<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________to___________________
Commission File Number: 0-18664
GLENWAY FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 31-1297820
- --------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5535 Glenway Avenue, Cincinnati, Ohio 45238
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (513) 922-5959
---------------
Securities registered pursuant to Section 12(b) of the Exchange Act:
None Common Stock, par value $.01 per share
----------------------------------- --------------------------------------
(Name of each exchange on which registered) (Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
None
----
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such requirements for the past 90 days. Yes X No
-- --
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State the issuer's revenues for its most recent fiscal year: $21.7
million.
The aggregate market value of the voting stock held by nonaffiliates of
the registrant, computed by reference to the average of the bid and asked prices
of such stock on The NASDAQ National Market as of September 12, 1997, was
$5,798,167. (The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant.)
As of September 12, 1997, there were 1,139,997 shares of the Registrant's
Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Annual Report to Stockholders for the fiscal year
ended June 30, 1997. Part III of Form 10-KSB - Proxy Statement for 1997
Annual Meeting of Stockholders.
Transitional Small Business Disclosure Format: Yes No X
-- --
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Glenway Financial Corporation (the "Holding Company" or the
"Corporation") was incorporated under the name Centennial Financial Corp. in the
State of Delaware in March 1990 for the purpose of owning all of the outstanding
stock of Centennial Savings Bank ("Centennial" or the "Savings Bank") issued
upon the conversion of Centennial from the mutual to stock form (the
"Conversion"). The Corporation is subject to regulation by the Office of Thrift
Supervision (the "OTS").
On August 24, 1993, the Holding Company consummated a conversion-merger
transaction with The Glenway Loan and Deposit Company ("Glenway") in which the
Corporation issued 700,000 new shares of Holding Company stock at a price of
$14.00 per share. In connection with this conversion-merger transaction, the
Holding Company's stockholders approved a charter amendment changing its name
from Centennial Financial Corp. to Glenway Financial Corporation.
The Savings Bank was organized in 1876 as an Ohio mutual savings and
loan company and converted to a federally-chartered stock savings bank in 1990.
In January 1994, Centennial converted from a federal thrift to an Ohio savings
bank.
Centennial considers its principal market area to be the west side of
Cincinnati, Ohio. In addition to its new main office at Glenway Crossing in the
Western Hills area of Cincinnati, Centennial has five branch offices on the west
side of Cincinnati. Its deposits are insured up to applicable limits by the
Federal Deposit Insurance Corporation (the "FDIC") in the Savings Association
Insurance Fund (the "SAIF"). The Savings Bank is subject to regulation by the
FDIC and the Ohio Department of Commerce, Division of Financial Institutions
(the "Division").
Centennial is a community-oriented institution dedicated to continuing
its tradition of providing affordable home ownership for the community and a
competitive return for its depositors by offering a range of retail financial
services. Centennial originates adjustable-rate, one- to four-family residential
loans for its portfolio and fixed-rate, one- to four-family real estate loans
for its portfolio or for sale, and it purchases mortgage-backed securities. It
also makes multifamily and nonresidential real estate loans and consumer loans
and, from time to time, it purchases loans from other lenders. Centennial has
expanded its lending activities into commercial lending, subject to applicable
limits of Ohio law. Because Centennial is a community-oriented association,
Centennial's Board of Directors has long recognized that improving the quality
of life in Centennial's primary market area is a prerequisite to continued
success in the competitive financial services arena. As a result, Centennial's
management and employees have taken a prominent position in civic promotion and
development.
In addition to its primary business, owning the capital stock of
Centennial, the Corporation also owns and operates a strip shopping center in
which one of Centennial's branches is located. The impact of this activity on
the Corporation's financial condition is not considered material. Accordingly,
the remainder of this description of the Corporation's business will focus on
Centennial's operations. The executive offices of the Holding Company and
Centennial are located at 5535 Glenway Avenue, Cincinnati, Ohio 45238 and the
telephone number at that address is (513) 922-5959.
LENDING ACTIVITIES
GENERAL. The principal lending activity of Centennial is originating
conventional mortgage loans secured by owner-occupied, one- to four-family
residential real estate located in its primary market area. Depending on the
level of interest rates, in general, and whether the rates on these loans are
fixed-rate, Centennial may sell such loans in the secondary market, rather than
hold them in its portfolio. Centennial originates and processes loans insured by
the Federal Housing Authority and loans guaranteed by the Veterans
Administration for a local mortgage company which, in turn, closes and services
the loans. To a lesser extent, Centennial also originates multifamily and
construction loans secured by properties located in its primary market area and
has originated nonresidential real estate loans. In addition, Centennial makes
home equity and other consumer loans, including loans secured by deposit
accounts, automobile loans and unsecured loans. Centennial's loan portfolio also
includes mortgage-backed securities. Finally, to diversify its portfolio,
Centennial, from time to time, purchases residential and other real estate loans
from other lending institutions. Centennial has expanded its lending activities
into commercial lending.
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<PAGE> 3
LOAN AND MORTGAGE-BACKED SECURITIES PORTFOLIO COMPOSITION. The
following table sets forth information concerning the composition of
Centennial's loan portfolio, including loans held for sale and mortgage-backed
securities, in dollar amounts and in percentages as of the dates indicated:
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------- ------------- --------------- --------------
(Dollars in thousands)
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ -- ------- -- ------ -- ------- -- ------ --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS AND MORTGAGE-BACKED
SECURITIES:
One- to four-family (1) $176,559 64.7% $162,855 62.2% $158,573 64.5% $132,189 59.8% $120,655 61.8%
Home equity 23,797 8.7 20,051 7.7 14,823 6.0 10,188 4.6 9,852 5.0
Multifamily residential 17,912 6.6 16,368 6.3 14,945 6.1 14,279 6.5 10,465 5.4
Nonresidential 14,469 5.3 12,337 4.7 11,207 4.6 13,177 6.0 12,581 6.4
Construction 14,947 5.5 18,969 7.2 12,693 5.2 12,932 5.8 9,420 4.8
Mortgage-backed securities (2) 23,201 8.5 30,471 11.6 32,780 13.3 37,578 17.0 31,625 16.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans and
mortgage-backed securities 270,885 99.3 261,051 99.7 245,021 99.7 220,343 99.7 194,598 99.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
OTHER LOANS:
Consumer loans:
Deposits 507 .2 507 .2 450 .2 495 .2 517 .3
Automobile 344 .1 347 .1 223 .1 126 .1 133 .1
Home improvement 11 -- 14 -- 22 -- 35 -- 53 --
Other (3) 964 .4 16 -- 15 -- 12 -- 18 --
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total other loans 1,826 .7 884 .3 710 .3 668 .3 721 .4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans and mortgage-backed
securities 272,711 100.0% 261,935 100.0% 245,731 100.0% 221,011 100.0% 195,319 100.0%
-------- ===== -------- ===== -------- ===== -------- ===== -------- =====
LESS:
Loans in process 8,735 9,318 6,393 6,963 5,654
Deferred loan origination fees and
discounts 307 427 529 636 865
Allowance for loan losses 820 618 616 724 648
----- ----- ------ ----- -----
Total loans and mortgage-backed
securities - net $262,849 $251,572 $238,193 $212,688 $188,152
======== ======== ======== ======== ========
- ------------------------------------
<FN>
(1) Includes $110.2 million of adjustable-rate mortgage loans at June 30, 1997.
(2) Includes $12.6 million of adjustable-rate mortgage-backed securities at June 30, 1997.
(3) Includes $904,000 of commercial loans at June 30, 1997.
</TABLE>
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<PAGE> 4
The following schedule sets forth the contractual maturities of or
repricing periods for the instruments in Centennial's loan portfolio, net of
loans in process, including loans held for sale and mortgage-backed securities,
at June 30, 1997. This schedule indicates the timing and ability of Centennial
to reprice its assets and does not reflect the effects of possible prepayments,
amortizations or enforcement of due-on-sale clauses. Demand loans, loans having
no stated schedule of repayments or no stated maturity and overdrafts are
reported as due in one year or less.
<TABLE>
<CAPTION>
Amounts Amounts Amounts Amounts
Amounts due due in due in due in due in Amounts due
within 1 year 1 to 3 years 3 to 5 years 5 to 10 years 10 to 20 years after 20 years Total
------------- ------------ ------------- ------------- -------------- -------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage
instruments
Adjustable-rate $144,203 $23,793 $ 8,292 $ 4,758 $ - $ - $181,046
Fixed-rate 4,966 7,497 7,464 17,202 29,814 14,161 81,104
Consumer and other 1,377 357 92 - - - 1,826
-------- -------- -------- -------- -------- ------- --------
Total loans and mortgage-
backed securities $150,546 $31,647 $15,848 $21,960 $29,814 $14,161 $263,976
======== ======= ======= ======= ======= ======= ========
</TABLE>
The following table sets forth the dollar amount of loans and
mortgage-backed securities, before net items, maturing after one year from June
30, 1997, which have predetermined interest rates or floating or adjustable
interest rates.
<TABLE>
<CAPTION>
Predetermined rates Floating or adjustable rates
------------------- ----------------------------
(In thousands)
<S> <C> <C>
Real estate mortgage instruments $ 70,794 $121,048
Nonresidential real estate 5,103 27,001
Consumer and other 449 --
-------- --------
Total $ 76,346 $148,049
======== ========
</TABLE>
The aggregate amount of loans that Centennial is permitted by
regulation to have outstanding to any one borrower is generally limited to 15%
of Centennial's total risk-based capital. This limit increases to 25% of total
risk-based capital if the security has a "readily ascertainable" value. At June
30, 1997, Centennial's lending limit was $3.6 million. Centennial's largest loan
outstanding (or total loans outstanding) to any one borrower at June 30, 1997,
totaled approximately $2.6 million.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. The cornerstone of
Centennial's lending program has been the origination of permanent loans, to be
held in its portfolio, secured by mortgages on owner-occupied, one- to
four-family residences. At June 30, 1997, $176.6 million, or 64.7% of
Centennial's loan and mortgage-backed securities portfolio consisted of
permanent loans on one- to four-family residences. Substantially all of the
residential loans originated by Centennial are secured by properties located in
greater Cincinnati. Also included in Centennial's residential loans at June 30,
1997, were $3.7 million of purchased one- to four-family loans which were
located on properties outside of Centennial's principal market area.
Centennial originates a variety of residential loans, including
conventional 15-, 20- and 30-year fixed-rate loans and one-, three- and
five-year adjustable-rate mortgages ("ARMs"). In order to reduce its exposure to
changes in interest rates, Centennial emphasizes the origination of ARMs. In
order to meet consumer demand, however, Centennial has continued to originate,
either for sale or for retention in its portfolio, fixed-rate residential loans
in amounts which are carefully monitored to ensure compliance with Centennial's
asset/liability management goals.
Centennial's current one- to four-family residential ARMs are fully
amortizing loans with contractual maturities of up to 30 years. The interest
rates on the majority of ARMs originated by Centennial are subject to adjustment
at one- or three-year intervals. Centennial's ARMs carry interest rates which
are reset to a stated margin over an index based on the yields for U.S. Treasury
securities with terms to maturities of the same length as the applicable
adjustment period. Decreases or increases in the interest rate of Centennial's
ARMs are generally limited to 1% to 2% at any adjustment date and 5% to 6% over
the life of the loan. From time to time, Centennial has offered initial interest
rates on the ARMs it originates that are below the rate that would be indicated
by reference to the repricing formula. Centennial's ARMs are not assumable, do
not contain prepayment penalties and do not produce negative amortization. At
June 30, 1997, the total balance of one- to four-family residential ARMs was
$134.9 million.
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<PAGE> 5
Although Centennial maintains a portfolio of loans held for sale,
substantially all of Centennial's residential loans are underwritten and
documented to permit sale in the secondary market. During fiscal 1997,
Centennial sold $440,000 of real estate loans in the secondary market.
Centennial had no real estate loans held for sale at June 30, 1997.
In originating mortgage loans, Centennial evaluates both the borrower's
ability to make principal and interest payments and the value of the property
that will secure the loan. Centennial originates residential mortgage loans with
loan-to-value ratios up to 95%. On any mortgage loan exceeding an 80%
loan-to-value ratio at the time of origination, however, Centennial requires
private mortgage insurance or other credit enhancements in an amount intended to
reduce Centennial's exposure to 80% of the appraised value of the underlying
collateral. All property securing real estate loans made by Centennial is
appraised by independent appraisers selected by Centennial and subject to review
by the management of Centennial. Centennial requires evidence of marketable
title and lien position, as well as title insurance, on all loans secured by
real property and requires fire and extended coverage casualty insurance in
amounts at least equal to the principal amount of the loan or the replacement
value of the property, depending on the type of loan. Centennial may also
require flood insurance to protect the property securing its interest.
Centennial has focused a portion of its lending efforts on home equity
lending. Centennial's home equity lines of credit are written so that the total
commitment amount, when combined with the balance of the first mortgage, may not
exceed 90% of the appraised value of the property. Interest is accrued at a
floating rate based on a specified prime rate plus a margin and monthly payments
of at least the monthly interest charge are required. At June 30, 1997,
Centennial had $23.8 million of home equity loans and an additional $26.6
million of unfunded commitments outstanding under home equity lines of credit.
Centennial's fixed-rate residential mortgage loans customarily include
"due-on-sale" clauses, which are provisions giving Centennial 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. Centennial may enforce due-on-sale clauses to the extent permitted
under applicable laws.
MORTGAGE-BACKED SECURITIES. Centennial has historically purchased
mortgage-backed securities as portfolio investments to supplement loan
production. Centennial's mortgage-backed securities are either held in portfolio
at cost or carried as available for sale at fair, or market, value.
Historically, most of Centennial's mortgage-backed securities were
long-term, fixed-rate federal agency securities. In recent years, however,
Centennial has purchased other types of mortgage-backed securities, consistent
with its interest rate risk management and balance sheet objectives. During
recent fiscal years, most of the mortgage-backed securities purchased by
Centennial have had adjustable interest rates. In addition, Centennial has
purchased short and intermediate tranche collateralized mortgage obligations
("CMOs") having estimated average lives of from two to four years. CMOs are
securities derived by reallocating cash flows from mortgage pass-through
securities or from pools of mortgage loans. Centennial does not purchase CMOs
that are interest only or principal only or residual interests. At June 30,
1997, the carrying value of Centennial's mortgage-backed securities, including
those designated as available for sale, was $23.2 million.
Substantially all of Centennial's mortgage-backed securities are issued
or backed by federal government agencies or sponsored organizations.
Accordingly, management believes that Centennial's mortgage-backed securities
are generally resistant to credit problems.
Centennial's holdings of mortgage-backed securities have increased in
recent years as a result of loan competition. Federal agency mortgage-backed
securities generally carry a yield approximately 50 to 100 basis points below
that of the corresponding type of residential loan (due to the implied federal
agency guarantee fee and the retention of a servicing spread by the loan
servicer). Centennial's CMOs also carry lower yields (due to the implied federal
agency guarantee and because such securities tend to have shorter actual
durations than 30 year loans). In the event that the proportion of assets
consisting of mortgage-backed securities and CMOs increases, Centennial's asset
yields could be somewhat adversely affected. Centennial will evaluate
mortgage-backed securities purchases in the future based on its investment and
interest rate risk management objectives, market conditions and alternative
investment opportunities.
MULTIFAMILY AND NONRESIDENTIAL REAL ESTATE LENDING. Centennial
originates and purchases permanent loans secured by multifamily and
nonresidential real estate. Centennial's permanent multifamily and
nonresidential real estate loan portfolio includes, for the most part, loans
originated by Centennial with balances of under $300,000, secured by apartments,
small office buildings, retail establishments and other business properties
located on the west side of Cincinnati. At June 30, 1997,
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<PAGE> 6
$32.4 million, or 11.9%, of Centennial's loan and mortgage-backed securities
portfolio consisted of permanent loans on multifamily and nonresidential real
estate.
Permanent multifamily and nonresidential real estate loans have maximum
terms of 25 years, with most having terms ranging from 5 to 25 years and 15- to
25-year amortization schedules. Although some of Centennial's multifamily or
nonresidential real estate loans have fixed interest rates, interest rates on
most originations generally either adjust (subject, in some cases, to specified
interest rate caps) at one-year or three-year intervals to specified spreads
over the related rate on U.S. Treasury securities, adjusted to a constant
maturity, or float (subject, in some cases, to specified interest rate caps)
with changes in a specified prime rate. Multifamily loans and nonresidential
real estate loans are written in amounts of up to 80% of the appraised value or
80% of the purchase price of the property, whichever is lower.
Appraisals on properties securing multifamily and nonresidential real
estate property loans originated by Centennial are performed by an independent
appraiser designated by Centennial at the time the application is processed. All
appraisals on multifamily and nonresidential real estate loans are reviewed by
Centennial's management. In addition, Centennial's underwriting procedures
require verification of the borrower's credit history, income and financial
statements, banking relationships, references and income projections for the
property.
A management committee periodically reviews all multifamily and
nonresidential mortgage loans in excess of $300,000. Such review includes an
analysis of the continuing ability of the borrower to make loan payments and of
the condition of the underlying collateral property.
The table below sets forth, by type of security property, certain
information regarding Centennial's multifamily and nonresidential real estate
loans at June 30, 1997:
<TABLE>
<CAPTION>
Outstanding
Number principal
of loans balance
-------- -------
(Dollars in thousands)
<S> <C> <C>
Multifamily 57 $ 17,912
== ========
Nonresidential:
Office buildings 25 $ 4,135
Centennial real estate 1 30
Retail facility 24 2,380
Other 52 7,924
--- --------
Total nonresidential
real estate loans 102 $14,469
=== =======
</TABLE>
Multifamily and nonresidential real estate loans generally present a
higher level of risk than loans secured by one- to-four family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effects of general economic
conditions on income-producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multifamily and commercial real estate is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced (for example, if leases are not obtained or
renewed), the borrower's ability to repay the loan may be impaired.
CONSTRUCTION LENDING. Centennial makes construction loans to
individuals for the construction of their residences as well as to builders and,
to a lesser extent, developers for the construction of one- to four-family
residences and condominiums, the development of one- to four-family lots and the
development of commercial property in Centennial's primary market area.
Construction loans to individuals for their residences are structured
to be converted to permanent loans at the end of the construction phase, which
typically runs six months. These construction loans have rates and terms which
match rates on one- to four-family loans then offered by Centennial, except that
during the construction phase the borrower pays interest only. Residential
construction loans are generally underwritten pursuant to the same guidelines
used for originating permanent residential loans. At June 30, 1997, Centennial
had $1.3 million of construction loans to borrowers intending to live in the
properties upon completion of construction.
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<PAGE> 7
Construction loans to builders of one- to four-family residences
require the payment of interest only and typically have terms of up to 24
months. These loans may provide for the payment of interest and loan fees from
loan proceeds and carry interest rates which float (subject, in some cases, to
interest rate caps) with changes in the specified prime rate. Loan commitment
and origination fees of from 1/4% to 1% are charged. At June 30, 1997,
Centennial had $4.2 million of construction loans to builders of one- to
four-family residences, with no loans over $3.5 million.
Centennial also makes loans to builders for the purpose of developing
one- to four-family lots. These loans typically have terms of from one to five
years and carry interest rates which float (subject, in some cases, to interest
rate caps) with changes in the specified prime rate. Loan commitment and
origination fees of 1/2% to 1% are charged. The principal on these loans is
typically paid down as lots are sold. At June 30, 1997, Centennial had five
development loans totaling $697,000. From time to time, Centennial also makes
loans to builders for nonresidential construction. At June 30, 1997, Centennial
had two nonresidential construction loans totaling $550,000.
Construction and development loans are obtained principally through
continued business from developers and builders who have previously borrowed
from Centennial, as well as from broker referrals and direct solicitations by
developers and builders. The application process includes a submission to
Centennial of accurate plans, specifications, and costs of the project to be
constructed or developed. These items are used as the basis to determine the
appraised value of the subject property. Loans are based on the lesser of
current appraised value and the cost of construction (land plus building).
Construction and development loans are made up to a maximum
loan-to-value ratio of 80% (75% in the case of land loans), based upon an
independent appraisal. Because of the uncertainties inherent in estimating
development and construction costs and the market for the project upon
completion, it is relatively difficult to evaluate accurately the total loan
funds required to complete a project, the related loan-to-value ratios and the
likelihood of ultimate success of the project. Construction and development
loans to borrowers other than owner-occupants also involve many of the same
risks discussed above regarding multifamily and nonresidential real estate loans
and tend to be more sensitive to general economic conditions than many other
types of loans.
CONSUMER LENDING. Centennial originates a variety of different types of
consumer loans, including overdraft protection lines of credit, direct
automobile loans, deposit account loans and other loans for household purposes.
The underwriting standards employed by Centennial for consumer loans
include a determination of the applicant's payment history on other debts and
ability to meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is the primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount. While consumer loans generally involve a
higher level of credit risk than one- to four-family residential loans, consumer
loans are typically made at higher interest rates and for shorter terms or at
adjustable rates, thus increasing the interest rate sensitivity of the lending
institution's portfolio.
Centennial also offers Visa and Master Card credit cards to its
customers as agent for a Delaware-based commercial bank. Centennial does not own
the credit card receivables and, therefore, such activity poses no risk to
Centennial.
COMMERCIAL LENDING. Centennial has expanded its lending activities into
commercial lending. Currently, Ohio savings banks are authorized to invest up to
10% of their assets in commercial, agricultural or business loans and, pursuant
to a general investment authority, up to an additional 15% of assets in such
loans, assuming such general investment authority has not already been utilized.
Commercial lending entails significant risks. Such loans are subject to
greater risk of default during periods of adverse economic conditions. Because
such loans are secured by equipment, inventory, accounts receivable and other
non-real estate assets, the collateral may not be sufficient to ensure full
payment of the loan in the event of a default.
ORIGINATIONS, PURCHASES, SALES AND SERVICING OF REAL ESTATE LOANS
Centennial originates real estate loans through its internal loan
production personnel. Walk-in customers and referrals from real estate brokers
and builders are also important sources of loan originations.
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<PAGE> 8
All mortgage loans must be approved by a loan officer and a lending
assistant vice president. Loans to be held in Centennial's portfolio also must
be approved by the senior vice president of lending. All loans in excess of
$300,000 must be approved by the Loan Committee of Centennial's Board of
Directors.
Centennial has, from time to time, purchased loans to supplement loan
originations. At June 30, 1997, approximately $3.7 million (including $3.1
million on properties located outside of Ohio) of Centennial's one- to
four-family residential loan portfolio was serviced by others.
The table below sets forth information related to Centennial's
purchased loans secured by real estate located outside of Cincinnati, Ohio and
the surrounding areas at June 30, 1997.
<TABLE>
<CAPTION>
Loan balance
Date of purchase Location of collateral Type of property at June 30, 1997
- ---------------- ---------------------- ------------------- ----------------
(In thousands)
<C> <C> <C> <C>
1984 and 1985 Los Angeles, CA One- to four- family $ 621
1983 and 1984 Houston, TX One- to four-family 1,300
-------
Total $1,921
=======
</TABLE>
When loans are sold, Centennial retains the responsibility for
servicing the loans and receives a servicing fee for performing these services.
Centennial serviced a portfolio of loans for others totaling approximately $61.1
million at June 30, 1997.
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<PAGE> 9
The following table presents Centennial's loan origination and loan and
mortgage-backed securities purchase and sale activities for the years indicated:
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------- -------------- ---------------
(Dollars in thousands)
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ -- ------ -- ------ -- ------ -- ------ --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ORIGINATIONS
Conventional real estate loans:
Construction loans $16,171 22.2% $17,237 22.6% $19,587 30.4% $ 9,921 11.5% $13,862 14.9%
Fixed-rate loans on
existing property 12,752 17.5 20,949 27.6 13,207 20.5 50,335 58.4 45,539 49.0
Adjustable-rate loans on
existing property 30,688 42.2 26,034 34.3 25,620 39.8 19,559 22.7 25,461 27.4
Consumer and other loans 13,173 18.1 11,756 15.5 5,943 9.3 6,354 7.4 8,050 8.7
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans originated (1) $72,784 100.0% $75,796 100.0% $64,357 100.0% $86,169 100.0% $92,912 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
PURCHASES
Conventional real estate loans $ -- --% $ -- --% $ 74 100.0% $ 234 1.2% $ -- -%
Mortgage-backed securities -- -- 4,267 100.0 -- -- 19,725 98.8 12,509 100.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans and mortgage-backed $ -- -% $ 4,267 100.0% $ 74 100.0% $19,959 100.0% $12,509 100.0%
securities purchased ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
SALES
Real estate loans $ 2,672 85.8% $ 2,887 73.1% $ 1,963 56.7% $30,258 100.0% $52,114 100.0%
Mortgage-backed securities 444 14.2 1,060 26.9 1,500 43.3 -- -- -- --
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans and mortgage-backed $ 3,116 100.0% $ 3,947 100.0% $ 3,463 100.0% $30,258 100.0% $52,114 100.0%
securities sold ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
- ------------------------------------
<FN>
(1) Includes loans originated for sale in the secondary market.
</TABLE>
-9-
<PAGE> 10
DELINQUENCIES AND NONPERFORMING ASSETS
When a borrower fails to make a required payment on a loan, Centennial
attempts to cause the deficiency to be cured by contacting the borrower. In most
cases, deficiencies are cured promptly. A notice is mailed to the borrower after
a payment is 15 days past due, at which time Centennial assesses a penalty
against the borrower. After a payment is 30 days past due, Centennial's
collections department contacts the borrower by telephone and letter. After a
payment is 90 days past due, Centennial sends the borrower a demand letter. When
deemed appropriate by management, Centennial institutes action to foreclose on
the property or to acquire it by deed in lieu of foreclosure. If foreclosed on,
real property is sold at a public sale and may be purchased by Centennial. A
decision as to whether and when to initiate foreclosure proceedings is based on
such factors as the amount of the outstanding loan in relation to the original
indebtedness, the extent of delinquency and the borrower's ability and
willingness to cooperate in curing the delinquency.
Real estate acquired by Centennial as a result of foreclosure or by
deed in lieu of foreclosure is classified as other real estate owned ("REO")
until it is sold. When REO is acquired, it is recorded at the lower of the
loan's unpaid principal balance or estimated fair value less selling expenses at
the date of acquisition and any write-down resulting therefrom is charged to the
allowance for losses. Interest accrual, if any, ceases no later than the date of
acquisition and all costs incurred from that date in maintaining the REO are
expensed. However, costs relating to the development and improvement of REO are
capitalized to the extent of fair value.
FDIC-regulated institutions are required to classify their own assets
on a regular basis. 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
characteristics 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. There is also a Special Mention category which
consists of assets that do not currently expose an institution to a sufficient
degree of risk to warrant classification but which do possess credit
deficiencies or potential weaknesses deserving management's close attention.
Institutions must establish prudent general allowances for loan losses for
assets classified as Substandard or Doubtful. If an asset or portion thereof is
classified as Loss, the 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. In connection with examinations of savings
institutions, examiners have authority to identify problem assets and, if
appropriate, classify them. If an institution does not agree with an examiner's
classification of an asset it may appeal the determination to the FDIC.
On the basis of management's quarterly review of its assets, at June
30, 1997, Centennial had $812,000 in assets classified as Special Mention,
$937,000 as Substandard, and no assets classified as Doubtful or Loss. Included
in the Substandard assets at June 30, 1997, are $217,000 in single-family and
condominium loans located in Texas, discussed herein, as to which no loss is
anticipated. Included in the Substandard category of classified assets is
$44,000 in REO. The remainder of Centennial's classified assets is comprised
primarily of one- to four-family residential loans.
-10-
<PAGE> 11
The following table sets forth information concerning delinquent loans
at June 30, 1997, in dollar amounts and as a percentage of Centennial's total
loan and mortgage-backed securities portfolio (including loans held for sale).
The amounts presented represent the total outstanding principal balances of the
related loans, net of allowances, rather than the actual payment amounts which
are past due.
<TABLE>
<CAPTION>
At June 30, 1997
------------------------------------------------------------------------
Residential
real estate loans Consumer loans Total
----------------------- --------------------- ------------------------
Number Amount % (1) Number Amount % (1) Number Amount % (1)
------ ------ ----- ------ ------ ----- ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days 37 $1,334 0.48% 1 $3 -% (2) 38 $1,337 0.49%
60-89 days 9 274 0.10 - - - 9 274 0.10
90 days and over 17 851 0.31 - - - 17 851 0.31
--- ------ ---- -- -- --- -- ------ ----
Total delinquent
loans 63 $2,459 0.89% 1 $3 -% (2) 64 $2,462 0.90%
=== ====== ==== == == === == ====== ====
-----------------------------------
<FN>
(1) Total percentages have been correlated to total loans and mortgage-backed securities before net items.
(2) Less than one-tenth of one percent.
</TABLE>
The table below sets forth the amounts and categories of Centennial's
nonperforming assets. Loans are placed on nonaccrual status when the collection
of principal or interest becomes doubtful and the loan is 90 days or more
delinquent. For all the periods presented, Centennial did not have any loans
accounted for as troubled debt restructurings. Foreclosed assets include assets
acquired in settlement of loans.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonperforming assets (net
of allowances):
Nonperforming loans:
Residential $851 $ 705 $ 772 $1,719 $1,939
Construction - 178 155 168 -
Consumer - - - - 5
Nonresidential - - - - 41
---- ----- ----- ----- -----
Total 851 883 927 1,887 1,985
Foreclosed assets:
Residential - 242 715 408 667
Nonresidential 44 - - - -
---- ------ ------ ------ ------
Total 44 242 715 408 667
---- ------ ------ ------ ------
Total nonperforming assets $895 $1,125 $1,642 $2,295 $2,652
==== ====== ====== ====== ======
Total nonperforming assets as a
percentage of total assets .31% .40% .62% .94% 1.18%
=== === === === ====
</TABLE>
As of June 30, 1997, there were no additional loans with respect to
which known information about the possible credit problems of the borrowers
caused management of Centennial to have doubts as to the ability of the
borrowers to comply with present loan repayment terms and which may result in
the future inclusion of such items in the nonperforming asset categories.
For the year ended June 30, 1997, interest income which would have been
recorded with respect to nonaccruing loans, had such loans been current in
accordance with their original terms, totaled approximately $22,000. There was
no interest included in interest income on such loans for the year ended June
30, 1997.
The responsibility for maintaining an adequate allowance for loan
losses rests with Centennial's Asset Classification Committee, which is
comprised of Centennial's senior management, with oversight provided by the
Board of Directors. The Committee meets on a quarterly basis to determine the
adequacy of the allowance for loan losses as it relates to a number of
-11-
<PAGE> 12
relevant factors, including, but not limited to, trends in the level of
nonperforming assets and classified loans, current and anticipated economic
conditions in the primary lending area, past loss experience, and possible
losses arising from specific problem assets. To a lesser extent, the Committee
considers loan concentrations to single borrowers and changes in the composition
of its loan portfolio. At June 30, 1997, Centennial's allowance for loan losses
totaled $820,000 and was primarily allocated to potential problem assets in the
residential loan portfolio.
The foregoing statement regarding the adequacy of the allowance for
loan losses is a "forward-looking" statement within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Factors that could affect
the adequacy of the loan loss allowance include, but are not limited to, the
following: (1) changes in the national and local economy which may negatively
impact the ability of borrowers to repay their loans and which may cause the
value of real estate and other properties that secure outstanding loans to
decline; (2) unforeseen adverse changes in circumstances with respect to certain
large loans; (3) decreases in the value of collateral securing consumer loans to
amounts less than the outstanding balances of the consumer loans; and (4)
determinations by various regulatory agencies that Centennial must recognize
additions to its loan loss allowance based on such regulators' judgment of
information available to them at the time of their examinations.
The following table sets forth an analysis of Centennial's allowance
for losses on loans.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $618 $616 $724 $648 $457
Charge-offs:
Residential (30) (58) (192) (23) (39)
Non-residential (27) - - - (5)
Consumer - - - (5) (7)
---- ---- ---- ---- ----
Total charge-offs (57) (58) (192) (28) (51)
---- ---- ---- ---- ----
Recoveries:
Residential 15 - - 8 -
Consumer - - - - 2
---- ---- ---- ---- ----
Total recoveries 15 - - 8 2
---- ---- ---- ---- ----
Net-charge offs (42) (58) (192) (20) (49)
---- ---- ---- ---- ----
Provision for losses on loans
(charged to operations) 244 60 84 96 240
---- ---- ---- ---- ----
Balance at end of period $820 $618 $616 $724 $648
==== ==== ==== ==== ====
Ratio of net charge-offs to
average loans outstanding 0.02% 0.03% 0.10% 0.10% 0.03%
Ratio of allowance for losses on
loans to nonperforming loans 96.4% 70.0% 66.5% 38.4% 32.6%
Ratio of allowance for losses on
loans to total loans 0.32 % 0.27% 0.29% 0.41% 0.40%
</TABLE>
-12-
<PAGE> 13
INVESTMENT ACTIVITIES
Centennial's assets, other than loans receivable and mortgage-backed
securities, are invested primarily in short-term investments, including
interest-bearing deposits, U.S. Government and agency securities and mutual fund
holdings.
The book value and market values of investment securities at the dates
indicated are summarized as follows:
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------------------
1997 1996 1995
---------------------- ----------------------- -----------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- ------ -------- ------ -------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasuries $2,983 $2,981 $ - $ - $ - $ -
U.S. Government agency
obligations 3,984 3,979 5,474 5,426 7,463 7,273
Municipal obligations 75 75 75 73 26 26
------ ------ ------ ------ ------- --------
Total investment
securities 7,042 7,035 5,549 5,499 7,489 7,299
Asset management funds
available for sale - - 4,084 4,084 4,092 4,092
------ ------ ------ ------ ------- --------
Total $7,042 $7,035 $9,633 $9,583 $11,581 $11,391
====== ====== ====== ====== ======= =======
</TABLE>
The following table presents the contractual maturities or terms to
repricing of investment securities along with the weighted average yields at
June 30, 1997:
<TABLE>
<CAPTION>
Within one Over one to Over five to Over ten
year five years ten years years Total
------------- -------------- ------------- ------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasuries $ - -% $2,983 6.04% $ - -% $ - -% $2,983 6.04%
U.S. Government agency
obligations 500 5.35 2,984 5.83 - - 500 7.87 3,984 6.03
Municipal obligations - - - - 50 4.50% 25 4.70 75 4.57
---- ---- ------ ---- --- ---- ---- ---- ------ ----
Total investment
securities $500 5.35% $5,967 5.93% $50 4.50% $525 7.72% $7,042 6.01%
==== ==== ====== ==== === ==== ==== ==== ====== ====
</TABLE>
The FDIC has a policy which requires that institutions maintain an
average balance of liquid assets (e.g. cash, time deposits and U.S. Government
and agency obligations) in an amount which it deems adequate to protect safety
and soundness, but it does not require a specific level of liquid assets. In the
opinion of management, Centennial's liquidity position was adequate to maintain
safe and sound operations at June 30, 1997. Cash flow projections are regularly
reviewed and updated to assure that adequate liquidity is provided.
SOURCES OF FUNDS
GENERAL. Deposit accounts have traditionally been the principal source
of Centennial's funds for use in lending and for other general business
purposes. In addition to deposits, Centennial derives funds from loan repayments
and cash flows generated from operations. Scheduled loan payments are a
relatively stable source of funds, while deposit inflows and outflows and the
related costs of such funds have varied. Centennial also utilizes borrowings as
a mechanism to raise additional funds without altering Centennial's deposit
pricing structure.
DEPOSITS. Centennial attracts both short-term and long-term deposits
from Centennial's primary market area by offering a wide assortment of accounts
and rates. Centennial offers regular passbook savings accounts, NOW accounts,
money market accounts, fixed interest rate certificates of deposit with varying
maturities and individual retirement accounts. The various Centennial deposit
accounts have differing minimum balance requirements, time periods during which
funds must remain on deposit and interest rates, among other factors. Centennial
generally has not actively sought deposits outside of its primary market area.
-13-
<PAGE> 14
Centennial regularly evaluates its internal cost of funds, surveys
rates offered by competing institutions, reviews its cash flow requirements for
lending and liquidity and executes rate changes when deemed appropriate. In
order to decrease the volatility of its deposits, Centennial imposes stringent
penalties on early withdrawal on its certificates of deposit. Centennial does
not have any brokered deposits and has no present intention to accept or solicit
such deposits. Centennial historically has not been a market leader in pricing
deposits.
The following table sets forth the savings flows at Centennial during
the periods indicated:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Opening balance $ 222,768 $ 208,377 $ 196,499
Deposits 323,722 310,192 299,274
Withdrawals (319,637) (295,801) (287,396)
--------- --------- ---------
Ending balance $ 226,853 $ 222,768 $ 208,377
========= ========= =========
Net increase $ 4,085 $ 14,391 $ 11,878
========= ========= =========
Percentage increase 1.83% 6.91% 6.04%
==== ==== ====
</TABLE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by Centennial at the dates
indicated:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------------------
1997 1996 1995
----------------------- ------------------------ -----------------------
Amount % of total Amount % of total Amount % of total
------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts
- --------------------
3.00 - 5.99% $126,329 55.7% $109,194 49.0% $ 78,115 37.5%
6.00 - 7.99% 30,889 13.6 43,827 19.7 63,440 30.5
8.00 - 9.99% 352 0.2 1,120 0.5 1,534 0.7
------- ---- ------- ---- -------- ----
Total certificate accounts 157,570 69.5% 154,141 69.2% 143,089 68.7
------- ---- ------- ---- -------- ----
Transaction accounts
- --------------------
Passbook savings 36,602 16.1 40,482 18.2 42,013 20.2
Money market accounts 5,965 2.6 7,634 3.4 9,226 4.4
NOW accounts 26,716 11.8 20,511 9.2 14,049 6.7
------ ---- --------- ----- --------- ----
Total transaction accounts 69,283 30.5 68,627 30.8 65,288 31.3
------ ---- --------- ---- --------- ----
Total deposits $226,853 100.0% $222,768 100.0% $208,377 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
The following table shows the interest rate and remaining maturity
information for Centennial's certificates of deposit as of June 30, 1997:
<TABLE>
<CAPTION>
Interest rate Less than 1 year One to 3 years Over 3 years total
------------- ---------------- -------------- ------------ -----
<S> <C> <C> <C> <C> <C>
3.00 - 5.99% $100,163 $22,022 $4,144 $126,329
6.00 - 7.99% 9,538 19,194 2,157 30,889
8.00 - 9.99% 69 268 15 352
-------- ------- ------ --------
Total certificates of deposit $109,770 $41,484 $6,316 $157,570
======== ======= ====== ========
</TABLE>
-14-
<PAGE> 15
The following table sets forth the maturities of Centennial's
certificates of deposit having principal amounts greater than $100,000 at June
30, 1997.
<TABLE>
<CAPTION>
Maturing in quarter ending :
(In thousands)
<S> <C> <C>
September 30, 1997 $ 1,499
December 31, 1997 2,670
March 31, 1998 3,540
June 30, 1998 1,516
After June 30, 1998 5,581
-------
Total certificates of deposit with balances over $100,000 $14,806
=======
</TABLE>
BORROWINGS. Centennial's other sources of funds include advances from
the Federal Home Loan Bank (the "FHLB") of Cincinnati. As a member of the FHLB,
Centennial is required to own capital stock in the FHLB and is authorized to
apply for advances from the FHLB. Each FHLB credit program has its own interest
rate, which may be fixed or variable, and range of maturity. The FHLB may
prescribe the acceptable uses for these advances, as well as limitations on the
size of the advances and repayment provisions.
The following table sets forth certain information as to Centennial's
FHLB advances and other borrowings at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------
1997 1996 1995
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances $28,114 $25,634 $27,158
Other borrowings 65 213 362
------- ------- -------
Total borrowings $28,179 $25,847 $27,520
======= ======= =======
Weighted average interest rate
of FHLB advances 5.97% 5.78% 5.64%
===== ==== ====
Weighted average rate of other borrowings 8.50% 8.25% 8.75%
===== ==== ====
</TABLE>
The following table sets forth the maximum balance and average balance
of FHLB advances and other borrowings during the periods indicated:
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------
1997 1996 1995
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Maximum balance:
FHLB advances $28,643 $27,308 $31,598
Other borrowings $ 213 $ 362 $ 1,600
Average balance:
FHLB advances $22,073 $23,051 $25,083
Other borrowings $ 178 $ 324 $ 660
Weighted average interest
rate of FHLB advances 5.63% 5.69% 5.83%
Weighted average interest
rate of other borrowings 8.30% 8.70% 8.26%
</TABLE>
-15-
<PAGE> 16
SUBSIDIARY ACTIVITIES
Centennial currently owns a service corporation, Centennial Savings and
Loan Service Corporation. This subsidiary offers mutual funds, self-directed
IRA's and other securities and insurance products to Centennial customers
through a third party marketing arrangement with Money Concepts, Inc.
COMPETITION
Centennial faces strong competition both in originating real estate
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from other savings institutions, commercial banks and mortgage
bankers who also make loans secured by real estate located in Centennial's
primary market area. Centennial competes for real estate loans principally on
the basis of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers.
Centennial faces substantial competition in attracting deposits from
other savings institutions, commercial banks, money market and mutual funds,
credit unions and other investment vehicles. The ability of Centennial to
attract and retain deposits depends on its ability to provide an investment
opportunity that satisfies the requirements of investors as to rate of return,
liquidity, risk and other factors. Centennial competes for these deposits by
offering a variety of deposit accounts at competitive rates, convenient business
hours, and convenient branch locations with inter-branch deposit and withdrawal
privileges at each. The authority to offer money market deposits and expanded
lending and other powers authorized for savings institutions by federal
legislation has resulted in increased competition for both deposits and loans
between savings institutions and other financial institutions, such as
commercial banks.
EMPLOYEES
At June 30, 1997, Centennial had a total of 54 full-time employees and
22 part-time employees.
REGULATION
GENERAL
As a savings and loan holding company within the meaning of the Home
Owners' Loan Act, as amended, the Corporation is subject to regulation,
examination and supervision by the OTS. As a state chartered savings bank which
is not a member of the Federal Reserve System, Centennial is subject to
regulation by the Division and the FDIC. The Corporation and Centennial must
file periodic reports with these governmental agencies, as applicable,
concerning their activities and financial condition. Examinations are conducted
periodically by the applicable regulators to determine whether the Corporation
and Centennial are in compliance with various regulatory requirements and are
operating in a safe and sound manner. Centennial is a member of the FHLB and is
also subject to certain regulations of the Board of Governors of the Federal
Reserve (the "FRB").
OHIO REGULATION OF CENTENNIAL
As a savings bank incorporated under Ohio law, Centennial is subject to
regulation by the Division. Such regulation affects Centennial's savings,
lending and investment activities. Ohio law requires that Centennial maintain at
least 60% of its assets in housing-related and other specified investments. At
June 30, 1997, Centennial had more than 60% of its assets in such investments.
The ability of Ohio savings banks to engage in certain state-authorized
investments is subject to oversight and approval by the FDIC.
Ohio law generally limits the aggregate amount that a savings bank can
lend to one borrower to an amount equal to 15% of the institution's unimpaired
capital and surplus. Based on such limit, Centennial was able to lend
approximately $3.6 million to one borrower at June 30, 1997. A savings bank may
lend to one borrower an additional amount not to exceed 10% of the institution's
unimpaired capital and surplus, if the additional amount is fully secured by
certain forms of "readily marketable collateral." Real estate is not considered
"readily marketable collateral."
The Division is responsible for the regulation and supervision of Ohio
savings banks in accordance with the laws of the State of Ohio. Periodic
examinations by the Division are usually conducted on a joint basis with the
FDIC. Ohio law requires that Centennial maintain federal deposit insurance as a
condition of doing business. The Division may initiate certain
-16-
<PAGE> 17
supervisory measures or formal enforcement actions against Ohio savings banks.
Ultimately, if the grounds provided by law exist, the Division may place an Ohio
savings banks in conservatorship or receivership. Any mergers involving or
acquisitions of control of Ohio savings banks must be approved by the Division.
In addition to being governed by the laws of Ohio specifically
governing savings banks, Centennial is also governed by Ohio corporate law, to
the extent such law does not conflict with the laws specifically governing
savings banks.
FEDERAL REGULATION OF CENTENNIAL
SUPERVISION AND EXAMINATION. The FDIC is responsible for the regulation
and supervision of all commercial banks and state savings banks that are not
members of the Federal Reserve System ("Non-member Banks"). The FDIC issues
regulations governing the operations of Non-member Banks, examines such
institutions and may also initiate enforcement actions against such institutions
and certain persons affiliated with them for violations of laws and regulations
or for engaging in unsafe or unsound practices. If the grounds provided by law
exist, the FDIC may appoint a conservator or a receiver for a Non-member Bank.
Non-member Banks are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosure, equal credit opportunity, fair credit
reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
institution to open a new branch or engage in a merger transaction. The federal
financial institution regulatory agencies recently issued revised regulations
governing community reinvestment that evaluate actual lending and investment
within an institution's designated service area, with particular emphasis on
low-to-moderate income areas and borrowers. These regulations also evaluate an
institution's service to low and moderate-income areas in terms of branch
locations.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDIC has issued regulations and
adopted guidelines for Non-member Banks establishing standards for (a) internal
controls, information systems and internal audit systems; (b) loan
documentation; (c) credit underwriting; (d) interest rate exposure; (e) asset
growth; and (f) compensation, fees and benefits. These standards provide general
guidance on what operational systems and procedures the FDIC believes Non-member
Banks should have in place in each of these areas. A Non-member Bank which fails
to meet these standards may be required by the FDIC to submit an acceptable plan
to achieve compliance.
STATE-CHARTERED BANK ACTIVITIES. The ability of state-chartered banks,
including Centennial, to engage in any state-authorized activities or make any
state-authorized investments, as principal, is limited to the extent that such
activity is done or investment is made in a manner different than that permitted
for, or subject to different terms and conditions than those imposed on,
national banks. Any such activity or investment, as principal, not permissible
for a national bank is subject to approval by the FDIC. Such approval will not
be granted unless certain capital requirements are met and there is not a
significant risk to the FDIC insurance fund. Most equity and real estate
investments (excluding office space and REO) are prohibited. Certain exceptions
are granted, including one for any activity deemed to be closely related to
banking by the FRB and, therefore, permissible for bank holding companies and
another for FDIC-approved subsidiary activities.
REGULATORY CAPITAL REQUIREMENTS. Centennial is required by applicable
law and regulations to meet certain minimum capital requirements, which include
a leverage, or core, capital requirement and a risk-based capital requirement.
The leverage capital requirement is a minimum level of Tier 1 capital
to average total consolidated assets of 3%, if Centennial has the highest
regulatory examination rating, well diversified risk and minimal anticipated
growth or expansion, and between 4% and 5% of average total consolidated assets
if it does not meet those criteria. "Tier 1" capital includes common
stockholders' equity, noncumulative perpetual preferred stock and minority
interest in the equity accounts of consolidated subsidiaries, less all
intangibles, other than includable purchased mortgage servicing rights and
credit card relationships.
Pursuant to the risk-based capital requirement, Centennial must
maintain total capital, which consists of Tier 1 capital and certain general
valuation reserves, of 8% of risk-weighted assets. The FDIC may, however, set
higher capital requirements when particular circumstances warrant higher capital
levels, including the presence of excessive interest rate risk. For purposes of
computing risk-based capital, assets and certain off-balance sheet items are
weighted at percentage levels ranging from 0% to 100%, depending on the relative
risk.
-17-
<PAGE> 18
The following table presents certain information regarding compliance
by Centennial with applicable capital requirements at June 30, 1997:
<TABLE>
<CAPTION>
Amount %
------ -
<S> <C> <C>
Tier 1 capital (1) $23,985 8.5%
Maximum leverage capital requirement 14,190 5.0
------ ---
Excess $ 9,795 3.5%
======== ====
Total capital (1) $24,795 13.4%
Risk-based capital requirement 14,752 8.0
-------- -----
Excess $10,043 5.4%
======= ======
-----------------------------
<FN>
(1) Tier 1 capital and risk-based capital reflect capital computed in accordance
with generally accepted accounting principles, net of $368,000 of goodwill.
Risk-based capital includes a $820,000 general loan loss allowance.
</TABLE>
The FDIC has added a market risk component to the capital requirements
of Non-member Banks. Such component would require additional capital for general
or specific market risk or trading portfolios of debt and equity securities and
other investments or assets. The policy will apply to an institution with less
than $5 billion in assets only if its trading portfolio constitutes at least 10%
of the institution's assets. The Corporation has no trading portfolio and,
therefore, does not expect to have to meet this new requirement. The FDIC may
also require additional capital to address interest-rate risk, concentrations of
credit and non-traditional activities on a case-by-case basis.
The FDIC has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled Non-member
Banks. At each successively lower defined capital category, an institution is
subject to more restrictive and numerous mandatory or discretionary regulatory
actions or limits, and the applicable agency has less flexibility in determining
how to resolve the problems of the institution. The FDIC has defined these
capital levels as follows: (1) well-capitalized institutions must have total
risk-based capital of at least 10%, Tier 1 risk-based capital (consisting only
of items that qualify for inclusion in Tier 1 capital) of at least 6% and Tier 1
capital of at least 5%; (2) adequately capitalized institutions are those that
meet the regulatory minimum of total risk-based capital of at least 8%, Tier 1
risk-based capital (consisting only of items that qualify for inclusion in Tier
1 capital) of at least 4% and Tier 1 capital of at least 4% (except for
institutions receiving the highest examination rating and with an acceptable
level of risk, in which case the Tier 1 capital level is at least 3%); (3)
undercapitalized institutions are those that do not meet regulatory limits, but
that are not significantly undercapitalized; (4) significantly undercapitalized
institutions have total risk-based capital of less than 6%, Tier 1 risk-based
capital (consisting only of items that qualify for inclusion in Tier 1 capital)
of less than 3% and Tier 1 capital of less than 3%; and (5) critically
undercapitalized institutions are those with Tier 1 capital of less than 2% of
total assets. In addition, the FDIC generally can downgrade an institution's
capital category, notwithstanding its capital level, if, after notice and
opportunity for hearing, the institution is deemed to be engaging in an unsafe
or unsound practice, because it has not corrected deficiencies that resulted in
it receiving a less than satisfactory examination rating on matters other than
capital or it is deemed to be in an unsafe or unsound condition. An
undercapitalized institution must submit a capital restoration plan to the FDIC
within 45 days after it becomes undercapitalized. Such institution will be
subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. A critically undercapitalized institutions must be placed
in conservatorship or receivership within 90 days of reaching that
capitalization level, except under limited circumstances. Centennial's capital
levels at June 30, 1997, meet the standards for a well-capitalized institution.
Federal law prohibits a financial institution from making a capital
distribution to anyone or paying management fees to any person having control of
the institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with its capital
restoration plan until the institution has been adequately capitalized on an
average during each of the four preceding calendar quarters and must provide
adequate assurances of performance. The aggregate liability pursuant to such
guarantee is limited to the lesser of (a) an amount equal to 5% of the
institution's total assets at the time it became undercapitalized or (b) the
amount necessary to bring the institution into compliance with all capital
standards applicable to such institution at the time the institution fails to
comply with its capital restoration plan.
TRANSACTIONS WITH AFFILIATES AND INSIDERS. All transactions between
Centennial and the Corporation or any other affiliate must comply with Sections
23A and 23B of the Federal Reserve Act (the "FRA"). An affiliate is any company
or entity
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<PAGE> 19
which controls, is controlled by or is under common control with the financial
institution. In a holding company context, the parent holding company of an
insured institution and any companies that are controlled by such parent holding
company are affiliates of the institution. Generally, Sections 23A and 23B of
the FRA (i) limit the extent to which a financial 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 for any one
affiliate and 20% of such capital stock and surplus for the aggregate of such
transactions with all affiliates, and (ii) require that all such transactions be
on terms substantially the same, or at least as favorable to the institution or
the 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 types of transactions. In addition because it is a
subsidiary of a savings and loan holding company, Centennial may not make any
loan or other extension of credit to an affiliate unless the affiliate is
engaged only in activities permissible for a bank holding company and may not
purchase or invest in securities of any affiliate, except shares of a
subsidiary. Exemptions from Sections 23A or 23B of the FRA may be granted only
by the FRB. Centennial was in compliance with these requirements at June 30,
1997.
Loans to insiders of Centennial and the Corporation are subject to the
restrictions contained in Section 22(g) and (h) of the FRA, which restrict loans
to executive officers, directors and principal shareholders. Loans to an
executive officer and to a greater than 10% shareholder of a financial
institution (18% in the case of institutions located in an area with less than
30,000 in population), and certain affiliated entities of either, may not
exceed, together with all other outstanding loans to such person and affiliated
entities, the institution's lending limit. The total of all loans to such
persons may not exceed the institution's unimpaired capital and surplus. Most
loans to directors, executive officers and greater than 10% shareholders of an
institution, and their respective affiliates, must be approved in advance by a
majority of the board of directors of the institution with any "interested"
director not participating in the voting. All loans to directors, executive
officers and principal shareholders must be made on terms substantially the same
as offered in comparable transactions to other persons. In addition, loans
generally may not be made to an executive officer, except loans for specific
authorized purposes, such as financing the education of the officer's children
or the purchase of the officer's primary residence.
DEPOSIT INSURANCE
The FDIC is an independent federal agency that insures the deposits, up
to prescribed statutory limits, of federally insured banks and savings and loan
associations and safeguards the safety and soundness of the banking and savings
and loan industries. The FDIC administers two separate insurance funds, the Bank
Insurance Fund ("BIF") for commercial banks and state savings banks and the SAIF
for savings associations. Centennial is a member of the SAIF and its deposit
accounts are insured by the FDIC up to the prescribed limits. The FDIC has
examination authority over all insured depository institutions, including
Centennial, and has authority to initiate enforcement actions against
federally-insured savings associations if the FDIC does not believe the OTS has
taken appropriate action to safeguard safety and soundness and the deposit
insurance fund.
The FDIC is required to maintain designated levels of reserves in the
SAIF and in the BIF. The FDIC may increase assessment rates for either fund if
necessary to restore the fund's ratio of reserves to insured deposits to its
target level within a reasonable time and may decrease such rates if such target
level has been met. The FDIC has established a risk-based assessment system for
both SAIF and BIF members. Under this system, assessments vary based on the risk
the institution poses to its deposit insurance fund. The risk level is
determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution.
Prior to September 1996, the SAIF's ratio of reserves to insured
deposits was significantly below the level required by law, while the BIF's
ratio was above the required level. As a result, institutions with SAIF-insured
deposits were paying higher deposit insurance assessments than institutions with
BIF-insured deposits. Federal legislation providing for the recapitalization of
the SAIF became effective in September 1996 and included a special assessment of
$.657 per $100 of SAIF-insured deposits held at March 31, 1995. Centennial had
approximately $206.0 million in deposits at March 31, 1995, and paid a special
assessment of $1.35 million.
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<PAGE> 20
CHANGES IN CONTROL
FEDERAL LAW. The Federal Deposit Insurance Act (the "FDIA") provides
that no person, acting directly or indirectly or in concert with one or more
persons, shall acquire control of any insured depository institution or holding
company unless 60 days prior written notice has been given to the primary
federal regulator for that institution and such regulator has not issued a
notice disapproving the proposed acquisition. Control, for purposes of the FDIA,
means the power, directly or indirectly, alone or acting in concert, to direct
the management or policies of an insured institution or to vote 25% or more of
any class of securities of such institution. Control exists in situations in
which the acquiring party has direct or indirect voting control of at least 25%
of the institution's voting shares, controls in any manner the election of a
majority of the directors of such institution or is determined to exercise a
controlling influence over the management or policies of such institution. In
addition, control is presumed to exist, under certain circumstances where the
acquiring party (which includes a group "acting in concert") has voting control
of at least 10% of the institution's voting stock. These restrictions do not
apply to holding company acquisitions.
OHIO LAW. A statutory limitation on the acquisition of control of an
Ohio savings bank requires the written approval of the Division prior to the
acquisition by any person or entity of a controlling interest in an Ohio
association. Control exists, for purposes of Ohio law, when any person or entity
which, either directly or indirectly, or acting in concert with one or more
other persons or entities, owns, controls, holds with power to vote, or holds
proxies representing, 15% or more of the voting shares or rights of an
association, or controls in any manner the election or appointment of a majority
of the directors. A director will not be deemed to be in control by virtue of an
annual solicitation of proxies voted as directed by a majority of the board of
directors. Ohio law also requires that certain acquisitions of voting securities
that would result in the acquiring shareholder owning 20%, 33-1/3% or 50% of the
outstanding voting securities of the Corporation must be approved in advance by
the holders of at least a majority of the outstanding voting shares represented
at a meeting at which a quorum is present and a majority of the portion of the
outstanding voting shares represented at such a meeting, excluding the voting
shares by the acquiring shareholder. This statute was intended, in part, to
protect shareholders of Ohio corporations from coercive tender offers.
Interstate mergers and acquisitions involving savings banks
incorporated under Ohio law are permitted by Ohio law ,under certain
circumstances. A financial institution or financial institution holding company
with its principal place of business in another state may acquire a savings
institution loan association or savings and loan holding company incorporated
under Ohio law if, in the discretion of the Division, the laws of such other
state give an Ohio institution or an Ohio holding company reciprocal rights.
HOLDING COMPANY REGULATION
The Corporation is a unitary savings and loan holding company subject
to the regulatory oversight, examination and enforcement authority of the OTS.
Though Centennial is not a savings association, it has elected to be treated as
such for holding company purposes, so that the Corporation does not become a
bank holding company. As a savings and loan holding company, the Corporation is
required to register and file periodic reports with the OTS. If the OTS
determines that the continuation of a particular activity by a savings and loan
holding company constitutes a serious threat to the financial condition of its
subsidiary institutions, the OTS may impose restrictions on the holding company.
Such restrictions may include limiting the payment of dividends, transactions
with affiliates or any other activities deemed to pose a serious threat to the
savings associations.
In order for the Corporation to retain its status as a savings and loan
holding company, Centennial must meet the qualified thrift lender ("QTL") test.
The QTL test requires that 65% of the association's portfolio assets consist of
qualified thrift investments on a monthly average basis in 9 out of every 12
months. If Centennial fails to meet the QTL test, the Corporation may be subject
to certain regulatory restrictions and will not be eligible for FHLB advances to
the fullest possible extent. At June 30, 1997, Centennial had qualified thrift
investments in excess of 90% of its portfolio assets.
Generally, no savings and loan holding company may (i) acquire or
retain control of a savings association or another savings and loan holding
company or control the assets thereof or (ii) acquire or retain more than 5% of
the voting shares of a savings association or holding company thereof which is
not a subsidiary without the prior written approval of the Director of the OTS.
Additionally, under certain circumstances a savings and loan holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15% of
the previously unissued voting shares of an undercapitalized savings association
for cash without such savings association being deemed to be controlled by the
holding company. 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
also acquire control of any savings institution, other than a subsidiary
institution, or any other savings and loan holding company.
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<PAGE> 21
The Director of the OTS may approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by 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). As under prior law, the Director of the OTS may approve
an acquisition resulting in a multiple savings and loan holding company
controlling savings associations in more than one state in the case of certain
emergency thrift acquisitions.
If it became a multiple savings and loan holding company, the
activities of the Corporation and those of any of its subsidiaries (other than
Centennial) would be subject to certain restrictions. Generally, no multiple
savings and loan holding company or subsidiary thereof that is not a savings
association may engage in any business activity other than (i) furnishing or
performing management services for a subsidiary savings association, (ii)
conducting an insurance agency or an escrow business, (iii) holding, managing or
liquidating assets owned by or acquired from a subsidiary savings association,
(iv) holding or managing properties used or occupied by a subsidiary savings
association, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by federal regulation as of March 5, 1987, to be
engaged in by multiple holding companies, or (vii) furnishing or performing such
other services or engaging in those activities authorized by the FRB as
permissible for bank holding companies, unless the director of the OTS by
regulation prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above must also be approved by
the Director of the OTS prior to being engaged in by a multiple holding company.
Federal law provides that an insured institution shall be liable for
any loss incurred by the FDIC in connection with the default or potential
default of, or federal assistance provided to, an insured institution which is
controlled by the same holding company. Such loss would be apportioned among all
of the insured institutions controlled by the holding company.
FRB RESERVE REQUIREMENTS
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $49.3
million, subject to an exemption of up to $4.4 million, and to maintain reserves
of 10% of net transaction accounts in excess of $49.3 million. These percentages
are subject to revision by the FRB. At June 30, 1997, Centennial was in
compliance with the FRB's reserve requirement.
FEDERAL HOME LOAN BANK SYSTEM
As a member of the FHLB, Centennial is required to maintain an
investment in the capital stock of the FHLB in an amount equal to the greater of
1.0% of the aggregate outstanding principal amount of its residential mortgage
loans, home purchase contracts and similar obligations at the beginning of each
year, or 5% of its advances from the FHLB. Centennial is in compliance with this
requirement with an investment in FHLB stock of $2.4 million at June 30, 1997.
FHLB advances to member institutions who meet the QTL test are
generally limited to the lower of (i) 25% of the member's assets or (ii) 20
times the member's investment in FHLB stock. At June 30, 1997, Centennial's
maximum limit on advances was approximately $48.0 million. The granting of
advances is also subject to the FHLB's collateral and credit underwriting
guidelines.
Upon the origination or renewal of a loan or advance, the FHLB is
required by law to obtain and maintain a security interest in collateral in one
or more of the following categories: fully-disbursed, whole first mortgage loans
on improved residential property or securities representing a whole interest in
such loans; securities issued, insured or guaranteed by the United States
Government or an agency thereof; deposits in any FHLB; or other real estate
related collateral (up to 30% of the member association's capital) acceptable to
the FHLB, if such collateral has a readily ascertainable value and the FHLB can
perfect its security interest in the collateral.
The FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
All long-term advances by the FHLB must be made only to provide funds for
residential housing finance.
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TAXATION
FEDERAL TAXATION
The Holding Company and Centennial are both subject to the federal tax
laws and regulations which apply to corporations generally. In addition to the
regular income tax, the Holding Company and Centennial are subject to the
alternative minimum tax which is imposed at a minimum tax rate of 20% on
"alternative minimum taxable income" (which is the sum of a corporation's
regular taxable income, with certain adjustments, and tax preference items),
less any available exemption. Such tax preference items include interest on
certain tax-exempt bonds issued after August 7, 1986. In addition, 75% of the
amount by which a corporation's "adjusted current earnings" exceeds its
alternative minimum taxable income computed without regard to this preference
item and prior to reduction by net operating losses, is included in alternative
minimum taxable income. Net operating losses can offset no more than 90% of
alternative minimum taxable income. The alternative minimum tax is imposed to
the extent it exceeds the corporation's regular income tax. Payments of
alternative minimum tax may be used as credits against regular tax liabilities
in future years. However, the Taxpayer Relief Act of 1997 repealed the
alternative minimum tax for certain "small corporations" for tax years beginning
after December 31, 1997. A corporation initially qualifies as a small
corporation if it had average gross receipts of $5,000,000 or less for the three
tax years ending with its first tax year beginning after December 31, 1996. Once
a corporation is recognized as a small corporation, it will continue to be
exempt from the alternative minimum tax for as long as its average gross
receipts for the prior three-year period does not exceed $7,500,000. In
determining if a corporation meets this requirement, the first year that it
achieved small corporation status is not taken into consideration.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Act"), which was signed into law on August 21, 1996, certain thrift
institutions, such as Centennial, were allowed deductions for bad debts under
methods more favorable than those granted to other taxpayers. Qualified thrift
institutions could compute deductions for bad debts using either the specific
charge-off method of Section 166 of the Code or one of two reserve methods of
Section 593 of the Code. The reserve methods under Section 593 of the Code
permitted a thrift institution annually to elect to deduct bad debts under
either (i) the "percentage of taxable income" method applicable only to thrift
institutions, or (ii) the "experience" method that also was available to small
banks. Under the "percentage of taxable income" method, a thrift institution
generally was allowed a deduction for an addition to its bad debt reserve equal
to 8% of its taxable income (determined without regard to this deduction and
with additional adjustments). Under the "experience" method, a thrift
institution was generally allowed a deduction for an addition to its bad debt
reserve equal to the greater of (i) an amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of the
base year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the experience
method or the percentage of taxable income method. For tax years 1995 and
earlier, Centennial used the percentage of taxable income method because such
method provided a higher bad debt deduction than the experience method.
The Act eliminated the percentage of taxable income method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are required to use only the
specific charge off method.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six-taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that is treated
as a large bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans (generally loans secured by improved real estate)
and its reserve for losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (I.E., the "pre-1988 reserves"). In the case of
a thrift institution that is treated as a small bank, like Centennial, the
amount of the institution's applicable excess reserves generally is the excess
of (i) the balances of its reserve for losses on qualifying real property loans
and its reserve for losses on nonqualifying loans as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the greater of the
balance of (a) its pre-1988 reserves or (b) what the thrift's reserves would
have been at the close of its last year beginning before January 1, 1996, had
the thrift always used the experience method.
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For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential or church property and certain mobile homes), but only to the extent
that the loan is made to the owner of the property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which require recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may not
be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the pre-1988 reserves; and third, out of such other accounts as may be proper.
To the extent a distribution by Centennial to the Holding Company is deemed paid
out of its pre-1988 reserves under these rules, the pre-1988 reserves would be
reduced and the gross income of Centennial for tax purposes would be increased
by the amount which, when reduced by the income tax, if any, attributable to the
inclusion of such amount in its gross income, equals the amount deemed paid out
of the pre-1988 reserves. As of June 30, 1997, the pre-1988 reserves of
Centennial for tax purposes totaled approximately $2.3 million. Centennial
believes it had approximately $11.3 million of accumulated earnings and profits
for tax purposes as of June 30, 1997, which would be available for dividend
distributions, provided regulatory restrictions applicable to the payment of
dividends are met. No representation can be made as to whether Centennial will
have current or accumulated earnings and profits in subsequent years.
The tax returns of Centennial have been audited or closed without audit
through fiscal year 1992. In the opinion of management, any examination of open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of Centennial.
OHIO TAXATION
The Holding Company is subject to the Ohio corporation franchise tax,
which, as applied to the Holding Company, is a tax measured by both net earnings
and net worth. The rate of tax is the greater of (i) 5.1% on the first $50,000
of computed Ohio taxable income and 8.9% of computed Ohio taxable income in
excess of $50,000 or (ii) 0.582% times taxable net worth. For tax years
beginning after December 31, 1998, the rate of tax is the greater of (i) 5.1% on
the first $50,000 of computed Ohio taxable income and 8.5% of computed Ohio
taxable income in excess of $50,000 or (ii) .400% times taxable net worth.
A special litter tax is also applicable to all corporations, including
the Holding Company, subject to the Ohio corporation franchise tax other than
"financial institutions." If the franchise tax is paid on the net income basis,
the litter tax is equal to .11% of the first $50,000 of computed Ohio taxable
income and .22% of computed Ohio taxable income in excess of $50,000. If the
franchise tax is paid on the net worth basis, the litter tax is equal to .014%
times taxable net worth.
Centennial is a "financial institution" for State of Ohio tax purposes.
As such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of the book net worth
of Centennial determined in accordance with generally accepted accounting
principles. For tax year 1999, however, the franchise tax on financial
institutions will be 1.4% of the book net worth and for tax year 2000 and years
thereafter the tax will be 1.3% of the book net worth. As a "financial
institution," Centennial is not subject to any tax based upon net income or net
profits imposed by the State of Ohio.
OHIO TAXATION
The State of Ohio imposes a franchise tax of 1.5% of an institutions's
capital determined under generally accepted accounting principles, as adjusted
for goodwill and with allocations pursuant to prescribed formulas for property
held outside the State of Ohio.
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<PAGE> 24
DELAWARE TAXATION
As a Delaware holding company, Centennial is exempted from Delaware
corporate income tax but is required to file an annual report with and pay an
annual fee to the State of Delaware. Centennial is also subject to an annual
franchise tax imposed by the State of Delaware.
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth certain information concerning the main
office and each branch office of Centennial at June 30, 1997. The aggregate net
book value of Centennial's office premises and equipment was approximately $5.4
million at June 30, 1997.
<TABLE>
<CAPTION>
Location Year opened Owned or leasd Book value
-------- ----------- -------------- ----------
Main office
<S> <C> <C> <C>
5535 Glenway Avenue 1997 Owned $4,515,000
Cincinnati, Ohio 45238
Branch offices
4221 Glenway Avenue 1915 Owned $274,000
Cincinnati, Ohio 45205
5681 Rapid Run 1982 Leased (1) n/a
Cincinnati, Ohio 45238
3916 Harrison Avenue 1958 Owned $305,000
Cincinnati, Ohio 45211
9090 Colerain Avenue 1975 Owned $304,000
Cincinnati, Ohio 45251
Additional office space
3820 Washington Avenue 1987 Owned $25,000
Cheviot, Ohio 45211
<FN>
(1) Branch office is located in a strip shopping center owned by the Holding Company.
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
Centennial and its subsidiaries are involved as plaintiff or defendant
in various legal actions arising in the normal course of their businesses. While
the ultimate outcome of the various legal proceedings involving Centennial and
its subsidiary cannot be predicted with certainty, it is the opinion of
management, after consultation with counsel, that the resolution of these legal
actions should not have a material effect on Centennial's consolidated financial
position.
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 contained in the 1997 Annual Report to Stockholders, a
copy of which is attached hereto as Exhibit 13 (the "Annual Report"), under the
caption "COMMON STOCK AND RELATED INFORMATION" is incorporated herein by
reference.
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<PAGE> 25
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information contained in the Annual Report under the caption
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The Report of Independent Certified Public Accountants, Consolidated
Financial Statements and Notes to Consolidated Financial Statements contained in
the Annual Report to Stockholders are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
The information regarding the directors and executive officers of the
Holding Company contained in the Proxy Statement for the 1997 Annual Meeting of
Stockholders, a copy of which is attached hereto as Exhibit 99 (the "Proxy
Statement"), under the caption "BOARD OF DIRECTORS" and "EXECUTIVE OFFICERS" is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption
"COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS" is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement under the caption
"VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no relationships or related transactions to report.
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<PAGE> 26
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
3(a) Certificate of Incorporation
3(b) Bylaws
13 1997 Annual Report to Stockholders
21 Subsidiaries of Registrant
27 Financial Data Schedule
99 Proxy Statement for 1997 Annual Meeting of
Stockholders
(B) REPORTS ON FORM 8-K
The Holding Company filed a Form 8-K with the Securities and Exchange
Commission on March 1, 1997, to report its intention to repurchase up to 5%
of its outstanding common stock over the following six months.
-26-
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 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.
GLENWAY FINANCIAL CORPORATION
By: Robert R. Sudbrook
----------------------------------------
Robert R. Sudbrook, President and
Chief Executive Office (Duly
Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/S/ Robert R. Sudbrook /S/ Edgar A. Rust
------------------------------ --------------------------------
Robert R. Sudbrook, President Edgar A. Rust, Chairman
and Chief Executive Officer
Date: September 25, 1997 Date: September 25, 1997
/S/ Milton L. Van Schoik /S/ Daniel W. Geeding
------------------------------ --------------------------------
Milton L. Van Schoik, Vice Daniel W. Geeding, Secretary and
Chairman Director
Date: September 25, 1997 Date: September 25, 1997
/S/ Ronald L. Goodfellow /S/ Kenneth C. Lichtendahl
------------------------------ --------------------------------
Ronald L. Goodfellow, Director Kenneth C. Lichtendahl, Director
Date: September 25, 1997 Date: September 25, 1997
/S/ Albert W. Moeller /S/ John P. Torbeck
------------------------------ --------------------------------
Albert W. Moeller, Director John P. Torbeck, Director
Date: September 25, 1997 Date: September 25, 1997
/S/ Gregory P. Niesen
--------------------------------
Gregory P. Niesen, Vice President
Principal Accounting and
Financial Officer
Date: September 25, 1997
</TABLE>
-27-
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Incorporation by Reference
- ------ ----------- --------------------------
<S> <C> <C>
3(a) Certificate of Incorporation Incorporated by reference to Registration
Statements on Form S-1 (File No. 33-61156 and File
No. 33-33987) filed by the Issuer pursuant to
Section 5 of the Securities Act of 1933 (the
"Registration Statements").
3(b) Bylaws Incorporated by reference to the Registration
Statements.
13 1997 Annual Report to Stockholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
99 Proxy Statement for 1997 Annual Meeting of
Stockholders
</TABLE>
<PAGE> 1
Exhibit 13
PRESIDENT'S LETTER
Dear Shareholders,
On behalf of the Officers, Directors and staff of Glenway Financial
Corporation and its wholly owned subsidiary, Centennial Savings Bank, it is with
great pleasure that I present your company's operating results for fiscal year
1997.
As anticipated, the recapitalization of the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation (SAIF) occurred this
reporting period. Our one-time assessment amounted to $1.35 million which
negatively impacted after-tax net earnings by $891,000. Without the SAIF charge,
annual earnings of $2.1 million would have been realized, a substantial 36%
increase over prior year earnings of $1.5 million. The impact of the charge to
first quarter earnings is apparent when comparing the unaudited 1997 quarterly
earnings to the prior year results.
<TABLE>
<CAPTION>
Net Earnings
Quarter Ending September 30, December 31, March 31, June 30,
-------------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C>
Fiscal 1997 $(439,000) $507,000 $552,000 $586,000
Fiscal 1996 $ 404,000 $340,000 $364,000 $437,000
</TABLE>
We moved into our new GlenCrossing headquarters in August 1996,
enabling us to achieve various economies of scale and to consolidate the bank
operations, including the successful relocation of the Ferguson Road branch
personnel and deposits to the new headquarters. Controlling operating expense is
one of our principal goals, and we are very pleased with the progress that we
have made in 1997. Excluding the SAIF special assessment, total general,
administrative and other expense declined approximately $276,000 in fiscal 1997,
compared to fiscal 1996. The 1998 fiscal year will be the first full year of
expenses associated with the new corporate headquarters. It will also be the
first full year of reduced deposit insurance premiums following the September
1996 SAIF recapitalization. We estimate that the headquarters expense will be
substantially offset by the reduced deposit insurance premiums. We anticipate,
however, that our continuing focus on cost reduction measures will produce other
savings that will allow us to further reduce total general, administrative and
other expense.
Loans continued to increase a very respectable 8.4% in fiscal 1997
compared to fiscal 1996. At year-end, net loan receivables were $239.6 million
compared to prior year-end of $221.1 million, an increase of $18.5 million.
During the fiscal year, we initiated a commercial lending program and Centennial
now offers conventional business loans and programs sponsored by the Small
Business Administration (SBA) and state and local governments. To date we have
generated commercial loans and commitments for various business purpose loans
amounting to approximately $1.7 million. We anticipate substantial growth in
this area and look forward to serving the credit needs of small businesses in
the community.
Year-end deposits of $226.9 million reflected an increase of $4.1
million for a 1.8% increase over 1996 year-end deposits of $222.8 million. This
modest increase, coupled with the wide array of borrowing programs available to
us through the Federal Home Loan Bank, was more than adequate to finance loan
demand.
Given last year's fine performance and a continuing interest rate
friendly economy, we look forward to the future. We enter fiscal 1998 with a
capable staff that is excited about our company and the opportunities that
accompany success.
In closing, we wish to formally recognize the retirement of Robert
(Bud) Holden from the Board of Directors effective October 23, 1996. Bud served
the Centennial organization and our present day company a total of 39 years as a
Director. Typical of Bud's dedication, he timed his retirement to coincide with
the completion of our new headquarters that he so expertly coordinated as
Chairman of the Building Committee.
Sincerely,
Robert R. Sudbrook
President
<PAGE> 2
BUSINESS OF THE CORPORATION
Glenway Financial Corporation (the "Corporation" or "Glenway
Financial") was originally incorporated under the name Centennial Financial
Corp. in the State of Delaware in March 1990 for the purpose of owning all of
the outstanding stock of Centennial Savings Bank ("Centennial" or the "Savings
Bank") issued upon the conversion of the Savings Bank from the mutual to stock
form in November 1990.
On August 24, 1993, the Corporation consummated a conversion-merger
transaction with The Glenway Loan and Deposit Company ("Glenway"), a
state-chartered mutual savings association, in which the Corporation issued $9.8
million in new common stock, representing the appraised value of Glenway. In
connection with the completion of the conversion-merger transaction, the
Corporation changed its name to Glenway Financial Corporation.
The Savings Bank was organized in 1876 as an Ohio mutual savings and
loan company and converted to a federally-chartered stock savings bank in 1990.
In January 1994, Centennial converted its charter to an Ohio savings bank
charter. As an Ohio savings bank, Centennial is subject to regulation,
supervision and examination by the Ohio Department of Commerce, Division of
Financial Institutions and the Federal Deposit Insurance Corporation (the
"FDIC"). Centennial's deposits are insured up to applicable limits by the FDIC
in the Savings Association Insurance Fund (the "SAIF"). The Corporation is
subject to regulation by the Office of Thrift Supervision (the "OTS").
Centennial considers its principal market area to be the western side
of Cincinnati, Ohio, with five offices in the neighborhoods of Western Hills,
Cheviot, Price Hill, Delhi and Colerain Township. With total assets of
approximately $287.1 million and stockholders' equity of approximately $27.2
million at June 30, 1997, Centennial is one of the largest thrifts headquartered
in Hamilton County, Ohio.
As a community-oriented association, Centennial offers a wide range of
retail banking services. Centennial is principally engaged in the business of
attracting deposits from the general public and using such deposits, together
with borrowings and other funds, to originate residential mortgage loans.
Centennial also originates multi-family and construction loans, primarily on
properties located in its market area and has originated consumer loans and
nonresidential real estate loans. Additionally, Centennial has expanded its
lending activities to make commercial loans to businesses in its principal
market area, subject to applicable investment limits under Ohio law.
Centennial's operating philosophy revolves around the fundamental goal
of providing affordable home ownership for the community and a safe, competitive
return for the depositors. Centennial's Board of Directors has long recognized
that improving the quality of life in Centennial's primary market area is a
prerequisite to continued success in the competitive financial services arena.
As a result, Centennial's management and employees have taken a prominent
position in civic promotion and development, thereby reciprocating the 121 years
of support that Centennial has received from its community.
1
<PAGE> 3
COMMON STOCK AND RELATED INFORMATION
The Corporation's common stock was listed on The NASDAQ Small Cap
Market from August 1993 through June 1995, when the Corporation received
approval for listing on The NASDAQ National Market. The Corporation's common
stock was designated a marginable security by the Federal Reserve Board in
August 1995.
Presented below are the high and low bids for the Corporation's common
stock for each quarter of fiscal 1997, 1996 and 1995 and the amount of cash
dividends paid on the common stock in each quarter of fiscal 1997, 1996 and
1995. These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
FISCAL YEAR ENDING JUNE 30, HIGH LOW CASH DIVIDENDS
- --------------------------- ---- --- --------------
<S> <C> <C> <C>
1997
Quarter ending June 30, 1997 $26.50 $23.00 $ .17
Quarter ending March 31, 1997 23.50 21.50 .17
Quarter ending December 31, 1996 20.05 19.00 .17
Quarter ending September 30, 1996 20.00 18.25 .17
1996
Quarter ending June 30, 1996 $22.09 $19.24 $ .16
Quarter ending March 31, 1996 23.28 19.95 .16
Quarter ending December 31, 1995 23.28 17.81 .16
Quarter ending September 30, 1995 20.43 15.91 .16
1995
Quarter ending June 30, 1995 $17.15 $14.44 $ .15
Quarter ending March 31, 1995 17.60 15.34 .15
Quarter ending December 31, 1994 17.82 15.11 .15
Quarter ending September 30, 1994 17.82 16.25 .13
</TABLE>
As of September 12, 1997, the Corporation had outstanding 1,139,997
shares of common stock, held by approximately 523 stockholders of record. This
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.
In 1996, the Corporation announced the implementation of a dividend
reinvestment program (the "DRIP") pursuant to which stockholders may choose to
reinvest automatically all or a portion of the cash dividends received on shares
of the Corporation's common stock. Stockholders also may make quarterly cash
contributions to the DRIP for the purchase of additional shares of common stock
of the Corporation. The Corporation's transfer agent administers the DRIP.
2
<PAGE> 4
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth certain information concerning the
Corporation's consolidated financial position and results of operations at the
dates and for the periods indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA:(1)
Total amount of:
Assets $287,088 $278,809 $265,740 $243,914 $225,540
Interest-bearing deposits in other
financial institutions - 340 426 1,821 3,970
Investment securities held for sale - - - - 6,702
Investment securities, at cost 7,042 5,549 7,489 10,499 8,549
Investment securities available for sale, at
market - 4,084 4,092 4,047 -
Mortgage-backed securities available for
sale, at market 9,920 14,761 4,769 6,824 -
Mortgage-backed securities, at cost 13,281 15,710 28,011 30,754 31,625
Loans receivable, net(2) 239,648 221,101 205,413 175,110 160,906
Goodwill and other intangible assets 368 576 796 1,037 1,357
Deposit accounts 226,853 222,768 208,377 196,499 202,713
FHLB advances 28,114 25,634 27,158 17,731 4,066
Stockholders' equity - restricted(3) 27,238 26,781 25,387 25,045 15,986
</TABLE>
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS: (1)
Total interest income $20,903 $19,984 $17,862 $15,132 $16,849
Total interest expense 12,195 11,933 10,300 8,160 9,813
------ ------ ------ ------- -------
Net interest income 8,708 8,051 7,562 6,972 7,036
Provision for losses on loans 244 60 84 96 240
-------- --------- --------- --------- --------
Net interest income after provision
for losses on loans 8,464 7,991 7,478 6,876 6,796
Other income 786 734 913 809 1,526
General, administrative and other expense 7,348 6,274 6,001 5,664 5,462
------- ------- ------- ------- -------
Earnings before income taxes 1,902 2,451 2,390 2,021 2,860
Federal income taxes 696 906 915 761 1,104
-------- -------- -------- -------- -------
Net earnings $ 1,206 $ 1,545 $ 1,475 $ 1,260 $ 1,756
======== ======== ======== ======== ========
Earnings per share(4) $1.06 $1.37 $1.30 $1.09 $1.53
===== ===== ===== ===== =====
</TABLE>
Footnotes on next page
3
<PAGE> 5
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Interest rate spread 2.94% 2.77% 2.77% 2.96% 3.05%
Return on average assets (5) .43 .57 .57 .54 .77
Average equity-to-assets ratio 9.53 9.58 9.72 10.23 6.62
Return on average equity (5) 4.48 5.92 5.91 5.29 11.48
Number of:
Real estate loans outstanding 3,968 4,092 4,163 3,556 3,383
Deposit accounts 31,760 31,221 30,429 28,372 28,248
Full service office locations 5 5 6 6 6
- ---------------------------------
<FN>
(1) The consolidated financial statements as of and for the year ended June 30, 1993, have been restated to give
effect to the conversion-merger transaction, which was accounted for as a pooling-of-interests.
(2) Includes loans held for sale.
(3) See Notes I and K of the Notes to Consolidated Financial Statements regarding restrictions on equity.
(4) Earnings per share for 1993 through 1996 has been adjusted to give effect to 5% stock dividends paid in fiscal
1997, 1996 and 1993. Earnings per share is computed based on the following numbers of weighted average shares
outstanding for the years indicated: 1,142,527 for fiscal 1993; 1,148,765 for fiscal 1994; 1,137,877 for fiscal
1995; 1,129,066 for fiscal 1996; and 1,137,814 for fiscal 1997.
(5) Before consideration of the SAIF recapitalization assessment the ratios set forth below would have been as
follows:
Return on average assets .74%
Return on average equity 7.79%
</TABLE>
4
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Glenway Financial's activities are limited primarily to holding the
Savings Bank's stock. The Corporation owns and operates a strip shopping center
in which one of the Savings Bank's branches is located; however, the impact of
this activity on the financial condition and results of operations of the
Corporation has not been material. Therefore, the discussion that follows
focuses on the comparison of Centennial's operations in the fiscal years ended
June 30, 1997 ("fiscal 1997"), June 30, 1996 ("fiscal 1996"), and June 30, 1995
("fiscal 1995").
OVERVIEW
The principal asset of the Corporation is the capital stock of
Centennial. Accordingly, the Corporation's results of operations are primarily
dependent upon the results of operations of the Savings Bank. The Savings Bank
conducts a general banking business that consists primarily of attracting
deposits from the general public and using those funds to originate loans for
commercial, consumer and residential purposes.
The Savings Bank's profitability depends primarily 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
incurred on interest-bearing liabilities (i.e., deposits and borrowed funds).
Net interest income is affected by the relative amounts of interest-earning
assets and interest-bearing liabilities, and the interest rates earned and paid
on these balances.
Additionally, and to a lesser extent, the Savings Bank's profitability
is affected by such factors as the level of non-interest income and expenses,
the provision for loan losses, and the effective tax rate. Non-interest income
consists primarily of service charges and other fees and income from the sale of
loans. Non-interest expenses consist of compensation and benefits,
occupancy-related expenses, FDIC deposit insurance premiums and other operating
expenses.
Management's discussion and analysis of earnings and related financial
data are presented herein to assist investors in understanding the consolidated
financial condition and results of operations of the Corporation for the fiscal
years ended June 30, 1997 and 1996. This discussion should be read in
conjunction with the consolidated financial statements and related footnotes
presented elsewhere in this report.
5
<PAGE> 7
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM JUNE 30, 1996 TO JUNE 30, 1997
The Corporation's total assets amounted to $287.1 million as of June
30, 1997, an increase of $8.3 million, or 3.0%, over the $278.8 million total at
June 30, 1996. The increase was funded primarily through growth in deposits of
$4.1 million and an increase in borrowings of $2.5 million.
Cash and due from banks, federal funds sold and interest bearing
deposits in other financial institutions decreased by $1.3 million, or 24.3%, to
a total of $3.9 million at June 30, 1997, compared to $5.1 million at June 30,
1996. Investment securities and investment securities available for sale
decreased by $2.6 million, or 26.9%, while mortgage-backed securities and
mortgage-backed securities available for sale decreased by $7.3 million, or
23.9%. The combined decrease of $9.9 million in investment and mortgage-backed
securities resulted from the sale of $6.8 million of securities designated as
available for sale, scheduled maturities and calls of $1.5 million and principal
repayments and payoffs of $4.8 million on mortgage-backed securities. These
decreases were partially offset by the purchase of $3.0 million of U.S. Treasury
notes. The proceeds of sales and maturity of investment and mortgage-backed
securities were redeployed primarily to fund growth in the loan portfolio.
Loans receivable totaled $239.6 million at June 30, 1997, an increase
of $18.5 million, or 8.4%, over the $221.1 million total at June 30, 1996. Loan
originations, which totaled $72.8 million during 1997, were partially offset by
loan sales of $440,000 and principal repayments of $53.3 million. Loan
origination volume during 1997 remained relatively consistent with that of 1996,
although sales volume decreased by $3.0 million. Growth in the loan portfolio in
fiscal 1997 was comprised of $17.0 million in one- to four-family and multi
family residential real estate loans and $2.1 million in nonresidential real
estate and commercial loans. The Corporation's allowance for loan losses
amounted to $820,000 at June 30, 1997, an increase of $202,000, or 32.7%, over
the total at June 30, 1996. The allowance for loan losses represented .33% of
the total loan portfolio at June 30, 1997, as compared to .27% at June 30, 1996.
The Corporation's allowances represented 96.4% and 70.0% of non-performing
loans, which totaled $851,000 and $883,000 at June 30, 1997 and 1996,
respectively.
Deposits totaled $226.9 million at June 30, 1997, an increase of $4.1
million, or 1.8%, over the $222.8 million total at June 30, 1996. The increase
resulted from management's continuing marketing efforts, increased consumer
interest in the Savings Bank's "Optimum Choice Account" and growth at the new
main office location. Alternative sources of funds, such as Federal Home Loan
Bank ("FHLB") advances, are frequently used to manage the cost of funds. FHLB
advances totaled $28.1 million at June 30, 1997, an increase of $2.5 million, or
9.7%, over June 30, 1996, and were utilized primarily to fund loan growth.
Stockholders' equity amounted to $27.2 million at June 30, 1997, an
increase of $457,000, or 1.7%, over the $26.8 million total at June 30, 1996.
The increase resulted primarily from period earnings of $1.2 million, a net
increase attributable to employee benefit and stock option plans totaling
$328,000, and an increase of $111,000 in net unrealized gains on securities
designated as available for sale, which were partially offset by dividends to
stockholders of $777,000 and the repurchase of $411,000 of outstanding stock
during fiscal 1997.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
GENERAL. Net earnings for fiscal 1997, totaled $1.2 million, a decrease
of $339,000, or 21.9%, from the $1.5 million in net earnings recorded in fiscal
1996. The decrease in earnings was primarily attributable to the one-time $1.35
million, or $891,000 after tax, assessment imposed on the Savings Bank as part
of legislation to recapitalize the SAIF. Additionally, the decline in earnings
resulted from an increase in the provision for losses on loans of $184,000.
These increased expense items were partially offset by an increase of $657,000
in net interest income and a $52,000 increase in other income. As a result of
the decrease in net earnings before taxes, total federal income tax expense
decreased by $210,000.
Absent the special SAIF assessment, net earnings for fiscal 1997, would
have been $2.1 million, which would represent an increase in net earnings of
$552,000, or 35.7%, over fiscal 1996.
6
<PAGE> 8
NET INTEREST INCOME. Total interest income for fiscal 1997 amounted to
$20.9 million, an increase of $919,000, or 4.6%, over the $20.0 million recorded
for fiscal 1996. Interest income on loans and mortgage-backed securities totaled
$20.2 million, an increase of $1.1 million, or 5.6%, over the 1996 fiscal
period. This increase resulted primarily from a $12.2 million, or 5.0%, increase
in the average balance outstanding year to year, coupled with a 5 basis point
increase in the average yield, from 7.83% in fiscal 1996 to 7.88% in fiscal
1997. Interest income on investment securities and other interest-earning assets
decreased by $153,000, or 18.3%, to a total of $681,000 in fiscal 1997, as
compared to $834,000 in fiscal 1996. This decrease resulted primarily from a
$3.4 million decrease in the average portfolio balance year to year, as a result
of the sale of $4.1 million in securities designated as available for sale,
which was partially offset by a 36 basis point increase in the average yield,
from 5.64% in fiscal 1996 to 6.00% in fiscal 1997.
Total interest expense amounted to $12.2 million for fiscal 1997, an
increase of $262,000, or 2.2%, over fiscal 1996. Interest expense on deposits
increased by $345,000, or 3.3%, to a total of $10.9 million in fiscal 1997. The
increase resulted primarily from a $10.4 million, or 4.8%, increase in the
average deposit portfolio balance outstanding year to year, which was partially
offset by a 7 basis point decrease in the average cost of deposits, from 4.85%
in 1996 to 4.78% in 1997. Interest expense on borrowings decreased by $83,000,
or 6.2%, during fiscal 1997. This decrease was due to a $1.1 million decrease in
average borrowings outstanding and an 8 basis point decrease in the average cost
of borrowings, from 5.73% in fiscal 1996 to 5.65% in fiscal 1997.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $657,000, or 8.2%, for fiscal 1997, as
compared to fiscal 1996. The interest rate spread increased by 17 basis points
to 2.94% in 1997 from 2.77 % in 1996, while the net interest margin increased by
15 basis points, to 3.25% in 1997 from 3.10% in 1996.
PROVISION FOR LOSSES ON LOANS. The provision for losses on loans
represents a charge to earnings to maintain the allowance for loan losses at a
level management believes is adequate to absorb losses in the loan portfolio.
The Corporation's provision for loan losses amount to $244,000 for fiscal 1997,
as compared to $60,000 for fiscal 1996, an increase of $184,000, or 306.7 %. The
provision for loan losses in 1997 was increased primarily as a result of the
$19.1 million, or 8.3%, of growth in the loan portfolio over the year and
introduction of small business commercial lending . Net loan charge-offs
amounted to $42,000 in fiscal 1997 as compared to $58,000 in fiscal 1996.
Management uses the best information available in providing for
possible loan losses and believes that the allowance is adequate at June 30,
1997. However, future adjustments to the allowance could be necessary and net
earnings could be affected if circumstances and/or economic conditions differ
substantially from the assumptions used in making the initial determinations.
OTHER INCOME. Other income totaled $786,000 for fiscal 1997, an
increase of $52,000, or 7.1 %, over the $734,000 recorded in fiscal 1996. The
increase resulted primarily from a $43,000, or 6.9%, increase in service fees,
charges and other operating income, coupled with a $53,000 increase in gain on
sale of loans, as well as a $72,000 increase in net gains on securities
transactions. The increase in service fees, charges and other operating income
resulted primarily from growth in the deposit portfolio, coupled with an
increase in service fee rates and management's continued focus on collecting
fees assessed on deposit accounts.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense increased by $1.1 million, or 17.1%, for fiscal 1997, compared to
fiscal 1996, due primarily to a $1.1 million increase in federal deposit
insurance premiums as a result of the one-time SAIF recapitalization assessment.
Excluding the SAIF recapitalization charge of $1.35 million, general,
administrative and other expense decreased by $276,000, or 4.4%. This net
decrease resulted primarily from a $140,000, or 4.2%, decrease in employee
compensation and benefits, a $19,000, or 5.0%, decrease in franchise taxes and a
$12,000 decrease in goodwill amortization. The decrease in employee compensation
and benefits resulted from a combination of benefits paid in connection with the
death of the Corporation's President in the prior year, coupled with employee
attrition resulting in a net decrease of two full-time equivalent employee
positions. Increases in general, administrative and other expense included a
$116,000, or 24.4%, increase in occupancy and equipment and an $85,000, or
34.7%, increase in data processing expense. In
7
<PAGE> 9
August 1996, the Corporation opened it's new main office headquarters and
upgraded the data communications systems of the Savings Bank, which resulted in
the increases in the aforementioned expenses.
FEDERAL INCOME TAXES. The provision for federal income taxes amounted
to $696,000 for fiscal 1997, a decrease of $210,000, or 23.2 %, from the
$906,000 recorded in fiscal 1996. The decrease resulted primarily from a
$549,000, or 22.4%, decrease in earnings before taxes. The effective tax rates
were 36.6% and 37.0%, for fiscal 1997 and 1996, respectively.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1996 AND
1995
GENERAL. Net earnings for fiscal 1996 totaled $1.5 million,
representing an increase of $70,000, or 4.7%, over net earnings reported for
fiscal 1995. The increase in earnings during fiscal 1996 is primarily
attributable to a $513,000, or 6.9%, increase in net interest income after
provision for losses on loans, which was partially offset by a $179,000, or
19.6%, decline in other income and an increase of $273,000 in general,
administrative and other expense.
NET INTEREST INCOME. Interest income on loans and mortgage-backed
securities totaled $19.2 million in fiscal 1996, an increase of $2.2 million, or
12.9%, over the $17.0 million recorded in fiscal 1995. The increase resulted
primarily from an increase in the weighted average balance outstanding of $14.6
million, or 6.3%, coupled with an increase in the weighted average yield of 45
basis points, to 7.83% in fiscal 1996. Interest on investments and
interest-bearing deposits declined during fiscal 1996 by $67,000, or 7.4%, due
to a 24 basis point decline in weighted average yield and a $549,000 decline in
the weighted average balance outstanding.
Interest expense on deposits totaled $10.6 million during fiscal 1996,
reflecting an increase of $1.8 million, or 20.6%, over fiscal 1995 levels. The
increase was due primarily to the increase in the weighted average balance
outstanding of $15.9 million, or 7.8%, and, to a lesser extent, an increase in
the weighted average rate from 4.34% in fiscal 1995 to 4.85% in fiscal 1996.
Interest on FHLB advances declined during fiscal 1996 by $176,000, or 11.6%, due
primarily to the decrease in outstanding advances year to year.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $489,000, or 6.5%, during fiscal 1996.
The Corporation's interest rate spread remained consistent at 2.77% for fiscal
1995 and fiscal 1996, while the net interest margin increased by two basis
points, from 3.08% in fiscal 1995 to 3.10% in fiscal 1996.
PROVISION FOR LOSSES ON LOANS. The Corporation's provision for losses
on loans totaled $60,000 in fiscal 1996, compared to $84,000 in fiscal 1995. The
Corporation's provision during fiscal 1996 was based on management's overall
assessment of current and anticipated economic conditions, the level of asset
quality, delinquency totals, and portfolio growth from year to year.
OTHER INCOME. Other income declined during fiscal 1996 by $179,000, or
19.6%. The decrease was primarily attributable to a $273,000 gain on sale of
real estate held for sale recorded in fiscal 1995, compared to a $144,000 gain
on sale of office premises realized in fiscal 1996. Additionally, gains on sale
of mortgage loans declined by $28,000 and gains on sale of real estate acquired
through foreclosure declined by $31,000.
8
<PAGE> 10
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense increased during fiscal 1996 by $273,000, or 4.5%, due primarily
to a $111,000, or 3.5%, increase in employee compensation and benefits, an
increase in franchise taxes of $120,000, or 46.7%, and increases in occupancy
and equipment and federal deposit insurance premiums of $35,000 and $27,000,
respectively. A $21,000 decline in amortization of goodwill and a $34,000
decrease in other operating expenses partially offset the overall increase in
general and administrative expenses.
FEDERAL INCOME TAXES. The provision for federal income taxes totaled
$906,000 in fiscal 1996, a reduction of $9,000, or 1.0%, from the $915,000
recorded in fiscal 1995. The decline is partially attributable to a decline in
the amortization of certain non-deductible intangible expense items. The
Corporation's effective tax rate was 37.0% in fiscal 1996, as compared to 38.3%
in fiscal 1995.
9
<PAGE> 11
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
month-end balances.
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------------------------------
1997 1996
---------------------------------- -------------------------------------
Average Average
balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable and mortgage-
backed securities (1) $256,785 $20,222 7.88% $244,558 $19,150 7.83%
Investment securities (2) 7,419 465 6.27 11,886 646 5.43
Other interest-earning assets 3,927 216 5.50 2,897 188 6.49
------- -------- ---- ------- ------ ----
Total interest-earning assets 268,131 20,903 7.80 259,341 19,984 7.71
Non-interest earning assets 14,399 13,104
------- -------
Total assets $282,530 $272,445
======= =======
Interest-bearing liabilities:
Passbook savings $ 38,562 1,079 2.80 $ 41,479 1,162 2.80
NOW accounts 24,877 641 2.58 17,090 333 1.95
Money market accounts 6,849 219 3.20 8,814 283 3.21
Certificates of deposit 158,469 8,999 5.68 150,997 8,815 5.84
------- ------- ---- ------- ------ ----
Total Deposits 228,757 10,938 4.78 218,380 10,593 4.85
Borrowings 22,241 1,257 5.65 23,375 1,340 5.73
------- ------- ---- ------- ------ ----
Total interest-bearing liabilities 250,998 12,195 4.86 241,755 11,933 4.94
------ ---- ------ ----
Non-interest bearing liabilities 4,615 4,585
------- -------
Total liabilities 255,613 246,340
Stockholders' equity 26,917 26,105
------- -------
Total liabilities and stockholders'
equity $282,530 $272,445
======= =======
Net interest income; interest
rate spread $ 8,708 2.94% $ 8,051 2.77%
======= ==== ======= ====
Net interest margin (3) 3.25% 3.10%
==== ====
Average interest-earning assets to
interest-bearing liabilities 106.83% 107.27%
====== ======
Year ended June 30,
-------------------------------------
1995
-------------------------------------
Average
balance Interest Yield/Rate
------- -------- ----------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable and mortgage-
backed securities (1) $229,965 $16,961 7.38%
Investment securities (2) 12,778 752 5.89
Other interest-earning assets 2,554 149 5.83
------- ------ ----
Total interest-earning assets 245,297 17,862 7.28
Non-interest earning assets 11,578
-------
Total assets $256,875
=======
Interest-bearing liabilities:
Passbook savings $$ 46,455 1,302 2.80
NOW accounts 15,029 311 2.07
Money market accounts 11,277 356 3.16
Certificates of deposit 129,752 6,815 5.25
------- ------ ----
Total Deposits 202,513 8,784 4.34
Borrowings 25,743 1,516 5.89
------- ------ ----
Total interest-bearing liabilities 228,256 10,300 4.51
------ ----
Non-interest bearing liabilities 3,653
-------
Total liabilities 231,909
Stockholders' equity 24,966
-------
Total liabilities and stockholders'
equity $256,875
=======
Net interest income; interest
rate spread $ 7,562 2.77%
======= ====
Net interest margin (3) 3.08%
====
Average interest-earning assets to
interest-bearing liabilities 107.47%
======
- -----------------------------
<FN>
(1) Includes loans held for sale, nonaccrual loans and mortgage-backed securities designated as available for sale.
(2) Includes investment securities designated as available for sale or held for sale.
(3) Net interest margin is net interest income divided by average interest-earning assets.
</TABLE>
10
<PAGE> 12
RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected Centennial's interest income and 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 changes in rate and volume.
The combined effects of changes in both rate and volume, which cannot be
separately identified, have been allocated proportionately to the change due to
rate and the change due to volume.
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
------------------------------------- -----------------------------------
Increase Increase
(decrease) Total (decrease) Total
due to increase due to increase
--------------------- -------------------
Rate Volume (decrease) Rate Volume (Decrease)
---- ------ ---------- ---- ------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) $110 $962 $1,072 $1,079 $1,110 $2,189
Investment securities (2) 88 (269) (181) (56) (50) (106)
Other interest-earning assets (32) 60 28 18 21 39
---- ---- ------- ------- ------- -------
Total interest-earning
assets 166 753 919 1,041 1,081 2,122
--- --- ------ ----- ----- -----
Interest-bearing liabilities
Deposits (153) 498 345 1,088 720 1,808
Borrowings (19) (64) (83) (39) (136) (175)
---- ---- ------- ------- ------ ------
Total interest-bearing
liabilities (172) 434 262 1,049 584 1,633
--- --- ------ ----- ------ -----
Increase (decrease) in net
interest income $338 $319 $ 657 $ (8) $ 497 $ 489
=== === ====== ======== ====== =======
- ------------------------------
<FN>
(1) Includes loans held for sale, nonaccrual loans and mortgage-backed securities designated as available for sale.
(2) Includes investment securities designated as available for sale.
</TABLE>
ASSET/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 of its interest-earning assets and its
interest-bearing liabilities, the Corporation's earnings will be affected
differently under various interest rate scenarios. The Corporation has sought to
limit these net income fluctuations and manage interest rate risk by originating
adjustable-rate loans and purchasing relatively short-term and variable-rate
investments and securities. The Corporation has a high percentage of
adjustable-rate, interest-earning assets, which reprice quickly with market
interest rate movements. At June 30, 1997, approximately $185.0 million, or
67.7%, of the Corporation's interest-earning assets had adjustable rates.
11
<PAGE> 13
The following table presents the Corporation's interest rate
sensitivity gap, or the difference between the repricing periods of
interest-earning assets and interest-bearing liabilities, at June 30, 1997:
<TABLE>
<CAPTION>
Over one Over three Over ten
through through Over five through Over
One year three five through twenty twenty
or less years years ten years years years Total
-------- -------- ------- --------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Fixed-rate mortgage loans (1) (2) $ 12,787 $ 18,632 $13,857 $20,478 $13,516 $ 1,834 $ 81,104
Balloon and adjustable-rate loans
(1) (3) (5) 157,791 23,255 - - - - 181,046
Consumer and other loans (1) 1,448 323 55 - - - 1,826
Investment securities (4) 5,865 2,983 - 50 525 - 9,423
------- ------ ------ ------ ------ ----- -------
Total 177,891 45,193 13,912 20,528 14,041 1,834 273,399
INTEREST-BEARING LIABILITIES:
Passbook savings (5) 12,079 13,515 6,067 4,275 655 11 36,602
NOW accounts (6) 6,509 8,543 4,806 4,712 1,384 83 26,037
Money market accounts (5) (6) 2,984 2,238 560 181 5 - 5,968
Certificates of deposit 109,770 41,482 6,316 - - - 157,568
Advances and other borrowings 15,428 4,000 - 6,064 5,050 - 30,542
------- ------ ------ ------ ------ ----- -------
Total 146,770 69,778 17,749 15,232 7,094 94 256,717
------- ------ ------ ------ ------ ----- -------
Interest rate sensitivity gap $ 31,121 $(24,585) $ (3,837) $ 5,296 $ 6,947 $ 1,740 $ 16,682
======== ======= ======= ======= ======= ======= ========
Cumulative interest rate sensitivity
gap $ 31,121 $ 6,536 $ 2,699 $ 7,995 $14,942 $16,682 $ 16,682
======== ======== ======= ======= ====== ====== ========
Cumulative interest rate
sensitivity gap as a percent of
rate sensitive assets 11.38% 2.39% 0.99% 2.92% 5.47% 6.10% 6.10%
===== ==== ==== ==== ==== ==== ====
<FN>
(1) The dollar amount of loans in any repricing period includes funds from the amortization and prepayment of loans
estimated to occur in that period in accordance with the prepayment assumptions utilized by Performance Analysis by
Sendero ("PAS") as of June 30, 1997, the latest date for which assumptions are available. PAS is a consulting firm
which assists thrift institutions in monitoring and managing their interest-rate risk.
(2) Includes all fixed-rate mortgage loans, net of the undisbursed portion of loans in process, unearned discounts and
deferred loan origination fees, and mortgage-backed securities.
(3) Includes all adjustable-rate mortgage loans, net of the undisbursed portion of loans-in-process, and mortgage-backed
securities.
(4) Includes interest-bearing deposits and all other investment securities, including those available for sale at
amortized cost.
(5) Based on an approximation of assumptions utilized by PAS in assessing the interest rate sensitivity of thrift
institutions, passbook savings, money market accounts and NOW accounts are shown as decaying at annual rates of 33%,
50% and 25%, respectively. It has been Centennial's experience that the actual decay rates are at least as favorable
as the assumptions.
(6) Excludes escrows, advances by borrowers for taxes and insurance and non-interest-bearing NOW accounts.
</TABLE>
12
<PAGE> 14
As depicted above, the Corporation has a positive cumulative interest
rate gap at each measurement period. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities and is considered negative when the amount of
interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. Generally, during a period of rising interest rates, a
positive gap within shorter maturities would increase net interest income, while
a negative gap within shorter maturities would result in a decrease in net
interest income. Conversely, during a period of falling interest rates, a
positive gap within shorter maturities would result in a decrease in net
interest income, while a negative gap within shorter maturities would have the
opposite effect.
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to 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. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels could deviate
significantly from those assumed in calculating the table. Finally, the ability
of some borrowers to service their adjustable-rate debt may become impaired in
the event of an increase in interest rates.
AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following table sets forth the average yields on the Corporation's
interest-earning assets, the average interest rates paid on interest-bearing
liabilities and the interest rate spread between the weighted average yields
earned and rates paid by the Corporation at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Yield on assets:
Weighted average yield on loan portfolio (1) 7.90% 7.84% 7.61%
Weighted average yield on investment portfolio (2) 6.02 6.31 6.03
Weighted average yield on other interest-earning assets 5.12 5.25 5.65
Weighted average yield on all interest-earning assets 7.85 7.66 7.53
Cost of liabilities:
Weighted average rate paid on deposits 4.88 4.79 4.84
Weighted average rate paid on borrowings 5.97 5.78 6.11
Weighted average rate paid on all interest-bearing liabilities 4.99 4.89 4.99
Interest rate spread (spread between weighted average rate on
all interest-earning assets and all interest-bearing 2.86 2.77 2.54
liabilities)
- -----------------------------
<FN>
(1) Includes loans held for sale and mortgage-backed securities designated
as available for sale.
(2) Includes investments designated as available for sale or held for sale.
</TABLE>
13
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
Like other financial institutions, Centennial must ensure that
sufficient funds are available to meet deposit withdrawals, loan commitments and
expenses. Control of Centennial's cash flow requires the anticipation of deposit
flows and loan payments. Centennial's primary sources of funds are deposits and
principal and interest repayments on loans.
At June 30, 1997, Centennial had $109.8 million of certificates of
deposit maturing within one year. It has been Centennial's historic experience
that such certificates of deposit will be renewed at market rates of interest.
It is management's belief that maturing certificates of deposit over the next
year will similarly be renewed at market rates of interest without a material
adverse effect on results of operations.
In the event that certificates of deposit cannot be renewed at
prevailing market rates, Centennial can obtain up to $47.6 million in advances
from the FHLB of Cincinnati. Centennial uses advances to help with
asset/liability management and liquidity. At June 30, 1997, Centennial had $28.1
million of outstanding FHLB advances.
As of June 30, 1997, loan commitments and loans committed but not
closed totaled $8.7 million. Additionally, Centennial had unused lines of credit
totaling $27.5 million. Funding for these amounts is expected to be provided by
the sources described above. Management believes Centennial has adequate
resources to meet its normal funding requirements.
The FDIC has a policy which requires institutions to maintain an
average balance of liquid assets (e.g. cash, time deposits, U.S. Government and
agency obligations) in an amount which it deems adequate to protect safety and
soundness. The FDIC does not set a specific required level. In the opinion of
management, Centennial's liquidity position was adequate to maintain safe and
sound operations at June 30, 1997.
Centennial's liquidity, represented by cash and cash-equivalents, is a
function of its operating, investing and financing activities. These activities
are summarized below for the periods indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------
1997 1996 1995
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Net earnings $1,206 $ 1,545 $ 1,475
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities 2,176 (616) (120)
----- ------ ------
Net cash provided by operating activities 3,382 929 1,355
Net cash used in investing activities (9,991) (11,995) (22,714)
Net cash provided by financing activities 5,357 12,136 19,424
----- ------ ------
Net increase (decrease) in cash and
cash equivalents (1,252) 1,070 (1,935)
Cash and cash equivalents at beginning of year 5,142 4,072 6,007
----- ------ ------
Cash and cash equivalents at end of year $3,890 $ 5,142 $ 4,072
===== ====== ======
</TABLE>
The FDIC has adopted risk-based capital ratio guidelines to which
Centennial is subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among financial institutions. Risk-based capital
ratios are determined by allocating assets and specified off-balance sheet
commitments to four risk-weighting categories, with higher levels of capital
being required for the categories perceived as representing greater risk. Such
guidelines also take into account other risks on an individualized basis,
including interest rate risk.
The FDIC capital guidelines divide an institution's capital into two
tiers. The first tier ("Tier 1") capital includes common equity, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill, unrealized gains and losses on securities designated as available for
sale, and certain other intangible assets (except mortgage servicing rights and
purchased credit card relationships, subject to certain limitations).
Supplementary ("Tier 2") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, long-term subordinated debt and
the allowance for loan and lease losses, subject to certain limitations, less
required deductions.
14
<PAGE> 16
In addition, FDIC guidelines prescribe a minimum Tier 1 leverage ratio
(Tier 1 capital to adjusted total assets as specified in the guidelines). These
guidelines provide for a minimum Tier 1 leverage ratio of 3% for financial
institutions that meet certain specified criteria, including that they have the
highest regulatory rating and are not experiencing or anticipating significant
growth. All other institutions are required to maintain a Tier 1 leverage ratio
of 3% plus an additional cushion of at least 100 to 200 basis points. Financial
institutions are required to maintain a total risk-based capital ratio of 8%, of
which 4% must be met with Tier 1 capital. The FDIC may, however, set higher
capital requirements when particular circumstances warrant, including the
presence of excessive interest rate risk. Financial institutions experiencing or
anticipating significant growth are expected to maintain capital ratios well
above the minimum levels.
The following is a summary of Centennial's regulatory capital at June
30, 1997:
<TABLE>
<CAPTION>
Percent
-------
<S> <C>
Tier 1 Leverage Ratio 8.5%
Tier 1 Capital to Risk-Weighted Assets 13.0%
Total Capital to Risk-Weighted Assets 13.4%
</TABLE>
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based compensation plans. SFAS No. 123 encourages all
entities to adopt a new method of accounting to measure compensation of all
stock compensation plans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that elect to remain with the existing accounting are
required to disclose in a footnote to the financial statements pro forma net
earnings and, if presented, earnings per share, as if SFAS No. 123 had been
adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into during fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards granted
in their first fiscal year beginning after December 15, 1994. Management has
determined that the Corporation will continue to account for stock-based
compensation pursuant to Accounting Principles Board Opinion No. 25 and,
therefore, the disclosure provisions of SFAS No. 123 will have no effect on its
consolidated financial condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
of Financial Assets, Servicing Rights, and Extinguishment of Liabilities," that
provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, 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.
15
<PAGE> 17
SFAS No. 125 provides that a liability is removed from the balance
sheet only if the debtor either pays the creditor and is relieved of its
obligation for the liability or is legally released from being the primary
obligor.
SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1997, and
is to be applied prospectively. Earlier or retroactive application is not
permitted. Management does not believe that adoption of SFAS No. 125 will have a
material adverse effect on the Corporation's consolidated financial position or
results of operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share,"
which requires companies to present basic earnings per share and, if applicable,
diluted earnings per share, instead of primary and fully diluted earnings per
share, respectively. Basic earnings per share is computed without including
potentially dilutive common shares. Diluted earnings per share is computed
taking into consideration common shares outstanding and potentially dilutive
common shares, including options, warrants, convertible securities and
contingent stock agreements. SFAS No. 128 is effective for periods ending after
December 14, 1997. Early application is not permitted. Based upon the provisions
of SFAS No. 128, the Corporation's basic and diluted earnings per share for the
fiscal year ended June 30, 1997, would have been $1.06 and $1.04, respectively.
Basic and diluted earnings per share for the fiscal year ended June 30, 1996,
would have been $1.37 and $1.36, respectively.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which requires entities presenting a complete set of financial
statements to include details of comprehensive income that arise in the
reporting period. Comprehensive income consists of net earnings or loss for the
current period and other comprehensive income, expense, gains and losses that
bypass the income statement and are reported in a separate component of equity,
i.e., unrealized gains and losses on certain investment securities. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. Management does
not believe that adoption of SFAS No. 130 will have a material adverse effect on
the Corporation's consolidated 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 Centennial could cause the effects
of the accounting pronouncements to differ from management's foregoing
assessment.
16
<PAGE> 18
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Glenway Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Glenway Financial Corporation as of June 30, 1997 and 1996, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years ended June 30, 1997, 1996 and 1995. These consolidated
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated 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 Glenway Financial
Corporation as of June 30, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years ended June 30, 1997,
1996 and 1995, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Cincinnati, Ohio
August 14, 1997
17
<PAGE> 19
<TABLE>
<CAPTION>
GLENWAY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands, except share data)
ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks $ 3,890 $ 4,802
Federal funds sold -- 204
Interest-bearing deposits in other financial institutions -- 136
-------- --------
Cash and cash equivalents 3,890 5,142
Investment securities - at amortized cost, approximate market
value of $7,035 and $5,499 at June 30, 1997 and 1996 7,042 5,549
Investment securities available for sale - at market -- 4,084
Mortgage-backed securities - at amortized cost, approximate market
value of $12,946 and $15,354 at June 30, 1997 and 1996 13,281 15,710
Mortgage-backed securities available for sale - at market 9,920 14,761
Loans receivable - net 239,648 220,007
Loans held for sale - at lower of cost or market -- 1,094
Office premises and equipment - at depreciated cost 7,043 5,929
Real estate acquired through foreclosure 44 242
Federal Home Loan Bank stock - at cost 2,382 2,222
Accrued interest receivable on loans 1,214 1,103
Accrued interest receivable on mortgage-backed securities 156 181
Accrued interest receivable on investments and interest-bearing deposits 111 177
Cash surrender value of life insurance 1,585 1,457
Prepaid expenses and other assets 404 545
Prepaid federal income taxes -- 30
Goodwill and other intangible assets - net of amortization 368 576
-------- --------
Total assets $287,088 $278,809
======== ========
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
<S> <C> <C>
Deposits $ 226,853 $ 222,768
Advances from the Federal Home Loan Bank 28,114 25,634
Loan to Employee Stock Ownership Plan 65 213
Checks issued in excess of bank balance 2,422 1,034
Advances by borrowers for taxes and insurance 235 242
Accounts payable on mortgage loans serviced for others 229 599
Accrued interest payable 61 56
Other liabilities 1,189 999
Accrued federal income taxes 102 --
Deferred federal income taxes 580 483
--------- ---------
Total liabilities 259,850 252,028
Commitments -- --
Stockholders' equity
Serial preferred stock - authorized 500,000 shares of $.01 par value;
no shares issued -- --
Common stock - authorized 3,000,000 shares of $.01 par value;
1,187,369 and 1,131,109 shares issued at June 30, 1997 and 1996 12 11
Additional paid-in capital 13,267 12,102
Retained earnings - substantially restricted 15,038 15,749
Less required contributions for shares acquired by employee benefit plans (216) (316)
Less 47,372 and 37,292 shares of treasury stock at June 30, 1997 and 1996 - at cost (965) (756)
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects 102 (9)
--------- ---------
Total stockholders' equity 27,238 26,781
--------- ---------
Total liabilities and stockholders' equity $ 287,088 $ 278,809
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE> 21
GLENWAY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended June 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Interest income
Loans $18,458 $17,121 $14,911
Mortgage-backed securities 1,764 2,029 2,050
Investment securities 465 646 752
Interest-bearing deposits and other 216 188 149
------- ------- -------
Total interest income 20,903 19,984 17,862
Interest expense
Deposits 10,938 10,593 8,784
Borrowings 1,257 1,340 1,516
------- ------- -------
Total interest expense 12,195 11,933 10,300
------- ------- -------
Net interest income 8,708 8,051 7,562
Provision for losses on loans 244 60 84
------- ------- -------
Net interest income after provision for losses on loans 8,464 7,991 7,478
Other income
Gain (loss) on sale of loans 39 (14) 14
Gain (loss) on investment securities transactions 63 (9) 1
Gain on sale of real estate held for sale -- -- 273
Gain on sale of office premises and equipment -- 144 --
Gain (loss) on sale of real estate acquired through foreclosure 15 (13) 18
Other operating 669 626 607
------- ------- -------
Total other income 786 734 913
General, administrative and other expense
Employee compensation and benefits 3,168 3,308 3,197
Occupancy and equipment 591 475 440
Federal deposit insurance premiums 1,549 484 457
Franchise taxes 358 377 257
Data processing 330 245 210
Amortization of goodwill and other
intangible assets 208 220 241
Other operating 1,144 1,165 1,199
------- ------- -------
Total general, administrative and other expense 7,348 6,274 6,001
------- ------- -------
Earnings before income taxes 1,902 2,451 2,390
Federal income taxes
Current 657 774 708
Deferred 39 132 207
------- ------- -------
Total federal income taxes 696 906 915
------- ------- -------
NET EARNINGS $ 1,206 $ 1,545 $ 1,475
======= ======= =======
EARNINGS PER SHARE $ 1.06 $ 1.37 $ 1.30
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE> 22
GLENWAY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended June 30, 1997, 1996 and 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
SHARES
ACQUIRED BY
ADDITIONAL EMPLOYEE
COMMON PAID-IN RETAINED BENEFIT
STOCK CAPITAL EARNINGS PLANS
<S> <C> <C> <C> <C>
Balance at July 1, 1994 $10 $10,915 $15,136 $(914)
Principal repayments on loan to ESOP/amortization of
expense related to employee benefit plans -- -- -- 296
Net earnings for the year ended June 30, 1995 -- -- 1,475 --
Cash dividends of $.63 per share -- -- (705) --
Purchase of treasury shares -- -- -- --
Issuance of shares under employee benefit and stock option plans -- 111 -- --
Unrealized gains on securities designated as available for sale,
net of related tax effects -- -- -- --
--- ------- ------- ---
Balance at June 30, 1995 10 11,026 15,906 (618)
Principal repayments on loan to ESOP/amortization of
expense related to employee benefit plans -- 31 -- 149
Net earnings for the year ended June 30, 1996 -- -- 1,545 --
Cash dividends of $.65 per share -- -- (732) --
Stock dividend (5%), including cash in lieu of fractional shares 1 965 (970) --
Issuance of shares under employee benefit and stock option plans -- 80 -- 153
Unrealized gains on securities designated as available for sale,
net of related tax effects -- -- -- --
--- ------- ------- ---
Balance at June 30, 1996 11 12,102 15,749 (316)
Principal repayments on loan to ESOP/amortization of
expense related to employee benefit plans -- 44 -- 149
Net earnings for the year ended June 30, 1997 -- -- 1,206 --
Cash dividends of $.68 per share -- -- (772) --
Purchase of treasury shares -- -- -- --
Stock dividend (5%), including cash in lieu of fractional shares 1 1,139 (1,145) --
Issuance of shares under employee benefit and stock option plans -- (18) -- (49)
Unrealized gains on securities designated as available for sale,
net of related tax effects -- -- -- --
--- ------- ------- ---
Balance at June 30, 1997 $12 $13,267 $15,038 $(216)
=== ======= ======= =====
UNREALIZED
GAINS (LOSSES)
ON SECURITIES
TREASURY DESIGNATED AS
STOCK AVAILABLE FOR SALE TOTAL
<S> <C> <C> <C>
Balance at July 1, 1994 $ -- $(102) $25,045
Principal repayments on loan to ESOP/amortization of
expense related to employee benefit plans -- -- 296
Net earnings for the year ended June 30, 1995 -- -- 1,475
Cash dividends of $.63 per share -- -- (705)
Purchase of treasury shares (1,048) -- (1,048)
Issuance of shares under employee benefit and stock option plans 140 -- 251
Unrealized gains on securities designated as available for sale,
net of related tax effects -- 73 73
------- ---- -------
Balance at June 30, 1995 (908) (29) 25,387
Principal repayments on loan to ESOP/amortization of
expense related to employee benefit plans -- -- 180
Net earnings for the year ended June 30, 1996 -- -- 1,545
Cash dividends of $.65 per share -- -- (732)
Stock dividend (5%), including cash in lieu of fractional shares -- -- (4)
Issuance of shares under employee benefit and stock option plans 152 -- 385
Unrealized gains on securities designated as available for sale,
net of related tax effects -- 20 20
------- ---- -------
Balance at June 30, 1996 (756) (9) 26,781
Principal repayments on loan to ESOP/amortization of
expense related to employee benefit plans -- -- 193
Net earnings for the year ended June 30, 1997 -- -- 1,206
Cash dividends of $.68 per share -- -- (772)
Purchase of treasury shares (411) -- (411)
Stock dividend (5%), including cash in lieu of fractional shares -- -- (5)
Issuance of shares under employee benefit and stock option plans 202 -- 135
Unrealized gains on securities designated as available for sale,
net of related tax effects -- 111 111
------- ---- -------
Balance at June 30, 1997 $ (965) $102 $27,238
======= ==== =======
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE> 23
GLENWAY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $1,206 $1,545 $1,475
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Amortization of premiums and discounts on loans,
investments and mortgage-backed securities - net 53 67 51
Depreciation and amortization 335 197 198
Provision for losses on loans 244 60 84
(Gain) loss on sale of loans (39) 14 (14)
(Gain) loss on investment securities transactions (63) 9 (1)
(Gain) loss on sale of real estate acquired through foreclosure (15) 13 (18)
Gain on sale of real estate held for sale -- -- (273)
Gain on sale of office premises and equipment -- (144) --
Amortization of deferred loan origination fees (90) (102) (100)
Amortization of goodwill and other intangible assets 208 220 241
Amortization of expense related to employee benefit plans 193 180 296
Loans disbursed for sale in the secondary market (440) (3,442) (2,300)
Proceeds from loans sold in the secondary market 444 2,873 1,977
Federal Home Loan Bank stock dividends (160) (148) (113)
Increases (decreases) in cash due to changes in:
Accrued interest receivable on loans (111) (113) (183)
Accrued interest receivable on mortgage-backed securities 25 35 (4)
Accrued interest receivable on investments and
interest-bearing deposits 66 (30) 37
Prepaid expenses and other assets 141 337 (331)
Accounts payable on mortgage loans serviced for others (370) (82) (240)
Accrued interest payable and other liabilities 196 (40) 406
Checks issued in excess of bank balance 1,388 (832) 361
Federal income taxes
Current 132 180 (401)
Deferred 39 132 207
------ ------ ------
Net cash provided by operating activities 3,382 929 1,355
Cash flows provided by (used in) investing activities:
Proceeds from maturities of investment securities 1,500 3,026 2,010
Proceeds from sale of investment securities designated as available for sale 4,090 993 1,001
Purchase of investment securities designated as held-to-maturity (3,000) (2,075) --
Principal repayments on mortgage-backed securities 4,795 5,474 3,290
Purchase of mortgage-backed securities designated as held-to-maturity -- (4,267) --
Proceeds from sale of mortgage-backed securities designated
as available for sale 2,672 1,060 1,500
Loan principal repayments 53,283 56,987 26,248
Loan disbursements (72,344) (72,354) (56,730)
Decrease in certificates of deposit in other financial institutions -- -- 100
Purchase and construction of office premises and equipment (1,449) (1,898) (297)
Proceeds from sale of office premises and equipment -- 370 --
Proceeds from sale of real estate acquired through foreclosure 590 736 243
Proceeds from sale of real estate held for sale -- -- 1,387
Purchase of Federal Home Loan Bank stock -- (16) (320)
Redemption of Federal Home Loan Bank stock -- -- 280
Purchase of single premium life insurance policy (60) -- (1,370)
Increase in cash surrender value of life insurance policy (68) (31) (56)
------ ------ ------
Net cash used in investing activities (9,991) (11,995) (22,714)
------ ------ ------
Net cash used in operating and investing
activities (subtotal carried forward) (6,609) (11,066) (21,359)
------ ------ ------
</TABLE>
22
<PAGE> 24
GLENWAY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net cash used in operating and investing
activities (subtotal brought forward) $(6,609) $(11,066) $(21,359)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 4,085 14,391 11,878
Proceeds from Federal Home Loan Bank advances 58,250 50,200 54,150
Repayment of Federal Home Loan Bank advances (55,770) (51,724) (44,723)
Repayment of loan to employee stock ownership plan (148) (149) (238)
Advances by borrowers for taxes and insurance (7) (231) (141)
Issuance of shares under stock option and benefit plans 135 385 251
Dividends paid on common stock (777) (736) (705)
Purchase of treasury stock (411) -- (1,048)
------ ------ ------
Net cash provided by financing activities 5,357 12,136 19,424
------ ------ ------
Net increase (decrease) in cash and cash equivalents (1,252) 1,070 (1,935)
Cash and cash equivalents at beginning of year 5,142 4,072 6,007
------ ------ ------
Cash and cash equivalents at end of year $ 3,890 $ 5,142 $ 4,072
====== ====== ======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 387 $ 583 $ 797
====== ====== ======
Interest on deposits and borrowings $12,190 $11,921 $10,276
====== ====== ======
Supplemental disclosure of noncash investing activities:
Transfer from loans to real estate acquired
through foreclosure $ 378 $ 276 $ 575
====== ====== ======
Transfer of investment securities to an available for sale
classification $ -- $ 1,000 $ --
====== ====== ======
Transfer of mortgage-backed securities to an available
for sale classification $ -- $12,100 $ --
====== ====== ======
Unrealized gains on securities designated as available
for sale, net of related tax effects $ 111 $ 20 $ 73
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE> 25
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Glenway Financial Corporation (the "Corporation") is a savings and loan
holding company whose activities are primarily limited to holding the stock
of Centennial Savings Bank (the "Savings Bank"). Future references to the
Corporation or the Savings Bank are utilized herein as the context requires.
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 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 consolidated 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 consolidated 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 the Corporation's significant accounting
policies which have been consistently applied in the preparation of the
accompanying consolidated financial statements.
1. Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Corporation and its subsidiary, the Savings Bank, and its wholly-owned
subsidiary Centennial Savings and Loan Service Corporation. Centennial
Savings and Loan Service Corporation is currently inactive. All significant
intercompany balances and transactions have been eliminated.
2. Investment Securities 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.
24
<PAGE> 26
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed Securities (continued)
----------------------------------------------------
During September 1995, the Financial Accounting Standards Board (the "FASB")
granted financial institutions the opportunity to reclassify investment
portfolios without calling into question prior intent under SFAS No. 115.
The Corporation took advantage of this opportunity by reclassifying
approximately $1.0 million of investment securities and $12.1 million of
mortgage-backed securities from held-to-maturity to the available-for-sale
classification. All reclassifications were made on a single day in
conformity with the requirement. It was management's belief that such
changes would allow more flexibility in managing interest rate risk within
the investment and mortgage-backed securities portfolios. At June 30, 1997,
the Corporation's stockholders' equity reflected an unrealized gain on
securities designated as available for sale, net of applicable tax effects,
totaling $102,000. At June 30, 1996, the Corporation's stockholders' equity
reflected an unrealized loss on securities designated as available-for-sale,
net of applicable tax effects, of $9,000.
Realized gains or 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 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.
25
<PAGE> 27
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
3. Loans Receivable (continued)
----------------
The Savings Bank retains the servicing on loans sold and agrees to remit to
the investor loan principal and interest at agreed-upon rates. These rates
can differ from the loan's contractual interest rate, resulting in a "yield
differential." In addition to previously deferred loan origination fees and
cash gains, gains on sale of loans can represent the present value of the
future yield differential less a normal servicing fee, capitalized over the
estimated life of the loans sold. Normal servicing fees are determined by
reference to the stipulated servicing fee set forth by the government agency
loan sale agreement. Such fees approximate the Savings Bank's normal
servicing costs. The resulting capitalized excess servicing fee is amortized
to operations over the estimated life of the loans using the interest
method. If prepayments are higher than expected, an immediate charge to
operations is made. If prepayments are lower, then adjustments are made
prospectively. At June 30, 1997 and 1996, unamortized deferred excess
servicing fees totaled approximately $18,000 and $31,000, respectively.
Amortization of the deferred excess servicing fee asset totaled
approximately $13,000, $17,000 and $13,000 for the years ended June 30,
1997, 1996 and 1995, respectively.
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. The Corporation
had no loans held for sale at June 30, 1997. At June 30, 1996, loans held
for sale were carried at market, which resulted in a charge to operations
for the unrealized loss totaling $50,000.
4. Loan Origination Fees
---------------------
The Savings Bank accounts for loan origination fees in accordance with 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 direct origination costs, are deferred and amortized to interest income
using the level-yield 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.
26
<PAGE> 28
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
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 loss experience, current trends in
the level of delinquent and specific 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 its
primary lending areas. When the collection of a loan becomes doubtful, or
otherwise troubled, the Savings Bank records a charge-off equal to the
difference between the fair value of the property securing the loan and the
loan's carrying value. Major loans and major lending areas are reviewed
periodically to determine potential problems at an early date. The allowance
for losses on loans is increased by charges to earnings and decreased by
charge-offs (net of recoveries).
In June 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." This promulgation, which became effective for the
Savings Bank's fiscal year which began July 1, 1995, 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 loan's observable market price or fair value of the collateral. The
Savings Bank's current procedures for evaluating impaired loans result in
carrying such loans at the lower of cost or fair value. As a result, the
Corporation adopted SFAS No. 114 as of July 1, 1995, without material
financial statement effect.
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
valuation of impairment thereof, such loans are collateral dependent and as
a result are carried as a practical expedient at the lower of cost or fair
value.
It is the Savings Bank's policy to charge off unsecured credits that are
more than ninety days delinquent. Similarly, collateral dependent loans
which are more than ninety days delinquent are considered to constitute more
than a minimum delay in repayment and are evaluated for impairment under
SFAS No. 114 at that time.
At June 30, 1997 and 1996, the Savings Bank had no loans that would be
defined as impaired under SFAS No. 114.
6. Depreciation and Amortization
-----------------------------
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over the estimated
service lives, principally on the straight-line method. An accelerated
method is used for tax reporting purposes.
27
<PAGE> 29
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
7. 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 loss provision is recorded for
any writedown in the loan's carrying value to fair value at the date of
acquisition. A real estate loss provision is recorded if the property's 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 capitalized. Costs
relating to holding real estate acquired through foreclosure, net of rental
income, are charged against earnings as incurred.
8. Real Estate Held for Sale
-------------------------
Real estate held for sale is carried at the lower of cost or fair value. The
investment in real estate held for sale was comprised of a developed tract
of land contiguous to the Corporation's new main office site. The parcel of
land was sold during fiscal 1995, resulting in a realized gain of $273,000
on such sale.
9. Federal Income Taxes
--------------------
The Corporation accounts for federal income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109
established financial accounting and reporting standards for the effects of
income taxes that result from the Corporation's activities within the
current and previous years. Pursuant to the provisions of SFAS No. 109, a
deferred tax liability or deferred tax asset is computed by applying the
current statutory tax rates to net taxable or deductible 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, certain components of retirement expense, gains on sale of loans
utilizing the net yield method, book and tax bad debt deductions and the
loss on mortgage loans sold in a reciprocal sale transaction. Additional
temporary differences result from depreciation expense computed utilizing
accelerated methods for federal income tax purposes.
28
<PAGE> 30
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
10. Amortization of Goodwill and Other Intangible Assets
----------------------------------------------------
Goodwill arising from acquisitions is being amortized to expense in the same
manner and over the same time period as the related original discount on
long-term interest-bearing assets acquired, to the extent the value was
attributable to that discount. The amount of goodwill in excess of the
original unearned discount is being amortized to operations using the
straight-line method over a twenty-year period.
Specifically identifiable intangible assets arising from branch acquisitions
were amortized over the ten year estimated useful life of the deposits
acquired.
At June 30, 1997, intangible assets consisted of the following:
<TABLE>
<CAPTION>
ORIGINAL UNAMORTIZED
BALANCE BALANCE
(In thousands)
<S> <C> <C>
Goodwill $3,850 $368
===== ===
</TABLE>
The approximate scheduled amortization with respect to intangible assets is
as follows:
<TABLE>
<CAPTION>
FUTURE
FISCAL YEAR ENDING JUNE 30, AMORTIZATION
(In thousands)
<S> <C> <C>
1998 $142
1999 103
2000 82
2001 and years thereafter 41
---
$368
===
</TABLE>
11. Benefit Plans
-------------
The Corporation has an Employee Stock Ownership Plan (ESOP) which provides
retirement benefits for substantially all employees who have completed one
year of service. Contributions of approximately $228,000, $270,000 and
$238,000 were made to the ESOP for the years ended June 30, 1997, 1996 and
1995, respectively.
The Savings Bank sponsors a 401(k) profit sharing plan. Employer
contributions are made solely at the discretion of the Board of Directors,
not to exceed amounts allowable under Internal Revenue Service regulations.
Profit sharing plan contributions for the years ended June 30, 1997, 1996
and 1995 totaled approximately $65,000, $99,000 and $92,000, respectively.
29
<PAGE> 31
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
12. Stock Incentive Plan
--------------------
The Corporation had a Stock Incentive Plan that provided for the issuance of
30,870 shares to directors, officers, and employees. Compensation expense
for restricted shares is measured by the fair value at the date of grant.
The Corporation issued 8,169, 11,517 and 13,040 shares of restricted stock
during fiscal 1997, 1996 and 1995, respectively. The term of the Incentive
Plan expired during fiscal 1997. The Corporation recognized expense totaling
$19,000, $178,000 and $221,000 for the years ended June 30, 1997, 1996 and
1995, respectively, under the Incentive Plan. The number of shares subject
to the Incentive Plan, as well as future references to share totals, have
been adjusted for 5% stock dividends paid during fiscal 1997 and 1996.
13. Management Recognition and Retention Plan and Trust
---------------------------------------------------
The Corporation has established a Management Recognition and Retention Plan
and Trust ("MRP") for which Centennial initially funded the purchase of
10,990 authorized and issued shares of common stock. In conjunction with the
conversion-merger transaction, the Corporation funded the purchase of an
additional 19,294 shares by the MRP. During fiscal 1997, an additional 5,807
shares were awarded under the Incentive Plan. Shares issued by the MRP are
generally deemed earned and allocated to employees over a five year period.
The Corporation issued 1,543, 6,946 and 3,859 shares of common stock under
the MRP during fiscal 1997, 1996 and 1995, respectively, leaving 8,121
shares subject to future issuance at June 30, 1997. Expense under the MRP
plan totaled approximately $55,000, $141,000 and $88,000 for the years ended
June 30, 1997, 1996 and 1995, respectively.
14. Earnings Per Share
------------------
Earnings per share for the years ended June 30, 1997, 1996 and 1995, is
based upon the weighted-average shares outstanding during the year plus
those stock options that are dilutive, less shares in the ESOP that are
unallocated and not committed to be released. Weighted-average shares deemed
outstanding totaled 1,137,814, 1,129,066 and 1,137,877 during the respective
years. Weighted-average shares outstanding have been adjusted for the 5%
stock dividends paid in fiscal 1997 and 1996. Fully-diluted earnings per
share is not presented, as there is no material dilutive effect associated
with the Corporation's Stock Option Plan.
30
<PAGE> 32
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
15. Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the fair value of financial instruments, both assets
and liabilities, whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair
values are based on estimates using present value and other valuation
methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair
values presented may not represent amounts that could be realized in an
exchange for certain financial instruments.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at June 30,
1997 and 1996:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in
the consolidated statements of financial condition for cash
and cash equivalents are deemed to approximate fair value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES: For investment and
mortgage-backed securities, fair value is deemed to equal the
quoted market price.
LOANS RECEIVABLE: The loan portfolio has been segregated into
categories with similar characteristics, such as one- to
four-family residential, multi family residential and
nonresidential real estate. These loan categories were further
delineated into fixed-rate and adjustable-rate loans. The fair
values for the resultant loan categories were computed via
discounted cash flow analysis, using current interest rates
offered for loans with similar terms to borrowers of similar
credit quality. For loans on deposit accounts and consumer and
other loans, fair values were deemed to equal the historic
carrying values. The historical carrying amount of accrued
interest on loans is deemed to approximate fair value.
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. 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.
31
<PAGE> 33
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
15. Fair Value of Financial Instruments (Continued)
-----------------------------------------------
ADVANCES FROM FEDERAL HOME LOAN BANK: The fair value of these
advances is estimated using the rates currently offered for
similar advances of similar remaining maturities or, when
available, quoted market prices.
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. The difference between the fair
value and notional amount of outstanding loan commitments at
June 30, 1997 and 1996, was not material.
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments at June 30, are as follows:
<TABLE>
<CAPTION>
1997 1996
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 3,890 $ 3,890 $ 5,142 $ 5,142
Investment securities 7,042 7,035 9,633 9,583
Mortgage-backed securities 23,201 22,866 30,471 30,115
Loans receivable 239,648 238,978 221,101 219,910
Stock in Federal Home Loan Bank 2,382 2,382 2,222 2,222
-------- -------- -------- --------
$276,163 $275,151 $268,569 $266,972
======== ======== ======== ========
Financial liabilities
Deposits $226,853 $226,671 $222,768 $224,585
Advances from the Federal Home Loan Bank 28,114 27,997 25,634 25,511
Advances by borrowers for taxes and insurance 235 235 242 242
-------- -------- -------- --------
$255,202 $254,903 $248,644 $250,338
======== ======== ======== ========
</TABLE>
16. 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 terms to maturity of less than
ninety days.
17. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the 1997
consolidated financial statement presentation.
32
<PAGE> 34
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE B - INVESTMENTS, SECURITIES AVAILABLE FOR SALE AND MORTGAGE-BACKED
SECURITIES
Carrying values and approximate market values of investment securities
classified as held-to-maturity at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
U. S. Government obligations $2,983 $2,981 $ - $ -
U. S. Government agency obligations 3,984 3,979 5,474 5,426
Municipal obligations 75 75 75 73
------ ------ ------ ------
$7,042 $7,035 $5,549 $5,499
====== ====== ====== ======
</TABLE>
At June 30, 1997, the excess of the Savings Bank's cost carrying value over
the market value of investment securities, totaling $7,000, was comprised of
gross unrealized losses totaling $26,000 and gross unrealized gains of
$19,000. At June 30, 1996, the excess of the Savings Bank's cost carrying
value over the market value of investment securities, totaling $50,000, was
comprised of gross unrealized losses totaling $55,000 and gross unrealized
gains of $5,000.
The amortized cost and market value of investment securities at June 30,
1997, by term to maturity, are shown below.
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
(In thousands)
<S> <C> <C>
Due within two years $4,484 $4,478
Due in two to five years 1,983 1,986
Due after five years 575 571
------ ------
$7,042 $7,035
====== ======
</TABLE>
Investment securities designated as available for sale at June 30 consist of
the following:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Asset management funds (cost of $4,118 at June 30, 1996) $ - $4,084
=== =====
</TABLE>
33
<PAGE> 35
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE B - INVESTMENTS, SECURITIES AVAILABLE FOR SALE AND MORTGAGE-BACKED
SECURITIES (continued)
During fiscal 1997 and 1996, the Corporation sold $4.1 million and $1.0
million of investment securities designated as available for sale, realizing
a loss of $29,000 and $7,000, respectively, as a result of such sales.
During fiscal 1995, the Corporation sold $1.0 million of investment
securities, realizing a gain of $1,000 as a result of such sale.
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at June 30, 1997 and
1996 (including those designated as available for sale), are shown below.
<TABLE>
<CAPTION>
1997
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation
participation certificates $ 2,960 $- $ 54 $ 2,906
Government National
Mortgage Association
participation certificates 71 - 2 69
Federal National
Mortgage Association
participation certificates 4,081 - 58 4,023
Collateralized mortgage obligations 6,169 19 240 5,948
------- ---- --- -------
Total mortgage-backed securities
held to maturity 13,281 19 354 12,946
Mortgage-backed securities designated
as available for sale 9,766 169 15 9,920
------- ---- --- -------
Total mortgage-backed securities $23,047 $188 $369 $22,866
======= ==== ==== =======
</TABLE>
34
<PAGE> 36
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE B - INVESTMENTS, SECURITIES AVAILABLE FOR SALE AND MORTGAGE-BACKED
SECURITIES (continued)
<TABLE>
<CAPTION>
1996
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation
participation certificates $ 4,687 $- $ 70 $ 4,617
Government National
Mortgage Association
participation certificates 93 - 3 90
Federal National
Mortgage Association
participation certificates 8,930 - 225 8,705
Collateralized mortgage obligations 2,000 - 58 1,942
------- -- ---- -------
Total mortgage-backed securities
held to maturity 15,710 - 356 15,354
Mortgage-backed securities designated
as available for sale 14,740 69 48 14,761
------ ---- ---- ------
Total mortgage-backed securities $30,450 $ 69 $404 $30,115
======= ===== ==== =======
</TABLE>
The amortized cost of mortgage-backed securities at June 30, 1997, including
those designated as available-for-sale, are shown below by contractual terms
to maturity. Expected maturities will differ from contractual maturities
because borrowers may generally prepay obligations without prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED
COST
(In thousands)
<S> <C>
Due within one year $ -
Due after one to five years 71
Due after five years to ten years 2,026
Due after ten years to twenty years 725
Due after twenty years 20,225
------
Total mortgage-backed securities $23,047
=======
</TABLE>
During fiscal 1997, the Corporation sold $2.7 million of mortgage-backed
securities designated as available-for-sale, realizing a gain of $92,000 as
a result of such sale.
During fiscal 1996, the Corporation sold $1.0 million of mortgage-backed
securities designated as available-for-sale, realizing a loss of $2,000 as a
result of such sale.
During fiscal 1995, the Corporation sold $1.5 million of mortgage-backed
securities designated as available-for-sale, realizing no gain or loss as a
result of such sale.
35
<PAGE> 37
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Residential real estate
One- to four-family residential $177,504 $161,761
Home equity lines of credit 23,797 20,051
Multi family residential 17,912 16,368
Construction 14,947 18,969
Nonresidential real estate 14,469 12,337
Consumer and other 881 884
---------- ----------
249,510 230,370
Less:
Undisbursed portion of loans in
process 8,735 9,318
Deferred loan origination fees 307 427
Allowance for loan losses 820 618
---------- ----------
$239,648 $220,007
======= =======
</TABLE>
As depicted above, the Savings Bank's lending efforts have historically
focused on one- to four-family residential and multi family residential real
estate loans, which comprise approximately $224.3 million, or 94%, of the
total loan portfolio at June 30, 1997, and $206.8 million, or 94%, of the
total loan portfolio at June 30, 1996. Generally, such loans have been
underwritten on the basis of no more than an 80% loan-to-value ratio, which
has historically provided the Savings Bank with adequate collateral coverage
in the event of default. Nevertheless, the Savings Bank, as with any lending
institution, is subject to the risk that residential real estate values
could deteriorate in its primary lending area of southwestern Ohio, thereby
impairing collateral values. However, management is of the belief that
residential real estate values in the Savings Bank's primary lending area
are presently stable.
As discussed previously, the Savings Bank has sold whole loans and
participating interests in loans in the secondary market, retaining
servicing on the loans sold. Loans sold and serviced for others totaled
approximately $61.1 million, $68.8 million and $74.9 million at June 30,
1997, 1996 and 1995, respectively.
36
<PAGE> 38
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE C - LOANS RECEIVABLE (continued)
The Savings Bank, in the ordinary course of business, has granted loans to
its directors, officers and their related business interests. Loans to
officers and directors totaled approximately $877,000 and $1.1 million at
June 30, 1997 and 1996, respectively. During the year ended June 30, 1997,
there were $160,000 in loans disbursed to officers and directors, while
principal repayments of $383,000 were received from officers and directors.
The Savings Bank retains a director's spouse to perform title and other
legal services principally related to the loan origination function.
Management believes that the fees paid for such services (totaling
approximately $153,000, $137,000 and $126,000 for the years ended June 30,
1997, 1996 and 1995, respectively) are at, or below, the comparable cost of
such services from unrelated parties.
NOTE D - ALLOWANCE FOR LOSSES ON LOANS
The activity in the allowance for losses on loans is summarized as follows
for the years ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Beginning balance $618 $616 $724
Provision charged to operations 244 60 84
Charge-off of loans (57) (58) (192)
Recoveries of loan losses 15 - -
---- -- -
Ending balance $820 $618 $616
=== === ===
</TABLE>
At June 30, 1997, the Savings Bank's allowance for losses on loans was
solely general in nature, and includible as a component of regulatory
risk-based capital.
At June 30, 1997, 1996 and 1995, the Savings Bank's nonaccrual and
nonperforming loans totaled $851,000, $883,000 and $927,000, respectively.
Interest income which would have been recognized if such loans had performed
pursuant to contractual terms totaled approximately $22,000, $35,000 and
$34,000 for the years ended June 30, 1997, 1996 and 1995, respectively.
37
<PAGE> 39
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at June 30 are comprised of the following:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Land $1,630 $1,559
Office buildings and improvements 4,692 4,528
Furniture, fixtures and equipment 2,915 1,701
----- -----
9,237 7,788
Less accumulated depreciation
and amortization 2,194 1,859
----- -----
$7,043 $5,929
====== ======
</TABLE>
During fiscal 1991, the Corporation purchased a developed tract of land as a
future office site for $2.1 million. After evaluating various alternatives,
the Corporation entered into an option during fiscal 1993 to sell a parcel
of land adjacent to the office site at a sales price of $1.5 million, less
selling costs of approximately $80,000. Accordingly, the land was
transferred to real estate held for sale at the lower of cost or fair value.
The land was sold in July 1994, resulting in a $273,000 pre-tax gain. The
construction of the new branch facility and corporate headquarters was
completed in August 1996, at a total cost of $2.5 million. Additionally,
during fiscal 1996, two of the Savings Bank's branch locations were sold
resulting in gains totaling $144,000.
38
<PAGE> 40
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE F - DEPOSITS
Deposits consist of the following major classifications at June 30:
<TABLE>
<CAPTION>
Deposit type and weighted-
average interest rate 1997 1996
(In thousands)
<S> <C> <C>
NOW accounts
1997 - 2.81% $ 26,716
1996 - 2.47% $ 20,511
Passbook and club accounts
1997 - 2.78% 36,602
1996 - 2.79% 40,482
Money market deposit accounts
1997 - 3.15% 5,965
1996 - 3.17% 7,634
-------- --------
Total demand, transaction and passbook
deposits 69,283 68,627
Certificates of deposit
Original maturities of:
Less than 12 months
1997 - 5.57% 45,028
1996 - 5.28% 46,861
12 months to 30 months
1997 - 5.86% 102,112
1996 - 5.87% 83,752
36 months or greater
1997 - 6.01% 10,430
1996 - 6.03% 23,528
-------- --------
Total certificates of deposit 157,570 154,141
-------- --------
$226,853 $222,768
======= =======
</TABLE>
At June 30, 1997 and 1996, the Savings Bank had certificates of deposit with
balances in excess of $100,000 totaling $14.8 million and $13.2 million,
respectively.
39
<PAGE> 41
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE F - DEPOSITS (continued)
Interest expense on deposit accounts for the years ended June 30 is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Passbook $ 1,079 $ 1,162 $1,311
NOW accounts 641 333 303
Money market deposit accounts 219 283 356
Certificates of deposit 8,999 8,815 6,814
------- ------- -----
$10,938 $10,593 $8,784
====== ====== =====
</TABLE>
Maturities of outstanding certificates of deposit are summarized as follows
at June 30:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Less than one year $109,770 $106,938
One year to three years 41,484 37,827
More than three years 6,316 9,376
--------- ---------
$157,570 $154,141
======== ========
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at June 30, 1997
and 1996, by pledges of certain residential mortgage loans totaling $42.2
million and $38.5 million, and the Savings Bank's investment in Federal Home
Loan Bank stock are summarized as follows:
<TABLE>
<CAPTION>
INTEREST MATURING IN FISCAL JUNE 30,
RATE YEAR ENDING 1997 1996
<S> <C> <C> <C>
5.40 - 5.80% 1997 $ - $11,600
5.52 - 6.15% 1998 13,000 2,000
6.30 - 6.50% 1999 3,000 -
6.45% 2000 1,000 -
5.68% 2004 6,064 6,766
5.95% 2009 2,148 2,270
5.99% 2013 143 152
6.25% 2014 2,759 2,846
------- -------
$28,114 $25,634
======= =======
Weighted-average interest rate 5.97% 5.78%
==== ====
</TABLE>
40
<PAGE> 42
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE H - LOAN TO EMPLOYEE STOCK OWNERSHIP PLAN
As discussed previously in Note A-11, the Corporation established the ESOP,
which initially acquired 25,526 shares of common stock in the conversion
offering. In order to fund the acquisition of stock, the ESOP borrowed
$147,000 from an independent third-party lender, payable over a six year
term. In connection with the conversion-merger, the ESOP purchased an
additional 54,023 shares of common stock by borrowing an additional
$686,000, payable over a six year term. The sole security for the loans is
the acquired stock and, while neither Centennial nor the Corporation has
guaranteed the loans, future contributions to retire the loans will be paid
out of current or retained earnings. Accordingly, the remaining unpaid
amount of the loans to the ESOP has been deducted from stockholders' equity,
with the corresponding future payments reflected as a liability. At June 30,
1997, the ESOP held 82,742 shares of common stock, of which approximately
78,058 shares had been allocated to participants.
NOTE I - FEDERAL INCOME TAXES
The provision for federal income taxes on earnings differs from that
computed at the statutory corporate tax rate for the years ended June 30 as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at the statutory rate $647 $833 $813
Increase (decrease) in taxes resulting from:
Purchase method accounting adjustments
(comprised solely of goodwill) 71 75 76
Tax-exempt interest (44) (29) (25)
Other 22 27 51
---- ---- ----
Federal income tax provision per consolidated
financial statements $696 $906 $915
=== === ===
</TABLE>
41
<PAGE> 43
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE I - FEDERAL INCOME TAXES (continued)
The composition of the Corporation's net deferred tax liability at June 30
is as follows:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Taxes (payable) refundable on temporary differences at estimated corporate
tax rate:
Deferred tax assets:
General loan loss allowance $ 279 $ 210
Retirement expense 208 118
Purchase accounting adjustments other than goodwill 31 52
Unrealized losses on securities designated as available
for sale - 5
------- -----
Total deferred tax assets 518 385
Deferred tax liabilities:
Percentage of earnings bad debt deduction (349) (338)
Book/tax depreciation (186) (171)
Federal Home Loan Bank stock dividends (367) (313)
Deferred loan origination costs (141) (25)
Other (2) (21)
Unrealized gains on securities designated as available for sale (53) -
------- -----
Total deferred tax liabilities (1,098) (868)
------- -----
Net deferred tax liability $ (580) $(483)
====== ====
</TABLE>
The Savings Bank was allowed a special bad debt deduction, generally limited
to 8% of otherwise taxable income, subject to certain limitations based on
aggregate loans and deposit account balances at the end of the year. 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. Retained earnings at June 30,
1997, includes approximately $3.7 million for which federal income taxes
have not been provided. The amount of unrecognized deferred tax liability
relating to the cumulative bad debt deduction at June 30, 1997, is
approximately $1.0 million. See Note N for additional information regarding
the Savings Bank's future percentage of earnings bad debt deductions.
NOTE J - LOAN 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 statements of financial condition. The contract
or notional amounts of the commitments reflect the extent of the Savings
Bank's involvement in such financial instruments.
The Savings Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
is represented by the contractual notional amount of those instruments. The
Savings Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
42
<PAGE> 44
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE J - LOAN COMMITMENTS (continued)
At June 30, 1997, the Savings Bank had total outstanding commitments of
approximately $8.7 million to originate one- to four-family residential real
estate loans.
Additionally, the Savings Bank had $26.6 million of outstanding loan
commitments under home equity lines and $783,000 of outstanding loan
commitments under commercial lines of credit. In the opinion of management,
all loan commitments equaled or exceeded prevalent market interest rates as
of June 30, 1997, and such commitments have been underwritten on the same
basis as that of the existing loan portfolio. Management believes that all
loan commitments are able to be funded through cash flow from operations and
existing excess liquidity. Fees received in connection with these
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 the regulatory capital requirements of the
Federal Deposit Insurance Corporation (the "FDIC"). 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 Savings Bank'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.
During the calendar year, the Savings Bank was notified by its primary
regulator that it was categorized as "well-capitalized" under the regulatory
framework for prompt corrective action. To be categorized as
"well-capitalized" the Savings Bank must maintain minimum capital ratios as
set forth in the table that follows.
43
<PAGE> 45
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE K - REGULATORY CAPITAL (continued)
The FDIC has adopted risk-based capital ratio guidelines to which the
Savings Bank is subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. Risk-based capital
ratios are determined by allocating assets and specified off-balance sheet
commitments to four risk-weighting categories, with higher levels of capital
being required for the categories perceived as representing greater risk.
These guidelines divide the capital into two tiers. The first tier ("Tier
1") includes common equity, certain non-cumulative perpetual preferred stock
(excluding auction rate issues) and minority interests in equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets
(except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary ("Tier 2") capital includes,
among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatory convertible securities, certain hybrid capital instruments,
term subordinated debt and the allowance for loan losses, subject to certain
limitations, less required deductions. Savings banks are required to
maintain a total risk-based capital (the sum of Tier 1 and Tier 2 capital)
ratio of 8%, of which 4% must be Tier 1 capital. The FDIC may, however, set
higher capital requirements when particular circumstances warrant. Savings
banks experiencing or anticipating significant growth are expected to
maintain capital ratios, including tangible capital positions, well above
the minimum levels.
In addition, the FDIC established guidelines prescribing a minimum Tier 1
leverage ratio (Tier 1 capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of
3% for savings banks that meet certain specified criteria, including that
they have the highest regulatory rating and are not experiencing or
anticipating significant growth. All other savings banks are required to
maintain a Tier 1 leverage ratio of 3% plus an additional cushion of at
least 100 to 200 basis points.
As of June 30, 1997, management believes that the Savings Bank met all
capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------- ---------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $24,795 13.4% $14,752 8.0% $18,440 10.0%
Tier 1 Capital
(to risk-weighed assets) $23,985 13.0% $ 7,376 4.0% $11,064 6.0%
Tier 1 Leverage $23,985 8.5% $11,333 4.0% $14,167 5.0%
</TABLE>
44
<PAGE> 46
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE K - REGULATORY CAPITAL (continued)
The Corporation's management believes that, under the current regulatory
capital regulations, the Savings Bank will continue to meet its minimum
capital requirements in the foreseeable future. However, events beyond the
control of the Corporation, such as increased interest rates or a downturn
in the economy in the Savings Bank's market areas, could adversely affect
future earnings and, consequently, the ability to meet future minimum
regulatory capital requirements.
NOTE L - CONDENSED FINANCIAL STATEMENTS OF GLENWAY FINANCIAL
CORPORATION
The following condensed financial statements summarize the financial
position of the Corporation as of June 30, 1997 and 1996, and the results of
its operations and its cash flows for each of the years ended June 30, 1997,
1996 and 1995.
Glenway Financial Corporation
STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash $ 164 $ 204
Investment in Centennial Savings Bank 24,455 23,707
Real estate held for investment 1,668 1,689
Cash surrender value of life insurance 1,585 1,457
Prepaid expenses and other assets 2 338
-------- --------
Total assets $ 27,874 $ 27,395
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 571 $ 401
Loan to Employee Stock Ownership Plan 65 213
-------- --------
636 614
Stockholders' equity
Common stock12 11
Additional paid-in capital 13,267 12,102
Retained earnings 15,038 15,749
Shares acquired by employee benefit plans (216) (316)
Treasury stock - at cost (965) (756)
Unrealized gains (losses) on securities designated as
available for sale 102 (9)
-------- --------
Total stockholders' equity 27,238 26,781
-------- --------
Total liabilities and stockholders' equity $ 27,874 $ 27,395
======== ========
</TABLE>
45
<PAGE> 47
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE L - CONDENSED FINANCIAL STATEMENTS OF GLENWAY FINANCIAL
CORPORATION (continued)
Glenway Financial Corporation
STATEMENTS OF EARNINGS
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenue
Interest income $ 4 $ 6 $ 19
Dividends received from subsidiary 1,075 1,160 4,353
Equity in undistributed earnings of (excess
distributions from) subsidiary 660 735 (2,222)
Other income 107 88 74
------- ------- -------
Total revenue 1,846 1,989 2,224
Expenses
Administrative and other 675 624 972
------- ------- -------
Net earnings before tax credits 1,171 1,365 1,252
Federal income tax credits (35) (180) (223)
------- ------- -------
Net earnings $ 1,206 $ 1,545 $ 1,475
======= ======= =======
</TABLE>
Glenway Financial Corporation
STATEMENTS OF CASH FLOWS
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows provided by (used in) operating
activities:
Net earnings for the year $ 1,206 $ 1,545 $ 1,475
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
(Undistributed earnings of) excess of distributions
from consolidated subsidiary (660) (735) 462
Amortization of expense related to employee
benefit plans 193 180 296
Depreciation 36 36 8
Increases (decreases) in cash due to
changes in:
Other liabilities 170 (98) 424
Prepaid expenses and other assets 336 (179) (107)
------- ------- -------
Cash provided by operating activities
(balance carried forward) 1,281 749 2,558
------- ------- -------
</TABLE>
46
<PAGE> 48
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE L - CONDENSED FINANCIAL STATEMENTS OF GLENWAY FINANCIAL
CORPORATION (continued)
Glenway Financial Corporation
STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash provided by operating activities
(balance brought forward) $ 1,281 $ 749 $ 2,558
Cash flows used in investing activities:
Purchase of office premises and equipment (15) (5) (25)
Purchase of single premium life insurance policy (60) -- (1,370)
Increase in cash surrender value of life insurance
policy (68) (31) (56)
------- ------- -------
Net cash used in investing activities (143) (36) (1,451)
Cash flows provided by (used in) financing activities:
Repayment of loan to ESOP (148) (149) (238)
Payment of dividends on common stock (777) (736) (705)
Issuance of shares under stock option plan 158 188 251
Purchase of treasury stock (411) -- (1,048)
------- ------- -------
Net cash used in financing activities (1,178) (697) (1,740)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (40) 16 (633)
Cash and cash equivalents at beginning of year 204 188 821
------- ------- -------
Cash and cash equivalents at end of year $ 164 $ 204 $ 188
======= ======= =======
</TABLE>
Under Federal Reserve Board supervisory policy, a bank holding company
generally should not maintain its existing rate of cash dividends on common
shares unless (i) the corporation's net earnings available to common
stockholders over the past year has been sufficient to fully fund the
dividends, and (ii) the prospective rate of earnings retention appears
consistent with the company's capital needs, asset quality, and overall
financial condition. The FDIC has authority under the Financial Institutions
Supervisory Act to prohibit a company from paying dividends if, in its
opinion, the payment of dividends would constitute an unsafe or unsound
practice in light of the financial condition of the company. Under Ohio law,
the Corporation and Centennial are prohibited from paying a dividend which
would result in insolvency. Ohio law requires the Corporation and Centennial
to obtain approval from the Ohio Department of Commerce, Division of
Financial Institutions before payment of dividends in excess of net earnings
for the current and two prior fiscal years, with certain adjustments.
47
<PAGE> 49
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE M - STOCK OPTION PLAN
The Corporation adopted a stock option plan during fiscal 1991 that
initially provided for the issuance of 25,660 options to purchase shares to
officers and directors. In connection with the conversion-merger
transaction, the Corporation granted an additional 46,228 options during
fiscal 1994.
The Corporation applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for the Stock Option Plan.
Accordingly, no compensation cost has been recognized for the Stock Option
Plan. Had compensation cost for the Corporation's stock option plan been
determined based on the fair value at the grant dates, 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>
1997 1996 1995
<S> <C> <C> <C> <C>
Net earnings As reported $1,206 $1,545 $1,475
===== ===== =====
Pro-forma $1,149 $1,545 $1,475
===== ===== =====
Earnings per share As reported $1.06 $1.37 $1.30
==== ==== ====
Pro-forma $1.01 $1.37 $1.30
==== ==== ====
</TABLE>
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 1997 and 1996, respectively;
dividend yield of 7.50% and expected volatility of 25.0% for all years;
risk-free interest rates of 6.00% and 5.95% and expected lives of ten years.
A summary of the status of the Corporation's Stock Option Plans as of June
30, 1997 and 1996, and changes during the periods ending on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 42,074 $12.25 53,591 $8.51 61,740 $8.97
Granted 20,500 $20.88 - $ - - $ -
Exercised (9,976) $10.90 (11,517) $5.12 (8,149) $5.93
Forfeited - $ - - $ - - $ -
------ ------ ------
Outstanding at end of year 52,598 $14.34 42,074 $12.24 53,591 $8.51
====== ===== ====== ===== ====== ====
Options exercisable at year-end 52,598 42,074
====== ======
Weighted-average fair value of
options granted during the year $4.24 N/A N/A
====
</TABLE>
48
<PAGE> 50
GLENWAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE M - STOCK OPTION PLAN (continued)
The following information applies to options outstanding at June 30, 1997:
<TABLE>
<S> <C>
Number outstanding 52,598
Range of exercise prices $13.33 - $23.00
Weighted-average exercise price $14.34
Weighted-average remaining contractual life 7.4 years
</TABLE>
NOTE N - LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Savings Bank and of other savings associations
are insured by the FDIC through the Savings Association Insurance Fund
("SAIF"). Prior to September 1996, the reserves of the SAIF were below the
level required by law because a significant portion of the assessments paid
into the fund were used to pay the cost of prior thrift failures. The
deposit accounts of commercial banks are insured by the FDIC through the
Bank Insurance Fund ("BIF"), except to the extent such banks have acquired
SAIF deposits. The reserves of the BIF met the level required by law in May
1995. As a result of the respective reserve levels of the funds, deposit
insurance assessments paid by healthy savings associations exceeded those
paid by healthy commercial banks by approximately $.19 per $100 in deposits
in 1995. In fiscal 1996 and 1997, no BIF assessments were required for
healthy commercial banks except for a $2,000 minimum fee.
Legislation was enacted to recapitalize the SAIF that provided for a special
assessment totaling $.657 per $100 of SAIF deposits held at March 31, 1995,
in order to increase SAIF reserves to the level required by law. The Savings
Bank held $205.5 million in deposits at March 31, 1995, resulting in an
assessment of approximately $1.35 million, or $891,000 after tax, which was
charged to operations in fiscal 1997.
Under separate legislation related to the recapitalization plan, the Savings
Bank is required to recapture as taxable income approximately $1.0 million
of its tax bad debt reserve, which represents the post-1987 additions to the
reserve, and will be unable to utilize the percentage of earnings method to
compute its bad debt deduction in the future. The Savings Bank has provided
deferred taxes for this amount and will be permitted to amortize the
recapture of the bad debt reserve in taxable income over six years.
49
<PAGE> 51
CORPORATE INFORMATION - GLENWAY FINANCIAL CORPORATION
CORPORATE HEADQUARTERS:
5535 Glenway Avenue
Cincinnati, Ohio 45238
Telephone: (513) 922-5959
TRANSFER AGENT AND REGISTRAR:
The Fifth Third Bank
Stock Transfer Department
ML #1090D2
38 Fountain Square
Cincinnati, Ohio 45263
INDEPENDENT AUDITORS:
Grant Thornton LLP
625 Eden Park Drive, Suite 900
Cincinnati, Ohio 45202-4181
MARKET MAKERS:
Herzog, Heine, Geduld Inc.
McDonald & Company Securities, Inc.
Trident Securities, Inc.
National Securities Corporation
ANNUAL MEETING:
October 22, 1997, 2:00 P.M.
Corporate Headquarters
Glenway Financial Corporation
5535 Glenway Avenue
Cincinnati, Ohio 45238
A COPY OF FORM 10-KSB, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE RECORD
DATE UPON WRITTEN REQUEST TO ROBERT R. SUDBROOK, PRESIDENT, GLENWAY FINANCIAL
CORPORATION, 5535 GLENWAY AVENUE, CINCINNATI, OHIO 45238.
50
<PAGE> 52
DIRECTORS AND OFFICERS -
GLENWAY FINANCIAL CORPORATION
DIRECTORS:
EDGAR A. RUST
Chairman of the Board
Housing Director of Bethany House Services, Inc.
MILTON L. VAN SCHOIK
Vice Chairman of the Board
Retired Vice President of the
Cincinnati Gas and Electric Company
DANIEL W. GEEDING
Secretary
Professor of Management
Director of The Center for International Business
Xavier University
ROBERT R. SUDBROOK
President and Chief Executive Officer of Glenway
Financial Corporation and Centennial Savings Bank
RONALD L. GOODFELLOW
Retired executive of Cincinnati Milacron, Inc.
KENNETH LICHTENDAHL
President of Hudepohl-Schoenling Brewery
JOHN P. TORBECK
Vice President of Torbeck Homes, Inc.
ALBERT W. MOELLER
Retired executive of The Procter & Gamble Company
OFFICERS:
ROBERT R. SUDBROOK
President and Chief Executive Officer
GREGORY P. NIESEN
Treasurer and Chief Financial Officer
JOSEPH V. BUNKE
Vice President/Audit
51
<PAGE> 53
DIRECTORS AND OFFICERS -
CENTENNIAL SAVINGS BANK
DIRECTORS:
RONALD L. GOODFELLOW
Chairman of the Board
Retired executive of Cincinnati Milacron, Inc.
JOHN L. TORBECK
Vice Chairman of the Board
President of Torbeck Homes, Inc.
DONALD E. WILLIG
Secretary
Retired President of Parkway Products
ROBERT R. SUDBROOK
President and Chief Executive Officer of Glenway
Financial Corporation and Centennial Savings Bank
JAMES M. HATER
Chief Executive Officer of Hater Dry Goods
FRANK S. HODGES
Chief Executive Officer of Pioneer Guns
EDGAR A. RUST
Housing Director of Bethany House Services, Inc.
JAMES W. SCHACKMANN
Retired Chief Executive Officer of
The Glenway Loan and Deposit Company
MILTON L. VAN SCHOIK
Retired Vice President of the
Cincinnati Gas and Electric Company
OFFICERS:
ROBERT R. SUDBROOK MICHAEL P. DOHERTY
President and Chief Senior Vice President/
Executive Officer Lending
ELAINE M. SCHMIDT LINDA M. CLARK
Senior Vice President/ Vice President/
Chief Operations Officer Branch Operations
GREGORY P. NIESEN
Vice President/
Chief Financial Officer
JOSEPH V. BUNKE
Vice President/
Audit
52
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Centennial Savings Bank
Centennial Savings and Loan Service Corporation
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 3,890
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,920
<INVESTMENTS-CARRYING> 20,323
<INVESTMENTS-MARKET> 19,981
<LOANS> 239,648
<ALLOWANCE> 820
<TOTAL-ASSETS> 287,088
<DEPOSITS> 226,853
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,818
<LONG-TERM> 28,179
0
0
<COMMON> 12
<OTHER-SE> 27,226
<TOTAL-LIABILITIES-AND-EQUITY> 287,088
<INTEREST-LOAN> 18,458
<INTEREST-INVEST> 2,229
<INTEREST-OTHER> 216
<INTEREST-TOTAL> 20,903
<INTEREST-DEPOSIT> 10,938
<INTEREST-EXPENSE> 12,195
<INTEREST-INCOME-NET> 8,708
<LOAN-LOSSES> 244
<SECURITIES-GAINS> 63
<EXPENSE-OTHER> 7,348
<INCOME-PRETAX> 1,902
<INCOME-PRE-EXTRAORDINARY> 1,206
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,206
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.06
<YIELD-ACTUAL> 2.94
<LOANS-NON> 284
<LOANS-PAST> 567
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,612
<ALLOWANCE-OPEN> 618
<CHARGE-OFFS> 57
<RECOVERIES> 15
<ALLOWANCE-CLOSE> 820
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 820
</TABLE>
<PAGE> 1
Exhibit 99
GLENWAY FINANCIAL CORPORATION
5535 GLENWAY AVENUE
CINCINNATI, OHIO 45238
(513) 922-5959
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Notice is hereby given that the 1997 Annual Meeting of Stockholders of
Glenway Financial Corporation (the "Corporation") will be held at the
Corporation's headquarters at 5535 Glenway Avenue, Cincinnati, Ohio, on October
22, 1997, at 2:00 p.m., local time (the "Annual Meeting"), for the following
purposes, which are more completely set forth in the accompanying Proxy
Statement:
To elect three directors of the Corporation for terms expiring in
2000;
To ratify the selection of Grant Thornton LLP as the auditors of
the Corporation for the current fiscal year; and
To transact such other business as may properly come before the
Annual Meeting and any adjournments thereof.
Only stockholders of the Corporation of record at the close of business
on September 12, 1997, will be entitled to receive notice of and to vote at the
Annual Meeting and any adjournments thereof. Whether or not you expect to attend
the Annual Meeting, we urge you to consider the accompanying Proxy Statement
carefully and to SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY SO THAT YOUR
SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES AND THE PRESENCE OF A QUORUM
MAY BE ASSURED. The giving of a Proxy does not affect your right to vote in
person in the event you attend the Annual Meeting.
By Order of the Board of Directors
Cincinnati, Ohio Robert R. Sudbrook
September 17, 1997 President
<PAGE> 2
GLENWAY FINANCIAL CORPORATION
5535 GLENWAY AVENUE
CINCINNATI, OHIO 45238
(513) 922-5959
PROXY STATEMENT
PROXIES
The enclosed proxy (the Proxy) is being solicited by the Board of
Directors of Glenway Financial Corporation (the "Corporation") for use at the
1997 Annual Meeting of Stockholders of the Corporation to be held at the
Corporation's headquarters at 5535 Glenway Avenue, Cincinnati, Ohio, on October
22, 1997, at 2:00 p.m., local time, and at any adjournments thereof (the "Annual
Meeting"). Proxies may be revoked by (a) the delivery of a written notice
expressly revoking the Proxy to the Secretary of the Corporation at the above
address prior to the Annual Meeting, (b) the delivery of a later dated proxy to
the Corporation at the above address prior to the Annual Meeting, or (c) the
attendance at the Annual Meeting and the casting of votes personally. Attendance
at the Annual Meeting will not, in and of itself, constitute revocation of a
Proxy.
Each properly executed Proxy which is received prior to the Annual
Meeting and not revoked will be voted as specified thereon or, in the absence of
specific instructions to the contrary, will be voted:
FOR the election of Daniel W. Geeding, Ronald L. Goodfellow and
Kenneth C. Lichtendahl as directors of the Corporation for terms
expiring in 2000; and
FOR the ratification of the selection of Grant Thornton LLP as the
auditors of the Corporation for the current fiscal year.
The cost of solicitation of Proxies will be borne by the Corporation.
The Corporation will reimburse brokerage firms and other custodians, nominees
and fiduciaries for reasonable expenses incurred by them in sending proxy
materials to the beneficial owners. In addition to solicitation by mail,
directors, officers and regular employees of the Corporation may solicit Proxies
personally or by telegraph or telephone without additional compensation.
Only stockholders of record as of the close of business on September
12, 1997 (the "Voting Record Date"), are eligible to vote at the Annual Meeting
and will be entitled to cast one vote for each share of Common Stock (the
"Common Stock") owned. The Corporation's records disclose that, as of the Voting
Record Date, there were 1,139,997 shares of the Common Stock outstanding and
entitled to be voted at the Annual Meeting. The Corporation's Certificate of
Incorporation does not allow cumulative voting in the election of directors.
This Proxy Statement is first being mailed to stockholders of the
Corporation on or about September 17, 1997.
1
<PAGE> 3
VOTE REQUIRED
ELECTION OF DIRECTORS
Under Delaware law and the Corporation's Bylaws, the three nominees
receiving the greatest number of votes will be elected as directors. Shares as
to which the authority to vote is withheld and shares held by a nominee for a
beneficial owner which are represented in person or by proxy but are not voted
with respect to the election of directors ("non-votes") are counted for purposes
of a quorum but are not counted toward the election of directors.
RATIFICATION OF SELECTION OF AUDITORS
The affirmative vote of the holders of a majority of the shares
represented in person or by proxy at the Annual Meeting is necessary to ratify
the selection of Grant Thornton LLP as the auditors of the Corporation for the
current fiscal year. Non-votes are counted for purposes of establishing a
quorum. The effect of an abstention or a non-vote with respect to the
ratification of the selection of auditors is the same as a "no" vote. If the
accompanying Proxy is signed and dated by the stockholder but no vote or
instruction to abstain is specified thereon, the shares held by such stockholder
will be voted FOR the ratification of the selection of Grant Thornton LLP as
auditors and will not be considered "non-votes."
VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
only persons known to the Corporation to own beneficially more than five percent
of the Common Stock as of September 1, 1997:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address Beneficial Ownership (1) Shares Outstanding
- ---------------- -------------------- ------------------
<S> <C> <C>
Fifth Third Bancorp and
Fifth Third Bank 61,383 (2) 5.38%
38 Fountain Square Plaza
Cincinnati, Ohio 45263
<FN>
- ---------------------------
(1) The information provided in this table and the footnotes thereto is
based solely upon the information contained in the Form 13G (the "Form
13G") filed by the named entities with the Securities and Exchange
Commission.
(2) Consists of holdings of Fifth Third Bancorp in fiduciary accounts at
several of its banking subsidiaries, including Fifth Third Bank. The
Form 13G states that Fifth Third Bancorp has sole voting power over all
61,383 shares and that Fifth Third Bank has sole voting power over
58,758 shares. The Form 13G indicates that both Fifth Third Bancorp and
Fifth Third Bank have sole dispositive power over 519 shares and shared
dispositive power over 3,307 shares.
</TABLE>
2
<PAGE> 4
The following table sets forth certain information with respect to the
shares of Common Stock beneficially owned by each director of the Corporation
and by all directors and executive officers of the Corporation as a group as of
September 1, 1997:
<TABLE>
<CAPTION>
Amount and Nature of Percent of Shares
Name and Address(1) Beneficial Ownership(2) Outstanding(3)
- -------------------- -------------------- ------------
<S> <C> <C>
Daniel W. Geeding 15,637 1.37%
Ronald L. Goodfellow 13,619(4) 1.19
Kenneth C. Lichtendahl 17,404(5) 1.52
Albert W. Moeller 11,974(6) 1.05
Edgar A. Rust 56,416(7) 4.94
Robert R. Sudbrook 16,064(8) 1.40
John P. Torbeck 17,647(9) 1.54
Milton L. Van Schoik 12,449(10) 1.08
All directors and executive officers
as a group (10 persons) 166,730 14.30
<FN>
- -----------------------------
(1) Each of the persons listed in this table may be contacted at the address of
the Corporation, 5535 Glenway Avenue, Cincinnati, Ohio 45238.
(2) All shares are owned directly with sole voting or investment power unless
otherwise indicated by footnote.
(3) Assumes a total of 1,139,997 shares of Common Stock outstanding, plus the
number of shares such person or group has the right to acquire within 60
days, if any.
(4) Includes 3,858 shares which may be acquired upon the exercise of options
and 1,967 shares owned by Mr. Goodfellow's spouse.
(5) Includes 3,858 shares as to which Mr. Lichtendahl shares voting and
investment power.
(6) Includes 10,479 shares as to which Mr. Moeller shares voting and investment
power and 551 shares owned by Mr. Moeller's spouse.
(7) Includes 1,681 shares owned by Mr. Rust's spouse, 4,590 shares held in a
trust for which Mr. Rust is the trustee and Mr. Rust's children are the
beneficiaries and 6,250 shares allocated to Mr. Rust's account under the
Corporation's Employee Stock Ownership Plan.
(8) Includes 10,500 shares which may be acquired upon the exercise of options
and 1,044 shares allocated to Mr. Sudbrook's account under the
Corporation's Employee Stock Ownership Plan.
(9) Includes 3,858 shares which may be acquired upon the exercise of options,
576 shares owned by Mr. Torbeck's spouse and 780 shares which Mr. Torbeck
holds as custodian for his grandchildren, as to which Mr. Torbeck has sole
voting power.
(10) Includes 3,858 shares which may be acquired upon the exercise of options
and 4,199 shares owned by Mr. Van Schoik's spouse.
</TABLE>
3
<PAGE> 5
PROPOSAL ONE - ELECTION OF DIRECTORS
ELECTION OF DIRECTORS
In accordance with the Corporation's Certificate of Incorporation and
Bylaws, the number of directors of the Corporation is currently fixed at eight,
divided into three classes as nearly equal in number as possible. One class is
elected annually, and each class serves a term of three years. Any stockholder
entitled to vote for the election of directors at an annual meeting may nominate
persons for election as directors at such annual meeting by following the
procedure set out in the Corporation's Bylaws. Such procedure provides, in
general, that a stockholder wishing to make a nomination must deliver to the
Secretary of the Corporation, not less than 30 days prior to the annual meeting,
a written notice setting forth certain information regarding both the nominee
and the stockholder making such nomination.
Three directors will be elected by a plurality of the votes present in
person or by Proxy at the Annual Meeting. The nominees receiving the greatest
number of votes will be elected.
The Board of Directors proposes the re-election of the following
directors to terms that will expire in 2000:
Director
Name Age(1) Position(s) Held Since(2)
---- --- ---------------- --------
Daniel W. Geeding 55 Director 1988
Ronald L. Goodfellow 66 Director 1970
Kenneth C. Lichtendahl 48 Director 1997
- -----------------------------
(1) As of September 1, 1997.
(2) Indicates the year that the individual became a director of the
Corporation's subsidiary, Centennial Savings Bank ("Centennial") or The
Glenway Loan and Deposit Company ("Glenway Loan and Deposit"), which
converted to stock form and merged into Centennial on August 24, 1993
(the "Merger-Conversion"). Mr. Geeding became a director of the
Corporation when the Corporation was formed in 1990. Mr. Goodfellow
became a director of the Corporation on the effective date of the
Merger-Conversion. Mr. Lichtendahl was a director of the Corporation
from its formation in 1990 through the expiration of his term in 1996
and was re-appointed by the Board of Directors to fill a vacancy on the
Board in 1997.
If any nominee is unable to stand for election, any Proxies granting
authority to vote for such nominee will be voted for such substitute as the
Board of Directors recommends. At this time, the Board of Directors knows of no
reason why any nominee would be unable to serve if elected.
4
<PAGE> 6
The following directors will continue to serve after the Annual Meeting
for the terms indicated:
Director Term
Name Age(1) Position(s) Held Since(2) Expires
- ---- --- ---------------- --------- -------
Albert W. Moeller 75 Director 1972 1999
Edgar A. Rust 54 Chairman of the Board 1975 1998
Robert R. Sudbrook 54 Director and President 1996 1999
John P. Torbeck 69 Director 1984 1998
Milton L. Van Schoik 69 Director 1971 1998
- ---------------------------
(1) As of September 1, 1997.
(2) Indicates the year that the individual became a director of Centennial
or Glenway Loan and Deposit. Messrs. Moeller and Rust became directors
of the Corporation when the Corporation was formed in 1990. Messrs.
Torbeck and Van Schoik became directors of the Corporation on the
effective date of the Merger-Conversion. Mr. Sudbrook was appointed by
the Board of Directors to fill a vacancy on the Board.
DANIEL W. GEEDING served as the Dean of the College of Business
Administration at Xavier University from 1988 through 1997. Mr. Geeding
currently serves as a Professor of Management and the Director of the Center for
International Business at Xavier University. Mr. Geeding also serves as a
director of Choice Care, Frisch's Restaurants, Inc. and Zaring Homes, Inc.
RONALD L. GOODFELLOW became Chairman of the Board of Directors of
Centennial in September 1995. Prior to that, he served as Vice-Chairman of the
Board of Centennial. In 1988, Mr. Goodfellow retired from Cincinnati Milacron,
Inc., as the Manager of Marketing Administration and Distributor Sales, where he
had been employed for 32 years.
KENNETH C. LICHTENDAHL has served as the President of
Hudepohl-Schoenling Brewing Company since 1970. Mr. Lichtendahl also serves as a
director of Cincinnati Financial Corporation.
ALBERT W. MOELLER served as either Chairman or Vice Chairman of the
Board of the Corporation from its formation in 1990 until July 1996. Mr. Moeller
retired from Procter & Gamble as Assistant Treasurer in 1983, where he had been
employed for 42 years.
EDGAR A. RUST is Chairman of the Board of the Corporation and a
director of Centennial. From 1975 through the effective date of the
Merger-Conversion, Mr. Rust served as President and Chief Executive Officer of
Centennial. Between 1993 and 1996, Mr. Rust served the Corporation and
Centennial in various capacities, including Vice Chairman of the Corporation and
an interim appointment as President and Chief Executive Officer following the
death of Mr. Sudbrook's predecessor. Since January 1995, Mr. Rust has served as
Housing Director of Bethany House Services. He also serves as Chairman of the
Board of the Cincinnati Development Fund.
ROBERT R. SUDBROOK has served as the President and Chief Executive
Officer of the Corporation and Centennial since July 1996. Before his arrival at
the Corporation, Mr. Sudbrook served as the President and Chief Executive
Officer of The North Side Bank & Trust Company, a $215 million asset bank in
Cincinnati, for six years. Prior to that, Mr. Sudbrook had over 20 years of
experience in the banking industry.
5
<PAGE> 7
JOHN P. TORBECK is the Vice President and Secretary of Torbeck Homes,
Inc., a residential construction company located in Cincinnati, a position he
has held since the establishment of that company in 1984.
MILTON L. VAN SCHOIK became Vice Chairman of the Corporation in 1996.
Mr. Van Schoik is currently retired. At the time of his retirement, he held the
position of Senior Vice President - Information and General Services at the
Cincinnati Gas and Electric Company, where he had been employed since 1957.
MEETINGS AND COMMITTEES OF DIRECTORS
The Board of Directors of the Corporation met eight times for regularly
scheduled and special meetings during the fiscal year ended June 30, 1997. Each
director attended at least 75% of the aggregate of the total meetings of the
board held during such fiscal year and the total number of meetings held by all
committees of the board on which he served.
The Board of Directors of the Corporation has an Executive Committee, a
Nominating Committee and an Audit Committee.
The Executive Committee is comprised of Messrs. Geeding, Goodfellow,
Moeller, Rust and Van Schoik. The Executive Committee meets as needed to
consider matters of general concern to the Corporation. All decisions of the
Executive Committee are ratified by the Board of Directors. The Executive
Committee met one time during the fiscal year ended June 30, 1997.
The members of the Nominating Committee are Messrs. Goodfellow,
Lichtendahl, Moeller and Sudbrook. The Nominating Committee selects nominees for
elections as directors of the Corporation. The Nominating Committee considers
stockholder recommendations in selecting nominees. The Nominating Committee met
six times during the fiscal year ended June 30, 1997.
The Audit Committee is composed of Messrs. Geeding, Moeller, Torbeck
and Van Schoik. Mr. Geeding is the Chairman of the Audit Committee, which
reviews audit reports and related matters to ensure effective compliance with
regulatory and internal policies and procedures. James M. Hater and James W.
Schackmann, directors of Centennial, attend meetings of the Corporation's Audit
Committee. The Audit Committee met five times during the fiscal year ended June
30, 1997.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
current executive officers of the Corporation, as of September 1, 1997:
Name Age (1) Position(s) Held
- ---- --- ----------------
Daniel W. Geeding 55 Secretary
Edgar A. Rust 54 Chairman of the Board
Robert R. Sudbrook 54 President and Chief Executive Officer
Milton L. Van Schoik 69 Vice Chairman of the Board
Joseph V. Bunke 43 Vice President/Audit
Gregory P. Niesen 31 Treasurer and Chief Financial Officer
- ------------------------
(1) As of September 1, 1997.
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<PAGE> 8
JOSEPH V. BUNKE is the Vice President/Audit of the Corporation and
Centennial, a position he has held since October 1993. Prior to the
Merger-Conversion, Mr. Bunke was the Treasurer of Glenway Loan and Deposit, a
position he had held since 1986.
GREGORY P. NIESEN has served as the Treasurer/Chief Financial Officer
of the Corporation and as the Vice President/Chief Financial Officer of
Centennial since 1996. Prior to his employment by the Corporation, Mr. Niesen
was employed by Grant Thornton LLP for three years.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to Robert R.
Sudbrook, the President and Chief Executive Officer of the Corporation, for the
fiscal year ended June 30, 1997. Mr. Sudbrook was not an executive officer of
the Corporation prior to July 1996. No other executive officer of the
Corporation earned salary and bonus in excess of $100,000 during fiscal 1997.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
------------------- -------------------
Name and Fiscal Restricted Options/
Principal Position Year Salary($) Bonus($) Stock Awards($) Sars(#)
- ------------------ ---- --------- -------- --------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert R. Sudbrook 1997 $147,692 $20,213(1) $143,325 (2) 10,500 (3)
President and Chief Executive Officer
<FN>
- --------------------------
(1) Consists of 1,050 shares of Common Stock issued to Mr. Sudbrook upon
his employment by the Corporation and Centennial. The aggregate market
value of such shares is based upon the closing bid of $19.25 per share
of the Common Stock on August 29, 1996, the effective date of the
grant, as quoted on The NASDAQ National Market ("NASDAQ").
(2) On August 29, 1996, Mr. Sudbrook was awarded 7,350 shares of Common
Stock under Centennial's Bank Incentive Plan. The aggregate market
value of such shares as of August 29, 1996, based upon the closing bid
of $19.50 per shares of the Common Stock, as quoted on NASDAQ, was
$143,325. As of June 30, 1997, the aggregate market value of the
shares, as quoted on NASDAQ, was $181,913. One-fifth of the shares
become vested on each of the first five anniversaries of the award.
(3) Represents the number of shares of Common Stock underlying options
granted to Mr. Sudbrook during the fiscal year ended June 30, 1997.
</TABLE>
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<PAGE> 9
The following table sets forth information regarding the number and
value of unexercised options held by Mr. Sudbrook:
<TABLE>
Aggregated Option/SAR Exercises In Last Fiscal Year And 6/30/97 Option/sar Values
---------------------------------------------------------------------------------
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money
Options/SARs at Options/SARs at
6/30/97 (#) 6/30/97 ($)(1)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable
- ---- ----------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Robert R. Sudbrook - - 10,500/0 $57,750/0
<FN>
- -------------------
(1) Represents the value of such unexercised options, determined by
multiplying the number of unexercised options by the difference between
the exercise price of such options and the closing bid price for shares
of the Common Stock reported by NASDAQ on June 30, 1997.
</TABLE>
DIRECTOR COMPENSATION
Each director of the Corporation, except Mr. Sudbrook, receives a
monthly fee of $1,050 and $200 for each Board meeting and committee meeting of
the Corporation attended. In addition, Messrs. Goodfellow, Rust and Van Schoik,
who are also directors of Centennial, received $200 for each Board and committee
meeting of Centennial attended.
EMPLOYMENT AGREEMENT
Centennial entered into an employment agreement with Robert R.
Sudbrook, effective in July 1996, retaining him as President and Chief Executive
Officer of the Corporation. The employment agreement has a term of three years
and is subject to annual one-year extensions, at the discretion of the Board of
Directors. The employment agreement provides for an annual salary of not less
than $160,000. If Mr. Sudbrook is terminated at any time during such three-year
term for any reason other than "just cause," as defined in the employment
agreement, he will be entitled to receive an amount equal to his annual
compensation for 36 months, subject to reduction to the extent necessary to
comply with certain provisions of the Internal Revenue Code of 1986, as amended.
Assuming a termination of the employment contract, based on an annual salary of
$160,000, the payment to Mr. Sudbrook would be $480,000.
CERTAIN TRANSACTIONS WITH CENTENNIAL
Centennial has extended loans to certain directors and executive
officers of the Corporation and Centennial, their affiliates and members of
their families. All such loans were made in the ordinary course of business on
substantially the same terms, including interest rates and collateral
requirements, as those prevailing at the time for comparable transactions with
other persons and did not present more than the normal risk of collectibility or
other unfavorable features.
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<PAGE> 10
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Corporation's directors
and executive officers, and persons who own more than 10% of a registered class
of the Corporation's equity securities, to file with the Securities and Exchange
Commission ("SEC") reports of ownership and reports of changes in ownership of
common stock and other equity securities of the Corporation. Officers, directors
and greater than 10% stockholders are required by SEC regulation to furnish the
Corporation with copies of all Section 16(a) forms they file. The Form 3,
"Initial Statement of Beneficial Ownership of Securities," required to filed
with the SEC within ten days of becoming an executive officer or director, was
filed late by Mr. Sudbrook at the time of his hiring. To the Corporation's
knowledge, based solely on a review of the copies of such reports furnished to
the Corporation and written representations that no other reports were required
during the fiscal year ended June 30, 1997, the Corporation's directors and
executive officers complied with all Section 16(a) filing requirements
applicable to them.
PROPOSAL TWO - SELECTION OF AUDITOR
The Board of Directors has selected Grant Thornton LLP as the auditor
of the Corporation for the current fiscal year and recommends that the
stockholders ratify the selection. Such ratification requires the affirmative
vote of the holders of a majority of the shares actually voted on such proposal.
Abstentions and non-votes will have the effect of a "no" vote. Management
expects that a representative of Grant Thornton LLP will be present at the
Annual Meeting, will have the opportunity to make a statement, if he or she so
desires, and will be available to respond to appropriate questions from
stockholders.
PROPOSALS OF SECURITY HOLDERS AND OTHER MATTERS
Any proposals of security holders intended to be included in the
Corporation's Proxy Statement for the 1998 Annual Meeting of Stockholders should
be sent to the Corporation by certified mail and must be received by the
Corporation not later than May 27, 1998.
Management knows of no other business which will be brought before the
Annual Meeting, including matters incident to the conduct of the Annual Meeting.
It is the intention of the persons named in the enclosed Proxy to vote such
Proxy in accordance with their best judgment on any other matters which may be
brought before the Annual Meeting.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. WHETHER OR NOT YOU
EXPECT TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO FILL IN, SIGN AND
RETURN THE PROXY IN THE ENCLOSED SELF-ADDRESSED ENVELOPE.
By Order of the Board of Directors
Cincinnati, Ohio Robert R. Sudbrook
September 17, 1997 President
9
