<PAGE> 1
FORT THOMAS FINANCIAL CORPORATION
1997 ANNUAL REPORT
<PAGE> 2
TABLE OF CONTENTS
Page
----
President's Letter to Stockholders.................................... 1
Corporate Profile .................................................... 2
Selected Consolidated Financial Highlights............................ 3
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 4
Report of Independent Certified Public Accountants ................... 17
Consolidated Financial Statements..................................... 18
Stock Information .................................................... 50
Directors and Officers................................................ 51
Banking Locations..................................................... 51
Stockholder Information............................................... 52
<PAGE> 3
Dear Stockholders:
Our third annual report covers the year ended September 30, 1997, a
period of time which was highlighted by record net income, strong asset growth
and continued quarterly dividend payments. Our fiscal 1997 results reflect
management's efforts in leveraging our capital in order to maximize shareholder
value.
FISCAL 1997 RESULTS
Net income for fiscal 1997 amounted to $1.1 million or $.79 per share
compared to $517,000 or $.35 per share for fiscal 1996. The $622,000 or 120.3%
increase was primarily due to decreased operating expenses as a result of
decreased compensation and employee benefit costs. In addition, net interest
income, the Company's primary determinant of net income, increased due to an
increase in the average interest rate spread to 3.31% for fiscal 1997 compared
to 3.13% for fiscal 1996. The increase in the average interest rate spread was
partially offset by a decrease in the ratio of average interest-earning assets
to average interest-bearing liabilities to 119.0% in fiscal 1997 from 130.8% in
fiscal 1996 primarily due to the reduction in cash and other assets to pay the
$4.00 per share special distribution in August 1996. We are also pleased to
report that total assets increased during fiscal 1997 to $97.9 million at
September 30, 1997 from $88.0 million at September 30, 1996. In addition, our
strong capital base allowed us to repurchase 5% of our outstanding common stock
during 1997.
OUTLOOK
Since our conversion,we have taken action to increase the value of your
investment, including the $4.00 special distribution and the 5% stock
repurchase, and we intend to continue to explore other means to enhance your
value as a shareholder. We were pleased with loan demand in fiscal 1997 and look
forward to further growth in our loan portfolio in 1998. Overall, we are
encouraged by our progress to date and look forward to building on this success
in the future.
I would like to thank our directors, officers and employees for their
continued service and dedication to the Company. I would also like to thank you
as a stockholder for your confidence in Fort Thomas Financial Corporation.
Sincerely,
Larry N. Hatfield
President
<PAGE> 4
CORPORATE PROFILE
Fort Thomas Financial Corporation (the "Company") was incorporated in
March 1995 under Ohio law for the purpose of acquiring all of the capital stock
issued by Fort Thomas Federal Savings and Loan Association in connection with
its conversion from a federally chartered mutual savings and loan association to
a federally chartered stock savings bank (the "Conversion"). The Conversion was
consummated on June 27, 1995 and, as a result, the Company became a unitary
savings and loan holding company for its wholly owned subsidiary, Fort Thomas
Savings Bank, F.S.B. (the "Savings Bank"). The Company has no significant assets
other than the shares of the Savings Bank's common stock acquired in the
Conversion, the loan to the Employee Stock Ownership Plan ("ESOP") and that
portion of the net proceeds of the Conversion retained by the Company, and has
no significant liabilities.
The Savings Bank is a federally chartered stock savings bank conducting
business from two full-service offices located in Campbell County, Kentucky. The
Savings Bank is a community oriented savings bank which has traditionally
offered a wide variety of savings products to its retail customers while
concentrating its lending activities on real estate loans secured by one-to-four
family residential properties located in Campbell County, Kentucky and
surrounding counties in northern Kentucky. To a lesser extent, the Savings Bank
also focuses its lending activities on multi-family, residential real estate
loans, and land and construction loans. The Savings Bank also invests in
securities which are issued by United States government and agency securities.
The Company's and the Savings Bank's principal offices are located at 25
North Fort Thomas Avenue, Fort Thomas, Kentucky 41075, and their telephone
number is (606) 441-3302.
2
<PAGE> 5
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At or for the Year Ended September 30,
--------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ------------- ------------- ------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets $97,873 $88,013 $86,214 $70,577 $69,043
Loans receivable, net 88,452 77,987 71,156 64,585 61,586
Investment and mortgage-backed securities 3,788 4,813 5,973 2,606 4,584
Deposits 71,858 63,731 59,998 55,127 56,041
Borrowed funds 8,846 6,754 3,651 7,587 6,000
Stockholders' equity 15,786 15,921 21,790 7,178 6,298
SELECTED OPERATING DATA:
Interest income 7,970 7,285 6,251 5,502 5,632
Interest expense 4,138 3,517 3,182 2,587 2,737
----- ------ ------ ----- -----
Net interest income 3,832 3,768 3,069 2,915 2,895
Provision for loan losses 137 125 25 135 30
------ ------ ------ ----- ------
Net interest income after provision
for loan losses 3,695 3,643 3,044 2,780 2,865
Other income 268 177 161 177 178
Other expenses 2,237 3,028 1,784 1,620 1,552
------ ------ ------ ----- ------
Income before income taxes 1,726 792 1,421 1,337 1,491
Income tax 587 275 460 456 483
------- ------ ------ ----- -------
Net income $ 1,139 $ 517 $ 961 $ 881 $ 1,008
======= ====== ====== ===== =======
SELECTED OPERATING RATIOS(1):
Average interest rate spread(2) 3.31% 3.13% 3.49% 3.97% 4.00%
Net interest margin(2) 4.19 4.39 4.11 4.33 4.39
Ratio of average interest-earning assets to
average interest-bearing liabilities 119.34 130.80 114.53 109.38 109.23
Return on average assets 1.21 .59 1.25 1.28 1.53
Return on average equity 7.26 2.54 9.55 14.29 19.07
ASSET QUALITY RATIOS(3):
Nonperforming assets as a percent of
total assets(4) 1.98% 1.34% 1.44% 2.01% 2.08%
Allowance for loan losses as a
percent of total loans .53 .45 .32 .35 .18
Allowance for loan losses as a
percent of nonperforming loans 24.57 31.02 19.20 16.43 8.00
CAPITAL RATIOS(3):
Tangible capital ratio 16.94% 19.04% 19.38% 10.19% 9.21%
Core capital ratio 16.94 19.04 19.38 10.19 9.21
Risk-based capital ratio 24.32 29.90 31.64 17.71 16.13
- ------------------------------------
<FN>
(1) With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods.
(2) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities, and net interest margin represents net
interest income as a percent of average interest-earning assets.
(3) Asset Quality Ratios and Capital Ratios are end of period ratios.
Capital Ratios reflect the Savings Bank's capital ratios calculated
under regulations of the Office of Thrift Supervision ("OTS").
(4) Nonperforming assets consist of nonperforming loans and real estate
owned ("REO"). Nonperforming loans consist of non-accrual loans and
accruing loans 90 days or more overdue, while REO consists of real
estate acquired through foreclosure.
</TABLE>
3
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of results of operations is
intended to assist in understanding the financial condition and results of
operations of the Company. The information contained in this section should be
read in conjunction with the Consolidated Financial Statements and the
accompanying Notes to Consolidated Financial Statements and the other sections
contained in this Annual Report.
The Company's results of operations depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities. The Company's
results of operations also are affected by the provision for loan losses,
resulting from management's assessment of the adequacy of the allowance for loan
losses; the level of its other income; the level of its other expenses; and
income tax expense.
Net income for fiscal 1997, 1996 and 1995 amounted to $1.1 million,
$517,000 and $961,000, respectively. Net income during such periods primarily
resulted from net interest income, which amounted to $3.8 million, $3.8 million
and $3.1 million, respectively, for fiscal 1997, 1996 and 1995. Net interest
income is determined by the interest rate spread and the amount of
interest-earning assets and interest-bearing liabilities. During fiscal 1997,
1996 and 1995, the Savings Bank's average interest rate spread was 3.31%, 3.13%,
and 3.49%, respectively. In addition, at September 30, 1997, 1996 and 1995, the
ratio of interest-earning assets to interest-bearing liabilities amounted to
119.34%, 130.80% and 114.53%, respectively.
In addition to the historical information contained herein, the
following discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Company's operations and actual
results could differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
market interest rates generally and in the Company's market area. The
forward-looking statements contained herein include, but are not limited to,
those with respect to the following matters:
1. Management's determination of the amount of and adequacy of the
allowance for loan losses;
2. The effect of changes in interest rates; and
3. Management's opinion as to the effects of recent accounting
pronouncements on the Company's consolidated financial statements.
4
<PAGE> 7
ASSET AND LIABILITY MANAGEMENT
The ability to maximize net interest income is largely dependent upon
the achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. 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
negative gap within shorter maturities would adversely affect net interest
income, while a positive gap within shorter maturities would result in an
increase in net interest income, and during a period of falling interest rates,
a negative gap within shorter maturities would result in an increase in net
interest income while a positive gap within shorter maturities would have the
opposite effect. As of September 30, 1997, the Savings Bank estimates that the
ratio of its one-year gap to total assets was approximately a positive 3.5% and
its ratio of interest-earning assets to interest-bearing liabilities maturing or
repricing in one year was 106.7%.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on the Company's results of operations,
the Savings Bank's management has implemented and continues to monitor asset and
liability management policies to better match the maturities and repricing terms
of the Savings Bank's interest-earning assets and interest-bearing liabilities.
Such policies have consisted primarily of emphasizing investment in
adjustable-rate mortgage loans ("ARMs").
The Savings Bank focuses its lending activities on the origination of
one and three-year ARMs. Although adjustable-rate loans involve certain risks,
such loans decrease the risks associated with changes in interest rates. As a
result of the Savings Bank's efforts, as of September 30, 1997, $55.1 million or
74.1% of the Savings Bank's portfolio of one-to-four family residential mortgage
loans consisted of ARMs.
With respect to liabilities, the Savings Bank prices deposit accounts
based upon competitive factors. Pursuant to this policy, the Savings Bank has
generally neither engaged in sporadic increases or decreases in interest rates
paid nor offered the highest rates available in its deposit market except upon
specific occasions to control deposit flow or when market conditions have
created opportunities to attract longer-term deposits. In addition, the Savings
Bank does not pursue an aggressive growth strategy which would force the Savings
Bank to focus exclusively on competitors' rates rather than affordability. This
policy has assisted the Savings Bank in controlling its cost of funds.
5
<PAGE> 8
NET PORTFOLIO VALUE
Management also presently monitors and evaluates the potential impact of
interest rate changes upon the market value of the Savings Bank's portfolio
equity and the level of net interest income on a quarterly basis. The OTS
adopted a final rule in August 1993 incorporating an interest rate risk
component into the risk-based capital rules. Although the Savings Bank is not
presently subject to the interest rate risk component of the risk-based capital
rules, the maturity/rate data is voluntarily submitted to the OTS so that
management remains aware of the potential impact of interest rate changes as
reported quarterly by the OTS in its interest rate risk exposure report.
Utilizing this measurement concept, at September 30, 1997, there would have been
a decrease in the Savings Bank's NPV of approximately 5.0% of the present value
of its assets, assuming a 200 basis point increase in interest rates.
The following table presents the Savings Bank's net portfolio value
("NPV") and the ratio of NPV to the present value ("PV") of assets as of
September 30, 1997, as calculated by the OTS, based on information provided to
the OTS by the Savings Bank.
<TABLE>
<CAPTION>
Net Portfolio Value
- --------------------------------------------------------------------------------------------------------------------------
Estimated
Change in NPV As A %
Interest Rates Estimated of PV of Amount
(basis points) NPV Assets of Change Percent
- -------------------- -------------------- -------------------- -------------------- ------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+400 $15,146 16.17% $(3,511) (20)%
+300 16,541 17.27 (2,116) (11)
+200 17,673 18.09 (984) (5)
+100 18,400 18.55 (257) (1)
-- 18,657 18.60 -- --
-100 18,515 18.32 (142) (1)
-200 18,417 18.06 (240) (1)
-300 18,542 17.99 (115) (1)
-400 18,876 18.07 220 1
</TABLE>
6
<PAGE> 9
CHANGES IN FINANCIAL CONDITION
GENERAL. The Company's assets increased from $88.0 million at September
30, 1996 to $97.9 million at September 30, 1997, an increase of $9.9 million or
11.2%. Loans receivable, net increased $10.5 million or 13.4% from $78.0 million
at September 30,1996 to $88.5 million at September 30, 1997. Such increase,
which was primarily funded by an increase in deposits and borrowed funds,
resulted primarily from an increase in single-family loan originations.
Total liabilities increased $10.0 million or 13.9% between September 30,
1996 and September 30, 1997 due primarily to an increase in deposits of $8.1
million or 12.8% and an increase in borrowed funds of $2.1 million or 31.0%.
Stockholders' equity decreased $135,000 from $15.9 million, or 18.1% of
total assets, at September 30, 1996 to $15.8 million, or 16.1% of total assets,
at September 30, 1997. Such decrease was primarily due to $1.1 million of stock
repurchases and $452,000 in dividends which were partially offset by net income
of $1.1 million.
7
<PAGE> 10
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID
The following average balance sheet table sets forth for the periods
indicated, information on the Company regarding: (i) the total dollar amounts of
interest income on interest-earning assets and the resulting average yields;
(ii) the total dollar amounts of interest expense on interest-bearing
liabilities and the resulting average costs; (iii) net interest income; (iv)
interest rate spread; (v) net interest-earning assets (interest-bearing
liabilities); (vi) the net yield earned on interest-earning assets; and (vii)
the ratio of average interest-earning assets to average interest-bearing
liabilities. Information is based on average monthly balances during the periods
presented.
<TABLE>
<CAPTION>
Year Ended September 30,
At September 30, -------------------------------------------------------------------
1997 1997 1996
---------------- ------------------------------ ----------------------------------
Average Average Average Average
Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
---------------- --------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Total loans, net(1) 8.58% $83,912 $7,499 8.94% $73,875 $ 6,576 8.90%
Mortgage-backed securities 6.30 795 50 6.29 910 54 5.94
Investment securities 6.49 3,898 254 6.52 5,293 342 6.46
Other interest-earning assets 5.72 2,932 167 5.70 5,829 313 5.37
---- ------ ------ ---- ------ ------ ------
Total interest-earning assets 8.38 91,537 7,970 8.71 85,907 7,285 8.48
---- ------ ----- ---- ------ ------ ------
Noninterest-earning assets 2,269 1,782
------ ------
Total assets 93,806 87,689
------ ------
Interest-bearing liabilities:
Savings deposits 2.59 13,451 352 2.62 13,391 349 2.61
Other time deposits 6.03 54,312 3,263 6.01 48,096 2,939 6.11
Borrowed funds 5.76 8,937 523 5.85 4,191 229 5.46
---- ------ ----- ---- ------ ------ ------
Total interest-bearing liabilities 5.44 76,699 4,138 5.40 65,678 3,517 5.35
---- ------ ----- ---- ------ ------ ------
Noninterest-bearing liabilities 1,428 1,642
------ ------
Total liabilities 78,127 67,320
------ ------
Stockholders' equity 15,679 20,369
------ ------
Total liabilities and equity 93,806 87,689
------ ------
Net interest-earning assets $14,837 $20,229
====== ======
Net interest income/interest rate spread 2.94% $3,832 3.31% $ 3,768 3.13%
==== ===== ==== ====== ======
Net interest margin(2) 3.81 4.19% 4.39%
==== ==== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 119.34% 130.80%
====== ======
<CAPTION>
---------------------------------------
1995
---------------------------------------
Average Average
Balance Interest Yield/Rate
---------- -------- ------------
<S> <C> <C> <C>
Interest-earning assets:
Total loans, net(1) $67,248 $5,800 8.62%
Mortgage-backed securities 130 11 8.46
Investment securities 3,320 158 4.76
Other interest-earning assets 3,989 282 7.07
------ ----- ------
Total interest-earning assets 74,687 6,251 8.37
------ ----- ------
Noninterest-earning assets 2,095
------
Total assets 76,782
------
Interest-bearing liabilities:
Savings deposits 15,356 450 2.93
Other time deposits 42,205 2,293 5.43
Borrowed funds 7,651 439 5.74
------ ----- ------
Total interest-bearing liabilities 65,212 3,182 4.88
------ ----- ------
Noninterest-bearing liabilities 2,095
------
Total liabilities 67,307
------
Stockholders' equity 10,063
------
Total liabilities and equity 76,782
------
Net interest-earning assets $ 9,475
======
Net interest income/interest rate spread $3,069 3.49%
===== ======
Net interest margin(2) 4.11%
======
Ratio of average interest-earning assets
to average interest-bearing liabilities 114.53%
======
- ----------------
<FN>
(1) Total loans, net include nonaccruing loans.
(2) Net interest margin is net interest income divided by interest-earning
assets.
</TABLE>
8
<PAGE> 11
RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected the Savings Bank'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 change in rate
and volume. The combined effect of changes in both rate and volume has been
allocated proportionately to the change due to rate and the change due to
volume.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
------------------------------------------ -----------------------------------------
Increase Increase
(Decrease) Due To (Decrease) Due to
------------------------- ------------------------
Total Increase Total Increase
Rate Volume (Decrease) Rate Volume (Decrease)
----------- ---------- -------------- --------- ----------- ---------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Total loans receivable, net $ 31 $ 892 $ 923 $ 311 $ 465 $ 776
Mortgage-backed securities 2 (6) (4) (1) 44 43
Investment securities 6 (94) (88) 69 115 184
Other interest-earning assets 10 (156) (146) (34) 65 31
------- ------- ------- ------- ------- -------
Total interest-earning assets 49 636 685 345 689 1,034
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Savings deposits 2 1 3 (48) (54) (102)
Other time deposits (25) 349 324 306 341 647
Borrowed funds 81 213 294 (20) (190) (210)
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 58 563 621 238 97 335
------- ------- ------- ------- ------- -------
Increase (decrease) in net interest income $ (9) $ 73 $ 64 $ 107 $ 529 $ 699
======= ======= ======= ======= ======= =======
</TABLE>
9
<PAGE> 12
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND
1996
GENERAL. The Company's net income amounted to $1.1 million or $.79 per
share for fiscal 1997 compared to $517,000 or $.35 per share for fiscal 1996.
The increase of $622,000 or 120.3% in net income for fiscal 1997 was primarily
due to a decrease in federal insurance premiums as well as an increase in net
interest income and other income.
NET INTEREST INCOME. Net interest income is determined by the Company's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities. The Company's net interest income increased $64,000 or 1.7% to $3.8
million for fiscal 1997 compared to fiscal 1996. The increase in the average
interest rate spread to 3.31% for fiscal 1997 compared to 3.13% for fiscal 1996
was substantially offset by a decrease in the ratio of average interest-earning
assets to average interest-bearing liabilities to 119.34% for fiscal 1997 from
130.80% for fiscal 1996. The net interest margin for fiscal 1997 was 4.19%
compared to 4.39% for fiscal 1996.
INTEREST INCOME. Interest income amounted to $8.0 million for fiscal
1997, an increase of $685,000 or 9.4% compared to interest income of $7.3
million for fiscal 1996. Such increase was primarily due to an increase in
interest income on loans as a result of an increase in the average balance of
loans and, to a lesser extent, an increase in the average yield earned on such
assets. The average balance of loans receivable increased $10.0 million or 13.6%
to $83.9 million for fiscal 1997 compared to $73.9 million for fiscal 1996. In
addition, the average yield earned on such assets increased to 8.94% for fiscal
1997 compared to 8.90% for fiscal 1996. The increase in the average balance of
loans receivable was primarily due to increased originations of single-family
mortgage loans.
INTEREST EXPENSE. Interest expense increased $621,000 or 17.7% to $4.1
million for fiscal 1997 compared to $3.5 million for fiscal 1996. Such increase
was primarily due to an increase in the average balance of time deposits as well
as an increase in the average balance of and rates paid on FHLB advances. The
average balance of time deposits and FHLB advances increased to $54.3 million
and $8.9 million, respectively, for fiscal 1997 compared to $48.1 million and
$4.2 million, respectively, for fiscal 1996. The increase in the average balance
of time deposits and FHLB advances was primarily due to increased funding needs
as a result of increased loan origination activity. The average rate paid on
FHLB advances increased to 5.85% for fiscal 1997 compared to 5.46% for fiscal
1996.
PROVISION FOR LOAN LOSSES. The provision for loan losses amounted to
$137,000 and $125,000 for fiscal 1997 and 1996, respectively. The allowance for
loan losses as a percent of total loans and as a percent of nonperforming loans
was .53% and 24.57% for fiscal 1997 compared to .45% and 31.02% for fiscal 1996.
The Savings Bank establishes provisions for loan losses in order to
maintain the allowance for loan losses at a level deemed to be appropriate based
upon management's
10
<PAGE> 13
assessment of prior loss experience, the volume and type of lending conducted by
the Savings Bank, industry standards, past due loans, economic conditions in the
Savings Bank's market area and generally and other factors related to the
collectibility of the Savings Bank's loan portfolio. A significant majority of
the Savings Bank's nonperforming loans has historically consisted of one-to-four
family loans. Due to the stability of the local economy, the lower level of risk
involved with such loans and the minimal level of charge-offs, the Savings Bank
has maintained its allowance for loan losses at a level deemed adequate by
management, although lower than industry standards with respect to the allowance
as a percent of both total nonperforming loans and total loans.
OTHER INCOME. Other income amounted to $268,000 for fiscal 1997 compared
to $177,000 for fiscal 1996, an increase of $91,000 or 51.4%. Such increase was
primarily due to an increase in fees and charges.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $791,000 or 26.1% to $2.2 million for fiscal 1997 compared to $3.0
million for fiscal 1996. Such decrease was primarily due to a decrease of
$393,000 or 26.1% in compensation and employee benefits and a decrease of
$449,000 or 86.3% in federal insurance premiums. The decrease in compensation
and employee benefits was primarily due to decreased employee benefit costs. The
decrease in federal deposit insurance premiums was due to federal legislation
passed in 1996 which authorized a one-time assessment on all savings
institutions to recapitalize the Savings Association Insurance Fund ("SAIF").
The Savings Bank's assessment amounted to $375,000 (pre-tax) in fiscal 1996. The
recapitalization of the SAIF has resulted in lower deposit premiums which has
benefited the Savings Bank's earnings.
INCOME TAXES. Total income taxes amounted to $587,000 and $275,000 for
fiscal 1997 and 1996, respectively. The effective tax rate was 34.0% and 34.7%,
respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND
1995
GENERAL. The Company's net income amounted to $517,000 for fiscal 1996
as compared to $961,000 for fiscal 1995. The decrease of approximately $444,000
or 46.2% was due primarily to increases in general and administrative expenses.
NET INTEREST INCOME. The Company's net interest income increased
$699,000 or 22.8% during the year ended September 30, 1996 as compared to the
year ended September 30, 1995. The increase in net interest income was the
result of a $1.0 million or 16.5% increase in total interest income, due
primarily to an increase in the average balance of interest-earning assets from
$74.7 million in fiscal 1995 to $85.9 million in fiscal 1996, which was
partially offset by an increase of $335,000 or 10.5% in total interest expense,
due primarily to increases in the average rate paid on and average balance of
other time deposits. The Company's interest rate spread decreased from 3.49% to
3.13% during the year ended September 30, 1996 as compared to the year ended
September 30, 1995, and the Company's net interest margin increased from 4.11%
to 4.39% during the same respective periods. The
11
<PAGE> 14
decrease in the interest rate spread was more than offset in fiscal 1996 by the
increase in the ratio of average interest-earning assets to average
interest-bearing liabilities from 114.53% for fiscal 1995 to 130.80% for fiscal
1996.
INTEREST INCOME. The increase in interest income was primarily
attributable to an increase in interest income on loans of $776,000 or 13.4%
during the year ended September 30, 1996 as compared to the year ended September
30, 1995. The increase in interest income on loans was largely due to an
increase in the average balance of $6.6 million or 9.9% to $73.9 million in
fiscal 1996 as compared to fiscal 1995 as well as a 28 basis point increase (100
basis points equals 1%) in the weighted average yield earned on the Savings
Bank's loan portfolio during the same respective periods. In addition, the
increase in interest income was attributable to an increase in interest income
on investment securities of $184,000 or 116.5% to $342,000 during fiscal 1996 as
compared with fiscal 1995. Such increase was due to an increase in the average
balance of and average yield earned on such assets during the same respective
periods. The increase in the average balance of loans and investment securities
reflects increased lending and investment by the Savings Bank using proceeds
from the Conversion while the increase in rates reflects the increases in market
interest rates during fiscal 1995 and, to a lesser extent, the early part of
1996.
INTEREST EXPENSE. Interest expense on deposits, the largest component of
the Savings Bank's interest-bearing liabilities, increased $545,000 or 19.9% to
$3.3 million during the year ended September 30, 1996 as compared to the year
ended September 30, 1995. The increase in interest expense on deposits was due
to both an increase of 58 basis points in the weighted average rate paid on
deposits to 5.35% for fiscal 1996 from 4.77% for fiscal 1995 due to upward
pricing of the Savings Bank's deposits, particularly certificates of deposits,
as well as an increase of $3.9 million in the average balance of deposits during
the same respective periods. During fiscal 1995 and 1996, the Savings Bank
experienced a shift in deposits from passbook accounts to certificate of deposit
accounts due to an increase in the rates paid on certificates of deposit to
reflect a rise in market interest rates.
Interest expense on borrowings decreased $210,000 or 47.8% during the
year ended September 30, 1996 as compared to the year ended September 30, 1995
due primarily to an decrease in the average balance of FHLB advances
outstanding.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased by
$100,000 from $25,000 for the year ended September 30, 1995 to $125,000 for the
year ended September 30, 1996. At September 30, 1996, the Savings Bank's
allowance for loan losses to total nonperforming loans and total loans amounted
to 31.02% and .45%, respectively, compared to 19.20% and .32%, at September 30,
1995.
OTHER INCOME. Total other income increased by $16,000 or 9.9% from
$161,000 for the year ended September 30, 1995 to $177,000 for the year ended
September 30, 1996. Such increase was primarily due to an increase in other
miscellaneous income.
12
<PAGE> 15
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $1.2 million or 69.7% to $3.0 million during the year ended September
30, 1996 compared to fiscal 1995 primarily as a result of a $672,000 increase in
compensation and employee benefits and an increase of $392,000 or 306.3% in
federal insurance premiums. The increase in compensation and employee benefits
was primarily due to benefits related to the Company's ESOP as well as normal
salary and merit increases. The increase in benefits related to the ESOP was
partially attributable to the release of additional shares of Common Stock in
1996 as a result of the special distribution of $4.00 per share paid in fiscal
1996. Accordingly, the Company believes such costs will decrease in fiscal 1997.
The increase in federal deposit insurance premiums was primarily due to federal
legislation which authorized a one-time assessment on all savings institutions
to recapitalize the SAIF. The Savings Bank's assessment amounted to $375,000
(pre-tax). The recapitalization of the SAIF has resulted in lower deposit
premiums which will benefit future earnings.
INCOME TAXES. Total income taxes amounted to $275,000 and $460,000 for
the years ended September 30, 1996 and 1995, respectively. The effective tax
rate was 34.7% and 32.3% for the years ended September 30, 1996 and 1995,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Savings Bank's liquidity, represented by cash and cash equivalents,
is a product of its operating, investing and financing activities. The Savings
Bank's primary sources of funds are deposits, borrowings, amortization,
prepayments and maturities of outstanding loans, sales of loans, maturities of
investment securities and other short-term investments and funds provided from
operations. While scheduled loan amortization and maturing investment securities
and short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. The Savings Bank manages the pricing of its
deposits to maintain a steady deposit balance. In addition, the Savings Bank
invests excess funds in overnight deposits and other short-term interest-earning
assets which provide liquidity to meet lending requirements. The Savings Bank
has generally been able to generate enough cash through the retail deposit
market, its traditional funding source, to offset the cash utilized in investing
activities. As an additional source of funds, the Savings Bank may borrow from
the FHLB of Cincinnati and has access to the Federal Reserve discount window. At
September 30, 1997, the Savings Bank had $8.8 million of outstanding advances
from the FHLB of Cincinnati.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, the Savings Bank maintains a
strategy of investing in various lending products. The Savings Bank uses its
sources of funds primarily to meet its ongoing commitments, to pay maturing
savings certificates and savings withdrawals and fund loan commitments. At
September 30, 1997, the total approved loan commitments outstanding, excluding
construction loans, amounted to $2.6 million. At the same date, the unadvanced
13
<PAGE> 16
portion of construction loans approximated $1.0 million. Certificates of deposit
scheduled to mature in one year or less at September 30, 1997 totalled $34.4
million. The Savings Bank did not have any investment securities scheduled to
mature in one year or less at September 30, 1997. Management believes that a
significant portion of maturing deposits will remain with the Savings Bank. The
Savings Bank anticipates that it will continue to have sufficient funds to meet
its current commitments.
The Savings Bank is required by the OTS to maintain average daily
balances of liquid assets and short-term liquid assets (as defined) in amounts
equal to 5% and 1%, respectively, of net withdrawable deposits and borrowings
payable in one year or less to assure its ability to meet demand for withdrawals
and repayment of short-term borrowings. The liquidity requirements may vary from
time to time at the direction of the OTS depending upon economic conditions and
deposit flows. The Savings Bank generally maintains a liquidity ratio of between
5% and 10% of its net withdrawable deposits and borrowings payable in one year
or less. The Savings Bank's average monthly liquidity ratio and short-term
liquid assets ratio for September 1997 was 5.45% and 1.32%, respectively.
Federally insured savings institutions are required to satisfy three
different OTS capital requirements. Under these standards, savings institutions
must maintain "tangible" capital equal to at least 1.5% of adjusted total
assets, "core" capital equal to at least 3% of adjusted total assets and "total"
capital (a combination of core and "supplementary" capital) equal to at least 8%
of "risk-weighted" assets. For purposes of the regulation, core capital is
defined as common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and qualifying supervisory
goodwill. Core capital is generally reduced by the amount of a savings
institution's intangible assets, although limited exceptions to the deduction of
intangible assets are provided for purchased mortgage servicing rights,
qualifying supervisory goodwill and certain other intangibles, all of which are
currently not relevant to the calculation of Savings Bank's regulatory capital.
Tangible capital is core capital less all intangible assets, with a limited
exception for purchased mortgage servicing rights.
The Savings Bank substantially exceeded each of the above-described
regulatory capital requirements at September 30, 1997.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
14
<PAGE> 17
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
released Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share." SFAS No. 128 establishes standards for computing and presenting
earnings per share ("EPS") and applies to entities with publicly held common
stock or potential common stock. SFAS No. 128 simplifies the standards for
computing earnings per share previously found in APB Opinion No. 15, Earnings
Per Share and makes them comparable to international EPS standards. It replaces
the presentation of basic and diluted EPS on the face of the numerator and
denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. SFAS No. 128 requires restatement of all prior-period EPS data
presented.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure." Statement No. 129 continues the existing requirements
to disclose the pertinent rights and privileges of all securities other than
ordinary common stock but expands the number of companies subject to portions of
its requirements. Specifically, the Statement requires all entities to provide
the capital structure disclosures previously required by Opinion 15. Companies
that were exempt from the provisions of Opinion 15 will now need to make those
disclosures.
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The objective of the Statement is to report a measure of
all changes in equity of an enterprise that result from transactions and other
economic events during the period other than transactions with owners
("Comprehensive income"). Comprehensive income is the total of net income and
all other nonowner changes in equity. The Statement is effective for fiscal
years beginning after December 15, 1997 with earlier application permitted.
In July, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." Statement No. 131 requires disclosures for
each segment that
15
<PAGE> 18
are similar to those required under current standards with the addition of
quarterly disclosure requirements and a finer partitioning of geographic
disclosures. It requires limited segment data on a quarterly basis. It also
requires geographic data by country, as opposed to broader geographic regions as
permitted under current standards. The Statement is effective for fiscal years
beginning after December 15, 1997 with earlier application permitted.
16
<PAGE> 19
[LOGO]
VONLEHMAN & COMPANY INC. 250 Grandview Drive Suite 300
Fort Mitchell, Kentucky 41017-5610
- --------------------------------------------------------------------------------
Certified Public Accountants and Business Advisors 4221 Malsbary Road Suite 102
Cincinnati, Ohio 45242-5502
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Fort Thomas Financial Corporation
and Subsidiary
Fort Thomas, Kentucky
We have audited the accompanying consolidated statements of financial condition
of Fort Thomas Financial Corporation and Subsidiary as of September 30, 1997
and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for the years ended September 30, 1997, 1996 and 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 Fort Thomas
Financial Corporation and Subsidiary at September 30, 1997 and 1996, and the
consolidated results of its operations and its cash flows for the years ended
September 30, 1997, 1996 and 1995 in conformity with generally accepted
accounting principles.
/s/ VonLehman & Company Inc.
Fort Mitchell, Kentucky
October 22, 1997
17
<PAGE> 20
<TABLE>
<CAPTION>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
SEPTEMBER 30,
-----------------------------------
1997 1996
-------------- --------------
ASSETS
<S> <C> <C>
Cash and Cash Equivalents $ 2,186 $ 1,785
Investment Securities
Held to Maturity - at Amortized Cost (Market Value of $2,984 and
$3,486 for 1997 and 1996, Respectively) 2,990 3,503
Available for Sale - at Market - 494
Mortgage-Backed Securities
Available for Sale - at Market 798 816
Loans Receivable, Net 88,452 77,987
Office Properties and Equipment - at
Depreciated Cost 570 643
Federal Home Loan Bank Stock 785 700
Cash Surrender Value of Life Insurance 1,114 1,068
Accrued Interest Receivable 770 642
Prepaid and Other Assets 93 118
Deferred Federal Income Tax Asset 86 257
Prepaid Federal Income Tax Asset 29 -
-------------- --------------
TOTAL ASSETS $ 97,873 $ 88,013
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 71,858 $ 63,731
Borrowed Funds 8,846 6,754
Advances from Borrowers for
Taxes and Insurance 229 188
Deferred Compensation 504 376
Accrued Interest Payable 59 60
Accrued Federal Income Tax Liability - 85
Other Liabilities 591 898
-------------- --------------
TOTAL LIABILITIES 82,087 72,092
-------------- --------------
STOCKHOLDERS' EQUITY
Common Stock of $.01 Par Value; 4,000,000 Shares Authorized; 1,573,775
Shares Issued; 1,420,699 and 1,489,096 Shares Outstanding as of
1997 and 1996, Respectively 16 16
Additional Paid-In Capital 9,436 9,387
Shares Acquired by Employee Stock Ownership Plan (744) (847)
Shares Acquired by MRP Trust (672) (793)
Retained Earnings - Substantially Restricted 8,852 8,165
Treasury Stock (1,103) -
Unrealized Gain (Loss) on Available for Sale Securities,
Net of Related Tax Effects 1 (7)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 15,786 15,921
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 97,873 $ 88,013
============== ==============
See auditors' report and accompanying notes.
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1997 1996 1995
--------- --------- ---------
INTEREST INCOME
<S> <C> <C> <C>
Interest on Loans $ 7,499 $ 6,576 $ 5,800
Interest on Investment Securities 254 342 158
Interest on Mortgage-Backed Securities 50 54 11
Other Interest and Dividends 167 313 282
--------- --------- ---------
Total Interest Income 7,970 7,285 6,251
--------- --------- ---------
INTEREST EXPENSE
Deposits 3,615 3,288 2,743
Borrowed Funds 523 229 439
--------- --------- ---------
Total Interest Expense 4,138 3,517 3,182
--------- --------- ---------
Net Interest Income 3,832 3,768 3,069
Provision for Losses on Loans 137 125 25
--------- --------- ---------
Net Interest Income After Provision for
Losses on Loans 3,695 3,643 3,044
--------- --------- ---------
OTHER INCOME
Fees and Charges 133 64 63
Other 135 113 98
--------- --------- ---------
Total Other Income 268 177 161
--------- --------- ---------
GENERAL AND ADMINISTRATIVE EXPENSES
Compensation and Employee Benefits 1,115 1,508 836
Franchise and Other Taxes 116 128 99
Federal Insurance Premium 71 520 128
Expenses of Premises and Equipment 175 163 174
Data Processing and Related Contract Services 137 127 104
Other Operating Expenses 623 582 443
--------- --------- ---------
Total General and Administrative Expenses 2,237 3,028 1,784
--------- --------- ---------
Income Before Income Tax 1,726 792 1,421
Federal Income Tax Expense 587 275 460
--------- --------- ---------
NET INCOME $ 1,139 $ 517 $ 961
========= ========= =========
EARNINGS PER COMMON SHARE $ .79 .35 .17
========= ========= =========
</TABLE>
See auditors' report and accompanying notes.
19
<PAGE> 22
<TABLE>
<CAPTION>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Unrealized
Gains
Additional Shares Shares (Losses) Total
Common Paid-In Acquired Acquired By Retained Treasury on AFS Stockholders'
Stock Capital By ESOP MRP Trust Earnings Stock Securities Equity
--------- --------- ---------- --------- -------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 $ -- $ -- $ -- $ -- $ 7,179 $ -- $ -- $ 7,179
Net Income -- -- -- -- 961 -- -- 961
Sale of Stock at Public Offering 16 14,981 (1,259) -- -- -- -- 13,738
ESOP Common Stock Released
for Allocation -- -- 10 -- -- -- -- 10
Dividends Declared -- -- -- -- (98) -- -- (98)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1995 16 14,981 (1,249) -- 8,042 -- -- 21,790
Net Income -- -- -- -- 517 -- -- 517
Unrealized Loss on AFS Securities, -- -- -- -- -- -- (7) (7)
Net of Tax Effect
ESOP Common Stock Released
for Allocation -- 161 402 -- -- -- -- 563
Amortization of Stock Compensation Plans -- 14 -- 80 -- -- -- 94
Common Stock Acquired for MRP -- -- -- (873) -- -- -- (873)
Dividends Declared -- (5,769) -- -- (394) -- -- (6,163)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1996 16 9,387 (847) (793) 8,165 -- (7) 15,921
Net Income -- -- -- -- 1,139 -- -- 1,139
Unrealized Gain on AFS Securities
Net of Tax Effect -- -- -- -- -- -- 8 8
ESOP Common Stock Released
for Allocation -- 25 103 -- -- -- -- 128
Treasury Stock Acquired -- -- -- -- -- (1,103) -- (1,103)
Amortization of Stock Compensation Plans -- 24 -- 121 -- -- -- 145
Dividends Declared -- -- -- -- (452) -- -- (452)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1997 $ 16 $ 9,436 $ (744) $ (672) $ 8,852 $ (1,103) $ 1 $ 15,786
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See auditors' report and accompanying notes.
20
<PAGE> 23
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------------
1997 1996 1995
----------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net Income $ 1,139 $ 517 $ 961
Reconciliation of Net Income
with Cash Flows from Operations
Allowance for Losses on Loans 137 125 25
Depreciation 77 87 93
Deferred Federal Income Taxes 171 (258) (40)
Amortization (292) (85) 36
FHLB Stock Dividends (52) (49) (41)
(Gain) Loss on Sale of Real Estate Owned 4 (12) (1)
Amortization of Stock Compensation Plans 145 94 -
REO Donated - 11 -
Changes In
Accrued Interest Receivable (128) (67) (148)
Prepaid and Other Assets 25 (19) 220
Cash Surrender Value of Life Insurance (46) (56) (45)
Deferred Compensation 128 113 102
Accrued Interest Payable (1) 30 (17)
Prepaid/Accrued Federal Income Tax Liability (114) 52 33
Other Liabilities (307) 631 13
----------- ------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 886 1,114 1,191
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturity of Investment Securities 3,000 3,496 1,500
Purchase of Investment Securities (1,988) (2,502) (4,480)
Purchase of Mortgage-Backed Securities - - (1,013)
Loan Originations and Repayments, Net (10,375) (7,157) (6,862)
Purchase of FHLB Stock (33) - -
Principal Received on Mortgage-Backed Securities 18 151 20
Proceeds from the Sale of Real Estate
Acquired Through Foreclosure 64 295 229
Purchase of Office Equipment (4) (12) (16)
----------- ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (9,318) (5,729) (10,622)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change in Deposits 8,127 3,733 4,871
Net Proceeds from Stock Offering - - 13,738
Dividends Paid (452) (6,163) -
ESOP Shares Released 128 563 10
Common Stock Purchased for MRP Trust - (873) -
Common Stock Purchased for Treasury (1,103) - -
Advance from Borrowers for Taxes and Insurance 41 5 (91)
Repayments of Borrowings (4,558) (197) (6,937)
Proceeds from Borrowings 6,650 3,300 3,000
----------- ------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,833 368 14,591
----------- ------------ -----------
CHANGES IN CASH AND CASH EQUIVALENTS 401 (4,247) 5,160
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,785 6,032 872
----------- ------------ -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,186 $ 1,785 $ 6,032
=========== ============ ===========
<FN>
See auditors' report and accompanying notes.
</TABLE>
21
<PAGE> 24
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
Fort Thomas Financial Corporation (the Company) provides financial services
to individuals and corporate customers, and is subject to competition from
other financial institutions. The Company is also subject to the
regulations of certain Federal agencies and undergoes periodic examinations
by those regulatory authorities.
The Company is a holding company whose activities are primarily limited to
holding the stock of Fort Thomas Savings Bank (the Bank). The Bank conducts
a general banking business in Northern Kentucky which consists of
attracting deposits from the general public and primarily applying those
funds to the origination of loans for residential, consumer and
nonresidential purposes. The 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 Bank can be significantly
influenced by a number of environmental factors, such as governmental
monetary policy, that are outside management's control.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of Fort Thomas
Financial Corporation and its subsidiary, Fort Thomas Savings Bank, FSB.
All material intercompany balances and transactions have been eliminated in
consolidation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as
of the date of the statement of financial condition and revenues and
expenses for the year. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the
allowances for losses on loans and foreclosed real estate, management
obtains appraisals for significant properties.
A substantial portion of the Bank's loans are secured by real estate in
local markets. In addition, foreclosed real estate is located in this same
market. Accordingly, the ultimate collectibility of a substantial portion
of the Bank's loan portfolio and the recovery of a substantial portion of
the carrying amount of foreclosed real estate are susceptible to changes in
local market conditions.
22
<PAGE> 25
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
While management uses available information to recognize losses on
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically
review the Bank's allowances for losses on loans and foreclosed real
estate. Such agencies may require the Bank to recognize additions to the
allowances based on their judgments about information available to them at
the time of their examination.
FHLB STOCK
The Bank, as a member of the Federal Home Loan Bank System, is required by
law to maintain an investment in capital stock of the Federal Home Loan
Bank of Cincinnati (FHLB). The stock is recorded at cost, which represents
anticipated redemption value.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The Company's investments and mortgage-backed securities are classified in
three categories and accounted for as follows:
Trading Securities
Investment securities held principally for resale in the near
term and mortgage-backed securities held for sale in conjunction
with the Company's mortgage banking activities are classified as
trading securities and recorded at their fair values. Unrealized
gains and losses on trading securities are included in other
income. The Company currently has no investments in this
category.
Securities Held to Maturity
Investment securities and mortgage-backed securities for which
the Company has the positive intent and ability to hold until
maturity are reported at cost, adjusted for amortization of
premiums and accretion of discounts which are recognized in
interest income using the interest method over the period to
maturity.
Available for Sale Securities
Securities available for sale consist of bonds, notes, debentures
and certain equity securities not classified as trading
securities or as securities to be held to maturity. Unrealized
holding gains and losses, net of tax, on securities available for
sale are reported as a net amount in a separate component of
stockholders' equity until realized. Gains and losses on the sale
of securities available for sale are determined using the
specific-identification method.
23
<PAGE> 26
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by issuers of the
securities. Premiums and discounts are amortized using methods
approximating the interest method over the remaining period to contractual
maturity, adjusted for anticipated prepayments.
In November 1995, the FASB issued a Special Report on Implementation of
SFAS No. 115 (the Special Report), which provided for the reclassification
of securities between the held-to-maturity, available for sale and trading
portfolios during a forty-five day period, without calling into question
management's prior intent with respect to such securities. Management
elected to restructure the Company's securities portfolio pursuant to the
Special Report, and transferred all mortgage-backed securities from the
held-to-maturity portfolio to an available for sale classification. At
September 30, 1997, the Company's shareholders' equity reflected a net
unrealized gain of $1,000 on securities designated as available for sale.
FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
The Company does not participate in interest-rate exchange agreements,
hedging or other similar financial instruments.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances less the allowance
for loan losses, loans in process and deferred loan-origination fees.
Interest is accrued as earned unless the collectibility of the loan is in
doubt.
Loans are placed on nonaccrual when principal or interest is delinquent for
90 days or more. Any unpaid interest previously accrued on those loans is
reversed from income, and thereafter interest is recognized only to the
extent of payments received.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the lives of
the related loans using the interest method. Amortization of deferred loan
fees is discontinued when a loan is placed on a nonaccrual status.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb potential losses inherent in
the loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans and economic conditions. The allowance
is increased by a provision for loan losses, which is charged to expense,
and reduced by charge-offs, net of recoveries. Changes in the allowance
relating to impaired loans are charged or credited to the provision for
loan losses.
24
<PAGE> 27
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
In June 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". SFAS No. 114, which was subsequently amended by SFAS
No. 118 as to certain income recognition and financial statement disclosure
provisions, 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 Company's current procedures for
evaluating impaired loans result in carrying such loans at the lower of
cost or fair value.
The Company adopted SFAS No. 114, as subsequently amended, on October 1,
1995, without material effect on consolidated financial condition or
results of operations.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Company
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
Company, investment in impaired nonresidential and multifamily residential
real estate loans, such loans are generally collateral dependent and, as a
result, are carried as a practical expedient at the lower of cost or fair
value. 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 this time.
At September 30, 1997 and 1996, the Company had no loans that would be
defined as impaired under SFAS No. 114.
PROVISION FOR LOSSES
Provision for losses includes charges to reduce the recorded balances of
mortgage loans receivable, uncollected interest and real estate to their
estimated net realizable value or fair value, as applicable. Such
provisions are based on management's estimate of net realizable value or
fair value of the collateral, as applicable, considering the current and
currently anticipated future operating or sales conditions, thereby causing
these estimates to be particularly susceptible to changes that could result
in a material adjustment to results of operations in the near term.
Recovery of the carrying value of such loans and real estate is dependent
to a great extent on economic, operating and other conditions that may be
beyond the Bank's control. It is the opinion of management, however, that
adequate provisions have been made for losses on loans and real estate.
25
<PAGE> 28
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
LOAN ORIGINATION FEES
Loan origination fees net of direct loan origination costs are offset and
the resulting net amount is deferred and amortized over the life of the
related loans as an adjustment to the yield. In addition, commitment fees
are required to be offset against certain related direct loan origination
costs and generally recognized over the contractual life of the related
loans as an adjustment of yield if the commitment is exercised. If the
commitment expires unexercised, the fee is recognized as income upon
expiration of the commitment.
OFFICE PROPERTIES AND EQUIPMENT
The cost of office properties and equipment is depreciated over the
estimated useful lives of the related assets. Depreciation is computed on
the straight-line and accelerated methods.
Maintenance and repairs are charged to operations when incurred.
Significant betterments and renewals are capitalized. When office
properties and equipment are sold or otherwise disposed of, the asset
account and related accumulated depreciation account are relieved, and any
gain or loss is included in operations.
The useful lives of office properties and equipment for purposes of
computing depreciation are:
Office Properties 15-35 Years
Equipment 5-10 Years
REAL ESTATE OWNED
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. Real estate loss provisions are
recorded if the properties' fair value subsequently declines below the
amount 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.
26
<PAGE> 29
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES
The Company 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 Company'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.
STOCK BENEFIT PLANS
In conjunction with its common stock offering, the Company implemented an
Employee Stock Ownership Plan (ESOP). The ESOP provides retirement benefits
for substantially all full-time employees who have completed one year of
service. The Company accounts for the ESOP in accordance with Statement of
Position (SOP) 93- 6, "Employer's Accounting for Employee Stock Ownership
Plans". SOP 93-6 changed the measure of compensation expense recorded by
employers from the cost of allocated ESOP shares to the fair value of ESOP
shares allocated to participants during a fiscal year. Expense recognized
related to the plan totaled approximately $128,000, $563,000 and $10,000
for the years ended September 30, 1997, 1996, and 1995, respectively.
The Company also has a Management Recognition Plan (MRP). Subsequent to the
offering, the MRP purchased 62,951 shares of common stock in the open
market. During fiscal year 1997, 8,558 shares available, under the plan,
were granted to executive officers and members of the Board of Directors of
the Company. Common stock granted under the MRP vests ratably over a five
year period, commencing in December 1996. Provisions of $119,000 and
$79,000 related to the MRP were charged to expense for the fiscal years
ended September 30, 1997 and 1996, respectively. No provision was charged
to expense for the fiscal year ended September 30, 1995, because the plan
began in fiscal year 1996.
Also, the Board of Directors adopted a Stock Option Plan that provided for
the issuance of 107,000 shares of common stock at fair market value at the
date of grant. During fiscal 1997, the Company granted options to purchase
shares to members of the Board of Directors and executive officers at fair
value of $8.34 per share. As of September 30, 1997, none of the stock
options granted have been exercised.
27
<PAGE> 30
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
Advertising costs are expensed as incurred. Advertising costs totaled
$45,447, $44,523 and $51,776 for the years ended September 30, 1997, 1996
and 1995, respectively.
TREASURY STOCK
Treasury stock is shown at cost, and in 1997 consists of 78,689 shares of
common stock.
RECLASSIFICATIONS
Certain amounts in the prior-year financial statements have been
reclassified for comparative purposes to conform with the presentation in
the current-year financial statements.
NOTE 2 - CASH FLOWS INFORMATION
For purposes of the cash flows statement, cash includes cash and cash
equivalents on hand and in demand and time accounts and certificates of
deposit with three months or less maturity.
Cash paid for interest and income taxes was as follows:
<TABLE>
<CAPTION>
Years Ended
September 30,
---------------------------------------
1997 1996 1995
-------- ------- ------
(In Thousands)
<S> <C> <C> <C>
Interest $ 4,139 $ 3,487 $3,199
======== ======= ======
Income Taxes $ 530 $ 481 $ 467
======== ======= ======
The Company had noncash investing or financing activities as follows:
Real Estate Acquired
through Foreclosure
of Mortgage Loans $ 64 $ 269 $ 204
======== ======= ======
Deferred Gain on Sale
of Real Estate $ -- $ -- $ 8
======== ======= ======
FHLB Stock Dividend
Received $ 52 $ 49 $ 41
======== ======= ======
</TABLE>
28
<PAGE> 31
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 2 - CASH FLOWS INFORMATION (CONTINUED)
The balance in cash and cash equivalents as of and September 30, 1997 and
1996 consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Cash on Hand $ 167 $ 206
Cash in Demand Accounts:
Interest Bearing 1,947 1,454
Non-Interest Bearing 72 125
------ ------
Totals $2,186 $1,785
===== =====
</TABLE>
NOTE 3 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
Investment securities held to maturity as of September 30, 1997 and 1996
consist of the following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
----- ----- ------ -----
1997 (In Thousands)
----
<S> <C> <C> <C> <C>
U.S. Government and
Federal Agencies $2,990 $ 3 $ 9 $2,984
===== == === =====
1996
----
U.S. Government and
Federal Agencies $3,503 $ 5 $22 $3,486
===== == == =====
The following is a summary of maturities of securities held-to-maturity as
of September 30, 1997:
<CAPTION>
Carrying Estimated
Value Fair Value
----- ----------
(In Thousands)
<S> <C> <C>
Over One Year Through Five Years $2,990 $2,984
===== =====
</TABLE>
29
<PAGE> 32
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 3 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
(CONTINUED)
Investment securities and mortgage-backed securities available for sale as
of September 30, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
(In Thousands)
1997 - Available For Sale
-------------------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation Participations $ 797 $ 1 $ -- $ 798
====== ====== ====== ======
1996 - Available For Sale
-------------------------
Federal Home Loan Mortgage
Corporation Participations $ 818 $ -- $ 2 $ 816
U.S. Government and
Federal Agencies 500 -- 6 494
------ ------ ------ ------
$1,318 $ -- $ 8 $1,310
====== ====== ====== ======
The following is a summary of maturities of available for sale securities
as of September 30, 1997:
<CAPTION>
Carrying Estimated
Value Fair Value
----- ----------
(In Thousands)
<S> <C> <C>
Maturing Over One through Five Years $797 $798
=== ===
</TABLE>
30
<PAGE> 33
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The balances in loans receivable as of September 30, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
September 30,
------------------------------
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Real Estate Mortgage Loans:
One to Four Family $74,471 $62,632
Multi-Family Residential 11,015 11,138
Land and Construction:
Residential 3,885 5,737
Commercial -- 255
Consumer Loans:
Savings Accounts Loans 702 632
Other Consumer Loans 528 516
------- -------
Total 90,601 80,910
Less:
Loans in Process 1,048 1,884
Deferred Loan Origination Fees 625 673
Allowances for Losses 476 366
------- -------
Loans Receivable - Net $88,452 $77,987
======= =======
A summary of activity in the allowance for loan losses at September 30,
1997, 1996 and 1995 is as follows:
<CAPTION>
1997 1996 1995
-------- ------- ------
(In Thousands)
<S> <C> <C> <C>
Balance at Beginning of the Year $366 $239 $233
Additions to Allowance 137 125 25
Recoveries (Charge Offs) During the Year (27) 2 (19)
---- ---- ----
Balance at End of the Year $476 $366 $239
==== ==== ====
</TABLE>
At September 30, 1997 and 1996 the Bank had non-accrual loans of
approximately $1,937,000 and $1,180,000, respectively. Had interest been
recognized on these loans at the original rates, interest income would have
increased approximately $76,900, $41,000 and $48,000 in 1997, 1996 and
1995, respectively. The Bank has no commitments to loan additional funds to
the borrowers of non-accrual loans.
The Bank has sold participating interests in loans in the secondary market,
retaining servicing on the loans sold. Loans sold and serviced for others
totaled approximately $2,380,000 and $4,093,000 at September 30, 1997 and
1996, respectively.
31
<PAGE> 34
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 5 - ACCRUED INTEREST RECEIVABLE
A breakdown of accrued interest receivable is as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Loans Receivable $683 $574
Mortgage-Backed Securities 20 4
Investments 67 64
---- ---
Total $770 $642
=== ===
<CAPTION>
NOTE 6 - OFFICE PROPERTIES AND EQUIPMENT
The balance in office properties and equipment as of September 30, 1997 and
1996 consists of the following:
<S> <C> <C>
Land $ 98 $ 98
Buildings and Improvements 792 792
Furniture and Equipment 637 633
----- ------
1,527 1,523
Accumulated Depreciation ( 957) ( 880)
------ ------
Office Properties and Equipment at
Depreciated Cost $ 570 $ 643
====== =====
</TABLE>
NOTE 7 - BORROWED FUNDS
The Bank has short-term advances from the FHLB for $2,600,000 with interest
at 5.9% at September 30, 1997. These loans mature in December, 1998.
The Bank also has two long-term advances from the FHLB. These two advances
accrue interest at 5.30% and 5.55%, respectively. Monthly principal and
interest payments on these loans are approximately $16,000 each. These
loans mature October, 2008.
The Bank has another long-term advance from the FHLB for $3,000,000. This
loan accrues interest at a prime-based variable rate, which was 6.0% at
September 30, 1997. Interest only payments are due each month. This loan
matures in October, 1998.
These advances are collateralized by the Bank's Federal Home Loan Bank
stock and first mortgage loans. Payment of these loans prior to their due
date could result in a prepayment penalty.
32
<PAGE> 35
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 7 - BORROWED FUNDS (CONTINUED)
Maturities for the next five years and thereafter are as follows:
<TABLE>
<CAPTION>
Maturing in Years Long-Term Short-Term
Ending September 30, Advances Advances Total
-------------------- -------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C>
1998 $ 220 $2,600 $2,820
1999 3,232 - 3,232
2000 245 - 245
2001 258 - 258
2002 273 - 273
Thereafter 2,018 - 2,018
----- -------- -----
$6,246 $2,600 $8,846
===== ===== =====
</TABLE>
NOTE 8 - DEPOSITS
A breakdown of deposit balances by interest rate and major type as of
September 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------
1997 1996
------------------------- --------------------------
Deposit Type and Weighted Amount Percent Amount Percent
------------------------- ------ ------- ------ -------
Average Interest Rate (In Thousands, Except Percents)
<S> <C> <C> <C> <C>
Passbooks - 2.75% in 1997
and 1996 $ 7,563 10.5% $ 8,393 13.2%
Money Market Deposit
Accounts - 2.74% in
1997 and 1996 2,685 3.7 2,690 4.2
Now Accounts - 2.16% in
1997 and 1996 2,950 4.1 3,000 4.7
------- ------- ------- -------
Total Demand, Transaction and
Passbook Deposits 13,198 18.3 14,083 22.1
------- ------- ------- -------
Certificates of Deposit
4.01% - 5.00% 1,434 2.0 1,684 2.6
5.01% - 6.00% 27,298 38.0 24,187 38.0
6.01% - 7.00% 29,928 41.7 23,777 37.3
------- ------- ------- -------
Total Certificates of Deposits 58,660 81.7 49,648 77.9
------- ------- ------- -------
Totals $71,858 100.0% $63,731 100.0%
======= ======= ======= =======
</TABLE>
33
<PAGE> 36
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 8 - DEPOSITS (CONTINUED)
The aggregate amount of deposits with a minimum denomination of $100,000
was approximately $8.3 million and $6.1 million at September 30, 1997 and
1996, respectively. Deposits of $100,000 or less are insured by the FDIC.
Non-interest bearing deposit accounts totaled approximately $247,000 and
$157,000 for September 30, 1997 and 1996, respectively.
Savings deposit customers are primarily Northern Kentucky area individuals
and businesses.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- ------
(In Thousands)
<S> <C> <C> <C>
Passbook Savings Accounts $ 217 $ 219 $ 281
Money Market Deposit Accounts 72 79 116
Certificates of Deposit 3,263 2,932 2,292
Now Accounts 63 58 54
------ ------ ------
Interest Expense on Deposits $3,615 $3,288 $2,743
====== ====== ======
</TABLE>
At September 30,1997, the scheduled maturities of certificates of deposits
are as follows:
<TABLE>
<CAPTION>
Weighted
Certificates Maturing In Average Interest
September 30, Amount Rate
------------- ------ ----
(In Thousands, Except Percents)
<S> <C> <C>
1998 $34,455 5.90%
1999 13,981 6.20
2000 6,269 6.30
2001 2,365 6.15
2002 1,573 5.99
Thereafter 17 6.50
--------- ----
Total Certificates of Deposit $58,660 6.03%
====== ====
</TABLE>
34
<PAGE> 37
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 9 - RETAINED EARNINGS
The Bank was allowed (until fiscal 1996) a special bad debt deduction for
federal income tax purposes limited to a certain percentage of otherwise
taxable income. This deduction is subject to certain limitations based on
aggregate loans and savings account balances. If the amounts that qualified
for this deduction are later used for purposes other than for bad debt
losses, they will be subject to federal income tax at the then current
corporate rate. Retained earnings include approximately $1.7 million for
which federal income tax has not been provided.
Under new legislation passed August, 1996, the special bad debt deduction
was repealed for thrift institutions. The legislation also requires thrifts
to recapture, over a six-year period, bad debt reserves added since 1988. As
the Bank has provided for a deferred tax liability for special bad debt
deductions since 1988, the legislation is not expected to have a material
effect on the results of its operations.
NOTE 10 - RETIREMENT PLANS
The Company provides for death benefits (prior to retirement) or pensions
for eligible employees through its participation in the multiemployer
savings and loan industry noncontributory defined benefit retirement plan.
This multiemployer plan does not provide information on funding by employer,
but as of September 30, 1997 and 1996, the plan was fully funded. Pension
expense was $11,304, $52,801 and $78,802 for the years ended September 30,
1997, 1996 and 1995, respectively. The Company's policy is to fund pension
costs when accrued.
The Company participates in a Profit Sharing and 401(k) Plan. Employees are
eligible to participate in the 401(k) Plan after completing one year of
service with the Company and attaining age 21. The 401(k) Plan permits
participants to make voluntary tax deferred contributions in an amount up to
15% of their annual base compensation. The Company makes matching
contributions in an amount equal to 50% of each participant's contributions
that do not exceed 4% of compensation.
In addition, the Company may make discretionary contributions to the 401(k)
Plan which would be allocated to the accounts of plan participants in
proportion to each participant's compensation for the plan year. All amounts
deferred by employees are 100% vested. Vesting of matching and discretionary
contributions is 100% vested after five years of service. The Company
contributed $10,563, $10,797 and $17,719 to the 401(k) plan during the years
ended September 30, 1997, 1996 and 1995, respectively.
35
<PAGE> 38
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 11 - DEFERRED COMPENSATION PLANS
The Company has entered into a non-qualified deferred compensation plan with
certain of its officers. Under the plan, in return for the officers
relinquishing the right to a portion of their current earnings, the Company
will pay them a retirement benefit in the form of a monthly payment to be
drawn over a period of 180 months upon normal retirement. The retirement
benefit is calculated based upon the amount of compensation deferred by the
officers over a ten year period, together with a corresponding match by the
association of one-third of the deferral. Both the deferral and the match
accrue interest at 12% per year compounded monthly. Assuming normal
retirement, these payments will be paid in varying amounts between 2005 and
2033.
The Company also entered into a non-qualified deferred compensation plan
with certain of its directors. Under the plan, in return for the directors
relinquishing the right to a portion of their current fees, the Company will
pay them a retirement benefit in the form of a monthly payment to be drawn
upon retirement over a period of 60 to 120 months. The retirement benefit is
calculated based upon the amount of fees deferred by the directors over a
five year period together with interest accrued on this deferral of 12% per
year compounded monthly. Assuming normal retirement, these payments will be
paid in varying amounts between 1998 and 2029.
During the years ended September 30, 1997, 1996 and 1995, the net periodic
pension costs, including accrued interest and company match, under these
plans were as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------------
1997 1996 1995
------ ------- ------
(In Thousands)
<S> <C> <C> <C>
Deferred Compensation -
Officers and Directors $ 73 $ 73 $ 73
Company Match - Officers 2 2 2
Interest Accrued on Balance 53 38 27
---- ---- ----
Net Periodic Pension Costs $128 $113 $102
==== ==== ====
</TABLE>
The total accrued liability for these plans at September 30, 1997 and 1996
was $504,000 and $376,000, respectively. This liability is included in
these financial statements. The funding of these plans is to come from the
general assets of the Company.
In conjunction with the formation of these plans, the Company purchased
life insurance on the participants. The contracts are owned by the Company
and the officers and directors have no ownership rights to them. As of
September 30, 1997 and 1996, the cash surrender value of these insurance
contracts was $1,114,000 and $1,068,000, respectively. The increase in the
cash surrender value of the life insurance for the years ended September
30, 1997, 1996 and 1995 was $46,000, $56,000 and $45,000, respectively.
This increase is recorded as income by the Company.
36
<PAGE> 39
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 12 - EMPLOYEE STOCK OWNERSHIP PLAN
The Company has established an ESOP for its employees. As part of the
Conversion, the ESOP borrowed funds from the Company. The loan was equal to
100% of the aggregate purchase price of the Common Stock acquired by the
ESOP. The loan to the ESOP is being repaid principally from the Company's
and the Bank's contributions to the ESOP over a period of fifteen years, and
the collateral for the loan is the Common Stock purchased by the ESOP. The
interest rate for the ESOP loan is a fixed rate of 9.0%. The Company may, in
any plan year, make additional discretionary contributions for the benefit
of the plan participants in either cash or shares of Common Stock, which may
be acquired through the purchase of outstanding shares in the market or from
individual stockholders, upon the original issuance of additional shares by
the Company or upon the sale of treasury shares by the Company.
Such purchases, if made, would be funded through additional borrowings by
the ESOP or additional contributions from the Company. The timing, amount
and manner of future contributions to the ESOP will be affected by various
factors, including prevailing regulatory policies, the requirements of
applicable laws and regulations and market conditions.
Shares purchased by the ESOP with the proceeds of the loan are held in a
suspense account and released on a pro rata basis as debt service payments
are made. Discretionary contributions to the ESOP and shares released from
the suspense account are allocated among participants on the basis of
compensation. Forfeitures are reallocated among remaining participating
employees and may reduce any amount the Company might otherwise have
contributed to the ESOP. Participants vest in their right to receive their
account balances within the ESOP at the rate of 20% per year starting with
the completion of three years of service and will be 100% vested upon the
completion of seven years of service. Credit is given for years of service
with the Company prior to adoption of the ESOP.
Accounting principles requires that any third party borrowing by the ESOP be
reflected as a liability on the Company's statement of financial condition.
Since the ESOP borrowed from the Company, such obligation is not treated as
a liability, but is excluded from stockholders' equity. If the ESOP
purchases newly issued shares from the Company, total stockholders' equity
would neither increase nor decrease, but per share stockholders' equity and
per share net earnings would decrease as the newly issued shares are
allocated to the ESOP participants.
The ESOP is subject to the requirements of the Employee Retirement Income
Security Act of 1974 as amended ("ERISA"), and the regulations of the IRS
and the Department of Labor thereunder.
The fair value of the 74,387 unearned ESOP shares at September 30, 1997 was
approximately $976,329. Shares committed to be released during 1997 were
10,289. Shares allocated during the current year were 39,128.
The fair value of the 84,676 unearned ESOP shares at September 30, 1996 was
approximately $1,185,463. Shares committed to be released during 1996 were
39,128. Shares allocated during 1996 were 2,098.
37
<PAGE> 40
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 13 - INCOME TAXES
A reconciliation of income tax expense at the statutory rate (34% for all
periods) to income tax expense at the Company's effective rate is as
follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------------
1997 1996 1995
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Computed Tax at the Expected
Statutory Rate $587 $269 $483
Nondeductible Expenses 2 3 2
Other Differences ( 2) 3 ( 25)
---- ---- ----
Income Tax Expense $587 $275 $460
==== ==== ====
Effective Income Tax Rate 34.0% 34.7% 32.3%
==== ==== ====
</TABLE>
The components of income tax expense are summarized as follows:
<TABLE>
<S> <C> <C> <C>
Current Tax Expense $ 416 $ 533 $500
Deferred Tax (Benefit) Expense 171 (258) (40)
---- --- ---
Income Tax Expense $ 587 $ 275 $460
==== ==== ===
</TABLE>
Deferred income taxes arise from temporary differences resulting from income
and expense items reported for financial accounting and tax purposes in
different periods. Temporary differences between the financial statement
carrying amounts and tax bases of assets and liabilities that give rise to
the deferred tax asset at September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
September 30,
--------------------
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Deferred Compensation Agreements (Deductible When
Paid for Taxes) $171 $128
Loan Fees Deferred for Financial Reporting Purposes 26 53
Allowance for Loan Losses 162 121
Accrual for Savings Association Insurance Fund
Recapitalization -- 128
Holding Company Loss Carryforward 173 110
Accumulated Amortization of Stock Compensation Plans 19 32
Other -- 24
---- ----
Deferred Tax Asset 551 596
---- ----
</TABLE>
38
<PAGE> 41
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 13 - INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
September 30,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Deferred Tax Asset (Amount Brought Forward) $551 $596
---- ----
Federal Home Loan Bank Stock (Income Tax Payable
When Shares Received as Stock Dividends are Sold) 166 138
Special Tax Bad Debt Deduction 160 121
Real Estate and Equipment (Depreciation Method
Differences) 8 10
Book Value of CSV of Life Insurance in Excess of
Tax Basis 86 70
Other 45 --
---- ----
Deferred Tax Liability 465 339
---- ----
Net Deferred Income Tax Asset $ 86 $257
==== ====
</TABLE>
NOTE 14 - RELATED PARTY TRANSACTIONS
The Bank has mortgage loans outstanding with various officers, directors
and employees. Loans are granted at interest rates and fees which are 1%
below the Bank's normal lending rate, but are above its cost of funds. All
these loans require board approval and will be repaid with regular monthly
payments in the ordinary course of business until the loans are paid off.
Activity for the year is as follows:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
Balance at September 30, 1996 $ 966
New Loans Made 301
Payments Made (327)
---
Balance at September 30, 1997 $ 940
===
</TABLE>
The Company had deposits from various officers, directors, and employees
totaling $699,283 and $458,165 as of September 30, 1997 and 1996,
respectively.
The Company's attorney and legal counsel serves on the Board of Directors
of the Company and is paid approximately $160,000 annually for services
rendered. The majority of these fees are reimbursed to the Bank as part of
loan costs passed through to the Bank's customers. A member of the Board of
the Directors of the Company is an insurance agent and presently assists in
placing the Bank's insurance coverage. Another member of the Board provides
appraisal services and is paid approximately $20,000 annually.
39
<PAGE> 42
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 15 - LOAN COMMITMENTS
The Bank is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of their
customers including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest rate risk in excess of
the amount recognized in the consolidated statement of financial condition.
The contract amounts of the commitments reflect the extent of the Bank's
involvement in such financial instruments.
The 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 amount of those instruments. The Bank uses
the same credit policies in making commitments and conditional obligations
as those utilized for on-balance-sheet instruments.
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 Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the 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.
As of September 30, 1997, the Bank had fixed and adjustable rate loan
commitments as follows:
<TABLE>
<CAPTION>
Fixed Adjustable Total
----- ---------- -----
(In Thousands, Except Percents)
<S> <C> <C> <C>
First Mortgage Loans on
One to Four Family Residential
Property $ 974 $1,500 $2,474
Commercial Loans -- 145 145
------ ------ ------
Total Loan Commitments $ 974 $1,645 $2,619
====== ====== ======
Weighted Average Interest Rates 9.12% 7.84% 8.32%
====== ====== ======
</TABLE>
40
<PAGE> 43
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 16 - INTEREST RATE RISK
The Bank is engaged principally in providing first mortgage loans to
individuals and commercial enterprises. At September 30, 1997, the Bank's
assets consist of significant amounts that earn interest at fixed interest
rates. Those assets were funded primarily with short-term liabilities that
have interest rates that vary with market rates over time.
At September 30, 1997, the Bank had interest earning assets of approximately
$94.9 million having a weighted average effective yield of 8.42% and with
durations of up to 30 years, and interest bearing liabilities of
approximately $80.7 million having a weighted average effective interest
rate of 5.44% and with durations of up to 13 years. The shorter duration of
the interest-sensitive liabilities indicates that the Bank is exposed to
interest rate risk because, in a rising rate environment, liabilities will
be repriced faster at higher interest rates, thereby reducing the market
value of long-term assets and net interest income.
At September 30, 1996, the Bank had interest earning assets of approximately
$86.1 million having a weighted average effective yield of 8.26% and with
durations of up to 30 years, and interest bearing liabilities of
approximately $70.5 million having a weighted average effective interest
rate of 5.19% and with durations up to 13 years.
NOTE 17 - RECONCILIATION OF NET INCOME AND RETAINED EARNINGS
A reconciliation of the amounts reported to the Office of Thrift
Supervision (OTS) for the Bank and amounts in these audited financial
statements is as follows:
<TABLE>
<CAPTION>
September 30,
-------------------------------------
1997 1996 1995
------ ------- ------
(In Thousands)
<S> <C> <C> <C>
Net Income
Per OTS Report $1,200 $ 825 $ 872
Adjustments Made
Federal Income Tax (17) -- 29
Interest on Loans -- -- 2
Interest on Investments -- -- 3
------ ------ ------
1,183 825 906
Net (Loss) Income of Holding
Company After Eliminating Entries (44) (308) 55
------ ------ ------
Net Income Per Consolidated
Statements of Income $1,139 $ 517 $ 961
====== ====== ======
</TABLE>
41
<PAGE> 44
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 17 - RECONCILIATION OF NET INCOME AND RETAINED EARNINGS
(CONTINUED)
<TABLE>
<CAPTION>
September 30,
------------------------------------------
1997 1996 1995
-------- -------- ------
(In Thousands)
<S> <C> <C> <C>
Retained Earnings
Per OTS Report $ 7,009 $ 8,808 $ 7,987
Adjustments Made
Federal Income Tax ( 17) -- --
------- ------- -----
6,992 8,808 7,987
Retained Earnings (Accumulated
Deficit) of Holding Company
After Eliminating Entries 1,860 (643) 55
------- ------- -----
Retained Earnings Per Consolidated
Statements of Financial
Condition $ 8,852 $ 8,165 $ 8,042
======= ======= =======
</TABLE>
NOTE 18 - REGULATORY CAPITAL REQUIREMENTS
Regulations require savings banks to maintain capital at least sufficient
to meet three separate requirements: (i) tangible capital equal to 1.5% of
adjusted total assets, (ii) core capital equal to 3.0% of adjusted total
assets and (iii) risk-based capital equal to 8.0% of risk-weighted assets.
Any savings bank that is not in compliance with the new capital standards
may have asset growth restrictions placed on them by the Office of Thrift
Supervision (OTS). Additionally, OTS has the discretion to treat the
failure of any savings bank to maintain capital at or above the minimum
required level as an "unsafe and unsound practice" subject to a number of
enforcement actions.
At September 30, 1997, information with respect to the Bank's capital
ratios is summarized as follows:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Capital Under Generally
Accepted Accounting Principles $14,509 $14,509 $14,509
Additional Capital Items:
Allowance for Loan Losses -- -- 476
------- ------- -------
Regulatory Capital 14,509 14,509 14,985
Minimum Capital Requirement 1,285 2,569 4,929
------- ------- -------
Capital in Excess of
Minimum Requirement $13,224 $11,940 $10,056
======= ======= =======
</TABLE>
42
<PAGE> 45
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 18 - REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Regulatory Capital as a
Percentage of Applicable
Adjusted Total Assets 16.94% 16.94% 24.32%
Minimum Capital as a
Percentage 1.50% 3.00% 8.00%
----- ------ ------
Regulatory Capital as a
Percentage of Applicable
Adjusted Total Assets in
Excess of Requirements 15.44% 13.94% 16.32%
===== ===== =====
</TABLE>
The Company's management believes that, under the current regulations, the
Bank will continue to meet its minimum capital requirements in the
foreseeable future. However, events beyond the control of the Bank, such as
increased interest rates or a downturn in the economy in areas where the
Bank has most of it loans, could adversely affect future earnings and,
consequently, the ability of the Bank to meet its future minimum capital
requirements.
NOTE 19 - DEPOSIT INSURANCE PREMIUM ASSESSMENT
Deposits of the Savings Bank are currently insured by the Savings
Association Insurance Fund ("SAIF"). Both the SAIF and the Bank Insurance
Fund ("BIF"), the deposit insurance fund that covers most commercial bank
deposits, are statutorily required to be recapitalized to a ratio of 1.25%
of insured reserve deposits.
On September 30, 1996 a law was passed to recapitalize the SAIF with a
one-time assessment of SAIF-insured institutions of $.657 for every $100 of
assessable deposits. The assessment to the Bank was $374,511. This
assessment was accrued at September 30, 1996 and was paid in November,
1996.
NOTE 20 - EARNINGS PER SHARE
Primary earnings per share amount for the year ended September 30, 1997 is
based upon the average outstanding shares of the Company reduced by the
unreleased shares of the ESOP (see ESOP note).
The average number of shares outstanding was 1,448,857 and 1,454,067 for
the years ended September 30, 1997 and 1996, respectively. Also, since the
Company converted to a stock savings bank as of June 27, 1995, the earnings
per share calculation was pro rated based upon the number of days the stock
was outstanding (95), compared to the full year. There was no material
dilutive effect to the Company's stock compensation plans.
43
<PAGE> 46
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 21 - DIVIDENDS
During the years ended September 30, 1997, 1996 and 1995, the Company
declared dividends of $.30, $4.25 and $.0625 per common share,
respectively. Of the 1996 amount, $4 per share was paid from funds retained
by the Company in the conversion and was deemed by management to constitute
a return of excess capital. Accordingly, the Company charged the return of
capital dividend to additional paid-in capital. Management has obtained a
Private Letter Ruling from the Internal Revenue Service which states that
the Company's dividend payments in excess of accumulated earnings and
profits are considered a tax-free return of capital for federal income tax
purposes. As a result, management believes that approximately $4 of the
1996 fiscal year dividends constitute a tax-free return of capital.
NOTE 22 - 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 Company in
estimating its fair value disclosures for financial instruments at
September 30, 1997:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in the
consolidated statement of financial condition for cash and cash
equivalents are deemed to approximate fair value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES: For investment and
mortgage-backed securities, fair value is deemed to equal the quoted
market price.
LOANS RECEIVABLE: The loan portfolio has been segregated into
categories with similar characteristics, such as one- to four-family
residential, multi-family residential and nonresidential real estate.
These loan categories were further delineated into fixed-rate and
adjustable-rate loans. The fair values for the resultant loan
categories were computed via discounted 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 statement of financial condition is deemed to approximate
fair value.
44
<PAGE> 47
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
DEPOSITS: The fair value of NOW accounts, passbook accounts, money
market demand and escrow deposits is deemed to approximate the amount
payable on demand. Fair values of fixed-rate certificates of deposit
have been estimated using a discounted cash flow calculation using the
interest rates currently offered for similar deposits.
BORROWED FUNDS: The fair value of these advances is estimated using
the rates currently offered for similar advances of similar remaining
maturities.
CASH SURRENDER VALUE OF LIFE INSURANCE: The carrying amount
presented in the consolidated financial statements is deemed to
approximate fair value.
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Company's financial instruments at September 30, 1997, are as
follows:
<TABLE>
<CAPTION>
Carrying Fair
Value Value
----- -----
(In Thousands)
<S> <C> <C>
Financial Assets
Cash and Cash Equivalents $ 2,186 $ 2,186
Investment Securities 2,990 2,984
Mortgage-Backed Securities 798 798
Loans Receivable 88,452 91,350
Stock in Federal Home Loan Bank 785 785
Cash Surrender Value of Life Insurance 1,114 1,114
------- -------
$96,325 $99,217
======= =======
Financial Liabilities
Deposits $71,858 $71,943
Advances from FHLB and Other
Borrowings 8,846 8,818
Advances from Borrowers
for Taxes and Insurance 229 229
------- -------
$80,933 $80,990
======= =======
</TABLE>
NOTE 23 - REORGANIZATION AND CHANGE OF CORPORATE FORM
In June, 1995, the Board of Directors of Fort Thomas Federal Savings and
Loan Association (the "Association") adopted a Plan of Reorganization (the
"Plan" or the "Reorganization") pursuant to which the Association proposed
to reorganize into a stock company, Fort Thomas Financial Corporation (the
"Company"). As part of the Plan, the Company organized Fort Thomas Savings
Bank, FSB (the" Bank"), a federally-chartered savings bank, and transferred
substantially all of its assets and liabilities to the Bank in exchange for
all of the capital stock of the Bank to be outstanding upon consummation of
the Reorganization. Concurrent with the Reorganization, the
45
<PAGE> 48
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 23 - REORGANIZATION AND CHANGE OF CORPORATE FORM (CONTINUED)
Company undertook an initial offering of its common stock. The Company's
stock charter authorized 4,000,000 shares of $.01 par value common stock.
The costs of issuing the common stock were deducted from the sale proceeds.
The net proceeds from the offering were $13,738,000.
Under Federal regulations, the Bank may not declare or pay a cash dividend
on or repurchase any of its stock if the effect thereof would cause the
Bank's regulatory capital to be reduced below the amount required for the
regulatory capital requirements of the OTS. In addition, banks that before
and after proposed dividend distributions meet or exceed their fully
phased-in capital requirements, may make capital distributions, with prior
notice to the OTS, during any calendar year up to 100% of net income for
the year plus 50% of the amounts in excess of their fully phased-in capital
requirements as of the beginning of the calendar year. However, the OTS may
impose greater restrictions if an Institution is deemed to be in need of
more than normal supervision. The Bank currently exceeds its fully
phased-in capital requirement and has not been notified of a need for more
than normal supervision.
The Reorganization was accounted for as a change in corporate form with the
historic basis of Fort Thomas Federal Savings and Loan Association's
assets, liabilities and equity unchanged as a result. Subsequent to the
Reorganization, the existing rights of the Association's depositors upon
liquidation as of the effective date were transferred to the Company and
records will be maintained to ensure such rights receive statutory priority
in the future.
NOTE 24 - CONDENSED FINANCIAL STATEMENTS OF FORT THOMAS FINANCIAL
CORPORATION
The following condensed financial statements summarize the financial
position of Fort Thomas Financial Corporation as of September 30, 1997 and
1996, and the results of operations and cash flows for the years ended
September 30, 1997, 1996 and 1995.
46
<PAGE> 49
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 24 - CONDENSED FINANCIAL STATEMENTS OF FORT THOMAS FINANCIAL
CORPORATION (CONTINUED)
<TABLE>
<CAPTION>
FORT THOMAS FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
September 30,
----------------------------
1997 1996
---- ----
ASSETS
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 725 $ 879
Investment Securities
Available for Sale - at Market Value - 494
Mortgage-Backed Securities Available for Sale
Available for Sale - at Market Value 799 816
Investment in Fort Thomas Savings Bank 10,428 9,227
Loan Receivable - ESOP 658 847
Other Assets 194 90
------- -------
TOTAL ASSETS $12,804 $12,353
======= =======
</TABLE>
FORT THOMAS FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30,
----------------------------
1997 1996
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
LIABILITIES
Borrowed Funds $ -- $ 2,300
Other Liabilities 424 366
-------- --------
TOTAL LIABILITIES 424 2,666
-------- --------
STOCKHOLDERS' EQUITY
Common Stock and Additional Paid-In Capital 11,226 8,610
Retained Earnings 1,154 1,084
Unrealized Loss on Investment Securities -- (7)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 12,380 9,687
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,804 $ 12,353
======== ========
</TABLE>
47
<PAGE> 50
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 24 - CONDENSED FINANCIAL STATEMENTS OF FORT THOMAS FINANCIAL
CORPORATION (CONTINUED)
<TABLE>
<CAPTION>
FORT THOMAS FINANCIAL CORPORATION
STATEMENTS OF INCOME
(IN THOUSANDS)
Years Ended September 30,
-----------------------------------------
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
REVENUE
Interest Income $ 190 $ 407 $ 112
Equity in Earnings of Fort Thomas
Savings Bank 1,183 825 902
------ ------ ------
Total Revenue 1,373 1,232 1,014
GENERAL AND ADMINISTRATIVE EXPENSES 133 823 20
------ ------ ------
Net Income Before Income Taxes 1,240 409 994
Federal Income Tax (Benefit) Expense (101) 108 33
------ ------ ------
Net Income Before Dividend Income 1,139 517 961
Dividend Income From Fort Thomas
Savings Bank 3,000 -- --
------ ------ ------
NET INCOME $4,139 $ 517 $ 961
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
FORT THOMAS FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended September 30,
-------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Income Before Dividend Income $ 1,139 $ 517 $ 961
Reconciliation of Net Income with
Cash Flows from Operations:
Undistributed Earnings of Consolidated
Subsidiary (1,183) (825) (902)
Deferred Federal Income Tax (89) (84) --
Amortization of Stock Compensation Plans 145 94 --
Shares Released to ESOP 128 563 10
Changes In
Accrued Interest Receivable (15) 23 (28)
Accrued Interest Payable (22) 22 --
Accrued Federal Income Tax Liability (97) (108) 34
Other Liabilities 91 354 16
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 97 556 91
------- ------- -------
</TABLE>
48
<PAGE> 51
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
================================================================================
NOTE 24 - CONDENSED FINANCIAL STATEMENTS OF FORT THOMAS FINANCIAL
CORPORATION (CONTINUED)
<TABLE>
<CAPTION>
CASH FLOWS FROM INVESTING ACTIVITIES
<S> <C> <C> <C>
Proceeds from Repayment of Loan to ESOP 127 40 --
Purchase of Investment Securities -- -- (1,997)
Investment in Fort Thomas Savings Bank -- -- (7,500)
Purchase of Mortgage-Backed Securities -- -- (972)
Maturity of Investment Securities 494 1,503 --
Principal Received on Mortgage-Backed Securities (17) 156 --
-------- -------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 604 1,699 (10,469)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Proceeds of Sale of Stock -- -- 13,738
Dividends Paid (452) (6,163) --
Dividends Received 3,000 -- --
Common Stock Shares Purchased for MRP Trust -- (873) --
Treasury Stock Purchased (1,103) -- --
Repayment of Borrowings (2,300) -- --
Proceeds from Borrowings -- 2,300 --
-------- -------- --------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (855) (4,736) 13,738
-------- -------- --------
CHANGES IN CASH AND CASH EQUIVALENTS (154) (2,481) 3,360
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 879 3,360 --
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 725 $ 879 $ 3,360
======== ======== ========
</TABLE>
NOTE 25 - STOCK OPTION PLAN
The Company applies APB Opinion No. 25 in accounting for its stock option
plan. Accordingly, no compensation cost has been recognized for the plan.
Had compensation cost for this plan been determined based on the fair value
at the grant date for awards using SFAS No. 123, the Company's net income
and earnings per share (EPS) for the year ended September 30, 1996 for
would have been reduced to the proforma amounts indicated below. This SFAS
would have no effect on the years ending September 30, 1997 or 1995:
<TABLE>
<CAPTION>
Net Income Eps
---------- ---
<S> <C> <C>
As Reported - 1996 $517,000 $ .35
Proforma - 1996 $452,000 $ .31
</TABLE>
Assumptions used in determined fair value of the stock options include a
dividend yield of 3%, expected volatility of 20%, a risk free interest rate
of 6% and expected lives of ten years. No stock has been exercised or
forfeited. The fair value of options issued in 1996 was $ .92.
49
<PAGE> 52
STOCK INFORMATION
- -------------------------------------------------------------------------------=
The Conversion was completed effective June 27, 1995. In connection with
the Conversion, the Company issued 1,573,775 shares of common stock to certain
depositors and borrowers of the Savings Bank, an employee benefit plan of the
Company and certain other depositors and borrowers.
At December 23, 1997, the Company had 1,478,466 shares of common stock
outstanding which were held by approximately 680 stockholders. Such figure does
not reflect the number of beneficial owners of common stock.
The Company's common stock is quoted on the Nasdaq SmallCap Market under
the symbol "FTSB." The high and low bid quotations for the common stock for each
of the quarters in fiscal 1996 and 1997 as well as cash dividends declared
during these periods were:
<TABLE>
<CAPTION>
Quotations Dividends
---------------------------------------- ---------------------------------------------
High Bid Low Bid Amount Payment Date
---------------- ------------------- ---------------- ------------------------
<S> <C> <C> <C> <C>
December 31, 1995 $12.25 $11.25 $ .0625 January 16, 1996
March 31, 1996 14.50 11.75 .0625 April 16, 1996
June 30, 1996 17.75 13.00 .0625 July 15, 1996
September 30, 1996 18.00 13.25 4.00 August 22, 1996
December 31, 1996 15.00 13.13 .0625 January 16, 1997
March 31, 1997 14.31 10.75 .0625 April 16, 1997
June 30, 1997 11.63 9.25 .0625 July 15, 1997
September 30, 1997 13.13 10.38 .1125 October 14, 1997
</TABLE>
The bid prices of the Company's common stock reflect inter-dealer
quotations and do not include markups, markdowns or commissions and may not
necessarily represent actual transactions.
50
<PAGE> 53
FORT THOMAS FINANCIAL CORPORATION
FORT THOMAS SAVINGS BANK, F.S.B.
- --------------------------------------------------------------------------------
DIRECTORS OFFICERS
LARRY N. HATFIELD LARRY N. HATFIELD
Director, President and Director, President and
Chief Executive Officer Chief Executive Officer
ROBERT L. GRIMM J. MICHAEL LONNEMANN
Chairman of the Board Vice President and Secretary
HAROLD A. LUERSEN
Managing Partner
Luersen & Luersen
Fort Thomas, Kentucky
DON J. BECKMEYER
President
Beckmeyer Insurance Agency, Inc.
Newport, Kentucky
J. STEVEN MCLANE
President
Disney-McLane, Inc.
Cincinnati, Ohio
BANKING LOCATIONS
- --------------------------------------------------------------------------------
MAIN OFFICE:
25 North Fort Thomas Avenue
Fort Thomas, Kentucky
BRANCH OFFICE:
7612 Alexandria Pike
Alexandria, Kentucky
51
<PAGE> 54
STOCKHOLDER INFORMATION
- --------------------------------------------------------------------------------
Fort Thomas Financial Corporation is a unitary savings and loan holding
company conducting business through its wholly-owned subsidiary, Fort Thomas
Savings Bank, F.S.B. The Savings Bank is a federally-chartered, SAIF-insured
savings institution operating through its two full-service offices. The
Company's headquarters is located at 25 North Fort Thomas Avenue, Fort Thomas,
Kentucky 41075.
TRANSFER AGENT/REGISTRAR:
The Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45263
INDEPENDENT AUDITORS:
VonLehman & Company, Inc.
250 Grandview Drive
Fort Mitchell, Kentucky 41017
SPECIAL LEGAL COUNSEL:
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W.
Washington, D.C. 20005
STOCKHOLDER REQUESTS:
Requests for annual reports, quarterly reports and related stockholder
literature should be directed to Secretary, Fort Thomas Financial Corporation,
25 North Fort Thomas Avenue, Fort Thomas, Kentucky 41075.
Stockholders needing assistance with stock records, transfers or lost
certificates, please contact the Company's transfer agent, The Fifth Third Bank.
52
