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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
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Commission file number : 0-27868
FIDELITY FINANCIAL OF OHIO, INC.
State of Incorporation: Ohio IRS EIN: 31-1455721
4555 Montgomery Road, Cincinnati, Ohio 45212
(513) 351-6666
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date : Shares outstanding as of
November 11, 1997, 5,579,719.
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Page 1 of 22. Exhibit index on page 21.
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FIDELITY FINANCIAL OF OHIO, INC.
INDEX
Part I Financial Information Page
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Number
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Item 1 Financial Statements:
Consolidated Statements of Financial Condition
September 30, 1997 (Unaudited) and December 31, 1996 3
Consolidated Statements of Operations (Unaudited)
For the Nine Months and Three Months Ended
September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 19
Part II Other Information
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Items 1 through 6 20
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FIDELITY FINANCIAL OF OHIO, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30, December 31,
1997 1996
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ASSETS (unaudited)
Cash and due from banks $ 2,161 $ 2,121
Federal funds sold 8,790 13,820
Interest-bearing deposits in other financial institutions 4,168 6,669
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Cash and cash equivalents 15,119 22,610
Investment securities available for sale - at market 12,039 16,120
Mortgage-backed securities available for sale - at market 23,016 30,760
Mortgage-backed securities - at cost, approximate market value of
$14,401 and $10,831 at September 30, 1997 and December 31, 1996 14,261 10,744
Loans receivable - net 441,418 396,541
Loans held for sale - at lower of cost or market 129 --
Office premises and equipment - at depreciated cost 7,380 7,371
Federal Home Loan Bank stock - at cost 4,083 3,781
Accrued interest receivable on loans 2,263 1,950
Accrued interest receivable on mortgage-backed securities 270 310
Accrued interest receivable on investments 133 284
Prepaid expenses and other assets 522 371
Goodwill and other intangible assets, net of accumulated amortization 7,799 8,322
Prepaid federal income taxes 272 754
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TOTAL ASSETS $ 528,704 $ 499,918
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 422,826 $ 408,159
Advances from Federal Home Loan Bank 33,077 20,186
Advances by borrowers for taxes and insurance 1,528 2,005
Accrued interest and other liabilities 1,803 2,706
Deferred federal income taxes 595 150
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TOTAL LIABILITIES 459,829 433,206
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Preferred stock - authorized, 5,000,000 shares at $0.10 par value; none issued -- --
Common stock - authorized, 15,000,000 shares at $0.10 par value; 5,593,969
issued at September 30, 1997 and December 31, 1996 559 559
Additional paid-in capital 41,625 41,608
Retained earnings - restricted 28,885 26,311
Less shares acquired by Employee Stock Ownership Plan (ESOP) (1,822) (1,938)
Less 14,250 shares of common stock held in treasury - at cost (208) --
Less shares acquired by Management Recognition Plan (MRP) (272) --
Unrealized gains on securities designated as available for sale,
net of related tax effects 108 172
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TOTAL STOCKHOLDERS' EQUITY 68,875 66,712
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 528,704 $ 499,918
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FIDELITY FINANCIAL OF OHIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data, unaudited)
Nine Months Ended September 30, Three Months Ended September 30,
1997 1996 1997 1996
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Interest income
Loans $24,765 $11,435 $ 8,513 $ 3,859
Mortgage-backed securities 2,057 1,340 602 431
Investment securities 862 555 268 245
Interest-bearing deposits and other 765 522 269 157
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Total interest income 28,449 13,852 9,652 4,692
Interest expense
Deposits 15,601 7,190 5,332 2,404
Borrowings 1,106 680 433 214
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Total interest expense 16,707 7,870 5,765 2,618
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Net interest income 11,742 5,982 3,887 2,074
Provision for losses on loans 75 48 25 16
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Net interest income after provision for losses on loans 11,667 5,934 3,862 2,058
Other income
Gain (loss) on sale of investment and mortgage-backed securities 136 2 8 (10)
Gain on sale of loans 29 3 25 --
Gain on sale of real estate 6 -- -- --
Rental 164 124 48 47
Other operating 644 191 246 67
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Total other income 979 320 327 104
General, administrative and other expense
Employee compensation and benefits 3,066 1,658 1,019 594
Occupancy and equipment 1,115 546 379 190
Federal deposit insurance premium 189 1,446 66 1,239
Franchise tax 557 339 185 113
Amortization of goodwill and other intangible assets 523 -- 173 --
Other operating 1,559 693 518 243
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Total general, administrative and other expense 7,009 4,682 2,340 2,379
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Earnings (loss) before income taxes (credits) 5,637 1,572 1,849 (217)
Federal income taxes (credits)
Current 1,513 455 507 (59)
Deferred 479 79 126 (12)
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Total federal income taxes (credits) 1,992 534 633 (71)
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NET EARNINGS (LOSS) $ 3,645 $ 1,038 $ 1,216 $ (146)
======= ======= ======= =======
EARNINGS (LOSS) PER SHARE $ 0.67 $ 0.26 $ 0.22 $ (0.04)
======= ======= ======= =======
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FIDELITY FINANCIAL OF OHIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30,
(In thousands, unaudited)
1997 1996
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Cash flows from operating activities:
Net earnings for the period $ 3,645 $ 1,038
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 488 227
Amortization of premiums on investments and
mortgage-backed securities 20 38
Amortization of deferred loan origination fees (costs) 165 (144)
Amortization expense of stock benefit plans 233 117
Amortization of goodwill and other intangible assets 523 --
Amortization of purchase accounting adjustments (640) --
Gain on sale of investments and mortgage-backed securities (136) (2)
Gain on sale of mortgage loans (29) (3)
Loans disbursed for sale in the secondary market (2,086) (71)
Proceeds from sale of mortgage loans 1,974 353
Gain on sale of office premises and equipment (6) --
Federal Home Loan Bank stock dividends (209) (100)
Provision for losses on loans 75 48
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (313) (99)
Accrued interest receivable on mortgage-backed securities 40 27
Accrued interest receivable on investments 151 (178)
Prepaid expenses and other assets (151) (380)
Accrued interest and other liabilities (903) 1,271
Federal income taxes 986 (331)
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Net cash provided by operating activities 3,827 1,811
Cash flows provided by (used in) investing activities: Investment securities
designated available for sale:
Purchases (12,508) (11,521)
Proceeds from sales 16,575 2,994
Principal repayments 38 66
Mortgage-backed securities designated as available for sale:
Purchases (10,040) (3,173)
Proceeds from sales 14,306 1,006
Principal repayments 3,473 4,449
Mortgage-backed securities designated as held to maturity:
Purchases (5,078) --
Principal repayments 1,550 --
Loans disbursements (88,981) (36,972)
Purchase of loan participations (5,038) --
Principal repayments on loans 49,267 28,125
Purchase of Federal Home Loan Bank stock (93) (28)
Proceeds from sale of office premises and equipment 135 --
Purchases and additions to office premises and equipment (631) (316)
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Net cash used in investing activities (37,025) (15,370)
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Net cash used in operating and investing activities
(subtotal carried forward) (33,198) (13,559)
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FIDELITY FINANCIAL OF OHIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30,
(In thousands, unaudited)
1997 1996
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Net cash used in operating and investing activities
(subtotal carried forward) $(33,198) $(13,559)
Cash provided by (used in) financing activities:
Net increase in deposit accounts 14,976 7,583
Proceeds from Federal Home Loan Bank advances 20,000 --
Repayment of Federal Home Loan Bank advances (7,116) (4,176)
Repayment of loan to ESOP -- (178)
Proceeds from sale of common stock -- 20,434
Purchase of treasury stock (219) --
Purchase of stock for management recognition plan (292) --
Proceeds from the exercise of stock options 7 24
Dividends on common stock (1,172) (661)
Advances by borrowers for taxes and insurance (477) (397)
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Net cash provided by financing activities 25,707 22,629
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Net increase (decrease) in cash and cash equivalents (7,491) 9,070
Cash and cash equivalents at beginning of period 22,610 4,486
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Cash and cash equivalents at end of period $ 15,119 $ 13,556
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Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 1,025 $ 835
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Interest on deposits and borrowings $ 16,957 $ 7,851
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Supplemental disclosure of noncash investing activities:
Unrealized losses on securities designated as available
for sale, net of related tax effects $ (64) $ (277)
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Exchange of office premises for similar assets $ - $ 61
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Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
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On April 29, 1996, Fidelity Financial of Ohio, Inc. ("Fidelity" or the
"Corporation") entered into an Agreement of Merger, which was
subsequently amended on June 13, 1996, with Circle Financial
Corporation ("Circle"), a savings and loan holding company, pursuant to
which Circle would merge with and into a wholly-owned subsidiary of the
Corporation, and Circle's wholly-owned subsidiary, People's Savings
Association ("People's"), would merge with and into Fidelity Federal
Savings Bank (the "Savings Bank") (collectively the "Merger"). The
transaction was consummated on October 11, 1996, pursuant to the
amended and restated Agreement of Merger, and was accounted for using
the purchase method of accounting. The Corporation effected the
acquisition through cash payments totaling $12.2 million and the
issuance of 1,513,967 shares of its common stock at a fair value of
$9.87 per share. The acquisition resulted in the Savings Bank recording
residual goodwill totaling $5.4 million, which is being amortized over
a fifteen-year term using the straight-line method.
The unaudited financial statements were prepared in accordance with
instructions for Form 10-Q and, therefore, do not include information
or footnotes necessary for a complete presentation of financial
condition, results of operations, and cash flows in conformity with
generally accepted accounting principles. However, all adjustments
(consisting only of normal recurring accruals) which, in the opinion of
management, are necessary for a fair presentation of the consolidated
financial statements have been included. Accordingly, these financial
statements should be read in conjunction with the consolidated
financial statements, and the notes thereto, included in the
Corporation's Form 10-K for the year ended December 31, 1996. The
results of operations for the three months and nine months ended
September 30, 1997, are not necessarily indicative of the results which
may be expected for the entire year or any other period.
2. Effect of Recent Accounting Pronouncements
------------------------------------------
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation", establishing financial
accounting and reporting standards for stock-based compensation plans.
SFAS No. 123 encourages all entities to adopt a new method of
accounting to measure compensation cost of all stock-based 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
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the intrinsic value based method of accounting, which generally does
not result in compensation expense recognition for most plans.
Companies that elect to remain with the existing accounting are
required to disclose in a footnote to the financial statements pro
forma net earnings and, if presented, earnings per share, as if this
Statement had been adopted. The accounting requirements of SFAS No. 123
are effective for transactions entered into during fiscal years that
begin after December 15, 1995; however, companies are required to
disclose information for awards granted in their first fiscal year
beginning after December 15, 1994. Management has determined that the
Corporation will continue to account for stock-based compensation
pursuant to Accounting Principles Board Opinion No. 25, and therefore,
the disclosure provisions of SFAS No. 123 have no effect on its
consolidated financial condition or results of operations.
In June 1996 the FASB issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" which
established accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. The
standard is based on a consistent application of a financial components
approach that focuses on control. Under that approach, after a transfer
of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes
liabilities when extinguished. SFAS No. 125 provides consistent
standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. SFAS No. 125
supersedes SFAS No. 122. SFAS No. 125 is effective for transactions
occurring after December 31, 1997. Management does not expect any
material financial statement impact from adoption of SFAS No. 125.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share",
which requires companies to present basic earnings per share and, if
applicable, diluted earnings per share, instead of primary and fully
diluted earnings per share, respectively. Basic earnings per share is
computed without including potential common shares, i.e., no dilutive
effect. Diluted earnings per share is computed taking into
consideration common shares outstanding and dilutive potential common
shares, including options, warrants, convertible securities and
contingent stock agreements. SFAS No. 128 is effective for periods
ending after December 15, 1997. Early application is not permitted.
Based upon the provisions of SFAS No. 128, the Corporation's basic and
diluted earnings per share for the nine months ended September 30,
1997, would have each been $0.67, and the basic and diluted earnings
per share for the nine months ended September 30, 1996 would have each
been $0.26.
In February 1997, the FASB issued SFAS No. 129, "Disclosures of
Information about Capital Structure." SFAS No. 129 consolidated
existing accounting guidance relating to disclosure about a company's
capital structure. SFAS No. 129 is effective for financial statements
for periods ending after December 15, 1997. SFAS No. 129 is not
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expected to have a material impact on the Corporation's financial
statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of generalpurpose financial statements. SFAS
No. 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income
for the period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided
for comparative purposes is required. SFAS No. 130 is not expected to
have a material impact on the Corporation's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 significantly
changes the way that public business enterprises report information
about operating segments in annual financial statements and requires
that those enterprises report selected information about reportable
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS No. 131 uses a
"management approach" to disclose financial and descriptive information
about the way that management organizes the segments within the
enterprise for making operating decisions and assessing performance.
For many enterprises, the management approach will likely result in
more segments being reported. In addition, SFAS No. 131 requires
significantly more information to be disclosed for each reportable
segment than is presently being reported in annual financial statements
and also requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 is not expected to have
a material impact on the Corporation's financial statements.
3. Earnings Per Share
------------------
Earnings per share for the nine months and three months ended September
30, 1997 is based on approximately 5,463,000 and 5,468,000 weighted
average common and common equivalent shares outstanding, respectively.
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Earnings per share for the nine months and three months ended September
30, 1996 is based on approximately 3,904,000 and 3,905,000 weighted
average common and common equivalent shares outstanding, respectively.
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Fidelity Financial of Ohio, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Item 2
In the following pages, management presents an analysis of Fidelity's financial
condition as of September 30, 1997, and the results of operations for the nine
month and three month periods ended September 30, 1997, as compared to the same
periods in 1996. In addition to this historical information, the following
discussion contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995.
Readers should be aware that all forward-looking statements are necessarily
speculative and not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. Various risks and
uncertainties, including regional and national economic conditions, changes in
levels of market interest rates, credit risks of lending activities, and
competitive and regulatory factors, could affect the Corporation's financial
performance and could cause the Corporation's actual results for future periods
to differ materially from those anticipated or projected.
Discussion of Financial Condition Changes from December 31, 1996 to September
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30, 1997
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The Corporation's assets totaled $528.7 million at September 30, 1997, an
increase of $28.8 million, or 5.8%, from the December 31, 1996 total of $499.9
million. This increase was primarily funded by a $14.7 million increase in
deposit accounts and an increase of $12.9 million in Federal Home Loan Bank
(FHLB) advances.
Cash and cash equivalents, comprised of cash, interest-bearing deposits in other
financial institutions and federal funds sold, decreased by $7.5 million to
$15.1 million on September 30, 1997 from $22.6 million on December 31, 1996, as
a result of management redeploying excess liquidity into loan originations.
Investment securities totaled $12.0 million at September 30, 1997, a decrease of
$4.1 million, or 25.3%, from the $16.1 million of investments at December 31,
1996. The decrease in investment securities was primarily the result of the sale
of approximately $3.5 million of two-year U.S. Treasury notes during the third
quarter of 1997. The proceeds from such sale were reinvested in medium-term
(five years or less) fixed-rate mortgage-backed securities. At September 30,
1997, all of the Corporation's investment securities were classified as
available for sale and Fidelity had approximately $50,000 of unrealized gains
(net of related tax effects) with respect to its investment securities
portfolio. Total mortgage-backed securities decreased $4.2 million, from $41.5
million on December 31, 1996, to $37.3 million at September 30, 1997, due to the
sale of $14.2 million of fixed-rate mortgage-backed securities and repayments of
approximately
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$5.0 million, which were partially offset by the purchase of $5.1 million of
adjustable-rate mortgage-backed securities and $10.0 million of medium-term
fixed-rate mortgage-backed securities. At September 30, 1997, $23.0 million of
the Corporation's mortgage-backed securities portfolio were classified as
available for sale and Fidelity had approximately $58,000 of unrealized gains
(net of related tax effects) with respect to such securities. Due to changes
within the portfolio during the nine months ended September 30, 1997, the
Corporation's investment in adjustable-rate and medium-term fixed-rate
mortgage-backed securities totaled 100.0% of the portfolio, as compared to 62.7%
at December 31, 1996. Management's decision to invest in such a portfolio was
based on efforts to improve yields on liquid assets while reducing the
vulnerability of the Savings Bank's operations to changes in interest rates.
Loans receivable, including loans held for sale, totaled $441.5 million at
September 30, 1997, as compared to $396.5 million at December 31,1996. Loans
receivable increased by $45.0 million, or 11.3%, during the nine month period
ended September 30,1997, primarily due to $91.1 million of loan originations and
$5.0 million of loan participations purchased, which were partially offset by
$49.3 of principal repayments and $1.9 million of loan sales. At September 30,
1997, the Savings Bank's allowance for loan losses totaled $1.6 million, an
increase of $75,000 from the level maintained at December 31, 1996. At September
30, 1997, the Savings Bank's allowance represented approximately 0.36% of the
total loan portfolio and 106.3% of non-performing loans. At September 30, 1997,
the Savings Bank had $1.5 million of non performing loans, as compared to $1.1
million at December 31, 1996. At September 30, 1997, the ratio of total
non-performing loans to total loans amounted to 0.34%, as compared to 0.28% at
December 31,1996. Although management of the Savings Bank believes that its
allowance for loan losses at September 30, 1997 was adequate based on the
available facts and circumstances available to it, there can be no assurances
that additions to such allowance will not be necessary in future periods, which
could adversely affect the Corporation's results of operations.
Deposits totaled $422.8 million at September 30, 1997, an increase of $14.7
million, or 3.6%, over the $408.2 million of deposits at December 31, 1996.
Deposit accounts subject to daily repricing (passbook, money market deposit, NOW
and demand deposit accounts) decreased $4.5 million, or 4.8%, while certificates
of deposit accounts increased by $19.2 million, or 6.1%. A significant portion
of the increase in certificate of deposit accounts was due to increased
marketing efforts and attractive rates offered in order to increase deposit
balances.
At September 30, 1997, FHLB advances totaled $33.1 million, which represented a
$12.9 million, or 63.9%, increase from the $20.2 million balance at December 31,
1996. The increase resulted primarily from management's decision fund certain
non-residential real estate loan originations with FHLB advances of similar
maturity.
Stockholders' equity totaled $68.9 million at September 30, 1997, an increase of
approximately $2.2 million, or 3.2%, over the December 31, 1996 total. The
increase resulted from undistributed net earnings of $2.5 million and
amortization of stock benefit plan expense of approximately $233,000, which were
partially offset by a decrease in unrealized gains on
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available for sale securities of approximately $64,000, the purchase of shares
of common stock for the management recognition plan of $292,000 and the purchase
of shares of common stock to be held in treasury of $219,000.
Liquidity and Capital Resources
- -------------------------------
The Savings Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of United States
Government and government agency obligations and other similar investments
having maturities of five years or less. Such investments are intended to
provide a source of relatively liquid funds upon which the Savings Bank may
rely, if necessary, to fund deposit withdrawals and for other short-term funding
needs. The required level of such liquid investments is currently 5% of certain
liabilities as defined by the Office of Thrift Supervision ("OTS") and is
changed from time to time to reflect economic conditions.
The liquidity of the Savings Bank, as measured by the ratio of cash, cash
equivalents (not committed, pledged or required to liquidate specific
liabilities), investment and qualifying mortgage-backed securities to the sum of
total deposits plus borrowings payable within one year, was 6.33% at September
30, 1997, as compared to 7.20% at December 31, 1996. At September 30, 1997, the
Savings Bank's "liquid" assets totaled approximately $28.9 million, which was
$7.4 million in excess of the current OTS minimum requirements.
The Savings Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Savings Bank's
primary sources of funds are deposits, borrowings, amortization and prepayments
of outstanding loans and mortgage-backed securities, maturities of investment
and mortgage-backed securities and other short-term investments, sales of loans
and investment and mortgage-backed securities and funds provided from
operations. While scheduled loan and mortgage-backed securities amortization and
maturing investment securities 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 generates cash through the retail deposit market and, to the extent deemed
necessary, utilizes borrowings for liquidity purposes (primarily consisting of
advances from the FHLB of Cincinnati). At September 30, 1997, the Savings Bank
had $33.1 million of outstanding advances from the FHLB of Cincinnati.
Additionally, the Savings Bank has access to the Federal Reserve Bank discount
window.
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 long-term basis, the Savings Bank maintains a
strategy of investing in various loans, mortgage-backed securities and
investment securities. The Savings Bank uses its sources of funds primarily to
meet its ongoing commitments, to pay maturing savings certificates and savings
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withdrawals, fund loan commitments and maintain a portfolio of investment and
mortgage-backed securities. At September 30, 1997, the total approved loan
commitments outstanding amounted to approximately $9.9 million and commitments
to purchase participation loans totaled approximately $4.2 million. At the same
date, commitments under unused lines of credit secured by one- to four-family
residential property amounted to $6.1 million, commitments under unused lines of
credit secured by multi-family and non-residential real estate totaled $5.1
million and the unadvanced portion of construction loans approximated $6.3
million. Certificates of deposit scheduled to mature in one year or less at
September 30, 1997, totaled $239.0 million. The Savings Bank believes that it
has adequate resources to fund all of its commitments and that it can adjust the
rate of certificates of deposit in order to retain deposits in changing interest
rate environments.
The Savings Bank is required to maintain minimum levels of capital under three
separate standards. The Savings Bank is required to maintain regulatory capital
sufficient to meet tangible, core and risk-based capital ratios of 1.5% and 3.0%
of adjusted total assets and 8.0% of risk-weighted assets, respectively. At
September 30, 1997, the Savings Bank exceeded each of its capital requirements,
with tangible, core and risk-based ratios of 10.1%, 10.1% and 18.7%,
respectively.
The following table sets forth the Savings Bank's approximate regulatory capital
position, in dollars (millions) and as a percentage of applicable assets, at
September 30, 1997:
Actual Required Excess
-----------------------------------------------------------------
Tangible Capital $51.7 10.1% $ 7.7 1.5% $44.0 8.6%
Core Capital $51.7 10.1% $15.4 3.0% $36.3 7.1%
Risk-based Capital $53.3 18.7% $22.8 8.0% $30.5 10.7%
Comparison of Operating Results for The Nine Month and Three Month Periods Ended
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September 30, 1997 and 1996
- ---------------------------
General
- -------
Net earnings for the nine months ended September 30, 1997, totaled $3.6 million,
or $.67 per share, as compared to $1.0 million, or $.26 per share, for the nine
months ended September 30, 1996, an increase of $2.6 million. The net earnings
for the nine months ended September 30, 1996 was negatively impacted by a
$749,000 after-tax charge relating to the Federal Deposit Insurance Corporation
("FDIC") special assessment to recapitalize the Savings Association Insurance
Fund ("SAIF"). Excluding the SAIF assessment, net earnings for the 1996 period
would have been $1.8 million, or $.45 per share. In comparing the nine months
ended September 30, 1997 with the adjusted 1996 period, net earnings increased
$1.9 million
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and $.22 per share, or 104.0%. The increase resulted primarily from a $5.8
million increase in net interest income and a $659,000 increase in other income,
which were partially offset by a $3.5 million increase in general,
administrative and other expense (as adjusted to exclude the $1.1 million before
tax charge relating to the SAIF assessment) and a $1.1 million increase in the
provision for federal income taxes (as adjusted to exclude the tax benefits
recognized in connection with the SAIF assessment).
Net earnings for the three months ended September 30, 1997 totaled $1.2 million,
or $.22 per share, as compared to a loss of $146,000, or $.04 per share loss,
for the three months ended September 30, 1996. The earnings for the three months
ended September 30, 1996, Excluding the SAIF assessment of $749,000 on an
after-tax basis, would have totaled $603,000, or $.15 per share. Absent the SAIF
assessment in 1996, net earnings for the quarter ended September 30, 1997
increased $613,000 and $.07 per share, or 101.7%. The increase resulted
primarily from a $1.8 million increase in net interest income and a $223,000
increase in other income, which were partially offset by a $1.1 million increase
in general, administrative and other expenses (as adjusted to exclude the $1.1
million before tax charge relating to the SAIF assessment) and a $318,000
increase in the provision for federal income taxes (as adjusted to exclude the
tax benefits recognized in connection with the SAIF assessment).
Net Interest Income
- -------------------
Net interest income increased $5.8 million, or 96.3%, and $1.8 million, or
87.4%, for the nine month period and the three month period ended September 30,
1997, as compared to the same periods ended September 30, 1996. The increase in
net interest income for the nine month period was primarily due to the increase
in average interest earning assets of $255.9 million, from $242.2 million for
the nine months ended September 30, 1996 to $498.1 million for the nine months
ended September 30, 1997, which was partially offset by an increase in average
interest-bearing liabilities of $245.9 million, from $198.9 million for the nine
months ended September 30, 1996, to $444.8 million for the nine months ended
September 30, 1997. The increase in net interest income for the three month
period was primarily due to the increase in average interest earning assets of
$259.0 million, from $248.1 million for the three months ended September 30,
1996, to $507.1 million for the three months ended September 30, 1997, which was
partially offset by an increase in average interest-bearing liabilities of
$253.6 million, from $199.5 million for the three months ended September 30,
1996 to $453.1 million for the three months ended September 30, 1997. These
increases in average balances primarily reflect the effects of the October 11,
1996 acquisition of Circle. Increases in the interest rate spread, which
averaged 2.61% and 2.52% for the nine month and three month periods ended
September 30, 1997, respectively, as compared to 2.35% and 2.32% for the nine
month and three month periods ended September 30, 1996, also contributed to the
increase in net interest income.
Interest Income
- ---------------
For the nine month period ended September 30, 1997, interest income on loans
increased $13.3
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million, or 116.6%, compared to the same period ended September 30, 1996. This
increase was due primarily to an increase of $232.7 million in the average
balance of loans outstanding, which was partially offset by a decrease in the
average yield earned on the portfolio from 8.04% for the 1996 period, to 7.82%
for the 1997 period. Interest income on mortgage-backed securities increased
$717,000, or 53.5%, for the nine month period ended September 30, 1997, over the
comparable 1996 period, due primarily to an increase in the average balance of
such securities outstanding of $12.2 million. An increase in average yield from
6.28% for the 1996 period to 6.75% for the 1997 period also contributed to the
increase in interest income on mortgage-backed securities. Interest and
dividends on investment securities and other interest earning assets increased
$550,000, or 51.1%, for the nine month period ended September 30, 1997 over the
comparable period ended September 30, 1996. This increase was due primarily to
an increase in the average balance of such assets outstanding of $11.0 million.
Also contributing to the increase in interest and dividends on investment
securities and other interest earning assets was an increase in average yield
from 5.95% for the 1996 period to 6.18% for the 1997 period.
For the three month period ended September 30, 1997, interest income on loans
increased $4.7 million, or 120.6%, compared to the same period ended September
30, 1996. This increase was due primarily to an increase of $245.4 million in
the average balance of loans outstanding, which was partially offset by a
decrease in the average yield earned on the portfolio from 7.98% for the 1996
period, to 7.76% for the 1997 period. Interest income on mortgage-backed
securities increased $171,000, or 39.7%, for the three month period ended
September 30, 1997, over the comparable 1996 period, due primarily to an
increase in the average balance of such securities outstanding of $6.7 million.
An increase in average yield from 6.21% for the 1996 period to 6.99% for the
1997 period also contributed to the increase in interest income on
mortgage-backed securities. Interest and dividends on investment securities and
other interest earning assets increased $135,000, or 33.6%, for the three month
period ended September 30, 1997 over the comparable period ended September 30,
1996. This increase was due primarily to an increase in the average balance of
such assets outstanding of $6.8 million. Also contributing to the increase in
interest and dividends on investment securities and other interest earning
assets was an increase in average yield from 5.95% for the 1996 period to 6.34%
for the 1997 period.
Interest Expense
- ----------------
Interest expense on deposits increased by $8.4 million, or 117.0%, for the nine
months ended September 30, 1997, due to a $236.8 million increase in the average
balance of deposits outstanding, partially offset by a decrease in the average
rate paid on deposits, from 5.20% for the nine months ended September 30, 1996,
to 4.94% for the nine months ended September 30, 1997. Interest expense on
borrowings increased by $426,000, or 62.6%, due to a $9.0 million increase in
the average balance of borrowings outstanding and, to a lesser extent, an
increase in the average rate paid thereon, from 6.23% for the nine months ended
September 30, 1996, to 6.25% for the nine months ended September 30, 1997.
Interest expense on deposits increased by $2.9 million, or 121.8%, for the three
months ended September 30, 1997, due to a $239.8 million increase in the average
balance of deposits outstanding, partially offset by a decrease in the average
rate paid on deposits, from 5.18% for the
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three months ended September 30, 1996, to 5.01% for the three months ended
September 30, 1997. Interest expense on borrowings increased by $219,000, or
102.3%, due to a $13.8 million increase in the average balance of borrowings
outstanding and an increase in the average rate paid thereon, from 6.26% for the
three months ended September 30, 1996, to 6.29% for the three months ended
September 30, 1997.
Provision for Losses on Loans
- -----------------------------
Provisions for losses on loans are charged to earnings to bring the total
allowance to a level considered appropriate by management based on historical
experience, the volume and type of lending conducted by the Savings Bank, the
status of past due principal and interest payments, general economic conditions,
particularly as they relate to the Savings Bank's market area, and other factors
related to the collectibility of the Savings Bank's loan portfolio.
The provision for loan losses totaled $75,000 and $25,000 for the nine months
and three months ended September 30, 1997 and $48,000 and $16,000 for the nine
months and three months ended September 30, 1996, respectively. The provision
for loan losses for the nine months and three months ended September 30, 1997
and 1996 represented additions to the Savings Bank's general allowance for loan
losses primarily as a result of growth in the loan portfolio.
Other Income
- ------------
Total other income increased by $659,00, or 205.9%, for the nine months ended
September 30, 1997 as compared to the nine months ended September 30, 1996. The
increase was primarily attributable to a $134,000 increase in gain on sale of
investment and mortgage-backed securities, a $26,000 gain on sale of loans, a
$40,000 increase in rental income and a $453,000 increase in other operating
income. The increase in other operating income was due primarily to a $215,000
increase in fee income on checking accounts, a $145,000 increase on service
charges related to automated teller machines and an $85,000 increase in other
miscellaneous service charges. The above increases in other operating income are
primarily related to the servicing of additional accounts as a result of the
merger with Circle.
Total other income increased by $223,000 , or 214.4%, for the three months ended
September 30, 1997 as compared to the three month period ended September 30,
1996. The increase was primarily attributable to an $18,000 increase in gain on
sale of investments and mortgage-backed securities, a $25,000 increase in gain
on sale of loans and a $179,000 increase in other operating income. The increase
in other operating income was due primarily to a $66,000 increase in fee income
on checking accounts, a $63,000 increase on service charges related to automated
teller machines and a $19,000 increase in other miscellaneous service charges.
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General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense totaled $7.0 million for the nine
months ended September 30, 1997, an increase of $2.3 million, or 49.7%, over the
$4.7 million for the nine months ended September 30, 1996. During the nine month
period ended September 30, 1997 employee compensation and benefits increased
approximately $1.4 million and occupancy and equipment expense increased
approximately $569,000 over the comparable 1996 period, primarily due to the
increase in number of employees and rent, maintenance and depreciation charges
related to the increased branches acquired in the merger with Circle. Federal
deposit insurance premiums decreased by $1.3 million during the nine months
ended September 30, 1997, as compared to the nine months ended September 30,
1996, due primarily to the $1.1 million SAIF recapitalization charge that was
recognized during the 1996 period. Absent the SAIF assessment, Federal deposit
insurance premiums would have decreased $122,000, despite the $236.8 million
increase in the average balance of deposit accounts, due to the reduction in
premium rates as a result of the recapitalization of the SAIF. During the nine
months ended September 30, 1997, amortization of goodwill and other intangible
assets totaled $523,000 as compared to no charge for the 1996 period. The
goodwill and other intangible assets was recognized as a result of the merger
with Circle. Franchise taxes increased $218,000 during the 1997 period over the
1996 period, due to the increased tangible stockholders' equity of the
Corporation. Other operating expenses increased $866,000, or 125.0%, for the
nine months ended September 30, 1997 as compared to the nine months ended
September 30, 1996. The increase in other operating expense is due primarily to
a $180,000 increase in advertising, a $116,000 increase in legal, accounting,
supervisory and other professional fees, a $355,000 increase in data processing
and other outside service charges and a $118,000 increase in office supplies,
insurance, postage, telephone and organizational dues. The above increases in
other operating expenses were primarily related to the merger with Circle.
General, administrative and other expense for the three months ended September
30, 1997 decreased by $39,000, as compared to the same period in 1996. The
decrease was primarily attributable to a $1.2 million decrease in Federal
deposit insurance premiums as a result of the $1.1 million SAIF recapitalization
charge that was recognized during the 1996 period and reduced insurance premiums
during the 1997 period. The above decrease was offset by a $425,000 increase in
employee compensation and benefits, a $189,000 increase in occupancy and
equipment, a $72,000 increase in franchise taxes, a $173,000 increase in
amortization of goodwill and other intangible assets and a $275,000 increase in
other operating expenses. The increase in employee compensation and benefits,
occupancy and equipment, franchise taxes and amortization of goodwill and other
intangible assets was directly related to the merger with Circle, as discussed
above. The increase in other operating expenses is primarily attributable to a
$20,000 increase in advertising, a $39,000 increase in legal, accounting,
supervisory and other professional fees, a $118,000 increase in data processing
and other outside service charges and a $20,000 increase in office supplies,
insurance, postage, telephone and organizational dues. The above increases in
other operating expenses were primarily related to the merger with Circle.
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Federal Income Taxes
- --------------------
The provision for federal income taxes totaled $2.0 million for the nine months
ended September 30, 1997, a $1.5 million, or 273.0%, increase from the
comparable period in 1996. The increase resulted primarily from a $4.1 million
increase in earnings before taxes in comparing the 1997 period to the 1996
period. The Corporation's effective tax rates amounted to 35.3% and 34.0% for
the nine month periods ended September 30, 1997 and 1996, respectively.
The provision for federal income taxes totaled $633,000 for the three months
ended September 30, 1996, as compared to a credit of $71,000 for the three
months ended September 30, 1996, an increase of $704,000. The increase resulted
primarily from a $2.1 million increase in earnings before taxes. The
Corporation's effective tax rates amounted to 34.2% and 32.7% for the three
month periods ended September 30, 1997 and 1996, respectively.
Impact of Inflation and Changing Prices
- ---------------------------------------
The consolidated financial statements and related financial data 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 relative
purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the Corporation's assets and
liabilities are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than does the
effect of inflation.
Item 3
Quantitative and Qualitative Disclosures About Market Risk Not Applicable
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Fidelity Financial of Ohio, Inc.
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
N/A
Item 2 Changes in Securities
N/A
Item 3 Default upon Senior Securities
N/A
Item 4 Submission of Matters to a Vote of Security Holders
N/A
Item 5 Other Information
N/A
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. 27. Financial Data Schedule
(b) Reports on Form 8-K
N/A
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SIGNATURES
Pursuant to the requirements 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.
FIDELITY FINANCIAL OF OHIO, INC.
November 11, 1997 By: /s/ John R. Reusing
- ------------------------------- -------------------------------------
Date John R. Reusing,
President and Chief Executive Officer
November 11, 1997 By: /s/ Paul D. Staubach
- ------------------------------- ------------------------------------
Date Paul D. Staubach,
Senior Vice President and
Chief Financial Officer
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Fidelity Financial of Ohio, Inc.
EXHIBIT INDEX
Page
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Exhibit 27. Financial Data Schedule 23
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