UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
[ ] 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 (Title of Class)
on which registered)
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: $23.4 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 24, 1998, was $39.4
million. (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 15, 1998, there were 2,293,210 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, 1998. Part III of Form 10-KSB - Proxy Statement for
1998 Annual Meeting of Stockholders.
Transitional Small Business Disclosure Format: Yes __ No X
1
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EXPLANATORY NOTE
The Registrant is amending its Annual Report on Form 10-KSB for the year ended
June 30, 1998 to included in Item 13, Exhibit 13 a signed auditor's report and a
complete set of financial statements.
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
13 Financial Statements and Auditor's Report
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: /s/Robert R. Sudbrook
Robert R. Sudbrook, President and
Chief Executive Office (Duly
Authorized Representative)
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INDEX TO EXHIBITS
Exhibit Number Description
13 Financial Statements and Auditor's Report
3
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, 1998 and 1997, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years ended June 30, 1998, 1997 and 1996. 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, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years ended June 30, 1998,
1997 and 1996, in conformity with generally accepted accounting principles.
/s/GRANT THORNTON LLP
Cincinnati, Ohio
August 31, 1998
<PAGE>
<TABLE>
<CAPTION>
Glenway Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands, except share data)
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 1,436 $ 3,890
Federal funds sold 1,764 -
------- -------
Cash and cash equivalents 3,200 3,890
Investment securities - at amortized cost, approximate market
value of $8,120 and $7,035 at June 30, 1998 and 1997 8,069 7,042
Mortgage-backed securities - at amortized cost, approximate market
value of $11,158 and $12,946 at June 30, 1998 and 1997 11,304 13,281
Mortgage-backed securities available for sale - at market 5,570 9,920
Loans receivable - net 262,327 239,648
Office premises and equipment - at depreciated cost 5,805 7,043
Real estate acquired through foreclosure - 44
Federal Home Loan Bank stock - at cost 2,617 2,382
Accrued interest receivable on loans 1,548 1,214
Accrued interest receivable on mortgage-backed securities, investments
and interest-bearing deposits 230 267
Cash surrender value of life insurance 1,652 1,585
Prepaid expenses and other assets 412 404
Prepaid federal income taxes 372 -
Goodwill - net of amortization 226 368
------- -------
Total assets $303,332 $287,088
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $220,639 $226,853
Advances from the Federal Home Loan Bank 50,435 28,114
Loan to Employee Stock Ownership Plan - 65
Checks issued in excess of bank balance - 2,422
Advances by borrowers for taxes and insurance 186 235
Accounts payable on mortgage loans serviced for others 600 229
Accrued interest payable 108 61
Other liabilities 1,486 1,189
Accrued federal income taxes - 102
Deferred federal income taxes 657 580
------- -------
Total liabilities 274,111 259,850
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;
2,374,738 and 1,187,369 shares issued at June 30, 1998 and 1997 24 12
Additional paid-in capital 13,359 13,267
Retained earnings - substantially restricted 16,806 15,038
Less required contributions for shares acquired by employee benefit plans (107) (216)
Less 91,244 and 47,372 shares of treasury stock at June 30, 1998 and 1997 - at cost (929) (965)
Unrealized gains on securities designated as available for sale,
net of related tax effects 68 102
------- -------
Total stockholders' equity 29,221 27,238
------- -------
Total liabilities and stockholders' equity $303,332 $287,088
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
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<TABLE>
Glenway Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended June 30,
(In thousands, except share data)
1998 1997 1996
<S> <C> <C> <C>
Interest income
Loans $20,477 $18,290 $16,934
Mortgage-backed securities 1,343 1,764 2,029
Investment securities 476 465 646
Interest-bearing deposits and other 229 216 188
------ ------ ------
Total interest income 22,525 20,735 19,797
Interest expense
Deposits 10,910 10,938 10,593
Borrowings 2,283 1,257 1,340
------ ------ ------
Total interest expense 13,193 12,195 11,933
------ ------ ------
Net interest income 9,332 8,540 7,864
Provision for losses on loans 363 244 60
------ ------ ------
Net interest income after provision for losses on loans 8,969 8,296 7,804
Other income
Gain (loss) on sale of loans 21 39 (14)
Gain (loss) on securities transactions 42 63 (9)
Gain (loss) on sale of office premises and equipment (57) - 144
Gain (loss) on sale of real estate acquired through foreclosure (19) 15 (13)
Loan servicing fees 143 168 187
Other operating 753 669 626
------ ------ ------
Total other income 883 954 813
General, administrative and other expense
Employee compensation and benefits 3,235 3,168 3,308
Occupancy and equipment 689 591 475
Federal deposit insurance premiums 146 1,549 484
Franchise taxes 239 358 377
Data processing 323 330 245
Amortization of goodwill 142 208 220
Other operating 941 1,144 1,165
------ ------ ------
Total general, administrative and other expense 5,715 7,348 6,274
------ ------ ------
Earnings before income taxes 4,137 1,902 2,451
Federal income taxes
Current 1,339 657 774
Deferred 94 39 132
------ ------ ------
Total federal income taxes 1,433 696 906
------ ------ ------
NET EARNINGS $ 2,704 $ 1,206 $ 1,545
====== ====== ======
EARNINGS PER SHARE
Basic $1.19 $.53 $.68
==== === ===
Diluted $1.16 $.52 $.67
==== === ===
</TABLE>
The accompanying notes are an integral part of these statements.
5
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<TABLE>
Glenway Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended June 30, 1998, 1997 and 1996
(In thousands, except share data)
Shares
acquired by
Additional employee
Common paid-in Retained benefit
stock capital earnings plans
<S> <C> <C> <C> <C>
Balance at July 1, 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 $.323 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 $.34 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)
Principal repayments on loan to ESOP/amortization of
expense related to employee benefit plans - 78 - 65
Net earnings for the year ended June 30, 1998 - - 2,704 -
Cash dividends of $.41 per share - - (936) -
2-for-1 stock split 12 (12) - -
Issuance of shares under employee benefit and stock option plans - 26 - 44
Unrealized losses on securities designated as available for sale,
net of related tax effects - - - -
--- ------ ------ ---
Balance at June 30, 1998 $ 24 $13,359 $16,806 $(107)
=== ====== ====== ====
</TABLE>
<TABLE>
<CAPTION>
Unrealized
gains (losses)
on securities
Treasury designated as
stock available for sale Total
<S> <C> <C> <C>
Balance at July 1, 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 $.323 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 $.34 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
Principal repayments on loan to ESOP/amortization of
expense related to employee benefit plans - - 143
Net earnings for the year ended June 30, 1998 - - 2,704
Cash dividends of $.41 per share - - (936)
2-for-1 stock split - - -
Issuance of shares under employee benefit and stock option plans 36 - 106
Unrealized losses on securities designated as available for sale,
net of related tax effects - (34) (34)
--- --- ------
Balance at June 30, 1998 $(929) $ 68 $29,221
==== === ======
</TABLE>
The accompanying notes are an integral part of these statements.
6
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<TABLE>
Glenway Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
(In thousands)
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 2,704 $ 1,206 $ 1,545
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 (10) 53 67
Depreciation and amortization 370 335 197
Provision for losses on loans 363 244 60
(Gain) loss on sale of loans (12) (39) 14
(Gain) loss on securities transactions (42) (63) 9
(Gain) loss on sale of real estate acquired through foreclosure 19 (15) 13
(Gain) loss on sale of office premises and equipment 57 - (144)
Amortization of deferred loan origination fees (198) (90) (102)
Amortization of goodwill 142 208 220
Amortization of expense related to employee benefit plans 143 193 180
Loans disbursed for sale in the secondary market (1,123) (440) (3,442)
Proceeds from loans sold in the secondary market 1,135 444 2,873
Federal Home Loan Bank stock dividends (177) (160) (148)
Increases (decreases) in cash due to changes in:
Accrued interest receivable on loans (334) (111) (113)
Accrued interest receivable on mortgage-backed securities,
investments and interest-bearing deposits 37 91 5
Prepaid expenses and other assets (8) 141 337
Accounts payable on mortgage loans serviced for others 371 (370) (82)
Accrued interest payable and other liabilities 344 196 (40)
Checks issued in excess of bank balance (2,422) 1,388 (832)
Federal income taxes
Current (474) 132 180
Deferred 94 39 132
------- ------ ------
Net cash provided by operating activities 979 3,382 929
Cash flows provided by (used in) investing activities:
Proceeds from maturities/calls of investment securities 3,000 1,500 3,026
Proceeds from sale of investment securities designated as available for sale - 4,090 993
Purchase of investment securities designated as held-to-maturity (4,000) (3,000) (2,075)
Principal repayments on mortgage-backed securities 4,715 4,795 5,474
Purchase of mortgage-backed securities designated as held-to-maturity - - (4,267)
Proceeds from sale of mortgage-backed securities designated
as available for sale 1,578 2,672 1,060
Loan principal repayments 82,289 53,283 56,987
Loan disbursements (105,125) (72,344) (72,354)
Purchase and construction of office premises and equipment (785) (1,449) (1,898)
Proceeds from sale of office premises and equipment 1,596 - 370
Proceeds from sale/disposal of real estate acquired through foreclosure 25 590 736
Purchase of Federal Home Loan Bank stock (58) - (16)
Purchase of single premium life insurance policy - (60) -
Increase in cash surrender value of life insurance policies (67) (68) (31)
------- ------ ------
Net cash used in investing activities (16,832) (9,991) (11,995)
------- ------ ------
Net cash used in operating and investing
activities (subtotal carried forward) (15,853) (6,609) (11,066)
------- ------ ------
</TABLE>
7
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<TABLE>
Glenway Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended June 30,
(In thousands)
1998 1997 1996
<S> <C> <C> <C>
Net cash used in operating and investing
activities (subtotal brought forward) $(15,853) $(6,609) $(11,066)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts (6,214) 4,085 14,391
Proceeds from borrowings 95,191 58,250 50,200
Repayment of borrowings (72,870) (55,770) (51,724)
Repayment of loan to employee stock ownership plan (65) (148) (149)
Advances by borrowers for taxes and insurance (49) (7) (231)
Issuance of shares under stock option and benefit plans 106 135 385
Dividends paid on common stock (936) (777) (736)
Purchase of treasury stock - (411) -
------- ------ -------
Net cash provided by financing activities 15,163 5,357 12,136
------- ------ -------
Net increase (decrease) in cash and cash equivalents (690) (1,252) 1,070
Cash and cash equivalents at beginning of year 3,890 5,142 4,072
------- ------ -------
Cash and cash equivalents at end of year $ 3,200 $ 3,890 $ 5,142
======= ====== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 1,591 $ 387 $ 583
======= ====== =======
Interest on deposits and borrowings $ 13,146 $12,190 $ 11,921
======= ====== =======
Supplemental disclosure of noncash investing activities:
Transfer from loans to real estate acquired
through foreclosure $ - $ 378 $ 276
======= ====== =======
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 (losses) on securities designated as available
for sale, net of related tax effects $ (34) $ 111 $ 20
======= ====== =======
Recognition of mortgage servicing rights in accordance with
SFAS No. 125 $ 9 $ - $ -
======= ====== =======
Supplemental disclosure of noncash financing activities:
Issuance of treasury shares in exchange for outstanding
shares related to exercise of stock options $ 36 $ 202 $ 152
======= ====== =======
</TABLE>
The accompanying notes are an integral part of these statements.
8
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Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
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 recorded to operations or stockholders' equity, respectively.
9
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Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
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 in fiscal 1996 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, 1998 and 1997, the Corporation's stockholders' equity reflected
unrealized gains on securities designated as available for sale, net of
applicable tax effects, totaling $68,000 and $102,000, respectively.
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 deferred loan origination fees, the allowance for loan losses
and premiums and discounts on loans purchased and sold. Premiums and
discounts on loans purchased and sold are amortized and accreted to
operations using the interest method over the average life of the underlying
loans.
Interest is accrued as earned unless the collectibility of the loan is in
doubt. Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income
equal to all interest previously accrued, and income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments has returned to normal, in which case the loan is
returned to accrual status. If the ultimate collectibility of the loan is in
doubt, in whole or in part, all payments received on nonaccrual loans are
applied to reduce principal until such doubt is eliminated.
Loans held for sale are carried at the lower of cost or market, determined
in the aggregate. In computing cost, deferred loan origination fees are
deducted from the principal balances of the related loans. The Corporation
had no loans held for sale at June 30, 1998 and 1997.
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." Prior to the adoption of SFAS No. 125, gains on sale of loans
could include 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 were
10
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Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
3. Loans Receivable (continued)
determined by reference to the stipulated servicing fee set forth by the
government agency loan sale agreement. Such fees approximated the Savings
Bank's normal servicing costs. The resulting capitalized excess servicing
fee is being 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, unamortized deferred
excess servicing fees totaled approximately $18,000. Amortization of the
deferred excess servicing fee asset totaled approximately $18,000, $13,000
and $17,000 for the years ended June 30, 1998, 1997 and 1996, respectively.
The Savings Bank recognizes rights to service mortgage loans for others
pursuant to SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." In accordance with
SFAS No. 125, an institution that acquires mortgage servicing rights
through either the purchase or origination of mortgage loans and sells
those loans with servicing rights retained would allocate some of the cost
of the loans to the mortgage servicing rights.
SFAS No. 125 requires that securitization of mortgage loans be accounted
for as sales of mortgage loans and acquisitions of mortgage-backed
securities. Additionally, SFAS No. 125 requires that capitalized mortgage
servicing rights and capitalized excess servicing receivables be assessed
for impairment. Impairment is measured based on fair value.
The Savings Bank recognized $9,000 of pre-tax gains on sales of loans
related to capitalized mortgage servicing rights during the fiscal year
ended June 30, 1998.
The mortgage servicing rights recorded by the Savings Bank, calculated in
accordance with the provisions of SFAS No. 125, were segregated into pools
for valuation purposes, using as pooling criteria the loan term and coupon
rate. Once pooled, each grouping of loans was evaluated on a discounted
earnings basis to determine the present value of future earnings that a
purchaser could expect to realize from each portfolio. Earnings were
projected from a variety of sources including loan servicing fees, interest
earned on float, net interest earned on escrows, miscellaneous income, and
costs to service the loans. The present value of future earnings is the
"economic" value for the pool, i.e., the net realizable present value to an
acquirer of the acquired servicing.
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
11
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
4. Loan Origination Fees (continued)
prepayments. Additionally, SFAS No. 91 generally limits the definition of
loan origination costs to the direct costs attributable to originating a
loan, i.e., principally, actual personnel costs. Fees received for loan
commitments that are expected to be drawn upon, based on the Savings Bank's
experience with similar commitments, are deferred and amortized over the
life of the loan using the level-yield method. Fees for other loan
commitments are deferred and amortized over the loan commitment period on a
straight-line basis.
5. Allowance for Losses on Loans
It is the Savings Bank's policy to provide valuation allowances for
estimated losses on loans based on past 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).
The Savings Bank accounts for impaired loans in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan," which 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.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Savings Bank
considers its investment in one- to four-family residential loans and
consumer installment loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment. With respect to the
Savings Bank's investment in multi-family and nonresidential loans, and its
evaluation of 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, 1998 and 1997, the Savings Bank had no loans that would be
defined as impaired under SFAS No. 114.
12
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
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.
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. Federal Income Taxes
The Corporation accounts for federal income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes." Pursuant to the
provisions of SFAS No. 109, a deferred tax liability or deferred tax asset
is computed by applying the current statutory tax rates to net taxable or
deductible 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.
13
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
9. Amortization of Goodwill
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.
The approximate scheduled amortization with respect to intangible assets is
as follows:
Future
Fiscal year ending June 30, amortization
(In thousands)
1999 $103
2000 82
2001 41
---
$226
10. 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 $149,000, $228,000 and
$270,000 were made to the ESOP for the years ended June 30, 1998, 1997 and
1996, 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, 1998, 1997
and 1996 totaled approximately $88,000, $65,000 and $99,000, respectively.
The Savings Bank has a directors retirement plan which provides for payments
to directors upon retirement, subject to a ten year vesting schedule.
Expense recorded for the directors retirement plan totaled $173,000,
$279,000 and $87,000 for the fiscal years ended June 30, 1998, 1997 and
1996, respectively.
14
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
11. Stock Incentive Plan
The Corporation had a Stock Incentive Plan that provided for the issuance of
61,740 shares to directors, officers, and employees. Compensation expense
for restricted shares was measured by the fair value at the date of grant.
The Corporation issued 16,338 and 23,034 shares of restricted stock during
fiscal 1997 and 1996, respectively. The term of the Incentive Plan expired
during fiscal 1997. The Corporation recognized expense totaling $19,000 and
$178,000 for the years ended June 30, 1997 and 1996, 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 the 2-for-1
stock split in fiscal 1998 and for 5% stock dividends in fiscal 1997 and
1996.
12. Management Recognition and Retention Plan and Trust
The Corporation has a Management Recognition and Retention Plan and Trust
("MRP") which provided for the award of 60,568 shares of the Corporation's
common stock to members of management and the Board of Directors. Shares
issued by the MRP are generally deemed earned and allocated to participants
over a five year period. The Corporation issued 4,484, 3,086 and 13,892
shares of common stock under the MRP during fiscal 1998, 1997 and 1996,
respectively, leaving 11,760 shares subject to future issuance at June 30,
1998. Expense under the MRP plan totaled approximately $88,000, $55,000 and
$141,000 for the years ended June 30, 1998, 1997 and 1996, respectively.
13. Earnings Per Share
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period, less shares in the Corporation's ESOP that
are unallocated and not committed to be released. Weighted-average common
shares outstanding totaled 2,273,025, 2,275,628 and 2,258,132 for the fiscal
years ended June 30, 1998, 1997 and 1996, respectively.
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under
the Corporation's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share totaled
2,326,671, 2,310,076, and 2,289,838 for the fiscal years ended June 30,
1998, 1997 and 1996, respectively.
15
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
13. Earnings Per Share (continued)
During fiscal 1998, the Corporation began presenting earnings per share
pursuant to the provisions of SFAS No. 128, "Earnings Per Share."
Accordingly, the fiscal 1997 and 1996 earnings per share presentation has
been revised to conform to the requirements of SFAS No. 128.
14. 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,
1998 and 1997:
Cash and cash equivalents: The carrying amounts presented in
the consolidated statements of financial condition for cash
and cash equivalents are deemed to approximate fair value.
Investment and mortgage-backed securities: For investment and
mortgage-backed securities, fair value is deemed to equal the
quoted market price.
Loans receivable: The loan portfolio has been segregated into
categories with similar characteristics, such as one- to
four-family residential, multi-family residential 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.
16
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
14. Fair Value of Financial Instruments (continued)
Deposits: The fair values of NOW accounts, passbook and club
accounts, money market deposits, and advances by borrowers are
deemed to approximate the amounts 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.
Advances from the Federal Home Loan Bank: The fair value of
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, 1998 and 1997, 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>
1998 1997
Carrying Fair Carrying Fair
value value value value
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 3,200 $ 3,200 $ 3,890 $ 3,890
Investment securities 8,069 8,120 7,042 7,035
Mortgage-backed securities 16,874 16,728 23,201 22,866
Loans receivable 262,327 263,124 239,648 238,978
Stock in Federal Home Loan Bank 2,617 2,617 2,382 2,382
------- ------- ------- -------
$293,087 $293,798 $276,163 $275,151
======= ======= ======= =======
Financial liabilities
Deposits $220,639 $221,611 $226,853 $226,671
Advances from the Federal Home Loan Bank 50,435 50,669 28,114 27,997
Advances by borrowers for taxes and insurance 186 186 235 235
------- ------- ------- -------
$271,260 $272,466 $255,202 $254,903
======= ======= ======= =======
</TABLE>
15. 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
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
16. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1998
consolidated financial statement presentation.
NOTE B - INVESTMENTS, SECURITIES AVAILABLE FOR SALE AND MORTGAGE-BACKED
SECURITIES
Carrying values and estimated fair values of investment securities
classified as held-to-maturity at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
Estimated Estimated
Carrying fair Carrying fair
value value value value
(In thousands)
<S> <C> <C> <C> <C>
U. S. Government obligations $3,989 $4,026 $2,983 $2,981
U. S. Government agency obligations 4,005 4,018 3,984 3,979
Municipal obligations 75 76 75 75
----- ----- ----- -----
$8,069 $8,120 $7,042 $7,035
===== ===== ===== =====
</TABLE>
At June 30, 1998, the excess of the estimated fair value over the Savings
Bank's cost carrying value of investment securities, totaling $51,000, was
comprised of gross unrealized losses totaling $4,000 and gross unrealized
gains of $55,000. At June 30, 1997, the excess of the Savings Bank's cost
carrying value over the estimated fair value of investment securities,
totaling $7,000, was comprised of gross unrealized losses totaling $26,000
and gross unrealized gains of $19,000.
The amortized cost and estimated fair value of investment securities at
June 30, 1998, by term to maturity, are shown below.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
(In thousands)
<S> <C> <C>
Due within one year $2,000 $2,001
Due in one to five years 5,994 6,043
Due after five years 75 76
----- -----
$8,069 $8,120
===== =====
</TABLE>
At June 30, 1998, the Savings Bank had pledged investment securities with a
carrying value of approximately $6.5 million to secure public deposits.
18
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
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
losses of $29,000 and $7,000 on such sales.
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at June 30, 1998 and
1997 (including those designated as available for sale), are shown below.
<TABLE>
<CAPTION>
1998
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
<S> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation
participation certificates $ 1,951 $ 5 $ 25 $ 1,931
Government National
Mortgage Association
participation certificates 37 - 1 36
Federal National
Mortgage Association
participation certificates 3,226 7 21 3,212
Collateralized mortgage obligations 6,090 21 132 5,979
------ --- --- ------
Total mortgage-backed securities
held to maturity 11,304 33 179 11,158
Mortgage-backed securities designated
as available for sale 5,469 104 3 5,570
------ --- --- ------
Total mortgage-backed securities $16,773 $137 $183 $16,728
====== === === ======
</TABLE>
19
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE B - INVESTMENTS, SECURITIES AVAILABLE FOR SALE AND MORTGAGE-BACKED
SECURITIES (continued)
<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>
The amortized cost of mortgage-backed securities at June 30, 1998, 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 after one to five years $ 774
Due after five years to ten years 890
Due after ten years to twenty years 1,312
Due after twenty years 13,797
------
Total mortgage-backed securities $16,773
======
</TABLE>
During fiscal 1998 and 1997, the Corporation sold $1.6 million and $2.7
million, respectively, of mortgage-backed securities designated as
available-for-sale, realizing respective gains of $42,000 and $92,000.
During fiscal 1996, the Corporation sold $1.1 million of mortgage-backed
securities designated as available-for-sale, realizing a loss of $2,000 as a
result of such sale.
20
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Residential real estate
One- to four-family residential $186,723 $177,504
Home equity lines of credit 19,816 23,797
Multi-family residential 25,572 17,912
Construction 17,048 14,947
Nonresidential real estate 18,848 13,548
Commercial 4,779 921
Consumer and other 696 881
------- -------
273,482 249,510
Less:
Undisbursed portion of loans in
process 9,880 8,735
Deferred loan origination fees 101 307
Allowance for loan losses 1,174 820
------- -------
$262,327 $239,648
======= =======
</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 $239.3 million, or 91%, of the
total loan portfolio at June 30, 1998, and $225.4 million, or 94%, of the
total loan portfolio at June 30, 1997. 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 $49.8 million, $61.1 million and $68.8 million at June 30,
1998, 1997 and 1996, respectively.
21
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
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 $1.3 million and $877,000 at
June 30, 1998 and 1997, respectively.
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 $215,000, $153,000 and $137,000 for the years ended June 30,
1998, 1997 and 1996, 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>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Beginning balance $ 820 $618 $616
Provision charged to operations 363 244 60
Charge-offs (26) (57) (58)
Recoveries 17 15 -
----- --- ---
Ending balance $1,174 $820 $618
===== === ===
</TABLE>
At June 30, 1998, 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, 1998, 1997 and 1996, the Savings Bank's nonaccrual and
nonperforming loans totaled $982,000, $851,000 and $883,000, respectively.
Interest income which would have been recognized if such loans had performed
pursuant to contractual terms totaled approximately $16,000, $22,000 and
$35,000 for the years ended June 30, 1998, 1997 and 1996, respectively.
22
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at June 30 are comprised of the following:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Land $1,329 $1,630
Office buildings and improvements 3,283 4,692
Furniture, fixtures and equipment 3,618 2,915
----- -----
8,230 9,237
Less accumulated depreciation
and amortization 2,425 2,194
----- -----
$5,805 $7,043
===== =====
</TABLE>
In January 1998, the Corporation sold a shopping center for a sales price of
$1.6 million, resulting in a loss on sale of $57,000. A branch office
located in the shopping center was leased back under a ten year operating
lease. The lease cost is subject to adjustment every three years, and
totaled $46,000 for the fiscal year ended June 30, 1998. The lease provides
for two additional five year renewals. During fiscal 1996, two of the
Savings Bank's branch locations were sold resulting in gains totaling
$144,000.
23
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE F - DEPOSITS
Deposits consist of the following major classifications at June 30:
<TABLE>
<CAPTION>
Deposit type and weighted-
average interest rate 1998 1997
(In thousands)
<S> <C> <C>
Checking/NOW accounts
1998 - 2.81% $ 37,252
1997 - 2.81% $ 26,716
Savings accounts
1998 - 2.53% 31,039
1997 - 2.78% 36,602
Money market deposit accounts
1998 - 3.07% 5,001
1997 - 3.15% 5,965
------- -------
Total demand, transaction and savings
deposits 73,292 69,283
Certificates of deposit
Original maturities of:
Less than 12 months
1998 - 5.25% 28,894
1997 - 5.57% 45,028
12 months to 30 months
1998 - 5.75% 95,686
1997 - 5.86% 102,112
36 months or greater
1998 - 6.10% 22,757
1997 - 6.01% 10,430
------- -------
Total certificates of deposit 147,347 157,570
------- -------
$220,639 $226,853
======= =======
</TABLE>
At June 30, 1998 and 1997, the Savings Bank had certificates of deposit
accounts with balances in excess of $100,000 totaling $23.6 million and
$19.1 million, respectively.
24
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE F - DEPOSITS (continued)
Interest expense on deposit accounts for the years ended June 30 is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Savings accounts $ 896 $ 1,079 $ 1,162
Checking/NOW accounts 959 641 333
Money market deposit accounts 171 219 283
Certificates of deposit 8,884 8,999 8,815
------ ------ ------
$10,910 $10,938 $10,593
====== ====== ======
</TABLE>
Maturities of outstanding certificates of deposit are summarized as follows
at June 30:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Less than one year $102,663 $109,770
One year to three years 41,131 41,484
More than three years 3,553 6,316
------- -------
$147,347 $157,570
======= =======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at June 30, 1998
and 1997, by pledges of certain residential mortgage loans totaling $75.7
million and $42.2 million, and the Savings Bank's investment in Federal Home
Loan Bank stock are summarized as follows:
<TABLE>
<CAPTION>
Interest June 30,
rate Terms to maturity 1998 1997
(In thousands)
<S> <C> <C> <C>
5.10% - 6.50% Within one year $16,000 $13,000
5.42% - 6.50% One to three years 20,000 4,000
5.65% Three to five years 2,000 -
5.50% - 8.20% Five to ten years 7,325 6,064
5.25% - 6.25% Over ten years 5,110 5,050
------ ------
$50,435 $28,114
====== ======
Weighted-average interest rate 5.76% 5.97%
==== ====
</TABLE>
25
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE H - LOAN TO EMPLOYEE STOCK OWNERSHIP PLAN
As discussed previously in Note A-10, the Corporation established an ESOP,
which initially acquired 51,052 split-adjusted shares of common stock in the
1990 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 in 1993, the ESOP
purchased an additional 108,046 split-adjusted shares of common stock by
borrowing an additional $686,000, payable over a six year term. The ESOP
loans were repaid in fiscal 1998. At June 30, 1998, the ESOP held 156,143
shares of common stock, of which approximately 147,749 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>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at the statutory rate $1,407 $647 $833
Increase (decrease) in taxes resulting from:
Goodwill amortization 48 71 75
Tax-exempt interest (24) (44) (29)
Other 2 22 27
----- --- ---
Federal income tax provision per consolidated
financial statements $1,433 $696 $906
===== === ===
</TABLE>
26
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE I - FEDERAL INCOME TAXES (continued)
The composition of the Corporation's net deferred tax liability at June 30
is as follows:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Taxes (payable) refundable on temporary differences
at estimated corporate tax rate:
Deferred tax assets:
General loan loss allowance $ 399 $ 279
Retirement expense 229 208
Purchase accounting adjustments other than goodwill 10 31
Other 20 -
----- -----
Total deferred tax assets 658 518
Deferred tax liabilities:
Percentage of earnings bad debt deduction (349) (349)
Book/tax depreciation (322) (186)
Federal Home Loan Bank stock dividends (428) (367)
Deferred loan origination costs (183) (141)
Other - (2)
Unrealized gains on securities designated as available for sale (33) (53)
----- -----
Total deferred tax liabilities (1,315) (1,098)
----- -----
Net deferred tax liability $ (657) $ (580)
===== =====
</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,
1998, 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, 1998, 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.
27
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE J - LOAN COMMITMENTS (continued)
The Savings Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
is represented by the contractual notional amount of those instruments. The
Savings Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
At June 30, 1998, the Savings Bank had total outstanding commitments of
approximately $1.8 million to originate one- to four-family residential real
estate loans.
Additionally, the Savings Bank had $29.9 million of outstanding loan
commitments under home equity lines and $3.3 million 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, 1998, 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.
28
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE K - REGULATORY CAPITAL (continued)
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.
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.
29
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE K - REGULATORY CAPITAL (continued)
As of June 30, 1998 and 1997, management believes that the Savings Bank met
all capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
1998
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $27,688 14.2% =>$15,650 =>8.0% =>$19,563 =>10.0%
Tier I capital
(to risk-weighted assets) $26,514 13.6% =>$ 7,825 =>4.0% =>$11,738 => 6.0%
Tier I leverage $26,514 8.8% =>$12,021 =>4.0% =>$15,027 => 5.0%
</TABLE>
<TABLE>
<CAPTION>
1997
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $24,795 13.4% =>$14,752 =>8.0% =>$18,440 =>10.0%
Tier I capital
(to risk-weighted assets) $23,985 13.0% =>$ 7,376 =>4.0% =>$11,064 => 6.0%
Tier I leverage $23,985 8.5% =>$11,333 =>4.0% =>$14,167 => 5.0%
</TABLE>
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.
30
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
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, 1998 and 1997, and the results of
its operations and its cash flows for each of the years ended June 30, 1998,
1997 and 1996.
<TABLE>
<CAPTION>
Glenway Financial Corporation
STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands)
ASSETS 1998 1997
<S> <C> <C>
Cash $ 32 $ 164
Investment in Centennial Savings Bank 26,808 24,455
Loans receivable, net 1,273 -
Real estate held for investment - 1,668
Cash surrender value of life insurance 1,652 1,585
Prepaid expenses and other assets 79 2
------ ------
Total assets $29,844 $27,874
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 623 $ 571
Loan to Employee Stock Ownership Plan - 65
------ ------
623 636
Stockholders' equity
Common stock24 12
Additional paid-in capital 13,359 13,267
Retained earnings 16,806 15,038
Shares acquired by employee benefit plans (107) (216)
Treasury stock - at cost (929) (965)
Unrealized gains on securities designated as
available for sale 68 102
------ ------
Total stockholders' equity 29,221 27,238
------ ------
Total liabilities and stockholders' equity $29,844 $27,874
====== ======
</TABLE>
31
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE L - CONDENSED FINANCIAL STATEMENTS OF GLENWAY FINANCIAL
CORPORATION (continued)
<TABLE>
<CAPTION>
Glenway Financial Corporation
STATEMENTS OF EARNINGS
Year ended June 30,
(In thousands)
1998 1997 1996
<S> <C> <C> <C>
Revenue
Interest income $ 47 $ 4 $ 6
Dividends received from subsidiary 724 1,075 1,160
Equity in undistributed earnings of subsidiary 2,242 660 735
Other incom 204 298 279
----- ----- -----
Total revenue 3,217 1,846 1,989
Other operating
Loss on sale of office premises and equipment (57) - -
Expenses
Administrative and other 626 866 815
----- ----- -----
Net earnings before tax credits 2,419 1,171 1,365
Federal income tax credits (170) (35) (180)
----- ----- -----
Net earnings $2,704 $1,206 $1,545
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Glenway Financial Corporation
STATEMENTS OF CASH FLOWS
Year ended June 30,
(In thousands)
1998 1997 1996
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings for the year $2,704 $1,206 $1,545
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Undistributed earnings of consolidated subsidiary (2,242) (660) (735)
Depreciation 20 36 36
Loss on sale of office premises and equipment 57 - -
Increases (decreases) in cash due to
changes in:
Other liabilities 52 170 (98)
Prepaid expenses and other (12) 485 (30)
----- ----- -----
Net cash provided by operating activities
(balance carried forward) 579 1,237 718
----- ----- -----
</TABLE>
32
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE L - CONDENSED FINANCIAL STATEMENTS OF GLENWAY FINANCIAL
CORPORATION (continued)
<TABLE>
<CAPTION>
Glenway Financial Corporation
STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended June 30,
(In thousands)
1998 1997 1996
<S> <C> <C> <C>
Net cash provided by operating activities
(balance brought forward) $ 579 $1,237 $718
Cash flows used in investing activities:
Proceeds from sale of office premises and equipment 1,596 - -
Purchase of office premises and equipment (5) (15) (5)
Loan principal repayments 7 - -
Loan disbursements (1,280) - -
Purchase of single premium life insurance policy - (60) -
Increase in cash surrender value of life insurance
policies (67) (68) (31)
----- ----- ---
Net cash provided by (used in) investing activities 251 (143) (36)
Cash flows provided by (used in) financing activities:
Repayment of loan to ESOP (65) (148) (149)
Payment of dividends on common stock (936) (777) (736)
Issuance of shares under stock option plan 39 202 219
Purchase of treasury stock - (411) -
----- ----- ---
Net cash used in financing activities (962) (1,134) (666)
----- ----- ---
Net increase (decrease) in cash and cash equivalents (132) (40) 16
Cash and cash equivalents at beginning of year 164 204 188
----- ----- ---
Cash and cash equivalents at end of year $ 32 $ 164 $204
===== ===== ===
</TABLE>
Under Federal Reserve Board supervisory policy, a 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 capital
needs, asset quality, and overall financial condition. The FDIC has
authority 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.
33
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE M - STOCK OPTION PLAN
In fiscal 1996, the Corporation adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which contains a fair value-based method for
valuing stock-based compensation that entities may use, which measures
compensation cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, SFAS No. 123 permits entities to continue
to account for stock options and similar equity instruments under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net earnings
and earnings per share, as if the fair value-based method of accounting
defined in SFAS No. 123 had been applied.
The Corporation applies 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>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C> <C>
Net earnings (In thousands) As reported $2,704 $1,206 $1,545
===== ===== =====
Pro-forma $2,686 $1,149 $1,545
===== ===== =====
Earnings per share
Basic As reported $1.19 $.53 $.68
==== === ===
Pro-forma $1.18 $.51 $.68
==== === ===
Diluted As reported $1.16 $.52 $.67
==== === ===
Pro-forma $1.15 $.50 $.67
==== === ===
</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 1998 and 1997, respectively;
dividend yield of 7.50% and expected volatility of 25.0% for all years;
risk-free interest rate of 6.00% and expected lives of ten years.
34
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE M - STOCK OPTION PLAN (continued)
A summary of the status of the Corporation's stock option plan as of June
30, 1998, 1997 and 1996, and changes during the periods ending on those
dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 52,599 $14.34 42,075 $12.24 53,592 $ 8.51
Effect of two-for-one stock split 51,849 7.17 - - - -
Granted 7,000 17.75 20,500 20.88 - -
Exercised 2,750 11.13 (9,976) 10.90 (11,517) 5.12
Forfeited 5,093 6.33 - - - -
------- ----- ------ ----- ------ -----
Outstanding at end of year 103,605 $ 8.55 52,599 $14.34 42,075 $12.24
======= ===== ====== ===== ====== =====
Options exercisable at year-end 103,605 $ 8.55 52,599 $14.34 42,075 $12.24
======= ===== ====== ===== ====== =====
Weighted-average fair value of
options granted during the year
(split-adjusted) $2.14 $2.12 N/A
==== ==== ===
</TABLE>
The following information applies to options outstanding at June 30, 1998:
Number outstanding 103,605
Range of exercise prices $6.33 - $17.75
Weighted-average exercise price $8.55
Weighted-average remaining contractual life 7.12 years
NOTE N - LEGISLATIVE MATTERS
The deposit accounts of the Savings Bank and of other savings associations
are insured by the FDIC through the Savings Association Insurance Fund
("SAIF"). 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.
35
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE N - LEGISLATIVE MATTERS (continued)
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.
36
