SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (fee required)
For the fiscal year ended: June 30, 1996
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (no fee required)
For the Transaction period from ____ to _____.
_________________________________
Commission File No. 0-22880
Fidelity Federal Bancorp
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(Exact name of registrant as specified in its charter)
Indiana 35-1894432
- ---------------------------- -------------------
(State of other jurisdiction (I.R.S. Employer
of Incorporation or Identification No.)
Organization)
18 N.W. Fourth Street, P.O. Box 1347, Evansville, Indiana 47706-1347
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code (812) 424-0921
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Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $1 Stated Value
-----------------------------
(Title of Class)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1996 Annual Report to Stockholders for the
year ended June 30, 1996 are incorporated by reference into Part II.
Portions of the Registrant's Proxy Statement dated September 9, 1996,
for the Annual Meeting of Stockholders to be held October 16, 1996 are
incorporated by reference into Part III.
Exhibit index is on page 18
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 past preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
---- ----
Indicate by checkmark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained to the best of Registrant's knowledge, in the definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant (for purposes of such calculation, includes persons who are
not directors, executive officers, or holders of more than 10% of the
registrant's common stock) based on the average bid and asked prices of
such stock at September 4, 1996 was approximately $17,460,000.
Indicated below is the number of shares outstanding of each of the
registrant's classes of common stock as of September 9, 1996.
Common Stock - 2,495,516 shares
<PAGE>
FIDELITY FEDERAL BANCORP
Index
Page
PART I ----
ITEM 1 - Business 3
ITEM 2 - Properties 13
ITEM 3 - Legal Proceedings 14
ITEM 4 - Submission of Matters to a Vote of Security Holders 14
PART II
ITEM 5 - Market for Registrant's Common Equity
and Related Stockholder Matters 14
ITEM 6 - Selected Financial Data 14
ITEM 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
ITEM 8 - Financial Statements and Supplementary Data 14
Consolidated Balance Sheet 14
Consolidated Statement of Income 14
Consolidated Statement of Stockholders' Equity 14
Consolidated Statement of Cash Flows 14
Notes to Consolidated Financial Statements 14
Report of Independent Auditors 14
ITEM 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 14
PART III
ITEM 10 - Directors and Executive Officers of Registrant 15
ITEM 11 - Executive Compensation 15
ITEM 12 - Security Ownership of Certain Beneficial
Owners and Management 15
ITEM 13 - Certain Relationships and Related Transactions 15
PART IV
ITEM 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K 16
SIGNATURES 17
<PAGE>
PART I
ITEM 1. BUSINESS
OVERVIEW
Fidelity Federal Bancorp (the "Company") formed in 1993, is a
corporation organized under the laws of the State of Indiana and is a
registered savings and loan holding company, with its principal office
in Evansville, Indiana. The Company's savings and loan subsidiary,
United Fidelity Bank, fsb (the "Savings Bank"), organized in 1914, is a
federally-chartered stock savings bank located in Evansville, Indiana.
In 1992, the Board of Directors developed and began implementation of a
new business plan for the Savings Bank to improve the financial
performance of the organization. The key elements of this business plan
included: (i) the formation of a holding company to provide financial
flexibility and to develop and engage in nonbanking businesses; (ii) the
formation of an affordable housing group to engage in real estate
development, management and financing of affordable housing projects;
and (iii) the growth of assets through the origination and acquisition
of loans. Since the implementation of the business plan, the holding
company as well as an affordable housing group, consisting of four
nonbank subsidiaries of the Savings Bank, has been formed. Revenue
generated from affordable housing activities has increased dramatically
and significant asset growth has been achieved, also resulting in higher
revenues. In fiscal 1996 the Company slowed its growth and positioned
the Company to reduce debt, increase core deposits, sell loans and use
the proceeds to fund new loan production. The Company's business plan
is to continue developing and expanding the activities of the affordable
housing group in an ever increasing competitive market and by continuing
to look for new financing niches both in and outside the housing arena.
The Company will work to increase the profitability of the core banking
activities and to grow earnings in each business segment.
The Company, through its savings bank subsidiary, is engaged in
the business of obtaining funds in the form of savings deposits and
other borrowings and investing such funds in consumer installment loans,
commercial loans, and mortgage loans, primarily owner occupied
one-to-four family homes located in Indiana, and in investment and money
market securities. Following the adoption of its new business plan, the
Company has engaged in the business of financing, owning, developing,
building, renting and managing affordable housing projects through its
Savings Bank wholly-owned subsidiaries, Fidelity Federal Capital
Corporation, Village Management Corporation, Village Community
Development Corporation and Village Housing Corporation (collectively,
the "Affordable Housing Group"). The Affordable Housing Group
structures and participates in multifamily housing developments which
have been granted tax credits pursuant to Section 42 of the Internal
Revenue Code of 1986, as amended (the "Code") and tax-exempt bond
financed developments. The Affordable Housing Group is currently
involved in various tax credit and tax-exempt bond projects which are in
various stages of completion, ranging from completed construction and
stabilized occupancy to location and site identification and preparation
of feasibility studies. Village Housing Corporation as general partner
to limited partnerships which own the developments, receives a
percentage interest in the profits, losses and tax credits during the
life of the project and receives a percentage of the annual cash flow
and residual (sale or refinancing) proceeds during operation and at
disposition or refinancing of the developments, respectively. Village
Community Development Corporation, as contractor and developer, receives
construction and development fees as the project is completed. Village
Management Corporation, as manager of the completed project, receives a
fee based on a percentage of rental payments received from the project's
tenants. As part of Village Management's duties as project manager, it
monitors compliance with the requirements of the Code to prevent
recapture of all or a portion of the tax credits or forfeiture of the
tax-exempt status of the bonds which would occur if certain tenant
eligibility and rent restriction requirements were violated. Fidelity
Federal Capital Corporation ("FFCC"), was established in April, 1994, to
be the mortgage banking arm of the Company in the financing of real
estate, including holding and placing debt and equity interests in real
estate. FFCC has packaged loan requests for developers of multifamily
residential real estate projects eligible for federal tax credits and
tax exempt financing. While the loans packaged to date have been
referred to the Savings Bank for origination, FFCC may also package loan
transactions for other lenders, if the opportunity arises. FFCC earns
origination fees and fees for construction review, supervision, and
general project oversight. The Savings Bank, as lender, can earn points
and interest on loans made to developers. The Savings Bank's credit
decisions are subject to applicable OTS restrictions on loans of this type.
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<PAGE>
The final subsidiary of the Savings Bank, Village Insurance
Corporation, is engaged in the business of selling credit life
insurance, as well as accident and health insurance, to the Savings
Bank's loan customers.
A second subsidiary of the Company, Village Securities
Corporation, a discount brokerage service, is scheduled to begin
operation in the second quarter of fiscal 1997.
The Company had consolidated total assets of $262,215,709 and
total shareholder's equity of $14,294,975 as of June 30, 1996.
The Company's subsidiaries at June 30, 1996, are listed below:
<TABLE>
<CAPTION>
Subsidiary Principal Office Year Organized Assets
<S> <C> <C> <C>
- -------------------- ---------------- -------------- ------------
1. United Fidelity Bank, fsb Evansville, IN 1914 $255,456,250
Subsidiaries of United Fidelity Bank, fsb:
Fidelity Federal Capital Corporation Evansville, IN 1994 987,443
Village Insurance Corporation Evansville, IN 1980 55,125
Village Management Corporation Evansville, IN 1992 70,995
Village Community Development
Corporation Indianapolis, IN 1992 5,019,125
Village Housing Corporation Indianapolis, IN 1992 6,660,366
2. Village Securities Corporation Evansville, IN 1994 34,439
</TABLE>
The Company's home office is located at 18 N.W. Fourth Street,
Evansville, Indiana, 47708 and its telephone number is (812) 424-0921.
Effective November 1, 1996 the Company's new address will be 700 S.
Green River Road, Suite 2000, Evansville, IN 47715 and its telephone
number will be (812) 469-2100.
COMPETITION
The Company and the Savings Bank faces strong direct competition for
deposits, loans and other financial- related services. The Savings Bank
competes in Indiana, Kentucky and Illinois with the other thrifts,
commercial banks, credit unions, stockbrokers, finance companies and
insurance companies. Some of these competitors are local, while others
are statewide or national. The Savings Bank competes for deposits
principally by offering depositors a variety of deposit programs,
convenient office locations, hours and other services, and for loan
originations primarily through competitive interest rates and fees, the
efficiency and quality of service provided and the variety of loan
products offered. Some of the non-bank financial institutions and
financial services organizations with which the Savings Bank competes
are not subject to the same degree of regulation as that imposed on
federal savings banks, thrifts, or thrift-holding companies. As a
result, such competitors may have advantages over the Savings Bank in
providing certain services. As of September 1, 1996, approximately 4
banks, 4 thrifts, and 12 credit unions operated in the Evansville,
Indiana metropolitan area, which is the Savings Bank's principal deposit
market area. The Savings Bank is currently the second largest thrift in
this market. Many competitors are substantially larger or have
significantly greater capital resources than the Savings Bank. Due to
recently enacted legislation to allow unlimited interstate branching,
the Company and the Savings Bank may experience heightened competition
from existing competitors and other major financial institutions seeking
to expand their regional banking presence in Indiana.
The Affordable Housing Group competes with other real estate
developers for projects throughout the United States. Presently, the
Affordable Housing Group is one of the most active participants in the
affordable housing market, although additional or stronger competition
from other developers may arise in the future. The competition for
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<PAGE>
affordable housing projects focuses on locations, available tax credits
or tax-exempt bond allocations, and for eligible tenants which meet the
criteria for an affordable housing project. Since the IRS Section 42
tax credit program was created in 1986, competition has consistently
increased in this area. Particularly during fiscal 1996 as the
Affordable Housing Group has seen a reduction in the fees charged for
their service, in order to remain competitive in the market. The
Company's business plan is to continue developing and expanding the
activities of the affordable housing group in an ever increasing
competitive market, and by continuing to look for new financing niches
both in and outside the housing arena.
REGULATION OF THE COMPANY
The Company is a savings and loan holding company within the meaning
of the Home Owners' Loan Act of 1933 ("HOLA"), as amended. The Company
is registered with the Office of Thrift Supervision ("OTS") and is
subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company,
the Savings Bank is subject to certain restrictions in its dealings with
the Company and with other companies affiliated with the Company.
The HOLA generally prohibits a savings and loan holding company,
without prior approval of the Director of the OTS, from (i) acquiring
control of any other savings institution or savings and loan holding
company or controlling the assets thereof; or (ii) acquiring or
retaining more than 5% of the voting shares of a savings institution or
holding company thereof which is not a subsidiary of such savings and
loan holding company. Under certain circumstances a savings and loan
holding company is permitted to acquire, with the approval of the
Director of the OTS, up to 15% of previously unissued voting shares of
an under-capitalized savings association for cash without that savings
association being deemed controlled by the holding company. Except with
the prior approval of the Director of the OTS, no director or officer of
a savings and loan holding company or person owning or controlling by
proxy or otherwise more than 25% of such company's stock, may also
acquire control of any savings institution, other than a subsidiary
institution, or any other savings and loan holding company.
The Bank Holding Company Act of 1956, as amended, specifically
authorizes a bank holding company, upon receipt of appropriate approvals
from the Board of Governors of the Federal Reserve System ("FRB") and
the Director of the OTS, to acquire control of any savings association
or holding company thereof wherever located. Similarly, a savings and
loan holding company may acquire control of a bank. A savings
association acquired by a bank holding company cannot continue any
non-banking activities not authorized for bank holding companies.
Savings associations acquired by a bank holding company may, if located
in a state where the bank holding company is legally authorized to
acquire a bank, be converted to the status of a bank, but deposit
insurance assessments and payments will continue to be paid by the
association to the Savings Association Insurance Fund ("SAIF"). A
savings association so converted to a bank becomes subject to the
branching restrictions applicable to banks. Also, any insured
depository institution may merge with, acquire the assets of, or assume
the liabilities of any other insured depository institution with the
appropriate regulatory approvals if (i) continued payments of deposit
insurance premiums are made on the acquired depository institution's
deposits (including an assumed rate of growth in such deposits) to SAIF
(if the acquired institution was a SAIF member) or to the Bank Insurance
Fund ("BIF") (if the acquired institution was a BIF member), (ii) the
acquiring institution and any holding company in control thereof meet
all applicable capital requirements at the time of the transaction, and
(iii) if the acquiring institution is a BIF member, the transaction
would meet the requirements of the Bank Holding Company Act of 1956 if
the savings association involved was a state bank.
The Company operates as a unitary savings and loan holding company.
There are generally no restrictions on the activities of a unitary
savings and loan holding company. However, if the Director of the OTS
determines that there is reasonable cause to believe that the
continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness, or
stability of its subsidiary savings association, the Director of the OTS
may impose such restrictions as deemed necessary to address such risk
and limit (i) payment of dividends by the savings association, (ii)
transactions between the savings association and its affiliates, and
(iii) any activities of the savings association that might create a
serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings association.
Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings
5
<PAGE>
association subsidiary of such a holding company fails to meet the
Qualified Thrift Lender Test ("QTL test"), as discussed below, then such
unitary holding company would become subject to the activities
restrictions applicable to multiple savings and loan holding companies.
Additional restrictions on the savings association s ability to obtain
advances from the FHLB also apply.
If the Company were to acquire control of another savings
institution, other than through merger or other business combinations
with the Savings Bank, the Company would thereupon become a multiple
savings and loan holding company. Except where such acquisition is
pursuant to the authority of the OTS to approve emergency thrift
acquisitions and where each subsidiary savings institution meets the QTL
test, the activities of the Company and any of its subsidiaries (other
than the Savings Bank or other subsidiary savings institutions) would
thereafter be subject to further restrictions. The HOLA provides that,
among other things, no multiple savings and loan holding company or
subsidiary thereof which is not a savings institution shall commence or
continue for a limited period of time after becoming a multiple savings
and loan holding company or subsidiary thereof, any business activity
other than (i) furnishing or performing management services for a
subsidiary savings institution, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing or liquidating assets owned by
or acquired from a subsidiary savings institution, (iv) holding or
managing properties used or occupied by a subsidiary savings
institution, (v) acting as trustee under deeds of trust, (vi) those
activities previously directly authorized by regulation as of March 5,
1987, to be engaged in by multiple savings and loan holding companies,
or (vii) those activities authorized by regulation of the FRB as
permissible for bank holding companies, unless the Director of the OTS
by regulation prohibits or limits such activities for savings and loan
holding companies. Those activities described in (vii) above must also
be approved by the Director of the OTS prior to being engaged in by a
multiple savings and loan holding company.
The Director of the OTS may also approve acquisitions resulting in
the formation of a multiple savings and loan holding company which
controls savings institutions in more than one state, if the multiple
savings and loan holding company involved controls a savings institution
which operated a home or branch office in the state of the institution
to be acquired as of March 5, 1987, or if the laws of the state in which
the institution to be acquired is located specifically permit
institutions to be acquired by state-chartered institutions or savings
and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such
state-chartered savings institutions). The Director of the OTS may also
approve an acquisition resulting in a multiple savings and loan holding
company controlling savings institutions in more than one state in the
case of certain emergency thrift acquisitions.
Subject to certain exceptions, commonly controlled banks and savings
associations must reimburse the Federal Deposit Insurance Corporation
("FDIC") for any losses suffered in connection with a failed bank or
savings association affiliate. Institutions are commonly controlled if
one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate
to claims of depositors, secured creditors, and holders of subordinated
debt, other than affiliates.
SAVINGS BANK REGULATION
General. As a SAIF-insured savings institutions, the Savings Bank is
subject to supervision and regulation by the Director of the OTS. Under
the OTS regulations, the Savings Bank may be required to obtain audits
by independent auditors and to be examined periodically by the Director
of the OTS. The Savings Bank is subject to assessments by the OTS and
the FDIC to cover the costs of such examinations. The Director of the
OTS also is authorized to promulgate regulations to ensure the safe and
sound operations of savings institutions and may impose various
requirements and restrictions on the activities of savings institutions.
The extensive regulation, supervision and examination of the Savings
Bank by the OTS is intended primarily for the protection of the
insurance fund and depositors. Moreover, such regulation imposes
substantial restrictions on the operations and activities of the Savings
Bank, and grants to regulators broad discretion in connection with their
supervisory and enforcement activities and examination policies,
including policies with respect to classification of assets and
establishment of adequate loan loss reserves. Any changes in such
regulations, whether by legislation or regulatory action, could have a
material impact on the Savings Bank and its operations. Neither the
6
<PAGE>
Company nor the Savings Bank can predict what, if any, future actions
may be taken by legislative or regulatory authorities or what impact any
such actions may have on the operations of the Company or the Savings
Bank.
The activities of savings institutions are governed by HOLA and, in
certain respects, the Federal Deposit Insurance Act, as amended ("FDI
Act").
Qualified Thrift Lender Requirement. In order for the Savings Bank
to exercise the powers granted to federally-chartered savings
institutions and maintain full access to FHLB advances, it must be a
"qualified thrift lender" ("QTL"). A savings institution is a QTL if
its qualified thrift investments continue to equal or exceed 65% of the
savings institution's portfolio assets on a monthly basis in 9 out of
every 12 months. Qualified thrift investments generally consist of (i)
various housing related loans and investments (such as residential
construction and mortgage loans, home improvement loans, manufactured
housing loans, home equity loans and mortgage-backed securities), (ii)
certain obligations of the FSLIC, the FDIC, the FSLIC Resolution Fund
and the Resolution Trust Corporation (for limited periods), and (iii)
shares of stock issued by any Federal Home Loan Bank, the Federal Home
Loan Mortgage Corporation or the Federal National Mortgage Association.
At June 30, 1996, the qualified thrift investment percentage test for
the Savings Bank was 79.9%.
Liquidity. Under applicable federal regulations, savings
institutions are required to maintain an average daily balance of liquid
assets (including cash, certain time deposits, certain banker's
acceptances, certain corporate debt securities and highly rated
commercial paper, securities of certain mutual funds and specified
United States government, state or federal agency obligations) of not
less than 5% of the average daily balance of the savings association's
net withdrawable deposits plus short-term borrowing during the preceding
calendar month. Under HOLA, this liquidity requirement may be changed
from time to time by the Director of the OTS to any amount within the
range of 4% to 10%, depending upon economic conditions and the deposit
flows of member institutions. A savings institution is also required to
maintain an average daily balance of short-term liquid assets of not
less than 1% of the average daily balance of its net withdrawable
deposits and short-term borrowing during the preceding calendar month.
At June 30, 1996, the Savings Bank was in compliance with these
liquidity requirements.
Loans-to-One-Borrower Limitations. HOLA generally requires savings
institutions to comply with the loans-to-one-borrower limitations
applicable to national banks. In general, national banks may make loans
to one borrower in amounts up to 15% of the bank's unimpaired capital
and surplus, plus an additional 10% of capital and surplus for loans
secured by readily marketable collateral. At June 30, 1996, the
Savings Bank's loan-to-one-borrower limitation was approximately $3.6
million and no loans to a single borrower exceeded that amount, except
as provided herein. Under certain OTS regulations, a savings
institution may make loans to one borrower for residential housing
developments in amounts up to 30% of the bank's unimpaired capital and
surplus upon prior notice to and approval of the OTS and provided that
all loans made in reliance upon the increased lending limit do not, in
the aggregate, exceed 150% of the bank's unimpaired capital and surplus.
At June 30, 1996, the Savings Bank had $12.6 million in loans
outstanding under the increased lending limit regulations.
Commercial Real Property Loans. HOLA limits the aggregate amount of
commercial real estate loans that a federal savings institution may make
to an amount not in excess of 400% of the savings institution's capital.
Limitation on Capital Distributions. The OTS regulations impose
limitations on capital distributions by savings institutions. Under the
rule, a savings institution is classified as a tier 1 institution, a
tier 2 institution, or a tier 3 institution, depending on its level of
regulatory capital both before and after giving effect to a proposed
capital distribution. A tier 1 institution may generally make capital
distributions in any calendar year up to 100% of its net income to date
during the calendar year plus the amount that would reduce by one-half
its "surplus capital ratio" (i.e., the percentage by which the
institution's capital-to-assets ratio exceeds the ratio of its capital
requirements to its assets) at the beginning of the calendar year. No
regulatory approval of the capital distribution is required, but prior
notice must be given to the OTS. Restrictions exist on the ability of
tier 2 and tier 3 institutions to make capital distributions. For
purposes of this regulation, the Savings Bank is a tier 1 institution.
Limitation on Equity Risk Investments. Under applicable regulations,
the Savings Bank is generally prohibited from investing directly in
equity securities and real estate (other than that used for offices and
related facilities, that acquired through, or in lieu of, foreclosure,
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that on which a contract purchaser has defaulted or investments in an
amount up to 2% of the savings association's assets in real property and
obligations secured by real property located within a geographic area or
neighborhood receiving assistance under Title I of the Housing &
Development Act of 1974). In addition, the OTS regulations limit the
aggregate investment by savings institutions in certain equity risk
investments, including equity securities, real estate, service
corporations and operating subsidiaries and loans for the purchase of
land and construction loans made after February 27, 1987, on
non-residential properties with loan-to-value ratios exceeding 80%. At
June 30, 1996, the Savings Bank was in compliance with the requirements
of these limitations.
Insurance of Deposits. The FDIC has devised a system for assessing
deposit insurance whereby insured savings associations pay premiums
between $0.23 and $0.31 per $100 of their domestic deposits, depending
on their placement within one of nine categories. The categories are
determined by (i) the insured institution's placement in capital group
1, 2, or 3, depending on its classifications as "well-capitalized,"
"adequately capitalized," or "undercapitalized," respectively, and (ii)
its supervisory rating of A, B, or C. Well-capitalized institutions with
a supervisory rating of A pay $0.23 per $100 of deposits, while
undercapitalized institutions with a rating of C pay $0.31 per $100 of
deposits. The Savings Bank currently pays $0.23 per $100 of deposit.
Legislation pending in Congress proposes a one-time assessment on all
SAIF-insured deposits. The bill authorizes FDIC to make a one-time
assessment, at a level determined by FDIC, on all SAIF-insured deposits
held as of March 31, 1995. The total amount assessed will be forwarded
directly to SAIF with none of the funds being used to pay interest on
FICO debt. In addition, the bill authorizes FDIC to exempt some
institutions from the assessment, such as those determined by FDIC as
being weak or certain newly chartered thrifts. Exempt firms must make
assessments at rates in effect on June 30, 1995, for the next three
years. While the rate of the assessment is not established in the
legislation, the Banking & Financial Services Committee estimates it
will be equal to 68 basis points (68 cents per $100 of insured
deposits). If the assessment occurs, the effect on the Savings Bank
would be a pre-tax charge of approximately $1.0 million, but the Savings
Bank s capital category would not be adversely affected. The Company is
unable to predict at this time whether this legislation will be enacted
and, if enacted, in what form.
Community Reinvestment Act. Ratings of depository institutions under
the Community Reinvestment Act of 1977 ("CRA") must be disclosed. The
disclosure includes both a four-tier descriptive rating using terms such
as "outstanding," "satisfactory," "needs to improve," or "substantial
non-compliance" and a written evaluation of each institution's
performance. The Savings Bank received a satisfactory rating from the
OTS in its most recent CRA examination. Also, the FHLB is required to
adopt regulations establishing standards of community investment and
service for members of the FHLB System to meet to be eligible for
long-term advances. Those regulations are required to take into account
a savings institution's CRA record and the member's record of lending to
first-time home buyers. The Savings Bank intends to maintain its record
of community lending and to meet or exceed the applicable CRA standards.
Brokered Deposits. Pursuant to the FDIC regulations,
well-capitalized institutions are subject to no brokered deposits
limitations, while adequately capitalized institutions are able to
accept, renew or rollover brokered deposit only (i) with a waiver from
the FDIC, and (ii) subject to the limitation that they do not pay an
effective yield on any such deposit which exceeds by more than 75 basis
points (a) the effective yield paid on deposits of comparable size and
maturity in such institution's normal market area for deposits accepted
in its normal market area, or (b) the yield equal to 120 basis points of
the current yield on comparable maturity U.S. treasury obligations.
Undercapitalized institutions are not permitted to accept brokered
deposits and may not solicit deposits by offering an effective yield
that exceeds by more than 75 basis points the prevailing effective
yields on insured deposits of comparable maturity in the institution's
normal market area or in which such deposits are being solicited.
Enforcement. The OTS has primary enforcement responsibility over
savings institutions and has the authority to bring enforcement action
against all "institution-affiliated parties," including stockholders,
and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse
effect on an insured institution. Civil penalties cover a wide range of
violations and actions and range up to $25,000 per day unless a finding
of reckless disregard is made, in which case penalties may be as high as
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$1 million per day. In addition, regulators are provided with far
greater flexibility to impose enforcement action on an institution that
fails to comply with its regulatory requirements, particularly with
respect to the capital requirements. Possible enforcement action ranges
from the imposition of a capital directive to receivership,
conservatorship or the termination of deposit insurance. The FDIC has
the authority to recommend to the Director of OTS that enforcement
action to be taken with respect to a particular savings institution. If
action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances.
Standards for Safety and Soundness. The FDI Act requires each
federal banking agency to prescribe for all insured depository
institutions standards relating to internal controls, information
systems and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, and compensation, fees and
benefits and such other operational and managerial standards as the
agency deems appropriate. In addition, the federal banking regulatory
agencies are required to prescribe by regulation standards specifying
(i) maximum classified assets to capital ratios, (ii) minimum earnings
sufficient to absorb losses without impairing capital; (iii) to the
extent feasible, a minimum ratio of market value to book value for
publicly traded shares of depository institutions; and (iv) such other
standards relating to asset quality, earnings and valuation as the
agency deems appropriate. Finally, each federal banking agency is
required to prescribe standards for employment contracts and other
compensation arrangement of executive officers, directors and principal
stockholders of insured depository institutions that would prohibit
compensation and benefits arrangements that are excessive or that could
lead to a material financial loss for the institution. If an insured
depository institution fails to meet any of the standards described
above, it will be required to submit to the appropriate federal banking
agency a plan specifying the steps that will be taken to cure the
deficiency. If an institution fails to submit an acceptable plan or
fails to implement the plan, the appropriate federal banking agency will
require the institution to comply with the restrictions applicable
under the prompt corrective action provisions of the FDI Act. The
federal banking agencies, including the OTS and the FDIC, adopted
guidelines on July 10, 1995 regarding safety and soundness standards.
The OTS and the other federal banking agencies have adopted uniform
regulations regarding real estate lending standards. The OTS regulation
requires each savings association to establish and maintain written
internal real estate standards consistent with safe and sound banking
practices and appropriate to the size of the institution and the nature
and scope of its real estate lending activities. The policy also must
be consistent with accompanying OTS guidelines, which include
loan-to-value ratios for the following types of real estate loans: raw
land (65%); land development (75%); non-residential construction (80%);
improved property (85%); and one-to-four family residential construction
(85%). One-to-four family mortgages and home equity loans do not have
maximum loan-to-value ratio limits, but those with a loan-to-value ratio
at origination of 90% or greater are expected to be backed by private
mortgage insurance or readily marketable collateral. Institutions also
are permitted to make a limited amount of loans that do not conform to
the proposed loan-to-value limitations so long as such exceptions to the
loan-to-value standards are justified.
Prompt Corrective Regulatory Action. The FDI Act establishes a
system of prompt corrective action to resolve the problems of
undercapitalized institutions. Under this system, the banking
regulators are required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Generally, subject to narrow
exceptions, the FDI Act requires the banking regulators to appoint a
receiver or conservator for an institution that is critically
undercapitalized. The FDI Act authorizes the banking regulators to
specify the ratio of tangible capital to assets at which an institution
becomes critically undercapitalized and requires that ratio to be not
less than 2% of assets.
Under the OTS prompt corrective action regulation, generally, a
savings institution that has a total risk-based capital of less than
8.0% or a leverage ratio is less than 4.0% is considered to be
undercapitalized. A savings institution that has a total risk-based
capital of less than 6.0%, a tier 1 risk-based capital ratio of less
than 3%, or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a
tangible capital to assets ratio equal to or less than 2% is deemed to
be "critically undercapitalized." Generally, a capital restoration plan
must be filed with the OTS within 45 days of the date an association
receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition,
numerous mandatory supervisory actions become immediately applicable to
the institutions, including, but not limited to, restrictions on growth,
investment activities, capital distributions, and affiliate
9
<PAGE>
transactions. The OTS could also take any one of a number of
discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and
directors.
Capital Requirements. The Director of the OTS has adopted capital
standards under which savings associations must maintain (i) "core
capital" in an amount not less than 3% of total adjusted assets, (ii)
"tangible capital" in an amount not less than 1.5% of total adjusted
assets, and (iii) a level of risk-based capital equal to 8.0% of
risk-weighted assets. The capital standards established by the OTS for
savings associations must generally be no less stringent that those
applicable to national banks.
Under OTS regulations "core capital" includes common stockholders'
equity, noncumulative perpetual preferred stock and related surplus, and
minority interests in the equity accounts of consolidated subsidiaries,
less intangible assets other than certain qualifying supervisory
goodwill and certain purchased mortgage servicing rights. In
determining compliance with the capital standards, a savings association
must deduct from capital its entire investment in and loans to any
subsidiary engaged in activities not permissible for a national bank,
other than subsidiaries (i) engaged in such non-permissible activities
solely as agent for their customers; (ii) engaged in mortgage banking
activities; or (iii) that are themselves savings associations or
companies, the only investment of which is another savings association,
acquired prior to May 1, 1989.
In determining total risk-weighted assets for purposes of the
risk-based requirement, (i) each off-balance sheet asset must be
converted to its on-balance sheet credit equivalent by multiplying the
face amount of each such item by a credit conversion factor ranging from
0% to 100% (depending upon the nature of the asset), (ii) the credit
equivalent amount of each off-balance sheet asset and the book value of
each on-balance sheet asset must be multiplied by a risk factor ranging
from 0% to 100% (again depending upon the nature of the asset), and
(iii) the resulting amounts are added together and constitute total
risk-weighted assets. Total capital, for purposes of the risk-based
requirement, equals the sum of core capital plus supplementary capital
(which, as defined, includes, among other items, perpetual preferred
stock not counted as core capital, limited life preferred stock,
subordinated debt and general loan and lease loss allowances up to 1.25%
of risk-weighted assets, less certain deductions). The amount of
supplementary capital that may be counted towards satisfaction of the
total capital requirement may not exceed 100% of core capital.
Capital requirements higher than the generally applicable minimum
requirement may be established for a particular savings association if
the OTS determines that the institution's capital was or may become
inadequate in view of its particular circumstances. Individual minimum
capital requirements may be appropriate where the savings association is
receiving special supervisory attention, has a high degree of exposure
to interest rate risk, or poses other safety or soundness concerns.
In determining compliance with the risk-based capital requirements, a
savings association must determine its interest rate risk and, if such
risk exceeds a certain level, it must deduct an interest rate risk
component in calculating its total capital for purposes of determining
whether it meets its risk-based capital requirements. An association's
interest rate risk (IRR) is measured by the decline in the net portfolio
value (NPV) resulting from a 200 basis point increase or decrease in
market interest rates, divided by the estimated economic value of its
assets. If an association's measured IRR exposure exceeds 2%, it must
then deduct an IRR component from total capital for determining its
risk-based capital requirement. The IRR component is an amount equal to
one-half the difference between its measured interest rate risk and 2%,
multiplied by the estimated economic value of its total assets.
The Savings Bank's Subsidiaries. The OTS regulations permit federal
savings institutions to invest in the capital stock, obligations or
specified types of securities of subsidiaries (referred to as "service
corporations") and to make loans to such subsidiaries and joint ventures
in which such subsidiaries are participants in an aggregate amount not
exceeding 3% of an institution's assets, provided any investment over 2%
is used for specified community or inner-city development purposes. In
addition, federal regulations permit institutions to make specified
types of loans to such subsidiaries, in which the institution owns more
than 10% of the stock, in an aggregate amount not exceeding 50% of the
institution's regulatory capital if the institution's investment is in
compliance with applicable loans-to-one-borrower regulations. A savings
institution which acquires a non-savings institution subsidiary, or
which elects to conduct a new activity within a subsidiary, must give
10
<PAGE>
the FDIC and the OTS at least 30 days advance written notice. The FDIC
may, after consultation with the OTS, prohibit specific activities if it
determines such activities pose a serious threat to SAIF.
Assessments. Savings institutions are required by OTS regulation to
pay assessments to the OTS to fund the operations of the OTS. The
general assessment is computed upon the savings institution's total
assets, including consolidated subsidiaries, as reported in the Saving
Bank's latest quarterly Thrift Financial Report. The Savings Bank's
total assessment for the year ended June 30, 1996, was approximately
$69,000.
Branching. A federally-chartered savings association may establish,
retain or operate a branch outside of the state in which it has its home
office if it qualifies as a domestic building and loan association under
the Internal Revenue Code of 1986, as amended.
TRANSACTIONS WITH AFFILIATES
Pursuant to HOLA, transactions engaged in by a savings institution or
one of its subsidiaries with affiliates of the savings institution
generally are subject to the affiliate transaction restrictions
contained in Sections 23A and 23B of the Federal Reserve Act in the same
manner and to the same extent as such restrictions now apply to
transactions engaged in by a member bank or one of its subsidiaries with
affiliates of the member bank. Section 23A of the Federal Reserve Act
imposes both quantitative and qualitative restrictions on transactions
engaged in by a member bank or one of its subsidiaries with an
affiliate, while Section 23B of the Federal Reserve Act requires, among
other things, that all transactions with affiliates be on terms
substantially the same, and at least as favorable to the member bank or
its subsidiary, as the terms that would apply to or would be offered in
a comparable transaction with an unaffiliated party.
Section 22(h) of the Federal Reserve Act imposes restrictions on
loans to executive officers, directors, and principal shareholders.
Under Section 22(h), loans to an executive officer, director, or a
greater than 10% shareholder of a savings institution, or certain
affiliated entities of either, may not exceed together with all other
outstanding loans to such person and affiliated entities the
institution's loan-to-one-borrower limit. Section 22(h) also prohibits
loans, above amounts prescribed by the appropriate federal banking
agency, to directors, executive officers, and greater than 10%
shareholders of a savings institution, and their respective affiliates,
unless the loan is approved in advance by a majority of the board of
directors of the institution with any "interested" director not
participating in the voting. The Federal Reserve Board has prescribed
the loan amount (which includes all other outstanding loans to such
person), as to which such prior board of director approval is required,
as being the greater of $25,000 or 5% of unimpaired capital and surplus
(up to $500,000). Further, the Federal Reserve Board pursuant to
Section 22(h) requires that loans to directors, executive officers, and
principal shareholders be made on terms substantially the same as
offered in comparable transactions to other persons. The Savings Bank
was in compliance with these rules at June 30, 1996.
FEDERAL HOME LOAN BANK SYSTEM
The Federal Home Loan Bank System consists of 12 regional Federal
Home Loan Banks ("FHLBs"), each subject to supervision and regulation by
the Federal Housing Finance Board (the "FHFB"). The FHLBs provide a
central credit facility for member savings institutions. As a member of
the FHLB of Indianapolis, the Savings Bank is required to own shares of
capital stock in the FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans,
home purchase contracts, and similar obligations at the beginning of
each year, or 1/20 of its advances (borrowings) from the FHLB, whichever
is greater. As of June 30, 1996, the Savings Bank was in compliance
with this requirement.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board has adopted regulations that require
savings institutions to maintain non-earning reserves against their
transaction accounts (primarily NOW and regular checking accounts) and
non-personal time deposits (those which are transferable or held by a
person other than a natural person) with an original maturity of less
than 1 1/2 years. At June 30, 1996, the Savings Bank was in compliance
11
<PAGE>
with these requirements. These reserves may be used to satisfy liquidity
requirements imposed by the Director of the OTS. Because required
reserves must be maintained in the form of vault cash or a
non-interest-bearing account at a Federal Reserve Bank, the effect of
this reserve requirement is to reduce the amount of the institution's
interest-earning assets.
Savings institutions also have the authority to borrow from the
Federal Reserve discount window. Federal Reserve Board regulations,
however, require savings institutions to exhaust all the FHLB sources
before borrowing from a Federal Reserve Bank. The Federal Reserve Board
regulations also place limitations upon a Federal Reserve Bank's ability
to extend advances to undercapitalized and critically undercapitalized
depository institutions by providing that a Federal Reserve Bank
generally may not have advances outstanding to an undercapitalized
institution for more than 60 days in any 120-day period.
RECENT LEGISLATION
In January, 1995, President Clinton signed into law the Riegle
Community Development and Regulatory Improvement Act of 1994 ("Riegle
Act"). The Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 allows for interstate banking and interstate branching without
regard to whether such activity is permissible under state law, with
permissible activities being phased-in between September 29, 1995, and
June 1, 1997. Such interstate banking and branching activities are
already permitted for federally-chartered savings associations. The
Company is not able to predict with certainty the impact of this
legislation on the banking industry, but expects that it will increase
competition between banks and savings associations.
ADDITIONAL REGULATION
The Savings Bank is also subject to additional regulation of its
activities, including a variety of consumer protection regulations
affecting its lending, deposit and collection activities and regulations
affecting secondary mortgage market activities.
The earnings of financial institutions are also affected by general
economic conditions and prevailing interest rates, both domestic and
foreign and by the monetary and fiscal policies of the United States
Government and its various agencies, particularly the Federal Reserve
Board.
Additional legislation and administrative actions affecting the
banking industry may be considered by the United States Congress, state
legislatures and various regulatory agencies, including those referred
to above. It cannot be predicted with certainty whether such
legislation or administrative action will be enacted or the extent to
which the banking industry in general or the Company and the Savings
Bank in particular would be affected thereby.
PERSONNEL
As of June 30, 1996 the Company had 133 full-time equivalent
employees. The employees are not represented by any collective
bargaining unit. The Company believes its relations with its employees
are good.
The Company maintains group life, hospital, surgical, dental, major
medical, and long-term disability programs for full-time employees. The
Company also participates in a defined benefit pension plan covering all
eligible employees, as well as a defined contribution 401(k) plan.
ITEM 2. PROPERTIES
The following table sets forth the location of the Company's savings
bank offices, all of which are owned by the Savings Bank, as well as
certain additional information relating to these offices as of June 30,
1996. The Savings Bank currently has one branch application on file, as
the Savings Bank is planning to open a branch in nearby Newburgh, IN.
Also the Company is near completion of its Eastside Branch expansion,
when completed the building will house the Savings Bank's branch, the
Company, Village Management Corporation, and Village Securities Corporation.
The Company expects to be operational at the new location during the second
quarter of fiscal 1997. The Savings Bank currently has no plans to sell
or close any existing branches. The Company's Savings Bank previously
owned land, along the downtown Evansville riverfront with a book value
12
<PAGE>
of $281,500 approximately three blocks from the main office building.
This land was purchased in 1982 with the intent of constructing a new
home office on the site. The Savings Bank entered into a contract for
the sale of this property with Aztar Corporation for $1,000,000. This
transaction was closed during the first quarter of fiscal 1996 and the
gain of approximately $400,000, net of tax, was treated as other
operating income.
<TABLE>
<CAPTION>
Year Facility Net
Office Location Opened Book Value
<S> <C> <C>
- --------------- ------------- ----------
Home Office 1974 $1,901,901
18 NW Fourth Street
Evansville, IN 47708
Eastside Branch 1971 1,666,754
700 S. Green River Rd
Evansville, IN 47715
Northside Branch 1976 222,064
4441 First Avenue
Evansville, IN 47710
Westside Branch 1979 200,354
4801 W. Lloyd Expressway
Evansville, IN 47712
</TABLE>
The Company uses the premises of the Savings Bank for its
office and equipment needs and pays rental fees for such use. Village
Insurance Corporation and Village Securities Corporation are housed at
the Savings Bank's principal Evansville office, but do not pay any
rental fees for such use. FFCC, Village Community Development
Corporation, and Village Housing Corporation lease office space in
Indianapolis, Indiana. Village Management Corporation leases an office
in Evansville, Indiana.
13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Other than as discussed herein there are no material pending
legal proceedings, other than ordinary routine litigation incidental to
the Registrant's business, to which the Registrant or its subsidiaries
is a party or of which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Registrant's security
holders during the fourth quarter of the fiscal year ended June 30,
1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
The discussion concerning the market for the Registrant's
common equity and related shareholder matters under the heading "Market
Summary" included in the 1996 Annual Report to Stockholders on page 4
and is incorporated herein by reference. Cash dividends by quarter for
the current and previous year appear under the heading "Quarterly
Results of Operations" included in the 1996 Annual Report to
Stockholders on page 12 and is incorporated herein by reference.
Additional information relating to stockholder matters can be found
under the heading "Corporate Information" included in the 1996 Annual
Report to Stockholders on page 64 and is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial and Other Data included in the 1996 Annual
Report to Stockholders on page 5 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and
Results of Operation included in the 1996 Annual Report to Stockholders
on pages 7 through 27 is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required under
this item are incorporated herein by reference to pages 28 through 59 of
the 1996 Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
No response to this item is required.
14
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information to be provided under this Item is incorporated
by reference to the information under the heading "Information
Concerning Nominees, Directors and Executive Officers" on pages 5
through 8 (up to but exclusive of the information presented under the
caption "Certain Transactions and Other Matters Between Management and
the Company" on page 8), and under the heading "Security Ownership
Reporting" on page 21, (up to but exclusive of the information presented
under the caption "Auditors of the Company", "Shareholders Proposals",
and "Additional Information" on page 21), of the Company's definitive
proxy statement dated September 9, 1996, as filed with the Securities
and Exchange Commission pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information to be provided under this Item is incorporated
by reference to the information under the heading "Executive
Compensation and Other Information" on pages 9 through 21 (up to but
exclusive of the information presented under the caption "Security
Ownership of Management" on page 21) of the Company's definitive proxy
statement dated September 9, 1996, as filed with the Securities and
Exchange Commission pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information to be provided under this Item is incorporated
by reference to the information under the headings "Beneficial
Ownership" on pages 3 and 4 (up to but exclusive of the information
presented under the captions "Proxies" on page 4), and under the heading
"Security Ownership of Management" on pages 19 through 21 (up to but
exclusive of the information presented under the caption "Security
Ownership Reporting" on page 21), of the definitive proxy statement
dated September 9, 1996 as filed with the Securities and Exchange
Commission pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information to be provided under this Item is incorporated
by reference to the information under the heading "Certain Transactions
and Other Matters Between Management and the Company" on page 8 and 9
(up to but exclusive of the information presented under the captions
"Board Meeting", "Board Committees", and "Executive Compensation and
Other Information" on page 9), of the Company's definitive proxy
statement dated September 9, 1996 as filed with the Securities and
Exchange Commission pursuant to Regulation 14A.
(This space intentionally left blank)
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements are included in
Item 8:
Page Number in
Annual Report
Independent Auditor's Report on
Consolidated Financial Statements 28
Consolidated Balance Sheet
June 30, 1996 and 1995 29
Consolidated Statement of Income -
For the years ended June 30, 1996,
1995, and 1994 30 and 31
Consolidated Statement of Changes in Stockholders'
Equity - For the years ended
June 30, 1996, 1995, and 1994 32 and 33
Consolidated Statement of Cash Flows -
For the years ended June 30, 1996, 1995, and 1994 34 and 35
Notes to Consolidated Financial Statements 36 through 59
(2) See response to Item 14 (a) (1). All other financial statement
schedules have been omitted because they are not applicable, or the
required information is shown in the consolidated financial statements
or notes thereto.
(3) List of Exhibits
Exhibit Number Description
-------------- -----------
3 (a) Articles of Incorporation of the Company, filed
as exhibit 3(a) to the Company's 1995 Annual
Report on Form 10-K, are incorporated herein by
reference.
3 (b) By-Laws of the Company, filed as exhibit 3(b) to
the Company's 1994 Annual Report on Form 10-K,
are incorporated herein by reference.
10 (a) The 1987 Incentive Stock Option Plan, filed as
exhibit 10(c) to the Company's 1995 Annual
Report on Form 10-K, is incorporated herein by
reference.
(b) The 1993 Director's Stock Option Plan, filed as
exhibit 10(d) to the Company's 1995 Annual
Report on Form 10-K, is incorporated herein by
reference.
(c) 1995 Key Employee's Stock Option Plan.
11 Statement regarding computation of per share
earnings.
13 1996 Annual Report to Stockholders of Fidelity
Federal Bancorp (Incorporated in part into the
Form 10-K by reference).
21 Subsidiaries of Fidelity Federal Bancorp.
27 Financial Data Schedule.
(b) No Form 8-K was filed during the last quarter of the fiscal year.
(c) See the list of exhibits in Item 14 (a) (3).
(d) No other financial statement schedules are required to be submitted.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 18th day
of September, 1996.
FIDELITY FEDERAL BANCORP
Registrant
By /S/ M. BRIAN DAVIS
------------------------------
M. Brian Davis
President and Chief Operating Officer
(Principal Executive Officer)
By /S/ DONALD R. NEEL
------------------------------
Donald R. Neel, Senior Vice President,
Treasurer and Chief Financial Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on September 18, 1996, by the
following persons on behalf of the registrant and in the capacities
indicated.
By /S/ BRUCE A. CORDINGLEY
--------------------------------
Bruce A. Cordingley
Chairman of the Board
By /S/ M. BRIAN DAVIS
--------------------------------
M. Brian Davis
President, Chief Operating Officer
and Director
By: /S/ CURT J. ANGERMEIER
--------------------------------
Curt J. Angermeier, Director
By /S/ WILLIAM R. BAUGH
--------------------------------
William R. Baugh, Director
By /S/ JACK CUNNINGHAM
--------------------------------
Jack Cunningham, Director
By /S/ ROBERT F. DOERTER
--------------------------------
Robert F. Doerter, Director
By /S/ DAVID L. MARAMAN
--------------------------------
David L. Maraman, Director
By /S/ MARK S. MATTINGLY
--------------------------------
Mark S. Mattingly, Director
By /S/ BARRY A. SCHNAKENBURG
--------------------------------
Barry A. Schnakenburg, Director
By /S/ JACK CUNNINGHAM
-----------------------------
Jack Cunningham, Attorney-in-fact
17
<PAGE>
INDEX TO EXHIBITS
Page Exhibit Number Exhibit
- ---------------------------------------------------------------------------
10(c) 1995 Key Employee's Stock Option Plan.
11 Statement regarding computation of
per share earnings.
13 1996 Annual Report to Stockholders
of Fidelity Federal Bancorp
(Incorporated in part into the Form
10-K by reference).
21 Subsidiaries of Fidelity Federal
Bancorp.
27 Financial Data Schedule.
18
Exhibit 10(c)
1995 KEY EMPLOYEES' STOCK OPTION PLAN
OF
FIDELITY FEDERAL BANCORP
1. PURPOSE. The Plan is designed to promote the interest
of Fidelity Federal Bancorp ("Company") and its Subsidiaries by
encouraging their officers and key employees, upon whose judgment,
initiative and industry the Company and its Subsidiaries are largely
dependent for the successful conduct and growth of their businesses, to
continue the association with the Company and its Subsidiaries of such
officers and key employees by providing additional incentive and
opportunity for unusual industry and efficiency through stock ownership,
and by increasing their proprietary interest in the Company and their
personal interest in its continued success and progress. The Plan
provides for the granting of (i) incentive stock options ("ISO's") and
(ii) nonqualified stock options ("NSO's").
2. ADMINISTRATION.
(a) The Plan shall be administered by a committee of not
less than three directors of the Company ("Committee") who shall be
designated from time to time by the Board of Directors. No member of
the Committee shall be eligible, at any time when he is such a member,
to receive the grant of an option under the Plan. The decision of a
majority of the members of the Committee shall constitute the decision
of the Committee. Subject to the provisions of the Plan, the Committee
is authorized (i) to grant ISO's and NSO's; (ii) to determine the
employees to be granted ISO's and NSO's; (iii) to determine the option
period, the option price and the number of shares subject to each
option; (iv) to determine the time or times at which options will be
granted; (v) to determine the time or times when each option becomes
exercisable and the duration of the exercise period; (vi) to determine
other conditions and limitations, if any, applicable to the exercise of
each option; and (vii) to determine the nature and duration of the
restrictions, if any, to be imposed upon the sale or other disposition
of shares acquired by any optionee upon exercise of an option, and the
nature of the events, if any, and the duration of the period, in which
any optionee's rights in respect of shares acquired upon exercise of an
option may be forfeited. Each option granted under the Plan shall be
evidenced by a written stock option agreement containing terms and
conditions established by the Committee consistent with the provisions
of the Plan, including such terms as the Committee shall deem advisable
in order that each ISO shall constitute an "incentive stock option"
within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended ("Code").
(b) The Committee is authorized, subject to the provisions of
the Plan, to adopt, amend and rescind such rules and regulations as it
may deem appropriate for the administration of the Plan and to make
determinations and interpretations which it deems consistent with the
Plan's provisions. The Committee's determinations and interpretations
shall be final and conclusive.
(c) The Committee shall also determine, in its sole
discretion, with respect to each employee, whether such options shall be
ISO's or NSO's, or any combination thereof; and whether any employee
<PAGE>
shall be given discretion to determine whether any options granted to
him shall be ISO's or NSO's or any combination thereof.
(d) Neither the Plan nor any stock option agreement executed
hereunder shall constitute a contract of employment. Participation in
the Plan does not give any employee the right to be retained in the
employ of the Company or any Subsidiary and does not limit in any way
the right of the Company or a Subsidiary to change the duties or
responsibilities of any employee or to terminate the employment of any
employee.
3. SHARES COVERED BY THE PLAN. The stock to be subject to
options under the Plan shall be shares of authorized common stock of the
Company and may be unissued shares or reacquired shares (including
shares purchased in the open market), or a combination thereof, as the
Committee may from time to time determine. Subject to the provisions of
Paragraph 14, the maximum number of shares to be delivered upon exercise
of all options granted under the Plan shall not exceed Two Hundred
Fifteen Thousand (215,000) shares. Shares covered by an option that
remain unpurchased upon expiration or termination of the option may be
made subject to further options.
4. ELIGIBILITY. Officers and key employees of the Company
or of any of its Subsidiaries, as selected by the Committee, shall be
eligible to receive grants of ISO's and NSO's under the Plan. Members
of the Committee shall not be eligible to receive grants of options
under the Plan while serving as members of the Committee.
5. OPTION PRICE.
(a) The option price per share of stock under each ISO shall
be not less than the fair market value of the share on the date on which
the option is granted; provided, however, as to officers and key
employees who, at the time an ISO is granted, own, within the meaning of
Section 425(d) of the Code, more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any
Subsidiary ("Shareholder-Employees"), the purchase price per share of
stock under each ISO shall be not less than one hundred ten percent
(110%) of the fair market value of the stock on the date on which the
option is granted.
(b) The option price per share of stock under each NSO shall
be determined by the Committee in its discretion; provided, however, the
option price per share under each NSO shall not be less than one hundred
per cent (100%) of the fair market value of the share on the date on
which the option is granted.
(c) For all purposes of the Plan, the term "fair market
value" shall be the mean between the reported closing bid and asked
prices for the shares of common stock of the Company as quoted by the
North American Securities Dealers Automated Quotation System ("NASDAQ").
If the common stock of the Company is not quoted by NASDAQ, the fair
market value shall be determined by the Committee based upon quotations
of the entities which make a market in Company stock and such other
factors as the Committee shall deem appropriate. If the common stock of
2
<PAGE>
the Company is not quoted by entities which make a market in the
Company's stock, the fair market value shall be determined by the
Committee based upon such factors as the Committee deems appropriate.
6. OPTION PERIOD. No option period shall exceed ten (10)
years; provided, however, the option period with respect to ISO's
granted to Shareholder-Employees shall not exceed five (5) years.
7. VESTING AND EXERCISE. Options granted hereunder shall,
unless otherwise provided by the Committee and agreed to by the employee
in the option agreement, vest in each eligible employee and thus become
exercisable commencing on the day the employee is granted options under
the Plan and on the first day of each succeeding calendar year so long
as the employee remains an employee in accordance with the following
schedule:
Percentage of Option
Calendar Year Shares Vested
Day of Grant 20%
January 1st of first year following year of grant 40%
January 1st of second year following year of grant 60%
January 1st of third year following year of grant 80%
January 1st of fourth year following year of grant 100%
and thereafter
If the employee is not an employee of the Company or any Subsidiary on
any of the above dates, then the option shares otherwise scheduled to
vest in the employee for the year in which the employee ceases to be an
employee of the Company or any Subsidiary and all option shares
scheduled to vest in the following years shall not vest in the employee
but shall be forfeited and shall not be exercisable by the employee
hereunder. Provided, however, if an employee dies or becomes permanently
and totally disabled prior to the time the employee becomes one hundred
percent (100%) vested in the option shares, then one hundred percent
(100%) of the option shares shall nevertheless vest, upon the death or
permanent and total disability of the employee, in the employee s
estate, legatees or heirs in the case of his death or the employee, his
attorney-in-fact or guardian in the case of his permanent and total
disability. As used herein, "permanent and total disability" shall have
the same meaning ascribed to such term by Section 22(e)(3) of the Code.
8. CHANGE IN CONTROL OF THE COMPANY. Notwithstanding the
provisions of Paragraph 7, in the event of a Change in Control of the
Company, the options covered by the agreement between the Company and
the employee may be exercised in full if such Change in Control of the
Company occurs when the employee is an employee of the Company or any
Subsidiary.
9. SPECIAL CALENDAR YEAR LIMITATION ON SHARES SUBJECT TO
ISO'S. Subject to the provisions of Paragraph 8 regarding Change in
Control of the Company, the aggregate fair market value (determined at
the time of the grant of the ISO's) of the stock with respect to which
ISO's are exercisable for the first time by an eligible employee during
3
<PAGE>
any calendar year (under all plans providing for the grant of incentive
stock options of the Company or any of its Subsidiaries) shall not
exceed One Hundred Thousand Dollars ($100,000.00).
10. SEQUENCE OF EXERCISING INCENTIVE STOCK OPTIONS. Any ISO
granted to an employee pursuant to the Plan shall be exercisable even if
there are outstanding previously granted but unexercised ISO's with
respect to such employee.
11. EARLY TERMINATION OF OPTION.
(a) Termination of Employment. All rights to exercise an option
shall terminate 30 days after the employee s employment terminates for
any reason other than his death or permanent and total disability (but
not later than the date the option expires pursuant to its terms).
Transfer of employment from the Company to a corporation which is a
Subsidiary of the Company, or vice versa, or from one Subsidiary to
another, shall not be deemed termination of employment. The Committee
shall have the authority to determine in each case whether a leave of
absence on military or government service shall be deemed a termination
of employment for purposes of this subparagraph.
(b) Permanent and Total Disability or Death of Optionee. If an
optionee's employment terminates due to permanent and total disability
or death, his option shall terminate one (1) year after termination of
his employment due to his permanent and total disability or death (but
not later than the date the option expires pursuant to its terms).
During such period, subject to the limitations of the option grant, the
optionee, his guardian, attorney-in-fact or personal representative, as
the case may be, may exercise the option in full. Provided, however, in
the case of an ISO, the option must be exercised within three (3) months
after the Optionee s retirement or death. In the event the ISO is not
exercised within such three (3) month period, the option may
nevertheless be exercised during the twelve (12) month period provided
for in the preceding provisions of this subsection (c), but shall be
treated for all purposes as an NSO. Provided, further, except as
otherwise provided in Paragraph 6 regarding the five (5) year term with
respect to certain grants of ISOs, this Option shall not be exercisable
after the expiration of ten (10) years from the date of this Agreement.
12. PAYMENT FOR STOCK. Full payment for shares purchased
shall be made at the time of exercising the option in whole or in part.
Such payment may be made either (a) in cash or (b) at the discretion of
the Committee, by delivering whole shares of common stock of the Company
(the "Delivered Stock") or a combination of cash and Delivered Stock.
Delivered Stock shall be valued by the Committee at its fair market
value determined as of the date of the exercise of the option in
accordance with the provisions of Paragraph 5. No shares shall be
issued until full payment for them has been made, and an optionee shall
have none of the rights of a shareholder with respect to such shares
until such shares are issued to him. Upon payment of the full purchase
price, the Company shall issue a certificate or certificates to the
optionee evidencing ownership of the shares purchased pursuant to the
exercise of the option which contain(s) such terms, conditions and
provisions as may be required and as are consistent with the terms,
conditions and provisions of the Plan and the stock option agreement
between the optionee and the Company.
4
<PAGE>
13. NONTRANSFERABILITY. No option shall be transferable,
except by the optionee's will or the laws of descent and distribution.
During the optionee's lifetime, his option shall be exercisable (to the
extent exercisable) only by him. The option and any rights and
privileges pertaining thereto shall not be transferred, assigned,
pledged or hypothecated by him in any way, whether by operation of law
or otherwise and shall not be subject to execution, attachment, or
similar process.
14. CHANGES IN STOCK.
(a) Subject to the provisions of Paragraph 8, in the event of
any change in the common stock of the Company through stock dividends,
split-ups, recapitalizations, reclassifications, conversions, or
otherwise, or in the event that other stock shall be converted into or
substituted for the present common stock of the Company as the result of
any merger, consolidation, reorganization or similar transaction, then
the Committee may make appropriate adjustment or substitution in the
aggregate number, price, and kind of shares available under the Plan and
in the number, price and kind of shares covered under any options
granted or to be granted under the Plan. The Committee's determination
in this respect shall be final and conclusive. Provided, however, that
the Company shall not, and shall not permit its Subsidiaries to,
recommend, facilitate or agree or consent to a transaction or series of
transactions which would result in a Change of Control of the Company
unless and until the person or persons or entity or entities acquiring
or succeeding to the assets or capital stock of the Company or any of
its Subsidiaries as a result of such transaction or transactions agrees
to be bound by the terms of the Plan so far as it pertains to options
theretofore granted but unexercised and agrees to assume and perform the
obligations of the Company hereunder. Notwithstanding the foregoing
provisions of this Paragraph 14(a), no adjustment shall be made which
would operate to reduce the option price of any ISO below the fair
market value of the stock (determined at the time the option was
granted) which is subject to an ISO.
(b) Subject to the provisions of Paragraph 8, in the event of
a Change in Control of the Company pursuant to which another person or
entity acquires control of the Company (such other person or entity
being the "Successor"), the kind of shares of common stock which shall
be subject to the Plan and to each outstanding option, shall,
automatically by virtue of such Change in Control of the Company, be
converted into and replaced by shares of common stock, or such other
class of securities having rights and preferences no less favorable than
common stock of the Successor, and the number of shares subject to the
option and the purchase price per share upon exercise of the option
shall be correspondingly adjusted, so that, by virtue of such Change in
Control of the Company, each optionee shall have the right to purchase
(i) that number of shares of common stock of the Successor which have a
fair market value equal, as of the date of such Change in Control of the
Company, to the fair market value, as of the date of such Change in
Control, of the shares of common stock of the Company theretofore
subject to his option, and (ii) for a purchase price per share which,
when multiplied by the number of shares of common stock of the Successor
subject to the option, shall equal the aggregate exercise price at which
the optionee could have acquired all of the shares of common stock of
the Company theretofore optioned to the optionee.
15. USE OF PROCEEDS. The proceeds received by the Company
from the sale of stock pursuant to the Plan will be used for general
corporate purposes.
5
<PAGE>
16. INVESTMENT REPRESENTATIONS. Unless the shares subject to
an option are registered under the Securities Act of 1933, each optionee
in the stock option agreement between the Company and the optionee shall
agree for himself and his legal representatives that any and all shares
of common stock purchased upon the exercise of the option shall be
acquired for investment and not with a view to, or for sale in
connection with, any distribution thereof. Any share issued pursuant to
an exercise of an option subject to this investment representation shall
bear a legend evidencing such restriction.
17. AMENDMENT AND DISCONTINUANCE. The Board of Directors
may, at any time, without the approval of the stockholders of the
Company (except as otherwise required by applicable law, rule or
regulations, including without limitation any shareholder approval of
the safe harbor rule promulgated under the Securities Exchange Act of
1934), alter, amend, modify, suspend, or discontinue the Plan, but may
not, without the consent of the holder of an option, make any alteration
which would adversely affect an option previously granted under the Plan
or, without the approval of the stockholders of the Company, make any
alteration which would: (a) increase the aggregate number of shares
subject to options under the Plan, except as provided in Paragraph 14;
(b) decrease the minimum option price, except as provided in Paragraph
14; (c) permit any member of the Committee to become eligible for
options under the Plan; (d) withdraw administration of the Plan from the
Committee or the Board of Directors; (e) extend the term of the Plan or
the maximum period during which any option may be exercised; (f) change
the manner of determining the option price; (g) change the class of
individuals eligible for options under the Plan; or (h) without the
consent of the holder of the option, alter or impair any option
previously granted under the Plan.
18. LIABILITY. No member of the Board of Directors, the
Committee or officers or employees of the Company or its Subsidiaries
shall be personally liable for any action, omission or determination
made in good faith in connection with the Plan.
19. EFFECTIVE DATE AND DURATION. Options may be granted
under the Plan for a period of ten (10) years commencing March 15, 1995,
the date on which the Board of Directors approved the Plan; provided,
however, that no option may be exercised until the Plan has been
approved by the shareholders of the Company. No options shall be granted
after March 15, 2005. Upon such date, the Plan shall expire except as
to outstanding options and which options and rights shall remain in
effect until they have been exercised or terminated or have expired.
ISO's must be granted within ten (10) years of the date the Plan is
adopted by the Board of Directors of the Company or approved by the
shareholders of the Company, whichever is earlier.
20. MISCELLANEOUS.
(a) The term "Board" or "Board of Directors" used herein
shall mean the Board of Directors of the Company, unless the context
clearly requires otherwise, and to the extent that any powers and
discretion vested in the Board of Directors are delegated to any
committee of the Board, the term "Board of Directors" shall also mean
such committee.
6
<PAGE>
(b) The term "Subsidiary" or "Subsidiaries" used herein shall
mean any savings association or other corporation more than fifty
percent (50%) of whose total combined voting stock of all classes is
held by the Company or by another corporation qualifying as a Subsidiary
within this definition.
(c) The term "Change in Control of the Company" used herein
shall mean a change in control of the Company of a nature that would be
required to be reported pursuant to the Change in Bank Control Act, as
amended (12 U.S.C. 1817(j)) and the Savings and Loan Holding Company Act
(12 U.S.C. 1467a), and regulations issued thereunder by the Office of
Thrift Supervision; provided that, without limitation, such change in
control shall also be deemed to have occurred for the purposes of this
Plan if any person, other than any person who on the day hereof is an
officer or director of the Company, is or becomes the beneficial owner,
directly or indirectly, of securities of the Company, its parent or any
Subsidiary representing 20% or more of the combined voting power of the
Company s then outstanding securities; or, during any period of two
consecutive years during the term of this Plan or the term of any
options granted hereunder as specified in Paragraph 19, individuals who
at the beginning of such period constitute the Board of Directors of the
Company cease for any reason to constitute at least a majority thereof,
unless the election of each director who was not a director at the
beginning of such period has been approved by directors representing at
least 2/3 of the directors then in office who were directors at the
beginning of the period. Notwithstanding the foregoing, a Change in
Control of the Company shall not occur as a result of the issuance of
stock by the Company in connection with a public offering of its stock.
7
FIDELITY FEDERAL BANCORP
EARNINGS PER SHARE COMPUTATION
EXHIBIT 11
<TABLE>
<CAPTION>
Fiscal years ending June 30 1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------
Primary:
Net income $3,234,909 $3,061,141 $1,582,512
========================================
Average common shares outstanding 2,453,275 2,360,586 2,338,600
Common stock equivalents - stock options 51,359 47,618 30,561
Common stock equivalents - warrants 271,513 90,688
----------------------------------------
Total average common and common
equivalent shares outstanding 2,776,147 2,498,891 2,369,161
========================================
Primary earnings per share $ 1.17 $ 1.23 $ 0.67
========================================
Fully Diluted:
Net income $3,234,909 $3,061,141 $1,582,512
========================================
Average common shares outstanding 2,453,275 2,360,586 2,338,600
Common stock equivalents - stock options 51,359 69,589 30,561
Common stock equivalents - warrants 271,513 204,256
----------------------------------------
Total average common and common
equivalent shares outstanding 2,776,147 2,634,431 2,369,161
========================================
Fully diluted earnings per share $ 1.17 $ 1.16 $ 0.67
========================================
</TABLE>
Exhibit 13
FIDELITY FEDERAL BANCORP
1996 ANNUAL REPORT
CONTENTS
Financial Highlights Page 2
Letter to Stockholders Page 3
Market Summary Page 4
Selected Statistical Information Page 5
Management's Report Page 6
Management's Discussion and Analysis Pages 7-27
Independent Auditor's Report Page 28
Consolidated Balance Sheet Page 29
Consolidated Statement of Income Pages 30-31
Consolidated Statement of Changes in Stockholders' Equity Pages 32-33
Consolidated Statement of Cash Flows Pages 34-35
Notes to the Consolidated Financial Statements Pages 36-59
Corporate Information Pages 60-64
<PAGE>
FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Per Share 1996 1995 Change
<S> <C> <C> <C>
- --------------------------------------------------------------------------
Fully diluted net income $1.17 $1.16 0.9%
Primary net income 1.17 1.23 (4.9)
Cash dividends declared 0.79 0.33 139.4
Book value at year-end 5.73 5.21 10.0
Market price (bid) at year-end 11.25 10.88 3.4
For the Year
- --------------------------------------------------------------------------
Net interest income $6,004 $5,531 8.6%
Provision for loan losses 455 420 8.3
Non-interest income 8,180 5,377 52.1
Non-interest expense 8,607 5,912 45.6
Net income 3,235 3,061 5.7
At Year-end
- --------------------------------------------------------------------------
Total assets $262,216 $269,438 (2.7)%
Total loans 217,221 223,100 (2.6)
Deposits 181,702 180,771 0.5
Stockholders' equity 14,295 12,405 15.2
Averages
- --------------------------------------------------------------------------
Total assets $274,837 $199,094 38.0%
Total earning assets 261,924 192,533 36.0
Total loans 226,874 173,980 30.4
Total deposits 184,105 123,120 49.5
Total stockholders' equity 13,618 11,122 22.4
Profitability Ratios
- --------------------------------------------------------------------------
Return on average assets 1.18% 1.54%
Return on average stockholders' equity 23.75 27.52
Net interest margin 2.29 2.87
Loan Quality Ratios
- --------------------------------------------------------------------------
Net charge-offs to average loans 0.05% 0.04%
Allowance for loan losses to loans
at end of period 0.49 0.32
Allowance for loan losses to
non-performing loans 275.06 122.09
Savings Bank Capital Ratios
- --------------------------------------------------------------------------
Tangible equity to assets at end
of period 7.05% 6.02%
Risk-based capital ratios:
Tier 1 capital 9.30 9.04
Total capital 12.35 12.19
Other Data
- --------------------------------------------------------------------------
Average common and common equivalent
shares outstanding 2,776,147 2,634,431
Number of full-time equivalent
employees at year-end 133 119
Number of banking offices 4 4
</TABLE>
2
<PAGE>
LETTER TO STOCKHOLDERS
It is again a pleasure to report record earnings for the third
consecutive year. Your company earned over $3.2 million in fiscal 1996,
or $1.17 per share. As our primary focus continues to be the
enhancement of shareholder value through consistent annual earnings
growth, Fidelity Federal Bancorp's management has embarked on a mission
to further refine its niche in the financial services sector. The
Company's recent operating history points to our success in penetrating
niche areas such as multifamily housing development, consulting, and
finance. Indeed, $10,000 invested in the Company in 1991 would today
have a market value of $65,481, an average annual return of 111%,
including dividend reinvestment. However, we refuse to rest on our
laurels. Non-traditional real estate businesses have served us well for
the past few years despite quarter to quarter earnings variability. It
is our goal to reduce the volatility of our real estate based fee income
to lessen this variability, although there can be no certainty of
success. In the long term, it will continue to be our ability to serve
our customers needs that will determine the profitability of our
company.
As evidence of management's efforts to enhance shareholder value,
the Company's return on equity for fiscal 1996 was 23.75%, placing its
return in the top ten of all exchange-traded banks and thrifts in the
country for the second consecutive year. Furthermore, the dividend
yield on the Company's stock currently exceeds 7%, tops in the country
among the same group, according to SNL Securities, Charlottesville, VA.
Return on assets was a robust 1.18% this year. In addition, the Company
declared and paid a 10% stock dividend in the fiscal fourth quarter, the
third dividend or split of the Company's shares in the last two years.
During the year, management has engineered some structural changes
in our organization and its balance sheet in order to set the stage for
long-term earnings improvements. Following three years of double-digit
asset growth, the Company showed a slight decrease in assets from the
previous year. In the second half of fiscal 1996, the Company sold
over $50 million in fixed rate mortgage loans in an effort to both
redeploy funds into higher yielding assets, as well as to reduce the
interest rate risk inherent with holding high levels of fixed rate
mortgages. Management believes it has sharply reduced the risks
associated with potential increases in interest rates as a result of
these transactions.
The asset sales during the year increased funds available for the
Company's continued expansion into commercial loans. The commercial
loan portfolio increased by 104% during the year to approximately $28
million. The multiple relationships that typically develop as a result
of these transactions present new opportunities to cross-market our
products to a new clientele. Management anticipates that this base of
lending business being acquired will accelerate the Company's transition
from a more traditional mortgage-based savings and loan to a financial
services entity with a broad spectrum of banking products and services.
Management anticipates that the regional environment for commercial
activity will facilitate the push into these lines of business.
The Company continues to use its expertise in the multifamily
housing arena to both develop its own properties and to provide
consulting services and financing to outside developers. The Company is
generally viewed by the industry as a leader in innovative and
personalized financial services and has had representatives lead panel
discussions at housing conferences across the country. These
activities remain an integral part of the Company's overall strategy.
Soon we will be announcing the opening of a modern two-story
office building on the east side of Evansville. This structure will
house the East Side Branch of United Fidelity Bank, fsb, as well as the
offices for Fidelity Federal Bancorp, Village Management Corporation,
and Village Securities Corporation, a new discount stock brokerage
company. Construction is expected to be completed in the next couple of
months. In addition, the Company recently announced the creation of
Village Finance Corporation, a consumer finance company, pending
regulatory approval. This entity will be based in the new office
building as well.
During the past year, Bruce Cordingley resigned as CEO to pursue
other opportunities but continues to serve as chairman. Mr. Cordingley
continues to assist the President in the day-to-day operations of the
Company.
In closing we would once again wish to thank all the employees of
Fidelity Federal Bancorp and its affiliates for another successful year.
We also want to thank all of the shareholders for their continued
support.
Cordially,
/S/ BRUCE A. CORDINGLEY /S/ M. BRIAN DAVIS
- ----------------------- ------------------
Bruce A. Cordingley M. Brian Davis
Chairman of the Board President and COO
3
<PAGE>
MARKET SUMMARY
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market
System under the symbol FFED. The following table sets forth, for the
periods indicated, the high and low bid prices per share as reported by
NASDAQ. The bid prices represent prices between dealers, do not include
retail mark-up, mark-down, or commissions, and may not represent actual
transactions. All amounts have been adjusted for the 10 percent stock
dividend distributed on May 27, 1996, the 2.1 for 1 stock split
distributed on April 14, 1995, and the twenty percent stock dividend
distributed July 15, 1994.
<TABLE>
<CAPTION>
Fiscal Year Common Stock Fiscal Year Common Stock
Ended Bid Prices Ended Bid Prices
June 30, 1996 High Low June 30, 1995 High Low
<S> <C> <C> <S> <C> <C>
- ------------------------------------------------------------------------------
First Quarter $12-3/4 $10-7/8 First Quarter $ 6-1/4 $5-1/2
Second Quarter 13-5/8 10-1/2 Second Quarter 7-3/4 6-1/4
Third Quarter 13-5/8 10-7/8 Third Quarter 9-1/2 7-3/4
Fourth Quarter 12-1/4 11-1/4 Fourth Quarter 10-7/8 9-1/2
</TABLE>
The recent bid and ask prices on August 23, 1996, were $10-1/4 and $11
respectively. During fiscal 1996 the Board of Directors declared a 10
percent stock dividend payable May 27, 1996. This was the third time in
the past two years the Company has rewarded the stockholders by issuing
a stock dividend or split. The Company declared cash dividends of $0.79
per share during fiscal 1996 compared to $0.33 per share for fiscal 1995
and $0.12 per share in fiscal 1994. The Company's principal source of
income and funds is dividends from the savings bank subsidiary and the
Company is not subject to any regulatory restriction on future
dividends, if any. The Company's dividend policy is to pay cash or
distribute stock dividends when the Board of Directors deems it to be
appropriate, taking into account the Company's financial condition and
results of operations, economic and market conditions, industry
standards, and other factors, including regulatory capital requirements
of its savings bank subsidiary.
STOCK OWNERSHIP
The following figures are used as an example of a stockholder who
purchased 100 shares of Fidelity Federal Bancorp stock at June 30, 1990.
The following data has not been restated for the stock dividends or
stock split.
<TABLE>
<CAPTION>
Closing
Market
Total Price (Bid)
Shares At Year Market
Date Stock Changes Owned End Value
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------
06/30/90 100 $ 6.50 $ 650.00
06/30/91 100 5.25 525.00
06/30/92 100 6.50 650.00
06/30/93 100 8.00 800.00
06/30/94 20% stock dividend 120 12.50 1,500.00
06/30/95 2.1 for 1 stock split 252 12.00 3,024.00
06/30/96 10% stock dividend 277 11.25 3,116.25
</TABLE>
In addition, this stockholder would have received $379.30 in cash
dividends during the period shown.
The approximate number of holders of outstanding Common Stock based upon
holders of record, as of August 23, 1996 is 925.
4
<PAGE>
SELECTED STATISTICAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA AS OF JUNE 30: 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Total assets $262,216 $269,438 $152,188 $108,375 $ 90,146
Interest-bearing deposits 4,107 6,549 6,254 2,619 3,620
Investment securities available for sale 17,458 15,403 14,465 19,315
Investment securities 14 17,795
Loans (net) 216,162 222,387 123,176 79,599 63,910
Deposits 181,702 180,771 89,038 74,373 79,607
Borrowings 62,985 73,996 51,689 24,266 4,325
Stockholders' equity 14,295 12,405 9,775 8,520 5,675
SELECTED OPERATIONS DATA FOR THE YEAR ENDED JUNE 30:
- ------------------------------------------------------------------------------------------------------
Interest income $21,529 $15,794 $8,710 $7,196 $7,727
Interest expense 15,525 10,263 5,171 4,729 5,219
---------------------------------------------------------
Net interest income 6,004 5,531 3,539 2,467 2,508
Provision for loan losses 455 420 150 130 538
---------------------------------------------------------
Net interest income after
provision for loan losses 5,549 5,111 3,389 2,337 1,970
Non-interest income 8,180 5,377 2,457 537 272
Non-interest expense 8,607 5,912 3,219 2,301 2,174
---------------------------------------------------------
Income before income tax 5,122 4,576 2,627 573 68
Income tax 1,887 1,515 1,044 228 19
Cumulative effect of change in
accounting method 78
---------------------------------------------------------
Net income $ 3,235 $ 3,061 $1,583 $ 423 $ 49
=========================================================
SELECTED FINANCIAL RATIOS
- ------------------------------------------------------------------------------------------------------
Return on average assets 1.18% 1.54% 1.30% 0.43% 0.05%
Return on stockholders' equity 23.75 27.52 17.20 6.38 0.87
Net interest margin 2.29 2.87 3.02 2.60 2.83
Net interest spread 2.11 2.59 2.67 2.38 2.66
Tangible equity to assets at year-end 7.05 6.02 6.43 7.86 6.30
Allowance for loan losses to loans 0.49 0.32 0.29 0.30 0.23
Allowance for loan losses to
non-performing loans 275.06 122.09 37.79 22.52 10.20
Dividend payout ratio 67.52 28.45 17.91 38.46 50.00
PER SHARE DATA
- ------------------------------------------------------------------------------------------------------
Fully diluted net income $ 1.17 $ 1.16 $ 0.67 $ 0.26 $ 0.04
Primary net income 1.17 1.23 0.67 0.26 0.04
Cash dividends declared 0.79 0.33 0.12 0.10 0.02
Book value at year-end 5.73 5.21 4.17 3.64 4.34
Closing market price (bid) at year-end 11.25 10.88 5.41 2.89 2.71
Number of average common and common
equivalent shares outstanding 2,776,147 2,634,431 2,369,161 1,638,945 1,314,053
</TABLE>
Note: All per share and average share data have been adjusted to reflect
the 10% stock dividend distributed on May 27, 1996, the 2.1 for 1 stock
split distributed on April 14, 1995, and the twenty percent stock
dividend distributed on July 15, 1994.
5
<PAGE>
MANAGEMENT'S REPORT
The management of Fidelity Federal Bancorp is responsible for the
accompanying consolidated financial statements. These statements have
been prepared in conformity with generally accepted accounting
principles which represent the best estimates and judgments of
management where appropriate. Financial information elsewhere in the
Annual Report is consistent with that in the financial statements.
To meet this responsibility, management maintains a system of internal
controls, policies, and administrative procedures designed to provide
reasonable assurance that transactions are recorded accurately. These
systems are augmented by the careful selection and training of qualified
personnel and a continuous program of internal audits. While there are
inherent limits in all internal control structures, management believes
the Company's internal controls provide basis for the preparation of
reliable financial statements.
The Audit Committee of the Board of Directors, composed solely of
directors who are not officers or employees of the Company, meet
regularly with the internal auditor and with the independent certified
public accountants, and Management, when appropriate, to review
auditing, accounting, reporting, and internal control matters. Both the
internal and external auditors have direct and private access to the
Audit Committee.
/S/ M. BRIAN DAVIS /S/ DONALD R. NEEL
----------------------- -----------------------
M. BRIAN DAVIS DONALD R. NEEL
President and Chief Senior Vice President,
Operating Officer Chief Financial Officer
and Treasurer
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
Fidelity Federal Bancorp (the "Company"), formed in 1993, is a
corporation organized under the laws of the State of Indiana and is a
registered savings and loan holding company, with its principal office
in Evansville, Indiana. The Company's savings bank subsidiary, United
Fidelity Bank, fsb (the "Savings Bank"), was organized in 1914 and is a
federally-chartered stock savings bank located in Evansville, Indiana.
In 1992, the Board of Directors developed and began implementation of a
new business plan for the Company to improve the financial performance
of the organization. The key elements of this business plan included:
(i) the formation of a holding company to provide financial flexibility
and to develop and engage in nonbanking business; (ii) the formation of
an affordable housing group to engage in real estate development,
management and financing of affordable housing projects; and (iii) the
growth of assets through the origination and acquisition of loans. Since
the implementation of the business plan, the holding company as well as
the affordable housing group, consisting of three nonbank subsidiaries
of the Savings Bank, has been formed. Revenue generated from
affordable housing activities has increased dramatically and significant
asset growth has been achieved, also resulting in higher revenues. In
fiscal 1996 the Company slowed its growth and positioned itself to
reduce debt, increase core deposits, sell loans and use the proceeds to
fund new loan production. The Company's business plan is to continue
developing and expanding the activities of the affordable housing group
in an ever increasing competitive market, and by continuing to look for
new financing niches both in and outside the housing arena. The Company
will work to increase the profitability of the core banking activities
and to grow earnings in each business segment.
The Company's net income has significantly increased over the past two
years. Net income has increased to $3,235,000 in 1996, from $1,583,000
in 1994, consolidated assets increased to $262,216,000 at June 30, 1996,
from $152,188,000 at June 30, 1994, and the Company achieved return on
average equity and return on average assets of 23.75% and 1.18% in 1996,
compared to 17.20% and 1.30% in 1994.
The Company, through its savings bank subsidiary, is engaged in the
business of obtaining funds in the form of savings deposits and other
borrowings and investing such funds in consumer installment loans,
commercial loans, and mortgage loans, primarily owner occupied
one-to-four family homes located in Indiana, and in investment and money
market securities. Following the adoption of its new business plan, the
Company has engaged in the business of owning, developing, building,
renting and managing affordable housing projects through its
wholly-owned subsidiaries, Village Management Corporation, Village
Community Development Corporation and Village Housing Corporation
(collectively, the "Affordable Housing Group"). The Affordable Housing
Group structures and participates in multifamily housing developments
which have been granted tax credits pursuant to Section 42 of the
Internal Revenue Code of 1986, as amended (the "Code") and tax-exempt
bond financed developments. The Affordable Housing Group is currently
involved in various tax-credit and tax-exempt bond projects which are in
various stages of development. Village Housing Corporation, as general
partner to limited partnerships which own the developments, receives a
percentage interest in the profits, losses and tax credits during the
life of the project and receives a percentage of the annual cash flow
and residual (sale or refinancing) proceeds during operation and at
disposition or refinancing of the developments, respectively. Village
Community Development Corporation, as contractor and developer, receives
construction and development fees as the project is completed and
Village Management Corporation, as manager of the completed project,
receives a fee based on a percentage of rental payments received from
the project's tenants. As part of Village Management's duties as
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
project manager, it monitors compliance with the requirements of the
Code to prevent recapture of all or a portion of the tax credits or
forfeiture of the tax-exempt status of the bonds which would occur if
certain tenant eligibility and rent restriction requirements were
violated. Revenue generated by the Affordable Housing Group has
increased from $2,186,000 in 1994 to $4,440,000 in 1996.
Another wholly-owned subsidiary of the Savings Bank, Fidelity Federal
Capital Corporation ("FFCC"), was established in April, 1994, to be the
mortgage banking arm of the Company in the financing of real estate,
including holding and placing debt and equity interests in real estate.
FFCC has packaged loan requests for developers of multifamily
residential real estate projects eligible for federal tax credits and
tax exempt financing and may finance housing transactions on a
conventional basis as well. While the loans packaged to date have been
referred to the Savings Bank for origination, FFCC may also package loan
transactions for other lenders, if the opportunity arises. FFCC earns
fees for construction review, supervision, and general project
oversight. The Savings Bank, as lender, can earn points and interest on
loans made to developers. The Savings Bank's credit decisions are
subject to applicable OTS restrictions on loans of this type.
A key element in the first stage of the Company's business plan was to
increase earning assets, primarily through loan growth. As illustrated
in the following table, the Company has steadily increased its average
earning assets and average loans resulting in corresponding increases in
total interest income. However, total interest income, as a percentage
of total income, has steadily decreased over this three-year period
resulting from increases in income from affordable housing activities.
Further, the Company has opted to control its loan growth by selling
loans in the secondary market, thus slowing the growth of total interest
income.
<TABLE>
<CAPTION>
Year Ended June 30, 1996 1995 1994
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
(dollars in thousands)
Average earning assets $261,924 $192,533 $117,055
Average loans $226,874 $173,980 $ 97,151
Average earning assets growth 36.0% 64.5% 23.7%
Average loan growth 30.4% 79.1% 34.7%
Average loans/average earning assets 86.6% 90.4% 83.0%
Total interest income $ 21,529 $ 15,794 $ 8,710
Total income $ 29,709 $ 21,171 $ 11,167
Total interest income/total income 72.5% 74.6% 78.0%
</TABLE>
The Company has been engaged in affordable housing activities since
September, 1992. The Company engages in the business of owning,
developing, building, renting and managing affordable housing projects
through the Affordable Housing Group. The Affordable Housing Group
earns income at various stages of the development. Village Housing
Corporation, as general partner to the limited partnerships which own
the developments, receives a percentage interest in the profits, losses
and tax credits during the life of the project and receives a percentage
of the annual cash flow and residual (sale or refinancing) proceeds
during operation and at disposition or refinancing of the developments,
respectively. Village Community Development Corporation, as contractor
and developer, receives construction and development fees as the project
is completed. As the development progresses, development fee income is
earned contractually on each project. However, these fees are not
recognized as fee income until the limited partners' equity investment
has been received or the syndication firm providing the equity has given
a firm commitment to provide the funds. Village Management Corporation,
as manager of the completed project, receives a fee based on a
percentage of rental payments received from the project's tenants.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Since June 30, 1994, FFCC has begun to earn fees for providing real
estate mortgage banking services to nonaffiliated developers.
A key element in the Company's business plan is to increase the income
generated by its affordable housing activities. As illustrated in the
following table, affordable housing income has substantially increased
over the last three years. Despite the steady increase in total
interest income, affordable housing income, as a percentage of total
income, has increased dramatically for 1994 and 1995. Despite increased
competition for tax credits and tax exempt financing, total affordable
housing income increased in 1996 compared to 1995, though the percentage
of affordable housing income to total income decreased.
<TABLE>
<CAPTION>
Year Ended June 30, 1996 1995 1994
<S> <C> <C> <C>
- ----------------------------------------------------------------------------
(dollars in thousands)
Real estate development fees $ 4,250 $ 4,252 $ 2,146
Real estate management fees 156 37 13
Real estate partnership fees 34 81 27
Real estate mortgage banking fees 942 351
--------------------------------
Total affordable housing income 5,382 4,721 2,186
Other non-interest income 2,798 656 271
--------------------------------
Total non-interest income $ 8,180 $ 5,377 $ 2,457
--------------------------------
Total income $29,709 $21,171 $11,167
================================
Affordable housing income/
total non-interest income 65.8% 87.8% 89.0%
Total non-interest income/total income 27.5% 25.4% 22.0%
Affordable housing income/total income 18.1% 22.3% 19.6%
</TABLE>
The Company also earns income from loan origination fees and interest
income on affordable housing loans, which is not reflected in the table.
The following table details average balances, interest income/expense
and average rates/yield for the Company's earning assets and interest
bearing liabilities for the years ended June 30, 1996, 1995, and 1994.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
<TABLE>
<CAPTION>
1996 1995 1994
Average Average Average Average Average Average
Year Ended June 30 Balances Interest Rates Balances Interest Rates Balances Interest Rates
<C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
ASSETS
Interest-bearing deposits $ 1,347 $ 64 4.75% $ 1,783 $ 90 5.05% $ 2,141 $ 108 5.04%
Federal funds sold 2,421 132 5.45 25 1 4.00
Investment securities available
for sale 16,528 1,099 6.65 14,125 857 6.07 16,144 736 4.56
Loans held for sale 11,140 877 7.87
Federal Home Loan Bank Stock 3,614 286 7.91 2,620 187 7.14 1,619 92 5.68
Loans(1)(2)
Commercial loans 9,720 1,022 10.51 6,817 689 10.11 426 31 7.28
Multifamily loans 28,804 3,049 10.59 15,799 2,494 15.79 4,796 673 14.03
Real estate mortgages 155,300 12,010 7.73 121,158 8,997 7.43 79,462 6,082 7.65
Consumer loans 33,050 2,990 9.05 30,206 2,479 8.21 12,467 988 7.92
--------------------------------------------------------------------------------------
Total loans 226,874 19,071 8.41 173,980 14,659 8.43 97,151 7,774 8.00
Total earning assets 261,924 21,529 8.22% 192,533 15,794 8.20% 117,055 8,710 7.44%
Less: Allowance for loan losses 833 482 289
Cash and due from banks 2,012 1,034 969
Premises and equipment 4,345 3,009 2,548
Other assets 7,389 3,000 1,852
--------------------------------------------------------------------------------------
Total assets $274,837 $199,094 $122,135
======================================================================================
LIABILITIES
Interest-bearing deposits
Interest-bearing checking $ 10,092 $ 398 3.94% $ 4,916 $ 115 2.34% $ 3,929 $ 104 2.65%
Money market accounts 6,066 180 2.97 6,600 200 3.03 5,987 174 2.91
Savings accounts 5,346 155 2.90 5,795 161 2.78 5,800 176 3.03
Certificates of deposit 158,703 9,816 6.19 102,651 5,950 5.80 59,180 2,694 4.55
--------------------------------------------------------------------------------------
Total interest bearing deposits 180,207 10,549 5.85 119,962 6,426 5.36 74,896 3,148 4.20
Federal funds purchased 2,301 136 5.91 4,115 244 5.93 414 16 3.86
Other borrowings 17,523 1,397 7.97 12,759 691 5.42 1,172 50 4.27
Federal Home Loan Bank advances 54,116 3,443 6.36 46,018 2,902 6.31 32,019 1,957 6.11
--------------------------------------------------------------------------------------
Total interest-bearing liabilities 254,147 15,525 6.11% 182,854 10,263 5.61% 108,501 5,171 4.77%
Non-interest bearing demand deposits 3,898 3,158 2,993
Advances by borrowers for taxes and
insurance 930 600 432
Other liabilities 2,244 1,360 1,012
--------------------------------------------------------------------------------------
Total liabilities 261,219 187,972 112,938
Stockholders' equity 13,618 11,122 9,197
--------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $274,837 $199,094 $122,135
======================================================================================
Recap: (3)
Interest income $21,529 8.22% $15,794 8.20% $8,710 7.44%
Interest expense 15,525 5.93 10,263 5.33 5,171 4.42
--------------------------------------------------------------------------------------
Net interest income/margin $ 6,004 2.29% $5,531 2.87% $3,539 3.02%
======================================================================================
</TABLE>
(1) Nonaccrual loans have been included in the average balances.
(2) Loan income includes interest and fees on loans.
(3) Average rates have been computed by dividing by total earning assets.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income, the Company's largest component of income,
represents the difference between interest and fees earned on loans,
investments and other interest-earning assets, and interest paid on
interest-bearing liabilities. It also measures how effectively
management has balanced and allocated the Company's interest
rate-sensitive assets and liabilities. Net interest income increased to
$6,004,000 or 8.6% in 1996 from $5,531,000 in 1995, which increased by
56.3% from $3,539,000 in 1994.
The net interest margin decreased from 2.87% at June 30, 1995 to 2.29%
at June 30, 1996, due to a decrease in loan fees associated with
company-developed affordable housing developments and increased
competition for deposits and loans. The average yield on interest
earning assets increased slightly to 8.22% at June 30, 1996 compared to
8.20% at June 30, 1995. The average yield on interest bearing
liabilities increased 50 basis points from June 30, 1995 to 6.11% at
June 30, 1996. The yield increase was primarily in certificates of
deposits, agent-acquired deposits and other borrowings. The
agent-acquired funds were acquired at varying terms but at higher rates
than would have been paid in the retail market. As a result of the
Company's plan to reduce the rapid growth rate, the balance of
agent-acquired funds remained relatively constant during fiscal 1996.
The Company sold over $57,000,000 of its fixed-rate mortgage loan
portfolio during the latter part of fiscal 1996, thus allowing the
Company the flexibility to let the agent acquired funds, which
typically bear a higher rate, to mature or rollover at the prevailing
rate, creating a favorable impact on the Company's net interest margin.
Interest income for the year ended June 30, 1996, was $21,529,000
compared to $15,794,000 for the year ended June 30, 1995, an increase of
$5,735,000 or 36.3%. These increases are primarily due to the interest
income generated from the increased loan balances over those of the
prior period. Average loans increased $52,894,000 or 30.4% over June
30, 1995. Of the $5,735,000 increase in interest income for fiscal
1996, interest on loans contributed $4,412,000. Interest expense for
the year ended June 30, 1996 increased $5,262,000 over the corresponding
period in 1995. Approximately $3,341,000 of the increase for fiscal
1996, is related to deposit growth. This is the result of an increase
of $60,245,000 in average interest-bearing deposits over June 30, 1995
and higher rates of interest paid on such deposits. Non-deposit
interest-bearing liabilities interest expenses also increased over June
30, 1995 by $1,139,000 to $4,976,000.
Net interest income increased to $5,531,000 for the year ended June 30,
1995, compared to $3,539,000 for the year ended June 30, 1994. The net
interest margin decreased slightly from 3.02% at June 30, 1994 to 2.87%
at June 30, 1995, as a result of increased competition for deposits.
Also contributing to this decrease was the Company's loan portfolio
yield which remained relatively flat due to competition, compared to the
increase in the market rates over the previous year. The average yield
on interest-earning assets increased from 7.44% at June 30, 1994 to
8.20% at June 30, 1995, an increase of 76 basis points. Meanwhile, the
average yield on interest-bearing liabilities increased 84 basis points
from June 30, 1994 to 5.61%. Interest income for the year ended June
30, 1995, was $15,794,000 compared to $8,710,000 for the year ended June
30, 1994, an increase of $7,084,000 or 81.3%. These increases are
mainly due to the interest income generated from the increased loan
balances over those of the prior period. Average loans increased
$76,829,000 or 79.1% over June 30, 1994. Of the $7,084,000 increase in
interest income for fiscal 1995, interest on loans contributed
$6,885,000. Additionally, the Company has originated construction loans
when providing financing for multifamily affordable housing developments
to unrelated borrowers. The Company recognized construction loan
origination fees of $657,000 for fiscal 1995, compared to $180,000 in
the corresponding period in 1994.
Interest expense for the year ended June 30, 1995 increased $5,092,000
over the corresponding period in 1994. Approximately $2,023,000 of the
increase for fiscal 1995, is related to deposit growth. This is the
result of an increase of $45,066,000 in average interest-bearing
deposits over June 30, 1994, and higher rates of interest paid
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
on such deposits. In addition to an increase in the interest rate
environment as compared to 1994, the increase in interest expense was
due to the use of agent-acquired deposits, which generally carry a
higher interest rate than retail deposits. This strategy permits the
Company to better match loan origination terms and thus obtain growth,
while providing a favorable (even though somewhat smaller) spread
between the yield on loans and the cost of the funds. The disadvantage
is that, to the extent the non-deposit interest-bearing liabilities and
agent-acquired deposits replace retail deposits, the cost of funds is
increased in the current environment. Interest expense on non-deposit
interest-bearing liabilities increased $1,814,000 or 89.7% for the year
ended June 30, 1995, compared to the year ended June 30, 1994, due to
the increase in non-deposit interest-bearing liabilities outstanding.
QUARTERLY RESULTS OF OPERATIONS
The Company's non-interest income is largely dependent upon the
completion of large individual loan transactions or housing
developments. As such, the Company's earnings may experience some
variability from quarter to quarter.
<TABLE>
<CAPTION>
1996 Sept 30 Dec 31 Mar 31 June 30
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------
Interest income $5,350 $5,510 $5,366 $5,303
Interest expense 3,938 4,021 3,843 3,723
-------------------------------------------
Net interest income 1,412 1,489 1,523 1,580
Provision for loan losses 110 60 75 210
Non-interest income 2,657 2,162 1,680 1,681
Non-interest expense 2,038 2,142 2,262 2,165
-------------------------------------------
Income before income taxes 1,921 1,449 866 886
Income taxes 780 535 297 275
-------------------------------------------
Net income $1,141 $ 914 $ 569 $ 611
===========================================
Per share:
Fully diluted net income $ 0.42 $ 0.33 $ 0.20 $ 0.22
Primary net income 0.42 0.33 0.20 0.22
Cash dividend 0.14 0.23 0.23 0.20
1995 Sept 30 Dec 31 Mar 31 June 30
- -------------------------------------------------------------------------
Interest income $2,935 $3,954 $4,135 $4,770
Interest expense 1,837 2,222 2,780 3,424
-------------------------------------------
Net interest income 1,098 1,732 1,355 1,346
Provision for loan losses 65 85 135 135
Non-interest income 1,280 760 1,294 2,043
Non-interest expense 1,222 1,326 1,435 1,929
-------------------------------------------
Income before income taxes 1,091 1,081 1,079 1,325
Income taxes 428 259 326 502
-------------------------------------------
Net income $ 663 $ 822 $ 753 $ 823
===========================================
Per share:
Fully diluted net income $ 0.28 $ 0.34 $ 0.29 $ 0.31
Primary net income 0.28 0.34 0.30 0.31
Cash dividend 0.06 0.07 0.09 0.11
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RATE/VOLUME ANALYSIS
The following table sets forth an analysis of volume and rate changes in
interest income and interest expense of the Company's average earning
assets and average interest-bearing liabilities. The table
distinguishes between the changes related to average outstanding
balances of assets and liabilities (changes in volume holding the
initial interest rate constant) and the changes related to average
interest rates (changes in average rate holding the initial outstanding
balance constant). The change in interest due to both volume and rate
has been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in each.
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Increase/(Decrease) Increase/(Decrease)
----------------------------- ---------------------------
Due to Due to
---------------- ---------------
Year Ended June 30 Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Interest income on average earning assets:
Loans $4,456 $ (44) $4,412 $6,148 $ 737 $6,885
Investment securities available for sale 146 96 242 (92) 213 121
Loans held for sale 877 877
Federal Home Loan Bank Stock 71 28 99 57 38 95
Interest bearing deposits in
other banks (22) (4) (26) (18) (18)
Federal funds sold 96 35 131 1 1
------------------------------------------------------------------
Total interest income from
earning assets 4,747 988 5,735 6,095 989 7,084
------------------------------------------------------------------
Interest expense on average interest-bearing
liabilities:
Now accounts 121 162 283 26 (15) 11
Money market deposits accounts (16) (4) (20) 18 8 26
Passbook savings accounts (12) 6 (6) (15) (15)
Certificates of deposit 3,248 618 3,866 1,979 1,277 3,256
Federal funds purchased (108) (108) 143 85 228
Other borrowings 258 448 706 494 147 641
Federal Home Loan Bank advances 511 30 541 856 89 945
------------------------------------------------------------------
Total interest expense on interest-
bearing liabilities 4,002 1,260 5,262 3,516 1,576 5,092
------------------------------------------------------------------
Changes in net interest income $ 745 $ (272) $ 473 $2,579 $ (587) $1,992
==================================================================
</TABLE>
PROVISION FOR LOAN LOSSES
The Company makes monthly provisions for possible loan losses in amounts
estimated to be sufficient to maintain the allowance for loan losses at
a level considered necessary by management to absorb possible losses in
the loan portfolios. Provision for loan losses was $455,000 for the
year ended June 30, 1996, compared to $420,000 for June 30, 1995, and
$150,000 for June 30, 1994. The ratio of the allowance for loan losses
to non-performing loans was 275.1% at June 30, 1996, 122.1% at June 30,
1995, and 37.8% at June 30, 1994. The increase in the provision was
primarily due to the growth in and the change in the composition of the
portfolio, which includes higher levels of commercial and multifamily
loans than in prior years.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
NON-INTEREST INCOME. Non-interest income increased by $2,803,000 or
52.1% for the year ended June 30, 1996, compared to 1995, after
increasing by $2,920,000 or 118.8% in 1995 from 1994. The following
table summarizes non-interest income for the three years ending June 30:
<TABLE>
<CAPTION>
NON-INTEREST INCOME
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Change from prior year
Amount 1996 1995
1996 1995 1994 Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------
Fee income from real estate
development and management $4,440 $4,370 $2,186 $ 70 1.6% $2,184 99.9%
Service charges on deposit accounts 181 99 103 82 82.8 (4) (3.9)
Gain on sale of
Real estate loans 743 743 100.0
Premises and equipment 719 719 100.0
Letter of credit fees 481 189 2 292 154.5 187 9,350.0
Real estate mortgage banking fees 942 351 591 168.4 351 100.0
Other income 674 368 166 306 83.2 202 121.7
----------------------------------------------------------------------------
Total non-interest income $8,180 $5,377 $2,457 $2,803 52.1% $2,920 118.8%
============================================================================
</TABLE>
Fee income from real estate development and management increased $70,000
over June 30, 1995 to $4,440,000 at June 30, 1996. The Affordable
Housing Group has begun to encounter increased competition in the
financing and development of multifamily housing. The IRS Section 42
tax credit program has been used by the Company to develop affordable
housing for individuals with low to moderate incomes. In addition, the
Company has provided financing for other developers utilizing the
program. Since the IRS Section 42 tax credit program was created in
1986, competition has consistently increased in this area. As a result
of the increase in the number of competitors in this industry, the
Company has noted a reduction in the amount of fees it has been able to
charge on individual transactions. Thus, fee income generated to date
is not necessarily indicative of future results. The Company continues
to develop new and innovative housing-related products to supplement its
Section 42 activity. However, there is no assurance that those new
products will be able to replace any loss of income from current
activities. Fee income from real estate development and management was
$4,370,000 for the year ended June 30, 1995 compared to $2,186,000 for
June 30, 1994, an increase of $2,184,000. The number of tax-credit and
tax-exempt bond projects increased from eight projects in 1994 to over
30 projects in 1995, which are in various stages of completion. Service
charges on deposit accounts increased $82,000 over fiscal 1995 to
$181,000 for fiscal 1996. The Company has concentrated its efforts to
attract transaction accounts, which increased $16,901,000 over fiscal
1995 resulting in higher fee income. The Company's savings bank
subsidiary sold a parcel of real estate during the first quarter
resulting in a gain of $719,000. The Company has no plans at this time
to sell additional real estate. Beginning in fiscal 1996, the Company
began selling its current production of one-to-four family fixed rate
mortgage loans, as well as a package of seasoned consumer loans. In the
second quarter, the Company continued to sell current production of
one-to-four family fixed rate mortgage loans, but also reclassified $52
million of one-to-four family loans as loans held for sale. The Company
has reported net gains of $743,000 for fiscal 1996.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company adopted FAS 122 "Accounting for Certain Mortgage Banking
Activities" ("FAS 122") to require the holder of mortgage services to
recognize as separate assets, rights to service mortgage loans,
regardless of how the rights were acquired. The Company adopted FAS 122
during the first quarter of fiscal 1996. With the increase in mortgage
loan sales during fiscal 1996, the Company has recognized $575,000 in
mortgage loan servicing rights which are included in the net gain on
sale of loans. Letter of credit fees increased $292,000 over fiscal
1995 as the Company increased its standby letters of credit outstanding,
particularly on affordable housing developments in which the borrowers
are not affiliated with the Company. FFCC began operations in April
1994, and earned $351,000 in fees for fiscal 1995 and $942,000 in fiscal
1996. This has been the result of an increase in the number of
transactions closed compared to fiscal 1995. Other income increased
$306,000 over fiscal 1995 due to the Company's receipt of $146,000 in
dividend income on the stock the Savings Bank holds with its data
processing cooperative, a $48,000 increase in loan servicing fees over
fiscal 1995, the Company's receipt of $50,000 on the expiration of a
land option, and the receipt of $31,000 in title fee income. The
$202,000 increase in other non-interest income for fiscal 1995 over
fiscal 1994 was the result of the recognition of income related to other
affordable housing activities including the Company's admission as a
limited partner in two affordable housing partnerships, for service
provided.
NON-INTEREST EXPENSE. Non-interest expense increased by $2,695,000 or
45.6% for the year ended June 30, 1996, compared to 1995 after
increasing by $2,693,000 or 83.7% in 1995 from 1994. The following
table summarizes non-interest expense for the three years ending June
30:
<TABLE>
<CAPTION>
Non-interest expense
- ----------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Change from prior year
Amount 1996 1995
1996 1995 1994 Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------
Salaries and employee benefits $4,486 $2,888 $1,538 $1,598 55.3% $1,350 87.8%
Net occupancy expenses 471 426 313 45 10.6 113 36.1
Equipment expenses 383 287 159 96 33.4 128 80.5
Deposit insurance expense 287 238 171 49 20.6 67 39.2
Data processing expense 417 211 134 206 97.6 77 57.5
Legal and professional fees 448 471 180 (23) (4.9) 291 161.7
Other expense 2,115 1,391 724 724 52.0 667 92.1
----------------------------------------------------------------------------
Total non-interest expense $8,607 $5,912 $3,219 $2,695 45.6% $2,693 83.7%
============================================================================
</TABLE>
Salaries and employee benefits increased $1,598,000 and accounted for
59.3% of the increase in total non-interest expense in fiscal 1996. An
increase in staffing was planned to accommodate growth and to continue
providing professional and timely service to the Company's customers.
Also as a result of the Company's growth and loan diversification
strategy, net occupancy and equipment expense increased over June 30,
1995, by $45,000 and $96,000, respectively. Deposit insurance increased
$206,000 over fiscal 1995 as total average deposits have increased by
$60,985,000 or 49.5% since June 30, 1995. Legal and professional fees
decreased $23,000 from fiscal 1995, while other expense increased
$724,000 as follows: Advertising increased $108,000 over the prior year
as the Company's Savings Bank increased the advertising campaign to
accomplish deposit growth and name recognition. The Affordable Housing
Group also increased advertising as competition grew in fiscal 1996.
During fiscal 1996, the Company began participating some of its
multifamily loans resulting in an
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
increase in loan participation expenses of $94,000. OTS assessment and
filing fees increased $54,000 over the prior year due to the increased
complexity of the Company's activities. Travel and lodging increased
$49,000 due to the Company's expansion in affordable housing activities,
which include research on potential sites, closings on new sites and
routine checks on existing sites and sites in the construction phase.
The Company's affordable housing subsidiaries continue to search for new
sites to develop, but sometimes expenses are incurred on potential sites
that do not materialize and are expensed as abandoned projects.
Abandoned projects expense was $61,000 compared to $18,000 in the prior
year as activity continues to increase in the affordable housing segment
of the Company. The Company accounts for the investment in various
affordable housing partnerships on the equity method. Currently, the
Company has written down its investment in various developments by
$73,000 for fiscal 1996. As a result of consumer loan sales, dealer
fees expense increased $32,000 over the prior year. In addition, the
expensing of prepaid dealer interest on sold loans resulted in
additional expense of $52,000. Finally bond issuance cost amortization
for the junior and senior subordinated notes were $58,000 for fiscal
1996 compared to $14,000 in fiscal 1995. The remaining increase was
generally due to the Company's expanded business activities.
Salaries and employee benefits increased $1,350,000 and accounted for
50.1% of the increase in total non-interest expense in fiscal 1995.
Staffing level increases associated with the Savings Bank's growth and
loan diversification strategy, as well as increases in affordable
housing activities were the primary reasons for the increase and the
increase in net occupancy and equipment expenses, which increased over
June 30, 1994, by $113,000 and $128,000, respectively. Legal and
professional fees increased $291,000 of which $125,000 was incurred as a
result of consulting fees paid for syndication strategies in connection
with real estate development and management activities. Other expenses
increased $667,000 due to printing and supplies, postage and other
operating expenses which again increased due to the growth of the
Company. Advertising costs increased $61,000 over June 30, 1994 as
advertising was increased and the name change of the Company's savings
bank subsidiary was completed. Expenses of $79,000 were incurred by
FFCC, which started operations in the first quarter of fiscal 1995.
INCOME TAX EXPENSE. Income tax expense was $1,887,000 in fiscal 1996,
as compared to $1,515,000 recorded in fiscal 1995 and $1,044,000 in
fiscal 1994. The effective tax rate for the current year increased to
36.8% from 33.1% for fiscal 1995 and 39.8% for fiscal 1994, as pre-tax
income increased from fiscal 1995 despite an increase in tax credits
from Affordable Housing Group activities.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
At year-end, the Company's assets decreased $7,222,000 or 2.7%. The
Company reclassified $52,000,000 of its fixed rate residential first
mortgages from the loan portfolio into a Loans Held for Sale balance
sheet category and sold these loans during fiscal 1996. Average assets
for fiscal 1996 increased 38.0% over fiscal 1995 to $274,837,000. Total
liabilities decreased $9,112,000 at year-end as the Company used loan
proceeds to reduce its borrowings. Total deposits increased $931,000
despite allowing agent acquired funds to reprice at the retail rate or
mature.
LOANS
The following table shows the composition of the Company's loan
portfolio as of June 30:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
(dollars in thousands)
Real estate mortgage loans
Conventional $106,288 $113,870 $ 74,701 $ 58,677 $43,187
Construction loans 36,938 24,670 12,536 3,988 880
Commercial loans 18,267 7,133 1,022
Multifamily loans 15,420 26,147 12,372 2,969 5,265
First mortgage real estate
loans purchased 7,612 4,921 4,064 4,635 6,499
Real estate contracts 56 101 107 112 116
----------------------------------------------------------
184,581 176,842 104,802 70,381 55,947
Commercial loans-other than secured
by real estate 9,393 6,414 442 162
Consumer loans 23,062 39,635 18,063 9,087 7,890
Loans to depositors secured by savings 185 209 225 205 223
----------------------------------------------------------
Total loans $217,221 $223,100 $123,532 $ 79,835 $64,060
==========================================================
Total assets $262,216 $269,438 $152,188 $108,375 $90,146
----------------------------------------------------------
Total loans to total assets 82.8% 82.8% 81.2% 73.7% 71.1%
==========================================================
</TABLE>
As mentioned above, the loan sale accounts for the $7,582,000 decrease
in conventional loans. Included in construction loans are $7,476,000 in
loans to affordable housing developments in addition to $9,782,000 in
affordable housing development loans which are included in the
multifamily loans. The remaining $29,462,000 in construction loans were
primarily single-family dwellings. Commercial loans have continued to
increase since the Company began originating commercial loans during the
first quarter of fiscal 1995. Commercial real estate and commercial
loans have increased from $1,464,000 in fiscal 1994 to $27,660,000 in
fiscal 1996. The Company purchased some first mortgage real estate
loans during fiscal 1996 accounting for the $2,691,000 increase over
fiscal 1995. Consumer loans decreased $16,573,000 from fiscal 1995 as a
result of two consumer loan sales. The Company has made arrangements
with another institution to pass new indirect consumer loans originated
to the other institution in exchange for a fee. Therefore the Company's
consumer loan portfolio has been shrinking. The Company's loan
portfolio contains no loans to foreign governments, foreign enterprises,
foreign operations of domestic
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
companies, or highly leveraged transactions, nor any concentration to
borrowers engaged in the same or similar industries that exceed 10
percent of total loans.
The following table sets forth the remaining maturities for certain loan
categories as of June 30, 1996:
<TABLE>
<CAPTION>
Total for Loans
Due After
One Year Having:
Within One to After Fixed Variable
LOAN MATURITIES One Year Five Years Five Years Total Rates Rates
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
(dollars in thousands)
Real estate mortgage loans $11,292 $44,640 $128,834 $184,766 $69,746 $115,020
Consumer loans 9,954 12,287 821 23,062 18,149 4,913
Commercial loans 5,489 3,613 291 9,393 1,599 7,794
----------------------------------------------------------------------
Total $26,735 $60,540 $129,946 $217,221 $89,494 $127,727
======================================================================
</TABLE>
Non-performing loans. The Company discontinues the accrual of interest
income on loans when, in the opinion of management, there is reasonable
doubt as to the timely collectibility of interest or principal.
Nonaccrual loans are returned to an accrual status when, in the opinion
of management, the financial position of the borrower indicates that
there is no longer any reasonable doubt as to the timely payment of
principal and interest. Management believes that loans now current where
there are reasonable doubts as to the ability of the borrower to comply
with the present loan repayment terms are immaterial. Income received
on restructured and nonaccrual loans was $15,000 in 1996, $74,000 in
1995 and $96,000 in 1994. Additional interest income of approximately
$9,000, $3,000, and $14,000 for 1996, 1995, and 1994, respectively,
would have been recorded had income on nonaccruing and restructured
loans been considered collectible and accounted for on an accrual basis.
The following table provides information on the Company's non-performing
loans as of June 30:
<TABLE>
<CAPTION>
NON-PERFORMING LOANS 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------
(dollars in thousands)
Nonaccrual loans $342 $ 47 $190 $ 288 $1,461
Restructured 514 752 760
90 days or more past due 43 23 9
----------------------------------------
Total $385 $584 $942 $1,048 $1,470
========================================
Ratio of non-performing loans to
Total loans 0.18% 0.26% 0.76% 1.31% 2.29%
========================================
</TABLE>
Non-performing loans amounted to 0.18% of total loans as of June 30,
1996, as compared to 0.26% of total loans as of June 30, 1995. The
decrease in the ratio from 1996 to 1995 is attributable to the 34.1%
decrease in non-performing loans. Management is not aware of any loans
that have not been disclosed that represent or result from trends or
uncertainties which may have a material impact on the Company's future
operating results, liquidity or capital resources.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES. The Company establishes its
provision for loan losses and evaluates the adequacy of the allowance
for loan losses based on management's evaluation of its loan portfolio
and changes in loan activity. Such evaluation, which includes a review
of all loans for which full collectibility may not be reasonably
assured, considers among other matters, the estimated fair value of the
underlying collateral, economic conditions, historical loan loss
experience, the composition of the loan portfolio and other factors that
warrant recognition in providing for an adequate loan loss allowance.
This evaluation is performed on a monthly basis and is designed to
ensure that all relevant matters affecting loan collectibility will
consistently be identified in a detailed loan review and that the
outcome of the review will be considered in a disciplined manner by
management in determining the necessary allowance and the provision for
loan losses. The amounts actually reported in each period will vary
with the outcome of this detailed review.
The Company adopted SFAS Nos. 114 and 118, Accounting by Creditors for
Impairment of a Loan and Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures on July 1, 1995. The adoption
of SFAS Nos. 114 and 118 did not have a material impact on the Company's
financial position or results of operations. The Company has not
experienced any impaired loans since the adoption of SFAS Nos. 114 and
118.
The following table sets forth loan charge-offs and recoveries by the
type of loan and an analysis of the allowance for loan losses for the
years ended June 30:
<TABLE>
<CAPTION>
SUMMARY OF LOAN LOSS EXPERIENCE 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
(dollars in thousands)
Allowance for loan losses
Balance at July 1, $ 713 $356 $236 $150 $142
Loan charge-offs:
Real estate mortgage 12 8 8 22 537
Consumer 128 74 39 28 26
-----------------------------------------------
Total loan charge-offs 140 82 47 50 563
Loan recoveries:
Real estate mortgage 17 8 6 5 23
Consumer 14 11 11 1 10
-----------------------------------------------
Total loan recoveries 31 19 17 6 33
Net charge-offs 109 63 30 44 530
Provision for loan losses 455 420 150 130 538
-----------------------------------------------
Balance at June 30, $1,059 $713 $356 $236 $150
===============================================
Ratio of net charge-offs to average loans
outstanding during the period 0.05% 0.04% 0.03% 0.06% 0.83%
===============================================
Ratio of provision for loan losses to
average loans outstanding during the period 0.20% 0.24% 0.15% 0.18% 0.84%
===============================================
Ratio of allowance for loan losses to
total loans outstanding at year end 0.49% 0.32% 0.29% 0.30% 0.23%
===============================================
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The allowance for loan losses was $1,059,000 as of June 30, 1996, and
$713,000 as of June 30, 1995. Net loan charge-offs were $109,000 or
0.05% of average loans in 1996 compared to $63,000 or 0.04% of average
loans in 1995. Management considers the allowance for loan losses
adequate to meet losses inherent in the loan portfolio as of June 30,
1996.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses
was further allocated to include commercial and multifamily loans in
fiscal 1995. The allocation for loan losses and the percentage of loans
within each category to total loans at June 30 are as follows:
<TABLE>
<CAPTION>
Allowance Amount Percentage of Loans to Total Loans
1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------
(dollars in thousands)
Real estate mortgage $ 155 $208 $219 $151 $ 78 61.3% 67.5% 74.8% 84.5% 79.1%
Multifamily 420 195 8.8 11.7 10.0 3.7 8.2
Consumer 214 260 137 85 72 10.7 17.9 14.8 11.6 12.7
Commercial 270 50 19.2 2.9 0.4 0.2
------------------------------------------------------------------------------------------
Total $1,059 $713 $356 $236 $150 100.0% 100.0% 100.0% 100.0% 100.0%
==========================================================================================
</TABLE>
INVESTMENT SECURITIES. The Company's investment policy is reviewed
annually by its Board of Directors. Any significant changes to the
policy must be approved by the Board. The Board has an asset/liability
management committee which is responsible for keeping the investment
policy current.
As of June 30, 1996, the investment portfolio represented 6.7% of the
Company's assets, compared to 5.7% at June 30, 1995, and is managed in a
manner designed to meet the Board's investment policy objectives. The
primary objectives, in order of priority, are to further the safety and
soundness of the Company, to provide the liquidity necessary to meet day
to day, cyclical, and long-term changes in the mix of the Company's
assets and liabilities and to provide for diversification of risk and
management of interest rate and economic risk. At June 30, 1996, the
entire investment portfolio was classified as available for sale, in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". The
net unrealized loss at June 30, 1996, was $140,000 which was comprised
of gross gains of $36,000, gross losses of $267,000, and a tax benefit
of $91,000, an increase of $128,000 over June 30, 1995. Theincrease was
caused by market interest rate changes during the period. Although the
entire portfolio is available for sale, management has not identified
specific investments for sale in future periods.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following table sets forth the components of the Company's
investment securities available for sale:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
(dollars in thousands)
Investment securities available for sale:
U.S. Treasury securities $ 504 $ 515 $ 2,505
Federal agency securities 4,365 4,002 991
Federal Home Loan Mortgage
Corporation mortgage-backed securities 6,727 6,830 7,959
Federal National Mortgage
Association mortgage-backed securities 1,697 2,103 2,515
Government National Mortgage
Association mortgage-backed securities 4,165 1,953 495
-------------------------------
Total securities available for sale $17,458 $15,403 $14,465
===============================
</TABLE>
The Company's investment securities portfolio increased by $2,055,000 to
$17,458,000 at June 30, 1996, compared to $15,403,000 at June 30, 1995.
The Company holds various types of securities, including mortgage-backed
securities. Inherent in mortgage-backed securities is prepayment risk.
Prepayment rates generally can be expected to increase during periods of
lower interest rates as some of the underlying mortgages are refinanced
at lower rates. Conversely, the average lives of these securities
generally are extended as interest rates increase. The Company's total
investment securities portfolio increased by $938,000 at June 30, 1995,
from June 30, 1994 as additional securities were purchased during 1995
and due to a decrease in the net unrealized loss.
The following table sets forth the contractual maturities of investment
securities available for sale as of June 30, 1996, and the weighted
average yields of such securities. As of June 30, 1996, the Company
held no securities with a book value exceeding 10% of stockholders'
equity.
<TABLE>
<CAPTION>
Maturity
-------------------------------------------------------------------------------------------
After One But After Five But
Within One Within Five Within Ten
Year Years Years Over Ten Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------
(dollars in thousands)
U.S. Treasuries $504 8.00% $ 504 8.00%
Federal agencies $3,872 5.84% $493 6.00% 4,365 5.86
Federal Home Loan Mortgage
Corporation 264 8.00 1,107 6.00 218 7.39 $ 5,138 7.24% 6,727 7.07
Federal National Mortgage
Association 1,697 6.58 1,697 6.58
Government National Mortgage
Association 23 7.51 4,142 6.83 4,165 6.83
-------------------------------------------------------------------------------------------
Total $768 8.00% $5,002 5.88% $711 6.43% $10,977 6.98% $17,458 6.69%
-------------------------------------------------------------------------------------------
Percent of total 4% 29% 4% 63% 100%
===========================================================================================
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Funding Sources
DEPOSITS. The Company attracts both short-term and long-term deposits
from the retail market by offering a wide assortment of accounts with
different terms and different interest rates. These deposit
alternatives include checking accounts, regular savings accounts, money
market deposit accounts, fixed rate certificates with varying
maturities, variable interest rate certificates, negotiable rate jumbo
certificates ($100,000 or more), and variable rate IRA certificates.
Average deposits increased by $60,985,000 or 49.5% for the year ended
June 30, 1996. Growth came from three categories; NOW, Certificates of
deposit and agent-acquired certificates of deposit. NOW accounts and
certificates of deposit increased $5,176,000 and $10,022,000,
respectively, as the Company launched an aggressive marketing campaign
with new products during fiscal 1996 to increase the core deposit base.
The remaining growth was primarily due to the acquistion of
agent-acquired certificates of deposit. The $46,030,000 increase in
these funds were primarily used to fund loan originations. The term of
the certificates of deposit acquired was dependent upon the terms of the
loans originated and matched accordingly, in order to limit the
Company's interest rate risk. The certificates of deposit were acquired
at rates higher than the current local market for retail deposits, but
generally below rates charged for FHLB advances.
The following table sets forth the average balances of and the average
rate paid on deposits by deposit category for the year ended June 30,
1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
AVERAGE DEPOSITS Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
(dollars in thousands)
Demand $ 3,898 $ 3,158 $ 2,993
Now accounts 10,092 3.95% 4,916 2.34% 3,929 2.65%
Money market accounts 6,066 2.97 6,600 3.03 5,987 2.91
Savings accounts 5,346 2.90 5,795 2.78 5,800 3.03
Certificates of deposit 71,337 5.77 61,315 5.29 54,751 4.52
Agent-acquired certificates of
deposit 87,366 6.52 41,336 6.55 4,429 4.95
----------------------------------------------------------
Total $184,105 5.73% $123,120 5.22% $77,889 4.04%
==========================================================
</TABLE>
The following table summarizes certificates of deposit in amounts of
$100,000 or more by time remaining until maturity as of the following
dates:
<TABLE>
<CAPTION>
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE AT JUNE 30,
1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------
(dollars in thousands)
3 Months or less $ 7,206 $13,555 $2,820
3-6 months 15,009 14,535 1,962
6-12 months 5,042 20,470 1,706
Over 12 months 18,669 14,569 2,880
------------------------------
Total $45,926 $63,129 $9,368
==============================
22
<PAGE>
Management' Discussion and Analysis
Results of Operations and Financial Condition
The decrease of $17,203,000 is primarily due to agent-acquired
certificates of deposit that generally are issued in amounts greater
than $100,000. This is a result of the real estate loan sales which has
allowed the Company the flexibility of retaining or allowing these
higher costing funds to mature.
BORROWINGS
The Company' borrowings decreased $11,011,000 from fiscal 1995 primarily
due to the Company' pay off of various Federal Home Loan Bank advances.
The funds were provided by the loan sales mentioned above. For further
details see Notes to the Consolidated Financial Statements.
Other short-term borrowings totaled $5,693,000 which represented a
decrease of $3,604,000 since June 30, 1995, due primarily to a decrease
in guaranteed investment contracts. Federal funds purchased and
short-term FHLB advances, while utilized during 1996, were repaid prior
to year-end. These borrowings were partially replaced with guaranteed
investment contracts at lower rates. The guaranteed investment contracts
are typically fully disbursed throughout the year, but obtained at lower
rates compared to other short term borrowing rates.
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM BORROWINGS AT JUNE 30,
Federal Treasury Tax Guaranteed
Funds FHLB & Loan Note Investment
1996 Purchased Advances Option Contracts
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
(dollars in thousands)
Outstanding at June 30 $129 $5,564
Average amount outstanding $2,301 $ 625 89 4,064
Maximum amount outstanding at
any month-end 7,400 6,000 139 8,590
Weighted average interest rate:
During year 5.92% 6.86% 2.94% 4.13%
End year 3.96% 5.00%
1995
- ---------------------------------------------------------------------------------------
(dollars in thousands)
Outstanding at June 30 $105 $9,192
Average amount outstanding $4,115 $ 8,978 36 7,249
Maximum amount outstanding at
any month-end 7,400 18,500 150 9,900
Weighted average interest rate:
During year 5.93% 5.52% 2.68% 3.37%
End year 6.03% 3.74%
</TABLE>
CAPITAL RESOURCES
Federal regulations require all financial institutions to evaluate
capital adequacy by the risk-based capital method, which makes capital
requirements more sensitive to the differences in the level of risk
assets maintained in financial institution portfolios. Included in the
risk-based capital method are two measures of capital adequacy, Tier 1
or core capital and total capital, which consists of Tier 1 plus Tier 2
capital.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following table summarizes capital positions and selected ratios of
the Savings Bank:
<TABLE>
<CAPTION>
June 30 1996 1995 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
(dollars in thousands)
Tier 1 capital
Common stock $ 843 $ 843 $ 843
Surplus 8,619 8,155 4,030
Retained earnings 8,629 7,061 4,817
----------------------------------
Total tier 1 capital $ 18,091 $ 16,059 $ 9,690
Tier 2 capital
Allowance for loan losses (1) 1,059 713 356
Subordinated debt (2) 4,875 4,875
----------------------------------
Total capital $ 24,025 $ 21,647 $10,046
==================================
Risk-weighted assets $194,516 $177,572 $84,562
==================================
Tier 1 capital to risk-weighted assets (3) 9.30% 9.04% 11.46%
Total Capital to risk-weighted assets (3) 12.35 12.19 11.88
Tangible capital (4) 7.05 6.02 6.43
Core capital (4) 7.05 6.02 6.43
</TABLE>
(1) Computed in accordance with fully phased-in capital standards
limiting the allowance to 1.25% of total risk-weighted assets for
the year-end 1992 and thereafter.
(2) After appropriate notification and approval from the OTS,
subordinated debt is allowed as a component in the total capital
ratio.
(3) The well capitalized requirement generally applicable to federal
savings banks are 6% Tier 1 capital to risk-weighted assets and
10% total capital to risk-weighted assets.
(4) Under OTS capital standards, savings associations must maintain
"core capital" in an amount not less than 3% of total assets and
"tangible capital" in an amount not less than 1.5% of total
adjusted assets.
The Savings Bank is in excess of all capital requirements. For further
detail see Notes to the Consolidated Financial Statements.
The Company's stockholders' equity increased $1,890,000 to $14,295,000
at June 30, 1996, compared to $12,405,000 at June 30, 1995. The
increase in stockholders' equity was accounted for by net income of
$3,235,000 and the exercise of warrants and stock options of $741,000.
Dividends declared of $1,958,000 and the change in the net unrealized
loss on investment securities of $128,000 decreased stockholders' equity
in fiscal 1996.
The Savings Bank's ratio of stockholders' equity to total assets was
7.05% at June 30, 1996 up from 6.02% at June 30, 1995. Book value per
share increased to $5.73 at June 30, 1996, compared to $5.21 one year
earlier, an increase of 10.0%.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
LIQUIDITY
The Company's principal sources of income and funds are dividends from
subsidiaries, and if necessary, borrowings. The Company is not subject
to any regulatory restrictions on the payment of dividends to its
stockholders. However, OTS regulations set restrictions on the amount of
dividends the Savings Bank may pay to the Company.
The Savings Bank is required by federal regulations to maintain
specified levels of "liquid" assets consisting of cash and other
eligible investments. Currently, liquid assets must equal at least five
percent of net withdrawable savings plus borrowings payable upon demand
or due within one year or less. As of June 30, 1996, and June 30, 1995,
the Savings Bank liquidity ratios were 10.64% and 10.92%, respectively.
Management believes that this level of liquidity is sufficient to meet
any anticipated requirements for the Savings Bank's operations.
The primary sources of funds for operations are principal and interest
payments on loans, deposits from customers, and sales and maturities of
investment securities. In addition, the Savings Bank is authorized to
borrow money from the FHLB and other sources as needed. The Savings
Bank decreased its borrowings from the FHLB from $52,413,000 at June 30,
1995, to $42,474,000 at June 30, 1996, as a result of the real estate
loan sales previously mentioned which allowed the Company to pay down
various FHLB advances. The interest rate margin on loans originated
which are funded by borrowings is smaller than if funded by retail
deposits, thus narrowing the overall interest rate margin, but
increasing overall gross income. The Company took the opportunity to
reduce the borrowings outstanding at June 30, 1996.
ASSET/LIABILITY MANAGEMENT
The measurement and analysis of the exposure of the Company to changes
in the interest rate environment is referred to as asset/liability
management. One method used to analyze the Company's sensitivity to
changes in interest rates is to measure the difference between the
amount of interest-earning assets which are anticipated to mature or
reprice within a given period of time as compared to the amount of
interest-bearing liabilities which are expected to mature or reprice
within the same period. This difference is known as the interest rate
sensitivity "gap". A gap is considered negative when the amount of
interest-bearing liabilities anticipated to reprice or mature exceeds
the amount of interest-earning assets anticipated to reprice or mature
in a given period.
At June 30, 1996, the Company's total interest-bearing assets maturing
or repricing within one year exceeded total interest bearing liabilities
maturing or repricing in the same period by $34,967,000, representing a
positive cumulative one-year gap ratio of 13.34% of total assets. The
Company relies on certain assumptions, such as the amount and timing of
savings deposit repricing opportunities, among others, in the
measurement of the interest rate sensitivity gap.
The Company changed its strategy of originating and retaining mortgage
loans and funding these with borrowings of similar durations, such as
FHLB advances, as well as with deposits acquired through agents during
fiscal 1996. The Company opted to start selling current loan production
during the year in addition to reclassifying $52,000,000 to loans held
for sale and selling these loans during fiscal 1996. This has allowed
the Company to reduce borrowings, let higher rate agent-acquired funds
rolloff or rollover at the retail rate, and fund new loan demand. The
positive impact on the margin became evident in the fourth quarter as
the margin in the fourth quarter was 2.46% compared to the third quarter
margin of 2.35%.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company has in place an interest rate risk management policy that
addresses the goals to be met and what steps are to be taken to manage
interest rate risk exposure in a manner to ensure profits and maintain
net worth to the best extent possible in any interest rate environment.
Specific limits have been set (and are periodically reviewed) by the
Board of Directors as to the amount of interest rate exposure it is
willing to accept. Reports are required of management to reflect how
well the current policies have achieved the desired goals. The interest
rate risk policy also establishes an Asset/Liability Committee (ALCO)
that is composed of senior bank officers which meets at least monthly to
determine strategies, measure results and plan policies to implement the
broad goals set forth in the policy. In viewing the Company's interest
rate risk position, the ALCO must be aware of how changes in interest
rates affect both its net interest income and its market value of
equity.
In evaluating the Company's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the
following table must be considered. For example, although certain
assets and liabilities may have similar maturities or periods to
reprice, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate
mortgages, have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in calculating the
table. For example, projected savings, money market and interest
bearing accounts maturities may also materially change if interest rates
change. Finally, the ability of many borrowers to service their debt may
decrease in the event of an interest rate increase. The Company
considers all of these factors in monitoring its exposure to interest
rate risk.
In addition, the following table does not necessarily indicate the
impact of general interest rate movements on the Company's net interest
income because the repricing of certain categories of assets and
liabilities indicated as maturing or otherwise repricing within a stated
period may, in fact, mature or reprice at different times and at
different volumes.
The following table sets forth the interest rate sensitivity of the
Company's assets and liabilities at June 30, 1996, on the basis of the
assumptions described below, and sets forth the repricing dates of the
Company's interest-earning assets and interest-bearing liabilities at
June 30, 1996, and the Company's interest rate sensitivity "gap"
percentages at the dates indicated. The information presented does not
include estimated prepayment rates for loans and mortgage-backed
securities. This has the effect of understating the amount of assets
that may reprice in the current year, thus giving the appearance of a
balance sheet that is more negatively gapped than it actually is.
Interest-bearing checking accounts are included with 30% in the three
months or less category and the remaining 70% in the three years or more
category. Savings accounts are included with 10% in the three months or
less category and the remaining 90% in the three years or more category.
In money market accounts, 14% are placed in the three months or less
category while the remaining 86% are placed in the over three year
category. The assumptions for savings and checking accounts are
developed from the Company's deposit pricing reaction to changes in the
prevailing interest rate environment.
The effect of these assumptions is to quantify the dollar amount of
items that are interest-sensitive and which can be repriced within each
of the periods specified. Such repricing can occur in one of three
ways: (i) the rate of interest to be paid on an asset or liability may
adjust periodically on the basis of an interest rate index; (ii) an
asset or liability such as a mortgage loan may amortize, permitting
reinvestment of cash flows at the then-prevailing interest rate; or
(iii) an asset or liability may mature, at which time the proceeds can
be reinvested at the current market rates.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, 1996
----------------------------------------------------------
Three Over Three One to Three
Months or Months to Three Years or
Less One Year Years More Total
----------------------------------------------------------
(dollars in thousands)
<S>
Assets <C> <C> <C> <C> <C>
Interest-bearing deposits in other banks $ 4,106 $ 4,106
Federal funds sold 5,000 5,000
Investment securities available
for sale and FHLB stock 6,840 $ 8,469 $ 3,050 $ 3,019 21,378
Loans 63,655 51,469 24,774 77,323 217,221
Non-earning assets 14,511 14,511
----------------------------------------------------------
Total assets $79,601 $ 59,938 $ 27,824 $94,853 $262,216
==========================================================
Liabilities and stockholders' equity
Interest-bearing deposits:
Interest-bearing transaction accounts $ 5,996 $13,991 $ 19,987
Money market accounts 751 4,613 5,364
Savings 513 4,621 5,134
Certificates of deposit 16,771 $ 64,754 $ 55,616 8,976 146,117
----------------------------------------------------------
Total interest-bearing deposits 24,031 64,754 55,616 32,201 176,602
Other borrowings and debt 2,707 13,080 15,312 31,886 62,985
Non-interest bearing deposits 5,100 5,100
Non-interest bearing liabilities and
stockholders' equity 17,529 17,529
----------------------------------------------------------
Total liabilities and stockholders' equity $26,738 $ 77,834 $ 70,928 $86,716 $262,216
==========================================================
Interest sensitivity gap $52,863 $(17,896) $(43,104) $ 8,137
==========================================================
Cumulative interest sensitivity gap $52,863 $ 34,967 $ (8,137)
==========================================================
Cumulative gap as a percentage of total assets 20.16% 13.34% (3.10)%
==========================================================
</TABLE>
27
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Stockholders and Board of Directors
Fidelity Federal Bancorp
Evansville, Indiana
We have audited the consolidated balance sheet of Fidelity Federal
Bancorp and subsidiaries as of June 30, 1996 and 1995 and the related
consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended June 30,
1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above
present fairly, in all material respects, the consolidated financial
position of Fidelity Federal Bancorp and subsidiaries as of June 30,
1996 and 1995, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 1996, in
conformity with generally accepted accounting principles.
GEORGE S. OLIVE & COMPANY LLC
Evansville, Indiana
July 16, 1996
28
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30 1996 1996
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 1,111,737 $ 889,275
Short-term interest-bearing deposits 4,101,143 6,543,690
Federal funds sold 5,000,000 9,000,000
-------------------------------
Total cash and cash equivalents 10,212,880 16,432,965
Interest-bearing deposits 5,370 5,119
Investment securities available for sale 17,458,474 15,403,382
Real estate loans held for sale 1,923,099
Loans 217,221,244 223,099,648
Allowance for loan losses (1,058,894) (712,872)
-------------------------------
Net loans 216,162,350 222,386,776
Premises and equipment 5,559,322 3,851,734
Federal Home Loan Bank of Indianapolis stock, at cost 3,919,500 3,091,100
Interest receivable and other assets 8,897,813 6,343,939
-------------------------------
Total assets $262,215,709 $269,438,114
===============================
LIABILITIES
Deposits
Non-interest bearing $ 5,099,938 $ 3,211,006
Interest bearing 176,602,082 177,559,886
-------------------------------
Total deposits 181,702,020 180,770,892
Borrowings 62,984,689 73,995,786
Advances by borrowers for taxes and insurance 859,110 699,054
Other liabilities 2,374,915 1,567,013
-------------------------------
Total liabilities 247,920,734 257,032,745
-------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, no par or stated value
Authorized and unissued 5,000,000 shares
Common stock, $1 stated value
Authorized 5,000,000 shares
Issued and outstanding 2,495,040 and 2,162,799 shares 2,495,040 2,162,799
Capital surplus 8,785,148 5,394,610
Stock warrants 265,500 299,000
Retained earnings, substantially restricted 2,888,866 4,560,437
Net unrealized loss on securities available-for-sale (139,579) (11,477)
-------------------------------
Total stockholders' equity 14,294,975 12,405,369
-------------------------------
Total liabilities and stockholders' equity $262,215,709 $269,438,114
===============================
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended June 30 1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans receivable $19,044,730 $ 14,658,913 $ 7,773,591
Loans held for sale 904,190
Investment securities available for sale 1,098,527 856,355 736,158
Federal funds sold 132,076 1,482
Interest-bearing deposits 64,368 90,204 108,346
Other interest and dividend income 285,536 186,563 92,072
-----------------------------------------------
21,529,427 15,793,517 8,710,167
-----------------------------------------------
INTEREST EXPENSE
Deposits 10,549,760 6,425,729 3,148,266
Federal Home Loan Bank advances 3,442,326 2,902,536 1,956,597
Federal funds purchased 136,161 243,761 16,125
Other interest expense 1,396,989 690,929 50,045
-----------------------------------------------
15,525,236 10,262,955 5,171,033
-----------------------------------------------
NET INTEREST INCOME 6,004,191 5,530,562 3,539,134
Provision for loan losses 455,000 420,000 150,000
-----------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 5,549,191 5,110,562 3,389,134
-----------------------------------------------
NON-INTEREST INCOME
Fee income - real estate development
and management 4,439,894 4,370,351 2,186,417
Service charges on deposit accounts 180,565 99,390 103,185
Gain on sale of
Investment securities 234
Real estate loans 742,978
Premises and equipment 718,765 360
Letter of credit fees 480,867 189,376 2,366
Real estate mortgage banking fees 942,002 350,638
Other income 674,961 367,738 164,425
-----------------------------------------------
8,180,032 5,377,853 2,456,627
-----------------------------------------------
</TABLE>
30
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended June 30 1996 1995 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits $4,486,097 $2,888,470 $1,537,930
Net occupancy expense 471,019 425,883 312,885
Equipment expense 382,693 286,885 158,712
Data processing fees 286,818 210,942 134,190
Deposit insurance expense 417,231 237,521 171,162
Legal and professional fees 447,538 471,276 179,924
Other expense 2,116,131 1,391,257 724,632
--------------------------------------
8,607,527 5,912,234 3,219,435
--------------------------------------
INCOME BEFORE INCOME TAX 5,121,696 4,576,181 2,626,326
Income tax expense 1,886,787 1,515,040 1,043,814
--------------------------------------
NET INCOME $3,234,909 $3,061,141 $1,582,512
======================================
PER SHARE
Primary net income $1.17 $1.23 $.67
Fully diluted net income 1.17 1.16 .67
AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 2,776,147 2,634,431 2,369,161
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------
Shares Amount
<S> <C> <C>
- -----------------------------------------------------------------------------
BALANCES, JULY 1, 1993 843,362 $ 843,362
Net income for 1994
Cash dividends ($.12 per share)
20% stock dividend ($1,180 paid in lieu of
fractional shares) 169,063 169,063
Stock warrants issued
Exercise of stock options 2,340 2,340
Net change in unrealized gain (loss) on securities
available for sale, net of taxes of $144,531
- -----------------------------------------------------------------------------
BALANCES, JUNE 30, 1994 1,014,765 1,014,765
Net income for 1995
Cash dividends ($.33 per share)
2.1-for-1 stock split ($2,875 paid in lieu of
fractional shares) 1,125,562 1,125,562
Stock warrants issued
Exercise of stock options 20,648 20,648
Exercise of stock warrants 1,824 1,824
Net change in unrealized gain (loss) on securities
available for sale, net of taxes of $89,291
- -----------------------------------------------------------------------------
BALANCES, JUNE 30, 1995 2,162,799 2,162,799
Net income for 1996
Cash dividends ($.79 per share)
10% stock dividend ($1,000 paid in lieu of
fractional shares) 226,747 226,747
Exercise of stock options 27,837 27,837
Exercise of stock warrants 77,657 77,657
Net change in unrealized gain (loss) on securities
available for sale, net of taxes of $84,023
- -----------------------------------------------------------------------------
BALANCES, JUNE 30, 1996 2,495,040 $2,495,040
=============================================================================
</TABLE>>
See notes to consolidated financial statements.
32
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) on
Securities
Paid-In Stock Retained Available
Capital Warrants Earnings for Sale Total
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES, JULY 1, 1993 $4,030,030 $3,574,194 $ 72,743 $ 8,520,329
Net income for 1994 1,582,512 1,582,512
Cash dividends ($.12 per share) (270,163) (270,163)
20% stock dividend ($1,180 paid in lieu of
fractional shares) 2,409,142 (2,579,385) (1,180)
Stock warrants issued $150,000 150,000
Exercise of stock options 11,700 14,040
Net change in unrealized gain (loss) on securities
available for sale, net of taxes of $144,531 (220,353) (220,353)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES, JUNE 30, 1994 6,450,872 150,000 2,307,158 (147,610) 9,775,185
Net income for 1995 3,061,141 3,061,141
Cash dividends ($.33 per share) (807,862) (807,862)
2.1-for-1 stock split ($2,875 paid in lieu of
fractional shares) (1,128,437) (2,875)
Stock warrants issued 150,000 150,000
Exercise of stock options 54,395 75,043
Exercise of stock warrants 17,780 (1,000) 18,604
Net change in unrealized gain (loss) on securities
available for sale, net of taxes of $89,291 136,133 136,133
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES, JUNE 30, 1995 5,394,610 299,000 4,560,437 (11,477) 12,405,369
Net income for 1996 3,234,909 3,234,909
Cash dividends ($.79 per share) (1,957,703) (1,957,703)
10% stock dividend ($1,000 paid in lieu of
fractional shares) 2,721,030 (2,948,777) (1,000)
Exercise of stock options 81,311 109,148
Exercise of stock warrants 588,197 (33,500) 632,354
Net change in unrealized gain (loss) on securities
available for sale, net of taxes of $84,023 (128,102) (128,102)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES, JUNE 30, 1996 $8,785,148 $265,500 $2,888,866 $(139,579) $14,294,975
=================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30 1996 1995 1994
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $3,234,909 $3,061,141 $1,582,512
Adjustments to reconcile net income to net
cash provided (used) by operating activities
Provision for loan losses 455,000 420,000 150,000
Investment securities gains (234)
Loss on sale of premises and equipment 29,640 6,201
Provision for real estate owned losses (5,000)
Gain on sale of premises and equipment (718,765)
Depreciation 359,056 276,362 176,000
Investment securities amortization (accretion), net (33,395) 48,199 159,166
Amortization of net loan origination fees and points (55,796) (190,579) (200,114)
Deferred income tax (benefit) 295,941 (57,935) (88,280)
Net (increase) decrease in real estate loans
held for sale 1,923,099 (1,923,099)
Changes in
Interest payable and other liabilities 366,593 5,153 591,716
Interest receivable and other assets (2,495,117) (3,510,217) (1,498,840)
-----------------------------------------
Net cash provided (used) by operating activities 3,361,165 (1,864,774) 866,926
-----------------------------------------
INVESTING ACTIVITIES
Net change in interest-bearing deposits (251) 574,881 1,382,000
Purchases of investment securities available for sale (9,776,687) (4,491,069) (1,000,000)
Proceeds from investment securities available for sale,
sales and maturities 7,542,865 3,729,799 5,376,428
Net changes in loans 5,766,465 (99,440,406) (43,585,027)
Purchase of premises and equipment (2,377,519) (1,552,525) (421,672)
Proceeds from sale of premises and equipment 1,000,000 1,664 94,775
Purchase of FHLB of Indianapolis stock (828,400) (891,600) (986,200)
Proceeds from real estate owned sales 49,705 1,248,158
-----------------------------------------
Net cash provided (used) by investing activities 1,326,473 (102,019,551) (37,891,538)
-----------------------------------------
</TABLE>
34
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended June 30 1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in
Noninterest-bearing, interest-bearing
demand and savings deposits $16,223,138 $ (1,975,491) $ 4,065,010
Certificates of deposit (15,292,010) 93,707,903 10,600,784
Net decrease in federal funds purchased (2,050,000)
Proceeds from other borrowings 11,490,097 21,577,524 27,780,393
Repayment of other borrowings (12,562,016) (5,908,033) (20,079,507)
Proceeds from FHLB advances 16,556,000 126,687,000 47,060,000
Repayment of FHLB advances (26,495,178) (118,262,124) (27,337,793)
Net change in advances by borrowers for
taxes and insurance 160,056 301,532 38,959
Cash dividends (1,729,312) (625,695) (236,195)
Proceeds from exercise of stock options 109,148 75,043 14,040
Proceeds from exercise of stock warrants 632,354 18,604
Proceeds from issuance of stock warrants 150,000 150,000
-----------------------------------------------
Net cash provided (used) by financing activities (10,907,723) 113,696,263 42,055,691
-----------------------------------------------
Net Change in Cash and Cash Equivalents (6,220,085) 9,811,938 5,031,079
Cash and Cash Equivalents, Beginning of Year 16,432,965 6,621,027 1,589,948
-----------------------------------------------
Cash and Cash Equivalents, End of Year $10,212,880 $ 16,432,965 $ 6,621,027
===============================================
ADDITIONAL CASH FLOWS AND SUPPLEMENTARY
INFORMATION
Income tax paid, net of refunds $ 1,937,735 $ 2,227,750 $ 673,077
Interest paid 15,722,698 9,552,816 5,073,139
Other real estate transfers 58,757 57,920
Debt underwriting fees offset against debt
proceeds 262,500
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Fidelity Federal Bancorp
("Company") and its wholly-owned subsidiaries conform to generally
accepted accounting principles and general practices followed by the
thrift industry. The more significant of the policies are described
below.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The Company is a registered savings and loan holding company. The
Company's savings bank subsidiary, United Fidelity Bank, fsb ("Savings
Bank") generates mortgage, consumer and commercial loans and receives
deposits from customers located primarily in southern Indiana. The
Company's loans are generally secured by specific items of collateral
including real property, consumer assets and business assets. Although
the Company has a diversified loan portfolio, a substantial portion of
its debtors' ability to honor their contracts is dependent upon general
economic conditions. The Savings Bank is subject to regulation by the
Office of Thrift Supervision and the Federal Deposit Insurance
Corporation. The Savings Bank's wholly-owned subsidiaries, Village
Management Corporation, Village Community Development Corporation and
Village Housing Corporation (collectively, the "Affordable Housing
Group"), are in the business of owning, developing, building, renting
and managing affordable housing projects. The Savings Bank's other
wholly-owned subsidiaries are Fidelity Federal Capital Corporation,
which was established to be the real estate mortgage banking arm of the
Company in the financing of real estate, including holding and placing
debt and equity interests in real estate, and Village Insurance
Corporation, which offers an array of insurance products.
CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its subsidiaries after elimination of all
material intercompany transactions and accounts. Certain prior year
amounts have been reclassified to conform with current classifications.
INVESTMENT SECURITIES AVAILABLE FOR SALE are carried at market.
Realized gains and losses on sales are determined using the
specific-identification method and are included in other income.
Unrealized gains and losses are reported separately in stockholders'
equity, net of tax. Premiums and discounts on all securities
available-for-sale are amortized using a method approximating the
interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments for mortgage-backed securities.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REAL ESTATE LOANS HELD FOR SALE are carried at the lower of aggregate
cost or market value. Net unrealized losses are recognized through a
valuation allowance by charges to income.
LOANS are carried at the principal amount outstanding. Interest income
is accrued on the principal balances of loans. Loans are placed in a
nonaccrual status when the collection of interest becomes doubtful.
Interest income previously accrued but not deemed collectible is
reversed and charged against current income. Interest on nonaccrual and
impaired loans is then recognized as income when collected. Certain
loan fees and related direct costs are being deferred and amortized over
the lives of the loans as adjustments of yield on the loans.
ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES are maintained to absorb
potential losses based on management's continuing review and evaluation
of the portfolios and its judgement as to the impact of economic
conditions on the portfolios. The evaluation by management includes
consideration of past loss experience, changes in the composition of the
portfolios, the current condition and amount of loans outstanding and
real estate owned and the probability of collecting all amounts due.
Impaired loans are measured by the present value of expected future cash
flows, or the fair value of the collateral of the loan, if collateral
dependent.
The determination of the adequacy of the allowance for loan losses is
based on estimates that are particularly susceptible to significant
changes in the economic environment and market conditions. Management
believes that, as of June 30, 1996, the allowance for loan losses is
adequate based on information currently available. A worsening or
protracted economic decline in the area within which the Company
operates would increase the likelihood of additional losses due to
credit and market risks and could create the need for additional loss
reserves.
PREMISES AND EQUIPMENT are carried at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line method
based principally on the estimated useful lives of the assets.
Maintenance and repairs are expensed as incurred while major additions
and improvements are capitalized. Gains and losses on dispositions are
included in current operations.
FEDERAL HOME LOAN BANK (FHLB) STOCK is a required investment for
institutions that are members of the FHLB system. The required
investment in the common stock is based on a predetermined formula.
PENSION PLAN COSTS are based on actuarial computations and charged to
current operations. The funding policy is to pay at least the minimum
amounts required by ERISA.
INCOME TAX in the consolidated statement of income includes deferred
income tax provisions or benefits for all significant temporary
differences in recognizing income and expenses for financial reporting
and income tax purposes. The Company files consolidated income tax
returns with its subsidiaries.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fee Income on real estate development and management in the consolidated
statement of income is attributable to activities of the Company's
subsidiaries involved in affordable housing projects. The fees are
recognized when earned under the applicable agreements and when
collectibility is assured. Fee income related to insurance services is
recognized when earned and collected.
Net income per share, primary and fully diluted, have been computed
based on the weighted average common and common equivalent shares
outstanding during each year. All share data included in the notes to
consolidated financial statements has been adjusted for stock dividends
and stock splits.
Accounting for mortgage servicing rights - Effective July 1, 1995, the
company adopted Statement of Financial Accounting Standard (SFAS) No.
122, Accounting for Mortgage Servicing Rights. SFAS No. 122 requires
the Company to recognize as separate assets, mortgage servicing rights
for loans originated with the intent to sell as well as purchased
servicing rights. The adoption of SFAS No. 122 did not have a
significant impact on the Company's operating results. Loan servicing
costs are amortized in proportion to, and over the period of, estimated
new servicing revenues. Fair values of mortgage servicing rights are
based on the present value of estimated future cash flows. Impairment
of mortgage servicing rights is assessed based on the fair value of
those rights. When participating interests in loans sold have an
average contractual interest rate, adjusted for normal servicing fees,
that differs from the agreed yield to the purchaser, gains or losses are
recognized equal to the present value of such differential over the
estimated remaining lives of such loans. The resulting asset or
liability is amortized over the estimated servicing period using a
method approximating the interest method.
REORGANIZATION
During fiscal 1994, the Company was organized as an Indiana corporation
for the purpose of becoming a registered savings and loan holding
company for the Savings Bank. The stockholders of the Savings Bank
approved the merger of the Savings Bank into the Company as a
wholly-owned subsidiary. The merger resulted in the conversion of 100
percent of Savings Bank stock into Company stock on the basis of one
share of Company stock for each share of Savings Bank stock.
The reorganization was accounted for in the same manner as if it were a
pooling-of-interests and, accordingly, the Company's consolidated
financial statements, prior to the effective date of the merger, include
the accounts and operations of the Savings Bank and are restated as
though the reorganization occurred on July 1, 1992.
RESTRICTION ON CASH AND DUE FROM BANKS
The Company is required to maintain reserve funds in cash and/or on
deposit with the Federal Reserve Bank. The reserve required at June 30,
1996 was $410,000.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
Investment Securities Available for sale
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------
INVESTMENT SECURITIES AT JUNE 30, 1996
U. S. Treasury $ 503 $ 1 $ 504
Federal Agencies 4,500 $ (135) 4,365
Mortgage-backed securities 12,686 35 (132) 12,589
------------------------------------------
$17,689 $ 36 $ (267) $17,458
------------------------------------------
INVESTMENT SECURITIES AT JUNE 30, 1995
U. S. Treasury $ 514 $ 1 $ 515
Federal Agencies 3,993 22 $ (13) 4,002
Mortgage-backed securities 10,915 55 (84) 10,886
------------------------------------------
$15,422 $ 78 $ (97) $15,403
==========================================
</TABLE>
The amortized cost and fair value of investment securities available for
sale at June 30, 1996, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
Amortized Fair
MATURITY DISTRIBUTION AT JUNE 30, 1996 Cost Value
<S> <C> <C>
- -----------------------------------------------------------------------------
Within one year $ 503 $ 504
One to five years 4,000 3,872
Five to ten years 500 493
-------------------
5,003 4,869
Mortgage-backed securities 12,686 12,589
-------------------
$17,689 $17,458
===================
</TABLE>
Proceeds from sales of investment securities available for sale during
1994 were $1,500,234. Gross gains of $234 were recognized during 1994.
There were no sales of investment securities available for sale during
1996 and 1995.
The mortgage-backed securities have various contractual maturities. The
actual maturities of mortgage-backed securities will differ from
contractual maturities because issuers may have the right to call or
prepay the obligations, with or without call or prepayment penalties.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
Loans and Allowances
<TABLE>
<CAPTION>
June 30 1996 1995
<S> <C> <C>
- ------------------------------------------------------------------------------
REAL ESTATE MORTGAGE LOANS
First mortgage loans
Conventional $106,288 $113,870
Construction 36,938 24,670
Commercial 18,267 7,133
Multifamily 15,420 26,147
First mortgage real estate loans purchased 7,612 4,921
Real estate contracts 56 101
Commercial loans - other than secured by real estate 9,393 6,414
Consumer loans 23,062 39,635
Loans to depositors secured by savings 185 209
--------------------
$217,221 $223,100
====================
</TABLE>
Included in multi-family loans are loans made to affordable housing
developments totaling $9,782,000 and $22,624,000 at June 30, 1996 and
1995. An additional $7,476,000 in loans to affordable housing
developments is included in construction loans at June 30, 1996.
<TABLE>
<CAPTION>
Year Ended June 30 1996 1995 1994
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
Balances, beginning of year $ 713 $ 356 $ 236
Provision for loan losses 455 420 150
Loans charged off (140) (82) (47)
Recoveries on loans 31 19 17
-------------------------------
Balances, end of year $1,059 $ 713 $ 356
===============================
</TABLE>
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended June 30 1996 1995
<C> <C>
- ------------------------------------------------------------------
NON-PERFORMING LOANS
Non-accruing loans $342 $ 47
Restructured loans 514
Loans contractually past due 90 days or more 43 23
---------------
$385 $584
===============
</TABLE>
Interest income of approximately $15,000, $74,000 and $96,000 in 1996,
1995 and 1994 was included in income on restructured and non-accrual
loans. Additional interest income of approximately $9,000, $3,000 and
$14,000 for 1996, 1995 and 1994 would have been recorded had income on
nonaccruing and restructured loans been considered collectible and
accounted for on the accrual basis under the original terms of the
loans.
The Company adopted SFAS Nos. 114 and 118, Accounting by Creditors for
Impairment of a Loan and Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures on July 1, 1995. The adoption
of SFAS Nos. 114 and 118 did not have a material impact on the Company's
financial position or results of operations. The Company has not
experienced any impaired loans since the adoption of SFAS Nos. 114 and
118.
The amount of mortgage loans serviced by the Company for the benefit of
others was approximately $58,854,000, $4,509,000 and $5,341,000 at June
30, 1996, 1995 and 1994. Mortgage loans serviced for others are not
included in the accompanying consolidated balance sheet.
The Company and subsidiaries have entered into transactions with certain
executive officers, limited partnerships in which the Company is an
investor, and their affiliates or associates. Such transactions were
made in the ordinary course of business on substantially the same terms
and conditions, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with other
customers, and did not, in the opinion of management, involve more than
normal credit risk or present other unfavorable features.
The aggregate amount of loans, as defined, to such related parties was
as follows:
<TABLE>
<CAPTION>
<S> <C>
Balances, July 1, 1995 $16,918
New loans, including renewals 551
Payments, etc., including renewals (8,712)
--------
Balances, June 30, 1996 $ 8,757
========
</TABLE>
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
Premises and Equipment
<TABLE>
<CAPTION>
June 30 1996 1995
<S> <C> <C>
- ----------------------------------------------------------------------
Land $1,741 $1,340
Building and land improvements 4,648 3,483
Furniture, fixtures and equipment 1,818 1,605
-------------------
Total cost 8,207 6,428
Accumulated depreciation (2,648) (2,576)
-------------------
Net $5,559 $3,852
===================
</TABLE>
Other Assets
Included in other assets at June 30, 1996 and 1995 are investments of
$3,478,000 and $1,794,000 in limited partnerships which are organized to
build, own and operate apartment complexes. Of the $3,478,000,
$1,311,000 represents the Company's 1% equity in sixteen limited
partnerships (as general partner), $723,000 represents a 49.99% equity
in one partnership (the Company is a 1% general partner and a 48.99%
limited partner), $679,000 represents a 40% equity in one limited
partnership (the Company is a 1% general partner and a 39% limited
partner), $362,000 represents a 9.985% equity in one limited
partnership, $238,000 represents a 9.99% equity in one limited
partnership, and $165,000 represents a 99% equity in two limited
partnerships (the Company is a limited partner). The Company records
income on the equity method in the income and losses of the limited
partnerships, which resulted in a $73,000 loss during 1996 compared to
zero for 1995 and 1994. In addition to recording its equity in the
losses of these projects, the Company has recorded the benefit of
low-income housing tax credits of $229,000, $72,000 and $10,000 for the
years ended June 30, 1996, 1995 and 1994. Combined condensed financial
statements for the limited partnerships as of June 30, 1996 and 1995,
and for the years ended June 30, 1996, 1995 and 1994 are as follows:
42
<PAGE>
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
June 30 1996 1995
<S> <C> <C>
- ----------------------------------------------------------------------------
Combined condensed balance sheet (unaudited)
ASSETS
Cash $ 635 $ 8,737
Construction in process 7,298 16,084
Land and property 49,238 14,691
Other assets 903 128
-------------------
Total assets $58,074 $39,640
===================
Liabilities
Notes payable $39,890 $29,599
Other liabilities 1,537 565
-------------------
Total liabilities 41,427 30,164
Partners' equity 16,647 9,476
-------------------
Total liabilities and partners' equity $58,074 $39,640
===================
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30 1996 1995 1994
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
Condensed statement of operations (unaudited)
Total revenue $ 3,501 $ 712 $ 197
Total expenses 5,261 1,265 356
------------------------------
Net loss $(1,760) $ (553) $(159)
==============================
</TABLE>
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
Of the notes payable, approximately $18,258,000 and $16,551,000 are due
to the Company at June 30, 1996 and 1995. Included in land and property
are development fees totaling approximately $4,440,000 and $4,370,000 at
June 30, 1996 and 1995 and loan fees totaling approximately $31,000 and
$657,000 for 1996 and 1995 paid to the Company.
Included in other assets is interest receivable as follows:
<TABLE>
<CAPTION>
June 30 1996 1995
<S> <C> <C>
- -----------------------------------------------------------------------
Interest receivable on loans $1,297 $1,172
Interest receivable on investments and other 189 166
------------------
Total interest receivable $1,486 $1,338
==================
</TABLE>
Deposits
<TABLE>
<CAPTION>
June 30 1996 1995
<S> <C> <C>
- -----------------------------------------------------------------------
Non-interest bearing transaction accounts $ 5,100 $ 3,211
Interest-bearing transaction accounts 19,987 4,975
Money market deposit accounts 5,364 6,053
Savings accounts 5,134 5,123
Certificates of $100,000 or more 45,926 63,129
Certificates of deposit and other time 100,191 98,280
---------------------
Total $181,702 $180,771
=====================
</TABLE>
Included in the above amounts are agent-acquired certificates of deposit
of $73,081,000 and $78,813,000 at June 30, 1996 and 1995.
Certificates maturing in years ending June 30:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 81,386
1998 37,156
1999 18,598
2000 7,893
2001 1,068
Thereafter 16
--------
$146,117
========
</TABLE>
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
Borrowings
<TABLE>
<CAPTION>
June 30 1996 1995
<S> <C> <C>
- -----------------------------------------------------------------------------------------
Note payable, 8%, adjusted annually, payable $16,943 per
month, including interest, due April 1, 2009, secured by
specific multi-family mortgages $ 2,266 $ 2,286
Note payable, 10% adjusted annually, payable $8,621 per
month, including interest, due September 14, 2010, secured
by specific multi-family mortgages 1,015
Note payable, 10% adjusted annually, payable $13,182 per
month, interest only, principal and interest payments
beginning November 1, 1996, due September 22, 2010,
secured by specific multi-family mortgages 1,552
Junior subordinated notes, 9 1/8%, interest paid
semi- annually, due April 30, 2001, unsecured 1,485 1,500
Junior subordinated notes, 9 1/4%, interest paid
semi- annually, due January 31, 2002, unsecured 1,500 1,500
Senior subordinated notes, 10%, interest paid
semi-annually, due June 1, 2005, unsecured 7,000 7,000
Guaranteed investment contracts, interest rates ranging from
4% to 5%, interest paid monthly, secured by qualifying first
mortgage loans in an amount equal to at least 120% of the
amount outstanding, due at various dates during 1997 or
on demand 5,564 9,192
Federal Home Loan Bank advances, due at various dates
through 2003 (weighted average rates of 6.24% and 6.38%
at June 30, 1996 and 1995) 42,474 52,413
Treasury tax and loan note option 129 105
-------------------
Totals $62,985 $73,996
===================
</TABLE>
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
The terms of a security agreement with the FHLB require the Savings Bank
to pledge as collateral qualifying first mortgage loans in an amount
equal to at least 125% of these advances and all stock in the FHLB or
eligible securities with a market value in an amount equal to at least
110% of these advances. In addition to the first mortgage loans
pledged, the Company had $4,500,000 in eligible securities pledged at
June 30, 1996. The Company pledged only first mortgage loans during
1995. Some of the advances are subject to restrictions or penalties in
the event of prepayment.
The scheduled principal reduction of borrowings at June 30, 1996, is
approximately as follows: 1997, $15,792; 1998, $8,683; 1999, $6,632;
2000, $9,355; 2001, $3,826; and 2002 and later, $18,697.
Income Tax
<TABLE>
<CAPTION>
Year Ended June 30 1996 1995 1994
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
Income tax expense
Currently payable
Federal $1,175 $1,214 $ 879
State 416 359 253
Deferred
Federal 244 (47) (65)
State 52 (11) (23)
-------------------------------
Total income tax expense $1,887 $1,515 $1,044
===============================
Reconciliation of federal statutory to actual
tax expense
Federal statutory income tax at 34% $1,741 $1,556 $ 893
State income tax, net of federal benefit 309 230 151
Affordable housing tax credits and other (177) (276) (9)
Other, net 14 5 9
-------------------------------
Actual tax expense $1,887 $1,515 $1,044
===============================
</TABLE>
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
A cumulative deferred tax asset of $197,000 and $409,000 is included in
other assets at June 30, 1996 and 1995. The components of the asset are
as follows at:
<TABLE>
<CAPTION>
June 30 1996 1995
<S> <C> <C>
- -----------------------------------------------------------------------------------
Differences in accounting for certain accrued liabilities $ 21 $ 34
Differences in accounting for other real estate (13) (19)
Differences in depreciation methods (23) 45
Differences in accounting for loan losses 341 229
Differences in accounting for loan fee income 87 166
Differences in accounting for loan sales (7) (12)
Differences in basis of FHLB stock (66) (66)
Unrealized gain/loss on investment securities available for sale 91 7
Basis differential on certain partnership interests (263)
Other 29 25
---------------
$197 $409
===============
Assets $569 $506
Liabilities (372) (97)
---------------
$197 $409
===============
</TABLE>
Retained earnings include approximately $1,870,000 for which no deferred
income tax liability has been recognized. This amount represents an
allocation of income to bad debt deductions as of December 31, 1987 for
tax purposes only. Reduction of amounts so allocated for purposes other
than tax bad debt losses or adjustments arising from carryback of net
operating losses would create income for tax purposes only, which income
would be subject to the then-current corporate income tax rate. The
unrecorded deferred income tax liability on the above amounts was
approximately $635,000.
Retained Earnings and Regulatory Matters
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
requires thrifts to maintain core capital and tangible capital of at
least 3 and 1.5 percent, respectively, of adjusted total assets and
risk-based capital of at least 8 percent of risk-weighted assets.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
The Savings Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate actions by the regulatory agencies
that, if undertaken, could have a material effect on the Company's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Savings Bank must
meet specific capital guidelines that involve quantitative measures of
the Savings Bank's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Savings
Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings and other factors.
At June 30, 1996, the Company believes that the Savings Bank meets all
capital adequacy requirements to which it is subject and the most recent
notification from the regulatory agency categorized the Savings Bank as
well capitalized under the regulatory framework for prompt corrective
action.
The actual and required capital amounts of the Company's savings bank
subsidiary are as follows:
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------
Required for To Be Well
Actual Adequate Capital Capitalized
- ----------------------------------------------------------------------------------------------------------
June 30 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Total capital (1) (to risk weighted assets)
Savings Bank $24,025 12.4% $15,561 8.0% $19,452 10.0%
Tier I capital (1) (to risk weighted assets)
Savings Bank $18,091 9.3% $ 7,781 4.0% $11,671 6.0%
Tier I capital (1) (total assets)
Savings Bank $18,091 7.1% $10,269 4.0% $12,836 5.0%
(1) As defined by the regulatory agencies
The Company's principal source of income and funds is dividends from its
savings association banking subsidiary and is not subject to any regulatory
restrictions on the payment of dividends to its stockholders. However, the
Office of Thrift Supervision (OTS) regulations set restrictions on the amount
of dividends the Company's savings bank subsidiary may pay. At June 30, 1996,
total stockholders' equity of the banking subsidiary was $18,091,000,
excluding the SFAS No. 115 adjustment, of which $6,042,000 was available for
the payment of dividends without prior approval by the OTS.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OTS regulations provide that a savings association which meets fully
phased-in capital requirements and is subject only to "normal
supervision" may pay out, as a dividend, 100 percent of net income to
date over the calendar year and 50 percent surplus capital existing at
the beginning of the calendar year without supervisory approval, but
with 30 days prior notice to the OTS. Any additional amount of capital
distributions would require prior regulatory approval. A savings
association meeting current minimum capital requirements but not fully
phased-in standards, may, with 30 days prior notice but without prior
approval, distribute up to 75 percent of net income if it meets the risk
based requirement on January 1, 1993. A savings association failing to
meet current capital standards may only pay dividends with supervisory
approval.
STOCKHOLDERS' EQUITY
Stockholders' equity has been adjusted to record the twenty percent
stock dividend declared May 18, 1994 and distributed on July 15, 1994,
and the 2.1-for-1 stock split declared on March 20, 1995 and paid on
April 14, 1995 and the 10% stock dividend declared on April 24, 1996 and
distributed on May 27, 1996. All share data has been adjusted to
reflect the stock dividends.
In connection with the Company's first debt and equity rights offering
completed April 30, 1994, the Company reserved 415,500 shares of its
common stock for issuance upon exercise of 1,500 outstanding warrants.
Each warrant represents the right to purchase 277 shares of common
stock. The warrants were valued at $100 per warrant, carry an exercise
price of $6.22 per share and expire on April 30, 2004. At June 30,
1996, a total of 49,860 of the shares originally reserved had been
issued and 365,640 remained reserved and unissued.
In connection with the Company's second debt and equity offering
completed on January 31, 1995, the Company reserved 346,500 shares of
its common stock for issuance upon exercise of 1,500 outstanding
warrants. Each warrant represents the right to purchase 231 shares of
common stock. The warrants were valued at $100 per warrant, carry an
exercise price of $8.93 per share and expire on January 31, 2005. At
June 30, 1996, a total of 38,115 of the shares originally reserved had
been issued and 308,385 remained reserved and unissued.
COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are outstanding commitments and
contingent liabilities, such as commitments to extend credit, which are
not included in the accompanying consolidated financial statements. The
Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend
credit is represented by the contractual or notional amount of those
instruments. The Company uses the same credit policies in making such
commitments as it does for on-balance sheet instruments. At June 30,
1996 and 1995, commitments to extend credit, which represent financial
instruments whose contract amount represents credit risk, were
$17,599,000 and $14,338,000.
The Company has issued standby letters of credit on affordable housing
developments in which one of the Company's subsidiaries is involved. The
letters of credit secure tax exempt bond issues of limited partnerships in
which one of the Company's subsidiaries owns a 1% general partner interest.
The amount outstanding on the letters of credit at June 30, 1996 and 1995 is
$16,572,000 and $17,351,000.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has also issued standby letters of credit on affordable
housing developments in which the borrowers are not affiliated with the
Company. The letters of credit secure tax-exempt bond issues of limited
partnerships. The amount outstanding on the letters of credit at June
30, 1996 and 1995 is $20,136,000 and $5,431,000.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on
management's credit evaluation. Collateral held varies, but may include
residential real estate, income-producing commercial properties, or
other assets of the borrower.
The Company, in its role as general partner on various affordable
housing developments through its subsidiaries, is committed to advance
amounts in certain circumstances to limited partnerships. These
commitments potentially include short-term loans to the limited partners
or an increase in the general partner's equity investment in limited
cases.
The Company also has standby letters of credit to guarantee the
performance of a customer to a third party. The amount outstanding on
the letter of credit at June 30, 1996 and 1995 is $785,000 and $295,000.
BENEFIT PLANS
The Company is a participant in the Financial Institutions Retirement
Fund (FIRF). This defined-benefit plan is a multi-employer plan;
separate actuarial valuations are not made with respect to each
participating employer. According to FIRF administrators, the market
value of the fund's assets exceeded the value of vested benefits in the
aggregate as of June 30, 1995, the date of the latest actuarial
valuation. No pension expense was recorded in 1996, 1995 or 1994. Due
to the Internal Revenue Service's full funding limit, contributions to
the plan have not been required since June, 1987. This plan provides
pension benefits for substantially all of the Company's employees.
In 1994, the Company adopted a retirement savings Section 401(k) plan in
which substantially all employees may participate. The Company matches
employees' contributions at the rate of 25 percent up to 6 percent of
the participant's salary. The Company expense for the plan was $27,000,
$17,000 and $9,000 for 1996, 1995 and 1994.
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
The Company has an incentive stock option plan in which 42,403 common
shares have been reserved for issuance under the plan at June 30, 1996.
The option exercise price will not be less than the fair market value of
the common stock on the date of the grant of the option. The date on
which the options are first exercisable is determined by the Board of
Directors, and the terms of the stock options will not exceed ten years
from the date of grant. At June 30, 1996, there were 29,643 options
available for grant. A summary of the stock options activity for the
plan is as follows:
INCENTIVE STOCK OPTION PLAN
</TABLE>
<TABLE>
<CAPTION>
June 30 1996 1995 1994
<S> <C> <C> <C>
- -------------------------------------------------------------------------
SHARES UNDER OPTION
Outstanding at beginning of year 36,451 67,871 61,883
Granted during the year 6,930 6,930 12,474
Exercised during the year 30,621 32,528 6,486
Canceled options 5,822
Outstanding at end of year 12,760 36,451 67,871
Exercisable at end of year 8,602 36,451 53,735
WEIGHTED OPTION PRICE PER SHARE
Exercisable $10.33 $4.35 $2.45
Exercised 3.92 2.31 2.60
Granted 14.32 8.45 5.83
</TABLE>
In August, 1993, the Board of Directors of the Company adopted a
non-qualified stock option plan (Directors' Plan) which provides for the
grant of non-qualified stock options to individuals who are directors of
the Company, or any of its subsidiaries. The Directors' Plan provides
for the grant of non-qualified stock options to acquire shares of common
stock of the Company for the price of not less than $2 above the average
of the high and low bid quotations, as reported by NASDAQ, for the
common stock of the Company for the five trading days immediately
preceding the date the option is granted. A total of 233,779 shares
have been reserved for issuance under the Directors' Plan.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
On May 18, 1994, options for 39,916 shares each were granted to two
directors. On February 15, 1995, options for 6,930 shares were granted
to an additional director. All options are exercisable immediately. At
June 30, 1996, there were 147,017 options available for grant. A
summary of the stock options activity for the plan is as follows:
DIRECTORS' PLAN
<TABLE>
<CAPTION>
June 30 1996 1995 1994
<S> <C> <C> <C>
- --------------------------------------------------------------------
SHARES UNDER OPTION
Outstanding at beginning of year 86,762 79,832
Granted during the year 6,930 79,832
Outstanding at end of year 86,762 86,762 79,832
Exercisable at end of year 86,762 86,762 79,832
WEIGHTED OPTION PRICE PER SHARE
Exercisable $6.50 $6.50 $6.22
Granted 9.74 6.22
</TABLE>
The Board of Directors of the Company adopted and approved the 1995 Key
Employees' Stock Option Plan (1995 Plan) of the Company on March 15,
1995, subject to stockholder approval, which occurred on October 18,
1995. At that time, 80,850 shares were granted retroactively to March
15, 1995. The 1995 Plan provides for the granting of either incentive
stock options (ISOs) pursuant to Section 422A of the Internal Revenue
Code (Code) of 1986, as amended, or stock options which do not qualify
as incentive stock options (NSOs), or any combination thereof. Options
may be granted to key employees and officers of the Company and its
subsidiaries.
The option price per share for ISOs will be not less than the fair
market value of a share on the date the option is granted. The option
price per share for ISOs granted to an employee owning 10% or more of
the common stock of the Company will be not less than 110% of the fair
market value of a share on the date the option is granted. The option
price per share for NSOs will be determined by the compensation
committee, but may not be less than 100% of the fair market value on the
date of grant. A total of 236,500 shares have been reserved for
issuance under the 1995 Plan.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
On March 15, 1995, options for 80,850 were granted to three key
employees. All options were 20% vested on the date of the grant, with
an additional 20% vesting on January 1 for each additional year. At
June 30, 1996, there were 155,650 options available for grant. A
summary of the stock options activity for the 1995 Plan is as follows:
1995 KEY EMPLOYEES' STOCK OPTION PLAN
<TABLE>
<CAPTION>
June 30 1996 1995
<S> <C> <C>
- ----------------------------------------------------------------
Outstanding at beginning of year 80,850
Granted during the year 80,850
Outstanding at end of year 80,850 80,850
Exercisable at end of year 32,340 16,170
Weighted option price per share
Exercisable $10.51 $10.51
Granted 10.51
</TABLE>
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, Accounting for Stock-Based Compensation, which requires a fair
value based method of accounting for stock options granted after
December 31, 1994. The statement is effective for fiscal years
beginning after December 15, 1995. The statement allows the Company to
continue to account for these plans according to Accounting Principles
Board Opinion No. 25, provided pro forma disclosures are made using the
fair value based method. The Company anticipates continuing the current
practice and will provide pro forma disclosures as required in the 1997
annual report.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument:
CASH AND CASH EQUIVALENTS
The fair value of cash and cash equivalents approximates carrying value.
INTEREST-BEARING DEPOSITS
The fair value of interest-bearing time deposits approximates carrying value.
INVESTMENT SECURITIES
Fair values are based on quoted market prices.
LOANS
For both short-term loans and variable-rate loans that reprice
frequently and with no significant change in credit risk, fair values
are based on carrying values. The fair values for certain mortgage
loans, including one-to-four family residential, are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. The
fair value for other loans, is estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
INTEREST RECEIVABLE/PAYABLE
The fair values of interest receivable/payable approximate carrying values.
FHLB STOCK
The fair value is estimated to be the carrying value, which is par. All
transactions in the capital stock of the FHLB of Indianapolis are
executed at par.
DEPOSITS
The fair values of non-interest bearing, interest bearing demand and
savings accounts are equal to the amount payable on demand at the
balance sheet date. The carrying amounts for variable rate, fixed-term
certificates of deposit approximate their fair values at the balance
sheet date. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on such time deposits.
LONG-TERM DEBT
The fair value of these borrowings are estimated using a discounted cash
flow calculation, based on current rates for similar debt. Long-term
debt consists of adjustable instruments tied to a variable market
interest rate.
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
OFF-BALANCE-SHEET COMMITMENTS
Commitments include commitments to purchase and originate mortgage
loans, commitments to sell mortgage loans, and standby letters of credit
and are generally of a short-term nature. The fair value of such
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements
and the counterparties' credit standing. The carrying amounts of these
commitments, which are immaterial, are reasonable estimates of the fair
value of these financial instruments.
The estimated fair values of the Savings Bank's financial instruments
are as follows:
<TABLE>
<CAPTION>
1996
---------------------
Carrying Fair
June 30 Amount Value
<S> <C> <C>
- ------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 10,213 $ 10,213
Interest-bearing deposits 5 5
Investment securities available-for-sale 17,458 17,458
Loans including loans held for sale, net 216,162 216,720
Interest receivable 1,486 1,486
FHLB Stock 3,920 3,920
Liabilities
Deposits 181,702 182,043
Short-term borrowings 5,693 5,693
Long-term debt 57,292 57,621
Interest payable 749 749
</TABLE>
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial
position, results of operations and cash flows of the Company:
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
June 30 1996 1995
<S> <C> <C>
- ------------------------------------------------------------------------------
ASSETS
Cash on deposit $ 160 $ 293
Bank certificates of deposit 5 5
Investment in subsidiaries 17,992 16,624
Loans, net 5,341 4,032
Subordinated debentures and other loan receivables
from subsidiaries 5,933 4,875
Other assets 699 1,095
---------------------
Total assets $30,130 $26,924
=====================
LIABILITIES
Long-term debt $15,317 $14,047
Other liabilities 518 471
---------------------
Total liabilities 15,835 14,518
---------------------
Stockholders' Equity
Common stock 2,495 2,163
Capital surplus 8,785 5,395
Stock warrants 266 299
Retained earnings, substantially restricted 2,889 4,560
Net unrealized loss on securities available-for-sale (140) (11)
---------------------
Total stockholders' equity 14,295 12,406
---------------------
Total liabilities and stockholders' equity $30,130 $26,924
=====================
</TABLE>
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended June 30 1996 1995 1994
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------
INCOME
Dividends from subsidiaries $2,200 $ 742 $ 400
Interest income 978 442
Other income 234 189 65
--------------------------------
Total income 3,412 1,373 465
--------------------------------
EXPENSE
Interest expense 1,364 527 52
Other expenses 611 336 120
--------------------------------
Total expense 1,975 863 172
--------------------------------
INCOME BEFORE INCOME TAX AND EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARIES 1,437 510 293
INCOME TAX BENEFIT (302) (92) (46)
--------------------------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME
OF SUBSIDIARIES 1,739 602 339
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 1,496 2,459 1,244
--------------------------------
NET INCOME $3,235 $3,061 $1,583
================================
</TABLE>
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30 1996 1995 1994
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 3,235 $ 3,061 $1,582
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 4 34 12
Undistributed net income of subsidiaries (1,496) (2,459) (1,244)
Increase in other assets 392 (618) (260)
Increase in other liabilities (183) 172 29
--------------------------------
Net cash provided by operating activities 1,952 190 119
--------------------------------
INVESTING ACTIVITIES
(Increase) decrease in interest-bearing
deposits in other banks 5 (10)
Capital contributions to subsidiaries (4,485)
Advance on note to subsidiary (1,058) (4,875)
Net increase in loans (1,309) (1,455) (2,577)
--------------------------------
Net cash used by investing activities (2,367) (10,810) (2,587)
--------------------------------
FINANCING ACTIVITIES
Payment of long-term debt (28) (5)
Proceeds from issuance of long-term debt 1,270 9,847 3,970
Proceeds from exercise of stock options 109 75 14
Proceeds from exercise of stock warrants 632 19
Payment of cash dividends (1,729) (626) (236)
Proceeds from issuance of stock warrants 150 150
--------------------------------
Net cash provided by financing activities 282 9,437 3,893
--------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (133) (1,183) 1,425
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 293 1,476 51
--------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 160 $ 293 $1,476
================================
</TABLE>
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
BUSINESS SEGMENT INFORMATION
The Company operates principally in two industries, banking and real
estate development and management. Through the Savings Bank, the
Company offers traditional banking products, such as checking, savings
and certificates of deposit, as well as mortgage, commercial and
consumer loans. Through the Affordable Housing Group, all wholly-owned
subsidiaries of the Savings Bank, the Company is involved in various
aspects of developing, building, renting and managing affordable housing
units.
Operating profit is total revenue less operating expenses. In computing
operating profit, incomes taxes have been deducted.
Identifiable assets are principally those used in each segment. Real
estate development and management activities conducted by the Company
are not asset intensive.
Presented below is condensed financial information relating to the
Company's business segments:
<TABLE>
<CAPTION>
June 30 1996 1995 1994
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
REVENUE
Banking $ 25,190 $ 16,788 $ 8,984
Real estate development and management 4,519 4,383 2,183
---------------------------------
$ 29,709 $ 21,171 $ 11,167
=================================
OPERATING PROFIT
Banking $ 1,416 $ 1,032 $ 543
Real estate development and management 1,819 2,029 1,040
---------------------------------
$ 3,235 $ 3,061 $ 1,583
=================================
IDENTIFIABLE ASSETS
Banking $250,466 $261,121 $149,672
Real estate development and management 11,750 8,317 2,516
---------------------------------
$262,216 $269,438 $152,188
=================================
DEPRECIATION AND AMORTIZATION
Banking $ 282 $ 232 $ 167
Real estate development and management 77 44 9
---------------------------------
$ 359 $ 276 $ 176
=================================
CAPITAL EXPENDITURES
Banking $ 1,569 $ 1,118 $ 210
Real estate development and management 809 435 212
---------------------------------
$ 2,378 $ 1,553 $ 422
=================================
</TABLE>
59
<PAGE>
CORPORATE INFORMATION
FIDELITY FEDERAL BANCORP BOARD OF DIRECTORS
CURT J. ANGERMEIER
Attorney
Director, United Fidelity Bank, fsb
WILLIAM R. BAUGH
Chairman Emeritus, Fidelity Federal Bancorp
Director, United Fidelity Bank, fsb
Retired President, United Fidelity Bank, fsb
BRUCE A. CORDINGLEY
Chairman, Fidelity Federal Bancorp
Chairman and Director, United Fidelity Bank, fsb
Chairman, Fidelity Federal Capital Corporation
Director and Officer, The Village Companies
President, Pedcor Investments
Director, Evansville Brewing Company
Director, Flagship Bank, fsb (San Diego, CA)
Director, International City Bank, n.a. (Long Beach, CA)
JACK CUNNINGHAM
Vice-Chairman and Secretary, Fidelity Federal Bancorp
Director, United Fidelity Bank, fsb
Director and Officer, The Village Companies
Vice President and Director, Fidelity Federal Capital Corporation
Past President, United Fidelity Bank, fsb
Port of Evansville Wharfmaster
M. BRIAN DAVIS
President and Chief Operating Officer, Fidelity Federal Bancorp
Vice Chairman and Director, United Fidelity Bank, fsb
Vice-Chairman and Director, Fidelity Federal Capital Corporation
Director and Officer, The Village Companies
President, Southern Investment Corporation
Director, Evansville Brewing Company
ROBERT F. DOERTER
Director, United Fidelity Bank, fsb
Retired President, United Fidelity Bank, fsb
MARK S. MATTINGLY
Attorney and CPA
President and Chief Executive Officer, Evansville Brewing Company
Director, United Fidelity Bank, fsb
Director, General Waste Management Corporation
DAVID L. MARAMAN
President and Chief Executive Officer, United Fidelity Bank, fsb
Director, United Fidelity Bank, fsb
Secretary, United Fidelity Bank, fsb
BARRY A. SCHNAKENBURG
President, U.S. Industries Group, Inc.
President, Barry Inc.
Director, United Fidelity Bank, fsb
Director, Fidelity Federal Capital Corporation
Director and Officer, Village Insurance Corporation
60
<PAGE>
CORPORATE INFORMATION
FIDELITY FEDERAL BANCORP - OFFICERS
Bruce A. Cordingley
Chairman of the Board
Jack Cunningham
Vice-Chairman of the Board and Secretary
M. Brian Davis
President and Chief Operating Officer
Donald R. Neel, CPA
Senior Vice President,
Chief Financial Officer and Treasurer
Mark A. Isaac
Vice President, Controller
Deborah H. Gorman
Assistant Vice President, Human Resources
Jane A. Nunez, CPA
Assistant Vice President, Internal Auditor
Anthony W. Freels
Shareholder Relations Officer
UNITED FIDELITY BANK, FSB - OFFICERS
Bruce A. Cordingley
Chairman of the Board
M. Brian Davis
Vice Chairman of the Board
David L. Maraman
President, Chief Executive Officer, and Secretary
Kirby W. King
Senior Vice President, Consumer Loans
Michael S. Sutton, CPA
Senior Vice President, Commercial Banking
Roger C. Baugh
Vice President, Special Services
Lisa C. Frank, CPA
Vice President, Chief Financial Officer
and Treasurer
Vickie L. Jeffries
Vice President, Branch Administration
Wayne M. Jones
Vice President, Mortgage Banking
Richard A. Klein
Vice President, Mortgage Origination
Donald H. Schenk
Vice President, Branch Manager
Patricia R. Cummins
Assistant Vice President, Mortgage Banking
Thomas H. Ford
Assistant Vice President, Mortgage Banking
Patricia L. Griffin
Assistant Vice President, Mortgage Origination
Jamie R. Hagan
Assistant Vice President, Marketing
Maria D. Harris
Assistant Vice President, Mortgage Banking
Dale Holt
Assistant Vice President, Consumer Loans
Steven A. Knight
Assistant Vice President, Operations
Barbara A. Luckett
Assistant Vice President, Branch Manager
Deborah S. Reich
Assistant Vice President, Branch Manager
Christopher A. Viton
Assistant Vice President, Consumer Loans
Beverly A. Winternheimer
Assistant Vice President, Branch Manager
Richard S. Witte
Assistant Vice President, Operations
61
<PAGE>
CORPORATE INFORMATION
FIDELITY FEDERAL CAPITAL CORPORATION - OFFICERS
Bruce A. Cordingley
Chairman of the Board
M. Brian Davis
Vice Chairman of the Board
Theresa P. Bennett
President and Chief Executive Officer
David G. Bennett
Vice President
Jack Cunningham
Vice President
Michael E. Gaither, CPA
Vice President and Chief Financial Officer
Terry G. Johnston
Vice President
Duane D. Reindl
Vice President
Donald R. Neel, CPA
Treasurer
Michelle M. Milbourne
Assistant Vice President and Secretary
VILLAGE SECURITIES CORPORATION - OFFICERS
Bruce A. Cordingley
Chairman of the Board
M. Brian Davis
President and Chief Executive Officer
Donald R. Neel, CPA
Senior Vice President and Treasurer
Darren R. Flener
Vice President
Mark A. Isaac
Secretary
VILLAGE INSURANCE CORPORATION - OFFICERS
Jack Cunningham
Chairman of the Board
M. Brian Davis
President and Chief Executive Officer
Barry A. Schnakenburg
Executive Vice President
and Chief Operating Officer
Roger C. Baugh
Vice President
Donald R. Neel, CPA
Treasurer
Kirby W. King
Secretary
VILLAGE HOUSING CORPORATION - OFFICERS
Jack Cunningham
Chairman of the Board
Bruce A. Cordingley
President and Chief Executive Officer
M. Brian Davis
Executive Vice President
Theresa P. Bennett
Senior Vice President
David G. Bennett
Vice President
Michael E. Gaither, CPA
Vice President and Chief Financial Officer
Duane D. Reindl
Vice President
Donald R. Neel, CPA
Treasurer
Michelle M. Milbourne
Secretary
62
<PAGE>
CORPORATE INFORMATION
VILLAGE MANAGEMENT CORPORATION - OFFICERS
Jack Cunningham
Chairman of the Board
M. Brian Davis
President and Chief Executive Officer
Christine M. Marshall
Executive Vice President
Morgan B. Fulton
Senior Vice President, Area Manager
Bruce A. Cordingley
Vice President
Bradley E. Parker
Vice President, Commercial Real Estate
Rhonda J. Wagner
Vice President, Area Manager
Sarah A. Lentz, CPM
Vice President
John A. Stewart
Assistant Vice President, Compliance
Michael E. Gaither, CPA
Vice President and Chief Financial Officer
Donald R. Neel, CPA
Treasurer
Mark A. Isaac
Secretary
Donald J. Fuchs, Esq
Vice President, Village Title Company
VILLAGE COMMUNITY DEVELOPMENT CORPORATION - OFFICERS
Jack Cunningham
Chairman of the Board
Bruce A. Cordingley
President and Chief Executive Officer
M. Brian Davis
Executive Vice President
Theresa P. Bennett
Senior Vice President
David G. Bennett
Vice President
Michael E. Gaither, CPA
Vice President and Chief Financial Officer
Duane D. Reindl
Vice President
Terry G. Johnston
Vice President
Donald R. Neel, CPA
Treasurer
Michelle M. Milbourne
Assistant Vice President and Secretary
63
<PAGE>
CORPORATE INFORMATION
TOLL-FREE SHAREHOLDER INQUIRIES: 1-800-280-8280
If you have inquiries or questions regarding your Fidelity Federal
Bancorp Shareholder account, call shareholder relations at
1-800-280-8280.
STOCK TRANSFERS, DIVIDEND PAYMENTS OR DIVIDEND REINVESTMENT
Fidelity Federal Bancorp
Attn: Shareholder Services
18 N.W. Fourth St.
PO Box 1347
Evansville, IN 47706-1347
Fidelity Federal Bancorp offers its Common shareholders a no-cost way in
which to reinvest cash dividends. For additional information about this
plan, contact us at the above address or phone number.
FINANCIAL INFORMATION
If you are seeking financial information, contact:
Donald R. Neel, Senior Vice-President
CFO and Treasurer
Fidelity Federal Bancorp
18 N.W. Fourth St.
PO Box 1347
Evansville, IN 47706-1347
1-800-280-8280, ext. 310
All other requests, including requests for the Annual Report, Form 10-K,
Form 10-Q, etc. should be directed to:
Anthony W. Freels
Fidelity Federal Bancorp
18 N.W. Fourth St.
PO Box 1347
Evansville, IN 47706-1347
1-800-280-8280, ext. 312
INTERNET
Information on Fidelity Federal Bancorp
is available on the Internet at:
http://www.ufb-ffed.com
COMMON STOCK INFORMATION
NASDAQ National Market System
Ticker Symbol: FFED
DIVIDEND CALENDAR
Dividends on common shares, if approved by the Board of Directors, are
anticipated to be paid to shareholders
RECORD DATES
September 2, 1996, December 2, 1996, March 3, 1997, June 2, 1997
PAYMENT DATES
October 7, 1996, January 6, 1997, April 7, 1997, July 7, 1997
PRODUCTS AND SERVICES
For specific information on products and services offered by the
Company's banking subsidiary, United Fidelity Bank, fsb, call
1-800-280-8280 or (812) 424-0921. For specific information on any of
Fidelity Federal Bancorp's multifamily housing projects, contact Village
Management Corporation at (812) 471-1661.
CORPORATE HEADQUARTERS
Fidelity Federal Bancorp's Corporate headquarters:
Fidelity Federal Bancorp
18 N.W. Fourth St.
PO Box 1347
Evansville, IN 47706-1347 1-800-280-8280 (812) 424-0921
Effective November 1, 1996:
Fidelity Federal Bancorp
700 S. Green River Road, Suite 2000
Evansville, IN 47715
1-800-280-8280
(812) 469-2100
Annual Meeting
The annual meeting of shareholders will be held on Wednesday, October
16, 1996, at Fidelity Federal Bancorp's Corporate headquarters at 11:00
a.m. (Central Daylight Time).
64
EXHIBIT 21 SUBSIDIARIES OF FIDELITY FEDERAL BANCORP
Name Jurisdiction of Incorporation
- ---- -----------------------------
Fidelity Federal Bancorp:
United Fidelity Bank, fsb Indiana
Village Securities Corporation Indiana
Also included are the subsidiaries of United
Fidelity Bank, fsb: Indiana
Village Insurance Corporation Indiana
Village Housing Corporation Indiana
Village Community Development Corporation Indiana
Village Management Corporation Indiana
Fidelity Federal Capital Corporation Indiana
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
Fidelity Federal Bancorp's consilidated balance sheet as of June 30, 1996 and
the consolidated statement of income for the year ended June 30, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 1,112
<INT-BEARING-DEPOSITS> 4,107
<FED-FUNDS-SOLD> 5,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,458
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 217,221
<ALLOWANCE> (1,059)
<TOTAL-ASSETS> 262,216
<DEPOSITS> 181,702
<SHORT-TERM> 5,693
<LIABILITIES-OTHER> 3,234
<LONG-TERM> 57,292
2,495
0
<COMMON> 0
<OTHER-SE> 11,800
<TOTAL-LIABILITIES-AND-EQUITY> 262,216
<INTEREST-LOAN> 19,949
<INTEREST-INVEST> 1,295
<INTEREST-OTHER> 285
<INTEREST-TOTAL> 21,529
<INTEREST-DEPOSIT> 10,550
<INTEREST-EXPENSE> 15,525
<INTEREST-INCOME-NET> 6,004
<LOAN-LOSSES> 455
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,607
<INCOME-PRETAX> 5,122
<INCOME-PRE-EXTRAORDINARY> 5,122
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,235
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.17
<YIELD-ACTUAL> 2.29
<LOANS-NON> 342
<LOANS-PAST> 43
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 713
<CHARGE-OFFS> 140
<RECOVERIES> 31
<ALLOWANCE-CLOSE> 1,059
<ALLOWANCE-DOMESTIC> 1,059
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
