UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1998
FIDELITY FEDERAL BANCORP
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 0-22880 35-1894432
---------------------------- ---------- -------------------
(State of other jurisdiction Commission (IRS Employer
of Incorporation of File No. Identification No.)
Organization)
700 S. Green River Road, Suite 2000
Evansville, Indiana 47715
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(812) 469-2100
--------------------------------------------------
Registrant's telephone number, including area code
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
--- ---
As of November 5, 1998, there were 3,147,766 shares of the Registrant's common
stock, $1 stated value, issued and outstanding.
Exhibit Index is on page 26.
<PAGE>
FIDELITY FEDERAL BANCORP
AND SUBSIDIARIES
Index
Page
PART I - FINANCIAL INFORMATION
ITEM 1--Financial Statements:
Consolidated balance sheet............................................ 3
Consolidated statement of income...................................... 4
Consolidated statement of changes in stockholders' equity............. 5
Consolidated statement of cash flows.................................. 6
Notes to consolidated financial statements............................ 7
ITEM 2--Management's Discussion and Analysis of Results of Operation
and Financial Condition
Results of Operations ............................................. 11
Financial Condition................................................ 16
Capital Resources and Capital Requirements......................... 21
Liquidity.......................................................... 23
PART II - OTHER INFORMATION.............................................. 24
SIGNATURES............................................................... 25
EXHIBIT INDEX............................................................ 26
2
<PAGE>
ITEM 1 - FINANCIAL STATEMENTS
PART I - FINANCIAL INFORMATION
FIDELITY FEDERAL BANCORP
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,631 $ 1,683
Short-term interest-bearing deposits 20,409 6,260
-------- --------
Total cash and cash equivalents 22,040 7,943
Interest-bearing deposits 6 6
Investment securities available for sale 9,444 9,854
Loans 150,951 159,732
Allowance for loan losses (3,960) (3,049)
-------- --------
Net loans 146,991 156,683
Premises and equipment 5,755 5,846
Federal Home Loan Bank of Indianapolis stock 3,920 3,920
Income tax receivable 5,560 6,690
Other assets 5,981 6,104
-------- --------
Total assets $199,697 $197,046
======== ========
LIABILITIES
Deposits
Non-interest bearing $ 5,401 $ 4,760
Interest-bearing 148,733 144,179
-------- --------
Total deposits 154,134 148,939
Short-term borrowings 106 2,531
FHLB advances and other long-term debt 28,886 29,488
Advances by borrowers for taxes and insurance 611 426
Letter of credit valuation allowance 5,883 6,778
Other liabilities 2,123 1,369
-------- --------
Total liabilities 192,638 189,531
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 Outstanding - 3,147,664 and 3,127,208 shares 3,148 3,127
Capital surplus 10,869 10,799
Stock warrants 11 11
Retained earnings, (deficit) (6,045) (6,380)
Accumulated other comprehensive loss-net unrealized losses
on investment securities available for sale (29) (42)
-------- --------
Total stockholders' equity 7,954 7,515
-------- --------
Total liabilities and stockholders' equity $199,697 $197,046
======== ========
</TABLE>
See notes to consolidated financial statements.
NOTE: The consolidated balance sheet at June 30, 1998 has been derived from the
audited financial statements.
3
<PAGE>
FIDELITY FEDERAL BANCORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------ ------
<S> <C> <C>
INTEREST INCOME
Loans receivable $3,481 $4,527
Investment securities 141 208
Federal funds sold 29
Interest-bearing deposits 182 41
Other interest and dividend income 79 82
------ ------
Total interest income 3,883 4,887
------ ------
INTEREST EXPENSE
Deposits 2,009 2,533
Short-term borrowings 243 360
Long-term debt 366 392
------ ------
Total interest expense 2,618 3,285
------ ------
NET INTEREST INCOME 1,265 1,602
Provision for loan losses 75 135
------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,190 1,467
------ ------
NON-INTEREST INCOME
Management fees 93 107
Service charges on deposit accounts 119 115
Net gains on sale of
Real estate loans 109 62
Premises and equipment 23
Letter of credit fees 146 194
Agent fee income 167 219
Other income 238 153
------ ------
Total non-interest income 895 850
------ ------
NON-INTEREST EXPENSE
Salaries and employee benefits 887 839
Net occupancy expense 105 113
Equipment expense 76 88
Data processing expense 89 89
Deposit insurance expense 34 15
Legal and professional fees 70 70
Advertising 51 51
Other expense 529 384
------ ------
Total non-interest expense 1,841 1,649
------ ------
INCOME BEFORE INCOME TAX 244 668
Income tax expense (92) 159
------ ------
NET INCOME $ 336 $ 509
====== ======
PER SHARE:
Basic net income $ 0.11 $ 0.19
Diluted net income 0.11 0.19
WEIGHTED AVERAGE SHARES OUTSTANDING 3,129,876 2,613,418
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
FIDELITY FEDERAL BANCORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------ ------
<S> <C> <C>
BEGINNING BALANCES $7,515 $12,936
Comprehensive income: 336 509
Net income
Other comprehensive income 13 54
------ -------
Comprehensive income 348 563
Cash dividends (300)
Issuance of stock 90
Exercise of stock warrants 1,182
------ -------
BALANCES, SEPTEMBER 30 $7,954 $14,381
====== =======
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE>
FIDELITY FEDERAL BANCORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------ ------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 336 $ 509
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 75 135
(Gain) loss on sale of premises and equipment (23) 15
Depreciation 104 116
Investment securities amortization (accretion), net 6
Amortization of net loan origination fees and points (27) (42)
Changes in:
Interest receivable and other assets 1,254 (32)
Interest payable and other liabilities 899 1,111
------- ------
Net cash provided by operating activities 2,624 1,812
------- ------
INVESTING ACTIVITIES
Proceeds from investment securities available for sale,
sales and maturities 426 419
Net changes in loans 8,749 6,447
Purchases of premises and equipment (25) (66)
Proceeds from sale of premises and equipment 35 -
------- ------
Net cash provided by investing activities 9,185 6,800
------- ------
FINANCING ACTIVITIES
Net change in:
Noninterest-bearing, interest being demand and
savings deposits (572) 2,666
Certificates of deposit 5,768 (4,783)
Short-term borrowings (2,425) (1,866)
Repayment of FHLB advances and other long-term debt (602) (3,665)
Net change in advances by borrowers for taxes and insurance 185 344
Cash dividends (156) (249)
Proceeds from exercise of stock warrants 1,182
Issuance of stock 90 -
------- ------
Net cash provided (used) by financing activities 2,288 (6,371)
------- ------
Net change in Cash and Cash Equivalents 14,097 2,241
Cash and Cash Equivalents, beginning of period 7,943 3,506
------- ------
Cash and Cash Equivalents, end of period $22,040 $5,747
======= ======
Additional Cash Flows and Supplementary information
Cash paid for income taxes, net of refunds $ 125
Cash paid for interest $ 1,829 2,566
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
FIDELITY FEDERAL BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- - ACCOUNTING POLICIES
The significant accounting policies followed by Fidelity Federal Bancorp (the
"Company") and its wholly owned subsidiaries for interim financial reporting are
consistent with the accounting policies followed for annual financial reporting.
All adjustments which are necessary for a fair presentation of the results for
the periods reported, consist only of normal recurring adjustments, and have
been included in the accompanying unaudited consolidated condensed financial
statements. The results of operations for the three months ended September 30,
1998 are not necessarily indicative of those expected for the remainder of the
year.
- - NET INCOME PER SHARE
Basic and diluted earnings per share have been computed based on the weighted
average number of shares outstanding during the periods. Common stock options
and warrants are included in weighted average shares to the extent they are
dilutive. The Company adopted Statement of Financial Accounting Standards (SFAS)
NO. 128 "Earnings per Share" for fiscal 1998. All prior periods' earnings per
share have been restated for SFAS 128.
Options to purchase 133,746 shares of common stock at an average price of $7.09
and warrants of 27,753 shares at an average price of $7.15 were outstanding
during fiscal 1999, but were not included in the computation of diluted EPS
because the options' exercise price was greater than the average market price of
the common shares.
Options to purchase 55,113 shares of common stock at an average price of $10.42
were outstanding during fiscal 1998, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares.
- - STOCKHOLDERS' EQUITY
On September 22, 1997, the Company filed a Schedule 13E4 with the Securities and
Exchange Commission regarding a warrant tender offer to holders of its 1994 and
1995 warrants. The offer and withdrawal rights expired on October 31, 1997. The
Company decreased the exercise price, upon the terms and subject to the
conditions set forth in the Letter of Transmittal, to $3.70 for the 1994
Warrants and $4.04 for the 1995 Warrants. The proceeds from the exercise of the
warrants under this offer totaled $2.5 million.
In connection with the Company's second debt and equity rights offering
completed January 31, 1995, the Company has 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 September 30, 1998, a total of 337,029
of the shares originally reserved had been issued and 9,471 remained reserved
and unissued.
In connection with the Company's first debt and equity rights offering completed
on April 30, 1994, the Company has 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 September 30, 1998, a total of 397,218 of the
shares originally reserved had been issued and 18,282 remained reserved and
unissued.
7
<PAGE>
- - CASH DIVIDEND
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's primary source of
income is dividends from its thrift subsidiary, United Fidelity Bank, fsb
("Savings Bank"). The Savings Bank has determined to not pay any dividends in
the immediate future. This decision was based upon discussions with the Office
of Thrift Supervision ("OTS"), the primary federal regulator for the Savings
Bank, following an examination of the Savings Bank by the OTS. In these
discussions, the OTS indicated that the Savings Bank should refrain from paying
dividends due to the risk perceived by the OTS in the Savings Bank's loan and
letters of credit portfolio, as well as the Savings Bank's existing capital
levels. The Savings Bank is uncertain when it will pay dividends in the future
and the amount of such dividends, if any. It is also possible that the OTS will
take action to officially prohibit the payment of dividends by the Savings Bank.
The Company anticipates that it will not pay any dividends until such time as it
receives dividends from the Savings Bank.
- - COMPANY SUBSIDIARIES
United Fidelity Bank, fsb, Village Securities Corporation and Village Affordable
Housing Corporation are three subsidiaries of the Company. The Savings Bank is a
federally chartered savings bank, and is regulated by the Office of Thrift
Supervision. Village Securities Corporation began operations July 1, 1997, by
providing customers with discount brokerage services for stocks and bonds.
Village Affordable Housing Corporation was formed during the third quarter of
fiscal 1998 for the purpose of holding interests in real estate housing, and is
not operational.
The Savings Bank's subsidiaries, Village Housing Corporation, Village Management
Corporation and Village Community Development Corporation (the "Affordable
Housing Group"), and Village Capital Corporation have been involved in various
aspects of financing, owning, developing, building, renting and managing
affordable housing projects. Village Capital Corporation has earned fees by
providing real estate mortgage banking services to unaffiliated borrowers since
1994. Another subsidiary of the Savings Bank, Village Insurance Corporation, is
engaged in the business of selling various insurance products.
The Company reevaluated its business plan in fiscal 1997. As a result, Village
Community Development Corporation had reduced its activities significantly, and
discontinued activities in fiscal 1998. Village 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.
- - NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board has issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
requires companies to record derivatives on the balance sheet at their fair
value. Statement No. 133 will be effective for the Company beginning in fiscal
2000. The adoption of this statement is not expected to have a material impact
on the Company's financial condition or results of operations.
- - OTHER RESTRICTIONS
The OTS has also notified the Company that it plans to restrict the Company from
appointing directors or members of senior executive management without OTS
approval, and that it plans to restrict all types of commercial lending until
approved to do so by the OTS.
8
<PAGE>
- - COMPREHENSIVE INCOME
The Company adopted Financial Accounting Standards Board Statement No. 130,
"Reporting Comprehensive Income", effective July 1, 1998. The statement was
effective for fiscal years beginning after December 15, 1997. This statement
establishes standards for the reporting and display of comprehensive income,
which includes net income and all other non-owner changes in equity during the
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1998 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
Net income (loss) $336 $509 $(6,794)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period, net of tax 13 54 (59)
Less: adjustment for gains realized in
net income, net of tax 48
---- ---- -------
Net unrealized gains (losses) 13 5 (11)
Other comprehensive income $349 $563 $(6,805)
==== ==== =======
</TABLE>
- - 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, consumer, and commercial loans. Through the
Affordable Housing Group, the Company is involved in various aspects of
developing, building, renting and managing affordable housing projects.
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. The assets in this segment primarily include cash received in the
form of fees and land to be used for future developments.
9
<PAGE>
Presented below is condensed financial information relating to the Company's
business segments:
<TABLE>
<CAPTION>
(IN THOUSANDS) THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
-------- --------
<S> <C> <C>
REVENUE:
Banking $ 4,583 $ 5,514
Real estate development and management 195 223
-------- --------
Total consolidated $ 4,778 $ 5,737
======== ========
OPERATING PROFIT:
Banking $ 467 $ 534
Real estate development and management (131) (25)
-------- --------
Total consolidated $ 336 $ 509
======== ========
IDENTIFIABLE ASSETS:
Banking $189,902 $223,452
Real estate development and management 9,795 11,884
-------- --------
Total consolidated $199,697 $235,336
======== ========
DEPRECIATION AND AMORTIZATION:
Banking $ 101 $ 111
Real estate development and management 3 5
-------- --------
Total consolidated $ 104 $ 116
======== ========
CAPITAL EXPENDITURES:
Banking $ 17 $ 66
Real estate development and management 1 -
-------- --------
Total consolidated $ 18 $ 66
======== ========
</TABLE>
10
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Quarterly Report on Form 10-Q are
"forward-looking statements" intended to qualify for the safe harbors from
liability established by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes",
"anticipates", "expects", "estimates" or words of similar import. Similarly,
statements that describe the Company's future plans, objectives or goals are
also forward-looking statements. Such forward-looking statements are subject to
certain risks and uncertainties which are described inclose proximity to such
statements and which could cause actual results to differ materially from those
anticipated as of the date of this report. Shareholders, potential investors and
other readers are urged to consider these factors in evaluating the
forward-looking statements and are cautioned not to place undue reliance on such
forward-looking statements. The forward-looking statements included herein are
only made as of the date of this report and the Company undertakes no obligation
to publicly update such forward-looking statements to reflect subsequent events
or circumstances.
- - RESULTS OF OPERATIONS
The net income for the three months ended September 30, 1998 was $336,000,
compared to net income of $509,000 for the same period last year. Basic and
diluted net income per share was $.11 per share for the three months ended
September 30, 1998, compared to $.19 per share in 1997. Interest income
decreased $1.0 million from the prior year primarily due to a decrease in higher
yielding multifamily and commercial real estate loans. Interest expense
decreased approximately $700,000 due to the maturity of higher interest bearing
brokered deposits that were partially replaced with retail deposits. As a result
of these maturities and payoffs, the Company's assets have decreased $34.7
million from September 30, 1997 to $200.6 million at September 30, 1998.
Non-interest income for the three months ended September 30, 1998, increased
$45,000 over the three months ended September 30, 1997 primarily due an increase
in gains on sales of loans. Non-interest expense increased slightly to $1.8
million compared to $1.6 million for the three months ended September 30, 1997.
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 for the three months ended September 30, 1998, was $1,265,000
compared to $1,602,000 for the three month period ending September 30, 1997, a
decrease of $337,000.
The net interest margin is a percentage computed by dividing net interest income
on a fully taxable equivalent basis ("FTE") by average earning assets and
represents a measure of basic earnings on interest bearing assets held by the
Company. The reduction in net interest income in Fiscal 1999 was primarily due
to a decrease in average earning assets of $40.6 million, which was offset by a
decrease in average interest-bearing liabilities of $41.0 million. Interest
income for the three months ended September 30, 1998 was $3.9 million compared
to $4.9 million for the three months September 30, 1997, a decrease of
approximately $1.0 million or about 20.4%. Interest expense for the three months
ended September 30, 1998 was $2.6 million compared to $3.3 million for the three
months ended September 30, 1997, a decrease of approximately $700,000 or 21.2%.
The reduction in average earning assets was attributable to a significant number
of multifamily and commercial loan payoffs, as well as payoffs on conventional
real estate mortgage loans. The average balance of agent-acquired certificates
of deposit, which had an average rate of 6.29% for the three months ended
September 30, 1997 was reduced from $58.3 million to $35.0 million for the three
months ended September 30, 1998. The net interest margin for the three months
ended September 30, 1998 decreased slightly to 2.76% from 2.79% at June 30, 1998
and 2.87% at September 30, 1997. The decrease in the margin was affected by a
decrease in higher yielding multifamily construction and commercial real estate
loans.
11
<PAGE>
ASSET/LIABILITY MANAGEMENT
The Company is subject to interest rate risk to the degree that its interest
bearing liabilities, primarily deposits with short and medium term maturities,
mature or reprice at different rates than its interest-earning assets. Although
having liabilities that mature or reprice less frequently on average assets will
be beneficial in times of rising interest rates, such as asset/liability
structure will result in lower net income during periods of declining interest
rates, unless off-set by other factors.
The OTS utilizes a model, the "Office of Thrift Supervision Net Portfolio Value"
("NPV") model, which uses a net market value methodology to measure the interest
rate risk exposure of savings associations. Under this model, an institution's
"normal" level of interest rate risk in the event of an assumed change in
interest rates is a decrease in the institution's NPV in an amount not exceeding
2% of the present value of its assets. Savings associations with over $300
million in assets or less than 12% risk-based capital ratio are required to file
the OTS Schedule CMR. Data from Schedule CMR is used by the OTS to calculate
changes in NPV (and the related "normal" level of interest rate risk) based upon
certain interest rate changes (discussed below). Associations which do not meet
either of the filing requirements are not required to file OTS Schedule CMR, but
may do so voluntarily. The Savings Bank is required to file a CMR since it does
not meet the risk-based capital requirement as of September 30, 1998. Under the
regulation, associations which must file are required to take a deduction (the
interest rate risk capital component) from their total capital available to
calculate their risk based capital requirement if their interest rate exposure
is greater than "normal". The amount of that deduction is one-half of the
difference between (a) the institution's actual calculated exposure to a 200
basis point interest rate increase or decrease (whichever results in the greater
pro forma decrease in NPV) and (b) its "normal" level of exposure which is 2% of
the present value of its assets.
Presented below, at June 30, 1998 and September 30, 1997, is an analysis
performed by the OTS of the Savings Bank's interest rate risk as measured by
changes in NPV for instantaneous and sustained parallel shifts in the yield
curve, in 100 basis point increments, up and down 400 basis points. At June 30,
1998 and September 30, 1997, 2% of the present value of the Savings Bank's
assets was approximately $3.9 million and $4.6 million. Because the interest
rate risk of a 200 basis point increase was $1.1 million at June 30, 1998 and
$1.6 million at September 30, 1997, the Savings Bank would not have been
required to make a deduction from its total capital available to calculate its
risk based capital requirement. The decrease in interest rate risk from 1998 to
1997 is due to an improved match of expected cash flows from assets and
liabilities.
<TABLE>
<CAPTION>
INTEREST RATE RISK AS OF JUNE 30, 1998
NPV AS PERCENT OF PRESENT
NET PORTFOLIO VALUE OF ASSETS VALUE
CHANGE DOLLAR DOLLAR PERCENTAGE
IN RATES AMOUNT CHANGE CHANGE NPV CHANGE
<S> <C> <C> <C> <C> <C>
+400 bp $12,405 $(3,255) (21)% 6.69% - 131 bp
+300 bp 13,549 (2,111) (13) 7.20 - 80 bp
+200 bp 14,598 (1,062) (7) 7.64 - 36 bp
+100 bp 15,407 (253) (2) 7.95 - 04 bp
0 bp 15,660 8.00
-100 bp 15,524 (136) (1) 7.85 - 15 bp
-200 bp 14,815 (845) (5) 7.44 - 56 bp
-300 bp 14,277 (1,383) (9) 7.11 - 88 bp
-400 bp 13,944 (1,716) (11) 6.88 - 111 bp
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
INTEREST RATE RISK AS OF SEPTEMBER 30, 1997
NPV AS PERCENT OF PRESENT
NET PORTFOLIO VALUE OF ASSETS VALUE
CHANGE DOLLAR DOLLAR PERCENTAGE
IN RATES AMOUNT CHANGE CHANGE NPV CHANGE
<S> <C> <C> <C> <C> <C>
+400 bp $12,841 $(4,165) (24)% 5.87% - 146 bp
+300 bp 14,285 (2,721) (16) 6.43 - 91 bp
+200 bp 15,581 (1,425) (8) 6.91 - 43 bp
+100 bp 16,568 (438) (3) 7.24 - 10 bp
0 bp 17,066 7.34
-100 bp 16,612 (395) (2) 7.10 - 24 bp
-200 bp 15,408 (1,599) (9) 6.54 - 80 bp
-300 bp 13,958 (3,048) (18) 5.88 - 146 bp
-400 bp 12,626 (4,380) (26) 5.27 - 206 bp
</TABLE>
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the methods of analysis presented above. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market 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 loans, have features which restrict changes in interest rates on
a short-term basis and over the life of the assets. Further, in the event of a
change in interest rates, expected rates of prepayments on loans and early
withdrawals from certificates could likely deviate significantly from those
assume in calculating the table.
NON-INTEREST INCOME. Non-interest income for the quarter ended September 30,
1998, was $895,000 compared to $850,000 for the same period in 1997, an increase
of $45,000.
<TABLE>
<CAPTION>
NON-INTEREST INCOME
- -------------------
(IN THOUSANDS)
THREE MONTHS ENDED
SEPTEMBER 30, INCREASE
1998 1997 (DECREASE)
---- ---- ----------
<S> <C> <C> <C>
Management fees $ 93 $107 $(14)
Letter of credit fees 146 194 (48)
Service charges on deposit accounts 119 115 4
Net gain on sale of loans 51 15 36
Net gain on sale of fixed assets 23 23
Loan servicing rights, net of amortization 45 25 20
Release fees 32 20 12
Agent fee income 167 219 (52)
Servicing fees on loans sold 19 44 (25)
Other 200 111 89
---- ---- ----
Total non-interest income $895 $850 $ 45
==== ==== ====
</TABLE>
Non-interest income for the three months ended September 30, 1998, increased by
$45,000 as compared to the three months ended September 30, 1997.
The Company has recorded no Section 42 real estate development fees over the
past year. Fee income from management activities decreased to $93,000 for the
three months ended September 30, 1998 compared to $107,000 for the three months
ended September 30, 1997. The decrease is primarily due to a reduction in fees
collected on partnerships managed by Village Housing Corporation.
Letter of credit fees were $146,000 for the three months ended September 30,
1998 as compared to $194,000 for the three months ended September 30, 1997.
Outstanding standby letters of credit at September 30, 1998 were $48.2 million
as compared to $55 million at September 30, 1997. The decrease in fee income is
partially due the fact that fees have not been collected from certain of the
affordable housing projects that are not generating cash
13
<PAGE>
flows that are in line with earlier projected amounts and are therefore not
projected to be able to support outstanding loan balances to other borrowers and
associated letter of credit fees that are due to the Company.
Service charges on deposit accounts increased $4,000 to $119,000 for the three
months ended September 30, 1998 as compared to $115,000 in 1997. The increase in
fees is due to continued increased growth in transaction accounts. The Company
has continued its efforts to attract transaction accounts.
The net gain on sale of loans increased $36,000 for the three months ended
September 30, 1998 compared to the same period in 1997. The Company has
emphasized growth in this area and has added originators to increase volume. The
increase in mortgage loan volume also accounted for the $20,000 increase in loan
servicing rights. The Company participates in an arrangement in which automobile
loans are originated on behalf of another organization. Agent fee income, which
represents the Company's earned fee from these transactions, decreased $52,000
for the three months ended September 30, 1998 compared to the same period last
year. This decrease was primarily due to an increase in factory financing
incentives offered by the auto makers, which compete directly for financing. The
Company believes that these incentives will decrease as it has in the past.
Servicing fees on loans sold decreased $25,000 due to a decrease in the number
of mortgage loans being serviced by the Company compared to the prior year.
Other income increased $89,000 over the three month ended September 30, 1997 due
to fees earned on a multifamily loan of $22,000 and income of $58,000 collected
on a paid-off multifamily transaction.
PROVISION FOR LOAN LOSSES
The Company makes 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. The
provision for loan losses was $75,000 for the three months ended September
30,1998 compared to $135,000 for the three months ended September 30, 1997. The
ratio of the allowance for loan losses to non-performing loans was 82.2% at
September 30, 1998 and 87.5% at September 30, 1997.
The decrease in the provision for loan losses in fiscal 1999 is the result of
the Company providing $4.5 million in the provision for loan losses last year.
During the fourth quarter of fiscal 1998, the OTS performed an examination of
the Bank and the Company. Despite similar loan classifications, the methodology
used by the OTS to compute the allowance for loan losses and to establish
reserves for letters of credit in connection with the Section 42 projects was
different than the one previously used by the Company to compute these
estimates. The methodology which was used by the OTS and accepted by management
considered only recent cash flows and then used those cash flows to determine
the level of debt service, given certain assumptions, the individual affordable
housing projects could support. This information was then used to determine
whether charge-offs of the loans, equity investments or general partner loans
were required and to compute specific reserves for the remainder of those
assets, as well as for the related letters of credit. A letter of credit
valuation allowance of $6.8 million was also recorded in fiscal 1998.
NON-INTEREST EXPENSE. Non-interest expense for the quarter ended September 30,
1998, was $1,841,000 compared to $1,649,000 for the same period in 1997, a
increase of $192,000, or 11.6%. The Company continues its efforts to control
costs.
14
<PAGE>
<TABLE>
<CAPTION>
NON-INTEREST EXPENSE
- -------------------
(IN THOUSANDS)
THREE MONTHS ENDED
SEPTEMBER 30, INCREASE
1998 1997 (DECREASE)
---- ---- ----------
<S> <C> <C> <C>
Salaries and employee benefits $ 887 $ 839 $ 48
Legal and professional 70 70 (0)
Occupancy expense 105 113 (8)
Equipment expense 78 88 (10)
Deposit insurance 34 15 19
Data processing expense 89 89 0
Advertising 51 51 (0)
Correspondent bank charges 40 40 (0)
Printing and supplies 26 23 3
Loss on investment 135 36 99
Telephone 17 18 (1)
Postage 24 16 8
Insurance & surety bond premium 22 29 (7)
Travel and lodging 13 14 (1)
Miscellaneous operating expense 56 3 53
Other operating expense 194 205 (11)
------ ------ ------
Total non-interest expense $1,841 $1,649 $192
====== ====== ====
</TABLE>
Salaries and employee benefits increased $48,000 for the three months ended
September 30, 1998, compared to the same period last year. Salaries increased
primarily due to an increase in incentives in the mortgage loan area as a result
of increased originations over the prior year and some staffing increases at the
Bank's subsidiaries. Occupancy and equipment expense decreased by $8,000
compared to the prior year as management continues to closely monitor expenses.
Deposit insurance increased $19,000 from the prior year, due to an increase in
the Savings Bank's risk classification over the prior year. The Company has
written down the investment in various developments by $135,000 compared to
$36,000 in the prior year. These writedowns are offset by tax credits received
for the investments in these developments. Miscellaneous operating expense
increased $53,000 as compared to the previous year due the expiration of a
$50,000 land option that was not exercised.
INCOME TAX EXPENSE. Income tax expense decreased $251,000 for the three months
ended September 30, 1998, compared to the same period in 1997, due to an
$120,000 accrual adjustment associated with the Company's Section 42 tax credits
receivable. This credit was offset by an additional write down on the Company's
Section 42 investments of $114,000, which is included in the above table under
the caption "Loss on investment".
YEAR 2000
The Company has completed an assessment of its computer systems and identified
those systems that it believes could be affected by the Year 2000 issue and has
developed an implementation plan to address the issue. The Company, in addition
to completing its assessment and plan, is in the early stages of testing its
internal mission critical hardware systems to determine if they are Year 2000
compliant. While the Company has exposure to several risks related to Year 2000,
the primary risk is the potential inability to correctly process and record
customer loan and deposit transactions.
The Company has not yet met certain of the requirements that have been
established for the banking industry by the Federal Financial Institution
Examination Council ("FFIEC"). Theses standards require that a series of
procedures be performed by financial institutions within established timeframes
to reduce the risk of noncompliance with the Year 2000 issue. Specifically, the
Company has developed but not yet completed a testing plan and a customer-based
risk management plan. While the Company believes that it ultimately will meet
all of the FFIEC requirements, it cannot guarantee that the systems of other
companies on which the Company's systems rely will be timely converted and not
have a material effect on the Company.
The Company is in the early stages of developing a contingency plan that would
take effect if its internal systems, or the systems of those material vendors on
which it is reliant on, would not be complaint with Year 2000 requirements.
The Company has accrued a total of $90,000 in Year 2000 related costs at
September 30, 1998, a portion of which have been paid. The amounts that have
been paid to date were to provide assistance to the Company with the initial
assessment and formulation of the plan to ensure compliance with year 2000 and
for some equipment to assist in the testing process. At September 30, 1998, the
Company has not completed its assessment of the expected total cost of
performing necessary procedures or purchasing equipment that is compliant with
Year 2000.
15
<PAGE>
The Company outsources a significant portion of its data processing to an
outside provider. A worst case scenario for the Company would likely involve
non-compliance with Year 2000 by its primary data processor in such a manner
that would leave the Company in a position where it could not correctly process
and record customer loan and deposit transactions.
The Company does not have, at September 30, 1998 any material commitments to
purchase new equipment, software or to incur material costs to modify its
existing system and does not believe that any material amounts of its existing
computer hardware or software is impaired. The Company has not fully assessed
the impact of Year 2000 on its commercial lending customers, but believes that
the impact, in terms of potential credit exposure, would not be material. The
majority of the Company's commercial lending portfolio consists of commercial
real estate loans that are made to companies that are not highly technologically
intensive.
The Company cannot provide any assurance that the effect of Year 2000 will not
be material to the Company's financial position or operating results.
FINANCIAL CONDITION
Total assets increased by $3.5 million from June 30, 1998, to approximately
$200.6 million at September 30, 1998. The increase is the result of the Company
increasing its liquidity position.
LOANS. The following table shows the composition of the Company's loan
portfolio as of September 30, 1998 and June 30, 1998.
<TABLE>
<CAPTION>
LOANS OUTSTANDING
- -----------------
(IN THOUSANDS)
SEPTEMBER 30, JUNE 30,
1998 1998
------------- ----------
<S> <C> <C>
Real estate mortgage loans
First mortgage loans
Conventional $ 64,600 $71,343
Construction 14,483 16,110
Commercial 19,908 20,753
Multifamily loans 6,783 5,742
First mortgage real estate loans purchased 2,589 2,704
Commercial loans - other than secured by real estate 9,353 11,568
Consumer and home equity loans 33,235 31,512
-------- --------
Total loans 150,951 159,732
======== ========
Total assets $200,592 $197,046
======== ========
Total loans to total assets 75.3% 81.1%
======== ========
</TABLE>
Total loans decreased by $8.8 million or 5.5% to $150.9 million at September 30,
1998, compared to June 30, 1998. The Savings Bank is continually offering new
and competitive first mortgage and multifamily loan products. The Company
continues to sell current production of 1-4 family loans in fiscal 1999,
recording the gain or loss and using the proceeds to fund new products. As a
result of historically low market interest rates, payoffs of conventional real
estate mortgage loans decreased the portfolio by $6.7 million from June 30, 1998
to September 30, 1998.
16
<PAGE>
Construction loans decreased by $1.6 million at September 30, 1998 from June 30,
1998 to $14.4 million at September 30, 1998. Construction loans at September 30,
1998 includes $11.5 million of multifamily loans.
Consumer and home equity loans increased $1.7 million since June 30, 1998 as the
Company has originated an increasing volume of automobile loans. The Company
participates in an arrangement in which the majority of these loans are
originated on behalf of another organization.
The Company's loan portfolio contains no loans to foreign governments, foreign
enterprises, foreign operations of domestic companies, hedge funds, or for
highly leveraged transactions.
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. When a loan reaches a ninety day
or more past due status, the asset is generally repossessed or sold, if
applicable, or the foreclosure process is started and the loan is moved to other
real estate owned to be sold. A loan could be placed in a nonaccrual status
sooner than ninety days, if management knows the customer has abandoned the
collateral and has no intention of paying. At this point, the loan would go into
non-accrual status and the Company would start the repossession or foreclosure
process. Typically, when a loan goes to nonaccrual status, the accrued interest
is reversed from income, unless strong evidence exists that the value of the
collateral would support the collection of interest in a foreclosure situation.
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.
<TABLE>
<CAPTION>
NON-PERFORMING LOANS
- --------------------
(IN THOUSANDS)
SEPTEMBER 30, JUNE 30,
1998 1998
------------- ----------
<S> <C> <C>
Nonaccrual loans
Multifamily $4,188 $461
Mortgage 158
------
Subtotal $4,346
Restructured
Consumer 74
90 days or more past due
Consumer 47 86
Commercial 352 26
------ ----
Subtotal 399 112
------ ----
Total $4,819 573
====== ====
Percent of total loans 3.19% 0.36%
====== ====
</TABLE>
Non-performing loans were 3.19% of total loans at September 30, 1998, as
compared to .11% of total loans at September 30, 1997 and consisted primarily of
one large multifamily loan. This loan was previously a classified letter of
credit, with a specific reserve of $895,000. This letter of credit was called
upon during the first quarter of fiscal 1999 and is currently classified as a
non accrual loan. The Company is in the foreclosure process on this loan at this
time. The remaining multifamily affordable housing loans, for which specific
reserves have been computed, are currently performing with respect to debt
service and are therefore not included in the above "non-performing loans"
totals. The ability of the permanent multifamily loans to remain performing is
in part due to general partner advances made by the Company to support cash flow
deficits encountered by the affordable housing projects. The majority of these
general partner advances were charged off in fiscal 1998. Classified assets of
the Company $55.0 million compared to $57.6 million at June 30, 1998. Classified
savings bank assets were 280.56% of savings bank capital and reserves at
September 30, 1998.
17
<PAGE>
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES AND LETTER OF CREDIT VALUATION ALLOWANCE
The Company establishes its provision for loan losses and evaluates the adequacy
of the allowance for loan losses based on management evaluation of its loan and
letter of credit portfolio and changes in loan and letter of credit activity.
Such evaluation, which includes a review of all loans and letters of credit for
which full collectibility may not be reasonably assured, considers among other
matters, the estimated fair value of the underlying collateral, economic
conditions, historical loss experience, the composition of the portfolios and
other factors that warrant recognition in providing for an adequate loan loss
allowance and letter of credit valuation allowance. This evaluation is performed
on a monthly basis and is designed to ensure that all relevant matters affecting
collectibility will consistently identified in a detailed review and that the
outcome of the review will be considered in a disciplined manner by management
in determining the necessary allowances and related provisions. The amounts
actually reported in each period will vary with the outcome of this detailed
review.
At September 30, 1998 the Company had impaired loans totaling $13.5 million. The
allowance for losses on such impaired loans totaled $1,897,000 and is included
in the Company's allowance for loan losses at September 30, 1998. Impaired loans
do not include large groups of homogeneous loans that are collectively evaluated
for impairment, such as, residential mortgage and consumer installment loans.
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 three months ended
September 30, 1998 and the year ended June 30, 1998:
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
- -------------------------
(IN THOUSANDS) SEPTEMBER 30, JUNE 30,
1998 1998
------------- --------
<S> <C> <C>
Allowance for loan losses
Balance at July 1, $3,049 $1,781
Loan charge-offs:
Real estate mortgage 15
Multifamily 3,089
Commercial 14
Consumer 64 195
------ ------
Total loan charge-offs 78 3,299
Loan recoveries:
Real estate mortgage 15
Consumer 4 24
------ ------
Total loan recoveries 19 24
Net charge-offs 59 3,275
Provision for loan losses 75 4,543
Transfer from letter of credit valuation allowance 895
------ ------
Allowance for loan losses
at end of period $3,960 $3,049
====== ======
Ratio of net charge-offs to
average loans outstanding
during the period 0.15% 1.18%
Ratio of provision for loan losses
to average loans outstanding
during the period 0.05% 2.52%
Ratio of allowance for loan
losses total loans outstanding
at end of period 2.62% 1.91%
Average amount of loans
outstanding for the period 155,603 180,530
Amount of loans
outstanding at end of period $150,951 $159,732
</TABLE>
The allowance for loan losses was $3.0 million at June 30, 1998 and $4.0 million
at September 30, 1998, and $1.9 million at September 30, 1997. Net loan
charge-offs were $59,000 or .15% of average loans for the three month ended
September 30, 1998 compared to $217,000 or .11% of average loans in September
1997. As discussed previously
18
<PAGE>
the Company increased the provision for loan losses during fiscal 1998 primarily
in connection with loans made to certain Section 42 tax-credit real estate
development projects that the Company is currently managing. The Company has
loans and letters of credit securing loans to these projects and also has other
loans and letters of credit outstanding that relate to other multifamily
developments, most of which are outside the Company's geographic market.
The Company has also recorded a letter of credit valuation allowance and related
provision of $6.8 million in fiscal 1998 and is currently $5.9 million at
September 30, 1998. The decrease is associated with the transfer of $895,000
from the letter of credit valuation allowance to the allowance for loan losses.
The $895,000 was a specific reserve for this letter of credit which was funded
by the Company, and is included in loans on the balance sheet during the first
quarter of fiscal 1999. The loan, as was the letter of credit, is considered a
classified asset. Multifamily letters of credit, an off-balance sheet item,
carry the same risk characteristics as conventional loans and totaled $48.2
million at September 30, 1998. Specific reserves for letters of credit totaled
14.05% of outstanding letters of credit at September 30, 1998. Classified loans
and letters of credit to total loans and letters of credit were 26.5% at
September 30, 1998 and .11% at September 30, 1997. The Company has paid on one
letter of credit ("LOC") totaling $6.7 million to third parties due to the
non-performance of the credit. The Company has classified this credit, net of
cash collateral as a nonaccrual loan as of September 30, 1998. Management is not
aware of any additional LOC's to be called. Management considers the allowance
for loan losses and letter of credit valuation reserve adequate to meet losses
inherent in the loan portfolio as of September 30, 1998.
INVESTMENT SECURITIES. The Savings Bank's investment policy is annually reviewed
by its Board of Directors and 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 September 30, 1998, the investment portfolio represented 4.7% of the
Company's assets compared to 5.0% at June 30, 1998, 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 funding needs,
cyclical and long-term changes in the mix of our assets and liabilities, and to
provide for diversification of risk and management of interest rate and economic
risk. At September 30, 1998, the entire investment portfolio was classified as
available for sale. The net unrealized gain at September 30, 1998 was $29,000,
which was comprised of gross gains of $11,000, gross losses of $59,000, and a
tax benefit of $19,000. The decrease of $12,000 from June 30, 1998 was caused by
market interest rate changes during the period. Although the entire portfolio is
available for sale, management has not identified individual investments for
sale in future periods.
The following table sets forth the components of the Savings Bank's securities
available for sale as of the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
------------- --------
(IN THOUSANDS)
<S> <C> <C>
Securities available for sale:
U.S. Treasury securities $1,001 $1,001
Federal agencies securities 3,003 2,985
Federal Home Loan Mortgage Corporation
mortgage-backed securities 1,651 1,779
Federal National Mortgage Association
mortgage-backed securities 1,825 1,945
Government National Mortgage Association
mortgage-backed securities 1,964 2,144
------ ------
Total securities available for sale $9,444 $9,854
====== ======
</TABLE>
19
<PAGE>
The Savings Bank's total investment securities portfolio decreased by $410,000
at September 30, 1998, from June 30, 1998. The Savings Bank receives payments of
principal and interest on its mortgage-backed securities on a monthly basis.
These certificates represent ownership of pools of one-to-four family mortgage
loans. As interest rates decline, principal of the underlying mortgage loans
typically is returned more quickly in the form of payoffs and refinancings.
FUNDING SOURCES
DEPOSITS. The Savings Bank 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 $11.6 million during the first three months of
fiscal 1999. Most of the decreases were due to certificates of deposit acquired
through agents, and retail certificates of deposit which decreased $7.5 million
and $3.8 million to $35.0 million and $81.9 million, respectively at September
30, 1998. Demand accounts and money market accounts decreased $268,000 and
$212,000, respectively. NOW accounts decreased $358,000, offset by an increase
in savings accounts of $496,000.
The following table sets forth the average balances of and the average rate paid
on deposits by deposit category for the three months ended September 30, 1998
and for the year ended June 30, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1998 JUNE 30, 1998
------------------ -------------
AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
------- ---- ------- ----
<S> <C>
(DOLLARS IN THOUSANDS)
Average Deposits
Demand $ 4,961 $ 5,229
Now accounts 21,853 3.97% 22,211 4.24%
Money market accounts 2,815 2.71 3,027 2.71
Savings accounts 5,309 2.52 4,813 2.83
Certificates of deposit 81,938 5.84 85,699 5.80
Agent-acquired certificates of deposit 34,954 6.02 42,443 6.26
-------- --------
Total $151,830 5.25% $163,422 5.38%
======== ========
</TABLE>
20
<PAGE>
FEDERAL HOME LOAN BANK ADVANCES AND OTHER LONG-TERM DEBT. The following table
summarizes the Company's borrowings as of September 30, 1998, and June 30, 1998.
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
------------- --------
(IN THOUSANDS)
<S> <C> <C>
Note payable, 7.43% adjusted annually, payable $16
per month, including interest, due April 1, 2009,
secured by specific multifamily mortgages $ 2,203 $ 2,210
Note payable, 8.75% adjusted annually, payable $8
per month, including interest, due September 14, 2010,
secured by specific multifamily mortgages 995 996
Note payable, 8.75% adjusted annually, payable $12
per month, including interest, due September 22, 2010,
secured by specific multifamily mortgages 1,526 1,529
Junior subordinated notes, 9 1/8%, interest paid
semi-annually, due April 30, 2001, unsecured 1,476 1,476
Junior subordinated notes, 9 1/4% interest paid
semi-annually, due January 31, 2002 unsecured 1,494 1,494
Senior subordinated notes, 10%, interest paid semi-
annually, due June 1, 2005, unsecured 7,000 7,000
Federal Home Loan Bank advances due at various dates
through 2002 14,192 14,783
------- -------
Total $28,886 $29,488
======= =======
</TABLE>
Borrowings decreased $602,000 to $28.9 million at September 30, 1998. Borrowings
have been reduced during fiscal 1998 primarily due to large payoffs received in
loans and the continued sales of current 1-4 family loan production. This allows
the Company to use the proceeds from the sale of loans to fund new loan
originations and ease the need for additional borrowings. The decrease is due
primarily to the maturity of FHLB advances. The Company, thus far, has been in a
position to allow the FHLB advance to mature and not replace it. Alternate
funding sources were provided by loan sales and payoffs, retail deposits, and
public funds. However, when prudent, the Company may utilize FHLB advances as an
option again.
CAPITAL RESOURCES AND CAPITAL REQUIREMENTS
The ratio of stockholders' equity to total assets for the Savings Bank, was
6.96% at September 30, 1998, compared to 6.31% at June 30, 1998, due primarily
to a reduction in the Savings Bank's asset size. The Company issued stock in
exchange for a general partnership interest in a Company-financed multifamily
housing development. This issuance of stock, along with a decrease in the
unrealized loss on available for sale investments, and net income for the
period, increased book value. The Company's book value per share at September
30, 1998 was $2.53, compared to $2.40 at June 30, 1998.
The OTS has adopted capital standards under which savings associations must
maintain (i) "core capital" in an amount not less than 3% of total 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 than those applicable to national banks.
Under OTS regulations "core capital" includes common stockholders' equity,
noncumulative perpetual preferred stock and related surplus, and minority
interests in the equity accounts of consolidated subsidiaries, less intangible
assets other than certain qualifying supervisory goodwill and certain purchased
mortgage servicing rights. In determining compliance with the capital standards,
a savings association must deduct from capital its entire investment in and
loans to any subsidiary engaged in activities not permissible for a national
bank, other than subsidiaries (i) engaged in such non-permissible activities
solely as agent for their customers; (ii) engaged in mortgage banking
activities; or (iii) that are themselves savings associations, or companies the
only investment of which is another insured depository institution, 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 amount 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
21
<PAGE>
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 capital 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 including the savings
association's interest-rate risk component. The amount of supplementary capital
that may be counted towards satisfaction of the total capital requirement may
not exceed 100% of core capital.
At September 30, 1998, actual and required minimum levels of regulatory capital
for the Savings Bank were as follows:
(Dollars in Thousands)
Required
Amount Percent Amount Percent Excess
-----------------------------------------------------------
Core $13,426 6.96% $5,787 3.0% $7,638
Tangible $13,426 6.96% $2,894 1.5% $10,532
Risk-based $20,372 12.31% $13,245 8.0% $7,128
Pursuant to HOLA of 1933, as amended, the OTS is required to issue capital
standards that are no less stringent than those applicable to national banks. In
April 1991, the OTS proposed to amend its capital regulations to reflect
amendments made by the OCC to the leverage ratio capital requirement for
national banks. The proposal would establish a core capital leverage ratio (core
capital to adjusted total assets) of 3% for savings associations rated composite
1 under the OTS MACRO rating system. For all other savings associations, the
minimum core capital leverage ratio would be 3% plus at least an additional 100
to 200 basis points. Under the proposal, the OTS may impose higher regulations
for individual savings associations. The OTS has not adopted this regulation in
final form. The prompt corrective action regulation adopted by the OTS provides
that a savings association that has a leverage capital ratio of less than 4%
will be considered "undercapitalized" and may be subject to certain
restrictions. At September 30, 1998 the Savings Bank had a core capital leverage
ratio (as defined in the proposal) of 6.96%.
The OTS adopted a final regulation adding an interest-rate risk component to its
risk-based capital rule. A savings association's interest-rate risk is generally
defined as the change that occurs to its net portfolio value as a result of a
hypothetical two hundred basis point increase or decrease in market interest
rates. A "normal level" of interest-rate risk is defined as any decline in net
portfolio value of up to 2% of the institution's assets. If the 2% threshold is
exceeded, a savings association will be required to deduct from its capital, for
purposes of determining whether the institution meets its risk-based capital
requirements, an amount equal to one-half of the difference between the measured
risk and 2% of assets.
Capital requirements higher than the generally applicable minimum requirement
may be established for a particular savings association if the OTS determines
that the institution's capital was or may become inadequate in view of its
particular circumstances. Individual minimum capital requirements may be
appropriate where the savings association is receiving special supervisory
attention, has a high degree of exposure to interest rate risk, or poses other
safety or soundness concerns.
The capital category assigned to an entity can also be affected by qualitative
judgments made by regulatory agencies about the risk inherent in the entity's
activities that are not part of the calculated ratios. At September 30, 1998 and
September 30, 1997, the Bank is categorized as well capitalized and met all
subject capital adequacy requirements at those dates; however, the Savings
Bank's primary regulatory agency, the OTS, notified the Savings Bank verbally in
August 1998 that its capital needs to be increased, primarily based on asset
quality concerns raised during its examination.
The Company plans to evaluate alternatives and pursue opportunities to raise
additional capital in 1999 with the purpose of improving its capital ratios.
22
<PAGE>
LIQUIDITY
Liquidity for a savings bank represents its ability to accommodate growth in
loan demand and/or reduction in deposits. The Savings Bank liquidity ratio was
23.75% on September 30, 1998, up from 6.70% on June 30, 1998. The liquidity
ratio has increased because of commercial lending restrictions and the payoffs
of commercial and conventional mortgage loans. Management believes that this
level of liquidity is appropriate while it attempts to reduce the risk profile
of the loan portfolio. Management believes that this level of liquidity is
sufficient to meet any anticipated requirements for the Bank's operations.
Federal regulations have historically required the Bank to maintain minimum
levels of liquid assets. The required percentage has varied from time to time
based on economic condition and savings flows, and is currently 4% of net
withdrawable savings deposits and borrowings payable on demand or in one year or
less during the preceding calendar month.
23
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS:
------------------
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 are a party of or which any of their
property is the subject.
ITEM 2 CHANGES IN SECURITIES:
----------------------
Not applicable.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES:
--------------------------------
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
----------------------------------------------------
On November 30, 1998 at 9:00 AM, at the Company's principal executive
offices at 18 N.W. Fourth Street, Evansville, Indiana, the Annual meeting
of Shareholders will be held in order to vote on two matters.
ITEM 5 OTHER INFORMATION:
------------------
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K:
---------------------------------
a. The following exhibit is submitted herewith:
27 Financial Data Schedule
b. Reports on Form 8-K
No reports were filed
24
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
FIDELITY FEDERAL BANCORP
Date: NOVEMBER 12, 1998 By: /s/ M. BRIAN DAVIS
---------------------------- ---------------------
M. Brian Davis
President and CEO
By: /s/ DONALD R. NEEL
---------------------
Donald R. Neel,
Executive Vice President,
CFO and Treasurer
(Principal Financial Officer)
25
<PAGE>
Exhibit Index
Reg. S-K
Exhibit No. Description of Exhibit Page
- -------------------------------------------------------------------------
27 Financial Data Schedule 22
26
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FIDELITY FEDERAL BANCORP CONSOLIDATED BALANCE SHEET AS OF
SEPTEMBER 30, 1998 AND THE CONSOLIDATED INCOME STATEMENT FOR THE THREE
MONTHS ENDED SEPTEMBER 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,631
<INT-BEARING-DEPOSITS> 20,415
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,444
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 150,951
<ALLOWANCE> 3,065
<TOTAL-ASSETS> 200,592
<DEPOSITS> 154,134
<SHORT-TERM> 106
<LIABILITIES-OTHER> 9,512
<LONG-TERM> 28,886
0
0
<COMMON> 3,148
<OTHER-SE> 4,806
<TOTAL-LIABILITIES-AND-EQUITY> 200,592
<INTEREST-LOAN> 3,481
<INTEREST-INVEST> 141
<INTEREST-OTHER> 261
<INTEREST-TOTAL> 3,883
<INTEREST-DEPOSIT> 2,009
<INTEREST-EXPENSE> 609
<INTEREST-INCOME-NET> 1,265
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,841
<INCOME-PRETAX> 244
<INCOME-PRE-EXTRAORDINARY> 244
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 336
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
<YIELD-ACTUAL> 2.76
<LOANS-NON> 4,346
<LOANS-PAST> 399
<LOANS-TROUBLED> 74
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,049
<CHARGE-OFFS> 78
<RECOVERIES> 19
<ALLOWANCE-CLOSE> 3,065
<ALLOWANCE-DOMESTIC> 2,115
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 950
</TABLE>
