-----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, NphDbDGaxMuwiQRhhEuA4CUwEbNR5161SSY5pq17ctwnES4Q13XxP5s+lOR9J0pq 4bvYkNSko1Faee3UV/7+Hg== /in/edgar/work/0000926274-00-000470/0000926274-00-000470.txt : 20001115 0000926274-00-000470.hdr.sgml : 20001115 ACCESSION NUMBER: 0000926274-00-000470 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIDELITY FEDERAL BANCORP CENTRAL INDEX KEY: 0000910492 STANDARD INDUSTRIAL CLASSIFICATION: [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: 765436 BUSINESS ADDRESS: STREET 1: 700 S GREEN RIVER ROAD STREET 2: SUITE 2000 CITY: EVANSVILLE STATE: IN ZIP: 47715 BUSINESS PHONE: 8124692100 MAIL ADDRESS: STREET 1: 18 NW FOURTH ST STREET 2: PO BOX 1347 CITY: EVANSVILLE STATE: IN ZIP: 47706-1347 10-Q 1 0001.txt 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 September 30, 2000 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 NO X --- --- As of November 1, 2000, there were 4,607,659 shares of the Registrant's common stock, $1 stated value, issued and outstanding. Exhibit Index is on page 29. FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Index Page PART I - FINANCIAL INFORMATION ITEM 1--Financial Statements: Condensed Consolidated Balance Sheet................................ 3 Condensed Consolidated Statement of Income.......................... 4 Condensed Consolidated Statement of Stockholders' Equity............ 5 Condensed Consolidated Statement of Cash Flows...................... 6 Notes to Condensed Consolidated Financial Statements................ 7 ITEM 2--Management's Discussion and Analysis of Results of Operations and Financial Condition........................... 11-24 ITEM 3--Quantitative and Qualitative Disclosures about Market Risk... 25-26 PART II - OTHER INFORMATION............................................ 27 SIGNATURES............................................................. 28 EXHIBIT INDEX.......................................................... 29 2 Item 1 - Financial Statements Part I - Financial Information Fidelity Federal Bancorp and Subsidiaries Condensed Consolidated Balance Sheet (In thousands except for share data) (Unaudited)
September 30, December 31, 2000 1999 ---- ---- Assets Cash and due from banks $ 1,600 $ 8,003 Interest-bearing demand deposits 16,713 22,911 --------- --------- Cash and cash equivalents 18,313 30,914 Investment securities available for sale 21,558 24,305 Loans, net of allowance for loan losses of $2,051 and $2,021 108,163 96,919 Premises and equipment 4,998 5,727 Federal Home Loan Bank of Indianapolis stock 2,620 3,920 Deferred income tax receivable 7,107 5,372 Interest receivable and other assets 5,595 4,300 --------- --------- Total assets $ 168,354 $ 171,457 ========= ========= Liabilities Deposits Non-interest bearing $ 3,808 $ 6,593 Interest-bearing 123,119 128,423 --------- --------- Total deposits 126,927 135,016 Long-term debt 24,690 23,504 Advances by borrowers for taxes and insurance 548 409 Valuation allowance for letters of credit 5,222 5,787 Other liabilities 2,426 1,314 --------- --------- Total liabilities 159,813 166,030 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 - 4,607,659 and 3,147,662 shares 4,608 3,147 Additional paid in capital 13,673 10,869 Stock warrants 11 11 Accumulated deficit (9,051) (7,825) Accumulated other comprehensive loss (700) (775) --------- --------- Total stockholders' equity 8,541 5,427 --------- --------- Total liabilities and stockholders' equity $ 168,354 $ 171,457 ========= =========
See notes to condensed consolidated financial statements. 3 Fidelity Federal Bancorp and Subsidiaries Condensed Consolidated Statement of Income (In thousands, except for per share data) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ---- ---- ---- ---- Interest Income Loans receivable $ 2,385 $ 2,300 $ 6,987 $ 7,466 Investment securities - taxable 373 434 1,158 1,118 Deposits with financial institutions 179 177 633 659 Other dividend income 61 79 217 249 ----------- ----------- ----------- ----------- Total interest income 2,998 2,990 8,995 9,492 ----------- ----------- ----------- ----------- Interest Expense Deposits 1,609 1,507 4,726 4,982 Long-term debt 523 578 1,499 1,659 ----------- ----------- ----------- ----------- Total interest expense 2,132 2,085 6,225 6,641 ----------- ----------- ----------- ----------- Net interest income 866 905 2,770 2,851 Provision (adjustment) for loan losses 375 75 550 (213) ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 491 830 2,220 3,064 ----------- ----------- ----------- ----------- Non-interest income Fee income-apartment management 0 43 88 143 Service charges on deposit accounts 79 98 219 302 Net gains on loan sales 18 70 30 190 Letter of credit fees 134 146 400 437 Real estate investment banking fees 35 4 66 25 Agent fee income 86 0 133 7 Title fee income 5 10 16 33 Servicing fees on loans sold 27 28 82 80 Release fees on multifamily loans 10 6 22 36 Other income 50 83 199 265 ----------- ----------- ----------- ----------- Total non-interest income 444 488 1,255 1,518 ----------- ----------- ----------- ----------- Non-interest expense Salaries and employee benefits 1,205 858 2,749 2,521 Net occupancy expense 107 100 291 285 Equipment expense 65 75 197 224 Data processing expense 86 113 252 324 Deposit insurance expense 60 81 185 218 Legal and professional fees 261 90 492 292 Advertising 64 43 148 143 Letter of credit valuation provision (1,215) Valuation allowance - affordable housing investments 14 123 55 627 Other expense 763 (181) 1,607 1,132 ----------- ----------- ----------- ----------- Total non-interest expense 2,625 1,302 5,976 4,551 ----------- ----------- ----------- ----------- Income (loss) before income tax (1,690) 16 (2,501) 31 Income tax benefit (765) (88) (1,275) (261) ----------- ----------- ----------- ----------- Net Income (loss) $ (925) $ 104 $ (1,226) $ 292 =========== =========== =========== =========== Per share: Basic earnings (loss) per share $ (0.20) $ 0.03 $ (0.32) $ 0.09 Diluted earnings (loss) per share (0.20) 0.03 (0.32) 0.09 Average common and common equivalent shares outstanding 4,607,659 3,147,662 3,872,332 3,147,662
See notes to condensed consolidated financial statements. 4 Fidelity Federal Bancorp and Subsidiaries Condensed Consolidated Statement of Stockholders' Equity (in thousands) (Unaudited)
Nine Months Ended September 30 2000 1999 ---- ---- Beginning Balances $ 5,427 $ 8,036 Comprehensive income: Net income (loss) (1,226) 292 Other comprehensive income net of tax-- Unrealized gain (loss) on securities 74 (545) ------- ------- Comprehensive income (1,152) (253) Issuance of stock 4,266 ------- ------- Balances, September 30 $ 8,541 $ 7,783 ======= =======
See notes to condensed consolidated financial statements. 5 Fidelity Federal Bancorp and Subsidiaries Condensed Consolidated Statement of Cash Flows (Unaudited)
Nine months ended September 30 2000 1999 ---- ---- Operating Activities Net cash provided (used) by operating activities $ (2,519) $ 286 Investing Activities Purchases of securities available for sale (17,196) Proceeds from maturities of securities available for sale 2,824 3,744 Net change in loans (11,764) 26,120 Redemption of FHLB stock 1,300 Purchases of premises and equipment (48) (363) Proceeds from sale of premises and equipment 105 7 -------- -------- Net cash provided (used) by investing activities (7,583) 12,312 Financing Activities Net change in: Noninterest-bearing, interest-bearing demand and savings deposits 2,883 (2,075) Certificates of deposit (10,972) (25,530) Proceeds of long-term debt 2,000 5,000 Repayment of long-term debt (814) (5,828) Issuance of stock 4,266 Net change in advances by borrowers for taxes and insurance 138 168 -------- -------- Net cash used by financing activities (2,499) (28,265) Net change in Cash and Cash Equivalents (12,601) (15,667) Cash and Cash Equivalents, beginning of period 30,914 29,960 -------- -------- Cash and Cash Equivalents, end of period $ 18,313 $ 14,293 ======== ======== Additional Cash Flows and Supplementary information Interest paid $ 5,324 $ 6,007 Income tax paid 727
See notes to condensed consolidated financial statements 6 Fidelity Federal Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) o Accounting Policies The significant accounting policies followed by Fidelity Federal Bancorp ("Fidelity") 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 condensed consolidated financial statements. The results of operations for the nine months ended September 30, 2000 are not necessarily indicative of those expected for the remainder of the year. The condensed consolidated balance sheet at December 31, 1999 has been derived from the audited financial statements. o Stockholders' Equity On January 21, 2000 Fidelity signed a definitive stock purchase agreement as amended and restated on April 6, 2000, to sell 1,460,000 shares of its common stock to Pedcor Holdings, a limited liability company ("Pedcor"). One of the principals of Pedcor, Bruce A. Cordingley, was a director of Fidelity until his resignation as a director in December 1999. On May 19, 2000, the shareholders ratified the approval of the stock purchase agreement. The consideration paid by Pedcor included $3,000,000 in cash ($3.00 per share), a five-year guarantee to United in an aggregate amount up to $1,500,000 against any negative cash flow from operations of certain specified affordable housing properties in United's portfolio and an agreement to provide management and certain accounting services for the specified properties for ten years at no fee to United or Fidelity. In addition, three Pedcor principals (including Cordingley) were named to Fidelity's board of directors. In connection with Fidelity's first debt and equity rights offering completed on April 30, 1994, Fidelity 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 September 30, 2000, a total of 397,218 shares originally reserved had been issued and 18,282 remained reserved and unissued. In connection with Fidelity's second debt and equity rights offering completed January 31, 1995, Fidelity 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 September 30, 2000, a total of 337,029 of the shares originally reserved had been issued and 9,471 remained reserved and unissued. o Cash Dividend Fidelity's dividend policy is to pay cash or distribute stock dividends when its Board of Directors deems it to be appropriate, taking into account Fidelity'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 is not subject to any regulatory restrictions on payments to its stockholders. Fidelity's primary source of income is dividends from United Fidelity Bank ("United"). United has entered into a Supervisory Agreement ("Agreement") with the Office of Thrift Supervision ("OTS"). One of the provisions of the Agreement restricts the payments of dividends from United to Fidelity without prior 7 written OTS approval. The OTS, in 1999, permitted the payment of dividends to assist Fidelity in meeting interest payments on its outstanding debt; however, there can be no assurance that this approval will be granted going forward if it continues to be necessary. Fidelity is uncertain when it will pay dividends in the future and the amount of such dividends, if any. o Company Subsidiaries United, Village Affordable Housing Corporation and Village Securities Corporation are three subsidiaries of Fidelity. United is a federally chartered savings bank, and is regulated by the OTS. Village Affordable Housing Corporation was formed during the third quarter of fiscal 1998 for the purpose of owning interests in real estate housing, and is currently inactive. Village Securities Corporation is also currently inactive, and is in the process of being dissolved. United's subsidiaries, Village Housing Corporation and Village Management Corporation (the "Affordable Housing Group"), and Village Capital Corporation have been involved in various aspects of financing, owning, developing, and managing affordable housing projects. Currently, they are involved only in the business of owning affordable housing properties. As of May 19, 2000, a subsidiary of Pedcor Holdings, LLC, started providing management and certain accounting services for the properties previously managed by Village Management Corporation. Village Management completed this transition by the end of June 2000 and is currently inactive. Village Capital Corporation has earned fees by providing real estate mortgage banking services to unaffiliated borrowers since 1994. Village Capital has not provided any new banking services for the past two years, but records fee income on transactions previously completed. Another subsidiary of United, Village Insurance Corporation, is engaged in the business of selling credit life and accident health insurance in conjunction with bank lending activities. o Accounting Pronouncements The Financial Accounting Standards Board has issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. The provisions of this statement were to become effective for fiscal years beginning after June 15, 1999. The effective date of the statement has been delayed by Statement No. 137 to fiscal years beginning after June 15, 2000. Fidelity does not expect the statement to have a material impact on Fidelity's financial condition or results of operations and plans on adopting it on January 1, 2001. o Other Restrictions United entered into a Supervisory Agreement with the OTS on February 3, 1999 which is in effect until terminated, modified or suspended by the OTS. Under the terms of the Agreement, United developed and submitted 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's concentrations of high risk assets; review of infrastructure, staffing and expertise with respect to each area of United's operations; and capital planning. The agreement indicated that United must, among other things, take other specified actions within specified time frames. These actions include: the development of and adherence to a written plan for the reduction of classified and criticized assets to specified levels; maintenance of sufficient allowances for loan and lease losses; quarterly reporting to the OTS relating to classified assets and workout plans; restriction of its growth in total assets without prior OTS approval; limiting growth of its consumer loan portfolio to an amount not in excess of 30 percent 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 8 increase liquidity; adoption of a policy with respect to its mortgage brokerage activity, which would address its operation and methods for risk management; development of a policy to administer the general partnerships held by Village Housing Corporation; and maintenance of fully staffed and functioning internal audit and independent loan review processes. United is also prohibited from taking certain actions without prior approval, including but not limited to: 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 has hired an experienced loan staff; 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; making any additional equity investments; developing any 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 strategic plan; and, refinancing or extending any non-classified or criticized commercial loan if additional funds are extended. United is also required to obtain OTS approval prior to adding or replacing any director or senior executive officer. United 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 is required to develop a plan to reduce employee turnover, build an experienced staff, and provide for management succession. In conjunction with the recent OTS approval of United's business plan, management of United has taken or is refraining from taking, as applicable, the actions requested by the OTS and at September 30, 2000, was in compliance with the conditions of its Supervisory Agreement. o Segment Information Fidelity operates principally in two industries, banking and real estate activities. Through United, Fidelity 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, Fidelity was previously involved in various aspects of developing, building, renting and managing affordable housing units. On May 19, 2000, a stock purchase agreement was approved by the shareholders, which calls for Pedcor to provide management services to the affordable housing properties at no fee to the properties or Fidelity. The Affordable Housing Group's remaining activities consist of holding a general partner interest in various properties and recognizing income or loss under the equity method of accounting. Banking revenue consists primarily of interest and fee income, while the real estate activities income or loss is generated through the percentage of ownership in various partnerships. All revenue is earned in the United States. Operating profit is total revenue less operating expenses. In computing operating profit, income taxes have been deducted. 9 Identified assets are principally those used in each segment and are all held in the United States. Real estate activities conducted by Fidelity are not asset intensive.
Three months ended Real Estate September 30, 2000 Banking Activities Eliminations Total - ---------------------------------------------------------------------------------------------------- Interest income $2,998 $ 2 $ (2) $ 2,998 Other income 428 16 444 Interest expense 2,132 2 (2) 2,132 Other expense 2,461 164 2,625 Provision (adjustment) for loan losses (42) 417 375 Income (loss) before tax (1,125) (565) (1,690) Income tax expense (benefit) (654) (111) (765) Total assets 169,005 2,933 (3,584) 168,354 Capital expenditures 25 25 Depreciation and amortization 85 2 87 Three months ended Real Estate September 30, 1999 Banking Activities Eliminations Total - ---------------------------------------------------------------------------------------------------- Interest income $2,990 $ 2 $ (2) $ 2,990 Other income 406 99 (17) 488 Interest expense 2,085 2 (2) 2,085 Other expense 1,083 236 (17) 1,302 Provision for loan losses 75 75 Income (loss) before tax 153 (137) 16 Income tax expense (benefit) (9) (79) - (88) Total assets 165,341 2,915 (3,504) 164,752 Capital expenditures 167 - 167 Depreciation and amortization 96 2 - 98 Nine months ended Real Estate September 30, 2000 Banking Activities Eliminations Total - ---------------------------------------------------------------------------------------------------- Interest income $8,995 $ 6 $ (6) $ 8,995 Other income 1,125 147 (17) 1,255 Interest expense 6,225 6 (6) 6,225 Other expense 5,577 416 (17) 5,976 Provision for loan losses 550 550 Income (loss) before tax (2,232) (269) (2,501) Income tax expense (benefit) (1,095) (180) (1,275) Total assets 169,005 2,933 (3,584) 168,354 Capital expenditures 48 48 Depreciation and amortization 262 6 268 Nine months ended Real Estate September 30, 1999 Banking Activities Eliminations Total - ---------------------------------------------------------------------------------------------------- Interest income $9,492 $ 5 $ (5) $9,492 Other income 1,299 256 (37) 1,518 Interest expense 6,633 13 (5) 6,641 Other expense 3,663 925 (37) 4,551 Provision (adjustment) for loan losses (530) 317 - (213) Income (loss) before tax 1,025 (994) - 31 Income tax expense (benefit) 208 (469) - (261) Total assets 165,341 2,915 (3,504) 164,752 Capital expenditures 360 3 - 363 Depreciation and amortization 290 8 - 298
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 "believes", "anticipates", "expects", "estimates" or words of similar import. Similarly, statements that describe Fidelity'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 in close 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 undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. o Results of Operations The net loss for the three months ended September 30, 2000 was $925,000, compared to net income of $104,000 for the same period last year. Basic and diluted net loss per share was $.20 per share for the three months ended September 30, 2000, compared to net income of $0.03 per share in 1999. The net loss for the nine months ended September 30, 2000 was $1,226,000 compared to net income of $292,000 for the same period last year. Basic and diluted net loss per share was $0.32 per share for the nine months ended September 30, 2000, compared to net income of $0.09 per share in 1999. Interest income decreased $497,000 from the prior year primarily due to payoffs in higher yielding multifamily and commercial real estate loans, and a reduction in residential mortgage loans, due to refinancing activity. An increase in consumer loan activity helped offset a portion of the decrease in interest income. Consumer loan interest income increased $528,000 for the nine months ended September 30, 2000. Interest expense decreased approximately $416,000 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's assets have decreased $3.1 million from December 31, 1999 to $168.4 million at September 30, 2000. Non-interest income for the nine months ended September 30, 2000, decreased $263,000 from the nine months ended September 30, 1999 primarily due to a decrease in mortgage loan origination volume, management fees and service charges collected on deposit accounts. Non-interest expense increased $1.4 million to $6.0 million due primarily to the prior year's letter of credit valuation adjustment of $1.2 million, a decrease in the valuation allowance for affordable housing investments of $572,000 and an increase in other operating expense of $782,000. The non-interest expense section of this document provides further details regarding the increase in non-interest expense. Net Interest Income Net interest income, Fidelity'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's interest rate-sensitive assets and liabilities. For the quarter ended September 30, 2000 net interest income decreased $39,000 from the quarter ended September 30, 1999. The net interest margin increased during the nine month period to 2.51% from 2.30% a year ago. Despite the $18.4 million dollar decrease in average earning assets for the nine months ended September 30, 2000, net interest income decreased only $81,000 to $2.8 million for the nine months ended September 30, 2000. Fidelity's reduction in average earning assets was composed of reductions in fixed rate 1-4 family mortgage loans, multifamily loans and commercial real estate loans. Average multifamily and commercial real estate loans decreased $15.7 million due to continued workout efforts, resulting in a decrease of interest income of $848,000 from the prior year. These decreases were partially offset by a $6.8 million increase in average consumer loans, resulting in an increase of interest income of $528,000. Certificates of deposit and borrowings partially offset this reduction in assets with a decrease of $6.4 million in certificates and $1.7 million in borrowings. 11 This resulted in decreased interest expense of $162,000 and $160,000, respectively. Interest income for the nine months ended September 30, 2000 was $9.0 million compared to $9.5 million for the nine months ended September 30, 1999, a decrease of $500,000 or about 5.3%. Interest expense for the nine months ended September 30, 2000 was $6.2 million compared to $6.6 million for the nine months ended September 30, 1999, a decrease of $400,000 or 6.1%. During the current year United's cost to retain or replace scheduled certificate of deposit maturities has increased due to the rising interest rate environment. The average rate on total deposits has increased 21 basis points since December 31, 1999. The decrease in commercial and multifamily loans is expected to continue during the time that United operates under the Supervisory Agreement. Please refer to the footnote "Other Restrictions" in the Notes to Consolidated Financial Statements for further details. Despite management's efforts, the net interest margin is expected to be relatively constant or decline during the term of the Supervisory Agreement between United and the OTS, due to certain lending restrictions. The increase in the net interest margin during the nine months ended September 30, 2000 came despite the Supervisory Agreement between United and the OTS, and the resulting lending restrictions, and was primarily due to consumer lending activity. There can be no assurance that the net interest margin can continue to increase at the same rate. Provision for Loan Losses and Letter of Credit Reserves Fidelity makes provisions for loan losses in amounts estimated to be sufficient to maintain the allowance for loan losses at a level considered necessary by management to absorb losses in the loan portfolios. The provision for loan losses for the nine months ending September 30, 2000 was $550,000 compared to a adjustment of $213,000 in the prior year, an increase of $763,000. During the nine months ended September 30, 1999 Fidelity reduced its allowance for loan losses and letters of credit valuation reserve due to pay-offs on large, impaired loans that Fidelity had previously provided reserves for. Increases in the current quarter and year-to-date provisions for loan losses were primarily due to losses on consumer loans originated prior to January 1999, and an additional $200,000 provision for loans to the affordable housing limited partnerships. The additional provision on the partnership loans is due to routine maintenance on Fidelity's affordable housing portfolio that had been deferred by the previous property manager, Village Management Corporation, a subsidiary of Fidelity. Since these items were deferred by the previous property manager, they are not eligible for the cash deficit guarantees by Pedcor according to the Stock Purchase Agreement. Management feels that these types of items have been identified and adequately reserved for at September 30, 2000. The ratio of allowance for loan losses to non performing loans was 201.7% at September 30, 2000 compared to 180.0% at December 31, 1999. Specific reserves are assigned to certain credits. The reserves are determined by management's evaluation of those credits. The results of internal loan reviews, OTS evaluations and recent events assist Fidelity in making that evaluation. The independent support for the allowance for loan losses and letters of credit valuation reserve includes documentation that supports the amount of recorded reserves for these credits. General reserves for loans and letters of credit not specifically reserved are also determined. Fidelity computes general reserves for the commercial, commercial mortgage, residential mortgage, consumer and credit card loan portfolios by utilizing historical information and information currently available about the loans within those portfolios that provides information as to the likelihood of loss. The potential effect of current economic conditions is also considered with respect to establishing general reserve amounts. Non-interest income. Non-interest income for the quarter ended September 30, 2000, was $444,000 compared to $488,000 for the same period in 1999, a decrease of $44,000. Non-interest income for the nine months ended September 30, 2000, was $1,255,000 compared to $1,518,000 for the same period in 1999, a decrease of $263,000. 12 The following table summarizes non-interest income for the nine months ending September 30, 2000 and 1999: - ----------------------------------------------------------------------------- (in thousands)
Nine Months Ended September 30, Increase 2000 1999 (Decrease) ---- ---- ---------- Fee income-apartment management $ 88 $ 143 $ (55) Service charges on deposit accounts 219 302 (83) Gain on sale of real estate loans 30 190 (160) Letter of credit fees 400 437 (37) Servicing fees on loans sold 82 80 2 Release fees on multifamily loans 22 36 (14) Real estate investment banking and reborrowing fees 78 81 (3) Agent fee income 133 7 126 Title fee income 16 33 (17) Rate cap fee income 12 31 (19) Other 175 178 (3) -------- ------ ------- Total non-interest income $ 1,255 $1,518 $ (263) ======== ====== =======
Fidelity's level of activity in Section 42 real estate activities has continued to decrease. Fidelity has recorded no Section 42 real estate development fees over the past three years. Fee income from management activities for the nine months ended September 30, 2000 decreased approximately $55,000 due to a reduction in the rate charged for apartment management during the first five months of the year, and the discontinuance of management activities as of June 1, 2000. The stock purchase agreement approved by the shareholders on May 19, 2000 calls for Pedcor to provide management services to the affordable housing property at no fee to the property or Fidelity. Therefore, no management fees will be collected in the future by Fidelity's subsidiary, Village Management Corporation and expenses will also no longer be incurred to manage these properties. Service charges on deposit accounts decreased $83,000 for the nine months ended September 30, 2000, compared to the prior fiscal year due to a decline in checking accounts. Gains on sale of real estate loans decreased $160,000 to $30,000 during the nine months ending September 30, 2000 due to a decrease in mortgage loan sales. Letter of credit fees decreased $37,000 from the prior year due to a decrease in outstanding letters that are generating fees. Agent fee income increased $126,000 over the prior year due to increased activity in the consumer indirect lending area. Non-Interest Expense Non-interest expense increased $1.3 million for the three months ended September 30, 2000, compared to the three months ended September 30, 1999. Non-interest expense increased $1.4 million for the nine months ended September 30, 2000, compared to the nine months ended September 30, 1999. 13 The following table summarizes non-interest expense for the nine months ending September 30, 2000 and 1999: - ------------------------------------------------------------------------------ (in thousands)
Nine Months Ended September 30 ------------------------------------------- Increase 2000 1999 (Decrease) ---- ---- ---------- Salaries and employee benefits $2,749 $2,521 $ 228 Letter of credit valuation provision (1,215) 1,215 Write down of affordable housing Partnership investments 55 627 (572) Legal and professional 492 292 200 Occupancy expense 291 285 6 Equipment expense 197 224 (27) Data processing expense 252 324 (72) Advertising 148 143 5 Deposit insurance 185 218 (33) Correspondent bank charges 117 115 2 Printing and supplies 67 75 (8) Loss on investment 224 81 143 Telephone 72 46 26 Postage 70 65 5 Directors fees 25 101 (76) Credit Bureau expense 43 9 34 Amortization of intangible assets 87 87 Travel and lodging 23 24 (1) Other operating expense 879 616 263 ------------------------------------------------ Total non-interest expense $5,976 $4,551 $1,425 ================================================
Salaries and employee benefits increased $228,000 over the nine months ended September 30, 1999. Fidelity announced on September 29, 2000, that Fidelity and former President and CEO M. Brian Davis could not come to resolution on an existing employment contract modification and that Davis would cease to serve in those roles effective September 29. In conjunction with this announcement, Fidelity recognized severance expense of approximately $527,000. The severance payments are subject to OTS and FDIC approval before they can be paid. Without the $527,000 charge, salaries would have decreased $299,000 from the prior year due to staff reductions completed during the nine months ended September 30, 2000. A portion of these savings result from the transition of affordable housing management to Pedcor for certain partnerships previously managed by Village Management Corporation, and the resulting reductions in staff. Last year, $1,215,000 was recognized as income on the reversal of a letter of credit valuation provision; there were no provisions or credits during the nine months ended September 30, 2000. This credit last year was offset partially by additional writedowns on affordable housing partnership investments totaling $627,000. Legal and professional fees increased by $200,000 to $492,000, primarily due to $125,000 in anticipated legal and professional expenses in connection with the defense of litigation occurring on a large multifamily loan that was paid off in 1998. After repaying its loan, the Borrower sued United alleging that United had agreed to make a second loan for another apartment development. The Company disputes the allegation and believes that, based on information available to it, that no material additional charges are expected as a result of this litigation. The remaining increase is associated with additional costs incurred for 14 workout activities with respect to various classified assets. Equipment expense decreased $27,000 from the prior year due to a decrease in depreciation and equipment maintenance expense. Data processing expense for the nine months ended September 30, 2000 decreased $72,000 from the same period last year due to the decrease in expenses connected with Y2K efforts. Deposit insurance decreased $33,000 from the prior year due to a decrease in average deposits of $10.8 million since September 30, 1999. Fidelity recorded its percentage share of losses for its investments in various affordable housing properties under the equity method of accounting in addition to any additional writedowns due to the performance of the properties. Fidelity's losses were $224,000 and $81,000 for the nine months ended September 30, 2000 and September 30, 1999, respectively. These writedowns are partially offset by tax credits received and recorded as reductions of income tax expense. Telephone expense increased $26,000 over last year due to switching telephone service providers and the data transmission enhancements associated with the new service. Directors fees decreased $76,000 for the nine months ended September 30, 2000 due to a reduction in monthly board fees paid to directors. Credit bureau expense increased $34,000 from the prior year due to an increase in consumer loan activity. In conjunction with the stock sale to Pedcor Holdings, LLC, intangible assets totaling $1.3 million were recorded. Amortization of these assets resulted in expense of $87,000 for the nine months ended September 30, 2000. Other operating expense increased $263,000 over last year, primarily due to $205,000 in adjustments to the values of several real estate properties to record them at their appraised values. An additional $100,000 for interest expense payable to the Internal Revenue Service (IRS) was recognized in connection with a recently completed examination, in which certain prior year deduction were disallowed, therefore reducing the amount of refund that Fidelity received two years ago. These deductions are expected by Fidelity to be taken in future years. Income Tax Benefit The income tax benefit was $1.3 million for the nine months ending September 30, 2000 compared to $261,000 in the same period last year, primarily due to a decrease in taxable income. Included in the tax benefit of $1.3 million for the nine months ending September 30, 2000 are tax credits of $290,000. These credits are received from Fidelity's investment in affordable housing properties and comprise a portion of the return on these investments. Fidelity also receives the tax benefit on its percentage of the operating losses for those projects. Some of the benefits associated with these tax credits are partially offset by reductions of the investment in the affordable housing properties, which are included in the above table under the caption "Loss on Investment". The effective tax rate for the nine months ended September 30, 2000, was 51.0%, due to the benefits accrued for the tax credits. Consideration of the need for a valuation allowance for the deferred tax asset was made at September 30, 2000 after projecting the reversal of the deferred items. These analyses were based on projected operating income in future years, action plans developed and partially implemented included in a newly developed business plan, cost reductions, and the planned sale of a portion of United's limited partnership interests. These analyses showed that it was more likely than not that all carryforwards would be utilized within the carryforward periods (federal and state) and therefore no valuation allowance was recorded. The analyses assume that Fidelity will execute its current business plan, sell approximately 25% of its limited partnership interests (reducing tax credits granted annually) and then achieve 5 to 10% growth in annual earnings thereafter. The level of earnings contemplated by these analyses, if achieved, will constitute, for the majority of the carry forward periods, earnings levels that are below other thrift holding companies included within Fidelity's peer group. The analyses used to help consider the need for a valuation allowance for the deferred tax asset are subject to certain risks and uncertainties that could impact the final determination regarding the amount of the valuation allowance. These risks include the failure to implement the newly developed business plan including cost reductions, or the failure to execute the planned sale of United's limited partnership interests. United should complete the sale of 25% of its limited partnerships during the fourth quarter of 2000. Financial Condition Total assets at September 30, 2000 decreased $3.1 million to $168.4 million from $171.5 million in December 1999. Average assets for the nine months ended September 30, 2000 decreased 8.4% from 1999 to $164.1 million. 15 Average interest-bearing liabilities at September 30, 2000 decreased $13.7 million as Fidelity used loan payoff proceeds to reduce borrowings and agent-acquired certificates of deposit, which represent a higher-cost source of funds for Fidelity. The decrease in total assets is primarily the result of loan payoffs, refinancing and payments received on commercial loans and the reduction in interest-bearing demand deposits due to the continued maturities and roll off of agent acquired certificates of deposit. According to the provisions of the Supervisory Agreement, Fidelity is unable to use agent-acquired certificates as a funding source. Loans The following table shows the composition of Fidelity's loan portfolio as of September 30, 2000 and December 31, 1999:
September 30, December 31, 2000 1999 - ---------------------------------------------------------------------------------------- Real estate mortgage loans First mortgage loans Conventional $ 48,437 $ 48,845 Construction 2,131 1,867 Commercial 7,399 8,576 Multi-family loans 3,668 3,629 Home equity loans 5,444 5,567 First mortgage real estate loans purchased 1,744 1,899 ----------------------------------- 68,823 70,383 Commercial loans, other than secured by real estate 2,899 4,154 Consumer loans 38,492 24,403 ----------------------------------- Total loans 110,214 98,940 Allowance for loan losses (2,051) (2,021) ----------------------------------- Net loans $108,163 $96,919 =================================== Total loans to total assets 65.5% 57.7% ===================================
Fidelity sells a portion of its current production of 1-4 family loans, recording the gain or loss and using the proceeds to fund new products. As a result, conventional real estate mortgage loans continue to decrease. Multi-family loans increased slightly over the prior year due to the conversion of multifamily construction loans to permanent loans. Fidelity continues to work with borrowers to find alternative refinancing opportunities for the remaining classified multifamily loans, commercial loans and letters of credit. Commercial real estate loans and commercial loans have continued to decline as a result of the Supervisory Agreement's restriction of new commercial lending. Refer to the "Other Restrictions" footnote to the financial statements for additional information. The focus of United's commercial lending department has been to develop action plans to minimize potential losses relating to its remaining classified commercial credits and its letter of credit exposure. 16 The increase in loans is primarily due to an increase in consumer loans of $14.1 million from December 31, 1999 to $38.5 million at September 30, 2000. Recent staff replacements to the consumer loan department in 1999 have enabled Fidelity to achieve strategies designed to increase the number of direct and indirect automobile loans financed. The level of growth in the consumer loan portfolio during the first nine months of 2000 is not expected to continue. Under the Supervisory Agreement, United's total consumer loans are limited to 30% of its total assets. Currently, consumer loans represent 23.7% of total assets. Fidelity'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. Non-Performing Loans Fidelity 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 initiated and the loan is re-classified 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 repaying the loan. At this point, management discontinues the accrual of interest and Fidelity would initiate the repossession or foreclosure process. Typically, when a loan reaches 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. The following table provides information on Fidelity's non-performing loans as of September 30, 2000 and December 31, 1999:
September 30, December 31, 2000 1999 ------------------------------------------------------------------------------------------- (Dollars in Thousands) Non-accrual loans Consumer $ 127 Commercial 623 Real estate mortgage $ 253 Multi-family 229 ------------------------------------- Total non-accrual loans 750 482 Restructured Consumer 75 75 Commercial 119 118 ------------------------------------- Total restructured loans 194 193 90 days or more past due and accruing Consumer 49 135 Commercial 24 313 ------------------------------------- Total 90 days or more past due and accruing 73 448 ------------------------------------- Total non-performing loans $1,017 $1,123 ===================================== Ratio of non-performing loans to total loans 0.92% 1.14% =====================================
Multi-family affordable housing loans, for which specific and general 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 multi-family loans to remain performing is in part due to general partner or other advances made 17 by Fidelity to support cash flow deficits incurred by the affordable housing projects. There is no assurance that general partner advances will not be necessary in the future to support further cash flow deficits, or that Fidelity will not have to extend funds in order to protect its collateral position with respect to the loans. The likelihood of Fidelity having to make additional advances should be reduced in future periods due to the guarantees provided by Pedcor as part of its stock purchase. Analysis of Allowance for Loan Losses and Letter of Credit Valuation Allowance Fidelity establishes its provision for loan losses and evaluates the adequacy of the allowance for loan losses based on management's evaluation of the performance of its loan and letter of credit portfolio. 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 present value of capitalized cash flows, 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 quarterly 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.
Classified Assets and Letters of Credit (in thousands) September 30, December 31, 2000 1999 ------------------------------- Classified assets $ 8,756 $ 8,991 Classified letters of credit 11,793 13,218 ------- ------- Total classified assets/letters of credit $20,549 $22,209 ======= =======
Classified assets and letters of credit of Fidelity totaled $20.5 million at September 30, 2000 compared to $22.2 million at December 31, 1999 and $40.7 million at June 30, 1999, a decrease of 7.7% and 49.6%, respectively. Classified assets and letters of credit were 167.3% and 214.0% of Fidelity's capital and reserves at September 30, 2000 and December 31, 1999, respectively. Classified assets and letters of credit were 71.8% and 85.8% of United's capital and reserves at September 30, 2000 and December 31, 1999, respectively. In addition to the classified assets and letters of credit, there were other assets and letters of credit totaling $18.8 million for which management was closely monitoring the borrowers' abilities to comply with payment terms. Impaired loans are those that management believes will not perform under the original loan terms. At September 30, 2000 and December 31, 1999, Fidelity had impaired loans totaling $7.7 million and $7.6 million respectively. The allowance for losses on such impaired loans totaled $1.0 million and $1.1 million, which are included in Fidelity's allowance for loan losses at September 30, 2000 and December 31, 1999, respectively. In addition, using similar guidelines for impaired loans, impaired letters of credit at September 30, 2000 and December 31, 1999 total $12.4 million. The valuation allowance on such impaired letters of credit totaled $1.2 million and is included in Fidelity's letter of credit valuation allowance at September 30, 2000 and December 31, 1999. Impaired loans do not include large groups of homogeneous loans that are collectively evaluated for impairment, such as, residential mortgage and consumer installment loans. 18 The following table sets forth loan charge-offs and recoveries by the type of loan and an analysis of the allowance for loan losses at September 30, 2000 and December 31, 1999:
Year Nine Months Ended Ended September 30, December 31, 2000 1999 - ----------------------------------------------------------------------------------------------- (dollars in thousands) Allowance for loan losses at beginning of period $ 2,021 $ 3,521 ---------------------------------------- Loan charge offs Real estate mortgage 80 Multi-family 354 2,631 Commercial 12 11 Consumer 282 235 ---------------------------------------- Total loan charge offs 728 2,877 ---------------------------------------- Loan recoveries Real estate mortgage Multi-family 154 3 Commercial 17 3 Consumer 37 26 ---------------------------------------- Total loan recoveries 208 32 ---------------------------------------- Net charge offs 520 2,845 Provision for loan losses 550 1,345 ---------------------------------------- Allowance for loan losses at end of period $ 2,051 $ 2,021 ======================================== Ratio of net charge offs to average loans outstanding during period (annualized) .65% 5.20% ======================================== Ratio of provision for loan losses to average loans outstanding during period (annualized) .69% 2.46% ======================================== Ratio of allowance for loan losses to total loans outstanding at year end 1.86% 2.04% ======================================== Average amount of loans outstanding for the period $107,196 $108,455 ======================================== Amount of loans outstanding at end of period $110,214 $98,940 ========================================
The allowance for loan losses was $2.1 million at September 30, 2000 compared to $2.0 million at December 31, 1999. Net loan charge-offs were $520,000 or 0.65% of average loans (annualized) for the nine months ended September 30, 2000 compared to $2.8 million or 5.20% of average loans for the six months ended December 31, 1999. During the nine months ended September 30, 2000, Fidelity charged-off $354,000 of multifamily loans that 19 reserves were previously provided for. Consumer loan charge-offs of $282,000, related primarily to loans originated prior to 1999. During the six months ended December 31, 1999, Fidelity reevaluated some of the loans that it had previously established reserves for in fiscal 1998 and charged off $2.8 million of these loans. In addition, it was determined a $3.2 million loan originated for the financing of a hotel was not meeting its cash flow projections, and thus was classified. This substandard classification resulted in an approximate $470,000 increase in the allowance for loan losses. Based on recent loss experience, United increased its allowance for consumer loan losses to target between 1.25% and 1.5% of consumer loans outstanding. Multi-family letters of credit, an off-balance sheet item, carry the same risk characteristics as conventional loans and totaled $44.4 million at September 30, 2000 and $44.5 million at December 31, 1999. Specific allocations for letters of credit totaled 7.7% of outstanding letters of credit at September 30, 2000 compared to 5.5% at December 31, 1999. Management is not currently aware of any additional letters of credit that are expected to be called or funded. Management considers the allowance for loan losses and letter of credit valuation reserve adequate to meet losses inherent in the loan and letter of credit portfolios as of September 30, 2000. Allocation of Allowance for Loan Losses The allocation for loan losses and the percentage of loans within each category to total loans at September 30, 2000 and at December 31, 1999 are as follows: Allocation of Amount September 30, December 31, 2000 1999 - ------------------------------------------------------------------------ (dollars in thousands) Real Estate Mortgage: Conventional and home equity $ 102 $ 103 Multi-family 689 482 Consumer 595 496 Commercial 665 940 ---------------------------------- Total $2,051 $2,021 ================================== Percentage of Loans to Total Loans September 30, December 31, 2000 1999 - ------------------------------------------------------------------------ Real Estate Mortgage Conventional and home equity 52.5% 58.8% Multi-family 3.3 3.7 Consumer 34.9 24.7 Commercial 9.3 12.8 ---------------------------------- Total 100.0% 100.0% ================================== Investment Securities United'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. At September 30, 2000, the investment portfolio represented 12.8% of Fidelity's assets, compared to 14.2% at December 31, 1999, and is managed in a manner designed to meet the Board's investment policy objectives. 20 During fiscal 1999 due to continued reductions in the loan portfolio, excess liquidity was reinvested in lower risk investment securities. The primary objectives, in order of priority, are to further the safety and soundness of Fidelity, to provide the liquidity necessary to meet day to day, cyclical, and long-term changes in the mix of Fidelity's assets and liabilities and to provide for diversification of risk and management of interest rate and economic risk. At September 30, 2000, the entire investment portfolio was classified as available for sale. The net unrealized loss at September 30, 2000, which is included as a component of stockholders' equity, was $700,000 and was comprised of gross unrealized losses of $1,159,000 and a tax benefit of $459,000. The decrease in the unrealized loss was caused primarily the portfolio also declined by market interest rate changes during the period and the decline in the portfolio. 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 United's available-for-sale investment portfolio as of September 30, 2000 and December 31, 1999:
September 30, December 31, 2000 1999 - ----------------------------------------------------------------------------------------------------------- (dollars in thousands) Federal Home Loan Mortgage Corporation mortgage-backed securities $ 846 $ 1,043 Federal National Mortgage Association mortgage-backed securities 1,144 1,377 Government National Mortgage Association mortgage-backed securities 19,568 21,885 ------------------------------------ Total securities available for sale $21,558 $24,305 ====================================
For the nine months ended September 30, 2000, United's investment securities portfolio decreased by $2.7 million to $21.6 million compared to $24.3 million at December 31, 1999. The current year's decrease is the result of maturities and paydowns received during the nine months. United 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. Funding Sources Deposits 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 ($90,000 or more), and variable rate IRA certificates. Average deposits decreased by $4.0 million during the first nine months of 2000. An increase in deposits came primarily in the area of core certificates of deposit, for which the average balance increased $7.0 million but was offset by a decrease in NOW accounts and agent-acquired certificates of deposit of $2.0 million and $7.8 million, respectively. According to the provisions of the Supervisory Agreement, Fidelity is unable to use agent-acquired certificates as a funding source. Existing 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 these agent acquired certificates mature, United has been successful in replacing the majority of these deposits with core certificate of deposit products. Due to the rise in interest rates during this time period, the average rate on total deposits has increased 21 basis points since December 31, 1999 to 5.06% at September 30, 2000. 21 The following table sets forth the average balances of and the average rate paid on deposits by deposit category for the nine months ended September 30, 2000 and the six months ended December 31, 1999.
September 30, December 31, 2000 1999 Average Deposits Amount Rate Amount Rate - --------------------------------------------------------------------------------------------------- (dollars in thousands) Demand $ 5,491 $ 6,097 NOW accounts 17,066 3.31% 19,107 3.39% Money market accounts 2,137 1.99 2,545 2.03 Savings accounts 4,437 2.08 4,657 2.26 Certificates of deposit 85,373 5.86 78,329 5.60 Agent-acquired certificates of deposit 10,380 5.98 18,147 5.88 --------------- --------------- Totals $124,884 5.06 $128,882 4.85% =============== ===============
Borrowings Fidelity's long-term debt increased $1.2 million for the first nine months of 2000 primarily due to a new $2.0 million FHLB advance for a 10 year term obtained in the second quarter of 2000, which was offset partially by paydowns on other FHLB advances secured by specific single-family loans. Alternate funding sources for United are provided by loan sales, loan payoffs, Federal Home Loan Bank advances as well as through retail deposits. In the following table, all notes, except for the Federal Home Loan Bank advances, are debt of the Parent Company both secured and unsecured, and total $14.4 million. 22 The following table summarizes Fidelity's borrowings as of September 30, 2000 and December 31, 1999.
September 30, December 31, (dollars in thousands) 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------- Note payable, 8.49% adjusted annually, payable $8 per month, including interest, due September 2010, secured by specific multi-family mortgages $ 977 985 Note payable, 8.49% adjusted annually, payable $12 per month, including interest, due September 2010, secured by specific multi-family mortgages 1,497 1,510 Note payable, 9.50%, interest paid quarterly, due June 2001, secured by United stock 2,000 2,000 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, 10.00%, 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 6.49% and 6.59% at September 30, 2000 and December 31, 1999) 10,246 9,039 -------------------------------------- Total long-term debt $24,690 $23,504 ======================================
On September 30, 2000 a modification agreement was entered into, to be effective October 1, 2000, for the above $2.0 million note payable. Fidelity reduced the principal balance by $500,000 in return for the extension of the maturity date from June 21, 2001 to June 21, 2003. It was also agreed that the annual interest rate would increase to 10.50%. As noted in the liquidity section, Fidelity is in the process of negotiating agreements to extend maturities of certain debt obligations. Capital Resources Fidelity's stockholders' equity increased $3.1 to $8.5 million at September 30, 2000, compared to $5.4 million at December 31, 1999. The change in stockholders' equity was accounted for by a net loss of $1.2 million, a decrease in the net unrealized loss on securities available for sale of $75,000 and the sale of stock to Pedcor for $3.0 million (at $3.00 per share) and the issuance of additional $1.3 million in stock for cash flow deficit guarantees and property management services to be provided by Pedcor. At September 30, 2000, actual and required minimum levels (to be adequately capitalized) of regulatory capital for United were as follows:
(Dollars in Thousands) Actual Required Amount Percent Amount Percent Excess -------------------------------------------------------------------------------- Core(*) $13,071 8.14% $ 6,423 4.0% $ 6,648 Tangible(*) $13,071 8.14% $ 2,409 1.5% $10,662 Risk-based $17,616 13.28% $10,608 8.0% $ 7,008
(*) to adjusted total assets 23 Total capital for United 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. United's capital ratios have exceeded each of these levels. The leverage ratio was 8.1% at September 30, 2000 and 6.8% for December 31, 1999, tier I capital to risk-weighted assets was 9.9% and 9.1% and total capital to risk-weighted assets was 13.3% and 14.3% at September 30, 2000 and December 31, 1999, respectively. Book value per share, including unrealized losses on investment securities, increased to $1.85 at September 30, 2000, compared to $1.72 at December 31, 2000. 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 September 30, 2000 and December 31, 1999, the Bank is categorized as well capitalized and met all capital adequacy requirements at those dates. Liquidity Fidelity's principal source of income and funds is dividends from United and is not subject to any regulatory restrictions on the payment of dividends to its stockholders. However, United is restricted from paying any dividends to Fidelity without prior approval of the OTS. As previously discussed, the Pedcor transaction added an additional $3.0 million in cash at the holding company level. In addition, for 3 years following the approval of the stock purchase agreement, approved on May 19, 2000, Pedcor is entitled, but not required, under the terms of the Stock Purchase Agreement to purchase additional shares from Fidelity in an aggregate amount up to $5.0 million. For shares purchased in the first year following the closing, Pedcor will pay $3.00 per share. For shares purchased in the second and third year following the closing, Pedcor will pay the fair market value of the shares. Absent potential sources of liquidity available to the holding company including the potential issuance of additional stock to Pedcor, potential execution of additional debt or equity financing, and dividends from United (with OTS approval), the holding company may deplete its available cash in April 2001. In addition to the potential exercise of Pedcor's option to purchase up to $5.0 million in additional stock, the Board of Directors is considering term for a common stock rights offering to existing shareholders in the first half of 2001, and is negotiating agreements to extend maturities on certain debt obligations coming due in 2001 and 2002. As noted in the Borrowing section, Fidelity has been partially successful on one of the debt obligations and is pursuing the extension of certain remaining debt obligations. These actions, in the aggregate, should provide sufficient cash to meet projected cash flow shortfalls, if successful. United 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 four percent of net withdrawable savings plus borrowings payable upon demand or due within one year or less. As of September 30, 2000 and December 31, 1999, United's liquidity ratios were 17.4% and 31.4%. United's significant increase in liquidity at December 31, 1999 was the result of United's cash contingency plan for Year 2000. As a result, United has reduced the liquidity during the first nine months of 2000. Management believes that this level of liquidity is sufficient to meet any anticipated requirements for United'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, United is authorized to borrow money from the FHLB and other sources as needed. United decreased its borrowings from the FHLB from $10.7 million at September 30, 1999, to $10.2 million at September 30, 2000. Fidelity 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 also decreased. 24 Item 3 - Asset/Liability Management--Quantitative and Qualitative Disclosures about Market Risk Fidelity 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 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 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 voluntarily submits a CMR quarterly to the OTS. 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, 2000 and December 31, 1999, is an analysis of United'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 300 basis points. At June 30, 2000 and December 31, 1999, 2% of the present value of United's assets was approximately $3.2 million and $3.4 million. Because the interest rate risk of a 200 basis point increase or decrease in market rates (using the larger number of a plus or minus 200 basis point shock) was $3.2 million at June 30, 2000 and $2.9 million at December 31, 1999, United would not have been required to make a deduction from its total capital available to calculate its risk based capital requirement. The increase in interest rate risk in the event of increased rates, from December 31, 1999 to June 30, 2000 is due to interest rate changes and a change in United's balance sheet mix.
Interest Rate Risk as of June 30, 2000 -------------------------------------- Net Portfolio Value NPV as Percent of Present (in thousands) Value of Assets ----------------------------------------------------------------------------------- Change Dollar Dollar Percentage in Rates Amount Change Change NPV Ratio Change - ------------------------------------------------------------------------------------------------------- + 300 bp $13,139 $(4,858) (27)% 8.80% - 259 bp + 200 bp 14,840 (3,157) (18) 9.75 - 165 bp + 100 bp 16,511 (1,486) (8) 10.64 - 75 bp 0 bp 17,997 11.39 - 100 bp 18,921 924 5 11.80 41 bp - 200 bp 18,766 769 4 11.62 22 bp - 300 bp 18,625 628 3 11.44 5 bp
25
Interest Rate Risk as of December 31, 1999 ------------------------------------------ Net Portfolio Value NPV as Percent of Present (in thousands) Value of Assets ----------------------------------------------------------------------------------- Change Dollar Dollar Percentage in Rates Amount Change Change NPV Change - ------------------------------------------------------------------------------------------------------- +300 bp $10,879 $(4,685) (30)% 6.75% - 242 bp +200 bp 12,622 (2,942) (19) 7.69 - 148 bp +100 bp 14,256 (1,308) (8) 8.53 - 64 bp 0 bp 15,564 9.17 -100 bp 16,148 585 4 9.41 24 bp -200 bp 16,023 459 3 9.27 10 bp -300 bp 16,010 446 3 9.19 2 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 above amounts. 26 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 and Use of Proceeds: ------------------------------------------ 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. A Form 8-K was filed on October 5, 2000. On September 29, 2000, Fidelity announced that President and CEO M. Brian Davis would cease to serve in those roles, effective September 29, 2000. 27 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: NOVEMBER 14, 2000 By: /s/ BRUCE A. CORDINGLEY ------------------- -------------------------------- Bruce A. Cordingley Executive Committee Chairman (Acting Principal Executive Officer) By: /s/ DONALD R. NEEL -------------------------------- Donald R. Neel, Executive Vice President, CFO and Treasurer (Principal Financial Officer) 28 Exhibit Index Reg. S-K Exhibit No. Description of Exhibit Page - ---------------------------------------------------------------------------- 27 Financial Data Schedule 30 29 EX-27 2 0002.txt
9 This schedule contains summary financial information extracted from Fidelity Federal Bancorp Consolidated Balance Sheet as of 9/30/00 and Consolidated Income Statement for the Nine Months Ended 9/30/00 and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 1600 16713 0 0 21558 0 0 110214 2051 168354 126927 0 8196 24690 0 0 4608 3933 168354 6987 1158 850 8995 4726 6225 2220 550 0 5976 (2501) (1226) 0 0 (1226) (0.32) (0.32) 2.51 750 73 194 0 2021 728 208 2051 1058 0 993
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