10-Q 1 ffb-10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended March 31, 2001 FIDELITY FEDERAL BANCORP ------------------------------------------------------ (Exact name of registrant as specified in its charter) Indiana 0-22880 35-1894432 ------- ------- ---------- (State of other jurisdiction Commission (IRS Employer of Incorporation of File No. Identification No.) Organization) 18 NW Fourth Street Evansville, Indiana 47708 --------------------------------------------------- (Address of principal executive offices) (Zip Code) (812) 424-0921 -------------------------------------------------- Registrant's telephone number, including area code Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months and (2) has been subject to such filing requirements for the past 90 days. YES NO X --- --- As of May 2, 2001, there were 4,607,658 shares of the Registrant's common stock, $1 stated value, issued and outstanding. FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Index Page PART I - FINANCIAL INFORMATION ITEM 1--Financial Statements: Condensed Consolidated Balance Sheet.................................. 3 Condensed Consolidated Statement of Income............................ 4 Condensed Consolidated Statement of Stockholders' Equity.............. 5 Condensed Consolidated Statement of Cash Flows........................ 6 Notes to Condensed Consolidated Financial Statements.................. 7 ITEM 2--Management's Discussion and Analysis of Results of Operations and Financial Condition............................................... 10-21 ITEM 3--Quantitative and Qualitative Disclosures about Market Risk..... 21-22 PART II - OTHER INFORMATION.............................................. 23 SIGNATURES............................................................... 24 2 Item 1 - Financial Statements Part I - Financial Information Fidelity Federal Bancorp and Subsidiaries The Condensed Consolidated Balance Sheet (In thousands) (Unaudited)
March 31, December 31, 2001 2000 Assets Cash and due from banks $ 2,055 $ 1,926 Interest-bearing demand deposits 17,000 14,718 --------- --------- Cash and cash equivalents 19,055 16,644 Investment securities available for sale 20,482 21,001 Loans, net of allowance for loan losses of $1,474 and $1,921 108,681 107,842 Premises and equipment 5,855 5,847 Federal Home Loan Bank of Indianapolis stock 2,620 2,620 Deferred income tax receivable 7,129 7,245 Interest receivable and other assets 5,376 5,267 --------- --------- Total assets $ 169,198 $ 166,466 ========= ========= Liabilities Deposits Non-interest bearing $ 3,637 $ 4,291 Interest bearing 127,075 122,653 --------- --------- Total deposits 130,712 126,944 Long-term debt 23,835 23,842 Advances by borrowers for taxes and insurance 598 362 Valuation allowance for letters of credit 2,684 5,153 Other liabilities 2,214 1,390 --------- --------- Total liabilities 160,043 157,691 --------- --------- Stockholders' Equity Preferred stock, no par or stated value Authorized and unissued--5,000,000 shares Common stock, $1 stated value Authorized--5,000,000 shares Issued and outstanding--4,607,658 shares 4,607 4,607 7Additional paid-in capital 13,674 13,674 Stock warrants 11 11 Retained earnings (8,957) (8,981) Accumulated other comprehensive loss (180) (536) --------- --------- Total stockholders' equity 9,155 8,775 --------- --------- Total liabilities and stockholders' equity 169,198 $ 166,466 ========= =========
See notes to condensed consolidated financial statements. 3 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Condensed Consolidated Statement of Income (In Thousands, Except Share Data) (Unaudited)
Three Months Ended March 31, 2001 2000 -------------------------------------------------------------------------- Interest Income Loans receivable $ 2,426 2,190 Investment securities--taxable 344 401 Deposits with financial institutions 212 305 Other dividend income 52 78 ------- ------- Total interest income 3,034 2,974 ------- ------- Interest Expense Deposits 1,776 1,610 Long-term debt 507 485 ------- ------- Total interest expense 2,283 2,095 ------- ------- Net Interest Income 751 879 Provision for loan losses 284 75 ------- ------- Net Interest Income After Provision for Loan Losses 467 804 ------- ------- Other Income Fee income--management fees -- 44 Service charges on deposit accounts 83 77 Net gains on loan sales 63 7 Letter of credit fees 129 145 Agent fee income 233 7 Servicing fees on loans sold 27 28 Other income 141 127 ------- ------- Total non-interest income 676 435 ------- ------- Other Expenses Salaries and employee benefits 696 763 Net occupancy expenses 91 92 Equipment expenses 60 69 Data processing fees 91 84 Deposit insurance expense 62 60 Legal and professional fees 55 133 Advertising 55 30 Letter of credit valuation provision (284) -- Amortization of intangible assets 52 -- Loss on investment in partnerships 55 83 Other expense 313 359 ------- ------- Total non-interest expense 1,246 1,673 ------- ------- Income (Loss) Before Income Tax (103) (434) Income tax benefit (127) (266) ------- ------- Net Income (Loss) 24 (168) ======= ======= Basic Earnings (Loss) Per Share 0.01 (0.05) Diluted Earnings (Loss) Per Share 0.01 (0.05)
4 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Consolidated Statement of Changes in Stockholders' Equity (In Thousands, Except Share Data)
Three Months Ended March 31, ----------------------- 2001 2000 ----------------------- Beginning Balance $ 8,775 $ 5,427 Comprehensive income Net income (loss) 24 (168) Other comprehensive income - net of tax Unrealized gain on securities 356 219 ------- ------- Comprehensive income 380 51 Purchase of stock ------- ------- Balances, March 31 $ 9,155 $ 5,478 ======= =======
See notes to consolidated financial statements. 5 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Condensed Consolidated Statement of Cash Flows (Unaudited)
Three Months Ended March 31, 2001 2000 ------------------------------------------------------------------------------------------- Operating Activities Net income (loss) $ 24 $ (168) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities Provision for loan losses 284 75 Letter of credit valuation provision (284) Depreciation 82 92 Investment securities amortization (accretion), net 14 15 Valuation allowance--affordable housing investments 14 21 Loans originated for sale (3,476) (1,437) Proceeds from sale of loans 3,497 1,424 Amortization of net loan origination fees and points (1) (4) Deferred income tax benefit 116 55 Changes in Interest payable and other liabilities 590 (330) Interest receivable and other assets (123) 996 ------------------------------- Net cash provided by operating activities 737 739 ------------------------------- Investing Activities Proceeds from maturities of securities available for sale 1,094 842 Net change in loans (1,143) (8,387) Purchase of premises and equipment (89) (21) Funding on outstanding letters of credit (2,185) -- Proceeds from sales of premises and equipment -- 108 ------------------------------- Net cash used by investing activities (2,323) (7,458) ------------------------------- Financing Activities Net change in Noninterest-bearing, interest-bearing demand and savings deposits 2,989 (1,679) Certificates of deposit 779 (7,889) Short-term borrowings (59) Proceeds of long-term debt Repayment of long-term debt (7) (516) Net change in advances by borrowers for taxes and insurance 236 195 ------------------------------- Net cash provided (used) by financing activities 3,997 (9,948) ------------------------------- Net Change in Cash and Cash Equivalents $ 2,411 $(16,667) Cash and Cash Equivalents, Beginning of Period 16,644 30,914 ------------------------------- Cash and Cash Equivalents, End of Period $ 19,055 $ 14,247 =============================== Additional Cash Flows Information Interest paid $ 1,292 $ 1,211
See notes to consolidated financial statements. 6 Fidelity Federal Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) o Accounting Policies The significant accounting policies followed by Fidelity Federal Bancorp ("Fidelity") and its wholly owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments which are necessary for a fair presentation of the results for the periods reported, consist only of normal recurring adjustments, and have been included in the accompanying unaudited condensed consolidated financial statements. The results of operations for the three months ended March 31, 2001 are not necessarily indicative of those expected for the remainder of the year. The condensed consolidated balance sheet at December 31, 2000 has been derived from the audited financial statements. o Stockholders' Equity and Capital Infusion 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). 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. An intangible asset of $1,265,000 was recorded as a result of this transaction. These assets are being amortized over periods ranging from five to ten years depending on their estimated lives. The net unamortized balance of these intangible assets at March 31, 2001 was $1,073,000 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. The filing was effective with the SEC on April 25, 2001. The rights offering is available to existing shareholders as of April 26, 2001, the record date. For every 4.6 shares of Fidelity held on the record date, the shareholder may purchase one share of Fidelity at $1.55 representing their basic subscription right. All shareholders have the right to oversubscribe for shares not purchased by other shareholders based on their pro-rated ownership in Fidelity. Existing directors expect to purchase at least $698,387 shares. 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 March 31, 2001, 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 March 31, 2001, a total of 337,029 of the shares originally reserved had been issued and 9,471 remained reserved and unissued. 7 o Cash Dividend Fidelity's dividend policy is to pay cash or distribute stock dividends when its Board of Directors deems it to be appropriate, taking into account Fidelity's financial condition and results of operations, economic and market conditions, industry standards, and other factors, including regulatory capital requirements of its savings bank subsidiary. Fidelity is not subject to any regulatory restrictions on payments to its stockholders. Fidelity's primary source of income is dividends from United Fidelity Bank ("United"). United has entered into a Supervisory Agreement ("Agreement") with the Office of Thrift Supervision ("OTS"). One of the provisions of the Agreement restricts the payments of dividends from United to Fidelity without prior written OTS approval. The OTS, in 1999, permitted the payment of dividends to assist Fidelity in meeting interest payments on its outstanding debt; however, there can be no assurance that this approval will be granted going forward if necessary. Fidelity is uncertain when it will pay dividends in the future and the amount of such dividends, if any. o Company Subsidiaries 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 acquired certain real estate from United and its subsidiaries to assist in United's divestiture efforts in the first quarter of 2001. 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 mortgage banking services for the past two years. Another subsidiary of United, Village Insurance Corporation, receives fee income for credit life and accident health insurance sales. o Other Restrictions United entered into a Supervisory Agreement with the OTS on February 3, 1999 which is in effect until terminated, modified or suspended by the OTS. Under the terms of the Agreement, United developed and submitted to the OTS for approval a strategic plan which includes, at a minimum, capital targets; specific strategies; the completion of quarterly projections for a three-year period; concentration limits for all assets; a plan for reducing United's concentrations of high risk assets; review of infrastructure, staffing and expertise with respect to each area of United's operations; and capital planning. 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 possible 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 terminated, modified, or suspended. The restrictions regarding certain activities 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: 8 o reduce its level of classified assets to core capital and allowance for loan and lease losses to 50% or less by 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. United currently is in compliance with all provisions of the supervisory agreement at March 31, 2001. o Segment Information Fidelity operates principally in two industries, banking and real estate activities. Through United, Fidelity offers traditional banking products, such as checking, savings and certificates of deposit, as well as mortgage, commercial and consumer loans. Through the Affordable Housing Group, Fidelity was previously involved in various aspects of developing, building, renting and managing affordable housing units. On May 19, 2000, a stock purchase agreement was approved by the shareholders, which calls for Pedcor to provide management services to the affordable housing properties at no fee to the properties or Fidelity. The Affordable Housing Group's remaining activities consist of holding a general partner interest in various properties and recognizing income or loss under the equity method of accounting. 9 Banking revenue consists primarily of interest and fee income, while the real estate activities income or loss is generated through the percentage of ownership in various partnerships. All revenue is earned in the United States. Operating profit is total revenue less operating expenses. In computing operating profit, income taxes have been deducted. Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition Special Note Regarding Forward-Looking Statements Certain matters discussed in this Quarterly Report on Form 10-Q are "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as Fidelity "believes", "anticipates", "expects", "estimates" or words of similar import. Similarly, statements that describe Fidelity's future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and which could cause actual results to differ materially from those anticipated as of the date of this report. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this report and Fidelity undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. o Results of Operations The net income for the three months ended March 31, 2001 was $24,000, compared to a net loss of $168,000 for the same period last year. Basic and diluted net income per share was $.01 per share for the three months ended March 31, 2001, compared to a net loss of $0.05 per share in 2000. Interest income increased slightly from the prior year primarily due to an increase in consumer loan activity which helped offset a portion of the payoffs in higher yielding multifamily and commercial real estate loans, and a reduction in residential mortgage loans, due to refinancing activity. Interest income increased $60,000 for the three months ended March 31, 2001. The net interest margin was impacted by the .50% reduction in the federal funds rate during the quarter by the Federal reserve Board. The negative effect was magnified by Fidelity's significant holdings of short-term deposits. Interest expense increased approximately $188,000 for the period. Yields on liabilities are anticipated to decrease in the 2nd half of 2001 due to the lower interest rate environment during 2001. Fidelity's assets have increased $2.7 million from December 31, 2000 to $169.2 million at March 31, 2001 due to an increase in deposits. Non-interest income for the three months ended March 31, 2001, increased $241,000 from the three months ended March 31, 2000 primarily due to an increase in agent fee income generated through consumer lending activities. Non-interest expense decreased $427,000 to $1.2 million due primarily to a decrease in the letter of credit valuation provision of $284,000, and a decrease in other operating expense of $143,000. 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. For the quarter ended March 31, 2001 net interest income decreased $128,000 from the quarter ended March 31, 2000. The net interest margin decreased during the three month period to 2.06% from 2.35% a year ago. Fidelity's reduction in average earning assets of $2.6 million from a year ago was primarily composed of reductions in commercial loans, multifamily loans and commercial real estate loans. Average multifamily, commercial and commercial real estate loans decreased $3.9 million. These decreases were offset by a $7.6 million increase in average consumer loans, resulting in an increase of interest income of $306,000. The decrease in commercial and multifamily loans is expected to continue during the time that United operates under the Supervisory Agreement. Please refer to the footnote "Other Restrictions" in the Notes to Consolidated Financial Statements for further details. Average interest bearing liabilities increased $1.8 million from March 31, 2000 to $149.1 million at March 31, 2001. Total average interest bearing deposits increased $1.0 million, while borrowings and FHLB advances increased $746,000 over March 31, 2000. This resulted in an increase in interest expense of 10 $169,000 over the three months ending March 31, 2000. The average balance of agent-acquired certificates of deposit, which had an average rate of 5.92% at March 2000, was reduced from $13.3 million at March 31, 2000 to $5.3 million at March 31, 2001 with an average rate of 6.07%. Due to the rising interest rate environment in 2000, the average rate on total deposits has increased to 5.63% from 4.97% since March 31, 2000. Despite management's efforts, the net interest margin is expected to be relatively constant or decline during the term of the Supervisory Agreement between United and the OTS, due to certain lending restrictions. 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 three months ending March 31, 2001 was $284,000 compared to $75,000 in the prior year, an increase of $209,000. During the three months ended March 31, 2001 Fidelity increased its allowance for loan losses and reduced its letters of credit valuation reserve by $284,000 due to refinancing activities completed during the first quarter of 2001. During the first quarter of 2001, Fidelity successfully closed on new financing for four affordable housing letters of credit, in which Fidelity or United provided letters of credit. The ratio of allowance for loan losses to non-performing loans was 182.8% at March 31, 2001 compared to 189.9% at March 31, 2000. Specific reserves are assigned to certain credits. The reserves are determined by management's evaluation of those credits. The results of internal loan reviews, OTS evaluations and recent events assist Fidelity in making that evaluation. The independent support for the allowance for loan losses and letters of credit valuation reserve includes documentation that supports the amount of recorded reserves for these credits. General reserves for loans and letters of credit not specifically reserved are also determined. Fidelity computes general reserves for the commercial, commercial mortgage, residential mortgage, consumer and credit card loan portfolios by utilizing historical information and information currently available about the loans within those portfolios that provides information as to the likelihood of loss. The potential effect of current economic conditions is also considered with respect to establishing general reserve amounts. Non-interest income. Non-interest income for the quarter ended March 31, 2001, was $676,000 compared to $435,000 for the same period in 2000, an increase of $241,000. The following table summarizes non-interest income for the quarter ended March 31, 2001 and 2000: (in thousands) Three months ended March 31, ---------------------------------------------------------------------- Increase 2001 2000 (Decrease) ---------------------------------------------------------------------- (Dollars In Thousands) Fee income management fees $ 44 $ (44) Service charges on deposit accounts $ 83 77 6 Net gains on sale of real estate loans 63 7 56 Letter of credit fees 129 145 (16) Servicing fees on loans sold 27 28 (1) Agent fee income 233 7 226 Other 141 127 14 -------------------------- Total non-interest income $ 676 $ 435 $ 241 ========================== Fee income from real estate management decreased $44,000 from the prior year. 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 were collected for the three months ended March 31, 2001 11 compared to the same period last year. Service charges on deposit accounts increased $6,000 for the three months ended March 31, 2001 compared to the prior fiscal year due to an increase in the number of checking deposit accounts. Net gain on sale of real estate loans increased $56,000 over the prior year due to an increase in mortgage loan activity. Letter of credit fees decreased $16,000 from the prior year. United has participated in an arrangement in which automobiles are originated and sold for a fee to another organization. Agent fees for the three months ended March 31, 2001 were $233,000 compared to $7,000 last year. United fully resumed its consumer lending activities in late 1999 and has continued to increase its network of automobile dealers during 2000 and 2001. The continued expansion and penetration of its automobile network has been instrumental in the increase in agent fees over the prior year. Non-Interest Expense Non-interest expense decreased $427,000 or 25.5% for the three months ended March 31, 2001, compared to the three months ended March 31, 2000. The following table summarizes non-interest expense for the three months ending March 31, 2001 and 2000: (in thousands) Three Months Ended March 31 ---------------------------------- Increase 2001 2000 (Decrease) ---- ---- ---------- Salaries and employee benefits $696 $763 $ (67) Letter of credit valuation provision (284) (-) (284) Legal and professional 55 133 (78) Net occupancy expenses 91 92 (1) Equipment expenses 60 69 (9) Data processing fees 91 84 7 Advertising 55 30 25 Deposit insurance expense 62 60 2 Correspondent bank charges 38 38 (-) Printing and supplies 26 21 5 Loss on investment in partnerships 55 83 (28) Telephone 19 34 (15) Postage 28 24 4 Amortization of intangible assets 52 (-) 52 Other operating expense 202 242 (40) ---------------------------------- Total non-interest expense $1,246 $1,673 $ (427) ================================== Salaries and employee benefits decreased $67,000 for the three months ended March 31, 2001, due to staff reductions completed since March 31, 2000. During the three months ended March 31, 2001 a $284,000 letter of credit valuation provision reversal was recognized due to the refinancing activities completed during the first quarter of 2001. This reversal was fully offset by an increase in the provision for loan losses. Fidelity successfully closed on new financing for four affordable housing letters of credit, in which Fidelity or United provided letters of credit. Fidelity recorded its percentage share of losses for its investments in various affordable housing properties under the equity method of accounting. Fidelity's losses were $55,000 and $83,000 for the three months ended March 31, 2001 and March 31, 2000, respectively. These writedowns are partially offset by tax credits received and recorded as reductions of income tax expense. 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. Fidelity is in varying stages of completing refinancing on an additional five affordable housing developments, which should be completed by the end of 2001. Legal and professional fees decreased $78,000 for the three months ended March 31, 2001 due to increased legal expenses for the same period last year relating to workout activities with respect to various classified assets. Equipment expense decreased $9,000 from the prior year due to a decrease in depreciation expense. Advertising increased $25,000 from the prior year primarily due to increased promotional activities with respect to increased activities in the consumer lending and mortgage areas, as well as the opening of a new branch in Warrick County, Indiana. Telephone expense decreased by $15,000 for the three months ended March 31, 2001 due to increased 12 expenses for a new system in the prior year. In conjunction with the stock sale to Pedcor Holdings, LLC, intangible assets totaling $1.3 million were recorded. Amortization of these assets resulted in expense of $52,000 for the three months ended March 31, 2001. Other operating expense decreased $40,000 from the prior year. Management continues to monitor expenses closely. Income Tax Benefit The income tax benefit was $127,000 for the three months ending March 31, 2001 compared to $266,000 in the same period last year, primarily due to an increase in taxable income. Included in the tax benefit of $127,000 for the three months ending March 31, 2001 are tax credits of $80,000. These credits are received from Fidelity's investment in affordable housing properties and are a component of the overall 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 in partnerships". The effective tax rate for the three months ended March 31, 2001, was 123.3%, due to the benefits accrued from the tax credits. Consideration of the need for a valuation allowance for the deferred tax asset was made at March 31, 2001 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 targets for increased revenues, 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 March 31, 2001 increased $2.7 million to $169.2 million from $166.5 million in December 2000. Average assets for the three months ended March 31, 2001 increased by $3.8 million from $163.9 million at December 31, 2000 to $167.8 million at March 31, 2001. Interest-bearing liabilities increased $5.4 million due to an increase in NOW accounts and retail certificates in an effort to retain and replace $12.9 million in maturing agent-acquired and retail certificates of deposit during the first quarter of 2001. The increase in total assets is primarily due to an increase in short-term interest-bearing deposits and an increase in consumer loans offset by loan payoffs, refinancing and payments received on commercial, multifamily and fixed 1-4 family mortgage loans. The increase in total liabilities was primarily due to an increase in a high-balance money market product bearing a higher interest rate than United's traditional money market accounts and retail certificates bearing a premium market rate. These increases were partially offset by the reduction of letter of credit valuation reserves due to refinancing activities. 13 Loans The following table shows the composition of Fidelity's loan portfolio as of March 31, 2001 and December 31, 2000: March 31, December 31, 2001 2000 ----------------------------------------------------------------------------- Real estate mortgage loans First mortgage loans Conventional $ 47,750 $ 47,809 Construction 1,157 1,274 Commercial 6,750 6,873 Multi-family loans 3,785 4,350 Home equity loans 5,137 5,274 First mortgage real estate loans purchased 1,483 1,753 ------------------------- 66,062 67,333 Commercial loans, other than secured by real estate 2,257 2,305 Consumer loans 41,835 40,125 ------------------------- Total loans 110,154 109,763 Allowance for loan losses (1,474) (1,921) ------------------------- Net loans $108,680 $107,842 ========================= Total loans to total assets 65.1% 65.9% ========================= Fidelity sells a portion of its current production of 1-4 family loans, recording the gain or loss and using the proceeds to fund new loan originations. The amount of loans retained are typically less than principal payments received on outstanding accounts. 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 assist in the acquisition of outside financing for certain loans or letters of credit, develop 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 $1.7 million from December 31, 2000 to $41.8 million at March 31, 2001. Staffing added to the consumer loan department in 1999 has enabled Fidelity to substantially increase the number of direct and indirect automobile loans financed. The level of growth achieved in the consumer loan portfolio during 2000 is not expected to continue during 2001, although activity could increase as a result of the sale of automobiles loans for a fee to a non-affiliated organization. Fidelity's loan portfolio contains no loans to foreign governments, foreign enterprises, foreign operations of domestic companies or highly leveraged transactions, nor any concentration to borrowers engaged in the same or similar industries that exceed ten percent of total loans. Non-Performing Loans Fidelity discontinues the accrual of interest income on loans when, in the opinion of management, there is reasonable doubt as to the timely collectibility of interest or principal. When a loan reaches a ninety day or more past due status, the asset is generally repossessed or sold, if applicable, or the foreclosure process is initiated and the loan is re-classified to other real estate owned to be sold. A loan could be placed in a nonaccrual status sooner than ninety days, if management knows the customer has abandoned the collateral and has no intention of repaying the loan. At this point, management discontinues the accrual of interest and Fidelity would initiate the repossession or foreclosure process. Typically, when a loan reaches nonaccrual status, the accrued interest is reversed from income, unless strong evidence exists that the value of the collateral would support the collection of interest in a foreclosure situation. Nonaccrual loans are returned to an accrual status when, in the opinion of management, the financial 14 position of the borrower indicates that there is no longer any reasonable doubt as to the timely payment of principal and interest. The following table provides information on Fidelity's non-performing loans as of March 31, 2001 and December 31, 2000: March 31, December 31, 2001 2000 ----------------------------------------------------------------------------- (Dollars in Thousands) Non-accrual loans Consumer Commercial $ 235 $472 Real estate mortgage Multi-family 143 148 ----- ----- Total non-accrual loans 378 620 Restructured Consumer 131 115 Commercial 119 119 ----- ----- Total restructured loans 250 234 90 days or more past due and accruing Mortgage 112 - Consumer 36 10 Commercial 30 - ----- ------- Total 90 days or more past due and accruing 178 10 ---- ----- Total non-performing loans $806 $864 ==== ==== Ratio of non-performing loans to total loans .73% 0.79% Non-performing loans were .73% of total loans at March 31, 2001, as compared to .79% of total loans at December 31, 2000 and consisted primarily of commercial and multi-family loans. Commercial non-performing loans decreased during the quarter due to the charge-down in the balance of one commercial loan but was partially offset by an increase in non-performing mortgage loans. Multi-family affordable housing loans, for which specific and general reserves have been computed, are currently performing with respect to debt service and are therefore not included in the above "non-performing loans" totals. The ability of the multi-family loans to remain performing is in part due to general partner or other advances made by Fidelity to support cash flow deficits incurred by the affordable housing projects. There is no assurance that general partner advances will not be necessary in the future to support further cash flow deficits, or that Fidelity will not have to extend funds in order to protect its collateral position with respect to the loans. The amount of additional advances should be reduced in future periods due to the operating deficit 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. 15 Classified Assets and Letters of Credit (in thousands) March 31, December 31, 2001 2000 ----------------------------- Classified assets $ 7,012 $ 8,754 Classified letters of credit 4,721 11,773 ------- ------- Total classified assets/letters of credit $11,733 $20,527 ======= ======= Classified assets and letters of credit of Fidelity totaled $11.7 million at March 31, 2001 compared to $20.5 million at December 31, 2000 a decrease of 42.9%. Classified assets and letters of credit were 102.4% and 129.5% of Fidelity's capital and reserves at March 31, 2001 and December 31, 2000, respectively. Classified assets and letters of credit were 34.6% and 69.9% of United's capital and reserves at March 31, 2001 and December 31, 2000, respectively. In addition to the classified assets and letters of credit, there were other assets and letters of credit totaling $10.8 million for which management was closely monitoring the borrowers' abilities to comply with payment terms. Impaired loans are those that management believes will not perform under the original loan terms. At March 31, 2001 and December 31, 2000, Fidelity had impaired loans totaling $3.7 million compared to $7.4 million at December 31, 1999, a decrease of 50%. The large decrease in impaired loans recognizes Fidelity's ongoing efforts to reduce classified loans. The allowance for losses on such impaired loans totaled $286,000 and $384,000, which are included in Fidelity's allowance for loan losses at March 31, 2001 and December 31, 2000, respectively. In addition, using similar guidelines for impaired loans, impaired letters of credit at March 31, 2001 total $8.2 million, versus $11.8 million at December 31, 2000, a decrease of 32.1%. The valuation allowance on such impaired letters of credit totaled $2.7 million and is included in Fidelity's letter of credit valuation allowance at March 31, 2001 compared to $5.2 million at December 31, 2000. Impaired loans do not include large groups of homogeneous loans that are collectively evaluated for impairment, such as, residential mortgage and consumer installment loans. 16 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 March 31, 2001 and December 31, 2000: Three months ended Year ended March 31, December 31, 2001 2000 -------------------------------------------------------------------------------- (dollars in thousands) Allowance for loan losses at beginning of period $ 1,921 $ 2,021 ------------------------ Loan charge offs Real estate mortgage 80 Multi-family 638 683 Commercial 238 12 Consumer 121 391 ------------------------ Total loan charge offs 997 1,166 ------------------------ Loan recoveries Real estate mortgage Multi-family 261 317 Commercial (12) 20 Consumer 16 59 ------------------------ Total loan recoveries 265 396 ------------------------ Net charge offs 732 770 Provision for loan losses 284 670 ------------------------ Allowance for loan losses at end of period $ 1,473 $ 1,921 ======================== Ratio of net charge offs to average loans outstanding during period (annualized) 2.67% .72% ======================== Ratio of provision for loan losses to average loans outstanding during period (annualized) 1.03% .63% ======================== Ratio of allowance for loan losses to total loans outstanding at year end 1.34% 1.75% ======================== Average amount of loans outstanding for the period $ 110,457 $ 106,599 ======================== Amount of loans outstanding at end of period $ 110,206 $ 109,763 ======================== The allowance for loan losses was $1.5 million at March 31, 2001 compared to $1.9 million at December 31, 2000. Net loan charge-offs were $732,000 or 2.67% of average loans for the three months ended March 31, 2001 compared to $770,000 or 0.72% of average loans for the year ended December 31, 2000. During the three months ended March 31, 2001, Fidelity charged-off $638,000 of multifamily loans and $238,000 of commercial loans that reserves were previously provided for. Consumer loan charge-offs of $121,000, were related primarily to loans originated prior to 1999. Multi-family letters of credit, an off-balance sheet item, carry the same risk characteristics as conventional loans and totaled $38.2 million at March 31, 2001 and $43.8 million at December 31, 2000. Specific allocations for letters of credit totaled 7.0% of outstanding letters of credit at March 31, 2001 compared to 11.8% at December 31, 2000. During the first quarter of 2001 approximately $1.9 million was funded to assist in the refinancing efforts on four partnerships. These funds were charged against previous reserves that were established in prior periods. An additional $284,000 of excess reserves were reversed during the current quarter for re-allocation to the provision for loan losses. Management is not currently aware of any additional letters of credit that are expected to be called or funded. Management considers 17 the allowance for loan losses and letter of credit valuation reserve adequate to meet losses inherent in the loan and letter of credit portfolios as of March 31, 2001. Allocation of Allowance for Loan Losses The allocation for loan losses and the percentage of loans within each category to total loans at March 31, 2001 and at December 31, 2000 are as follows: Allocation of Amount March 31, December 31, 2001 2000 ----------------------------------------------------------------------- (dollars in thousands) Real Estate Mortgage $ 86 $ 49 Home equity 26 53 Multi-family 22 514 Consumer 678 628 Commercial 662 677 --------------------------- Total $1,474 $1,921 =========================== Percentage of Loans to Total Loans March 31, December 31, 2001 2000 ----------------------------------------------------------------------- Real Estate Mortgage 44.9% 45.2% Home equity 4.7 4.8 Multi-family 3.4 3.4 Consumer 38.0 36.6 Commercial 9.0 10.0 --------------------------- Total 100.0% 100.0% =========================== Investment Securities United's investment policy is annually reviewed by its Board of Directors. Any significant changes to the policy must be approved by the Board. The Board has an interest rate risk management committee, which is responsible for keeping the investment policy current. At March 31, 2001, the investment portfolio represented 12.1% of Fidelity's assets, compared to 12.6% at December 31, 2000, and is managed in a manner designed to meet the Board's investment policy objectives. The primary objectives, in order of priority, are to further the safety and soundness of 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 March 31, 2001, the entire investment portfolio was classified as available for sale. The net unrealized loss at March 31, 2001, which is included as a component of stockholders' equity, was $180,000 and was comprised of gross unrealized losses of $298,000 and a tax benefit of $118,000. 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 March 31, 2001 and December 31, 2000: March 31, December 31, 2001 2000 -------------------------------------------------------------------------------- (dollars in thousands) Federal Home Loan Mortgage Corporation mortgage-backed securities $ 771 $ 805 Federal National Mortgage Association mortgage-backed securities 1,049 1,095 Government National Mortgage Association Mortgage-backed securities 18,662 19,101 -------------------------- Total securities available for sale $20,482 $21,001 ========================== 18 For the three months ended March 31, 2001, United's investment securities portfolio decreased by $.5 million to $20.5 million compared to $21.0 million at December 31, 2000. The current year's decrease is the result of maturities and paydowns received during the three months. United holds various types of securities, including mortgage-backed securities. Inherent in mortgage-backed securities is prepayment risk. Prepayment rates generally can be expected to increase during periods of lower interest rates as some of the underlying mortgages are refinanced at lower rates. Conversely, the average lives of these securities generally are extended as interest rates increase. Funding Sources Deposits Fidelity attracts both short-term and long-term deposits from the retail market by offering a wide assortment of accounts with different terms and different interest rates. These deposit alternatives include checking accounts, regular savings accounts, money market deposit accounts, fixed rate certificates with varying maturities, variable interest rate certificates, negotiable rate jumbo certificates ($99,000 or more), and variable rate IRA certificates. Average deposits increased by $2.8 million during the first three months of 2001. The average balance of retail certificates of deposit and NOW accounts increased $6.7 million and $3.4 million, respectively. These increases were partially offset by a decrease in agent-acquired certificates of deposit and demand accounts of $3.9 million and $2.5 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 deposits 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 deposit products. Due to the rise in interest rates in 2000, the average rate on total deposits has increased 48 basis points since December 31, 2000 to 5.63% at March 31, 2001. The following table sets forth the average balances of and the average rate paid on deposits by deposit category for the three months ended March 31, 2001 and the year ended December 31, 2000. Three months ended Year ended March 31, December 31, 2001 2000 Average Deposits Amount Rate Amount Rate ------------------------------------------------------------------------------ (dollars in thousands) Demand $ 2,612 $ 5,136 NOW accounts 20,608 3.93% 17,159 3.21% Money market accounts 1,673 1.99 2,058 1.99 Savings accounts 3,842 2.31 4,349 2.25 Certificates of deposit 93,716 6.34 87,027 5.97 Agent-acquired certificates of deposit 5,325 6.07 9,241 6.00 -------- -------- Totals $127,776 5.63 $124,970 5.15% ======== ======== Borrowings Fidelity's long-term debt decreased $7,000 during the first three months of 2001 primarily due to paydowns on other FHLB advances secured by specific single-family loans. Alternate funding sources for United are provided by loan sales, loan payoffs, Federal Home Loan Bank advances as well as through retail deposits. In the following table, all notes, except for the Federal Home Loan Bank advances, are debt of the Parent Company both secured and unsecured, and total $13.9 million. 19 The following table summarizes Fidelity's borrowings as of March 31, 2001 and December 31, 2000.
March 31, December 31, (dollars in thousands) 2001 2000 ----------------------------------------------------------------------------------------- Note payable, 9.45% adjusted annually, payable $8 per month, including interest, due September 2010, secured by specific multi-family mortgages $ 972 975 Note payable, 9.45% adjusted annually, payable $13 per month, including interest, due September 2010, secured by specific multi-family mortgages 1,490 1,494 Note payable, 10.50%, interest paid quarterly, due June 2003, secured by United stock 1,500 1,500 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 both at March 31, 2001 and December 31, 2000) 9,903 9,903 ------------------- Total long-term debt $23,835 $23,842 ===================
Fidelity filed with the Securities and Exchange Commission a registration statement, effective April 2001, to exchange all outstanding 9 1/8% junior subordinated notes due totaling, 1,476,000 in principal on April 30, 2001 for 12% junior subordinated notes due in April 2004. In February 2001, Fidelity established a $1.5 million line of credit with another financial institution that may be called upon at anytime prior to its expiration of September 2001. The interest rate is 8.5% and is tied to the prime rate plus one percent (1.0%). Capital Resources Fidelity's stockholders' equity increased $380,000 to $9.2 million at March 31, 2001, compared to $8.8 million at December 31, 2000. The change in stockholders' equity was accounted for by net income of $24,000, and a decrease in the net unrealized loss on securities available for sale of $356,000.
------------------------------------------------------------------------------------------------------------ Required for To be well Actual adequate capital Capitalized ------------------------------------------------------------------------------------------------------------ Amount Ratio Amount Percent Amount Percent ---------------------------------------------------------------------------------------------------------- As of March 31, 2001 ---------------------------------------------------------------------------------------------------------- Total risk-based capital (to risk-weighted assets) $17,280 14.0% $9,886 8.0% $12,357 10.0% ---------------------------------------------------------------------------------------------------------- Tier 1 capital (to risk-weighted assets) 12,852 10.4 4,943 4.0 7,414 6.0 ---------------------------------------------------------------------------------------------------------- Core capital (to adjusted total assets) 12,852 8.0 6,399 4.0 7,999 5.0 ---------------------------------------------------------------------------------------------------------- Core capital (to adjusted tangible assets) 12,852 8.0 3,200 2.0 N/A ---------------------------------------------------------------------------------------------------------- Tangible capital (to adjusted total assets) 12,852 8.0 2,400 1.5 N/A ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------------------- Tangible capital (to adjusted total assets) 13,327 8.4 2,375 1.5 N/A ----------------------------------------------------------------------------------------------------------
Total capital for United consists of Tier I capital plus the allowance for loan losses. Minimum capital levels are 4% for the leverage ratio, which is, defined as Tier I capital as a percentage of total assets less goodwill and other identifiable intangible assets; 4% for Tier I to risk-weighted assets; and 8% for total capital to risk-weighted assets. United's capital ratios have exceeded each of these levels. The leverage ratio was 8.0% at March 31, 2001 and 8.4% for December 31, 2000, tier I capital to risk-weighted assets was 10.4% and 10.3% and total capital to risk-weighted assets was 14.0% and 13.8% at March 31, 2001 and December 31, 20 2000, respectively. Book value per share, including unrealized losses on investment securities, increased to $1.99 at March 31, 2001, compared to $1.90 at December 31, 2000. The capital category assigned to an entity can also be affected by qualitative judgements made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios. At March 31, 2001 and December 31, 2000, the Bank is categorized as well capitalized and met all capital adequacy requirements at those dates. Liquidity Fidelity's principal source of income and funds is dividends from United. 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 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. In January 2001, Fidelity filed a registration statement with the Securities and Exchange Commission for a common stock rights offering to existing shareholders, effective April 25, 2001. The common stock rights offering will be for existing shareholders as of the April 26, 2001 record date. The offering will end at 5:00 pm (CDT) on June 29, 2001. Fidelity is also in the process of negotiating agreements to extend maturities on certain other debt obligations coming due in 2002. Fidelity filed a registration statement in March 2001 with the Securities and Exchange Commission to exchange all outstanding 9 1/8% junior subordinated notes due totaling, $1,476,000 in principal, on April 30, 2001 for 12% junior subordinated notes due in April 2004. This offering is open until May 14, 2001, to allow noteholders the opportunity to participate. 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. 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. Fidelity has also decreased its utilization of agency-acquired certificates of deposit as total loans have decreased and the need for these types of funds has also decreased. Item 3 - Asset/Liability Management--Quantitative and Qualitative Disclosures about Market Risk Fidelity is subject to interest rate risk to the degree that its interest bearing liabilities, primarily deposits with short and medium term maturities, mature or reprice at different rates than its interest-earning assets. Although having liabilities that mature or reprice less frequently will be beneficial in times of rising interest rates, such an asset/liability structure will result in lower net income during periods of declining interest rates, unless off-set by other factors. The OTS utilizes a model, the "Office of Thrift Supervision Net Portfolio Value" ("NPV") model, which uses a net market value methodology to measure the interest rate risk exposure of savings associations. 21 Under this model, an institution's "normal" level of interest rate risk in the event of an assumed change in interest rates is a decrease in the institution's NPV in an amount not exceeding 2% of the present value of its assets. Savings associations with over $300 million in assets or less than 12% risk-based capital ratio are required to file the OTS Schedule CMR. Data from Schedule CMR is used by the OTS to calculate changes in NPV (and the related "normal" level of interest rate risk) based upon certain interest rate changes (discussed below). Associations which do not meet either of the filing requirements are not required to file OTS Schedule CMR, but may do so voluntarily. United voluntarily submits a CMR quarterly to the OTS. Under the regulation, associations which must file are required to take a deduction (the interest rate risk capital component) from their total capital available to calculate their risk based capital requirement if their interest rate exposure is greater than "normal". The amount of that deduction is one-half of the difference between (a) the institution's actual calculated exposure to a 200 basis point interest rate increase or decrease (whichever results in the greater pro forma decrease in NPV) and (b) its "normal" level of exposure which is 2% of the present value of its assets. The data for March 31, 2001 is not required to be filed with the OTS until 45 day after quarter end, which coincides with the 10-Q filing. Management monitors its interest rate sensitivity during the quarter and will request the OTS to run scenarios on the NPV model to determine the change in interest rate sensitivity for management in an effort to assist management on various decision making regarding products, maturities, repricing, etc. United should have an internal model completed in the second quarter of 2001 to assist in interest rate risk management. Although United has not yet submitted its CMR to the OTS for March 31, 2001, management anticipates there has been no material change from the information disclosed in Fidelity's annual report to shareholders at December 31, 2000. 22 PART II -- OTHER INFORMATION ITEM 1 Legal Proceedings: ------------------ There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Registrant's business, to which the Registrant or its subsidiaries are a party of or which any of their property is the subject. ITEM 2 Changes in Securities and Use of Proceeds: ------------------------------------------ Not applicable. ITEM 3 Defaults Upon Senior Securities: -------------------------------- Not applicable. ITEM 4 Submission of Matters to a Vote of Security Holders: ---------------------------------------------------- Submission of Matters to a Vote of Security Holders: On April 30, 2001 at 10:00 am at the Sheraton Keystone Crossing 8787 Keystone Crossing, Indianapolis, Indiana, the Annual meeting of Shareholders was held in order to vote on two matters. Matter 1 was to elect six directors to the Board of Directors to serve until their successors are duly elected and qualified. The vote tabulation for the election of William R. Baugh was 3,381,586 for and 986,303 shares against; Bruce A. Cordingley was 3,415,426 for and 952,463 shares against; Donald R. Neel was 3,419,953 for and 947,798 shares against; Gerald K. Pedigo was 3,415,682 for and 952,204 shares against; Barry A. Schnakenburg was 3,388,314 for and 979,482 shares against; Phillip J. Stoffregen was 3,416,286 for and 951,372 shares against The following directors term continued after the meeting; William Baugh, Jack Cunningham, Bruce A. Cordingley, Gerald K. Pedigo, Donald R. Neel, Barry A. Schnakenburg and Phillip Stoffregen. Matter 2 was the ratification of the appointment of the auditor of Fidelity. The vote tabulation for Olive LLP was 4,142,002 for, 223,522 shares against, and 2,271 shares abstained. ITEM 5 Other Information: ------------------ None ITEM 6 Exhibits and Reports on Form 8-K: --------------------------------- None 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIDELITY FEDERAL BANCORP Date: MAY 14, 2001 By: /s/ BRUCE A. CORDINGLEY ------------ ----------------------- Bruce A. Cordingley Executive Committee Chairman (Acting Principal Executive Officer) By: /s/ DONALD R. NEEL ------------------ Donald R. Neel, Executive Vice President, CFO and Treasurer (Principal Financial Officer) 24