UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1996
FIDELITY FEDERAL BANCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 0-22880 35-1894432
- ---------------------------- ---------- -------------------
(State of other jurisdiction Commission (IRS Employer
of Incorporation of File No. Identification No.)
Organization)
18 N. W. Fourth Street, P. O. Box 1347
Evansville, Indiana 47706-1347
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(812) 424-0921
--------------------------------------------------
Registrant's telephone number, including area code
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months and (2) has been subject
to such filing requirements for the past 90 days.
YES X NO
----- -----
As of November 4, 1996, there were 2,492,793 shares of the Registrant's
common stock, $1 stated value, issued and outstanding.
FIDELITY FEDERAL BANCORP
AND SUBSIDIARIES
Index
Page
PART I - FINANCIAL INFORMATION
ITEM 1--Financial Statements:
Consolidated balance sheet . . . . . . . . . . . . . . . . . . . . 3
Consolidated statement of income . . . . . . . . . . . . . . . . . 4
Consolidated statement of changes in stockholders' equity . . . . 5
Consolidated statement of cash flows . . . . . . . . . . . . . . . 6
Notes to consolidated financial statements . . . . . . . . . . . . 7
ITEM 2--Management's Discussion and Analysis of Financial
Results of Operations and Condition . . . . . . . . . . . . . . . 10
Capital Resources and Capital Requirements . . . . . . . . . . . . 16
Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIDELITY FEDERAL BANCORP
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, JUNE 30,
1996 1996
- ----------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 2,158,879 $ 1,111,737
Short-term interest-bearing deposits 450,761 4,101,143
Federal funds sold 5,000,000
-------------- --------------
Total cash and cash equivalents 2,609,640 10,212,880
Interest-bearing deposits 5,370 5,370
Securities available for sale 17,828,076 17,458,474
Loans 224,883,389 217,221,244
Allowance for loan losses (1,870,363) (1,058,894)
-------------- --------------
Net loans 223,013,026 216,162,350
Premises and equipment 5,833,267 5,559,322
Federal Home Loan Bank of Indianapolis stock, at cost 3,919,500 3,919,500
Other assets 8,625,609 8,897,813
-------------- --------------
Total assets $ 261,834,488 $ 262,215,709
============== ==============
Liabilities
Deposits
Non-interest bearing $ 6,091,299 $ 5,099,938
Interest-bearing 175,105,276 176,602,082
-------------- --------------
Total deposits 181,196,575 181,702,020
Federal funds purchased 7,400,000
Borrowings 57,003,917 62,984,689
Advances by borrowers for taxes and insurance 907,969 859,110
Other liabilities 2,780,263 2,374,915
-------------- --------------
Total liabilities 249,288,724 247,920,734
STOCKHOLDERS' EQUITY
Preferred stock, no par or stated value
Authorized and unissued - 5,000,000 shares
Common stock, $1 stated value
Authorized - 5,000,000 shares
Issued - 2,495,516 and 2,495,040 shares
Outstanding 2,493,516 and 2,495,040 shares 2,495,516 2,495,040
Capital surplus 8,788,416 8,785,148
Treasury stock - 2,000 shares
at cost (32,250)
Stock warrants 265,400 265,500
Retained earnings, substantially restricted 1,145,370 2,888,866
Net unrealized losses on securities and mortgage-
backed securities available for sale (116,688) (139,579)
-------------- --------------
Total stockholders' equity 12,545,764 14,294,975
-------------- --------------
Total liabilities and stockholders' equity $ 261,834,488 $ 262,215,709
============== ==============
See notes to consolidated financial statements.
NOTE: The consolidated balance sheet at June 30, 1996 has been derived
from the audited financial statements.
3
FIDELITY FEDERAL BANCORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
1996 1995
-------------------------
INTEREST INCOME
Loans $ 4,754,751 $ 4,924,399
Loans held for sale 3,610
Securities available for sale 285,442 278,032
Federal funds sold 16,989 50,007
Interest-bearing deposits 17,197 30,404
Other interest and dividend income 77,341 63,271
----------- -----------
Total interest income 5,151,720 5,349,723
----------- -----------
INTEREST EXPENSE
Deposits 2,472,309 2,700,709
Federal Home Loan Bank advances 652,587 870,642
Federal funds purchased 39,801 3,944
Other interest expense 409,092 362,762
----------- -----------
Total interest expense 3,573,789 3,938,057
----------- -----------
NET INTEREST INCOME 1,577,931 1,411,666
Provision for loan losses 850,000 110,000
----------- -----------
Net interest income after provision for loan losses 727,931 1,301,666
----------- -----------
NON-INTEREST INCOME
Fee income-real estate development and management 78,810 1,406,994
Service charges on deposit accounts 69,546 30,404
Net gain on sale of
Loans 28,048 111,348
Premises and equipment 468 718,690
Letter of credit fees 154,205 90,988
Other income 277,022 298,861
----------- -----------
Total non-interest income 608,099 2,657,285
----------- -----------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,121,628 1,075,125
Net occupancy expense 112,148 122,719
Equipment expense 83,963 98,056
Data processing expense 73,027 65,316
Deposit insurance expense 1,150,728 90,979
Legal and professional fees 122,456 60,130
Other expense 618,702 525,045
----------- -----------
Total non-interest expense 3,282,652 2,037,370
----------- -----------
Income before income tax (1,946,622) 1,921,581
Income tax expense (702,228) 780,429
----------- -----------
NET INCOME (LOSS) $(1,244,394) $ 1,141,152
=========== ===========
PER SHARE:
Primary net income (loss) $ (0.46) $ 0.42
Fully diluted net income (loss) (0.46) 0.42
Average common and common equivalent shares
outstanding 2,727,611 2,740,179
See notes to consolidated financial statements.
4
FIDELITY FEDERAL BANCORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
1996 1995
-------------------------
BEGINNING BALANCES $14,294,975 $12,405,369
Net income (1,244,394) 1,141,152
Net change in unrealized gain (loss) on securities
available for sale 22,891 (34,950)
Cash dividends (499,103) (329,072)
Purchase of treasury stock (32,250)
Exercise of stock warrants 1,719 159,264
Exercise of stock options 1,926 47,830
----------- -----------
BALANCES, SEPTEMBER 30 $12,545,764 $13,389,593
=========== ===========
See notes to consolidated condensed financial statements.
5
FIDELITY FEDERAL BANCORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
1996 1995
-----------------------------------
OPERATING ACTIVITIES
Net income $ (1,244,394) $ 1,141,152
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 850,000 110,000
Loss on sale of premises and equipment 5,457 34,737
Gain on sale of premises and equipment (468) (718,690)
Net (increase) decrease in real estate loans held for sale 1,335,817
Depreciation 85,135 85,636
Investment securities amortization (accretion), net 3,243 4,261
Amortization of net loan origination fees and points (28) (52,626)
Changes in:
Interest receivable and other assets 272,204 (657,644)
Interest payable and other liabilities 404,986 1,377,595
------------- -------------
Net cash provided by operating activities 376,135 2,660,238
------------- -------------
INVESTING ACTIVITIES
Net change in interest-bearing deposits
Purchases of investment securities available for sale (1,011,596) (3,000,000)
Proceeds from investment securities available for sale,
sales and maturities 661,904 1,000,000
Net changes in loans (7,700,648) (16,589,443)
Purchases of premises and equipment (364,426) (307,053)
Proceeds from sale of premises and equipment 357 1,000,000
Purchases of FHLB of Indianapolis stock (262,800)
------------- -------------
Net cash used by investing activities (8,414,409) (18,159,296)
------------- -------------
FINANCING ACTIVITIES
Net change in:
Noninterest-bearing, NOW, savings and money
market deposits (1,980,048) 768,362
Certificates of deposit 1,474,603 1,681,168
Net increase in federal funds purchased 7,400,000
Proceeds from borrowings 662,864 442,448
Repayment of borrowings (3,244,054) (4,408,396)
Proceeds from FHLB advances 7,600,000 6,056,000
Repayment of FHLB advances (10,999,582) (1,299,466)
Net change in advances by borrowers for taxes and insurance 48,859 353,538
Purchase of treasury stock (32,250)
Cash dividends (499,003) (269,612)
Proceeds from exercise of stock warrants 1,719 159,264
Proceeds from exercise of stock options 1,926 47,830
------------- -------------
Net cash provided by financing activities 435,034 3,531,136
------------- -------------
Net change in Cash and Cash Equivalents (7,603,240) (11,967,922)
Cash and Cash Equivalents, beginning of year 10,212,880 16,432,965
------------- -------------
Cash and Cash Equivalents, September 30 $ 2,609,640 $ 4,465,043
============= =============
Additional Cash Flows and Supplementary information
Cash paid for income taxes, net of refunds $ 200,000 $ 81,000
Cash paid for interest 2,944,488 3,203,428
Other real estate transfers 25,795
See notes to consolidated financial statements.
6
FIDELITY FEDERAL BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- - ACCOUNTING POLICIES
The significant accounting policies followed by Fidelity Federal Bancorp
(the "Company") and its wholly owned subsidiaries for interim financial
reporting are consistent with the accounting policies followed for
annual financial reporting. All adjustments which are necessary for a
fair presentation of the results for the periods reported, consist only
of normal recurring adjustments, and have been included in the
accompanying unaudited consolidated condensed financial statements. The
results of operations for the three months ended September 30, 1996 are
not necessarily indicative of those expected for the remainder of the
year.
- - NET INCOME PER SHARE
Primary and fully diluted earnings per share have been computed based on
the weighted average common and common equivalent shares outstanding
during the periods. Common stock options and warrants are considered to
be common equivalent shares to the extent they are dilutive.
- - STOCKHOLDERS' EQUITY
Stockholders' equity has been adjusted to reflect the 10% stock dividend
distributed on May 27, 1996. All per share and average share data have
been adjusted to reflect the stock dividend.
In connection with the Company's second debt and equity rights offering
completed January 31, 1995, the Company has reserved 346,500 shares of
its common stock for issuance upon exercise of 1,500 outstanding
warrants. Each warrant represents the right to purchase 231 shares of
common stock. The warrants were valued at $100 per warrant, carry an
exercise price of $8.93 per share, and expire on January 31, 2005. At
September 30, 1996, a total of 38,115 of the shares originally reserved
had been issued and 308,385 remained reserved and unissued.
In connection with the Company's first debt and equity rights offering
completed on April 30, 1994, the Company has reserved 415,500 shares of
its common stock for issuance upon exercise of 1,500 outstanding
warrants. Each warrant represents the right to purchase 277 shares of
common stock. The warrants were valued at $100 per warrant, carry an
exercise price of $6.22 per share, and expire on April 30, 2004. At
September 30, 1996, a total of 49,869 of the shares originally reserved
had been issued and 365,631 remained reserved and unissued.
- - CASH DIVIDEND
On August 21, 1996, the Board of Directors of the Company declared a
dividend of $.20 per share payable on October 7, 1996 to stockholders of
record on September 2, 1996.
7
- - COMPANY SUBSIDIARIES
United Fidelity Bank, fsb ("Savings Bank") and Village Securities
Corporation are two subsidiaries of the Company. The Savings Bank is a
federally chartered savings bank, and is regulated by the Office of
Thrift Supervision. Village Securities Corporation was formed in
December, 1994, but is presently inactive.
The Savings Bank's subsidiaries, Village Housing Corporation, Village
Management Corporation and Village Community Development Corporation,
and Fidelity Federal Capital Corporation (the "Affordable Housing
Group") are involved in various aspects of financing, owning,
developing, building, renting and managing affordable housing projects.
The Company has found that it may be advantageous for the Affordable
Housing Group to finance, develop, build, rent and manage many types of
housing, including IRS Section 42 housing, condominiums, market-rate
multifamily housing, and others. Another subsidiary of the Savings
Bank, Village Insurance Corporation, is engaged in the business of
selling various insurance products.
Fidelity Federal Capital Corporation ("FFCC") is a mortgage banking
company. On December 31, 1995, the Company transferred ownership of
FFCC to the Savings Bank for a nominal amount. The transaction had the
effect of increasing bank capital and regulatory capital ratios. FFCC
will remain to be the mortgage banking arm of the Company in the
financing of real estate, including holding and placing debt and equity
interests in real estate. While loans packaged by FFCC to date have
been referred to the Savings Bank for origination, management
anticipates that FFCC may arrange for financing from other lenders, if
the opportunity arises.
The proposed activities of Village Securities Corporation include
full-service or discount brokerage services, private placements of
securities and other securities-related activities. Village Securities
Corporation is anticipating providing such services during the second
quarter of fiscal 1997.
- - ACCOUNTING FOR MORTGAGE SERVICING RIGHTS
Effective July 1, 1995, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 122, Accounting for Mortgage Servicing
Rights. SFAS No. 122 requires the Company to recognize as separate
assets, mortgage servicing rights for loans originated with the intent
to sell as well as purchased servicing rights. The adoption of SFAS No.
122 did not have a significant impact on the Company's operating
results. Loan servicing costs are amortized in proportion to, and over
the period of, estimated new servicing revenues. Fair values of
mortgage servicing rights are based on the present value of estimated
future cash flows. Impairment of mortgage servicing rights is assessed
based on the fair value of those rights. When participating interests
in loans sold have an average contractual interest rate, adjusted for
normal servicing fees, that differs from the agreed yield to the
purchaser, gains or losses are recognized equal to the present value of
such differential over the estimated remaining lives of such loans. The
resulting asset or liability is amortized over the estimated servicing
period using a method approximating the interest method.
8
- - SEGMENT INFORMATION
The Company operates principally in two industries, banking and real
estate development and management. The Savings Bank offers traditional
banking products, such as checking, savings, and certificates of
deposit, as well as mortgage, consumer, and commercial loans. Through
the Affordable Housing Group, the Company is involved in various aspects
of financing, owning, developing, building, renting and managing
affordable housing projects.
Operating profit is total revenue less operating expenses. In computing
operating profit, income taxes have been deducted.
Identified assets are principally those used in each segment. Real
estate development and management activities conducted by the Company
are not asset intensive. The assets in this segment primarily include
cash received in the form of fees and land to be used for future
developments.
Presented below is condensed financial information relating to the
Company's business segments:
(IN THOUSANDS) THREE MONTHS ENDED
SEPTEMBER 30,
1996 1995
-------------------------
REVENUE:
Banking $ 5,681 $ 6,600
Real estate development and management 79 1,407
--------- ---------
Total consolidated $ 5,760 $ 8,007
========= =========
OPERATING PROFIT:
Banking $ (790) $ 441
Real estate development and management (454) 700
--------- ---------
Total consolidated $ (1,244) $ 1,141
========= =========
IDENTIFIABLE ASSETS:
Banking $ 250,273 $ 264,061
Real estate development and management 11,561 11,369
--------- ---------
Total consolidated $ 261,834 $ 275,430
========= =========
DEPRECIATION AND AMORTIZATION:
Banking $ 71 $ 68
Real estate development and management 14 18
--------- ---------
Total consolidated $ 85 $ 86
========= =========
CAPITAL EXPENDITURES:
Banking $ 363 $ 299
Real estate development and management 1 8
--------- ---------
Total consolidated $ 364 $ 307
========= =========
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
- - RESULTS OF OPERATIONS
The net loss for the three months ended September 30, 1996 was
$1,244,000, compared to $1,141,000 in net income for the same period
last year. Fully diluted net loss per share was $.46 per share for the
three months ended September 30, 1996, compared to net income of $.42
per share for the same period in 1995. The federal legislation
resolving the FDIC insurance funding issue signed by President Clinton
in September required thrifts to pay a one-time assessment of
approximately $.66 per $100 of deposits within 60 days of September 30,
1996. As a result, the Company recorded a charge of $1,040,000 during
the first quarter of fiscal 1997. The legislation provisions include a
reduction of the ongoing insurance premiums thrifts pay from $.23 - $.31
per $100 of deposits to approximately $.06 per $100, as well as the
ultimate merger of the funds by the year 2000. In anticipation of this
and as a result of continued consolidation and standardization of the
bank and thrift industries, the Company, in an ongoing effort to more
closely resemble a commercial banking operation, set aside $850,000 in
loan loss allowances for the quarter. The Company's fee income from
real estate development and management was down from $1,407,000 last
year to $79,000 in the current quarter. These fees, which are
transaction-based, are volatile in nature. There is no assurance that
individual transactions, once initiated, will be completed.
NET INTEREST INCOME. Net interest income, the Company's largest
component of income, represents the difference between interest and fees
earned on loans, investments and other interest earning assets, and
interest paid on interest bearing liabilities. It also measures how
effectively management has balanced and allocated the Company's interest
rate-sensitive assets and liabilities. Net interest income for the three
months ended September 30, 1996 was $1,578,000 compared to $1,412,000
for the three month period ending September 30, 1995, an increase of
$166,000 or 11.8%.
The Company's net interest margin for the quarter increased from 2.15%
at September 30, 1995 to 2.57% at September 30, 1996. The average yield
on interest earning assets increased slightly to 8.36% at September 30,
1996 compared to 8.14% at September 30, 1995. The average yield on
interest bearing liabilities decreased 20 basis points from September
30, 1995 to 5.79% at September 30, 1996. The yield decrease was
primarily in certificates of deposits, agent-acquired deposits and other
borrowings. The agent-acquired funds previously acquired were at
varying terms but at higher rates than would have been paid in the
retail market. As a result of the Company's plan to reduce the rapid
growth rate, the average balance of agent-acquired funds has decreased
$11,502,000 from September 30, 1995. The Company sold over $57,000,000
of its fixed-rate mortgage loan portfolio during the latter part of
fiscal 1996, thus allowing the Company the flexibility to let the agent
acquired funds, which typically bear a higher rate, to mature or
rollover at the prevailing rate, creating a favorable impact on the
Company's net interest margin. Interest income for the quarter ended
September 30, 1996, was $5,152,000 compared to $5,350,000 for the
quarter ended September 30, 1995, a decrease of $198,000. These
decreases are primarily due to the interest income lost from the above
mentioned loan sale. Interest expense for the quarter ended September
30, 1996 decreased $364,000 over the corresponding period in 1995. This
is the result of paying off FHLB advances and letting agent acquired
funds mature or rollover at the prevailing rate.
10
NON-INTEREST INCOME. Non-interest income for the quarter ended
September 30, 1996, was $608,000 compared to $2,657,000 for the same
period in 1995, a decrease of $2,049,000.
NON-INTEREST INCOME
- ----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30, INCREASE
1996 1995 (DECREASE)
-------- ---------- ------------
Net income from real estate development and management $ 78,810 $1,406,994 $(1,328,184)
Letter of credit fees 154,205 90,988 63,217
Service charges on deposit accounts 69,546 30,404 39,142
Net gain on sale of loans 28,048 111,348 (83,300)
Gain on sale of fixed assets 468 718,690 (718,222)
Loan servicing rights net of amortization 20,446 57,744 (37,298)
Dividend income 87,245 (87,245)
Real estate mortgage banking fees 2,500 31,350 (28,850)
Other 254,076 122,522 131,554
-------- ---------- ------------
Total non-interest income $608,099 $2,657,285 $(2,049,186)
======== ========== ============
Non-interest income for the three months ended September 30, 1996,
decreased by $2,049,000 as compared to the three months ended September
30, 1995. Net income from real estate development and management
decreased by $1,328,000 as compared to the prior year. The Company can
and will experience fluctuations in income associated with affordable
housing projects. Typically the financing and development of these
projects can span over one to two quarters, depending on various
circumstances, thus creating fluctuations in earnings depending on the
number of projects closed in each quarter. However, the fee income
generated by the Affordable Housing Group during this period is not
necessarily indicative of the fee income expected to be generated during
the remainder of the year. The Affordable Housing Group has begun to
encounter increased competition in the financing and development of
multifamily housing. The IRS Section 42 tax credit program has been
used by the Company to develop affordable housing for individuals with
low to moderate incomes. In addition, the Company has provided
financing for other developers which began utilizing the program. Since
the IRS Section 42 tax credit program was created in 1986, competition
has consistently increased in this area. As a result of the increase in
the number of competitors in this industry, the Company has noted a
reduction in the amount of fees it has been able to collect on
individual transactions. The Company continues to develop new and
innovative housing-related products to supplement its Section 42
activity. However, there is no assurance that those new products will
be able to replace any loss of income from current activities. The
Company has also recognized $154,000 in letter of credit fees compared
to $91,000 in fiscal 1996, as an integral part of the Affordable Housing
Group's real estate activities. Mortgage banking fees decreased $29,000
to $3,000 for the three months ended September 30, 1996 due to the
reduced volume of multifamily housing transactions completed in the
Savings Bank subsidiary, FFCC.
The Company's savings bank subsidiary sold a parcel of real estate
during the first quarter of fiscal 1996 resulting in a gain of $719,000.
The Company has not sold and has no plans at this time to sell
additional real estate. Gain on sale of real estate loans decreased
$83,000 as the volume of loans sold has decreased from the prior year.
Service charges on deposit accounts increased $39,000 over the prior
fiscal year as the Company's deposit base continues to grow. During the
first quarter of fiscal 1996, the Company's savings bank subsidiary
received $84,000 in dividend income on the stock the Savings Bank holds
with its data processing co-operative, but none in fiscal 1997.
Non-interest income increased by $132,000 from the prior year. Servicing
fees on loans sold increased $32,000 over prior year as a result of an
increased servicing portfolio. Agent fee income increased $115,000 over
September 30, 1995 as a result of the Company originating auto loans as
agent for another institution on consumer loans, while retaining a fee
for services provided. Loan servicing rights decreased $28,000 as the
volume of loans sold decreased and the expiration of a land option
during the first quarter of fiscal 1996 resulted in $50,000 in income
compared to none in fiscal 1997.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased
$740,000 to $850,000 for the three months ended September 30, 1996
compared to $110,000 for the same period in 1995. As a result of the
continued consolidation and standardization of the bank and thrift
institutions, the Company, in an ongoing effort to more closely resemble
a commercial banking operation, set aside $850,000 in loan loss
allowance for the quarter. The increase in the provision does not
result from the identification of any particular problem credit or
credits, but does reflect the increase of multifamily construction and
commercial loans in the Company's loan portfolio.
11
NON-INTEREST EXPENSE. Non-interest expense for the quarter ended
September 30, 1996, was $3,282,000 compared to $2,037,000 for the same
period in 1995, an increase of $1,245,000.
NON-INTEREST EXPENSE
- ----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30, INCREASE
1996 1995 (DECREASE)
---------- ---------- ------------
Salaries and employee benefits $1,121,628 $1,075,125 $ 46,503
Legal and professional 122,456 60,130 62,326
Occupancy expense 112,148 122,719 (10,571)
Equipment expense 83,963 98,056 (14,093)
Deposit insurance 1,150,728 90,979 1,059,749
Data processing expense 73,027 65,316 7,711
Advertising 68,651 65,797 2,854
Printing and supplies 55,792 64,526 (8,734)
Travel and lodging 18,957 34,642 (15,685)
Telephone 28,665 33,741 (5,076)
Postage 25,619 25,337 282
Abandoned projects 135,136 12,477 122,659
Loss on investment 23,913 -- 23,913
Other operating expense 261,969 288,525 (26,556)
---------- ---------- ------------
Total non-interest expense $3,282,652 $2,037,370 $ 1,245,282
========== ========== ============
Salaries and employee benefits increased by $47,000 and accounted for
only 3.7% of the increase in non-interest expense. Staffing level
increases associated with the Company's loan diversification strategy,
as well as increases in affordable housing activities were the primary
reasons for this increase. Legal and professional fees increased
$62,000 over prior year due to the increased activity in the Company's
affordable housing subsidiaries. Occupancy and equipment expense
decreases of $11,000 and $14,000, respectively, were primarily a result
of decreases seen in repairs and maintenance expense compared to the
three months ending September 30, 1995. As a result of the BIF-SAIF
assessment previously discussed, a one-time assessment of $1,040,000
accounted for the increase in deposit insurance. Data processing
expense has increased $8,000 over prior year due to the increased
activity and volume associated with the growth of the Company. Printing
and supplies decreased $9,000, while travel and lodging also decreased
$16,000 from prior year. The Company's affordable housing subsidiaries
continue to search for new sites to develop, but sometimes expenses are
incurred on potential sites that do not materialize and are expensed as
abandoned projects. Abandoned projects expense was $135,000 compared to
$12,000 in the prior year as activity continues to increase in the
affordable housing segment of the Company. The Company accounts for its
investment in various affordable housing partnerships on the equity
method. Currently the Company has written down its investment in various
developments by $24,000 for the year-to-date. Other operating expenses
decreased $27,000 from the prior year. The remaining decreases in other
operating expense from prior year is comprised of various non-material
items.
INCOME TAX EXPENSE. Income tax expense decreased $1,483,000 for the
three months ended September 30, 1996 compared to the same period in
1995, due to the taxable net loss for the current quarter compared to
the previous year's taxable net income for the quarter.
- - FINANCIAL CONDITION
Total assets decreased by $381,000 from June 30, 1996 to approximately
$261.8 million at September 30, 1996. The Company still continues to
sell current fixed 1-4 family mortgage and passes through various
consumer loans to another institution that meet certain criteria.
12
LOANS. The following table shows the composition of the Company's loan
portfolio as of September 30, 1996 and June 30, 1996, excluding loans
held for sale.
LOANS OUTSTANDING
- -------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
SEPTEMBER 30, JUNE 30,
1996 1996
------------- --------
Real estate mortgage loans
First mortgage loans
Conventional $102,570 $106,288
Construction 41,791 36,938
Commercial 20,146 18,267
Multifamily loans 15,422 15,420
First mortgage real estate loans purchased 7,407 7,612
Real estate contracts 44 56
Commercial loans - other than secured by real estate 14,090 9,393
Consumer and home equity loans 23,272 23,062
Loans to depositors secured by savings 141 185
-------- --------
Total loans 224,883 217,221
======== ========
Total assets $261,834 $262,216
======== ========
Total loans to total assets 85.9 82.8%
======== ========
Total loans increased by $7.7 million or 3.5% to $224.9 million at
September 30, 1996, compared to June 30, 1996. Beginning in fiscal 1996,
the Company opted to sell new loan production, recognize the gain or
loss on the sale, and use the proceeds to fund new loan production. The
Savings Bank is continually offering new and competitive first mortgage
and multifamily loan products. The Savings Bank has arrangements
pursuant to which it funds and acquires certain conventional first
mortgage loans underwritten to Federal Home Loan Mortgage Corporation
guidelines, originated by correspondents throughout Indiana and Ohio.
The Company's construction loan category, which includes approximately
$33.9 million in commercial and multi-family loans and $7.9 million in
1-4 family real estate loans, has increased $4.9 million since June 30,
1996. The Company has also experienced commercial loan growth of $4.7
million as the Company continues to expand the commercial loan
operations to further diversify its loan portfolio.
NON-PERFORMING LOANS. The Company discontinues the accrual of interest
income on loans when, in the opinion of management, there is reasonable
doubt as to the timely collectibility of interest or principal.
Non-accrual loans are returned to an accrual status when, in the opinion
of management, the financial position of the borrower indicates that
there is no longer any reasonable doubt as to the timely payment of
principal and interest. Management believes that loans now current
where there are reasonable doubts as to the ability of the borrower to
comply with the present loan repayment terms are immaterial. The
Company adopted SFAS Nos. 114 and 118, Accounting by Creditors for
Impairment of a Loan and Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures on July 1, 1995. The adoption
of SFAS Nos. 114 and 118 did not have a material impact on the Company's
financial position or results of operations. The Company has not
experienced any impaired loans since the adoption of SFAS Nos. 114 and
118.
NON-PERFORMING LOANS
- --------------------------------------------------------------------------------------
(IN THOUSANDS)
SEPTEMBER 30, JUNE 30,
1996 1996
------------- --------
Nonaccrual loans $328 $342
Restructured
90 days or more past due 55 43
----- -----
Total $383 $385
===== =====
Percent of total loans 0.17% 0.18%
===== =====
13
The ratio decreased from 0.18% at June 30, 1996, to 0.17% at September
30, 1996. Management is not aware of any loans that have not been
disclosed that represent or result from trends or uncertainties which
may have a material impact on the Company's future operating results,
liquidity or capital resources.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES. The Savings Bank establishes its
provision for loan losses and evaluates the adequacy of its allowance
for loan losses based on management's evaluation of its loan portfolio
and changes in loan activity. Such evaluation, which includes a review
of all loans for which full collectiblity may not be reasonably assured,
considers among other matters, the estimated fair value of the
underlying collateral, economic conditions, historical loan loss
experience, the composition of the loan portfolio and other factors that
warrant recognition in providing for an adequate loan loss allowance.
This evaluation is performed on a monthly basis and is designed to
ensure that all relevant matters affecting loan collectibility will
consistently be identified in a detailed loan review and that the
outcome of the review will be considered in a disciplined manner by
management in determining the necessary allowance and the provision for
loan losses. The amounts actually reported in each period will vary
with the outcome of this detailed review.
The following table sets forth an analysis of the allowance for loan
losses for the three months ended September 30, 1996 and June 30, 1996.
ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------------
(IN THOUSANDS)
SEPTEMBER 30, JUNE 30,
1996 1996
------------------------------
Allowance for loan losses:
Balances, beginning of year $1,059 $ 713
Provision for losses 850 110
Loans charged off (42) (56)
Recoveries on loans 3 3
------- -------
Balances, end of quarter $1,870 $ 770
======= =======
As of September 30, 1996, net loan charge-offs were $39,000, or 0.07%
(annualized) of average loans for the period, compared to $53,000 or
0.09% of average loans as of June 30, 1996. The provision for loan
losses increased $740,000 for the three months ended September 30, 1996
compared to the previous year as the Company set aside $850,000 in loan
loss allowance for the quarter in an ongoing effort to more closely
resemble a commercial banking operation. Management considers the
allowance for loan losses adequate to meet losses inherent in the loan
portfolio as of September 30, 1996.
INVESTMENT SECURITIES. The Savings Bank's investment policy is
annually reviewed by its Board of Directors and any significant changes
to the policy must be approved by the Board. The Board has an
asset/liability management committee which is responsible for keeping
the investment policy current.
As of September 30, 1996, the investment portfolio represented 6.8% of
the Company's assets compared to 6.7% at June 30, 1996, and is managed
in a manner designed to meet the Board's investment policy objectives.
The primary objectives, in order of priority, are to further the safety
and soundness of the Company, to provide the liquidity necessary to meet
day to day funding needs, cyclical and long-term changes in the mix of
our assets and liabilities, and to provide for diversification of risk
and management of interest rate and economic risk. At September 30,
1996, the entire investment portfolio was classified as available for
sale, in accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investment in Debt and Equity Securities".
The net unrealized loss at September 30, 1996 was $117,000, which was
comprised of gross gains of $57,000, gross losses of $265,000, and a tax
benefit of $91,000. The decrease of $23,000 over June 30, 1996 was
caused by market interest rate changes during the period. Although the
entire portfolio is available for sale, management has not identified
investments for sale in future periods.
14
The following table sets forth the components of the Savings Bank's
securities available for sale as of the dates indicated.
SEPTEMBER 30, JUNE 30,
1996 1996
------------ -------
(IN THOUSANDS)
Securities available for sale:
U.S. Treasury securities $ 501 $ 504
Federal agencies securities 4,381 4,365
Federal Home Loan Mortgage Corporation
mortgage-backed securities 6,193 6,727
Federal National Mortgage Association
mortgage-backed securities 1,680 1,697
Government National Mortgage Association
mortgage-backed securities 4,038 4,165
Municipal revenue bonds 1,035
------- -------
Total securities available for sale $17,828 $17,458
======= =======
The Savings Bank's total investment securities portfolio increased by
$370,000 at September 30, 1996, from June 30, 1996. The Savings Bank
receives payments of principal and interest on its mortgage-backed
securities on a monthly basis. These certificates represent ownership
of pools of one-to-four family mortgage loans. As interest rates
decline, principal of the underlying mortgage loans typically is
returned more quickly in the form of payoffs and refinances.
FUNDING SOURCES
DEPOSITS. The Savings Bank attracts both short-term and long-term
deposits from the retail market by offering a wide assortment of
accounts with different terms and different interest rates. These
deposit alternatives include checking accounts, regular savings
accounts, money market deposit accounts, fixed rate certificates with
varying maturities, variable interest rate certificates, negotiable rate
jumbo certificates ($100,000 or more), and variable rate IRA
certificates.
Average deposits decreased by $4.2 million during the first three months
of fiscal 1997. Most of the decrease was due to certificates of deposit
acquired through agents, which decreased $15.4 million to $72.0 million
at September 30, 1996. Retail certificate deposits have increased $1.2
million since June 30, 1996 as the Savings Bank continues to grow its
core deposits. The Company's savings bank subsidiary began to market
new NOW account products during the second quarter of fiscal 1996, which
has significantly contributed to the $10.1 million increase in NOW
accounts.
The following table sets forth the average balances of and the average
rate paid on deposits by deposit category for the year ended June 30,
1996 and for the three months ended September 30, 1996.
THREE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 JUNE 30, 1996
------------------ --------------
AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
------- ---- ------- ----
(DOLLARS IN THOUSANDS)
Average Deposits
Demand $ 4,661 $ 3,898
Now accounts 20,239 4.26% 10,092 3.95%
Money market accounts 4,880 2.73 6,066 2.97
Savings accounts 5,591 2.59 5,346 2.90
Certificates of deposit 72,502 5.66 71,337 5.77
Agent-acquired certificates of deposit 71,992 6.34 87,366 6.52
-------- --------
Total $179,865 5.43% $184,105 5.73%
======== ========
15
BORROWINGS. The following table summarizes the Company's borrowings as
of September 30, 1996, and June 30, 1996.
SEPTEMBER 30, JUNE 30,
1996 1996
------------- --------
(IN THOUSANDS)
Note payable, 7% adjusted annually, payable $16,943
per month, including interest, due April 1, 2009,
secured by specific multifamily mortgages $ 2,261 $ 2,266
Note payable, 10% adjusted annually, payable $8,621
per month, including interest, due September 14, 2010,
secured by specific multifamily mortgages 1,015 1,015
Note payable, 10% adjusted annually, payable $13,182
per month, interest only, principal and interest payments
beginning November 1, 1996, due September 22, 2010,
secured by specific multifamily mortgages 1,552 1,552
Junior subordinated notes, 9 1/8%, interest paid
semi-annually, due April 30, 2001, unsecured 1,485 1,485
Junior subordinated notes, 9 1/4% interest paid
semi-annually, due January 31, 2002 unsecured 1,500 1,500
Senior subordinated notes, 10%, interest paid semi-
annually, due June 1, 2005, unsecured 7,000 7,000
Guaranteed investment contracts, interest rates of 5%,
interest paid monthly, secured by qualifying first
mortgage loans in an amount equal to 120% of the
amount outstanding, due at various dates during
1997 or on demand 3,005 5,564
Treasury tax and loan note option 112 129
Federal Home Loan Bank advances 39,074 42,474
------- -------
Total $57,004 $62,985
======= =======
Borrowings decreased $6.0 million to $57.0 million at September 30,
1996. Borrowings have been slower or reduced during fiscal 1997 as the
Company has continued selling its fixed rate 1-4 family loan production.
This allows the Company to use the proceeds from the sale of loans to
fund new loan originations and ease the need for additional borrowings
in the future.
CAPITAL RESOURCES AND CAPITAL REQUIREMENTS
The ratio of stockholders' equity to total assets for the Savings Bank,
was 6.36% at September 30, 1996, compared to 7.05% at June 30, 1996. The
net loss for the period, a decrease in the unrealized gain (losses) on
available for sale investments, and dividends paid and declared on
common stock decreased the ratio. The Company's book value per share at
September 30, 1996 was $5.03 as compared to $5.54 at June 30, 1996, as
adjusted for the 10 percent stock dividend distributed on May 27, 1995.
The OTS has adopted capital standards under which savings associations
must maintain (i) "core capital" in an amount not less than 3% of total
assets, (ii) "tangible capital" in an amount not less than 1.5% of total
adjusted assets, and (iii) a level of risk-based capital equal to 8.0%
of risk-weighted assets. The capital standards established by the OTS
for savings associations must generally be no less stringent than those
applicable to national banks.
Under OTS regulations "core capital" includes common stockholders'
equity, noncumulative perpetual preferred stock and related surplus, and
minority interests in the equity accounts of consolidated subsidiaries,
less intangible assets other than certain qualifying supervisory
goodwill and certain purchased mortgage servicing rights. In
determining compliance with the capital standards, a savings association
must deduct from capital its entire investment in and loans to any
subsidiary engaged in activities not permissible for a national bank,
other than subsidiaries (i) engaged in such non-permissible activities
solely as agent for their customers; (ii) engaged in mortgage banking
activities; or (iii) that are themselves savings associations, or
companies the only investment of which is another insured depository
institution, acquired prior to May 1, 1989.
16
In determining total risk-weighted assets for purposes of the risk based
requirement, (i) each off-balance sheet asset must be converted to its
on-balance sheet credit equivalent amount by multiplying the face amount
of each such item by a credit conversion factor ranging from 0% to 100%
(depending upon the nature of the asset), (ii) the credit equivalent
amount of each off-balance sheet asset and the book value of each
on-balance sheet asset must be multiplied by a risk factor ranging from
0% to 100% (again depending upon the nature of the asset), and (iii) the
resulting amounts are added together and constitute total risk-weighted
assets. Total capital, for purposes of the risk-based capital
requirement, equals the sum of core capital plus supplementary capital
(which, as defined, includes, among other items, perpetual preferred
stock not counted as core capital, limited life preferred stock,
subordinated debt, and general loan and lease loss allowances up to
1.25% of risk-weighted assets) less certain deductions including the
savings association's interest-rate risk component. The amount of
supplementary capital that may be counted towards satisfaction of the
total capital requirement may not exceed 100% of core capital.
At September 30, 1996, actual and required minimum levels of regulatory
capital for the Savings Bank were as follows:
(Dollars in Thousands)
Required
Amount Percent Amount Percent Excess
------------------------------------------------------------------------
Core $16,316 6.36% $ 7,693 3.0% $ 8,623
Tangible $16,316 6.36% $ 3,846 1.5% $12,470
Risk-based $22,987 11.32% $16,242 8.0% $ 6,745
Pursuant to HOLA of 1933, as amended, the OTS is required to issue
capital standards that are no less stringent than those applicable to
national banks. In April 1991, the OTS proposed to amend its capital
regulations to reflect amendments made by the OCC to the leverage ratio
capital requirement for national banks. The proposal would establish a
core capital leverage ratio (core capital to adjusted total assets) of
3% for savings associations rated composite 1 under the OTS MACRO rating
system. For all other savings associations, the minimum core capital
leverage ratio would be 3% plus at least an additional 100 to 200 basis
points. Under the proposal, the OTS may impose higher regulations for
individual savings associations. The OTS has not adopted this
regulation in final form. The prompt corrective action regulation
adopted by the OTS provides that a savings association that has a
leverage capital ratio of less than 4% will be considered
"undercapitalized" and may be subject to certain restrictions. At
September 30, 1996 the Savings Bank had a core capital leverage ratio
(as defined in the proposal) of 6.36%.
The OTS adopted a final regulation adding an interest-rate risk
component to its risk-based capital rule. A savings association's
interest-rate risk is generally defined as the change that occurs to its
net portfolio value as a result of a hypothetical two hundred basis
point increase or decrease in market interest rates. A "normal level"
of interest-rate risk is defined as any decline in net portfolio value
of up to 2% of the institution's assets. If the 2% threshold is
exceeded, a savings association will be required to deduct from its
capital, for purposes of determining whether the institution meets its
risk-based capital requirements, an amount equal to one-half of the
difference between the measured risk and 2% of assets.
Capital requirements higher than the generally applicable minimum
requirement may be established for a particular savings association if
the OTS determines that the institution's capital was or may become
inadequate in view of its particular circumstances. Individual minimum
capital requirements may be appropriate where the savings association is
receiving special supervisory attention, has a high degree of exposure
to interest rate risk, or poses other safety or soundness concerns.
LIQUIDITY
Liquidity for a savings bank represents its ability to accommodate
growth in loan demand and/or reduction in deposits. The Savings Bank
liquidity ratio was 5.73% on September 30, 1996, down from 10.64% on
June 30, 1996. Management believes that this level of liquidity is
sufficient to meet any anticipated requirements for the Bank's
operations. Federal regulations have historically required the Bank to
maintain minimum levels of liquid assets. The required percentage has
varied from time to time based on economic condition and savings flows,
and is currently 5% of net withdrawable savings deposits and borrowings
payable on demand or in one year or less during the preceding calendar
month.
17
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS:
There are no material pending legal proceedings, other than
ordinary routine litigation incidental to the Registrant's
business, to which the Registrant or its subsidiaries are a
party of or which any of their property is the subject.
ITEM 2 CHANGES IN SECURITIES:
Not applicable.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES:
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
On October 16, 1996 at 11:00 AM, at the Company's principal
executive offices at 18 N.W. Fourth Street, Evansville, Indiana,
the Annual meeting of Shareholders was held in order to vote on
one matter.
Matter 1 was to elect three directors to the Board of Directors
to serve for the ensuing term of three years and until their
successors are duly elected and qualified. The vote tabulation
for the election of Jack Cunningham was 2,143,942 for and 6,146
shares withheld. For Robert F. Doerter the vote tabulation was
2,108,318 for, and 18,016 shares withheld. For David L. Maraman
the vote tabulation was 2,115,337 for, and 13,337 shares
withheld.
The following directors term continued after the meeting: Curt
J. Angermeier, William R. Baugh, Bruce A. Cordingley, M. Brian
Davis, Mark S. Mattingly, and Barry Schnakenburg.
ITEM 5 OTHER INFORMATION:
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K:
a. The following exhibit is submitted herewith:
27 Financial Data Schedule
Reports on Form 8-K
b. No reports were filed
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIDELITY FEDERAL BANCORP
Date: NOVEMBER 13, 1996 By: /s/ M. BRIAN DAVIS
----------------------------------------
M. Brian Davis
President and COO
By: /s/ DONALD R. NEEL
----------------------------------------
Donald R. Neel,
Senior Vice President, CFO and Treasurer
(Principal Financial Officer)
19
Exhibit Index
Reg. S-K
Exhibit No. Description of Exhibit Page
- ----------- ---------------------- ----
27 Financial Data Schedule 21
20