-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gc5h1qwPgtIDZcJISGHCDRI6YwjXBW6Obkn/DL0C7g6j+TYT4hTXbMrqkpepMgvX qNo9NAJtHa90jejaKUPq6Q== 0000926274-96-000047.txt : 19960930 0000926274-96-000047.hdr.sgml : 19960930 ACCESSION NUMBER: 0000926274-96-000047 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960927 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIDELITY FEDERAL BANCORP CENTRAL INDEX KEY: 0000910492 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 351894432 STATE OF INCORPORATION: IN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-22880 FILM NUMBER: 96636152 BUSINESS ADDRESS: STREET 1: 18 N W FOURTH ST STREET 2: P O BOX 1347 CITY: EVANSVILLE STATE: IN ZIP: 47706-1347 BUSINESS PHONE: 8124240921 MAIL ADDRESS: STREET 1: 18 NW FOURTH ST STREET 2: PO BOX 1347 CITY: EVANSVILLE STATE: IN ZIP: 47706-1347 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________________________ FORM 10-K [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (fee required) For the fiscal year ended: June 30, 1996 ------------- or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (no fee required) For the Transaction period from ____ to _____. _________________________________ 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) 18 N.W. Fourth Street, P.O. Box 1347, Evansville, Indiana 47706-1347 -------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's Telephone number, including area code (812) 424-0921 -------------- 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 Portions of the Registrant's 1996 Annual Report to Stockholders for the year ended June 30, 1996 are incorporated by reference into Part II. Portions of the Registrant's Proxy Statement dated September 9, 1996, for the Annual Meeting of Stockholders to be held October 16, 1996 are incorporated by reference into Part III. Exhibit index is on page 18 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 September 4, 1996 was approximately $17,460,000. Indicated below is the number of shares outstanding of each of the registrant's classes of common stock as of September 9, 1996. Common Stock - 2,495,516 shares FIDELITY FEDERAL BANCORP Index Page PART I ---- ITEM 1 - Business 3 ITEM 2 - Properties 13 ITEM 3 - Legal Proceedings 14 ITEM 4 - Submission of Matters to a Vote of Security Holders 14 PART II ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters 14 ITEM 6 - Selected Financial Data 14 ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 14 ITEM 8 - Financial Statements and Supplementary Data 14 Consolidated Balance Sheet 14 Consolidated Statement of Income 14 Consolidated Statement of Stockholders' Equity 14 Consolidated Statement of Cash Flows 14 Notes to Consolidated Financial Statements 14 Report of Independent Auditors 14 ITEM 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 14 PART III ITEM 10 - Directors and Executive Officers of Registrant 15 ITEM 11 - Executive Compensation 15 ITEM 12 - Security Ownership of Certain Beneficial Owners and Management 15 ITEM 13 - Certain Relationships and Related Transactions 15 PART IV ITEM 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 16 SIGNATURES 17 PART I ITEM 1. BUSINESS OVERVIEW Fidelity Federal Bancorp (the "Company") formed in 1993, is a corporation organized under the laws of the State of Indiana and is a registered savings and loan holding company, with its principal office in Evansville, Indiana. The Company's savings and loan subsidiary, United Fidelity Bank, fsb (the "Savings Bank"), organized in 1914, is a federally-chartered stock savings bank located in Evansville, Indiana. In 1992, the Board of Directors developed and began implementation of a new business plan for the Savings Bank 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 nonbanking businesses; (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. Since the implementation of the business plan, the holding company as well as an affordable housing group, consisting of four nonbank subsidiaries of the Savings Bank, has been formed. Revenue generated from affordable housing activities has increased dramatically and significant asset growth has been achieved, also resulting in higher revenues. In fiscal 1996 the Company slowed its growth and positioned the Company to reduce debt, increase core deposits, sell loans and use the proceeds to fund new loan production. The Company's business plan is to continue developing and expanding the activities of the affordable housing group in an ever increasing competitive market and by continuing to look for new financing niches both in and outside the housing arena. The Company will work to increase the profitability of the core banking activities and to grow earnings in each business segment. The Company, 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 installment loans, commercial loans, and mortgage loans, primarily owner occupied one-to-four family homes located in Indiana, and in investment and money market securities. Following the adoption of its new business plan, the Company has engaged in the business of financing, owning, developing, building, renting and managing affordable housing projects through its Savings Bank wholly-owned subsidiaries, Fidelity Federal Capital Corporation, Village Management Corporation, Village Community Development Corporation and Village Housing Corporation (collectively, the "Affordable Housing Group"). The Affordable Housing Group structures and participates in multifamily housing developments which have been granted tax credits pursuant to Section 42 of the Internal Revenue Code of 1986, as amended (the "Code") and tax-exempt bond financed developments. The Affordable Housing Group is currently involved in various tax credit and tax-exempt bond projects which are in various stages of completion, ranging from completed construction and stabilized occupancy to location and site identification and preparation of feasibility studies. Village Housing Corporation as general partner to 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, as contractor and developer, receives construction and development fees as the project is completed. 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. 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. Fidelity Federal Capital Corporation ("FFCC"), was established in April, 1994, 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. FFCC has packaged loan requests for developers of multifamily residential real estate projects eligible for federal tax credits and tax exempt financing. While the loans packaged to date have been referred to the Savings Bank for origination, FFCC may also package loan transactions for other lenders, if the opportunity arises. FFCC earns origination fees and fees for construction review, supervision, and general project oversight. The Savings Bank, as lender, can earn points and interest on loans made to developers. The Savings Bank's credit decisions are subject to applicable OTS restrictions on loans of this type. 3 The final subsidiary of the Savings Bank, Village Insurance Corporation, is engaged in the business of selling credit life insurance, as well as accident and health insurance, to the Savings Bank's loan customers. A second subsidiary of the Company, Village Securities Corporation, a discount brokerage service, is scheduled to begin operation in the second quarter of fiscal 1997. The Company had consolidated total assets of $262,215,709 and total shareholder's equity of $14,294,975 as of June 30, 1996. The Company's subsidiaries at June 30, 1996, are listed below:
Subsidiary Principal Office Year Organized Assets - -------------------- ---------------- -------------- ------------ 1. United Fidelity Bank, fsb Evansville, IN 1914 $255,456,250 Subsidiaries of United Fidelity Bank, fsb: Fidelity Federal Capital Corporation Evansville, IN 1994 987,443 Village Insurance Corporation Evansville, IN 1980 55,125 Village Management Corporation Evansville, IN 1992 70,995 Village Community Development Corporation Indianapolis, IN 1992 5,019,125 Village Housing Corporation Indianapolis, IN 1992 6,660,366 2. Village Securities Corporation Evansville, IN 1994 34,439
The Company's home office is located at 18 N.W. Fourth Street, Evansville, Indiana, 47708 and its telephone number is (812) 424-0921. Effective November 1, 1996 the Company's new address will be 700 S. Green River Road, Suite 2000, Evansville, IN 47715 and its telephone number will be (812) 469-2100. COMPETITION The Company and the Savings Bank faces strong direct competition for deposits, loans and other financial- related services. The Savings Bank competes in Indiana, Kentucky and Illinois with the other thrifts, commercial banks, credit unions, stockbrokers, finance companies and insurance companies. Some of these competitors are local, while others are statewide or national. The Savings Bank 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 the Savings Bank 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 the Savings Bank in providing certain services. As of September 1, 1996, approximately 4 banks, 4 thrifts, and 12 credit unions operated in the Evansville, Indiana metropolitan area, which is the Savings Bank's principal deposit market area. The Savings Bank is currently the second largest thrift in this market. Many competitors are substantially larger or have significantly greater capital resources than the Savings Bank. Due to recently enacted legislation to allow unlimited interstate branching, the Company and the Savings Bank may experience heightened competition from existing competitors and other major financial institutions seeking to expand their regional banking presence in Indiana. The Affordable Housing Group competes with other real estate developers for projects throughout the United States. Presently, the Affordable Housing Group is one of the most active participants in the affordable housing market, although additional or stronger competition from other developers may arise in the future. The competition for 4 affordable housing projects focuses on locations, available tax credits or tax-exempt bond allocations, and for eligible tenants which meet the criteria for an affordable housing project. Since the IRS Section 42 tax credit program was created in 1986, competition has consistently increased in this area. Particularly during fiscal 1996 as the Affordable Housing Group has seen a reduction in the fees charged for their service, in order to remain competitive in the market. The Company's business plan is to continue developing and expanding the activities of the affordable housing group in an ever increasing competitive market, and by continuing to look for new financing niches both in and outside the housing arena. REGULATION OF THE COMPANY The Company is a savings and loan holding company within the meaning of the Home Owners' Loan Act of 1933 ("HOLA"), as amended. The Company 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, the Savings Bank is subject to certain restrictions in its dealings with the Company and with other companies affiliated with the Company. The HOLA generally prohibits a savings and loan holding company, without prior approval of the Director of the OTS, from (i) acquiring control of any other savings institution or savings and loan holding company or controlling the assets thereof; or (ii) acquiring or retaining more than 5% of the voting shares of a savings institution or holding company thereof which is not a subsidiary of such savings and loan holding company. Under certain circumstances a savings and loan holding company is permitted to acquire, with the approval of the Director of the OTS, up to 15% of previously unissued voting shares of an under-capitalized savings association for cash without that savings association being deemed controlled by the holding company. 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 also acquire control of any savings institution, other than a subsidiary institution, or any other savings and loan holding company. The Bank Holding Company Act of 1956, as amended, specifically authorizes a bank holding company, upon receipt of appropriate approvals from the Board of Governors of the Federal Reserve System ("FRB") and the Director of the OTS, 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. A savings association acquired by a bank holding company cannot continue any non-banking activities not authorized for bank holding companies. Savings associations acquired by a bank holding company may, if located in a state where the bank holding company is legally authorized to acquire a bank, be converted to the status of a bank, but deposit insurance assessments and payments will continue to be paid by the association to the Savings Association Insurance Fund ("SAIF"). A savings association so converted to a bank becomes subject to the branching restrictions applicable to banks. Also, any insured depository institution may merge with, acquire the assets of, or assume the liabilities of any other insured depository institution with the appropriate regulatory approvals if (i) continued payments of deposit insurance premiums are made on the acquired depository institution's deposits (including an assumed rate of growth in such deposits) to SAIF (if the acquired institution was a SAIF member) or to the Bank Insurance Fund ("BIF") (if the acquired institution was a BIF member), (ii) the acquiring institution and any holding company in control thereof meet all applicable capital requirements at the time of the transaction, and (iii) if the acquiring institution is a BIF member, the transaction would meet the requirements of the Bank Holding Company Act of 1956 if the savings association involved was a state bank. The Company 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 5 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 the Company were to acquire control of another savings institution, other than through merger or other business combinations with the Savings Bank, the Company would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority of the OTS to approve emergency thrift acquisitions and where each subsidiary savings institution meets the QTL test, the activities of the Company and any of its subsidiaries (other than the Savings Bank or other subsidiary savings institutions) 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 institution 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 institution, (ii) conducting an insurance agency or escrow business, (iii) holding, managing or liquidating assets owned by or acquired from a subsidiary savings institution, (iv) holding or managing properties used or occupied by a subsidiary savings institution, (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 FRB 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 institutions in more than one state, if the multiple savings and loan holding company involved controls a savings institution which operated a home or branch office in the state of the institution to be acquired as of March 5, 1987, or if the laws of the state in which the institution to be acquired is located specifically permit institutions to be acquired by state-chartered institutions 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 institutions). The Director of the OTS may also approve an acquisition resulting in a multiple savings and loan holding company controlling savings institutions in more than one state in the case of certain emergency thrift acquisitions. 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 SAIF-insured savings institutions, the Savings Bank is subject to supervision and regulation by the Director of the OTS. Under the OTS regulations, the Savings Bank may be required to obtain audits by independent auditors and to be examined periodically by the Director of the OTS. The Savings Bank is subject to assessments by the OTS and the FDIC to cover the costs of such examinations. The Director of the OTS also is authorized to promulgate regulations to ensure the safe and sound operations of savings institutions and may impose various requirements and restrictions on the activities of savings institutions. The extensive regulation, supervision and examination of the Savings Bank by the OTS is intended primarily for the protection of the insurance fund and depositors. Moreover, such regulation imposes substantial restrictions on the operations and activities of the Savings Bank, and grants to regulators broad discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to classification of assets and establishment of adequate loan loss reserves. Any changes in such regulations, whether by legislation or regulatory action, could have a material impact on the Savings Bank and its operations. Neither the 6 Company nor the Savings Bank can predict what, if any, future actions may be taken by legislative or regulatory authorities or what impact any such actions may have on the operations of the Company or the Savings Bank. The activities of savings institutions are governed by HOLA and, in certain respects, the Federal Deposit Insurance Act, as amended ("FDI Act"). Qualified Thrift Lender Requirement. In order for the Savings Bank to exercise the powers granted to federally-chartered savings institutions and maintain full access to FHLB advances, it must be a "qualified thrift lender" ("QTL"). A savings institution is a QTL if its qualified thrift investments continue to equal or exceed 65% of the savings institution'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 June 30, 1996, the qualified thrift investment percentage test for the Savings Bank was 79.9%. Liquidity. Under applicable federal regulations, savings institutions 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 5% 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 institutions. A savings institution is also required to maintain an average daily balance of short-term liquid assets of not less than 1% of the average daily balance of its net withdrawable deposits and short-term borrowing during the preceding calendar month. At June 30, 1996, the Savings Bank was in compliance with these liquidity requirements. Loans-to-One-Borrower Limitations. HOLA generally requires savings institutions 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% of the bank's unimpaired capital and surplus, plus an additional 10% of capital and surplus for loans secured by readily marketable collateral. At June 30, 1996, the Savings Bank's loan-to-one-borrower limitation was approximately $3.6 million and no loans to a single borrower exceeded that amount, except as provided herein. Under certain OTS regulations, a savings institution may make loans to one borrower for residential housing developments in amounts up to 30% of the bank's unimpaired capital and surplus upon prior notice to and approval of the OTS and 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 June 30, 1996, the Savings Bank had $12.6 million in loans outstanding under the increased lending limit regulations. Commercial Real Property Loans. HOLA limits the aggregate amount of commercial real estate loans that a federal savings institution may make to an amount not in excess of 400% of the savings institution's capital. Limitation on Capital Distributions. The OTS regulations impose limitations on capital distributions by savings institutions. Under the rule, a savings institution 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 institution'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. For purposes of this regulation, the Savings Bank is a tier 1 institution. Limitation on Equity Risk Investments. Under applicable regulations, the Savings Bank is generally prohibited from investing directly in equity securities and real estate (other than that used for offices and related facilities, that acquired through, or in lieu of, foreclosure, 7 that on which a contract purchaser has defaulted or investments in an amount up to 2% of the savings association's assets in real property and obligations secured by real property located within a geographic area or neighborhood receiving assistance under Title I of the Housing & Development Act of 1974). In addition, the OTS regulations limit the aggregate investment by savings institutions in certain equity risk investments, including equity securities, real estate, service corporations and operating subsidiaries and loans for the purchase of land and construction loans made after February 27, 1987, on non-residential properties with loan-to-value ratios exceeding 80%. At June 30, 1996, the Savings Bank was in compliance with the requirements of these limitations. Insurance of Deposits. The FDIC has devised a system for assessing deposit insurance whereby insured savings associations pay premiums between $0.23 and $0.31 per $100 of their domestic deposits, depending on their placement within one of nine categories. The categories are determined by (i) the insured institution's placement in capital group 1, 2, or 3, depending on its classifications as "well-capitalized," "adequately capitalized," or "undercapitalized," respectively, and (ii) its supervisory rating of A, B, or C. Well-capitalized institutions with a supervisory rating of A pay $0.23 per $100 of deposits, while undercapitalized institutions with a rating of C pay $0.31 per $100 of deposits. The Savings Bank currently pays $0.23 per $100 of deposit. Legislation pending in Congress proposes a one-time assessment on all SAIF-insured deposits. The bill authorizes FDIC to make a one-time assessment, at a level determined by FDIC, on all SAIF-insured deposits held as of March 31, 1995. The total amount assessed will be forwarded directly to SAIF with none of the funds being used to pay interest on FICO debt. In addition, the bill authorizes FDIC to exempt some institutions from the assessment, such as those determined by FDIC as being weak or certain newly chartered thrifts. Exempt firms must make assessments at rates in effect on June 30, 1995, for the next three years. While the rate of the assessment is not established in the legislation, the Banking & Financial Services Committee estimates it will be equal to 68 basis points (68 cents per $100 of insured deposits). If the assessment occurs, the effect on the Savings Bank would be a pre-tax charge of approximately $1.0 million, but the Savings Bank s capital category would not be adversely affected. The Company is unable to predict at this time whether this legislation will be enacted and, if enacted, in what form. 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. The Savings Bank received a satisfactory rating from the OTS in its most recent CRA examination. Also, the FHLB is required to adopt regulations establishing standards of community investment and service for members of the FHLB System to meet to be eligible for long-term advances. Those regulations are required to take into account a savings institution's CRA record and the member's record of lending to first-time home buyers. The Savings Bank intends to maintain its record of community lending and to meet or exceed the applicable CRA standards. 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 the limitation that they do not pay an effective yield on any such deposit which exceeds by more than 75 basis points (a) the effective yield paid on deposits of comparable size and maturity in such institution's normal market area for deposits accepted in its normal market area, or (b) the yield equal to 120 basis points of the current yield on comparable maturity U.S. treasury obligations. Undercapitalized institutions are not permitted to accept brokered deposits and may not solicit deposits by offering an effective yield that exceeds by more than 75 basis points 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 institutions 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 8 $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 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 FDI Act requires each federal banking agency to prescribe for all insured depository institutions standards relating to internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, and compensation, fees and benefits and such other operational and managerial standards as the agency deems appropriate. In addition, the federal banking regulatory agencies are required to prescribe by regulation standards specifying (i) maximum classified assets to capital ratios, (ii) minimum earnings sufficient to absorb losses without impairing capital; (iii) to the extent feasible, a minimum ratio of market value to book value for publicly traded shares of depository institutions; and (iv) such other standards relating to asset quality, earnings and valuation as the agency deems appropriate. Finally, each federal banking agency is required to prescribe standards for employment contracts and other compensation arrangement of executive officers, directors and principal stockholders of insured depository institutions that would prohibit compensation and benefits arrangements that are excessive or that could lead to a material financial loss for the institution. 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 require the institution to comply with the restrictions applicable under the prompt corrective action provisions of the FDI Act. The federal banking agencies, including the OTS and the FDIC, adopted guidelines on July 10, 1995 regarding safety and soundness standards. The OTS and the other federal banking agencies have adopted uniform regulations regarding real estate lending standards. The OTS regulation requires each savings association to establish and maintain written internal real estate standards consistent with safe and sound banking practices and appropriate to the size of the institution and the nature and scope of its real estate lending activities. The policy also must be consistent with accompanying OTS guidelines, which include loan-to-value ratios for the following types of real estate loans: raw land (65%); land development (75%); non-residential construction (80%); improved property (85%); and one-to-four family residential construction (85%). One-to-four family mortgages and home equity loans do not have maximum loan-to-value ratio limits, but those with a loan-to-value ratio at origination of 90% or greater are expected to be backed by private mortgage insurance or readily marketable collateral. Institutions also are permitted to make a limited amount of loans that do not conform to the proposed loan-to-value limitations so long as such exceptions to the loan-to-value standards are justified. Prompt Corrective Regulatory Action. The 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. Generally, subject to narrow exceptions, the FDI Act requires the banking regulators to appoint a receiver or conservator for an institution that is critically undercapitalized. The FDI Act authorizes the banking regulators to specify the ratio of tangible capital to assets at which an institution becomes critically undercapitalized and requires that ratio to be not less than 2% of assets. Under the OTS prompt corrective action regulation, generally, a savings institution that has a total risk-based capital of less than 8.0% or a leverage ratio is less than 4.0% is considered to be undercapitalized. A savings institution 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 institution 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 institutions, including, but not limited to, restrictions on growth, investment activities, capital distributions, and affiliate 9 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, (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 that 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 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. 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. 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 institutions 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 institution's assets, provided any investment over 2% is used for specified community or inner-city development purposes. In addition, federal regulations permit institutions to make specified types of loans to such subsidiaries, in which the institution owns more than 10% of the stock, in an aggregate amount not exceeding 50% of the institution's regulatory capital if the institution's investment is in compliance with applicable loans-to-one-borrower regulations. A savings institution which acquires a non-savings institution subsidiary, or which elects to conduct a new activity within a subsidiary, must give 10 the FDIC and the OTS at least 30 days advance written notice. The FDIC may, after consultation with the OTS, prohibit specific activities if it determines such activities pose a serious threat to SAIF. Assessments. Savings institutions 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 institution's total assets, including consolidated subsidiaries, as reported in the Saving Bank's latest quarterly Thrift Financial Report. The Savings Bank's total assessment for the year ended June 30, 1996, was approximately $69,000. Branching. A federally-chartered savings association may establish, retain or operate a branch outside of the state in which it has its home office if it qualifies as a domestic building and loan association under the Internal Revenue Code of 1986, as amended. TRANSACTIONS WITH AFFILIATES Pursuant to HOLA, transactions engaged in by a savings institution or one of its subsidiaries with affiliates of the savings institution 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. Under Section 22(h), loans to an executive officer, director, or a greater than 10% shareholder of a savings institution, or certain affiliated entities of either, may not exceed together with all other outstanding loans to such person and affiliated entities the institution's loan-to-one-borrower limit. Section 22(h) also prohibits loans, above amounts prescribed by the appropriate federal banking agency, to directors, executive officers, and greater than 10% shareholders of a savings institution, and their respective affiliates, unless the loan is approved in advance by a majority of the board of directors of the institution with any "interested" director not participating in the voting. The Federal Reserve Board has prescribed the loan amount (which includes all other outstanding loans to such person), as to which such prior board of director approval is required, as being the greater of $25,000 or 5% of unimpaired capital and surplus (up to $500,000). 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. The Savings Bank was in compliance with these rules at June 30, 1996. FEDERAL HOME LOAN BANK SYSTEM 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 institutions. As a member of the FHLB of Indianapolis, the Savings Bank 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 June 30, 1996, the Savings Bank was in compliance with this requirement. FEDERAL RESERVE SYSTEM The Federal Reserve Board has adopted regulations that require savings institutions to maintain non-earning reserves against their transaction accounts (primarily NOW and regular checking accounts) and non-personal time deposits (those which are transferable or held by a person other than a natural person) with an original maturity of less than 1 1/2 years. At June 30, 1996, the Savings Bank was in compliance 11 with these requirements. These reserves may be used to satisfy liquidity requirements imposed by the Director of the OTS. Because required reserves must be maintained in the form of vault cash or a non-interest-bearing account at a Federal Reserve Bank, the effect of this reserve requirement is to reduce the amount of the institution's interest-earning assets. Savings institutions also have the authority to borrow from the Federal Reserve discount window. Federal Reserve Board regulations, however, require savings institutions to exhaust all the FHLB sources before borrowing from a Federal Reserve Bank. The Federal Reserve Board regulations also place limitations upon a Federal Reserve Bank's ability to extend advances to undercapitalized and critically undercapitalized depository institutions by providing that a Federal Reserve Bank generally may not have advances outstanding to an undercapitalized institution for more than 60 days in any 120-day period. RECENT LEGISLATION In January, 1995, President Clinton signed into law the Riegle Community Development and Regulatory Improvement Act of 1994 ("Riegle Act"). The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 allows for interstate banking and interstate branching without regard to whether such activity is permissible under state law, with permissible activities being phased-in between September 29, 1995, and June 1, 1997. Such interstate banking and branching activities are already permitted for federally-chartered savings associations. The Company is not able to predict with certainty the impact of this legislation on the banking industry, but expects that it will increase competition between banks and savings associations. ADDITIONAL REGULATION The Savings Bank is also subject to additional regulation of its activities, including a variety of consumer protection regulations affecting its lending, deposit and collection activities and regulations affecting secondary mortgage market activities. 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 Board. Additional legislation and administrative actions affecting the banking industry may be considered by the United States Congress, state legislatures and various regulatory agencies, including those referred to above. 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 the Company and the Savings Bank in particular would be affected thereby. PERSONNEL As of June 30, 1996 the Company had 133 full-time equivalent employees. The employees are not represented by any collective bargaining unit. The Company believes its relations with its employees are good. The Company maintains group life, hospital, surgical, dental, major medical, and long-term disability programs for full-time employees. The Company 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 the Company's savings bank offices, all of which are owned by the Savings Bank, as well as certain additional information relating to these offices as of June 30, 1996. The Savings Bank currently has one branch application on file, as the Savings Bank is planning to open a branch in nearby Newburgh, IN. Also the Company is near completion of its Eastside Branch expansion, when completed the building will house the Savings Bank's branch, the Company, Village Management Corporation, and Village Securities Corporation. The Company expects to be operational at the new location during the second quarter of fiscal 1997. The Savings Bank currently has no plans to sell or close any existing branches. The Company's Savings Bank previously owned land, along the downtown Evansville riverfront with a book value 12 of $281,500 approximately three blocks from the main office building. This land was purchased in 1982 with the intent of constructing a new home office on the site. The Savings Bank entered into a contract for the sale of this property with Aztar Corporation for $1,000,000. This transaction was closed during the first quarter of fiscal 1996 and the gain of approximately $400,000, net of tax, was treated as other operating income.
Year Facility Net Office Location Opened Book Value - --------------- ------------- ---------- Home Office 1974 $1,901,901 18 NW Fourth Street Evansville, IN 47708 Eastside Branch 1971 1,666,754 700 S. Green River Rd Evansville, IN 47715 Northside Branch 1976 222,064 4441 First Avenue Evansville, IN 47710 Westside Branch 1979 200,354 4801 W. Lloyd Expressway Evansville, IN 47712
The Company uses the premises of the Savings Bank for its office and equipment needs and pays rental fees for such use. Village Insurance Corporation and Village Securities Corporation are housed at the Savings Bank's principal Evansville office, but do not pay any rental fees for such use. FFCC, Village Community Development Corporation, and Village Housing Corporation lease office space in Indianapolis, Indiana. Village Management Corporation leases an office in Evansville, Indiana. 13 ITEM 3. LEGAL PROCEEDINGS Other than as discussed herein 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 No matter was submitted to a vote of the Registrant's security holders during the fourth quarter of the fiscal year ended June 30, 1996. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS The discussion concerning the market for the Registrant's common equity and related shareholder matters under the heading "Market Summary" included in the 1996 Annual Report to Stockholders on page 4 and is incorporated herein by reference. Cash dividends by quarter for the current and previous year appear under the heading "Quarterly Results of Operations" included in the 1996 Annual Report to Stockholders on page 12 and is incorporated herein by reference. Additional information relating to stockholder matters can be found under the heading "Corporate Information" included in the 1996 Annual Report to Stockholders on page 64 and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Selected Financial and Other Data included in the 1996 Annual Report to Stockholders on page 5 is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operation included in the 1996 Annual Report to Stockholders on pages 7 through 27 is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required under this item are incorporated herein by reference to pages 28 through 59 of the 1996 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES No response to this item is required. 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information to be provided under this Item is incorporated by reference to the information under the heading "Information Concerning Nominees, Directors and Executive Officers" on pages 5 through 8 (up to but exclusive of the information presented under the caption "Certain Transactions and Other Matters Between Management and the Company" on page 8), and under the heading "Security Ownership Reporting" on page 21, (up to but exclusive of the information presented under the caption "Auditors of the Company", "Shareholders Proposals", and "Additional Information" on page 21), of the Company's definitive proxy statement dated September 9, 1996, as filed with the Securities and Exchange Commission pursuant to Regulation 14A. ITEM 11. EXECUTIVE COMPENSATION The information to be provided under this Item is incorporated by reference to the information under the heading "Executive Compensation and Other Information" on pages 9 through 21 (up to but exclusive of the information presented under the caption "Security Ownership of Management" on page 21) of the Company's definitive proxy statement dated September 9, 1996, as filed with the Securities and Exchange Commission pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information to be provided under this Item is incorporated by reference to the information under the headings "Beneficial Ownership" on pages 3 and 4 (up to but exclusive of the information presented under the captions "Proxies" on page 4), and under the heading "Security Ownership of Management" on pages 19 through 21 (up to but exclusive of the information presented under the caption "Security Ownership Reporting" on page 21), of the definitive proxy statement dated September 9, 1996 as filed with the Securities and Exchange Commission pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information to be provided under this Item is incorporated by reference to the information under the heading "Certain Transactions and Other Matters Between Management and the Company" on page 8 and 9 (up to but exclusive of the information presented under the captions "Board Meeting", "Board Committees", and "Executive Compensation and Other Information" on page 9), of the Company's definitive proxy statement dated September 9, 1996 as filed with the Securities and Exchange Commission pursuant to Regulation 14A. (This space intentionally left blank) 15 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 Annual Report Independent Auditor's Report on Consolidated Financial Statements 28 Consolidated Balance Sheet June 30, 1996 and 1995 29 Consolidated Statement of Income - For the years ended June 30, 1996, 1995, and 1994 30 and 31 Consolidated Statement of Changes in Stockholders' Equity - For the years ended June 30, 1996, 1995, and 1994 32 and 33 Consolidated Statement of Cash Flows - For the years ended June 30, 1996, 1995, and 1994 34 and 35 Notes to Consolidated Financial Statements 36 through 59 (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 the Company, filed as exhibit 3(a) to the Company's 1995 Annual Report on Form 10-K, are incorporated herein by reference. 3 (b) By-Laws of the Company, filed as exhibit 3(b) to the Company's 1994 Annual Report on Form 10-K, are incorporated herein by reference. 10 (a) The 1987 Incentive Stock Option Plan, filed as exhibit 10(c) to the Company's 1995 Annual Report on Form 10-K, is incorporated herein by reference. (b) The 1993 Director's Stock Option Plan, filed as exhibit 10(d) to the Company's 1995 Annual Report on Form 10-K, is incorporated herein by reference. (c) 1995 Key Employee's Stock Option Plan. 11 Statement regarding computation of per share earnings. 13 1996 Annual Report to Stockholders of Fidelity Federal Bancorp (Incorporated in part into the Form 10-K by reference). 21 Subsidiaries of Fidelity Federal Bancorp. 27 Financial Data Schedule. (b) No Form 8-K was filed during the last quarter of the fiscal year. (c) See the list of exhibits in Item 14 (a) (3). (d) No other financial statement schedules are required to be submitted. 16 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 18th day of September, 1996. FIDELITY FEDERAL BANCORP Registrant By /S/ M. BRIAN DAVIS ------------------------------ M. Brian Davis President and Chief Operating Officer (Principal Executive Officer) By /S/ DONALD R. NEEL ------------------------------ Donald R. Neel, Senior 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 18, 1996, by the following persons on behalf of the registrant and in the capacities indicated. By /S/ BRUCE A. CORDINGLEY -------------------------------- Bruce A. Cordingley Chairman of the Board By /S/ M. BRIAN DAVIS -------------------------------- M. Brian Davis President, Chief Operating Officer and Director By: /S/ CURT J. ANGERMEIER -------------------------------- Curt J. Angermeier, Director By /S/ WILLIAM R. BAUGH -------------------------------- William R. Baugh, Director By /S/ JACK CUNNINGHAM -------------------------------- Jack Cunningham, Director By /S/ ROBERT F. DOERTER -------------------------------- Robert F. Doerter, Director By /S/ DAVID L. MARAMAN -------------------------------- David L. Maraman, Director By /S/ MARK S. MATTINGLY -------------------------------- Mark S. Mattingly, Director By /S/ BARRY A. SCHNAKENBURG -------------------------------- Barry A. Schnakenburg, Director By /S/ JACK CUNNINGHAM ----------------------------- Jack Cunningham, Attorney-in-fact 17 INDEX TO EXHIBITS Page Exhibit Number Exhibit - --------------------------------------------------------------------------- 10(c) 1995 Key Employee's Stock Option Plan. 11 Statement regarding computation of per share earnings. 13 1996 Annual Report to Stockholders of Fidelity Federal Bancorp (Incorporated in part into the Form 10-K by reference). 21 Subsidiaries of Fidelity Federal Bancorp. 27 Financial Data Schedule. 18 EX-10.C 2 Exhibit 10(c) 1995 KEY EMPLOYEES' STOCK OPTION PLAN OF FIDELITY FEDERAL BANCORP 1. PURPOSE. The Plan is designed to promote the interest of Fidelity Federal Bancorp ("Company") and its Subsidiaries by encouraging their officers and key employees, upon whose judgment, initiative and industry the Company and its Subsidiaries are largely dependent for the successful conduct and growth of their businesses, to continue the association with the Company and its Subsidiaries of such officers and key employees by providing additional incentive and opportunity for unusual industry and efficiency through stock ownership, and by increasing their proprietary interest in the Company and their personal interest in its continued success and progress. The Plan provides for the granting of (i) incentive stock options ("ISO's") and (ii) nonqualified stock options ("NSO's"). 2. ADMINISTRATION. (a) The Plan shall be administered by a committee of not less than three directors of the Company ("Committee") who shall be designated from time to time by the Board of Directors. No member of the Committee shall be eligible, at any time when he is such a member, to receive the grant of an option under the Plan. The decision of a majority of the members of the Committee shall constitute the decision of the Committee. Subject to the provisions of the Plan, the Committee is authorized (i) to grant ISO's and NSO's; (ii) to determine the employees to be granted ISO's and NSO's; (iii) to determine the option period, the option price and the number of shares subject to each option; (iv) to determine the time or times at which options will be granted; (v) to determine the time or times when each option becomes exercisable and the duration of the exercise period; (vi) to determine other conditions and limitations, if any, applicable to the exercise of each option; and (vii) to determine the nature and duration of the restrictions, if any, to be imposed upon the sale or other disposition of shares acquired by any optionee upon exercise of an option, and the nature of the events, if any, and the duration of the period, in which any optionee's rights in respect of shares acquired upon exercise of an option may be forfeited. Each option granted under the Plan shall be evidenced by a written stock option agreement containing terms and conditions established by the Committee consistent with the provisions of the Plan, including such terms as the Committee shall deem advisable in order that each ISO shall constitute an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended ("Code"). (b) The Committee is authorized, subject to the provisions of the Plan, to adopt, amend and rescind such rules and regulations as it may deem appropriate for the administration of the Plan and to make determinations and interpretations which it deems consistent with the Plan's provisions. The Committee's determinations and interpretations shall be final and conclusive. (c) The Committee shall also determine, in its sole discretion, with respect to each employee, whether such options shall be ISO's or NSO's, or any combination thereof; and whether any employee shall be given discretion to determine whether any options granted to him shall be ISO's or NSO's or any combination thereof. (d) Neither the Plan nor any stock option agreement executed hereunder shall constitute a contract of employment. Participation in the Plan does not give any employee the right to be retained in the employ of the Company or any Subsidiary and does not limit in any way the right of the Company or a Subsidiary to change the duties or responsibilities of any employee or to terminate the employment of any employee. 3. SHARES COVERED BY THE PLAN. The stock to be subject to options under the Plan shall be shares of authorized common stock of the Company and may be unissued shares or reacquired shares (including shares purchased in the open market), or a combination thereof, as the Committee may from time to time determine. Subject to the provisions of Paragraph 14, the maximum number of shares to be delivered upon exercise of all options granted under the Plan shall not exceed Two Hundred Fifteen Thousand (215,000) shares. Shares covered by an option that remain unpurchased upon expiration or termination of the option may be made subject to further options. 4. ELIGIBILITY. Officers and key employees of the Company or of any of its Subsidiaries, as selected by the Committee, shall be eligible to receive grants of ISO's and NSO's under the Plan. Members of the Committee shall not be eligible to receive grants of options under the Plan while serving as members of the Committee. 5. OPTION PRICE. (a) The option price per share of stock under each ISO shall be not less than the fair market value of the share on the date on which the option is granted; provided, however, as to officers and key employees who, at the time an ISO is granted, own, within the meaning of Section 425(d) of the Code, more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Subsidiary ("Shareholder-Employees"), the purchase price per share of stock under each ISO shall be not less than one hundred ten percent (110%) of the fair market value of the stock on the date on which the option is granted. (b) The option price per share of stock under each NSO shall be determined by the Committee in its discretion; provided, however, the option price per share under each NSO shall not be less than one hundred per cent (100%) of the fair market value of the share on the date on which the option is granted. (c) For all purposes of the Plan, the term "fair market value" shall be the mean between the reported closing bid and asked prices for the shares of common stock of the Company as quoted by the North American Securities Dealers Automated Quotation System ("NASDAQ"). If the common stock of the Company is not quoted by NASDAQ, the fair market value shall be determined by the Committee based upon quotations of the entities which make a market in Company stock and such other factors as the Committee shall deem appropriate. If the common stock of 2 the Company is not quoted by entities which make a market in the Company's stock, the fair market value shall be determined by the Committee based upon such factors as the Committee deems appropriate. 6. OPTION PERIOD. No option period shall exceed ten (10) years; provided, however, the option period with respect to ISO's granted to Shareholder-Employees shall not exceed five (5) years. 7. VESTING AND EXERCISE. Options granted hereunder shall, unless otherwise provided by the Committee and agreed to by the employee in the option agreement, vest in each eligible employee and thus become exercisable commencing on the day the employee is granted options under the Plan and on the first day of each succeeding calendar year so long as the employee remains an employee in accordance with the following schedule: Percentage of Option Calendar Year Shares Vested Day of Grant 20% January 1st of first year following year of grant 40% January 1st of second year following year of grant 60% January 1st of third year following year of grant 80% January 1st of fourth year following year of grant 100% and thereafter If the employee is not an employee of the Company or any Subsidiary on any of the above dates, then the option shares otherwise scheduled to vest in the employee for the year in which the employee ceases to be an employee of the Company or any Subsidiary and all option shares scheduled to vest in the following years shall not vest in the employee but shall be forfeited and shall not be exercisable by the employee hereunder. Provided, however, if an employee dies or becomes permanently and totally disabled prior to the time the employee becomes one hundred percent (100%) vested in the option shares, then one hundred percent (100%) of the option shares shall nevertheless vest, upon the death or permanent and total disability of the employee, in the employee s estate, legatees or heirs in the case of his death or the employee, his attorney-in-fact or guardian in the case of his permanent and total disability. As used herein, "permanent and total disability" shall have the same meaning ascribed to such term by Section 22(e)(3) of the Code. 8. CHANGE IN CONTROL OF THE COMPANY. Notwithstanding the provisions of Paragraph 7, in the event of a Change in Control of the Company, the options covered by the agreement between the Company and the employee may be exercised in full if such Change in Control of the Company occurs when the employee is an employee of the Company or any Subsidiary. 9. SPECIAL CALENDAR YEAR LIMITATION ON SHARES SUBJECT TO ISO'S. Subject to the provisions of Paragraph 8 regarding Change in Control of the Company, the aggregate fair market value (determined at the time of the grant of the ISO's) of the stock with respect to which ISO's are exercisable for the first time by an eligible employee during 3 any calendar year (under all plans providing for the grant of incentive stock options of the Company or any of its Subsidiaries) shall not exceed One Hundred Thousand Dollars ($100,000.00). 10. SEQUENCE OF EXERCISING INCENTIVE STOCK OPTIONS. Any ISO granted to an employee pursuant to the Plan shall be exercisable even if there are outstanding previously granted but unexercised ISO's with respect to such employee. 11. EARLY TERMINATION OF OPTION. (a) Termination of Employment. All rights to exercise an option shall terminate 30 days after the employee s employment terminates for any reason other than his death or permanent and total disability (but not later than the date the option expires pursuant to its terms). Transfer of employment from the Company to a corporation which is a Subsidiary of the Company, or vice versa, or from one Subsidiary to another, shall not be deemed termination of employment. The Committee shall have the authority to determine in each case whether a leave of absence on military or government service shall be deemed a termination of employment for purposes of this subparagraph. (b) Permanent and Total Disability or Death of Optionee. If an optionee's employment terminates due to permanent and total disability or death, his option shall terminate one (1) year after termination of his employment due to his permanent and total disability or death (but not later than the date the option expires pursuant to its terms). During such period, subject to the limitations of the option grant, the optionee, his guardian, attorney-in-fact or personal representative, as the case may be, may exercise the option in full. Provided, however, in the case of an ISO, the option must be exercised within three (3) months after the Optionee s retirement or death. In the event the ISO is not exercised within such three (3) month period, the option may nevertheless be exercised during the twelve (12) month period provided for in the preceding provisions of this subsection (c), but shall be treated for all purposes as an NSO. Provided, further, except as otherwise provided in Paragraph 6 regarding the five (5) year term with respect to certain grants of ISOs, this Option shall not be exercisable after the expiration of ten (10) years from the date of this Agreement. 12. PAYMENT FOR STOCK. Full payment for shares purchased shall be made at the time of exercising the option in whole or in part. Such payment may be made either (a) in cash or (b) at the discretion of the Committee, by delivering whole shares of common stock of the Company (the "Delivered Stock") or a combination of cash and Delivered Stock. Delivered Stock shall be valued by the Committee at its fair market value determined as of the date of the exercise of the option in accordance with the provisions of Paragraph 5. No shares shall be issued until full payment for them has been made, and an optionee shall have none of the rights of a shareholder with respect to such shares until such shares are issued to him. Upon payment of the full purchase price, the Company shall issue a certificate or certificates to the optionee evidencing ownership of the shares purchased pursuant to the exercise of the option which contain(s) such terms, conditions and provisions as may be required and as are consistent with the terms, conditions and provisions of the Plan and the stock option agreement between the optionee and the Company. 4 13. NONTRANSFERABILITY. No option shall be transferable, except by the optionee's will or the laws of descent and distribution. During the optionee's lifetime, his option shall be exercisable (to the extent exercisable) only by him. The option and any rights and privileges pertaining thereto shall not be transferred, assigned, pledged or hypothecated by him in any way, whether by operation of law or otherwise and shall not be subject to execution, attachment, or similar process. 14. CHANGES IN STOCK. (a) Subject to the provisions of Paragraph 8, in the event of any change in the common stock of the Company through stock dividends, split-ups, recapitalizations, reclassifications, conversions, or otherwise, or in the event that other stock shall be converted into or substituted for the present common stock of the Company as the result of any merger, consolidation, reorganization or similar transaction, then the Committee may make appropriate adjustment or substitution in the aggregate number, price, and kind of shares available under the Plan and in the number, price and kind of shares covered under any options granted or to be granted under the Plan. The Committee's determination in this respect shall be final and conclusive. Provided, however, that the Company shall not, and shall not permit its Subsidiaries to, recommend, facilitate or agree or consent to a transaction or series of transactions which would result in a Change of Control of the Company unless and until the person or persons or entity or entities acquiring or succeeding to the assets or capital stock of the Company or any of its Subsidiaries as a result of such transaction or transactions agrees to be bound by the terms of the Plan so far as it pertains to options theretofore granted but unexercised and agrees to assume and perform the obligations of the Company hereunder. Notwithstanding the foregoing provisions of this Paragraph 14(a), no adjustment shall be made which would operate to reduce the option price of any ISO below the fair market value of the stock (determined at the time the option was granted) which is subject to an ISO. (b) Subject to the provisions of Paragraph 8, in the event of a Change in Control of the Company pursuant to which another person or entity acquires control of the Company (such other person or entity being the "Successor"), the kind of shares of common stock which shall be subject to the Plan and to each outstanding option, shall, automatically by virtue of such Change in Control of the Company, be converted into and replaced by shares of common stock, or such other class of securities having rights and preferences no less favorable than common stock of the Successor, and the number of shares subject to the option and the purchase price per share upon exercise of the option shall be correspondingly adjusted, so that, by virtue of such Change in Control of the Company, each optionee shall have the right to purchase (i) that number of shares of common stock of the Successor which have a fair market value equal, as of the date of such Change in Control of the Company, to the fair market value, as of the date of such Change in Control, of the shares of common stock of the Company theretofore subject to his option, and (ii) for a purchase price per share which, when multiplied by the number of shares of common stock of the Successor subject to the option, shall equal the aggregate exercise price at which the optionee could have acquired all of the shares of common stock of the Company theretofore optioned to the optionee. 15. USE OF PROCEEDS. The proceeds received by the Company from the sale of stock pursuant to the Plan will be used for general corporate purposes. 5 16. INVESTMENT REPRESENTATIONS. Unless the shares subject to an option are registered under the Securities Act of 1933, each optionee in the stock option agreement between the Company and the optionee shall agree for himself and his legal representatives that any and all shares of common stock purchased upon the exercise of the option shall be acquired for investment and not with a view to, or for sale in connection with, any distribution thereof. Any share issued pursuant to an exercise of an option subject to this investment representation shall bear a legend evidencing such restriction. 17. AMENDMENT AND DISCONTINUANCE. The Board of Directors may, at any time, without the approval of the stockholders of the Company (except as otherwise required by applicable law, rule or regulations, including without limitation any shareholder approval of the safe harbor rule promulgated under the Securities Exchange Act of 1934), alter, amend, modify, suspend, or discontinue the Plan, but may not, without the consent of the holder of an option, make any alteration which would adversely affect an option previously granted under the Plan or, without the approval of the stockholders of the Company, make any alteration which would: (a) increase the aggregate number of shares subject to options under the Plan, except as provided in Paragraph 14; (b) decrease the minimum option price, except as provided in Paragraph 14; (c) permit any member of the Committee to become eligible for options under the Plan; (d) withdraw administration of the Plan from the Committee or the Board of Directors; (e) extend the term of the Plan or the maximum period during which any option may be exercised; (f) change the manner of determining the option price; (g) change the class of individuals eligible for options under the Plan; or (h) without the consent of the holder of the option, alter or impair any option previously granted under the Plan. 18. LIABILITY. No member of the Board of Directors, the Committee or officers or employees of the Company or its Subsidiaries shall be personally liable for any action, omission or determination made in good faith in connection with the Plan. 19. EFFECTIVE DATE AND DURATION. Options may be granted under the Plan for a period of ten (10) years commencing March 15, 1995, the date on which the Board of Directors approved the Plan; provided, however, that no option may be exercised until the Plan has been approved by the shareholders of the Company. No options shall be granted after March 15, 2005. Upon such date, the Plan shall expire except as to outstanding options and which options and rights shall remain in effect until they have been exercised or terminated or have expired. ISO's must be granted within ten (10) years of the date the Plan is adopted by the Board of Directors of the Company or approved by the shareholders of the Company, whichever is earlier. 20. MISCELLANEOUS. (a) The term "Board" or "Board of Directors" used herein shall mean the Board of Directors of the Company, unless the context clearly requires otherwise, and to the extent that any powers and discretion vested in the Board of Directors are delegated to any committee of the Board, the term "Board of Directors" shall also mean such committee. 6 (b) The term "Subsidiary" or "Subsidiaries" used herein shall mean any savings association or other corporation more than fifty percent (50%) of whose total combined voting stock of all classes is held by the Company or by another corporation qualifying as a Subsidiary within this definition. (c) The term "Change in Control of the Company" used herein shall mean a change in control of the Company of a nature that would be required to be reported pursuant to the Change in Bank Control Act, as amended (12 U.S.C. 1817(j)) and the Savings and Loan Holding Company Act (12 U.S.C. 1467a), and regulations issued thereunder by the Office of Thrift Supervision; provided that, without limitation, such change in control shall also be deemed to have occurred for the purposes of this Plan if any person, other than any person who on the day hereof is an officer or director of the Company, is or becomes the beneficial owner, directly or indirectly, of securities of the Company, its parent or any Subsidiary representing 20% or more of the combined voting power of the Company s then outstanding securities; or, during any period of two consecutive years during the term of this Plan or the term of any options granted hereunder as specified in Paragraph 19, individuals who at the beginning of such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved by directors representing at least 2/3 of the directors then in office who were directors at the beginning of the period. Notwithstanding the foregoing, a Change in Control of the Company shall not occur as a result of the issuance of stock by the Company in connection with a public offering of its stock. 7 EX-11 3 FIDELITY FEDERAL BANCORP EARNINGS PER SHARE COMPUTATION EXHIBIT 11
Fiscal years ending June 30 1996 1995 1994 - --------------------------------------------------------------------------------------- Primary: Net income $3,234,909 $3,061,141 $1,582,512 ======================================== Average common shares outstanding 2,453,275 2,360,586 2,338,600 Common stock equivalents - stock options 51,359 47,618 30,561 Common stock equivalents - warrants 271,513 90,688 ---------------------------------------- Total average common and common equivalent shares outstanding 2,776,147 2,498,891 2,369,161 ======================================== Primary earnings per share $ 1.17 $ 1.23 $ 0.67 ======================================== Fully Diluted: Net income $3,234,909 $3,061,141 $1,582,512 ======================================== Average common shares outstanding 2,453,275 2,360,586 2,338,600 Common stock equivalents - stock options 51,359 69,589 30,561 Common stock equivalents - warrants 271,513 204,256 ---------------------------------------- Total average common and common equivalent shares outstanding 2,776,147 2,634,431 2,369,161 ======================================== Fully diluted earnings per share $ 1.17 $ 1.16 $ 0.67 ========================================
EX-13 4 Exhibit 13 FIDELITY FEDERAL BANCORP 1996 ANNUAL REPORT CONTENTS Financial Highlights Page 2 Letter to Stockholders Page 3 Market Summary Page 4 Selected Statistical Information Page 5 Management's Report Page 6 Management's Discussion and Analysis Pages 7-27 Independent Auditor's Report Page 28 Consolidated Balance Sheet Page 29 Consolidated Statement of Income Pages 30-31 Consolidated Statement of Changes in Stockholders' Equity Pages 32-33 Consolidated Statement of Cash Flows Pages 34-35 Notes to the Consolidated Financial Statements Pages 36-59 Corporate Information Pages 60-64 FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Per Share 1996 1995 Change - -------------------------------------------------------------------------- Fully diluted net income $1.17 $1.16 0.9% Primary net income 1.17 1.23 (4.9) Cash dividends declared 0.79 0.33 139.4 Book value at year-end 5.73 5.21 10.0 Market price (bid) at year-end 11.25 10.88 3.4 For the Year - -------------------------------------------------------------------------- Net interest income $6,004 $5,531 8.6% Provision for loan losses 455 420 8.3 Non-interest income 8,180 5,377 52.1 Non-interest expense 8,607 5,912 45.6 Net income 3,235 3,061 5.7 At Year-end - -------------------------------------------------------------------------- Total assets $262,216 $269,438 (2.7)% Total loans 217,221 223,100 (2.6) Deposits 181,702 180,771 0.5 Stockholders' equity 14,295 12,405 15.2 Averages - -------------------------------------------------------------------------- Total assets $274,837 $199,094 38.0% Total earning assets 261,924 192,533 36.0 Total loans 226,874 173,980 30.4 Total deposits 184,105 123,120 49.5 Total stockholders' equity 13,618 11,122 22.4 Profitability Ratios - -------------------------------------------------------------------------- Return on average assets 1.18% 1.54% Return on average stockholders' equity 23.75 27.52 Net interest margin 2.29 2.87 Loan Quality Ratios - -------------------------------------------------------------------------- Net charge-offs to average loans 0.05% 0.04% Allowance for loan losses to loans at end of period 0.49 0.32 Allowance for loan losses to non-performing loans 275.06 122.09 Savings Bank Capital Ratios - -------------------------------------------------------------------------- Tangible equity to assets at end of period 7.05% 6.02% Risk-based capital ratios: Tier 1 capital 9.30 9.04 Total capital 12.35 12.19 Other Data - -------------------------------------------------------------------------- Average common and common equivalent shares outstanding 2,776,147 2,634,431 Number of full-time equivalent employees at year-end 133 119 Number of banking offices 4 4
2 LETTER TO STOCKHOLDERS It is again a pleasure to report record earnings for the third consecutive year. Your company earned over $3.2 million in fiscal 1996, or $1.17 per share. As our primary focus continues to be the enhancement of shareholder value through consistent annual earnings growth, Fidelity Federal Bancorp's management has embarked on a mission to further refine its niche in the financial services sector. The Company's recent operating history points to our success in penetrating niche areas such as multifamily housing development, consulting, and finance. Indeed, $10,000 invested in the Company in 1991 would today have a market value of $65,481, an average annual return of 111%, including dividend reinvestment. However, we refuse to rest on our laurels. Non-traditional real estate businesses have served us well for the past few years despite quarter to quarter earnings variability. It is our goal to reduce the volatility of our real estate based fee income to lessen this variability, although there can be no certainty of success. In the long term, it will continue to be our ability to serve our customers needs that will determine the profitability of our company. As evidence of management's efforts to enhance shareholder value, the Company's return on equity for fiscal 1996 was 23.75%, placing its return in the top ten of all exchange-traded banks and thrifts in the country for the second consecutive year. Furthermore, the dividend yield on the Company's stock currently exceeds 7%, tops in the country among the same group, according to SNL Securities, Charlottesville, VA. Return on assets was a robust 1.18% this year. In addition, the Company declared and paid a 10% stock dividend in the fiscal fourth quarter, the third dividend or split of the Company's shares in the last two years. During the year, management has engineered some structural changes in our organization and its balance sheet in order to set the stage for long-term earnings improvements. Following three years of double-digit asset growth, the Company showed a slight decrease in assets from the previous year. In the second half of fiscal 1996, the Company sold over $50 million in fixed rate mortgage loans in an effort to both redeploy funds into higher yielding assets, as well as to reduce the interest rate risk inherent with holding high levels of fixed rate mortgages. Management believes it has sharply reduced the risks associated with potential increases in interest rates as a result of these transactions. The asset sales during the year increased funds available for the Company's continued expansion into commercial loans. The commercial loan portfolio increased by 104% during the year to approximately $28 million. The multiple relationships that typically develop as a result of these transactions present new opportunities to cross-market our products to a new clientele. Management anticipates that this base of lending business being acquired will accelerate the Company's transition from a more traditional mortgage-based savings and loan to a financial services entity with a broad spectrum of banking products and services. Management anticipates that the regional environment for commercial activity will facilitate the push into these lines of business. The Company continues to use its expertise in the multifamily housing arena to both develop its own properties and to provide consulting services and financing to outside developers. The Company is generally viewed by the industry as a leader in innovative and personalized financial services and has had representatives lead panel discussions at housing conferences across the country. These activities remain an integral part of the Company's overall strategy. Soon we will be announcing the opening of a modern two-story office building on the east side of Evansville. This structure will house the East Side Branch of United Fidelity Bank, fsb, as well as the offices for Fidelity Federal Bancorp, Village Management Corporation, and Village Securities Corporation, a new discount stock brokerage company. Construction is expected to be completed in the next couple of months. In addition, the Company recently announced the creation of Village Finance Corporation, a consumer finance company, pending regulatory approval. This entity will be based in the new office building as well. During the past year, Bruce Cordingley resigned as CEO to pursue other opportunities but continues to serve as chairman. Mr. Cordingley continues to assist the President in the day-to-day operations of the Company. In closing we would once again wish to thank all the employees of Fidelity Federal Bancorp and its affiliates for another successful year. We also want to thank all of the shareholders for their continued support. Cordially, /S/ BRUCE A. CORDINGLEY /S/ M. BRIAN DAVIS - ----------------------- ------------------ Bruce A. Cordingley M. Brian Davis Chairman of the Board President and COO 3 MARKET SUMMARY MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company'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. All amounts have been adjusted for the 10 percent stock dividend distributed on May 27, 1996, the 2.1 for 1 stock split distributed on April 14, 1995, and the twenty percent stock dividend distributed July 15, 1994.
Fiscal Year Common Stock Fiscal Year Common Stock Ended Bid Prices Ended Bid Prices June 30, 1996 High Low June 30, 1995 High Low - ------------------------------------------------------------------------------ First Quarter $12-3/4 $10-7/8 First Quarter $ 6-1/4 $5-1/2 Second Quarter 13-5/8 10-1/2 Second Quarter 7-3/4 6-1/4 Third Quarter 13-5/8 10-7/8 Third Quarter 9-1/2 7-3/4 Fourth Quarter 12-1/4 11-1/4 Fourth Quarter 10-7/8 9-1/2
The recent bid and ask prices on August 23, 1996, were $10-1/4 and $11 respectively. During fiscal 1996 the Board of Directors declared a 10 percent stock dividend payable May 27, 1996. This was the third time in the past two years the Company has rewarded the stockholders by issuing a stock dividend or split. The Company declared cash dividends of $0.79 per share during fiscal 1996 compared to $0.33 per share for fiscal 1995 and $0.12 per share in fiscal 1994. The Company's principal source of income and funds is dividends from the savings bank subsidiary and the Company is not subject to any regulatory restriction on future dividends, if any. The Company's dividend policy is to pay cash or distribute stock dividends when the Board of Directors deems it to be appropriate, taking into account the Company's financial condition and results of operations, economic and market conditions, industry standards, and other factors, including regulatory capital requirements of its savings bank subsidiary. STOCK OWNERSHIP The following figures are used as an example of a stockholder who purchased 100 shares of Fidelity Federal Bancorp stock at June 30, 1990. The following data has not been restated for the stock dividends or stock split.
Closing Market Total Price (Bid) Shares At Year Market Date Stock Changes Owned End Value - ------------------------------------------------------------------------ 06/30/90 100 $ 6.50 $ 650.00 06/30/91 100 5.25 525.00 06/30/92 100 6.50 650.00 06/30/93 100 8.00 800.00 06/30/94 20% stock dividend 120 12.50 1,500.00 06/30/95 2.1 for 1 stock split 252 12.00 3,024.00 06/30/96 10% stock dividend 277 11.25 3,116.25
In addition, this stockholder would have received $379.30 in cash dividends during the period shown. The approximate number of holders of outstanding Common Stock based upon holders of record, as of August 23, 1996 is 925. 4 SELECTED STATISTICAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED FINANCIAL DATA AS OF JUNE 30: 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------ Total assets $262,216 $269,438 $152,188 $108,375 $ 90,146 Interest-bearing deposits 4,107 6,549 6,254 2,619 3,620 Investment securities available for sale 17,458 15,403 14,465 19,315 Investment securities 14 17,795 Loans (net) 216,162 222,387 123,176 79,599 63,910 Deposits 181,702 180,771 89,038 74,373 79,607 Borrowings 62,985 73,996 51,689 24,266 4,325 Stockholders' equity 14,295 12,405 9,775 8,520 5,675 SELECTED OPERATIONS DATA FOR THE YEAR ENDED JUNE 30: - ------------------------------------------------------------------------------------------------------ Interest income $21,529 $15,794 $8,710 $7,196 $7,727 Interest expense 15,525 10,263 5,171 4,729 5,219 --------------------------------------------------------- Net interest income 6,004 5,531 3,539 2,467 2,508 Provision for loan losses 455 420 150 130 538 --------------------------------------------------------- Net interest income after provision for loan losses 5,549 5,111 3,389 2,337 1,970 Non-interest income 8,180 5,377 2,457 537 272 Non-interest expense 8,607 5,912 3,219 2,301 2,174 --------------------------------------------------------- Income before income tax 5,122 4,576 2,627 573 68 Income tax 1,887 1,515 1,044 228 19 Cumulative effect of change in accounting method 78 --------------------------------------------------------- Net income $ 3,235 $ 3,061 $1,583 $ 423 $ 49 ========================================================= SELECTED FINANCIAL RATIOS - ------------------------------------------------------------------------------------------------------ Return on average assets 1.18% 1.54% 1.30% 0.43% 0.05% Return on stockholders' equity 23.75 27.52 17.20 6.38 0.87 Net interest margin 2.29 2.87 3.02 2.60 2.83 Net interest spread 2.11 2.59 2.67 2.38 2.66 Tangible equity to assets at year-end 7.05 6.02 6.43 7.86 6.30 Allowance for loan losses to loans 0.49 0.32 0.29 0.30 0.23 Allowance for loan losses to non-performing loans 275.06 122.09 37.79 22.52 10.20 Dividend payout ratio 67.52 28.45 17.91 38.46 50.00 PER SHARE DATA - ------------------------------------------------------------------------------------------------------ Fully diluted net income $ 1.17 $ 1.16 $ 0.67 $ 0.26 $ 0.04 Primary net income 1.17 1.23 0.67 0.26 0.04 Cash dividends declared 0.79 0.33 0.12 0.10 0.02 Book value at year-end 5.73 5.21 4.17 3.64 4.34 Closing market price (bid) at year-end 11.25 10.88 5.41 2.89 2.71 Number of average common and common equivalent shares outstanding 2,776,147 2,634,431 2,369,161 1,638,945 1,314,053
Note: All per share and average share data have been adjusted to reflect the 10% stock dividend distributed on May 27, 1996, the 2.1 for 1 stock split distributed on April 14, 1995, and the twenty percent stock dividend distributed on July 15, 1994. 5 MANAGEMENT'S REPORT The management of Fidelity Federal Bancorp is responsible for the accompanying consolidated financial statements. These statements have been prepared in conformity with generally accepted accounting principles which represent the best estimates and judgments of management where appropriate. Financial information elsewhere in the Annual Report is consistent with that in the financial statements. To meet this responsibility, management maintains a system of internal controls, policies, and administrative procedures designed to provide reasonable assurance that transactions are recorded accurately. These systems are augmented by the careful selection and training of qualified personnel and a continuous program of internal audits. While there are inherent limits in all internal control structures, management believes the Company's internal controls provide basis for the preparation of reliable financial statements. The Audit Committee of the Board of Directors, composed solely of directors who are not officers or employees of the Company, meet regularly with the internal auditor and with the independent certified public accountants, and Management, when appropriate, to review auditing, accounting, reporting, and internal control matters. Both the internal and external auditors have direct and private access to the Audit Committee. /S/ M. BRIAN DAVIS /S/ DONALD R. NEEL ----------------------- ----------------------- M. BRIAN DAVIS DONALD R. NEEL President and Chief Senior Vice President, Operating Officer Chief Financial Officer and Treasurer 6 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL Fidelity Federal Bancorp (the "Company"), formed in 1993, is a corporation organized under the laws of the State of Indiana and is a registered savings and loan holding company, with its principal office in Evansville, Indiana. The Company's savings bank subsidiary, United Fidelity Bank, fsb (the "Savings Bank"), was organized in 1914 and is a federally-chartered stock savings bank located in Evansville, Indiana. In 1992, the Board of Directors developed and began implementation of a new business plan for the Company 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 nonbanking 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. Since the implementation of the business plan, the holding company as well as the affordable housing group, consisting of three nonbank subsidiaries of the Savings Bank, has been formed. Revenue generated from affordable housing activities has increased dramatically and significant asset growth has been achieved, also resulting in higher revenues. In fiscal 1996 the Company slowed its growth and positioned itself to reduce debt, increase core deposits, sell loans and use the proceeds to fund new loan production. The Company's business plan is to continue developing and expanding the activities of the affordable housing group in an ever increasing competitive market, and by continuing to look for new financing niches both in and outside the housing arena. The Company will work to increase the profitability of the core banking activities and to grow earnings in each business segment. The Company's net income has significantly increased over the past two years. Net income has increased to $3,235,000 in 1996, from $1,583,000 in 1994, consolidated assets increased to $262,216,000 at June 30, 1996, from $152,188,000 at June 30, 1994, and the Company achieved return on average equity and return on average assets of 23.75% and 1.18% in 1996, compared to 17.20% and 1.30% in 1994. The Company, 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 installment loans, commercial loans, and mortgage loans, primarily owner occupied one-to-four family homes located in Indiana, and in investment and money market securities. Following the adoption of its new business plan, the Company has engaged in the business of owning, developing, building, renting and managing affordable housing projects through its wholly-owned subsidiaries, Village Management Corporation, Village Community Development Corporation and Village Housing Corporation (collectively, the "Affordable Housing Group"). The Affordable Housing Group structures and participates in multifamily housing developments which have been granted tax credits pursuant to Section 42 of the Internal Revenue Code of 1986, as amended (the "Code") and tax-exempt bond financed developments. The Affordable Housing Group is currently involved in various tax-credit and tax-exempt bond projects which are in various stages of development. Village Housing Corporation, as general partner to 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, as contractor and developer, receives construction and development fees as the project is completed and 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. As part of Village Management's duties as 7 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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. Revenue generated by the Affordable Housing Group has increased from $2,186,000 in 1994 to $4,440,000 in 1996. Another wholly-owned subsidiary of the Savings Bank, Fidelity Federal Capital Corporation ("FFCC"), was established in April, 1994, 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. FFCC has packaged loan requests for developers of multifamily residential real estate projects eligible for federal tax credits and tax exempt financing and may finance housing transactions on a conventional basis as well. While the loans packaged to date have been referred to the Savings Bank for origination, FFCC may also package loan transactions for other lenders, if the opportunity arises. FFCC earns fees for construction review, supervision, and general project oversight. The Savings Bank, as lender, can earn points and interest on loans made to developers. The Savings Bank's credit decisions are subject to applicable OTS restrictions on loans of this type. A key element in the first stage of the Company's business plan was to increase earning assets, primarily through loan growth. As illustrated in the following table, the Company has steadily increased its average earning assets and average loans resulting in corresponding increases in total interest income. However, total interest income, as a percentage of total income, has steadily decreased over this three-year period resulting from increases in income from affordable housing activities. Further, the Company has opted to control its loan growth by selling loans in the secondary market, thus slowing the growth of total interest income.
Year Ended June 30, 1996 1995 1994 - ----------------------------------------------------------------------------- (dollars in thousands) Average earning assets $261,924 $192,533 $117,055 Average loans $226,874 $173,980 $ 97,151 Average earning assets growth 36.0% 64.5% 23.7% Average loan growth 30.4% 79.1% 34.7% Average loans/average earning assets 86.6% 90.4% 83.0% Total interest income $ 21,529 $ 15,794 $ 8,710 Total income $ 29,709 $ 21,171 $ 11,167 Total interest income/total income 72.5% 74.6% 78.0%
The Company has been engaged in affordable housing activities since September, 1992. The Company engages in the business of owning, developing, building, renting and managing affordable housing projects through the Affordable Housing Group. The Affordable Housing Group earns income at various stages of the development. 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, as contractor and developer, receives construction and development fees as the project is completed. As the development progresses, development fee income is earned contractually on each project. However, these fees are not recognized as fee income until the limited partners' equity investment has been received or the syndication firm providing the equity has given a firm commitment to provide the funds. 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. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION Since June 30, 1994, FFCC has begun to earn fees for providing real estate mortgage banking services to nonaffiliated developers. A key element in the Company's business plan is to increase the income generated by its affordable housing activities. As illustrated in the following table, affordable housing income has substantially increased over the last three years. Despite the steady increase in total interest income, affordable housing income, as a percentage of total income, has increased dramatically for 1994 and 1995. Despite increased competition for tax credits and tax exempt financing, total affordable housing income increased in 1996 compared to 1995, though the percentage of affordable housing income to total income decreased.
Year Ended June 30, 1996 1995 1994 - ---------------------------------------------------------------------------- (dollars in thousands) Real estate development fees $ 4,250 $ 4,252 $ 2,146 Real estate management fees 156 37 13 Real estate partnership fees 34 81 27 Real estate mortgage banking fees 942 351 -------------------------------- Total affordable housing income 5,382 4,721 2,186 Other non-interest income 2,798 656 271 -------------------------------- Total non-interest income $ 8,180 $ 5,377 $ 2,457 -------------------------------- Total income $29,709 $21,171 $11,167 ================================ Affordable housing income/ total non-interest income 65.8% 87.8% 89.0% Total non-interest income/total income 27.5% 25.4% 22.0% Affordable housing income/total income 18.1% 22.3% 19.6%
The Company also earns income from loan origination fees and interest income on affordable housing loans, which is not reflected in the table. The following table details average balances, interest income/expense and average rates/yield for the Company's earning assets and interest bearing liabilities for the years ended June 30, 1996, 1995, and 1994. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
1996 1995 1994 Average Average Average Average Average Average Year Ended June 30 Balances Interest Rates Balances Interest Rates Balances Interest Rates - --------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) ASSETS Interest-bearing deposits $ 1,347 $ 64 4.75% $ 1,783 $ 90 5.05% $ 2,141 $ 108 5.04% Federal funds sold 2,421 132 5.45 25 1 4.00 Investment securities available for sale 16,528 1,099 6.65 14,125 857 6.07 16,144 736 4.56 Loans held for sale 11,140 877 7.87 Federal Home Loan Bank Stock 3,614 286 7.91 2,620 187 7.14 1,619 92 5.68 Loans(1)(2) Commercial loans 9,720 1,022 10.51 6,817 689 10.11 426 31 7.28 Multifamily loans 28,804 3,049 10.59 15,799 2,494 15.79 4,796 673 14.03 Real estate mortgages 155,300 12,010 7.73 121,158 8,997 7.43 79,462 6,082 7.65 Consumer loans 33,050 2,990 9.05 30,206 2,479 8.21 12,467 988 7.92 -------------------------------------------------------------------------------------- Total loans 226,874 19,071 8.41 173,980 14,659 8.43 97,151 7,774 8.00 Total earning assets 261,924 21,529 8.22% 192,533 15,794 8.20% 117,055 8,710 7.44% Less: Allowance for loan losses 833 482 289 Cash and due from banks 2,012 1,034 969 Premises and equipment 4,345 3,009 2,548 Other assets 7,389 3,000 1,852 -------------------------------------------------------------------------------------- Total assets $274,837 $199,094 $122,135 ====================================================================================== LIABILITIES Interest-bearing deposits Interest-bearing checking $ 10,092 $ 398 3.94% $ 4,916 $ 115 2.34% $ 3,929 $ 104 2.65% Money market accounts 6,066 180 2.97 6,600 200 3.03 5,987 174 2.91 Savings accounts 5,346 155 2.90 5,795 161 2.78 5,800 176 3.03 Certificates of deposit 158,703 9,816 6.19 102,651 5,950 5.80 59,180 2,694 4.55 -------------------------------------------------------------------------------------- Total interest bearing deposits 180,207 10,549 5.85 119,962 6,426 5.36 74,896 3,148 4.20 Federal funds purchased 2,301 136 5.91 4,115 244 5.93 414 16 3.86 Other borrowings 17,523 1,397 7.97 12,759 691 5.42 1,172 50 4.27 Federal Home Loan Bank advances 54,116 3,443 6.36 46,018 2,902 6.31 32,019 1,957 6.11 -------------------------------------------------------------------------------------- Total interest-bearing liabilities 254,147 15,525 6.11% 182,854 10,263 5.61% 108,501 5,171 4.77% Non-interest bearing demand deposits 3,898 3,158 2,993 Advances by borrowers for taxes and insurance 930 600 432 Other liabilities 2,244 1,360 1,012 -------------------------------------------------------------------------------------- Total liabilities 261,219 187,972 112,938 Stockholders' equity 13,618 11,122 9,197 -------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $274,837 $199,094 $122,135 ====================================================================================== Recap: (3) Interest income $21,529 8.22% $15,794 8.20% $8,710 7.44% Interest expense 15,525 5.93 10,263 5.33 5,171 4.42 -------------------------------------------------------------------------------------- Net interest income/margin $ 6,004 2.29% $5,531 2.87% $3,539 3.02% ======================================================================================
(1) Nonaccrual loans have been included in the average balances. (2) Loan income includes interest and fees on loans. (3) Average rates have been computed by dividing by total earning assets. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS 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 increased to $6,004,000 or 8.6% in 1996 from $5,531,000 in 1995, which increased by 56.3% from $3,539,000 in 1994. The net interest margin decreased from 2.87% at June 30, 1995 to 2.29% at June 30, 1996, due to a decrease in loan fees associated with company-developed affordable housing developments and increased competition for deposits and loans. The average yield on interest earning assets increased slightly to 8.22% at June 30, 1996 compared to 8.20% at June 30, 1995. The average yield on interest bearing liabilities increased 50 basis points from June 30, 1995 to 6.11% at June 30, 1996. The yield increase was primarily in certificates of deposits, agent-acquired deposits and other borrowings. The agent-acquired funds were acquired 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 balance of agent-acquired funds remained relatively constant during fiscal 1996. 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 year ended June 30, 1996, was $21,529,000 compared to $15,794,000 for the year ended June 30, 1995, an increase of $5,735,000 or 36.3%. These increases are primarily due to the interest income generated from the increased loan balances over those of the prior period. Average loans increased $52,894,000 or 30.4% over June 30, 1995. Of the $5,735,000 increase in interest income for fiscal 1996, interest on loans contributed $4,412,000. Interest expense for the year ended June 30, 1996 increased $5,262,000 over the corresponding period in 1995. Approximately $3,341,000 of the increase for fiscal 1996, is related to deposit growth. This is the result of an increase of $60,245,000 in average interest-bearing deposits over June 30, 1995 and higher rates of interest paid on such deposits. Non-deposit interest-bearing liabilities interest expenses also increased over June 30, 1995 by $1,139,000 to $4,976,000. Net interest income increased to $5,531,000 for the year ended June 30, 1995, compared to $3,539,000 for the year ended June 30, 1994. The net interest margin decreased slightly from 3.02% at June 30, 1994 to 2.87% at June 30, 1995, as a result of increased competition for deposits. Also contributing to this decrease was the Company's loan portfolio yield which remained relatively flat due to competition, compared to the increase in the market rates over the previous year. The average yield on interest-earning assets increased from 7.44% at June 30, 1994 to 8.20% at June 30, 1995, an increase of 76 basis points. Meanwhile, the average yield on interest-bearing liabilities increased 84 basis points from June 30, 1994 to 5.61%. Interest income for the year ended June 30, 1995, was $15,794,000 compared to $8,710,000 for the year ended June 30, 1994, an increase of $7,084,000 or 81.3%. These increases are mainly due to the interest income generated from the increased loan balances over those of the prior period. Average loans increased $76,829,000 or 79.1% over June 30, 1994. Of the $7,084,000 increase in interest income for fiscal 1995, interest on loans contributed $6,885,000. Additionally, the Company has originated construction loans when providing financing for multifamily affordable housing developments to unrelated borrowers. The Company recognized construction loan origination fees of $657,000 for fiscal 1995, compared to $180,000 in the corresponding period in 1994. Interest expense for the year ended June 30, 1995 increased $5,092,000 over the corresponding period in 1994. Approximately $2,023,000 of the increase for fiscal 1995, is related to deposit growth. This is the result of an increase of $45,066,000 in average interest-bearing deposits over June 30, 1994, and higher rates of interest paid 11 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION on such deposits. In addition to an increase in the interest rate environment as compared to 1994, the increase in interest expense was due to the use of agent-acquired deposits, which generally carry a higher interest rate than retail deposits. This strategy permits the Company to better match loan origination terms and thus obtain growth, while providing a favorable (even though somewhat smaller) spread between the yield on loans and the cost of the funds. The disadvantage is that, to the extent the non-deposit interest-bearing liabilities and agent-acquired deposits replace retail deposits, the cost of funds is increased in the current environment. Interest expense on non-deposit interest-bearing liabilities increased $1,814,000 or 89.7% for the year ended June 30, 1995, compared to the year ended June 30, 1994, due to the increase in non-deposit interest-bearing liabilities outstanding. QUARTERLY RESULTS OF OPERATIONS The Company's non-interest income is largely dependent upon the completion of large individual loan transactions or housing developments. As such, the Company's earnings may experience some variability from quarter to quarter.
1996 Sept 30 Dec 31 Mar 31 June 30 - ------------------------------------------------------------------------- Interest income $5,350 $5,510 $5,366 $5,303 Interest expense 3,938 4,021 3,843 3,723 ------------------------------------------- Net interest income 1,412 1,489 1,523 1,580 Provision for loan losses 110 60 75 210 Non-interest income 2,657 2,162 1,680 1,681 Non-interest expense 2,038 2,142 2,262 2,165 ------------------------------------------- Income before income taxes 1,921 1,449 866 886 Income taxes 780 535 297 275 ------------------------------------------- Net income $1,141 $ 914 $ 569 $ 611 =========================================== Per share: Fully diluted net income $ 0.42 $ 0.33 $ 0.20 $ 0.22 Primary net income 0.42 0.33 0.20 0.22 Cash dividend 0.14 0.23 0.23 0.20 1995 Sept 30 Dec 31 Mar 31 June 30 - ------------------------------------------------------------------------- Interest income $2,935 $3,954 $4,135 $4,770 Interest expense 1,837 2,222 2,780 3,424 ------------------------------------------- Net interest income 1,098 1,732 1,355 1,346 Provision for loan losses 65 85 135 135 Non-interest income 1,280 760 1,294 2,043 Non-interest expense 1,222 1,326 1,435 1,929 ------------------------------------------- Income before income taxes 1,091 1,081 1,079 1,325 Income taxes 428 259 326 502 ------------------------------------------- Net income $ 663 $ 822 $ 753 $ 823 =========================================== Per share: Fully diluted net income $ 0.28 $ 0.34 $ 0.29 $ 0.31 Primary net income 0.28 0.34 0.30 0.31 Cash dividend 0.06 0.07 0.09 0.11
12 MANAGEMENT'S DISCUSSION AND ANALYSIS 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 the Company'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.
1996 Compared to 1995 1995 Compared to 1994 Increase/(Decrease) Increase/(Decrease) ----------------------------- --------------------------- Due to Due to ---------------- --------------- Year Ended June 30 Volume Rate Net Volume Rate Net - ------------------------------------------------------------------------------------------------------------------ (dollars in thousands) Interest income on average earning assets: Loans $4,456 $ (44) $4,412 $6,148 $ 737 $6,885 Investment securities available for sale 146 96 242 (92) 213 121 Loans held for sale 877 877 Federal Home Loan Bank Stock 71 28 99 57 38 95 Interest bearing deposits in other banks (22) (4) (26) (18) (18) Federal funds sold 96 35 131 1 1 ------------------------------------------------------------------ Total interest income from earning assets 4,747 988 5,735 6,095 989 7,084 ------------------------------------------------------------------ Interest expense on average interest-bearing liabilities: Now accounts 121 162 283 26 (15) 11 Money market deposits accounts (16) (4) (20) 18 8 26 Passbook savings accounts (12) 6 (6) (15) (15) Certificates of deposit 3,248 618 3,866 1,979 1,277 3,256 Federal funds purchased (108) (108) 143 85 228 Other borrowings 258 448 706 494 147 641 Federal Home Loan Bank advances 511 30 541 856 89 945 ------------------------------------------------------------------ Total interest expense on interest- bearing liabilities 4,002 1,260 5,262 3,516 1,576 5,092 ------------------------------------------------------------------ Changes in net interest income $ 745 $ (272) $ 473 $2,579 $ (587) $1,992 ==================================================================
PROVISION FOR LOAN LOSSES The Company makes monthly provisions for possible loan losses in amounts estimated to be sufficient to maintain the allowance for loan losses at a level considered necessary by management to absorb possible losses in the loan portfolios. Provision for loan losses was $455,000 for the year ended June 30, 1996, compared to $420,000 for June 30, 1995, and $150,000 for June 30, 1994. The ratio of the allowance for loan losses to non-performing loans was 275.1% at June 30, 1996, 122.1% at June 30, 1995, and 37.8% at June 30, 1994. The increase in the provision was primarily due to the growth in and the change in the composition of the portfolio, which includes higher levels of commercial and multifamily loans than in prior years. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION NON-INTEREST INCOME. Non-interest income increased by $2,803,000 or 52.1% for the year ended June 30, 1996, compared to 1995, after increasing by $2,920,000 or 118.8% in 1995 from 1994. The following table summarizes non-interest income for the three years ending June 30:
NON-INTEREST INCOME - -------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Change from prior year Amount 1996 1995 1996 1995 1994 Amount Percent Amount Percent ---------------------------------------------------------------------------- Fee income from real estate development and management $4,440 $4,370 $2,186 $ 70 1.6% $2,184 99.9% Service charges on deposit accounts 181 99 103 82 82.8 (4) (3.9) Gain on sale of Real estate loans 743 743 100.0 Premises and equipment 719 719 100.0 Letter of credit fees 481 189 2 292 154.5 187 9,350.0 Real estate mortgage banking fees 942 351 591 168.4 351 100.0 Other income 674 368 166 306 83.2 202 121.7 ---------------------------------------------------------------------------- Total non-interest income $8,180 $5,377 $2,457 $2,803 52.1% $2,920 118.8% ============================================================================
Fee income from real estate development and management increased $70,000 over June 30, 1995 to $4,440,000 at June 30, 1996. 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 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 charge on individual transactions. Thus, fee income generated to date is not necessarily indicative of future results. 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. Fee income from real estate development and management was $4,370,000 for the year ended June 30, 1995 compared to $2,186,000 for June 30, 1994, an increase of $2,184,000. The number of tax-credit and tax-exempt bond projects increased from eight projects in 1994 to over 30 projects in 1995, which are in various stages of completion. Service charges on deposit accounts increased $82,000 over fiscal 1995 to $181,000 for fiscal 1996. The Company has concentrated its efforts to attract transaction accounts, which increased $16,901,000 over fiscal 1995 resulting in higher fee income. The Company's savings bank subsidiary sold a parcel of real estate during the first quarter resulting in a gain of $719,000. The Company has no plans at this time to sell additional real estate. Beginning in fiscal 1996, the Company began selling its current production of one-to-four family fixed rate mortgage loans, as well as a package of seasoned consumer loans. In the second quarter, the Company continued to sell current production of one-to-four family fixed rate mortgage loans, but also reclassified $52 million of one-to-four family loans as loans held for sale. The Company has reported net gains of $743,000 for fiscal 1996. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION The Company adopted FAS 122 "Accounting for Certain Mortgage Banking Activities" ("FAS 122") to require the holder of mortgage services to recognize as separate assets, rights to service mortgage loans, regardless of how the rights were acquired. The Company adopted FAS 122 during the first quarter of fiscal 1996. With the increase in mortgage loan sales during fiscal 1996, the Company has recognized $575,000 in mortgage loan servicing rights which are included in the net gain on sale of loans. Letter of credit fees increased $292,000 over fiscal 1995 as the Company increased its standby letters of credit outstanding, particularly on affordable housing developments in which the borrowers are not affiliated with the Company. FFCC began operations in April 1994, and earned $351,000 in fees for fiscal 1995 and $942,000 in fiscal 1996. This has been the result of an increase in the number of transactions closed compared to fiscal 1995. Other income increased $306,000 over fiscal 1995 due to the Company's receipt of $146,000 in dividend income on the stock the Savings Bank holds with its data processing cooperative, a $48,000 increase in loan servicing fees over fiscal 1995, the Company's receipt of $50,000 on the expiration of a land option, and the receipt of $31,000 in title fee income. The $202,000 increase in other non-interest income for fiscal 1995 over fiscal 1994 was the result of the recognition of income related to other affordable housing activities including the Company's admission as a limited partner in two affordable housing partnerships, for service provided. NON-INTEREST EXPENSE. Non-interest expense increased by $2,695,000 or 45.6% for the year ended June 30, 1996, compared to 1995 after increasing by $2,693,000 or 83.7% in 1995 from 1994. The following table summarizes non-interest expense for the three years ending June 30:
Non-interest expense - ---------------------------------------------------------------------------------------------------------------- (dollars in thousands) Change from prior year Amount 1996 1995 1996 1995 1994 Amount Percent Amount Percent ---------------------------------------------------------------------------- Salaries and employee benefits $4,486 $2,888 $1,538 $1,598 55.3% $1,350 87.8% Net occupancy expenses 471 426 313 45 10.6 113 36.1 Equipment expenses 383 287 159 96 33.4 128 80.5 Deposit insurance expense 287 238 171 49 20.6 67 39.2 Data processing expense 417 211 134 206 97.6 77 57.5 Legal and professional fees 448 471 180 (23) (4.9) 291 161.7 Other expense 2,115 1,391 724 724 52.0 667 92.1 ---------------------------------------------------------------------------- Total non-interest expense $8,607 $5,912 $3,219 $2,695 45.6% $2,693 83.7% ============================================================================
Salaries and employee benefits increased $1,598,000 and accounted for 59.3% of the increase in total non-interest expense in fiscal 1996. An increase in staffing was planned to accommodate growth and to continue providing professional and timely service to the Company's customers. Also as a result of the Company's growth and loan diversification strategy, net occupancy and equipment expense increased over June 30, 1995, by $45,000 and $96,000, respectively. Deposit insurance increased $206,000 over fiscal 1995 as total average deposits have increased by $60,985,000 or 49.5% since June 30, 1995. Legal and professional fees decreased $23,000 from fiscal 1995, while other expense increased $724,000 as follows: Advertising increased $108,000 over the prior year as the Company's Savings Bank increased the advertising campaign to accomplish deposit growth and name recognition. The Affordable Housing Group also increased advertising as competition grew in fiscal 1996. During fiscal 1996, the Company began participating some of its multifamily loans resulting in an 15 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION increase in loan participation expenses of $94,000. OTS assessment and filing fees increased $54,000 over the prior year due to the increased complexity of the Company's activities. Travel and lodging increased $49,000 due to the Company's expansion in affordable housing activities, which include research on potential sites, closings on new sites and routine checks on existing sites and sites in the construction phase. 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 $61,000 compared to $18,000 in the prior year as activity continues to increase in the affordable housing segment of the Company. The Company accounts for the investment in various affordable housing partnerships on the equity method. Currently, the Company has written down its investment in various developments by $73,000 for fiscal 1996. As a result of consumer loan sales, dealer fees expense increased $32,000 over the prior year. In addition, the expensing of prepaid dealer interest on sold loans resulted in additional expense of $52,000. Finally bond issuance cost amortization for the junior and senior subordinated notes were $58,000 for fiscal 1996 compared to $14,000 in fiscal 1995. The remaining increase was generally due to the Company's expanded business activities. Salaries and employee benefits increased $1,350,000 and accounted for 50.1% of the increase in total non-interest expense in fiscal 1995. Staffing level increases associated with the Savings Bank's growth and loan diversification strategy, as well as increases in affordable housing activities were the primary reasons for the increase and the increase in net occupancy and equipment expenses, which increased over June 30, 1994, by $113,000 and $128,000, respectively. Legal and professional fees increased $291,000 of which $125,000 was incurred as a result of consulting fees paid for syndication strategies in connection with real estate development and management activities. Other expenses increased $667,000 due to printing and supplies, postage and other operating expenses which again increased due to the growth of the Company. Advertising costs increased $61,000 over June 30, 1994 as advertising was increased and the name change of the Company's savings bank subsidiary was completed. Expenses of $79,000 were incurred by FFCC, which started operations in the first quarter of fiscal 1995. INCOME TAX EXPENSE. Income tax expense was $1,887,000 in fiscal 1996, as compared to $1,515,000 recorded in fiscal 1995 and $1,044,000 in fiscal 1994. The effective tax rate for the current year increased to 36.8% from 33.1% for fiscal 1995 and 39.8% for fiscal 1994, as pre-tax income increased from fiscal 1995 despite an increase in tax credits from Affordable Housing Group activities. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION FINANCIAL CONDITION At year-end, the Company's assets decreased $7,222,000 or 2.7%. The Company reclassified $52,000,000 of its fixed rate residential first mortgages from the loan portfolio into a Loans Held for Sale balance sheet category and sold these loans during fiscal 1996. Average assets for fiscal 1996 increased 38.0% over fiscal 1995 to $274,837,000. Total liabilities decreased $9,112,000 at year-end as the Company used loan proceeds to reduce its borrowings. Total deposits increased $931,000 despite allowing agent acquired funds to reprice at the retail rate or mature. LOANS The following table shows the composition of the Company's loan portfolio as of June 30:
1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------- (dollars in thousands) Real estate mortgage loans Conventional $106,288 $113,870 $ 74,701 $ 58,677 $43,187 Construction loans 36,938 24,670 12,536 3,988 880 Commercial loans 18,267 7,133 1,022 Multifamily loans 15,420 26,147 12,372 2,969 5,265 First mortgage real estate loans purchased 7,612 4,921 4,064 4,635 6,499 Real estate contracts 56 101 107 112 116 ---------------------------------------------------------- 184,581 176,842 104,802 70,381 55,947 Commercial loans-other than secured by real estate 9,393 6,414 442 162 Consumer loans 23,062 39,635 18,063 9,087 7,890 Loans to depositors secured by savings 185 209 225 205 223 ---------------------------------------------------------- Total loans $217,221 $223,100 $123,532 $ 79,835 $64,060 ========================================================== Total assets $262,216 $269,438 $152,188 $108,375 $90,146 ---------------------------------------------------------- Total loans to total assets 82.8% 82.8% 81.2% 73.7% 71.1% ==========================================================
As mentioned above, the loan sale accounts for the $7,582,000 decrease in conventional loans. Included in construction loans are $7,476,000 in loans to affordable housing developments in addition to $9,782,000 in affordable housing development loans which are included in the multifamily loans. The remaining $29,462,000 in construction loans were primarily single-family dwellings. Commercial loans have continued to increase since the Company began originating commercial loans during the first quarter of fiscal 1995. Commercial real estate and commercial loans have increased from $1,464,000 in fiscal 1994 to $27,660,000 in fiscal 1996. The Company purchased some first mortgage real estate loans during fiscal 1996 accounting for the $2,691,000 increase over fiscal 1995. Consumer loans decreased $16,573,000 from fiscal 1995 as a result of two consumer loan sales. The Company has made arrangements with another institution to pass new indirect consumer loans originated to the other institution in exchange for a fee. Therefore the Company's consumer loan portfolio has been shrinking. The Company's loan portfolio contains no loans to foreign governments, foreign enterprises, foreign operations of domestic 17 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION companies, or highly leveraged transactions, nor any concentration to borrowers engaged in the same or similar industries that exceed 10 percent of total loans. The following table sets forth the remaining maturities for certain loan categories as of June 30, 1996:
Total for Loans Due After One Year Having: Within One to After Fixed Variable LOAN MATURITIES One Year Five Years Five Years Total Rates Rates - ---------------------------------------------------------------------------------------------------- (dollars in thousands) Real estate mortgage loans $11,292 $44,640 $128,834 $184,766 $69,746 $115,020 Consumer loans 9,954 12,287 821 23,062 18,149 4,913 Commercial loans 5,489 3,613 291 9,393 1,599 7,794 ---------------------------------------------------------------------- Total $26,735 $60,540 $129,946 $217,221 $89,494 $127,727 ======================================================================
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. 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. 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. Income received on restructured and nonaccrual loans was $15,000 in 1996, $74,000 in 1995 and $96,000 in 1994. Additional interest income of approximately $9,000, $3,000, and $14,000 for 1996, 1995, and 1994, 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 the Company's non-performing loans as of June 30:
NON-PERFORMING LOANS 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------- (dollars in thousands) Nonaccrual loans $342 $ 47 $190 $ 288 $1,461 Restructured 514 752 760 90 days or more past due 43 23 9 ---------------------------------------- Total $385 $584 $942 $1,048 $1,470 ======================================== Ratio of non-performing loans to Total loans 0.18% 0.26% 0.76% 1.31% 2.29% ========================================
Non-performing loans amounted to 0.18% of total loans as of June 30, 1996, as compared to 0.26% of total loans as of June 30, 1995. The decrease in the ratio from 1996 to 1995 is attributable to the 34.1% decrease in non-performing loans. Management is not aware of any loans that have not been disclosed that represent or result from trends or uncertainties which may have a material impact on the Company's future operating results, liquidity or capital resources. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION ANALYSIS OF ALLOWANCE FOR LOAN LOSSES. The Company establishes its provision for loan losses and evaluates the adequacy of the 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 collectibility 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 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. The following table sets forth loan charge-offs and recoveries by the type of loan and an analysis of the allowance for loan losses for the years ended June 30:
SUMMARY OF LOAN LOSS EXPERIENCE 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------ (dollars in thousands) Allowance for loan losses Balance at July 1, $ 713 $356 $236 $150 $142 Loan charge-offs: Real estate mortgage 12 8 8 22 537 Consumer 128 74 39 28 26 ----------------------------------------------- Total loan charge-offs 140 82 47 50 563 Loan recoveries: Real estate mortgage 17 8 6 5 23 Consumer 14 11 11 1 10 ----------------------------------------------- Total loan recoveries 31 19 17 6 33 Net charge-offs 109 63 30 44 530 Provision for loan losses 455 420 150 130 538 ----------------------------------------------- Balance at June 30, $1,059 $713 $356 $236 $150 =============================================== Ratio of net charge-offs to average loans outstanding during the period 0.05% 0.04% 0.03% 0.06% 0.83% =============================================== Ratio of provision for loan losses to average loans outstanding during the period 0.20% 0.24% 0.15% 0.18% 0.84% =============================================== Ratio of allowance for loan losses to total loans outstanding at year end 0.49% 0.32% 0.29% 0.30% 0.23% ===============================================
19 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION The allowance for loan losses was $1,059,000 as of June 30, 1996, and $713,000 as of June 30, 1995. Net loan charge-offs were $109,000 or 0.05% of average loans in 1996 compared to $63,000 or 0.04% of average loans in 1995. Management considers the allowance for loan losses adequate to meet losses inherent in the loan portfolio as of June 30, 1996. ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses was further allocated to include commercial and multifamily loans in fiscal 1995. The allocation for loan losses and the percentage of loans within each category to total loans at June 30 are as follows:
Allowance Amount Percentage of Loans to Total Loans 1996 1995 1994 1993 1992 1996 1995 1994 1993 1992 ------------------------------------------------------------------------------------------ (dollars in thousands) Real estate mortgage $ 155 $208 $219 $151 $ 78 61.3% 67.5% 74.8% 84.5% 79.1% Multifamily 420 195 8.8 11.7 10.0 3.7 8.2 Consumer 214 260 137 85 72 10.7 17.9 14.8 11.6 12.7 Commercial 270 50 19.2 2.9 0.4 0.2 ------------------------------------------------------------------------------------------ Total $1,059 $713 $356 $236 $150 100.0% 100.0% 100.0% 100.0% 100.0% ==========================================================================================
INVESTMENT SECURITIES. The Company's investment policy is reviewed annually 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. As of June 30, 1996, the investment portfolio represented 6.7% of the Company's assets, compared to 5.7% at June 30, 1995, 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, cyclical, and long-term changes in the mix of the Company's assets and liabilities and to provide for diversification of risk and management of interest rate and economic risk. At June 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 Investments in Debt and Equity Securities". The net unrealized loss at June 30, 1996, was $140,000 which was comprised of gross gains of $36,000, gross losses of $267,000, and a tax benefit of $91,000, an increase of $128,000 over June 30, 1995. Theincrease 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. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following table sets forth the components of the Company's investment securities available for sale:
1996 1995 1994 - ------------------------------------------------------------------------------- (dollars in thousands) Investment securities available for sale: U.S. Treasury securities $ 504 $ 515 $ 2,505 Federal agency securities 4,365 4,002 991 Federal Home Loan Mortgage Corporation mortgage-backed securities 6,727 6,830 7,959 Federal National Mortgage Association mortgage-backed securities 1,697 2,103 2,515 Government National Mortgage Association mortgage-backed securities 4,165 1,953 495 ------------------------------- Total securities available for sale $17,458 $15,403 $14,465 ===============================
The Company's investment securities portfolio increased by $2,055,000 to $17,458,000 at June 30, 1996, compared to $15,403,000 at June 30, 1995. The Company 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. The Company's total investment securities portfolio increased by $938,000 at June 30, 1995, from June 30, 1994 as additional securities were purchased during 1995 and due to a decrease in the net unrealized loss. The following table sets forth the contractual maturities of investment securities available for sale as of June 30, 1996, and the weighted average yields of such securities. As of June 30, 1996, the Company held no securities with a book value exceeding 10% of stockholders' equity.
Maturity ------------------------------------------------------------------------------------------- After One But After Five But Within One Within Five Within Ten Year Years Years Over Ten Years Total Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ------------------------------------------------------------------------------------------- (dollars in thousands) U.S. Treasuries $504 8.00% $ 504 8.00% Federal agencies $3,872 5.84% $493 6.00% 4,365 5.86 Federal Home Loan Mortgage Corporation 264 8.00 1,107 6.00 218 7.39 $ 5,138 7.24% 6,727 7.07 Federal National Mortgage Association 1,697 6.58 1,697 6.58 Government National Mortgage Association 23 7.51 4,142 6.83 4,165 6.83 ------------------------------------------------------------------------------------------- Total $768 8.00% $5,002 5.88% $711 6.43% $10,977 6.98% $17,458 6.69% ------------------------------------------------------------------------------------------- Percent of total 4% 29% 4% 63% 100% ===========================================================================================
21 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION Funding Sources DEPOSITS. The Company 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 increased by $60,985,000 or 49.5% for the year ended June 30, 1996. Growth came from three categories; NOW, Certificates of deposit and agent-acquired certificates of deposit. NOW accounts and certificates of deposit increased $5,176,000 and $10,022,000, respectively, as the Company launched an aggressive marketing campaign with new products during fiscal 1996 to increase the core deposit base. The remaining growth was primarily due to the acquistion of agent-acquired certificates of deposit. The $46,030,000 increase in these funds were primarily used to fund loan originations. The term of the certificates of deposit acquired was dependent upon the terms of the loans originated and matched accordingly, in order to limit the Company's interest rate risk. The certificates of deposit were acquired at rates higher than the current local market for retail deposits, but generally below rates charged for FHLB advances. 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, 1995 and 1994.
1996 1995 1994 AVERAGE DEPOSITS Amount Rate Amount Rate Amount Rate - ------------------------------------------------------------------------------------------------ (dollars in thousands) Demand $ 3,898 $ 3,158 $ 2,993 Now accounts 10,092 3.95% 4,916 2.34% 3,929 2.65% Money market accounts 6,066 2.97 6,600 3.03 5,987 2.91 Savings accounts 5,346 2.90 5,795 2.78 5,800 3.03 Certificates of deposit 71,337 5.77 61,315 5.29 54,751 4.52 Agent-acquired certificates of deposit 87,366 6.52 41,336 6.55 4,429 4.95 ---------------------------------------------------------- Total $184,105 5.73% $123,120 5.22% $77,889 4.04% ==========================================================
The following table summarizes certificates of deposit in amounts of $100,000 or more by time remaining until maturity as of the following dates:
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE AT JUNE 30, 1996 1995 1994 - --------------------------------------------------------- (dollars in thousands) 3 Months or less $ 7,206 $13,555 $2,820 3-6 months 15,009 14,535 1,962 6-12 months 5,042 20,470 1,706 Over 12 months 18,669 14,569 2,880 ------------------------------ Total $45,926 $63,129 $9,368 ============================== 22 Management' Discussion and Analysis Results of Operations and Financial Condition The decrease of $17,203,000 is primarily due to agent-acquired certificates of deposit that generally are issued in amounts greater than $100,000. This is a result of the real estate loan sales which has allowed the Company the flexibility of retaining or allowing these higher costing funds to mature. BORROWINGS The Company' borrowings decreased $11,011,000 from fiscal 1995 primarily due to the Company' pay off of various Federal Home Loan Bank advances. The funds were provided by the loan sales mentioned above. For further details see Notes to the Consolidated Financial Statements. Other short-term borrowings totaled $5,693,000 which represented a decrease of $3,604,000 since June 30, 1995, due primarily to a decrease in guaranteed investment contracts. Federal funds purchased and short-term FHLB advances, while utilized during 1996, were repaid prior to year-end. These borrowings were partially replaced with guaranteed investment contracts at lower rates. The guaranteed investment contracts are typically fully disbursed throughout the year, but obtained at lower rates compared to other short term borrowing rates.
SHORT-TERM BORROWINGS AT JUNE 30, Federal Treasury Tax Guaranteed Funds FHLB & Loan Note Investment 1996 Purchased Advances Option Contracts - --------------------------------------------------------------------------------------- (dollars in thousands) Outstanding at June 30 $129 $5,564 Average amount outstanding $2,301 $ 625 89 4,064 Maximum amount outstanding at any month-end 7,400 6,000 139 8,590 Weighted average interest rate: During year 5.92% 6.86% 2.94% 4.13% End year 3.96% 5.00% 1995 - --------------------------------------------------------------------------------------- (dollars in thousands) Outstanding at June 30 $105 $9,192 Average amount outstanding $4,115 $ 8,978 36 7,249 Maximum amount outstanding at any month-end 7,400 18,500 150 9,900 Weighted average interest rate: During year 5.93% 5.52% 2.68% 3.37% End year 6.03% 3.74%
CAPITAL RESOURCES Federal regulations require all financial institutions to evaluate capital adequacy by the risk-based capital method, which makes capital requirements more sensitive to the differences in the level of risk assets maintained in financial institution portfolios. Included in the risk-based capital method are two measures of capital adequacy, Tier 1 or core capital and total capital, which consists of Tier 1 plus Tier 2 capital. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following table summarizes capital positions and selected ratios of the Savings Bank:
June 30 1996 1995 1994 - ------------------------------------------------------------------------------ (dollars in thousands) Tier 1 capital Common stock $ 843 $ 843 $ 843 Surplus 8,619 8,155 4,030 Retained earnings 8,629 7,061 4,817 ---------------------------------- Total tier 1 capital $ 18,091 $ 16,059 $ 9,690 Tier 2 capital Allowance for loan losses (1) 1,059 713 356 Subordinated debt (2) 4,875 4,875 ---------------------------------- Total capital $ 24,025 $ 21,647 $10,046 ================================== Risk-weighted assets $194,516 $177,572 $84,562 ================================== Tier 1 capital to risk-weighted assets (3) 9.30% 9.04% 11.46% Total Capital to risk-weighted assets (3) 12.35 12.19 11.88 Tangible capital (4) 7.05 6.02 6.43 Core capital (4) 7.05 6.02 6.43
(1) Computed in accordance with fully phased-in capital standards limiting the allowance to 1.25% of total risk-weighted assets for the year-end 1992 and thereafter. (2) After appropriate notification and approval from the OTS, subordinated debt is allowed as a component in the total capital ratio. (3) The well capitalized requirement generally applicable to federal savings banks are 6% Tier 1 capital to risk-weighted assets and 10% total capital to risk-weighted assets. (4) Under OTS capital standards, savings associations must maintain "core capital" in an amount not less than 3% of total assets and "tangible capital" in an amount not less than 1.5% of total adjusted assets. The Savings Bank is in excess of all capital requirements. For further detail see Notes to the Consolidated Financial Statements. The Company's stockholders' equity increased $1,890,000 to $14,295,000 at June 30, 1996, compared to $12,405,000 at June 30, 1995. The increase in stockholders' equity was accounted for by net income of $3,235,000 and the exercise of warrants and stock options of $741,000. Dividends declared of $1,958,000 and the change in the net unrealized loss on investment securities of $128,000 decreased stockholders' equity in fiscal 1996. The Savings Bank's ratio of stockholders' equity to total assets was 7.05% at June 30, 1996 up from 6.02% at June 30, 1995. Book value per share increased to $5.73 at June 30, 1996, compared to $5.21 one year earlier, an increase of 10.0%. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION LIQUIDITY The Company's principal sources of income and funds are dividends from subsidiaries, and if necessary, borrowings. The Company is not subject to any regulatory restrictions on the payment of dividends to its stockholders. However, OTS regulations set restrictions on the amount of dividends the Savings Bank may pay to the Company. The Savings Bank 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 five percent of net withdrawable savings plus borrowings payable upon demand or due within one year or less. As of June 30, 1996, and June 30, 1995, the Savings Bank liquidity ratios were 10.64% and 10.92%, respectively. Management believes that this level of liquidity is sufficient to meet any anticipated requirements for the Savings Bank'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, the Savings Bank is authorized to borrow money from the FHLB and other sources as needed. The Savings Bank decreased its borrowings from the FHLB from $52,413,000 at June 30, 1995, to $42,474,000 at June 30, 1996, as a result of the real estate loan sales previously mentioned which allowed the Company to pay down various FHLB advances. The interest rate margin on loans originated which are funded by borrowings is smaller than if funded by retail deposits, thus narrowing the overall interest rate margin, but increasing overall gross income. The Company took the opportunity to reduce the borrowings outstanding at June 30, 1996. ASSET/LIABILITY MANAGEMENT The measurement and analysis of the exposure of the Company to changes in the interest rate environment is referred to as asset/liability management. One method used to analyze the Company's sensitivity to changes in interest rates is to measure the difference between the amount of interest-earning assets which are anticipated to mature or reprice within a given period of time as compared to the amount of interest-bearing liabilities which are expected to mature or reprice within the same period. This difference is known as the interest rate sensitivity "gap". A gap is considered negative when the amount of interest-bearing liabilities anticipated to reprice or mature exceeds the amount of interest-earning assets anticipated to reprice or mature in a given period. At June 30, 1996, the Company's total interest-bearing assets maturing or repricing within one year exceeded total interest bearing liabilities maturing or repricing in the same period by $34,967,000, representing a positive cumulative one-year gap ratio of 13.34% of total assets. The Company relies on certain assumptions, such as the amount and timing of savings deposit repricing opportunities, among others, in the measurement of the interest rate sensitivity gap. The Company changed its strategy of originating and retaining mortgage loans and funding these with borrowings of similar durations, such as FHLB advances, as well as with deposits acquired through agents during fiscal 1996. The Company opted to start selling current loan production during the year in addition to reclassifying $52,000,000 to loans held for sale and selling these loans during fiscal 1996. This has allowed the Company to reduce borrowings, let higher rate agent-acquired funds rolloff or rollover at the retail rate, and fund new loan demand. The positive impact on the margin became evident in the fourth quarter as the margin in the fourth quarter was 2.46% compared to the third quarter margin of 2.35%. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION The Company has in place an interest rate risk management policy that addresses the goals to be met and what steps are to be taken to manage interest rate risk exposure in a manner to ensure profits and maintain net worth to the best extent possible in any interest rate environment. Specific limits have been set (and are periodically reviewed) by the Board of Directors as to the amount of interest rate exposure it is willing to accept. Reports are required of management to reflect how well the current policies have achieved the desired goals. The interest rate risk policy also establishes an Asset/Liability Committee (ALCO) that is composed of senior bank officers which meets at least monthly to determine strategies, measure results and plan policies to implement the broad goals set forth in the policy. In viewing the Company's interest rate risk position, the ALCO must be aware of how changes in interest rates affect both its net interest income and its market value of equity. In evaluating the Company's exposure to interest rate risk, certain shortcomings inherent in the method of analysis presented in the following table must be considered. For example, although certain assets and liabilities may have similar maturities or periods to reprice, they may react in different degrees to changes in market interest 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 mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. For example, projected savings, money market and interest bearing accounts maturities may also materially change if interest rates change. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. The Company considers all of these factors in monitoring its exposure to interest rate risk. In addition, the following table does not necessarily indicate the impact of general interest rate movements on the Company's net interest income because the repricing of certain categories of assets and liabilities indicated as maturing or otherwise repricing within a stated period may, in fact, mature or reprice at different times and at different volumes. The following table sets forth the interest rate sensitivity of the Company's assets and liabilities at June 30, 1996, on the basis of the assumptions described below, and sets forth the repricing dates of the Company's interest-earning assets and interest-bearing liabilities at June 30, 1996, and the Company's interest rate sensitivity "gap" percentages at the dates indicated. The information presented does not include estimated prepayment rates for loans and mortgage-backed securities. This has the effect of understating the amount of assets that may reprice in the current year, thus giving the appearance of a balance sheet that is more negatively gapped than it actually is. Interest-bearing checking accounts are included with 30% in the three months or less category and the remaining 70% in the three years or more category. Savings accounts are included with 10% in the three months or less category and the remaining 90% in the three years or more category. In money market accounts, 14% are placed in the three months or less category while the remaining 86% are placed in the over three year category. The assumptions for savings and checking accounts are developed from the Company's deposit pricing reaction to changes in the prevailing interest rate environment. The effect of these assumptions is to quantify the dollar amount of items that are interest-sensitive and which can be repriced within each of the periods specified. Such repricing can occur in one of three ways: (i) the rate of interest to be paid on an asset or liability may adjust periodically on the basis of an interest rate index; (ii) an asset or liability such as a mortgage loan may amortize, permitting reinvestment of cash flows at the then-prevailing interest rate; or (iii) an asset or liability may mature, at which time the proceeds can be reinvested at the current market rates. 26 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION
June 30, 1996 ---------------------------------------------------------- Three Over Three One to Three Months or Months to Three Years or Less One Year Years More Total ---------------------------------------------------------- (dollars in thousands) Assets Interest-bearing deposits in other banks $ 4,106 $ 4,106 Federal funds sold 5,000 5,000 Investment securities available for sale and FHLB stock 6,840 $ 8,469 $ 3,050 $ 3,019 21,378 Loans 63,655 51,469 24,774 77,323 217,221 Non-earning assets 14,511 14,511 ---------------------------------------------------------- Total assets $79,601 $ 59,938 $ 27,824 $94,853 $262,216 ========================================================== Liabilities and stockholders' equity Interest-bearing deposits: Interest-bearing transaction accounts $ 5,996 $13,991 $ 19,987 Money market accounts 751 4,613 5,364 Savings 513 4,621 5,134 Certificates of deposit 16,771 $ 64,754 $ 55,616 8,976 146,117 ---------------------------------------------------------- Total interest-bearing deposits 24,031 64,754 55,616 32,201 176,602 Other borrowings and debt 2,707 13,080 15,312 31,886 62,985 Non-interest bearing deposits 5,100 5,100 Non-interest bearing liabilities and stockholders' equity 17,529 17,529 ---------------------------------------------------------- Total liabilities and stockholders' equity $26,738 $ 77,834 $ 70,928 $86,716 $262,216 ========================================================== Interest sensitivity gap $52,863 $(17,896) $(43,104) $ 8,137 ========================================================== Cumulative interest sensitivity gap $52,863 $ 34,967 $ (8,137) ========================================================== Cumulative gap as a percentage of total assets 20.16% 13.34% (3.10)% ==========================================================
27 INDEPENDENT AUDITOR'S REPORT Stockholders and Board of Directors Fidelity Federal Bancorp Evansville, Indiana We have audited the consolidated balance sheet of Fidelity Federal Bancorp and subsidiaries as of June 30, 1996 and 1995 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended June 30, 1996. 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 June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. GEORGE S. OLIVE & COMPANY LLC Evansville, Indiana July 16, 1996 28 CONSOLIDATED BALANCE SHEET
June 30 1996 1996 - ---------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 1,111,737 $ 889,275 Short-term interest-bearing deposits 4,101,143 6,543,690 Federal funds sold 5,000,000 9,000,000 ------------------------------- Total cash and cash equivalents 10,212,880 16,432,965 Interest-bearing deposits 5,370 5,119 Investment securities available for sale 17,458,474 15,403,382 Real estate loans held for sale 1,923,099 Loans 217,221,244 223,099,648 Allowance for loan losses (1,058,894) (712,872) ------------------------------- Net loans 216,162,350 222,386,776 Premises and equipment 5,559,322 3,851,734 Federal Home Loan Bank of Indianapolis stock, at cost 3,919,500 3,091,100 Interest receivable and other assets 8,897,813 6,343,939 ------------------------------- Total assets $262,215,709 $269,438,114 =============================== LIABILITIES Deposits Non-interest bearing $ 5,099,938 $ 3,211,006 Interest bearing 176,602,082 177,559,886 ------------------------------- Total deposits 181,702,020 180,770,892 Borrowings 62,984,689 73,995,786 Advances by borrowers for taxes and insurance 859,110 699,054 Other liabilities 2,374,915 1,567,013 ------------------------------- Total liabilities 247,920,734 257,032,745 ------------------------------- 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 2,495,040 and 2,162,799 shares 2,495,040 2,162,799 Capital surplus 8,785,148 5,394,610 Stock warrants 265,500 299,000 Retained earnings, substantially restricted 2,888,866 4,560,437 Net unrealized loss on securities available-for-sale (139,579) (11,477) ------------------------------- Total stockholders' equity 14,294,975 12,405,369 ------------------------------- Total liabilities and stockholders' equity $262,215,709 $269,438,114 ===============================
See notes to consolidated financial statements. 29 CONSOLIDATED STATEMENT OF INCOME
Year Ended June 30 1996 1995 1994 - --------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans receivable $19,044,730 $ 14,658,913 $ 7,773,591 Loans held for sale 904,190 Investment securities available for sale 1,098,527 856,355 736,158 Federal funds sold 132,076 1,482 Interest-bearing deposits 64,368 90,204 108,346 Other interest and dividend income 285,536 186,563 92,072 ----------------------------------------------- 21,529,427 15,793,517 8,710,167 ----------------------------------------------- INTEREST EXPENSE Deposits 10,549,760 6,425,729 3,148,266 Federal Home Loan Bank advances 3,442,326 2,902,536 1,956,597 Federal funds purchased 136,161 243,761 16,125 Other interest expense 1,396,989 690,929 50,045 ----------------------------------------------- 15,525,236 10,262,955 5,171,033 ----------------------------------------------- NET INTEREST INCOME 6,004,191 5,530,562 3,539,134 Provision for loan losses 455,000 420,000 150,000 ----------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,549,191 5,110,562 3,389,134 ----------------------------------------------- NON-INTEREST INCOME Fee income - real estate development and management 4,439,894 4,370,351 2,186,417 Service charges on deposit accounts 180,565 99,390 103,185 Gain on sale of Investment securities 234 Real estate loans 742,978 Premises and equipment 718,765 360 Letter of credit fees 480,867 189,376 2,366 Real estate mortgage banking fees 942,002 350,638 Other income 674,961 367,738 164,425 ----------------------------------------------- 8,180,032 5,377,853 2,456,627 -----------------------------------------------
30 CONSOLIDATED STATEMENT OF INCOME (CONTINUED)
Year Ended June 30 1996 1995 1994 - ------------------------------------------------------------------------------ NON-INTEREST EXPENSE Salaries and employee benefits $4,486,097 $2,888,470 $1,537,930 Net occupancy expense 471,019 425,883 312,885 Equipment expense 382,693 286,885 158,712 Data processing fees 286,818 210,942 134,190 Deposit insurance expense 417,231 237,521 171,162 Legal and professional fees 447,538 471,276 179,924 Other expense 2,116,131 1,391,257 724,632 -------------------------------------- 8,607,527 5,912,234 3,219,435 -------------------------------------- INCOME BEFORE INCOME TAX 5,121,696 4,576,181 2,626,326 Income tax expense 1,886,787 1,515,040 1,043,814 -------------------------------------- NET INCOME $3,234,909 $3,061,141 $1,582,512 ====================================== PER SHARE Primary net income $1.17 $1.23 $.67 Fully diluted net income 1.17 1.16 .67 AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 2,776,147 2,634,431 2,369,161
See notes to consolidated financial statements. 31 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock ------------------------ Shares Amount - ----------------------------------------------------------------------------- BALANCES, JULY 1, 1993 843,362 $ 843,362 Net income for 1994 Cash dividends ($.12 per share) 20% stock dividend ($1,180 paid in lieu of fractional shares) 169,063 169,063 Stock warrants issued Exercise of stock options 2,340 2,340 Net change in unrealized gain (loss) on securities available for sale, net of taxes of $144,531 - ----------------------------------------------------------------------------- BALANCES, JUNE 30, 1994 1,014,765 1,014,765 Net income for 1995 Cash dividends ($.33 per share) 2.1-for-1 stock split ($2,875 paid in lieu of fractional shares) 1,125,562 1,125,562 Stock warrants issued Exercise of stock options 20,648 20,648 Exercise of stock warrants 1,824 1,824 Net change in unrealized gain (loss) on securities available for sale, net of taxes of $89,291 - ----------------------------------------------------------------------------- BALANCES, JUNE 30, 1995 2,162,799 2,162,799 Net income for 1996 Cash dividends ($.79 per share) 10% stock dividend ($1,000 paid in lieu of fractional shares) 226,747 226,747 Exercise of stock options 27,837 27,837 Exercise of stock warrants 77,657 77,657 Net change in unrealized gain (loss) on securities available for sale, net of taxes of $84,023 - ----------------------------------------------------------------------------- BALANCES, JUNE 30, 1996 2,495,040 $2,495,040 =============================================================================
> See notes to consolidated financial statements. 32 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Net Unrealized Gain (Loss) on Securities Paid-In Stock Retained Available Capital Warrants Earnings for Sale Total - --------------------------------------------------------------------------------------------------------------------------------- BALANCES, JULY 1, 1993 $4,030,030 $3,574,194 $ 72,743 $ 8,520,329 Net income for 1994 1,582,512 1,582,512 Cash dividends ($.12 per share) (270,163) (270,163) 20% stock dividend ($1,180 paid in lieu of fractional shares) 2,409,142 (2,579,385) (1,180) Stock warrants issued $150,000 150,000 Exercise of stock options 11,700 14,040 Net change in unrealized gain (loss) on securities available for sale, net of taxes of $144,531 (220,353) (220,353) - --------------------------------------------------------------------------------------------------------------------------------- BALANCES, JUNE 30, 1994 6,450,872 150,000 2,307,158 (147,610) 9,775,185 Net income for 1995 3,061,141 3,061,141 Cash dividends ($.33 per share) (807,862) (807,862) 2.1-for-1 stock split ($2,875 paid in lieu of fractional shares) (1,128,437) (2,875) Stock warrants issued 150,000 150,000 Exercise of stock options 54,395 75,043 Exercise of stock warrants 17,780 (1,000) 18,604 Net change in unrealized gain (loss) on securities available for sale, net of taxes of $89,291 136,133 136,133 - --------------------------------------------------------------------------------------------------------------------------------- BALANCES, JUNE 30, 1995 5,394,610 299,000 4,560,437 (11,477) 12,405,369 Net income for 1996 3,234,909 3,234,909 Cash dividends ($.79 per share) (1,957,703) (1,957,703) 10% stock dividend ($1,000 paid in lieu of fractional shares) 2,721,030 (2,948,777) (1,000) Exercise of stock options 81,311 109,148 Exercise of stock warrants 588,197 (33,500) 632,354 Net change in unrealized gain (loss) on securities available for sale, net of taxes of $84,023 (128,102) (128,102) - --------------------------------------------------------------------------------------------------------------------------------- BALANCES, JUNE 30, 1996 $8,785,148 $265,500 $2,888,866 $(139,579) $14,294,975 =================================================================================================================================
See notes to consolidated financial statements. 33 CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended June 30 1996 1995 1994 - -------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $3,234,909 $3,061,141 $1,582,512 Adjustments to reconcile net income to net cash provided (used) by operating activities Provision for loan losses 455,000 420,000 150,000 Investment securities gains (234) Loss on sale of premises and equipment 29,640 6,201 Provision for real estate owned losses (5,000) Gain on sale of premises and equipment (718,765) Depreciation 359,056 276,362 176,000 Investment securities amortization (accretion), net (33,395) 48,199 159,166 Amortization of net loan origination fees and points (55,796) (190,579) (200,114) Deferred income tax (benefit) 295,941 (57,935) (88,280) Net (increase) decrease in real estate loans held for sale 1,923,099 (1,923,099) Changes in Interest payable and other liabilities 366,593 5,153 591,716 Interest receivable and other assets (2,495,117) (3,510,217) (1,498,840) ----------------------------------------- Net cash provided (used) by operating activities 3,361,165 (1,864,774) 866,926 ----------------------------------------- INVESTING ACTIVITIES Net change in interest-bearing deposits (251) 574,881 1,382,000 Purchases of investment securities available for sale (9,776,687) (4,491,069) (1,000,000) Proceeds from investment securities available for sale, sales and maturities 7,542,865 3,729,799 5,376,428 Net changes in loans 5,766,465 (99,440,406) (43,585,027) Purchase of premises and equipment (2,377,519) (1,552,525) (421,672) Proceeds from sale of premises and equipment 1,000,000 1,664 94,775 Purchase of FHLB of Indianapolis stock (828,400) (891,600) (986,200) Proceeds from real estate owned sales 49,705 1,248,158 ----------------------------------------- Net cash provided (used) by investing activities 1,326,473 (102,019,551) (37,891,538) -----------------------------------------
34 CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Year Ended June 30 1996 1995 1994 - --------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net change in Noninterest-bearing, interest-bearing demand and savings deposits $16,223,138 $ (1,975,491) $ 4,065,010 Certificates of deposit (15,292,010) 93,707,903 10,600,784 Net decrease in federal funds purchased (2,050,000) Proceeds from other borrowings 11,490,097 21,577,524 27,780,393 Repayment of other borrowings (12,562,016) (5,908,033) (20,079,507) Proceeds from FHLB advances 16,556,000 126,687,000 47,060,000 Repayment of FHLB advances (26,495,178) (118,262,124) (27,337,793) Net change in advances by borrowers for taxes and insurance 160,056 301,532 38,959 Cash dividends (1,729,312) (625,695) (236,195) Proceeds from exercise of stock options 109,148 75,043 14,040 Proceeds from exercise of stock warrants 632,354 18,604 Proceeds from issuance of stock warrants 150,000 150,000 ----------------------------------------------- Net cash provided (used) by financing activities (10,907,723) 113,696,263 42,055,691 ----------------------------------------------- Net Change in Cash and Cash Equivalents (6,220,085) 9,811,938 5,031,079 Cash and Cash Equivalents, Beginning of Year 16,432,965 6,621,027 1,589,948 ----------------------------------------------- Cash and Cash Equivalents, End of Year $10,212,880 $ 16,432,965 $ 6,621,027 =============================================== ADDITIONAL CASH FLOWS AND SUPPLEMENTARY INFORMATION Income tax paid, net of refunds $ 1,937,735 $ 2,227,750 $ 673,077 Interest paid 15,722,698 9,552,816 5,073,139 Other real estate transfers 58,757 57,920 Debt underwriting fees offset against debt proceeds 262,500
See notes to consolidated financial statements. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nature of Operations and Summary of Significant Accounting Policies The accounting and reporting policies of Fidelity Federal Bancorp ("Company") and its wholly-owned subsidiaries conform to generally accepted accounting principles and general 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. The Company is a registered savings and loan holding company. The Company's savings bank subsidiary, United Fidelity Bank, fsb ("Savings Bank") generates mortgage, consumer and commercial loans and receives deposits from customers located primarily in southern Indiana. The Company's loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Although the Company has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon general economic conditions. The Savings Bank is subject to regulation by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. The Savings Bank's wholly-owned subsidiaries, Village Management Corporation, Village Community Development Corporation and Village Housing Corporation (collectively, the "Affordable Housing Group"), are in the business of owning, developing, building, renting and managing affordable housing projects. The Savings Bank's other wholly-owned subsidiaries are Fidelity Federal Capital Corporation, which was established to be the real estate mortgage banking arm of the Company in the financing of real estate, including holding and placing debt and equity interests in real estate, and Village Insurance Corporation, which offers an array of insurance products. CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all material intercompany transactions and accounts. Certain prior year amounts have been reclassified to conform with current classifications. INVESTMENT SECURITIES AVAILABLE FOR SALE are carried at market. Realized gains and losses on sales are determined using the specific-identification method and are included in other income. Unrealized gains and losses are reported separately in stockholders' equity, net of tax. Premiums and discounts on all securities available-for-sale are amortized using a method approximating the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments for mortgage-backed securities. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REAL ESTATE LOANS HELD FOR SALE are carried at the lower of aggregate cost or market value. Net unrealized losses are recognized through a valuation allowance by charges to income. LOANS are carried at the principal amount outstanding. Interest income is accrued on the principal balances of loans. Loans are placed in a nonaccrual status when the collection of interest becomes doubtful. Interest income previously accrued but not deemed collectible is reversed and charged against current income. Interest on nonaccrual and impaired loans is then recognized as income when collected. Certain loan fees and related direct costs are being deferred and amortized over the lives of the loans as adjustments of yield on the loans. ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES are maintained to absorb potential losses based on management's continuing review and evaluation of the portfolios and its judgement 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 outstanding and real estate owned 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 is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Management believes that, as of June 30, 1996, the allowance for loan losses is adequate based on information currently available. A worsening or protracted economic decline in the area within which the Company operates would increase the likelihood 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. PENSION PLAN COSTS are based on actuarial computations and charged to current operations. The funding policy is to pay at least the minimum amounts required by ERISA. 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. The Company files consolidated income tax returns with its subsidiaries. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fee Income on real estate development and management in the consolidated statement of income is attributable to activities of the Company's subsidiaries involved in affordable housing projects. 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. Net income per share, primary and fully diluted, have been computed based on the weighted average common and common equivalent shares outstanding during each year. All share data included in the notes to consolidated financial statements has been adjusted for stock dividends and stock splits. 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. REORGANIZATION During fiscal 1994, the Company was organized as an Indiana corporation for the purpose of becoming a registered savings and loan holding company for the Savings Bank. The stockholders of the Savings Bank approved the merger of the Savings Bank into the Company as a wholly-owned subsidiary. The merger resulted in the conversion of 100 percent of Savings Bank stock into Company stock on the basis of one share of Company stock for each share of Savings Bank stock. The reorganization was accounted for in the same manner as if it were a pooling-of-interests and, accordingly, the Company's consolidated financial statements, prior to the effective date of the merger, include the accounts and operations of the Savings Bank and are restated as though the reorganization occurred on July 1, 1992. RESTRICTION ON CASH AND DUE FROM BANKS The Company is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at June 30, 1996 was $410,000. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) Investment Securities Available for sale
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value - ----------------------------------------------------------------------------- INVESTMENT SECURITIES AT JUNE 30, 1996 U. S. Treasury $ 503 $ 1 $ 504 Federal Agencies 4,500 $ (135) 4,365 Mortgage-backed securities 12,686 35 (132) 12,589 ------------------------------------------ $17,689 $ 36 $ (267) $17,458 ------------------------------------------ INVESTMENT SECURITIES AT JUNE 30, 1995 U. S. Treasury $ 514 $ 1 $ 515 Federal Agencies 3,993 22 $ (13) 4,002 Mortgage-backed securities 10,915 55 (84) 10,886 ------------------------------------------ $15,422 $ 78 $ (97) $15,403 ==========================================
The amortized cost and fair value of investment securities available for sale at June 30, 1996, by contractual maturity, are shown below:
Amortized Fair MATURITY DISTRIBUTION AT JUNE 30, 1996 Cost Value - ----------------------------------------------------------------------------- Within one year $ 503 $ 504 One to five years 4,000 3,872 Five to ten years 500 493 ------------------- 5,003 4,869 Mortgage-backed securities 12,686 12,589 ------------------- $17,689 $17,458 ===================
Proceeds from sales of investment securities available for sale during 1994 were $1,500,234. Gross gains of $234 were recognized during 1994. There were no sales of investment securities available for sale during 1996 and 1995. The mortgage-backed securities have various contractual maturities. The actual maturities of mortgage-backed securities will differ from contractual maturities because issuers may have the right to call or prepay the obligations, with or without call or prepayment penalties. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) Loans and Allowances
June 30 1996 1995 - ------------------------------------------------------------------------------ REAL ESTATE MORTGAGE LOANS First mortgage loans Conventional $106,288 $113,870 Construction 36,938 24,670 Commercial 18,267 7,133 Multifamily 15,420 26,147 First mortgage real estate loans purchased 7,612 4,921 Real estate contracts 56 101 Commercial loans - other than secured by real estate 9,393 6,414 Consumer loans 23,062 39,635 Loans to depositors secured by savings 185 209 -------------------- $217,221 $223,100 ====================
Included in multi-family loans are loans made to affordable housing developments totaling $9,782,000 and $22,624,000 at June 30, 1996 and 1995. An additional $7,476,000 in loans to affordable housing developments is included in construction loans at June 30, 1996.
Year Ended June 30 1996 1995 1994 - ----------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES Balances, beginning of year $ 713 $ 356 $ 236 Provision for loan losses 455 420 150 Loans charged off (140) (82) (47) Recoveries on loans 31 19 17 ------------------------------- Balances, end of year $1,059 $ 713 $ 356 ===============================
40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS)
Year Ended June 30 1996 1995 - ------------------------------------------------------------------ NON-PERFORMING LOANS Non-accruing loans $342 $ 47 Restructured loans 514 Loans contractually past due 90 days or more 43 23 --------------- $385 $584 ===============
Interest income of approximately $15,000, $74,000 and $96,000 in 1996, 1995 and 1994 was included in income on restructured and non-accrual loans. Additional interest income of approximately $9,000, $3,000 and $14,000 for 1996, 1995 and 1994 would have been recorded had income on nonaccruing and restructured loans been considered collectible and accounted for on the accrual basis under the original terms of the loans. 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. The amount of mortgage loans serviced by the Company for the benefit of others was approximately $58,854,000, $4,509,000 and $5,341,000 at June 30, 1996, 1995 and 1994. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheet. The Company and subsidiaries have entered into transactions with certain executive officers, limited partnerships in which the Company is an investor, and their affiliates or 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 was as follows:
Balances, July 1, 1995 $16,918 New loans, including renewals 551 Payments, etc., including renewals (8,712) -------- Balances, June 30, 1996 $ 8,757 ========
41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) Premises and Equipment
June 30 1996 1995 - ---------------------------------------------------------------------- Land $1,741 $1,340 Building and land improvements 4,648 3,483 Furniture, fixtures and equipment 1,818 1,605 ------------------- Total cost 8,207 6,428 Accumulated depreciation (2,648) (2,576) ------------------- Net $5,559 $3,852 ===================
Other Assets Included in other assets at June 30, 1996 and 1995 are investments of $3,478,000 and $1,794,000 in limited partnerships which are organized to build, own and operate apartment complexes. Of the $3,478,000, $1,311,000 represents the Company's 1% equity in sixteen limited partnerships (as general partner), $723,000 represents a 49.99% equity in one partnership (the Company is a 1% general partner and a 48.99% limited partner), $679,000 represents a 40% equity in one limited partnership (the Company is a 1% general partner and a 39% limited partner), $362,000 represents a 9.985% equity in one limited partnership, $238,000 represents a 9.99% equity in one limited partnership, and $165,000 represents a 99% equity in two limited partnerships (the Company is a limited partner). The Company records income on the equity method in the income and losses of the limited partnerships, which resulted in a $73,000 loss during 1996 compared to zero for 1995 and 1994. In addition to recording its equity in the losses of these projects, the Company has recorded the benefit of low-income housing tax credits of $229,000, $72,000 and $10,000 for the years ended June 30, 1996, 1995 and 1994. Combined condensed financial statements for the limited partnerships as of June 30, 1996 and 1995, and for the years ended June 30, 1996, 1995 and 1994 are as follows: 42 Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands)
June 30 1996 1995 - ---------------------------------------------------------------------------- Combined condensed balance sheet (unaudited) ASSETS Cash $ 635 $ 8,737 Construction in process 7,298 16,084 Land and property 49,238 14,691 Other assets 903 128 ------------------- Total assets $58,074 $39,640 =================== Liabilities Notes payable $39,890 $29,599 Other liabilities 1,537 565 ------------------- Total liabilities 41,427 30,164 Partners' equity 16,647 9,476 ------------------- Total liabilities and partners' equity $58,074 $39,640 ===================
Year Ended June 30 1996 1995 1994 - ----------------------------------------------------------------------------- Condensed statement of operations (unaudited) Total revenue $ 3,501 $ 712 $ 197 Total expenses 5,261 1,265 356 ------------------------------ Net loss $(1,760) $ (553) $(159) ==============================
43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) Of the notes payable, approximately $18,258,000 and $16,551,000 are due to the Company at June 30, 1996 and 1995. Included in land and property are development fees totaling approximately $4,440,000 and $4,370,000 at June 30, 1996 and 1995 and loan fees totaling approximately $31,000 and $657,000 for 1996 and 1995 paid to the Company. Included in other assets is interest receivable as follows:
June 30 1996 1995 - ----------------------------------------------------------------------- Interest receivable on loans $1,297 $1,172 Interest receivable on investments and other 189 166 ------------------ Total interest receivable $1,486 $1,338 ==================
Deposits
June 30 1996 1995 - ----------------------------------------------------------------------- Non-interest bearing transaction accounts $ 5,100 $ 3,211 Interest-bearing transaction accounts 19,987 4,975 Money market deposit accounts 5,364 6,053 Savings accounts 5,134 5,123 Certificates of $100,000 or more 45,926 63,129 Certificates of deposit and other time 100,191 98,280 --------------------- Total $181,702 $180,771 =====================
Included in the above amounts are agent-acquired certificates of deposit of $73,081,000 and $78,813,000 at June 30, 1996 and 1995. Certificates maturing in years ending June 30:
1997 $ 81,386 1998 37,156 1999 18,598 2000 7,893 2001 1,068 Thereafter 16 -------- $146,117 ========
44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) Borrowings
June 30 1996 1995 - ----------------------------------------------------------------------------------------- Note payable, 8%, adjusted annually, payable $16,943 per month, including interest, due April 1, 2009, secured by specific multi-family mortgages $ 2,266 $ 2,286 Note payable, 10% adjusted annually, payable $8,621 per month, including interest, due September 14, 2010, secured by specific multi-family mortgages 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 multi-family mortgages 1,552 Junior subordinated notes, 9 1/8%, interest paid semi- annually, due April 30, 2001, unsecured 1,485 1,500 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 ranging from 4% to 5%, interest paid monthly, secured by qualifying first mortgage loans in an amount equal to at least 120% of the amount outstanding, due at various dates during 1997 or on demand 5,564 9,192 Federal Home Loan Bank advances, due at various dates through 2003 (weighted average rates of 6.24% and 6.38% at June 30, 1996 and 1995) 42,474 52,413 Treasury tax and loan note option 129 105 ------------------- Totals $62,985 $73,996 ===================
45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) The terms of a security agreement with the FHLB require the Savings Bank 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 the first mortgage loans pledged, the Company had $4,500,000 in eligible securities pledged at June 30, 1996. The Company pledged only first mortgage loans during 1995. Some of the advances are subject to restrictions or penalties in the event of prepayment. The scheduled principal reduction of borrowings at June 30, 1996, is approximately as follows: 1997, $15,792; 1998, $8,683; 1999, $6,632; 2000, $9,355; 2001, $3,826; and 2002 and later, $18,697. Income Tax
Year Ended June 30 1996 1995 1994 - ------------------------------------------------------------------------------- Income tax expense Currently payable Federal $1,175 $1,214 $ 879 State 416 359 253 Deferred Federal 244 (47) (65) State 52 (11) (23) ------------------------------- Total income tax expense $1,887 $1,515 $1,044 =============================== Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 34% $1,741 $1,556 $ 893 State income tax, net of federal benefit 309 230 151 Affordable housing tax credits and other (177) (276) (9) Other, net 14 5 9 ------------------------------- Actual tax expense $1,887 $1,515 $1,044 ===============================
46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) A cumulative deferred tax asset of $197,000 and $409,000 is included in other assets at June 30, 1996 and 1995. The components of the asset are as follows at:
June 30 1996 1995 - ----------------------------------------------------------------------------------- Differences in accounting for certain accrued liabilities $ 21 $ 34 Differences in accounting for other real estate (13) (19) Differences in depreciation methods (23) 45 Differences in accounting for loan losses 341 229 Differences in accounting for loan fee income 87 166 Differences in accounting for loan sales (7) (12) Differences in basis of FHLB stock (66) (66) Unrealized gain/loss on investment securities available for sale 91 7 Basis differential on certain partnership interests (263) Other 29 25 --------------- $197 $409 =============== Assets $569 $506 Liabilities (372) (97) --------------- $197 $409 ===============
Retained earnings include approximately $1,870,000 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 or adjustments arising from carryback of net operating losses 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 amounts was approximately $635,000. Retained Earnings and Regulatory Matters The Financial Institutions Reform, Recovery and Enforcement Act of 1989 requires thrifts to maintain core capital and tangible capital of at least 3 and 1.5 percent, respectively, of adjusted total assets and risk-based capital of at least 8 percent of risk-weighted assets. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) The Savings Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate actions by the regulatory agencies that, if undertaken, could have a material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Savings Bank must meet specific capital guidelines that involve quantitative measures of the Savings Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Savings Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. At June 30, 1996, the Company believes that the Savings Bank meets all capital adequacy requirements to which it is subject and the most recent notification from the regulatory agency categorized the Savings Bank as well capitalized under the regulatory framework for prompt corrective action. The actual and required capital amounts of the Company's savings bank subsidiary are as follows:
1996 ----------------------------------------------------------- Required for To Be Well Actual Adequate Capital Capitalized - ---------------------------------------------------------------------------------------------------------- June 30 Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------- Total capital (1) (to risk weighted assets) Savings Bank $24,025 12.4% $15,561 8.0% $19,452 10.0% Tier I capital (1) (to risk weighted assets) Savings Bank $18,091 9.3% $ 7,781 4.0% $11,671 6.0% Tier I capital (1) (total assets) Savings Bank $18,091 7.1% $10,269 4.0% $12,836 5.0% (1) As defined by the regulatory agencies The Company's principal source of income and funds is dividends from its savings association banking subsidiary and is not subject to any regulatory restrictions on the payment of dividends to its stockholders. However, the Office of Thrift Supervision (OTS) regulations set restrictions on the amount of dividends the Company's savings bank subsidiary may pay. At June 30, 1996, total stockholders' equity of the banking subsidiary was $18,091,000, excluding the SFAS No. 115 adjustment, of which $6,042,000 was available for the payment of dividends without prior approval by the OTS. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OTS regulations provide that a savings association which meets fully phased-in capital requirements and is subject only to "normal supervision" may pay out, as a dividend, 100 percent of net income to date over the calendar year and 50 percent surplus capital existing at the beginning of the calendar year without supervisory approval, but with 30 days prior notice to the OTS. Any additional amount of capital distributions would require prior regulatory approval. A savings association meeting current minimum capital requirements but not fully phased-in standards, may, with 30 days prior notice but without prior approval, distribute up to 75 percent of net income if it meets the risk based requirement on January 1, 1993. A savings association failing to meet current capital standards may only pay dividends with supervisory approval. STOCKHOLDERS' EQUITY Stockholders' equity has been adjusted to record the twenty percent stock dividend declared May 18, 1994 and distributed on July 15, 1994, and the 2.1-for-1 stock split declared on March 20, 1995 and paid on April 14, 1995 and the 10% stock dividend declared on April 24, 1996 and distributed on May 27, 1996. All share data has been adjusted to reflect the stock dividends. In connection with the Company's first debt and equity rights offering completed April 30, 1994, the Company 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 June 30, 1996, a total of 49,860 of the shares originally reserved had been issued and 365,640 remained reserved and unissued. In connection with the Company's second debt and equity offering completed on January 31, 1995, the Company 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 June 30, 1996, a total of 38,115 of the shares originally reserved had been issued and 308,385 remained reserved and unissued. COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, there are outstanding commitments and contingent liabilities, such as commitments to extend credit, which are not included in the accompanying consolidated financial statements. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making such commitments as it does for on-balance sheet instruments. At June 30, 1996 and 1995, commitments to extend credit, which represent financial instruments whose contract amount represents credit risk, were $17,599,000 and $14,338,000. The Company has issued standby letters of credit on affordable housing developments in which one of the Company's subsidiaries is involved. The letters of credit secure tax exempt bond issues of limited partnerships in which one of the Company's subsidiaries owns a 1% general partner interest. The amount outstanding on the letters of credit at June 30, 1996 and 1995 is $16,572,000 and $17,351,000. 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company has also issued standby letters of credit on affordable housing developments in which the borrowers are not affiliated with the Company. The letters of credit secure tax-exempt bond issues of limited partnerships. The amount outstanding on the letters of credit at June 30, 1996 and 1995 is $20,136,000 and $5,431,000. 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. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company 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. The Company, in its role as general partner on various affordable housing developments through its subsidiaries, is committed to advance amounts in certain circumstances to limited partnerships. These commitments potentially include short-term loans to the limited partners or an increase in the general partner's equity investment in limited cases. The Company also has standby letters of credit to guarantee the performance of a customer to a third party. The amount outstanding on the letter of credit at June 30, 1996 and 1995 is $785,000 and $295,000. BENEFIT PLANS The Company 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, 1995, the date of the latest actuarial valuation. No pension expense was recorded in 1996, 1995 or 1994. Due to the Internal Revenue Service's full funding limit, contributions to the plan have not been required since June, 1987. This plan provides pension benefits for substantially all of the Company's employees. In 1994, the Company adopted a retirement savings Section 401(k) plan in which substantially all employees may participate. The Company matches employees' contributions at the rate of 25 percent up to 6 percent of the participant's salary. The Company expense for the plan was $27,000, $17,000 and $9,000 for 1996, 1995 and 1994. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) The Company has an incentive stock option plan in which 42,403 common shares have been reserved for issuance under the plan at June 30, 1996. The option exercise price will not be less than the fair market value of the common stock on the date of the grant of the option. The date on which the options are first exercisable is determined by the Board of Directors, and the terms of the stock options will not exceed ten years from the date of grant. At June 30, 1996, there were 29,643 options available for grant. A summary of the stock options activity for the plan is as follows: INCENTIVE STOCK OPTION PLAN
June 30 1996 1995 1994 - ------------------------------------------------------------------------- SHARES UNDER OPTION Outstanding at beginning of year 36,451 67,871 61,883 Granted during the year 6,930 6,930 12,474 Exercised during the year 30,621 32,528 6,486 Canceled options 5,822 Outstanding at end of year 12,760 36,451 67,871 Exercisable at end of year 8,602 36,451 53,735 WEIGHTED OPTION PRICE PER SHARE Exercisable $10.33 $4.35 $2.45 Exercised 3.92 2.31 2.60 Granted 14.32 8.45 5.83
In August, 1993, the Board of Directors of the Company 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 the Company, or any of its subsidiaries. The Directors' Plan provides for the grant of non-qualified stock options to acquire shares of common stock of the Company 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 the Company 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. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) On May 18, 1994, options for 39,916 shares each were granted to two directors. On February 15, 1995, options for 6,930 shares were granted to an additional director. All options are exercisable immediately. At June 30, 1996, there were 147,017 options available for grant. A summary of the stock options activity for the plan is as follows: DIRECTORS' PLAN
June 30 1996 1995 1994 - -------------------------------------------------------------------- SHARES UNDER OPTION Outstanding at beginning of year 86,762 79,832 Granted during the year 6,930 79,832 Outstanding at end of year 86,762 86,762 79,832 Exercisable at end of year 86,762 86,762 79,832 WEIGHTED OPTION PRICE PER SHARE Exercisable $6.50 $6.50 $6.22 Granted 9.74 6.22
The Board of Directors of the Company adopted and approved the 1995 Key Employees' Stock Option Plan (1995 Plan) of the Company on March 15, 1995, subject to stockholder approval, which occurred on October 18, 1995. At that time, 80,850 shares were granted retroactively to March 15, 1995. The 1995 Plan provides for the granting of either incentive stock options (ISOs) pursuant to Section 422A of the Internal Revenue Code (Code) of 1986, as amended, or stock options which do not qualify as incentive stock options (NSOs), or any combination thereof. Options may be granted to key employees and officers of the Company and its subsidiaries. The option price per share for ISOs will be not 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% or more of the common stock of the Company will be not less than 110% of the fair market value of a share on the date the option is granted. The option price per share for NSOs will be determined by the compensation committee, but may not be less than 100% 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. 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) On March 15, 1995, options for 80,850 were granted to three key employees. All options were 20% vested on the date of the grant, with an additional 20% vesting on January 1 for each additional year. At June 30, 1996, there were 155,650 options available for grant. A summary of the stock options activity for the 1995 Plan is as follows: 1995 KEY EMPLOYEES' STOCK OPTION PLAN
June 30 1996 1995 - ---------------------------------------------------------------- Outstanding at beginning of year 80,850 Granted during the year 80,850 Outstanding at end of year 80,850 80,850 Exercisable at end of year 32,340 16,170 Weighted option price per share Exercisable $10.51 $10.51 Granted 10.51
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation, which requires a fair value based method of accounting for stock options granted after December 31, 1994. The statement is effective for fiscal years beginning after December 15, 1995. The statement allows the Company to continue to account for these plans according to Accounting Principles Board Opinion No. 25, provided pro forma disclosures are made using the fair value based method. The Company anticipates continuing the current practice and will provide pro forma disclosures as required in the 1997 annual report. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair Values 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 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. LONG-TERM DEBT The fair value of these borrowings are 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. 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) 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 such 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 these commitments, which are immaterial, are reasonable estimates of the fair value of these financial instruments. The estimated fair values of the Savings Bank's financial instruments are as follows:
1996 --------------------- Carrying Fair June 30 Amount Value - ------------------------------------------------------------------------ Assets Cash and cash equivalents $ 10,213 $ 10,213 Interest-bearing deposits 5 5 Investment securities available-for-sale 17,458 17,458 Loans including loans held for sale, net 216,162 216,720 Interest receivable 1,486 1,486 FHLB Stock 3,920 3,920 Liabilities Deposits 181,702 182,043 Short-term borrowings 5,693 5,693 Long-term debt 57,292 57,621 Interest payable 749 749
55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) Condensed Financial Information (Parent Company Only) Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company: CONDENSED BALANCE SHEET
June 30 1996 1995 - ------------------------------------------------------------------------------ ASSETS Cash on deposit $ 160 $ 293 Bank certificates of deposit 5 5 Investment in subsidiaries 17,992 16,624 Loans, net 5,341 4,032 Subordinated debentures and other loan receivables from subsidiaries 5,933 4,875 Other assets 699 1,095 --------------------- Total assets $30,130 $26,924 ===================== LIABILITIES Long-term debt $15,317 $14,047 Other liabilities 518 471 --------------------- Total liabilities 15,835 14,518 --------------------- Stockholders' Equity Common stock 2,495 2,163 Capital surplus 8,785 5,395 Stock warrants 266 299 Retained earnings, substantially restricted 2,889 4,560 Net unrealized loss on securities available-for-sale (140) (11) --------------------- Total stockholders' equity 14,295 12,406 --------------------- Total liabilities and stockholders' equity $30,130 $26,924 =====================
56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) CONDENSED STATEMENT OF INCOME
Year Ended June 30 1996 1995 1994 - ----------------------------------------------------------------------------------- INCOME Dividends from subsidiaries $2,200 $ 742 $ 400 Interest income 978 442 Other income 234 189 65 -------------------------------- Total income 3,412 1,373 465 -------------------------------- EXPENSE Interest expense 1,364 527 52 Other expenses 611 336 120 -------------------------------- Total expense 1,975 863 172 -------------------------------- INCOME BEFORE INCOME TAX AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 1,437 510 293 INCOME TAX BENEFIT (302) (92) (46) -------------------------------- INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 1,739 602 339 EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 1,496 2,459 1,244 -------------------------------- NET INCOME $3,235 $3,061 $1,583 ================================
57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) CONDENSED STATEMENT OF CASH FLOWS
Year Ended June 30 1996 1995 1994 - ------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 3,235 $ 3,061 $1,582 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 4 34 12 Undistributed net income of subsidiaries (1,496) (2,459) (1,244) Increase in other assets 392 (618) (260) Increase in other liabilities (183) 172 29 -------------------------------- Net cash provided by operating activities 1,952 190 119 -------------------------------- INVESTING ACTIVITIES (Increase) decrease in interest-bearing deposits in other banks 5 (10) Capital contributions to subsidiaries (4,485) Advance on note to subsidiary (1,058) (4,875) Net increase in loans (1,309) (1,455) (2,577) -------------------------------- Net cash used by investing activities (2,367) (10,810) (2,587) -------------------------------- FINANCING ACTIVITIES Payment of long-term debt (28) (5) Proceeds from issuance of long-term debt 1,270 9,847 3,970 Proceeds from exercise of stock options 109 75 14 Proceeds from exercise of stock warrants 632 19 Payment of cash dividends (1,729) (626) (236) Proceeds from issuance of stock warrants 150 150 -------------------------------- Net cash provided by financing activities 282 9,437 3,893 -------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (133) (1,183) 1,425 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 293 1,476 51 -------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 160 $ 293 $1,476 ================================
58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) BUSINESS SEGMENT INFORMATION The Company operates principally in two industries, banking and real estate development and management. Through the Savings Bank, the Company offers traditional banking products, such as checking, savings and certificates of deposit, as well as mortgage, commercial and consumer loans. Through the Affordable Housing Group, all wholly-owned subsidiaries of the Savings Bank, the Company is involved in various aspects of developing, building, renting and managing affordable housing units. Operating profit is total revenue less operating expenses. In computing operating profit, incomes taxes have been deducted. Identifiable assets are principally those used in each segment. Real estate development and management activities conducted by the Company are not asset intensive. Presented below is condensed financial information relating to the Company's business segments:
June 30 1996 1995 1994 - ----------------------------------------------------------------------------- REVENUE Banking $ 25,190 $ 16,788 $ 8,984 Real estate development and management 4,519 4,383 2,183 --------------------------------- $ 29,709 $ 21,171 $ 11,167 ================================= OPERATING PROFIT Banking $ 1,416 $ 1,032 $ 543 Real estate development and management 1,819 2,029 1,040 --------------------------------- $ 3,235 $ 3,061 $ 1,583 ================================= IDENTIFIABLE ASSETS Banking $250,466 $261,121 $149,672 Real estate development and management 11,750 8,317 2,516 --------------------------------- $262,216 $269,438 $152,188 ================================= DEPRECIATION AND AMORTIZATION Banking $ 282 $ 232 $ 167 Real estate development and management 77 44 9 --------------------------------- $ 359 $ 276 $ 176 ================================= CAPITAL EXPENDITURES Banking $ 1,569 $ 1,118 $ 210 Real estate development and management 809 435 212 --------------------------------- $ 2,378 $ 1,553 $ 422 =================================
59 CORPORATE INFORMATION FIDELITY FEDERAL BANCORP BOARD OF DIRECTORS CURT J. ANGERMEIER Attorney Director, United Fidelity Bank, fsb WILLIAM R. BAUGH Chairman Emeritus, Fidelity Federal Bancorp Director, United Fidelity Bank, fsb Retired President, United Fidelity Bank, fsb BRUCE A. CORDINGLEY Chairman, Fidelity Federal Bancorp Chairman and Director, United Fidelity Bank, fsb Chairman, Fidelity Federal Capital Corporation Director and Officer, The Village Companies President, Pedcor Investments Director, Evansville Brewing Company Director, Flagship Bank, fsb (San Diego, CA) Director, International City Bank, n.a. (Long Beach, CA) JACK CUNNINGHAM Vice-Chairman and Secretary, Fidelity Federal Bancorp Director, United Fidelity Bank, fsb Director and Officer, The Village Companies Vice President and Director, Fidelity Federal Capital Corporation Past President, United Fidelity Bank, fsb Port of Evansville Wharfmaster M. BRIAN DAVIS President and Chief Operating Officer, Fidelity Federal Bancorp Vice Chairman and Director, United Fidelity Bank, fsb Vice-Chairman and Director, Fidelity Federal Capital Corporation Director and Officer, The Village Companies President, Southern Investment Corporation Director, Evansville Brewing Company ROBERT F. DOERTER Director, United Fidelity Bank, fsb Retired President, United Fidelity Bank, fsb MARK S. MATTINGLY Attorney and CPA President and Chief Executive Officer, Evansville Brewing Company Director, United Fidelity Bank, fsb Director, General Waste Management Corporation DAVID L. MARAMAN President and Chief Executive Officer, United Fidelity Bank, fsb Director, United Fidelity Bank, fsb Secretary, United Fidelity Bank, fsb BARRY A. SCHNAKENBURG President, U.S. Industries Group, Inc. President, Barry Inc. Director, United Fidelity Bank, fsb Director, Fidelity Federal Capital Corporation Director and Officer, Village Insurance Corporation 60 CORPORATE INFORMATION FIDELITY FEDERAL BANCORP - OFFICERS Bruce A. Cordingley Chairman of the Board Jack Cunningham Vice-Chairman of the Board and Secretary M. Brian Davis President and Chief Operating Officer Donald R. Neel, CPA Senior Vice President, Chief Financial Officer and Treasurer Mark A. Isaac Vice President, Controller Deborah H. Gorman Assistant Vice President, Human Resources Jane A. Nunez, CPA Assistant Vice President, Internal Auditor Anthony W. Freels Shareholder Relations Officer UNITED FIDELITY BANK, FSB - OFFICERS Bruce A. Cordingley Chairman of the Board M. Brian Davis Vice Chairman of the Board David L. Maraman President, Chief Executive Officer, and Secretary Kirby W. King Senior Vice President, Consumer Loans Michael S. Sutton, CPA Senior Vice President, Commercial Banking Roger C. Baugh Vice President, Special Services Lisa C. Frank, CPA Vice President, Chief Financial Officer and Treasurer Vickie L. Jeffries Vice President, Branch Administration Wayne M. Jones Vice President, Mortgage Banking Richard A. Klein Vice President, Mortgage Origination Donald H. Schenk Vice President, Branch Manager Patricia R. Cummins Assistant Vice President, Mortgage Banking Thomas H. Ford Assistant Vice President, Mortgage Banking Patricia L. Griffin Assistant Vice President, Mortgage Origination Jamie R. Hagan Assistant Vice President, Marketing Maria D. Harris Assistant Vice President, Mortgage Banking Dale Holt Assistant Vice President, Consumer Loans Steven A. Knight Assistant Vice President, Operations Barbara A. Luckett Assistant Vice President, Branch Manager Deborah S. Reich Assistant Vice President, Branch Manager Christopher A. Viton Assistant Vice President, Consumer Loans Beverly A. Winternheimer Assistant Vice President, Branch Manager Richard S. Witte Assistant Vice President, Operations 61 CORPORATE INFORMATION FIDELITY FEDERAL CAPITAL CORPORATION - OFFICERS Bruce A. Cordingley Chairman of the Board M. Brian Davis Vice Chairman of the Board Theresa P. Bennett President and Chief Executive Officer David G. Bennett Vice President Jack Cunningham Vice President Michael E. Gaither, CPA Vice President and Chief Financial Officer Terry G. Johnston Vice President Duane D. Reindl Vice President Donald R. Neel, CPA Treasurer Michelle M. Milbourne Assistant Vice President and Secretary VILLAGE SECURITIES CORPORATION - OFFICERS Bruce A. Cordingley Chairman of the Board M. Brian Davis President and Chief Executive Officer Donald R. Neel, CPA Senior Vice President and Treasurer Darren R. Flener Vice President Mark A. Isaac Secretary VILLAGE INSURANCE CORPORATION - OFFICERS Jack Cunningham Chairman of the Board M. Brian Davis President and Chief Executive Officer Barry A. Schnakenburg Executive Vice President and Chief Operating Officer Roger C. Baugh Vice President Donald R. Neel, CPA Treasurer Kirby W. King Secretary VILLAGE HOUSING CORPORATION - OFFICERS Jack Cunningham Chairman of the Board Bruce A. Cordingley President and Chief Executive Officer M. Brian Davis Executive Vice President Theresa P. Bennett Senior Vice President David G. Bennett Vice President Michael E. Gaither, CPA Vice President and Chief Financial Officer Duane D. Reindl Vice President Donald R. Neel, CPA Treasurer Michelle M. Milbourne Secretary 62 CORPORATE INFORMATION VILLAGE MANAGEMENT CORPORATION - OFFICERS Jack Cunningham Chairman of the Board M. Brian Davis President and Chief Executive Officer Christine M. Marshall Executive Vice President Morgan B. Fulton Senior Vice President, Area Manager Bruce A. Cordingley Vice President Bradley E. Parker Vice President, Commercial Real Estate Rhonda J. Wagner Vice President, Area Manager Sarah A. Lentz, CPM Vice President John A. Stewart Assistant Vice President, Compliance Michael E. Gaither, CPA Vice President and Chief Financial Officer Donald R. Neel, CPA Treasurer Mark A. Isaac Secretary Donald J. Fuchs, Esq Vice President, Village Title Company VILLAGE COMMUNITY DEVELOPMENT CORPORATION - OFFICERS Jack Cunningham Chairman of the Board Bruce A. Cordingley President and Chief Executive Officer M. Brian Davis Executive Vice President Theresa P. Bennett Senior Vice President David G. Bennett Vice President Michael E. Gaither, CPA Vice President and Chief Financial Officer Duane D. Reindl Vice President Terry G. Johnston Vice President Donald R. Neel, CPA Treasurer Michelle M. Milbourne Assistant Vice President and Secretary 63 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. STOCK TRANSFERS, DIVIDEND PAYMENTS OR DIVIDEND REINVESTMENT Fidelity Federal Bancorp Attn: Shareholder Services 18 N.W. Fourth St. PO Box 1347 Evansville, IN 47706-1347 Fidelity Federal Bancorp offers its Common 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: Donald R. Neel, Senior Vice-President CFO and Treasurer Fidelity Federal Bancorp 18 N.W. Fourth St. PO Box 1347 Evansville, IN 47706-1347 1-800-280-8280, ext. 310 All other requests, including requests for the Annual Report, Form 10-K, Form 10-Q, etc. should be directed to: Anthony W. Freels Fidelity Federal Bancorp 18 N.W. Fourth St. PO Box 1347 Evansville, IN 47706-1347 1-800-280-8280, ext. 312 INTERNET Information on Fidelity Federal Bancorp is available on the Internet at: http://www.ufb-ffed.com COMMON STOCK INFORMATION NASDAQ National Market System Ticker Symbol: FFED DIVIDEND CALENDAR Dividends on common shares, if approved by the Board of Directors, are anticipated to be paid to shareholders RECORD DATES September 2, 1996, December 2, 1996, March 3, 1997, June 2, 1997 PAYMENT DATES October 7, 1996, January 6, 1997, April 7, 1997, July 7, 1997 PRODUCTS AND SERVICES For specific information on products and services offered by the Company's banking subsidiary, United Fidelity Bank, fsb, call 1-800-280-8280 or (812) 424-0921. For specific information on any of Fidelity Federal Bancorp's multifamily housing projects, contact Village Management Corporation at (812) 471-1661. CORPORATE HEADQUARTERS Fidelity Federal Bancorp's Corporate headquarters: Fidelity Federal Bancorp 18 N.W. Fourth St. PO Box 1347 Evansville, IN 47706-1347 1-800-280-8280 (812) 424-0921 Effective November 1, 1996: Fidelity Federal Bancorp 700 S. Green River Road, Suite 2000 Evansville, IN 47715 1-800-280-8280 (812) 469-2100 Annual Meeting The annual meeting of shareholders will be held on Wednesday, October 16, 1996, at Fidelity Federal Bancorp's Corporate headquarters at 11:00 a.m. (Central Daylight Time). 64 EX-21 5 EXHIBIT 21 SUBSIDIARIES OF FIDELITY FEDERAL BANCORP Name Jurisdiction of Incorporation - ---- ----------------------------- Fidelity Federal Bancorp: United Fidelity Bank, fsb Indiana Village Securities Corporation Indiana Also included are the subsidiaries of United Fidelity Bank, fsb: Indiana Village Insurance Corporation Indiana Village Housing Corporation Indiana Village Community Development Corporation Indiana Village Management Corporation Indiana Fidelity Federal Capital Corporation Indiana EX-27 6
9 Fidelity Federal Bancorp's consilidated balance sheet as of June 30, 1996 and the consolidated statement of income for the year ended June 30, 1996. 1,000 YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 1,112 4,107 5,000 0 17,458 0 0 217,221 (1,059) 262,216 181,702 5,693 3,234 57,292 2,495 0 0 11,800 262,216 19,949 1,295 285 21,529 10,550 15,525 6,004 455 0 8,607 5,122 5,122 0 0 3,235 1.17 1.17 2.29 342 43 0 0 713 140 31 1,059 1,059 0 0
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