-----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, RxGx7EYxeD+YyXxP5z7h+VW87ei1bs/xDSKrre6yx4x84JU/nx+B4K/lC/1JDhZN XSV9RjB/qEzhZHr7m9OPuw== 0000926274-01-000196.txt : 20010402 0000926274-01-000196.hdr.sgml : 20010402 ACCESSION NUMBER: 0000926274-01-000196 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 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-K SEC ACT: SEC FILE NUMBER: 000-22880 FILM NUMBER: 1586527 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-K 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------------- FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (fee required) For the fiscal year ended: December 31, 2000 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (no fee required) For the Transition period from ______ to __________. Commission File No. 0-22880 Fidelity Federal Bancorp ------------------------------------------------------ (Exact name of registrant as specified in its charter) Indiana 35-1894432 - -------------------------------------------------------------------------------- (State of other jurisdiction (I.R.S. Employer of Incorporation or Identification No.) Organization) 18 North West Fourth Street, PO Box 1347, Evansville, Indiana 47706-1347 ------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's Telephone number, including area code (812) 424-0921 -------------- Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $1 Stated Value ----------------------------- (Title of Class) DOCUMENTS INCORPORATED BY REFERENCE Exhibit index is on page 16 Indicate by check mark 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 past preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of Registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the Registrant (for purposes of such calculation, includes persons who are not directors, executive officers, or holders of more than 10% of the registrant's common stock) based on the average bid and asked prices of such stock at February 28, 2001 was approximately $3,325,564. Indicated below is the number of shares outstanding of each of the registrant's classes of common stock as of February 28, 2001. Common Stock - 4,607,658 shares FIDELITY FEDERAL BANCORP Index PART I Page ---- ITEM 1 - Business 3 ITEM 2 - Properties 11 ITEM 3 - Legal Proceedings 11 ITEM 4 - Submission of Matters to a Vote of Security Holders 11 PART II ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters 11 ITEM 6 - Selected Financial Data 12 ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 12 ITEM 7 A Quantitative and Qualitative Disclosures About Market Risk 12 ITEM 8 - Financial Statements and Supplementary Data 12 ITEM 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 12 PART III ITEM 10 - Directors and Executive Officers of the Registrant 12 ITEM 11 - Executive Compensation 12 ITEM 12 - Security Ownership of Certain Beneficial Owners and Management 12 ITEM 13 - Certain Relationships and Related Transactions 13 PART IV ITEM 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 13 SIGNATURES 15 PART I ITEM 1. BUSINESS CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This discussion contains certain forward-looking statements that are subject to risks and uncertainties and includes information about possible or assumed future results of operations. Many possible events or factors could affect our future financial results and performance. This could cause results or performance to differ materially from those expressed in our forward-looking statements. Words such as "expects", "anticipates", "may", "could", "intends", "projects", "believes", "estimates", and variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Investors and readers should not rely solely on or place undue reliance on the forward-looking statements and should consider all uncertainties and risks discussed throughout this document. These statements are representative only on the date hereof. The possible events or factors include the following: the restrictions imposed by the Supervisory Agreement between the OTS and our savings bank subsidiary, United Fidelity Bank; our loan growth is dependent on economic conditions, as well as various discretionary factors, such as decisions to sell or purchase certain loans or loan portfolios; syndications or participations of loans; retention of residential mortgage loans; and the management of a borrower. The rate of charge-offs and provision expense can be affected by local, regional and international economic and market conditions, concentrations of borrowers, industries, products and geographic locations, the mix of the loan portfolio and management's judgments regarding the collectibility of loans. Liquidity requirements may change as a result of fluctuations in assets and liabilities and off-balance sheet exposures, which will impact our capital and debt financing needs and the mix of funding sources. Decisions to purchase, hold or sell securities are also dependent on liquidity requirements and market volatility, as well as on- and off-balance sheet positions. Factors that may impact interest rate risk include local, regional and international economic conditions, levels, mix, maturities, yields or rates of assets and liabilities, utilization and effectiveness of interest rate contracts and the wholesale and retail funding sources of United. We are also exposed to the potential of losses arising from adverse changes in market rates and prices which can adversely impact the value of financial products, including securities, loans, deposits, debt and derivative financial instruments, such as futures, forwards, swaps, options and other financial instruments with similar characteristics. In addition, the banking industry in general is subject to various monetary and fiscal policies and regulations, which include those determined by the Federal Reserve Board, the OCC, the FDIC, state regulators and the Office of Thrift Supervision, whose policies and regulations could affect our results. Other factors that may cause actual results to differ from the forward-looking statements include the following: competition with other local, regional and international banks, thrifts, credit unions and other nonbank financial institutions, such as investment banking firms, investment advisory firms, brokerage firms, investment companies and insurance companies, as well as other entities which offer financial services, located both within and outside the United States and through alternative delivery channels such as the World Wide Web; interest rate, market and monetary fluctuations; inflation; market volatility; general economic conditions and economic conditions in the geographic regions and industries in which we operate; introduction and acceptance of new banking-related products, services and enhancements; fee pricing strategies, mergers and acquisitions and our ability to manage these and other risks. Overview Fidelity Federal Bancorp, incorporated in 1993 under the laws of the State of Indiana, is a registered savings and loan holding company with its principal office in Evansville, Indiana. Fidelity's savings bank subsidiary, United Fidelity Bank, fsb ("United"), was organized in 1914 and is a federally-chartered stock savings bank located in Evansville, Indiana. Fidelity, through its savings bank subsidiary, is engaged in the business of obtaining funds in the form of savings deposits and other borrowings and investing such funds in consumer, commercial, and mortgage loans, and in investment and money market securities. 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. In May 2000, Pedcor Management Corporation, began providing management and certain accounting services for the 3 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 but has not provided any new services for the past two years, but records fee income on transactions previously completed. Another subsidiary of United, Village Insurance Corporation, receives fee income for credit life and accident health insurance sales. The other subsidiary of Fidelity, Village Affordable Housing Corporation, was formed during the third quarter of fiscal 1998. This company was formed for the purpose of owning interest in real estate housing, and recently, in 2001, acquired certain real estate from United and its subsidiaries to assist in United's divesture efforts. Fidelity had consolidated total assets of $166.5 million and total shareholders' equity of $8.8 million as of December 31, 2000. Fidelity's subsidiaries at December 31, 2000, are listed below:
Subsidiary Principal Office Year Organized Assets (in thousands) 1. United Fidelity Bank, fsb Evansville, IN 1914 $161,769 Subsidiaries of United Fidelity Bank, fsb: Village Capital Corporation Evansville, IN 1994 834 Village Insurance Corporation Evansville, IN 1980 97 Village Management Corporation Evansville, IN 1992 260 Village Housing Corporation Evansville, IN 1992 2,680 2. Village Affordable Housing Corporation Evansville, IN 1998 36
Fidelity's home office is located at 18 North West Fourth Street, Evansville, Indiana, 47708 and its telephone number is (812) 424-0921. Competition Fidelity and United face strong direct competition for deposits, loans and other financial-related services. United competes in Indiana, Kentucky and Illinois with other thrifts, commercial banks, credit unions, stockbrokers, finance companies and insurance companies. Some of these competitors are local, while others are statewide or national. United competes for deposits principally by offering depositors a variety of deposit programs, convenient office locations, hours and other services, and for loan originations primarily through competitive interest rates and fees, the efficiency and quality of service provided and the variety of loan products offered. Some of the non-bank financial institutions and financial services organizations with which United competes are not subject to the same degree of regulation as that imposed on federal savings banks, thrifts, or thrift-holding companies. As a result, such competitors may have advantages over United in providing certain services. As of February 28, 2001, approximately 4 banks, 2 thrifts, and 11 credit unions operated in the Evansville, Indiana metropolitan area, which is United's principal deposit market area. Many competitors are substantially larger or have significantly greater capital resources than United. Due to enacted legislation to allow unlimited interstate branching, Fidelity and United may experience heightened competition from existing competitors and other major financial institutions seeking to expand their regional banking presence in Indiana. SUPERVISION AND REGULATION In addition to the general provisions discussed below, Fidelity and United are also subject to the provisions of the Supervisory Agreement entered into with the OTS in February 1999, which also impacts the operations of Fidelity and United. See the "Other Restrictions" footnote in Fidelity's Notes to Consolidated Financial Statements. Regulation of the Company Fidelity is a savings and loan holding company within the meaning of the Home Owners' Loan Act of 1933. Fidelity is registered with the Office of Thrift Supervision and is subject to OTS regulations, examinations, supervision and reporting requirements 4 The Home Owners' Loan Act generally prohibits a savings and loan holding company, without prior approval of the OTS, from (i) acquiring control of any other savings association or savings and loan holding company; or (ii) acquiring more than 5% of the voting shares of a savings association or savings and loan holding company which is not a subsidiary. Except with the prior approval of the OTS, no director or officer of a savings and loan holding company or person owning or controlling more than 25% of such company's stock, may acquire control of any savings association, other than a subsidiary association, or any other savings and loan holding company. Fidelity operates as a unitary savings and loan holding company. There are generally no restrictions on the activities of a unitary savings and loan holding company. However, if the OTS determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of an activity constitutes a serious risk to the financial safety, soundness, or stability of its subsidiary savings association, the OTS may impose restrictions it considers necessary to address such risk, which may include a limitation on the payment of dividends. If the savings association subsidiary of a unitary savings and loan holding company fails to meet the Qualified Thrift Lender Test ("QTL test"), as discussed below, then the holding company would be required to register as, and become subject to the activities restrictions applicable to, bank holding companies. If Fidelity were to acquire control of another savings association it would become a multiple savings and loan holding company. In general, the activities of Fidelity and any of its subsidiaries (other than United or other subsidiary savings associations) would be subject to further restrictions. The Home Owners' Loan Act generally provides that, among other things, no multiple savings and loan holding company or subsidiary which is not a savings association may engage in any business activity other than (i) furnishing or performing management services for a subsidiary savings association, (ii) conducting an insurance agency or escrow business, (iii) holding, managing or liquidating assets owned by or acquired from a subsidiary savings association, (iv) holding or managing properties used or occupied by a subsidiary savings association, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by regulation as of March 5, 1987, to be engaged in by multiple savings and loan holding companies, or (vii) those activities authorized by regulation of the Board of Governors of the Federal Reserve System as permissible for bank holding companies, unless the OTS by regulation prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above must also be approved by the OTS prior to being engaged in by a multiple savings and loan holding company. The OTS may also approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state. Generally, this may only occur if the state in which the association to be acquired is located specifically permits associations to be acquired by state-chartered associations or savings and loan holding companies located in the state where the acquiring entity is located or by a holding company that controls that state-chartered savings association. Indiana law permits federal and state savings association holding companies with their home offices located outside of Indiana to acquire savings associations whose home offices are located in Indiana and savings and loan holding companies with their principal place of business in Indiana. Indiana savings and loan holding companies also may acquire savings associations with their home offices located outside of Indiana and savings association holding companies with their principal place of business located outside of Indiana. Savings Bank Regulation General. As a federally chartered, SAIF-insured savings association, United is subject to extensive regulation by the OTS and the FDIC. The OTS periodically examines the books and records of United and, in conjunction with the FDIC in certain situations, has examination and enforcement powers. This supervision and regulation are intended primarily for the protection of depositors and federal deposit insurance funds. United's activities and operations are subject to a number of detailed, complex and sometimes overlapping federal and state laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining legislation and antitrust laws. The earnings of financial institutions are also affected by general economic conditions and prevailing interest rates, both domestic and foreign and by the monetary and fiscal policies of the United States Government and its various agencies, particularly the Federal Reserve. 5 Additional legislation and administrative action affecting the banking industry is often considered by Congress, state legislatures and various regulatory agencies. It cannot be predicted with certainty whether such legislation or administrative action will be enacted or the extent to which the banking industry in general or Fidelity and United in particular would be affected. Financial Modernization Legislation: The Gramm Leach Bliley Act. Effective as of March 11, 2000, the Gramm-Leach-Bliley Act: (i) allows bank holding companies meeting management, capital and CRA standards to engage in a substantially broader range of nonbanking activities then was previously permissible, including insurance underwriting and agency, and underwriting and making merchant banking investments in commercial and financial companies; (ii) allows insurers and other financial services companies to acquire banks and thrifts; (iii) removes various restrictions that previously applied to bank holding company ownership of securities firms and mutual fund advisory companies; and (iv) establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations. In order for a bank holding company to engage in the broader range of activities that are permitted by the Gramm-Leach-Bliley Act, (1) all of its depository institutions must be well capitalized and well managed and (2) it must file a declaration with the Federal Reserve Board that it elects to be a "financial holding company". In addition, to commence any new activity permitted by the Gramm-Leach-Bliley Act, each insured depository institution of the financial holding company must have received at least a "satisfactory" rating in its most recent examination under the Community Reinvestment Act. In addition, the Gramm-Leach-Bliley Act provides that no company may acquire control of an insured savings association after May 4, 1999, unless that company either (i) engages only in the financial activities permissible for a financial holding company or (ii) is a grandfathered, unitary savings and loan holding company. The Gramm-Leach-Bliley Act generally grandfathers any company that was a unitary savings and loan holding company on May 4, 1999. Such a company may continue to operate under present law as long as (i) the company continues to control only one savings institution or its successor (excluding supervisory acquisitions) that it controlled on May 4, 1999 and (ii) each controlled institution meets the qualified thrift lender test. The Company is a grandfathered unitary savings and loan holding company. The Gramm-Leach-Bliley Act also modified laws related to financial privacy. The new financial privacy provisions generally prohibit financial institutions, including United, from disclosing nonpublic personal financial information to third parties unless customer have the opportunity to "opt out" of the disclosure. Fidelity does not believe that the Gramm-Leach-Bliley Act will have any immediate, material impact on its operations. However, to the extent that the Gramm-Leach-Bliley Act permits commercial banks, securities firms and insurance companies to affiliate, the Act may have the effect of increasing the amount of competition that Fidelity faces from other companies offering financial products, many of which may have substantially more financial resources. Qualified Thrift Lender Requirement. In order for United to exercise the powers granted to federally-chartered savings associations, it must be a "qualified thrift lender", or a "QTL". A savings association is a QTL if its qualified thrift investments equal or exceed 65% of the savings association's portfolio assets on a monthly basis in 9 out of every 12 months. Qualified thrift investments generally consist of (i) various housing related loans and investments (such as residential construction and mortgage loans, home improvement loans, manufactured housing loans, home equity loans and mortgage-backed securities), (ii) certain obligations of the FSLIC, the FDIC, the FSLIC Resolution Fund and the Resolution Trust Corporation (for limited periods), and (iii) shares of stock issued by any Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association. At December 31, 2000, the qualified thrift investment percentage test for United was 83.75%. Liquidity. Savings associations are required to maintain an average daily balance of liquid assets (including cash, certain time deposits, certain banker's acceptances, certain corporate debt securities and highly rated commercial paper, securities of certain mutual funds and specified United States government, state or federal agency obligations) of not less than 4% of the average daily balance of the savings association's net withdrawable deposits plus short-term borrowings during the 6 preceding calendar month. Under the Home Owners' Loan Act, this liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10%, depending upon economic conditions and the deposit flows of member associations. At December 31, 2000, United was in compliance with these liquidity requirements. Loans-to-One-Borrower Limitations. The Home Owners' Loan Act generally requires savings associations to comply with the loans-to-one-borrower limitations applicable to national banks. In general, national banks may make loans to one borrower in amounts up to 15% of the bank's unimpaired capital and surplus, plus an additional 10% of capital and surplus for loans secured by readily marketable collateral. At December 31, 2000 United's loan-to-one-borrower limitation was approximately $3.2 million and no loans to a single borrower exceeded that amount, except as provided herein. Under certain conditions, a savings association may make loans to one borrower for residential housing developments in amounts up to 30% of the bank's unimpaired capital and surplus provided that all loans made in reliance upon the increased lending limit do not, in the aggregate, exceed 150% of the bank's unimpaired capital and surplus. At December 31, 2000 under this component of the higher lending limit, United had made $6.2 million in such loans. Commercial Real Property Loans. The Home Owners' Loan Act limits the aggregate amount of commercial real estate loans that a federal savings association may make to an amount not in excess of 400% of the savings association's capital. Consumer Loans. The Home Owners' Loan Act limits the aggregate amount of consumer loans that a federal savings association may make to an amount not in excess of 35% of the savings association's total assets. Under the terms of the Supervisory Agreement with the OTS, United's consumer loans may not in the aggregate exceed 30% of its total assets. Limitation on Capital Distributions. Under OTS regulations, a savings association must file an application with the OTS for a capital distribution, including cash dividends, if (i) it is not eligible for expedited treatment of its application, (ii) the proposed capital distribution, plus all other capital distributions of the savings association during the calendar year, exceeds its net income for that year to date plus its retained net income for the preceding two years, (iii) it would not be at least adequately capitalized, as defined in the prompt corrective action regulations of the OTS, or (iv) the proposed distribution would be in violation of any applicable law, regulation, or agreement with the OTS. A savings association has no restrictions on capital distributions as long as, after the distribution, it is still classified as adequately capitalized. Although no application is required, a prior notice must filed with the OTS if the savings association would not be well capitalized after the distribution, or if the savings association is a subsidiary of a savings and loan holding company. United is currently restricted by the terms of the Supervisory Agreement with the OTS from paying dividends. Insurance of Deposits. The FDIC is an independent federal agency that insures the deposits, up to $100,000 per depositor subject to aggregation rules, of banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the Bank Insurance Fund (the "BIF") for commercial banks and state savings banks and the SAIF for savings associations such as United. The FDIC is required to maintain designated levels of reserves in each fund. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and members of the SAIF. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary depending on the risk the institution poses to its deposit insurance fund. An institution's risk level is determined based on its capital level and the FDIC's level of supervisory concern about the institution. Annual deposit insurance premiums range between $0.00 and $0.27 per $100 of deposits are in effect, based on the assessment determined in accordance with the risk-assessment system discussed above. The Financing Corporation ("FICO") assessment to service the interest on its bond obligations is separate from the SAIF assessment. As part of the deposit insurance assessments, institutions pay a FICO assessment for debt service requirements. The FICO assessment rate is subject to change on a quarterly basis, depending on the debt service requirements. In 2000, United paid $0.05 per $100 of deposits to comply with this assessment. The total deposit insurance expense paid was $243,000, for the year ended December 31, 2000, $156,000 for the six months ended December 31, 1999 and $244,000 for fiscal 1999. Commonly Controlled Banks and Savings Associations. Subject to certain exceptions, commonly controlled banks and savings associations must reimburse the FDIC for any losses suffered in connection with a failed bank or savings association affiliate. Institutions are commonly controlled if one is owned by another or if both are owned by the same holding company. 7 Community Reinvestment Act. Ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") must be disclosed. The disclosure includes both a four-tier descriptive rating using terms such as "outstanding," "satisfactory," "needs to improve," or "substantial non-compliance" and a written evaluation of each institution's performance. United received a satisfactory rating from the OTS in its most recent CRA examination. Also, the Federal Housing Finance Board has adopted regulations establishing standards of community investment and service for members of the FHLB System to meet to be eligible for long-term advances. These regulations take into account a savings association's CRA record and the member's record of lending to first-time home buyers. Brokered Deposits. Pursuant to the FDIC regulations, well-capitalized institutions are subject to no brokered deposits limitations, while adequately capitalized institutions are able to accept, renew or rollover brokered deposits only (i) with a waiver from the FDIC, and (ii) subject to certain restrictions on payment of rates. Undercapitalized institutions are not permitted to accept brokered deposits and may not solicit deposits by offering an effective yield that significantly exceeds the prevailing effective yields on insured deposits of comparable maturity in the institution's normal market area or in which such deposits are being solicited. United is currently restricted by the terms of the Supervisory Agreement with the OTS from accepting brokered deposits. Enforcement. The OTS has primary enforcement responsibility over savings associations and has the authority to bring enforcement action against all "institution-affiliated parties," including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Civil penalties cover a wide range of violations and actions and range up to $25,000 per day unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. In addition, regulators are provided with flexibility to impose enforcement action on an institution that fails to comply with its regulatory requirements, particularly with respect to the capital requirements. Possible enforcement action ranges from the imposition of a capital directive to receivership, conservatorship or the termination of deposit insurance. The FDIC has the authority to recommend to the OTS that enforcement action to be taken with respect to a particular savings institution. If action is not taken by the OTS, the FDIC has authority to take such action under certain circumstances. Standards for Safety and Soundness. The federal banking agencies have prescribed for all insured depository institutions safety and soundness standards in the form of guidelines, relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset quality and growth, earnings, and compensation, fees and benefits, and safekeeping of customer information. If an insured depository institution fails to meet any of the standards described above, it will be required to submit to the appropriate federal banking agency a plan specifying the steps that will be taken to cure the deficiency. If an institution fails to submit an acceptable plan or fails to implement the plan, the appropriate federal banking agency will issue an order requiring the institution to take immediate steps to correct a safety and soundness deficiency. Real Estate Lending Standards. OTS regulations require savings associations to establish and maintain written internal real estate lending policies. Each association's lending policies must be consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its operations. The policies must establish loan portfolio diversification standards; establish prudent underwriting standards, including loan-to-value limits that are clear and measurable; establish loan administration procedures for the association's real estate portfolio; and establish documentation, approval, and reporting requirements to monitor compliance with the association's real estate lending policies. The association's written real estate lending policies must be reviewed and approved by the association's Board of Directors at least annually. Further, each association is expected to monitor conditions in its real estate market to ensure that its lending policies continue to be appropriate for current market conditions. Prompt Corrective Action. The Federal Deposit Insurance Act establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the banking regulators are required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of capitalization. Under the OTS prompt corrective action regulation, generally, a savings association that has a total risk-based capital of less than 8.0% or a tier 1 risk-based capital ratio or leverage ratio of less than 4.0% is considered to be undercapitalized. A savings association that has a total risk-based capital of less than 6.0%, a tier 1 risk-based capital ratio of less than 3%, or a leverage ratio that is less than 3.0% is considered to be "significantly undercapitalized" and a savings association that has a tangible capital to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized." Generally, a capital restoration plan must be filed with the OTS within 45 days of the date an association receives notice that it is 8 "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." In addition, numerous mandatory supervisory actions become immediately applicable to the associations, including, but not limited to, restrictions on growth, investment activities, capital distributions, and affiliate transactions. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Capital Requirements. The OTS has adopted capital standards under which savings associations must maintain (i) "core capital" in an amount not less than 3% of total adjusted assets for a savings association with a composite rating of 1, and not less than 4% for all other savings associations, (ii) "tangible capital" in an amount not less than 1.5% of total adjusted assets, and (iii) a level of risk-based capital equal to 8.0% of risk-weighted assets. Under OTS regulations "core capital" includes common stockholders' equity, noncumulative perpetual preferred stock and related surplus, and minority interests in the equity accounts of consolidated subsidiaries, less nonqualifying intangible assets. In determining compliance with the capital standards, a savings association must deduct from capital its entire investment in and loans to any subsidiary engaged in activities not permissible for a national bank, other than subsidiaries (i) engaged in such non-permissible activities solely as agent for their customers; (ii) engaged in mortgage banking activities; or (iii) that are themselves savings associations or companies, the only investment of which is another savings association, acquired prior to May 1, 1989. Capital requirements higher than the generally applicable minimum requirement may be established for a particular savings association if the OTS determines that the association's capital was or may become inadequate in view of its particular circumstances. Individual minimum capital requirements may be appropriate where the savings association is receiving special supervisory attention, has a high degree of exposure to interest rate risk, losses resulting in capital inadequacy, poor liquidity or cash flow, or poses other safety or soundness concerns. In determining compliance with the risk-based capital requirements, a savings association must determine its interest rate risk and, if such risk exceeds a certain level, it must deduct an interest rate risk component in calculating its total capital for purposes of determining whether it meets its risk-based capital requirements. An association's interest rate risk (IRR) is measured by the decline in the net portfolio value resulting from a 200 basis point increase or decrease in market interest rates. If an association's measured IRR exposure exceeds 2%, it must then deduct an IRR component from total capital for determining its risk-based capital requirement. The Savings Bank's Subsidiaries. The OTS regulations permit federal savings associations to invest in the capital stock, obligations or specified types of securities of subsidiaries known as "service corporations" and as "operating subsidiaries". Operating subsidiaries may engage in any activity in which the savings association may engage. There is no limit as to the amount of the investment in an operating subsidiary. A service corporation may engage in certain specified activities. The savings association may make loans to a service corporation and joint ventures in which a service corporation is a participant in an aggregate amount not exceeding 3% of an association's assets, provided any investment over 2% is used for specified community or inner-city development purposes. The FDIC may, after consultation with the OTS, prohibit specific activities if it determines such activities pose a serious threat to SAIF. Assessments. Savings associations are required by OTS regulation to pay assessments to the OTS to fund the operations of the OTS. The general assessment is computed upon the savings association's total assets, condition, and complexity of its operations, including consolidated subsidiaries, as reported in the Saving Bank's latest quarterly Thrift Financial Report. United's total assessment for the year ended December 31, 2000 was $63,000. Acquisitions and Branching The Bank Holding Company Act specifically authorizes a bank holding company, upon receipt of appropriate regulatory approvals, to acquire control of any savings association or holding company thereof wherever located. Similarly, a savings and loan holding company may acquire control of a bank. Moreover, federal savings associations may acquire or be acquired by any insured depository institution. Regulations promulgated by the Federal Reserve Board restrict the branching authority of savings associations acquired by bank holding companies. The OTS has adopted regulations which permit nationwide branching to the extent permitted by federal statute. Federal statutes permit federal savings associations to branch outside of their home state if the association meets the domestic building and loan test in Section 7701(a)(19) of the Internal Revenue Code or the asset composition test of Section 7701(c) of the 9 Internal Revenue Code. Branching that would result in the formation of a multiple savings and loan holding company controlling savings associations in more than one state is permitted if the law of the state in which the savings association to be acquired is located specifically authorizes acquisitions of its state-chartered associations by state-chartered associations or their holding companies in the state where the acquiring association or holding company is located. Moreover, Indiana banks and savings associations are permitted to acquire other Indiana banks and savings associations and to establish branches throughout Indiana. Transactions with Affiliates Pursuant to the Home Owners' Loan Act, transactions engaged in by a savings association or one of its subsidiaries with affiliates of the savings association generally are subject to the affiliate transaction restrictions contained in Sections 23A and 23B of the Federal Reserve Act in the same manner and to the same extent as such restrictions now apply to transactions engaged in by a member bank or one of its subsidiaries with affiliates of the member bank. Section 23A of the Federal Reserve Act imposes both quantitative and qualitative restrictions on transactions engaged in by a member bank or one of its subsidiaries with an affiliate, while Section 23B of the Federal Reserve Act requires, among other things, that all transactions with affiliates be on terms substantially the same, and at least as favorable to the member bank or its subsidiary, as the terms that would apply to or would be offered in a comparable transaction with an unaffiliated party. Loans to executive officers, directors, and principal shareholders must comply with Section 22(h) of the Federal Reserve Act, which requires these loans be made on terms substantially the same as offered in comparable transactions to other persons. United was in compliance with these rules at December 31, 2000. Federal Home Loan Bank System United is a member of the Federal Home Loan Bank of Indianapolis. The Federal Home Loan Bank System consists of 12 regional Federal Home Loan Banks ("FHLBs"), each subject to supervision and regulation by the Federal Housing Finance Board (the "FHFB"). The FHLBs provide a central credit facility for members. As a member of the FHLB of Indianapolis, United is required to own shares of capital stock in the FHLB in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts, and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater. As of December 31, 2000, United was in compliance with this requirement. Personnel As of December 31, 2000 Fidelity had 65 full-time equivalent employees. The employees are not represented by any collective bargaining unit. Fidelity believes its relations with its employees are good. Fidelity maintains group life, hospital, surgical, dental, major medical, and long-term disability programs for full-time employees. Fidelity also participates in a defined benefit pension plan covering all eligible employees, as well as a defined contribution 401(k) plan. 10 ITEM 2. PROPERTIES The following table sets forth the location of Fidelity's savings bank offices, all of which are owned by United, as well as certain additional information relating to these offices as of December 31, 2000.
- ---------------------------------------------------------------------------------------------------- Office Location Year Facility Opened Net Book Value - ---------------------------------------------------------------------------------------------------- Home Office 1974 $963,000 18 NW Fourth Street Evansville, IN 47708 - ---------------------------------------------------------------------------------------------------- Eastside Branch 1997 1,811,000 700 S. Green River Rd Evansville, IN 47715 - ---------------------------------------------------------------------------------------------------- Northside Branch 1976 83,000 4441 First Avenue Evansville, IN 47710 - ---------------------------------------------------------------------------------------------------- Westside Branch 1979 81,000 4801 W. Lloyd Expressway Evansville, IN 47712 - ---------------------------------------------------------------------------------------------------- Bell Oaks Branch Opened in March 2001 700,000 8533 Bell Oaks Drive Newburgh, IN 47630 - ----------------------------------------------------------------------------------------------------
ITEM 3. 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 is a party or of which any of their property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Registrant's security holders during the fourth quarter of the year ended December 31, 2000. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS The discussion concerning the market for the registrant's common equity and related shareholder matters under the heading "Market Summary" is included in the 2000 Annual Report to Stockholders on page 4 and is incorporated herein by reference. Cash dividends by quarter for the current and previous year appear under the heading "Quarterly Results of Operations" included in the 2000 Annual Report to Stockholders on page 9 and is incorporated herein by reference. Additional information relating to stockholder matters can be found under the heading "Corporate Information" included in the 2000 annual Report to Stockholders on page 66 and is incorporated herein by reference. On May 19th, 2000, following receipt of shareholder approval on May 19th, Fidelity sold 1,460,000 shares of common stock to Pedcor Holdings, LLC and Pedcor Bancorp. Bruce A. Cordingley, Gerald K. Pedigo, and Phillip J. Stoffregen were named directors of Fidelity as a part of the transaction. These shares were not registered under the Securities Act of 1933 in reliance upon the private placement exemption from such registration afforded by Section 4(2) of the Securities Act of 1933. No underwriters were utilized in connection with this transaction. In exchange for the 1,460,000 shares, Fidelity received: (1) cash in the amount of $3,000,000; (2) 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 development properties in United's portfolio; and (3) an agreement to provide management services and certain accounting services to the specified properties for ten years. 11 Pedcor Holdings, LLC, Pedcor Bancorp or their permitted assigns also received as a part of the transaction an option to purchase additional shares from Fidelity in an aggregate amount of up to $5 million until May 19, 2003. For shares purchased prior to May 19, 2001, the price for such shares will be $3.00 per share. For shares purchased after May 19, 2001 until May 19, 2003, the price for such shares will be the fair market value of the shares. ITEM 6. SELECTED FINANCIAL DATA Selected Financial and Other Data included in the 2000 Annual Report to Stockholders on page 5 is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management' Discussion and Analysis of Financial Condition and Results of Operation included in the 2000 Annual Report to Stockholders on pages 6 through 32 is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOVE MARKET RISK The discussion concerning quantilative and qualitative disclosures about market risk under the heading "Asset/Liability Management" included in the 2000 Annual Report to Stockholders on pages 31 and 32, and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required under this item are incorporated herein by reference to pages 33 through 65 of the 2000 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES No response to this item is required. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information is to be provided under this Item is incorporated by reference to the information under the heading "Information Concerning Nominees, Directors and Executive Officers" on pages 5 and 6 (up to but exclusive of the information presented under the caption "Certain Transactions and Other Matters Between Management and Fidelity") and under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" on page 17, (up to but exclusive of the information presented under the caption "Item 2. Ratification of Independent Auditors of Fidelity"), of the Company's definitive proxy statement dated March 26, 2001, as filed with the Securities and Exchange Commission pursuant to Regulation 14A. ITEM 11. EXECUTIVE COMPENSATION The information to be provided under this Item is incorporated by reference to the information under the heading "Executive Compensation and Other Information" on pages 8 through 15 of the Company's definitive proxy statement dated March 26, 2001, as filed with the Securities and Exchange Commission pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information to be provided under this Item is incorporated by reference to the information under the heading "Beneficial Ownership" on pages 3 and 4 (up to but exclusive of the information presented under the caption "Proxies" on page 4) and under the heading "Security Ownership of Management" on pages 16 and 17 (up to but exclusive of the information presented under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 17), of the definitive proxy statement dated March 26, 2001 as filed with the Securities and Exchange Commission pursuant to regulation 14A. 12 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information to be provided under this Item is incorporated by reference to the information under the heading "Certain Transactions and Other Matters Between Management and Fidelity" on page 6 and 7 (up to but exclusive of the information presented under the caption "Board Meetings" on page 7) of the Company's definitive proxy statement dated March 26, 2001 as filed with The Securities and Exchange Commission pursuant to Regulation 14A. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) The following consolidated financial statements are included in Item 8: Page Number in Annual report Independent Auditor's Report on Consolidated Financial Statements 33 Consolidated Balance Sheet December 31, 2000 and December 31, 1999 34 Consolidated Statement of Income- For the year ended December 31, 2000, the six months ended December 31, 1999 and the fiscal ended June 30, 1999 35, 36 Consolidated Statement of Changes in Stockholders' Equity- For the year ended December 31, 2000, the six months ended December 31, 1999 and the fiscal ended June 30, 1999 37 Consolidated Statement of Cash Flows - For the year ended December 31, 2000, the six months ended December 31, 1999 and the fiscal ended June 30, 1999 38, 39 Notes to consolidated Financial Statements 40 - 65 (2) See response to Item 14 (a) (1). All other financial statement schedules have been omitted because they are not applicable, or the required information is shown in the consolidated financial statements or notes thereto. (3) List of Exhibits Exhibit Number Description -------------- ----------- 3(i) (a) Articles of Incorporation of Fidelity, filed as exhibit 3(a) to Fidelity's 1995 Annual Report on Form 10-K, are incorporated herein by reference 3(i) (b) Articles of Amendment of the Articles of Incorporation, filed as exhibit 4.1 with Fidelity's Registration Statement on Form S-3 (file no. 333-53668), are incorporated by reference 3(ii) By-Laws of Fidelity, filed as exhibit 4.2 with Fidelity's Registration Statement on Form S-3 (file no. 333-53668), are incorporated by reference 10(a) The 1993 Director's Stock Option Plan, filed as exhibit 10(d) to Fidelity's 1995 Annual Report on Form 10-K, is incorporated herein by reference. (b) The 1995 Key Employee's Stock Option Plan, filed as exhibit 10(c) to Fidelity's 1996 Annual Report on Form 10-K, is incorporated herein by reference. (c) Employment agreement between Fidelity and M. Brian Davis, filed as exhibit 10(c) to Fidelity's 2000 Annual Report on Form 10-K (d) Employment agreement between Fidelity and Donald R. Neel, filed as exhibit 10(d) to Fidelity's 2000 Annual Report on Form 10-K 13 13 Annual report to shareholders 21 Subsidiaries of Fidelity Federal Bancorp 23 Independent Auditor's Consent (b) A Form 8-K was filed on October 5, 2000, announcing that President and CEO M. Brian Davis would cease to serve in those roles effective September 29, 2000. (c) See the list of exhibits in Item 14 (a) (3). (d) No other financial statement schedules are required to be submitted. SIGNATURES Pursuant to the requirements of Section 13 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 on the 29th day of March, 2001. FIDELITY FEDERAL BANCORP Registrant 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, Treasurer and Chief Financial Officer (Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 29, 2001, by the following persons on behalf of the registrant and in the capacities indicated. By /S/ JACK CUNNINGHAM ---------------------------------- Jack Cunningham, Chairman By /S/ BRUCE A. CORDINGLEY ---------------------------------- Bruce A. Cordingley, Director By /S/ WILLIAM R. BAUGH ---------------------------------- William R. Baugh, Director By /S/ DONALD R. NEEL ---------------------------------- Donald R. Neel, Director By /S/ GERALD K. PEDIGO ---------------------------------- Gerald K. Pedigo, Director By /S/ BARRY A. SCHNAKENBURG ---------------------------------- Barry A. Schnakenburg, Director By /S/ PHILLIP J. STOFFREGEN ---------------------------------- Phillip J. Stoffregen, Director By ---------------------------------- M. Brian Davis, Director By ---------------------------------- Curt J. Angermeier, Director 15 INDEX TO EXHIBITS - ----------------- Page Exhibit Number Exhibit - -------------------------------------------------------------------------------- 10(c) Employment agreement between Fidelity and M. Brian Davis 10(d) Employment agreement between Fidelity and Donald R. Neel 13 Annual report to shareholders 21 Subsidiaries of Fidelity Federal Bancorp. 23 Independent Auditor's Consent EX-10.(C) 2 0002.txt EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of May 19, 2000, between M. BRIAN DAVIS, an individual residing at 7731 Newburgh Road, Evansville, Indiana 47715 ("Executive"), and FIDELITY FEDERAL BANCORP, an Indiana corporation (the "Company"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Executive is currently employed as the President and Chief Executive Officer of the Company; and WHEREAS, the Company expressly acknowledges that Executive has heretofore performed a significant role in the furtherance of the Company's business activities; and WHEREAS, on January 21, 2000 the Company and Pedcor Investments, a limited liability company, entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") pursuant to which Pedcor Investments, a limited liability company has agreed to purchase from the Company and the Company has agreed to sell to the Purchaser or its permitted assigns (including Pedcor Bancorp and Pedcor Holdings, LLC) (collectively, the "Purchaser") shares of Common Stock (as hereinafter defined) of the Company (such transaction being hereinafter referred to as the "Acquisition"); and WHEREAS, the obligation of the Purchaser to consummate the Acquisition is expressly conditioned upon the execution and delivery of this Agreement by Executive on the date hereof and the performance of his obligations under this Agreement by Executive from and after the Effective Date (as hereinafter defined); WHEREAS, the Company desires to continue the employment of Executive as its President and Chief Executive Officer commencing on the Effective Date and to be assured of its right to his services, on the terms and conditions hereinafter set forth, and Executive desires to continue to be so employed commencing on the Effective Date on such terms and conditions; and WHEREAS, Executive expressly understands and agrees that his failure to continue employment with the Company on the Effective Date upon the terms and conditions set forth in this Agreement will cause substantial damages to the Company and the Purchaser; NOW, THEREFORE, in consideration of the premises and of the mutual covenants and conditions herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Employment; Duties. The Company hereby employs Executive and Executive hereby accepts such employment as President and Chief Executive Officer of the Company, on the terms and subject to the conditions hereinafter set forth. In such capacity and subject to the authority 1 of the Company's Board of Directors ("Board"), Executive shall perform such functions with respect to the business and affairs of the Company, consistent with his position, as the Board or the board of directors of the Subsidiaries (as defined below) shall determine from time to time. Executive shall be based and shall perform his duties at the Company's present principal offices; provided, however, that Executive shall not be required to perform his duties at the principal offices of the Company if the Company should move its principal offices during the Employment Term to a location in excess of thirty-five (35) miles from Evansville, Indiana. Executive shall travel at the Company's expense to the extent necessary to perform his duties hereunder. Executive shall devote his full business time and energies to the business and affairs of the Company and shall not accept other employment or perform any services for any other person, firm or corporation; provided, however, that Executive may devote reasonable amounts of time to activities having a charitable, educational or other public interest purpose if and to the extent such activities do not substantially interfere with Executive's performance of his responsibilities hereunder. Executive shall, upon reasonable notice, furnish such information and proper assistance to the Company and its affiliates as reasonably may be required by the Company in connection with any legal action involving the Company or any of its affiliates. Executive agrees to use his best efforts, skills and abilities to promote and protect the interests of the Company and all of its subsidiaries now or hereafter organized (the "Subsidiaries"), including United Fidelity Bank, FSB (the "Bank") and to perform his duties hereunder. Executive agrees to serve as a director or officer of any of the Company's subsidiaries or controlled affiliates requesting his services, and to perform such services for such subsidiaries or controlled affiliates, consistent with his office, as its Board of Directors or other governing body shall request. 2. Term; Termination. (a) Executive's employment pursuant hereto shall become effective on the Effective Date (as hereinafter defined) and shall remain in effect, subject to renewal pursuant to subparagraph (b) of this Paragraph 2 and to earlier termination pursuant to subparagraph (c) of this Paragraph 2, until the third anniversary of the Effective Date (the "Initial Expiration Date"). The term of employment hereunder, commencing with the Effective Date and including any renewals or extensions hereof, is hereinafter referred to as the "Employment Term." (b) Subject to the provisions of subparagraph (c) of this Paragraph 2, this Agreement may be extended for additional periods of one year commencing on the Initial Expiration Date and on each anniversary of the Initial Expiration Date (each such anniversary date being referred to herein as an "Extension Date") if the Board of Directors of the Company determines by resolution, after reviewing the performance of the Executive, to extend this Agreement prior to the Initial Expiration Date and/or Extension Date and such extension is not objected to by Executive pursuant to written notice to the Company prior to such anniversary. (c) In addition to the expiration of the Employment Term as hereinabove provided, subject to the provisions of Paragraph 2(f) hereof, this Agreement and Executive's employment by the Company shall terminate on the Date of Termination (as hereinafter defined) as follows: (i) automatically upon Executive's death; 2 (ii) at the Company's option if, as a result of Executive's incapacity due to physical or mental illness, he is unable to perform the duties of his employment hereunder for a continuous period of sixty (60) days or an aggregate of ninety (90) days in any one hundred eighty (180) day period (each such period being hereinafter referred to as a "Disability Period"); (iii) at the Company's option at any time for Cause. "Cause" shall mean (A) action by Executive involving personal dishonesty; incompetence; willful misconduct; breach of fiduciary duty involving personal profit; intentional failure to perform stated duties; willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order; or gross negligence which has or may reasonably be expected to have a material adverse effect on the financial condition or reputation of the Company or the Bank; (B) termination of Executive pursuant to the requirement or direction of a federal or state regulatory agency having jurisdiction over the Company or the Bank; (C) conviction of Executive of the commission of any criminal offense involving dishonesty or breach of trust; (D) any material breach by Executive of a term, condition or covenant of this Agreement; or (E) the engagement by Executive in any activity constituting a material breach of Paragraph 9, 10 or 11 of this Agreement. The Company reserves the right to institute litigation against Executive to recover damages in the event that the Company or its Subsidiaries or Affiliates suffers damages as a result of the Executive engaging in any of the conduct specified in clauses (A) through (E) of this Section 2(c)(iii); (iv) at the Company's option at any time without Cause; or (v) by Executive for Good Reason. "Good Reason" shall mean (A) any removal of Executive as a principal executive officer of the Company, except as a result of his death, his disability or for Cause, (B) the failure of the Company to cause any resulting or surviving owner of the Company's business or any transferee of the Company to assume all of the Company's continuing obligations hereunder, or (C) a material breach by the Company of any of its obligations to Executive arising hereunder. (d) Any termination pursuant to subparagraph (b) or (c) shall be communicated by a Notice of Termination from the terminating party to the other party. "Notice of Termination" shall mean a written notice indicating the specific provision of this Agreement upon which such termination is based and, in the case of a termination pursuant to subparagraph(c)(ii), (c)(iii) or (c)(v), setting forth in reasonable detail the facts and circumstances giving rise to such termination. (e) As appropriate under the circumstances, "Date of Termination" shall mean, as applicable: (A) the date of Executive's death; (B) thirty (30) days after a Notice of Termination is given to Executive, if Executive's employment is terminated pursuant to subparagraph (c)(ii) above; (C) the date specified in the Notice of Termination if Executive's employment is terminated by the Company pursuant to subparagraph (c)(iii) or (c)(iv) above; or (D) thirty (30) days after a Notice of Termination is given to the Company, if Executive's employment is terminated pursuant to subparagraph (c)(v) above. 3 (f) All obligations under the Agreement shall be terminated, except to the extent determined that the continuation of the Agreement is necessary for the continued operation of the Bank (i) by the Director of the Office of Thrift Supervision or his or her designee, at the time the Federal Deposit Insurance Corporation or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the Federal Deposit Insurance Act; or (ii) by the Director of the Office of Thrift Supervision or his or her designee at the time the Director of the Office of Thrift Supervision or his or her designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director of the Office of Thrift Supervision to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. 3. Compensation. (a) The Company shall pay Executive an annual base salary ("Base Salary") equal to $195,000 during the Employment Term and during any renewal year of the Employment Term (subject to any increases which the Board, in its sole discretion, may approve). Base Salary shall be payable in equal installments in accordance with the Company's regular payroll practices for executive level employees, as determined from time to time by the Board, but in no event less frequently than monthly. (b) On the Effective Date, the Executive shall be granted options to purchase 50,000 shares of Common Stock at an exercise price of $4.00 per share and otherwise substantially upon the terms and conditions set forth in the form of Option Agreement attached as Exhibit A hereto. Such options shall not be "incentive stock options" within the meaning of the Internal Revenue Code. 4. Compensation Upon Termination and During Disability. (a) If Executive's employment shall be terminated by his death, the Company shall pay to his estate Executive's unpaid Base Salary for the period through the Date of Termination from the Company's regular payroll. In addition, Executive shall continue to participate in the employee benefit, retirement and compensation plans and receive other benefits as provided in Paragraph 6(a) hereof through the Date of Termination. (b) In the event of Executive's physical or mental disability, the Company shall continue to pay Executive his Base Salary during the Disability Period. If the Company terminates Executive following the Disability Period, the Company shall pay Executive his Base Salary for the period from the Company's regular payroll through the Date of Termination. In addition, Executive shall continue to participate in the employee benefit, retirement and compensation plans and receive other benefits as provided in Paragraph 6(a) hereof through the Date of Termination. (c) If Executive's employment shall be terminated for Cause by the Company or by the Executive without Good Reason, the Company shall continue to pay Executive his Base Salary through the Date of Termination. In addition, Executive shall continue to participate 4 in the employee benefit, retirement and compensation plans and receive other benefits as provided in Paragraph 6(a) hereof through the Date of Termination. (d) If Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason and such termination does not occur after a Change in Control (as hereinafter defined), (i) the Company shall continue to pay Executive his Base Salary for a period equal to the remaining Employment Term payable in semi-monthly installments during such remaining period, and (ii) in lieu of the COBRA coverage otherwise available to the Executive and provided that the Executive's continued participation is permissible under the terms and provisions of the employee health plans and programs in which the Executive participated immediately prior to the Date of Termination, the Company shall maintain in full force and effect for the continued benefit of the Executive for a period equal to the remaining Employment Term, all such plans and programs. The Executive shall pay all costs associated with obtaining the benefits described in this subparagraph (d) for the entire period following the Date of Termination, but will be promptly reimbursed for such costs by the Company. In the event that the Executive's participation in any such plan or program is or becomes barred or unavailable, the Company shall pay to the Executive the difference between the cost the Executive would have incurred pursuant to the terms of this Agreement had he been able to continue participation in such plans and programs and the cost to the Executive of obtaining substantially comparable health benefits. Executive's entitlement to benefits pursuant to this subparagraph (d) shall be reduced to the extent that Executive is eligible for comparable health benefits in connection with employment with an employer other than the Company. (e) If Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason at any time within twelve months after a Change of Control, then the Company shall pay Executive the amounts specified in subparagraphs (e)(i) and (e)(iii) below at the times and in the manner specified therein, less any withholding payments required under applicable federal, state or local income tax, other tax or social security laws or similar statutes and shall provide Executive with the benefits specified in subparagraph (e)(ii) below: (i) an aggregate amount payable in 48 equal semi-monthly installments commencing with the Company's first regularly scheduled payroll payment date after the Date of Termination or, at the option of the Executive, in a lump-sum payable no later than thirty (30) days after the Date of Termination equal to the lesser of (A) 2.99 times the average annual Base Salary plus 2.99 times the average annual bonus paid to the Executive by the Company and any subsidiaries of the Company during the five most recent taxable years (annualized if such year is a "short" year for tax purposes) immediately preceding the Date of Termination and (B) 2.99 times the annual Base Salary in respect of the fiscal year in which the Date of Termination occurs and 2.99 times the annual bonus paid to the Executive by the Company and/or all subsidiaries during the last fiscal year immediately preceding the Date of Termination; 5 (ii) in lieu of the COBRA coverage otherwise available to the Executive and provided that the Executive's continued participation is permissible under the terms and provisions of the employee health plans and programs in which the Executive participated immediately prior to the Date of Termination, the Company shall maintain in full force and effect for the continued benefit of the Executive for three (3) years following the Date of Termination, all such plans and programs. The Executive shall pay all costs associated with obtaining the benefits described in this subparagraph (e)(ii) for the first twenty-four (24) months following the Date of Termination, but will be promptly reimbursed for such costs by the Company. The Executive shall not be entitled to reimbursement for the costs relating to such benefits for the final twelve (12) months of coverage. In the event that the Executive's participation in any such plan or program is or becomes barred or unavailable, the Company shall pay to the Executive the difference between the cost the Executive would have incurred pursuant to the terms of this Agreement had he been able to continue participation in such plans and programs and the cost to the Executive of obtaining substantially comparable health benefits. Executive's entitlement to benefits pursuant to this subparagraph (e)(ii) shall be reduced to the extent that Executive is eligible for comparable health benefits in connection with employment with an employer other than the Company; and (iii) the Company will permit Executive or his personal representative(s) or heir(s), during a period of thirty (30) days following the Date of Termination (but in no event later than the date of expiration or forfeiture of the subject stock options), to require the Company, upon written request, to purchase all outstanding stock options previously granted to Executive under any Company stock option plan at a cash purchase price equal to the amount by which the aggregate "fair market value" (as hereinafter defined) of the shares subject to such options on the Date of Termination exceeds the aggregate exercise price for such options; provided that the Company shall not be required to purchase any such stock options which have expired or were forfeited pursuant to the terms of such plan or any stock option agreement issued pursuant to the terms of such plan. For purposes of this subparagraph (e)(iii), "fair market value" shall mean the mid-point between the reported closing bid and ask prices for the shares of such option stock as quoted by the North American Securities Dealer Automated Quotation System ("NASDAQ"). If the option stock is not quoted on NASDAQ, the "fair market value" shall be determined by the Board based upon quotations of the entities which make a market in the Company's option stock. In the event no entity makes a market in the Company's option stock, "fair market value" shall mean the amount agreed upon by the Executive and the Company. If the Executive and the Company are unable to reach an agreement regarding the "fair market value" of the option stock within ten (10) days of the Date of Termination specified in the Notice of Termination, then the Executive and the Company shall each select an appraisal firm and the two firms shall determine the fair market value of the option stock. If the two appraisal firms cannot agree upon the "fair market value" within thirty (30) days of their appointment, they shall appoint a third appraisal firm and the decision of a majority of the three (3) appraisal firms shall be final and binding on the Executive and the Company; provided, however, the Executive may elect, by notifying the Company within thirty (30) days after the Date of Termination, to have the following definition of "fair market value" apply for purposes of this subparagraph (e)(iii): the per share book value of the Company's option stock, calculated in accordance with generally accepted accounting principles as of the last day of the month coinciding with or immediately preceding the Date of Termination. The costs of any appraisals required pursuant to this subparagraph (e)(iii) shall be paid one-half by the Company and one-half by the Executive or his personal representative(s) or heir(s), as applicable. 6 (f) If Executive is suspended and/or temporarily prohibited from participating in the conduct of the Company's or any affiliate's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1818(e)(3) and (g)(1)), the Company's obligations under this Agreement (including, without limitation, the payment of Base Salary) shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Company shall (i) pay Executive all or part of the compensation withheld while its obligations under this Agreement were suspended and (ii) reinstate (in whole or in part) any of it obligations which were suspended. (g) If Executive is removed and/or permanently prohibited from participating in the conduct of the Company's or any affiliate's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1818(e)(4) and (g)(1)), all obligations of the Company under this Agreement shall terminate as of the effective date of such order. In connection therewith, the Company shall continue to pay Executive his Base Salary through the Date of Termination. In addition, Executive shall continue to participate in the employee benefit, retirement and compensation plans and receive other benefits as provided in Paragraph 6(a) hereof through the Date of Termination. If the Company is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act), all obligations under this Agreement shall terminate as of the date of default, but this provision shall not affect any vested rights of Executive or of the Company. (h) Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. (i) Unless otherwise agreed by the Company and Executive, all payments made to Executive (or his estate, as applicable) pursuant to this Paragraph 4, whether during a Disability Period or after the Date of Termination, shall be made in the amounts, at the times and subject to the terms and conditions otherwise applicable to payments to Executive pursuant to Paragraph 3 hereof, as if such payments were made to Executive during the Employment Term. 5. Reimbursement of Expenses. In addition to the compensation and benefits provided to Executive pursuant to other provisions of this Agreement, the Company will reimburse Executive in a manner consistent with established policies of the Company for reasonable out-of-pocket expenses actually incurred or paid by him in the performance of his services hereunder, subject to presentation of such expense statements, receipts, vouchers or other supporting information as the Company may reasonably require. 6. Other Benefits. In addition to the compensation and benefits provided to Executive pursuant to other provisions of this Agreement, during the Employment Term, Executive shall be entitled to the following: (a) participation in and receipt of benefits under (i) any retirement plan or arrangement for the benefit of executive employees of the Company,(ii) any health or other welfare plan or arrangement for the benefit of executive employees of the Company, (iii) any bonus, profit-sharing or deferred compensation plan or arrangement for the benefit of executive employees 7 of the Company and (iv) any other employee benefit plan, program or arrangement, made available by Company to its executive employees; provided that Executive's participation in any such plan, program or arrangement shall be on a basis consistent with the terms, conditions and overall administration of such plan, program or arrangement and Executive is otherwise eligible to participate or receive benefits under such plan, program or arrangement; and (b) a number of paid vacation days, sick days and personal days which are usual and customary for senior executive officers of corporations which are similarly situated to the Company or provided to any other executive level employees of the Company, but in no event shall the number of paid vacation days in any year of the Employment Term exceed four (4) weeks. 7. Other Agreements. Executive represents and warrants to the Company that he is not a party to any agreement, written or oral, and is not bound by the terms of any written or oral agreement to which he is not a party, which prohibits him from performing his duties under this Agreement or of serving the Company in any other capacity. Executive agrees to indemnify the Company and shall hold the Company harmless from and against any liability, loss, cost or expense, including reasonable attorneys' fees and expenses, incurred by the Company by reason of the inaccuracy of the representations and warranties made by Executive in this Paragraph 7. 8. Life Insurance. Executive agrees that, if requested by the Company, he will cooperate with the Company to obtain a policy or policies of life insurance on his life in such amount(s) as the Company may determine, including submitting to any appropriate medical examinations and completing and executing any appropriate application(s) or similar form(s). Any such policy or policies shall be for the benefit of the Company and the Company shall pay all premiums thereunder. 9. Inventions, Etc. Executive agrees to promptly disclose in writing to the Company all ideas, formulae, programs, systems, devices, processes, business concepts, discoveries and inventions (hereinafter referred to collectively as "Discoveries"), whether or not patentable, which he, while employed hereunder, conceives, makes, develops, acquires or reduces to practice, whether alone or with others and whether during or after usual working hours, and which are related to the Company's business or interests, or are used or usable by the Company, or arise out of or in connection with the duties performed by Executive hereunder. Executive hereby transfers and assigns to the Company all right, title and interest in and to all Discoveries, including any and all domestic and foreign patent rights therein and any renewals thereof. On request of the Company, Executive shall from time to time during or after the expiration or termination of his employment by the Company, execute such further instruments (including, without limitation, applications for letters patent and assignments thereof) and do all such other reasonable and legal acts and things as may be deemed necessary or desirable by the Company to protect and/or enforce its rights in respect of Discoveries. All expenses of filing or prosecuting any patent application shall be borne by the Company, but Executive shall cooperate in filing and/or prosecuting any such application. Executive shall receive no additional compensation for the performance of his obligations hereunder, except as may be agreed to by the Company. 8 10. Covenant Regarding Confidentiality. All information about the business and affairs of the Company and its affiliates which is not generally available to the public or disclosed by the Company or such affiliates, and any information about the Company and its affiliates which becomes generally available to the public as a result of a breach by any person of any confidentiality obligation to the Company or any such affiliate (including, without limitation, with respect to the Company and each such affiliate, its secrets and information about its business, financial condition and performance, prospects, products, technology, know-how, merchandising and advertising programs and plans, and the names of its suppliers, customers and lenders and the nature of its dealings with them), constitute "Company Confidential Information." Executive acknowledges that he will have access to, and knowledge of, Company Confidential Information, and that improper use or revelation of same by Executive, whether during or after the termination of his employment by the Company, could cause serious injury to the business of the Company and its affiliates. Accordingly, Executive agrees that, except as required to perform his duties under this Agreement, or as required by law, he will forever keep secret and inviolate all Company Confidential Information which shall come into his possession, and he will not disclose the same to any other person or organization for so long as such Company Confidential Information is not generally known by, or accessible to, the public. Executive further agrees that he will not use any Company Confidential Information for his own benefit or directly or indirectly for the benefit of any person or organization other than the Company and its affiliates. 11. Covenant Not to Compete. (a) During the Employment Term and for a period of three (3) years thereafter (whether Executive's employment shall have ended by reason of the expiration of this Agreement or otherwise, and which period is hereinafter referred to as the "Restricted Period"), Executive shall not, directly or indirectly, engage in any business anywhere in the Restricted Territory (as hereinafter defined) either as a stockholder, officer, manager, employee, agent, representative, consultant, partner, member, proprietor or principal in any other capacity, in any business engaged in the wholesale and/or retail sub-prime mortgage lending business or net branch banking or in the consumer indirect lending area (the "Restricted Activities"), or directly or indirectly, own any interest in, manage, operate, join, control, lend money or render financial or other assistance to or participate in or be connected with, as a partner, stockholder, member, proprietor, other principal, consultant or otherwise, any person that otherwise competes with respect to the Restricted Activities with the Company or such Subsidiaries, including the Bank. As a separate and independent covenant, the Executive further agrees with the Company that, during the Restricted Period, the Executive will not in any way, directly or indirectly, for the purpose of conducting or engaging in the Restricted Activities, solicit, advise or otherwise do, or attempt to do, business with any customers of the Company or its affiliates with whom the Company or its affiliates had any dealings during the one (1) year period immediately preceding such solicitation or take away or interfere or attempt to interfere with any employee (or person who was an employee during the six (6) month period preceding the date of attempted hiring or recruitment), customer, trade, business or patronage of the Company or its affiliates, or induce or attempt to induce any of them to leave the employ of the Company or its affiliates, or violate the terms of their contracts, or any employment arrangements, with the Company or its affiliates. Notwithstanding anything herein to the contrary, the ownership by Executive of not more than five percent (5%) of any class of outstanding securities of an issuer listed on a national securities exchange or regularly traded in the over-the-counter market 9 shall not constitute a violation of this Paragraph 11(a). The "Restricted Territory" shall mean any location in the United States of America, and in any other country, state, region, county, city or locality thereof where the Company or any of its Subsidiaries, including the Bank or any of its affiliates is transacting business during the Restricted Period or during a period of five (5) years prior thereto has been transacting business. The parties agree and intend that the covenants contained in this Paragraph 11(a) shall be construed as a series of separate covenants, one for each applicable region, county, city, state or country. Except for geographic coverage, each such separate covenant shall be deemed identical in terms. (b) Executive acknowledges that the operation and conduct of the business of the Company is special and unique and involves the use of trade secrets and confidential information and that during the period of his employment hereunder, Executive will acquire special knowledge and/or skill that he could effectively utilize in competition with the Company and its affiliates. Executive further acknowledges that the provisions of Paragraphs 9, 10 and 11 hereof are essential to the goodwill and profitability of the Company and its affiliates, and have provided substantial inducement to the Company's agreement to execute and consummate this Agreement, and that the application or operation thereof shall not involve a substantial hardship upon his future business or livelihood. Executive agrees that remedies at law for any breach by him of the covenants contained in Paragraphs 9, 10 and 11 hereof will be inadequate, and that in the event of a violation of the covenants therein, in addition to any and all legal and equitable remedies which may be available to the Company and its affiliates, the said covenants may be enforced by an injunction in a suit in equity, without the necessity of proving actual damage, and that a temporary injunction may be granted immediately upon the commencement of any such suit and without notice. Should any court determine that any of the separate covenants of this Paragraph 11 shall be unenforceable in respect of geographic area, then such covenant shall be deemed eliminated for the purpose of those proceedings to the extent necessary to permit the remaining separate covenants to be enforced. If any other provision of Paragraphs 9, 10 and 11 shall be deemed by an appropriate court to be unenforceable for any reason, then such court shall be empowered to substitute, to the extent enforceable, provisions similar thereto or other provisions so as to provide the Company and its affiliates to the fullest extent permitted by applicable law, the benefits intended by Paragraphs 9, 10 and 11 hereof. Executive acknowledges that the covenants contained in this Paragraph 11 are intended by the parties to be in addition to and not in lieu of or in limitation of any other agreement or covenant between Executive and the Company. Each of the provisions of Paragraphs 9,10 and 11 hereof shall survive the termination of this Agreement and the termination of Executive's employment by the Company. (c) Notwithstanding anything in this Paragraph 11 to the contrary, in the event that Executive's employment is terminated by the Company without Cause prior to the scheduled expiration of the Employment Term, the provisions of this Paragraph 11 shall apply only for the period during which Executive is paid Base Salary (or would have been paid the Base Salary except for the election by the Executive to receive a lump-sum payment pursuant to Paragraph 4(e)(i)) after termination pursuant to the terms of this Agreement, plus one year. 12. Notices. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed to have been duly given or made as of the date delivered if delivered personally or by facsimile (followed by first class U.S. mail), or three days 10 after mailing if mailed by registered or certified mail (postage prepaid, return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice, except that notice of changes of address shall be effective upon receipt): If to the Company: Fidelity Federal Bancorp 700 S. Green River Road - Suite 2000 Evansville, Indiana 47715 Attn: Chairman of the Board of Directors Telecopy No.: (812) 469-2101 with a copy to: Krieg, DeVault, Alexander & Capehart, LLP One Indiana Square - Suite 2800 Indianapolis, Indiana 46204 Attn: John W. Tanselle, Esq. Telecopy No.: (317) 636-1507 If to Executive, to him at his address set forth in the introductory Paragraph of this Agreement. 13. Definitions. In addition to other terms defined elsewhere in this Agreement, the following terms shall have the meanings set forth below: "Change of Control" shall mean (a) consummation of any transaction in which a person or entity was required to file an application or notice to acquire the securities or assets of the Company or the Bank, whether by purchase, merger, consolidation, share exchange or other combination or reorganization (irrespective of which party is the surviving entity), or by sale, lease, exchange, transfer, or other disposition of all or any substantial part of the assets of the Company or the Bank (collectively referred herein as a "Transaction"), under the federal Bank Holding Company Act of 1956 (12 U.S.C. Section 1841 et seq), the federal Change in Bank Control Act (12 U.S.C. Section 1817(j)), the federal Savings and Loan Holding Company Act (12 U.S.C. Section 1467a) or the federal Bank Merger Act (12 U.S.C. Section 1828(c)), as such laws may be amended from time to time or any regulations promulgated thereunder (collectively, the "Governing Laws"). Notwithstanding anything herein to the contrary, the following shall not be deemed to constitute a "Change of Control" for purposes of this definition or for purposes of this Agreement: (i) the Acquisition; (ii) the purchase by Purchaser, or any of their affiliates, or the transfer by Purchaser to any of their affiliates, of shares of Common Stock; (iii) consummation of any Transaction requiring approval under the Governing Laws (1) involving the Company solely in connection with the acquisition by the Company of any subsidiary, (2) involving a business combination or reorganization in which the shareholders of the Company immediately prior to such Transaction own at least a majority of the issued and outstanding voting securities of the surviving entity immediately subsequent to such Transaction and individuals who were directors of the Company immediately 11 prior to such Transaction constitute at least a majority of the Board of Directors of the surviving entity immediately subsequent to such Transaction or (3) involving any employee benefit plan sponsored by the Company or any subsidiary thereof; (iv) consummation of any acquisition of shares of Common Stock requiring approval under the Governing Laws by individuals or entities who at the date of this Agreement were either a director or officer of the Company or the beneficial owner (either directly or indirectly) of ten percent (10%) or more of the combined voting power of the Company's then outstanding securities; or (v) consummation of any acquisition of the Common Stock requiring approval under the Governing Laws by individuals or entities which would result in such individuals or entities owning directly and/or beneficially less than 25% of the combined voting power of the Company's then outstanding securities, unless after such acquisition such individuals or entities would constitute the largest shareholder of the Common Stock (for this purpose, the shares of Common Stock owned by the Purchaser and its affiliates shall be aggregated). "Common Stock" shall mean the common stock, stated value $1.00 per share, of the Company. "Effective Date" shall mean the date of this Agreement. 14. Conditions and Acknowledgment. (a) This Agreement shall only become effective and binding upon the Executive and upon the Company commencing upon and as of the Effective Date; and (b) By executing and delivering this Agreement, Executive expressly acknowledges and agrees (i) that his continuation of employment by the Company pursuant to the provisions of this Agreement constitutes a significant condition to consummation of the Stock Purchase Agreement, (ii) that Executive's failure to continue his employment with the Company from and after the Effective Date upon the terms and conditions set forth in this Agreement (unless Executive's employment by the Company is terminated upon the terms and conditions set forth herein) will cause substantial damages to the Company and to the Purchaser for which he, the Executive, shall be personally liable, and (iii) upon the Effective Date, the Severance Agreement dated December 1, 1997 by and between the Executive and the Company shall terminate and be void and of no effect, and that Executive shall have no rights and the Company shall have no obligations thereunder. 15. General. (a) This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Indiana applicable to contracts made and to be performed entirely within such state (without regard to principles of conflict of laws of Indiana or of any other jurisdictions). (b) The Paragraph headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 12 (c) This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof, and supersedes all prior agreements, arrangements and understandings, written or oral, between the parties. (d) This Agreement and the benefits hereunder are personal to the Company and Executive, and are not assignable or transferable, nor may the services to be performed hereunder be assigned by Executive, the Company to any person, firm or corporation; provided, however, that this Agreement and the benefits hereunder may be assigned by the Company and/or will be assigned (by operation of law) to any person, firm or corporation acquiring all or substantially all of the assets or stock of the Company or to any corporation into which the Company may be merged or consolidated, as long as no such assignment operates to expand the Restricted Territory without the consent of Executive. (e) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, to expressly assume and agree to perform all of the provisions of this Agreement. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be deemed a material breach of this Agreement and shall entitle Executive to terminate his employment with the Company pursuant to subparagraph 2(c)(v) hereof. (f) Anything in this Agreement to the contrary notwithstanding in the event the Company's independent public accountants determine that any payment by the Company to or for the benefit of Executive, whether paid or payable pursuant to the terms of this Agreement, would be non-deductible by the Company for federal income tax purposes as a result of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then the amount payable to or for the benefit of Executive pursuant to the Agreement shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Paragraph 15(f), the "Reduced Amount" shall be the amount which maximizes the amount payable to Executive without causing the payment to be non-deductible to the Company as a result of the provisions of Section 280G of the Code. (g) All references in this Agreement to amounts to be paid or benefits to be provided to or on behalf of Executive are to the gross amounts thereof which are due hereunder. Except as otherwise provided herein, the Company shall have the right to deduct therefrom or collect from Executive all sums which may be required to be deducted or withheld under any provision of law, including, but not limited to, social security payments, income tax withholding, any other deduction required by law and any interest, penalties or additions to tax imposed with respect thereto. (h) This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms or covenants hereof may be waived, only by a written instrument executed by both parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time to require performance of any provision hereof shall in no manner affect the right of such party at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by 13 conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. (i) This Agreement may be executed in counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. (j) Subject to the provisions of Paragraph 11 hereof, if any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. * * * * * * * * 14 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. FIDELITY FEDERAL BANCORP By: ----------------------------- Name: Jack Cunningham Title: Chairman of the Board ----------------------------- M. BRIAN DAVIS 15 EX-10.(D) 3 0003.txt EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of May 19, 2000, between DONALD R. NEEL, an individual residing at 10414 Knollbrook Court, Evansville, Indiana 47711 ("Executive"), FIDELITY FEDERAL BANCORP, an Indiana corporation (the "Company") and UNITED FIDELITY BANK, FSB (the "Bank"), a wholly-owned subsidiary of the Company. W I T N E S S E T H: - - - - - - - - - - WHEREAS, Executive is currently employed as the Executive Vice President, Chief Financial Officer and Treasurer of the Company and Executive Vice President, Chief Operating Officer and Treasurer of the Bank; and WHEREAS, the Company and the Bank expressly acknowledge that Executive has heretofore performed a significant role in the furtherance of the Company's and the Bank's business activities; and WHEREAS, on January 21, 2000 the Company and Pedcor Investments, a limited liability company, entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") pursuant to which Pedcor Investments, a limited liability company has agreed to purchase from the Company and the Company has agreed to sell to the Purchaser or its permitted assigns (including Pedcor Bancorp and Pedcor Holdings, LLC) (collectively, the "Purchaser") shares of Common Stock (as hereinafter defined) of the Company (such transaction being hereinafter referred to as the "Acquisition"); and WHEREAS, the obligation of the Purchaser to consummate the Acquisition is expressly conditioned upon the execution and delivery of this Agreement by Executive on the date hereof and the performance of his obligations under this Agreement by Executive from and after the Effective Date (as hereinafter defined); WHEREAS, the Company desires to continue the employment of Executive as its Chief Financial Officer and the Bank desires to continue the employment of Executive as its Executive Vice President, Chief Operating Officer and Treasurer, and effective July 1, 2000 the Bank desires the Executive to become its President and Chief Executive Officer, and to be assured of its right to his services, on the terms and conditions hereinafter set forth, and Executive desires to continue to be so employed commencing on the Effective Date on such terms and conditions; and WHEREAS, Executive expressly understands and agrees that his failure to continue employment with the Company and the Bank on the Effective Date upon the terms and conditions set forth in this Agreement will cause substantial damages to the Company and the Purchaser; NOW, THEREFORE, in consideration of the premises and of the mutual covenants and conditions herein contained, and for other good and valuable consideration, the receipt and 1 sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Employment; Duties. The Company hereby employs Executive and Executive hereby accepts such employment as Chief Financial Officer of the Company, and the Bank hereby employs Executive and Executive hereby accepts such employment as Executive Vice President, Chief Operating Officer and Treasurer of the Bank, on the terms and subject to the conditions hereinafter set forth. Effective July 1, 2000, Executive shall be promoted from the offices of Executive Vice President, Chief Operating Officer and Treasurer of the Bank and assume the role and office of the President and Chief Executive Officer of the Bank. In such capacities, Executive shall perform such functions with respect to the business and affairs of the Company, the Bank, and the Subsidiaries (as defined below) consistent with his position, as the Board of the Company or the Bank shall determine from time to time; provided, however, that Executive shall not be required to perform his duties at the principal offices of the Bank if the Bank should move its principal offices during the Employment Term to a location in excess of thirty-five (35) miles from Evansville, Indiana. Executive shall travel at the expense of the Company or the Bank, as appropriate, to the extent necessary to perform his duties hereunder. Executive shall devote his full business time and energies to the business and affairs of the Company and the Bank and shall not accept other employment or perform any services for any other person, firm or corporation; provided, however, that Executive may devote reasonable amounts of time to activities having a charitable, educational or other public interest purpose if and to the extent such activities do not substantially interfere with Executive's performance of his responsibilities hereunder. Executive shall, upon reasonable notice, furnish such information and proper assistance to the Company and its affiliates as reasonably may be required by the Company or the Bank in connection with any legal action involving the Company, the Bank, or any of their affiliates. Executive agrees to use his best efforts, skills and abilities to promote and protect the interests of the Company and all of its subsidiaries now or hereafter organized (the "Subsidiaries"), including the Bank, and to perform his duties hereunder. Executive agrees to serve as a director or officer of any of the Company's subsidiaries or controlled affiliates requesting his services, and to perform such services for such subsidiaries or controlled affiliates, consistent with his office, as its Board of Directors or other governing body shall request. 2. Term; Termination. (a) Executive's employment pursuant hereto shall become effective on the Effective Date (as hereinafter defined) and shall remain in effect, subject to renewal pursuant to subparagraph (b) of this Paragraph 2 and to earlier termination pursuant to subparagraph (c) of this Paragraph 2, until the third anniversary of the Effective Date (the "Initial Expiration Date"). The term of employment hereunder, commencing with the Effective Date and including any renewals or extensions hereof, is hereinafter referred to as the "Employment Term." (b) Subject to the provisions of subparagraph (c) of this Paragraph 2, this Agreement may be extended for additional periods of one year commencing on the Initial Expiration Date and on each anniversary of the Initial Expiration Date (each such anniversary date being referred to herein as an "Extension Date") if the Board of Directors of both the Company and the Bank determines by resolution, after reviewing the performance of the Executive, to extend this 2 Agreement prior to the Initial Expiration Date and/or Extension Date and such extension is not objected to by Executive pursuant to written notice to the Company or the Bank prior to such anniversary. (c) In addition to the expiration of the Employment Term as provided above, subject to the provisions of Paragraph 2(f) hereof, this Agreement and Executive's employment by the Company and the Bank shall terminate on the Date of Termination (as hereinafter defined) as follows: (i) automatically upon Executive's death; (ii) at the the option of the Company or the Bank if, as a result of Executive's incapacity due to physical or mental illness, he is unable to perform the duties of his employment hereunder for a period of sixty (60) consecutive days or an aggregate of ninety (90) days in any one hundred eighty (180) day period (each such period being hereinafter referred to as a "Disability Period"); (iii) at the option of the Company or the Bank at any time for Cause. "Cause" shall mean (A) action by Executive involving personal dishonesty; incompetence; willful misconduct; breach of fiduciary duty involving personal profit; intentional failure to perform stated duties; willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order; or gross negligence which has or may reasonably be expected to have a material adverse effect on the financial condition or reputation of the Company or the Bank; (B) termination of Executive pursuant to the requirement or direction of a federal or state regulatory agency having jurisdiction over the Company or the Bank; (C) conviction of Executive of the commission of any criminal offense involving dishonesty or breach of trust; (D) any material breach by Executive of a term, condition or covenant of this Agreement; or (E) the engagement by Executive in any activity constituting a material breach of Paragraph 9, 10 or 11 of this Agreement. The Company reserves the right to institute litigation against Executive to recover damages in the event that the Company or its Subsidiaries or Affiliates suffers damages as a result of the Executive engaging in any of the conduct specified in clauses (A) through (E) of this Section 2(c)(iii); (iv) at the option of the Company or the Bank at any time without Cause; or (v) by Executive for Good Reason. "Good Reason" shall mean (A) any removal of Executive as a principal executive officer of the Company or the Bank, except as a result of his death, his disability or for Cause, (B) the failure of the Company or the Bank to cause any resulting or surviving owner of the Company's or the Bank's business or any transferee of the Company or the Bank to assume all of the Company's and the Bank's continuing obligations hereunder, or (C) a material breach by the Company or the Bank of any of its obligations to Executive arising hereunder. (d) Any termination pursuant to subparagraph (c) shall be communicated by a Notice of Termination from the terminating party to the other party. "Notice of Termination" 3 shall mean a written notice indicating the specific provision of this Agreement upon which such termination is based and, in the case of a termination pursuant to subparagraph (c)(ii), (c)(iii) or (c)(v), setting forth in reasonable detail the facts and circumstances giving rise to such termination. (e) As appropriate under the circumstances, "Date of Termination" shall mean, as applicable: (A) the date of Executive's death; (B) thirty (30) days after a Notice of Termination is given to Executive, if Executive's employment is terminated pursuant to subparagraph (c)(ii) above; (C) the date specified in the Notice of Termination if Executive's employment is terminated by the Company or the Bank pursuant to subparagraph (c)(iii) or (c)(iv) above; or (D) thirty (30) days after a Notice of Termination is given to the Company or the Bank, if Executive's employment is terminated pursuant to subparagraph (c)(v) above. (f) All obligations under the Agreement shall be terminated, except to the extent determined that the continuation of the Agreement is necessary for the continued operation of the Bank (i) by the Director of the Office of Thrift Supervision or his or her designee, at the time the Federal Deposit Insurance Corporation or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the Federal Deposit Insurance Act; or (ii) by the Director of the Office of Thrift Supervision or his or her designee at the time the Director of the Office of Thrift Supervision or his or her designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director of the Office of Thrift Supervision to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. 3. Compensation. (a) The Executive shall receive from the Company and/or the Bank an annual base salary ("Base Salary") equal in the aggregate to $140,000 during the Employment Term and during any renewal year of the Employment Term (subject to any increases which the Board, in its sole discretion, may approve). Base Salary shall be payable in equal installments in accordance with the Company's regular payroll practices for executive level employees, as determined from time to time by the Board, but in no event less frequently than monthly. The amount of the Base Salary shall be allocated on an equitable basis between the Company and the Bank, based upon the good faith determination by the Executive and the Board of Directors of the Company and the Bank as to the amount of time spent by the Executive with respect to the business of the Company and the business of the Bank. (b) On the Effective Date, the Executive shall be granted options to purchase 25,000 shares of Common Stock at an exercise price of $4.00 per share and otherwise substantially upon the terms and conditions set forth in the form of Option Agreement attached as Exhibit A hereto. Such options shall not be "incentive stock options" within the meaning of the Internal Revenue Code. 4 4. Compensation Upon Termination and During Disability. (a) If Executive's employment shall be terminated by his death, the Company and/or the Bank shall pay to his estate Executive's unpaid Base Salary for the period through the Date of Termination from the Company's and/or the Bank's regular payroll. In addition, Executive shall continue to participate in the employee benefit, retirement and compensation plans and receive other benefits as provided in Paragraph 6(a) hereof through the Date of Termination. (b) In the event of Executive's physical or mental disability, the Company and/or the Bank shall continue to pay Executive his Base Salary during the Disability Period. If the Company or the Bank terminates Executive following the Disability Period, the Company and/or the Bank shall pay Executive his Base Salary for the period from the Company's and/or the Bank's regular payroll through the Date of Termination. In addition, Executive shall continue to participate in the employee benefit, retirement and compensation plans and receive other benefits as provided in Paragraph 6(a) hereof through the Date of Termination. (c) If Executive's employment shall be terminated for Cause by the Company or the Bank or by the Executive without Good Reason, the Company and/or the Bank shall continue to pay Executive his Base Salary through the Date of Termination. In addition, Executive shall continue to participate in the employee benefit, retirement and compensation plans and receive other benefits as provided in Paragraph 6(a) hereof through the Date of Termination. (d) If Executive's employment is terminated by the Company or the Bank without Cause or by the Executive for Good Reason and such termination does not occur after a Change in Control (as hereinafter defined), (i) the Company and/or the Bank shall continue to pay Executive his Base Salary for a period equal to the remaining Employment Term payable in semi-monthly installments during such remaining period, and (ii) in lieu of the COBRA coverage otherwise available to the Executive and provided that the Executive's continued participation is permissible under the terms and provisions of the employee health plans and programs in which the Executive participated immediately prior to the Date of Termination, the Company and/or the Bank shall maintain in full force and effect for the continued benefit of the Executive for a period equal to the remaining Employment Term, all such plans and programs. The Executive shall pay all costs associated with obtaining the benefits described in this subparagraph (d) for the entire period following the Date of Termination, but will be promptly reimbursed for such costs by the Company and/or the Bank. In the event that the Executive's participation in any such plan or program is or becomes barred or unavailable, the Company and/or the Bank shall pay to the Executive the difference between the cost the Executive would have incurred pursuant to the terms of this Agreement had he been able to continue participation in such plans and programs and the cost to the Executive of obtaining substantially comparable health benefits. Executive's entitlement to benefits pursuant to this subparagraph (d) shall be reduced to the extent that Executive is eligible for comparable health benefits in connection with employment with an employer other than the Company or the Bank. (e) If Executive's employment is terminated by the Company or the Bank without Cause or by the Executive for Good Reason at any time within twelve months after a Change of Control, then the Company and/or the Bank shall pay Executive the amounts specified in 5 subparagraphs (e)(i) and (e)(iii) below at the times and in the manner specified therein, less any withholding payments required under applicable federal, state or local income tax, other tax or social security laws or similar statutes and shall provide Executive with the benefits specified in subparagraph (e)(ii) below: (i) an aggregate amount payable in 48 equal semi-monthly installments commencing with the Company's first regularly scheduled payroll payment date after the Date of Termination or, at the option of the Executive, in a lump-sum payable no later than thirty (30) days after the Date of Termination equal to the lesser of (A) 2.99 times the average annual Base Salary plus 2.99 times the average annual bonus paid to the Executive by the Company and any subsidiaries of the Company during the five most recent taxable years (annualized if such year is a "short" year for tax purposes) immediately preceding the Date of Termination, and (B) 2.99 times the annual Base Salary in respect of the fiscal year in which the Date of Termination occurs plus 2.99 times the annual bonus paid to the Executive by the Company and/or all subsidiaries during the last fiscal year immediately preceding the Date of Termination; (ii) in lieu of the COBRA coverage otherwise available to the Executive and provided that the Executive's continued participation is permissible under the terms and provisions of the employee health plans and programs in which the Executive participated immediately prior to the Date of Termination, the Company and/or the Bank shall maintain in full force and effect for the continued benefit of the Executive for three (3) years following the Date of Termination, all such plans and programs. The Executive shall pay all costs associated with obtaining the benefits described in this subparagraph (e)(ii) for the first twenty-four (24) months following the Date of Termination, but will be promptly reimbursed for such costs by the Company and/or the Bank. The Executive shall not be entitled to reimbursement for the costs relating to such benefits for the final twelve (12) months of coverage. In the event that the Executive's participation in any such plan or program is or becomes barred or unavailable, the Company and/or the Bank shall pay to the Executive the difference between the cost the Executive would have incurred pursuant to the terms of this Agreement had he been able to continue participation in such plans and programs and the cost to the Executive of obtaining substantially comparable health benefits. Executive's entitlement to benefits pursuant to this subparagraph (e)(ii) shall be reduced to the extent that Executive is eligible for comparable health benefits in connection with employment with an employer other than the Company or the Bank; and (iii) the Company will permit Executive or his personal representative(s) or heir(s), during a period of thirty (30) days following the Date of Termination (but in no event later than the date of expiration or forfeiture of the subject stock options), to require the Company, upon written request, to purchase all outstanding stock options previously granted to Executive under any Company stock option plan at a cash purchase price equal to the amount by which the aggregate "fair market value" (as hereinafter defined) of the shares subject to such options on the Date of Termination exceeds the aggregate exercise price for such options; provided that the Company shall not be required to purchase any such stock options which have expired or were forfeited pursuant to the terms of such plan or any stock option agreement issued pursuant to the terms of such plan. For purposes of this subparagraph (e)(iii), "fair market value" shall mean the mid-point between the reported closing bid and ask prices for the shares of such option stock as quoted by the North American Securities Dealer Automated Quotation System ("NASDAQ"). If the 6 option stock is not quoted on NASDAQ, the "fair market value" shall be determined by the Board based upon quotations of the entities which make a market in the Company's option stock. In the event no entity makes a market in the Company's option stock, "fair market value" shall mean the amount agreed upon by the Executive and the Company. If the Executive and the Company are unable to reach an agreement regarding the "fair market value" of the option stock within ten (10) days of the Date of Termination specified in the Notice of Termination, then the Executive and the Company shall each select an appraisal firm and the two firms shall determine the fair market value of the option stock. If the two appraisal firms cannot agree upon the "fair market value" within thirty (30) days of their appointment, they shall appoint a third appraisal firm and the decision of a majority of the three (3) appraisal firms shall be final and binding on the Executive and the Company; provided, however, the Executive may elect, by notifying the Company within thirty (30) days after the Date of Termination, to have the following definition of "fair market value" apply for purposes of this subparagraph (e)(iii): the per share book value of the Company's option stock, calculated in accordance with generally accepted accounting principles as of the last day of the month coinciding with or immediately preceding the Date of Termination. The costs of any appraisals required pursuant to this subparagraph (e)(iii) shall be paid one-half by the Company and one-half by the Executive or his personal representative(s) or heir(s), as applicable. (f) If Executive is suspended and/or temporarily prohibited from participating in the conduct of the Company's, Bank's, or any affiliate's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1818(e)(3) and (g)(1)), the Company's and the Bank's obligations under this Agreement (including, without limitation, the payment of Base Salary) shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Company and/or the Bank shall (i) pay Executive all or part of the compensation withheld while its obligations under this Agreement were suspended and (ii) reinstate (in whole or in part) any of it obligations which were suspended. (g) If Executive is removed and/or permanently prohibited from participating in the conduct of the Company's, Bank's, or any affiliate's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1818(e)(4) and (g)(1)), all obligations of the Company and the Bank under this Agreement shall terminate as of the effective date of such order. In connection therewith, the Company and/or shall continue to pay Executive his Base Salary through the Date of Termination. In addition, Executive shall continue to participate in the employee benefit, retirement and compensation plans and receive other benefits as provided in Paragraph 6(a) hereof through the Date of Termination. If the Company or the Bank is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act), all obligations under this Agreement shall terminate as of the date of default, but this provision shall not affect any vested rights of Executive or of the Company or of the Bank. (h) Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. (i) Unless otherwise agreed by the Company or the Bank, and Executive, all payments made to Executive (or his estate, as applicable) pursuant to this Paragraph 4, whether 7 during a Disability Period or after the Date of Termination, shall be made in the amounts, at the times and subject to the terms and conditions otherwise applicable to payments to Executive pursuant to Paragraph 3 hereof, as if such payments were made to Executive during the Employment Term. (j) The amounts to be paid to Executive pursuant to Paragraph 4 of this Agreement shall be allocated on an equitable basis between the Company and the Bank, based upon the good faith determination by the Board of Directors of the Company and the Bank as to the amount of time spent by the Executive with respect to the business of the Company and the business of the Bank. 5. Reimbursement of Expenses. In addition to the compensation and benefits provided to Executive pursuant to other provisions of this Agreement, the Company and/or the Bank will reimburse Executive in a manner consistent with established policies of the Company and the Bank for reasonable out-of-pocket expenses actually incurred or paid by him in the performance of his services hereunder, subject to presentation of such expense statements, receipts, vouchers or other supporting information as the Company or the Bank may reasonably require. 6. Other Benefits. In addition to the compensation and benefits provided to Executive pursuant to other provisions of this Agreement, during the Employment Term, Executive shall be entitled to the following: (a) participation in and receipt of benefits under (i) any retirement plan or arrangement for the benefit of executive employees of the Company or the Bank,(ii) any health or other welfare plan or arrangement for the benefit of executive employees of the Company or the Bank, (iii) any bonus, profit-sharing or deferred compensation plan or arrangement for the benefit of executive employees of the Company or the Bank, and (iv) any other employee benefit plan, program or arrangement, made available by Company or the Bank to its executive employees; provided that Executive's participation in any such plan, program or arrangement shall be on a basis consistent with the terms, conditions and overall administration of such plan, program or arrangement and Executive is otherwise eligible to participate or receive benefits under such plan, program or arrangement; and (b) a number of paid vacation days, sick days and personal days which are usual and customary for senior executive officers of corporations which are similarly situated to the Company or the Bank or provided to any other executive level employees of the Company or the Bank, but in no event shall the number of paid vacation days in any year of the Employment Term exceed four (4) weeks. 7. Other Agreements. Executive represents and warrants to the Company and the Bank that he is not a party to any agreement, written or oral, and is not bound by the terms of any written or oral agreement to which he is not a party, which prohibits him from performing his duties under this Agreement or of serving the Company or the Bank in any other capacity. Executive agrees to indemnify the Company and the Bank and shall hold each of them harmless from and against any liability, loss, cost or expense, including reasonable attorneys' fees and expenses, incurred by the 8 Company or the Bank by reason of the inaccuracy of the representations and warranties made by Executive in this Paragraph 7. 8. Life Insurance. Executive agrees that, if requested by the Company or the Bank, he will cooperate with the Company and/or the Bank to obtain a policy or policies of life insurance on his life in such amount(s) as the Company or the Bank may determine, including submitting to any appropriate medical examinations and completing and executing any appropriate application(s) or similar form(s). Any such policy or policies shall be for the benefit of the Company or the Bank and the Company and/or the Bank shall pay all premiums thereunder. 9. Inventions, Etc. Executive agrees to promptly disclose in writing to the Company all ideas, formulae, programs, systems, devices, processes, business concepts, discoveries and inventions (hereinafter referred to collectively as "Discoveries"), whether or not patentable, which he, while employed hereunder, conceives, makes, develops, acquires or reduces to practice, whether alone or with others and whether during or after usual working hours, and which are related to the Company's or the Bank's business or interests, or are used or usable by the Company or the Bank, or arise out of or in connection with the duties performed by Executive hereunder. Executive hereby transfers and assigns to the Company and/or the Bank all right, title and interest in and to all Discoveries, including any and all domestic and foreign patent rights therein and any renewals thereof. On request of the Company, Executive shall from time to time during or after the expiration or termination of his employment by the Company or the Bank, execute such further instruments (including, without limitation, applications for letters patent and assignments thereof) and do all such other reasonable and legal acts and things as may be deemed necessary or desirable by the Company or the Bank to protect and/or enforce their or its rights in respect of Discoveries. All expenses of filing or prosecuting any patent application shall be borne by the Company or the Bank, but Executive shall cooperate in filing and/or prosecuting any such application. Executive ]shall receive no additional compensation for the performance of his obligations hereunder, except as may be agreed to in writing by the Company or the Bank. 10. Covenant Regarding Confidentiality. All information about the business and affairs of the Company and its affiliates which is not generally available to the public or disclosed by the Company or such affiliates, and any information about the Company and its affiliates which becomes generally available to the public as a result of a breach by any person of any confidentiality obligation to the Company or any such affiliate (including, without limitation, with respect to the Company and each such affiliate, its secrets and information about its business, financial condition and performance, prospects, products, technology, know-how, merchandising and advertising programs and plans, and the names of its suppliers, customers and lenders and the nature of its dealings with them), constitute "Company Confidential Information." Executive acknowledges that he will have access to, and knowledge of, Company Confidential Information, and that improper use or revelation of same by Executive, whether during or after the termination of his employment by the Company, could cause serious injury to the business of the Company and its affiliates. Accordingly, Executive agrees that, except as required to perform his duties under this Agreement, or as required by law, he will forever keep secret and inviolate all Company Confidential Information which shall come into his possession, and he will not disclose the same to any other person or organization for so long as such Company Confidential Information is not generally known by, or accessible to, the public. Executive further agrees that he will not use any Company Confidential 9 Information for his own benefit or directly or indirectly for the benefit of any person or organization other than the Company and its affiliates. 11. Covenant Not to Solicit or Compete. (a) During the Employment Term and for a period of three (3) years thereafter (whether Executive's employment shall have ended by reason of the expiration of this Agreement or otherwise, and which period is hereinafter referred to as the "Restricted Period"), Executive agrees with the Company that he will not in any way, directly or indirectly, take away or interfere or attempt to interfere with any employee (or person who was an employee during the six (6) month period preceding the date of attempted hiring or recruitment) of the Company or its affiliates, or induce or attempt to induce any of them to leave the employ of the Company or its affiliates, or violate the terms of their contracts, or any employment arrangements, with the Company or its affiliates. The parties agree and intend that the covenants contained in this Paragraph 11(a) shall be construed as a series of separate covenants, one for each applicable region, county, city, state or country. Except for geographic coverage, each such separate covenant shall be deemed identical in terms. (b) Executive acknowledges that the operation and conduct of the business of the Company is special and unique and involves the use of trade secrets and confidential information and that during the period of his employment hereunder, Executive will acquire special knowledge and/or skill that he could effectively utilize in competition with the Company and its affiliates. Executive further acknowledges that the provisions of Paragraphs 9, 10 and 11 hereof are essential to the goodwill and profitability of the Company and its affiliates, and have provided substantial inducement to the Company's agreement to execute and consummate this Agreement, and that the application or operation thereof shall not involve a substantial hardship upon his future business or livelihood. Executive agrees that remedies at law for any breach by him of the covenants contained in Paragraphs 9, 10 and 11 hereof will be inadequate, and that in the event of a violation of the covenants therein, in addition to any and all legal and equitable remedies which may be available to the Company and its affiliates, the said covenants may be enforced by an injunction in a suit in equity, without the necessity of proving actual damage, and that a temporary injunction may be granted immediately upon the commencement of any such suit and without notice. Should any court determine that any of the separate covenants of this Paragraph 11 shall be unenforceable in respect of geographic area, then such covenant shall be deemed eliminated for the purpose of those proceedings to the extent necessary to permit the remaining separate covenants to be enforced. If any other provision of Paragraphs 9, 10 and 11 shall be deemed by an appropriate court to be unenforceable for any reason, then such court shall be empowered to substitute, to the extent enforceable, provisions similar thereto or other provisions so as to provide the Company and its affiliates to the fullest extent permitted by applicable law, the benefits intended by Paragraphs 9, 10 and 11 hereof. Executive acknowledges that the covenants contained in this Paragraph 11 are intended by the parties to be in addition to and not in lieu of or in limitation of any other agreement or covenant between Executive and the Company. Each of the provisions of Paragraphs 9,10 and 11 hereof shall survive the termination of this Agreement and the termination of Executive's employment by the Company. 10 (c) Notwithstanding anything in this Paragraph 11 to the contrary, in the event that Executive's employment is terminated by the Company or the Bank without Cause prior to the scheduled expiration of the Employment Term, the provisions of this Paragraph 11 shall apply only for the period for which Executive is paid Base Salary (or would have been paid the Base Salary except for the election by the Executive to receive a lump-sum payment pursuant to Paragraph 4(e)(i)) after termination pursuant to the terms of this Agreement, plus one year. 12. Notices. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed to have been duly given or made as of the date delivered if delivered personally or by facsimile (followed by first class U.S. mail), or three days after mailing if mailed by registered or certified mail (postage prepaid, return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice, except that notice of changes of address shall be effective upon receipt): If to the Company or the Bank: Fidelity Federal Bancorp 700 S. Green River Road - Suite 2000 Evansville, Indiana 47715 Attn: Chairman of the Board of Directors Telecopy No.: (812) 469-2101 with a copy to: Krieg, DeVault, Alexander & Capehart, LLP One Indiana Square - Suite 2800 Indianapolis, Indiana 46204 Attn: John W. Tanselle, Esq. Telecopy No.: (317) 636-1507 If to Executive, to him at his address set forth in the introductory Paragraph of this Agreement. 13. Definitions. In addition to other terms defined elsewhere in this Agreement, the following terms shall have the meanings set forth below: "Change of Control" shall mean (a) consummation of any transaction in which a person or entity was required to file an application or notice to acquire the securities or assets of the Company or the Bank, whether by purchase, merger, consolidation, share exchange or other combination or reorganization (irrespective of which party is the surviving entity), or by sale, lease, exchange, transfer, or other disposition of all or any substantial part of the assets of the Company or the Bank (collectively referred herein as a "Transaction"), under the federal Bank Holding Company Act of 1956 (12 U.S.C. Section 1841 et seq), the federal Change in Bank Control Act (12 U.S.C. Section 817(j)), the federal Savings and Loan Holding Company Act (12 U.S.C. Section 1467a) or the federal Bank Merger Act (12 U.S.C. Section 1828(c)), as such laws may be amended from time to 11 time or any regulations promulgated thereunder (collectively, the "Governing Laws"). Notwithstanding anything herein to the contrary, the following shall not be deemed to constitute a "Change of Control" for purposes of this definition or for purposes of this Agreement: (i) the Acquisition; (ii) the purchase by Purchaser, or any of their affiliates, or the transfer by Purchaser to any of their affiliates, of shares of Common Stock; (iii) consummation of any Transaction requiring approval under the Governing Laws (1) involving the Company solely in connection with the acquisition by the Company of any subsidiary, (2) involving a business combination or reorganization in which the shareholders of the Company immediately prior to such Transaction own at least a majority of the issued and outstanding voting securities of the surviving entity immediately subsequent to such Transaction and individuals who were directors of the Company immediately prior to such Transaction constitute at least a majority of the Board of Directors of the surviving entity immediately subsequent to such Transaction or (3) involving any employee benefit plan sponsored by the Company or any subsidiary thereof; (iv) consummation of any acquisition of shares of Common Stock requiring approval under the Governing Laws by individuals or entities who at the date of this Agreement were either a director or officer of the Company or the beneficial owner (either directly or indirectly) of ten percent (10%) or more of the combined voting power of the Company's then outstanding securities; or (v) consummation of any acquisition of the Common Stock requiring approval under the Governing Laws by individuals or entities which would result in such individuals or entities owning directly and/or beneficially less than 25% of the combined voting power of the Company's then outstanding securities, unless after such acquisition such individuals or entities would constitute the largest shareholder of the Common Stock (for this purpose, the shares of Common Stock owned by the Purchaser and its affiliates shall be aggregated). "Common Stock" shall mean the common stock, stated value $1.00 per share, of the Company. "Effective Date" shall mean the date of this Agreement. 14. Conditions and Acknowledgment. (a) This Agreement shall only become effective and binding upon the Executive and upon the Company and the Bank commencing upon and as of the Effective Date; and (b) By executing and delivering this Agreement, Executive expressly acknowledges and agrees (i) that his continuation of employment by the Company and the Bank pursuant to the provisions of this Agreement constitutes a significant condition to consummation of the Stock Purchase Agreement, (ii) that Executive's failure to continue his employment with the Company and the Bank from and after the Effective Date upon the terms and conditions set forth in this Agreement (unless Executive's employment by the Company or the Bank is terminated upon the terms and conditions set forth herein) will cause substantial damages to the Company and the Bank and to the Purchaser for which he, the Executive, shall be personally liable, and (iii) upon the Effective Date, the Severance Agreement dated December 1, 1997 by and between the Executive and the Company shall terminate and be void and of no effect, and that Executive shall have no rights and the Company shall have no obligations thereunder. 12 15. General. (a) This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Indiana applicable to contracts made and to be performed entirely within such state (without regard to principles of conflict of laws of Indiana or of any other jurisdictions). (b) The Paragraph headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. (c) This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof, and supersedes all prior agreements, arrangements and understandings, written or oral, between the parties. (d) This Agreement and the benefits hereunder are personal to the Company, the Bank and Executive, and are not assignable or transferable, nor may the services to be performed hereunder be assigned by Executive, the Company or the Bank to any person, firm or corporation; provided, however, that this Agreement and the benefits hereunder may be assigned by the Company and the Bank and/or will be assigned (by operation of law) to any person, firm or corporation acquiring all or substantially all of the assets or stock of the Company or the Bank or to any corporation into which the Company or the Bank may be merged or consolidated, as long as no such assignment operates to expand the Restricted Territory without the consent of Executive. (e) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, to expressly assume and agree to perform all of the provisions of this Agreement. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be deemed a material breach of this Agreement and shall entitle Executive to terminate his employment with the Company pursuant to subparagraph 2(c)(v) hereof. (f) Anything in this Agreement to the contrary notwithstanding in the event the Company's independent public accountants determine that any payment by the Company to or for the benefit of Executive, whether paid or payable pursuant to the terms of this Agreement, would be non-deductible by the Company for federal income tax purposes as a result of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then the amount payable to or for the benefit of Executive pursuant to the Agreement shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Paragraph 15(f), the "Reduced Amount" shall be the amount which maximizes the amount payable to Executive without causing the payment to be non-deductible to the Company as a result of the provisions of Section 280G of the Code. (g) All references in this Agreement to amounts to be paid or benefits to be provided to or on behalf of Executive are to the gross amounts thereof which are due hereunder. Except as otherwise provided herein, the Company and/or the Bank shall have the right to deduct therefrom or collect from Executive all sums which may be required to be deducted or withheld 13 under any provision of law, including, but not limited to, social security payments, income tax withholding, any other deduction required by law and any interest, penalties or additions to tax imposed with respect thereto. (h) This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms or covenants hereof may be waived, only by a written instrument executed by both parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time to require performance of any provision hereof shall in no manner affect the right of such party at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. (i) This Agreement may be executed in counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. (j) Subject to the provisions of Paragraph 11 hereof, if any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. 14 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. FIDELITY FEDERAL BANCORP By: ---------------------------------- Name: Jack Cunningham Title: Chairman of the Board UNITED FIDELITY BANK, fsb By: ---------------------------------- Name: Jack Cunningham Title: Chairman of the Board "EXECUTIVE" -------------------------------------- DONALD R. NEEL 15 EX-13 4 0004.txt FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Financial Highlights (Dollars in Thousands, Except Share and Per Share Data)
Six months December 31, ended 2000 December 31, Change 1999 - ------------------------------------------------------------------------------------------------------ Per Share Basic net income (loss) $ (.29) $ (.66) (56.06)% Diluted net income (loss) (.29) (.66) (56.06) Book value at year end 1.90 1.72 10.47 Market price (bid) at year end 1.31 1.25 4.80 For the Year Net interest income $ 3,643 $ 1,751 108.05% Provision for loan losses 670 1,345 (50.19) Non-interest income 1,816 1,001 81.42 Non-interest expense 7,314 5,148 42.07 Net income (loss) (1,156) (2,070) (44.15) At Year End Total assets $ 166,466 $ 171,457 (2.91)% Loans (net) 107,842 96,919 11.27 Total deposits 126,944 135,016 (5.98) Total stockholders' equity 8,775 5,427 61.69 Averages Total assets $ 163,925 $ 170,719 (3.98)% Total earning assets 146,492 155,301 (5.67) Total loans 106,599 108,455 (1.71) Total deposits 124,970 128,882 (3.04) Total stockholders' equity 7,164 7,992 (10.36) Profitability Ratios Return on average assets (.71)% (2.41)% Return on average stockholders' equity (16.14) (51.37) Net interest margin 2.49 2.24 Loan Quality Ratios Net charge offs to average loans (.72)% 5.20% Allowance for loan losses to loans at end of period 1.75 2.04 Valuation allowance for letters of credit to total letters of credit 11.80 13.00 Savings Bank Capital Ratios Tangible capital to adjusted total assets 8.42% 6.80% Risk-based capital ratios Tier I capital 10.31 9.10 Total capital 13.80 14.30 Other Data Average common and common equivalent shares outstanding 4,057,168 3,147,662 Number of full-time equivalent employees at year end 66 90 Number of banking offices 5 4
2 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Letter To Our Shareholders Your company, Fidelity Federal Bancorp, is the parent company of United Fidelity Bank, fsb, which is a community bank providing financial services through its five banking offices in the Evansville area. Your company saw significant change during the year 2000, including: o The completion of the stock sale to Pedcor Holdings, LLC, which raised $4.3 million in equity capital for Fidelity Federal; o The opening by United Fidelity Bank of a new branch banking office in Warrick County; o The adoption and ongoing implementation of a strategic plan which provides for significant improvement in overall profitability and balance sheet quality; o The reduction in outstanding bank debt of the parent company, Fidelity Federal; o An increased focus by United Fidelity Bank on core banking activities, including our consumer lending area; o The successful implementation of "Y2K" procedures at the beginning of the year with no disruptions to service; o An increased level of community involvement by Fidelity Federal and its associates; o An improvement in the tangible capital ratio of United Fidelity Bank, and o A return to profitable operations for Fidelity Federal in the fourth quarter of 2000. Much of this change resulted from our continuing commitment to providing an unsurpassed level of service to our customers and our community. Our mission statement provides: United Fidelity Bank shall be the premier community banking institution providing financial services for our market by surpassing customer expectations and fulfilling community needs in a manner that enhances value. We recognize that although improvements were made in 2000, there is still much work to be completed. Over the course of 2001, we will continue our efforts to improve the quality of our balance sheet. We also plan to upgrade our data processing systems and product delivery channels to further enhance the level of our customer service. The opening of our new banking office serving the growing Warrick County area marks the first new office of United Fidelity in many years. This office will be a focal point for management in 2001 as we introduce our products and our level of customer service to the Warrick County area. In closing, we recognize that the accomplishments of the past year could not have been completed without the exceptional efforts of our associates, who are committed to maximizing both the value of your investment and our impact in the community. We also would like to extend our collective thanks to our shareholders for their continuing support of our efforts. Jack Cunningham Donald R. Neel Chairman President and CEO Fidelity Federal Bancorp United Fidelity Bank 3 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES MARKET SUMMARY MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS Fidelity's common stock is traded on the NASDAQ National Market System under the symbol FFED. The following table sets forth, for the periods indicated, the high and low bid prices per share as reported by NASDAQ. The bid prices represent prices between dealers, do not include retail mark-up, mark-down, or commissions and may not represent actual transactions. 2000 1999 ------------------------------------------------------ Common Stock Bid Prices Common Stock Bid Prices ------------------------------------------------------ Year Ended June 30 High Low High Low - ----------------------------------------------------------------------------- First quarter $3 5/16 $1 1/4 $3 1/16 $2 5/8 Second quarter 2 7/8 1 3/4 2 7/8 1 1/4 Third quarter 2 5/8 2 Fourth quarter 2 1/8 1 1/4 We have not paid any cash dividends on our common stock since July 6, 1998 and do not anticipate paying cash dividends in the foreseeable future, since we are dependent upon United for funds for dividends and, under the terms of the Supervisory Agreement, United cannot pay a dividend to Fidelity without approval of the OTS. For the foreseeable future, we anticipate that United will retain any earnings which it generates or, subject to OTS approval, pay a portion of these earnings to us in order for us to service our existing debt. Unlike United, Fidelity is not subject to any regulatory restriction on future dividends. Fidelity's dividend policy is to pay cash or distribute stock dividends when the Board of Directors deems it to be appropriate, taking into account Fidelity'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. Refer to the "Other Restrictions" footnote in Fidelity's consolidated financial statements for further details. 4 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Selected Statistical Information (Dollars in Thousands, Except Share and Per Share Data)
Six months ended December 31, December 31, June 30, June 30, June 30, Selected Financial Data as of 2000 1999 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Total assets $ 166,466 $ 171,457 $ 172,253 $ 197,046 $ 240,819 Interest-bearing deposits 14,718 22,911 14,668 6,266 1,765 Investment securities available 21,001 24,305 27,325 9,854 13,790 for sale Loans, net 107,842 96,919 110,436 156,683 203,183 Deposits 126,944 135,016 128,596 148,939 181,787 Short-term borrowings 28 89 128 2,531 5,191 Long-term debt 23,842 23,504 29,149 29,488 38,089 Stockholders' equity 8,775 5,427 7,814 7,515 12,936 Selected Operations Data for Year Ended Interest income $ 12,100 $ 6,019 $ 14,094 $ 17,192 $ 20,282 Interest expense 8,457 4,268 9,730 11,586 13,831 --------------------------------------------------------------------------- Net interest income 3,643 1,751 4,364 5,606 6,451 Provision for loan losses 670 1,345 (138) 4,543 975 --------------------------------------------------------------------------- Net interest income after provision 2,973 406 4,502 1,063 5,476 for loan losses Non-interest income 1,816 1,001 2,663 3,025 3,856 Non-interest expense 7,314 5,148 6,878 16,076 9,474 --------------------------------------------------------------------------- Income (loss) before income tax (2,525) (3,741) 287 (11,988) (142) Income tax expense (benefit) (1,369) (1,671) (338) (5,194) (255) --------------------------------------------------------------------------- Net income (loss) $ (1,156) $ (2,070) $ 625 $ (6,794) $ 113 =========================================================================== Selected Financial Ratios Return on average assets (.71)% (2.41)% .33% (3.12)% .04% Return on stockholders' equity (16.14) (51.37) 7.58 (50.68) .83 Net interest margin 2.49 2.24 2.48 2.79 2.72 Net interest spread 2.38 2.05 2.24 2.62 2.57 Tangible equity to assets at year 8.42 6.78 8.49 6.31 6.93 end Allowance for loan losses to loans 1.75 2.04 3.09 1.91 .87 Allowance for loan losses to non-performing loans 222.27 179.96 69.57 532.11 624.91 Dividend payout ratio N/A N/A N/A N/A 1,500.00 Per Share Data Diluted net income (loss) $ (.29) $ (.66) $ .20 $ (2.30) $ .04 Basic net income (loss) (.29) (.66) .20 (2.30) .05 Cash dividends declared .35 .60 Book value at year end 1.90 1.72 2.48 2.40 5.20 Closing market price (bid) at year 1.31 1.25 2.88 6.50 8.75 end Number of average common and common equivalent shares 4,057,168 3,147,662 3,143,179 2,956,157 2,655,181 outstanding
5 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition General Fidelity Federal Bancorp ("Fidelity"), incorporated in 1993 under the laws of the State of Indiana, is a registered savings and loan holding company with its principal office in Evansville, Indiana. Fidelity's savings bank subsidiary, United Fidelity Bank, fsb ("United"), was organized in 1914 and is a federally-chartered stock savings bank located in Evansville, Indiana, and is regulated by the Office of Thrift Supervision ("OTS"). Fidelity, through its savings bank subsidiary, is engaged in the business of obtaining funds in the form of savings deposits and other borrowings and investing such funds in consumer, commercial, and mortgage loans, and in investment and money market securities. Village Affordable Housing Corporation, the other subsidiary of Fidelity, was formed during the third quarter of fiscal 1998 for the purpose of owning interests in real estate housing, and recently, in 2001, acquired certain real estate from United and its subsidiaries to assist in United's divestiture efforts. 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. In May 2000, Pedcor Management Corporation, an affiliate of Pedcor Holdings, LLC, began 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 but has not provided any new services for the past two years. Another subsidiary of United, Village Insurance Corporation, receives fee income for credit life and accident health insurance sales. In January 2000, Fidelity signed a definitive stock purchase agreement, as amended and restated in April 2000, to sell 1,460,000 shares of its common stock to Pedcor Holdings, LLC, 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. In May 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 December 1999, Fidelity's Board of Directors voted to change Fidelity's fiscal year end from June 30 to December 31. Accordingly, the following discussion analyzes the results of operations for the six months ended December 31, 1999 compared to the twelve months ended December 31, 2000 and June 30, 1999 (fiscal 1999) and the financial position as of December 31, 2000 to the financial position as of December 31, 1999. Fluctuations in the results of operations are significant in part because there are two quarters less in the period ended December 31, 1999 compared to calendar year 2000 and fiscal 1999. All references to percentage changes in income or expense items have been annualized. The following table details average balances, interest income/expense and average rates/yield for Fidelity's earning assets and interest bearing liabilities for the year ended and six months ended December 31, 2000 and 1999, and year ended June 30, 1999. The average rates for the six months ended December 31, 1999 were adjusted to reflect annualized percentages. 6 Fidelity Federal Bancorp and Subsidiaries Management's Discussion and Analysis of Results of Operations and Financial Condition Average Balance Sheet and Net Interest Analysis (Dollars In Thousands on Fully Taxable Equivalent Basis)
December 2000 December 1999 June 1999 ------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Year Ended: Balances Interest Rates Balances Interest Rates Balances Interest Rates - ---------------------------------------------------------------------------------------------------------------------------- Assets Federal funds sold and other short-term money $ 13,909 $ 873 6.28% $ 17,069 $ 454 5.28% $ 18,962 $ 964 5.08% market investments Investment securities available for 22,658 1,518 6.70 25,857 849 6.51 15,455 955 6.18 sale-taxable Loans held for sale Federal Home Loan Bank stock 3,326 273 8.21 3,920 158 8.00 3,920 314 8.01 Loans (1) (2) Commercial loans 3,273 341 10.42 5,512 276 9.93 8,055 791 9.82 Multi-family loans 13,435 1,399 10.41 24,525 1,026 8.30 33,918 2,999 8.84 Home equity loans 4,635 465 10.03 4,959 250 10.00 4,914 490 9.97 Real estate mortgages 50,196 3,926 7.82 51,414 1,944 7.50 63,980 4,956 7.75 Consumer loans 35,060 3,305 9.43 22,045 1,062 9.56 26,926 2,625 9.75 ---------------------- ---------------------- ----------------------- Total loans 106,599 9,436 8.85 108,455 4,558 8.33 137,793 11,861 8.61 ---------------------- ---------------------- ----------------------- Total earning assets 146,492 12,100 8.26 155,301 6,019 7.69 176,130 14,094 8.00 Allowance for loan (1,989) (2,868) (3,414) losses Cash and due from banks 2,893 4,193 2,680 Premises and equipment 5,145 5,747 5,749 Other assets 11,384 8,346 10,426 ---------- ---------- ---------- Total assets $163,925 $170,719 $191,571 ========== ========== ========== Liabilities Interest-bearing deposits Interest-bearing $ 17,159 $ 551 3.21% $ 19,107 $ 327 3.39% $ 20,436 $ 716 3.50% checking Money market accounts 2,058 41 1.99 2,545 26 2.03 2,733 61 2.23 Savings accounts 4,349 98 2.25 4,657 53 2.26 5,082 118 2.32 Certificates of deposit 96,268 5,752 5.98 96,476 2,745 5.64 112,539 6,572 5.84 ---------------------- ---------------------- ----------------------- Total interest-bearing deposits 119,834 6,442 5.38 122,785 3,151 5.09 140,790 7,467 5.30 Federal funds purchased Other borrowings 14,396 1,375 9.55 16,505 760 9.13 15,167 1,384 9.13 Federal Home Loan Bank advances 9,488 640 6.75 10,844 357 6.53 13,103 879 6.71 ---------------------- ---------------------- ----------------------- Total interest-bearing 143,718 8,457 5.88 150,134 4,268 5.64 169,060 9,730 5.76 liabilities Non-interest bearing demand deposits 5,136 6,097 5,724 Advances by borrowers for taxes and insurance 421 463 457 Other liabilities 7,486 6,033 8,079 ---------- ---------- ---------- Total liabilities 156,761 162,727 183,320 Stockholders' Equity 7,164 7,992 8,251 ---------- ---------- ---------- Total liabilities and stockholders' equity $163,925 $170,719 $191,571 ========== ========== ========== Recap: (2) Interest income 12,100 8.26% 6,019 7.69% 14,094 8.00% Interest expense 8,457 5.77 4,268 5.45 9,730 5.52 -------------------- -------------------- --------------------- Net interest income/margin $ 3,643 2.49% $ 1,751 2.24% $ 4,364 2.48% ==================== ==================== ===================== Interest rate spread (3) 2.38% 2.05% 2.24% Average interest-bearing assets to average 101.93% 103.44% 104.18% interest-bearing liabilities
(1) Nonaccrual loans have been included in the average balances. (2) Loan income includes interest and fees on loans. (3) Interest rate spread is calculated by subtracting combined weighted average interest rate cost from combined weighted average interest rate earned for the period indicated. 7 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations 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. In addition, certain external factors such as the overall condition of the economy, credit demand strength, Federal Reserve Board monetary policy, changes in tax laws, and the Supervisory Agreement that United currently operates under, can also have significant effects on changes in net interest income from one period to another. Net interest income increased $141,000 for the period ended December 31, 2000 compared to the same period ended at December 31, 1999 on an annualized basis. Despite the decrease in average earning assets of $8.8 million the net interest margin increased to 2.49% at December 31, 2000 compared to 2.24% a year ago. Fidelity's reduction in average earning assets was composed of reductions in fixed-rate 1-4 family mortgage, multifamily and commercial real estate loans. Average multifamily and commercial real estate loans decreased $13.3 million, resulting in a decrease of interest income of $864,000 on an annualized basis from the prior year. 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. These decreases were offset by a $13.0 million increase in average consumer loans, resulting in an increase of interest income of $1.2 million compared to the previous year, on an annualized basis. Average interest bearing liabilities decreased $6.4 million from December 31, 1999 to $143.7 million at December 31, 2000. Total average interest bearing deposits decreased $3.0 million, while borrowings and FHLB advances decreased $3.5 million from December 31, 1999. These decreases contributed to an overall decrease in interest expense of $79,000 compared to the period ended December 31, 1999 on an annualized basis. The average balance of agent-acquired certificates of deposit, which had an average rate of 5.88% in 1999, was reduced from $18.1 million for the six months ended December 31, 1999 to $9.2 million at December 31, 2000 with an average rate of 6.00%. 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 to 5.38% from 5.09% since December 31, 1999. Despite management's efforts, the net interest margin is expected to be relatively constant or potentially 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 calendar 2000 came despite the Supervisory Agreement between United and the OTS, and was primarily due to increased activity in consumer lending. There can be no assurance that the net interest margin will continue to increase. The reduction in net interest income during the six months ended December 31, 1999 compared to the year ended June 30, 1999 was primarily due to the continued reduction in average earning assets of $20.8 million, which was partially offset by a decrease in average interest-bearing liabilities of $18.9 million. Fidelity's reduction in average earning assets and average interest-bearing liabilities occurred in fixed rate 1-4 family mortgage loans, multifamily loans and certificates of deposit, primarily agent-acquired deposits. Average real estate mortgage loans decreased $12.6 million, resulting in a decrease of $1.1 million in interest income on an annualized basis. Average multifamily loans also decreased $9.4 million which resulted in a decrease in interest income of $947,000 on an annualized basis. Certificates of deposit and borrowings partially offset this reduction in assets with a decrease of $16.1 million in certificates and $921,000 in borrowings. This resulted in decreased interest expense, on an annualized basis of $1.1 million and $29,000, respectively. Interest income on an annualized basis for the six months ended December 31, 1999 was $12.0 million compared to $14.1 million for the year ended June 30, 1999, a decrease of $2.1 million or approximately 14.9%. Interest expense on an annualized basis for the year ended December 31, 1999 was $8.5 million compared to $9.7 million for the year ended June 30, 1999, a decrease of $1.2 million or 12.4%. The reduction in average earning assets was attributable to multifamily loans and conventional real estate mortgage loan payoffs. 8 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition The average balance of agent-acquired certificates of deposit, which had an average rate of 6.02% in 1999, was reduced from $33.5 million in fiscal 1999 to $18.1 million for the six months ended December 31, 1999 with an average rate of 5.88%. The net interest margin decreased during the six month period to 2.24% from 2.48% in fiscal 1999. The average yield on interest-earning assets and average rate paid on interest-bearing liabilities of 7.69% and 5.64% declined from the prior period's average rates of 8.00% and 5.76%.
Quarterly Results of Operations March 31 June 30 September 30 December 31 Total - ------------------------------------------------------------------------------------------------- (In Thousands) December 31, 2000 Interest income $ 2,974 $ 3,025 $ 2,998 $ 3,103 $ 12,100 Interest expense 2,095 1,999 2,132 2,231 8,457 ----------------------------------------------------------- Net interest income 879 1,026 866 872 3,643 Provision for loan losses 75 100 375 120 670 Non-interest income 435 376 444 561 1,816 Non-interest expense 1,673 1,679 2,625 1,337 7,314 ----------------------------------------------------------- Income (loss) before income tax (434) (377) (1,690) (24) (2,525) Income tax benefit (266) (244) (765) (94) (1,369) ----------------------------------------------------------- Net income $ (168) $ (133) (925) 70 $ (1,156) =========================================================== Net income per share Diluted net income $ (.05) $ (.04) $ (.20) .$02 $ (.29) Basic net income (.05) (.04) (.20) .02 (.29) Cash dividends* December 31, 1999 Interest income $ 2,990 $ 3,029 $ 6,019 Interest expense 2,085 2,183 4,268 ----------------------------------------------------------- Net interest income 905 846 1,751 Provision for loan losses 75 1,270 1,345 Non-interest income 488 513 1,001 Non-interest expense 1,302 3,846 5,148 ----------------------------------------------------------- Income (loss) before income tax 16 (3,757) (3,741) Income tax benefit (88) (1,583) (1,671) ----------------------------------------------------------- Net income $ 104 $ (2,174) $ (2,070) =========================================================== Net income per share Diluted net income $ .03 $ (.69) $ (.66) Basic net income .03 (.69) (.66) Cash dividends*
*No cash dividends were paid for the year ended December 31, 2000 or for the six months ended December 31, 1999. 9 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition Rate/Volume Analysis The following table sets forth an analysis of volume and rate changes in interest income and interest expense of Fidelity's average earning assets and average interest-bearing liabilities. The table distinguishes between the changes related to average outstanding balances of assets and liabilities (changes in volume holding the initial interest rate constant) and the changes related to average interest rates (changes in average rate holding the initial outstanding balance constant). The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. The column labeled, "Change in fiscal year," represents the change in net interest income due to Fidelity changing the fiscal year from June 30 to December 31.
December 31, 2000 December 31, 1999 Compared to December 31, 1999 Compared to June 30, 1999 Increase (Decrease) Due To Increase (Decrease) Due To ------------------------------------------------------------------------------------- Change in Change in Volume Rate Fiscal Year Total Volume Rate Fiscal Year Total - ------------------------------------------------------------------------------------------------------------------------------- (Dollars In Thousands) Interest income on average earning assets Loans $ (155) $ 549 $ 4,484 $ 4,878 $(2,525) $ (294) $(4,484) ($7,303) Investment securities (208) 42 835 669 643 86 (835) (106) Federal Home Loan Bank stock (47) 7 155 115 (1) (155) (156) Federal funds sold and other short-term money market investments (167) 139 447 419 (96) 33 (447) (510) ----------------------------------------------------------------------------------- Total interest income (577) 737 5,921 6,081 (1,978) (176) (5,921) (8,075) ----------------------------------------------------------------------------------- Interest expense on average interest- bearing liabilities Interest bearing accounts (66) (2) 322 254 (47) (21) (322) (390) Money market deposit accounts (10) (1) 26 15 (4) (5) (26) (35) Savings accounts (7) (0) 52 45 (10) (3) (52) (65) Certificates of deposit (12) 291 2,700 2,979 (937) (189) (2,700) (3,826) Federal funds purchased Other borrowings (193) 60 748 615 122 2 (748) (624) Federal Home Loan Bank advances (89) 19 351 281 (152) (19) (351) (522) ----------------------------------------------------------------------------------- Total interest expense (377) 367 4,199 4,189 (1,028) (235) (4,199) (5,462) ----------------------------------------------------------------------------------- Changes in net interest income $ (200) $ 370 $ 1,722 $ 1,892 $ (950) $ 59 $(1,722) $(2,613) ===================================================================================
10 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition 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 year ended December 31, 2000 was $670,000 compared to $1,345,000 for the six months ended December 1999, a decrease of $675,000 or $2.0 million on an annualized basis. During the twelve months ended December 31, 2000, Fidelity provided an additional $470,000 for the consumer allowance for loan losses. As a result of recent loss levels in consumer loans originated prior to 1999 and the growth of the portfolio in 2000, the provision for consumer loan losses was increased to a level approximating 1.5% of consumer loans outstanding. An additional $200,000 provision was provided 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 items have been identified and adequately reserved for at December 31, 2000. The ratio of allowance for loan losses to nonperforming loans was 222.3% at December 31, 2000 compared to 180.0% at December 31, 1999. The method used beginning in the third quarter of fiscal 1998 to determine the amount of required reserves for affordable housing industry permanent and general partner loans, equity investments and letters of credit used past monthly cash flows as a determinant as to how much debt service the projects could support. Specifically, the method determined the amount of debt service for fiscal 1998, 1999, the six months ended December 31, 1999 and the year ended December 31, 2000 as follows: 1. Cash flows from the projects were scheduled from internal project records. These were used to project annualized cash flows that were based on periods of time that were considered to be best reflective of future performance of that project. Certain items affecting cash flows during only certain months of the year, such as the payment of real estate taxes, were subtracted from the calculated annualized amounts so that monthly cash flows would be reflective of actual monthly operation. 2. A projected loan amount that could be supported by current cash flows was calculated using the computed cash flows for the most appropriate period (converted to a monthly cash flow amount), the current rate, and a 25-year amortization period. This amount was added to the computed residual value of the project at the end of a 15-year amortization period to reflect the total value of the project in fiscal 1998 and 1999. In the period ended December 31, 1999, the project loan amounts that could be supported by cash flows were adjusted to provide for a 1.15:1 debt service coverage ratio, due to the continued aging of the loan portfolio, and historical volatility of the cash flows. This adjustment, along with recent deterioration in cash flows in a segment of the affordable housing loan portfolio, significantly reduced the total value of certain projects, and thus increased the required reserves for those projects in 1999. 3. This information was used to determine proper classifications, and ultimately reserves, for the loan, letter of credit, general partner loan and equity investment amounts. A "potential tax credit market adjustment" was computed in fiscal 1998 and 1999 by taking the difference between the price paid by investors for tax credits at the project's inception and an amount that was determined to be better reflective of the true value of the credits. This market adjustment was used to determine what portion of the loans, letters of credit, general partner loans and equity investments would be classified as doubtful, which included a 50 percent reserve, and loss, which included a 100 percent reserve or charge-off of the related asset or reserve for the letter of credit. This market adjustment was not used to compute the appropriate level of reserves at December 31, 1999. The elimination of the market value adjustment with respect to determining the overall reserve level, resulted in a significant increase in the reserves required for the six months ending December 31, 1999. 11 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition The assignment was originally based on the possibility of limited partner participation in operating deficits of the partnerships due to the market value appreciation of the tax credits held by the limited partners in the respective partnerships. Since this participation did not occur, management classified the potential adjustment as loss, despite continued appreciation of the remaining tax credits. 4. The analyses are updated quarterly for current operating information of the actual projects. Except for the market value adjustment and the increased debt service coverage requirement noted above for the December 31, 1999 review, the assumptions used to compute reserves were not changed for any of the quarters in fiscal 1999; only the data used to compute classifications was changed. The period of cash flows used was changed in certain instances if it was determined that the period used more closely approximated future projected results. For the periods ended December 31, 1999 and 2000, calendar 1999 and 2000 data was used to compute the required reserves based on the above methodology. 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 past events assist Fidelity in making that evaluation. The independent support for the allowance for loan losses and letter of credit valuation reserve includes documentation that supports the amount of recorded reserves for these credits. During the year 2000 the only additional provisions for loan losses associated with the affordable housing industry loans was $200,000 due to additional loans for routine maintenance on Fidelity's affordable housing portfolio as mentioned above. 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. 12 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition Non-Interest Income Non-interest income for the year ended December 31, 2000 increased by $815,000 or decreased $186,000 compared to December 31, 1999 on an annualized basis. Non-interest income decreased by $1.7 million or $661,000 on an annualized basis for the six months ending December 31, 1999 compared to June 30, 1999. The percent change for December 31, 2000 and 1999 have been annualized. The following table summarizes non-interest income for the following time periods:
Change From Prior Year Increase (Decrease) ------------------------------------------------- Amount December 31, 2000 December 31, 1999 --------------------------------------------------------------------------------------------- Six months Year ended ended Year ended December 31, December 31, June 30, Annualized Annualized 2000 1999 1999 Amount Percent Amount Percent - ------------------------------------------------------------------------------------------------------------------------------ (Dollars In Thousands) Fee income from real estate management $ 88 $ 88 $ 196 (50%) $ (108) (10.2)% Service charges on deposit accounts 311 201 437 $110 (22.6) (236) (8.0) Gain on sale of real estate loans 54 110 343 (56) (75.5) (233) (35.9) Letter of credit fees 530 291 582 239 (8.9) (291) Servicing fees on loans sold 109 55 91 54 (.9) (36) 20.9 Release fees on multifamily loans 34 20 82 14 (15.0) (62) (51.2) Real estate investment banking fees 78 13 78 65 200.0 (65) (66.7) Agent fee income 240 4 333 236 2900.0 (329) (97.6) Title fee income 16 18 72 (2) (55.6) (54) (50.0) Other 356 201 449 155 (11.4) (248) (10.5) --------------------------------------------------------------------------------------------- Total non-interest income $1,816 $1,001 $2,663 $815 (9.3)% $(1,662) (24.8)% =============================================================================================
Fidelity's level of activity in Section 42 real estate activities has continued to decrease, and since June 2000, has been limited to management activities. Fee income from management activities for the year ended December 31, 2000 decreased approximately $88,000 on an annualized basis due to the discontinuance of management activities. The stock purchase agreement approved by the shareholders in May 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 $91,000 for the year ended December 31, 2000, compared to the six months ended December 31, 1999 on an annualized basis due to a decline in checking deposit accounts. Gains on sale of real estate loans decreased $166,000 to $54,000 on a annualized basis during the year ended December 31, 2000. Higher interest rates caused a significant reduction in volume. Gain on sale of loans during the six months ending December 31, 1999 also declined by $123,000 on an annualized basis compared to the year ended June 30, 1999, due to the decline in mortgage loan originations. Letter of credit fees decreased $52,000 from the annualized amount at December 31, 1999 and the year ended June 30, 1999. Real estate investment banking fees increased $52,000 over the six months ending December 31, 1999 on an annualized basis as fees are recorded on transactions previously completed when received. These fees are expected to be minimal in the foreseeable future. Title fee income decreased $20,000 on an annualized basis for year-end December 31, 2000 compared to the six months ending December 31, 1999 and $56,000 from June 30, 1999. 13 Fidelity Federal Bancorp and Subsidiaries Management's Discussion and Analysis of Results of Operations and Financial Condition United has participated in an arrangement in which automobile loans are originated on behalf of another organization for the last three fiscal years. Agent fee income, which represents earned fees from these transactions, decreased by $325,000, on an annualized basis, for the six months ending December 31, 1999 compared to June 30, 1999. In January 1999, the head of United's consumer loan division and key members of the consumer loan division staff resigned to accept employment with a local competitor. As such, United's revenue from consumer loans was sharply reduced. During the fourth quarter of fiscal 1999, United hired a manager and staff to resume this lending activity. United commenced certain types of consumer lending, such as home equity lending as of June 30, 1999. United fully resumed its consumer lending activities, including the acquisition of automobile loans through its network of automobile dealers during the first quarter of the fiscal period ended December 31, 1999. Agent fees annualized for the six months ended December 31, 1999 were only $8,000 compared to $240,000 for the year ended December 31, 2000. United is continuing its efforts to expand its automobile dealer network. Non-Interest Expense Non-interest expense on an annualized basis decreased $3.0 million or 29.0% for the year ended December 31, 2000, compared to the six months ending December 31, 1999. The following table summarizes non-interest expense for the year ended December 31, 2000 and the six months ending December 31, 1999, and year ended June 30, 1999. The percent change for December 31, 2000 and 1999 has been annualized.
Change From Prior Year Increase (Decrease) -------------------------------------------------- December 1999 June 1999 ----------------------------------------------------------------------------------------------- Six Months Year Ended Ended Year Ended December 31, December 31, June 30, Annualized Annualized 2000 1999 1999 Amount Percent Amount Percent - -------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Salaries and employee benefits $3,370 $1,747 $ 3,414 $ 1,623 (3.5)% $(1,667) 2.3% Letter of credit valuation provision (85) 1,069 (715) (1,154) (104.0) 1,784 (399.0) Loss on investment 352 356 831 (4) (50.6) (475) (14.3) Legal and professional 544 379 379 165 (28.2) 100.0 Occupancy expense 364 192 394 172 (5.2) (202) (2.5) Equipment expense 250 166 299 84 (24.7) (133) 11.0 Data processing expense 339 247 407 92 (31.4) (160) 21.4 Advertising 198 78 202 120 26.9 (124) (22.8) Deposit insurance 243 156 244 87 (22.1) (88) 27.9 Correspondent bank charges 156 79 154 77 (1.3) (75) 2.6 Printing and supplies 89 57 104 32 (21.9) (47) 9.6 Telephone 89 48 74 41 (7.3) (26) 29.7 Postage 87 42 95 45 3.6 (53) (11.6) Travel and lodging 30 30 44 (50.0) (14) 36.4 Amortization of intangible asset 139 139 100.0 Other operating expense 1,149 502 952 647 14.4 (450) 5.5 ----------------------------------------------------------------------------------------------- Total non-interest expense $7,314 $5,148 $6,878 $2,166 (29.0)% $(1,730) 49.7% ===============================================================================================
14 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition The decrease in total non-interest expense for the year ended December 31, 2000, as compared to the annualized non-interest expense for the six months ending December 31, 1999, relates primarily to expenses associated with Fidelity's Section 42 tax credit real estate development program. Due to a deterioration in cash flows and occupancy during the six months ending December 31, 1999, an additional letter of credit provision of $1.1 million was recognized compared to a credit of $85,000 in 2000. Volatility in cash flows, occupancy, and other performance measurements can create large variances in reserves that are necessary based on quarterly loan and letters of credit reviews of the affordable housing credits as discussed in the provision for loan losses and letter of credit reserve section. Fidelity records the percentage share of losses for the investments in various affordable housing partnerships under the equity method of accounting in addition to any additional writedowns due to the performance of the properties. Losses on investment in affordable housing partnerships were $356,000 for the six months ended December 31, 1999 or $712,000 annualized, compared to only $352,000 for 2000. Fidelity continues to monitor these partnerships very closely and has taken steps to assist these partnerships to increase their cash flows through various refinancing efforts. In 1999, Fidelity completed the refinancing of two affordable housing developments. In early 2001, Fidelity completed the refinancing of four additional affordable housing developments, and is in varying stages of completing refinancing an additional six affordable housing developments. Fidelity expects these to be completed by end of 2001. The refinancing of the debt at lower fixed rates and/or longer terms will allow the properties to improve their cash flows and improve the performance of the properties. Also, in May 2000, a subsidiary of Pedcor initiated management and certain accounting services for the properties previously managed by Village Management Corporation. Salaries and employee benefits on an annualized basis decreased $124,000 from the six months ending December 31, 1999 due to staff reductions. Fidelity announced in September 2000, that former President and CEO M. Brian Davis would terminate employment effective immediately. In conjunction with this announcement, Fidelity recognized severance expense of approximately $527,000, pursuant to an employment agreement executed between Fidelity and Davis. The severance payments are subject to OTS and FDIC approval prior to payment. Excluding the $527,000, pursuant to an employment agreement expense, salaries would have decreased $651,000 from the prior year due to staff reductions completed during the year ended December 31, 2000. A portion of these savings resulted from the transition of affordable housing management to Pedcor, as well as reductions in United's staffing levels. Legal and professional fees decreased $214,000 from the prior year on an annualized basis. Last year an additional $103,000 in legal fees associated with the terminated Lincolnshire transaction was incurred during the six month period. In addition to routine legal expenses additional legal expenses for 2000 were generated by the Pedcor transaction, Fidelity's commitment to continue workout activities, and other legal actions commenced by Fidelity. Also, during 2000 an additional $125,000 was accrued for anticipated legal and professional expenses in connection with the defense of litigation related to a large multifamily loan that was paid off in 1998. After repaying the loan, the Borrower sued United alleging that United had agreed to make a second loan for another apartment development. United determined that the suit was likely to go to trial, but unreasonable in terms of its content. United, at December 31, 2000, determined that there was not a reasonable possibility that a material loss had occurred by internally evaluating the merits of the suit and by engaging legal counsel to assist in the evaluation as well as the defense for this suit. Equipment expense on an annualized basis decreased $82,000 due to a decrease in depreciation and maintenance expense. Data processing expense decreased $155,000, annualized, due to the decreases in expenses connected with Year 2000 preparedness efforts during the prior year. Deposit insurance decreased $69,000 from the prior year due to a decrease in deposits of $8.1 million since December 31, 1999. Advertising increased $42,000 over the prior year primarily due to increased promotional activities. Printing and supplies decreased $25,000 due to the staff reductions and redundancy in supplies for operating various subsidiaries at separate locations, which have been consolidated. In conjunction with the stock sale to Pedcor, intangible assets totaling $1.3 million were recorded. Amortization of these assets resulted in expense of $139,000 for the year ended December 31, 2000. Other operating expense increased $145,000 over last years expense, on an annualized basis, primarily due to adjustments to the values of several surplus real estate properties to record them at their appraised values and interest expense payable to the Internal Revenue Service (IRS) in connection with a recently completed examination. Certain prior year deductions were disallowed, reducing the amount of the tax refund that Fidelity received two years ago. These deductions are expected to be taken by Fidelity in future years. 15 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition Income Tax Benefit The income tax benefit was $1.4 million for the year ended December 31, 2000 compared to $1.7 million or $3.3 million annualized for the six months ending December 31, 1999, primarily due to an increase in taxable income. Included in the tax benefit of $1.4 million for the year ended December 31, 2000 are tax credits of $375,000. 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 year ended December 31, 2000, was 54.2%, compared to the six months ended December 31, 1999 of 44.7% and 117.8% for fiscal 1999, 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 December 31, 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 Fidelity's business plan and cost reductions. 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 75% of the initiatives included within its current business plan and then achieve 5 to 10% growth in annual earnings thereafter. The conservative level of earnings contemplated by these analyses, if achieved, will constitute for the majority of the carryforward 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 business plan including cost reductions, the potential loss of key employees, ability to maintain projected interest rate margins, and the potential disruption of activities in key income-producing areas. Financial Condition Total assets at December 31, 2000 decreased $5.0 million to $166.5 million from $171.5 million in December 1999. Average assets for the year ended December 31, 2000 decreased 4.0% from average assets for the six months ended December 31, 1999 to $163.9 million. Average interest-bearing liabilities at December 31, 2000 decreased $6.4 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. The decrease in total liabilities was due to a reduction in interest-bearing demand deposits and the continued maturities of agent acquired certificates of deposit. 16 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition Loans The following table shows the composition of Fidelity's loan portfolio:
December December June June June 2000 1999 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- (In Thousands) Real estate mortgage loans First mortgage loans Conventional $ 47,809 $ 48,845 $ 49,733 $ 71,343 $ 94,293 Construction 1,274 1,867 6,732 16,110 32,577 Commercial 6,873 8,576 14,140 20,753 26,668 Multi-family loans 4,350 3,629 7,597 5,742 9,602 Home equity loans 5,274 5,567 4,819 4,946 5,111 First mortgage real estate loans purchased 1,753 1,899 2,061 2,704 3,184 ------------------------------------------------------------------------------------ 67,333 70,383 85,082 121,598 171,435 Commercial loans, other than secured by real estate 2,305 4,154 6,076 11,568 12,522 Consumer loans 40,125 24,403 22,799 26,566 21,007 ------------------------------------------------------------------------------------ Total loans 109,763 98,940 113,957 159,732 204,964 Allowance for loan losses (1,921) (2,021) (3,521) (3,049) (1,781) ------------------------------------------------------------------------------------ Net loans $107,842 $96,919 $110,436 $156,683 $203,183 ==================================================================================== Total assets $166,466 $171,457 $172,253 $197,046 $240,819 ==================================================================================== Total loans to total assets 65.9% 57.7% 66.2% 81.1% 85.1% ====================================================================================
Fidelity began selling its current production of 1-4 family loans in 1997, recording the gain or loss and using the proceeds to fund new products. As a result, conventional real estate mortgage loans decreased $46.5 million from June 30, 1997 to December 31, 2000. Multi-family loans increased slightly over the prior year due to the conversion of multifamily construction loans to permanent loans. 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 and execute action plans to monitor the portfolio and 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 $15.7 million from December 31, 1999 to $40.1 million at December 31, 2000. Staffing added to the consumer loan department in 1999 has enabled Fidelity to substantially increase the portfolio of direct and indirect automobile loans, net interest income, and fee income. The level of growth in the consumer loan portfolio during 2000 is not expected to continue. Currently, consumer loans represent 24.8% of United's total assets at December 31, 2000. 17 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition 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. Loan Maturities The following table sets forth the remaining maturities for commercial loans as of December 31, 2000:
Within One One to Five After Five Year Years Years Total - ------------------------------------------------------------------------------------------------------- (In Thousands) Predetermined interest rates $432 $1,644 $88 $2,164 Floating interest rates 23 118 141 ------------------------------------------------------------------ $455 $1,762 $88 $2,305 ==================================================================
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. Income received on nonaccrual and restructured loans was $33,000 for the year ended December 31, 2000, $18,000 for the six months ended December 31, 1999 and $157,000 in fiscal 1999. Additional interest income of approximately $49,000, $13,000 and $214,000 for the year ended December 31, 2000, the six months ended December 31, 1999 and fiscal 1999, respectively would have been recorded had income on nonaccruing and restructured loans been considered collectible and accounted for on an accrual basis. 18 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition The following table provides information on Fidelity's non-performing loans.
December 31, December 31, June 30, June 30, June 30, 2000 1999 1999 1998 1997 --------------------------------------------------------------------------- (Dollars In Thousands) Non-accrual loans Real estate mortgage $ 253 $ 76 $461 $256 Multi-family $ 148 229 4,112 Commercial 472 --------------------------------------------------------------------------- Total non-accrued loans 620 482 4,188 461 256 Restructured Real estate mortgage Consumer 115 75 77 Commercial 119 118 --------------------------------------------------------------------------- Total restructured loans 234 193 77 90 days or more past due and accruing Consumer 10 135 164 86 29 Commercial - 313 632 26 --------------------------------------------------------------------------- Total 90 days or more past due and accruing 10 448 796 112 29 --------------------------------------------------------------------------- Total non-performing loans $ 864 $1,123 $5,061 $573 $285 =========================================================================== Ratio of non-performing loans to total loans .79% 1.14% 4.44% .36% .14% ===========================================================================
Non-performing loans were .79% of total loans at December 31, 2000, as compared to 1.14% of total loans at December 31, 1999 and 4.44% at June 30, 1999 and consisted primarily of commercial and multi-family loans. The decrease in non-performing loans since June 30, 1999 is primarily due to one large multifamily loan to an unaffiliated borrower which was paid in full in October 1999. 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 that Fidelity will be required to make additional advances is expected to decline in future periods due to the guarantees provided by Pedcor, the management of the affordable housing portfolio by Pedcor, and because of completed refinancing efforts. 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. 19 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition
Classified Assets and Letters of Credit (in thousands) December 31, December 31, 2000 1999 ------------------------------------- Classified assets $ 8,754 $ 8,991 Classified letters of credit 11,773 13,218 ------ ------ Total classified assets/letters of credit $20,527 $22,209 ======= =======
Classified assets and letters of credit of Fidelity totaled $20.5 million at December 31, 2000 compared to $22.2 million at December 31, 1999 and $40.7 million at June 30, 1999, a decrease of 7.7% and 45.5%, respectively. Classified assets and letters of credit were 129.5% and 167.8% of Fidelity's capital and reserves at December 31, 2000 and December 31, 1999, respectively. Classified assets and letters of credit were 69.9% and 75.8% of United's core capital and reserves at December 31, 2000 and December 31, 1999, respectively. The Supervisory Agreement originally established 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. United was not in compliance with this requirement at December 31, 1999, however, this deadline was extended by the OTS to March 31, 2001. United expects to be in full compliance on March 31, 2001. In addition to the classified assets and letters of credit, there were other assets and letters of credit totaling $18.6 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 December 31, 2000 and December 31, 1999, Fidelity had impaired loans totaling $3.7 million and $7.4 million respectively. The allowance for losses on such impaired loans totaled $384,000 and $1.1 million, which are included in Fidelity's allowance for loan losses at December 31, 2000 and December 31, 1999, respectively. In addition, using similar guidelines for impaired loans, impaired letters of credit at December 31, 2000 and December 31, 1999 totaled $11.8 million and $13.2 million, respectively. The valuation allowance on such impaired letters of credit totaled $5.2 million and $5.8 million, respectively at December 31, 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. 20 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition 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 December 31, 2000 and 1999 and the fiscal years ended June 30:
December 31, December 31, June 30, June 30, June 30, 2000 1999 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- (In Thousands) Allowance for loan losses at beginning of period $ 2,021 $ 3,521 $ 3,049 $ 1,781 $ 1,059 ---------------------------------------------------------------------------------------- Loan charge offs Real estate mortgage 80 15 100 Multi-family 683 2,631 3,089 Commercial 12 11 14 25 Consumer 391 235 324 195 142 ---------------------------------------------------------------------------------------- Total loan charge offs 1,166 2,877 338 3,299 267 ---------------------------------------------------------------------------------------- Loan recoveries Real estate mortgage 15 3 Multi-family 317 3 Commercial 20 3 3 Consumer 59 26 35 24 11 ---------------------------------------------------------------------------------------- Total loan recoveries 396 32 53 24 14 ---------------------------------------------------------------------------------------- Net charge offs 770 2,845 285 3,275 253 Reclassifications 895 Provision for loan losses 670 1,345 (138) 4,543 975 ---------------------------------------------------------------------------------------- Allowance for loan losses at end of period $ 1,921 $ 2,021 $ 3,521 $ 3,049 $ 1,781 ======================================================================================== Ratio of net charge offs to average loans outstanding during period .72% 5.20% .21% 1.81% .12% ======================================================================================== Ratio of provision for loan losses to average loans outstanding during period .63% 2.46% (.10)% 2.52% .46% ======================================================================================== Ratio of allowance for loan losses to total loans outstanding at year end 1.75% 2.04% 3.09% 1.91% .87% ======================================================================================== Average amount of loans outstanding for the period $106,599 $108,455 $137,793 $180,530 $213,793 ======================================================================================== Amount of loans outstanding at end of period $109,763 $98,940 $113,957 $159,732 $204,964 ========================================================================================
21 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition The allowance for loan losses was $1.9 million at December 31, 2000 compared to $2.0 million at December 31, 1999. Net loan charge-offs were $770,000 or .72% of average loans for the year ended December 31, 2000 compared to $2.8 million or 5.20% of average loans for the six months ended December 31, 1999. During the year ended December 31, 2000, net charge-offs consisted primarily of multifamily and consumer loans. Of the $683,000 multifamily charge-offs, $317,000 was later recovered during 2000. Payments under operating deficit guarantees provided by Pedcor are limited to $300,000 per year. Through December 2000 $240,000 in payments had been received. Total provision for loan losses for the period ended December 31, 2000 were $670,000. Included in this total were provisions totaling $275,000 taken in the third quarter of 2000, due to routine maintenance of Fidelity's affordable housing portfolio that had been deferred by the previous property manager, and for recent growth in consumer loans. 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 in loans. In addition, it was determined that a $3.2 million loan originated for the financing of a hotel was not meeting its cash flow projections, and thus a $470,000 reserve was established. Consumer loan net charge-offs of $249,000 were related primarily to loans originated prior to 1999. Based on loss experience in United's consumer loan portfolio originated prior to 1999, United increased the allowance for loan losses to $496,000 at December 31, 1999, or approximately 1.5% of consumer loans outstanding. Due to the growth in the consumer loan portfolio the allowance for consumer loan losses grew to $628,000 at December 31, 2000. During the six months ended December 31, 1999 an additional letter of credit valuation provision of $1.1 million was recognized due to deterioration in the affordable housing portfolio. A letter of credit was funded during the first quarter of fiscal 1999 and was classified as a non-accrual loan upon conversion. This loan was previously classified as a substandard letter of credit with a specific reserve of $895,000. The loan was paid in full during the second quarter of fiscal 1999 and Fidelity reclassified the $895,000 specific reserve to the general allowance for loan losses. As discussed previously, Fidelity has loans and letters of credit securing third-party loans to certain Section 42 tax-credit projects and also has other loans and letters of credit outstanding that are related to other multi-family developments, most of which are outside Fidelity's geographic market. Fidelity also recorded a letter of credit valuation allowance and related provision of $6.8 million in fiscal 1998, the balance of which is $5.2 million at December 31, 2000. The decrease is primarily due to the transfer of $895,000 from the letter of credit valuation allowance to the allowance for loan losses. An additional $600,000 was funded during 2000 to assist in the refinancing efforts on two partnerships. Multi-family letters of credit, an off-balance sheet item, carry the same risk characteristics as conventional loans and totaled $43.8 million at December 31, 2000, compared to $44.5 million at December 31, 1999 and $45 million at June 30, 1999. The valuation allowance for letters of credit totaled 11.8% of outstanding letters of credit at December 31, 2000 compared to 13.0% at December 31, 1999. Allowance for loan losses and valuation allowance for letters of credit to total loans and letters of credit at December 31, 2000 and 1999 was 4.61% and 5.44%, respectively. 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 portfolio as of December 31, 2000. 22 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition Allocation of Allowance for Loan Losses The allocation for loan losses and the percentage of loans within each category to total loans at December 31, 2000 and 1999 and at June 30, 1999, 1998, and 1997 are as follows:
Allocation of Amount ------------------------------------------------------------------------------------- December 31, December 31, June 30, June 30, June 30, 2000 1999 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- (In Thousands) Real estate mortgage $ 49 $ 49 $ 51 $ 124 $ 102 Home equity 53 54 48 49 51 Multi-family 514 482 2,177 1,868 994 Consumer 628 496 182 275 168 Commercial 677 940 1,063 733 466 ------------------------------------------------------------------------------------- Total $1,921 $2,021 $3,521 $3,049 $1,781 ===================================================================================== Percentage of Loans to Total Loans ------------------------------------------------------------------------------------- December 31, December 31, June 30, June 30, June 30, 2000 1999 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Real estate mortgage 45.2% 45.7% 42.0% 45.6% 51.4% Home equity 4.8 5.5 4.2 3.1 2.5 Multi-family 3.4 5.9 11.5 11.4 14.3 Consumer 36.6 30.0 24.2 19.7 12.7 Commercial 10.0 12.9 18.1 20.2 19.1 ------------------------------------------------------------------------------------- Total 100.0% 100.0% 100.0% 100.0% 100.0% =====================================================================================
23 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition Association with Section 42 As noted previously, Fidelity has various investments in seventeen real estate development projects located throughout Indiana, Illinois and Kentucky. Management considers the projects and properties to be in good condition. Fidelity has various Section 42 loans, general partner loans, equity investments and letters of credit associated with these projects. The following table summarizes Fidelity's association with these projects:
Activities associated with Section 42 Conventional General Bank Financing Partner Additional Equity Letters of Loans Notes Investments Credit ---------------------------------------------------------------------------- Balance at June 30, 1998 $5,325 $606 $1,686 $19,423 Increases 61 13 $284 Paydowns, payoffs, or loss on investment (563) (369) (262) Payoffs of financing secured by letters of credit (2,757) Charge-offs (545) ---------------------------------------------------------------------------- Balance at June 30, 1999 4,823 250 284 879 16,666 Increases 58 1 Paydowns, payoffs, or loss on investment (1,401) (152) (77) Charge-offs or funding on outstanding letters of credit (994) (85) (151) (235) (450) ---------------------------------------------------------------------------- Balance at December 31, 1999 2,428 13 56 702 16,217 Increases 63 624 Sale of partnership interests (301) Paydowns, payoffs, or loss on investment (29) (5) (75) (4) Charge-offs or funding on outstanding letters of credit (8) (680) (43) (600) ---------------------------------------------------------------------------- Balance at December 31, 2000 $2,462 $ 0 $ 0 $ 283 $15,613 ============================================================================
Specific reserves included in allowance for loan losses ------------------------------------------- Specific Valuation Conventional General Allowance Reserves Allowance Bank financing Partner additional for equity for letters loans notes Investments of credit --------------------------------------------------------------------------- Balance at June 30, 1998 $878 $56 75 $5,300 Provision-year ended June 30, 1999 (205) 69 44 470 (532) Charge-offs (545) --------------------------------------------------------------------------- Balance at June 30, 1999 673 125 44 4,768 Provision-six months ended December 31, 1999 651 (40) 111 253 606 Funding on outstanding letter of credit (450) Charge-offs (994) (85) (151) (235) --------------------------------------------------------------------------- Balance at December 31, 1999 330 4 18 4,924 Provision-year ended December 31, 2000 106 2 430 Funding on outstanding letter of credit (600) Reclassification (188) 8 674 25 Charge-offs (8) (680) (43) --------------------------------------------------------------------------- Balance at December 31, 2000 $ 248 $ 0 $ 0 $ 0 $4,754 ===========================================================================
24 Fidelity Federal Bancorp and Subsidiaries Management's Discussion and Analysis of Results of Operations and Financial Condition 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 interest rate risk management committee, which is responsible for keeping the investment policy current. At December 31, 2000, the investment portfolio represented 12.6% 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, 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 December 31, 2000, the entire investment portfolio was classified as available for sale. The net unrealized loss at December 31, 2000, which is included as a component of stockholders' equity, was $536,000 and was comprised of gross unrealized losses of $887,000 and a tax benefit of $351,000. The decrease in the unrealized loss was caused primarily 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 December 31, 2000 and 1999 and at June 30, 1999:
December 31, December 31, June 30, 2000 1999 1999 - ----------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Federal Home Loan Mortgage Corporation mortgage-backed securities $ 805 $ 1,043 $ 1,202 Federal National Mortgage Association mortgage-backed securities 1,095 1,377 1,510 Government National Mortgage Association mortgage-backed securities 19,101 21,885 24,613 ------------------------------------------------ Total securities available for sale $21,001 $24,305 $27,325 ================================================
For the year ended December 31, 2000, United's investment securities portfolio decreased by $3.3 million to $21.0 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 year. 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. 25 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition The following table sets forth the contractual maturities of investment and mortgage-backed securities as of December 31, 2000, and the weighted average yields of such securities. The contractual maturities of mortgage-backed securities are not typically indicative of the actual holding period for such investments, as pre-payments on the underlying mortgage loans will reduce the average life of the investment, based on prevailing market interest rates.
------------------------------------------------------------------------------ After One But After Five But Within One Year Within Five Years Within Ten Years Over Ten Years Total - ------------------------------------------------------------------------------------------------------------------------- Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield - ------------------------------------------------------------------------------------------------------------------------- Federal Home Loan Mortgage Corporation $252 7.00% $ 30 7.53% $ 523 6.45% $ 805 6.66% Federal National Mortgage Association 307 7.00 788 6.14 1,095 6.38 Government National Mortgage $ 4,178 6.75% 14,923 6.97 19,101 6.92 Association ------- ------- -------- --------- --------- Total $559 7.00% $ 30 7.53% $ 4,178 6.75% $ 16,234 6.91% $ 21,001 6.88% ====== ======= ======== ========= ========= Percent of total 2.7% .1% 19.9% 77.3% 100% ====== ======= ======== ========= =========
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 ($99,000 or more), and variable rate IRA certificates. Average deposits decreased by $3.9 million for the year ended December 31, 2000. Average retail certificates of deposit, for which the average balance increased $8.7 million but was offset by a decrease in NOW accounts and agent-acquired certificates of deposit of $1.9 million and $8.9 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 retail certificate of deposit products. Due to the rise in interest rates during 2000, the average rate on total deposits has increased 30 basis points since December 31, 1999 to 5.15% at December 31, 2000. 26 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition The following table sets forth the average balances of and the average rate paid on deposits by deposit category for the years ended December 31, 2000 and 1999 and June 30, 1999.
December 31, December 31, June 30, 2000 1999 1999 --------------------------------------------------------------------------------- Average Deposits Amount Rate Amount Rate Amount Rate - ------------------------------------------------------------------------------------------------------------------------- (In Thousands) Demand $ 5,136 $ 6,097 $ 5,724 NOW accounts 17,159 3.21% 19,107 3.39% 20,436 3.50% Money market accounts 2,058 1.99 2,545 2.03 2,733 2.23 Savings accounts 4,349 2.25 4,657 2.26 5,082 2.32 Certificates of deposit 87,027 5.97 78,329 5.60 79,072 5.76 Agent-acquired certificates of deposit 9,241 6.00 18,147 5.88 33,467 6.02 --------------- --------------- --------------- Totals $124,970 5.15% $128,882 4.85% $146,514 5.10% =============== =============== ===============
The following table summarizes certificates of deposit in amounts of $100,000 or more by maturity as of the following dates:
December 31, December 31, June 30, 2000 1999 1999 - ------------------------------------------------------------------------------------------------------------------ (In Thousands) Three months or less $1,692 $ 5,656 $ 4,218 Three to six months 1,359 7,727 1,364 Six to twelve months 5,093 2,766 7,760 Over twelve months 4,882 6,825 3,763 -------------------------------------------------- Totals $13,026 $22,974 $17,105 ==================================================
Borrowings Fidelity's long-term debt increased $338,000 from the year ended December 31, 1999, primarily due to a new $2.0 million FHLB advance for a 10 year term obtained in the second quarter of 2000, which has been partially offset during the year by paydowns on other FHLB advances secured by specific single-family loans. During the year an agreement was entered into on an existing $2.0 million note payable for Fidelity to reduce the principal balance by $500,000 in return for the extension of the maturity date from June 2001 to June 2003. As noted in the liquidity section, Fidelity is in the process of negotiating agreements to extend maturities on certain other debt obligations. Alternative funding sources for United are provided by loan sales, loan payoffs, Federal Home Loan Bank advances as well as through retail deposits. 27 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition Capital Resources Fidelity's stockholders' equity increased $3.4 million to $8.8 million at December 31, 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 $239,000 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. 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 exceed each of these levels. The leverage ratio was 8.4% for the year ended December 31, 2000 and 6.8% for December 31, 1999, tier I capital to risk-weighted assets was 10.3% and 9.1% and total capital to risk-weighted assets was 13.8% and 14.3% at December 31, 2000 and December 31, 1999 respectively. Book value per share, increased to $1.90 at December 31, 2000, compared to $1.72 at December 31, 1999 due to the changes noted above in stockholder's equity. 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 December 31, 2000 and 1999, the Bank is categorized as well capitalized and met all capital adequacy requirements; however, United's primary regulator, the OTS felt that additional capital was necessary based on overall asset quality. United has evaluated and pursued alternatives to improve its capital ratios since it entered into the Supervisory Agreement. There are no specific targets for capital levels included or agreed to within the Supervisory Agreement between United and the OTS, only a requirement that United include capital targets within a strategic plan. The strategic plan established capital targets of 8.12% for tangible, leverage and core capital and 13.75% for risk-based capital. At December 31, 2000 United has improved its capital ratios to 8.4% and 13.8% respectively at December 31, 2000 compared to 6.3% and 10.8%, respectively at June 30, 1998. In May 2000 a Stock Purchase Agreement was approved by the shareholders, which added an additional $4.3 million in capital for Fidelity. In addition, under the Stock Purchase Agreement, Pedcor is entitled 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. Fidelity recently filed with the Securities and Exchange Commission a registration statement for a common stock rights offering to existing shareholders. The approximate date of commencement of the proposed sale of securities would be as soon as practical after the effective date of the Registration Statement. 28 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition Liquidity Fidelity's principal source of income and funds is dividends from United. Fidelity 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. The Stock Purchase Agreement approved by shareholders in May 2000 added an additional $3.0 million in cash for Fidelity. In addition, for 3 years following the approval of the stock purchase agreement, approved on May 19, 2000, Pedcor is entitled 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. Fidelity recently obtained a $1.5 million line of credit and can draw on this line until its expiration in September 2001. Absent the line of credit, the potential issuance of additional stock to Pedcor, potential execution of additional debt or equity financing, or dividends from United (with OTS approval), the holding company would have depleted its available cash in April 2001. Fidelity filed, in January 2001, with the Securities and Exchange Commission a registration statement for a common stock rights offering to existing shareholders. The approximate date of commencement of the proposed sale of the securities would be as soon as practical after the effective date of the Registration Statement. The common stock rights offering will be for existing shareholders as of a certain record date. Fidelity is also in the process of negotiating agreements to extend maturities on certain debt obligations coming due in 2001 and 2002. Fidelity filed with the Securities and Exchange Commission a registration statement in March 2001 to exchange all outstanding 9 1/8% junior subordinated notes due totaling, $1,476,000 in principal, in April 2001 for 12% junior subordinated notes due in April 2004. These actions excluding letter of credit issues noted below will facilitate the acquisition of sufficient cash to meet projected cash flow shortfalls, if successful. Fidelity has issued letters of credit that back tax-exempt bond financing for three Section 42 multifamily housing developments. The municipal bonds are periodically re-marketed to current or new bondholders. Beginning in July 2001 through October 2001, approximately $8.7 million in bonds are due to be re-marketed. In the event that some of the bonds cannot successfully be re-marketed, Fidelity will be required to fund the difference. The amount of cash that would be required could be in excess of the amount Fidelity is anticipated to maintain. As such, alternative strategies for re-financing this debt such as utilizing the Federal Housing Administration 223(f) program are being sought. Fidelity has had prior success in refinancing Section 42 multifamily housing debt outstanding utilizing this program, however, there is no assurance that this effort will be 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 December 31, 2000 and December 31, 1999, United's liquidity ratios were 19.1% 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. United has reduced the liquidity throughout the year 2000. Management believes that the remaining 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's borrowings increased slightly from the FHLB from $9.0 million at December 31, 1999, to $9.9 million at December 31, 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. Supervisory Agreement Management has expended significant time and effort ensuring that United continues to operate in compliance with the Supervisory Agreement. While the Supervisory Agreement remains in place, it is likely that total loans outstanding will continue to decline, and management efforts will be concentrated on compliance, rather than business development. This will likely continue to impact the financial condition and the operating results of United and Fidelity until the Agreement is lifted. As noted previously and discussed in the footnotes under "Other Restrictions", United is currently operating under restrictions imposed by the Supervisory Agreement entered into with the OTS. The restrictions regarding certain activities 29 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition in the Supervisory Agreement have had a significant impact on United's net interest margin, net interest income, and net income as a result of United's inability to participate in new commercial lending. The supervisory agreement currently requires United to: o reduce its level of classified assets to core capital and allowance for loan and lease losses to 50% or less by December 31, 1999, (this was extended to March 31, 2001); o refrain from making any commercial loans without OTS approval; o refrain from engaging in any "sub prime" lending activity; o not increase the size of the consumer loan portfolio in excess of 30% of United's assets; o refrain from paying dividends without OTS approval; o adopt a strategic plan including: oo capital targets, which United set at 8.12% for tangible, leverage and core capital ratios and 13.75% for total risk-based capital; oo establish concentration limits for all assets; and oo develop a plan to reduce its concentration of high risk assets. o refrain from making additional investments in equity securities or real estate for development without OTS approval; o develop a plan to divest real estate held for development; o develop a plan to reduce employee turnover and obtain OTS approval before hiring any additional or replacing any directors or senior executive officers; o develop a conflicts of interest policy and refrain from engaging in any transaction with or distribution of funds to Fidelity or its subsidiaries or selling any assets to an affiliate without OTS approval; o develop a plan to increase liquidity and manage liquidity and cash flow; o refrain from increasing the level of executive compensation in excess of the greater of $5,000 or the annual cost of living without OTS approval; o not increase its assets in excess of net interest credited on its deposit liabilities without OTS approval; o not engage in new activities not included in its strategic plan without OTS approval; o maintain a fully-staffed and functioning internal audit and internal loan review process; o adopt a policy to administer the general partnerships held by the subsidiaries of United; and o adopt a policy to administer its mortgage brokerage activities. 30 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition United currently is in compliance with all provisions of the supervisory agreement, and expects to meet the March 31, 2001 deadline to reduce its level of classified assets to core capital and allowance for loan and lease losses to 50% or less. Accounting Pronouncements The Financial Accounting Standards Board has issued Statement No. 133, Accounting for Derivative Instruments and Hedge 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. Asset/Liability Management 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 than average assets will be beneficial in times of rising interest rates, such an asset/liability structure will result in lower net income during periods of declining interest rates, unless offset by other factors. The OTS utilizes a model, the "Office of Thrift Supervision Net Portfolio Value" ("NPV") model, which uses a net market value methodology to measure the interest rate risk exposure of savings associations. Under this model, an institution's "normal" level of interest rate risk in the event of an assumed change in interest rates is a decrease in the institution's NPV in an amount not exceeding 2% of the present value of its assets. Savings associations with over $300 million in assets or less than a 12% risk-based capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is used by the OTS to calculate changes in NPV (and the related "normal" level of interest rate risk) based upon certain interest rate changes (discussed below). Associations which do not meet either of the filing requirements are not required to file OTS Schedule CMR, but may do so voluntarily. United is not required to file a CMR since it exceeds the risk-based capital requirement and its assets are less than $300 million, but does so on a voluntary basis. Under the regulation, associations, which must file are required to take a deduction (the interest rate risk capital component) from their total capital available to calculate their risk based capital requirement if their interest rate exposure is greater than "normal". The amount of that deduction is one-half of the difference between (a) the institution's actual calculated exposure to a 200 basis point interest rate increase or decrease (whichever results in the greater pro forma decrease in NPV) and (b) its "normal" level of exposure which is 2% of the present value of its assets. Presented below, at December 31, 2000 and December 31, 1999, is an analysis performed by the OTS 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 December 31, 2000 and December 31, 1999, 2% of the present value of United's assets was approximately $3.2 million and $3.4 million for December 31, 2000 and 1999, respectively. Because the interest rate risk of a 200 basis point increase in market rates (which was greater than the interest rate risk of a 200 basis point decrease) was $2.3 million at December 31, 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 decrease in interest rate risk from December 31, 1999 to December 31, 2000 is due to interest rate changes and a change in United's balance sheet mix. 31 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition
Interest Rate Risk as of December 31, 2000 NPV as Percent of Present Net Portfolio Value Value of Assets ------------------------------------------------------------------------------------------------- Change Dollar Dollar Percentage in Rates Amount Change Change NPV Ratio Change - ---------------------------------------------------------------------------------------------------------------------- + 300 bp $11,424 $(3,799) (25)% 7.41% - 198 bp + 200 bp 12,848 (2,375) (16) 8.19 - 120 bp + 100 bp 14,154 (1,068) (7) 8.87 - 52 bp 0 bp 15,223 9.40 - 100 bp 15,578 356 2 9.51 11 bp - 200 bp 15,567 345 2 9.42 3 bp - 300 bp 15,912 689 5 9.53 13 bp
Interest Rate Risk as of December 31, 1999 NPV as Percent of Present Net Portfolio Value 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 assumptions used in calculating the table. 32 [LOGO OF OLIVE LLP] Independent Auditor's Report Stockholders and Board of Directors Fidelity Federal Bancorp Evansville, Indiana We have audited the accompanying consolidated balance sheet of Fidelity Federal Bancorp and subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of income, changes in stockholders' equity and cash flows for the year and six months ended December 31, 2000 and 1999 and for the year ended June 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements described above present fairly, in all material respects, the consolidated financial position of Fidelity Federal Bancorp and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the year and six months ended December 31, 2000 and 1999 and for the year ended June 30, 1999 in conformity with generally accepted accounting principles. /s/ Olive LLP Evansville, Indiana January 12, 2001 33 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Consolidated Balance Sheet (In Thousands, Except Share Data)
December 31 2000 1999 - ---------------------------------------------------------------------------------------- Assets Cash and due from banks $ 1,926 $ 8,003 Interest-bearing demand deposits 14,718 22,911 ------------------------------------ Cash and cash equivalents 16,644 30,914 Investment securities available for sale 21,001 24,305 Loans, net of allowance for loan losses of $1,921 and $2,021 107,842 96,919 Premises and equipment 5,847 5,727 Federal Home Loan Bank of Indianapolis stock 2,620 3,920 Deferred income tax receivable 7,245 5,372 Interest receivable and other assets 5,267 4,300 ------------------------------------ Total assets $ 166,466 $ 171,457 ==================================== Liabilities Deposits Non-interest bearing $ 4,291 $ 6,593 Interest bearing 122,653 128,423 ------------------------------------ Total deposits 126,944 135,016 Long-term debt 23,842 23,504 Advances by borrowers for taxes and insurance 362 409 Valuation allowance for letters of credit 5,153 5,787 Other liabilities 1,390 1,314 ------------------------------------ Total liabilities 157,691 166,030 ------------------------------------ Stockholders' Equity Preferred stock, no par or stated value Authorized and unissued--5,000,000 shares Common stock, $1 stated value Authorized--15,000,000 shares Issued and outstanding--4,607,658 and 3,147,662 shares 4,607 3,147 Additional paid-in capital 13,674 10,869 Stock warrants 11 11 Retained earnings (8,981) (7,825) Accumulated other comprehensive loss (536) (775) ------------------------------------ Total stockholders' equity 8,775 5,427 ------------------------------------ Total liabilities and stockholders' equity $ 166,466 $ 171,457 ====================================
See notes to consolidated financial statements. 34 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Consolidated Statement of Income (In Thousands, Except Share Data)
Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 2000 1999 1999 - ------------------------------------------------------------------------------- Interest Income Loans receivable $ 9,436 $ 4,558 $ 11,861 Investment securities--taxable 1,518 849 955 Federal funds sold 25 Deposits with financial institutions 873 454 939 Other dividend income 273 158 314 ----------------------------------- Total interest income 12,100 6,019 14,094 ----------------------------------- Interest Expense Deposits 6,442 3,151 7,467 Long-term debt 2,015 1,117 2,263 ----------------------------------- Total interest expense 8,457 4,268 9,730 ----------------------------------- Net Interest Income 3,643 1,751 4,364 Provision for loan losses 670 1,345 (138) ----------------------------------- Net Interest Income After Provision for Loan Losses 2,973 406 4,502 ----------------------------------- Other Income Fee income--management fees 88 88 196 Service charges on deposit accounts 311 201 437 Net gains on loan sales 54 110 343 Letter of credit fees 530 291 582 Real estate investment banking fees 78 13 78 Agent fee income 240 4 333 Title fee income 16 18 72 Servicing fees on loans sold 109 55 91 Release fees on multifamily loans 34 20 82 Other income 356 201 449 ----------------------------------- Total non-interest income 1,816 1,001 2,663 -----------------------------------
35 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Consolidated Statement of Income (In Thousands, Except Share Data) (Continued)
Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 2000 1999 1999 - ------------------------------------------------------------------------------- Other Expenses Salaries and employee benefits $ 3,370 $ 1,747 $ 3,414 Net occupancy expenses 364 192 394 Equipment expenses 250 166 299 Data processing fees 339 247 407 Deposit insurance expense 243 156 244 Legal and professional fees 544 379 379 Advertising 198 78 202 Letter of credit valuation provision (85) 1,069 (715) Loss on investment in partnerships 352 356 831 Amortization of intangible assets 139 Correspondent bank charges 156 79 154 Other expense 1,444 679 1,269 ------------------------------------- Total non-interest expense 7,314 5,148 6,878 ------------------------------------- Income (Loss) Before Income Tax (2,525) (3,741) 287 Income tax benefit (1,369) (1,671) (338) ------------------------------------- Net Income (Loss) $(1,156) $(2,070) $ 625 ===================================== Basic Earnings (Loss) Per Share $ (.29) $ (.66) $ .20 Diluted Earnings (Loss) Per Share (.29) (.66) .20
See notes to consolidated financial statements. 36 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Consolidated Statement of Changes in Stockholders' Equity (In Thousands, Except Share Data)
Accumulated Common Stock Comprehensive Other --------------------- Paid-in Stock Income Retained Comprehensive Shares Amount Capital Warrants (Loss) Earnings Income (Loss) Total --------------------------------------------------------------------------------------- Balances, July 1, 1998 3,127,208 $3,127 $10,799 $11 $(6,380) $ (42) $7,515 Comprehensive income Net income $625 625 625 Other comprehensive loss, net of tax Unrealized loss on securities (416) (416) (416) ------- Comprehensive income $209 ======= Sale of stock 20,458 20 70 90 Purchase of stock (4) ---------------------------------------- -------------------------------- Balances, June 30, 1999 3,147,662 3,147 10,869 11 (5,755) (458) 7,814 Comprehensive loss Net loss Other comprehensive loss, net of tax $(2,070) (2,070) (2,070) Unrealized loss on securities (317) (317) (317) -------- Comprehensive loss $(2,387) ======== ---------------------------------------- -------------------------------- Balances, December 31, 1999 3,147,662 3,147 10,869 11 (7,825) (775) 5,427 Comprehensive loss Net loss $(1,156) (1,156) (1,156) Other comprehensive income, net of tax Unrealized gain on securities 239 239 239 -------- Comprehensive loss $ (917) ======== Sale of stock 1,460,000 1,460 2,805 4,265 Purchase of stock (4) ---------------------------------------- -------------------------------- Balances, December 31, 2000 4,607,658 $4,607 $13,674 $11 $(8,981) $(536) $8,775 ======================================== ================================
See notes to consolidated financial statements. 37 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Consolidated Statement of Cash Flows (In Thousands)
Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 2000 1999 1999 - ---------------------------------------------------------------------------------------------------- Operating Activities Net income (loss) $ (1,156) $ (2,070) $ 625 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities Provision for loan losses 670 1,345 (138) Letter of credit valuation provision (85) 1,069 (715) Depreciation and amortization 491 196 402 Valuation allowance--affordable housing investments 69 331 545 Loans originated for sale (5,395) (4,527) (25,474) Proceeds from sale of loans 5,384 4,542 25,342 Deferred income tax benefit (2,031) (1,673) (6) Changes in Interest payable and other liabilities (114) 219 66 Interest receivable and other assets 247 594 3,642 Other 261 17 (43) ----------------------------------------- Net cash provided (used) by operating activities (1,659) 43 4,246 ----------------------------------------- Investing Activities Purchases of securities available for sale (25,388) Proceeds from maturities of securities available for sale 3,639 2,463 7,189 Proceeds from redemption of FHLB stock 1,300 Net change in loans (11,484) 12,069 45,683 Purchase of premises and equipment (794) (231) (267) Proceeds from sales of premises and equipment 110 40 Funding on outstanding letter of credit (600) (450) ----------------------------------------- Net cash provided (used) by investing activities (7,829) 13,851 27,257 ----------------------------------------- Financing Activities Net change in Noninterest-bearing, interest-bearing demand and savings deposits (2,030) (2,022) (1,430) Certificates of deposit (6,042) 8,442 (18,913) Short-term borrowings (2,403) Proceeds of long-term debt 2,000 5,000 Repayment of long-term debt (1,663) (5,684) (5,339) Net change in advances by borrowers for taxes and insurance (47) 17 (34) Sale of stock 3,000 90 Cash dividends (156) ----------------------------------------- Net cash provided (used) by financing activities (4,782) 753 (23,185) -----------------------------------------
38 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Consolidated Statement of Cash Flows (In Thousands) (Continued)
Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 2000 1999 1999 - ------------------------------------------------------------------------------------------------ Net Change in Cash and Cash Equivalents $(14,270) $ 14,647 $ 8,318 Cash and Cash Equivalents, Beginning of Period 30,914 16,267 7,949 --------------------------------------- Cash and Cash Equivalents, End of Period $ 16,644 $ 30,914 $ 16,267 ======================================= Additional Cash Flows Information Interest paid $ 8,448 $ 4,211 $ 9,879 Income tax paid (refunded) 727 (3,013) Stock issued in exchange for partnership operating cash flow deficit guarantees and management services 1,265
See notes to consolidated financial statements. 39 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) >> Nature of Operations and Summary of Significant Accounting Policies The accounting and reporting policies of Fidelity Federal Bancorp (Fidelity) and its wholly-owned subsidiaries conform to generally accepted accounting principles and reporting practices followed by the thrift industry. The more significant of the policies are described below. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fidelity is a registered thrift holding company whose principal activity is the ownership and management of United Fidelity Bank, fsb (United). United operates under a national thrift charter and provides full banking services. As a federally chartered thrift, United is subject to regulation by the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation. Fidelity's other subsidiary is Village Affordable Housing Corporation, which was formed during 1999 for the purpose of owning interests in real estate housing, and is currently inactive. United generates mortgage, consumer and commercial loans and receives deposits from customers located primarily in Vanderburgh County, Indiana and surrounding counties. Fidelity's loans are generally secured by specific items of collateral including real property, consumer assets and business assets. United's subsidiaries, Village Housing Corporation and Village Management Corporation (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. In May 2000, a subsidiary of Pedcor Holdings, LLC began providing management and certain accounting services for the properties previously managed by Village Management Corporation. Village Management is currently inactive. Village Capital Corporation earns fees by providing real estate mortgage banking services to unaffiliated borrowers. Village Capital has not provided any new banking services for the past two years, but records fee income on transactions previously completed. Another United subsidiary, Village Insurance Corporation, is engaged in the business of selling credit life and accident health insurance in conjunction with United's lending activities. Consolidation--The consolidated financial statements include the accounts of Fidelity and its subsidiaries after elimination of all material intercompany transactions. Securities available for sale are carried at fair value, with unrealized gains and losses reported separately in accumulated other comprehensive income, net of tax. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses of securities are recorded on the specific-identification method. Loans held for sale are carried at the lower of aggregate cost or market value. Market is determined using the aggregate method. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income, based on the difference between estimated sales proceeds and aggregate cost. 40 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) Loans are carried at the principal amount outstanding. Interest income is accrued on the principal balances of loans. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed when considered uncollectible. Interest income is subsequently recognized only to the extent cash payments are received. Certain loan fees and related direct costs are being deferred and amortized over the lives of the loans as an adjustment of yield on the loans. Allowance for loan losses and letter of credit valuation allowance are maintained for credit losses to absorb losses inherent in the loan portfolio. The allowances are based on ongoing quarterly assessments of the probable estimated losses inherent in the loan portfolios. The allowance for loan losses is increased by the provision for credit losses, which is charged against current period operating results and decreased by the amount of chargeoffs, net of recoveries. Fidelity's methodology for assessing the appropriateness of the allowance for loan losses consists of several key elements, which include the formula allowance, specific allowances for identified problem loans, and the unallocated allowance. The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments, in each case based on the internal risk grade of such loans, pools of loans, or commitments. Changes in risk grades of both performing and nonperforming loans affect the amount of the formula allowance. Loss factors are based on historical loss experience and may be adjusted for significant factors that, in management's judgement, affect the collectibility of the portfolio as of the evaluation date. Specific loan and letter of credit valuation reserves are established in cases where management has identified significant conditions or circumstances related to a loan or letter of credit that management believes indicate the probability that a loss has been incurred in excess of the amount determined by the application of, in the case of the allowance for loan losses, the formula allowance. The unallocated allowance for loan losses is based upon management's evaluation of various conditions, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific credits. The conditions evaluated in connection with the unallocated allowance for loan losses and the letter of credit valuation reserve may include existing general economic and business conditions affecting Fidelity's key lending areas, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the loan and letter of credit portfolios, specific industry conditions within portfolio segments, recent loss experience in particular segments of the portfolios, duration of the current business cycle, regulatory examination results, and findings of an independent third party conducting quarterly reviews of the loan and letter of credit portfolios. The allowance for loan losses also incorporates the results of measuring impaired loans as provided in SFAS No. 114 and SFAS No. 118. A loan is considered impaired when management determines that it is probable that the Bank will be unable to collect all amounts due according to the original contractual terms of the loan agreement. Impairment is measured by the difference between the recorded investment in the loan and the estimated present value of total expected future cash flows, discounted at the loan's effective rate, or the fair value of the collateral of the loan, if collateral dependent. Impairment is recognized by adjusting an allocation of the existing allowance for loan losses. 41 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) The determination of the adequacy of the allowance for loan losses and the letter of credit valuation allowance is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Management believes that, as of December 31, 2000, the allowance for loan losses and the letter of credit valuation allowance is adequate based on information currently available. A worsening or protracted economic decline in the area within which Fidelity operates could affect the possibility of additional losses due to credit and market risks and could create the need for additional loss reserves. Premises and equipment are carried at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method based principally on the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations. Federal Home Loan Bank (FHLB) stock is a required investment for institutions that are members of the FHLB system. The required investment in the common stock is based on a predetermined formula. Income tax in the consolidated statement of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. Fidelity files consolidated income tax returns with its subsidiaries. Mortgage servicing rights on originated loans are capitalized by allocating the total cost of the mortgage loans between the mortgage servicing rights and the loans based on their relative fair values. Capitalized servicing rights, which includes purchased servicing rights, are amortized in proportion to and over the period of estimated servicing revenues. Intangible assets are being amortized on the straight-line basis over periods ranging from five to ten years. Such assets are periodically evaluated as to the recoverability of their carrying value. Stock options are granted for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. Fidelity accounts for stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognized no compensation expense for the stock option grants. Earnings per share have been computed based upon the weighted-average common shares outstanding during the year. The effect of outstanding options and warrants are included in diluted earnings per share if they are not anti-dilutive. Reclassification of certain amounts in the 1999 consolidated financial statements have been made to conform to the 2000 presentation. 42 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) >> Restriction on Cash and Due From Banks United is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 2000 was $173. >> Investment Securities Available for Sale
Gross Amortized Unrealized Fair Cost Losses Value ----------------------------------------------- December 31, 2000 Mortgage-backed securities $21,888 $ (887) $21,001 =============================================== December 31, 1999 Mortgage-backed securities $25,589 $(1,284) $24,305 ===============================================
Securities with a carrying value of $20,727 and $23,650 were pledged at December 31, 2000 and 1999 to secure certain deposits, outstanding Federal Home Loan Bank advances, and for other purposes as permitted or required by law. >> Loans and Allowance
December 31 2000 1999 - --------------------------------------------------------------------------------------------------- Real estate mortgage loans First mortgage loans Conventional $ 47,809 $48,845 Construction 1,274 1,867 Commercial 6,873 8,576 Multi-family 4,350 3,629 Home equity loans 5,274 5,567 First mortgage real estate loans purchased 1,753 1,899 Commercial loans--other than secured by real estate 2,305 4,154 Consumer loans 40,125 24,403 ------------------------------- Total loans 109,763 98,940 Allowance for loan losses (1,921) (2,021) ------------------------------- Total loans, net of the allowance for loan losses $107,842 $96,919 ===============================
43 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) Multi-family first mortgage loans are loans made to affordable housing developments. An additional $973 and $1,529 in multi-family loans is included in construction loans at December 31, 2000 and 1999.
Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 2000 1999 1999 - --------------------------------------------------------------------------------------------------------------- Allowance for Loan Losses Balances, beginning of period $2,021 $3,521 $3,049 Provision for losses 670 1,345 (138) Transfer from letter of credit valuation reserve 895 Recoveries on loans 396 32 53 Loans charged off (1,166) (2,877) (338) -------------------------------------------------- Balances, end of period $1,921 $2,021 $3,521 ==================================================
Information on impaired loans is summarized below:
December 31 2000 1999 - ------------------------------------------------------------------------------------------------------ Impaired loans with an allowance $3,696 $7,351 =============================== Allowance for impaired loans (included in allowance for loan losses) $ 384 $1,055 ===============================
Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 2000 1999 1999 - ------------------------------------------------------------------------------------------------------------ Average balance of impaired loans $7,298 $13,548 $13,868 Interest income recognized on impaired loans 1,008 663 1,396 Cash-basis interest included above 1,045 614 1,396
44 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) >> Letter of Credit Valuation Allowance Reserves related to letters of credit issued by Fidelity and United relate to the permanent financing for certain affordable housing projects. Multi-family letters of credit, an off-balance sheet item, carry the same risk characteristics as conventional loans and totaled $43,800 and $44,463 at December 31, 2000 and 1999, respectively.
Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 2000 1999 1999 - ----------------------------------------------------------------------------------------------------------- Letter of credit valuation allowance Balances, beginning of year $5,787 $5,168 $6,778 Provision (85) 1,069 (715) Recoveries 51 Transfer to allowance for loan losses (895) Funding of outstanding letters of credit (600) (450) ---------------------------------------------- Balances, end of year $5,153 $5,787 $5,168 ==============================================
During the year ended December 31, 2000 and the six months ended December 31, 1999, Fidelity disbursed $600 and $450 to holders of bond obligations of limited partnerships in which Fidelity is a general partner. This was done in an effort to place the partnerships' debt service coverage ratio at a level that would support full repayment of the obligation. Fidelity funded one letter of credit totaling $4,200 during the year ended June 30, 1999. The valuation allowance for this letter of credit, totaling $895, was transferred to the allowance for loan losses. >> Premises and Equipment
December 31 2000 1999 - ----------------------------------------------------------------------------------------- Land $1,695 $1,620 Building and land improvements 5,727 5,369 Furniture, fixtures and equipment 2,454 2,455 ----------------------------- Total cost 9,876 9,444 Accumulated depreciation (4,029) (3,717) ----------------------------- Net $5,847 $5,727 =============================
45 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) >> Other Assets and Investments in Limited Partnerships Included in other assets at December 31, 2000 and 1999 are investments of $791 and $1,302 in limited partnerships which are organized to build, own and operate apartment complexes. The carrying amounts of these investments approximates Fidelity's equity in the net assets of the partnerships. The investments at December 31, 2000 are as follows: Percentage and Type of Amount of Number of Partnership Interest Investment Partnerships ----------------------------------------------------------- 1%--General $ (41) 15 1%--General and 31%--Limited 159 1 1%--General and 26%--Limited 165 1 10%--Limited 308 1 10%--Limited 125 1 99%--Limited 75 2 Fidelity records income on the equity method in the income and losses of the limited partnerships, which resulted in losses of $283, $25 and $246 during the year and six months ended December 31, 2000 and 1999 and year ended June 30, 1999. In addition to recording its equity in the losses of these projects, Fidelity has recorded the benefit of low-income housing tax credits of $375, $193 and $460 for the year and six months ended December 31, 2000 and 1999 and year ended June 30, 1999. In certain cases, Fidelity could reduce the carrying value of its investments in and related loans to these partnerships, should its share of net losses materially exceed the net investments in and loans to these partnerships. Combined condensed financial statements (unaudited) for the limited partnerships as of December 31, 2000 and 1999 and June 30, 1999 and for the year and six months ended December 31, 2000 and 1999 and year ended June 30 1999 are as follows:
December 31 2000 1999 - ---------------------------------------------------------------------------------------------- Combined condensed balance sheet (unaudited) Assets Cash $ 412 $ 322 Land and property 53,226 54,531 Other assets 1,832 1,733 -------------------------------- Total assets $55,470 $56,586 ================================ Liabilities Notes payable $40,958 $40,015 Other liabilities 3,133 2,575 -------------------------------- Total liabilities 44,091 42,590 Partners' equity 11,379 13,996 -------------------------------- Total liabilities and partners' equity $55,470 $56,586 ================================
46 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data)
Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 2000 1999 1999 - ----------------------------------------------------------------------------------------------------------------- Combined condensed statement of operations (unaudited) Total revenue $ 5,681 $ 3,481 $ 5,734 Total expenses 8,094 4,539 7,161 --------------------------------------------------- Net loss $(2,413) $(1,058) $(1,427) ===================================================
Approximately $2,647 and $2,459 of the notes payable are due to Fidelity from these partnerships at December 31, 2000 and 1999, and specific reserves on these notes receivable of $237 and $334 are included in the Company's allowance for loan losses at December 31, 2000 and 1999. Fidelity wrote down the investments in limited partnerships by $352, $356 and $831 during the year ended December 31, 2000 and six months ended December 31, 1999 and year ended June 30, 1999, based on the performance of the underlying real estate operations. Included in other assets is interest receivable as follows:
December 31 2000 1999 - ---------------------------------------------------------------------------------------------------- Interest receivable on loans $580 $570 Interest receivable on investment securities and other 148 170 ------------------------------- Total interest receivable $728 $740 ===============================
>> Deposits
December 31 2000 1999 - ---------------------------------------------------------------------------------------------------- Non-interest bearing transaction accounts $ 4,305 $ 6,593 Interest-bearing transaction accounts 18,840 17,766 Money market deposit accounts 1,795 2,072 Savings accounts 4,020 4,559 Certificates of $100 or more 13,026 22,974 Other certificates and time deposits 84,958 81,052 ------------------------------- Total deposits $126,944 $135,016 ===============================
47 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) Certificates maturing in years ending December 31: 2001 $58,402 2002 16,164 2003 21,551 2004 1,158 2005 709 ----------- $97,984 =========== >> Long-Term Debt
December 31 2000 1999 - --------------------------------------------------------------------------------------------------------------------- Note payable, 9.45% adjusted annually, payable $8 per month, including interest, due September 2010, secured by specific multi-family mortgages $ 975 $ 985 Note payable, 9.45% adjusted annually, payable $13 per month, including interest, due September 2010, secured by specific multi-family mortgages 1,494 1,510 Note payable, 10.50%, interest paid quarterly, due June 2003, secured by United stock 1,500 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 2010 (weighted-average rates of 6.72% and 6.59% at December 31, 2000 and 1999) 9,903 9,039 ------------------------------- Total long-term debt $23,842 $23,504 ===============================
The terms of a security agreement with the FHLB require United to pledge as collateral qualifying first mortgage loans in an amount equal to at least 125% of these advances and all stock in the FHLB or eligible securities with a market value in an amount equal to at least 110% of these advances. In addition to first mortgage loans pledged of $42,455, Fidelity had $20,626 of investment securities pledged at December 31, 2000. Certain advances are subject to restrictions or penalties in the event of prepayment. All long-term debt, except for Federal Home Loan Bank advances, is debt of the parent company and totals $13,939. The scheduled principal reduction of borrowings at December 31, 2000, is as follows: 2001, $5,070; 2002, $5,854; 2003, $1,529; 2004, $31; 2005, $7,031; and thereafter, $4,327. 48 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) >> Loan Servicing Loans serviced for others are not included in the accompanying consolidated balance sheet. The unpaid principal balances of mortgage loans serviced for others totaled $40,858, $40,693 and $38,646 at December 31, 2000 and 1999 and June 30, 1999. The aggregate fair value of capitalized mortgage servicing rights at December 31, 2000 and 1999 approximated $511 and $509. Comparable market prices were used to estimate fair value.
Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 2000 1999 1999 - ----------------------------------------------------------------------------------------------------------------- Mortgage servicing rights Balances, beginning of period $430 $409 $226 Servicing rights capitalized 54 45 250 Amortization of servicing rights (53) (24) (67) ------------------------------------------------ Balances, end of period $431 $430 $409 ================================================
>> Income Tax
Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 2000 1999 1999 - ----------------------------------------------------------------------------------------------------------------- Income tax benefit Currently payable Federal $ 662 $(330) State $ 2 (2) Deferred Federal (1,822) (1,356) (39) State (209) (317) 33 ------------------------------------------------- Total income tax benefit $(1,369) $(1,671) $(338) ================================================= Reconciliation of federal statutory to actual tax benefit Federal statutory income tax at 34% $ (859) $(1,272) $ 98 Effect of state income taxes (138) (208) 21 Nondeductible expenses 3 Affordable housing tax credits and other (375) (191) (457) ------------------------------------------------- Actual tax benefit $(1,369) $(1,671) $ (338) =================================================
49 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) The components of the deferred tax asset are as follows:
December 31 2000 1999 - --------------------------------------------------------------------------------------------------------- Assets Differences in accounting for certain accrued liabilities $ 3 $ 12 Allowance for loan losses 3,054 2,391 Letter of credit allowance for loss 1,498 926 Loan fees 32 Unrealized gain/loss on available-for-sale securities 351 509 Alternative minimum tax credit 71 147 Low income housing credit carryforward 1,311 1,337 State net operating loss carryforward 834 805 Federal net operating loss carryforward 1,386 761 State income tax 105 Other 3 39 ------------------------------- Total assets 8,616 6,959 ------------------------------- Liabilities Depreciation and amortization (6) (40) State income tax (273) Differences in basis of FHLB stock (66) (66) Basis differential on certain partnership interests (1,128) (1,038) Differences in accounting for mortgage servicing rights (171) (170) ------------------------------- Total liabilities (1,371) (1,587) ------------------------------- $7,245 $5,372 ===============================
At December 31, 2000, Fidelity has federal net operating loss carryforwards for tax purposes totaling $4,076. These loss carryforwards expire in varying amounts through the year 2020. Fidelity has state net operating loss carryforwards for tax purposes of $9,809. These loss carryforwards expire in varying amounts through the year 2015. Fidelity has affordable housing credit carryforwards of $1,311. These carryforwards expire in varying amounts through the year 2020. In addition, Fidelity has an alternative minimum tax credit carryforward of $71. Retained earnings include approximately $1,870 for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions as of December 31, 1987 for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses, including redemption of bank stock or excess dividends, or loss of "bank" status, would create income for tax purposes only, which income would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amount was approximately $635. The Company has recorded a deferred tax asset of $2,220 for the expected benefit to be realized from the federal and state net operating loss carryovers discussed above. In addition, a deferred tax asset of $1,311 for low income housing tax credits is recorded. Realization depends upon the ability of the Company to generate sufficient taxable income before the expiration of the carryover periods. The amount that management considers to be realizable is reevaluated at each financial statement date. That estimate could be reduced in the near term if management lowers its estimate of future taxable income during the carryover period. 50 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) >> Commitments and Contingent Liabilities In the normal course of business, there are outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. Fidelity's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. Fidelity uses the same credit policies in making such commitments as it does for instruments that are included on the consolidated balance sheet. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Fidelity evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Fidelity upon extension of credit, is based on management's credit evaluation. Collateral held varies, but may include residential real estate, income-producing commercial properties, or other assets of the borrower. At December 31, 2000 and 1999, commitments to extend credit, which represent financial instruments whose contract amount represents credit risk, were $8,518 and $8,098. Fidelity has issued standby letters of credit on affordable housing developments in which one of Fidelity's subsidiaries has a partnership interest. The letters of credit secure tax exempt bond issues and other permanent financing of limited partnerships in which one of Fidelity's subsidiaries owns a one percent general partner interest. The amount outstanding on these letters of credit at December 31, 2000 and 1999 was $15,612 and $16,240. Fidelity has also issued standby letters of credit on affordable housing developments in which the borrowers are not affiliated with Fidelity. The letters of credit secure tax-exempt bond issues and other permanent financing of limited partnerships. The amount outstanding on the letters of credit at December 31, 2000 and 1999 was $28,188 and $28,223. Fidelity also has standby letters of credit to guarantee the performance of a customer to a third party. The amount outstanding on the standby letters of credit at December 31, 2000 and 1999 was $96 and $115. Fidelity, in its role as general partner on various affordable housing developments through its subsidiaries, is committed to advance certain amounts to limited partnerships. These commitments potentially include short-term loans to the limited partners or an increase in the general partner's equity investment. Fidelity has entered into change in control agreements with one of its employees which provide for the continuation of a multiple of the employee's existing salary and certain benefits for a two-year period of time under certain conditions following a change in control. The agreement becomes effective if there is a change in control that is accompanied by a significant change in job responsibilities and/or compensation. Fidelity and its subsidiaries are also subject to claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of Fidelity. 51 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) >> Dividend and Capital Restrictions 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. United has entered into a Supervisory Agreement (Agreement) with the OTS. 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. >> Regulatory Capital United is subject to various regulatory capital requirements administered by the federal banking agencies and is assigned to a capital category. The assigned capital category is largely determined by three ratios that are calculated according to the regulations: total risk adjusted capital, Tier 1 capital, and Tier 1 leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios. There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. At December 31, 2000 and 1999, United is categorized as well capitalized and met all subject capital adequacy requirements at those dates. 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 strategic plan that was developed by United in 2000, and approved by the OTS, sets capital targets of 8.12% for tangible, leverage and core capital and 13.75% for risk-based capital. At December 31, 2000, United's tangible, leverage and core capital was 8.4% and risk-based capital was 13.8%. United's classified assets to core capital plus the allowance for loan losses and letter of credit valuation reserves was 69.9% at December 31, 2000. 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, but this was subsequently extended until March 31, 2001 by the OTS. At December 31, 1999, United's tangible, leverage and core capital was 6.8% and risk-based capital was 14.3%. United's classified assets to core capital plus the allowance for loan losses and letter of credit valuation reserves was 85.8% at December 31, 1999. 52 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) United's actual and required capital amounts and ratios are as follows:
Required for To Be Well Actual Adequate Capital* Capitalized* -------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio -------------------------------------------------------------------------- As of December 31, 2000 Total risk-based capital* (to risk- weighted assets) $17,830 13.8% $10,337 8.0% $12,921 10.0% Tier 1 capital* (to risk-weighted assets) 13,327 10.3 5,168 4.0 7,753 6.0 Core capital* (to adjusted total assets) 13,327 8.4 6,333 4.0 7,916 5.0 Core capital (to adjusted tangible assets) 13,327 8.4 3,166 2.0 N/A N/A Tangible capital (to adjusted total 13,327 8.4 2,375 1.5 N/A N/A assets) As of December 31, 1999 Total risk-based capital* (to risk- weighted assets) 17,603 14.3 9,839 8.0 12,298 10.0 Tier 1 capital* (to risk-weighted assets) 11,167 9.1 4,919 4.0 7,379 6.0 Core capital* (to adjusted total assets) 11,167 6.8 6,593 4.0 8,241 5.0 Core capital (to adjusted tangible assets) 11,167 6.8 3,296 2.0 N/A N/A Tangible capital (to adjusted total 11,167 6.8 2,472 1.5 N/A N/A assets)
*As defined by regulatory agencies >> 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. The agreement was modified by United and approved by the OTS in the fourth quarter of 2000. Under the terms of the Agreement, United developed and submitted to the OTS for approval a strategic plan which included, 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, 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 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 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. 53 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) 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 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 any 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 begun taking, or refraining from taking, as applicable, the actions requested by the OTS. United was in compliance with all of the provisions of the Agreement at December 31, 1999, except for the targeted capital levels it set forth in its strategic plan and the targeted reduction in classified asset levels set forth in the Agreement. The deadline to reduce the level of classified assets was subsequently extended by the OTS to March 31, 2001. United is in compliance with the provisions of the supervisory agreement at December 31, 2000. >> Stockholders' Equity and Capital Infusion In connection with Fidelity's first debt and equity rights offering completed April 30, 1994, Fidelity 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, carrying an exercise price of $6.22 per share, and expire on April 30, 2004. At December 31, 2000, a total of 397,218 of the shares originally reserved had been issued and 18,282 remained reserved and unissued. In connection with Fidelity's second debt and equity offering completed on January 31, 1995, Fidelity 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, carrying an exercise price of $8.93 per share, and expire on January 31, 2005. At December 31, 2000, a total of 337,029 of the shares originally reserved had been issued and 9,471 remained reserved and unissued. In 2000 Fidelity and its stockholders agreed to sell 1,460,000 shares of its common stock to Pedcor Holdings, LLC, a limited liability company (Pedcor). 54 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) 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 certain management services for the specified properties for ten years at no fee to United or Fidelity. Pedcor, as a result of this transaction, has the ability to exercise an option to purchase up to $5 million of additional stock for a period of three years from the closing date. All purchases completed within one year of the execution of the Agreement must be executed at $3.00 per share. Thereafter, Pedcor may purchase shares from Fidelity at fair market value through May 2003. In addition, three Pedcor principals were named to Fidelity's Board of Directors. Intangible assets of $1,265 were recognized as a result of this transaction. These assets are being amortized over periods ranging from five to ten years. The net unamortized balance of these intangibles at December 31, 2000 was $1,126 and is included in other assets. In January 2001, the Company filed a registration statement for a stockholder rights offering with the Securities and Exchange Commission. A total of 1,000,000 shares were registered in this filing. >> Benefit Plans Fidelity is a participant in the Financial Institutions Retirement Fund (FIRF). This defined-benefit plan is a multi-employer plan; separate actuarial valuations are not made with respect to each participating employer. According to FIRF administrators, the market value of the fund's assets exceeded the value of vested benefits in the aggregate as of June 30, 2000, the date of the latest actuarial valuation. The plan provides pension benefits for substantially all of Fidelity's employees. No plan expense was recorded for Fidelity during the year and six months ended December 31, 2000 and 1999 or the year ended June 30, 1999. Fidelity has a retirement savings 401(k) plan in which substantially all employees may participate. Fidelity matches employees' contributions at the rate of 25% up to 6% of the participant's salary. Fidelity's expense for the plan was $15, $8, and $17 for the year and six months ended December 31, 2000 and 1999 and the year ended June 30, 1999. >> Related Party Transactions Fidelity has entered into transactions with certain directors, executive officers, significant stockholders and limited partnerships in which Fidelity is an investor and their affiliates and associates. Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of loans, as defined, to such related parties were as follows: Balances, beginning of year $2,968 Loans charged off (683) New loans, including renewals 752 Payments, etc., including renewals (79) ------------ Balances, end of year $2,958 ============ 55 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) Total internally classified related party loans included in the total related party loans at December 31, 2000 and 1999 were $2,951 and $2,943. Reserves for these classified related party loans totaled $254 and are included in the allowance for loan losses. Deposits from related parties held by the Company at December 31, 2000 totaled $593. Fidelity has also executed a purchase agreement to sell a parcel of real estate in Adrian, Michigan to Pedcor Investments, a related entity of Pedcor Holdings, for $165,000. The transaction is subject to certain contingencies and there is no assurance that it will be completed. >> Stock Option Plans Under Fidelity's stock option plans, Fidelity grants stock option awards which vest and become exercisable at various dates. During the year and six months ended December 31, 2000 and 1999 and year ended June 30, 1999, Fidelity authorized the grant of options for up to 111,000, 3,000 and 12,500 shares of its common stock. The exercise price of each option, which has a 10-year life, was greater than the market price of Fidelity's stock on the date of grant; therefore, no compensation expense was recognized. Although Fidelity has elected to follow APB No. 25, SFAS No. 123 requires proforma disclosures of net income and earnings per share as if Fidelity had accounted for its employee stock options under that Statement. The fair value of each option grant was estimated on the grant date using an option-pricing model with the following assumptions:
Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 2000 1999 1999 - ----------------------------------------------------------------------------------------------------------------- Risk-free interest rates 6.5% 6.0% 5.2% Dividend yields 0.0% 0.0% 0.0% Volatility factors of expected market price of common stock 29.6% 28.9% 26.9% Weighted-average expected life of the options 10 years 10 years 10 years
56 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) Under SFAS No. 123, compensation cost is recognized in the amount of the estimated fair value of the options and amortized to expense over the options' vesting period. The pro forma effect on net income and earnings per share of this statement is as follows:
Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 2000 1999 1999 - ----------------------------------------------------------------------------------------------------------------- Net income (loss) As reported $(1,156) $(2,070) $625 Pro forma $(1,227) $(2,076) $611 Basic earnings (loss) per share As reported $ (.29) $(.66) $.20 Pro forma $ (.31) $(.66) $.20 Diluted earnings (loss) per share As reported $ (.29) $(.66) $.20 Pro forma $ (.31) $(.66) $.20
The following is a summary of the status of the Fidelity's stock option plans and changes in the plans as of and for the year and six months ended December 31, 2000 and 1999 and the year ended June 30, 1999. Directors' Plan Fidelity has a non-qualified stock option plan (Directors' Plan) which provides for the grant of non-qualified stock options to individuals who are directors of Fidelity, or any of its subsidiaries. The Directors' Plan provides for the grant of non-qualified stock options to acquire shares of common stock of Fidelity for the price of not less than $2 above the average of the high and low bid quotations, as reported by NASDAQ, for the common stock of Fidelity for the five trading days immediately preceding the date the option is granted. A total of 233,779 shares have been reserved for issuance under the Directors' Plan. 57 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) At December 31, 2000, there were 81,466 options available for grant. A summary of the stock options activity for the Directors' Plan is as follows:
December 31, ---------------------------------- June 30 2000 1999 1999 - ------------------------------------------------------------------------------------------------------ Shares under option Outstanding at beginning of year 118,293 118,293 118,293 Granted 36,000 Forfeited/expired (1,980) Outstanding at end of year 152,313 118,293 118,293 Exercisable at end of year 152,313 118,293 118,293 Weighted option price per share Exercisable $7.05 $ 7.92 $ 7.92 Granted 4.46 Weighted-average fair value of options granted during the year $1.03
1995 Key Employees' Stock Option Plan The 1995 Key Employees' Stock Option Plan (1995 Plan) provides for the granting of either incentive stock options (ISOs) pursuant to Section 422A of the Internal Revenue Code of 1986, as amended (Code), or stock options which do not qualify as incentive stock options (ISOs), or any combination thereof. Options may be granted to key employees and officers of Fidelity and its subsidiaries. The option price per share for ISOs will not be less than the fair market value of a share on the date the option is granted. The option price per share for ISOs granted to an employee owning 10 percent or more of the common stock of Fidelity will be not less than 110 percent of the fair market value of a share on the date the option is granted. The option price per share for ISOs will be determined by the compensation committee, but may not be less than 100 percent of the fair market value on the date of grant. A total of 236,500 shares have been reserved for issuance under the 1995 Plan. 58 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) At December 31, 2000, there were 139,670 options available for grant. A summary of the stock options activity for the 1995 Plan is as follows:
December 31, ---------------------------------- June 30 2000 1999 1999 - ------------------------------------------------------------------------------------------------------ Shares under option Outstanding at beginning of year 80,278 77,278 64,220 Granted 75,000 3,000 23,058 Forfeited/expired (58,855) (10,000) Outstanding at end of year 96,423 80,278 77,278 Exercisable at end of year 30,523 47,620 47,020 Weighted option price per share Exercisable $ 5.26 $ 10.16 $10.26 Granted 4.00 3.01 3.22 Weighted-average fair value of options granted during the year $ 0.82 $ 1.64 $ 1.43
>> Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Cash Equivalents--The fair value of cash and cash equivalents approximates carrying value. Interest-bearing Time Deposits--The fair value of interest-bearing time deposits approximates carrying value. Investment Securities--Fair values are based on quoted market prices. Loans--For both short-term loans and variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for certain mortgage loans, including one-to-four family residential, are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair value for other loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Interest Receivable/Payable--The fair values of interest receivable/payable approximate carrying values. 59 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) FHLB Stock--The fair value is estimated to be the carrying value, which is par. All transactions in the capital stock of the FHLB of Indianapolis are executed at par. Deposits--The fair values of non-interest-bearing, interest-bearing demand and savings accounts are equal to the amount payable on demand at the balance sheet date. The carrying amounts for variable rate, fixed-term certificates of deposit approximate their fair values at the balance sheet date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits. Long-Term Debt--The fair value of these borrowings is estimated using a discounted cash flow calculation, based on current rates for similar debt. Long-term debt consists of adjustable instruments tied to a variable market interest rate. Off-Balance-Sheet Commitments--Commitments include commitments to purchase and originate mortgage loans, commitments to sell mortgage loans, and standby letters of credit and are generally of a short-term nature. The fair value of the loan commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The carrying amounts of the commitments to purchase and originate mortgage loans and to sell mortgage loans, which are immaterial, are reasonable estimates of the fair value of these financial instruments. The carrying amount of the standby letters of credit, which consist of a letter of credit valuation allowance of $5,153, is a reasonable estimate of the fair value of those off-balance sheet items. The estimated fair values of Fidelity's financial instruments are as follows:
2000 1999 ------------------------------------------------------------------- Carrying Fair Carrying Fair December 31 Amount Value Amount Value - -------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 16,644 $ 16,644 $ 30,914 $ 30,914 Investment securities available for sale 21,001 21,001 24,305 24,305 Loans, net 107,842 107,806 96,919 96,194 Interest receivable 728 728 740 740 FHLB stock 2,620 2,620 3,920 3,920 Liabilities Deposits 126,944 127,488 135,016 135,077 Long-term debt 23,842 24,188 23,504 23,515 Interest payable 338 338 329 329 Standby letters of credit 5,153 5,153 5,787 5,787
60 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) >> Condensed Financial Information (Parent Company Only) Presented below is condensed financial information as to financial position, results of operations and cash flows of Fidelity: Condensed Balance Sheet
December 31 2000 1999 - ----------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 971 $ 444 Investment in common stock of subsidiaries 15,008 12,541 Loans, net 2,452 2,161 Subordinated debentures and other loan receivables from subsidiaries 2,875 4,875 Income tax receivable 2,508 1,723 Other assets 1,474 471 ---------------------------------- Total assets $ 25,288 $ 22,215 ================================== Liabilities Long-term debt $ 14,416 $ 14,948 Letter of credit valuation allowance 1,370 1,670 Other liabilities 727 170 ---------------------------------- Total liabilities 16,513 16,788 Stockholders' Equity 8,775 5,427 ---------------------------------- Total liabilities and stockholders' equity $ 25,288 $ 22,215 ==================================
61 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) Condensed Statement of Income
Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 2000 1999 1999 - ------------------------------------------------------------------------------------------------------------------------- Income Dividends from subsidiaries $ 150 Interest income $ 711 $ 485 1,010 Other income 21 2 8 --------------------------------------------------- Total income 732 487 1,168 --------------------------------------------------- Expense Interest expense 1,412 777 1,400 Provision for loan losses 100 284 424 Letter of credit valuation provision (735) (434) Other expenses 1,186 293 461 --------------------------------------------------- Total expense 2,698 619 1,851 --------------------------------------------------- Loss Before Income Tax and Equity in Undistributed (Distributions in Excess of) Income of Subsidiaries (1,966) (132) (683) Income Tax Benefit (779) (52) (330) --------------------------------------------------- Loss Before Equity in Undistributed (Distributions in Excess of) Income of Subsidiaries (1,187) (80) (353) Equity in Undistributed (Distributions in Excess of) Income of Subsidiaries 31 (1,990) 978 --------------------------------------------------- Net Income (Loss) $(1,156) $(2,070) $ 625 ===================================================
62 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) Condensed Statement of Cash Flows
Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 2000 1999 1999 - ---------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income (loss) $ (1,156) $ (2,070) $ 625 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities Depreciation and amortization 13 8 24 Provision for loan losses 100 284 424 Letter of credit valuation provision (735) (434) Funding on outstanding letters of credit (300) (450) Undistributed net income of subsidiaries (31) 1,990 (978) (Increase) decrease in other assets (1,801) 127 371 (Increase) decrease in other liabilities 557 (97) 123 ---------------------------------------------------- Net cash provided (used) by operating activities (2,618) (943) 155 ---------------------------------------------------- Investing Activities Decrease in interest-bearing deposits in other banks 6 Capital contributions to subsidiaries (2,197) (1,094) Principal payments received on notes from subsidiaries 2,000 1,188 Net change in loans (391) 1,363 (160) ---------------------------------------------------- Net cash provided (used) by investing activities (588) 1,363 (60) ---------------------------------------------------- Financing Activities Repayment of long-term debt (532) (2,196) (51) Proceeds from issuance of long-term debt 2,000 Cash dividends (156) Sale of common stock 4,265 90 ---------------------------------------------------- Net cash provided (used) by financing activities 3,733 (2,196) 1,883 ---------------------------------------------------- Change in Cash and Cash Equivalents 527 (1,776) 1,978 Cash and Cash Equivalents, Beginning of Period 444 2,220 242 ---------------------------------------------------- Cash and Cash Equivalents, End of Period $ 971 $ 444 $ 2,220 ====================================================
63 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) >> Business Segment Information Fidelity operates principally in two industries, banking and real estate development and management. United offers traditional banking products, such as checking, savings and certificates of deposit, as well as mortgage, commercial and consumer loans. The Affordable Housing Group is 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. 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. Presented below is condensed financial information relating to Fidelity's business segments:
2000 --------------------------------------------------------------------------- Real Estate As of and for the Development Year Ended December 31 Banking and Management Eliminations Total - ------------------------------------------------------------------------------------------------------------------------ Interest income $ 12,100 $ 8 $ (8) $ 12,100 Other income 1,681 152 (17) 1,816 Interest expense 8,457 8 (8) 8,457 Other expense 6,878 453 (17) 7,314 Provision for loan losses 670 670 Loss before tax (2,224) (301) (2,525) Income tax benefit (1,152) (217) (1,369) Total assets 167,125 2,940 (3,599) 166,466 Capital expenditures 794 794 Depreciation and amortization 484 7 491
64 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data)
1999 --------------------------------------------------------------------------- Real Estate As of and for the Development Six Months Ended December 31 Banking and Management Eliminations Total - ------------------------------------------------------------------------------------------------------------------------ Interest income $ 6,019 $ 3 $ (3) $ 6,019 Other income 854 167 (20) 1,001 Interest expense 4,268 3 (3) 4,268 Other expense 4,731 437 (20) 5,148 Provision for loan losses 1,345 1,345 Loss before tax (3,471) (270) (3,741) Income tax benefit (1,283) (388) (1,671) Total assets 172,044 3,089 (3,676) 171,457 Capital expenditures 231 231 Depreciation and amortization 192 4 196
1999 --------------------------------------------------------------------------- Real Estate As of and for the Development Year Ended June 30 Banking and Management Eliminations Total - ------------------------------------------------------------------------------------------------------------------------ Interest income $ 14,175 $ 197 $ (278) $ 14,094 Other income 2,368 335 (40) 2,663 Interest expense 9,730 278 (278) 9,730 Other expense 5,916 1,002 (40) 6,878 Provision for loan losses (454) 316 (138) Income (loss) before tax 1,351 (1,064) 287 Income tax expense (benefit) 112 (450) (338) Total assets 172,864 2,975 (3,586) 172,253 Capital expenditures 263 4 267 Depreciation and amortization 390 12 402
Eliminations in the above tables include, for total assets, the elimination of the Bank's investment in its affordable housing subsidiaries. 65 Corporate Information
Toll-Free Shareholder Common Stock Information Inquiries: 1-800-280-8280 NASDAQ If you have inquiries or questions regarding Ticker Symbol: FFED your Fidelity Federal Bancorp Shareholder account, call shareholder relations at Market Makers 1-800-280-8280 or 812-424-0921 ext. 2226. Natcity Investments, Inc. Stock Transfers, Dividend Payments Fleet Trading/Division Fleet Securities Dividend Reinvestment Hoefer & Arnett, Incorporated Spear, Leeds & Kellogg Fidelity Federal Bancorp Attn: Debbie Fritz, Shareholder Relations Products and Services 18 NW Fourth St. For specific information on products and PO Box 1347 services offered by the Company's banking Evansville, IN 47706-1347 subsidiary, United Fidelity Bank, fsb, call 1-800-280-8280 or Fidelity Federal Bancorp offers its Common (812) 424-0921 shareholders a no-cost way to purchase stock, and when applicable, reinvest cash Corporate Headquarters dividends. For additional information about Fidelity Federal Bancorp this plan, contact us at the above address 18 NW Fourth St. or phone number. PO Box 1347 Evansville, IN 47706-1347 Financial Information 1-800-280-8280 812-424-0921 If you are seeking financial information, contact: Mark A. Isaac, Controller Annual Meeting Fidelity Federal Bancorp 18 NW Fourth St. Monday, April 30, 2001 PO Box 1347 10:00 am (Central Daylight Time) Evansville, IN 47706-1347 Sheraton Inn 812-424-0921 ext. 3319 8787 Keystone Crossing Indianapolis, Indiana 46240 All other requests, including requests for the Annual Report, Form 10-K, Form 10-Q, etc. should be directed to: Debbie Fritz, Shareholder Relations Fidelity Federal Bancorp 18 NW Fourth St. PO Box 1347 Evansville, IN 47706-1347 812-424-0921 ext. 2226 Internet Information on Fidelity Federal Bancorp is available on the Internet at: http://www.unitedfidelity.com
66 Fidelity Federal Bancorp and Subsidiaries Corporate Information Board of Directors William R. Baugh Chairman Emeritus, Fidelity Federal Bancorp Director, United Fidelity Bank, fsb Retired President, United Fidelity Bank, fsb Bruce A. Cordingley President, Chief Executive Officer, Pedcor Investments President, Chief Executive Officer, Pedcor Bancorp Director, International City Bank, N.A. (Long Beach, CA) President, Chief Executive Officer, Village Housing Corporation Jack Cunningham Chairman of the Board, United Fidelity Bank, fsb Chairman of the Board, Fidelity Federal Bancorp Port of Evansville Wharfmaster Donald R. Neel Executive Vice President, Chief Financial Officer and Treasurer, Fidelity Federal Bancorp President, Chief Executive Officer, and Director, United Fidelity Bank, fsb Gerald K. Pedigo Chairman, Pedcor Bancorp Director, International City Bank, N.A. (Long Beach, CA) Barry A. Schnakenburg President, U.S. Industries Group, Inc. President, Barry Inc. Director, United Fidelity Bank, fsb Phillip J. Stoffregen Executive Vice President, Pedcor Investments 67 Fidelity Federal Bancorp and Subsidiaries Corporate Information Officers Jack Cunningham Mark A. Isaac Chairman, Secretary Vice President, Controller Bruce A. Cordingley Debbie M. Fritz Chairman, Executive Committee Assistant Vice President, Shareholder Relations Donald R. Neel Executive Vice President, Chief Financial Officer and Treasurer United Fidelity Bank, fsb Officers Donald R. Neel Debbie M. Fritz President and Chief Executive Officer Assistant Vice President, Facilities and Purchasing Thomas D. Wuerth Senior Vice President, Retail Banking Dannel R. Garness Assistant Vice President, Mark A. Isaac Loan Administration Senior Vice President, Chief Financial Officer James W. Goodwin Assistant Vice President, Karen F. Carter Consumer Loans Vice President, Loan Administration G. Andrew Jenkins Richard J. Goebel Assistant Vice President, Vice President, Operations Mortgage Lending Nancy K. Sweazey Jeffery T. Racey Vice President, Human Resources Assistant Vice President, Mortgage Lending William P. Wisuri Vice President, Consumer Lending Diane T. Tabor Assistant Vice President, Gregory W. Brown Assistant Controller Assistant Vice President, Assistant Controller D. Brent Taylor Assistant Vice President, W. Ray Buckman Branch Administration Assistant Vice President, Consumer Lending Timothy J. Wagner Assistant Vice President, Lawrence H. Coffman Loan Operations Assistant Vice President, Consumer Lending Cheryl L. Wolf Assistant Vice President, Shanon L. DeLong Deposit Operations Assistant Vice President, Assistant Controller Carrie L. Howard Bank Officer, Marilyn A. Doyle Consumer Lending Assistant Vice President, Marketing and Sales Lesa A. Osborne Bank Officer, Deposit Operations Joanne E. Smallwood Bank Officer, Accounting 68 EX-21 5 0005.txt Exhibit 21 Subsidiaries of Fidelity Federal Bancorp Name Jurisdiction of Incorporation - ---- ----------------------------- Fidelity Federal Bancorp: United Fidelity Bank, fsb Indiana Village Affordable Housing Corporation Indiana Also included are the subsidiaries of United Fidelity Bank, fsb: Village Insurance Corporation Indiana Village Housing Corporation Indiana Village Management Corporation Indiana Village Capital Corporation Indiana EX-23 6 0006.txt Independent Auditor's Consent We consent to the incorporation by reference to the Registration Statements of Fidelity Federal Bancorp (the Company), on Form S-3, File Number 333-53668 and Form S-4, File Number 333-56600 of our report dated January 12, 2001, on the financial statements of the Company, which report is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000 filed by Fidelity Federal Bancorp. Evansville, Indiana March 29, 2001 -----END PRIVACY-ENHANCED MESSAGE-----