-----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, Ot/7F+EXVqyREsjiee+bB3nQhDJhJglzpWlAuBOAnDdRiRew3NjJzHNqpeOUm2cx Q8Cos4SuzSey5LWqFShmPg== 0000926274-98-000281.txt : 19981030 0000926274-98-000281.hdr.sgml : 19981030 ACCESSION NUMBER: 0000926274-98-000281 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19981029 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: DEF 14A SEC ACT: SEC FILE NUMBER: 000-22880 FILM NUMBER: 98732896 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 DEF 14A 1 SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 [AMENDMENT NO. ] Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, for use of the Commission only (as permitted by Rule 14a-6(e)(2)) [X] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to §240.14a-11(c) or Section 240.14a-12 Fidelity Federal Bancorp - -------------------------------------------------------------------------------- (Name of Registrant as Specified in Its Charter) N/A - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required. [ ] $125 per Exchange Act Rules O-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item 22(a)(2) of Schedule 14A. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. 1) Title of each class of securities to which transaction applies: --------------------------------------------------------------------------- 2) Aggregate number of securities to which transaction applies: --------------------------------------------------------------------------- 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): --------------------------------------------------------------------------- 4) Proposed maximum aggregate value of transaction: --------------------------------------------------------------------------- 5) Total fee paid: --------------------------------------------------------------------------- [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid:________________________________________________ 2) Form Schedule or Registration Statement No.:___________________________ 3) Filing Party:__________________________________________________________ 4) Date Filed:____________________________________________________________ [FIDELITY FEDERAL BANCORP LOGO] ------------------------------------ NOTICE OF ANNUAL MEETING OF SHAREHOLDERS to be held November 30, 1998 ------------------------------------ Notice is hereby given that the Annual Meeting of Shareholders of Fidelity Federal Bancorp (the "Company") will be held on November 30, 1998, at 9:00 o'clock a.m., local time, at the downtown office of United Fidelity Bank, fsb, 18 N.W. Fourth Street, Evansville, Indiana. The purposes of the meeting are: (1) To elect three directors to the Board of Directors to serve for the ensuing term of three years and until their successors are duly elected and qualified; (2) To ratify the appointment of Olive LLP, Certified Public Accountants, as independent public accountants of the Company for the fiscal year ending June 30, 1999; and (3) To transact such other business as may properly come before the meeting or any adjournment thereof. Other than with respect to procedural matters incident to the conduct of the meeting, management is not aware of any other matters which may properly come before the meeting. The Board of Directors of the Company has fixed the close of business on October 16, 1998, as the record date for determination of shareholders entitled to notice of, and to vote at, the Annual Meeting and at any adjournment of the Annual Meeting. By Order of the Board of Directors JACK CUNNINGHAM Vice Chairman of the Board of Directors and Secretary October 20, 1998 IMPORTANT -- PLEASE MAIL YOUR PROXY PROMPTLY - ------------------------------------------------------------------------------ YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED, REGARDLESS OF THE NUMBER YOU OWN. EVEN IF YOU PLAN TO BE PRESENT, YOU ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE ENVELOPE PROVIDED. IF YOU ATTEND THE MEETING, YOU MAY VOTE EITHER IN PERSON OR BY PROXY. ANY PROXY GIVEN MAY BE REVOKED BY YOU IN WRITING OR IN PERSON AT ANY TIME PRIOR TO THE EXERCISE THEREOF. - ------------------------------------------------------------------------------ The date of this Proxy Statement is October 20, 1998. [THIS PAGE INTENTIONALLY LEFT BLANK.] TABLE OF CONTENTS Page ---- INTRODUCTORY STATEMENT . . . . . . . . . . . . . . . . . . . . 1 Proposals Presented . . . . . . . . . . . . . . . . . . . . 1 Voting Rights . . . . . . . . . . . . . . . . . . . . . . . 1 Beneficial Ownership. . . . . . . . . . . . . . . . . . . . 3 Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Solicitation of Proxies . . . . . . . . . . . . . . . . . . 4 ELECTION OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . 4 INFORMATION CONCERNING NOMINEES, DIRECTORS AND EXECUTIVE OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . 5 Certain Transactions and Other Matters Between Management and the Company . . . . . . . . . . . . . . . . . . . . . 6 Board Meetings. . . . . . . . . . . . . . . . . . . . . . . 7 Board Committees. . . . . . . . . . . . . . . . . . . . . . 7 EXECUTIVE COMPENSATION AND OTHER INFORMATION . . . . . . . . . 7 Five-Year Total Shareholder Return. . . . . . . . . . . . . 7 Compensation Committee Report . . . . . . . . . . . . . . . 8 Compensation Committee Insider Participation. . . . . . . . 9 Summary Compensation Table. . . . . . . . . . . . . . . . . 9 1993 Directors' Stock Option Plan . . . . . . . . . . . . 10 1995 Key Employees' Stock Option Plan . . . . . . . . . . . 10 Option Grants in Last Fiscal Year . . . . . . . . . . . . . 11 Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Table . . . . . . . . . . . . . . . . . . 11 Other Employee Benefit Plans. . . . . . . . . . . . . . . . 12 Compensation of Directors . . . . . . . . . . . . . . . . . 13 Employment Contracts and Termination of Employment and Change of Control Arrangements . . . . . . . . . . . . . . 13 Security Ownership of Management. . . . . . . . . . . . . . 14 Security Ownership Reporting. . . . . . . . . . . . . . . . 15 RATIFICATION OF THE APPOINTMENT OF AUDITORS OF THE COMPANY . . 15 SHAREHOLDER PROPOSALS. . . . . . . . . . . . . . . . . . . . . 15 ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . 16 OTHER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . 16 [THIS PAGE INTENTIONALLY LEFT BLANK.] [FIDELITY FEDERAL BANCORP LOGO] PROXY STATEMENT ANNUAL MEETING OF SHAREHOLDERS OF FIDELITY FEDERAL BANCORP TO BE HELD ON NOVEMBER 30, 1998 INTRODUCTORY STATEMENT ---------------------- This Proxy Statement is being furnished to the shareholders of Fidelity Federal Bancorp (the "Company") in connection with the solicitation of proxies by the Board of Directors of the Company for use at the Annual Meeting of Shareholders to be held on November 30, 1998, at 9:00 a.m., local time, at the downtown office of United Fidelity Bank, fsb, 18 N.W. Fourth Street, Evansville, Indiana and any adjournment thereof (the "Annual Meeting"). The Company is a unitary savings and loan holding company which owns all of the issued and outstanding stock of United Fidelity Bank, fsb (the "Savings Bank") and Village Securities Corporation. The Savings Bank is a federally-chartered stock savings bank with its main office located in Evansville, Indiana. Village Securities Corporation is a discount brokerage. The Savings Bank maintains four (4) locations in Evansville. The Savings Bank participates in various real estate activities, including mortgage banking and financing, as well as owning, and managing housing developments through its fully-owned subsidiaries, Village Capital Corporation, Village Community Development Corporation, Village Housing Corporation, Village Management Corporation and Village Affordable Housing Corporation. The Company also offers an array of insurance products through Village Insurance Corporation. PROPOSALS PRESENTED At the Annual Meeting, shareholders of the Company will be asked to consider and vote upon the election of three directors to the Board of Directors of the Company to serve for an ensuing term of three years in accordance with the Company's Articles of Incorporation (which call for staggered terms for the Company's Board of Directors), to ratify the appointment of Olive LLP, Certified Public Accountants, as independent public accountants of the Company for the fiscal year ending June 30, 1999, and to transact such other business as may properly come before the meeting or any adjournment thereof. If any other matters should properly come before the meeting, it is intended that the proxies will be voted, with respect to these matters, in accordance with the recommendations of the Board of Directors. Except with respect to procedural matters incident to the conduct of the meeting, management of the Company does not know of any additional matters that may properly come before the Annual Meeting. The Proxy Statement, the attached Notice and the enclosed proxy card are being first mailed to shareholders of the Company on or about October 20, 1998. VOTING RIGHTS Only holders of shares of common stock of the Company of record at the close of business on October 16, 1998 (the "Record Date") will be entitled to notice of and to vote at the Annual Meeting. At the close of business on the Record Date there were 3,127,208 shares of common stock of the Company issued and outstanding. Such shares were held of record by approximately 500 shareholders. There are no other outstanding securities of the Company entitled to vote. The presence, either in person or by proxy, of the holders of a majority of the shares of Common Stock issued and outstanding as of the Record Date is necessary to constitute a quorum at the Annual Meeting. The inspectors of election will treat abstentions as shares that are present and entitled to vote for purposes of determining the presence of a quorum but as unvoted for purpose of determining the approval of any matters submitted to the shareholders for a vote. If 1 a broker indicates on the proxy that it does not have discretionary authority to vote certain shares on a particular matter, those shares will not be considered as present and entitled to vote with respect to that matter. The nominees for election as director of the Company named in this Proxy Statement will be elected by a plurality of the votes cast. Action on the other items or matters to be presented at the Annual Meeting will be approved if the votes cast in favor of the action exceed the votes cast opposing the action. Company shareholders of record on the Record Date are entitled to one vote per share on any matter than may properly come before the Annual Meeting, except of the ability to cumulate votes with respect to the election of directors. The Articles of Incorporation of the Company provide that shareholders are entitled to cumulate votes for the election of directors. As such, each shareholder is entitled to vote, in person or by proxy, the number of shares owned by the shareholder for each nominee. Alternatively, each shareholder is entitled to cumulate votes for nominees and give one nominee a number of votes equal to the number of directors to be elected (3 for the Annual Meeting) multiplied by the number of votes to which that shareholder's shares are entitled, or distribute such votes the same principal among any number of the nominees as such shareholder deems appropriate. However, a shareholder may only cumulate votes for a nominee or nominees whose names have been properly placed in nomination prior to the Annual Meeting. The nominees receiving the highest number of votes, up to the number of directors to be elected, shall be elected. Voting on all other matters to be submitted at the Annual Meeting is non-cumulative. The proxies will have full discretion and authority to vote cumulatively and to allocate votes among all or any of the nominees as the Board of Directors may determine. Such grant of discretion and authority to the proxy holders to vote cumulatively may be withheld by checking the box marked "withhold authority" on the enclosed proxy card. Ballots will be available at the Annual Meeting for shareholders desiring to vote in person. [REST OF PAGE INTENTIONALLY LEFT BLANK.] 2 BENEFICIAL OWNERSHIP The following table sets forth information regarding the beneficial ownership of the Company's common stock as of September 17, 1998 by the only persons known by the Company to beneficially own 5% or more of the issued and outstanding shares of common stock of the Company. NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) - ------------------------------------------------------------------------------ Bruce A. Cordingley 300,567 (2) 9.46% 8888 Keystone Crossing Suite 900 Indianapolis, IN 46240 M. Brian Davis 775,662 (3) 24.28% 700 S. Green River Road Suite 2000 Evansville, IN 47716 Barry A. Schnakenburg 269,182 (4) 8.57% 8701 Petersburg Road Evansville, IN 47711 Rahmi Soyugenc 171,720 5.5% 119 LaDonna Blvd. Evansville, IN 47711 First Financial Fund, Inc. 202,900 (5) 6.49% c/o Wellington Management 75 State St. Boston, MA 02109 Wellington Management 202,900 (6) 6.49% 75 State St. Boston, MA 02109 (1) This information is based on Schedule 13D and 13G Reports filed by the beneficial owner with the Securities and Exchange Commission ("SEC") pursuant to applicable provisions of the Securities Exchange Act of 1934 ("Exchange Act"), as of September 17, 1998, and any other information provided to the Company by the beneficial owner. It does not reflect any changes in those shareholdings which may have occurred since that date. Beneficial ownership is direct except as otherwise indicated by footnote. (2) Includes 196,683 shares held by Pedcor Investments, a limited liability company, of which Mr. Cordingley is a 47.6% owner and a co-chief executive officer and President. Also includes 39,916 shares which Mr. Cordingley has the right to acquire pursuant to the exercise of stock options granted under the Company's 1993 Directors' Stock Options Plan, 8,587 shares which Mr. Cordingley, Pedcor Investments, and Mr. Cordingley's wife are entitled to purchase upon exercise of 31 warrants acquired pursuant to the 1994 Rights Offering and also includes 42,966 shares held by Gerald Pedigo which is a part of the Cordingley Group. (3) Includes 13,646 shares which Mr. Davis holds as custodian for his minor daughter and 12,714 shares which Mr. Davis holds as custodian for his minor son. Also includes 39,916 shares which Mr. Davis has the right to acquire pursuant to the exercise of stock options granted under the 1993 Directors' Stock Option Plan and 28,176 shares which Mr. Davis has the right to acquire pursuant to the exercise of stock options granted under the Company's 1995 Key Employees' Stock Option Plan. Also includes 106,758 shares of the Company owned by Maybelle R. Davis, the mother of Mr. Davis, as to which shares Mr. Davis has authority to vote pursuant to a power of attorney. Also includes 796 shares owned by Mr. Davis' wife. 3 (4) Includes 5,775 shares held by the spouse of Mr. Schnakenburg, 12,474 shares held as custodian by Mr. Schnakenburg for his minor children living in his home, 24,948 shares held by U.S. Industries Group, Inc., 52,263 shares held by Barry, Inc. and 40,378 shares held by BOAH Associates. Also includes 13,497 shares which Mr. Schnakenburg has the right to acquire through the exercise of stock options granted under the Company's 1993 Directors' Stock Option Plan. Also includes 74,109 shares of the Company pursuant to which Mr. Schnakenburg may exercise voting and investment power pursuant to a power of attorney. (5) First Financial Fund, Inc. reports that it had sole voting power and shared dispositive power with respect to the reported shares. These shares are also included in the shares beneficially owned by Wellington Management Company, as investment adviser to First Financial Fund, Inc., as explained in footnote 6. (6) Wellington Management Company ("WMC"), in its capacity as investment adviser, may be deemed to have beneficial ownership of these shares, which are owned by First Financial Fund, Inc. As of September 25, 1998, WMC reported that it had sole/shared voting power as to 0 shares, and shared dispositive power as to 202,900 shares. PROXIES Each properly executed and returned proxy will be voted at the Annual Meeting in accordance with the instructions thereon. If no instructions are given, the proxy will be voted by the individuals designated as proxies in their discretion and with authority to cumulate votes. Any shareholder giving a proxy may revoke it at any time before it is exercised by (i) attending the Annual Meeting, filing a written notice of revocation with the Secretary of the Annual Meeting and voting in person; (ii) executing a written instrument to that effect and delivering it to the Secretary of the Company prior to the Annual Meeting; or (iii) duly executing and delivering a later dated proxy to the Secretary of the Company prior to the Annual Meeting. SOLICITATION OF PROXIES In addition to use of the mails, proxies may be solicited personally or by telephone or telegraph by officers, directors and certain employees who will not be specially compensated for such activity. The Company will request brokerage houses, nominees, fiduciaries and other custodians to forward soliciting materials to beneficial owners. The Company will bear all expenses in connection with the solicitation of proxies for the Annual Meeting. ITEM 1. ELECTION OF DIRECTORS The Board of Directors of the Company is currently composed of eight members. The Company's Articles of Incorporation divide the Board of Directors into three classes, as nearly equal in size as possible, with one class of Directors elected each year for a three-year term. The terms of William R. Baugh, Bruce A. Cordingley, and M. Brian Davis expire at the 1998 Annual Meeting of Shareholders. Each of these directors has been nominated for re-election to a three-year term to expire at the 2001 Annual Meeting of Shareholders. If for any reason any of these nominees becomes unable or is unwilling to serve at the time of the Annual Meeting, the person named in the enclosed proxy card will have discretionary authority to vote for a substitute nominee or nominees. It is not anticipated that any nominee will be unavailable for election. At the Annual Meeting, proxies cannot be voted for a greater number of persons than the number of nominees named. 4 THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE ELECTION OF THOSE INDIVIDUALS NAMED AS NOMINEES IN THE ACCOMPANYING PROXY. INFORMATION CONCERNING NOMINEES, DIRECTORS AND EXECUTIVE OFFICERS -------------------------------- The following sets forth information as to each nominee for election at the Annual Meeting, each Director continuing in office, and each executive officer of the Company as of June 30, 1998, including their ages, present principal occupations, other business experience during the last five years, directorships in other publicly held companies, and the year they were first elected or appointed to the Board of Directors (if applicable). Each individual's service with the Company began at the formation of the Company in 1993, unless otherwise noted. In addition, all current Directors of the Company are also current Directors of the Savings Bank. All nominees are currently members of the Board of Directors. There are no arrangements or understandings between any of the Directors, executive officers or any other person pursuant to which any Director or executive officer has been selected for his or her respective position. CURT J. ANGERMEIER Age - 44, term expires in 2000. - ------------------ Mr. Angermeier was appointed to the Board of Directors of the Company on March 21, 1996. Mr. Angermeier is a practicing attorney, concentrating on insurance law matters. Mr. Angermeier is a member of the Indiana Bar Association, Indiana Defense Lawyers Association and the Evansville Bar Association. WILLIAM R. BAUGH Age - 77, term expires in 1998. - ---------------- Mr. Baugh is a Director of the Company and has been Chairman Emeritus of the Board of Directors since October 1994. Mr. Baugh served as Chairman of the Board of Directors of the Company from its formation in 1993 until October 1994. He has been a Director of the Savings Bank since 1955, was Chairman of the Board of the Savings Bank from 1979 until October 1994, and was President of the Savings Bank from 1970 until 1981 and from 1983 until 1986. BRUCE A. CORDINGLEY Age - 51, term expires in 1998. - ------------------- Mr. Cordingley is a Director of the Company and served as Chairman of the Board of Directors from October 1994 until April 1998, and served as Chief Executive Officer of the Company from June 1995 to March 1996. He continues to serve as a Director of the Company and in the other positions discussed below. Mr. Cordingley is a Director of Village Management Corporation, Village Community Development Corporation, and Village Housing Corporation (the three service corporation subsidiaries of the Savings Bank previously involved in the development and currently involved in the management of affordable housing units) and Village Insurance Corporation. Mr. Cordingley has been a Director of the Savings Bank since 1992. Mr. Cordingley is an attorney and was a partner in the law firm of Ice Miller Donadio and Ryan in Indianapolis, Indiana from 1973 to February 1992. Mr. Cordingley is President of Pedcor Investments, a limited liability company, located in Indianapolis, Indiana, the principal business of which is real estate oriented investments and developments. Mr. Cordingley is also a Director of International City Bank, N.A. (Long Beach, California). JACK CUNNINGHAM Age - 68, term expires in 1999. - ------------------- Mr. Cunningham is a Director of the Company and has served as Chairman and Secretary of the Company and the Savings Bank since April 1998. He served as President of the Company from May 1994 through October 1994 and as President of the Savings Bank from May 1994 through December 1994. Mr. Cunningham again served as President and CEO of the Savings Bank from March 1997 until January 1998. Mr. Cunningham is Chairman of the Board of Village Management Corporation, Village Community 5 Development Corporation, and Village Housing Corporation (the three service corporation subsidiaries of the Savings Bank previously involved in the development and currently the management of affordable housing units) Village Capital Corporation, and Village Insurance Corporation. Mr. Cunningham has been a Director of the Savings Bank since 1985 and an officer of the Savings Bank since 1974. M. BRIAN DAVIS Age - 43, term expires in 1998. - -------------- Mr. Davis is a Director of the Company and has served as its President and Chief Executive Officer since November 1996. Mr. Davis is also a Director of the Savings Bank and has served as its Chief Executive Officer since January 1998. Mr. Davis previously served as Chief Operating Officer of the Company from June 1995 to November 1996. Mr. Davis is also a Director of Village Management Corporation, Village Community Development Corporation, and Village Housing Corporation (the three service corporation subsidiaries of the Savings Bank previously involved in the development and currently involved in the management of affordable housing units). Mr. Davis is the President of Village Management Corporation, Village Insurance Corporation, Village Community Development Corporation, Village Housing Corporation, Village Capital Corporation and Village Securities Corporation. Mr. Davis has been a Director of the Savings Bank since 1992. Mr. Davis is a partner in the Davis Brothers Real Estate Partnership, located in Evansville, Indiana, which has developed and managed commercial real estate throughout the Midwest. He is also currently President of Southern Investment Corporation, a real estate investment company. ROBERT F. DOERTER Age - 78, term expires in 1999. - ----------------- Mr. Doerter is a Director of the Company, and has been a Director of the Savings Bank since 1968. Mr. Doerter is currently retired. BARRY A. SCHNAKENBURG Age - 50, term expires in 2000. - --------------------- Mr. Schnakenburg is a Director of the Company. He has been a Director of the Savings Bank since 1990. Mr. Schnakenburg currently serves as a Director of Village Capital Corporation and as a Director and the Executive Vice-President and Chief Operating Officer of Village Insurance Corporation. Mr. Schnakenburg has served as the President of U.S. Industries Group, Inc. for the past 12 years. U.S. Industries Group, Inc. is a building contractor located in Evansville, Indiana. DONALD R. NEEL Age - 35, term expires in 2000. - -------------- Mr. Neel is a Director of the Company and serves as Executive Vice-President, Chief Financial Officer, and Treasurer of the Company and as Executive Vice President and Chief Operating Officer of the Savings Bank. Mr. Neel also serves as Treasurer of Village Management Corporation, Village Insurance Corporation, and as Executive Vice President and Treasurer of Village Capital Corporation and as Senior Vice President and Treasurer of Village Securities Corporation, Village Community Development Corporation and Village Housing Corporation. Prior to joining the Savings Bank and the Company in 1993, Mr. Neel served as Vice-President and Controller of INB Banking Company, Southwest (successor to Peoples Bank) from May 1987 through April 1993. CERTAIN TRANSACTIONS AND OTHER MATTERS BETWEEN MANAGEMENT AND THE COMPANY Directors and executive officers of the Company and the Savings Bank and their associates are customers of, and have had transactions with, the Company and the Savings Bank in the ordinary course of business. Comparable transactions may be expected to take place in the future. Directors of the Company may not obtain extensions of credit from the Company. Loans made to non-director officers were made in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with other persons. These loans did not involve more than the normal risk of collectibility or present other unfavorable features. 6 The Office of Thrift Supervision ("OTS"), the primary federal banking regulatory agency of the Savings Bank, by regulation has provided that each director, officer, or affiliated person of a savings association, such as the Savings Bank, has a fundamental duty to avoid placing himself in a position which creates, or which leads to or could lead to, a conflict of interest or appearance of a conflict of interest having an adverse effect upon, among other things, the interests of the members of the savings association or the association's soundness. In addition, the OTS by regulation has stated that the fiduciary relationship owed by a director or officer of a savings association, such as the Savings Bank, includes the duty to protect the association and that the OTS would consider this duty to be breached if such individual would take advantage of a business opportunity for his own or another person's personal benefit or profit when the opportunity is within the corporate powers of the savings association (or its service corporation) and when the opportunity is of a present or potential practical advantage to the savings association. The Board of Directors of the Company and the Savings Bank are aware of these regulations and requirements of the OTS and believe they have conducted, and intend to continue to conduct, themselves in compliance with these requirements at all times. BOARD MEETINGS The Company had 13 Board of Directors meetings during its fiscal year ended June 30, 1998. Each of the incumbent Directors of the Company attended at least 75% of the meetings of the Board of Directors and any committees upon which he or she served during the period which such individual served. BOARD COMMITTEES The Board of Directors has a Nominating Committee which consists of Jack Cunningham (Chairman), Curt J. Angermeier, and Donald R. Neel. The Nominating Committee, whose purpose is to nominate directors for election to the Board of Directors, met twice during the fiscal year ended June 30, 1998. Under the Company's By-Laws, no nominations for director, except those made by the Nominating Committee, shall be voted upon at the Annual Meeting, unless other nomination by shareholders are made in writing and delivered to the Secretary of the Company not later than the close of business on the tenth day following the date the notice of the Annual Meeting was mailed to shareholders. Shareholders who wish to recommend nominees must do so in writing to the Secretary of the Company as described above. The Board of Directors also has an Audit Committee consisting of Curt J. Angermeier (Chairman), William R. Baugh, Robert F. Doerter and Barry A. Schnakenburg. The Audit Committee, whose purpose is to review audit reports and related matters to ensure effective compliance with regulatory and internal policies and procedures, met five times during the fiscal year ended June 30, 1998. The members of the Audit Committee also serve as the committee authorized to direct the grant of options to eligible Key Employees under the 1987 Incentive Stock Option Plan of the Company, the 1993 Directors' Stock Option Plan, and the 1995 Key Employees' Stock Option Plan. The Executive Committee of the Board of Directors serves as the Compensation Committee. The Executive Committee is currently composed of Bruce A. Cordingley (Chairman), M. Brian Davis, Barry A. Schnakenburg, and Jack Cunningham. The Executive Committee met thirteen times during the fiscal year ended June 30, 1998. Mr. Davis meets with the Compensation Committee but abstains and excuses himself from discussions related to his compensation. EXECUTIVE COMPENSATION AND OTHER INFORMATION -------------------------------------------- FIVE-YEAR TOTAL SHAREHOLDER RETURN The following indexed graph indicates the Company's total return to its shareholders on its common stock for the past five years, assuming dividend reinvestment, as compared to total return for the NASDAQ Market Index and the Peer Group Index (which is a line-of-business index prepared by an independent third party consisting of savings and loan holding companies or federally chartered savings institutions with the same SIC number as the Company and which have been publicly traded for at least six years). The 7 comparison of total return on investment for each of the periods assumes that $100 was invested on July 1, 1993, in each of the Company, the NASDAQ Market Index, and the Peer Group Index. The period prior to November 8, 1993 (the date the Company became the sole shareholder of the Saving Bank pursuant to a reorganization in which the Company exchanged one share of its common stock for each one share of common stock of the Savings Bank outstanding) reflects the stock of the Savings Bank. COMPARATIVE 5-YEAR CUMULATIVE TOTAL RETURN AMONG FIDELITY FEDERAL BANCORP, NASDAQ MARKET INDEX AND SIC CODE INDEX [CHART APPEARS BELOW] ASSUMES $100 INVESTED ON JULY 1, 1993 ASSUMES DIVIDENDS REINVESTED FISCAL YEAR ENDING JUNE 30, 1998 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- NASDAQ MARKET INDEX 100 109.66 128.61 161.89 195.02 258.52 SIC CODE INDEX 100 116.22 135.42 170.66 267.49 376.54 FIDELITY FEDERAL 100 227.89 414.05 430.83 421.20 295.35 COMPENSATION COMMITTEE REPORT Decisions on compensation of the Company's executives are made by the Executive Committee of the Board of Directors of the Company, which also serves as the Compensation Committee. All decisions of the Executive Committee relating to the compensation of the Company's officers are reviewed by the full board. Set forth below is a report submitted by Messrs. Cordingley, Davis, Cunningham and Schnakenburg, in their capacity as the Board's Executive Committee, addressing the Company's compensation policies for 1998 as they affected the Company's executive officers. Compensation Policies Toward Executive Officers. ----------------------------------------------- The Executive Committee's executive compensation policies are designed to provide competitive levels of compensation to the executive officers and to reward officers for satisfactory individual performance and for satisfactory performance of the Company as a whole. There are no established goals or standards relating to performance of the Company which have been utilized in setting compensation of individual employees. 8 Base Salary. ----------- Each executive officer is reviewed individually by the Executive Committee, which includes an analysis of the performance of the Company. In addition, the review includes, among other things, an analysis of the individual's performance during the past fiscal year, focusing primarily upon the following aspects of the individual's job or characteristics of the individual exhibited during the most recent fiscal year: quality and quantity of work; supervisory skills; dependability; initiative; attendance; overall skill level; and overall value to the Company. Other Compensation Plans. ------------------------ At various times in the past the Company has adopted certain broad based employee benefit plans in which the senior executives are permitted to participate on the same terms as non-executive employees who meet applicable eligibility criteria, subject to any legal limitations on the amount that may be contributed or the benefits that may be payable under the plans. Benefits. -------- The Company provides medical, defined benefit, and defined contribution plans to the senior executives that are generally available to the other Company employees. The amount of perquisites, as determined in accordance with the rules of the SEC relating to executive compensation, did not exceed 10% of salary and bonus for fiscal year 1998. Mr. Davis' 1998 Compensation. ---------------------------- Regulations of the Securities and Exchange Commission require that the Executive Committee disclose the Committee's basis for compensation reported for any individual who served as the Chief Executive Officer during the last fiscal year. Mr. Davis' salary is determined in the same manner as discussed above for other senior executives. Mr. Davis did not participate in the deliberations of the Executive Committee with respect to his compensation level. See "Compensation Committee Insider Participation." Current Members of the 1998 Executive Committee: Bruce A. Cordingley M. Brian Davis Jack Cunningham Barry A. Schnakenburg COMPENSATION COMMITTEE INSIDER PARTICIPATION During the past fiscal year, Mr. Davis, a current officer of the Company, and Messrs. Cunningham and Cordingley, former officers of the Company, served on the Executive Committee. Mr. Davis did not participate in any discussion or voting with respect to his salary as an executive officer and was not present in the room during the discussion by the Executive Committee of his compensation. SUMMARY COMPENSATION TABLE The following table sets forth, for the fiscal years ended June 30, 1998, 1997, and 1996, the cash compensation paid by the Company or its subsidiaries, as well as certain other compensation paid or awarded during those years, to the Chief Executive Officer of the Company at any time during the fiscal year ended June 30, 1998 and the executive officers of the Company whose salary and bonus exceeded $100,000 during the fiscal year ended June 30, 1998. 9
SUMMARY COMPENSATION TABLE - ------------------------------------------------------------------------------------------------------------------------ LONG-TERM COMPENSATION - ------------------------------------------------------------------------------------------------------------------------ ANNUAL COMPENSATION AWARDS PAYOUTS - ------------------------------------------------------------------------------------------------------------------------ SECURITIES OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER NAME AND PRINCIPAL COMPENSATION STOCK OPTIONS/ LTIP COMPEN- POSITION YEAR SALARY BONUS (1)(2) AWARDS SARS PAYOUTS SATION(3) - ------------------------------------------------------------------------------------------------------------------------ Brian Davis - 1998 $226,646.05 $0.00 $17,600.00 0 15,000 0 $2,343.00 President, CEO and 1997 $220,783.00 $0.00 $15,600.00 0 0 0 $1,671.00 Director 1996 $581,280.00 $0.00 $12,000.00 0 0 0 $ 0.00 - ------------------------------------------------------------------------------------------------------------------------ Bruce A. Cordingley - 1998 $130,903.87 $0.00 $19,200.00 0 0 0 $ 784.00 Chairman and Director 1997 $235,693.00 $0.00 $15,600.00 0 0 0 $2,004.00 1996 $280,519.00 $0.00 $12,000.00 0 0 0 $1,496.00 - ------------------------------------------------------------------------------------------------------------------------ Donald R. Neel - 1998 $103,164.00 $0.00 $ 8,400.00 0 7,500 0 $1,547.00 Exec. Vice-President, CFO, Treasurer and Director - ------------------------------------------------------------------------------------------------------------------------
(1) While officers enjoy certain perquisites, such perquisites do not exceed the lesser of $50,000 or 10% of such officer's salary and bonus and are not required to be disclosed by applicable rules of the SEC. (2) Includes Directors' fees of $19,200 paid to Mr. Cordingley and $17,600 paid to Mr. Davis and $8,400 paid to Mr. Neel for the fiscal year ended June 30, 1997. (3) Includes Company contributions under the Company's Retirement Savings Plan. 1993 DIRECTORS' STOCK OPTION PLAN The 1993 Directors' Stock Option Plan ("Directors' Plan") expired on August 1, 1998. It provided for the grant of non-qualified stock options to individuals who are directors of the Company or any of its subsidiaries to acquire shares of common stock of the Company for a 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. No additional options may be granted under the plan; however, outstanding options shall remain in effect until they have been exercised, terminated, forfeited, or have expired. As such, options will be outstanding under the Directors' Plan through November 19, 2007. The number of shares and option exercise prices under the Directors' Plan have been adjusted to reflect a twenty percent stock dividend distributed in 1994, a 2.1 for 1 stock split in 1995, and a 10% stock dividend in 1996. As of September 30, 1998 there were options for 118,293 shares outstanding. 1995 KEY EMPLOYEES' STOCK OPTION PLAN The Key Employees' Plan provides for the grant of incentive stock options and non-qualified stock options to acquire shares of common stock of the Company for a price of not less than the fair market value of the share on the date which the option is granted. A total of 236,500 shares was reserved for issuance under the Key Employees Plan. The option price per share for each incentive stock option granted to an employee must not be less than the fair market value of the share of common stock on the date the option is granted. The option price per share for an incentive stock option granted to an employee owning 10% or more of the common stock of the Company must not be less than 110% of the fair market value of the share on the date that the option is granted. The option price per share for non-qualified stock options will be determined by the Administrative Committee of the Key Employees' Plan, but may not be less than 100% of the fair market value of a share of common stock on the date of the grant of the option. 10 The Key Employees' Plan will expire on March 15, 2005, except outstanding options will remain in effect until they have been exercised, terminated, forfeited, or have expired. As such, options may be outstanding under the Key Employees' Plan through March 15, 2015. The number of shares and option exercise prices under the Key Employees' Plan have been adjusted to reflect a 2.1 for 1 stock split in 1995, and a 10% stock dividend in 1996. OPTIONS GRANTS IN LAST FISCAL YEAR The following table provides details regarding stock options granted to Messrs. Davis and Neel in 1998. In addition, in accordance with the rules of the Securities and Exchange Commission, there are shown the hypothetical gains or "options spreads" that would exist for respective options. These gains are based on assumed rates of annual compound stock price appreciation of five percent (5%) and ten percent (10%) from the date the options were granted over the full option term. Gains are reported net of the option exercise price, but before any effect of taxes. In assessing these values, it should be kept in mind that no matter what value is placed on a stock option on the date of grant, its ultimate value will be dependent on the market value of the Company's stock at a future date, and that value would depend on the efforts of such executive to foster the future success of the Company for the benefit of all shareholders. The amounts reflected in the table may not necessarily be achieved.
INDIVIDUAL GRANTS - ------------------------------------------------------------------------------------------------------------------ Number of Percent of Shares Total Options Market Price Underlying Granted in Exercise or on Date of Options Fiscal Year Base Price Grant Expiration Name Granted (%) ($/Share) ($/Share) Date 5% ($) 10% ($) - ------------------------------------------------------------------------------------------------------------------ M. Brian Davis 15,000 47.6% $10.81 $9.81 11/19/07 $101,975 $258,425 - ------------------------------------------------------------------------------------------------------------------ Donald R. Neel 7,500 23.8% $10.81 $9.81 11/19/07 $ 50,988 $129,213 - ------------------------------------------------------------------------------------------------------------------
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES TABLE The following table shows for the named executive officers the number of shares acquired on exercise and shares covered by both exercisable and non-exercisable stock options as of June 30, 1998. Also reported are the values for "in-the-money" options which represent the positive spread between the exercise price of any such existing stock options and the fiscal year-end price of Common Stock.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES - ------------------------------------------------------------------------------------------------------------------ SHARES NUMBER OF UNEXERCISED VALUE OF UNEXERCISED ACQUIRED STOCK OPTIONS IN-THE-MONEY OPTIONS ON VALUE 06/30/98 06/30/98 NAME EXERCISE REALIZED --------------------------- --------------------------- (#) ($) Exercisable Unexercisable Exercisable Unexercisable - ------------------------------------------------------------------------------------------------------------------ 39,916 0 $11,176 (1) N/A 22,176 5,544 N/A (2) N/A (2) M. Brian Davis None N/A 6,000 9,000 N/A (3) N/A (3) Bruce A. Cordingley None N/A 39,916 0 $11,176 (1) N/A Donald R. Neel None N/A 3,000 4,500 N/A (3) N/A (3)
(1) The bid value of the Company's Common Stock at June 30, 1998 ($6.50 per share), was less than the exercise price ($6.22 per share). (2) The bid value of the Company's Common Stock at June 30, 1998 ($6.50 per share), was less than the exercise price ($10.60 per share). 11 (3) The bid value of the Company's Common Stock at June 30, 1998 ($6.50 per share), was less than the exercise price ($10.81 per share). OTHER EMPLOYEE BENEFIT PLANS Pension Plan ------------ The Company currently participates in a defined benefit pension plan sponsored by the Financial Institutions Retirement Fund, a non-profit, tax qualified, tax-exempt pension plan and trust in which Federal Home Loan Banks, savings and loan associations and similar institutions participate ("Pension Plan"). All employees of the Company or its subsidiaries (which excludes non-employee Directors of the Company) (i) who have not attained age sixty (60) prior to being hired, and (ii) who work a minimum of 1000 hours per year are covered by the Pension Plan and become participants upon completion of one year of service and attainment of age 21. Participants are not required or allowed to make contributions to the Pension Plan. A participant in the Pension Plan is entitled to receive benefits based upon years of service for the Company or its subsidiaries and a percentage of the individual's average annual salary during the five (5) consecutive years of service which produce the highest such average without deduction for Social Security benefits. For purposes of computing benefits, "salary" includes an employee's regular base salary or wage inclusive of bonuses and overtime but is exclusive of special payments such as fees, deferred compensation, severance payments and contributions by the Company to the Pension Plan. Participants become fully vested in their benefits after completion of five (5) years of service. Upon attaining age sixty-five (65), participants become one hundred percent (100%) vested in their benefits provided by the Company under the Pension Plan, regardless of the number of their years of service. Benefits are payable at normal retirement age (age 65). The Pension Plan also contains provisions for the payment of benefits on the early retirement, late retirement, death or disability of a participant. The regular benefit under the Pension Plan to be paid on a participant's retirement is a monthly pension for the life of a participant with minimum guaranteed benefit of twelve (12) times the participant's annual retirement benefit under the Pension Plan. Thus, the regular form of all retirement benefits includes not only a retirement allowance, but also a lump sum retirement death benefit which is twelve (12) times the annual retirement benefit less the sum of such retirement benefits made before death. The Pension Plan provides that married participants will receive the regular retirement benefit in the form of an actuarially equivalent joint and survivor annuity. Optional forms of payments are available to all participants; however, married participants must obtain written spousal consent to the distribution of benefits in a form other than a joint and survivor annuity. According to the Pension Plan sponsor, the actuaries for the Pension Plan have determined that no contributions were required to be made to the Pension Plan by the Company for the plan year ended June 30, 1998. The following table shows estimated annual benefits payable at normal retirement to persons in specified remuneration classifications. The benefit amounts presented in the totals are annual pension amounts for the life of the participant, with a minimum guaranteed benefit of twelve (12) times the annual retirement benefit under the Pension Plan, for a participant at normal retirement (age 65) with the years of service set forth below with no deduction for Social Security or other offset amounts. The maximum compensation which may be taken into account for any purpose under the Pension Plan is limited by the Internal Revenue Code to $160,000 for 1998. As of July 1, 1998, M. Brian Davis had 3 years of service and Donald R. Neel had 5 years of service under the Pension Plan. 12
- -------------------------------------------------------------------------------------- ANNUAL BENEFIT AT NORMAL RETIREMENT YEARS OF SERVICE --------------------------------------------------------------------- HIGHEST FIVE- YEAR AVERAGE ANNUAL SALARY 10 15 20 25 30 35 40 - -------------------------------------------------------------------------------------- $50,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 $75,000 15,000 22,500 30,000 37,500 45,000 52,500 60,000 $100,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 $125,000 25,000 37,500 50,000 62,500 75,000 87,500 100,000 $150,000 30,000 45,000 60,000 75,000 90,000 105,000 120,000 $175,000 35,000 52,500 70,000 87,500 105,000 122,500 140,000
Retirement Savings Plan. ----------------------- In 1994 the Company adopted a defined contribution plan under Internal Revenue Code Section 401(k) in which substantially all employees may participate. Under this plan, employees may contribute up to 15% of pay, and contributions up to 6% are supplemented by Company contributions. Such Company contributions are made at the rate of 25(cent) for each dollar contributed by the participant. Participants may elect to have all or a portion of their contributions made on a tax-deferred basis pursuant to provisions in the plan meeting the requirements of Section 401(k) of the Internal Revenue Code. The Company expense for the plan was $19,000 for the fiscal year ended June 30, 1998. COMPENSATION OF DIRECTORS The Directors of the Company and Savings Bank, who are the same individuals, are compensated for their services in the amount of $1,000 per month (or $12,000 per year) plus an additional $200 per month if the Director attends that month's regularly scheduled Board meeting. Executive Committee members receive an extra $400 per month for their services. The maximum compensation received by any Director for his or her service on the Board was $19,200 for the current year. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS On December 1, 1997, the Company entered into severance agreements with M. Brian Davis, Donald R. Neel, and Terry G. Johnston. Each of these agreements provides that it will terminate on December 1, 1999, but may be extended annually for an additional year. If not extended, the agreement will terminate in two years. Each agreement provides that if during the two year period following a change in control (as defined in the agreement), the executive is terminated for any reason other than cause (as defined in the agreement), disability, retirement or death, or if the executive resigns due to a reduction in his duties or responsibilities, a reduction in his compensation or benefits, or a requirement that he be based at a location other than Evansville, the executive is entitled to an amount equal to two times his average annual base salary and bonus, plus an amount computed by the actuary for the Company's retirement plan equal to the present value of the executive's accrued benefit (as defined in the plan) computed as if the executive had remained employed by the Company for two years after his termination of employment. In addition, the Company must maintain for the benefit of the executive for three years following termination all employee welfare plans and programs in which he was entitled to participate prior to termination, and reimburse the executive for the cost of obtaining such benefits for the first 24 months following termination. No payments may be made pursuant to the agreement if such payments would, among other things, be considered by a federal or state regulatory authority having jurisdiction over the Company an unsafe or unsound practice. 13 SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth certain information as of September 17, 1998, with respect to the common stock of the Company beneficially owned by each Director of the Company and by all executive officers and directors as a group.
NAME NUMBER OF SHARES BENEFICIALLY PERCENT OF CLASS (1) - -------------------------------------------------------------------------------------------------------- William R. Baugh (2) 28,570 .91% Bruce A. Cordingley (3) 300,567 9.46% Jack Cunningham (4) 46,535 1.48% M. Brian Davis (5) 775,662 24.28% Robert F. Doerter (6) 10,563 .34% Barry A. Schnakenburg (7) 269,182 8.57% Curt J. Angermeier (8) 30,878 .99% Donald R. Neel (9) 7,827 .25% All Executive Officers and Directors as a Group (8 persons) 1,469,784 44.74%
(1) The information contained in this column is based upon information furnished to the Company as of September 17, 1998, by the individuals named above. The nature of beneficial ownership for shares shown in this column represent sole or shared voting and investment unless otherwise noted. At September 17, 1998, the Company had 3,127,208 shares of common stock outstanding. (2) Includes 26,600 shares beneficially owned by Mr. Baugh. Also includes 1,970 shares which Mr. Baugh has the right to acquire pursuant to the exercise of stock options granted under the 1993 Directors' Stock Option Plan. (3) Includes 196,683 shares held by Pedcor Investments, a limited liability company, as to which Mr. Cordingley is a 47.6% owner and a co-chief executive officer and President. Also includes 39,916 shares which Mr. Cordingley has the right to acquire pursuant to the exercise of stock options granted under the Company's 1993 Directors' Stock Option Plan, 8,587 shares which Mr. Cordingley, Pedcor Investments, and Mr. Cordingley's wife are entitled to purchase upon exercise of 31 warrants acquired pursuant to the 1994 Rights Offering, and 42,966 shares held by Gerald Pedigo which is a part of the Cordingley Group. (4) Includes 9,744 shares held in the name of Mr. Cunningham's wife and 17,074 shares which Mr. Cunningham has the right to acquire pursuant to the exercise of stock options granted under the Company's 1993 Directors' Stock Option Plan. (5) Includes 13,646 shares which Mr. Davis holds as custodian for his minor daughter and 12,714 shares which Mr. Davis holds as custodian for his minor son. Also includes 39,916 shares which Mr. Davis has the right to acquire pursuant to the exercise of stock options granted under the 1993 Directors' Stock Option Plan, and 28,176 shares which Mr. Davis has the right to acquire pursuant to the exercise of stock options granted under the Company's 1995 Key Employees' Stock Option Plan. Also includes 106,758 shares of the Company owned by Maybelle R. Davis, the mother of Mr. Davis, as to which shares Mr. Davis has authority to vote pursuant to a Power of Attorney. Also includes 796 shares owned by Mr. Davis' wife. 14 (6) Includes 8,593 shares beneficially owned by Mr. Doerter. Also includes 1,970 shares which Mr. Doerter has the right to acquire pursuant to the exercise of stock options granted under the 1993 Directors' Stock Option Plan. (7) Includes 5,775 shares held by the spouse of Mr. Schnakenburg, 12,474 shares held as custodian by Mr. Schnakenburg for his minor children living in his home, 24,958 shares held by U.S. Industries Group, Inc., 52,263 shares held by Barry, Inc. and 40,378 shares held by BOAH Associates. Also includes 13,497 shares which Mr. Schnakenburg has the right to acquire through the exercise of stock options granted under the Company's 1993 Directors' Stock Option Plan. Also includes 74,109 shares of the Company pursuant to which Mr. Schnakenburg may exercise voting and investment power pursuant to a Power of Attorney. (8) Includes 19,401 shares held in a Family Trust of Mr. Angermeier. Also includes 3,940 shares which Mr. Angermeier has the right to acquire pursuant to the exercise of stock options granted under the 1993 Directors' Stock Option Plan. (9) Includes 4,827 shares beneficially owned by Donald R. Neel, Executive Vice-President, Chief Financial Officer and Treasurer of the Company. Also includes 3,000 shares which Mr. Neel has the right to acquire pursuant to the exercise of the stock options granted under the Company's 1995 Key Employees' Stock Option Plan. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more than 10% of a registered class of the Company's equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of Company common stock and other equity securities of the Company. Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the best knowledge of the Company, during the most recent fiscal year ended June 30, 1998, there were no late filings with respect to the Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners. ITEM 2. RATIFICATION OF THE APPOINTMENT OF ------------------------------------------- AUDITORS OF THE COMPANY ----------------------- The Board of Directors of the Company proposes that the shareholders ratify the appointment of the firm of Olive LLP, Certified Public Accountants as independent public accounts for the Company for the fiscal year ending June 30, 1999. Representatives of Olive LLP are expected to be present at the meeting and available to respond to appropriate questions. They will be given an opportunity to make a statement if they desire to do so. Olive LLP has been the independent auditors of the Company since 1982. In the event the appointment of Olive LLP is not ratified by the shareholders, the Board of Directors will consider appointment of other independent public accountants for the fiscal year ending June 30, 1999. SHAREHOLDERS PROPOSALS ---------------------- Any proposal which a shareholder intends to bring before the next Annual Meeting of Shareholders to be held in 1999 must be received by the Company no later than May 17, 1999 for inclusion in next year's proxy statement. Such proposals should be addressed to Jack Cunningham, Chairman and Secretary of the Company, at 18 N.W. Fourth Street, P.O. Box 1347, Evansville, Indiana 47706-1347. If a shareholder proposal is introduced at the 1999 Annual Meeting of Shareholders without any discussion of the proposal in the Company's proxy statement, and if the shareholder does not notify the Company on or before July 26, 1999, as required by SEC Rule 14a-4(c)(1), of the intent to raise such proposal at the Annual Meeting of Shareholders, then proxies received by the Company for the 1999 Annual Meeting will be voted by the persons named as proxies in their discretion with respect to such proposal. Notice of such proposals is to be 15 given to Jack Cunningham, Chairman and Secretary of the Company in writing at 18 N.W. Fourth Street, P.O. Box 1347, Evansville, Indiana 47706-1347 ADDITIONAL INFORMATION ---------------------- The 1998 Annual Report to Shareholders, containing financial statements for the year ended June 30, 1998, and other information concerning the operations of Company is enclosed herewith, but is not to be regarded as proxy soliciting material. UPON WRITTEN REQUEST, FIDELITY FEDERAL BANCORP WILL PROVIDE WITHOUT CHARGE TO EACH SHAREHOLDER A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K WHICH IS REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED JUNE 30, 1998. ALL REQUEST SHOULD BE ADDRESSED TO: DEBBIE FRITZ, SHAREHOLDER RELATIONS FIDELITY FEDERAL BANCORP 700 S. GREEN RIVER ROAD, SUITE 2000 PO BOX 5584 EVANSVILLE, INDIANA 47716-5584 OTHER MATTERS ------------- The Annual Meeting is called for the purposes set forth in the Notice. The Board of Directors of the Company does not know of any matters for action by shareholders at the Annual Meeting other than the matters described in the Notice. However, the enclosed Proxy will confer discretionary authority with respect to matters which are not known to the Board of Directors at the time of the printing hereof and which may properly come before the Annual Meeting. It is the intention of the persons named in the Proxy to vote pursuant to the Proxy with respect to such matters in accordance with the recommendations of the Board of Directors. By Order of the Board of Directors /s/ JACK CUNNINGHAM ---------------------------------- Jack Cunningham Chairman and Secretary 16 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES 1998 ANNUAL REPORT CONTENTS PAGE - -------------------------------------------------------------------------------- Financial Highlights 2 Letter to Stockholders 3 Market Summary 4 Selected Statistical Information 5 Management's Report 6 Management's Discussion and Analysis 7-26 Independent Auditor's Report 27 Consolidated Statement of Financial Condition 28 Consolidated Statement of Income 29-30 Consolidated Statement of Changes in Stockholders' Equity 31 Consolidated Statement of Cash Flows 32-33 Notes to Consolidated Financial Statements 34-57 Corporate Information 58-62 1 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES FINANCIAL HIGHLIGHTS (Dollars in Thousands, Except Share and Per Share Data)
1998 1997 CHANGE - ---------------------------------------------------------------------------------------------------------------------- PER SHARE Basic net income (loss) $ (2.30) $ .05 (4,700)% Diluted net income (loss) (2.30) .04 (5,850) Cash dividends declared .35 .60 (42) Book value at year end 2.40 5.20 (54) Market price (bid) at year end 6.50 8.75 (26) FOR THE YEAR Net interest income $ 5,606 $ 6,451 (13)% Provision for loan losses 4,543 975 366 Non-interest income 3,025 3,856 (22) Non-interest expense 16,076 9,474 70 Net income (loss) (6,794) 113 (6,112) AT YEAR END Total assets $ 197,046 $ 240,819 (18)% Total loans 159,732 204,964 (22) Total deposits 148,939 181,787 (18) Total stockholders' equity 7,515 12,936 (42) AVERAGES Total assets $ 217,726 $ 254,130 (14)% Total earning assets 201,233 238,438 (16) Total loans 180,530 213,793 (16) Total deposits 163,422 183,706 (11) Total stockholders' equity 13,406 13,596 (1) PROFITABILITY RATIOS Return on average assets (3.12)% .04% Return on average stockholders' equity (50.68) .83 Net interest margin 2.79 2.72 LOAN QUALITY RATIOS Net charge offs to average loans 1.81% .12% Allowance for loan losses to loans at end of period 1.91 .87 Classified loans and letters of credit to total loans and letters of credit 2.70 .11 Specific reserves for letters of credit to total letters of credit 12.21 SAVINGS BANK CAPITAL RATIOS Tangible equity to assets at end of period 6.31% 6.93% Risk-based capital ratios Tier I capital 6.78 7.64 Total capital 10.79 10.74 OTHER DATA Weighted average shares outstanding 2,956,157 2,655,181 Number of full-time equivalent employees at year end 122 103 Number of banking offices 4 4
2 LETTER TO STOCKHOLDERS FIDELITY FEDERAL BANCORP AND SUBSIDIARIES In 1914, Fidelity Savings & Loan first opened its doors to the Evansville community. Many changes have occurred in and to the institution since then, including the formation of Fidelity Federal Bancorp. Fidelity Federal Bancorp has undergone significant changes that will better position itself for the challenges that lie ahead in the next millennium. As you are aware, fiscal 1998 was not a good year for the Company. Because of an increased provision for loan loss reserves, primarily for loans generated out of the now closed Indianapolis office made during the 1993 - 1996 period, the Company posted a $2.30 loss per share in fiscal 1998. Although we are not happy with the fiscal 1998 results, we think it's worth noting that without these extraordinary charges, the Company would have recorded approximately $1.4 million in after tax profits, or $.48 per share. Also, even after calculating the effects of the BIF/SAIF assessment last year, the Company is continuing to operate more profitably from its traditional banking operations than the previous year. The Board of Directors approved a strategic change in direction this year by ceasing the further development and funding of its Section 42 housing activities. The Company has come "full circle" by returning to its base business, that being a single family, consumer and commercial lender. Village Capital Corporation, a bank subsidiary, will continue to broker loans to other lenders. The Company's primary asset, United Fidelity Bank, continues to exceed regulatory "Well Capitalized" levels. Management is seeking the refinancing of a large portion of loans for which additional reserves have been made. If it is successful, there will be a potential positive loan loss reserve reversal, although management cannot guarantee if or when its efforts will be successful or realized. A final thought worth mentioning is that, unlike most financial institutions, management owns in excess of 58 percent of the Company, along with approximately 17 percent of institutional ownership. As significant shareholders, when the Company falls short of its goals, management truly "feels the pain." We are economically motivated and committed to returning the Company to profitability. As always, we appreciate your continued support. Cordially, /s/ M. BRIAN DAVIS /s/ JACK CUNNINGHAM - -------------------- --------------------- M. Brian Davis Jack Cunningham President / C.E.O. Chairman 3 MARKET SUMMARY FIDELITY FEDERAL BANCORP 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, 1998 High Low June 30, 1997 High Low First Quarter $ 9 $ 8-1/4 First Quarter $11-1/4 $10-1/4 Second Quarter 10-3/8 8-3/4 Second Quarter 10-1/2 8-3/4 Third Quarter 10-3/8 8-3/4 Third Quarter 9-3/8 8-1/4 Fourth Quarter 9-3/8 6-1/16 Fourth Quarter 8-3/4 7-1/2
The Company declared dividends of $0.35 per share during fiscal 1998 compared to $0.60 per share for fiscal 1997 and $0.79 per share in fiscal 1996. The Company's principal source of income and funds is dividends from the savings bank subsidiary which has dividend restrictions, unlike the Company which is not subject to any regulatory restriction on future dividends. 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 Savings Bank has determined to not pay any dividends in the immediate future. This decision was based upon discussions with the Office of Thrift Supervision ("OTS"), the primary federal regulator for the Savings Bank, following an examination of the Savings Bank by the OTS. In these discussions, the OTS indicated that the Savings Bank should refrain from paying dividends due to the risk perceived by the OTS in the Savings Bank's loan portfolio. The Savings Bank is uncertain when it will pay dividends in the future and the amount of such dividends, if any. It is also possible that the OTS will take action to officially prohibit the payment of dividends by the Savings Bank. The Company anticipates that it will not pay any dividends until such time as it receives dividends from the Savings Bank. 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 $ 8.75 $2,423.75 06/30/98 277 $ 6.50 $1,800.50
In addition, this stockholder would have received $585.65 in cash dividends during the period shown. The approximate number of holders of outstanding Common Stock based upon holders of record, as of September 17, 1998 is 503. 4 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES SELECTED STATISTICAL INFORMATION (Dollars in Thousands, Except Share and Per Share Data)
1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL DATA AS OF JUNE 30 Total assets $ 197,046 $ 240,819 $ 262,216 $ 269,438 $ 152,188 Interest-bearing deposits 6,266 1,765 4,107 6,549 6,254 Investment securities available for sale 9,854 13,790 17,459 15,404 14,465 Loans, net 156,683 203,183 216,162 222,387 123,176 Deposits 148,939 181,787 181,702 180,771 89,038 Short-term borrowings 2,531 5,191 5,693 9,297 1,835 Long-term debt 29,488 38,089 57,292 64,699 49,854 Stockholders' equity 7,515 12,936 14,295 12,405 9,775 SELECTED OPERATIONS DATA FOR YEAR ENDED JUNE 30 Interest income $ 17,192 $ 20,282 $ 21,529 $ 15,794 $ 8,710 Interest expense 11,586 13,831 15,525 10,263 5,171 -------------------------------------------------------------------------- Net interest income 5,606 6,451 6,004 5,531 3,539 Provision for loan losses 4,543 975 455 420 150 -------------------------------------------------------------------------- Net interest income after provision for loan losses 1,063 5,476 5,549 5,111 3,389 Non-interest income 3,025 3,856 8,180 5,377 2,457 Non-interest expense 16,076 9,474 8,608 5,912 3,220 -------------------------------------------------------------------------- Income (loss) before income tax (11,988) (142) 5,121 4,576 2,626 Income tax (5,194) (255) 1,886 1,515 1,044 -------------------------------------------------------------------------- Net income (loss) $ (6,794) $ 113 $ 3,235 $ 3,061 $ 1,582 ========================================================================== SELECTED FINANCIAL RATIOS Return on average assets (3.12)% .04% 1.18% 1.54% 1.30% Return on stockholders' equity (50.68) .83 23.75 27.52 17.20 Net interest margin 2.79 2.72 2.29 2.87 3.02 Net interest spread 2.62 2.57 2.11 2.59 2.67 Tangible equity to assets at year end 6.31 6.93 7.08 6.02 6.43 Allowance for loan losses to loans 1.91 .87 .49 .32 .29 Allowance for loan losses to non-performing loans 532.11 624.91 275.06 122.09 37.79 Dividend payout ratio N/A 1,500.00 67.52 28.45 17.91 PER SHARE DATA Diluted net income (loss) $ (2.30) $ .04 $ 1.17 $ 1.22 $ .67 Basic net income (loss) (2.30) (.05) 1.32 1.30 .68 Cash dividends declared .35 .60 .79 .33 .12 Book value at year end 2.40 5.20 5.73 5.21 4.17 Closing market price (bid) at year end 6.50 8.75 11.25 10.88 5.41 Number of average common and common equivalent shares outstanding 2,956,157 2,655,181 2,776,147 2,498,892 2,369,161
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 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL Fidelity Federal Bancorp (the "Company"), incorporated in 1993 under the laws of the State of Indiana, is a registered savings and loan holding company with its principal office in Evansville, Indiana. 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. 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, commercial, 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 the limited partnerships which own the developments, receives a percentage interest in the profits, losses and tax credits during the life of the project and receives a percentage of the annual cash flow and residual (sale or refinancing) proceeds during operation and at disposition or refinancing of the developments, respectively. Village Community Development Corporation, as contractor and developer, received construction and development fees as the project is completed. As the development progressed, development fee income was 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 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"). Since June 30, 1994, VCC has earned fees by providing real estate mortgage banking services to unaffiliated borrowers. 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 non-banking business; (ii) the formation of an affordable housing group to engage in real estate development, management and financing of affordable housing projects; and (iii) the growth of assets through the origination and acquisition of loans. After the implementation of the business plan, the holding company as well as the affordable housing group, consisting of three non-bank subsidiaries of the Savings Bank, was formed. In 1995 and 1996, revenue generated from affordable housing activities increased dramatically and significant asset growth was achieved, also resulting in higher revenues. To conserve capital 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 1996, the Company encountered increasing competition in the affordable housing group area. As a result the Company reevaluated its business plan in fiscal 1997 and closed its Indianapolis, Indiana real estate development office. In 1998, the Company's Affordable Housing Group discontinued the development of real estate but continued to actively manage existing Company affordable housing projects. As a result of this, fee income from real estate development and real estate investment banking fees carried by Village Community Development Corporation and Village Capital Corporation have declined. Village Housing Corporation and Village Management Corporation continue to be fully operational at the Company's headquarters in Evansville. 7 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 included 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 allowance for loan losses in 1997. Also in 1997, the Company initiated a cost reduction program that 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 through departmental reorganization, reconsolidation, position attrition and `right-sizing' of operations within all the subsidiaries. The Company's results in 1998 included an increase in the provision for loan losses of $3.6 million, a letter of credit valuation provision of $6.8 million, and an additional write-down of its investments in affordable housing projects of $1.5 million. The majority of these charges relate to the Company's involvement in its Internal Revenue Code Section 42 tax-credit real estate development program and were recorded during the third quarter in conjunction with an examination by the Company's primary regulator, the Office of Thrift Supervision ("OTS"), of the Company and the Bank. The methodology used by the OTS to compute the allowance for loan losses and to establish reserves for letters of credit in connection with its affordable housing projects was different than the methodology previously used by the Company to compute these estimates. The methodology used by the OTS was accepted by management and resulted in additions to the provisions for loan loss and non-interest expense, including the letter of credit valuation reserve. While the Company has not participated in the development of any new projects that it manages, the performance of a majority of the projects that the Company is managing is below that which was originally projected when the projects were formed. This has resulted in lower than expected cash flows, which are needed to support debt repayment. Cash flows of the projects have been affected by a number of items, including lower than expected occupancy and/or rent levels, higher than expected expenses and, in certain situations, additional construction costs or delays which resulted in longer start up periods for the projects. The areas in which many of the projects are located have also seen increased competition in the affordable housing industry, which has affected the project's ability to perform at the levels originally projected. Each of the projects are beyond the start-up or construction phase and have been in operation for a sufficient period of time to enable management to conclude that additional provisions and reserves are required. The Company's current plans are to not originate, participate or invest in any new or additional Section 42 projects. The Company believes that the properties cash flows will not improve significantly unless a change in the property's financing or debt structure occurs. It is currently pursuing a plan to refinance its Section 42 projects which, if successful, could result in the reversal of a portion of the additional charges taken during 1998. The availability of such refinancing depends upon numerous factors, including, among other things, interest rates, third-party appraisals and the occupancy levels in the Section 42 projects. The June 30, 1998 audited financial statements include condensed financial information about each of the Company's business segments. 8 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, 1998, 1997 and 1996:
AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS (In Thousands on Fully Taxable Equivalent Basis) 1998 1997 1996 ------------------------------------------------------------------------------------------------- AVERAGE AVERAGE Average Average Average Average YEAR ENDED JUNE 30 BALANCES INTEREST RATES Balances Interest Rates Balances Interest Rates - ---------------------------------------------------------------------------------------------------------------------------- ASSETS Federal funds sold and other short-term money market investments $ 5,533 $ 330 5.96% $ 3,594 $ 194 5.40% $ 3,768 $ 196 5.20% Investment securities available for sale Taxable 10,806 650 6.01 16,168 1,033 6.39 16,528 1,099 6.65 Tax exempt (1) 444 36 8.33 963 85 8.83 Loans held for sale 11,140 877 7.87 Federal Home Loan Bank 3,920 316 8.06 3,920 307 7.83 3,614 286 7.91 Stock Loans (2) (3) Commercial loans 11,683 1,124 9.62 11,695 1,154 9.87 9,720 1,022 10.51 Multi-family loans 25,573 2,672 10.45 22,768 2,374 10.43 28,804 3,049 10.59 Real estate mortgages 114,335 9,213 8.06 155,527 12,919 8.31 155,300 12,011 7.73 Consumer loans 28,939 2,863 9.89 23,803 2,245 9.43 33,050 2,990 9.05 ------------------- ------------------- ------------------- Total loans 180,530 15,872 8.75 213,793 18,692 8.74 226,874 19,072 8.41 ------------------- ------------------- ------------------- Total earning assets 201,233 17,204 8.55 238,438 20,311 8.52 261,924 21,530 8.22 -------- -------- ------- Allowance for loan losses (2,538) (1,664) (833) Cash and due from banks 3,018 2,386 2,012 Premises and equipment 6,214 6,145 4,345 Other assets 9,799 8,825 7,389 -------- -------- -------- Total assets $217,726 $254,130 $274,837 ======== ======== ======== LIABILITIES Interest-bearing deposits Interest-bearing checking $ 22,211 $ 942 4.24% $ 20,585 $ 868 4.22% $ 10,092 $ 398 3.94% Money market accounts 3,027 82 2.71 3,890 106 2.72 6,066 180 2.97 Savings accounts 4,813 136 2.83 4,793 139 2.90 5,346 155 2.90 Certificates of deposit 128,142 7,625 5.95 148,754 8,887 5.97 158,703 9,817 6.19 ------------------- ------------------- ------------------- Total interest- bearing deposits 158,193 8,785 5.55 178,022 10,000 5.62 180,207 10,550 5.85 Federal funds purchased 116 7 6.03 1,810 102 5.64 2,301 136 5.91 Other borrowings 17,673 1,523 8.62 19,664 1,616 8.22 17,523 1,397 7.97 Federal Home Loan Bank advances 19,253 1,271 6.60 33,136 2,113 6.38 54,116 3,443 6.36 ------------------- ------------------- ------------------- Total interest- bearing liabilities 195,235 11,586 5.93 232,632 13,831 5.95 254,147 15,526 6.11 -------- -------- ------- Non-interest bearing demand deposits 5,229 5,684 3,898 Advances by borrowers for taxes and insurance 596 798 930 Other liabilities 3,260 1,420 2,244 -------- -------- -------- Total liabilities 204,320 240,534 261,219 STOCKHOLDERS' EQUITY 13,406 13,596 13,618 -------- -------- -------- Total liabilities and stockholders' equity $217,726 $254,130 $274,837 ======== ========= ======== Net interest income/margin $ 5,618 2.79% $ 6,480 2.72% $ 6,004 2.29% ======== ======== ======= Interest rate spread (4) 2.62% 2.57% 2.11% Average interest-earning assets to average interest-bearing liabilities 103.07% 102.50% 103.06%
9 (1) Tax-exempt securities have been adjusted to a fully tax equipment basis using a marginal tax rate of 34%. (2) Nonaccrual loans have been included in the average balances. (3) Loan income includes interest and fees on loans. (4) Interest rate spread is calculated by subtracting combined weighted average interest rate cost from combined weighted average interest rate earned for the period indicated. 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 decreased to $5.6 million or 13.1% in 1998 from $6.5 million in 1997. Net interest income increased by 7.4% in 1997 compared to $6.0 million in 1996. The reduction in net interest income in 1998 was primarily due to a decrease in average earning assets of $37.2 million, which was partially offset by a decrease in average interest-bearing liabilities of $37.4 million. Interest income for the year ended June 30, 1998 was $17.2 million compared to $20.3 million for the year ended June 30, 1997, a decrease of $3.1 million or about 17.4%. Interest expense for the year ended June 30, 1998 was $11.6 million compared to $13.8 million for the year ended June 30, 1997, a decrease of $2.2 million or 16.2%. The reduction in average earning assets was attributable to a significant number of multifamily and commercial loan payoffs, as well as the payoff and sale of several conventional real estate mortgage loans. The average balance of agent-acquired certificates of deposit, which had an average rate of 6.26% in 1998, was reduced from $70.3 million in 1997 to $42.4 million in 1998 as the Company reduced the balance of this higher-cost source of funds. The net interest margin improved in 1998 to 2.79% from 2.72% in 1997. The average rate of interest earning assets and average rate paid on interest bearing liabilities of 8.55 and 5.93% were consistent with the rates in 1997 of 8.52 and 5.95%. The increase in the margin was affected positively by the maturing of the agent-acquired certificates and an increase in the balance and average rate of consumer loans. The increase was affected negatively by a decrease in higher yielding multifamily construction and commercial real estate loans. During 1996, the Company positioned itself during the latter part of fiscal 1996 by selling over $57.0 million of fixed-rate mortgage loans. This 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 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 30 basis points to 8.52% at June 30, 1997 from 8.22% at June 30, 1996. The average yield on interest bearing liabilities decreased 16 basis points to 5.95% at June 30, 1997. The loan portfolio accounted for the majority of the increased yield on earning assets. New NOW account 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 5.9%. The Company took the opportunity to replace the sold loans with higher yielding commercial, commercial real estate, and multi-family loans 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 expense decreased $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. 10 QUARTERLY RESULTS OF OPERATIONS The Company's non-interest income is largely dependent upon the completion of large individual loan transactions or the earning of fee income for affordable housing transactions. Notwithstanding the aforementioned loan and letter of credit reserves set aside in 1998, the Company's earnings may have experienced some variability from quarter to quarter due to the uncertainty of the timing of such transactions.
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 - ---------------------------------------------------------------------------------------------------------------------------- (In Thousands) 1998 Interest income $ 4,887 $ 4,453 $ 3,993 $ 3,859 Interest expense 3,285 3,057 2,700 2,544 ----------------------------------------------------------------------- Net interest income 1,602 1,396 1,293 1,315 Provision for loan losses 135 90 4,298 20 Non-interest income 850 974 590 611 Non-interest expense 1,649 1,697 11,070 1,660 ----------------------------------------------------------------------- Income (loss) before income tax 668 583 (13,485) 246 Income tax expense (benefit) 159 175 (5,363) (165) ----------------------------------------------------------------------- Net income (loss) $ 509 $ 408 $(8,122) $ 411 ======================================================================= Net income (loss) per share Diluted net income (loss) $ .19 $ .13 $ (2.60) $ .13 Basic net income (loss) .19 .13 (2.60) .13 Cash dividends .10 .10 .10 .05 1997 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 (loss) before income tax (1,947) 704 721 380 Income tax expense (benefit) (702) 189 192 66 ----------------------------------------------------------------------- Net income (loss) $(1,245) $ 515 $ 529 $ 314 ======================================================================= Net income (loss) per share Basic net income (loss) $ (.46) $ .21 $ .21 $ .13 Diluted net income (loss) (.46) .19 .20 .12 Cash dividends .20 .20 .10 .10
11 RATE/VOLUME ANALYSIS The following table sets forth an analysis of volume and rate changes in interest income and interest expense of the Company's average earning assets and average interest-bearing liabilities. The table distinguishes between the changes related to average outstanding balances of assets and liabilities (changes in volume holding the initial interest rate constant) and the changes related to average interest rates (changes in average rate holding the initial outstanding balance constant). The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
1998 COMPARED TO 1997 1997 Compared to 1996 INCREASE (DECREASE) DUE TO Increase (Decrease) Due To -------------------------------------------------------------------------------- VOLUME RATE NET Volume Rate Net - ---------------------------------------------------------------------------------------------------------------------------- (In Thousands) Interest income on average earning assets Loans $(2,908) $ 88 $(2,820) $(1,100) $ 720 $ (380) Investment securities (388) (44) (432) (24) 43 19 Loans held for sale (877) (877) Federal Home Loan Bank stock 9 9 24 (3) 21 Federal funds sold and other short-term money market investments 105 31 136 (9) 7 (2) -------------------------------------------------------------------------------- Total interest income (3,191) 84 (3,107) (1,986) 767 (1,219) -------------------------------------------------------------------------------- Interest expense on average interest-bearing liabilities NOW accounts 69 5 74 414 56 470 Money market deposit accounts (24) (24) (65) (9) (74) Passbook savings accounts 1 (4) (3) (16) (16) Certificates of deposit (1,231) (31) (1,262) (615) (315) (930) Federal funds purchased (95) (95) (29) (5) (34) Other borrowings (164) 71 (93) 171 48 219 Federal Home Loan Bank advances (885) 43 (842) (1,335) 5 (1,330) -------------------------------------------------------------------------------- Total interest expense on interest-bearing liabilities (2,329) 84 (2,245) (1,475) (220) (1,695) -------------------------------------------------------------------------------- Changes in net interest income $ (862) $ 0 $ (862) $ (511) $ 987 $ 476 ================================================================================
PROVISION FOR LOAN LOSSES The Company makes provisions for possible loan losses in amounts estimated to be sufficient to maintain the allowance for loan losses at a level considered necessary by management to absorb possible losses in the loan portfolios. The provision for loan losses was $4.5 million for the year ended June 30, 1998, compared to $975,000 for June 30, 1997, and $455,000 for June 30, 1996. The ratio of the allowance for loan losses to non-performing loans was 532% at June 30, 1998, 625% for June 30, 1997 and 275% at June 30, 1996. The increase in the provision for loan losses in 1998 is due primarily to increased allowances for losses on loans made to affordable housing projects. During the fourth quarter of fiscal 1998, 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 one 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 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 those assets, as well as for the related letters of credit. 12 NON-INTEREST INCOME Non-interest income decreased by $831,000 or 21.6% for the year ended June 30, 1998, compared to a decrease of $4.3 million or 52.8% for the year ended June 30, 1997. The following table summarizes non-interest income for the three years ending June 30:
CHANGE FROM PRIOR YEAR INCREASE (DECREASE) ---------------------------------------------------- AMOUNT 1998 1997 ------------------------------------------------------------------------------------------- 1998 1997 1996 AMOUNT PERCENT Amount Percent - ---------------------------------------------------------------------------------------------------------------------------- (In Thousands) Fee income from real estate development and management $ 191 $ 337 $4,440 $(146) (43.3)% $(4,103) (92.4)% Service charges on deposit accounts 436 316 180 120 38.0 136 74.6 Gain on sale of Real estate loans 186 338 743 (152) (45.0) (405) (54.5) Premises and equipment 3 719 (3) (100.0) (716) (99.6) Investment securities 79 42 37 88.1 42 100.0 Letter of credit fees 657 722 481 (65) (9.0) 241 50.1 Real estate investment banking fees 139 963 942 (824) (85.6) 21 2.2 Agent fee income 650 452 47 198 43.8 405 861.7 Other 687 683 628 4 .6 55 8.9 ------------------------------------------------------------------------------------------- Total non-interest income $3,025 $3,856 $8,180 $(831) (21.6)% $(4,324) (52.8)% ===========================================================================================
The Company's level of activity in Section 42 real estate development has continued to decrease as competition in the industry has continued to increase and the number of multifamily transactions the Company has participated in has declined. As a result, fee income from real estate development and management decreased to $191,000 in 1998 from $337,000 in 1997 and $4.4 million in 1996. The decrease is primarily in the area of development fees, as the Company has continued to earn management fees for properties that it is currently managing. Real estate investment banking fees, which are earned when the Company provides financing for real estate development projects, decreased to $139,000 in 1998 as compared to $963,000 in 1997 and $942,000 in 1996. Letter of credit fees were $657,000 in 1998 as compared to $722,000 in 1997 and $481,000 in 1996. Outstanding standby letters of credit at June 30, 1998 were $55.5 million as compared to $54.4 million at June 30, 1997. The decrease in fee income is partially due the fact that fees have not been collected from certain of the affordable housing projects that are not generating cash flows that are in line with earlier projected amounts and are therefore not projected to be able to support outstanding loan balances to other borrowers and associated letter of credit fees that are due to the Company. Service charges on deposit accounts increased $120,000 to $436,000 in 1998 as compared to $316,000 in 1997 and $180,000 in 1996. The increase in fees is due to continued increased growth in the deposit base as the Company has continued to focus on concentrating its efforts to attract transaction accounts. The net gain on sale of loans decreased to $186,000 from $338,000 in 1997 and $743,000 in 1996. The 1996 sales included, in this gain, recognition of $575,000 of mortgage servicing rights compared to $250,000 in 1997 and $127,000 in 1998 as the volume of sales has continued to decrease. Sales in 1998 and 1997 have consisted only of current production, while in the 1996 the sales included $52 million of loans that were reclassified as available for sale and then sold. 13 The Company participates in an arrangement in which automobile loans are originated on behalf of another organization. Agent fee income, which represents the Company's earned fee from these transactions, continued to increase in 1998 to $650,000, as compared to $452,000 in 1997 and $47,000 in 1996. Other non-interest income was $687,000, as compared to $683,000 in 1997 and $628,000 in 1996 and consisted of several items. Included in other non-interest income are loan servicing fees of $95,000 in 1998, as compared to $176,000 in 1997 and $76,000 in 1996. NON-INTEREST EXPENSE Non-interest expense increased by $6,602,000 or 69.7% for the year ended June 30, 1998, compared to 1997 after increasing by $866,000 or 10.1% in 1997 from 1996. The following table summarizes non-interest expense for the three years ending June 30:
CHANGE FROM PRIOR YEAR INCREASE (DECREASE) ---------------------------------------------------- AMOUNT 1998 1997 ------------------------------------------------------------------------------------------- JUNE 30 1998 1997 1996 AMOUNT PERCENT Amount Percent - ---------------------------------------------------------------------------------------------------------------------------- (In Thousands) Salaries and employee benefits $ 3,341 $4,318 $4,486 $ (977) (22.60)% $ (168) (3.70)% Letter of credit valuation provision 6,778 6,778 100.00 Write down of affordable housing partnership investments 1,478 335 1,143 341.19 335 100.00 Legal and professional 304 303 448 1 .33 (145) (32.37) Occupancy expense 444 481 471 (37) (7.69) 10 2.12 Equipment expense 354 374 383 (20) (5.35) (9) (2.35) Data processing expense 456 318 287 138 43.40 31 10.80 Affordable housing group activity expenses 769 177 61 592 334.46 116 190.16 Advertising 199 230 226 (31) (13.48) 4 1.77 Deposit insurance 140 255 417 (115) (45.10) (162) (38.85) SAIF assessment 1,040 (1,040) (100.00) 1,040 100.00 Correspondent bank charges 160 135 93 25 18.52 42 45.16 Printing and supplies 130 181 204 (51) (28.18) (23) (11.27) Loss on investment 87 132 73 (45) (34.09) 59 80.82 Telephone 74 111 121 (37) (33.33) (10) (8.26) Postage 79 96 110 (17) (17.71) (14) (12.73) Travel and lodging 68 95 183 (27) (28.42) (88) (48.09) Other operating expense 1,215 893 1,045 322 36.05 (152) (14.55) ------------------------------------------------------------------------------------------- Total non-interest expense $16,076 $9,474 $8,608 $ 6,602 69.69% $ 866 10.10% ===========================================================================================
The increase in total non-interest expense for 1998, as compared to 1997, relates primarily to the Company's Section 42 tax credit real estate development program. The Company recorded specific reserves of $6.8 million related to letters of credit issued by the Company and the Bank and also charged off equity investments in these projects of $1.5 million. Although the majority of the letter of credit reserve relates 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 paid any amounts to third parties as a result of these letters of credit. Affordable Housing Group expenses increased to $769,000 in 1998, as compared to $177,000 in 1997 and $61,000 in 1996. Included in the 1998 expense were abandoned projects expense of $213,000 and write-offs of partnership management, investment banking, real estate development and letter of credit fees totaling $384,000. Abandoned projects expense consists of costs that were incurred on abandoned development sites. 14 Salaries and employee benefit expense continued to decrease as the Company realized the impact of staff reductions that occurred during the fourth quarter of fiscal 1997 as part of the Company's cost reduction program that were designed to eliminate duplicative activities. Salaries and employee benefit expense was $3.3 million in 1998, a reduction of $1.0 million from the 1997 amount of $4.3 million. Data processing expense increased by $138,000 to $456,000 in 1998 because of an increase in the Company's deposit base and amounts for incurred and planned costs related to the Company's compliance with Year 2000. Deposit insurance decreased $115,000 from 1997 as the Company benefited from lower deposit insurance rates. Non-interest expense for 1997 also includes a one-time special Savings Association Insurance Fund assessment of approximately $.06 per one-hundred dollars of deposits, or $1 million, that was imposed on thrifts in September, 1996. Several other expenses, including advertising, printing and supplies, travel and lodging, telephone and postage decreased in 1998 over 1997 amounts, as increased cost control measures that were put in place as part of the Company's cost reduction program took effect. Other operating expenses were $1.2 million in 1998, an increase of $322,000 over the 1997 amount of $893,000. Included in the 1998 amount is an $80,000 on a kiting scheme, an increase in correspondent banking charges of $25,000, a $17,000 increase in consumer credit reports and various other increases in expense items. INCOME TAX EXPENSE Income tax benefit was $5,194,000 in 1998, compared to a $255,000 benefit in 1997 and income tax expense of $1,886,000 in 1996. The Company's net income before income tax expense decreased $11,846,000 to a net loss before income taxes of $11,988,000. A reduction in income tax expense from IRS Section 42 low income housing credits reduced income tax expense $508,000 and $341,000 for 1998 and 1997. The effective tax rate for the current year was 43.3% compared to 180.0% for 1997 and 36.8% for 1996. YEAR 2000 The Company has completed an assessment of its computer systems and identified those systems that it believes could be affected by the Year 2000 issue and has developed an implementation plan to address the issue. The Company, in addition to completing its assessment and plan, is in the early stages of testing its internal mission critical hardware systems to determine if they are Year 2000 compliant. While the Company has exposure to several risks related to Year 2000, the primary risk to the Company of not complying with Year 2000 is the potential inability to correctly process and record customer loan and deposit transactions. The Company has not yet met certain of the requirements that have been established for the banking industry by the Federal Financial Institution Examination Council. These standards require that a series of procedures be performed by financial institutions within established timeframes to reduce the risk of noncompliance with the Year 2000 issue. Specifically, the Company has not yet developed and completed a complete testing plan or a customer-based risk management plan. While the Company believes that it ultimately will meet all of the FFIEC requirements, it cannot guarantee that the systems of other companies on which the Company's systems rely will be timely converted and not have a material effect on the Company. The Company is in the early stages of developing a contingency plan that would take effect if its internal systems, or the systems of those material vendors on which it is reliant on, would not be compliant with Year 2000 requirements. The Company has accrued a total of $80,000 in Year 2000 related costs, a portion of which have been paid as of June 30, 1998. The amounts that have been paid to date were to provide assistance to the Company with the initial assessment and formulation of the plan to ensure compliance with Year 2000. At June 30, 1998, the Company has not completed its assessment of the expected total cost of performing necessary procedures or purchasing equipment that is compliant with Year 2000. 15 The Company outsources a significant portion of its data processing to an outside provider. A worst case scenario for the Company would likely involve non-compliance with Year 2000 by its primary data processor in such a manner that would leave the Company in a position where it could not correctly process and record customer loan and deposit transactions. The Company does not have, at September 30, 1998 any material commitments to purchase new equipment, software or to incur material costs to modify its existing system and does not believe that any material amounts of its existing computer hardware or software is impaired. The Company has not fully assessed the impact of Year 2000 on its commercial lending customers, but believes that the impact, in terms of potential credit exposure, would not be material. The majority of the Company's commercial lending portfolio consists of commercial real estate loans that are made to companies that are not highly technology intensive. The Company cannot provide any assurance that the effect of Year 2000 will not be material to the Company's financial position or operating results. FINANCIAL CONDITION Total assets at June 30, 1998 decreased $43.8 million or 18.2% to $197 million from $241 million in 1997. Average assets for 1998 decreased 14.3% from 1997 to $217.7 million. Average liabilities decreased $36.2 million as the Company used loan payoff proceeds to reduce borrowings, primarily agent-acquired certificates of deposit, which represent a higher cost source of funds for the Company. The decrease in total assets is primarily the result of a significant number of multifamily and commercial loan payoffs, as well as the payoff and sale of several conventional real estate mortgage loans. The Company has continued to sell current production of fixed 1-4 family mortgages to investors in the secondary market. LOANS The following table shows the composition of the Company's loan portfolio as of June 30:
JUNE 30 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- (In Thousands) Real estate mortgage loans First mortgage loans Conventional $ 71,343 $ 94,293 $106,344 $113,971 $ 74,808 Construction 16,110 32,577 36,938 24,670 12,536 Commercial 20,753 26,668 18,267 7,133 1,022 Multi-family loans 5,742 9,602 15,420 26,147 12,372 First mortgage real estate loans purchased 2,704 3,184 7,612 4,921 4,064 ------------------------------------------------------------------------------------ 116,652 166,324 184,581 176,842 104,802 Commercial loans, other than secured by real estate 11,568 12,522 9,393 6,414 442 Consumer and home equity loans 31,512 26,118 23,247 39,844 18,288 ------------------------------------------------------------------------------------ Total loans $159,732 $204,964 $217,221 $223,100 $123,532 ==================================================================================== Total assets $197,046 $240,819 $262,216 $269,438 $152,188 ==================================================================================== Total loans to total assets 81.1% 85.1% 82.8% 82.8% 81.2% ====================================================================================
16 The Company began selling current production of 1-4 family loans in 1997, recording the gain or loss and using the proceeds to fund new products. With this strategy in place, conventional real estate mortgage loans decreased $23.0 million from June 30, 1997 to June 30, 1998. Construction loans decreased by $16.5 million at June 30, 1998 from June 30, 1997. Construction loans at June 30, 1998 include $12.9 million of multi-family loans. Commercial real estate loans and commercial loans grew from 1994 to 1997 as the Company continued to expand into the commercial loan market. Multifamily loans have decreased since 1995 as the Company has sold participations in the loans or they have paid off because of the availability of more favorable financing alternatives. In several cases where multifamily loan borrowers required more favorable financing alternatives, the Company has issued a standby letter of credit and continued to assume the credit risk associated with the financing. Consumer and home equity loans have increased since 1997 as the Company has originated an increasing volume of automobile loans. The Company participates in an arrangement in which the majority of these loans are originated on behalf of another organization. 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 ten percent of total loans. LOAN MATURITIES The following table sets forth the remaining maturities for certain loan categories as of June 30, 1998:
WITHIN ONE ONE TO FIVE AFTER FIVE JUNE 30 YEAR YEARS YEARS TOTAL - ------------------------------------------------------------------------------------------------------------------ (In Thousands) Real estate mortgage loans $27,443 $24,735 $64,474 $116,652 Consumer and home equity loans 12,298 18,026 1,188 31,512 Commercial loans 8,252 3,165 151 11,568 ---------------------------------------------------------------------- Total $47,993 $45,926 $65,813 $159,732 ====================================================================== Predetermined interest rates $10,762 $29,919 $39,831 $80,512 Floating interest rates 37,231 16,007 25,982 79,220 ---------------------------------------------------------------------- $47,993 $45,926 $65,813 $159,732 ======================================================================
17 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. When a loan reaches a ninety day or more past due status, the asset is generally repossessed or sold, if applicable, or the foreclosure process is started and the loan is moved to other real estate owned to be sold. A loan could be placed in a nonaccrual status sooner than ninety days, if management knows the customer has abandoned the collateral and has no intention of paying. At this point, the loan would go into non-accrual status and the Company would start the repossession or foreclosure process. Typically, when a loan goes to nonaccrual status, the accrued interest is reversed from income, unless strong evidence exists that the value of the collateral would support the collection of interest in a foreclosure situation. Nonaccrual loans are returned to an accrual status when, in the opinion of management, the financial position of the borrower indicates that there is no longer any reasonable doubt as to the timely payment of principal and interest. Income received on restructured and nonaccrual loans was $10,000 in 1998, $11,000 in 1997 and $15,000 in 1996. Additional interest income of approximately $33,000, $12,000 and $9,000 for 1998, 1997 and 1996, 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:
JUNE 30 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- (In Thousands) Non-accrual loans (real estate mortgage) $461 $256 $342 $ 47 $190 Restructured (real estate mortgage) 514 752 90 days or more past due Consumer 86 29 43 23 Commercial 26 ----------------------------------------------------------------------- 112 29 43 23 ----------------------------------------------------------------------- Total $573 $285 $385 $584 $942 ======================================================================= Ratio of non-performing loans to total loans .27% .14% .18% .26% .76% =======================================================================
Non-performing loans were .27% of total loans at June 30, 1998, as compared to .14% of total loans at June 30, 1997 and consisted primarily of real estate mortgage 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 "non-performing 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 general partner advances were charged off in 1998. ANALYSIS OF ALLOWANCE FOR LOAN LOSSES AND LETTER OF CREDIT VALUATION ALLOWANCE 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 and letter of credit portfolio and changes in loan and letter of credit activity. Such evaluation, which includes a review of all loans and letters of credit for which full collectibility may not be reasonably assured, considers among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loss experience, the composition of the portfolios and other factors that warrant recognition in providing for an adequate loan loss allowance and letter of credit valuation allowance. This evaluation is performed on a monthly basis and is designed to ensure that all relevant matters affecting collectibility will consistently be identified in a detailed review and that the outcome of the review will be considered in a disciplined manner by management in determining the necessary allowances and related provisions. The amounts actually reported in each period will vary with the outcome of this detailed review. 18 At June 30, 1998 the Company had impaired loans totaling $13,925,000. The allowance for losses on such impaired loans totaled $1,897,000 and is included in the Company's allowance for loan losses at June 30, 1998. The average balance of impaired loans was $3,472,000 during the year ended June 30, 1998 and the Company recorded and collected $385,000 in interest during this period. Impaired loans do not include large groups of homogeneous loans that are collectively evaluated for impairment, such as, residential mortgage and consumer installment loans. The Company did not have any impaired loans during the year ended June 30, 1997. 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:
JUNE 30 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------- (In Thousands) Allowance for loan losses balance at July 1 $ 1,781 $ 1,059 $ 713 $ 356 $ 236 -------------------------------------------------------------------------------------- Loan charge offs Real estate mortgage Conventional 15 100 12 8 8 Multi-family 3,089 Commercial 25 Consumer 195 142 128 74 39 -------------------------------------------------------------------------------------- Total loan charge offs 3,299 267 140 82 47 -------------------------------------------------------------------------------------- Loan recoveries Real estate mortgage Conventional 3 17 8 6 Consumer 24 11 14 11 11 -------------------------------------------------------------------------------------- Total loan recoveries 24 14 31 19 17 -------------------------------------------------------------------------------------- Net charge offs 3,275 253 109 63 30 Provision for loan losses 4,543 975 455 420 150 -------------------------------------------------------------------------------------- Allowance for loan losses at June 30 $ 3,049 $ 1,781 $ 1,059 $ 713 $ 356 ====================================================================================== Ratio of net charge offs to average loans outstanding during period 1.81% .12% .05% .04% .03% ====================================================================================== Ratio of provision for loan losses to average loans outstanding during period 2.52% .46% .20% .24% .15% ====================================================================================== Ratio of allowance for loan losses to total loans outstanding at year end 1.91% .87% .49% .32% .29% ====================================================================================== Average amount of loans outstanding for the period $180,530 $213,793 $226,874 $173,980 $ 97,151 ====================================================================================== Amount of loans outstanding at end of period $159,732 $204,964 $217,221 $223,100 $123,532 ======================================================================================
19 The allowance for loan losses was $3.0 million at June 30, 1998, and $1.8 million at June 30, 1997. Net loan charge-offs were $3.3 million or 1.81% of average loans in 1998 compared to $253,000 or 0.12% of average loans in 1997. As discussed in "Management's Discussion and Analysis--General" and "Provision for Loan Losses", the Company increased the provision for loan losses during the current year 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 June 30, 1998. Multi-family letters of credit, an off-balance sheet item, carry the same risk characteristics as conventional loans and totaled $55.5 million at June 30, 1998. Specific reserves for letters of credit totaled 12.21% of outstanding letters of credit at June 30, 1998. Classified loans and letters of credit to total loans and letters of credit were 2.70% at June 30, 1998 and .11% at June 30, 1997. The Company has not paid any amounts to third parties as a result of these letters of credit. Management considers the allowance for loan losses adequate to meet losses inherent in the loan portfolio as of June 30, 1998. ALLOCATION OF ALLOWANCE FOR LOAN LOSSES The allocation for loan losses and the percentage of loans within each category to total loans at June 30 are as follows:
ALLOCATION OF AMOUNT ---------------------------------------------------------------------------------------- JUNE 30 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- (In Thousands) Real Estate Mortgage Conventional $ 173 $ 153 $ 155 $ 208 $ 219 Multi-family 1,868 994 420 195 Home equity and consumer 275 168 214 260 137 Commercial 733 466 270 50 ---------------------------------------------------------------------------------------- Total $3,049 $1,781 $1,059 $ 713 $ 356 ======================================================================================== PERCENTAGE OF LOANS TO TOTAL LOANS ---------------------------------------------------------------------------------------- JUNE 30 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- Real Estate Mortgage Conventional 48.7% 53.9% 63.2% 67.5% 74.8% Multi-family 11.4 14.3 13.4 11.7 10.0 Home equity and consumer 19.7 12.7 10.7 17.9 14.8 Commercial 20.2 19.1 12.7 2.9 .4 ---------------------------------------------------------------------------------------- Total 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. 20 At June 30, 1998, the investment portfolio represented 5.0% of the Company's assets, compared to 5.8% at June 30, 1997, 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, 1998, the entire investment portfolio was classified as available for sale. The net unrealized loss at June 30, 1998, which is included as a component of stockholders' equity, was $42,000 which was comprised of gross gains of $5,000, gross losses of $74,000, and a tax benefit of $27,000. The increase in unrealized loss was caused by market interest rate changes during the period. Although the entire portfolio is available for sale, management has not identified specific investments for sale in future periods. The following table sets forth the components of the Savings Bank's available-for-sale investment portfolio as of June 30:
JUNE 30 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- (In Thousands) Investment securities available for sale U. S. Treasury $ 1,001 $ 1,000 $ 504 Federal agency securities 2,985 2,944 4,365 Federal Home Loan Mortgage Corporation mortgage-backed securities 1,779 3,003 6,727 Federal National Mortgage Association mortgage-backed securities 1,945 1,562 1,697 Government National Mortgage Association mortgage-backed securities 2,144 4,223 4,165 Municipals 1,058 ----------------------------------------------------- Total securities available for sale $9,854 $13,790 $17,458 =====================================================
The Savings Bank's investment securities portfolio decreased by $3.9 million to $9.9 million at June 30, 1998, compared to $13.8 million at June 30, 1997. In addition to maturities and paydowns, the Company sold $3.5 million of securities during fiscal 1998. 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 decreased by $3.6 million at June 30, 1997, from June 30, 1996 as securities were sold during 1997 and as paydowns and early payoffs occurred. The following table sets forth the contractual maturities of investment and mortgage-backed securities as of June 30, 1998, and the weighted average yields of such securities.
AFTER ONE BUT AFTER FIVE BUT WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS OVER TEN YEARS TOTAL ------------------------------------------------------------------------------------------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD - ---------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) U. S. Treasuries $1,001 5.88% $1,001 5.88% Federal agencies 997 5.06 $1,988 5.50% 2,985 5.50 Federal Home Loan Mortgage Corporation 851 7.01 $ 50 7.72% $ 878 6.20% 1,779 6.63 Federal National Mortgage Association 837 7.00 1,108 6.23 1,945 6.56 Government National Mortgage Association 9 7.50 2,135 6.81 2,144 6.81 -------- -------- -------- -------- -------- Total $1,998 5.47% $3,685 6.19% $ 50 7.72% $4,121 6.52% $9,854 6.24% ======== ======== ======== ======== ======== Percent of total 20% 37% 1% 42% 100% ======== ======== ======== ======== =========
21 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 $20.2 million for the year ended June 30, 1998. The decrease came primarily in the area of agent-acquired certificates of deposit, for which the average balance decreased $27.9 million from June 30, 1997. The average balance of retail certificates of deposit increased $7.3 million from 1997, while the average balance of demand, NOW, money market and savings accounts increased $328,000 from 1997. Demand, NOW and certificates of deposit increased $1.8 million, $10.5 million and $7.1 million in 1997 from 1996, as the Company continued an aggressive marketing and pricing campaign with new products during 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. Agent-acquired certificates of deposit were acquired at rates higher than the current local market for retail deposits, but generally below rates charged for FHLB advances. As total loans have decreased in 1998 and 1997, the Company's need for these types of funds have also decreased. The following table sets forth the average balances of and the average rate paid on deposits by deposit category for the years ended June 30, 1998, 1997 and 1996.
1998 1997 1996 -------------------------------------------------------------------------------- AVERAGE DEPOSITS AMOUNT RATE Amount Rate Amount Rate - ---------------------------------------------------------------------------------------------------------------------------- (In Thousands) Demand $ 5,229 $ 5,684 $ 3,898 NOW accounts 22,211 4.24% 20,585 4.22% 10,092 3.94% Money market accounts 3,027 2.71 3,890 2.72 6,066 2.97 Savings accounts 4,813 2.83 4,793 2.90 5,346 2.90 Certificates of deposit 85,699 5.80 78,408 5.68 71,337 5.77 Agent-acquired certificates of deposit 42,443 6.26 70,346 6.31 87,366 6.52 ---------- ---------- ---------- Totals $163,422 5.38% $183,706 5.45% $184,105 5.73% ========== ========== ==========
The following table summarizes certificates of deposit in amounts of $100,000 or more by maturity as of the following dates:
JUNE 30 1998 1997 1996 - ------------------------------------------------------------------------------------------- (In Thousands) Three months or less $ 2,716 $ 12,312 $ 7,206 Three to six months 4,008 16,319 15,009 Six to twelve months 4,227 13,331 5,042 Over twelve months 11,471 11,119 18,669 ------------------------------------------------- Totals $ 22,422 $ 53,081 $ 45,926 =================================================
22 BORROWINGS The Company's long-term debt decreased $8.6 million from 1997 primarily due to a decrease in Federal Home Loan Bank advances of $8.5 million. Alternate funding sources were provided by loan sales and payoffs, retail deposits, and public funds. Short-term borrowings totaled $2.5 million at June 30, 1998, which represented a decrease of $2.7 million since June 30, 1997.
FEDERAL FUNDS TREASURY TAX AND GUARANTEED PURCHASED FHLB ADVANCES LOAN NOTE OPTION INVESTMENT CONTRACTS - ------------------------------------------------------------------------------------------------------------------ (In Thousands) JUNE 30, 1998 Outstanding at June 30 $115 $2,416 Average amount outstanding $ 116 81 2,861 Maximum amount outstanding at any month end 2,400 115 3,736 Weighted average interest rate During the year 6.03% 5.32% 5.61% End of the year 5.69 5.63 JUNE 30, 1997 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 the year 5.62% 6.46% 5.16% 5.34% End of the year 5.62 5.57
CAPITAL RESOURCES The Company's stockholders' equity decreased $5.4 million to $7.5 million at June 30, 1998, compared to $12.9 million at June 30, 1997. The decrease in stockholders' equity was accounted for by the net loss of $6.8 million, cash dividends declared of $1.1 million, an increase in the net unrealized loss on securities available for sale of $11,000 and the purchase of treasury stock of $14,000. Offsetting these decreases were proceeds from the exercise of stock warrants of $2.5 million. The common stock that was repurchased in 1997 and 1998 was retired upon purchase. Total capital consists of Tier I capital plus the allowance for loan losses. Minimum capital levels are 4% for the leverage ratio which is defined as Tier I capital as a percentage of total assets less goodwill and other identifiable intangible assets; 4% for Tier I to risk-weighted assets; and 8% for total capital to risk-weighted assets. The Savings Bank's capital ratios have exceeded each of these levels. The leverage ratio was 6.31% and 6.93%; Tier I capital to risk-weighted assets was 6.78% and 7.64%; and total capital to risk-weighted assets was 10.79% and 10.74% at June 30, 1998 and 1997. Book value per share decreased to $2.40 at June 30, 1998, compared to $5.20 one year earlier, due to the decrease in capital noted above. The capital category assigned to an entity can also be affected by qualitative judgements made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios. At June 30, 1998 and 1997, the Bank is categorized as well capitalized and met all subject capital adequacy requirements at those dates; however, the Savings Bank's primary regulatory agency, the OTS, notified the Savings Bank verbally in August 1998 that its capital needs to be increased, primarily based on asset quality concerns raised during its examination. 23 The Company plans to evaluate alternatives and pursue opportunities to raise additional capital in 1999 with the purpose of improving its capital ratios. LIQUIDITY 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 OTS regulations set restrictions on the amount of dividends the Savings Bank may pay and the OTS has restricted any payment of dividends by the Savings Bank to the Company without its prior approval. The Savings Bank is required by federal regulations to maintain specified levels of "liquid" assets consisting of cash and other eligible investments. Currently, liquid assets must equal at least five percent of net withdrawable savings plus borrowings payable upon demand or due within one year or less. As of June 30, 1998, and June 30, 1997, the Savings Bank liquidity ratios were 6.70% and 5.57%. 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 $23.3 million at June 30, 1996, to $14.8 million at June 30, 1998. The Company has also decreased its utilization of agency-acquired certificates of deposit as total loans have decreased and the need for these types of funds has therefore decreased as well. ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board ("FASB") has issued Statement No. 130, Reporting Comprehensive Income, which establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements, 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. Statement No. 132, Employers' Disclosures About Pensions and Other Postretirement Benefits, which revises employers disclosures about pension and other postretirement benefit plans, and Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires companies to record derivatives on the balance sheet at their fair value. Statements Nos. 130, 131 and 132 will be effective for the Company beginning in fiscal 1999 and will not have any material impact on the Company's financial condition or results of operations. Statement No. 133 will be effective for the Company beginning in fiscal 2000 and is also not expected to have a material impact on the Company's financial condition or results of operations. 24 ASSET/LIABILITY MANAGEMENT The Company is subject to interest rate risk to the degree that its interest-bearing liabilities, primarily deposits with short and medium term maturities, mature or reprice at different rates than its interest-earning assets. Although having liabilities that mature or reprice less frequently on average assets will be beneficial in times of rising interest rates, such an asset/liability structure will result in lower net income during periods of declining interest rates, unless offset by other factors. The OTS utilizes a model, the "Office of Thrift Supervision Net Portfolio Value" ("NPV") model. which uses a net market value methodology to measure the interest rate risk exposure of savings associations. Under this model, an institution's "normal" level of interest rate risk in the event of an assumed change in interest rates is a decrease in the institution's NPV in an amount not exceeding 2% of the present value of its assets. Savings associations with over $300 million in assets or less than 12% risk-based capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is used by the OTS to calculate changes in NPV (and the related "normal" level of interest rate risk) based upon certain interest rate changes (discussed below). Associations which do not meet either of the filing requirements are not required to file OTS Schedule CMR, but may do so voluntarily. The Savings Bank is required to file a CMR since it does not meet the risk-based capital requirement. Under the regulation, associations which must file are required to take a deduction (the interest rate risk capital component) from their total capital available to calculate their risk based capital requirement if their interest rate exposure is greater than "normal". The amount of that deduction is one-half of the difference between (a) the institution's actual calculated exposure to a 200 basis point interest rate increase or decrease (whichever results in the greater pro forma decrease in NPV) and (b) its "normal" level of exposure which is 2% of the present value of its assets. Presented below, at June 30, 1998 and 1997, is an analysis performed by the OTS of the Savings Bank's interest rate risk as measured by changes in NPV for instantaneous and sustained parallel shifts in the yield curve, in 100 basis point increments, up and down 400 basis points. At June 30, 1998 and 1997, 2% of the present value of the Savings Bank's assets was approximately $3.9 million and $4.8 million. Because the interest rate risk of a 200 basis point decrease in market rates (which was greater than the interest rate risk of a 200 basis point increase) was $845,000 at June 30, 1998 and $1.2 million at June 30, 1997, the Savings Bank would not have been required to make a deduction from its total capital available to calculate its risk based capital requirement. The decrease in interest rate risk from 1998 to 1997 is due to an improved match of expected cash flows from assets and liabilities.
INTEREST RATE RISK AS OF JUNE 30, 1998 NPV AS PERCENT OF PRESENT NET PORTFOLIO VALUE VALUE OF ASSETS ---------------------------------------------------------------------------------------------------- CHANGE DOLLAR DOLLAR PERCENTAGE IN RATES AMOUNT CHANGE CHANGE NPV RATIO CHANGE - --------------------------------------------------------------------------------------------------------------------- + 400 bp $12,405 $(3,255) (21)% 6.69% - 131 bp + 300 bp 13,549 (2,111) (13) 7.20 - 80 bp + 200 bp 14,598 (1,062) (7) 7.64 - 36 bp + 100 bp 15,407 (253) (2) 7.95 - 04 bp 0 bp 15,660 8.00 - 100 bp 15,524 (136) (1) 7.85 - 15 bp - 200 bp 14,815 (845) (5) 7.44 - 56 bp - 300 bp 14,277 (1,383) (9) 7.11 - 88 bp - 400 bp 13,944 (1,716) (11) 6.88 - 111 bp
25
INTEREST RATE RISK AS OF JUNE 30, 1997 NPV AS PERCENT OF PRESENT NET PORTFOLIO VALUE VALUE OF ASSETS ---------------------------------------------------------------------------------------------------- CHANGE DOLLAR DOLLAR PERCENTAGE IN RATES AMOUNT CHANGE CHANGE NPV RATIO CHANGE - --------------------------------------------------------------------------------------------------------------------- + 400 bp $13,200 $(4,960) (27)% 5.90% - 173 bp + 300 bp 14,760 (3,400) (19) 6.49 - 114 bp + 200 bp 16,220 (1,940) (11) 7.01 - 61 bp + 100 bp 17,405 (755) (4) 7.41 - 21 bp 0 bp 18,160 7.62 - 100 bp 18,073 (87) 0 7.50 - 12 bp - 200 bp 16,962 (1,198) (7) 6.99 - 63 bp - 300 bp 15,366 (2,794) (15) 6.29 - 133 bp - 400 bp 13,953 (4,206) (23) 5.67 - 195 bp
As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analysis presented above. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates on a short-term basis and over the life of the assets. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could likely deviate significantly from those assume in calculating the table. 26 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, 1998 and 1997 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, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements described above present fairly, in all material respects, the consolidated financial position of Fidelity Federal Bancorp and subsidiaries as of June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. /s/ Olive LLP Evansville, Indiana August 20, 1998 27 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Thousands, Except Share Data)
JUNE 30 1998 1997 - ------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 1,683 $ 1,746 Short-term interest-bearing deposits 6,260 1,759 -------------------------------- Total cash and cash equivalents 7,943 3,505 Interest-bearing deposits 6 6 Investment securities available for sale 9,854 13,790 Loans 159,732 204,964 Allowance for loan losses (3,049) (1,781) -------------------------------- Net loans 156,683 203,183 Premises and equipment 5,846 6,340 Federal Home Loan Bank of Indianapolis stock 3,920 3,920 Income tax receivable 6,690 818 Interest receivable and other assets 6,104 9,257 -------------------------------- Total assets $197,046 $240,819 ================================ LIABILITIES Deposits Non-interest bearing $ 4,760 $ 4,714 Interest bearing 144,179 177,073 -------------------------------- Total deposits 148,939 181,787 Short-term borrowings 2,531 5,191 FHLB advances and other long-term debt 29,488 38,089 Advances by borrowers for taxes and insurance 426 674 Letter of credit valuation allowance 6,778 Other liabilities 1,369 2,142 -------------------------------- Total liabilities 189,531 227,883 -------------------------------- STOCKHOLDERS' EQUITY Preferred stock, no par or stated value Authorized and unissued--5,000,000 shares Common stock, $1 stated value Authorized--5,000,000 shares Issued and outstanding--3,127,208 and 2,487,385 shares 3,127 2,487 Capital surplus 10,799 8,708 Stock warrants 11 264 Retained earnings (deficit) (6,380) 1,508 Net unrealized loss on securities available for sale (42) (31) -------------------------------- Total stockholders' equity 7,515 12,936 -------------------------------- Total liabilities and stockholders' equity $197,046 $240,819 ================================
See notes to consolidated financial statements. 28 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (In Thousands, Except Share Data)
YEAR ENDED JUNE 30 1998 1997 1996 - ------------------------------------------------------------------------------------------------------- Interest Income Loans receivable $ 15,872 $ 18,692 $ 19,045 Loans held for sale 904 Investment securities Taxable 650 1,033 1,099 Tax exempt 24 56 Federal funds sold 75 70 132 Interest-bearing deposits 255 124 64 Other interest and dividend income 316 307 285 ----------------------------------------------------- 17,192 20,282 21,529 ----------------------------------------------------- Interest Expense Deposits 8,785 10,000 10,550 Short-term borrowings 170 359 306 Long-term debt 2,631 3,472 4,669 ----------------------------------------------------- 11,586 13,831 15,525 ----------------------------------------------------- Net Interest Income 5,606 6,451 6,004 Provision for loan losses 4,543 975 455 ----------------------------------------------------- Net Interest Income After Provision for Loan Losses 1,063 5,476 5,549 ----------------------------------------------------- Non-Interest Income Fee income--real estate development and management fees 191 337 4,440 Service charges on deposit accounts 436 316 180 Net gains on sale of Investment securities 79 42 Real estate loans 186 338 743 Premises and equipment 3 719 Letter of credit fees 657 722 481 Real estate investment banking fees 139 963 942 Agent fees 650 452 47 Other income 687 683 628 ----------------------------------------------------- 3,025 3,856 8,180 -----------------------------------------------------
29 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (In Thousands, Except Share Data) (Continued)
YEAR ENDED JUNE 30 1998 1997 1996 - ------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE Salaries and employee benefits $ 3,341 $ 4,318 $ 4,486 Net occupancy expense 444 481 471 Equipment expense 354 374 383 Data processing fees 456 318 287 Deposit insurance expense 140 255 417 SAIF assessment 1,040 Legal and professional fees 304 303 448 Advertising 199 230 226 Letter of credit valuation provision 6,778 Write-down of affordable housing investments 1,478 335 Affordable housing group activity expenses 769 177 61 Other expense 1,813 1,643 1,829 ----------------------------------------------------- 16,076 9,474 8,608 ----------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAX (11,988) (142) 5,121 Income tax expense (benefit) (5,194) (255) 1,886 ----------------------------------------------------- NET INCOME (LOSS) $ (6,794) $ 113 $ 3,235 ===================================================== BASIC EARNINGS (LOSS) PER SHARE $(2.30) $.05 $1.32 DILUTED EARNINGS (LOSS) PER SHARE (2.30) .04 1.17 WEIGHTED AVERAGE SHARES OUTSTANDING 2,956,157 2,655,181 2,776,147
See notes to consolidated financial statements. 30 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (In Thousands, Except Share and Per Share Data)
NET UNREALIZED COMMON STOCK GAIN (LOSS) ON ---------------------- CAPITAL STOCK RETAINED SECURITIES SHARES AMOUNT SURPLUS WARRANTS EARNINGS AVAILABLE FOR SALE TOTAL -------------------------------------------------------------------------------------- BALANCES, JULY 1, 1995 2,162,799 $2,163 $ 5,395 $299 $4,560 $(12) $12,405 Net income for 1996 3,235 3,235 Cash dividends ($.79 per share) (1,957) (1,957) 10% stock dividend ($1,000 paid in lieu of fractional shares) 226,747 227 2,721 (2,949) (1) Exercise of stock options 27,837 28 81 109 Exercise of stock warrants 77,657 77 588 (33) 632 Net change in unrealized gain (loss) on securities available for sale (128) (128) -------------------------------------------------------------------------------------- BALANCES, JUNE 30, 1996 2,495,040 2,495 8,785 266 2,889 (140) 14,295 Net income for 1997 113 113 Cash dividends ($.60 per share) (1,494) (1,494) Exercise of stock options 407 4 4 Exercise of stock warrants 4,938 5 32 (2) 35 Purchase of common stock (13,000) (13) (113) (126) Net change in unrealized gain (loss) on securities available for sale 109 109 -------------------------------------------------------------------------------------- BALANCES, JUNE 30, 1997 2,487,385 2,487 8,708 264 1,508 (31) 12,936 Net income (loss) for 1998 (6,794) (6,794) Cash dividends ($.35 per share) (1,094) (1,094) Exercise of stock warrants 641,323 641 2,104 (253) 2,492 Purchase of common stock (1,500) (1) (13) (14) Net change in unrealized gain (loss) on securities available for sale (11) (11) -------------------------------------------------------------------------------------- BALANCES, JUNE 30, 1998 3,127,208 $3,127 $10,799 $ 11 $(6,380) $(42) $ 7,515 ======================================================================================
See notes to consolidated financial statements. 31 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands)
YEAR ENDED JUNE 30 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income (loss) $ (6,794) $ 113 $ 3,235 Adjustments to reconcile net income (loss) to net cash provided by operating activities Provision for loan losses 4,543 975 455 Letter of credit valuation provision 6,778 Investment securities gains (79) (42) (Gain) loss on premises and equipment 100 (3) (719) Depreciation 449 424 359 Investment securities amortization (accretion), net (16) 29 (33) Amortization of net loan origination fees and points (26) (3) (56) Deferred income tax (3,389) 313 296 Net decrease in real estate loans held for sale 1,923 Changes in Interest payable and other liabilities (682) (331) 396 Interest receivable, tax receivable and other assets 670 (1,138) (2,495) ---------------------------------------------------- Net cash provided by operating activities 1,554 337 3,361 ---------------------------------------------------- INVESTING ACTIVITIES Purchases of securities available for sale (1,906) (2,597) (9,777) Proceeds from maturities of securities available for sale 2,476 3,806 7,543 Proceeds from sale of securities available for sale 3,451 2,624 Net change in loans 41,983 11,968 5,767 Purchase of premises and equipment (111) (1,233) (2,378) Proceeds from sale of premises and equipment 56 23 1,000 Purchase of FHLB of Indianapolis stock (828) ---------------------------------------------------- Net cash provided by investing activities 45,949 14,591 1,327 ---------------------------------------------------- FINANCING ACTIVITIES Net change in Noninterest-bearing, interest-bearing demand and savings deposits 910 (2,054) 16,223 Certificates of deposit (33,758) 2,139 (15,292) Short-term borrowings (2,660) (567) (1,072) Proceeds from FHLB advances and other long-term debt 7,600 16,556 Repayment of FHLB advances and other long-term debt (8,601) (26,737) (26,495) Net change in advances by borrowers for taxes and insurance (248) (185) 160 Purchase of stock (14) (126) Cash dividends (1,186) (1,745) (1,729) Proceeds from exercise of stock options 4 109 Proceeds from exercise of stock warrants 2,492 35 632 ---------------------------------------------------- Net cash used by financing activities (43,065) (21,636) (10,908) ----------------------------------------------------
32 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands) (Continued)
YEAR ENDED JUNE 30 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ NET CHANGE IN CASH AND CASH EQUIVALENTS $ 4,438 $ (6,708) $(6,220) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,505 10,213 16,433 ----------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,943 $ 3,505 $10,213 ===================================================== ADDITIONAL CASH FLOWS AND SUPPLEMENTARY INFORMATION Income tax paid, net of refunds $ 625 $ 710 $ 1,938 Interest paid 11,900 13,846 15,723
See notes to consolidated financial statements. 33 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) - - 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, 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's other subsidiaries are Village Securities Corporation, which offers brokerage services, and Village Affordable Housing Corporation, which is not operational. The Company's Affordable Housing Group has discontinued the development of real estate, but continues actively managing existing Company affordable housing projects. CONSOLIDATION--The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all material intercompany transactions. 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. 34 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) MORTGAGE LOANS HELD FOR SALE are carried at the lower of aggregate cost or market value. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income, based on the difference between estimated sales proceeds and aggregate cost. LOANS are carried at the principal amount outstanding. Interest income is accrued on the principal balances of loans. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed when considered uncollectible. Interest income is subsequently recognized only to the extent cash payments are received. Certain loan fees and related direct costs are being deferred and amortized over the lives of the loans as an adjustment of yield on the loans. ALLOWANCE FOR LOAN LOSSES and letter of credit valuation allowance are maintained to absorb losses based on management's continuing review and evaluation of the loan and letter of credit portfolios and its judgment as to the impact of economic conditions on the portfolios. The evaluation by management includes consideration of past loss experience, changes in the composition of the portfolios, the current condition and amount of loans and letters of credit outstanding and the probability of collecting all amounts due. Impaired loans are measured by the present value of expected future cash flows, or the fair value of the collateral of the loan, if collateral dependent. The determination of the adequacy of the allowance for loan losses and the letter of credit valuation allowance is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Management believes that, as of June 30, 1998, the allowance for loan losses and the letter of credit valuation allowance is adequate based on information currently available. A worsening or protracted economic decline in the area within which the Company operates could affect the possibility of additional losses due to credit and market risks and could create the need for additional loss reserves. PREMISES AND EQUIPMENT are carried at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method based principally on the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations. FEDERAL HOME LOAN BANK (FHLB) STOCK is a required investment for institutions that are members of the FHLB system. The required investment in the common stock is based on a predetermined formula. INCOME TAX in the consolidated statement of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. The Company files consolidated income tax returns with its subsidiaries. 35 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) FEE INCOME on real estate development and management in the consolidated statement of income is attributable to activities of the Affordable Housing Group. The fees are recognized when earned under the applicable agreements and when collectibility is assured. Fee income related to insurance services is recognized when earned and collected. MORTGAGE SERVICING RIGHTS on originated loans are capitalized by allocating the total cost of the mortgage loans between the mortgage servicing rights and the loans based on their relative fair values. Capitalized servicing rights, which includes purchased servicing rights, are amortized in proportion to and over the period of estimated servicing revenues. STOCK OPTIONS are granted for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for and will continue to account for stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognized no compensation expense for the stock option grants. EARNINGS PER SHARE have been computed based upon the weighted average number of shares outstanding. - - 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, 1998 was $420. - - INVESTMENT SECURITIES AVAILABLE FOR SALE
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------------------------------------------------------------- JUNE 30, 1998 U. S. Treasury $ 1,000 $ 1 $ 1,001 Federal agencies 3,000 $ (15) 2,985 Mortgage-backed securities 5,923 4 (59) 5,868 ----------------------------------------------------------------- $ 9,923 $ 5 $ (74) $ 9,854 ================================================================= 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 =================================================================
36 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) The amortized cost and fair value of investment securities available for sale at June 30, 1998, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. AMORTIZED FAIR COST VALUE ---------------------------------- Within one year $2,000 $1,998 One to five years 2,000 1,988 ---------------------------------- 4,000 3,986 Mortgage-backed securities 5,923 5,868 ---------------------------------- $9,923 $9,854 ================================== Proceeds from sales of investment securities available for sale during 1998 and 1997 were approximately $3,451 and $2,624. Gross gains of approximately $79 were realized on the 1998 sales. Gross gains of approximately $43 and gross losses of approximately $1 were realized on the 1997 sales. There were no sales of investment securities available for sale during 1996. - - LOANS AND ALLOWANCE
JUNE 30 1998 1997 - --------------------------------------------------------------------------------------- Real estate mortgage loans First mortgage loans Conventional $ 71,343 $ 94,293 Construction 16,110 32,577 Commercial 20,753 26,668 Multi-family 5,742 9,602 First mortgage real estate loans purchased 2,704 3,184 Commercial loans--other than secured by real estate 11,568 12,522 Consumer and home equity loans 31,512 26,118 ------------------------------- $159,732 $204,964 ===============================
37 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) Included in multi-family loans are loans made to affordable housing developments totaling $5,742 and $4,607 at June 30, 1998 and 1997. An additional $12,904 and $29,243 in multi-family loans is included in construction loans at June 30, 1998 and 1997. YEAR ENDED JUNE 30 1998 1997 1996 - --------------------------------------------------------------------------- Allowance for loan losses Balances, beginning of year $1,781 $1,059 $ 713 Provision for losses 4,543 975 455 Loans charged off (3,299) (267) (140) Recoveries on loans 24 14 31 ----------------------------------------- Balances, end of year $3,049 $1,781 $1,059 ========================================= The Company and subsidiaries have entered into transactions with certain executive officers, directors, significant stockholders and 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, 1997 $6,434 New loans, including renewals 34 Payments, etc., including renewals (176) -------------- Balances, June 30, 1998 $6,292 ============== At June 30, 1998, the Company had impaired loans totaling $13,925. The allowance for losses on such impaired loans totaled $1,897 and is included in the Company's allowance for loan losses at June 30, 1998. The average balance of impaired loans was $3,472 during the year ended June 30, 1998 and the Company recorded and collected $385 in interest during this period. The Company did not have any impaired loans during the year ended June 30, 1997. 38 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) - - LETTER OF CREDIT VALUATION ALLOWANCE In 1998, the Company recorded specific reserves related to letters of credit issued by the Company and the Bank of approximately $6.8 million primarily related to the permanent financing for certain of the affordable housing projects. The Company has not yet paid any amounts to third parties as a result of these letters of credit. Multifamily letters of credit, an off-balance sheet item, carry the same risk characteristics as conventional loans and totaled $55.5 million at June 30, 1998. - - 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 $19,481, $64,517 and $58,854 at June 30, 1998, 1997 and 1996. The aggregate fair value of capitalized mortgage servicing rights at June 30, 1998 approximated $244. Comparable market prices were used to estimate fair value. 1998 1997 1996 ------------------------------------- Mortgage servicing rights Balances, beginning of year $721 $543 Servicing rights capitalized 127 250 $575 Amortization of servicing rights (69) (72) (32) Sale of servicing rights (553) ------------------------------------- Balances, end of year $226 $721 $543 ===================================== - - PREMISES AND EQUIPMENT JUNE 30 1998 1997 - ------------------------------------------------------------------------------- Land $1,611 $1,766 Building and land improvements 5,288 5,244 Furniture, fixtures and equipment 1,943 2,058 ---------------------------- Total cost 8,842 9,068 Accumulated depreciation (2,996) (2,728) ---------------------------- Net $5,846 $6,340 ============================= 39 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) - - OTHER ASSETS AND INVESTMENTS IN LIMITED PARTNERSHIPS Included in other assets at June 30, 1998 and 1997 are investments of $2,230 and $4,021 in limited partnerships which are organized to build, own and operate apartment complexes. The investments at June 30, 1998 are as follows: PERCENTAGE AND TYPE OF AMOUNT OF NUMBER OF PARTNERSHIP INTEREST INVESTMENT PARTNERSHIPS ----------------------------------------------------------------- 1%--General $554 16 1%--General and 47%--Limited 496 1 1%--General and 39%--Limited 467 1 10%--Limited 362 1 10%--Limited 219 1 99%--Limited 132 2 The Company records income on the equity method in the income and losses of the limited partnerships, which resulted in losses of $87, $132 and $73 during 1998, 1997 and 1996. 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 $508, $341 and $273 for the years ended June 30, 1998, 1997 and 1996. Combined condensed financial statements for the limited partnerships as of June 30, 1998 and 1997 and for the years ended June 30, 1998, 1997 and 1996 are as follows: JUNE 30 1998 1997 - ----------------------------------------------------------------------------- Combined condensed balance sheet (unaudited) Assets Cash $ 310 $ 727 Land and property 54,927 56,357 Other assets 1,720 1,271 ----------------------------- Total assets $56,957 $58,355 ============================= Liabilities Notes payable $38,039 $38,214 Other liabilities 2,626 2,348 ----------------------------- Total liabilities 40,665 40,562 Partners' equity 16,292 17,793 ----------------------------- Total liabilities and partners' equity $56,957 $58,355 ============================= 40 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands)
YEAR ENDED JUNE 30 1998 1997 1996 - --------------------------------------------------------------------------------------------- Combined condensed statement of operations (unaudited) Total revenue $ 5,259 $ 3,181 $ 3,501 Total expenses 6,784 4,253 5,261 ------------------------------------ Net loss $(1,525) $(1,072) $(1,760) ====================================
Approximately $5,433 and $9,087 of the notes payable are due to the Company from these partnerships at June 30, 1998 and 1997. The Company wrote down the investments in limited partnerships by $1,478 and $335 in 1998 and 1997, based on the performance of the underlying real estate operations. Included in other assets is interest receivable as follows: JUNE 30 1998 1997 - ------------------------------------------------------------------------------ Interest receivable on loans $1,015 $1,340 Interest receivable on investments and other 114 178 ------------------------------ Total interest receivable $1,129 $1,518 ============================== - - DEPOSITS JUNE 30 1998 1997 - ----------------------------------------------------------------------------- Non-interest bearing transaction accounts $ 4,760 $ 4,714 Interest-bearing transaction accounts 21,365 20,952 Money market deposit accounts 2,847 3,103 Savings accounts 5,470 4,763 Certificates of $100 or more 22,422 53,081 Other certificates and time deposits 92,075 95,174 ----------------------------- Total $148,939 $181,787 ============================= 41 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) Certificates maturing in years ending June 30: 1999 $ 62,473 2000 41,630 2001 8,732 2002 988 2003 674 ------------------ $114,497 ================== - - SHORT-TERM BORROWINGS JUNE 30 1998 1997 - ------------------------------------------------------------------------ Treasury tax and loan note option $ 115 $ 105 Guaranteed investment contracts 2,416 5,086 --------------------------------- Total short-term borrowings $2,531 $5,191 ================================= - - FHLB ADVANCES AND OTHER LONG-TERM DEBT
JUNE 30 1998 1997 - -------------------------------------------------------------------------------------------------------------- Note payable, 7.43%, adjusted annually, payable $16 per month, including interest, due April 2009, secured by specific multi-family mortgages $ 2,210 $ 2,234 Note payable, 8.75% adjusted annually, payable $8 per month, including interest, due September 2010, secured by specific multi-family mortgages 996 1,006 Note payable, 8.75% adjusted annually, payable $12 per month, including interest, due September 2010, secured by specific multi-family mortgages 1,529 1,542 Junior subordinated notes, 9.125%, interest paid semi-annually, due April 2001, unsecured 1,476 1,476 Junior subordinated notes, 9.25%, interest paid semi-annually, due January 2002, unsecured 1,494 1,494 Senior subordinated notes, 10%, interest paid semi-annually, due June 2005, unsecured 7,000 7,000 Federal Home Loan Bank advances, due at various dates through 2002 (weighted average rates of 6.62% and 6.48% at June 30, 1998 and 1997) 14,783 23,337 ------------------------------ Totals $29,488 $38,089 ==============================
42 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 $8,293 of investment securities pledged at June 30, 1998. Certain advances are subject to restrictions or penalties in the event of prepayment. The scheduled principal reduction of borrowings at June 30, 1998, is as follows: 1999, $5,344; 2000, $4,042; 2001, $2,162; 2002, $2,317; 2003, $4,189; and 2004 and later, $11,434. - - INCOME TAX
YEAR ENDED JUNE 30 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Income tax expense (benefit) Currently payable Federal $(1,803) $(515) $1,174 State (2) (53) 416 Deferred Federal (2,382) 240 244 State (1,007) 73 52 ------------------------------------------------ Total income tax expense (benefit) $(5,194) $(255) $1,886 ================================================ Reconciliation of federal statutory to actual tax expense (benefit) Federal statutory income tax at 34% $(4,076) $ (48) $1,741 Effect of state income taxes (666) 13 309 Affordable housing tax credits and other (449) (221) (177) Other, net (3) 1 13 ------------------------------------------------ Actual tax expense (benefit) $(5,194) $(255) $1,886 ================================================
43 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) A cumulative deferred tax asset is included in other assets at June 30, 1998 and a cumulative deferred tax liability is included in other liabilities at June 30, 1997. The components of the asset and liability are as follows:
JUNE 30 1998 1997 - ------------------------------------------------------------------------------------------------- ASSETS Differences in accounting for certain accrued liabilities $ 15 $ 17 Allowance for loan losses 2,120 792 Loan fees 100 110 Unrealized gain/loss on available-for-sale securities 27 49 Alternative minimum tax credit 200 Low income housing credit carryforward 969 State net operating loss carryforward 699 Federal net operating loss carryforward 323 Other 26 44 -------------------------------- Total assets 4,479 1,012 -------------------------------- LIABILITIES Depreciation (40) (31) State income tax (239) Differences in basis of FHLB stock (66) (66) Basis differential on certain partnership interests (834) (767) Differences in accounting for mortgage servicing rights (90) (285) Differences in accounting for other real estate (16) Differences in accounting for loan sales (5) -------------------------------- Total liabilities (1,269) (1,170) -------------------------------- $3,210 $ (158) ================================
At June 30, 1998, the Company has a federal net operating loss carryforward for tax purposes of $949. This loss carryforward expires in the year 2013. The Company has a state net operating loss carryforward for tax purposes of $8,218. This loss carryforward expires in the year 2013. The Company has low income housing credit carryforwards of $969. These carryforwards expire in varying amounts through the year 2013. In addition, the Company has an alternative minimum tax credit carryforward of $200. Retained earnings include approximately $1,870 for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions as of December 31, 1987 for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses, including redemption of bank stock or excess dividends, or loss of "bank" status, would create income for tax purposes only, which income would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amounts was approximately $635. 44 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) - - REGULATORY CAPITAL The Savings Bank is subject to various regulatory capital requirements administered by the federal banking agencies and is assigned to a capital category. The assigned capital category is largely determined by three ratios that are calculated according to the regulations: total risk adjusted capital, Tier 1 capital, and Tier 1 leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios. There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. At June 30, 1998 and 1997, the Bank is categorized as well capitalized and met all subject capital adequacy requirements at those dates; however, the Savings Bank's primary regulatory agency, the Office of Thrift Supervision (OTS) following its regularly scheduled examination, notified the Savings Bank verbally in August 1998 that its capital needs to be increased, based on asset quality concerns raised during its examination. The Bank's actual and required capital amounts and ratios are as follows:
REQUIRED FOR TO BE WELL ACTUAL ADEQUATE CAPITAL* CAPITALIZED* ------------------------------------------------------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------------------------------------------------------------------------------- AS OF JUNE 30, 1998 Total risk-based capital* (to risk- weighted assets) $19,041 10.79% $14,111 8.00% $17,639 10.00% Core capital* (to risk-weighted assets) 11,961 6.78 7,056 4.00 10,583 6.00 Core capital* (to adjusted total assets) 11,961 6.31 7,581 4.00 9,476 5.00 AS OF JUNE 30, 1997 Total risk-based capital* (to risk- weighted assets) $22,826 10.74% $17,004 8.00% $21,255 10.00% Core capital* (to risk-weighted assets) 16,245 7.64 8,502 4.00 12,753 6.00 Core capital* (to adjusted total assets) 16,245 6.93 9,381 4.00 11,726 5.00
*As defined by regulatory agencies The Bank's tangible capital at June 30, 1998 was $11,961, which amount was 6.31 percent of tangible assets and exceeded the required ratio of 1.5 percent. 45 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) - - DIVIDEND, CAPITAL AND OTHER RESTRICTIONS 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 OTS regulations set restrictions on the amount of dividends the Savings Bank may pay and the OTS has restricted any payment of dividends by the Savings Bank to the Company without its prior approval. The OTS has also notified the Company that it plans to restrict the Company from appointing directors or members of senior executive management without OTS approval, and that it plans to restrict all types of commercial lending until approved to do so by the OTS. - - STOCKHOLDERS' EQUITY Stockholders' equity and all share data have been adjusted for the 10 percent stock dividend declared on April 24, 1996 and distributed on May 27, 1996. 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 and expire on April 30, 2004. At June 30, 1998, a total of 397,218 of the shares originally reserved had been issued and 18,282 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 and expire on January 31, 2005. At June 30, 1998, a total of 337,029 of the shares originally reserved had been issued and 9,471 remained reserved and unissued. On September 22, 1997, the Company filed 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 on October 31, 1997. The Company decreased the exercise price, upon the terms and subject to the conditions set forth in the Letter of Transmittal, to $3.70 for the 1994 warrants and $4.04 for the 1995 warrants. The proceeds from the exercise of the warrants under this offer totaled $2.5 million. 46 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) - - 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. 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 commercial properties, or other assets of the borrower. At June 30, 1998 and 1997, commitments to extend credit, which represent financial instruments whose contract amount represents credit risk, were $17,169 and $30,363. During a recent examination of the Company by the OTS, the OTS reviewed the letters of credit and used a different methodology than what had previously been used by management in assessing credit risk associated with the letters of credit. The Company, in adopting the OTS methodology, recorded a $6.8 million valuation allowance associated with these off-balance sheet assets. As of June 30, 1998, none of these letters of credit had been presented for payment to the Company. The Company has issued standby letters of credit on affordable housing developments in which one of the Company's subsidiaries has a partnership interest. The letters of credit secure tax exempt bond issues and other permanent financing of limited partnerships in which one of the Company's subsidiaries owns a 1 percent general partner interest. The amount outstanding on the letters of credit at June 30, 1998 and 1997 was $19,423 and $19,432. 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 and other permanent financing of limited partnerships. The amount outstanding on the letters of credit at June 30, 1998 and 1997 was $36,031 and $34,985. The Company also has standby letters of credit to guarantee the performance of a customer to a third party. The amount outstanding on the letters of credit at June 30, 1998 and 1997 was $1,034 and $916. The Company, in its role as general partner on various affordable housing developments through its subsidiaries, is committed to advance certain amounts to limited partnerships. These commitments potentially include short-term loans to the limited partners or an increase in the general partner's equity investment. 47 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) The Company has entered into a change in control agreements with three of its employees which provide for the continuation of a multiple of the employee's existing salary and certain benefits for a two-year period of time under certain conditions following a change in control. The Federal Financial Institutions Examination Council has established Year 2000 compliance requirements and timetables for the banking industry. Those standards require that a series of procedures be performed by financial institutions that, if done correctly and on time, should reduce the risk of noncompliance with Year 2000. The Company, at June 30, 1998, has not met certain of those requirements in a timely manner but is in the process of completing the required procedures. The Company cannot provide any assurance that the effect of Year 2000 will not be material to the Company's financial position or operating results. The Company and subsidiaries are also subject to claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Company. - - 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, 1997, the date of the latest actuarial valuation. The plan provides pension benefits for substantially all of the Company's employees. The Company recorded pension expense of $64 in 1997, with no expense recorded in 1998 or 1996. 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 $19, $28 and $27 for 1998, 1997 and 1996. - - STOCK OPTION PLANS Under the Company's stock option plans, the Company grants stock option awards which vest and become exercisable at various dates. In November 1997, the Company authorized the grant of options for up to 71,531 shares of the Company's common stock. The exercise price of each option was greater than the market price of the Company's stock on the date of grant; therefore, no compensation expense was recognized. Although the Company has elected to follow APB Opinion No. 25, SFAS No. 123 requires proforma disclosures of net income and earnings per share as if the Company had accounted for its employee stock options under that statement. The Company did not grant any options during the year ended June 30, 1997, therefore no proforma disclosures were required. The proforma effect on net income and earnings per share of the options granted in 1998 were not materially different from those presented on the consolidated statement of income. 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, 1998, 1997 and 1996. 48 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) INCENTIVE STOCK OPTION PLAN The Company had an incentive stock option plan that expired on November 17, 1997. There were no options granted or exercised during 1998 or 1997. The options that were outstanding at June 30, 1996 were canceled in 1997. A summary of the stock options activity for the incentive stock option plan for 1996 is as follows: June 30 1996 - -------------------------------------------------------------------------- Shares under option Outstanding at beginning of year 36,451 Granted 6,930 Exercised 30,621 -------------- Outstanding at end of year 12,760 ============== Exercisable at end of year 8,602 ============== Weighted option price per share Exercisable $10.33 Exercised 3.92 Granted 14.32 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. 49 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) At June 30, 1998, there were 115,486 options available for grant. A summary of the stock options activity for the Directors' Plan is as follows: JUNE 30 1998 1997 1996 - ------------------------------------------------------------------------------ Shares under option Outstanding at beginning of year 86,762 86,762 86,762 Granted 31,531 Outstanding at end of year 118,293 86,762 86,762 Exercisable at end of year 118,293 86,762 86,762 Weighted option price per share Exercisable $ 7.92 $6.50 $6.50 Granted 11.81 1995 KEY EMPLOYEES' STOCK OPTION PLAN The 1995 Key Employees' Stock Option Plan (1995 Plan) provides for the granting of either incentive stock options (ISOs) pursuant to Section 422A of the Internal Revenue Code of 1986, as amended (Code), or stock options which do not qualify as incentive stock options (ISOs), or any combination thereof. Options may be granted to key employees and officers of 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 percent or more of the common stock of the Company will be not less than 110 percent of the fair market value of a share on the date the option is granted. The option price per share for ISOs will be determined by the compensation committee, but may not be less than 100 percent of the fair market value on the date of grant. A total of 236,500 shares have been reserved for issuance under the 1995 Plan. 50 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) At June 30, 1998, there were 171,873 options available for grant. A summary of the stock options activity for the 1995 Plan is as follows: JUNE 30 1998 1997 - ----------------------------------------------------------------------------- Shares under option Outstanding at beginning of year 80,443 80,850 Granted 40,000 Exercised 407 Canceled (56,223) Outstanding at end of year 64,220 80,443 Exercisable at end of year 36,176 48,183 Weighted option price per share Exercisable $10.68 $10.52 Exercised 9.63 Granted 10.81 - - EARNINGS PER SHARE
1998 1997 1996 ------------------------------------------------------------------------------------------------ WEIGHTED AMOUNT Weighted Amount Weighted Amount AVERAGE PER Average Per Average Per YEAR ENDED JUNE 30 INCOME SHARES SHARE Income Shares Share Income Shares Share - --------------------------------------------------------------------------------------------------------------------------- Basic Earnings (Loss) Per Share Income available to common stockholders $(6,794) 2,956,157 $(2.30) $113 2,491,074 $.05 $3,235 2,453,275 $1.32 Effect of Dilutive Securities Options 26,869 51,359 Warrants 137,238 271,513 ----------------------------------------------------------------------------------------------- Diluted Earnings (Loss) Per Share Income available to common stockholders plus assumed conversions $(6,794) 2,956,157 $(2.30) $113 2,655,181 $.04 $3,235 2,776,147 $1.17 ===============================================================================================
51 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) Options to purchase 55,714, 55,113 and 2,772 shares of common stock at an average price of $11.81 and $10.81 for 1998, $10.42 for 1997 and $14.32 for 1996 were outstanding at June 30, 1998, 1997 and 1996 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. For the year ended June 30, 1998, the effect of 23,391 options and 32,859 warrants would had an anti-dilutive effect on earnings per share, if the Company would have had net income as opposed to a net loss, and, therefore, are not included in the earnings per share calculation. - - 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 loans, including one-to-four family residential, are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair value for other loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. INTEREST RECEIVABLE/PAYABLE--The fair values of interest receivable/payable approximate carrying values. FHLB STOCK--The fair value is estimated to be the carrying value, which is par. All transactions in the capital stock of the FHLB of Indianapolis are executed at par. DEPOSITS--The fair values of non-interest-bearing, interest-bearing demand and savings accounts are equal to the amount payable on demand at the balance sheet date. The carrying amounts for variable rate, fixed-term certificates of deposit approximate their fair values at the balance sheet date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits. SHORT-TERM BORROWINGS--The fair value of these borrowings is estimated using rates currently available to 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. 52 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) OFF-BALANCE-SHEET COMMITMENTS--Commitments include commitments to purchase and originate mortgage loans, commitments to sell mortgage loans, and standby letters of credit and are generally of a short-term nature. The fair value of the loan commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The carrying amounts of the commitments to purchase and originate mortgage loans and to sell mortgage loans, which are immaterial, are reasonable estimates of the fair value of these financial instruments. The carrying amount of the standby letters of credit, which consist of a letter of credit valuation allowance of $6,778, is a reasonable estimate of the fair value of those off-balance sheet items. The estimated fair values of the Company's financial instruments are as follows:
1998 1997 --------------------------------------------------------------------- CARRYING FAIR Carrying Fair JUNE 30 AMOUNT VALUE Amount Value - -------------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 7,943 $ 7,943 $ 3,505 $ 3,505 Interest-bearing deposits 6 6 6 6 Investment securities available for sale 9,854 9,854 13,790 13,790 Loans, net 156,683 155,108 203,183 201,600 Interest receivable 1,129 1,129 1,518 1,518 FHLB stock 3,920 3,920 3,920 3,920 Liabilities Deposits 148,939 149,135 181,787 181,864 Short-term borrowings 2,531 2,531 5,191 5,191 FHLB advances and other long-term debt 29,488 29,542 38,089 37,995 Interest payable 421 421 735 735 Standby letters of credit 6,778 6,778
53 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) - - CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company: CONDENSED BALANCE SHEET
JUNE 30 1998 1997 - ----------------------------------------------------------------------------------------- ASSETS Cash on deposit $ 242 $ 92 Interest-bearing deposits 6 6 Investment in subsidiaries 13,192 16,308 Loans 4,072 5,208 Subordinated debentures and other loan receivables from subsidiaries 6,063 5,813 Income tax receivable 2,147 403 Other assets 577 750 ----------------------------- Total assets $26,299 $28,580 ============================= LIABILITIES Long-term debt $15,195 $15,247 Letter of credit valuation allowance 3,289 Other liabilities 300 397 ----------------------------- Total liabilities 18,784 15,644 ----------------------------- STOCKHOLDERS' EQUITY Common stock 3,127 2,487 Capital surplus 10,799 8,708 Stock warrants 11 264 Retained earnings (deficit) (6,380) 1,508 Net unrealized loss on securities available for sale (42) (31) ----------------------------- Total stockholders' equity 7,515 12,936 ----------------------------- Total liabilities and stockholders' equity $26,299 $28,580 =============================
54 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) CONDENSED STATEMENT OF INCOME
YEAR ENDED JUNE 30 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- INCOME Dividends from subsidiaries $ 875 $2,500 $2,200 Interest income 1,089 1,092 978 Other income 10 148 234 ----------------------------------------------------- Total income 1,974 3,740 3,412 ----------------------------------------------------- EXPENSE Interest expense 1,402 1,397 1,364 Provision for loan losses 1,092 75 Letter of credit valuation provision 3,289 Other expenses 555 619 611 ----------------------------------------------------- Total expense 6,338 2,091 1,975 ----------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAX AND EQUITY IN UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF) INCOME OF SUBSIDIARIES (4,364) 1,649 1,437 INCOME TAX BENEFIT (2,075) (337) (302) ----------------------------------------------------- INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF) INCOME OF SUBSIDIARIES (2,289) 1,986 1,739 EQUITY IN UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF) INCOME OF SUBSIDIARIES (4,505) (1,873) 1,496 ----------------------------------------------------- NET INCOME (LOSS) $(6,794) $ 113 $3,235 =====================================================
55 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income (loss) $(6,794) $ 113 $ 3,235 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities Depreciation and amortization 40 37 4 Provision for loan losses 1,092 75 Letter of credit valuation provision 3,289 Undistributed net income of subsidiaries 4,505 1,873 (1,496) (Increase) decrease in other assets (1,611) (491) 392 (Increase) decrease in other liabilities (1,045) 128 (183) ---------------------------------------------------- Net cash provided (used) by operating activities (524) 1,735 1,952 ---------------------------------------------------- INVESTING ACTIVITIES Decrease in interest-bearing deposits in other banks 1 Capital contributions to subsidiaries (1,400) (80) Advance on note to subsidiary (250) (1,058) Principal payments received on notes from subsidiaries 120 Net (increase) decrease in loans 1,084 58 (1,309) ---------------------------------------------------- Net cash provided (used) by investing activities (566) 99 (2,367) ---------------------------------------------------- FINANCING ACTIVITIES Payment of long-term debt (52) (70) Proceeds from issuance of long-term debt 1,270 Proceeds from exercise of stock options 4 109 Proceeds from exercise of stock warrants 2,492 35 632 Cash dividends (1,186) (1,745) (1,729) Purchase of treasury stock (14) (126) ---------------------------------------------------- Net cash provided (used) by financing activities 1,240 (1,902) 282 ---------------------------------------------------- CHANGE IN CASH 150 (68) (133) CASH, BEGINNING OF YEAR 92 160 293 ---------------------------------------------------- CASH, END OF YEAR $ 242 $ 92 $ 160 ====================================================
56 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 1998 1997 1996 - ----------------------------------------------------------------------------------------------- Revenue Banking $ 19,443 $ 22,958 $ 25,190 Real estate development and management 774 1,181 4,519 -------------------------------------------------- $ 20,217 $ 24,139 $ 29,709 ================================================== Operating Profit Banking $ (4,102) $ 682 $ 1,416 Real estate development and management (2,692) (569) 1,819 -------------------------------------------------- $ (6,794) $ 113 $ 3,235 ================================================== Identifiable Assets Banking $ 187,326 $ 228,181 $ 250,466 Real estate development and management 9,720 11,820 11,750 -------------------------------------------------- $ 197,046 $ 240,001 $ 262,216 ================================================== Depreciation and Amortization Banking $ 430 $ 354 $ 282 Real estate development and management 19 70 77 -------------------------------------------------- $ 449 $ 424 $ 359 ================================================== Capital Expenditures Banking $ 103 $ 1,106 $ 1,569 Real estate development and management 8 127 809 -------------------------------------------------- $ 111 $ 1,233 $ 2,378 ==================================================
57 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 Natcity Investments, Inc. Howe Barnes Investments, Inc. Knight Securities L.P. 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 Monday, November 30, 1998 9:00 am (Central Time) United Fidelity Bank, fsb, downtown 18 NW Fourth Street, 2nd floor Evansville, Indiana 58 CORPORATE INFORMATION 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 Director, United Fidelity Bank, fsb Director, The Village Companies President, Pedcor Investments Director, International City Bank, N.A. (Long Beach, CA) JACK CUNNINGHAM Chairman, Director and Secretary, United Fidelity Bank, fsb 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 President, Chief Executive Officer and Director, United Fidelity Bank, fsb Director and Officer, The Village Companies President, Southern Investment Corporation ROBERT F. DOERTER Director, United Fidelity Bank, fsb Retired President, United Fidelity Bank, fsb DONALD R. NEEL, CPA Executive Vice President, Chief Financial Officer and Treasurer, Fidelity Federal Bancorp Executive Vice President, Chief Operating Officer and Director, United Fidelity Bank, fsb Director and Officer, The Village Companies BARRY A. SCHNAKENBURG President, U.S. Industries Group, Inc. President, Barry Inc. Director, United Fidelity Bank, fsb Director, Village Capital Corporation 59 CORPORATE INFORMATION FIDELITY FEDERAL BANCORP OFFICERS JACK CUNNINGHAM Chairman and Secretary M. BRIAN DAVIS Vice Chairman, President and Chief Executive Officer DONALD R. NEEL, CPA Executive Vice President, Chief Financial Officer and Treasurer KEITH E. ROUNDER Vice President, Corporate Counsel MARK A. ISAAC Vice President, Controller WILLIAM M. MCCUTCHAN Vice President, Loan Review NANCY K. SWEAZEY Assistant Vice President, Human Resources SHANON L. DELONG Internal Auditor DEBBIE M. FRITZ Assistant Vice President, Shareholder Relations Officer UNITED FIDELITY BANK, FSB OFFICERS JACK CUNNINGHAM Chairman and Secretary M. BRIAN DAVIS Vice Chairman, President and Chief Executive Officer DONALD R. NEEL, CPA Executive Vice President, Chief Operating Officer and Treasurer TERRY G. JOHNSTON Executive Vice President, Senior Lending Officer KIRBY W. KING Senior Vice President, Retail Banking MARK A. ISAAC Vice President, Chief Financial Officer ROGER C. BAUGH Vice President, Special Services KAREN F. CARTER Vice President, Commerical Lending DALE HOLT Vice President, Consumer Loans SCOTT E. KLUEH Vice President, Loan Originations DAVID K. OGG Vice President, Mortgage Lending ANTHONY W. FREELS Assistant Vice President, Loan Servicing DANIEL R. GARNESS Assistant Vice President, Loan Administrator BARBARA A. LUCKETT Assistant Vice President, Branch Manager KIMBERLY J. LUDWIG Assistant Vice President, Consumer Loans DIANE T. TABOR Assistant Vice President, Assistant Controller CHRISTOPHER A. VITON Assistant Vice President, Consumer Loans CHERYL L. WOLF Assistant Vice President, Deposit Servicing BEVERLY A. WINTERNHEIMER Assistant Vice President, Branch Manager 60 CORPORATE INFORMATION VILLAGE CAPITAL CORPORATION OFFICERS JACK CUNNINGHAM Chairman M. BRIAN DAVIS President and Chief Executive Officer DONALD R. NEEL, CPA Executive Vice President and Treasurer BRADLEY E. PARKER Senior Vice President MARK A. ISAAC Secretary VILLAGE SECURITIES CORPORATION OFFICERS JACK CUNNINGHAM Chairman M. BRIAN DAVIS President and Chief Executive Officer DONALD R. NEEL, CPA Senior Vice President and Treasurer MARK A. ISAAC Secretary VILLAGE INSURANCE CORPORATION OFFICERS M. BRIAN DAVIS Chairman, President and Chief Executive Officer BARRY A. SCHNAKENBURG Executive Vice President CURT ANGERMEIER Senior Vice President ROGER C. BAUGH Vice President DONALD R. NEEL, CPA Treasurer MARK A. ISAAC Secretary VILLAGE HOUSING CORPORATION OFFICERS JACK CUNNINGHAM Chairman 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 61 CORPORATE INFORMATION VILLAGE MANAGEMENT CORPORATION OFFICERS M. BRIAN DAVIS Chairman, President and Chief Executive Officer JACK CUNNINGHAM Vice Chairman MORGAN B. FULTON Senior Vice President, Area Manager JULIEANNE NONTE Senior Vice President, Area Manager DONALD J. FUCHS, ESQ Vice President (Village Title Co.) HELEN L. DYE Assistant Vice President, Collections HOWARD G. FINK Assistant Vice President, Collections JOHN A. STEWART Assistant Vice President DONALD R. NEEL, CPA Treasurer MARK A. ISAAC Secretary VILLAGE COMMUNITY DEVELOPMENT CORPORATION OFFICERS JACK CUNNINGHAM Chairman 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 MARK A. ISAAC Secretary VILLAGE AFFORDABLE HOUSING CORPORATION OFFICERS JACK CUNNINGHAM Chairman and Secretary M. BRIAN DAVIS Vice Chairman and President DONALD R. NEEL Treasurer 62 FIDELITY FEDERAL BANCORP ANNUAL MEETING OF SHAREHOLDERS NOVEMBER 30, 1998 THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF FIDELITY FEDERAL BANCORP The undersigned shareholder of Fidelity Federal Bancorp, an Indiana corporation ("Fidelity Federal"), hereby appoints Jack Cunningham, with full power to act alone, the true and lawful attorney-in-fact and proxy of the undersigned, with the full power of substitution and revocation, and hereby authorizes him to represent and to vote all shares of Common Stock of Fidelity Federal held of record on October 16, 1998, which the undersigned is entitled to vote at the Annual Meeting of Shareholders of Fidelity Federal to be held at the downtown office of United Fidelity Bank, fsb, 18 N.W. Fourth Street, Evansville, Indiana on November 30, 1998, at 9:00 a.m., Central Standard Time, and at any adjournment thereof, with all powers the undersigned would possess if personally present as follows: PLEASE SPECIFY CHOICES BY CLEARLY MARKING THE APPROPRIATE LINE. ITEM 1. Election of Directors: Nominees: William R. Baugh Bruce A. Cordingley M. Brian Davis ____ FOR all nominees listed above (except vote withheld from the following nominees, if any). __________________________________________________________ ____ WITHOHLD AUTHORITY to vote for all of the nominees listed above. ITEM 2. Ratification of accountants: Ratify Olive LLP, as independent public accountants for Fidelity Federal for the fiscal year ending June 30, 1999. ____ FOR Olive LLP, as independent accountants ____ AGAINST Olive LLP, as independent public accountants ____ ABSTAIN IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED "FOR" THE ELECTION OF THE NOMINEES OF THE BOARD OF DIRECTORS, AND "FOR" THE RATIFICATION OF OLIVE LLP AS INDEPENDENT PUBLIC ACCOUNTANTS FOR THE FISCAL YEAR ENDING JUNE 30, 1999. IF ANY OTHER BUSINESS IS PRESENTED AT THE MEETING, THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE RECOMMENDATIONS OF MANAGEMENT. PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. Please sign exactly as name appears hereon. If signing as a representative, please include capacity. __________________________________________ Signature of Shareholder (if jointly held) Dated:____________, 1998 Tax Identification Number:________________ __________________________________________ Signature of Shareholder (if jointly held) Dated:____________, 1998 Tax Identification Number:________________ -----END PRIVACY-ENHANCED MESSAGE-----