FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
---------------------------------
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 Number 0-27868
FIDELITY FINANCIAL OF OHIO, INC.
(Exact name of registrant as specified in its charter)
United States of America 31-1455721
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4555 Montgomery Road
Cincinnati, Ohio 45212
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (513) 351-6666
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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
As of May 7, 1996, the latest practicable date, 4,073,589 shares of the
registrant's common stock, $.10 par value, were issued and outstanding.
Page 1 of 17 pages
Fidelity Financial of Ohio, Inc.
INDEX
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
PART II - OTHER INFORMATION 16
SIGNATURES 17
2
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
March 31, December 31,
ASSETS 1996 1995
Cash and due from banks $ 1,813 $ 1,702
Interest-bearing deposits in other financial institutions 16,258 2,784
-------- ---------
Cash and cash equivalents 18,071 4,486
Investment securities available for sale - at market 9,566 6,044
Mortgage-backed securities available for sale - at market 28,377 29,378
Loans receivable - net 186,938 184,486
Loans held for sale - at lower of cost or market 171 646
Office premises and equipment - at depreciated cost 2,516 2,528
Federal Home Loan Bank stock - at cost 1,886 1,854
Accrued interest receivable on loans 1,096 1,023
Accrued interest receivable on mortgage-backed securities 212 222
Accrued interest receivable on investments 125 63
Prepaid expenses and other assets 408 382
Prepaid federal income taxes - 25
--------- -----------
TOTAL ASSETS $249,366 $231,137
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $182,217 $180,697
Advances from the Federal Home Loan Bank 14,041 17,653
Loan to Employee Stock Ownership Plan 317 336
Advances by borrowers for taxes and insurance 621 1,063
Accrued interest and other liabilities 1,146 1,232
Accrued federal income taxes 194 -
Deferred federal income taxes 50 43
----------- -----------
TOTAL LIABILITIES 198,586 201,024
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Preferred stock - authorized, 500,000 shares at $.10 par value; none issued - -
Common stock - authorized, 7,000,000 shares at $.10 par value; 4,073,252
and 1,810,380 shares issued and outstanding at March 31, 1996 and
December 31, 1995, respectively 407 181
Additional paid-in capital 26,782 4,848
Retained earnings - substantially restricted 25,889 25,497
Less shares acquired by Employee Stock Ownership Plan (2,135) (336)
Less shares acquired by Management Recognition Plan (15) (20)
Less unrealized losses on securities designated as available for sale,
net of related tax benefits (148) (57)
---------- -----------
TOTAL STOCKHOLDERS' EQUITY 50,780 30,113
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $249,366 $231,137
======= =======
3
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended March 31,
(in thousands, except share data)
1996 1995
Interest income
Loans $3,782 $3,559
Mortgage-backed securities 460 400
Investment securities 93 73
Interest-bearing deposits and other 173 74
------ -------
Total interest income 4,508 4,106
Interest expense
Deposits 2,406 2,176
Borrowings 243 192
------ ------
Total interest expense 2,649 2,368
----- -----
Net interest income 1,859 1,738
Provision for losses on loans 17 14
------- -------
Net interest income after provision for losses on loans 1,842 1,724
Other income
Gain on sale of investment and mortgage-backed securities 12 -
Gain on sale of loans 3 -
Rental 39 31
Other operating 60 56
------- -------
Total other income 114 87
General, administrative and other expense
Employee compensation and benefits 501 526
Occupancy and equipment 180 157
Federal deposit insurance premiums 103 98
Franchise taxes 113 109
Other operating 222 183
------ ------
Total general, administrative and other expense 1,119 1,073
----- -----
Earnings before income taxes 837 738
Federal income taxes
Current 228 216
Deferred 54 36
------- -------
Total federal income taxes 282 252
------ ------
NET EARNINGS $ 555 $ 486
====== ======
EARNINGS PER SHARE $ .14 $ .12
=== ===
4
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31,
(In thousands)
1996 1995
Cash flows from operating activities:
Net earnings for the year $ 555 $ 486
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 72 63
Amortization of premiums on investments and mortgage-backed securities 3 -
Amortization of deferred loan origination fees (65) (47)
Amortization expense of employee benefit plans 24 5
Gain on sale of investment and mortgage-backed securities (12) -
Gain on sale of mortgage loans (3) -
Proceeds from sale of mortgage loans 208 -
Federal Home Loan Bank stock dividends (32) (28)
Provision for losses on loans 17 14
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (73) (2)
Accrued interest receivable on mortgage-backed securities 10 (6)
Accrued interest receivable on investments (62) (45)
Prepaid expenses and other assets (26) (280)
Accrued interest and other liabilities (86) 39
Federal income taxes
Current 219 216
Deferred 54 36
--------- -------
Net cash provided by operating activities 803 451
Cash flows provided by (used in) investing activities:
Proceeds from sale of investment securities designated as available for sale 1,004 -
Purchase of investment securities designated as available for sale (4,468) (498)
Principal repayments on investment securities designated as available for sale 12 -
Purchase of Federal Home Loan Bank stock - (38)
Purchase of mortgage-backed securities designated as available for sale (2,058) (996)
Purchase of mortgage-backed securities designated as held to maturity - (158)
Proceeds from sale of mortgage-backed securities 1,008 -
Principal repayments on mortgage-backed securities 1,852 1,226
Loan disbursements (13,453) (4,791)
Purchase of loan participations - (580)
Principal repayments on loans 11,319 4,170
Purchases and additions to office premises and equipment (60) (15)
Additions to real estate acquired through foreclosure - (11)
------- -------
Net cash used in investing activities (4,844) (1,691)
------- -----
Net cash used in operating and investing activities
(subtotal carried forward) (4,041) (1,240)
------- -----
5
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the three months ended March 31,
(In thousands)
1996 1995
Net cash used in operating and investing activities
(subtotal brought forward) $ (4,041) $(1,240)
Cash provided by (used in) financing activities:
Net increase (decrease) in deposit accounts 1,520 (97)
Proceeds from Federal Home Loan Bank advances - 2,000
Repayment of Federal Home Loan Bank advances (3,612) (276)
Proceeds from sale of common stock 20,432 -
Proceeds from the exercise of stock options 4
Dividends on common stock (272) (134)
Advances by borrowers for taxes and insurance (442) (355)
-------- -------
Net cash provided by financing activities 17,626 1,142
------ ------
Net increase (decrease) in cash and cash equivalents 13,585 (98)
Cash and cash equivalents at beginning of year 4,486 3,597
------- ------
Cash and cash equivalents at end of year $18,071 $ 3,499
====== ======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ - $ -
======= =====
Interest on deposits and borrowings $ 2,646 $ 2,331
======= ======
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ (91) $ (222)
========= =======
6
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
On May 11, 1992, Fidelity Federal Savings and Loan Association
(Fidelity) completed its reorganization into a federally-chartered,
mutual holding company (the Reorganization). The Reorganization was
approved by the Board of Directors, Fidelity's members and the Office
of Thrift Supervision prior to its implementation.
In accordance with the Reorganization, Fidelity organized Fidelity
Federal Savings Bank (the Savings Bank), a federally-chartered stock
savings bank, and transferred all but $100,000 of its assets and all of
its liabilities to the Savings Bank in exchange for 1,012,500 shares
(split adjusted) of common stock, $.10 par value per share, and
reorganized from a federally-chartered mutual savings and loan
association to a federally-chartered mutual holding company known as
Fidelity Federal Mutual Holding Company (the Mutual Holding Company).
Concurrent with the Reorganization, the Savings Bank issued an
additional 750,000 shares (split adjusted) of its common stock to
certain members of the public.
On October 10, 1995, the Boards of Directors of the Savings Bank and
the Mutual Holding Company adopted a Plan of Conversion (the Plan) and
in October 1995, the Savings Bank incorporated Fidelity Financial of
Ohio, Inc. (the Company) under Ohio law as a first-tier wholly owned
subsidiary of the Savings Bank. Pursuant to the Plan, on March 4, 1996,
(i) the Company completed its stock offering in connection with the
Savings Bank's conversion from the mutual holding company form of
organization to the stock holding company form whereby 2,278,100 shares
of the Company's common stock, $.10 par value per share, were sold at
$10 per share; (ii) the Mutual Holding Company converted to an interim
federal stock savings institution and simultaneously merged with and
into the Savings Bank, pursuant to which the Mutual Holding Company
ceased to exist and the 1,012,500 shares, or 55.9%, of the outstanding
Savings Bank common stock held by the Mutual Holding Company were
canceled; and (iii) an interim savings bank ("Interim") formed as a
wholly-owned subsidiary of the Company solely for such purpose was
merged with and into the Savings Bank. As a result of the merger of
Interim with and into the Savings Bank, the Savings Bank became a
wholly-owned subsidiary of the Company and the outstanding public
Savings Bank shares, which amounted to 797,880 shares, or 44.1%, of the
outstanding Savings Bank common stock at December 31, 1995, were
converted into the exchange shares pursuant to the exchange ratio,
which resulted in the holders of such shares owning in the aggregate
approximately the same percentage of the common stock to be outstanding
upon the completion of the Conversion and Reorganization (i.e., the
conversion stock and the exchange shares) as the percentage of Savings
Bank common stock owned by them in the aggregate immediately prior to
consummation of the conversion and reorganization, before giving effect
to (a) the payment of cash in lieu of issuing fractional exchange
shares, (b) any shares of conversion stock purchased by the Savings
Bank's stockholders in the offerings or the ESOP thereafter, and (c)
any exercise of dissenters' rights. The costs of issuing the common
stock were deducted from the sale proceeds of the offering. The
offering was completed on March 4, 1996 and resulted in net capital
proceeds totaling $22.4 million.
On April 29, 1996, the Company filed a Form 8-K with the Securities and
Exchange Commission, which reported its execution of an Agreement of
Merger with Circle Financial Corporation ("Circle Financial") under
which Circle Financial will merge with and into the Company.
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
7
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Basis of Presentation (continued)
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
financial statements have been included. The results of operations for
the three months ended March 31, 1996 and 1995 are not necessarily
indicative of the results which may be expected for the entire fiscal
year or any other period.
2. Effect of Recent Accounting Pronouncements
In May 1995, the Financial Accounting Standards Board (the "FASB")
adopted Statement of Financial Accounting Standards ("SFAS") No. 122,
"Accounting for Mortgage Servicing Rights". SFAS No. 122 requires that
the Savings Bank recognize as separate assets rights to service
mortgage loans for others, regardless of how those servicing rights
were acquired. An institution that acquires mortgage servicing rights
through either the purchase or origination of mortgage loans and sells
those loans with servicing rights retained would allocate some of the
cost of the loans to the mortgage servicing rights. SFAS No. 122 also
requires that an enterprise allocate the cost of purchasing or
originating the mortgage loans between the mortgage servicing rights
and the loans when mortgage loans are securitized, if it is practicable
to estimate the fair value of mortgage servicing rights. Additionally,
SFAS No. 122 requires that capitalized mortgage servicing rights and
capitalized excess servicing receivable be assessed for impairment.
Impairment would be measured based on fair value.
SFAS No. 122 is to be applied prospectively to fiscal years beginning
after December 15, 1995 (January 1, 1996 as to the Corporation), to
transactions in which an entity acquires mortgage servicing rights and
to impairment evaluations of all capitalized mortgage servicing rights
and capitalized excess servicing receivables whenever acquired.
Retroactive application would be prohibited. Management adopted SFAS
No. 122 as of January 1, 1996, as required, without a material effect
on the Corporation's consolidated financial position or results of
operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation", establishing financial accounting and
reporting standards for stock-based employee compensation plans. SFAS
No. 123 encourages all entities to adopt a new method of accounting to
measure compensation cost of all employee stock compensation plans
based on the estimated fair value of the award at the date it is
granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based
method of accounting, which generally does not result in compensation
expense recognition for most plans. Companies that elect to remain with
the existing accounting are required to disclose in a footnote to the
financial statements 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
of the Corporation has not completed an analysis of the potential
effects of SFAS No. 123 on its financial condition or results of
operations.
3. Earnings Per Share
Earnings per share for the three months ended March 31, 1996 and 1995
is based on approximately 3,900,014 and 4,087,693 weighted averaged
shares outstanding, respectively.
8
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Pending Legislative Changes
The deposit accounts of the Savings Bank and of other savings
associations are insured by the FDIC in the Savings Association
Insurance Fund ("SAIF"). The reserves of the SAIF are below the level
required by law, because a significant portion of the assessments paid
into the fund are used to pay the cost of prior thrift failures. The
deposit accounts of commercial banks are insured by the FDIC in the
Bank Insurance Fund ("BIF"), except to the extent such banks have
acquired SAIF deposits. Both SAIF and BIF are required by law to attain
and thereafter maintain a reserve ratio of 1.25% of insured deposits.
The reserves of the BIF met the level required by law in May 1995 in
contrast to the SAIF. As a result of the respective reserve levels of
the funds, deposit insurance assessments paid by healthy savings
associations exceeded those paid by healthy commercial banks by
approximately $.19 per $100 in deposits in 1995. In 1996, no BIF
assessments will be required for healthy commercial banks except for a
$2,000 minimum fee. A continuation of this premium disparity could have
a negative competitive impact on the Savings Bank and other
institutions with SAIF deposits.
Congress is considering legislation to recapitalize the SAIF and
eliminate the significant premium disparity. Currently, that
recapitalization plan provides for a special assessment of
approximately $.85 per $100 of SAIF deposits held at March 31, 1995, in
order to increase SAIF reserves to the level required by law. In
addition, the cost of prior thrift failures would be shared by both the
SAIF and the BIF. This would likely increase BIF assessments by $.02 to
$.025 per $100 in deposits. SAIF assessments would initially be set at
the same level as BIF assessments and could never be reduced below the
level for BIF assessments. These projected assessment levels may change
if commercial banks holding SAIF deposits are provided some relief from
the special assessment or are allowed to transfer SAIF deposits to the
BIF.
A component of the recapitalization plan provides for the merger of the
SAIF and BIF on January 1, 1998. However, the SAIF recapitalization
legislation currently provides for an elimination of the thrift charter
or of the separate federal regulation of thrifts prior to the merger of
the deposit insurance funds. As a result, the Savings Bank would be
regulated as a bank under Federal laws which would subject it to the
more restrictive activity limits imposed on national banks. If the
Savings Bank becomes a bank, the Savings Bank may be required to
recapture, as taxable income, approximately $1.6 million of its
percentage of earnings bad debt reserve, representing the post-1987
additions to the reserve, and would be unable to utilize the percentage
of earnings method to compute taxable income in the future. The Savings
Bank would be permitted to amortize the recapture of its bad debt
reserve into taxable income over six years. The Savings Bank has
previously recognized deferred taxes on the amount of the bad debt
reserve subject to recapture.
The Savings Bank had $173.1 million in deposits at March 31, 1995. If
the special assessment is finalized at $.85 per $100 in deposits, the
Savings Bank will pay an additional assessment of $1.5 million. This
assessment should be tax deductible, but it will reduce earnings and
capital for the quarter in which it is recorded.
No assurances can be given that the SAIF recapitalization plan will be
enacted into law or in what form it may be enacted. In addition, the
Savings Bank can give no assurances that the disparity between BIF and
SAIF assessments will be eliminated and cannot predict the impact of
being regulated as a bank, or the change in tax accounting for bad debt
reserves, until the legislation requiring such change is enacted.
9
Fidelity Financial of Ohio, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Discussion of Financial Condition Changes from December 31, 1995 to March 31,
1996
At March 31, 1996, the Corporation's assets totaled $249.4 million, as compared
to $231.1 million at December 31, 1995, an increase of $18.2 million, or
approximately 7.9%. The current period's increase was primarily funded by a
$20.7 million increase in stockholders' equity and a $1.5 million increase in
deposits, which were partially offset by a $3.6 million decrease in Federal Home
Loan Bank (FHLB) advances.
At March 31, 1996, liquid assets (cash, interest-bearing deposits in other
financial institutions, investment securities and qualifying mortgage-backed
securities) totaled $21.1 million, as compared to $13.0 million at December 31,
1995. The Savings Bank's regulatory liquidity at March 31, 1996, totaled 11.8%,
or $12.2 million in excess of the minimum regulatory requirement.
Investment securities totaled $9.6 million at March 31, 1996, an increase of
$3.5 million, or 58.3%, over the $6.0 million of investments at December 31,
1995. The increase was primarily due to a $4.5 million purchase of investment
securities which was partially offset by the sale of $1.0 million of investment
securities. At March 31, 1996, all of the Corporation's $9.6 million of
investment securities were classified as available for sale and Fidelity had
$20,000 of unrealized gains (net of related tax effects) with respect to its
investment securities portfolio which increased the Corporation's stockholders'
equity as of such date.
Mortgage-backed securities totaled $28.4 million at March 31, 1996, which
represents a $1.0 million decrease from the balance at December 31, 1995. The
decrease was primarily due to $1.9 million in principal repayments and $1.0
million in sales of mortgage-backed securities, which were partially offset by
the purchase of $2.0 million of mortgage-backed securities and a $141,000
increase in the unrealized loss on mortgage-backed securities classified as
available for sale. At March 31, 1996, the Savings Bank's investment in
adjustable-rate and medium-term (five years or less) fixed-rate mortgage-backed
securities amounted to approximately 92.3% of the total portfolio. Management's
decision to acquire 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 market interest rates. At March 31, 1996, all of the Corporation's
mortgage-backed securities portfolio was classified as available for sale and
Fidelity had $168,000 of unrealized losses (net of related tax benefits) with
respect to such securities which was deducted from the Corporation's
stockholders' equity as of such date.
Loans receivable (including loans held for sale) amounted to $187.1 million at
March 31, 1996, as compared to $185.1 million at December 31, 1995. Loans
receivable increased by $2.0 million, or 1.1%, during the three months ended
March 31, 1996, primarily due to $13.5 million of loan originations, which were
partially offset by $11.3 million of loan repayments and $208,000 of loan sales.
Although historically, the Savings Bank has acted as a portfolio lender by only
originating loans that management believes the Savings Bank can profitably
retain in its portfolio, at March 31, 1996, the Savings Bank had $171,000 of
loans classified as held for sale.
10
Fidelity Financial of Ohio, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from December 31, 1995 to March 31,
1996 (continued)
At March 31, 1996, the Savings Bank's allowance for loan losses totaled
$808,000, a decline of $10,000 from the level maintained at December 31, 1995.
At March 31, 1996, the Savings Bank's allowance represented approximately .4% of
the total loan portfolio (including loans classified as held for sale) and 80.9%
of total non-performing loans. At that date, the ratio of total non-performing
loans to total loans (including loans classified as held for sale) amounted to
.53%, as compared to .54% at December 31, 1995. Although management of the
Savings Bank believes that its allowance for loan losses at March 31, 1996, was
adequate based on 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 $182.2 million at March 31, 1996, an increase of $1.5 million,
or .8%, over the $180.7 million of deposits at December 31, 1995. Deposit
accounts subject to daily repricing (passbook, money market deposit and NOW
accounts) decreased by $1.3 million, while certificates of deposit increased by
$2.8 million. The decrease in deposit accounts subject to daily repricing is due
to a shift in the consumer preference away from money market type instruments as
a result of the higher rates paid on certificates of deposit.
At March 31, 1996, FHLB advances totaled $14.0 million, which represented a $3.6
million, or 20.5%, decrease from the $17.7 million balance at December 31, 1995.
The decrease resulted primarily from management's decision to repay certain
short-term advances, utilizing funds received in the common stock offering.
Stockholders' equity totaled $50.8 million at March 31, 1996, an increase of
$20.7 million, or 68.6%, over the December 31, 1995 total. The increase resulted
primarily from the $20.4 million in net proceeds from the common stock offering
and undistributed net earnings of $351,000.
Comparison of Operating Results for the Three Month Periods Ended March 31, 1996
and 1995
General
Net earnings for the three months ended March 31, 1996, totaled $555,000, an
increase of $69,000, or 14.2%, over the $486,00 recorded for the three months
ended March 31, 1995. The increase in earnings resulted primarily from a
$121,000 increase in net interest income and a $27,000 increase in total other
income, which were partially offset by a $46,000 increase in general,
administrative and other expense, a $3,000 increase in the provision for losses
on loans and a $30,000 increase in Federal income taxes.
11
Fidelity Financial of Ohio, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended March 31, 1996
and 1995 (continued)
Net Interest Income
Interest income on loans for the three months ended March 31, 1996 increased by
$223,000, or 6.3%, due primarily to a $10.4 million increase in the average
balance of loans outstanding, and to a lesser extent, an increase in the
weighted-average yield from 8.11% during the 1995 period to 8.13% during the
1996 period. Interest income on mortgage-backed securities increased by $60,000,
or 15.0%, due to an increase in the weighted-average yield from 5.93% during the
1995 period to 6.41% during the 1996 period, and to a lesser extent, a $1.8
million increase in the average balance outstanding. Interest income on
investment securities and other interest-earning assets increased by $119,000,
or 81.0%, due primarily to a $9.0 million increase in the average balance
outstanding during the three months ended March 31, 1996, which was partially
offset by a decrease in the weighted-average yield from 5.92% during the 1995
period to 5.63% during the 1996 period.
Interest expense on deposits increased by $230,000, or 10.6%, during the three
months ended March 31, 1996. This additional expense was the result of an
increase in the weighted-average rate paid on deposits from 5.03% for the three
months ended March 31, 1995 to 5.21% for the three months ended March 31, 1996,
and an $11.9 million increase in the average balance of deposits outstanding.
Interest expense on borrowings increased by $51,000, or 26.6%, due primarily to
a $3.4 million increase in the average balance of borrowings outstanding during
the period.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $121,000, or 7.0%, during the three months
ended March 31, 1996, as compared to the three months ended March 31, 1995. The
interest rate spread decreased from 2.61% during the three months ended March
31, 1995, to 2.43% for the three months ended March 31, 1996.
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 collectability of the Savings Bank's loan portfolio.
The provision for loan losses totaled $17,000 and $14,000 for the three months
ended March 31, 1996 and 1995, respectively. The provision for loan losses for
the three months ended March 31, 1996 and 1995 represented additions to the
Savings Bank's general reserve.
Other Income
Total other income increased by $27,000, or 31.0%, for the three months ended
March 31, 1996, as compared to the three months ended March 31, 1995. The
increase was primarily attributable to a $12,000 gain on sale of investment
securities, a $3,000 gain on sale of loans and an $8,000, or 25.8%, increase in
rental income.
12
Fidelity Financial of Ohio, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended March 31, 1996
and 1995 (continued)
General, Administrative and Other Expense
General, administrative and other expense for the quarter ended March 31, 1996
increased by $46,000, or 4.3%, as compared to the same period in 1995. The
increase was primarily the result of a $23,000, or 14.6%, increase in occupancy
and equipment expense and a $39,000, or 21.3%, increase in other operating
expenses, which were partially offset by a $25,000, or 4.8%, decrease in
employee compensation and benefits.
The increase in occupancy and equipment resulted primarily from increases in
office building maintenance and depreciation charges as a result of building
improvements. The increase in other operating expense was attributable to
increases in printing and office supplies incurred in connection with the
formation of the new holding company, coupled with pro-rata increases in other
operating expenses. The decline in employee compensation and benefits resulted
primarily from an increase in deferred loan origination costs due to the greater
lending volume in the current quarter.
Federal Income Taxes
The provision for federal income taxes for the quarter ended March 31, 1996
increased by $30,000, or 11.9%, as compared to the same period in 1995, due
primarily to an increase in earnings before income taxes of $99,000, or 13.4%.
The Corporation's effective tax rates amounted to 33.7% and 34.1% during the
three months ended March 31, 1996 and 1995, respectively.
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 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 11.8% at March 31,
1996, as compared to 7.2% at December 31, 1995. At March 31, 1996, the Savings
Bank's "liquid" assets totaled approximately $21.1 million, which was $12.5
million in excess of the current OTS minimum requirements. The increase in the
Savings Bank's liquidity was primarily due to proceeds from the aforementioned
stock offering.
13
Fidelity Financial of Ohio, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended March 31, 1996
and 1995 (continued)
Liquidity and Capital Resources (continued)
The Savings Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Savings Bank's
primary sources of funds are deposits, borrowings, amortization, prepayments and
maturities of outstanding loans 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 and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. The Savings Bank manages the pricing of its deposits to maintain a
steady deposit balance. In addition, the Savings Bank invests excess funds in
overnight deposits and other short-term interest-earning assets which provide
liquidity to meet lending requirements. The Savings Bank 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 March 31, 1996, the Savings Bank had $14.0 million of
outstanding advances from the FHLB of Cincinnati. Furthermore, 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
withdrawals, fund loan commitments and maintain a portfolio of investment and
mortgage-backed securities. At March 31, 1996, the total approved loan
commitments outstanding amounted to $4.2 million. At the same date, commitments
under unused lines of credit amounted to $2.1 million and the unadvanced portion
of construction loans approximated $1.2 million. Certificates of deposit
scheduled to mature in one year or less at March 31, 1996 totaled $92.7 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.
Regulatory Capital Requirements
As required by the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA") and regulations promulgated thereunder by the OTS, 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 1.50% and
3.00% of adjusted total assets, and 8.00% of risk-weighted assets, respectively.
At March 31, 1996, the Savings Bank exceeded each of its capital requirements,
with tangible, core and risk-based capital ratios of 16.7%, 16.7% and 32.5%,
respectively.
14
Fidelity Financial of Ohio, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended March 31, 1996
and 1995 (continued)
Regulatory Capital Requirements (continued)
The following table sets forth the Savings Bank's compliance with applicable
regulatory capital requirements at March 31, 1996:
Tangible Core Risk-based
capital capital capital
(Dollars in thousands)
Actual regulatory capital $40,024 $40,024 $40,824
Amount currently required 3,606 7,212 10,057
------- ------- ------
Regulatory capital in excess of requirement $36,418 $32,812 $30,767
====== ====== ======
Actual regulatory capital as a percentage 16.7% 16.7% 32.5%
Percentage currently required 1.5 3.0 8.0
----- ----- -----
Regulatory capital in excess of requirement 15.2% 13.7% 24.5%
==== ==== ====
The OTS adopted an amendment to the regulatory risk-based capital requirement to
include an interest rate risk component. The amount of the interest rate risk
component included in the risk-based capital requirement is based on an
individual institution's interest rate risk position. By virtue of the fact that
the Savings Bank has less than $300 million in assets, the Savings Bank will not
be required to add an interest rate risk component to its risk-based capital
requirement. Reporting under the revised risk-based capital requirement will
become effective upon attaining $300 million in asset size. Additionally, the
OTS has proposed an amendment to the core capital requirement that would
increase the minimum requirement to 4% of adjusted total assets for
substantially all savings associations. Management anticipates no material
change to the Savings Bank's excess regulatory capital position if the proposal
is adopted in its present form.
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.
15
Fidelity Financial of Ohio, Inc.
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities
None
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5. Other Materially Important Events
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) None
(b) On February 29, 1996, the Company filed a Form 8-K
with the Securities and Exchange Commission reporting
the proposed completion of its stock offering for
March 4, 1996.
16
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.
Date: May 14, 1996 By: /s/John R. Reusing
----------------------------------------
John R. Reusing
President and Chief Executive Officer
Date: May 14, 1996 By: /s/Paul D. Staubach
----------------------------------------
Paul D. Staubach
Senior Vice President and
Chief Financial Officer
17