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, 1999
----------------------------------------------
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)
5535 Glenway Avenue
Cincinnati, Ohio 45238
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (513) 922-5959
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 November 12, 1999, the latest practicable date, 9,143,462 shares of the
registrant's common stock, no par value, were issued and outstanding.
Page 1 of 18 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 10
Quantitative and Qualitative Disclosures About
Market Risk 16
PART II - OTHER INFORMATION 17
SIGNATURES 18
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30, December 31,
ASSETS 1999 1998
(Restated)
Cash and due from banks $ 4,617 $ 5,385
Interest-bearing deposits in other financial institutions 4,415 23,315
------- -------
Cash and cash equivalents 9,032 28,700
Investment securities available for sale - at market 15,482 838
Investment securities held to maturity - at cost, approximate market
value of $7,191 at December 31, 1998 - 7,079
Mortgage-backed securities available for sale - at market 48,515 29,432
Mortgage-backed securities held to maturity - at cost, approximate market value of
$20,996 and $38,200 at September 30, 1999 and December 31, 1998, respectively 21,218 38,234
Loans receivable - net 677,203 675,810
Loans held for sale - at lower of cost or market - 233
Office premises and equipment - at depreciated cost 12,299 12,876
Real estate acquired through foreclosure 291 32
Federal Home Loan Bank stock - at cost 7,563 7,176
Cash surrender value of life insurance 1,730 1,683
Accrued interest receivable on loans 3,663 3,521
Accrued interest receivable on investments 566 537
Prepaid expenses and other assets 1,275 1,073
Goodwill and other intangible assets, net of accumulated amortization 6,552 7,124
Prepaid federal income taxes 115 316
------- -------
Total assets $805,504 $814,664
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $595,853 $629,158
Advances from the Federal Home Loan Bank 104,722 78,752
Advances by borrowers for taxes and insurance 2,135 3,592
Accrued interest and other liabilities 3,789 3,490
Deferred federal income taxes 516 1,372
------- -------
Total liabilities 707,015 716,364
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; 9,141,792 and
9,093,684 shares issued and outstanding at September 30, 1999 and December 31, 1998 914 909
Additional paid-in capital 54,879 54,434
Retained earnings - restricted 45,065 44,906
Less shares acquired by Employee Stock Ownership Plan (ESOP) (1,520) (1,633)
Less shares acquired by Management Recognition Plan (MRP) (229) (314)
Unrealized losses on securities designated as available for sale,
net of related tax effects (620) (2)
------- -------
Total stockholders' equity 98,489 98,300
------- -------
Total liabilities and stockholders' equity $805,504 $814,664
======= =======
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,
1999 1998 1999 1998
(Restated) (Restated)
Interest income
Loans $38,284 $40,034 $12,674 $13,251
Mortgage-backed securities 3,096 3,465 1,118 1,178
Investment securities 542 601 244 184
Interest-bearing deposits and other 907 1,389 193 425
------ ------ ------ ------
Total interest income 42,829 45,489 14,229 15,038
Interest expense
Deposits 20,007 23,328 6,555 7,679
Borrowings 3,870 3,834 1,410 1,316
------ ------ ------ ------
Total interest expense 23,877 27,162 7,965 8,995
------ ------ ------ ------
Net interest income 18,952 18,327 6,264 6,043
Provision for losses on loans 225 322 50 75
------ ------ ------ ------
Net interest income after provision for losses on loans 18,727 18,005 6,214 5,968
Other income
Gain on sale of investment and mortgage-backed securities - 104 - -
Gain on sale of loans 9 193 3 104
Gain on sale of real estate 11 84 - -
Loss on sale of real estate acquired through foreclosure (2) (18) - 1
Rental 154 156 49 48
Other operating 1,228 1,375 429 493
------ ------ ------ ------
Total other income 1,400 1,894 481 646
General, administrative and other expense
Employee compensation and benefits 7,175 5,417 1,781 1,826
Occupancy and equipment 1,972 1,687 580 579
Federal deposit insurance premiums 267 307 91 109
Franchise taxes 920 721 314 271
Amortization of goodwill and other intangible assets 572 609 186 196
Data processing 839 582 47 168
Other operating 3,377 1,915 590 667
------ ------ ------ ------
Total general, administrative and other expense 15,122 11,238 3,589 3,816
------ ------ ------ ------
Earnings before income taxes 5,005 8,661 3,106 2,798
Federal income taxes
Current 2,700 2,825 931 1,007
Deferred (535) 238 153 (30)
------ ------ ------ ------
Total federal income taxes 2,165 3,063 1,084 977
------ ------ ------ ------
NET EARNINGS $ 2,840 $ 5,598 $ 2,022 $ 1,821
====== ====== ====== ======
EARNINGS PER SHARE
Basic $0.32 $0.63 $0.23 $0.21
==== ==== ==== ====
Diluted $0.31 $0.62 $0.22 $0.20
==== ==== ==== ====
4
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Nine months ended Three months ended
September 30, September 30,
1999 1998 1999 1998
(Restated) (Restated)
Net earnings $2,840 $5,598 $2,022 $1,821
Other comprehensive income, net of tax:
Unrealized losses on securities designated as
available for sale (618) (128) (277) (3)
Reclassification adjustment for gains included
in net earnings - (69) - -
----- ----- ----- -----
Comprehensive income $2,222 $5,401 $1,745 $1,818
===== ===== ===== =====
Accumulated comprehensive income (loss) $ (620) $ 85 $ (620) $ 85
===== ===== ===== =====
5
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30,
(In thousands)
1999 1998
(Restated)
Cash flows from operating activities:
Net earnings for the period $ 2,840 $ 5,598
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 807 800
Amortization of premiums on investments and mortgage-backed securities 141 74
Amortization of deferred loan origination costs 119 174
Amortization expense of stock benefit plans 522 431
Amortization of goodwill and other intangible assets 572 609
Amortization of purchase accounting adjustments 23 (167)
Gain on sale of investment and mortgage-backed securities - (104)
Loss on sale of mortgage loans 62 26
Loans disbursed for sale in the secondary market (6,722) (19,337)
Proceeds from sale of mortgage loans 5,678 19,552
Gain on sale of office premises and equipment (11) (84)
Loss on sale of real estate acquired through foreclosure 2 18
Federal Home Loan Bank stock dividends (387) (367)
Provision for losses on loans 225 322
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (142) (524)
Accrued interest receivable on mortgage-backed securities, investments
and other (29) 77
Prepaid expenses and other assets (202) (428)
Accrued interest and other liabilities 299 (605)
Federal income taxes
Current 201 267
Deferred (535) 238
------- -------
Net cash provided by operating activities 3,463 6,570
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale (7,949) (4,992)
Proceeds from maturities/calls of investment securities held to maturity - 3,500
Proceeds from sale of investment securities designated as available for sale - 1,146
Maturities of investment securities designated as available for sale - 4,036
Purchase of mortgage-backed securities designated as available for sale (19,423) (9,094)
Principal repayments on investment securities designated as available for sale 229 -
Principal repayments on mortgage-backed securities 16,402 17,452
Proceeds from sale of mortgage-backed securities designated as available for sale - 1,578
Purchase of mortgage-backed securities designated as held to maturity - (24,156)
Loan disbursements (113,674) (163,425)
Principal repayments on loans 113,152 172,955
Proceeds from sale of office premises and equipment 215 1,839
Purchases and additions to office premises and equipment (732) (994)
Disposal of office premises and equipment 280 25
Purchase of Federal Home Loan Bank stock - (58)
Increase in cash surrender value of life insurance (47) (46)
Proceeds from sale of real estate acquired through foreclosure 30 160
Additions to real estate acquired through foreclosure (291) (6)
------- -------
Net cash used in investing activities (11,808) (80)
------- -------
Net cash provided by (used in) operating and investing activities
(subtotal carried forward) (8,345) 6,490
------- -------
6
Fidelity Financial of Ohio, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended September 30,
(In thousands)
1999 1998
(Restated)
Net cash provided by (used in) operating and investing activities
(subtotal brought forward) $(8,345) $ 6,490
Cash provided by (used in) financing activities:
Net decrease in deposit accounts (33,188) (22,365)
Proceeds from Federal Home Loan Bank advances 52,050 58,441
Repayment of Federal Home Loan Bank advances (26,173) (50,476)
Shares issued under stock option and benefit plans 167 329
Dividends on common stock (2,722) (2,075)
Advances by borrowers for taxes and insurance (1,457) (1,144)
------ ------
Net cash used in financing activities (11,323) (17,290)
------ ------
Net decrease in cash and cash equivalents (19,668) (10,800)
Cash and cash equivalents at beginning of period 28,700 35,132
------ ------
Cash and cash equivalents at end of period $ 9,032 $24,332
====== ======
Supplemental disclosure of cash flow information: Cash paid during the year for:
Federal income taxes $ 2,425 $ 2,731
====== ======
Interest on deposits and borrowings $23,860 $27,247
====== ======
Supplemental disclosure of noncash investing activities:
Unrealized losses on securities designated as available
for sale, net of related tax effects $ (618) $ (197)
====== ======
Foreclosed mortgage loans transferred to real estate acquired
through foreclosure $ 291 $ 249
====== ======
Recognition of mortgage servicing rights in accordance with
SFAS No. 125 $ 71 $ 219
====== ======
Issuance of treasury shares in exchange for outstanding shares
related to exercise of stock options $ (16) $ 119
====== ======
7
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
On September 28, 1998, Fidelity Financial of Ohio, Inc. (the "Corporation")
entered into an Agreement of Merger with Glenway Financial Corporation
("Glenway"), pursuant to which Glenway would merge into a wholly-owned
subsidiary of the Corporation, and Fidelity Federal Savings Bank, a
wholly-owned subsidiary of the Corporation ("Fidelity"), would merge with
and into Centennial Savings Bank to form a new entity to be named Centennial
Bank ("Centennial", or the "Bank"). The merger was consummated on March 19,
1999 and was accounted for using the pooling of interests method of
accounting. Accordingly, the financial statements as of December 31, 1998,
and for the periods ending September 30, 1998, have been restated to give
effect to the combination.
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 the Corporation included in the Annual Report on Form 10-K
for the year ended December 31, 1998. 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, 1999 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, Centennial. 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
totaled 8,968,235 and 8,850,851 for the nine month periods ended September
30, 1999 and 1998, respectively, and 8,976,406 and 8,864,785 for the three
month periods ended September 30, 1999 and 1998, 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
9,034,080 and 8,976,832 for the nine month periods ended September 30, 1999
and 1998, respectively, and 9,042,251 and 8,997,604 for the three months
ended September 30, 1999 and 1998, respectively.
Incremental shares related to the assumed exercise of stock options included
in the computation of diluted earnings per share totaled 65,845 and 125,981
for the nine month periods ended September 30, 1999 and 1998, and 65,845 and
132,819 for the three month periods ended September 30, 1999 and 1998,
respectively.
8
Fidelity Financial of Ohio, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Effects of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("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, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. 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.
5. Pending Business Combination
On August 16, 1999, the Corporation entered into an Agreement and Plan of
Merger (the Agreement), whereby the Corporation would be acquired by the
Provident Financial Group, Inc. (Provident Financial). The Agreement
provides for each share of Fidelity Financial common stock to be exchanged
for $21.00 worth of Provident Financial common stock. It is anticipated that
the merger will be accounted for as a pooling of interests. The merger is
subject to shareholder and regulatory approval, and is expected to be
completed in the first quarter of 2000.
9
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
uncertainties. 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, 1998 to September
30, 1999
The Corporation's consolidated total assets amounted to $805.5 million at
September 30, 1999, a decrease of $9.2 million, or 1.1%, from the $814.7 million
total at December 31, 1998. The decline in assets resulted primarily from a
decline in deposits of $33.3 million, which was partially offset by an increase
of $26.0 million in Federal Home Loan Bank ("FHLB") advances.
Cash and cash equivalents, comprised of cash and due from banks and
interest-bearing deposits in other financial institutions, amounted to $9.0
million at September 30, 1999, a decrease of $19.7 million, or 68.5% from the
total in 1998. Excess liquidity was generally utilized to fund net deposit
outflows during the 1999 nine month period.
Investment securities (including investment securities classified at available
for sale) totaled $15.5 million at September 30, 1999, an increase of $7.6
million, or 95.6%. During the nine months ended September 30, 1999, $7.9 million
of agency securities were purchased. In accordance with SFAS No. 115, management
reclassified $7.1 million of investment securities from held to maturity to the
available for sale classification at the effective date of the merger.
Investments reclassified included U.S. Government treasury and agency
securities, and municipal securities.
Mortgage-backed securities (including securities classified as available for
sale) totaled $69.7 million at September 30, 1999, an increase of $2.1 million,
or 3.1%, over the total at December 31, 1998. The increase in mortgage-backed
securities was due primarily to purchases during the period totaling $19.4
million, which were partially offset by principal repayments totaling $16.4
million and a decline of $793,000 in market value. In accordance with SFAS No.
115 management reclassified $16.9 million of mortgage-backed securities from
held to maturity to the available for sale classification and transferred $27.2
million of securities from available for sale to the held to maturity portfolio
at the effective date of the merger.
10
Fidelity Financial of Ohio, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from December 31, 1998 to September
30, 1999 (continued)
Loans receivable totaled $677.2 million at September 30, 1999, an increase of
$1.2 million, or .2%, from the $676.0 million total at December 31, 1998. During
the 1999 period loan originations totaled $120.4 million, and were partially
offset by loan principal repayments totaling $113.2 million and sales of $5.7
million. Centennial's loan originations during 1999 were comprised primarily of
one- to four-family and multi-family loans.
Centennial's allowance for loan losses totaled $3.2 million at September 30,
1999, an increase of $194,000, or 6.6%, over the total at December 31, 1998. The
allowance represented .46% and .44% of total loans at September 30, 1999 and
December 31, 1998, respectively, and 105.7% and 125.6% of nonperforming loans,
which totaled $3.0 million and $2.4 million at those respective dates. While
management believes Centennial's allowance for loan losses is adequate at
September 30, 1999, 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 $595.9 million at September 30, 1999, a decrease of $33.3
million, or 5.3%, from the total at December 31, 1998. Deposits subject to daily
repricing totaled $156.3 million, or 26.2% of deposits at September 30, 1999, as
compared to 25.4% of total deposits at December 31, 1998. Certificates of
deposit totaled $429.7 million at September 30, 1999, a decrease of $28.1
million, or 6.1%, from the $457.7 million total at December 31, 1998. The
decrease in certificates of deposit was the result of management's strategy to
allow the outflow of higher-yielding certificates in order to reduce the
Corporation's funding cost.
Advances from the Federal Home Loan Bank totaled $104.7 million at September 30,
1999, an increase of $26.0 million, or 33.0%, over the balance at December 31,
1998. The increase resulted primarily from $52.1 million in borrowings during
the 1999 period, which were partially offset by repayments of $26.2 million. Of
the additional borrowings, $8.0 million consisted of fixed-rate advances with
maturities ranging between five and eight years, and the remaining increase in
borrowings was comprised of short-term (one year or less) variable-rate
advances. Proceeds from such advances were used primarily to offset the decrease
in deposits.
Stockholders' equity totaled $98.5 million at September 30, 1999, an increase of
$189,000, or .2%, from the total at December 31, 1998. The increase resulted
primarily from net earnings of $2.8 million exceeding dividends paid of $2.7
million during the period.
11
Fidelity Financial of Ohio, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine Month Periods ended September 30,
1999 and 1998
General
Net earnings amounted to $2.8 million for the nine months ended September 30,
1999, a decrease of $2.8 million, or 49.3%, from the $5.6 million in net
earnings recorded for the nine months ended September 30, 1998. The decrease in
net earnings resulted from an increase in general, administrative and other
expense of $3.9 million due to non-recurring merger-related costs of $4.2
million. Excluding such merger-related costs, net earnings amounted to $6.0
million, an increase of $383,000, or 6.8%, over the nine months ended September
30, 1998. The increase in net earnings resulted from a $625,000 increase in net
interest income, a $97,000 decrease in the provision for losses on loans and a
$316,000 decrease in general, administrative and other expense before
merger-related costs, which were partially offset by a decrease in other income
of $494,000 and an increase in federal income tax expense of $161,000.
Net Interest Income
Net interest income totaled $19.0 million for the nine months ended September
30, 1999, an increase of $625,000, or 3.4%, over the 1998 period. Interest
income decreased by $2.7 million, or 5.8%, for the nine months ended September
30, 1999, compared to 1998. Interest income on loans and mortgage-backed
securities decreased by $2.1 million, or 4.9%, due primarily to a $12.6 million,
or 1.7%, decrease in the average balance outstanding year to year, coupled with
a 25 basis point decline in the weighted-average yield, from 7.64% in 1998 to
7.39% in 1999. Interest income on investment securities and interest-bearing
deposits decreased by $541,000, or 27.2%, during 1999 due primarily to a $11.3
million, or 25.9%, decrease in the average balance outstanding.
Interest expense on deposits decreased by $3.3 million, or 14.2%, for the nine
months ended September 30, 1999, as compared to the nine months ended September
30, 1998. The decrease was due primarily to a $33.6 million, or 5.2%, decrease
in the average balance outstanding, coupled with a decline in the average cost
of deposits of 45 basis points, from 4.82% for the nine month period ended
September 30, 1998, to 4.37% for the same period in fiscal 1999. Interest
expense on borrowings increased by $36,000, or .9%, due to a $3.0 million
increase in the average balance of outstanding borrowings during 1999.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $625,000, or 3.4%, for the nine months ended
September 30, 1999 compared to 1998. The interest rate spread amounted to 2.79%
during 1999 and 2.60% in 1998, while the net interest margin amounted to 3.24%
and 3.04% for the nine months ended September 30, 1999 and 1998, 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 Bank,
the status of past due principal and interest payments, general economic
conditions, particularly as such conditions relate to the Bank's market area,
and other factors related to the collectibility of the Bank's loan portfolio. As
a result of such analysis, management recorded a $225,000 provision for losses
on loans during the nine months ended September 30, 1999, a decrease of $97,000
from the amount recorded in the 1998 nine month period. There can be no
assurance that the allowance for loan losses of the Bank will be adequate to
cover losses on nonperforming assets in the future.
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,
1999 and 1998 (continued)
Other Income
Other income totaled $1.4 million for the nine months ended September 30, 1999,
a decrease of $494,000, or 26.1%, compared to the nine month period ended
September 30, 1998. The decrease was due primarily to a $184,000 decrease in
gain on sale of loans, a $147,000, or 10.7%, decrease in other operating income,
which consisted primarily of service charges and fees, and a $104,000 decrease
in gains on sale of securities year to year.
General, Administrative and Other Expense
General, administrative and other expense totaled $15.1 million for the nine
months ended September 30, 1999, an increase of $3.9 million, or 34.6%, over the
1998 total. Excluding non-recurring merger charges totaling $4.2 million,
general, administrative, and other expense would have been reported as $10.9
million, a decrease of $316,000, or 2.8%, from the 1998 total. The non-recurring
merger charges included employee compensation and benefits of $1.7 million,
occupancy and equipment of $290,000, data processing of $522,000, and other
operating expenses of $1.7 million. The decrease in general administrative and
other expenses, excluding one-time merger expenses, was due to a decline in data
processing expense of $265,000, or 45.5%, a decline in other operating expenses
of $193,000, or 10.1%, a decline in Federal Deposit Insurance Corporation
("FDIC") insurance premiums of $40,000, and a decline in amortization of
goodwill of $39,000, which were partially offset by a $27,000, or .5%, increase
in employee compensation and benefits and a $199,000, or 27.6%, increase in
franchise tax expense.
The decline in data processing expense reflects the elimination of third-party
processing costs following the merger, as the Fidelity accounts have been added
to Centennial's in-house processing system.
The increase in employee compensation and benefits was due primarily to a
reduction in deferred loan origination costs associated with a decline in
lending volume year to year.
The increase in franchise taxes resulted from the increase in stockholders'
equity year to year and a tax refund of $90,000 received in 1998 due to
amendment of prior years tax returns.
Federal Income Taxes
The provision for federal income taxes totaled $2.2 million for the nine months
ended September 30, 1999, a decrease of $898,000, or 29.3%, from the provision
recorded in the nine months ended September 30, 1998. The decrease resulted
primarily from a $3.7 million, or 42.2%, decrease in pretax earnings, which was
partially offset by the effects of non-deductible merger expenses totaling $1.1
million. The Corporation's effective tax rates were 43.3% and 35.4% for the nine
months ended September 30, 1999 and 1998, respectively.
13
Fidelity Financial of Ohio, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods ended September 30,
1999 and 1998
General
Net earnings amounted to $2.0 million for the three months ended September 30,
1999, an increase of $201,000, or 11.0%, over the $1.8 million in net earnings
recorded for the three months ended September 30, 1998. The increase was due
primarily to a $221,000 increase in net interest income, a $25,000 decrease in
the provision for losses on loans and a $227,000 decrease in general,
administrative and other expense, which were partially offset by a $165,000
decrease in other income and a $107,000 increase in the provision for federal
income taxes.
Net Interest Income
Net interest income totaled $6.3 million for the three months ended September
30, 1999, an increase of $221,000, or 3.7%, over the 1998 period. Interest
income decreased by $809,000, or 5.4%, for the three months ended September 30,
1999, compared to 1998. Interest income on loans and mortgage-backed securities
decreased by $637,000, or 4.4%, due primarily to a $14.0 million, or 1.8%,
decrease in the average balance outstanding year to year, coupled with a 20
basis point decline in the weighted-average yield, from 7.58% in 1998 to 7.38%
in 1999. Interest income on investment securities and interest-bearing deposits
decreased by $172,000, or 28.2%, during 1999 due primarily to a $9.8 million, or
25.2%, decrease in the average balance outstanding.
Interest expense on deposits decreased by $1.1 million, or 14.6%, for the three
months ended September 30, 1999, compared to the three months ended September
30, 1998. The decrease was due primarily to a $37.0 million, or 5.8%, decrease
in the average balance outstanding, coupled with a 45 basis point decline in the
average cost of deposits from 4.81% for the three month period ended September
30, 1998 to 4.36% for the same period in fiscal 1999. Interest expense on
borrowings increased by $94,000, or 7.1%, due to a $7.6 million increase in the
average balance of outstanding borrowings during 1999.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $221,000, or 3.7%, for the three months ended
September 30, 1999 compared to 1998. The interest rate spread amounted to 2.77%
during 1999 and 2.57% in 1998, while the net interest margin increased to 3.23%
from 3.02% for the three months ended September 30, 1999 and 1998, respectively.
Provision for Losses on Loans
As a result of an analysis of historical experience, the volume and type of
lending conducted by the Bank, the status of past due principal and interest
payments, general economic conditions, particularly as such conditions relate to
the Bank's market area, and other factors related to the collectibility of the
Bank's loan portfolio, management recorded a $50,000 provision for losses on
loans during the three months ended September 30, 1999, a decrease of $25,000
from the amount recorded in the 1998 three month period. There can be no
assurance that the allowance for loan losses of the Bank will be adequate to
cover losses on nonperforming assets in the future.
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,
1999 and 1998 (continued)
Other Income
Other income decreased by $165,000, or 25.5%, to a total of $481,000 for the
three months ended September 30, 1999, compared to $646,000 in 1998. The
decrease was due primarily to a $101,000 decrease in gain on sale of loans and a
$64,000, or 13.0%, decrease in other operating income, which consisted primarily
of service charges and fees.
General, Administrative and Other Expense
General, administrative and other expense totaled $3.6 million for the three
months ended September 30, 1999, a decrease of $227,000, or 5.9%, from the 1998
total. The decrease resulted primarily from a $45,000, or 2.5%, decrease in
employee compensation and benefits, a $121,000, or 72.0%, decrease in data
processing and a $77,000, or 11.5%, decrease in other operating expense, which
were partially offset by a $43,000, or 15.9%, increase in franchise taxes.
The decrease in employee compensation and benefits resulted primarily from a
decrease in staffing levels and related benefit plan costs. The decrease in data
processing resulted from the elimination of third party processing costs
following the merger.
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 $1.1 million for the three months
ended September 30, 1999, an increase of $107,000, or 11.0%, over the provision
recorded in the three months ended September 30, 1998. The Corporation's
effective tax rate was 34.9% for both the three months ended September 30, 1999
and 1998.
Year 2000 Compliance Matters
Centennial has been working for the last several years to resolve the potential
impact of the Year 2000 on the ability of the computerized information system to
accurately process information that may be date sensitive. Centennial's Year
2000 compliance plan has five phases: (1) project management and awareness, (2)
assessment, (3) renovation and implementation, (4) validation and testing, and
(5) development of a contingency plan. Centennial has substantially completed
all phases and appropriate follow-up activities continue to occur.
Centennial's main core processing application (loans and deposits) is processed
on the Data Communications, Inc. ("DCI") in-house client server software.
Centennial converted to DCI in 1998. All screens and reports show 4-digit date
fields, and DCI has tested internal programming codes to ensure Y2K compliance.
15
Fidelity Financial of Ohio, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Compliance Matters (continued)
Centennial participated with DCI in testing for Y2K compliance. DCI's validation
and testing was completed by December 31, 1998. Centennial staff monitored DCI
testing and certification progress by review of DCI Y2K update documentation,
which has been provided to DCI users, and contact with designated DCI Y2K
project and executive staff. Internal testing by Centennial staff was completed
using actual databases which were future-dated to validate Y2K test dates
recommended by the Federal Financial Institutions Examination Council ("FFIEC").
No system errors were found.
Centennial's anticipated direct expenses are less than $50,000, primarily for
Y2K upgrades to existing user PC's. Additional expense could be incurred if
PC's, ATM's, and phone systems require further modifications. This expense would
be capitalized and depreciated over differing periods resulting in an immaterial
effect to the Corporation's financial statements.
Centennial's contingency planning includes assessment of account off-line
procedures, staffing requirements, security, cash needs, etc. The plan includes
consideration of the resources needed and available to resume normal operations
following a disaster.
Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative disclosures about market risk are presented at
December 31, 1998 in Item 7A of the Corporation's Annual Report on Form 10-K,
filed with the SEC on March 30, 1999. Management believes there have been no
material changes in the Corporation's market risk since December 31, 1998.
16
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
Form 8-K: A Form 8-K was filed on August 18, 1999, to report
the Agreement and Plan of Merger with Provident
Financial Group, Inc.
Exhibits:
27.1 Financial Data Schedule for the nine months ended
September 30, 1999.
27.2 Restated Financial Data Schedule for the nine months
ended September 30, 1998.
17
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, 1999 By: /s/Robert R. Sudbrook
------------------------- ----------------------------
Robert R. Sudbrook
Chairman and Chief
Executive Officer
Date: November 12, 1999 By: /s/Paul D. Staubach
------------------------- ----------------------------
Paul D. Staubach
Senior Vice President and
Chief Financial Officer
18