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 March 31, 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 May 12, 1999, the latest practicable date, 9,119,619 shares of the
registrant's common stock, no par value, were issued and outstanding.
Page 1 of 16 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 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 14
PART II - OTHER INFORMATION 15
SIGNATURES 16
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<TABLE>
Fidelity Financial of Ohio, Inc.
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
March 31, December 31,
ASSETS 1999 1998
(Restated)
<S> <C> <C>
Cash and due from banks $ 3,156 $ 5,385
Interest-bearing deposits in other financial institutions 15,426 23,315
------- -------
Cash and cash equivalents 18,582 28,700
Investment securities available for sale - at market 9,933 838
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 36,620 29,432
Mortgage-backed securities held to maturity - at cost, approximate market value of
$25,277 and $38,200 at March 31, 1999 and December 31, 1998, respectively 25,170 38,234
Loans receivable - net 681,572 675,807
Loans held for sale - at lower of cost or market 1,192 236
Office premises and equipment - at depreciated cost 12,463 12,876
Real estate acquired through foreclosure - 32
Federal Home Loan Bank stock - at cost 7,300 7,176
Accrued interest receivable on loans 3,970 3,521
Accrued interest receivable on mortgage-backed securities,
investment securities and other 427 537
Cash surrender value of life insurance 1,491 1,073
Prepaid expenses and other assets 1,699 1,683
Goodwill and other intangible assets, net of accumulated amortization 6,931 7,124
Prepaid federal income taxes 180 316
------- -------
Total assets $807,530 $814,664
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $617,120 $629,158
Advances from the Federal Home Loan Bank 85,986 78,752
Advances by borrowers for taxes and insurance 2,223 3,592
Accrued interest and other liabilities 5,041 3,490
Deferred federal income taxes 852 1,372
------- -------
Total liabilities 711,222 716,364
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; 9,119,619 and
9,093,684 shares issued and outstanding at March 31, 1999 and December 31, 1998 912 909
Additional paid-in capital 54,603 54,434
Retained earnings - restricted 42,620 44,906
Less shares acquired by Employee Stock Ownership Plan (ESOP) (1,596) (1,633)
Less shares acquired for stock benefit plans (314) (314)
Unrealized gain (loss) on securities designated as available for sale,
net of related tax effects 83 (2)
------- -------
Total stockholders' equity 96,308 98,300
------- -------
Total liabilities and stockholders' equity $807,530 $814,664
======= =======
</TABLE>
3
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<TABLE>
Fidelity Financial of Ohio, Inc.
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31,
(In thousands, except per share data)
1999 1998
(Restated)
<S> <C> <C>
Interest income
Loans $12,956 $13,484
Mortgage-backed securities 982 1,036
Investment securities 130 207
Interest-bearing deposits and other 393 531
------ ------
Total interest income 14,461 15,258
Interest expense
Deposits 6,806 7,971
Borrowings 1,208 1,173
------ ------
Total interest expense 8,014 9,144
------ ------
Net interest income 6,447 6,114
Provision for losses on loans 75 95
------ ------
Net interest income after provision for losses on loans 6,372 6,019
Other income
Gain on sale of investment and mortgage-backed securities - 62
Gain on sale of loans 32 60
Gain on sale of office premises and equipment - 84
Loss on sale of real estate owned (2) -
Other operating 429 501
------ ------
Total other income 459 707
General, administrative and other expense
Employee compensation and benefits 3,636 1,756
Occupancy and equipment 842 576
Federal deposit insurance premiums 86 103
Franchise taxes 310 269
Amortization of goodwill and other intangible assets 193 207
Data processing 743 224
Other operating 2,252 657
------ ------
Total general, administrative and other expense 8,062 3,792
------ ------
Earnings (loss) before income taxes (credits) (1,231) 2,934
Federal income taxes (credits)
Current 551 993
Deferred (562) 54
------ ------
Total federal income tax expense (credits) (11) 1,047
------ ------
NET EARNINGS (LOSS) $(1,220) $ 1,887
====== ======
EARNINGS (LOSS) PER SHARE
Basic $(.14) $.22
==== ===
Diluted $(.14) $.21
==== ===
</TABLE>
4
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<TABLE>
Fidelity Financial of Ohio, Inc.
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31,
(In thousands)
1999 1998
(Restated)
<S> <C> <C>
Net earnings (loss) $(1,220) $1,887
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities designated as
available for sale 85 (27)
Reclassification adjustment for gains included
in net earnings - 41
------ -----
Comprehensive income (loss) $(1,135) $1,901
====== =====
</TABLE>
5
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<TABLE>
Fidelity Financial of Ohio, Inc.
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31,
(In thousands)
1999 1998
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) for the period $(1,220) $ 1,887
Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 251 267
Amortization of premiums on investments and mortgage-backed securities 58 26
Amortization of deferred loan origination costs 73 133
Amortization expense of employee stock benefit plans 44 134
Amortization of goodwill and other intangible assets 193 207
Amortization of purchase accounting adjustments 23 (81)
Gain on sale of investment and mortgage-backed securities - (62)
Loss on sale of mortgage loans 2 25
Loans disbursed for sale in the secondary market (3,759) (7,820)
Proceeds from sale of mortgage loans 2,801 7,254
Gain on sale of real estate - (141)
Loss on sale of office premises and equipment - 57
Loss on sale of real estate acquired through foreclosure 2 -
Federal Home Loan Bank stock dividends (124) (119)
Provision for losses on loans 75 95
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (449) (152)
Accrued interest receivable on mortgage-backed securities,
investments and other 110 (108)
Prepaid expenses and other assets (418) (590)
Accrued interest and other liabilities 1,551 1,873
Federal income taxes
Current 136 794
Deferred (562) 54
------ ------
Net cash provided by (used in) operating activities (1,209) 3,733
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale (1,994) (992)
Proceeds from maturities/calls of investment securities held to maturity - 2,500
Proceeds from sale of investment securities designated as available for sale - 1,142
Maturities of investment securities designated as available for sale - 13
Purchase of mortgage-backed securities designated as available for sale - (8,210)
Principal repayments on investment securities designated as available for sale 33 -
Principal repayments on mortgage-backed securities 5,901 4,527
Purchase of mortgage-backed securities designated as held to maturity - (14,883)
Loan disbursements (46,712) (57,654)
Principal repayments on loans 40,755 72,871
Proceeds from sale of real estate - 1,809
Purchases and additions to office premises and equipment - (237)
Disposal of office premises and equipment 290 -
Decrease in cash surrender value of life insurance (16) (16)
Proceeds from sale of real estate acquired through foreclosure 30 -
Additions to real estate acquired through foreclosure (146) (6)
------ ------
Net cash provided by (used in) investing activities (1,859) 864
------ ------
Net cash provided by (used in) operating and investing activities
(subtotal carried forward) (3,068) 4,597
------ ------
</TABLE>
6
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<TABLE>
Fidelity Financial of Ohio, Inc.
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the three months ended March 31,
(In thousands)
1999 1998
(Restated)
<S> <C> <C>
Net cash provided by (used in) operating and investing activities
(subtotal brought forward) $(3,068) $ 4,597
Cash provided by (used in) financing activities:
Net decrease in deposit accounts (11,921) (10,454)
Proceeds from Federal Home Loan Bank advances 8,000 38,141
Repayment of Federal Home Loan Bank advances (859) (28,589)
Shares issued under stock option and benefit plans 177 71
Dividends on common stock (1,078) (675)
Advances by borrowers for taxes and insurance (1,369) (1,415)
------ ------
Net cash used in financing activities (7,050) (2,921)
------ ------
Net increase (decrease) in cash and cash equivalents (10,118) 1,676
Cash and cash equivalents at beginning of period 28,700 30,531
------ ------
Cash and cash equivalents at end of period $18,582 $32,207
====== ======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 300 $ 420
====== ======
Interest on deposits and borrowings $ 8,028 $ 9,097
====== ======
Supplemental disclosure of noncash investing and financing activities:
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ 85 $ (27)
====== ======
Transfer of investment securities to available for sale classification $ 7,079 $ -
====== ======
Transfer of mortgage-backed securities to available for sale classification $16,900 $ -
====== ======
Transfer of mortgage-backed securities from available for sale to held
to maturity $27,241 $ -
====== ======
Issuance of treasury shares related to exercise of stock options $ (16) $ (16)
====== ======
Recognition of mortgage servicing rights in accordance with SFAS No. 125 $ 34 $ 85
====== ======
</TABLE>
7
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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 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 period ending March 31, 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 Fidelity Financial of Ohio, Inc. (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 month period ended March 31, 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 Bank (the
"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 8,958,791 and 8,572,199 for the three month periods ended March 31,
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
8,958,791 and 9,004,686 for the three months ended March 31, 1999 and 1998,
respectively. Incremental shares related to the assumed exercise of stock
options totaling 432,487 were included in the computation of diluted
earnings per share for the three month period ended March 31, 1998.
8
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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 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.
9
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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 March 31,
1999
The Corporation's consolidated total assets amounted to $807.5 million at March
31, 1999, a decrease of $7.1 million, or .9%, from the $814.6 million total at
December 31, 1998. The decline in assets resulted primarily from a decline in
deposits of $12.0 million and decline in stockholder's equity of $2.0 million,
which were partially offset by an increase of $7.2 million in FHLB advances.
Cash and cash equivalents, comprised of cash and due from banks and
interest-bearing deposits in other financial institutions, amounted to $18.6
million at March 31, 1999, a decrease of $10.1 million, or 35.3%, from the total
in 1998.
Investment securities (including investment securities classified at available
for sale) totaled $9.9 million at March 31, 1999, an increase of $2.0 million,
or 25.5%. During the quarter ended March 31, 1999, a $2.0 million agency
security was 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 $61.8 million at March 31, 1999, a decrease of $5.9 million, or
8.7%, from the total at December 31, 1998. The decrease in mortgage-backed
securities was due primarily to principal repayments totaling $5.9 million. In
accordance with SFAS No. 115 management reclassified $27.2 million of
mortgage-backed securities from held to maturity to the available for sale
classification and transferred $16.9 million of securities from available for
sale to the held to maturity portfolio.
10
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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 March 31,
1999 (continued)
Loans receivable increased by $6.7 million, or 1.0%, to a total of $682.8
million at March 31, 1999, as compared to $676.0 million at December 31, 1998.
The increase resulted primarily from loan originations of $50.5 million, which
exceeded principal repayments totaling $40.8 million and sales of $2.8 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 $3.0 million at March 31, 1999,
an increase of $71,000, or 2.4%, over the total at December 31, 1998. The
allowance represented .44% and .43% of total loans at March 31, 1999 and
December 31, 1998, respectively, and 105.1% and 125.6% of nonperforming loans,
which totaled $2.9 million and $2.4 million at those respective dates. While
management believes Centennial's allowance for loan losses is adequate at March
31, 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 $617.1 million at March 31, 1999, a decrease of $12.0 million,
or 1.9%, from the total at December 31, 1998. Advances from the Federal Home
Loan Bank totaled $86.0 million at March 31, 1999, an increase of $7.2 million,
or 9.2%, over the balance at December 31, 1998. The increase resulted primarily
from $8.0 million in borrowings during the 1999 period, which were partially
offset by repayments of $859,000. During the quarter ended March 31, 1999,
certificate of deposit holders chose not to renew at the established rates which
caused the decline in deposits. The increase in advances was due to several
fixed-rate balloon loans obtained from the Federal Home Loan Bank with
maturities ranging between five and eight years. Proceeds from such advances
were used primarily to fund loan originations.
Stockholders' equity totaled $96.3 million at March 31, 1999, a decrease of $2.0
million, or 2.0%, from the total at December 31, 1998. The decrease resulted
primarily from a net loss of $1.2 million and dividends paid which totaled $1.1
million, which were partially offset by issuance of stock under employee benefit
and option plans of $221,000, and an $85,000 increase in unrealized gains on
securities designated as available for sale.
Comparison of Operating Results for the Three Month Periods ended March 31, 1999
and 1998
General
During the quarter ended March 31, 1999, a net loss of $1.2 million was
reported. The Corporation incurred $4.2 million in non-recurring merger costs
during the quarter to complete the merger of equals with Glenway Financial
Corporation. Excluding the non-recurring merger costs, net earnings would have
been $1.921 million, an increase of $34,000, or 1.8%, over the $1.887 million
recorded for the three months ended March 31, 1998.
11
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Fidelity Financial of Ohio, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods ended March 31, 1999
and 1998 (continued)
Net Interest Income
Net interest income totaled $6.4 million for the three months ended March 31,
1999, an increase of $333,000, or 5.5%, from the 1998 period. Interest income
decreased by $797,000 or 5.2%, for the three months ended March 31, 1999,
compared to the same quarter in 1998. Interest income on loans and
mortgage-backed securities decreased by $582,000, or 4.0%, due primarily to a 25
basis point decline in the weighted-average yield, from 7.71% in 1998 to 7.46%
in 1999, and a $5.9 million, or .8%, decline in the average balance outstanding
from period to period. Interest income on investment securities and
interest-bearing deposits decreased by $215,000, or 29.1%, during the 1999
period, compared to the 1998 period, due primarily to a $13.7 million, or 27.8%,
decrease in the average balance outstanding, coupled with a 10 basis point
decline in the weighted-average yield year to year, to 5.89% for the three
months ended March 31, 1999.
Interest expense on deposits decreased by $1.2 million, or 14.6%, for the three
months ended March 31, 1999, compared to the three months ended March 31, 1998.
The decrease was due primarily to a $34.6 million, or 5.3%, decrease in the
average balance outstanding, coupled with a 48 basis point decline in the
average cost of deposits, to 4.39% for the quarter ended March 31, 1999, as
compared to 4.87% for the 1998 quarter. Interest expense on borrowings increased
by $35,000, or 3.0%, due primarily to a $4.8 million increase in the average
balance of outstanding borrowings during 1999, which was partially offset by a
17 basis point decline in the average cost of borrowings.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $333,000, or 5.5%, for the three months ended
March 31, 1999 compared to 1998. The interest rate spread amounted to 2.84%
during the 1999 period and 2.62% in 1998, while the net interest margin
increased to 3.30% from 3.05% for the three months ended March 31, 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
Centennial, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to Centennial's
market area, and other factors related to the collectibility of Centennial's
loan portfolio. As a result of such analysis, management recorded a $75,000
provision for losses on loans during the three months ended March 31, 1999,
compared to $95,000 recorded in the 1998 three month period. The current period
provision reflects growth in the loan portfolio, coupled with an increase in
nonperforming loans during the quarter. Nonperforming loans at March 31, 1999
were comprised of $2.0 million of one- to four-family residential and
multi-family properties and $700,000 of nonresidential properties. It is
management's belief that all nonperforming loans are adequately collateralized
and that the Bank will not incur any losses on such loans. There can be no
assurance that the allowance for loan losses of Centennial will be adequate to
cover losses on nonperforming assets in the future.
12
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Fidelity Financial of Ohio, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods ended March 31, 1999
and 1998 (continued)
Other Income
Other income decreased by $248,000, or 35.1%, to a total of $459,000 for the
three months ended March 31, 1999, compared to $707,000 in 1998. The decrease
was due primarily to an $84,000 decrease in gains on sale of real estate, a
$62,000 decrease in gains on sale of investment and mortgage-backed securities,
and a decrease in gains on sale of loans of $28,000. Other operating income also
declined by $72,000, or 14.4%, from period to period. The decline in other
operating income was mainly attributable to a decrease in fees on loans and
service charges on deposits.
General, Administrative and Other Expense
General, administrative and other expense totaled $8.1 million for the three
months ended March 31, 1999. Excluding non-recurring merger charges totaling
$4.2 million, general, administrative, and other expense would have been
reported as $3.9 million, an increase of $70,000, or 1.8%, 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 increase in general
administrative and other expenses, excluding one-time merger expenses, was due
to a $149,000, or 8.5%, increase in employee compensation and benefits and a
$41,000, or 15.2%, increase in franchise tax expense. These increases were
partially offset by a decline in data processing expense of $3,000, or 1.3%, a
decline in occupancy and equipment of $24,000, or 4.2%, a decline in other
operating expenses of $62,000, a decline in FDIC insurance premiums of $17,000,
and a decline in amortization of goodwill of $14,000.
The increase in employee compensation and benefits was due to new staff hired
for the commercial lending department and normal merit increases.
Federal Income Taxes
The benefit for federal income taxes totaled $11,000 for the three months ended
March 31, 1999, a decrease of $1.1 million, from the provision recorded in the
three months ended March 31, 1998. The Corporation's effective tax rates were
35.5% and 35.7% for the three months ended March 31, 1999 and 1998,
respectively.
13
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Fidelity Financial of Ohio, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Compliance Matters
Centennial has been working for the last several years to resolve the potential
impact of 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: these phases are (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 phases one through four with respect to the core
application systems related to deposit and loan processing, although appropriate
follow-up activities continue to occur. Centennial is proceeding with additional
testing of ancillary processes, including system interfaces, and implementation
phases of the Y2K Plan.
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.
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 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 will
consider the resources needed and available to resume normal operations
following a disaster.
Centennial and DCI are on schedule to meet Y2K project dates set forth by the
FFIEC for remediation testing and contingency planning. Bank management believes
that all other systems and hardware will be Year 2000 ready by June 30, 1999.
Contingency plans will be made for elements outside of management's control or
ability to test, such as power, water or telephone failure, which could affect
operations.
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.
14
<PAGE>
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
A special meeting of shareholders was held on February 16, 1999. Two
matters were submitted to the shareholders for which the following
votes were cast:
1) A resolution to adopt an amendment to FFOH's Articles of
Incorporation to reduce from two-thirds of the voting power of
FFOH to a majority of the voting power of FFOH the vote required
to approve a proposed merger of consolidation of FFOH with or
into one or more corporations or a proposed combination or
majority share acquisition involving the issuance of shares of
FFOH and requiring shareholder approval.
For: 3,342,073 Against: 453,951 Abstain: 28,743
2) A resolution to adopt an Agreement of Merger, dated as of
September 28, 1998 (the "Agreement"), by and among FFOH, Fidelity
Acquisition Corporation ("FAC"), and Glenway Financial
Corporation ("GFCO"), which provides, among other things, for (i)
the merger of GFCO with and into FAC (the "Merger") and (ii) the
conversion of each share of common stock of GFCO outstanding
immediately prior to the Merger (other than any shares held by
either FFOH or GFCO) into the right to receive 1.50 share of FFOH
common stock, plus cash in lieu of any fractional share interest.
For: 3,539,925 Against: 493,809 Abstain: 19,362
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 three months
ended March 31, 1999.
Exhibit 27.2: Restated Financial Data Schedule for the
three months ended March 31, 1998.
15
<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: May 14, 1999 By: /s/Robert R. Sudbrook
----------------------------- ----------------------------
Robert R. Sudbrook
Chairman and Chief
Executive Officer
Date: May 14, 1999 By: /s/Paul D. Staubach
----------------------------- ----------------------------
Paul D. Staubach
Senior Vice President and
Chief Financial Officer
16
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