____________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION PRIVATE
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No.: 0-26242
-------
Fort Thomas Financial Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 61-1278396
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
25 North Fort Thomas Avenue
Fort Thomas, Kentucky 41075
- --------------------------- ----------
(Address) (Zip Code)
Registrant's telephone number, including area code: (606) 441-3302
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act
Common Stock (par value $.01 per share)
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of December 18, 1998, the aggregate value of the 1,374,002 shares of
Common Stock of the Registrant issued and outstanding on such date, which
excludes 100,319 shares held by all directors and officers of the Registrant
as a group, was approximately $18.5 million. This figure is based on the
last sales price of $13.50 per share of the Registrant's Common Stock on
December 17, 1998.
Number of shares of Common Stock outstanding as of December 18, 1998:
1,474,321
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and
the Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended
September 30, 1998 are incorporated into Part II, Items 5 through 8 of this
Form 10-K.
(2) Portions of the definitive proxy statement for the 1998 Annual Meeting
of Stockholders are incorporated into Part III, Items 9 through 13 of this
Form 10-K.
PART I
Item 1. Business
- ----------------
General
Fort Thomas Financial Corporation
Fort Thomas Financial Corporation (the "Company") is an Ohio
corporation organized in March 1995 by Fort Thomas Savings Bank, F.S.B. (the
"Bank") for the purpose of becoming a unitary holding company of the Bank.
The only significant assets of the Company are the capital stock of the
Bank, the Company's loan to the Employee Stock Ownership Plan ("ESOP"), and
the portion of the net proceeds retained by the Company in connection with
the Bank's conversion to stock form (the "Conversion"). The business and
management of the Company consists of the business and management of the
Bank. The Company does not own or lease any property, but instead uses the
premises, equipment and furniture of the Bank. At the present time, the
Company does not employ any persons other than officers of the Bank, and the
Company utilizes the support staff of the Bank from time to time.
Additional employees will be hired as appropriate to the extent the Company
expands or changes its business in the future.
The Company's executive office is located at the home office of the
Bank at 25 North Fort Thomas Avenue, Fort Thomas, Kentucky 41075, and its
telephone number is (606) 441-3302.
Fort Thomas Savings Bank, F.S.B.
The Bank is a federally chartered stock savings bank which conducts
business through two full service offices located in Campbell County,
Kentucky. The Bank was originally chartered under Kentucky law in 1910 as a
building and loan association and, as of September 29, 1994, converted
itself into a federally chartered mutual savings and loan association known
as "Fort Thomas Federal Savings and Loan Association." In connection with
the Conversion, the Bank became known as "Fort Thomas Savings Bank, F.S.B."
The Bank is primarily engaged in attracting deposits from the general
public through its branch offices and using such deposits primarily to
originate loans secured by first liens on single-family (one-to-four units)
residential properties and to a significantly lesser extent, multi-family
(over four units) residential properties, construction loans on primarily
residential properties and consumer loans. To a limited extent, the Bank
also invests in securities issued by the United States ("U.S.") Government
and agencies thereof. The Bank derives its income principally from interest
earned on loans and investments and, to a lesser extent, from fees received
in connection with the origination of loans and for other services. The
Bank's primary expenses are interest expense on deposits and general
operating expenses. Funds for activities are provided primarily by
deposits, borrowing, amortization and prepayments of outstanding loans and
other sources.
The Bank is subject to regulation by the Office of Thrift Supervision
(the "OTS"), as its chartering authority and primary regulator, and by the
Federal Deposit Insurance Corporation (the "FDIC"), which insures the Bank's
deposits up to applicable limits. The Bank also is subject to certain
reserve requirements established by the Federal Reserve Board and is a
member of the Federal Home Loan Bank ("FHLB") of Cincinnati, which is one of
the 12 banks which comprise the FHLB System.
The Bank's executive offices are located at 25 North Fort Thomas
Avenue, Fort Thomas, Kentucky 41075, and its telephone number is (606) 441-
3302.
Lending Activities
General. At September 30, 1998, the Bank's total portfolio of loans
receivable ("total loan portfolio"), amounted to $96.7 million or 93.3% of
the Bank's $103.6 million of total assets at such time. The Bank has
traditionally concentrated its lending activities on conventional first
mortgage loans secured by single-family residential property. At September
30, 1998, $79.0 million or 81.7% of the Bank's total loan portfolio
consisted of one-to-four family residential loans, including second mortgage
loans. To a much lesser extent, the Bank also originates multi-family
residential loans, land and construction loans and consumer loans. At
September 30, 1998, such loan categories amounted to $11.1 million, $5.5
million and $1.1 million, respectively, or 11.4%, 5.7% and 1.2% of the total
loan portfolio, respectively. The Bank does not offer loans which are
insured by the Federal Housing Administration ("FHA") nor partially
guaranteed by the Office of Veterans Affairs ("VA").
Loan Portfolio Composition. The following table sets forth the
composition of the Bank's loan portfolio by type of loan at the dates
indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent
--------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family residential $78,969 81.68% $74,471 82.20% $62,632 77.41%
Multi-family residential 11,070 11.46 11,015 12.16 11,138 13.77
Land and construction:
Residential 5,531 5.72 3,885 4.29 5,737 7.09
Commercial -- -- -- -- 255 0.32
-------------------------------------------------------------
Total real estate loans 95,570 98.85 89,371 98.64 79,762 98.58
-------------------------------------------------------------
Consumer:
Savings account 665 0.69 702 0.77 632 0.78
Other 449 0.47 528 0.58 516 0.64
-------------------------------------------------------------
Total consumer loans 1,114 1.16 1,230 1.36 1,148 1.42
-------------------------------------------------------------
Total loans 96,684 100.00% 90,601 100.00% 80,910 100.00%
------- ====== ------- ====== ------- ======
Less:
Loans in process 2,572 1,048 1,884
Unearned discounts -- -- --
Deferred loan fees 613 625 673
Allowance for loan losses 704 476 366
---------------------------------------------------
Loans receivable, net $92,795 $88,452 $77,987
======= ======= =======
</TABLE>
Contractual Maturities. The following table sets forth the scheduled
contractual maturities of the Bank's loans at September 30, 1998. Demand
loans, loans having no stated schedule of repayments and no stated maturity
and overdraft loans are reported as due in one year or less. Adjustable-
rate loans are reported on a repricing basis rather than on a contractual
basis. The amounts shown for each period do not take into account loan
prepayments and normal amortization of the Bank's loan portfolio.
<TABLE>
<CAPTION>
Real Estate Loans
-------------------------------------
One-to-four Multi- Land and Consumer
family(1) family Construction loans Total
-----------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Amounts due in:
One year or less $50,751 $ 4,690 $5,531 $ 847 $61,819
After one year through three years 15,229 3,266 -- 114 18,609
After three years through five years 1,931 579 -- 76 2,586
After five years through ten years 2,733 1,269 -- 71 4,073
After ten years through fifteen years 8,035 1,266 -- 6 9,307
Over fifteen years 290 -- -- -- 290
---------------------------------------------------------
Total $78,969 $11,070 $5,531 $1,114 $96,684
=========================================================
Interest rate terms on amounts
due after one year:
Fixed $12,560 $ 2,862 $ -- $ 267 $15,689
Adjustable 15,658 3,518 -- -- 19,176
---------------------------------------------------------
Total $28,218 $ 6,380 $ -- $ 267 $34,865
=========================================================
- --------------------
<FN>
<F1> Includes second mortgages on one-to-four family residential loans.
</FN>
</TABLE>
Origination, Purchase and Sale of Loans. The lending activities of
the Bank are subject to the written, non-discriminatory, underwriting
standards and loan origination procedures established by the Bank's Board of
Directors and management. Loan originations are obtained by a variety of
sources, including builders, existing customers, and walk-in customers.
Property valuations are always performed by independent outside appraisers
approved by the Bank's Board of Directors. Hazard insurance is required on
all security property. The loan committee meets on a weekly basis to
approve all new loans.
Historically, the Bank has not been an active purchaser of loans. The
Bank did not purchase any loans during fiscal 1998, 1997 or 1996. Although
the Bank emphasizes the origination of ARMs, the Bank also offers fixed rate
loans with terms up to 15 years. The Bank does not originate 30 year fixed
rate loans. With the exception of certain loans sold in 1993 which have an
aggregate outstanding principal balance at September 30, 1998 of $252,000,
all fixed rate loans sold by the Bank have been sold without any recourse to
the Bank by the purchaser in the event of default on the loan by the
borrower. Loans are sold by the Bank primarily to the Federal Home Loan
Mortgage Corporation ("FHLMC"). Loans are sold to the FHLMC pursuant to
forward sales commitments and, therefore, an increase or decrease in
interest rates after loan origination and prior to sale does not adversely
affect the Bank's income at the time of sale. The Bank did not sell any
loans during fiscal 1998, 1997 or fiscal 1996.
The following table shows origination and sale activity of the Bank
with respect to its loans during the periods indicated. The Bank has not
purchased any loans during the periods reported.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------
1998 1997 1996
-----------------------------
(In Thousands)
<S> <C> <C> <C>
Real estate loan originations:
One-to-four family residential $20,976 $17,528 $14,668
Multi-family residential 1,813 1,495 3,679
Land and construction:
Residential 5,094 5,125 4,242
Commercial 2,486 1,136 824
-----------------------------
Total real estate loan originations 30,369 25,284 23,413
-----------------------------
Total consumer loan originations 731 470 343
-----------------------------
Total loan originations 31,100 25,754 23,756
-----------------------------
Less:
Principal loan repayments 24,734 15,814 16,588
Transferred to other real estate owned 283 64 --
Loans in process 1,524 (836) (307)
Other, net(1) 216 247 644
-----------------------------
Net increase (decrease) $ 4,343 $10,465 $ 6,831
=============================
- --------------------
<FN>
<F1> Includes changes related to amortization of deferred loan fees, the
allowance for loan losses and other miscellaneous adjustments.
</FN>
</TABLE>
Loans-to-One Borrower. A savings institution generally may not make
loans to one borrower and related entities in an amount which exceeds 15% of
its unimpaired capital and surplus, although loans in an amount equal to an
additional 10% of unimpaired capital and surplus may be made to a borrower
if the loans are fully secured by readily marketable securities. At
September 30, 1998, the Bank's limit on loans-to-one borrower was
approximately $2.4 million.
One-to-Four Family Residential Real Estate Loans. The Bank has
historically concentrated its lending activities on the origination of loans
secured by first mortgage liens on existing one-to-four family residences, a
portion of which are non-owner occupied. At September 30, 1998, $79.0
million or 81.7% of the Bank's total loan portfolio consisted of one-to-four
family residential real estate loans. The Bank originated $24.3 million,
$17.5 million and $14.7 million of one-to-four family residential loans in
fiscal 1998, 1997 and 1996, respectively, and intends to continue to
emphasize the origination of permanent loans secured by first mortgage liens
on one-to-four family residential properties in the future. Of the $79.0
million of such loans at September 30, 1998, $55.9 million or 70.8% had
adjustable-rates of interest and $23.1 million or 29.2% had fixed-rates of
interest. At September 30, 1998, non-performing one-to-four family loans
amounted to $2.9 million or 3.7% of the one-to-four family loan portfolio.
See "Asset Quality."
The Bank currently originates for its portfolio 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) plus a margin. Such loans are typically based on a 25
or 30-year amortization schedule. The Bank does not offer "teaser" rates,
and the amount of any increase or decrease in the interest rate after the
initial one year period is presently limited to 1% per year, with a limit of
5% over the life of the loan. The Bank also originates residential mortgage
loans with an interest rate which is fixed for three years and adjusts every
year after the initial three-year period. The amount of any increase or
decrease in the interest rate after the initial three-year period is
presently limited to 2% per year, with a limit of 5% over the life of the
loan. The Bank's adjustable-rate loans currently being originated are not
assumable and do not contain prepayment penalties. The Bank underwrites its
adjustable rate loans on the basis of the borrowers ability to pay at the
initial rate or at the rate after the first adjustment.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms
of the loan, thereby increasing the potential for default. At the same
time, the marketability of the underlying property may be adversely affected
by higher interest rates. The Bank believes that these risks, which have
not had a material adverse effect on the Bank to date, generally are less
than the risks associated with holding fixed-rate loans in an increasing
interest rate environment.
The Bank's fixed rate loans are originated primarily with terms of 15
years and the Bank does not originate fixed rate loans with a term exceeding
20 years. The Bank also offers, but does not emphasize, second mortgage
loans with fixed rates of interest and terms of one to 15 years. The Bank
does not require that it hold the first mortgage on the secured property,
however, the balance on all mortgages on the secured property generally
cannot exceed 80% of the value of the secured property. At September 30,
1998, second mortgage loans amounted to $6.2 million or 6.4% of the total
loan portfolio.
The Bank is permitted to lend up to 100% of the appraised value of the
real property securing a residential loan. Pursuant to underwriting
guidelines adopted by the Board of Directors, the Bank will lend up to 95%
of the appraised value of the property securing a one-to-four family
residential loan, and generally requires borrowers to obtain private
mortgage insurance on the portion of the principal amount of the loan that
exceeds 80% of the appraised value of the security property. However, the
Bank's residential mortgage loans typically do not exceed 80% of the
appraised value of the security property. At September 30, 1998, the Bank
had $3.5 million of loans with a loan-to-value ratio in excess of 80% of
appraised value.
Multi-Family Residential Real Estate Loans. The Bank originates
mortgage loans for the acquisition and refinancing of existing multi-family
residential properties. At September 30, 1998, $11.1 million or 11.4% of
the Bank's total loan portfolio consisted of loans secured by existing
multi-family residential real estate properties. The majority of the Bank's
multi-family residential loans are secured by apartment buildings. All of
the Bank's multi-family real estate loans are secured by property located in
the Bank's primary market area.
Multi-family loans are made on terms up to 25 years. Although the
Bank will originate these loans with fixed interest rates, the majority of
these loans have interest rates which adjust in accordance with a designated
index (the weekly average yield on U.S. Treasury securities adjusted to a
constant comparable maturity of one year). Loan to value ratios on the
Bank's multi-family real estate loans are currently limited to 75%. It is
also the Bank's general policy to obtain corporate or personal guarantees,
as applicable, supported by financial statements, on its multi-family
residential real estate loans from the principals of the borrower.
Multi-family real estate lending entails significant additional risks
as compared with one-to-four family residential property lending. Such
loans typically involve large loan balances to single borrowers or groups of
related borrowers. The payment experience on such loans is typically
dependent on the successful operation of the real estate project. The
success of such projects is sensitive to changes in supply and demand
conditions in the market for multi-family real estate as well as economic
conditions generally. At September 30, 1998, the Bank had $343,000 of
nonperforming multi-family real estate loans. See "- Asset Quality."
Land and Construction Lending. The Bank also originates residential
land and construction loans, although the Bank has originated multi-family
construction and land acquisition and development loans to a limited degree.
Land and construction loans are classified as either residential or multi-
family at the time of origination, depending on the nature of the property
securing the loan. The Bank's construction lending activities are limited
to the Bank's primary market area. At September 30, 1998, land and
construction loans amounted to $5.5 million or 5.7% of the Bank's total loan
portfolio, all of which consisted of residential construction loans. The
Bank's residential and multi-family construction loans generally have fixed
interest rates for a term of one year, with payments being made monthly on
an interest-only basis. Construction loans are made with a maximum loan to
value ratio of 80%.
With limited exceptions, the Bank's construction loans are made to
individual homeowners and a limited number of local real estate builders and
developers for the purpose of constructing primarily one-to-four family
residential homes. Upon application, credit review and analysis of personal
and corporate financial statements, the Bank will make loans to local
builders. These loans may be used for the purpose of construction of
speculative (or unsold) residential properties. Once approved for a
construction loan, draws are granted on a percentage of completion basis.
The Bank also inspects construction projects as draws are requested.
Construction lending is generally considered to involve a higher level
of risk as compared to one-to-four family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and
the effects of general economic conditions on developers and builders.
Moreover, a construction loan can involve additional risks because of the
inherent difficulty in estimating both a property's value at completion of
the project and the estimated cost (including interest) of the project. The
nature of these loans is such that they are generally more difficult to
evaluate and monitor. In addition, speculative construction loans to a
builder involve projects which are not pre-sold and thus pose a greater
potential risk to the Bank than construction loans to individuals on their
personal residences.
The Bank has attempted to minimize the foregoing risks by, among other
things, limiting the extent of its construction lending generally and by
limiting its construction lending to primarily residential properties. In
addition, the Bank has adopted underwriting guidelines which impose
stringent loan-to-value, debt service and other requirements for loans which
are believed to involve higher elements of credit risk, by limiting the
geographic area in which the Bank will do business and by working with
builders with whom it has established relationships. At September 30, 1998,
the Bank had $335,000 of nonperforming land and construction loans. See "-
Asset Quality."
Consumer Loans. The Bank offers consumer loans in order to provide a
full range of financial services to its customers. The consumer loans
offered by the Bank include deposit account secured loans and unsecured
loans. Consumer loans amounted to $1.1 million or 1.2% of the total loan
portfolio at September 30, 1998, $665,000 of which consisted of loans
secured by deposit accounts. Such loans are originated for up to 90% of the
account balance, with a hold placed on the account restricting the
withdrawal of the account balance.
Loan Fee Income. In addition to interest earned on loans, the Bank
receives income from fees in connection with loan originations, loan
modifications, late payments, prepayments and for miscellaneous services
related to its loans. Income from these activities varies from period to
period depending upon the volume and type of loans made and competitive
conditions.
The Bank charges loan origination fees which are calculated as a
percentage of the amount borrowed. Loan origination and commitment fees and
all incremental direct loan origination costs are deferred and recognized
over the contractual remaining lives of the related loans on a level yield
basis. Discounts and premiums on loans purchased are accreted and amortized
in the same manner. In accordance with FASB No. 91, the Bank recognized
approximately $269,000 during fiscal 1998 in connection with loan
refinancing, payoffs and ongoing amortization of outstanding loans.
Asset Quality
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-
accrual status, previously accrued but unpaid interest is deducted from
interest income. The Bank does not accrue interest on real estate loans
past due 90 days or more. Loans may be reinstated to accrual status when
all payments are brought current and, in the opinion of management,
collection of the remaining balance can be reasonably expected.
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as other real estate owned until
sold. Pursuant to a statement of position ("SOP 92-3") issued by the
American Institute of Certified Public Accountants in April 1992, which
provides guidance on determining the balance sheet treatment of foreclosed
assets in annual financial statements for periods ending on or after
December 15, 1992, there is a rebuttable presumption that foreclosed assets
are held for sale and such assets are recommended to be carried at the lower
of fair value minus estimated costs to sell the property, or cost (generally
the balance of the loan on the property at the date of acquisition). After
the date of acquisition, all costs incurred in maintaining the property are
expensed and costs incurred for the improvement or development of such
property are capitalized up to the extent of their net realizable value.
The Bank's accounting for its real estate acquired by foreclosure complies
with the guidance set forth in SOP 92-3.
The Bank is required to account for certain loan modifications or
restructurings as "troubled debt restructurings." In general, the
modification or restructuring of a debt constitutes a troubled debt
restructuring if the Bank for economic or legal reasons related to the
borrower's financial difficulties grants a concession to the borrower that
the Bank would not otherwise consider. Debt restructurings or loan
modifications for a borrower do not necessarily always constitute troubled
debt restructurings, however, and troubled debt restructurings do not
necessarily result in non-accrual loans. The Bank did not have any troubled
debt restructurings as of September 30, 1998.
Delinquent Loans. The following table sets forth information
concerning delinquent loans at September 30, 1998 in dollar amounts and as a
percentage of each category of the Bank's loan portfolio at such date. The
amounts presented represent the total outstanding principal balances of the
related loans, rather than the actual payment amounts which are past due.
<TABLE>
<CAPTION>
One-to-Four Family Land and
Residential Multi-Family Construction Consumer Total
------------------ -------------- -------------- ------------ -------------
Amount % Amount % Amount % Amount % Amount %
------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 89 days $2,085 2.64% $ -- --% $227 4.10% $-- --% $2,312 2.39%
90 days and over 2,905 3.68 343 3.10 335 6.06 -- -- 3,583 3.71
------ ---- ---- --- ------
Total delinquent loans $4,990 $343 $562 $-- $5,895
====== ==== ==== === ======
</TABLE>
The following table sets forth the amounts and categories of the
Bank's non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------
1998 1997 1996
--------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Nonaccruing loans:
One-to-four family residential $2,905 $1,266 $ 917
Multi-family residential 343 360 56
Land and construction 335 309 90
Consumer -- -- --
Accruing consumer loans 90 days or
more delinquent: -- 2 117
--------------------------
Total nonperforming loans 3,583 1,937 1,180
--------------------------
Real estate acquired through foreclosure -- -- --
--------------------------
Total nonperforming assets $3,583 $1,937 $1,180
==========================
Total nonperforming loans as a
percentage of total net loans 3.86% 2.19% 1.51%
==========================
Total nonperforming assets as a
percentage of total assets 3.46% 1.98% 1.34%
==========================
</TABLE>
The $2.9 million of nonaccruing one-to-four family residential loans
at September 30, 1998 consisted of 38 loans secured by one-to-four family
residential property located in the Bank's market area. The largest of such
loans at such date amounted to approximately $343,000 and the average loan
balance was approximately $76,000. Substantially all of such loans are
extended to separate borrowers.
Classified Assets. Federal regulations require that each insured
savings association classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them.
There are three classifications for problem assets: "substandard,"
"doubtful" and "loss." Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with
the additional characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable, and there is a high possibility of loss. An asset
classified loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. At September
30, 1998, the Bank had $4.6 million of classified assets, $4.4 million as
substandard, $40,000 as special mention and $20,000 as doubtful.
Allowance for Loan Losses. It is management's policy to maintain an
allowance for estimated losses based on the perceived risk of loss in the
loan portfolio. In assessing risk, management considers historical loss
experience, the volume and type of lending conducted by the Bank, industry
standards, past due loans, general economic conditions and other factors
related to the collectibility of the loan portfolio. The allowance is
increased by provisions for loan losses which are charged against income.
Although management uses the best information available to make
determinations with respect to the provisions for loan losses, additional
provisions for loan losses may be required to be established in the future
should economic or other conditions change substantially. In addition, the
OTS and the FDIC, as an integral part of their examination process,
periodically review the Bank's allowance for possible loan losses. Such
agencies may require the Bank to recognize additions to such allowance based
on their judgments about information available to them at the time of their
examination.
The following table summarizes changes in the allowance for loan
losses and other selected statistics for the periods presented.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------
1998 1997 1996
-----------------------------
<S> <C> <C> <C>
Average loans receivable, net $91,487 $83,912 $73,875
=============================
Allowance for possible loan losses,
beginning of year $ 476 $ 366 $ 239
Charge-offs(1) (57) (27) --
Recoveries(1) -- -- 1
Provision for loan losses 285 137 126
-----------------------------
Allowance for loan losses, end of
period $ 704 $ 476 $ 366
=============================
Net loans (charged-off) recovered
to average loans, net (0.06)% (0.03)% --%
=============================
Allowance for loan losses to total loans 0.73% 0.53% 0.45%
=============================
Allowance for loan losses to total
nonperforming loans 19.65% 24.57% 31.02%
=============================
Net loans (charged-off) recovered
to allowance for loan losses (8.10)% (5.67)% 0.27%
=============================
- --------------------
<FN>
<F1> All charge-offs and recoveries relate to single-family loans.
</FN>
</TABLE>
The following table presents the allocation of the allowance for loan
losses to the total amount of loans in each category listed at the dates
indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
% of Loans % of Loans % of Loans
in Each in Each in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
---------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One-to-four family residential $522 74.3% $316 82.2% $226 78.5%
Multi-family real estate 106 15.0 100 12.2 80 14.0
Land and construction 68 9.6 50 4.3 25 7.2
Consumer 8 1.1 10 1.4 35 0.3.0
-----------------------------------------------------------------
Total $704 100.0% $476 100.0% $366 100.0%
=================================================================
</TABLE>
Investment Securities. The investment policy of the Bank, as
established by the Board of Directors, is designed primarily to provide and
maintain liquidity and to generate a favorable return on investments without
incurring undue interest rate risk, credit risk, and investment portfolio
asset concentrations. The Bank's investment policy is currently implemented
by Larry N. Hatfield, the Bank's President and reviewed and evaluated by the
Board of Directors.
The Bank is authorized to invest in obligations issued or fully
guaranteed by the U.S. Government, certain federal agency obligations,
certain time deposits, negotiable certificates of deposit issued by
commercial banks and other insured financial institutions, investment grade
corporate debt securities and other specified investments.
The following table sets forth certain information relating to the
Company's investment securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
agency securities $3,754 $3,762 $2,990 $2,984 $4,003 $3,980
Mortgage-backed
securities -- -- 797 798 818 816
FHLB stock 871 871 785 785 700 700
-----------------------------------------------------------
Total $4,625 $4,633 $4,572 $4,567 $5,521 $5,497
============================================================
</TABLE>
Information regarding the contractual maturities and weighted average
yield of the Company's investment securities portfolio at September 30, 1998
is presented below. The actual maturity of the Company's investment
securities may differ from contractual maturity since certain of the
Company's investment securities are subject to call provisions which allow
the issuer to accelerate the maturity date of the security.
<TABLE>
<CAPTION>
At September 30, 1998
------------------------------------------------------------
After Five
One Year After One to To Over 10
of Less Five Years 10 Years Years Total
------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. Government and agency
securities, excluding
FHLB stock $-- $3,001 $-- $753 $3,754
---------------------------------------------------------
Total $-- $3,001 $-- $753 $3,754
=========================================================
Weighted average yield --% 6.10% --% 5.63% 6.00%
</TABLE>
The Company generally holds its investments to maturity. The Bank
acquires investment securities with the intent and has the ability to hold
such investment securities to maturity. Investment securities are carried at
cost (as adjusted for amortization of premiums and discounts) because it is
management's intention to hold them to maturity. The Bank to date has not
engaged and does not intend to engage in the immediate future in trading
investment securities. As of September 30, 1998, the Company had $753,000
of investment securities classified as available for sale and no mortgage-
backed securities classified as available for sale. At September 30, 1998,
investments in the debt and/or equity securities of any one issuer did not
exceed more than 10% of the Company's stockholders' equity.
Sources of Funds
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank
derives funds from loan principal repayments, prepayments and advances from
the FHLB of Cincinnati. Loan repayments are a relatively stable source of
funds, while deposit inflows and outflows are significantly influenced by
general interest rates and money market conditions. Borrowings may be used
on a short-term basis to compensate for reductions in the availability of
funds from other sources. They may also be used on a longer term basis for
general business purposes.
Deposits. The Bank's deposit products include a broad selection of
deposit instruments, including NOW accounts, money market accounts, regular
savings accounts and term certificate accounts. Deposit account terms vary,
with the principal differences being the minimum balance required, the time
periods the funds must remain on deposit and the interest rate.
The Bank considers its primary market area to be Campbell County,
Kentucky. The Bank utilizes traditional marketing methods to attract new
customers and savings deposits. The Bank does not advertise for deposits
outside of its primary market area or utilize the services of deposit
brokers, and management believes that an insignificant number of deposit
accounts were held by non-residents of Kentucky at September 30, 1998.
The Bank has been competitive in the types of accounts and in interest
rates it has offered on its deposit products but does not necessarily seek
to match the highest rates paid by competing institutions. Although market
demand generally dictates which deposit maturities and rates will be
accepted by the public, the Bank intends to continue to promote longer term
deposits to the extent possible and consistent with its asset and liability
management goals.
The following table shows the distribution of, and certain other
information relating to, the Bank's deposits by type of deposit as of the
dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------
Amount Percent Amount Percent Amount Percent
-------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and statement
savings accounts $ 8,239 10.72% $ 7,563 10.52% $ 8,393 13.17%
Money market accounts 2,311 3.01 2,685 3.74 2,691 4.22
Certificates of deposit 62,327 81.11 58,660 81.63 49,647 77.90
NOW and Super NOW accounts 3,974 5.16 2,950 4.11 3,000 4.71
-------------------------------------------------------------------
Total deposits at end of period $76,851 100.00% $71,858 100.00% $63,731 100.00%
===================================================================
</TABLE>
The following table sets forth the net savings flows of the Bank
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------
1998 1997 1996
----------------------------
(In Thousands)
<S> <C> <C> <C>
Increase before interest credited $2,105 $4,919 $1,291
Interest credited 2,888 3,208 2,442
-----------------------------
Net savings increase $4,993 $8,127 $3,733
=============================
</TABLE>
The following table sets forth maturities of the Bank's certificates
of deposit of $100,000 or more at September 30, 1998 by time remaining to
maturity.
<TABLE>
<CAPTION>
Amounts in
Thousands
----------
<S> <C>
Three months or less $ 200
Over three months through six months 709
Over six months through 12 months 1,250
Over 12 months 3,809
------
Total $5,968
======
</TABLE>
The following table presents, by various interest rate categories, the
amount of certificates of deposit at September 30, 1998 and 1997, and the
amounts at September 30, 1998 which mature during the periods indicated.
<TABLE>
<CAPTION>
Amounts at September 30, 1998
September 30, Maturing Within
------------- ---------------------------------------------------
Certificates of
Deposit 1998 1997 One Year Two Years Three Years Thereafter
-------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
4.0% or less $ -- $ 82 $ -- $ -- $ -- $ --
4.01% to 6.0% 31,852 24,478 22,889 4,499 3,005 1,459
6.01% to 8.0% 30,475 34,100 13,261 13,547 1,611 2,056
--------------------------------------------------------------------------
Total certificate
accounts $62,327 $58,660 $36,150 $18,046 $4,616 $3,515
==========================================================================
</TABLE>
The following table presents the average balance of each deposit type
and the average rate paid on each deposit type for the periods indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
-----------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and statement
savings accounts $7,370 2.75% $7,888 2.73% $8,074 2.78%
Money market accounts 2,498 2.74 2,638 2.74 2,797 2.74
Certificates of deposit 60,278 5.86 54,312 6.01 48,096 6.11
NOW and Super NOW
accounts 3,347 2.15 2,732 2.27 2,521 2.16
Noninterest-bearing
deposits 282 -- 193 -- 157 --
-----------------------------------------------------------------
Total deposits $75,096 5.24% $67,763 5.40% $61,644 5.35%
=================================================================
</TABLE>
Borrowing. The Bank may obtain advances from the FHLB upon the
security of the common stock it owns in that bank and certain of its
residential mortgage loans, provided certain standards related to
creditworthiness have been met. Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. Such advances are generally available to meet seasonal and
other withdrawals of deposit accounts and to permit increased lending. At
September 30, 1998, the Bank had $8.5 million of advances from the FHLB of
Cincinnati.
The following table sets forth-certain information regarding borrowed
funds at or for the dates indicated:
<TABLE>
<CAPTION>
At or for the Year Ended September 30,
--------------------------------------
1998 1997 1996
-----------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding $ 9,327 $8,937 $3,926
Maximum amount outstanding at any
month-end during the period $11,292 $9,701 $4,504
Balance outstanding at end of period $ 8,526 $8,846 $4,454
Weighted average interest rate
during the period 5.81% 5.85% 5.46%
Weighted average interest rate at
end of period 5.22% 5.76% 5.51%
</TABLE>
<TABLE>
<CAPTION>
At or for the Year Ended September 30,
--------------------------------------
1998 1997 1996
----------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Other borrowings:
Average balance outstanding $ 250 $ 192 $ 265
Maximum amount outstanding at any
month-end during the period $4,000 $ -- $2,300
Balance outstanding at end of period $4,000 $ -- $2,300
Weighted average interest rate
during the period 8.25% 8.25% 8.25%
Weighted average interest rate at
end of period 8.25% --% 8.25%
</TABLE>
Employees
The Bank had 18 full-time employees and 4 part-time employees at
September 30, 1998. None of these employees is represented by a collective
bargaining agent, and the Bank believes that it enjoys good relations with
its personnel.
Subsidiaries
The Bank had no subsidiaries as of September 30, 1998.
Competition
The Bank faces strong competition both in attracting deposits and
making real estate loans. Its most direct competition for deposits has
historically come from other savings associations, credit unions and
commercial banks located in northern Kentucky, including many large
financial institutions which have greater financial and marketing resources
available to them. In addition, during times of high interest rates, the
Bank has faced additional significant competition for investors' funds from
short-term money market securities, mutual funds and other corporate and
government securities. The ability of the Bank to attract and retain
savings deposits depends on its ability to generally provide a rate of
return, liquidity and risk comparable to that offered by competing
investment opportunities.
The Bank experiences strong competition for real estate loans
principally from other savings associations, commercial banks and mortgage
banking companies. The Bank competes for loans principally through the
interest rates and loan fees it charges and the efficiency and quality of
services it provides borrowers. Competition may increase as a result of the
continuing reduction of restrictions on the interstate operations of
financial institutions.
Year 2000 Readiness
Because the Bank's operations rely extensively on computer systems, the
Bank is addressing problems associated with the possibility that computer
systems will not recognize the year 2000 ("Y2K") correctly. The Bank has
developed a Year 2000 Plan, which was presented to the Board of Directors in
1997. The Board of Directors appointed a Year 2000 Coordinator, which reports
to the Board of Directors quarterly.
The Bank relies primarily on third-party vendors for its computer and
processing, as well as other significant functions and services, such as
securities safekeeping services, ATM service, and wire transfers. The Year
2000 Coordinator is working with the vendors to assess their Y2K readiness.
Based on initial assessment, the Board of Directors believes that with planned
modifications to existing software and hardware and planned conversions to new
software and hardware, the third-party vendors are taking the appropriate
steps to ensure that critical systems will function properly. The planned
modifications and conversions should be completed and tested by June 30, 1999.
All date-dependent equipment and related software throughout the Bank
have been inventoried and tested for Y2K capabilities. Equipment identified as
not being Y2K compatible has been replaced. The Bank has estimated that the
cost for new hardware and software will be approximately $35,000.
If the modifications and conversions by both third-party vendors and the
Bank are not completed on a timely basis or if they fail to function properly,
the operations and financial condition of the Company could be materially
affected. The Bank is developing contingency operations in the event of
system failure.
In addition, financial institutions may experience increases in problem
loans and credit losses in the event that borrowers fail to prepare properly
for Y2K, and higher funding costs could result if consumers react to publicity
about the issue by withdrawing deposits. The Bank is assessing such risks among
its customers. The Company could also be materially adversely affected
if other third parties, such as governmental agencies, clearing houses,
telephone companies, utilities and other service providers fail to prepare
properly. The Bank is therefore attempting to assess these risks and take
action to minimize their effect.
REGULATION
Set forth below is a brief description of those laws and regulations
which, together with the descriptions of laws and regulations contained
elsewhere herein, are deemed material to an investor's understanding of the
extent to which the Company and the Bank are regulated. The description of
the laws and regulations hereunder and elsewhere herein does not purport to
be complete and is qualified in its entirety by reference to applicable laws
and regulations.
The Company
General. The Company, as a savings and loan holding company within
the meaning of the HOLA, has registered with the OTS and is subject to OTS
regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, the Bank is subject to
certain restrictions in its dealings with the Company and affiliates
thereof.
Activities Restrictions. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one
subsidiary savings institution. Such financial institution holding
companies are the only such companies which may engage in any commercial,
securities and insurance activities. However, Congressional legislative
proposals, which have been introduced and are under consideration, would
either limit unitary savings and loan holding companies to the same activity
limits as are imposed on other financial institution holding companies or
would permit certain bank holding companies to engage in commercial
activities and expanded securities and insurance activities. The Company
cannot predict if, and in what form, these proposals might become law.
However, the broad latitude to engage in activities under current law is
restricted if the Director of the OTS determines that there is reasonable
cause to believe that the continuation by a savings and loan holding company
of an activity constitutes a serious risk to the financial safety, soundness
or stability of its subsidiary savings institution. If this is the case,
the Director may impose such restrictions as deemed necessary to address
such risk, including limiting (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the
above rules as to permissible business activities of unitary savings and
loan holding companies, if the savings institution subsidiary of such a
holding company fails to meet the QTL test, as discussed under "- The Bank -
Qualified Thrift Lender Test," then such unitary holding company also shall
become subject to the activities restrictions applicable to multiple savings
and loan holding companies and, unless the savings institution requalifies
as a QTL within one year thereafter, shall register as, and become subject
to the restrictions applicable to, a bank holding company. See "- The Bank
- - Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve
emergency thrift acquisitions and where each subsidiary savings institution
meets the QTL test, as set forth below, the activities of the Company and
any of its subsidiaries (other than the Bank or other subsidiary savings
institutions) would thereafter be subject to further restrictions. Among
other things, no multiple savings and loan holding company or subsidiary
thereof which is not a savings institution shall commence or continue for a
limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof any business activity, upon prior notice to,
and no objection by the OTS, other than: (i) furnishing or performing
management services for a subsidiary savings institution; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution; (iv)
holding or managing properties used or occupied by a subsidiary savings
institution; (v) acting as trustee under deeds of trust; (vi) those
activities authorized by regulation as of March 5, 1987 to be engaged in by
multiple savings and loan holding companies; or (vii) unless the Director of
the OTS by regulation prohibits or limits such activities for savings and
loan holding companies, those activities authorized by the FRB as
permissible for bank holding companies. Those activities described in (vii)
above also must be approved by the Director of the OTS prior to being
engaged in by a multiple savings and loan holding company.
Limitations on Transactions with Affiliates. Transactions between
savings institutions and any affiliate are governed by Sections 23A and 23B
of the Federal Reserve Act. An affiliate of a savings institution is any
company or entity which controls, is controlled by or is under common
control with the savings institution. In a holding company context, the
parent holding company of a savings institution (such as the Company) and
any companies which are controlled by such parent holding company are
affiliates of the savings institution. Generally, Sections 23A and 23B (i)
limit the extent to which the savings institution or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such institution's capital stock and surplus, and contain an
aggregate limit on all such transactions with all affiliates to an amount
equal to 20% of such capital stock and surplus and (ii) require that all
affiliate transactions be on terms substantially the same, or at least as
favorable, to the institution or subsidiary as those provided to a non-
affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar transactions.
In addition to the restrictions imposed by Sections 23A and 23B, no savings
institution may (i) loan or otherwise extend credit to an affiliate, except
for any affiliate which engages only in activities which are permissible for
bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for
affiliates which are subsidiaries of the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders of savings institutions and their holding companies. Under
Section 22(h), loans to a director, an executive officer and to a greater
than 10% stockholder of a savings institution, and certain affiliated
interests of either, may not exceed, together with all other outstanding
loans to such person and affiliated interests, the savings institution's
loans to one borrower limit. Section 22(h) also requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other
persons and also requires prior board approval for certain loans. In
addition, the aggregate amount of extensions of credit by a savings
institution to all insiders cannot exceed the institution's unimpaired
capital and surplus. Furthermore, Section 22(g) places additional
restrictions on loans to executive officers. At September 30, 1998, the
Bank was in compliance with the above restrictions.
Restrictions on Acquisitions. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without
prior approval of the Director of the OTS, (i) control of any other savings
institution or savings and loan holding company or substantially all the
assets thereof or (ii) more than 5% of the voting shares of a savings
institution or holding company thereof which is not a subsidiary. Except
with the prior approval of the Director of the OTS, no director or officer
of a savings and loan holding company or person owning or controlling by
proxy or otherwise more than 25% of such company's stock, may acquire
control of any savings institution, other than a subsidiary savings
institution, or of any other savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls
savings institutions in more than one state if (i) the multiple savings and
loan holding company involved controls a savings institution which operated
a home or branch office located in the state of the institution to be
acquired as of March 5, 1987; (ii) the acquiror is authorized to acquire
control of the savings institution pursuant to the emergency acquisition
provisions of the Federal Deposit Insurance Act ("FDIA"); or (iii) the
statutes of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by the state-chartered
institutions or savings and loan holding companies located in the state
where the acquiring entity is located (or by a holding company that controls
such state-chartered savings institutions).
Under the Bank Holding Company Act of 1956, the FRB is authorized to
approve an application by a bank holding company to acquire control of a
savings institution. In addition, a bank holding company that controls a
savings institution to merge or consolidate the assets and liabilities of
the savings institution with, or transfer assets and liabilities to, any
subsidiary bank which is a member of the BIF with the approval of the
appropriate federal banking agency and the FRB. As a result of these
provisions, there have been a number of acquisitions of savings institutions
by bank holding companies in recent years.
The Bank
General. The OTS has extensive authority over the operations of
federally chartered savings institutions. As part of this authority,
savings institutions are required to file periodic reports with the OTS and
are subject to periodic examinations by the OTS and the FDIC. The
investment and lending authority of savings institutions are prescribed by
federal laws and regulations, and such institutions are prohibited from
engaging in any activities not permitted by such laws and regulations.
Those laws and regulations generally are applicable to all federally
chartered savings institutions and may also apply to state-chartered savings
institutions. Such regulation and supervision is primarily intended for the
protection of depositors.
The OTS' enforcement authority over all savings institutions and their
holding companies was substantially enhanced by FIRREA. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated
for violations of laws and regulations and for engaging in unsafe or unsound
practices. Other actions or inactions may provide the basis for an
enforcement action, including misleading or untimely reports filed with the
OTS. FIRREA significantly increased the amount of and grounds for civil
money penalties.
Insurance of Accounts. The deposits of the Bank are insured to the
maximum extent permitted by the SAIF, which is administered by the FDIC, and
are backed by the full faith and credit of the U.S. Government. As
insurer, the FDIC is authorized to conduct examinations of, and to require
reporting by, FDIC-insured institutions. It also may prohibit any FDIC-
insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious threat to the FDIC. The FDIC also has
the authority to initiate enforcement actions against savings institutions,
after giving the OTS an opportunity to take such action.
The deposits of the Bank are currently insured by the SAIF. Both the
SAIF and the 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 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, 1997, 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 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 had a significant impact on the fiscal 1996 earnings, the
resulting lower annual premiums will benefit future earnings.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement
with the FDIC. It also may suspend deposit insurance temporarily during the
hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If insurance of accounts is
terminated, the accounts at the institution at the time of the termination,
less subsequent withdrawals, continue to be insured for a period of six
months to two years, as determined by the FDIC. Management is aware of no
existing circumstances which would result in termination of the Bank's
deposit insurance.
Regulatory Capital Requirements. Federally insured savings
institutions are required to maintain minimum levels of regulatory capital.
The OTS has established capital standards applicable to all savings
institutions. These standards generally must be as stringent as the
comparable capital requirements imposed on national banks. The OTS also is
authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.
Current OTS capital standards require savings institutions to satisfy
three different 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 3.0% of adjusted
total assets and "total" capital (a combination of core and "supplementary"
capital) equal to at least 8.0% of "risk-weighted" assets. For purposes of
the regulation, core capital generally consists of 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." Tangible capital is
given the same definition as core capital but does not include qualifying
supervisory goodwill and is reduced by the amount of all the savings
institution's intangible assets, with a limited exception for purchased
mortgage servicing rights. The Bank had no goodwill or other intangible
assets at September 30, 1998. Both core and tangible capital are further
reduced by an amount equal to a savings institution's debt and equity
investments in subsidiaries engaged in activities not permissible for
national banks (other than subsidiaries engaged in activities undertaken as
agent for customers or in mortgage banking activities and subsidiary
depository institutions or their holding companies). These adjustments do
not affect the Bank's regulatory capital.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and
supplementary capital in its total capital, provided that the amount of
supplementary capital included does not exceed the savings institution's
core capital. Supplementary capital generally consists of hybrid capital
instruments; perpetual preferred stock which is not eligible to be included
as core capital; subordinated debt and intermediate-term preferred stock;
and general allowances for loan losses up to a maximum of 1.25% of risk-
weighted assets. In determining the required amount of risk-based capital,
total assets, including certain off-balance sheet items, are multiplied by a
risk weight based on the risks inherent in the type of assets. The risk
weights assigned by the OTS for principal categories of assets are (i) 0%
for cash and securities issued by the U.S. Government or unconditionally
backed by the full faith and credit of the U.S. Government; (ii) 20% for
securities (other than equity securities) issued by U.S. Government-
sponsored agencies and mortgage-backed securities issued by, or fully
guaranteed as to principal and interest by, the FNMA or the FHLMC, except
for those classes with residual characteristics or stripped mortgage-related
securities; (iii) 50% for prudently underwritten permanent one- to four-
family first lien mortgage loans not more than 90 days delinquent and having
a loan-to-value ratio of not more than 80% at origination unless insured to
such ratio by an insurer approved by the FNMA or the FHLMC, qualifying
residential bridge loans made directly for the construction of one- to four-
family residences and qualifying multi-family residential loans; and (iv)
100% for all other loans and investments, including consumer loans,
commercial loans, and one- to four-family residential real estate loans more
than 90 days delinquent, and for repossessed assets.
At September 30, 1998, the Bank exceeded all of its regulatory capital
requirements, with tangible, core and risk-based capital ratios of 15.35%,
15.35% and 24.90%, respectively. The following table sets forth the Bank's
compliance with each of the above-described capital requirements as of
September 30, 1998.
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital(1)
----------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Regulatory capital $15,686 $15,686 $15,686
Additional Capital Items:
A regulatory capital -- -- 704
Regulatory Capital 15,686 15,686 16,390
Minimum required
regulatory capital 1,533 4,089 5,267
Excess regulatory capital $14,153 $11,597 $11,123
Regulatory capital as a
percentage 15.35% 15.35% 24.90%
Minimum capital required
as a percentage 1.50 3.00 8.00
Regulatory capital as a
percentage in excess of
requirements 13.85% 12.35% 16.90%
</TABLE>
Liquidity Requirements. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. The liquidity
requirement may vary from time to time (between 4% and 10%) depending upon
economic conditions and savings flows of all savings institutions. At the
present time, the required minimum liquid asset ratio is 5%. At September
30, 1998, the Bank's liquidity ratio was 6.3%.
Capital Distributions. OTS regulations govern capital distributions
by savings institutions, which include cash dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt
and other transactions charged to the capital account of a savings
institution to make capital distributions. Generally, the regulation
creates a safe harbor for specified levels of capital distributions from
institutions meeting at least their minimum capital requirements, so long as
such institutions notify the OTS and receive no objection to the
distribution from the OTS. Savings institutions and distributions that do
not qualify for the safe harbor are required to obtain prior OTS approval
before making any capital distributions.
Generally, a savings institution that before and after the proposed
distribution meets or exceeds its fully phased-in capital requirements (Tier
1 institutions) may make capital distributions during any calendar year
equal to the higher of (i) 100% of net income for the calendar year-to-date
plus 50% of its "surplus capital ratio" at the beginning of the calendar
year or (ii) 75% of net income over the most recent four-quarter period.
The "surplus capital ratio" is defined to mean the percentage by which the
institution's ratio of total capital to assets exceeds the ratio of its
fully phased-in capital requirement to assets. "Fully phased-in capital
requirement" is defined to mean an institution's capital requirement under
the statutory and regulatory standards applicable on September 30, 1996, as
modified to reflect any applicable individual minimum capital requirement
imposed upon the institution. Failure to meet fully phased-in or minimum
capital requirements will result in further restrictions on capital
distributions, including possible prohibition without explicit OTS approval.
At September 30, 1998, the Bank was a Tier 1 institution for purposes of
this regulation. See "- Regulatory Capital Requirements."
In order to make distributions under these safe harbors, Tier 1 and
Tier 2 institutions must submit written notice to the OTS 30 days prior to
making the distribution. The OTS may object to the distribution during that
30-day period based on safety and soundness concerns. In addition, a Tier 1
institution deemed to be in need of more than normal supervision by the OTS
may be downgraded to a Tier 2 or Tier 3 institution as a result of such a
determination.
Qualified Thrift Lender Test. In general , savings associations are
required to maintain at least 65% of their portfolio assets in certain
qualified thrift investments (which consist primarily of loans and other
investments related to residential real estate and certain other assets). A
savings association that fails the qualified thrift lender test is subject
to substantial restrictions on activities and to other significant
penalties.
Recent legislation permits a savings association to qualify as a
qualified thrift lender not only by maintaining 65% of portfolio assets in
qualified thrift investments (the "QTL test") but also in the alternative,
by qualifying under the Code as a "domestic building and loan association."
The Bank is a domestic building and loan association as defined in the Code.
Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios.
In particular, credit card and educational loans may now be made by savings
associations without regard to any percentage-of-assets limit, and
commercial loans may be made in an amount up to 10 percent of total assets,
plus an additionally 10 percent for small business loans. Loans for
personal, family and household purposes (other than credit card, small
business and educational loans) are now included without limit with other
assets that, in the aggregate, may account for up to 20% of total assets.
At September 30, 1998, under the expanded QTL test, approximately 92.4% of
the Bank's portfolio assets were qualified thrift investments.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs that administers the home
financing credit function of savings institutions. Each FHLB serves as a
reserve or central bank for its members within its assigned region. It is
funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes loans to members (i.e., advances)
in accordance with policies and procedures established by the Board of
Directors of the FHLB. At September 30, 1998, the Bank had $8.5 million of
FHLB advances.
As a member, the Bank is required to purchase and maintain stock in
the FHLB of Cincinnati in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year. At September 30, 1998, the Bank
had $871,000 in FHLB stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs
through direct loans or interest subsidies on advances targeted for
community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends paid and
could continue to do so in the future. These contributions also could have
an adverse effect on the value of FHLB stock in the future.
TAXATION
Federal Taxation
General. The Company and the Bank are subject to the generally
applicable corporate tax provisions of the Code, and the Bank is subject to
certain additional provisions of the Code which apply to thrift and other
types of financial institutions. The following discussion of federal
taxation is intended only to summarize certain pertinent federal income tax
matters material to the taxation of the Company and the Bank and is not a
comprehensive discussion of the tax rules applicable to the Company and the
Bank.
Fiscal Year. The Company and the Bank file a federal income tax
return on the basis of a fiscal year ending on September 30.
Bad Debt Reserves. Savings institutions, such as the Bank, which meet
certain definitional tests primarily relating to their assets and the nature
of their businesses, historically were permitted to establish a reserve for
bad debts and to make annual additions to the reserve. Under new
legislation passed in 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.
Distributions. If the Bank were to distribute cash or property to its
sole stockholder, and the distribution was treated as being from its
accumulated bad debt reserves, the distribution will cause the Bank to have
additional taxable income. A distribution is deemed to have been made from
accumulated bad debt reserves to the extent that (a) the reserves exceed the
amount that would have been accumulated on the basis of actual loss
experience, and (b) the distribution is a "non-qualified distribution." A
distribution with respect to stock is a non-qualified distribution to the
extent that, for federal income tax purposes, (i) it is in redemption of
shares, (ii) it is pursuant to a liquidation of the institution, or (iii) in
the case of a current distribution, together with all other such
distributions during the taxable year, it exceeds the institution's current
and post-1951 accumulated earnings and profits. The amount of additional
taxable income created by a non-qualified distribution is an amount that
when reduced by the tax attributable to it is equal to the amount of the
distribution.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of
20%. The alternative minimum tax generally applies to a base of regular
taxable income plus certain tax preferences ("alternative minimum taxable
income" or "AMTI") and is payable to the extent such AMTI is in excess of an
exemption amount. The Code provides that an item of tax preference is the
excess of the bad debt deduction allowable for a taxable year pursuant to
the percentage of taxable income method over the amount allowable under the
experience method. Other items of tax preference that constitute AMTI
include (a) tax-exempt interest on newly issued (generally, issued on or
after August 8, 1986) private activity bonds other than certain qualified
bonds and (b) 75% of the excess (if any) of (i) adjusted current earnings as
defined in the Code, over (ii) AMTI (determined without regard to this
preference and prior to reduction by net operating losses).
Net Operating Loss Carryovers. A financial institution may carry back
net operating losses ("NOLs") to the preceding three taxable years and
forward to the succeeding 15 taxable years. This provision applies to
losses incurred in taxable years beginning after 1986. At September 30,
1998, the Bank had no NOL carryforwards for federal income tax purposes.
Capital Gains and Corporate Dividends-Received Deduction. Corporate
net capital gains are taxed at a maximum rate of 34%. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated
tax return, and corporations which own less than 20% of the stock of a
corporation distributing a dividend may deduct only 70% of dividends
received or accrued on their behalf. However, a corporation may deduct 100%
of dividends from a member of the same affiliated group of corporations.
Other Matters. Federal legislation is introduced from time to time
that would limit the ability of individuals to deduct interest paid on
mortgage loans. Individuals are currently not permitted to deduct interest
on consumer loans. Significant increases in tax rates or further
restrictions on the deductibility of mortgage interest could adversely
affect the Bank.
The Bank's federal income tax returns for the tax years ended
September 30, 1992 forward are open under the statute of limitations and are
subject to review by the IRS.
State Taxation
The State of Kentucky imposes no income or franchise taxes on savings
institutions. However, the Company (on an unconsolidated basis) must pay a
Kentucky state income tax, as well as a tax on capital. The tax on income
is 4.0% for the first $25,000 of taxable income, 5.0% for the next $25,000,
6.0% for the next $50,000, 7.0% for the next $150,000 and 8.25% for all
income over $250,000. The tax on capital is .0021 times the capital
employed.
The Bank is subject to an annual Kentucky ad valorem tax. Assessed at
the beginning of each calendar year, this tax is 0.1% of the Bank's savings
accounts, common stock, capital and retained income with certain deductions
allowed for amounts borrowed by depositors and for securities guaranteed by
the U.S. government or certain of its agencies. During the year ended
September 30, 1998, the amount of such expense for the Bank was $91,000.
The Company is subject to an Ohio franchise tax based on its net worth
plus certain reserve amounts. Total net worth for this purpose is reduced
by certain exempted assets. The resultant net worth is taxed at a rate of
1.5% for the 1998 return, which is based on net worth as of December 31,
1998.
Item 2. Properties.
- --------------------
At September 30, 1998, the Bank conducted its business from its
executive offices in Fort Thomas, Kentucky and one full service branch
office, both of which are located in Campbell County, Kentucky.
The following table sets forth certain information with respect to the
Bank's office properties at September 30, 1998.
<TABLE>
<CAPTION>
Net Book Assessed
Value of Value
Premises and for
Fixed Assets, Property Amount of
Description/Address Leased/Owned Net Taxes Deposits
- ------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Main Office
(2 Buildings)
Fort Thomas, KY Owned $175 $1,071 $52,704
Branch Office
Alexandria, KY Owned 318 347 24,147
------------------------------------
Totals $493 $1,418 $76,851
====================================
</TABLE>
Item 3. Legal Proceedings.
- ---------------------------
The Company is not involved in any pending legal proceedings other
than nonmaterial legal proceedings occurring in the ordinary course of
business.
Item 4. Submission of Matters to Vote of Security Holders.
- -----------------------------------------------------------
Not Applicable.
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
- ----------------------------------------------------------------------
Matters.
--------
The information required herein, to the extent applicable, is
incorporated by reference from page 49 of the Company's 1998 Annual Report
to Stockholders ("1998 Annual Report").
Item 6. Selected Financial Data.
- ---------------------------------
The information required herein is incorporated by reference from page
3 of the 1998 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations.
----------------------
The information required herein is incorporated by reference from
pages 4 to 14 of the 1998 Annual Report.
Item 8. Financial Statements and Supplementary Data.
- -----------------------------------------------------
The information required herein is incorporated by reference from
pages 18 to 47 of the 1998 Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure.
---------------------
Not Applicable.
PART III.
Item 10. Directors and Executive Officers of the Registrant.
- -------------------------------------------------------------
The information required herein is incorporated by reference from
pages 2 to 4 of the definitive proxy statement of the Company for the Annual
Meeting of Stockholders to be held on January 26, 1998 ("Definitive Proxy
Statement").
Item 11. Executive Compensation.
- ---------------------------------
The information required herein is incorporated by reference from
pages 6 to 9 of the Definitive Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------------------------------------------------------------------------
The information required herein is incorporated by reference from
pages 4 and 5 of the Definitive Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
- ---------------------------------------------------------
The information required herein is incorporated by reference from page
9 of the Definitive Proxy Statement.
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------------------------------------------------------------------------
(a) Documents Filed as Part of this Report
--------------------------------------
(1) The following financial statements are incorporated by reference
from Item 8 hereof (see Exhibit 13):
Independent Auditors' Report
Consolidated Statements of Financial Condition at September 30,
1998 and 1997
Consolidated Statements of Income for the years ended
September 30, 1998, September 30, 1997 and September 30, 1996
Consolidated Statements of Changes in Stockholders' Equity for
the years ended September 30, 1998, September 30, 1997 and
September 30, 1996.
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, September 30, 1997 and September 30, 1996.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the absence of
conditions under which they are required or because the required information
is included in the financial statements and related notes thereto.
(3) The following exhibits are filed as part of this Form 10-K and
this list includes the Exhibit Index.
Exhibit Index
-------------
Page
----
2.1 Plan of Conversion *
3.1 Amended and Restated Articles of Incorporation of
Fort Thomas Financial Corporation **
3.2 Code of Regulations of Fort Thomas Financial Corporation *
3.3 Bylaws of Fort Thomas Financial Corporation *
4.0 Stock Certificate of Fort Thomas Financial Corporation ***
10.5 Employment Agreement between Fort Thomas Financial
Corporation and Larry N. Hatfield *
10.6 Employment Agreement between Fort Thomas Financial
Corporation and J. Michael Lonnemann *
13.0 1998 Annual Report to Stockholders ****
22.0 Subsidiaries of the Registrant - Reference is made to
"Item 1 Business - Subsidiaries" for the required information
- --------------------
(*) Incorporated herein by reference from the Company's Registration
Statement on Form S-1 filed with the SEC on March 7, 1995.
(**) Incorporated herein by reference from the Company's Registration
Statement on Form 8-A filed with the SEC on June 14, 1995.
(***) Incorporated herein by reference from the Company's Form 10-K for
fiscal 1995.
(****) Filed with the Company's Definitive Proxy Statement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FORT THOMAS FINANCIAL CORPORATION
By: /s/ Larry N. Hatfield
-------------------------------------
Larry N. Hatfield
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Larry N. Hatfield December 28, 1998
- ---------------------------
Larry N. Hatfield
President and Chief
Executive Officer
/s/ Robert L. Grimm December 28, 1998
- ---------------------------
Robert L. Grimm
Chairman of the Board
/s/ Harold A. Luersen December 28, 1998
- ---------------------------
Harold A. Luersen
Director
/s/ Don J. Beckmeyer December 28, 1998
- ---------------------------
Don J. Beckmeyer
Director
/s/ J. Steven McLane December 28, 1998
- ---------------------------
J. Steven McLane
Director
/s/ J. Michael Lonnemann December 28, 1998
- ---------------------------
J. Michael Lonnemann
Vice President and Secretary
(Principal accounting officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 637
<INT-BEARING-DEPOSITS> 2,498
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 3,001
<INVESTMENTS-MARKET> 753
<LOANS> 93,499
<ALLOWANCE> 704
<TOTAL-ASSETS> 103,611
<DEPOSITS> 76,851
<SHORT-TERM> 4,000
<LIABILITIES-OTHER> 1,521
<LONG-TERM> 8,526
0
0
<COMMON> 16
<OTHER-SE> 12,697
<TOTAL-LIABILITIES-AND-EQUITY> 103,611
<INTEREST-LOAN> 8,079
<INTEREST-INVEST> 211
<INTEREST-OTHER> 212
<INTEREST-TOTAL> 8,502
<INTEREST-DEPOSIT> 3,938
<INTEREST-EXPENSE> 521
<INTEREST-INCOME-NET> 4,043
<LOAN-LOSSES> 285
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,505
<INCOME-PRETAX> 1,532
<INCOME-PRE-EXTRAORDINARY> 1,532
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 989
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.66
<YIELD-ACTUAL> 4.10
<LOANS-NON> 2,976
<LOANS-PAST> 607
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 476
<CHARGE-OFFS> 228
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 704
<ALLOWANCE-DOMESTIC> 704
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
