-----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, T6IqD7bSkzsOCDW22LQyGubApWqhx9e/xty5+FBxEaNbwpdwvWInQ9qms+HXnspN wWVUECfMpWsOuzHIL0pFKA== 0000926274-01-000128.txt : 20010307 0000926274-01-000128.hdr.sgml : 20010307 ACCESSION NUMBER: 0000926274-01-000128 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20010302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIDELITY FEDERAL BANCORP CENTRAL INDEX KEY: 0000910492 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 351894432 STATE OF INCORPORATION: IN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-22880 FILM NUMBER: 1560760 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/A 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended June 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 August 7, 2000, there were 4,607,659 shares of the Registrant's common stock, $1 stated value, issued and outstanding. Exhibit Index is on page 30. 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..... 24-26 PART II - OTHER INFORMATION.............................................. 27 SIGNATURES............................................................... 29 EXHIBIT INDEX............................................................ 30 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)
June 30, December 31, 2000 1999 --------- ------------ Assets Cash and due from banks $ 1,455 $ 8,003 Interest-bearing demand deposits 7,789 22,911 --------- --------- Cash and cash equivalents 9,244 30,914 Investment securities available for sale 22,615 24,305 Loans, net of allowance for loan losses of $1,812 and $2,021 108,282 96,919 Premises and equipment 5,459 5,727 Federal Home Loan Bank of Indianapolis stock 3,920 3,920 Deferred income tax receivable 5,610 5,372 Interest receivable and other assets 5,719 4,300 --------- --------- Total assets $ 160,849 $ 171,457 ========= ========= Liabilities Deposits Non-interest bearing $ 5,634 $ 6,593 Interest-bearing 113,726 128,423 --------- --------- Total deposits 119,360 135,016 Short-term borrowings 97 89 Long-term debt 24,953 23,504 Advances by borrowers for taxes and insurance 368 409 Valuation allowance for letters of credit 5,802 5,787 Other liabilities 750 1,225 --------- --------- Total liabilities 151,330 166,030 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 13,674 10,869 Stock warrants 11 11 Accumulated deficit (8,126) (7,825) Accumulated other comprehensive loss (648) (775) --------- --------- Total stockholders' equity 9,519 5,427 --------- --------- Total liabilities and stockholders' equity $ 160,849 $ 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 Six Months Ended June 30, June 30, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Interest Income Loans receivable $ 2,412 $ 2,443 $ 4,602 $ 5,166 Investment securities - taxable 385 426 786 684 Deposits with financial institutions 150 192 454 482 Other dividend income 78 78 156 170 ----------- ----------- ----------- ----------- Total interest income 3,025 3,139 5,998 6,502 ----------- ----------- ----------- ----------- Interest Expense Deposits 1,508 1,658 3,117 3,475 Short-term borrowings 1 1 Long-term debt 490 533 977 1,081 ----------- ----------- ----------- ----------- Total interest expense 1,999 2,192 4,094 4,556 ----------- ----------- ----------- ----------- Net interest income 1,026 947 1,904 1,946 Provision (adjustment) for loan losses 100 116 175 (288) ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 926 831 1,729 2,234 ----------- ----------- ----------- ----------- Non-interest income Fee income-apartment management 44 46 88 100 Service charges on deposit accounts 63 100 140 204 Net gains on loan sales 6 31 13 120 Letter of credit fees 121 146 266 291 Real estate investment banking fees 15 5 32 21 Agent fee income 39 -- 46 7 Title fee income 6 9 12 23 Servicing fees on loans sold 27 27 55 48 Release fees on multifamily loans 10 20 12 30 Other income 45 75 146 185 ----------- ----------- ----------- ----------- Total non-interest income 376 459 810 1,029 ----------- ----------- ----------- ----------- Non-interest expense Salaries and employee benefits 782 797 1,545 1,663 Net occupancy expense 92 101 184 185 Equipment expense 64 81 132 149 Data processing expense 82 106 166 211 Deposit insurance expense 65 65 124 137 Legal and professional fees 98 115 232 202 Advertising 53 53 83 100 Letter of credit valuation provision (750) (715) Valuation allowance - affordable housing investments 21 421 41 504 Other expense 422 385 843 813 ----------- ----------- ----------- ----------- Total non-interest expense 1,679 1,374 3,350 3,249 ----------- ----------- ----------- ----------- Income (loss) before income tax (377) (84) (811) 15 Income tax benefit (244) (137) (510) (173) ----------- ----------- ----------- ----------- Net Income (loss) $ (133) $ 53 $ (301) $ 188 =========== =========== =========== =========== Per share: Basic earnings (loss) per share $ (0.04) $ 0.02 $ (0.09) $ 0.06 Diluted earnings (loss) per share (0.04) 0.02 (0.09) 0.06 Average common and common equivalent shares outstanding 3,853,595 3,147,662 3,500,629 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)
Six Months Ended June 30, 2000 1999 ------- ------- Beginning Balances $ 5,427 $ 8,036 Comprehensive income: Net income (loss) (301) 188 Other comprehensive income net of tax-- Unrealized gain (loss) on securities 127 (410) ------- ------- Comprehensive income (174) (222) Issuance of stock 4,266 ------- ------- Balances, June 30 $ 9,519 $ 7,814 ======= =======
See notes to condensed consolidated financial statements 5 Fidelity Federal Bancorp and Subsidiaries Condensed Consolidated Statement of Cash Flows (Unaudited)
Six months ended June 30 2000 1999 -------- -------- Operating Activities Net cash used by operating activities (876) (45) Investing Activities Purchases of securities available for sale (17,196) Proceeds from maturities of securities available for sale 1,868 2,283 Net change in loans (11,509) 22,595 Purchases of premises and equipment (21) (195) Proceeds from sale of premises and equipment 108 7 -------- -------- Net cash provided (used) by investing activities (9,554) 7,494 Financing Activities Net change in: Noninterest-bearing, interest-bearing demand and savings deposits (2,424) (1,689) Certificates of deposit (13,232) (20,362) Short-term borrowings 8 (7) Repayment of long-term debt 1,449 936 Issuance of stock 3,000 Net change in advances by borrowers for taxes and insurance (41) (20) -------- -------- Net cash used by financing activities (11,240) (21,142) Net change in Cash and Cash Equivalents (21,670) (13,693) Cash and Cash Equivalents, beginning of period 30,914 29,960 -------- -------- Cash and Cash Equivalents, end of period $ 9,244 $ 16,267 ======== ======== Additional Cash Flows and Supplementary information Interest paid $ 4,165 $ 4,601 Stock issued in exchange for partnership operating cash flow deficit guarantees and management services 1,266
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 six months ended June 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 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 June 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 June 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 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. 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 holding interests in real estate housing, and is currently inactive. Village Securities Corporation is also currently inactive. 7 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 and managing 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 has not provided these type of services for the past two years and is currently not anticipating any new activity in the near future. Another subsidiary of United, Village Insurance Corporation, receives fee income for credit life and accident health insurance sales. 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, United must, among other things, take other specified actions within specified time frames. These actions include, among others; 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 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 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 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 and credit analyst; refinancing or extending classified or criticized commercial loans 8 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 also developed a plan to reduce employee turnover, build an experienced staff, and provide for management succession. Management of United has taken or is refraining from taking, as applicable, the actions requested by the OTS and at June 30, 2000, was in compliance with the conditions of its Supervisory Agreement, except for the following: meeting December 31, 1999 capital targets and meeting its target level of classified assets to core capital plus the allowance for loan loss of 50% or less by December 31, 1999. Total classified (substandard and doubtful) assets declined by approximately $14.6 million from $26.3 million at September 30, 1998 to $11.7 million at June 30, 2000. However, United was unable to meet the 50% target using post-examination December 31, 1999, and June 30, 2000 regulatory capital and Thrift Financial Report classified assets. The Board and management are continuing to work strenuously toward this target. o Capital Infusion 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. o Segment Information Fidelity operates principally in two industries, banking and real estate development and management. 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 is or was involved in various aspects of developing, building, renting and managing affordable housing units. Banking revenue consists primarily of interest and fee income, while real estate development and management fee income consists primarily of real estate management, investment banking, development and other fees. 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 development and management activities conducted by Fidelity are not asset intensive.
Three months ended Real Estate June 30, 2000 Banking Management Eliminations Total - ----------------------------------------------------------------------------------------------------------------- Interest income $3,025 $ 2 $ (2) $ 3,025 Other income 321 62 (7) 376 Interest expense 1,999 2 (2) 1,999 Other expense 1,563 123 (7) 1,679 Provision (adjustment) for loan losses 517 (417) - 100 Income (loss) before tax (732) 355 - (377) Income tax expense (benefit) (361) 117 - (244) Total assets 161,457 2,827 (3,435) 160,849 Capital expenditures 7 - - 7 Depreciation and amortization 87 2 - 89 Three months ended Real Estate June 30, 1999 Banking Management Eliminations Total - ---------------------------------------------------------------------------------------------------------------- Interest income $3,131 $ 2 $ 6 $3,139 Other income 398 71 (10) 459 Interest expense 2,184 2 6 2,192 Other expense 825 559 (10) 1,374 Provision (adjustment) for loan losses (64) 180 - 116 Income (loss) before tax 583 (667) - (84) Income tax expense (benefit) 152 (289) - (137) Total assets 172,859 2,975 (3,581) 172,253 Capital expenditures 132 3 - 135 Depreciation and amortization 96 3 - 99 Six months ended Real Estate June 30, 2000 Banking Management Eliminations Total - --------------------------------------------------------------------------------------------------------------------------- Interest income $5,998 $ 4 $ (4) $ 5,998 Other income 697 130 (17) 810 Interest expense 4,094 4 (4) 4,094 Other expense 3,116 252 (17) 3,351 Provision (adjustment) for loan losses 592 (417) - 175 Income (loss) before tax (1,106) 295 - (811) Income tax expense (benefit) (579) 69 - (510) Total assets 161,457 2,827 (3,435) 160,849 Capital expenditures 21 - - 21 Depreciation and amortization 177 4 - 181 Six months ended Real Estate June 31, 1999 Banking Management Eliminations Total - --------------------------------------------------------------------------------------------------------------------------- Interest income $6,502 $ 3 $ (3) $6,502 Other income 893 156 (20) 1,029 Interest expense 4,548 11 (3) 4,556 Other expense 2,580 689 (20) 3,249 Provision (adjustment) for loan losses (604) 316 - (288) Income (loss) before tax 872 (857) - 15 Income tax expense (benefit) 216 (389) - (173) Total assets 172,859 2,975 (3,581) 172,253 Capital expenditures 192 3 - 195 Depreciation and amortization 193 6 - 199
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 June 30, 2000 was $133,000, compared to net income of $53,000 for the same period last year. Basic and diluted net loss per share was $.04 per share for the three months ended June 30, 2000, compared to net income of $0.02 per share in 1999. The net loss for the six months ended June 30, 2000 was $301,000 compared to net income of $188,000 for the same period last year. Basic and diluted net loss per share was $0.09 per share for the six months ended June 30, 2000, compared to net income of $0.06 per share in 1999. Interest income decreased $504,000 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 $239,000 for the six months ended June 30, 2000. Interest expense decreased approximately $463,000 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 $10.6 million from December 31, 1999 to $160.9 million at June 30, 2000. Non-interest income for the six months ended June 30, 2000, decreased $219,000 from the six months ended June 30, 1999 primarily due to a decrease in mortgage loan origination volume and service charges collected on deposit accounts. Non-interest expense increased $101,000 to $3.4 million due primarily to the prior year's letter of credit valuation provision of ($715,000), and a decrease in the valuation allowance for affordable housing investments of $463,000. A reduction in total headcount resulted in a decrease in salaries and employee benefits of $118,000 for the six months ended June 30, 2000 compared to the prior period, 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. The net interest margin increased during the six month period to 2.58% from 2.30% a year ago. Despite the $28.2 million dollar decrease in average earning assets for the six months ended June 30, 2000, net interest income decreased $42,000 to $1,904,000 for the six months ended June 30, 2000. For the quarter ended June 30, 2000 net interest income increased $79,000 over the quarter ended June 30, 1999. 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 real estate mortgage loans have decreased $6.6 million, resulting in a decrease of $240,000 in interest income. Average multifamily and commercial real estate loans also decreased $15.2 million due to continued workout efforts, resulting in a decrease of interest income of $438,000. Certificates of deposit and borrowings partially offset this reduction in assets with a decrease of $10.9 million in certificates and $3.5 million in borrowings. This resulted in decreased interest expense, of $310,000 and $105,000, 11 respectively. Interest income for the six months ended June 30, 2000 was $6.0 million compared to $6.5 million for the six months ended June 30, 1999, a decrease of $500,000 or about 7.7%. Interest expense for the six months ended June 30, 2000 was $4.1 million compared to $4.6 million for the six months ended June 30, 1999, a decrease of $500,000 or 10.9%. These decreases were partially offset by a $6.2 million increase in average consumer loans, resulting in an increase of interest income of $239,000. 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 six months ended June 30, 2000 came despite the Supervisory Agreement between United and the OTS, and the resulting lending restrictions. 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 six months ending June 30, 2000 was $175,000 compared to a credit of $288,000 in the prior year, an increase of $463,000. During the six months ended June 30, 1999 Fidelity reduced its allowance for loan losses and letters of credit valuation reserve due to full pay-offs on large, impaired loans that Fidelity had previously provided reserves for. The current quarter and six months provision for loan losses was primarily associated with the consumer loan portfolio due to losses on loans originated prior to January 1999. The ratio of allowance for loan losses to non performing loans was 139.6% at June 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 June 30, 2000, was $376,000 compared to $459,000 for the same period in 1999, a decrease of $83,000. Non-interest income for the six months ended June 30, 2000, was $810,000 compared to $1,029,000 for the same period in 1999, a decrease of $219,000. 12 Non-interest income - ------------------- (in thousands)
Six Months Ended June 30, Increase 2000 1999 (Decrease) Fee income-apartment management $ 88 $ 100 $(12) Service charges on deposit accounts 140 204 (64) Gain on sale of real estate loans 13 120 (107) Gain on sale of fixed assets 13 13 Letter of credit fees 266 291 (25) Servicing fees on loans sold 55 48 7 Release fees on multifamily loans 12 30 (18) Real estate investment banking fees 32 21 11 Agent fee income 46 7 39 Title fee income 12 23 (11) Rate cap fee 10 21 (11) Reborrowing fee 12 50 (38) Other 111 114 (3) ------ ------ ------- Total non-interest income $ 810 $1,029 $ (219) ====== ====== =======
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 six months ended June 30, 2000 decreased approximately $12,000 due to a reduction in the rate charged for apartment management. The stock purchase agreement approved by 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 $64,000 for the six months ended June 30, 2000, compared to the prior fiscal year due to the collectability of previously accrued fee income. Gains on sale of real estate loans decreased $107,000 to $13,000 during the six months ending June 30, 2000 due to a volume-driven decrease in mortgage loan sales. Gain on sale of fixed assets increased $13,000 over the six months ending June 30, 1999 due to Fidelity selling equipment no longer in use. Letter of credit fees decreased $25,000 from the prior year due to a decrease in outstanding letters of credit and collectability on certain letters of credit. Release fees on multifamily loans decreased $18,000 due to the decrease in the number of units sold during the first six months of 2000 compared to last year at this time. Agent fee income increased $39,000 over the prior year due to increased activity in the consumer indirect lending area. Title fee income decreased $11,000 compared to the six months ended June 30, 1999. The decrease is primarily due to a decrease in loan volume compared to last year. Reborrowing fees decreased $38,000 from last year due to Fidelity's continuation of exiting the affordable housing and multifamily segment. Fees associated with this segment will continue to decrease each year. Non-Interest Expense Non-interest expense increased $305,000 for the three months ended June 30, 2000, compared to the three months ended June 30, 1999. This increase was associated with income recognition of $300,000 in provisions for letters of credit, and partnership investment valuations June 30, 1999. Non-interest expense increased $102,000 for the six months ended June 30, 2000, compared to the six months ended June 30, 1999. 13 The following table summarizes non-interest expense for the six months ending June 30, 1999 and 2000: Six Months Ended June 30 ------------------------------------ Increase 2000 1999 (Decrease) ---- ---- ---------- Salaries and employee benefits $1,545 $1,663 $ (118) Letter of credit valuation provision (715) 715 Write down of affordable housing Partnership investments 41 504 (463) Legal and professional 232 202 30 Occupancy expense 184 185 (1) Equipment expense 132 149 (17) Data processing expense 166 211 (45) Advertising 83 100 (17) Deposit insurance 124 137 (13) Correspondent bank charges 78 77 1 Printing and supplies 43 52 (9) Loss on investment 146 122 24 Telephone 61 32 29 Postage 51 45 6 Directors fees 18 67 (49) Credit Bureau expense 28 6 22 Amortization of intangible assets 35 35 Travel and lodging 16 10 6 Other operating expense 367 402 (35) ------------------------------------ Total non-interest expense $3,350 $3,249 $101 ==================================== Salaries and employee benefits decreased $118,000 due to staff reductions completed during the six months ended June 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. Last year, $715,000 of income was recognized as a letter of credit valuation provision compared to none during the six months ended June 30, 2000. This credit last year was offset partially by additional writedowns on affordable housing partnership investments totaling $504,000. Legal and professional fees increased by $30,000 to $232,000, primarily due to additional costs incurred for workout activities with respect to various classified assets. Equipment expense decreased $17,000 from the prior year due to a decrease in depreciation and equipment maintenance expense. Data processing expense for the six months ended June 30, 2000 decreased $46,000 from the same period last year due to the discontinuance of expenses connected with Y2K efforts. Advertising expense decreased $17,000 from the prior year due to a decrease in television advertising compared to the prior year. Deposit insurance decreased $13,000 from the prior year due to a decrease of $9.2 million in deposits since June 30, 1999. Fidelity recorded its percentage share of losses, for its investments in various affordable housing properties under the equity method of accounting. Fidelity's losses were $146,000 and $122,000 for the six months ended June 30, 2000 and June 30, 1999, respectively. These writedowns are offset by tax credits received and recorded as reductions of income tax expense. Telephone expense increased $29,000 over last year due to the timing of invoices associated with switching telephone service providers and the data transmission enhancements associated with the new service. Directors fees decreased $49,000 for the six months ended June 30, 2000 due to a 14 reduction in monthly board fees paid to directors. Credit bureau expense increased $22,000 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 created. Amortization of these assets resulted in expense of $35,000 for the six months ended June 30, 2000 compared to none last year. Other operating expense decreased from 1999 by $35,000. Management continues to monitor expenses closely. Income Tax Benefit The income tax benefit was $510,000 for the six months ending June 30, 2000 compared to $173,000 in the same period last year, primarily due to a decrease in taxable income. Included in the tax benefit of $510,000 for the six months ending June 30, 2000 are tax credits of $193,000. 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 of 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 six months ended June 30, 2000, was 62.9%, 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 June 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, planned sale of a portion of United's limited partnership interests and the completion of Fidelity's transaction with Pedcor Holdings, LLC on May 19, 2000. Please refer to the footnote, Capital Infusion, for further details regarding the Pedcor transaction. 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 approximately 50% of the initiatives included within its current business plan, sell approximately 50% 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 still 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. Fidelity is currently working towards the goals used in its projections, however 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. Financial Condition Total assets at June 30, 2000 decreased $10.6 million to $160.8 million from $171.5 million in December 1999. Average assets for the six months ended June 30, 2000 decreased 14.2% from 1999 to $164.3 million. Interest-bearing liabilities at June 30, 2000 decreased $13.8 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, multifamily and fixed 1-4 family mortgage loans. Fidelity has continued to sell a portion of current production of fixed 1-4 family mortgages to investors in the secondary market, therefore the mortgage loan portfolio continues to decline. 15 Loans The following table shows the composition of Fidelity's loan portfolio as of June 30, 2000 and December 31, 1999:
June December 2000 1999 - -------------------------------------------------------------------------------------------- Real estate mortgage loans First mortgage loans Conventional $ 48,815 $ 48,845 Construction 2,158 1,867 Commercial 7,559 8,576 Multi-family loans 3,648 3,629 Home equity loans 5,942 5,567 First mortgage real estate loans purchased 1,749 1,899 -------------------------------- 69,871 70,383 Commercial loans, other than secured by real estate 2,992 4,154 Consumer loans 37,231 24,403 -------------------------------- Total loans 110,094 98,940 Allowance for loan losses (1,812) (2,021) -------------------------------- Net loans $108,282 $96,919 ================================ Total assets $160,849 $171,457 ================================ Total loans to total assets 68.4% 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 pursue refinancing opportunities for available outlets 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 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. The increase in loans is primarily due to an increase in consumer loans of $12.8 million from December 31, 1999 to $37.2 million at June 30, 2000. Recent staff replacements to the consumer loan department in late 1999 have contributed to an increase in the automobile loans financed. The level of growth in the consumer loan portfolio during the first six months of 2000 is not expected to be repeated in the near future. Under the Supervisory Agreement, United's consumer loan growth is limited to 25% of its total assets. United is expected to increase sales of its loans to another financial institution, in which automobile loans are originated on their behalf and United earns a fee from these transactions. This process was started late in the second quarter of 2000. 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. 16 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 June 30, 2000 and December 31, 1999:
June 30, December 31, 2000 1999 ------------------------------------------------------------------------------------------ (Dollars in Thousands) Non-accrual loans Consumer $ 127 Commercial 149 Real estate mortgage $ 253 Multi-family 478 229 Total non-accrual loans 754 482 Restructured Consumer 106 75 Commercial 119 118 Total restructured loans 225 193 90 days or more past due and accruing Consumer 35 135 Commercial 284 313 ----------------------------------- Total 90 days or more past due and accruing 319 448 ----------------------------------- Total non-performing loans $1,298 $1,123 =================================== Ratio of non-performing loans to total loans 1.18% 1.14% =================================== Total loans 110,094 98,940 ===================================
Non-performing loans were 1.18% of total loans at June 30, 2000, as compared to 1.14% of total loans at December 31, 1999 and consisted primarily of commercial, mortgage and consumer loans. The increase in non-performing loans is due to an increase in multifamily and consumer loans. 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 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 quarantees provided by Pedcor as part of its stock purchase. 17 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 monthly basis and is designed to ensure that all relevant matters affecting collectibility will consistently be identified in a detailed review and that the outcome of the review will be considered in a disciplined manner by management in determining the necessary allowances and related provisions. The amounts actually reported in each period will vary with the outcome of this detailed review. Classified Assets and Letters of Credit (In Thousands) June 30, December 31, 2000 1999 Classified assets $8,504 $8,991 Classified letters of credit 11,964 13,218 ------- ------- Total classified assets/letters of credit $20,468 $22,209 ======= ======= Classified assets and letters of credit of Fidelity totaled $20.5 million at June 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 119.5% and 167.8% of Fidelity's capital and reserves at June 30, 2000 and December 31, 1999, respectively. Classified assets and letters of credit were 50.9% and 72.0% of United's capital and reserves at June 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 $19.0 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 June 30, 2000 and December 31, 1999, Fidelity had impaired loans totaling $7.6 million compared to $16.5 million at June 30, 1999, a decrease of 53.9%. The large decrease in impaired loans recognizes Fidelity's ongoing efforts to reduce classified loans. The allowance for losses on such impaired loans totaled $951,000 and $1.1 million, which are included in Fidelity's allowance for loan losses at June 30, 2000 and December 31, 1999, respectively. In addition, using similar guidelines for impaired loans, impaired letters of credit at June 30, 2000 total $12.2 million, versus $13.2 million at December 31, 1999, a decrease of 7.6%. The valuation allowance on such impaired letters of credit totaled $5.8 million and is included in Fidelity's letter of credit valuation allowance at June 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 June 30, 2000 and December 31, 1999:
Six Months Year Ended Ended - ----------------------------------------------------------------------------------------------- June 30, December 31, 2000 1999 - ----------------------------------------------------------------------------------------------- (in thousands) Allowance for loan losses at beginning of period $ 2,021 $ 3,521 ------------------------------------------ Loan charge offs Real estate mortgage 80 Multi-family 135 2,631 Commercial 12 11 Consumer 196 235 ------------------------------------------ Total loan charge offs 423 2,877 ------------------------------------------ Loan recoveries Real estate mortgage Multi-family 3 Commercial 17 3 Consumer 22 26 ------------------------------------------ Total loan recoveries 39 32 ------------------------------------------ Net charge offs 384 2,845 Provision for loan losses 175 1,345 ------------------------------------------ Allowance for loan losses at end of period $ 1,812 $ 2,021 ========================================== Ratio of net charge offs to average loans outstanding during period 0.73% 5.20% ========================================== Ratio of provision for loan losses to average loans outstanding during period 1.13% 2.46% ========================================== Ratio of allowance for loan losses to total loans outstanding at year end 1.65% 2.04% ========================================== Average amount of loans outstanding for the period $105,585 $108,455 ========================================== Amount of loans outstanding at end of period $110,094 $98,940 ==========================================
The allowance for loan losses was $1.8 million at June 30, 2000 compared to $2.0 million at December 31, 1999. Net loan charge-offs were $384,000 or 0.73% of average loans for the six months ended June 30, 2000 compared to $2.8 million or 5.20% of average loans for the six months ended December 31, 1999. During the six months ended June 30, 2000, Fidelity charged-off $135,000 of multifamily loans that reserves were previously provided for. Consumer loans charged-off totaled $196,000, primarily for loans originated prior to 1999. 19 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 $44.5 million at June 30, 2000 and December 31, 1999. Specific allocations for letters of credit totaled 9.0% of outstanding letters of credit at June 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 June 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 June 30, 2000 and at December 31, 1999 are as follows: Allocation of Amount June 30, December 31, 2000 1999 - ------------------------------------------------------------------------- (in thousands) Real Estate Mortgage: Conventional and home equity $102 $ 103 Multi-family 554 482 Consumer 491 496 Commercial 665 940 -------------------------- Total $1,812 $2,021 ========================== Percentage of Loans to Total Loans June 30, December 31, 2000 1999 - ------------------------------------------------------------------------- Real Estate Mortgage Conventional and home equity 51.5% 51.3% Multi-family 3.3 3.7 Consumer 33.8 30.3 Commercial 11.4 14.7 -------------------------- 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 June 30, 2000, the investment portfolio represented 14.1% 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. During fiscal 1999 due to continued reductions in the loan portfolio, the excess liquidity was reinvested in lower risk investment securities. The primary objectives, in order of priority, are to further the safety and soundness of 20 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 June 30, 2000, the entire investment portfolio was classified as available for sale. The net unrealized loss at June 30, 2000, which is included as a component of stockholders' equity, was $648,000 and was comprised of gross losses of $1,073,000 and a tax benefit of $425,000. The decrease in the unrealized loss was caused by market interest rate changes during the period. Although the entire portfolio is available for sale, management has not identified specific investments for sale in future periods. The following table sets forth the components of United's available-for-sale investment portfolio as of June 30, 2000 and December 31, 1999:
June 30, December 31, 2000 1999 - --------------------------------------------------------------------------------------------------------- (in thousands) Federal Home Loan Mortgage Corporation mortgage-backed securities $ 899 $ 1,043 Federal National Mortgage Association mortgage-backed securities 1,207 1,377 Government National Mortgage Association mortgage-backed securities 20,509 21,885 ----------------------------------- Total securities available for sale $22,615 $24,305 ===================================
For the six months ended June 30, 2000, United's investment securities portfolio decreased by $1.7 million to $22.6 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 six 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 ($100,000 or more), and variable rate IRA certificates. Average deposits decreased by $2.9 million during the first six months of 2000. An increase in deposits came primarily in the area of core certificates of deposit, for which the average balance increased $6.4 million but was offset by a decrease in NOW accounts and agent-acquired certificates of deposit of $2.2 million and $6.5 million, respectively. According to the provisions of the Supervisory Agreement, Fidelity is unable to use agent-acquired certificates as a funding source. 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. 21 The following table sets forth the average balances of and the average rate paid on deposits by deposit category for the six months ended June 30, 2000 and December 31, 1999.
June 30, December 31, 2000 1999 Average Deposits Amount Rate Amount Rate - ------------------------------------------------------------------------------------------------- (in thousands) Demand $ 6,045 $ 6,097 NOW accounts 16,859 3.27% 19,107 3.39% Money market accounts 2,226 1.99 2,545 2.03 Savings accounts 4,451 2.09 4,657 2.26 Certificates of deposit 84,757 5.75 78,329 5.60 Agent-acquired certificates of deposit 11,677 5.92 18,147 5.88 -------------- ------------- Totals $126,015 4.96% $128,882 4.85% ============== =============
Borrowings Fidelity's long-term debt increased $1.4 million for the first six 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 $14.5 million. 22 The following table summarizes Fidelity's borrowings as of June 30, 2000 and December 31, 1999.
June 30, December (dollars in thousands) 2000 31, 1999 - ------------------------------------------------------------------------------------------------------------ Note payable, 8.49% adjusted annually, payable $8 per month, including interest, due September 2010, secured by specific multi-family mortgages $ 979 985 Note payable, 8.49% adjusted annually, payable $12 per month, including interest, due September 2010, secured by specific multi-family mortgages 1,501 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 June 30, 2000 and December 31, 1999) 10,503 9,039 ----------------------------------- Total long-term debt $24,953 $23,504 ===================================
Capital Resources Fidelity's stockholders' equity increased $4.1 to $9.5 million at June 30, 2000, compared to $5.4 million at December 31, 1999. The change in stockholders' equity was accounted for by a net loss of $301,000, a decrease in the net unrealized loss on securities available for sale of $127,000 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 June 30, 2000, actual and required minimum levels (to be adequately and well capitalized) of regulatory capital for United were as follows:
(Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------ Required for To be well Actual Adequate Capital capitalized Amount Ratio Amount Percent Amount Percent - ------------------------------------------------------------------------------------------------------------ Total risk-based capital (to risk-weighted assets) $18,182 13.9% $10,490 8.0% $13,113 10.0% - ------------------------------------------------------------------------------------------------------------ Tier 1 capital (to risk-weighted assets) 13,658 10.4 5,245 4.0 7,868 6.0 - ------------------------------------------------------------------------------------------------------------ Core capital (to adjusted total assets) 13,658 8.9 6,158 4.0 6,556 5.0 - ------------------------------------------------------------------------------------------------------------ Core capital (to adjusted tangible assets) 13,658 8.9 3,079 2.0 N/A N/A - ------------------------------------------------------------------------------------------------------------ Tangible capital (to adjusted total assets) 13,658 8.9 2,309 1.5 N/A N/A - ------------------------------------------------------------------------------------------------------------
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 8.9% for the six months ended June 30, 2000 and 6.8% for December 31, 1999, tier I capital to risk-weighted assets was 10.4% and 9.1% and total capital to risk-weighted assets was 13.9% and 14.3% at June 30, 2000 and December 31, 1999, respectively. Book value per share, including unrealized losses on investment securities, increased to $2.07 at June 30, 2000, compared to $1.72 at December 31, 2000. There are no specific targets for capital levels included or agreed to within the Supervisory Agreement ("Agreement") between United and the OTS, only a requirement that United include capital targets within a strategic plan. The original strategic plan developed by United established capital targets of 8.25% for tangible, leverage and core capital and 16% for risk-based capital. The Agreement did set a target level to reduce its classified assets to 50% of core capital plus the allowance for loan losses and the letter of credit valuation reserves by December 31, 1999. At June 30, 2000, United's tangible, leverage and core capital was 8.9% and risk-based capital was 13.9%. United's classified assets to core capital plus the allowance for loan losses and letter of credit valuation reserves was 72.9% at June 30, 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 June 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 financing, and dividends from United (with OTS approval), the holding company may deplete its available cash in June 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 also considering common stock rights offering to existing shareholders on as-needed basis, as well as negotiating agreements to extend maturities on certain debt obligations coming due in 2001 and 2002. These actions, in the aggregate, should facilitate the acquisition of 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 June 30, 2000 and December 31, 1999, United's liquidity ratios were 14.1% 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 six months of 2000. Management believes that this level of liquidity is sufficient to meet any anticipated requirements for United's operations. 24 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 $12.5 million at June 30, 1999, to $10.5 million at June 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. 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 March 31, 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 March 31, 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 $3.5 million at March 31, 2000 and $2.9 million at December 31, 1999, United would have been required to make a deduction from its total capital available to calculate its risk based capital requirement if the institution was required to file the CMR at March 31, 2000, but not at December 31, 1999. The increase in interest rate risk in the event of increased rates, from December 31, 1999 to March 31, 2000 is due to interest rate changes and a change in United's balance sheet mix. 25 Interest Rate Risk as of March 31, 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 $9,754 $(5,424) (36)% 6.46% - 304 bp + 200 bp 11,630 (3,548) (23) 7.55 - 194 bp + 100 bp 13,492 (1,685) (11) 8.60 - 90 bp 0 bp 15,177 9.50 - 100 bp 16,316 1,139 8 10.06 56 bp - 200 bp 16,417 1,239 8 10.04 54 bp - 300 bp 16,356 1,179 8 9.93 43 bp 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 Ratio 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: On May 19, 2000 at 8:30 AM, at Fidelity's subsidiary downtown offices at 18 N.W. Fourth Street, Evansville, Indiana, the Annual meeting of Shareholders was held in order to vote on seven matters. Matter 1 was to elect three directors to the Board of Directors to serve until their successors are duly elected and qualified. The vote tabulation for the election of Curt J. Angermeier was 2,788,531 for and 195,851 shares against; Donald R. Neel was 2,791,006 for and 195,913 shares against; Barry Schnakenburg was 2,755,524 for and 220,263 shares against. The following directors terms continued after the meeting; Curt J. Angermeier, William Baugh, Jack Cunningham, M. Brian Davis, Donald R. Neel and Barry A. Schnakenburg. Matter 2 was to approve the Stock Purchase Agreement. The vote tabulation for approval was 2,059,327 for, 213,538 against, and 10,956 shares abstained. Matter 3 was to increase the Authorized Shares. The vote tabulation for approval was 2,723,676 for, 228,151 against, and 15,702 shares abstained. Matter 4 was the removal of Cumulative Voting for Directors. The vote tabulation for approval 2,037,307 for, 213,078 against, and 28,356 shares abstained. Matter 5 was to reduce the Terms of Directors. The vote tabulation for approval was 2,070,460 for, 175,281 against, and 27,050 shares abstained. Matter 6 was to authorize additional provisions for removal of directors. The vote tabulation for approval was 2,207,943 for, 48,295 against and 22,454 shares abstained. Matter 7 was the ratification of the appointment of the auditor of Fidelity. The vote tabulation for Olive LLP was 2,924,585 for, 32,604 shares against, and 10,011 shares abstained. ITEM 5 Other Information: None 27 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 May 24, 2000. Fidelity reported the completion of the Pedcor transaction on May 19, following receipt of regulatory approval on May 4 and receipt of shareholder approval on May 19, 2000. 28 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: AUGUST 14, 2000 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) 29 Exhibit Index Reg. S-K Exhibit No. Description of Exhibit Page - -------------------------------------------------------------------------------- 27 Financial Data Schedule 31 30 -----END PRIVACY-ENHANCED MESSAGE-----