SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
FORM 10-K
[ ] Annual Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of
1934 (fee required) For the fiscal year
ended: _____________
or
[X] Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of
1934 (no fee required)
For the Transition period from July 1, 1999 to December 31, 1999.
---------------------------------
Commission File No. 0-22880
Fidelity Federal Bancorp
(Exact name of registrant as specified in its charter)
Indiana 35-1894432
(State of other jurisdiction (I.R.S. Employer
of Incorporation or Identification No.)
Organization)
700 S. Green River Road, Suite 2000, PO Box 5584, Evansville, Indiana 47715
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code (812) 469-2100
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Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to
Section 12 (g) of the Act: Common Stock, $1 Stated Value
-----------------------------
(Title of Class)
DOCUMENTS INCORPORATED BY REFERENCE
Exhibit index is on page 79
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the past preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant (for purposes of such calculation, includes persons who are not
directors, executive officers, or holders of more than 10% of the registrant's
common stock) based on the average bid and asked prices of such stock at
February 29, 2000 was approximately $6,892,772.
Indicated below is the number of shares outstanding of each of the registrant's
classes of common stock as of February 29, 2000.
Common Stock - 3,147,662 shares
<PAGE>
FIDELITY FEDERAL BANCORP
Index
PART I
Page
ITEM 1 - Business 3
ITEM 2 - Properties 10
ITEM 3 - Legal Proceedings 10
ITEM 4 - Submission of Matters to a Vote of Security Holders 10
PART II
ITEM 5 - Market for Registrant's Common Equity
and Related Stockholder Matters 11
ITEM 6 - Selected Financial Data 13
ITEM 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
ITEM 7 A Quantitative and Qualitative Disclosures About Market Risk 14
ITEM 8 - Financial Statements and Supplementary Data
Report of Independent Auditors 41
Consolidated Balance Sheet 42
Consolidated Statement of Income 43
Consolidated Statement of Stockholders' Equity 45
Consolidated Statement of Cash Flows 46
Notes to Consolidated Financial Statements 48
ITEM 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 76
PART III
ITEM 10 - Directors and Executive Officers of the Registrant 76
ITEM 11 - Executive Compensation 76
ITEM 12 - Security Ownership of Certain Beneficial
Owners and Management 76
ITEM 13 - Certain Relationships and Related Transactions 76
PART IV
ITEM 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K 77
SIGNATURES 78
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PART I
ITEM 1. BUSINESS
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Annual Report on Form 10-K 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 Fidelity Federal Bancorp
("Fidelity") "believes", "anticipates", "expects", "estimates" or words of
similar import. Similarly, statements that describe Fidelity'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 in
close 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
Fidelity undertakes no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
Overview
Fidelity Federal Bancorp, incorporated in 1993 under the laws of the State of
Indiana, is a registered savings and loan holding company with its principal
office in Evansville, Indiana. Fidelity's savings bank subsidiary, United
Fidelity Bank, fsb ("United"), was organized in 1914 and is a
federally-chartered stock savings bank located in Evansville, Indiana. Fidelity,
through its savings bank subsidiary, is engaged in the business of obtaining
funds in the form of savings deposits and other borrowings and investing such
funds in consumer, commercial, and mortgage loans, and in investment and money
market securities.
In December, 1999, Fidelity's Board of Directors voted to change Fidelity's
fiscal year end from June 30 to December 31. Accordingly, the following
discussion analyzes the results of operations for the six months ended December
31, 1999 compared to the twelve months ended June 30, 1999 and the financial
position as of December 31, 1999 to the financial position as of June 30, 1999.
Fluctuations in the results of operations are significant in part because there
are two quarters less in the period ended December 31, 1999 compared to fiscal
1999. All references to percentage changes in income or expense items for the
period ended December 31, 1999 have been annualized.
Fidelity has engaged in the business of owning, renting and managing affordable
housing projects through its wholly-owned subsidiaries, Village Management
Corporation and Village Housing Corporation (collectively, the "Affordable
Housing Group"). Fidelity has been engaged in affordable housing activities
since September, 1992 through United, and since April, 1994, through Village
Capital Corporation ("VCC"). Since June 30, 1994, VCC has earned fees by
providing real estate mortgage banking services to unaffiliated borrowers. The
December 31, 1999 audited financial statements include condensed financial
information about both of Fidelity's business segments.
Another subsidiary of United, Village Insurance Corporation, is engaged in the
business of selling credit life insurance, as well as accident and health
insurance, to United's loan customers.
A second subsidiary of Fidelity, Village Affordable Housing Corporation, was
formed in fiscal 1998. This company was formed to hold an interest in a housing
partnership that was initially financed by United, which was subsequently
charged off and transferred to Village Housing Corporation.
A third subsidiary of Fidelity, Village Securities Corporation, is currently
inactive.
Fidelity had consolidated total assets of $171.5 million and total
shareholders' equity of $5.4 million as of December 31, 1999.
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Fidelity's subsidiaries at December 31, 1999, are listed below:
<TABLE>
<CAPTION>
Subsidiary Principal Office Year Organized Assets (in thousands)
<S> <C> <C> <C>
1. United Fidelity Bank, fsb Evansville, IN 1914 $168,746
Subsidiaries of United Fidelity Bank, fsb:
Village Capital Corporation Evansville, IN 1994 777
Village Insurance Corporation Evansville, IN 1980 88
Village Management Corporation Evansville, IN 1992 259
Village Housing Corporation Evansville, IN 1992 2,572
2. Village Affordable Housing Corporation Evansville, IN 1998 36
3. Village Securities Corporation Evansville, IN 1994 85
</TABLE>
Fidelity's home office is located at 700 S. Green River Road, Suite 2000,
Evansville, Indiana, 47715 and its telephone number is (812) 469-2100.
Competition
Fidelity and United face strong direct competition for deposits, loans and other
financial-related services. United competes in Indiana, Kentucky and Illinois
with other thrifts, commercial banks, credit unions, stockbrokers, finance
companies and insurance companies. Some of these competitors are local, while
others are statewide or national. United competes for deposits principally by
offering depositors a variety of deposit programs, convenient office locations,
hours and other services, and for loan originations primarily through
competitive interest rates and fees, the efficiency and quality of service
provided and the variety of loan products offered. Some of the non-bank
financial institutions and financial services organizations with which United
competes are not subject to the same degree of regulation as that imposed on
federal savings banks, thrifts, or thrift-holding companies. As a result, such
competitors may have advantages over United in providing certain services. As of
February 29, 2000, approximately 4 banks, 3 thrifts, and 11 credit unions
operated in the Evansville, Indiana metropolitan area, which is United's
principal deposit market area. Currently one of the local banks has reached an
agreement to acquire another local thrift, subject to regulatory and shareholder
approval. Completion of this transaction would make United the largest thrift in
this market. Many competitors are substantially larger or have significantly
greater capital resources than United. Due to recently enacted legislation to
allow unlimited interstate branching, Fidelity and United may experience
heightened competition from existing competitors and other major financial
institutions seeking to expand their regional banking presence in Indiana.
Fidelity has discontinued development activities pertaining to the affordable
housing industry and multifamily development in part because of increased levels
of competition, and significant losses taken in the most recent three years.
SUPERVISION AND REGULATION
In addition to the general provisions discussed below, Fidelity and United are
also subject to the provisions of the Supervisory Agreement entered into with
the OTS in February 1999, which also impacts the operations of Fidelity and
United. See the "Other Restrictions" footnote in Fidelity's Notes to
Consolidated Financial Statements.
Regulation of Fidelity
Fidelity is a savings and loan holding company within the meaning of the Home
Owners' Loan Act of 1933 ("HOLA"), as amended. Fidelity is registered with the
Office of Thrift Supervision ("OTS") and is subject to OTS regulations,
examinations, supervision and reporting requirements. As a subsidiary of a
savings and loan holding company, United is subject to certain restrictions in
its dealings with Fidelity and with other companies affiliated with Fidelity.
The HOLA generally prohibits a savings and loan holding company, without prior
approval of the Director of the OTS, from (i) acquiring control of, or
controlling the assets of, any other savings association or savings and loan
holding company; or (ii) acquiring or retaining more than 5% of the voting
shares of a savings association or savings and loan holding company which is not
a subsidiary. Except with the prior approval of the Director of the OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock, may
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acquire control of any savings association, other than a subsidiary association,
or any other savings and loan holding company.
Fidelity operates as a unitary savings and loan holding company. There are
generally no restrictions on the activities of a unitary savings and loan
holding company. However, if the Director of the OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings association, the Director of
the OTS may impose such restrictions as deemed necessary to address such risk
and limit (i) payment of dividends by the savings association, (ii) transactions
between the savings association and its affiliates, and (iii) any activities of
the savings association that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
association.
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, if the savings association subsidiary of
such a holding company fails to meet the Qualified Thrift Lender Test ("QTL
test"), as discussed below, then such unitary holding company would become
subject to the activities restrictions applicable to multiple savings and loan
holding companies. Additional restrictions on the savings association's ability
to obtain advances from the FHLB also apply.
If Fidelity were to acquire control of another savings association, other than
through merger or other business combinations with United, Fidelity would
thereupon become a multiple savings and loan holding company. Except where such
acquisition is pursuant to the authority of the regulatory agencies to approve
emergency thrift acquisitions and where each subsidiary savings association
meets the QTL test, the activities of Fidelity and any of its subsidiaries
(other than United or other subsidiary savings associations) would thereafter be
subject to further restrictions. The HOLA provides that, among other things, no
multiple savings and loan holding company or subsidiary thereof which is not a
savings association shall commence or continue for a limited period of time
after becoming a multiple savings and loan holding company or subsidiary
thereof, any business activity other than (i) furnishing or performing
management services for a subsidiary savings association, (ii) conducting an
insurance agency or escrow business, (iii) holding, managing or liquidating
assets owned by or acquired from a subsidiary savings association, (iv) holding
or managing properties used or occupied by a subsidiary savings association, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by regulation as of March 5, 1987, to be engaged in by
multiple savings and loan holding companies, or (vii) those activities
authorized by regulation of the Board of Governors of the Federal Reserve System
as permissible for bank holding companies, unless the Director of the OTS by
regulation prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above must also be approved by
the Director of the OTS prior to being engaged in by a multiple savings and loan
holding company.
The Director of the OTS may also approve acquisitions resulting in the formation
of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the association to be acquired is located
specifically permit associations to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings associations). The Director of the OTS may also approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits federal and state savings association holding companies with
their home offices located outside of Indiana to acquire savings associations
whose home offices are located in Indiana and savings and loan holding companies
with their principal place of business in Indiana ("Indiana Savings and Loan
Holding Companies") upon receipt of approval by the Indiana Department of
Financial Institutions. Moreover, Indiana Savings and Loan Holding Companies may
acquire savings associations with their home offices located outside of Indiana
and savings association holding companies with their principal place of business
located outside of Indiana upon receipt of approval by the Indiana Department of
Financial Institutions.
Subject to certain exceptions, commonly controlled banks and savings
associations must reimburse the Federal Deposit Insurance Corporation ("FDIC")
for any losses suffered in connection with a failed bank or savings association
affiliate. Institutions are commonly controlled if one is owned by another or if
both are owned by the same holding company. Such claims by the FDIC under this
provision are subordinate to claims of depositors, secured creditors, and
holders of subordinated debt, other than affiliates.
Savings Bank Regulation
General. As a federally chartered, SAIF-insured savings association, United is
subject to extensive regulation by the OTS and the FDIC. The OTS periodically
examines the books and records of United and, in conjunction with the FDIC in
certain situations, has examination and enforcement powers. This supervision and
regulation are intended primarily for the protection of depositors and federal
deposit insurance funds.
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In addition, its activities and operations are subject to a number of additional
detailed, complex and sometimes overlapping federal and state laws and
regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and antitrust
laws. The earnings of financial institutions are also affected by general
economic conditions and prevailing interest rates, both domestic and foreign and
by the monetary and fiscal policies of the United States Government and its
various agencies, particularly the Federal Reserve.
Additional legislation and administrative actions affecting the banking industry
is often considered by Congress, state legislatures and various regulatory
agencies. It cannot be predicted with certainty whether such legislation or
administrative action will be enacted or the extent to which the banking
industry in general or Fidelity and United in particular would be affected.
Financial Modernization Legislation: The Gramm Leach Bliley Act. On November 12,
1999,the President signed the Gramm-Leach-Bliley Act into law. Effective as of
March 11, 2000, the Gramm-Leach-Bliley Act:
- allows bank holding companies meeting management, capital and
CRA standards to engage in a substantially broader range of
nonbanking activities then was previously permissible,
including insurance underwriting and agency, and underwriting
and making merchant banking investments in commercial and
financial companies;
- allows insurers and other financial services companies to
acquire banks and thrifts;
- removes various restrictions that previously applied to bank
holding company ownership of securities firms and mutual fund
advisory companies and;
- establishes the overall regulatory structure applicable to
bank holding companies that also engage in insurance and
securities operations.
In order for a bank holding company to engage in the broader range of activities
that are permitted by the Gramm-Leach-Bliley Act, (1) all of its depository
institutions must be well capitalized and well managed and (2) it must file a
declaration with the Federal Reserve Broad that it elects to be a "financial
holding company". In addition, to commence any new activity permitted by the
Gramm-Leach-Bliley Act, each insured depository institution of the financial
holding company must have received at least a "satisfactory" rating in its most
recent examination under the Community Reinvestment Act.
The Gramm-Leach-Bliley Act also modified laws related to financial privacy and
community reinvestment. The new financial privacy provisions generally prohibit
financial institutions, including United, from disclosing nonpublic personal
financial information to third parties unless customer have the opportunity to
"opt out" of the disclosure. Regulations governing the privacy requirements of
the Act have been proposed. Until the final rules have been issued, it is
difficult to determine the impact of the regulations on the activities of
United.
Qualified Thrift Lender Requirement. In order for United to exercise the powers
granted to federally-chartered savings associations and maintain full access to
FHLB advances, it must be a "qualified thrift lender" ("QTL"). A savings
association is a QTL if its qualified thrift investments equal or exceed 65% of
the savings association's portfolio assets on a monthly basis in 9 out of every
12 months. Qualified thrift investments generally consist of (i) various housing
related loans and investments (such as residential construction and mortgage
loans, home improvement loans, manufactured housing loans, home equity loans and
mortgage-backed securities), (ii) certain obligations of the FSLIC, the FDIC,
the FSLIC Resolution Fund and the Resolution Trust Corporation (for limited
periods), and (iii) shares of stock issued by any Federal Home Loan Bank, the
Federal Home Loan Mortgage Corporation or the Federal National Mortgage
Association. At December 31, 1999, the qualified thrift investment percentage
test for United was 86.75%.
Liquidity. Under applicable federal regulations, savings associations are
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits, certain banker's acceptances, certain corporate debt
securities and highly rated commercial paper, securities of certain mutual funds
and specified United States government, state or federal agency obligations) of
not less than 4% of the average daily balance of the savings association's net
withdrawable deposits plus short-term borrowing during the preceding calendar
month. Under HOLA, this liquidity requirement may be changed from time to time
by the Director of the OTS to any amount within the range of 4% to 10%,
depending upon economic conditions and the deposit flows of member associations.
At December 31, 1999, United was in compliance with these liquidity
requirements.
Loans-to-One-Borrower Limitations. HOLA generally requires savings associations
to comply with the loans-to-one-borrower limitations applicable to national
banks. In general, national banks may make loans to one borrower in amounts up
to 15%
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of the bank's unimpaired capital and surplus, plus an additional 10% of capital
and surplus for loans secured by readily marketable collateral. At December 31,
1999, United's loan-to-one-borrower limitation was approximately $3 million and
no loans to a single borrower exceeded that amount, except as provided herein.
Under certain conditions, a savings association may make loans to one borrower
for residential housing developments in amounts up to 30% of the bank's
unimpaired capital and surplus provided that all loans made in reliance upon the
increased lending limit do not, in the aggregate, exceed 150% of the bank's
unimpaired capital and surplus. At December 31, 1999, United had made 6.1
million in such loans under this higher lending limit.
Commercial Real Property Loans. HOLA limits the aggregate amount of commercial
real estate loans that a federal savings association may make to an amount not
in excess of 400% of the savings association's capital.
Limitation on Capital Distributions. The OTS regulations impose limitations on
capital distributions by savings associations. Under the rule, a savings
association is classified as a tier 1 institution, a tier 2 institution, or a
tier 3 institution, depending on its level of regulatory capital both before and
after giving effect to a proposed capital distribution. A tier 1 institution may
generally make capital distributions in any calendar year up to 100% of its net
income to date during the calendar year plus the amount that would reduce by
one-half its "surplus capital ratio" (i.e., the percentage by which the
association's capital-to-assets ratio exceeds the ratio of its capital
requirements to its assets) at the beginning of the calendar year. No regulatory
approval of the capital distribution is required, but prior notice must be given
to the OTS. Restrictions exist on the ability of tier 2 and tier 3 institutions
to make capital distributions. Also, the OTS may prohibit any capital
distribution otherwise permitted if such distribution would constitute an unsafe
or unsound practice, such as a proposed distribution by an institution whose
capital is decreasing because of substantial losses or by an institution that is
in need of more than normal supervision.
Insurance of Deposits. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of banks and thrifts and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the Bank Insurance Fund (the
"BIF") for commercial banks and state savings banks and the SAIF for savings
associations such as United. The FDIC is required to maintain designated levels
of reserves in each fund.
The FDIC is authorized to establish separate annual assessment rates for deposit
insurance for members of the BIF and members of the SAIF. The FDIC may increase
assessment rates for either fund if necessary to restore the fund's ratio of
reserves to insured deposits to the target level within a reasonable time and
may decrease these rates if the target level has been met. The FDIC has
established a risk-based assessment system for both SAIF and BIF members. Under
this system, assessments vary depending on the risk the institution poses to its
deposit insurance fund. An institution's risk level is determined based on its
capital level and the FDIC's level of supervisory concern about the institution.
Annual deposit insurance premiums range between $0.00 and $0.27 per $100 of
deposits are in effect, based on the assessment determined in accordance with
the risk-assessment system discussed above. With respect to the funding of the
obligations issued by the federally-chartered corporation ("FICO") which
provided some of the financing to resolve the thrift crisis in the 1980's, BIF
institutions pay approximately 20% of the rate paid by SAIF institutions on
their deposits. After December 31, 1999, both BIF and SAIF institutions will be
assessed at the same rate for FICO payments.
Community Reinvestment Act. Ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") must be disclosed. The disclosure
includes both a four-tier descriptive rating using terms such as "outstanding,"
"satisfactory," "needs to improve," or "substantial non-compliance" and a
written evaluation of each institution's performance. United received a
satisfactory rating from the OTS in its most recent CRA examination. Also, the
Federal Housing Finance Board has adopted regulations establishing standards of
community investment and service for members of the FHLB System to meet to be
eligible for long-term advances. These regulations take into account a savings
association's CRA record and the member's record of lending to first-time home
buyers.
Brokered Deposits. Pursuant to the FDIC regulations, well-capitalized
institutions are subject to no brokered deposits limitations, while adequately
capitalized institutions are able to accept, renew or rollover brokered deposit
only (i) with a waiver from the FDIC, and (ii) subject to certain restrictions
on payment of rates. Undercapitalized institutions are not permitted to accept
brokered deposits and may not solicit deposits by offering an effective yield
that significantly exceeds the prevailing effective yields on insured deposits
of comparable maturity in the institution's normal market area or in which such
deposits are being solicited.
Enforcement. The OTS has primary enforcement responsibility over savings
associations and has the authority to bring enforcement action against all
"institution-affiliated parties," including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Civil
penalties cover a wide range of violations and actions and range up to $25,000
per day unless a finding of reckless disregard is made, in which case penalties
may be as high as $1 million per day. In addition, regulators are provided with
far greater flexibility to impose enforcement action on an institution that
fails to comply with its regulatory requirements, particularly with respect to
the capital requirements. Possible enforcement action ranges from the
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imposition of a capital directive to receivership, conservatorship or the
termination of deposit insurance. The FDIC has the authority to recommend to the
Director of OTS that enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances.
Standards for Safety and Soundness. The federal banking agencies have prescribed
for all insured depository institutions safety and soundness standards in the
form of guidelines, relating to internal controls and information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
risk exposure, asset quality and growth, earnings, and compensation, fees and
benefits. If an insured depository institution fails to meet any of the
standards described above, it will be required to submit to the appropriate
federal banking agency a plan specifying the steps that will be taken to cure
the deficiency. If an institution fails to submit an acceptable plan or fails to
implement the plan, the appropriate federal banking agency will issue an order
requiring the institution to take immediate steps to correct a safety and
soundness deficiency.
Real Estate Lending Standards. OTS regulations require savings associations to
establish and maintain written internal real estate lending policies. Each
association's lending policies must be consistent with safe and sound banking
practices and appropriate to the size of the association and the nature and
scope of its operations. The policies must establish loan portfolio
diversification standards; establish prudent underwriting standards, including
loan-to-value limits that are clear and measurable; establish loan
administration procedures for the association's real estate portfolio; and
establish documentation, approval, and reporting requirements to monitor
compliance with the association's real estate lending policies. The
association's written real estate lending policies must be reviewed and approved
by the association's Board of Directors at least annually. Further, each
association is expected to monitor conditions in its real estate market to
ensure that its lending policies continue to be appropriate for current market
conditions.
Prompt Corrective Regulatory Action. The Federal Deposit Insurance Act ("FDI
Act") establishes a system of prompt corrective action to resolve the problems
of undercapitalized institutions. Under this system, the banking regulators are
required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
capitalization.
Under the OTS prompt corrective action regulation, generally, a savings
association that has a total risk-based capital of less than 8.0% or a tier 1
risk-based capital ratio or leverage ratio of less than 4.0% is considered to be
undercapitalized. A savings association that has a total risk-based capital of
less than 6.0%, a tier 1 risk-based capital ratio of less than 3%, or a leverage
ratio that is less than 3.0% is considered to be "significantly
undercapitalized" and a savings association that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Generally, a capital restoration plan must be filed with the
OTS within 45 days of the date an association receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the associations, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The OTS could also take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.
Capital Requirements. The Director of the OTS has adopted capital standards
under which savings associations must maintain (i) "core capital" in an amount
not less than 3% of total adjusted assets for a savings association with a
composite rating of 1, and not less than 4% for all other savings associations,
(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.
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
nonqualifying intangible assets. In determining compliance with the capital
standards, a savings association must deduct from capital its entire investment
in and loans to any subsidiary engaged in activities not permissible for a
national bank, other than subsidiaries (i) engaged in such non-permissible
activities solely as agent for their customers; (ii) engaged in mortgage banking
activities; or (iii) that are themselves savings associations or companies, the
only investment of which is another savings association, acquired prior to May
1, 1989.
In determining total risk-weighted assets for purposes of the risk-based
requirement, (i) each off-balance sheet asset must be converted to its
on-balance sheet credit equivalent by multiplying the face amount of each such
item by a credit conversion factor ranging from 0% to 100% (depending upon the
nature of the asset), (ii) the credit equivalent amount of each off-balance
sheet asset and the book value of each on-balance sheet asset must be multiplied
by a risk factor ranging from 0% to 100% (again depending upon the nature of the
asset), and (iii) the resulting amounts are added together and constitute total
risk-weighted assets. Total capital, for purposes of the risk-based requirement,
equals the sum of core capital plus supplementary capital (which, as defined,
includes, among other items, perpetual preferred stock not counted as core
capital, limited life preferred stock, subordinated debt and general loan and
lease loss allowances up to 1.25% of risk-weighted assets, less certain
deductions). The amount of supplementary capital that may be counted towards
satisfaction of the total capital requirement may not exceed 100% of core
capital.
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Capital requirements higher than the generally applicable minimum requirement
may be established for a particular savings association if the OTS determines
that the association's capital was or may become inadequate in view of its
particular circumstances. Individual minimum capital requirements may be
appropriate where the savings association is receiving special supervisory
attention, has a high degree of exposure to interest rate risk, or poses other
safety or soundness concerns.
In determining compliance with the risk-based capital requirements, a savings
association must determine its interest rate risk and, if such risk exceeds a
certain level, it must deduct an interest rate risk component in calculating its
total capital for purposes of determining whether it meets its risk-based
capital requirements. An association's interest rate risk (IRR) is measured by
the decline in the net portfolio value (NPV) resulting from a 200 basis point
increase or decrease in market interest rates, divided by the estimated economic
value of its assets. If an association's measured IRR exposure exceeds 2%, it
must then deduct an IRR component from total capital for determining its
risk-based capital requirement. The IRR component is an amount equal to one-half
the difference between its measured interest rate risk and 2%, multiplied by the
estimated economic value of its total assets.
The Savings Bank's Subsidiaries. The OTS regulations permit federal savings
associations to invest in the capital stock, obligations or specified types of
securities of subsidiaries (referred to as "service corporations") and to make
loans to such subsidiaries and joint ventures in which such subsidiaries are
participants in an aggregate amount not exceeding 3% of an association's assets,
provided any investment over 2% is used for specified community or inner-city
development purposes. In addition, federal regulations permit associations to
make specified types of loans to such subsidiaries in an aggregate amount not
exceeding 50% of the association's regulatory capital if certain requirements
and conditions are met. The FDIC may, after consultation with the OTS, prohibit
specific activities if it determines such activities pose a serious threat to
SAIF.
Assessments. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general assessment
is computed upon the savings association's total assets, including consolidated
subsidiaries, as reported in the Saving Bank's latest quarterly Thrift Financial
Report. United's total assessment for the six months ended December 31, 1999 was
$35,000.
Acquisitions and Branching
The Bank Holding Company Act specifically authorizes a bank holding company,
upon receipt of appropriate regulatory approvals, to acquire control of any
savings association or holding company thereof wherever located. Similarly, a
savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the Federal Reserve Board
restrict the branching authority of savings associations acquired by bank
holding companies. Savings associations acquired by bank holding companies may
be converted to banks if they continue to pay SAIF premiums, but as such they
become subject to branching and activity restrictions applicable to banks.
The OTS has adopted regulations which permit nationwide branching to the extent
permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss.7701(a)(19) of the Internal Revenue Code
or the asset composition test of ss.7701(c) of the Internal Revenue Code.
Branching that would result in the formation of a multiple savings and loan
holding company controlling savings associations in more than one state is
permitted if the law of the state in which the savings association to be
acquired is located specifically authorizes acquisitions of its state-chartered
associations by state-chartered associations or their holding companies in the
state where the acquiring association or holding company is located. Moreover,
Indiana banks and savings associations are permitted to acquire other Indiana
banks and savings associations and to establish branches throughout Indiana.
Transactions with Affiliates
Pursuant to HOLA, transactions engaged in by a savings association or one of its
subsidiaries with affiliates of the savings association generally are subject to
the affiliate transaction restrictions contained in Sections 23A and 23B of the
Federal Reserve Act in the same manner and to the same extent as such
restrictions now apply to transactions engaged in by a member bank or one of its
subsidiaries with affiliates of the member bank. Section 23A of the Federal
Reserve Act imposes both quantitative and qualitative restrictions on
transactions engaged in by a member bank or one of its subsidiaries with an
affiliate, while Section 23B of the Federal Reserve Act requires, among other
things, that all transactions with affiliates be on terms substantially the
same, and at least as favorable to the member bank or its subsidiary, as the
terms that would apply to or would be offered in a comparable transaction with
an unaffiliated party. Section 22(h) of the Federal Reserve Act imposes
restrictions on loans to executive officers, directors, and principal
shareholders. Further, the Federal Reserve Board pursuant to Section 22(h)
requires that loans to directors, executive officers, and principal shareholders
be made on terms substantially the same as offered in comparable transactions to
other persons. United was in compliance with these rules at December 31, 1999.
9
<PAGE>
Federal Home Loan Bank System
United is a member of the Federal Home Loan Bank of Indianapolis. The Federal
Home Loan Bank System consists of 12 regional Federal Home Loan Banks ("FHLBs"),
each subject to supervision and regulation by the Federal Housing Finance Board
(the "FHFB"). The FHLBs provide a central credit facility for member savings
associations. As a member of the FHLB of Indianapolis, United is required to own
shares of capital stock in the FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans, home
purchase contracts, and similar obligations at the beginning of each year, or
1/20 of its advances (borrowings) from the FHLB, whichever is greater. As of
December 31, 1999, United was in compliance with this requirement.
Personnel
As of December 31, 1999 Fidelity had 90 full-time equivalent employees. The
employees are not represented by any collective bargaining unit. Fidelity
believes its relations with its employees are good.
Fidelity maintains group life, hospital, surgical, dental, major medical, and
long-term disability programs for full-time employees. Fidelity also
participates in a defined benefit pension plan covering all eligible employees,
as well as a defined contribution 401(k) plan.
ITEM 2. PROPERTIES
The following table sets forth the location of Fidelity's savings bank offices,
all of which are owned by United, as well as certain additional information
relating to these offices as of December 31, 1999.
- --------------------------------------------------------------------
Office Location Year Facility Opened Net Book Value
- --------------------------------------------------------------------
Home Office 1974 $993,000
18 NW Fourth Street
Evansville, IN 47708
- --------------------------------------------------------------------
Eastside Branch 1997 1,901,000
700 S. Green River Rd
Evansville, IN 47715
- --------------------------------------------------------------------
Northside Branch 1976 92,000
4441 First Avenue
Evansville, IN 47710
- --------------------------------------------------------------------
Westside Branch 1979 91,000
4801 W. Lloyd Expressway
Evansville, IN 47712
- --------------------------------------------------------------------
Fidelity and the other non-bank subsidiaries use the premises of United's Home
Office and 2nd floor of the Eastside Branch for their office and equipment needs
and pay rent for such use.
ITEM 3. 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 is a party or of which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 22, 1999, at 8:30 AM, at Fidelity's subsidiary downtown offices at
18 N.W. Fourth Street, Evansville, Indiana, the Annual meeting of Shareholders
was held in order to vote on two matters.
Matter 1 was to elect one director to the Board of Directors to serve for the
ensuing term of three years and until his successor is duly elected and
qualified. The vote tabulation for the election of Jack Cunningham was 1,854,904
for and 227,152 shares against.
The following directors terms continued after the meeting; Curt J.
Angermeier, William Baugh, Bruce Cordingley (until his subsequent resignation
from the Board on December 27, 1999), Jack Cunningham, M. Brian Davis, Donald
R. Neel and Barry A. Schnakenburg.
10
<PAGE>
Matter 2 was the ratification of the appointment of the auditor of Fidelity. The
vote tabulation for Olive LLP was 1,866,085 for, 212,798 shares against, and
3,166 shares abstained.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
Fidelity Federal Bancorp's common stock is traded on the NASDAQ National Market
System under the symbol FFED. The following table sets forth, for the periods
indicated, the high and low bid prices per share as reported by NASDAQ. The bid
prices represent prices between dealers, do not include retail mark-up,
mark-down, or commissions and may not represent actual transactions.
Six Months Ended Year Ended
December 31, 1999 June 30, 1999
---------------------------------------------------
Common Stock Bid Prices Common Stock Bid Prices
---------------------------------------------------
High Low High Low
- -----------------------------------------------------------------------
First quarter $3 1/16 $2 5/8 $ 6 1/2 $3 1/2
Second quarter 2 7/8 1 1/4 5 3 1/4
Third quarter N/A N/A 4 2 1/2
Fourth quarter N/A N/A 3 7/8 2 3/4
Fidelity declared no dividends during the six months ended December 31, 1999 and
fiscal 1999 compared to $.35 per share for 1998. Fidelity's principal source of
income and funds is dividends from its savings bank subsidiary (United) which
currently is subject to dividend restrictions. Unlike United, Fidelity is not
subject to any regulatory restriction on future dividends. Fidelity's dividend
policy is to pay cash or distribute stock dividends when the Board of Directors
deems it to be appropriate, taking into account Fidelity's financial condition
and results of operations, economic and market conditions, industry standards,
and other factors, including regulatory capital requirements of its savings bank
subsidiary. United will not pay any dividends in the immediate future without
regulatory approval. Refer to the "Other Restrictions" footnote in Fidelity's
consolidated financial statements for further details. United is uncertain when
it will pay dividends in the future and the amount of such dividends, if any.
Fidelity anticipates that it will not pay any dividends in the foreseeable
future. There were 499 stockholders of record as of February 29, 2000.
11
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
CORPORATE INFORMATION
Toll-Free Shareholder Inquiries: 1-800-280-8280
If you have inquiries or questions regarding your Fidelity Federal Bancorp
Shareholder account, call shareholder relations at 1-800-280-8280 or
812-469-2100, Ext. 2226.
Stock Transfers, Dividend Payments and
Dividend Reinvestment
Fidelity Federal Bancorp
Attn: Shareholder Relations
700 S. Green River Road, Suite 2000
PO Box 5584
Evansville, IN 47716-5584
Fidelity Federal Bancorp offers its common stock shareholders a no-cost way in
which to reinvest cash dividends. For additional information about this plan,
contact us at the above address or phone number.
Financial Information
If you are seeking financial information, contact:
Mark A. Isaac, Vice President and Controller
Fidelity Federal Bancorp
18 NW Fourth Street
PO Box 1347
Evansville, IN 47706-1347
812-429-0550, Ext. 3319
All other requests, including requests for the Annual Report, Form 10-K, and
Form 10-Q, should be directed to:
Shareholder Relations
Fidelity Federal Bancorp
700 S. Green River Road, Suite 2000
PO Box 5584
Evansville, IN 47716-5584
812-469-2100, Ext. 2226
Common Stock Information
NASDAQ
Ticker Symbol: FFED
Market Makers as of March 29, 2000
Natcity Investments, Inc.
Fleet Trading, a Division of Fleet Securities
Spear, Leeds & Kellogg
Products and Services
For specific information on products and Services offered by Fidelity's banking
subsidiary, United Fidelity Bank, fsb, call 1-800-280-8280 or (812) 424-0921.
For specific information on any of the Village Housing affordable housing
developments, contact Village Management Corporation (812) 469-2100, Ext. 2250
Corporate Headquarters
Fidelity Federal Bancorp
700 S. Green River Road, Suite 2000
PO Box 5584
Evansville, IN 47716-5584
1-800-280-8280
812-469-2100
Internet
Information on Fidelity Federal Bancorp is available on the Internet at:
http://www.ufb-ffed.com
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Selected Statistical Information
(Dollars in Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
As of and for
the year ended As of and for the years ended
- ------------------------------------------------------------------------------------------------------------------------------
December 31, June 30, June 30, June 30, June 30,
1999 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Data
Total assets $171,457 $172,253 $197,046 $240,819 $262,216
Interest-bearing deposits 22,911 14,668 6,266 1,765 4,107
Investment securities available for sale 24,305 27,325 9,854 13,790 17,459
Loans, net 96,919 110,436 156,683 203,183 216,162
Deposits 135,016 128,596 148,939 181,787 181,702
Short-term borrowings 89 128 2,531 5,191 5,693
Long-term debt 23,504 29,149 29,488 38,089 57,292
Stockholders' equity 5,427 7,814 7,515 12,936 14,295
Interest income $6,019 $ 14,094 $ 17,192 $ 20,282 $ 21,529
Interest expense 4,268 9,730 11,586 13,831 15,525
--------------------------------------------------------------------------
Net interest income 1,751 4,364 5,606 6,451 6,004
Provision for loan losses 1,345 (138) 4,543 975 455
--------------------------------------------------------------------------
Net interest income after provision
for loan losses 406 4,502 1,063 5,476 5,549
Non-interest income 1,001 2,663 3,025 3,856 8,180
Non-interest expense 5,148 6,878 16,076 9,474 8,608
--------------------------------------------------------------------------
Income (loss) before income tax (3,741) 287 (11,988) (142) 5,121
Income tax expense (benefit) (1,671) (338) (5,194) (255) 1,886
--------------------------------------------------------------------------
Net income (loss) $(2,070) $ 625 $ (6,794) $ 113 $ 3,235
==========================================================================
Selected Financial Ratios
Return on average assets (2.41)% .33% (3.12)% .04% 1.18%
Return on stockholders' equity (51.37) 7.58 (50.68) .83 23.75
Net interest margin 2.24 2.48 2.79 2.72 2.29
Net interest spread 2.05 2.24 2.62 2.57 2.11
Tangible equity to assets at year end 6.78 8.49 6.31 6.93 7.08
Allowance for loan losses to loans 2.04 3.09 1.91 .87 .49
Allowance for loan losses to non-performing loans 179.96 69.57 532.11 624.91 275.06
Dividend payout ratio N/A N/A N/A 1,500.00 67.52
Per Share Data
Diluted net income (loss) $ (0.66) $ .20 $ (2.30) $ .04 $ 1.17
Basic net income (loss) (0.66) .20 (2.30) .05 1.32
Cash dividends declared .35 .60 .79
Book value at period end 1.72 2.48 2.40 5.20 5.73
Closing market price (bid) at period end 1.25 2.88 6.50 8.75 11.25
Number of average common and common equivalent
shares outstanding 3,147,662 3,143,179 2,956,157 2,655,181 2,776,147
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
General
Fidelity Federal Bancorp (Fidelity), incorporated in 1993 under the laws of the
State of Indiana, is a registered savings and loan holding company with its
principal office in Evansville, Indiana. Fidelity's savings bank subsidiary,
United Fidelity Bank, fsb (United), was organized in 1914 and is a
federally-chartered stock savings bank located in Evansville, Indiana. Fidelity,
through its savings bank subsidiary, is engaged in the business of obtaining
funds in the form of savings deposits and other borrowings and investing such
funds in consumer, commercial, and mortgage loans, and in investment and money
market securities. Fidelity has engaged in the business of owning, developing,
building, renting and managing affordable housing projects through its
wholly-owned subsidiaries, Village Management Corporation and Village Housing
Corporation (collectively, the Affordable Housing Group). The Affordable Housing
Group has structured and participated in multi-family housing developments which
have been granted tax credits pursuant to Section 42 of the Internal Revenue
Code of 1986 (Section 42), as amended (Code) and tax-exempt bonds. Village
Housing Corporation, as general partner to the limited partnerships which own
the developments, receives a percentage interest in the profits, losses and tax
credits during the life of the project and receives a percentage of the annual
cash flow and residual (sale or refinancing) proceeds during operation and at
disposition or refinancing of the developments, respectively. Village Community
Development Corporation, (a subsidiary merged into Village Housing Corporation
during fiscal 1999) as contractor and developer, received construction and
development fees as the projects were completed. As the developments progressed,
development fee income was earned contractually on each project. These fees were
not recognized as income until the limited partner's equity investment had been
received or the syndication firm providing the equity had given a firm
commitment to provide the funds. As part of Village Management's duties as
project manager, it monitors compliance with the requirements of the Code to
prevent recapture of all or a portion of the tax credits or forfeiture of the
tax-exempt status of the bonds which would occur if certain tenant eligibility
and rent restriction requirements were violated. Village Management Corporation,
as manager of the completed project, receives a fee based on a percentage of
rental payments received from the project's tenants. Fidelity has been engaged
in affordable housing activities since September, 1992, through United, and
since April, 1994, through Village Capital Corporation (VCC). Since June 30,
1994, VCC has earned fees by providing real estate mortgage banking services to
unaffiliated borrowers.
In December, 1999, Fidelity's Board of Directors voted to change Fidelity's
fiscal year end from June 30 to December 31. Accordingly, the following
discussion analyzes the results of operations for the six months ended December
31, 1999 compared to the twelve months ended June 30, 1999 (fiscal 1999) and the
financial position as of December 31, 1999 to the financial position as of June
30, 1999. Fluctuations in the results of operations are significant in part
because there are two quarters less in the period ended December 31, 1999
compared to fiscal 1999. All references to percentage changes in income or
expense items have been annualized.
In 1992, the Board of Directors developed and began implementation of a new
business plan for United to improve the financial performance of the
organization. The key elements of this business plan included: (i) the formation
of a holding company to provide financial flexibility and to develop and engage
in non-banking business; (ii) the formation of an affordable housing group to
engage in real estate development, management and financing of affordable
housing projects; and (iii) the growth of assets through the origination and
acquisition of loans. After the implementation of the business plan, the holding
company as well as the affordable housing group, consisting of three non-bank
subsidiaries of United, was formed. In 1995 and 1996, revenue generated from
affordable housing activities increased dramatically and significant asset
growth was achieved, also resulting in higher revenues. To conserve capital,
Fidelity slowed its growth rate in fiscal 1996 and positioned Fidelity to reduce
debt, increase core deposits, sell loans, and use the proceeds to fund new loan
production. During 1996, Fidelity encountered increasing competition in the
affordable housing group arena. As a result, Fidelity re-evaluated its business
plan in fiscal 1997 and closed its Indianapolis, Indiana real estate development
office. In 1998, Fidelity's Affordable Housing Group discontinued the
development of real estate but continued to actively manage existing Company
affordable housing projects. As a result of this, fee income from real estate
development and real estate investment banking fees declined significantly.
There were no real estate development fees recorded in the six months ending
December 31, 1999, fiscal 1999 or 1998. Village Housing Corporation and Village
Management Corporation continue to be fully operational at Fidelity's
headquarters in Evansville.
14
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Fidelity's results in 1998 included an increase in the provision for loan losses
of $3.6 million, a letter of credit valuation provision of $6.8 million, and an
additional write-down of its investments in affordable housing projects of $1.5
million. The majority of these charges relate to Fidelity's involvement in the
Section 42 tax-credit real estate development program. The additional provision
for loan loss and letter of credit valuation provision that was recorded in
fiscal 1998 was recorded as a result of Fidelity's position that it was probable
that the losses would occur and that the losses could be reasonably estimated.
Statement of Financial Accounting Standards No. 5 "Accounting for Contingencies"
(SFAS No. 5) requires that both of these conditions must be met before an
estimated loss from a loss contingency is recorded. Prior to the third quarter
of fiscal 1998, Fidelity had determined that the possibility of loss was
"reasonably possible", but could not support that losses were "probable".
During the third quarter of fiscal 1998, Fidelity came to the realization that
it was probable that assets had been impaired (loans and equity investments) and
liabilities had been incurred (the letter of credit reserves). Fidelity came to
this realization because an adequate amount of time had passed since the
inception of the projects to support Fidelity's realization that the poor
performance of several of these projects was likely to continue. This
performance was below that which was originally projected for the majority of
the projects. Competing projects in several of the communities in which the
projects were in operation caused Fidelity to reduce its estimates of future
profitability.
These projects are not designed to initially have positive cash flow, but the
expectation is that they will have positive cash flow after the projects have
been active for a certain amount of time. Prior to the third quarter of 1998,
Fidelity determined that the reason for the projects not generating positive
cash flows was principally due to the recent start-up of the projects. Fidelity
was able to support that future improvements in monthly rents, monthly
occupancies, expense control, and in some cases financing, would occur. This
precluded Fidelity from determining that losses were "probable". The average
amount of time that Fidelity's seventeen projects (those projects for which
Fidelity's subsidiaries had equity investments) had been fully operational, as
of March 31, 1998, was 36 months.
While Fidelity has not participated in the development of any new projects that
it manages, the performance of a majority of the projects that Fidelity is
managing 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 of the projects 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 seen
increased competition in affordable housing, which has affected the project's
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 were required. Fidelity's current plans are to not
originate, participate or invest in any new or additional Section 42 projects.
Fidelity believes that the properties' cash flows will not improve significantly
unless a change in the properties' financing or debt structure occurs. It is
currently pursuing plans to restructure its Section 42 projects and has been
successful on two Section 42 projects during the six months ended December 31,
1999. The availability of such refinancing depends upon numerous factors,
including, among other things, interest rates, third-party appraisals and the
occupancy levels in the Section 42 projects. During the six months ended
December 31, 1999 and fiscal 1999, one of Fidelity's primary goals was to seek
refinancing opportunities with other potential financing sources. While this is
typically a lengthy process, Fidelity has been successful on reducing its
overall level of classified assets. Fidelity's classified assets and letters of
credit have decreased $18.5 million to $22.2 million at December 31, 1999 from
$40.7 million at June 30, 1999. Fidelity has a number of other credits in
process for refinancing to potentially further reduce the classified assets
during calendar 2000. However activities are temporarily on hold until interest
rates are lower, which will result in a higher level of principal that can be
refinanced. The workout effort is anticipated to be a significant portion of the
Fidelity and United business plan during calendar 2000. See "Allowance for Loan
Losses" and "Classified Assets" for a more detailed discussion. The December 31,
1999 audited financial statements include condensed financial information about
both of Fidelity's business segments.
The following table details average balances, interest income/expense and
average rates/yield for Fidelity's earning assets and interest bearing
liabilities for the six months ended December 31, 1999, and years ended June 30,
1999, and 1998. The average rates for the six months ended December 31, 1999
were adjusted to reflect annualized percentages.
15
<PAGE>
Fidelity Federal Bancorp and Subsidiaries
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Average Balance Sheet and Net Interest Analysis
(Dollars In Thousands on Fully Taxable Equivalent Basis)
<TABLE>
<CAPTION>
December 1999 June 1999 June 1998
- ----------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Year Ended: Balances Interest Rates Balances Interest Rates Balances Interest Rates
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold and
other short-term money
market investments $17,069 $ 454 5.28% $ 18,962 $ 964 5.08% $ 5,533 $ 330 5.96%
Investment securities
available for sale
Taxable 25,857 849 6.51 15,455 955 6.18 10,806 650 6.01
Tax exempt (1) 444 36 8.33
Loans held for sale
Federal Home Loan Bank
Stock 3,920 158 8.00 3,920 314 8.01 3,920 316 8.06
Loans (2) (3)
Commercial loans 5,512 276 9.93 8,055 791 9.82 11,683 1,124 9.62
Multi-family loans 24,525 1,026 8.30 33,918 2,999 8.84 25,573 2,672 10.45
Real estate mortgages 51,414 1,944 7.50 63,980 4,956 7.75 114,335 9,213 8.06
Consumer loans 27,004 1,312 9.64 31,840 3,115 9.78 28,939 2,863 9.89
------------------- ------------------- -------------------
Total loans 108,455 4,558 8.33 137,793 11,861 8.61 180,530 15,872 8.75
------------------- ------------------- -------------------
Total earning assets 155,301 6,019 7.69 176,130 14,094 8.00 201,233 17,204 8.55
------ ------ ------
Allowance for loan losses (2,868) (3,414) (2,538)
Cash and due from banks 4,193 2,680 3,018
Premises and equipment 5,747 5,749 6,214
Other assets 8,346 10,426 9,799
--------- --------- ---------
Total assets $170,719 $191,571 $217,726
========= ========= =========
Liabilities
Interest-bearing
deposits
Interest-bearing
checking $ 19,107 $ 327 3.39% $ 20,436 $ 716 3.50% $ 22,211 $ 942 4.24%
Money market accounts 2,545 26 2.03 2,733 61 2.23 3,027 82 2.71
Savings accounts 4,657 53 2.26 5,082 118 2.32 4,813 136 2.83
Certificates of deposit 96,476 2,745 5.64 112,539 6,572 5.84 128,142 7,625 5.95
------------------- ------------------- -------------------
Total
interest-bearing 122,785 3,151 5.09 140,790 7,467 5.30 158,193 8,785 5.55
Deposits
Federal funds purchased 116 7 6.03
Other borrowings 16,505 760 9.13 15,167 1,384 9.13 17,673 1,523 8.62
Federal Home Loan Bank
Advances 10,844 357 6.53 13,103 879 6.71 19,253 1,271 6.60
------------------- ------------------- -------------------
Total
interest-bearing
liabilities 150,134 4,268 5.64 169,060 9,730 5.76 195,235 11,586 5.93
------ ------ ------
Non-interest bearing
demand Deposits 6,097 5,724 5,229
Advances by borrowers
for Taxes and insurance 463 457 596
Other liabilities 6,033 8,079 3,260
-------- ------- -------
Total liabilities 162,727 183,320 204,320
Stockholders' Equity 7,992 8,251 13,406
-------- ------- -------
Total liabilities and
Stockholders' equity $170,719 $191,571 $217,726
========= ======== ========
Recap: (3)
Interest income 6,019 7.69% 14,094 8.00% 17,204 8.55%
Interest expense 4,268 5.45 9,730 5.52 11,586 5.76
----------------- ---------------- ------------------
Net interest
income/margin $1,751 2.24% $ 4,364 2.48% $ 5,618 2.79%
================= ================ ==================
Interest rate spread (4) 2.05% 2.24% 2.62%
Average interest-bearing
assets to average
interest-bearing
liabilities 103.44% 104.18% 103.07%
</TABLE>
(1) Tax-exempt securities have been adjusted to a fully tax equipment basis
using a marginal tax rate of 34%.
(2) Nonaccrual loans have been included in the average balances.
(3) Loan income includes interest and fees on loans.
(4) Interest rate spread is calculated by subtracting combined weighted
average interest rate cost from combined weighted average interest rate
earned for the period indicated.
16
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Results of Operations
Net Interest Income
Net interest income, Fidelity'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 Fidelity's
interest rate-sensitive assets and liabilities. Due to a significant decrease in
earning assets, net interest income decreased to $1.8 million for the six months
ended December 31, 1999. On an annualized basis this represents a $3.6 million
or 18.2% decrease compared to fiscal 1999 net interest income of $4.4 million.
The reduction in net interest income during the six months was primarily due to
the continued reduction in average earning assets of $20.8 million, which was
partially offset by a decrease in average interest-bearing liabilities of $18.9
million. Fidelity's reduction in average earning assets and average
interest-bearing liabilities has occurred in fixed rate 1-4 family mortgage
loans, multifamily loans and certificates of deposit, primarily agent-acquired
deposits. Average real estate mortgage loans have decreased $12.6 million,
resulting in a decrease of $1.1 million on an annualized basis in interest
income. Average multifamily loans also decreased $9.4 million due to continued
workout efforts, which has a negative impact on interest income, resulting in a
decrease of $964,000 on an annualized basis. Certificates of deposit and
borrowings partially offset this reduction in assets with a decrease of $16.1
million in certificates and $921,000 in borrowings. This resulted in decreased
interest expense, on an annualized basis of $1.2 million and $49,000,
respectively. Interest income on an annualized basis for the six months ended
December 31, 1999 was $11.9 million compared to $14.1 million for the year ended
June 30, 1999, a decrease of $2.2 million or about 15.6%. Interest expense on an
annualized basis for the year ended December 31, 1999 was $8.5 million compared
to $9.7 million for the year ended June 30, 1999, a decrease of $1.2 million or
12.4%. The reduction in average earning assets was attributable to loan payoffs,
multifamily loan workout activities for refinancing, and payoffs on conventional
real estate mortgage loans. The decrease in commercial and multifamily loans is
expected to continue during the time that United operates under the Supervisory
Agreement. Please refer to the footnote. "Other Restrictions" in the Notes to
Consolidated Financial Statements for further details. The average balance of
agent-acquired certificates of deposit, which had an average rate of 6.02% in
1999, was reduced from $33.5 million in fiscal 1999 to $18.1 million for the six
months ended December 31, 1999 with an average rate of 5.88%.
The net interest margin decreased during the six month period to 2.24% from
2.48% in fiscal 1999. The average yield on interest-earning assets and average
rate paid on interest-bearing liabilities of 7.69% and 5.64% declined from last
year's average rates of 8.00% and 5.76%. This is expected to be a continuing
trend during the term of the Supervisory Agreement between United and the OTS,
as certain lending activities are restricted.
The reduction in net interest income in the period ended June 30, 1999 compared
to June 30, 1998 was primarily due to the continued reduction in average earning
assets of $25.1 million, which was partially offset by a decrease in average
interest-bearing liabilities of $26.2 million. Fidelity's reduction in average
earning assets and average interest-bearing liabilities in fiscal 1999 compared
to fiscal 1998 has occurred in fixed rate 1-4 family mortgage loans and
certificates of deposit, primarily agent-acquired deposits. Average real estate
mortgage loans have decreased $50.4 million, resulting in a decrease of $4.3
million in interest income. Certificates of deposit and borrowings partially
offset this reduction in assets with a decrease of $15.6 million in certificates
and $8.7 million in borrowings. This resulted in decreased interest expense of
$1.1 million and $.5 million, respectively. Interest income for the year ended
June 30, 1999 was $14.1 million compared to $17.2 million for the year ended
June 30, 1998, a decrease of $3.1 million or about 18.0%. Interest expense for
the year ended June 30, 1999 was $9.7 million compared to $11.6 million for the
year ended June 30, 1998, a decrease of $1.9 million or 16.4%. The reduction in
average earning assets was attributable to payoffs and the sale of several
conventional real estate mortgage loans. The average balance of agent-acquired
certificates of deposit, which had an average rate of 6.26% in 1998, was reduced
from $42.4 million in 1998 to $33.5 million in 1999 with an average rate of
6.02%.
17
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The net interest margin decreased in 1999 to 2.48% from 2.79% in 1998. The
average yield on interest-earning assets and average rate paid on
interest-bearing liabilities of 8.00% and 5.76% declined from last year's
average rates of 8.55% and 5.93%. The decrease in the net interest margin, as
previously mentioned, is the result of loan payoffs on fixed rate 1-4 family
loans and the sale of new loan production on the secondary market. Commercial
loans and higher yielding multi- family loans continue to decrease due to
refinancing and payoffs. As such, earnings variability is possible in future
periods.
Quarterly Results of Operations
Fidelity's earnings have experienced some variability from quarter to quarter
due to the uncertainty of the timing when certain classified assets, and letters
of credit are refinanced, paid off or require additional or reduced provisions
or valuation reserves.
<TABLE>
<CAPTION>
September 30 December 31 March 31 June 30 Total
- ------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
December 31, 1999
Interest income $2,990 $3,029 $6,019
Interest expense 2,085 2,183 4,268
------------------------------------------------------------------------------------
Net interest income 905 846 1,751
Provision for loan losses 75 1,270 1,345
Non-interest income 488 513 1,001
Non-interest expense 1,302 3,846 5,148
------------------------------------------------------------------------------------
Income (loss) before income tax 16 (3,757) (3,741)
Income tax benefit (88) (1,583) (1,671)
------------------------------------------------------------------------------------
Net income $ 104 $ (2,174) $ (2,070)
====================================================================================
Net income per share
Diluted net income $.03 $(.69) $(.66)
Basic net income .03 (.69) (.66)
Cash dividends*
June 30, 1999
Interest income $3,883 $3,709 $3,363 $3,139 $14,094
Interest expense 2,618 2,556 2,364 2,192 9,730
------------------------------------------------------------------------------------
Net interest income 1,265 1,153 999 947 4,364
Provision for loan losses 75 75 (404) 116 (138)
Non-interest income 895 738 571 459 2,663
Non-interest expense 1,841 1,788 1,874 1,375 6,878
------------------------------------------------------------------------------------
Income (loss) before income tax 244 28 100 (85) 287
Income tax benefit (92) (73) (35) (138) (338)
------------------------------------------------------------------------------------
Net income $ 336 $ 101 $ 135 $ 53 $ 625
====================================================================================
Net income per share
Diluted net income $.11 $.03 $.04 $.02 $.20
Basic net income .11 .03 .04 .02 .20
Cash dividends*
</TABLE>
*No cash dividends were paid in the six months ended December 31, 1999 or for
fiscal 1999.
18
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Rate/Volume Analysis
The following table sets forth an analysis of volume and rate changes in
interest income and interest expense of Fidelity's average earning assets and
average interest-bearing liabilities. The table distinguishes between the
changes related to average outstanding balances of assets and liabilities
(changes in volume holding the initial interest rate constant) and the changes
related to average interest rates (changes in average rate holding the initial
outstanding balance constant). The change in interest due to both volume and
rate has been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in each. The column
labeled, "Change in fiscal year", represents the change in net interest income
due to Fidelity changing the fiscal year from June 30 to December 31.
<TABLE>
<CAPTION>
December 31, 1999 June 30, 1999
Compared to June 30, 1999 Compared to June 30, 1998
Increase (Decrease) Due To Increase (Decrease) Due To
Change in ------------------------------------
Volume Rate Fiscal Year Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income on average earning assets
Loans $(2,525) $(294) $(4,484) ($7,303) $(3,758) $(254) ($4,012)
Investment securities 643 86 (835) (106) 243 25 268
Federal Home Loan Bank stock (1) (155) (156) (2) (2)
Federal funds sold and other
short-term money market investments (96) 33 (447) (510) 801 (167) 634
-------------------------------------------------------------------------------
Total interest income (1,978) (176) (5,921) (8,075) (2,714) (398) (3,112)
-------------------------------------------------------------------------------
Interest expense on average interest-
bearing liabilities
Interest bearing accounts (47) (21) (322) (390) (75) (151) (226)
Money market deposit accounts (4) (5) (26) (35) (8) (13) (21)
Savings accounts (10) (3) (52) (65) 8 (26) (18)
Certificates of deposit (937) (189) (2,700) (3,826) (928) (125) (1,053)
Federal funds purchased (7) (7)
Other borrowings 122 2 (748) (624) (216) 77 (139)
Federal Home Loan Bank advances (152) (19) (351) (522) (406) 14 (392)
--------------------------------------------------------------------------------
Total interest expense (1,028) (235) (4,199) (5,462) (1,632) (224) (1,856)
--------------------------------------------------------------------------------
Changes in net interest income $ (950) $ 59 $ (1,722) $ (2,613) $(1,082) $(174) $(1,256)
================================================================================
</TABLE>
19
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Provision for Loan Losses and Letter of Credit Reserves
Fidelity makes provisions for possible loan losses in amounts estimated to be
sufficient to maintain the allowance for loan losses at a level considered
necessary by management to absorb losses in the loan portfolios. The provision
for loan losses for the six months ending December 31, 1999 was $1.3 million
compared to a credit of $138,000 in the prior year, an increase of $1.5 million.
During fiscal year ended June 30, 1999, as a result of a reduction in classified
and criticized assets and an overall improvement in the operating results of
Fidelity's affordable housing portfolio, Fidelity reduced its provision for loan
losses and reserve for letters of credit and recognized income of $607,000. The
operating results in the affordable housing portfolio deteriorated during the
six month period ending December 31, 1999, as discussed below, resulting in
significant additional provisions for loan losses of $1.3 million. Additionally,
a large hotel loan's operating results deteriorated to the extent that
management established a provision of approximately $470,000.
The ratio of allowance for loan losses to non performing loans was 180.0% at
December 31, 1999 compared to 69.6% at June 30, 1999. The decrease in
non-performing loans is due to one large multi-family loan to an unaffiliated
borrower that paid off in October 1999. A specific reserve of $510,000 had been
previously established for this loan.
During fiscal 1998 changes in loan and letter of credit concentrations and terms
did not affect the amount of the allowance for loan losses and letter of credit
valuation reserve for each period. The primary factor that led Fidelity to
determine that additional reserves were required, in 1998, was that enough time
had passed since start-up of the projects to more accurately project the future
performance of the projects. This changed Fidelity's evaluation of the quality
of the applicable projects and its assessment of the quality of those credits
which it held in its portfolio.
The method used beginning in the third quarter of fiscal 1998 to determine the
amount of required reserves for affordable housing industry permanent and
general partner loans, equity investments and letters of credit used past
monthly cash flows as a determinant as to how much debt service the projects
could support. Specifically, the method determined the amount of debt service
for fiscal 1998, 1999, and the six months ended December 31, 1999 as follows:
1. Cash flows from the projects were scheduled from internal project
records. These were used to project annualized cash flows that were
based on periods of time that were considered to be best reflective of
future performance of that project. Certain items affecting cash flows
during only certain months of the year, such as the payment of real
estate taxes, were subtracted from the calculated annualized amounts so
that monthly cash flows would be reflective of actual monthly
operation.
2. A projected loan amount that could be supported by current cash flows
was calculated using the computed cash flows for the most appropriate
period (converted to a monthly cash flow amount), the current rate, and
a 25-year amortization period. This amount was added to the computed
residual value of the project at the end of a 15-year amortization
period to reflect the total value of the project in fiscal 1998 and
1999. In the period ended December 31, 1999, the project loan amounts
that could be supported by cash flows were adjusted to provide for a
1.15:1 debt service coverage ratio, due to the continued aging of the
loan portfolio, and historical volatility of the cash flows. This
adjustment, along with recent deterioration in cash flows in a segment
of the affordable housing loan portfolio, significantly reduced the
total value of certain projects, and thus increased the required
reserves for those projects.
3. This information was used to determine proper classifications, and
ultimately reserves, for the loan, letter of credit, general partner
loan and equity investment amounts. A "potential tax credit market
adjustment" was computed in fiscal 1998 and 1999 by taking the
difference between the price paid by investors for tax credits at the
project's inception and an amount that was determined to be better
reflective of the true value of the credits. This market adjustment was
used to determine what portion of the loans, letters of credit, general
partner loans and equity investments would be classified as doubtful,
which included a 50 percent reserve, and loss, which included a 100
percent reserve or charge-off of the related asset or reserve for the
letter of credit. This market adjustment was not used to compute the
appropriate level of reserves at December 31, 1999. The elimination of
the market value adjustment with respect to determining the overall
reserve level, resulted in a significant increase in the reserves
required.
20
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The assignment was based on the possibility of limited partner
participation in operating deficits of the partnerships due to the
market value appreciation of the tax credits held by the limited
partners in the respective partnerships. Since this participation has
not occurred, management classified the potential adjustment as loss,
despite continued appreciation of the remaining tax credits.
4. The analyses were updated quarterly for current operating information
of the actual projects. Except for the market value adjustment and the
increased debt service coverage requirement noted above for the
December 31, 1999 review, the assumptions used to compute reserves were
not changed for any of the quarters in fiscal 1999; only the data used
to compute classifications was changed. The period of cash flows used
was changed in certain instances if it was determined that a change
better reflected future projected results. For the period ended
December 31, 1999, calendar 1999 data was used.
Prior to the quarter ended March 31, 1998, affordable housing industry loans and
letters of credit were classified in the categories of pass, special mention,
substandard, doubtful and loss. Percentages were applied to the balances
classified in the respective categories that represented Fidelity's best
estimate of loss for those classifications.
Specific reserves are assigned to certain credits. The reserves are determined
by management's evaluation of those credits. The results of internal loan
reviews, OTS evaluations and recent events assist Fidelity in making that
evaluation. The independent support for the allowance for loan losses and letter
of credit valuation reserve includes documentation that supports the amount of
recorded reserves for these credits. During the six months ended an additional
provision for letter of credit losses of $1.1 million was recognized due to a
deterioration in the affordable housing portfolio.
General reserves for loans and letters of credit not specifically reserved are
also determined. Fidelity computes general reserves for the commercial,
commercial mortgage, residential mortgage, consumer and credit card loan
portfolios by utilizing historical information and information currently
available about the loans within those portfolios that provides information as
to the likelihood of loss. The potential effect of current economic conditions
is also considered with respect to establishing general reserve amounts. As a
result of recent loss levels in consumer loans originated prior to 1999, the
provision for consumer loan losses was increased to a level approximating 1.5%
of consumer loans outstanding.
21
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Non-Interest Income
Non-interest income decreased by $1.7 million or $661,000 on an annualized basis
for the six months ending December 31, 1999, compared to a decrease of $362,000
or 12.0% for the year ended June 30, 1999. The percent change for December 31,
1999 has been annualized. The following table summarizes non-interest income for
the following time periods:
<TABLE>
<CAPTION>
Change From Prior Year
Increase (Decrease)
-------------------------------------------------
Amount December 31, 1999 June 30, 1999
--------------------------------------------------------------------------------------------
Six months ended Year ended Year ended
December 31, June 30, June 30, Annualized
1999 1999 1998 Amount Percent Amount Percent
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Fee income from real estate
Development and management $ 88 $ 196 $ 191 $ (108) (10.2)% $ 5 2.6%
Service charges on deposit
Accounts 201 437 436 (236) (8.0) 1 .2
Gain on sale of
Real estate loans 110 343 186 (233) (35.9) 157 84.4
Investment securities 79 0.0 (79) (100.0)
Letter of credit fees 291 582 657 (291) 0.0 (75) (11.4)
Servicing fees on loans sold 55 91 93 (36) 20.9 (2) (2.2)
Release fees on multifamily loans 20 82 74 (62) (51.2) 8 10.8
Real estate investment
Banking fees 13 78 139 (65) (66.7) (61) (43.9)
Agent fee income 4 333 650 (329) (97.6) (317) (48.8)
Title fee income 18 72 10 (54) (50.0) 62 620.0
Other 201 449 510 (248) (10.5) (61) (12.0)
--------------------------------------------------------------------------------------------
Total non-interest income $1,001 $2,663 $3,025 $(1,662) (24.8)% $(362) (12.0)%
============================================================================================
</TABLE>
Fidelity's level of activity in Section 42 real estate activities has continued
to decrease. Fidelity has recorded no Section 42 real estate development fees
over the past three years. Fee income from management activities for fiscal 1999
was approximately the same as 1998 even though there was a reduction during the
year in fee percentage from 5% to 4% collected on partnerships for which Village
Housing Corporation is the general partner. Management fee income for the six
months ended December 31, 1999, annualized decreased $20,000 from fiscal 1999
due to lower occupancy levels and a reduction in rent charged at certain
properties in an effort to increase occupancy levels. Service charges on deposit
accounts remained approximately the same in fiscal 1999 and 1998 despite a
reduction in the deposits. There is a slight decrease in the six months ended
December 31, 1999, annualized of $402,000 compared to the prior fiscal years due
to the continuing decrease in deposits. Net gains on the sale of single-family
loans during fiscal 1999 increased $157,000 over the same period in 1998,
resulting from increased loan originations during the year. Loan originations
during the six months ending December 31, 1999 have decreased due to the higher
level of mortgage interest rates compared to prior years. As a result,
annualized net gains of $220,000 were down $123,000 compared to fiscal 1999. No
securities were sold in the six months ending December 31, 1999 or fiscal 1999;
gains of $79,000 were recorded in 1998. Letter of credit fees annualized in the
short year and fiscal 1999 were $582,000 compared to $657,000 in fiscal year
1998. Outstanding letters of credit at December 31, 1999 and June 30, 1999 were
$44.6 million and $45.0 million respectively, compared to $55.5 million at June
30, 1998. Real estate investment banking fees continue to decrease from prior
years and are estimated to be minimal in the foreseeable future. Title fee
income decreased $36,000 on an annualized basis compared to fiscal 1999, but
increased $26,000 over fiscal 1998. The decrease is primarily due to a decrease
in loan volume compared to last year.
22
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
United has participated in an arrangement in which automobile loans are
originated on behalf of another organization for the last three fiscal years.
Agent fee income, which represents earned fees from these transactions,
decreased $317,000 for the year ended June 30, 1999 compared to fiscal 1999. In
January 1999, the head of United's consumer loan division and key members of the
consumer loan division staff left United to accept employment with a competitor.
As such, United's revenue from consumer loans has been sharply reduced. During
the fourth quarter of fiscal 1999, United hired a manager and staff to resume
this lending activity. United commenced certain types of consumer lending, such
as home equity lending as of June 30, 1999. United fully resumed indirect
lending during the first quarter of the fiscal period ended December 31, 1999.
Agent fees annualized for the six months ended December 31, 1999 were only
$8,000 compared to prior periods. United is currently retaining the majority of
these originations in the consumer loan portfolio. United has been adding new
consumer loans to the portfolio during the past six months, which adds to
consumer loan interest income, but not fee income.
Non-Interest Expense
Non-interest expense on an annualized basis increased $3.4 million or 49.7% for
the year ended December 31, 1999, compared to fiscal 1999 after decreasing by
$9.2 million or 57.2% in fiscal 1999 from 1998. The following table summarizes
non-interest expense for the six months ending December 31, 1999, and years
ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Change From Prior Year
Increase (Decrease)
------------------------------------------------
December 1999 June 1999
----------------------------------------------------------------------------------------
Year Ended Six months
ended Year ended Year Ended
December June June Annualized
1999 1999 1998 Amount Percent Amount Percent
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $1,747 $3,414 $ 3,341 $ (1,667) (2.3)% $ 73 2.2%
Letter of credit valuation
provision 1,069 (715) 6,778 1,784 (399.0)% (7,493) (110.5)%
Write down of affordable
housing partnership
investments 331 545 1,478 (214) (47.5) (933) (63.1)
Legal and professional 379 379 304 (0) 100.0 75 24.7
Occupancy expense 192 394 444 (202) (2.5) (50) (11.3)
Equipment expense 166 299 354 (133) 11.0 (55) (15.5)
Data processing expense 247 407 456 (160) 21.4 (49) (10.7)
Affordable housing group
activity expenses 769 (769) (100.0)
Advertising 78 202 199 (124) (22.8) 3 1.5
Deposit insurance 156 244 140 (88) 27.9 104 74.3
SAIF assessment
Correspondent bank charges 79 154 160 (75) 2.6 (6) (3.8)
Printing and supplies 57 104 130 (47) 9.6 (26) (20.0)
Loss on investment 25 246 87 (221) (25.2) 159 182.8
Telephone 48 74 74 (26) 29.7 0 0.0
Postage 42 95 79 (53) (11.6) 16 20.3
Travel and lodging 30 44 68 (14) 36.4 (24) (35.3)
Other operating expense 502 992 1,215 (490) 5.0 (223) (18.4)
----------------------------------------------------------------------------------------
Total non-interest expense $5,148 $6,878 $16,076 $(1,730) 49.7% $(9,198) (57.2)%
========================================================================================
</TABLE>
23
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The increase in total non-interest expense annualized for the six months ending
December 31, 1999, as compared to fiscal 1999, relates primarily to expenses
associated with Fidelity's Section 42 tax credit real estate development
program. Due to a deterioration in cashflows and occupancy during the six months
ending December 31, 1999, additional letter of credit provisions of $1.1 million
were recognized. Volatility in cashflows, occupancy and other performance
measurements can create large variances in reserves that are necessary based on
quarterly loan and letters of credit reviews of the partnerships. Writedowns on
affordable housing partnerships were $331,000 for the six months ended December
31, 1999 or $662,000 annualized. This is a $117,000 increase over fiscal 1999
primarily due to the same issues mentioned above. The letter of credit provision
was $6.8 million in fiscal 1998. Due to refinancings and reductions of
classified letters of credit, a portion of $6.8 million in reserves were
reversed in fiscal 1999. Although the majority of the letters of credit reserve
relates to the Section 42 program, a portion of this reserve relates to letters
of credit that are not related to the Section 42 program. Included in the 1998
expense of $769,000 were abandoned projects expense of $213,000 and write-offs
of partnership management, investment banking, real estate development and
letter of credit fees totaling $384,000. Abandoned projects expense consists of
costs that were incurred at sites that will not be fully developed.
Salaries and employee benefits on an annualized basis increased $80,000 over
fiscal 1999 due primarily to open positions in the consumer lending area during
fiscal 1999 that were filled in the six month period ending December 31, 1999.
In addition, severance expense of $50,000 associated with the elimination of
duplicative positions within Fidelity was recognized. For both the six months
and fiscal 1999 legal and professional fees were $379,000 for each time period
compared to $304,000 for fiscal 1998. Legal and professional fees are higher
primarily due to additional costs incurred for workout activities with respect
to various classified assets, and other legal actions commenced by Fidelity,
including actions connected with Fidelity's efforts to divest of its Section 42
tax-credit property loans and investments. An additional $103,000 in legal fees
associated with the Lincolnshire transaction that was terminated in November
1999 were also incurred during the six month period. Legal fees of $21,000
associated with the Pedcor transaction were also expensed during the six months
ending December 31, 1999. Occupancy expense for the six months ending December
31, 1999 was approximately the same as fiscal 1999 on an annualized basis.
Equipment expense increased $33,000 on an annualized basis over fiscal 1999
primarily due to higher cost repairs on equipment than last year. Data
processing expense was $247,000 for the six month period compared to $407,000 in
fiscal 1999. Year 2000 expense and improved data communications between the
branches accounts for the increase during the six months ending December 31,
1999 over fiscal 1999 on an annualized basis. Data processing expense for fiscal
1999 decreased $49,000 from fiscal 1998 due to a smaller number of transactions
with the data processor resulting from the reduction in Fidelity's asset size.
Deposit insurance increased $68,000 on an annualized basis due to the change in
United's risk classification compared to the prior year. Fidelity recorded its
percentage share of losses, as accounted for under the equity method of
accounting, for its investments in various IRS Section 42 developments of
$50,000 annualized compared to $246,000 and $87,000 in the prior years. These
writedowns are partially offset by tax credits received and recorded as
reductions of income tax expense. Other operating expense on an annualized basis
increased slightly over fiscal 1999 by $12,000. Management continues to monitor
expenses closely.
Income Tax Benefit
The income tax benefit was $1.7 million or $3.4 million annualized for the six
months ending December 31, 1999 compared to $338,000 and $5.2 million for fiscal
1999 and 1998, respectively. This represents a $3.0 million increase in income
tax benefits primarily resulting in a decrease in taxable income. Income tax
benefit decreased $4.9 million for the year ended June 30, 1999 compared to the
same period in 1998, primarily due to an increase in taxable income. Included in
the tax benefit of $1.7 million for the six months ending December 31, 1999 are
tax credits of $193,000. These credits are received from Fidelity's investment
in Section 42 affordable housing projects and comprise a portion of the return
on these investments. Fidelity also receives the tax benefit of its percentage
of the operating losses for those projects. Some of the benefits associated with
these tax credits are partially offset by reductions of the investment in the
Section 42 projects, which are included in the above table under the caption
"Loss on Investment". The effective tax rate for the six months ended December
31, 1999 was 44.7% compared to 117.8% and 43.3% for fiscal 1999 and 1998,
respectively.
24
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The change in the deferred tax asset balance from June 30, 1997 to June 30, 1998
was $3,368,000 and was due primarily to the loss incurred in fiscal 1998. At
June 30, 1998, a portion of the net operating loss was carried forward and a
portion was carried back to generate refunds from prior tax years. The portion
that was carried back "freed up" credits utilized in prior years. These credits
are now being carried forward. The remainder of the change in the deferred tax
balance is primarily due to writedowns of assets that are not deductible for tax
purposes for fiscal 1998.
A consideration of a valuation allowance for the deferred tax asset was made at
December 31, 1999 and June 30, 1999 and 1998 after projecting the reversal of
the deferred items. These analyses were based on projected operating income in
future years, action plans developed and partially implemented included in a
newly developed business plan, cost reductions, planned sale of a portion of
United's limited partnership interests and the completion of Fidelity's
transaction with Pedcor Holdings LLC ("Pedcor"). Please refer to the last
footnote in the Notes to Consolidated Financial Statements for further details
regarding the Pedcor transaction. These analyses showed that it was more likely
than not that all carryforwards would be utilized within the carryforward
periods (federal and state) and therefore no valuation allowance was recorded.
The analyses assume that Fidelity will execute approximately 50% of the
initiatives included within its current business plan, sell approximately 50% of
its limited partnerships interests (reducing tax credits granted annually) and
then achieve 5 to 10% growth in annual earnings thereafter. The level of
earnings contemplated by these analyses, if achieved, will still constitute, for
the majority of the carry forward periods, earnings levels that are below other
thrift holding companies included within Fidelity's peer group. The analyses to
consider the need for a valuation allowance for the deferred tax asset are
subject to certain risks and uncertainties that could impact the final
determination regarding the amount of the valuation allowance. These risks
include the failure of the Company to complete the transaction with Pedcor, the
failure to implement the newly developed business plan including cost
reductions, or the planned sale of United's limited partnership interests.
Year 2000
For the past several years, Fidelity has been taking corrective measures to
ensure that, on January 1, 2000, its computer systems and equipment that use
embedded computer chips would be able to distinguish between "1900" and "2000."
Fidelity also undertook corrective measures to avoid any business disruptions on
February 29, 2000 as a result of the millennium's first leap year. Due to these
efforts, Fidelity has not experienced any material system errors or failures as
a result of Year 2000 issues. Prior to December 31, 1999, Fidelity assigned
certain individuals to act as a single point of coordination and information
about all Year 2000 events, whether internal or external, that could impact
normal business processes. In addition, Fidelity will continue its business as
usual practices to monitor its computer systems and infrastructure, as well as
the Year 2000 efforts of third parties with which the Corporation does business.
Although Fidelity does not anticipate that any future Year 2000 issues will
result in a material impact on Fidelity, there can be no assurance that this
will be the case. Fidelity has incurred cumulative Year 2000 costs of
approximately $250,000 through December 31, 1999. A significant amount of these
costs was not incremental to Fidelity but instead constituted a reallocation of
existing internal systems technology resources and, accordingly, was funded from
normal operations. Remaining costs are expected to be immaterial and similarly
funded. Forward-looking statements contained in the foregoing "Year 2000"
section should be read in conjunction with the cautionary statements included in
the introductory paragraphs under "Management's Discussion and Analysis of
Results of Operations and Financial Condition".
Financial Condition
Total assets at December 31, 1999 decreased $796,000 to $171.5 million from
$172.2 million in fiscal 1999. Average assets for the six months ended December
31, 1999 decreased 10.9% from fiscal 1999 to $170.7 million. Average
interest-bearing liabilities decreased $18.9 million as Fidelity used loan
payoff proceeds to reduce borrowings and agent-acquired certificates of deposit,
which represent a higher-cost source of funds for Fidelity.
The decrease in total assets is primarily the result of loan payoffs,
refinancing and payments received on commercial, multifamily and fixed 1-4
family mortgage loans. Fidelity has continued to sell current production of
fixed 1-4 family mortgages to investors in the secondary market, therefore the
mortgage loan portfolio continues to decline.
25
<PAGE>
Loans
The following table shows the composition of Fidelity's loan portfolio as of
December 31, 1999 and June 30:
<TABLE>
<CAPTION>
December June June June June
1999 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Real estate mortgage loans
First mortgage loans
Conventional $ 48,845 $ 49,733 $ 71,343 $ 94,293 $106,344
Construction 1,867 6,732 16,110 32,577 36,938
Commercial 8,576 14,140 20,753 26,668 18,267
Multi-family loans 3,629 7,597 5,742 9,602 15,420
First mortgage real estate loans
purchased 1,899 2,061 2,704 3,184 7,612
------------------------------------------------------------------------------------
64,816 80,263 116,652 166,324 184,581
Commercial loans, other than
secured by real estate 4,154 6,076 11,568 12,522 9,393
Consumer and home equity loans 29,970 27,618 31,512 26,118 23,247
------------------------------------------------------------------------------------
Total loans 98,940 113,957 159,732 203,183 217,221
Allowance for loan losses (2,021) (3,521) (3,049) (1,781) (1,059)
------------------------------------------------------------------------------------
Net loans $96,919 $110,436 $156,683 $204,964 $216,162
====================================================================================
Total assets $171,457 $172,253 $197,046 $240,819 $262,216
====================================================================================
Total loans to total assets 57.7% 66.2% 81.1% 85.4% 82.8%
====================================================================================
</TABLE>
Fidelity began selling current production of 1-4 family loans in 1997, recording
the gain or loss and using the proceeds to fund new products. With this strategy
in place, conventional real estate mortgage loans decreased $45.4 million from
June 30, 1997 to December 31, 1999.
Construction loans decreased by $4.9 million at December 31, 1999 from June 30,
1999. Construction loans at December 31, 1999 include only $1.5 million of
multi-family loans, compared to $5.9 million at June 30, 1999. Multi-family
loans decreased $4.0 million from the prior fiscal year due to Fidelity's
efforts on reducing classified assets and charge offs of $865,000. Fidelity
continues to pursue refinancing opportunities for available outlets for the
remaining classified multifamily loans, commercial loans and letters of credit.
Commercial real estate loans and commercial loans have continued to decrease
since 1997 due to payoffs, paydowns and an overall decline in originations. One
additional factor playing a role in this decrease is the Supervisory Agreement
that United is currently under which restricts new commercial lending. Refer to
the "Other Restrictions" footnote for additional information. The focus of
United's commercial lending department has been to develop action plans to
minimize potential losses relating to its classified commercial credits and its
letter of credit exposure. Multi-family loans overall, including construction,
have decreased since 1995 as Fidelity has sold participations in the loans or
received payoffs because of the availability of more favorable financing
alternatives. In several cases where multi-family loan borrowers required more
favorable financing alternatives, Fidelity has issued a standby letter of credit
and continued to assume the credit risk associated with the financing.
Consumer and home equity loans increased $2.4 million from June 30, 1999 to $30
million at December 31, 1999. United has reestablished its presence in the
indirect auto lending market during the past six months. Recent staff
replacements to the consumer loan department in late fiscal 1999 have
contributed to the increase in the consumer and home equity loan portfolios.
26
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Fidelity's loan portfolio contains no loans to foreign governments, foreign
enterprises, foreign operations of domestic companies or highly leveraged
transactions, nor any concentration to borrowers engaged in the same or similar
industries that exceed ten percent of total loans.
Loan Maturities
The following table sets forth the remaining maturities for certain loan
categories as of December 31, 1999:
<TABLE>
<CAPTION>
Within One One to Five After Five Years
Year Years Total
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Real estate mortgage loans $ 3,029 $12,655 $49,132 $ 64,816
Consumer and home equity loans 12,628 16,360 982 29,970
Commercial loans 1,208 2,946 4,154
-----------------------------------------------------------------------
Total $16,865 $31,961 $50,114 $98,940
=======================================================================
Predetermined interest rates $ 8,685 $24,963 $26,503 $ 60,151
Floating interest rates 8,180 6,998 23,611 38,789
-----------------------------------------------------------------------
$16,865 $31,961 $50,114 $98,940
=======================================================================
</TABLE>
(This space intentionally left blank)
27
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Non-Performing Loans
Fidelity discontinues the accrual of interest income on loans when, in the
opinion of management, there is reasonable doubt as to the timely collectibility
of interest or principal. When a loan reaches a ninety day or more past due
status, the asset is generally repossessed or sold, if applicable, or the
foreclosure process is initiated and the loan is re-classified to other real
estate owned to be sold. A loan could be placed in a nonaccrual status sooner
than ninety days, if management knows the customer has abandoned the collateral
and has no intention of repaying the loan. At this point, management
discontinues the accrual of interest and Fidelity would initiate the
repossession or foreclosure process. Typically, when a loan reaches nonaccrual
status, the accrued interest is reversed from income, unless strong evidence
exists that the value of the collateral would support the collection of interest
in a foreclosure situation. Nonaccrual loans are returned to an accrual status
when, in the opinion of management, the financial position of the borrower
indicates that there is no longer any reasonable doubt as to the timely payment
of principal and interest. Income received on nonaccrual loans was $18,000 for
the six months ended December 31, 1999, $157,000 in fiscal 1999 and $10,000 in
1998. Additional interest income of approximately $13,000, $214,000, and $33,000
for the six months ended December 31, 1999, fiscal 1999, and 1998, respectively,
would have been recorded had income on nonaccruing and restructured loans been
considered collectible and accounted for on an accrual basis.
The following table provides information on Fidelity's non-performing loans as
of December 31, 1999 and June 30:
<TABLE>
<CAPTION>
December 31, June 30, June 30, June 30, June 30,
1999 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans
Real estate mortgage $ 253 $ 76 $461 $256 $342
Multi-family 229 4,112
--------------------------------------------------------------------------
Total non-accrued loans 482 4,188 461 256 342
Restructured
Real estate mortgage
Consumer 75 77
Commercial 118
--------------------------------------------------------------------------
Total restructured loans 193 77
90 days or more past due and accruing
Consumer 135 164 86 29 43
Commercial 313 632 26
--------------------------------------------------------------------------
Total 90 days or more past due and accruing 448 796 112 29 43
--------------------------------------------------------------------------
Total non-performing loans $1,123 $5,061 $573 $285 $385
==========================================================================
Ratio of non-performing loans to total loans 1.14% 4.44% .36% .14% .18%
==========================================================================
</TABLE>
Non-performing loans were 1.14% of total loans at December 31, 1999, as compared
to 4.44% of total loans at June 30, 1999 and consisted primarily of commercial
and multi-family loans. The decrease in non-performing loans is due to one large
multi-family loan to an unaffiliated borrower which was paid off in October
1999. Multi-family affordable housing loans, for which specific reserves have
been computed, are currently performing with respect to debt service and are,
therefore, not included in the above "non-performing loans" totals. The ability
of the multi-family loans to remain performing is in part due to general partner
or other advances made by Fidelity to support cash flow deficits incurred by the
affordable housing projects. During the six month period ended December 31,
1999, $541,000 was accrued by Village Housing Corporation for delinquent real
estate and property taxes, deferred maintenance and delinquent debt service
payments. The $541,000 was recorded due to the probability of not being
reimbursed for these necessary expenditures by the partnerships in the
foreseeable future. There is no assurance that general partner advances will not
be necessary in the future to support further cash flow deficits, or that
Fidelity will not have to extend funds in order to protect its collateral
position with respect to the loans. The majority of recorded general partner
advances were charged off in fiscal 1998.
28
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Analysis of Allowance for Loan Losses and Letter of Credit Valuation Allowance
Fidelity establishes its provision for loan losses and evaluates the adequacy of
the allowance for loan losses based on management's evaluation of the
performance of its loan and letter of credit portfolio. Such evaluation, which
includes a review of all loans and letters of credit for which full
collectibility may not be reasonably assured, considers among other matters, the
present value of capitalized cash flows, the estimated fair value of the
underlying collateral, economic conditions, historical loss experience, the
composition of the portfolios and other factors that warrant recognition in
providing for an adequate loan loss allowance and letter of credit valuation
allowance. This evaluation is performed on a monthly basis and is designed to
ensure that all relevant matters affecting collectibility will consistently be
identified in a detailed review and that the outcome of the review will be
considered in a disciplined manner by management in determining the necessary
allowances and related provisions. The amounts actually reported in each period
will vary with the outcome of this detailed review.
Classified Assets and Letters of Credit
(In Thousands)
December 31, June 30,
1999 1999
- -----------------------------------------------------------------------------
Classified assets $8,991 $19,680
Classified letters of credit 13,218 20,977
------------------------------
Total classified assets/letters of credit $22,209 $40,657
==============================
Classified and criticized assets of Fidelity totaled $22.2 million at December
31, 1999 compared to $40.7 million at June 30, 1999 a decrease of 45.4%.
Classified assets and letters of credit were 167.8% and 246.4% of Fidelity's
capital and reserves at December 31, 1999 and June 30, 1999, respectively.
Impaired loans are those that management believes will not perform under the
original loan terms. At December 31, 1999, Fidelity had impaired loans totaling
$7.4 million compared to $16.5 million at June 30, 1999, a decrease of 55.1%.
The 55.1% decrease in impaired loans recognizes Fidelity's ongoing efforts and
dedication in reducing classified loans. Fidelity recognizes there is still a
substantial risk in the remaining classified assets. The allowance for losses on
such impaired loans totaled $1.1 million and $1.8 million and is included in
Fidelity's allowance for loan losses at December 31, 1999 and June 30, 1999,
respectively. In addition, using the same guidelines for impaired loans,
impaired letters of credit at December 31, 1999 total $13.2 million versus $21.0
million at June 30, 1999, a decrease of 37.1%. The valuation allowance on such
impaired letters of credit totaled $5.8 million and $5.2 million and is included
in Fidelity's letters of credit valuation allowance at December 31, 1999 and
June 30, 1999, respectively. Impaired loans do not include large groups of
homogeneous loans that are collectively evaluated for impairment, such as,
residential mortgage and consumer installment loans.
29
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The following table sets forth loan charge-offs and recoveries by the type of
loan and an analysis of the allowance for loan losses at December 31, 1999 and
the fiscal years ended June 30:
<TABLE>
<CAPTION>
December 31, June 30, June 30, June 30, June 30,
1999 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses
balance at July 1 $ 3,521 $ 3,049 $ 1,781 $ 1,059 $ 713
-------------------------------------------------------------------------------------
Loan charge offs
Real estate mortgage 15 100 12
Multi-family 2,631 3,089
Commercial 11 14 25
Consumer 235 324 195 142 128
-------------------------------------------------------------------------------------
Total loan charge offs 2,877 338 3,299 267 140
-------------------------------------------------------------------------------------
Loan recoveries
Real estate mortgage 15 3 17
Multi-family 3
Commercial 3 3
Consumer 26 35 24 11 14
-------------------------------------------------------------------------------------
Total loan recoveries 32 53 24 14 31
-------------------------------------------------------------------------------------
Net charge offs 2,845 285 3,275 253 109
Reclassifications 895
Provision for loan losses 1,345 (138) 4,543 975 455
-------------------------------------------------------------------------------------
Allowance for loan losses
at end of period $ 2,021 $ 3,521 $ 3,049 $ 1,781 $ 1,059
=====================================================================================
Ratio of net charge offs to
average loans outstanding
during period 5.20% .21% 1.81% .12% .05%
=====================================================================================
Ratio of provision for loan
losses to average loans
outstanding during period 2.46% (.10)% 2.52% .46% .20%
=====================================================================================
Ratio of allowance for loan
losses to total loans
outstanding at year end 2.04% 3.09% 1.91% .87% .49%
=====================================================================================
Average amount of loans
outstanding for the period $108,455 $137,794 $180,530 $213,793 $226,874
=====================================================================================
Amount of loans outstanding
at end of period $98,940 $113,957 $159,732 $204,964 $217,221
=====================================================================================
</TABLE>
30
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The allowance for loan losses was $2.0 million at December 31, 1999 compared to
$3.5 million at June 30, 1999. Net loan charge-offs were $2.8 million or 5.20%
of average loans for the six months ended December 31, 1999 compared to $285,000
or .21% of average loans for the year ended June 30, 1999. During the six months
ended December 31, 1999, Fidelity reevaluated some of the loans that it had
previously established reserves for in fiscal 1998 and charged off $2.8 million
in loans. In addition, it was determined a $3.2 million loan originated for the
financing of a hotel was not meeting its cash flow projections, and thus was
classified. This substandard classification resulted in an approximate $470,000
increase in the allowance for loan losses. Based on recent loss experience in
United's consumer loan portfolio originated prior to 1999, United increased the
allowance for loan losses to $496 at December 31, 1999, or approximately 1.5% of
consumer loans outstanding.
During the six months ended December 31, 1999 an additional provision for letter
of credit losses of $1.1 million was recognized due to deterioration in the
affordable housing portfolio. A letter of credit was funded during the first
quarter of fiscal 1999 and was classified as a non-accrual loan upon conversion.
This loan was previously classified as a substandard letter of credit with a
specific reserve of $895,000. The loan was paid in full during the second
quarter of fiscal 1999 and Fidelity reclassified the $895,000 specific reserve
to the general allowance for loan losses. As discussed previously, Fidelity
increased the provision for loan losses during fiscal 1998 primarily in
connection with loans made to certain Section 42 tax-credit real estate
development projects that Fidelity was currently managing. Fidelity has loans
and letters of credit securing third-party loans to these projects and also has
other loans and letters of credit outstanding that are related to other
multi-family developments, most of which are outside Fidelity's geographic
market.
Fidelity also recorded a letter of credit valuation allowance and related
provision of $6.8 million in fiscal 1998, the balance of which is $5.8 million
at December 31, 1999. The decrease is primarily due to the transfer of $895,000
from the letter of credit valuation allowance to the allowance for loan losses.
Multi-family letters of credit, an off-balance sheet item, carry the same risk
characteristics as conventional loans and totaled $44.5 million at December 31,
1999. Specific allocations for letters of credit totaled 5.5% of outstanding
letters of credit at December 31, 1999 compared to 11.5% at June 30, 1999.
Classified loans and letters of credit to total loans and letters of credit were
14.5% at December 31, 1999 and 24.2% at June 30, 1999. Management is not
currently aware of any additional letters of credit that are expected to be
called or funded. Management considers the allowance for loan losses and letter
of credit valuation reserve adequate to meet losses inherent in the loan
portfolio as of December 31, 1999.
31
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Allocation of Allowance for Loan Losses
The allocation for loan losses and the percentage of loans within each category
to total loans at December 31, 1999 and at June 30, are as follows:
<TABLE>
<CAPTION>
Allocation of Amount
-------------------------------------------------------------------------------------
December 31, June 30, June 30, June 30, June 30,
1999 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Real Estate Mortgage
Conventional $ 103 $ 99 $ 173 $ 153 $ 155
Multi-family 482 2,177 1,868 994 420
Home equity and consumer 496 182 275 168 214
Commercial 940 1,063 733 466 270
-------------------------------------------------------------------------------------
Total $2,021 $3,521 $3,049 $1,781 $1,059
=====================================================================================
Percentage of Loans to Total Loans
-------------------------------------------------------------------------------------
December 31, June 30, June 30, June 30, June 30,
1999 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Real Estate Mortgage
Conventional 51.3% 46.2% 48.7% 53.9% 63.2%
Multi-family 3.7 11.5 11.4 14.3 13.4
Home equity and consumer 30.3 24.2 19.7 12.7 10.7
Commercial 14.7 18.1 20.2 19.1 12.7
-------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
=====================================================================================
</TABLE>
32
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Association with Section 42
As noted previously, Fidelity has various investments in seventeen real estate
development projects located throughout Indiana, Illinois and Kentucky.
Management considers the projects and properties to be in good condition.
Fidelity has various Section 42 loans, general partner loans, equity investments
and letters of credit associated with these projects. The following table
summarizes Fidelity's association with these projects:
<TABLE>
<CAPTION>
Conventional Bank Financing Original Amount December 31, 1999 June 30, 1999 June 30, 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Section 42 loans $8,044 $2,428 $4,823 $5,325
Chargeoffs 994 416
Specific reserve 330 673 878
Provision for loan losses 360 401 1,294
- ---------------------------------------------------------------------------------------------------------
General Partner
General partner loans * 13 250 606
Chargeoffs 85 2,549
Specific reserve 125 56
Provision for loan losses 53 316 2,605
- ---------------------------------------------------------------------------------------------------------
Equity Investments
Equity Investments 2,825 702 879 1,686
Chargeoffs 235 545 1,478
Specific reserve 18 75
- ---------------------------------------------------------------------------------------------------------
Letters of credit
Letters of credit 19,680 13,349 16,666 19,423
Chargeoffs 2,332 (532) 5,300
Valuation allowance 2,034 4,768 5,300
- ---------------------------------------------------------------------------------------------------------
Additional Notes
Additional notes * 56 284
Chargeoffs 151
Specific reserve 4 44
Provision for loan losses 95 166
- ---------------------------------------------------------------------------------------------------------
</TABLE>
*Per the partnership agreement, each partnership could request up to a specified
amount of additional money to cover shortfalls at the partnerships, therefore no
original amount is specified.
Investment Securities
United's investment policy is annually reviewed by its Board of Directors. Any
significant changes to the policy must be approved by the Board. The Board has
an asset/liability management committee, which is responsible for keeping the
investment policy current.
33
<PAGE>
Fidelity Federal Bancorp and Subsidiaries
Management's Discussion and Analysis
of Results of Operations and Financial Condition
At December 31, 1999, the investment portfolio represented 14.2% of Fidelity's
assets, compared to 15.9% at June 30, 1999, and is managed in a manner designed
to meet the Board's investment policy objectives. During fiscal 1999 due to
continued reductions in the loan portfolio, the excess liquidity was reinvested
in lower risk investment securities. The primary objectives, in order of
priority, are to further the safety and soundness of Fidelity, to provide the
liquidity necessary to meet day to day, cyclical, and long-term changes in the
mix of Fidelity's assets and liabilities and to provide for diversification of
risk and management of interest rate and economic risk. At December 31, 1999,
the entire investment portfolio was classified as available for sale. The net
unrealized loss at December 31, 1999, which is included as a component of
stockholders' equity, was $775,000 and was comprised of gross losses of
$1,284,000 and a tax benefit of $509,000. The increase in unrealized loss was
caused by market interest rate changes during the period. Although the entire
portfolio is available for sale, management has not identified specific
investments for sale in future periods.
The following table sets forth the components of United's available-for-sale
investment portfolio as of December 31, 1999 and June 30, 1999 and 1998:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1999 1999 1998
- -------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Investment securities available for sale
U. S. Treasury $1,001
Federal agency securities 2,985
Federal Home Loan Mortgage Corporation
mortgage-backed securities $ 1,043 $ 1,202 1,779
Federal National Mortgage Association
mortgage-backed securities 1,377 1,510 1,945
Government National Mortgage Association
mortgage-backed securities 21,885 24,613 2,144
-----------------------------------------------------
Total securities available for sale $24,305 $27,325 $9,854
=====================================================
</TABLE>
United's investment securities portfolio decreased by $3.0 million to $24.3
million at December 31, 1999, compared to $27.3 million at June 30, 1999. The
current year's decrease is the result of maturities and paydowns received during
the year. In fiscal 1999, United purchased $25.4 million of GNMA securities. As
mentioned above, this was the result of excess liquidity generated from the
reduction in the loan portfolio. United holds various types of securities,
including mortgage-backed securities. Inherent in mortgage-backed securities is
prepayment risk. Prepayment rates generally can be expected to increase during
periods of lower interest rates as some of the underlying mortgages are
refinanced at lower rates. Conversely, the average lives of these securities
generally are extended as interest rates increase.
34
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The following table sets forth the contractual maturities of investment and
mortgage-backed securities as of December 31, 1999, and the weighted average
yields of such securities. The contractual maturities of mortgage-backed
securities are not typically indicative of the actual holding period for such
investments, as pre-payments on the underlying mortgage loans will reduce the
average life of the investment, based on prevailing market interest rates.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
After One But After Five But
Within Five Years Within Ten Years Over Ten Years Total
- ---------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation $408 7.06% $ $ 635 5.81% $ 1,043 6.29%
Federal National Mortgage
Association 424 7.00 953 6.01 1,377 6.31
Government National
Mortgage 1 7.00 3,920 6.98% 17,964 6.91 21,885 6.92
Association
---------- ----------- ----------- ----------
Total $833 7.03% $3,920 6.98% $19,552 6.83% $24,305 6.86%
========== =========== =========== ==========
Percent of total 3% 16% 81% 100%
========== =========== =========== ==========
</TABLE>
Funding Sources
Deposits
Fidelity 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 $17.6 million for the year ended December 31,
1999. The decrease came primarily in the area of agent-acquired certificates and
core certificates of deposit, for which the average balance decreased $15.3
million and $743,000, respectively. The average balance of NOW, money market ,
and savings accounts decreased by $1.3 million, $188,000 and $425,000,
respectively, from fiscal 1999, while the average balance of demand accounts
increased $373,000 over fiscal 1999. According to the provisions of the
Supervisory Agreement, Fidelity is unable to use agent-acquired certificates as
a funding source. Agent-acquired certificates of deposit were acquired at rates
higher than the current local market for retail deposits, but generally below
rates charged for FHLB advances.
35
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The following table sets forth the average balances of and the average rate paid
on deposits by deposit category for the years ended December 31, 1999 and June
30, 1999, and 1998.
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1999 1999 1998
----------------------------------------------------------------------------------
Average Deposits Amount Rate Amount Rate Amount Rate
- --------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand $ 6,097 $ 5,724 $ 5,229
NOW accounts 19,107 3.39% 20,436 3.50% 22,211 4.24%
Money market accounts 2,545 2.03 2,733 2.23 3,027 2.71
Savings accounts 4,657 2.26 5,082 2.32 4,813 2.83
Certificates of deposit 78,329 5.60 79,072 5.76 85,699 5.80
Agent-acquired certificates of deposit 18,147 5.88 33,467 6.02 42,443 6.26
------------- --------------- ---------------
Totals $128,882 4.85% $146,514 5.10% $163,422 5.38%
============= =============== ===============
</TABLE>
The following table summarizes certificates of deposit in amounts of $100,000 or
more by maturity as of the following dates:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1999 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Three months or less $ 5,656 $ 4,218 $ 2,716
Three to six months 7,727 1,364 4,008
Six to twelve months 2,766 7,760 4,227
Over twelve months 6,825 3,763 11,471
---------------------------------------------------
Totals $22,974 $17,105 $22,422
===================================================
</TABLE>
Borrowings
Fidelity's long-term debt decreased $5.6 million from fiscal 1999 primarily due
to a decrease in Federal Home Loan Bank advances of $3.5 million and the payoff
of $2.2 million on notes payable secured by specific multifamily loans. The
payoff of the specific multifamily loans securing these notes was the result of
Fidelity locating refinancing for the mortgages securing these notes and
represented a continued commitment of Fidelity's loan workout efforts. With the
current dividend restrictions in the Supervisory Agreement, a $2.0 million loan
was obtained in fiscal 1999 to meet anticipated cash requirements of the parent
company. Alternate funding sources for United were provided by loan sales and
loan payoffs, as well as through retail deposits for United.
36
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Short-term borrowings totaled only $89,000 at December 31, 1999, which
represented a decrease of $39,000 since June 30, 1999. The Treasury Tax and Loan
Note Option was the only short-term borrowing utilized for the six months ended
December 31, 1999. During fiscal 1999, the guaranteed investment contracts
matured.
Capital Resources
Fidelity's stockholders' equity decreased $2.4 million to $5.4 million at
December 31, 1999, compared to $7.8 million at June 30, 1999. The change in
stockholders' equity was accounted for by a net loss of $2.1 million and an
increase in the in the net unrealized loss on securities available for sale of
$317,000.
Total capital for United consists of Tier I capital plus the allowance for loan
losses. Minimum capital levels are 4% for the leverage ratio, which is, defined
as Tier I capital as a percentage of total assets less goodwill and other
identifiable intangible assets; 4% for Tier I to risk-weighted assets; and 8%
for total capital to risk-weighted assets. United's capital ratios have exceeded
each of these levels. The leverage ratio was 6.8% for the year ended December
31, 1999 and 8.5% for June 30, 1999, tier I capital to risk-weighted assets was
9.1% and 10.5% and total capital to risk-weighted assets was 14.3% and 15.4% at
December 31, 1999 and June 30, 1999. Book value per share, excluding unrealized
losses on investment securities, decreased to $1.97 at December 31, 1999,
compared to $2.63 six months earlier. Including, unrealized losses, book value
per share was $ 1.72 and $2.48, respectively.
The capital category assigned to an entity can also be affected by qualitative
judgements made by regulatory agencies about the risk inherent in the entity's
activities that are not part of the calculated ratios. At December 31, 1999 and
June 30, 1999, the Bank is categorized as well capitalized and met all capital
adequacy requirements at those dates; however, per the Supervisory Agreement,
the OTS felt additional capital was necessary based on asset quality concerns.
United has evaluated and pursued alternatives to increasing its total capital
for the purpose of improving its capital ratios during the six months ended
December 31, 1999 and fiscal 1999. Management is progressing on a proposed stock
issuance with Pedcor that will increase Fidelity's capital. See the last
footnote in the Notes to Consolidated Financial Statements for further details
regarding the Pedcor transaction. At December 31, 1999 United has improved its
capital ratios over fiscal 1998 by reducing the asset size and mix of assets. As
noted above, risk-based capital decreased to 14.3% at December 31, 1999 compared
to 15.4% at June 30, 1999 and 10.8% at June 30, 1998.
37
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Liquidity
Fidelity's principal source of income and funds is dividends from United and is
not subject to any regulatory restrictions on the payment of dividends to its
stockholders. However, United is restricted from paying any dividends to
Fidelity without prior approval of the OTS.
Fidelity in late fiscal 1999, obtained additional financing of $2.0 million to
cover operating costs, debt reduction for three affordable housing developments,
and servicing of debt at the holding company level. Absent potential sources of
liquidity available to the holding company including the potential issuance of
additional stock, potential execution of additional debt financing, and
dividends from United (with OTS approval), the holding company may deplete its
available cash during calendar 2000. Management is progressing on a proposed
stock issuance to Pedcor and believes it will be completed before available cash
is depleted, although it cannot provide any assurance due to required regulatory
and shareholder approvals that must be obtained.
United is required by federal regulations to maintain specified levels of
"liquid" assets consisting of cash and other eligible investments. Currently,
liquid assets must equal at least four percent of net withdrawable savings plus
borrowings payable upon demand or due within one year or less. As of December
31, 1999 and June 30, 1999, United's liquidity ratios were 31.4% and 16.99%.
United's significant increase in liquidity was the result of United's cash
contingency plan for Y2K. United will reduce the liquidity to a more reasonable
level during the first quarter of 2000. Management believes that this level of
liquidity is sufficient to meet any anticipated requirements for United's
operations.
The primary sources of funds for operations are principal and interest payments
on loans, deposits from customers, and sales and maturities of investment
securities. In addition, United is authorized to borrow money from the FHLB and
other sources as needed. United decreased its borrowings from the FHLB from
$12.5 million at June 30, 1999, to $9.0 million at December 31, 1999. Fidelity
has also decreased its utilization of agency-acquired certificates of deposit as
total loans have decreased and the need for these types of funds has also
decreased.
Supervisory Agreement
As noted previously and discussed in the footnotes under "Other Restrictions",
United is currently operating under restrictions imposed by the Supervisory
Agreement entered into with the OTS. The restrictions regarding certain
activities in the Supervisory Agreement have had a significant impact on
United's net interest margin, net interest income, and net income as a result of
United's inability to participate in new commercial lending. Management has
expended significant time and effort ensuring that United has operated and will
continue to operate in compliance with the Supervisory Agreement. While the
Supervisory Agreement remains in place, it is likely that total loans
outstanding will continue to decline, and management efforts will be
concentrated on compliance, rather than business development. This will likely
have a further negative impact on the financial condition and the operating
results of United and Fidelity.
Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement No. 133,
Accounting for Derivative Instruments and Hedge Activities, which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The provisions of this statement were to
become effective for fiscal years beginning after June 15, 1999. The effective
date of the statement has been delayed by Statement No. 137 to fiscal years
beginning after June 15, 2000. Fidelity does not expect the statement to have a
material impact on Fidelity's financial condition or results of operations and
plans on adopting it on January 1, 2001.
38
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Asset/Liability Management
Fidelity is subject to interest rate risk to the degree that its
interest-bearing liabilities, primarily deposits with short and medium term
maturities, mature or reprice at different rates than its interest-earning
assets. Although having liabilities that mature or reprice less frequently than
average assets will be beneficial in times of rising interest rates, such an
asset/liability structure will result in lower net income during periods of
declining interest rates, unless offset by other factors.
The OTS utilizes a model, the "Office of Thrift Supervision Net Portfolio Value"
("NPV") model, which uses a net market value methodology to measure the interest
rate risk exposure of savings associations. Under this model, an institution's
"normal" level of interest rate risk in the event of an assumed change in
interest rates is a decrease in the institution's NPV in an amount not exceeding
2% of the present value of its assets. Savings associations with over $300
million in assets or less than a 12% risk-based capital ratio are required to
file OTS Schedule CMR. Data from Schedule CMR is used by the OTS to calculate
changes in NPV (and the related "normal" level of interest rate risk) based upon
certain interest rate changes (discussed below). Associations which do not meet
either of the filing requirements are not required to file OTS Schedule CMR, but
may do so voluntarily. United is not required to file a CMR since it exceeds the
risk-based capital requirement and its assets are less than $300 million, but
does so on a voluntary basis. Under the regulation, associations, which must
file are required to take a deduction (the interest rate risk capital component)
from their total capital available to calculate their risk based capital
requirement if their interest rate exposure is greater than "normal". The amount
of that deduction is one-half of the difference between (a) the institution's
actual calculated exposure to a 200 basis point interest rate increase or
decrease (whichever results in the greater pro forma decrease in NPV) and (b)
its "normal" level of exposure which is 2% of the present value of its assets.
Presented below, at December 31, 1999 and June 30, 1999, is an analysis
performed by the OTS of United's interest rate risk as measured by changes in
NPV for instantaneous and sustained parallel shifts in the yield curve, in 100
basis point increments, up and down 300 basis points. At December 31, 1999 and
June 30, 1999, 2% of the present value of United's assets was approximately $3.4
million for December 31, 1999 and June 30, 1999. Because the interest rate risk
of a 200 basis point increase in market rates (which was greater than the
interest rate risk of a 200 basis point decrease) was $2.9 million at December
31, 1999 and $1.8 million` at June 30, 1999, United would not have been required
to make a deduction from its total capital available to calculate its risk based
capital requirement. The increase in interest rate risk from December 31, 1999
to June 30, 1999 is due to interest rate changes and a change in United's
balance sheet mix.
Interest Rate Risk as of December 31, 1999
<TABLE>
<CAPTION>
NPV as Percent of Present
Net Portfolio Value Value of Assets
-------------------------------------------------------------------------------------------------------
Change Dollar Dollar Percentage
in Rates Amount Change Change NPV Ratio Change
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
+ 300 bp $10,879 $(4,685) (30)% 6.75% - 242 bp
+ 200 bp 12,622 (2,942) (19) 7.69 - 148 bp
+ 100 bp 14,256 (1,308) (8) 8.53 - 64 bp
0 bp 15,564 9.17
- 100 bp 16,148 585 4 9.41 24 bp
- 200 bp 16,023 459 3 9.27 10 bp
- 300 bp 16,010 446 3 9.19 2 bp
</TABLE>
39
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Interest Rate Risk as of June 30, 1999
<TABLE>
<CAPTION>
NPV as Percent of Present
Net Portfolio Value Value of Assets
-------------------------------------------------------------------------------------------------------
Change Dollar Dollar Percentage
in Rates Amount Change Change NPV Ratio Change
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
+ 300 bp $11,390 $(3,126) (22)% 7.09% - 151 bp
+ 200 bp 12,763 (1,753) (12) 7.81 - 80 bp
+ 100 bp 13,916 (600) (4) 8.37 - 24 bp
0 bp 14,516 8.61
- 100 bp 14,145 (371) (3) 8.31 - 30 bp
- 200 bp 13,203 (1,312) (9) 7.70 - 91 bp
- 300 bp 12,292 (2,224) (15) 7.10 - 150 bp
</TABLE>
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the methods of analysis presented above. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market rates. Also,
the interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Additionally, certain assets, such as
adjustable-rate loans, have features, which restrict changes in interest rates
on a short-term basis and over the life of the assets. Further, in the event of
a change in interest rates, expected rates of prepayments on loans and early
withdrawals from certificates could likely deviate significantly from those
assumptions used in calculating the table.
40
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
[LOGO OF OLIVE]
Independent Auditor's Report
Stockholders and Board of Directors
Fidelity Federal Bancorp
Evansville, Indiana
We have audited the accompanying consolidated balance sheet of Fidelity Federal
Bancorp and subsidiaries as of December 31, 1999 and June 30, 1999 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the six month period ended December 31, 1999 and for the years
ended June 30, 1999 and 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of
Fidelity Federal Bancorp and subsidiaries as of December 31, 1999 and June 30,
1999, and the results of their operations and their cash flows for the six month
period ended December 31, 1999 and for the years ended June 30, 1999 and 1998 in
conformity with generally accepted accounting principles.
[OBJECT OMITTED]
Evansville, Indiana
March 27, 2000
41
<PAGE>
62
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Balance Sheet
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 8,003 $ 1,599
Interest-bearing demand deposits 22,911 14,668
------------------------------------
Cash and cash equivalents 30,914 16,267
Investment securities available for sale 24,305 27,325
Loans, net of allowance for loan losses of $2,021 and $3,521 96,919 110,436
Premises and equipment 5,727 5,692
Federal Home Loan Bank of Indianapolis stock 3,920 3,920
Deferred income tax receivable 5,372 3,490
Interest receivable and other assets 4,300 5,123
------------------------------------
Total assets $171,457 $172,253
====================================
Liabilities
Deposits
Non-interest bearing $ 6,593 $ 6,224
Interest bearing 128,423 122,372
------------------------------------
Total deposits 135,016 128,596
Short-term borrowings 89 128
Long-term debt 23,504 29,149
Advances by borrowers for taxes and insurance 409 392
Valuation allowance for letters of credit 5,787 5,168
Other liabilities 1,225 1,006
------------------------------------
Total liabilities 166,030 164,439
------------------------------------
Stockholders' Equity
Preferred stock, no par or stated value
Authorized and unissued--5,000,000 shares
Common stock, $1 stated value
Authorized--5,000,000 shares
Issued and outstanding--3,147,662 shares 3,147 3,147
Additional paid-in capital 10,869 10,869
Stock warrants 11 11
Retained earnings (7,825) (5,755)
Accumulated other comprehensive loss (775) (458)
------------------------------------
Total stockholders' equity 5,427 7,814
------------------------------------
Total liabilities and stockholders' equity $171,457 $172,253
====================================
</TABLE>
See notes to consolidated financial statements.
42
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Statement of Income
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Six Month Period
Ended
December 31, Year Ended June 30,
------------------------------------
1999 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans receivable $4,558 $11,861 $15,872
Investment securities
Taxable 849 955 650
Tax exempt 24
Federal funds sold 25 75
Deposits with financial institutions 454 939 255
Other dividend income 158 314 316
-----------------------------------------------------
Total interest income 6,019 14,094 17,192
-----------------------------------------------------
Interest Expense
Deposits 3,151 7,467 8,785
Short-term borrowings 1 26 170
Long-term debt 1,116 2,237 2,631
-----------------------------------------------------
Total interest expense 4,268 9,730 11,586
-----------------------------------------------------
Net Interest Income 1,751 4,364 5,606
Provision for loan losses 1,345 (138) 4,543
-----------------------------------------------------
Net Interest Income After Provision for
Loan Losses 406 4,502 1,063
-----------------------------------------------------
Other Income
Fee income--management fees 88 196 191
Service charges on deposit accounts 201 437 436
Net realized gains on sales of securities available for sale 79
Net gains on loan sales 110 343 186
Letter of credit fees 291 582 657
Real estate investment banking fees 13 78 139
Agent fee income 4 333 650
Title fee income 18 72 10
Servicing fees on loans sold 55 91 93
Release fees on multifamily loans 20 82 74
Other income 201 449 510
-----------------------------------------------------
Total non-interest income 1,001 2,663 3,025
-----------------------------------------------------
</TABLE>
43
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Statement of Income
(In Thousands, Except Share Data)
(Continued)
<TABLE>
<CAPTION>
Six Month Period
Ended
December 31, Year Ended June 30,
------------------------------------
1999 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other Expenses
Salaries and employee benefits $1,747 $ 3,414 $ 3,341
Net occupancy expenses 192 394 444
Equipment expenses 166 299 354
Data processing fees 247 407 456
Deposit insurance expense 156 244 140
Legal and professional fees 379 379 304
Advertising 78 202 199
Letter of credit valuation provision 1,069 (715) 6,778
Valuation allowance--affordable housing investments 331 545 1,478
Affordable housing group activities 769
Other expense 783 1,709 1,813
-----------------------------------------------------
Total non-interest expense 5,148 6,878 16,076
-----------------------------------------------------
Income (Loss) Before Income Tax (3,741) 287 (11,988)
Income tax benefit (1,671) (338) (5,194)
-----------------------------------------------------
Net Income (Loss) $(2,070) $ 625 $ (6,794)
=====================================================
Basic Earnings (Loss) Per Share $(.66) $.20 $(2.30)
Diluted Earnings (Loss) Per Share (.66) .20 (2.30)
</TABLE>
See notes to consolidated financial statements.
44
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Comprehensive Other
-------------------- Paid-in Stock Income Retained Comprehensive
Shares Amount Capital Warrants (Loss) Earnings Loss Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1997 2,487,385 $2,487 $ 8,708 $264 $ 1,508 $ (31) $12,936
Comprehensive loss
Net loss $(6,794) (6,794) (6,794)
Other comprehensive loss, net of tax
Unrealized loss on securities, net of
reclassification adjustment (11) (11) (11)
--------------
Comprehensive loss $(6,805)
==============
Cash dividends ($.35 per share) (1,094) (1,094)
Exercise of stock warrants 641,323 641 2,104 (253) 2,492
Purchase of stock (1,500) (1) (13) (14)
---------------------------------------- --------------------------------
Balances, June 30, 1998 3,127,208 3,127 10,799 11 (6,380) (42) 7,515
Comprehensive income
Net income $625 625 625
Other comprehensive loss, net of tax
Unrealized loss on securities (416) (416) (416)
--------------
Comprehensive income $209
==============
Sale of stock 20,458 20 70 90
Purchase of stock (4)
---------------------------------------- --------------------------------
Balances, June 30, 1999 3,147,662 3,147 10,869 11 (5,755) (458) 7,814
Comprehensive loss
Net loss
Other comprehensive loss, net of tax $(2,070) (2,070) (2,070)
Unrealized loss on securities (317) (317) (317)
--------------
Comprehensive loss $(2,387)
==============
---------------------------------------- --------------------------------
Balances, December 31, 1999 3,147,662 $3,147 $10,869 $ 11 $(7,825) $(775) $ 5,427
======================================== ================================
</TABLE>
See notes to consolidated financial statements.
45
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Six Month Period
Ended Year Ended June 30,
December 31, ---------------------------------
1999 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ (2,070) $ 625 $ (6,794)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
Provision for loan losses 1,345 (138) 4,543
Investment securities gains (79)
Letter of credit valuation provision 1,069 (715) 6,778
Funding on outstanding letter of credit (450)
Gain on sale of premises and equipment (21)
Gain on sale of mortgage servicing rights (134)
Depreciation 196 402 449
Investment securities amortization (accretion), net 31 39 (16)
Valuation allowance for premises and equipment 100
Valuation allowance--affordable housing investments 331 545 1,478
Loans originated for sale (4,527) (25,474) (9,755)
Proceeds from sale of loans 4,542 25,342 9,468
Amortization of net loan origination fees and points (14) (61) (26)
Deferred income tax benefit (1,673) (6) (3,389)
Changes in
Interest payable and other liabilities 219 66 (682)
Interest receivable and other assets 594 3,642 (1,361)
--------------------------------------------------
Net cash provided (used) by operating activities (407) 4,246 580
--------------------------------------------------
Investing Activities
Purchases of securities available for sale (25,388) (1,906)
Proceeds from maturities of securities available for sale 2,463 7,189 2,476
Proceeds from sales of securities available for sale 3,451
Proceeds from sale of mortgage servicing rights 687
Net change in loans 12,069 45,683 42,270
Purchase of premises and equipment (231) (267) (111)
Proceeds from sales of premises and equipment 40 56
--------------------------------------------------
Net cash provided by investing activities 14,301 27,257 46,923
--------------------------------------------------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing
demand and savings deposits (2,022) (1,430) 910
Certificates of deposit 8,442 (18,913) (33,758)
Short-term borrowings (39) (2,403) (2,660)
Proceeds of long-term debt 5,000
Repayment of long-term debt (5,645) (5,339) (8,601)
Net change in advances by borrowers for
taxes and insurance 17 (34) (248)
Purchase of stock (14)
Sale of stock 90
Cash dividends (156) (1,186)
Proceeds from exercise of stock warrants 2,492
--------------------------------------------------
Net cash provided (used) by financing activities 753 (23,185) (43,065)
--------------------------------------------------
</TABLE>
46
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(In Thousands)
(Continued)
<TABLE>
<CAPTION>
Six Month Period
Ended Year Ended June 30,
December 31, ------------------------------------
1999 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Change in Cash and Cash Equivalents $14,647 $ 8,318 $ 4,438
Cash and Cash Equivalents, Beginning of Year 16,267 7,949 3,511
-----------------------------------------------------
Cash and Cash Equivalents, End of Year $30,914 $16,267 $ 7,949
=====================================================
Additional Cash Flows Information
Interest paid $ 4,211 $ 9,879 $11,900
Income tax paid (refunded) (3,013) 625
</TABLE>
See notes to consolidated financial statements.
47
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Fidelity Federal Bancorp (Fidelity) and
its wholly-owned subsidiaries conform to generally accepted accounting
principles and reporting practices followed by the thrift industry. The more
significant of the policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fidelity is a registered thrift holding company whose principal activity is the
ownership and management of United Fidelity Bank, fsb (United). United operates
under a national thrift charter and provides full banking services. As a
federally chartered thrift, United is subject to regulation by the Office of
Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation.
United generates mortgage, consumer and commercial loans and receives deposits
from customers located primarily in Vanderburgh County, Indiana and surrounding
counties. Fidelity's loans are generally secured by specific items of collateral
including real property, consumer assets and business assets. Two of United's
wholly-owned subsidiaries, Village Management Corporation and Village Housing
Corporation (collectively, the Affordable Housing Group), are in the business of
owning, renting and managing affordable housing projects. United's other
wholly-owned subsidiaries are Village Capital Corporation, which primarily
receives consulting fees for packaging various multi-family deals to be financed
and completed, and Village Insurance Corporation, which offers an array of
insurance products. Fidelity's other subsidiary is Village Affordable Housing
Corporation, which is dormant. The Affordable Housing Group has discontinued the
development of real estate, but continues actively managing affordable housing
projects.
Consolidation--The consolidated financial statements include the accounts of
Fidelity and its subsidiaries after elimination of all material intercompany
transactions.
Securities available for sale are carried at fair value, with unrealized gains
and losses reported separately in accumulated other comprehensive income, net of
tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses of securities are recorded on the
specific-identification method.
Loans held for sale are carried at the lower of aggregate cost or market value.
Market is determined using the aggregate method. Net unrealized losses, if any,
are recognized through a valuation allowance by charges to income, based on the
difference between estimated sales proceeds and aggregate cost.
48
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Loans are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. The accrual of interest on impaired
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed when considered uncollectible. Interest
income is subsequently recognized only to the extent cash payments are received.
Certain loan fees and related direct costs are being deferred and amortized over
the lives of the loans as an adjustment of yield on the loans.
Allowance for loan losses and letter of credit valuation allowance are
maintained to absorb losses based on management's continuing review and
evaluation of the loan and letter of credit portfolios and its judgment as to
the impact of economic conditions on the portfolios. The evaluation by
management includes consideration of past loss experience, changes in the
composition of the portfolios, the current condition and amount of loans and
letters of credit outstanding and the probability of collecting all amounts due.
Impaired loans are measured by the present value of expected future cash flows,
or the fair value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses and the
letter of credit valuation allowance is based on estimates that are particularly
susceptible to significant changes in the economic environment and market
conditions. Management believes that, as of December 31, 1999, the allowance for
loan losses and the letter of credit valuation allowance is adequate based on
information currently available. A worsening or protracted economic decline in
the area within which Fidelity operates could affect the possibility of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
Premises and equipment are carried at cost, net of accumulated depreciation.
Depreciation is computed using the straight-line method based principally on the
estimated useful lives of the assets. Maintenance and repairs are expensed as
incurred while major additions and improvements are capitalized. Gains and
losses on dispositions are included in current operations.
Federal Home Loan Bank (FHLB) stock is a required investment for institutions
that are members of the FHLB system. The required investment in the common stock
is based on a predetermined formula.
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. Fidelity
files consolidated income tax returns with its subsidiaries.
Fee income on real estate development and management in the consolidated
statement of income is attributable to activities of the Affordable Housing
Group. The fees are recognized when earned under the applicable agreements and
when collectibility is assured. Fee income related to insurance services is
recognized when earned and collected.
Mortgage servicing rights on originated loans are capitalized by allocating the
total cost of the mortgage loans between the mortgage servicing rights and the
loans based on their relative fair values. Capitalized servicing rights, which
includes purchased servicing rights, are amortized in proportion to and over the
period of estimated servicing revenues.
49
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Stock options are granted for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant.
Fidelity accounts for and will continue to account for stock option grants in
accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and, accordingly, recognized no compensation expense
for the stock option grants.
Earnings per share have been computed based upon the weighted average common
shares outstanding during the year.
>> Restriction on Cash and Due From Banks
United is required to maintain reserve funds in cash and/or on deposit with the
Federal Reserve Bank. The reserve required at December 31, 1999 was $378.
>> Investment Securities Available for Sale
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1999
Mortgage-backed securities $25,589 $(1,284) $24,305
=====================================================================
June 30, 1999
Mortgage-backed securities $28,083 $(758) $27,325
=====================================================================
</TABLE>
Securities with a carrying value of $23,650 and $27,322 were pledged at December
31, 1999 and June 30, 1999 to secure certain deposits and for other purposes as
permitted or required by law.
Proceeds from sales of investment securities available for sale during the year
ended June 30, 1998 were approximately $3,451. Gross gains of approximately $79
were realized on those sales. There were no sales of investment securities
available for sale during the six months ended December 31, 1999 and the year
ended June 30, 1999.
50
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Loans and Allowance
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate mortgage loans
First mortgage loans
Conventional $48,845 $ 49,733
Construction 1,867 6,732
Commercial 8,576 14,140
Multi-family 3,629 7,597
First mortgage real estate loans purchased 1,899 2,061
Commercial loans--other than secured by real estate 4,154 6,076
Consumer and home equity loans 29,970 27,618
------------------------------------
Total loans 98,940 113,957
Allowance for loan losses (2,021) (3,521)
------------------------------------
Total loans, net of the allowance for loan losses $96,919 $110,436
====================================
</TABLE>
Multi-family first mortgage loans are loans made to affordable housing
developments. An additional $1,529 and $5,937 in multi-family loans is included
in construction loans at December 31 and June 30, 1999.
<TABLE>
<CAPTION>
Six Month
Period Ended Year Ended June 30
December 31, ------------------------------------
Allowance for Loan Losses 1999 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances, beginning of period $3,521 $3,049 $1,781
Provision for losses 1,345 (138) 4,543
Transfer from letter of credit valuation reserve 895
Recoveries on loans 32 53 24
Loans charged off (2,877) (338) (3,299)
-----------------------------------------------------
Balances, end of period $2,021 $3,521 $3,049
=====================================================
</TABLE>
51
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Information on impaired loans is summarized below:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
- -----------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans with an allowance $ 7,351 $ 16,533
==================================
Allowance for impaired loans (included in
allowance for loan losses) $ 1,055 $ 1,842
==================================
December 31, June 30,
1999 1999
- -----------------------------------------------------------------------------------
Average balance of impaired loans $13,548 $13,868
Interest income recognized on impaired loans 663 1,396
Cash-basis interest included above 614 1,396
</TABLE>
52
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Letter of Credit Valuation Allowance
In the year ended June 30, 1998, Fidelity recorded specific reserves related to
letters of credit issued by Fidelity and United of approximately $6,800
primarily related to the permanent financing for certain affordable housing
projects. Multifamily letters of credit, an off-balance sheet item, carry the
same risk characteristics as conventional loans and totaled $44,463 and $45,000
at December 31 and June 30, 1999, respectively.
<TABLE>
<CAPTION> June 30,
December 31, ------------------------------------
1999 1999 1998
-----------------------------------------------------
<S> <C> <C> <C>
Letter of credit valuation allowance
Balances, beginning of year $5,168 $6,778
Provision 1,069 (715) $6,778
Transfer to allowance for loan losses (895)
Funding on outstanding letter of credit (450)
-----------------------------------------------------
Balances, end of year $5,787 $5,168 $6,778
=====================================================
</TABLE>
During the six months ended December 31, 1999, Fidelity disbursed $450 to
holders of a bond obligation of a limited partnership in which Fidelity is a
general partner. This was done in an effort to place the partnership's debt
service coverage ratio at a level that would support full repayment of the
obligation. Fidelity funded one letter of credit totaling $4,200 during the year
ended June 30, 1999. The valuation allowance for this letter of credit, totaling
$895 was transferred to the allowance for loan losses.
>> Premises and Equipment
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Land $1,620 $1,620
Building and land improvements 5,369 5,337
Furniture, fixtures and equipment 2,455 2,256
------------------------------------
Total cost 9,444 9,213
Accumulated depreciation (3,717) (3,521)
------------------------------------
Net $5,727 $5,692
====================================
</TABLE>
53
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Other Assets and Investments in Limited Partnerships
Included in other assets at December 31, 1999 and June 30, 1999 are investments
of $1,302 and $1,652 in limited partnerships which are organized to build, own
and operate apartment complexes. The investments at December 31, 1999 are as
follows:
Percentage and Type of Amount of Number of
Partnership Interest Investment Partnerships
----------------------------------------------------------------
1%--General $ 23 17
1%--General and
47%--Limited 319 1
1%--General and
39%--Limited 360 1
10%--Limited 362 1
10%--Limited 147 1
99%--Limited 91 2
Fidelity records income on the equity method in the income and losses of the
limited partnerships, which resulted in losses of $25, $246 and $87 during the
period ended December 31, 1999 and years ended June 30, 1999 and 1998. In
addition to recording its equity in the losses of these projects, Fidelity has
recorded the benefit of low-income housing tax credits of $193, $460 and $508
for the period ended December 31, 1999 and years ended June 30, 1999 and 1998.
Combined condensed financial statements (unaudited) for the limited partnerships
as of December 31, 1999 and June 30, 1999 and for the six months ended December
31, 1999 and years ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Combined condensed balance sheet (unaudited)
Assets
Cash $ 322 $ 487
Land and property 54,531 53,424
Other assets 1,733 1,516
------------------------------------
Total assets $56,586 $55,427
====================================
Liabilities
Notes payable $40,015 $38,157
Other liabilities 2,575 2,732
------------------------------------
Total liabilities 42,590 40,889
Partners' equity 13,996 14,538
------------------------------------
Total liabilities and partners' equity $56,586 $55,427
====================================
</TABLE>
54
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31, ------------------------------------
1999 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Combined condensed statement of operations (unaudited)
Total revenue $ 3,481 $ 5,734 $ 5,259
Total expenses 4,539 7,161 6,784
-----------------------------------------------------
Net loss $(1,058) $(1,427) $(1,525)
=====================================================
</TABLE>
Approximately $2,459 and $3,042 of the notes payable are due to Fidelity from
these partnerships at December 31, 1999 and June 30, 1999. Of the remaining
balance, specific reserves of $334 and $1,700 are included in the allowance for
loan losses at December 31 and June 30, 1999.
Fidelity wrote down the investments in limited partnerships by $331 and $1,478
during the six months ended December 31, 1999 and years ended June 30, 1999 and
1998, based on the performance of the underlying real estate operations.
Included in other assets is interest receivable as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest receivable on loans $570 $707
Interest receivable on investment securities and other 170 180
------------------------------------
Total interest receivable $740 $887
====================================
</TABLE>
>> Deposits
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Non-interest bearing transaction accounts $ 6,593 $ 6,223
Interest-bearing transaction accounts 17,766 18,829
Money market deposit accounts 2,072 2,715
Savings accounts 4,559 5,245
Certificates of $100 or more 22,974 17,105
Other certificates and time deposits 81,052 78,479
------------------------------------
Total deposits $135,016 $128,596
====================================
</TABLE>
55
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Certificates maturing in years ending December 31:
2000 $ 56,583
2001 39,988
2002 5,896
2003 1,372
2004 185
Thereafter 2
----------------
$104,026
================
>> Short-Term Borrowings
December 31, June 30,
1999 1999
- ------------------------------------------------------------------
Treasury tax and loan note option $89 $128
============================
>> Long-Term Debt
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Note payable, 6.78%, adjusted annually, payable $15 per month, including
interest, due April 2009, secured by specific multi-family mortgages $ 2,182
Note payable, 8.48% adjusted annually, payable $8 per month,
including interest, due September 2010, secured by specific
multi-family mortgages $ 985 990
Note payable, 8.48% adjusted annually, payable $12 per month,
including interest, due September 2010, secured by specific
multi-family mortgages 1,510 1,517
Note payable, 9.50%, interest paid quarterly, due June 2001,
secured by United stock 2,000 2,000
Junior subordinated notes, 9.125%, interest paid semi-annually,
due April 2001, unsecured 1,476 1,476
Junior subordinated notes, 9.25%, interest paid semi-annually,
due January 2002, unsecured 1,494 1,494
Senior subordinated notes, 10.00%, interest paid semi-annually,
due June 2005, unsecured 7,000 7,000
Federal Home Loan Bank advances, due at various dates through
2003 (weighted average rates of 6.59% and 6.50% at December 31
and June 30, 1999) 9,039 12,490
------------------------------------
Total long-term debt $23,504 $29,149
====================================
</TABLE>
56
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
The terms of a security agreement with the FHLB require United to pledge as
collateral qualifying first mortgage loans in an amount equal to at least 125%
of these advances and all stock in the FHLB or eligible securities with a market
value in an amount equal to at least 110% of these advances. In addition to
first mortgage loans pledged of $11,299, Fidelity had $23,522 of investment
securities pledged at December 31, 1999. Certain advances are subject to
restrictions or penalties in the event of prepayment.
All long-term debt, except for Federal Home Loan Bank advances, is debt of the
parent company and totals $14,465.
The scheduled principal reduction of borrowings at December 31, 1999, is as
follows: 2000, $1,162; 2001, $7,074; 2002, $5,858; 2003, $34; 2004, $36; and
thereafter, $9,340.
>> Loan Servicing
Loans serviced for others are not included in the accompanying consolidated
balance sheet. The unpaid principal balances of mortgage loans serviced for
others totaled $40,693, $38,646 and $19,481 at December 31, 1999 and June 30,
1999 and 1998.
The aggregate fair value of capitalized mortgage servicing rights at December
31, 1999 and June 30, 1999 approximated $509 and $483. Comparable market prices
were used to estimate fair value.
December 31, June 30,
----------------
1999 1999 1998
-------------------------------
Mortgage servicing rights
Balances, beginning of year $409 $226 $721
Servicing rights capitalized 45 250 127
Amortization of servicing rights (24) (67) (69)
Sale of servicing rights (553)
-------------------------------
Balances, end of year $430 $409 $226
===============================
57
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Income Tax
<TABLE>
<CAPTION>
Six Month
Period Ended Year Ended June 30,
December 31, ------------------------------------
1999 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax benefit
Currently payable
Federal $(330) $(1,803)
State $ 2 (2) (2)
Deferred
Federal (1,356) (39) (2,382)
State (317) 33 (1,007)
-----------------------------------------------------
Total income tax benefit $(1,671) $(338) $(5,194)
=====================================================
Reconciliation of federal statutory to actual tax benefit
Federal statutory income tax at 34% $(1,272) $ 98 $(4,076)
Effect of state income taxes (208) 21 (666)
Affordable housing tax credits and other (191) (457) (452)
-----------------------------------------------------
Actual tax benefit $(1,671) $(338) $(5,194)
=====================================================
</TABLE>
58
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
A cumulative deferred tax asset is included in other assets. The components of
the asset are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Differences in accounting for certain accrued liabilities $ 12 $ 16
Allowance for loan losses 2,391 1,252
Letter of credit allowance for loss 926 916
Loan fees 32 68
Unrealized gain/loss on available-for-sale securities 509 300
Alternative minimum tax credit 147 147
Low income housing credit carryforward 1,337 1,145
State net operating loss carryforward 805 703
Federal net operating loss carryforward 761 382
Other 39 6
------------------------------------
Total assets 6,959 4,935
------------------------------------
Liabilities
Depreciation (40) (40)
State income tax (273) (239)
Differences in basis of FHLB stock (66) (66)
Basis differential on certain partnership interests (1,038) (938)
Differences in accounting for mortgage servicing rights (170) (162)
------------------------------------
Total liabilities (1,587) (1,445)
------------------------------------
$5,372 $3,490
====================================
</TABLE>
At December 31, 1999, Fidelity has federal net operating loss carryforwards for
tax purposes totaling $2,239. These loss carryforwards expire in varying amounts
through the year 2019. Fidelity has state net operating loss carryforwards for
tax purposes of $9,470. These loss carryforwards expire in varying amounts
through the year 2014. Fidelity has affordable housing credit carryforwards of
$1,337. These carryforwards expire in varying amounts through the year 2019. In
addition, Fidelity has an alternative minimum tax credit carryforward of $147.
Retained earnings include approximately $1,870 for which no deferred income tax
liability has been recognized. This amount represents an allocation of income to
bad debt deductions as of December 31, 1987 for tax purposes only. Reduction of
amounts so allocated for purposes other than tax bad debt losses, including
redemption of bank stock or excess dividends, or loss of "bank" status, would
create income for tax purposes only, which income would be subject to the
then-current corporate income tax rate. The unrecorded deferred income tax
liability on the above amount was approximately $635.
The Company has recorded a deferred tax asset of $1,566 for the expected benefit
to be realized from the federal and state net operating loss carryovers
discussed above. Realization depends upon the ability of the Company to generate
sufficient taxable income before the expiration of the carryover periods. The
amount that management considers to be realizable is reevaluated at each
financial statement date. That estimate could be reduced in the near term if
management lowers its estimate of future taxable income during the carryover
period.
59
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Commitments and Contingent Liabilities
In the normal course of business, there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying consolidated financial
statements. Fidelity's exposure to credit loss in the event of nonperformance by
the other party to the financial instruments for commitments to extend credit
and standby letters of credit is represented by the contractual or notional
amount of those instruments. Fidelity uses the same credit policies in making
such commitments as it does for instruments that are included on the
consolidated balance sheet.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Fidelity evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by Fidelity upon extension of credit, is based on management's credit
evaluation. Collateral held varies, but may include residential real estate,
income-producing commercial properties, or other assets of the borrower. At
December 31 and June 30, 1999, commitments to extend credit, which represent
financial instruments whose contract amount represents credit risk, were $8,098
and $5,372.
Fidelity has issued standby letters of credit on affordable housing developments
in which one of Fidelity's subsidiaries has a partnership interest. The letters
of credit secure tax exempt bond issues and other permanent financing of limited
partnerships in which one of Fidelity's subsidiaries owns a one percent general
partner interest. The amount outstanding on these letters of credit at December
31 and June 30, 1999 was $16,240 and $16,666.
Fidelity has also issued standby letters of credit on affordable housing
developments in which the borrowers are not affiliated with Fidelity. The
letters of credit secure tax-exempt bond issues and other permanent financing of
limited partnerships. The amount outstanding on the letters of credit at
December 31 and June 30, 1999 was $28,223. Fidelity also has standby letters of
credit to guarantee the performance of a customer to a third party. The amount
outstanding on the standby letters of credit at December 31 and June 30, 1999
was $115 and $160.
Fidelity, in its role as general partner on various affordable housing
developments through its subsidiaries, is committed to advance certain amounts
to limited partnerships. These commitments potentially include short-term loans
to the limited partners or an increase in the general partner's equity
investment.
Fidelity has entered into change in control agreements with five of its
employees which provide for the continuation of a multiple of the employee's
existing salary and certain benefits for a two-year period of time under certain
conditions following a change in control. The agreements become effective if
there is a change in control that is accompanied by a significant change in job
responsibilities and/or compensation.
Fidelity and its subsidiaries are also subject to claims and lawsuits which
arise primarily in the ordinary course of business. It is the opinion of
management that the disposition or ultimate resolution of such claims and
lawsuits will not have a material adverse effect on the consolidated financial
position of Fidelity.
60
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Dividend and Capital Restrictions
Fidelity's dividend policy is to pay cash or distribute stock dividends when its
Board of Directors deems it to be appropriate, taking into account Fidelity's
financial condition and results of operations, economic and market conditions,
industry standards, and other factors, including regulatory capital requirements
of its savings bank subsidiary. Fidelity is not subject to any regulatory
restrictions on payments to its stockholders. Fidelity's primary source of
income is dividends from United.
United has entered into a Supervisory Agreement (Agreement) with the OTS. One of
the provisions of the Agreement restricts the payments of dividends from United
to Fidelity without prior written OTS approval. The OTS, in 1999, permitted the
payment of dividends to assist Fidelity in meeting interest payments on its
outstanding debt; however, there can be no assurance that this approval will be
granted going forward. Fidelity is uncertain when it will pay dividends in the
future and the amount of such dividends, if any.
>> Regulatory Capital
United is subject to various regulatory capital requirements administered by the
federal banking agencies and is assigned to a capital category. The assigned
capital category is largely determined by three ratios that are calculated
according to the regulations: total risk adjusted capital, Tier 1 capital, and
Tier 1 leverage ratios. The ratios are intended to measure capital relative to
assets and credit risk associated with those assets and off-balance sheet
exposures of the entity. The capital category assigned to an entity can also be
affected by qualitative judgments made by regulatory agencies about the risk
inherent in the entity's activities that are not part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At December 31 and June 30, 1999,
United is categorized as well capitalized and met all subject capital adequacy
requirements at those dates. In its Agreement with the OTS, Fidelity has agreed
to increase its capital.
61
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
United's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
Required for To Be Well
Actual Adequate Capital* Capitalized*
-------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total risk-based capital* (to risk-
weighted assets) $17,603 14.3% $ 9,839 8.0% $12,298 10.0%
Tier 1 capital* (to risk-weighted assets) 11,167 9.1 4,919 4.0 7,379 6.0
Core capital* (to adjusted total assets) 11,167 6.8 6,593 4.0 8,241 5.0
As of June 30, 1999
Total risk-based capital* (to risk-
weighted assets) 20,591 15.4 10,718 8.0 13,398 10.0
Tier 1 capital* (to risk-weighted assets) 14,033 10.5 5,359 4.0 8,039 6.0
Core capital* (to adjusted total assets) 14,033 8.5 6,615 4.0 8,269 5.0
</TABLE>
*As defined by regulatory agencies
62
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Other Restrictions
United entered into a Supervisory Agreement with the OTS on February 3, 1999
which is in effect until terminated, modified or suspended by the OTS.
Under the terms of the Agreement, United must develop and submit to the OTS for
approval a strategic plan which includes, at a minimum, capital targets;
specific strategies; the completion of quarterly projections for a three-year
period; concentration limits for all assets; a plan for reducing United's
concentrations of high risk assets; review of infrastructure, staffing and
expertise with respect to each area of United's operations; and capital
planning. The strategic plan was submitted and approved by the OTS.
In addition, United must, among other things, take other specified actions
within specified time frames. These actions include, among others; the
development of and adherence to a written plan for the reduction of classified
and criticized assets to specified levels; maintenance of sufficient allowances
for loan and lease losses; quarterly reporting to the OTS relating to classified
assets and workout plans; restriction of its growth in total assets to an amount
not in excess of an amount equal to the net interest credited on deposit
liabilities without prior OTS approval; limiting growth of its consumer loan
portfolio to an amount not in excess of 25 percent of its total assets;
development of a written plan to divest all real estate held for development;
adoption of policies and procedures designed to avoid potential conflicts of
interest; development of policies and procedures to increase liquidity; adoption
of a policy with respect to its mortgage brokerage activity, which would address
its operation and methods for risk management; development of a policy to
administer the general partnerships held by Village Housing Corporation; and
maintenance of a fully staffed and functioning internal audit and independent
loan review processes.
United is also prohibited from taking certain actions without prior approval,
including but not limited to: investing in, purchasing, or committing to make or
purchase any additional commercial loans or commercial real estate loans;
requesting permission from the OTS to engage in additional commercial loan
activity until United has hired an experienced loan staff and credit analyst;
refinancing or extending classified or criticized commercial loans without the
prior approval of the OTS; engaging in "sub prime" consumer lending activities;
making capital distributions, including dividends to Fidelity; making any
additional equity investments; developing any real estate without specific
approval of the OTS; acquiring any additional real estate for future
development; selling any asset to an affiliated party without prior written
approval of the OTS; engaging in any new activities not included in the to-be
developed strategic plan; and, refinancing or extending any non-classified or
criticized commercial loan if additional funds are extended.
United is also required to obtain OTS approval prior to adding or replacing any
director or senior executive officer. United is also prohibited, without prior
OTS approval, from entering into any contract with any executive officer or
director which would require a "golden parachute" payment and from increasing
the executive benefit package in an amount in excess of the annual cost of
living. United is also required to develop a plan to reduce employee turnover,
build an experienced staff, and provide for management succession.
Management of United has begun taking, or refraining from taking, as applicable,
some of the actions requested by the OTS and at December 31, 1999, United was in
compliance with the conditions of its Agreement with the OTS.
63
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Stockholders' Equity
In connection with Fidelity's first debt and equity rights offering completed
April 30, 1994, Fidelity 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, carrying an exercise price of $6.22 per share, and expire on
April 30, 2004. At December 31, 1999, a total of 397,218 of the shares
originally reserved had been issued and 18,282 remained reserved and unissued.
In connection with Fidelity's second debt and equity offering completed on
January 31, 1995, Fidelity 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, carrying an exercise price of $8.93 per share, and expire on
January 31, 2005. At December 31, 1999, a total of 337,029 of the shares
originally reserved had been issued and 9,471 remained reserved and unissued.
On September 22, 1997, Fidelity filed Schedule 13E4 with the Securities and
Exchange Commission for a warrant tender offer to holders of its 1994 and 1995
warrants. The offer and withdrawal rights expired on October 31, 1997. Fidelity
decreased the exercise price, upon the terms and subject to the conditions set
forth in the Letter of Transmittal, to $3.70 for the 1994 warrants and $4.04 for
the 1995 warrants. The proceeds from the exercise of the warrants under this
offer totaled $2,500.
>> Benefit Plans
Fidelity is a participant in the Financial Institutions Retirement Fund (FIRF).
This defined-benefit plan is a multi-employer plan; separate actuarial
valuations are not made with respect to each participating employer. According
to FIRF administrators, the market value of the fund's assets exceeded the value
of vested benefits in the aggregate as of June 30, 1999, the date of the latest
actuarial valuation. The plan provides pension benefits for substantially all of
Fidelity's employees. No expense was recorded for Fidelity during the six months
ended December 31, 1999 and the years ended June 30, 1999 and 1998.
Fidelity has a retirement savings 401(k) plan in which substantially all
employees may participate. Fidelity matches employees' contributions at the rate
of 25% up to 6% of the participant's salary. Fidelity's expense for the plan was
$8, $17 and $19 for the six months ended December 31, 1999 and the years ended
June 30, 1999 and 1998.
64
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Related Party Transactions
Fidelity has entered into transactions with certain directors, executive
officers, significant stockholders and limited partnerships in which Fidelity is
an investor and their affiliates and associates. Such transactions were made in
the ordinary course of business on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing at the same time
for comparable transactions with other customers, and did not, in the opinion of
management, involve more than normal credit risk or present other unfavorable
features.
The aggregate amount of loans, as defined, to such related parties were as
follows:
Balances, July 1, 1999 $5,909
Loans charged off (1,569)
New loans, including renewals 162
Payments, etc., including renewals (1,510)
-------------------
Balances, December 31, 1999 $2,992
===================
Total internally classified related party loans included in the total related
party loans at December 31 and June 30, 1999 were $2,943 and $6,200. General
reserves for these classified related party loans totaled $427 and are included
in the allowance for loan losses.
>> Stock Option Plans
Under Fidelity's stock option plans, Fidelity grants stock option awards which
vest and become exercisable at various dates. During the six months ended
December 31, 1999 and years ended June 30, 1999 and 1998, Fidelity authorized
the grant of options for up to 3,000, 12,500 and 71,531 shares of its common
stock. The exercise price of each option was greater than the market price of
Fidelity's stock on the date of grant; therefore, no compensation expense was
recognized.
Although Fidelity has elected to follow APB No. 25, SFAS No. 123 requires
proforma disclosures of net income and earnings per share as if Fidelity had
accounted for its employee stock options under that Statement. The proforma
effect on net income and earnings per share of the options granted in 1999 were
not materially different from those presented on the consolidated statement of
income.
The following is a summary of the status of the Fidelity's stock option plans
and changes in the plans as of and for the six months ended December 31, 1999
and the years ended June 30, 1999 and 1998.
Directors' Plan In August 1993, the Board of Directors of Fidelity adopted a
non-qualified stock option plan (Directors' Plan) which provides for the grant
of non-qualified stock options to individuals who are directors of Fidelity, or
any of its subsidiaries. The Directors' Plan provides for the grant of
non-qualified stock options to acquire shares of common stock of Fidelity for
the price of not less than $2 above the average of the high and low bid
quotations, as reported by NASDAQ, for the common stock of Fidelity for the five
trading days immediately preceding the date the option is granted. A total of
233,779 shares have been reserved for issuance under the Directors' Plan.
65
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
At December 31, 1999, there were 115,486 options available for grant. A summary
of the stock options activity for the Directors' Plan is as follows:
<TABLE>
<CAPTION> June 30,
December 31, ------------------------------------
1999 1999 1998
- -----------------------------------------------------------------------------------------------------
<S>
Shares under option <C> <C> <C>
Outstanding at beginning of year 118,293 118,293 86,762
Granted 31,531
Outstanding at end of year 118,293 118,293 118,293
Exercisable at end of year 118,293 118,293 118,293
Weighted option price per share
Exercisable $ 7.92 $ 7.92 $ 7.92
Granted 11.81
</TABLE>
1995 Key Employees' Stock Option Plan
The 1995 Key Employees' Stock Option Plan (1995 Plan) provides for the granting
of either incentive stock options (ISOs) pursuant to Section 422A of the
Internal Revenue Code of 1986, as amended (Code), or stock options which do not
qualify as incentive stock options (ISOs), or any combination thereof. Options
may be granted to key employees and officers of Fidelity and its subsidiaries.
The option price per share for ISOs will not be less than the fair market value
of a share on the date the option is granted. The option price per share for
ISOs granted to an employee owning 10 percent or more of the common stock of
Fidelity will be not less than 110 percent of the fair market value of a share
on the date the option is granted. The option price per share for ISOs will be
determined by the compensation committee, but may not be less than 100 percent
of the fair market value on the date of grant. A total of 236,500 shares have
been reserved for issuance under the 1995 Plan.
66
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
At December 31, 1999, there were 155,815 options available for grant. A summary
of the stock options activity for the 1995 Plan is as follows:
<TABLE>
<CAPTION> June 30,
December 31, ----------------------------------
1999 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares under option
Outstanding at beginning of year 77,278 64,220 80,443
Granted 3,000 23,058 40,000
Forfeited/expired (10,000) (56,223)
Outstanding at end of year 80,278 77,278 64,220
Exercisable at end of year 47,620 47,020 36,176
Weighted option price per share
Exercisable $10.16 $10.26 $10.68
Granted 3.01 3.22 10.81
</TABLE>
>> Earnings Per Share
Earnings per share were computed as follows:
<TABLE>
<CAPTION>
Six Month Period Ended Year Ended June 30
December 31, ---------------------------------------------------------------
1999 1999 1998
------------------------------------------------------------------------------------------------
Weighted Per- Weighted Per- Weighted Per-
Average Share Average Share Average Share
Income Shares Amount Income Shares Amount Loss Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) $(2,070) $625 $(6,794)
------------ ----------- -----------
Basic Earnings (Loss) Per
Share
Income available to
common stockholders (2,070) 3,147,662 $(.66) 625 3,143,179 $.20 (6,794) 2,956,157 $(2.30)
------------------------------------------------------------------------------------------------
Diluted Earnings (Loss)
Per Share
Income available to
common stockholders
and assumed
conversions $(2,070) 3,147,662 $(.66) $625 3,143,179 $.20 $(6,794) 2,956,157 $(2.30)
================================================================================================
</TABLE>
67
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Options to purchase 165,913, 152,694 and 55,714 shares of common stock at an
average price of $8.56 for the six months ended December 31, 1999, $8.33 for the
year ended June 30, 1999, and $11.81 and $10.81 for the year ended June 30, 1998
were outstanding at December 31, 1999 and June 30, 1999 and 1998 but were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares.
For the six months and years ended December 31, and June 30, 1999 and 1998, the
effect of outstanding options and warrants were anti-dilutive.
>> Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Interest-bearing Time Deposits--The fair value of interest-bearing time deposits
approximates carrying value.
Investment Securities--Fair values are based on quoted market prices.
Loans--For both short-term loans and variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values. The fair values for certain mortgage loans, including one-to-four family
residential, are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in loan
characteristics. The fair value for other loans is estimated using discounted
cash flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
Interest Receivable/Payable--The fair values of interest receivable/payable
approximate carrying values.
FHLB Stock--The fair value is estimated to be the carrying value, which is par.
All transactions in the capital stock of the FHLB of Indianapolis are executed
at par.
Deposits--The fair values of non-interest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the balance sheet
date. The carrying amounts for variable rate, fixed-term certificates of deposit
approximate their fair values at the balance sheet date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on such time deposits.
Short-Term Borrowings--The fair value of these borrowings is estimated using
rates currently available to Fidelity for debt with similar terms and remaining
maturities. These instruments adjust on a periodic basis and the carrying amount
represents the fair value.
68
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Long-Term Debt--The fair value of these borrowings is estimated using a
discounted cash flow calculation, based on current rates for similar debt.
Long-term debt consists of adjustable instruments tied to a variable market
interest rate.
Off-Balance-Sheet Commitments--Commitments include commitments to purchase and
originate mortgage loans, commitments to sell mortgage loans, and standby
letters of credit and are generally of a short-term nature. The fair value of
the loan commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing. The carrying amounts of the commitments to
purchase and originate mortgage loans and to sell mortgage loans, which are
immaterial, are reasonable estimates of the fair value of these financial
instruments. The carrying amount of the standby letters of credit, which consist
of a letter of credit valuation allowance of $5,787, is a reasonable estimate of
the fair value of those off-balance sheet items.
The estimated fair values of Fidelity's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
-----------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 30,914 $ 30,914 $ 16,267 $ 16,267
Investment securities available for sale 24,305 24,305 27,325 27,325
Loans, net 96,919 96,194 110,436 110,594
Interest receivable 740 740 887 887
FHLB stock 3,920 3,920 3,920 3,920
Liabilities
Deposits 135,016 135,077 128,596 128,856
Short-term borrowings 89 89 128 128
Long-term debt 23,504 23,515 29,149 28,896
Interest payable 329 329 272 272
Standby letters of credit 5,787 5,787 5,168 5,168
</TABLE>
69
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of Fidelity:
Condensed Balance Sheet
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 444 $ 2,220
Investment in common stock of subsidiaries 12,541 14,848
Loans 2,161 3,808
Subordinated debentures and other loan
receivables from subsidiaries 4,875 4,875
Income tax receivable 1,723 1,744
Other assets 471 585
------------------------------------
Total assets $22,215 $28,080
====================================
Liabilities
Long-term debt $14,948 $17,144
Letter of credit valuation allowance 1,670 2,855
Other liabilities 170 267
------------------------------------
Total liabilities 16,788 20,266
Stockholders' Equity 5,427 7,814
------------------------------------
Total liabilities and stockholders' equity $22,215 $28,080
====================================
</TABLE>
70
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Condensed Statement of Income
<TABLE>
<CAPTION>
Six Month
Period Ended Year Ended June 30,
December 31, ------------------------------------
1999 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from subsidiaries $ 150 $ 875
Interest income $ 485 1,010 1,089
Other income 2 8 10
-----------------------------------------------------
Total income 487 1,168 1,974
-----------------------------------------------------
Expense
Interest expense 777 1,400 1,402
Provision for loan losses 284 424 1,092
Letter of credit valuation provision (735) (434) 3,289
Other expenses 293 461 555
-----------------------------------------------------
Total expense 619 1,851 6,338
-----------------------------------------------------
Loss Before Income Tax and Equity in
Undistributed (Distributions in Excess of)
Income of Subsidiaries (132) (683) (4,364)
Income Tax Benefit (52) (330) (2,075)
-----------------------------------------------------
Loss Before Equity in Undistributed (Distributions in Excess of)
Income of Subsidiaries (80) (353) (2,289)
Equity in Undistributed (Distributions in Excess of) Income of
Subsidiaries (1,990) 978 (4,505)
-----------------------------------------------------
Net Income (Loss) $(2,070) $ 625 $(6,794)
=====================================================
</TABLE>
71
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Six Month Period
Ended Year Ended June 30,
December 31, -----------------------------------
1999 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $(2,070) $ 625 $(6,794)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
Depreciation and amortization 8 24 40
Provision for loan losses 284 424 1,092
Letter of credit valuation provision (735) (434) 3,289
Funding on outstanding letter of credit (450)
Undistributed net income of subsidiaries 1,990 (978) 4,505
(Increase) decrease in other assets 127 371 (1,611)
(Increase) decrease in other liabilities (97) 123 (1,045)
----------------------------------------------------
Net cash provided (used) by operating activities (943) 155 (524)
----------------------------------------------------
Investing Activities
Decrease in interest-bearing deposits in other banks 6
Capital contributions to subsidiaries (1,094) (1,400)
Advance on note to subsidiary (250)
Principal payments received on notes from subsidiaries 1,188
Net change in loans 1,363 (160) 1,084
----------------------------------------------------
Net cash provided (used) by investing activities 1,363 (60) (566)
----------------------------------------------------
Financing Activities
Repayment of long-term debt (2,196) (51) (52)
Proceeds from issuance of long-term debt 2,000
Proceeds from exercise of stock warrants 2,492
Cash dividends (156) (1,186)
Purchase of treasury stock (14)
Sale of common stock 90
----------------------------------------------------
Net cash provided (used) by financing activities (2,196) 1,883 1,240
----------------------------------------------------
Change in Cash and Cash Equivalents (1,776) 1,978 150
Cash and Cash Equivalents, Beginning of Year 2,220 242 92
----------------------------------------------------
Cash and Cash Equivalents, End of Year $ 444 $2,220 $ 242
====================================================
</TABLE>
72
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Business Segment Information
Fidelity operates principally in two industries, banking and real estate
development and management. Through United Fidelity, Fidelity offers traditional
banking products, such as checking, savings and certificates of deposit, as well
as mortgage, commercial and consumer loans. Through the Affordable Housing
Group, Fidelity is or was involved in various aspects of developing, building,
renting and managing affordable housing units.
Banking revenue consists primarily of interest and fee income, while real estate
development and management fee income consists primarily of real estate
management, investment banking, development and other fees. All revenue is
earned in the United States.
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 and are all held in
the United States. Real estate development and management activities conducted
by Fidelity are not asset intensive.
73
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
Presented below is condensed financial information relating to Fidelity's
business segments:
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------------------
Real Estate
Development
Banking & Management Eliminations Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 6,019 $ 3 $ (3) $ 6,019
Other income 854 167 (20) 1,001
Interest expense 4,268 3 (3) 4,268
Other expense 4,731 437 (20) 5,148
Provision for loan losses 1,345 1,345
Loss before tax (3,471) (270) (3,741)
Income tax benefit (1,283) (388) (1,671)
Total assets 172,044 3,089 (3,676) 171,457
Capital expenditures 231 231
Depreciation and amortization 192 4 196
June 30, 1999
--------------------------------------------------------------------------
Real Estate
Development
Banking & Management Eliminations Total
- ----------------------------------------------------------------------------------------------------------------------------
Interest income $ 14,175 $ 197 $ (278) $ 14,094
Other income 2,368 335 (40) 2,663
Interest expense 9,730 278 (278) 9,730
Other expense 5,916 1,002 (40) 6,878
Provision for loan losses (454) 316 (138)
Income (loss) before tax 1,351 (1,064) 287
Income tax expense (benefit) 112 (450) (338)
Total assets 172,864 2,975 (3,586) 172,253
Capital expenditures 263 4 267
Depreciation and amortization 390 12 402
June 30, 1998
--------------------------------------------------------------------------
Real Estate
Development
Banking & Management Eliminations Total
- ----------------------------------------------------------------------------------------------------------------------------
Interest income $ 17,332 $ 444 $ (584) $ 17,192
Other income 2,695 330 3,025
Interest expense 11,586 584 (584) 11,586
Other expense 13,660 2,416 16,076
Provision for loan losses 2,152 2,391 4,543
Loss before tax (7,371) (4,617) (11,988)
Income tax benefit (3,268) (1,926) (5,194)
Total assets 200,082 9,720 (12,756) 197,046
Capital expenditures 103 8 111
Depreciation and amortization 430 19 449
</TABLE>
74
<PAGE>
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Data)
>> Capital Infusion
On July 16, 1999, Fidelity signed a letter of intent with Lincolnshire
Management, Inc. (Lincolnshire). This proposed transaction was terminated in
November 1999.
On January 21, 2000 as amended and restated on March 15, 2000, Fidelity signed a
definitive stock purchase agreement to sell 1,460,000 shares of its common stock
to Pedcor Investments, a limited liability company (Pedcor). One of the
principals of Pedcor was a director of the Company until his resignation in
December 1999.
The consideration to be paid by Pedcor includes $3,000 in cash, a five-year
guarantee to United in an aggregate amount up to $1,500 against any negative
cash flow from operations of certain specified development properties in the
Bank's portfolio and an agreement to provide management and certain accounting
services for the specified properties for ten years at no fee to the Bank or
Company.
Consummation of the agreement is subject to receipt of all regulatory and
shareholder approvals.
75
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
No response to this item is required.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information called for by this item is incorporated by reference to the
definitive proxy statement of Fidelity to be filed with the Securities Exchange
Commission not later than 120 days after December 31, 1999 and to be delivered
to stockholders in connection with the annual meeting of the stockholders to be
held in 2000.
ITEM 11. EXECUTIVE COMPENSATION
This information called for by this item is incorporated by reference to the
definitive proxy statement of Fidelity to be filed with the Securities Exchange
Commission not later than 120 days after December 31, 1999 and to be delivered
to stockholders in connection with the annual meeting of the stockholders to be
held in 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information called for by this item is incorporated by reference to the
definitive proxy statement of Fidelity to be filed with the Securities Exchange
Commission not later than 120 days after December 31, 1999 and to be delivered
to stockholders in connection with the annual meeting of the stockholders to be
held in 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information called for by this item is incorporated by reference to the
definitive proxy statement of Fidelity to be filed with the Securities Exchange
Commission not later than 120 days after December 31, 1999 and to be delivered
to stockholders in connection with the annual meeting of the stockholders to be
held in 2000.
76
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements are included in
Item 8:
Page Number in
10-K
Independent Auditor's Report on
Consolidated Financial Statements 41
Consolidated Balance Sheet
December 31, 1999 and June 30, 1999 42
Consolidated Statement of Income-
For the six months ended December 31, 1999,
and years ended June 30, 1999 and 1998 43 and 44
Consolidated Statement of Changes in Stockholders' Equity -
For the six months ended December 31, 1999,
and years ended June 30, 1999 and 1998 45
Consolidated Statement of Cash Flows -
For the six months ended December 31, 1999,
and years ended June 30, 1999 and 1998 46 and 47
Notes to consolidated Financial Statements 48 through 75
(2) See response to Item 14 (a) (1). All other financial statement schedules
have been omitted because they are not applicable, or the required information
is shown in the consolidated financial statements or notes thereto.
(3) List of Exhibits
Exhibit Number Description
3 (a) Articles of Incorporation of Fidelity, filed as exhibit
3(a) to Fidelity's 1995 Annual Report on Form 10-K, are
incorporated herein by reference.
3 (b) By-Laws of Fidelity, filed as exhibit 3(b) to
Fidelity's 1994 Annual Report on Form 10-K, are
incorporated herein by reference.
10 (a) The 1993 Director's Stock Option Plan, filed as
exhibit 10(d) to Fidelity's 1995 Annual Report on Form
10-K, is incorporated herein by reference.
(b) The 1995 Key Employee's Stock Option Plan, filed as
exhibit 10(c) to Fidelity's 1996 Annual Report on Form
10-K, is incorporated herein by reference.
(c) Severance Agreement between Fidelity and M. Brian
Davis, filed as exhibit 10(c) to Fidelity's 1998 Annual
Report on Form 10-K, is incorporated herein by
reference.
(d) Severance Agreement between Fidelity and Donald R.
Neel, filed as exhibit 10(d) to Fidelity's 1998 Annual
Report on Form 10-K, is incorporated herein by
reference.
11 Statement regarding computation of per share earnings
21 Subsidiaries of Fidelity Federal Bancorp.
27 Financial Data Schedule.
(b) A Form 8-K was filed on November 23, 1999.
Fidelity released that negotiations with Mortgage Finance Acquisition
Partners, L.P., an affiliate of Lincolnshire Equity Fund II, had
terminated.
(c) See the list of exhibits in Item 14 (a) (3).
(d) No other financial statement schedules are required to be submitted.
77
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on the 30th day of March, 2000.
FIDELITY FEDERAL BANCORP
Registrant
By /S/ M. BRIAN DAVIS
------------------------------------
M. Brian Davis
President and Chief Executive Officer
(Principal Executive Officer)
By /S/ DONALD R. NEEL
------------------------------------
Donald R. Neel, Executive Vice President,
Treasurer and Chief Financial Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on September 27, 1999, by the following persons on behalf
of the registrant and in the capacities indicated.
By /S/ JACK CUNNINGHAM
-------------------------------------------------
Jack Cunningham,
Chairman
By /S/ M. BRIAN DAVIS
-------------------------------------------------
M. Brian Davis
President, Chief Executive Officer
and Director
By: /S/ CURT J. ANGERMEIER
-------------------------------------------------
Curt J. Angermeier, Director
By /S/ WILLIAM R. BAUGH
-------------------------------------------------
William R. Baugh, Director
By /S/ DONALD R. NEEL
-------------------------------------------------
Donald R. Neel, Director
By /S/ BARRY A. SCHNAKENBURG
-------------------------------------------------
Barry A. Schnakenburg, Director
78
<PAGE>
INDEX TO EXHIBITS
Page Exhibit Number Exhibit
- -----------------------------------------------------------------------------
67 11 Statement regarding computation of per share
earnings. See (Earnings per Share) of this
document.
80 21 Subsidiaries of Fidelity Federal Bancorp.
81 27 Financial Data Schedule.
79
Exhibit 21 Subsidiaries of Fidelity Federal Bancorp
Jurisdiction of
Name Incorporation
- ---- ----------------
Fidelity Federal Bancorp:
United Fidelity Bank, fsb Indiana
Village Affordable Housing Corporation Indiana
Village Securities Corporation Indiana
Also included are the subsidiaries of United Fidelity Bank, fsb:
Village Insurance Corporation Indiana
Village Housing Corporation Indiana
Village Management Corporation Indiana
Village Capital Corporation Indiana
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8003
<INT-BEARING-DEPOSITS> 22911
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24305
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 98940
<ALLOWANCE> 2021
<TOTAL-ASSETS> 171457
<DEPOSITS> 135016
<SHORT-TERM> 89
<LIABILITIES-OTHER> 7421
<LONG-TERM> 23504
0
0
<COMMON> 3147
<OTHER-SE> 2280
<TOTAL-LIABILITIES-AND-EQUITY> 171457
<INTEREST-LOAN> 4558
<INTEREST-INVEST> 849
<INTEREST-OTHER> 612
<INTEREST-TOTAL> 6019
<INTEREST-DEPOSIT> 3151
<INTEREST-EXPENSE> 1117
<INTEREST-INCOME-NET> 1751
<LOAN-LOSSES> 1345
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5148
<INCOME-PRETAX> (3741)
<INCOME-PRE-EXTRAORDINARY> (3741)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2070)
<EPS-BASIC> (0.66)
<EPS-DILUTED> (0.66)
<YIELD-ACTUAL> 2.24
<LOANS-NON> 482
<LOANS-PAST> 448
<LOANS-TROUBLED> 193
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3521
<CHARGE-OFFS> 2877
<RECOVERIES> 32
<ALLOWANCE-CLOSE> 2021
<ALLOWANCE-DOMESTIC> 2021
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 817
</TABLE>
