<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
{Mark One}
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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: 0-25348
FED ONE BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 55-0736264)
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number
21 Twelfth Street, Wheeling, WV 26003-3295
(Address of principal executive offices)
Registrant's telephone number, including area code: (304) 234-1100
Former name, former address, and former fiscal year, if changed since last
report
Indicate by check mark whether the Registrant (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 ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes _____ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date: Common Stock, $.10 par value--2,373,556 shares as of
October 27, 1997.
<PAGE>
FED ONE BANCORP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at September 30, 1997 (unaudited) and December 31, 1996..... 1
Consolidated Statements of Income for the Three and Nine Months ended September 30, 1997 and 1996
(unaudited).............................................................................................. 2
Consolidated Statement of Changes in Shareholders' Equity for the Nine Months ended September 30, 1997
(unaudited).............................................................................................. 3
Consolidated Statements of Cash Flows for the Nine Months ended September 30, 1997 and 1996 (unaudited).... 4
Notes to Unaudited Consolidated Financial Statements....................................................... 5
Financial Highlights....................................................................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................. 17
Item 6. Exhibits and Reports on Form 8-K................................................................... 17
</TABLE>
<PAGE>
FED ONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- ---------------
<S> <C> <C>
(DOLLARS IN THOUSANDS EXCEPT FOR SHARES)
ASSETS
Cash on hand and noninterest-earning
deposits in other institutions................................... $ 1,384 $ 1,043
Short-term investments:
Interest-earning deposits in other institutions.................. 4,632 8,896
Certificates of deposit.......................................... 893 595
Investment securities held to maturity
(market value of $33,810 and $39,045)............................ 33,647 39,195
Investment securities available for sale
(cost of $15,164 and $17,824).................................... 15,334 17,888
Mortgage-backed securities held to maturity
(market value of $127,084 and $131,224).......................... 125,284 130,173
Loans receivable, net of allowance for loan
losses of $1,466 and $1,434...................................... 165,049 133,401
Real estate owned.................................................. 60 56
Premises and equipment, net........................................ 6,464 5,543
Accrued interest receivable:
Investment securities............................................ 711 962
Mortgage-backed securities....................................... 884 882
Loans receivable................................................. 1,282 1,026
Prepaid expenses and other assets.................................. 2,097 2,237
--------------- ---------------
TOTAL ASSETS....................................................... $ 357,721 $ 341,897
--------------- ---------------
--------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits........................................................... $ 253,445 $ 249,685
Borrowed funds..................................................... 62,491 50,319
Advances by borrowers for taxes and insurance...................... 392 633
Accrued interest payable........................................... 477 314
Accrued expenses and other liabilities............................. 936 972
--------------- ---------------
TOTAL LIABILITIES.................................................. 317,741 301,923
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock: 5,000,000 shares authorized--
none issued -- --
Common stock, $.10 par value: 15,000,000 shares
authorized--2,818,762 issued at September 30, 1997
and December 31, 1996.......................................... 282 282
Additional paid-in capital....................................... 19,474 19,384
Unearned employee stock ownership plan (ESOP) shares............. (818) (903)
Retained earnings -substantially restricted...................... 28,493 27,226
Treasury stock at cost: 445,581 and 360,063 shares
at September 30, 1997 and December 31, 1996, respectively...... (7,078) (5,440)
Unearned common stock held by the recognition
and retention plan (RRP)....................................... (475) (613)
Net unrealized gain on investment securities
available for sale............................................. 102 38
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY......................................... 39,980 39,974
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................... $ 357,721 $ 341,897
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
1
<PAGE>
FED ONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable.......................................................... $ 3,563 $ 2,964 $ 9,983 $ 8,699
Mortgage-backed securities................................................ 2,041 2,103 6,234 6,139
Investment securities..................................................... 842 1,028 2,599 3,211
Short-term investments.................................................... 78 75 282 345
--------- --------- --------- ---------
TOTAL INTEREST INCOME.................................................... 6,524 6,170 19,098 18,394
INTEREST EXPENSE:
Deposits.................................................................. 2,748 2,518 7,959 7,496
Borrowed funds............................................................ 881 723 2,352 2,037
--------- --------- --------- ---------
TOTAL INTEREST EXPENSE................................................... 3,629 3,241 10,311 9,533
NET INTEREST INCOME........................................................ 2,895 2,929 8,787 8,861
Provision for loan losses.................................................. 40 20 120 70
--------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES........................................................... 2,855 2,909 8,667 8,791
NON-INTEREST INCOME:
Fees and service charges.................................................. 134 145 401 435
Net gain on sale of investment securities -available for sale............. 29 -- 29 3
Other..................................................................... 10 4 34 20
--------- --------- --------- ---------
TOTAL NON-INTEREST INCOME................................................. 173 149 464 458
NON-INTEREST EXPENSE:
Salaries and employee benefits............................................ 964 894 2,891 2,758
Premises and equipment expense............................................ 357 323 1,024 1,021
Data processing........................................................... 52 48 147 158
Federal insurance premiums................................................ 39 141 119 414
FDIC-SAIF assessment...................................................... -- 1,519 -- 1,519
Amortization expense...................................................... 60 70 201 211
REO expense............................................................... 4 3 14 9
Other..................................................................... 321 305 886 866
--------- --------- --------- ---------
TOTAL NON-INTEREST EXPENSE............................................... 1,797 3,303 5,282 6,956
INCOME (LOSS) BEFORE INCOME TAXES.......................................... 1,231 (245) 3,849 2,293
Provision (benefit) for income taxes....................................... 428 (106) 1,407 811
--------- --------- --------- ---------
NET INCOME (LOSS).......................................................... $ 803 $ (139) $ 2,442 $ 1,482
--------- --------- --------- ---------
--------- --------- --------- ---------
PRIMARY EARNINGS (LOSS) PER SHARE.......................................... $ 0.33 $ (0.06) $ 1.01 $ 0.58
FULLY DILUTED EARNINGS (LOSS) PER SHARE.................................... $ 0.33 $ (0.06) $ 1.00 $ 0.58
DIVIDENDS DECLARED PER SHARE............................................... $ 0.155 $ 0.145 $ 0.445 $ 0.415
AVERAGE NUMBER OF SHARES
OUTSTANDING (000's omitted):
Primary................................................................... 2,404 2,514 2,423 2,569
Fully diluted............................................................. 2,421 2,523 2,451 2,574
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
FED ONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Nine Months ended September 30, 1997
<TABLE>
<CAPTION>
UNREALIZED
UNEARNED GAIN ON
COMMON INVESTMENT
ADDITIONAL UNEARNED STOCK SECURITIES
COMMON PAID-IN ESOP RETAINED TREASURY HELD AVAILABLE
STOCK CAPITAL SHARES EARNINGS STOCK BY THE RRP FOR SALE TOTAL
------- ---------- -------- --------- -------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE AT
December 31, 1996........ $ 282 $ 19,384 $ (903) $ 27,226 $ (5,440) $ (613) $ 38 $ 39,974
Net income.................. -- -- -- 2,442 -- -- -- 2,442
Amortization of
Recognition and
Retention Plan............. -- -- -- -- -- 138 -- 138
Common stock issued
upon exercise of stock
options--15,582 shares..... -- 8 -- (149) 230 -- -- 89
Cash dividend declared...... -- 9 -- (1,026) -- -- (1,017)
Principal repayment of
ESOP debt.................. -- 73 85 -- -- -- -- 158
Purchse of Treasury
Stock--101,100 shares...... -- -- -- -- (1,868) -- -- (1,868)
Change in net unrealized gain
on investment securities
available for sale......... -- -- -- -- -- -- 64 64
---- --------- ------- --------- ---------- -------- --------- ---------
BALANCE AT
September 30, 1997.... $ 282 $ 19,474 $ (818) $ 28,493 $ (7,078) $ (475) $ 102 $ 39,980
---- --------- ------- --------- ---------- -------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
FED ONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
<S> <C> <C>
1997 1996
-------- -------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net Income................................................................................... $ 2,442 $ 1,482
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses.................................................................. 120 70
Depreciation and amortization.............................................................. 718 685
Non-cash compensation expense related to ESOP benefit...................................... 158 117
Net gain on sale of:
Investment securities available for sale................................................. (29) (3)
Real estate owned........................................................................ -- (2)
(Increase) decrease in accrued interest receivable......................................... (7) 107
Increase in accrued expenses............................................................... 85 858
Other, net................................................................................. (49) (73)
---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................................................... 3,438 3,241
INVESTING ACTIVITIES:
Purchases of:
Certificates of deposit.................................................................... (794) (595)
Investment securities held to maturity..................................................... (691) (19,971)
Investment securities available for sale................................................... (2,496) (7,127)
Mortgage-backed securities held to maturity................................................ (11,398) (26,017)
Loans...................................................................................... (41,242) (13,484)
Premises and equipment, net................................................................ (1,308) (526)
Proceeds from sales of:
Investment securities available for sale................................................... 79 5,000
Loans...................................................................................... 180 152
Real estate owned.......................................................................... -- 12
Principal repayments and maturities of:
Certificates of deposit.................................................................... 496 3,994
Investment securities held to maturity..................................................... 6,242 8,057
Investment securities available for sale................................................... 5,109 18,323
Mortgage-backed securities held to maturity................................................ 16,289 16,378
Net principal repayments on loans.......................................................... 9,267 2,818
---------- ---------
NET CASH USED BY INVESTING ACTIVITIES.......................................................... (20,267) (12,986)
FINANCING ACTIVITIES:
Increase in deposits, net.................................................................... 3,760 2,922
Increase in borrowings, net.................................................................. 12,172 5,676
Decrease in advances by borrowers for taxes and insurance.................................... (241) (415)
Proceeds from issuance of common stock....................................................... 89 46
Purchase of treasury stock................................................................... (1,868) (2,938)
Cash dividends paid.......................................................................... (1,006) (1,008)
---------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES...................................................... 12,906 4,283
---------- ---------
Decrease in cash and cash equivalents.......................................................... (3,923) (5,462)
Cash and cash equivalents at beginning of period............................................... 9,939 11,698
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................................................... $ 6,016 $ 6,236
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
FED ONE BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with the instructions for Form 10-Q and, therefore,
do not include all the 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 have been included. The
results of operations for the three and nine months ended September 30, 1997 are
not necessarily indicative of the results which may be expected for the entire
fiscal year.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Fed One
Bancorp, Inc. (the "Company"), and its wholly owned subsidiary, Fed One Bank
(the "Bank"). All significant intercompany balances and transactions have been
eliminated in consolidation.
3. RECLASSIFICATION OF PRIOR YEAR'S STATEMENTS
Certain items previously reported have been reclassified to conform with the
current year's reporting format.
4. EARNINGS PER SHARE
Primary earnings for the three and nine months ended September 30, 1997 were
$.33 per share and $1.01 per share, respectively, compared to a loss of $.06 per
share and income of $.58 per share for the three and nine months ended September
30, 1996, respectively. Fully diluted earnings for the three and nine months
ended September 30, 1997 were $.33 per share and $1.00 per share, respectively,
compared to a loss of $.06 per share and income of $.58 per share for the three
and nine months ended September 30, 1996, respectively. Earnings per share were
computed by dividing net income for the three and nine months ended September
30, 1997 and 1996 by the weighted average number of common shares and common
stock equivalents outstanding. Shares outstanding for the three and nine months
ended September 30, 1997 and 1996 do not include ESOP shares that have not been
committed to be released in accordance with SOP 93-6 "Employers' Accounting for
Employee Stock Ownership Plans." Reported primary per share amounts are based on
2,403,784 and 2,423,460 common shares and common stock equivalents for the three
and nine months ended September 30, 1997, and 2,514,388 and 2,568,682 common
shares and common stock equivalents for the three and nine months ended
September 30, 1996, respectively. Reported fully diluted per share amounts are
based on 2,420,638 and 2,451,151 common shares and common stock equivalents for
the three and nine months ended September 30, 1997 and 2,522,724 and 2,574,365
common shares and common stock equivalents for the three and nine months ended
September 30, 1996, respectively. Shares granted but not yet issued under the
Company's stock option plan are considered common stock equivalents for earnings
per share calculations.
5
<PAGE>
5. DIVIDENDS ON COMMON STOCK
On September 17, 1997, the Company declared a quarterly cash dividend of
$.155 per share payable on October 21, 1997 to shareholders of record on
September 30, 1997.
6. INCOME TAXES
Income taxes are accounted for under the asset and liability method pursuant
to Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes."
Total income tax expense through the nine months ended September 30, 1997
consists of (in thousands):
CURRENT DEFERRED TOTAL
----------- ----------- ---------
Federal....................... $ 1,319 $ (21) $ 1,298
State......................... 115 (6) 109
----------- --- ---------
$ 1,434 $ (27) $ 1,407
----------- --- ---------
----------- --- ---------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September
30, 1997 are presented below (in thousands):
Deferred tax assets:
Allowance for loan losses....................................... $ 261
Deposit-based intangibles....................................... 52
Other........................................................... 69
-----
Total gross deferred tax assets................................... $ 382
-----
Deferred tax liabilities:
Premises, plant and equipment................................... (143)
Net unrealized gain on securities available for sale............ (66)
Deferred loan fees.............................................. (244)
------
Total gross deferred tax liabilities.............................. (453)
------
Net deferred tax liability........................................ $ (71)
------
------
The effective tax rate computed pursuant to SFAS No. 109 and the items
which cause differences between the effective tax rate and the statutory U.S.
Federal income tax rate of 34% are not significantly different from such
amounts disclosed in prior years' audited financial statements.
The Company has determined that it is not required to establish a
valuation allowance for deferred tax assets since it is management's belief
that it is more likely than not that the deferred tax assets will be realized.
6
<PAGE>
7. CONTINGENCIES
The Company is involved in various claims and legal actions arising in
the ordinary course of business. The outcome of these claims and actions are
not presently determinable. In the opinion of the Company's management after
consulting with legal counsel, the ultimate disposition of these matters will
not have a material adverse effect on the accompanying consolidated financial
statements.
8. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
In connection with the 1995 Conversion and Reorganization, the Company
formed an ESOP. The ESOP covers employees which have completed at least one
year of service and have attained the age of 21. The ESOP Trust borrowed $1.1
million from the Company and purchased 112,868 shares, equal to 7% of the
total number of shares issued in the 1995 offering. The Bank makes scheduled
discretionary contributions to the ESOP sufficient to service the debt. The
cost of shares not committed to be released and unallocated (suspense shares)
is reported as a reduction in shareholders' equity. Dividends on allocated
and unallocated shares are used for debt service. Shares are released to
participants based on a compensation formula.
In connection with the formation of the ESOP, the Company adopted SOP
93-6. SOP 93-6 requires that (1) compensation expense be recognized based on
the average fair value of the ESOP shares committed to be released; (2)
dividends on unallocated shares used to pay debt service be reported as a
reduction of debt or of accrued interest payable and that dividends on
allocated shares be charged to retained earnings; and (3) ESOP shares which
have not been committed to be released not be considered outstanding for
purposes of computing earnings per share and book value per share.
Compensation expense related to the ESOP amounted to $60,000 and $158,000
for the three and nine months ended September 30, 1997, respectively,
compared to $39,000 and $122,000 for the three and nine months ended
September 30, 1996, respectively. The fair value of unearned ESOP shares at
September 30, 1997 totaled $2.3 million. At September 30, 1997, there were
8,464 ESOP shares committed to be released and 81,832 suspense shares. ESOP
shares totaling 22,572 were allocated as of September 30, 1997.
7
<PAGE>
9. RECENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board ("FASB") released Statement of
Financial Accounting Standard No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS
125") in June 1996. SFAS 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996 and is to be applied prospectively. SFAS 125 establishes standards
for resolving issues related to the circumstances under which the transfer of
financial assets should be considered as sales of all or part of the assets
or as secured borrowings and about when a liability should be considered
extinguished. The FASB released Statement of Financial Accounting Standard
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125" ("SFAS 127") which deferred the effective date of SFAS 125
until January 1, 1998 for certain transactions including repurchase
agreements, dollar roll, securities lending and similar transactions. The
adoption of SFAS 125 has not had a material effect on the Company's financial
position or results of operations. The Company has not yet determined the
effect, if any, that the adoption of SFAS 127 will have on its financial
position or results of operations.
The FASB released Statement of Financial Accounting Standard No. 128,
"Earnings Per Share" ("SFAS 128") in February 1997. SFAS 128 is effective for
periods ending after December 15, 1997, including interim periods; earlier
application is not permitted. SFAS 128 establishes standards for computing
and presenting earnings per share. SFAS 128 supersedes APB Opinion No. 15 and
replaces primary and fully diluted earnings per share with basic and diluted
earnings per share for all companies with complex capital structures and
requires a reconciliation of the numerator and denominator of the diluted
earnings per share computation. Under SFAS 128, basic earnings per share
would have been $.36 and $1.08 for the three and nine months ended September
30, 1997, respectively, compared to a loss of $.06 and earnings of $.61 for
the three and nine months ended September 30, 1996, respectively. Under SFAS
128 diluted earnings per share would have been $.34 and $1.02 for the three
and nine months ended September 30, 1997, respectively, compared to loss of
$.06 and earnings of $.59 for the three and nine months ended September 30,
1996, respectively. This information was calculated after reviewing the
components of SFAS 128. Further evaluation or subsequent opinions on the
disclosure of SFAS 128 could change the earnings per share numbers presented
above as calculated under SFAS 128.
The FASB released Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" ("SFAS 130") in June 1997. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and
its components in the financial statements. Comprehensive income is defined
as "the change in equity of business enterprise during a period from
transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners". The comprehensive income
and related cumulative equity impact of comprehensive income items will be
required to be disclosed as a separate statement or as a component of the
Company's statement of income.
8
<PAGE>
ONE BANCORP, INC. AND SUBSIDIARY
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
FINANCIAL CONDITION DATA:
Average interest-earning assets....................................... $ 339,138 $ 327,778
Average interest-bearing liabilities.................................. 300,508 287,604
Net average earning assets............................................ 38,630 40,174
Non-performing assets................................................. 1,594 1,068
Non-performing loans.................................................. 1,534 1,011
Allowance for loan losses............................................. 1,466 1,434
Average interest-earning assets to average interest-bearing
liabilities......................................................... 112.86% 113.97%
Allowance for loan losses to non-performing loans..................... 95.57% 141.84%
Allowance for loan losses to total loans.............................. 0.88% 1.07%
Non-performing loans to total loans................................... 0.92% 0.75%
Non-performing assets to total assets................................. 0.45% 0.31%
Cumulative one-year GAP............................................... 0.72% 11.68%
Shareholders(1) equity to assets...................................... 11.18% 11.69%
Efficiency ratio...................................................... 54.92% 67.76%
Coverage ratio........................................................ 166.36% 135.72%
Number of banking facilities.......................................... 11 9
</TABLE>
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
--------- --------- --------- ---------
SELECTED OPERATING ACTIVITIES (1):
Return on average
assets.......................................................................... 0.90% -0.16%(2) 0.93% 0.58%(2)
Return on average equity........................................................ 8.14% -1.36%(2) 8.24% 4.79%(2)
Net interest margin............................................................. 3.35% 3.55% 3.45% 3.61%
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------------- ---------------------
<S> <C> <C>
PER SHARE DATA:
Primary earnings per share (3).................................. $ 0.33 $ 1.01
Fully diluted earnings per share (3)............................ 0.33 1.00
Book value per share (4)........................................ 17.45 17.45
Tangible book value per share (4)............................... 16.63 16.63
Market price per share:
High for the quarter/year....................................... 27.25 27.25
Low for the quarter/year........................................ 20.00 15.75
Close 9/30/97................................................... 25.50 25.50
Cash dividend declared per share................................ 0.155 0.445
Average number of shares outstanding (3):
Primary......................................................... 2,403,784 2,423,460
Fully diluted................................................... 2,420,638 2,451,151
</TABLE>
- ------------------------
(1) Amounts are annualized.
(2) Reflects FDIC-SAIF assessment.
(3) Amounts calculated exclude ESOP shares not committed to be released and
include common stock equivalents.
(4) Amounts calculated exclude ESOP shares not committed to be released.
9
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
When used in this Form 10-Q, or, in future filings by the Company with
the Securities and Exchange Commission, in the Company's press releases or
other public or shareholder communications, or in oral statements made with
the approval of an authorized executive officer, the words or phrases "will
likely result", "are expected to", "will continue", "is anticipated",
"estimate", "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks
and uncertainties including changes in economic conditions in the Company's
market area, changes in policies by regulatory agencies, fluctuations in
interest rates, demand for loans in the Company's market area and competition
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. The Company wishes to advise readers
that the factors listed above could affect the Company's financial
performance and could cause the Company's actual results for future periods
to differ materially from any opinions or statements expressed with respect
to future periods in any current statements.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made
to forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
FINANCIAL CONDITION
Total assets increased $15.8 million or 4.6% to $357.7 million at
September 30, 1997 compared to $341.9 million at December 31, 1996.
Short-term investments and investment securities held to maturity were $5.5
million and $33.6 million, respectively, at September 30, 1997 compared to
$9.5 million and $39.2 million, respectively at December 31, 1996. The $4.0
million decrease in short-term investments was the result of the use of
available cash to purchase loans and the $5.5 million decrease in investment
securities was the result of calls and maturities for which the funds were
used to purchase loans. At September 30, 1997, the Company had $15.3 million
of investment securities classified as available for sale compared to $17.9
million at December 31, 1996. The after-tax net unrealized gain on these
securities amounted to $102,000 at September 30, 1997, which is reflected as
a separate component of shareholders' equity. The reduction in available for
sale securities was primarily the result of maturities for which the proceeds
were used to purchase loans. Mortgage-backed securities decreased $4.9
million to $125.3 million at September 30, 1997 compared to $130.2 million at
December 31, 1996 as the result of maturities and repayments which were used
to purchase loans. Loans receivable increased $31.6 million or 23.7% to
$165.0 million at September 30, 1997 compared to $133.4 million at December
31, 1996, as originations and purchases exceeded principal repayments.
Management invested available funds and borrowed from the FHLB in an effort
to increase loans outstanding. The Company purchased approximately $41.2
million of loans during the first nine months of 1997 of which $36.6 million
were adjustable rate residential mortgage loans. The majority of the
remaining purchases were the guaranteed portion of Small Business
Administration ("SBA") and Farmers Home Administration ("FMHA") loans.
10
<PAGE>
The Company derives a portion of its income from interest earned on
originations of insured FHA Title I home improvement loans under the Title I
program of the United States Department of Housing and Urban Development
("HUD"). These loans are originated through a network of approximately 70
home improvement contractors operating in Maryland, Virginia, West Virginia,
Ohio and Pennsylvania. The Company has originated Title I loans for more than
30 years. A portion of the principal on these loans is insured by HUD. Under
the FHA Title I programs the amount of the insurance claim is limited to 90%
of the calculated principal loss sustained by the Company subject to
insurance reserves available to the lender as determined by the FHA. The
Company pays an annual insurance fee each year that the loan is on its books
based on the original loan amount. In an address made on September 18, 1997
to the Title One Home Improvement Loan Association ("TOHILA") at their 1997
Washington Forum, Nicolas Retsinas, HUD Assistant Secretary for
Housing-Federal Housing Commissioner questioned the viability of the dealer
program. Although he declined to predict what action, if any, HUD might take
regarding the Title I program, he stated that HUD was still reviewing the 170
comments received on its proposed rule to terminate the dealer loan component
of Title I. The Company has formally responded in opposition to the proposed
rule. If in fact the dealer program is eliminated, it will have an adverse
effect on the Company. The Company has currently $37.9 million in Title I
loans outstanding at a weighted average rate of 11.1%. The Company currently
originates approximately $1.1 million of this type of loan product on a
monthly basis.
In a separate matter, the massive reorganization of HUD has caused delays
in claims being processed and as a result has impeded the receipt of those
monies by the Company. Although the Company expects full recovery of the
claims as filed, the claims process has slowed.
Total liabilities increased by $15.8 million or 5.2% to $317.7 million at
September 30, 1997 compared to $301.9 million at December 31, 1996. Deposits
increased $3.8 million or 1.5% to $253.4 million at September 30, 1997
compared to $249.7 million at December 31, 1996. Deposits increased primarily
due to the Company being competitively priced in certificates of deposit
during the first nine months of 1997. Borrowed funds increased $12.2 million
to $62.5 million at September 30, 1997 compared to $50.3 million at December
31, 1996. Advances from the FHLB were used to fund the purchased loans.
During the third quarter of 1997, the Company established two new 7 Day
Bank Centers located in newly-constructed Kroger supermarkets in Bellaire and
St. Clairsville, Ohio. These full service branches are approximately 350
square feet and are located at the front entrances of each store. Each one is
staffed with six associates, one ATM, an office, a new accounts desk and
teller areas. The Company plans to open a third 7 Day Bank Center in
Wheeling, WV in the first quarter of 1998. Management expects an increase in
operating expenses, in particular, in the last quarter of 1997 related to
this start-up operation. The expenses will reduce net income and earnings per
share during the fourth quarter of 1997. These start-up costs will help to
expand the Bank's franchise by added convenience to existing customers and
assisting in obtaining new customers. Management expects the impact to income
to continue until such time that the branches increase deposit and loan
growth.
Total shareholders' equity was $40.0 million at September 30, 1997 compared
to $40.0 million at December 31, 1996. There was a slight increase which was
primarily the result of net income of $2.4 million and an increase of $64,000 in
the unrealized gain on investment securities available for sale. These increases
were partially offset by the Company repurchasing $1.9 million of its common
stock during the first nine months of this year. In July 1996 the Company
announced a 5% stock repurchase program representing 127,567
11
<PAGE>
shares to be repurchased, of which there were 19,100 shares purchased at an
average price of $17.87 during the first quarter of 1997. There were 13,591
shares not bought back under this program. In April 1997 the Company
announced another 5% program representing 122,155 shares to be repurchased,
of which 76,000 shares were purchased at an average price of $18.51 per share
during the second quarter of 1997 and 6,000 shares were purchased at an
average price of $20.13 per share during the third quarter of 1997. All of
these repurchased shares are held as treasury shares. An additional reduction
in equity was caused by the Company declaring quarterly cash dividends of
approximately $338,000, $328,000 and $351,000 for the quarters ended March
31, 1997, June 30, 1997 and September 30, 1997, respectively.
RESULTS OF OPERATIONS
NET INCOME
Net income was $803,000 or $.33 per share for the three months ended
September 30, 1997 compared to a loss of $139,000 or $.06 per share for the
three months ended September 30, 1996. The net loss for the three months
ended September 30, 1996 was the result of a $1.5 million pre-tax charge for
the amount of the Federal Deposit Insurance Corporation ("FDIC") special
assessment to recapitalize the Savings Association Insurance Fund ("SAIF").
On an after-tax basis this one-time assessment of $956,000 resulted in a
decrease in earnings per share of $.38 for the quarter ended September 30,
1996. Without the assessment, net income for the three months ended September
30, 1996 would have been $818,000 or $.32 per share. For the three months
ended September 30, 1997 compared to the same period in 1996, non-interest
income increased $24,000, non-interest expense decreased $1.5 million, net
interest income decreased $34,000 and provision for loan losses increased
$20,000. Net income was $2.4 million or $1.01 per share for the nine months
ended September 30, 1997 compared to $1.5 million or $.58 per share for the
same period in 1996. Without the impact of the SAIF assessment, income was up
slightly due to a decrease in total non-interest expense of $155,000 and an
increase of $6,000 in non-interest income, offset by a $74,000 decrease in
net interest income, an increase of $50,000 in the provision for loan losses
and an increase of $34,000 in the provision for income taxes.
INTEREST INCOME
Interest income amounted to $6.5 million for the three month period ended
September 30, 1997, compared to $6.2 million during the same period in 1996.
The $354,000 increase was due to an increase in average interest-earning
assets of $15.7 million and an increase of 7 basis points in the weighted
average yield on interest-earning assets. The increase in average balances
occurred in loans receivable and was partially offset by reductions in
short-term investments, investment securities held to maturity and available
for sale and mortgage-backed securities held to maturity. The increase in the
weighted average yield occurred in short-term investments and investment
securities, which was partially offset by decreases in the yields on loans
and mortgage-backed securities. Interest income amounted to $19.1 million for
the nine months ended September 30, 1997 compared to $18.4 million for the
same time period in 1996. The $704,000 increase was due to an increase in
average interest-earning assets of $11.7 million and an increase of 2 basis
points in the weighted average yield on interest-earning assets. The increase
in the balances of average interest-earning assets was the result of a $23.5
million increase in the average balance of loans receivable and a $4.6
million increase in the average balance of mortgage-backed securities. The
majority of the increase in the average balance of loans receivable was due
to the purchase of adjustable rate
12
<PAGE>
residential mortgage loans partially offset by principal repayments. The
increase in the average balance of mortgage-backed securities was due to the
purchase of both fixed and adjustable rate securities partially offset by
principal repayments. These increases were partially offset by a $1.6 million
decrease in short-term investments for which funds were used to repurchase
the company's stock and a $14.7 million aggregate decrease in average
investment securities held to maturity and available for sale. These
decreases occurred due to available funds being used to purchase loans and to
repurchase the Company's stock. The increase in the weighted average yield
occurred in investment securities held to maturity and available for sale
with an offsetting decrease in the weighted average yield on short-term
investments, loans and mortgage-backed securities.
INTEREST EXPENSE
Interest expense amounted to $3.6 million for the three month period
ended September 30, 1997, compared to $3.2 million during the same period in
1996. This $388,000 increase in interest expense was due to a $17.5 million
increase in the balance of average interest-bearing liabilities and an
increase of 25 basis points in the weighted average cost of funds. Average
balances of NOW and money market accounts, certificates of deposit and
borrowed funds increased, which were partially offset by a decrease in the
balance of passbook accounts. The cost of funds increase was a result of
increases in the cost of funds in certificates of deposit and borrowed funds
offset by a decrease in the cost of funds in passbook accounts. Interest
expense amounted to $10.3 million for the nine month period ended September
30, 1997 compared to $9.5 million for the same period in 1996. This $778,000
increase in interest expense was due to a $13.7 million increase in the
balance of average interest-bearing liabilities and an increase of 14 basis
points in the average cost of funds. Average deposits increased $7.9 million
for the nine month period ended September 30, 1997 compared to the same
period in 1996 as a result of the Company being competitively priced in
certificates of deposit which increases were partially offset by decreases in
the average balance of passbook accounts. Average borrowed funds increased
$5.7 million for the nine month period ended September 30, 1997 compared to
the same period in 1996 due to the Company increasing its FHLB advances to
purchase loans. The weighted average cost of funds increase was a result of
increases in the cost of funds in certificates of deposit and borrowed funds
offset by a decrease in the cost of funds in passbook accounts.
NET INTEREST INCOME
Net interest income amounted to $2.9 million and $8.8 million for the three
and nine months ended September 30, 1997, respectively compared to $2.9 million
and $8.9 million during the same time periods in 1996. Net interest income
decreased mainly because of the increases in average balances of interest-
earning assets were more than offset by increases in average balances of
interest-bearing liabilities. Average interest-earning assets increased $15.7
million and $11.7 million during the three and nine months ended September 30,
1997, respectively compared to the year-earlier period. Average interest-bearing
liabilities increased $17.5 million and $13.7 million during the same
comparative time periods. Average interest-earning assets did not increase at
the same levels as average interest-bearing liabilities because the Company
repurchased $2.4 million of its common stock since the nine month period ended
September 30, 1996, of which $1.9 million was repurchased during the first nine
months of this year. A shift from lower yielding assets into higher yielding
assets for the nine months ended September 30, 1997 compared to the year-earlier
period was more than offset by a corresponding shift from lower yielding
deposits into higher yielding
13
<PAGE>
deposits and borrowings during the same comparative time period. The net
interest margin declined 20 and 16 basis points to 3.35% and 3.45% for the
three and nine months ended September 30, 1997, respectively, from 3.55% and
3.61% for the year-earlier periods. The decline in the net interest margin
for the nine months ended September 30, 1997 compared to the year-earlier
period was mainly due to an increase in the cost of funds during this time
period and a decrease in the net average earning assets due to the use of
funds to repurchase stock. Also, loans purchased during the period were
purchased at yields that were lower than the yields in the existing portfolio.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased to $120,000 for the nine month
period ended September 30, 1997 compared to $70,000 during the same time
period in 1996. This reflected not only management's evaluation of the
underlying credit risk of the loan portfolio but mainly resulted from the
level of allowance for loan losses to total loans receivable, which were
increasing in balances outstanding.
The allowance for loan losses amounted to $1.5 million or .88% and 95.57%
of total loans and total non-performing loans, respectively, at September 30,
1997, as compared to $1.4 million or 1.07% and 141.84% , respectively, at
December 31, 1996.
Non-performing loans (non-accrual loans and accruing loans 90 days or
more overdue) were $1.5 million and $1.0 million at September 30, 1997 and
December 31, 1996, respectively, which represented .92% and .75% of the
Company's total loans, respectively. This increase was primarily due to one
loan secured by commercial real estate which has a history of delinquency.
The Company's real estate owned, which consists of real estate acquired
through foreclosure or by deed-in-lieu thereof, amounted to $60,000 and
$56,000 at September 30, 1997 and December 31, 1996, respectively. As a
percentage of total assets, the Company's total non-performing assets
amounted to $1.6 million or .45% at September 30, 1997 and $1.1 million or
.31% at December 31, 1996.
NON-INTEREST INCOME
Non-interest income amounted to $173,000 and $464,000 for the three and
nine month periods ended September 30, 1997, as compared to $149,000 and
$458,000 for the same time periods in 1996. The increase of $6,000 or 1.3%
for the nine month period ended September 30, 1997 compared to the same
period in 1996 was due primarily to a gain on the sale of an investment
security available for sale of $29,000 and an increase of $14,000 in other
income. These increases were offset by a decrease in deposit charges.
NON-INTEREST EXPENSE
Non-interest expense decreased $1.5 million for the three month period
ended September 30, 1997 compared to the same time period in 1996, as a
result of the $1.5 million one-time FDIC special assessment incurred during
the three month period ended September 30, 1996 and decreases in the regular
federal insurance premiums of $102,000. These decreases were partially offset
by increases in salaries and employee benefits of $70,000, premises and
equipment expense of $34,000 and other expenses of $16,000. Non-interest
expense decreased $1.7 million for the nine month period ended September 30,
1997 compared to the same period in 1996 primarily as a result of the $1.5
million one-time FDIC special assessment, decreases in federal insurance
premiums of $295,000 and data processing expenses of $11,000 which were
offset by an increase in salaries and employee benefits of $133,000 and other
expenses of $20,000. Decreases in federal insurance premiums were due to a
lower assessment rate of approximately 6.5 cents per $100 of deposits in 1997
compared to 23 cents per $100 of deposits in 1996 as a result of the SAIF
being recapitalized in the
14
<PAGE>
third quarter of 1996. Decreases in data processing expenses were due to
decreases in ATM processing charges. Increases in salaries and employee
benefits were the result of normal salary adjustments plus additional
personnel employed in two new 7 Day Bank Centers opened during the third
quarter of 1997. There was also an increase in compensation expense related
to the ESOP due to increases in the market price of Fed One Bancorp stock
during the nine months ended September 30, 1997 compared to the year-earlier
period. Increases in other expenses were primarily due to increases in
advertising and other expenses relative to the two new 7 Day Bank Centers.
PROVISION FOR INCOME TAXES
Provision (benefit) for income taxes was $428,000 and $1.4 million for the
three and nine months ended September 30, 1997, respectively, and ($106,000) and
$811,000 for the three and nine month periods ended September 30, 1996,
respectively. The Company's effective tax rate amounted to 36.6% and 35.4%
during the nine months ended September 30, 1997 and 1996, respectively. Income
tax expense increased primarily due to the benefit received during the nine
months ended September 30, 1996 resulting from the one-time FDIC special
assessment incurred in the third quarter of 1996. Without this one-time special
assessment, income taxes would have been $1.4 million or an effective tax rate
of 36.0% for the year ended September 30, 1996. The Company's effective tax rate
for the three months ended September 30, 1997 and 1996 was 34.8% and (43.3%),
respectively. The three months ended September 30, 1996 contained the affect of
the tax benefit of the SAIF assessment without which the effective tax rate
would have been 35.8% compared to an effective tax rate of 34.8% for the three
months ended September 30, 1997.
LIQUIDITY
Office of Thrift Supervision ("OTS") regulations require the Bank to
maintain an average daily balance of liquid assets (cash, certain time
deposits, banker's acceptances and specified United States Government, state
or federal agency obligations) equal to a monthly average of not less than 5%
of its net withdrawable deposits plus short-term borrowings. For the month of
September 1997, the Bank's average liquidity position was $32.8 million or
11.9% compared to $45.4 million or 15.8% for the month of December 1996.
On May 14, 1997, the Office of Thrift Supervision ("OTS") proposed to
lower the minimum liquid asset requirement from 5% to 4% of an institution's
liquidity base. The proposed change would increase regulatory flexibility and
reduce the burden on savings associations, such as the Bank. In addition, the
OTS would streamline the calculations used to measure compliance with the
liquidity requirements, expand the types of assets that can be considered
liquid and reduce the liquidity base by modifying the definition of "net
withdrawable account." Under the proposal, simply meeting the minimum
liquidity requirement does not automatically mean a thrift institution holds
sufficient liquid assets to support safe and sound operations. Therefore the
OTS would add a new regulatory requirement that all savings associations
maintain a prudent level of liquidity. Management does not expect the
proposal to affect the Bank's compliance with respect to maintaining adequate
liquidity levels.
REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--and possibly additional discretionary--actions
by regulators, that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank
15
<PAGE>
must meet specific capital guidelines that involve quantitative measures of
the Bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain amounts and ratios of tangible and core
capital to adjusted total assets and of total risk-based capital to
risk-weighted assets of 1.5%, 3.0%, and 8.0%, respectively. As of September
30, 1997, the Bank meets all capital adequacy requirements to which it is
subject.
As of September 30, 1997, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum tangible, core and total risk-based capital ratios of 5.0%,
6.0%, and 10.0%, respectively. At September 30, 1997, the Bank's tangible,
core and risk-based capital ratios amounted to 9.94%, 9.94% and 24.28%,
respectively. There are no conditions or events since that notification that
management believes have changed the Bank's category.
YEAR 2000 COMPLIANCE
The Company has developed a plan of action to ensure that its operational
and financial systems will not be adversely affected by year 2000
software/hardware failures due to processing errors arising from calculations
using the year 2000 date. While the Company believes it is doing everything
technologically possible to assure year 2000 compliance, it is to some extent
dependent upon vendor cooperation. The Company is requiring its computer
systems and software vendors to represent that the products provided are or
will be year 2000 compliant. Any year 2000 compliance failures could result
in additional expenses to the Company which are currently unknown. The
Company does not itself internally program any major operating system of the
Company.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are various claims and lawsuits in which the Company is periodically
involved incidental to the Company's business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K
Not applicable
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
FED ONE BANCORP, INC.
Date: November 6, 1997 By: /s/Alan E. Groover
- ----------------------------------- -------------------------------
Alan E. Groover
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 6, 1997 By: /s/Lisa K. DiCarlo
- ----------------------------------- -------------------------------
Lisa K. DiCarlo
Senior Vice President
and Treasurer
(Principal Financial and
Accounting Officer)
18
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
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