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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _______________
Commission File No.: 0-27868
FIDELITY FINANCIAL OF OHIO, INC.
(Exact name of registrant as specified in its charter)
OHIO 31-1455721
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
4555 MONTGOMERY ROAD
CINCINNATI, OHIO 45212
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(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 ___
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 20, 1998, the aggregate value of the 5,038,828 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
556,230 shares held by all directors and officers of the Registrant and the
Registrant's Employee Stock Ownership Plan ("ESOP") as a group, was
approximately $90.7 million. This figure is based on the last known trade price
of $18.00 per share of the Registrant's Common Stock on March 20, 1998. 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 20, 1998: 5,595,058
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, 1997 are incorporated into Part II, Items 5 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 1998 Annual Meeting of
Stockholders are incorporated into Part III, Items 10 through 13 of this Form
10-K.
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PART I
ITEM 1. BUSINESS.
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 $341.6 million or 77.1% of Fidelity's
total loan portfolio (including loans held for sale) at December 31, 1997. To a
lesser extent, Fidelity originates loans secured by existing multi-family
residential and nonresidential real estate, which amounted to $26.1 million or
5.9% and $50.6 million or 11.4%, respectively, of the total loan portfolio
(including loans held for sale) at December 31, 1997, as well as construction
loans and consumer loans, which respectively amounted to $15.3 million or 3.5%
and $9.3 million or 2.1% 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, 1997, the Company had $535.1 million of total
consolidated assets, $470.8 million of total consolidated liabilities, including
$432.0 million of deposits, and $64.3 million of total consolidated
stockholders' equity.
LENDING ACTIVITIES
GENERAL. At December 31, 1997, Fidelity's net loan portfolio (including
loans held for sale) totaled $436.9 million, representing approximately 81.6% of
Fidelity's $535.1 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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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, 1997, Fidelity's limit on loans-to-one borrower was $8.2 million
and its five largest loans or groups of loans-to-one borrower, including related
entities, aggregated $7.4 million, $4.4 million, $4.1 million, $3.9 million and
$3.6 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 Fidelity's primary lending area and were performing in accordance
with their terms at December 31, 1997.
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Loan Portfolio Composition. The following table sets forth the
composition of Fidelity's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------
1997 1996(1) 1995 1994 1993
---------------- ---------------- --------------- --------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family residential(2) $341,636 77.1% $321,701 80.0% $142,246 75.7% $134,508 74.6% $120,902 72.7%
Multi-family residential 26,125 5.9 25,580 6.4 18,833 10.0 15,443 8.6 15,434 9.3
Nonresidential real estate 50,613 11.4 33,055 8.2 20,773 11.1 23,685 13.1 26,378 15.9
Construction 15,264 3.5 13,839 3.4 4,791 2.6 6,332 3.5 3,340 2.0
------- ------ ------- ----- ------- ----- ------- ----- -------- -----
Total real estate loans 433,638 97.9 394,175 98.0 186,643 99.4 179,968 99.8 166,054 99.9
Consumer loans:
Auto loans 1,427 0.3 1,149 0.3 -- -- -- -- -- --
Home improvement/equity 7,142 1.6 6,135 1.5 952 0.5 41 -- 42 --
Other 697 0.2 566 0.2 251 0.1 300 0.2 168 0.1
------- ------ ------- ----- ------- ----- ------- ----- ------- -----
Total consumer loans 9,266 2.1 7,850 2.0 1,203 0.6 341 0.2 210 0.1
------- ------ ------- ----- ------- ----- ------- ----- ------- -----
Total loans 442,904 100.0% 402,025 100.0% 187,846 100.0% 180,309 100.0% 166,264 100.0%
------- ====== ------- ===== ------- ===== ------- ===== ------- =====
Loans in process (5,127) (4,055) (1,305) (3,424) (1,927)
Unamortized yield adjustments 733 129 (591) (880) (1,142)
Allowance for loan losses (1,658) (1,558) (818) (783) (803)
------- ------- ------- ------- -------
Net loans $436,852 $396,541 $185,132 $175,222 $162,392
======= ======= ======= ======= =======
</TABLE>
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(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, 1997 and 1995, included $438,000 and $646,000 of loans
classified as held for sale, respectively. Fidelity did not have any loans
classified as held for sale at any of the other dates presented.
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CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following
table sets forth certain information at December 31, 1997 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
1998 1999 2000 12/31/97 12/31/97 12/31/97 12/31/97 Total
---- ---- ---- -------- -------- -------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family residential $ 7,919 $ 8,538 $ 9,204 $20,621 $ 67,406 $59,742 $168,206 $341,636
Multi-family residential and
nonresidential real estate 2,760 3,008 3,278 7,465 34,943 20,132 5,152 76,738
Construction 3,321 1,526 1,838 329 1,108 1,682 5,460 15,264
Consumer 1,734 1,897 2,075 2,961 599 -- -- 9,266
------- ------- ------- ------- -------- ------- -------- --------
Total $15,734 $14,969 $16,395 $31,376 $104,056 $81,556 $178,818 $442,904
======= ======= ======= ======= ======== ======= ======== ========
</TABLE>
The following table sets forth the dollar amount of all loans, before
net items, due after one year from December 31, 1997 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 $221,492 $112,225 $333,717
Multi-family residential and
nonresidential real estate 28,301 45,677 73,978
Construction 4,097 7,846 11,943
Consumer 4,532 3,000 7,532
-------- -------- --------
Total $258,422 $168,748 $427,170
======== ======== ========
</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 Chief Lending Officer. 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. Certain officers of the Savings
Bank have been authorized by the Board of Directors to approve loans up to
certain designated amounts. All nonresidential real estate and multi-family
residential loans exceeding $1.5 million are reported to the Board of Directors
on a monthly basis.
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 1997, the Savings Bank purchased $3.4 million and $11.4
million, respectively, in loan participations from other financial institutions.
Such loan purchases consisted of multi-family and nonresidential real estate
loans 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. At December 31, 1997, loans purchased and serviced by others
totaled $25.2 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, 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.
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The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Loan originations:
Single-family residential $ 83,169 $ 45,800 $27,785
Multi-family residential 2,796 3,030 1,865
Nonresidential real estate 8,186 869 572
Construction 19,504 6,372 4,308
Consumer 6,799 3,394 2,228
-------- -------- -------
Total loans originated 120,454 59,465 36,758
Purchases 11,368 -- 3,409
-------- -------- -------
Total loans originated and
purchased 131,822 59,465 40,167
Sales, securitizations and loan
principal reductions:
Loans sold 4,422 547 1,165
Loans securitized 8,099 -- --
Loan principal reductions 79,023 37,106 28,923
-------- -------- -------
Total loans sold, securitized and
principal reductions 91,544 37,653 30,088
Net loans acquired through Merger -- 189,405 --
Increase (decrease) due to other
items, net 33 838 (169)
-------- -------- -------
Net increase in loan portfolio $ 40,311 $212,055 $ 9,910
======== ======== =======
</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, 1997, $341.6 million or 77.1% 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 95% 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 loans that are fixed for
either five or seven years then become one year adjustable rate 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, 1997, $113.7 million or 33.3% 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, 1997, $26.1 million or 5.9% and $50.6 million or 11.4% 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,
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232 loans secured by apartment buildings, small office buildings, retail
establishments, 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
$331,000 at December 31, 1997.
Multi-family residential and nonresidential real estate loans have
terms which range up to 30 years. Fidelity offers both ten year and 15 year
fixed-rate loans and adjustable-rate loans which generally adjust at either a
one, three or five-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 originates fixed-rate multi-family residential and
nonresidential real estate loans with either five, seven or ten year balloon
terms. At December 31, 1997, $47.1 million or 61.4% 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 builders for the construction of single family
residences on a speculative (unsold) basis, based on the builders'
creditworthiness. Fidelity also makes construction loans to borrowers for the
construction of multi-family residential and nonresidential real estate. At
December 31, 1997, construction loans amounted to $15.3 million or 3.5% of
Fidelity's total loan portfolio (including loans held for sale), before net
items. Of this amount, $7.0 million consists of loans for the construction of
single-family residences and $8.3 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
<PAGE> 11
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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 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, 1997, consumer loans totaled $9.3
million or 2.1% of the total loan portfolio (including loans held for sale),
before net items, and consisted primarily of home equity loans, automobile 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,
1997, Fidelity had $671,000 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, 1997, 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 Construction Consumer Total
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans
delinquent for:
30 - 59 days $4,321 1.0% $-- --% $146 --% $-- --% $8 --% $4,475 1.0%
60 - 89 days 907 0.2 -- -- -- -- -- -- -- -- 907 0.2
90 days and over 957 0.2 -- -- -- -- -- -- -- -- 957 0.2
------ --- --- -- ---- -- --- -- -- -- ------ ---
Total
delinquent
loans $6,185 1.4% $-- --% $146 --% $-- --% $8 --% $6,339 1.4%
====== === === == ==== == === == == == ====== ===
</TABLE>
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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,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Single-family residential $957 $ 924 $ 949 $652 $ 955
Multi-family residential and
nonresidential real estate -- 206 58 187 513
---- ------ ------ ---- ------
Total non-performing loans 957 1,130 1,007 839 1,468
Real estate owned:
Single-family residential real
estate -- -- -- 85 65
Multi-family residential and
nonresidential real estate -- -- -- -- 39
---- ------ ------ ---- ------
Total real estate owned -- -- -- 85 104
---- ------ ------ ---- ------
Total non-performing assets $957 $1,130 $1,007 $924 $1,572
==== ====== ====== ==== ======
Total non-performing loans
as a percentage of total loans .22% .28% .54% .47% .88%
==== ====== ====== ==== ======
Total non-performing assets as
a percentage of total assets .18% .23% .44% .43% .77%
==== ====== ====== ==== ======
</TABLE>
<PAGE> 14
13
The interest income that would have been recorded during the years
ended December 31, 1997, 1996, 1995, 1994 and 1993 if Fidelity's non-performing
loans at the end of such periods had been current in accordance with their terms
during such periods was $25,000, $59,000, $12,000, $51,000 and $42,000,
respectively. The amount of interest income that was actually received during
the years ended December 31, 1997, 1996, 1995, 1994 and 1993 with respect to
such non-performing loans amounted to approximately $57,000, $74,000, $65,000,
$42,000 and $106,000, 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, 1997 consisted of
$1.5 million of loans classified as special mention, $1.8 million of loans
classified as substandard, and $501,000 of loans classified as doubtful.
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, 1997, Fidelity's allowance for loan losses amounted to
$1.7 million, of which $1.65 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,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding $442,904 $402,025 $187,846 $180,309 $166,264
======== ======== ======== ======== ========
Average loans outstanding, net $427,912 $234,133 $180,935 $170,340 $157,510
======== ======== ======== ======== ========
Balance at beginning of period $ 1,558 $ 818 $ 783 $ 803 $ 756
Charge-offs:
Single-family residential 1 29 36 23 5
Non-residential -- -- -- 41 --
-------- -------- -------- -------- --------
Total charge-offs 1 29 36 64 5
Recoveries -- -- -- -- --
-------- -------- -------- -------- --------
Net charge-offs 1 29 36 64 5
Provision for losses on loans 101 129 71 44 52
Increase attributable to Merger -- 640 -- -- --
-------- -------- -------- -------- --------
Balance at end of period $ 1,658 $ 1,558 $ 818 $ 783 $ 803
======== ======== ======== ======== ========
Allowance for loan losses as a
percent of total loans
outstanding .37% .39% .44% .43% .48%
=== === === === ===
Ratio of net charge-offs to
average loans outstanding -- .01% .02% .04% --%
=== === === === ===
</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,
----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
Percent of Percent of Percent of Percent of Percent of
Total Total Total Total Total
Loans by Loans by Loans by Loans by Loans by
Amount Category Amount Category Amount Category Amount Category Amount Category
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family residential loans $ 530 77.1% $1,246 80.0% $525 75.7% $346 74.6 % $418 72.7 %
Multi-family residential loans 153 5.9 100 6.4 106 10.0 133 8.6 97 9.3
Nonresidential real estate loans 709 11.4 128 8.2 162 11.1 272 13.1 268 15.9
Construction loans 79 3.5 53 3.4 22 2.6 32 3.5 20 2.0
Consumer loans 187 2.1 31 2.0 3 0.6 -- 0.2 -- 0.1
------ ----- ------ ----- ---- ----- ---- ------ ---- ------
Total $1,658 100.0% $1,558 100.0% $818 100.0% $783 100.00% $803 100.00%
====== ===== ====== ===== ==== ===== ==== ====== ==== ======
</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, 1997, the Company's equity accounts reflected a net
unrealized gain of $117,000 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,
1997, 1996 and 1995 (including those designated as available for sale):
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- -------------------------- --------------------------
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 $ 574 $ 575 $ 696 $ 689 $ -- $ --
GNMA participation certificates 11,632 11,797 8,354 8,434 -- --
FNMA participation certificates 236 246 306 319 -- --
Collateralized mortgage obligations 1,085 1,088 1,388 1,389 -- --
------- ------- ------- ------- ------- -------
Total mortgage-backed securities
held to maturity 13,527 13,706 10,744 10,831 -- --
Available for sale:
FHLMC Participation Certificates 12,610 12,683 19,767 19,926 14,346 14,296
GNMA Participation Certificates 4,707 4,752 6,028 6,062 4,958 4,977
FNMA Participation Certificates 7,160 7,146 4,776 4,772 8,456 8,406
Collateralized mortgage obligations 1,240 1,246 -- -- 1,732 1,699
------- ------- ------- ------- ------- -------
Total mortgage-backed securities
designated as available for sale 25,717 25,827 30,571 30,760 29,492 29,378
------- ------- ------- ------- ------- -------
Total mortgage-backed securities $39,244 $39,533 $41,315 $41,591 $29,492 $29,378
======= ======= ======= ======= ======= =======
</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,
----------------------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Mortgage-backed securities at
beginning of period $41,504 $29,378 $27,072
Purchases 19,173 3,173 6,587
Mortgage-backed securities received through loan 8,099 -- --
securitization
Acquisition of mortgage-backed securities
through Merger -- 44,435 --
Sales of mortgage-backed securities (22,434) (29,232) --
Unrealized gain (loss) on securities designated as
available for sale (79) 334 234
Repayments (6,845) (6,526) (4,487)
Premium amortization (64) (58) (28)
------- ------- -------
Mortgage-backed securities at end
of period $39,354 $41,504 $29,378
======= ======= =======
Weighted average yield at end of
period 6.83% 7.29% 6.63%
</TABLE>
At December 31, 1997, of the $39.4 million portfolio, $4.0 million was
scheduled to mature in one year or less, $13.7 million was scheduled to mature
in between one and five years, $2.8 million was scheduled to mature in between
five and ten years, and $18.9 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 $39.4 million of mortgage-backed securities at December 31,
1997, $15.7 million had fixed interest rates and had a final maturity of five
years or less and $23.7 million consisted of adjustable-rate securities. Of
Fidelity's total investment in mortgage-backed securities at December 31, 1997,
$16.4 million consisted of GNMA certificates, $7.4 million consisted of FNMA
certificates, $13.3 million consisted of FHLMC certificates, and $2.3 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,
----------------------------------------------------------------------------------------------
1997 1996(1) 1995
------------------------- --------------------------- ------------------------------
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) $5,869 $5,908 $ 8,502 $ 8,530 $5,016 $5,025
U.S. Treasury notes(2) -- -- 7,482 7,500 999 1,019
Corporate equity
securities 84 112 64 90 -- --
----- ------ ------- ------- ------ ------
$5,953 $6,020 $16,048 $16,120 $6,015 $6,044
====== ====== ======= ======= ====== ======
Weighted average yield
at end of period 6.92% 6.50% 6.55%
==== ===== ====
</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, 1997, 1996 and 1995, all investment securities were
classified as available for sale.
<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, 1997:
<TABLE>
<CAPTION>
Less Than One to Five to More Than
One Year Five Years Ten Years Ten Years Total
------------------- ------------------- ------------------ ------------------ ------------------
Amortized Market Amortized Market Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
agency obligations $-- $-- $1,998 $1,999 $2,997 $3,027 $874 $882 $5,869 $5,908
U.S. Treasury notes -- -- -- -- -- -- -- -- -- --
--- --- ------ ------ ------- ------ ---- ---- ------ ------
Total $-- $-- $1,998 $1,999 $ 2,997 $3,027 $874 $882 $5,869 $5,908
=== === ====== ====== ======= ====== ==== ==== ====== ======
</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 $61.4
million at December 31, 1997. 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,
-------------------------------------------------------------------------------------
1997 1996 1995
---------------------- ----------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
3.00 - 4.00% $ 2,067 0.48% $ -- --% $ 89 0.05%
4.01 - 6.00% 176,776 40.92 234,757 57.52 72,137 39.92
6.01 - 8.00% 157,898 36.55 77,835 19.07 66,094 36.58
8.01 - 10.00% 3,883 0.89 3,177 0.78 3,510 1.95
-------- ------ -------- ------ -------- ------
Total certificate accounts 340,624 78.84 315,769 77.37 141,830 78.50
-------- ------ -------- ------ -------- ------
Transaction accounts:
Passbook accounts 40,374 9.34 44,798 10.97 15,753 8.71
Money market accounts 25,730 5.96 24,721 6.06 12,800 7.08
NOW accounts 25,296 5.86 22,871 5.60 10,314 5.71
-------- ------ -------- ------ -------- ------
Total transaction accounts 91,400 21.16 92,390 22.63 38,867 21.50
-------- ------ -------- ------ -------- ------
Total deposits $432,024 100.00% $408,159 100.00% $180,697 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
<PAGE> 23
22
The following table sets forth the savings activities of Fidelity
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Deposits(1) $982,826 $684,220 $135,109
Withdrawals (979,976) (467,465) (135,222)
-------- -------- --------
Net increase (decrease) before interest
credited and other 2,850 216,755 (113)
Interest credited and other 21,015 10,707 7,612
-------- -------- --------
Net increase in deposits $ 23,865 $227,462 $ 7,499
======== ======== ========
</TABLE>
- --------------------
(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.
The following table shows the interest rate and maturity information
for Fidelity's certificates of deposit at December 31, 1997.
<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% $ 2,067 $ -- $ -- $ -- $ 2,067
4.01 - 6.00% 140,318 30,267 3,097 3,094 176,776
6.01 - 8.00% 107,419 39,526 8,848 2,105 157,898
8.01 - 10.00% 1,450 887 992 554 3,883
-------- ------- ------- ------ --------
Total $251,254 $70,680 $12,937 $5,753 $340,624
======== ======= ======= ====== ========
</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, 1997.
Certificates of deposit maturing in quarter ending:
---------------------------------------------------
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
March 31, 1998 $ 5,782
June 30, 1998 8,926
September 30, 1998 5,377
December 31, 1998 10,235
After December 31, 1998 13,761
-------
Total certificates of deposit with
balances of $100,000 or more $44,081
=======
</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, 1997, Fidelity had
$34.2 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,
--------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ----------------
(Dollars In Thousands)
<S> <C> <C> <C>
Maximum Balance $34,478 $29,672 $17,653
Average Balance 26,208 17,794 13,811
Weighted average interest rate of
FHLB advances 6.25% 6.19% 6.28%
</TABLE>
The following table sets forth certain information as to Fidelity's
FHLB advances at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
(Dollars In Thousands)
<S> <C> <C> <C>
FHLB advances(1) $34,233 $20,186 $17,653
Weighted average interest rate
of FHLB advances 6.21% 6.22% 6.16%
</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 101 full-time employees and 16 part-time
employees at December 31, 1997. 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
unless the loans are made pursuant to a benefit or compensation program that (i)
is widely available to employees of the institution and (ii) does not give
preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the savings
institution. Section 22(h) 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, 1997, 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
<PAGE> 28
27
the acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions).
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."
<PAGE> 29
28
INSURANCE OF ACCOUNTS. The deposits of the Savings Bank are currently
insured by the SAIF of the FDIC. Both the SAIF and the Bank Insurance Fund
("BIF"), the federal deposit insurance fund that covers commercial bank
deposits, are required by law to attain and thereafter maintain a reserve ratio
of 1.25% of insured deposits.
The BIF fund met its target reserve level in September 1995, but the
SAIF was not expected to meet its target reserve level until at least 2002.
Consequently, in late 1995, the FDIC approved a final rule regarding deposit
insurance premiums which, effective with respect to the semiannual premium
assessment beginning January 1, 1996, reduced deposit insurance premiums for BIF
member institutions to zero basis points (subject to an annual minimum of
$2,000) for institutions in the lowest risk category. Deposit insurance premiums
for SAIF members were maintained at their existing levels (23 basis points for
institutions in the lowest risk category).
On September 30, 1996, President Clinton signed into law legislation
which eliminated 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 to 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 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.
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
<PAGE> 30
29
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, 1997. 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 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;
<PAGE> 31
30
(ii) 20% for securities (other than equity securities) issued by U.S.
Government-sponsored agencies and mortgage-backed securities issued by, or fully
guaranteed as to principal and interest by, the FNMA or the FHLMC, except for
those classes with residual characteristics or stripped mortgage-related
securities; (iii) 50% for prudently underwritten permanent one-to four-family
first lien mortgage loans not more than 90 days delinquent and having a
loan-to-value ratio of not more than 80% at origination unless insured to such
ratio by an insurer approved by the FNMA or the FHLMC, qualifying residential
bridge loans made directly for the construction of one- to four-family
residences and qualifying multi-family residential loans; and (iv) 100% for all
other loans and investments, including consumer loans, commercial loans, and
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, 1997.
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital(1) Capital(2)
------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Regulatory capital $53,194 $53,194 $54,844
Minimum required regulatory capital 7,887 15,773 22,701
------- ------- -------
Regulatory capital excess $45,307 $37,421 $32,143
======= ======= =======
Regulatory capital as a
percentage(3) 10.1% 10.1% 19.3%
Minimum capital required as a
percentage 1.5 3.0 8.0
---- ---- ----
Regulatory capital as a percentage
in excess of requirements 8.6% 7.1% 11.3%
==== ==== ====
</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 $525.8 million. Risk-based capital is computed as a percentage of
total risk-weighted assets of $283.8 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 risk-based 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, 1997, 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 4%. At December 31, 1997, the Savings Bank's liquidity
ratio was 23.1%.
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.
<PAGE> 37
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, 1997, the Savings Bank was a Tier 1 institution for
purposes of this regulation.
On January 7, 1998, the OTS published a notice of proposed rulemaking
to amend its capital distribution regulation. Under the proposal, a savings
institution that would remain at least "adequately capitalized" following the
capital distribution and that meets other specified requirements, would not be
required to provide any notice or application to the OTS for cash dividends
below a specified amount. 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, a Tier 1 leverage capital ratio of 4.0% or more
(or 3% or more if the savings institution is assigned a composite rating of 1),
and does not meet the definition of "well capitalized." Because the Savings Bank
is a subsidiary of the Company, the proposal, however, would require the Savings
Bank to provide notice to the OTS of its intent to make a capital distribution,
unless an application is otherwise required. 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.
<PAGE> 38
37
Generally, federal law prohibits federal savings institutions from
establishing, retaining or operating a branch outside the state in which the
federal institution has its 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, 1997, the amount of the Savings Bank's
assets which were invested in QTIs was 91.9%, 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
<PAGE> 39
38
members within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the Board of Directors of the FHLB.
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, 1997, the Savings
Bank had $4.2 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, 1997, 1996 and 1995, dividends paid by the FHLB of Cincinnati to the Savings
Bank amounted to $283,000, $165,000 and $120,000, 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, 1997, 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.
<PAGE> 40
39
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 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, 1997, 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
<PAGE> 41
40
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 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 two taxable years and forward to
the succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 5, 1997. At December 31, 1997, 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, 1996, 1995 and 1994 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 1997.
<PAGE> 43
42
ITEM 2. PROPERTIES.
At December 31, 1997, 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, 1997.
<TABLE>
<CAPTION>
Net Book Value
Description/Address Leased/Owned of Property Deposits
------------------- ------------ ----------- --------
(In Thousands)
<S> <C> <C> <C>
Main Office Owned $1,088 $126,857
4555 Montgomery Road
Cincinnati, Ohio 45212 (1)
Branch Office Owned 457 42,297
8434 Vine Street
Cincinnati, Ohio 45216 (1)
Branch Office Owned 634 31,693
7136 Miami Avenue
Cincinnati, Ohio 45243
Branch Office Owned 1,286 58,266
11100 Reading Road
Cincinnati, Ohio 45241
Branch Office Leased 80 28,724
11700 Princeton Pike
Cincinnati, Ohio 45248 (2)
Branch Office Owned 467 24,667
4144 Hunt Road
Cincinnati, Ohio 45238
Branch Office Owned 511 33,503
5030 Delhi Avenue
Cincinnati, Ohio 45238
Branch Office Owned 331 44,961
3316 Glenmore Avenue
Cincinnati, Ohio 45211
Branch Office Owned 218 20,493
3777 Hamilton Cleves Road
Ross, Ohio 45013
</TABLE>
<PAGE> 44
43
<TABLE>
<CAPTION>
Net Book Value
Description/Address Leased/Owned of Property Deposits
------------------- ------------ ----------- --------
(In Thousands)
<S> <C> <C> <C>
Branch Office Owned $ 208 $ 13,306
8045 Colerain Avenue
Cincinnati, Ohio 45239
Branch Office Owned 400 4,320
10640 Loveland -
Madeira Road
Loveland, Ohio 45140
Branch Office Leased 2 2,937
7944 Beechmont Avenue
Cincinnati, Ohio 45255 (3)
Other property Owned 48 --
4541 Montgomery Road
Cincinnati, Ohio 45212 (4)
Other property Owned 7 --
17 Hillsdale
Cincinnati, Ohio 45216 (5)
Other property Owned 74 --
16 Hereford Avenue
Cincinnati, Ohio 45216 (6)
</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) Lease expiration date is September 30, 2002.
(4) Fidelity leases substantially all of its premises at this property to
various commercial tenants.
(5) Consists of a single-family home which is currently being leased on a
month-to-month basis.
(6) 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 1997 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.
<PAGE> 46
45
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 15 of the Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein is incorporated by reference from pages
six and seven of the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages
16 to 39 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 28, 1998 ("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.
<PAGE> 47
46
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):
Report of Independent Certified Public Accountants
Consolidated Statements of Financial Condition at December 31,
1997 and 1996
Consolidated Statements of Earnings for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995
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)/
<PAGE> 48
47
No. Exhibits
----- ---------------------------------------------------------------
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. Hughes***(1)/
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)/
10.8 1997 Stock Option Plan(1)/
10.9 1997 Management Recognition Plan and Trust(1)/
13.0 1997 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.
*** Incorporated herein by reference from the Company's Form 10-K filed with the
SEC on March 28, 1997.
(1)/ Management contract or compensatory plan or arrangement.
(b) None.
(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 24, 1998 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 24, 1998
- ------------------------------------------------
John R. Reusing, President,
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ MICHAEL W. JORDAN March 24, 1998
- ------------------------------------------------
Michael W. Jordan, Director
/s/ DAVID A. LUECKE March 24, 1998
- ------------------------------------------------
David A. Luecke, Director
/s/ CONSTANTINE N. PAPADAKIS March 24, 1998
- ------------------------------------------------
Constantine N. Papadakis, Director
<PAGE> 50
49
/s/ PAUL D. STAUBACH March 24, 1998
- ------------------------------------------------
Paul D. Staubach, Senior Vice President,
Chief Financial Officer and Director
(Principal Financial Officer)
/s/ ROBERT W. ZUMBIEL March 24, 1998
- ------------------------------------------------
Robert W. Zumbiel, Director
/s/ JOSEPH D. HUGHES March 24, 1998
- ------------------------------------------------
Joseph D. Hughes, Executive Vice
President and Director
/s/ THOMAS N. SPAETH March 24, 1998
- ------------------------------------------------
Thomas N. Spaeth, Director
<PAGE> 1
Exhibit 10.8
FIDELITY FINANCIAL OF OHIO, INC.
1997 STOCK OPTION PLAN
ARTICLE I
ESTABLISHMENT OF THE PLAN
Fidelity Financial of Ohio, Inc. (the "Corporation") hereby establishes
this 1997 Stock Option Plan (the "Plan") upon the terms and conditions
hereinafter stated.
ARTICLE II
PURPOSE OF THE PLAN
The purpose of this Plan is to improve the growth and profitability of
the Corporation and its Subsidiary Companies by providing Employees and
Non-Employee Directors with a proprietary interest in the Corporation as an
incentive to contribute to the success of the Corporation and its Subsidiary
Companies, and rewarding those Employees for outstanding performance and the
attainment of targeted goals. All Incentive Stock Options issued under this Plan
are intended to comply with the requirements of Section 422 of the Code, and the
regulations thereunder, and all provisions hereunder shall be read, interpreted
and applied with that purpose in mind.
ARTICLE III
DEFINITIONS
3.01 "Award" means an Option or Stock Appreciation Right granted
pursuant to the terms of this Plan.
3.02 "Bank" means Fidelity Federal Savings Bank, the wholly-owned
subsidiary of the Corporation.
3.03 "Board" means the Board of Directors of the Corporation.
3.04 "Change in Control of the Corporation" 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 (other than the Corporation and any trustee or other
fiduciary holding securities under any employee benefit plan of the
Corporation), 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; (ii) during any period of two
consecutive years (not including any period prior to the adoption of the Plan),
individuals who at the beginning of such
<PAGE> 2
period constitute the Board of Directors, and any new director whose election by
the Board of Directors or nomination for election by the Corporation's
stockholders was approved by a vote of at least two-thirds of the directors then
still in office who either were directors at the beginning of the two-year
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute at least a majority of the Board of
Directors; (iii) the stockholders of the Corporation approve a merger or
consolidation of the Corporation with any other corporation, other than a merger
or consolidation that would result in the voting securities of the Corporation
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of the voting
securities of the Corporation outstanding immediately after such merger or
consolidation; or (iv) the stockholders of the Corporation approve a plan of
complete liquidation of the Corporation or an agreement for the sale or
disposition by the Corporation of all or substantially all of the Corporation's
assets. If any of the events enumerated in clauses (i) through (iv) occur, the
Board shall determine the effective date of the Change in Control resulting
therefrom for purposes of the Plan.
3.05 "Code" means the Internal Revenue Code of 1986, as amended.
3.06 "Committee" means a committee of two or more directors appointed
by the Board pursuant to Article IV hereof, each of whom shall be a Non-Employee
Director.
3.07 "Common Stock" means shares of the common stock, $0.10 par value
per share, of the Corporation.
3.08 "Disability" means any physical or mental impairment which
qualifies an Employee for disability benefits under the applicable long-term
disability plan maintained by the Corporation or a Subsidiary Company, or, if no
such plan applies, which would qualify such Employee for disability benefits
under the Federal Social Security System.
3.09 "Effective Date" means the day upon which the Board approves this
Plan.
3.10 "Employee" means any person who is employed by the Corporation or
a Subsidiary Company, or is an Officer of the Corporation or a Subsidiary
Company, but not including directors who are not also Officers of or otherwise
employed by the Corporation or a Subsidiary Company.
3.11 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
3.12 "Fair Market Value" shall be equal to the fair market value per
share of the Corporation's Common Stock on the date an Award is granted. For
purposes hereof, the Fair Market Value of a share of Common Stock shall be the
closing sale price of a share of Common Stock on the date in question (or, if
such day is not a trading day in the U.S. markets, on the nearest preceding
trading day), as reported with respect to the principal
2
<PAGE> 3
market (or the composite of the markets, if more than one) or national quotation
system in which such shares are then traded, or if no such closing prices are
reported, the mean between the high bid and low asked prices that day on the
principal market or national quotation system then in use, or if no such
quotations are available, the price furnished by a professional securities
dealer making a market in such shares selected by the Committee.
3.13 "Incentive Stock Option" means any Option granted under this Plan
which the Board intends (at the time it is granted) to be an incentive stock
option within the meaning of Section 422 of the Code or any successor thereto.
3.14 "Non-Employee Director" means a member of the Board who is not an
Officer or Employee of the Corporation or any Subsidiary Company.
3.15 "Non-Qualified Option" means any Option granted under this Plan
which is not an Incentive Stock Option.
3.16 "Offering" means the offering of Common Stock to the public
pursuant to a Plan of Conversion and Agreement and Plan of Reorganization
adopted by the Corporation, the Bank and Fidelity Federal Mutual Holding
Company.
3.17 "Officer" means an Employee whose position in the Corporation or
Subsidiary Company is that of a corporate officer, as determined by the Board.
3.18 "Option" means a right granted under this Plan to purchase Common
Stock.
3.19 "Optionee" means an Employee or Non-Employee Director to whom an
Option is granted under the Plan.
3.20 "OTS" means the Office of Thrift Supervision.
3.21 "Retirement" means a termination of employment upon or after
attainment of age sixty-five (65) or such earlier age as may be specified in any
applicable qualified pension benefit plan maintained by the Corporation or a
Subsidiary Company.
3.22 "Stock Appreciation Right" means a right to surrender an Option in
consideration for a payment by the Corporation in cash and/or Common Stock, as
provided in the discretion of the Committee in accordance with Section 8.11.
3.23 "Subsidiary Companies" means those subsidiaries of the
Corporation, including the Bank, which meet the definition of "subsidiary
corporations" set forth in Section 425(f) of the Code, at the time of granting
of the Award in question.
3
<PAGE> 4
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 DUTIES OF THE COMMITTEE. The Plan shall be administered and
interpreted by the Committee, as appointed from time to time by the Board
pursuant to Section 4.02. The Committee shall have the authority (subject to
compliance with applicable OTS regulations) to adopt, amend and rescind such
rules, regulations and procedures as, in its opinion, may be advisable in the
administration of the Plan, including, without limitation, rules, regulations
and procedures which (i) deal with satisfaction of an Optionee's tax withholding
obligation pursuant to Section 12.02 hereof, (ii) include arrangements to
facilitate the Optionee's ability to borrow funds for payment of the exercise or
purchase price of an Award, if applicable, from securities brokers and dealers,
and (iii) include arrangements which provide for the payment of some or all of
such exercise or purchase price by delivery of previously-owned shares of Common
Stock or other property and/or by withholding some of the shares of Common Stock
which are being acquired. The interpretation and construction by the Committee
of any provisions of the Plan, any rule, regulation or procedure adopted by it
pursuant thereto or of any Award shall be final and binding in the absence of
action by the Board of Directors.
4.02 APPOINTMENT AND OPERATION OF THE COMMITTEE. The members of the
Committee shall be appointed by, and will serve at the pleasure of, the Board.
The Board from time to time may remove members from, or add members to, the
Committee, provided the Committee shall continue to consist of two or more
members of the Board, each of whom shall be a Non-Employee Director. The
Committee shall act by vote or written consent of a majority of its members.
Subject to the express provisions and limitations of the Plan, the Committee may
adopt such rules, regulations and procedures as it deems appropriate for the
conduct of its affairs. It may appoint one of its members to be chairman and any
person, whether or not a member, to be its secretary or agent. The Committee
shall report its actions and decisions to the Board at appropriate times but in
no event less than one time per calendar year.
4.03 REVOCATION FOR MISCONDUCT. The Board of Directors or the Committee
may by resolution immediately revoke, rescind and terminate any Option, or
portion thereof, to the extent not yet vested, or any Stock Appreciation Right,
to the extent not yet exercised, previously granted or awarded under this Plan
to an Employee who is discharged from the employ of the Corporation or a
Subsidiary Company for cause, which, for purposes hereof, shall mean termination
because of the Employee's personal dishonesty, incompetence, willful misconduct,
breach of fiduciary duty involving personal profit, intentional failure to
perform stated duties, willful violation of any law, rule, or regulation (other
than traffic violations or similar offenses) or final cease-and-desist order.
Options granted to a Non-Employee Director who is removed for cause pursuant to
the Corporation's Articles of Incorporation shall terminate as of the effective
date of such removal.
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4.04 LIMITATION ON LIABILITY. Neither the members of the Board of
Directors nor any member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan, any rule, regulation
or procedure adopted pursuant thereto or any Awards granted under it. If any
members of the Board of Directors or a member of the Committee is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of anything done or not done by him in such capacity under or with
respect to the Plan, the Corporation shall, subject to the requirements of
applicable laws and regulations, indemnify such member against all liabilities
and expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in the best interests of the Corporation and its
Subsidiary Companies and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his conduct was unlawful.
4.05 COMPLIANCE WITH LAW AND REGULATIONS. All Awards granted hereunder
shall be subject to all applicable federal and state laws, rules and regulations
and to such approvals by any government or regulatory agency as may be required.
The Corporation shall not be required to issue or deliver any certificates for
shares of Common Stock prior to the completion of any registration or
qualification of or obtaining of consents or approvals with respect to such
shares under any Federal or state law or any rule or regulation of any
government body, which the Corporation shall, in its sole discretion, determine
to be necessary or advisable. Moreover, no Option or Stock Appreciation Right
may be exercised if such exercise would be contrary to applicable laws and
regulations.
4.06 RESTRICTIONS ON TRANSFER. The Corporation may place a legend upon
any certificate representing shares acquired pursuant to an Award granted
hereunder noting that the transfer of such shares may be restricted by
applicable laws and regulations.
ARTICLE V
ELIGIBILITY
Awards may be granted to such Employees of the Corporation and its
Subsidiary Companies as may be designated from time to time by the Board of
Directors or the Committee. Awards may not be granted to individuals who are not
Employees or Non-Employee Directors of either the Corporation or its Subsidiary
Companies. Non-Employee Directors shall be eligible to receive only
Non-Qualified Options.
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ARTICLE VI
COMMON STOCK COVERED BY THE PLAN
6.01 OPTION SHARES. The aggregate number of shares of Common Stock
which may be issued pursuant to this Plan, subject to adjustment as provided in
Article IX, shall be 227,810 shares, which is equal to 10.0% of the shares of
Common Stock issued in the Offering. None of such shares shall be the subject of
more than one Award at any time, but if an Award as to any shares is surrendered
before exercise, or expires or terminates for any reason without having been
exercised in full, or for any other reason ceases to be exercisable, the number
of shares covered thereby shall again become available for grant under the Plan
as if no Awards had been previously granted with respect to such shares.
Notwithstanding the foregoing, if an Option is surrendered in connection with
the exercise of a Stock Appreciation Right, or vice versa, the number of shares
covered thereby shall not be available for grant under the Plan.
6.02 SOURCE OF SHARES. The shares of Common Stock issued under the Plan
may be authorized but unissued shares, treasury shares, shares purchased by the
Corporation on the open market or from private sources for use under the Plan
or, if applicable, shares held in a grantor trust created by the Corporation.
ARTICLE VII
DETERMINATION OF
AWARDS, NUMBER OF SHARES, ETC.
The Board of Directors or the Committee shall, in its discretion,
determine from time to time which Employees and Non-Employee Directors will be
granted Awards under the Plan, the number of shares of Common Stock subject to
each Award, and whether each Option will be an Incentive Stock Option or a
Non-Qualified Stock Option. In making determinations with respect to Employees
there shall be taken into account the duties, responsibilities and performance
of each respective Employee, his present and potential contributions to the
growth and success of the Corporation, his salary and such other factors as the
Board of Directors or the Committee shall deem relevant to accomplishing the
purposes of the Plan. No individual Employee shall receive Awards for more than
25% of the number of shares available for grant under this Plan, and
Non-Employee Directors shall not receive Awards for more than 5% individually,
or 30% in the aggregate, of the number of shares available for grant under this
Plan.
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ARTICLE VIII
OPTIONS AND STOCK APPRECIATION RIGHTS
Each Option granted hereunder shall be on the following terms and
conditions:
8.01 STOCK OPTION AGREEMENT. The proper Officers on behalf of the
Corporation and each Optionee shall execute a Stock Option Agreement which shall
set forth the total number of shares of Common Stock to which it pertains, the
exercise price, whether it is a Non-Qualified Option or an Incentive Stock
Option, and such other terms, conditions, restrictions and privileges as the
Board of Directors or the Committee in each instance shall deem appropriate,
provided they are not inconsistent with the terms, conditions and provisions of
this Plan. Each Optionee shall receive a copy of his executed Stock Option
Agreement.
8.02 AWARDS TO EMPLOYEES AND NON-EMPLOYEE DIRECTORS. Specific Awards to
Employees and Non-Employee Directors shall be made to such persons and in such
amounts as are determined by the Board of Directors or the Committee. However,
Awards equal to 68,343 shares (or 30% of the number of shares available under
this Plan) shall be made to Non-Employee Directors in the aggregate and no
individual Non-Employee Director may receive Awards in excess of 11,390 shares
(or 5% of the number of shares available under this Plan).
8.03 OPTION EXERCISE PRICE.
(a) INCENTIVE STOCK OPTIONS. The per share price at which the
subject Common Stock may be purchased upon exercise of an Incentive Stock Option
shall be no less than one hundred percent (100%) of the Fair Market Value of a
share of Common Stock at the time such Incentive Stock Option is granted, except
as provided in Section 8.10(b), and subject to any applicable adjustment
pursuant to Article IX hereof.
(b) NON-QUALIFIED OPTIONS. The per share price at which the
subject Common Stock may be purchased upon exercise of a Non-Qualified Option
shall be no less than one hundred percent (100%) of the Fair Market Value of a
share of Common Stock at the time such Non-Qualified Option is granted, and
subject to any applicable adjustment pursuant to Article IX hereof.
8.04 VESTING AND EXERCISE OF OPTIONS.
(a) GENERAL RULES. Incentive Stock Options and Non-Qualified
Options granted hereunder shall become vested and exercisable at the rate of 20%
per year, with the first installment becoming vested and exercisable as of the
date the Option was granted, and the right to exercise shall be cumulative.
Notwithstanding the foregoing, no vesting shall occur on or after an Employee's
employment with the Corporation and all Subsidiary Companies is terminated for
any reason other than his death or Disability. In determining
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the number of shares of Common Stock with respect to which Options are vested
and/or exercisable, fractional shares will be rounded up to the nearest whole
number if the fraction is 0.5 or higher, and down if it is less.
(b) ACCELERATED VESTING. Unless the Board of Directors or the
Committee shall specifically state otherwise at the time an Option is granted,
all Options granted hereunder shall become vested and exercisable in full on the
date an Optionee terminates his employment with or service to the Corporation or
a Subsidiary Company because of his death or Disability. In addition, all
options hereunder shall become immediately vested and exercisable in full on the
date an Optionee terminates his employment or service to the Corporation or a
Subsidiary Company as the result of a Change in Control of the Corporation.
8.05 DURATION OF OPTIONS.
(a) GENERAL RULE. Except as provided in Sections 8.05(b) and
8.10, each Option or portion thereof granted to Employees and Non-Employee
Directors shall be exercisable at any time on or after it vests and becomes
exercisable until the earlier of (i) ten (10) years after its date of grant or
(ii) three (3) months after the date on which the Optionee ceases to be employed
(or in the service of the Board of Directors in the case of Non-Employee
Directors) by the Corporation and all Subsidiary Companies, unless the Board of
Directors or the Committee in its discretion decides at the time of grant or
thereafter to extend such period of exercise upon termination of employment or
service from three (3) months to a period not exceeding one (1) year.
(b) EXCEPTION FOR TERMINATION DUE TO DEATH OR DISABILITY. If
an Employee dies while in the employ of the Corporation or a Subsidiary Company
or terminates employment with the Corporation or a Subsidiary Company as a
result of Disability without having fully exercised his Options, the Optionee or
the executors, administrators, legatees or distributee of his estate shall have
the right, during the twelve-month period following the earlier of his death or
Disability, to exercise such Options to the extent vested on the date of such
death or Disability. If a Non-Employee Director dies while serving as a
Non-Employee Director without having fully exercised his Options, the
Non-Employee Director's executors, administrators, legatees or distributee of
his estate shall have the right, during the twelve-month period following such
death, to exercise such Options. In no event, however, shall any Option be
exercisable more than ten (10) years from the date it was granted.
8.06 NONASSIGNABILITY. Options shall not be transferable by an Optionee
except by will or the laws of descent or distribution, and during an Optionee's
lifetime shall be exercisable only by such Optionee or the Optionee's guardian
or legal representative. Notwithstanding the foregoing, or any other provision
of this Plan, an Optionee who holds Non-Qualified Options may transfer such
Options to his or her spouse, lineal ascendants, lineal descendants, or to a
duly established trust for the benefit of one or more of these individuals.
Options so transferred may thereafter be transferred only to the Optionee who
originally received the grant or to an individual or trust to whom the Optionee
could have initially transferred the Option pursuant to this Section 8.06.
Options which are transferred
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pursuant to this Section 8.06 shall be exercisable by the transferee according
to the same terms and conditions as applied to the Optionee.
8.07 MANNER OF EXERCISE. Options may be exercised in part or in whole
and at one time or from time to time. The procedures for exercise shall be set
forth in the written Stock Option Agreement provided for in Section 8.01 above.
8.08 PAYMENT FOR SHARES. Payment in full of the purchase price for
shares of Common Stock purchased pursuant to the exercise of any Option shall be
made to the Corporation upon exercise of the Option. All shares sold under the
Plan shall be fully paid and nonassessable. Payment for shares may be made by
the Optionee in cash or, at the discretion of the Board of Directors or the
Committee, by delivering shares of Common Stock (including shares acquired
pursuant to the exercise of an Option) or other property equal in Fair Market
Value to the purchase price of the shares to be acquired pursuant to the Option,
by withholding some of the shares of Common Stock which are being purchased upon
exercise of an Option, or any combination of the foregoing.
8.09 VOTING AND DIVIDEND RIGHTS. No Optionee shall have any voting or
dividend rights or other rights of a stockholder in respect of any shares of
Common Stock covered by an Option prior to the time that his name is recorded on
the Corporation's stockholder ledger as the holder of record of such shares
acquired pursuant to an exercise of an Option.
8.10 ADDITIONAL TERMS APPLICABLE TO INCENTIVE STOCK OPTIONS. All
Options issued under the Plan as Incentive Stock Options will be subject, in
addition to the terms detailed in Sections 8.01 to 8.09 above, to those
contained in this Section 8.10.
(a) Notwithstanding any contrary provisions contained
elsewhere in this Plan and as long as required by Section 422 of the Code, the
aggregate Fair Market Value, determined as of the time an Incentive Stock Option
is granted, of the Common Stock with respect to which Incentive Stock Options
are exercisable for the first time by the Optionee during any calendar year
under this Plan and stock options that satisfy the requirements of Section 422
of the Code under any other stock option plan or plans maintained by the
Corporation (or any parent or Subsidiary Company), shall not exceed $100,000.
(b) LIMITATION ON TEN PERCENT STOCKHOLDERS. The price at which
shares of Common Stock may be purchased upon exercise of an Incentive Stock
Option granted to an individual who, at the time such Incentive Stock Option is
granted, owns, directly or indirectly, more than ten percent (10%) of the total
combined voting power of all classes of stock issued to stockholders of the
Corporation or any Subsidiary Company, shall be no less than one hundred and ten
percent (110%) of the Fair Market Value of a share of the Common Stock of the
Corporation at the time of grant, and such Incentive Stock Option shall by its
terms not be exercisable after the earlier of the date determined under Section
8.04 or the expiration of five (5) years from the date such Incentive Stock
Option is granted.
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(C) NOTICE OF DISPOSITION; WITHHOLDING; ESCROW. An Optionee
shall immediately notify the Corporation in writing of any sale, transfer,
assignment or other disposition (or action constituting a disqualifying
disposition within the meaning of Section 421 of the Code) of any shares of
Common Stock acquired through exercise of an Incentive Stock Option, within two
(2) years after the grant of such Incentive Stock Option or within one (1) year
after the acquisition of such shares, setting forth the date and manner of
disposition, the number of shares disposed of and the price at which such shares
were disposed of. The Corporation shall be entitled to withhold from any
compensation or other payments then or thereafter due to the Optionee such
amounts as may be necessary to satisfy any withholding requirements of Federal
or state law or regulation and, further, to collect from the Optionee any
additional amounts which may be required for such purpose. The Committee may, in
its discretion, require shares of Common Stock acquired by an Optionee upon
exercise of an Incentive Stock Option to be held in an escrow arrangement for
the purpose of enabling compliance with the provisions of this Section 8.10(c).
8.11 STOCK APPRECIATION RIGHTS.
(a) GENERAL TERMS AND CONDITIONS. The Board of Directors or
the Committee may, but shall not be obligated to, authorize the Corporation, on
such terms and conditions as it deems appropriate in each case, to grant rights
to Optionees to surrender an exercisable Option, or any portion thereof, in
consideration for the payment by the Corporation of an amount equal to the
excess of the Fair Market Value of the shares of Common Stock subject to the
Option, or portion thereof, surrendered over the exercise price of the Option
with respect to such shares (any such authorized surrender and payment being
hereinafter referred to as a "Stock Appreciation Right"). Such payment, at the
discretion of the Board of Directors or the Committee, may be made in shares of
Common Stock valued at the then Fair Market Value thereof, or in cash, or partly
in cash and partly in shares of Common Stock.
The terms and conditions set with respect to a Stock Appreciation Right
may include (without limitation), subject to other provisions of this Section
8.11 and the Plan, the period during which, date by which or event upon which
the Stock Appreciation Right may be exercised (which shall be on the same terms
as the Option to which it relates pursuant to Section 8.04 hereunder); the
method for valuing shares of Common Stock for purposes of this Section 8.11; a
ceiling on the amount of consideration which the Corporation may pay in
connection with exercise and cancellation of the Stock Appreciation Right; and
arrangements for income tax withholding. The Board of Directors or the Committee
shall have complete discretion to determine whether, when and to whom Stock
Appreciation Rights may be granted. Notwithstanding the foregoing, the
Corporation may not permit the exercise of a Stock Appreciation Right issued
pursuant to this Plan until the Corporation has been subject to the reporting
requirements of Section 13 of the Exchange Act for a period of at least one year
prior to the exercise of any such Stock Appreciation Right.
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(b) TIME LIMITATIONS. If a holder of a Stock Appreciation
Right terminates service with the Corporation, the Stock Appreciation Right may
be exercised only within the period, if any, within which the Option to which it
relates may be exercised. Notwithstanding the foregoing, any election by an
Optionee to exercise the Stock Appreciation Rights provided in this Plan shall
be made during the period beginning on the third business day following the
release for publication of quarterly or annual financial information required to
be prepared and disseminated by the Corporation pursuant to the requirements of
the Exchange Act and ending on the twelfth business day following such date. The
required release of information shall be deemed to have been satisfied when the
specified financial data appears on or in a wire service, financial news service
or newspaper of general circulation or is otherwise first made publicly
available.
(c) EFFECTS OF EXERCISE OF STOCK APPRECIATION RIGHTS OR
OPTIONS. Upon the exercise of a Stock Appreciation Right, the number of shares
of Common Stock available under the Option to which it relates shall decrease by
a number equal to the number of shares for which the Stock Appreciation Right
was exercised. Upon the exercise of an Option, any related Stock Appreciation
Right shall terminate as to any number of shares of Common Stock subject to the
Stock Appreciation Right that exceeds the total number of shares for which the
Option remains unexercised.
(d) TIME OF GRANT. A Stock Appreciation Right may be granted
concurrently with the Option to which it relates or at any time thereafter prior
to the exercise or expiration of such Option.
(e) NON-TRANSFERABLE. The holder of a Stock Appreciation Right
may not transfer or assign the Stock Appreciation Right otherwise than by will
or in accordance with the laws of descent and distribution, and during a
holder's lifetime a Stock Appreciation Right may be exercisable only by the
holder.
ARTICLE IX
ADJUSTMENTS FOR CAPITAL CHANGES
The aggregate number of shares of Common Stock available for issuance
under this Plan, the number of shares to which any Award relates and the
exercise price per share of Common Stock under any Award shall be
proportionately adjusted for any increase or decrease in the total number of
outstanding shares of Common Stock issued subsequent to the effective date of
this Plan resulting from a split, subdivision or consolidation of shares or any
other capital adjustment, the payment of a stock dividend, or other increase or
decrease in such shares effected without receipt or payment of consideration by
the Corporation. If, upon a merger, consolidation, reorganization, liquidation,
recapitalization or the like of the Corporation, the shares of the Corporation's
Common Stock shall be exchanged for other securities of the Corporation or of
another corporation, each recipient of an Award shall be entitled, subject to
the conditions herein stated, to purchase or acquire
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such number of shares of Common Stock or amount of other securities of the
Corporation or such other corporation as were exchangeable for the number of
shares of Common Stock of the Corporation which such Optionees would have been
entitled to purchase or acquire except for such action, and appropriate
adjustments shall be made to the per share exercise price of outstanding Awards.
Notwithstanding any provision to the contrary, the exercise price of shares
subject to outstanding Awards may be proportionately adjusted upon the payment
of a special large and nonrecurring dividend that has the effect of a return of
capital to the stockholders.
ARTICLE X
AMENDMENT AND TERMINATION OF THE PLAN
The Board may, by resolution, at any time terminate or amend the Plan
with respect to any shares of Common Stock as to which Awards have not been
granted, subject to regulations of the OTS and any required stockholder approval
or any stockholder approval which the Board may deem to be advisable for any
reason, such as for the purpose of obtaining or retaining any statutory or
regulatory benefits under tax, securities or other laws or satisfying any
applicable stock exchange listing requirements. The Board may not, without the
consent of the holder of an Award, alter or impair any Award previously granted
or awarded under this Plan as specifically authorized herein.
ARTICLE XI
EMPLOYMENT RIGHTS
Neither the Plan nor the grant of any Awards hereunder nor any action
taken by the Committee or the Board in connection with the Plan shall create any
right on the part of any Employee or Non-Employee Director of the Corporation or
a Subsidiary Company to continue in such capacity.
ARTICLE XII
WITHHOLDING
12.01 TAX WITHHOLDING. The Corporation may withhold from any cash
payment made under this Plan sufficient amounts to cover any applicable
withholding and employment taxes, and if the amount of such cash payment is
insufficient, the Corporation may require the Optionee to pay to the Corporation
the amount required to be withheld as a condition to delivering the shares
acquired pursuant to an Award. The Corporation also may withhold or collect
amounts with respect to a disqualifying disposition of shares of Common Stock
acquired pursuant to exercise of an Incentive Stock Option, as provided in
Section 8.10(c).
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12.02 METHODS OF TAX WITHHOLDING. The Board of Directors or the
Committee is authorized to adopt rules, regulations or procedures which provide
for the satisfaction of an Optionee's tax withholding obligation by the
retention of shares of Common Stock to which the Employee would otherwise be
entitled pursuant to an Award and/or by the Optionee's delivery of
previously-owned shares of Common Stock or other property.
ARTICLE XIII
EFFECTIVE DATE OF THE PLAN; TERM
13.01 EFFECTIVE DATE OF THE PLAN. This Plan shall become effective on
the Effective Date, and Awards may be granted hereunder as of or after the
Effective Date and prior to the termination of the Plan, provided that no
Incentive Stock Option issued pursuant to this Plan shall qualify as such unless
this Plan is approved by the requisite vote of the holders of the outstanding
voting shares of the Corporation at a meeting of stockholders of the Corporation
held within twelve (12) months of the Effective Date. Notwithstanding the
foregoing or anything to the contrary in this Plan, the implementation of this
Plan and any Awards granted pursuant hereto are subject to the approval of the
Corporation's stockholders.
13.02 TERM OF PLAN. Unless sooner terminated, this Plan shall remain in
effect for a period of ten (10) years ending on the tenth anniversary of the
Effective Date. Termination of the Plan shall not affect any Awards previously
granted and such Awards shall remain valid and in effect until they have been
fully exercised or earned, are surrendered or by their terms expire or are
forfeited.
ARTICLE XIV
MISCELLANEOUS
14.01 GOVERNING LAW. To the extent not governed by Federal law, this
Plan shall be construed under the laws of the State of Ohio.
14.02 PRONOUNS. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun, and the singular shall include the plural.
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Exhibit 10.9
FIDELITY FINANCIAL OF OHIO, INC.
1997 MANAGEMENT RECOGNITION PLAN AND TRUST AGREEMENT
ARTICLE I
ESTABLISHMENT OF THE PLAN AND TRUST
1.01 Fidelity Financial of Ohio, Inc. (the "Corporation") hereby
establishes a Management Recognition Plan (the "Plan") and Trust (the "Trust")
upon the terms and conditions hereinafter stated in this 1997 Management
Recognition Plan and Trust Agreement (the "Agreement").
1.02 The Trustee hereby accepts this Trust and agrees to hold the Trust
assets existing on the date of this Agreement and all additions and accretions
thereto upon the terms and conditions hereinafter stated.
ARTICLE II
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to retain personnel of experience and
ability in key positions by providing Employees and Non-Employee Directors of
the Corporation and of Fidelity Federal Savings Bank (the "Bank") with a
proprietary interest in the Corporation as compensation for their contributions
to the Corporation, the Bank, and any other Subsidiaries and as an incentive to
make such contributions in the future.
ARTICLE III
DEFINITIONS
The following words and phrases when used in this Agreement with an
initial capital letter, unless the context clearly indicates otherwise, shall
have the meanings set forth below. Wherever appropriate, the masculine pronouns
shall include the feminine pronouns and the singular shall include the plural.
3.01 "Bank" means Fidelity Federal Savings Bank, the wholly-owned
subsidiary of the Corporation.
3.02 "Beneficiary" means the person or persons designated by a
Recipient to receive any benefits payable under the Plan in the event of such
Recipient's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the
<PAGE> 2
absence of a written designation, the Beneficiary shall be the Recipient's
surviving spouse, if any, or if none, his estate.
3.03 "Board" means the Board of Directors of the Corporation.
3.04 "Change in Control of the Corporation" 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 (other than the Corporation and any trustee or other
fiduciary holding securities under any employee benefit plan of the
Corporation), 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; (ii) during any period of two
consecutive years (not including any period prior to the adoption of the Plan),
individuals who at the beginning of such period constitute the Board of
Directors, and any new director whose election by the Board of Directors or
nomination for election by the Corporation's stockholders was approved by a vote
of at least two-thirds of the directors then still in office who either were
directors at the beginning of the two-year period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute at least a majority of the Board of Directors; (iii) the stockholders
of the Corporation approve a merger or consolidation of the Corporation with any
other corporation, other than a merger or consolidation that would result in the
voting securities of the Corporation outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 50% of the combined
voting power of the voting securities of the Corporation outstanding immediately
after such merger or consolidation; or (iv) the stockholders of the Corporation
approve a plan of complete liquidation of the Corporation or an agreement for
the sale or disposition by the Corporation of all or substantially all of the
Corporation's assets. If any of the events enumerated in clauses (i) through
(iv) occur, the Board shall determine the effective date of the Change in
Control resulting therefrom for purposes of the Plan.
3.05 "Code" means the Internal Revenue Code of 1986, as amended.
3.06 "Committee" means the committee appointed by the Board pursuant to
Article IV hereof.
3.07 "Common Stock" means shares of the common stock, $0.10 par value
per share, of the Corporation.
3.08 "Disability" means any physical or mental impairment which
qualifies an Employee for disability benefits under the applicable long-term
disability plan maintained by the Corporation or any Subsidiary or, if no such
plan applies, which would qualify such Employee for disability benefits under
the Federal Social Security System.
3.09 "Effective Date" means the day upon which the Board approves this
Plan.
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3.10 "Employee" means any person who is employed by the Corporation,
the Bank, or any Subsidiary, or is an officer of the Corporation, the Bank, or
any Subsidiary, including officers or other employees who may be directors of
the Corporation.
3.11 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
3.12 "Non-Employee Director" means a member of the Board who is not an
Employee.
3.13 "OTS" means the Office of Thrift Supervision.
3.14 "Plan Shares" or "Shares" means shares of Common Stock held in the
Trust which may be distributed to a Recipient pursuant to the Plan.
3.15 "Plan Share Award" or "Award" means a right granted under this
Plan to receive a distribution of Plan Shares upon completion of the service
requirements described in Article VII.
3.16 "Recipient" means an Employee or Non-Employee Director who
receives a Plan Share Award under the Plan.
3.17 "Subsidiary" means Fidelity Federal Savings Bank and any other
subsidiaries of the Corporation or the Bank which, with the consent of the
Board, agree to participate in this Plan.
3.18 "Trustee" means such firm, entity or persons approved by the Board
of Directors to hold legal title to the Plan for the purposes set forth herein.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 ROLE OF THE COMMITTEE. The Plan shall be administered and
interpreted by the Committee, which shall consist of two or more members of the
Board, each of whom shall be a Non-Employee Director. The Committee shall have
all of the powers allocated to it in this and other Sections of the Plan. The
interpretation and construction by the Committee of any provisions of the Plan
or of any Plan Share Award granted hereunder shall be final and binding in the
absence of action by the Board of Directors. The Committee shall act by vote or
written consent of a majority of its members. Subject to the express provisions
and limitations of the Plan and subject to compliance with applicable OTS
regulations, the Committee may adopt such rules, regulations and procedures as
it deems appropriate for the conduct of its affairs. The Committee shall report
its actions and decisions with respect to the Plan to the Board at appropriate
times, but in no event less than one time per calendar year.
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4.02 ROLE OF THE BOARD. The members of the Committee and the Trustee
shall be appointed or approved by, and will serve at the pleasure of, the Board.
The Board may in its discretion from time to time remove members from, or add
members to, the Committee, and may remove or replace the Trustee, provided that
any directors who are selected as members of the Committee shall be Non-Employee
Directors.
4.03 LIMITATION ON LIABILITY. No member of the Board or the Committee
shall be liable for any determination made in good faith with respect to the
Plan or any Plan Shares or Plan Share Awards granted under it. If a member of
the Board or the Committee is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of anything done or not
done by him in such capacity under or with respect to the Plan, the Corporation
shall, subject to the requirements of applicable laws and regulations, indemnify
such member against all liabilities and expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in the best interests of the
Corporation and any Subsidiaries and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
4.04 COMPLIANCE WITH LAWS AND REGULATIONS. All Awards granted hereunder
shall be subject to all applicable federal and state laws, rules and regulations
and to such approvals by any government or regulatory agency or stockholders as
may be required.
ARTICLE V
CONTRIBUTIONS
5.01 AMOUNT AND TIMING OF CONTRIBUTIONS. The Board shall determine the
amount (or the method of computing the amount) and timing of any contributions
by the Corporation and any Subsidiaries to the Trust established under this
Plan. Such amounts may be paid in cash or in shares of Common Stock and shall be
paid to the Trust at the designated time of contribution. No contributions by
Employees shall be permitted.
5.02 INVESTMENT OF TRUST ASSETS; NUMBER OF PLAN SHARES. Subject to
Section 8.02 hereof, the Trustee shall invest all of the Trust's assets
primarily in Common Stock. The aggregate number of Plan Shares available for
distribution pursuant to this Plan shall be 91,124 shares of Common Stock, which
shares shall be purchased from the Corporation and/or from stockholders thereof
by the Trust with funds contributed by the Corporation.
4
<PAGE> 5
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 AWARDS TO NON-EMPLOYEE DIRECTORS. Plan Share Awards to
Non-Employee Directors shall be made to such persons and in such amounts as
determined by the Board of Directors or the Committee. However, Plan Share
Awards equal to 27,337 shares (or 30% of the number of shares available under
this Plan) shall be made to Non-Employee Directors in the aggregate and no
individual Non-Employee Director may receive Plan Share Awards in excess of
4,556 shares (or 5% of the number of shares available under this Plan). In the
event of a forfeiture of the right to any Shares subject to an Award, such
forfeited Shares shall be reallocated on the first day of the month following
such forfeiture to the remaining Non-Employee Directors who are eligible to
receive such re-allocation by dividing the number of forfeited shares of Common
Stock by such remaining number of Non-Employee Directors at such time.
6.02 AWARDS TO EMPLOYEES. Plan Share Awards may be made to such
Employees as may be selected by the Board of Directors or the Committee. In
selecting those Employees to whom Plan Share Awards may be granted and the
number of Shares covered by such Awards, the Board of Directors or the Committee
shall consider the duties, responsibilities and performance of each respective
Employee, his present and potential contributions to the growth and success of
the Corporation, his salary and such other factors as shall be deemed relevant
to accomplishing the purposes of the Plan. Other than with respect to Plan Share
Awards to be granted to the Chief Executive Officer, the Board of Directors or
the Committee may, but shall not be required to, request the written
recommendation of the Chief Executive Officer of the Corporation.
6.03 FORM OF ALLOCATION. As promptly as practicable after a
determination is made pursuant to Sections 6.01 or 6.02 that a Plan Share Award
is to be issued, the Board of Directors or the Committee shall notify the
Recipient in writing of the grant of the Award, the number of Plan Shares
covered by the Award, and the terms upon which the Plan Shares subject to the
Award shall be distributed to the Recipient. The date on which the Board of
Directors or the Committee so notifies the Recipient shall be considered the
date of grant of the Plan Share Award. The Board of Directors or the Committee
shall maintain records as to all grants of Plan Share Awards under the Plan.
6.04 MAXIMUM NUMBER OF PLAN SHARES TO ANY INDIVIDUAL. During the life
of this Plan, (i) no Employee shall be granted Plan Share Awards pursuant to
this Plan covering an aggregate number of Plan Shares in excess of 25% of the
number of shares of Common Stock available under this Plan, (ii) no Non-Employee
Director shall be granted Plan Share Awards pursuant to this Plan covering an
aggregate number of Plan Shares in excess of 5% of the shares of Common Stock
available under this Plan, and (iii) non-Employee Directors in the aggregate
shall not be granted Plan Share Awards pursuant to this Plan covering more than
30% of the shares of Common Stock available under this Plan.
5
<PAGE> 6
6.05 ALLOCATIONS NOT REQUIRED TO ANY SPECIFIC EMPLOYEE. Notwithstanding
anything to the contrary in Section 6.02 hereof, no Employee shall have any
right or entitlement to receive a Plan Share Award hereunder, such Awards being
at the total discretion of the Board of Directors or the Committee.
ARTICLE VII
EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 EARNING PLAN SHARES; FORFEITURES.
(a) GENERAL RULES. Subject to the terms hereof, Plan Share
Awards shall be earned by a Recipient at the rate of twenty percent (20%) of the
aggregate number of Shares covered by the Award as of each annual anniversary of
the date of grant of the Award. If the employment of an Employee or service as a
Non-Employee Director is terminated prior to the fifth (5th) annual anniversary
of the date of grant of a Plan Share Award for any reason (except as
specifically provided in subsections (b) and (c) below), the Recipient shall
forfeit the right to any Shares subject to the Award which have not theretofore
been earned. In the event of a forfeiture of the right to any Shares subject to
an Award by an Employee, such forfeited Shares shall become available for
allocation pursuant to Section 6.02 hereof as if no Award had been previously
granted with respect to such Shares. No fractional shares shall be distributed
pursuant to this Plan. In determining the number of Plan Shares which are to be
earned, fractional Shares shall be rounded down to the nearest whole number,
provided that such fractional Shares shall be aggregated and distributed on the
fifth annual anniversary of the date of grant.
(b) EXCEPTION FOR TERMINATIONS DUE TO DEATH OR DISABILITY.
Notwithstanding the general rule contained in Section 7.01(a), all Plan Shares
subject to a Plan Share Award held by a Recipient whose employment or service
with the Corporation or any Subsidiary terminates due to death or Disability
shall be deemed earned as of the Recipient's last day of employment with the
Corporation or any Subsidiary and shall be distributed as soon as practicable
thereafter; provided, however, that Awards shall be distributed in accordance
with Section 7.03(a).
(c) EXCEPTION FOR TERMINATIONS AFTER A CHANGE IN CONTROL OF
THE CORPORATION. Notwithstanding the general rule contained in Section 7.01(a),
all Plan Shares subject to a Plan Share Award held by a Recipient shall be
deemed to be earned in the event of a Change in Control of the Corporation.
(d) REVOCATION FOR MISCONDUCT. Notwithstanding anything
hereinafter to the contrary, the Board may by resolution immediately revoke,
rescind and terminate any Plan Share Award, or portion thereof, previously
awarded under this Plan, to the extent Plan Shares have not been distributed
hereunder to the Recipient, whether or not yet earned, in the case of an
Employee who is discharged from the employ of the Corporation or any
6
<PAGE> 7
Subsidiary for cause (as hereinafter defined). Termination for cause shall mean
termination because of the Employee's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order. Plan Share Awards granted to a Non-Employee Director who
is removed for cause pursuant to the Corporation's Articles of Incorporation
shall terminate as of the effective date of such removal.
7.02 DISTRIBUTION OF DIVIDENDS. Any cash dividends (including special
large and non-recurring dividends including one that has the effect of a return
of capital to the Corporation's stockholders) or stock dividends declared in
respect of each unvested Plan Share Award will be held by the Trust for the
benefit of the Recipient on whose behalf such Plan Share Award is then held by
the Trust and such dividends, including any interest thereon, will be paid out
proportionately by the Trust to the Recipient thereof as soon as practicable
after the Plan Share Awards become earned. Any cash dividends or stock dividends
declared in respect of each vested Plan Share held by the Trust will be paid by
the Trust, as soon as practicable after the Trust's receipt thereof, to the
Recipient on whose behalf such Plan Share is then held by the Trust.
7.03 DISTRIBUTION OF PLAN SHARES.
(a) TIMING OF DISTRIBUTIONS: GENERAL RULE. Plan Shares shall
be distributed to the Recipient or his Beneficiary, as the case may be, as soon
as practicable after they have been earned.
(b) FORM OF DISTRIBUTIONS. All Plan Shares, together with any
Shares representing stock dividends, shall be distributed in the form of Common
Stock. One share of Common Stock shall be given for each Plan Share earned and
distributable. Payments representing cash dividends shall be made in cash.
(c) WITHHOLDING. The Trustee may withhold from any cash
payment or Common Stock distribution made under this Plan sufficient amounts to
cover any applicable withholding and employment taxes, and if the amount of a
cash payment is insufficient, the Trustee may require the Recipient or
Beneficiary to pay to the Trustee the amount required to be withheld as a
condition of delivering the Plan Shares. The Trustee shall pay over to the
Corporation or any Subsidiary which employs or employed such Recipient any such
amount withheld from or paid by the Recipient or Beneficiary.
(d) RESTRICTIONS ON SELLING OF PLAN SHARES. Plan Share Awards
may not be sold, assigned, pledged or otherwise disposed of prior to the time
that they are earned and distributed pursuant to the terms of this Plan.
Following distribution, the Board of Directors or the Committee may require the
Recipient or his Beneficiary, as the case may be, to agree not to sell or
otherwise dispose of his distributed Plan Shares except in accordance with all
then applicable Federal and state securities laws, and the Board of Directors or
the
7
<PAGE> 8
Committee may cause a legend to be placed on the stock certificate(s)
representing the distributed Plan Shares in order to restrict the transfer of
the distributed Plan Shares for such period of time or under such circumstances
as the Board of Directors or the Committee, upon the advice of counsel, may deem
appropriate.
7.04 VOTING OF PLAN SHARES. All Plan Shares which have not yet been
earned and allocated shall be voted by the Trustee in its sole discretion.
ARTICLE VIII
TRUST
8.01 TRUST. The Trustee shall receive, hold, administer, invest and
make distributions and disbursements from the Trust in accordance with the
provisions of the Plan and Trust and the applicable directions, rules,
regulations, procedures and policies established by the Board of Directors or
the Committee pursuant to the Plan.
8.02 MANAGEMENT OF TRUST. It is the intent of this Plan and Trust that
the Trustee shall have complete authority and discretion with respect to the
arrangement, control and investment of the Trust, and that the Trustee shall
invest all assets of the Trust in Common Stock to the fullest extent
practicable, except to the extent that the Trustee determine that the holding of
monies in cash or cash equivalents is necessary to meet the obligations of the
Trust. In performing their duties, the Trustee shall have the power to do all
things and execute such instruments as may be deemed necessary or proper,
including the following powers:
(a) To invest up to one hundred percent (100%) of all Trust
assets in Common Stock without regard to any law now or hereafter in force
limiting investments for trustees or other fiduciaries. The investment
authorized herein may constitute the only investment of the Trust, and in making
such investment, the Trustee are authorized to purchase Common Stock from the
Corporation or from any other source, and such Common Stock so purchased may be
outstanding, newly issued, or treasury shares.
(b) To invest any Trust assets not otherwise invested in
accordance with (a) above, in such deposit accounts, and certificates of
deposit, obligations of the United States Government or its agencies or such
other investments as shall be considered the equivalent of cash.
(c) To sell, exchange or otherwise dispose of any property at
any time held or acquired by the Trust.
(d) To cause stocks, bonds or other securities to be
registered in the name of a nominee, without the addition of words indicating
that such security is an asset of the
8
<PAGE> 9
Trust (but accurate records shall be maintained showing that such security is an
asset of the Trust).
(e) To hold cash without interest in such amounts as may in
the opinion of the Trustee be reasonable for the proper operation of the Plan
and Trust.
(f) To employ brokers, agents, custodians, consultants and
accountants.
(g) To hire counsel to render advice with respect to their
rights, duties and obligations hereunder, and such other legal services or
representation as they may deem desirable.
(h) To hold funds and securities representing the amounts to
be distributed to a Recipient or his Beneficiary as a consequence of a dispute
as to the disposition thereof, whether in a segregated account or held in common
with other assets of the Trust.
Notwithstanding anything herein contained to the contrary, the Trustee
shall not be required to make any inventory, appraisal or settlement or report
to any court, or to secure any order of court for the exercise of any power
herein contained, or give bond.
8.03 RECORDS AND ACCOUNTS. The Trustee shall maintain accurate and
detailed records and accounts of all transactions of the Trust, which shall be
available at all reasonable times for inspection by any legally entitled person
or entity to the extent required by applicable law, or any other person
determined by the Board of Directors or the Committee.
8.04 EXPENSES. All costs and expenses incurred in the operation and
administration of this Plan shall be borne by the Corporation.
8.05 INDEMNIFICATION. Subject to the requirements of applicable laws
and regulations, the Corporation shall indemnify, defend and hold the Trustee
harmless against all claims, expenses and liabilities arising out of or related
to the exercise of the Trustee's powers and the discharge of their duties
hereunder, unless the same shall be due to their gross negligence or willful
misconduct.
ARTICLE IX
MISCELLANEOUS
9.01 ADJUSTMENTS FOR CAPITAL CHANGES. The aggregate number of Plan
Shares available for distribution pursuant to the Plan Share Awards and the
number of Shares to which any Plan Share Award relates shall be proportionately
adjusted for any increase or decrease in the total number of outstanding shares
of Common Stock issued subsequent to
9
<PAGE> 10
the effective date of the Plan resulting from any split, subdivision or
consolidation of shares or other capital adjustment, or other increase or
decrease in such shares effected without receipt or payment of consideration by
the Corporation.
9.02 AMENDMENT AND TERMINATION OF PLAN. The Board may, by resolution,
at any time amend or terminate the Plan and the Trust (including amendments
which may result in the merger of the Plan or the Trust with and into other
plans or trusts of the Corporation or successor thereto), subject to regulations
of the OTS and any required stockholder approval or any stockholder approval
which the Board may deem to be advisable for any reason, such as for the purpose
of obtaining or retaining any statutory or regulatory benefits under tax,
securities or other laws or satisfying any applicable stock exchange listing
requirements. The Board may not, without the consent of the Recipient, alter or
impair his Plan Share Award except as specifically authorized herein. Upon
termination of the Plan, the Recipient's Plan Share Awards shall be distributed
to the Recipient in accordance with the terms of Article VII hereof.
9.03 NONTRANSFERABLE. During the lifetime of the Recipient, Plan Shares
may only be earned by and paid to the Recipient who was notified in writing of
the Award pursuant to Section 6.03, provided that Plan Share Awards and rights
to Plan Shares shall be transferable by a Recipient to his or her spouse, lineal
ascendants, lineal descendants, or to a duly established trust. Plan Share
Awards so transferred may not again be transferred other than to the Recipient
who originally received the grant of Plan Share Awards or to an individual or
trust to whom such Recipient could have transferred Plan Share Awards pursuant
to this Section 9.03. Plan Share Awards which are transferred pursuant to this
Section 9.03 shall be subject to the same terms and conditions as would have
applied to such Plan Share Awards in the hands of the Recipient who originally
received the grant of such Plan Share Award. No Recipient or Beneficiary shall
have any right in or claim to any assets of the Plan or Trust, nor shall the
Corporation or any Subsidiary be subject to any claim for benefits hereunder.
9.04 EMPLOYMENT OR SERVICE RIGHTS. Neither the Plan nor any grant of a
Plan Share Award or Plan Shares hereunder nor any action taken by the Trustee,
the Committee or the Board in connection with the Plan shall create any right on
the part of any Employee or Non-Employee Director to continue in such capacity.
9.05 VOTING AND DIVIDEND RIGHTS. No Recipient shall have any voting or
dividend rights or other rights of a stockholder in respect of any Plan Shares
covered by a Plan Share Award, except as expressly provided in Sections 7.02 and
7.04 above, prior to the time said Plan Shares are actually earned and
distributed to him.
9.06 GOVERNING LAW. To the extent not governed by Federal law, the Plan
and Trust shall be governed by the laws of the State of Ohio.
10
<PAGE> 11
9.07 EFFECTIVE DATE. This Plan shall be effective as of the Effective
Date, and Awards may be granted hereunder as of or after the Effective Date and
as long as the Plan remains in effect. Notwithstanding the foregoing or anything
to the contrary in this Plan, the implementation of this Plan and any Awards
granted pursuant hereto are subject to the approval of the Corporation's
stockholders.
9.08 TERM OF PLAN. This Plan shall remain in effect until the earlier
of (1) ten (10) years from the Effective Date, (2) termination by the Board, or
(3) the distribution to Recipients and Beneficiaries of all assets of the Trust.
9.09 TAX STATUS OF TRUST. It is intended that the trust established
hereby be treated as a Grantor Trust of the Corporation under the provisions of
Section 671 et seq. of the Code, as the same may be amended from time to time.
11
<PAGE> 12
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed by its duly authorized officers and the corporate seal to be affixed
and duly attested, and the initial Trustee of the Trust established pursuant
hereto have duly and validly executed this Agreement, all on this 18th day of
February 1997.
FIDELITY FINANCIAL OF OHIO, INC.
By: /s/ JOHN R. REUSING
-----------------------------
John R. Reusing
President and Chief Executive Officer
ATTEST:
By: /s/ PAUL D. STAUBACH
-------------------------
Paul D. Staubach
Secretary
TRUSTEE:
By: /s/ MICHAEL W. JORDAN
-----------------------------
Michael W. Jordan
Trustee
By: /s/ DAVID A. LUECKE
-----------------------------
David A. Luecke
Trustee
By: /s/ CONSTANTINE N. PAPADAKIS
-----------------------------
Constantine N. Papadakis
Trustee
12
<PAGE> 1
Exhibit 13.0
[Cover]
Fidelity Financial of Ohio, Inc.
Annual Report 1997
<PAGE> 2
CONTENTS
<TABLE>
<S> <C>
LETTER TO STOCKHOLDERS.......................... 1
BUSINESS OF THE CORPORATION..................... 2
MARKET PRICE OF STOCK AND RELATED INFORMATION... 3
SELECTED CONSOLIDATED FINANCIAL AND OTHER
DATA.......................................... 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................... 6
INDEPENDENT AUDITORS' REPORT.................... 16
CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION..................................... 17
CONSOLIDATED STATEMENTS OF EARNINGS............. 18
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY........................................ 19
CONSOLIDATED STATEMENTS OF CASH FLOWS........... 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...... 22
DIRECTORS AND OFFICERS.......................... 40
LOCATIONS....................................... 40
</TABLE>
<PAGE> 3
- --------------------------------------------------------------------------------
TO OUR STOCKHOLDERS
- --------------------------------------------------------------------------------
Dear Stockholders,
It is my pleasure to report to you on the operations of Fidelity Financial
of Ohio, Inc. for the year ended December 31, 1997. Net earnings for the year
were a record $4.9 million, or $.90 per share, as compared to $1.6 million, or
$.38 per share, for the year ended December 31, 1996, representing an increase
of 203.2%.
Net earnings for 1996 were impacted by two non-recurring events: a $749,000
after-tax charge for the FDIC special assessment and $646,000 in after-tax
charges as a result of the merger with Circle Financial Corporation. Absent
these two charges, net earnings for the year ended December 31, 1996 would have
been approximately $3.0 million, or $.71 per share.
In 1997, total assets grew to $535.1 million as compared to $499.9 million
at December 31, 1996, an increase of $35.2 million, or 7.04%. Loans receivable
totaled $436.9 million at December 31, 1997, an increase of $40.3 million over
the balance at year end 1996.
Stockholders' equity totaled $64.3 million at December 31, 1997, as compared
to $66.7 million at December 31, 1996. The decrease in stockholders' equity was
attributable to cash distributions of over $7.0 million, including a $1.00 per
share special distribution paid in December 1997. We were very pleased to have
received a Private Letter Ruling from the Internal Revenue Service concerning
the income tax consequences of our cash distributions paid to stockholders,
wherein one hundred percent of all cash distributions paid in 1997 have been
deemed a return of capital. Fidelity still maintains a healthy tangible capital
ratio of 10.74% and we will continue to explore opportunities that will enable
us to profitably leverage our capital position.
Fidelity expanded its full service branch network in 1997 by establishing
two new offices to serve the communities of Loveland and Anderson Township. This
now brings our branch total to 12 facilities strategically located throughout
the greater Cincinnati marketplace. All offices are equipped with ATMs which
will further enhance our ability to better serve our customers' needs.
We appreciate the commitment made by our directors and staff for Fidelity's
success and want to thank our stockholders for your continued support.
Sincerely,
/s/ John R. Reusing
John R. Reusing
President
Fidelity Financial of Ohio, Inc.
1
<PAGE> 4
BUSINESS OF THE CORPORATION
Fidelity Financial of Ohio, Inc. (the "Corporation") is an Ohio corporation
which is the holding company for Fidelity Federal Savings Bank (the "Savings
Bank"). The Corporation was organized by the Savings Bank for the purpose of
acquiring all of the capital stock of the Savings Bank in connection with the
conversion of Fidelity Federal Mutual Holding Company, the former federally
chartered, mutual holding company parent of the Savings Bank, and the
reorganization of the Savings Bank to the stock holding company form, which was
completed on March 4, 1996 (the "Conversion and Reorganization"). The only
significant assets of the Corporation are the capital stock of the Savings Bank
and the net proceeds of the Conversion and Reorganization retained by the
Corporation.
On October 11, 1996, following receipt of all regulatory and stockholder
approvals, the Corporation completed the acquisition of Circle Financial
Corporation ("Circle") pursuant to the merger of Circle with and into a
subsidiary of the Corporation, and the subsequent merger of People's Savings
Association ("Peoples"), an Ohio-chartered savings association and a wholly
owned subsidiary of Circle, with and into the Savings Bank (collectively, the
"Merger"). The Merger was accounted for under the purchase method of accounting.
Consequently, the financial information and data presented herein excludes
Circle and Peoples for all periods prior to 1996.
The Savings Bank is a federally chartered savings bank which conducts
business through 12 full-service offices located in the Cincinnati, Ohio
metropolitan area. The Savings Bank is primarily engaged in attracting deposits
from the general public through its offices and using those and other available
sources of funds to originate loans secured by single-family residences located
primarily in southwestern Ohio. Such loans amounted to $341.6 million, or 77.1%
of the Savings Bank's total loan portfolio at December 31, 1997. To a lesser
extent, the Savings Bank originates loans secured by existing multi-family
residential and non-residential real estate, which amounted to $76.7 million, or
17.3% of the total loan portfolio at December 31, 1997, as well as construction
loans and consumer loans, which respectively amounted to $15.3 million, or 3.4%
of the total loan portfolio and $9.3 million, or 2.1% of the total loan
portfolio at such date. The Savings Bank also invests in U.S. Government and
federal agency obligations and mortgage-backed securities which are insured by
federal agencies.
As a savings and loan holding company, the Corporation is subject to
regulation, supervision and examination by the Office of Thrift Supervision of
the United States Department of the Treasury ("OTS"). The Savings Bank is
subject to regulation and examination by the OTS as its chartering authority and
primary regulator, and by the Federal Deposit Insurance Corporation ("FDIC"),
which, through the Savings Association Insurance Fund ("SAIF") administered by
it, insures the Savings Bank's deposits up to applicable limits. The Savings
Bank is a member of the Federal Home Loan Bank ("FHLB") of Cincinnati, which is
one of the 12 banks which comprise the FHLB System. The Savings Bank is further
subject to regulations of the Board of Governors of the Federal Reserve System
("Federal Reserve Board") governing reserves to be maintained against deposits
and certain other matters.
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. At March 13, 1998, the
Corporation had 5,595,058 shares of common stock outstanding and had
approximately 979 stockholders of record. The number of stockholders does not
reflect the number of persons or entities who may hold stock in nominee or
"street" name through brokerage firms or others.
The following table sets forth the reported high and low sales prices of a
share of the Corporation's common stock as reported by Nasdaq (the Corporation's
common stock commenced trading on the Nasdaq National Market on March 4, 1996).
<TABLE>
<CAPTION>
For the year ended December 31, 1997 High Low
----------------------------------------------------------------------------------
<S> <C> <C>
1997 SALES PRICES
Quarter ending December 31, 1997 $16.25 $14.25
Quarter ending September 30, 1997 16.50 14.50
Quarter ending June 30, 1997 15.00 12.38
Quarter ending March 31, 1997 13.75 11.50
For the year ended December 31, 1996 High Low
----------------------------------------------------------------------------------
1996 SALES PRICES
Quarter ending December 31, 1996 $11.88 $ 9.75
Quarter ending September 30, 1996 10.25 9.63
Quarter ending June 30, 1996 10.63 9.63
Quarter ending March 31, 1996 11.00 9.75
</TABLE>
Prior to March 4, 1996, there was no active and liquid public trading market
for the Corporation's common stock. The Corporation has been informed by brokers
who have executed trades in the Corporation's common stock that there were a
number of trades for the year ended December 31, 1995. The transactions for
which the Corporation has information took place at prices that range from $6.67
to $10.89 for the year ended December 31, 1995 (as adjusted to reflect the 2.25
to 1 exchange ratio which was utilized to convert the Savings Bank's common
stock into common stock of the Corporation in connection with the Conversion and
Reorganization).
Distributions with respect to the Corporation's common stock (including the
Savings Bank's common stock prior to the Conversion and Reorganization) for the
years ended December 31, 1997, 1996 and 1995 are set forth below.
<TABLE>
<CAPTION>
Cash
For the year ended December 31, 1997 Distributions
-------------------------------------------------------------------------------
<S> <C>
Quarter ending December 31, 1997 $1.070
Quarter ending September 30, 1997 0.070
Quarter ending June 30, 1997 0.070
Quarter ending March 31, 1997 0.070
Cash
For the year ended December 31, 1996 Distributions
-------------------------------------------------------------------------------
Quarter ending December 31, 1996 $0.050
Quarter ending September 30, 1996 0.050
Quarter ending June 30, 1996 0.050
Quarter ending March 31, 1996 0.094
Cash
For the year ended December 31, 1995 Distributions
-------------------------------------------------------------------------------
Quarter ending December 31, 1995 $0.075
Quarter ending September 30, 1995 0.075
Quarter ending June 30, 1995 0.075
Quarter ending March 31, 1995 0.075
</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,
----------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED FINANCIAL CONDITION DATA:
Total assets $535,100 $499,918 $231,137 $216,168 $202,991
Federal funds sold and interest-bearing deposits 27,730 20,489 2,784 1,766 6,002
Investment securities available for sale--at market
(1) 6,020 16,120 6,044 4,267 --
Investment securities--at cost -- -- -- -- 4,023
Mortgage-backed securities available for sale--at
market (1) 25,827 30,760 29,378 6,280 --
Mortgage-backed securities--at cost 13,527 10,744 -- 20,792 23,873
Loans receivable--net (2) 436,852 396,541 185,132 175,222 162,392
Goodwill and other intangible assets 7,628 8,322 -- -- --
Deposits 432,024 408,159 180,697 173,198 157,642
FHLB advances 34,233 20,186 17,653 12,089 15,954
Stockholders' equity -- net 64,274 66,712 30,113 28,540 26,905
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income $ 38,151 $ 22,738 $ 17,001 $ 15,748 $ 16,310
Total interest expense 22,562 12,656 10,167 8,331 8,106
----------------------------------------------------
Net interest income 15,589 10,082 6,834 7,417 8,204
Provision for losses on loans 101 129 71 44 52
----------------------------------------------------
Net interest income after provision for losses on
loans 15,488 9,953 6,763 7,373 8,152
Other income 1,415 165 355 347 250
General, administrative and other expenses (9,369) (7,638) (4,385) (4,172) (4,000)
----------------------------------------------------
Earnings before income taxes 7,534 2,480 2,733 3,548 4,402
Federal income taxes (2,658) (872) (919) (1,176) (1,464)
----------------------------------------------------
Net earnings $ 4,876 $ 1,608 $ 1,814 $ 2,372 $ 2,938
====================================================
Earnings per share
Basic $0.90 $0.38 $0.45 $0.58 $0.73
====================================================
Diluted $0.89 $0.38 $0.44 $0.58 $0.73
====================================================
</TABLE>
Footnote explanations on following page.
4
<PAGE> 7
<TABLE>
<CAPTION>
At or for the year ended December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING RATIOS (3):
Return on average assets (4) 0.94% 0.53% 0.82% 1.14% 1.47%
Return on average equity (4) 7.22% 3.16% 6.17% 8.51% 11.41%
Tangible equity to tangible assets at end of period 10.74% 11.88% 13.03% 13.20% 13.25%
Interest rate spread (5) 2.58% 2.59% 2.44% 3.04% 3.63%
Net interest margin (5) 3.11% 3.40% 3.13% 3.63% 4.20%
Non-performing loans to total loans at end of period (6) 0.22% 0.28% 0.54% 0.47% 0.88%
Non-performing assets to total assets at end of period
(6) 0.18% 0.23% 0.44% 0.43% 0.77%
Allowance for loan losses to non-performing loans at end
of period 167.81% 137.88% 81.23% 95.71% 51.50%
Average interest-earning assets to average
interest-bearing liabilities 111.88% 118.89% 114.74% 114.49% 113.91%
General, administrative and other expenses to average
total assets (4) 1.80% 2.51% 1.97% 2.00% 2.01%
Full service offices 12 10 4 4 3
</TABLE>
(1) The Corporation adopted SFAS No. 115 as of January 1, 1994. In connection
therewith, the Corporation classified certain of its debt securities as
available for sale. For additional information, see Notes A-2 and B of Notes
to Consolidated Financial Statements.
(2) At December 31, 1997 and 1995, included $438,000 and $646,000 of loans
classified as held for sale, respectively.
(3) With the exception of end of period ratios, all ratios are based on average
monthly balances during the period.
(4) Before consideration of non-recurring charges incurred in 1996, including
the SAIF recapitalization assessment and merger related expenses, the ratios
set forth below would have been as follows:
Return on average assets 0.92%
Return on average equity 5.52%
General, administrative and
other expenses to average total assets 1.91%
(5) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average rate on
interest-bearing liabilities. Net interest margin represents net interest
income as a percentage of average interest-earning assets.
(6) Non-performing loans consist of non-accrual loans and accruing loans that
are contractually past due 90 days or more, and non-performing assets
consist of non-performing loans and real estate acquired by foreclosure or
deed-in-lieu thereof.
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 is also affected by its provision for losses on
loans, as well as the level of its other income, including gains and losses on
sales of loans, investment securities and real estate acquired through
foreclosure, rental income and other miscellaneous operating income, and its
general, administrative and other expenses, such as employee compensation and
benefits, occupancy and equipment expense, federal deposit insurance premiums,
franchise taxes and miscellaneous other operating expenses, and federal income
tax expense.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Corporation's operations and actual
results could differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and the Corporation's general market area. The
forward-looking statements contained herein include, but are not limited to,
those with respect to the following matters:
1. Management's determination of the amount and adequacy of the allowance
for loan losses;
2. The effect of changes in interest rates;
3. Management's opinion as to the effects of recent accounting
pronouncements on the Corporation's consolidated financial statements;
4. Management's determination of the effects of the year 2000 on its
information technology systems.
ASSET AND LIABILITY MANAGEMENT
In general, financial institutions are vulnerable to an increase in interest
rates to the extent that interest-bearing liabilities mature or reprice more
rapidly than interest-earning assets. The lending activities of the Savings Bank
have historically emphasized the origination of long-term, fixed-rate loans
secured by single-family residences, and the primary source of funds of such
institutions has been deposits, which largely mature or are subject to repricing
within a short period of time. This factor, in combination with substantial
investments in long-term, fixed-rate loans, has historically caused the income
earned by the Savings Bank on its loan portfolio to adjust more slowly to
changes in interest rates than its cost of funds. While having liabilities that
reprice more frequently than assets is generally beneficial to net interest
income in times of declining interest rates, such an asset/liability mismatch is
generally detrimental during periods of rising interest rates.
The Savings Bank has established an Asset and Liability Management
Committee, which generally meets at least weekly in order to structure and price
the Savings Bank's assets and liabilities so as to maintain an acceptable
interest rate spread while reducing the effects of changes in interest rates.
The Committee reports monthly to the Board of Directors on interest rate risks
and trends, as well as with respect to the Savings Bank's liquidity and capital
ratios as compared to the respective regulatory requirements.
The Savings Bank's Asset and Liability Management Committee has in recent
periods implemented asset and liability management policies designed to better
match the maturities and repricing terms of the Savings Bank's interest-earning
assets and interest-bearing liabilities in order to minimize the adverse effects
on the Savings Bank's results of operations of material and prolonged increases
in interest rates. The Savings Bank has undertaken a variety of strategies to
reduce its exposure to interest rate fluctuations, including (i) subject to
market conditions, emphasizing the origination and purchase of adjustable-rate
mortgage loans and balloon loans (which amortize over a fifteen to thirty-year
period but are payable at the end of five, seven or ten years); (ii) continuing
to invest excess cash in adjustable-rate and medium-term (primarily five years
or less) mortgage-backed securities; (iii) maintaining high levels of capital
and strong asset quality; (iv) attempting to attract, to the extent possible,
longer-term, fixed-rate deposit accounts; (v) utilization of longer-term FHLB
advances; and (vi) the sale of certain long-term fixed-rate mortgage loans in
the secondary market.
6
<PAGE> 9
As a result of implementing these asset and liability initiatives, at
December 31, 1997, $254.7 million, or 57.5% of the Savings Bank's total loan
portfolio consisted of adjustable-rate or balloon loans. As of such date, $175.3
million, or 50.3% of the Savings Bank's portfolio of single-family residential
mortgage loans consisted of adjustable-rate or balloon loans. In addition, at
December 31, 1997, $39.4 million, or 100.0% of the Savings Bank's
mortgage-backed securities portfolio consisted of adjustable-rate securities or
had scheduled maturities of five years or less.
Management presently monitors and evaluates the potential impact of interest
rate changes upon the market value of the Savings Bank's portfolio equity and
the level of net interest income on a quarterly basis. The OTS adopted a final
rule in August 1993 incorporating an interest rate risk component into the
risk-based capital rules. Under the rule, an institution with a greater than
"normal" level of interest rate risk will be subject to a deduction of its
interest rate risk component from total capital for purposes of calculating the
risk-based capital requirement. An institution with a greater than "normal"
interest rate risk is defined as an institution that would suffer a loss of net
portfolio value ("NPV") exceeding 2.0% of the estimated market value of its
assets in the event of a 200 basis point increase or decrease in interest rates.
NPV is the difference between incoming and outgoing discounted cash flows from
assets, liabilities, and off-balance sheet contracts. A resulting change in NPV
of more than 2% of the estimated market value of an institution's assets will
require the institution to deduct from its capital 50% of that excess change.
The rule provides that the OTS will calculate the interest rate risk component
quarterly for each institution. The OTS has indicated that no institution will
be required to deduct an interest rate risk component from capital for purposes
of computing the risk-based capital requirement until further notice.
At December 31, 1997, 2% of the present value of the Savings Bank's assets
was approximately $10.6 million. Because the interest rate risk of a 200 basis
point increase in market interest rates (which was greater than the interest
rate risk of a 200 basis point decrease) was $15.9 million at December 31, 1997,
the Savings Bank would have been required to deduct $2.7 million (50% of the
$5.3 million difference) from its capital in determining whether the Savings
Bank met its risk-based capital requirement. Despite such reduction, however,
the Savings Bank's risk-based capital at December 31, 1997, would still have
exceeded the regulatory requirement by approximately $29.4 million.
The following table presents the Savings Bank's NPV as of December 31, 1997,
as calculated by the OTS, based on information provided to the OTS by the
Savings Bank.
NET PORTFOLIO VALUE
<TABLE>
<CAPTION>
Change in Estimated NPV
Interest Rates Estimated as a Percentage Amount
(Basis Points) NPV of Assets of Change Percent
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
+400 $21,527 4.47% $(36,253) (63)%
+300 31,845 6.43 (25,935) (45)
+200 41,830 8.23 (15,950) (28)
+100 50,776 9.76 (7,004) (12)
-- 57,780 10.89 -- --
-100 61,775 11.48 3,995 7
-200 62,699 11.55 4,919 9
-300 64,467 11.76 6,687 12
-400 68,403 12.30 10,623 18
</TABLE>
CHANGES IN FINANCIAL CONDITION FROM DECEMBER 31, 1996 TO DECEMBER 31, 1997
The Corporation's consolidated total assets amounted to $535.1 million at
December 31, 1997, an increase of $35.2 million, or 7.0%, over the $499.9
million total at December 31, 1996. The growth in assets was funded primarily
through growth in deposits of $23.9 million and an increase of $14.0 million in
FHLB advances, which were partially offset by a decline in stockholders' equity
of $2.4 million.
Cash and cash equivalents, comprised of cash and due from banks, federal
funds sold and interest-bearing deposits in other financial institutions,
amounted to $30.5 million at December 31, 1997, an increase of $7.9 million, or
35.0%, over the total in 1996. The increase in cash and cash equivalents
generally reflects funds received in December upon sale of mortgage-backed
securities. Such proceeds were held to fund commitments to originate loans at
December 31, 1997.
Investment securities totaled $6.0 million at December 31, 1997, a decrease
of $10.1 million, or 62.7%, from 1996 levels. The decrease was due primarily to
sales and maturities totaling $16.0 million and $7.7 million, respectively,
which were partially offset by purchases totaling $13.5 million. Proceeds from
sales of investment securities included $6.0 million which were sold to
partially fund the $1.00 per share return of capital distribution paid in
December 1997, while approximately $7.5 million in proceeds were redeployed into
purchases of short-term balloon maturity mortgage-backed securities.
7
<PAGE> 10
Mortgage-backed securities (including securities classified as available
for sale) totaled $39.4 million at December 31, 1997, a decrease of $2.2
million, or 5.2%, from the total in 1996. The decrease in mortgage-backed
securities was due primarily to sales of $22.7 million and principal repayments
of $6.8 million, which were partially offset by purchases totaling $19.2
million. Sales of mortgage-backed securities totaling $4.2 million during
January 1997, reflected management's completion of restructuring the portfolio
acquired in the merger with Circle in order to achieve an interest rate risk
position in accordance with the operating policies of the Savings Bank. Proceeds
from these sales were redeployed into purchases of $5.1 million of
adjustable-rate thirty year term mortgage-backed securities. Additionally, $10.3
million of mortgage-backed securities were sold in May to fund growth in the
loan portfolio, while $8.2 million of securities were sold in December, as
previously discussed.
Loans receivable increased by $40.3 million, or 10.2%, to a total of $436.9
million at December 31, 1997, as compared to $396.5 million at December 31,
1996. The increase resulted primarily from loan disbursements of $131.8 million,
which were partially offset by principal repayments totaling $79.0 million and
sales of $4.1 million. Loan originations during 1996 increased by $72.4 million,
or 121.7%, over 1996 totals, which reflects the effects of the combined
companies for a full year following the completion of the Merger in October
1996. The Savings Bank's loan originations during 1997 were primarily comprised
of one-to four-family and multi-family loans, which totaled $95.2 million, or
72.2%, of total loan originations.
The Savings Bank's allowance for loan losses totaled $1.7 million at
December 31, 1997, an increase of $100,000, or 6.4%, over the total at December
31, 1996. The allowance represented .37% and .39% of total loans at December 31,
1997 and 1996, respectively, and 172.9% and 137.9% of nonperforming loans, which
totaled $1.0 million and $1.1 million at those respective dates. While
management believes the Savings Bank's allowance for loan losses is adequate at
December 31, 1997, based upon the available facts and circumstances, there can
be no assurance that additions to the allowance will not be necessary in future
periods, which could adversely affect future operating results.
Deposits totaled $432.0 million at December 31, 1997, an increase of $23.9
million, or 5.8%, over 1996 levels. Deposits subject to daily repricing totaled
$91.4 million, or 21.2% of total deposits at December 31, 1997, as compared to
22.6% of total deposits at December 31, 1996. Certificates of deposit totaled
$340.6 million, or 78.8% of total deposits at December 31, 1997, as compared to
77.4% in 1996.
Advances from the Federal Home Loan Bank totaled $34.2 million at December
31, 1997, an increase of $14.0 million, or 69.6%, over 1996 levels. The increase
resulted primarily from $21.5 million in borrowings during 1997, which were
partially offset by repayments of $7.5 million. During 1997, management elected
to utilize FHLB advances to fund originations of nonresidential loans, including
loan participations, totaling $13.5 million, which provided for an initial
interest rate spread of approximately 2.30%.
Stockholders' equity totaled $64.3 million at December 31, 1997, a decrease
of $2.4 million, or 3.7%, from the total at December 31, 1996. The decrease
resulted primarily from the $7.0 million, or $1.28 per share in distributions
paid on common stock during the year, which were partially offset by net
earnings of $4.9 million.
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 period.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1997(1) 1996
-------------------------------------------------------------------
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
-------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable (2) $427,912 $33,433 7.81% $234,133 $18,872 8.06%
Mortgage-backed securities (3) 40,245 2,651 6.59% 32,263 2,103 6.52%
Investment securities (3) 15,082 1,006 6.67% 13,087 833 6.37%
Other interest-earning assets 18,318 1,061 5.79% 16,896 930 5.50%
-------------------------------------------------------------------
Total interest-earning assets 501,557 38,151 7.61% 296,379 22,738 7.67%
Non-interest earning assets 19,902 8,377
-------- --------
Total assets $521,459 $304,756
======== ========
Interest-bearing liabilities:
Deposits:
NOW accounts $ 22,184 $ 322 1.45% $ 14,100 $ 280 1.99%
Passbook and club accounts 42,712 859 2.01% 23,673 516 2.18%
Money market deposit accounts 24,839 796 3.20% 13,198 415 3.14%
Certificates of deposit accounts 332,370 18,946 5.70% 180,521 10,343 5.73%
Borrowings (4) 26,208 1,639 6.25% 17,794 1,102 6.19%
-------------------------------------------------------------------
Total interest-bearing liabilities 448,313 22,562 5.03% 249,286 12,656 5.08%
Non-interest-bearing liabilities 5,590 4,612
-------------------------------------------------------------------
Total liabilities 453,903 253,898
Stockholders' equity 67,556 50,858
-------- --------
Total liabilities and stockholders'
equity $521,459 $304,756
======== ========
Net interest income/ interest rate
spread $15,589 2.58% $10,082 2.59%
===================================================================
Net interest margin(5) 3.11% 3.40%
===================================================================
Average interest-earning assets to
average interest-bearing liabilities 111.88% 118.89%
===================================================================
<CAPTION>
Year Ended December 31,
--------------------------------
1995
--------------------------------
Average Interest Average
Outstanding Earned/ Yield/
Balance Paid Rate
--------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earnings assets:
Loans receivable (2) $180,935 $14,697 8.12%
Mortgage-backed securities (3) 27,178 1,695 6.24%
Investment securities (3) 5,020 307 6.12%
Other interest-earning assets 5,071 302 5.96%
-----------------------------------------
Total interest-earning assets 218,204 17,001 7.79%
Non-interest earning assets 4,284
--------
Total assets $222,488
========
Interest-bearing liabilities:
Deposits:
NOW accounts $ 9,213 $ 267 2.90%
Passbook and club accounts 16,297 432 2.65%
Money market deposit accounts 12,953 417 3.22%
Certificates of deposit accounts 137,564 8,151 5.93%
Borrowings (4) 14,146 900 6.36%
---------------------------------------------------------
Total interest-bearing liabilities 190,173 10,167 5.35%
Non-interest-bearing liabilities 2,912
-------------------------------------------------------------------
Total liabilities 193,085
Stockholders' equity 29,403
--------
Total liabilities and stockholders'
equity $222,488
========
Net interest income/ interest rate
spread $ 6,834 2.44%
===================================================================
Net interest margin(5) 3.13%
===================================================================
Average interest-earning assets to
average interest-bearing liabilities 114.74%
===================================================================
</TABLE>
(1) At December 31, 1997, the yields earned and rates paid were as follows:
loans receivable, 7.82%; mortgage-backed securities, 6.83%; investment
securities, 6.92%; other interest-earning assets, 5.68%; total
interest-earning assets, 7.60%; deposits, 5.08%; borrowings, 6.21%; total
interest-bearing liabilities, 5.16%; interest rate spread, 2.44%.
(2) Includes loans classified as held for sale.
(3) Includes mortgage-backed and investment securities classified as available
for sale.
(4) Includes FHLB advances and a loan from a third-party financial institution
to the Savings Bank's Employee Stock Ownership Plan for the year ended
December 31, 1996 and 1995.
(5) Net interest margin is net interest income divided by average
interest-earning assets.
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,
1997 vs. 1996 1996 vs. 1995
---------------------------------------------------------------
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
Rate Volume (Decrease) Rate Volume (Decrease)
---------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $(658) $15,219 $14,561 $(110) $4,285 $4,175
Mortgage-backed and related securities 23 525 548 81 327 408
Investment securities 42 131 173 15 511 526
Interest-earning deposits and other 50 81 131 (19) 647 628
---------------------------------------------------------------
Total $(543) $15,956 $15,413 $ (33) $5,770 $5,737
===============================================================
Interest-bearing liabilities:
Deposits $(185) $ 9,554 $ 9,369 $(496) $2,783 $2,287
Borrowings 11 526 537 (25) 227 202
---------------------------------------------------------------
Total $(174) $10,080 9,906 $(521) $3,010 2,489
===============================================================
Increase in net interest income $ 5,507 $3,248
===============================================================
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
1996
Net earnings amounted to $4.9 million for the year ended December 31, 1997,
an increase of $3.3 million, or 203%, over the $1.6 million in net earnings
recorded in 1996. The increase in net earnings resulted primarily from a $5.5
million increase in net interest income and a $1.3 million increase in other
income, which were partially offset by a $1.7 million increase in general,
administrative and other expense and a $1.8 million increase in the provision
for federal income taxes. The increases in overall income and expense components
for the year ended December 31, 1997, as compared to the year ended December 31,
1996, generally reflect the effects of a full year of combined operations
following the merger of Circle Financial Corporation which was consummated on
October 11, 1996. The merger was accounted for using the purchase method of
accounting, which does not provide for a restatement of prior period results of
operations to give effect to the combination.
The increase in net earnings also resulted from a non-recurring $749,000
after-tax charge for the FDIC special assessment to recapitalize the Savings
Association Insurance Fund ("SAIF"), in accordance with the legislation enacted
into law on September 30, 1996. In addition, the increase in earnings also
resulted from two non-recurring events related to the merger of Circle: a
$196,000 after-tax loss on the sale of investment and mortgage-backed securities
incurred as a result of restructuring Circle's portfolio and after-tax
restructuring expenses of approximately $450,000 incurred relating to employee
compensation and benefits, occupancy and equipment, and general, administrative
and other expenses. Absent the special assessment and merger related expenses,
net earnings for the year ended December 31, 1996, would have been approximately
$3.0 million.
Net interest income totaled $15.6 million for the year ended December 31,
1997, an increase of $5.5 million, or 54.6%, over 1996. Interest income
increased by $15.4 million, or 67.8%, for the year ended December 31, 1997, as
compared to 1996. Interest income on loans and mortgage-backed securities
increased by $15.1 million, or 72.0%, due primarily to a $201.8 million, or
75.7%, increase in the average balance outstanding year to year, which was
partially offset by a 16 basis point decline in the weighted-average yield, from
7.87% in 1996 to 7.71% in 1997. Interest income on investment securities and
interest-bearing deposits increased by $304,000, or 17.2%, during 1997 due
primarily to a $3.4 million, or 11.4%, increase in the average balance
outstanding, coupled with a 31 basis point increase in the average yield, to
6.19% during 1997.
Interest expense on deposits increased by $9.4 million, or 81.1%, for the
year ended December 31, 1997, as compared to 1996. The increase was due
primarily to a $190.6 million, or 82.3%, increase in the average balance
outstanding, which was partially offset by a 3 basis point decline in the
average cost of deposits, to 4.96% for the year ended December 31, 1997, as
10
<PAGE> 13
compared to 4.99% for 1996. Interest expense on borrowings increased by
$537,000, or 48.7%, due to an $8.4 million increase in the average balance of
outstanding borrowings during 1997, coupled with a 6 basis point increase in the
weighted-average cost of borrowings, to a rate of 6.25% for 1997.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $5.5 million, or 54.6%, for the year
ended December 31, 1997 as compared to 1996. The interest rate spread amounted
to 2.58% during 1997 and 2.59% in 1996, while the net interest margin declined
to 3.11% from 3.40% for the years ended December 31, 1997 and 1996,
respectively.
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the
Savings Bank, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Savings
Bank's market area, and other factors related to the collectibility of the
Savings Bank's loan portfolio. As a result of such analysis, management recorded
a $101,000 provision for losses on loans during the year ended December 31,
1997, a decrease of $28,000 from the amount recorded in 1996. There can be no
assurance that the allowance for loan losses of the Savings Bank will be
adequate to cover losses on nonperforming assets in the future.
Other income increased by $1.2 million to a total of $1.4 million for the
year ended December 31, 1997, as compared to $165,000 in 1996. The increase was
due primarily to a $562,000 increase in gains on sales of investment and
mortgage-backed securities, coupled with a $39,000, or 23.2%, increase in rental
income and a $610,000 increase in other operating income, which consisted
primarily of service charges and fees directly related to the increase in
transaction accounts as a result of the merger.
General, administrative and other expense totaled $9.4 million for the year
ended December 31, 1997, an increase of $1.7 million, or 22.7%, over the 1996
total. The increase resulted primarily from a $1.0 million, or 32.1%, increase
in employee compensation and benefits, a $624,000, or 73.2%, increase in
occupancy and equipment, a $230,000, or 44.1%, increase in franchise taxes, a
$551,000 increase in amortization of goodwill and other intangible assets, a
$208,000, or 77.6%, increase in data processing and a $457,000, or 40.3%,
increase in other operating expenses, all of which were partially offset by a
$1.3 million, or 84.0%, decrease in federal deposit insurance premiums. The
decrease in federal deposit insurance premiums resulted from the $1.1 million
one-time pre-tax charge recorded in 1996 to recapitalize the SAIF, coupled with
the corresponding decline in premium rates in 1997.
The increase in employee compensation and benefits resulted primarily from
an increase in staffing levels due to the Merger. The increase in amortization
of goodwill and other intangible assets was due to goodwill recorded as a result
of the Merger.
Increases in occupancy and equipment, franchise taxes, data processing and
other operating expenses generally resulted from the effects of the Merger,
which was consummated in 1996. As previously discussed, operating expenses
reflect the increased size of the Corporation, as compared to the prior year.
The provision for federal income taxes totaled $2.7 million for the year
ended December 31, 1997, an increase of $1.8 million, or 205%, over the
provision recorded in 1996. The increase resulted primarily from a $5.1 million,
or 204%, increase in pretax earnings year to year. The Corporation's effective
tax rates were 35.3% and 35.2% for the years ended December 31, 1997 and 1996,
respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
1995
Net earnings amounted to $1.6 million for the year ended December 31, 1996,
a decrease of $206,000, or 11.4%, from the $1.8 million in net earnings recorded
in 1995. The decline in net earnings resulted primarily from a non-recurring
$749,000 after-tax charge for the FDIC special assessment to recapitalize the
Savings Association Insurance Fund ("SAIF") in accordance with the legislation
enacted into law on September 30, 1996. In addition, the decline in earnings
also resulted from two non-recurring events related to the merger of Circle
during the fourth quarter of 1996: a $196,000 after-tax loss on the sale of
investment and mortgage-backed securities incurred as a result of restructuring
Circle's portfolio and after-tax restructuring expenses of approximately
$450,000 relating to employee compensation and benefits, occupancy and
equipment, and general, administrative and other expenses. Absent the special
assessment and merger related expenses, net earnings for the year ended December
31, 1996 would have been approximately $3.0 million.
Net interest income totaled $10.1 million for the year ended December 31,
1996, an increase of $3.2 million, or 47.5%, over 1995. Interest income
increased by $5.7 million, or 33.7%, for the year ended December 31, 1996, as
compared to 1995. Interest income on loans and mortgage-backed securities
increased by $4.6 million, or 28.0%, due primarily to a $58.3 million, or 28.0%,
increase in the average balance outstanding year to year. Interest income on
investment securities and interest-bearing deposits increased by $1.2 million,
or 189.5%, during 1996 due primarily to a $19.9 million, or 197.1%, increase in
the average balance outstanding, which was partially offset by a 16 basis point
decline in the average yield, to 5.88% during 1996. The increases in
11
<PAGE> 14
the average balances of interest-earning assets during 1996 over 1995 primarily
reflect the effects of the Merger which was consummated on October 11, 1996.
Interest expense on deposits increased by $2.3 million, or 24.7%, for the
year ended December 31, 1996, as compared to 1995. The increase was due
primarily to a $55.5 million, or 31.5%, increase in the average balance
outstanding, which was partially offset by a 27 basis point decline in the
average cost of deposits, to 4.99% for the year ended December 31, 1996, as
compared to 5.26% for 1995. Interest expense on borrowings increased by
$202,000, or 22.4%, due to a $3.6 million increase in the average balance of
outstanding borrowings during 1996, which was partially offset by a 17 basis
point decline in the cost of borrowings, to a rate of 6.19% for 1996. The
increases in the average balances of interest-bearing liabilities during 1996
over 1995 were primarily due to the effects of the Merger which was consummated
on October 11, 1996.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $3.2 million, or 47.5%, for the year
ended December 31, 1996 as compared to 1995. The interest rate spread increased
to 2.59% during 1996 from 2.44% in 1995, while the net interest margin increased
to 3.40% from 3.13% for the years ended December 31, 1996 and 1995,
respectively.
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the
Savings Bank, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Savings
Bank's market area, and other factors related to the collectibility of the
Savings Bank's loan portfolio. As a result of such analysis, management recorded
a $129,000 provision for losses on loans during the year ended December 31,
1996, an increase of $58,000 over the amount recorded in 1995. There can be no
assurance that the allowance for loan losses of the Savings Bank will be
adequate to cover losses on nonperforming assets in the future.
Other income decreased by $190,000, or 53.5%, to a total of $165,000 for the
year ended December 31, 1996, as compared to $355,000 in 1995. The decrease was
due primarily to a $274,000 increase in loss on sales of investment and
mortgage-backed securities, as previously discussed, which was partially offset
by a $30,000, or 21.7%, increase in rental income and a $54,000, or 23.0%,
increase in other operating income, which consisted primarily of service charges
and fees on deposit accounts.
General, administrative and other expense totaled $7.6 million for the year
ended December 31, 1996, an increase of $3.3 million, or 74.2%, over the 1995
total. The increase resulted primarily from a $1.2 million increase in federal
deposit insurance premiums due to the one-time assessment to recapitalize the
SAIF, coupled with a $1.0 million, or 48.2%, increase in employee compensation
and benefits, a $231,000, or 37.1%, increase in occupancy and equipment, a
$93,000, or 21.7%, increase in franchise taxes, a $143,000 increase in
amortization of goodwill and other intangible assets, an $80,000, or 42.6%,
increase in data processing and a $488,000, or 75.7%, increase in other
operating expenses.
Legislation enacted to recapitalize the SAIF in September 1996 provided for
a special assessment of $.657 per $100 of SAIF deposits held at March 31, 1995,
in order to increase SAIF reserves to the level required by law. The Savings
Bank had $173.1 million in SAIF deposits at March 31, 1995, resulting in an
assessment of approximately $1.1 million, or $749,000 after tax.
The legislation also provided for reduced premium rates for healthy savings
associations beginning in 1997, which amounted to $.064 per $100 of SAIF insured
deposits.
A component of the recapitalization plan provided for the merger of the SAIF
and BIF on January 1, 2000, assuming all federal savings associations have
become banks. Legislation introduced in late September 1996 proposed the
elimination of the federal thrift charter or of the separate federal regulation
of thrifts. As a result, the Savings Bank would be regulated as a bank under
federal laws which would subject it to the more restrictive activity limits
imposed on national banks. In the opinion of management, such restrictions would
not have a material adverse effect on the Savings Bank's results of operations.
Under separate but related legislation, the Savings Bank is required to
recapture as taxable income approximately $2.7 million of its bad debt reserve,
which represents the post-1987 additions to the reserve, and will be unable to
utilize the percentage of earnings method to compute its reserve in the future.
The Savings Bank has provided deferred taxes for this amount and, as a result,
repayment of the reserve will not result in a charge to operations in future
years. The Savings Bank is permitted by such legislation to amortize the
recapture of its bad debt reserve over six years.
The increase in employee compensation and benefits resulted primarily from
an increase in staffing levels, an increase in costs associated with employee
stock benefit plans and Merger-related severance benefits. The increase in
amortization of goodwill and other intangible assets was due to goodwill
recorded as a result of the Merger.
Increases in occupancy and equipment, franchise taxes, data processing and
other operating expenses generally resulted from the effects of the Merger,
which was consummated on October 11, 1996. From that date through the end of the
year, operating expenses reflect the increased size of the Corporation, as
compared to the prior year.
12
<PAGE> 15
The provision for federal income taxes totaled $872,000 for the year ended
December 31, 1996, a decrease of $47,000, or 5.1%, from the provision recorded
in 1995. The decline resulted primarily from a $253,000, or 9.3%, decrease in
pretax earnings year to year. The Corporation's effective tax rates were 35.2%
and 33.6% for the years ended December 31, 1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Savings Bank is required under applicable federal regulations to
maintain specified levels of "liquid" investments in qualifying types of United
States Government and government agency obligations and other similar
investments. Such investments are intended to provide a source of relatively
liquid funds upon which the Savings Bank may rely if necessary to fund deposit
withdrawals and for other short-term funding needs. The required level of such
liquid investments is currently 4% of certain liabilities as defined by the OTS
and is changed from time to time to reflect economic conditions.
The liquidity of the Savings Bank, as measured by the ratio of cash, cash
equivalents, (not committed, pledged or required to liquidate specific
liabilities), investment and qualifying mortgage-backed securities to the sum of
withdrawable deposit accounts and borrowings payable on demand or with unexpired
maturities of one year or less, was 23.1% at December 31, 1997. At December 31,
1997 the Savings Bank's "liquid" assets totaled approximately $73.8 million,
which was $61.0 million in excess of the current OTS minimum requirement.
The Savings Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Savings Bank's
primary sources of funds are deposits, borrowings, amortization, prepayments and
maturities of outstanding loans and mortgage-backed securities, maturities of
investment and mortgage-backed securities and other short-term investments,
sales of loans and investment and mortgage-backed securities and funds provided
from operations. While scheduled loan and mortgage-backed securities
amortization and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. The Savings Bank manages the pricing of its deposits to maintain a
steady deposit balance. In addition, the Savings Bank invests excess funds in
overnight deposits and other short-term interest-earning assets which provides
liquidity to meet lending requirements. The Savings Bank generates cash through
the retail deposit market and, to the extent deemed necessary, utilizes
borrowings for liquidity purposes (primarily consisting of advances from the
FHLB of Cincinnati). At December 31, 1997, the Savings Bank had $34.2 million of
outstanding advances from the FHLB of Cincinnati. Furthermore, the Savings Bank
has access to the Federal Reserve Bank discount window.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, the Savings Bank maintains a
strategy of investing in various loans, mortgage-backed securities and
investment securities. The Savings Bank uses its sources of funds primarily to
meet its ongoing commitments, to pay maturing savings certificates and savings
withdrawals, fund loan commitments and maintain a portfolio of investment and
mortgage-backed securities. At December 31, 1997, the total approved loan
commitments outstanding amounted to $9.2 million. At the same date, commitments
under unused lines of credit secured by one- to four-family residential property
amounted to $6.6 million, commitments under unused lines of credit secured by
multi-family and non-residential real estate totaled $4.9 million and the
unadvanced portion of construction loans approximated $5.1 million. The Savings
Bank also has outstanding commitments of $1.7 million to purchase and $336,000
to sell residential real estate loans as of December 31, 1997. Certificates of
deposit scheduled to mature in one year or less at December 31, 1997, totaled
$251.3 million. The Savings Bank believes that it has adequate resources to fund
all of its commitments and that it can adjust the rate of certificates of
deposit in order to retain deposits in changing interest rate environments.
The Savings Bank is subject to minimum capital standards promulgated by the
OTS. Such capital standards generally require the maintenance of regulatory
capital sufficient to meet each of the following three requirements: a tangible
capital requirement, a core capital requirement and a risk-based capital
requirement. At December 31, 1997, the Savings Bank's tangible and core capital
amounted to $53.2 million, or 10.1%, of total adjusted assets, which exceeded
the minimum requirements of 1.5% and 3.0% at that date by approximately $45.3
million and $37.4 million, or 8.6% and 7.1% of adjusted total assets,
respectively. The Savings Bank's risk-based capital totaled $54.8 million at
December 31, 1997, or 19.3% of risk-weighted assets, which exceeded the current
requirement of 8% of risk-weighted assets by approximately $32.1 million, or
11.3% of risk-weighted assets.
The OTS has proposed an amendment to the core capital requirement that would
increase the minimum requirement to 4% of adjusted total assets for
substantially all savings associations. Management anticipates no material
change to the Savings Bank's excess regulatory capital position if the proposal
is adopted in its present form.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
that
13
<PAGE> 16
provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, referred to
as the financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include, among
others, transfers involving repurchase agreements, securitizations of financial
assets, loan participations, factoring arrangements, and transfers of
receivables with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or liability
that is purchased or assumed is initially recognized at its fair value.
Servicing assets and liabilities are amortized in proportion to and over the
period of estimated net servicing income or net servicing loss and are subject
to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet
only if the debtor either pays the creditor and is relieved of its obligation
for the liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishment of liabilities occurring after December 31, 1997, and is to
be applied prospectively. Earlier or retroactive application is not permitted.
Management adopted SFAS No. 125 effective January 1, 1998, as required, without
material effect on the Corporation's consolidated financial position or results
of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. It does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial condition. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. SFAS No. 130 is not expected to
have a material impact on the Corporation's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 significantly changes the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about reportable segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
uses a "management approach" to disclose financial and descriptive information
about the way that management organizes the segments within the enterprise for
making operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and also requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 is not expected to have a material impact on the
Corporation's financial statements.
OTHER MATTERS
As with all providers of financial services, the Savings Bank's operations
are heavily dependent on information technology systems. The Savings Bank is
addressing the potential problems associated with the possibility that the
computers that control or operate the Savings Bank's information technology
system and infrastructure may not be programmed to read four-digit date codes
and, upon arrival of the year 2000, may recognize the two-digit code "00" as the
year 1900, causing systems to fail to function or to generate erroneous data.
The Savings Bank is working with the companies that supply or service its
information technology systems to identify and remedy any year 2000 related
problems.
As of the date of this Annual Report, the Savings Bank has not identified
any specific expenses that are reasonably likely to be incurred by the Savings
Bank in connection with this issue and does not expect to incur significant
expense to implement the necessary corrective measures. No assurance can be
given, however, that significant expense will not be incurred in future periods.
14
<PAGE> 17
In the event that the Savings Bank is ultimately required to purchase
replacement computer systems, programs and equipment, or incur substantial
expense to make the Savings Bank's current systems, programs and equipment year
2000 compliant, the Savings Bank's net earnings and financial condition could be
adversely affected.
In addition to possible expense related to its own systems, the Savings Bank
could incur losses if loan payments are delayed due to year 2000 problems
affecting any major borrowers in the Savings Bank's primary market area. Because
the Savings Bank's loan portfolio is highly diversified with regard to
individual borrowers and types of businesses and the Savings Bank's primary
market area is not significantly dependent upon one employer or industry, the
Savings Bank does not expect any significant or prolonged difficulties that will
affect net earnings or cash flow.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Corporation and related
consolidated financial data presented herein have been prepared in accordance
with generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Corporation's operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Corporation are monetary in nature. As a result,
interest rates have a greater impact on the Corporation's performance than do
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
15
<PAGE> 18
GRANT THORNTON LETTERHEAD
Board of Directors
Fidelity Financial of Ohio, Inc.
We have audited the accompanying consolidated statements of financial
condition of Fidelity Financial of Ohio, Inc. as of December 31, 1997 and 1996,
and the related consolidated statements of earnings, stockholders' equity, and
cash flows for each of the three years ended December 31, 1997, 1996 and 1995.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Fidelity
Financial of Ohio, Inc. as of December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years ended
December 31, 1997, 1996 and 1995, in conformity with generally accepted
accounting principles.
/s/ Grant Thornton LLP
Cincinnati, Ohio
February 12, 1998
16
<PAGE> 19
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
--------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,801 $ 2,121
Federal funds sold 22,646 13,820
Interest-bearing deposits in other financial institutions 5,084 6,669
- ----------------------------------------------------------------------------------
Cash and cash equivalents 30,531 22,610
Investment securities available for sale--at market 6,020 16,120
Mortgage-backed securities available for sale--at market 25,827 30,760
Mortgage-backed securities--at cost, approximate market
value of $13,706 and $10,831 at December 31, 1997 and
1996, respectively 13,527 10,744
Loans receivable--net 436,414 396,541
Loans held for sale--at lower of cost or market 438 --
Office premises and equipment--at depreciated cost 7,462 7,371
Federal Home Loan Bank stock--at cost 4,157 3,781
Accrued interest receivable on loans 2,110 1,950
Accrued interest receivable on mortgage-backed securities 245 310
Accrued interest receivable on investments 132 284
Prepaid expenses and other assets 289 371
Goodwill and other intangible assets, net of accumulated
amortization 7,628 8,322
Prepaid federal income taxes 320 754
- ----------------------------------------------------------------------------------
Total assets $535,100 $499,918
==================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $432,024 $408,159
Advances from the Federal Home Loan Bank 34,233 20,186
Advances by borrowers for taxes and insurance 2,134 2,005
Accrued interest and other liabilities 1,826 2,706
Deferred federal income taxes 609 150
- ----------------------------------------------------------------------------------
Total liabilities 470,826 433,206
Commitments -- --
Stockholders' equity
Preferred stock--authorized, 5,000,000 shares at $.10 par
value; none issued -- --
Common stock--authorized, 15,000,000 shares at $.10 par
value; 5,593,969 issued at December 31, 1997 and 1996 559 559
Additional paid-in capital 41,548 41,608
Retained earnings--restricted 24,147 26,311
Less shares acquired by Employee Stock Ownership Plan
(ESOP) (1,785) (1,938)
Less shares of common stock held in treasury--at cost (20) --
Less shares acquired by Management Recognition Plan (MRP) (292) --
Unrealized gains on securities designated as available for
sale, net of related tax effects 117 172
- ----------------------------------------------------------------------------------
Total stockholders' equity 64,274 66,712
- ----------------------------------------------------------------------------------
Total liabilities and stockholders' equity $535,100 $499,918
==================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE> 20
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Interest income
Loans $33,433 $18,872 $14,697
Mortgage-backed securities 2,651 2,103 1,695
Investment securities 1,006 833 307
Interest-bearing deposits and other 1,061 930 302
- -------------------------------------------------------------------------------------------
Total interest income 38,151 22,738 17,001
Interest expense
Deposits 20,923 11,554 9,267
Borrowings 1,639 1,102 900
- -------------------------------------------------------------------------------------------
Total interest expense 22,562 12,656 10,167
- -------------------------------------------------------------------------------------------
Net interest income 15,589 10,082 6,834
Provision for losses on loans 101 129 71
- -------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans 15,488 9,953 6,763
Other income
Gain (loss) on sale of investment and mortgage-backed
securities 267 (295) (21)
Gain on sale of loans 36 3 8
Gain on sale of real estate 6 -- --
Loss on sale of real estate acquired through foreclosure -- -- (5)
Rental 207 168 138
Other operating 899 289 235
- -------------------------------------------------------------------------------------------
Total other income 1,415 165 355
General, administrative and other expense
Employee compensation and benefits 4,125 3,122 2,107
Occupancy and equipment 1,477 853 622
Federal deposit insurance premiums 256 1,598 395
Franchise taxes 751 521 428
Amortization of goodwill and other intangible assets 694 143 --
Data processing 476 268 188
Other operating 1,590 1,133 645
- -------------------------------------------------------------------------------------------
Total general, administrative and other expense 9,369 7,638 4,385
- -------------------------------------------------------------------------------------------
Earnings before income taxes 7,534 2,480 2,733
Federal income taxes
Current 2,177 916 774
Deferred 481 (44) 145
- -------------------------------------------------------------------------------------------
Total federal income taxes 2,658 872 919
- -------------------------------------------------------------------------------------------
Net earnings $ 4,876 $ 1,608 $ 1,814
===========================================================================================
Earnings per share
Basic $ .90 $ .38 $ .45
===========================================================================================
Diluted $ .89 $ .38 $ .44
===========================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE> 21
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Unrealized
Gains (Losses)
Additional Shares Shares on Securities
Common Paid-In Retained Treasury Acquired Acquired Available
stock capital Earnings Stock by ESOP by MRP for Sale Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $181 $ 4,834 $24,218 $ -- $ (257) $ (42) $(394) $28,540
Net earnings for the year ended
December 31, 1995 -- -- 1,814 -- -- -- -- 1,814
Exercise of 3,335 stock options -- 14 -- -- -- -- -- 14
Principal payments on loans to
ESOP/ amortization of expense
related to employee stock
benefit plans -- -- -- -- 67 -- -- 67
Proceeds on additional borrowings
on loans to ESOP -- -- -- -- (146) 22 -- (124)
Unrealized gains on securities
designated as available for
sale, net of related tax
effects -- -- -- -- -- -- 337 337
Cash distributions of $.30 per
share -- -- (535) -- -- -- -- (535)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 181 4,848 25,497 -- (336) (20) (57) 30,113
Net earnings for the year ended
December 31, 1996 -- -- 1,608 -- -- -- -- 1,608
Proceeds from issuance of common
stock 226 21,893 137 -- (1,822) -- -- 20,434
Issuance of shares in connection
with merger 151 14,792 -- -- -- -- -- 14,943
Exercise of 6,750 stock options 1 32 -- -- -- -- -- 33
Principal payments on loans to
ESOP/ amortization of expense
related to employee stock
benefit plans -- 43 -- -- 220 20 -- 283
Unrealized gains on securities
designated as available for
sale, net of related tax
effects -- -- -- -- -- -- 229 229
Cash distributions of $.24 per
share -- -- (931) -- -- -- -- (931)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 559 41,608 26,311 -- (1,938) -- 172 66,712
Net earnings for the year ended
December 31, 1997 -- -- 4,876 -- -- -- -- 4,876
Purchase of treasury shares -- -- -- (229) -- -- -- (229)
Stock acquired for MRP -- -- -- -- -- (292) -- (292)
Exercise of 14,350 stock options -- (142) -- 209 -- -- -- 67
Principal payments on loans to
ESOP/ amortization of expense
related to employee stock
benefit plans -- 82 117 -- 153 -- -- 352
Unrealized losses on securities
designated as available for
sale, net of related tax
effects -- -- -- -- -- -- (55) (55)
Cash distributions of $1.28 per
share -- -- (7,157) -- -- -- -- (7,157)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $559 $41,548 $24,147 $(20) $(1,785) $ (292) $ 117 $64,274
=============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE> 22
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 4,876 $ 1,608 $ 1,814
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Depreciation and amortization 630 335 265
Amortization of premiums on investments and
mortgage-backed securities 46 47 34
Amortization of deferred loan origination (fees)
costs 277 (117) (222)
Amortization expense of employee stock benefit plans 235 63 22
Amortization of goodwill and other intangible assets 694 143 --
Amortization of purchase accounting adjustments (755) (480) --
(Gain) loss on sale of investment and mortgage-backed
securities (267) 295 21
(Gain) loss on sale of mortgage loans 41 (3) (8)
Loans disbursed for sale in the secondary market (4,599) (71) (1,811)
Proceeds from sale of mortgage loans 4,120 550 1,173
Gain on sale of real estate (6) -- --
Federal Home Loan Bank stock dividends (283) (165) (120)
Provision for losses on loans 101 129 71
Loss on sale of real estate acquired through
foreclosure -- -- 5
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (160) (328) (6)
Accrued interest receivable on mortgage-backed
securities 65 338 (38)
Accrued interest receivable on investments 152 (65) (20)
Prepaid expenses and other assets 82 837 (270)
Accrued interest and other liabilities (880) (499) 133
Federal income taxes
Current 434 -- 37
Deferred 481 (44) 145
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,284 2,573 1,225
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available
for sale (13,506) (13,540) (2,511)
Proceeds from sale of investment securities designated as
available for sale 16,002 6,966 979
Maturities of investment securities designated as
available for sale 7,651 4,079 4
Purchase of mortgage-backed securities designated as
available for sale (14,095) (3,173) (2,049)
Proceeds from sale of mortgage-backed securities
designated as available for sale 22,664 28,943 --
Principal repayments on mortgage-backed securities
designated as available for sale 4,560 6,182 1,389
Purchase of mortgage-backed securities designated as held
to maturity (5,078) -- (4,538)
Principal repayments on mortgage-backed securities
designated as held to maturity 2,285 344 3,098
Loan disbursements (115,855) (59,394) (34,947)
Purchase of loan participations (11,368) -- (3,409)
Sale of loan participations 261 -- 320
Principal repayments on loans 79,023 37,106 28,923
Purchase of Federal Home Loan Bank stock (93) (28) (38)
Proceeds from sale of real estate 135 -- --
Purchases and additions to office premises and equipment (856) (1,284) (257)
Proceeds from sale of real estate acquired through
foreclosure -- -- 91
Additions to real estate acquired through foreclosure -- -- (11)
Acquisition of Circle Financial Corporation common
stock--net -- (5,359) --
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (28,270) 842 (12,956)
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in) operating and investing
activities (subtotal carried forward) (22,986) 3,415 (11,731)
===============================================================================================
</TABLE>
20
<PAGE> 23
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Net cash provided by (used in) operating and investing
activities (subtotal brought forward) $ (22,986) $ 3,415 $ (11,731)
Cash provided by (used in) financing activities:
Net increase in deposit accounts 24,234 19,880 7,499
Proceeds from Federal Home Loan Bank advances 21,500 15,000 10,000
Repayment of Federal Home Loan Bank advances (7,462) (39,970) (4,436)
Proceeds from issuance of common stock, net -- 20,434 --
Purchase of treasury shares (229) -- --
Purchase of stock for management recognition plan (292) -- --
Proceeds from the exercise of stock options 67 33 14
Distributions on common stock (7,040) (931) (535)
Advances by borrowers for taxes and insurance 129 263 78
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities 30,907 14,709 12,620
- -------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 7,921 18,124 889
Cash and cash equivalents at beginning of year 22,610 4,486 3,597
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 30,531 $ 22,610 $ 4,486
=================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 1,743 $ 755 $ 737
=================================================================================================
Interest on deposits and borrowings $ 22,886 $ 12,574 $ 10,155
=================================================================================================
Supplemental disclosure of noncash investing and financing
activities:
Securitization of loans $ 8,099 $ -- $ --
=================================================================================================
Transfer of investment and mortgage-backed securities to
an available for sale classification $ -- $ -- $ 22,215
=================================================================================================
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects $ (55) $ 229 $ 337
=================================================================================================
Nonmonetary exchange of office premises and equipment for
similar assets $ -- $ 61 $ --
=================================================================================================
Recognition of mortgage servicing rights in accordance
with SFAS No. 122 $ 77 $ -- $ --
=================================================================================================
Liabilities assumed and stock and cash paid in acquisition
of Circle Financial Corporation $ -- $ 265,904 $ --
Less fair value of assets received -- 258,175 --
- -------------------------------------------------------------------------------------------------
Amount assigned to goodwill $ -- $ 7,729 $ --
=================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE A--SUMMARY OF ACCOUNTING POLICIES
Prior to 1996, Fidelity Federal Savings and Loan Association ("Fidelity")
had operated as a federally-chartered, mutual holding company. Fidelity had
capitalized Fidelity Federal Savings Bank (the "Savings Bank"), a
federally-chartered stock savings bank, by transferring substantially all of its
assets and liabilities to the Savings Bank in exchange for shares of common
stock and reorganized from a federally-chartered mutual savings and loan
association to a federally-chartered mutual holding company known as Fidelity
Federal Mutual Holding Company (the "Mutual Holding Company"). Concurrent with
the Reorganization, the Savings Bank had issued additional shares of its common
stock to certain members of the public.
In 1995, the Boards of Directors of the Savings Bank and the Mutual Holding
Company adopted a Plan of Conversion (the "Plan") and in October 1995, the
Savings Bank incorporated Fidelity Financial of Ohio, Inc. (the "Corporation")
under Ohio law as a first-tier wholly owned subsidiary of the Savings Bank. The
Corporation completed its stock offering in connection with the Savings Bank's
conversion from the mutual to stock form of ownership. Pursuant to the Plan (i)
2,278,100 shares of the Corporation's common stock were sold at $10 per share;
(ii) the Mutual Holding Company converted to an interim federal stock savings
institution and simultaneously merged with and into the Savings Bank and the
outstanding shares of Savings Bank common stock held by the Mutual Holding
Company were canceled; and (iii) an interim savings bank ("Interim") formed as a
wholly-owned subsidiary of the Corporation solely for such purpose, was merged
with and into the Savings Bank (the "Conversion and Reorganization"). As a
result of the merger of Interim with and into the Savings Bank, the Savings Bank
became a wholly-owned subsidiary of the Corporation and the outstanding public
Savings Bank's shares were converted into shares of the Corporation pursuant to
an exchange ratio of 2.25 shares for one, which resulted in the holders of such
shares owning in the aggregate approximately the same percentage of the common
stock to be outstanding upon the completion of the Conversion and Reorganization
as the percentage of Savings Bank common stock owned in the aggregate
immediately prior to consummation of the Conversion and Reorganization. The
costs of issuing the common stock were deducted from the sale proceeds of the
offering. The offering resulted in net capital proceeds totaling $20.4 million.
Future references to the Corporation or Savings Bank are utilized herein as the
context requires.
In April 1996, the Corporation entered into an Agreement of Merger with
Circle Financial Corporation ("Circle"), a savings and loan holding company,
pursuant to which Circle and its wholly owned subsidiary, Peoples Savings
Association ("Peoples"), would merge with and into the Corporation (the
"Merger"). The transaction was consummated in October 1996, and was accounted
for using the purchase method of accounting. The Corporation effected the
acquisition through cash payments totaling $12.2 million and issuance of
1,513,967 shares of its common stock at a fair value of $9.87 per share. The
acquisition resulted in the Savings Bank recording goodwill totaling $5.4
million, which is being amortized over a fifteen year term using the straight-
line method.
Presented below are pro-forma condensed consolidated statements of earnings
and earnings per share which have been prepared as if the acquisition had been
consummated as of the beginning of each of the respective years ended December
31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
------------------
(In thousands,
except share data)
(Unaudited)
<S> <C> <C>
Total interest income $35,313 $31,837
Total interest expense 19,924 18,049
- --------------------------------------------------------------------------------
Net interest income 15,389 13,788
Provision for losses on loans 129 71
Other income 555 1,030
General, administrative and other expense 12,645 9,07
- --------------------------------------------------------------------------------
Earnings before income taxes 3,170 5,670
Federal income taxes 1,170 2,051
- --------------------------------------------------------------------------------
Net earnings $ 2,000 $ 3,619
================================================================================
Basic earnings per share $ .38 $ .65
================================================================================
</TABLE>
22
<PAGE> 25
The Corporation is a savings and loan holding company whose activities are
primarily limited to holding the stock of the Savings Bank.
The Savings Bank conducts a general banking business in southwestern Ohio
which consists of attracting deposits from the general public and applying those
funds to the origination of loans for residential, consumer and nonresidential
purposes. The Savings Bank's profitability is significantly dependent on its net
interest income, which is the difference between interest income generated from
interest-earning assets (i.e. loans and investments) and the interest expense
paid on interest-bearing liabilities (i.e. customer deposits and borrowed
funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or received
by the Savings Bank can be significantly influenced by a number of environmental
factors, such as governmental monetary policy, that are outside of management's
control.
The financial information presented herein has been prepared in accordance
with generally accepted accounting principles ("GAAP") and general accounting
practices within the financial services industry. In preparing financial
statements in accordance with GAAP, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from such estimates.
The following is a summary of significant accounting policies which have
been consistently applied in the preparation of the accompanying consolidated
financial statements.
1. PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the Corporation and the
Savings Bank. All significant intercompany balances and transactions have been
eliminated.
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES
The Corporation accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities". SFAS No. 115
requires that investments be categorized as held-to-maturity, trading, or
available for sale. Securities classified as held to maturity are carried at
cost only if the Corporation has the positive intent and ability to hold these
securities to maturity. Trading securities and securities available for sale are
carried at fair value with resulting unrealized gains or losses charged to
operations or stockholders' equity, respectively.
In November 1995, the Financial Accounting Standards Board (the "FASB")
issued a Special Report on Implementation of SFAS No. 115, which provided for
the reclassification of securities between the held-to-maturity, available for
sale and trading portfolios during a forty-five day period, without calling into
question management's prior intent with respect to such securities. Management
elected to restructure the Corporation's securities portfolio pursuant to the
Special Report, and transferred approximately $22.2 million of mortgage-backed
securities from the held-to-maturity portfolio to an available for sale
portfolio. As a result of the transfer, the Corporation recorded an unrealized
loss, net of related tax effects, of approximately $83,000 to stockholders'
equity.
At December 31, 1997 and 1996, the Corporation's equity accounts reflected
unrealized gains, net of related tax effects, of $117,000 and $172,000,
respectively.
Realized gains and losses on sales of securities are recognized using the
specific identification method.
3. LOANS RECEIVABLE
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for deferred loan origination fees, the allowance for loan losses and
premiums and discounts on loans purchased and sold. Premiums and discounts on
loans purchased and sold are amortized and accreted to operations using the
interest method over the average life of the underlying loans. Interest is
accrued as earned, unless the collectibility of the loan is in doubt.
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued, and income is subsequently recognized only to the extent
that cash payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments has returned to normal,
in which case the loan is returned to accrual status. If the ultimate
collectibility of the loan is in doubt, in whole or in part, all payments
received on nonaccrual loans are applied to reduce principal until such doubt is
eliminated.
Loans held for sale are carried at the lower of cost or market, determined
in the aggregate. In computing cost, deferred loan origination fees are deducted
from the principal balances of the related loans. At December 31, 1997, loans
held for sale were carried at cost. The Savings Bank had not identified any
loans as held for sale at December 31, 1996.
23
<PAGE> 26
4. LOAN ORIGINATION AND COMMITMENT FEES
The Savings Bank accounts for loan origination fees in accordance with the
provisions of SFAS No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases". Pursuant to the provisions of SFAS No. 91, origination fees received
from loans, net of certain direct origination costs, are deferred and amortized
to interest income using the interest method, giving effect to actual loan
prepayments. Additionally, SFAS No. 91 generally limits the definition of loan
origination costs to the direct costs attributable to originating a loan, i.e.
principally actual personnel costs. Fees received for loan commitments that are
expected to be drawn upon, based on the Savings Bank's experience with similar
commitments, are deferred and amortized over the life of the loan using the
level-yield method. Fees for other loan commitments are deferred and amortized
over the loan commitment period on a straight-line basis.
5. ALLOWANCE FOR LOSSES ON LOANS
It is the Savings Bank's policy to provide valuation allowances for
estimated losses on loans based on past loan loss experience, changes in the
composition of the loan portfolio, trends in the level of delinquent and problem
loans, adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral and current and anticipated
economic conditions in the primary lending area. When the collection of a loan
becomes doubtful, or otherwise troubled, the Savings Bank records a loan loss
provision equal to the difference between the fair value of the property
securing the loan and the loan's carrying value. Major loans (including
development projects) and major lending areas are reviewed periodically to
determine potential problems at an early date. The allowance for loan losses is
increased by charges to earnings and decreased by charge-offs (net of
recoveries).
The Savings Bank accounts for impaired loans in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan". SFAS No. 114 requires
that impaired loans be measured based upon the present value of expected future
cash flows discounted at the loan's effective interest rate or, as an
alternative, at the loans observable market price or fair value of the
collateral.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
applying the provisions of SFAS No. 114, the Savings Bank considers its
investment in one-to-four family residential loans and consumer installment
loans to be homogeneous and therefore excluded from separate identification for
evaluation of impairment. With respect to the Savings Bank's investment in
multi-family and nonresidential loans, and its evaluation of any impairment
thereon, such loans are collateral dependent and as a result are carried as a
practical expedient at the lower of cost or fair value.
It is the Savings Bank's policy to charge off unsecured credits that are
more than ninety days delinquent. Similarly, collateral dependent loans which
are more than ninety days delinquent are considered to constitute more than a
minimum delay in repayment and are evaluated for impairment under SFAS No. 114
at that time.
At December 31, 1997, the Savings Bank had one loan for $376,000 that was
defined as impaired under SFAS No. 114, while no loans were defined as impaired
at December 31, 1996.
6. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. A loan charge-off is recorded for any
writedown in the loan's carrying value to fair value at the date of acquisition.
Real estate loss provisions are recorded if the properties' fair value
subsequently declines below the value determined at the recording date. In
determining the lower of cost or fair value at acquisition, costs relating to
development and improvement of property are considered. Costs relating to
holding real estate acquired through foreclosure, net of rental income, are
charged against earnings as incurred.
7. OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and minor
renewals are expensed as incurred. For financial reporting, depreciation and
amortization are provided on the straight-line and accelerated methods over the
useful lives of the assets, estimated to be thirty to forty years for buildings,
five to fifteen years for building improvements, three to ten years for
furniture and equipment and five years for automobiles. An accelerated method is
used for tax reporting purposes.
8. FEDERAL INCOME TAXES
The Corporation accounts for federal income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 establishes financial accounting and
reporting standards for the effects of income taxes that result from the
Corporation's activities within the current and previous years. Pursuant to the
provisions of SFAS No. 109, a deferred tax liability or deferred tax asset is
computed by applying the current statutory tax rates to net taxable or
deductible temporary differences between the tax basis of an asset or liability
and its reported amount in the consolidated financial statements that will
result in taxable or deductible amounts in future periods. Deferred tax assets
are recorded only to the extent that the amount of net deductible temporary
differences or carryforward attributes may be utilized against current period
earnings, carried back against prior years'
24
<PAGE> 27
earnings, offset against taxable temporary differences reversing in future
periods, or utilized to the extent of management's estimate of future taxable
income. A valuation allowance is provided for deferred tax assets to the extent
that the value of net deductible temporary differences and carryforward
attributes exceeds management's estimates of taxes payable on future taxable
income. Deferred tax liabilities are provided on the total amount of net
temporary differences taxable in the future.
The Corporation's principal temporary differences between pretax financial
income and taxable income result primarily from the different methods of
accounting for deferred loan origination fees, Federal Home Loan Bank stock
dividends, the general loan loss allowance, percentage of earnings bad debt
deductions and certain components of retirement expense. A temporary difference
is also recognized for depreciation expense computed using accelerated methods
for federal income tax purposes.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill resulting from the acquisition of Circle totaled approximately $7.7
million, and is being amortized over a fifteen year period using the
straight-line method. Specifically identifiable intangible assets totaling
$703,000 related to core deposit intangible assets is being amortized over an
estimated useful life of seven and a half years using an accelerated method.
Management periodically evaluates the carrying value of these intangible assets
in relation to the continuing earnings capacity of such acquired net assets.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
provides guidance on when to recognize and how to measure impairment losses of
long-lived assets and certain identifiable intangibles and how to value
long-lived assets to be disposed of. The Corporation adopted SFAS No. 121 in
1996, as required, without material effect on consolidated financial condition
or results of operations.
10. RETIREMENT AND INCENTIVE PLANS
The Savings Bank has several retirement and incentive plans covering the
directors and substantially all employees. Such plans are more fully described
as follows.
The Savings Bank has a 401(k) profit-sharing plan whereby employees may make
voluntary tax deferred contributions up to 15% of their base annual
compensation. The Savings Bank will provide, at its discretion, matching funds
of each participant's contribution, subject to a maximum of 8% of compensation.
The Savings Bank's 401(k) profit-sharing plan expense for the years ended
December 31, 1997, 1996 and 1995 amounted to $101,000, $45,000 and $46,000,
respectively.
The Savings Bank maintains an unfunded retirement plan for the specific
benefit of four retired outside directors. The directors' retirement plan
expense totaled approximately $18,000 for each of the years ended December 31,
1997, 1996 and 1995, respectively.
The Savings Bank has an Employee Stock Ownership Plan ("ESOP"), which
provides retirement benefits for all employees who have completed one year of
service and have attained the age of 21. The Savings Bank recognized expense
totaling $234,000, $187,000 and $93,000 related to the ESOP for the years ended
December 31, 1997, 1996 and 1995, respectively.
Additionally, the Savings Bank had a Management Recognition Plan ("MRP")
that commenced in 1992. The MRP purchased 50,625 shares (exchange and split
adjusted) of the Corporation's common stock. All of the shares available under
the MRP were granted to executive officers of the Savings Bank during 1992, with
such shares vesting ratably over a five-year period. In April 1997, the
Corporation's shareholders approved the 1997 Management Recognition Plan and
Trust (the "Plan") which provided for up to 91,124 shares to be awarded to
members of the Board of Directors and officers of the Corporation. During 1997,
the Corporation granted 20,000 shares to outside members of the Board of
Directors which vest ratably over a five year period. A provision of $35,000,
$20,000 and $23,000 was charged to MRP expense for the years ended December 31,
1997, 1996 and 1995, respectively.
11. EARNINGS PER SHARE AND DIVIDENDS PER SHARE
Effective December 31, 1997, the Corporation began presenting earnings per
share pursuant to the provisions of SFAS No. 128. In accordance with the
Statement, the 1996 and 1995 earnings per share presentation has been revised to
conform to SFAS No. 128.
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period, less shares in the ESOP that are unallocated and
not committed to be released. Weighted-average common shares outstanding, which
gives effect to 191,115, 200,810 and 20,843 unallocated ESOP shares, totaled
5,395,878, 4,207,788 and 4,053,980 for the years ended December 31, 1997, 1996
and 1995, respectively. Weighted-average shares outstanding in 1995 have been
adjusted to give effect to the 2.25-for-1 stock exchange ratio utilized in the
Conversion and Reorganization.
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under the
Corporation's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share totaled
5,449,727, 4,240,638 and 4,077,331 for the years ended December 31, 1997, 1996
and 1995, respectively. There were 53,849, 32,850, and 23,351 incremental shares
related to the assumed exercise of stock
25
<PAGE> 28
options included in the computation of diluted earnings per share for the years
ended December 31, 1997, 1996 and 1995, respectively.
During 1997 and 1996, the Corporation declared capital distributions of
$1.28 and $.24 per common share, respectively. Management has obtained a Private
Letter Ruling from the Internal Revenue Service which states that the
Corporation's dividend payments in excess of accumulated earnings and profits
are considered a tax-free return of capital for federal income tax purposes. As
a result, management believes that all of the 1997 distributions and $.09 of the
1996 capital distributions constituted a tax-free return of capital.
12. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents includes
cash and due from banks, federal funds sold and interest-bearing deposits in
other financial institutions with original maturities of less than 90 days.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value of financial instruments, both assets and
liabilities, whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair values
are based on estimates using present value and other valuation methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair values
presented may not represent amounts that could be realized in an exchange for
certain financial instruments.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at December 31,
1997 and 1996:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in the
consolidated statements of financial condition for cash and cash
equivalents are deemed to approximate fair value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES: For investment and
mortgage-backed securities, fair value is deemed to equal the quoted
market price.
LOANS RECEIVABLE: The loan portfolio has been segregated into categories
with similar characteristics, such as one-to-four family residential,
multi-family residential, nonresidential real estate and consumer. These
loan categories were further delineated into fixed-rate and
adjustable-rate loans. The fair values for the resultant loan categories
were computed via discounted cash flow analysis, using current interest
rates offered for loans with similar terms to borrowers of similar
credit quality.
FEDERAL HOME LOAN BANK STOCK: The carrying amount presented in the
consolidated statements of financial condition is deemed to approximate
fair value.
DEPOSITS: The fair value of NOW accounts, passbook and club accounts,
and money market deposits is deemed to approximate the amount payable on
demand at December 31, 1997 and 1996. Fair values for fixed-rate
certificates of deposit have been estimated using a discounted cash flow
calculation using the interest rates currently offered for deposits of
similar remaining maturities.
FEDERAL HOME LOAN BANK ADVANCES: The fair value of Federal Home Loan
Bank advances has been estimated using discounted cash flow analysis,
based on the interest rates currently offered for advances of similar
remaining maturities.
COMMITMENTS TO EXTEND CREDIT: For fixed-rate and adjustable-rate loan
commitments, the fair value estimate considers the difference between
current levels of interest rates and committed rates. At December 31,
1997 and 1996, the difference between the fair value and notional amount
of loan commitments was not material.
26
<PAGE> 29
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------
Carrying Fair Carrying Fair
value value value value
--------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 30,531 $ 30,531 $ 22,610 $ 22,610
Investment securities 6,020 6,020 16,120 16,120
Mortgage-backed securities 39,354 39,533 41,504 41,591
Loans receivable 436,852 440,741 396,541 398,771
Federal Home Loan Bank stock 4,157 4,157 3,781 3,781
--------------------------------------------
$516,984 $520,982 $480,556 $482,873
============================================
Financial liabilities
Deposits $432,024 $432,235 $408,159 $408,894
Advances from Federal Home Loan Bank 34,233 34,359 20,186 20,207
Advances by borrowers for taxes and insurance 2,134 2,134 2,005 2,005
--------------------------------------------
$468,391 $468,728 $430,350 $431,106
============================================
</TABLE>
14. ADVERTISING
Advertising costs are expensed when incurred.
15. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1997
consolidated financial statement presentation.
NOTE B--INVESTMENT AND MORTGAGE-BACKED SECURITIES
Amortized cost and estimated fair values of investment securities designated
as available for sale at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
U. S. Government agency obligations $5,869 $5,908 $ 8,502 $ 8,530
U. S. Government obligations -- -- 7,482 7,500
Corporate equity securities 84 112 64 90
-----------------------------------------------
$5,953 $6,020 $16,048 $16,120
===============================================
</TABLE>
At December 31, 1997, the market value appreciation of the Corporation's
investment securities in excess of amortized cost, totaling $67,000, was
comprised solely of gross unrealized gains.
At December 31, 1996, the market value appreciation of the Corporation's
investment securities in excess of amortized cost, totaling $72,000, was
comprised of gross unrealized gains of $87,000 and gross unrealized losses of
$15,000.
27
<PAGE> 30
The amortized cost and market value of U.S. Government and agency
obligations by contractual terms to maturity at December 31, 1997 and 1996, are
shown below:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Due within two years $1,000 $1,000 $ 8,490 $ 8,498
Due in two to five years 998 999 3,581 3,585
Due in five to ten years 2,997 3,027 2,987 3,021
More than ten years 874 882 926 926
-----------------------------------------------
$5,869 $5,908 $15,984 $16,030
===============================================
</TABLE>
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at December 31, 1997 and
1996 (including those designated as available for sale) are shown below.
<TABLE>
<CAPTION>
1997
--------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Available for sale:
Federal Home Loan Mortgage Corporation participation
certificates $12,610 $ 77 $ 4 $12,683
Government National Mortgage Association participation
certificates 4,707 48 3 4,752
Federal National Mortgage Association participation
certificates 7,160 22 36 7,146
Collateralized mortgage obligations of government agencies 1,240 6 -- 1,246
-------------------------------------------------
Total available for sale 25,717 153 43 25,827
Held to maturity:
Federal Home Loan Mortgage Corporation participation
certificates 574 1 -- 575
Government National Mortgage Association participation
certificates 11,632 165 -- 11,797
Federal National Mortgage Association participation
certificates 236 10 -- 246
Collateralized mortgage obligations of government agencies 1,085 3 -- 1,088
-------------------------------------------------
Total held to maturity 13,527 179 -- 13,706
-------------------------------------------------
Total mortgage-backed securities $39,244 $332 $43 $39,533
=================================================
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
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>
28
<PAGE> 31
The amortized cost and estimated fair value of mortgage-backed securities at
December 31, 1997 and 1996, by contractual terms to maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may generally prepay obligations without prepayment penalties.
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Available for sale:
Due within one year $ 3,762 3,774 $ 1,790 $ 1,795
Due after one to three years 8,326 8,352 4,001 4,012
Due after three years to five years 4,323 4,337 2,445 2,465
Due after five years to ten years 1,144 1,151 7,898 7,966
Due after ten years to twenty years 3,981 4,006 9,033 9,095
Due after twenty years 4,181 4,207 5,404 5,427
-----------------------------------------------
25,717 25,827 30,571 30,760
Held to maturity:
Due within one year 209 212 193 194
Due after one to three years 463 469 426 429
Due after three years to five years 530 536 486 489
Due after five years to ten years 1,682 1,703 1,536 1,547
Due after ten years to twenty years 5,620 5,692 4,569 4,606
Due after twenty years 5,023 5,094 3,534 3,566
-----------------------------------------------
13,527 13,706 10,744 10,831
-----------------------------------------------
Total mortgage-backed securities $39,244 $39,533 $41,315 $41,591
===============================================
</TABLE>
NOTE C--LOANS RECEIVABLE
The composition of the loan portfolio at December 31, including loans held
for sale, is as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------
(In thousands)
<S> <C> <C>
Residential real estate
One-to-four family residential $341,636 $321,701
Multi-family residential 26,125 25,580
Construction 9,016 11,039
Nonresidential real estate and land 50,613 33,055
Nonresidential construction 6,248 2,800
Consumer and other 9,266 7,850
--------------------
442,904 402,025
Undisbursed portion of loans in process (5,127) (4,055)
Unamortized yield adjustments 733 129
Allowance for loan losses (1,658) (1,558)
--------------------
$436,852 $396,541
====================
</TABLE>
The Savings Bank's lending efforts have historically focused on residential
and multi-family residential real estate loans, which comprised approximately
$376.8 million, or 85%, of the total loan portfolio at December 31, 1997, and
$358.3 million, or 89% of the total portfolio at December 31, 1996. Generally,
such loans have been underwritten on the basis of no more than an effective 80%
loan-to-value ratio, which has historically provided the Savings Bank with
adequate collateral coverage in the event of default. Nevertheless, the Savings
Bank, as with any lending institution, is subject to the risk that real estate
values could deteriorate in its primary lending area of southwestern Ohio,
thereby impairing collateral values. However, management is of the belief that
real estate values in the Savings Bank's primary lending area are presently
stable.
29
<PAGE> 32
The Savings Bank has sold participating interests in loans in the secondary
market, retaining servicing on the loans sold. Loans sold and serviced for
others totaled approximately $18.7 million and $7.3 million at December 31, 1997
and 1996, respectively.
In 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage Servicing
Rights," which requires that the Savings Bank recognize as separate assets,
rights to service mortgage loans for others, regardless of how those servicing
rights are acquired. An institution that acquires mortgage servicing rights
through either the purchase or origination of mortgage loans and sells those
loans with servicing rights retained would allocate some of the cost of the
loans to the mortgage servicing rights. SFAS No. 122 requires that
securitization of mortgage loans be accounted for as sales of mortgage loans and
acquisitions of mortgage-backed securities. Additionally, SFAS No. 122 requires
that capitalized mortgage servicing rights and capitalized excess servicing
receivables be assessed for impairment. Impairment is measured based on fair
value. SFAS No. 122 was to be applied prospectively to fiscal years beginning
after December 15, 1995, (1996, as to the Savings Bank) to transactions in which
an entity acquires mortgage servicing rights and to impairment evaluations of
all capitalized mortgage servicing rights and capitalized excess servicing
receivables whenever acquired. Management adopted SFAS No. 122, as required,
without material effect on consolidated financial condition or results of
operations. The Savings Bank recorded mortgage servicing rights totaling
$77,000, and amortization of $3,000 for the year ended December 31, 1997.
A director of the Corporation is a broker and general manager of a local
real estate agency. The agency received approximately $159,000 in real estate
commissions during 1997 which were the result of customers of the agency who
were also borrowers of the Savings Bank.
NOTE D--ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the year ended December 31
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------
(In thousands)
<S> <C> <C> <C>
Beginning balance $1,558 $ 818 $783
Allowance for loan losses of Circle -- 640 --
Provision for loan losses 101 129 71
Charge-offs of loans (1) (29) (36)
------------------------
Ending balance $1,658 $1,558 $818
========================
</TABLE>
At December 31, 1997, the Savings Bank's allowance for loan losses was
comprised of a general loan loss allowance of $1.65 million, which is includible
as a component of regulatory risk-based capital, and a specific loan loss
allowance of $8,000.
At December 31, 1997, 1996 and 1995, the Savings Bank had loans of $1.0
million, $1.1 million and $1.0 million, respectively, which had been placed on
nonaccrual status due to concerns as to borrowers' ability to pay. Interest
income that would have been recognized had nonaccrual loans performed pursuant
to contractual terms totaled approximately $25,000, $59,000 and $12,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
NOTE E--OFFICE PREMISES AND EQUIPMENT
Office premises and equipment is comprised of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------------
(In thousands)
<S> <C> <C>
Land $ 1,790 $ 1,826
Buildings and improvements 6,269 6,262
Furniture and equipment 3,501 3,630
Automobiles 14 38
------------------
11,574 11,756
Less accumulated depreciation and amortization 4,112 4,385
------------------
$ 7,462 $ 7,371
==================
</TABLE>
30
<PAGE> 33
NOTE F--DEPOSITS
Deposits consist of the following major classifications at December 31:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND WEIGHTED AVERAGE INTEREST RATE 1997 1996
--------------------
(In thousands)
<S> <C> <C>
NOW accounts
December 31, 1997--1.44% $ 25,296
December 31, 1996--1.77% $ 22,871
Passbook and club accounts
December 31, 1997--1.79% 40,374
December 31, 1996--2.11% 44,798
Money market deposit accounts
December 31, 1997--3.32% 25,730
December 31, 1996--3.19% 24,721
--------------------
Total demand, transaction and passbook deposits 91,400 92,390
Certificates of deposit
Original maturities of:
Less than 12 months
December 31, 1997--5.59% 91,221
December 31, 1996--5.57% 108,602
12 months to 18 months
December 31, 1997--5.87% 151,965
December 31, 1996--5.65% 109,668
18 months to 36 months
December 31, 1997--5.94% 60,819
December 31, 1996--6.07% 51,925
36 months to 48 months
December 31, 1997--5.91% 8,862
December 31, 1996--5.75% 11,996
More than 48 months
December 31, 1997--6.57% 27,757
December 31, 1996--6.49% 33,578
--------------------
Total certificates of deposit 340,624 315,769
--------------------
Total deposits $432,024 $408,159
====================
</TABLE>
At December 31, 1997 and 1996, the Corporation had certificates of deposit
accounts with balances of $100,000 or greater totaling $44.1 million and $46.9
million, respectively.
Interest expense on deposits for the years ended December 31 is summarized
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------
(In thousands)
<S> <C> <C> <C>
Passbook and money market deposit accounts $ 1,655 $ 931 $ 849
NOW accounts 322 280 267
Certificates of deposit 18,946 10,343 8,151
-----------------------------
$20,923 $11,554 $ 9,267
=============================
</TABLE>
Maturities of outstanding certificates of deposit at December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------
(In thousands)
<S> <C> <C>
Less than one year $251,254 $225,024
One to two years 70,680 60,533
Two to three years 12,937 15,213
Over three years 5,753 14,999
--------------------
$340,624 $315,769
====================
</TABLE>
31
<PAGE> 34
NOTE G--ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at December 31,
1997 by pledges of certain residential mortgage loans totaling $51.3 million and
the Savings Bank's investment in Federal Home Loan Bank stock, are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------------
(In thousands)
<S> <C> <C>
Due within one year $10,495 $ 2,147
Due after one to three years 14,946 8,405
Due after three to five years 3,647 4,851
Due after five to ten years 3,041 2,422
Due after ten to twenty years 2,104 2,361
------------------
$34,233 $20,186
==================
Weighted-average interest rate 6.21% 6.22%
==================
</TABLE>
NOTE H--LOAN TO EMPLOYEE STOCK OWNERSHIP PLAN
As discussed previously in Note A-10, the Savings Bank established an
Employee Stock Ownership Plan (the "ESOP") which initially acquired 135,000
shares of common stock of the Savings Bank in the initial common stock offering
in 1992. In order to fund the acquisition of stock, the ESOP borrowed $400,000
from an independent third-party lender, payable over a seven year period. During
1995, the ESOP borrowed an additional $146,000 from an independent third-party
lender, payable over a seven year period, to acquire approximately 21,950 shares
of common stock. During 1996, in connection with the Corporation's common stock
offering, the ESOP acquired 182,248 shares through funding from the Corporation,
payable over a fifteen year period. Additionally, the $146,000 ESOP loan was
repaid by a loan from the Corporation. At December 31, 1997, the ESOP held
319,520 shares of the Corporation's common stock, with approximately 136,321
shares allocated to participants as of that date.
NOTE I--FEDERAL INCOME TAXES
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate for the years ended December 31 as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at the statutory rate $2,562 $ 843 $ 929
Increase (decrease) in taxes resulting from:
Amortization of goodwill 123 26 --
Other (27) 3 (10)
--------------------------
Federal income tax provision per consolidated financial
statements $2,658 $ 872 $ 919
==========================
</TABLE>
32
<PAGE> 35
The composition of the Corporation's net deferred tax liability at December
31 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------------
(In thousands)
<S> <C> <C>
Taxes (payable) refundable on temporary differences at
statutory rate:
Deferred tax assets:
Deferred loan origination fees $ 136 $ 175
Retirement expense 195 388
General loan loss allowance 561 527
Purchase price adjustments from Circle acquisition 116 375
Other 167 164
------------------
Total deferred tax assets 1,175 1,629
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (630) (533)
Percentage of earnings bad debt deduction (908) (908)
Unrealized gains on securities designated as available for
sale (60) (89)
Book vs. tax depreciation (126) (126)
Purchase price adjustments from Circle acquisition (60) (123)
------------------
Total deferred tax liabilities (1,784) (1,779)
------------------
Net deferred tax liability $ (609) $ (150)
==================
</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, 1997. If the amounts that
qualify as deductions for federal income taxes are later used for purposes other
than bad debt losses, including distributions in liquidation, such distributions
will be subject to federal income taxes at the then current corporate income tax
rate. The approximate amount of unrecognized deferred tax liability relating to
the cumulative bad debt deduction is approximately $3.9 million at December 31,
1997. See Note L for additional information regarding future percentage of
earnings bad debt deductions.
NOTE J--COMMITMENTS
The Savings Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers including commitments to extend credit. Such commitments involve, to
varying degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the statement of financial condition. The contract or
notional amounts of the commitments reflect the extent of the Savings Bank's
involvement in such financial instruments.
The Savings Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Savings
Bank uses the same credit policies in making commitments and conditional
obligations as those utilized for on-balance-sheet instruments.
At December 31, 1997, the Savings Bank had total outstanding commitments of
approximately $7.1 million to originate residential one- to four-family and
multi-family real estate loans on the basis of an 80% loan to value ratio, of
which $2.9 million was comprised of adjustable rate loans at rates ranging from
6.88% to 8.50%, and $4.2 million was comprised of fixed rate loans at rates
ranging from 7.00% to 8.75%. The Savings Bank also had outstanding commitments
of approximately $2.1 million to originate nonresidential real estate loans.
Additionally, the Savings Bank had unused lines of credit under home equity
loans of approximately $6.6 million and unused lines of credit under
multi-family and nonresidential real estate loans of $4.9 million. The Savings
Bank also has outstanding commitments of $1.7 million to purchase and $336,000
to sell residential real estate loans as of December 31, 1997. In the opinion of
management, all loan commitments equaled or exceeded prevalent market interest
rates as of December 31, 1997, and such commitments have been underwritten on
the same basis as that of the existing loan portfolio. Management believes that
all commitments are able to be funded through cash flow from operations and
excess liquidity. Fees received in connection with loan commitments have not
been recognized in earnings.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Savings Bank evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if it is deemed
necessary by the Savings Bank upon extension of credit, is based on
33
<PAGE> 36
management's credit evaluation of the counterparty. Collateral on loans may vary
but the preponderance of loans granted generally include a mortgage interest in
real estate as security.
NOTE K--REGULATORY CAPITAL
The Savings Bank is subject to minimum capital requirements promulgated by
the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Savings Bank must meet specific capital guidelines that involve quantitative
measures of the Savings Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Savings Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Such minimum capital standards generally require the maintenance
of regulatory capital sufficient to meet each of three tests, hereinafter
described as the tangible capital requirement, the core capital requirement and
the risk-based capital requirement. The tangible capital requirement provides
for minimum tangible capital (defined as stockholders' equity less all
intangible assets) equal to 1.5% of adjusted total assets. The core capital
requirement provides for minimum core capital (tangible capital plus certain
forms of supervisory goodwill and other qualifying intangible assets) equal to
3.0% of adjusted total assets. An OTS proposal, if adopted in present form,
would increase the core capital requirement to a range of 4.0%--5.0% of adjusted
total assets for substantially all savings associations. Management anticipates
no material change to the Savings Bank's excess regulatory capital position as a
result of this proposed change to the regulatory capital requirement. The
risk-based capital requirement currently provides for the maintenance of core
capital plus general loan loss allowances equal to 8.0% of risk-weighted assets.
In computing risk-weighted assets, the Savings Bank multiplies the value of each
asset on its statement of financial condition by a defined risk-weighting
factor, e.g., one-to-four family residential loans carry a risk-weighted factor
of 50%.
As of December 31, 1997 and 1996, management believes that the Savings Bank
met all capital adequacy requirements to which it was subject.
<TABLE>
<CAPTION>
To Be
"Well-Capitalized"
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
---------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
1997:
Tangible capital $53,194 10.1% *$ 7,887 *1.5% *$ 26,289 * 5.0%
Core capital $53,194 10.1% *$ 15,773 *3.0% *$ 26,289 * 5.0%
Risk-based capital $54,844 19.3% *$ 22,701 *8.0% *$ 28,376 *10.0%
1996:
Tangible capital $47,427 9.8% *$ 7,234 *1.5% *$ 24,113 * 5.0%
Core capital $47,427 9.8% *$ 14,468 *3.0% *$ 24,113 * 5.0%
Risk-based capital $48,337 19.2% *$ 20,189 *8.0% *$ 25,236 *10.0%
</TABLE>
*=greater than or equal to
At December 31, 1997, the Savings Bank met all regulatory requirements for
classification as a "well-capitalized" institution. A "well-capitalized"
institution must have risk-based capital of 10.0%, and core capital of 5.0%. The
Savings Bank's capital exceeded the minimum required amounts for classification
as a "well-capitalized" institution by $26.5 million and $26.9 million,
respectively.
Regulations of the Office of Thrift Supervision ("OTS") impose limitations
on the payment of dividends and other capital distributions by savings
associations. Under such regulations, a savings association that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital requirement is
generally permitted without OTS approval (but subsequent to 30 days prior notice
to the OTS of the planned dividend) to make capital distributions during a
calendar year in an amount not to exceed the greater of (i) up to 100% of its
net earnings to date during the year plus an amount equal to one-half of the
amount by which its total capital to assets ratio exceeded its fully phased-in
capital to assets ratio at the beginning of the year, or (ii) 75% of its net
earnings for the most recent four quarters. Pursuant to such OTS dividend
regulations, the Savings Bank had the ability to pay dividends of approximately
$13.1 million to the Corporation at December 31, 1997.
34
<PAGE> 37
NOTE L--LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Savings Bank and of other savings associations
are insured by the FDIC through the Savings Association Insurance Fund ("SAIF").
The reserves of the SAIF were below the level required by law, because a
significant portion of the assessments paid into the fund are used to pay the
cost of prior thrift failures. The deposit accounts of commercial banks are
insured by the FDIC through the Bank Insurance Fund ("BIF"), except to the
extent such banks have acquired SAIF deposits. The reserves of the BIF met the
level required by law in May 1995. As a result of the respective reserve levels
of the funds, deposit insurance assessments paid by healthy savings associations
exceeded those paid by healthy commercial banks by approximately $.19 per $100
in deposits in 1995. In 1996, no BIF assessments were required for healthy
commercial banks except for a $2,000 minimum fee.
During 1996, legislation was enacted to recapitalize the SAIF that provided
for a special assessment of $.657 per $100 of SAIF deposits held at March 31,
1995. The Savings Bank had $173.1 million in deposits at March 31, 1995,
resulting in an assessment of approximately $1.1 million, or $749,000 after tax,
which was recorded during 1996.
A component of the recapitalization plan provides for the merger of the SAIF
and BIF on January 1, 2000, assuming the elimination of the thrift charter or of
the separate federal regulation of thrifts prior to the merger of the deposit
insurance funds. This legislation would require the Savings Bank to be regulated
as a bank under federal laws which would subject it to the more restrictive
activity limits imposed on national banks. In the opinion of management, such
restrictions would not materially affect the Corporation's operations. Under
separate legislation, the Savings Bank is required to recapture approximately
$2.7 million of its bad debt reserve as taxable income, which represents the
post-1987 additions to the reserve, and will be unable to utilize the percentage
of earnings method to compute its reserve in the future. The Savings Bank has
provided deferred taxes for this amount and will be permitted to amortize the
recapture of its bad debt reserve over six years.
NOTE M--STOCK OPTION PLAN
In connection with Fidelity's Reorganization to mutual holding company form,
the Savings Bank had adopted the 1992 Stock Option Plan that provided for the
issuance of 168,750 shares of authorized, but unissued shares of common stock.
All of the shares issued under that Plan have been granted.
In April 1997, the Corporation adopted the 1997 Stock Option Plan that
provides for the issuance of 227,810 shares of common stock. Options to purchase
171,500 shares were granted during 1997 at an exercise price equal to the fair
value at the date of grant.
In 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair value-based method for valuing stock-based
compensation that entities may use, which measures compensation cost at the
grant date based on the fair value of the award. Compensation is then recognized
over the service period, which is usually the vesting period. Alternatively,
SFAS No. 123 permits entities to continue to account for employee stock options
and similar equity instruments under Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees." Entities that continue to
account for stock options using APB Opinion No. 25 are required to make pro
forma disclosures of net earnings and earnings per share, as if the fair
value-based method of accounting defined in SFAS No. 123 had been applied.
The Corporation applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for the plan. Had compensation cost for
the Corporation's stock option plan been determined based on the fair value at
the grant dates for awards under the plan consistent with the accounting method
utilized in SFAS No. 123, the Corporation's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------
<S> <C> <C> <C> <C>
Net earnings
(In thousands) As reported $4,876 $1,608 $1,814
==========================
Pro-forma $4,826 $1,608 $1,802
==========================
Earnings per share
Basic As reported $ .90 $ .38 $ .45
==========================
Pro-forma $ .89 $ .38 $ .44
==========================
Diluted As reported $ .89 $ .38 $ .45
==========================
Pro-forma $ .88 $ .38 $ .44
==========================
</TABLE>
35
<PAGE> 38
The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in fiscal 1997 and 1995: dividend
yield of 4.0%, expected volatility of 20.0%, a risk-free interest rate of 5.5%
and expected lives of ten years.
A summary of the status of the Corporation's stock option plan as of
December 31, 1997, 1996 and 1995, and changes during the periods ending on those
dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 54,265 $ 4.41 61,015 $ 4.46 47,475 $ 3.65
Granted 171,500 $13.00 -- $ -- 16,875 $ 6.67
Adjustment for return of capital distribution 8,334 $ .44 -- $ -- -- $ --
Exercised (14,350) $ 5.21 (6,750) $ 4.81 (3,335) $ 4.20
Forfeited (6,400) $13.00 -- $ -- -- $ --
-------------------------------------------------------------
Outstanding at end of year 213,349 $10.86 54,265 $ 4.41 61,015 $ 4.46
=============================================================
Options exercisable at year-end 77,314 54,265 61,015
=============================================================
Weighted-average fair value of options granted during
the year $ 2.63 N/A $ 1.35
=============================================================
</TABLE>
The following information applies to options outstanding at December 31,
1997:
<TABLE>
<S> <C>
Number outstanding 213,349
Range of exercise prices $2.84-$12.49
Weighted-average exercise price $10.86
Weighted-average remaining contractual life 8.62 years
</TABLE>
36
<PAGE> 39
NOTE N--CONDENSED FINANCIAL STATEMENTS OF FIDELITY FINANCIAL OF OHIO, INC.
The following condensed financial statements summarize the financial
position of Fidelity Financial of Ohio, Inc. as of December 31, 1997 and 1996,
and the results of its operations for the periods then ended.
FIDELITY FINANCIAL OF OHIO, INC.
STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands)
<TABLE>
<CAPTION>
1997 1996
------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 198 $ 189
Interest-bearing deposits in other financial institutions -- 5,550
Investment securities available for sale--at market 1,112 3,080
Loan receivable from ESOP 1,785 1,938
Investment in subsidiary 61,463 56,458
Prepaid expenses and other 151 215
- --------------------------------------------------------------------------------
Total assets $64,709 $67,430
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 435 $ 718
Stockholders' equity
Common stock and additional paid-in capital 42,107 42,167
Retained earnings 24,147 26,311
Less shares acquired by Management Recognition Plan (292) --
Less shares held in treasury (20) --
Shares acquired by ESOP (1,785) (1,938)
Unrealized gains on securities designated as available for
sale, net 117 172
- --------------------------------------------------------------------------------
Total stockholders' equity 64,274 66,712
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $64,709 $67,430
================================================================================
</TABLE>
FIDELITY FINANCIAL OF OHIO, INC.
STATEMENTS OF EARNINGS
For the period ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1997 1996
------------------
<S> <C> <C>
Income
Interest income $ 462 $ 524
Equity in earnings of subsidiary 4,818 1,208
- --------------------------------------------------------------------------------
Total revenue 5,280 1,732
General and administrative expenses 390 421
- --------------------------------------------------------------------------------
Earnings before income taxes 4,890 1,311
Federal income taxes 14 35
- --------------------------------------------------------------------------------
NET EARNINGS $ 4,876 $ 1,276
================================================================================
</TABLE>
37
<PAGE> 40
FIDELITY FINANCIAL OF OHIO, INC.
STATEMENTS OF CASH FLOWS
For the period ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1997 1996
-------------------
<S> <C> <C>
Cash provided by (used in) operating activities:
Net earnings for the year $ 4,876 $ 1,276
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities
Undistributed earnings of consolidated subsidiary (4,818) (1,208)
Increase (decrease) in cash due to changes in:
Loss on sale of investment securities 8 --
Prepaid expenses and other assets 95 (250)
Other liabilities (283) 709
- ---------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities (122) 527
Cash flows provided by (used in) investing activities:
Proceeds from repayment of loan to ESOP 93 10
Proceeds from sale of investment securities 9,982 3,000
Purchase of investment securities (8,000) (6,080)
Issuance of loan to ESOP -- (1,948)
Acquisition of Circle Financial Corporation common
stock--net -- (5,359)
Effect of corporate reorganization -- (3,914)
- ---------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 2,075 (14,291)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock -- 20,434
Payment of dividends on common stock (7,040) (931)
Purchase of treasury stock (229) --
Purchase of stock for management recognition plan (292) --
Proceeds from exercise of stock options 67 --
- ---------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (7,494) 19,503
- ---------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (5,541) 5,739
Cash and cash equivalents at beginning of year 5,739 --
- ---------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 198 $ 5,739
=================================================================================
</TABLE>
NOTE O--REORGANIZATION AND CHANGE OF CORPORATE FORM
Prior to 1996, Fidelity Federal Savings ("Fidelity") operated as a 55.9%
owned subsidiary of Fidelity Federal Mutual Holding Company (the "Mutual Holding
Company"). In 1995, the Boards of Directors of the Savings Bank and the Mutual
Holding Company adopted a Plan of Conversion (the "Plan") and in October 1995,
the Savings Bank incorporated Fidelity Financial of Ohio, Inc. (the
"Corporation") under Ohio law as a first-tier wholly owned subsidiary of the
Savings Bank. Pursuant to the Plan, (i) the Mutual Holding Company converted to
an interim federal stock savings institution and simultaneously merged with and
into the Savings Bank, pursuant to which the Mutual Holding Company ceased to
exist and the 1,012,500 shares, or 55.9%, of the outstanding Savings Bank common
stock held by the Mutual Holding Company were canceled, and (ii) an interim
savings bank ("Interim") formed as a wholly-owned subsidiary of the Corporation
solely for such purpose was merged with and into the Savings Bank. As a result
of the merger of Interim with and into the Savings Bank, the Savings Bank became
a wholly-owned subsidiary of the Corporation and the outstanding public Savings
Bank shares, which amounted to 797,880 shares, or 44.1%, of the outstanding
Savings Bank common stock at December 31, 1995, were converted into the exchange
shares pursuant to the exchange ratio of 2.25 shares to one, which resulted in
the holders of such shares owning in the aggregate approximately the same
percentage of the common stock to be outstanding upon the completion of the
Conversion and Reorganization (i.e., the conversion stock and the exchange
shares) as the percentage of Savings Bank common stock owned by them in the
aggregate immediately prior to consummation of the conversion and
reorganization, before giving effect to (a) the payment of cash in lieu of
issuing fractional exchange shares, (b) any shares of conversion stock purchased
by the Savings Bank's stockholders in the offerings or the ESOP thereafter, and
(c) any exercise of dissenters' rights. The costs of issuing the common stock
were deducted from the sale proceeds of the offering. The offering was completed
in March 1996, and resulted in capital proceeds totaling $20.4 million, after
consideration of offering expenses and shares acquired by the ESOP.
38
<PAGE> 41
The rights of Fidelity's depositors in liquidation in the conversion to
stock form are maintained by the Savings Bank in an amount equal to the retained
earnings of the Savings Bank reflected in the statement of financial condition
used in the conversion offering circular. The liquidation account will be
maintained for the benefit of eligible savings account holders who maintained
deposit accounts in the Savings Bank after conversion.
NOTE P--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Corporation's quarterly results for the
years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Three Months Ended
March 31, June 30, September 30, December 31,
------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
1997:
Total interest income $9,286 $9,510 $9,652 $9,703
Total interest expense 5,365 5,577 5,765 5,855
-----------------------------------------------------
Net interest income 3,921 3,933 3,887 3,848
Provision for losses on loans 25 25 25 26
Other income 367 286 327 435
General, administrative and other expense 2,384 2,285 2,340 2,360
-----------------------------------------------------
Earnings before income taxes 1,879 1,909 1,849 1,897
Federal income taxes 671 688 633 666
-----------------------------------------------------
Net earnings $1,208 $1,221 $1,216 $1,231
=====================================================
Earnings per share:
Basic $ 0.22 $ 0.23 $ 0.22 $ 0.23
=====================================================
Diluted $ 0.22 $ 0.22 $ 0.22 $ 0.23
=====================================================
1996:
Total interest income $4,508 $4,652 $4,692 $8,886
Total interest expense 2,649 2,603 2,618 4,786
-----------------------------------------------------
Net interest income 1,859 2,049 2,074 4,100
Provision for losses on loans 17 15 16 81
Other income (expense) 114 102 104 (155)
General, administrative and other expense 1,119 1,184 2,379 2,956
-----------------------------------------------------
Earnings (loss) before income taxes (credits) 837 952 (217) 908
Federal income taxes (credits) 282 323 (71) 338
-----------------------------------------------------
Net earnings (loss) $ 555 $ 629 $ (146) $ 570
=====================================================
Earnings (loss) per share:
Basic $ 0.14 $ 0.16 $(0.04) $ 0.12
=====================================================
Diluted $ 0.14 $ 0.16 $(0.04) $ 0.12
=====================================================
</TABLE>
39
<PAGE> 42
DIRECTORS
<TABLE>
<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 Chief Financial Officer, Champion Window Manufacturing &
Supply, Inc.
PAUL D. STAUBACH Senior Vice President, Chief Financial Officer and
Secretary of Fidelity Financial of Ohio, Inc. and Fidelity
Federal Savings Bank.
ROBERT W. ZUMBIEL President of C.W. Zumbiel Company, Norwood, Ohio.
</TABLE>
OFFICERS
<TABLE>
<S> <C>
JOHN R. REUSING President and Chief Executive Officer
JOSEPH D. HUGHES Executive Vice President, Chief Lending Officer
PAUL D. STAUBACH Senior Vice President, Chief Financial Officer
M. ROBIN RUHOLL-CASSADY Vice President, Retail Banking
ANITA C. GLASMEIER Vice President, Marketing
KARAN KISER Vice President, Loan Servicing
RUTH A. MYERS Vice President, Loan Escrow Manager
JOHN P. OWENS Vice President, Loan Development and Production
DAVID R. PERSOHN Vice President, Internal Audit
DEBORAH A. PETER Vice President, Loan Operations
</TABLE>
LOCATIONS
ANDERSON 474-1141
7944 Beechmont Avenue
Cincinnati, OH 45255
BLUE ASH 793-5196
4144 Hunt Road
Cincinnati, OH 45236
DELHI 451-5353
5030 Delhi Road
Cincinnati, OH 45238
GROESBECK 521-3385
8045 Colerain Avenue
Cincinnati, OH 45239
HARTWELL 821-8880
8434 Vine Street
Cincinnati, OH 45216
LOVELAND 697-2442
10640 Loveland-Madeira Road
Loveland, OH 45140
MADEIRA 272-4200
7136 Miami Avenue
Cincinnati, OH 45243
NORWOOD 351-6666
4555 Montgomery Road
Cincinnati, OH 45212
ROSS 738-1111
3777 Hamilton Cleves Road
Hamilton, OH 45013
SHARONVILLE 733-9300
11100 Reading Road
Cincinnati, OH 45241
TRI COUNTY MALL 671-0866
11700 Princeton Road
Cincinnati, OH 45246
WESTWOOD 481-2481
3316 Glenmore Avenue
Cincinnati, OH 45211
40
<PAGE> 43
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
Fidelity Financial of Ohio, Inc.
4555 Montgomery Road
Cincinnati, Ohio 45212
(513) 351-6666
STOCK LISTING
The Nasdaq National Market
Symbol: FFOH
TRANSFER AGENT AND REGISTRAR
Fifth Third Bank
Corporate Trust Services
Mail Location 1090F5
38 Fountain Square Plaza
Cincinnati, Ohio 45263
(513) 579-5320
(800) 837-2755
INDEPENDENT AUDITORS
Grant Thornton LLP
625 Eden Park Drive, Suite 900
Cincinnati, Ohio 45202-4181
SPECIAL LEGAL COUNSEL
Elias, Matz, Tiernan & Herrick LLP
734 15th Street, N.W., 12th Floor
Washington, DC 20005
ANNUAL MEETING
April 28, 1998, 2:00 P.M.
Quality Hotel Central
4747 Montgomery Road
Cincinnati, Ohio 45212
FORM 10-K
Fidelity Financial of Ohio, Inc. is required to file an Annual Report on Form
10-K, for its year ended December 31, 1997. Copies of this Annual Report and
Quarterly Reports on Form 10-Q may be obtained without charge by contacting:
Paul D. Staubach
Senior Vice President,
Chief Financial Officer and Secretary
Fidelity Financial of Ohio, Inc.
4555 Montgomery Road
Cincinnati, Ohio 45212
MARKET MAKERS
Ernst & Company
Friedman, Billings, Ramsey & Co., Inc.
Gradison/McDonald & Co. Securities, Inc.
Herzog, Heine, Geduld, Inc.
Investment Technology Group
Knight Securities, Inc.
Ryan Beck & Co.
Sandler, O'Neill & Partners, LP
Trident Securities Inc.
<PAGE> 1
EXHIBIT 23.0
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-3768, 333-31613, and 333-22331 of Fidelity Financial of Ohio, Inc. on Form
S-8 of our report dated February 12, 1998 appearing in this Annual Report on
Form 10-K of Fidelity Financial of Ohio, Inc. for the year ended December 31,
1997.
GRANT THORNTON LLP
/s/ Grant Thornton LLP
Cincinnati, Ohio
March 24, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,801
<INT-BEARING-DEPOSITS> 5,084
<FED-FUNDS-SOLD> 22,646
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,847
<INVESTMENTS-CARRYING> 13,527
<INVESTMENTS-MARKET> 13,706
<LOANS> 436,852
<ALLOWANCE> 1,658
<TOTAL-ASSETS> 535,100
<DEPOSITS> 432,024
<SHORT-TERM> 10,495
<LIABILITIES-OTHER> 4,569
<LONG-TERM> 23,738
0
0
<COMMON> 559
<OTHER-SE> 63,715
<TOTAL-LIABILITIES-AND-EQUITY> 535,100
<INTEREST-LOAN> 33,433
<INTEREST-INVEST> 1,006
<INTEREST-OTHER> 3,712
<INTEREST-TOTAL> 38,151
<INTEREST-DEPOSIT> 20,923
<INTEREST-EXPENSE> 22,562
<INTEREST-INCOME-NET> 15,589
<LOAN-LOSSES> 101
<SECURITIES-GAINS> 267
<EXPENSE-OTHER> 9,369
<INCOME-PRETAX> 7,534
<INCOME-PRE-EXTRAORDINARY> 4,876
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,876
<EPS-PRIMARY> .90
<EPS-DILUTED> .89
<YIELD-ACTUAL> 3.11
<LOANS-NON> 957
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 376
<ALLOWANCE-OPEN> 1,558
<CHARGE-OFFS> 1
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,658
<ALLOWANCE-DOMESTIC> 1,658
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
