UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
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 24.
<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............................................... 15
Capital Resources and Capital Requirements........................ 19
Liquidity......................................................... 21
PART II - OTHER INFORMATION............................................. 22
SIGNATURES.............................................................. 23
EXHIBIT INDEX........................................................... 24
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 $ 1,507 $ 1,747
Short-term interest-bearing deposits 5,891 1,759
-------- --------
Total cash and cash equivalents 7,398 3,506
Interest-bearing deposits 6 6
Securities available for sale 10,472 13,790
Loans 163,297 204,964
Allowance for loan losses (3,090) (1,781)
-------- ---------
Net loans 160,207 203,183
Premises and equipment 5,933 6,341
Federal Home Loan Bank of Indianapolis stock, at cost 3,920 3,920
Other assets 11,748 9,258
-------- --------
Total assets $199,684 240,001
======== ========
LIABILITIES
Deposits
Non-interest bearing $ 6,057 $ 4,714
Interest-bearing 140,615 177,073
-------- --------
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
Letter of Credit valuation allowance 6,778
Other liabilities 2,473 1,324
-------- --------
Total liabilities 192,411 227,065
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 (6,635) 1,508
Net unrealized losses on securities available for sale (29) (31)
-------- --------
Total stockholders' equity 7,273 12,936
-------- --------
Total liabilities and stockholders' equity $199,684 $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 $12,288 $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 78 75 238 231
------- ------ ------- -------
Total interest income 3,993 4,935 13,334 15,224
------- ------ ------- -------
INTEREST EXPENSE
Deposits 2,023 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 2,700 3,400 9,042 10,484
------- ------ ------- -------
NET INTEREST INCOME 1,293 1,535 4,292 4,740
Provision for loan losses 4,298 60 4,523 915
------- ------ ------- -------
Net interest income after provision for loan losses (3,005) 1,475 (231) 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 2,570 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
Letter of credit valuation provision 6,778 6,778
Writedown of affordable housing
partnership investments 1,478
Affordable housing group activities 715 2,193
Advertising 56 50 158 177
Other expense 731 403 1,469 1,436
------- ------ ------- -------
Total non-interest expense 11,070 1,963 14,417 7,400
------ ------- -------
INCOME (LOSS) BEFORE INCOME TAX (13,485) 721 (12,234) (521)
Income tax expense (5,363) 192 (5,029) (321)
------- ------ ------- -------
NET INCOME (LOSS) $(8,122) $ 529 $(7,205) $(200)
======= ====== ======= =======
PER SHARE:
Basic net income (loss) $ (2.60) $ 0.21 $ (2.49) $(0.08)
Diluted net income (loss) (2.60) 0.20 (2.49) (0.08)
AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING 3,127,240 2,630,667 2,889,348 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 (8,122) 529 (7,205) (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 $ 7,273 $12,865 $ 7,273 $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 $ (7,205) $ (200)
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 4,523 915
Valuation allowance for land 200
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)
Valuation for Letters of credit 6,778
Changes in:
Interest receivable and other assets (2,491) (395)
Interest payable and other liabilities 1,111 (582)
-------- -------
Net cash provided by operating activities 3,144 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 3,892 (4,873)
Cash and Cash Equivalents, beginning of period 3,506 10,213
-------- -------
Cash and Cash Equivalents, end of period $7,398 $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, 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.
- - AMENDMENT OF FORM 10Q FOR THE QUARTER ENDED MARCH 31, 1998
The Company previously reported a net loss for the quarter ended March 31, 1998
of $2,010,000. This loss included an additional provision for loan losses of
$2.8 million as well as $753,000 in additional charges that were related to the
Company's Internal Revenue Code ("IRC") Section 42 tax-credit real estate
development program, which is discussed below under "Company Subsidiaries".
During the Company's fourth quarter, the Company's primary regulator, the Office
of Thrift Supervision ("OTS"), performed an examination of the Bank and the
Company. 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 methodology previously used by the
Company to compute these estimates. The OTS's methodology was accepted by
management and resulted in an additional provision for loan losses of $1.4
million and an increase in non-interest expense of $8.7 million. The increase in
non-interest expense consisted primarily of an addition to the letter of credit
valuation allowance of $6.8 million. This amended 10Q/A is being filed to
restate the results of operations and financial position of the Company for
these adjustments.
In connection with the OTS exam, for which a final report has not been issued,
it is probable that the Company will be restricted from performing certain
activities without prior approval by the OTS. The Company has announced that it
is currently suspending the payment of dividends.
7
<PAGE>
- - 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 $(7,205,337) 2,899,348 $(2.49) $(200,259) 2,491,971 $(0.08)
EFFECT OF DILUTIVE SECURITIES
Options* 30,449
Warrants* 163,620
DILUTED EPS
Income available to common
stockholders plus assumed ----------- --------- --------- ---------
conversions $(7,205,337) 2,899,348 $(2.49) $(200,259) 2,686,040 $(0.08)
=========== ========= ========= =========
</TABLE>
*Note: The effect of the options and warrants, 26,131 and 49,840, respectively,
would have an antidilutive effect on earnings per share, therefore are not
included in the earnings per share calculation.
<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 $(8,121,998) 3,127,240 $(2.60) $ 528,991 2,489,263 $ 0.21
EFFECT OF DILUTIVE SECURITIES
Options** 24,509
Warrants** 116,892
DILUTED EPS
Income available to common
stockholders plus assumed ----------- --------- --------- ---------
conversions $(8,121,998) 3,127,240 $(2.60) $ 528,991 2,630,664 $ 0.20
=========== ========= ========= =========
</TABLE>
**Note: The effect of the options and warrants, 27,730 and 6,950, respectively,
would have an antidilutive effect on earnings per share, therefore are not
included in the earnings per share calculation.
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.
8
<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. The
Company has currently suspended the payment of dividends.
- - 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. 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.
The Company's current plans are to not originate, participate or invest in any
new or additional Section 42 projects.
- - 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.
9
<PAGE>
- - 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, 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. The additional
provisions for losses on loans and letters of credit that the Company recorded
in the third quarter are included in the "banking segment" industry information
that follows below. The majority of the recorded provision is for loans that
were made to the Section 42 affordable housing projects that the Company is
managing. In addition, the majority of the reserves for letters of credit relate
to letters of credit that guarantee performance of loans made to the affordable
housing projects by other financial institutions.
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 $ 4,390 $ 5,518 $ 15,141 $ 17,018
Real estate development and management 193 626 607 1,260
-------- -------- -------- --------
Total consolidated $ 4,583 $ 6,144 $ 15,748 $ 18,278
======== ======== ======== ========
OPERATING PROFIT:
Banking $ (5,530) $ 631 (4,550) 296
Real estate development and management (2,592) (102) (2,655) (496)
-------- -------- -------- --------
Total consolidated $ (8,122) $ 529 $ (7,205) $ (200)
======== ======== ======== ========
IDENTIFIABLE ASSETS:
Banking $179,172 $236,833 $179,172 $236,833
Real estate development and management 8,214 13,452 8,214 13,452
-------- -------- -------- --------
Total consolidated $187,386 $250,285 $187,386 $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 $ 1,061
Real estate development and management 1 8 3 69
-------- -------- -------- --------
Total consolidated $ 29 $ 122 $ 145 $ 1,130
======== ======== ======== ========
</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 loss for the three months ended March 31, 1998 was $8,122,000, compared
to a net income of $529,000 for the same period last year. Basic and diluted net
loss per share was $(2.60) 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 $7,205,000 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 $(2.49) 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 Company's third quarter loss is primarily the result of
expenses that were recorded in connection with the Company's Section 42
tax-credit real estate development program. These expenses include:
- an additional provision for loan losses of $4.2 million;
- specific reserves related to letters of credit issued by the Company
and the Bank of $6.8 million, and;
- a charge-off of the equity investments in the Section 42 projects by
the Bank's subsidiary, Village Housing Corporation of $1.5 million.
The Company's Section 42 program was primarily in operation between 1993 and
1996 and was conducted from the Company's Indianapolis, Indiana office. In
December, 1996 this office was closed and the management of the affordable
housing projects was moved to the Company's main location in Evansville,
Indiana. The Company has not participated in the development of any new projects
that are currently being managed by the Company. Certain of the loans to the
affordable housing projects have been refinanced, at a lower rate, with other
financial institutions in the past two years, with the Company guaranteeing
performance of the credits by issuance of a letter of credit. This was done in
an effort to improve the property's ability to support debt payments. The
performance of a majority of the affordable housing projects is below that which
was originally projected when the projects were formed. This has resulted in
lower than expected cash flows, which are needed to support debt repayment. Cash
flows have been affected by a number of items, including lower than expected
occupancy and/or rent levels, higher than expected expenses and, in certain
situations, additional construction costs or delays which resulted in longer
start up periods for the projects. The areas in which many of the projects are
located have also seen increased competition in the affordable housing industry,
which has affected the projects ability to perform at the levels originally
projected. Each of the projects are beyond the start-up or construction phase
and have been in operation for a sufficient period of time to enable management
to conclude that additional provisions and reserves are required.
The Company announced on January 21, 1997 an expense reduction plan calling for
approximately $1 million in after tax savings. The plan called 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. Management, in 1997, 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
11
<PAGE>
certain components of non interest expense have decreased for the nine months
ended March 31, 1998 compared to the same period last year, such as salaries and
employee benefits expense which has decreased $845,000.
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
$29.6 million to $208.9 million at March 31, 1998. The Company's asset total has
decreased $62.9 million since March 31, 1997 to $199.7 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 2.73% 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. When these loans pay off 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 two basis points to 5.77% 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.
12
<PAGE>
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
$700,000 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.
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. 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 $4.2 million compared to the quarter ended March 31, 1997. The
provision for loan losses for the nine months ended was $4.5 million compared to
$915,000 in the prior year, an increase of $3.6 million. During the fourth
quarter, the OTS performed an examination of the Bank and the Company. 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 methodology 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
13
<PAGE>
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 these assets, as
well as for the related letters of credit.
NON-INTEREST EXPENSE. Non-interest expense for the quarter ended March 31, 1998
was $11.1 million compared to $2.0 million for the same period in 1997, an
increase of $9.1 million.
<TABLE>
<CAPTION>
NON-INTEREST EXPENSE
- ----------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
NINE MONTHS ENDED
MARCH 31, INCREASE
1998 1997 (DECREASE)
---- ---- ----------
<S> <C> <C> <C>
Salaries and employee benefits $ 2,570 $3,415 $ (845)
Letter of credit valuation provision 6,778 6,778
Write down of affordable housing partnership investments 1,478 1,478
Legal and professional 249 254 (5)
Occupancy expense 342 335 7
Equipment expense 264 277 (13)
Data processing expense 364 230 134
Abandoned projects 213 177 36
Write down on affordable housing land 200 200
Partnership management fees receivable 122 122
Advertising 158 177 (19)
Investment banking fees receivable 106 106
Letter of credit fees 104 104
Deposit insurance 102 1,276 (1,174)
Miscellaneous losses 100 14 86
Correspondent bank charges 119 98 21
Printing and supplies 89 144 (55)
Loss on investment 68 130 (62)
Telephone 56 86 (30)
Postage 56 79 (23)
Development fees receivable 52 52
Travel and lodging 34 40 (6)
Other operating expense 793 668 125
------- ------ ------
Total non-interest expense $14,417 $7,400 $7,017
======= ====== ======
</TABLE>
The increase in total non-interest expense for the nine months ended March 31,
1998, as compared to the same period last year relate primarily to the Company's
Section 42 tax credit real estate development program. The Company recorded
specific reserves related to letters of credit issued by the Company and the
Bank of $6.8 million and also charged off equity investments in these projects
of $1.5 million. Although the majority of the letter of credit reserves relate
to the Section 42 program, certain of this reserve relates to letters of credit
that are not related to the Section 42 program. The Company has not yet paid any
amounts to third parties as a result of these letters of credit. Additional
expenses that were recorded during this period that relate to the Section 42 or
other outside development projects include the write-off of investment banking
fees of $106,000, partnership management fees of $122,000, letter of credit fees
of $104,000 and development fees of $52,000.
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
14
<PAGE>
result of fewer employees. The Company's housing subsidiaries, as they searched
for new sites to develop and/or finance, sometimes incurred expenses on
potential sites that did not materialize and were expensed as abandoned
projects. Abandoned projects expense increased from $177,000 to $213,000.
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. Other operating expense increased by $125,000 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. Finally, 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.
INCOME TAX EXPENSE. Income tax expense decreased $4.7 million for the nine
months ended March 31, 1998, compared to the same period in 1997, due to the
loss in the current year compared to the previous year's. The income tax credit
associated with the loss was reduced by a $60,000 accrual adjustment made in the
third quarter.
YEAR 2000. The Year 2000 issue ("Y2K") 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 accrued $80,000 in expenses
during fiscal 1998 for Y2K 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, Y2K 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.
The Company is in the final stages of completing its written Y2K testing
strategies and plans. In house testing of internal mission critical systems
have begun. Internal testing of mission critical vendor supplied systems and
service providers are underway.
- - FINANCIAL CONDITION
Total assets decreased by $40.3 million from June 30, 1997, to approximately
$199.7 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 5,384 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 163,297 204,964
======== ========
Total assets $199,684 $240,001
======== ========
Total loans to total assets 81.8% 85.4%
======== ========
</TABLE>
15
<PAGE>
Total loans decreased by $41.7 million or 20.3% to $163.3 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 negatively impact the
interest rate margin if the decrease becomes a trend. Commercial real estate
loans and multifamily loans also decreased $4.2 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. 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 nonaccrual 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 initial adoption
of SFAS Nos. 114 and 118 did not have a material impact on the Company's
financial position or results of operations. At March 31, 1998 the Company had
impaired loans of $13.9 million , for which an allowance of $1.9 million was
recorded. The Company did not have any impaired loans at June 30, 1997.
<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 0.46% 0.14%
==== ====
</TABLE>
The ratio increased from 0.14% at June 30, 1997, to 0.46% 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.
The 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 "nonperforming 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 advances were charged
off at March 31, 1998.
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
16
<PAGE>
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.
<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 3,089
Commercial 25
Consumer 142 142
-------- --------
Total loan charge-offs 3,231 267
Loan recoveries:
Real estate mortgage 3
Consumer 17 11
-------- --------
Total loan recoveries 17 14
Net charge-offs 3,214 253
Provision for loan losses 4,523 975
-------- --------
Allowance for loan losses
at end of period $ 3,090 $ 1,781
======== ========
Ratio of net charge-offs to
average loans outstanding
during the period 2.29% 0.12%
Ratio of provision for loan losses
to average loans outstanding
during the period 2.42% 0.45%
Ratio of allowance for loan
losses to total loans outstanding
at end of period 1.89% 0.87%
Average amount of loans
outstanding for the period $186,708 $214,636
Amount of loans
outstanding at end of period $163,297 $204,964
</TABLE>
As of March 31, 1998, net loan charge-offs were $3,214,000, or 2.29%
(annualized) of average loans for the period, compared to $253,000 or 0.12% of
average loans as of June 30, 1997. As discussed in the "Results of Operations"
and "Provision for Loan Losses" sections, the Company increased the provision
for loan losses during the current quarter 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 at March 31, 1998. Multi-family letters of credit, an
off-balance sheet item, carry the same risk characteristics as conventional
loans and totaled $54.5 million at March 31, 1998. Specific reserves for letters
of credit to total letters of credit totaled 12.20% at March 31, 1998.
Classified loans and letters of credit to total loans and letters of credit were
2.65% at March 31, 1998 and 0.13% at March 31, 1997. 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.
17
<PAGE>
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.
18
<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 increase its usage of FHLB advances.
CAPITAL RESOURCES AND CAPITAL REQUIREMENTS
The ratio of stockholders' equity to total assets for the Savings Bank, was
6.11% 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 $2.33, compared
to $5.20 at June 30, 1997. The Company has announced the suspension of dividends
in order to increase the Saving's Bank core capital.
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
19
<PAGE>
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 $11,741 6.08% $ 5,798 3.0% $5,943
Tangible $11,741 6.08% $ 2,899 1.5% $8,842
Risk-based $18,835 10.62% $14,191 8.0% $4,644
</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 6.11%.
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.
20
<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.
21
<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. Report on Form 8-K was filed on September 4, 1998.
The Company released its year end results, noted the restatement
of the third quarter and suspended the quarterly dividend. A copy
of the press release was included in the filing.
22
<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: SEPTEMER 11, 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)
23
<PAGE>
Exhibit Index
Reg. S-K
Exhibit No. Description of Exhibit Page
- ----------- ---------------------- ----
27 Financial Data Schedule
24
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from Amended
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> 1,507
<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> 163,297
<ALLOWANCE> 3,090
<TOTAL-ASSETS> 199,684
<DEPOSITS> 146,672
<SHORT-TERM> 2,447
<LIABILITIES-OTHER> 9,946
<LONG-TERM> 33,346
0
0
<COMMON> 3,127
<OTHER-SE> 4,146
<TOTAL-LIABILITIES-AND-EQUITY> 199,684
<INTEREST-LOAN> 12,288
<INTEREST-INVEST> 520
<INTEREST-OTHER> 526
<INTEREST-TOTAL> 13,334
<INTEREST-DEPOSIT> 6,909
<INTEREST-EXPENSE> 2,133
<INTEREST-INCOME-NET> 4,292
<LOAN-LOSSES> 4,523
<SECURITIES-GAINS> 79
<EXPENSE-OTHER> 14,417
<INCOME-PRETAX> (12,234)
<INCOME-PRE-EXTRAORDINARY> (12,234)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,205)
<EPS-PRIMARY> (2.49)
<EPS-DILUTED> (2.49)
<YIELD-ACTUAL> 2.74
<LOANS-NON> 646
<LOANS-PAST> 106
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 13,925
<ALLOWANCE-OPEN> 1,781
<CHARGE-OFFS> 3,231
<RECOVERIES> 17
<ALLOWANCE-CLOSE> 3,090
<ALLOWANCE-DOMESTIC> 2,167
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 923
</TABLE>
