-----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, Q0FEXNaUj9a2NYsd8s1JWjCC8ZTggJYb6DlIxtpHzj9SSEvltC4kDaR1zQxRwnyE 4ObLQzR+gaVKKvaiV5hQJQ== 0000926274-99-000193.txt : 19990519 0000926274-99-000193.hdr.sgml : 19990519 ACCESSION NUMBER: 0000926274-99-000193 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990518 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIDELITY FEDERAL BANCORP CENTRAL INDEX KEY: 0000910492 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 351894432 STATE OF INCORPORATION: IN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22880 FILM NUMBER: 99628960 BUSINESS ADDRESS: STREET 1: 700 S GREEN RIVER ROAD STREET 2: SUITE 2000 CITY: EVANSVILLE STATE: IN ZIP: 47715 BUSINESS PHONE: 8124240921 MAIL ADDRESS: STREET 1: 18 NW FOURTH ST STREET 2: PO BOX 1347 CITY: EVANSVILLE STATE: IN ZIP: 47706-1347 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended March 31, 1999 FIDELITY FEDERAL BANCORP ------------------------------------------------------ (Exact name of registrant as specified in its charter) Indiana 0-22880 35-1894432 ---------------------------- ---------- ------------------- (State of other jurisdiction Commission (IRS Employer of Incorporation of File No. Identification No.) Organization) 700 S. Green River Road, Suite 2000 Evansville, Indiana 47715 --------------------------------------------------- (Address of principal executive offices) (Zip Code) (812) 469-2100 -------------------------------------------------- Registrant's telephone number, including area code Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- As of May 6, 1999, there were 3,147,662 shares of the Registrant's common stock, $1 stated value, issued and outstanding. Exhibit Index is on page 27. FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Index Page PART I - FINANCIAL INFORMATION ITEM 1--Financial Statements: Consolidated balance sheet....................................... 3 Consolidated statement of income................................. 4 Consolidated statement of stockholders' equity................... 5 Consolidated statement of cash flows............................. 6 Notes to consolidated financial statements....................... 7 ITEM 2--Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations ........................................ 11 Financial Condition........................................... 17 Capital Resources and Capital Requirements.................... 23 Liquidity..................................................... 24 PART II - OTHER INFORMATION......................................... 25 SIGNATURES.......................................................... 26 EXHIBIT INDEX....................................................... 27 2 Item 1 - Financial Statements Part I - Financial Information Fidelity Federal Bancorp and Subsidiaries Consolidated Balance Sheet (In thousands, except for share data) (Unaudited)
March 31, June 30, 1999 1998 ---------- ---------- Assets Cash and due from banks $ 1,764 $ 1,683 Short-term interest-bearing deposits 22,537 6,260 --------- --------- Total cash and cash equivalents 24,301 7,943 Interest-bearing deposits 6 Investment securities available for sale 22,155 9,854 Loans 123,504 159,732 Allowance for loan losses (3,481) (3,049) --------- --------- Net loans 120,023 156,683 Premises and equipment 5,658 5,846 Federal Home Loan Bank of Indianapolis stock 3,920 3,920 Income tax receivable 3,611 6,690 Other assets 5,572 6,104 --------- --------- Total assets $ 185,240 $ 197,046 ========= ========= Liabilities Deposits Non-interest bearing $ 6,807 $ 4,760 Interest-bearing 134,697 144,179 --------- --------- Total deposits 141,504 148,939 Short-term borrowings 25 2,531 FHLB advances and other long-term debt 26,878 29,488 Advances by borrowers for taxes and insurance 629 426 Letter of credit valuation allowance 5,918 6,778 Other liabilities 2,187 1,369 --------- --------- Total liabilities 177,141 189,531 Stockholders' Equity Preferred stock, no par or stated value Authorized and unissued - 5,000,000 shares Common stock, $1 stated value Authorized - 5,000,000 shares Issued Outstanding - 3,147,662 and 3,127,208 shares 3,148 3,127 Capital surplus 10,869 10,799 Stock warrants 11 11 Retained earnings, (deficit) (5,809) (6,380) Accumulated other comprehensive loss-net unrealized losses on investment securities available for sale (120) (42) --------- --------- Total stockholders' equity 8,099 7,515 --------- --------- Total liabilities and stockholders' equity $ 185,240 $ 197,046 ========= =========
See notes to consolidated financial statements. NOTE: The consolidated balance sheet at June 30, 1998 has been derived from the audited financial statements. 2 Fidelity Federal Bancorp and Subsidiaries Consolidated Statement of Income (In thousands, except for share data) (Unaudited)
Three Months Ended Nine Months Ended March 31, March 31, 1999 1998 1999 1998 ---- ---- ---- ---- Interest Income Loans receivable $ 2,723 $ 3,679 $ 9,418 $ 12,288 Investment securities 259 145 529 520 Federal funds sold 14 5 25 75 Interest-bearing deposits 290 86 747 213 Other interest and dividend income 77 78 236 238 ----------- ----------- ----------- ----------- Total interest income 3,363 3,993 10,955 13,334 ----------- ----------- ----------- ----------- Interest Expense Deposits 1,817 2,023 5,808 6,909 Federal Home Loan Bank advances 207 302 682 983 Other interest expense 340 375 1,048 1,150 ----------- ----------- ----------- ----------- Total interest expense 2,364 2,700 7,538 9,042 ----------- ----------- ----------- ----------- Net interest income 999 1,293 3,417 4,292 Provision for loan losses (404) 4,298 (254) 4,523 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 1,403 (3,005) 3,671 (231) ----------- ----------- ----------- ----------- Non-interest income Management fees 55 83 208 265 Service charges on deposit accounts 105 79 338 320 Net gains on sale of Investment securities 5 79 Real estate loans 89 8 312 42 Premises and equipment 23 Letter of credit fees 146 152 437 529 Agent fee income 7 126 333 510 Loan participation fees 197 Other income 169 137 553 472 ----------- ----------- ----------- ----------- Total non-interest income 571 590 2,204 2,414 ----------- ----------- ----------- ----------- Non-interest expense Salaries and employee benefits 865 842 2,617 2,570 Net occupancy expense 83 120 293 342 Equipment expense 68 87 218 264 Data processing expense 105 125 297 314 Deposit insurance expense 72 42 178 102 Legal and professional fees 86 96 263 227 Advertising 47 56 149 158 Letter of credit valuation provision 35 6,778 35 6,778 Writedown of affordable housing partnership investments 1,478 1,478 Affordable housing group activities 715 715 Other expense 513 731 1,453 1,469 ----------- ----------- ----------- ----------- Total non-interest expense 1,874 11,070 5,503 14,417 ----------- ----------- ----------- ----------- Income before income tax 100 (13,485) 372 (12,234) Income tax expense (35) (5,363) (200) (5,029) ----------- ----------- ----------- ----------- Net Income $ 135 $ (8,122) $ 572 $ (7,205) =========== =========== =========== =========== Per share: Basic net income $ 0.04 $ (2.60) $ 0.18 $ (2.49) Diluted net income 0.04 (2.60) 0.18 (2.49) Weighted average shares outstanding 3,147,663 3,127,240 3,141,691 2,899,348
See notes to consolidated financial statements. 4 Fidelity Federal Bancorp and Subsidiaries Consolidated Statement of Stockholders' Equity (in thousands) (Unaudited)
Three Months Ended Nine Months Ended March 31, March 31, 1999 1998 1999 1998 -------------------- --------------------- Beginning Balances $ 8,036 $ 15,702 $ 7,515 $ 12,936 Comprehensive income: Net income 135 (8,122) 572 (7,205) Other comprehensive income (72) 12 (78) 2 -------- -------- -------- -------- Comprehensive income 63 (8,110) 494 (7,203) Cash dividends (314) (938) Issuance of stock 90 Purchase of treasury stock (5) (15) Exercise of stock warrants 2,493 -------- -------- -------- -------- Balances, March 31 $ 8,099 $ 7,273 $ 8,099 $ 7,273 ======== ======== ======== ========
See notes to consolidated condensed financial statements. 5 Fidelity Federal Bancorp and Subsidiaries Consolidated Statement of Cash Flows (Unaudited)
Nine Months ended March 31, 1999 1998 ---- ---- Operating Activities Net cash provided by operating activities 4,347 3,144 -------- -------- Investing Activities Purchases of securities available for sale (18,205) (1,906) Proceeds from maturities of securities available for sale 5,753 1,909 Proceeds from sale of securities available for sale 3,379 Net change in loans 36,966 38,487 Purchases of premises and equipment (134) (145) Proceeds from sale of premises and equipment 40 Net changes in interest bearing deposits 6 -------- -------- Net cash provided by investing activities 24,426 41,724 -------- -------- Financing Activities Net change in: Noninterest-bearing, interest being demand and savings deposits (437) (35,077) Certificates of deposit (6,998) (38) Short-term borrowings (2,506) (2,777) Repayment of FHLB advances and other long-term debt (2,610) (4,710) Net change in advances by borrowers for taxes and insurance 202 21 Purchase of common stock (15) Cash dividends (156) (873) Proceeds from exercise of stock warrants 2,493 Issuance of stock 90 -------- -------- Net cash used by financing activities (12,415) (40,976) -------- -------- Net change in Cash and Cash Equivalents 16,358 3,892 Cash and Cash Equivalents, beginning of period 7,943 3,506 -------- -------- Cash and Cash Equivalents, end of period $ 24,301 $ 7,398 ======== ======== Additional Cash Flows and Supplementary information Cash paid for income taxes, net of refunds $ 625 Cash paid for interest $ 5,279 8,403
See notes to consolidated financial statements 6 Fidelity Federal Bancorp and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) o Accounting Policies The significant accounting policies followed by Fidelity Federal Bancorp ("Fidelity Federal") and its wholly owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments which are necessary for a fair presentation of the results for the periods reported, consist only of normal recurring adjustments, and have been included in the accompanying unaudited consolidated condensed financial statements. The results of operations for the nine months ended March 31, 1999 are not necessarily indicative of those expected for the remainder of the year. o Stockholders' Equity On September 22, 1997, Fidelity Federal filed a Schedule 13E4 with the SEC regarding a warrant tender offer to holders of its 1994 and 1995 warrants. The offer and withdrawal rights expired on October 31, 1997. Fidelity Federal 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. In connection with Fidelity Federal's second debt and equity rights offering completed January 31, 1995, Fidelity Federal has reserved 346,500 shares of its common stock for issuance upon exercise of 1,500 outstanding warrants. Each warrant represents the right to purchase 231 shares of common stock. The warrants were valued at $100 per warrant, carry an exercise price of $8.93 per share, and expire on January 31, 2005. At March 31, 1999, a total of 337,029 of the shares originally reserved had been issued and 9,471 remained reserved and unissued. In connection with Fidelity Federal's first debt and equity rights offering completed on April 30, 1994, Fidelity Federal has reserved 415,500 shares of its common stock for issuance upon exercise of 1,500 outstanding warrants. Each warrant represents the right to purchase 277 shares of common stock. The warrants were valued at $100 per warrant, carry an exercise price of $6.22 per share, and expire on April 30, 2004. At March 31, of the shares originally reserved had been issued and 18,282 remained reserved and unissued. 1999, a total of 397,218 o Cash Dividend Fidelity Federal's dividend policy is to pay cash or distribute stock dividends when the Board of Directors deems it to be appropriate, taking into account Fidelity Federal'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. Fidelity Federal's primary source of income is dividends from its thrift subsidiary, United Fidelity Bank, fsb ("United Fidelity"). United Fidelity has entered into a Supervisory Agreement ("Agreement") with the OTS. One of the provisions of the Agreement restricts the payments of dividends from United Fidelity to Fidelity Federal without prior written OTS approval. When necessary, the OTS has permitted dividends to assist Fidelity Federal in meeting interest payments on its outstanding debt, however there can be no assurance of these actions going forward. Refer to "Other Restrictions" below. Fidelity Federal is uncertain when it will pay dividends in the future to its shareholders, and the amount of such dividends, if any. o Company Subsidiaries United Fidelity, and Village Affordable Housing Corporation are two subsidiaries of Fidelity Federal. United Fidelity is a federally chartered savings bank, and is regulated by the Office of Thrift Supervision. Village Affordable Housing Corporation was formed during the third quarter of fiscal 1998 for the purpose of holding interests in real estate housing, and is currently inactive. Village Securities Corporation began operations July 1, 1997, by providing customers with discount brokerage services for stocks and bonds. Village Securities ceased operations on December 31, 1998. 7 United Fidelity's subsidiaries, Village Housing Corporation, Village Management Corporation and previously Village Community Development Corporation (the "Affordable Housing Group"), and Village Capital Corporation have been involved in various aspects of financing, owning, developing, building, renting and managing affordable housing projects. Village Capital Corporation has earned fees by providing real estate mortgage banking services to unaffiliated borrowers since 1994. Another subsidiary of United Fidelity, Village Insurance Corporation, is engaged in the business of selling various insurance products. Fidelity Federal reevaluated its business plan in fiscal 1997. As a result, Village Community Development Corporation reduced its activities significantly, discontinued activities in fiscal 1998. Its assets and liabilities were subsequently merged into Village Housing Corporation during the second quarter of fiscal 1999. Fidelity Federal continues to review the profitability of the remaining subsidiaries to determine its future impact on the Company's business plan. Representatives of Village Capital Corporation will broker loans as opportunities arise. Village Housing Corporation and Village Management Corporation continue to be fully operational. o New Accounting Standard The Financial Accounting Standards Board has issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires companies to record derivatives on the balance sheet at their fair value. Statement No. 133 will be effective for Fidelity Federal beginning in fiscal 2000. The adoption of this statement is not expected to have a material impact on Fidelity Federal's financial condition or results of operations. o Other Restrictions United Fidelity, has entered into a Supervisory Agreement with the OTS on February 3, 1999. The Supervisory Agreement follows the most recent examination of United Fidelity by the OTS during the Bank's fiscal 1998 fourth quarter. The agreement is in effect until terminated, modified or suspended, in writing, by the OTS. As previously reported and in response to such examination, United Fidelity voluntarily had already begun taking action to respond to some of the OTS criticisms in the examination and some of the requirements of the Supervisory Agreement. In entering into the supervisory Agreement, United Fidelity did not admit or deny any violations of law or regulations and/or unsafe or unsound practices. Under the terms of the Supervisory Agreement, United Fidelity must develop and submit to the OTS for approval a strategic plan which includes, at a minimum, capital targets; specific strategies; the completion of quarterly projections for a three year period; concentration limits for all assets; a plan for reducing United Fidelity's concentration of high risk assets; review of infrastructure, staffing and expertise with respect to each area of the Bank's operations; and capital planning. The strategic plan has been submitted, and is currently under OTS review. In addition, United Fidelity must, among other things, take other specified actions within specified time frames. These actions include, among others: the development of a written plan for the reduction of classified and criticized assets to specified levels; maintenance of sufficient reserves in the allowance for loan and lease losses; reporting quarterly, to the OTS, relating to classified assets and workout plans, restriction of its growth in total assets to an amount not in excess of an amount equal to the net interest credited on deposit liabilities without prior OTS approval; limiting growth of its consumer loan portfolio to an amount not in excess of 25% of its total assets; development of a written plan to divest all real estate held for development; adoption of policies and procedures designed to avoid potential conflicts of interest; development of policies and procedures to increase liquidity; adoption of a policy with respect to its mortgage brokerage activity, which would address the operation and risk management; development of a policy to administer the general partnerships held by Village Housing Corporation; and maintenance of a fully staffed and functioning internal audit department and independent loan review process. United Fidelity is also prohibited from taking certain actions, including, among others: investing in, purchasing, or committing to make or purchase any additional commercial loans or commercial real estate loans; requesting permission from the OTS to engage in additional commercial loan activity until United Fidelity has hired an experienced loan staff and credit analyst; refinancing or extending classified or criticized commercial loans without the prior approval of the OTS; engaging in "sub prime" consumer lending activities; making capital distributions, including dividends to Fidelity Federal; making any additional equity investments; developing any 8 real estate without specific approval of the OTS; acquiring any additional real estate for future development; selling any asset to an affiliated party without prior written approval of the OTS; engaging in any new activities not included in the to-be developed strategic plan; and, refinancing or extending any non-classified or criticized commercial loan if additional funds are extended. United Fidelity is also required to obtain OTS approval prior to adding or replacing any director or senior executive officer. United Fidelity is also prohibited, without prior OTS approval, from entering into any contract with any executive officer or director which would require a "golden parachute" payment and from increasing the executive benefit package in an amount in excess of the annual cost of living. United Fidelity is also required to develop a plan to reduce employee turnover, build an experience staff, and provide for management succession. Management of United Fidelity had already begun taking, or refraining from taking, some of the actions requested by the OTS. United Fidelity expects to stay in compliance with the terms of the Supervisory Agreement. In this respect, United Fidelity has already ceased making commercial loans; increased its allowance for loan and lease losses; restricted its growth; begun the process of divesting its real estate held for development; engaged an independent vendor to provide loan review services; ceased making additional equity investments; and ceased developing real estate. As of March 31,1999 United Fidelity was in full compliance with the OTS restrictions. Comprehensive Income Fidelity Federal adopted Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income", effective July 1, 1998. The statement was effective for fiscal years beginning after December 15, 1997. This statement establishes standards for the reporting and display of comprehensive income, which includes net income and all other non-owner changes in equity during the period. Nine Months Ended Year Ended March 31, March 31, June 30, 1999 1998 1998 ---- ---- ---- Net income (loss) $ 572 $(7,205) $(6,794) Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period, net of tax (78) (46) (59) Less: adjustment for gains realized in net income, net of tax 48 48 ------- ------- ------- Net unrealized gains (losses) (78) 2 (11) Other comprehensive income $ 494 $(7,203) $(6,805) ======= ======= ======= o Segment Information Fidelity Federal operates principally in two industries, banking and real estate management. Through United Fidelity, Fidelity Federal offers traditional banking products, such as checking, savings, and certificates of deposit, as well as mortgage, consumer, and commercial loans. Through the Affordable Housing Group, Fidelity Federal has been involved in various aspects of developing, building, renting and managing affordable housing projects. Currently Fidelity Federal only acts as owner and manager of affordable housing projects. Operating profit is total revenue less operating expenses. In computing operating profit, income taxes have been deducted. Identified assets are principally those used in each segment. Real estate development and management activities conducted by Fidelity Federal are not asset intensive. The assets in this segment primarily include cash received in the form of fees and land that was acquired with the intent of its use in future developments. 9 Presented below is condensed financial information relating to Fidelity Federal's business segments:
(In thousands) Three Months Ended Nine Months Ended March 31, March 31, 1999 1998 1999 1998 ---- ---- ---- ---- Revenue: Banking $ 3,847 $ 4,390 $ 12,699 $ 15,141 Real estate development and management 87 193 460 607 --------- --------- --------- --------- Total consolidated $ 3,934 $ 4,583 $ 13,159 $ 15,748 ========= ========= ========= ========= Operating profit: Banking $ 223 $ (5,530) $ 807 $ (4,550) Real estate development and management (88) (2,592) (235) (2,655) --------- --------- --------- --------- Total consolidated $ 135 $ (8,122) $ 572 $ (7,205) ========= ========= ========= ========= Identifiable assets: Banking $ 181,883 $ 179,172 $ 181,883 $ 179,172 Real estate development and management 3,357 8,214 3,357 8,214 --------- --------- --------- --------- Total consolidated $ 185,240 $ 187,386 $ 185,240 $ 187,386 ========= ========= ========= ========= Depreciation and amortization: Banking $ 98 $ 95 $ 294 $ 323 Real estate development and management 3 5 9 15 --------- --------- --------- --------- Total consolidated $ 101 $ 100 $ 303 $ 338 ========= ========= ========= ========= Capital expenditures: Banking $ 60 $ 28 $ 130 $ 142 Real estate development and management 1 4 3 --------- --------- --------- --------- Total consolidated $ 60 $ 29 $ 134 $ 145 ========= ========= ========= =========
10 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition Special Note Regarding Forward-Looking Statements Certain matters discussed in this Quarterly Report on Form 10-Q are "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as Fidelity Federal "believes", "anticipates", "expects", "estimates" or words of similar import. Similarly, statements that describe Fidelity Federal's future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described inclose proximity to such statements and which could cause actual results to differ materially from those anticipated as of the date of this report. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this report and Fidelity Federal undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. o Results of Operations The net income for the three months ended March 31, 1999 was $135,000, compared to a net loss of $8,122,000 for the same period last year. Basic and diluted net income per share was $.04 per share for the three months ended March 31, 1999, compared to a net loss of $2.60 per share in 1998. The net income for the nine months ended was $572,000 compared to a net loss of $7,205,000 for the same period last year. Basic and diluted net income per share for the nine months ended March 31, 1999 was $0.18 per share compared to a basic and diluted net loss per share of $2.49 for the same period last year. Interest income decreased $2.4 million from the prior year primarily due to a decrease in higher yielding multifamily and commercial real estate loans, and a reduction in residential mortgage loans, due to refinancing activity. Interest expense decreased approximately $1.5 million due to the maturity of higher interest bearing brokered deposits that were partially replaced with retail deposits. As a result of these maturities and payoffs, Fidelity Federal's assets have decreased $14.4 million from March 31, 1998 to $185.2 million at March 31, 1999. Non-interest income for the nine months ended March 31, 1999, decreased $210,000 from the nine months ended March 31, 1998 primarily due to a decrease in gains on sales of loans and investments, a decrease in participation fees, and a decrease in agent fees. Non-interest expense decreased slightly to $5.5 million (excluding the one time charges associated with Fidelity Federal's Section 42 housing program last year). Net Interest Income. Net interest income, Fidelity Federal'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 Fidelity Federal's interest rate-sensitive assets and liabilities. Net interest income for the three months ended March 31, 1999, was $999,000 compared to $1,293,000 for the three month period ending March 31, 1998, a decrease of $294,000. Net interest income for the nine months ended March 31, 1999 was $3.4 million compared to $4.3 million a year ago, a decrease of $875,000. These decreases are primarily attributable to decreases in earning assets and interest bearing liabilities. The net interest margin is a percentage computed by dividing net interest income on a fully taxable equivalent basis ("FTE") by average earning assets and represents a measure of basic earnings on interest bearing assets held by Fidelity Federal. The reduction in net interest income in Fiscal 1999 was primarily due to a decrease in average earning assets of $29.1 million, which was offset by a decrease in average interest-bearing liabilities of $34.6 million. For the three months ended March 31, 1998 interest income was $3.4 million compared to $4.0 million for the three months March 31, 1998, a decrease of approximately $630,000 or about 15.8%. Interest expense for the three months ended March 31, 1999 was $2.4 million compared to $2.7 million for the three months ended March 31, 1998, a decrease of approximately $336,000 or 12.4%. Interest income for the nine months ended March 31, 1999 was $11.0 million compared to $13.3 million for the same period last year, a decrease of approximately $2.3 million or 17.3%. The reduction in average earning assets was attributable to a significant number of multifamily and commercial loan payoffs, as well as payoffs on residential real estate mortgage loans. The average balance of agent-acquired certificates of deposit, which had an average yield of 6.30% for the nine months ended March 31, 1998, was reduced from $46.1 million to $34.5 million. The average yield decreased to 6.02% for the nine months ended March 31, 1999. The net interest margin for the three months ended March 31, 1999 decreased to 2.30% from 2.79% at June 30, 1998 and 2.73% at March 31, 11 1999. The net interest margin for the nine months ended March 31, 1999 decreased to 2.53% from 2.79% at June 30, 1998 and 2.74% at March 31, 1998. The decrease in the margin was affected by the decrease in higher yielding multifamily construction and commercial real estate loans. Asset/Liability Management Fidelity Federal 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 as asset/liability structure will result in lower net income during periods of declining interest rates, unless off-set 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 the 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. United Fidelity is required to file a CMR since it does not meet the risk-based capital requirement as of December 31, 1998. 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 December 31, 1998 and March 31, 1998, is an analysis performed by the OTS of United Fidelity'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 December 31, 1998 and March 31, 1998, 2% of the present value of United Fidelity's assets was approximately $3.8 million and $3.9 million. Because the interest rate risk of a 200 basis point increase was $1.1 million at December 31, 1998 and $1.4 million at March 31, 1998, United Fidelity 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 1999 to 1998 is due to an improved match of expected cash flows from assets and liabilities. United Fidelity's sensitivity to interest rate changes is in the fourth percentile of all OTS regulated entities at December 31, 1998, the most recent period that United Fidelity has information.
Interest Rate Risk as of December 31, 1998 NPV as Percent of Present Net Portfolio Value of Assets Value (in thousands) Change Dollar Dollar Percentage in Rates Amount Change Change NPV Change +400 bp $ 9,026 $(2,316) (20)% 5.01% - 99 bp +300 bp 9,992 (1,350) (12) 5.47 - 53 bp +200 bp 10,835 (507) (4) 5.85 - 14 bp +100 bp 11,377 35 0 6.07 8 bp 0 bp 11,342 5.99 -100 bp 10,707 (635) (6) 5.62 - 37 bp -200 bp 10,258 (1,084) (10) 5.34 - 65 bp -300 bp 9,976 (1,366) (12) 5.15 - 84 bp -400 bp 9,596 (1,746) (15) 4.91 - 108 bp
12
Interest Rate Risk as of March 31, 1998 NPV as Percent of Present Net Portfolio Value of Assets Value (in thousands) Change Dollar Dollar Percentage in Rates Amount Change Change NPV Change +400 bp $12,722 $(3,124) (20)% 6.90% - 121 bp +300 bp 13,802 (2,044) (13) 7.37 - 74 bp +200 bp 14,765 (1,081) (7) 7.76 - 35 bp +100 bp 15,534 (312) (2) 8.05 - 6 bp 0 bp 15,846 8.11 -100 bp 15,572 (273) (2) 7.89 - 22 bp -200 bp 14,431 (1,415) (9) 7.26 - 84 bp -300 bp 13,188 (2,658) (17) 6.59 - 151 bp -400 bp 12,178 (3,668) (23) 6.04 - 207 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 assumed in calculating the table. Non-interest income. Non-interest income for the quarter ended March 31, 1999, was $571,000 compared to $590,000 for the same period in 1998, a decrease of only $19,000. Non-interest income for the nine months ended March 31, 1999, was $2.2 million compared to $2.4 million for the same period in 1998, a decrease of $210,000. Non-interest income - ------------------- (in thousands)
Nine Months Ended December 31, Increase 1999 1998 (Decrease) ---- ---- ---------- Management fees $ 208 $ 265 $ (57) Letter of credit fees 437 529 (92) Service charges on deposit accounts 338 320 18 Net gain on sale of loans 312 140 172 Net gain on sale of investments 79 (79) Net gain on sale of fixed assets 23 23 Release fees 62 60 2 Participation fees 197 (197) Agent fee income 333 510 (177) Servicing fees on loans sold (net of amortization) 18 10 8 Other 473 304 169 ------- ------- ------- Total non-interest income $ 2,204 $ 2,414 $ (210) ======= ======= =======
Fidelity Federal has recorded no Section 42 real estate development fees over the past year. Fee income from management activities decreased to $208,000 for the nine months ended March 31, 1999 compared to $265,000 for the nine months ended March 31, 1998. The decrease is primarily due to a reduction in fee percentage from 5% to 4% collected on partnerships for which Village Housing Corporation is the general partner. Letter of credit fees were $437,000 for the nine months ended March 31, 1999 as compared to $529,000 for the nine months ended March 31, 1998. Outstanding standby letters of credit at March 31, 1999 were $45.0 million as compared to $55.6 million at March 31, 1998. The decrease in fee income is partially due to the reduction in letters of credit outstanding. 13 Service charges on deposit accounts increased $18,000 to $338,000 for the nine months ended March 31, 1999 as compared to $320,000 in 1998. The net gain on sale of single-family loans increased $172,000 for the nine months ended March 31, 1999 compared to the same period in 1998. Fidelity Federal has emphasized growth in this area and has added originators to increase loan volume. Servicing fees on loans sold increased $8,000 due to on increase in the number of mortgage loans being serviced by Fidelity Federal compared to the prior year. Participation fees decreased $197,000 from prior year due to Fidelity Federal arranging a participation for a large multifamily loan customer last year. Other income increased $169,000 over the nine months ended March 31, 1998 due to increased fees earned on a multifamily loan of $22,000, income of $58,000 relating to repayment of expenses incurred in connection with a payoff on a multifamily loan, leasing fees of $7,000, subprime mortgage agent fees of $12,000 and title fee income of $53,000. Title fee income increased over the prior year primarily due to increased mortgage loan volume. Fidelity Federal has participated in an arrangement in which automobile loans are originated on behalf of another organization for the last three fiscal years. Agent fee income, which represents Fidelity Federal's earned fee from these transactions, decreased $177,000 for the nine months ended March 31, 1999 compared to the same period last year. The decrease during the first six months was primarily due to an increase in factory financing incentives offered by the auto makers, which compete directly for financing. The primary reason for the decrease in the current quarter was the fact that in January 1999, the head of United Fidelity's consumer loan division and key members of the consumer loan division staff left United Fidelity to accept employment with a competitor of United Fidelity. In the consumer lending division, United Fidelity had participated in an arrangement in which automobile loans were originated on behalf of another organization. United Fidelity has been unable to continue to compete in this market segment since the departure of the staff. As such, United Fidelity's revenue from consumer loans has been sharply reduced. United Fidelity received OTS approval in March 1999 to hire individuals based on the new business plan to resume its indirect and consumer loan business. A senior vice president and assistant vice president have been hired and the Company is currently seeking qualified candidates for administrative operations. Fidelity Federal anticipates that the department will be fully operational by June 30, 1999. Provision for Loan Losses Fidelity Federal 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 for the nine months ended March 31, 1999 had a credit balance of $254,000 compared to expense of $4.5 million in the prior year, a decrease of $4.8 million.
Allowance for Loan Losses Letter Of Credit Valuation Allowance Beginning Balance, June 30, 1998 $3,049 Beginning Balance, June 30, 1998 $6,778 Net charge-off's 209 Provision for loan losses (254) Provision 35 Transfer from Letter Of Credit Transfer to allowance for valuation allowance 895 loan losses (895) ------ ------- $3,481 $5,918
During the quarter, as a result of a reduction in classified and criticized assets and an overall improvement in operating results of Fidelity Federal's affordable housing portfolio, Fidelity Federal reduced its reserve for letters of credit and recognized income of $300,000. The $300,000 is recorded as a credit in non-interest expense, where the original expense was recognized and is offset by an additional $335,000 provision. The additional $335,000 letter of credit provision did not impact net income due to offsetting credits in the provision for loan losses. Based on the most recent loan review some reserves were reclassified between the provision for loan losses and letter of credit reserves. The ratio of non-performing loans to the allowance for loan losses was 149.4% at March 31, 1999 compared to 18.8% at June 30, 1998 and 24.3% at March 31, 1998. The increase in non-performing loans is due to one large multifamily loan to an outside borrower which is past due pending its refinancing. Fidelity Federal is assisting the borrower in obtaining alternate refinancing, however, the ultimate refinancing of this credit with no additional losses cannot be assured. A specific reserve has been established for this loan. The decrease in the provision for loan losses in fiscal 1999 is primarily the result of Fidelity Federal providing $4.5 million in the provision for loan losses last year. As previously noted, during the fourth quarter of fiscal 14 1998, the OTS performed an examination of United Fidelity and Fidelity Federal. 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 Fidelity Federal 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. A letter of credit valuation allowance of $6.8 million was also recorded in fiscal 1998. Non-interest expense. Non-interest expense for the quarter ended March 31, 1999, was $1.9 million compared to $11.1 million for the same period in 1998, a decrease of $9.2 million. Non-interest expense for the nine months ended March 31, 1999, was $5.5 million compared to $14.4 million for the same period in 1998, a decrease of $8.9 million. These decreases are primarily attributable to the $6.8 million letter of credit provision recorded at March 31, 1998, a writedown of $1.5 million of Fidelity Federal's investments in affordable housing partnerships, and writedowns totaling $769,000 related to other affordable housing project related assets. Excluding these changes in the previous year, non-interest expense would have been $2.1 million and $5.4 million for the quarter and year-to-date, respectively.
Non-interest Expense - -------------------- (in thousands) Nine Months Ended March 31, Increase 1999 1998 (Decrease) ---- ---- ---------- Salaries and employee benefits $ 2,617 $ 2,570 $ 47 Letter of credit valuation provision 35 6,778 (6,743) Write down of affordable housing partnership investments 1,478 (1,478) Legal and professional 263 249 14 Occupancy expense 293 342 (49) Equipment expense 218 264 (46) Data processing expense 297 364 (67) Affordable housing group activity expense 769 (769) Advertising 149 158 (9) Deposit insurance 178 102 76 Correspondent bank charges 117 119 (2) Printing and supplies 91 89 2 Loss on investment 215 68 147 Telephone 53 56 (3) Postage 77 56 21 Travel and lodging 23 34 (11) Other operating expense 877 921 84 -------- -------- -------- Total non-interest expense $ 5,503 $ 14,417 $ (8,914) ======== ======== ========
Salaries and employee benefits increased $47,000 for the nine months ended March 31, 1999, compared to the same period last year. Salaries increased primarily due to an increase in incentives in the mortgage loan area as a result of increased originations over the prior year and some staffing replacements. Legal and professional fees increased $14,000 over last year due to additional costs incurred for workout activities with respect to various classified assets. Occupancy and equipment expenses decreased by $49,000 and $46,000 respectively, compared to the prior year as management continues to closely monitor expenses. Data processing expenses decreased $67,000 due to a smaller number of transactions with our data processor due to the reduction in asset size. For the nine months ended March 31, 1998, Fidelity Federal incurred expenses associated with the writeoffs of various components of Section 42 and multifamily projects consisting of abandoned projects, partnership management fees, land, real estate investment banking fees, letter of credit fees and development fees totaling $769,000. Deposit insurance increased $76,000 from the prior year, due to the change in United Fidelity's risk classification compared to the prior year. Fidelity Federal has recorded it's percentage share of losses, as accounted for by the equity method, for its investment in various developments by $215,000 compared to $68,000 in the prior year. These writedowns are partially offset by tax credits received and recorded as reductions of 15 income tax expense. Other operating expense increased $84,000 as compared to the previous year due primarily to the expiration of a $50,000 land option that was not exercised and a $21,000 increase in appraisal and other expenses associated with Fidelity Federal's efforts in refinancing several of the partnerships. Income Tax Expense. Income tax expense increased $4.8 million for the nine months ended March 31, 1999, compared to the same period in 1998, primarily due to an increase in taxable income. Included in the tax benefit of $200,000 for the nine months ended March 31, 1999, are tax credits of $266,000. These credits are received from Fidelity Federal's investment in Section 42 affordable housing projects and comprise a portion of the return on these investments. The Company also receives the tax benefit of its percentage of the operating losses for those projects. Some of these benefits associated with these tax credits are partially offset by reductions of the investment in the Section 42 investments, which are included in the above table under the caption "Loss on investment". Year 2000 Fidelity Federal 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. Fidelity Federal, in addition to completing its assessment and plan, is currently testing its internal mission critical hardware systems to determine if they are Year 2000 compliant. Internal testing is scheduled to be completed by May 31, 1999. Fidelity Federal has tested several of its systems, including 90% of all systems currently being provided by Fidelity Federal's main data processor. Mortgage loan software, personnel computers, alarms, cameras, VCR's and other related equipment has also been tested. The results from the testing, while necessitating some modifications, have been satisfactory. The testing of consumer loan software used for scoring applicants will be upgraded and compliant by the end of May. The testing for accounting software used for the partnerships, by Village Housing, will be completed by May 31, 1999. While Fidelity Federal has exposure to several risks related to Year 2000, the primary risk is the potential inability to correctly process and record customer loan and deposit transactions. Fidelity Federal is now on schedule with regard to requirements that have been established for the banking industry by the Federal Financial Institution Examination Council ("FFIEC"). Theses standards require that a series of procedures be performed by financial institutions within established timeframes to reduce the risk of non-compliance with the Year 2000 issue. Specifically, Fidelity Federal has developed a testing plan and a customer-based risk management plan. While Fidelity Federal believes that it will continue to meet all of the FFIEC requirements, it cannot guarantee that the systems of other companies on which Fidelity Federal's systems rely will be compliant. Third party non-compliance for the Year 2000 issue could potentially have a material impact on Fidelity Federal. Fidelity Federal has completed a contingency plan in the event its internal systems, or the systems of those material vendors on which it is reliant on, would not be complaint with Year 2000 requirements. Fidelity Federal has begun and will continue testing the contingency plan and modifying the contingency plan when appropriate, based on test results. The Company has recognized expense of approximately $85,000 over the past two years for costs related to Year 2000. The amounts that have been paid to date were to provide assistance to Fidelity Federal with the initial assessment and formulation of the plan to ensure compliance with Year 2000, equipment to assist in the testing process and replacement of non-compliant personal computers and equipment. At March 31, 1999, Fidelity Federal has completed its assessment of the expected total cost of performing necessary procedures or purchasing equipment that is compliant with Year 2000. Fidelity Federal is anticipating costs of approximately $275,000 to ensure Year 2000 compliance. A portion of these costs will be capitalized with the purchase and replacement of non-compliant equipment. Fidelity Federal anticipates that it will incur an additional $60,000 in expense by December 31, 1999. At March 31, 1999, total commitments to purchase new equipment, software or to incur material costs to modify existing systems were approximately $130,000. These costs do not include salaries paid to current employees related to their time spent with the year 2000 issue. Fidelity Federal outsources a significant portion of its data processing to an outside provider. A worst case scenario for Fidelity Federal would likely involve non-compliance with Year 2000 by its primary data processor in such a manner that would leave Fidelity Federal in a position where it could not correctly process and record customer loan and deposit transactions. Fidelity Federal has reviewed a substantial portion of the data processing provider's test scripts and results. At this time, no material problems have come to Fidelity Federal's attention with respect to test results. A failure by other third parties to effectively manage the Year 2000 issue, including Fidelity Federal's payroll processor, utility company, telecommunications company, or the government, etc., 16 could have an adverse effect on Fidelity Federal operations, customer service and net income. No assurance can be provided that these third parties will be Year 2000 compliant. Fidelity Federal completed its assessment of the potential impact of Year 2000 on its commercial lending customers, and believes the impact, in terms of potential credit exposure, would not be material. The majority of Fidelity Federal's commercial lending portfolio consists of commercial real estate loans that are made to companies that are not highly technologically intensive. Fidelity Federal cannot provide any assurance that the effect of Year 2000 will not be material to Fidelity Federal's financial position or operating results. Financial Condition Total assets decreased by $11.8 million from June 30, 1998, to approximately $185.2 million at March 31, 1999. Loans. The following table shows the composition of Fidelity Federal's loan portfolio as of March 31, 1999 and June 30, 1998. Loans Outstanding - ----------------- (in thousands) March 31, June 30, 1999 1998 --------- --------- Real estate mortgage loans First mortgage loans Conventional $ 52,726 $ 71,343 Construction 8,504 16,110 Commercial 15,284 20,753 Multifamily 7,581 5,742 First mortgage real estate loans purchased 2,263 2,704 Commercial loans - other than secured by real estate 6,570 11,568 Consumer and home equity loans 30,576 31,512 -------- -------- Total loans $123,504 $159,732 ======== ======== Total assets $185,240 $197,046 ======== ======== Total loans to total assets 66.7% 81.1% ======== ======== Total loans decreased by $36.2 million or 22.7% to $123.5 million at March 31, 1999, compared to June 30, 1998. Fidelity Federal's savings bank is continually offering new and competitive first mortgage loan products. Fidelity Federal continues to sell current production of 1-4 family loans in fiscal 1999, recording the gain or loss and using the proceeds to fund new products. As a result of historically low market interest rates, payoffs of conventional residential real estate mortgage loans decreased the portfolio by $18.6 million from June 30, 1998 to March 31, 1999. Construction loans decreased by $7.6 million at March 31, 1999 from June 30, 1998 to $8.5 million at March 31, 1999. Construction loans at March 31, 1999 include $6.8 million of multifamily loans. Commercial loans have also decreased $5.5 million since June 30, 1998. According to the OTS supervisory agreement, United Fidelity is not to enter into any new lines of credit or originate any new commercial loans. The focus of United Fidelity's commercial lending department personnel has been to develop action plans to minimize potential losses relating to its classified commercial credits and its letter of credit exposure. Consumer and home equity loans decreased $936,000 since June 30, 1998. The current portfolio continues to shrink due to paydowns and payoffs. As previously mentioned in the "non-interest income" discussion, Fidelity Federal has experienced employee turnover in the consumer loan division and has therefore generated a lower volume of loans. As a result of hiring a Senior Vice President and Assistant Vice President to head the consumer loan division, management anticipates that consumer loan volume will increase from levels attained in the third fiscal quarter of 1999. 17 Fidelity Federal's loan portfolio contains no loans to foreign governments, foreign enterprises, foreign operations of domestic companies, hedge funds, or for highly leveraged transactions. Non-performing loans. Fidelity Federal 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 Fidelity Federal 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. Non-performing loans - -------------------- (in thousands) March 31, June 30, 1999 1998 -------- -------- Nonaccrual loans: Multifamily $4,112 Mortgage 67 $ 461 ------ ------ Subtotal 4,179 461 Restructured: Consumer 77 90 days or more past due: Consumer 120 86 Commercial 747 Mortgage 79 26 ------ ------ Subtotal 946 112 ------ ------ Total $5,202 $ 573 ====== ====== Percent of total loans 4.21% 0.36% ====== ====== Non-performing loans at March 31, 1999, consisted primarily of commercial and multifamily loans. As discussed in the provision for loan loss section, the increase in non-performing loans is due to one large multifamily loan to an outside borrower which is past due pending its refinancing. Company officials are assisting the borrower in obtaining alternate financing, however, the ultimate refinancing of this credit with no additional losses cannot be assured. One multifamily loan which was reported in the September 30, 1998, Form 10-Q, of $4.2 million with a specific reserve of $895,000 paid off in full during the second quarter. The specific reserve associated with this loan was reallocated among the loan categories, based on the most recent loan review and evaluation by Fidelity Federal. The remaining 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. In the past, the ability of the multifamily loans to remain performing has been in part due to general partner advances made by Fidelity Federal to support cash flow deficits incurred by the affordable housing projects. During the current fiscal year, operating cash flows for most of the properties has improved and general partner advances have significantly decreased. There is no assurance that general partner advances will not be necessary in the future to support cash flow deficits. The majority of recorded general partner advances were charged off in fiscal 1998. 18 Classified Assets and Letters of Credit (in thousands) March 31, June 30, March 31, --------- -------- --------- 1999 1998 1998 Classified assets $21,244 $24,805 $29,270 Classified letters of credit 25,450 34,615 37,770 ------- ------- ------- Total classified assets/letters of credit $46,694 $59,420 $67,040 ======= ======= ======= Classified and criticized assets of Fidelity Federal totaled $46.7 million compared to $59.4 million at June 30, 1998. Classified assets and letters of credit were 280.4% of Fidelity Federal's capital and reserves at March 31, 1999 compared to 377.5% at March 31, 1998. Analysis of Allowance for Loan Losses and Letter of Credit Valuation Allowance Fidelity Federal 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 process is designed to ensure that all relevant matters affecting collectibility will be consistently 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. Impaired loans are those that management considers to be substandard or doubtful of collection. At March 31, 1999 Fidelity Federal had impaired loans totaling $12.7 million. The allowance for losses on such impaired loans totaled $1.9 million and is included in Fidelity Federal's allowance for loan losses at March 31, 1999. In addition, using the same guidelines for impaired loans, impaired letter of credits totaled $18.0 million. The valuation allowance on such impaired letter of credits totaled $2.9 million and is included in Fidelity Federal's letters of credit valuation allowance at March 31, 1999. 19 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 nine months ended March 31, 1999 and the year ended June 30, 1998: Allowance for Loan Losses - ------------------------- (in thousands) March 31, June 30, 1999 1998 ---- ---- Allowance for loan losses Balance at July 1, $ 3,049 $ 1,781 Loan charge-offs: Real estate mortgage 15 Multifamily 3,089 Commercial 14 Consumer 239 195 --------- --------- Total loan charge-offs 253 3,299 Loan recoveries: Real estate mortgage 15 Commercial 2 Consumer 27 24 --------- --------- Total loan recoveries 44 24 Net charge-offs 209 3,275 Provision for loan losses (254) 4,543 Transfer from letter of credit valuation allowance 895 --------- --------- Allowance for loan losses at end of period $ 3,481 $ 3,049 ========= ========= Ratio of net charge-offs to average loans outstanding during the period 0.19% 1.18% Ratio of provision for loan losses ` to average loans outstanding during the period -0.23% 2.52% Ratio of allowance for loan losses to total loans outstanding at end of period 2.82% 1.91% Average amount of loans outstanding for the period 144,095 180,530 Amount of loans outstanding at end of period $ 123,504 $ 159,732 The allowance for loan losses was $3.0 million at June 30, 1998, $3.5 million at March 31, 1999, and $3.1 million at March 31, 1998. Net loan charge-offs were $209,000 or .19% of average loans for the nine months ended March 31, 1999 compared to $3.3 million or 1.18% of average loans for the nine months ended March 31,1998. A letter of credit was funded during the first quarter of fiscal 1999 and was classified as a non-accrual loan upon conversion. This loan was previously classified as a substandard letter of credit, with a specific reserve of $895,000. The loan was paid off in full during the second quarter of fiscal 1999 and Fidelity Federal reclassified the $895,000 specific reserve to the general allowance for loan losses, based on the most recent loan review by Fidelity Federal. As discussed previously, Fidelity Federal increased the provision for loan losses during fiscal 1998 primarily in connection with loans made to certain Section 42 tax-credit real estate development projects that Fidelity Federal is currently managing. Fidelity Federal has loans and letters of credit securing third party 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 Fidelity Federal's geographic market. Fidelity Federal also recorded a letter of credit valuation allowance and related provision of $6.8 million in fiscal 1998, the balance of which is $5.9 million at March 31, 1999. The decrease is primarily due to the transfer of $895,000 from the letter of credit valuation allowance to the allowance for loan losses that is discussed in the preceding paragraph. Multifamily letters of credit, an off-balance sheet item, carry the same risk characteristics 20 as conventional loans and totaled $45.0 million at March 31, 1999. Specific reserves for letters of credit totaled 13.14% of outstanding letters of credit at March 31, 1999. Classified loans and letters of credit to total loans and letters of credit were 27.9% at March 31, 1999 and 28.2% at March 31, 1998. Management is not aware of any additional letters of credit that are expected to be called and funded. Management considers the allowance for loan losses and letter of credit valuation reserve adequate to meet losses inherent in the loan portfolio as of March 31, 1999. Investment securities. United Fidelity's investment policy is annually reviewed by its Board of Directors and any significant changes to the policy must be approved by the Board. The Board has an asset/liability management committee which is responsible for keeping the investment policy current. As of March 31, 1999, the investment portfolio represented 12.0% of Fidelity Federal's assets compared to 5.0% at June 30, 1998, and is managed in a manner designed to meet the Board's investment policy objectives. Due to continued reductions in the loan portfolio, the excess liquidity has been reinvested in lower risk investment securities. The primary objectives, in order of priority, are to further the safety and soundness of Fidelity Federal, to provide the liquidity necessary to meet day to day funding needs, and to provide for diversification of risk and management of interest rate and economic risk. At March 31, 1999, the entire investment portfolio was classified as available for sale. The net unrealized loss at March 31, 1999 was $120,000, which was comprised of gross gains of $1,000, gross losses of $199,000, and a tax benefit of $78,000. The decrease of $78,000 from June 30, 1998 was caused by market interest rate changes during the period. Although the entire portfolio is available for sale, management has not identified individual investments for sale in future periods. The following table sets forth the components of United Fidelity's securities available for sale as of the dates indicated. March 31, June 30, 1999 1998 ---- ---- (in thousands) Securities available for sale: U.S. Treasury securities $ 1,001 Federal agencies securities 2,985 Federal Home Loan Mortgage Corporation mortgage-backed securities 1,311 1,779 Federal National Mortgage Association mortgage-backed securities 1,603 1,945 Government National Mortgage Association mortgage-backed securities 19,240 2,144 Other securities available for sale 1 ------- Total securities available for sale $22,155 $ 9,854 ======= ======= United Fidelity's total investment securities portfolio increased by $12.3 million at March 31, 1999, from June 30, 1998. United Fidelity purchased $18.2 million in GNMA mortgage backed securities, which carry a 0% risk weight, during fiscal 1999. There were maturities of $4.0 million relating to agency bonds, while the remaining decreases are monthly payments of principal and interest on its mortgage-backed securities. These certificates represent ownership of pools of one-to-four family mortgage loans. As interest rates decline, principal of the underlying mortgage loans typically is returned more quickly in the form of payoffs and refinancings. Funding Sources Deposits. United Fidelity attracts both short-term and long-term deposits from the retail market by offering a wide assortment of accounts with different terms and different interest rates. These deposit alternatives include checking accounts, regular savings accounts, money market deposit accounts, fixed rate certificates with varying maturities, variable interest rate certificates, negotiable rate jumbo certificates ($100,000 or more), and variable rate IRA certificates. Average deposits decreased by $13.3 million during the first nine months of fiscal 1999. Most of the decreases were due to certificates of deposit acquired through agents, and retail certificates of deposit which decreased $7.9 million and $4.3 million to $34.5 million and $81.4 million, respectively at March 31, 1999. Money market 21 accounts decreased $284,000. NOW accounts decreased $1.4 million, which was partially offset by an increase in demand and savings accounts of $294,000 and $228,000, respectively. The following table sets forth the average balances of and the average rate paid on deposits by deposit category for the nine months ended March 31, 1999 and for the year ended June 30, 1998.
Nine Months Ended Year Ended March 31, 1999 June 30, 1998 ----------------- ---------------------- Average Average Balance Rate Balance Rate ------- ---- ------- ---- (dollars in thousands) Average Deposits Demand $ 5,524 $ 5,229 Now accounts 20,809 3.59% 22,211 4.24% Money market accounts 2,743 2.32 3,027 2.71 Savings accounts 5,041 2.28 4,813 2.83 Certificates of deposit 81,419 5.81 85,699 5.80 Agent-acquired certificates of deposit 34,545 6.02 42,443 6.26 -------- -------- Total $150,081 5.16% $163,422 5.38% ======== ========
Federal Home Loan Bank Advances and Other Long-Term Debt. The following table summarizes Fidelity Federal's borrowings as of March 31, 1999, and June 30, 1998.
March 31, June 30, 1999 1998 ---- ---- (in thousands) Notepayable, 7.43% adjusted annually, payable $16 per month, including interest, due April 1, 2009, secured by specific multifamily mortgages $2,191 $2,210 Note payable, 8.75% adjusted annually, payable $8 per month, including interest, due September 14, 2010, secured by specific multifamily mortgages 993 996 Note payable, 8.75% adjusted annually, payable $12 per month, including interest, due September 22, 2010, secured by specific multifamily mortgages 1,520 1,529 Junior subordinated notes, 9 1/8%, interest paid semi-annually, due April 30, 2001, unsecured 1,476 1,476 Junior subordinated notes, 9 1/4% interest paid semi-annually, due January 31, 2002 unsecured 1,494 1,494 Senior subordinated notes, 10%, interest paid semi- annually, due June 1, 2005, unsecured 7,000 7,000 Federal Home Loan Bank advances due at various dates through 2002 12,204 14,783 ------- ------- Total $26,878 $29,488 ======= =======
22 In the above table, all notes, except for the Federal Home Loan Bank advances, are debt of the Parent Company and total $14.7 million. Borrowings have been reduced during fiscal 1999 primarily due to large payoffs received in loans and the continued sales of current 1-4 family loan production. The decrease is due primarily to the maturity of FHLB advances. Fidelity Federal, thus far, has been in a position to allow FHLB advances to mature and not replace them. Alternate funding sources were provided by loan sales and payoffs, retail deposits, and public funds. Fidelity Federal may utilize FHLB advances, as a source of funds again should the need arise. Capital Resources and Capital Requirements The ratio of stockholders' equity to total assets for United Fidelity, was 7.86% at March 31, 1999, compared to 6.31% at June 30, 1998, due primarily to a reduction in United Fidelity's asset size. Fidelity Federal issued stock in exchange for a general partnership interest in a Fidelity Federal-financed multifamily housing development. This issuance of stock, and net income for the period increased the book value, while an increase in the unrealized loss on available for sale investments decreased the ratio. Fidelity Federal's book value per share at March 31, 1999 was $2.57, compared to $2.40 at June 30, 1998. The OTS has adopted capital standards under which savings associations must maintain (i) "core capital" in an amount not less than 3% of total assets, (ii) "tangible capital" in an amount not less than 1.5% of total adjusted assets, and (iii) a level of risk-based capital equal to 8.0% of risk-weighted assets. The capital standards established by the OTS for savings associations must generally be no less stringent than those applicable to national banks. Under OTS regulations "core capital" includes common stockholders' equity, noncumulative perpetual preferred stock and related surplus, and minority interests in the equity accounts of consolidated subsidiaries, less intangible assets other than certain qualifying supervisory goodwill and certain purchased mortgage servicing rights. In determining compliance with the capital standards, a savings association must deduct from capital its entire investment in and loans to any subsidiary engaged in activities not permissible for a national bank, other than subsidiaries (i) engaged in such non-permissible activities solely as agent for their customers; (ii) engaged in mortgage banking activities; or (iii) that are themselves savings associations, or companies the only investment of which is another insured depository institution, acquired prior to May 1, 1989. In determining total risk-weighted assets for purposes of the risk based requirement, (i) each off-balance sheet asset must be converted to its on-balance sheet credit equivalent amount by multiplying the face amount of each such item by a credit conversion factor ranging from 0% to 100% (depending upon the nature of the asset), (ii) the credit equivalent amount of each off-balance sheet asset and the book value of each on-balance sheet asset must be multiplied by a risk factor ranging from 0% to 100% (again depending upon the nature of the asset), and (iii) the resulting amounts are added together and constitute total risk-weighted assets. Total capital, for purposes of the risk-based capital requirement, equals the sum of core capital plus supplementary capital (which, as defined, includes, among other items, perpetual preferred stock not counted as core capital, limited life preferred stock, subordinated debt, and general loan and lease loss allowances up to 1.25% of risk-weighted assets) less certain deductions including the savings association's interest-rate risk component. The amount of supplementary capital that may be counted towards satisfaction of the total capital requirement may not exceed 100% of core capital. At March 31, 1999, actual and required minimum levels of regulatory capital for United Fidelity were as follows:
(Dollars in Thousands) Required Amount Percent Amount Percent Excess ------------------------------------------------------------------------- Core $14,011 7.86% $5,350 3.0% $8,661 Tangible $14,011 7.86% $2,675 1.5% $11,336 Risk-based $20,680 14.46% $11,442 8.0% $9,238
Pursuant to HOLA of 1933, as amended, the OTS is required to issue capital standards that are no less stringent than those applicable to national banks. In April 1991, the OTS proposed to amend its capital regulations to reflect amendments made by the OCC to the leverage ratio capital requirement for national banks. The proposal would establish a core capital leverage ratio (core capital to adjusted total assets) of 3% for savings associations 23 rated composite 1 under the OTS MACRO rating system. For all other savings associations, the minimum core capital leverage ratio would be 3% plus at least an additional 100 to 200 basis points. Under the proposal, the OTS may impose higher regulations for individual savings associations. The OTS has not adopted this regulation in final form. The prompt corrective action regulation adopted by the OTS provides that a savings association that has a leverage capital ratio of less than 4% will be considered "undercapitalized" and may be subject to certain restrictions. At March 31, 1999 United Fidelity had a core capital leverage ratio (as defined in the proposal) of 7.86%. The OTS adopted a final regulation adding an interest-rate risk component to its risk-based capital rule. A savings association's interest-rate risk is generally defined as the change that occurs to its net portfolio value as a result of a hypothetical two hundred basis point increase or decrease in market interest rates. A "normal level" of interest-rate risk is defined as any decline in net portfolio value of up to 2% of the institution's assets. If the 2% threshold is exceeded, a savings association will be required to deduct from its capital, for purposes of determining whether the institution meets its risk-based capital requirements, an amount equal to one-half of the difference between the measured risk and 2% of assets. Capital requirements higher than the generally applicable minimum requirement may be established for a particular savings association if the OTS determines that the institution's capital was or may become inadequate in view of its particular circumstances. Individual minimum capital requirements may be appropriate where the savings association is receiving special supervisory attention, has a high degree of exposure to interest rate risk, or poses other safety or soundness concerns. 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. At March 31, 1999 and March 31, 1998, United Fidelity was categorized as well capitalized and met all subject capital adequacy requirements at those dates. United Fidelity's primary regulatory agency, the OTS, notified United Fidelity in October 1998 that its capital position was not adequate and needed to be substantially improved, which was detailed in the Supervisory Agreement. Since June 30, 1998 United Fidelity's capital ratio has increased from 10.79% to 14.46% through the shrinkage of assets leaving a higher risk weighting or investing in lower risk weighted assets. Fidelity Federal plans to evaluate alternatives and pursue opportunities to raise additional capital in Final 1999 with the purpose of continuing to improve its capital ratios. The Company recently filed a Form S-3 with the SEC on March 24, 1999. Fidelity Federal is in the process of raising capital by issuing approximately 525,000 shares to its existing shareholders as of the record date. Approximately $1.5 million will be infused into United Fidelity to continue improving its capital ratios while the remainder will service existing debt at Fidelity Federal. Liquidity Liquidity for a savings bank represents its ability to accommodate growth in loan demand and/or reduction in deposits. United Fidelity's liquidity ratio was 29.98% on March 31, 1999, up from 6.70% on June 30, 1998. The liquidity ratio has increased because of payoffs of commercial and conventional mortgage loans. Management believes that this level of liquidity is sufficient to meet any anticipated requirements for the Bank's operations. Federal regulations have historically required the Bank to maintain minimum levels of liquid assets. The required percentage has varied from time to time based on economic condition and savings flows, and is currently 4% of net withdrawable savings deposits and borrowings payable on demand or in one year or less during the preceding calendar month. 24 PART II -- OTHER INFORMATION ITEM 1 Legal Proceedings: ------------------- There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Registrant's business, to which the Registrant or its subsidiaries are a party of or which any of their property is the subject. ITEM 2 Changes in Securities: ---------------------- Not applicable. ITEM 3 Defaults Upon Senior Securities: -------------------------------- Not applicable. ITEM 4 Submission of Matters to a Vote of Security Holders: ---------------------------------------------------- None ITEM 5 Other Information: ------------------ None ITEM 6 Exhibits and Reports on Form 8-K: --------------------------------- a. The following exhibit is submitted herewith: 27 Financial Data Schedule b. No new reports on Form 8-K. A Form 8-K was previously filed on February 8, 1999 and was included in the December 31, 1998 Form 10-Q filing. 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIDELITY FEDERAL BANCORP Date: MAY 14, 1999 By: /s/ M. BRIAN DAVIS --------------- ---------------------------------- M. Brian Davis President and CEO By: /s/ DONALD R. NEEL ---------------------------------- Donald R. Neel, Executive Vice President, CFO and Treasurer (Principal Financial Officer) 26 Exhibit Index Reg. S-K Exhibit No. Description of Exhibit Page - ------------------------------------------------------------------------- 27 Financial Data Schedule 28 EX-27 2
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIDELITY FEDERAL BANCORP CONSOLIDATED BALANCE SHEET AS OF 3/31/99 AND THE CONSOLIDATED INCOME STATEMENT FOR THE NINE MONTHS ENDED 3/31/99 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JUN-30-1999 JUL-01-1998 MAR-31-1999 1,764 22,537 0 0 22,155 0 0 123,504 3,481 185,240 141,504 25 8,734 26,878 0 0 3,148 4,951 185,240 9,418 529 1,008 10,955 5,808 7,538 3,417 312 0 5,503 372 372 0 0 572 .18 .18 2.53 4,179 946 77 0 3,049 253 44 3,481 3,331 0 150
-----END PRIVACY-ENHANCED MESSAGE-----