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 June 30, 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)
Ohio 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 August 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 19 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 11
PART II - OTHER INFORMATION 18
SIGNATURES 19
2
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
June 30, December 31,
ASSETS 1996 1995
Cash and due from banks $ 1,806 $ 1,702
Interest-bearing deposits in other financial institutions 8,249 2,784
Cash and cash equivalents 10,055 4,486
Investment securities available for sale - at market 14,943 6,044
Mortgage-backed securities available for sale - at market 27,833 29,378
Loans receivable - net 191,388 184,486
Loans held for sale - at lower of cost or market 211 646
Office premises and equipment - at depreciated cost 2,581 2,528
Federal Home Loan Bank stock - at cost 1,947 1,854
Accrued interest receivable on loans 1,117 1,023
Accrued interest receivable on mortgage-backed securities 204 222
Accrued interest receivable on investments 191 63
Prepaid expenses and other assets 649 382
Prepaid federal income taxes 66 25
Deferred federal income taxes 3 -
TOTAL ASSETS $251,188 $231,137
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $184,479 $180,697
Advances from the Federal Home Loan Bank 13,762 17,653
Loan to Employee Stock Ownership Plan 298 336
Advances by borrowers for taxes and insurance 349 1,063
Accrued interest and other liabilities 1,213 1,232
Deferred federal income taxes - 43
TOTAL LIABILITIES 200,101 201,024
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; 4,073,589
and 1,810,380 shares issued and outstanding at June 30, 1996 and
December 31, 1995, respectively 407 181
Additional paid-in capital 26,785 4,848
Retained earnings - substantially restricted 26,340 25,497
Less shares acquired by Employee Stock Ownership Plan (2,113) (336)
Less shares acquired by Management Recognition Plan (11) (20)
Less unrealized losses on securities designated as available for sale,
net of related tax benefits (321) (57)
TOTAL STOCKHOLDERS' EQUITY 51,087 30,113
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $251,188 $231,137
3
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
Six months ended Three months ended
June 30, June 30,
1996 1995 1996 1995
Interest income
Loans $7,576 $7,195 $3,794 $3,636
Mortgage-backed securities 909 825 449 425
Investment securities 310 145 217 72
Interest-bearing deposits and other 365 140 192 66
Total interest income 9,160 8,305 4,652 4,199
Interest expense
Deposits 4,786 4,481 2,380 2,305
Borrowings 466 409 223 217
Total interest expense 5,252 4,890 2,603 2,522
Net interest income 3,908 3,415 2,049 1,677
Provision for losses on loans 32 24 15 10
Net interest income after provision for losses on loans 3,876 3,391 2,034 1,667
Other income
Gain on sale of investment and mortgage-backed securities 12 - - -
Gain on sale of loans 3 - - -
Loss on sale of real estate acquired through foreclosure - (5) - (5)
Rental 77 65 38 34
Other operating 124 111 64 55
Total other income 216 171 102 84
General, administrative and other expense
Employee compensation and benefits 1,064 1,055 563 529
Occupancy and equipment 356 301 176 144
Federal deposit insurance premiums 207 195 104 97
Franchise taxes 226 217 113 108
Other operating 450 383 228 200
Total general, administrative and other expense 2,303 2,151 1,184 1,078
Earnings before income taxes 1,789 1,411 952 673
Federal income taxes
Current 514 391 286 175
Deferred 91 78 37 42
Total federal income taxes 605 469 323 217
NET EARNINGS $1,184 $ 942 $ 629 $ 456
EARNINGS PER SHARE $0.30 $0.23 $0.16 $0.11
4
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30,
(In thousands)
1996 1995
Cash flows from operating activities:
Net earnings for the period $ 1,184 $ 942
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 149 126
Amortization of premiums on investments and mortgage-backed securities 29 7
Amortization of deferred loan origination fees (113) (100)
Amortization expense of employee benefit plans 23 11
Gain on sale of investment and mortgage-backed securities (12) -
Gain on sale of mortgage loans (3) -
Loans disbursed for sale in the secondary market (40) (607)
Proceeds from sale of mortgage loans 212 -
Federal Home Loan Bank stock dividends (65) (57)
Provision for losses on loans 32 24
Loss on sale of real estate acquired through foreclosure - 5
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (94) (37)
Accrued interest receivable on mortgage-backed securities 18 (22)
Accrued interest receivable on investments (128) (16)
Prepaid expenses and other assets (267) (366)
Accrued interest and other liabilities (19) (5)
Federal income taxes
Current (16) 24
Deferred 91 78
Net cash provided by operating activities 981 7
Cash flows provided by (used in) investing activities:
Proceeds from sale of investment securities designated as available for sale 1,004 -
Proceeds from sale of mortgage-backed securities designated as available for sale 1,006 -
Purchase of investment securities designated as available for sale (10,022) (408)
Purchase of Federal Home Loan Bank stock (28) (38)
Purchase of mortgage-backed securities designated as available for sale (3,173) (1,202)
Purchase of mortgage-backed securities designated as held to maturity - (158)
Principal repayments on investment securities designated as available for sale 36 -
Principal repayments on mortgage-backed securities designated as available for sale 3,377 918
Principal repayments on mortgage-backed securities designated as held to maturity - 890
Loan disbursements (25,799) (13,984)
Purchase of loan participations - (580)
Principal repayments on loans 19,244 10,469
Purchases and additions to office premises and equipment (202) (48)
Proceeds from sale of real estate acquired through foreclosure - 91
Additions to real estate acquired through foreclosure - (11)
Net cash used in investing activities (14,557) (4,151)
Net cash used in operating and investing activities
(subtotal carried forward) (13,576) (4,144)
5
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended June 30,
(In thousands)
1996 1995
Net cash used in operating and investing activities
(subtotal brought forward) $(13,576) $(4,144)
Cash provided by (used in) financing activities:
Net increase in deposit accounts 3,782 3,034
Proceeds from Federal Home Loan Bank advances - 6,000
Repayment of Federal Home Loan Bank advances (3,891) (2,875)
Proceeds from sale of common stock 20,434 -
Proceeds from the exercise of stock options 1 4
Dividends on common stock (467) (267)
Advances by borrowers for taxes and insurance (714) (589)
Net cash provided by financing activities 19,145 5,307
Net increase in cash and cash equivalents 5,569 1,163
Cash and cash equivalents at beginning of period 4,486 3,597
Cash and cash equivalents at end of period $ 10,055 $ 4,760
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Federal income taxes $ 530 $ 367
Interest on deposits and borrowings $ 5,225 $ 4,846
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ (264) $ 331
Exchange of office premises and equipment for similar assets $ 61 $ -
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 Corporation) under Ohio law as a first-tier wholly
owned subsidiary of the Savings Bank. Pursuant to the Plan, on March 4,
1996, (i) the Corporation 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 Corporation'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 Corporation solely for such
purpose was merged with and into the Savings Bank (the Conversion and
Reorganization). As a result of the merger of Interim with and into the
Savings Bank, the Savings Bank became a wholly-owned subsidiary of the
Corporation 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 an 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.
7
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Basis of Presentation (continued)
On May 1, 1996, the Corporation 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"), dated
as of April 29, 1996, pursuant to which Circle Financial will merge
with and into the Corporation.
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 financial
statements have been included. The results of operations for the six
and three months ended June 30, 1996 and 1995 are not necessarily
indicative of the results which may be expected for the entire fiscal
year or any other period.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Fidelity Financial of Ohio, Inc. (the "Corporation") and Fidelity
Federal Savings Bank (the "Savings Bank"). All significant intercompany
items have been eliminated.
3. 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 Corporation 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.
8
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Effect of Recent Accounting Pronouncements (continued)
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 SFAS No. 123 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 implemented SFAS No. 123 on January 1, 1996, as
required, without effect on its financial condition or results of
operations.
4. Earnings Per Share
Earnings per share for the six and three months ended June 30, 1996 is
based on approximately 3,903,000 and 3,906,000 weighted averaged shares
outstanding, respectively.
Earnings per share for the six and three months ended June 30, 1995 is
based on approximately 4,078,000 weighted average shares outstanding,
respectively.
5. 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.
9
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Pending Legislative Changes (continued)
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.
10
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 June 30,
1996
At June 30, 1996, the Corporation's assets totaled $251.2 million, as compared
to $231.1 million at December 31, 1995, an increase of $20.1 million, or
approximately 8.7%. The current period's increase was primarily funded by a
$21.0 million increase in stockholders' equity, due to the net proceeds raised
in the Conversion and Reorganization, and a $3.8 million increase in deposits,
which were partially offset by a $3.9 million decrease in Federal Home Loan Bank
(FHLB) advances.
At June 30, 1996, the Corporation's liquid assets (cash, interest-bearing
deposits in other financial institutions, investment securities and qualifying
mortgage-backed securities) totaled $25.3 million, as compared to $13.0 million
at December 31, 1995. The increase in liquid assets resulted primarily from the
net proceeds raised in the Corporation's common stock offering which was
completed on March 4, 1996. The Savings Bank's regulatory liquidity at June 30,
1996, totaled 9.7%, or $8.9 million in excess of the minimum regulatory
requirement.
Investment securities totaled $14.9 million at June 30, 1996, an increase of
$8.9 million, or 147.2%, over the $6.0 million of investments at December 31,
1995. The increase was primarily due to the purchase of $10.0 million of
investment securities, which consisted of $4.0 million of two year term U.S.
Treasury notes and $6.0 million of U.S. Government agency obligations with
maturities ranging from two to five years. The increase was partially offset by
the sale of $1.0 million of investment securities. At June 30, 1996, all of the
Corporation's investment securities were classified as available for sale and
Fidelity had $37,000 of unrealized losses (net of related tax effects) with
respect to its investment securities portfolio which was deducted from the
Corporation's stockholders' equity as of such date.
Mortgage-backed securities totaled $27.8 million at June 30, 1996, which
represents a $1.5 million decrease from the balance at December 31, 1995. The
decrease was primarily due to $3.4 million in principal repayments and $1.0
million in sales of mortgage-backed securities, which were partially offset by
purchases of $3.2 million and a $314,000 increase in unrealized losses on
mortgage-backed securities classified as available for sale. At June 30, 1996,
the Corporation's investment in adjustable-rate and medium-term (five years or
less) fixed-rate mortgage-backed securities amounted to approximately 95.5% 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 Corporation's operations to changes in market interest rates. At June 30,
1996, all of the Corporation's mortgage-backed securities portfolio was
classified as available for sale and Fidelity had $284,000 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 $191.6 million at
June 30, 1996, as compared to $185.1 million at December 31, 1995. Loans
receivable increased by $6.5 million, or 3.5%, during the six months ended June
30, 1996, primarily due to $25.8 million of loan originations, which were
partially offset by $19.2 million of loan repayments and $209,000 of loan sales.
Although historically the Corporation has acted as a portfolio lender by only
originating loans that management believes the Corporation can profitably retain
in its portfolio, at June 30, 1996, the Corporation had $211,000 of loans
classified as held for sale.
11
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 June 30,
1996 (continued)
At June 30, 1996, the Corporation's allowance for loan losses totaled $831,000,
an increase of $13,000 from the level maintained at December 31, 1995. At June
30, 1996, the Corporation's allowance represented approximately .43% of the
total loan portfolio (including loans classified as held for sale) and 60.5% 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
.71%, as compared to .54% at December 31, 1995. Although management of the
Corporation believes that its allowance for loan losses at June 30, 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 $184.5 million at June 30, 1996, an increase of $3.8 million,
or 2.1%, over the $180.7 million of deposits at December 31, 1995. The overall
deposit growth was limited due to $3.3 million of existing accounts being
utilized to purchase the Corporation's common stock in the Conversion and
Reorganization. Deposit accounts subject to daily repricing (passbook, money
market deposit and NOW accounts) decreased by $1.8 million, while certificates
of deposit increased by $5.6 million.
At June 30, 1996, FHLB advances totaled $13.8 million, which represented a $3.9
million, or 22.0%, 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 $51.1 million at June 30, 1996, an increase of
$21.0 million, or 69.7%, over the December 31, 1995 total. The increase resulted
primarily from the $20.4 million in net proceeds from the common stock offering
(after consideration of shares acquired by the ESOP) and undistributed net
earnings of $717,000.
Comparison of Operating Results for the Six and Three Month Periods Ended June
30, 1996 and 1995
General
Net earnings for the six months ended June 30, 1996, totaled $1.2 million, or
$.30 per share, as compared to $942,000, or $.23 per share, for the six months
ended June 30, 1995, an increase of $242,000, or 25.7%. The increase in earnings
resulted primarily from a $493,000 increase in net interest income and a $45,000
increase in other income, which were partially offset by an $8,000 increase in
the provision for losses on loans, a $152,000 increase in general,
administrative and other expense and an increase in the provision for federal
income taxes of $136,000.
Net earnings for the quarter ended June 30, 1996 amounted to $629,000, or $.16
per share, as compared to $456,000, or $.11 per share, for the quarter ended
June 30, 1995, an increase of $173,000, or 37.9%. The increase in earnings
resulted primarily from a $372,000 increase in net interest income and an
$18,000 increase in other income, which were partially offset by a $5,000
increase in the provision for losses on loans, a $106,000 increase in general,
administrative and other expense and an increase in the provision for federal
income taxes of $106,000.
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 Six and Three Month Periods Ended June
30, 1996 and 1995 (continued)
Net Interest Income
Interest income on loans for the six months ended June 30, 1996 increased by
$381,000, or 5.3%, due primarily to a $10.4 million increase in the average
balance of loans outstanding, which was partially offset by a decrease in the
weighted-average yield earned on the loan portfolio, from 8.12% during the 1995
period, to 8.07% during the 1996 period. Interest income on mortgage-backed
securities increased by $84,000, or 10.2%, due to an increase in the
weighted-average yield from 6.10% during the six months ended June 30, 1995, to
6.32% during the six months ended June 30, 1996, coupled with a $1.7 million
increase in the average balance outstanding. Interest income on investment
securities and other interest-earning assets increased by $390,000, or 136.8%,
due primarily to a $13.0 million increase in the average balance outstanding
during the six months ended June 30, 1996, and to a lesser extent an increase in
the weighted-average yield, from 5.90% during the 1995 period, to 5.96% during
the 1996 period.
Interest expense on deposits increased by $305,000, or 6.8%, during the six
months ended June 30, 1996, due to a $10.0 million increase in the average
balance of deposits outstanding and an increase in the weighted-average rate
paid on deposits, from 5.16% for the six months ended June 30, 1995, to 5.21%
for the six months ended June 30, 1996. Interest expense on borrowings increased
by $57,000, or 13.9%, during the six months ended June 30, 1996, due to a $2.1
million increase in the average balance of borrowings outstanding, which was
partially offset by a decrease in the weighted-average rate paid, from 6.37% for
the six months ended June 30, 1995, to 6.22% for the six months ended June 30,
1996.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $493,000, or 14.4%, during the six months ended
June 30, 1996, as compared to the six months ended June 30, 1995. The net
interest margin increased from 3.19% to 3.27% during the six months ended June
30, 1996, as compared to the six months ended June 30, 1995.
Interest income on loans for the three months ended June 30, 1996 increased by
$158,000, or 4.3%, due primarily to a $10.4 million increase in the average
balance of loans outstanding, which was partially offset by a decrease in the
weighted-average yield earned on the loan portfolio, from 8.12% during the 1995
quarter, to 8.01% during the 1996 quarter. Interest income on mortgage-backed
securities increased by $24,000, or 5.6%, due to a $1.6 million increase in the
average balance outstanding, which was partially offset by a decrease in the
weighted-average yield, from 6.25% for the June 30, 1995 quarter, to 6.23% for
the June 30, 1996 quarter. Interest income on investment securities and other
interest-earning assets increased by $271,000, or 196.4%, due primarily to a
$17.0 million increase in the average balance outstanding during the three
months ended June 30, 1996, and to a lesser extent, an increase in the
weighted-average yield from 5.87% during the 1995 quarter to 6.19% during the
1996 quarter.
Interest expense on deposits increased by $75,000, or 3.3%, during the three
months ended June 30, 1996, due to an $8.0 million increased in the average
balance of deposits outstanding, which was partially offset by a decrease in the
weighted-average rate paid on deposits, from 5.29% for the quarter June 30,
1995, to 5.22% for the quarter June 30, 1996. Interest expense on borrowings
increased by $6,000, or 2.8%, during the three months ended June 30, 1996, due
to an $843,000 increase in the average balance of borrowings outstanding, which
was partially offset by a decrease in the weighted-average rate paid, from 6.44%
for the quarter June 30, 1995, to 6.23% for the quarter June 30, 1996.
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 Six and Three Month Periods Ended June
30, 1996 and 1995 (continued)
Net Interest Income (continued)
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $372,000, or 22.2%, during the three months
ended June 30, 1996 as compared to the three months ended June 30, 1995. The net
interest margin increased from 3.11% to 3.35% during the three months ended June
30, 1996, as compared to the three months ended June 30, 1995.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the
Corporation, the status of past due principal and interest payments, general
economic conditions, particularly as they relate to the Corporation's market
area, and other factors related to the collectibility of the Corporation's loan
portfolio.
The provision for loan losses totaled $32,000 and $24,000 for the six months
ended June 30, 1996 and 1995, respectively. During the six months ended June 30,
1996 and 1995, $19,000 and $36,000, respectively, of single-family residential
loans were charged-off against the Corporation's allowance. The provision for
loan losses for each of the six month periods ended June 30, 1996 and 1995
represented additions to the Corporation's general allowance.
The provision for loan losses totaled $15,000 and $10,000 for the three months
ended June 30, 1996 and 1995, respectively. The provision for loan losses for
the each of three month periods ended June 30, 1996 and 1995 represented
additions to the Corporation's general allowance.
Other Income
Total other income increased by $45,000, or 26.3%, for the six months ended June
30, 1996, as compared to the six months ended June 30, 1995. The increase was
primarily attributable to a $12,000 gain on sale of investment and
mortgage-backed securities, a $12,000 increase in rental income and a $13,000,
or 11.7% increase in other operating income. The increase in other operating
income was due primarily to additional fee income on checking accounts.
Total other income increased by $18,000, or 21.4%, for the three months ended
June 30, 1996 as compared to the three months ended June 30, 1995. The increase
was primarily attributable to a $5,000 decrease in loss on sale of real estate
acquired through foreclosure, a $4,000 increase in rental income and a $9,000,
or 16.4%, increase in other operating income, primarily attributable to
additional fee income on checking accounts.
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 Six and Three Month Periods Ended June
30, 1996 and 1995 (continued)
General, Administrative and Other Expense
General, administrative and other expense totaled $2.3 million for the six
months ended June 30, 1996, an increase of $152,000, or 7.1%, over the
comparable period in 1995. The increase resulted primarily from a $55,000, or
18.3%, increase in occupancy and equipment, generally reflecting increases in
depreciation and repair costs in connection with improvements to several branch
office locations, and a $67,000, or 17.5%, increase in other operating expenses.
The increase in other operating expense resulted primarily from increased costs
of public reporting, as well as increases in advertising and charitable
contributions expense.
General, administrative and other expense totaled $1.2 million for the three
months ended June 30, 1996, an increase of $106,000, or 9.8%, over the 1995
quarter. The increase resulted primarily from a $34,000, or 6.4%, increase in
employee compensation and benefits, reflecting the costs related to the
Corporation's Employee Stock Ownership Plan, a $32,000, or 22.2%, increase in
occupancy and equipment and a $28,000, or 14.0%, increase in other operating
expenses, as discussed above.
Federal Income Taxes
The provision for federal income taxes totaled $605,000 for the six months ended
June 30, 1996, a $136,000, or 29.0%, increase over the comparable period in
1995. The increase resulted primarily from a $378,000, or 26.8%, increase in
earnings before taxes year-to-year. The Corporation's effective tax rates
amounted to 33.8% and 33.2% for the six month periods ended June 30, 1996 and
1995, respectively.
The provision for federal income taxes totaled $323,000 for the three months
ended June 30, 1996, an increase of $106,000, or 48.8%, over the 1995 quarter.
The increase resulted primarily from a $279,000, or 41.5%, increase in earnings
before taxes. The Corporation's effective tax rates amounted to 33.9% and 32.2%
for the three month periods ended June 30, 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, totaled 9.7% at June 30,
1996, as compared to 7.2% at December 31, 1995. At June 30, 1996, the Savings
Bank's "liquid" assets totaled approximately $18.4 million, which exceeded the
current OTS minimum requirement by approximately $8.9 million. The increase in
the Savings Bank's liquidity was primarily due to proceeds from the
aforementioned stock offering.
15
Fidelity Financial of Ohio, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six and Three Month Periods Ended June
30, 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 $13.8 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 June 30, 1996, the total approved loan
commitments outstanding amounted to $5.9 million. At the same date, commitments
under unused lines of credit amounted to $2.3 million, the unadvanced portion of
construction loans approximated $1.7 million and commitments to purchase
investment securities approximated $500,000. Certificates of deposit scheduled
to mature in one year or less at June 30, 1996 totaled $99.8 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 June 30, 1996, the Savings Bank exceeded each of its capital requirements,
with tangible, core and risk-based capital ratios of 16.7%, 16.7% and 32.6%,
respectively.
16
Fidelity Financial of Ohio, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six and Three Month Periods Ended June
30, 1996 and 1995 (continued)
Regulatory Capital Requirements (continued)
The following table sets forth the Savings Bank's compliance with applicable
regulatory capital requirements at June 30, 1996:
Tangible Core Risk-based
capital capital capital
(Dollars in thousands)
Actual regulatory capital $40,591 $40,591 $41,406
Amount currently required 3,638 7,276 10,151
Regulatory capital in excess of requirement $36,953 $33,315 $31,255
Actual regulatory capital as a percentage 16.7% 16.7% 32.6%
Percentage currently required 1.5 3.0 8.0
Regulatory capital in excess of requirement 15.2% 13.7% 24.6%
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.
17
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
The Annual Meeting of Stockholders of Fidelity Financial of
Ohio, Inc. was held on May 15, 1996. At the Annual Meeting,
shareholders elected three directors to terms expiring in 1998
and ratified the appointment of the independent auditors for
the 1996 fiscal year. There was no solicitation in opposition
to management's nominees for election as directors and all of
such nominees were elected.
Annual Meeting Results For Against Abstain Withheld
(A) Election of Directors
Michael W. Jordan (term expiring 1998) 3,118,772 - - 62,574
Constantine N. Papadakis (term expiring 1998) 3,159,954 - - 21,412
Paul D. Staubach (term expiring 1998) 3,171,590 - - 9,776
(B) Ratify Grant Thornton LLP as
Independent Auditors 3,161,141 17,425 2,800 -
ITEM 5. Other Materially Important Events
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) None
(b) On May 1, 1996, the Corporation filed a Form 8-K with
the Securities and Exchange Commission reporting
under Item 5 its execution of an Agreement of Merger
with Circle Financial, dated as of April 29, 1996,
pursuant to which Circle Financial will merge with
and into the Corporation. On June 24, 1996, the
Corporation amended its Form 8-K to report the
execution of an amended and restated Agreement of
Merger with Circle Financial, dated as of June 13,
1996.
18
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: August 9, 1996 By: /s/John R. Reusing
___________________ John R. Reusing
President and Chief Executive Officer
Date: August 9, 1996 By: /s/Paul D. Staubach
___________________ Paul D. Staubach
Senior Vice President and
Chief Financial Officer
19