FORT THOMAS FINANCIAL CORPORATION
1996 ANNUAL REPORT
<PAGE>
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 .................. 18
Consolidated Financial Statements.................................... 19
Stock Information ................................................... 51
Directors and Officers............................................... 52
Banking Locations.................................................... 52
Stockholder Information.............................................. 53
<PAGE>
Dear Stockholders:
We are pleased to present Fort Thomas Financial Corporation's second
Annual Report to Stockholders for the fiscal year ended September 30, 1996,
which was our first full year as a stock company.
One of the highlights of fiscal 1996 was the distribution to
shareholders of $4.00 per share as a tax free return of capital. It has now been
determined that $3.86 will be treated as tax free and will result in an
adjustment to shareholder's basis of the stock. We feel that this action will
serve to enhance long-term shareholder value.
The Company also announced in October 1996 that the Board of Directors
authorized the repurchase of up to 5% of the number of outstanding shares from
time to time on the open market. It is anticipated that any repurchased shares
will be retained as treasury stock and used for general corporate purposes.
Net income for fiscal 1996 amounted to $517,000, as compared to $961,000
for the year ended September 30, 1995. This decline in net income is primarily
attributable to the one-time assessment to recapitalize the Savings Association
Insurance Fund. The one-time assessment amounted to a pre-tax charge of $375,000
for the Bank. While this assessment reduced earnings for fiscal 1996, the effect
on future results should be positive in the nature of lower deposit insurance
costs. We are also pleased to report that net interest income for fiscal 1996
increased to $3.8 million from $3.1 million in fiscal 1995, an increase of
22.8%.
As we look ahead, the Bank and the industry will no doubt face
significant change. Among those anticipated is a change in our charter as well
as a consolidation of regulators. We do not anticipate that these changes will
have a significant impact on this Company, either pro or con.
We look forward to 1997 and again want to thank you for the trust and
confidence you have shown in Fort Thomas Financial Corporation by your
investment.
Sincerely,
/s/ Larry N. Hatfield
Larry N. Hatfield
President
<PAGE>
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 Conversion resulted in net proceeds of
approximately $15.2 million.
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>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
At or for the Year Ended September 30,
-----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- ------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Total assets $88,013 $86,214 $70,577 $69,043 $65,191
Loans receivable, net 77,987 71,156 64,585 61,586 58,449
Investment and mortgage-backed
securities 4,813 5,973 2,606 4,584 2,291
Deposits 63,731 59,998 55,127 56,041 57,837
Borrowed funds 6,754 3,651 7,587 6,000 1,500
Stockholders' equity 15,921 21,790 7,178 6,298 5,291
Selected Operating Data:
Interest income 7,285 6,251 5,502 5,632 5,690
Interest expense 3,517 3,182 2,587 2,737 3,436
------ ------ ----- ----- -----
Net interest income 3,768 3,069 2,915 2,895 2,254
Provision for loan losses 125 25 135 30 34
------ ------ ----- ------ ------
Net interest income after provision
for loan losses 3,643 3,044 2,780 2,865 2,220
Other income 177 161 177 178 184
Other expenses 3,028 1,784 1,620 1,552 1,266
------ ------ ----- ------ ------
Income before income taxes 792 1,421 1,337 1,491 1,138
Income tax 275 460 456 483 378
------ ------ ----- ------- -------
Net income $ 517 $ 961 $ 881 $ 1,008 $ 760
====== ====== ===== ======= =======
Selected Operating Ratios(1):
Average interest rate spread(2) 3.13% 3.49% 3.97% 4.00% 3.41%
Net interest margin(2) 4.39 4.11 4.33 4.39 3.76
Ratio of average interest-earning assets
to average interest-bearing liabilities 130.80 114.53 109.38 109.23 107.52
Return on average assets .59 1.25 1.28 1.53 1.23
Return on average equity 2.54 9.55 14.29 19.07 16.84
Asset Quality Ratios(3):
Nonperforming assets as a percent of
total assets(4) 1.34% 1.44% 2.01% 2.08% 2.07%
Allowance for loan losses as a
percent of total loans .45 .32 0.35 0.18 0.13
Allowance for loan losses as a
percent of nonperforming loans 31.02 19.20 16.43 8.00 6.31
Capital Ratios(3):
Tangible capital ratio 19.04% 19.38% 10.19% 9.21% 8.12%
Core capital ratio 19.04% 19.38% 10.19% 9.21% 8.11%
Risk-based capital ratio 22.90% 31.64% 17.71% 16.13% 13.41%
</TABLE>
- ------------------------------------
(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.
3
<PAGE>
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 1996, 1995 and 1994 amounted to $517,000, $961,000
and $881,000, respectively. Net income during such periods primarily resulted
from net interest income, which amounted to $3.8 million, $3.1 million and $2.9
million, respectively, for fiscal 1996, 1995 and 1994. Net interest income is
determined by the interest rate spread and the amount of interest-earning assets
and interest-bearing liabilities. During fiscal 1996, 1995 and 1994, the Savings
Bank's average interest rate spread was 3.13%, 3.49% and 3.97%, respectively. In
addition, at September 30, 1996, 1995 and 1994, the ratio of interest-earning
assets to interest-bearing liabilities amounted to 130.80%, 114.53% and 109.38%,
respectively. The decrease in the average interest rate spread in fiscal 1996
and 1995 was primarily due to an increase in the average interest rate paid on
deposits as depositors shifted funds from lower cost passbook accounts to higher
rate certificate of deposit accounts.
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
4
<PAGE>
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, 1996, the Savings Bank estimates that the ratio of its one-year gap to total
assets was approximately a positive 9.6% and its ratio of interest-earning
assets to interest-bearing liabilities maturing or repricing in one year was
118.8%.
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, 1996, $43.6 million or
69.7% 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.
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. Under the rule, an institution with
a greater than "normal" level of interest rate risk will be subject to a
deduction of its interest rate component from total capital for purposes of
calculating the risk-based capital requirement. An institution with a greater
than "normal" interest rate risk is defined as an institution that would suffer
a loss of net portfolio value ("NPV") exceeding 2.0% of the estimated market
value of its assets in the event of a 200 basis point increase or decrease in
interest rates. NPV is the difference between incoming and outgoing discounted
cash flows from assets, liabilities, and off-balance sheet contracts. A
resulting change in NPV of more than 2% of the estimated market value of an
institution's assets will require the institution to deduct from its capital 50%
of that excess change. The rule
5
<PAGE>
provides that the OTS will calculate the interest rate risk component quarterly
for each institution. The OTS has recently indicated that no institution will be
required to deduct capital for interest rate risk until further notice. Small,
highly capitalized institutions, such as the Savings Bank, which have less than
$300 million of assets and a risk-based capital ratio in excess of 12% are not
generally subject to the interest rate risk component. Although the Savings Bank
is not 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, 1996, there would have been
a decrease in the Savings Bank's NPV of approximately 6.0% of the present value
of its assets, assuming a 200 basis point increase in interest rates.
The following table presents the Savings Bank's NPV and the ratio of NPV
to the present value ("PV") of assets as of September 30, 1996, as calculated by
the OTS, based on information provided to the OTS by the Savings Bank.
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)
+400 $16,628 20.05% $(3,619) (18)%
+300 17,888 21.09 (2,358) (12)
+200 18,988 21.93 (1,259) (6)
+100 19,811 22.49 (436) (2)
-- 20,247 22.68 -- --
-100 20,293 22.52 46 --
-200 20,106 22.15 (141) (1)
-300 20,139 21.96 (108) (1)
-400 20,346 21.91 99 --
6
<PAGE>
Changes in Financial Condition
General. The Company's assets increased from $86.2 million at September
30, 1995 to $88.0 million at September 30, 1996, an increase of $1.8 million or
2.1%. Loans receivable, net increased $6.8 million or 9.6% from $71.2 million at
September 30,1995 to $78.0 million at September 30, 1996. Such increase, which
was primarily funded by a decrease in cash and cash equivalents, resulted
primarily from an increase in single- and multi-family loan originations.
Total liabilities increased $7.7 million or 11.9% between September 30,
1995 and September 30, 1996 due primarily to an increase in deposits of $3.7
million or 6.2% and an increase in borrowed funds of $3.1 million or 85.0%.
Stockholders' equity decreased $5.9 million or 26.9% from $21.8 million,
or 25.3% of total assets, at September 30, 1995 to $15.9 million, or 18.1% of
total assets, at September 30, 1996. Such decrease was primarily due to the
$4.00 special distribution paid in fiscal 1996.
7
<PAGE>
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, -------------------------------------------------------------------------
1996 1996 1995
----------------- --------------------------------- -----------------------------------
Average Average Average Average
Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate(3)
----------------- -------- -------- ---------- ---------- -------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Total loans, net(1) 8.71% $73,875 $ 6,576 8.90% $67,248 $5,800 8.62%
Mortgage-backed securities 6.00 910 54 5.94 130 11 8.46
Investment securities 6.13 5,293 342 6.46 3,320 158 4.76
Other interest-earning assets 6.00 5,829 313 5.37 3,989 282 7.07
---- ------ ------ ------ ------ ----- ------
Total interest-earning assets 8.46 85,907 7,285 8.48 74,687 6,251 8.37
---- ------ ------ ------ ------ ----- ------
Noninterest-earning assets 1,781 2,095
------ ------
Total assets 87,689 76,782
------ ------
Interest-bearing liabilities:
Savings deposits 2.65 13,391 349 2.61 15,356 450 2.93
Other time deposits 5.98 48,096 2,939 6.11 42,205 2,293 5.43
Borrowed funds 6.44 4,191 229 5.46 7,651 439 5.74
---- ------ ------ ------ ------ ----- ------
Total interest-bearing liabilities 5.36 65,678 3,517 5.35 65,212 3,182 4.88
---- ------ ------ ------ ------ ----- ------
Noninterest-bearing liabilities 1,642 2,095
------ ------
Total liabilities 67,320 67,307
------ ------
Stockholders' equity 20,369 10,063
------ ------
Total liabilities and equity 87,689 76,782
------ ------
Net interest-earning assets $20,229 $ 9,475
====== ======
Net interest income/interest rate spread 3.10% $ 3,766 3.13% $3,069 3.49%
==== ====== ====== ===== ======
Net interest margin(2) 4.07 4.39% 4.11%
==== ====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 130.80% 114.53%
======= ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
1994
-----------------------------------------
Average Average
Balance Interest Yield/Rate
------- ---------- -------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Total loans, net(1) $61,252 $5,247 8.57%
Mortgage-backed securities -- -- --
Investment securities 4,131 146 3.53
Other interest-earning assets 1,868 109 5.84
------ ------ ----
Total interest-earning assets 67,251 5,502 8.16
------ ----- ----
Noninterest-earning assets 1,690
------
Total assets 68,941
------
Interest-bearing liabilities:
Savings deposits 20,999 585 2.79
Other time deposits 34,333 1,637 4.77
Borrowed funds 6,150 365 5.93
------ ----- ----
Total interest-bearing liabilities 61,482 2,587 4.21
------ ----- ----
Noninterest-bearing liabilities 1,302
------
Total liabilities 62,784
------
Stockholders' equity 6,157
------
Total liabilities and equity 68,941
------
Net interest-earning assets $ 5,769
======
Net interest income/interest rate spread $2,915 3.97%
===== ====
Net interest margin(2) 4.33%
====
Ratio of average interest-earning assets
to average interest-bearing liabilities 109.38%
======
</TABLE>
- ------------------
(1) Total loans, net include nonaccruing loans.
(2) Net interest margin is net interest income divided by interest-earning
assets.
8
<PAGE>
Rate/Volume Analysis
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected the 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,
-----------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
------------------------------------------------- --------------------------------------
Increase Increase
(Decrease) Due to (Decrease) Due To
------------------------------ --------------------------------
Total Increase
Rate Volume (Decrease) Rate Volume
------------ --------------- -------------- -------------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earnings assets:
Total loans receivable, net $ 311 $ 465 $ 776 $165 $ 388
Mortgage-backed securities (1) 44 43 0 11
Investment securities 69 115 184 (6) (13)
Other interest-earning assets (34) 65 31 67 136
--- ---- ----- --- ---
Total interest-earning assets 345 689 1,034 226 522
--- ---- ----- --- ---
Interest-bearing liabilities:
Savings deposits (48) (54) (102) 22 (157)
Other time deposits 306 341 647 181 474
Borrowed funds (20) (190) (210) 4 70
--- ---- ----- --- ---
Total interest-bearing liabilities 238 97 335 207 387
--- ---- ----- --- ---
Increase (decrease) in net interest income $ 107 $ 529 $ 699 $ 19 $ 135
=== ==== ===== === ===
Year Ended September 30,
------------------------
1995 vs. 1994
------------------------
Total Increase
(Decrease)
--------------
Interest-earnings assets:
Total loans receivable, net $553
Mortgage-backed securities 11
Investment securities (19)
Other interest-earning assets 203
---
Total interest-earning assets 748
---
Interest-bearing liabilities:
Savings deposits (135)
Other time deposits 655
Borrowed funds 74
---
Total interest-bearing liabilities 594
---
Increase (decrease) in net interest income $154
===
</TABLE>
9
<PAGE>
Comparison of Results of Operations for the Year 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 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
10
<PAGE>
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.
Provisions 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.
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 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 any 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. 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.
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 Employee Stock
Ownership Plan ("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
Savings Association Insurance Fund ("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.
11
<PAGE>
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 53.2% and 32.4% for the years ended September 30, 1996 and 1995,
respectively.
Comparison of Results of Operations for the Year Ended September 30, 1995
and 1994
General. The Company's net income amounted to $961,000 for fiscal 1995
as compared to $881,000 for fiscal 1994. The increase of approximately $80,000
or 9.1% was due primarily to increases in interest income earned on loans
receivable, net and other interest-earning assets.
Net Interest Income. The Company's net interest income increased
$154,000 or 5.3% during the year ended September 30, 1995 as compared to the
year ended September 30, 1994. The increase in net interest income was the
result of a $748,000 or 13.6% increase in total interest income, due primarily
to an increase in the average balance of interest-earning assets from $67.3
million in fiscal 1994 to $74.7 million in fiscal 1995, which was partially
offset by an increase of $594,000 or 23.0% 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 3.97% to 3.49%
during the year ended September 30, 1995 as compared to the year ended September
30, 1994, and the Company's net interest margin decreased from 4.33% to 4.11%
during the same respective periods. The Savings Bank currently originates
one-to-four family residential mortgage loans which typically provide for an
interest rate which adjusts every year in accordance with a designated index
(the weekly average yield on U.S. Treasury securities adjusted to a constant
comparable maturity of one year). Accordingly, the yields on the Savings Bank's
ARMs in 1995 are based on interest rates in 1994. The effect of the rise in
interest rates in 1995 will not impact the Savings Bank's yield on its ARMs
until 1996. However, such decreases in the interest rate spread and net interest
margin were more than offset in fiscal 1995 by the increase in the ratio of
average interest-earning assets to average interest-bearing liabilities from
109.38% for fiscal 1994 to 114.53% for fiscal 1995.
Interest Income. The increase in interest income was primarily
attributable to an increase in interest income on loans of $553,000 or 10.5%
during the year ended September 30, 1995 as compared to the year ended September
30, 1994. The increase in interest income on loans was largely due to an
increase in the average balance of $6.0 million or 9.8% to $67.2 million in
fiscal 1995 as compared to fiscal 1994 as well as a 15 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 other interest-earning assets of $173,000 or 158.7% to $282,000 during fiscal
1995 as compared with fiscal 1994. Such increase was due to an increase in the
average balance of other interest-earning assets of $2.1 million or 113.5% for
the year ended September 30, 1995 as compared to the year ended September 30,
1994 as well as a 123 basis point increase in the weighted average yield earned
on such assets during the same respective periods. The increase in the average
12
<PAGE>
balance of loans and other interest-earning assets 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.
Interest Expense. Interest expense on deposits, the largest component of
the Savings Bank's interest-bearing liabilities, increased $520,000 or 23.4% to
$2.7 million during the year ended September 30, 1995 as compared to the year
ended September 30, 1994. The increase in interest expense on deposits was due
to both an increase of 75 basis points in the weighted average rate paid on
deposits to 4.77% for fiscal 1995 from 4.02% for fiscal 1994 due to upward
pricing of the Savings Bank's deposits, particularly certificates of deposits,
as well as an increase of $2.2 million in the average balance of deposits during
the same respective periods. During fiscal 1995, 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 increased $74,000 or 20.3% during the
year ended September 30, 1995 as compared to the year ended September 30, 1994
due primarily to an increase in the average balance of FHLB advances outstanding
which was slightly offset by a decrease of 19 basis points paid on such
liabilities.
Provisions for Loan Losses. The provision for loan losses decreased by
$110,000 from $135,000 for the year ended September 30, 1994 to $25,000 for the
year ended September 30, 1995. At September 1995, the Savings Bank's allowance
for loan losses to total nonperforming loans and total loans amounted to 19.20%
and .32%, respectively, compared to 16.43% and .35%, at September 30, 1994.
Other Income. Total other income decreased by $16,000 or 9.0% from
$177,000 for the year ended September 30, 1994 to $161,000 for the year ended
September 30, 1995. This decrease was primarily attributable to the decrease in
fees and other charges of $11,000 or 14.9% due to decreased loan origination
activity relative to fiscal 1994 levels.
General and Administrative Expenses. General and administrative expenses
increased $165,000 or 10.2% to $1.8 million during the year ended September 30,
1995 compared to fiscal 1994 primarily as a result of a $76,000 increase in
compensation expenses which is attributable to normal salary and merit
increases.
Income Taxes. Total income taxes amounted to $460,000 and $456,000 for
the years ended September 30, 1995 and 1994, respectively. The effective tax
rate was 32.4% and 34.1% for the years ended September 30, 1995 and 1994,
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
13
<PAGE>
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, 1996, the Savings Bank had $4.5 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, 1996, the total approved loan commitments outstanding, excluding
construction loans, amounted to $2.2 million. At the same date, the unadvanced
portion of construction loans approximated $1.8 million. Certificates of deposit
scheduled to mature in one year or less at September 30, 1996 totalled $28.8
million. Investment securities scheduled to mature in one year or less at
September 30, 1996 totalled $2.0 million. 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 1996 was 7.78% and 5.41%, 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
14
<PAGE>
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 following table sets forth Savings Bank's compliance with each of
the above-described regulatory capital requirements at September 30, 1996.
Tangible Core Risk-Based
Capital Capital Capital
--------- ------- ---------
(Dollars in Thousands)
Regulatory capital $16,308 $16,308 $16,639
Minimum required
regulatory capital 1,285 2,569 4,451
------ ------ ------
Excess regulatory capital $15,023 $13,739 $12,188
====== ====== ======
Regulatory capital as a
percentage of assets(4) 19.04% 19.04% 22.90%
Minimum capital required
as a percentage 1.50 3.00 8.00
------ ------ ------
Excess regulatory capital
as a percentage in
excess of requirement 17.54% 16.04% 14.90%
====== ====== ======
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.
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.
15
<PAGE>
Recent Accounting Pronouncements
In May 1993, the Financial Accounting Statement Board ("FASB") adopted
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," affecting the accounting for
investments in all debt and equity securities, which are to be classified in one
of three categories for fiscal years beginning after December 15, 1993.
Securities that an institution has the positive intent and ability to hold to
maturity are to be reported at amortized cost. Securities that are bought and
held principally for the purpose of selling them in the near term are to be
classified as trading securities and reported at fair value, with unrealized
gains and losses included in earnings. Other securities are to be classified as
securities available for sale and reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders' equity. The Company adopted SFAS No. 115 effective October 1,
1994. At September 30, 1996, all of the Company's investment and mortgage-backed
securities were classified as "held to maturity."
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based employee compensation plans. This Statement encourages
all entities to adopt a new method of accounting to measure compensation cost of
all employee stock compensation plans based on the estimated fair value of the
award at the date it is granted. Companies are, however, allowed to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting are required to disclose in a footnote to the financial statements
proforma net income and, if presented, earnings per share, as if this Statement
had been adopted. The accounting requirements of this Statement are effective
for transactions entered into in fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards granted
in their first fiscal year beginning after December 15, 1994. Management of the
Company has not completed an analysis of the potential effects of this Statement
on its financial condition or results of operations.
In November 1993, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position ("SOP") 93-6, which will
apply to the Company for its fiscal year beginning October 1, 1995. SOP 93-6
will, among other things, change the measure of compensation expense recorded by
employers from the cost of ESOP shares to the fair value of ESOP shares. Under
SOP 93-6, the Company will recognize compensation cost equal to the fair value
of the ESOP shares during the periods in which they become committed to be
released. To the extent that fair value of the Company's ESOP shares differ from
the cost of such shares, this differential will be charged or credited to
equity.
16
<PAGE>
Recent Legislation
The deposits of the Savings Bank are currently insured by the SAIF.
Both the SAIF and the Bank Insurance Fund ("BIF"), the federal deposit insurance
fund that covers commercial bank deposits, are required by law to attain and
thereafter maintain a reserve ration of 1.25% of insured deposits. The BIF had
achieved a fully funded status in contrast to the SAIF and, therefore, the
Federal Deposit Insurance Corporation ("FDIC") substantially reduced the average
deposit insurance premium paid by commercial banks to a level significantly
below the average premium paid by savings institutions.
The underfunded status of the SAIF resulted in the introduction of
federal legislation intended to, among other things, recapitalize the SAIF and
address the resulting premium disparity. On September 30, 1996, The Omnibus
Appropriations Act was signed into law. The legislation authorized a one-time
charge on SAIF insured deposits at a rate of 65.7 basis points per $100.00 of
March 31, 1995 deposits. As a result, the Savings Bank's assessment amounted to
$375,000 ($248,000 net of tax). Additional provisions of the Act include new BIF
and SAIF premiums and the merger of BIF and SAIF. The new BIF and SAIF premiums
will include a premium for repayment of the Financing Corporation ("FICO") bonds
plus any regular insurance assessment, currently nothing for the lowest risk
category institutions. Until full pro-rata FICO sharing is in effect, the FICO
premiums for BIF and SAIF will be 1.3 and 6.4 basis points, respectively,
beginning January 1, 1997. Full pro-rata FICO sharing is to begin no later than
January 1, 2000. The BIF and SAIF are to be merged on January 1, 1999, provided
the bank and savings association charters are merged by that date. While the
one-time special assessment has a significant impact on the current year
earnings, the resulting lower annual premiums will benefit future earnings.
17
<PAGE>
[Letterhead of Von Lehman and Company]
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, 1996 and
1995, and the related consolidated statements of income, stockholders' equity,
and cash flows for the years ended September 30, 1996, 1995 and 1994. 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, 1996 and 1995, and the
consolidated results of its operations and its cash flows for the years ended
September 30, 1996, 1995, and 1994 in conformity with generally accepted
accounting principles.
/s/ Von Lehman & Company
Fort Mitchell, Kentucky
November 15, 1996
18
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1996 and 1995
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
ASSETS
Assets 1996 1995
------------- --------------
<S> <C> <C>
Cash and Cash Equivalents $ 1,785 $ 6,032
Investment Securities
Held to Maturity - at Amortized Cost (Market Value of $3,486 and
$5,000 for 1996 and 1995, Respectively) 3,503 5,001
Available for Sale - at Market 494 -
Mortgage-Backed Securities
Held to Maturity - at Amortized Cost (Market Value of $971 in 1995) - 972
Available for Sale - at Market 816 -
Loans Receivable, Net 77,987 71,156
Office Properties and Equipment - at
Depreciated Cost 643 718
Federal Home Loan Bank Stock 700 651
Cash Surrender Value of Life Insurance 1,068 1,012
Accrued Interest Receivable 642 575
Prepaid and Other Assets 118 97
Deferred Federal Income Tax Asset 257 -
------------- -------------
Total Assets $ 88,013 $ 86,214
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 63,731 $ 59,998
Borrowed Funds 6,754 3,651
Advances from Borrowers for
Taxes and Insurance 188 183
Deferred Compensation 376 263
Accrued Interest Payable 60 30
Accrued Federal Income Tax Liability 85 33
Deferred Federal Income Tax Liability - 1
Other Liabilities 887 254
Deferred Income 11 11
------------- -------------
Total Liabilities 72,092 64,424
------------- -------------
Stockholders' Equity
Common Stock of $.01 Par Value; 4,000,000 Shares Authorized; 1,573,775
Shares Issued; 1,489,096 and 1,449,971 Shares Outstanding as of
1996 and 1995, Respectively 16 16
Additional Paid-In Capital 9,387 14,981
Shares Acquired by Employee Stock Ownership Plan (847) (1,249)
Shares Acquired by MRP Trust (793) -
Retained Earnings - Substantially Restricted 8,165 8,042
Unrealized Loss on Available for Sale Securities,
Net of Related Tax Effects (7) -
------------- -------------
Total Stockholders' Equity 15,921 21,790
------------- -------------
Total Liabilities and Stockholders' Equity $ 88,013 $ 86,214
============= =============
See auditors' report and accompanying notes.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, 1996, 1995 and 1994
(In Thousands, Except Share Data)
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Interest Income
Interest on Loans $ 6,576 $ 5,800 $ 5,247
Interest on Investment Securities 342 158 146
Interest on Mortgage Backed Securities 54 11 -
Other Interest and Dividends 313 282 109
-------- -------- --------
Total Interest Income 7,285 6,251 5,502
-------- -------- --------
Interest Expense
Deposits 3,288 2,743 2,222
Borrowed Funds 229 439 365
-------- -------- --------
Total Interest Expense 3,517 3,182 2,587
-------- -------- --------
Net Interest Income 3,768 3,069 2,915
Provision for Losses on Loans 125 25 135
-------- -------- --------
Net Interest Income After Provision for
Losses on Loans 3,643 3,044 2,780
-------- -------- --------
Other Income
Fees and Charges 64 63 74
Other 113 98 103
-------- -------- --------
Total Other Income 177 161 177
-------- -------- --------
General and Administrative Expenses
Compensation and Employee Benefits 1,508 836 761
Franchise and Other Taxes 128 99 97
Federal Insurance Premium 520 128 128
Expenses of Premises and Equipment 163 174 160
Data Processing and Related Contract Services 127 104 94
Other Operating Expenses 582 443 380
-------- -------- --------
Total General and Administrative Expenses 3,028 1,784 1,620
-------- -------- --------
Income Before Income Tax 792 1,421 1,337
Federal Income Tax Expense 275 460 456
-------- -------- --------
Net Income $ 517 $ 961 $ 881
======== ======== ========
Earnings Per Common Share $ .35 .17 N/A
======== ======== ========
See auditors' report and accompanying notes.
</TABLE>
20
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1996, 1995 and 1994
(In Thousands)
<TABLE>
<CAPTION>
Additional Shares Shares
Common Paid-In Acquired Acquired By Retained
Stock Capital By ESOP MRP Trust Earnings
-------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1993 $ - $ - $ - $ - $ 6,298
Net Income - - - - 881
-------- ---------- ---------- ----------- ---------
Balance at September 30, 1994 - - - - 7,179
Net Income - - - - 961
Sale of Stock at Public Offering 16 14,981 (1,259) - -
ESOP Common Stock Released
for Allocation - - 10 - -
Dividends Declared - - - - (98)
-------- ---------- ---------- ----------- ---------
Balance at September 30, 1995 16 14,981 (1,249) - 8,042
Net Income - - - - 517
Unrealized Loss on AFS Securities, - - - - -
Net of Tax Effect
ESOP Common Stock Released
for Allocation - 161 402 - -
Amortization of Stock Compensation Plans - 14 - 80 -
Common Stock Acquired for MRP - - - (873) -
Dividends Declared - (5,769) - - (394)
-------- ---------- ---------- ----------- ---------
Balance at September 30, 1996 $ 16 $ 9,387 $ (847) $ (793) $ 8,165
======== ========== ========== =========== =========
</TABLE>
<PAGE>
Unrealized
Losses Total
on AFS Stockholders'
Securities Equity
------------ -------------
Balance at October 1, 1993 $ - $ 6,298
Net Income - 881
------------ -------------
Balance at September 30, 1994 - 7,179
Net Income - 961
Sale of Stock at Public Offering - 13,738
ESOP Common Stock Released
for Allocation - 10
Dividends Declared - (98)
------------ -------------
Balance at September 30, 1995 - 21,790
Net Income - 517
Unrealized Loss on AFS Securities, (7) (7)
Net of Tax Effect
ESOP Common Stock Released
for Allocation - 563
Amortization of Stock Compensation Plans - 94
Common Stock Acquired for MRP - (873)
Dividends Declared - (6,163)
------------ -------------
Balance at September 30, 1996 (7) 15,921
============ =============
See Auditors' report and accompanying notes.
21
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1996, 1995 and 1994
(In Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income $ 517 $ 961 $ 881
Reconciliation of Net Income
with Cash Flows from Operations
Allowance for Losses on Loans 125 25 135
Depreciation 87 93 81
Deferred Federal Income Taxes (258) (40) 104
Amortization (85) 36 (40)
FHLB Stock Dividends (49) (41) (31)
Gain on Sale of Real Estate Owned (12) (1) (11)
Amortization of Stock Compensation Plans 94 - -
Shares Released to ESOP 563 10 -
REO Donated 11 - -
Changes In
Accrued Interest Receivable (67) (148) 55
Prepaid and Other Assets (19) 220 (39)
Cash Surrender Value of Life Insurance (57) (45) (59)
Deferred Compensation 113 102 88
Accrued Interest Payable 30 (17) 1
Accrued Federal Income Tax Liability 52 33 (308)
Other Liabilities 632 3 (34)
---------- ----------- ----------
Net Cash Provided by Operating Activities 1,677 1,191 823
---------- ----------- ----------
Cash Flows From Investing Activities
Proceeds from Maturity of Investment Securities 3,496 1,500 3,037
Purchase of Investment Securities (2,502) (4,480) (988)
Purchase of Mortgage-Backed Securities - (1,013) -
Loan Originations and Repayments, Net (7,157) (6,862) (3,202)
Principal Received on Mortgage-Backed Securities 151 20 -
Proceeds from the Sale of Real Estate
Acquired Through Foreclosure 295 229 67
Purchase of Office Equipment (12) (16) (312)
---------- ----------- ----------
Net Cash Used In Investing Activities (5,729) (10,622) (1,398)
---------- ----------- ----------
Cash Flows From Financing Activities
Net Change in Deposits 3,733 4,871 (913)
Net Proceeds from Stock Offering - 13,748 -
Dividends Paid (6,163) - -
Common Stock Purchased for MRP Trust (873) - -
Advance from Borrowers for Taxes and Insurance 5 (91) (9)
Repayments of Borrowings (197) (6,937) (5,313)
Proceeds from Borrowings 3,300 3,000 6,900
---------- ----------- ----------
Net Cash (Used) Provided by Financing Activities (195) 14,591 665
---------- ----------- ----------
Changes in Cash and Cash Equivalents (4,247) 5,160 90
Cash and Cash Equivalents, Beginning of Year 6,032 872 782
---------- ----------- ----------
Cash and Cash Equivalents, End of Year $ 1,785 $ 6,032 $ 872
========== =========== ==========
See auditors' report and accompanying notes.
</TABLE>
22
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
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.
23
<PAGE>
NOTE 1 - ACCOUNTING POLICIES (Continued)
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
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.
24
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
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, 1996, the Company's shareholders' equity reflected a net
unrealized loss of $7,000 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.
25
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
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 Bank's current procedures for evaluating
impaired loans result in carrying such loans at the lower of cost or fair
value.
The Bank adopted SFAS No. 114, as subsequently amended, on October 1, 1995,
without material effect on consolidated financial condition or results of
operations.
At September 30, 1996, the Bank 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.
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.
26
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 1 - ACCOUNTING POLICIES (Continued)
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.
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.
27
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 1 - ACCOUNTING POLICIES (Continued)
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, 1996:
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 delineate 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.
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.
28
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 1 - ACCOUNTING POLICIES (Continued)
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, 1996, are as
follows:
Carrying Fair
Value Value
----- -----
(In thousands)
Financial Assets
Cash and Cash Equivalents $ 1,785 $ 1,785
Investment Securities 3,997 3,980
Mortgage-Backed Securities 816 816
Loans Receivable 77,987 79,866
Stock in Federal Home Loan Bank 700 700
Cash Surrender Value of Life Insurance 1,068 1,068
------ -----
$86,353 $88,215
======= =======
Financial Liabilities
Deposits $63,731 $63,903
Advances from FHLB and Other
Borrowings 6,754 6,294
Advances from Borrowers
for Taxes and Insurance 188 188
------- -------
$70,673 $70,385
======= =======
Retirement Plans and Stock Option 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 $563,000 and $10,000 for the years
ended September 30, 1996 and 1995, respectively.
29
<PAGE>
NOTE 1 - ACCOUNTING POLICIES (Continued)
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
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 1996, 42,808 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 1995. A provision of $79,000 related to the MRP was
charged to expense for the fiscal year ended September 30, 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 1996, 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, 1996, none of the stock options
granted have been exercised.
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 were as follows:
Years Ended
September 30,
-----------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
Interest $3,486 $3,199 $2,586
====== ====== =====
Income Taxes $ 441 $ 300 $ 660
====== ======= ======
30
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 2 - CASH FLOWS INFORMATION (Continued)
The Company had noncash investing or financing activities as follows:
Years Ended
September 30,
-------------------------------
1996 1995 1994
------ ----- ----
(In Thousands)
Real Estate Acquired
through Foreclosure
of Mortgage Loans $269 $204 $69
==== ==== ==
Deferred Gain on Sale
of Real Estate $ - $ 8 $ 3
==== ==== ===
FHLB Stock Dividend
Received $ 47 $ 41 $31
===== ==== ===
Dividends Payable $ 98 $ 98 $ -
===== ==== ===
The balance in cash and cash equivalents as of and September 30, 1996 and 1995
consists of the following:
1996 1995
------ ------
(In Thousands)
Cash on Hand $ 206 $ 226
Cash in Demand Accounts 1,579 5,706
Short Term Certificate of Deposit - 100
------ ------
Totals $1,785 $6,032
====== ======
NOTE 3 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
Investment securities held to maturity as of September 30, 1996 and 1995
consist of the following:
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
----- ----- ------ -----
1996 (In Thousands)
U.S. Government and
Federal Agencies $3,503 $ 5 $22 $3,486
====== === === ======
1995
U.S. Government and
Federal Agencies $5,001 $14 $15 $5,000
====== === === ======
31
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 3 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
(Continued)
The following is a summary of maturities of securities held-to-maturity as of
September 30, 1996:
Carrying Estimated
Value Fair Value
------- ----------
(In Thousands)
One Year or Less $2,002 $2,004
Over One Year Through Five Years 1,501 1,482
------ ------
Totals $3,503 $3,486
====== ======
Investment securities and mortgage-backed securities as of September 30, 1996
and 1995 consist of the following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- --------- ---------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
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
====== ====== == ======
1995 - Held to Maturity
Federal Home Loan Mortgage
Corporation Participants $ 972 $ - $1 $ 971
====== ====== == ======
</TABLE>
The following is a summary of maturities of available for sale securities as
of September 30, 1996:
Carrying Estimated
Value Fair Value
-------- ----------
(In Thousands)
Maturing Over One through Five Years $1,318 $1,311
====== ======
32
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The balances in loans receivable as of September 30, 1996 and 1995 are as
follows:
1996 1995
------- ------
(In Thousands)
Real Estate Mortgage Loans:
One to Four Family $62,632 $57,775
Multi-Family Residential 11,138 7,915
Land and Construction:
Residential 5,737 7,140
Commercial 255 255
Consumer Loans:
Savings Accounts Loans 632 651
Other Consumer Loans 516 481
------- ------
Total 80,910 74,217
Less:
Loans in Process 1,884 2,191
Deferred Loan Origination Fees 673 631
Allowances for Losses 366 239
------- -------
Loans Receivable - Net $77,987 $71,156
======= =======
A summary of activity in the allowance for loan losses at September 30, 1996,
1995 and 1994 is as follows:
1996 1995 1994
----- ------ -----
(In Thousands)
Balance at beginning of the year $239 $233 $115
Additions to allowance 126 25 135
Recoveries (Charge offs) during the year 1 (19) (17)
----- ---- ----
Balance at end of the year $366 $239 $233
===== ==== ====
At September 30, 1996 and 1995 the Bank had non-accrual loans of approximately
$1,180,000 and $1,397,000, respectively. Had interest been recognized on these
loans at the original rates, interest income would have increased
approximately $41,000, $48,000 and $48,000 in 1996, 1995 and 1994,
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 $4,093,000 and $4,513,000 at September 30, 1996 and
1995, respectively.
33
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 5 - ACCRUED INTEREST RECEIVABLE
A breakdown of accrued interest receivable is as follows:
1996 1995
---- ----
(In Thousands)
Loans Receivable $574 $509
Mortgage-backed Securities 4 5
Investments 64 61
---- ----
Total $642 $575
==== ====
NOTE 6 - OFFICE PROPERTIES AND EQUIPMENT
The balance in office properties and equipment as of September 30, 1996 and
1995 consists of the following:
1996 1995
---- ----
(In Thousands)
Land $ 98 $ 98
Buildings and Improvements 792 792
Furniture and Equipment 633 625
---- ----
1,523 1,515
Accumulated Depreciation (880) (797)
Office Properties and Equipment at
Depreciated Cost $ 643 $ 718
====== ======
NOTE 7 - BORROWED FUNDS
Federal Home Loan Advances
The Bank has a short-term advance from the FHLB for $1,000,000 with interest
at 5.8% at September 30, 1996. This loan matures in December, 1996.
The Bank also has two long-term advances from the FHLB for $1,719,000 and
$1,735,000. 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.
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.
34
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 7 - BORROWED FUNDS (Continued)
Other Borrowed Funds
The Company has a short-term note with a local bank for $2,300,000. This loan
accrues interest at 8.25% and is due October 31, 1996.
Maturities for the next five years and thereafter are as follows:
Maturing in Years Long-Term Short-Term
Ending September 30, Advances Advances Total
-------------------- -------- -------- -----
(In Thousands)
1997 $ 208 $3,300 $3,508
1998 220 - 220
1999 232 - 232
2000 245 - 245
2001 258 - 258
Thereafter 2,291 - 2,291
------ ------ ------
$3,454 $3,300 $6,754
====== ====== ======
NOTE 8 - DEPOSITS
A breakdown of deposit balances by interest rate and major type as of
September 30, 1996 and 1995 is as follows:
1996 1995
----------------- -------------------
Amount Percent Amount Percent
Deposit Type and Weighted ------ ------- ------ -------
Average Interest Rate (In Thousands, Except Percents)
Passbooks - 2.75% in 1996
and 1995 $ 8,393 13.2% $ 7,859 13.1%
Money Market Deposit
Accounts 2.74% in
1996 and 1995 2,690 4.2 3,002 5.0
Now Accounts - 2.16% in 1996
and 2.21% in 1995 3,000 4.7 2,455 4.1
------ ---- ------ ----
Total Demand, Transaction and
Passbook Deposits 14,083 22.1 13,316 22.2
------ ---- ------ ----
35
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 8 - DEPOSITS (Continued)
<TABLE>
<CAPTION>
1996 1995
----------------------- ---------------------
Amount Percent Amount Percent
------ ------- ------ -------
In Thousands, Except Percents)
<S> <C> <C> <C> <C>
Certificates of Deposit
4.01% - 4.50% 55 - 21 -
4.51% - 5.00% 1,629 2.6 2,142 3.6
5.01% - 5.50% 11,638 18.3 3,737 6.2
5.51% - 6.00% 12,549 19.7 9,361 15.6
6.01% - 6.50% 14,705 23.1 15,883 26.5
6.51% - 7.00% 9,072 14.2 15,497 25.8
7.01% - 7.50% - - 41 .1
------- ------ ------ -----
Total Certificates of Deposits 49,648 77.9 46,682 77.8
------- ------ ------ -----
Totals $63,731 100.0% $59,998 100.0%
======= ====== ======= =====
Balances by Type
Passbook $ 8,393 13.2% $ 7,859 13.1%
M.M.D.A. 2,690 4.2 3,002 5.0
Now Accounts 3,000 4.7 2,455 4.1
Three Month Certificates 489 .8 411 .7
Six Month Certificates 1,629 2.6 2,164 3.6
Twelve Month Certificates 3,472 5.4 1,859 3.1
Eighteen Month Certificates 4,303 6.8 2,443 4.1
Thirty Month Certificates 4,931 7.7 5,810 9.7
Other Certificates 34,824 54.6 33,995 56.6
------ ----- ------ -----
Totals $63,731 100.0% $59,998 100.0%
====== ===== ======= =====
</TABLE>
The aggregate amount of deposits with a minimum denomination of $100,000 was
approximately $6.1 million and $6.5 million at September 30, 1996 and 1995,
respectively. Deposits of $100,000 or less are insured by the FDIC.
Non-interest bearing deposit accounts totaled approximately $157,000 and
$136,000 for September 30, 1996 and 1995, respectively.
Savings deposit customers are primarily Northern Kentucky area individuals
and businesses.
36
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 8 - DEPOSITS (Continued)
Interest expense on deposits is summarized as follows:
1996 1995 1994
------- ------ ------
(In Thousands)
Passbook Savings Accounts $ 219 $ 281 $ 347
Money Market Deposit Accounts 79 116 177
Certificates of Deposit 2,932 2,292 1,636
Now Accounts 58 54 62
------ ------ -----
Interest Expense on Deposits $3,288 $2,743 $2,222
====== ====== ======
At September 30,1996, the scheduled maturities of certificates of deposits
are as follows:
Weighted
Certificates Maturing In Average Interest
September 30, Amount Rate
------------------------ ------ ----------------
(In Thousands, Except Percents)
1997 $28,797 5.86%
1998 13,725 6.03
1999 3,452 6.41
2000 1,374 6.74
2001 2,284 6.06
Thereafter 16 6.50
------ ----
Total Certificates of Deposit $49,648 5.98%
======= ====
NOTE 9 - 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, 1996 and 1995, the plan was fully funded. Pension expense
was $52,801, $78,802 and $76,445 for the years ended September 30, 1996, 1995
and 1994, 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.
37
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 9 - RETIREMENT PLANS (Continued)
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 $10,797 and $17,719 to the 401(k) plan during the years ended
September 30, 1996 and 1995, respectively.
NOTE 10 - 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, 1996, 1995 and 1994, the net periodic
pension costs, including accrued interest and company match, under these
plans were as follows:
1996 1995 1994
------ ------ ------
(In Thousands)
Deferred Compensation -
Officers and Directors $ 73 $ 73 $73
Company Match - Officers 2 2 2
Interest Accrued on Balance 38 27 13
--- --- --
Net Periodic Pension Costs $113 $102 $88
==== ==== ===
38
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 10 - DEFERRED COMPENSATION PLANS (Continued)
The total accrued liability for these plans at September 30, 1996 and 1995
was $376,000 and $263,000, 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,
1996 and 1995 the cash surrender value of these insurance contracts was
$1,068,000 and $1,012,000, respectively. The increase in the cash surrender
value of the life insurance for the years ended September 30, 1996, 1995 and
1994 was $56,000, $45,000 and $59,000, respectively. This increase is
recorded as income by the Company.
NOTE 11 - 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.
NOTE 12 - INCOME TAXES
Deferred income taxes arise from temporary differences resulting from income
and expense items reported for financial accounting and tax purposes in
different periods. The principle sources of temporary differences are
depreciation methods, different methods of recognizing income on loan closing
fees and nontaxable stock dividends.
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:
1996 1995 1994
------- ------ ------
(In Thousands)
Computed Tax at the Expected
Statutory Rate $269 $483 $454
Nondeductible Expenses 3 2 1
Other Differences 3 (25) 1
---- ---- ----
Income Tax Expense $275 $460 $456
==== ==== ====
Effective Income Tax Rate 34.7% 32.3% 34.1%
==== ==== ====
39
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 12 - INCOME TAXES (Continued)
The components of income tax expense are summarized as follows:
1996 1995 1994
------ ------ ------
(In Thousands)
Current Tax Expense $ 533 $500 $352
Deferred Tax (Benefit) Expense (258) (40) 104
----- ---- ----
Income Tax Expense $ 275 $460 $456
===== ==== ====
Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that give rise to the deferred tax
liability at September 30, 1996 and 1995 are as follows:
1996 1995
------ -------
(In Thousands)
Deferred Compensation Agreements (Deductible When
Paid for Taxes) $ 128 $ 89
Loan Fees Deferred for Financial Reporting Purposes 53 79
Allowance for Loan Losses 121 81
Accrual for Savings Association Insurance Fund
Recapitalization 128 -
Holding Company Loss Carryforward 110 -
Accumulated Amortization of Stock Compensation Plans 32 -
Other 24 22
----- ---
Deferred Tax Asset 596 271
----- ---
Federal Home Loan Bank Stock (Income Tax Payable
When Shares Received as Stock Dividends are Sold) $138 $118
Special Tax Bad Debt Deduction 121 81
Real Estate and Equipment (Depreciation Method
Differences) 10 22
Book Value of CSV of Life Insurance in Excess of
Tax Basis 70 51
----- ----
Deferred Tax Liability 339 272
----- ----
Net Deferred Income Tax Asset (Liability) $ 257 $ (1)
===== =====
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.
40
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 13 - RELATED PARTY TRANSACTIONS
The Bank has mortgage loans outstanding with various officers, directors,
employees and their relatives. Loans to employees are granted at interest
rates and fees which are 1% below the Bank's normal lending rate, but are
above its cost of funds. Loans to officers and directors are made at the
current market rate. 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:
(In Thousands)
Balance at September 30, 1995 $ 632
New Loans Made 382
Payments Made (48)
Balance at September 30, 1996 $966
===
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.
NOTE 14 - 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.
41
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 14 - LOAN COMMITMENTS (Continued)
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, 1996, the Bank had fixed and adjustable rate loan
commitments as follows:
Fixed Adjustable Total
----- ---------- -----
First Mortgage Loans on (In Thousands, Except Percents)
One-to-Four Family Residential
Property $184 $1,965 $2,159
==== ====== ======
Weighted Average Interest Rates 7.85% 8.09% 8.07%
==== ====== ======
NOTE 15 - INTEREST RATE RISK
The Bank is engaged principally in providing first mortgage loans to
individuals and commercial enterprises. At September 30, 1996, 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, 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 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, 1995, the Bank had interest earning assets of approximately
$84 million having a weighted average effective yield of 8.43% and with
durations of up to 30 years, and interest bearing liabilities of
approximately $64 million having a weighted average effective interest rate
of 5.39% and with durations up to 13 years.
42
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 16 - 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:
1996 1995 1994
------ ------ ------
(In Thousands)
Net Income
Per OTS Report $ 825 $ 872 $850
Adjustments Made
Federal Income Tax - 29 16
Accrued Compensation - - -
Interest on Loans - 2 5
Interest on Investments - 3 1
Other Operating Expense - - 9
---- ---- ----
825 906 881
Net (Loss) Income of Holding
Company After Eliminating Entries (308) 55 -
---- ---- ----
Net Income Per Consolidated
Statements of Income $ 517 $ 961 $881
==== ==== ====
Retained Earnings
Per OTS Report $8,808 $7,987 $7,213
Adjustments Made
Federal Income Tax - - (29)
Accrued Compensation - - (14)
Interest on Loans - - 5
Interest on Investments - - 2
Other Operating Expense - - 2
----- ------ ------
8,808 7,987 7,179
(Accumulated Deficit) Retained
Earnings of Holding Company
After Eliminating Entries (643) 55 -
----- ------ ------
Retained Earnings Per Consolidated
Statements of Financial
Condition $8,165 $8,042 $7,179
====== ====== ======
43
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 17 - 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 association 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, 1996, 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 $16,308 $16,308 $16,308
Additional Capital Items:
General Valuation Allowances - - 331
------- ------- ------
Regulatory Capital 16,308 16,308 16,639
Minimum Capital Requirement 1,285 2,569 4,451
------- ------- ------
Capital in Excess of
Minimum Requirement $15,023 $13,739 $12,188
======= ======= =======
Regulatory Capital as a
Percentage 19.04% 19.04% 29.90%
Minimum Capital as a
Percentage 1.50 3.00 8.00
------ ------ ------
Regulatory Capital as a
Percent in Excess of
Requirements 17.54% 16.04% 21.90%
====== ====== =====
</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.
44
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 18 - 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 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.
45
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 19 - 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%. They 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 form 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 five 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 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 the current year were 2,098.
46
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 20 - 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
has been accrued to these financial statements and was paid in November, 1996.
NOTE 21 - EARNINGS PER SHARE
Primary earnings per share amount for the year ended September 30, 1996 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 1,454,067 and 1,432,643 for the
years ended September 30, 1996 and 1995, 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 dillutive
effect to the Company's stock compensation plans.
No earnings per share is reported for 1994 since the Company was a mutual
savings association in that year.
NOTE 22 - DIVIDENDS
During the year ended September 30, 1996, the Company declared dividends of
$4.25 per common share. Of this amount $4.00 per share was paid in August 1996
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 $4.00 of the current fiscal year dividends constitute a tax-free
return of capital.
47
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 23 - 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, 1996, and the results
of operations for the years ended.
FORT THOMAS FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
(In Thousands)
<TABLE>
<CAPTION>
September 30,
-------------------
1996 1995
---- ----
ASSETS
<S> <C> <C>
Assets
Cash and Cash Equivalents $ 879 $ 3,360
Investment Securities
Available for Sale - at Market Value 494 -
Held to Maturity - at Amortized Cost - 1,997
Mortgage-Backed Securities Available for Sale -
Available for Sale - at Market Value 816 -
Held to Maturity - at Amortized Cost - 972
Investment in Fort Thomas Savings Bank 9,227 8,402
Loan Receivable - ESOP 847 1,249
Other Assets 90 29
------- -------
Total Assets $12,353 $16,009
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Borrowed Funds $ 2,300 $ -
Other Liabilities 366 50
-------- -------
Total Liabilities 2,666 50
-------- -------
Stockholders' Equity
Common Stock and Additional Paid-In Capital 8,610 14,998
Retained Earnings 1,084 961
Unrealized Loss on Investment Securities (7) -
-------- -------
Total Stockholders' Equity 9,687 15,959
-------- -------
Total Liabilities and Stockholders' Equity $12,353 $16,009
======== =======
</TABLE>
48
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 23 - CONDENSED FINANCIAL STATEMENTS OF FORT THOMAS FINANCIAL
CORPORATION (Continued)
FORT THOMAS FINANCIAL CORPORATION
STATEMENTS OF INCOME
(In Thousands)
Years Ended September 30,
-------------------------
1996 1995
---- ----
Revenue
Interest Income $ 407 $ 112
Equity in Earnings of Fort Thomas Savings Bank 825 902
------ ------
Total Revenue 1,232 1,014
General and Administrative Expenses 823 20
------ ------
Earnings Before Income Taxes 409 994
Federal Income Tax (Benefit) Expense (108) 33
------ ------
Net Income $ 517 $ 961
====== ======
49
<PAGE>
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE 23 - CONDENSED FINANCIAL STATEMENTS OF FORT THOMAS FINANCIAL
CORPORATION (Continued)
FORT THOMAS FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
(In Thousands)
Years Ended September 30,
-------------------------
1996 1995
---- ----
Cash Flows from Operating Activities
Net Income $ 517 $ 961
Reconciliation of Net Income with
Cash Flows from Operations:
Undistributed Earnings of Consolidated
Subsidiary (825) (902)
Deferred Federal Income Tax (84) -
Amortization of Stock Compensation Plans 94 -
Shares Released to ESOP 563 10
Changes In
Accrued Interest Receivable 23 (28)
Accrued Interest Payable 22 -
Accrued Federal Income Tax Liability (108) 34
Other Liabilities 354 16
----- -------
Net Cash Provided by Operating Activities 556 91
----- -------
Cash Flows from Investing Activities
Proceeds from Repayment of Loan to ESOP 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 1,503 -
Principal Received on Mortgage-Backed Securities 156 -
----- -------
Net Cash Provided (Used) by Investing
Activities 1,699 (10,469)
----- -------
Cash Flows from Financing Activities
Net Proceeds of Sale of Stock - 13,738
Dividends Paid (6,163) -
Common Stock Shares Purchased for MRP Trust (873) -
Proceeds from Borrowings 2,300 -
----- ------
Net Cash (Used) Provided by Financing
Activities (4,736) 13,738
Changes in Cash and Cash Equivalents (2,481) 3,360
Cash and Cash Equivalents, Beginning of Period 3,360 -
------ -----
Cash and Cash Equivalents, End of Period $ 879 $ 3,360
====== =======
50
<PAGE>
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, 1996, the Company had 1,546,225 shares of common stock
outstanding which were held by approximately 775 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 the quarter ended September 30, 1995 and for each of the quarters in fiscal
1996 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>
September 30, 1995 $12.00 $11.50 $ .0625 October 16, 1995
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
</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.
51
<PAGE>
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
52
<PAGE>
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., Suite 1200
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.
53
