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, 1997
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
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(State of other jurisdiction (I.R.S. Employer
of Incorporation or Identification No.)
Organization)
700 S. Green River Road, Suite 2000, PO Box 5584, Evansville, Indiana 47715
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code (812) 469-2100
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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 1997 Annual Report to Stockholders for the year
ended June 30, 1997 are incorporated by reference into Part II.
Portions of the Registrant's Proxy Statement dated September 15, 1997, for the
Annual Meeting of Stockholders to be held October 15, 1997 are incorporated by
reference into Part III.
Exhibit index is on page 17
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 1, 1997 was approximately $15,255,000.
Indicated below is the number of shares outstanding of each of the
registrant's classes of common stock as of September 1, 1997.
Common Stock - 2,487,382 shares
<PAGE>
FIDELITY FEDERAL BANCORP
Index
PART I
Page
----
ITEM 1 - Business 3
ITEM 2 - Properties 12
ITEM 3 - Legal Proceedings 13
ITEM 4 - Submission of Matters to a Vote of Security Holders 13
PART II
ITEM 5 - Market for Registrant's Common Equity
and Related Stockholder Matters 13
ITEM 6 - Selected Financial Data 13
ITEM 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
ITEM 8 - Financial Statements and Supplementary Data 13
Consolidated Balance Sheet 13
Consolidated Statement of Income 13
Consolidated Statement of Stockholders' Equity 13
Consolidated Statement of Cash Flows 13
Notes to Consolidated Financial Statements 13
Report of Independent Auditors 13
ITEM 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 13
PART III
ITEM 10 - Directors and Executive Officers of the Registrant 14
ITEM 11 - Executive Compensation 14
ITEM 12 - Security Ownership of Certain Beneficial
Owners and Management 14
ITEM 13 - Certain Relationships and Related Transactions 14
PART IV
ITEM 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K 15
SIGNATURES 16
<PAGE>
PART I
ITEM 1. BUSINESS
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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. To
conserve capital, the Company slowed its growth in fiscal 1996 and positioned
the Company to reduce debt, increase core deposits, sell loans and use the
proceeds to fund new loan production. During fiscal 1996 the Company
encountered increasing competition in the affordable housing group activities.
As a result the Company reevaluated its business plan in fiscal 1997 and
closed its Indianapolis, Indiana real estate development office. This process
was completed in the fourth quarter of fiscal 1997. Due to the above, Village
Community Development Corporation, though operational in Evansville, has
reduced its activities significantly. Due to the increased competition in the
affordable housing segment mentioned above and a change in the business plan,
the Company initiated a cost reduction program in the third quarter of fiscal
1997 which was completed early in the fourth quarter. The cost reduction
program called for the Company to work toward achieving optimum efficiency
within its banking and real estate management, development, and financing
units by eliminating duplicative and less profitable activities. The Company
has succeeded in achieving after tax cost savings of approximately $0.44 per
share, through departmental reorganization, reconsolidation, position
attrition and 'right-sizing' of operations within all the subsidiaries. The
Company's business plan includes the search for new financing niches both in
and outside the housing arena, increasing the profitability of the core
banking activity and to increase 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 loans, multi-family loans,
commercial loans, and mortgage loans, primarily owner occupied one-to-four
family homes located in Indiana, and in investment and money market
securities. 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, Village Capital Corporation
(formerly known as 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. 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. Village Capital Corporation
("VCC") has packaged loan requests for developers of multifamily residential
real estate projects eligible for federal tax credits and tax exempt
financing. While most of the loans packaged to date have been referred to the
Savings
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Bank for origination, VCC also packages loan transactions for other lenders,
if the opportunity arises. VCC has earned fees by providing real estate
mortgage banking and consulting services to unaffiliated borrowers. 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.
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, was dormant in fiscal 1996, but began operations
in July 1997.
The Company had consolidated total assets of $240.0 million and total
shareholder's equity of $12.9 million as of June 30, 1997.
The Company's subsidiaries at June 30, 1997, are listed below:
<TABLE>
<CAPTION>
PRINCIPAL YEAR ASSETS
SUBSIDIARY OFFICE ORGANIZED (in thousands)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. United Fidelity Bank, fsb Evansville, IN 1914 $233,874
Subsidiaries of United Fidelity Bank, fsb:
Village Capital Corporation Evansville, IN 1994 1,254
Village Insurance Corporation Evansville, IN 1980 56
Village Management Corporation Evansville, IN 1992 321
Village Community Development
Corporation Evansville, IN 1992 4,700
Village Housing Corporation Evansville, IN 1992 6,798
2. Village Securities Corporation Evansville, IN 1994 79
</TABLE>
The Company's home office is located at 700 S. Green River Road, Suite
2000, Evansville, Indiana, 47715 and its telephone number is (812) 469-2100.
The Company has reviewed future accounting pronouncements and anticipates
no significant impact on the Company's financials.
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, 1997, approximately 5 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
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<PAGE>
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. The competition for 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 the Affordable Housing Group began seeing a
reduction in the fees charged for their service, in order to remain
competitive in the market. This increased competition continued into fiscal
1997, resulting in the Company to reevaluate its business plan in fiscal 1997
and close its Indianapolis, Indiana development office. This was completed in
the fourth quarter of 1997. The Company's business plan is to continue
searching 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 association 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 association or holding company thereof which is not a
subsidiary of such savings and loan 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
association, other than a subsidiary association, or any other savings and
loan holding company.
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 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 association,
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
association meets the QTL test, the activities of the Company and any of its
subsidiaries (other than the Savings Bank or other subsidiary savings
associations) 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 association 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 association,
5
<PAGE>
(ii) conducting an insurance agency or escrow business, (iii) holding,
managing or liquidating assets owned by or acquired from a subsidiary savings
association, (iv) holding or managing properties used or occupied by a
subsidiary savings association, (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 associations in more than one state, if the multiple savings and loan
holding company involved controls a savings association which operated a home
or branch office in the state of the association to be acquired as of March 5,
1987, or if the laws of the state in which the association to be acquired is
located specifically permit associations to be acquired by state-chartered
associations 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 associations). The Director of the OTS may also
approve an acquisition resulting in a multiple savings and loan holding
company controlling savings associations in more than one state in the case of
certain emergency thrift acquisitions.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire
savings associations whose home offices are located in Indiana and savings and
loan holding companies with their principal place of business in Indiana
("Indiana Savings and Loan Holding Companies") upon receipt of approval by the
Indiana Department of Financial Institutions. Moreover, Indiana Savings and
Loan Holding Companies may acquire savings associations with their home
offices located outside of Indiana and savings association holding companies
with their principal place of business located outside of Indiana upon receipt
of approval by the Indiana Department of Financial Institutions.
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 federally chartered, SAIF-insured savings association, the
Savings Bank is subject to extensive regulation by the OTS and the FDIC. The
OTS periodically examines the books and records of the Savings Bank and, in
conjunction with the FDIC in certain situations, has examination and
enforcement powers. This supervision and regulation are intended primarily
for the protection of depositors and federal deposit insurance funds.
The Savings Bank is also subject to federal and state regulation as to
such matters as loans to officers, directors, or principal shareholders,
required reserves, limitations as to the nature and amount of its loans and
investments, regulatory approval of any merger or consolidation, issuance or
retirements of its securities, and limitations upon other aspects of banking
operations. In addition, its activities and operations are subject to a
number of additional detailed, complex and sometimes overlapping federal and
state laws and regulations. These include state usury and consumer credit
laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and
Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the
Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining
legislation and antitrust laws.
The United States Congress is considering legislation that would require
all federal savings associations, such as the Savings Bank, to either convert
to a national bank or a state-chartered bank by a specified date to be
determined. In addition, under the legislation, the Company likely would not
be regulated as a savings and loan holding company but rather as a bank
holding company. This proposed legislation would abolish the OTS and transfer
its functions among the other federal banking regulators. Certain aspects of
the legislation remain to be
6
<PAGE>
resolved and, therefore, no assurance can be given as to whether or in what
form the legislation will be enacted or its effect on the Company and the
Savings Bank. Any changes in legislation or regulations, whether by
legislation or regulatory action, could have a material impact on the Savings
Bank and its operations. Neither the 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.
Qualified Thrift Lender Requirement. In order for the Savings Bank to
exercise the powers granted to federally-chartered savings associations and
maintain full access to FHLB advances, it must be a "qualified thrift lender"
("QTL"). A savings association is a QTL if its qualified thrift investments
equal or exceed 65% of the savings association'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, 1997,
the qualified thrift investment percentage test for the Savings Bank was
84.2%.
Liquidity. Under applicable federal regulations, savings associations
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 associations. A savings association 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, 1997, the Savings
Bank was in compliance with these liquidity requirements.
Loans-to-One-Borrower Limitations. HOLA generally requires savings
associations 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, 1997, the Savings Bank's loan-to-one-borrower
limitation was approximately $3.4 million and no loans to a single borrower
exceeded that amount, except as provided herein. Under certain OTS
regulations, a savings association may make loans to one borrower for
residential housing developments in amounts up to 30% of the bank's unimpaired
capital and surplus 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, 1997, the Savings Bank had made
$24.2 million in such loans under this higher lending limit.
Commercial Real Property Loans. HOLA limits the aggregate amount of
commercial real estate loans that a federal savings association may make to an
amount not in excess of 400% of the savings association's capital.
Limitation on Capital Distributions. The OTS regulations impose
limitations on capital distributions by savings associations. Under the
rule, a savings association 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 association'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.
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<PAGE>
INSURANCE OF DEPOSITS.
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of banks and thrifts
and safeguards the safety and soundness of the banking and thrift industries.
The FDIC administers two separate insurance funds, the Bank Insurance Fund
(the "BIF") for commercial banks and state savings banks and the SAIF for
savings associations such as the Savings Bank. The FDIC is required to
maintain designated levels of reserves in each fund.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of
the SAIF. The FDIC may increase assessment rates for either fund if necessary
to restore the fund's ratio of reserves to insured deposits to the target
level within a reasonable time and may decrease these rates if the target
level has been met. The FDIC has established a risk-based assessment system
for both SAIF and BIF members. Under this system, assessments vary depending
on the risk the institution poses to its deposit insurance fund. An
institution's risk level is determined based on its capital level and the
FDIC's level of supervisory concern about the institution.
On September 30, 1996, President Clinton signed into law legislation
which included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and the SAIF. Under the new
law, the Savings Banks was charged a one-time special assessment equal to
$.657 per $100 in assessable deposits at March 31, 1995. The Savings Bank
recognized this one-time assessment as a non-recurring operating expense of
$1,040,000 ($628,000 after tax) during the three-month period ending September
30, 1996, and paid this assessment on November 27, 1996. The assessment was
fully deductible for both federal and state income tax purposes. Beginning
January 1, 1997, the Savings Bank's annual deposit insurance premium was
reduced from .23% to .0644% of total assessable deposits. BIF institutions
pay lower assessments than comparable SAIF institutions because BIF
institutions pay only 20% of the rate being paid by SAIF institutions on their
deposits with respect to obligations issued by the federally-chartered
corporation which provided some of the financing to resolve the thrift crisis
in the 1980's ("FICO"). The 1996 law also provides for the merger of the SAIF
and the BIF by 1999, but not until such time as bank and thrift charters are
combined. Until the charters are combined, savings associations with SAIF
deposits may not transfer deposits into the BIF system without paying various
exit and entrance fees, and SAIF institutions will continue to pay higher FICO
assessments. Such exit and entrance fees need not be paid if a SAIF
institution converts to a bank charter or merges with a bank, as long as the
resulting bank continues to pay applicable insurance assessments to the SAIF,
and as long as certain other conditions are met.
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 association'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 certain
restrictions on payment of rates. Undercapitalized institutions are not
permitted to accept brokered deposits and may not solicit deposits by offering
an effective yield that significantly exceeds 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
associations 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
8
<PAGE>
per day unless a finding of reckless disregard is made, in which case
penalties may be as high as $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. In 1995 the federal banking agencies
prescribed for all insured depository institutions safety and soundness
standards in the form of guidelines, relating to internal controls,
information systems and audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset quality and growth, earnings,
and compensation, fees and benefits. 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 Federal
Deposit Insurance Act.
Real Estate Lending Standards. OTS regulations require savings
associations to establish and maintain written internal real estate lending
policies. Each association's lending policies must be consistent with safe
and sound banking practices and appropriate to the size of the association and
the nature and scope of its operations. The policies must establish loan
portfolio diversification standards; establish prudent underwriting standards,
including loan-to-value limits, that are clear and measurable; establish loan
administration procedures for the association's real estate portfolio; and
establish documentation, approval, and reporting requirements to monitor
compliance with the association's real estate lending policies. The
association's written real estate lending policies must be reviewed and
approved by the association's Board of Directors at least annually. Further,
each association is expected to monitor conditions in its real estate market
to ensure that its lending policies continue to be appropriate for current
market conditions.
Prompt Corrective Regulatory Action. The Federal Deposit Insurance Act
("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 regulator 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
association 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 association 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 association 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
associations, including, but not limited to, restrictions on growth,
investment activities, capital distributions, and affiliate 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.
9
<PAGE>
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 association'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 associations 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
association's assets, provided any investment over 2% is used for specified
community or inner-city development purposes. In addition, federal
regulations permit associations to make specified types of loans to such
subsidiaries, in which the association owns more than 10% of the stock, in an
aggregate amount not exceeding 50% of the association's regulatory capital if
the association's investment is in compliance with applicable loans-to-one-
borrower regulations. A savings association which acquires a non-savings
association subsidiary, or which elects to conduct a new activity within a
subsidiary, must give 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 associations 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 association'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, 1997 was $73,000.
10
<PAGE>
ACQUISITIONS AND BRANCHING
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, 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.
Moreover, federal savings associations may acquire or be acquired by any
insured depository institution. Regulations promulgated by the Federal
Reserve Board restrict the branching authority of savings associations
acquired by bank holding companies. Savings associations acquired by bank
holding companies may be converted to banks if they continue to pay SAIF
premiums, but as such they become subject to branching and activity
restrictions applicable to banks.
The OTS has adopted regulations which permit nationwide branching to the
extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets
the domestic building and loan test in Section 7701(a)(19) of the Internal
Revenue Code or the asset composition test of Section 7701(c) of the Internal
Revenue Code. Branching that would result in the formation of a multiple
savings and loan holding company controlling savings associations in more than
one state is permitted if the law of the state in which the savings
association to be acquired is located specifically authorizes acquisitions of
its state-chartered associations by state-chartered associations or their
holding companies in the state where the acquiring association or holding
company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.
Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire
banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through
merger or de novo expansion. The State of Indiana enacted legislation
establishing interstate branching provisions for Indiana state-chartered banks
consistent with those established by the Riegle-Neal Act (the "Indiana
Branching Law"). The Indiana Branching Law authorizes Indiana banks to branch
interstate by merger or de novo expansion, provided that such transactions are
not permitted to out-of-state banks unless the laws of their home states
permit Indiana banks to merge or establish de novo banks on a reciprocal
basis. The Indiana Branching Law became effective March 15, 1996.
TRANSACTIONS WITH AFFILIATES
Pursuant to HOLA, transactions engaged in by a savings association or one
of its subsidiaries with affiliates of the savings association 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. 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, 1997.
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 associations. 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, 1997, the
Savings Bank was in compliance with this requirement.
11
<PAGE>
PERSONNEL
As of June 30, 1997 the Company had 103 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, 1997. The
Savings Bank currently has no plans to sell or close any existing branches.
Year Facility Net
Office Location Opened Book Value
- --------------- ------------- ----------
Home Office 1974 $1,799,000
18 NW Fourth Street
Evansville, IN 47708
Eastside Branch 1971 2,411,000
700 S. Green River Rd
Evansville, IN 47715
Northside Branch 1976 220,000
4441 First Avenue
Evansville, IN 47710
Westside Branch 1979 200,000
4801 W. Lloyd Expressway
Evansville, IN 47712
The Company and the other non-bank subsidiaries use the premises of the
Savings Bank's Home office and 2nd floor of the Eastside Branch, for its
office and equipment needs and pays rental fees for such use.
(This space intentionally left blank)
12
<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, 1997.
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" is included
in the 1997 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
1997 Annual Report to Stockholders on page 11 and is incorporated herein by
reference. Additional information relating to stockholder matters can be
found under the heading "Corporate Information" included in the 1997 Annual
Report to Stockholders on page 54 and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
- -------
Selected Financial and Other Data included in the 1997 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 1997 Annual Report to Stockholders on pages 7
through 25 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 26 through 53 of the 1997 Annual
Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- FINANCIAL DISCLOSURES
No response to this item is required.
13
<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 7, and under
the heading "Security Ownership Reporting" on page 19, (up to but exclusive of
the information presented under the caption "Ratification of the appointment
of Auditors of the Company", and "Shareholders Proposals"), of the Company's
definitive proxy statement dated September 15, 1997, 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 17 (up to but exclusive of the
information presented under the caption "Security Ownership of Management" on
page 17) of the Company's definitive proxy statement dated September 15, 1997,
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
caption "Proxies" on page 4), and under the heading "Security Ownership of
Management" on pages 17 through 19 (up to but exclusive of the information
presented under the caption "Security Ownership Reporting" on page 19), of the
definitive proxy statement dated September 15, 1997 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 (up to but exclusive of
the information presented under the captions "Board Meetings", and "Board
Committees"), of the Company's definitive proxy statement dated September 15,
1997 as filed with the Securities and Exchange Commission pursuant to
Regulation 14A.
(This space intentionally left blank)
14
<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 26
Consolidated Balance Sheet
June 30, 1997 and 1996 27
Consolidated Statement of Income -
For the years ended June 30, 1997,
1996, and 1995 28 and 29
Consolidated Statement of Changes in Stockholders'
Equity - For the years ended
June 30, 1997, 1996, and 1995 30
Consolidated Statement of Cash Flows -
For the years ended June 30, 1997, 1996, and 1995 31 and 32
Notes to Consolidated Financial Statements 33 through 53
(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, filed as exhibit
10(c) to the Company's 1996 Annual Report on Form 10-K,
is incorporated herein by reference.
11 Statement regarding computation of per share earnings.
13 1997 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.
15
<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 17th day of September, 1997.
FIDELITY FEDERAL BANCORP
Registrant
By /S/ M. BRIAN DAVIS
-----------------------------------
M. Brian Davis
President and Chief Executive Officer
(Principal Executive Officer)
By /S/ DONALD R. NEEL
-----------------------------------
Donald R. Neel, Executive 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 17, 1997, 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 Executive 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/ BARRY A. SCHNAKENBURG
--------------------------------------
Barry A. Schnakenburg, Director
By /S/ JACK CUNNINGHAM
--------------------------------------
Jack Cunningham, Attorney-in-fact
16
<PAGE>
INDEX TO EXHIBITS
-----------------
Page Exhibit Number Exhibit
- ------------------------------------------------------------------------------
11 Statement regarding computation of per share
earnings.
13 1997 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.
17
FIDELITY FEDERAL BANCORP
EARNINGS PER SHARE COMPUTATION
Exhibit 11
<TABLE>
<CAPTION>
Fiscal years ending June 30 1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRIMARY:
Net income $ 113,468 $3,234,909 $3,061,141
========================================
Average common shares outstanding 2,491,078 2,453,275 2,360,586
Common stock equivalents - stock options 26,869 51,359 47,618
Common stock equivalents - warrants 137,234 271,513 90,688
----------------------------------------
Total average common and common
equivalent shares outstanding 2,655,181 2,776,147 2,498,891
========================================
PRIMARY EARNINGS PER SHARE $ 0.04 $ 1.17 $ 1.23
========================================
FULLY DILUTED:
Net income $ 113,468 $3,234,909 $3,061,141
========================================
Average common shares outstanding 2,491,078 2,453,275 2,360,586
Common stock equivalents - stock options 26,869 51,359 69,589
Common stock equivalents - warrants 137,234 271,513 204,256
----------------------------------------
Total average common and common
equivalent shares outstanding 2,655,181 2,776,147 2,634,431
========================================
FULLY DILUTED EARNINGS PER SHARE $ 0.04 $ 1.17 $ 1.16
========================================
</TABLE>
Fidelity Federal Bancorp
1997 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 Page 7-25
Independent Auditor's Report Page 26
Consolidated Balance Sheet Page 27
Consolidated Statement of Income Page 28-29
Consolidated Statement of Changes in Stockholders' Equity Page 30
Consolidated Statement of Cash Flows Page 31-32
Notes to the Consolidated Financial Statements Page 33-53
Corporate Information Page 54-56
1
<PAGE>
Financial Highlights
Fidelity Federal Bancorp and Subsidiaries
(Dollars in Thousands, except share and per share data)
PER SHARE 1997 1996 CHANGE
- ----------------------------------------------------------------------------
Fully diluted net income $0.04 $1.17 (96.6)%
Primary net income 0.04 1.17 (96.6)%
Cash dividends declared 0.60 0.79 (24.1)%
Book value at year-end 5.20 5.73 (9.2)%
Market price (bid) at year-end 8.75 11.25 (22.2)%
FOR THE YEAR
- ----------------------------------------------------------------------------
Net interest income $6,451 $6,004 7.4%
Provision for loan losses 975 455 114.3
Non-interest income 3,856 8,180 (52.9)
Non-interest expense 9,474 8,607 10.1
Net income 113 3,235 (96.5)
AT YEAR-END
- ----------------------------------------------------------------------------
Total assets $240,001 $262,216 (8.5)%
Total loans 204,964 217,221 (5.6)
Total deposits 181,787 181,702 0.0
Total stockholders' equity 12,936 14,295 (9.5)
AVERAGES
- ----------------------------------------------------------------------------
Total assets $254,130 $274,837 (7.5)%
Total earning assets 238,438 261,924 (9.0)
Total loans 213,793 226,874 (5.8)
Total deposits 183,706 184,105 (0.2)
Total stockholders' equity 13,596 13,618 (0.2)
PROFITABILITY RATIOS
- ----------------------------------------------------------------------------
Return on average assets 0.04% 1.18%
Return on average stockholders' equity 0.83 23.75
Net interest margin 2.72 2.29
LOAN QUALITY RATIOS
- ----------------------------------------------------------------------------
Net charge-offs to average loans 0.12% 0.05%
Allowance for loan losses to loans at
end of period 0.87 0.49
Allowance for loan losses to non-performing
loans 624.91 275.06
SAVINGS BANK CAPITAL RATIOS
- ----------------------------------------------------------------------------
Tangible equity to assets at end of period 6.93% 7.05%
Risk-based capital ratios:
Tier 1 capital 7.64 9.30
Total capital 10.74 12.35
OTHER DATA
- ----------------------------------------------------------------------------
Average common and common equivalent
shares outstanding 2,655,181 2,776,147
Number of full-time equivalent
employees at year-end 103 133
Number of banking offices 4 4
Note: All per share and average share data have been adjusted to reflect the
10 percent stock dividend distributed May 27, 1996.
2
<PAGE>
Letter to Stockholders
Fidelity Federal Bancorp and Subsidiaries
Fiscal 1997 was in many respects a watershed year for the Company. First, the
Board of Directors, after analyzing the competitive environment, implemented a
strategic change in our business plan. Because of the increasing competition
in the affordable housing industry, management determined to reduce the
Company's dependence on fee income generated by the affordable housing segment
of our business. As a result, the Bank has increased the percentage of
higher-yielding consumer and commercial loans in its loan portfolio. In
addition, in Fiscal 1997 management has generated additional fee income by
offering the development, consulting and financing skills of its affordable
housing group to developers throughout the Midwest. This business niche has
thus far exceeded management's income projections by over 400 percent. We
believe that this segment of our business will continue to contribute
significantly in Fiscal 1998.
In the third and fourth fiscal quarters the Company began and completed a cost
reduction program. We anticipate that this will result in an annual profit
enhancement of an estimated $0.44 per share on an after-tax basis. These cost
savings are largely due to staff reductions realized by the closing of our
Indianapolis operation and the "right-sizing" of the Bank. As a result of
this program, approximately 20 percent of the overall staff positions were
eliminated. I would like to take this opportunity to thank our employees for
their hard work and sacrifices in these somewhat tumultuous times.
Village Securities Corporation, our deep discount stock and bond brokerage
subsidiary, also became operational in July of this year. We certainly hope
you will consider "Village" for your next security trade.
Although we were not satisfied with 1997 profits, it is important to realize
that earnings were impacted during our first fiscal quarter by a one-time
special assessment of over $1 million imposed to recapitalize the Savings
Association Insurance Fund. Management believes, however, that the
intermediate and long-term cost savings of this charge will exceed the
one-time, $1 million assessment. Because the annual deposit insurance premium
paid by the Bank has been reduced as a result of the assessment, management
anticipates an annual savings on deposit insurance premiums in excess of
$300,000. If realized, this would result in a pay-back period of
approximately 3.4 years. In addition, the Bank increased its loan loss
allowance due to the increased percentage of consumer and commercial loans in
its loan portfolio. The special assessment, coupled with declining fee income
and the increase of the loan loss allowance strained our capital reserves,
thus necessitating the dividend reduction made in the third fiscal quarter.
Management is optimistic that Fiscal 1998 will be a prosperous one for your
company. What has made this company a top performer in years past, in
addition to its high level of customer service, has been its capability to
explore niche markets and be entrepreneurial in nature. We feel that this
will continue to be the case. I personally wish to thank those of you who
have continued to show support through the past year. I am confident that
your support will be rewarded.
Cordially Yours,
/s/ M. Brian Davis
M. Brian Davis
President and Chief Executive Officer
3
<PAGE>
MARKET SUMMARY
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
FISCAL YEAR COMMON STOCK FISCAL YEAR COMMON STOCK
ENDED BID PRICES ENDED BID PRICES
JUNE 30, 1997 HIGH LOW JUNE 30, 1996 HIGH LOW
<S> <C> <C> <C> <C> <C>
First Quarter $11-1/4 $10-1/4 First Quarter $12-3/4 $10-7/8
Second Quarter 10-1/2 8-3/4 Second Quarter 13-5/8 10-1/2
Third Quarter 9-3/8 8-1/4 Third Quarter 13-5/8 10-7/8
Fourth Quarter 8-3/4 7-1/2 Fourth Quarter 12-1/4 11-1/4
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The recent bid and ask prices on August 31, 1997, were $8-3/8 and $9-1/4
respectively. The Company declared dividends of $0.60 per share during fiscal
1997 compared to $0.79 per share for fiscal 1996 and $0.33 per share in fiscal
1995. 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. The Company has undergone several changes in the past year and
has revised its business plan during fiscal 1997, discussed further in
Management's Discussion and Analysis. As a result the Company reduced its
dividend rate in the third quarter from $0.20 per share to $0.10 per share to
enhance capital growth.
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, 1993. The following
data has not been restated for the stock dividends or split.
- ------------------------------------------------------------------------
CLOSING
MARKET
TOTAL PRICE (BID)
SHARES AT YEAR MARKET
DATE STOCK CHANGES OWNED END VALUE
- ------------------------------------------------------------------------
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 $3,116.00
06/30/97 277 $ 8.25 $2,285.25
- ------------------------------------------------------------------------
In addition, this stockholder would have received $488.70 in cash dividends
during the period shown.
The approximate number of holders of outstanding Common Stock based upon
holders of record, as of August 27, 1997 is 450.
4
<PAGE>
SELECTED STATISTICAL INFORMATION
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA AS OF JUNE 30: 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $240,001 $262,216 $269,438 $152,188 $108,375
Interest-bearing deposits 1,765 4,107 6,549 6,254 2,619
Investment securities available for sale 13,790 17,459 15,404 14,465 19,329
Loans (net) 203,183 216,162 222,387 123,176 79,599
Deposits 181,787 181,702 180,771 89,038 74,373
Short-term borrowings 5,191 5,693 9,297 1,835
Long-term debt 38,089 57,292 64,699 49,854 24,266
Stockholders' equity 12,936 14,295 12,405 9,775 8,520
SELECTED OPERATIONS DATA FOR THE YEAR ENDED JUNE 30:
- ------------------------------------------------------------------------------------------------------------------------
Interest income $20,282 $21,529 $15,794 $8,710 $7,196
Interest expense 13,831 15,525 10,263 5,171 4,729
-------------------------------------------------------------------------
Net interest income 6,451 6,004 5,531 3,539 2,467
Provision for loan losses 975 455 420 150 130
-------------------------------------------------------------------------
Net interest income after
provision for loan losses 5,476 5,549 5,111 3,389 2,337
Non-interest income 3,856 8,180 5,377 2,457 537
Non-interest expense 9,474 8,607 5,912 3,220 2,301
-------------------------------------------------------------------------
Income before income tax (142) 5,122 4,576 2,626 573
Income tax (255) 1,887 1,515 1,044 228
Cumulative effect of change in
accounting method 78
-------------------------------------------------------------------------
Net income $ 113 $ 3,235 $ 3,061 $1,582 $ 423
=========================================================================
SELECTED FINANCIAL RATIOS
- ------------------------------------------------------------------------------------------------------------------------
Return on average assets 0.04% 1.18% 1.54% 1.30% 0.43%
Return on stockholders' equity 0.83 23.75 27.52 17.20 6.38
Net interest margin 2.72 2.29 2.87 3.02 2.60
Net interest spread 2.57 2.11 2.59 2.67 2.38
Tangible equity to assets at year-end 6.93 7.08 6.02 6.43 7.86
Allowance for loan losses to loans 0.87 0.49 0.32 0.29 0.30
Allowance for loan losses to
non-performing loans 624.91 275.06 122.09 37.79 22.52
Dividend payout ratio 1,500.00 67.52 28.45 17.91 38.46
PER SHARE DATA
- ------------------------------------------------------------------------------------------------------------------------
Fully diluted net income $0.04 $1.17 $1.16 $0.67 $0.26
Primary net income 0.04 1.17 1.23 0.67 0.26
Cash dividends declared 0.60 0.79 0.33 0.12 0.10
Book value at year-end 5.20 5.73 5.21 4.17 3.64
Closing market price (bid) at year-end 8.75 11.25 10.88 5.41 2.89
Number of average common and common
equivalent shares outstanding 2,655,181 2,776,147 2,634,431 2,369,161 1,638,945
</TABLE>
Note: All per share and average share data have been adjusted to reflect the
10% stock dividend distributed on May 27, 1996.
5
<PAGE>
MANAGEMENT'S REPORT
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
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 consolidated financial statements of the Company have been audited by Geo.
S. Olive & Co. LLC, independent certified public accountants. These audits
were conducted in accordance with generally accepted auditing standards and
included a review of the financial controls and such other procedures and
tests of the accounting records as they deemed necessary to express an opinion
on the fairness of the consolidated 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 Executive Officer Executive Vice President,
Chief Financial Officer and Treasurer
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF 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 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 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 increased dramatically and significant asset growth was achieved,
also resulting in higher revenues. To conserve capital the Company slowed its
growth rate in fiscal 1996 and positioned the Company to reduce debt, increase
core deposits, sell loans, and use the proceeds to fund new loan production.
During fiscal 1996 the Company encountered increasing competition in the
affordable housing group activities. As a result the Company reevaluated its
business plan in fiscal 1997 and closed its Indianapolis, Indiana development
office. This process was completed in the fourth quarter of fiscal 1997. Due
to the above, Village Community Development Corporation, though operational in
Evansville, has reduced its activities significantly. Village Capital
Corporation (formerly known as Fidelity Federal Capital Corporation) continues
to receive consulting fees for its services in assisting unaffiliated
borrowers obtain financing. Village Housing Corporation and Village
Management Corporation continue to be fully operational at the Company's
headquarters in Evansville.
The Company's results for fiscal 1997 were significantly impacted during the
first quarter by the FDIC insurance funding bill signed by President Clinton
in September, 1996, which required thrifts to pay a one-time assessment of
approximately $0.66 per $100 of deposits. As a result, the Company recorded a
charge of $1.04 million in September 1996. The legislation's provisions
include a reduction of the ongoing insurance premiums thrifts pay from $0.23 -
0.31 per $100 of deposits to approximately $0.06 per $100, as well as the
ultimate merger of the funds by the year 2000. In anticipation of this and as
a result of continued consolidation and standardization of the bank and thrift
industries, the Company, in an ongoing effort to more closely resemble a
commercial banking operation, increased its provision for loan loss allowance
significantly, compared to prior years.
Due to the increased competition in the affordable housing segment mentioned
above and a change in the business plan, the Company initiated a cost
reduction program in the third quarter of fiscal 1997 which was completed
early in the fourth quarter. The cost reduction program called for the
Company to work toward achieving optimum efficiency within its banking and
real estate management, development, and financing units by eliminating
duplicative and less profitable activities. The Company has succeeded in
achieving after tax cost savings of approximately $0.44 per share, through
departmental reorganization, reconsolidation, position attrition and
"right-sizing" of operations within all the subsidiaries. The Company's
business plan includes the search for new financing niches both in and outside
the housing arena, increasing the profitability of the core banking activity
and to increase earnings in each business segment.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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, and in investment and money market securities. 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 has structured and participated 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. 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. 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 partner's equity
investment has been received or the syndication firm providing the equity has
given a firm commitment to provide the funds. As mentioned previously,
Village Community Development Corporation has reduced its activities
significantly. 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. 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. The Company has been engaged in
affordable housing activities since September 1992, through the Savings Bank,
and since April 1994, through Village Capital Corporation ("VCC"), formerly
known as Fidelity Federal Capital Corporation ("FFCC"). Since June 30, 1994,
VCC has earned fees by providing real estate mortgage banking and consulting
services to unaffiliated borrowers.
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, 1997, 1996, and 1995.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
1997 1996 1995
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
YEAR ENDED JUNE 30 BALANCES INTEREST RATES BALANCES INTEREST RATES BALANCES INTEREST RATES
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 3,594 $ 194 5.40% $ 3,768 $ 196 5.20% $ 1,808 $ 91 5.03%
Investment securities available for sale:
Taxable 16,168 1,033 6.39 16,528 1,099 6.65 14,125 857 6.07
Tax exempt (1) 963 85 8.83
Loans held for sale 11,140 877 7.87
Federal Home Loan Bank Stock 3,920 307 7.83 3,614 286 7.91 2,620 187 7.14
Loans(2)(3)
Commercial loans 11,695 1,154 9.87 9,720 1,022 10.51 6,817 689 10.11
Multifamily loans 22,768 2,374 10.43 28,804 3,049 10.59 15,799 2,494 15.79
Real estate mortgages 155,527 12,919 8.31 155,300 12,011 7.73 121,158 8,997 7.43
Consumer loans 23,803 2,245 9.43 33,050 2,990 9.05 30,206 2,479 8.21
---------------------------------------------------------------------------------------
Total loans 213,793 18,692 8.74 226,874 19,072 8.41 173,980 14,659 8.43
Total earning assets 238,438 20,311 8.52% 261,924 21,530 8.22% 192,533 15,794 8.20%
Less: Allowance for loan losses 1,664 833 482
Cash and due from banks 2,386 2,012 1,034
Premises and equipment 6,145 4,345 3,009
Other assets 8,825 7,389 3,000
---------------------------------------------------------------------------------------
Total assets $254,130 $274,837 $199,094
=======================================================================================
LIABILITIES
Interest-bearing deposits
Interest-bearing checking $ 20,585 $ 868 4.22% $ 10,092 $ 398 3.94% $ 4,916 $ 115 2.34%
Money market accounts 3,890 106 2.72 6,066 180 2.97 6,600 200 3.03
Savings accounts 4,793 139 2.90 5,346 155 2.90 5,795 161 2.78
Certificates of deposit 148,754 8,887 5.97 158,703 9,817 6.19 102,651 5,950 5.80
---------------------------------------------------------------------------------------
Total interest-bearing deposits 178,022 10,000 5.62 180,207 10,550 5.85 119,962 6,426 5.36
Federal funds purchased 1,810 102 5.64 2,301 136 5.91 4,115 244 5.93
Other borrowings 19,664 1,616 8.22 17,523 1,397 7.97 12,759 691 5.42
Federal Home Loan Bank advances 33,136 2,113 6.38 54,116 3,443 6.36 46,018 2,902 6.31
---------------------------------------------------------------------------------------
Total interest-bearing liabilities 232,632 13,831 5.95% 254,147 15,526 6.11% 182,854 10,263 5.61%
Non-interest bearing demand deposits 5,684 3,898 3,158
Advances by borrowers for taxes and
insurance 798 930 600
Other liabilities 1,420 2,244 1,360
---------------------------------------------------------------------------------------
Total liabilities 240,534 261,219 187,972
Stockholders' equity 13,596 13,618 11,122
---------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $254,130 $274,837 $199,094
---------------------------------------------------------------------------------------
Recap: (4)
Interest income $20,282 8.52% $21,529 8.22% $15,794 8.20%
Interest expense 13,831 5.80 15,525 5.93 10,263 5.33
---------------------------------------------------------------------------------------
Net interest income/margin $ 6,451 2.72% $ 6,004 2.29% $ 5,531 2.87%
=======================================================================================
</TABLE>
(1) Tax exempt securities have been adjusted to a fully tax equivalent basis
using a marginal tax rate of 34%.
(2) Nonaccrual loans have been included in the average balances.
(3) Loan income includes interest and fees on loans.
(4) Average rates have been computed by dividing by total earning assets.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF 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 $6.5 million or 7.4% in 1997 from $6.0 million in 1996. Net
interest income increased by 8.6% in 1996 compared to $5.5 million in 1995.
One of the Company's goals for fiscal 1997 was to improve the net interest
margin. The Company positioned itself during the latter part of fiscal 1996
by selling over $57.0 million of fixed-rate mortgage loans. This has provided
the Company with the flexibility of allowing agent-acquired funds to mature or
rollover at the prevailing rate, thus creating a favorable impact on the net
interest margin. The net interest margin increased from 2.29% at June 30,
1996 to 2.72% at June 30, 1997. The Company has been innovative in offering
selected retail products to enhance the core deposit base. Increased loan
yields positively impacted the margin as well. The average yield on interest
earning assets increased to 8.52% from 8.22% at June 30, 1996. The average
yield on interest bearing liabilities decreased to 5.95% at June 30, 1997.
The loan portfolio accounted for the majority of the increased yield on
earning assets. New NOW accounts, certificates of deposit, and the reduction
of agent-acquired deposits were the primary reasons for the decreased yield on
interest bearing liabilities. Interest income for the year ended June 30,
1997, was $20.3 million compared to $21.5 million for the year ended June 30,
1996, a decrease of $1.2 million or about 5.9%. The Company took the
opportunity to replace the sold loans with higher yielding commercial,
commercial real estate, and multi-family loan assets which had a favorable
impact on the margin. Interest expense for the year ended June 30, 1997
decreased $1.7 million or 10.9%. Approximately $1.3 million of the decrease
for fiscal 1997 is related to a reduction in Federal Home Loan Bank advances.
Deposit interest expense decreased by approximately $550,000 due to reductions
in brokered deposits, but was offset by growth in retail deposits, which also
favorably impacted the margin, due to brokered deposits usually bearing a
higher rate of interest than retail deposits.
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 deposit, 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 $57.0 million 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 $21.5 million compared to $15.8
million for the year ended June 30, 1995, an increase of $5.7 million 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 $52.9 million or 30.4% over June 30, 1995. Of the $5.7
million increase in interest income for fiscal 1996, interest on loans
contributed $4.4 million. Interest expense for the year ended June 30, 1996
increased $5.3 million over the corresponding period in 1995. Approximately
$3.3 million of the increase for fiscal 1996, is related to deposit growth.
This is the result of an increase of $60.2 million 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 $1.1 million to $5.0 million.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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.
- --------------------------------------------------------------------------
1997 SEPT 30 DEC 31 MAR 31 JUNE 30
- --------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Interest income $ 5,152 $5,137 $4,935 $5,058
Interest expense 3,574 3,510 3,400 3,347
----------------------------------
Net interest income 1,578 1,627 1,535 1,711
Provision for loan losses 850 5 60 60
Non-interest income 608 1,237 1,209 803
Non-interest expense 3,283 2,155 1,963 2,074
----------------------------------
Income before income taxes (1,947) 704 721 380
Income taxes (702) 189 192 66
----------------------------------
Net income $(1,245) $ 515 $ 529 $ 314
==================================
Net income per share:
Fully diluted net income per share $ (0.46) $ 0.19 $ 0.20 $ 0.12
Primary net income per share $ (0.46) $ 0.19 $ 0.20 $ 0.12
Cash dividend 0.20 $ 0.20 $ 0.10 $ 0.10
1996 SEPT 30 DEC 31 MAR 31 JUNE 30
- --------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
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
==================================
Net income per share:
Fully diluted net income per share $ 0.42 $ 0.33 $ 0.20 $ 0.22
Primary net income per share $ 0.42 $ 0.33 $ 0.20 $ 0.22
Cash dividend $ 0.14 $ 0.23 $ 0.23 $ 0.20
RATE/VOLUME ANALYSIS.
The following table sets forth on a fully taxable equivalent basis 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). Also, 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.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
<TABLE>
<CAPTION>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
INCREASE/(DECREASE) INCREASE/(DECREASE)
------------------- -------------------
DUE TO DUE TO
------------------------ ---------------------
YEAR ENDED JUNE 30 VOLUME RATE NET VOLUME RATE NET
- -------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income on average earning assets:
Loans $(1,100) $720 $ (380) $4,456 $ (44) $4,412
Investment securities available for sale (24) 43 19 146 96 242
Loans held for sale (877) (877) 877 877
Federal Home Loan Bank stock 24 (3) 21 71 28 99
Federal funds sold (9) 7 (2) 99 6 105
---------------------------------------------------
Total interest income from
earning assets (1,986) 767 (1,219) 4,772 963 5,735
---------------------------------------------------
Interest expense on average interest-bearing
liabilities:
Now accounts 414 56 470 121 162 283
Money market deposits accounts (65) (9) (74) (16) (4) (20)
Passbook savings accounts (16) (16) (12) 6 (6)
Certificates of deposit (615) (315) (930) 3,248 618 3,866
Federal funds purchased (29) (5) (34) (108) (108)
Other borrowings 171 48 219 258 448 706
Federal Home Loan Bank advances (1,335) 5 (1,330) 511 30 541
---------------------------------------------------
Total interest expense on interest-
bearing liabilities (1,475) (220) (1,695) 4,002 1,260 5,262
---------------------------------------------------
Changes in net interest income $ (511) $987 $ 476 $ 770 $ (297) $ 473
===================================================
- -------------------------------------------------------------------------------------------------------
</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 $975,000 for the year ended June
30, 1997, compared to $455,000 for June 30, 1996, and $420,000 for June 30,
1995. The ratio of the allowance for loan losses to non-performing loans was
624.9% at June 30, 1997, 275.1% at June 30, 1996, and 122.1% at June 30, 1995.
The increase in the provision was primarily due to the growth and change in
the composition of the portfolio, which includes higher levels of commercial,
commercial real estate, and multifamily loans than in prior years. As
mentioned earlier, the Company increased its provision for loan loss allowance
significantly, compared to prior year, in an effort to more closely resemble a
commercial banking operation.
NON-INTEREST INCOME. Non-interest income decreased by $4.3 million or 52.8%
for the year ended June 30, 1997, compared to an increase in 1996, of $2.8
million or 52.1% from 1995. The following table summarizes non-interest
income for the three years ending June 30:
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
<TABLE>
<CAPTION>
NON-INTEREST INCOME
- ---------------------------------------------------------------------------------------------------
(dollars in thousands)
CHANGE FROM PRIOR YEAR
AMOUNT 1997 1996
1997 1996 1995 AMOUNT PERCENT AMOUNT PERCENT
------ ------ ------ -------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Fee income from real estate
development and management $ 758 $4,440 $4,370 $(3,682) (82.9)% $ 70 1.6%
Service charges on deposit accounts 316 181 99 135 74.6 82 82.8
Gain on sale of
Real estate loans 338 743 (405) (54.5) 743 100.0
Premises and equipment 3 719 (716) (99.6) 719 100.0
Investments 42 42 100.0
Letter of credit fees 722 481 189 241 50.1 292 154.5
Real estate mortgage banking fees 543 942 351 (399) (42.4) 591 168.4
Agent fee income 452 47 405 861.7 47 100.0
Other income 683 627 368 56 8.9 259 70.4
-------------------------------------------------------------
Total non-interest income $3,857 $8,180 $5,377 $(4,323) (52.8)% $2,803 52.1%
=============================================================
- --------------------------------------------------------------------------------------------------
</TABLE>
The largest component of the decrease in non-interest income was the $3.7
million decrease in fee income from real estate development and management.
The Company experienced increased competition in the tax credit housing
industry. The Company utilized the IRS Section 42 tax credit program in the
past to develop affordable housing for individuals with low to moderate
incomes. The Company continues to monitor this market segment, but has
shifted its focus to developing new and innovative housing-related financing
products to supplement the previous Section 42 activity. However, the fees
anticipated are not anticipated to match the fees generated in the past. The
Company continues to provide financing for unaffiliated developers with
tax-credit developments, utilizing the Company's experience with such
transactions. The Company also earns consulting fees for its services in
preparing multifamily loan transactions for financing, although the fees are
down to $543,000 in fiscal 1997 from $942,000 in fiscal 1996. Service charges
on deposit accounts increased $135,000 to $316,000, compared to the previous
years total of $181,000, a 74.6% increase from prior year. Service charges on
deposit accounts increased to $181,000 in fiscal 1996, compared to $99,000 in
1995 or 82.8%. The Company has concentrated its efforts to attract
transaction accounts, thus increasing the Company's service charge income.
The Company reclassified $52 million of one-to-four family loans as loans held
for sale in fiscal 1996 and sold these loans during fiscal 1996 resulting in
$743,000 in gains. Gain on loan sales for fiscal 1997 have resulted only from
sales of current loan production, resulting in income of $338,000.
The Company adopted FAS 122 in fiscal 1996 "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. With the increase in mortgage loan sales during
fiscal 1996, the Company recognized $575,000 in mortgage loan servicing rights
compared to $250,000 in fiscal 1997 which are included in the net gain on sale
of loans. The Company also sold a parcel of real estate during fiscal 1996
resulting in a gain of $719,000 compared to no sales in fiscal 1997. The
Company sold $2.6 million in investments during fiscal 1997, resulting in a
$42,000 net gain for the year, compared to no sales for fiscal 1996 and 1995.
The Company continues to issue standby letters of credit, particularly for
multifamily developments. Letters of credit fees have grown from $189,000 in
1995, $481,000 in 1996, to $722,000 in fiscal 1997 repre-
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
senting a 282% increase over 1995 and a 50% increase over last year. Real
estate banking fees decreased $399,000 from last year due to the decrease in
the number of transactions financed. The Company participates in an
arrangement to pass automobile loan originations to another financial
institution in exchange for a fee. Loan volume has been significant in this
area, resulting in an 862% increase in fees to $452,000, from $47,000 last
year. Other income increased $56,000 over fiscal 1996, including the
Company's receipt of $146,000 in dividend income in fiscal 1996 on the stock
the Savings Bank holds with its data processing cooperative, compared to
$14,000 in fiscal 1997. The Company's data processing cooperative was
purchased in fiscal 1996 resulting in a distribution in fiscal 1996 and a
final installment received in fiscal 1997. Offsetting this decrease were
increases in servicing fees on loans sold of $100,000 and other loan fees of
$42,000. Debit card income, ATM network fees and dealer interest recapture
increased $25,000, $11,000 and $17,000, respectively.
NON-INTEREST EXPENSE. Non-interest expense increased by $867,000 or 10.1% for
the year ended June 30, 1997, compared to 1996 after increasing by $2.7
million or 45.6% in 1996 from 1995. 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 1997 1996
1997 1996 1995 AMOUNT PERCENT AMOUNT PERCENT
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $4,318 $4,486 $2,888 $ (168) (3.7)% $1,598 55.3%
Net occupancy expense 481 471 426 10 2.1 45 10.6%
Equipment expense 374 383 287 (9) (2.3) 96 33.4%
Deposit insurance expense 255 417 238 (162) (38.8) 179 75.2%
SAIF assessment 1,040 1,040 100.0
Data processing expense 312 287 211 25 8.7 76 36.0%
Legal and professional fees 303 448 471 (145) (32.4) (23) (4.9)
Advertising expense 230 226 118 4 1.8 108 91.5%
Abandoned projects expense 177 61 18 116 190.2 43 238.9%
Write down of partnership investments 335 335 100.0
Other expense 1,649 1,828 1,255 (179) (9.8) 573 45.7
-----------------------------------------------------------
Total non-interest expense $9,474 $8,607 $5,912 $ 867 10.1% $2,695 45.6%
===========================================================
- ------------------------------------------------------------------------------------------------
</TABLE>
Salaries and employee benefits decreased $168,000 from fiscal 1996 due
primarily to the Company's cost reduction plan, which was completed in the
fourth quarter of fiscal 1997. The cost reduction program was designed to
eliminate duplicative functions. The Company should realize the full impact
of the cost reductions during fiscal 1998. Net occupancy expense increased
slightly in fiscal 1997 but was offset by the decrease in equipment expense
for fiscal 1997. These two categories increased $45,000 and $96,000,
respectively, during 1996 as compared to 1995 as the Company was still
expanding. In September 1996, legislation enacted by Congress imposed a
one-time special assessment of approximately $0.66 per one-hundred dollars of
deposits insured by the SAIF, resulting in a $1.0 million charge to the
Company. As a result the Company's annual assessment will decrease from $.23
to approximately $0.06 per one-hundred dollars of deposits. The Company
expects its future assessment to be reduced approximately $355,000 annually
due to the assessment. Data processing expense
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
increased $25,000 over fiscal 1996 due to increasing costs and volume of
transactions being processed. Legal and professional fees decreased $145,000
from fiscal 1996 and decreased $23,000 from fiscal 1995 due to the legal costs
associated with the affordable housing segment, which has decreased in the
past three years due to increased competition. Advertising increased slightly
to $230,000 in fiscal 1997 from $226,000 in fiscal 1996, which was up
considerably from $118,000 in fiscal 1995. Abandoned projects expense
increased $116,000 to $177,000 for fiscal 1997 due to increased competition in
the affordable housing segment. These are expenses incurred on potential
developments that do not materialize. The Company accounts for its general
partnership interests on the equity method, which is adjusted quarterly based
on the partnerships performance. In addition to equity method adjustments,
the Company wrote down its investment by $375,000 during fiscal 1997 due to
below expectation level performance of a number of the investments. Other
expense decreased $179,000 from fiscal 1996. During fiscal 1996, the Company
participated some of its multifamily loans resulting in expenses of $113,000
compared to none for fiscal 1997. The decrease in affordable housing
developments caused a reduction of $67,000 in travel and lodging compared to
last year. A decrease in losses on the sale of other real estate, disposition
of fixed assets and sale of repossessed assets accounted for a $52,000
decrease in expenses compared to fiscal 1996. Offsetting some of these larger
decreases were increases in debit card and ATM expense of $15,000 and $17,000,
respectively and correspondent bank charge increases of $42,000 and other
miscellaneous increases.
INCOME TAX EXPENSE. Income tax benefit was $255,000 in fiscal 1997, compared
to income tax expense of $1.9 million recorded in fiscal 1996 and $1.5 million
in fiscal 1995. The Company's net income before income tax expense decreased
$5.3 million to a net loss before income taxes of $141,000. A reduction in
income tax expense from IRS Section 42 low income housing credit reduced
income tax expense $341,000 and $273,000 for fiscal 1997 and fiscal 1996. The
effective tax rate for the current year was 180.0% compared to 36.8% for
fiscal 1996 and 33.1% for fiscal 1995.
FINANCIAL CONDITION.
At year-end the Company's assets decreased $22.2 million or 8.5%. The Company
had reclassified $52.0 million 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. The Company used these proceeds to
reduce debt, and allow higher rate brokered CD's to mature or rollover at the
prevailing retail rates which in turn increased the net interest margin.
Average assets for fiscal 1997 decreased 7.5% from fiscal 1996 to
$254.1 million. Average liabilities decreased $20.7 million as the Company
used some of the loan sale proceeds to reduce borrowings.
LOANS.
The following table shows the composition of the Company's loan portfolio as
of June 30:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Real estate mortgage loans
Conventional $ 94,293 $106,344 $113,971 $ 74,808 $ 58,789
Construction loans 32,577 36,938 24,670 12,536 3,988
Commercial loans 26,668 18,267 7,133 1,022
Multifamily loans 9,602 15,420 26,147 12,372 2,969
First mortgage real estate
loans purchased 3,184 7,612 4,921 4,064 4,635
----------------------------------------------------
Total real estate mortgage loans 166,324 184,581 176,842 104,802 70,381
Commercial loans-other than secured
by real estate 12,522 9,393 6,414 442 162
Consumer and home equity loans 26,118 23,247 39,844 18,288 9,292
----------------------------------------------------
Total loans $204,964 $217,221 $223,100 $123,532 $ 79,835
====================================================
Total assets $240,001 $262,216 $269,438 $152,188 $108,375
----------------------------------------------------
Total loans to total assets 85.4% 82.8% 82.8% 81.2% 73.7%
====================================================
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company began selling current production of 1-4 family loans for fiscal
1997, book the gain or loss currently and use some of the proceeds to fund new
products. With this strategy in place, conventional real estate mortgage
loans decreased $12.1 million from fiscal 1996. Included in construction
loans are $1.2 million in loans to affordable housing developments in addition
to $4.6 million in affordable housing developments which are included in
multifamily loans. Commercial real estate loans and commercial loans have
continued to grow as the Company continues expanding into the commercial loan
market. Commercial real estate loans have increased from $0 at the end of
fiscal 1993 to $26.7 million at June 30, 1997. Multifamily loans have
declined since June 30, 1995 as the Company has participated the loans or the
loans have paid off. Multifamily loans have decreased $16.5 million from June
30, 1995 to $9.6 million at June 30, 1997. Purchased real estate loans have
decreased due to payoffs and paydowns from the previous year. Commercial loans
other than real estate have increased from $162,000 at the end of fiscal 1993
compared to $12.5 million at June 30, 1997. The Company continues to
diversify its loan portfolio as a continuing part of its business plan.
Consumer loans increased slightly to $26.1 million from $23.2 million at June
30, 1996 due to the Company retaining some of the new loans generated. The
Company participates in an arrangement to pass most of its automobile loan
originations to another financial institution in exchange for a fee. The
Company's loan portfolio contains no loans to foreign governments, foreign
enterprises, foreign operations of domestic companies, or highly leveraged
transactions, nor any concentration to borrowers engaged in the same or
similar industries that exceed 10 percent of total loans.
LOAN MATURITIES.
The following table sets forth the remaining maturities for certain loan
categories as of June 30, 1997:
- ------------------------------------------------------------------------
WITHIN ONE TO AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ------------------------------------------------------------------------
(dollars in thousands)
Real estate mortgage loans $67,383 $60,225 $38,716 $166,324
Consumer and home equity loans 12,538 13,317 263 26,118
Commercial loans 9,346 3,176 12,522
----------------------------------------
Total $89,267 $76,718 $38,979 $204,964
========================================
Predetermined interest rates $15,151 $37,670 $26,006 $ 78,827
Floating interest rates 74,116 39,048 12,973 126,137
----------------------------------------
$89,267 $76,718 $38,979 $204,964
========================================
- ------------------------------------------------------------------------
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 $11,000 in 1997, $15,000 in 1996 and $74,000 in 1995. Additional interest
income of approximately $12,000, $9,000, and $3,000 for 1997, 1996, and 1995,
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:
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Non-performing loans
- -----------------------------------------------------------------------
(dollars in thousands)
1997 1996 1995 1994 1993
-------------------------------------
Nonaccrual loans $256 $342 $ 47 $190 $ 288
Restructured 514 752 760
90 days or more past due 29 43 23
-------------------------------------
Total $285 $385 $584 $942 $1,048
=====================================
Ratio of non-performing loans to
Total loans 0.14% 0.18% 0.26% 0.76% 1.31%
=====================================
Non-performing loans amounted to 0.14% of total loans as of June 30, 1997, as
compared to 0.18% of total loans as of June 30, 1996. The decrease in the
ratio from 1997 to 1996 is attributable to the 26.0% 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, although the Company has several credits in its loan
portfolio that are in excess of $1 million which inherently carry more risk
due to their size in relation to total equity of the Company.
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 fiscal years
ended June 30:
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SUMMARY OF LOAN LOSS EXPERIENCE 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
(dollars in thousands)
Allowance for loan losses
Balance at July 1, $1,059 $ 713 $356 $236 $150
Loan charge-offs:
Real estate mortgage 100 12 8 8 22
Commercial 25
Consumer and home equity 142 128 74 39 28
--------------------------------------
Total loan charge-offs 267 140 82 47 50
Loan recoveries:
Real estate mortgage 3 17 8 6 5
Home equity and consumer 11 14 11 11 1
--------------------------------------
Total loan recoveries 14 31 19 17 6
Net charge-offs 253 109 63 30 44
Provision for loan losses 975 455 420 150 130
--------------------------------------
Balance at June 30, $1,781 $1,059 $713 $356 $236
======================================
Ratio of net charge-offs to average loans
outstanding during the period 0.12% 0.05% 0.04% 0.03% 0.06%
======================================
Ratio of provision for loan losses to
average loans outstanding during
the period 0.45% 0.20% 0.24% 0.15% 0.18%
======================================
Ratio of allowance for loan losses to
total loans outstanding at year end 0.87% 0.49% 0.32% 0.29% 0.30%
======================================
- -------------------------------------------------------------------------------
The allowance for loan losses was $1.8 million as of June 30, 1997, and $1.1
million as of June 30, 1996. Net loan charge-offs were $253,000 or 0.12% of
average loans in 1997 compared to $109,000 or 0.05% of average loans in 1996.
The allowance increased $722,000 over fiscal 1996 due primarily to the marked
increase in the provision for loan losses. The increase in the provision was
recorded despite the decrease in non-performing loans. However, the Company
has closed a number of large credits during the past two years. Management
considers the allowance for loan losses adequate to meet losses inherent in
the loan portfolio as of June 30, 1997.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses was
further allocated to enumerate allowances for 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:
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
<TABLE>
<CAPTION>
Allowance Amount Percentage of Loans to Total Loans
1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
--------------------------------------- ------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage $ 153 $ 155 $208 $219 $151 60.6% 67.8% 67.5% 74.8% 84.5%
Multifamily 994 420 195 7.6 8.8 11.7 10.0 3.7
Consumer and home equity 168 214 260 137 85 12.7 10.7 17.9 14.8 11.6
Commercial 466 270 50 19.1 12.7 2.9 0.4 0.2
-------------------------------------------------------------------------------
Total $ 1,781 $1,059 $713 $356 $236 100.0% 100.0% 100.0% 100.0% 100.0%
===============================================================================
- ------------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT SECURITIES. The Savings Bank's investment policy is annually
reviewed, 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, 1997, the investment portfolio represented 5.8% of the
Company's assets, compared to 6.7% at June 30, 1996, 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, 1997, 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, 1997, was $31,000
which was comprised of gross gains of $69,000, gross losses of $149,000, and a
tax benefit of $49,000, a decrease of $109,000 from June 30, 1996. The
decrease 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.
The following table sets forth the components of the Savings Bank's available
for sale investment portfolio as of June 30:
- -------------------------------------------------------------------------
1997 1996 1995
-------------------------
(dollars in thousands)
Investment securities available for sale:
U.S. Treasury securities $ 1,000 $ 504 $ 515
Federal agency securities 2,944 4,365 4,002
Federal Home Loan Mortgage
Corporation mortgage-backed securities 3,003 6,727 6,830
Federal National Mortgage
Association mortgage-backed securities 1,562 1,697 2,103
Government National Mortgage
Association mortgage-backed securities 4,223 4,165 1,953
Municipals 1,058
-------------------------
Total securities available for sale $13,790 $17,458 $15,403
=========================
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Savings Bank's investment securities portfolio decreased by $3.7 million
to $13.8 million at June 30, 1997, compared to $17.5 million at June 30, 1996.
In addition to maturity, paydowns and early payoffs, the Company sold $2.6
million in various small-pool mortgage-backed securities during fiscal 1997.
The Corporation 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 Savings Bank's total investment
securities portfolio increased by $2.1 million at June 30, 1996, from June 30,
1995 as additional securities were purchased during 1996.
The following table sets forth the contractual maturities of investment and
mortgage-backed securities as of June 30, 1997, and the weighted average
yields of such securities. As of June 30, 1997, 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
-------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $1,000 5.88% $ 1,000 5.88%
Federal agencies 2,944 5.35 2,944 5.35
Federal Home Loan Mortgage
Corporation $945 6.00% $165 7.41% $1,893 6.42% 3,003 6.34
Federal National Mortgage
Association 1,562 6.43 1,562 6.43
Government National Mortgage
Association 16 7.50 4,207 6.77 4,223 6.77
Municipals 1,058 5.60 1,058 5.60
-------------------------------------------------------------------------------
Total $945 6.00% $3,960 5.49% $165 7.41% $8,720 6.50% $13,790 6.18%
===============================================================================
Percent of total 7% 29% 1% 63% 100%
===============================================================================
</TABLE>
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 decreased by $399,000 for the year ended June 30, 1997. The
decrease was offset by growth in Demand, NOW and Certificates of deposit.
Demand, NOW and Certificates of deposit increased $1.8 million, $10.5 million
and $7.1 million, respectively, as the Company continued an aggressive
marketing and pricing campaign with new products during fiscal 1997 to
increase the core deposit base, and to allow the Company the flexibility to
allow agent acquired certificates of deposit to mature or rollover at the
prevailing retail rate. With the increases mentioned above and the loan sale
in fiscal 1996, agent acquired certificates of deposit have decreased $17.0
million.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
These certificates of deposit were acquired at rates higher than the current
local market for retail deposits, but generally below rates charged for FHLB
advances, thus creating a favorable impact on the net interest margin. Most
of the decrease in the money market account category was as a result of some
current accounts converting to a new NOW account product.
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, 1997, 1996
and 1995.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1997 1996 1995
AVERAGE DEPOSITS AMOUNT RATE AMOUNT RATE AMOUNT RATE
- --------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand $ 5,685 $ 3,898 $ 3,158
NOW accounts 20,585 4.22% 10,092 3.95% 4,916 2.34%
Money market accounts 3,890 2.72 6,066 2.97 6,600 3.03
Savings accounts 4,792 2.90 5,346 2.90 5,795 2.78
Certificates of deposit 78,408 5.68 71,337 5.77 61,315 5.29
Agent-acquired certificates of deposit 70,346 6.31 87,366 6.52 41,336 6.55
-----------------------------------------------------
Total $183,706 5.45% $184,105 5.73% $123,120 5.22%
=====================================================
- --------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes certificates of deposit
in amounts of $100,000 by maturity as of the following dates:
- -----------------------------------------------------------------------------
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE AT JUNE 30:
1997 1996 1995
- -----------------------------------------------------------------------------
(dollars in thousands)
3 Months or less $12,312 $ 7,206 $13,555
3-6 months 16,319 15,009 14,535
6-12 months 13,331 5,042 20,470
Over 12 months 11,119 18,669 14,569
--------------------------
Total $53,081 $45,926 $63,129
==========================
- -----------------------------------------------------------------------------
The increase of $7.2 million is primarily due to an increase in public and
state funds that generally are issued in amounts greater than $100,000.
BORROWINGS.
The Company's long-term debt decreased $19.2 million from fiscal 1996
primarily due to a decrease in Federal Home Loan Bank advances. Alternate
funding sources were provided by loan sales, retail deposits, and public
funds. For further details see Notes to the Consolidated Financial
Statements.
Short-term borrowings totaled $5.2 million which represented a slight decrease
of $502,000 since June 30, 1996, due primarily to a decrease in guaranteed
investment contracts. Federal funds purchased and short-term FHLB advances
while utilized during fiscal 1997, were repaid prior to fiscal 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.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
<TABLE>
<CAPTION>
FEDERAL TREASURY TAX GUARANTEED
FUNDS FHLB & LOAN NOTE INVESTMENT
1997 PURCHASED ADVANCES OPTION CONTRACTS
- ------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
OUTSTANDING AT JUNE 30 $105 $5,086
AVERAGE AMOUNT OUTSTANDING $1,810 $ 206 102 4,771
MAXIMUM AMOUNT OUTSTANDING AT
ANY MONTH-END 7,400 4,150 145 7,151
WEIGHTED AVERAGE INTEREST RATE:
DURING YEAR 5.62% 6.46% 5.16% 5.34%
END YEAR 5.62% 5.57%
1996
- ------------------------------------------------------------------------------------
(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%
- ------------------------------------------------------------------------------------
</TABLE>
CAPITAL RESOURCES
The Company's stockholders' equity decreased $1.4 million to $12.9 million at
June 30, 1997, compared to $14.3 million at June 30, 1996. The decrease in
stockholders' equity was accounted for by the cash dividends declared of $1.5
million and the purchase of treasury stock of $126,000. Offsetting these
decreases were net income of $113,000, exercise of stock options and warrants
of $39,000 and a decrease in the net unrealized loss on securities available
for sale of $109,000. The dividend rate was reduced from $0.20 to $0.10 per
share for the third and fourth quarter. The Company will use the additional
capital to strengthen the capital position to support future growth.
Total capital consists of Tier I capital plus the allowance for loan losses.
Minimum capital levels are 3% for the leverage ratio which is defined as Tier
I capital as a percentage of total assets less goodwill and other identifiable
intangible assets; 4% for Tier I to risk-weighted assets; and 8% for total
capital to risk-weighted assets. The Savings Bank's capital ratios have
exceeded each of these levels. The leverage ratio was 6.93% and 7.05%; Tier I
capital to risk-weighted assets was 7.64% and 9.30%; and total capital to
risk-weighted assets was 10.74% and 12.35% at June 30, 1997 and 1996. Book
value per share decreased to $5.20 at June 30, 1997, compared to $5.73 one
year earlier, due to the decrease in capital noted above.
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. See the retained earnings and regulatory
matters footnote to the financial statements.
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
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
demand or due within one year or less. As of June 30, 1997, and June 30,
1996, the Savings Bank liquidity ratios were 5.57% and 10.64%, 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 $42.5 million at June 30, 1996, to $23.3
million at June 30, 1997, as noted above. 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, therefore the
Company took the opportunity to reduce the borrowings outstanding at June 30,
1997.
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, 1997, 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 $4.2 million, representing a positive
cumulative one-year gap ratio of 1.77% 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 is continuing its strategy of originating and selling current loan
production. With the current strategy and last fiscal years loan sale, this
has allowed the Company to reduce borrowings, let higher rate agent-acquired
funds rolloff or rollover at the prevailing retail rates and fund new loan
demand. The positive impact on the margin became evident in fiscal 1997 as
the margin increased from 2.29% to 2.72% for the year ended June 30, 1997.
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 Savings Bank's interest rate risk position, the ALCO must be aware of how
changes in interest rates affect both its net interest income and its net
portfolio value.
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
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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, 1997, 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, 1997, 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 Savings
Bank'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.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------------------------------------------------
THREE OVER THREE ONE TO THREE
MONTHS OR MONTHS TO THREE YEARS OR
LESS ONE YEAR YEARS MORE TOTAL
------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets
Interest-bearing deposits in other banks $ 1,759 $ 6 $ 1,765
Investment securities available for sale
and FHLB stock 5,760 6,459 $ 3,991 $ 1,500 17,710
Loans 74,145 40,404 19,089 71,326 204,964
Non-earning assets 15,562 15,562
------------------------------------------------------------------------
Total assets $ 81,664 $ 46,869 $ 23,080 $ 88,388 $240,001
========================================================================
Liabilities and stockholders' equity
Interest-bearing deposits:
Interest-bearing transaction accounts $ 6,286 $ 14,666 $ 20,952
Money market accounts 434 2,669 3,103
Savings 476 4,287 4,763
Certificates of deposits 25,166 $ 77,807 $ 43,424 1,858 148,255
------------------------------------------------------------------------
Total interest-bearing deposits 32,362 77,807 43,424 23,480 177,073
Other borrowings and debt 6,398 7,729 10,014 19,139 43,280
Non-interest bearing deposits 4,714 4,714
Non-interest bearing liabilities and
stockholders' equity 14,934 14,934
========================================================================
Total liabilities and stockholders' equity $ 38,760 $ 85,536 $ 53,438 $ 62,267 $240,001
========================================================================
Interest sensitivity gap $ 42,904 $(38,667) $ (30,358) $ 26,121
========================================================================
Cumulative interest sensitivity gap $ 42,904 $ 4,237 $ (26,121)
========================================================================
Cumulative gap as a percentage of total assets 17.88% 1.77% (10.88)%
========================================================================
</TABLE>
25
<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, 1997 and 1996 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, 1997. 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, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1997, in conformity with generally accepted
accounting principles.
/s/ GEO. S. OLIVE & CO. LLC
- ---------------------------
Evansville, Indiana
August 20, 1997
26
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,746,765 $ 1,111,737
Short-term interest-bearing deposits 1,759,013 4,101,143
Federal funds sold 5,000,000
----------------------------------
Total cash and cash equivalents 3,505,778 10,212,880
Interest-bearing deposits 5,619 5,370
Investment securities available for sale 13,789,771 17,458,474
Loans 204,963,999 217,221,244
Allowance for loan losses (1,781,391) (1,058,894)
----------------------------------
Net loans 203,182,608 216,162,350
Premises and equipment 6,340,535 5,559,322
Federal Home Loan Bank of Indianapolis stock, at cost 3,919,500 3,919,500
Interest receivable and other assets 9,257,545 8,897,813
----------------------------------
Total assets $ 240,001,356 $ 262,215,709
==================================
LIABILITIES
Deposits
Non-interest bearing $ 4,713,653 $ 5,099,938
Interest bearing 177,072,854 176,602,082
----------------------------------
Total deposits 181,786,507 181,702,020
Short-term borrowings 5,190,946 5,693,189
FHLB advances and other long-term debt 38,089,011 57,291,500
Advances by borrowers for taxes and insurance 674,287 859,110
Other liabilities 1,324,717 2,374,915
----------------------------------
Total liabilities 227,065,468 247,920,734
----------------------------------
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 - 2,487,385 and 2,495,040 shares 2,487,385 2,495,040
Capital surplus 8,707,840 8,785,148
Stock warrants 263,600 265,500
Retained earnings, substantially restricted 1,507,784 2,888,866
Net unrealized loss on securities available for sale (30,721) (139,579)
----------------------------------
Total stockholders' equity 12,935,888 14,294,975
----------------------------------
Total liabilities and stockholders' equity $ 240,001,356 $ 262,215,709
==================================
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans receivable $18,691,852 $19,044,730 $14,658,913
Loans held for sale 904,190
Investment securities
Taxable 1,032,768 1,098,527 856,355
Tax exempt 56,050
Federal funds sold 70,358 132,076 1,482
Interest-bearing deposits 124,430 64,368 90,204
Other interest and dividend income 307,075 285,536 186,563
--------------------------------------------
20,282,533 21,529,427 15,793,517
--------------------------------------------
Interest Expense
Deposits 10,000,013 10,549,760 6,425,729
Short-term borrowings 358,913 306,421 488,768
Long-term debt 3,472,237 4,669,055 3,348,458
--------------------------------------------
13,831,163 15,525,236 10,262,955
--------------------------------------------
Net Interest Income 6,451,370 6,004,191 5,530,562
Provision for loan losses 975,000 455,000 420,000
--------------------------------------------
Net Interest Income After Provision for
Loan Losses 5,476,370 5,549,191 5,110,562
--------------------------------------------
Non-Interest Income
Real estate development and
management fees 757,999 4,439,894 4,370,351
Service charges on deposit accounts 316,009 180,565 99,390
Gain on sale of
Investment securities 42,132
Real estate loans 337,766 742,978
Premises and equipment 2,676 718,765 360
Letter of credit fees 721,966 480,867 189,376
Mortgage banking fees 543,345 942,002 350,638
Agent fees 451,585 47,461
Other income 683,049 627,500 367,738
--------------------------------------------
3,856,527 8,180,032 5,377,853
--------------------------------------------
</TABLE>
28
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-Interest Expense
Salaries and employee benefits $ 4,318,495 $ 4,486,097 $ 2,888,470
Net occupancy expense 480,877 471,019 425,883
Equipment expense 374,344 382,693 286,885
Data processing fees 312,231 286,818 210,942
Deposit insurance expense 255,419 417,231 237,521
SAIF assessment 1,040,000
Legal and professional fees 303,073 447,538 471,276
Write down of affordable housing
partnership investments 335,000
Other expense 2,054,753 2,116,131 1,391,257
---------------------------------------------
9,474,192 8,607,527 5,912,234
---------------------------------------------
Income (Loss) Before Income Tax (141,295) 5,121,696 4,576,181
Income tax expense (benefit) (254,763) 1,886,787 1,515,040
---------------------------------------------
NET INCOME $ 113,468 $ 3,234,909 $ 3,061,141
=============================================
PER SHARE
Primary net income $.04 $1.17 $1.23
Fully diluted net income .04 1.17 1.16
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 2,655,181 2,776,147 2,634,431
See notes to consolidated financial statements.
29
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- CAPITAL STOCK
SHARES AMOUNT SURPLUS WARRANTS
----------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCES, JULY 1, 1994 1,014,765 $1,014,765 $6,450,872 $150,000
Net income for 1995
Cash dividends ($.33 per share)
2.1-for-1 stock split ($2,875 paid in
lieu of fractional shares) 1,125,562 1,125,562 (1,128,437)
Stock warrants issued 150,000
Exercise of stock options 20,648 20,648 54,395
Exercise of stock warrants 1,824 1,824 17,780 (1,000)
Net change in unrealized gain (loss) on securities
available for sale, net of taxes of $89,291
----------------------------------------------------------
BALANCES, JUNE 30, 1995 2,162,799 2,162,799 5,394,610 299,000
Net income for 1996
Cash dividends ($.79 per share)
10% stock dividend ($1,000 paid in
lieu of fractional shares) 226,747 226,747 2,721,030
Exercise of stock options 27,837 27,837 81,311
Exercise of stock warrants 77,657 77,657 588,197 (33,500)
Net change in unrealized gain (loss) on securities
available for sale, net of taxes of $84,023
----------------------------------------------------------
BALANCES, JUNE 30, 1996 2,495,040 2,495,040 8,785,148 265,500
Net income for 1997
Cash dividends ($.60 per share)
Exercise of stock options 407 407 3,512
Exercise of stock warrants 4,938 4,938 32,055 (1,900)
Purchase of common stock (13,000) (13,000) (112,875)
Net change in unrealized gain (loss) on securities
available for sale, net of taxes of $42,451
----------------------------------------------------------
BALANCES, JUNE 30, 1997 2,487,385 $2,487,385 $8,707,840 $263,600
==========================================================
</TABLE>
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS) ON
RETAINED SECURITIES
EARNINGS AVAILABLE FOR SALE TOTAL
-----------------------------------------------
<S> <C> <C> <C>
BALANCES, JULY 1, 1994 $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) (2,875)
Stock warrants issued 150,000
Exercise of stock options 75,043
Exercise of stock warrants 18,604
Net change in unrealized gain (loss) on securities
available for sale, net of taxes of $89,291 136,133 136,133
-----------------------------------------------
BALANCES, JUNE 30, 1995 4,560,437 (11,477) 12,405,369
Net income for 1996 3,234,909 3,234,909
Cash dividends ($.79 per share) (1,957,703) (1,957,703)
10% stock dividend ($1,000 paid in
lieu of fractional shares) (2,948,777) (1,000)
Exercise of stock options 109,148
Exercise of stock warrants 632,354
Net change in unrealized gain (loss) on securities
available for sale, net of taxes of $84,023 (128,102) (128,102)
-----------------------------------------------
BALANCES, JUNE 30, 1996 2,888,866 (139,579) 14,294,975
Net income for 1997 113,468 113,468
Cash dividends ($.60 per share) (1,494,550) (1,494,550)
Exercise of stock options 3,919
Exercise of stock warrants 35,093
Purchase of common stock (125,875)
Net change in unrealized gain (loss) on securities
available for sale, net of taxes of $42,451 108,858 108,858
-----------------------------------------------
BALANCES, JUNE 30, 1997 $1,507,784 $ (30,721) $ 12,935,888
===============================================
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 113,468 $ 3,234,909 $ 3,061,141
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Provision for loan losses 975,000 455,000 420,000
Investment securities gains (42,132)
Gain on sale of premises and equipment (2,676) (718,765)
Depreciation 424,302 359,056 276,362
Investment securities amortization
(accretion), net 29,008 (33,395) 48,199
Amortization of net loan origination fees
and points (2,988) (55,796) (190,579)
Deferred income tax (benefit) 313,344 295,941 (57,935)
Net (increase) decrease in real estate
loans held for sale 1,923,099 (1,923,099)
Changes in
Interest payable and other liabilities (1,148,511) 396,233 11,354
Interest receivable and other assets (377,882) (2,495,117) (3,510,217)
---------------------------------------------
Net cash provided (used) by operating activities 280,933 3,361,165 (1,864,774)
---------------------------------------------
INVESTING ACTIVITIES
Net change in interest-bearing deposits (249) (251) 574,881
Purchases of investment securities available
for sale (2,596,920) (9,776,687) (4,491,069)
Proceeds from maturities of investment securities
available for sale 3,806,455 7,542,865 3,729,799
Proceeds from sale of investment securities
available for sale 2,623,601
Net changes in loans 11,968,144 5,766,465 (99,440,406)
Purchase of premises and equipment (1,232,901) (2,377,519) (1,552,525)
Proceeds from sale of premises and equipment 22,862 1,000,000 1,664
Purchase of FHLB of Indianapolis stock (828,400) (891,600)
Proceeds from real estate owned sales 57,736 49,705
---------------------------------------------
Net cash provided (used) by investing activities 14,648,728 1,326,473 (102,019,551)
---------------------------------------------
</TABLE>
31
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net change in
Noninterest-bearing, interest-bearing
demand and savings deposits $ (2,054,098) $ 16,223,138 $ (1,975,491)
Certificates of deposit 2,138,585 (15,292,010) 93,707,903
Net decrease in federal funds purchased (2,050,000)
Proceeds from other borrowings 9,115,590 11,490,097 21,577,524
Repayment of other borrowings (9,683,248) (12,562,016) (5,908,033)
Proceeds from FHLB advances 7,600,000 16,556,000 126,687,000
Repayment of FHLB advances (26,737,074) (26,495,178) (118,262,124)
Net change in advances by borrowers for
taxes and insurance (184,823) 160,056 301,532
Purchase of common stock (125,875)
Cash dividends (1,744,832) (1,729,312) (625,695)
Proceeds from exercise of stock options 3,919 109,148 75,043
Proceeds from exercise of stock warrants 35,093 632,354 18,604
Proceeds from issuance of stock warrants 150,000
----------------------------------------------
Net cash provided (used) by financing
activities (21,636,763) (10,907,723) 113,696,263
----------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS (6,707,102) (6,220,085) 9,811,938
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,212,880 16,432,965 6,621,027
----------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,505,778 $ 10,212,880 $ 16,432,965
==============================================
ADDITIONAL CASH FLOWS AND SUPPLEMENTARY
INFORMATION
Income tax paid, net of refunds $ 710,000 $ 1,937,735 $ 2,227,750
Interest paid 13,845,906 15,722,698 9,552,816
Other real estate transfers 39,586 58,757
Debt underwriting fees offset against
debt proceeds 262,500
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
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 reporting 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. The Savings Bank is subject to regulation by the
Office of Thrift Supervision and the Federal Deposit Insurance Corporation.
Three of 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 Village
Capital Corporation (formerly Fidelity Federal Capital Corporation), which
primarily receives consulting fees for packaging various multi-family deals to
be financed and completed, and Village Insurance Corporation, which offers an
array of insurance products. The Company recently closed its Indianapolis,
Indiana offices, which housed Village Community Development Corporation,
Village Housing Corporation and Village Capital Corporation, and moved the
offices to the Company's headquarters in Evansville, Indiana. Village
Community Development Corporation has reduced its level of business
activities, including the development of real estate.
CONSOLIDATION - The consolidated financial statements include the accounts of
the Company and its subsidiaries after elimination of all material
intercompany transactions and accounts.
INVESTMENT SECURITIES AVAILABLE FOR SALE are carried at fair value. Realized
gains and losses on sales are determined using the specific-identification
method and are included in other income as net security gains (losses).
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.
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. The accrual of interest on
impaired loans is discontinued when, in management's opinion, the borrower may
be unable to meet payments as they become due. When interest accrual is
discontinued, all unpaid accrued interest is reversed. Interest income is
subsequently recognized only to the extent cash payments are received.
Certain loan fees and related direct costs are being deferred and amortized
over the lives of the loans as an adjustment of yield on the loans.
ALLOWANCE FOR LOAN LOSSES is maintained to absorb losses based on management's
continuing review and evaluation of the portfolios and its judg-
33
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ment 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 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, 1997, 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.
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.
FEE INCOME on real estate development and management in the consolidated
statement of income is attributable to activities of the Affordable Housing
Group. 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.
MORTGAGE SERVICING RIGHTS on originated loans are capitalized by allocating
the total cost of the mortgage loans between the mortgage servicing rights and
the loans based on their relative fair values. Capitalized servicing rights,
which includes purchased servicing rights, are amortized in proportion to and
over the period of estimated servicing revenues.
RESTRICTION ON CASH AND DUE FROM BANKS
The Savings Bank is required to maintain reserve funds in cash and/or on
deposit with the Federal Reserve Bank. The reserve required at June 30, 1997
was $415,000.
34
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
INVESTMENT SECURITIES AVAILABLE FOR SALE
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES AT JUNE 30, 1997
U. S. Treasury $ 1,003 $ (3) $ 1,000
Federal agencies 3,000 (56) 2,944
Mortgage-backed securities 8,853 $25 (90) 8,788
Municipals 1,014 44 1,058
--------------------------------------------
$13,870 $69 $(149) $13,790
============================================
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
============================================
35
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
The amortized cost and fair value of investment
securities available for sale at June 30, 1997, by
contractual maturity, are shown below:
- ------------------------------------------------------------------
AMORTIZED FAIR
MATURITY DISTRIBUTION AT JUNE 30, 1997 COST VALUE
- ------------------------------------------------------------------
Within one year $ 1,003 $ 1,000
One to five years 3,000 2,991
Five to ten years 1,014 1,011
------------------
5,017 5,002
Mortgage-backed securities 8,853 8,788
------------------
$13,870 $13,790
==================
- ------------------------------------------------------------------
Proceeds from sales of investment securities available for sale during 1997
were approximately $2,624,000. Gross gains of approximately $43,000 and gross
losses of $1,000 were realized on those sales. There were no sales of
investment securities available for sale during 1996 or 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.
- -----------------------------------------------------------------------------
LOANS AND ALLOWANCES
JUNE 30 1997 1996
- ---------------------------------------------------------------------------
Real estate mortgage loans
First mortgage loans
Conventional $ 94,293 $106,344
Construction 32,577 36,938
Commercial 26,668 18,267
Multi-family 9,602 15,420
First mortgage real estate loans purchased 3,184 7,612
Commercial loans - other than secured by real estate 12,522 9,393
Consumer and home equity loans 26,118 23,247
---------------------
$204,964 $217,221
=====================
36
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
Included in multi-family loans are loans made to affordable housing
developments totaling $4,607,000 and $9,782,000 at June 30, 1997 and 1996.
An additional $1,183,000 and $7,476,000 in loans to affordable housing
developments is included in construction loans at June 30, 1997 and 1996.
- ----------------------------------------------------------------
YEAR ENDED JUNE 30 1997 1996 1995
- ----------------------------------------------------------------
Allowance for loan losses
Balances, beginning of year $1,059 $ 713 $356
Provision for loan losses 975 455 420
Loans charged off (267) (140) (82)
Recoveries on loans 14 31 19
---------------------
Balances, end of year $1,781 $1,059 $713
=====================
- ----------------------------------------------------------------
The Company has not had any impaired loans during the years ended June 30,
1997 or 1996.
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:
- ----------------------------------------------------------------
Balances, July 1, 1996 $8,757
New loans, including renewals 37
Payments, etc., including renewals (6,573)
------
Balances, June 30, 1997 $2,221
======
- ----------------------------------------------------------------
LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheet. The unpaid principal balances of mortgage loans
serviced for others totaled $64,517,000 and $58,854,000 at June 30, 1997 and
1996.
37
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
In 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 122, Accounting for Mortgage Servicing Rights. This statement
requires the capitalization of retained mortgage servicing rights on
originated or purchased loans by allocating the total cost of the mortgage
loans between the mortgage servicing rights and the loans (without the
servicing rights) based on their relative fair values. SFAS No. 122 was
superseded during 1996 by SFAS No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities. SFAS No. 125 (as did
SFAS No. 122) requires the assessment of impairment of capitalized mortgage
servicing rights and requires that impairment be recognized through a
valuation allowance based on the fair value of those rights. The aggregate
fair value of capitalized mortgage servicing rights at June 30, 1997
approximated $800,000. Comparable market prices were used to estimate fair
value.
- ----------------------------------------------------------------
1997 1996
-------------
Mortgage servicing rights
Balances, beginning of year $543
Servicing rights capitalized 250 $575
Amortization of servicing rights (72) (32)
-------------
Balances, end of year $721 $543
=============
PREMISES AND EQUIPMENT
JUNE 30 1997 1996
- ----------------------------------------------------------------
Land $1,766 $1,741
Building and land improvements 5,244 4,648
Furniture, fixtures and equipment 2,058 1,818
--------------
Total cost 9,068 8,207
Accumulated depreciation (2,727) (2,648)
--------------
Net $6,341 $5,559
==============
38
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
OTHER ASSETS
Included in other assets at June 30, 1997 and 1996 are investments of
$4,021,000 and $3,478,000 in limited partnerships which are organized to
build, own and operate apartment complexes. The investments at June 30, 1997
include: the Company's 1% equity in 16 limited partnerships as general
partner ($1,884,000), a 47.99% equity in one partnership in which the Company
is a 1% general partner and a 46.99% limited partner ($683,000), a 40% equity
in one limited partnership in which the Company is a 1% general partner and a
39% limited partner ($655,000), a 9.985% equity in one limited partnership
($362,000), a 9.99% equity in one limited partnership ($238,000), and a 99%
equity in two limited partnerships in which the Company is a limited partner
($199,000). The Company records income on the equity method in the income and
losses of the limited partnerships, which resulted in a $132,000 and $73,000
loss during 1997 and 1996 compared to none in 1995. 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 $341,000, $273,000 and $72,000
for the years ended June 30, 1997, 1996 and 1995. Combined condensed
financial statements for the limited partnerships as of June 30, 1997 and 1996
and for the years ended June 30, 1997, 1996 and 1995 are as follows:
- ---------------------------------------------------------------------
JUNE 30 1997 1996
- ---------------------------------------------------------------------
Combined condensed balance sheet (unaudited)
Assets
Cash $ 727 $ 635
Construction in process 7,298
Land and property 56,357 49,238
Other assets 1,271 903
----------------
Total assets $58,355 $58,074
================
Liabilities
Notes payable $38,214 $39,890
Other liabilities 2,348 1,537
----------------
Total liabilities 40,562 41,427
Partners' equity 17,793 16,647
----------------
Total liabilities and partners' equity $58,355 $58,074
================
YEAR ENDED JUNE 30 1997 1996 1995
- ----------------------------------------------------------------------
Condensed statement of operations (unaudited)
Total revenue $ 3,181 $ 3,501 $ 712
Total expenses 4,253 5,261 1,265
-------------------------
Net loss $(1,072) $(1,760) $ (553)
=========================
39
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
Approximately $9,087,000 and $18,258,000 of the notes payable are due to the
Company at June 30, 1997 and 1996. Included in land and property are
development fees earned during the years ended June 30, 1997 and 1996 of
approximately $758,000 and $4,440,000 and loan fees of approximately $29,000
and $31,000.
During the year ended June 30, 1997, the Company wrote down its investment in
limited partnerships by $335,000, based on current cash flows and actual
performance compared to proforma performance estimates.
Included in other assets is interest receivable as follows:
- ---------------------------------------------------------------------
JUNE 30 1997 1996
- ---------------------------------------------------------------------
Interest receivable on loans $1,340 $1,297
Interest receivable on investments and other 178 189
--------------
Total interest receivable $1,518 $1,486
==============
DEPOSITS
JUNE 30 1997 1996
- ---------------------------------------------------------------------
Non-interest bearing transaction accounts $ 4,714 $ 5,100
Interest-bearing transaction accounts 20,952 19,987
Money market deposit accounts 3,103 5,364
Savings accounts 4,763 5,134
Certificates of $100,000 or more 53,081 45,926
Other certificates and time deposits 95,174 100,191
-------------------
Total $181,787 $181,702
===================
Certificates maturing in years ending June 30:
1998 $102,972
1999 34,485
2000 8,939
2001 1,169
2002 674
Thereafter 16
--------
$148,255
========
40
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
SHORT-TERM BORROWINGS
JUNE 30 1997 1996
- ---------------------------------------------------------------------
Treasury tax and loan note option $ 105 $ 129
Guaranteed investment contracts 5,086 5,564
--------------
Total short-term borrowings $5,191 $5,693
==============
FHLB ADVANCES AND OTHER LONG-TERM DEBT
</TABLE>
<TABLE>
<CAPTION>
JUNE 30 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Note payable, 7.70%, adjusted annually, payable $16,443 per month,
including interest, due April 1, 2009, secured by specific multi-family
mortgages $ 2,234 $ 2,266
Note payable, 7.75% adjusted annually, payable $7,272 per month,
including interest, due September 14, 2010, secured by specific
multi-family mortgages 1,006 1,015
Note payable, 7.75% adjusted annually, payable $11,119 per month,
including interest, due September 22, 2010, secured by specific
multi-family mortgages 1,542 1,552
Junior subordinated notes, 9.125%, interest paid semi-annually, due
April 30, 2001, unsecured 1,476 1,485
Junior subordinated notes, 9.25%, interest paid semi-annually, due
January 31, 2002, unsecured 1,494 1,500
Senior subordinated notes, 10.00%, interest paid semi-annually, due
June 1, 2005, unsecured 7,000 7,000
Federal Home Loan Bank advances, due at various dates through
2002 (weighted average rates of 6.48% and 6.38% at June 30,
1997 and 1996) 23,337 42,474
-----------------
Totals $38,089 $57,292
=================
</TABLE>
41
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
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 $4,000,000 in
eligible investment securities pledged at June 30, 1997. Some of the advances
are subject to restrictions or penalties in the event of prepayment.
The scheduled principal reduction of borrowings at June 30, 1997, is
approximately as follows: 1998, $8,605,000; 1999, $5,347,000; 2000,
$4,044,000; 2001, $2,161,000; 2002, $2,317,000 and 2003 and later,
$15,615,000.
- -----------------------------------------------------------------------
INCOME TAX
YEAR ENDED JUNE 30 1997 1996 1995
- -----------------------------------------------------------------------
Income tax expense (benefit)
Currently payable
Federal $(515) $1,175 $1,214
State (53) 416 359
Deferred
Federal 240 244 (47)
State 73 52 (11)
----------------------
Total income tax expense (benefit) $(255) $1,887 $1,515
======================
Reconciliation of federal statutory to actual
tax expense (benefit)
Federal statutory income tax at 34% $ (48) $1,741 $1,556
State income tax, net of federal benefit 13 309 230
Tax-exempt interest (19)
Affordable housing tax credits and other (221) (177) (276)
Other, net 20 14 5
----------------------
Actual tax expense (benefit) $(255) $1,887 $1,515
======================
42
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
A cumulative deferred tax asset (liability) of $(158,000) and $197,000 is
included in the balance sheet at June 30, 1997 and 1996. The components are
as follows:
- -----------------------------------------------------------------------------
JUNE 30 1997 1996
- -----------------------------------------------------------------------------
Differences in accounting for certain accrued liabilities $ 17 $ 21
Differences in accounting for other real estate (16) (13)
Differences in depreciation methods (31) (23)
Differences in accounting for loan losses 792 341
Differences in accounting for loan fee income 110 87
Differences in accounting for loan sales (5) (7)
Differences in accounting for mortgage servicing rights (285)
Differences in basis of FHLB stock (66) (66)
Unrealized gain/loss on available-for-sale securities 49 91
Basis differential on certain partnership interests (767) (263)
Other 44 29
---------------
Deferred tax asset (liability) $ (158) $197
===============
Assets $ 1,012 $569
Liabilities (1,170) (372)
---------------
Deferred tax asset (liability) $ (158) $197
===============
- -----------------------------------------------------------------------------
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, including redemption of bank stock or excess dividends, or
loss of "bank" status, 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.
REGULATORY CAPITAL
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.
43
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
At June 30, 1997, the management of the Company believes that the Savings Bank
meets all capital adequacy requirements to which it is subject. The most
recent notification from its regulatory agency categorized the Savings Bank as
well capitalized under the regulatory framework for prompt corrective action.
There have been no conditions or events since that notification that
management believes have changed this categorization. However, as a result of
increased credit risk, management believes that the Savings Bank's capital
ratios need to be improved.
The actual and required capital amounts of the Savings Bank are as follows:
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997
------------------------------------------------
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* (to risk-weighted assets) $22,826 10.74% $17,004 8.00% $21,255 10.00%
Tier I capital* (to risk-weighted assets) 16,245 7.64 8,502 4.00 12,753 6.00
Tier I capital* (to adjusted total assets) 16,245 6.93 9,381 4.00 11,726 5.00
</TABLE>
* As defined by regulatory agencies
- -----------------------------------------------------------------------------
The Savings Bank's tangible capital at June 30, 1997 was $16,245,000, which
amount was 6.93% of tangible assets and exceeded the required ratio of 1.5%.
RESTRICTION ON DIVIDENDS
The Company's principal source of income and funds is dividends from the
Savings Bank 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 Savings Bank
may pay. At June 30, 1997, total stockholder's equity of the Savings Bank was
$16,245,000, of which $5,433,000 was available for the payment of dividends
without prior approval by the OTS.
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% of net income to date over the calendar year and 50%
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% of net income if it meets the risk based
requirement on January 1, 1993. A savings association failing to meet current
capital standards, or at the discretion of its regulators, may only pay
dividends with supervisory approval.
44
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCKHOLDERS' EQUITY
Stockholders' equity has been adjusted to record 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, 1997, a total of 53,184 of the
shares originally reserved had been issued and 362,316 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, 1997, a total of 39,732 of the shares
originally reserved had been issued and 306,768 remained reserved and
unissued.
The Board, at its August meeting, approved a tender offer with respect to
those warrants. In connection with the offer, the Company will attempt to
induce the exercise of the warrants at exercise prices of $3.70 and $4.04 per
share, respectively.
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, 1997 and 1996, commitments to extend credit,
which represent financial instruments whose contract amount represents credit
risk, were $30,363,000 and $17,599,000.
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, 1997 and 1996 was
$19,432,000 and $16,572,000.
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, 1997 and 1996 was
$34,985,000 and $20,136,000.
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 credit worthiness 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
45
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997 and 1996 was $916,000 and $785,000.
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, 1996,
the date of the latest actuarial valuation. The Company incurred pension
expense of $64,000 for the current year, compared to no pension expense in
1996 or 1995. Due to the Internal Revenue Service's full funding limit,
contributions to the plan have not been required since June 1987 until fiscal
1997. The plan provides pension benefits for substantially all of the
Company's employees.
The Company has a retirement savings Section 401(k) plan in which
substantially all employees may participate. The Company matches employees'
contributions at the rate of 25% up to 6% of the participant's salary. The
Company's expense for the plan was $28,000, $27,000 and $17,000 for 1997, 1996
and 1995.
STOCK OPTION PLANS
Under the Company's stock option plans, which are accounted for in accordance
with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations, the Company grants stock
option awards which vest and become exercisable at various dates.
On July 1, 1996, the Company adopted SFAS No. 123 and elected to continue to
apply the provisions of APB Opinion No. 25 and provide the proforma
disclosures required by SFAS No. 123. The Company did not grant any options
during the year ended June 30, 1997, therefore no proforma disclosures are
required.
The following is a summary of the status of the Company's stock option plans
and changes in the plans as of and for the years ended June 30, 1997, 1996 and
1995:
INCENTIVE STOCK OPTION PLAN
The Company has an incentive stock option plan in which 29,643 common shares
have been reserved for issuance under the plan at June 30, 1997. 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 the options were first
exercisable was determined by the Board of Directors, and the terms of the
stock options will not exceed ten years from the date of grant. No options
shall be granted after November 17, 1997. Upon such date, the Plan shall
expire except as to outstanding options which will remain in effect until they
have been exercised, terminated, or expired. At June 30, 1997, there were
29,643 options available for grant. A total of 12,760 shares under option
outstanding at June 30, 1996 were canceled in 1997. A summary of the stock
options activity for the incentive stock option plan is as follows:
46
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30 1996 1995
- ---------------------------------------------------------------------
Shares under option
Outstanding at beginning of year 36,451 67,871
Granted during the year 6,930 6,930
Exercised during the year 30,621 32,528
Canceled options 5,822
Outstanding at end of year 12,760 36,451
Exercisable at end of year 8,602 36,451
Weighted option price per share
Exercisable $10.33 $4.35
Exercised 3.92 2.31
Granted 14.32 8.45
- ---------------------------------------------------------------------
DIRECTORS' PLAN
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.
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, 1997, there
were 147,017 options available for grant. A summary of the stock options
activity for the Directors' Plan is as follows:
- ---------------------------------------------------------------------
JUNE 30 1997 1996 1995
- ---------------------------------------------------------------------
Shares under option
Outstanding at beginning of year 86,762 86,762 79,832
Granted during the year 6,930
Outstanding at end of year 86,762 86,762 86,762
Exercisable at end of year 86,762 86,762 86,762
Weighted option price per share
Exercisable $6.50 $6.50 $6.50
Granted 9.74
47
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1995 KEY EMPLOYEES' STOCK OPTION PLAN
The Board of Directors of the Company adopted and approved the 1995 Key
Employees' Stock Option Plan (1995 Plan) 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 of 1986, as amended (Code), 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.
On March 15, 1995, options for 80,850 common shares 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,
1997, there were 155,650 options available for grant. A summary of the stock
options activity for the 1995 Plan is as follows:
- ---------------------------------------------------------------------
JUNE 30 1997 1996
- ---------------------------------------------------------------------
Shares under option
Outstanding at beginning of year 80,850 80,850
Granted during the year
Exercised during the year 407
Outstanding at end of year 80,443 80,850
Exercisable at end of year 48,183 32,340
Weighted option price per share
Exercisable $10.52 $10.51
Exercised 9.63
Granted
- ---------------------------------------------------------------------
FAIR VALUE 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
48
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 noninterest-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.
SHORT-TERM BORROWINGS - The fair value of these borrowings is estimated using
rates currently available to the Company for debt with similar terms and
remaining maturities. These instruments adjust on a periodic basis and the
carrying amount represents the fair value.
FHLB ADVANCES AND OTHER LONG-TERM DEBT - The fair value of these borrowings is
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.
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 Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
1997 1996
CARRYING FAIR Carrying Fair
JUNE 30 AMOUNT VALUE Amount Value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 3,506 $ 3,506 $ 10,213 $ 10,213
Interest-bearing deposits 6 6 5 5
Investment securities available for sale 13,790 13,790 17,458 17,458
Loans, net 203,183 201,600 216,162 216,720
Interest receivable 1,518 1,518 1,486 1,486
FHLB stock 3,920 3,920 3,920 3,920
Liabilities
Deposits 181,787 181,864 181,702 182,043
Short-term borrowings 5,191 5,191 5,693 5,693
Long-term debt 38,089 37,995 57,292 57,621
Interest payable 735 735 749 749
</TABLE>
49
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial informa-
tion as to financial position, results of operations
and cash flows of the Company:
- ----------------------------------------------------------------------------
CONDENSED BALANCE SHEET
JUNE 30 1997 1996
- ----------------------------------------------------------------------------
Assets
Cash on deposit $ 92 $ 160
Bank certificates of deposit 6 5
Investment in subsidiaries 16,308 17,992
Loans, net 5,208 5,341
Subordinated debentures and other loan
receivables from subsidiaries 5,813 5,933
Other assets 1,153 699
----------------
Total assets $28,580 $30,130
================
Liabilities
Long-term debt $15,247 $15,317
Other liabilities 397 518
----------------
Total liabilities 15,644 15,835
----------------
Stockholders' Equity
Common stock 2,487 2,495
Capital surplus 8,708 8,785
Stock warrants 264 266
Retained earnings, substantially restricted 1,508 2,889
Net unrealized loss on securities available for sale (31) (140)
----------------
Total stockholders' equity 12,936 14,295
----------------
Total liabilities and stockholders' equity $28,580 $30,130
================
50
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
CONDENSED STATEMENT OF INCOME
YEAR ENDED JUNE 30 1997 1996 1995
- -----------------------------------------------------------------------------
Income
Dividends from subsidiaries $2,500 $2,200 $ 742
Interest income 1,092 978 442
Other income 148 234 189
-------------------------
Total income 3,740 3,412 1,373
-------------------------
Expense
Interest expense 1,397 1,364 527
Provision for loan losses 75
Other expenses 619 611 336
-------------------------
Total expense 2,091 1,975 863
-------------------------
Income Before Income Tax and Equity in
Undistributed (Distribution in excess)
Income of Subsidiaries 1,649 1,437 510
Income Tax Benefit (337) (302) (92)
-------------------------
Income Before Equity in Undistributed
(Distribution in excess) Income of Subsidiaries 1,986 1,739 602
Equity in Undistributed Income of Subsidiaries (1,873) 1,496 2,459
-------------------------
Net Income $ 113 $3,235 $3,061
=========================
51
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 113 $3,235 $ 3,061
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 37 4 34
Undistributed net income of subsidiaries 1,873 (1,496) (2,459)
(Increase) decrease in other assets (491) 392 (618)
(Increase) decrease in other liabilities 128 (183) 172
--------------------------
Net cash provided by operating activities 1,660 1,952 190
--------------------------
Investing Activities
Decrease in interest-bearing deposits
in other banks 1 5
Capital contributions to subsidiaries (80) (4,485)
Advance on note to subsidiary (1,058) (4,875)
Principal payments received on notes from subsidiaries 120
Net (increase) decrease in loans 133 (1,309) (1,455)
--------------------------
Net cash provided (used) by investing activities 174 (2,367) (10,810)
--------------------------
Financing Activities
Payment of long-term debt (70) (28)
Proceeds from issuance of long-term debt 1,270 9,847
Proceeds from exercise of stock options 4 109 75
Proceeds from exercise of stock warrants 35 632 19
Payment of cash dividends (1,745) (1,729) (626)
Purchase of common stock (126)
Proceeds from issuance of stock warrants 150
--------------------------
Net cash provided (used) by financing activities (1,902) 282 9,437
--------------------------
Change in Cash and Cash Equivalents (68) (133) (1,183)
Cash and Cash Equivalents, Beginning of Year 160 293 1,476
--------------------------
Cash and Cash Equivalents, End of Year $ 92 $ 160 $ 293
==========================
</TABLE>
52
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
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, 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, income taxes have been deducted.
Identified 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:
- -----------------------------------------------------------------------
JUNE 30 1997 1996 1995
- -----------------------------------------------------------------------
Revenue
Banking $ 22,958 $ 25,190 $ 16,788
Real estate development and management 1,181 4,519 4,383
-----------------------------
$ 24,139 $ 29,709 $ 21,171
=============================
Operating Profit
Banking $ 682 $ 1,416 $ 1,032
Real estate development and management (569) 1,819 2,029
-----------------------------
$ 113 $ 3,235 $ 3,061
=============================
Identifiable Assets
Banking $228,181 $250,466 $261,121
Real estate development and management 11,820 11,750 8,317
-----------------------------
$240,001 $262,216 $269,438
=============================
Depreciation and Amortization
Banking $ 354 $ 282 $ 232
Real estate development and management 70 77 44
-----------------------------
$ 424 $ 359 $ 276
=============================
Capital Expenditures
Banking $ 1,106 $ 1,569 $ 1,118
Real estate development and management 127 809 435
-----------------------------
$ 1,233 $ 2,378 $ 1,553
=============================
- -----------------------------------------------------------------------
53
<PAGE>
CORPORATE INFORMATION
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
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 or
(812) 469-2100 ext. 16.
STOCK TRANSFERS, DIVIDEND PAYMENTS
DIVIDEND REINVESTMENT
Fidelity Federal Bancorp
Attn: Shareholder Relations
700 S. Green River Road, Suite 2000
PO Box 5584
Evansville, IN 47716-5584
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, Executive Vice President,
CFO, and Treasurer
Fidelity Federal Bancorp
700 S. Green River Road, Suite 2000
PO Box 5584
Evansville, IN 47716-5584
(812) 469-2100 ext. 14
All other requests, including requests for the Annual Report, Form 10-K, Form
10-Q, etc. should be directed to:
Shareholder Relations
Fidelity Federal Bancorp
700 S. Green River Road, Suite 2000
PO Box 5584
Evansville, IN 47716-5584
(812) 469-2100 ext. 16
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
MARKET MAKERS
Wedbush Morgan Securities, Inc.
Natcity Investments, Inc.
McDonald and Company Securities, Inc.
Howe Barnes Investments, Inc.
Herzog, Heine, Geduld, Inc.
DIVIDEND CALENDAR
Dividends on common shares, if approved by the Board of Directors, are
anticipated as follows:
RECORD DATES PAYMENT DATES
September, 1997 October, 1997
December, 1997 January, 1998
March, 1998 April, 1998
June, 1998 July, 1998
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 the Village Housing affordable
housing developments, contact Village Management Corporation
(812) 469-2100, ext. 20
CORPORATE HEADQUARTERS
Fidelity Federal Bancorp
700 S. Green River Road, Suite 2000
PO Box 5584
Evansville, IN 47716-5584
1-800-280-8280
(812) 469-2100
ANNUAL MEETING
Wednesday, October 15, 1997
10:00 am (CDT)
United Fidelity Bank, fsb, Downtown Office
18 NW Fourth Street, 2nd floor
Evansville, Indiana
54
<PAGE>
CORPORATE INFORMATION
Fidelity Federal Bancorp
Unitary savings and loan
holding company
------------------------
|
-----------------------------------
| |
Village Securities Corp. United Fidelity Bank, fsb.
Discount brokerage Federal savings bank -
Equities and debt full service operations
---------------------------
|
Village Capital Corp. |
Multifamily real estate -----------------|
finance subsidiary |
|
Village Comm. Dev. Corp. |
Multifamily real estate -----------------|
development subsidiary |
|
Village Management Corp. |
Multifamily real estate -----------------|
property management |
|
Village Housing Corp. |
General partner in -----------------|
Sec. 42 partnerships |
|
Village Insurance Corp. |
Accident/Health and -----------------|
Life Insurance
BOARD OF DIRECTORS
CURT J. ANGERMEIER
Attorney
Director, United Fidelity Bank, fsb
Director, Village Securities Corporation
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, Village Capital Corporation
Director and Officer, The Village Companies
President, Pedcor Investments
Director, Flagship Bank, fsb (San Diego, CA)
Director, International City Bank, N.A. (Long Beach, CA)
JACK CUNNINGHAM
President, Chief Executive Officer, and Director, United Fidelity Bank, fsb
Vice-Chairman and Secretary, Fidelity Federal Bancorp
Director and Officer, The Village Companies
Port of Evansville Wharfmaster
M. BRIAN DAVIS
President and Chief Executive Officer, Fidelity Federal Bancorp
Vice Chairman and Director, United Fidelity Bank, fsb
President and Chief Executive Officer, Village 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
BARRY A. SCHNAKENBURG
President, U.S. Industries Group, Inc.
President, Barry Inc.
Director, United Fidelity Bank, fsb
Director, Village Capital Corporation
Director and Officer, Village Insurance Corporation
OFFICERS
BRUCE A. CORDINGLEY
Chairman of the Board
JACK CUNNINGHAM
Vice-Chairman of the Board and Secretary
M. BRIAN DAVIS
President and Chief Executive Officer
DONALD R. NEEL, CPA
Executive Vice President,
Chief Financial Officer and Treasurer
MARK A. ISAAC
Vice President, Controller
WILLIAM M. MCCUTCHAN
Vice President, Loan Review
DEBORAH H. GORMAN
Assistant Vice President, Human Resources
SHANON L. DELONG
Internal Auditor
ANTHONY W. FREELS
Shareholder Relations Officer
55
<PAGE>
CORPORATE INFORMATION
FIDELITY FEDERAL BANCORP
UNITED FIDELITY BANK, FSB OFFICERS
BRUCE A. CORDINGLEY
Chairman of the Board
M. BRIAN DAVIS
Vice Chairman of the Board
JACK CUNNINGHAM
President, Chief Executive Officer and Secretary
DONALD R. NEEL, CPA
Executive Vice President,
Chief Operating Officer and Treasurer
TERRY G. JOHNSTON
Executive Vice President, Mortgage Banking
MICHAEL S. SUTTON, CPA
Executive Vice President, Commercial Banking
KIRBY W. KING
Senior Vice President, Retail Banking
ROGER C. BAUGH
Vice President, Special Services
MARK A. ISAAC
Vice President, Controller
JAMIE R. HAGAN
Assistant Vice President, Marketing
DALE HOLT
Assistant Vice President, Consumer Loans
JANET L. JACKSON
Assistant Vice President, Loan Servicing
TONY L. KRAMPE
Assistant Vice President, Mortgage Banking
BARBARA A. LUCKETT
Assistant Vice President, Branch Manager
DEBORAH S. REICH
Assistant Vice President, Branch Manager
CHRISTOPHER A. VITON
Assistant Vice President, Consumer Loans
STEVEN L. WALKER
Assistant Vice President, Commercial Banking
BEVERLY A. WINTERNHEIMER
Assistant Vice President, Branch Manager
VILLAGE CAPITAL
CORPORATION OFFICERS
BRUCE A. CORDINGLEY
Chairman of the Board
JACK CUNNINGHAM
Vice Chairman of the Board
M. BRIAN DAVIS
President and Chief Executive Officer
DONALD R. NEEL, CPA
Executive Vice President and Treasurer
BRADLEY E. PARKER
Senior Vice President
STACI D. KRANTZ
Assistant Vice President
MARK A. ISAAC
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
M. BRIAN DAVIS
Chairman of the Board,
President and Chief Executive Officer
BARRY A. SCHNAKENBURG
Executive Vice President
ROGER C. BAUGH
Vice President
DONALD R. NEEL, CPA
Treasurer
MARK A. ISAAC
Secretary
VILLAGE HOUSING
CORPORATION OFFICERS
BRUCE A. CORDINGLEY
Chairman of the Board
JACK CUNNINGHAM
Vice Chairman of the Board
and Executive Vice President
M. BRIAN DAVIS
President and Chief Executive Officer
DONALD R. NEEL, CPA
Senior Vice President and Treasurer
BRADLEY E. PARKER
Senior Vice President
TIMOTHY J. WAGNER
Vice President and Controller
MARK A. ISAAC
Secretary
VILLAGE MANAGEMENT
CORPORATION OFFICERS
M. BRIAN DAVIS
Chairman,
President and Chief Executive Officer
JACK CUNNINGHAM
Vice Chairman of the Board
CHRISTINE M. MARSHALL
Executive Vice President
MORGAN B. FULTON
Senior Vice President, Area Manager
BRADLEY E. PARKER
Senior Vice President
DONALD J. FUCHS, ESQ
Vice President (Village Title Co.)
JULIE NONTE
Vice President, Area Manager
HELEN L. DYE
Assistant Vice President, Collections
JOHN A. STEWART
Assistant Vice President, Compliance
DONALD R. NEEL, CPA
Treasurer
MARK A. ISAAC
Secretary
VILLAGE COMMUNITY DEVELOPMENT CORPORATION OFFICERS
BRUCE A. CORDINGLEY
Chairman of the Board
M. BRIAN DAVIS
President and Chief Executive Officer
JACK CUNNINGHAM
Executive Vice President
DONALD R. NEEL, CPA
Senior Vice President and Treasurer
BRADLEY E. PARKER
Senior Vice President
STACI D. KRANTZ
Assistant Vice President
MARK A. ISAAC
Secretary
56
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:
Village Insurance Corporation Indiana
Village Housing Corporation Indiana
Village Community Development Corporation Indiana
Village Management Corporation Indiana
Village Capital Corporation Indiana
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from Fidelity
Federal Bancorp's consolidated balance sheet as of June 30, 1997 and the
consolidated statement of income for the year ended June 30, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,747
<INT-BEARING-DEPOSITS> 1,765
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,790
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 204,964
<ALLOWANCE> 1,781
<TOTAL-ASSETS> 240,001
<DEPOSITS> 181,787
<SHORT-TERM> 5,191
<LIABILITIES-OTHER> 1,999
<LONG-TERM> 38,089
0
0
<COMMON> 2,487
<OTHER-SE> 10,449
<TOTAL-LIABILITIES-AND-EQUITY> 240,001
<INTEREST-LOAN> 18,692
<INTEREST-INVEST> 1,089
<INTEREST-OTHER> 502
<INTEREST-TOTAL> 20,283
<INTEREST-DEPOSIT> 10,000
<INTEREST-EXPENSE> 13,831
<INTEREST-INCOME-NET> 6,451
<LOAN-LOSSES> 975
<SECURITIES-GAINS> 42
<EXPENSE-OTHER> 9,474
<INCOME-PRETAX> (141)
<INCOME-PRE-EXTRAORDINARY> (141)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 113
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
<YIELD-ACTUAL> 2.72
<LOANS-NON> 256
<LOANS-PAST> 29
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,059
<CHARGE-OFFS> 267
<RECOVERIES> 14
<ALLOWANCE-CLOSE> 1,781
<ALLOWANCE-DOMESTIC> 1,781
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
