<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
-------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File Number 0-27868
FIDELITY FINANCIAL OF OHIO, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-1455721
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4555 Montgomery Road
Cincinnati, Ohio 45212
- ------------------------------------ --------
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (513) 351-6666
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
As of November 8, 1996, the latest practicable date, 4,076,964 shares of the
registrant's common stock, $.10 par value, were issued and outstanding.
Page 1 of 20 pages
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Fidelity Financial of Ohio, Inc.
INDEX
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
PART II - OTHER INFORMATION 19
SIGNATURES 20
2
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FIDELITY FINANCIAL OF OHIO, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 2,694 $ 1,702
Interest-bearing deposits in other financial institutions 10,862 2,784
-------- ---------
Cash and cash equivalents 13,556 4,486
Investment securities available for sale - at market 14,403 6,044
Mortgage-backed securities available for sale - at market 26,738 29,378
Loans receivable - net 193,429 184,486
Loans held for sale - at lower of cost or market 367 646
Office premises and equipment - at depreciated cost 2,617 2,528
Federal Home Loan Bank stock - at cost 1,982 1,854
Accrued interest receivable on loans 1,122 1,023
Accrued interest receivable on mortgage-backed securities 195 222
Accrued interest receivable on investments 241 63
Prepaid expenses and other assets 762 382
Prepaid federal income taxes 435 25
Deferred federal income taxes 23 -
----------- ---------
TOTAL ASSETS $255,870 $231,137
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $188,280 $180,697
Advances from the Federal Home Loan Bank 13,477 17,653
Loan to Employee Stock Ownership Plan 158 336
Advances by borrowers for taxes and insurance 666 1,063
Accrued interest and other liabilities 2,503 1,232
Deferred federal income taxes - 43
--------- -----------
TOTAL LIABILITIES 205,084 201,024
Stockholders' equity
Preferred stock - authorized, 500,000 shares at $.10 par value; none issued - -
Common stock - authorized, 7,000,000 shares at $.10 par value; 4,076,964
and 1,810,380 shares issued and outstanding at September 30, 1996 and
December 31, 1995, respectively 408 181
Additional paid-in capital 26,808 4,848
Retained earnings - substantially restricted 26,008 25,497
Less shares acquired by Employee Stock Ownership Plan (2,097) (336)
Less shares acquired by Management Recognition Plan (7) (20)
Less unrealized losses on securities designated as available for sale,
net of related tax effects (334) (57)
---------- -----------
TOTAL STOCKHOLDERS' EQUITY 50,786 30,113
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $255,870 $231,137
======= =======
</TABLE>
3
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FIDELITY FINANCIAL OF OHIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Interest income
Loans $11,435 $10,957 $3,859 $3,762
Mortgage-backed securities 1,340 1,255 431 430
Investment securities 555 222 245 77
Interest-bearing deposits and other 522 217 157 77
-------- -------- ------ -------
Total interest income 13,852 12,651 4,692 4,346
Interest expense
Deposits 7,190 6,875 2,404 2,394
Borrowings 680 657 214 248
-------- -------- ------ ------
Total interest expense 7,870 7,532 2,618 2,642
------- ------- ----- -----
Net interest income 5,982 5,119 2,074 1,704
Provision for losses on loans 48 36 16 12
--------- --------- ------- -------
Net interest income after provision for losses on loans 5,934 5,083 2,058 1,692
Other income
Gain (loss) on sale of investment and mortgage-backed securities 2 (21) (10) (21)
Gain on sale of loans 3 3 - 3
Loss on sale of real estate acquired through foreclosure - (5) - -
Rental 124 101 47 36
Other operating 191 172 67 61
-------- -------- ------- -------
Total other income 320 250 104 79
General, administrative and other expense
Employee compensation and benefits 1,658 1,577 594 522
Occupancy and equipment 546 449 190 148
Federal deposit insurance premiums 1,446 296 1,239 101
Franchise taxes 339 321 113 104
Other operating 693 587 243 204
-------- -------- ------ ------
Total general, administrative and other expense 4,682 3,230 2,379 1,079
------- ------- ----- -----
Earnings (loss) before income taxes (credits) 1,572 2,103 (217) 692
Federal income taxes (credits)
Current 455 590 (59) 199
Deferred 79 113 (12) 35
--------- -------- ------- -------
Total federal income taxes (credits) 534 703 (71) 234
-------- -------- ------- ------
NET EARNINGS (LOSS) $ 1,038 $ 1,400 $ (146) $ 458
======= ======= ====== ======
EARNINGS (LOSS) PER SHARE $.26 $.34 $(.04) $.11
=== === ==== ===
</TABLE>
4
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FIDELITY FINANCIAL OF OHIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net earnings for the period $ 1,038 $ 1,400
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 227 196
Amortization of premiums on investments and mortgage-backed securities 38 15
Amortization of deferred loan origination fees (144) (176)
Amortization expense of employee benefit plans 117 64
(Gain) loss on sale of investment and mortgage-backed securities (2) 21
Gain on sale of mortgage loans (3) (3)
Loans disbursed for sale in the secondary market (71) (1,382)
Proceeds from sale of mortgage loans 353 306
Federal Home Loan Bank stock dividends (100) (88)
Provision for losses on loans 48 36
Loss on sale of real estate acquired through foreclosure - 5
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (99) (22)
Accrued interest receivable on mortgage-backed securities 27 (25)
Accrued interest receivable on investments (178) (54)
Prepaid expenses and other assets (380) (301)
Accrued interest and other liabilities 1,271 100
Federal income taxes
Current (410) 39
Deferred 79 113
--------- --------
Net cash provided by operating activities 1,811 244
Cash flows provided by (used in) investing activities:
Proceeds from sale of investment securities designated as available for sale 2,994 979
Proceeds from sale of mortgage-backed securities designated as available for sale 1,006 -
Purchase of investment securities designated as available for sale (11,521) (1,510)
Purchase of Federal Home Loan Bank stock (28) (38)
Purchase of mortgage-backed securities designated as available for sale (3,173) (2,048)
Purchase of mortgage-backed securities designated as held to maturity - (157)
Principal repayments on investment securities designated as available for sale 66 -
Principal repayments on mortgage-backed securities designated as available for sale 4,449 1,117
Principal repayments on mortgage-backed securities designated as held to maturity - 1,725
Loan disbursements (36,972) (26,503)
Purchase of loan participations - (2,909)
Principal repayments on loans 28,125 21,580
Purchases and additions to office premises and equipment (316) (140)
Proceeds from sale of real estate acquired through foreclosure - 91
Additions to real estate acquired through foreclosure - (11)
------- ---------
Net cash used in investing activities (15,370) (7,824)
------ -------
Net cash used in operating and investing activities
(subtotal carried forward) (13,559) (7,580)
------ -------
</TABLE>
5
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FIDELITY FINANCIAL OF OHIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net cash used in operating and investing activities
(subtotal brought forward) $(13,559) $(7,580)
Cash provided by (used in) financing activities:
Net increase in deposit accounts 7,583 5,627
Proceeds from Federal Home Loan Bank advances - 7,000
Repayment of Federal Home Loan Bank advances (4,176) (3,156)
Repayment of loan to ESOP (178) (48)
Proceeds from loan to ESOP - 147
Purchase of shares for ESOP - (147)
Proceeds from sale of common stock 20,434 -
Proceeds from the exercise of stock options 24 14
Dividends on common stock (661) (401)
Advances by borrowers for taxes and insurance (397) (337)
--------- -------
Net cash provided by financing activities 22,629 8,699
------- ------
Net increase in cash and cash equivalents 9,070 1,119
Cash and cash equivalents at beginning of period 4,486 3,597
-------- ------
Cash and cash equivalents at end of period $ 13,556 $ 4,716
======= ======
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Federal income taxes $ 835 $ 551
========= =======
Interest on deposits and borrowings $ 7,851 $ 7,480
======== ======
Supplemental disclosure of noncash investing activities:
Unrealized losses on securities designated as available
for sale, net of related tax effects $ (277) $ (64)
========= ========
Exchange of office premises and equipment for similar assets $ 61 $ -
========== ========
</TABLE>
6
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FIDELITY FINANCIAL OF OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
On May 11, 1992, Fidelity Federal Savings and Loan Association
(Fidelity) completed its reorganization into a federally-chartered,
mutual holding company (the Reorganization). The Reorganization was
approved by the Board of Directors, Fidelity's members and the Office
of Thrift Supervision prior to its implementation.
In accordance with the Reorganization, Fidelity organized Fidelity
Federal Savings Bank (the Savings Bank), a federally-chartered stock
savings bank, and transferred substantially all of its assets and all
of its liabilities to the Savings Bank in exchange for shares of common
stock, $.10 par value per share, and reorganized from a
federally-chartered mutual savings and loan association to a
federally-chartered mutual holding company known as Fidelity Federal
Mutual Holding Company (the Mutual Holding Company). Concurrent with
the Reorganization, the Savings Bank issued additional shares of its
common stock to certain members of the public.
On October 10, 1995, the Boards of Directors of the Savings Bank and
the Mutual Holding Company adopted a Plan of Conversion (the Plan) and
in October 1995, the Savings Bank incorporated Fidelity Financial of
Ohio, Inc. (the Corporation) under Ohio law as a first-tier wholly
owned subsidiary of the Savings Bank. Pursuant to the Plan, on March 4,
1996, (i) the Corporation completed its stock offering in connection
with the Savings Bank's conversion from the mutual holding company form
of organization to the stock holding company form whereby 2,278,100
shares of the Corporation's common stock, $.10 par value per share,
were sold at $10 per share; (ii) the Mutual Holding Company converted
to an interim federal stock savings institution and simultaneously
merged with and into the Savings Bank, pursuant to which the Mutual
Holding Company ceased to exist and the outstanding Savings Bank common
stock held by the Mutual Holding Company were canceled; and (iii) an
interim savings bank (Interim) formed as a wholly-owned subsidiary of
the Corporation solely for such purpose was merged with and into the
Savings Bank (the Conversion and Reorganization). As a result of the
merger of Interim with and into the Savings Bank, the Savings Bank
became a wholly-owned subsidiary of the Corporation and the outstanding
public Savings Bank shares were converted into the exchange shares of
the Corporation pursuant to an exchange ratio, which resulted in the
holders of such shares owning in the aggregate approximately the same
percentage of the common stock to be outstanding upon the completion of
the Conversion and Reorganization as the percentage of Savings Bank
common stock owned by them in the aggregate immediately prior to
consummation of the Conversion and Reorganization. The costs of issuing
the common stock were deducted from the sale proceeds of the offering.
The offering was completed on March 4, 1996 and resulted in net capital
proceeds totaling $22.4 million.
On May 1, 1996, the Corporation filed a Form 8-K with the Securities
and Exchange Commission reporting under Item 5 execution of an
Agreement of Merger with Circle Financial, dated as of April 29, 1996,
pursuant to which Circle Financial will merge with and into the
Corporation. On June 24, 1996, the Corporation amended its Form 8-K to
report the execution of an amended and restated Agreement of Merger
with Circle Financial, dated as of June 13, 1996. On October 11, 1996,
Circle Financial merged with and into the Corporation.
7
<PAGE>
FIDELITY FINANCIAL OF OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Basis of Presentation (continued)
The unaudited financial statements were prepared in accordance with
instructions for Form 10-Q and, therefore, do not include information
or footnotes necessary for a complete presentation of financial
condition, results of operations, and cash flows in conformity with
generally accepted accounting principles. However, all adjustments
(consisting only of normal recurring accruals) which, in the opinion of
management, are necessary for a fair presentation of the financial
statements have been included. The results of operations for the nine
and three months ended September 30, 1996 and 1995 are not necessarily
indicative of the results which may be expected for the entire fiscal
year or any other period.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Fidelity Financial of Ohio, Inc. (the "Corporation") and Fidelity
Federal Savings Bank (the "Savings Bank"). All significant intercompany
items have been eliminated.
3. Effect of Recent Accounting Pronouncements
In May 1995, the Financial Accounting Standards Board (the "FASB")
adopted Statement of Financial Accounting Standards ("SFAS") No. 122,
"Accounting for Mortgage Servicing Rights". SFAS No. 122 requires that
the Corporation recognize as separate assets rights to service mortgage
loans for others, regardless of how those servicing rights were
acquired. An institution that acquires mortgage servicing rights
through either the purchase or origination of mortgage loans and sells
those loans with servicing rights retained would allocate some of the
cost of the loans to the mortgage servicing rights. SFAS No. 122 also
requires that an enterprise allocate the cost of purchasing or
originating the mortgage loans between the mortgage servicing rights
and the loans when mortgage loans are securitized, if it is practicable
to estimate the fair value of mortgage servicing rights. Additionally,
SFAS No. 122 requires that capitalized mortgage servicing rights and
capitalized excess servicing receivable be assessed for impairment.
Impairment would be measured based on fair value.
SFAS No. 122 is to be applied prospectively to fiscal years beginning
after December 15, 1995 (January 1, 1996 as to the Corporation), to
transactions in which an entity acquires mortgage servicing rights and
to impairment evaluations of all capitalized mortgage servicing rights
and capitalized excess servicing receivables whenever acquired.
Retroactive application would be prohibited. Management adopted SFAS
No. 122 as of January 1, 1996, as required, without a material effect
on the Corporation's consolidated financial position or results of
operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation", establishing financial accounting and
reporting standards for stock-based employee compensation plans. SFAS
No. 123 encourages all entities to adopt a new method of accounting to
measure compensation cost of all employee stock compensation plans
based on the estimated fair value of the award at the date it is
granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based
method of accounting, which generally does not result in compensation
expense recognition for most plans. Companies that elect to remain with
the existing accounting are required to disclose in a footnote to the
financial statements pro forma net earnings and, if presented, earnings
per share, as if SFAS No. 123 had been
8
<PAGE>
FIDELITY FINANCIAL OF OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Effect of Recent Accounting Pronouncements (continued)
adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into during fiscal years that begin after December
15, 1995; however, companies are required to disclose information for
awards granted in their first fiscal year beginning after December 15,
1994. Management has determined that the Corporation will continue to
account for stock-based compensation pursuant to Accounting Principles
Board Opinion No. 25, and therefore the disclosure provisions of SFAS
No. 123 will have no effect on its consolidated financial condition or
results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
of Financial Assets, Servicing Rights, and Extinguishment 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 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,
1996, and is to be applied prospectively. Earlier or retroactive
application is not permitted. Management does not believe that adoption
of SFAS No. 125 will have a material adverse effect on the
Corporation's consolidated financial position or results of operations.
9
<PAGE>
FIDELITY FINANCIAL OF OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Earnings Per Share
Earnings per share for the nine and three months ended September 30,
1996 is based on approximately 3,904,000 and 3,905,000 weighted
averaged shares outstanding, respectively.
Earnings per share for the nine and three months ended September 30,
1995 is based on approximately 4,076,000 and 4,072,000 weighted average
shares outstanding, respectively.
5. Recent Legislative Changes
The deposit accounts of the Savings Bank and of other savings
associations are insured by the FDIC in the Savings Association
Insurance Fund ("SAIF"). The reserves of the SAIF are below the level
required by law, because a significant portion of the assessments paid
into the fund are used to pay the cost of prior thrift failures. The
deposit accounts of commercial banks are insured by the FDIC in the
Bank Insurance Fund ("BIF"), except to the extent such banks have
acquired SAIF deposits. Both SAIF and BIF are required by law to attain
and thereafter maintain a reserve ratio of 1.25% of insured deposits.
The reserves of the BIF met the level required by law in May 1995 in
contrast to the SAIF. As a result of the respective reserve levels of
the funds, deposit insurance assessments paid by healthy savings
associations exceeded those paid by healthy commercial banks by
approximately $.19 per $100 in deposits in 1995. In 1996, no BIF
assessments have been required for healthy commercial banks except for
a $2,000 minimum fee. A continuation of this premium disparity could
have a negative competitive impact on the Savings Bank and other
institutions with SAIF deposits.
Congress recently enacted legislation to recapitalize the SAIF and
eliminate the significant premium disparity. This legislation provides
for a special assessment of approximately $.657 per $100 of SAIF
deposits held at March 31, 1995, in order to increase SAIF reserves to
the level required by law.
A component of the recapitalization plan provides for the merger of the
SAIF and BIF on January 1, 1999. However, the SAIF recapitalization
legislation currently provides for an elimination of the thrift charter
or of the separate federal regulation of thrifts prior to the merger of
the deposit insurance funds. As a result, the Savings Bank would be
regulated as a bank under Federal laws which would subject it to the
more restrictive activity limits imposed on national banks.
The Savings Bank had an assessment base of $172.0 million at March 31,
1995. Consequently, as a result of the special assessment of $.657 per
$100 in deposits, the Savings Bank will be required to pay an aggregate
assessment of $1.1 million ($749,000 after tax), effective November 27,
1996. Beginning January 1, 1997, the Savings Bank's deposit insurance
premium will decrease from $.23 per $100 in deposits to approximately
$.06 per $100 in deposits. Based upon the Savings Bank's total deposits
at September 30, 1996, the annual deposit insurance expense will
decrease by approximately $300,000.
10
<PAGE>
FIDELITY FINANCIAL OF OHIO, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Discussion of Financial Condition Changes from December 31, 1995 to September
30, 1996
At September 30, 1996, the Corporation's assets totaled $255.9 million, as
compared to $231.1 million at December 31, 1995, an increase of $24.7 million,
or approximately 10.7%. The current period's increase was primarily funded by a
$20.7 million increase in stockholders' equity, due to the net proceeds raised
in the Conversion and Reorganization, and a $7.6 million increase in deposits,
which were partially offset by a $4.2 million decrease in Federal Home Loan Bank
(FHLB) advances.
At September 30, 1996, the Corporation's liquid assets (cash, interest-bearing
deposits in other financial institutions, investment securities and qualifying
mortgage-backed securities) totaled $29.8 million, as compared to $13.0 million
at December 31, 1995. The increase in liquid assets resulted primarily from the
net proceeds raised in the Corporation's common stock offering which was
completed on March 4, 1996. The Savings Bank's regulatory liquidity at September
30, 1996, totaled 11.2%, or $11.9 million in excess of the minimum regulatory
requirement.
Investment securities totaled $14.4 million at September 30, 1996, an increase
of $8.4 million, or 138.3%, over the $6.0 million of investments at December 31,
1995. The increase was primarily due to the purchase of $11.5 million of
investment securities, which consisted of $5.5 million of two year term U.S.
Treasury notes and $6.0 million of U.S. Government agency obligations with
maturities ranging from two to five years. The increase was partially offset by
the sale of $3.0 million of investment securities. At September 30, 1996, all of
the Corporation's investment securities were classified as available for sale
and the Corporation had $45,000 of unrealized losses (net of related tax
effects) with respect to its investment securities portfolio which was deducted
from the Corporation's stockholders' equity as of such date.
Mortgage-backed securities totaled $26.7 million at September 30, 1996, which
represents a $2.6 million decrease from the balance at December 31, 1995. The
decrease was primarily due to $4.4 million in principal repayments, $1.0 million
in sales of mortgage-backed securities and a $323,000 increase in unrealized
losses on mortgage-backed securities classified as available for sale, which
were partially offset by purchases of $3.2 million. At September 30, 1996, the
Corporation's investment in adjustable-rate and medium-term (five years or less)
fixed-rate mortgage-backed securities amounted to approximately 95.5% of the
total portfolio. Management's decision to acquire such a portfolio was based on
efforts to improve yields on liquid assets while reducing the vulnerability of
the Corporation's operations to changes in market interest rates. At September
30, 1996, all of the Corporation's mortgage-backed securities portfolio was
classified as available for sale and the Corporation had $289,000 of unrealized
losses (net of related tax effects) with respect to such securities which was
deducted from the Corporation's stockholders' equity as of such date.
11
<PAGE>
FIDELITY FINANCIAL OF OHIO, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from December 31, 1995 to September
30, 1996 (continued)
Loans receivable (including loans held for sale) amounted to $193.8 million at
September 30, 1996, as compared to $185.1 million at December 31, 1995. Loans
receivable increased by $8.7 million, or 4.7%, during the nine months ended
September 30, 1996, primarily due to $37.0 million of loan originations, which
were partially offset by $28.1 million of loan repayments and $350,000 of loan
sales. Although historically the Corporation has acted as a portfolio lender by
only originating loans that management believes the Corporation can profitably
retain in its portfolio, at September 30, 1996, the Corporation had $367,000 of
loans classified as held for sale.
At September 30, 1996, the Corporation's allowance for loan losses totaled
$843,000, an increase of $25,000 over the level maintained at December 31, 1995.
At September 30, 1996, the Corporation's allowance represented approximately
.42% of the total loan portfolio (including loans classified as held for sale)
and 77.6% of total non-performing loans. At that date, the ratio of total
non-performing loans to total loans (including loans classified as held for
sale) amounted to .55%, as compared to .54% at December 31, 1995. Although
management of the Corporation believes that its allowance for loan losses at
September 30, 1996, was adequate based on facts and circumstances available to
it, there can be no assurances that additions to such allowance will not be
necessary in future periods, which could adversely affect the Corporation's
results of operations.
Deposits totaled $188.3 million at September 30, 1996, an increase of $7.6
million, or 4.2%, over the $180.7 million of deposits at December 31, 1995. The
overall deposit growth was limited due to $3.3 million of existing accounts
being utilized to purchase the Corporation's common stock in the Conversion and
Reorganization. Deposit accounts subject to daily repricing (passbook, money
market deposit and NOW accounts) decreased by $2.2 million, while certificates
of deposit increased by $9.8 million.
At September 30, 1996, FHLB advances totaled $13.5 million, which represented a
$4.2 million, or 23.7%, decrease from the $17.7 million balance at December 31,
1995. The decrease resulted primarily from management's decision to repay
certain short-term advances, utilizing funds received in the common stock
offering.
Stockholders' equity totaled $50.8 million at September 30, 1996, an increase of
$20.7 million, or 68.7%, over the December 31, 1995 total. The increase resulted
primarily from the $20.4 million in net proceeds from the common stock offering
(after consideration of shares acquired by the ESOP) and undistributed net
earnings of $377,000.
12
<PAGE>
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 and Three Month Periods Ended
September 30, 1996 and 1995
General
Net earnings for the nine months ended September 30, 1996, totaled $1.0 million,
or $.26 per share, as compared to $1.4 million, or $.34 per share, for the nine
months ended September 30, 1995, a decline of $362,000, or 25.9%. The decline in
earnings resulted primarily from a $1.5 million increase in general,
administrative and other expense ($1.1 million of which was due to the one-time
special assessment discussed in greater detail below) and a $12,000 increase in
the provision for losses on loans, which were partially offset by an $863,000
increase in net interest income, a $70,000 increase in other income and a
$169,000 decrease in the provision for federal income taxes. Absent the
non-recurring special assessment, net earnings for the nine months ended
September 30, 1996 would have been $1.8 million, or $.45 per share, an increase
of $387,000, or 27.7%, over the comparable period in 1995.
The Corporation recorded a net loss of $146,000 for the quarter ended September
30, 1996, as compared to net earnings totaling $458,000 for the same period in
1995, a decline of $604,000, or 131.9%. This decline resulted primarily from an
increase in general, administrative and other expense of $1.3 million ($1.1
million of which was due to the one-time special assessment discussed in greater
detail below) and a $4,000 increase in the provision for losses on loans, which
were partially offset by a $370,000 increase in net interest income, a $25,000
increase in other income and a $305,000 decrease in the provision for federal
income taxes. Absent the non-recurring special assessment, net earnings for the
three months ended September 30, 1996 would have been $603,000, or $.15 per
share, an increase of $145,000, or 31.7%, over the comparable period in 1995.
Net Interest Income
Interest income on loans for the nine months ended September 30, 1996 increased
by $478,000, or 4.4%, due primarily to a $10.7 million increase in the average
balance of loans outstanding, which was partially offset by a decrease in the
weighted-average yield earned on the loan portfolio, from 8.17% during the 1995
period, to 8.04% during the 1996 period. Interest income on mortgage-backed
securities increased by $85,000, or 6.8%, due to an increase in the
weighted-average yield from 6.22% during the nine months ended September 30,
1995, to 6.28% during the nine months ended September 30, 1996, coupled with a
$1.5 million increase in the average balance outstanding. Interest income on
investment securities and other interest-earning assets increased by $638,000,
or 145.3%, due primarily to a $14.2 million increase in the average balance
outstanding during the nine months ended September 30, 1996, and to a lesser
extent an increase in the weighted-average yield, from 5.91% during the 1995
period, to 5.95% during the 1996 period.
Interest expense on deposits increased by $315,000, or 4.6%, during the nine
months ended September 30, 1996, due to a $9.5 million increase in the average
balance of deposits outstanding. Interest expense on borrowings increased by
$23,000, or 3.5%, during the nine months ended September 30, 1996, due to an
$846,000 increase in the average balance of borrowings outstanding, which was
partially offset by a decrease in the weighted-average rate paid, from 6.39% for
the nine months ended September 30, 1995, to 6.23% for the nine months ended
September 30, 1996.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $863,000, or 16.9%, during the nine months
ended September 30, 1996, as compared to the nine months ended September 30,
1995. The net interest margin increased from 3.16% to 3.29% during the nine
months ended September 30, 1996, as compared to the nine months ended September
30, 1995.
13
<PAGE>
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 and Three Month Periods Ended
September 30, 1996 and 1995 (continued)
Net Interest Income (continued)
Interest income on loans for the three months ended September 30, 1996 increased
by $97,000, or 2.6%, due primarily to an $11.3 million increase in the average
balance of loans outstanding, which was partially offset by a decrease in the
weighted-average yield earned on the loan portfolio, from 8.27% during the 1995
quarter, to 7.98% during the 1996 quarter. Interest income on mortgage-backed
securities increased $1,000, due to a $1.2 million increase in the average
balance outstanding, which was partially offset by a decrease in the
weighted-average yield earned on the mortgage-backed, from 6.47% during the 1995
quarter to 6.21% during the 1996 quarter. Interest income on investment
securities and other interest-earning assets increased by $248,000, or 161.0%,
due primarily to a $16.7 million increase in the average balance outstanding
during the quarter ended September 30, 1996.
Interest expense on deposits increased by $10,000, or .4%, during the three
months ended September 30, 1996, due to an $8.4 million increase in the average
balance of deposits outstanding, which was partially offset by a decrease in the
weighted-average rate paid on deposits, from 5.40% for the quarter September 30,
1995, to 5.18% for the quarter September 30, 1996. Interest expense on
borrowings decreased by $34,000, or 13.7%, during the quarter ended September
30, 1996, due to a $1.7 million decrease in the average balance of borrowings
outstanding coupled with a decrease in the weighted-average rate paid, from
6.44% for the quarter September 30, 1995, to 6.26% for the quarter September 30,
1996.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $370,000, or 21.7%, during the quarter ended
September 30, 1996 as compared to the quarter ended September 30, 1995. The net
interest margin increased from 3.11% to 3.34% during the quarter ended September
30, 1996, as compared to the quarter ended September 30, 1995.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the
Corporation, the status of past due principal and interest payments, general
economic conditions, particularly as they relate to the Corporation's market
area, and other factors related to the collectibility of the Corporation's loan
portfolio.
The provision for loan losses totaled $48,000 and $36,000 for the nine months
ended September 30, 1996 and 1995, respectively. During the nine months ended
September 30, 1996 and 1995, $23,000 and $36,000, respectively, of single-family
residential loans were charged-off against the Corporation's allowance. The
provision for loan losses for each of the nine month periods ended September 30,
1996 and 1995 represented additions to the Corporation's general allowance.
The provision for loan losses totaled $16,000 and $12,000 for the three months
ended September 30, 1996 and 1995, respectively. The provision for loan losses
for the each of three month periods ended September 30, 1996 and 1995
represented additions to the Corporation's general allowance.
14
<PAGE>
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 and Three Month Periods Ended
September 30, 1996 and 1995 (continued)
Other Income
Total other income increased by $70,000, or 28.0%, for the nine months ended
September 30, 1996, as compared to the nine months ended September 30, 1995. The
increase was primarily attributable to a $23,000 decrease in loss on sale of
investment and mortgage-backed securities, a $23,000 increase in rental income
and a $19,000, or 11.0% increase in other operating income. The increase in
other operating income was due primarily to additional fee income on checking
accounts.
Total other income increased by $25,000, or 31.6%, for the three months ended
September 30, 1996 as compared to the three months ended September 30, 1995. The
increase was primarily attributable to an $11,000 decrease in loss on sale of
investment and mortgage-backed securities, a $9,000 increase in rental income
and a $6,000, or 9.8%, increase in other operating income, primarily
attributable to additional fee income on checking accounts.
General, Administrative and Other Expense
General, administrative and other expense totaled $4.7 million for the nine
months ended September 30, 1996, an increase of $1.5 million, or 45.0%, over the
comparable period in 1995. The increase resulted primarily from an $81,000, or
5.1%, increase in employee compensation and benefits, a $97,000, or 21.6%,
increase in occupancy and equipment expense, a $1.2 million increase in federal
deposit insurance premiums and a $106,000, or 18.1%, increase in other operating
expenses. The increase in federal deposit insurance premiums reflects the
special SAIF recapitalization assessment of .657% for every $100 of deposits
held as of March 31, 1995, which resulted in a charge of $1.1 million, or
$749,000 after tax. Beginning January 1, 1997, the Savings Bank's deposit
insurance premium will decrease from $.23 per $100 in deposits to approximately
$.06 per $100 in deposits. Based upon the Savings Bank's deposits at September
30, 1996, the annual deposit insurance expense will decrease by approximately
$300,000. The increase in employee compensation and benefits resulted primarily
from normal merit increases and the increase in occupancy and equipment
generally reflects increases in depreciation and repair costs in connection with
improvements to several branch office locations. The increase in other operating
expense resulted primarily from increased costs of public reporting, as well as
increases in advertising and charitable contributions expense.
General, administrative and other expense totaled $2.4 million for the three
months ended September 30, 1996, an increase of $1.3 million, or 120.5%, over
the 1995 quarter. The increase resulted primarily from a $72,000, or 13.8%,
increase in employee compensation and benefits, a $42,000, or 28.4%, increase in
occupancy and equipment, a $1.1 million increase in federal deposit insurance
premiums and a $39,000, or 19.1%, increase in other operating expenses, as
discussed above.
Federal Income Taxes
The provision for federal income taxes totaled $534,000 for the nine months
ended September 30, 1996, a $169,000, or 24.0%, decrease from the comparable
period in 1995. The decrease resulted primarily from a $531,000, or 25.2%,
decrease in earnings before taxes year-to-year. The Corporation's effective tax
rates amounted to 34.0% and 33.4% for the nine month periods ended September 30,
1996 and 1995, respectively.
15
<PAGE>
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 and Three Month Periods Ended
September 30, 1996 and 1995 (continued)
Federal Income Taxes (continued)
The Corporation recognized a credit for federal income taxes of $71,000 during
the three months ended September 30, 1996, as compared to a $234,000 provision
for federal income taxes during the 1995 quarter. The decrease resulted
primarily from a $909,000 decrease in earnings before taxes. The Corporation's
effective tax rates amounted to 32.7% and 33.8% for the three month periods
ended September 30, 1996 and 1995, respectively.
Liquidity and Capital Resources
The Savings Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of United States
Government and government agency obligations and other similar investments
having maturities of five years or less. Such investments are intended to
provide a source of relatively liquid funds upon which the Savings Bank may rely
if necessary to fund deposit withdrawals and for other short-term funding needs.
The required level of such liquid investments is currently 5% of certain
liabilities as defined by the OTS and is changed from time to time to reflect
economic conditions.
The liquidity of the Savings Bank, as measured by the ratio of cash, cash
equivalents, (not committed, pledged or required to liquidate specific
liabilities) investment and qualifying mortgage-backed securities to the sum of
total deposits plus borrowings payable within one year, totaled 11.2% at
September 30, 1996, as compared to 7.2% at December 31, 1995. At September 30,
1996, the Savings Bank's "liquid" assets totaled approximately $21.5 million,
which exceeded the current OTS minimum requirement by approximately $11.9
million. The increase in the Savings Bank's liquidity was primarily due to
proceeds from the aforementioned stock offering.
The Savings Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Savings Bank's
primary sources of funds are deposits, borrowings, amortization, prepayments and
maturities of outstanding loans and mortgage-backed securities, maturities of
investment and mortgage-backed securities and other short-term investments,
sales of loans and investment and mortgage-backed securities and funds provided
from operations. While scheduled loan and mortgage-backed securities
amortization and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. The Savings Bank manages the pricing of its deposits to maintain a
steady deposit balance. In addition, the Savings Bank invests excess funds in
overnight deposits and other short-term interest-earning assets which provide
liquidity to meet lending requirements. The Savings Bank generates cash through
the retail deposit market and, to the extent deemed necessary, utilizes
borrowings for liquidity purposes (primarily consisting of advances from the
FHLB of Cincinnati). At September 30, 1996, the Savings Bank had $13.5 million
of outstanding advances from the FHLB of Cincinnati. Furthermore, the Savings
Bank has access to the Federal Reserve Bank discount window.
16
<PAGE>
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 and Three Month Periods Ended
September 30, 1996 and 1995 (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 long-term basis, the Savings Bank maintains a
strategy of investing in various loans, mortgage-backed securities and
investment securities. The Savings Bank uses its sources of funds primarily to
meet its ongoing commitments, to pay maturing savings certificates and savings
withdrawals, fund loan commitments and maintain a portfolio of investment and
mortgage-backed securities. At September 30, 1996, the total approved loan
commitments outstanding amounted to $1.8 million. At the same date, commitments
under unused lines of credit amounted to $3.0 million and the unadvanced portion
of construction loans approximated $2.4 million. Certificates of deposit
scheduled to mature in one year or less at September 30, 1996 totaled $105.1
million. The Savings Bank believes that it has adequate resources to fund all of
its commitments and that it can adjust the rate of certificates of deposit in
order to retain deposits in changing interest rate environments.
Regulatory Capital Requirements
As required by the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA") and regulations promulgated thereunder by the OTS, the
Savings Bank is required to maintain minimum levels of capital under three
separate standards. The Savings Bank is required to maintain regulatory capital
sufficient to meet tangible, core and risk-based capital ratios of 1.50% and
3.00% of adjusted total assets, and 8.00% of risk-weighted assets, respectively.
At September 30, 1996, the Savings Bank exceeded each of its capital
requirements, with tangible, core and risk-based capital ratios of 16.3%, 16.3%
and 31.7%, respectively.
The following table sets forth the Savings Bank's compliance with applicable
regulatory capital requirements at September 30, 1996:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
(Dollars in thousands)
<S> <C> <C> <C>
Actual regulatory capital $40,364 $40,364 $41,199
Amount currently required 3,709 7,418 10,400
------- ------- ------
Regulatory capital in excess of requirement $36,655 $32,946 $30,799
====== ====== ======
Actual regulatory capital as a percentage 16.3% 16.3% 31.7%
Percentage currently required 1.5 3.0 8.0
----- ----- -----
Regulatory capital in excess of requirement 14.8% 13.3% 23.7%
==== ==== ====
</TABLE>
17
<PAGE>
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 and Three Month Periods Ended
September 30, 1996 and 1995 (continued)
Regulatory Capital Requirements (continued)
The OTS adopted an amendment to the regulatory risk-based capital requirement to
include an interest rate risk component. The amount of the interest rate risk
component included in the risk-based capital requirement is based on an
individual institution's interest rate risk position. By virtue of the fact that
the Savings Bank has less than $300 million in assets, the Savings Bank will not
be required to add an interest rate risk component to its risk-based capital
requirement. Reporting under the revised risk-based capital requirement will
become effective upon attaining $300 million in asset size. Additionally, the
OTS has proposed an amendment to the core capital requirement that would
increase the minimum requirement to 4% of adjusted total assets for
substantially all savings associations. Management anticipates no material
change to the Savings Bank's excess regulatory capital position if the proposal
is adopted in its present form.
Impact of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the Corporation's assets and
liabilities are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than does the
effect of inflation.
18
<PAGE>
Fidelity Financial of Ohio, Inc.
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities
None
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of Shareholders of Fidelity Financial of
Ohio, Inc. was held on September 10, 1996 (as adjourned to
September 17, 1996). At the Special Meeting, shareholders
approved an Amended and Restated Agreement of Merger with
Circle Financial Corporation, dated June 13, 1996, pursuant to
which Circle Financial merged with and into the Corporation.
In addition, the shareholders approved a proposal to amend the
Corporation's Articles of Incorporation in order to increase
the authorized number of shares of common stock to 15,000,000
and preferred stock to 5,000,000.
<TABLE>
<CAPTION>
SPECIAL MEETING RESULTS
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
(a) Agreement of Merger 1,980,672 791,135 59,918
(b) Amendment of Articles
of Incorporation 2,098,756 780,290 63,155
</TABLE>
ITEM 5. Other Materially Important Events
None
ITEM 6. Exhibits and Reports on Form 8-K
None
19
<PAGE>
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: ___________________ By:____________________________________
John R. Reusing
President and Chief Executive Officer
Date: ___________________ By:_____________________________________
Paul D. Staubach
Senior Vice President and
Chief Financial Officer
20
<PAGE>
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: ___________________ By: /s/John R. Reusing
John R. Reusing
President and Chief Executive Officer
Date: ___________________ By: /s/Paul D. Staubach
Paul D. Staubach
Senior Vice President and
Chief Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,694
<INT-BEARING-DEPOSITS> 10,862
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,141
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 193,796
<ALLOWANCE> 843
<TOTAL-ASSETS> 255,870
<DEPOSITS> 188,280
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,169
<LONG-TERM> 13,635
0
0
<COMMON> 408
<OTHER-SE> 50,378
<TOTAL-LIABILITIES-AND-EQUITY> 255,870
<INTEREST-LOAN> 11,435
<INTEREST-INVEST> 1,895
<INTEREST-OTHER> 522
<INTEREST-TOTAL> 13,852
<INTEREST-DEPOSIT> 7,190
<INTEREST-EXPENSE> 7,870
<INTEREST-INCOME-NET> 5,982
<LOAN-LOSSES> 48
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 4,682
<INCOME-PRETAX> 1,572
<INCOME-PRE-EXTRAORDINARY> 1,038
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,038
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
<YIELD-ACTUAL> 7.56
<LOANS-NON> 1,087
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 818
<CHARGE-OFFS> 23
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 843
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 843
</TABLE>
