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, 1998
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
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
5535 Glenway Avenue
Cincinnati, Ohio 45238
(Address) (Zip Code)
Registrant's telephone number, including area code: (513) 922-5959
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.
-----
As of March 25, 1999, the aggregate value of the 7,752,509 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
1,366,598 shares held by all directors and officers of the Registrant, the
Registrant's Employee Stock Ownership Plan ("ESOP") and the Registrant's 401(k)
Plan as a group, was approximately $99.8 million. This figure is based on the
last known trade price of $12.88 per share of the Registrant's Common Stock on
March 25, 1999. Although directors and officers, the ESOP and the 401(k) Plan
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 25, 1999: 9,119,107.
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, 1998 are incorporated into Part II, Items 5 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 1999 Annual Meeting of
Stockholders are incorporated into Part III, Items 10 through 13 of this Form
10-K.
<PAGE>
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 asset of the Company is the capital stock of the Savings Bank.
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 $325.4 million or 75.8% of Fidelity's
total loan portfolio (including loans held for sale) at December 31, 1998. To a
lesser extent, Fidelity originates loans secured by existing multi-family
residential and nonresidential real estate, which amounted to $23.8 million or
5.5% and $49.2 million or 11.4%, respectively, of the total loan portfolio
(including loans held for sale) at December 31, 1998, as well as construction
loans and consumer loans, which respectively amounted to $21.3 million or 5.0%
and $9.8 million or 2.3% 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.
<PAGE>
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 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, 1998, the Company had $519.2 million of total
consolidated assets, $451.6 million of total consolidated liabilities, including
$412.1 million of deposits, and $67.6 million of total consolidated
stockholders' equity.
Lending Activities
General. At December 31, 1998, Fidelity's net loan portfolio (including
loans held for sale) totaled $419.4 million, representing approximately 80.8% of
Fidelity's $519.2 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.
2
<PAGE>
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 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,
1998, Fidelity's limit on loans-to-one borrower was $9.0 million and its five
largest loans or groups of loans-to-one borrower, including related entities,
aggregated $6.9 million, $5.2 million, $4.3 million, $4.0 million and $3.7
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, 1998.
3
<PAGE>
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,
-------------------------------------------------------------------------------------
1998 1997 1996(1)
--------------------------- ---------------------------- ---------------------------
Amount Percent Amount Percent Amount Percent
----------- ------------ ------------ ------------ ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential(2) $325,398 75.8% $ 341,636 77.1% $321,701 80.0%
Multi-family residential 23,803 5.5 26,125 5.9 25,580 6.4
Nonresidential real estate 49,172 11.4 50,613 11.4 33,055 8.2
Construction 21,327 5.0 15,264 3.5 13,839 3.4
------- ----- ------- ----- ------- -----
Total real estate loans 419,700 97.7 433,638 97.9 394,175 98.0
Consumer loans:
Auto loans 1,983 0.5 1,427 0.3 1,149 0.3
Home improvement/equity 7,535 1.7 7,142 1.6 6,135 1.5
Other 295 0.1 697 0.2 566 0.2
------- ----- ------- ----- ------- -----
Total consumer loans 9,813 2.3 9,266 2.1 7,850 2.0
------- ----- ------- ----- ------- -----
Total loans 429,513 100.0% 442,904 100.0% 402,025 100.0%
------- ===== ------- ===== ------- =====
Loans in process (9,233) (5,127) (4,055)
Unamortized yield adjustments 859 733 129
Allowance for loan losses (1,703) (1,658) (1,558)
------- ------- -------
Net loans $419,436 $436,852 $396,541
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1995 1994
---------------------------- ---------------------------
Amount Percent Amount Percent
----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Single-family residential(2) $142,246 75.7% $134,508 74.6%
Multi-family residential 18,833 10.0 15,443 8.6
Nonresidential real estate 20,773 11.1 23,685 13.1
Construction 4,791 2.6 6,332 3.5
------- ----- ------- -----
Total real estate loans 186,643 99.4 179,968 99.8
Consumer loans:
Auto loans -- -- -- --
Home improvement/equity 952 0.5 41 --
Other 251 0.1 300 0.2
------- ----- ------- -----
Total consumer loans 1,203 0.6 341 0.2
------- ----- ------- -----
Total loans 187,846 100.0% 180,309 100.0%
------- ===== ------- =====
Loans in process (1,305) (3,424)
Unamortized yield adjustments (591) (880)
Allowance for loan losses (818) (783)
------- -------
Net loans $185,132 $175,222
======= =======
</TABLE>
(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, 1998, 1997 and 1995, included $236,000, $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.
4
<PAGE>
Contractual Principal Repayments and Interest Rates. The following
table sets forth certain information at December 31, 1998 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 more
Due 3-5 Due 5-10 Due 10-15 than 15
years after years after years after years after
1999 2000 2001 12/31/98 12/31/98 12/31/98 12/31/98 Total
---- ---- ---- --------- --------- ---------- ---------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family residential $12,187 $13,101 $14,084 $31,419 $ 76,460 $57,370 $120,777 $325,398
Multi-family residential and
nonresidential real estate 2,366 2,574 2,801 6,362 31,847 23,172 3,853 72,975
Construction 2,862 1,812 326 733 2,422 3,580 9,592 21,327
Consumer and other 1,871 1,777 1,946 2,978 1,241 -- -- 9,813
------ ------ ------ ------ ------- ------ ------- -------
Total $19,286 $19,264 $19,157 $41,492 $111,970 $84,122 $134,222 $429,513
====== ====== ====== ====== ======= ====== ======= =======
</TABLE>
The following table sets forth the dollar amount of all loans, before
net items, due after one year from December 31, 1998 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 $235,294 $ 77,917 $313,211
Multi-family residential and
nonresidential real estate 25,742 44,867 70,609
Construction 8,319 10,146 18,465
Consumer 5,202 2,740 7,942
------- -------- --------
Total $274,557 $135,670 $410,227
======= ======= =======
</TABLE>
5
<PAGE>
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 1998 and 1997,
the Savings Bank purchased $2.0 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,
1998, loans purchased and serviced by others totaled approximately $15.4
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.
6
<PAGE>
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Loan originations:
Single-family residential $102,195 $ 83,169 $ 45,800
Multi-family residential 2,804 2,796 3,030
Nonresidential real estate 2,588 8,186 869
Construction 25,907 19,504 6,372
Consumer and other 7,828 6,799 3,394
-------- ------- -------
Total loans originated 141,322 120,454 59,465
Purchases 1,999 11,368 --
-------- ------- -------
Total loans originated and
purchased 143,321 131,822 59,465
Sales, securitizations and loan
principal reductions:
Loans sold 18,786 4,422 547
Loans securitized -- 8,099 --
Loan principal reductions 141,217 79,023 37,106
-------- ------- -------
Total loans sold, securitized and
principal reductions 160,003 91,544 37,653
Net loans acquired through Merger -- -- 189,405
Increase (decrease) due to other
items, net (734) 33 838
-------- ------- -------
Net increase (decrease) in
loan portfolio $(17,416) $ 40,311 $212,055
======= ======= =======
</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, 1998, $325.4 million or 75.8% 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.
7
<PAGE>
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, 1998, $79.1 million or 24.3% 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.
8
<PAGE>
Multi-Family Residential, Nonresidential Real Estate and Construction
Loans. At December 31, 1998, $23.8 million or 5.5% and $49.2 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, 218
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
$335,000 at December 31, 1998.
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, 1998, $46.3 million or 63.5% of the multi-family
residential and nonresidential real estate loan portfolio, before net items,
consisted of adjustable-rate loans.
Multi-family residential and nonresidential real estate loans are
generally made in amounts up to 75% of the appraised value of the security
property. All appraisals are generally performed by an independent appraiser
designated by Fidelity and are reviewed by management. In originating
multi-family residential and nonresidential real estate loans, Fidelity
considers the quality of the property, the credit of the borrower, cash flow of
the project, location of the real estate and the quality of management involved
with the property.
Fidelity makes construction loans to individuals for the construction
of their residences and to 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, 1998, construction loans amounted to $21.3 million or 5.0% of
Fidelity's total loan portfolio (including loans held for sale), before net
items. Of this amount, $9.9 million consists of loans for the construction of
single-family residences and $11.4 million consists of loans for the
construction of multi-family residential and nonresidential real estate.
Construction lending is generally limited to Fidelity's primary lending
area. Construction loans are structured to be converted to permanent loans at
the end of the construction phase, which typically is 12 months. Construction
loans have rates and terms which generally match the non-construction loans then
offered by Fidelity, except that during the construction phase the borrower only
pays interest on the loan. Construction loans are underwritten pursuant to the
same general guidelines used for originating permanent loans.
9
<PAGE>
Multi-family residential and nonresidential real estate lending is
generally considered to involve a higher degree of risk than single-family
residential lending. Such lending typically involves large loan balances
concentrated in a single borrower or groups of related borrowers. In addition,
the payment experience on loans secured by income-producing properties is
typically dependent on the successful operation of the related real estate
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, 1998, consumer loans totaled $9.8
million or 2.3% 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,
1998, Fidelity had $579,000 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.
10
<PAGE>
The following table sets forth information concerning delinquent loans
at December 31, 1998, in dollar amount and as a percentage of Fidelity's total
loan portfolio (before net items). The amounts presented represent the total
outstanding principal balances of the related loans, rather than the actual
payment amounts which are past due.
<TABLE>
<CAPTION>
Single-family Multi-family Nonresidential
Residential Residential Real Estate
-------------------------- ------------------------- ---------------------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days $2,811 .7% $-- --% $234 .1%
60 - 89 days 452 .1 74 -- -- --
90 days and over 1,770 .4 -- -- -- --
----- --- -- -- --- --
Total delinquent loans $5,033 1.2% $74 --% $234 .1%
===== === == == === ==
</TABLE>
<TABLE>
<CAPTION>
Construction Consumer Total
------------------------ ------------------------ -------------------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days $-- --% $ 76 --% $3,121 .8%
60 - 89 days -- -- 30 -- 556 .1
90 days and over -- -- 38 -- 1,808 .4
-- -- --- -- ----- ---
Total delinquent loans $-- --% $144 --% $5,485 1.3%
== == === == ===== ===
</TABLE>
11
<PAGE>
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,
-------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Single-family residential $1,770 $957 $ 924 $ 949 $652
Multi-family residential and
nonresidential real estate -- -- 206 58 187
Consumer and other 38 -- -- -- --
----- --- ----- ----- ---
Total non-performing loans 1,808 957 1,130 1,007 839
Real estate owned:
Single-family residential real estate 32 -- -- -- 85
Multi-family residential and
nonresidential real estate -- -- -- -- --
----- --- ----- ----- ---
Total real estate owned 32 -- -- -- 85
----- --- ----- ----- ---
Total non-performing assets $1,840 $957 $1,130 $1,007 $924
===== === ===== ===== ===
Total non-performing loans
as a percentage of total loans .42% .22% .28% .54% .47%
=== === === === ===
Total non-performing assets as
a percentage of total assets .35% .18% .23% .44% .43%
=== === === === ===
</TABLE>
12
<PAGE>
The interest income that would have been recorded during the years
ended December 31, 1998, 1997, 1996, 1995 and 1994 if Fidelity's non-performing
loans at the end of such periods had been current in accordance with their terms
during such periods was $57,000, $25,000, $59,000, $12,000 and $51,000,
respectively. The amount of interest income that was actually received during
the years ended December 31, 1998, 1997, 1996, 1995 and 1994 with respect to
such non-performing loans amounted to approximately $14,000, $57,000, $74,000,
$65,000 and $42,000, 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, 1998 consisted of
$1.4 million of loans classified as special mention, $2.2 million of loans
classified as substandard and $406,000 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.
13
<PAGE>
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, 1998, Fidelity's allowance for loan losses amounted to
$1.7 million, which was general 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,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding $429,513 $442,904 $402,025 $187,846 $180,309
======= ======= ======= ======= =======
Average loans outstanding, net $426,420 $427,912 $234,133 $180,935 $170,340
======= ======= ======= ======= =======
Balance at beginning of period $ 1,658 $ 1,558 $ 818 $ 783 $ 803
Charge-offs:
Single-family residential 59 1 29 36 23
Non-residential 3 -- -- -- 41
------- ------- ------- ------- -------
Total charge-offs 62 1 29 36 64
Recoveries -- -- -- -- --
------- ------- ------- ------- -------
Net charge-offs 62 1 29 36 64
Provision for losses on loans 107 101 129 71 44
Increase attributable to Merger -- -- 640 -- --
------- ------- ------- ------- -------
Balance at end of period $1,703 $ 1,658 $ 1,558 $ 818 $ 783
===== ======= ======= ======= =======
Allowance for loan losses as a
percent of total loans outstanding .40% .37% .39% .44% .43%
=== === === ===
Ratio of net charge-offs to
average loans outstanding .01% -- .01% .02% .04%
=== == === === ===
</TABLE>
14
<PAGE>
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,
1998 1997 1996
Percent of Percent of Percent of
Total Total Total
Loans by Loans by Loans by
Amount Category Amount Category Amount Category
------ ----------- ------ ------------ ------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential $ 614 75.8% $ 530 77.1% $1,246 80.0%
loans
Multi-family residential loans 137 5.5 153 5.9 100 6.4
Nonresidential real estate 724 11.4 709 11.4 128 8.2
loans
Construction loans 111 5.0 79 3.5 53 3.4
Consumer loans 117 2.3 187 2.1 31 2.0
----- ----- ----- ----- ----- -----
Total $1,703 100.0% $1,658 100.0% $1,558 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
December 31,
1995 1994
Percent Percent of
of Total Total
Loans by Loans by
Amount Category Amount Category
------ ----------- ------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Single-family residential $525 75.7% $346 74.6%
loans
Multi-family residential loans 106 10.0 133 8.6
Nonresidential real estate 162 11.1 272 13.1
loans
Construction loans 22 2.6 32 3.5
Consumer loans 3 0.6 -- 0.2
--- ----- --- -----
Total $818 100.0% $783 100.0%
=== ===== === =====
</TABLE>
15
<PAGE>
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. At December 31, 1998, the Company's equity accounts
reflected a net unrealized loss of $26,000 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.
16
<PAGE>
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,
1998, 1997 and 1996 (including those designated as available for sale):
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996
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 $ 451 $ 445 $ 574 $ 575 $ 696 $ 689
GNMA participation certificates 7,248 7,248 11,632 11,797 8,354 8,434
FNMA participation certificates 221 230 236 246 306 319
Collateralized mortgage
obligations 21,762 21,805 1,085 1,088 1,388 1,389
------ ------ ------ ------ ------ ------
Total mortgage-backed
securities held to
maturity 29,682 29,728 13,527 13,706 10,744 10,831
Available for sale:
FHLMC Participation Certificates 8,418 8,434 12,610 12,683 19,767 19,926
GNMA Participation Certificates 8,055 8,013 4,707 4,752 6,028 6,062
FNMA Participation Certificates 6,217 6,181 7,160 7,146 4,776 4,772
Collateralized mortgage
obligations 2,557 2,577 1,240 1,246 -- --
------ ------ ------ ------ ------ ------
Total mortgage-backed
securities designated
as available for sale 25,247 25,205 25,717 25,827 30,571 30,760
------ ------ ------ ------ ------ ------
Total mortgage-backed securities $54,929 $54,933 $39,244 $39,533 $41,315 $41,591
====== ====== ====== ====== ====== ======
</TABLE>
17
<PAGE>
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,
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Mortgage-backed securities at
beginning of period $39,354 $41,504 $29,378
Purchases 35,479 19,173 3,173
Mortgage-backed securities received through loan
securitization -- 8,099 --
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 (152) (79) 334
Repayments (19,615) (6,845) (6,526)
Premium amortization (179) (64) (58)
------ ------ ------
Mortgage-backed securities at end
of period $54,887 $39,354 $41,504
====== ====== ======
Weighted average yield at end of
period 6.32% 6.83% 7.29%
</TABLE>
At December 31, 1998, of the $54.9 million portfolio, $3.9 million was
scheduled to mature in one year or less, $12.9 million was scheduled to mature
in between one and five years, $9.5 million was scheduled to mature in between
five and ten years, and $28.6 million was scheduled to mature after ten years.
Due to repayments of the underlying loans, the actual maturities of
mortgage-backed securities generally are substantially less than the scheduled
maturities.
Of the $54.9 million of mortgage-backed securities at December 31,
1998, $32.1 million had fixed interest rates and $22.8 million consisted of
adjustable-rate securities. Of Fidelity's total investment in mortgage-backed
securities at December 31, 1998, $15.3 million consisted of GNMA certificates,
$6.4 million consisted of FNMA certificates, $8.9 million consisted of FHLMC
certificates, and $24.3 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.
18
<PAGE>
The following table sets forth information relating to the amortized
cost and market value of Fidelity's investment securities designated as
available for sale at the dates indicated:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
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 $835 $838 $5,869 $5,908 $ 8,502 $ 8,530
U.S. Treasury notes -- -- -- -- 7,482 7,500
Corporate equity
securities -- -- 84 112 64 90
--- --- ----- ----- ------ ------
$835 $838 $5,953 $6,020 $16,048 $16,120
=== === ===== ===== ====== ======
Weighted average yield
at end of period 6.15% 6.92% 6.50%
==== ==== ====
</TABLE>
19
<PAGE>
The following table sets forth amortized cost and market value of
investment securities by contractual terms to maturity at December 31, 1998:
<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 $ -- $ -- $ -- $ -- $835 $838 $ -- $ -- $835 $838
==== ==== ==== ==== === === ==== ==== === ===
</TABLE>
20
<PAGE>
Sources of Funds
General. Deposits are the primary source of Fidelity's funds for
lending and other investment purposes. In addition to deposits, Fidelity derives
funds from loan principal repayments and advances from the FHLB of Cincinnati.
Loan repayments are a relatively stable source of funds, while deposit inflows
and outflows are significantly influenced by general interest rates and money
market conditions. Borrowings may be used on a short-term basis to compensate
for reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes.
Deposits. Fidelity's deposits are attracted principally from within
Fidelity's primary market area through the offering of a broad selection of
deposit instruments, including NOW accounts, money market accounts, regular
savings accounts, and term certificate accounts. Included among these deposit
products are individual retirement account certificates of approximately $57.7
million at December 31, 1998. 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,
1998 1997 1996
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
3.00 - 4.00% $ 4,786 1.16% $ 2,067 0.48% $ -- --%
4.01 - 6.00% 258,514 62.73 176,776 40.92 234,757 57.52
6.01 - 8.00% 52,255 12.68 157,898 36.55 77,835 19.07
8.01 - 10.00% 2,083 0.51 3,883 0.89 3,177 0.78
------- ------ ------- ------- ------- ------
Total certificate accounts 317,638 77.08 340,624 78.84 315,769 77.37
------- ------ ------- ------ ------- ------
Transaction accounts:
Passbook accounts 36,526 8.86 40,374 9.34 44,798 10.97
Money market accounts 25,324 6.14 25,730 5.96 24,721 6.06
NOW accounts 32,634 7.92 25,296 5.86 22,871 5.60
------- ------ ------- ------ ------- ------
Total transaction accounts 94,484 22.92 91,400 21.16 92,390 22.63
------- ------ ------- ------ ------- ------
Total deposits $412,122 100.00% $432,024 100.00% $408,159 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
21
<PAGE>
The following table sets forth the savings activities of Fidelity
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Deposits(1) $1,090,881 $982,826 $684,220
Withdrawals (1,130,696) (979,976) (467,465)
--------- ------- -------
Net increase (decrease) before interest
credited and other (39,815) 2,850 216,755
Interest credited and other 19,913 21,015 10,707
--------- ------- -------
Net increase (decrease) in deposits $ (19,902) $ 23,865 $227,462
====== ======= =======
</TABLE>
- --------------------
(1) The deposits at December 31, 1996 reflect the $207.8 million of deposits
acquired by Fidelity as a result of the Merger with Circle Financial
Corporation.
The following table shows the interest rate and maturity information
for Fidelity's certificates of deposit at December 31, 1998.
<TABLE>
<CAPTION>
Maturity Date
Interest Rate One Year or Less Over 1-2 Years Over 2-3 Years Over 3 Years Total
(In Thousands)
<S> <C> <C> <C> <C> <C>
3.00 - 4.00% $ 4,786 $ -- $ -- $ -- $ 4,786
4.01 - 6.00% 207,910 43,866 4,508 2,230 258,514
6.01 - 8.00% 40,724 9,005 1,258 1,268 52,255
8.01 - 10.00% 841 1,064 178 -- 2,083
------- ------ ----- ----- -------
Total $254,261 $53,935 $5,944 $3,498 $317,638
======= ====== ===== ===== =======
</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, 1998.
<TABLE>
<CAPTION>
Certificates of deposit maturing in quarter ending:
- -----------------------------------------------------------------------------
(In Thousands)
<S> <C>
March 31, 1999 $ 9,632
June 30, 1999 8,579
September 30, 1999 9,218
December 31, 1999 6,214
After December 31, 1999 10,584
------
Total certificates of deposit with
balances of $100,000 or more $44,227
======
</TABLE>
22
<PAGE>
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, 1998, Fidelity had
$34.7 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,
1998 1997 1996
(Dollars In Thousands)
<S> <C> <C> <C>
Maximum Balance $46,234 $34,478 $29,672
Average Balance 39,378 26,208 17,794
Weighted average interest rate of
FHLB advances 6.08% 6.25% 6.19%
</TABLE>
The following table sets forth certain information as to Fidelity's
FHLB advances at the dates indicated.
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
(Dollars In Thousands)
<S> <C> <C> <C>
FHLB advances(1) $34,735 $34,233 $20,186
Weighted average interest rate
of FHLB advances 6.02% 6.21% 6.22%
</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 97 full-time employees and 12 part-time
employees at December 31, 1998. None of these employees is represented by a
collective bargaining agreement, and Fidelity believes that it enjoys good
relations with its personnel.
23
<PAGE>
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.
24
<PAGE>
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 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.
25
<PAGE>
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 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, 1998, the Savings Bank was in compliance
with the above restrictions.
Restrictions on Acquisitions. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of the OTS, (i) control of any other savings
institution or savings and loan holding company or substantially all the assets
thereof or (ii) more than 5% of the voting shares of a savings institution or
holding company thereof which is not a subsidiary. Except with the prior
approval of the Director of the OTS, no director or officer of a savings and
loan holding company or person owning or controlling by proxy or otherwise more
than 25% of such company's stock, may acquire control of any savings
institution, other than a subsidiary savings institution, or of any other
savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if (i) the multiple savings and loan holding
company involved controls a savings institution which operated a home or branch
office located in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions).
26
<PAGE>
FIRREA amended provisions of the Bank Holding Company Act of 1956 to
specifically authorize the Federal Reserve Board to approve an application by a
bank holding company to acquire control of a savings institution. FIRREA also
authorized a bank holding company that controls a savings institution to merge
or consolidate the assets and liabilities of the savings institution with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. As a result of these provisions, there have been a number of
acquisitions of savings institutions by bank holding companies in recent years.
The Savings Bank
General. The OTS has extensive authority over the operations of
federally chartered savings institutions. As part of this authority, savings
institutions are required to file periodic reports with the OTS and are subject
to periodic examinations by the OTS and the FDIC. The investment and lending
authority of savings institutions are prescribed by federal laws and
regulations, and such institutions are prohibited from engaging in any
activities not permitted by such laws and regulations. Those laws and
regulations generally are applicable to all federally chartered savings
institutions and may also apply to state-chartered savings institutions. Such
regulation and supervision is primarily intended for the protection of
depositors.
The OTS' enforcement authority over all savings institutions was
substantially enhanced by FIRREA. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely reports filed with the
OTS. FIRREA significantly increased the amount of and grounds for civil money
penalties.
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted into law. The FDICIA provides
for, among other things, the recapitalization of the BIF; the authorization of
the FDIC to make emergency special assessments under certain circumstances
against BIF members and members of the SAIF; the establishment of risk-based
deposit insurance premiums; and improved examinations and reporting
requirements. The FDICIA also provides for enhanced federal supervision of
depository institutions based on, among other things, an institution's capital
level. See " - Prompt Corrective Action."
Insurance of Accounts. The deposits of the Savings Bank are 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.
27
<PAGE>
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 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. OTS capital regulations require
savings institutions to satisfy minimum capital standards: risk-based capital
requirements, a leverage requirement and a tangible capital requirement. Savings
institutions must meet each of these standards in order to be deemed in
compliance with OTS capital requirements. In addition, the OTS may require a
savings institution to maintain capital above the minimum capital levels.
28
<PAGE>
All savings institutions are required to meet a minimum risk-based
capital requirement of total capital (core capital plus supplementary capital)
equal to 8% of risk-weighted assets (which includes the credit risk equivalents
of certain off-balance sheet items). In calculating total capital for purposes
of the risk-based requirement, supplementary capital may not exceed 100% of core
capital. Under the leverage requirement, a savings institution is required to
maintain core capital equal to a minimum of 3% of adjusted total assets. (In
addition, under the prompt corrective action provisions of the OTS regulations,
all but the most highly-rated institutions must maintain a minimum leverage
ratio of 4% in order to be adequately capitalized. See "--Prompt Corrective
Action.") A savings institution is also required to maintain tangible capital in
an amount at least equal to 1.5% of its adjusted total assets.
The following table sets forth Fidelity's compliance with each of the
above-described capital requirements at December 31, 1998:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital(1) Capital(2)
(Dollars in Thousands)
<S> <C> <C> <C>
Regulatory capital $58,548 $58,548 $60,251
Minimum required regulatory capital 7,693 15,386 22,402
----- ------ ------
Regulatory capital excess $50,855 $43,162 $37,849
====== ====== ======
Regulatory capital as a
percentage(3) 11.4% 11.4% 21.5%
Minimum capital required as a
percentage 1.5 3.0 8.0
---- ---- ----
Regulatory capital as a percentage
in excess of requirements 9.9% 8.4% 13.5%
==== ==== ====
</TABLE>
- ----------------------------
(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 $512.9 million. Risk-based capital is computed as a percentage of
total risk-weighted assets of $280.0 million.
29
<PAGE>
The foregoing capital requirements are viewed as minimum standards by
the OTS, and most institutions are expected to maintain capital levels well
above the minimum. In addition, the OTS regulations provide that minimum capital
levels higher than those provided in the regulations may be established by the
OTS for individual savings institutions, upon a determination that the savings
institution's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: (1) a
savings institution has a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk, certain risks
arising from nontraditional activities, or similar risks or a high proportion of
off-balance sheet risk; (2) a savings institution is growing, either internally
or through acquisitions, at such a rate that supervisory problems are presented
that are not dealt with adequately by OTS regulations; and (3) a savings
institution may be adversely affected by activities or condition of its holding
company, affiliates, subsidiaries or other persons or savings institutions with
which it has significant business relationships. The Savings Bank is not subject
to any such individual minimum regulatory capital requirement.
In March 1999, the federal banking agencies amended their risk-based
and leverage capital standards to make uniform their regulations. In particular,
the agencies made risk-based capital treatments for construction loans on
presold residential properties, real estate loans secured by junior liens on
1-to 4-family residential properties, and investments in mutual funds consistent
among the agencies, and simplified and made uniform the agencies' Tier 1
leverage capital standards. The most highly-rated institutions must maintain a
minimum Tier 1 leverage ratio of 3.0 percent, with all other institutions
required to maintain a minimum leverage ratio of 4.0 percent. The OTS
regulations now state that higher-than-minimum capital levels may be required if
warranted, and that institutions should maintain capital levels consistent with
their risk exposures.
30
<PAGE>
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 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 taken with respect to
significantly undercapitalized and critically undercapitalized institutions.
At December 31, 1998, 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.
31
<PAGE>
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.
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, 1998, the Savings Bank's liquidity
ratio was 15.89%.
32
<PAGE>
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.
In January 1999, the OTS amended its capital distribution regulation to
bring such regulations into greater conformity with the other bank regulatory
agencies. Under the regulation, certain savings associations would not be
required to file with the OTS. Specifically, savings associations that would be
well capitalized following a capital distribution would not be subject to any
requirement for notice or application unless the total amount of all capital
distributions, including any proposed capital distribution, for the applicable
calendar year would exceed an amount equal to the savings association's net
income for that year to date plus the savings association's retained net income
for the preceding two years. Because the Savings Bank is a subsidiary of the
Company, the regulation, 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
regulation will adversely affect its ability to make capital distributions.
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.
33
<PAGE>
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, 1998, the amount of the Savings Bank's
assets which were invested in QTIs was 96.43%, which exceeded the percentage
required to qualify the Savings Bank under the QTL test. A savings institution
that does not meet the QTL test must either convert to a bank charter or comply
with the following restrictions on its operations: (i) the institution may not
engage in any new activity or make any new investment, directly or indirectly,
unless such activity or investment is permissible for a national bank; (ii) the
branching powers of the institution shall be restricted to those of a national
bank; (iii) the institution shall not be eligible to obtain any advances from
its FHLB; and (iv) payment of dividends by the institution shall be subject to
the rules regarding payment of dividends by a national bank. Upon the expiration
of three years from the date the institution ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
Federal Home Loan Bank System. The Savings Bank is a member of the FHLB
of Cincinnati, which is one of 12 regional FHLBs that administers the home
financing credit function of savings institutions. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., 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, 1998, the Savings
Bank had $4.5 million in FHLB stock, which was in compliance with this
requirement.
34
<PAGE>
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, 1998, 1997 and 1996, dividends paid by the FHLB of Cincinnati to the Savings
Bank amounted to $307,000, $283,000 and $165,000, 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, 1998, no reserves were
required to be maintained on the first $4.4 million of transaction accounts,
reserves of 3% were required to be maintained against the next $44.9 million of
net transaction accounts (with such dollar amounts subject to adjustment by the
Federal Reserve Board), and a reserve of 10% against all remaining net
transaction accounts. Because required reserves must be maintained in the form
of vault cash or a noninterest-bearing account at a Federal Reserve Bank, the
effect of this reserve requirement is to reduce an institution's earning assets.
TAXATION
Federal Taxation
General. The Company and the Savings Bank are subject to the generally
applicable corporate tax provisions of the Code, and the Savings Bank is subject
to certain additional provisions of the Code which apply to thrifts and other
types of financial institutions. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is
not a comprehensive discussion of the tax rules applicable to the Savings Bank.
Fiscal Year. The Company and the Savings Bank file federal income tax
returns on the basis of a calendar year ending on December 31.
Bad Debt Reserves. Prior to the enactment, on August 20, 1996, of the Small
Business Job Protection Act of 1996 (the "Small Business Act"), for federal
income tax 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.
35
<PAGE>
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, 1998, the federal income tax reserves of the Savings
Bank included $14.2 million for which no federal income tax has been provided,
of this amount, $11.5 million and $2.7 million are attributable to pre-1987 and
post-1987 bad debt reserves, respectively. The Savings Bank will recapture into
income approximately $450,000 per year over the six year period beginning
January 1, 1996, subject to suspension for two years in the event the
residential loan exemption is met as discussed above. The Savings Bank has
previously accounted for this tax liability under FASB 109 and, therefore,
recognition of these amounts will not impact the Savings Bank's profit and loss
statement.
Distributions. If the Savings Bank distributes cash or property to its
stockholders, and the distribution is treated as being from its pre-1987 bad
debt reserves, the distribution will cause the Savings Bank to have additional
taxable income. A distribution is deemed to have been made from pre-1987 bad
debt reserves to the extent that (a) the reserves exceed the amount that would
have been accumulated on the basis of actual loss experience, and (b) the
distribution is a "non-qualified distribution." A distribution with respect to
stock is a non-dividend distribution to the extent that, for federal income tax
purposes, (i) it is in redemption of shares, (ii) it is pursuant to a
liquidation of the institution, or (iii) in the case 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.
36
<PAGE>
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, 1998, 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, 1997, 1996 and 1995 are open under the statute of limitations
and are subject to review by the IRS.
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 1998.
37
<PAGE>
Item 2. Properties.
At December 31, 1998, 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, 1998:
<TABLE>
<CAPTION>
Net Book Value of
Description/Address Leased/Owned Property Deposits
(In Thousands)
<S> <C> <C> <C>
Main Office Owned $ 986 $117,140
4555 Montgomery Road
Cincinnati, Ohio 45212 (1)
Branch Office Owned 370 40,109
8434 Vine Street
Cincinnati, Ohio 45216 (1)
Branch Office Owned 617 28,201
7136 Miami Avenue
Cincinnati, Ohio 45243
Branch Office Owned 1,249 52,487
11100 Reading Road
Cincinnati, Ohio 45241
Branch Office Leased 45 27,314
11700 Princeton Pike
Cincinnati, Ohio 45248 (2)
Branch Office Owned 455 24,934
4144 Hunt Road
Cincinnati, Ohio 45238
Branch Office Owned 497 31,295
5030 Delhi Avenue
Cincinnati, Ohio 45238
Branch Office Owned 325 41,913
3316 Glenmore Avenue
Cincinnati, Ohio 45211
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Net Book Value of
Description/Address Leased/Owned Property Deposits
(In Thousands)
<S> <C> <C> <C>
Branch Office Owned $ 214 $20,240
3777 Hamilton Cleves Road
Ross, Ohio 45013
Branch Office Owned 204 13,198
8045 Colerain Avenue
Cincinnati, Ohio 45239
Branch Office Owned 357 8,089
10640 Loveland -
Madeira Road
Loveland, Ohio 45140
Branch Office Leased 2 7,202
7944 Beechmont Avenue
Cincinnati, Ohio 45255 (3)
Other property Owned 85 --
4541 Montgomery Road
Cincinnati, Ohio 45212 (4)
Other property Owned 7 --
17 Hillsdale
Cincinnati, Ohio 45216 (5)
Other property Owned 78 --
16 Hereford Avenue
Cincinnati, Ohio 45216 (6)
</TABLE>
_________
(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.
39
<PAGE>
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 3 of
the Company's 1998 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 4
and 5 of the Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required herein is incorporated by reference from pages 6
to 21 of the Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required herein is incorporated by reference from pages
6 to 9 of the Annual Report.
Item 8. Financial Statements and Supplementary Data.
The information required herein is incorporated by reference from pages 22
to 56 of the Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
40
<PAGE>
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 filed within 120 days after the Company's fiscal year end ("Definitive
Proxy Statement").
Item 11. Executive Compensation.
The information required herein is incorporated by reference from the
Definitive Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required herein is incorporated by reference from the
Definitive Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required herein is incorporated by reference from the
Definitive Proxy Statement.
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this Report
(1) The following financial statements are incorporated by
reference from Item 8 hereof (see Exhibit 13 attached
hereto):
Report of Independent Certified Public Accountants
Consolidated Statements of Financial Condition at December 31,
1998 and 1997
Consolidated Statements of Earnings for the Years Ended December
31, 1998, 1997 and 1996
Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1998, 1997 and 1996
41
<PAGE>
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996
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.
<TABLE>
<CAPTION>
No. Exhibits
<S> <C>
2.1 Plan of Conversion and Agreement and Plan of Reorganization*
3.1 Articles of Incorporation of Fidelity Financial of
Ohio, Inc.*
3.2 Code of Regulations of Fidelity Financial of Ohio, Inc.*
3.3 Bylaws of Fidelity Financial of Ohio, Inc.*
4.1 Specimen Stock Certificate of Fidelity Financial of Ohio, Inc.**
10.1 1992 Stock Incentive Plan*1/
10.2 1992 Directors' Stock Option Plan*1/
10.3 Management Recognition Plan*1/
10.4 Employee Stock Ownership Plan*1/
10.5 Employment Agreements between Fidelity Financial of Ohio, Inc.,
Fidelity Federal Savings Bank and John R. Reusing and Paul D.
Staubach**1/
10.6 Employment Agreement between Fidelity Financial of Ohio, Inc.,
Fidelity Federal Savings Bank and Joseph D. 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 1998 Annual Report to Stockholders
23.0 Consent of Grant Thornton LLP
27.0 Financial Data Schedule
</TABLE>
(Footnotes on following page)
42
<PAGE>
* 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.
**** Incorporated herein by reference from the Company's Form 10-K filed with
the SEC on March 30, 1998.
1/ Management contract or compensatory plan or arrangement.
(b) On October 1, 1998, the Company filed an amendment to the Form 8-K
filed with the SEC on September 29, 1998 reporting under Item 5 its execution of
an Agreement of Merger with Glenway Financial Corporation ("Glenway"), dated as
of September 28, 1998 (the "Agreement"), pursuant to which Glenway will merge
into a wholly-owned subsidiary of the Company. The purpose of the amendment was
to file the Agreement and exhibits thereto.
(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.
43
<PAGE>
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 29, 1999 By:/s/ Robert R. Sudbrook
--------------------------------------
Robert R. Sudbrook
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 29, 1999
- --------------------------------------
John R. Reusing, Chairman of the Board
/s/ Robert R. Sudbrook March 29, 1999
- --------------------------------------
Robert R. Sudbrook, President,
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Michael W. Jordan March 29, 1999
- --------------------------------------
Michael W. Jordan, Director
/s/ David A. Luecke March 29, 1999
- --------------------------------------
David A. Luecke, Director
44
<PAGE>
/s/ Constantine N. Papadakis March 29, 1999
- ------------------------------------------
Constantine N. Papadakis, Director
/s/ Paul D. Staubach March 29, 1999
- ------------------------------------------
Paul D. Staubach, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
March __, 1999
- ------------------------------------------
Robert W. Zumbiel, Director
/s/ Joseph D. Hughes March 29, 1999
- ------------------------------------------
Joseph D. Hughes, Executive Vice
President and Director
/s/ Thomas N. Spaeth March 29, 1999
- ------------------------------------------
Thomas N. Spaeth, Director
/s/ Edgar A. Rust March 29, 1999
- ------------------------------------------
Edgar A. Rust, Director
/s/ Daniel W. Geeding March 29, 1999
- ------------------------------------------
Daniel W. Geeding, Director
/s/ Kenneth C. Lichtendahl March 29, 1999
- ------------------------------------------
Kenneth C. Lichtendahl, Director
/s/ John L. Torbeck March 29, 1999
- ------------------------------------------
John L. Torbeck, Director
45
CONTENTS
Letter to Stockholders..................................................... 1
Business of the Corporation................................................ 2
Market Price of Stock and Related Information.............................. 3
Selected Consolidated Financial and Other Data............................. 4
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 6
Independent Auditors' Report............................................... 22
Consolidated Statements of Financial Condition............................. 23
Consolidated Statements of Earnings........................................ 24
Consolidated Statements of Comprehensive Income............................ 25
Consolidated Statements of Stockholders' Equity............................ 26
Consolidated Statements of Cash Flows...................................... 27
Notes to Consolidated Financial Statements................................. 29
Directors and Executive Officers........................................... 57
Locations.................................................................. 57
Corporate Information...................................................... 58
Annual Meeting............................................................. 58
<PAGE>
Dear Shareholders,
Enclosed is the 1998 Annual Report of Fidelity Financial of Ohio, Inc.
This report, which covers the year ended December 31, 1998, does not reflect the
results of the merger of equals of FFOH and Glenway Financial Corporation. As a
result of the merger, which was just completed on March 19, 1999, your company
looks very different than it did at the end of 1998.
FFOH now has consolidated assets in excess of $800 million and our
savings bank subsidiary, Centennial Bank, has 15 branches throughout Greater
Cincinnati. We have 180 total employees and a seasoned management team that
combines a long tradition of service to the thrift industry with the commercial
banking expertise that will be so important to our future. We have a board of 12
directors, a blend of talented people who will provide forward-looking
leadership without abandoning the heritage of the past.
We are very busy guiding our combined staff through the many
transitions that accompany a merger of this size. Our immediate goal is to make
the operational transitions transparent to our customers, who can now transact
their banking business at any one of our 15 offices and 19 ATMs, regardless of
where their accounts were held before the merger. We believe we are achieving
that goal, as a result of careful planning and the efforts of our talented and
dedicated personnel.
Our longer term goal is one we know our customers will notice - an
expanded offering of products and services that will meet more of their
financial services needs. The resources and economies of scale that we have
achieved through the merger position us to serve our existing customers better
and to establish relationships with new customers.
Our most important goal is for our shareholders to see the benefits of
this merger. Management will work diligently to implement the cost-savings
opportunities that the merger presents to ensure that our efforts achieve value
for our shareholders. A more immediate benefit is the enhanced liquidity of FFOH
stock. FFOH now has approximately 9.1 million common shares outstanding, held of
record by approximately 1,500 shareholders.
We appreciate the confidence our shareholders demonstrated by approving
this merger. We are very excited about the future for FFOH, and we are pleased
to have you with us as we pursue new opportunities.
/s/ John R. Reusing /s/ Robert R. Sudbrook
John R. Reusing Robert R. Sudbrook
Chairman President and Chief Executive Officer
1
<PAGE>
BUSINESS OF THE CORPORATION
Fidelity Financial of Ohio, Inc. (the "Corporation") is an Ohio
corporation which is the holding company for Centennial Bank ("Centennial"). The
Corporation was originally organized by Fidelity Federal Savings Bank (the
"Savings Bank") for the purpose of acquiring all of the capital stock of the
Savings Bank in connection with the conversion of Fidelity Federal Mutual
Holding Company, the former federally chartered, mutual holding company parent
of the Savings Bank, and the reorganization of the Savings Bank to the stock
holding company form, which was completed on March 4, 1996 (the "Conversion and
Reorganization"). The only significant asset of the Corporation is the capital
stock of the Savings Bank.
On September 28, 1998, the Corporation entered into an agreement of
merger with Glenway Financial Corporation ("Glenway") and its wholly-owned
subsidiary Centennial Savings Bank ("Centennial"), which provided for a
merger-of-equals between the Corporation and Glenway, and the Savings Bank and
Centennial. The transaction was consummated on March 19, 1999, and accounted for
using the pooling-of-interests method of accounting.
As a result of the merger, Centennial is an Ohio chartered savings bank
which conducts business through 15 full-service offices located in the
Cincinnati, Ohio metropolitan area. Centennial is primarily engaged in
attracting deposits from the general public through its offices and using those
and other available sources of funds to originate loans secured by single-family
residences located primarily in southwestern Ohio. In addition, Centennial
originates loans secured by existing multi-family residential and
non-residential real estate, as well as commercial, construction and consumer
loans. Centennial also invests in U.S. Government and federal agency obligations
and mortgage-backed securities which are insured by federal agencies.
As a savings and loan holding company, the Corporation is subject to
regulation, supervision and examination by the Office of Thrift Supervision of
the United States Department of the Treasury ("OTS"). Centennial is subject to
regulation and examination by the Ohio Department of Commerce, Division of
Financial Institutions as its chartering authority and primary regulator, and by
the Federal Deposit Insurance Corporation ("FDIC"), which, through the Savings
Association Insurance Fund ("SAIF") administered by it, insures Centennial's
deposits up to applicable limits. Centennial is a member of the Federal Home
Loan Bank ("FHLB") of Cincinnati, which is one of the 12 banks which comprise
the FHLB System. Centennial is further subject to regulations of the Board of
Governors of the Federal Reserve System ("Federal Reserve Board") governing
reserves to be maintained against deposits and certain other matters.
2
<PAGE>
MARKET PRICE OF STOCK AND RELATED INFORMATION
Shares of the Corporation's common stock are traded under the symbol "FFOH"
on the Nasdaq National Market. At March 25, 1999, the Corporation had 9,119,707
shares of common stock outstanding and had approximately 1,472 stockholders of
record. The number of stockholders does not reflect the number of persons or
entities who may hold stock in nominee or "street" name through brokerage firms
or others.
The following table sets forth the reported high and low sales prices of a
share of the Corporation's common stock as reported by Nasdaq National Market.
<TABLE>
<CAPTION>
For the year ended December 31, 1998 High Low
-----------------------------------------------------------------------------
<S> <C> <C>
1998 Sales Prices
Quarter ending December 31, 1998 $14.25 $12.38
Quarter ending September 30, 1998 16.38 11.88
Quarter ending June 30, 1998 19.88 15.19
Quarter ending March 31, 1998 18.25 15.50
For the year ended December 31, 1997 High Low
-----------------------------------------------------------------------------
1997 Sales Prices
Quarter ending December 31, 1997 $16.25 $14.25
Quarter ending September 30, 1997 16.50 14.50
Quarter ending June 30, 1997 15.00 12.38
Quarter ending March 31, 1997 13.75 11.50
</TABLE>
Distributions with respect to the Corporation's common stock for the years
ended December 31, 1998 and 1997 are set forth below.
<TABLE>
<CAPTION>
Cash
For the year ended December 31, 1998 Distributions
----------------------------------------------------------------------
<S> <C>
Quarter ending December 31, 1998 $0.08
Quarter ending September 30, 1998 0.08
Quarter ending June 30, 1998 0.08
Quarter ending March 31, 1998 0.08
Cash
For the year ended December 31, 1997 Distributions
----------------------------------------------------------------------
Quarter ending December 31, 1997 $1.07
Quarter ending September 30, 1997 0.07
Quarter ending June 30, 1997 0.07
Quarter ending March 31, 1997 0.07
</TABLE>
3
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth certain financial and other data of the
Corporation at the date and for the periods indicated. For additional financial
information about the Corporation, reference is made to "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of the Corporation and related notes included
elsewhere herein. For information with respect to the merger of equals with
Glenway, see Note O of the Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
Selected Consolidated Financial Condition Data:
At December 31,
1998 1997 1996 1995 1994
(In thousands)
<S> <C> <C> <C> <C> <C>
Total assets $519,219 $535,100 $499,918 $231,137 $216,168
Federal funds sold and interest-bearing deposits 18,323 27,730 20,489 2,784 1,766
Investment securities available for sale - at market (1) 838 6,020 16,120 6,044 4,267
Mortgage-backed securities available for sale - at market (1) 25,205 25,827 30,760 29,378 6,280
Mortgage-backed securities held to maturity - at cost 29,682 13,527 10,744 - 20,792
Loans receivable - net (2) 419,436 436,852 396,541 185,132 175,222
Goodwill and other intangible assets 6,949 7,628 8,322 - -
Deposits 412,122 432,024 408,159 180,697 173,198
FHLB advances 34,735 34,233 20,186 17,653 12,089
Stockholders' equity, net 67,618 64,274 66,712 30,113 28,540
</TABLE>
<TABLE>
<CAPTION>
Selected Operating Data:
Year Ended December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
(In thousands, except share data)
Total interest income $37,645 $38,151 $22,738 $17,001 $15,748
Total interest expense 22,695 22,562 12,656 10,167 8,331
------ ------ ------ ------ ------
Net interest income 14,950 15,589 10,082 6,834 7,417
Provision for losses on loans 107 101 129 71 44
------ ------ ------ ------ ------
Net interest income after provision for losses on loans 14,843 15,488 9,953 6,763 7,373
Other income 1,474 1,415 165 355 347
General, administrative and other expense (9,204) (9,369) (7,638) (4,385) (4,172)
------ ------ ------ ------ ------
Earnings before income taxes 7,113 7,534 2,480 2,733 3,548
Federal income taxes (2,557) (2,658) (872) (919) (1,176)
------ ------ ------ ------ ------
Net earnings $ 4,556 $ 4,876 $ 1,608 $ 1,814 $ 2,372
====== ====== ====== ====== ======
Earnings per share
Basic $0.84 $0.90 $0.38 $0.45 $0.58
==== ==== ==== ==== ====
Diluted $0.83 $0.89 $0.38 $0.44 $0.58
==== ==== ==== ==== ====
</TABLE>
Footnote explanations on following page.
4
<PAGE>
<TABLE>
<CAPTION>
Selected Operating Ratios (3):
At or for the year ended December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Return on average assets (4) 0.86% 0.94% 0.53% 0.82% 1.14%
Return on average equity (4) 6.89% 7.22% 3.16% 6.17% 8.51%
Dividend payout ratio (4) 34.61% 144.38% 57.90% 29.49% 18.47%
Tangible equity to tangible assets at end of period 11.85% 10.74% 11.88% 13.03% 13.20%
Interest rate spread (5) 2.41% 2.58% 2.59% 2.44% 3.04%
Net interest margin (5) 2.92% 3.11% 3.40% 3.13% 3.63%
Non-performing loans to total loans at end of period (6) 0.42% 0.22% 0.28% 0.54% 0.47%
Non-performing assets to total assets at end of period (6) 0.35% 0.18% 0.23% 0.44% 0.43%
Allowance for loan losses to non-performing loans at
end of period 94.20% 167.81% 137.88% 81.23% 95.71%
Average interest-earning assets to average interest-bearing
liabilities 111.55% 111.88% 118.89% 114.74% 114.49%
General, administrative and other expense to average
total assets (4) 1.73% 1.80% 2.51% 1.97% 2.00%
Full service offices 12 12 10 4 4
</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 the
Notes to Consolidated Financial Statements.
(2) At December 31, 1998, 1997 and 1995, included $236,000, $438,000 and
$646,000 of loans classified as held for sale, respectively.
(3) With the exception of end of period ratios, all ratios are based on average
monthly balances during the period.
(4) Before consideration of non-recurring charges incurred in 1996, including
the SAIF recapitalization assessment and merger related expenses, the
ratios set forth above would have been as follows:
Return on average assets 0.92%
Dividend payout ratio 39.50%
Return on average equity 5.52%
General, administrative and other expense
to average total assets 1.91%
(5) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average rate on
interest-bearing liabilities. Net interest margin represents net interest
income as a percentage of average interest-earning assets.
(6) Non-performing loans consist of non-accrual loans and accruing loans that
are contractually past due 90 days or more, and non-performing assets
consist of non-performing loans and real estate acquired by foreclosure or
deed-in-lieu thereof.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Since its formation, the Corporation's activities have been primarily
limited to holding the stock of the Savings Bank. As a result, the discussion
that follows focuses largely on the operations of the Savings Bank.
The operating results of the Savings Bank depend primarily upon its net
interest income, which is determined by the difference between interest and
dividend income on interest-earning assets, principally loans, mortgage-backed
securities and investment securities, and interest expense on interest-bearing
liabilities, which principally consist of customer deposits and borrowings. The
Savings Bank's net earnings is also affected by its provision for losses on
loans, as well as the level of its other income, including gains and losses on
sales of loans, investment securities and real estate acquired through
foreclosure, rental income and other miscellaneous operating income, and its
general, administrative and other expenses, such as employee compensation and
benefits, occupancy and equipment expense, federal deposit insurance premiums,
franchise taxes and miscellaneous other operating expenses, and federal income
tax expense.
In addition to the historical information contained herein, the
following discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Corporation's operations and actual
results could differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and the Corporation's general market area. The
forward-looking statements contained herein include, but are not limited to,
those with respect to the following matters:
1. Management's analysis of the interest rate risk of the Corporation as set
forth under "Asset and Liability Management;"
2. Management's discussion of the liquidity of the Savings Bank's assets and
the regulatory capital of the Savings Bank as set forth under "Liquidity
and Capital Resources;"
3. Management's determination of the amount and adequacy of the allowance for
loan losses as set forth under "Discussion of Changes in Financial
Condition from December 31, 1997 to December 31, 1998," "Comparison of
Results of Operations for the Fiscal Years Ended December 31, 1998 and
1997" and "Comparison of Results of Operations for the Fiscal Years Ended
December 31, 1997 and 1996;"
4. Management's determination of the effects of the year 2000 on the
Corporation's information technology systems as set forth under "Year 2000
Compliance Issues;" and
5. Management's estimate as to the effects of recent accounting pronouncements
as set forth under "Effects of Recent Accounting Pronouncements".
ASSET AND LIABILITY MANAGEMENT
The Corporation's earnings depend primarily upon its net interest
income, which is the difference between its interest income on interest-earning
assets, such as mortgage loans, investment securities and mortgage-backed
securities, and its interest expense paid on interest-bearing liabilities,
consisting of deposits and borrowings. As market interest rates change, asset
yields and liability costs do not change simultaneously. Due to maturity,
repricing and timing differences between such interest-earning assets and such
interest-bearing liabilities, the Corporation's earnings will be affected
differently under various interest rate scenarios. Management believes that the
steps which have been taken in asset/liability management may reduce the overall
vulnerability of the Corporation to interest rate risk.
6
<PAGE>
The Savings Bank has established an Asset and Liability Management
Committee, which generally meets at least weekly in order to structure and price
the Savings Bank's assets and liabilities so as to maintain an acceptable
interest rate spread while reducing the effects of changes in interest rates.
The Committee reports quarterly to the Board of Directors on interest rate risks
and trends, as well as with respect to the Savings Bank's liquidity and capital
ratios as compared to the respective regulatory requirements.
The Savings Bank's Asset and Liability Management Committee has in
recent periods implemented asset and liability management policies designed to
better match the maturities and repricing terms of the Savings Bank's
interest-earning assets and interest-bearing liabilities in order to minimize
the adverse effects on the Savings Bank's results of operations of material and
prolonged increases in interest rates. The Savings Bank has undertaken a variety
of strategies to reduce its exposure to interest rate fluctuations, including
(i) subject to market conditions, emphasizing the origination and purchase of
adjustable-rate mortgage loans and balloon loans (which amortize over a fifteen
to thirty-year period but are payable at the end of five or seven years); (ii)
continuing to invest excess cash in adjustable-rate and medium-term (primarily
five years or less) mortgage-backed securities; (iii) maintaining high levels of
capital and strong asset quality; (iv) attempting to attract, to the extent
possible, longer-term, fixed-rate deposit accounts; (v) utilization of longer
term FHLB advances; and (vi) the sale of certain long-term fixed-rate mortgage
loans in the secondary market.
As a result of implementing these asset and liability initiatives, at
December 31, 1998, $178.9 million, or 42.6% of the Savings Bank's total loan
portfolio consisted of adjustable-rate or balloon loans. In addition, at
December 31, 1998, $234.5 million, or 45.2% of the Savings Bank's
interest-earning assets consisted of adjustable rate loans or securities,
balloon notes or had scheduled maturities of five years or less.
Management presently monitors and evaluates the potential impact of
interest rate changes upon the market value of the Savings Bank's portfolio
equity and the level of net interest income on a quarterly basis. As a part of
its efforts to monitor its interest rate risk, the Savings Bank reviews the
reports of the OTS which set forth the application of the "net portfolio value"
("NPV") methodology, adopted by the OTS as part of its capital regulations, to
the assets and liabilities of the Savings Bank. Although the Savings Bank is not
currently subject to the NPV regulation, because its implementation has been
delayed by the OTS, the application of the NPV methodology may illustrate the
Savings Bank's level of interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing liabilities. The application of the methodology attempts to
quantify interest rate risk as the change in the NPV which would result from a
theoretical 200 basis point (100 basis points equals 1%) change in market
interest rates. Both a 200 basis point increase in market interest rates and a
200 basis point decrease in market interest rates are considered. If the NPV
would decrease more than 2% of the present value of the institution's assets
with either an increase or a decrease in market rates, the institution would
have to deduct 50% of the amount of the decrease in excess of such 2% in the
calculation of the institution's risk-based capital, if the regulations were in
effect. Even before the regulation is in effect, the OTS could increase the
Savings Bank's risk-based capital requirement on an individualized basis to
address excess interest rate risk.
At December 31, 1998, 2% of the present value of the Savings Bank's
assets was approximately $10.4 million. Because the interest rate risk of a 200
basis point increase in market interest rates (which was greater than the
interest rate risk of a 200 basis point decrease) was $18.3 million at December
31, 1998, the Savings Bank would have been required to deduct $4.0 million (50%
of the $7.9 million difference) from its capital in determining whether the
Savings Bank met its risk-based capital requirement. Despite such reduction,
however, the Savings Bank's risk-based capital at December 31, 1998, would still
have exceeded the regulatory requirement by approximately $33.8 million.
7
<PAGE>
The following tables present the Savings Bank's NPV as of December 31,
1998 and 1997, as calculated by the OTS, based on information provided to the
OTS by the Savings Bank.
<TABLE>
<CAPTION>
Net Portfolio Value
December 31, 1998
Estimated
Change in NPV as a
interest rates Estimated percentage Amount
(basis points) NPV of assets of change Percent
<S> <C> <C> <C> <C>
+300 $36,502 7.54% $(29,148) (44)%
+200 47,336 9.52 (18,314) (28)
+100 57,489 11.27 (8,161) (12)
-- 65,650 12.60 - -
-100 69,663 13.20 4,013 6
-200 72,490 13.58 6,840 10
-300 76,404 14.13 10,754 16
</TABLE>
<TABLE>
<CAPTION>
Net Portfolio Value
December 31, 1997
Estimated
Change in NPV as a
interest rates Estimated percentage Amount
(basis points) NPV of assets of change Percent
<S> <C> <C> <C> <C>
+300 $33,170 6.68% $(29,873) (47)%
+200 44,029 8.63 (19,014) (30)
+100 54,374 10.38 (8,669) (14)
-- 63,043 11.76 - -
-100 68,407 12.56 5,364 9
-200 70,244 12.76 7,201 11
-300 72,449 13.02 9,406 15
</TABLE>
As illustrated in the tables, NPV is more sensitive to rising rates than
declining rates. Such difference in sensitivity occurs principally because, as
rates rise, borrowers do not prepay fixed-rate loans as quickly as they do when
interest rates are declining. Thus, in a rising interest rate environment, the
amount of interest the Savings Bank would receive on its loans would increase
relatively slowly as loans are slowly prepaid and new loans at higher rates are
made. Moreover, the interest the Savings Bank would pay on its deposits would
increase rapidly because the Savings Bank's deposits generally have shorter
periods to repricing. Assumptions used in calculating the amounts in the above
tables are OTS assumptions.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations.
8
<PAGE>
In the event that interest rates rise, the Savings Bank's net interest income
could be expected to be negatively affected. Moreover, rising interest rates
could negatively affect the Savings Bank's earnings due to diminished loan
demand.
CHANGES IN FINANCIAL CONDITION FROM DECEMBER 31, 1997 TO DECEMBER 31, 1998
The Corporation's consolidated total assets amounted to $519.2 million
at December 31, 1998, a decrease of $15.9 million, or 3.0%, from the $535.1
million total at December 31, 1997. This decline in assets was primarily the
result of a strategy put in place by management to allow the outflow of
higher-yielding certificates of deposit in order to lower the Corporation's
funding costs, resulting in a decrease in deposits of $19.9 million and a
decrease in the Corporation's cost of funds from 5.16% at December 31, 1997 to
4.73% at December 31, 1998. The decrease in deposits was partially offset by an
increase in stockholders' equity of $3.3 million.
Cash and cash equivalents, comprised of cash and due from banks,
federal funds sold and interest-bearing deposits in other financial
institutions, amounted to $22.2 million at December 31, 1998, a decrease of $8.3
million, or 27.2%, from the total at December 31, 1997. The decrease in cash and
cash equivalents resulted from the decrease in deposits as discussed above.
Investment securities totaled $838,000 at December 31, 1998, a decrease
of $5.2 million, or 86.1%, from 1997 levels. The decrease was due primarily to
sales and maturities totaling $1.1 million and $5.0 million, respectively, which
were partially offset by purchases totaling $1.0 million. Proceeds from sales of
investment securities were redeployed into purchases of mortgage-backed
securities.
Mortgage-backed securities (including securities classified as
available for sale) totaled $54.9 million at December 31, 1998, an increase of
$15.5 million, or 39.5%, over the total at December 31, 1997. The increase in
mortgage-backed securities was due primarily to purchases of $35.5 million,
which were partially offset by principal repayments of $19.6 million. Purchases
of mortgage-backed securities during 1998 consisted of $26.3 million of
fixed-rate securities and $9.2 million of adjustable-rate securities. These
purchases were funded primarily by loan repayments, excess liquidity and
proceeds from the maturity of investment securities.
Loans receivable (including loans held for sale) decreased by $17.4
million, or 4.0%, to a total of $419.4 million at December 31, 1998, as compared
to $436.9 million at December 31, 1997. The decrease resulted primarily from
loan repayments of $141.2 million and sales of $18.7 million, which exceeded
loan disbursements and purchases totaling $143.3 million. Loan originations and
purchases during 1998 increased by $11.5 million, or 8.7%, over 1997 totals. The
Savings Bank's loan originations during 1998 were primarily comprised of one- to
four-family and multi-family loans, which totaled $105.0 million, or 74.3%, of
total loan originations.
The Savings Bank's allowance for loan losses totaled $1.7 million at
December 31, 1998, an increase of $45,000, or 2.7%, over the total at December
31, 1997. The allowance represented .40% and .37% of total loans at December 31,
1998 and 1997, respectively, and 94.2% and 167.8% of nonperforming loans, which
totaled $1.8 million and $1.0 million at those respective dates. While
management believes the Savings Bank's allowance for loan losses is adequate at
December 31, 1998, based upon the available facts and circumstances, there can
be no assurance that additions to the allowance will not be necessary in future
periods, which could adversely affect future operating results.
Deposits totaled $412.1 million at December 31, 1998, a decrease of
$19.9 million, or 4.6%, from December 31, 1997. Deposits subject to daily
repricing totaled $94.5 million, or 22.9% of total deposits at December 31,
1998, as compared to 21.2% of total deposits at December 31, 1997. Certificates
of deposit totaled $317.6 million, or 77.1% of total deposits at December 31,
1998, as compared to 78.8% at December 31, 1997. Certificates of deposits
decreased $23.0 million, or 6.7%, as a result of management's strategy to allow
the outflow of higher-yielding certificates in order to reduce the Corporation's
funding cost.
9
<PAGE>
Advances from the Federal Home Loan Bank ("FHLB") totaled $34.7 million
at December 31, 1998, an increase of $502,000, or 1.5%, over December 31, 1997.
The increase resulted primarily from $13.0 million in borrowings during 1998,
which were partially offset by repayments of $12.5 million.
Stockholders' equity totaled $67.6 million at December 31, 1998, an
increase of $3.3 million, or 5.2%, over the total at December 31, 1997. The
increase resulted primarily from net earnings of $4.6 million which was
partially offset by distributions paid on common stock totaling $1.6 million
during the year.
10
<PAGE>
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,
1998 (1) 1997 1996
-------------------------- ----------------------------- ----------------------------
Average Interest Average Average Interest Average Average Interest Average
standing earned/ yield/ outstanding earned/ yield/ outstanding earned/ yield/
balance paid rate balance paid rate balance paid rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable (2) $426,420 $32,413 7.60% $427,912 $33,433 7.81% $234,133 $18,872 8.06%
Mortgage-backed securities (3) 55,490 3,464 6.24 40,245 2,651 6.59 32,263 2,103 6.52
Investment securities (3) 3,556 250 7.03 15,082 1,006 6.67 13,087 833 6.37
Other interest-earning assets 26,744 1,518 5.68 18,318 1,061 5.79 16,896 930 5.50
------- ------ ------ ------- ------ ------ -------- ------ -----
Total interest-earning assets 512,210 37,645 7.35 501,557 38,151 7.61 296,379 22,738 7.67
Non-interest earning assets 19,523 19,902 8,377
------- ------- -------
Total assets $531,733 $521,459 $304,756
======= ======= =======
Interest-bearing liabilities:
Deposits:
NOW accounts 28,095 270 0.96 $ 22,184 $ 322 1.45 $ 14,100 $ 280 1.99
Passbook and club accounts 38,164 688 1.80 42,712 859 2.01 23,673 516 2.18
Money market deposit accounts 25,993 769 2.96 24,839 796 3.20 13,198 415 3.14
Certificate of deposit accounts 327,545 18,574 5.67 332,370 18,946 5.70 180,521 10,343 5.73
Borrowings (4) 39,378 2,394 6.08 26,208 1,639 6.25 17,794 1,102 6.19
------- ------ ------ ------- ------ ------ ------- ------ -----
Total interest-bearing liabilities 459,175 22,695 4.94 448,313 22,562 5.03 249,286 12,656 5.08
------ ------ ------
Non-interest-bearing liabilities 6,448 5,590 4,612
------- ------- -------
Total liabilities 465,623 453,903 253,898
Stockholders' equity 66,110 67,556 50,858
------- ------- -------
Total liabilities and stockholders'
equity $531,733 $521,459 $304,756
======= ======= =======
Net interest income/interest rate spread $14,950 2.41% $15,589 2.58% $10,082 2.59%
====== ====== ====== ====== ====== =====
Net interest margin (5) 2.92% 3.11% 3.40%
====== ====== =====
Average interest-earning assets to average
interest-bearing liabilities 111.55% 111.88% 118.89%
====== ====== ======
</TABLE>
- -----------------------------------
(1) At December 31, 1998, the yields earned and rates paid were as follows:
loans receivable, 7.57%; mortgage-backed securities, 6.32%; investment
securities, 6.15%; other interest-earning assets, 5.14%; total
interest-earning assets, 7.31%; deposits, 4.62%; borrowings, 6.02%; total
interest-bearing liabilities, 4.73%; interest rate spread, 2.58%.
(2) Includes loans classified as held for sale.
(3) Includes mortgage-backed and investment securities classified as available
for sale.
(4) Includes FHLB advances and a loan from a third-party financial institution
to the Savings Bank's Employee Stock Ownership Plan for the year ended
December 31, 1996.
(5) Net interest margin is net interest income divided by average
interest-earning assets.
11
<PAGE>
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,
1998 vs. 1997 1997 vs. 1996
------------------------------------ -----------------------------------
Increase Total Increase Total
(decrease) due to increase (decrease) due to increase
Rate Volume (decrease) Rate Volume (decrease)
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ (902) $(118) $(1,020) $(658) $15,219 $14,561
Mortgage-backed and related
securities (147) 960 813 23 525 548
Investment securities and
interest-earning deposits and other (111) (188) (299) 92 212 304
------ ---- ------ ---- ------ ------
Total $(1,019) $ 513 (506) $(543) $15,956 15,413
====== ==== ==== ======
Interest-bearing liabilities:
Deposits $ (506) $(116) (622) $(185) $ 9,554 9,369
Borrowings (47) 802 755 11 526 537
------ ---- ------- ----- ------ ------
Total $ (553) $ 686 (133) $(174) $10,080 9,906
====== ==== ------- ==== ====== ------
Increase (decrease) in net interest income $ (639) $ 5,507
======= ======
</TABLE>
12
<PAGE>
Comparison of Results of Operations for the Years Ended December 31, 1998 and
1997
Net earnings amounted to $4.6 million for the year ended December 31,
1998, a decrease of $320,000, or 6.6%, from the $4.9 million in net earnings
recorded in 1997. The decrease in net earnings resulted primarily from a
$639,000 decrease in net interest income, which was partially offset by a
$59,000 increase in other income, a $165,000 decrease in general, administrative
and other expense and a $101,000 decrease in the provision for federal income
taxes.
Net interest income totaled $15.0 million for the year ended December
31, 1998, a decrease of $639,000, or 4.1%, as compared to 1997. Total interest
income decreased by $506,000, or 1.3%, for the year ended December 31, 1998, as
compared to 1997. Interest income on loans decreased by $1.0 million, or 3.1%,
due primarily to a 21 basis point decline in the weighted-average yield, from
7.81% in 1997 to 7.60% in 1998, coupled with a $1.5 million decrease in the
average balance outstanding year to year. Interest income on mortgage-backed
securities increased by $813,000, or 30.7%, due primarily to a $15.2 million, or
37.9%, increase in the average balance outstanding year to year, which was
partially offset by a 35 basis point decline in the weighted-average yield, from
6.59% in 1997 to 6.24% in 1998. Interest income on investment securities and
interest-bearing deposits decreased by $299,000, or 14.5%, during 1998 due
primarily to a $3.1 million, or 9.3%, decrease in the average balance
outstanding, coupled with a 36 basis point decrease in the average yield, to
5.83% during 1998. The decrease in the average balance of investments reflected
the Corporation's utilization of the proceeds from sales of investment
securities to fund the purchase of higher yielding mortgage-backed securities.
Interest expense on deposits decreased by $622,000, or 3.0%, for the
year ended December 31, 1998, as compared to 1997. The decrease was due
primarily to a 12 basis point decline in the average cost of deposits, to 4.84%
for the year ended December 31, 1998, as compared to 4.96% for 1997, coupled
with a $2.3 million decrease in the average balance outstanding from year to
year. The decline in the average balance of deposits and the weighted average
rate paid thereon reflected management's strategy to allow the outflow of
higher-yielding certificates in order to reduce the Corporation's funding cost.
Interest expense on borrowings increased by $755,000, or 46.1%, due to a $13.2
million increase in the average balance of outstanding borrowings during 1998,
which was partially offset by a 17 basis point decrease in the weighted-average
cost of borrowings, to a rate of 6.08% for 1998.
As a result of the foregoing changes in interest income and interest
expense, net interest income decreased by $639,000, or 4.1%, for the year ended
December 31, 1998 as compared to 1997. The interest rate spread amounted to
2.41% during 1998 and 2.58% in 1997, while the net interest margin declined to
2.92% from 3.11% for the years ended December 31, 1998 and 1997, respectively.
A provision for losses on loans is charged to earnings to bring the
total allowance for loan losses to a level considered appropriate by management
based on historical experience, the volume and type of lending conducted by the
Savings Bank, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Savings
Bank's market area, and other factors related to the collectibility of the
Savings Bank's loan portfolio. As a result of such analysis, management recorded
a $107,000 provision for losses on loans during the year ended December 31,
1998, an increase of $6,000 from the amount recorded in 1997. The provision for
1998 was predicated upon an increase in nonperforming loans year to year, from
$1.0 million at December 31, 1997 to $1.8 million at December 31, 1998, coupled
with an increase in loan charge-offs during 1998 to $62,000. Nonperforming loans
and loans charged-off primarily relate to loans secured by one- to four-family
residential real estate. It is management's opinion that such nonperforming
loans at December 31, 1998 was adequately collateralized. In addition, the
largest loan classified as nonperforming at December 31, 1998, totaling
$430,000, was brought current by the borrower in 1999. There can be no assurance
that the allowance for loan losses of the Savings Bank will be adequate to cover
losses on nonperforming assets in the future.
13
<PAGE>
Other income increased by $59,000, or 4.2%, to a total of $1.5 million
for the year ended December 31, 1998, as compared to $1.4 million in 1997. The
increase was due primarily to a $143,000 increase in gains on sale of real
estate and real estate acquired through foreclosure, coupled with a $90,000
increase on gain on sale of loans and a $40,000 increase in other operating
income, which consisted primarily of service charges and fees, which were
partially offset by a $205,000 decrease in gains on sale of securities year to
year.
General, administrative and other expense totaled $9.2 million for the
year ended December 31, 1998, a decrease of $165,000, or 1.8%, as compared to
1997. The decrease resulted primarily from a $336,000, or 8.1%, decrease in
employee compensation and benefits, and a $15,000, or 2.2%, decrease in
amortization of goodwill and other intangible assets, which were partially
offset by a $77,000, or 5.2%, increase in occupancy and equipment, a $49,000, or
6.5%, increase in franchise taxes, a $27,000, or 5.7%, increase in data
processing and a $31,000, or 1.9%, increase in other operating expense.
The decrease in employee compensation and benefits resulted primarily
from an increase in deferred loan origination costs associated with the increase
in loan volume year to year. The increase in occupancy and equipment expense
resulted primarily from a $64,000 increase in depreciation expense due to the
purchase of new computer equipment. The increase in franchise taxes resulted
from the increase in equity. The increase in data processing represented a cost
of living increase coupled with an increase related to greater transaction
volume. The small increase in other operating expense reflects management's
continuing efforts to control such operating costs.
The provision for federal income taxes totaled $2.6 million for the
year ended December 31, 1998, a decrease of $101,000, or 3.8%, from the
provision recorded in 1997. The decrease resulted primarily from a $421,000, or
5.6%, decrease in pretax earnings year to year. The Corporation's effective tax
rates were 35.9% and 35.3% for the years ended December 31, 1998 and 1997,
respectively.
Comparison of Results of Operations for the Years Ended December 31, 1997 and
1996
Net earnings amounted to $4.9 million for the year ended December 31,
1997, an increase of $3.3 million, or 203%, over the $1.6 million in net
earnings recorded in 1996. The increase in net earnings resulted primarily from
a $5.5 million increase in net interest income and a $1.3 million increase in
other income, which were partially offset by a $1.7 million increase in general,
administrative and other expense and a $1.8 million increase in the provision
for federal income taxes. The increases in overall income and expense components
for the year ended December 31, 1997, as compared to the year ended December 31,
1996, generally reflect the effects of a full year of combined operations
following the merger of Circle Financial Corporation ("Circle") which was
consummated on October 11, 1996. The merger was accounted for using the purchase
method of accounting, which does not provide for a restatement of prior period
results of operations to give effect to the combination.
The increase in net earnings also resulted from a non-recurring
$749,000 after-tax charge for the FDIC special assessment to recapitalize the
Savings Association Insurance Fund ("SAIF"), in accordance with the legislation
enacted into law on September 30, 1996. In addition, the increase in earnings
also resulted from two non-recurring events related to the merger of Circle: a
$196,000 after-tax loss on the sale of investment and mortgage-backed securities
incurred as a result of restructuring Circle's portfolio and after-tax
restructuring expenses of approximately $450,000 incurred relating to employee
compensation and benefits, occupancy and equipment, and general, administrative
and other expenses. Absent the special assessment and merger related expenses,
net earnings for the year ended December 31, 1996, would have been approximately
$3.0 million.
14
<PAGE>
Net interest income totaled $15.6 million for the year ended December
31, 1997, an increase of $5.5 million, or 54.6%, over 1996. Interest income
increased by $15.4 million, or 67.8%, for the year ended December 31, 1997, as
compared to 1996. Interest income on loans and mortgage-backed securities
increased by $15.1 million, or 72.0%, due primarily to a $201.8 million, or
75.7%, increase in the average balance outstanding year to year, which was
partially offset by a 16 basis point decline in the weighted-average yield, from
7.87% in 1996 to 7.71% in 1997. Interest income on investment securities and
interest-bearing deposits increased by $304,000, or 17.2%, during 1997 due
primarily to a $3.4 million, or 11.4%, increase in the average balance
outstanding, coupled with a 31 basis point increase in the average yield, to
6.19% during 1997.
Interest expense on deposits increased by $9.4 million, or 81.1%, for
the year ended December 31, 1997, as compared to 1996. The increase was due
primarily to a $190.6 million, or 82.3%, increase in the average balance
outstanding, which was partially offset by a 3 basis point decline in the
average cost of deposits, to 4.96% for the year ended December 31, 1997, as
compared to 4.99% for 1996. Interest expense on borrowings increased by
$537,000, or 48.7%, due to an $8.4 million increase in the average balance of
outstanding borrowings during 1997, coupled with a 6 basis point increase in the
weighted-average cost of borrowings, to a rate of 6.25% for 1997.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $5.5 million, or 54.6%, for the year
ended December 31, 1997 as compared to 1996. The interest rate spread amounted
to 2.58% during 1997 and 2.59% in 1996, while the net interest margin declined
to 3.11% from 3.40% for the years ended December 31, 1997 and 1996,
respectively.
A provision for losses on loans is charged to earnings to bring the
total allowance for loan losses to a level considered appropriate by management
based on historical experience, the volume and type of lending conducted by the
Savings Bank, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Savings
Bank's market area, and other factors related to the collectibility of the
Savings Bank's loan portfolio. As a result of such analysis, management recorded
a $101,000 provision for losses on loans during the year ended December 31,
1997, a decrease of $28,000 from the amount recorded in 1996.
Other income increased by $1.2 million to a total of $1.4 million for
the year ended December 31, 1997, as compared to $165,000 in 1996. The increase
was due primarily to a $562,000 increase in gains on sales of investment and
mortgage-backed securities, coupled with a $39,000, or 23.2%, increase in rental
income and a $610,000 increase in other operating income, which consisted
primarily of service charges and fees directly related to the increase in
transaction accounts as a result of the merger with Circle.
General, administrative and other expense totaled $9.4 million for the
year ended December 31, 1997, an increase of $1.7 million, or 22.7%, over the
1996 total. The increase resulted primarily from a $1.0 million, or 32.1%,
increase in employee compensation and benefits, a $624,000, or 73.2%, increase
in occupancy and equipment, a $230,000, or 44.1%, increase in franchise taxes, a
$551,000 increase in amortization of goodwill and other intangible assets, a
$208,000, or 77.6%, increase in data processing and a $457,000, or 40.3%,
increase in other operating expenses, all of which were partially offset by a
$1.3 million, or 84.0%, decrease in federal deposit insurance premiums. The
decrease in federal deposit insurance premiums resulted from the $1.1 million
one-time pre-tax charge recorded in 1996 to recapitalize the SAIF, coupled with
the corresponding decline in premium rates in 1997.
The increase in employee compensation and benefits resulted primarily
from an increase in staffing levels due to the merger with Circle. The increase
in amortization of goodwill and other intangible assets was due to goodwill
recorded as a result of the merger with Circle.
15
<PAGE>
Increases in occupancy and equipment, franchise taxes, data processing
and other operating expenses generally resulted from the effects of the merger
with Circle, which was consummated in 1996. As previously discussed, operating
expenses reflect the increased size of the Corporation, as compared to the prior
year.
The provision for federal income taxes totaled $2.7 million for the
year ended December 31, 1997, an increase of $1.8 million, or 205%, over the
provision recorded in 1996. The increase resulted primarily from a $5.1 million,
or 204%, increase in pretax earnings year to year. The Corporation's effective
tax rates were 35.3% and 35.2% for the years ended December 31, 1997 and 1996,
respectively.
Liquidity and Capital Resources
The Savings Bank is required under applicable federal regulations to
maintain specified levels of "liquid" investments in qualifying types of United
States Government and government agency obligations and other similar
investments. Such investments are intended to provide a source of relatively
liquid funds upon which the Savings Bank may rely if necessary to fund deposit
withdrawals and for other short-term funding needs. The required level of such
liquid investments is currently 4% of certain liabilities as defined by the OTS
and is changed from time to time to reflect economic conditions.
The liquidity of the Savings Bank, as measured by the ratio of cash,
cash equivalents, (not committed, pledged or required to liquidate specific
liabilities), investment and qualifying mortgage-backed securities to the sum of
withdrawable deposit accounts and borrowings payable on demand or with unexpired
maturities of one year or less, was 15.9% at December 31, 1998. At December 31,
1998 the Savings Bank's "liquid" assets totaled approximately $56.4 million,
which was $42.2 million in excess of the current OTS minimum requirement.
The Savings Bank's liquidity, represented by cash and cash equivalents,
is a product of its operating, investing and financing activities. The Savings
Bank's primary sources of funds are deposits, borrowings, amortization,
prepayments and maturities of outstanding loans and mortgage-backed securities,
maturities of investment and mortgage-backed securities and other short-term
investments, sales of loans and investment and mortgage-backed securities and
funds provided from operations. While scheduled loan and mortgage-backed
securities amortization and maturing investment securities and short-term
investments are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Savings Bank manages the pricing of its deposits
to maintain a steady deposit balance. In addition, the Savings Bank invests
excess funds in overnight deposits and other short-term interest-earning assets
which provides liquidity to meet lending requirements. The Savings Bank
generates cash through the retail deposit market and, to the extent deemed
necessary, utilizes borrowings for liquidity purposes (primarily consisting of
advances from the FHLB of Cincinnati). At December 31, 1998, the Savings Bank
had $34.7 million of outstanding advances from the FHLB of Cincinnati.
Furthermore, the Savings Bank has access to the Federal Reserve Bank discount
window.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, the Savings Bank maintains a
strategy of investing in various loans, mortgage-backed securities and
investment securities. The Savings Bank uses its sources of funds primarily to
meet its ongoing commitments, to pay maturing savings certificates and savings
withdrawals, fund loan commitments and maintain a portfolio of investment and
mortgage-backed securities. At December 31, 1998, the total approved loan
commitments outstanding amounted to $14.0 million. At the same date, commitments
under unused lines of credit secured by one- to four-family residential property
amounted to $4.7 million, commitments under unused lines of credit secured by
multi-family, non-residential real estate and commercial loans totaled $7.2
million and the unadvanced portion of construction loans approximated $9.2
million. The Savings Bank also has outstanding commitments of $196,000 to
purchase and $1.1 million to sell nonresidential real estate loans as of
December 31, 1998.
16
<PAGE>
Certificates of deposit scheduled to mature in one year or less at
December 31, 1998, totaled $254.3 million. The Savings Bank believes that it has
adequate resources to fund all of its commitments and that it can adjust the
rate of certificates of deposit in order to retain deposits in changing interest
rate environments.
The Savings Bank is subject to minimum capital standards promulgated by
the OTS. Such capital standards generally require the maintenance of regulatory
capital sufficient to meet each of the following three requirements: a tangible
capital requirement, a core capital requirement and a risk-based capital
requirement. At December 31, 1998, the Savings Bank's tangible and core capital
amounted to $58.5 million, or 11.4%, of total adjusted assets, which exceeded
the minimum requirements of 1.5% and 3.0% at that date by approximately $50.9
million and $43.2 million, or 9.9% and 8.4% of adjusted total assets,
respectively. The Savings Bank's risk-based capital totaled $60.3 million at
December 31, 1998, or 21.5% of risk-weighted assets, which exceeded the current
requirement of 8% of risk-weighted assets by approximately $37.8 million, or
13.5% of risk-weighted assets.
The OTS has amended the core capital requirement and increased the
minimum requirement to 4% of adjusted total assets for all but the most
highly-rated savings associations. Management anticipates no material change to
the Savings Bank's excess regulatory capital position.
Effect of Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", that provides accounting guidance on transfers of financial
assets, servicing of financial assets, and extinguishment of liabilities. SFAS
No. 125 introduces an approach to accounting for transfers of financial assets
that provides a means of dealing with more complex transactions in which the
seller disposes of only a partial interest in the assets, retains rights or
obligations, makes use of special purpose entities in the transaction, or
otherwise has continuing involvement with the transferred assets. The new
accounting method, referred to as the financial components approach, provides
that the carrying amount of the financial assets transferred be allocated to
components of the transaction based on their relative fair values. SFAS No. 125
provides criteria for determining whether control of assets has been
relinquished and whether a sale has occurred. If the transfer does not qualify
as a sale, it is accounted for as a secured borrowing. Transactions subject to
the provisions of SFAS No. 125 include, among others, transfers involving
repurchase agreements, securitizations of financial assets, loan participations,
factoring arrangements, and transfers of receivables with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or liability
that is purchased or assumed is initially recognized at its fair value.
Servicing assets and liabilities are amortized in proportion to and over the
period of estimated net servicing income or net servicing loss and are subject
to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance
sheet only if the debtor either pays the creditor and is relieved of its
obligation for the liability or is legally released from being the primary
obligor.
SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1997, and
is to be applied prospectively. Earlier or retroactive application is not
permitted. Management adopted SFAS No. 125 effective January 1, 1998, as
required, without material effect on the Corporation's consolidated financial
position or results of operations.
17
<PAGE>
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. It does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
Management adopted SFAS No. 130 effective January 1, 1998, as required, without
material impact on the Corporation's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 significantly changes
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about reportable segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 uses a "management approach" to disclose financial and descriptive
information about the way that management organizes the segments within the
enterprise for making operating decisions and assessing performance. For many
enterprises, the management approach will likely result in more segments being
reported. In addition, SFAS No. 131 requires significantly more information to
be disclosed for each reportable segment than is presently being reported in
annual financial statements and also requires that selected information be
reported in interim financial statements. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Management adopted SFAS No. 131
effective January 1, 1998, as required, without material impact on the
Corporation's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
The definition of a derivative financial instrument is complex, but in
general, it is an instrument with one or more underlyings, such as an interest
rate or foreign exchange rate, that is applied to a notional amount, such as an
amount of currency, to determine the settlement amount(s). It generally requires
no significant initial investment and can be settled net or by delivery of an
asset that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. On adoption, entities are permitted to transfer held-to-maturity debt
securities to the available-for-sale or trading category without calling into
question their intent to hold other debt securities to maturity in the future.
SFAS No. 133 is not expected to have a material impact on the Corporation's
financial position or results of operations.
The foregoing discussion of the effects of recent accounting
pronouncements contains forward-looking statements that involve risks and
uncertainties. Changes in economic circumstances, interest rates or the balance
of loan servicing rights sold and retained by the Savings Bank could cause the
effects of the accounting pronouncements to differ from management's foregoing
assessment.
18
<PAGE>
Impact of Inflation and Changing Prices
The consolidated financial statements of the Corporation and related
consolidated financial data presented herein have been prepared in accordance
with generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Corporation's operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Corporation are monetary in nature. As a result,
interest rates have a greater impact on the Corporation's performance than do
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
Year 2000 Compliance Matters
The Year 2000 (or Y2K) issue is a serious operational problem which is
widespread and complex, affecting all industries. The Federal Financial
Institution Examination Council (the "FFIEC"), representing the views of each of
the primary financial institution regulators, has focused on the risk that
programming codes in existing computer systems may fail to properly recognize
the new millennium when it occurs in the year 2000. The Savings Bank has
addressed the potential problems associated with the possibility that the
computers which control or operate the Corporation's operating systems may not
be programmed to read four-digit date codes and, upon arrival of the year 2000,
may recognize the two-digit code "00" as the year 1900, causing systems to fail
to function or to generate erroneous data. Other concerns have been raised
regarding February 29, 2000, as well as September 9, 1999, which are new
calculation challenges that may result in further problems.
During 1997, the Savings Bank had identified a Year 2000 compliance
committee, which has worked throughout 1998 to develop and implement a Year 2000
action plan in accordance with the guidelines established by the FFIEC. The
committee had substantially completed all phases of the action plan during 1998,
including Year 2000 awareness, assessment, renovation and implementation, and
validation and testing.
During 1998 the Savings Bank's internal hardware and software had been
upgraded in accordance with the Savings Bank's normal course of operations. Most
of the computer equipment replaced was fully depreciated and upgrades would have
been necessary in the near future. To date, the cost incurred has been
approximately $325,000. This cost has been capitalized and will be amortized
over a three year period.
On September 28, 1998, the Corporation entered into an agreement of
merger with Glenway and its wholly-owned subsidiary Centennial, which provided
for a merger-of-equals between the Corporation and Glenway, and the Savings Bank
and Centennial. The transaction was consummated on March 19, 1999.
In connection with the merger, the Savings Bank was merged with and
into Centennial. As a result, the discussion that follows will focus on
Centennial's progress on the Year 2000 issue.
Centennial has been working for the last several years to resolve the
potential impact of Year 2000 on the ability of the computerized information
system to accurately process information that may be date sensitive. It may also
affect the operations of third parties with which Centennial does business,
including the vendors, suppliers, utility companies, and customers. Centennial's
Year 2000 compliance plan has five phases. These phases are (1) project
19
<PAGE>
management and awareness, (2) assessment, (3) renovation and implementation, (4)
validation and testing, and (5) development of a contingency plan. Centennial
has substantially completed phases one through four with respect to the core
application systems related to deposit and loan processing, although appropriate
follow-up activities continue to occur. Centennial is proceeding with additional
testing of ancillary processes, including system interfaces, and implementation
phases of the Y2K Plan.
Project Management and Awareness
Centennial has assigned primary responsibility for Year 2000 project
management to its Chief Operations Officer. Several projects have been
designed to promote awareness of Year 2000 issues throughout Centennial
and the customer base. These procedures include providing information
brochures to deposit and loan customers, training internal staff, and
responding to customer, vendor and shareholder inquiries.
Assessment
Assessment is the process of identifying all mission critical
applications that could potentially be impacted by the Year 2000.
Centennial's assessment phase is complete. The scope of this
examination included core-processing applications for loans and
deposits, telecommunications systems, vendor supplied software, PC
hardware and firmware, and other software and hardware used in daily
operations.
Centennial's operations are dependent upon vendors of both computer
hardware and computer software for most applications. Centennial has
identified and contacted those vendors to receive Year 2000 compliance
assurance from its primary mission critical vendors, and is continuing
to monitor the progress/status of each.
Centennial's main core processing application (loans and deposits) is
processed on Data Communications, Inc. ("DCI") in-house client server
software. Centennial converted to DCI in 1998. All screens and reports
show 4-digit fields, and DCI has tested internal programming codes to
ensure Y2K compliance.
Validation and Testing
Centennial participated with DCI in testing for Y2K compliance. DCI's
validation and testing was completed by December 31, 1998. Centennial
staff monitored DCI testing and certification progress by review of DCI
Y2K update documentation, which has been provided to DCI users, and via
contact with designated DCI Y2K project and executive staff. Internal
testing by Centennial staff was completed using actual databases which
were future-dated to validate FFIEC Y2K test dates recommended. No
system errors were found.
Renovation and Implementation
This phase involves obtaining and implementing renovated software
applications provided by vendors. As these applications are received
and implemented, Centennial will test them for Year 2000 compliance as
noted above. This phase also involves upgrading and replacing software
and hardware where appropriate and should be substantially complete by
the end of March 1999.
Centennial's anticipated direct expenses are less than $50,000,
primarily for Y2K upgrades to existing user PC's. Additional expense
could be incurred if PC's, ATM's, and phone systems require further
modifications. This expense would be capitalized and depreciated over
differing periods resulting in an immaterial effect to the
Corporation's financial statements.
20
<PAGE>
Contingency Plan
Contingency planning will include assessment of account off-line
procedures, staffing requirements, security, cash needs, etc. The plan
will consider the resources needed and available to resume normal
operations following a disaster.
Centennial and DCI are on schedule to meet Y2K project dates set forth
by the FFIEC for remediation testing and contingency planning. Bank
management believes that all other mission critical systems and
hardware will be Year 2000 ready by June 30, 1999. Contingency plans
will be made for elements outside of management's control or ability to
test, such as power, water or telephone failure, which could affect
operations.
21
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Fidelity Financial of Ohio, Inc.
We have audited the accompanying consolidated statements of financial condition
of Fidelity Financial of Ohio, Inc. as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, comprehensive income, stockholders'
equity, and cash flows for each of the three years ended December 31, 1998, 1997
and 1996. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Fidelity Financial
of Ohio, Inc. as of December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years ended December 31,
1998, 1997 and 1996, in conformity with generally accepted accounting
principles.
/s/GRANT THORNTON LLP
Cincinnati, Ohio
February 10, 1999
22
<PAGE>
<TABLE>
Fidelity Financial of Ohio, Inc.
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands, except share data)
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 3,898 $ 2,801
Federal funds sold 17,619 22,646
Interest-bearing deposits in other financial institutions 704 5,084
------- -------
Cash and cash equivalents 22,221 30,531
Investment securities available for sale - at market 838 6,020
Mortgage-backed securities available for sale - at market 25,205 25,827
Mortgage-backed securities held to maturity - at cost, approximate market value
of $29,728 and $13,706 at December 31, 1998 and
1997, respectively 29,682 13,527
Loans receivable - net 419,200 436,414
Loans held for sale - at lower of cost or market 236 438
Office premises and equipment - at depreciated cost 7,186 7,462
Real estate acquired through foreclosure 32 -
Federal Home Loan Bank stock - at cost 4,464 4,157
Accrued interest receivable on loans 2,046 2,110
Accrued interest receivable on mortgage-backed securities 318 245
Accrued interest receivable on investments 21 132
Prepaid expenses and other assets 483 289
Goodwill and other intangible assets, net of accumulated amortization 6,949 7,628
Prepaid federal income taxes 338 320
------- -------
Total assets $519,219 $535,100
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $412,122 $432,024
Advances from the Federal Home Loan Bank 34,735 34,233
Advances by borrowers for taxes and insurance 2,426 2,134
Accrued interest and other liabilities 1,519 1,826
Deferred federal income taxes 799 609
------- -------
Total liabilities 451,601 470,826
Commitments - -
Stockholders' equity
Preferred stock - authorized, 5,000,000 shares at $.10 par value; none issued - -
Common stock - authorized, 15,000,000 shares at $.10 par value; 5,613,107
and 5,593,969 issued at December 31, 1998 and 1997 561 559
Additional paid-in capital 41,824 41,548
Retained earnings - restricted 27,126 24,147
Less shares acquired by Employee Stock Ownership Plan (ESOP) (1,633) (1,785)
Less shares of common stock held in treasury - at cost - (20)
Less shares acquired by Management Recognition Plan (MRP) (234) (292)
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects (26) 117
------- -------
Total stockholders' equity 67,618 64,274
------- -------
Total liabilities and stockholders' equity $519,219 $535,100
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
<TABLE>
Fidelity Financial of Ohio, Inc.
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
For the year ended December 31,
(In thousands, except share data)
1998 1997 1996
<S> <C> <C> <C>
Interest income
Loans $32,413 $33,433 $18,872
Mortgage-backed securities 3,464 2,651 2,103
Investment securities 250 1,006 833
Interest-bearing deposits and other 1,518 1,061 930
------ ------ ------
Total interest income 37,645 38,151 22,738
Interest expense
Deposits 20,301 20,923 11,554
Borrowings 2,394 1,639 1,102
------ ------ ------
Total interest expense 22,695 22,562 12,656
------ ------ ------
Net interest income 14,950 15,589 10,082
Provision for losses on loans 107 101 129
------ ------ ------
Net interest income after provision for losses on loans 14,843 15,488 9,953
Other income
Gain (loss) on sale of investment and mortgage-backed securities 62 267 (295)
Gain on sale of loans 126 36 3
Gain on sale of real estate 141 6 -
Gain on sale of real estate acquired through foreclosure 8 - -
Rental 198 207 168
Other operating 939 899 289
------ ------ ------
Total other income 1,474 1,415 165
General, administrative and other expense
Employee compensation and benefits 3,789 4,125 3,122
Occupancy and equipment 1,554 1,477 853
Federal deposit insurance premiums 258 256 1,598
Franchise taxes 800 751 521
Amortization of goodwill and other intangible assets 679 694 143
Data processing 503 476 268
Other operating 1,621 1,590 1,133
------ ------ ------
Total general, administrative and other expense 9,204 9,369 7,638
------ ------ ------
Earnings before income taxes 7,113 7,534 2,480
Federal income taxes
Current 2,292 2,177 916
Deferred 265 481 (44)
------ ------ ------
Total federal income taxes 2,557 2,658 872
------ ------ ------
NET EARNINGS $ 4,556 $ 4,876 $ 1,608
====== ====== ======
EARNINGS PER SHARE
Basic $.84 $.90 $.38
=== === ===
Diluted $.83 $.89 $.38
=== === ===
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE>
<TABLE>
Fidelity Financial of Ohio, Inc.
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31,
(In thousands)
1998 1997 1996
<S> <C> <C> <C>
Net earnings $4,556 $4,876 $1,608
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
designated as available for sale, net of tax of $53,
$62 and $18 in 1998, 1997 and 1996, respectively (102) 121 34
Reclassification adjustment for (gains) losses included
in net earnings, net of tax of $21, $91 and $100 in
1998, 1997 and 1996, respectively (41) (176) 195
----- ----- -----
Comprehensive income $4,413 $4,821 $1,837
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE>
<TABLE>
<CAPTION>
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY For the years ended December 31, 1998, 1997 and 1996
(In thousands, except share data)
Unrealized
gains
(losses) on
Additional Shares Shares securities
Common paid-in Retained Treasury acquired acquired available
stock capital earnings stock by ESOP by MRP for sale Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $181 $ 4,848 $25,497 $ - $ (336) $ (20) $ (57) $30,113
Net earnings for the year ended December 31, 1996 - - 1,608 - - - - 1,608
Proceeds from issuance of common stock 226 21,893 137 - (1,822) - - 20,434
Issuance of shares in connection with merger 151 14,792 - - - - - 14,943
Exercise of 6,750 stock options 1 32 - - - - - 33
Principal payments on loans to ESOP/amortization of
expense related to employee stock benefit plans - 43 - - 220 20 - 283
Unrealized gains on securities designated as
available for sale, net of related tax effects - - - - - - 229 229
Cash distributions of $.24 per share - - (931) - - - - (931)
--- ------ ------ --- ------ --- --- ------
Balance at December 31, 1996 559 41,608 26,311 - (1,938) - 172 66,712
Net earnings for the year ended December 31, 1997 - - 4,876 - - - - 4,876
Purchase of treasury shares - - - (229) - - - (229)
Stock acquired for MRP - - - - - (292) - (292)
Exercise of 14,350 stock options - (142) - 209 - - - 67
Principal payments on loans to ESOP/amortization of
expense related to employee stock benefit plans - 82 117 - 153 - - 352
Unrealized losses on securities designated as
available for sale, net of related tax effects - - - - - - (55) (55)
Cash distributions of $1.28 per share - - (7,157) - - - - (7,157)
--- ------ ------ --- ------ --- --- ------
Balance at December 31, 1997 559 41,548 24,147 (20) (1,785) (292) 117 64,274
Net earnings for the year ended December 31, 1998 - - 4,556 - - - - 4,556
Exercise of 20,442 stock options 2 173 - 20 - - - 195
Principal payments on loans to ESOP/amortization of
expense related to employee stock benefit plans - 103 215 - 152 58 - 528
Unrealized losses on securities designated as
available for sale, net of related tax effects - - - - - - (143) (143)
Cash distributions of $.32 per share - - (1,792) - - - - (1,792)
--- ------ ------ --- ------ --- -- ------
Balance at December 31, 1998 $561 $41,824 $27,126 $ - $(1,633) $(234) $ (26) $67,618
=== ====== ====== === ====== ==== ==== ======
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE>
<TABLE>
<CAPTION>
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31,
(In thousands)
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 4,556 $ 4,876 $ 1,608
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 694 630 335
Amortization of premiums on investments and mortgage-backed securities 178 46 47
Amortization of deferred loan origination (fees) costs 431 277 (117)
Amortization expense of employee stock benefit plans 313 235 63
Amortization of goodwill and other intangible assets 679 694 143
Amortization of purchase accounting adjustments - net (191) (755) (480)
(Gain) loss on sale of investment and mortgage-backed securities (62) (267) 295
(Gain) loss on sale of mortgage loans 82 41 (3)
Loans disbursed for sale in the secondary market (16,461) (4,599) (71)
Proceeds from sale of mortgage loans 16,584 4,120 550
Gain on sale of real estate (141) (6) -
Federal Home Loan Bank stock dividends (307) (283) (165)
Provision for losses on loans 107 101 129
Gain on sale of real estate acquired through foreclosure (8) - -
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans 64 (160) (328)
Accrued interest receivable on mortgage-backed securities (73) 65 338
Accrued interest receivable on investments 111 152 (65)
Prepaid expenses and other assets (194) 82 837
Accrued interest and other liabilities (307) (880) (499)
Federal income taxes
Current (18) 434 -
Deferred 265 481 (44)
------- ------- ------
Net cash provided by operating activities 6,302 5,284 2,573
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale (1,000) (13,506) (13,540)
Proceeds from sale of investment securities designated as available for sale 1,146 16,002 6,966
Maturities of investment securities designated as available for sale 5,040 7,651 4,079
Purchase of mortgage-backed securities designated as available for sale (11,323) (14,095) (3,173)
Proceeds from sale of mortgage-backed securities designated as
available for sale - 22,664 28,943
Principal repayments on mortgage-backed securities designated as
available for sale 11,662 4,560 6,182
Purchase of mortgage-backed securities designated as held to maturity (24,156) (5,078) -
Principal repayments on mortgage-backed securities designated as held
to maturity 7,953 2,285 344
Loan disbursements (124,861) (115,855) (59,394)
Purchase of loan participations (1,999) (11,368) -
Sale of loan participations 2,120 261 -
Principal repayments on loans 141,217 79,023 37,106
Purchase of Federal Home Loan Bank stock - (93) (28)
Proceeds from sale of real estate 213 135 -
Purchases and additions to office premises and equipment (496) (856) (1,284)
Proceeds from sale of real estate acquired through foreclosure 237 - -
Additions to real estate acquired through foreclosure (13) - -
Acquisition of Circle Financial Corporation common stock - net - - (5,359)
------- ------- ------
Net cash provided by (used in) investing activities 5,740 (28,270) 842
------- ------- ------
Net cash provided by (used in) operating and investing activities
(subtotal carried forward) 12,042 (22,986) 3,415
------- ------- ------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the year ended December 31,
(In thousands)
1998 1997 1996
<S> <C> <C> <C>
Net cash provided by (used in) operating and investing activities
(subtotal brought forward) $12,042 $(22,986) $ 3,415
Cash provided by (used in) financing activities:
Net increase (decrease) in deposit accounts (19,754) 24,234 19,880
Proceeds from Federal Home Loan Bank advances 13,000 21,500 15,000
Repayment of Federal Home Loan Bank advances (12,508) (7,462) (39,970)
Proceeds from issuance of common stock, net - - 20,434
Purchase of treasury shares - (229) -
Purchase of stock for management recognition plan - (292) -
Proceeds from the exercise of stock options 195 67 33
Distributions on common stock (1,577) (7,040) (931)
Advances by borrowers for taxes and insurance 292 129 263
------ ------- -------
Net cash provided by (used in) financing activities (20,352) 30,907 14,709
------ ------- -------
Net increase (decrease) in cash and cash equivalents (8,310) 7,921 18,124
Cash and cash equivalents at beginning of year 30,531 22,610 4,486
------ ------- -------
Cash and cash equivalents at end of year $22,221 $ 30,531 $ 22,610
====== ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 2,310 $ 1,743 $ 755
====== ======= =======
Interest on deposits and borrowings $22,841 $ 22,886 $ 12,574
====== ======= =======
Supplemental disclosure of noncash investing and financing activities:
Securitization of loans $ - $ 8,099 $ -
====== ======= =======
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ (143) $ (55) $ 229
====== ======= =======
Nonmonetary exchange of office premises and equipment for similar assets $ - $ - $ 61
====== ======= =======
Recognition of mortgage servicing rights in accordance with SFAS No. 125 $ 208 $ 77 $ -
====== ======= =======
Transfers from loans to real estate acquired through foreclosure $ 261 $ - $ -
====== ======= =======
Liabilities assumed and stock and cash paid in acquisition
of Circle Financial Corporation $ - $ - $265,904
Less fair value of assets received - - 258,175
------ ------- -------
Amount assigned to goodwill and other intangible assets $ - $ - $ 7,729
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Prior to 1996, Fidelity Federal Savings and Loan Association ("Fidelity")
had operated as a federally-chartered, mutual holding company. Fidelity had
capitalized Fidelity Federal Savings Bank (the "Savings Bank"), a
federally-chartered stock savings bank, by transferring substantially all of
its assets and liabilities to the Savings Bank in exchange for shares of
common stock and reorganized from a federally-chartered mutual savings and
loan association to a federally-chartered mutual holding company known as
Fidelity Federal Mutual Holding Company (the "Mutual Holding Company").
Concurrent with the Reorganization, the Savings Bank had issued additional
shares of its common stock to certain members of the public.
In 1995, the Boards of Directors of the Savings Bank and the Mutual Holding
Company adopted a Plan of Conversion (the "Plan") and in October 1995, the
Savings Bank incorporated Fidelity Financial of Ohio, Inc. (the
"Corporation") under Ohio law as a first-tier wholly owned subsidiary of the
Savings Bank. The Corporation completed its stock offering in connection
with the Savings Bank's conversion from the mutual to stock form of
ownership. Pursuant to the Plan (i) 2,278,100 shares of the Corporation's
common stock were sold at $10 per share; (ii) the Mutual Holding Company
converted to an interim federal stock savings institution and simultaneously
merged with and into the Savings Bank and the outstanding shares of Savings
Bank common stock held by the Mutual Holding Company were canceled; and
(iii) an interim savings bank ("Interim") formed as a wholly-owned
subsidiary of the Corporation solely for such purpose, was merged with and
into the Savings Bank (the "Conversion and Reorganization"). As a result of
the merger of Interim with and into the Savings Bank, the Savings Bank
became a wholly-owned subsidiary of the Corporation and the outstanding
public Savings Bank's shares were converted into shares of the Corporation
pursuant to an exchange ratio of 2.25 shares for one, which resulted in the
holders of such shares owning in the aggregate approximately the same
percentage of the common stock to be outstanding upon the completion of the
Conversion and Reorganization as the percentage of Savings Bank common stock
owned in the aggregate immediately prior to consummation of the Conversion
and Reorganization. The costs of issuing the common stock were deducted from
the sale proceeds of the offering. The offering resulted in net capital
proceeds totaling $20.4 million. Future references to the Corporation or
Savings Bank are utilized herein as the context requires.
In April 1996, the Corporation entered into an Agreement of Merger with
Circle Financial Corporation ("Circle"), a savings and loan holding company,
pursuant to which Circle and its wholly owned subsidiary, Peoples Savings
Association ("Peoples"), would merge with and into the Corporation (the
"Merger"). The transaction was consummated in October 1996, and was
accounted for using the purchase method of accounting. The Corporation
effected the acquisition through cash payments totaling $12.2 million and
issuance of 1,513,967 shares of its common stock at a fair value of $9.87
per share. The acquisition resulted in the Savings Bank recording goodwill
and other intangible assets totaling $7.7 million.
29
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Presented below are pro-forma condensed consolidated statements of earnings
and earnings per share which have been prepared as if the acquisition of
Circle had been consummated as of the beginning of the year ended December
31, 1996.
<TABLE>
<CAPTION>
(In thousands, except share data)
(Unaudited)
<S> <C>
Total interest income $35,313
Total interest expense 19,924
Net interest income 15,389
Provision for losses on loans 129
Other income 555
General, administrative and other expense 12,645
------
Earnings before income taxes 3,170
Federal income taxes 1,170
Net earnings $ 2,000
======
Basic earnings per share $.38
===
</TABLE>
The Corporation is a savings and loan holding company whose activities are
primarily limited to holding the stock of the Savings Bank.
The Savings Bank conducts a general banking business in southwestern Ohio
which consists of attracting deposits from the general public and applying
those funds to the origination of loans for residential, consumer and
nonresidential purposes. The Savings Bank's profitability is significantly
dependent on its net interest income, which is the difference between
interest income generated from interest-earning assets (i.e. loans and
investments) and the interest expense paid on interest-bearing liabilities
(i.e. customer deposits and borrowed funds). Net interest income is affected
by the relative amount of interest-earning assets and interest-bearing
liabilities and the interest received or paid on these balances. The level
of interest rates paid or received by the Savings Bank can be significantly
influenced by a number of environmental factors, such as governmental
monetary policy, that are outside of management's control.
The financial information presented herein has been prepared in accordance
with generally accepted accounting principles ("GAAP") and general
accounting practices within the financial services industry. In preparing
financial statements in accordance with GAAP, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from such estimates.
The following is a summary of significant accounting policies which have
been consistently applied in the preparation of the accompanying
consolidated financial statements.
30
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
1. Principles of Consolidation
The financial statements include the accounts of the Corporation and the
Savings Bank. All significant intercompany balances and transactions have
been eliminated.
2. Investment and Mortgage-backed Securities
The Corporation accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities". SFAS No.
115 requires that investments be categorized as held to maturity, trading,
or available for sale. Securities classified as held to maturity are carried
at cost only if the Corporation has the positive intent and ability to hold
these securities to maturity. Trading securities and securities available
for sale are carried at fair value with resulting unrealized gains or losses
charged to operations or stockholders' equity, respectively.
At December 31, 1998 and 1997, the Corporation's equity accounts reflected
unrealized losses and gains on securities designated as available for sale,
net of related tax effects, of $26,000 and $117,000, respectively.
Realized gains and losses on sales of securities are recognized using the
specific identification method.
3. Loans Receivable
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for deferred loan origination fees, the allowance for loan losses
and premiums and discounts on loans purchased and sold. Premiums and
discounts on loans purchased and sold are amortized and accreted to
operations using the interest method over the average life of the underlying
loans. Interest is accrued as earned, unless the collectibility of the loan
is in doubt. Uncollectible interest on loans that are contractually past due
is charged off, or an allowance is established based on management's
periodic evaluation. The allowance is established by a charge to interest
income equal to all interest previously accrued, and income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments has returned to normal, in which case the loan is
returned to accrual status. If the ultimate collectibility of the loan is in
doubt, in whole or in part, all payments received on nonaccrual loans are
applied to reduce principal until such doubt is eliminated.
Loans held for sale are carried at the lower of cost or market, determined
in the aggregate. In computing cost, deferred loan origination fees are
deducted from the principal balances of the related loans. At December 31,
1998 and 1997, loans held for sale were carried at cost.
31
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
3. Loans Receivable (continued)
The Savings Bank accounts for mortgage servicing rights pursuant to the
provisions of SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," which requires that
the Savings Bank recognize as separate assets, rights to service mortgage
loans for others, regardless of how those servicing rights are acquired. An
institution that acquires mortgage servicing rights through either the
purchase or origination of mortgage loans and sells those loans with
servicing rights retained would allocate some of the cost of the loans to
the mortgage servicing rights.
SFAS No. 125 requires that securitization of mortgage loans be accounted
for as sales of mortgage loans and acquisitions of mortgage-backed
securities. Additionally, SFAS No. 125 requires that capitalized mortgage
servicing rights and capitalized excess servicing receivables be assessed
for impairment. Impairment is measured based on fair value.
The mortgage servicing rights recorded by the Savings Bank, calculated in
accordance with the provisions of SFAS No. 125, were segregated into pools
for valuation purposes, using as pooling criteria the loan term and coupon
rate. Once pooled, each grouping of loans was evaluated on a discounted
earnings basis to determine the present value of future earnings that a
purchaser could expect to realize from each portfolio. Earnings were
projected from a variety of sources including loan servicing fees, interest
earned on float, net interest earned on escrows, miscellaneous income, and
costs to service the loans. The present value of future earnings is the
"economic" value for the pool, i.e., the net realizable present value to an
acquirer of the acquired servicing.
The Savings Bank recorded amortization related to mortgage servicing rights
totaling approximately $39,000 and $3,000 for the years ended December 31,
1998 and 1997, respectively. At December 31, 1998 and 1997, the fair value
of the Savings Bank's mortgage servicing rights totaled approximately
$243,000 and $74,000, respectively.
4. Loan Origination and Commitment Fees
The Savings Bank accounts for loan origination fees in accordance with the
provisions of SFAS No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases". Pursuant to the provisions of SFAS No. 91, origination fees
received from loans, net of certain direct origination costs, are deferred
and amortized to interest income using the interest method, giving effect
to actual loan prepayments. Additionally, SFAS No. 91 generally limits the
definition of loan origination costs to the direct costs attributable to
originating a loan, i.e. principally actual personnel costs. Fees received
for loan commitments that are expected to be drawn upon, based on the
Savings Bank's experience with similar commitments, are deferred and
amortized over the life of the loan using the level-yield method. Fees for
other loan commitments are deferred and amortized over the loan commitment
period on a straight-line basis.
32
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
5. Allowance for Losses on Loans
It is the Savings Bank's policy to provide valuation allowances for
estimated losses on loans based on past loan loss experience, changes in
the composition of the loan portfolio, trends in the level of delinquent
and problem loans, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral and
current and anticipated economic conditions in the primary lending area.
When the collection of a loan becomes doubtful, or otherwise troubled, the
Savings Bank records a loan loss provision equal to the difference between
the fair value of the property securing the loan and the loan's carrying
value. Major loans (including development projects) and major lending areas
are reviewed periodically to determine potential problems at an early date.
The allowance for loan losses is increased by charges to earnings and
decreased by charge-offs (net of recoveries).
The Savings Bank accounts for impaired loans in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan". SFAS No. 114
requires that impaired loans be measured based upon the present value of
expected future cash flows discounted at the loan's effective interest rate
or, as an alternative, at the loans observable market price or fair value
of the collateral.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Savings Bank
considers its investment in one-to-four family residential loans and
consumer installment loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment. With respect to the
Savings Bank's investment in multi-family and nonresidential loans, and its
evaluation of any impairment thereon, such loans are collateral dependent
and as a result are carried as a practical expedient at the lower of cost
or fair value.
It is the Savings Bank's policy to evaluate all unsecured credits that are
more than ninety days delinquent and charge off such credits as deemed
necessary. Similarly, collateral dependent loans which are more than ninety
days delinquent are considered to constitute more than a minimum delay in
repayment and are evaluated for impairment under SFAS No. 114 at that time.
At December 31, 1998 and 1997, the Savings Bank had one loan for $371,000
and $376,000, respectively, that was defined as impaired under SFAS No.
114.
33
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
6. Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. A loan charge-off is recorded for any
writedown in the loan's carrying value to fair value at the date of
acquisition. Real estate loss provisions are recorded if the properties'
fair value subsequently declines below the value determined at the recording
date. In determining the lower of cost or fair value at acquisition, costs
relating to development and improvement of property are considered. Costs
relating to holding real estate acquired through foreclosure, net of rental
income, are charged against earnings as incurred.
7. Office Premises and Equipment
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation and amortization are provided on the straight-line and
accelerated methods over the useful lives of the assets, estimated to be
thirty to forty years for buildings, five to fifteen years for building
improvements, three to ten years for furniture and equipment and five years
for automobiles. An accelerated method is used for tax reporting purposes.
8. Federal Income Taxes
The Corporation accounts for federal income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes". Pursuant to the provisions of SFAS No. 109, a
deferred tax liability or deferred tax asset is computed by applying the
current statutory tax rates to net taxable or deductible temporary
differences between the tax basis of an asset or liability and its reported
amount in the consolidated financial statements that will result in taxable
or deductible amounts in future periods. Deferred tax assets are recorded
only to the extent that the amount of net deductible temporary differences
or carryforward attributes may be utilized against current period earnings,
carried back against prior years' earnings, offset against taxable temporary
differences reversing in future periods, or utilized to the extent of
management's estimate of future taxable income. A valuation allowance is
provided for deferred tax assets to the extent that the value of net
deductible temporary differences and carryforward attributes exceeds
management's estimates of taxes payable on future taxable income. Deferred
tax liabilities are provided on the total amount of net temporary
differences taxable in the future.
The Corporation's principal temporary differences between pretax financial
income and taxable income result primarily from the different methods of
accounting for deferred loan origination fees, Federal Home Loan Bank stock
dividends, the general loan loss allowance, percentage of earnings bad debt
deductions and certain components of retirement expense. A temporary
difference is also recognized for depreciation expense computed using
accelerated methods for federal income tax purposes.
34
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
9. Goodwill and Other Intangible Assets
Goodwill resulting from the acquisition of Circle totaled approximately $7.7
million, and is being amortized over a fifteen year period using the
straight-line method. Specifically identifiable intangible assets totaling
$703,000 related to core deposit intangible assets is being amortized over
an estimated useful life of seven and a half years using an accelerated
method. Management periodically evaluates the carrying value of these
intangible assets in relation to the continuing earnings capacity of such
acquired net assets.
10. Retirement and Incentive Plans
The Savings Bank has several retirement and incentive plans covering the
directors and substantially all employees. Such plans are more fully
described as follows.
The Savings Bank has a 401(k) profit-sharing plan whereby employees may make
voluntary tax deferred contributions up to 15% of their base annual
compensation. The Savings Bank will provide, at its discretion, matching
funds of each participant's contribution, subject to a maximum of 8% of
compensation. The Savings Bank's 401(k) profit-sharing plan expense for the
years ended December 31, 1998, 1997 and 1996 amounted to $90,000, $101,000
and $45,000, respectively.
The Savings Bank maintains an unfunded retirement plan for the specific
benefit of four retired outside directors. The directors' retirement plan
expense totaled approximately $18,000 for each of the years ended December
31, 1998, 1997 and 1996, respectively.
The Savings Bank has an Employee Stock Ownership Plan ("ESOP"), which
provides retirement benefits for all employees who have completed one year
of service and have attained the age of 21. The Savings Bank recognized
expense totaling $258,000, $234,000 and $187,000 related to the ESOP for the
years ended December 31, 1998, 1997 and 1996, respectively.
Additionally, the Savings Bank had a Management Recognition Plan ("MRP")
that commenced in 1992. The MRP purchased 50,625 shares (exchange and split
adjusted) of the Corporation's common stock. All of the shares available
under the MRP were granted to executive officers of the Savings Bank during
1992, with such shares vesting ratably over a five-year period. In April
1997, the Corporation's shareholders approved the 1997 Management
Recognition Plan and Trust (the "Plan") which provided for up to 91,124
shares to be awarded to members of the Board of Directors and officers of
the Corporation. During 1997, the Corporation granted 20,000 shares to
members of the Board of Directors which vest ratably over a five year
period. A provision of $60,000, $35,000 and $20,000 was charged to MRP
expense for the years ended December 31, 1998, 1997 and 1996, respectively.
35
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
11. Earnings Per Share and Dividends Per Share
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period, less shares in the ESOP that are unallocated
and not committed to be released. Weighted-average common shares
outstanding, which gives effect to 175,047, 191,115 and 200,810 unallocated
ESOP shares, totaled 5,423,383, 5,395,878 and 4,207,788 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under
the Corporation's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share totaled
5,484,091, 5,449,727 and 4,240,638 for the years ended December 31, 1998,
1997 and 1996, respectively. There were 60,708, 53,849 and 32,850
incremental shares related to the assumed exercise of stock options included
in the computation of diluted earnings per share for the years ended
December 31, 1998, 1997 and 1996, respectively.
During 1998, 1997 and 1996, the Corporation declared capital distributions
of $.32, $1.28 and $.24 per common share, respectively. Management has
obtained a Private Letter Ruling from the Internal Revenue Service which
states that the Corporation's dividend payments in excess of accumulated
earnings and profits are considered a tax-free return of capital for federal
income tax purposes. As a result, management believes that $.25 of the 1998
distributions, all of the 1997 distributions and $.09 of the 1996 capital
distributions constituted a tax-free return of capital.
12. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes
cash and due from banks, federal funds sold and interest-bearing deposits in
other financial institutions with original maturities of less than 90 days.
13. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value of financial instruments, both assets and
liabilities, whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair
values are based on estimates using present value and other valuation
methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair
values presented may not represent amounts that could be realized in an
exchange for certain financial instruments.
36
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
13. Fair Value of Financial Instruments (continued)
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at December
31, 1998 and 1997:
Cash and cash equivalents: The carrying amounts presented in
the consolidated statements of financial condition for cash
and cash equivalents are deemed to approximate fair value.
Investment and mortgage-backed securities: For investment and
mortgage-backed securities, fair value is deemed to equal the
quoted market price.
Loans receivable: The loan portfolio has been segregated into
categories with similar characteristics, such as one-to-four
family residential, multi-family residential, nonresidential
real estate and consumer. These loan categories were further
delineated into fixed-rate and adjustable-rate loans. The fair
values for the resultant loan categories were computed via
discounted cash flow analysis, using current interest rates
offered for loans with similar terms to borrowers of similar
credit quality.
Federal Home Loan Bank stock: The carrying amount presented in
the consolidated statements of financial condition is deemed
to approximate fair value.
Deposits: The fair value of NOW accounts, passbook and club
accounts, and money market deposits is deemed to approximate
the amount payable on demand at December 31, 1998 and 1997.
Fair values for fixed-rate certificates of deposit have been
estimated using a discounted cash flow calculation using the
interest rates currently offered for deposits of similar
remaining maturities.
Federal Home Loan Bank advances: The fair value of Federal
Home Loan Bank advances has been estimated using discounted
cash flow analysis, based on the interest rates currently
offered for advances of similar remaining maturities.
Commitments to extend credit: For fixed-rate and
adjustable-rate loan commitments, the fair value estimate
considers the difference between current levels of interest
rates and committed rates. At December 31, 1998 and 1997, the
difference between the fair value and notional amount of loan
commitments was not material.
37
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
13. Fair Value of Financial Instruments (continued)
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments are as follows at December
31:
<TABLE>
<CAPTION>
1998 1997
Carrying Fair Carrying Fair
value value value value
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 22,221 $ 22,221 $ 30,531 $ 30,531
Investment securities 838 838 6,020 6,020
Mortgage-backed securities 54,887 54,933 39,354 39,533
Loans receivable 419,436 424,405 436,852 440,741
Federal Home Loan Bank stock 4,464 4,464 4,157 4,157
------- ------- ------- -------
$501,846 $506,861 $516,914 $520,982
======= ======= ======= =======
Financial liabilities
Deposits $412,122 $414,695 $432,024 $432,235
Advances from Federal Home Loan Bank 34,735 35,054 34,233 34,359
Advances by borrowers for taxes and
insurance 2,426 2,426 2,134 2,134
------- ------- ------- -------
$449,283 $452,175 $468,391 $468,728
======= ======= ======= =======
</TABLE>
14. Comprehensive Income
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," as
of January 1, 1998. The Statement established standards for reporting and
presentation of comprehensive income and its components in a full set of
general-purpose financial statements. It requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is presented
with the same prominence as other financial statements. SFAS No. 130
requires that companies (i) classify items of other comprehensive income by
their nature in a financial statement and (ii) display the components of
other comprehensive income separately from retained earnings and additional
paid-in capital. Financial statements for earlier periods have been
reclassified for comparative purposes.
15. Advertising
Advertising costs are expensed when incurred.
16. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1998
consolidated financial statement presentation.
38
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES
Amortized cost and estimated fair values of investment securities designated
as available for sale at December 31, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
1998 1997
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
<S> <C> <C> <C> <C>
U. S. Government agency obligations $835 $838 $5,869 $5,908
Corporate equity securities - - 84 112
--- --- ----- -----
$835 $838 $5,953 $6,020
=== === ===== =====
</TABLE>
At December 31, 1998 and 1997, the market value appreciation of the
Corporation's investment securities in excess of amortized cost, totaling
$3,000 and $67,000, respectively, was comprised solely of gross unrealized
gains.
The amortized cost and estimated fair value of U.S. Government agency
obligations by contractual terms to maturity at December 31, 1998 and 1997,
are shown below:
<TABLE>
<CAPTION>
1998 1997
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
Due in two to five years - - 998 999
Due in five to ten years 835 838 2,997 3,027
More than ten years - - 874 882
--- --- ----- -----
$835 $838 $5,869 $5,908
=== === ===== =====
</TABLE>
39
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at December 31, 1998 and
1997 (including those designated as available for sale) are shown below.
<TABLE>
<CAPTION>
1998
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 $ 8,418 $ 30 $ 14 $ 8,434
Government National Mortgage
Association participation certificates 8,055 6 48 8,013
Federal National Mortgage
Association participation certificates 6,217 12 48 6,181
Collateralized mortgage obligations 2,557 20 - 2,577
------ ---- -- ------
Total available for sale 25,247 68 110 25,205
Held to maturity:
Federal Home Loan Mortgage
Corporation participation certificates 451 - 6 445
Government National Mortgage
Association participation certificates 7,248 20 20 7,248
Federal National Mortgage
Association participation certificates 221 9 - 230
Collateralized mortgage obligations 21,762 59 16 21,805
------ ---- ---- ------
Total held to maturity 29,682 88 42 29,728
------ ---- ---- ------
Total mortgage-backed securities $54,929 $156 $152 $54,933
====== === === ======
</TABLE>
<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 1,240 6 - 1,246
------ ---- -- ------
Total available for sale 25,717 153 43 25,827
Held to maturity:
Federal Home Loan Mortgage
Corporation participation certificates 574 1 - 575
Government National Mortgage
Association participation certificates 11,632 165 - 11,797
Federal National Mortgage
Association participation certificates 236 10 - 246
Collateralized mortgage obligations 1,085 3 - 1,088
------ ---- -- ------
Total held to maturity 13,527 179 - 13,706
------ --- -- ------
Total mortgage-backed securities $39,244 $332 $ 43 $39,533
====== === ==== ======
</TABLE>
40
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost and estimated fair value of mortgage-backed securities at
December 31, 1998 and 1997, by contractual terms to maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may generally prepay obligations without prepayment penalties.
<TABLE>
<CAPTION>
1998 1997
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
<S> <C> <C> <C> <C>
Available for sale:
Due within one year $ 2,938 $ 2,943 $ 3,762 $ 3,774
Due after one to three years 6,509 6,520 8,326 8,352
Due after three years to five years 2,004 2,006 4,323 4,337
Due after five years to ten years 2,099 2,094 1,144 1,151
Due after ten years to twenty years 6,617 6,597 3,981 4,006
Due after twenty years 5,080 5,045 4,181 4,207
------ ------ ------ ------
25,247 25,205 25,717 25,827
Held to maturity:
Due within one year 927 929 209 212
Due after one to three years 2,051 2,055 463 469
Due after three years to five years 2,345 2,349 530 536
Due after five years to ten years 7,435 7,448 1,682 1,703
Due after ten years to twenty years 14,490 14,512 5,620 5,692
Due after twenty years 2,434 2,435 5,023 5,094
------ ------ ------ ------
29,682 29,728 13,527 13,706
------ ------ ------ ------
Total mortgage-backed securities $54,929 $54,933 $39,244 $39,533
====== ====== ====== ======
</TABLE>
41
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio, including loans held for sale, is as
follows at December 31:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Residential real estate
One-to-four family residential $325,398 $341,636
Multi-family residential 23,803 26,125
Construction 12,722 9,016
Nonresidential real estate and land 49,172 50,613
Nonresidential construction 8,605 6,248
Consumer and other 9,813 9,266
-------- --------
429,513 442,904
Undisbursed portion of loans in process (9,233) (5,127)
Unamortized yield adjustments 859 733
Allowance for loan losses (1,703) (1,658)
-------- --------
$419,436 $436,852
======= =======
</TABLE>
The Savings Bank's lending efforts have historically focused on residential
and multi-family residential real estate loans, which comprised
approximately $352.7 million, or 84%, of the total loan portfolio at
December 31, 1998, and $371.7 million, or 85%, of the total portfolio at
December 31, 1997. Generally, such loans have been underwritten on the basis
of no more than an effective 80% loan-to-value ratio, which has historically
provided the Savings Bank with adequate collateral coverage in the event of
default. Nevertheless, the Savings Bank, as with any lending institution, is
subject to the risk that real estate values could deteriorate in its primary
lending area of southwestern Ohio, thereby impairing collateral values.
However, management is of the belief that real estate values in the Savings
Bank's primary lending area are presently stable.
The Savings Bank has sold participating interests in loans in the secondary
market, retaining servicing on the loans sold. Loans sold and serviced for
others totaled approximately $27.1 million and $18.7 million at December 31,
1998 and 1997, respectively.
A director of the Corporation is a broker and general manager of a local
real estate agency. The agency received approximately $113,000 in real
estate commissions during 1998 as a result of sales of real estate financed
by the Savings Bank.
42
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the year ended December 31
is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Beginning balance $1,658 $1,558 $ 818
Allowance for loan losses of Circle - - 640
Provision for loan losses 107 101 129
Charge-offs of loans (62) (1) (29)
----- ----- -----
Ending balance $1,703 $1,658 $1,558
===== ===== =====
</TABLE>
At December 31, 1998, the Savings Bank's allowance for loan losses was
solely general in nature, which is includible as a component of regulatory
risk-based capital.
At December 31, 1998, 1997 and 1996, the Savings Bank had loans of $1.8
million, $1.0 million and $1.1 million, respectively, which had been placed
on nonaccrual status due to concerns as to borrowers' ability to pay.
Interest income that would have been recognized had nonaccrual loans
performed pursuant to contractual terms totaled approximately $57,000,
$25,000 and $59,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment is comprised of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Land $ 1,786 $ 1,790
Buildings and improvements 6,174 6,269
Furniture and equipment 3,994 3,501
Automobiles 14 14
------ ------
11,968 11,574
Less accumulated depreciation and amortization 4,782 4,112
------ ------
$ 7,186 $ 7,462
====== ======
</TABLE>
43
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE F - DEPOSITS
Deposits consist of the following major classifications at December 31:
<TABLE>
<CAPTION>
Deposit type and weighted average
interest rate 1998 1997
(In thousands)
<S> <C> <C>
NOW accounts
December 31, 1998 - 0.86% $ 32,634
December 31, 1997 - 1.44% $ 25,296
Passbook and club accounts
December 31, 1998 - 1.81% 36,526
December 31, 1997 - 1.79% 40,374
Money market deposit accounts
December 31, 1998 - 2.71% 25,324
December 31, 1997 - 3.32% 25,730
------- -------
Total demand, transaction and passbook deposits 94,484 91,400
Certificates of deposit
Original maturities of:
Less than 12 months
December 31, 1998 - 5.00% 87,126
December 31, 1997 - 5.59% 91,221
12 months to 18 months
December 31, 1998 - 5.50% 170,082
December 31, 1997 - 5.87% 151,965
18 months to 36 months
December 31, 1998 - 5.62% 31,182
December 31, 1997 - 5.94 % 60,819
36 months to 48 months
December 31, 1998 - 5.63% 6,274
December 31, 1997 - 5.91% 8,862
More than 48 months
December 31, 1998 - 6.48% 22,974
December 31, 1997 - 6.57% 27,757
------- -------
Total certificates of deposit 317,638 340,624
------- -------
Total deposits $412,122 $432,024
======= =======
</TABLE>
At December 31, 1998 and 1997, the Savings Bank had certificate of deposit
accounts with balances of $100,000 or greater totaling $44.2 million and
$44.1 million, respectively.
44
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE F - DEPOSITS (continued)
Interest expense on deposits for the years ended December 31 is summarized
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Passbook and money market deposit accounts $ 1,457 $ 1,655 $ 931
NOW accounts 270 322 280
Certificates of deposit 18,574 18,946 10,343
------ ------ ------
$20,301 $20,923 $11,554
====== ====== ======
</TABLE>
Maturities of outstanding certificates of deposit at December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Less than one year $254,261 $251,254
One to two years 53,935 70,680
Two to three years 5,944 12,937
Over three years 3,498 5,753
--------- ---------
$317,638 $340,624
======= =======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at December 31,
1998 by pledges of certain residential mortgage loans totaling $52.2 million
and the Savings Bank's investment in Federal Home Loan Bank stock, are
summarized as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Due within one year $ 7,262 $10,495
Due after one to three years 20,889 14,946
Due after three to five years 2,241 3,647
Due after five to ten years 2,290 3,041
Due after ten to twenty years 2,053 2,104
------- -------
$34,735 $34,233
====== ======
Weighted-average interest rate 6.02% 6.21%
==== ====
</TABLE>
45
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE H - LOAN TO EMPLOYEE STOCK OWNERSHIP PLAN
As discussed previously in Note A-10, the Savings Bank established an
Employee Stock Ownership Plan (the "ESOP") which initially acquired 135,000
shares of common stock of the Savings Bank in the initial common stock
offering in 1992. In order to fund the acquisition of stock, the ESOP
borrowed $400,000 from an independent third-party lender, payable over a
seven year period. During 1995, the ESOP borrowed an additional $146,000
from an independent third-party lender, payable over a seven year period, to
acquire approximately 21,950 shares of common stock. During 1996, in
connection with the Corporation's common stock offering, the ESOP acquired
182,248 shares through funding from the Corporation, payable over a fifteen
year period. Additionally, the $146,000 ESOP loan was repaid by a loan from
the Corporation. At December 31, 1998, the ESOP held 327,575 shares of the
Corporation's common stock, with approximately 160,681 shares allocated to
participants as of that date.
NOTE I - FEDERAL INCOME TAXES
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate for the years ended December 31 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at the statutory rate $2,418 $2,562 $843
Increase (decrease) in taxes resulting from:
Amortization of goodwill 123 123 26
Other 16 (27) 3
------- ------- -----
Federal income tax provision per consolidated
financial statements $2,557 $2,658 $872
===== ===== ===
</TABLE>
46
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE I - FEDERAL INCOME TAXES (continued)
The composition of the Corporation's net deferred tax liability at December
31 is as follows:
<TABLE>
<CAPTION>
Taxes (payable) refundable on temporary 1998 1997
differences at statutory rate: (In thousands)
<S> <C> <C>
Deferred tax assets:
Deferred loan origination fees $ 87 $ 136
Retirement expense 183 195
General loan loss allowance 579 561
Purchase price adjustments from Circle acquisition 43 116
Unrealized losses on securities designated as available for sale 13 -
Other 157 167
------ ------
Total deferred tax assets 1,062 1,175
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (734) (630)
Percentage of earnings bad debt deduction (757) (908)
Unrealized gains on securities designated as available for sale - (60)
Book versus tax depreciation (236) (126)
Mortgage servicing rights (83) -
Purchase price adjustments from Circle acquisition (51) (60)
----- -----
Total deferred tax liabilities (1,861) (1,784)
----- -----
Net deferred tax liability $ (799) $ (609)
===== =====
</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, 1998. If the
amounts that qualify as deductions for federal income taxes are later used
for purposes other than bad debt losses, including distributions in
liquidation, such distributions will be subject to federal income taxes at
the then current corporate income tax rate. The approximate amount of
unrecognized deferred tax liability relating to the cumulative bad debt
deduction is approximately $3.9 million at December 31, 1998. See Note L for
additional information regarding future percentage of earnings bad debt
deductions.
NOTE J - COMMITMENTS
The Savings Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the consolidated statement of financial condition.
The contract or notional amounts of the commitments reflect the extent of
the Savings Bank's involvement in such financial instruments.
47
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE J - COMMITMENTS (continued)
The Savings Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
is represented by the contractual notional amount of those instruments. The
Savings Bank uses the same credit policies in making commitments and
conditional obligations as those utilized for on-balance-sheet instruments.
At December 31, 1998, the Savings Bank had total outstanding commitments of
approximately $12.1 million to originate residential one- to four-family and
multi-family real estate loans on the basis of an 80% loan to value ratio,
of which $4.3 million was comprised of adjustable rate loans at rates
ranging from 6.125% to 7.75%, and $7.8 million was comprised of fixed rate
loans at rates ranging from 6.25% to 8.25%. The Savings Bank also had
outstanding commitments of approximately $1.9 million to originate
nonresidential real estate loans. Additionally, the Savings Bank had unused
lines of credit under home equity loans of approximately $4.7 million and
unused lines of credit under multi-family, nonresidential real estate loans
and commercial loans of $7.2 million. The Savings Bank also has outstanding
commitments of $196,000 to purchase and $1.1 million to sell non-residential
real estate loans as of December 31, 1998. In the opinion of management, all
loan commitments equaled or exceeded prevalent market interest rates as of
December 31, 1998, and such commitments have been underwritten on the same
basis as that of the existing loan portfolio. Management believes that all
commitments are able to be funded through cash flow from operations and
excess liquidity. Fees received in connection with loan commitments have not
been recognized in earnings.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments may
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Savings Bank evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Savings Bank upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral on loans may vary but the preponderance of loans
granted generally include a mortgage interest in real estate as security.
NOTE K - REGULATORY CAPITAL
The Savings Bank is subject to minimum capital requirements promulgated by
the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a
direct material effect on the Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Savings Bank must meet specific capital guidelines
that involve quantitative measures of the Savings Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Savings Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Such minimum capital
standards generally require the maintenance of
48
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE K - REGULATORY CAPITAL (continued)
regulatory capital sufficient to meet each of three tests, hereinafter
described as the tangible capital requirement, the core capital requirement
and the risk-based capital requirement. The tangible capital requirement
provides for minimum tangible capital (defined as stockholders' equity less
all intangible assets) equal to 1.5% of adjusted total assets. The core
capital requirement provides for minimum core capital (tangible capital plus
certain forms of supervisory goodwill and other qualifying intangible
assets) equal to 3.0% of adjusted total assets. An OTS proposal, if adopted
in present form, would increase the core capital requirement to a range of
4.0% - 5.0% of adjusted total assets for substantially all savings
associations. Management anticipates no material change to the Savings
Bank's excess regulatory capital position as a result of this proposed
change to the regulatory capital requirement. The risk-based capital
requirement currently provides for the maintenance of core capital plus
general loan loss allowances equal to 8.0% of risk-weighted assets. In
computing risk-weighted assets, the Savings Bank multiplies the value of
each asset on its statement of financial condition by a defined
risk-weighting factor, e.g., one-to-four family residential loans carry a
risk-weighted factor of 50%.
As of December 31, 1998 and 1997, management believes that the Savings Bank
met all capital adequacy requirements to which it was subject.
<TABLE>
<CAPTION>
1998: To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $58,548 11.4% =>$ 7,693 =>1.5% =>$25,643 => 5.0%
Core capital $58,548 11.4% =>$15,386 =>3.0% =>$30,771 => 6.0%
Risk-based capital $60,251 21.5% =>$22,402 =>8.0% =>$28,003 =>10.0%
</TABLE>
<TABLE>
<CAPTION>
1997: To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $53,194 10.1% =>$ 7,887 =>1.5% =>$26,289 => 5.0%
Core capital $53,194 10.1% =>$15,773 =>3.0% =>$31,547 => 6.0%
Risk-based capital $54,844 19.3% =>$22,701 =>8.0% =>$28,376 =>10.0%
</TABLE>
At December 31, 1998, the Savings Bank met all regulatory requirements for
classification as a "well-capitalized" institution. A "well-capitalized"
institution must have risk-based capital of 10.0%, and core capital of 6.0%.
The Savings Bank's capital exceeded the minimum required amounts for
classification as a "well-capitalized" institution by $32.2 million and
$27.8 million, respectively.
49
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE K - REGULATORY CAPITAL (continued)
Regulations of the Office of Thrift Supervision ("OTS") impose limitations
on the payment of dividends and other capital distributions by savings
associations. Under such regulations, a savings association that,
immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution, has total capital (as defined by OTS
regulation) that is equal to or greater than the amount of its fully
phased-in capital requirement is generally permitted without OTS approval
(but subsequent to 30 days prior notice to the OTS of the planned dividend)
to make capital distributions during a calendar year in an amount not to
exceed the greater of (i) up to 100% of its net earnings to date during the
year plus an amount equal to one-half of the amount by which its total
capital to assets ratio exceeded its fully phased-in capital to assets ratio
at the beginning of the year, or (ii) 75% of its net earnings for the most
recent four quarters. Pursuant to such OTS dividend regulations, the Savings
Bank had the ability to pay dividends of approximately $22.2 million to the
Corporation at December 31, 1998.
NOTE L - LEGISLATIVE MATTERS
The deposit accounts of the Savings Bank and of other savings associations
are insured by the FDIC through the Savings Association Insurance Fund
("SAIF"). The reserves of the SAIF were below the level required by law,
because a significant portion of the assessments paid into the fund are used
to pay the cost of prior thrift failures. The deposit accounts of commercial
banks are insured by the FDIC through the Bank Insurance Fund ("BIF"),
except to the extent such banks have acquired SAIF deposits. The reserves of
the BIF met the level required by law in May 1995. As a result of the
respective reserve levels of the funds, deposit insurance assessments paid
by healthy savings associations exceeded those paid by healthy commercial
banks by approximately $.19 per $100 in deposits in 1995. In 1996, no BIF
assessments were required for healthy commercial banks except for a $2,000
minimum fee.
During 1996, legislation was enacted to recapitalize the SAIF that provided
for a special assessment of $.657 per $100 of SAIF deposits held at March
31, 1995. The Savings Bank had $173.1 million in deposits at March 31, 1995,
resulting in an assessment of approximately $1.1 million, or $749,000 after
tax, which was recorded during 1996.
A component of the recapitalization plan provided for the merger of the SAIF
and BIF on January 1, 2000, assuming the elimination of the thrift charter
or of the separate federal regulation of thrifts prior to the merger of the
deposit insurance funds. This legislation would require the Savings Bank to
be regulated as a bank under federal laws which would subject it to the more
restrictive activity limits imposed on national banks. In the opinion of
management, such restrictions would not materially affect the Corporation's
operations. Under separate legislation, the Savings Bank is required to
recapture approximately $2.7 million of its bad debt reserve as taxable
income, which represents the post-1987 additions to the reserve, and will be
unable to utilize the percentage of earnings method to compute its reserve
in the future. The Savings Bank has provided deferred taxes for this amount
and will amortize the recapture of its bad debt reserve over six years
commencing in 1998.
50
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE M - STOCK OPTION PLANS
In connection with Fidelity's Reorganization to mutual holding company form,
the Savings Bank had adopted the 1992 Stock Option Plan that provided for
the issuance of 168,750 shares of authorized, but unissued shares of common
stock. All of the shares provided for under that Plan have been granted.
In April 1997, the Corporation adopted the 1997 Stock Option Plan that
provides for the issuance of 227,810 shares of common stock. Options to
purchase 4,000 and 171,500 shares were granted during 1998 and 1997,
respectively, at an exercise price equal to the fair value at the date of
grant.
In 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair value-based method for valuing
stock-based compensation that entities may use, which measures compensation
cost at the grant date based on the fair value of the award. Compensation is
then recognized over the service period, which is usually the vesting
period. Alternatively, SFAS No. 123 permits entities to continue to account
for stock options and similar equity instruments under Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities that continue to account for stock options using APB Opinion No. 25
are required to make pro forma disclosures of net earnings and earnings per
share, as if the fair value-based method of accounting defined in SFAS No.
123 had been applied.
The Corporation applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized for the plans. Had compensation cost for the Corporation's
stock option plans been determined based on the fair value at the grant
dates for awards under the plans consistent with the accounting method
utilized in SFAS No. 123, the Corporation's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C> <C>
Net earnings (In thousands) As reported $4,556 $4,876 $1,608
===== ===== =====
Pro-forma $4,551 $4,826 $1,608
===== ===== =====
Earnings per share
Basic As reported $.84 $.90 $.38
=== === ===
Pro-forma $.84 $.89 $.38
=== === ===
Diluted As reported $.83 $.89 $.38
=== === ===
Pro-forma $.83 $.88 $.38
=== === ===
</TABLE>
51
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE M - STOCK OPTION PLANS (continued)
The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 1998 and 1997: dividend
yield of 4.0%, expected volatility of 20.0%, a risk-free interest rate of
5.5% and expected lives of ten years.
A summary of the status of the Corporation's stock option plans as of
December 31, 1998, 1997 and 1996, and changes during the periods ending on
those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
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 213,349 $10.86 54,265 $ 4.41 61,015 $4.46
Granted 4,000 15.50 171,500 13.00 - -
Adjustment for return of capital
distribution - - 8,334 (.44) - -
Exercised (20,442) 9.50 (14,350) 5.21 (6,750) 4.81
Forfeited (8,742) 12.49 (6,400) 13.00 - -
--------- ----- --------- ----- ------- ----
Outstanding at end of year 188,165 $11.03 213,349 $10.86 54,265 $4.41
======= ===== ======= ===== ====== ====
Options exercisable at year-end 91,617 77,314 54,265
======== ====== ======
Weighted-average fair value of
options granted during the year $ 3.14 $ 2.63 N/A
====== ====== ===
</TABLE>
The following information applies to options outstanding at December 31,
1998:
<TABLE>
<CAPTION>
<S> <C>
Number outstanding 188,165
Range of exercise prices $2.84 - $15.50
Weighted-average exercise price $11.03
Weighted-average remaining contractual life 8.01 years
</TABLE>
52
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE N - CONDENSED FINANCIAL STATEMENTS OF FIDELITY FINANCIAL OF OHIO, INC.
The following condensed financial statements summarize the financial
position of Fidelity Financial of Ohio, Inc. as of December 31, 1998 and
1997, and the results of its operations and its cash flows for the periods
then ended.
<TABLE>
<CAPTION>
Fidelity Financial of Ohio, Inc.
STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands)
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 285 $ 198
Investment securities available for sale - at market - 1,112
Loan receivable from ESOP 1,755 1,785
Investment in subsidiary 65,505 61,463
Prepaid expenses and other 551 151
------ ------
Total assets $68,096 $64,709
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 478 $ 435
Stockholders' equity
Common stock and additional paid-in capital 42,385 42,107
Retained earnings 27,126 24,147
Less shares acquired by Management Recognition Plan (234) (292)
Less shares held in treasury - (20)
Shares acquired by ESOP (1,633) (1,785)
Unrealized gains (losses) on securities designated as
available for sale, net (26) 117
------ ------
Total stockholders' equity 67,618 64,274
------ ------
Total liabilities and stockholders' equity $68,096 $64,709
====== ======
</TABLE>
<TABLE>
<CAPTION>
Fidelity Financial of Ohio, Inc.
STATEMENTS OF EARNINGS
For the period ended December 31,
(In thousands)
1998 1997 1996
<S> <C> <C> <C>
Income
Interest income $ 153 $ 462 $ 524
Gain on sale of investment securities 62 - -
Equity in earnings of subsidiary 4,650 4,818 1,208
----- ----- -----
Total revenue 4,865 5,280 1,732
General and administrative expenses 358 390 421
----- ----- -----
Earnings before income taxes (credits) 4,507 4,890 1,311
Federal income taxes (credits) (49) 14 35
----- ----- -----
NET EARNINGS $4,556 $4,876 $1,276
===== ===== =====
</TABLE>
53
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE N - CONDENSED FINANCIAL STATEMENTS OF FIDELITY FINANCIAL OF
OHIO, INC. (continued)
<TABLE>
<CAPTION>
Fidelity Financial of Ohio, Inc.
STATEMENTS OF CASH FLOWS
For the period ended December 31,
(In thousands)
1998 1997 1996
<S> <C> <C> <C>
Cash provided by (used in) operating activities:
Net earnings for the period $4,556 $4,876 $ 1,276
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Undistributed earnings of consolidated subsidiary (3,922) (4,818) (1,208)
Increase (decrease) in cash due to changes in:
(Gain) loss on sale of investment securities (62) 8 -
Prepaid expenses and other assets (400) 95 (250)
Other liabilities 51 (283) 709
----- ----- ------
Net cash provided by (used in) operating activities 223 (122) 527
Cash flows provided by (used in) investing activities:
Proceeds from repayment of loan to ESOP 100 93 10
Proceeds from sale of investment securities 1,146 9,982 3,000
Purchase of investment securities - (8,000) (6,080)
Issuance of loan to ESOP - - (1,948)
Acquisition of Circle Financial Corporation common stock - net - - (5,359)
Effect of corporate reorganization - - (3,914)
----- ----- ------
Net cash provided by (used in) investing activities 1,246 2,075 (14,291)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock - - 20,434
Payment of dividends on common stock (1,577) (7,040) (931)
Purchase of treasury stock - (229) -
Purchase of stock for management recognition plan - (292) -
Proceeds from exercise of stock options 195 67 -
----- ----- ------
Net cash provided by (used in) financing activities (1,382) (7,494) 19,503
----- ----- ------
Net increase (decrease) in cash and cash equivalents 87 (5,541) 5,739
Cash and cash equivalents at beginning of period 198 5,739 -
----- ----- ------
Cash and cash equivalents at end of period $ 285 $ 198 $ 5,739
===== ===== ======
</TABLE>
54
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE O - BUSINESS COMBINATION
On September 28, 1998, the Corporation's Board of Directors approved a
business combination whereby Glenway Financial Corporation ("Glenway") would
merge with and into Fidelity Financial of Ohio, Inc. The merger was
completed on March 19, 1999. The business combination was accounted for as a
pooling-of-interests and, accordingly, the assets, liabilities and capital
of the respective combining companies were added together at historic
carrying value. Unaudited pro-forma condensed, combined financial
information of the Corporation and Glenway as of and for the year ended
December 31, 1998, is as follows:
<TABLE>
<CAPTION>
Fidelity Pro-forma
Financial Glenway combined
(unaudited) (unaudited)
(In thousands, except share data)
<S> <C> <C> <C>
Total assets $519,219 $295,467 $814,686
======= ======= =======
Total liabilities $451,601 $264,785 $716,386
======= ======= =======
Stockholders' equity $ 67,618 $ 30,682 $ 98,300
======= ======= =======
Total revenue $ 39,119 $ 23,543 $ 62,662
Total expense 34,563 20,624 55,187
------- ------- -------
Net earnings $ 4,556 $ 2,919 $ 7,475
======= ======= =======
Basic earnings per share $.84 $1.28 $.84
=== ==== ===
</TABLE>
55
<PAGE>
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE P - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Corporation's quarterly results for the
years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended
March 31, June 30, September 30, December 31,
1998: (In thousands, except per share data)
<S> <C> <C> <C> <C>
Total interest income $9,567 $9,527 $9,427 $9,124
Total interest expense 5,842 5,740 5,683 5,430
----- ----- ----- -----
Net interest income 3,725 3,787 3,744 3,694
Provision for losses on loans 20 27 30 30
Other income 505 306 355 308
General, administrative and other expense 2,330 2,279 2,343 2,252
----- ----- ----- -----
Earnings before income taxes 1,880 1,787 1,726 1,720
Federal income taxes 677 653 611 616
----- ----- ----- -----
Net earnings $1,203 $1,134 $1,115 $1,104
===== ===== ===== =====
Earnings per share:
Basic $.22 $.21 $.21 $.20
=== === === ===
Diluted $.22 $.21 $.20 $.20
=== === === ===
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, June 30, September 30, December 31,
1997: (In thousands, except per share data)
<S> <C> <C> <C> <C>
Total interest income $9,286 $9,510 $9,652 $9,703
Total interest expense 5,365 5,577 5,765 5,855
----- ----- ----- -----
Net interest income 3,921 3,933 3,887 3,848
Provision for losses on loans 25 25 25 26
Other income 367 286 327 435
General, administrative and other expense 2,384 2,285 2,340 2,360
----- ----- ----- -----
Earnings before income taxes 1,879 1,909 1,849 1,897
Federal income taxes 671 688 633 666
----- ----- ----- -----
Net earnings $1,208 $1,221 $1,216 $1,231
===== ===== ===== =====
Earnings per share:
Basic $.22 $.23 $.22 $.23
=== === === ===
Diluted $.22 $.22 $.22 $.23
=== === === ===
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS
<S> <C>
JOHN R. REUSING Chairman of the Board of Fidelity Financial of
Ohio, Inc. and President of Centennial Bank.
ROBERT R. SUDBROOK President and Chief Executive Officer of Fidelity
Financial of Ohio, Inc. and Chairman of the Board
and Chief Executive Officer of Centennial Bank.
DANIEL W. GEEDING Professor of Management and the Director of the
Center for International Business at Xavier
University.
JOSEPH D. HUGHES Executive Vice President and Chief Lending Officer
of Fidelity Financial of Ohio, Inc. and Centennial
Bank.
MICHAEL W. JORDAN Executive Vice President of Jordan Realtors,
Cincinnati, Ohio.
KENNETH C. LICHTENDAHL President of Hudepohl-Schoenling Brewing Company.
DAVID A. LUECKE President and Chief Executive Officer of Riemeier
Lumber Company, Cincinnati, Ohio.
CONSTANTINE N. PAPADAKIS President of Drexel University, Philadelphia,
Pennsylvania.
EDGAR A. RUST Retired President and Chief Executive Officer of
Glenway Financial Corporation.
THOMAS N. SPAETH Chief Financial Officer, Champion Window
Manufacturing & Supply, Inc.
JOHN L. TORBECK President of Torbeck Homes, Inc.
ROBERT W. ZUMBIEL President of C.W. Zumbiel Company, Norwood, Ohio.
OFFICERS
ROBERT R. SUDBROOK President and Chief Executive Officer of Fidelity
Financial of Ohio, Inc. and Chairman of the Board
and Chief Executive Officer of Centennial Bank.
JOHN R. REUSING Chairman of the Board of Fidelity Financial of
Ohio, Inc. and President of Centennial Bank.
JOSEPH D. HUGHES Executive Vice President and Chief Lending Officer
of Fidelity Financial of Ohio, Inc. and Centennial
Bank.
GREGORY P. NIESEN Senior Vice President and Treasurer of Fidelity
Financial of Ohio, Inc. and Centennial Bank.
THOMAS N. SCHILLER Executive Vice President Commercial Banking of
Fidelity Financial of Ohio, Inc. and Centennial
Bank.
ELAINE M. SCHMIDT Senior Vice President and Chief Operations Officer
of Fidelity Financial of Ohio, Inc. and Centennial
Bank.
PAUL D. STAUBACH Senior Vice President and Chief Financial Officer
of Fidelity Financial of Ohio, Inc. and Centennial
Bank.
</TABLE>
<TABLE>
<CAPTION>
LOCATIONS
<S> <C> <C>
Main Office/Glencrossing 5535 Glenway Avenue 922-5959
Anderson 7944 Beechmont Avenue 474-1141
Blue Ash 4144 Hunt Road 793-5196
Cheviot 3916 Harrison Avenue 661-5997
Delhi 5030 Delhi Pike 451-5353
Delhi/Rapid Run 5681 Rapid Run (at Neeb) 451-7575
Hartwell 8434 Vine Street 821-8880
Loveland 10640 Loveland-Madeira Road 683-1124
Madeira 7136 Miami Avenue 272-4200
Northgate 9090 Colerain Avenue 385-8148
Norwood 4555 Montgomery Road 351-6666
Price Hill 4221 Glenway Avenue 921-5505
Ross 3777 Hamilton Cleves Road 738-1111
Sharonville 11100 Reading Road 733-9300
Tri County 11700 Princeton Road 671-0866
</TABLE>
57
<PAGE>
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
Fidelity Financial of Ohio, Inc.
5535 Glenway Avenue
Cincinnati, Ohio 45238
(513) 922-5959
STOCK LISTING
The Nasdaq National Market
Symbol: FFOH
TRANSFER AGENT AND REGISTRAR
Fifth Third Bank
Corporate Trust Services
Mail Location 1090F5
38 Fountain Square Plaza
Cincinnati, Ohio 45263
(513) 579-5320
(800) 837-2755
INDEPENDENT AUDITORS
Grant Thornton LLP
625 Eden Park Drive, Suite 900
Cincinnati, Ohio 45202-4181
SPECIAL LEGAL COUNSEL
Elias, Matz, Tiernan & Herrick LLP
734 15th Street, N.W., 12th Floor Washington,
DC 20005
ANNUAL MEETING
May 18, 1999, 2:00 P.M.
Quality Hotel Central
4747 Montgomery Road
Cincinnati, Ohio 45212
FORM 10-K
Fidelity Financial of Ohio, Inc. is required to file an Annual Report on Form
10-K, for its year ended December 31, 1998. Copies of this Annual Report and
Quarterly Reports on Form 10-Q may be obtained without charge by contacting:
Paul D. Staubach
Senior Vice President
Chief Financial Officer
Fidelity Financial of Ohio, Inc.
5535 Glenway Avenue
Cincinnati, Ohio 45238
MARKET MAKERS
Ernst & Company
Friedman, Billings, Ramsey & Co., Inc.
S. J. Wolfe and Company, as a subsidiary of
McDonald & Co. Securities
Herzog, Heine, Geduld, Inc.
Knight Securities, Inc.
Sandler, O'Neill & Partners, LP
Stifel, Nicholas & Company, Inc.
Trident Securities Inc.
58
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 10, 1999 appearing in this Annual Report on
Form 10-K of Fidelity Financial of Ohio, Inc. for the year ended December 31,
1998.
/s/ GRANT THORNTON LLP
Cincinnati, Ohio
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,898
<INT-BEARING-DEPOSITS> 704
<FED-FUNDS-SOLD> 17,619
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,043
<INVESTMENTS-CARRYING> 29,682
<INVESTMENTS-MARKET> 29,728
<LOANS> 419,436
<ALLOWANCE> 1,703
<TOTAL-ASSETS> 519,219
<DEPOSITS> 412,122
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,744
<LONG-TERM> 34,735
0
0
<COMMON> 561
<OTHER-SE> 67,057
<TOTAL-LIABILITIES-AND-EQUITY> 519,219
<INTEREST-LOAN> 32,413
<INTEREST-INVEST> 3,714
<INTEREST-OTHER> 1,518
<INTEREST-TOTAL> 37,645
<INTEREST-DEPOSIT> 20,301
<INTEREST-EXPENSE> 22,695
<INTEREST-INCOME-NET> 14,843
<LOAN-LOSSES> 107
<SECURITIES-GAINS> 62
<EXPENSE-OTHER> 9,204
<INCOME-PRETAX> 7,113
<INCOME-PRE-EXTRAORDINARY> 7,113
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,556
<EPS-PRIMARY> .84
<EPS-DILUTED> .83
<YIELD-ACTUAL> 2.92
<LOANS-NON> 1,808
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,658
<CHARGE-OFFS> 62
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,703
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,703
</TABLE>
