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 September 30, 1998
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File No. 0-27868
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 October 28, 1998, the latest practicable date, 5,601,977 shares of the
registrant's common stock, no par value, were issued and outstanding.
Page 1 of 21 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 19
PART II - OTHER INFORMATION 20
SIGNATURES 21
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30, December 31,
ASSETS 1998 1997
Cash and due from banks $ 2,069 $ 2,801
Federal funds sold 17,024 22,646
Interest-bearing deposits in other financial institutions 416 5,084
------- -------
Cash and cash equivalents 19,509 30,531
Investment securities available for sale - at market 1,844 6,020
Mortgage-backed securities available for sale - at market 26,629 25,827
Mortgage-backed securities - at cost, approximate market value of
$32,120 and $13,706 at September 30, 1998 and December 31, 1997, respectively 31,999 13,527
Loans receivable - net 425,498 436,414
Loans held for sale - at lower of cost or market 197 438
Office premises and equipment - at depreciated cost 7,387 7,462
Real estate acquired through foreclosure 95 -
Federal Home Loan Bank stock - at cost 4,387 4,157
Accrued interest receivable on loans 2,273 2,110
Accrued interest receivable on mortgage-backed securities 353 245
Accrued interest receivable on investments 46 132
Prepaid expenses and other assets 623 289
Goodwill and other intangible assets, net of accumulated amortization 7,116 7,628
Prepaid federal income taxes 161 320
------- -------
Total assets $528,117 $535,100
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $418,953 $432,024
Advances from the Federal Home Loan Bank 38,392 34,233
Advances by borrowers for taxes and insurance 1,690 2,134
Accrued interest and other liabilities 1,573 1,826
Deferred federal income taxes 682 609
------- -------
Total liabilities 461,290 470,826
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; 5,601,977 and
5,593,969 shares issued and outstanding at September 30, 1998 and December 31, 1997 560 559
Additional paid-in capital 41,634 41,548
Retained earnings - restricted 26,515 24,147
Less shares acquired by Employee Stock Ownership Plan (ESOP) (1,672) (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 24 117
------- -------
Total stockholders' equity 66,827 64,274
------- -------
Total liabilities and stockholders' equity $528,117 $535,100
======= =======
3
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
For the three and nine months ended September 30,
(In thousands, except share data)
Nine months ended Three months ended
September 30, September 30,
1998 1997 1998 1997
Interest income
Loans $24,531 $24,765 $8,123 $8,513
Mortgage-backed securities 2,583 2,057 921 602
Investment securities 243 862 60 268
Interest-bearing deposits and other 1,164 765 323 269
------ ------ ----- -----
Total interest income 28,521 28,449 9,427 9,652
Interest expense
Deposits 15,426 15,601 5,069 5,332
Borrowings 1,839 1,106 614 433
------ ------ ----- -----
Total interest expense 17,265 16,707 5,683 5,765
------ ------ ----- -----
Net interest income 11,256 11,742 3,744 3,887
Provision for losses on loans 77 75 30 25
------ ------ ----- -----
Net interest income after provision for losses on loans 11,179 11,667 3,714 3,862
Other income
Gain on sale of investment and mortgage-backed securities 62 136 - 8
Gain on sale of loans 119 29 51 25
Gain on sale of real estate 141 6 - -
Rental 150 164 47 48
Other operating 694 644 257 246
------ ------ ----- -----
Total other income 1,166 979 355 327
General, administrative and other expense
Employee compensation and benefits 2,893 3,066 937 1,019
Occupancy and equipment 1,148 1,115 395 379
Federal deposit insurance premiums 197 189 74 66
Franchise taxes 598 557 202 185
Amortization of goodwill and other intangible assets 512 523 169 173
Data processing 376 345 129 122
Other operating 1,228 1,214 437 396
------ ------ ----- -----
Total general, administrative and other expense 6,952 7,009 2,343 2,340
------ ------ ----- -----
Earnings before income taxes 5,393 5,637 1,726 1,849
Federal income taxes
Current 1,820 1,513 578 508
Deferred 121 479 33 125
------ ------ ----- -----
Total federal income taxes 1,941 1,992 611 633
------ ------ ----- -----
NET EARNINGS $ 3,452 $ 3,645 $1,115 $1,216
====== ====== ===== =====
EARNINGS PER SHARE
Basic $0.64 $0.67 $0.21 $0.22
==== ==== ==== ====
Diluted $0.63 $0.66 $0.20 $0.22
==== ==== ==== ====
4
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the nine months ended September 30,
(In thousands)
1998 1997
Net earnings $3,452 $3,645
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities
designated as available for sale (52) 27
Reclassification adjustment for gains included
in net earnings (41) (91)
----- -----
Comprehensive income $3,359 $3,581
===== =====
5
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30,
(In thousands)
1998 1997
Cash flows from operating activities:
Net earnings for the period $ 3,452 $ 3,645
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 496 488
Amortization of premiums on investments and mortgage-backed securities 122 20
Amortization of deferred loan origination costs 327 165
Amortization expense of employee stock benefit plans 430 233
Amortization of goodwill and other intangible assets 512 523
Amortization of purchase accounting adjustments (167) (640)
Gain on sale of investment and mortgage-backed securities (62) (136)
(Gain) loss on sale of mortgage loans 63 (4)
Loans disbursed for sale in the secondary market (14,715) (2,086)
Proceeds from sale of mortgage loans 14,893 1,974
Gain on sale of office premises and equipment - (6)
Gain on sale of real estate (141) -
Federal Home Loan Bank stock dividends (230) (209)
Provision for losses on loans 77 75
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (163) (313)
Accrued interest receivable on mortgage-backed securities (108) 40
Accrued interest receivable on investments 86 151
Prepaid expenses and other assets (334) (151)
Accrued interest and other liabilities (253) (903)
Federal income taxes
Current 159 507
Deferred 121 479
------- ------
Net cash provided by operating activities 4,565 3,852
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale (1,000) (12,508)
Proceeds from sale of investment securities designated as available for sale 1,146 16,575
Maturities of investment securities designated as available for sale 4,036 38
Purchase of mortgage-backed securities designated as available for sale (9,094) (10,040)
Proceeds from sale of mortgage-backed securities designated as available for sale - 14,306
Principal repayments on mortgage-backed securities designated as available for sale 8,127 3,473
Purchase of mortgage-backed securities designated as held to maturity (24,156) (5,078)
Principal repayments on mortgage-backed securities designated as held to maturity 5,645 1,550
Loan disbursements (90,069) (88,981)
Sale of loan participations 1,708 -
Purchase of loan participations (1,999) (5,038)
Principal repayments on loans 100,677 49,242
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 (497) (631)
Additions to real estate acquired through foreclosure (6) -
Proceeds from sale of real estate acquired through foreclosure 160 -
------- ------
Net cash used in investing activities (5,109) (37,050)
------- ------
Net cash used in operating and investing activities
(subtotal carried forward) (544) (33,198)
------- ------
6
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended September 30,
(In thousands)
1998 1997
Net cash used in operating and investing activities
(subtotal brought forward) $ (544) $(33,198)
Cash provided by (used in) financing activities:
Net increase (decrease) in deposit accounts (12,950) 14,976
Proceeds from Federal Home Loan Bank advances 13,000 20,000
Repayment of Federal Home Loan Bank advances (8,848) (7,116)
Purchase of treasury stock - (219)
Purchase of stock for Management Recognition Plan - (292)
Proceeds from the exercise of stock options 107 7
Dividends on common stock (1,343) (1,172)
Advances by borrowers for taxes and insurance (444) (477)
------ -------
Net cash provided by (used in) financing activities (10,478) 25,707
------ -------
Net decrease in cash and cash equivalents (11,022) (7,491)
Cash and cash equivalents at beginning of period 30,531 22,610
------ -------
Cash and cash equivalents at end of period $19,509 $ 15,119
====== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 1,661 $ 1,025
====== =======
Interest on deposits and borrowings $17,335 $ 16,957
====== =======
Supplemental disclosure of noncash investing activities:
Unrealized losses on securities designated as available
for sale, net of related tax effects $ (93) $ (64)
====== =======
Foreclosed mortgage loans transferred to real estate acquired
through foreclosure $ 249 $ -
====== =======
Recognition of mortgage servicing rights in accordance with
SFAS No. 125 $ 182 $ 25
====== =======
7
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
On September 29, 1998, Fidelity Financial of Ohio, Inc. (the "Corporation")
filed a Form 8-K with the Securities and Exchange Commission, which reported
its execution of an Agreement of Merger with Glenway Financial Corporation
("Glenway"), dated as of September 28, 1998, pursuant to which Glenway will
merge into a wholly-owned subsidiary of the Corporation.
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 nine month periods ended September 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 5,421,425 and 5,396,962 for the nine month periods ended
September 30, 1998 and 1997, respectively, and 5,424,970 and 5,388,454 for
the three month periods ended September 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
5,492,363 and 5,446,753 for the nine month periods ended September 30, 1998
and 1997, respectively, and 5,474,566 and 5,451,962 for the three months
ended September 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
8
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Effects of Recent Accounting Pronouncements (continued)
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
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. Management adopted SFAS No. 131 effective January 1,
1998, as required, without material impact on the Corporation's financial
statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revises employers'
disclosures about pension and other postretirement benefit plans. It
eliminates certain current disclosures and requires additional information
about changes in the benefit obligation and the fair values of plan assets.
It also standardizes the requirements for pensions and other postretirement
benefit plans, to the extent possible, and illustrates combined formats for
the presentation of pension plan and other postretirement benefit plan
disclosures.
SFAS No. 132 is effective for fiscal years beginning after December 15,
1997, with earlier application encouraged. Disclosures for earlier periods
provided for comparative purposes should be restated. SFAS No. 132 is not
expected to have a material impact on the Corporation's financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize
all derivatives in their financial statements as either assets or
liabilities measured at fair value. SFAS No. 133 also specifies new methods
of accounting for hedging transactions, prescribes the items and
transactions that may be hedged, and specifies detailed criteria to be met
to qualify for hedge accounting.
The definition of a derivative financial instrument is complex, but in
general, it is an instrument with one or more underlyings, such as an
interest rate or foreign exchange rate, that is applied to a notional
amount, such as an amount of currency, to determine the settlement
amount(s). It generally requires no significant initial investment and can
be settled net or by delivery of an asset that is readily convertible to
cash. SFAS No. 133 applies to derivatives embedded in other contracts,
unless the underlying of the embedded derivative is clearly and closely
related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. On
adoption, entities are permitted to transfer held-to-maturity debt
securities to the available-for-sale or trading category without calling
into question their intent to hold other debt securities to maturity in the
future. SFAS No. 133 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
September 30, 1998
The Corporation's consolidated total assets amounted to $528.1 million at
September 30, 1998, a decrease of $7.0 million, or 1.3%, from the $535.1 million
total at December 31, 1997. The decline in assets resulted primarily from a
decline in deposits of $13.1 million, which was partially offset by an increase
of $4.2 million in FHLB advances and undistributed earnings of $2.1 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
$19.5 million at September 30, 1998, a decrease of $11.0 million, or 36.1%, from
the total in 1997.
Investment securities totaled $1.8 million at September 30, 1998, a decrease of
$4.2 million, or 69.4%, from 1997 levels, due primarily to maturities and sales
during the period totaling $4.0 million and $1.1 million, respectively, which
were partially offset by the purchase of $1.0 million of investment securities.
Mortgage-backed securities (including securities classified as available for
sale) totaled $58.6 million at September 30, 1998, an increase of $19.3 million,
or 49.0%, over the total at December 31, 1997. The increase in mortgage-backed
securities was due primarily to purchases totaling $33.3 million, which were
partially offset by principal repayments of $13.8 million. Purchases during the
current period consisted of $26.3 million of fixed-rate securities and $7.0
million of adjustable-rate securities. Such purchases were funded by proceeds
from loan repayments and utilization of excess liquidity.
Loans receivable decreased by $11.2 million, or 2.6%, to a total of $425.7
million at September 30, 1998, as compared to $436.9 million at December 31,
1997. The decrease resulted primarily from loan disbursements and purchases of
$106.8 million, which were exceeded by principal repayments totaling $100.7
million and sales of $16.6 million. Loan originations and purchases during the
1998 period increased by $10.7 million, or 11.1%, 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 $86.7 million, or
81.2%, 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 September
30, 1998 (continued)
The Savings Bank's allowance for loan losses totaled $1.7 million at September
30, 1998, an increase of $67,000, or 3.9%, over the total at December 31, 1997.
The allowance represented .40% and .37% of total loans at September 30, 1998 and
December 31, 1997, respectively, and 133.2% and 173.2% of nonperforming loans,
which totaled $1.3 million and $1.0 million at those respective dates. While
management believes the Savings Bank's allowance for loan losses is adequate at
September 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 $419.0 million at September 30, 1998, a decrease of $13.1
million, or 3.0%, from the total at December 31, 1997. Deposits subject to daily
repricing totaled $89.3 million, or 21.3%, of total deposits at September 30,
1998, as compared to 21.2% of total deposits at December 31, 1997. Certificates
of deposit totaled $329.7 million, or 78.7% of total deposits at September 30,
1998, as compared to 78.8% at December 31, 1997.
Advances from the Federal Home Loan Bank totaled $38.4 million at September 30,
1998, an increase of $4.2 million, or 12.1%, 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 $8.8 million.
During the nine months ended September 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 $66.8 million at September 30, 1998, an increase of
$2.6 million, or 4.0%, over the total at December 31, 1997. The increase
resulted primarily from the net earnings of $3.5 million, less dividends paid
which totaled $1.3 million.
Comparison of Operating Results for the Nine Month Periods ended September 30,
1998 and 1997
General
Net earnings amounted to $3.5 million for the nine months ended September 30,
1998, a decrease of $193,000, or 5.3%, from the $3.6 million in net earnings
recorded for the nine months ended September 30, 1997. Net interest income
decreased by $486,000, which was partially offset by a $187,000 increase in
other income, a $57,000 decrease in general, administrative and other expense
and a $51,000 decrease in the provision for federal income taxes.
Net Interest Income
Net interest income totaled $11.3 million for the nine months ended September
30, 1998, a decrease of $486,000, or 4.1%, from the 1997 period. Interest income
increased by $72,000, or .3%, for the nine months ended September 30, 1998, as
compared to 1997. Interest income on loans and mortgage-backed securities
increased by $292,000, or 1.1%, due primarily to a $19.4 million, or 4.2%,
increase in the average balance outstanding year to year, which was partially
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 Nine Month Periods ended September 30,
1998 and 1997 (continued)
Net Interest Income (continued)
offset by a 22 basis point decline in the weighted-average yield, from 7.72% in
1997 to 7.50% in 1998. Interest income on investment securities and
interest-bearing deposits decreased by $220,000, or 13.5%, during the nine
months ended September 30, 1998 compared to the same period in 1997, due
primarily to a $3.6 million, or 10.2%, decrease in the average balance
outstanding.
Interest expense on deposits decreased by $175,000, or 1.1%, for the nine months
ended September 30, 1998, as compared to the nine months ended September 30,
1997. The decrease was due primarily to a 6 basis point decline in the average
cost of deposits, from 4.94% for the nine months ended September 30, 1997 to
4.88% for the nine months ended September 30, 1998, as the average deposit
balance outstanding remained consistent for each of the periods at $421.2
million. Interest expense on borrowings increased by $733,000, or 66.3%, due
primarily to a $16.8 million increase in the average balance of outstanding
borrowings during the 1998 period.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $486,000, or 4.1%, for the nine months ended
September 30, 1998 as compared to 1997. The interest rate spread amounted to
2.41% during 1998 and 2.61% in 1997, while the net interest margin declined to
2.92% from 3.14% for the nine months ended September 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 $77,000 provision for losses on loans during the nine months ended September
30, 1998, an increase of $2,000 from the amount recorded in the 1997 nine 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 $187,000, or 19.1%, to a total of $1.2 million for the
nine months ended September 30, 1998, as compared to $979,000 in 1997. The
increase was due primarily to a $135,000 increase in gains on sales of real
estate, coupled with a $90,000 increase in gain on sale of loans and a $50,000,
or 7.8%, increase in other operating income, which consisted primarily of
service charges and fees, which were partially offset by a $74,000 decrease in
gains on sale of securities year to year.
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 Nine Month Periods ended September 30,
1998 and 1997 (continued)
General, Administrative and Other Expense
General, administrative and other expense totaled $7.0 million for the nine
months ended September 30, 1998, a decrease of $57,000, or .8%, from the 1997
total. The decrease resulted primarily from a $173,000, or 5.6%, decrease in
employee compensation and benefits, which was partially offset by a $41,000
increase in franchise taxes, a $33,000 increase in occupancy and equipment
expense and a $42,000 net increase in other all operating expenses.
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.
Federal Income Taxes
The provision for federal income taxes totaled $1.9 million for the nine months
ended September 30, 1998, a decrease of $51,000, or 2.6%, from the provision
recorded in the nine months ended September 30, 1997. The Corporation's
effective tax rates were 36.0% and 35.3% for the nine months ended September 30,
1998 and 1997, respectively.
Comparison of Operating Results for the Three Month Periods ended September 30,
1998 and 1997
General
Net earnings amounted to $1.1 million for the three months ended September 30,
1998, a decrease of $101,000, or 8.3%, from the $1.2 million in net earnings
recorded for the three months ended September 30, 1997. Net interest income
decreased by $143,000, which was partially offset by a $28,000 increase in other
income and a $22,000 decrease in the provision for federal income taxes.
Net Interest Income
Net interest income totaled $3.7 million for the three months ended September
30, 1998, a decrease of $143,000, or 3.7%, from the 1997 period. Interest income
decreased by $225,000, or 2.3%, for the three months ended September 30, 1998,
as compared to 1997. Interest income on loans and mortgage-backed securities
decreased by $71,000, or .8%, due primarily to a 26 basis point decline in the
weighted-average yield, from 7.71% in 1997 to 7.45% in 1998, which was partially
offset by a $12.2 million, or 2.6%, increase in the average balance outstanding
from period to period. Interest income on investment securities and
interest-bearing deposits decreased by $154,000, or 28.7%, during the 1998
period, as compared to the 1997 period, due primarily to an $8.2 million, or
24.1%, decrease in the average balance outstanding, coupled with a 38 basis
point decline in the weighted-average yield year to year, to 5.96% for the three
months ended September 30, 1998.
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 September 30,
1998 and 1997 (continued)
Net Interest Income (continued)
Interest expense on deposits decreased by $263,000, or 4.9%, for the three
months ended September 30, 1998, as compared to the three months ended September
30, 1997. The decrease was due primarily to a $7.3 million, or 1.7%, decrease in
the average balance outstanding, coupled with a 16 basis point decline in the
average cost of deposits, to 4.85% for the quarter ended September 30, 1998, as
compared to 5.01% for the 1997 quarter. Interest expense on borrowings increased
by $181,000, or 41.8%, due primarily to a $12.8 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 $143,000, or 3.7%, for the three months ended
September 30, 1998 as compared to 1997. The interest rate spread amounted to
2.42% during 1998 and 2.53% in 1997, while the net interest margin declined to
2.93% from 3.07% for the three months ended September 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 $30,000 provision for losses on loans during the three months ended September
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 $28,000, or 8.6%, to a total of $355,000 for the three
months ended September 30, 1998, as compared to $327,000 in 1997. The increase
was due primarily to a $26,000 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 September 30, 1998, an increase of $3,000 from the 1997 total.
Within general, administrative and other expenses, employee compensation and
benefits decreased by $82,000, or 8.0%, and was offset by a $16,000 increase in
occupancy and equipment, a $17,000 increase in franchise taxes, an $8,000
increase in federal deposit insurance premiums and a $48,000 increase in
combined other operating and data processing expense.
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 September 30,
1998 and 1997 (continued)
Federal Income Taxes
The provision for federal income taxes totaled $611,000 for the three months
ended September 30, 1998, a decrease of $22,000, or 3.5%, from the provision
recorded in the three months ended September 30, 1997. The Corporation's
effective tax rates were 35.4% and 34.2% for the three months ended September
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 16.2% at September 30, 1998. At September
30, 1998 the Savings Bank's "liquid" assets totaled approximately $57.4 million,
which was $43.2 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 September 30, 1998, the Savings Bank had $38.4 million
of outstanding advances from the FHLB of Cincinnati. Furthermore, the Savings
Bank has access to the Federal Reserve Bank discount window.
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 Three Month Periods ended September 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 September 30, 1998, the total approved loan
commitments outstanding amounted to $4.5 million. At the same date, commitments
under unused lines of credit secured by one- to four-family residential property
amounted to $5.5 million, commitments under unused lines of credit secured by
multi-family and non-residential real estate totaled $8.3 million and the
unadvanced portion of construction loans approximated $9.2 million. At September
30, 1998, commitments to sell loans amounted to $1.5 million. Certificates of
deposit scheduled to mature in one year or less at September 30, 1998, totaled
$257.7 million and Federal Home Loan Bank advances maturing in one year or less
amounted to $7.4 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 September 30, 1998, the Savings Bank's capital was well in excess of all such
minimum capital requirements.
Year 2000 Compliance 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's progress on the year 2000 issue at September 30, 1998 can be
summarized as follows:
1. State of readiness
The Savings Bank does not utilize internally developed systems
therefore testing and test planning is focused on service providers,
software vendors and other third parties.
A. Prior to testing, renovations of internal hardware and
software, including operating systems, was necessary. This
process has been completed with the replacement of all
personal computers throughout the Savings Bank that were not
year 2000 compliant. In addition, the Savings Bank's wide area
network has been upgraded.
17
Fidelity Financial of Ohio, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Compliance Matters (continued)
B. Most critical to the continuing operations of the Savings Bank
is the data processing of all the customer's loan and savings
accounts. The Savings Bank contracts with NCR to provide the
data processing for this critical area. The following testing
in relation to the NCR systems has occurred:
1. The Savings Bank was an active participant in the NCR
Customer Acceptance Test, May 4 - 15, 1998. Employees
of the Savings Bank participated in the test,
representing the testing of deposits, loans, and
accounting. The tests encompassed an extensive sampling
of the NCR online core processing. No significant
problems occurred.
2. On August 23, 1998, the Savings Bank participated in an
online processing test with NCR and their data
processing center in Columbia, Maryland ("DPC").
Primary considerations were to test the Savings Bank's
internal systems in communication with the DPC and
communications within Fidelity's wide area network.
Tests of hardware, software, communication equipment,
and operating systems representative of that used
throughout the Savings Bank's wide area network were
incorporated into the online test. No significant
problems occurred in communications with the DPC or
within the Savings Bank's wide area network.
3. Additional testing on the NCR system will be performed
in the future.
C. Other important applications include: Automatic Teller
Machines ("ATM") and card services, Fedline for check and wire
transfer clearings, telephone systems, heating and air
conditioning systems, alarms and all other third party
software products used throughout the Savings Bank. The above
vendors have been contacted and testing on the above products
will occur in the near future.
2. Cost to address the Savings Bank's Year 2000 issues:
Since the Savings Bank's primary computer applications are not
internally developed and contracted with third party vendors, the cost
has been isolated to hardware and systems upgrades.
A. As previously stated, upgrades of the Savings Bank's internal
hardware and software have occurred, in accordance with the
Savings Bank's normal course of operations. Most of the
computer equipment replaced was fully depreciated and upgrades
would have been necessary in the near future. To date, the
cost incurred has been approximately $325,000. This cost has
been capitalized and will be amortized over a three year
period. Future estimated costs are not expected to have a
material impact on the Savings Bank's financial statements.
18
Fidelity Financial of Ohio, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Compliance Matters (continued)
3. Risk of the Savings Bank's Year 2000 issue:
A. Business interruption due to the failure of third party vendors.
B. Misstated interest income and interest expense as a result of
improper accruals associated with the year 2000 computer issues.
C. Customer risk including deposit outflows and loan loss reserves.
4. Contingency plans will be developed in the future and the following
will be considered (prior to any effect due to the pending merger with
Glenway):
A. Overall disaster recovery in the event of computer and utility
failures taking into consideration business resumption,
offline procedures, staffing requirements, security, etc. The
plan will consider the resources needed and available to
resume normal operations following a disaster.
B. Anticipated cash withdrawals in the month of December 1999,
including but not limited to cash requirements for office and
ATMs, security, cash deliveries, and staffing needs.
C. Considerations for temporary failure of ATM network, such
as extended hours at restricted locations.
D. Accommodation plans in the event of late Social Security and
other government payments to the Savings Bank's customers.
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.
19
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
None
ITEM 6. Exhibits and Reports on Form 8-K
On September 29, 1998, 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 Glenway Financial Corporation
("Glenway"), dated as of September 28, 1998 (the "Agreement"),
pursuant to which Glenway will merge into a wholly-owned subsidiary of
the Corporation. On October 1, 1998, the Corporation amended its Form
8-K to file the Agreement and exhibits thereto.
Exhibit 27.1: Financial Data Schedule for the Nine Months Ended
September 30, 1998.
Exhibit 27.2: Restated Financial Data Schedule for the Nine
Months Ended September 30, 1998.
20
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: November 12, 1998 By: /s/John R. Reusing
-------------------------- ------------------------------
John R. Reusing
President and Chief Executive
Officer
Date: November 12, 1998 By: /s/Paul D. Staubach
-------------------------- ------------------------------
Paul D. Staubach
Senior Vice President and
Chief Financial Officer
21