-----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, CZeYusgugJXCRns7sAxDD5VsbRD/GALLAmQDyBSBU54ZvVZA9kYxtBxhuP3skt33 87jbawfLCDDxxEm9Q+HelQ== 0000926274-98-000275.txt : 19980915 0000926274-98-000275.hdr.sgml : 19980915 ACCESSION NUMBER: 0000926274-98-000275 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980914 SROS: NASD 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-Q/A SEC ACT: SEC FILE NUMBER: 000-22880 FILM NUMBER: 98708966 BUSINESS ADDRESS: STREET 1: 700 S GREEN RIVER ROAD STREET 2: SUITE 2000 CITY: EVANSVILLE STATE: IN ZIP: 47715 BUSINESS PHONE: 8124240921 MAIL ADDRESS: STREET 1: 18 NW FOURTH ST STREET 2: PO BOX 1347 CITY: EVANSVILLE STATE: IN ZIP: 47706-1347 10-Q/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended March 31, 1998 FIDELITY FEDERAL BANCORP ------------------------------------------------------ (Exact name of registrant as specified in its charter) Indiana 0-22880 35-1894432 - ---------------------------- ---------- ------------------- (State of other jurisdiction Commission (IRS Employer of Incorporation of File No. Identification No.) Organization) 700 S. Green River Road, Suite 2000 Evansville, Indiana 47715 --------------------------------------------------- (Address of principal executive offices) (Zip Code) (812) 469-2100 -------------------------------------------------- Registrant's telephone number, including area code Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- As of April 12, 1998, there were 3,127,210 shares of the Registrant's common stock, $1 stated value, issued and outstanding. Exhibit Index is on page 24. FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Index Page PART I - FINANCIAL INFORMATION ITEM 1--Financial Statements: Consolidated balance sheet........................................... 3 Consolidated statement of income..................................... 4 Consolidated statement of changes in stockholders' equity............ 5 Consolidated statement of cash flows................................. 6 Notes to consolidated financial statements........................... 7 ITEM 2--Management's Discussion and Analysis of Results of Operation and Financial Condition Results of Operations ............................................ 11 Financial Condition............................................... 15 Capital Resources and Capital Requirements........................ 19 Liquidity......................................................... 21 PART II - OTHER INFORMATION............................................. 22 SIGNATURES.............................................................. 23 EXHIBIT INDEX........................................................... 24 2 ITEM 1 - FINANCIAL STATEMENTS PART I - FINANCIAL INFORMATION FIDELITY FEDERAL BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT FOR SHARE DATA) (UNAUDITED)
MARCH 31, JUNE 30, 1998 1997 - ------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 1,507 $ 1,747 Short-term interest-bearing deposits 5,891 1,759 -------- -------- Total cash and cash equivalents 7,398 3,506 Interest-bearing deposits 6 6 Securities available for sale 10,472 13,790 Loans 163,297 204,964 Allowance for loan losses (3,090) (1,781) -------- --------- Net loans 160,207 203,183 Premises and equipment 5,933 6,341 Federal Home Loan Bank of Indianapolis stock, at cost 3,920 3,920 Other assets 11,748 9,258 -------- -------- Total assets $199,684 240,001 ======== ======== LIABILITIES Deposits Non-interest bearing $ 6,057 $ 4,714 Interest-bearing 140,615 177,073 -------- -------- Total deposits 146,672 181,787 Short-term Borrowings 2,447 5,191 Federal Home Loan Bank advances and other long-term debt 33,346 38,089 Advances by borrowers for taxes and insurance 695 674 Letter of Credit valuation allowance 6,778 Other liabilities 2,473 1,324 -------- -------- Total liabilities 192,411 227,065 STOCKHOLDERS' EQUITY Preferred stock, no par or stated value Authorized and unissued - 5,000,000 shares Common stock, $1 stated value Authorized - 5,000,000 shares Issued Outstanding - 3,127,210 and 2,487,385 shares 3,127 2,487 Capital surplus 10,799 8,708 Stock warrants 11 264 Retained earnings, substantially restricted (6,635) 1,508 Net unrealized losses on securities available for sale (29) (31) -------- -------- Total stockholders' equity 7,273 12,936 -------- -------- Total liabilities and stockholders' equity $199,684 $240,001 ======== ========
See notes to consolidated financial statements. NOTE: The consolidated balance sheet at June 30, 1997 has been derived from the audited financial statements. 3 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT FOR SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, 1998 1997 1998 1997 ------------------------ ----------------------- INTEREST INCOME Loans $3,679 $4,509 $12,288 $13,996 Securities available for sale 145 269 520 834 Federal funds sold 5 52 75 70 Interest-bearing deposits 86 30 213 93 Other interest and dividend income 78 75 238 231 ------- ------ ------- ------- Total interest income 3,993 4,935 13,334 15,224 ------- ------ ------- ------- INTEREST EXPENSE Deposits 2,023 2,489 6,909 7,545 Federal Home Loan Bank advances 302 483 983 1,680 Federal funds purchased 49 Other interest expense 375 428 1,150 1,210 ------- ------ ------- ------- Total interest expense 2,700 3,400 9,042 10,484 ------- ------ ------- ------- NET INTEREST INCOME 1,293 1,535 4,292 4,740 Provision for loan losses 4,298 60 4,523 915 ------- ------ ------- ------- Net interest income after provision for loan losses (3,005) 1,475 (231) 3,825 ------- ------ ------- ------- NON-INTEREST INCOME Fee income-real estate development and management 83 90 265 262 Service charges on deposit accounts 79 79 320 225 Gain on sale of Real estate loans 8 19 42 81 Investments 5 79 Letter of credit fees 152 185 529 509 Agent fees 126 111 510 291 Real estate mortgage banking fees 535 999 Loan participation fees 197 Other income 137 190 472 687 ------- ------ ------- ------- Total non-interest income 590 1,209 2,414 3,054 ------- ------ ------- ------- NON-INTEREST EXPENSE Salaries and employee benefits 842 1,145 2,570 3,415 Net occupancy expense 120 103 342 335 Equipment expense 87 97 264 277 Data processing expense 125 77 314 230 Deposit insurance expense 42 18 102 1,276 Legal and professional fees 96 70 227 254 Letter of credit valuation provision 6,778 6,778 Writedown of affordable housing partnership investments 1,478 Affordable housing group activities 715 2,193 Advertising 56 50 158 177 Other expense 731 403 1,469 1,436 ------- ------ ------- ------- Total non-interest expense 11,070 1,963 14,417 7,400 ------ ------- ------- INCOME (LOSS) BEFORE INCOME TAX (13,485) 721 (12,234) (521) Income tax expense (5,363) 192 (5,029) (321) ------- ------ ------- ------- NET INCOME (LOSS) $(8,122) $ 529 $(7,205) $(200) ======= ====== ======= ======= PER SHARE: Basic net income (loss) $ (2.60) $ 0.21 $ (2.49) $(0.08) Diluted net income (loss) (2.60) 0.20 (2.49) (0.08) AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 3,127,240 2,630,667 2,889,348 2,686,040
See notes to consolidated financial statements. 4 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, 1998 1997 1998 1997 ----------------------- ------------------- BEGINNING BALANCES $15,702 $12,605 $12,936 $14,295 Net income (8,122) 529 (7,205) (200) Net change in unrealized gain (loss) on securities available for sale 12 (27) 2 80 Cash dividends (314) (249) (938) (1,246) Purchase of treasury stock (5) (15) (101) Exercise of stock warrants 5 2,493 33 Exercise of stock options 2 4 ------- ------- ------- ------- BALANCES, MARCH 31 $ 7,273 $12,865 $ 7,273 $12,865 ======= ======= ======= =======
See notes to consolidated condensed financial statements. 5 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED MARCH 31, 1998 1997 ---------------------------- Operating Activities Net income $ (7,205) $ (200) Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 4,523 915 Valuation allowance for land 200 Investment securities gains (79) Loss on sale of premises and equipment 14 7 Gain on sale of premises and equipment (2) Depreciation 338 305 Investment securities amortization (accretion), net (11) 5 Amortization of net loan origination fees and points (34) (5) Valuation for Letters of credit 6,778 Changes in: Interest receivable and other assets (2,491) (395) Interest payable and other liabilities 1,111 (582) -------- ------- Net cash provided by operating activities 3,144 48 -------- ------- Investing Activities Purchases of investment securities available for sale (1,906) (2,015) Proceeds from maturities of investment securities available for sale 1,909 2,821 Proceeds from sale of investment securities available for sale 3,379 Net changes in loans 38,487 6,674 Purchases of premises and equipment (145) (1,133) -------- ------- Net cash provided by investing activities 41,724 6,347 -------- ------- Financing Activities Net change in: Noninterest-bearing, NOW, savings and money market deposits (35,077) 449 Certificates of deposit (38) 3,652 Proceeds from short-term borrowings 3,038 8,327 Repayment of short-term borrowings (5,815) (7,556) Proceeds from FHLB advances and other long-term borrowings 7,600 Repayment of FHLB advances other long-term borrowings (4,710) (22,469) Net change in advances by borrowers for taxes and insurance 21 290 Purchase of common stock (15) (102) Cash dividends (873) (1,496) Proceeds from exercise of stock warrants 2,493 4 Proceeds from exercise of stock options 33 -------- ------- Net cash used by financing activities (40,976) (11,268) -------- ------- Change in Cash and Cash Equivalents 3,892 (4,873) Cash and Cash Equivalents, beginning of period 3,506 10,213 -------- ------- Cash and Cash Equivalents, end of period $7,398 $5,340 ======== ======= Additional Cash Flows and Supplementary information Cash paid for income taxes, net of refunds $ 625 $ 590 Cash paid for interest 8,403 9,720
See notes to consolidated financial statements. 6 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - - ACCOUNTING POLICIES The significant accounting policies followed by Fidelity Federal Bancorp (the "Company") and its wholly owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments which are necessary for a fair presentation of the results for the periods reported, and have been included in the accompanying unaudited consolidated condensed financial statements. The results of operations for the nine months ended March 31, 1998 are not necessarily indicative of those expected for the remainder of the year. - - AMENDMENT OF FORM 10Q FOR THE QUARTER ENDED MARCH 31, 1998 The Company previously reported a net loss for the quarter ended March 31, 1998 of $2,010,000. This loss included an additional provision for loan losses of $2.8 million as well as $753,000 in additional charges that were related to the Company's Internal Revenue Code ("IRC") Section 42 tax-credit real estate development program, which is discussed below under "Company Subsidiaries". During the Company's fourth quarter, the Company's primary regulator, the Office of Thrift Supervision ("OTS"), performed an examination of the Bank and the Company. The methodology used by the OTS to compute the allowance for loan losses and to establish reserves for letters of credit in connection with the Section 42 projects was different than the methodology previously used by the Company to compute these estimates. The OTS's methodology was accepted by management and resulted in an additional provision for loan losses of $1.4 million and an increase in non-interest expense of $8.7 million. The increase in non-interest expense consisted primarily of an addition to the letter of credit valuation allowance of $6.8 million. This amended 10Q/A is being filed to restate the results of operations and financial position of the Company for these adjustments. In connection with the OTS exam, for which a final report has not been issued, it is probable that the Company will be restricted from performing certain activities without prior approval by the OTS. The Company has announced that it is currently suspending the payment of dividends. 7 - - NET INCOME PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement No. 128 "Earnings Per Share." This statement simplifies the computation of earnings per share and requires dual presentation of basic and diluted earnings per share on the face of the income statement. This statement is effective for financial statements issued for periods ending after December 15, 1997, with earlier application not permitted. Basic and diluted earnings per share have been computed based on the weighted average common and common equivalent shares outstanding during the periods. Common stock options and warrants are considered to be common equivalent shares to the extent they are dilutive. The Company adopted FAS 128 for the period ending December 31, 1997. All prior periods earnings per share have been restated for FAS 128.
FOR THE NINE MONTHS FOR THE NINE MONTHS ENDED 3/31/98 ENDED 3/31/97 INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) (AMOUNT) (NUMERATOR) (DENOMINATOR) (AMOUNT) --------------------------------------- ---------------------------------------- BASIC EPS Income available to common stockholders $(7,205,337) 2,899,348 $(2.49) $(200,259) 2,491,971 $(0.08) EFFECT OF DILUTIVE SECURITIES Options* 30,449 Warrants* 163,620 DILUTED EPS Income available to common stockholders plus assumed ----------- --------- --------- --------- conversions $(7,205,337) 2,899,348 $(2.49) $(200,259) 2,686,040 $(0.08) =========== ========= ========= =========
*Note: The effect of the options and warrants, 26,131 and 49,840, respectively, would have an antidilutive effect on earnings per share, therefore are not included in the earnings per share calculation.
FOR THE THREE MONTHS FOR THE THREE MONTHS ENDED 3/31/98 ENDED 3/31/97 INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) (AMOUNT) (NUMERATOR) (DENOMINATOR) (AMOUNT) --------------------------------------- ---------------------------------------- BASIC EPS Income available to common stockholders $(8,121,998) 3,127,240 $(2.60) $ 528,991 2,489,263 $ 0.21 EFFECT OF DILUTIVE SECURITIES Options** 24,509 Warrants** 116,892 DILUTED EPS Income available to common stockholders plus assumed ----------- --------- --------- --------- conversions $(8,121,998) 3,127,240 $(2.60) $ 528,991 2,630,664 $ 0.20 =========== ========= ========= =========
**Note: The effect of the options and warrants, 27,730 and 6,950, respectively, would have an antidilutive effect on earnings per share, therefore are not included in the earnings per share calculation. Options to purchase 102,275 shares of common stock at an average price of $10.74 were outstanding during fiscal 1998, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. Options to purchase 48,510 shares of common stock at an average price of $10.91 were outstanding during fiscal 1997, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. 8 - - STOCKHOLDERS' EQUITY On September 22, 1997, the Company filed a Schedule 13E4 with the Securities and Exchange Commission regarding a warrant tender offer to holders of its 1994 and 1995 warrants. The offer and withdrawal rights expired at 5:00 pm, Central Standard Time, on October 31, 1997. The Board of Directors of the Company had decreased the exercise price, upon the terms and subject to the conditions set forth in the Letter of Transmittal, to $3.70 for the 1994 Warrants and $4.04 for the 1995 Warrants. The Company raised approximately $2.5 million in additional capital. In connection with the Company's second debt and equity rights offering completed January 31, 1995, the Company has reserved 346,500 shares of its common stock for issuance upon exercise of 1,500 outstanding warrants. Each warrant represents the right to purchase 231 shares of common stock. The warrants were valued at $100 per warrant, carry an exercise price of $8.93 per share, and expire on January 31, 2005. At March 31, 1998, a total of 210,441 of the shares originally reserved had been issued and 9,471 remained reserved and unissued. In connection with the Company's first debt and equity rights offering completed on April 30, 1994, the Company has reserved 415,500 shares of its common stock for issuance upon exercise of 1,500 outstanding warrants. Each warrant represents the right to purchase 277 shares of common stock. The warrants were valued at $100 per warrant, carry an exercise price of $6.22 per share, and expire on April 30, 2004. At March 31, 1998, a total of 186,144 of the shares originally reserved had been issued and 18,282 remained reserved and unissued. - - CASH DIVIDEND On February 18, 1998, the Board of Directors declared a dividend of $0.10 per share payable on April 6, 1998 to stockholders of record on March 2, 1998. The Company has currently suspended the payment of dividends. - - COMPANY SUBSIDIARIES United Fidelity Bank, fsb ("Savings Bank"), Village Securities Corporation and Village Affordable Housing Corporation are three subsidiaries of the Company. The Savings Bank is a federally chartered savings bank, and is regulated by the Office of Thrift Supervision. Village Securities Corporation began operations July 1, 1997, by providing customers with discount brokerage services for stocks and bonds and Village Affordable Housing Corporation was formed during the third quarter fiscal 1998 for the purpose of holding interests in real estate housing, and is not operational. The Savings Bank's subsidiaries, Village Housing Corporation, Village Management Corporation and Village Community Development Corporation, and Village Capital Corporation (the "Affordable Housing Group") are involved in various aspects of financing, owning, developing, building, renting and managing affordable housing projects. Another subsidiary of the Savings Bank, Village Insurance Corporation, is engaged in the business of selling various insurance products. The Company reevaluated its business plan in fiscal 1997. As a result, Village Community Development Corporation has reduced its activities significantly. Village Capital Corporation (formerly known as Fidelity Federal Capital Corporation) continues to receive consulting fees for its services in assisting unaffiliated borrowers obtain financing. Village Housing Corporation and Village Management Corporation remain fully operational. The Company's current plans are to not originate, participate or invest in any new or additional Section 42 projects. - - NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board has issued Statement No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components. In addition, the Financial Accounting Standards Board has issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for disclosing information about operating segments in interim and annual financial statements. The statement is effective for fiscal years beginning after December 15, 1997. The Company will comply with the new disclosure requirements beginning in fiscal 1999. The application of the new rules will not have a material impact on the Company's financial condition or results of operations. 9 - - SEGMENT INFORMATION The Company operates principally in two industries, banking and real estate development and management. The Savings Bank offers traditional banking products, such as checking, savings, and certificates of deposit, as well as mortgage, consumer, and commercial loans. Through the Affordable Housing Group, the Company is involved in various aspects of financing, owning, developing, building, renting and managing affordable housing projects. The additional provisions for losses on loans and letters of credit that the Company recorded in the third quarter are included in the "banking segment" industry information that follows below. The majority of the recorded provision is for loans that were made to the Section 42 affordable housing projects that the Company is managing. In addition, the majority of the reserves for letters of credit relate to letters of credit that guarantee performance of loans made to the affordable housing projects by other financial institutions. Operating profit is total revenue less operating expenses. In computing operating profit, income taxes have been deducted. Identified assets are principally those used in each segment. Real estate development and management activities conducted by the Company are not asset intensive. The assets in this segment primarily include cash received in the form of fees and land to be used for future developments. Presented below is condensed financial information relating to the Company's business segments:
(IN THOUSANDS) THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, 1998 1997 1998 1997 ----------------------- ---------------------- REVENUE: Banking $ 4,390 $ 5,518 $ 15,141 $ 17,018 Real estate development and management 193 626 607 1,260 -------- -------- -------- -------- Total consolidated $ 4,583 $ 6,144 $ 15,748 $ 18,278 ======== ======== ======== ======== OPERATING PROFIT: Banking $ (5,530) $ 631 (4,550) 296 Real estate development and management (2,592) (102) (2,655) (496) -------- -------- -------- -------- Total consolidated $ (8,122) $ 529 $ (7,205) $ (200) ======== ======== ======== ======== IDENTIFIABLE ASSETS: Banking $179,172 $236,833 $179,172 $236,833 Real estate development and management 8,214 13,452 8,214 13,452 -------- -------- -------- -------- Total consolidated $187,386 $250,285 $187,386 $250,285 ======== ======== ======== ======== DEPRECIATION AND AMORTIZATION: Banking $ 95 $ 97 $ 323 $ 256 Real estate development and management 5 18 15 49 -------- -------- -------- -------- Total consolidated $ 100 $ 115 $ 338 $ 305 ======== ======== ======== ======== CAPITAL EXPENDITURES: Banking $ 28 $ 114 $ 142 $ 1,061 Real estate development and management 1 8 3 69 -------- -------- -------- -------- Total consolidated $ 29 $ 122 $ 145 $ 1,130 ======== ======== ======== ========
10 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain matters discussed in this Quarterly Report on Form 10-Q are "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as the Company "believes", "anticipates", "expects", "estimates" or words of similar import. Similarly, statements that describe the Company's future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described inclose proximity to such statements and which could cause actual results to differ materially from those anticipated as of the date of this report. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this report and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. - - RESULTS OF OPERATIONS The net loss for the three months ended March 31, 1998 was $8,122,000, compared to a net income of $529,000 for the same period last year. Basic and diluted net loss per share was $(2.60) per share for the three months ended March 31, 1998, compared to net income per share of $0.21 and $0.20 per share, respectively in 1997. Net loss for the nine months ended was $7,205,000 compared to a net loss of $200,000 for the same period last year. Basic and diluted net loss per share for the nine months ended March 31, 1998 was $(2.49) per share compared to a net loss per share of $(0.08) for the same period last year. Last year's net loss was impacted by the federal legislation resolving the FDIC insurance funding issue signed by President Clinton in September, 1996, requiring thrifts to pay a one-time assessment of approximately $.66 per $100 of deposits within 60 days of September 30, 1996. As a result, the Company recorded a charge of $1.0 million during the first quarter of fiscal 1997. The legislation provisions include a reduction of the ongoing insurance premiums thrifts pay from $.23 - $.31 per $100 of deposits to approximately $.06 per $100, as well as the ultimate merger of the funds by the year 2000. In anticipation of this and as a result of continued consolidation and standardization of the bank and thrift industries, the Company, in an ongoing effort to more closely resemble a commercial banking operation, set aside $850,000 in loan loss allowances during the first quarter of fiscal 1997. The Company's third quarter loss is primarily the result of expenses that were recorded in connection with the Company's Section 42 tax-credit real estate development program. These expenses include: - an additional provision for loan losses of $4.2 million; - specific reserves related to letters of credit issued by the Company and the Bank of $6.8 million, and; - a charge-off of the equity investments in the Section 42 projects by the Bank's subsidiary, Village Housing Corporation of $1.5 million. The Company's Section 42 program was primarily in operation between 1993 and 1996 and was conducted from the Company's Indianapolis, Indiana office. In December, 1996 this office was closed and the management of the affordable housing projects was moved to the Company's main location in Evansville, Indiana. The Company has not participated in the development of any new projects that are currently being managed by the Company. Certain of the loans to the affordable housing projects have been refinanced, at a lower rate, with other financial institutions in the past two years, with the Company guaranteeing performance of the credits by issuance of a letter of credit. This was done in an effort to improve the property's ability to support debt payments. The performance of a majority of the affordable housing projects is below that which was originally projected when the projects were formed. This has resulted in lower than expected cash flows, which are needed to support debt repayment. Cash flows have been affected by a number of items, including lower than expected occupancy and/or rent levels, higher than expected expenses and, in certain situations, additional construction costs or delays which resulted in longer start up periods for the projects. The areas in which many of the projects are located have also seen increased competition in the affordable housing industry, which has affected the projects ability to perform at the levels originally projected. Each of the projects are beyond the start-up or construction phase and have been in operation for a sufficient period of time to enable management to conclude that additional provisions and reserves are required. The Company announced on January 21, 1997 an expense reduction plan calling for approximately $1 million in after tax savings. The plan called for the Company to work towards achieving optimum efficiency within its banking and real estate management, development, and financing units by eliminating duplicative and less profitable activities. The Company's long term plan originally called for rapid internal asset growth to a target of $500 million in assets. Management mobilized for the ambitious goal by appropriately staffing the Company to meet the increased demands of a larger organization. Management, in 1997, determined that a more conservative growth plan would allow the Company to grow profitably without straining its capital resources. As such, it was determined that some infrastructure that had been developed would not be required in the short run. On April 25, 1997 the Company announced the completion of the cost reduction program. The Company completed the cost reduction program ahead of schedule and 11 certain components of non interest expense have decreased for the nine months ended March 31, 1998 compared to the same period last year, such as salaries and employee benefits expense which has decreased $845,000. NET INTEREST INCOME. Net interest income, the Company's largest component of income, represents the difference between interest and fees earned on loans, investments and other interest earning assets, and interest paid on interest bearing liabilities. It also measures how effectively management has balanced and allocated the Company's interest rate-sensitive assets and liabilities. Net interest income for the three months ended March 31, 1998, was $1.3 million compared to $1.5 million for the three month period ending March 31, 1997, a decrease of $200,000. A decrease of $11.2 million in loans outstanding and $8.0 million in federal funds sold during the third quarter was the primary reason for the decline. Net interest income for the nine months ended March 31, 1998 was $4.3 million compare to $4.7 million a year ago, a decrease of $400,000. This is primarily due to a decrease in year-to-date average earning assets of $29.6 million to $208.9 million at March 31, 1998. The Company's asset total has decreased $62.9 million since March 31, 1997 to $199.7 million at March 31, 1998, due primarily to payoffs received on multifamily and single-family mortgage loans. The net interest margin is a percentage computed by dividing net interest income on a fully taxable equivalent basis ("FTE") by average earning assets and represents a measure of basic earnings on interest bearing assets held by the Company. The Company's annualized net interest margin for the quarter increased from 2.64% at March 31, 1997, to 2.73% at March 31, 1998. The increase in the margin was caused in part by allowing agent acquired funds, which typically carry a higher cost to the Company, to mature or rollover at the prevailing rate, having a favorable impact on the margin. The impact was offset by a decrease in multifamily construction and commercial real estate loans, which typically bear yields that are significantly higher than traditional single family loans. When these loans pay off the impact on the Company's asset size and margin can be significant. In the Company's current fiscal year, approximately $18.9 million in these loans paid off. However, the average yield on all interest earning assets increased seven basis points to 8.50% at March 31, 1998, compared to 8.43% at March 31, 1997. The average yield on interest bearing liabilities decreased two basis points to 5.77% compared to the same period last year. An ongoing objective of the Company's asset/liability management policy is to match rate-adjustable assets and liabilities at similar maturity horizons to minimize wide fluctuations in net interest income. Management utilizes the Office of Thrift Supervision Net Portfolio Valve ("NPV") model. This model analyzes the NPV and changes in the NPV under several different interest rate scenarios (shocks). The NPV model utilizes several measures of interest rate risk (IRR): the IRR Exposure Measure, the Interest Rate Sensitivity Measuring the Base-Case Net Present Value Capital Ratio and the Percentage Change in NPV. Results of the December 31, 1997 NPV model indicate that the Company's rate sensitivity measure based on a 200 basis points rate shock was 97 basis points at December 31, 1997, which ranks it among the least sensitive to interest rate changes in the thrift industry. The Company utilizes the OTS simulation model to measure and evaluate the impact of changing interest rates on net interest income. The simulation model involves changes in interest rate relationships, asset and liability mixes, prepayments and directional changes in the prevailing interests rates. An institution's NPV is equal to the estimated percent value of assets minus the present value of liabilities plus the net present value of off-balance sheet contracts. The table below illustrates the projected change in the Company's NPV if all market rates were to uniformly and gradually increase or decrease by as much as 2.00%, compared to the results of a flat rate environment. These projections are based upon the Company's Savings Bank balance sheet at December 31, 1997.
(DOLLARS IN THOUSANDS) INCREASE (DECREASE) ------------------------------------------ Change in interest rates from current level (2.00%) (1.00%) 1.00% 2.00% Change in NPV (1,794) (396) (217) (982) Percent change (-11%) (-2%) (-1%) (-6%)
The table indicates that if rates were to gradually increase or decrease by 2.00%, the Company's NPV would be expected to decrease by 6% or 11%, respectively, compared to a flat rate environment. Assuming a 200 basis point rate shock to the Net portfolio value (NPV)
12/31/97 9/30/97 6/30/97 -------- ------- ------- Pre-shock NPV Ratio: NPV as a percent of PV of assets 7.92% 7.34% 7.62% Exposure Measure: Post-shock NPV Ratio 6.54 6.95 6.99 Sensitivity Measure: Change in NPV Ratio .97bp .80bp .63bp
The 97 basis point change in the NPV ratio ranks the Company in the 70th -80th percentile in sensitivity among the thrift industry from a sensitivity measure. The lower the sensitivity measure, the less the Company has interest rate exposure. 12 Interest income for the quarter ended March 31, 1998, was $4.0 million compared to $4.9 million for the quarter ended March 31, 1997, a decrease of $900,000. These decreases are primarily due to a decrease in earning assets compared to the prior year. Interest expense for the quarter ended March 31, 1998, decreased $700,000 over the corresponding period in 1997. This is the result of paying off FHLB advances and allowing agent acquired funds mature or rollover at the prevailing rate. The Company is continuing to monitor the net interest margin which continues to be an area of increased concentration this year. NON-INTEREST INCOME. Non-interest income for the quarter ended March 31, 1998, was $590,000 compared to $1.2 million for the same period in 1997, an decrease of $610,000.
NON-INTEREST INCOME - ----------------------------------------------------------------------------------------------------------- (IN THOUSANDS) NINE MONTHS ENDED MARCH 31, INCREASE 1998 1997 (DECREASE) ---- ---- ---------- Net income from real estate development and management $ 265 $ 683 $(418) Letter of credit fees 529 509 20 Service charges on deposit accounts 320 225 95 Gain on sale of loans 42 81 (39) Gain on sale of investments 79 79 Loan servicing rights net of amortization 31 65 (34) Real estate mortgage banking fees 578 (578) Agent fee income 510 291 219 Loan participation fees 197 197 Servicing fees on loans sold 77 134 (57) Other loan fees 53 97 (44) Other 311 391 (80) ------ ------ ------- Total non-interest income $2,414 $3,054 $ (640) ====== ====== =======
Non-interest income for the nine months ended March 31, 1998, decreased by $640,000 as compared to the nine months ended March 31, 1997. The Company's fee income from real estate development and management decreased from $683,000 last year to $265,000 for the first nine months of fiscal 1998. The $418,000 decrease is primarily due to a decrease of $295,000 in consulting fees, $37,000 in management fees, $45,000 in development and builder fees. Consulting fees are earned for packaging multifamily deals for nonaffiliated borrowers. These fees, which are transaction-based, are volatile in nature. There is no assurance that individual transactions, once initiated, will be completed. The Affordable Housing Group has encountered increased competition in the financing and development of multifamily housing. The AHD program has been used in the past by the Company to develop affordable housing for individuals with low to moderate incomes. The Company has provided financing for other developers which began utilizing the program, due to increased competition in this area. As a result, the Company has noted a significant reduction in the amount of fees it has been able to collect on individual transactions. The Company recognized $578,000 in real estate mortgage banking fees for fiscal 1997 compared to none in the current year. As mentioned above, the increase in competition plus a decrease in multifamily transactions has reduced fee income. The Company did recognize $529,000 in multifamily loan letter of credit fees compared to $509,000 in fiscal 1997. Service charges on deposit accounts increased $95,000 over the prior fiscal year due to the continued growth in the deposit base. Agent fee income increased $219,000 over March 31, 1997, as a result of the Company's origination of auto loans as agent for another financial institution. Net gain on sale of loans decreased $39,000 as the volume of loans has decreased. This was offset by $79,000 in securities gains compared to zero last year. Loan servicing rights also decreased $34,000 from prior year due to a decrease in the volume of loans. The Company arranged a participation for a large multifamily loan customer and collected $197,000 in loan participation fees. The Company sold approximately $48 million in loan servicing rights last year, as a result, servicing fees on loan sold decreased $57,000 from the prior year. Other loan fees decreased $44,000 from the prior year due to large prepayment penalties fees on multifamily loans in the prior year. Other income decreased $80,000 from the prior year due to a recovery of $48,000 on a lawsuit settlement in the prior year and a $20,000 decrease in lease-up fee income associated with the affordable housing segment. PROVISION FOR LOAN LOSSES. The provision for loan losses for the current quarter increased $4.2 million compared to the quarter ended March 31, 1997. The provision for loan losses for the nine months ended was $4.5 million compared to $915,000 in the prior year, an increase of $3.6 million. During the fourth quarter, the OTS performed an examination of the Bank and the Company. The methodology used by the OTS to compute the allowance for loan losses and to establish reserves for letters of credit in connection with the Section 42 projects was different than the methodology previously used by the Company to compute these estimates. The methodology which was used by the OTS and accepted by management considered only recent cash flows and then used those cash flows to determine the level of debt service, given certain assumptions, the individual affordable housing 13 projects could support. This information was then used to determine whether charge-offs of the loans, equity investments or general partner loans were required and to compute specific reserves for the remainder of these assets, as well as for the related letters of credit. NON-INTEREST EXPENSE. Non-interest expense for the quarter ended March 31, 1998 was $11.1 million compared to $2.0 million for the same period in 1997, an increase of $9.1 million.
NON-INTEREST EXPENSE - ---------------------------------------------------------------------------------------------------------- (IN THOUSANDS) NINE MONTHS ENDED MARCH 31, INCREASE 1998 1997 (DECREASE) ---- ---- ---------- Salaries and employee benefits $ 2,570 $3,415 $ (845) Letter of credit valuation provision 6,778 6,778 Write down of affordable housing partnership investments 1,478 1,478 Legal and professional 249 254 (5) Occupancy expense 342 335 7 Equipment expense 264 277 (13) Data processing expense 364 230 134 Abandoned projects 213 177 36 Write down on affordable housing land 200 200 Partnership management fees receivable 122 122 Advertising 158 177 (19) Investment banking fees receivable 106 106 Letter of credit fees 104 104 Deposit insurance 102 1,276 (1,174) Miscellaneous losses 100 14 86 Correspondent bank charges 119 98 21 Printing and supplies 89 144 (55) Loss on investment 68 130 (62) Telephone 56 86 (30) Postage 56 79 (23) Development fees receivable 52 52 Travel and lodging 34 40 (6) Other operating expense 793 668 125 ------- ------ ------ Total non-interest expense $14,417 $7,400 $7,017 ======= ====== ======
The increase in total non-interest expense for the nine months ended March 31, 1998, as compared to the same period last year relate primarily to the Company's Section 42 tax credit real estate development program. The Company recorded specific reserves related to letters of credit issued by the Company and the Bank of $6.8 million and also charged off equity investments in these projects of $1.5 million. Although the majority of the letter of credit reserves relate to the Section 42 program, certain of this reserve relates to letters of credit that are not related to the Section 42 program. The Company has not yet paid any amounts to third parties as a result of these letters of credit. Additional expenses that were recorded during this period that relate to the Section 42 or other outside development projects include the write-off of investment banking fees of $106,000, partnership management fees of $122,000, letter of credit fees of $104,000 and development fees of $52,000. Salaries and employee benefits decreased $846,000 for the nine months ended March 31, 1998, compared to the same period last year. The Company completed a cost reduction in the fourth quarter of fiscal 1997, resulting in a significant reduction in staff. The Company should realize the full impact of the cost reduction during fiscal 1998. Legal and professional fees decreased $27,000 from the prior year due to the legal costs associated with the affordable housing segment, which has decreased from the prior year. Occupancy expense increased $7,000 over the prior year due to the Company realizing the full years impact of depreciation expense for the new Eastside location. Equipment expense decreased by $13,000 compared to the prior year as management continues to closely monitor these expenses. Deposit insurance decreased $1.2 million from the prior year, due primarily to the one-time special SAIF assessment imposed on thrifts in September 1996. Data processing expense increased $84,000 due primarily to the increase in the Company's retail deposit base and increased volumes in other areas and an additional $30,000 accrued for Year 2000 compliance. Advertising expense decreased $19,000 from the prior year primarily due to a decrease in media spending this year. Printing and supplies decreased $55,000 from the prior year due to the cost reduction program and increased cost control measures. Travel and lodging decreased $6,000 from prior year due to the decreased activities in the Company's affordable housing segment. Telephone and postage decreased $30,000 and $23,000, respectively, also a 14 result of fewer employees. The Company's housing subsidiaries, as they searched for new sites to develop and/or finance, sometimes incurred expenses on potential sites that did not materialize and were expensed as abandoned projects. Abandoned projects expense increased from $177,000 to $213,000. Miscellaneous losses were $100,000 for the nine months ended compared to $14,000 for the same period last year, primarily due to the discovery of an $80,000 kiting scheme. The Company is using all means available to recover the loss, but there can be no assurance as to the ultimate collectibility of the funds. Also, title fees and NOW account receivables totaling $8,000 and $15,000, respectively, were charged off in the third quarter of fiscal 1998. A deferred premium of $16,000 on a mortgage loan sale several years ago was deemed worthless and written off. Other operating expense increased by $125,000 due to a $12,000 increase in Visa credit transaction charges, a $17,000 increase in indirect consumer credit reports as a results of increased volume over last year. Finally, a $21,000 increase in correspondent bank charges and a $50,000 increase in miscellaneous operating expense over last year accounted for a portion of these increases. INCOME TAX EXPENSE. Income tax expense decreased $4.7 million for the nine months ended March 31, 1998, compared to the same period in 1997, due to the loss in the current year compared to the previous year's. The income tax credit associated with the loss was reduced by a $60,000 accrual adjustment made in the third quarter. YEAR 2000. The Year 2000 issue ("Y2K") is the result of computer programs being written using two digits rather then four to define the applicable year. Any of the Company's computer program that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operation, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company recently completed an assessment to determine what will be required to modify or replace software so the computer systems will properly utilize dates beyond December 31, 1999. The Company has accrued $80,000 in expenses during fiscal 1998 for Y2K compliance. The Company will continue with the Year 2000 compliance work and will report the full potential impact of future operating results as soon as a reasonable basis has been reached for a conclusion. However, if such modifications and conversions are not made, or not completed timely, Y2K could have a material impact on the operations of the Company. The Company has initiated formal communications with all of the significant vendors and large customers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 Issue. There can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have material adverse effect on the Company. The Company is in the final stages of completing its written Y2K testing strategies and plans. In house testing of internal mission critical systems have begun. Internal testing of mission critical vendor supplied systems and service providers are underway. - - FINANCIAL CONDITION Total assets decreased by $40.3 million from June 30, 1997, to approximately $199.7 million at March 31, 1998. The decrease is primarily the result of payoffs received on certain multifamily loans. The Company continues to sell current production of fixed 1-4 family mortgages, and also pass through consumer loans to another institution that meet certain criteria, and receive payments and payoffs in the normal course of business. LOANS. The following table shows the composition of the Company's loan portfolio as of March 31, 1998 and June 30, 1997.
LOANS OUTSTANDING - --------------------------------------------------------------------------------------------- (IN THOUSANDS) MARCH 31, JUNE 30, 1998 1997 --------- -------- Real estate mortgage loans First mortgage loans Conventional $ 76,693 $ 94,293 Construction 17,220 32,577 Commercial 21,180 26,668 Multifamily loans 5,384 9,602 First mortgage real estate loans purchased 2,873 3,184 Commercial loans - other than secured by real estate 10,234 12,522 Consumer and home equity loans 29,713 26,118 -------- -------- Total loans 163,297 204,964 ======== ======== Total assets $199,684 $240,001 ======== ======== Total loans to total assets 81.8% 85.4% ======== ========
15 Total loans decreased by $41.7 million or 20.3% to $163.3 million at March 31, 1998, compared to June 30, 1997. The largest component of the decrease is conventional 1-4 family loans. The second largest component of the decrease is in the construction real estate area, which was primarily three multifamily construction loans. The Company continues to sell new single family loan production, recognize the gain or loss on the sale, and use the proceeds to fund more single family loan production. As a result the Company's single family loans continue to shrink due to payoffs and refinancing. The Company's construction loan category, which includes approximately $15.3 million in commercial and multi-family loans and $1.9 million in 1-4 family real estate loans, has decreased since June 30, 1997, due to several large payoffs on multifamily and commercial real estate loans, which could negatively impact the interest rate margin if the decrease becomes a trend. Commercial real estate loans and multifamily loans also decreased $4.2 million and $1.3 million, respectively, due to paydowns and payoffs. Consumer and home equity loans increased $3.6 million due to the Company's retention of a portion of indirect automobile loan originations. NON-PERFORMING LOANS. The Company discontinues the accrual of interest income on loans when, in the opinion of management, there is reasonable doubt as to the timely collectibility of interest or principal. Non-accrual loans are returned to an accrual status when, in the opinion of management, the financial position of the borrower indicates that there is no longer any reasonable doubt as to the timely payment of principal and interest. When a loan reaches a 90 day or more past due status, the asset is repossessed and sold, if applicable, or the foreclosure process is started and the loan is moved to other real estate owned to be sold. Typically a loan never reaches the impaired status because it is moved to an "other asset" category and disposed of. A loan could be placed in a nonaccrual status sooner than 90 days, if management knows the customer has abandoned the collateral and has no intention of paying. At this point the loan would go to nonaccrual status and the Company would start the repossession or foreclosure process. Typically, when a loan goes to nonaccrual status, the accrued interest is reversed out of income, unless strong evidence exists that the value of the collateral would support the collection of the interest in a foreclosure situation. The Company adopted SFAS Nos. 114 and 118, Accounting by Creditors for Impairment of a Loan and Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures on July 1, 1995. The initial adoption of SFAS Nos. 114 and 118 did not have a material impact on the Company's financial position or results of operations. At March 31, 1998 the Company had impaired loans of $13.9 million , for which an allowance of $1.9 million was recorded. The Company did not have any impaired loans at June 30, 1997.
NON-PERFORMING LOANS - ------------------------------------------------------------------------- (IN THOUSANDS) MARCH 31, JUNE 30, 1998 1997 --------- -------- Nonaccrual loans: $646 $256 Mortgage Restructured 90 days or more past due: Consumer 89 29 Multifamily 17 ---- ---- Total $752 $285 ==== ==== Percent of total loans 0.46% 0.14% ==== ====
The ratio increased from 0.14% at June 30, 1997, to 0.46% at March 31, 1998 as non-performing loans increased $467,000. The nonaccrual loan total is entirely made up of six mortgage loans, while the 90 days past due total primarily consists of consumer loans. Two of the six mortgage loans account for $480,000 of the $646,000 outstanding nonaccrual loans. The multifamily affordable housing loans, for which specific reserves have been computed are currently performing with respect to debt service and are therefore not included in the above "nonperforming loans" totals. The ability of the permanent multifamily loans to remain performing is in part due to general partner advances made by the Company to support cash flow deficits encountered by the affordable housing projects. The majority of these advances were charged off at March 31, 1998. ANALYSIS OF ALLOWANCE FOR LOAN LOSSES. The Company establishes its provision for loan losses and evaluates the adequacy of its allowance for loan losses based on management's evaluation of its loan portfolio and changes in loan activity. Such evaluation, which includes a review of all loans for which full collectiblity may not be reasonably assured, considers among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience, the composition of the loan portfolio and other factors that warrant recognition in providing for an adequate loan loss allowance. This evaluation is performed on a monthly basis and is designed to ensure that all relevant matters affecting loan collectibility will consistently be identified in a detailed loan review and that the outcome of the review will be considered in a disciplined manner by management in determining the necessary 16 allowance and the provision for loan losses. The amounts actually reported in each period will vary with the outcome of this detailed review. The following table sets forth an analysis of the allowance for loan losses for the nine months ended March 31, 1998, and the year ended June 30, 1997.
ALLOWANCE FOR LOAN LOSSES - ----------------------------------------------------------------------------------- (IN THOUSANDS) MARCH 31, JUNE 30, 1998 1997 --------- -------- Allowance for loan losses: Balances, at July 1, $ 1,781 $ 1,059 Loan charge-offs: Real estate mortgage 100 Multifamily 3,089 Commercial 25 Consumer 142 142 -------- -------- Total loan charge-offs 3,231 267 Loan recoveries: Real estate mortgage 3 Consumer 17 11 -------- -------- Total loan recoveries 17 14 Net charge-offs 3,214 253 Provision for loan losses 4,523 975 -------- -------- Allowance for loan losses at end of period $ 3,090 $ 1,781 ======== ======== Ratio of net charge-offs to average loans outstanding during the period 2.29% 0.12% Ratio of provision for loan losses to average loans outstanding during the period 2.42% 0.45% Ratio of allowance for loan losses to total loans outstanding at end of period 1.89% 0.87% Average amount of loans outstanding for the period $186,708 $214,636 Amount of loans outstanding at end of period $163,297 $204,964
As of March 31, 1998, net loan charge-offs were $3,214,000, or 2.29% (annualized) of average loans for the period, compared to $253,000 or 0.12% of average loans as of June 30, 1997. As discussed in the "Results of Operations" and "Provision for Loan Losses" sections, the Company increased the provision for loan losses during the current quarter primarily in connection with loans made to certain Section 42 tax-credit real estate development projects that the Company is currently managing. The Company has loans and letters of credit securing loans to these projects and also has other loans and letters of credit outstanding that relate to other multifamily developments, most of which are outside the Company's geographic market. The Company has also recorded a letter of credit valuation allowance and related provision of $6.8 million at March 31, 1998. Multi-family letters of credit, an off-balance sheet item, carry the same risk characteristics as conventional loans and totaled $54.5 million at March 31, 1998. Specific reserves for letters of credit to total letters of credit totaled 12.20% at March 31, 1998. Classified loans and letters of credit to total loans and letters of credit were 2.65% at March 31, 1998 and 0.13% at March 31, 1997. Management considers the allowance for loan losses adequate to meet losses inherent in the loan portfolio as of March 31, 1998. INVESTMENT SECURITIES. The Savings Bank's investment policy is annually reviewed by its Board of Directors and any significant changes to the policy must be approved by the Board. The Board has an asset/liability management committee which is responsible for keeping the investment policy current. 17 As of March 31, 1998, the investment portfolio represented 5.3% of the Company's assets compared to 5.7% at June 30, 1997, and is managed in a manner designed to meet the Board's investment policy objectives. The Savings Bank sold $3.4 million in securities during the second quarter resulting in net gains of $74,000. An additional investment was sold in the third quarter, resulting in of $5,000 gain. The remaining decrease is the monthly payments of principal and interest on the Savings Bank's mortgage-backed securities. The primary objectives, in order of priority, are to further the safety and soundness of the Company, to provide the liquidity necessary to meet day to day funding needs, cyclical and long-term changes in the mix of our assets and liabilities, and to provide for diversification of risk and management of interest rate and economic risk. At March 31, 1998, the entire investment portfolio was classified as available for sale, in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investment in Debt and Equity Securities". The net unrealized loss at March 31, 1998 was $29,000, which was comprised of gross gains of $7,000, gross losses of $56,000, and a tax benefit of $20,000. The decrease of $2,000 from June 30, 1997 was caused by market interest rate changes during the period. Although the entire portfolio is available for sale, management has not identified individual investments for sale in future periods. The Company currently has $4.0 million of securities pledged at the Federal Home Loan Bank as collateral for FHLB advances and overdraft lines of credit in addition to $170,000 pledged at the Federal Reserve for Treasury Tax and Loan transactions. The following table sets forth the components of the Savings Bank's securities available for sale as of the dates indicated.
MARCH 31, JUNE 30, 1998 1997 --------- -------- (IN THOUSANDS) Securities available for sale: U.S. Treasury securities $ 1,002 $ 1,000 Federal agencies securities 2,988 2,944 Federal Home Loan Mortgage Corporation mortgage-backed securities 1,947 3,003 Federal National Mortgage Association mortgage-backed securities 2,140 1,562 Government National Mortgage Association mortgage-backed securities 2,396 4,223 Municipal revenue bonds 1,058 Other securities available for sale -------- -------- Total securities available for sale $ 10,473 $ 13,790 ======== ========
FUNDING SOURCES DEPOSITS. The Savings Bank attracts both short-term and long-term deposits from the retail market by offering a wide assortment of accounts with different terms and different interest rates. These deposit alternatives include checking accounts, regular savings accounts, money market deposit accounts, fixed rate certificates with varying maturities, variable interest rate certificates, negotiable rate jumbo certificates ($100,000 or more), and variable rate IRA certificates. Average deposits decreased by $13.9 million during the first nine months of fiscal 1998. Most of the decreases were due to certificates of deposit acquired through agents, which decreased $24.2 million to $46.1 million at March 31, 1998. This decrease was offset by the Company's savings bank subsidiary promoting selected retail certificates of deposit, which have increased $10.0 million since June 30, 1997 in an effort to increase its core deposit base. Demand accounts and money market accounts decreased $532,000 and $804,000, respectively, offset by an increase in a premium rate NOW accounts product of $1.7 million. The Company's savings bank subsidiary continues to actively market this premium rate NOW account product. 18 The following table sets forth the average balances of and the average rate paid on deposits by deposit category for the nine months ended March 31, 1998 and for the year ended June 30, 1997.
NINE MONTHS ENDED YEAR ENDED MARCH 31, 1998 JUNE 30, 1997 ----------------- ------------- AVERAGE AVERAGE BALANCE RATE BALANCE RATE ------- ---- ------- ---- (DOLLARS IN THOUSANDS) Average Deposits Demand $ 5,153 $ 5,685 Now accounts 22,308 4.26% 20,585 4.22% Money market accounts 3,086 2.71 3,890 2.72 Savings accounts 4,704 2.52 4,792 2.90 Certificates of deposit 88,381 5.80 78,408 5.68 Agent-acquired certificates of deposit 46,134 6.30 70,346 6.31 -------- -------- Total $169,766 5.44% $183,706 5.45% ======== ========
FEDERAL HOME LOAN BANK ADVANCES AND OTHER LONG-TERM DEBT. The following table summarizes the Company's borrowings as of March 31, 1998, and June 30, 1997.
MARCH 31, JUNE 30, 1998 1997 --------- -------- (IN THOUSANDS) Note payable, 7.70% adjusted annually, payable $16,443 per month, including interest, due April 1, 2009, secured by specific multifamily mortgages $ 2,217 $ 2,234 Note payable, 8.75% adjusted annually, payable $8,018 per month, including interest, due September 14, 2010, secured by specific multifamily mortgages 1,000 1,006 Note payable, 8.75% adjusted annually, payable $12,190 per month, including interest, due September 22, 2010, secured by specific multifamily mortgages 1,532 1,542 Junior subordinated notes, 9 1/8%, interest paid semi-annually, due April 30, 2001, unsecured 1,476 1,476 Junior subordinated notes, 9 1/4% interest paid semi-annually, due January 31, 2002 unsecured 1,494 1,494 Senior subordinated notes, 10%, interest paid semi- annually, due June 1, 2005, unsecured 7,000 7,000 Federal Home Loan Bank advances 18,627 23,337 ------- ------- Total $33,346 $38,089 ======= =======
Borrowings decreased $4.7 million to $33.3 million at March 31, 1998. Borrowings have been reduced during fiscal 1998 primarily due to large payoffs received in loans and the continued sales of current 1-4 family loan production. This allows the Company to use the proceeds to fund new loan originations and ease the need for additional borrowings in the future. The decrease is due primarily to the maturity of FHLB advances. The Company, thus far, has been in a position to allow FHLB advance levels to decline. However, when prudent funds management dictates the Company may increase its usage of FHLB advances. CAPITAL RESOURCES AND CAPITAL REQUIREMENTS The ratio of stockholders' equity to total assets for the Savings Bank, was 6.11% at March 31, 1998, compared to 6.93% at June 30, 1997. The dividends paid and declared on common stock and the net loss for the period decreased the ratio, while a decrease in the unrealized loss on available for sale investments and an infusion of capital from the Savings Bank's parent company increased the ratio. The Company's book value per share at March 31, 1998 was $2.33, compared to $5.20 at June 30, 1997. The Company has announced the suspension of dividends in order to increase the Saving's Bank core capital. The OTS has adopted capital standards under which savings associations must maintain (i) "core capital" in an amount not less than 3% of total assets, (ii) "tangible capital" in an amount not less than 1.5% of total adjusted assets, and (iii) a level of risk-based capital equal to 8.0% of risk-weighted assets. The capital standards established by the OTS for savings associations must generally be no less stringent than those applicable to national banks. Under OTS regulations "core capital" includes common stockholders' equity, noncumulative perpetual preferred stock and related surplus, and minority interests in the equity accounts of consolidated subsidiaries, less intangible assets other than certain qualifying supervisory goodwill and certain purchased mortgage servicing rights. In determining compliance with the capital standards, a savings association must deduct from capital its entire investment in and loans 19 to any subsidiary engaged in activities not permissible for a national bank, other than subsidiaries (i) engaged in such non-permissible activities solely as agent for their customers; (ii) engaged in mortgage banking activities; or (iii) that are themselves savings associations, or companies the only investment of which is another insured depository institution, acquired prior to May 1, 1989. In determining total risk-weighted assets for purposes of the risk based requirement, (i) each off-balance sheet asset must be converted to its on-balance sheet credit equivalent amount by multiplying the face amount of each such item by a credit conversion factor ranging from 0% to 100% (depending upon the nature of the asset), (ii) the credit equivalent amount of each off-balance sheet asset and the book value of each on-balance sheet asset must be multiplied by a risk factor ranging from 0% to 100% (again depending upon the nature of the asset), and (iii) the resulting amounts are added together and constitute total risk-weighted assets. Total capital, for purposes of the risk-based capital requirement, equals the sum of core capital plus supplementary capital (which, as defined, includes, among other items, perpetual preferred stock not counted as core capital, limited life preferred stock, subordinated debt, and general loan and lease loss allowances up to 1.25% of risk-weighted assets) less certain deductions including the savings association's interest-rate risk component. The amount of supplementary capital that may be counted towards satisfaction of the total capital requirement may not exceed 100% of core capital. At March 31, 1998, actual and required minimum levels of regulatory capital for the Savings Bank were as follows:
(Dollars in Thousands) Required Amount Percent Amount Percent Excess --------------------------------------------------------- Core $11,741 6.08% $ 5,798 3.0% $5,943 Tangible $11,741 6.08% $ 2,899 1.5% $8,842 Risk-based $18,835 10.62% $14,191 8.0% $4,644
Pursuant to HOLA of 1933, as amended, the OTS is required to issue capital standards that are no less stringent than those applicable to national banks. In April 1991, the OTS proposed to amend its capital regulations to reflect amendments made by the OCC to the leverage ratio capital requirement for national banks. The proposal would establish a core capital leverage ratio (core capital to adjusted total assets) of 3% for savings associations rated composite 1 under the OTS MACRO rating system. For all other savings associations, the minimum core capital leverage ratio would be 3% plus at least an additional 100 to 200 basis points. Under the proposal, the OTS may impose higher regulations for individual savings associations. The OTS has not adopted this regulation in final form. The prompt corrective action regulation adopted by the OTS provides that a savings association that has a leverage capital ratio of less than 4% will be considered "undercapitalized" and may be subject to certain restrictions. At March 31, 1998 the Savings Bank had a core capital leverage ratio (as defined in the proposal) of 6.11%. When the Company deems it prudent, and as market conditions allow, the Company from time to time has repurchased its common stock. The repurchased shares have been retired as Treasury Stock in accordance with Accounting Research Bulletin 43 (ARB 43). The OTS adopted a final regulation adding an interest-rate risk component to its risk-based capital rule. A savings association's interest-rate risk is generally defined as the change that occurs to its net portfolio value as a result of a hypothetical two hundred basis point increase or decrease in market interest rates. A "normal level" of interest-rate risk is defined as any decline in net portfolio value of up to 2% of the institution's assets. If the 2% threshold is exceeded, a savings association will be required to deduct from its capital, for purposes of determining whether the institution meets its risk-based capital requirements, an amount equal to one-half of the difference between the measured risk and 2% of assets. Capital requirements higher than the generally applicable minimum requirement may be established for a particular savings association if the OTS determines that the institution's capital was or may become inadequate in view of its particular circumstances. Individual minimum capital requirements may be appropriate where the savings association is receiving special supervisory attention, has a high degree of exposure to interest rate risk, or poses other safety or soundness concerns. 20 LIQUIDITY Liquidity for a savings bank represents its ability to accommodate growth in loan demand and/or reduction in deposits. The Savings Bank liquidity ratio was 11.00% on March 31, 1998, up from 5.57% on June 30, 1997. On November 24, 1997, the OTS adopted a new liquidity ratio which lowered liquidity requirements for savings associations from 5 to 4 percent of the association's liquidity base. The liquidity base has been reduced by modifying the definition of net withdrawable accounts to exclude, at the association's option, accounts with maturities exceeding one year. Another change removes the requirement that certain obligation must mature in five years or less in order to qualify as a liquid asset. Finally, the rule added certain short-term mortgage-related securities and short-term first lien residential mortgage loans to the list of assets includable as regulatory liquidity. Management believes that this level of liquidity is sufficient to meet any anticipated requirements for the Bank's operations. 21 PART II -- OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS: ------------------ There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Registrant's business, to which the Registrant or its subsidiaries are a party of or which any of their property is the subject. ITEM 2 CHANGES IN SECURITIES: ---------------------- Not applicable. ITEM 3 DEFAULTS UPON SENIOR SECURITIES: -------------------------------- Not applicable. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: ---------------------------------------------------- None ITEM 5 OTHER INFORMATION: ------------------ None ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K: --------------------------------- a. The following exhibit is submitted herewith: 27 Financial Data Schedule Reports on Form 8-K b. Report on Form 8-K was filed on September 4, 1998. The Company released its year end results, noted the restatement of the third quarter and suspended the quarterly dividend. A copy of the press release was included in the filing. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIDELITY FEDERAL BANCORP Date: SEPTEMER 11, 1998 By: /s/ M. BRIAN DAVIS ------------------- ----------------------------- M. Brian Davis President and CEO By: /s/ DONALD R. NEEL ----------------------------- Donald R. Neel, Executive Vice President, CFO and Treasurer (Principal Financial Officer) 23 Exhibit Index Reg. S-K Exhibit No. Description of Exhibit Page - ----------- ---------------------- ---- 27 Financial Data Schedule 24 EX-27 2
9 This schedule contains summary financial information extracted from Amended Fidelity Federal Bancorp Consolidated Balance Sheet as of 3/31/98 and the Consolidated Income Statement for the nine months ended 3/31/98. 1,000 9-MOS JUN-30-1998 JUL-01-1997 MAR-31-1998 1,507 5,897 0 0 10,472 0 0 163,297 3,090 199,684 146,672 2,447 9,946 33,346 0 0 3,127 4,146 199,684 12,288 520 526 13,334 6,909 2,133 4,292 4,523 79 14,417 (12,234) (12,234) 0 0 (7,205) (2.49) (2.49) 2.74 646 106 0 13,925 1,781 3,231 17 3,090 2,167 0 923
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