<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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------- --------
Commission File 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--2,394,903 shares as of May 7, 1998.
<PAGE>
FED ONE BANCORP, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at 1
March 31, 1998 (unaudited) and December 31, 1997
Consolidated Statements of Income for the Three Months ended March 31, 1998 2
and 1997 (unaudited)
Consolidated Statement of Changes in Shareholders' Equity for the Three Months 3
ended March 31, 1998 (unaudited)
Consolidated Statements of Cash Flows for the Three Months ended March 31, 4
1998 and 1997 (unaudited)
Notes to Unaudited Consolidated Financial Statements 5
Financial Highlights 10
Item 2. Management's Discussion and Analysis of Financial Condition and 11
Results of Operations
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of
Security Holders 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>
MARCH 31, DECEMBER 31,
1998 1997
------------------ --------------------
ASSETS (Dollars In Thousands Except For Shares)
<S> <C> <C>
Cash on hand and noninterest-earning
deposits in other institutions $ 1,585 $ 2,309
Short-term investments:
Interest-earning deposits in other institutions 12,376 6,855
Certificates of deposit 893 893
Investment securities held to maturity
(market value of $28,148 and $25,406) 28,108 25,236
Investment securities available for sale
(cost of $10,071 and $16,185) 10,359 16,399
Mortgage-backed securities held to maturity
(market value of $135,814 and $139,367) 133,754 137,376
Mortgage-backed securities available for sale 1,953 -
(cost of $1,960 and $0)
Loans receivable, net of allowance for loan
losses of $1,512 and $1,481 167,383 166,137
Real estate owned 20 14
Premises and equipment, net 6,454 6,533
Accrued interest receivable:
Investment securities 401 695
Mortgage-backed securities 928 949
Loans receivable 1,261 1,299
Prepaid expenses and other assets 2,192 2,081
------------- ------------
TOTAL ASSETS $ 367,667 $ 366,776
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits $ 264,096 $ 258,913
Borrowed funds 59,784 65,096
Advances by borrowers for taxes and insurance 811 635
Accrued interest payable 501 583
Income taxes payable 391 99
Accrued expenses and other liabilities 756 868
------------- ------------
TOTAL LIABILITIES 326,339 326,194
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 March 31, 1998
and December 31, 1997 282 282
Additional paid-in capital 19,694 19,519
Unearned employee stock ownership plan (ESOP) shares (762) (790)
Retained earnings - substantially restricted 29,095 28,920
Treasury stock at cost: 424,483 and 443,606 shares
at March 31, 1998 and December 31, 1997, respectively (6,767) (7,049)
Unearned common stock held by the recognition
and retention plan (RRP) (383) (429)
Accumulated other comprehensive income, net of income tax 169 129
------------- ------------
TOTAL SHAREHOLDERS' EQUITY 41,328 40,582
------------- ------------
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 367,667 $ 366,776
------------- ------------
------------- ------------
</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
MARCH 31,
--------------
1998 1997
------ ------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C>
INTEREST INCOME:
Loans receivable........................... $3,609 $3,053
Mortgage-backed securities................. 2,228 2,124
Investment securities...................... 654 883
Short-term investments..................... 102 130
------ ------
TOTAL INTEREST INCOME...................... 6,593 6,190
INTEREST EXPENSE:
Deposits................................... 2,830 2,553
Borrowed funds............................. 925 687
------ ------
TOTAL INTEREST EXPENSE..................... 3,755 3,240
NET INTEREST INCOME.......................... 2,838 2,950
Provision for loan losses.................... 30 30
------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES..................................... 2,808 2,920
NON-INTEREST INCOME:
Fees and service charges................... 143 133
Other...................................... 19 17
------ ------
TOTAL NON-INTEREST INCOME.................. 162 150
NON-INTEREST EXPENSE:
Salaries and employee benefits............. 1,059 985
Premises and equipment expense............. 370 329
Data processing............................ 53 45
Federal insurance premiums................. 39 39
Amortization expense....................... 60 70
REO expense................................ 1 6
Other...................................... 304 259
------ ------
TOTAL NON-INTEREST EXPENSE................. 1,886 1,733
INCOME BEFORE INCOME TAXES................... 1,084 1,337
Provision for income taxes................... 409 516
------ ------
NET INCOME................................... $ 675 $ 821
------ ------
------ ------
BASIC EARNINGS PER SHARE..................... $ 0.30 $ 0.36
DILUTED EARNINGS PER SHARE................... $ 0.28 $ 0.34
DIVIDENDS DECLARED PER SHARE................. $0.155 $0.145
AVERAGE NUMBER OF SHARES OUTSTANDING (000's
omitted):
Basic...................................... 2,261 2,309
Diluted.................................... 2,425 2,410
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
FED ONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Three Months ended March 31, 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
------ ---------- -------- -------- -------- ---------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE AT
December 31, 1997............. $282 $19,519 $(790) $28,920 $(7,049) $(429) $129 $40,582
Net income.................... -- -- -- 675 -- -- -- 675
Amortization of Recognition
and Retention Plan.......... -- -- -- -- -- 46 -- 46
Common stock issued upon
exercise of stock options--
19,123 shares............... -- 109 -- (141) 282 -- -- 250
Cash dividend declared........ -- 5 -- (359) -- -- (354)
Principal repayment of ESOP
debt........................ -- 61 28 -- -- -- -- 89
Purchase of Treasury Stock--
none........................ -- -- -- -- -- -- -- --
Change in net unrealized gain
on investment securities
available for sale, net of
income tax.................. -- -- -- -- -- -- 40 40
------ ---------- -------- -------- -------- ----- ----- -------
BALANCE AT March 31, 1998..... $282 $19,694 $(762) $29,095 $(6,767) $(383) $169 $41,328
------ ---------- -------- -------- -------- ----- ----- -------
------ ---------- -------- -------- -------- ----- ----- -------
</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 THREE
MONTHS ENDED
MARCH 31,
----------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income................................. $ 675 $ 821
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses................ 30 30
Depreciation and amortization............ 273 226
Non-cash compensation expense related to
ESOP benefit............................ 89 46
Decrease in accrued interest receivable.. 353 55
Decrease in accrued expenses............. (198) (41)
Increase in taxes payable................ 266 457
Other, net............................... (148) (20)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES.... 1,340 1,574
INVESTING ACTIVITIES:
Purchases of:
Certificates of deposit.................. -- --
Investment securities held to maturity... (12,491) (494)
Investment securities available for sale. (2,887) (50)
Mortgage-backed securities held to
maturity............................... (6,057) (5,156)
Mortgage-backed securities available for
sale................................... (2,010) --
Loans.................................... (6,185) (13,005)
Premises and equipment, net.............. (55) (460)
Proceeds from sales of:
Loans.................................... 124 --
Real estate owned........................ -- --
Principal repayments and maturities of:
Certificates of deposit.................. -- --
Investment securities held to maturity... 9,621 557
Investment securities available for sale. 9,001 2,548
Mortgage-backed securities held to
maturity............................... 9,644 5,807
Mortgage-backed securities available for
sale................................... 50 --
Net principal repayments on loans....... 4,773 2,753
------- -------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES................................. 3,528 (7,500)
FINANCING ACTIVITIES:
Increase in deposits, net.................. 5,183 3,559
Increase (decrease) in borrowings, net..... (5,312) 21
Increase in advances by borrowers for taxes
and insurance............................ 176 95
Proceeds from exercise of stock options.... 250 14
Purchase of treasury stock................. -- (342)
Cash dividends paid........................ (368) (341)
------- -------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES................................. (71) 3,006
------- -------
Decrease in cash and cash equivalents........ 4,797 (2,920)
Cash and cash equivalents at beginning of
period..................................... 9,164 9,939
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD... $13,961 $ 7,019
------- -------
------- -------
</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 months ended March 31, 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"
("SFAS128"). 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
----------------------
March 31,
----------------------
1998 1997
---- ----
<S> <C> <C>
Basic EPS computation:
Numerator - Net Income ....................... $ 675,000 $ 821,000
Denominator - Weighted average
common shares outstanding .................. 2,260,654 2,308,620
Basic EPS ...................................... $ .30 $ 0.36
---------- ----------
---------- ----------
Diluted EPS computation:
Numerator - Net Income ....................... $ 675,000 $ 821,000
Denominator - Weighted average
common shares outstanding .................. 2,260,654 2,308,620
Stock options .............................. 141,795 92,478
Unvested RRP shares ........................ 22,099 9,289
---------- ----------
Weighted average common shares and
common stock equivalents ................... 2,424,548 2,410,387
Diluted EPS .................................... $ .28 $ 0.34
---------- ----------
---------- ----------
</TABLE>
Shares outstanding for three months ended March 31, 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 March 18, 1998, the Company declared a quarterly cash dividend of
$.155 per share payable on April 21, 1998 to shareholders of record
on March 31, 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 (benefit) for the three months ended March
31, 1998 consists of (in thousands):
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
Federal ........ $ 376 $ (9) $ 367
State .......... 45 (3) 42
----- ----- -----
$ 421 $ (12) $ 409
----- ----- -----
----- ----- -----
</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 March 31, 1998 are presented below (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for loan losses ................. $ 280
Deposit-based intangibles ................. 59
Other ..................................... 81
-----
Total gross deferred tax assets .............. $ 420
-----
Deferred tax liabilities:
Premises, plant and equipment ............. (176)
Net unrealized gain on securities
available for sale ..................... (112)
Deferred loan costs ....................... (262)
-----
Total gross deferred tax liabilities ........ (550)
-----
Net deferred tax liability ................... $(130)
-----
-----
</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 $89,000 and
$46,000 for the three months ended March 31, 1998 and 1997,
respectively. The fair value of unearned ESOP shares at March 31,
1998 totaled $2.9 million. At March 31, 1998, there were 2,820 ESOP
shares committed to be released and 76,189 suspense shares. ESOP
shares totaling 33,859 were allocated as of March 31, 1998.
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 and SFAS
127 has not had a material effect on the Company's financial position
or results of operations.
8
<PAGE>
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 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 months ended March 31, 1998 and 1997, the Company's
total comprehensive income was $715,000 and $796,000, respectively.
Total comprehensive income is comprised of net income of $675,000 and
$821,000 and other comprehensive income of $40,000 and $(25,000), net
of tax, respectively. Other comprehensive income consists of
unrealized gains and losses on investment securities and
mortgage-backed securities available for sale. There were no
reclassification adjustments for the three months ended March 31,
1998 and 1997.
9
<PAGE>
FED ONE BANCORP, INC. AND SUBSIDIARY
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1998 1997
------------------ -------------
FINANCIAL CONDITION DATA: (DOLLARS IN THOUSANDS)
<S> <C> <C>
Average interest-earning assets.............. $355,581 $342,121
Average interest-bearing liabilities......... 316,113 303,557
Net average earning assets................... 39,468 38,564
Non-performing assets........................ 1,068 1,323
Non-performing loans......................... 1,048 1,309
Allowance for loan losses.................... 1,512 1,481
Average interest-earning assets to average
interest-bearing liabilities............... 112.49% 112.70%
Allowance for loan losses to non-performing
loans...................................... 144.27% 113.14%
Allowance for loan losses to total loans..... 0.90% 0.89%
Non-performing loans to total loans.......... 0.62% 0.78%
Non-performing assets to total assets........ 0.29% 0.36%
Cumulative one-year GAP...................... 0.93% 0.79%
Shareholders(1) equity to assets............. 11.24% 11.06%
Efficiency ratio............................. 60.87% 55.45%
Coverage ratio............................... 150.48% 163.95%
Number of banking facilities................. 12 11
</TABLE>
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
MARCH 31,
-------------------
SELECTED OPERATING ACTIVITIES: 1998 (1) 1997 (1)
-------- --------
<S> <C> <C>
Return on average assets..................... 0.73% 0.96%
Return on average equity..................... 6.65% 8.23%
Net interest margin.......................... 3.19% 3.56%
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED
PER SHARE DATA: MARCH 31, 1998
- --------------------------------------------- ------------------
<S> <C>
Basic earnings per share (2)................. $ 0.30
Diluted earnings per share (3)............... 0.28
Book value per share (2)..................... 17.83
Tangible book value per share (2)............ 17.12
Market price per share:
High for the quarter....................... 37.50
Low for the quarter........................ 27.75
Close 3/31/98.............................. 36.25
Cash dividend declared per share............. 0.155
Average number of shares outstanding:
Basic (2).................................. 2,260,654
Diluted (3)................................ 2,242,548
</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 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. 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 $891,000 or .24% to $367.7 million at March
31, 1998 compared to $366.8 million at December 31, 1997. Short-term
investments and investment securities held to maturity were $13.3
million and $28.1 million, respectively, at March 31, 1998 compared
to $7.7 million and $25.2 million, respectively at December 31, 1997.
The $5.5 million increase in short-term investments was the result of
calls and maturities of investment securities and repayments of loans
and mortgage-backed securities which were partially offset by the use
of such funds to purchase loans and investment securities. The $2.3
million increase in investment securities was the result of the use
of available funds. At March 31, 1998, the Company had $10.4 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
11
<PAGE>
securities amounted to $169,000 at March 31, 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 $2.0 million at March 31, 1998. Mortgage-backed securities,
held to maturity decreased $3.6 million to $133.8 million at March
31, 1998 compared to $137.4 million at December 31, 1997 as the
result of maturities and repayments which were used to purchase loans
and investment securities. Loans receivable increased $1.2 million or
.75% to $167.4 million at March 31, 1998 compared to $166.1 million
at December 31, 1997, as originations and purchases exceeded
principal repayments. The Company purchased approximately $6.2
million of loans during the first three months of 1998 of which $4.0
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.
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. The Company has currently $36.0 million in Title I
loans outstanding at a weighted average rate of 11.1%. The Company
currently originates approximately $730,000 of this type of loan
product on a monthly basis.
Total liabilities increased by $145,000 to $326.3 million at March
31, 1998 compared to $326.2 million at December 31, 1997. Deposits
increased $5.2 million or 2.0% to $264.1 million at March 31, 1998
compared to $258.9 million at December 31, 1997. Deposits increased
primarily due to the Company being competitively priced in
certificates of deposit and money market accounts during the first
three months of 1998. Borrowed funds decreased $5.3 million or 8.2%
to $59.8 million at March 31, 1998 compared to $65.1 million at
December 31, 1997. The decrease in borrowed funds was due to the
excess principal repayments received on loans and mortgage-backed
securities and maturities and calls of investment securities.
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.
Management expects an increase in operating expenses
12
<PAGE>
related to this start-up operation. The expenses caused a reduction
in net income and earnings per share during the first quarter of 1998
compared to the first quarter of 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 $746,000 to $41.3 million at
March 31, 1998 compared to $40.6 million at December 31, 1997. The
increase was primarily the result of net income of $675,000, an
increase of $40,000 in accumulated other comprehensive income and a
decrease in treasury stock of $282,000. An additional reduction in
equity was caused by the Company declaring quarterly cash dividends
of approximately $354,000 for the quarter ended March 31, 1998.
Results of Operations
Net Income
Net income was $675,000 or $.28 per diluted share for the three
months ended March 31, 1998 compared to $821,000 or $.34 per diluted
share for the three months ended March 31, 1997. The $146,000
decrease in net income for the three months ended March 31, 1998
compared to the same period in 1997 was primarily the result of a
decrease in net interest income of $112,000 and an increase in
non-interest expense of $153,000 which were partially offset by an
increase in non-interest income of $12,000 and a decrease in
provision for income taxes of $107,000.
Interest Income
Interest income amounted to $6.6 million for the three month period
ended March 31, 1998, compared to $6.2 million during the same period
in 1997. The $403,000 increase was due to an increase in average
interest-earning assets of $24.1 million offset by a decrease of 5
basis points in the weighted average yield on interest-earning
assets. The increase in average balances occurred in loans receivable
and mortgage-backed securities held to maturity and available for
sale and was partially offset by reductions in short-term investments
and investment securities held to maturity and available for sale.
The decrease in the weighted average yield occurred in investment
securities, loans and mortgage-backed securities, which was partially
offset by an increase in the yield on short-term investments.
Interest Expense
Interest expense amounted to $3.8 million for the three month period
ended March 31, 1998, compared to $3.2 million during the same period
in 1997. This $515,000 increase in interest expense was due to a
$23.7 million increase in the balance of average interest-bearing
liabilities and an increase of 32 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 money market accounts, certificates of deposit and
borrowed funds offset by a decrease in the cost of funds in passbook
accounts.
13
<PAGE>
Net Interest Income
Net interest income amounted to $2.8 million for the three months
ended March 31, 1998, compared to $3.0 million during the same time
period in 1997. Average interest-earning assets increased $24.1
million during the three months ended March 31, 1998 compared to the
year-earlier period. Average interest-bearing liabilities increased
$23.7 million during the same comparative time periods. A shift from
lower yielding assets into higher yielding assets for the three
months ended March 31, 1998 compared to the year-earlier period was
more than offset by a corresponding shift from lower yielding
deposits into higher yielding deposits and borrowings during the same
comparative time period. The net interest margin declined 37 basis
points to 3.19% for the three months ended March 31, 1998 from 3.56%
for the year-earlier period. The decline in the net interest margin
for the three months ended March 31, 1998 compared to the
year-earlier period was mainly due to an increase in the cost of
funds during this time period. Also, loans were purchased at yields
that were lower than the yields in the existing portfolio.
Provision for Loan Losses
The provision for loan losses remained the same for the three month
period ended March 31, 1998 compared to 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
144.27% of total loans and total non-performing loans, respectively,
at March 31, 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 $1.0 million and $1.3 million at March 31, 1998
and December 31, 1997, respectively, which represented .62% 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 $20,000 and $14,000 at March 31,
1998 and December 31, 1997, respectively. As a percentage of total
assets, the Company's total non-performing assets amounted to $1.1
million or .29% at March 31, 1998 and $1.3 million or .36% at
December 31, 1997.
Non-Interest Income
Non-interest income amounted to $162,000 for the three month period
ended March 31, 1998, as compared to $150,000 for the same time
period in 1997. The increase of $12,000 or 8% for the three month
period ended March 31, 1998 compared to the same period in 1997 was
due primarily to an increase in ATM and debit card fees.
Non-interest Expense
Non-interest expense increased $153,000 for the three month period
ended March 31, 1998 compared to the same time period in 1997, as a
result of increases in salaries and employee benefits of $74,000,
premises and equipment of $41,000, data processing expense of $8,000
and other expense of $45,000. These increases were partially offset
by a decrease in goodwill amortization expense of $10,000 and other
forms of personnel expense. 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 plans due to increases in the market price of Fed One Bancorp
stock during the three months ended March 31, 1998 compared to the
year-earlier period.
14
<PAGE>
Provision for Income Taxes
Provisions for income taxes were $409,000 and $516,000 for the three
months ended March 31, 1998 and 1997, respectively. The Company's
effective tax rate amounted to 37.7% and 38.6% during the three
months ended March 31, 1998 and 1997, respectively. 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 57.4% for the first
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 March 31, 1998, the Bank meets all capital
adequacy requirements to which it is subject.
As of March 31, 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 March 31, 1998, the Bank's Tier I
(leverage), Tier I risk-based and total risk-based capital ratios
amounted to 10.03%, 24.11% and 25.06%, 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 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
15
<PAGE>
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 and are believed to be
immaterial. 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.
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 4. Submission of Matters to a Vote of Security Holders
a) An annual meeting of shareholders of the Company was held on
April 22, 1998 ("Annual Meeting").
b) Not applicable.
c) There were 2,377,879 shares of Common Stock of the Company
eligible to be voted at the Annual Meeting and 2,022,728 shares
were represented at the meeting by the holders thereof, which
constituted a quorum. The items voted upon at the Annual Meeting
and the vote for each proposal were as follows:
1. Election of directors for a three-year term.
FOR WITHHELD
Danny C. Aderholt 2,016,417 6,311
Louis Salvatori 2,015,562 7,166
William Salvatori 2,016,765 5,963
Paul R. Turner 2,016,765 5,963
2. Proposal to ratify the appointment of KPMG Peat
Marwick LLP as the Company's independent auditors for
the year ending December 31, 1998.
FOR AGAINST ABSTAIN
2,012,271 1,174 9,283
There were no broker non-votes at the annual meeting.
Each of the proposals were adopted by the shareholders of
the Company.
d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 27Financial Data Schedule
b) Reports on Form 8-K
On February 20, 1998, the Company filed a Current Report on
Form 8-K to report the execution of an Agreement and Plan
of Merger with United Bankshares, Inc.
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: May 8, 1998 By: /s/Alan E. Groover
------------------------ ------------------------------
Alan E. Groover
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 8, 1998 By: /s/Lisa K. DiCarlo
------------------------ ------------------------------
Lisa K. DiCarlo
Senior Vice President
and Treasurer
(Principal Financial and
Accounting Officer)
18
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