-----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, R4sQ5oIJTthNINskoC4tUSh/dGnJpYkluTS5crVd2RYYvUehfVWkZxkrmfaJGxrS /tBZ7KM1QF++E4dnISEWPg== 0000926274-97-000123.txt : 19970922 0000926274-97-000123.hdr.sgml : 19970922 ACCESSION NUMBER: 0000926274-97-000123 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970919 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: SEC FILE NUMBER: 000-22880 FILM NUMBER: 97683222 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, 1997 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) 700 S. Green River Road, Suite 2000, PO Box 5584, Evansville, Indiana 47715 ---------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's Telephone number, including area code (812) 469-2100 -------------- 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 1997 Annual Report to Stockholders for the year ended June 30, 1997 are incorporated by reference into Part II. Portions of the Registrant's Proxy Statement dated September 15, 1997, for the Annual Meeting of Stockholders to be held October 15, 1997 are incorporated by reference into Part III. Exhibit index is on page 17 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 1, 1997 was approximately $15,255,000. Indicated below is the number of shares outstanding of each of the registrant's classes of common stock as of September 1, 1997. Common Stock - 2,487,382 shares FIDELITY FEDERAL BANCORP Index PART I Page ---- ITEM 1 - Business 3 ITEM 2 - Properties 12 ITEM 3 - Legal Proceedings 13 ITEM 4 - Submission of Matters to a Vote of Security Holders 13 PART II ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters 13 ITEM 6 - Selected Financial Data 13 ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 13 ITEM 8 - Financial Statements and Supplementary Data 13 Consolidated Balance Sheet 13 Consolidated Statement of Income 13 Consolidated Statement of Stockholders' Equity 13 Consolidated Statement of Cash Flows 13 Notes to Consolidated Financial Statements 13 Report of Independent Auditors 13 ITEM 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 13 PART III ITEM 10 - Directors and Executive Officers of the Registrant 14 ITEM 11 - Executive Compensation 14 ITEM 12 - Security Ownership of Certain Beneficial Owners and Management 14 ITEM 13 - Certain Relationships and Related Transactions 14 PART IV ITEM 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 15 SIGNATURES 16 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. To conserve capital, the Company slowed its growth in fiscal 1996 and positioned the Company to reduce debt, increase core deposits, sell loans and use the proceeds to fund new loan production. During fiscal 1996 the Company encountered increasing competition in the affordable housing group activities. As a result the Company reevaluated its business plan in fiscal 1997 and closed its Indianapolis, Indiana real estate development office. This process was completed in the fourth quarter of fiscal 1997. Due to the above, Village Community Development Corporation, though operational in Evansville, has reduced its activities significantly. Due to the increased competition in the affordable housing segment mentioned above and a change in the business plan, the Company initiated a cost reduction program in the third quarter of fiscal 1997 which was completed early in the fourth quarter. The cost reduction program called for the Company to work toward achieving optimum efficiency within its banking and real estate management, development, and financing units by eliminating duplicative and less profitable activities. The Company has succeeded in achieving after tax cost savings of approximately $0.44 per share, through departmental reorganization, reconsolidation, position attrition and 'right-sizing' of operations within all the subsidiaries. The Company's business plan includes the search for new financing niches both in and outside the housing arena, increasing the profitability of the core banking activity and to increase 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 loans, multi-family loans, commercial loans, and mortgage loans, primarily owner occupied one-to-four family homes located in Indiana, and in investment and money market securities. 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, Village Capital Corporation (formerly known as 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. 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. Village Capital Corporation ("VCC") has packaged loan requests for developers of multifamily residential real estate projects eligible for federal tax credits and tax exempt financing. While most of the loans packaged to date have been referred to the Savings 3 Bank for origination, VCC also packages loan transactions for other lenders, if the opportunity arises. VCC has earned fees by providing real estate mortgage banking and consulting services to unaffiliated borrowers. 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. 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, was dormant in fiscal 1996, but began operations in July 1997. The Company had consolidated total assets of $240.0 million and total shareholder's equity of $12.9 million as of June 30, 1997. The Company's subsidiaries at June 30, 1997, are listed below:
PRINCIPAL YEAR ASSETS SUBSIDIARY OFFICE ORGANIZED (in thousands) - ------------------------------------------------------------------------------------------------ 1. United Fidelity Bank, fsb Evansville, IN 1914 $233,874 Subsidiaries of United Fidelity Bank, fsb: Village Capital Corporation Evansville, IN 1994 1,254 Village Insurance Corporation Evansville, IN 1980 56 Village Management Corporation Evansville, IN 1992 321 Village Community Development Corporation Evansville, IN 1992 4,700 Village Housing Corporation Evansville, IN 1992 6,798 2. Village Securities Corporation Evansville, IN 1994 79
The Company's home office is located at 700 S. Green River Road, Suite 2000, Evansville, Indiana, 47715 and its telephone number is (812) 469-2100. The Company has reviewed future accounting pronouncements and anticipates no significant impact on the Company's financials. 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, 1997, approximately 5 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 4 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. The competition for 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 the Affordable Housing Group began seeing a reduction in the fees charged for their service, in order to remain competitive in the market. This increased competition continued into fiscal 1997, resulting in the Company to reevaluate its business plan in fiscal 1997 and close its Indianapolis, Indiana development office. This was completed in the fourth quarter of 1997. The Company's business plan is to continue searching 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 association 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 association or holding company thereof which is not a subsidiary of such savings and loan 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 association, other than a subsidiary association, or any other savings and loan holding company. 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 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 association, 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 association meets the QTL test, the activities of the Company and any of its subsidiaries (other than the Savings Bank or other subsidiary savings associations) would thereafter be subject to further restrictions. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings association shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity other than (i) furnishing or performing management services for a subsidiary savings association, 5 (ii) conducting an insurance agency or escrow business, (iii) holding, managing or liquidating assets owned by or acquired from a subsidiary savings association, (iv) holding or managing properties used or occupied by a subsidiary savings association, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by regulation as of March 5, 1987, to be engaged in by multiple savings and loan holding companies, or (vii) those activities authorized by regulation of the 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 associations in more than one state, if the multiple savings and loan holding company involved controls a savings association which operated a home or branch office in the state of the association to be acquired as of March 5, 1987, or if the laws of the state in which the association to be acquired is located specifically permit associations to be acquired by state-chartered associations or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings associations). The Director of the OTS may also approve an acquisition resulting in a multiple savings and loan holding company controlling savings associations in more than one state in the case of certain emergency thrift acquisitions. Indiana law permits federal and state savings association holding companies with their home offices located outside of Indiana to acquire savings associations whose home offices are located in Indiana and savings and loan holding companies with their principal place of business in Indiana ("Indiana Savings and Loan Holding Companies") upon receipt of approval by the Indiana Department of Financial Institutions. Moreover, Indiana Savings and Loan Holding Companies may acquire savings associations with their home offices located outside of Indiana and savings association holding companies with their principal place of business located outside of Indiana upon receipt of approval by the Indiana Department of Financial Institutions. Subject to certain exceptions, commonly controlled banks and savings associations must reimburse the Federal Deposit Insurance Corporation ("FDIC") for any losses suffered in connection with a failed bank or savings association affiliate. Institutions are commonly controlled if one is owned by another or if both are owned by the same holding company. Such claims by the FDIC under this provision are subordinate to claims of depositors, secured creditors, and holders of subordinated debt, other than affiliates. SAVINGS BANK REGULATION General. As a federally chartered, SAIF-insured savings association, the Savings Bank is subject to extensive regulation by the OTS and the FDIC. The OTS periodically examines the books and records of the Savings Bank and, in conjunction with the FDIC in certain situations, has examination and enforcement powers. This supervision and regulation are intended primarily for the protection of depositors and federal deposit insurance funds. The Savings Bank is also subject to federal and state regulation as to such matters as loans to officers, directors, or principal shareholders, required reserves, limitations as to the nature and amount of its loans and investments, regulatory approval of any merger or consolidation, issuance or retirements of its securities, and limitations upon other aspects of banking operations. In addition, its activities and operations are subject to a number of additional detailed, complex and sometimes overlapping federal and state laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining legislation and antitrust laws. The United States Congress is considering legislation that would require all federal savings associations, such as the Savings Bank, to either convert to a national bank or a state-chartered bank by a specified date to be determined. In addition, under the legislation, the Company likely would not be regulated as a savings and loan holding company but rather as a bank holding company. This proposed legislation would abolish the OTS and transfer its functions among the other federal banking regulators. Certain aspects of the legislation remain to be 6 resolved and, therefore, no assurance can be given as to whether or in what form the legislation will be enacted or its effect on the Company and the Savings Bank. Any changes in legislation or regulations, whether by legislation or regulatory action, could have a material impact on the Savings Bank and its operations. Neither the 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. Qualified Thrift Lender Requirement. In order for the Savings Bank to exercise the powers granted to federally-chartered savings associations and maintain full access to FHLB advances, it must be a "qualified thrift lender" ("QTL"). A savings association is a QTL if its qualified thrift investments equal or exceed 65% of the savings association's portfolio assets on a monthly basis in 9 out of every 12 months. Qualified thrift investments generally consist of (i) various housing related loans and investments (such as residential construction and mortgage loans, home improvement loans, manufactured housing loans, home equity loans and mortgage-backed securities), (ii) certain obligations of the FSLIC, the FDIC, the FSLIC Resolution Fund and the Resolution Trust Corporation (for limited periods), and (iii) shares of stock issued by any Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association. At June 30, 1997, the qualified thrift investment percentage test for the Savings Bank was 84.2%. Liquidity. Under applicable federal regulations, savings associations are required to maintain an average daily balance of liquid assets (including cash, certain time deposits, certain banker's acceptances, certain corporate debt securities and highly rated commercial paper, securities of certain mutual funds and specified United States government, state or federal agency obligations) of not less than 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 associations. A savings association 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, 1997, the Savings Bank was in compliance with these liquidity requirements. Loans-to-One-Borrower Limitations. HOLA generally requires savings associations to comply with the loans-to-one-borrower limitations applicable to national banks. In general, national banks may make loans to one borrower in amounts up to 15% 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, 1997, the Savings Bank's loan-to-one-borrower limitation was approximately $3.4 million and no loans to a single borrower exceeded that amount, except as provided herein. Under certain OTS regulations, a savings association may make loans to one borrower for residential housing developments in amounts up to 30% of the bank's unimpaired capital and surplus provided that all loans made in reliance upon the increased lending limit do not, in the aggregate, exceed 150% of the bank's unimpaired capital and surplus. At June 30, 1997, the Savings Bank had made $24.2 million in such loans under this higher lending limit. Commercial Real Property Loans. HOLA limits the aggregate amount of commercial real estate loans that a federal savings association may make to an amount not in excess of 400% of the savings association's capital. Limitation on Capital Distributions. The OTS regulations impose limitations on capital distributions by savings associations. Under the rule, a savings association is classified as a tier 1 institution, a tier 2 institution, or a tier 3 institution, depending on its level of regulatory capital both before and after giving effect to a proposed capital distribution. A tier 1 institution may generally make capital distributions in any calendar year up to 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (i.e., the percentage by which the association's capital-to-assets ratio exceeds the ratio of its capital requirements to its assets) at the beginning of the calendar year. No regulatory approval of the capital distribution is required, but prior notice must be given to the OTS. Restrictions exist on the ability of tier 2 and tier 3 institutions to make capital distributions. For purposes of this regulation, the Savings Bank is a tier 1 institution. 7 INSURANCE OF DEPOSITS. Deposit Insurance. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the Bank Insurance Fund (the "BIF") for commercial banks and state savings banks and the SAIF for savings associations such as the Savings Bank. The FDIC is required to maintain designated levels of reserves in each fund. Assessments. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and members of the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to the target level within a reasonable time and may decrease these rates if the target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary depending on the risk the institution poses to its deposit insurance fund. An institution's risk level is determined based on its capital level and the FDIC's level of supervisory concern about the institution. On September 30, 1996, President Clinton signed into law legislation which included provisions designed to recapitalize the SAIF and eliminate the significant premium disparity between the BIF and the SAIF. Under the new law, the Savings Banks was charged a one-time special assessment equal to $.657 per $100 in assessable deposits at March 31, 1995. The Savings Bank recognized this one-time assessment as a non-recurring operating expense of $1,040,000 ($628,000 after tax) during the three-month period ending September 30, 1996, and paid this assessment on November 27, 1996. The assessment was fully deductible for both federal and state income tax purposes. Beginning January 1, 1997, the Savings Bank's annual deposit insurance premium was reduced from .23% to .0644% of total assessable deposits. BIF institutions pay lower assessments than comparable SAIF institutions because BIF institutions pay only 20% of the rate being paid by SAIF institutions on their deposits with respect to obligations issued by the federally-chartered corporation which provided some of the financing to resolve the thrift crisis in the 1980's ("FICO"). The 1996 law also provides for the merger of the SAIF and the BIF by 1999, but not until such time as bank and thrift charters are combined. Until the charters are combined, savings associations with SAIF deposits may not transfer deposits into the BIF system without paying various exit and entrance fees, and SAIF institutions will continue to pay higher FICO assessments. Such exit and entrance fees need not be paid if a SAIF institution converts to a bank charter or merges with a bank, as long as the resulting bank continues to pay applicable insurance assessments to the SAIF, and as long as certain other conditions are met. 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 association'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 certain restrictions on payment of rates. Undercapitalized institutions are not permitted to accept brokered deposits and may not solicit deposits by offering an effective yield that significantly exceeds the prevailing effective yields on insured deposits of comparable maturity in the institution's normal market area or in which such deposits are being solicited. Enforcement. The OTS has primary enforcement responsibility over savings associations and has the authority to bring enforcement action against all "institution-affiliated parties," including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Civil penalties cover a wide range of violations and actions and range up to $25,000 8 per day unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. In addition, regulators are provided with far greater flexibility to impose enforcement action on an institution that fails to comply with its regulatory requirements, particularly with respect to the capital requirements. Possible enforcement action ranges from the 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. In 1995 the federal banking agencies prescribed for all insured depository institutions safety and soundness standards in the form of guidelines, relating to internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset quality and growth, earnings, and compensation, fees and benefits. If an insured depository institution fails to meet any of the standards described above, it will be required to submit to the appropriate federal banking agency a plan specifying the steps that will be taken to cure the deficiency. If an institution fails to submit an acceptable plan or fails to implement the plan, the appropriate federal banking agency will require the institution to comply with the restrictions applicable under the prompt corrective action provisions of the Federal Deposit Insurance Act. Real Estate Lending Standards. OTS regulations require savings associations to establish and maintain written internal real estate lending policies. Each association's lending policies must be consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its operations. The policies must establish loan portfolio diversification standards; establish prudent underwriting standards, including loan-to-value limits, that are clear and measurable; establish loan administration procedures for the association's real estate portfolio; and establish documentation, approval, and reporting requirements to monitor compliance with the association's real estate lending policies. The association's written real estate lending policies must be reviewed and approved by the association's Board of Directors at least annually. Further, each association is expected to monitor conditions in its real estate market to ensure that its lending policies continue to be appropriate for current market conditions. Prompt Corrective Regulatory Action. The Federal Deposit Insurance Act ("FDI Act") establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the banking regulators are required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of capitalization. Generally, subject to narrow exceptions, the FDI Act requires the banking regulator 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 association 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 association that has a total risk-based capital of less than 6.0%, a tier 1 risk-based capital ratio of less than 3%, or a leverage ratio that is less than 3.0% is considered to be "significantly undercapitalized" and a savings association that has a tangible capital to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized." Generally, a capital restoration plan must be filed with the OTS within 45 days of the date an association receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." In addition, numerous mandatory supervisory actions become immediately applicable to the associations, including, but not limited to, restrictions on growth, investment activities, capital distributions, and affiliate transactions. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Capital Requirements. The Director of the OTS has adopted capital standards under which savings associations must maintain (i) "core capital" in an amount not less than 3% of total adjusted assets, (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. 9 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 association's capital was or may become inadequate in view of its particular circumstances. Individual minimum capital requirements may be appropriate where the savings association is receiving special supervisory attention, has a high degree of exposure to interest rate risk, or poses other safety or soundness concerns. In determining compliance with the risk-based capital requirements, a savings association must determine its interest rate risk and, if such risk exceeds a certain level, it must deduct an interest rate risk component in calculating its total capital for purposes of determining whether it meets its risk-based capital requirements. An association's interest rate risk (IRR) is measured by the decline in the net portfolio value (NPV) resulting from a 200 basis point increase or decrease in market interest rates, divided by the estimated economic value of its assets. If an association's measured IRR exposure exceeds 2%, it must then deduct an IRR component from total capital for determining its risk-based capital requirement. The IRR component is an amount equal to one-half the difference between its measured interest rate risk and 2%, multiplied by the estimated economic value of its total assets. The Savings Bank's Subsidiaries. The OTS regulations permit federal savings associations to invest in the capital stock, obligations or specified types of securities of subsidiaries (referred to as "service corporations") and to make loans to such subsidiaries and joint ventures in which such subsidiaries are participants in an aggregate amount not exceeding 3% of an association's assets, provided any investment over 2% is used for specified community or inner-city development purposes. In addition, federal regulations permit associations to make specified types of loans to such subsidiaries, in which the association owns more than 10% of the stock, in an aggregate amount not exceeding 50% of the association's regulatory capital if the association's investment is in compliance with applicable loans-to-one- borrower regulations. A savings association which acquires a non-savings association subsidiary, or which elects to conduct a new activity within a subsidiary, must give 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 associations are required by OTS regulation to pay assessments to the OTS to fund the operations of the OTS. The general assessment is computed upon the savings association's total assets, including consolidated subsidiaries, as reported in the Saving Bank's latest quarterly Thrift Financial Report. The Savings Bank's total assessment for the year ended June 30, 1997 was $73,000. 10 ACQUISITIONS AND BRANCHING The Bank Holding Company Act specifically authorizes a bank holding company, upon receipt of appropriate regulatory approvals, to acquire control of any savings association or holding company thereof wherever located. Similarly, a savings and loan holding company may acquire control of a bank. Moreover, federal savings associations may acquire or be acquired by any insured depository institution. Regulations promulgated by the Federal Reserve Board restrict the branching authority of savings associations acquired by bank holding companies. Savings associations acquired by bank holding companies may be converted to banks if they continue to pay SAIF premiums, but as such they become subject to branching and activity restrictions applicable to banks. The OTS has adopted regulations which permit nationwide branching to the extent permitted by federal statute. Federal statutes permit federal savings associations to branch outside of their home state if the association meets the domestic building and loan test in Section 7701(a)(19) of the Internal Revenue Code or the asset composition test of Section 7701(c) of the Internal Revenue Code. Branching that would result in the formation of a multiple savings and loan holding company controlling savings associations in more than one state is permitted if the law of the state in which the savings association to be acquired is located specifically authorizes acquisitions of its state-chartered associations by state-chartered associations or their holding companies in the state where the acquiring association or holding company is located. Moreover, Indiana banks and savings associations are permitted to acquire other Indiana banks and savings associations and to establish branches throughout Indiana. Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in other states and, with state consent and subject to certain limitations, allows banks to acquire out-of-state branches either through merger or de novo expansion. The State of Indiana enacted legislation establishing interstate branching provisions for Indiana state-chartered banks consistent with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law authorizes Indiana banks to branch interstate by merger or de novo expansion, provided that such transactions are not permitted to out-of-state banks unless the laws of their home states permit Indiana banks to merge or establish de novo banks on a reciprocal basis. The Indiana Branching Law became effective March 15, 1996. TRANSACTIONS WITH AFFILIATES Pursuant to HOLA, transactions engaged in by a savings association or one of its subsidiaries with affiliates of the savings association generally are subject to the affiliate transaction restrictions contained in Sections 23A and 23B of the Federal Reserve Act in the same manner and to the same extent as such restrictions now apply to transactions engaged in by a member bank or one of its subsidiaries with affiliates of the member bank. Section 23A of the Federal Reserve Act imposes both quantitative and qualitative restrictions on transactions engaged in by a member bank or one of its subsidiaries with an affiliate, while Section 23B of the Federal Reserve Act requires, among other things, that all transactions with affiliates be on terms substantially the same, and at least as favorable to the member bank or its subsidiary, as the terms that would apply to or would be offered in a comparable transaction with an unaffiliated party. Section 22(h) of the Federal Reserve Act imposes restrictions on loans to executive officers, directors, and principal shareholders. Further, the Federal Reserve Board pursuant to Section 22(h) requires that loans to directors, executive officers, and principal shareholders be made on terms substantially the same as offered in comparable transactions to other persons. The Savings Bank was in compliance with these rules at June 30, 1997. 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 associations. 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, 1997, the Savings Bank was in compliance with this requirement. 11 PERSONNEL As of June 30, 1997 the Company had 103 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, 1997. The Savings Bank currently has no plans to sell or close any existing branches. Year Facility Net Office Location Opened Book Value - --------------- ------------- ---------- Home Office 1974 $1,799,000 18 NW Fourth Street Evansville, IN 47708 Eastside Branch 1971 2,411,000 700 S. Green River Rd Evansville, IN 47715 Northside Branch 1976 220,000 4441 First Avenue Evansville, IN 47710 Westside Branch 1979 200,000 4801 W. Lloyd Expressway Evansville, IN 47712 The Company and the other non-bank subsidiaries use the premises of the Savings Bank's Home office and 2nd floor of the Eastside Branch, for its office and equipment needs and pays rental fees for such use. (This space intentionally left blank) 12 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, 1997. 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" is included in the 1997 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 1997 Annual Report to Stockholders on page 11 and is incorporated herein by reference. Additional information relating to stockholder matters can be found under the heading "Corporate Information" included in the 1997 Annual Report to Stockholders on page 54 and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA - ------- Selected Financial and Other Data included in the 1997 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 1997 Annual Report to Stockholders on pages 7 through 25 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 26 through 53 of the 1997 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- FINANCIAL DISCLOSURES No response to this item is required. 13 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 7, and under the heading "Security Ownership Reporting" on page 19, (up to but exclusive of the information presented under the caption "Ratification of the appointment of Auditors of the Company", and "Shareholders Proposals"), of the Company's definitive proxy statement dated September 15, 1997, 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 17 (up to but exclusive of the information presented under the caption "Security Ownership of Management" on page 17) of the Company's definitive proxy statement dated September 15, 1997, 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 caption "Proxies" on page 4), and under the heading "Security Ownership of Management" on pages 17 through 19 (up to but exclusive of the information presented under the caption "Security Ownership Reporting" on page 19), of the definitive proxy statement dated September 15, 1997 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 (up to but exclusive of the information presented under the captions "Board Meetings", and "Board Committees"), of the Company's definitive proxy statement dated September 15, 1997 as filed with the Securities and Exchange Commission pursuant to Regulation 14A. (This space intentionally left blank) 14 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 26 Consolidated Balance Sheet June 30, 1997 and 1996 27 Consolidated Statement of Income - For the years ended June 30, 1997, 1996, and 1995 28 and 29 Consolidated Statement of Changes in Stockholders' Equity - For the years ended June 30, 1997, 1996, and 1995 30 Consolidated Statement of Cash Flows - For the years ended June 30, 1997, 1996, and 1995 31 and 32 Notes to Consolidated Financial Statements 33 through 53 (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, filed as exhibit 10(c) to the Company's 1996 Annual Report on Form 10-K, is incorporated herein by reference. 11 Statement regarding computation of per share earnings. 13 1997 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. 15 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 17th day of September, 1997. FIDELITY FEDERAL BANCORP Registrant By /S/ M. BRIAN DAVIS ----------------------------------- M. Brian Davis President and Chief Executive Officer (Principal Executive Officer) By /S/ DONALD R. NEEL ----------------------------------- Donald R. Neel, Executive Vice President, Treasurer and Chief Financial Officer (Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on September 17, 1997, 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 Executive 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/ BARRY A. SCHNAKENBURG -------------------------------------- Barry A. Schnakenburg, Director By /S/ JACK CUNNINGHAM -------------------------------------- Jack Cunningham, Attorney-in-fact 16 INDEX TO EXHIBITS ----------------- Page Exhibit Number Exhibit - ------------------------------------------------------------------------------ 11 Statement regarding computation of per share earnings. 13 1997 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. 17 EX-11 2 FIDELITY FEDERAL BANCORP EARNINGS PER SHARE COMPUTATION Exhibit 11
Fiscal years ending June 30 1997 1996 1995 - ------------------------------------------------------------------------------------ PRIMARY: Net income $ 113,468 $3,234,909 $3,061,141 ======================================== Average common shares outstanding 2,491,078 2,453,275 2,360,586 Common stock equivalents - stock options 26,869 51,359 47,618 Common stock equivalents - warrants 137,234 271,513 90,688 ---------------------------------------- Total average common and common equivalent shares outstanding 2,655,181 2,776,147 2,498,891 ======================================== PRIMARY EARNINGS PER SHARE $ 0.04 $ 1.17 $ 1.23 ======================================== FULLY DILUTED: Net income $ 113,468 $3,234,909 $3,061,141 ======================================== Average common shares outstanding 2,491,078 2,453,275 2,360,586 Common stock equivalents - stock options 26,869 51,359 69,589 Common stock equivalents - warrants 137,234 271,513 204,256 ---------------------------------------- Total average common and common equivalent shares outstanding 2,655,181 2,776,147 2,634,431 ======================================== FULLY DILUTED EARNINGS PER SHARE $ 0.04 $ 1.17 $ 1.16 ========================================
EX-13 3 Fidelity Federal Bancorp 1997 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 Page 7-25 Independent Auditor's Report Page 26 Consolidated Balance Sheet Page 27 Consolidated Statement of Income Page 28-29 Consolidated Statement of Changes in Stockholders' Equity Page 30 Consolidated Statement of Cash Flows Page 31-32 Notes to the Consolidated Financial Statements Page 33-53 Corporate Information Page 54-56 1 Financial Highlights Fidelity Federal Bancorp and Subsidiaries (Dollars in Thousands, except share and per share data) PER SHARE 1997 1996 CHANGE - ---------------------------------------------------------------------------- Fully diluted net income $0.04 $1.17 (96.6)% Primary net income 0.04 1.17 (96.6)% Cash dividends declared 0.60 0.79 (24.1)% Book value at year-end 5.20 5.73 (9.2)% Market price (bid) at year-end 8.75 11.25 (22.2)% FOR THE YEAR - ---------------------------------------------------------------------------- Net interest income $6,451 $6,004 7.4% Provision for loan losses 975 455 114.3 Non-interest income 3,856 8,180 (52.9) Non-interest expense 9,474 8,607 10.1 Net income 113 3,235 (96.5) AT YEAR-END - ---------------------------------------------------------------------------- Total assets $240,001 $262,216 (8.5)% Total loans 204,964 217,221 (5.6) Total deposits 181,787 181,702 0.0 Total stockholders' equity 12,936 14,295 (9.5) AVERAGES - ---------------------------------------------------------------------------- Total assets $254,130 $274,837 (7.5)% Total earning assets 238,438 261,924 (9.0) Total loans 213,793 226,874 (5.8) Total deposits 183,706 184,105 (0.2) Total stockholders' equity 13,596 13,618 (0.2) PROFITABILITY RATIOS - ---------------------------------------------------------------------------- Return on average assets 0.04% 1.18% Return on average stockholders' equity 0.83 23.75 Net interest margin 2.72 2.29 LOAN QUALITY RATIOS - ---------------------------------------------------------------------------- Net charge-offs to average loans 0.12% 0.05% Allowance for loan losses to loans at end of period 0.87 0.49 Allowance for loan losses to non-performing loans 624.91 275.06 SAVINGS BANK CAPITAL RATIOS - ---------------------------------------------------------------------------- Tangible equity to assets at end of period 6.93% 7.05% Risk-based capital ratios: Tier 1 capital 7.64 9.30 Total capital 10.74 12.35 OTHER DATA - ---------------------------------------------------------------------------- Average common and common equivalent shares outstanding 2,655,181 2,776,147 Number of full-time equivalent employees at year-end 103 133 Number of banking offices 4 4 Note: All per share and average share data have been adjusted to reflect the 10 percent stock dividend distributed May 27, 1996. 2 Letter to Stockholders Fidelity Federal Bancorp and Subsidiaries Fiscal 1997 was in many respects a watershed year for the Company. First, the Board of Directors, after analyzing the competitive environment, implemented a strategic change in our business plan. Because of the increasing competition in the affordable housing industry, management determined to reduce the Company's dependence on fee income generated by the affordable housing segment of our business. As a result, the Bank has increased the percentage of higher-yielding consumer and commercial loans in its loan portfolio. In addition, in Fiscal 1997 management has generated additional fee income by offering the development, consulting and financing skills of its affordable housing group to developers throughout the Midwest. This business niche has thus far exceeded management's income projections by over 400 percent. We believe that this segment of our business will continue to contribute significantly in Fiscal 1998. In the third and fourth fiscal quarters the Company began and completed a cost reduction program. We anticipate that this will result in an annual profit enhancement of an estimated $0.44 per share on an after-tax basis. These cost savings are largely due to staff reductions realized by the closing of our Indianapolis operation and the "right-sizing" of the Bank. As a result of this program, approximately 20 percent of the overall staff positions were eliminated. I would like to take this opportunity to thank our employees for their hard work and sacrifices in these somewhat tumultuous times. Village Securities Corporation, our deep discount stock and bond brokerage subsidiary, also became operational in July of this year. We certainly hope you will consider "Village" for your next security trade. Although we were not satisfied with 1997 profits, it is important to realize that earnings were impacted during our first fiscal quarter by a one-time special assessment of over $1 million imposed to recapitalize the Savings Association Insurance Fund. Management believes, however, that the intermediate and long-term cost savings of this charge will exceed the one-time, $1 million assessment. Because the annual deposit insurance premium paid by the Bank has been reduced as a result of the assessment, management anticipates an annual savings on deposit insurance premiums in excess of $300,000. If realized, this would result in a pay-back period of approximately 3.4 years. In addition, the Bank increased its loan loss allowance due to the increased percentage of consumer and commercial loans in its loan portfolio. The special assessment, coupled with declining fee income and the increase of the loan loss allowance strained our capital reserves, thus necessitating the dividend reduction made in the third fiscal quarter. Management is optimistic that Fiscal 1998 will be a prosperous one for your company. What has made this company a top performer in years past, in addition to its high level of customer service, has been its capability to explore niche markets and be entrepreneurial in nature. We feel that this will continue to be the case. I personally wish to thank those of you who have continued to show support through the past year. I am confident that your support will be rewarded. Cordially Yours, /s/ M. Brian Davis M. Brian Davis President and Chief Executive Officer 3 MARKET SUMMARY FIDELITY FEDERAL BANCORP AND SUBSIDIARIES 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.
- ----------------------------------------------------------------------------------------------------------------- FISCAL YEAR COMMON STOCK FISCAL YEAR COMMON STOCK ENDED BID PRICES ENDED BID PRICES JUNE 30, 1997 HIGH LOW JUNE 30, 1996 HIGH LOW First Quarter $11-1/4 $10-1/4 First Quarter $12-3/4 $10-7/8 Second Quarter 10-1/2 8-3/4 Second Quarter 13-5/8 10-1/2 Third Quarter 9-3/8 8-1/4 Third Quarter 13-5/8 10-7/8 Fourth Quarter 8-3/4 7-1/2 Fourth Quarter 12-1/4 11-1/4 - -----------------------------------------------------------------------------------------------------------------
The recent bid and ask prices on August 31, 1997, were $8-3/8 and $9-1/4 respectively. The Company declared dividends of $0.60 per share during fiscal 1997 compared to $0.79 per share for fiscal 1996 and $0.33 per share in fiscal 1995. 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. The Company has undergone several changes in the past year and has revised its business plan during fiscal 1997, discussed further in Management's Discussion and Analysis. As a result the Company reduced its dividend rate in the third quarter from $0.20 per share to $0.10 per share to enhance capital growth. 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, 1993. The following data has not been restated for the stock dividends or split. - ------------------------------------------------------------------------ CLOSING MARKET TOTAL PRICE (BID) SHARES AT YEAR MARKET DATE STOCK CHANGES OWNED END VALUE - ------------------------------------------------------------------------ 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 $3,116.00 06/30/97 277 $ 8.25 $2,285.25 - ------------------------------------------------------------------------ In addition, this stockholder would have received $488.70 in cash dividends during the period shown. The approximate number of holders of outstanding Common Stock based upon holders of record, as of August 27, 1997 is 450. 4 SELECTED STATISTICAL INFORMATION FIDELITY FEDERAL BANCORP AND SUBSIDIARIES (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED FINANCIAL DATA AS OF JUNE 30: 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------ Total assets $240,001 $262,216 $269,438 $152,188 $108,375 Interest-bearing deposits 1,765 4,107 6,549 6,254 2,619 Investment securities available for sale 13,790 17,459 15,404 14,465 19,329 Loans (net) 203,183 216,162 222,387 123,176 79,599 Deposits 181,787 181,702 180,771 89,038 74,373 Short-term borrowings 5,191 5,693 9,297 1,835 Long-term debt 38,089 57,292 64,699 49,854 24,266 Stockholders' equity 12,936 14,295 12,405 9,775 8,520 SELECTED OPERATIONS DATA FOR THE YEAR ENDED JUNE 30: - ------------------------------------------------------------------------------------------------------------------------ Interest income $20,282 $21,529 $15,794 $8,710 $7,196 Interest expense 13,831 15,525 10,263 5,171 4,729 ------------------------------------------------------------------------- Net interest income 6,451 6,004 5,531 3,539 2,467 Provision for loan losses 975 455 420 150 130 ------------------------------------------------------------------------- Net interest income after provision for loan losses 5,476 5,549 5,111 3,389 2,337 Non-interest income 3,856 8,180 5,377 2,457 537 Non-interest expense 9,474 8,607 5,912 3,220 2,301 ------------------------------------------------------------------------- Income before income tax (142) 5,122 4,576 2,626 573 Income tax (255) 1,887 1,515 1,044 228 Cumulative effect of change in accounting method 78 ------------------------------------------------------------------------- Net income $ 113 $ 3,235 $ 3,061 $1,582 $ 423 ========================================================================= SELECTED FINANCIAL RATIOS - ------------------------------------------------------------------------------------------------------------------------ Return on average assets 0.04% 1.18% 1.54% 1.30% 0.43% Return on stockholders' equity 0.83 23.75 27.52 17.20 6.38 Net interest margin 2.72 2.29 2.87 3.02 2.60 Net interest spread 2.57 2.11 2.59 2.67 2.38 Tangible equity to assets at year-end 6.93 7.08 6.02 6.43 7.86 Allowance for loan losses to loans 0.87 0.49 0.32 0.29 0.30 Allowance for loan losses to non-performing loans 624.91 275.06 122.09 37.79 22.52 Dividend payout ratio 1,500.00 67.52 28.45 17.91 38.46 PER SHARE DATA - ------------------------------------------------------------------------------------------------------------------------ Fully diluted net income $0.04 $1.17 $1.16 $0.67 $0.26 Primary net income 0.04 1.17 1.23 0.67 0.26 Cash dividends declared 0.60 0.79 0.33 0.12 0.10 Book value at year-end 5.20 5.73 5.21 4.17 3.64 Closing market price (bid) at year-end 8.75 11.25 10.88 5.41 2.89 Number of average common and common equivalent shares outstanding 2,655,181 2,776,147 2,634,431 2,369,161 1,638,945
Note: All per share and average share data have been adjusted to reflect the 10% stock dividend distributed on May 27, 1996. 5 MANAGEMENT'S REPORT FIDELITY FEDERAL BANCORP AND SUBSIDIARIES 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 consolidated financial statements of the Company have been audited by Geo. S. Olive & Co. LLC, independent certified public accountants. These audits were conducted in accordance with generally accepted auditing standards and included a review of the financial controls and such other procedures and tests of the accounting records as they deemed necessary to express an opinion on the fairness of the consolidated 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 Executive Officer Executive Vice President, Chief Financial Officer and Treasurer 6 MANAGEMENT'S DISCUSSION AND ANALYSIS FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF 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 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 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 increased dramatically and significant asset growth was achieved, also resulting in higher revenues. To conserve capital the Company slowed its growth rate in fiscal 1996 and positioned the Company to reduce debt, increase core deposits, sell loans, and use the proceeds to fund new loan production. During fiscal 1996 the Company encountered increasing competition in the affordable housing group activities. As a result the Company reevaluated its business plan in fiscal 1997 and closed its Indianapolis, Indiana development office. This process was completed in the fourth quarter of fiscal 1997. Due to the above, Village Community Development Corporation, though operational in Evansville, has reduced its activities significantly. Village Capital Corporation (formerly known as Fidelity Federal Capital Corporation) continues to receive consulting fees for its services in assisting unaffiliated borrowers obtain financing. Village Housing Corporation and Village Management Corporation continue to be fully operational at the Company's headquarters in Evansville. The Company's results for fiscal 1997 were significantly impacted during the first quarter by the FDIC insurance funding bill signed by President Clinton in September, 1996, which required thrifts to pay a one-time assessment of approximately $0.66 per $100 of deposits. As a result, the Company recorded a charge of $1.04 million in September 1996. The legislation's provisions include a reduction of the ongoing insurance premiums thrifts pay from $0.23 - 0.31 per $100 of deposits to approximately $0.06 per $100, as well as the ultimate merger of the funds by the year 2000. In anticipation of this and as a result of continued consolidation and standardization of the bank and thrift industries, the Company, in an ongoing effort to more closely resemble a commercial banking operation, increased its provision for loan loss allowance significantly, compared to prior years. Due to the increased competition in the affordable housing segment mentioned above and a change in the business plan, the Company initiated a cost reduction program in the third quarter of fiscal 1997 which was completed early in the fourth quarter. The cost reduction program called for the Company to work toward achieving optimum efficiency within its banking and real estate management, development, and financing units by eliminating duplicative and less profitable activities. The Company has succeeded in achieving after tax cost savings of approximately $0.44 per share, through departmental reorganization, reconsolidation, position attrition and "right-sizing" of operations within all the subsidiaries. The Company's business plan includes the search for new financing niches both in and outside the housing arena, increasing the profitability of the core banking activity and to increase earnings in each business segment. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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, and in investment and money market securities. 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 has structured and participated 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. 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. 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 partner's equity investment has been received or the syndication firm providing the equity has given a firm commitment to provide the funds. As mentioned previously, Village Community Development Corporation has reduced its activities significantly. As part of Village Management's duties as project manager, it monitors compliance with the requirements of the Code to prevent recapture of all or a portion of the tax credits or forfeiture of the tax-exempt status of the bonds which would occur if certain tenant eligibility and rent restriction requirements were violated. Village Management Corporation, as manager of the completed project, receives a fee based on a percentage of rental payments received from the project's tenants. The Company has been engaged in affordable housing activities since September 1992, through the Savings Bank, and since April 1994, through Village Capital Corporation ("VCC"), formerly known as Fidelity Federal Capital Corporation ("FFCC"). Since June 30, 1994, VCC has earned fees by providing real estate mortgage banking and consulting services to unaffiliated borrowers. 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, 1997, 1996, and 1995. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
- ------------------------------------------------------------------------------------------------------------------------------------ AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS 1997 1996 1995 AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE YEAR ENDED JUNE 30 BALANCES INTEREST RATES BALANCES INTEREST RATES BALANCES INTEREST RATES - ------------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands) ASSETS Federal funds sold $ 3,594 $ 194 5.40% $ 3,768 $ 196 5.20% $ 1,808 $ 91 5.03% Investment securities available for sale: Taxable 16,168 1,033 6.39 16,528 1,099 6.65 14,125 857 6.07 Tax exempt (1) 963 85 8.83 Loans held for sale 11,140 877 7.87 Federal Home Loan Bank Stock 3,920 307 7.83 3,614 286 7.91 2,620 187 7.14 Loans(2)(3) Commercial loans 11,695 1,154 9.87 9,720 1,022 10.51 6,817 689 10.11 Multifamily loans 22,768 2,374 10.43 28,804 3,049 10.59 15,799 2,494 15.79 Real estate mortgages 155,527 12,919 8.31 155,300 12,011 7.73 121,158 8,997 7.43 Consumer loans 23,803 2,245 9.43 33,050 2,990 9.05 30,206 2,479 8.21 --------------------------------------------------------------------------------------- Total loans 213,793 18,692 8.74 226,874 19,072 8.41 173,980 14,659 8.43 Total earning assets 238,438 20,311 8.52% 261,924 21,530 8.22% 192,533 15,794 8.20% Less: Allowance for loan losses 1,664 833 482 Cash and due from banks 2,386 2,012 1,034 Premises and equipment 6,145 4,345 3,009 Other assets 8,825 7,389 3,000 --------------------------------------------------------------------------------------- Total assets $254,130 $274,837 $199,094 ======================================================================================= LIABILITIES Interest-bearing deposits Interest-bearing checking $ 20,585 $ 868 4.22% $ 10,092 $ 398 3.94% $ 4,916 $ 115 2.34% Money market accounts 3,890 106 2.72 6,066 180 2.97 6,600 200 3.03 Savings accounts 4,793 139 2.90 5,346 155 2.90 5,795 161 2.78 Certificates of deposit 148,754 8,887 5.97 158,703 9,817 6.19 102,651 5,950 5.80 --------------------------------------------------------------------------------------- Total interest-bearing deposits 178,022 10,000 5.62 180,207 10,550 5.85 119,962 6,426 5.36 Federal funds purchased 1,810 102 5.64 2,301 136 5.91 4,115 244 5.93 Other borrowings 19,664 1,616 8.22 17,523 1,397 7.97 12,759 691 5.42 Federal Home Loan Bank advances 33,136 2,113 6.38 54,116 3,443 6.36 46,018 2,902 6.31 --------------------------------------------------------------------------------------- Total interest-bearing liabilities 232,632 13,831 5.95% 254,147 15,526 6.11% 182,854 10,263 5.61% Non-interest bearing demand deposits 5,684 3,898 3,158 Advances by borrowers for taxes and insurance 798 930 600 Other liabilities 1,420 2,244 1,360 --------------------------------------------------------------------------------------- Total liabilities 240,534 261,219 187,972 Stockholders' equity 13,596 13,618 11,122 --------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $254,130 $274,837 $199,094 --------------------------------------------------------------------------------------- Recap: (4) Interest income $20,282 8.52% $21,529 8.22% $15,794 8.20% Interest expense 13,831 5.80 15,525 5.93 10,263 5.33 --------------------------------------------------------------------------------------- Net interest income/margin $ 6,451 2.72% $ 6,004 2.29% $ 5,531 2.87% =======================================================================================
(1) Tax exempt securities have been adjusted to a fully tax equivalent basis using a marginal tax rate of 34%. (2) Nonaccrual loans have been included in the average balances. (3) Loan income includes interest and fees on loans. (4) Average rates have been computed by dividing by total earning assets. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income, 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 $6.5 million or 7.4% in 1997 from $6.0 million in 1996. Net interest income increased by 8.6% in 1996 compared to $5.5 million in 1995. One of the Company's goals for fiscal 1997 was to improve the net interest margin. The Company positioned itself during the latter part of fiscal 1996 by selling over $57.0 million of fixed-rate mortgage loans. This has provided the Company with the flexibility of allowing agent-acquired funds to mature or rollover at the prevailing rate, thus creating a favorable impact on the net interest margin. The net interest margin increased from 2.29% at June 30, 1996 to 2.72% at June 30, 1997. The Company has been innovative in offering selected retail products to enhance the core deposit base. Increased loan yields positively impacted the margin as well. The average yield on interest earning assets increased to 8.52% from 8.22% at June 30, 1996. The average yield on interest bearing liabilities decreased to 5.95% at June 30, 1997. The loan portfolio accounted for the majority of the increased yield on earning assets. New NOW accounts, certificates of deposit, and the reduction of agent-acquired deposits were the primary reasons for the decreased yield on interest bearing liabilities. Interest income for the year ended June 30, 1997, was $20.3 million compared to $21.5 million for the year ended June 30, 1996, a decrease of $1.2 million or about 5.9%. The Company took the opportunity to replace the sold loans with higher yielding commercial, commercial real estate, and multi-family loan assets which had a favorable impact on the margin. Interest expense for the year ended June 30, 1997 decreased $1.7 million or 10.9%. Approximately $1.3 million of the decrease for fiscal 1997 is related to a reduction in Federal Home Loan Bank advances. Deposit interest expense decreased by approximately $550,000 due to reductions in brokered deposits, but was offset by growth in retail deposits, which also favorably impacted the margin, due to brokered deposits usually bearing a higher rate of interest than retail deposits. 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 deposit, 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 $57.0 million 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 $21.5 million compared to $15.8 million for the year ended June 30, 1995, an increase of $5.7 million 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 $52.9 million or 30.4% over June 30, 1995. Of the $5.7 million increase in interest income for fiscal 1996, interest on loans contributed $4.4 million. Interest expense for the year ended June 30, 1996 increased $5.3 million over the corresponding period in 1995. Approximately $3.3 million of the increase for fiscal 1996, is related to deposit growth. This is the result of an increase of $60.2 million 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 $1.1 million to $5.0 million. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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. - -------------------------------------------------------------------------- 1997 SEPT 30 DEC 31 MAR 31 JUNE 30 - -------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Interest income $ 5,152 $5,137 $4,935 $5,058 Interest expense 3,574 3,510 3,400 3,347 ---------------------------------- Net interest income 1,578 1,627 1,535 1,711 Provision for loan losses 850 5 60 60 Non-interest income 608 1,237 1,209 803 Non-interest expense 3,283 2,155 1,963 2,074 ---------------------------------- Income before income taxes (1,947) 704 721 380 Income taxes (702) 189 192 66 ---------------------------------- Net income $(1,245) $ 515 $ 529 $ 314 ================================== Net income per share: Fully diluted net income per share $ (0.46) $ 0.19 $ 0.20 $ 0.12 Primary net income per share $ (0.46) $ 0.19 $ 0.20 $ 0.12 Cash dividend 0.20 $ 0.20 $ 0.10 $ 0.10 1996 SEPT 30 DEC 31 MAR 31 JUNE 30 - -------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 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 ================================== Net income per share: Fully diluted net income per share $ 0.42 $ 0.33 $ 0.20 $ 0.22 Primary net income per share $ 0.42 $ 0.33 $ 0.20 $ 0.22 Cash dividend $ 0.14 $ 0.23 $ 0.23 $ 0.20 RATE/VOLUME ANALYSIS. The following table sets forth on a fully taxable equivalent basis 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). Also, 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. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
1997 COMPARED TO 1996 1996 COMPARED TO 1995 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 $(1,100) $720 $ (380) $4,456 $ (44) $4,412 Investment securities available for sale (24) 43 19 146 96 242 Loans held for sale (877) (877) 877 877 Federal Home Loan Bank stock 24 (3) 21 71 28 99 Federal funds sold (9) 7 (2) 99 6 105 --------------------------------------------------- Total interest income from earning assets (1,986) 767 (1,219) 4,772 963 5,735 --------------------------------------------------- Interest expense on average interest-bearing liabilities: Now accounts 414 56 470 121 162 283 Money market deposits accounts (65) (9) (74) (16) (4) (20) Passbook savings accounts (16) (16) (12) 6 (6) Certificates of deposit (615) (315) (930) 3,248 618 3,866 Federal funds purchased (29) (5) (34) (108) (108) Other borrowings 171 48 219 258 448 706 Federal Home Loan Bank advances (1,335) 5 (1,330) 511 30 541 --------------------------------------------------- Total interest expense on interest- bearing liabilities (1,475) (220) (1,695) 4,002 1,260 5,262 --------------------------------------------------- Changes in net interest income $ (511) $987 $ 476 $ 770 $ (297) $ 473 =================================================== - -------------------------------------------------------------------------------------------------------
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 $975,000 for the year ended June 30, 1997, compared to $455,000 for June 30, 1996, and $420,000 for June 30, 1995. The ratio of the allowance for loan losses to non-performing loans was 624.9% at June 30, 1997, 275.1% at June 30, 1996, and 122.1% at June 30, 1995. The increase in the provision was primarily due to the growth and change in the composition of the portfolio, which includes higher levels of commercial, commercial real estate, and multifamily loans than in prior years. As mentioned earlier, the Company increased its provision for loan loss allowance significantly, compared to prior year, in an effort to more closely resemble a commercial banking operation. NON-INTEREST INCOME. Non-interest income decreased by $4.3 million or 52.8% for the year ended June 30, 1997, compared to an increase in 1996, of $2.8 million or 52.1% from 1995. The following table summarizes non-interest income for the three years ending June 30: 12 MANAGEMENT'S DISCUSSION AND ANALYSIS FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
NON-INTEREST INCOME - --------------------------------------------------------------------------------------------------- (dollars in thousands) CHANGE FROM PRIOR YEAR AMOUNT 1997 1996 1997 1996 1995 AMOUNT PERCENT AMOUNT PERCENT ------ ------ ------ -------- ------- ------ ------- Fee income from real estate development and management $ 758 $4,440 $4,370 $(3,682) (82.9)% $ 70 1.6% Service charges on deposit accounts 316 181 99 135 74.6 82 82.8 Gain on sale of Real estate loans 338 743 (405) (54.5) 743 100.0 Premises and equipment 3 719 (716) (99.6) 719 100.0 Investments 42 42 100.0 Letter of credit fees 722 481 189 241 50.1 292 154.5 Real estate mortgage banking fees 543 942 351 (399) (42.4) 591 168.4 Agent fee income 452 47 405 861.7 47 100.0 Other income 683 627 368 56 8.9 259 70.4 ------------------------------------------------------------- Total non-interest income $3,857 $8,180 $5,377 $(4,323) (52.8)% $2,803 52.1% ============================================================= - --------------------------------------------------------------------------------------------------
The largest component of the decrease in non-interest income was the $3.7 million decrease in fee income from real estate development and management. The Company experienced increased competition in the tax credit housing industry. The Company utilized the IRS Section 42 tax credit program in the past to develop affordable housing for individuals with low to moderate incomes. The Company continues to monitor this market segment, but has shifted its focus to developing new and innovative housing-related financing products to supplement the previous Section 42 activity. However, the fees anticipated are not anticipated to match the fees generated in the past. The Company continues to provide financing for unaffiliated developers with tax-credit developments, utilizing the Company's experience with such transactions. The Company also earns consulting fees for its services in preparing multifamily loan transactions for financing, although the fees are down to $543,000 in fiscal 1997 from $942,000 in fiscal 1996. Service charges on deposit accounts increased $135,000 to $316,000, compared to the previous years total of $181,000, a 74.6% increase from prior year. Service charges on deposit accounts increased to $181,000 in fiscal 1996, compared to $99,000 in 1995 or 82.8%. The Company has concentrated its efforts to attract transaction accounts, thus increasing the Company's service charge income. The Company reclassified $52 million of one-to-four family loans as loans held for sale in fiscal 1996 and sold these loans during fiscal 1996 resulting in $743,000 in gains. Gain on loan sales for fiscal 1997 have resulted only from sales of current loan production, resulting in income of $338,000. The Company adopted FAS 122 in fiscal 1996 "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. With the increase in mortgage loan sales during fiscal 1996, the Company recognized $575,000 in mortgage loan servicing rights compared to $250,000 in fiscal 1997 which are included in the net gain on sale of loans. The Company also sold a parcel of real estate during fiscal 1996 resulting in a gain of $719,000 compared to no sales in fiscal 1997. The Company sold $2.6 million in investments during fiscal 1997, resulting in a $42,000 net gain for the year, compared to no sales for fiscal 1996 and 1995. The Company continues to issue standby letters of credit, particularly for multifamily developments. Letters of credit fees have grown from $189,000 in 1995, $481,000 in 1996, to $722,000 in fiscal 1997 repre- 13 MANAGEMENT'S DISCUSSION AND ANALYSIS FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION senting a 282% increase over 1995 and a 50% increase over last year. Real estate banking fees decreased $399,000 from last year due to the decrease in the number of transactions financed. The Company participates in an arrangement to pass automobile loan originations to another financial institution in exchange for a fee. Loan volume has been significant in this area, resulting in an 862% increase in fees to $452,000, from $47,000 last year. Other income increased $56,000 over fiscal 1996, including the Company's receipt of $146,000 in dividend income in fiscal 1996 on the stock the Savings Bank holds with its data processing cooperative, compared to $14,000 in fiscal 1997. The Company's data processing cooperative was purchased in fiscal 1996 resulting in a distribution in fiscal 1996 and a final installment received in fiscal 1997. Offsetting this decrease were increases in servicing fees on loans sold of $100,000 and other loan fees of $42,000. Debit card income, ATM network fees and dealer interest recapture increased $25,000, $11,000 and $17,000, respectively. NON-INTEREST EXPENSE. Non-interest expense increased by $867,000 or 10.1% for the year ended June 30, 1997, compared to 1996 after increasing by $2.7 million or 45.6% in 1996 from 1995. 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 1997 1996 1997 1996 1995 AMOUNT PERCENT AMOUNT PERCENT ----------------------------------------------------------- Salaries and employee benefits $4,318 $4,486 $2,888 $ (168) (3.7)% $1,598 55.3% Net occupancy expense 481 471 426 10 2.1 45 10.6% Equipment expense 374 383 287 (9) (2.3) 96 33.4% Deposit insurance expense 255 417 238 (162) (38.8) 179 75.2% SAIF assessment 1,040 1,040 100.0 Data processing expense 312 287 211 25 8.7 76 36.0% Legal and professional fees 303 448 471 (145) (32.4) (23) (4.9) Advertising expense 230 226 118 4 1.8 108 91.5% Abandoned projects expense 177 61 18 116 190.2 43 238.9% Write down of partnership investments 335 335 100.0 Other expense 1,649 1,828 1,255 (179) (9.8) 573 45.7 ----------------------------------------------------------- Total non-interest expense $9,474 $8,607 $5,912 $ 867 10.1% $2,695 45.6% =========================================================== - ------------------------------------------------------------------------------------------------
Salaries and employee benefits decreased $168,000 from fiscal 1996 due primarily to the Company's cost reduction plan, which was completed in the fourth quarter of fiscal 1997. The cost reduction program was designed to eliminate duplicative functions. The Company should realize the full impact of the cost reductions during fiscal 1998. Net occupancy expense increased slightly in fiscal 1997 but was offset by the decrease in equipment expense for fiscal 1997. These two categories increased $45,000 and $96,000, respectively, during 1996 as compared to 1995 as the Company was still expanding. In September 1996, legislation enacted by Congress imposed a one-time special assessment of approximately $0.66 per one-hundred dollars of deposits insured by the SAIF, resulting in a $1.0 million charge to the Company. As a result the Company's annual assessment will decrease from $.23 to approximately $0.06 per one-hundred dollars of deposits. The Company expects its future assessment to be reduced approximately $355,000 annually due to the assessment. Data processing expense 14 MANAGEMENT'S DISCUSSION AND ANALYSIS FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION increased $25,000 over fiscal 1996 due to increasing costs and volume of transactions being processed. Legal and professional fees decreased $145,000 from fiscal 1996 and decreased $23,000 from fiscal 1995 due to the legal costs associated with the affordable housing segment, which has decreased in the past three years due to increased competition. Advertising increased slightly to $230,000 in fiscal 1997 from $226,000 in fiscal 1996, which was up considerably from $118,000 in fiscal 1995. Abandoned projects expense increased $116,000 to $177,000 for fiscal 1997 due to increased competition in the affordable housing segment. These are expenses incurred on potential developments that do not materialize. The Company accounts for its general partnership interests on the equity method, which is adjusted quarterly based on the partnerships performance. In addition to equity method adjustments, the Company wrote down its investment by $375,000 during fiscal 1997 due to below expectation level performance of a number of the investments. Other expense decreased $179,000 from fiscal 1996. During fiscal 1996, the Company participated some of its multifamily loans resulting in expenses of $113,000 compared to none for fiscal 1997. The decrease in affordable housing developments caused a reduction of $67,000 in travel and lodging compared to last year. A decrease in losses on the sale of other real estate, disposition of fixed assets and sale of repossessed assets accounted for a $52,000 decrease in expenses compared to fiscal 1996. Offsetting some of these larger decreases were increases in debit card and ATM expense of $15,000 and $17,000, respectively and correspondent bank charge increases of $42,000 and other miscellaneous increases. INCOME TAX EXPENSE. Income tax benefit was $255,000 in fiscal 1997, compared to income tax expense of $1.9 million recorded in fiscal 1996 and $1.5 million in fiscal 1995. The Company's net income before income tax expense decreased $5.3 million to a net loss before income taxes of $141,000. A reduction in income tax expense from IRS Section 42 low income housing credit reduced income tax expense $341,000 and $273,000 for fiscal 1997 and fiscal 1996. The effective tax rate for the current year was 180.0% compared to 36.8% for fiscal 1996 and 33.1% for fiscal 1995. FINANCIAL CONDITION. At year-end the Company's assets decreased $22.2 million or 8.5%. The Company had reclassified $52.0 million 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. The Company used these proceeds to reduce debt, and allow higher rate brokered CD's to mature or rollover at the prevailing retail rates which in turn increased the net interest margin. Average assets for fiscal 1997 decreased 7.5% from fiscal 1996 to $254.1 million. Average liabilities decreased $20.7 million as the Company used some of the loan sale proceeds to reduce borrowings. LOANS. The following table shows the composition of the Company's loan portfolio as of June 30:
- --------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------- (dollars in thousands) Real estate mortgage loans Conventional $ 94,293 $106,344 $113,971 $ 74,808 $ 58,789 Construction loans 32,577 36,938 24,670 12,536 3,988 Commercial loans 26,668 18,267 7,133 1,022 Multifamily loans 9,602 15,420 26,147 12,372 2,969 First mortgage real estate loans purchased 3,184 7,612 4,921 4,064 4,635 ---------------------------------------------------- Total real estate mortgage loans 166,324 184,581 176,842 104,802 70,381 Commercial loans-other than secured by real estate 12,522 9,393 6,414 442 162 Consumer and home equity loans 26,118 23,247 39,844 18,288 9,292 ---------------------------------------------------- Total loans $204,964 $217,221 $223,100 $123,532 $ 79,835 ==================================================== Total assets $240,001 $262,216 $269,438 $152,188 $108,375 ---------------------------------------------------- Total loans to total assets 85.4% 82.8% 82.8% 81.2% 73.7% ====================================================
15 MANAGEMENT'S DISCUSSION AND ANALYSIS FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The Company began selling current production of 1-4 family loans for fiscal 1997, book the gain or loss currently and use some of the proceeds to fund new products. With this strategy in place, conventional real estate mortgage loans decreased $12.1 million from fiscal 1996. Included in construction loans are $1.2 million in loans to affordable housing developments in addition to $4.6 million in affordable housing developments which are included in multifamily loans. Commercial real estate loans and commercial loans have continued to grow as the Company continues expanding into the commercial loan market. Commercial real estate loans have increased from $0 at the end of fiscal 1993 to $26.7 million at June 30, 1997. Multifamily loans have declined since June 30, 1995 as the Company has participated the loans or the loans have paid off. Multifamily loans have decreased $16.5 million from June 30, 1995 to $9.6 million at June 30, 1997. Purchased real estate loans have decreased due to payoffs and paydowns from the previous year. Commercial loans other than real estate have increased from $162,000 at the end of fiscal 1993 compared to $12.5 million at June 30, 1997. The Company continues to diversify its loan portfolio as a continuing part of its business plan. Consumer loans increased slightly to $26.1 million from $23.2 million at June 30, 1996 due to the Company retaining some of the new loans generated. The Company participates in an arrangement to pass most of its automobile loan originations to another financial institution in exchange for a fee. The Company's loan portfolio contains no loans to foreign governments, foreign enterprises, foreign operations of domestic companies, or highly leveraged transactions, nor any concentration to borrowers engaged in the same or similar industries that exceed 10 percent of total loans. LOAN MATURITIES. The following table sets forth the remaining maturities for certain loan categories as of June 30, 1997: - ------------------------------------------------------------------------ WITHIN ONE TO AFTER ONE YEAR FIVE YEARS FIVE YEARS TOTAL - ------------------------------------------------------------------------ (dollars in thousands) Real estate mortgage loans $67,383 $60,225 $38,716 $166,324 Consumer and home equity loans 12,538 13,317 263 26,118 Commercial loans 9,346 3,176 12,522 ---------------------------------------- Total $89,267 $76,718 $38,979 $204,964 ======================================== Predetermined interest rates $15,151 $37,670 $26,006 $ 78,827 Floating interest rates 74,116 39,048 12,973 126,137 ---------------------------------------- $89,267 $76,718 $38,979 $204,964 ======================================== - ------------------------------------------------------------------------ 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 $11,000 in 1997, $15,000 in 1996 and $74,000 in 1995. Additional interest income of approximately $12,000, $9,000, and $3,000 for 1997, 1996, and 1995, 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: 16 MANAGEMENT'S DISCUSSION AND ANALYSIS FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Non-performing loans - ----------------------------------------------------------------------- (dollars in thousands) 1997 1996 1995 1994 1993 ------------------------------------- Nonaccrual loans $256 $342 $ 47 $190 $ 288 Restructured 514 752 760 90 days or more past due 29 43 23 ------------------------------------- Total $285 $385 $584 $942 $1,048 ===================================== Ratio of non-performing loans to Total loans 0.14% 0.18% 0.26% 0.76% 1.31% ===================================== Non-performing loans amounted to 0.14% of total loans as of June 30, 1997, as compared to 0.18% of total loans as of June 30, 1996. The decrease in the ratio from 1997 to 1996 is attributable to the 26.0% 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, although the Company has several credits in its loan portfolio that are in excess of $1 million which inherently carry more risk due to their size in relation to total equity of the Company. 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 fiscal years ended June 30: 17 MANAGEMENT'S DISCUSSION AND ANALYSIS FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SUMMARY OF LOAN LOSS EXPERIENCE 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------- (dollars in thousands) Allowance for loan losses Balance at July 1, $1,059 $ 713 $356 $236 $150 Loan charge-offs: Real estate mortgage 100 12 8 8 22 Commercial 25 Consumer and home equity 142 128 74 39 28 -------------------------------------- Total loan charge-offs 267 140 82 47 50 Loan recoveries: Real estate mortgage 3 17 8 6 5 Home equity and consumer 11 14 11 11 1 -------------------------------------- Total loan recoveries 14 31 19 17 6 Net charge-offs 253 109 63 30 44 Provision for loan losses 975 455 420 150 130 -------------------------------------- Balance at June 30, $1,781 $1,059 $713 $356 $236 ====================================== Ratio of net charge-offs to average loans outstanding during the period 0.12% 0.05% 0.04% 0.03% 0.06% ====================================== Ratio of provision for loan losses to average loans outstanding during the period 0.45% 0.20% 0.24% 0.15% 0.18% ====================================== Ratio of allowance for loan losses to total loans outstanding at year end 0.87% 0.49% 0.32% 0.29% 0.30% ====================================== - ------------------------------------------------------------------------------- The allowance for loan losses was $1.8 million as of June 30, 1997, and $1.1 million as of June 30, 1996. Net loan charge-offs were $253,000 or 0.12% of average loans in 1997 compared to $109,000 or 0.05% of average loans in 1996. The allowance increased $722,000 over fiscal 1996 due primarily to the marked increase in the provision for loan losses. The increase in the provision was recorded despite the decrease in non-performing loans. However, the Company has closed a number of large credits during the past two years. Management considers the allowance for loan losses adequate to meet losses inherent in the loan portfolio as of June 30, 1997. ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses was further allocated to enumerate allowances for 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: 18 MANAGEMENT'S DISCUSSION AND ANALYSIS FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Allowance Amount Percentage of Loans to Total Loans 1997 1996 1995 1994 1993 1997 1996 1995 1994 1993 --------------------------------------- ------------------------------------ (dollars in thousands) Real estate mortgage $ 153 $ 155 $208 $219 $151 60.6% 67.8% 67.5% 74.8% 84.5% Multifamily 994 420 195 7.6 8.8 11.7 10.0 3.7 Consumer and home equity 168 214 260 137 85 12.7 10.7 17.9 14.8 11.6 Commercial 466 270 50 19.1 12.7 2.9 0.4 0.2 ------------------------------------------------------------------------------- Total $ 1,781 $1,059 $713 $356 $236 100.0% 100.0% 100.0% 100.0% 100.0% =============================================================================== - ------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES. The Savings Bank's investment policy is annually reviewed, by its Board of Directors. Any significant changes to the policy must be approved by the Board. The Board has an asset/liability management committee which is responsible for keeping the investment policy current. As of June 30, 1997, the investment portfolio represented 5.8% of the Company's assets, compared to 6.7% at June 30, 1996, and is managed in a manner designed to meet the Board's investment policy objectives. The primary objectives, in order of priority, are to further the safety and soundness of the Company, to provide the liquidity necessary to meet day to day, 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, 1997, 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, 1997, was $31,000 which was comprised of gross gains of $69,000, gross losses of $149,000, and a tax benefit of $49,000, a decrease of $109,000 from June 30, 1996. The decrease was caused by market interest rate changes during the period. Although the entire portfolio is available for sale, management has not identified specific investments for sale in future periods. The following table sets forth the components of the Savings Bank's available for sale investment portfolio as of June 30: - ------------------------------------------------------------------------- 1997 1996 1995 ------------------------- (dollars in thousands) Investment securities available for sale: U.S. Treasury securities $ 1,000 $ 504 $ 515 Federal agency securities 2,944 4,365 4,002 Federal Home Loan Mortgage Corporation mortgage-backed securities 3,003 6,727 6,830 Federal National Mortgage Association mortgage-backed securities 1,562 1,697 2,103 Government National Mortgage Association mortgage-backed securities 4,223 4,165 1,953 Municipals 1,058 ------------------------- Total securities available for sale $13,790 $17,458 $15,403 ========================= 19 MANAGEMENT'S DISCUSSION AND ANALYSIS FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The Savings Bank's investment securities portfolio decreased by $3.7 million to $13.8 million at June 30, 1997, compared to $17.5 million at June 30, 1996. In addition to maturity, paydowns and early payoffs, the Company sold $2.6 million in various small-pool mortgage-backed securities during fiscal 1997. The Corporation 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 Savings Bank's total investment securities portfolio increased by $2.1 million at June 30, 1996, from June 30, 1995 as additional securities were purchased during 1996. The following table sets forth the contractual maturities of investment and mortgage-backed securities as of June 30, 1997, and the weighted average yields of such securities. As of June 30, 1997, 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. Treasury $1,000 5.88% $ 1,000 5.88% Federal agencies 2,944 5.35 2,944 5.35 Federal Home Loan Mortgage Corporation $945 6.00% $165 7.41% $1,893 6.42% 3,003 6.34 Federal National Mortgage Association 1,562 6.43 1,562 6.43 Government National Mortgage Association 16 7.50 4,207 6.77 4,223 6.77 Municipals 1,058 5.60 1,058 5.60 ------------------------------------------------------------------------------- Total $945 6.00% $3,960 5.49% $165 7.41% $8,720 6.50% $13,790 6.18% =============================================================================== Percent of total 7% 29% 1% 63% 100% ===============================================================================
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 decreased by $399,000 for the year ended June 30, 1997. The decrease was offset by growth in Demand, NOW and Certificates of deposit. Demand, NOW and Certificates of deposit increased $1.8 million, $10.5 million and $7.1 million, respectively, as the Company continued an aggressive marketing and pricing campaign with new products during fiscal 1997 to increase the core deposit base, and to allow the Company the flexibility to allow agent acquired certificates of deposit to mature or rollover at the prevailing retail rate. With the increases mentioned above and the loan sale in fiscal 1996, agent acquired certificates of deposit have decreased $17.0 million. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION These certificates of deposit were acquired at rates higher than the current local market for retail deposits, but generally below rates charged for FHLB advances, thus creating a favorable impact on the net interest margin. Most of the decrease in the money market account category was as a result of some current accounts converting to a new NOW account product. 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, 1997, 1996 and 1995.
- -------------------------------------------------------------------------------------------- 1997 1996 1995 AVERAGE DEPOSITS AMOUNT RATE AMOUNT RATE AMOUNT RATE - -------------------------------------------------------------------------------------------- (dollars in thousands) Demand $ 5,685 $ 3,898 $ 3,158 NOW accounts 20,585 4.22% 10,092 3.95% 4,916 2.34% Money market accounts 3,890 2.72 6,066 2.97 6,600 3.03 Savings accounts 4,792 2.90 5,346 2.90 5,795 2.78 Certificates of deposit 78,408 5.68 71,337 5.77 61,315 5.29 Agent-acquired certificates of deposit 70,346 6.31 87,366 6.52 41,336 6.55 ----------------------------------------------------- Total $183,706 5.45% $184,105 5.73% $123,120 5.22% ===================================================== - --------------------------------------------------------------------------------------------
The following table summarizes certificates of deposit in amounts of $100,000 by maturity as of the following dates: - ----------------------------------------------------------------------------- MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE AT JUNE 30: 1997 1996 1995 - ----------------------------------------------------------------------------- (dollars in thousands) 3 Months or less $12,312 $ 7,206 $13,555 3-6 months 16,319 15,009 14,535 6-12 months 13,331 5,042 20,470 Over 12 months 11,119 18,669 14,569 -------------------------- Total $53,081 $45,926 $63,129 ========================== - ----------------------------------------------------------------------------- The increase of $7.2 million is primarily due to an increase in public and state funds that generally are issued in amounts greater than $100,000. BORROWINGS. The Company's long-term debt decreased $19.2 million from fiscal 1996 primarily due to a decrease in Federal Home Loan Bank advances. Alternate funding sources were provided by loan sales, retail deposits, and public funds. For further details see Notes to the Consolidated Financial Statements. Short-term borrowings totaled $5.2 million which represented a slight decrease of $502,000 since June 30, 1996, due primarily to a decrease in guaranteed investment contracts. Federal funds purchased and short-term FHLB advances while utilized during fiscal 1997, were repaid prior to fiscal 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. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FEDERAL TREASURY TAX GUARANTEED FUNDS FHLB & LOAN NOTE INVESTMENT 1997 PURCHASED ADVANCES OPTION CONTRACTS - ------------------------------------------------------------------------------------ (dollars in thousands) OUTSTANDING AT JUNE 30 $105 $5,086 AVERAGE AMOUNT OUTSTANDING $1,810 $ 206 102 4,771 MAXIMUM AMOUNT OUTSTANDING AT ANY MONTH-END 7,400 4,150 145 7,151 WEIGHTED AVERAGE INTEREST RATE: DURING YEAR 5.62% 6.46% 5.16% 5.34% END YEAR 5.62% 5.57% 1996 - ------------------------------------------------------------------------------------ (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% - ------------------------------------------------------------------------------------
CAPITAL RESOURCES The Company's stockholders' equity decreased $1.4 million to $12.9 million at June 30, 1997, compared to $14.3 million at June 30, 1996. The decrease in stockholders' equity was accounted for by the cash dividends declared of $1.5 million and the purchase of treasury stock of $126,000. Offsetting these decreases were net income of $113,000, exercise of stock options and warrants of $39,000 and a decrease in the net unrealized loss on securities available for sale of $109,000. The dividend rate was reduced from $0.20 to $0.10 per share for the third and fourth quarter. The Company will use the additional capital to strengthen the capital position to support future growth. Total capital consists of Tier I capital plus the allowance for loan losses. Minimum capital levels are 3% for the leverage ratio which is defined as Tier I capital as a percentage of total assets less goodwill and other identifiable intangible assets; 4% for Tier I to risk-weighted assets; and 8% for total capital to risk-weighted assets. The Savings Bank's capital ratios have exceeded each of these levels. The leverage ratio was 6.93% and 7.05%; Tier I capital to risk-weighted assets was 7.64% and 9.30%; and total capital to risk-weighted assets was 10.74% and 12.35% at June 30, 1997 and 1996. Book value per share decreased to $5.20 at June 30, 1997, compared to $5.73 one year earlier, due to the decrease in capital noted above. 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. See the retained earnings and regulatory matters footnote to the financial statements. 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 22 MANAGEMENT'S DISCUSSION AND ANALYSIS FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION demand or due within one year or less. As of June 30, 1997, and June 30, 1996, the Savings Bank liquidity ratios were 5.57% and 10.64%, 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 $42.5 million at June 30, 1996, to $23.3 million at June 30, 1997, as noted above. 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, therefore the Company took the opportunity to reduce the borrowings outstanding at June 30, 1997. 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, 1997, 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 $4.2 million, representing a positive cumulative one-year gap ratio of 1.77% 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 is continuing its strategy of originating and selling current loan production. With the current strategy and last fiscal years loan sale, this has allowed the Company to reduce borrowings, let higher rate agent-acquired funds rolloff or rollover at the prevailing retail rates and fund new loan demand. The positive impact on the margin became evident in fiscal 1997 as the margin increased from 2.29% to 2.72% for the year ended June 30, 1997. 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 Savings Bank's interest rate risk position, the ALCO must be aware of how changes in interest rates affect both its net interest income and its net portfolio value. 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 23 MANAGEMENT'S DISCUSSION AND ANALYSIS FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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, 1997, 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, 1997, 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 Savings Bank'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. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
JUNE 30, 1997 ------------------------------------------------------------------------ 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 $ 1,759 $ 6 $ 1,765 Investment securities available for sale and FHLB stock 5,760 6,459 $ 3,991 $ 1,500 17,710 Loans 74,145 40,404 19,089 71,326 204,964 Non-earning assets 15,562 15,562 ------------------------------------------------------------------------ Total assets $ 81,664 $ 46,869 $ 23,080 $ 88,388 $240,001 ======================================================================== Liabilities and stockholders' equity Interest-bearing deposits: Interest-bearing transaction accounts $ 6,286 $ 14,666 $ 20,952 Money market accounts 434 2,669 3,103 Savings 476 4,287 4,763 Certificates of deposits 25,166 $ 77,807 $ 43,424 1,858 148,255 ------------------------------------------------------------------------ Total interest-bearing deposits 32,362 77,807 43,424 23,480 177,073 Other borrowings and debt 6,398 7,729 10,014 19,139 43,280 Non-interest bearing deposits 4,714 4,714 Non-interest bearing liabilities and stockholders' equity 14,934 14,934 ======================================================================== Total liabilities and stockholders' equity $ 38,760 $ 85,536 $ 53,438 $ 62,267 $240,001 ======================================================================== Interest sensitivity gap $ 42,904 $(38,667) $ (30,358) $ 26,121 ======================================================================== Cumulative interest sensitivity gap $ 42,904 $ 4,237 $ (26,121) ======================================================================== Cumulative gap as a percentage of total assets 17.88% 1.77% (10.88)% ========================================================================
25 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, 1997 and 1996 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. /s/ GEO. S. OLIVE & CO. LLC - --------------------------- Evansville, Indiana August 20, 1997 26 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
JUNE 30 1997 1996 - ---------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 1,746,765 $ 1,111,737 Short-term interest-bearing deposits 1,759,013 4,101,143 Federal funds sold 5,000,000 ---------------------------------- Total cash and cash equivalents 3,505,778 10,212,880 Interest-bearing deposits 5,619 5,370 Investment securities available for sale 13,789,771 17,458,474 Loans 204,963,999 217,221,244 Allowance for loan losses (1,781,391) (1,058,894) ---------------------------------- Net loans 203,182,608 216,162,350 Premises and equipment 6,340,535 5,559,322 Federal Home Loan Bank of Indianapolis stock, at cost 3,919,500 3,919,500 Interest receivable and other assets 9,257,545 8,897,813 ---------------------------------- Total assets $ 240,001,356 $ 262,215,709 ================================== LIABILITIES Deposits Non-interest bearing $ 4,713,653 $ 5,099,938 Interest bearing 177,072,854 176,602,082 ---------------------------------- Total deposits 181,786,507 181,702,020 Short-term borrowings 5,190,946 5,693,189 FHLB advances and other long-term debt 38,089,011 57,291,500 Advances by borrowers for taxes and insurance 674,287 859,110 Other liabilities 1,324,717 2,374,915 ---------------------------------- Total liabilities 227,065,468 247,920,734 ---------------------------------- STOCKHOLDERS' EQUITY Preferred stock, no par or stated value Authorized and unissued - 5,000,000 shares Common stock, $1 stated value Authorized - 5,000,000 shares Issued and outstanding - 2,487,385 and 2,495,040 shares 2,487,385 2,495,040 Capital surplus 8,707,840 8,785,148 Stock warrants 263,600 265,500 Retained earnings, substantially restricted 1,507,784 2,888,866 Net unrealized loss on securities available for sale (30,721) (139,579) ---------------------------------- Total stockholders' equity 12,935,888 14,294,975 ---------------------------------- Total liabilities and stockholders' equity $ 240,001,356 $ 262,215,709 ==================================
See notes to consolidated financial statements. 27 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED JUNE 30 1997 1996 1995 - --------------------------------------------------------------------------------------- Interest Income Loans receivable $18,691,852 $19,044,730 $14,658,913 Loans held for sale 904,190 Investment securities Taxable 1,032,768 1,098,527 856,355 Tax exempt 56,050 Federal funds sold 70,358 132,076 1,482 Interest-bearing deposits 124,430 64,368 90,204 Other interest and dividend income 307,075 285,536 186,563 -------------------------------------------- 20,282,533 21,529,427 15,793,517 -------------------------------------------- Interest Expense Deposits 10,000,013 10,549,760 6,425,729 Short-term borrowings 358,913 306,421 488,768 Long-term debt 3,472,237 4,669,055 3,348,458 -------------------------------------------- 13,831,163 15,525,236 10,262,955 -------------------------------------------- Net Interest Income 6,451,370 6,004,191 5,530,562 Provision for loan losses 975,000 455,000 420,000 -------------------------------------------- Net Interest Income After Provision for Loan Losses 5,476,370 5,549,191 5,110,562 -------------------------------------------- Non-Interest Income Real estate development and management fees 757,999 4,439,894 4,370,351 Service charges on deposit accounts 316,009 180,565 99,390 Gain on sale of Investment securities 42,132 Real estate loans 337,766 742,978 Premises and equipment 2,676 718,765 360 Letter of credit fees 721,966 480,867 189,376 Mortgage banking fees 543,345 942,002 350,638 Agent fees 451,585 47,461 Other income 683,049 627,500 367,738 -------------------------------------------- 3,856,527 8,180,032 5,377,853 --------------------------------------------
28 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (CONTINUED)
YEAR ENDED JUNE 30 1997 1996 1995 - --------------------------------------------------------------------------------------- Non-Interest Expense Salaries and employee benefits $ 4,318,495 $ 4,486,097 $ 2,888,470 Net occupancy expense 480,877 471,019 425,883 Equipment expense 374,344 382,693 286,885 Data processing fees 312,231 286,818 210,942 Deposit insurance expense 255,419 417,231 237,521 SAIF assessment 1,040,000 Legal and professional fees 303,073 447,538 471,276 Write down of affordable housing partnership investments 335,000 Other expense 2,054,753 2,116,131 1,391,257 --------------------------------------------- 9,474,192 8,607,527 5,912,234 --------------------------------------------- Income (Loss) Before Income Tax (141,295) 5,121,696 4,576,181 Income tax expense (benefit) (254,763) 1,886,787 1,515,040 --------------------------------------------- NET INCOME $ 113,468 $ 3,234,909 $ 3,061,141 ============================================= PER SHARE Primary net income $.04 $1.17 $1.23 Fully diluted net income .04 1.17 1.16 AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 2,655,181 2,776,147 2,634,431 See notes to consolidated financial statements. 29 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK --------------------------- CAPITAL STOCK SHARES AMOUNT SURPLUS WARRANTS ---------------------------------------------------------- BALANCES, JULY 1, 1994 1,014,765 $1,014,765 $6,450,872 $150,000 Net income for 1995 Cash dividends ($.33 per share) 2.1-for-1 stock split ($2,875 paid in lieu of fractional shares) 1,125,562 1,125,562 (1,128,437) Stock warrants issued 150,000 Exercise of stock options 20,648 20,648 54,395 Exercise of stock warrants 1,824 1,824 17,780 (1,000) Net change in unrealized gain (loss) on securities available for sale, net of taxes of $89,291 ---------------------------------------------------------- BALANCES, JUNE 30, 1995 2,162,799 2,162,799 5,394,610 299,000 Net income for 1996 Cash dividends ($.79 per share) 10% stock dividend ($1,000 paid in lieu of fractional shares) 226,747 226,747 2,721,030 Exercise of stock options 27,837 27,837 81,311 Exercise of stock warrants 77,657 77,657 588,197 (33,500) Net change in unrealized gain (loss) on securities available for sale, net of taxes of $84,023 ---------------------------------------------------------- BALANCES, JUNE 30, 1996 2,495,040 2,495,040 8,785,148 265,500 Net income for 1997 Cash dividends ($.60 per share) Exercise of stock options 407 407 3,512 Exercise of stock warrants 4,938 4,938 32,055 (1,900) Purchase of common stock (13,000) (13,000) (112,875) Net change in unrealized gain (loss) on securities available for sale, net of taxes of $42,451 ---------------------------------------------------------- BALANCES, JUNE 30, 1997 2,487,385 $2,487,385 $8,707,840 $263,600 ==========================================================
NET UNREALIZED GAIN (LOSS) ON RETAINED SECURITIES EARNINGS AVAILABLE FOR SALE TOTAL ----------------------------------------------- BALANCES, JULY 1, 1994 $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) (2,875) Stock warrants issued 150,000 Exercise of stock options 75,043 Exercise of stock warrants 18,604 Net change in unrealized gain (loss) on securities available for sale, net of taxes of $89,291 136,133 136,133 ----------------------------------------------- BALANCES, JUNE 30, 1995 4,560,437 (11,477) 12,405,369 Net income for 1996 3,234,909 3,234,909 Cash dividends ($.79 per share) (1,957,703) (1,957,703) 10% stock dividend ($1,000 paid in lieu of fractional shares) (2,948,777) (1,000) Exercise of stock options 109,148 Exercise of stock warrants 632,354 Net change in unrealized gain (loss) on securities available for sale, net of taxes of $84,023 (128,102) (128,102) ----------------------------------------------- BALANCES, JUNE 30, 1996 2,888,866 (139,579) 14,294,975 Net income for 1997 113,468 113,468 Cash dividends ($.60 per share) (1,494,550) (1,494,550) Exercise of stock options 3,919 Exercise of stock warrants 35,093 Purchase of common stock (125,875) Net change in unrealized gain (loss) on securities available for sale, net of taxes of $42,451 108,858 108,858 ----------------------------------------------- BALANCES, JUNE 30, 1997 $1,507,784 $ (30,721) $ 12,935,888 ===============================================
See notes to consolidated financial statements. 30 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 113,468 $ 3,234,909 $ 3,061,141 Adjustments to reconcile net income to net cash provided (used) by operating activities Provision for loan losses 975,000 455,000 420,000 Investment securities gains (42,132) Gain on sale of premises and equipment (2,676) (718,765) Depreciation 424,302 359,056 276,362 Investment securities amortization (accretion), net 29,008 (33,395) 48,199 Amortization of net loan origination fees and points (2,988) (55,796) (190,579) Deferred income tax (benefit) 313,344 295,941 (57,935) Net (increase) decrease in real estate loans held for sale 1,923,099 (1,923,099) Changes in Interest payable and other liabilities (1,148,511) 396,233 11,354 Interest receivable and other assets (377,882) (2,495,117) (3,510,217) --------------------------------------------- Net cash provided (used) by operating activities 280,933 3,361,165 (1,864,774) --------------------------------------------- INVESTING ACTIVITIES Net change in interest-bearing deposits (249) (251) 574,881 Purchases of investment securities available for sale (2,596,920) (9,776,687) (4,491,069) Proceeds from maturities of investment securities available for sale 3,806,455 7,542,865 3,729,799 Proceeds from sale of investment securities available for sale 2,623,601 Net changes in loans 11,968,144 5,766,465 (99,440,406) Purchase of premises and equipment (1,232,901) (2,377,519) (1,552,525) Proceeds from sale of premises and equipment 22,862 1,000,000 1,664 Purchase of FHLB of Indianapolis stock (828,400) (891,600) Proceeds from real estate owned sales 57,736 49,705 --------------------------------------------- Net cash provided (used) by investing activities 14,648,728 1,326,473 (102,019,551) ---------------------------------------------
31 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
YEAR ENDED JUNE 30 1997 1996 1995 - ---------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net change in Noninterest-bearing, interest-bearing demand and savings deposits $ (2,054,098) $ 16,223,138 $ (1,975,491) Certificates of deposit 2,138,585 (15,292,010) 93,707,903 Net decrease in federal funds purchased (2,050,000) Proceeds from other borrowings 9,115,590 11,490,097 21,577,524 Repayment of other borrowings (9,683,248) (12,562,016) (5,908,033) Proceeds from FHLB advances 7,600,000 16,556,000 126,687,000 Repayment of FHLB advances (26,737,074) (26,495,178) (118,262,124) Net change in advances by borrowers for taxes and insurance (184,823) 160,056 301,532 Purchase of common stock (125,875) Cash dividends (1,744,832) (1,729,312) (625,695) Proceeds from exercise of stock options 3,919 109,148 75,043 Proceeds from exercise of stock warrants 35,093 632,354 18,604 Proceeds from issuance of stock warrants 150,000 ---------------------------------------------- Net cash provided (used) by financing activities (21,636,763) (10,907,723) 113,696,263 ---------------------------------------------- CHANGE IN CASH AND CASH EQUIVALENTS (6,707,102) (6,220,085) 9,811,938 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,212,880 16,432,965 6,621,027 ---------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,505,778 $ 10,212,880 $ 16,432,965 ============================================== ADDITIONAL CASH FLOWS AND SUPPLEMENTARY INFORMATION Income tax paid, net of refunds $ 710,000 $ 1,937,735 $ 2,227,750 Interest paid 13,845,906 15,722,698 9,552,816 Other real estate transfers 39,586 58,757 Debt underwriting fees offset against debt proceeds 262,500
See notes to consolidated financial statements. 32 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES 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 reporting practices followed by the thrift industry. The more significant of the policies are described below. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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. The Savings Bank is subject to regulation by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. Three of 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 Village Capital Corporation (formerly Fidelity Federal Capital Corporation), which primarily receives consulting fees for packaging various multi-family deals to be financed and completed, and Village Insurance Corporation, which offers an array of insurance products. The Company recently closed its Indianapolis, Indiana offices, which housed Village Community Development Corporation, Village Housing Corporation and Village Capital Corporation, and moved the offices to the Company's headquarters in Evansville, Indiana. Village Community Development Corporation has reduced its level of business activities, including the development of real estate. CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all material intercompany transactions and accounts. INVESTMENT SECURITIES AVAILABLE FOR SALE are carried at fair value. Realized gains and losses on sales are determined using the specific-identification method and are included in other income as net security gains (losses). 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. 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. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Certain loan fees and related direct costs are being deferred and amortized over the lives of the loans as an adjustment of yield on the loans. ALLOWANCE FOR LOAN LOSSES is maintained to absorb losses based on management's continuing review and evaluation of the portfolios and its judg- 33 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ment 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 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, 1997, 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. 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. FEE INCOME on real estate development and management in the consolidated statement of income is attributable to activities of the Affordable Housing Group. The fees are recognized when earned under the applicable agreements and when collectibility is assured. Fee income related to insurance services is recognized when earned and collected. 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. MORTGAGE SERVICING RIGHTS on originated loans are capitalized by allocating the total cost of the mortgage loans between the mortgage servicing rights and the loans based on their relative fair values. Capitalized servicing rights, which includes purchased servicing rights, are amortized in proportion to and over the period of estimated servicing revenues. RESTRICTION ON CASH AND DUE FROM BANKS The Savings Bank is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at June 30, 1997 was $415,000. 34 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES 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, 1997 U. S. Treasury $ 1,003 $ (3) $ 1,000 Federal agencies 3,000 (56) 2,944 Mortgage-backed securities 8,853 $25 (90) 8,788 Municipals 1,014 44 1,058 -------------------------------------------- $13,870 $69 $(149) $13,790 ============================================ 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 ============================================ 35 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) The amortized cost and fair value of investment securities available for sale at June 30, 1997, by contractual maturity, are shown below: - ------------------------------------------------------------------ AMORTIZED FAIR MATURITY DISTRIBUTION AT JUNE 30, 1997 COST VALUE - ------------------------------------------------------------------ Within one year $ 1,003 $ 1,000 One to five years 3,000 2,991 Five to ten years 1,014 1,011 ------------------ 5,017 5,002 Mortgage-backed securities 8,853 8,788 ------------------ $13,870 $13,790 ================== - ------------------------------------------------------------------ Proceeds from sales of investment securities available for sale during 1997 were approximately $2,624,000. Gross gains of approximately $43,000 and gross losses of $1,000 were realized on those sales. There were no sales of investment securities available for sale during 1996 or 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. - ----------------------------------------------------------------------------- LOANS AND ALLOWANCES JUNE 30 1997 1996 - --------------------------------------------------------------------------- Real estate mortgage loans First mortgage loans Conventional $ 94,293 $106,344 Construction 32,577 36,938 Commercial 26,668 18,267 Multi-family 9,602 15,420 First mortgage real estate loans purchased 3,184 7,612 Commercial loans - other than secured by real estate 12,522 9,393 Consumer and home equity loans 26,118 23,247 --------------------- $204,964 $217,221 ===================== 36 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) Included in multi-family loans are loans made to affordable housing developments totaling $4,607,000 and $9,782,000 at June 30, 1997 and 1996. An additional $1,183,000 and $7,476,000 in loans to affordable housing developments is included in construction loans at June 30, 1997 and 1996. - ---------------------------------------------------------------- YEAR ENDED JUNE 30 1997 1996 1995 - ---------------------------------------------------------------- Allowance for loan losses Balances, beginning of year $1,059 $ 713 $356 Provision for loan losses 975 455 420 Loans charged off (267) (140) (82) Recoveries on loans 14 31 19 --------------------- Balances, end of year $1,781 $1,059 $713 ===================== - ---------------------------------------------------------------- The Company has not had any impaired loans during the years ended June 30, 1997 or 1996. 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, 1996 $8,757 New loans, including renewals 37 Payments, etc., including renewals (6,573) ------ Balances, June 30, 1997 $2,221 ====== - ---------------------------------------------------------------- LOAN SERVICING Mortgage loans serviced for others are not included in the accompanying consolidated balance sheet. The unpaid principal balances of mortgage loans serviced for others totaled $64,517,000 and $58,854,000 at June 30, 1997 and 1996. 37 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) In 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 122, Accounting for Mortgage Servicing Rights. This statement requires the capitalization of retained mortgage servicing rights on originated or purchased loans by allocating the total cost of the mortgage loans between the mortgage servicing rights and the loans (without the servicing rights) based on their relative fair values. SFAS No. 122 was superseded during 1996 by SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. SFAS No. 125 (as did SFAS No. 122) requires the assessment of impairment of capitalized mortgage servicing rights and requires that impairment be recognized through a valuation allowance based on the fair value of those rights. The aggregate fair value of capitalized mortgage servicing rights at June 30, 1997 approximated $800,000. Comparable market prices were used to estimate fair value. - ---------------------------------------------------------------- 1997 1996 ------------- Mortgage servicing rights Balances, beginning of year $543 Servicing rights capitalized 250 $575 Amortization of servicing rights (72) (32) ------------- Balances, end of year $721 $543 ============= PREMISES AND EQUIPMENT JUNE 30 1997 1996 - ---------------------------------------------------------------- Land $1,766 $1,741 Building and land improvements 5,244 4,648 Furniture, fixtures and equipment 2,058 1,818 -------------- Total cost 9,068 8,207 Accumulated depreciation (2,727) (2,648) -------------- Net $6,341 $5,559 ============== 38 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) OTHER ASSETS Included in other assets at June 30, 1997 and 1996 are investments of $4,021,000 and $3,478,000 in limited partnerships which are organized to build, own and operate apartment complexes. The investments at June 30, 1997 include: the Company's 1% equity in 16 limited partnerships as general partner ($1,884,000), a 47.99% equity in one partnership in which the Company is a 1% general partner and a 46.99% limited partner ($683,000), a 40% equity in one limited partnership in which the Company is a 1% general partner and a 39% limited partner ($655,000), a 9.985% equity in one limited partnership ($362,000), a 9.99% equity in one limited partnership ($238,000), and a 99% equity in two limited partnerships in which the Company is a limited partner ($199,000). The Company records income on the equity method in the income and losses of the limited partnerships, which resulted in a $132,000 and $73,000 loss during 1997 and 1996 compared to none in 1995. 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 $341,000, $273,000 and $72,000 for the years ended June 30, 1997, 1996 and 1995. Combined condensed financial statements for the limited partnerships as of June 30, 1997 and 1996 and for the years ended June 30, 1997, 1996 and 1995 are as follows: - --------------------------------------------------------------------- JUNE 30 1997 1996 - --------------------------------------------------------------------- Combined condensed balance sheet (unaudited) Assets Cash $ 727 $ 635 Construction in process 7,298 Land and property 56,357 49,238 Other assets 1,271 903 ---------------- Total assets $58,355 $58,074 ================ Liabilities Notes payable $38,214 $39,890 Other liabilities 2,348 1,537 ---------------- Total liabilities 40,562 41,427 Partners' equity 17,793 16,647 ---------------- Total liabilities and partners' equity $58,355 $58,074 ================ YEAR ENDED JUNE 30 1997 1996 1995 - ---------------------------------------------------------------------- Condensed statement of operations (unaudited) Total revenue $ 3,181 $ 3,501 $ 712 Total expenses 4,253 5,261 1,265 ------------------------- Net loss $(1,072) $(1,760) $ (553) ========================= 39 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Table Dollar Amounts in Thousands) Approximately $9,087,000 and $18,258,000 of the notes payable are due to the Company at June 30, 1997 and 1996. Included in land and property are development fees earned during the years ended June 30, 1997 and 1996 of approximately $758,000 and $4,440,000 and loan fees of approximately $29,000 and $31,000. During the year ended June 30, 1997, the Company wrote down its investment in limited partnerships by $335,000, based on current cash flows and actual performance compared to proforma performance estimates. Included in other assets is interest receivable as follows: - --------------------------------------------------------------------- JUNE 30 1997 1996 - --------------------------------------------------------------------- Interest receivable on loans $1,340 $1,297 Interest receivable on investments and other 178 189 -------------- Total interest receivable $1,518 $1,486 ============== DEPOSITS JUNE 30 1997 1996 - --------------------------------------------------------------------- Non-interest bearing transaction accounts $ 4,714 $ 5,100 Interest-bearing transaction accounts 20,952 19,987 Money market deposit accounts 3,103 5,364 Savings accounts 4,763 5,134 Certificates of $100,000 or more 53,081 45,926 Other certificates and time deposits 95,174 100,191 ------------------- Total $181,787 $181,702 =================== Certificates maturing in years ending June 30: 1998 $102,972 1999 34,485 2000 8,939 2001 1,169 2002 674 Thereafter 16 -------- $148,255 ======== 40 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) SHORT-TERM BORROWINGS JUNE 30 1997 1996 - --------------------------------------------------------------------- Treasury tax and loan note option $ 105 $ 129 Guaranteed investment contracts 5,086 5,564 -------------- Total short-term borrowings $5,191 $5,693 ============== FHLB ADVANCES AND OTHER LONG-TERM DEBT
JUNE 30 1997 1996 - ------------------------------------------------------------------------------------------ Note payable, 7.70%, adjusted annually, payable $16,443 per month, including interest, due April 1, 2009, secured by specific multi-family mortgages $ 2,234 $ 2,266 Note payable, 7.75% adjusted annually, payable $7,272 per month, including interest, due September 14, 2010, secured by specific multi-family mortgages 1,006 1,015 Note payable, 7.75% adjusted annually, payable $11,119 per month, including interest, due September 22, 2010, secured by specific multi-family mortgages 1,542 1,552 Junior subordinated notes, 9.125%, interest paid semi-annually, due April 30, 2001, unsecured 1,476 1,485 Junior subordinated notes, 9.25%, interest paid semi-annually, due January 31, 2002, unsecured 1,494 1,500 Senior subordinated notes, 10.00%, interest paid semi-annually, due June 1, 2005, unsecured 7,000 7,000 Federal Home Loan Bank advances, due at various dates through 2002 (weighted average rates of 6.48% and 6.38% at June 30, 1997 and 1996) 23,337 42,474 ----------------- Totals $38,089 $57,292 =================
41 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES 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 $4,000,000 in eligible investment securities pledged at June 30, 1997. Some of the advances are subject to restrictions or penalties in the event of prepayment. The scheduled principal reduction of borrowings at June 30, 1997, is approximately as follows: 1998, $8,605,000; 1999, $5,347,000; 2000, $4,044,000; 2001, $2,161,000; 2002, $2,317,000 and 2003 and later, $15,615,000. - ----------------------------------------------------------------------- INCOME TAX YEAR ENDED JUNE 30 1997 1996 1995 - ----------------------------------------------------------------------- Income tax expense (benefit) Currently payable Federal $(515) $1,175 $1,214 State (53) 416 359 Deferred Federal 240 244 (47) State 73 52 (11) ---------------------- Total income tax expense (benefit) $(255) $1,887 $1,515 ====================== Reconciliation of federal statutory to actual tax expense (benefit) Federal statutory income tax at 34% $ (48) $1,741 $1,556 State income tax, net of federal benefit 13 309 230 Tax-exempt interest (19) Affordable housing tax credits and other (221) (177) (276) Other, net 20 14 5 ---------------------- Actual tax expense (benefit) $(255) $1,887 $1,515 ====================== 42 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) A cumulative deferred tax asset (liability) of $(158,000) and $197,000 is included in the balance sheet at June 30, 1997 and 1996. The components are as follows: - ----------------------------------------------------------------------------- JUNE 30 1997 1996 - ----------------------------------------------------------------------------- Differences in accounting for certain accrued liabilities $ 17 $ 21 Differences in accounting for other real estate (16) (13) Differences in depreciation methods (31) (23) Differences in accounting for loan losses 792 341 Differences in accounting for loan fee income 110 87 Differences in accounting for loan sales (5) (7) Differences in accounting for mortgage servicing rights (285) Differences in basis of FHLB stock (66) (66) Unrealized gain/loss on available-for-sale securities 49 91 Basis differential on certain partnership interests (767) (263) Other 44 29 --------------- Deferred tax asset (liability) $ (158) $197 =============== Assets $ 1,012 $569 Liabilities (1,170) (372) --------------- Deferred tax asset (liability) $ (158) $197 =============== - ----------------------------------------------------------------------------- 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, including redemption of bank stock or excess dividends, or loss of "bank" status, would create income for tax purposes only, which income would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amounts was approximately $635,000. REGULATORY CAPITAL 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. 43 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) At June 30, 1997, the management of the Company believes that the Savings Bank meets all capital adequacy requirements to which it is subject. The most recent notification from its regulatory agency categorized the Savings Bank as well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since that notification that management believes have changed this categorization. However, as a result of increased credit risk, management believes that the Savings Bank's capital ratios need to be improved. The actual and required capital amounts of the Savings Bank are as follows: - -----------------------------------------------------------------------------
1997 ------------------------------------------------ REQUIRED FOR TO BE WELL ACTUAL ADEQUATE CAPITAL* CAPITALIZED* ------------------------------------------------ JUNE 30 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ------------------------------------------------------------------------------------------------ Total capital* (to risk-weighted assets) $22,826 10.74% $17,004 8.00% $21,255 10.00% Tier I capital* (to risk-weighted assets) 16,245 7.64 8,502 4.00 12,753 6.00 Tier I capital* (to adjusted total assets) 16,245 6.93 9,381 4.00 11,726 5.00
* As defined by regulatory agencies - ----------------------------------------------------------------------------- The Savings Bank's tangible capital at June 30, 1997 was $16,245,000, which amount was 6.93% of tangible assets and exceeded the required ratio of 1.5%. RESTRICTION ON DIVIDENDS The Company's principal source of income and funds is dividends from the Savings Bank 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 Savings Bank may pay. At June 30, 1997, total stockholder's equity of the Savings Bank was $16,245,000, of which $5,433,000 was available for the payment of dividends without prior approval by the OTS. 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% of net income to date over the calendar year and 50% 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% of net income if it meets the risk based requirement on January 1, 1993. A savings association failing to meet current capital standards, or at the discretion of its regulators, may only pay dividends with supervisory approval. 44 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STOCKHOLDERS' EQUITY Stockholders' equity has been adjusted to record 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, 1997, a total of 53,184 of the shares originally reserved had been issued and 362,316 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, 1997, a total of 39,732 of the shares originally reserved had been issued and 306,768 remained reserved and unissued. The Board, at its August meeting, approved a tender offer with respect to those warrants. In connection with the offer, the Company will attempt to induce the exercise of the warrants at exercise prices of $3.70 and $4.04 per share, respectively. 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, 1997 and 1996, commitments to extend credit, which represent financial instruments whose contract amount represents credit risk, were $30,363,000 and $17,599,000. 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, 1997 and 1996 was $19,432,000 and $16,572,000. 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, 1997 and 1996 was $34,985,000 and $20,136,000. 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 credit worthiness 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 45 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 1997 and 1996 was $916,000 and $785,000. 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, 1996, the date of the latest actuarial valuation. The Company incurred pension expense of $64,000 for the current year, compared to no pension expense in 1996 or 1995. Due to the Internal Revenue Service's full funding limit, contributions to the plan have not been required since June 1987 until fiscal 1997. The plan provides pension benefits for substantially all of the Company's employees. The Company has a retirement savings Section 401(k) plan in which substantially all employees may participate. The Company matches employees' contributions at the rate of 25% up to 6% of the participant's salary. The Company's expense for the plan was $28,000, $27,000 and $17,000 for 1997, 1996 and 1995. STOCK OPTION PLANS Under the Company's stock option plans, which are accounted for in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, the Company grants stock option awards which vest and become exercisable at various dates. On July 1, 1996, the Company adopted SFAS No. 123 and elected to continue to apply the provisions of APB Opinion No. 25 and provide the proforma disclosures required by SFAS No. 123. The Company did not grant any options during the year ended June 30, 1997, therefore no proforma disclosures are required. The following is a summary of the status of the Company's stock option plans and changes in the plans as of and for the years ended June 30, 1997, 1996 and 1995: INCENTIVE STOCK OPTION PLAN The Company has an incentive stock option plan in which 29,643 common shares have been reserved for issuance under the plan at June 30, 1997. 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 the options were first exercisable was determined by the Board of Directors, and the terms of the stock options will not exceed ten years from the date of grant. No options shall be granted after November 17, 1997. Upon such date, the Plan shall expire except as to outstanding options which will remain in effect until they have been exercised, terminated, or expired. At June 30, 1997, there were 29,643 options available for grant. A total of 12,760 shares under option outstanding at June 30, 1996 were canceled in 1997. A summary of the stock options activity for the incentive stock option plan is as follows: 46 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30 1996 1995 - --------------------------------------------------------------------- Shares under option Outstanding at beginning of year 36,451 67,871 Granted during the year 6,930 6,930 Exercised during the year 30,621 32,528 Canceled options 5,822 Outstanding at end of year 12,760 36,451 Exercisable at end of year 8,602 36,451 Weighted option price per share Exercisable $10.33 $4.35 Exercised 3.92 2.31 Granted 14.32 8.45 - --------------------------------------------------------------------- DIRECTORS' PLAN 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. 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, 1997, there were 147,017 options available for grant. A summary of the stock options activity for the Directors' Plan is as follows: - --------------------------------------------------------------------- JUNE 30 1997 1996 1995 - --------------------------------------------------------------------- Shares under option Outstanding at beginning of year 86,762 86,762 79,832 Granted during the year 6,930 Outstanding at end of year 86,762 86,762 86,762 Exercisable at end of year 86,762 86,762 86,762 Weighted option price per share Exercisable $6.50 $6.50 $6.50 Granted 9.74 47 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1995 KEY EMPLOYEES' STOCK OPTION PLAN The Board of Directors of the Company adopted and approved the 1995 Key Employees' Stock Option Plan (1995 Plan) 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 of 1986, as amended (Code), 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. On March 15, 1995, options for 80,850 common shares 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, 1997, there were 155,650 options available for grant. A summary of the stock options activity for the 1995 Plan is as follows: - --------------------------------------------------------------------- JUNE 30 1997 1996 - --------------------------------------------------------------------- Shares under option Outstanding at beginning of year 80,850 80,850 Granted during the year Exercised during the year 407 Outstanding at end of year 80,443 80,850 Exercisable at end of year 48,183 32,340 Weighted option price per share Exercisable $10.52 $10.51 Exercised 9.63 Granted - --------------------------------------------------------------------- FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument: CASH AND CASH EQUIVALENTS - The fair value of cash and cash equivalents approximates carrying value. INTEREST-BEARING 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 48 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 noninterest-bearing, interest-bearing demand and savings accounts are equal to the amount payable on demand at the balance sheet date. The carrying amounts for variable rate, fixed-term certificates of deposit approximate their fair values at the balance sheet date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits. SHORT-TERM BORROWINGS - The fair value of these borrowings is estimated using rates currently available to the Company for debt with similar terms and remaining maturities. These instruments adjust on a periodic basis and the carrying amount represents the fair value. FHLB ADVANCES AND OTHER LONG-TERM DEBT - The fair value of these borrowings is estimated using a discounted cash flow calculation, based on current rates for similar debt. Long-term debt consists of adjustable instruments tied to a variable market interest rate. OFF-BALANCE-SHEET COMMITMENTS - Commitments include commitments to purchase and originate mortgage loans, commitments to sell mortgage loans, and standby letters of credit and are generally of a short-term nature. The fair value of 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 Company's financial instruments are as follows:
- ------------------------------------------------------------------------------------ 1997 1996 CARRYING FAIR Carrying Fair JUNE 30 AMOUNT VALUE Amount Value - ------------------------------------------------------------------------------------ Assets Cash and cash equivalents $ 3,506 $ 3,506 $ 10,213 $ 10,213 Interest-bearing deposits 6 6 5 5 Investment securities available for sale 13,790 13,790 17,458 17,458 Loans, net 203,183 201,600 216,162 216,720 Interest receivable 1,518 1,518 1,486 1,486 FHLB stock 3,920 3,920 3,920 3,920 Liabilities Deposits 181,787 181,864 181,702 182,043 Short-term borrowings 5,191 5,191 5,693 5,693 Long-term debt 38,089 37,995 57,292 57,621 Interest payable 735 735 749 749
49 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) Presented below is condensed financial informa- tion as to financial position, results of operations and cash flows of the Company: - ---------------------------------------------------------------------------- CONDENSED BALANCE SHEET JUNE 30 1997 1996 - ---------------------------------------------------------------------------- Assets Cash on deposit $ 92 $ 160 Bank certificates of deposit 6 5 Investment in subsidiaries 16,308 17,992 Loans, net 5,208 5,341 Subordinated debentures and other loan receivables from subsidiaries 5,813 5,933 Other assets 1,153 699 ---------------- Total assets $28,580 $30,130 ================ Liabilities Long-term debt $15,247 $15,317 Other liabilities 397 518 ---------------- Total liabilities 15,644 15,835 ---------------- Stockholders' Equity Common stock 2,487 2,495 Capital surplus 8,708 8,785 Stock warrants 264 266 Retained earnings, substantially restricted 1,508 2,889 Net unrealized loss on securities available for sale (31) (140) ---------------- Total stockholders' equity 12,936 14,295 ---------------- Total liabilities and stockholders' equity $28,580 $30,130 ================ 50 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) CONDENSED STATEMENT OF INCOME YEAR ENDED JUNE 30 1997 1996 1995 - ----------------------------------------------------------------------------- Income Dividends from subsidiaries $2,500 $2,200 $ 742 Interest income 1,092 978 442 Other income 148 234 189 ------------------------- Total income 3,740 3,412 1,373 ------------------------- Expense Interest expense 1,397 1,364 527 Provision for loan losses 75 Other expenses 619 611 336 ------------------------- Total expense 2,091 1,975 863 ------------------------- Income Before Income Tax and Equity in Undistributed (Distribution in excess) Income of Subsidiaries 1,649 1,437 510 Income Tax Benefit (337) (302) (92) ------------------------- Income Before Equity in Undistributed (Distribution in excess) Income of Subsidiaries 1,986 1,739 602 Equity in Undistributed Income of Subsidiaries (1,873) 1,496 2,459 ------------------------- Net Income $ 113 $3,235 $3,061 ========================= 51 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLE DOLLAR AMOUNTS IN THOUSANDS) CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30 1997 1996 1995 - -------------------------------------------------------------------------------- Operating Activities Net income $ 113 $3,235 $ 3,061 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 37 4 34 Undistributed net income of subsidiaries 1,873 (1,496) (2,459) (Increase) decrease in other assets (491) 392 (618) (Increase) decrease in other liabilities 128 (183) 172 -------------------------- Net cash provided by operating activities 1,660 1,952 190 -------------------------- Investing Activities Decrease in interest-bearing deposits in other banks 1 5 Capital contributions to subsidiaries (80) (4,485) Advance on note to subsidiary (1,058) (4,875) Principal payments received on notes from subsidiaries 120 Net (increase) decrease in loans 133 (1,309) (1,455) -------------------------- Net cash provided (used) by investing activities 174 (2,367) (10,810) -------------------------- Financing Activities Payment of long-term debt (70) (28) Proceeds from issuance of long-term debt 1,270 9,847 Proceeds from exercise of stock options 4 109 75 Proceeds from exercise of stock warrants 35 632 19 Payment of cash dividends (1,745) (1,729) (626) Purchase of common stock (126) Proceeds from issuance of stock warrants 150 -------------------------- Net cash provided (used) by financing activities (1,902) 282 9,437 -------------------------- Change in Cash and Cash Equivalents (68) (133) (1,183) Cash and Cash Equivalents, Beginning of Year 160 293 1,476 -------------------------- Cash and Cash Equivalents, End of Year $ 92 $ 160 $ 293 ==========================
52 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES 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, 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, income taxes have been deducted. Identified assets are principally those used in each segment. Real estate development and management activities conducted by the Company are not asset intensive. Presented below is condensed financial information relating to the Company's business segments: - ----------------------------------------------------------------------- JUNE 30 1997 1996 1995 - ----------------------------------------------------------------------- Revenue Banking $ 22,958 $ 25,190 $ 16,788 Real estate development and management 1,181 4,519 4,383 ----------------------------- $ 24,139 $ 29,709 $ 21,171 ============================= Operating Profit Banking $ 682 $ 1,416 $ 1,032 Real estate development and management (569) 1,819 2,029 ----------------------------- $ 113 $ 3,235 $ 3,061 ============================= Identifiable Assets Banking $228,181 $250,466 $261,121 Real estate development and management 11,820 11,750 8,317 ----------------------------- $240,001 $262,216 $269,438 ============================= Depreciation and Amortization Banking $ 354 $ 282 $ 232 Real estate development and management 70 77 44 ----------------------------- $ 424 $ 359 $ 276 ============================= Capital Expenditures Banking $ 1,106 $ 1,569 $ 1,118 Real estate development and management 127 809 435 ----------------------------- $ 1,233 $ 2,378 $ 1,553 ============================= - ----------------------------------------------------------------------- 53 CORPORATE INFORMATION FIDELITY FEDERAL BANCORP AND SUBSIDIARIES TOLL-FREE SHAREHOLDER INQUIRIES: 1-800-280-8280 If you have inquiries or questions regarding your Fidelity Federal Bancorp Shareholder account, call shareholder relations at 1-800-280-8280 or (812) 469-2100 ext. 16. STOCK TRANSFERS, DIVIDEND PAYMENTS DIVIDEND REINVESTMENT Fidelity Federal Bancorp Attn: Shareholder Relations 700 S. Green River Road, Suite 2000 PO Box 5584 Evansville, IN 47716-5584 Fidelity Federal Bancorp offers its Common 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, Executive Vice President, CFO, and Treasurer Fidelity Federal Bancorp 700 S. Green River Road, Suite 2000 PO Box 5584 Evansville, IN 47716-5584 (812) 469-2100 ext. 14 All other requests, including requests for the Annual Report, Form 10-K, Form 10-Q, etc. should be directed to: Shareholder Relations Fidelity Federal Bancorp 700 S. Green River Road, Suite 2000 PO Box 5584 Evansville, IN 47716-5584 (812) 469-2100 ext. 16 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 MARKET MAKERS Wedbush Morgan Securities, Inc. Natcity Investments, Inc. McDonald and Company Securities, Inc. Howe Barnes Investments, Inc. Herzog, Heine, Geduld, Inc. DIVIDEND CALENDAR Dividends on common shares, if approved by the Board of Directors, are anticipated as follows: RECORD DATES PAYMENT DATES September, 1997 October, 1997 December, 1997 January, 1998 March, 1998 April, 1998 June, 1998 July, 1998 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 the Village Housing affordable housing developments, contact Village Management Corporation (812) 469-2100, ext. 20 CORPORATE HEADQUARTERS Fidelity Federal Bancorp 700 S. Green River Road, Suite 2000 PO Box 5584 Evansville, IN 47716-5584 1-800-280-8280 (812) 469-2100 ANNUAL MEETING Wednesday, October 15, 1997 10:00 am (CDT) United Fidelity Bank, fsb, Downtown Office 18 NW Fourth Street, 2nd floor Evansville, Indiana 54 CORPORATE INFORMATION Fidelity Federal Bancorp Unitary savings and loan holding company ------------------------ | ----------------------------------- | | Village Securities Corp. United Fidelity Bank, fsb. Discount brokerage Federal savings bank - Equities and debt full service operations --------------------------- | Village Capital Corp. | Multifamily real estate -----------------| finance subsidiary | | Village Comm. Dev. Corp. | Multifamily real estate -----------------| development subsidiary | | Village Management Corp. | Multifamily real estate -----------------| property management | | Village Housing Corp. | General partner in -----------------| Sec. 42 partnerships | | Village Insurance Corp. | Accident/Health and -----------------| Life Insurance BOARD OF DIRECTORS CURT J. ANGERMEIER Attorney Director, United Fidelity Bank, fsb Director, Village Securities Corporation 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, Village Capital Corporation Director and Officer, The Village Companies President, Pedcor Investments Director, Flagship Bank, fsb (San Diego, CA) Director, International City Bank, N.A. (Long Beach, CA) JACK CUNNINGHAM President, Chief Executive Officer, and Director, United Fidelity Bank, fsb Vice-Chairman and Secretary, Fidelity Federal Bancorp Director and Officer, The Village Companies Port of Evansville Wharfmaster M. BRIAN DAVIS President and Chief Executive Officer, Fidelity Federal Bancorp Vice Chairman and Director, United Fidelity Bank, fsb President and Chief Executive Officer, Village 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 BARRY A. SCHNAKENBURG President, U.S. Industries Group, Inc. President, Barry Inc. Director, United Fidelity Bank, fsb Director, Village Capital Corporation Director and Officer, Village Insurance Corporation OFFICERS BRUCE A. CORDINGLEY Chairman of the Board JACK CUNNINGHAM Vice-Chairman of the Board and Secretary M. BRIAN DAVIS President and Chief Executive Officer DONALD R. NEEL, CPA Executive Vice President, Chief Financial Officer and Treasurer MARK A. ISAAC Vice President, Controller WILLIAM M. MCCUTCHAN Vice President, Loan Review DEBORAH H. GORMAN Assistant Vice President, Human Resources SHANON L. DELONG Internal Auditor ANTHONY W. FREELS Shareholder Relations Officer 55 CORPORATE INFORMATION FIDELITY FEDERAL BANCORP UNITED FIDELITY BANK, FSB OFFICERS BRUCE A. CORDINGLEY Chairman of the Board M. BRIAN DAVIS Vice Chairman of the Board JACK CUNNINGHAM President, Chief Executive Officer and Secretary DONALD R. NEEL, CPA Executive Vice President, Chief Operating Officer and Treasurer TERRY G. JOHNSTON Executive Vice President, Mortgage Banking MICHAEL S. SUTTON, CPA Executive Vice President, Commercial Banking KIRBY W. KING Senior Vice President, Retail Banking ROGER C. BAUGH Vice President, Special Services MARK A. ISAAC Vice President, Controller JAMIE R. HAGAN Assistant Vice President, Marketing DALE HOLT Assistant Vice President, Consumer Loans JANET L. JACKSON Assistant Vice President, Loan Servicing TONY L. KRAMPE Assistant Vice President, Mortgage Banking BARBARA A. LUCKETT Assistant Vice President, Branch Manager DEBORAH S. REICH Assistant Vice President, Branch Manager CHRISTOPHER A. VITON Assistant Vice President, Consumer Loans STEVEN L. WALKER Assistant Vice President, Commercial Banking BEVERLY A. WINTERNHEIMER Assistant Vice President, Branch Manager VILLAGE CAPITAL CORPORATION OFFICERS BRUCE A. CORDINGLEY Chairman of the Board JACK CUNNINGHAM Vice Chairman of the Board M. BRIAN DAVIS President and Chief Executive Officer DONALD R. NEEL, CPA Executive Vice President and Treasurer BRADLEY E. PARKER Senior Vice President STACI D. KRANTZ Assistant Vice President MARK A. ISAAC 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 M. BRIAN DAVIS Chairman of the Board, President and Chief Executive Officer BARRY A. SCHNAKENBURG Executive Vice President ROGER C. BAUGH Vice President DONALD R. NEEL, CPA Treasurer MARK A. ISAAC Secretary VILLAGE HOUSING CORPORATION OFFICERS BRUCE A. CORDINGLEY Chairman of the Board JACK CUNNINGHAM Vice Chairman of the Board and Executive Vice President M. BRIAN DAVIS President and Chief Executive Officer DONALD R. NEEL, CPA Senior Vice President and Treasurer BRADLEY E. PARKER Senior Vice President TIMOTHY J. WAGNER Vice President and Controller MARK A. ISAAC Secretary VILLAGE MANAGEMENT CORPORATION OFFICERS M. BRIAN DAVIS Chairman, President and Chief Executive Officer JACK CUNNINGHAM Vice Chairman of the Board CHRISTINE M. MARSHALL Executive Vice President MORGAN B. FULTON Senior Vice President, Area Manager BRADLEY E. PARKER Senior Vice President DONALD J. FUCHS, ESQ Vice President (Village Title Co.) JULIE NONTE Vice President, Area Manager HELEN L. DYE Assistant Vice President, Collections JOHN A. STEWART Assistant Vice President, Compliance DONALD R. NEEL, CPA Treasurer MARK A. ISAAC Secretary VILLAGE COMMUNITY DEVELOPMENT CORPORATION OFFICERS BRUCE A. CORDINGLEY Chairman of the Board M. BRIAN DAVIS President and Chief Executive Officer JACK CUNNINGHAM Executive Vice President DONALD R. NEEL, CPA Senior Vice President and Treasurer BRADLEY E. PARKER Senior Vice President STACI D. KRANTZ Assistant Vice President MARK A. ISAAC Secretary 56 EX-21 4 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: Village Insurance Corporation Indiana Village Housing Corporation Indiana Village Community Development Corporation Indiana Village Management Corporation Indiana Village Capital Corporation Indiana EX-27 5
9 This schedule contains summary financial information extracted from Fidelity Federal Bancorp's consolidated balance sheet as of June 30, 1997 and the consolidated statement of income for the year ended June 30, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 1,747 1,765 0 0 13,790 0 0 204,964 1,781 240,001 181,787 5,191 1,999 38,089 0 0 2,487 10,449 240,001 18,692 1,089 502 20,283 10,000 13,831 6,451 975 42 9,474 (141) (141) 0 0 113 .04 .04 2.72 256 29 0 0 1,059 267 14 1,781 1,781 0 0
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