<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 June 30, 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 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--2,401,540 shares as of August 4, 1998.
<PAGE>
FED ONE BANCORP, INC.
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at 1
June 30, 1998 (unaudited) and December 31, 1997
Consolidated Statements of Income for the Three and Six 2
Months ended June 30, 1998 and 1997 (unaudited)
Consolidated Statement of Changes in Shareholders' Equity
for the Six Months ended June 30, 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the Six Months
ended June 30, 1998 and 1997 (unaudited) 4
Notes to Unaudited Consolidated Financial Statements 5
Financial Highlights 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
<PAGE>
FED ONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- ------------
(Dollars In Thousands Except For Shares)
<S> <C> <C>
ASSETS
Cash on hand and noninterest-earning
deposits in other institutions $ 1,748 $ 2,309
Short-term investments:
Interest-earning deposits in other institutions 13,708 6,855
Certificates of deposit 198 893
Investment securities held to maturity
(market value of $44,247 and $25,406) 44,148 25,236
Investment securities available for sale
(cost of $8,586 and $16,185) 8,785 16,399
Mortgage-backed securities held to maturity
(market value of $124,962 and $139,367) 123,224 137,376
Mortgage-backed securities available for sale
(cost of $3,045 and $0) 3,043 --
Loans receivable, net of allowance for loan
losses of $1,516 and $1,481 167,666 166,137
Real estate owned 10 14
Premises and equipment, net 6,332 6,533
Accrued interest receivable:
Investment securities 795 695
Mortgage-backed securities 829 949
Loans receivable 1,293 1,299
Prepaid expenses and other assets 2,058 2,081
--------- ---------
--------- ---------
TOTAL ASSETS $ 373,837 $ 366,776
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits $ 259,924 $ 258,913
Borrowed funds 70,155 65,096
Advances by borrowers for taxes and insurance 928 635
Accrued interest payable 490 583
Income taxes payable 166 99
Accrued expenses and other liabilities 304 868
--------- ---------
TOTAL LIABILITIES 331,967 326,194
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 June 30, 1998
and December 31, 1997 282 282
Additional paid-in capital 19,780 19,519
Unearned employee stock ownership plan (ESOP) shares (734) (790)
Retained earnings--substantially restricted 29,420 28,920
Treasury stock at cost: 417,222 and 443,606 shares
at June 30, 1998 and December 31, 1997, respectively (6,660) (7,049)
Unearned common stock held by the recognition
and retention plan (RRP) (337) (429)
Accumulated other comprehensive income, net of income tax 119 129
--------- ---------
TOTAL SHAREHOLDERS'EQUITY 41,870 40,582
--------- ---------
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 373,837 $ 366,776
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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<PAGE>
FED ONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------- ------- ------- -------
(In Thousands except per share data)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $ 3,650 $ 3,367 $ 7,259 $ 6,420
Mortgage-backed securities 2,115 2,069 4,343 4,193
Investment securities 698 874 1,352 1,757
Short-term investments 122 74 224 204
------- ------- ------- -------
TOTAL INTEREST INCOME 6,585 6,384 13,178 12,574
INTEREST EXPENSE:
Deposits 2,889 2,658 5,719 5,211
Borrowed funds 946 784 1,871 1,471
------- ------- ------- -------
TOTAL INTEREST EXPENSE 3,835 3,442 7,590 6,682
NET INTEREST INCOME 2,750 2,942 5,588 5,892
Provision for loan losses -- 50 30 80
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,750 2,892 5,558 5,812
NON-INTEREST INCOME:
Fees and service charges 170 134 313 267
Net gain on sale of MBS and investment securities 93 -- 93 --
Other 10 7 29 24
------- ------- ------- -------
TOTAL NON-INTEREST INCOME 273 141 435 291
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,041 942 2,100 1,927
Premises and equipment expense 400 338 770 667
Data processing 55 50 108 95
Federal insurance premiums 40 41 79 80
Amortization expense 61 71 121 141
REO expense 1 4 2 10
Other 269 306 573 565
------- ------- ------- -------
TOTAL NON-INTEREST EXPENSE 1,867 1,752 3,753 3,485
INCOME BEFORE INCOME TAXES 1,156 1,281 2,240 2,618
Provision for income taxes 431 463 840 979
------- ------- ------- -------
NET INCOME $ 725 $ 818 $ 1,400 $ 1,639
------- ------- ------- -------
------- ------- ------- -------
BASIC EARNINGS PER SHARE $ 0.32 $ 0.36 $ 0.62 $ 0.72
DILUTED EARNINGS PER SHARE $ 0.30 $ 0.35 $ 0.58 $ 0.69
DIVIDENDS DECLARED PER SHARE $ 0.155 $ 0.145 $ 0.31 $ 0.29
AVERAGE NUMBER OF SHARES
OUTSTANDING (000's omitted):
Basic 2,291 2,256 2,276 2,282
Diluted 2,438 2,369 2,428 2,389
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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<PAGE>
FED ONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Six Months ended June 30, 1998
<TABLE>
<CAPTION>
ACCUMULATED
UNEARNED OTHER
COMMON COMPREHENSIVE
ADDITIONAL UNEARNED STOCK INCOME,
COMMON PAID-IN ESOP RETAINED TREASURY HELD NET OF
STOCK CAPITAL SHARES EARNINGS STOCK BY THE RRP INCOME TAX TOTAL
------ ---------- -------- -------- --------- ---------- ------------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
December 31, 1997 $ 282 $ 19,519 $ (790) $ 28,920 $ (7,049) $ (429) $ 129 $ 40,582
Net income -- -- -- 1,400 -- -- -- 1,400
Amortization of
Recognition and
Retention Plan -- -- -- -- -- 92 -- 92
Common stock issued
upon exercise of stock
options - 26,384 shares -- 110 -- (181) 389 -- -- 318
Cash dividend declared -- 10 -- (719) -- -- -- (709)
Principal repayment of
ESOP debt -- 141 56 -- -- -- -- 197
Change in net unrealized gain (loss)
on investment securities
available for sale, net of
income tax -- -- -- -- -- -- (10) (10)
------ -------- ------ -------- -------- ------ ------ --------
BALANCE AT
June 30, 1998 $ 282 $ 19,780 $ (734) $ 29,420 $ (6,660) $ (337) $ 119 $ 41,870
------ -------- ------ -------- -------- ------ ------ --------
------ -------- ------ -------- -------- ------ ------ --------
</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 SIX MONTHS ENDED
JUNE 30,
1998 1997
-------- --------
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 1,400 $ 1,639
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 30 80
Depreciation and amortization 561 470
Non-cash compensation expense related to ESOP benefit plan 197 98
Net gain on sale of:
Mortgage-backed securities held to maturity (22) --
Investment securities available for sale (56) --
Loans (15) --
(Increase) Decrease in accrued interest receivable 26 (125)
Increase (Decrease) in accrued expenses (626) 35
Increase (Decrease) in taxes payable 78 (63)
Other, net (86) (110)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,487 2,024
INVESTING ACTIVITIES:
Purchases of:
Certificates of deposit -- (695)
Investment securities held to maturity (31,481) (691)
Investment securities available for sale (2,940) (1,710)
Mortgage-backed securities held to maturity (9,857) (6,525)
Mortgage-backed securities available for sale (3,279) --
Loans (14,709) (27,774)
Premises and equipment, net (73) (625)
Proceeds from sales of:
Investment securities available for sale 39 --
Mortgage-backed securities held to maturity 2,285 --
Loans 2,158 --
Real estate owned 9 --
Principal repayments and maturities of:
Certificates of deposit 695 --
Investment securities held to maturity 12,572 1,384
Investment securities available for sale 10,543 2,639
Mortgage-backed securities held to maturity 21,669 10,401
Mortgage-backed securities available for sale 238 --
Net principal repayments on loans 10,995 4,714
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (1,136) (18,882)
FINANCING ACTIVITIES:
Increase in deposits, net 1,011 6,339
Increase in borrowings, net 5,059 8,726
Increase in advances by borrowers
for taxes and insurance 293 271
Proceeds from exercise of stock options 318 46
Purchase of treasury stock -- (1,747)
Cash dividends paid (740) (678)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,941 12,957
-------- --------
Increase (Decrease) in cash and cash equivalents 6,292 (3,901)
Cash and cash equivalents at beginning of period 9,164 9,939
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,456 $ 6,038
-------- --------
-------- --------
</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 six months
ended June 30, 1998 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
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standard No. 128, "Earnings Per Share" ("SFAS 128"). This
statement establishes standards for computing and presenting basic and
diluted earnings per share. It supersedes Accounting Principles Board
("APB") Opinion No. 15 that required the presentation of both primary and
fully diluted EPS.
Basic EPS is computed by dividing net income applicable to common stock by
the weighted average number of common shares outstanding during the period,
without considering any dilutive items. Diluted EPS is computed by dividing
net income applicable to common stock by the weighted average number of
common shares and common stock equivalents for items that are dilutive, net
of shares assumed to be repurchased using the treasury stock method at the
average share price for the Company's common stock during the period.
Common stock equivalents arise from the assumed conversion of outstanding
stock options and unvested RRP shares.
As required, all previously reported primary and fully diluted EPS have
been replaced with the presentation of basic and diluted EPS. The
computation of basic and diluted earnings per share is shown in the table
below.
-5-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic EPS computation:
Numerator - Net Income $ 725,000 $ 818,000 $1,400,000 $1,639,000
Denominator - Weighted average
common shares outstanding 2,291,006 2,255,960 2,275,914 2,282,145
Basic EPS $ .32 $ .36 $ .62 $ .72
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted EPS computation:
Numerator - Net Income $ 725,000 $ 818,000 $1,400,000 1,639,000
Denominator - Weighted average
common shares outstanding 2,291,006 2,255,960 2,275,914 2,282,145
Stock options 130,229 102,330 132,311 97,404
Unvested RRP shares 16,671 10,237 19,385 9,763
---------- ---------- ---------- ----------
Weighted average common 2,437,906 2,368,527 2,427,610 2,389,312
shares and common stock
equivalents
Diluted EPS $ .30 $ .35 $ .58 $ .69
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Shares outstanding for three and six months ended June 30, 1998 and
1997 do not include ESOP shares that were not committed to be released in
accordance with Statement of Position ("SOP") 93-6, "Employers' Accounting for
Employees Stock Ownership Plans".
5. DIVIDENDS ON COMMON STOCK
On May 20, 1998, the Company declared a quarterly cash dividend of $.155
per share payable on July 1, 1998 to shareholders of record on June 12,
1998.
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 for the six months ended June 30, 1998 consists of
(in thousands):
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
Federal $ 760 $ 1 $ 761
State 79 - 79
------ ----- -----
$ 839 $ 1 $ 840
------ ----- -----
------ ----- -----
</TABLE>
-6-
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 1998 are presented below (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for loan losses $ 274
Deposit-based intangibles 64
Other 82
-------
Total gross deferred tax assets $ 420
-------
Deferred tax liabilities:
Premises, plant and equipment (178)
Net unrealized gain on securities
available for sale (81)
Deferred loan costs (271)
-------
Total gross deferred tax liabilities (530)
-------
Net deferred tax liability $ (110)
-------
-------
</TABLE>
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.
-7-
<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.
Compensation expense related to the ESOP amounted to $108,000 and $197,000
for the three and six months ended June 30, 1998, respectively compared to
$52,000 and $98,000 for the three and six months ended June 30, 1997,
respectively. The fair value of unearned ESOP shares at June 30, 1998
totaled $3.6 million. At June 30, 1998, there were 5,641 ESOP shares
committed to be released and 73,368 suspense shares. ESOP shares totaling
33,859 were allocated as of June 30, 1998.
9. RECENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board ("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 is required to be disclosed in
the Company's annual financial statements as a separate statement or as a
component of either the Company's statement of income or statement of
changes in shareholders' equity. For the three and six months ended June
30, 1998, the Company's total comprehensive income was $675,000 and $1.4
million respectively compared to $879,000 and $1.7 million for the three
and six months ended June 30, 1997, respectively. Total
-8-
<PAGE>
comprehensive income for the three and six months ended June 30, 1998 is
comprised of net income of $725,000 and $1.4 million and other
comprehensive income (loss) of $(50,000) and $(10,000), net of tax,
respectively. The reduction in other comprehensive income during the three
and six months ended June 30, 1998 reflects a change in the fair market
value of investment securities available for sale and reclassification
adjustments during the respective time periods. Total comprehensive income
for the three and six months ended June 30, 1997 is comprised of net income
of $818,000 and $1.6 million and other comprehensive income of $61,000 and
$36,000, net of tax, respectively. Other comprehensive income consists of
unrealized gains and losses on investment securities and mortgage-backed
securities available for sale. The reclassification adjustments for the
three and six months ended June 30, 1998 were due to the sale of investment
securities available for sale. There were no reclassification adjustments
for the three and six months ended June 30, 1997, as there were no sales of
securities during these time periods.
In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities on the balance sheet and measure those
instruments at fair value. This statement is effective January 1, 2000, and
need not be applied retroactively to financial statements of prior periods.
The statement may be adopted early, as of the beginning of any quarter
beginning with the third quarter of 1998. The Company does not anticipate
that the adoption of SFAS 133 would have a material effect on its financial
position or results of operation.
-9-
<PAGE>
FED ONE BANCORP, INC. AND SUBSIDIARY
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
---------------- -----------------
(Dollars in Thousands)
<S> <C> <C>
FINANCIAL CONDITION DATA:
Average interest-earnings assets $ 357,110 $ 342,121
Average interest-bearing liabilities 316,997 303,557
Net average interest-earning assets 40,113 38,564
Non-performing assets 1,357 1,323
Non-performing loans 1,347 1,309
Allowance for loan losses 1,516 1,481
Average interest-earning assets to
average interest-bearing liabilities 112.65% 112.70%
Allowance for loan losses to
non-performing loans 112.55% 113.14%
Allowance for loan losses to
total loans 0.90% 0.89%
Non-performing loans to total loans 0.80% 0.78%
Non-performing assets to total assets 0.36% 0.36%
Cumulative one-year GAP 0.43% 0.79%
Shareholders' equity to assets 11.20% 11.06%
Efficiency ratio 60.30% 55.45%
Coverage ratio 148.89% 163.95%
Number of banking facilities 12 11
</TABLE>
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1998 (1) 1997 (1) 1998 (1) 1997 (1)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
SELECTED OPERATING ACTIVITIES
Return on average assets 0.78% 0.93% 0.76% 0.94%
Return on average equity 7.02% 8.36% 6.83% 8.29%
Net interest margin 3.07% 3.46% 3.13% 3.51%
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
---------------- -----------------
<S> <C> <C>
PER SHARE DATA:
Basic earnings per share (2) $ 0.32 $ .62
Diluted earnings per share (3) 0.30 .58
Book value per share 17.98 17.98
Tangible book value per share (2) 17.30 17.30
Market price per share:
High for the quarter/six months 45.50 45.50
Low for the quarter/six months 36.00 27.75
Close 6/30/98 45.50 45.50
Cash dividend declared per share 0.155 0.31
Average number of shares outstanding
Basic (2) 2,291,006 2,275,914
Diluted (3) 2,437,906 2,427,610
</TABLE>
(1) Amounts are annualized.
(2) Amounts calculated exclude ESOP shares not committed to be released.
(3) Amounts calculated exclude ESOP shares not committed to be released and
include common stock equivalents.
-10-
<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.
On February 18, 1998, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") with United Bankshares, Inc. ("United"), pursuant to which
the Company will be merged with and into a wholly-owned subsidiary of United.
The agreement provides, among other things, that as a result of the merger, each
outstanding share of common stock of the Company (subject to certain exceptions)
will be converted into the right to receive 1.50 (subject to adjustment) of a
newly-issued share of United common stock. Pursuant to the adjustments set forth
in the Merger Agreement and in light of a two-for-one stock split effected in
the form of a 100% stock dividend declared by United and paid March 27, 1998 to
shareholders of record of United as of March 13, 1998, the exchange ratio
expressed in the Merger Agreement, 0.75 of a share has been adjusted to 1.5
shares of United common stock (the "exchange ratio"). The exchange ratio also is
subject to potential adjustment at the election of United in the event that the
Company elects to terminate the agreement because the average price of the
United common stock during a specified period falls below $19.47 and this
decline in value is 20% greater than the percentage decline in the weighted
average price of the common stocks of a group of similar financial institutions.
The proposed merger is expected to close early in the fourth quarter of 1998.
The merger is subject to the approval of the Company's shareholders and the
approval by United's shareholders of an amendment to United's articles of
incorporation which increases United's authorized common stock, as well as the
receipt of all required regulatory approvals.
Financial Condition
Total assets increased $7.1 million or 1.9% to $373.8 million at June 30, 1998
compared to $366.8 million at December 31, 1997. Short-term investments and
investment securities held to maturity were $13.9 million and $44.1 million,
respectively, at June 30, 1998 compared to $7.7 million and $25.2 million,
respectively at December 31, 1997. The $6.2 million increase in short-term
investments was the result of proceeds reinvested from calls and
-11-
<PAGE>
maturities of investment securities and repayments of loans and mortgage-backed
securities of which those reinvestments were partially offset by the use of such
funds to also purchase investment securities and loans. The $18.9 million
increase in investment securities was the result of the use of such available
funds. At June 30, 1998, the Company had $8.8 million of investment securities
classified as available for sale compared to $16.4 million at December 31, 1997.
The after-tax net unrealized gain on these securities amounted to $119,000 at
June 30, 1998, which is reflected as a separate component of shareholders'
equity. The reduction in available for sale securities was primarily the result
of calls and maturities. Mortgage-backed securities classified as available for
sale were $3.0 million at June 30, 1998. Mortgage-backed securities, held to
maturity, decreased $14.2 million to $123.2 million at June 30, 1998 compared to
$137.4 million at December 31, 1997 primarily as the result of maturities and
repayments which were used to purchase investment securities and loans. Also in
June 1998 the Company sold $2.3 million of its mortgage-backed securities held
to maturity which had paid down at least 85% of their original principal
balances. Loans receivable increased $1.5 million or .92% to $167.7 million at
June 30, 1998 compared to $166.1 million at December 31, 1997, as originations
and purchases exceeded principal repayments. The Company used repayments and
FHLB advances to purchase approximately $14.7 million of loans during the first
six months of 1998 of which $11.9 million were adjustable rate residential
mortgage loans. The majority of the remaining purchases were fixed rate
residential mortgage loans and the guaranteed portion of Small Business
Administration ("SBA") and Farmers Home Administration ("FmHA") loans. In June
1998 the Company sold $1.9 million of its 30 year fixed rate residential
mortgage loans.
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 primarily 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. A
proposed rule was published in the Federal Register on July 3, 1997 to eliminate
the dealer portion of the Title I Property Improvement and Manufactured Home
Loan Insurance Program. Subsequently, in an address made on September 18, 1997
to the Home Improvement Loan Association ("HILA") 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. The Company has formally responded in opposition to the proposed
rule. As of June 1998 no decision has been made by HUD regarding the dealer
portion of the Title I program. The Company has currently $35.5 million in Title
I loans outstanding at a weighted average rate of 11.1%. The Company currently
originates approximately $1.0 million of this type of loan product on a monthly
basis.
Total liabilities increased by $5.8 million to $332.0 million at June 30, 1998
compared to $326.2 million at December 31, 1997. Deposits increased $1.0 million
or .39% to $259.9 million at June 30, 1998 compared to $258.9 million at
December 31, 1997. Deposits increased primarily due to the Company being
competitively priced in money market accounts during the first six months of
1998. Borrowed funds increased $5.1 million or 7.8% to $70.2 million at June 30,
1998 compared to $65.1 million at December 31, 1997. Advances from the FHLB were
used to fund the purchase of loans and investment securities.
-12-
<PAGE>
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 opened a third 7 Day Bank Center in Wheeling, WV in January of 1998. The
Company experienced an increase in operating expenses related to these start-up
operations. The expenses caused a reduction in net income and earnings per share
during the six months ended June 30, 1998 compared to the same period in 1997.
Although there are costs associated with establishing the 7 Day Bank Centers,
these branches will add convenience to the Bank's existing customer base while
giving the Bank the opportunity to expand its franchise by 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 increased $1.3 million to $41.9 million at June 30,
1998 compared to $40.6 million at December 31, 1997. The increase was primarily
the result of net income of $1.4 million and a decrease in treasury stock of
$389,000. A reduction in equity was caused by the Company declaring quarterly
cash dividends of approximately $354,000 and $355,000 for the quarters ended
March 31, 1998 and June 30, 1998, respectively.
Results of Operations
Net Income
Net income was $725,000 or $.30 per diluted share for the three months ended
June 30, 1998 compared to $818,000 or $.35 per diluted share for the three
months ended June 30, 1997. The $93,000 decrease in net income for the three
months ended June 30, 1998 compared to the same period in 1997 was primarily the
result of a decrease in net interest income of $192,000 and an increase in
non-interest expense of $115,000 both of which were partially offset by an
increase in non-interest income of $132,000, a decrease in provision for loan
losses of $50,000 and a decrease in provision for income taxes of $32,000. Net
income was $1.4 million or $.58 per diluted share for the six months ended June
30, 1998 compared to $1.6 million or $.69 per diluted share for the same period
in 1997. The $239,000 decrease for the six month period ended June 30, 1998
compared to the year-earlier period was primarily the result of a decrease to
net interest income of $304,000 and an increase in non-interest expense of
$268,000 both of which were partially offset by an increase in non-interest
income of $144,000, a decrease in provision for loan losses of $50,000 and a
decrease in provision for income taxes of $139,000.
Interest Income
Interest income amounted to $6.6 million for the three month period ended June
30, 1998, compared to $6.4 million during the same period in 1997. The $201,000
increase was due to an increase in average interest-earning assets of $18.2
million offset by a decrease of 16 basis points in the weighted average rate on
interest-earning assets. The increase in average balances occurred in short-term
investments, loans receivable and mortgage-backed securities held to maturity
and available for sale and was partially offset by a reduction in investment
securities held to maturity and available for sale. The decrease in the weighted
average rate occurred in investment securities, loans and mortgage-backed
securities, which was partially offset by an increase in the rate on short-term
investments. Interest income amounted to $13.2 million for the six months ended
June 30, 1998 compared to $12.6 million for the same
-13-
<PAGE>
time period in 1997. The $604,000 increase was due to an increase in average
interest-earning assets of $21.1 million offset by a decrease of 11 basis points
in the weighted average rate on interest-earning assets. The increase in average
balances was the result of a $529,000 increase in short-term investments, a
$26.3 million increase in loans receivable and a $6.2 million increase in
mortgage-backed securities held to maturity and available for sale and was
partially offset by a reduction of $11.9 million in investment securities held
to maturity and available for sale. The decrease in the weighted average rate
occurred in investment securities, loans and mortgage-backed securities which
was partially offset by an increase in the rate in short-term investments. The
majority of the increase in loans receivable was due to the purchase of
adjustable and fixed rate residential mortgage loans partially offset by
principal repayments and a $1.9 million sale of 30 year fixed rate residential
mortgage loans in June 1998. The increase in the average balance of
mortgage-backed securities was due to the purchase of securities partially
offset by principal repayments and a $2.3 million sale of mortgage-backed
securities held to maturity which had paid down at least 85% of their original
principal balances. The decrease in the average balance of investment securities
was due to maturities and calls, and the sale of FNMA stock available for sale,
which decrease was partially offset by purchases of investment securities.
Interest Expense
Interest expense amounted to $3.8 million for the three month period ended June
30, 1998, compared to $3.4 million during the same period in 1997. This $393,000
increase in interest expense was due to a $16.4 million increase in the balance
of average interest-bearing liabilities and an increase of 26 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 yield increases in money market accounts,
certificates of deposit and borrowed funds. The yields of passbook accounts
remained the same. Interest expense amounted to $7.6 million for the six month
period ended June 30, 1998 compared to $6.7 million for the same period in 1997.
This $908,000 increase in interest expense was due to a $20.0 million increase
in the balance of average interest-bearing liabilities and an increase of 29
basis points in the weighted average cost of funds. Average deposit balances
increased $7.4 million for the six month period ended June 30, 1998 compared to
the same period in 1997 as a result of the Company being competitively priced in
certificates of deposit and money market accounts which increases were partially
offset by a decrease in the average balance of passbook accounts. Average
borrowed fund balances increased $12.6 million for the six month period ended
June 30, 1998 compared to the same period in 1997 due to the Company increasing
its FHLB advances.
Net Interest Income
Net interest income amounted to $2.8 million and $5.6 million for the three and
six months ended June 30, 1998, respectively compared to $2.9 million and $5.9
million during the same time period in 1997. Net interest income decreased
mainly because of decreases in the weighted average rates earned on
interest-earning assets and increases in the weighted average cost of funds.
Average interest-earning assets increased $18.2 million and $21.1 million during
the three and six months ended June 30, 1998, respectively compared to the
year-earlier periods. Average interest-bearing liabilities increased $16.4
million and $20.0 million during the same comparative time periods. A shift from
lower yielding assets into higher yielding assets for the six months ended June
30, 1998 compared to the year-earlier period was more than offset by a
corresponding shift from lower yielding deposits into higher
-14-
<PAGE>
yielding deposits and borrowings during the same comparative time period. The
net interest margin declined 39 and 38 basis points to 3.07% and 3.13% for the
three and six months ended June 30, 1998 respectively compared to 3.46% and
3.51% for the year-earlier periods. The decline in the net interest margin for
the three and six months ended June 30, 1998, compared to the year-earlier
periods was mainly due to an increase in the cost of funds during this time
period. Also, investments and loans were purchased at yields that were lower
than the yields in the existing portfolio, due to the current market conditions.
Provision for Loan Losses
The provision for loan losses decreased to $30,000 for the six month period
ended June 30, 1998 compared to $80,000 during the same time period in 1997.
This reflected management's evaluation of the underlying credit risk of the loan
portfolio and the level of allowance for loan losses.
The allowance for loan losses amounted to $1.5 million or .90% and 112.55% of
total loans and total non-performing loans, respectively, at June 30, 1998, as
compared to $1.5 million or .89% and 113.14% , respectively, at December 31,
1997.
Non-performing loans (non-accrual loans and accruing loans 90 days or more
overdue) were $1.3 million and $1.3 million at June 30, 1998 and December 31,
1997, respectively, which represented .80% and .78% of the Company's total
loans, respectively. The Company's real estate owned, which consists of real
estate acquired through foreclosure or by deed-in-lieu thereof, amounted to
$10,000 and $14,000 at June 30, 1998 and December 31, 1997, respectively. As a
percentage of total assets, the Company's total non-performing assets amounted
to $1.4 million or .36% at June 30, 1998 and $1.3 million or .36% at December
31, 1997.
Non-Interest Income
Non-interest income amounted to $273,000 and $435,000 for the three and six
month period ended June 30, 1998, as compared to $141,000 and $291,000 for the
same time period in 1997. The increase of $144,000 or 49.5% for the six month
period ended June 30, 1998 compared to the same period in 1997 was due primarily
to net gains of $15,000 on the sale of loans, $22,000 on the sale of
mortgaged-backed securities held to maturity (which had paid down 85% of their
original principal balances) and $56,000 on the sale of investment securities
available for sale. In addition there were increases in ATM and debit card fees
and other deposit charges.
Non-interest Expense
Non-interest expense increased $115,000 for the three month period ended June
30, 1998 compared to the same time period in 1997, as a result of increases in
salaries and employee benefits of $99,000, premises and equipment of $62,000 and
data processing expense of $5,000. These increases were partially offset by
decreases in goodwill amortization expense of $10,000 and other expenses of
$37,000. Non-interest expense increased $268,000 for the six month period ended
June 30, 1998 compared to the same period in 1997 primarily as a result of
increases in salaries and employee benefits of $173,000, premises and equipment
expense of $103,000, data processing expense of $13,000 and other expense of
$8,000. These increases were partially offset by decreases in goodwill
amortization of $20,000 and REO expense of $8,000.
The increase in non-interest expense was primarily due to the three new 7 day
Bank Centers. Also, there was an increase in compensation expense associated
with the Company's benefit
-15-
<PAGE>
plans due to increases in the market price of Fed One Bancorp stock during the
six months ended June 30, 1998 compared to the year-earlier period.
Provision for Income Taxes
Provisions for income taxes were $431,000 and $840,000 for the three and six
months ended June 30, 1998 and $463,000 and $979,000 for the three and six
months periods ended June 30, 1997, respectively. The Company's effective tax
rate amounted to 37.3% and 36.1% during the three months ended June 30, 1998 and
1997, respectively and 37.5% and 37.4% during the six months ended June 30, 1998
and 1997. Income tax expense decreased primarily due to the decrease in pre-tax
income.
Liquidity
The Bank is required to maintain minimum levels of liquid assets as defined by
regulations of the Office of Thrift Supervision ("OTS"). This requirement, which
varies from time to time depending upon economic conditions and deposit flows,
is based upon a percentage of deposits and short-terms borrowings, In November
1997, the OTS revised its liquidity rule to lower the minimum requirement from
5% to 4%, the lowest level permitted by current law and eliminate the 1%
short-term liquidity requirement. The OTS also expanded the types of investments
considered to be liquid assets and removed the requirement that certain
investments must mature within 5 years in order to qualify as a liquid asset.
The Bank historically has maintained a level of liquid assets in excess of
regulatory requirements. The Bank's liquidity ratio averaged 55.7% for the
second quarter of 1998 compared to 29.6% for the fourth quarter of 1997.
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 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 June 30, 1998, the Bank meets all
capital adequacy requirements to which it is subject.
As of June 30, 1998, the Bank was well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum Tier I (leverage), Tier I risk-based and total
risk-based capital ratios of 5.0%, 6.0%, and 10.0%, respectively. At June 30,
1998, the Bank's Tier I (leverage), Tier I risk-based and total risk-based
capital ratios amounted to 10.09%, 24.38% and 25.32%, respectively.
-16-
<PAGE>
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 and
operationally possible to assure year 2000 compliance, it is to a large 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 or business disruption to the Company which are currently unknown. The
Company does not itself internally program any major operating system of the
Company; therefore, the Company does not expect to incur material costs for
remediation efforts.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are presented at
December 31, 1997 in Item 7A of the Company's Annual Report on Form 10-K, filed
with the SEC on March 31, 1998. Management believes there have been no material
changes in the Company's market risk since December 31, 1997.
-17-
<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 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on April 22, 1998. The
results of the vote on matters submitted to shareholders at the meeting were
previously reported in the Company's Quarterly Report on Form 10-Q for the three
months ended March 31, 1998.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1998.
-18-
<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: August 7, 1998 By: /s/Alan E. Groover
----------------------- ---------------------------------
Alan E. Groover
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 7, 1998 By: /s/Lisa K. DiCarlo
----------------------- ---------------------------------
Lisa K. DiCarlo
Senior Vice President
and Treasurer
(Principal Financial and
Accounting Officer)
-19-
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