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 March 31, 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 April 12, 1998, there were 3,127,210 shares of the Registrant's common
stock, $1 stated value, issued and outstanding.
Exhibit Index is on page 23.
<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 ............................................ 10
Financial Condition............................................... 14
Capital Resources and Capital Requirements........................ 18
Liquidity......................................................... 20
PART II - OTHER INFORMATION............................................. 21
SIGNATURES.............................................................. 22
EXHIBIT INDEX........................................................... 23
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>
MARCH 31, JUNE 30,
1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,509 $ 1,746
Short-term interest-bearing deposits 5,891 1,759
-------- --------
Total cash and cash equivalents 7,400 3,505
Interest-bearing deposits 6 6
Securities available for sale 10,472 13,790
Loans 166,249 204,964
Allowance for loan losses (4,611) (1,781)
-------- ---------
Net loans 161,638 203,183
Premises and equipment 6,133 6,340
Federal Home Loan Bank of Indianapolis stock, at cost 3,920 3,920
Other assets 7,867 9,257
-------- --------
Total assets $197,436 240,001
======== ========
LIABILITIES
Deposits
Non-interest bearing $ 7,799 $ 4,714
Interest-bearing 138,873 177,073
-------- --------
Total deposits 146,672 181,787
Short-term Borrowings 2,447 5,191
Federal Home Loan Bank advances and other long-term debt 33,346 38,089
Advances by borrowers for taxes and insurance 695 674
Other liabilities 891 1,324
-------- --------
Total liabilities 184,051 227,065
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 - 3,127,210 and 2,487,385 shares 3,127 2,487
Capital surplus 10,799 8,708
Stock warrants 11 264
Retained earnings, substantially restricted (523) 1,508
Net unrealized losses on securities available for sale (29) (31)
-------- --------
Total stockholders' equity 13,385 12,936
-------- --------
Total liabilities and stockholders' equity $197,436 $240,001
======== ========
</TABLE>
See notes to consolidated financial statements.
NOTE: The consolidated balance sheet at June 30, 1997 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
------------------------ -----------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $3,679 $4,509 $12,287 $13,996
Securities available for sale 145 269 520 834
Federal funds sold 5 52 75 70
Interest-bearing deposits 86 30 213 93
Other interest and dividend income 79 75 239 231
------- ------ ------- -------
Total interest income 3,994 4,935 13,334 15,224
------- ------ -------
INTEREST EXPENSE
Deposits 2,024 2,489 6,909 7,545
Federal Home Loan Bank advances 302 483 983 1,680
Federal funds purchased 49
Other interest expense 375 428 1,150 1,210
------- ------ ------- -------
Total interest expense 2,701 3,400 9,042 10,484
------- ------ -------
NET INTEREST INCOME 1,293 1,535 4,292 4,740
Provision for loan losses 2,867 60 3,092 915
------- ------ ------- -------
Net interest income after provision for loan losses (1,574) 1,475 1,200 3,825
------- ------ ------- -------
NON-INTEREST INCOME
Fee income-real estate development and management 83 90 265 262
Service charges on deposit accounts 79 79 320 225
Gain on sale of
Real estate loans 8 19 42 81
Investments 5 79
Letter of credit fees 152 185 529 509
Agent fees 126 111 510 291
Real estate mortgage banking fees 535 999
Loan participation fees 197
Other income 137 190 472 687
------- ------ ------- -------
Total non-interest income 590 1,209 2,414 3,054
------- ------ ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 842 1,145 2,569 3,415
Net occupancy expense 120 103 342 335
Equipment expense 87 97 264 277
Data processing expense 125 77 314 230
Deposit insurance expense 42 18 102 1,276
Legal and professional fees 96 70 227 254
Advertising 56 50 158 177
Other expense 1,012 403 1,751 1,436
------- ------ ------- -------
Total non-interest expense 2,380 1,963 5,727 7,400
------ ------- -------
INCOME BEFORE INCOME TAX (3,364) 721 (2,113) (521)
Income tax expense (1,354) 192 (1,020) (321)
------- ------ ------- -------
NET INCOME $(2,010) $ 529 $(1,093) $(200)
======= ====== ======= =======
PER SHARE:
Basic net income $ (0.64) $ 0.21 $ (0.38) $(0.08)
Diluted net income (0.64) 0.20 (0.37) (0.08)
AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING 3,161,921 2,630,667 2,975,319 2,686,040
</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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
----------------------- -------------------
<C> <C> <C> <C> <C>
BEGINNING BALANCES $15,702 $12,605 $12,936 $14,295
Net income (2,010) 529 (1,093) (200)
Net change in unrealized gain (loss) on securities
available for sale 12 (27) 2 80
Cash dividends (314) (249) (938) (1,246)
Purchase of treasury stock (5) (15) (101)
Exercise of stock warrants 5 2,493 33
Exercise of stock options 2 4
------- ------- ------- -------
BALANCES, MARCH 31 $13,385 $12,865 $13,385 $12,865
======= ======= ======= =======
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE>
FIDELITY FEDERAL BANCORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
1998 1997
----------------------------
<S> <C> <C>
Operating Activities
Net income $ (1,093) $ (200)
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 3,092 915
Investment securities gains (79)
Loss on sale of premises and equipment 14 7
Gain on sale of premises and equipment (2)
Depreciation 338 305
Investment securities amortization (accretion), net (11) 5
Amortization of net loan origination fees and points (34) (5)
Changes in:
Interest receivable and other assets 1,388 (395)
Interest payable and other liabilities (468) (582)
-------- -------
Net cash provided by operating activities 3,147 48
-------- -------
Investing Activities
Purchases of investment securities available for sale (1,906) (2,015)
Proceeds from maturities of investment securities available for sale 1,909 2,821
Proceeds from sale of investment securities available for sale 3,379
Net changes in loans 38,487 6,674
Purchases of premises and equipment (145) (1,133)
-------- -------
Net cash provided by investing activities 41,724 6,347
-------- -------
Financing Activities
Net change in:
Noninterest-bearing, NOW, savings and money
market deposits (35,077) 449
Certificates of deposit (38) 3,652
Proceeds from short-term borrowings 3,038 8,327
Repayment of short-term borrowings (5,815) (7,556)
Proceeds from FHLB advances and other long-term borrowings 7,600
Repayment of FHLB advances other long-term borrowings (4,710) (22,469)
Net change in advances by borrowers for taxes and insurance 21 290
Purchase of common stock (15) (102)
Cash dividends (873) (1,496)
Proceeds from exercise of stock warrants 2,493 4
Proceeds from exercise of stock options 33
-------- -------
Net cash used by financing activities (40,976) (11,268)
-------- -------
Change in Cash and Cash Equivalents 3,895 (4,873)
Cash and Cash Equivalents, beginning of year 3,505 10,213
-------- -------
Cash and Cash Equivalents, end of year $7,400 $5,340
======== =======
Additional Cash Flows and Supplementary information
Cash paid for income taxes, net of refunds $ 625 $ 590
Cash paid for interest 8,403 9,720
</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 nine months ended March 31, 1998
are not necessarily indicative of those expected for the remainder of the year.
- - NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128 "Earnings Per Share." This statement simplifies the computation of earnings
per share and requires dual presentation of basic and diluted earnings per share
on the face of the income statement. This statement is effective for financial
statements issued for periods ending after December 15, 1997, with earlier
application not permitted. Basic and diluted earnings per share have been
computed based on the weighted average common and common equivalent shares
outstanding during the periods. Common stock options and warrants are considered
to be common equivalent shares to the extent they are dilutive. The Company
adopted FAS 128 for the period ending December 31, 1997. All prior periods
earnings per share have been restated for FAS 128.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE NINE MONTHS
ENDED 3/31/98 ENDED 3/31/97
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) (AMOUNT) (NUMERATOR) (DENOMINATOR) (AMOUNT)
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to
common stockholders $(1,092,771) 2,899,348 $(0.38) $(200,259) 2,491,971 $(0.08)
EFFECT OF DILUTIVE SECURITIES
Options 26,131 30,449
Warrants 49,840 163,620
DILUTED EPS
Income available to common
stockholders plus assumed ----------- --------- --------- ---------
conversions $(1,092,771) 2,975,319 $(0.37) $(200,259) 2,686,040 $(0.08)
=========== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED 3/31/98 ENDED 3/31/97
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) (AMOUNT) (NUMERATOR) (DENOMINATOR) (AMOUNT)
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to
common stockholders $(2,009,432) 3,127,240 $(0.64) $528,991 2,489,263 $0.21
EFFECT OF DILUTIVE SECURITIES
Options 27,730 24,509
Warrants 6,950 116,892
DILUTED EPS
Income available to common
stockholders plus assumed ----------- --------- --------- ---------
conversions $(2,009,432) 3,161,920 $(0.64) $528,991 2,630,664 $0.20
=========== ========= ========= =========
</TABLE>
Options to purchase 102,275 shares of common stock at an average price of $10.74
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.
Options to purchase 48,510 shares of common stock at an average price of $10.91
were outstanding during fiscal 1997, 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.
7
<PAGE>
- - 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 at 5:00 pm,
Central Standard Time, on October 31, 1997. The Board of Directors of the
Company had 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 Company raised approximately
$2.5 million in additional capital.
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 March 31, 1998, a total of
210,441 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 March 31, 1998, a total of
186,144 of the shares originally reserved had been issued and 18,282 remained
reserved and unissued.
- - CASH DIVIDEND
On February 18, 1998, the Board of Directors declared a dividend of
$0.10 per share payable on April 6, 1998 to stockholders of record on March
2, 1998.
- - COMPANY SUBSIDIARIES
United Fidelity Bank, fsb ("Savings Bank"), 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 and Village Affordable Housing Corporation was
formed during the third quarter 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, and
Village Capital Corporation (the "Affordable Housing Group") are involved in
various aspects of financing, owning, developing, building, renting and
managing affordable housing projects. The Company has found that it may be
advantageous for the Affordable Housing Group to finance, develop, build,
rent and manage many types of housing, including IRS Section 42 housing,
condominiums, market-rate multifamily housing, and others. 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 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 remain fully
operational.
- - NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting
and display of comprehensive income and its components. In addition, the
Financial Accounting Standards Board has issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes standards for disclosing information about operating segments in
interim and annual financial statements. The statement is effective for
fiscal years beginning after December 15, 1997. The Company will comply with
the new disclosure requirements beginning in fiscal 1999. The application of
the new rules will not have a material impact on the Company's financial
condition or results of operations.
- - SEGMENT INFORMATION
The Company operates principally in two industries, banking and real estate
development and management. The Savings Bank offers traditional banking
products, such as checking, savings, and certificates of deposit, as well as
mortgage,
8
<PAGE>
consumer, and commercial loans. Through the Affordable Housing Group, the
Company is involved in various aspects of financing, owning, 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.
Presented below is condensed financial information relating to the Company's
business segments:
<TABLE>
<CAPTION>
(IN THOUSANDS) THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
-------------------------- ---------------------
<S> <C> <C> <C> <C>
REVENUE:
Banking $ 4,391 $ 5,518 $ 15,141 $17,018
Real estate development and management 193 626 607 1,260
---------- --------- -------- -------
Total consolidated $ 4,584 $ 6,144 $ 15,748 $18,278
========== ========= ======== =======
OPERATING PROFIT:
Banking $ (1,147) $ 631 (167) 296
Real estate development and management (863) (102) (926) (496)
---------- --------- -------- --------
Total consolidated $ (2,010) $ 529 $ (1,093) $ (200)
========== ========= ======== ========
IDENTIFIABLE ASSETS:
Banking $ 186,359 $ 236,833 $186,359 $236,833
Real estate development and management 11,077 13,452 11,077 13,452
---------- --------- -------- --------
Total consolidated $ 197,436 $ 250,285 $197,436 $250,285
========== ========= ======== ========
DEPRECIATION AND AMORTIZATION:
Banking $ 95 $ 97 $ 323 $ 256
Real estate development and management 5 18 15 49
---------- --------- -------- --------
Total consolidated $ 100 $ 115 $ 338 $ 305
========== ========= ======== ========
CAPITAL EXPENDITURES:
Banking $ 28 $ 114 $ 142 $ 1,064
Real estate development and management 1 8 3 69
---------- --------- --------- ---------
Total consolidated $ 29 $ 122 $ 145 $1,133
========== ========= ========= =========
</TABLE>
9
<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 loss for the three months ended March 31, 1998 was $2,010,000,
compared to a net income of $529,000 for the same period last year. Basic and
diluted net loss per share was $(0.64) per share for the three months ended
March 31, 1998, compared to net income per share of $0.21 and $0.20 per share,
respectively in 1997. Net loss for the nine months ended was $1,093,000
compared to a net loss of $200,000 for the same period last year. Basic and
diluted net loss per share for the nine months ended March 31, 1998 was
$(0.38) and $(0.37) per share compared to a net loss per share of $(0.08) for
the same period last year. Last year's net loss was impacted by the federal
legislation resolving the FDIC insurance funding issue signed by President
Clinton in September, 1996, requiring thrifts to pay a one-time assessment of
approximately $.66 per $100 of deposits within 60 days of September 30, 1996.
As a result, the Company recorded a charge of $1.0 million during the first
quarter of fiscal 1997. The legislation provisions include a reduction of the
ongoing insurance premiums thrifts pay from $.23 - $.31 per $100 of deposits
to approximately $.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, set aside $850,000 in loan loss allowances during the first quarter
of fiscal 1997. The current quarter's net loss was the result of additional
provisions and other charges associated primarily with loans and receivables
generated under the Company's IRS Sec. 42 tax-credit affordable housing
development program (AHD). This activity was conducted in the Company's
Indianapolis office that was eliminated in December 1996. The Company has not
operated in this line of business for approximately three years. Payments on
the loans that have been additionally provided for are current. However, based
on their current performance at lower than original projection, management
believed additional reserves were warranted. The Company provided an
additional $2.8 million for the allowance and incurred $753,000 in additional
charges related primarily to the tax credit program (see Analysis of allowance
for loan losses).
The Company announced on January 21, 1997 an expense reduction plan calling
for approximately $1 million in after tax savings. The plan calls for the
Company to work towards achieving optimum efficiency within its banking and
real estate management, development, and financing units by eliminating
duplicative and less profitable activities. The Company's long term plan
originally called for rapid internal asset growth to a target of $500 million
in assets. Management mobilized for the ambitious goal by appropriately
staffing the Company to meet the increased demands of a larger organization.
Recently, management determined that a more conservative growth plan would
allow the Company to grow profitably without straining its capital resources.
As such, it was determined that some infrastructure that had been developed
would not be required in the short run. On April 25, 1997 the Company
announced the completion of the cost reduction program. The Company completed
the cost reduction program ahead of schedule and non interest expense has
decreased approximately $1.1 million for the nine months ended March 31, 1998
compared to the same period last year, excluding the $437,000 in charges for
the current quarter.
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 March 31, 1998, was $1.3
million compared to $1.5 million for the three month period ending March 31,
1997, a decrease of $200,000. A decrease of $11.2 million in loans outstanding
and $8.0 million in federal funds sold during the third quarter was the
primary reason for the decline. Net interest income for the nine months ended
March 31, 1998 was $4.3 million compare to $4.7 million a year ago, a decrease
of $400,000. This is primarily due to a decrease in year-to-date average
earning assets of $31.8 million to $208.9 million at March 31, 1998. The
Company's asset total has de-
10
<PAGE>
creased $52.8 million since March 31, 1997 to $197.4 million at March 31,
1998, due primarily to payoffs received on multifamily and single-family
mortgage loans.
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 Company's annualized net interest margin for the quarter
increased from 2.64% at March 31, 1997, to 2.72% at March 31, 1998. The
increase in the margin was caused in part by allowing agent acquired funds,
which typically carry a higher cost to the Company, to mature or rollover at
the prevailing rate, having a favorable impact on the margin. The impact was
offset by a decrease in multifamily construction and commercial real estate
loans, which typically bear yields that are significantly higher than
traditional single family loans. The Company has several large multifamily
loans in its portfolio. When these loans pay off from time to time, the impact
on the Company's asset size and margin can be significant. In the Company's
current fiscal year, approximately $18.9 million in these loans paid off.
However, the average yield on all interest earning assets increased seven
basis points to 8.50% at March 31, 1998, compared to 8.43% at March 31, 1997.
The average yield on interest bearing liabilities decreased three basis points
to 5.76 compared to the same period last year.
An ongoing objective of the Company's asset/liability management policy is to
match rate-adjustable assets and liabilities at similar maturity horizons to
minimize wide fluctuations in net interest income. Management utilizes the
Office of Thrift Supervision Net Portfolio Valve ("NPV") model. This model
analyzes the NPV and changes in the NPV under several different interest rate
scenarios (shocks). The NPV model utilizes several measures of interest rate
risk (IRR): the IRR Exposure Measure, the Interest Rate Sensitivity Measuring
the Base-Case Net Present Value Capital Ratio and the Percentage Change in
NPV. Results of the December 31, 1997 NPV model indicate that the Company's
rate sensitivity measure based on a 200 basis points rate shock was 97 basis
points at December 31, 1997, which ranks it among the least sensitive to
interest rate changes in the thrift industry. The Company utilizes the OTS
simulation model to measure and evaluate the impact of changing interest rates
on net interest income. The simulation model involves changes in interest rate
relationships, asset and liability mixes, prepayments and directional changes
in the prevailing interests rates. An institution's NPV is equal to the
estimated percent value of assets minus the present value of liabilities plus
the net present value of off-balance sheet contracts. The table below
illustrates the projected change in the Company's NPV if all market rates were
to uniformly and gradually increase or decrease by as much as 2.00%, compared
to the results of a flat rate environment. These projections are based upon
the Company's Savings Bank balance sheet at December 31, 1997.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
INCREASE (DECREASE)
-------------------------------------------
<S> <C> <C> <C> <C>
Change in interest rates from current level (2.00%) (1.00%) 1.00% 2.00%
Change in NPV (1,794) (396) (217) (982)
Percent change (-11%) (-2%) (-1%) (-6%)
</TABLE>
The table indicates that if rates were to gradually increase or decrease by
2.00%, the Company's NPV would be expected to decrease by 6% or 11%,
respectively, compared to a flat rate environment.
Assuming a 200 basis point rate shock to the Net portfolio value (NPV)
<TABLE>
<CAPTION>
12/31/97 9/30/97 6/30/97
-------- ------- -------
<S> <C> <C> <C>
Pre-shock NPV Ratio: NPV as a percent of PV of assets 7.92% 7.34% 7.62%
Exposure Measure: Post-shock NPV Ratio 6.54 6.95 6.99
Sensitivity Measure: Change in NPV Ratio .97bp .80bp .63bp
</TABLE>
The 97 basis point change in the NPV ratio ranks the Company in the 70th-80th
percentile in sensitivity among the thrift industry from a sensitivity
measure. The lower the sensitivity measure, the less the Company has interest
rate exposure.
Interest income for the quarter ended March 31, 1998, was $4.0 million
compared to $4.9 million for the quarter ended March 31, 1997, a decrease of
$900,000. These decreases are primarily due to a decrease in earning assets
compared to the prior year. Interest expense for the quarter ended March 31,
1998, decreased $699,000 over the corresponding period in 1997. This is the
result of paying off FHLB advances and allowing agent acquired funds mature or
rollover at the prevailing rate. The Company is continuing to monitor the net
interest margin which continues to be an area of increased concentration this
year.
11
<PAGE>
NON-INTEREST INCOME. Non-interest income for the quarter ended March 31,
1998, was $590,000 compared to $1.2 million for the same period in 1997, an
decrease of $610,000.
<TABLE>
<CAPTION>
NON-INTEREST INCOME
- ----------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
NINE MONTHS ENDED
MARCH 31, INCREASE
1998 1997 (DECREASE)
------ ------ ----------
<S> <C> <C> <C>
Net income from real estate development and management $ 265 $ 683 $ (418)
Letter of credit fees 529 509 20
Service charges on deposit accounts 320 225 95
Gain on sale of loans 42 81 (39)
Gain on sale of investments 79 79
Loan servicing rights net of amortization 31 65 (34)
Real estate mortgage banking fees 578 (578)
Agent fee income 510 291 219
Loan participation fees 197 197
Servicing fees on loans sold 77 134 (57)
Other loan fees 53 97 (44)
Other 311 391 (80)
------ ------ -------
Total non-interest income $2,414 $3,054 $ (640)
====== ====== =======
</TABLE>
Non-interest income for the nine months ended March 31, 1998, decreased by
$640,000 as compared to the nine months ended March 31, 1997. The Company's
fee income from real estate development and management decreased from $683,000
last year to $265,000 for the first nine months of fiscal 1998. The $418,000
decrease is primarily due to a decrease of $295,000 in consulting fees,
$37,000 in management fees, $45,000 in development and builder fees.
Consulting fees are earned for packaging multifamily deals for nonaffiliated
borrowers. These fees, which are transaction-based, are volatile in nature.
There is no assurance that individual transactions, once initiated, will be
completed. While the Company may continue to participate in development
activities, it has shifted its primary focus to financing multifamily real
estate for non-affiliated borrowers. The Company has not exited the
development industry, but has significantly reduced its activities. The
Company intends to remain active in financing multifamily transactions. The
Affordable Housing Group has encountered increased competition in the
financing and development of multifamily housing. The AHD program has been
used in the past by the Company to develop affordable housing for individuals
with low to moderate incomes. The Company has provided financing for other
developers which began utilizing the program, due to increased competition in
this area. As a result, the Company has noted a significant reduction in the
amount of fees it has been able to collect on individual transactions. The
Company recognized $578,000 in real estate mortgage banking fees for fiscal
1997 compared to none in the current year. As mentioned above, the increase in
competition plus a decrease in multifamily transactions has reduced fee
income. The Company did recognize $529,000 in multifamily loan letter of
credit fees compared to $509,000 in fiscal 1997.
Service charges on deposit accounts increased $95,000 over the prior fiscal
year due to the continued growth in the deposit base. Agent fee income
increased $219,000 over March 31, 1997, as a result of the Company's
origination of auto loans as agent for another financial institution. Net gain
on sale of loans decreased $39,000 as the volume of loans has decreased. This
was offset by $79,000 in securities gains compared to zero last year. Loan
servicing rights also decreased $34,000 from prior year due to a decrease in
the volume of loans. The Company arranged a participation for a large
multifamily loan customer and collected $197,000 in loan participation fees.
The Company sold approximately $48 million in loan servicing rights last year,
as a result, servicing fees on loan sold decreased $57,000 from the prior
year. Other loan fees decreased $44,000 from the prior year due to large
prepayment penalties fees on multifamily loans in the prior year. Other income
decreased $80,000 from the prior year due to a recovery of $48,000 on a
lawsuit settlement in the prior year and a $20,000 decrease in lease-up fee
income associated with the affordable housing segment.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the current
quarter increased $2.8 million compared to the quarter ended March 31, 1997.
The provision for loan losses for the nine months ended was $3.1 million
compared to $915,000 in the prior year, an increase of $2.2 million. The
Company changed its philosophy with respect to computing its allowance for
loan losses with respect to loans generated under the AHD program. The Company
estimated cash flows of the AHD properties using certain assumptions with
respect to rents, occupancy levels, and expenses. Shortfalls in cash flows
based on current debt levels were computed for allowance purposes. The result
was an additional provision despite the fact that the loans that have been
additionally provided for are current with respect to principal and interest.
However, based on their current performance at lower than original
projections, management felt additional reserves were warranted based on
allowance calculations.
12
<PAGE>
NON-INTEREST EXPENSE. Non-interest expense for the quarter ended March 31,
1998 was $2.4 million compared to $2.0 million for the same period in 1997, an
increase of $400,000.
<TABLE>
<CAPTION>
NON-INTEREST EXPENSE
- --------------------------------------------------------------------------------------
(IN THOUSANDS)
NINE MONTHS ENDED
MARCH 31, INCREASE
1998 1997 (DECREASE)
------ ------ ----------
<S> <C> <C> <C>
Salaries and employee benefits $2,569 $3,415 $ (846)
Legal and professional 227 254 (27)
Occupancy expense 342 335 7
Equipment expense 264 277 (13)
Deposit insurance 102 1,276 (1,174)
Data processing expense 314 230 84
Advertising 158 177 (19)
Miscellaneous losses 100 14 86
Non-operating charges 437 437
Printing and supplies 89 144 (55)
Travel and lodging 34 40 (6)
Telephone 56 86 (30)
Postage 56 79 (23)
Abandoned projects 41 177 (136)
Loss on investment 68 130 (62)
Other operating expense 870 766 104
------ ------ --------
Total non-interest expense $5,727 $7,400 $(1,673)
====== ====== ========
</TABLE>
Salaries and employee benefits decreased $846,000 for the nine months ended
March 31, 1998, compared to the same period last year. The Company completed a
cost reduction in the fourth quarter of fiscal 1997, resulting in a
significant reduction in staff. The Company should realize the full impact of
the cost reduction during fiscal 1998. Legal and professional fees decreased
$27,000 from the prior year due to the legal costs associated with the
affordable housing segment, which has decreased from the prior year. Occupancy
expense increased $7,000 over the prior year due to the Company realizing the
full years impact of depreciation expense for the new Eastside location.
Equipment expense decreased by $13,000 compared to the prior year as
management continues to closely monitor these expenses. Deposit insurance
decreased $1.2 million from the prior year, due primarily to the one-time
special SAIF assessment imposed on thrifts in September 1996. Data processing
expense increased $84,000 due primarily to the increase in the Company's
retail deposit base and increased volumes in other areas and an additional
$30,000 accrued for Year 2000 compliance. Advertising expense decreased
$19,000 from the prior year primarily due to a decrease in media spending this
year. Printing and supplies decreased $55,000 from the prior year due to the
cost reduction program and increased cost control measures. Travel and lodging
decreased $6,000 from prior year due to the decreased activities in the
Company's affordable housing segment. Telephone and postage decreased $30,000
and $23,000, respectively, also a result of fewer employees. The Company's
housing subsidiaries continue to search for new sites to develop and/or
finance, but sometimes expenses are incurred on potential sites that do not
materialize and are expensed as abandoned projects. The Company has written
down the investment in various developments by $68,000 compared to $130,000 in
the prior year. These writedowns are offset by tax credits received for the
investments in these developments. Some additional non-operating charges for
the current quarter included investment banking fees and partnership
management fees receivable of $106,000 and $122,000, respectively. Abandoned
projects expense was $177,000 in the previous year compared to $41,000 in the
current year. Letter of credit fees and development fees of $104,000 and
$39,000 respectively, accrued on affordable housing deals were written off as
collection became doubtful. These non-operating charges were all generated
under the Company's IRS Sec. 42 tax-credit real estate development program.
Miscellaneous losses were $100,000 for the nine months ended compared to
$14,000 for the same period last year, primarily due to the discovery of an
$80,000 kiting scheme. The Company is using all means available to recover the
loss, but there can be no assurance as to the ultimate collectibility of the
funds. Also, title fees and NOW account receivables totaling $8,000 and
$15,000, respectively, were charged off in the third quarter of fiscal 1998. A
deferred premium of $16,000 on a mortgage loan sale several years ago was
deemed worthless and written off. Various items accounted for the remaining
dollars written off. Other operating expense increased by $104,000 due to a
$12,000 increase in Visa credit transaction charges, a $17,000 increase in
indirect consumer credit reports as a results of increased volume over last
year. Also, a $21,000 increase in correspondent bank charges and a $50,000
increase in miscellaneous operating expense over last year accounted for a
portion of these increases.
13
<PAGE>
INCOME TAX EXPENSE. Income tax expense decreased $699,000 for the nine months
ended March 31, 1998, compared to the same period in 1997, due to the larger
taxable net loss in the current year compared to the previous year's taxable
net loss. The income tax credit associated with the taxable net loss was
reduced by a $60,000 accrual adjustment made in the third quarter.
YEAR 2000. The Year 2000 Issue is the result of computer programs being
written using two digits rather then four to define the applicable year. Any
of the Company's computer program that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operation, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company recently completed an assessment to determine what will be
required to modify or replace software so the computer systems will properly
utilize dates beyond December 31, 1999. The Company has recognized $30,000 in
expenses during fiscal 1998 for Year 2000 compliance. The Company will
continue with the Year 2000 compliance work and will report the full potential
impact of future operating results as soon as a reasonable basis has been
reached for a conclusion. However, if such modifications and conversions are
not made, or not completed timely, the Year 2000 Issue could have a material
impact on the operations of the Company.
The Company has initiated formal communications with all of the significant
vendors and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. There can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company.
- - FINANCIAL CONDITION
Total assets decreased by $42.6 million from June 30, 1997, to approximately
$197.4 million at March 31, 1998. The decrease is primarily the result of
payoffs received on certain multifamily loans. The Company continues to sell
current production of fixed 1-4 family mortgages, and also pass through
consumer loans to another institution that meet certain criteria, and receive
payments and payoffs in the normal course of business.
LOANS. The following table shows the composition of the Company's loan
portfolio as of March 31, 1998 and June 30, 1997.
<TABLE>
<CAPTION>
LOANS OUTSTANDING
- ----------------------------------------------------------------------------------------------
(IN THOUSANDS)
MARCH 31, JUNE 30,
1998 1997
--------- ---------
<S> <C> <C>
Real estate mortgage loans
First mortgage loans
Conventional $ 76,693 $ 94,293
Construction 17,220 32,577
Commercial 21,180 26,668
Multifamily loans 8,336 9,602
First mortgage real estate loans purchased 2,873 3,184
Commercial loans - other than secured by real estate 10,234 12,522
Consumer and home equity loans 29,713 26,118
--------- ---------
Total loans 166,249 204,964
========= =========
Total assets $197,436 $240,001
========= =========
Total loans to total assets 84.2% 85.4%
========= =========
</TABLE>
Total loans decreased by $38.7 million or 18.9% to $166.2 million at March 31,
1998, compared to June 30, 1997. The largest component of the decrease is
conventional 1-4 family loans. The second largest component of the decrease is
in the construction real estate area, which was primarily three multifamily
construction loans. The Company continues to sell new single family loan
production, recognize the gain or loss on the sale, and use the proceeds to
fund more single family loan production. As a result the Company's single
family loans continue to shrink due to payoffs and refinancing. The Company's
construction loan category, which includes approximately $15.3 million in
commercial and multi-family loans and $1.9 million in 1-4 family real estate
loans, has decreased since June 30, 1997, due to several large payoffs on
multifamily and commercial real estate loans, which could neg-
14
<PAGE>
atively impact the interest rate margin if the decrease becomes a trend.
Commercial real estate loans and multifamily loans also decreased $5.5 million
and $1.3 million, respectively, due to paydowns and payoffs. Consumer and home
equity loans increased $3.6 million due to the Company's retention of a
portion of indirect automobile loan originations.
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. Non-accrual 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. When a loan reaches a 90 day or more past due status,
the asset is repossessed and sold, if applicable, or the foreclosure process
is started and the loan is moved to other real estate owned to be sold.
Typically a loan never reaches the impaired status because it is moved to an
"other asset" category and disposed of. A loan could be placed in a nonaccrual
status sooner than 90 days, if management knows the customer has abandoned the
collateral and has no intention of paying. At this point the loan would go to
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 out of income, unless strong evidence exists that the
value of the collateral would support the collection of the interest in a
foreclosure situation. 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.
<TABLE>
<CAPTION>
NON-PERFORMING LOANS
- ------------------------------------------------------------------------------
(IN THOUSANDS)
MARCH 31, JUNE 30,
1998 1997
--------- --------
<S> <C> <C>
Nonaccrual loans: $646 $256
Mortgage
Restructured 90 days or more past due:
Consumer 89 29
Multifamily 17
----- -----
Total $752 $285
===== =====
Percent of total loans 0.45% 0.14%
===== =====
</TABLE>
The ratio increased from 0.14% at June 30, 1997, to 0.45% at March 31, 1998 as
non-performing loans increased $467,000. The nonaccrual loan total is entirely
made up of six mortgage loans, while the 90 days past due total primarily
consists of consumer loans. Two of the six mortgage loans account for $480,000
of the $646,000 outstanding nonaccrual 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. Despite the additional
provision for the AHD related loans, these loans are currently performing with
respect to debt service and thus are not included above.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES. The Company establishes its provision
for loan losses and evaluates the adequacy of its 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
collectiblity 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 following table sets forth an analysis of the allowance for loan losses
for the nine months ended March 31, 1998, and the year ended June 30, 1997.
15
<PAGE>
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
- -----------------------------------------------------------------------------------
(IN THOUSANDS)
MARCH 31, JUNE 30,
1998 1997
--------- --------
<S> <C> <C>
Allowance for loan losses:
Balances, at July 1, $ 1,781 $ 1,059
Loan charge-offs:
Real estate mortgage 100
Multifamily 137
Commercial 25
Consumer 142 142
-------- --------
Total loan charge-offs 279 267
Loan recoveries:
Real estate mortgage 3
Consumer 17 11
-------- --------
Total loan recoveries 17 14
Net charge-offs 262 253
Provision for loan losses 3,092 975
-------- --------
Allowance for loan losses
at end of period $ 4,611 $ 1,781
======== ========
Ratio of net charge-offs to
average loans outstanding
during the period 0.19% 0.12%
Ratio of provision for loan losses
to average loans outstanding
during the period 1.66% 0.45%
Ratio of allowance for loan
losses to total loans outstanding
at end of period 2.77% 0.87%
Ratio of allowance for loan losses to
total loans and letters of credit outstanding 2.09% 0.68%
Average amount of loans
outstanding for the period $186,730 $214,636
Amount of loans
outstanding at end of period $166,249 $204,964
</TABLE>
As of March 31, 1998, net loan charge-offs were $262,000, or 0.19%
(annualized) of average loans for the period, compared to $253,000 or 0.12% of
average loans as of June 30, 1997. Because the Company changed its philosophy
with respect to computing its allowance for loan losses the provision
increased $2.1 million for the nine months ended March 31, 1998 compared to
the previous year with respect to certain AHD loans the Company estimated cash
flows of the AHD properties using certain assumptions with respect to rents,
occupancy levels, and expenses. Shortfalls in cash flows based on current debt
levels were computed for allowance purposes. The result was an additional
provision despite the fact that the loans that have been additionally provided
for are current with respect to principal and interest, as well as for certain
commercial real estate and consumer loans. The loans that were provided for
are generally current, but based on their current performance at lower than
original projections, management felt additional reserves were warranted. The
multifamily segment of the portfolio may only represent 10% of the total loan
portfolio, but the Company's risk associated with these large loans represent
a greater risk then the other loan categories due to the larger size of these
credits. This fact impacts management's decision to allocate more to this
category. Loans associated with the multifamily segment can be as large as 15%
of Tier 1 and Tier 11 capital, and in some cases can be as much as 30% of
capital. Therefore, the Company has additional exposure on these loans
compared to the typical loan portfolio. The Company has reserved for
multi-family letters of credit, an off balance sheet item, which are also
typically large and are treated the same as conventional loans from a risk
analysis perspective. Multifamily letter of credits totaled $54.5 million at
March 31, 1998. The allowance for loan losses to total loans outstanding
increased from .87% at June 30, 1997 to 2.77% at March 31, 1998. The Company
still has a number of large multifamily loans, both completed and in
construction in its portfolio. These credits are currently performing, but
present a higher amount of risk than other loans due to their size in
relationship to the Company's net worth and loan loss allowances. The loans
are primarily outside the Company's geographic market.
16
<PAGE>
Management considers the allowance for loan losses adequate to meet losses
inherent in the loan portfolio as of March 31, 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 March 31, 1998, the investment portfolio represented 5.3% of the
Company's assets compared to 5.7% at June 30, 1997, and is managed in a manner
designed to meet the Board's investment policy objectives. The Savings Bank
sold $3.4 million in securities during the second quarter resulting in net
gains of $74,000. An additional investment was sold in the third quarter,
resulting in of $5,000 gain. The remaining decrease is the monthly payments of
principal and interest on the Savings Bank's mortgage-backed securities. 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 March 31, 1998, the entire investment
portfolio was classified as available for sale, in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investment
in Debt and Equity Securities". The net unrealized loss at March 31, 1998 was
$29,000, which was comprised of gross gains of $7,000, gross losses of
$56,000, and a tax benefit of $20,000. The decrease of $2,000 from June 30,
1997 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 Company currently has
$4.0 million of securities pledged at the Federal Home Loan Bank as collateral
for FHLB advances and overdraft lines of credit in addition to $170,000
pledged at the Federal Reserve for Treasury Tax and Loan transactions.
The following table sets forth the components of the Savings Bank's securities
available for sale as of the dates indicated.
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
Securities available for sale:
U.S. Treasury securities $ 1,002 $ 1,000
Federal agencies securities 2,988 2,944
Federal Home Loan Mortgage Corporation
mortgage-backed securities 1,947 3,003
Federal National Mortgage Association
mortgage-backed securities 2,140 1,562
Government National Mortgage Association
mortgage-backed securities 2,396 4,223
Municipal revenue bonds 1,058
Other securities available for sale
------- -------
Total securities available for sale $10,473 $13,790
======= =======
</TABLE>
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 $13.9 million during the first nine months of
fiscal 1998. Most of the decreases were due to certificates of deposit
acquired through agents, which decreased $24.2 million to $46.1 million at
March 31, 1998. This decrease was offset by the Company's savings bank
subsidiary promoting selected retail certificates of deposit, which have
increased $10.0 million since June 30, 1997 in an effort to increase its core
deposit base. Demand accounts and money market accounts decreased $532,000 and
$804,000, respectively, offset by an increase in a premium rate NOW accounts
product of $1.7 million. The Company's savings bank subsidiary continues to
actively market this premium rate NOW account product.
17
<PAGE>
The following table sets forth the average balances of and the average rate paid
on deposits by deposit category for the nine months ended March 31, 1998 and for
the year ended June 30, 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
MARCH 31, 1998 JUNE 30, 1997
------------------- --------------------
AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
------- ---- ------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Average Deposits
Demand $ 5,153 $ 5,685
Now accounts 22,308 4.26% 20,585 4.22%
Money market accounts 3,086 2.71 3,890 2.72
Savings accounts 4,704 2.52 4,792 2.90
Certificates of deposit 88,381 5.80 78,408 5.68
Agent-acquired certificates of deposit 46,134 6.30 70,346 6.31
-------- --------
Total $169,766 5.44% $183,706 5.45%
======== ========
</TABLE>
FEDERAL HOME LOAN BANK ADVANCES AND OTHER LONG-TERM DEBT. The following table
summarizes the Company's borrowings as of March 31, 1998, and June 30, 1997.
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Note payable, 7.70% adjusted annually, payable $16,443
per month, including interest, due April 1, 2009,
secured by specific multifamily mortgages $ 2,217 $ 2,234
Note payable, 8.75% adjusted annually, payable $8,018
per month, including interest, due September 14, 2010,
secured by specific multifamily mortgages 1,000 1,006
Note payable, 8.75% adjusted annually, payable $12,190
per month, including interest, due September 22, 2010,
secured by specific multifamily mortgages 1,532 1,542
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 18,627 23,337
------- -------
Total $33,346 $38,089
======= =======
</TABLE>
Borrowings decreased $4.7 million to $33.3 million at March 31, 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 to fund new loan originations and
ease the need for additional borrowings in the future. The decrease is due
primarily to the maturity of FHLB advances. The Company, thus far, has been in
a position to allow FHLB advance levels to decline. However, when prudent
funds management dictates 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
8.67% at March 31, 1998, compared to 6.93% at June 30, 1997. The dividends
paid and declared on common stock and the net loss for the period decreased
the ratio, while a decrease in the unrealized loss on available for sale
investments and an infusion of capital from the Savings Bank's parent company
increased the ratio. The Company's book value per share at March 31, 1998 was
$4.28, compared to $5.20 at June 30, 1997.
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.
18
<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 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
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 March 31, 1998, actual and required minimum levels of regulatory capital
for the Savings Bank were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Required
Amount Percent Amount Percent Excess
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Core $16,708 8.67% $ 5,779 3.0% $10,929
Tangible $16,708 8.67% $ 2,889 1.5% $13,819
Risk-based $23,829 13.26% $17,969 8.0% $ 5,860
</TABLE>
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 March 31, 1998 the Savings Bank had a core
capital leverage ratio (as defined in the proposal) of 8.67%.
When the Company deems it prudent, and as market conditions allow, the Company
from time to time has repurchased its common stock. The repurchased shares
have been retired as Treasury Stock in accordance with Accounting Research
Bulletin 43 (ARB 43).
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.
19
<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
11.00% on March 31, 1998, up from 5.57% on June 30, 1997. On November 24,
1997, the OTS adopted a new liquidity ratio which lowered liquidity
requirements for savings associations from 5 to 4 percent of the association's
liquidity base. The liquidity base has been reduced by modifying the
definition of net withdrawable accounts to exclude, at the association's
option, accounts with maturities exceeding one year. Another change removes
the requirement that certain obligation must mature in five years or less in
order to qualify as a liquid asset. Finally, the rule added certain short-term
mortgage-related securities and short-term first lien residential mortgage
loans to the list of assets includable as regulatory liquidity. Management
believes that this level of liquidity is sufficient to meet any anticipated
requirements for the Bank's operations.
20
<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:
----------------------------------------------------
None
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
Reports on Form 8-K
b. No reports were filed
21
<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: MAY 15, 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)
22
<PAGE>
Exhibit Index
Reg. S-K
Exhibit No. Description of Exhibit Page
- ----------- ---------------------- ----
27 Financial Data Schedule 24
23
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
Fidelity Federal Bancorp Consolidated Balance Sheet as of 3/31/98 and
the Consolidated Income Statement for the nine months ended 3/31/98.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,509
<INT-BEARING-DEPOSITS> 5,897
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,472
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 166,249
<ALLOWANCE> 4,611
<TOTAL-ASSETS> 197,436
<DEPOSITS> 146,672
<SHORT-TERM> 2,447
<LIABILITIES-OTHER> 1,586
<LONG-TERM> 33,346
0
0
<COMMON> 3,127
<OTHER-SE> 10,258
<TOTAL-LIABILITIES-AND-EQUITY> 197,436
<INTEREST-LOAN> 12,287
<INTEREST-INVEST> 520
<INTEREST-OTHER> 527
<INTEREST-TOTAL> 13,334
<INTEREST-DEPOSIT> 6,909
<INTEREST-EXPENSE> 2,133
<INTEREST-INCOME-NET> 4,292
<LOAN-LOSSES> 3,092
<SECURITIES-GAINS> 79
<EXPENSE-OTHER> 5,727
<INCOME-PRETAX> (2,113)
<INCOME-PRE-EXTRAORDINARY> (2,113)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,093)
<EPS-PRIMARY> .38
<EPS-DILUTED> .37
<YIELD-ACTUAL> 2.74
<LOANS-NON> 646
<LOANS-PAST> 106
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,781
<CHARGE-OFFS> 279
<RECOVERIES> 17
<ALLOWANCE-CLOSE> 4,611
<ALLOWANCE-DOMESTIC> 4,611
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
