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when current mortgage loan rates are substantially lower
than rates on existing mortgage loans (due to refinancings of adjustable-rate
and fixed-rate loans at lower rates). Under the latter circumstances, the
weighted average yield on loans decreases as higher yielding loans are repaid or
refinanced at lower rates.
ORIGINATIONS, PURCHASES AND SALES OF LOANS. The lending activities of
Fidelity are subject to the written, non-discriminatory, underwriting standards
and loan origination procedures established by Fidelity's Board of Directors and
management. Loan originations are obtained by a variety of sources, including
referrals from real estate brokers, developers, builders, existing customers,
newspaper, radio, periodical advertising and walk-in customers. Loan
applications are taken by lending personnel, and the loan department supervises
the obtainment of credit reports, appraisals and other documentation involved
with a loan. Property valuations are generally performed by independent outside
appraisers approved by Fidelity's Board of Directors. An attorney's opinion of
title and hazard insurance are required on all security property.
Fidelity's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. A loan application file is
first reviewed by Fidelity's loan department and then is submitted for approval
to a loan committee. The loan committee is comprised of five members, of which
three are members of the Board of Directors (including the President and the
Chief Financial Officer).
Traditionally, the Savings Bank has originated substantially all of the
loans in its portfolio and has held them until maturity. During the years ended
December 31, 1995 and 1994, the Savings Bank purchased $3.4 million and $1.6
million, respectively, in loan participations from other financial institutions.
The $3.4 million of loan purchases consisted of multi-family and nonresidential
real estate loans secured by properties located within the Savings Bank's
primary market area, while the $1.6 million of loan purchases consisted of
single-family residential loans also secured by properties located within the
Savings Bank's primary market area. During 1996, the Savings Bank purchased no
loan participations, while acquiring $17.5 million in participations through the
merger with Circle Financial Corp. As a result of this acquisition, at December
31, 1996, loans purchased and serviced by others totaled $17.1 million.
As a result of the Merger, Fidelity acquired $194.3 million of gross
loans ($189.4 million, net) of which single-family residential loans,
multi-family residential loans,
<PAGE> 8
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nonresidential real estate and land loans, construction loans and consumer loans
were $159.9 million, $8.4 million, $8.2 million, $12.6 million, and $5.2
million, respectively.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1996 1995 1994
---------------- ------------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Loan originations:
Single-family residential $ 45,800 $27,785 $28,353
Multi-family residential 3,030 1,865 3,066
Nonresidential real estate 869 572 2,008
Construction 6,372 4,308 3,892
Consumer 3,394 2,228 471
------- ------ ------
Total loans originated 59,465 36,758 37,790
Purchases -- 3,409 1,556
------- ------ ------
Total loans originated and
purchased 59,465 40,167 39,346
Sales and loan principal reductions:
Loans sold 547 1,165 180
Loan principal reductions 37,106 28,923 26,052
------- ------- ------
Total loans sold and principal
reductions 37,653 30,088 26,232
Net loans acquired through Merger 189,405 -- --
Increase (decrease) due to other
items, net 838 (169) (284)
------- ------- ------
Net increase in loan portfolio $212,055 $ 9,910 $12,830
======= ======= ======
</TABLE>
SINGLE-FAMILY RESIDENTIAL LOANS. The primary lending activity of
Fidelity is the origination of loans secured by first mortgage liens on
single-family residences. At December 31, 1996, $321.7 million or 80.0% of
Fidelity's total loan portfolio (including loans held for sale), before net
items, consisted of single-family residential loans.
The loan-to-value ratio, maturity and other provisions of the loans
made by Fidelity generally have reflected the policy of making less than the
maximum loan permissible under applicable regulations, in accordance with sound
lending practices, market conditions and underwriting standards established by
Fidelity. Fidelity's lending policies on single-family residential mortgage
loans generally limits the maximum loan-to-value ratio to 90% of the lesser of
the appraised value or purchase price of the property and generally all
single-family residential loans in excess of an 80% loan-to-value ratio require
private mortgage insurance.
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Fidelity offers fixed-rate single-family residential loans with terms
of 10 to 30 years. In addition, Fidelity also offers fixed-rate five-year and
seven-year balloon loans. Such loans are amortized on a monthly basis with
principal and interest due each month and customarily include "due-on-sale"
clauses, which are provisions giving Fidelity the right to declare a loan
immediately due and payable in the event the borrower sells or otherwise
disposes of the real property subject to the mortgage and the loan is not
repaid. Fidelity enforces due-on-sale clauses to the extent permitted under
applicable laws.
Since the early 1980s, Fidelity has been offering adjustable-rate loans
in order to decrease the vulnerability of its operations to changes in interest
rates. At December 31, 1996, $141.0 million or 43.8% of the single-family
residential loans in Fidelity's loan portfolio, before net items, consisted of
adjustable-rate loans.
Fidelity's single-family residential adjustable-rate loans are fully
amortizing loans with contractual maturities of up to 30 years. These loans have
interest rates which are scheduled to adjust every one or three years in
accordance with a designated index (The National Average Mortgage Contract
Interest Rate for the Purchase of Previously-Occupied Homes or the weekly
average yield on U.S. Treasury securities adjusted to a constant comparable
maturity). There is a 2% cap on the rate adjustment per period and either a 5%
or 6% cap on the rate adjustment over the life of the loan. Fidelity's
adjustable-rate loans are not convertible into fixed-rate loans, are not
assumable, do not contain prepayment penalties and do not produce negative
amortization.
The demand for adjustable-rate loans in Fidelity's primary market area
has been a function of several factors, including the level of interest rates,
the expectations of changes in the level of interest rates and the difference
between the interest rates and loan fees offered for fixed-rate loans and
adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate
residential loans that can be originated at any time is largely determined by
the demand for each in a competitive environment.
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. Fidelity believes that these risks, which have not had a
material adverse effect on Fidelity to date, generally are less than the risks
associated with holding fixed-rate loans in an increasing interest rate
environment.
MULTI-FAMILY RESIDENTIAL, NONRESIDENTIAL REAL ESTATE AND CONSTRUCTION
LOANS. At December 31, 1996, $25.6 million or 6.4% and $33.1 million or 8.2% of
Fidelity's total loan portfolio (including loans held for sale), before net
items, consisted of loans secured by existing multi-family residential and
nonresidential real estate, respectively. Fidelity's multi-family residential
and nonresidential real estate loan portfolio includes, for the most part, 220
loans secured by apartment buildings, small office buildings, retail
establishments,
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nursing homes and other special purpose properties located within Fidelity's
primary lending area. The average amount of Fidelity's multi-family residential
and nonresidential real estate loans was approximately $267,000 at December 31,
1996.
Multi-family residential and nonresidential real estate loans have
terms which range up to 30 years. Although some of the multi-family residential
and nonresidential real estate loans which were originated in prior periods have
fixed rates, interest rates on current originations generally adjust at either a
one or three-year interval in accordance with changes in a designated index
(generally a prime rate or the weekly average yield on U.S. Treasury securities
adjusted to a constant comparable maturity). The maximum adjustment in any one
period is 2% with either a 5% or 6% cap over the life of the loan. In addition,
Fidelity recently began originating fixed-rate multi-family residential and
nonresidential real estate loans with either five, seven or ten year balloon
terms. At December 31, 1996, $34.9 million or 59.5% of the multi-family
residential and nonresidential real estate loan portfolio, before net items,
consisted of adjustable-rate loans.
Multi-family residential and nonresidential real estate loans are
generally made in amounts up to 75% of the appraised value of the security
property. All appraisals are generally performed by an independent appraiser
designated by Fidelity and are reviewed by management. In originating
multi-family residential and nonresidential real estate loans, Fidelity
considers the quality of the property, the credit of the borrower, cash flow of
the project, location of the real estate and the quality of management involved
with the property.
Fidelity makes construction loans to individuals for the construction
of their residences and to borrowers for the construction of multi-family
residential and nonresidential real estate. At December 31, 1996, construction
loans amounted to $13.8 million or 3.4% of Fidelity's total loan portfolio
(including loans held for sale), before net items. Of this amount, $7.4 million
consists of loans for the construction of single-family residences and $6.4
million consists of loans for the construction of multi-family residential and
nonresidential real estate.
Construction lending is generally limited to Fidelity's primary lending
area. Construction loans are structured to be converted to permanent loans at
the end of the construction phase, which typically is 12 months. Construction
loans have rates and terms which generally match the non-construction loans then
offered by Fidelity, except that during the construction phase the borrower only
pays interest on the loan. Construction loans are underwritten pursuant to the
same general guidelines used for originating permanent loans.
Multi-family residential and nonresidential real estate lending is
generally considered to involve a higher degree of risk than single-family
residential lending. Such lending typically involves large loan balances
concentrated in a single borrower or groups of related borrowers. In addition,
the payment experience on loans secured by income-producing properties is
typically dependent on the successful operation of the related real estate
<PAGE> 11
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project and thus may be subject to a greater extent to adverse conditions in the
real estate market or in the general economy. Construction financing also is
generally considered to involve a higher degree of risk of loss than long term
financing on improved, owner-occupied real estate because of the uncertainties
of construction, including the possibility of costs exceeding the initial
estimates and the need to obtain a tenant or purchaser if the property will not
be owner-occupied. Fidelity generally attempts to mitigate the risks associated
with multi-family residential, nonresidential real estate and construction
lending by, among other things, lending primarily in its market area and using
low loan-to-value ratios in the underwriting process.
CONSUMER LOANS. At December 31, 1996, consumer loans totaled $7.8
million or 2.0% of the total loan portfolio (including loans held for sale),
before net items, and consisted solely of home improvement/equity loans and
loans secured by deposit accounts.
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on
loans, Fidelity receives loan origination fees or "points" for originating
loans. Loan points are a percentage of the principal amount of the mortgage loan
and are charged to the borrower in connection with the origination of the loan.
In accordance with Statement of Financial Accounting Standards No. 91,
which deals with the accounting for non-refundable fees and costs associated
with originating or acquiring loans, Fidelity's loan origination fees and
certain related direct loan origination costs are offset, and the resulting net
amount is deferred and amortized as interest income over the contractual life of
the related loans as an adjustment to the yield of such loans. At December 31,
1996, Fidelity had $81,000 of net loan costs which had been deferred and are
being recognized as an adjustment to income over the estimated maturities of the
related loans.
ASSET QUALITY
LOAN DELINQUENCIES. When a borrower fails to make a required payment on
a loan, Fidelity attempts to cure the deficiency by contacting the borrower and
seeking payment. Contacts are generally made following the fifteenth day after a
payment is due, at which time a late payment is assessed. In most cases,
deficiencies are cured promptly. If a delinquency extends beyond 15 days, the
loan and payment history is reviewed and efforts are made to collect the loan.
While Fidelity generally prefers to work with borrowers to resolve such
problems, when the account becomes 90 days delinquent, Fidelity does institute
foreclosure or other proceedings, as necessary, to minimize any potential loss.
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The following table sets forth information concerning delinquent loans
at December 31, 1996, in dollar amount and as a percentage of Fidelity's total
loan portfolio (before net items). The amounts presented represent the total
outstanding principal balances of the related loans, rather than the actual
payment amounts which are past due.
<TABLE>
<CAPTION>
Single-family Multi-family Nonresidential
Residential Residential Real Estate
----------------------- --------------------- --------------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days $3,716 .9% $261 .1% $715 .2%
60 - 89 days 412 .1 -- -- 134 --
90 days and over 924 .2 185 .1 21 --
----- --- --- --- --- ----
Total delinquent loans $5,052 1.2% $446 .2% $870 .2%
===== === === === === ====
Construction Consumer Total
-------------------- -------------------- ---------------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
Loans delinquent for:
30 - 59 days $ -- --% $ -- --% $4,692 1.2%
60 - 89 days -- -- -- -- 546 .1
90 days and over -- -- -- -- 1,130 .3
----- ---- ---- ----- ----- ---
Total delinquent loans $ -- --% $ -- --% $6,368 1.6%
===== ==== ==== ===== ===== ===
</TABLE>
<PAGE> 13
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NON-PERFORMING ASSETS. All loans are reviewed on a regular basis and
are placed on non-accrual status when, in the opinion of management, the
collection of additional interest is deemed insufficient to warrant further
accrual. As a matter of policy, Fidelity does not accrue interest on loans past
due 90 days or more except when the estimated value of the collateral and
collection efforts are deemed sufficient to ensure full recovery. Consumer loans
generally are charged-off when the loan becomes over 120 days delinquent.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. Subsequent payments are either applied to
the outstanding principal balance or recorded as interest income, depending on
the assessment of the ultimate collectibility of the loan.
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.
The following table sets forth the amounts and categories of Fidelity's
non-performing assets at the dates indicated. Fidelity did not have any accruing
loans 90 days or more delinquent or troubled debt restructurings at any of the
dates presented.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ---------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Single-family residential $ 924 $ 949 $ 652 $ 955 $392
Multi-family residential and
nonresidential real estate 206 58 187 513 36
----- ----- ----- ----- ---
Total non-performing loans 1,130 1,007 839 1,468 428
Real estate owned:
Single-family residential real
estate -- -- 85 65 113
Multi-family residential and
nonresidential real estate -- -- -- 39 364
----- ----- ----- ----- ---
Total real estate owned -- -- 85 104 477
----- ----- ----- ----- ---
Total non-performing assets $1,130 $1,007 $ 924 $1,572 $905
===== ===== ===== ===== ===
Total non-performing loans
as a percentage of total loans .28% .54% .47% .88% .27%
===== ===== ===== ===== ===
Total non-performing assets as
a percentage of total assets .23% .44% .43% .77% .46%
===== ===== ===== ==== ===
</TABLE>
<PAGE> 14
13
The interest income that would have been recorded during the years
ended December 31, 1996, 1995, 1994, 1993 and 1992 if Fidelity's non-performing
loans at the end of such periods had been current in accordance with their terms
during such periods was $59,000, $12,000, $51,000, $42,000 and $17,000,
respectively. The amount of interest income that was actually received during
the years ended December 31, 1996, 1995, 1994, 1993 and 1992 with respect to
such non-performing loans amounted to approximately $74,000, $65,000, $42,000,
$106,000 and $30,000, respectively.
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. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. Assets classified as substandard or doubtful
require the institution to establish general allowances for loan losses. If an
asset or portion thereof is classified loss, the insured institution must either
establish specific allowances for loan losses in the amount of 100% of the
portion of the asset classified loss, or charge-off such amount. General loss
allowances established to cover possible losses related to assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses do not
qualify as regulatory capital. Federal examiners may disagree with an insured
institution's classifications and amounts reserved.
Exclusive of assets classified loss and which have been fully reserved
or charged-off, Fidelity's classified assets at December 31, 1996 consisted of
$1.0 million of loans classified as special mention, $3.5 million of loans
classified as substandard, $108,000 of loans classified as doubtful and $8,000
of loans classified as loss.
ALLOWANCE FOR LOAN LOSSES. It is management's policy to maintain an
allowance for estimated losses on loans based upon an assessment of prior loss
experience, the volume and type of lending conducted by Fidelity, industry
standards, past due loans, general economic conditions and other factors related
to the collectibility of the loan portfolio. Although management believes that
it uses the best information available to make such determinations, future
adjustments to allowances may be necessary, and net earnings could be
significantly affected, if circumstances differ substantially from the
assumptions used in making the initial determinations.
<PAGE> 15
14
Effective December 21, 1993, the OTS, in conjunction with the Office of
the Comptroller of the Currency, the FDIC and the Federal Reserve Board, issued
an Interagency Policy Statement on the Allowance for Loan and Lease Losses
("Policy Statement"). The Policy Statement includes guidance (i) on the
responsibilities of management for the assessment and establishment of an
adequate allowance and (ii) for the agencies' examiners to use in evaluating the
adequacy of such allowance and the policies utilized to determine such
allowance. The Policy Statement also sets forth quantitative measures for the
allowance with respect to assets classified substandard and doubtful and with
respect to the remaining portion of an institution's loan portfolio.
Specifically, the Policy Statement sets forth the following quantitative
measures which examiners may use to determine the reasonableness of an
allowance: (i) 50% of the portfolio that is classified doubtful; (ii) 15% of the
portfolio that is classified substandard and (iii) for the portions of the
portfolio that have not been classified (including loans designated special
mention), estimated credit losses over the upcoming twelve months based on facts
and circumstances available on the evaluation date. While the Policy Statement
sets forth this quantitative measure, such guidance is not intended as a "floor"
or "ceiling".
At December 31, 1996, Fidelity's allowance for loan losses amounted to
$1.6 million, of which $1.55 million was general in nature and $8,000 was
specific in nature.
The following table sets forth an analysis of Fidelity's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding $402,025 $187,846 $180,309 $166,264 $158,672
======= ======= ======= ======= =======
Average loans outstanding, net $234,133 $180,935 $170,340 $157,510 $152,406
======= ======= ======= ======= =======
Balance at beginning of period $ 818 $ 783 $ 803 $ 756 $ 732
Charge-offs:
Single-family residential 29 36 23 5 8
Non-residential -- -- 41 -- 40
------ -------- ------- ------- --------
Total charge-offs 29 36 64 5 48
Recoveries -- -- -- -- --
------ -------- ------- ------- --------
Net charge-offs 29 36 64 5 48
Provision for losses on loans 129 71 44 52 72
Increase attributable to Merger 640 -- -- -- --
-------- --------- -------- -------- --------
Balance at end of period $ 1,558 $ 818 $ 783 $ 803 $ 756
====== ======== ======= ======= ========
Allowance for loan losses as a
percent of total loans
outstanding .39% .44% .43% .48% .48%
=== === === === ===
Ratio of net charge-offs to
average loans outstanding .01% .02% .04% --% .03%
=== === === === ===
</TABLE>
<PAGE> 16
15
The following table sets forth information concerning the allocation of
Fidelity's allowance for loan losses by loan categories at the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------
1996 1995 1994
----------------------- -------------------------- ------------------------------
Percent of Percent of Percent of
Total Total Total
Loans by Loans by Loans by
Amount Category Amount Category Amount Category
----------- ---------- ---------- ---------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential loans $1,246 80.0% $525 75.7% $346 74.6%
Multi-family residential loans 100 6.4 106 10.0 133 8.6
Nonresidential real estate loans 128 8.2 162 11.1 272 13.1
Construction loans 53 3.4 22 2.6 32 3.5
Consumer loans 31 2.0 3 .6 -- .2
--- ---- --- ----- ---- -------
Total $1,558 100.0% $818 100.0% $783 100.00%
===== ===== === ===== === ======
</TABLE>
<TABLE>
December 31,
-----------------------------------------------------------
1993 1992
----------------------- ---------------------------
Percent of Percent of
Total Total
Loans by Loans by
Amount Category Amount Category
----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Single-family residential loans $418 72.7% $346 70.6%
Multi-family residential loans 97 9.3 100 10.1
Nonresidential real estate loans 268 15.9 276 15.6
Construction loans 20 2.0 34 3.5
Consumer loans -- .1 -- .2
---- ------- ---- -------
Total $803 100.00% $756 100.00%
=== ====== === ======
</TABLE>
<PAGE> 17
16
Management of Fidelity believes that the reserves it has established
are adequate to cover any potential losses in Fidelity's loan portfolio.
However, future adjustments to these reserves may be necessary, and Fidelity's
results of operations could be adversely affected if circumstances differ
substantially from the assumptions used by management in making its
determinations in this regard.
INVESTMENT ACTIVITIES
GENERAL. Fidelity's mortgage-backed and investment securities portfolio
is managed in accordance with a written investment policy adopted by the Board
of Directors and administered by the Savings Bank's Asset/Liability Committee.
All transactions must be approved by the Asset/Liability Committee and reported
to the Board of Directors.
Fidelity accounts for investment and mortgage-backed securities in
accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" (the "Statement"). The Statement 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 Savings Bank 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. The Savings Bank adopted the Statement as of January 1,
1994. At December 31, 1996, the Company's equity accounts reflected a net
unrealized gain of $172,000 with respect to securities classified as available
for sale.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent a
participation interest in a pool of single-family or multi-family mortgage
loans, the principle and interest payments on which, in general, are passed from
the mortgage originators, through intermediaries that pool and repackage the
participation interests in the form of securities, to investors such as the
Savings Bank. Such intermediaries may be private issuers, or agencies including
the Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage
Association ("FNMA") and the Government National Mortgage Association ("GNMA")
that guarantee the payment of principal and interest to investors.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed- or adjustable-rate
mortgage loans. Mortgage-backed securities are generally referred to as mortgage
participation certificates or pass-through certificates. As a result, the
interest rate risk characteristics of the underlying pool of mortgages (e.g.,
fixed-rate or adjustable-rate) as well as prepayment, default and other risks
associated with the underlying mortgages are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages.
<PAGE> 18
17
Fidelity has invested in a portfolio of mortgage-backed securities
which are insured or guaranteed by the FHLMC, the GNMA or FNMA. Mortgage-backed
securities increase the quality of Fidelity's assets by virtue of the guarantees
that back them, are more liquid than individual mortgage loans and may be used
to collateralize borrowings or other obligations of Fidelity.
The following table sets forth information relating to the amortized
cost and market value of Fidelity's mortgage-backed securities at December 31,
1996, 1995 and 1994 (including those designated as available for sale):
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------------ --------- ------------ --------- ------------ ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to maturity:
FHLMC participation certificates $ 696 $ 689 $ -- $ -- $11,280 $10,757
GNMA participation certificates 8,354 8,434 -- -- 3,692 3,511
FNMA participation certificates 306 319 -- -- 5,820 5,578
Collateralized mortgage obligations 1,388 1,389 -- -- -- --
------ ------ ------ ------ ------ ------
Total mortgage-backed securities
held to maturity 10,744 10,831 -- -- 20,792 19,846
Available for sale:
FHLMC Participation Certificates 19,767 19,926 14,346 14,296 3,166 3,068
GNMA Participation Certificates 6,028 6,062 4,958 4,977 547 542
FNMA Participation Certificates 4,776 4,772 8,456 8,406 1,181 1,099
Collateralized mortgage obligations -- -- 1,732 1,699 1,734 1,571
------ ----- ------ ------ ------ ------
Total mortgage-backed securities
designated as available for sale 30,571 30,760 29,492 29,378 6,628 6,280
------ ------ ------- ------ ------ ------
Total mortgage-backed securities $41,315 $41,591 $29,492 $29,378 $27,420 $26,126
====== ====== ====== ====== ====== ======
</TABLE>
<PAGE> 19
18
The following table sets forth the activity in Fidelity's
mortgage-backed securities portfolio during the periods indicated (including
those designated as available for sale):
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
---------------------------------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Mortgage-backed securities at
beginning of period $29,378 $27,072 $23,873
Purchases 3,173 6,587 9,695
Acquisition of mortgage-backed securities
through Merger 44,435 -- --
Sales of mortgage-backed securities (29,232) -- --
Unrealized gain (loss) on securities designated as
available for sale 334 234 (348)
Repayments (6,526) (4,487) (6,079)
Premium amortization (58) (28) (69)
------- ------- -------
Mortgage-backed securities at end
of period $41,504 $29,378 $27,072
====== ====== ======
Weighted average yield at end of
period 7.29% 6.63% 5.89%
</TABLE>
At December 31, 1996, of the $41.5 million portfolio, $2.0 million was
scheduled to mature in one year or less, $7.4 million was scheduled to mature in
between one and five years, $9.5 million was scheduled to mature in between five
and ten years, and $22.6 million was scheduled to mature after ten years. Due to
repayments of the underlying loans, the actual maturities of mortgage-backed
securities generally are substantially less than the scheduled maturities.
Of the $9.4 million of mortgage-backed securities which were scheduled
to mature in five years or less at December 31, 1996, $3.0 million qualify for
regulatory liquidity and have fixed interest rates, $4.3 million have fixed
interest rates and do not qualify for regulatory liquidity and $2.1 million
consist of adjustable-rate securities. The remaining $32.1 million of
mortgage-backed securities at such date consisted of $11.1 of fixed-rate and
$21.0 million of adjustable-rate securities.
Of Fidelity's total investment in mortgage-backed securities at
December 31, 1996, $14.4 million consisted of GNMA certificates, $5.1 million
consisted of FNMA certificates, $20.6 million consisted of FHLMC certificates,
and $1.4 million consisted of other collateralized mortgage obligations
("CMOs").
INVESTMENT SECURITIES. The Savings Bank invests in various types of
liquid assets that are permissible investments for federally chartered savings
banks, including United States Treasury and securities of various federal
agencies. The Savings Bank's current investment policy only permits purchases of
securities in one of the three highest grades by a nationally recognized rating
agency and does not permit purchases of securities of noninvestment grade
quality.
<PAGE> 20
19
The following table sets forth information relating to the amortized
cost and market value of Fidelity's investment securities at the dates
indicated:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------------
1996(1) 1995 1994
--------------------------- --------------------------- -----------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------------- ---------- --------------- ---------- ------------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
agency obligations(2) $ 8,502 $ 8,530 $4,007 $4,006 $ 4,015 $ 3,771
U.S. Treasury notes(2) 7,482 7,500 999 1,019 500 496
Corporate equity
securities 64 90 -- -- -- --
Other(2)(3) -- -- 1,009 1,019 -- --
------ ------ ----- ----- ------ ------
$16,048 $16,120 $6,015 $6,044 $ 4,515 $ 4,267
====== ====== ===== ===== ====== ======
Weighted average yield
at end of period 6.50% 6.55% 5.93%
===== ==== ====
- -----------------------
</TABLE>
(1) The substantial increase in investment securities at December 31, 1996 as
compared to December 31, 1995 reflects the $7.6 million of U.S. Government
agency obligations acquired by Fidelity as a result of the Merger.
(2) At December 31, 1996, 1995 and 1994, all investment securities were
classified as available for sale.
(3) Consists of Small Business Administration ("SBA") loan pools. Obligations of
the SBA are partially guaranteed by the full faith and credit of the United
States Government.
<PAGE> 21
20
The following table sets forth amortized cost and market value of
investment securities, excluding corporate equity securities, by contractual
terms to maturity at December 31, 1996:
<TABLE>
<CAPTION>
Less Than One to Five to
One Year Five Years Ten Years
---------------------------- -------------------------- ----------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------------- ----------- ------------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
agency obligations $ -- $ -- $ 4,589 $ 4,582 $2,987 $3,021
U.S. Treasury notes -- -- 7,482 7,501 -- --
----- ----- ------ ------ ----- -----
Total $ -- $ -- $12,071 $12,083 $2,987 $3,021
===== ===== ====== ====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
More Than
Ten Years Total
------------------------- --------------------------
Amortized Market Amortized Market
Cost Value Cost Value
------------- -------- ------------- ---------
<S> <C> <C> <C> <C>
U.S. Government
agency obligations $ 926 $ 926 $ 8,502 $ 8,530
U.S. Treasury notes -- -- 7,482 7,500
---- ---- ------ -----
Total $ 926 $ 926 $15,984 $16,030
==== ==== ====== ======
</TABLE>
<PAGE> 22
21
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of Fidelity's funds for
lending and other investment purposes. In addition to deposits, Fidelity derives
funds from loan principal repayments 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. Fidelity's deposits are attracted principally from within
Fidelity's primary market area through the offering of a broad selection of
deposit instruments, including NOW accounts, money market accounts, regular
savings accounts, and term certificate accounts. Included among these deposit
products are individual retirement account certificates of approximately $57.1
million at December 31, 1996. 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.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by Fidelity on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals and federal regulations.
Fidelity does not advertise for deposits outside its local market area
or utilize the services of deposit brokers.
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by Fidelity at the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
3.00 - 4.00% $ -- --% $ 89 0.05% $ 2,752 1.59%
4.01 - 6.00% 234,757 57.52 72,137 39.92 96,708 55.84
6.01 - 8.00% 77,835 19.07 66,094 36.58 27,951 16.14
8.01 - 10.00% 3,177 .78 3,510 1.95 4,684 2.70
-------- ------ ------- ------ ------- ------
Total certificate accounts 315,769 77.37 141,830 78.50 132,095 76.27
-------- ------ ------- ------ ------- ------
Transaction accounts:
Passbook accounts 44,798 10.97 15,753 8.71 17,173 9.92
Money market accounts 17,350 4.25 12,800 7.08 14,986 8.65
NOW accounts 30,242 7.41 10,314 5.71 8,944 5.16
------- ------ ------- ------ ------- ------
Total transaction accounts 92,390 22.63 38,867 21.50 41,103 23.73
------- ------ ------- ------ ------- ------
Total deposits $408,159 100.00% $180,697 100.00% $173,198 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
<PAGE> 23
22
The following table sets forth the savings activities of Fidelity
during the periods indicated.
<TABLE>
Year Ended December 31,
------------------------------------------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Deposits(1) $684,220 $135,109 $101,016
Withdrawals 467,465 (135,222) (91,566)
------- ------- -------
Net increase (decrease) before interest
credited 216,755 (113) 9,450
Interest credited 10,707 7,612 6,106
------- ------- -------
Net increase in deposits $227,462 $ 7,499 $ 15,556
======= ======= =======
- --------------------
<FN>
(1) The substantial increase in deposits at December 31, 1996 as compared to
December 31, 1995 reflects the $207.8 million of deposits acquired by Fidelity
as a result of the Merger.
</TABLE>
The following table shows the interest rate and maturity information
for Fidelity's certificates of deposit at December 31, 1996.
<TABLE>
<CAPTION>
Maturity Date
---------------------------------------------------------------------------------------------------------
Interest Rate One Year or Less Over 1-2 Years Over 2-3 Years Over 3 Years Total
- ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
3.00 - 4.00% $ -- $ -- $ -- $ -- $ --
4.01 - 6.00% 197,241 26,672 7,069 3,775 234,757
6.01 - 8.00% 27,702 32,337 7,250 10,546 77,835
8.01 - 10.00% 81 1,524 894 678 3,177
------- ------- ------ ------ -------
Total $225,024 $ 60,533 $15,213 $14,999 $315,769
======= ======= ====== ====== =======
</TABLE>
The following table sets forth the maturities of Fidelity's
certificates of deposit having principal amounts of $100,000 or more at December
31, 1996.
<TABLE>
<CAPTION>
Certificates of deposit maturing
in quarter ending:
- ---------------------------------------
(In Thousands)
<S> <C>
March 31, 1997 $6,340
June 30, 1997 8,736
September 30, 1997 4,401
December 31, 1997 4,219
After December 31, 1997 23,249
------
Total certificates of deposit with
balances of $100,000 or more $46,945
======
</TABLE>
<PAGE> 24
23
BORROWINGS. Fidelity may obtain advances from the FHLB of Cincinnati
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. See
"Regulation-Federal Home Loan Bank System." At December 31, 1996, Fidelity had
$20.2 million of advances from the FHLB of Cincinnati.
The following table sets forth the maximum month-end balance and
average balance of Fidelity's FHLB advances during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1996 1995 1994
----------- ---------------- --------------
(Dollars In Thousands)
<S> <C> <C> <C>
Maximum Balance $29,672 $17,653 $15,954
Average Balance 17,794 13,811 13,150
Weighted average interest rate of
FHLB advances 6.19% 6.28% 6.35%
</TABLE>
The following table sets forth certain information as to Fidelity's
FHLB advances at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1996 1995 1994
---------------- ---------------- ------------------
(Dollars In Thousands)
<S> <C> <C> <C>
FHLB advances(1) $20,186 $17,653 $12,089
Weighted average interest rate
of FHLB advances 6.22% 6.16% 6.28%
- -------------------
</TABLE>
(1) Fidelity acquired $27.4 million of FHLB advances as a result of the Merger,
of which $2.5 million remained at December 31, 1996.
EMPLOYEES. Fidelity had 105 full-time employees and 12 part-time
employees at December 31, 1996. None of these employees is represented by a
collective bargaining agreement, and Fidelity believes that it enjoys good
relations with its personnel.
<PAGE> 25
24
COMPETITION
Fidelity 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 the greater Cincinnati area, including many large financial
institutions which have greater financial and marketing resources available to
them. In addition, during times of high interest rates, Fidelity has faced
additional significant competition for investors' funds from short-term money
market securities and other corporate and government securities. The ability of
Fidelity 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.
Fidelity experiences strong competition for real estate loans
principally from other savings associations, commercial banks, and mortgage
banking companies. Fidelity 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 certain laws and regulations
which currently relate to the regulation of the Company and Fidelity. The
description of these laws and regulations, as well as descriptions of laws and
regulations contained 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 Home Owners' Loan Act ("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 Savings
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. However, 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, 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
<PAGE> 26
25
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 a qualified thrift lender ("QTL") test, then such unitary holding
company also shall become subject to the activities restrictions applicable to
multiple savings and loan 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
Savings 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 Savings 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 Savings 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
Federal Reserve Board 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 such 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
<PAGE> 27
26
guarantee and similar other types of 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 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 places
restrictions on loans to executive officers, directors and principal
stockholders. 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 institution's
loans to one borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus). 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 December 31, 1996, the Savings 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).
<PAGE> 28
27
FIRREA amended provisions of the Bank Holding Company Act of 1956 to
specifically authorize the Federal Reserve Board to approve an application by a
bank holding company to acquire control of a savings institution. FIRREA also
authorized 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, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. As a result of these provisions, there have been a number of
acquisitions of savings institutions by bank holding companies in recent years.
THE SAVINGS 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 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
unsafe or unsound practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely reports filed with the
OTS. FIRREA significantly increased the amount of and grounds for civil money
penalties.
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted into law. The FDICIA provides
for, among other things, the recapitalization of the BIF; the authorization of
the FDIC to make emergency special assessments under certain circumstances
against BIF members and members of the SAIF; the establishment of risk-based
deposit insurance premiums; and improved examinations and reporting
requirements. The FDICIA also provides for enhanced federal supervision of
depository institutions based on, among other things, an institution's capital
level. See " Prompt Corrective Action."
INSURANCE OF ACCOUNTS. The deposits of the Savings 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
<PAGE> 29
28
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.
Under current FDIC regulations, institutions are assigned to one of
three capital groups which are based solely on the level of an institution's
capital--"well capitalized," "adequately capitalized," and
"undercapitalized"--which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the FDIA,
as discussed below. These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created resulted in nine assessment risk
classifications, with rates ranging from .23% for well capitalized, healthy
institutions to .31% for undercapitalized institutions with substantial
supervisory concerns.
On November 14, 1995, the FDIC adopted a new assessment rate schedule
of zero to 27 basis points (subject to a $2,000 minimum) for BIF members
beginning on or about January 1, 1996 while retaining the existing assessment
rate schedule for SAIF member institutions. In announcing this new schedule, the
FDIC noted that the premium differential may have adverse consequences for SAIF
members, including reduced earnings and an impaired ability to raise funds in
the capital markets. In addition, SAIF members, such as the Savings Bank, could
be placed at a competitive disadvantage to BIF members with respect to pricing
of loans and deposits and the ability to achieve lower operating costs.
On September 30, 1996, President Clinton signed into law legislation
which eliminates the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio. The legislation required all SAIF member institutions pay a one-time
special assessment to recapitalize the SAIF, with the aggregate amount to be
sufficient to bring the reserve ratio in the SAIF to 1.25% of insured deposits.
The legislation also provides for the merger of the BIF and the SAIF, with such
merger being conditioned upon the prior elimination of the thrift charter.
Implementing FDIC regulations imposed a one-time special assessment
equal to 65.7 basis points for all SAIF-assessable deposits as of March 31,
1995, which was accrued as an expense on September 30, 1996. The Savings Bank's
one-time special assessment amounted to $1.1 million. Net of related tax
benefits, the one-time special assessment amounted to $749,000. The payment of
such special assessment had the effect of immediately reducing the Savings
Bank's capital by such amount.
In the fourth quarter of 1996, the FDIC lowered the assessment rates
for SAIF members to reduce the disparity in the assessment rates paid by BIF and
SAIF members. Beginning October 1, 1996, effective SAIF rates generally range
from zero basis points to 27 basis points, except that during the fourth quarter
of 1996, the rates for SAIF members
<PAGE> 30
29
ranged from 18 basis points to 27 basis points in order to include assessments
paid to the Financing Corporation ("FICO"). From 1997 through 1999, SAIF members
will pay 6.4 basis points to fund the FICO, while BIF member institutions will
pay approximately 1.3 basis points. The Savings Bank's insurance premiums, which
had amounted to 23 basis points, were thus reduced to 6.4 basis points effective
January 1, 1997. Based upon the $406.1 million of assessable deposits at
December 31, 1996, the Savings Bank would expect to pay approximately $167,500
less in insurance premiums per quarter during 1997.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Savings 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, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. There are no pending proceedings to terminate the deposit insurance of
the Savings Bank.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings institutions
are required to maintain minimum levels of regulatory capital. Pursuant to
FIRREA, 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 only a limited exception
for purchased mortgage servicing rights. The Savings Bank had no goodwill or
other intangible assets at December 31, 1996. Both core and tangible capital are
further reduced by an amount equal to a savings institution's debt and equity
investments in subsidiaries engaged in activities not permissible to 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
Savings Bank's regulatory capital. Supplementary capital generally consists of
hybrid capital
<PAGE> 31
30
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 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. 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
oneto 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 single-family residential real estate loans more than 90 days
delinquent, and for repossessed assets.
The following table sets forth Fidelity's compliance with each of the
above-described capital requirements at December 31, 1996.
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital(1) Capital(2)
------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Regulatory capital $47,427 $47,427 $48,337
Minimum required regulatory capital 7,234 14,468 20,189
------ ------ ------
Regulatory capital excess $40,193 $32,959 $28,148
====== ====== ======
Regulatory capital as a
percentage(3) 9.8% 9.8% 19.2%
Minimum capital required as a
percentage 1.5 3.0 8.0
--- ---- ----
Regulatory capital as a percentage
in excess of requirements 8.3% 6.8 % 11.2%
=== ==== ====
</TABLE>
(Footnotes on following page)
<PAGE> 32
31
- ------------------
(1) Does not reflect proposed amendments or the 4% requirement to be met in
order for an institution to be "adequately capitalized" under
applicable laws and regulations, as discussed below.
(2) Does not reflect amendments to the risk-based capital requirement which
were adopted by the OTS in August 1993, the effective date of which has
been postponed, as discussed below.
(3) Tangible and core capital are computed as a percentage of adjusted
total assets of $482.3 million. Risk-based capital is computed as a
percentage of total risk-weighted assets of $252.4 million.
In April 1991, the OTS proposed to modify the 3% of adjusted total
assets core capital requirement in the same manner as was recently done by the
Comptroller of the Currency for national banks. Under the OTS proposal, only
savings associations rated composite 1 under the OTS CAMEL rating system will be
permitted to operate at the regulatory minimum core capital ratio of 3%. For all
other savings associations, the minimum core capital ratio will be 3% plus at
least an additional 100 to 200 basis points, which thus will increase the core
capital ratio requirement to at least 4% of adjusted total assets or more. In
determining the amount of additional capital, the OTS will assess both the
quality of risk management systems and the level of overall risk in each
individual savings association through the supervisory process on a case-by-case
basis.
A savings institution which is not in capital compliance or which is
otherwise deemed to require more than normal supervision is subject to
restrictions on its ability to grow pursuant to Regulatory Bulletin 3a-1. In
addition, a provision of HOLA generally provides that the Director of OTS must
restrict the asset growth of savings institutions not in regulatory capital
compliance, subject to a limited exception for growth not exceeding interest
credited.
A savings institution which is not in capital compliance is also
automatically subject to the following: (i) new directors and senior executive
officers and employment contracts for senior executive officers must be approved
by the OTS in advance; (ii) the savings institution may not accept or renew any
brokered deposits; (iii) the savings institution is subject to higher OTS
assessments as a capital-deficient institution; and (iv) the savings institution
may not make any capital distributions without prior written approval.
Any savings institution that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on the institution's operations,
termination of federal deposit insurance and the appointment of a conservator or
receiver. The OTS' capital regulation provides that such actions,
<PAGE> 33
32
through enforcement proceedings or otherwise, could require one or more of a
variety of corrective actions.
In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation. Under the
rule, an institution with a greater than "normal" level of interest rate risk is
subject to a deduction of its interest rate risk component from total capital
for purposes of calculating its risk-based capital. As a result, such an
institution is required to maintain additional capital in order to comply with
the risk-based capital requirement. An institution with a greater than "normal"
interest rate risk is defined as an institution that would suffer a loss of net
portfolio value exceeding 2.0% of the estimated economic value of its assets in
the event of a 200 basis point increase or decrease (with certain minor
exceptions) in interest rates. The interest rate risk component is calculated,
on a quarterly basis, as one-half of the difference between an institution's
measured interest rate risk and 2.0%, multiplied by the economic value of its
assets. The rule also authorizes the Director of the OTS, or his designee, to
waive or defer an institution's interest rate risk component on a case-by-case
basis. The final rule was originally to be effective as of January 1, 1994,
subject however to a three quarter "lag" time between the reporting date of the
data used to calculate an institution's interest rate risk and the effective
date of each quarter's interest rate risk component. However, in October 1994,
the Director of the OTS indicated that it would waive the capital deduction for
institutions with greater than "normal" interest rate risk until the OTS
publishes an appeals process. The OTS has recently indicated that no savings
institution will be required to deduct capital for interest rate risk until
further notice. In any event, management of the Savings Bank does not believe
that the OTS' adoption of an interest rate risk component to the risk-based
capital requirement will adversely affect the Savings Bank's regulatory capital
position.
PROMPT CORRECTIVE ACTION. Under Section 38 of the FDIA, as added by the
FDICIA, each federal banking agency was required to implement a system of prompt
corrective action for institutions which it regulates. The federal banking
agencies, including the OTS, adopted substantially similar regulations to
implement Section 38 of the FDIA, effective as of December 19, 1992. Under the
regulations, an institution is deemed to be (i) "well capitalized" if it has
total risk-based capital of 10.0% or more, has a Tier 1 risk-based capital ratio
of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more and is not
subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure, (ii) "adequately capitalized" if it has a
total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital
ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more (3.0%
under certain circumstances) and does not meet the definition of "well
capitalized," (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less
than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0% under
certain circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier 1 riskbased capital
ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less
than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets
<PAGE> 34
33
that is equal to or less than 2.0%. Section 38 of the FDIA and the regulations
promulgated thereunder also specify circumstances under which a federal banking
agency may reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category (except that the FDIC may not reclassify a significantly
undercapitalized institution as critically undercapitalized).
An institution generally must file a written capital restoration plan
which meets specified requirements with an appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. A federal banking agency must provide the
institution with written notice of approval or disapproval within 60 days after
receiving a capital restoration plan, subject to extensions by the agency.
An institution which is required to submit a capital restoration plan
must concurrently submit a performance guaranty by each company that controls
the institution. Such guaranty shall be limited to the lesser of (i) an amount
equal to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary to restore the relevant capital measures of the institution to
the levels required for the institution to be classified as adequately
capitalized. Such a guarantee shall expire after the federal banking agency
notifies the institution that it has remained adequately capitalized for each of
four consecutive calendar quarters. An institution which fails to submit a
written capital restoration plan within the requisite period, including any
required performance guarantee(s), or fails in any material respect to implement
a capital restoration plan, shall be subject to the restrictions in Section 38
of the FDIA which are applicable to significantly undercapitalized institutions.
Immediately upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA (i) restricting payment of
capital distributions and management fees, (ii) requiring that the appropriate
federal banking agency monitor the condition of the institution and its efforts
to restore its capital, (iii) requiring submission of a capital restoration
plan, (iv) restricting the growth of the institution's assets and (v) requiring
prior approval of certain expansion proposals. The appropriate federal banking
agency for an undercapitalized institution also may take any number of
discretionary supervisory actions if the agency determines that any of these
actions is necessary to resolve the problems of the institution at the least
possible long-term cost to the deposit insurance fund, subject in certain cases
to specified procedures. These discretionary supervisory actions include
requiring the institution to raise additional capital; restricting transactions
with affiliates; restricting interest rates paid by the institution on deposits;
requiring replacement of senior executive officers and directors; restricting
the activities of the institution and its affiliates; requiring divestiture of
the institution or the sale of the institution to a willing purchaser; and any
other supervisory action that the agency deems appropriate. These and additional
mandatory and permissive supervisory actions may be
<PAGE> 35
34
taken with respect to significantly undercapitalized and critically
undercapitalized institutions.
At December 31, 1996, the Savings Bank was deemed a "well capitalized"
institution for purposes of the above regulations and as such was not subject to
the above mentioned restrictions.
SAFETY AND SOUNDNESS. FDICIA requires each federal banking regulatory
agency to prescribe, by regulation or guideline, standards for all insured
depository institutions and depository institution holding companies relating to
(i) internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; (vi) compensation, fees and benefits; and (vii) such other
operational and managerial standards as the agency determines to be appropriate.
The compensation standards would prohibit employment contracts or other
compensatory arrangements that provide excess compensation, fees or benefits or
could lead to material financial loss. In addition, each federal banking
regulatory agency must prescribe, by regulation or guideline, standards relating
to asset quality, earnings and stock valuation as the agency determines to be
appropriate. Effective August 9, 1995, the federal banking agencies, including
the OTS, implemented final rules and guidelines concerning standards for safety
and soundness required to be prescribed by regulation pursuant to Section 39 of
the FDIA. In general, the standards relate to (1) operational and managerial
matters; (2) asset quality and earnings; and (3) compensation. The operational
and managerial standards cover (a) internal controls and information systems,
(b) internal audit systems, (c) loan documentation, (d) credit underwriting, (e)
interest rate exposure, (f) asset growth, and (g) compensation, fees and
benefits. Under the asset quality and earnings standards, the Savings Bank would
be required to establish and maintain systems to (i) identify problem assets and
prevent deterioration in those assets, and (ii) evaluate and monitor earnings
and ensure that earnings are sufficient to maintain adequate capital reserves.
Finally, the compensation standard states that compensation will be considered
excessive if it is unreasonable or disproportionate to the services actually
performed by the individual being compensated. Effective October 1, 1996, the
federal banking agencies also adopted asset quality and earnings standards. If a
savings institution fails to meet any of the standards promulgated by
regulation, then such institution will be required to submit a plan within 30
days to the OTS specifying the steps it will take to correct the deficiency. In
the event that a savings institution fails to submit or fails in any material
respect to implement a compliance plan within the time allowed by the federal
banking agency, Section 39 of the FDIA provides that the OTS must order the
institution to correct the deficiency and may (1) restrict asset growth; (2)
require the savings institution to increase its ratio of tangible equity to
assets; (3) restrict the rates of interest that the savings institution may pay;
or (4) take any other action that would better carry out the purpose of prompt
corrective action. The Savings Bank believes that it has been and will continue
to be in compliance with each of the standards as they have been adopted by the
OTS.
<PAGE> 36
35
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 December 31, 1996, the Savings Bank's liquidity
ratio was 7.2%.
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 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
to be applicable on December 31, 1994, 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. See "- Regulatory Capital Requirements."
Tier 2 institutions, which are institutions that before and after the
proposed distribution meet or exceed their minimum capital requirements, may
make capital distributions up to 75% of their net income over the most recent
four quarter period.
In order to make distributions under these safe harbors, Tier 1 and
Tier 2 institutions must submit 30 days written notice to the OTS 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.
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36
Tier 3 institutions, which are institutions that do not meet current
minimum capital requirements, or that have capital in excess of either their
fully phased-in capital requirement or minimum capital requirement but which
have been notified by the OTS that it will be treated as a Tier 3 institution
because they are in need of more than normal supervision, cannot make any
capital distribution without obtaining OTS approval prior to making such
distributions.
At December 31, 1996, the Savings Bank was a Tier 1 institution for
purposes of this regulation.
On December 5, 1994, the OTS published a notice of proposed rulemaking
to amend its capital distribution regulation. Under the proposal, savings
institutions would be permitted to only make capital distributions that would
not result in their capital being reduced below the level required to remain
"adequately capitalized." A savings institution is adequately capitalized if it
has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based
capital ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or
more and does not meet the definition of "well capitalized." Because the Savings
Bank is a subsidiary of the Company, the proposal would require the Savings Bank
to provide notice to the OTS of its intent to make a capital distribution. The
Savings Bank does not believe that the proposal will adversely affect its
ability to make capital distributions if it is adopted substantially as
proposed.
LOANS TO ONE BORROWER. FIRREA imposed limitations on the aggregate
amount of loans that a savings institution could make to any one borrower,
including related entities. Under FIRREA, the permissible amount of loans-to-one
borrower now follows the national bank standard for all loans made by savings
institutions, as compared to the pre-FIRREA rule that applied that standard only
to commercial loans made by federally chartered savings institutions. The
regulations promulgated pursuant to FIRREA generally do not permit loans-to-one
borrower to exceed the greater of $500,000 or 15% of unimpaired capital and
surplus. Loans in an amount equal to an additional 10% of unimpaired capital and
surplus also may be made to a borrower if the loans are fully secured by readily
marketable securities.
BRANCHING BY FEDERAL SAVINGS INSTITUTIONS. Effective May 11, 1992, the
OTS amended its Policy Statement on Branching by Federal Savings Institutions to
permit interstate branching to the full extent permitted by statute (which is
essentially unlimited). Prior policy permitted interstate branching for federal
savings institutions only to the extent allowed for state-chartered institutions
in the states where the institution's home office is located and where the
branch is sought. Prior policy also permitted healthy out-of-state federal
institutions to branch into another state, regardless of the law in that state,
provided the branch office was the result of a purchase of an institution that
was in danger of default.
Generally, federal law prohibits federal savings institutions from
establishing, retaining or operating a branch outside the state in which the
federal institution has its
<PAGE> 38
37
home office unless the institution meets the IRS's domestic building and loan
test (generally, 60% of a thrift's assets must be housing-related) ("IRS Test").
The IRS Test requirement does not apply if: (i) the branch(es) result(s) from an
emergency acquisition of a troubled savings institution (however, if the
troubled savings institution is acquired by a bank holding company, does not
have its home office in the state of the bank holding company bank subsidiary
and does not qualify under the IRS Test, its branching is limited to the
branching laws for state-chartered banks in the state where the savings
institution is located); (ii) the law of the state where the branch would be
located would permit the branch to be established if the federal savings
institution were chartered by the state in which its home office is located; or
(iii) the branch was operated lawfully as a branch under state law prior to the
savings institution's conversion to a federal charter.
Furthermore, the OTS will evaluate a branching applicant's record of
compliance with the Community Reinvestment Act of 1977 ("CRA"). An
unsatisfactory CRA record may be the basis for denial of a branching
application.
QUALIFIED THRIFT LENDER TEST. Under Section 2303 of the Economic Growth
and Regulatory Paperwork Reduction Act of 1996, a savings association can comply
with the QTL test by either meeting the QTL test set forth in the HOLA and
implementing regulations or qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Internal Revenue Code of
1986, as amended ("Code"). The QTL test set forth in the HOLA requires a thrift
institution to maintain 65% of portfolio assets in Qualified Thrift Investments
("QTIs"). Portfolio assets are defined as total assets less intangibles,
property used by a savings institution in its business and liquidity investments
in an amount not exceeding 20% of assets. Generally, QTIs are residential
housing related assets. At December 31, 1996, the amount of the Savings Bank's
assets which were invested in QTIs was 91.2%, which exceeded the percentage
required to qualify the Savings Bank under the QTL test. A savings institution
that does not meet the QTL test must either convert to a bank charter or comply
with the following restrictions on its operations: (i) the institution may not
engage in any new activity or make any new investment, directly or indirectly,
unless such activity or investment is permissible for a national bank; (ii) the
branching powers of the institution shall be restricted to those of a national
bank; (iii) the institution shall not be eligible to obtain any advances from
its FHLB; and (iv) payment of dividends by the institution shall be subject to
the rules regarding payment of dividends by a national bank. Upon the expiration
of three years from the date the institution ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
FEDERAL HOME LOAN BANK SYSTEM. The Savings 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.,
<PAGE> 39
38
advances) in accordance with policies and procedures established by the
Board of Directors of the FHLB.
As a member, the Savings 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 December 31, 1996, the Savings
Bank had $3.8 million in FHLB stock, which was in compliance with this
requirement.
As a result of FIRREA, 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. For the years ended December
31, 1996, 1995 and 1994, dividends paid by the FHLB of Cincinnati to the Savings
Bank amounted to $165,000, $120,000 and $94,000, respectively.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction accounts
(primarily NOW and Super NOW checking accounts). As of December 31, 1996, no
reserves were required to be maintained on the first $4.4 million of transaction
accounts, reserves of 3% were required to be maintained against the next $44.9
million of net transaction accounts (with such dollar amounts subject to
adjustment by the Federal Reserve Board), and a reserve of 10% against all
remaining net transaction accounts. Because required reserves must be maintained
in the form of vault cash or a noninterest-bearing account at a Federal Reserve
Bank, the effect of this reserve requirement is to reduce an institution's
earning assets.
TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Savings Bank are subject to the generally
applicable corporate tax provisions of the Code, and the Savings Bank is subject
to certain additional provisions of the Code which apply to thrifts and other
types of financial institutions. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is
not a comprehensive discussion of the tax rules applicable to the Savings Bank.
FISCAL YEAR. The Company and the Savings Bank file federal income tax
returns on the basis of a calendar year ending on December 31.
BAD DEBT RESERVES. Prior to the enactment, on August 20, 1996, of the
Small Business Job Protection Act of 1996 (the "Small Business Act"), for
federal income tax
<PAGE> 40
39
purposes, thrift institutions such as the Savings Bank, which met certain
definitional tests primarily relating to their assets and the nature of their
business, were permitted to establish tax reserves for bad debts and to make
annual additions thereto, which additions could, within specified limitations,
be deducted in arriving at their taxable income. The Savings Bank's deduction
with respect to "qualifying loans," which are generally loans secured by certain
interests in real property, could be computed using an amount based on a
six-year moving average of the Savings Bank's actual loss experience (the
"Experience Method"), or a percentage equal to 8.0% of the Savings Bank's
taxable income (the "PTI Method"), computed without regard to this deduction and
with additional modifications and reduced by the amount of any permitted
addition to the non-qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and the
Savings Bank will be required to use the Experience Method of computing
additions to its bad debt reserve for taxable years beginning with the Savings
Bank's taxable year beginning January 1, 1996. In addition, the Savings Bank
will be required to recapture (i.e., take into taxable income) over a six-year
period, beginning with the Savings Bank's taxable year beginning January 1,
1996, the excess of the balance of its bad debt reserves (other than the
supplemental reserve) as of December 31, 1995 over (a) the greater of the
balance of such reserves as of December 31, 1987 or (b) an amount that would
have been the balance of such reserves as of December 31, 1995 had the Savings
Bank always computed the additions to its reserves using the Experience Method.
However, under the Small Business Act such recapture requirements will be
suspended for each of the two successive taxable years beginning January 1, 1996
in which the Savings Bank originates a minimum amount of certain residential
loans during such years that is not less than the average of the principal
amounts of such loans made by the Savings Bank during its six taxable years
preceding January 1, 1996.
At December 31, 1996, the federal income tax reserves of the Savings
Bank included $14.2 million for which no federal income tax has been provided,
of this amount, $11.5 million and $2.7 million are attributable to pre-1987 and
post-1987 bad debt reserves, respectively. The Savings Bank will recapture into
income approximately $450,000 per year over the six year period beginning
January 1, 1996, subject to suspension for two years in the event the
residential loan exemption is met as discussed above. The Savings Bank has
previously accounted for this tax liability under FASB 109 and, therefore,
recognition of these amounts will not impact the Savings Bank's profit and loss
statement.
DISTRIBUTIONS. If the Savings Bank distributes cash or property to its
stockholders, and the distribution is treated as being from its pre-1987 bad
debt reserves, the distribution will cause the Savings Bank to have additional
taxable income. A distribution is deemed to have been made from pre-1987 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-dividend 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
<PAGE> 41
40
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-dividend 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 December 31, 1996, the Company 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.
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 Savings Bank.
The Savings Bank's federal income tax returns have not been audited by
the IRS in recent years and its federal income tax returns for the tax years
ended December 31, 1995, 1994 and 1993 are open under the statute of limitations
and are subject to review by the IRS.
<PAGE> 42
41
STATE TAXATION
The Company is subject to an Ohio tax based on the greater of its tax
liability as determined under separate net worth and net income computations.
The Company will exclude its investment in Fidelity in determining its tax
liability under the net worth computation. The tax liability under the net worth
computation will be computed at .596% of the Company's net taxable value. The
tax liability under the net income method will be computed at a graduated rate
not exceeding 9.12% of the Company's Ohio taxable income.
The Savings Bank is subject to an Ohio franchise tax based on its
equity capital plus certain reserve amounts. Total capital for this purpose is
reduced by certain exempted assets. The resultant net taxable value was taxed at
a rate of 1.5% for 1996.
<PAGE> 43
42
ITEM 2. PROPERTIES.
- ------- -----------
At December 31, 1996, the Company conducted its business from its main
office at 4555 Montgomery Road, Cincinnati, Ohio and other full service branches
in Cincinnati, Ohio.
The following table sets forth certain information with respect to the
offices and other properties at December 31, 1996.
<TABLE>
<CAPTION>
Net Book Value
Description/Address Leased/Owned of Property Deposits
- ---------------------------------- -------------------- ---------------------- ----------------------
(In Thousands)
<S> <C> <C> <C>
Main Office Owned $1,152 $127,699
4555 Montgomery Road
Cincinnati, Ohio 45212 (1)
Branch Office Owned 451 41,899
8434 Vine Street
Cincinnati, Ohio 45216 (1)
Branch Office Owned 573 27,874
7136 Miami Avenue
Cincinnati, Ohio 45243
Branch Office Owned 1,322 57,970
11100 Reading Road
Cincinnati, Ohio 45241
Branch Office Leased 116 29,374
11700 Princeton Pike
Cincinnati, Ohio 45248 (2)
Branch Office Owned 474 21,902
4144 Hunt Road
Cincinnati, Ohio 45238
Branch Office Owned 520 31,805
5030 Delhl Avenue
Cincinnati, Ohio 45238
Branch Office Owned 333 42,737
3316 Glenmore Avenue
Cincinnati, Ohio 45211
Branch Office Owned 219 18,867
3777 Hamilton Cleves Road
Ross, Ohio 45013
</TABLE>
<PAGE> 44
43
<TABLE>
Net Book Value
Description/Address Leased/Owned of Property Deposits
- ---------------------------------- -------------------- ---------------------- ----------------------
(In Thousands)
<S> <C> <C> <C>
Branch Office Owned $210 $9,024
8045 Colerain Avenue
Cincinnati, Ohio 45239
Branch Office Owned 117 0
4255 Harrison Avenue
Cincinnati, Ohio 45211
Other property Owned 96 ---
4541 Montgomery Road
Cincinnati, Ohio 45212 (3)
Other property Owned 7 ---
17 Hillsdale
Cincinnati, Ohio 45216 (4)
Other property Owned 77 ---
16 Hereford Avenue
Cincinnati, Ohio 45216 (5)
</TABLE>
(Footnotes on following page)
<PAGE> 45
44
- ------------------------
(1) Fidelity leases a portion of its premises at these offices to various
commercial tenants.
(2) Lease expiration date is September 30, 2000.
(3) Fidelity leases substantially all of its premises at this property to
various commercial tenants.
(4) Consists of a single-family home which is currently being leased on a
month-to-month basis.
(5) Consists of a multi-family home which is currently being leased on a
month-to-month basis.
ITEM 3. LEGAL PROCEEDINGS.
- ------- ------------------
The Company is involved in routine legal proceedings occurring in the
ordinary course of business which, in the aggregate, are believed by management
to be immaterial to the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- ----------------------------------------------------
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ------- ----------------------------------------------------------------------
The information required herein is incorporated by reference from page
three of the Company's 1996 Annual Report to Stockholders, which is included
herein as Exhibit 13 ("Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
- ------- ------------------------
The information required herein is incorporated by reference from pages
four and five of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS.
--------------
The information required herein is incorporated by reference from pages
six to 14 of the Annual Report.
<PAGE> 46
45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- --------------------------------------------
The information required herein is incorporated by reference from pages
15 to 35 of the 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 the
definitive proxy statement of the Company for the Annual Meeting of Stockholders
to be held on April 29, 1997 ("Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
- ------- -----------------------
The information required herein is incorporated by reference from the
Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------- ---------------------------------------------------------------
The information required herein is incorporated by reference from the
Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ------- -----------------------------------------------
The information required herein is incorporated by reference from the
Definitive Proxy Statement.
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 attached hereto):
<PAGE> 47
46
Report of Independent Certified Public Accountants
Consolidated Statements of Financial Condition at December
31, 1996 and 1995
Consolidated Statements of Earnings for the Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) All schedules for which provision is made in the
applicable accounting regulations 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.
No. Exhibits
- ----------- ------------------------------------------------------------
2.1 Plan of Conversion and Agreement and Plan of Reorganization
3.1 Articles of Incorporation of Fidelity Financial of Ohio,
Inc.*
3.2 Code of Regulations of Fidelity Financial of Ohio, Inc.*
3.3 Bylaws of Fidelity Financial of Ohio, Inc.*
4.1 Specimen Stock Certificate of Fidelity Financial of Ohio,
Inc.**
10.1 1992 Stock Incentive Plan*1/
10.2 1992 Directors' Stock Option Plan*1/
10.3 Management Recognition Plan*1/
10.4 Employee Stock Ownership Plan*1/
10.5 Employment Agreements between Fidelity Financial of Ohio,
Inc., Fidelity Federal Savings Bank and John R. Reusing
and Paul D. Staubach**1/
10.6 Employment Agreement between Fidelity Financial of Ohio,
Inc., Fidelity Federal Savings Bank and Joseph D. Hughes1/
10.7 Form of Severance Agreement between Fidelity Financial of
Ohio, Inc., Fidelity Federal Savings Bank and certain
officers of Fidelity Financial of Ohio, Inc. and Fidelity
Federal Savings
Bank**1/
<PAGE> 48
47
No. Exhibits
- --------------- ----------------------------------------------------------
13.0 1996 Annual Report to Stockholders
23.0 Consent of Grant Thornton LLP
27.0 Financial Data Schedule
* Incorporated herein by reference from the Company's Registration Statement
on Form S-1 filed with the SEC on November 14, 1995.
** Incorporated herein by reference from the Company's Form 10-K filed with
the SEC on April 1, 1996.
1/ Management contract or compensatory plan or arrangement.
(b) On October 15, 1996, the Company filed a Form 8-K to report that
it had completed the acquisition of Circle Financial Corporation and the merger
of People's Savings Association into Fidelity. On December 18, 1996, the Company
filed a Form 8-K/A to provide certain unaudited pro forma consolidated condensed
combined financial information of the Company.
(c) See (a)(3) above for all exhibits filed herewith and the Exhibit
Index.
(d) There are no other financial statements and financial statement
schedules which were excluded from Item 8 which are required to be included
herein.
<PAGE> 49
48
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.
FIDELITY FINANCIAL OF OHIO, INC.
March 28, 1997 By:/s/ John R. Reusing
-------------------
John R. Reusing
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/ John R. Reusing March 28, 1997
- -----------------------------------------------------
John R. Reusing, President,
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Michael W. Jordan March 28, 1997
- -----------------------------------------------------
Michael W. Jordan, Director
/s/ David A. Luecke March 28, 1997
- -----------------------------------------------------
David A. Luecke, Director
/s/ Constantine N. Papadakis March 28, 1997
- -----------------------------------------------------
Constantine N. Papadakis, Director
<PAGE> 50
49
/s/ Paul D. Staubach March 28, 1997
- -----------------------------------------------------
Paul D. Staubach, Senior Vice President,
Chief Financial Officer and Director
(Principal Financial Officer)
/s/ Robert W. Zumbiel March 28, 1997
- -----------------------------------------------------
Robert W. Zumbiel, Director
/s/ Joseph D. Hughes March 28, 1997
- -----------------------------------------------------
Joseph D. Hughes, Executive Vice
President and Director
/s/ Thomas N. Spaeth March 28, 1997
- -----------------------------------------------------
Thomas N. Spaeth, Director
<PAGE> 1
Exhibit 10.6
Employment Agreement between Fidelity Financial of Ohio, Inc.,
Fidelity Federal Savings Bank and Joseph D. Hughes
<PAGE> 2
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated this 11th day of October 1996, between
Fidelity Financial of Ohio, Inc., an Ohio corporation (the "Corporation"),
Fidelity Federal Savings Bank, a federally chartered savings bank and a wholly
owned subsidiary of the Corporation (the "Bank"), and Joseph D. Hughes (the
"Executive"). Hereinafter, the Corporation and the Bank are referred to
collectively as the "Employers."
WITNESSETH
WHEREAS, pursuant to an Amended and Restated Agreement of Merger dated
June 13, 1996 (the "Plan") by and among the Corporation, Fidelity Acquisition
Corporation ("FAC") and Circle Financial Corporation ("Circle Financial"), and
an Amended and Restated Agreement of Merger dated June 13, 1996 between the Bank
and People's Savings Association (the "Association"), Circle Financial merged
with and into FAC and the Association merged with and into the Bank;
WHEREAS, pursuant to the terms of the Plan, upon the consummation of
the transactions contemplated thereby on October 11, 1996 the Executive became
the Executive Vice President of the Corporation and the Executive Vice President
and Chief Lending Officer of the Bank;
WHEREAS, the Employers desire to be ensured of the Executive's
continued active participation in the business of the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the severance benefits
which shall be due the Executive in the event that his employment with the
Employers is terminated under specified circumstances.
NOW THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereby agree as follows:
1. DEFINITIONS. The following words and terms shall have the
meanings set forth below for the purposes of this Agreement:
(a) AVERAGE ANNUAL COMPENSATION. The Executive's "Average Annual
Compensation" for purposes of this Agreement shall be deemed to mean the average
level of compensation paid to the Executive by the Employers or any subsidiary
thereof (or Circle Financial or any subsidiary thereof) during the most recent
five taxable years preceding the Date of Termination (or such shorter period as
the Executive was employed thereby), including Base Salary and bonuses under any
employee benefit plans of the Employers.
1
<PAGE> 3
(b) BASE SALARY. "Base Salary" shall have the meaning set forth
in Section 3(a) hereof.
(c) CAUSE. Termination of the Executive"s employment for "Cause"
shall mean termination because of personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform his duties as described in Section 2(b) hereof, willful
violation of any law, rule or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order or material breach of any
provision of this Agreement. For purposes of this paragraph, no act or failure
to act on the Executive's part shall be considered "willful" unless done, or
omitted to be done, by the Executive not in good faith and without reasonable
belief that the Executive's action or omission was in the best interest of the
Employers.
(d) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" shall mean a change in control of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), or any successor thereto, whether or not the Corporation is registered
under Exchange Act; provided that, without limitation, such a change in control
shall be deemed to have occurred if (i) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation representing 25% or more of the
combined voting power of the Corporation's then outstanding securities; or (ii)
during any period of two consecutive years, individuals who at the beginning of
such period constitute the Board of Directors of the Corporation cease for any
reason to constitute at least a majority thereof unless the election, or the
nomination for election by stockholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
(e) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(f) DATE OF TERMINATION. "Date of Termination" shall mean (i) if
the Executive's employment is terminated for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's employment
is terminated for any other reason, the date on which a Notice of Termination is
given or as specified in such Notice.
(g) DISABILITY. Termination by the Employers of the Executive's
employment based on "Disability" shall mean termination because of any physical
or mental impairment which qualifies the Executive for disability benefits under
the applicable long-term disability plan maintained by the Employers or any
subsidiary or, if no such plan applies, which would qualify the Executive for
disability benefits under the Federal Social Security System.
(h) GOOD REASON. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive following
a Change in Control of the Corporation based on:
2
<PAGE> 4
(i) Without the Executive's express written consent, a
material adverse change made by the Employers in the Executive's
functions, duties or responsibilities as Executive Vice President
of the Corporation and Executive Vice President and Chief Lending
Officer of the Bank;
(ii) Without the Executive's express written consent, a
material reduction by the Employers in the Executive's Base
Salary as the same may be increased from time to time or, except
to the extent permitted by Section 3(b) hereof, a material
reduction in the package of fringe benefits provided to the
Executive, taken as a whole;
(iii) Without the Executive's express written consent, the
Employers require the Executive to work in an office which is
more than 30 miles from the location of the Employers' current
principal executive office, except for required travel on
business of the Employers to an extent substantially consistent
with the Executive's present business travel obligations;
(iv) Any purported termination of the Executive's employment
for Cause, Disability or Retirement which is not effected
pursuant to a Notice of Termination satisfying the requirements
of paragraph (j) below; or
(v) The failure by the Employers to obtain the assumption of
and agreement to perform this Agreement by any successor as
contemplated in Section 9 hereof.
(i) IRS. IRS shall mean the Internal Revenue Service.
(j) NOTICE OF TERMINATION. Any purported termination of the
Executive's employment by the Employers for any reason, including without
limitation for Cause, Disability or Retirement, or by the Executive for any
reason, including without limitation for Good Reason, shall be communicated
by written "Notice of Termination" to the other parties hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a dated notice which (i)
indicates the specific termination provision in this Agreement relied upon,
(ii) sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision
so indicated, (iii) specifies a Date of Termination, which shall be not less
than thirty (30) nor more than ninety (90) days after such Notice of
Termination is given, except in the case of the Employers' termination of
Executive's employment for Cause; and (iv) is given in the manner specified in
Section 10 hereof.
3
<PAGE> 5
(k) RETIREMENT. "Retirement" shall mean voluntary termination by
the Executive in accordance with the Employers' retirement policies, including
early retirement, generally applicable to the Employers' salaried employees.
2. TERM OF EMPLOYMENT.
(a) The Employers hereby employ the Executive as Executive Vice
President of the Corporation and Executive Vice President and Chief Lending
Officer of the Bank and Executive hereby accepts said employment and agrees to
render such services to the Employers on the terms and conditions set forth in
this Agreement. Unless extended as provided in this Section 2, this Agreement
shall terminate three (3) years after the date first above written. Prior to the
first annual anniversary of the date first above written and each annual
anniversary thereafter, the Boards of Directors of the Employers shall consider,
review (with appropriate corporate documentation thereof, and after taking into
account all relevant factors, including the Executive's performance) and, if
appropriate, explicitly approve a one-year extension of the remaining term of
this Agreement. The term of this Agreement shall continue to extend each year if
the Boards of Directors so approve such extension unless the Executive gives
written notice to the Employers of the Executive's election not to extend the
term, with such notice to be given not less than thirty (30) days prior to any
such anniversary date. If the Boards of Directors elect not to extend the term,
they shall give written notice of such decision to the Executive not less than
thirty (30) days prior to any such anniversary date. If any party gives timely
notice that the term will not be extended as of any annual anniversary date,
then this Agreement shall terminate at the conclusion of its remaining term.
References herein to the term of this Agreement shall refer both to the initial
term and successive terms.
(b) During the term of this Agreement, the Executive shall perform
such executive services for the Employers as is consistent with his title of
Executive Vice President and Chief Lending Officer. The Executive shall be
responsible for establishing and coordinating the lending activities of the
Bank, including oversight of the Bank's loan portfolio.
3. COMPENSATION AND BENEFITS.
(a) The Employers shall compensate and pay Executive for his
services during the term of this Agreement at a minimum base salary of $124,000
per year ("Base Salary"), which may be increased from time to time in such
amounts as may be determined by the Boards of Directors of the Employers. In
addition to his Base Salary, the Executive shall be entitled to receive during
the term of this Agreement such bonus payments as may be determined by the
Boards of Directors of the Employers.
(b) During the term of the Agreement, Executive shall be entitled
to participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing, stock option, employee stock ownership, or other
plans, benefits and privileges given to employees and executives of the
Employers, to the extent commensurate with his then duties
4
<PAGE> 6
and responsibilities, as fixed by the Boards of Directors of the Employers. The
Employers shall not make any changes in such plans, benefits or privileges which
would adversely affect Executive's rights or benefits thereunder, unless such
change occurs pursuant to a program applicable to all executive officers of the
Employers and does not result in a proportionately greater adverse change in the
rights of or benefits to Executive as compared with any other executive officer
of the Employers. Nothing paid to Executive under any plan or arrangement
presently in effect or made available in the future shall be deemed to be in
lieu of the salary payable to Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, Executive shall be entitled
to paid annual vacation in accordance with the policies as established from
time to time by the Boards of Directors of the Employers, which shall in no
event be less than four weeks per annum. Executive shall not be entitled to
receive any additional compensation from the Employers for failure to take a
vacation, nor shall Executive be able to accumulate unused vacation time from
one year to the next, except to the extent authorized by the Boards of Directors
of the Employers.
4. EXPENSES. The Employers shall reimburse Executive or otherwise
provide for or pay for all reasonable expenses incurred by Executive in
furtherance of, or in connection with the business of the Employers, including,
but not by way of limitation, automobile and traveling expenses, and all
reasonable entertainment expenses (whether incurred at the Executive's
residence, while traveling or otherwise), subject to such reasonable
documentation and other limitations as may be established by the Boards of
Directors of the Employers. If such expenses are paid in the first instance by
Executive, the Employers shall reimburse the Executive therefor.
5. TERMINATION.
(a) The Employers shall have the right, at any time upon prior
Notice of Termination, to terminate the Executive's employment hereunder
for any reason, including without limitation termination for Cause, Disability
or Retirement, and Executive shall have the right, upon prior Notice of
Termination, to terminate his employment hereunder for any reason.
(b) In the event that (i) Executive's employment is terminated by
the Employers for Cause, Disability or Retirement or in the event of the
Executive's death, or (ii) Executive terminates his employment hereunder other
than for Good Reason, Executive shall have no right pursuant to this Agreement
to compensation or other benefits for any period after the applicable Date of
Termination.
(c)(i) In the event that Executive's employment is terminated by the
Employers for other than Cause, Disability, Retirement or the Executive's death
or such employment is terminated by the Executive due to a material breach of
this Agreement by the Employers, which breach has not been cured within fifteen
(15) days after a written notice of
5
<PAGE> 7
non-compliance has been given by the Executive to the Employers, and as of
Executive's Date of Termination no Change in Control of the Corporation has
occurred, no written agreement which contemplates a Change in Control of the
Corporation and which still is in effect has been entered into by either or both
of the Employers and no discussions and/or negotiations are being conducted
which relate to the same, then the Employers shall, subject to the provisions of
Section 6 hereof, if applicable:
(A) Pay to the Executive, in equal monthly installments beginning
with the first business day of the month following the Date of Termination,
a cash severance amount equal to the Base Salary which the Executive would have
earned over the remaining term of this Agreement as of his Date of Termination,
and
(B) Maintain and provide for a period ending at the earlier of
(i) the expiration of the remaining term of employment pursuant hereto
prior to the Notice of Termination or (ii) the date of the Executive's full-time
employment by another employer (provided that the Executive is entitled under
the terms of such employment to benefits substantially similar to those
described in this subparagraph (B)), at no cost to the Executive, the
Executive's continued participation in all group insurance, life insurance,
health and accident, disability and other employee benefit plans, programs and
arrangements in which the Executive was entitled to participate immediately
prior to the Date of Termination (other than stock option and restricted stock
plans of the Employers), provided that in the event that the Executive's
participation in any plan, program or arrangement as provided in this
subparagraph (B) is barred or during such period any such plan, program or
arrangement is discontinued or the benefits thereunder are materially reduced,
the Employers shall arrange to provide the Executive with benefits substantially
similar to those which the Executive was entitled to receive under such plans,
programs and arrangements immediately prior to the Date of Termination.
(ii) In the event that Executive's employment is terminated by the
Employers for other than Cause, Disability, Retirement or the Executive's death,
or such employment is terminated by the Executive due to a material breach of
this Agreement by the Employers which has not been cured within fifteen (15)
days after a written notice of non-compliance has been given by the Executive to
the Employers or for Good Reason, and on or prior to the Executive's Date of
Termination there has been a Change in Control of the Corporation, or a written
agreement which contemplates a Change in Control of the Corporation is in
effect, then the Employers shall subject to the provisions of Section 6 hereof,
if applicable:
(A) Pay to the Executive, in thirty-six (36) equal monthly
installments beginning with the first business day of the month following
the Date of Termination, a cash severance amount equal to three (3) times the
Executive's Average Annual Compensation over the most recent five taxable years,
and
6
<PAGE> 8
(B) Maintain and provide for a period ending at the earlier of
(i) the expiration of the remaining term of employment pursuant hereto
prior to the Notice of Termination or (ii) the date of the Executive's full-time
employment by another employer (provided that the Executive is entitled under
the terms of such employment to benefits substantially similar to those
described in this subparagraph (B)), at no cost to the Executive, the
Executive's continued participation in all group insurance, life insurance,
health and accident, disability and other employee benefit plans, programs and
arrangements in which the Executive was entitled to participate immediately
prior to the Date of Termination (other than stock option and restricted stock
plans of the Employers), provided that in the event that the Executive's
participation in any plan, program or arrangement as provided in this
subparagraph (B) is barred or during such period any such plan, program or
arrangement is discontinued or the benefits thereunder are materially reduced,
the Employers shall arrange to provide the Executive with benefits substantially
similar to those which the Executive was entitled to receive under such plans,
programs and arrangements immediately prior to the Date of Termination.
6. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the
payments and benefits pursuant to Section 5 hereof, either alone or
together with other payments and benefits which Executive has the right to
receive from the Employers, would constitute a "parachute payment" under Section
280G of the Code, the payments and benefits pursuant to Section 5 hereof shall
be reduced, in the manner determined by the Executive, by the amount, if any,
which is the minimum necessary to result in no portion of the payments and
benefits under Section 5 being non-deductible to either of the Employers
pursuant to Section 280G of the Code and subject to the excise tax imposed under
Section 4999 of the Code. The determination of any reduction in the payments and
benefits to be made pursuant to Section 5 shall be based upon the opinion of
independent tax counsel selected by the Employers' independent public
accountants and paid by the Employers. Such counsel shall be reasonably
acceptable to the Employers and the Executive; shall promptly prepare the
foregoing opinion, but in no event later than thirty (30) days from the Date of
Termination; and may use such actuaries as such counsel deems necessary or
advisable for the purpose. In the event that the Employers and/or the Executive
do not agree with the opinion of such counsel, (i) the Employers shall pay to
the Executive the maximum amount of payments and benefits pursuant to Section 5,
as selected by the Executive, which such opinion indicates that there is a high
probability do not result in any of such payments and benefits being
non-deductible to the Employers and subject to the imposition of the excise tax
imposed under Section 4999 of the Code and (ii) the Employers may request, and
Executive shall have the right to demand that the Employers request, a ruling
from the IRS as to whether the disputed payments and benefits pursuant to
Section 5 hereof have such consequences. Any such request for a ruling from the
IRS shall be promptly prepared and filed by the Employers, but in no event later
than thirty (30) days from the date of the opinion of counsel referred to above,
and shall be subject to Executive's approval prior to filing, which shall not be
unreasonably withheld. The Employers and Executive agree to be bound by any
ruling received from the IRS and to make appropriate payments to each other to
reflect any such rulings, together with interest at the applicable federal rate
provided for
7
<PAGE> 9
in Section 7872(f)(2) of the Code. Nothing contained herein shall result in a
reduction of any payments or benefits to which the Executive may be entitled
upon termination of employment under any circumstances other than as specified
in this Section 6, or a reduction in the payments and benefits specified in
Section 5 below zero.
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive shall not be required to mitigate the amount of
any benefits hereunder by seeking other employment or otherwise, nor shall the
amount of any such benefits be reduced by any compensation earned by the
Executive as a result of employment by another employer after the Date of
Termination or otherwise.
(b) The specific arrangements referred to herein are not intended
to exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise.
8. WITHHOLDING. All payments required to be made by the Employers
hereunder to the Executive shall be subject to the withholding of such
amounts, if any, relating to tax and other payroll deductions as the Employers
may reasonably determine should be withheld pursuant to any applicable law or
regulation.
9. ASSIGNABILITY. The Employers may assign this Agreement and its
rights and obligations hereunder in whole, but not in part, to any corporation,
bank or other entity with or into which the Employers may hereafter merge or
consolidate or to which the Employers may transfer all or substantially all of
its assets, if in any such case said corporation, bank or other entity shall by
operation of law or expressly in writing assume all obligations of the Employers
hereunder as fully as if it had been originally made a party hereto, but may not
otherwise assign this Agreement or its rights and obligations hereunder. The
Executive may not assign or transfer this Agreement or any rights or obligations
hereunder.
10. NOTICE. For the purposes of this Agreement, notices and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Employers: Board of Directors
Fidelity Financial of Ohio, Inc.
4555 Montgomery Road
Cincinnati, Ohio 45212
To the Executive: Joseph D. Hughes
43 Huntersknoll Lane
Cincinnati, Ohio 45230
8
<PAGE> 10
11. AMENDMENT; WAIVER. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing signed by the Executive and such officer or
officers as may be specifically designated by the Boards of Directors of the
Employers to sign on its behalf. No waiver by any party hereto at any time of
any breach by any other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time.
12. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of Ohio.
13. NATURE OF OBLIGATIONS. Nothing contained herein shall create
or require the Employers to create a trust of any kind to fund any benefits
which may be payable hereunder, and to the extent that the Executive
acquires a right to receive benefits from the Employers hereunder, such right
shall be no greater than the right of any unsecured general creditor of the
Employers.
14. INTERPRETATION AND HEADINGS. This agreement shall be
interpreted in order to achieve the purposes for which it was entered into.
The section headings contained in this Agreement are for reference purposes only
and shall not affect in any way the meaning or interpretation of this Agreement.
15. VALIDITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
16. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
17. REGULATORY ACTIONS. The following provisions shall be
applicable to the parties to the extent that they are required to be included
in employment agreements between a savings association and its employees
pursuant to Section 563.39(b) of the Regulations Applicable to all Savings
Associations, 12 C.F.R. ss.563.39(b), or any successor thereto, and shall be
controlling in the event of a conflict with any other provision of this
Agreement, including without limitation Section 5 hereof.
(a) If Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Employers' affairs
pursuant to notice served under Section 8(e)(3) or Section 8(g)(1) of the
Federal Deposit Insurance Act ("FDIA")(12 U.S.C. ss.ss.1818(e)(3) and
1818(g)(1)), the Employers' obligations under this Agreement shall be suspended
as of the date of service of such notice, unless stayed by appropriate
proceedings.
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<PAGE> 11
If the charges in the notice are dismissed, the Employers may, in their
discretion: (i) pay Executive all or part of the compensation withheld while its
obligations under this Agreement were suspended, and (ii) reinstate (in whole or
in part) any of its obligations which were suspended.
(b) If Executive is removed from office and/or permanently
prohibited from participating in the conduct of the Employers' affairs by
an order issued under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C.
ss.ss.1818(e)(4) and (g)(1)), all obligations of the Employers under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the Executive and the Employers as of the date of termination shall
not be affected.
(c) If the Bank is in default, as defined in Section 3(x)(1) of
the FDIA (12 U.S.C. ss.1813(x)(1)), all obligations under this Agreement shall
terminate as of the date of default, but vested rights of the Executive and the
Employers as of the date of termination shall not be affected.
(d) All obligations under this Agreement shall be terminated
pursuant to 12 C.F.R. ss.563.39(b)(5) (except to the extent that it is
determined that continuation of the Agreement for the continued operation of the
Employers is necessary): (i) by the Director of the Office of Thrift Supervision
("OTS"), or his/her designee, at the time the Federal Deposit Insurance
Corporation ("FDIC") or Resolution Trust Corporation enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of the FDIA (12 U.S.C. ss.1823(c)); or (ii) by the Director of the
OTS, or his/her designee, at the time the Director or his/her designee approves
a supervisory merger to resolve problems related to operation of the Bank or
when the Bank is determined by the Director of the OTS to be in an unsafe or
unsound condition, but vested rights of the Executive and the Employers as of
the date of termination shall not be affected.
18. REGULATORY PROHIBITION. Notwithstanding any other provision of
this Agreement to the contrary, any payments made to the Executive pursuant to
this Agreement, or otherwise, are subject to and conditioned upon their
compliance with Section 18(k) of the FDIA (12 U.S.C. ss.1828(k)) and any
regulations promulgated thereunder.
19. ENTIRE AGREEMENT. This Agreement incorporates the entire
understanding among the parties hereto relating to the subject matter hereof,
recites the sole consideration of the premises and mutual agreements exchanged
and supersedes any prior agreements between the Employers, including
predecessors thereof or entities acquired thereby, and Executive with respect to
the subject matter hereof, including specifically and without limitation, that
certain employment agreement dated as of August 6, 1991 (the "Association
Agreement") between the Association and Executive. In addition, the Executive by
execution hereof specifically waives any and all claims for benefits, payments,
compensation or amounts otherwise payable thereto by the provisions of the
Association Agreement as a result of the consummation of the transactions
contemplated by the Plan and agrees that this Agreement shall serve as the
complete and final settlement of all obligations of the Association and the
Employers, as the successors thereto, under the Association Agreement.
10
<PAGE> 12
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: FIDELITY FINANCIAL OF OHIO, INC.
/s/ Paul D. Staubach By: /s/ John R. Reusing
- ----------------------------------- ------------------------------------
Paul D. Staubach John R. Reusing
Senior Vice President, Chief President and Chief Executive Officer
Financial Officer and Secretary
Attest: FIDELITY FEDERAL SAVINGS BANK
/s/ Paul D. Staubach By: /s/ John R. Reusing
- ----------------------------------- ------------------------------------
Paul D. Staubach John R. Reusing
Senior Vice President, Chief President and Chief Executive Officer
Financial Officer and Secretary
EXECUTIVE
By:/s/ Joseph D. Hughes
--------------------------------------
Joseph D. Hughes
11
<PAGE> 1
[FIDELITY FINANCIAL OF OHIO, INC. LOGO]
FIDELITY
FINANCIAL
OF OHIO, INC.
ANNUAL REPORT 1996
<PAGE> 2
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
LETTER TO STOCKHOLDERS ....................................... 1
BUSINESS OF THE COMPANY ...................................... 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 ................................. 15
CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION ................................................ 16
CONSOLIDATED STATEMENTS OF
EARNINGS ................................................. 17
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY ..................................... 18
CONSOLIDATED STATEMENTS OF CASH
FLOWS .................................................... 19
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS ............................................... 21
DIRECTORS AND EXECUTIVE OFFICERS ............................. 36
LOCATIONS .................................................... 36
CORPORATE INFORMATION ........................................ 37
ANNUAL MEETING ............................................... 37
</TABLE>
<PAGE> 3
- --------------------------------------------------------------------------------
TO OUR STOCKHOLDERS
- --------------------------------------------------------------------------------
Dear Stockholders,
The year ended December 31, 1996 represented a period of unprecedented
growth for Fidelity Financial of Ohio, Inc. Pursuant to a long range strategic
plan formulated in late 1995, two significant events became the cornerstone in
Fidelity's implementation:
- In March 1996, Fidelity completed a "second step" stock offering with
the conversion from a mutual holding company form of ownership to a
full stock company. This process generated approximately $20.4 million
in additional capital thus allowing for future expansion and
flexibility in the financial market.
- In October 1996, Fidelity finalized the acquisition of People's
Savings Association of Sharonville and its holding company, Circle
Financial Corporation, to create one of the premier thrift franchises
in Southwest Ohio.
As a result of these events, during 1996, total assets grew from $231.1
million to $499.9 million, an increase of 116.3%. The deposit base also
expanded, from $180.7 million to $408.1 million, with Fidelity now offering full
banking services at ten locations as compared to three previously. This gives
Fidelity a dramatic increase in Hamilton and Butler counties.
Despite the tremendous growth of Fidelity, we still possess a healthy
tangible capital ratio of 11.9%. This level will permit further expansion of the
company well into the future when opportunities may present themselves.
From an industry standpoint, 1996 was a historic year. The SAIF insurance
fund was recapitalized and thrifts were put on a more level playing field with
bank competitors. In addition, a major tax issue dating back to 1953, relating
to the bad debt deduction, was resolved. Both items will benefit stockholders in
the long run.
I would like to commend the efforts of all the directors, officers and
employees who worked extremely long hours to effect the stock offering and the
merger of two excellent companies. After all, it is the people who make this
institution function and maintain its profitability. It is in that context that
I would like to acknowledge three individuals who passed away last year. Lloyd
Kuster, Fidelity's senior loan officer who recently retired after almost a
quarter century of originating millions of dollars in local loans; Leo Krapp, a
retired director of ten years; and Betty Duffy of our Groesbeck office who
always had a wonderful smile for our customers. They have all left their mark on
Fidelity.
As you read the remainder of the annual report, know that the entire staff
remains committed to the enhancement of stockholder value into the future. We
firmly believe that Fidelity can continue as "Your Community Bank" serving the
people of Southwest Ohio well into the next millennium.
Sincerely,
/s/ John R. Reusing
John R. Reusing
President & Chief Executive Officer
Fidelity Financial of Ohio Inc.
1
<PAGE> 4
BUSINESS OF THE COMPANY
Fidelity Financial of Ohio, Inc. (the "Corporation") is an Ohio corporation
which is the holding company for Fidelity Federal Savings Bank (the "Savings
Bank"). The Corporation was organized by the Savings Bank for the purpose of
acquiring all of the capital stock of the Savings Bank in connection with the
conversion of Fidelity Federal Mutual Holding Company, the former federally
chartered, mutual holding company parent of the Savings Bank, and the
reorganization of the Savings Bank to the stock holding company form, which was
completed on March 4, 1996 (the "Conversion and Reorganization"). The only
significant assets of the Corporation are the capital stock of the Savings Bank
and the net proceeds of the Conversion and Reorganization retained by the
Corporation.
On October 11, 1996, following receipt of all regulatory and stockholder
approvals, the Corporation completed the acquisition of Circle Financial
Corporation ("Circle") pursuant to the merger of Circle with and into a
subsidiary of the Corporation, and the subsequent merger of People's Savings
Association ("Peoples"), an Ohio-chartered savings association and a
wholly owned subsidiary of Circle, with and into the Savings Bank (collectively,
the "Merger"). The Merger was accounted for under the purchase method of
accounting. Consequently, the financial information and data presented herein
excludes Circle and Peoples for all periods prior to 1996.
The Savings Bank is a federally chartered savings bank which conducts
business through ten full-service offices located in the Cincinnati, Ohio
metropolitan area. The Savings Bank is primarily engaged in attracting deposits
from the general public through its offices and using those and other available
sources of funds to originate loans secured by single-family residences located
primarily in southwestern Ohio. Such loans amounted to $321.7 million or 80.0%
of the Savings Bank's total loan portfolio at December 31, 1996. To a lesser
extent, the Savings Bank originates loans secured by existing multi-family
residential and non-residential real estate, which amounted to $58.6 million, or
14.6% of the total loan portfolio at December 31, 1996, as well as construction
loans and consumer loans, which respectively amounted to $13.8 million, or 3.4%
of the total loan portfolio and $7.9 million or 2.0% of the total loan portfolio
at such date. The Savings Bank also invests in U.S. Government and federal
agency obligations and mortgage-backed securities which are insured by federal
agencies.
As a savings and loan holding company, the Corporation is subject to
regulation, supervision and examination by the Office of Thrift Supervision of
the United States Department of the Treasury ("OTS"). The Savings Bank is
subject to regulation and examination by the OTS as its chartering authority and
primary regulator, and by the Federal Deposit Insurance Corporation ("FDIC"),
which, through the Savings Association Insurance Fund ("SAIF") administered by
it, insures the Savings Bank's deposits up to applicable limits. The Savings
Bank is a member of the Federal Home Loan Bank ("FHLB") of Cincinnati, which is
one of the 12 banks which comprise the FHLB System. The Savings Bank is further
subject to regulations of the Board of Governors of the Federal Reserve System
("Federal Reserve Board") governing reserves to be maintained against deposits
and certain other matters.
2
<PAGE> 5
MARKET PRICE OF STOCK AND RELATED INFORMATION
Shares of Fidelity Financial of Ohio, Inc.'s common stock are traded under
the symbol "FFOH" on the Nasdaq National Market System. At March 12, 1997, the
Corporation had 5,593,969 shares of common stock outstanding and had
approximately 1,079 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 sale prices of a
share of the Corporation's common stock as reported by Nasdaq (the Corporation's
common stock commenced trading on the Nasdaq National Market System on March 4,
1996).
<TABLE>
<CAPTION>
For the year ended December 31, 1996 High Low
- -----------------------------------------------------------------------------------
1996 SALES PRICES
<S> <C> <C>
Quarter ending March 31, 1996 $ 11.00 $ 9.75
Quarter ending June 30, 1996 10.63 9.63
Quarter ending September 30, 1996 10.25 9.63
Quarter ending December 31, 1996 11.88 9.75
</TABLE>
Prior to March 4, 1996, there was no active and liquid public trading
market for the Savings Bank's common stock. The Savings Bank has been informed
by brokers who have executed trades in the Savings Bank's common stock that
there were a number of trades during the years ended December 31, 1995 and 1994.
The transactions for which the Savings Bank has information took place at prices
that range from $6.67 to $10.89 for the year ended December 31, 1995, and from
$5.26 to $6.44 for the year ended December 31, 1994 (as adjusted to reflect the
2.25 to 1 exchange ratio which was utilized to convert the Savings Bank's common
stock into common stock of the Corporation in connection with the Conversion and
Reorganization).
Dividends with respect to the Corporation's common stock (including the
Savings Bank's common stock prior to the Conversion and Reorganization) for the
years ended December 31, 1996, 1995 and 1994 are set forth below.
<TABLE>
<CAPTION>
Cash
For the year ended December 31, 1996 Dividends
- ---------------------------------------------------------------------------
<S> <C>
Quarter ending March 31 $ .094
Quarter ending June 30 .050
Quarter ending September 30 .050
Quarter ending December 31 .050
Cash
For the year ended December 31, 1995 Dividends
- ---------------------------------------------------------------------------
Quarter ending March 31 .075
Quarter ending June 30 .075
Quarter ending September 30 .075
Quarter ending December 31 .075
Cash
For the year ended December 31, 1994 Dividends
- ---------------------------------------------------------------------------
Quarter ending March 31 .058
Quarter ending June 30 .058
Quarter ending September 30 .058
Quarter ending December 31 .057
</TABLE>
3
<PAGE> 6
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.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED FINANCIAL CONDITION DATA:
Total assets $499,918 $231,137 $216,168 $202,991 $194,631
Federal funds sold and interest-bearing deposits 20,489 2,784 1,766 6,002 4,271
Investment securities available for sale--at market (1) 16,120 6,044 4,267 -- --
Investment securities--at cost -- -- -- 4,023 3,030
Mortgage-backed securities--at cost 10,744 -- 20,792 23,873 26,573
Mortgage-backed securities available for sale--at market (1) 30,760 29,378 6,280
Loans receivable--net (2) 396,541 185,132 175,222 162,392 153,409
Goodwill and other intangible assets 8,322 -- -- -- --
Deposits 408,159 180,697 173,198 157,642 154,659
FHLB advances 20,186 17,653 12,089 15,954 13,605
Stockholders' equity 66,712 30,113 28,540 26,905 24,270
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
(Dollars in thousands, except per share data)
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income $ 22,738 $ 17,001 $ 15,748 $ 16,310 $ 17,142
Total interest expense 12,656 10,167 8,331 8,106 9,659
--------------------------------------------------------
Net interest income 10,082 6,834 7,417 8,204 7,483
Provision for losses on loans 129 71 44 52 72
--------------------------------------------------------
Net interest income after provision for losses on loans 9,953 6,763 7,373 8,152 7,411
Other income 165 355 347 250 324
General, administrative and other expense (7,638) (4,385) (4,172) (4,000) (3,692)
--------------------------------------------------------
Earnings before income taxes and cumulative effect of
changes in accounting methods 2,480 2,733 3,548 4,402 4,043
Federal income taxes (872) (919) (1,176) (1,464) (1,371)
--------------------------------------------------------
Earnings before cumulative effect of changes in
accounting methods 1,608 1,814 2,372 2,938 2,672
--------------------------------------------------------
Cumulative effect of changes in accounting methods -- -- -- -- (229)
--------------------------------------------------------
Net earnings $ 1,608 $ 1,814 $ 2,372 $ 2,938 $ 2,443
========================================================
Earnings per share (3) $ .38 $ .45 $ .58 $ .73 $ .44
========================================================
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
-----------------------------------------------
1996 1995 1994 1993 1992
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING RATIOS (4):
Return on average assets (5) .53% .82% 1.14% 1.47% 1.29%
Return on average equity (5) 3.16% 6.17% 8.51% 11.41% 11.22%
Tangible equity to tangible assets at end of period 11.88% 13.03% 13.20% 13.25% 12.47%
Interest rate spread (6) 2.59% 2.44% 3.04% 3.63% 3.42%
Net interest margin (6) 3.40% 3.13% 3.63% 4.20% 4.03%
Non-performing loans to total loans at end of period (7) .28% .54% .47% .88% .27%
Non-performing assets to total assets at end of period (7) .23% .44% .43% .77% .46%
Allowance for loan losses to non-performing loans at end of period 137.88% 81.23% 95.71% 51.50% 171.03%
Average interest-earning assets to average interest-bearing liabilities 118.89% 114.74% 114.49% 113.91% 111.87%
Net interest income after provision for loan losses to total
general, administrative and other expenses (5) 130.31% 154.23% 176.73% 203.80% 200.73%
General, administrative and other expenses to
average total assets (5) 2.51% 1.97% 2.00% 2.01% 1.95%
Full service offices 10 4 4 3 3
<FN>
(1) The Corporation adopted SFAS No. 115 as of January 1, 1994. In connection
therewith, the Corporation classified certain of its debt securities as
available for sale. For additional information, see Notes A-2 and B of
Notes to Consolidated Financial Statements.
(2) At December 31, 1995, included $646,000 of loans classified as held for
sale. At December 31, 1996, 1994, 1993 and 1992, the Corporation did not
have any loans classified as held for sale.
(3) The Savings Bank converted to the stock form of ownership on May 11, 1992.
Earnings per share for the year ended December 31, 1992 has been computed
on a pro forma basis based on the number of days that the Savings Bank was
a stock institution during the year.
(4) With the exception of end of period ratios, all ratios are based on average
monthly balances during the periods.
(5) Before consideration of non-recurring charges incurred in 1996, including
the SAIF recapitalization assessment and merger related expenses, the
ratios set forth below would have been as follows:
Return on average assets .92%
Return on average equity 5.52%
Net interest income after provision for losses on loans to
total general, administrative and other expenses 170.95%
General, administrative and other expenses to average total assets 1.91%
(6) 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-earnings assets.
(7) 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.
</TABLE>
5
<PAGE> 8
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 also is affected by its
provision for losses on loans, as well as the level of its other income,
including gains and losses on sales of loans, investment securities and real
estate acquired through foreclosure, rental income and other miscellaneous
operating income, and its general, administrative and other expenses, such as
employee compensation and benefits, occupancy and equipment expense, federal
deposit insurance premiums, franchise taxes and miscellaneous other operating
expenses, and federal income tax expense.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Corporation's operations and actual
results could differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and the Corporation's general market area. The
forward-looking statements contained herein include, but are not limited to,
those with respect to the following matters:
1. Management's determination of the amount of allowance for loan
losses;
2. The effect of changes in interest rates;
3. Changes in deposit insurance premiums;
4. Management's opinion as to the effects of recent accounting
pronouncements on the Corporation's consolidated financial
statements.
ASSET AND LIABILITY MANAGEMENT
In general, financial institutions are vulnerable to an increase in
interest rates to the extent that interest-bearing liabilities mature or reprice
more rapidly than interest-earning assets. The lending activities of financial
institutions, including the Savings Bank, have historically emphasized the
origination of long-term, fixed-rate loans secured by single-family residences,
and the primary source of funds of such institutions has been deposits, which
largely mature or are subject to repricing within a short period of time. This
factor, in combination with substantial investments in long-term, fixed-rate
loans, has historically caused the income earned by the Savings Bank on its loan
portfolio to adjust more slowly to changes in interest rates than its cost of
funds. While having liabilities that reprice more frequently than assets is
generally beneficial to net interest income in times of declining interest
rates, such an asset/liability mismatch is generally detrimental during periods
of rising interest rates.
The Savings Bank has established an Asset and Liability Management
Committee, which generally meets at least weekly in order to structure and price
the Savings Bank's assets and liabilities so as to maintain an acceptable
interest rate spread while reducing the effects of changes in interest rates.
The Committee reports monthly to the Board of Directors on interest rate risks
and trends, as well as with respect to the Savings Bank's liquidity and capital
ratios as compared to the respective regulatory requirements.
The Savings Bank's Asset and Liability Management Committee has in recent
periods implemented asset and liability management policies designed to better
match the maturities and repricing terms of the Savings Bank's interest-earning
assets and interest-bearing liabilities in order to minimize the adverse effects
on the Savings Bank's results of operations of material and prolonged increases
in interest rates. The Savings Bank has undertaken a variety of strategies to
reduce its exposure to interest rate fluctuations, including (i) subject to
market conditions, emphasizing the origination and purchase of adjustable-rate
mortgage loans and balloon loans (which amortize over a fifteen to thirty-year
period but are payable at the end of five 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; and (v) utilization of longer term
FHLB advances.
6
<PAGE> 9
As a result of implementing these asset and liability initiatives, at
December 31, 1996, $220.1 million, or 54.6% of the Savings Bank's total loan
portfolio consisted of adjustable-rate or balloon loans. As of such date, $157.6
million, or 48.9% of the Savings Bank's portfolio of single-family residential
mortgage loans consisted of adjustable-rate or balloon loans. In addition, at
December 31, 1996, $26.0 million, or 62.7% of the Savings Bank's mortgage-backed
securities portfolio consisted of adjustable-rate securities or had scheduled
maturities of five years or less.
Management presently monitors and evaluates the potential impact of
interest rate changes upon the market value of the Savings Bank's portfolio
equity and the level of net interest income on a quarterly basis. The OTS
adopted a final rule in August 1993 incorporating an interest rate risk
component into the risk-based capital rules. Under the rule, an institution with
a greater than "normal" level of interest rate risk will be subject to a
deduction of its interest rate risk component from total capital for purposes of
calculating the risk-based capital requirement. An institution with a greater
than "normal" interest rate risk is defined as an institution that would suffer
a loss of net portfolio value ("NPV") exceeding 2.0% of the estimated market
value of its assets in the event of a 200 basis point increase or decrease in
interest rates. NPV is the difference between incoming and outgoing discounted
cash flows from assets, liabilities, and off-balance sheet contracts. A
resulting change in NPV of more than 2% of the estimated market value of an
institution's assets will require the institution to deduct from its capital 50%
of that excess change. The rule provides that the OTS will calculate the
interest rate risk component quarterly for each institution. The OTS has
indicated that no institution will be required to deduct an interest rate risk
component from capital for purposes of computing the risk-based capital
requirement until further notice.
At December 31, 1996, 2% of the present value of the Savings Bank's assets
was approximately $9.8 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, 1996,
the Savings Bank would have been required to deduct $4.3 million (50% of the
$8.5 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, 1996, would still have
exceeded the regulatory requirement by approximately $23.9 million.
The following table presents the Savings Bank's NPV as of December 31, 1996,
as calculated by the OTS, based on information provided to the OTS by the
Savings Bank.
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE
ESTIMATED
CHANGE IN NPV AS A
INTEREST RATES ESTIMATED PERCENTAGE AMOUNT
(BASIS POINTS) NPV OF ASSETS OF CHANGE PERCENT
<S> <C> <C> <C> <C>
+400 $16,318 3.71% $(39,169) (71)%
+300 26,668 5.89 (28,819) (52)
+200 37,171 7.97 (18,316) (33)
+100 47,236 9.85 (8,251) (15)
-- 55,487 11.31 -- --
-100 61,366 12.28 5,879 11
-200 63,730 12.62 8,243 15
-300 64,790 12.72 9,303 17
-400 67,360 13.07 11,873 21
</TABLE>
CHANGES IN FINANCIAL CONDITION FROM DECEMBER 31, 1995 TO DECEMBER 31, 1996
The Corporation's consolidated total assets amounted to $499.9 million at
December 31, 1996, an increase of $268.8 million, or 116.3%, over the $231.1
million total at December 31, 1995. The increase resulted primarily from
approximately $247.0 million of net assets acquired through the Corporation's
acquisition of Circle Financial Corporation (the "Merger"), which was completed
on October 11, 1996. In addition, the Merger contributed $207.8 million in
deposits, $8.5 million in net advances from the Federal Home Loan Bank ("FHLB")
and $14.9 million in stockholders' equity. Additionally, the growth in assets
was funded through the Corporation's secondary common stock offering, which was
completed in March 1996 and resulted in net proceeds totaling $20.4 million,
coupled with growth in deposits of $19.7 million and undistributed net earnings
of $677,000, which were partially offset by repayments of $7.0 million in FHLB
advances.
Cash and cash equivalents, comprised of cash and due from banks, federal
funds sold and interest-bearing deposits in other financial institutions,
amounted to $22.6 million at December 31, 1996, an increase of $18.1 million, or
404.0%, over the total in 1995. Regulatory liquidity, including certain
investment and qualifying mortgage-backed securities, totaled $29.5 million, or
7.2%, at December 31, 1996.
7
<PAGE> 10
Investment securities totaled $16.1 million at December 31, 1996, an
increase of $10.1 million, or 166.7%, over 1995 levels. The increase was due
primarily to $7.6 million of investment securities acquired as a result of the
Merger, coupled with purchases totaling $13.5 million, which were partially
offset by sales and maturities totaling $7.0 million and $4.1 million,
respectively.
Mortgage-backed securities (including securities classified as available
for sale) totaled $41.5 million at December 31, 1996, an increase of $12.1
million, or 41.3%, over the total in 1995. The increase in mortgage-backed
securities was due primarily to $44.4 million of such securities acquired as a
result of the Merger, coupled with purchases totaling $3.2 million, which were
partially offset by sales of $28.9 million and principal repayments of $6.5
million. Sales of mortgage-backed securities during the year reflected
management's desire to restructure the acquired portfolio in order to achieve an
interest rate risk position in accordance with the operating policies of the
Savings Bank, as well as to repay short-term FHLB advances which were acquired
as a result of the Merger.
Loans receivable increased by $211.4 million, or 114.2%, to a total of
$396.5 million at December 31, 1996, as compared to $185.1 million at December
31, 1995. The increase resulted primarily from loans acquired as a result of the
Merger totaling $189.4 million, coupled with loan disbursements of $59.5
million, which were partially offset by principal repayments totaling $37.1
million and sales of $547,000. Loans acquired as a result of the Merger
consisted primarily of one-to four-family and multi-family residential loans,
which totaled $168.4 million, or 88.9%, of total loans acquired in the Merger.
Loan originations during 1996 increased by $19.3 million, or 48%, over 1995
totals. The Savings Bank's originations during 1996 were primarily comprised of
one- to four-family and multi-family loans, which totaled $48.8 million, or
82.1%, of total loan originations.
The Savings Bank's allowance for loan losses totaled $1.6 million at
December 31, 1996, an increase of $740,000, or 90.5%, over the total at December
31, 1995. The increase consisted of $640,000 acquired as a result of the Merger
and a provision for losses on loans totaling $129,000 recorded in 1996. The
allowance represented .39% and .44% of total loans at December 31, 1996 and
1995, respectively, and 137.9% and 81.2% of nonperforming loans, which totaled
$1.1 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, 1996, 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 $408.2 million at December 31, 1996, an increase of $227.5
million, or 125.9%, over 1995 levels. The increase was attributable to $207.8
million of deposits acquired in the Merger, coupled with overall growth in the
portfolio of $19.7 million. Deposits subject to daily repricing totaled $92.4
million, or 22.6% of total deposits at December 31, 1996, as compared to 21.5%
of total deposits at December 31, 1995. Certificates of deposit totaled $315.8
million, or 77.4% of total deposits at December 31, 1996, as compared to 78.5%
in 1995.
Advances from the Federal Home Loan Bank totaled $20.2 million at December
31, 1996, an increase of $2.5 million, or 14.3%, over 1995 levels. The increase
resulted primarily from advances acquired as a result of the Merger totaling
$27.4 million, coupled with $15.0 million in borrowings during 1996, which were
partially offset by repayments of $39.9 million. Advances acquired as a result
of the Merger totaling $2.5 million consisted of long-term, fixed-rate
borrowings which were retained in the Savings Bank's portfolio. These advances
were retained by management after consideration of the Corporation's overall
interest-rate risk profile.
Stockholders' equity totaled $66.7 million at December 31, 1996, an
increase of $36.6 million, or 121.5%, over the total at December 31, 1995. The
increase was due primarily to the net proceeds from the Corporation's common
stock offering of $20.4 million, stock issued in connection with the acquisition
of Circle totaling $14.9 million, and undistributed net earnings of $677,000.
8
<PAGE> 11
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 periods.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1996
------------------------------------------
Average Yield/
balance Interest rate
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (2) $234,133 $18,872 8.06%
Mortgage-backed securities (3) 32,263 2,103 6.52
Investment securities (3) 13,087 833 6.37
Other interest-earning assets 16,896 930 5.50
------------------------------------------
Total interest-earning assets 296,379 22,738 7.67
Non-interest-earning assets 8,377
--------
Total assets $304,756
========
Interest-bearing liabilities:
Deposits:
NOW accounts $ 14,100 280 1.99
Passbook and club accounts 23,673 516 2.18
Money market deposit accounts 13,198 415 3.14
Certificates of deposit accounts 180,521 10,343 5.73
Borrowings (4) 17,794 1,102 6.19
------------------------------------------
Total interest-bearing
liabilities 249,286 12,656 5.08
Non-interest-bearing liabilities 4,612
------------------------------------------
Total liabilities 253,898
Stockholders' equity 50,858
--------
Total liabilities and
stockholders' equity $304,756
========
Net interest income/
Interest rate spread $10,082 2 .59%
==========================================
Net interest margin (5) 3.40%
==========================================
Average interest-earning
assets to average interest-
bearing liabilities 118.89%
==========================================
Year ended December 31,
----------------------------------------------------------------------------------------
1995 1994
----------------------------------------------------------------------------------------
Average Yield/ Average Yield/
balance Interest rate balance Interest rate
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (2) $180,935 $14,697 8.12% $170,340 $13,927 8.18%
Mortgage-backed securities (3) 27,178 1,695 6.24 25,479 1,359 5.33
Investment securities (3) 5,020 307 6.12 4,068 258 6.34
Other interest-earning assets 5,071 302 5.96 4,288 204 4.76
---------------------------------------------------------------------------------------
Total interest-earning assets 218,204 17,001 7.79 204,175 15,748 7.71
Non-interest-earning assets 4,284 4,255
-------- --------
Total assets $222,488 $208,430
======== ========
Interest-bearing liabilities:
Deposits:
NOW accounts $ 9,213 267 2.90 $ 7,647 190 2.48
Passbook and club accounts 16,297 432 2.65 18,483 516 2.79
Money market deposit accounts 12,953 417 3.22 15,916 495 3.11
Certificates of deposit accounts 137,564 8,151 5.93 122,857 6,277 5.11
Borrowings (4) 14,146 900 6.36 13,436 853 6.35
---------------------------------------------------------------------------------------
Total interest-bearing
liabilities 190,173 10,167 5.35 178,339 8,331 4.67
Non-interest-bearing liabilities 2,912 2,209
---------------------------------------------------------------------------------------
Total liabilities 193,085 180,548
Stockholders' equity 29,403 27,882
------- -------
Total liabilities and
stockholders' equity $222,488 $208,430
======== ========
Net interest income/
Interest rate spread $ 6,834 2.44% $ 7,417 3.04%
=======================================================================================
Net interest margin (5) 3.13% 3.63%
=======================================================================================
Average interest-earning
assets to average interest-
bearing liabilities 114.74% 114.49%
=======================================================================================
</TABLE>
(1) At December 31, 1996, the yields earned and rates paid were as follows:
loans receivable, 7.79%; mortgage-backed securities, 7.32%; investment
securities, 6.49%; other interest-earning assets, 5.39%; total
interest-earning assets, 7.58%; deposits, 4.96%; borrowings, 6.22%; total
interest-bearing liabilities, 5.02%; interest rate spread, 2.56%.
(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.
(5) Net interest margin is net interest income divided by average
interest-earning assets.
9
<PAGE> 12
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.
<TABLE>
<CAPTION>
Year ended December 31,
1996 vs. 1995 1995 vs. 1994
------------------------------------------------------------
Increase Increase
(decrease) (decrease)
due to due to
Rate Volume Total Rate Volume Total
------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ (110) $ 4,285 $ 4,175 $ (97) $ 867 $ 770
Mortgage-backed and related securities 81 327 408 241 95 336
Investment securities 15 511 526 (11) 60 49
Interest-earning deposits and other (19) 647 628 58 40 98
------------------------------------------------------------
Total $ (33) $ 5,770 5,737 $ 191 $1,062 1,253
============================================================
Interest-bearing liabilities:
Deposits $ (496) $ 2,783 2,287 $ 1,260 $ 529 1,789
Borrowings (25) 227 202 2 45 47
------------------------------------------------------------
Total $ (521) $ 3,010 2,489 $ 1,262 $ 574 1,836
============================================================
Increase (decrease) in net interest income $ 3,248 $ (583)
============================================================
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED
-------------------------------------------------------
DECEMBER 31, 1996 AND 1995
--------------------------
Net earnings amounted to $1.6 million for the year ended December 31, 1996,
a decrease of $206,000, or 11.4%, from the $1.8 million in net earnings recorded
in 1995. The decline in net earnings resulted primarily from a non-recurring
$749,000 after-tax charge for the FDIC special assessment to recapitalize the
Savings Association Insurance Fund ("SAIF") in accordance with the recent
legislation enacted into law on September 30, 1996. In addition, the decline in
earnings also resulted from two non-recurring events related to the merger of
Circle during the fourth quarter of 1996: a $196,000 after-tax loss on the sale
of investment and mortgage-backed securities incurred as a result of
restructuring Circle's portfolio and using the proceeds to repay short-term FHLB
advances, 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 non-recurring expenses, net earnings for the year
ended December 31, 1996 would have been approximately $3.0 million.
Net interest income totaled $10.1 million for the year ended December 31,
1996, an increase of $3.2 million, or 47.5%, over 1995. Interest income
increased by $5.7 million, or 33.7%, for the year ended December 31, 1996, as
compared to 1995. Interest income on loans and mortgage-backed securities
increased by $4.6 million, or 28.0%, due primarily to a $58.3 million, or 28.0%,
increase in the average balance outstanding year to year. Interest income on
investment securities and interest-bearing deposits increased by $1.2 million,
or 189.5%, during 1996 due primarily to a $19.9 million, or 197.1%, increase in
the average balance outstanding, which was partially offset by a 16 basis point
decline in the average yield, to 5.88% during 1996. The increases in the average
balances of interest-earning assets during 1996 over 1995 primarily reflect the
effects of the Merger which was consummated on October 11, 1996.
Interest expense on deposits increased by $2.3 million, or 24.7%, for the
year ended December 31, 1996, as compared to 1995. The increase was due
primarily to a $55.5 million, or 31.5%, increase in the average balance
outstanding, which was partially offset by a 27 basis point decline in the
average cost of deposits, to 4.99% for the year ended December 31, 1996, as
compared to 5.26% for 1995. Interest expense on borrowings increased by
$202,000, or 22.4%, due to a $3.6 million increase in the average balance of
outstanding borrowings during 1996, which was partially offset by a 17 basis
point decline in the cost of borrowings, to a rate of 6.19% for 1996. The
increases in the average balances of interest-bearing liabilities during 1996
over 1995 were primarily due to the effects of the Merger which was consummated
on October 11, 1996.
10
<PAGE> 13
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $3.2 million, or 47.5%, for the year
ended December 31, 1996 as compared to 1995. The interest rate spread increased
to 2.59% during 1996 from 2.44% in 1995, while the net interest margin increased
to 3.40% from 3.13% for the years ended December 31, 1996 and 1995,
respectively.
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the
Savings Bank, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Savings
Bank's market area, and other factors related to the collectibility of the
Savings Bank's loan portfolio. As a result of such analysis, management recorded
a $129,000 provision for losses on loans during the year ended December 31,
1996, an increase of $58,000 over the amount recorded in 1995. There can be no
assurance that the allowance for loan losses of the Savings Bank will be
adequate to cover losses on nonperforming assets in the future.
Other income decreased by $190,000, or 53.5%, to a total of $165,000 for
the year ended December 31, 1996, as compared to $355,000 in 1995. The decrease
was due primarily to a $274,000 increase in loss on sales of investment and
mortgage-backed securities, as previously discussed, which was partially offset
by a $38,000, or 27.5%, increase in rental income and a $46,000, or 19.6%,
increase in other operating income, which consisted primarily of service charges
and fees on deposit accounts.
General, administrative and other expense totaled $7.6 million for the year
ended December 31, 1996, an increase of $3.3 million, or 74.2%, over the 1995
total. The increase resulted primarily from a $1.2 million increase in federal
deposit insurance premiums due to the one-time assessment to recapitalize the
SAIF, coupled with a $1.0 million, or 48.2%, increase in employee compensation
and benefits, a $231,000, or 37.1%, increase in occupancy and equipment, a
$93,000, or 21.7%, increase in franchise taxes, a $143,000 increase in
amortization of goodwill and other intangible assets, an $80,000, or 42.6%,
increase in data processing and a $488,000, or 75.7%, increase in other
operating expenses.
Legislation enacted to recapitalize the SAIF in September 1996 provided for
a special assessment of $.657 per $100 of SAIF deposits held at March 31, 1995,
in order to increase SAIF reserves to the level required by law. The Savings
Bank had $173.1 million in SAIF deposits at March 31, 1995, resulting in an
assessment of approximately $1.1 million, or $749,000 after tax.
The legislation also provides for reduced premium rates for healthy savings
associations beginning in 1997, estimated to amount to $.064 per $100 of SAIF
insured deposits.
A component of the recapitalization plan provides for the merger of the
SAIF and BIF on January 1, 1999, assuming all federal savings association have
become banks. Legislation introduced in late September 1996 proposes the
elimination of the federal thrift charter or of the separate federal regulation
of thrifts. As a result, the Savings Bank would be regulated as a bank under
federal laws which would subject it to the more restrictive activity limits
imposed on national banks. Under separate legislation recently enacted into law,
the Savings Bank is required to recapture as taxable income approximately $2.7
million of its bad debt reserve, which represents the post-1987 additions to the
reserve, and will be unable to utilize the percent age of earnings method to
compute its reserve in the future. The Savings Bank has provided deferred taxes
for this amount and, as a result, repayment of the reserve will not result in a
charge to operations in future years. The Savings Bank is permitted by such
legislation to amortize the recapture of its bad debt reserve over six years.
The increase in employee compensation and benefits resulted primarily from
an increase in staffing levels, an increase in costs associated with stock
benefit plans and Merger-related severance benefits. The increase in
amortization of goodwill and other intangible assets was due to goodwill
recorded as a result of the Merger. Amortization of intangible assets, which
will be recorded over remaining terms ranging from six to fifteen years, is
expected to amount to approximately $700,000 for the year ended December 31,
1997.
Increases in occupancy and equipment, franchise taxes, data processing and
other operating expenses generally resulted from the effects of the Merger,
which was consummated on October 11, 1996. From that date through the end of the
year, operating expenses reflect the increased size of the Corporation, as
compared to the prior year.
The provision for federal income taxes totaled $872,000 for the year ended
December 31, 1996, a decrease of $47,000, or 5.1%, from the provision recorded
in 1995. The decline resulted primarily from a $253,000, or 9.3%, decrease in
pretax earnings year to year. The Corporation's effective tax rates were 35.2%
and 33.6% for the years ended December 31, 1996 and 1995, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED
-------------------------------------------------------
DECEMBER 31, 1995 AND 1994
--------------------------
Net earnings for the year ended December 31, 1995 totaled $1.8 million, a
decrease of $558,000, or 23.5%, from the $2.4 million in net earnings recorded
in 1994. The decline in earnings resulted primarily from a $583,000 decrease in
net interest income, a $27,000 increase in the provision for losses on loans and
a $213,000 increase in general, administrative and other expense, which were
partially offset by an increase in other income of $8,000 and a decrease in the
provision for federal income taxes of $257,000.
11
<PAGE> 14
Total interest income was $17.0 million for the year ended December 31,
1995, an increase of $1.3 million, or 8.0%, over the 1994 total. Interest income
on loans increased by $770,000, or 5.5%, to a total of $14.7 million. This
increase resulted primarily from a $10.6 million increase in the average
portfolio balance outstanding, which was partially offset by a six basis point
decline in the average yield year-to-year, from 8.18% in 1994 to 8.12% in 1995.
Interest income on mortgage-backed securities totaled $1.7 million for 1995, an
increase of $336,000, or 24.7%, over the 1994 total. This increase resulted from
a $1.7 million increase in the average balance outstanding, coupled with a 91
basis point increase in the average yield, which was 6.24% in 1995. Interest
income on investment securities and interest bearing deposits totaled $609,000
in 1995, an increase of $147,000, or 31.8%, over 1994. This increase resulted
primarily from an increase in the average balance of $1.7 million, coupled with
an increase in the average yield of approximately 51 basis points, to a yield of
6.04% in 1995.
Total interest expense for the year ended December 31, 1995, amounted to
approximately $10.2 million, an increase of $1.8 million, or 22.0%, over the
1994 amount. Interest expense on deposits totaled $9.3 million, an increase of
$1.8 million, or 23.9%, over 1994. This increase resulted primarily from an
$11.1 million increase in the average portfolio balance outstanding, (consisting
primarily of certificates of deposit) coupled with a 73 basis point increase in
the average cost of deposits, from 4.53% in 1994 to 5.26% in 1995. This increase
reflects the overall increase in interest rates in the economy during 1995.
Interest expense on borrowings increased by $47,000, or 5.5%, during 1995, as
compared to 1994, due primarily to a $710,000 increase in average borrowings
outstanding year-to-year.
As a result of the foregoing changes in interest income and interest
expense, net interest income declined by $583,000, or 7.9%, for the year ended
December 31, 1995 compared to 1994. The Savings Bank's interest rate spread was
2.44% for 1995, a decrease of 60 basis points from the 3.04% spread in 1994.
Similarly, the net interest margin declined by 50 basis points, to 3.13% in
1995, from 3.63% in 1994.
The provision for losses on loans totaled $71,000 for the year ended
December 31, 1995, an increase of $27,000, or 61.4% over 1994. The increase in
the provision in 1995 generally reflects management's desire to maintain an
adequate level of the allowance for loan losses given growth in the loan
portfolio over the period. As previously mentioned, nonperforming loans totaled
$1.0 million at December 31, 1995, compared to $839,000 in 1994. Charge-offs of
loans amounted to $36,000 during 1995, compared to $64,000 in 1994.
Other income totaled $355,000 for the year ended December 31, 1995, an
increase of $8,000, or 2.3%, over the 1994 total. The increase resulted
primarily from a $7,000 increase in gain on sale of loans, a $17,000, or 14.0%
increase in rental income and an $8,000, or 3.5%, increase in other operating,
which were partially offset by a $21,000 loss on sale of investment securities
during 1995 and a $3,000 increase in loss on sale of real estate acquired
through foreclosure.
General, administrative and other expense totaled $4.4 million for the year
ended December 31, 1995, an increase of $213,000, or 5.1%, over the $4.2 million
total in 1994. The increase resulted primarily from a $128,000, or 6.5%,
increase in employee compensation and benefits, a $32,000, or 5.4%, increase in
occupancy and equipment, a $28,000, or 7.6%, increase in federal deposit
insurance premiums and a $25,000, or 6.2%, increase in franchise taxes. The
increase in employee compensation and benefits resulted primarily from normal
merit increases and pro-rata increases in benefits expense. The increase in
occupancy and equipment was due primarily to increased costs related to the new
branch office location which opened in 1994. The increases in federal deposit
insurance premiums and franchise taxes resulted from the growth in the deposit
portfolio and stockholders' equity, respectively, during 1995.
The Savings Bank's provision for federal income taxes amounted to $919,000
for the year ended December 31, 1995, a decrease of $257,000, or 21.9%, from the
1994 provision. The decline resulted primarily from the decline in pretax
earnings of $815,000, or 23.0%, year-to-year. The effective tax rates were 33.6%
and 33.1% for the years ended December 31, 1995 and 1994, 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 having maturities of five years or less. 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 5% 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
total deposits plus borrowings payable within one year, was 7.2% at both
December 31, 1996 and 1995. At December 31, 1996 the Savings Bank's "liquid"
assets totaled approximately $29.5 million, which was $9.2 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
12
<PAGE> 15
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, 1996, the
Savings Bank had $20.2 million of outstanding advances from the FHLB of
Cincinnati. Furthermore, the Savings Bank has access to the Federal Reserve Bank
discount window.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, the Savings Bank maintains a
strategy of investing in various loans, mortgage-backed securities and
investment securities. The Savings Bank uses its sources of funds primarily to
meet its ongoing commitments, to pay maturing savings certificates and savings
withdrawals, fund loan commitments and maintain a portfolio of investment and
mortgage-backed securities. At December 31, 1996, the total approved loan
commitments outstanding amounted to $4.6 million. At the same date, commitments
under unused lines of credit secured by one- to four-family residential property
amounted to $5.3 million, commitments under unused lines of credit secured by
multi-family and non-residential real estate totaled $3.4 million and the
unadvanced portion of construction loans approximated $4.1 million. Certificates
of deposit scheduled to mature in one year or less at December 31, 1996, totaled
$225.7 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, 1996, the Savings Bank's tangible and core capital
amounted to $47.4 million, or 9.8%, of total adjusted assets, which exceeded the
minimum requirements of 1.5% and 3.0% at that date by approximately $40.2
million and $33.0 million, or 8.3% and 6.8% of adjusted total assets,
respectively. The Savings Bank's risk-based capital totaled $48.3 million at
December 31, 1996, or 19.2%, of risk-weighted assets, which exceeded the current
requirement of 8% of risk-weighted assets by approximately $28.1 million, or
11.2% of risk-weighted assets.
The OTS has proposed an amendment to the core capital requirement that
would increase the minimum requirement to 4% of adjusted total assets for
substantially all savings associations. Management anticipates no material
change to the Savings Bank's excess regulatory capital position if the proposal
is adopted in its present form.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
------------------------------------------
In October 1994, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 119, "Disclosure
About Derivative Financial Instruments and Fair Value of Financial Instruments."
SFAS No. 119 requires financial statement disclosure of certain derivative
financial instruments, defined as futures, forwards, swaps, option contracts, or
other financial instruments with similar characteristics. In the opinion of
management, the disclosure requirements of SFAS No. 119 will have no material
effect on the Corporation's consolidated financial condition or results of
operations, as the Corporation does not invest in derivative financial
instruments, as defined. As a result, the applicability of SFAS No. 119 relates
solely to disclosure requirements pertaining to fixed-rate and adjustable-rate
loan commitments.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, the entity should
estimate the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the assets, an impairment loss is recognized. Measurement of an impairment loss
for long-lived assets and identifiable intangibles that an entity expects to
hold and use should be based on the fair value of the asset. SFAS No. 121 is
effective for financial statements for fiscal years beginning after December 15,
1995. Earlier application is encouraged. Management adopted SFAS No. 121 on
January 1, 1996, as required, without material effect on the Corporation's
consolidated financial position or results of operations.
In June 1994, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights", which requires that the Corporation recognize as separate
assets, rights to service mortgage loans for others, regardless of how those
servicing rights are acquired. An institution that acquires mortgage-servicing
rights through either the purchase or origination of mortgage loans and sells
those loans with servicing rights retained would allocate some of the cost of
the loans to the mortgage-servicing rights. SFAS No. 122 requires that
securitization of mortgage loans be accounted for as sales of mortgage loans and
acquisitions of mortgage- backed securities. Additionally, SFAS No. 122 requires
that capitalized mortgage servicing rights be assessed for impairment.
Impairment is measured based on fair value. SFAS No. 122 was required for fiscal
years beginning after December 15, 1995, (January 1, 1996, as to the
Corporation) to transactions in which an entity acquires mortgage servicing
rights and to impairment
13
<PAGE> 16
evaluations of all capitalized mortgage servicing rights whenever acquired.
Retroactive application is prohibited and earlier adoption was encouraged.
Management adopted SFAS No. 122 as of January 1, 1996, without material effect
on the Corporations consolidated financial position or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", establishing financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 encourages all entities to
adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that elect to remain with the existing accounting are
required to disclose in a footnote to the financial statements pro forma net
earnings and, if presented, earnings per share, as if SFAS No. 123 had been
adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into during fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards granted
in their first fiscal year beginning after December 15, 1994. Management has
determined that the Corporation will continue to account for stock-based
compensation pursuant to Accounting Principles Board Opinion No. 25, and
therefore, the disclosure provisions of SFAS No. 123 will have no effect on its
consolidated financial condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers of
Financial Assets, Servicing Rights, and Extinguishment 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 does not believe that adoption of SFAS No. 125 will have a material
adverse effect on the Corporation's consolidated financial position or results
of operations.
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.
14
<PAGE> 17
[GRANT THORNTON LOGO]
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. (formerly Fidelity Federal Savings
Bank) as of December 31, 1996 and 1995, and the related consolidated statements
of earnings, stockholders' equity, and cash flows for each of the three years
ended December 31, 1996, 1995 and 1994. 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 fee 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, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years ended
December 31, 1996, 1995 and 1994, in conformity with generally accepted
accounting principles.
/s/ Grant Thornton LLP
Cincinnati, Ohio
March 20, 1997
15
<PAGE> 18
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995
------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,121 $ 1,702
Federal funds sold 13,820 2,176
Interest-bearing deposits in other financial institutions 6,669 608
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 22,610 4,486
Investment securities available for sale--at market 16,120 6,044
Mortgage-backed securities available for sale--at market 30,760 29,378
Mortgage-backed securities--at cost, approximate market value of $10,831
at December 31, 1996 10,744 --
Loans receivable--net 396,541 184,486
Loans held for sale--at lower of cost or market -- 646
Office premises and equipment--at depreciated cost 7,371 2,528
Federal Home Loan Bank stock--at cost 3,781 1,854
Accrued interest receivable on loans 1,950 1,023
Accrued interest receivable on mortgage-backed securities 310 222
Accrued interest receivable on investments 284 63
Prepaid expenses and other assets 371 382
Goodwill and other intangible assets, net of accumulated amortization 8,322 --
Prepaid federal income taxes 754 25
- -------------------------------------------------------------------------------------------------------------
Total assets $ 499,918 $ 231,137
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 408,159 $ 180,697
Advances from the Federal Home Loan Bank 20,186 17,653
Loan to Employee Stock Ownership Plan -- 336
Advances by borrowers for taxes and insurance 2,005 1,063
Accrued interest and other liabilities 2,706 1,232
Deferred federal income taxes 150 43
- -------------------------------------------------------------------------------------------------------------
Total liabilities 433,206 201,024
Commitments -- --
Stockholders' equity -- --
Preferred stock - authorized, 5,000,000 shares at $.10 par value; none issued
Common stock - authorized, 15,000,000 shares at $.10 par value; 5,593,969
and 1,810,380 shares issued and outstanding at December 31, 1996 and 1995 559 181
Additional paid-in capital 41,608 4,848
Retained earnings - restricted 26,311 25,497
Less shares acquired by Employee Stock Ownership Plan (ESOP) (1,938) (336)
Less shares acquired by Management Recognition Plan (MRP) -- (20)
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects 172 (57)
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 66,712 30,113
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 499,918 $ 231,137
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE> 19
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
Interest income
Loans $18,872 $14,697 $13,927
Mortgage-backed securities 2,103 1,695 1,359
Investment securities 833 307 258
Interest-bearing deposits and other 930 302 204
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 22,738 17,001 15,748
Interest expense
Deposits 11,554 9,267 7,478
Borrowings 1,102 900 853
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 12,656 10,167 8,331
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 10,082 6,834 7,417
Provision for losses on loans 129 71 44
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans 9,953 6,763 7,373
Other income (expense)
Loss on sale of investment and mortgage-backed securities (295) (21) --
Gain on sale of loans 3 8 1
Loss on sale of real estate acquired through foreclosure -- (5) (2)
Rental 176 138 121
Other operating 281 235 227
- ---------------------------------------------------------------------------------------------------------------------
Total other income 165 355 347
General, administrative and other expense
Employee compensation and benefits 3,122 2,107 1,979
Occupancy and equipment 853 622 590
Federal deposit insurance premiums 1,598 395 367
Franchise taxes 521 428 403
Amortization of goodwill and other intangible assets 143 -- --
Data processing 268 188 170
Other operating 1,133 645 663
- ---------------------------------------------------------------------------------------------------------------------
Total general, administrative and other expense 7,638 4,385 4,172
- ---------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 2,480 2,733 3,548
Federal income taxes
Current 916 774 1,025
Deferred (44) 145 151
- ---------------------------------------------------------------------------------------------------------------------
Total federal income taxes 872 919 1,176
- ---------------------------------------------------------------------------------------------------------------------
Net earnings $ 1,608 $ 1,814 $ 2,372
=====================================================================================================================
Earnings per share $.38 $.45 $.58
=====================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE> 20
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
GAINS
(LOSSES) ON
ADDITIONAL SHARES SHARES SECURITIES
COMMON PAID-IN RETAINED ACQUIRED ACQUIRED AVAILABLE
STOCK CAPITAL EARNINGS BY ESOP BY MRP FOR SALE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $121 $ 4,828 $ 22,344 $ (315) $ (73) $ -- $ 26,905
Net earnings for the year ended
December 31, 1994 -- -- 2,372 -- -- -- 2,372
Exercise of 1,125 stock options -- 6 -- -- -- -- 6
Principal payments on loans to ESOP -- -- -- 58 -- -- 58
Cumulative effect of adopting SFAS
No. 115, net of related tax effect -- -- -- -- -- 160 160
Unrealized losses on securities designated as-
available for sale, net of related tax benefits -- -- -- -- -- (554) (554)
Amortization of MRP -- -- -- -- 31 -- 31
Stock dividend effected in the form of a
3-for-2 split 60 -- (60) -- -- -- --
Cash dividends of $.24 per share -- -- (438) -- -- -- (438)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 181 4,834 24,218 (257) (42) (394) 28,540
Net earnings for the year ended
December 31, 1995 -- -- 1,814 -- -- -- 1,814
Exercise of 3,335 stock options -- 14 -- -- -- -- 14
Principal payments on loans to ESOP -- -- -- 67 -- -- 67
Proceeds on additional borrowings on
loans to ESOP -- -- -- (146) -- -- (146)
Unrealized gains on securities designated as
available for sale, net of related tax effects -- -- -- -- -- 337 337
Amortization of MRP -- -- -- -- 22 -- 22
Cash dividends of $.30 per share -- -- (535) -- -- -- (535)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 181 4,848 25,497 (336) (20) (57) 30,113
Net earnings for the year ended
December 31, 1996 -- -- 1,608 -- -- -- 1,608
Proceeds from issuance of common stock 226 21,893 137 (1,822) -- -- 20,434
Issuance of shares in connection with merger 151 14,792 -- -- -- -- 14,943
Exercise of 6,750 stock options 1 32 -- -- -- -- 33
Principal payments on loans to ESOP -- 43 -- 220 -- -- 263
Unrealized gains on securities designated as
available for sale, net of related tax effects -- -- -- -- -- 229 229
Amortization of MRP -- -- -- -- 20 -- 20
Cash dividends of $.24 per share -- -- (931) -- -- -- (931)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $559 $41,608 $ 26,311 $(1,938) $ -- $ 172 $ 66,712
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE> 21
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 1,608 $ 1,814 $ 2,372
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization 335 265 235
Amortization of premiums on investments and mortgage-backed securities 47 34 77
Amortization of deferred loan origination fees (117) (222) (263)
Amortization expense of stock benefit plans 63 22 31
Amortization of goodwill 143 -- --
Amortization of purchase accounting adjustments (480) -- --
Loss on sale of investment and mortgage-backed securities 295 21 --
Gain on sale of mortgage loans (3) (8) (1)
Loans disbursed for sale in the secondary market (71) (1,811) (180)
Proceeds from sale of loans in the secondary market 550 1,173 181
Federal Home Loan Bank stock dividends (165) (120) (93)
Provision for losses on loans 129 71 44
Loss on sale of real estate acquired through foreclosure -- 5 2
Increase (decrease) in cash, net of acquisition of Circle Financial
Corporation, due to changes in:
Accrued interest receivable on loans (328) (6) (105)
Accrued interest receivable on mortgage-backed securities 338 (38) (39)
Accrued interest receivable on investments (65) (20) (5)
Prepaid expenses and other assets 837 (270) 10
Accrued interest and other liabilities (499) 133 (178)
Federal income taxes
Current -- 37 73
Deferred (44) 145 151
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,573 1,225 2,312
Cash flows provided by (used in) investing activities:
Proceeds from sale of investment securities designated as available for sale 6,966 979 --
Purchase of investment securities designated as available for sale (13,540) (2,511) (500)
Maturities of investment securities designated as available for sale 4,079 4 --
Purchase of Federal Home Loan Bank stock (28) (38) --
Proceeds from sale of mortgage-backed securities designated as available for sale 28,943 -- --
Purchase of mortgage-backed securities designated as available for sale (3,173) (2,049) (989)
Purchase of mortgage-backed securities designated as held to maturity -- (4,538) (8,706)
Principal repayments on mortgage-backed securities designated as available for sale 6,182 1,389 3,448
Principal repayments on mortgage-backed securities designated as held to maturity 344 3,098 2,631
Loan disbursements (59,394) (34,947) (37,610)
Purchase of loan participations -- (3,409) (1,556)
Sale of loan participations -- 320 --
Principal repayments on loans 37,106 28,923 26,052
Purchases and additions to office premises and equipment (1,284) (257) (1,073)
Proceeds from sale of real estate acquired through foreclosure -- 91 520
Additions to real estate acquired through foreclosure -- (11) --
Acquisition of Circle Financial Corporation common stock--net (5,359) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 842 (12,956) (17,783)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating and investing activities
(subtotal carried forward) 3,415 (11,731) (15,471)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 22
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------
<S> <C> <C> <C>
Net cash provided by (used in) operating and investing activities
(subtotal brought forward) $ 3,415 $(11,731) $ (15,471)
Cash provided by (used in) financing activities:
Net increase in deposit accounts 19,880 7,499 15,556
Proceeds from Federal Home Loan Bank advances 15,000 10,000 1,000
Repayment of Federal Home Loan Bank advances (39,970) (4,436) (4,865)
Proceeds from the exercise of stock options 33 14 6
Proceeds from issuance of common stock 20,434 -- --
Dividends on common stock (931) (535) (438)
Advances by borrowers for taxes and insurance 263 78 87
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 14,709 12,620 11,346
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 18,124 889 (4,125)
Cash and cash equivalents at beginning of year 4,486 3,597 7,722
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 22,610 $ 4,486 $ 3,597
====================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 755 $ 737 $ 952
====================================================================================================================================
Interest on deposits and borrowings $ 12,574 $ 10,155 $ 8,347
====================================================================================================================================
Supplemental disclosure of noncash investing and financing activities:
Foreclosed mortgage loans transferred to real estate acquired
through foreclosure $ -- $ -- $ 503
====================================================================================================================================
Transfer of investment and mortgage-backed securities
to an available for sale classification $ -- $ 22,215 $ 13,136
====================================================================================================================================
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ 229 $ 337 $ (394)
====================================================================================================================================
Exchange of office premises and equipment for similar assets $ 61 $ -- $ --
====================================================================================================================================
Liabilities assumed and stock and cash paid in acquisition
of Circle Financial Corporation $ 265,904 $ -- $ --
Less: fair value of assets received 258,175
- ------------------------------------------------------------------------------------------------------------------------------------
Amount assigned to goodwill $ 7,729 $ -- $ --
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
In 1992, Fidelity Federal Savings and Loan Association ("Fidelity")
completed its reorganization into a federally-chartered, mutual holding company
(the "Reorganization"). The Reorganization was approved by the Board of
Directors, Fidelity's members and the Office of Thrift Supervision prior to its
implementation.
In accordance with the Reorganization, Fidelity organized Fidelity Federal
Savings Bank (the "Savings Bank"), a federally-chartered stock savings bank, and
transferred substantially all of its assets and all of its liabilities to the
Savings Bank in exchange for shares of common stock, $.10 par value per share,
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 issued additional shares of its common stock to
certain members of the public.
On October 10, 1995, the Boards of Directors of the Savings Bank and the
Mutual Holding Company adopted a Plan of Conversion (the "Plan") and in October
1995, the Savings Bank incorporated Fidelity Financial of Ohio, Inc. (the
"Corporation") under Ohio law as a first-tier wholly owned subsidiary of the
Savings Bank. Pursuant to the Plan, on March 4, 1996, (i) the Corporation
completed its stock offering in connection with the Savings Bank's conversion
from the mutual holding company form of organization to the stock holding
company form whereby 2,278,100 shares of the Corporation's common stock, $.10
par value per share, 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, pursuant to which the Mutual Holding
Company ceased to exist and the outstanding shares of the Savings Bank's 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 was completed on
March 4, 1996, and resulted in net capital proceeds totaling $20.4 million.
Future references to the Corporation or Savings Bank are utilized herein as the
context requires.
On April 29, 1996, the Corporation entered into an Agreement of Merger,
which was subsequently amended on June 13, 1996, 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 on October 11, 1996, pursuant to the amended and restated Agreement
of Merger, and was accounted for using the purchase method of accounting. The
Corporation effected the acquisition through cash payments totaling $12.2
million and issuance of 1,513,967 shares of its common stock at a fair value of
$9.87 per share. The acquisition resulted in the Savings Bank recording goodwill
totaling $5.4 million, which will be amortized over a fifteen year term using
the straight-line method.
Presented below are pro-forma condensed consolidated statements of earnings
and earnings per share which have been prepared as if the acquisition had been
consummated as of the beginning of each of the respective years ended December
31, 1996 and 1995.
1996 1995
------------------
(In thousands,
except share data)
(unaudited)
Total interest income $35,313 $31,837
Total interest expense 19,924 18,049
- --------------------------------------------------------------------------------
Net interest income 15,389 13,788
Provision for losses on loans 129 71
Other income 555 1,030
General, administrative and other expense 12,645 9,077
- --------------------------------------------------------------------------------
Earnings before income taxes 3,170 5,670
Federal income taxes 1,170 2,051
- --------------------------------------------------------------------------------
Net earnings $ 2,000 $ 3,619
================================================================================
Earnings per share $ .38 $ .65
================================================================================
21
<PAGE> 24
The Corporation is a savings and loan holding company whose activities are
primarily limited to holding the stock of the Savings Bank.
The Savings Bank conducts a general banking business in southwestern Ohio
which consists of attracting deposits from the general public and applying those
funds to the origination of loans for residential, consumer and nonresidential
purposes. The Savings Bank's profitability is significantly dependent on its net
interest income, which is the difference between interest income generated from
interest-earning assets (i.e. loans and investments) and the interest expense
paid on interest-bearing liabilities (i.e. customer deposits and borrowed
funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or received
by the Savings Bank can be significantly influenced by a number of environmental
factors, such as governmental monetary policy, that are outside of management's
control.
The financial information presented herein has been prepared in accordance
with generally accepted accounting principles ("GAAP") and general accounting
practices within the financial services industry. In preparing financial
statements in accordance with GAAP, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from such estimates.
The following is a summary of significant accounting policies which have
been consistently applied in the preparation of the accompanying consolidated
financial statements.
1. PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the Corporation and the
Savings Bank. All significant intercompany balances and transactions have been
eliminated.
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES
The Corporation accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities". SFAS No. 115
requires that investments be categorized as held-to-maturity, trading, or
available for sale. Securities classified as held to maturity are carried at
cost only if the Corporation has the positive intent and ability to hold these
securities to maturity. Trading securities and securities available for sale are
carried at fair value with resulting unrealized gains or losses charged to
operations or stockholders' equity, respectively. In November 1995, the
Financial Accounting Standards Board (the "FASB") issued a Special Report on
Implementation of SFAS No. 115, which provided for the reclassification of
securities between the held-to-maturity, available for sale and trading
portfolios during a forty-five day period, without calling into question
management's prior intent with respect to such securities. Management elected to
restructure the Savings Bank's securities portfolio pursuant to the Special
Report, and transferred approximately $22.2 million of mortgage-backed
securities from the held-to-maturity portfolio to an available for sale
portfolio. As a result of the transfer, the Savings Bank recorded an unrealized
loss, net of related tax effects, of approximately $83,000 to stockholders'
equity.
At December 31, 1996 and 1995, the Corporation's equity accounts reflected
a net unrealized gain of $172,000 and a net unrealized loss of $57,000, net of
related tax effects, 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,
1995, loans held for sale were carried at cost.
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
22
<PAGE> 25
commitments, are deferred and amortized over the life of the loan using the
level-yield method. Fees for other loan commitments are deferred and amortized
over the loan commitment period on a straight-line basis.
5. ALLOWANCE FOR LOSSES ON LOANS
It is the Savings Bank's policy to provide valuation allowances for
estimated losses on loans based on past loan loss experience, changes in the
composition of the loan portfolio, trends in the level of delinquent and problem
loans, adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral and current and anticipated
economic conditions in the primary lending area. When the collection of a loan
becomes doubtful, or otherwise troubled, the Savings Bank records a loan loss
provision equal to the difference between the fair value of the property
securing the loan and the loan's carrying value. Major loans (including
development projects) and major lending areas are reviewed periodically to
determine potential problems at an early date. The allowance for loan losses is
increased by charges to earnings and decreased by charge-offs (net of
recoveries).
In 1993, the FASB issued 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. The Savings Bank adopted SFAS No.
114, as subsequently amended, on January 1, 1995, without material effect on
financial condition or results of operations.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
applying the provisions of SFAS No. 114, the Savings Bank considers its
investment in one-to-four family residential loans and consumer installment
loans to be homogeneous and therefore excluded from separate identification for
evaluation of impairment. With respect to the Savings Bank's investment in
multi-family and nonresidential loans, and its evaluation of any impairment
thereon, such loans are collateral dependent and as a result are carried as a
practical expedient at the lower of cost or fair value.
It is the Savings Bank's policy to charge off unsecured credits that are
more than ninety days delinquent. Similarly, collateral dependent loans which
are more than ninety days delinquent are considered to constitute more than a
minimum delay in repayment and are evaluated for impairment under SFAS No. 114
at that time.
At December 31, 1996 and 1995, the Savings Bank had no loans that would be
defined as impaired under SFAS No. 114.
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, five to ten years for furniture
and equipment and five years for automobiles. An accelerated method is used for
tax reporting purposes.
8. FEDERAL INCOME TAXES
The Corporation accounts for federal income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 establishes financial accounting and
reporting standards for the effects of income taxes that result from the
Corporation's activities within the current and previous years. Pursuant to the
provisions of SFAS No. 109, a deferred tax liability or deferred tax asset is
computed by applying the current statutory tax rates to net taxable or
deductible temporary differences between the tax basis of an asset or liability
and its reported amount in the consolidated financial statements that will
result in taxable or deductible amounts in future periods. Deferred tax assets
are recorded only to the extent that the amount of net deductible temporary
differences or carryforward attributes may be utilized against current period
earnings, carried back against prior years' 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.
23
<PAGE> 26
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill resulting from the acquisition of Circle, net of amortization
recorded in 1996, totaled approximately $7.7 million, and is being amortized
over a fifteen year period using straight-line method. specifically identifiable
intangible assets totaling $703,000 related to core deposits are 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 the acquired assets
and assumed liabilities.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
provides guidance on when to recognize and how to measure impairment losses of
long-lived assets and certain identifiable intangibles and how to value
long-lived assets to be disposed of. The Corporation adopted SFAS No. 121
effective January 1, 1996, as required, without material effect on consolidated
financial condition or results of operations.
10. RETIREMENT AND INCENTIVE PLANS
The Savings Bank has several retirement and incentive plans covering the
directors and substantially all employees. Such plans are more fully described
as follows.
The Savings Bank has a 401(k) profit-sharing plan whereby employees may
make voluntary tax deferred contributions up to 15% of their base annual
compensation. The Savings Bank will provide, at its discretion, matching funds
of each participant's contribution, subject to a maximum of 6% of base
compensation. The Savings Bank's 401(k) profit-sharing plan expense for the
years ended December 31, 1996, 1995 and 1994 amounted to $45,000, $46,000 and
$47,000, 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,
1996, 1995 and 1994, 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 Corporation recognized expense
totaling $187,000, $93,000 and $77,000 related to the ESOP for the years ended
December 31, 1996, 1995 and 1994, respectively.
Additionally, the Corporation has a Management Recognition Plan (MRP). The
MRP purchased 50,625 shares (exchange and split adjusted) of the common stock.
All of the shares available under the plan were granted to executive officers of
the Savings Bank during 1992. Common stock granted under the MRP vests ratably
over a five-year period, commencing in May 1992. A provision of $20,000, $23,000
and $31,000 was charged to expense for the years ended December 31, 1996, 1995
and 1994, respectively.
11. EARNINGS PER SHARE AND DIVIDENDS PER SHARE
Earnings per share for 1996, 1995 and 1994 is based on net earnings divided
by 4,207,788, 4,053,980 and 4,068,000 weighted-average shares outstanding during
the respective periods. Weighted-average shares outstanding have been adjusted
for the 2.25 exchange ratio effected in the Corporation's Conversion and
Reorganization and a 3 for 2 stock split in 1994. There is no material dilutive
effect attendant to the Corporation's Stock Option Plan.
12. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents includes
cash and due from banks, federal funds sold and interest-bearing deposits in
other financial institutions with original maturities of less than 90 days.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value of financial instruments, both assets and
liabilities, whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair values
are based on estimates using present value and other valuation methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair values
presented may not represent amounts that could be realized in an exchange for
certain financial instruments.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at December 31,
1996 and 1995:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in the
consolidated statement 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 and nonresidential real estate. 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
24
<PAGE> 27
cash flow analysis, using current interest rates offered for loans with
similar terms to borrowers of similar credit quality or quoted market
prices, when available.
FEDERAL HOME LOAN BANK STOCK: The carrying amount presented in the
consolidated statement 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, 1996 and 1995. 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 have been estimated using discounted cash flow analysis, based on
the interest rates currently offered for advances of similar remaining
maturities.
LOAN TO EMPLOYEE STOCK OWNERSHIP PLAN (ESOP): The fair value of the ESOP
loan is deemed to approximate the historical carrying value due to the
daily repricing of the loan's interest rate.
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, 1996,
the difference between the fair value and notional amount of loan
commitments was not material.
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:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------------------------------------
Financial assets (In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 22,610 $ 22,610 $ 4,486 $ 4,486
Investment securities 16,120 16,120 6,044 6,044
Mortgage-backed securities 41,504 41,591 29,378 29,378
Loans receivable 396,541 398,771 185,132 190,261
Federal Home Loan Bank stock 3,781 3,781 1,854 1,854
-----------------------------------------
$480,556 $482,873 $226,894 $232,023
=========================================
Financial liabilities
Deposits $408,159 $408,894 $180,697 $182,064
Advances from Federal Home Loan Bank 20,186 20,207 17,653 17,846
Loan to Employee Stock Ownership Plan -- -- 336 336
Advances by borrowers for taxes and insurance 2,005 2,005 1,063 1,063
-----------------------------------------
$430,350 $431,106 $199,749 $201,309
=========================================
</TABLE>
14. ADVERTISING
Advertising costs are expensed when incurred.
15. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1996
consolidated financial statement presentation.
NOTE B -- INVESTMENT AND MORTGAGE-BACKED SECURITIES
Amortized cost and estimated fair values of investment securities
designated as available for sale at December 31, 1996 and 1995 consist of the
following:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
-----------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
U. S. Government agency obligations $ 8,502 $ 8,530 $ 5,016 $ 5,025
U. S. Government obligations 7,482 7,500 999 1,019
Corporate equity securities 64 90 -- --
----------------------------------------------
$16,048 $16,120 $ 6,015 $ 6,044
==============================================
</TABLE>
At December 31, 1996, the market value appreciation of the Corporation's
investment securities in excess of amortized cost, totaling $72,000, was
comprised of gross unrealized gains of $87,000 and gross unrealized losses of
$15,000.
25
<PAGE> 28
At December 31, 1995, the market value appreciation of the Corporation's
investment securities in excess of amortized cost, totaling $29,000, was
comprised of gross unrealized gains of $41,000 and gross unrealized losses of
$12,000.
The amortized cost and market value of U.S. Government and agency
obligations by contractual terms to maturity at December 31, 1996 and 1995 are
shown below:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
-------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Due within two years $ 8,490 $ 8,498 $ 3,006 $ 3,037
Due in two to five years 3,581 3,585 2,000 1,988
Due in five to ten years 2,987 3,021 -- --
More than ten years 926 926 1,009 1,019
-------------------------------------------------
$15,984 $16,030 $ 6,015 $ 6,044
=================================================
</TABLE>
The amortized cost, gross unrealized gains, gross unrealized losses and
market values of mortgage-backed securities at December 31, 1996 and 1995
(including those designated as available for sale) are shown below.
<TABLE>
<CAPTION>
1996
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Available for sale:
Federal Home Loan Mortgage Corporation participation certificates $19,767 $ 186 $ 27 $19,926
Government National Mortgage Association participation certificates 6,028 43 9 6,062
Federal National Mortgage Association participation certificates 4,776 50 54 4,772
------------------------------------------------
Total available for sale 30,571 279 90 30,760
Held to maturity:
Federal Home Loan Mortgage Corporation participation certificates 696 -- 7 689
Government National Mortgage Association participation certificates 8,354 80 -- 8,434
Federal National Mortgage Association participation certificates 306 13 -- 319
Collateralized mortgage obligations of government agencies 1,388 1 -- 1,389
------------------------------------------------
Total held to maturity 10,744 94 7 10,831
------------------------------------------------
Total mortgage-backed securities $41,315 $ 373 $ 97 $41,591
================================================
</TABLE>
<TABLE>
<CAPTION>
1995
-----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-----------------------------------------
(In thousands)
Available for sale:
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation participation certificates $14,346 $ 65 $ 115 $14,296
Government National Mortgage Association participation certificates 4,958 39 20 4,977
Federal National Mortgage Association participation certificates 8,456 46 96 8,406
Collateralized mortgage obligations of government agencies 1,732 -- 33 1,699
-----------------------------------------
Total mortgage-backed securities $29,492 $ 150 $ 264 $29,378
=========================================
</TABLE>
26
<PAGE> 29
The amortized cost and market value of mortgage-backed securities at
December 31, 1996 and 1995, by contractual terms to maturity, are shown below
Expected maturities will differ from contractual maturities because borrowers
may generally prepay obligations without prepayment penalties. The Corporation
had no mortgage-backed securities designated as held to maturity at December 31,
1995.
<TABLE>
<CAPTION>
1996 1995
---------------------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
---------------------------------------
(In thousands)
Available for sale:
<S> <C> <C> <C> <C>
Due within one year $ 1,790 $ 1,795 $ 2,109 $ 2,114
Due after one to three years 4,001 4,012 3,105 3,113
Due after three years to five years 2,445 2,465 1,577 1,585
Due after five years to ten years 7,898 7,966 3,316 3,309
Due after ten years to twenty years 9,033 9,095 8,760 8,698
Due after twenty years 5,404 5,427 10,625 10,559
-------------------------------------
30,571 30,760 29,492 29,378
Held to maturity:
Due within one year 193 194 -- --
Due after one to three years 426 429 -- --
Due after three years to five years 486 489 -- --
Due after five years to ten years 1,536 1,547 -- --
Due after ten years to twenty years 4,569 4,606 -- --
Due after twenty years 3,534 3,566 -- --
---------------------------------------
10,744 10,831 -- --
---------------------------------------
Total mortgage-backed securities $41,315 $41,591 $29,492 $29,378
=====================================
</TABLE>
NOTE C -- LOANS RECEIVABLE
The composition of the loan portfolio at December 31, including loans held
for sale, is as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------
(In thousands)
<S> <C> <C>
Residential real estate
One-to-four family residential $ 321,701 $ 142,246
Multi-family residential 25,580 18,833
Construction 11,039 3,791
Nonresidential real estate and land 33,055 20,773
Nonresidential construction 2,800 1,000
Consumer and other 7,850 1,203
-------------------------
402,025 187,846
Undisbursed portion of loans in process (4,055) (1,305)
Unamortized yield adjustments 129 (591)
Allowance for loan losses (1,558) (818)
-------------------------
$ 396,541 $ 185,132
=========================
</TABLE>
The Savings Bank's lending efforts have historically focused on residential
and multi-family residential real estate loans, which comprised approximately
$352.6 million, or 89%, of the total loan portfolio at December 31, 1996, and
$162.2 million, or 88% of the total portfolio at December 31, 1995. Generally,
such loans have been underwritten on the basis of no more than an 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.
In May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage
Servicing Rights," which requires that the Savings Bank recognize as separate
assets, rights to service mortgage loans for others, regardless of how those
servicing rights are acquired. An institution that acquires mortgage servicing
rights through either the purchase or origination of mortgage loans and sells
those
27
<PAGE> 30
loans with servicing rights retained would allocate some of the cost of the
loans to the mortgage servicing rights. SFAS No. 122 requires that
securitization of mortgage loans be accounted for as sales of mortgage loans and
acquisitions of mortgage-backed securities. Additionally, SFAS No. 122 requires
that capitalized mortgage servicing rights and capitalized excess servicing
receivables be assessed for impairment. Impairment is measured based on fair
value. SFAS No. 122 is to be applied prospectively to fiscal years beginning
after December 15, 1995, (January 1, 1996, as to the Savings Bank) to
transactions in which an entity acquires mortgage servicing rights and to
impairment evaluations of all capitalized mortgage servicing rights and
capitalized excess servicing receivables whenever acquired. Management adopted
SFAS No. 122 as of January 1, 1996, as required, without material effect on
consolidated financial condition or results of operations.
In the normal course of business, the Savings Bank has made loans to its
directors, officers and their related business interests. Related party loans
are made on the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons and do
not involve more than the normal risk of collectibility. Loans to officers and
directors totaled approximately $985,000, $428,000 and $37,000, at December 31,
1996, 1995 and 1994, respectively. The increase in such loans during 1996 was
due primarily to loans acquired through the Merger.
NOTE D--ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the year ended December
31 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------
(In thousands)
<S> <C> <C> <C>
Beginning balance $ 818 $ 783 $ 803
Allowance for loan losses of Circle 640 -- --
Provision for loan losses 129 71 44
Charge-off of loans (29) (36) (64)
---------------------------------
Ending balance $ 1,558 $ 818 $ 783
=================================
</TABLE>
At December 31, 1996, the Savings Bank's allowance for loan losses was
comprised of a general loan loss allowance of $1,550,000, which is includible as
a component of regulatory risk-based capital, and a specific loan loss allowance
of $8,000.
At December 31, 1996, 1995 and 1994, the Savings Bank had loans of $1.1
million, $1.0 million and $839,000, 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 $59,000, $12,000 and $51,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
NOTE E -- OFFICE PREMISES AND EQUIPMENT
Office premises and equipment is comprised of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
-------------------
(In thousands)
<S> <C> <C>
Land $ 1,826 $ 718
Buildings and improvements 6,262 2,773
Furniture and equipment 3,630 1,088
Automobiles 38 24
--------------------
11,756 4,603
Less accumulated depreciation and amortization 4,385 2,075
--------------------
$ 7,371 $ 2,528
===================
</TABLE>
28
<PAGE> 31
NOTE F -- DEPOSITS
Deposits consist of the following major classifications at December 31:
DEPOSIT TYPE AND WEIGHTED AVERAGE INTEREST RATE
<TABLE>
<CAPTION>
1996 1995
-----------------------
(In thousands)
<S> <C> <C>
NOW accounts
December 31, 1996 - 1.77% $ 30,242
December 31, 1995 - 2.43% $ 10,314
Passbook and club accounts
December 31, 1996 - 2.11% 44,798
December 31, 1995 - 2.50% 15,753
Money market deposit accounts
December 31, 1996 - 3.19% 17,350
December 31, 1995 - 3.27% 12,800
-----------------------
Total demand, transaction passbook deposits 92,390 38,867
Certificates of deposit
Original maturities of:
Less than 12 months
December 31, 1996 - 5.57% 108,602
December 31, 1995 - 5.52% 21,059
12 months to 18 months
December 31, 1996 - 5.65% 109,668
December 31, 1995 - 6.14% 50,152
21 months to 33 months
December 31, 1996 - 6.07% 51,925
December 31, 1995 - 6.09% 45,716
36 months to 48 months
December 31, 1996 - 5.75% 11,996
December 31, 1995 - 5.53% 8,154
More than 48 months
December 31, 1996 - 6.49% 33,578
December 31, 1995 - 6.89% 16,749
-----------------------
Total certificates of deposit 315,769 141,830
-----------------------
Total deposits $408,159 $180,697
=======================
</TABLE>
At December 31, 1996 and 1995, the Corporation had deposit accounts with
balances greater than $100,000 totaling $38.0 million and $16.9 million,
respectively.
Interest expense on deposits for the year ended December 31 is summarized
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------
(In thousands)
<S> <C> <C> <C>
Passbook and money market deposit accounts $ 931 $ 849 $ 1,011
NOW accounts 280 267 190
Certificates of deposit 10,343 8,151 6,277
-----------------------------
$11,554 $ 9,267 $ 7,478
=============================
</TABLE>
Maturities of outstanding certificates of deposit at December 31 are summarized
as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------
(In thousands)
<S> <C> <C>
Less than one year $225,717 $ 87,815
One to three years 75,790 44,087
Over three years 14,262 9,928
---------------------------
$315,769 $141,830
===========================
</TABLE>
29
<PAGE> 32
NOTE G -- ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at December 31,
1996 by pledges of certain residential mortgage loans totaling $30.4 million and
the Savings Bank's investment in Federal Home Loan Bank stock, are summarized as
follows:
DECEMBER 31,
1996 1995
-------------------------
(In thousands)
Due within one year $ 2,147 $ 4,168
Due after one to three years 8,405 4,566
Due after three to five years 4,851 4,907
Due after five to ten years 2,422 3,645
Due after ten to twenty years 2,361 367
-------------------------
$20,186 $17,653
=========================
Weighted-average interest rate 6.22% 6.16%
=========================
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 (exchange and split adjusted) 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 (exchange and split adjusted) of
common stock. Share totals have been adjusted to give effect to a stock dividend
effected in the form of a 3-for-2 stock split and for the exchange of shares
effected in connection with the Conversion and Reorganization. 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 loan was repaid in 1996 with proceeds from a
note payable to the Corporation. The sole security for the loans is the acquired
stock, and while the Savings Bank has not guaranteed the loans, future
contributions to retire the loans will be paid to the ESOP from current or
retained earnings. Accordingly, the Savings Bank has deducted the remaining
unpaid amount of the loans from the stockholders' equity and correspondingly
reflected such amount as a liability. At December 31, 1996, the ESOP held
remaining totaling 329,854 of the Corporation's common stock, with approximately
130,350 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 year ended December 31 as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at the statutory rate $ 843 $ 929 $ 1,206
Increase (decrease) in taxes resulting from:
Amortization of goodwill 26 -- --
Other 3 (10) (30)
-----------------------------
Federal income tax provision per consolidated financial statements $ 872 $ 919 $ 1,176
=============================
</TABLE>
30
<PAGE> 33
The composition of the Corporation's net deferred tax liability at December
31 is as follows:
<TABLE>
<CAPTION>
1996 1995
------------------
(In thousands)
<S> <C> <C>
Taxes (payable) refundable on temporary differences at statutory rate:
Deferred tax assets:
Deferred loan origination fees $ 175 $ 213
Retirement expense 388 217
General loan loss allowance 527 264
Unrealized losses on securities designated as available for sale -- 28
Valuation allowances from Circle acquisition 375 --
Other 164 46
------------------
Total deferred tax assets 1,629 768
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (533) (294)
Percentage of earnings bad debt deduction (908) (517)
Unrealized gains on securities designated as available for sale (89) --
Book vs. tax depreciation (126) --
Valuation allowances from Circle acquisition (123) --
------------------
Total deferred tax liabilities (1,779) (811)
------------------
Net deferred tax liability $ (150) $ (43)
==================
</TABLE>
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, 1996. 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,
1996. See Note K 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 their
customers including commitments to extend credit. Such commitments involve, to
varying degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the statement of financial condition. The contract or
notional amounts of the commitments reflect the extent of the Savings Bank's
involvement in such financial instruments.
The Savings Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit
is represented by the contractual notional amount of those instruments. The
Savings Bank uses the same credit policies in making commitments and conditional
obligations as those utilized for on-balance-sheet instruments.
At December 31, 1996, the Savings Bank had total outstanding commitments of
approximately $3.2 million to originate residential one-to four-family and
multifamily real estate loans on the basis of an 80% loan to value ratio, of
which $1.3 million was comprised of adjustable rate loans at rates ranging from
6.75% to 8.50%, and $1.9 million was comprised of fixed rate loans at rates
ranging from 6.88% to 8.75%. The Savings Bank also had outstanding commitments
of approximately $1.4 million to originate nonresidential real estate loans.
Additionally, the Savings Bank had unused lines of credit under home equity
loans of approximately $5.3 million and unused collateralized lines of credit
under multi-family and nonresidential real estate of $3.4 million. In the
opinion of management, all loan commitments equaled or exceeded prevalent market
interest rates as of December 31, 1996, 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.
31
<PAGE> 34
NOTE K -- STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
The Savings Bank is subject to minimum capital requirements promulgated by
the Office of Thrift Supervision (OTS). Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Savings Bank must meet specific capital guidelines that involve quantitative
measures of the Savings Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Savings Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Such minimum capital standards generally require the maintenance
of regulatory capital sufficient to meet each of three tests, hereinafter
described as the tangible capital requirement, the core capital requirement and
the risk-based capital requirement. The tangible capital requirement provides
for minimum tangible capital (defined as stockholders' equity less all
intangible assets) equal to 1.5% of adjusted total assets. The core capital
requirement provides for minimum core capital (tangible capital plus certain
forms of supervisory goodwill and other qualifying intangible assets) equal to
3.0% of adjusted total assets. An OTS proposal, if adopted in present form,
would increase the core capital requirement to a range of 4.0% - 5.0% of
adjusted total assets for substantially all savings associations. Management
anticipates no material change to the Savings Bank's excess regulatory capital
position as a result of this proposed change to the regulatory capital
requirement. The risk-based capital requirement currently provides for the
maintenance of core capital plus general loan loss allowances equal to 8.0% of
risk-weighted assets. In computing risk-weighted assets, the Savings Bank
multiplies the value of each asset on its statement of financial condition by a
defined risk-weighting factor, e.g., one-to-four family residential loans carry
a risk-weighted factor of 50%.
At December 31, 1996, management believes that the Savings Bank met all
regulatory capital requirements to which it was subject:
<TABLE>
<CAPTION>
REGULATORY CAPITAL
---------------------------------------------------------------
TANGIBLE CORE RISK-BASED
CAPITAL PERCENT CAPITAL PERCENT CAPITAL PERCENT
---------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Capital under generally accepted accounting principles $ 55,903 $ 55,903 $ 55,903
Nonincludable assets:
Unrealized gains on securities designated as available
for sale (154) (154) (154)
Goodwill (8,322) (8,322) (8,322)
Additional capital items:
General valuation allowances--limited -- -- 910
---------------------------------------------------------------
Regulatory capital computed 47,427 9.8 47,427 9.8 48,337 19.2
Minimum capital requirement 7,234 1.5 14,468 3.0 20,189 8.0
---------------------------------------------------------------
Regulatory capital--excess $ 40,193 8.3 $ 32,959 6.8 $ 28,148 11.2
===============================================================
</TABLE>
At December 31, 1996, the Savings Bank met all regulatory requirements for
classification as a "well-capitalized" institution. A "well-capitalized"
institution must have risk-based capital of 10.0%, and core capital of 5.0%. The
Savings Bank's capital exceeded the minimum required amounts for classification
as a "well-capitalized" institution by $23.1 million and $23.3 million,
respectively.
Regulations of the Office of Thrift Supervision (OTS) impose limitations on
the payment of dividends and other capital distributions by savings
associations. Under such regulations, a savings association that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital requirement is
generally permitted without OTS approval (but subsequent to 30 days prior notice
to the OTS of the planned dividend) to make capital distributions during a
calendar year in the amount 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 (ii) or 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 $6.9 million to the Corporation at
December 31, 1996.
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 were 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.
32
<PAGE> 35
During 1996, legislation was enacted to recapitalize the SAIF and eliminate
the significant premium disparity that provided for a special assessment of
$.657 per $100 of SAIF deposits held at March 31, 1995, in order to increase
SAIF reserves to the level required by law. The Savings Bank had $173.1 million
in deposits at March 31, 1995. The special assessment was finalized at $.657 per
$100 in deposits, resulting in an assessment of approximately $1.1 million, or
$749,000 after tax, which was recorded during 1996.
A component of the recapitalization plan provides for the merger of the
SAIF and BIF on January 1, 1999, assuming the elimination of the thrift charter
or of the separate federal regulation of thrifts prior to the merger of the
deposit insurance funds. Under other proposed legislation, the Savings Bank
would be regulated as a bank under federal laws which would subject it to the
more restrictive activity limits imposed on national banks. Under separate
legislation, the Savings Bank is required to recapture approximately $2.7
million of its bad debt reserve as taxable income, which represents the
post-1987 additions to the reserve, and will be unable to utilize the percentage
of earnings method to compute its reserve in the future. The Savings Bank has
provided deferred taxes for this amount and will be permitted to amortize the
recapture of its bad debt reserve over six years.
NOTE L -- STOCK OPTION PLAN
The Corporation has a Stock Option Plan that provides for the issuance of
168,750 shares of authorized, but unissued shares of common stock. The number of
shares under option have been adjusted to reflect the 3 for 2 stock split
effected during the year ended December 31, 1994, and the 2.25 for one exchange
ratio effected in the Corporation's Conversion and Reorganization.
The following summarizes stock option transactions for the years ended
December, 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
OPTION
NUMBER PRICE
OF SHARES PER SHARE TOTAL
----------------------------------
<S> <C> <C> <C>
Outstanding at January 1, 1994 31,725 $2.96 $ 93,906
Options granted 16,875 5.04 85,050
Exercised (1,125) 5.04 (5,670)
----------------------------------
Balance at December 31, 1994 47,475 3.65 173,286
Options granted 16,875 6.67 112,556
Exercised (3,335) 4.20 (14,000)
----------------------------------
Balance at December 31, 1995 61,015 4.46 271,842
Exercised (6,750) 4.81 (32,501)
----------------------------------
Balance at December 31, 1996 54,265 $4.41 $ 239,341
==================================
</TABLE>
At December 31, 1996, all of the stock options granted were subject to
exercise at the discretion of the grantees, subject to expiration as follows:
YEAR ENDED NUMBER OF SHARES
2002 27,000
2004 13,765
2005 13,500
------
54,265
======
On January 1, 1996, the Corporation adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which contains a fair value-based method for valuing
stock-based compensation that entities may use, which measures compensation cost
at the grant date based on the fair value of the award. Compensation is then
recognized over the service period, which is usually the vesting period.
Alternatively, SFAS No. 123 permits entities to continue to account for employee
stock options and similar equity instruments under Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities
that continue to account for stock options using APB Opinion No. 25 are required
to make pro forma disclosures of net earnings and earnings per share, as if the
fair value-based method of accounting defined in SFAS No. 123 had been applied.
Such disclosures are not required for the Corporation since no stock options
were granted in 1996. The Corporation's employee stock option plan is accounted
for under APB Opinion No. 25.
33
<PAGE> 36
NOTE M -- 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, 1996, and the
results of its operations for the period then ended.
<TABLE>
<CAPTION>
FIDELITY FINANCIAL OF OHIO, INC.
STATEMENT OF FINANCIAL CONDITION
December 31, 1996
(In thousands)
<S> <C>
ASSETS
Cash and due from banks $ 189
Interest-bearing deposits in other financial institutions 5,550
Investment securities available for sale at market 3,080
Loan receivable from ESOP 1,948
Investment in subsidiary 56,458
Prepaid expenses and other 205
- ---------------------------------------------------------------------------------
Total assets $67,430
=================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 718
Stockholders' equity
Common stock and additional paid-in capital 42,167
Retained earnings 24,540
Unrealized gains on securities designated as available for sale, net 5
- ---------------------------------------------------------------------------------
Total stockholders' equity 66,712
- ---------------------------------------------------------------------------------
Total liabilities and stockholders' equity $67,430
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
FIDELITY FINANCIAL OF OHIO, INC.
STATEMENT OF EARNINGS
Period ended December 31, 1996
(In thousands)
<S> <C>
Income
Interest income $ 289
Equity in earnings of subsidiary 1,443
- --------------------------------------------------------------------------------
Total income 1,732
General and administrative expenses 421
- --------------------------------------------------------------------------------
Earnings before income taxes 1,311
Federal income taxes 35
- --------------------------------------------------------------------------------
NET EARNINGS $1,276
================================================================================
</TABLE>
NOTE N -- REORGANIZATION AND CHANGE OF CORPORATION
In 1992, Fidelity Federal Savings and Loan Association ("Fidelity")
completed its reorganization into a federally-chartered, mutual holding company
(the "Reorganization"). The Reorganization was approved by the Board of
Directors, Fidelity's members and the Office of Thrift Supervision prior to its
implementation.
In accordance with the Reorganization, Fidelity organized Fidelity Federal
Savings Bank (the "Savings Bank"), a federally-chartered stock savings bank, and
transferred all but $100,000 of its assets and all of its liabilities to the
Savings Bank in exchange for 1,012,500 shares (split adjusted) of common stock,
$.10 par value per share, 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 issued an additional
750,000 shares (split adjusted) of its common stock to certain members of the
public.
On October 10, 1995, the Boards of Directors of the Savings Bank and
the Mutual Holding Company adopted a Plan of Conversion (the "Plan") and in
October 1995, the Savings Bank incorporated Fidelity Financial of Ohio, Inc.
(the "Corporation") under Ohio law as a first-tier wholly owned subsidiary of
the Savings Bank. Pursuant to the Plan, (i) the Mutual Holding Company
converted to an interim federal stock savings institution and simultaneously
merged with and into the Savings Bank, pursuant to
34
<PAGE> 37
which the Mutual Holding Company ceased to exist and the 1,012,500
shares, or 55.9%, of the outstanding Savings Bank common stock held by the
Mutual Holding Company were canceled, and (ii) an interim savings bank
("Interim") formed as a wholly-owned subsidiary of the Corporation solely for
such purpose was merged with and into the Savings Bank. As a result of the
merger of Interim with and into the Savings Bank, the Savings Bank became a
wholly-owned subsidiary of the Corporation and the outstanding public Savings
Bank shares, which amounted to 797,880 shares, or 44.1%, of the outstanding
Savings Bank common stock at December 31, 1995, were converted into the exchange
shares pursuant to the exchange ratio of 2.25 shares to one, which resulted in
the holders of such shares owning in the aggregate approximately the same
percentage of the common stock to be outstanding upon the completion of the
Conversion and Reorganization (i.e., the conversion stock and the exchange
shares) as the percentage of Savings Bank common stock owned by them in the
aggregate immediately prior to consummation of the conversion and
reorganization, before giving effect to (a) the payment of cash in lieu of
issuing fractional exchange shares, (b) any shares of conversion stock purchased
by the Savings Bank's stockholders in the offerings or the ESOP thereafter, and
(c) any exercise of dissenters' rights. The costs of issuing the common stock
were deducted from the sale proceeds of the offering. The offering was completed
on March 4, 1996 and resulted in capital proceeds totaling $20.4 million, after
consideration of offering expenses and shares acquired by the ESOP.
The rights of Fidelity's depositors in liquidation in the conversion to
stock form are maintained by the Savings Bank in an amount equal to the retained
earnings of the Savings Bank reflected in the statement of financial condition
used in the conversion offering circular. The liquidation account will be
maintained for the benefit of eligible savings account holders who maintained
deposit accounts in the Savings Bank after conversion.
NOTE O -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Savings Bank's quarterly results for the
years ended December 31, 1996 and 1995. Certain amounts, as previously reported,
have been reclassified to conform to the 1996 presentation.
<TABLE>
<CAPTION>
Three Months Ended
March 31, June 30, September 30, December 31,
-------------------------------------------------
1996: (In thousands, except per share data)
<S> <C> <C> <C> <C>
Total interest income $ 4,508 $ 4,652 $ 4,692 $ 8,886
Total interest expense 2,649 2,603 2,618 4,786
-------------------------------------------------
Net interest income 1,859 2,049 2,074 4,100
Provision for losses on loans 17 15 16 81
Other income (expense) 114 102 104 (155)
General, administrative and other expense 1,119 1,184 2,379 2,956
-------------------------------------------------
Earnings (loss) before income taxes (credits) 837 952 (217) 908
Federal income taxes (credits) 282 323 (71) 338
------------------------------------------------
Net earnings (loss) $ 555 $ 629 $ (146) $ 570
------------------------------------------------
Earnings (loss) per share $ .14 $ .16 $ (.04) $ .12
================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, June 30, September 30, December 31,
1995: (In thousands, except per share data)
-------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $4,106 $4,199 $4,346 $4,350
Total interest expense 2,368 2,522 2,642 2,635
-------------------------------------------------
Net interest income 1,738 1,677 1,704 1,715
Provision for losses on loans 14 10 12 35
Other income 87 84 79 105
General, administrative and other expense 1,073 1,078 1,079 1,155
-------------------------------------------------
Earnings before income taxes 738 673 692 630
Federal income taxes 252 217 234 216
-------------------------------------------------
Net earnings $ 486 $ 456 $ 458 $ 414
-------------------------------------------------
Earnings per share $ .12 $ .11 $ .12 $ .10
=================================================
</TABLE>
35
<PAGE> 38
<TABLE>
<CAPTION>
DIRECTORS
<S> <C>
JOHN R. REUSING President and Chief Executive Officer of Fidelity
Financial of Ohio, Inc., and Fidelity Federal
Savings Bank.
JOSEPH D. HUGHES Executive Vice President and Chief Lending Officer
of Fidelity Financial of Ohio, Inc., and Fidelity
Federal Savings Bank.
MICHAEL W. JORDAN General Manager of Jordan Realtors, Cincinnati,
Ohio.
DAVID A. LUECKE President and Chief Executive Officer of Riemeier
Lumber Company, Cincinnati, Ohio.
CONSTANTINE N. PAPADAKIS President of Drexel University, Philadelphia,
Pennsylvania.
THOMAS N. SPAETH Managing partner of Spaeth & Batterberry,
Cincinnati, Ohio.
PAUL D. STAUBACH Senior Vice President, Chief Financial Officer and
Secretary of Fidelity Financial of Ohio, Inc., and
Fidelity Federal Savings Bank.
ROBERT W. ZUMBIEL President of C.W. Zumbiel Company, Norwood, Ohio.
EXECUTIVE OFFICERS
JOHN R. REUSING President and Chief Executive Officer
JOSEPH D. HUGHES Executive Vice President, Chief Lending Officer
PAUL D. STAUBACH Senior Vice President, Chief Financial Officer
M. ROBIN RUHOLL-CASSADY Vice President, Retail Banking
ANITA C. GLASMEIER Vice President, Marketing
JERALD L. JONES Vice President , Security
RUTH A. MEYERS Vice President, Loan Servicing
JOHN P. OWENS Vice President, Mortgage Development and Production
DAVID R. PERSOHN Vice President, Internal Audit
DEBORAH A. PETER Vice President, Loan Operations
CAROLYN R. WATT Vice President, Controller
</TABLE>
LOCATIONS
BLUE ASH 793-5196
4144 Hunt Road
Cincinnati, OH 45236
DELHI 451-5353
5030 Delhi Road
Cincinnati, OH 45238
GROESBECK 521-3385
8045 Colerain Avenue
Cincinnati, OH 45239
HARTWELL 821-8880
8434 Vine Street
Cincinnati, OH 45216
MADEIRA 272-4200
7136 Miami Avenue
Cincinnati, OH 45243
NORWOOD 351-6666
4555 Montgomery Rd.
Cincinnati, OH 45212
ROSS 738-1111
3777 Hamilton Cleves Rd.
Hamilton, OH 45013
SHARONVILLE 733-9300
11100 Reading Rd.
Cincinnati, OH 45241
TRI COUNTY MALL 671-0866
11700 Princeton Rd.
Cincinnati, OH 45246
WESTWOOD 481-2481
3316 Glenmore Avenue
Cincinnati, OH 45211
LOVELAND 683-1124
10640 Loveland-Madeira Road
Loveland, OH 45140
(Opening Second Quarter 1997)
36
<PAGE> 39
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
Fidelity Financial of Ohio, Inc.
4555 Montgomery Road
Cincinnati, OH 45212
(513) 351-6666
STOCK LISTING
The Nasdaq National Market
Symbol: FFOH
TRANSFER AGENT AND REGISTRAR
Fifth Third Bank
Corporate Trust Services
Mail Location 1090F5
38 Fountain Square Plaza
Cincinnati, OH 45263
(513) 579-5320
(800) 837-2755
INDEPENDENT AUDITORS
Grant Thornton LLP
625 Eden Park Drive, Suite 900
Cincinnati, OH 45202-4181
SPECIAL LEGAL COUNSEL
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W., 12th Floor
Washington, D.C. 20005
ANNUAL MEETING
April 29, 1997, 2:00 P.M.
Quality Hotel Central
4747 Montgomery Road
Norwood, Ohio 45212
FORM 10-K
Fidelity Financial of Ohio, Inc. is required to file an annual report an Form
10-K for its fiscal year ended December 31, 1996 with the Securities and
Exchange Commission. Copies of this annual report and quarterly reports may be
obtained without charge by contacting:
Paul D. Staubach
Senior Vice President, Chief
Financial Officer and Secretary
Fidelity Financial of Ohio, Inc.
4555 Montgomery Road
Cincinnati, OH 45212
MARKET MAKERS
Chicago Corporation
Ernst & Company
Friedman, Billings, Ramsey & Co., Inc.
Gradison/McDonald & Co. Securities, Inc.
Herzog, Heine, Geduld, Inc.
Josephthal, Lyon & Ross
Knight Securities, Inc.
Mayer & Schweitzer, Inc.
Nash, Weiss & Co.
Rodman & Renshaw, Inc.
Ryan, Beck & Co.
Sandler, O'Neill & Partners, L.P.
<PAGE> 1
EXHIBIT 23.0
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-22331 of Fidelity Financial of Ohio, Inc. on Form S-8 of our report dated
March 20, 1997 appearing in this Annual Report on Form 10-K of Fidelity
Financial of Ohio, Inc. for the year ended December 31, 1996.
GRANT THORTON LLP
/s/ Grant Thorton LLP
Cincinnati, Ohio
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,121
<INT-BEARING-DEPOSITS> 6,669
<FED-FUNDS-SOLD> 13,820
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 46,880
<INVESTMENTS-CARRYING> 10,744
<INVESTMENTS-MARKET> 10,831
<LOANS> 396,541
<ALLOWANCE> 1,558
<TOTAL-ASSETS> 499,918
<DEPOSITS> 408,159
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,861
<LONG-TERM> 20,186
<COMMON> 559
0
0
<OTHER-SE> 66,153
<TOTAL-LIABILITIES-AND-EQUITY> 499,918
<INTEREST-LOAN> 18,872
<INTEREST-INVEST> 2,936
<INTEREST-OTHER> 930
<INTEREST-TOTAL> 22,738
<INTEREST-DEPOSIT> 11,554
<INTEREST-EXPENSE> 12,656
<INTEREST-INCOME-NET> 10,082
<LOAN-LOSSES> 129
<SECURITIES-GAINS> (295)
<EXPENSE-OTHER> 7,638
<INCOME-PRETAX> 2,480
<INCOME-PRE-EXTRAORDINARY> 1,608
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,608
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
<YIELD-ACTUAL> 3.4
<LOANS-NON> 1,130
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 818
<CHARGE-OFFS> 29
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,558
<ALLOWANCE-DOMESTIC> 1,558
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
