FORM 10-QSB
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 December 31, 1998
-----------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File No. 0-18664
GLENWAY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 31-1297820
(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 Securities Exchange Act of 1934 during the preceding
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 February 9, 1999, the latest practicable date, 2,337,733 shares of the
registrant's common stock, $.01 par value, were issued and outstanding.
Page 1 of 19 pages
<PAGE>
Glenway Financial Corporation
INDEX
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial
Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
PART II - OTHER INFORMATION 18
SIGNATURES 19
<PAGE>
<TABLE>
Glenway Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
December 31, June 30,
ASSETS 1998 1998
<S> <C> <C>
Cash and due from banks $ 1,487 $ 1,436
Interest-bearing deposits in other financial institutions 4,992 1,764
------- -------
Cash and cash equivalents 6,479 3,200
Investment securities held to maturity - at amortized cost, approximate
market value of $7,192
and $8,120 at December 31, 1998 and June 30, 1998, respectively 7,079 8,069
Mortgage-backed securities held to maturity - at cost, approximate market
value of $8,472 and $11,158 at December 31, 1998 and June 30, 1998, respectively 8,552 11,304
Mortgage-backed securities available for sale - at market 4,227 5,570
Loans receivable - net 256,607 262,327
Office premises and equipment - at depreciated cost 5,690 5,805
Federal Home Loan Bank stock - at cost 2,712 2,617
Accrued interest receivable on loans 1,475 1,548
Accrued interest receivable on mortgage-backed securities, investments and
interest-bearing deposits 198 230
Cash surrender value of life insurance 1,683 1,652
Prepaid expenses and other assets 590 412
Prepaid federal income taxes - 372
Goodwill and other intangible assets - net of amortization 175 226
------- -------
Total assets $295,467 $303,332
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $217,036 $220,639
Advances from the Federal Home Loan Bank 44,017 50,435
Advances by borrowers for taxes and insurance 1,166 186
Accounts payable on mortgage loans serviced for others 734 600
Accrued interest payable 127 108
Other liabilities 1,110 1,486
Accrued federal income taxes 22 -
Deferred federal income taxes 573 657
------- -------
Total liabilities 264,785 274,111
Stockholders' equity
Serial preferred stock (500,000 shares of $.01 par value authorized; no
shares issued) - -
Common stock - authorized, 3,000,000 shares of $.01 par value; 2,374,738
shares issued 24 24
Additional paid-in capital 13,481 13,359
Retained earnings - substantially restricted 17,780 16,806
Shares acquired by employee benefit plans (80) (107)
Treasury stock - 54,295 and 91,244 shares at December 31, 1998 and
June 30, 1998, respectively - at cost (547) (929)
Unrealized gains on securities designated as available for sale,
net of related tax effects 24 68
------- -------
Total stockholders' equity 30,682 29,221
------- -------
Total liabilities and stockholders' equity $295,467 $303,332
======= =======
</TABLE>
3
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<TABLE>
Glenway Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
For the six months For the three months
ended December 31, ended December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income
Loans $10,244 $10,073 $5,101 $5,147
Mortgage-backed securities 476 718 220 346
Investment securities 251 242 125 134
Interest-bearing deposits and other 193 106 112 50
------ ------ ----- -----
Total interest income 11,164 11,139 5,558 5,677
Interest expense
Deposits 5,148 5,618 2,537 2,817
Borrowings 1,370 990 669 567
------ ------ ----- -----
Total interest expense 6,518 6,608 3,206 3,384
------ ------ ----- -----
Net interest income 4,646 4,531 2,352 2,293
Provision for losses on loans 90 163 45 63
------ ------ ----- -----
Net interest income after provision
for losses on loans 4,556 4,368 2,307 2,230
Other income
Gain on sale of mortgage loans 84 - 36 -
Gain on sale of office premises and equipment 7 - - -
Loan servicing fees 65 76 31 37
Other operating 429 399 220 202
------ ------ ----- -----
Total other income 585 475 287 239
General, administrative and other expense
Employee compensation and benefits 1,714 1,600 825 811
Occupancy and equipment 373 334 191 163
Federal deposit insurance premiums 74 71 38 35
Franchise taxes 143 185 71 91
Data processing 78 156 40 75
Amortization of goodwill and other intangible assets 51 71 25 36
Other operating 463 485 230 256
------ ------ ----- -----
Total general, administrative and other expense 2,896 2,902 1,420 1,467
------ ------ ----- -----
Earnings before income taxes 2,245 1,941 1,174 1,002
Federal income taxes
Current 836 763 408 426
Deferred (70) (86) (7) (75)
------ ------ ----- -----
Total federal income taxes 766 677 401 351
------ ------ ----- -----
NET EARNINGS $ 1,479 $ 1,264 $ 773 $ 651
====== ====== ===== =====
EARNINGS PER SHARE
Basic $.65 $.56 $.34 $.29
=== === === ===
Diluted $.63 $.54 $.33 $.28
=== === === ===
</TABLE>
4
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<TABLE>
Glenway Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
For the six months For the three months
ended December 31, ended December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net earnings $1,479 $1,264 $773 $651
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period (44) 63 (37) 6
----- ----- --- ---
Comprehensive income $1,435 $1,327 $736 $657
===== ===== === ===
</TABLE>
5
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<TABLE>
Glenway Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended December 31,
(In thousands)
1998 1997
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings for the period $ 1,479 $ 1,264
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation of fixed assets 208 171
Provision for losses on loans 90 163
Gain on sale of loans (16) -
Loans disbursed for sale in the secondary market (6,984) -
Proceeds from sale of loans 7,000 -
Amortization of deferred loan origination fees/costs (27) (48)
Amortization of goodwill and other intangible assets 51 71
Amortization of premiums and discounts on loans, investments
and mortgage-backed securities - net (21) 17
Gain on sale of office premises (7) -
Amortization of expense related to employee benefit plans 83 142
Federal Home Loan Bank stock dividends (95) (88)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans 73 8
Accrued interest receivable on mortgage-backed securities,
investment securities and interest-bearing deposits 32 (1)
Prepaid expenses and other assets (178) 84
Accounts payable on mortgage loans serviced for others 134 684
Other liabilities (357) 45
Decrease in checks issued in excess of bank balance - (2,422)
Federal income taxes
Current 394 (201)
Deferred (70) (86)
------ ------
Net cash provided by (used in) operating activities 1,789 (197)
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed securities 4,030 2,190
Purchase of investment securities (2,000) (2,008)
Proceeds from maturities/calls of investment securities 3,000 500
Loan principal repayments 44,843 32,184
Loan disbursements (39,168) (49,508)
Purchase of office premises and equipment (116) (318)
Proceeds from sale of office premises 30 -
Increase in cash surrender value of life insurance (31) (36)
------ ------
Net cash provided by (used in) investing activities 10,588 (16,996)
------ ------
Net cash provided by (used in) operating and investing
activities (balance carried forward) 12,377 (17,193)
------ ------
</TABLE>
6
<PAGE>
<TABLE>
Glenway Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended December 31,
(In thousands)
1998 1997
<S> <C> <C>
Net cash provided by (used in) operating and investing
activities (balance brought forward) $12,377 $(17,193)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts (3,603) 1,897
Proceeds from borrowings 1,400 51,150
Repayments of borrowings (7,818) (35,878)
Repayment of ESOP loan - (65)
Advances by borrowers for taxes and insurance 980 1,201
Dividends paid on common stock (505) (457)
Shares issued under stock option and benefit plans 448 56
------ -------
Net cash provided by (used in) financing activities (9,098) 17,904
------ -------
Net increase in cash and cash equivalents 3,279 711
Cash and cash equivalents at beginning of period 3,200 3,890
------ -------
Cash and cash equivalents at end of period $ 6,479 $ 4,601
====== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 300 $ 671
====== =======
Interest on deposits and borrowings $ 6,499 $ 6,561
====== =======
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available for
sale, net of related tax effects $ (44) $ 63
====== =======
Recognition of mortgage servicing rights in accordance with
SFAS No. 125 $ 68 $ -
====== =======
Supplemental disclosure of noncash financing activities:
Issuance of treasury shares in exchange for outstanding shares related
to exercise of stock options $ 361 $ 16
====== =======
</TABLE>
7
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six and three month periods ended
December 31, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-QSB 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 Annual Report on Form 10-KSB of Glenway
Financial Corporation (the "Corporation") for the fiscal year ended June 30,
1998. However, all adjustments (consisting only of normal recurring accruals)
which, in the opinion of management, are necessary for a fair presentation of
the consolidated financial statements have been included. The results of
operations for the six and three month periods ended December 31, 1998, are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Corporation, Centennial Savings Bank (the "Savings Bank") and its wholly-owned
subsidiary, Centennial Savings and Loan Service Corporation. 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 Corporation's ESOP that are
unallocated and not committed to be released. Weighted-average common shares
totaled 2,292,916 and 2,302,810 for the six and three month periods ended
December 31, 1998 and 2,271,091 and 2,280,999 for the six and three month
periods ended December 31, 1997.
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
2,329,647 and 2,336,520 for the six and three month periods ended December 31,
1998 and 2,331,077 and 2,331,585 for the six and three month periods ended
December 31, 1997. Incremental shares related to the assumed exercise of stock
options included in the calculation of diluted earnings per share totaled 36,731
and 33,710 for the six and three months ended December 31, 1998 and 1997, and
59,986 and 50,586 for the six and three months ended December 31, 1997,
respectively.
8
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Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six and three month periods ended
December 31, 1998 and 1997
4. Effect of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 established standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. It does not require a specific format for that financial statement
but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. Management adopted SFAS No. 130
effective July 1, 1998, as required, without material effect on the
Corporation's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 significantly changes the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 uses a
"management approach" to disclose financial and descriptive information about an
enterprise's reportable operating segments which is based on reporting
information the way that management organizes the segments within the enterprise
for making operating decisions and assessing performance. For many enterprises,
the management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. SFAS No. 131 is not expected to have
a material effect on the Corporation's financial position or results of
operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
9
<PAGE>
Glenway Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six and three month periods ended
December 31, 1998 and 1997
4. Effects of Recent Accounting Pronouncements (continued)
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. On
adoption, entities are permitted to transfer held-to-maturity debt securities to
the available-for-sale or trading category without calling into question their
intent to hold other debt securities to maturity in the future. SFAS No. 133 is
not expected to have a material impact on the Corporation's financial
statements.
10
<PAGE>
Glenway Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Discussion of Financial Condition Changes from June 30, 1998 to December 31,
1998
The Corporation's total assets amounted to $295.5 million at December 31, 1998,
a decrease of $7.9 million, or 2.6%, from the $303.3 million total at June 30,
1998. The decrease consisted primarily of an overall decline in loans receivable
of $5.7 million while deposits and borrowings declined by $3.6 million and $6.4
million, respectively.
Cash and due from banks and interest-bearing deposits in other financial
institutions increased by $3.3 million, or 102.5%, to a total of $6.5 million at
December 31, 1998, compared to $3.2 million at June 30, 1998. Investment
securities decreased by $990,000 as calls/maturities of $3.0 million exceeded
purchases of $2.0 million during the period. Mortgage-backed securities and
mortgage-backed securities available for sale decreased by $4.1 million, or
24.3%, as a result of principal repayments.
Loans receivable decreased by $5.7 million, or 2.2%, during the current six
month period, as principal repayments of $44.8 million, coupled with sales of
$7.0 million exceeded loan originations of $46.2 million. During the six months
ended December 31, 1998, the Savings Bank sold $7.0 million of fixed rate 30
year mortgage loans in the secondary market. Due to consumer demand for
long-term fixed rate products in the current interest rate environment, loans
are evaluated and sold in the secondary market as part of the Savings Bank's
interest rate risk management strategy.
The Savings Bank's allowance for loan losses amounted to $1.3 million at
December 31, 1998, an increase of $83,000, or 7.1%, over the total at June 30,
1998. The allowance for loan losses represented .48% of the total loan portfolio
at December 31, 1998, compared to .43% at June 30, 1998, and represented 128.7%
of non-performing loans, which totaled $977,000 at December 31, 1998, compared
to 119.6% of nonperforming loans, which totaled $982,000, at June 30, 1998.
Deposits decreased by $3.6 million, or 1.6%, to a total of $217.0 million at
December 31, 1998. During the current period management has maintained its
strategy of not offering or matching the highest interest rates on deposits in
its marketplace. As a result, certain maturing certificates have not been
renewed. Total borrowings decreased by $6.4 million, or 12.7%, from June 30,
1998, to December 31, 1998. The Corporation repaid $7.8 million in borrowings
with funds obtained from loan sales and mortgage-backed securities principal
repayments.
Stockholders' equity increased by $1.5 million during the current six month
period, as period earnings of $1.5 million and the effects of distributions of
employee benefits and stock awards totaling $531,000 exceeded cash dividends
paid totaling $505,000 and a decline in unrealized gains on securities
designated as available for sale of $44,000.
The Federal Deposit Insurance Corporation prescribes minimum regulatory capital
ratio guidelines to which the Savings Bank is subject. At December 31, 1998, the
Savings Bank's Tier 1 capital of $27.5 million, or 9.3% of adjusted total
assets, exceeded the required Tier 1 leverage ratio of 5%, or $14.8 million, by
$12.7 million. The Savings Bank's risk-based capital of $28.8 million, or 15.3%
of total risk-weighted assets, exceeded the 8% risk-based capital requirement of
$15.1 million by $13.7 million.
11
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Glenway Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Months ended December 31, 1998
and 1997
General
Net earnings totaled $1.5 million for the six months ended December 31, 1998,
compared to $1.3 million for the same period in 1997 an increase of $215,000, or
17.0%. The increase in net earnings is primarily attributable to an increase in
net interest income of $115,000, an increase in other income of $110,000, a
decline in the provision for loan losses of $73,000, and a decline in general,
administrative and other expense of $6,000, which were partially offset by an
increase in federal income taxes of $89,000.
Net Interest Income
Interest income on loans for the six months ended December 31, 1998, increased
by $171,000, or 1.7%, over the same period in 1997. This increase resulted from
growth of $10.7 million in the average loan portfolio balance outstanding year
to year, which was partially offset by a decline in the weighted-average rate
from 8.10% to 7.90%. For the six months ended December 31, 1998, interest on
mortgage-backed securities declined by $242,000, of 33.7%, from the same period
in 1997, due to a decline in both the average balance outstanding year to year
and the weighted-average rate of $6.9 million and 25 basis points, respectively.
Interest on investments and interest-bearing deposits increased by $96,000, or
27.6%, over the same period in 1997.
Interest expense on deposits decreased by $470,000, or 8.4%, for the six months
ended December 31, 1998, compared to the comparable period in 1997, due
primarily to a $9.9 million, or 4.3%, decrease in average deposit balances for
the six month period year to year, and a 21 basis point decline in the average
cost of funds, to 4.68% in the 1998 period. Interest on borrowings increased by
$380,000, or 38.4%, due to a $13.5 million, or 40.5%, increase in the average
balance of borrowings outstanding year to year.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $115,000, or 2.5%, to a total of $4.6 million
for the six months ended December 31, 1998. The interest rate spread decreased
to approximately 2.84% for the six months ended December 31, 1998, from 2.88%
for the 1997 period, while the net interest margin decreased to approximately
3.19% in 1998, as compared to 3.22% in 1997.
Provision for Losses on Loans
The provision for losses on loans represents a charge to earnings to maintain
the allowance for loan losses at a level management believes is adequate to
absorb potential losses in the loan portfolio. The provision for losses on loans
amounted to $90,000 for the six months ended December 31, 1998, as compared to
$163,000 for the same period in 1997, a decrease of $73,000, or 44.8%. The
current period provision reflects continuing growth in the commercial loan
portfolio, which totaled $7.0 million at December 31, 1998, and a stable level
of nonperforming loans over the period.
12
<PAGE>
Glenway Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Months ended December 31, 1998 and
1997 (continued)
Provision for Losses on Loans (continued)
Although management believes that it uses the best information available in
providing for possible loan losses and believes that the allowance is adequate
at December 31, 1998, future adjustments to the allowance could be necessary and
net earnings could be affected if circumstances and/or economic conditions
differ substantially from the assumptions used in making the initial
determinations.
Other Income
Other income for the six months ended December 31, 1998, increased by $110,000,
or 23.2%, primarily as a result of a gain on sales of loans totaling $84,000 and
a gain on sale of office premises of $7,000 during the 1998 period. Other
operating income for the six months ended December 31, 1998, increased by
$30,000, or 7.5%, due to increases in service charges, loan fees and
miscellaneous revenues.
General, Administrative and Other Expense
General, administrative and other expense decreased by $6,000, or .2%, for the
six months ended December 31, 1998, compared to the six months ended December
31, 1997, due primarily to a decrease of $78,000, or 50.0%, in data processing,
a $42,000, or 22.7%, decrease in franchise taxes, a $20,000 decrease in
amortization of goodwill and a decrease in other operating expenses of $22,000,
or 4.5%. These decreases were partially offset by a $114,000, or 7.1%, increase
in employee compensation and benefits and an increase of $39,000, or 11.7%, in
occupancy and equipment.
The increase in employee compensation and benefits is due primarily to normal
annual merit increases, an increase in staffing levels, and payments made to two
officers of the Savings Bank who retired during the quarter ended December 31,
1998. In April 1998, the Bank began the process of converting to an in-house
computer processing system which led to the reduction in data processing
expense. The increase in occupancy and equipment was due primarily to increased
depreciation expense on the new in-house computer equipment.
Federal Income Taxes
The provision for federal income taxes totaled $766,000 for the six months ended
December 31, 1998, an increase of $89,000, or 13.1%, over the $677,000 recorded
in the 1997 period. The increase resulted primarily from a $304,000, or 15.7%,
increase in earnings before taxes over the 1997 period. The effective tax rates
were 34.1% and 34.9% for the six months ended December 31, 1998 and 1997,
respectively.
13
<PAGE>
Glenway Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Months ended December 31, 1998
and 1997
General
Net earnings totaled $773,000 for the three months ended December 31, 1998,
compared to $651,000, for the same period in 1997, an increase of $122,000, or
18.7%. The increase in net earnings is primarily attributable to an increase in
net interest income of $59,000, an increase in other income of $48,000, a
decline in general, administrative and other expense of $47,000, and a decline
in the provision for loan losses of $18,000, which were partially offset by an
increase in federal income taxes of $50,000.
Net Interest Income
Interest income on loans for the three months ended December 31, 1998, decreased
by $46,000, or .9%, from the same period in 1997. The decrease resulted from a
33 basis point decline in weighted-average rate from year to year, which was
partially offset by a $1.0 million increase in the average loan portfolio
balance outstanding from period to period. For the three months ended December
31, 1998, interest on mortgage-backed securities declined by $126,000, or 36.4%,
over the same three month period in 1997, due to a $10.4 million decline in the
average-balance outstanding year to year, coupled with a 31 basis point decrease
in the weighted-average rate. Interest on investments and interest-bearing
deposits increased by $53,000, or 28.8%, during the three month period ended
December 31, 1998, compared to the 1997 quarter.
Interest expense on deposits decreased by $280,000, or 9.9%, for the three
months ended December 31, 1998, compared to the comparable period in 1997, due
primarily to a $12.3 million, or 5.3%, decrease in average deposit balances for
the three month period year to year, which was partially offset by a 27 basis
point decline in the average cost of funds to 4.49% in the 1998 period. Interest
on borrowings increased by $102,000, or 18.0%, due to a $5.4 million, or 13.5%,
increase in the average balance of borrowings outstanding year to year.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $59,000, or 2.6%, to a total of $2.4 million
for the three months ended December 31, 1998. The interest rate spread decreased
to approximately 2.77% for the three months ended December 31, 1998, from 2.84%
for the 1997 period, while the net interest margin decreased to approximately
3.19% in 1998, as compared to 3.22% in 1997.
Provision for Losses on Loans
The provision for losses on loans represents a charge to earnings to maintain
the allowance for loan losses at a level management believes is adequate to
absorb potential losses in the loan portfolio. The provision for losses on loans
amounted to $45,000 for the three months ended December 31, 1998, as compared to
$63,000 for the same period in 1997, a decrease of $18,000, or 28.6%.
14
<PAGE>
Glenway Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Months ended December 31, 1998
and 1997 (continued)
Provision for Losses on Loans (continued)
Although management believes that it uses the best information available in
providing for possible loan losses and believes that the allowance is adequate
at December 31, 1998, future adjustments to the allowance could be necessary and
net earnings could be affected if circumstances and/or economic conditions
differ substantially from the assumptions used in making the initial
determinations.
Other Income
Other income for the three months ended December 31, 1998, increased by $48,000,
or 20.1%, primarily as a result of a $36,000 gain on sales of loans during the
1998 period. Other operating income for the three months ended December 31,
1998, increased by $18,000, or 8.9%, due to increases in service charges, loan
fees and miscellaneous revenues.
General, Administrative and Other Expense
General, administrative and other expense decreased by $47,000, or 3.2%, for the
three months ended December 31, 1998, compared to the three months ended
December 31, 1997, due primarily to a $35,000, or 46.7%, decrease in data
processing expense, a decrease of $26,000, or 10.2%, in other operating expense,
a decline of $20,000, or 22.0%, in franchise taxes, and a decrease of $11,000 in
amortization of goodwill. These decreases were partially offset by an increase
of $28,000, or 17.2%, in occupancy and equipment, a $14,000, or 1.7%, increase
in employee compensation and benefits and a $3,000 increase in FDIC insurance
premiums.
The increase in employee compensation and benefits is due primarily to normal
annual merit increases and an increase in staffing levels. In April 1998, the
Bank began the process of converting to an in-house computer processing system
which led to the reduction in data processing expense, which was partially
offset by an increase in depreciation expense year to year.
Federal Income Taxes
The provision for federal income taxes totaled $401,000 for the three months
ended December 31, 1998, an increase of $50,000, or 14.2%, over the $351,000
recorded in the 1997 quarter. The increase resulted primarily from a $172,000,
or 17.2%, increase in earnings before taxes over the 1997 period. The effective
tax rates were 34.2% and 35.0% for the three months ended December 31, 1998 and
1997, respectively.
15
<PAGE>
Glenway Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Compliance Matters
The Savings Bank's operations, like those of most financial institutions, depend
almost entirely on computer systems. The Savings Bank has addressed the
potential problems associated with the possibility that the computers which
control or operate the Savings Bank's operating systems, facilities and
infrastructure may not be programmed to read four-digit date codes and, upon
arrival of the year 2000, may recognize the two-digit code "00" as the year
1900, causing systems to fail to function or to generate erroneous data.
Centennial Savings Bank has been working for the last several years to resolve
the potential impact of Year 2000 on the ability of our computerized information
system to accurately process information that may be date sensitive. It may also
affect the operations of third parties with which the Savings Bank does
business, including the vendors, suppliers, utility companies, and customers.
The Savings Bank'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. The Savings Bank 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. The Savings Bank is
proceeding with additional testing of ancillary processes, including system
interfaces, and implementation phases of the Y2K Plan.
Project Management and Awareness
The Savings Bank has assigned primary responsibility for Year 2000 project
management to its Chief Operations Officer. Several projects have been
designed to promote awareness of Year 2000 issues throughout the Savings
Bank and our customer base. These procedures include mailing information
brochures to deposit and loan customers, providing training for staff, and
responding to customer, vendor and shareholder inquiries.
Assessment
Assessment is the process of identifying all mission critical applications
that could potentially be impacted by the Year 2000. The Savings Bank's
assessment phase is complete. The scope of this examination included
core-processing applications for loans and deposits, telecommunications
systems, vendor supplied software, PC hardware and firmware, and other
software and hardware used in daily operations.
The Savings Bank's operations are dependent upon vendors of both computer
hardware and computer software for most applications. The Savings Bank has
identified and contacted those vendors to receive Year 2000 compliance
assurance from its primary mission critical vendors, and is continuing to
monitor the progress/status of each.
The Savings Bank's main core processing application (loans and deposits) is
processed on Data Communications, Inc. in-house client server software. The
Savings Bank converted to DCI in 1998. All screens and reports show 4-digit
fields, and DCI has tested internal programming codes to ensure Y2K
compliance.
16
<PAGE>
Glenway Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Compliance Matters (continued)
Validation and Testing
The Savings Bank has participated with DCI in testing for Y2K compliance.
Validation and testing was completed by December 31, 1998. The Savings Bank
staff monitored DCI testing and certification progress by review of DCI Y2K
update documentation, which has been provided to all DCI users, and via
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 Federal Financial Institutions Examinations
Council ("FFIEC") Y2K test dates recommended. No system errors were found.
Renovation and Implementation
This phase involves obtaining and implementing renovated software
applications provided by our vendors. As these applications are received
and implemented, the Savings Bank will test them for Year 2000 compliance
as noted above. This phase also involves upgrading and replacing software
and hardware where appropriate and will continue throughout 1998 and should
be substantially complete by the end of March 1999.
The Savings Bank's anticipated direct expenses are less than $20,000,
primarily for 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 affect to the Corporation's financial
statements.
Contingency Plan
Alternatives if renovation is unsuccessful with the DCI core processing
system include:
In the unlikely event that Y2K remediation cannot be timely completed by
DCI for critical date issues, the Savings Bank will convert all necessary
applications to a vendor which has been proven to be Y2K compliant.
Contingency planning will include 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.
The Savings Bank 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 mission critical systems and hardware will be
Year 2000 ready by March 31, 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.
17
1.
<PAGE>
Glenway Financial Corporation
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
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K: None.
Exhibit 27: Financial data schedule for the six
months ended December 31, 1998.
18
<PAGE>
Glenway Financial Corporation
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: February 12, 1999 By: /s/Robert R. Sudbrook
----------------------- ----------------------------
Robert R. Sudbrook
President
Date: February 12, 1999 By: /s/Gregory P. Niesen
----------------------- ----------------------------
Gregory P. Niesen
Chief Financial Officer
19
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