FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
--------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File No. 0-27868
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 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 ____
As of August 10, 1998, the latest practicable date, 5,599,428 shares of the
registrant's common stock, no par value, were issued and outstanding.
Page 1 of 20 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 Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
Quantitative and Qualitative Disclosures About
Market Risk 18
PART II - OTHER INFORMATION 19
SIGNATURES 20
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
June 30, December 31,
ASSETS 1998 1997
Cash and due from banks $ 3,374 $ 2,801
Federal funds sold 17,742 22,646
Interest-bearing deposits in other financial institutions 1,153 5,084
------- -------
Cash and cash equivalents 22,269 30,531
Investment securities available for sale - at market 4,871 6,020
Mortgage-backed securities available for sale - at market 28,725 25,827
Mortgage-backed securities - at cost, approximate market value of
$29,694 and $13,706 at June 30, 1998 and December 31, 1997, respectively 29,562 13,527
Loans receivable - net 423,031 436,414
Loans held for sale - at lower of cost or market 697 438
Office premises and equipment - at depreciated cost 7,248 7,462
Real estate acquired through foreclosure 160 -
Federal Home Loan Bank stock - at cost 4,308 4,157
Accrued interest receivable on loans 2,197 2,110
Accrued interest receivable on mortgage-backed securities 359 245
Accrued interest receivable on investments 99 132
Prepaid expenses and other assets 733 289
Goodwill and other intangible assets, net of accumulated amortization 7,285 7,628
Prepaid federal income taxes 382 320
------- -------
Total assets $531,926 $535,100
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $418,404 $432,024
Advances from the Federal Home Loan Bank 43,845 34,233
Advances by borrowers for taxes and insurance 1,275 2,134
Accrued interest and other liabilities 1,742 1,826
Deferred federal income taxes 645 609
------- -------
Total liabilities 465,911 470,826
Stockholders' equity
Preferred stock - authorized, 5,000,000 shares at $.10 par value; none issued - -
Common stock - authorized, 15,000,000 shares at $.10 par value; 5,598,180 and
5,593,969 shares issued and outstanding at June 30, 1998 and December 31, 1997 560 559
Additional paid-in capital 41,597 41,548
Retained earnings - restricted 25,782 24,147
Less shares acquired by Employee Stock Ownership Plan (ESOP) (1,710) (1,785)
Less shares of common stock held in treasury - at cost - (20)
Less shares acquired by Management Recognition Plan (MRP) (234) (292)
Unrealized gains on securities designated as available for sale,
net of related tax effects 20 117
------- -------
Total stockholders' equity 66,015 64,274
------- -------
Total liabilities and stockholders' equity $531,926 $535,100
======= =======
3
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
For the three and six months ended June 30,
(In thousands, except share data)
Six months ended Three months ended
June 30, June 30,
1998 1997 1998 1997
Interest income
Loans $16,408 $16,252 $8,112 $8,288
Mortgage-backed securities 1,662 1,455 958 680
Investment securities 183 593 93 311
Interest-bearing deposits and other 841 496 364 231
------ ------ ----- -----
Total interest income 19,094 18,796 9,527 9,510
Interest expense
Deposits 10,357 10,269 5,060 5,229
Borrowings 1,225 673 680 348
------ ------ ----- -----
Total interest expense 11,582 10,942 5,740 5,577
------ ------ ----- -----
Net interest income 7,512 7,854 3,787 3,933
Provision for losses on loans 47 50 27 25
------ ------ ----- -----
Net interest income after provision for losses on loans 7,465 7,804 3,760 3,908
Other income
Gain on sale of investment and mortgage-backed securities 62 128 - 3
Gain on sale of loans 68 4 29 4
Gain on sale of real estate 141 6 - -
Rental 103 116 49 56
Other operating 437 399 228 223
------ ------ ----- -----
Total other income 811 653 306 286
General, administrative and other expense
Employee compensation and benefits 1,956 2,047 987 1,005
Occupancy and equipment 753 736 361 350
Federal deposit insurance premiums 123 123 57 58
Franchise taxes 396 372 198 187
Amortization of goodwill and other intangible assets 343 350 171 175
Data processing 247 223 122 101
Other operating 791 818 383 409
------ ------ ----- -----
Total general, administrative and other expense 4,609 4,669 2,279 2,285
------ ------ ----- -----
Earnings before income taxes 3,667 3,788 1,787 1,909
Federal income taxes
Current 1,242 1,005 614 598
Deferred 88 354 39 90
------ ------ ----- -----
Total federal income taxes 1,330 1,359 653 688
------ ------ ----- -----
NET EARNINGS $ 2,337 $ 2,429 $1,134 $1,221
====== ====== ===== =====
EARNINGS PER SHARE
Basic $0.43 $0.45 $0.21 $0.23
==== ==== ==== ====
Diluted $0.42 $0.45 $0.21 $0.22
==== ==== ==== ====
4
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the six months ended June 30,
(In thousands)
1998 1997
Net earnings $2,337 $2,429
Other comprehensive income, net of tax:
Unrealized losses on securities designated as
available for sale (28) (28)
Reclassification adjustment for gains included
in net earnings - -
----- -----
Comprehensive income $2,309 $2,401
===== =====
5
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30,
(In thousands)
1998 1997
Cash flows from operating activities:
Net earnings for the period $ 2,337 $ 2,429
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 322 340
Amortization of premiums on investments and mortgage-backed securities 73 22
Amortization of deferred loan origination (fees) costs 263 (5)
Amortization expense of employee stock benefit plans 326 187
Amortization of goodwill and other intangible assets 343 350
Amortization of purchase accounting adjustments (143) (493)
Gain on sale of investment and mortgage-backed securities (62) (128)
(Gain) loss on sale of mortgage loans 63 (4)
Loans disbursed for sale in the secondary market (10,759) (536)
Proceeds from sale of mortgage loans 10,504 253
Gain on sale of real estate (141) (6)
Federal Home Loan Bank stock dividends (151) (136)
Provision for losses on loans 47 50
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (87) (293)
Accrued interest receivable on mortgage-backed securities (114) 63
Accrued interest receivable on investments 33 (65)
Prepaid expenses and other assets (444) (163)
Accrued interest and other liabilities (84) (844)
Federal income taxes
Current (62) 375
Deferred 88 354
------- ------
Net cash provided by operating activities 2,352 1,750
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale - (9,489)
Proceeds from sale of investment securities designated as available for sale 1,142 6,489
Maturities of investment securities designated as available for sale 22 19
Purchase of mortgage-backed securities designated as available for sale (8,210) (6,426)
Proceeds from sale of mortgage-backed securities designated as available for sale - 14,309
Principal repayments on mortgage-backed securities designated as available for sale 5,165 2,589
Purchase of mortgage-backed securities designated as held to maturity (19,398) (5,078)
Principal repayments on mortgage-backed securities designated as held to maturity 3,338 840
Loan disbursements (63,598) (58,992)
Sale of loan participations 1,477 -
Purchase of loan participations (1,999) (5,038)
Principal repayments on loans 77,028 28,402
Purchase of Federal Home Loan Bank stock - (93)
Proceeds from sale of office premises and equipment - 135
Proceeds from sale of real estate 213 -
Purchases and additions to office premises and equipment (183) (622)
Additions to real estate acquired through foreclosure (6) -
------- ------
Net cash used in investing activities (5,009) (32,955)
------- ------
Net cash used in operating and investing activities
(subtotal carried forward) (2,657) (31,205)
------- ------
6
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended June 30,
(In thousands)
1998 1997
Net cash used in operating and investing activities
(subtotal brought forward) $(2,657) $(31,205)
Cash provided by (used in) financing activities:
Net increase (decrease) in deposit accounts (13,528) 22,569
Proceeds from Federal Home Loan Bank advances 13,000 9,000
Repayment of Federal Home Loan Bank advances (3,393) (6,737)
Purchase of treasury stock - (219)
Purchase of stock for Management Recognition Plan - (292)
Proceeds from the exercise of stock options 70 2
Dividends on common stock (895) (782)
Advances by borrowers for taxes and insurance (859) (405)
------ -------
Net cash provided by (used in) financing activities (5,605) 23,136
------ -------
Net decrease in cash and cash equivalents (8,262) (8,069)
Cash and cash equivalents at beginning of period 30,531 22,610
------ -------
Cash and cash equivalents at end of period $22,269 $ 14,541
====== =======
Supplemental disclosure of cash flow information: Cash paid during the year for:
Federal income taxes $ 1,300 $ 625
====== =======
Interest on deposits and borrowings $11,558 $ 10,901
====== =======
Supplemental disclosure of noncash investing activities:
Unrealized losses on securities designated as available
for sale, net of related tax effects $ (97) $ (173)
====== =======
Recognition of mortgage servicing rights in accordance with
SFAS No. 125 $ 131 $ -
====== ======
7
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated 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
position, results of operations and cash flows in conformity with generally
accepted accounting principles. Accordingly, these financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto of Fidelity Financial of Ohio, Inc. (the "Corporation")
included in the Annual Report on Form 10-K for the year ended December 31,
1997. However, in the opinion of management, all adjustments (consisting of
only normal recurring accruals) which are necessary for a fair presentation
of the financial statements have been included. The results of operations
for the three and six month periods ended June 30, 1998 are not necessarily
indicative of the results which may be expected for the entire year.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Corporation and its wholly owned subsidiary, Fidelity Federal Savings
Bank (the "Savings Bank"). All significant intercompany items have been
eliminated.
3. Earnings Per Share
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period, less shares in the ESOP that are unallocated
and not committed to be released. Weighted-average common shares
outstanding, which gives effect to 175,047 and 191,115 unallocated ESOP
shares, totaled 5,419,622 and 5,401,286 for the six month periods ended June
30, 1998 and 1997, respectively, and 5,420,263 and 5,401,286 for the three
month periods ended June 30, 1998 and 1997, respectively.
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under
the Corporation's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share totaled
5,499,151 and 5,445,805 for the six month periods ended June 30, 1998 and
1997, respectively, and 5,499,684 and 5,451,878 for the three months ended
June 30, 1998 and 1997, respectively.
4. Effects of Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", that provides accounting guidance on transfers of financial
assets, servicing of financial assets, and extinguishment of liabilities.
SFAS No. 125 introduces an approach to accounting for transfers of financial
assets that provides a means of dealing with more complex transactions in
which the seller disposes of only a partial interest in the assets, retains
rights or obligations, makes use of special purpose entities in the
transaction, or otherwise has continuing involvement with the transferred
assets. The new accounting method, the financial components approach,
provides that the
8
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Effects of Recent Accounting Pronouncements (continued)
carrying amount of the financial assets transferred be allocated to
components of the transaction based on their relative fair values. SFAS No.
125 provides criteria for determining whether control of assets has been
relinquished and whether a sale has occurred. If the transfer does not
qualify as a sale, it is accounted for as a secured borrowing. Transactions
subject to the provisions of SFAS No. 125 include, among others, transfers
involving repurchase agreements, securitizations of financial assets, loan
participations, factoring arrangements, and transfers of receivables with
recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized
assets are retained and classified as held-to-maturity). A servicing asset
or liability that is purchased or assumed is initially recognized at its
fair value. Servicing assets and liabilities are amortized in proportion to
and over the period of estimated net servicing income or net servicing loss
and are subject to subsequent assessments for impairment based on fair
value.
SFAS No. 125 provides that a liability is removed from the balance sheet
only if the debtor either pays the creditor and is relieved of its
obligation for the liability or is legally released from being the primary
obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishment of liabilities occurring after December 31, 1997, and is
to be applied prospectively. Earlier or retroactive application is not
permitted. Management adopted SFAS No. 125 effective January 1, 1998, as
required, without material effect on the Corporation's consolidated
financial position or results of operations.
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 general-purpose 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. The Corporation adopted SFAS No. 130 effective January 1, 1998, as
required, without material effect on the Corporation's financial statements.
9
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Effects of Recent Accounting Pronouncements (continued)
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.
10
Fidelity Financial of Ohio, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertanties. Economic circumstances, the Corporation's operations and actual
results could differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and the Corporation's general market area. The
forward-looking statements contained herein include, but are not limited to,
those with respect to the following matters:
1. Management's determination of the amount and adequacy of the allowance for
loan losses;
2. The effect of changes in interest rates;
3. Management's opinion as to the effects of recent accounting pronouncements
on the Corporation's consolidated financial statements;
4. Management's determination of the effect of the year 2000 on its information
technology systems.
Discussion of Financial Condition Changes from December 31, 1997 to June 30,
1998
The Corporation's consolidated total assets amounted to $531.9 million at June
30, 1998, a decrease of $3.2 million, or .6%, from the $535.1 million total at
December 31, 1997. The decline in assets resulted primarily from a decline in
deposits of $13.6 million which was partially offset by an increase of $9.6
million in FHLB advances and undistributed earnings of $1.4 million.
Cash and cash equivalents, comprised of cash and due from banks, federal funds
sold and interest-bearing deposits in other financial institutions, amounted to
$22.3 million at June 30, 1998, a decrease of $8.3 million, or 27.1%, from the
total in 1997.
Investment securities totaled $4.9 million at June 30, 1998, a decrease of $1.1
million, or 19.1%, from 1997 levels, due primarily to sales during the period
totaling $1.1 million.
Mortgage-backed securities (including securities classified as available for
sale) totaled $58.3 million at June 30, 1998, an increase of $18.9 million, or
48.1%, from the total at December 31, 1997. The increase in mortgage-backed
securities was due primarily to purchases totaling $27.6 million, which were
partially offset by principal repayments of $8.5 million. Purchases during the
current period consisted of $21.5 million of fixed-rate securities and $6.1
million of adjustable-rate securities. Such purchases were funded by proceeds
from loan repayments and utilization of excess liquidity.
Loans receivable decreased by $13.1 million, or 3.0%, to a total of $423.7
million at June 30, 1998, as compared to $436.9 million at December 31, 1997.
The decrease resulted primarily from loan disbursements of $76.4 million, which
were exceeded by principal repayments totaling $77.0 million and sales of $12.0
million. Loan originations during the 1998 period increased by $11.8 million, or
18.3%, over the comparable period in 1997. The Savings Bank's loan originations
during 1998 were primarily comprised of one- to four-family and multi-family
loans, which totaled $59.9 million, or 78.5%, of total loan originations.
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, 1997 to June 30,
1998 (continued)
The Savings Bank's allowance for loan losses totaled $1.7 million at June 30,
1998, an increase of $37,000, or 2.2%, over the total at December 31, 1997. The
allowance represented .39% and .37% of total loans at June 30, 1998 and December
31, 1997, respectively, and 137.0% and 173.2% of nonperforming loans, which
totaled $1.2 million and $1.0 million at those respective dates. While
management believes the Savings Bank's allowance for loan losses is adequate at
June 30, 1998, based upon the available facts and circumstances, there can be no
assurance that additions to the allowance will not be necessary in future
periods, which could adversely affect future operating results.
Deposits totaled $418.4 million at June 30, 1998, a decrease of $13.6 million,
or 3.2%, from the total at December 31, 1997. Deposits subject to daily
repricing totaled $91.6 million, or 21.9%, of total deposits at June 30, 1998,
as compared to 21.2% of total deposits at December 31, 1997. Certificates of
deposit totaled $326.8 million, or 78.1% of total deposits at June 30, 1998, as
compared to 78.8% at December 31, 1997.
Advances from the Federal Home Loan Bank totaled $43.8 million at June 30, 1998,
an increase of $9.6 million, or 28.1%, over the balance at December 31, 1997.
The increase resulted primarily from $13.0 million in borrowings during the 1998
period, which were partially offset by repayments of $3.4 million. During the
six months ended June 30, 1998, management elected to utilize advances to fund
net deposit outflows in order to achieve an overall reduction in the cost of
funds.
Stockholders' equity totaled $66.0 million at June 30, 1998, an increase of $1.7
million, or 2.7%, over the total at December 31, 1997. The increase resulted
primarily from the net earnings of $2.3 million, less dividends paid which
totaled $895,000.
Comparison of Operating Results for the Six Month Periods ended June 30, 1998
and 1997
General
Net earnings amounted to $2.3 million for the six months ended June 30, 1998, a
decrease of $92,000, or 3.8%, from the $2.4 million in net earnings recorded for
the six months ended June 30, 1997. Net interest income decreased by $342,000,
which was partially offset by a $158,000 increase in other income and a $60,000
decrease in general, administrative and other expense.
Net Interest Income
Net interest income totaled $7.5 million for the six months ended June 30, 1998,
a decrease of $342,000, or 4.4%, from the 1997 period. Interest income increased
by $298,000, or 1.6%, for the six months ended June 30, 1998, as compared to
1997. Interest income on loans and mortgage-backed securities increased by
$363,000, or 2.1%, due primarily to a $23.0 million, or 5.0%, increase in the
average balance outstanding year to year, which was partially offset by a 21
basis point decline in the weighted-average yield, from 7.74% in 1997 to 7.53%
in 1998. Interest income on investment securities and interest-bearing deposits
decreased by $65,000, or 6.0%, during 1998 due primarily to a $1.3 million, or
3.5%, decrease in the average balance outstanding.
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 Month Periods ended June 30, 1998
and 1997 (continued)
Net Interest Income (continued)
Interest expense on deposits increased by $88,000, or .9%, for the six months
ended June 30, 1998, as compared to the six months ended June 30, 1997. The
increase was due primarily to a $3.7 million, or .9%, increase in the average
balance outstanding, as the average cost of deposits remained unchanged at 4.90%
for each of the six month periods ended June 30, 1998 and 1997. Interest expense
on borrowings increased by $552,000, or 82.0%, due to an $18.8 million increase
in the average balance of outstanding borrowings during 1998.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $342,000, or 4.4%, for the six months ended
June 30, 1998 as compared to 1997. The interest rate spread amounted to 2.42%
during 1998 and 2.65% in 1997, while the net interest margin declined to 2.92%
from 3.18% for the six months ended June 30, 1998 and 1997, respectively.
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
Savings Bank, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Savings
Bank's market area, and other factors related to the collectibility of the
Savings Bank's loan portfolio. As a result of such analysis, management recorded
a $47,000 provision for losses on loans during the six months ended June 30,
1998, a decrease of $3,000 from the amount recorded in the 1997 six month
period. There can be no assurance that the allowance for loan losses of the
Savings Bank will be adequate to cover losses on nonperforming assets in the
future.
Other Income
Other income increased by $158,000, or 24.2%, to a total of $811,000 for the six
months ended June 30, 1998, as compared to $653,000 in 1997. The increase was
due primarily to a $135,000 increase in gains on sales of real estate, coupled
with a $68,000 gain on sale of loans and a $38,000, or 9.5%, increase in other
operating income, which consisted primarily of service charges and fees, which
were partially offset by a $66,000 decrease in gains on sale of securities year
to year.
General, Administrative and Other Expense
General, administrative and other expense totaled $4.6 million for the six
months ended June 30, 1998, a decrease of $60,000, or 1.3%, from the 1997 total.
The decrease resulted primarily from a $91,000, or 4.4%, decrease in employee
compensation and benefits, which was partially offset by a $24,000, or 6.5%,
increase in franchise taxes.
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 Month Periods ended June 30, 1998
and 1997 (continued)
General, Administrative and Other Expense (continued)
The decrease in employee compensation and benefits resulted primarily from an
increase in deferred loan origination costs associated with the increase in loan
volume year to year.
The increase in franchise taxes resulted from the increase in stockholders'
equity year to year.
Federal Income Taxes
The provision for federal income taxes totaled $1.3 million for the six months
ended June 30, 1998, a decrease of $29,000, or 2.1%, from the provision recorded
in the six months ended June 30, 1997. The Corporation's effective tax rates
were 36.3% and 35.9% for the six months ended June 30, 1998 and 1997,
respectively.
Comparison of Operating Results for the Three Month Periods ended June 30, 1998
and 1997
General
Net earnings amounted to $1.1 million for the three months ended June 30, 1998,
a decrease of $87,000, or 7.1%, from the $1.2 million in net earnings recorded
for the three months ended June 30, 1997. Net interest income decreased by
$146,000, which was partially offset by a $20,000 increase in other income, a
$6,000 decrease in general, administrative and other expense and a $35,000
decrease in the provision for federal income taxes.
Net Interest Income
Net interest income totaled $3.8 million for the three months ended June 30,
1998, a decrease of $146,000, or 3.7%, from the 1997 period. Interest income
increased by $17,000, or .2%, for the three months ended June 30, 1998, as
compared to 1997. Interest income on loans and mortgage-backed securities
increased by $102,000, or 1.1%, due primarily to a $20.5 million, or 4.4%,
increase in the average balance outstanding year to year, which was partially
offset by a 24 basis point decline in the weighted-average yield, from 7.71% in
1997 to 7.47% in 1998. Interest income on investment securities and
interest-bearing deposits decreased by $85,000, or 15.7%, during 1998 due
primarily to a $3.9 million, or 11.2%, decrease in the average balance
outstanding, coupled with a 31 basis point decline in the weighted-average yield
year to year, to 5.97% for the three months ended June 30, 1998.
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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 June 30, 1998
and 1997 (continued)
Net Interest Income (continued)
Interest expense on deposits decreased by $169,000, or 3.2%, for the three
months ended June 30, 1998, as compared to the three months ended June 30, 1997.
The decrease was due primarily to a $5.5 million, or 1.3%, decrease in the
average balance outstanding, coupled with a 10 basis point decline in the
average cost of deposits, to 4.84% for the quarter ended June 30, 1998, as
compared to 4.94% for the 1997 quarter. Interest expense on borrowings increased
by $332,000, or 95.4%, due to a $23.0 million increase in the average balance of
outstanding borrowings during 1998.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $146,000, or 3.7%, for the three months ended
June 30, 1998 as compared to 1997. The interest rate spread amounted to 2.44%
during 1998 and 2.61% in 1997, while the net interest margin declined to 2.95%
from 3.15% for the three months ended June 30, 1998 and 1997, respectively.
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
Savings Bank, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Savings
Bank's market area, and other factors related to the collectibility of the
Savings Bank's loan portfolio. As a result of such analysis, management recorded
a $27,000 provision for losses on loans during the three months ended June 30,
1998, compared to $25,000 recorded in the 1997 three month period. There can be
no assurance that the allowance for loan losses of the Savings Bank will be
adequate to cover losses on nonperforming assets in the future.
Other Income
Other income increased by $20,000, or 7.0%, to a total of $306,000 for the three
months ended June 30, 1998, as compared to $286,000 in 1997. The increase was
due primarily to a $25,000 increase in gains on sales of loans.
General, Administrative and Other Expense
General, administrative and other expense totaled $2.3 million for the three
months ended June 30, 1998, a decrease of $6,000, or .3%, from the 1997 total.
The decrease resulted primarily from an $18,000, or 1.8%, decrease in employee
compensation and benefits and a $26,000, or 6.4%, decrease in other operating
expense, which were partially offset by an $11,000, or 5.9%, increase in
franchise taxes and a $21,000, or 20.8%, increase in data processing.
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 Three Month Periods ended June 30, 1998
and 1997 (continued)
Federal Income Taxes
The provision for federal income taxes totaled $653,000 for the three months
ended June 30, 1998, a decrease of $35,000, or 5.1%, from the provision recorded
in the three months ended June 30, 1997. The Corporation's effective tax rates
were 36.5% and 36.0% for the three months ended June 30, 1998 and 1997,
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. 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 4% 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
withdrawable deposit accounts and borrowings payable on demand or with unexpired
maturities of one year or less, was 18.76% at June 30, 1998. At June 30, 1998
the Savings Bank's "liquid" assets totaled approximately $66.3 million, which
was $51.4 million in excess of the current OTS minimum requirement.
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 provides
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 June 30, 1998, the Savings Bank had $44.5 million of
outstanding advances from the FHLB of Cincinnati. Furthermore, the Savings Bank
has access to the Federal Reserve Bank discount window.
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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 June 30, 1998
and 1997 (continued)
Liquidity and Capital Resources (continued)
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, the Savings Bank maintains a
strategy of investing in various 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, 1998, the total approved loan
commitments outstanding amounted to $13.0 million. At the same date, commitments
under unused lines of credit secured by one- to four-family residential property
amounted to $5.3 million, commitments under unused lines of credit secured by
multi-family and non-residential real estate totaled $3.0 million and the
unadvanced portion of construction loans approximated $9.4 million. At June 30,
1998, commitments to sell loans amounted to $2.2 million. Certificates of
deposit scheduled to mature in one year or less at June 30, 1998, totaled $248.5
million and Federal Home Loan Bank advances maturing in one year or less
amounted to $12.4 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 subject to minimum capital standards promulgated by the OTS.
At June 30, 1998, the Savings Bank's capital was well in excess of all such
minimum capital requirements.
Other Matters
As with all providers of financial services, the Savings Bank's operations are
heavily dependent on information technology systems. The Savings Bank is
addressing the potential problems associated with the possibility that the
computers that control or operate the Savings Bank's information technology
system and infrastructure may not be programmed to read four-digit date codes
and, upon arrival of the year 2000, may recognize the two-digit code "00" as the
year 1900, causing systems to fail to function or to generate erroneous data.
The Savings Bank is working with the companies that supply or service its
information technology systems to identify and remedy any year 2000 related
problems.
As of the date of this Form 10-Q, management has developed an estimate of
expenses that are reasonably likely to be incurred by the Savings Bank in
connection with this issue, however does not expect to incur significant expense
to implement the necessary corrective measures. No assurance can be given,
however, that significant expense will not be incurred in future periods. In the
event that the Savings Bank is ultimately required to purchase replacement
computer systems, programs and equipment, or incur substantial expense to make
the Savings Bank's current systems, programs and equipment year 2000 compliant,
the Savings Bank's net earnings and financial condition could be adversely
affected.
17
Fidelity Financial of Ohio, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Other Matters (continued)
In addition to possible expense related to its own systems, the Savings Bank
could incur losses if loan payments are delayed due to year 2000 problems
affecting any major borrowers in the Savings Bank's primary market area. Because
the Savings Bank's loan portfolio is highly diversified with regard to
individual borrowers and types of businesses and the Savings Bank's primary
market area is not significantly dependent upon one employer or industry, the
Savings Bank does not expect any significant or prolonged difficulties that will
affect net earnings or cash flow.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Corporation and related
consolidated 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 the change in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Corporation's operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Corporation are monetary in nature. As a result,
interest rates have a greater impact on the Corporation's performance than do
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative disclosures about market risk are presented at
December 31, 1997 in Item 7A of the Corporation's Annual Report on Form 10K,
filed with the SEC on March 30, 1998. Management believes there have been no
material changes in the Corporation's market risk since December 31, 1997.
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Fidelity Financial of Ohio, Inc.
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities and Use of Proceeds
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
Deadlines for Shareholder Proposals
Pursuant to Rule 14a-5(e) under the Securities Exchange Act of
1934, as amended effective June 29, 1998:
(1) The deadline for submitting shareholder proposals for
inclusion in the Corporation's proxy statement and
form of proxy for the Corporation's 1999 Annual
Meeting of Stockholders pursuant to Rule 14a-8 is
November 27, 1998.
(2) The date after which notice of a shareholder proposal
submitted outside the processes of Rule 14a-8 is
considered untimely is February 27, 1999.
ITEM 6. Exhibits and Reports on Form 8-K
There were no Form 8-K's filed by Fidelity Financial of Ohio,
Inc. during the quarter ended June 30, 1998.
Exhibit 27: Financial Data Schedule for the Six Months Ended
June 30, 1998.
19
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 10, 1998 By: /s/John R. Reusing
----------------------- ------------------
John R. Reusing
President and Chief Executive
Officer
Date: August 10, 1998 By: /s/Paul D. Staubach
----------------------- -------------------
Paul D. Staubach
Senior Vice President and
Chief Financial Officer
20