EX-13 3 ex13.txt [LOGO OF FIDELITY FEDERAL BANCORP] 2001 Annual Report Contents Page -------------------------------------------------------------------------------- Financial Highlights 2 Letter to our Shareholders 3 Market Summary 4 Selected Statistical Information 5 Management's Discussion and Analysis 6 Independent Accountant's Report 30 Consolidated Balance Sheets 31 Consolidated Statements of Income 32 Consolidated Statements of Changes in Stockholders' Equity 34 Consolidated Statements of Cash Flows 35 Notes to Consolidated Financial Statements 37 Corporate Information 62 1
Financial Highlights (Dollars in Thousands, Except Share and Per Share Data) December 31, December 31, 2001 2000 Change ------------------------------------------------------------------------------------------ Per Share Basic net income (loss) $ .04 $ (.29) (113.79)% Diluted net income (loss) .04 (.29) (113.79) Book value at year end 1.99 1.90 4.74 Market price (bid) at year end 2.30 1.31 75.57 For the Year Net interest income $ 2,954 $ 3,643 (18.91)% Provision for loan losses 1,349 670 101.34 Non-interest income 3,608 1,816 98.68 Non-interest expense 5,698 7,314 (22.09) Net income (loss) before extraordinary item 28 (1,156) (102.42) Gain on extraordinary item, net of tax 196 100.00 Net income (loss) 224 (1,156) (119.38) At Year End Total assets $ 159,659 $ 166,466 (4.09)% Loans (net) 104,432 107,842 (3.16) Total deposits 120,155 126,944 (5.35) Total stockholders' equity 11,895 8,775 35.56 Averages Total assets $ 165,592 $ 163,925 1.02% Total earning assets 145,342 146,492 (.79) Total loans 111,572 106,599 4.67 Total deposits 125,853 124,970 .71 Total stockholders' equity 10,288 7,164 43.61 Profitability Ratios Return on average assets .14% (.71)% Return on average stockholders' equity 2.18 (16.14) Net interest margin 2.03 2.49 Loan Quality Ratios Net charge offs to average loans 1.02% .72% Allowance for loan losses to loans at end of period 2.01 1.75 Valuation allowance for letters of credit to total letters of credit 2.18 11.76 Savings Bank Capital Ratios Tangible capital to adjusted total assets 8.48% 8.42% Risk-based capital ratios Tier I capital 10.71 10.31 Total risk-based capital 14.39 13.80 Other Data Average common and common equivalent shares outstanding 5,146,726 4,057,168 Number of full-time equivalent employees at year end 83 66 Number of banking offices 5 4
2 [LOGO OF FIDELITY FEDERAL BANCORP] Letter To Our Shareholders The year 2001 will likely be remembered as one of the most tumultuous in history for the financial markets. The nation's economy ended a 10-year economic expansion and drifted into what we now believe was a mild recession. Equities that led the market rally in the 1990's, particularly internet and technology stocks, fell significantly in 2001. To respond to economic weakness and falling equity prices, the Federal Reserve Board reduced interest rates a record 11 times to conclude 2001 with a target federal funds rate at an historic low of 1.75%. No discussion of the year 2001 from a national viewpoint can be complete without mention of the unspeakable horror in New York City, Washington, and in western Pennsylvania on September 11. Our thoughts and prayers go out to those affected by the senseless acts of violence against our great nation and our people. Amid the destruction and despair, heroes emerged, and our great nation has shown its strength and resiliency again and again. Those that may have thought that these cowardly acts would cripple the nation politically and economically have been resoundingly proven wrong. We support our leaders more than ever before and consumers have continued to spend, likely leading the economy out of its slowdown. Unemployment has increased, but this increase was from record-low levels. Productivity continues to improve and the banking system, with record levels of capital and earnings, is far healthier than it has ever been. For your Company, the year 2001 was highlighted by substantially improved earnings in conjunction with a significant decrease in the risk profile of the organization. Net income of $224,000 or $0.04 per share was much improved over the $1.156 million, or $0.29 loss per share in the year 2000. Classified assets of the Company were reduced from $20.5 to $7.7 million, which was a 62.5% decline in the level of problem assets. The Company was able to reduce long-term debt of $1 million through early retirement, which also resulted in a $196,000 after-tax gain. The capital ratios of the Company's savings bank subsidiary, United Fidelity Bank, improved in 2001 and remained considerably above levels considered by regulations to be "well-capitalized." The Company also raised $2.4 million in equity during 2001 which the Company used to reduce its long-term debt, as well as for additional liquidity. We are very proud of the growth in the Bank's consumer and mortgage lending operations this year. Total loan originations in 2001 in these areas were more than double the origination levels in 2000, and were a significant contributor to net income this year. This was the result of the execution of the Company's strategic plan, and the hard work and effort of our associates. The Company also used 2001 to begin preparing for future growth and expansion by opening a new branch office in Newburgh in western Warrick County, and by installing an additional ATM location to better serve our current and new Warrick County customers. We look forward to the opportunity to provide premier community banking services to the greater Newburgh area. Our mission statement includes the lofty ideals of providing unsurpassed levels of service while profitably meeting customer and community needs. These goals will continue to drive the Company's efforts in 2002 and beyond. Jack Cunningham Donald R. Neel Chairman of the Board President 3 [LOGO OF FIDELITY FEDERAL BANCORP] MARKET SUMMARY MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS Fidelity's common stock is traded on the NASDAQ 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. 2001 2000 ------------------------------------------------- Common Stock Bid Prices Common Stock Bid Prices ------------------------------------------------- Year Ended December 31 High Low High Low ------------------------------------------------------------------------------- First quarter $1.81 $1.31 $3.31 $1.25 Second quarter 1.75 1.50 2.88 1.75 Third quarter 3.70 1.75 2.63 2.00 Fourth quarter 2.55 2.00 2.13 1.25 We did not pay any cash dividends on our common stock in 2001 or 2000. 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. We do not anticipate paying cash dividends in the foreseeable future. 4 [LOGO OF FIDELITY FEDERAL BANCORP] Selected Statistical Information (Dollars in Thousands, Except Share and Per Share Data)
Six months ended Selected Financial Data as of December 31, December 31, December 31, June 30, June 30, 2001 2000 1999 1999 1998 ---------------------------------------------------------------------------------------------------------------------------- Total assets $ 159,659 $ 166,466 $ 171,457 $ 172,253 $ 197,046 Interest-bearing deposits 14,605 14,718 22,911 14,668 6,266 Investment securities available for sale 18,074 21,001 24,305 27,325 9,854 Loans, net 104,432 107,842 96,919 110,436 156,683 Deposits 120,155 126,944 135,016 128,596 148,939 Long-term debt 24,650 23,842 23,504 29,149 29,488 Stockholders' equity 11,895 8,775 5,427 7,814 7,515 Selected Operations Data for Year Ended Interest income $ 11,455 $ 12,100 $ 6,019 $ 14,094 $ 17,192 Interest expense 8,501 8,457 4,268 9,730 11,586 ---------------------------------------------------------------------------- Net interest income 2,954 3,643 1,751 4,364 5,606 Provision for loan losses 1,349 670 1,345 (138) 4,543 ---------------------------------------------------------------------------- Net interest income after provision for loan losses 1,605 2,973 406 4,502 1,063 Non-interest income 3,608 1,816 1,001 2,663 3,025 Non-interest expense 5,698 7,314 5,148 6,878 16,076 ---------------------------------------------------------------------------- Income (loss) before income tax (485) (2,525) (3,741) 287 (11,988) Income tax benefit (513) (1,369) (1,671) (338) (5,194) ---------------------------------------------------------------------------- Net income (loss) before extraordinary item 28 (1,156) (2,070) 625 (6,794) Extraordinary item, net of tax 196 ---------------------------------------------------------------------------- Net income (loss) $ 224 $ (1,156) $ (2,070) $ 625 $ (6,794) ============================================================================ Selected Financial Ratios Return on average assets .14% (.71)% (2.41)% .33% (3.12)% Return on stockholders' equity 2.18 (16.14) (51.37) 7.58 (50.68) Net interest margin 2.03 2.49 2.24 2.48 2.79 Net interest spread 2.12 2.33 2.00 2.24 2.62 Tangible equity to assets at year end 8.48 8.42 6.78 8.49 6.31 Allowance for loan losses to loans 2.01 1.75 2.04 3.09 1.91 Allowance for loan losses to nonperforming loans 55.90 222.27 179.96 69.57 532.11 Dividend payout ratio N/A N/A N/A N/A N/A Per Share Data Diluted net income (loss) $ .04 $ (.29) $ (.66) $ .20 $ (2.30) Basic net income (loss) .04 (.29) (.66) .20 (2.30) Cash dividends declared .35 Book value at year end 1.99 1.90 1.72 2.48 2.40 Closing market price (bid) at year end 2.30 1.31 1.25 2.88 6.50 Number of average common and common equivalent shares outstanding 5,146,726 4,057,168 3,147,662 3,143,179 2,956,157
5 [LOGO OF FIDELITY FEDERAL BANCORP] 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, 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 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. 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, 2001 and 2000. 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 years 2000 and 2001. All references to percentage changes in income or expense items have been annualized. 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 (see the footnote entitled "Other Restrictions" in the audited financial statements for further details), can also have significant effects on changes in net interest income from one period to another. The net interest margin is determined by dividing net interest income by average interest earning assets. The net interest spread is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The following table details average balances, interest income/expense and average rates/yield for Fidelity's earning assets and interest bearing liabilities for the years ended December 31, 2001 and 2000 and the six months ended December 31, 1999. The average rates for the six months ended December 31, 1999 were adjusted to reflect annualized percentages. 6 [LOGO OF FIDELITY FEDERAL BANCORP] Average Balance Sheet and Net Interest Analysis (Dollars In Thousands on Fully Taxable Equivalent Basis)
December 2001 December 2000 December 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 investments $12,173 $ 481 3.95% $13,909 $ 873 6.28% $17,069 $ 454 5.28% Investment securities available for sale-taxable 18,977 1,220 6.43 22,658 1,518 6.70 25,857 849 6.51 Federal Home Loan Bank Stock 2,620 195 7.44 3,326 273 8.21 3,920 158 8.00 Loans (1) (2) Commercial loans 2,076 166 8.00 3,273 341 10.42 5,512 276 9.93 Multifamily loans 11,097 972 8.76 13,435 1,399 10.41 24,525 1,026 8.30 Home equity loans 4,879 381 7.81 4,635 465 10.03 4,959 250 10.00 Real estate mortgages 47,619 3,716 7.80 50,196 3,926 7.82 51,414 1,944 7.50 Consumer loans 45,901 4,324 9.42 35,060 3,305 9.43 22,045 1,062 9.56 -------------------- -------------------- -------------------- Total loans 111,572 9,559 8.57 106,599 9,436 8.85 108,455 4,558 8.33 -------------------- -------------------- -------------------- Total earning assets 145,342 11,455 7.88 146,492 12,100 8.26 155,301 6,019 7.69 -------- -------- -------- Allowance for loan losses (1,702) (1,989) (2,868) Cash and due from banks 3,794 2,893 4,193 Premises and equipment 5,903 5,145 5,747 Other assets 12,255 11,384 8,346 -------- -------- -------- Total assets $165,592 $163,925 $170,719 ======== ======== ======== Liabilities Interest-bearing deposits Interest-bearing checking $ 11,009 $ 196 1.78% $ 14,915 $ 458 3.07% $ 18,541 $ 314 3.36% Money market accounts 13,808 496 3.59 2,919 135 4.62 1,527 38 4.94 Savings accounts 4,497 72 1.60 4,689 98 2.09 5,051 53 2.08 Certificates of deposit 93,885 5,730 6.10 96,268 5,751 5.97 96,476 2,746 5.65 Total interest-bearing deposits 123,199 6,494 5.27 118,791 6,442 5.42 121,595 3,151 5.14 Federal funds purchased 32 Other borrowings 13,493 1,335 9.89 14,396 1,376 9.55 16,505 760 9.13 Federal Home Loan Bank advances 10,926 672 6.15 9,488 639 6.73 10,844 357 6.53 Total interest-bearing liabilities 147,650 8,501 5.76 142,675 8,457 5.93 148,944 4,268 5.68 -------- -------- -------- Non-interest bearing demand deposits 2,654 6,179 7,287 Advances by borrowers for taxes and insurance 369 421 463 Other liabilities 4,631 7,486 6,033 -------- -------- -------- Total liabilities 155,304 156,761 162,727 Stockholders' Equity 10,288 7,164 7,992 -------- -------- -------- Total liabilities and stockholders' equity $165,592 $163,925 $170,719 ======== ======== ======== Recap: (2) Interest income 11,455 7.88% 12,100 8.26% 6,019 7.69% Interest expense 8,501 5.85 8,457 5.77 4,268 5.45 ----------------- ----------------- ------------------ Net interest income/margin $2,954 2.03% $3,643 2.49% $1,751 2.24% ================= ================= ================== Interest rate spread (3) 2.12% 2.33% 2.00% Average interest-bearing assets to average interest-bearing liabilities 98.44% 102.68% 103.44%
(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 [LOGO OF FIDELITY FEDERAL BANCORP] Management's Discussion and Analysis of Results of Operations and Financial Condition Net interest income decreased $689,000 for the year ended December 31, 2001 compared to the same period last year. The net interest margin decreased to 2.03% at December 31, 2001 from to 2.49% at December 31, 2000. The net interest margin was negatively impacted by the 11 reductions in the federal funds rate during 2001 by the Federal Reserve Board, which resulted in assets adjusting to lower rates more quickly than the liabilities used to fund those assets. Additionally, a $3.1 million non-residential real estate loan was placed in non accrual status during the third quarter of 2001. The impact of the rate cuts was magnified by Fidelity's significant holdings of short-term investments which repriced immediately, compared to the interest bearing liabilities used to fund those assets. The approximate negative impact of holding these short-term investments, as compared to maintaining a more normal level of liquidity was $230,000. The primary reason for holding these short-term investments was to provide additional liquidity in consideration of past asset quality concerns in Fidelity's loan and letter of credit portfolios. Rates on interest-bearing liabilities began to decline in the second half of 2001 as maturities and repricing of higher rate deposits began to occur. Average commercial and multifamily loans decreased by $3.5 million, resulting in a $368,000 decrease in interest income. The decreases in commercial and multifamily loans have been the result of continued workout activities and payoffs. This trend is expected to continue in 2002, but will be partially offset by the origination of new commercial loans, which began in early 2002. Average mortgage loans decreased $2.6 million, primarily due to the increase in refinancing activity, resulting in a $202,000 decrease in interest income. These decreases were offset by a $10.8 million increase in average consumer loans, resulting in an increase of consumer loan interest income of $1.0 million. Average interest-bearing liabilities increased $5.0 million from December 31, 2000 to $147.7 million at December 31, 2001. Of this increase, average interest-bearing deposits increased $4.4 million due to United's increase in money market deposits. The increase in interest-bearing deposits resulted in a slight increase in deposit interest expense of $52,000. The average rate on interest-bearing deposits decreased to 5.27% for 2001 from 5.42% for 2000 primarily due to the maturity of higher costing liabilities during the last half of the year. With the reduction in market interest rates in 2001, United has significantly reduced interest rates offered on deposit products. 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% in 1999. 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. Average consumer loans increased by $13 million, resulting in an increase of interest income of $1.2 million in 2000 compared to the previous reporting period, 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 2000 United's cost to retain or replace scheduled certificate of deposit maturities increased due to the rising interest rate environment. The average rate on total deposits increased to 5.38% from 5.09% since December 31, 1999. 8 [LOGO OF FIDELITY FEDERAL BANCORP] Management's Discussion and Analysis of Results of Operations and Financial Condition Quarterly Results of Operations
March 31 June 30 September 30 December 31 Total ------------------------------------------------------------------------------------------------ (In Thousands) December 31, 2001 Interest income $ 3,033 $ 2,995 $ 2,779 $ 2,648 $ 11,455 Interest expense 2,282 2,297 2,106 1,816 8,501 --------------------------------------------------------- Net interest income 751 698 673 832 2,954 Provision for loan losses 284 63 800 202 1,349 Non-interest income 677 934 914 1,083 3,608 Non-interest expense 1,246 1,634 1,106 1,712 5,698 --------------------------------------------------------- Income (loss) before income tax (102) (65) (319) 1 (485) Income tax benefit (126) (108) (203) (76) (513) --------------------------------------------------------- Income (loss) before extraordinary item 24 43 (116) 77 28 Extraordinary item, net of tax 196 196 --------------------------------------------------------- Net income $ 24 $ 43 $ 80 $ 77 $ 224 ======================================================== Net income per share Diluted net income $ 0.01 $ 0.01 $ 0.01 $ 0.01 $ 0.04 Basic net income 0.01 0.01 0.01 0.01 0.04 Cash dividends* 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 --------------------------------------------------------- Loss before income tax (434) (377) (1,690) (24) (2,525) Income tax benefit (266) (244) (765) (94) (1,369) --------------------------------------------------------- Net income (loss) $ (168) $ (133) $ (925) $ 70 $ (1,156) ======================================================== Net income (loss) per share Diluted net income (loss) $ (.05) $ (.04) $ (.20) $ .02 $ (.29) Basic net income (loss) (.05) (.04) (.20) .02 (.29) Cash dividends*
*No cash dividends were paid for the years ended December 31, 2001 and 2000. 9 [LOGO OF FIDELITY FEDERAL BANCORP] 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 its fiscal year from June 30 to December 31.
December 31, 2001 December 31, 2000 Compared to December 31, 2000 Compared to December 31, 1999 Increase (Decrease) Due To Increase (Decrease) Due To -------------------------------------------------------------------------------- Change in Volume Rate Total Volume Rate Fiscal Year Total ---------------------------------------------------------------------------------------------------------------------------- (Dollars In Thousands) Interest income on average earning assets: Loans $ 440 $ (317) $ 123 $ (155) $ 549 $4,484 $4,878 Investment securities (247) (51) (298) (208) 42 835 669 Federal Home Loan Bank stock (58) (20) (78) (47) 7 155 115 Federal funds sold and other short-term investments (109) (283) (392) (167) 139 447 419 -------------------------------------------------------------------------------- Total interest income 26 (671) (645) (577) 737 5,921 6,081 -------------------------------------------------------------------------------- Interest expense on average interest- bearing liabilities: Interest bearing accounts (120) (142) (262) (66) (2) 322 254 Money market deposit accounts 504 (143) 361 (10) (1) 26 15 Savings accounts (4) (22) (26) (7) 0 52 45 Certificates of deposit (142) 120 (22) (12) 291 2,700 2,979 Other borrowings (86) 46 (40) (193) 60 748 615 Federal Home Loan Bank advances 97 (64) 33 (89) 19 351 281 -------------------------------------------------------------------------------- Total interest expense 249 (205) 44 (377) 367 4,199 4,189 -------------------------------------------------------------------------------- Changes in net interest income $ (223) $ (466) $ (689) $ (200) $ 370 $1,722 $1,892 ================================================================================
10 [LOGO OF FIDELITY FEDERAL BANCORP] Management's Discussion and Analysis of Results of Operations and Financial Conditions 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. Specific reserves are assigned to certain credits. The reserves are determined by management's evaluation of those credits, which include evaluations of borrower's ability to repay outstanding debt, as well as the value of supporting collateral. The results of internal loan reviews, previous regulatory reviews, 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. 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 and consumer 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. The provision for loan losses for the year ended December 31, 2001 was $1,349,000 compared to $670,000 for the year ended December 2000, an increase of $679,000. During the first two quarters of 2001, seven entities in which Fidelity or United had outstanding classified, or impaired letters of credit, obtained non-recourse financing outside of Fidelity. Fidelity provided $3.0 million in previously reserved funds in order to complete the refinancing transactions. As a result, total classified assets and letters of credit were reduced from $20.5 million at December 31, 2000 to $7.7 million at December 31, 2001. The ratio of allowance for loan losses to non-performing loans was 55.9% at December 31, 2001 compared to 222.3% at December 31, 2000. The primary reason for the decrease in the ratio of allowance for loan losses to non-performing loans was the deterioration of one $3.1 million commercial real estate credit that was placed in nonaccrual status during the year. The provision for 2001 included $585,000 of additional advances to the partnerships, and related charge-offs and recoveries of $585,000 and $252,000, respectively. During 2000 an additional $200,000 provision was made for loans to the affordable housing limited partnerships for maintenance on Fidelity's affordable housing portfolio that had been deferred by the previous property manager. 11 [LOGO OF FIDELITY FEDERAL BANCORP] Management's Discussion and Analysis of Results of Operations and Financial Condition Non-Interest Income Non-interest income for the year ended December 31, 2001 increased by $1.8 million or 98.7% compared to December 31, 2000. Non-interest income increased by $815,000 or decreased by $186,000 on an annualized basis compared to December 31, 1999. The percent change for December 31, 2000 has been annualized to reflect the six-month reporting period for 1999. The following table summarizes non-interest income for the following time periods:
Change From Prior Year Increase (Decrease) -------------------------------------------------- Amount December 31, 2001 December 31, 2000 ------------------------------------------------------------------------------------------- Six months Year ended Year ended ended December 31, December 31, December 31, Annualized 2001 2000 1999 Amount Percent Amount Percent ------------------------------------------------------------------------------------------------------------------------------ (Dollars In Thousands) Service charges on deposit accounts $ 364 $ 311 $ 201 $ 53 17.0% $ 110 (22.6)% Net gains on loan sales 579 54 110 525 972.2 (56) (75.5) Letter of credit fees 506 530 291 (24) (4.5) 239 (8.9) Agent fee income 1,472 240 4 1,232 513.3 236 2,900.0 Servicing fees on loans sold 125 109 55 16 14.7 54 (0.9) Other income 562 572 340 (10) (1.7) 232 (15.9) ------------------------------------------------------------------------------------------- Total non-interest income $ 3,608 $ 1,816 $ 1,001 $ 1,792 98.7% $ 815 (9.3)% ===========================================================================================
Service charges on deposit accounts increased $53,000 for the year ended December 31, 2001 compared to the prior year due to an increase in the number of deposit accounts, higher activity fees and new fee sources combined with improved monitoring of fee waivers. Net gains on the sale of loans increased $525,000 over the prior year due to an increase in mortgage loan activity and a fourth quarter sale of $5.0 million of consumer loans which resulted in a net gain of $89,000. Letter of credit fees decreased $24,000 from the prior year due to the paydowns on bonds backed by Fidelity and United letters of credit. United participates in an arrangement in which automobile loans are originated on behalf of another organization in exchange for a fee. Agent fee income, which represents earned fees from these transactions for the year ended December 31, 2001 were $1.5 million compared to $240,000 last year and $8,000, on an annualized basis for the six months ended December 31, 1999. United fully resumed its consumer lending activities in late 1999 and has continued to increase its network of automobile dealers. Loan originations for 2001 were $128.0 million, compared to $45.0 million in 2000 and $7.4 million in 1999. The continued expansion and penetration of its automobile dealer network has been instrumental in the increase in agent fees over the prior year. Servicing fees on loans sold increased $16,000 over 2000 due to the continued growth in loans sold to the secondary market with servicing retained by United. Other income includes gains on sales of land of $134,000 offset partially by a reduction in apartment management fees of $88,000. The reduction in management fees reflects the transfer of property management from United to Pedcor Holdings, Inc. ("Pedcor") as part of the stock purchase agreement executed in 2000. 12 [LOGO OF FIDELITY FEDERAL BANCORP] Management's Discussion and Analysis of Results of Operations and Financial Condition Non-Interest Expense Non-interest expense decreased $1.6 million or 22.1% for the year ended December 31, 2001, compared to December 31, 2000. The following table summarizes non-interest expense for the years ended December 31, 2001 and 2000 and the six months ending December 31, 1999. The percent change for December 31, 2000 has been annualized to reflect the six-month reporting period for 1999.
Change From Prior Year Increase (Decrease) ----------------------------------------------------- Amount December 31, 2001 December 31, 2000 ---------------------------------------------------------------------------------------------- Six months Year ended Year ended ended December 31, December 31, December 31, Annualized 2001 2000 1999 Amount Percent Amount Percent --------------------------------------------------------------------------------------------------------------------------------- (Dollars In Thousands) Salaries and employee benefits $ 3,258 $ 3,370 $ 1,747 $ (112) (3.3)% $ 1,623 (3.5)% Letter of credit valuation provision (1,450) (85) 1,069 (1,365) 1605.9 (1,154) (104.0) Loss on investments in partnerships 304 352 356 (48) (13.6) (4) (50.6) Legal and professional fees 243 544 379 (301) (55.3) 165 (28.2) Net occupancy expenses 368 364 192 4 1.1 172 (5.2) Equipment expenses 282 250 166 32 12.8 84 (24.7) Data processing fees 348 339 247 9 2.7 92 (31.4) Advertising 327 198 78 129 65.2 120 26.9 Deposit insurance expense 248 243 156 5 2.1 87 (22.1) Correspondent bank charges 155 156 79 (1) (.6) 77 (1.3) Amortization of intangible assets 209 139 70 50.4 139 100.0 Other expense 1,406 1,444 679 (38) (2.6) 765 6.3 ---------------------------------------------------------------------------------------------- Total non-interest expense $ 5,698 $ 7,314 $ 5,148 $(1,616) (22.1)% $ 2,166 (29.0)% ==============================================================================================
During 2001, the valuation allowance for letters of credit was reduced by $1.5 million to reflect a reduction in loss exposure achieved as a result of the previously discussed refinancing activities completed during 2001, resulting in a reduction of other expense. Fidelity is in varying stages of completion on the refinancing of additional affordable housing related credits, which should be substantially completed in 2002. Fidelity records its percentage share of losses for its investments in various affordable housing partnerships under the equity method of accounting. These losses were $304,000 and $352,000 for 2001 and 2000, respectively. These writedowns are entirely offset by tax credits received and recorded as reductions of income tax expense. Fidelity continues to monitor these partnerships very closely and take steps to assist these partnerships in increasing their cash flows. The results of refinancing efforts, a lower interest rate environment, and a change in the property manager last year have started to positively impact the performance of these partnerships. 13 [LOGO OF FIDELITY FEDERAL BANCORP] Management's Discussion and Analysis of Results of Operations and Financial Condition Legal and professional fees decreased $301,000 in 2001 due to expenses related to workout activities with respect to various classified assets in 2000. Advertising increased $129,000 from 2000 primarily due to increased promotional activities with respect to the consumer lending and mortgage areas, as well as the opening of a new branch in Warrick County, Indiana during the first quarter of 2001. Amortization of intangible assets resulted in expense of $209,000 for 2001 compared to $139,000 for 2000. The amortization of this asset began in June 2000. Other operating expense decreased $38,000 from the prior year. Income Tax Benefit The income tax benefit was $513,000 for the year ended December 31, 2001 compared to $1.4 million in the same period last year, primarily due to the reduction in pre-tax loss for the year. Included in this tax benefit are tax credits of $319,000. These credits are received from Fidelity's investment in affordable housing properties and are a component of the overall return on these investments. Consideration of the need for a valuation allowance for the deferred tax asset was made at December 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. At December 31, 2001, Fidelity's operating results were slightly ahead of those contemplated by the 2001 business plan. The assumptions 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 December 31, 2001 decreased $6.8 million to $159.7 million from $166.5 million in December 2000, primarily due to the sale of $5.0 million in consumer loans during the fourth quarter and the maturities of investment securities. Average assets for the year ended December 31, 2001 increased by $1.7 million from $163.9 million at December 31, 2000 to $165.6 million at December 31, 2001. The increase in total average assets is primarily due to an increase in consumer loans offset by loan payoffs, refinancing and payments received on commercial, multifamily and fixed 1-4 family mortgage loans and proceeds from maturities of investment securities. Average interest-bearing liabilities increased $5.0 million due to the increase in premium money market account balances. This increase was partially offset by the reduction in non-interest bearing deposits and certificates of deposit. 14 14 [LOGO OF FIDELITY FEDERAL BANCORP] 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 December June June 2001 2000 1999 1999 1998 --------------------------------------------------------------------------------------------------------- (In Thousands) Real estate mortgage loans First mortgage loans Conventional $ 43,929 $ 47,809 $ 48,845 $ 49,733 $ 71,343 Construction 513 1,274 1,867 6,732 16,110 Commercial 6,114 6,873 8,576 14,140 20,753 Multifamily loans 3,856 4,350 3,629 7,597 5,742 Home equity loans 4,577 5,274 5,567 4,819 4,946 First mortgage real estate loans purchased 745 1,753 1,899 2,061 2,704 ----------------------------------------------------------------------- 59,734 67,333 70,383 85,082 121,598 Commercial loans, other than secured by real estate 1,848 2,305 4,154 6,076 11,568 Consumer loans 44,988 40,125 24,403 22,799 26,566 ----------------------------------------------------------------------- Total loans 106,570 109,763 98,940 113,957 159,732 Allowance for loan losses (2,138) (1,921) (2,021) (3,521) (3,049) ----------------------------------------------------------------------- Net loans $ 104,432 $ 107,842 $ 96,919 $ 110,436 $ 156,683 ======================================================================= Total assets $ 159,659 $ 166,466 $ 171,457 $ 172,253 $ 197,046 ======================================================================= Total loans to total assets 66.7% 65.9% 57.7% 66.2% 81.1% =======================================================================
Fidelity has continued to sell its current production of fixed-rate 1-4 family loans recording the gain or loss and using the proceeds to fund future originations. As a result, conventional real estate mortgage loans have decreased $27.4 million from June 30, 1998 to December 31, 2001. Multifamily loans decreased slightly in 2001 due to payments received on these loans. Commercial real estate loans and commercial loans have continued to decline as a result of the Supervisory Agreement restriction on new commercial lending. The focus of United's commercial lending department through 2001 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. In February 2002, United received authority from the OTS to engage in commercial lending activity on a limited basis, as outlined in United's business plan. Consumer loans have increased $20.6 million from December 31, 1999 to $45.0 million at December 31, 2001. Additions to the dealer network and increased penetration of its new and existing dealer base has enabled Fidelity to substantially increase the portfolio of direct and indirect automobile loans, and increase interest and fee income. The rate of growth in the consumer loan portfolio during 2000 and 2001 cannot be assured to continue. Consumer loans represent 29.4% of United's total assets at December 31, 2001. 15 [LOGO OF FIDELITY FEDERAL BANCORP] Management's Discussion and Analysis of Results of Operations and Financial Condition Fidelity has 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, 2001: Within One One to Five After Five Total Year Years Years ----------------------------------------------------------------------------- (In Thousands) Predetermined interest rates $ 4 $ 170 $ 174 Floating interest rates 463 526 685 1,674 --------------------------------------------- $ 467 $ 696 $ 685 $1,848 ============================================= 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 initiates 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 $22,000 for the year ended December 31, 2001, $33,000 for the year ended December 31, 2000 and $18,000 for the six months ended December 31, 1999. Additional interest income of approximately $237,000, $49,000 and $13,000 for the years ended December 31, 2001 and 2000 and the six months ended December 31, 1999, respectively would have been recorded had income on nonaccruing and restructured loans been considered collectible and accounted for on an accrual basis. 16 [LOGO OF FIDELITY FEDERAL BANCORP] 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, December 31, June 30, June 30, 2001 2000 1999 1999 1998 ------------------------------------------------------------------ (In Thousands) Nonaccrual loans Real estate mortgage $ 130 $ 253 $ 76 $ 461 Consumer 116 Multifamily $ 148 229 4,112 Commercial 3,291 472 ------------------------------------------------------------------ Total nonaccrual loans 3,537 620 482 4,188 461 Restructured Consumer 190 115 75 77 Commercial 53 119 118 ------------------------------------------------------------------ Total restructured loans 243 234 193 77 90 days or more past due and accruing Consumer 23 10 135 164 86 Commercial 22 313 632 26 ------------------------------------------------------------------ Total 90 days or more past due and accruing 45 10 448 796 112 ------------------------------------------------------------------ Total non-performing loans $3,825 $ 864 $1,123 $5,061 $ 573 ================================================================== Ratio of non-performing loans to total loans 3.59% .79% 1.14% 4.44% .36% ==================================================================
The increase in non-performing loans in 2001 is primarily due to one non-residential real estate loan totaling $3.1 million in which accrual of interest income was ceased during the third quarter. This loan was subsequently charged down to $1.9 million, using existing reserves set aside for the loan, and reclassified to other real estate owned during the first quarter of 2002. Multifamily 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 may 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 letter of credit valuation provision and evaluates the adequacy of the allowance for loan losses and its letter of credit valuation reserve based on management's evaluation of the performance of its loan and letter of credit portfolios. This 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 expected 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. 17 [LOGO OF FIDELITY FEDERAL BANCORP] Management's Discussion and Analysis of Results of Operations and Financial Condition Classified Assets and Letters of Credit (in thousands) December 31, December 31, 2001 2000 ------------ ------------ Classified assets $7,357 $ 8,754 Classified letters of credit 350 11,773 ---------------------------- Total classified assets $7,707 $20,527 ============================ Classified assets and letters of credit of Fidelity totaled $7.7 million at December 31, 2001 compared to $20.5 million at December 31, 2000, a decrease of 62.5%. Total classified assets were 53.3% and 167.1% of Fidelity's capital and reserves at December 31, 2001 and December 31, 2000, respectively, and 31.5% and 69.9% of United's core capital and reserves. In addition to the classified assets and letters of credit, there are other assets and letters of credit totaling $10.6 million at December 31, 2001 for which management was closely monitoring the borrowers' abilities to comply with payment terms. Impaired loans are those that management believes will not perform in accordance with the original loan terms. At December 31, 2001 and December 31, 2000, Fidelity had impaired loans totaling $6.8 million and $3.7 million respectively. As previously discussed, a non-residential real estate loan totaling $3.1 million resulted in the increase in impaired loans over 2000. The allowance for loan losses on such impaired loans totaled $1.3 million and $384,000, which are included in Fidelity's allowance for loan losses at December 31, 2001 and December 31, 2000 respectively. Using similar guidelines for impaired loans, impaired letters of credit at December 31, 2001 and December 31, 2000 totaled $350,000 and $11.8 million, respectively. The valuation allowance on such impaired letters of credit totaled $700,000 and $5.2 million, respectively at December 31, 2001 and 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. 18 [LOGO OF FIDELITY FEDERAL BANCORP] 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 for the years ended December 31, 2001 and 2000, the six months ended December 31, 1999 and the fiscal years ended June 30, 1999 and 1998:
December 31, December 31, December 31, June 30, June 30, 2001 2000 1999 1999 1998 ------------------------------------------------------------------ (In Thousands) Allowance for loan losses at beginning of period $ 1,921 $ 2,021 $ 3,521 $ 3,049 $ 1,781 ------------------------------------------------------------------ Loan charge offs Real estate mortgage 80 15 Multifamily 606 683 2,631 3,089 Commercial 354 12 11 14 Consumer 441 391 235 324 195 ------------------------------------------------------------------ Total loan charge offs 1,401 1,166 2,877 338 3,299 ------------------------------------------------------------------ Loan recoveries Real estate mortgage 7 15 Multifamily 200 317 3 Commercial 20 3 3 Consumer 62 59 26 35 24 ------------------------------------------------------------------ Total loan recoveries 269 396 32 53 24 ------------------------------------------------------------------ Net charge offs 1,132 770 2,845 285 3,275 Reclassifications 895 Provision for loan losses 1,349 670 1,345 (138) 4,543 ------------------------------------------------------------------ Allowance for loan losses at end of period $ 2,138 $ 1,921 $ 2,021 $ 3,521 $ 3,049 ================================================================== Ratio of net charge offs to average loans outstanding during period 1.02% .72% 5.20% .21% 1.81% ================================================================== Ratio of provision for loan losses to average loans outstanding during period 1.21% .63% 2.46% (.10)% 2.52% ================================================================== Ratio of allowance for loan losses to total loans outstanding at year end 2.01% 1.75% 2.04% 3.09% 1.91% ================================================================== Average amount of loans outstanding for the period $ 111,572 $ 106,599 $ 108,455 $ 137,793 $ 180,530 ================================================================== Amount of loans outstanding at end of period $ 106,570 $ 109,763 $ 98,940 $ 113,957 $ 159,732 ==================================================================
19 [LOGO OF FIDELITY FEDERAL BANCORP] Management's Discussion and Analysis of Results of Operations and Financial Condition During the year ended December 31, 2001, net charge-offs consisted primarily of multifamily, commercial and consumer loans. Of the $606,000 of multifamily charge-offs in 2001, $200,000 was later recovered. Operating deficit guarantees provided by Pedcor resulted in payments being made to Fidelity in the event that cash flows from properties were negative, based on a pre-determined computation. Payments under operating deficit guarantees provided by Pedcor are limited to $300,000 per year. For the twelve months ended May 31, 2001, Fidelity received $300,000 in payments from Pedcor. Since June 2001, $131,000 of payments have been received. The total provision for loan losses for the period ended December 31, 2001 was $1.3 million. The reduction in of letter of credit reserves totaled $1.5 million. 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. This loan was subsequently placed in nonaccrual status during 2001. A portion of consumer loan net charge-offs of $379,000 in 2001 were related to loans originated prior to 1999 by a different underwriting staff. 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 increased to $628,000 at December 31, 2000. The allowance for loan losses on consumer loans decreased to $505,000 at December 31, 2001 because of improvement in the credit quality of the consumer loan portfolio which supported a smaller allocation for losses on a comparative basis. Fidelity's letter of credit valuation allowance was $665,000 at December 31, 2001 compared to $5.2 million at December 31, 2000. The decrease is primarily due to results of the refinancing efforts of seven partnerships, funding of $3.0 million in connection with those refinancings, and the reduction of remaining reserves by $1.5 million. Multi-family letters of credit, an off-balance sheet item, carry the same risk characteristics as conventional loans and totaled $30.5 million at December 31, 2001, compared to $43.8 million at December 31, 2000 and $44.5 million at December 31, 1999. The valuation allowance for letters of credit totaled 2.2% of outstanding letters of credit at December 31, 2001 compared to 11.8% at December 31, 2000. The allowance for loan losses and letters of credit to total loans and letters of credit at December 31, 2001 and 2000 was 2.05% and 2.34%, 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 valuation allowance for letters of credit adequate to meet losses inherent in the loan and letter of credit portfolios at December 31, 2001. 20 [LOGO OF FIDELITY FEDERAL BANCORP] 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, 2001, 2000 and 1999 and at June 30, 1999, and 1998, are as follows:
Allocation of Amount ------------------------------------------------------------ December 31, December 31, December 31, June 30, June 30, 2001 2000 1999 1999 1998 ------------------------------------------------------------------------------------ (In Thousands) Real estate mortgage $ 80 $ 49 $ 49 $ 51 $ 124 Home equity 23 53 54 48 49 Multifamily 258 514 482 2,177 1,868 Consumer 505 628 496 182 275 Commercial 1,272 677 940 1,063 733 ------------------------------------------------------------ Total $2,138 $1,921 $2,021 $3,521 $3,049 ============================================================
Percentage of Loans to Total Loans ------------------------------------------------------------ December 31, December 31, December 31, June 30, June 30, 2001 2000 1999 1999 1998 ------------------------------------------------------------------------------------ (In Thousands) Real estate mortgage 42.4% 45.2% 45.7% 42.0% 45.6% Home equity 4.3 4.8 5.5 4.2 3.1 Multifamily 3.6 3.4 5.9 11.5 11.4 Consumer 42.2 36.6 30.0 24.2 19.7 Commercial 7.5 10.0 12.9 18.1 20.2 ------------------------------------------------------------ Total 100.0% 100.0% 100.0% 100.0% 100.0% ============================================================
21 [LOGO OF FIDELITY FEDERAL BANCORP] Management's Discussion and Analysis of Results of Operations and Financial Condition Association with Section 42 Fidelity has 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 Section 42 loans, general partner loans, equity investments and letters of credit associated with these projects totaling $5.4 million at December 31, 2001, compared to $18.7 million and $19.7 million at December 31, 2000 and 1999. The following table summarizes Fidelity's association with these projects:
Activities associated with Section 42 Conventional General Bank Partner Additional Equity Letters Financing Loans Notes Investments of Credit ----------------------------------------------------------------- Balance at June 30, 1999 $ 5,118 $ 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 2,723 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 2,757 283 15,613 Increases 585 Paydowns, payoffs, or loss on investment (14) (105) (10,081) Charge-offs or funding on outstanding letters of credit (1) (585) (88) (2,976) ----------------------------------------------------------------- Balance at December 31, 2001 $ 2,742 $ 0 $ 0 $ 90 $ 2,556 =================================================================
Specific reserves included in allowance for loan losses --------------------------------------- Specific Valuation Conventional General Allowance Reserves Allowance Bank Partner Additional for equity for Letters Financing Loans Notes Investments of Credit --------------------------------------------------------------------- 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 4,754 Provision-year ended December 31, 2001 216 585 (1,493) Funding on outstanding letter of credit (2,976) Reclassification (219) Charge-offs (585) --------------------------------------------------------------------- Balance at December 31, 2001 $ 245 $ 0 $ 0 $ 0 $ 285 ======================================================================
22 [LOGO OF FIDELITY FEDERAL BANCORP] 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, 2001, the investment portfolio represented 11.3% 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. 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 for 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, 2001, the entire investment portfolio was classified as available for sale. The net unrealized loss at December 31, 2001, which is included as a component of stockholders' equity, was $38,000 and was comprised of gross unrealized gains of $49,000 and gross unrealized losses of $112,000 and a tax benefit of $25,000. The decrease in the unrealized loss was caused primarily by market interest rate changes during the period. Although the entire portfolio is classified as 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, 2001, 2000 and 1999:
December 31, December 31, December 31, 2001 2000 1999 --------------------------------------------------------------------------------------------------------- (dollars in thousands) Federal Home Loan Mortgage Corporation mortgage-backed securities $ 443 $ 805 $ 1,043 Federal National Mortgage Association mortgage-backed securities 625 1,095 1,377 Government National Mortgage Association mortgage-backed securities 17,006 19,101 21,885 ---------------------------------- Total securities available for sale $18,074 $21,001 $24,305 ==================================
In 2001, United's investment securities portfolio decreased by $2.9 million to $18.1 million compared to $21.0 million at December 31, 2000. The decrease is the result of maturities and paydowns received during the year. During the fourth quarter of 2001, United purchased $2.0 million of mortgage backed securities to replace a portion of the securities that were repaid during 2001 due to the falling interest rate environment and the effect on prepayments. 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. 23 [LOGO OF FIDELITY FEDERAL BANCORP] 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, 2001, 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 prepayments 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 $ 3 7.17% $ 8 7.96% $ 432 6.20% $ 443 6.24% Federal National Mortgage Association 625 5.92 625 5.92 Government National Mortgage Association $ 3,220 6.73% 13,786 6.70 17,006 6.70 ----- ----- ------- ------- ------- Total $ 3 7.17% $ 8 7.96% $ 3,220 6.73% $14,843 6.65% $18,074 6.66% ===== ===== ======= ======= ======= Percent of total 0.02% 0.04% 17.82% 82.12% 100% ===== ===== ======= ======= =======
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 $883,000 for the year ended December 31, 2001. Average retail certificates of deposit and money market accounts, increased $4.7 million and $10.9 million, respectively, but were partially offset by decreases in demand, NOW account and agent-acquired certificates of deposit of $3.5 million, $3.9 million and $7.1 million, respectively. The provisions of the Supervisory Agreement prohibit Fidelity from using agent-acquired certificates as a funding source. Due to the rise in interest rates during 2000, the average rate on total deposits increased 0.26% since December 31, 1999 to 5.15% at December 31, 2000. The average rate on deposits increased 0.01% during 2001 to 5.16%, even though rates fell during 2001. Due to the higher interest rate environment at the beginning of 2001, certificates of deposit yield increased during the first half of 2001 when the certificates matured and renewed despite falling market interest rates. Interest rates on deposits declined at a much slower pace as compared to reductions in market interest rates. United began experiencing significant repricing opportunities in its certificate of deposit portfolio during the last half of 2001 and expects to continue to see benefits from the lower interest rate environment. 24 [LOGO OF FIDELITY FEDERAL BANCORP] 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, 2001 and 2000 and the six months ended December 31, 1999.
December 31, December 31, December 31, 2001 2000 1999 ----------------------------------------------------- Average Deposits Amount Rate Amount Rate Amount Rate ------------------------------------------------------------------------------------------------------- (In Thousands) Demand $ 2,654 $ 6,179 $ 7,287 NOW accounts 11,009 1.78% 14,915 3.07% 18,541 3.36% Money market accounts 13,808 3.59 2,919 4.62 1,527 4.94 Savings accounts 4,497 1.60 4,689 2.09 5,051 2.08 Certificates of deposit 91,706 6.10 87,027 5.97 78,329 5.59 Agent-acquired certificates of deposit 2,179 6.06 9,241 6.00 18,147 5.91 -------- -------- -------- Totals $125,853 5.16% $124,970 5.15% $128,882 4.89% ======== ======== ========
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, December 31, 2001 2000 1999 ------------------------------------------------------------------------------- (In Thousands) Three months or less $ 3,661 $ 1,692 $ 5,656 Three to six months 3,877 1,359 7,727 Six to twelve months 1,067 5,093 2,766 Over twelve months 5,773 4,882 6,825 ----------------------------------------- Totals $14,378 $13,026 $22,974 ========================================= Borrowings Fidelity's long-term debt increased $808,000 from the year ended December 31, 2001, primarily due to a $2.4 million increase in Federal Home Loan Bank advances and a draw on a $1.5 million line of credit totaling $725,000. The maturity of $1.5 million in junior subordinated notes and the early extinguishment of $1.0 million in senior subordinated notes offset a portion of the increase in borrowings during 2001. Alternative funding sources for United are provided by loan sales, loan payoffs, Federal Home Loan Bank advances as well as through retail deposits. The long-term debt footnote, in the audited financial statements, provides additional information on Fidelity's borrowings. 25 [LOGO OF FIDELITY FEDERAL BANCORP] Management's Discussion and Analysis of Results of Operations and Financial Condition Capital Resources Fidelity's stockholders' equity increased $3.1 million to $11.9 million at December 31, 2001, compared to $8.8 million at December 31, 2000. The change in stockholders' equity was accounted for by net income of $224,000, a decrease in the net unrealized loss on securities available for sale of $498,000, and $2.4 million from completed stock offerings in June and November of 2001. A total of 1,000,000 shares at $1.55 were issued upon the completion of the rights offering in June 2001 and a total of 379,353 shares at $2.50 were issued upon completion of the second rights offering completed in November 2001. 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 8.5% for the year ended December 31, 2001 and 8.4% for December 31, 2000, tier I capital to risk-weighted assets was 10.7% and 10.3% and total risk-based capital to risk-weighted assets was 14.4% and 13.8% at December 31, 2001 and December 31, 2000 respectively. Book value per share, increased to $1.99 at December 31, 2001, compared to $1.90 at December 31, 2000 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, 2001 and 2000, the Bank is categorized as well capitalized and met all capital adequacy requirements. However, United continues to evaluate and pursue alternatives to improve its capital ratios. 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 8.4% for tangible, leverage and core capital and 13.9% for risk-based capital, which United exceeded at December 31, 2001. 26 [LOGO OF FIDELITY FEDERAL BANCORP] 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 order the terms of the Supervisory Agreement. The Stock Purchase Agreement approved by Fidelity's shareholders in May 2000 indicates that, for three years following the approval of the stock purchase agreement, Pedcor is entitled to purchase additional shares from Fidelity in an aggregate amount up to $5.0 million. Fidelity obtained a $1.5 million line of credit in the first quarter of 2001 and can draw on this line until its expiration in September 2002. At December 31, 2001, $725,000 was outstanding on the line of credit. Fidelity's liquidity position may be further improved by the potential issuance of additional stock to Pedcor, additional debt or equity financing, or dividends from United (with OTS approval), to the holding company. Fidelity completed two successful stock offerings in 2001 and raised approximately $2.4 million. In addition, Fidelity is offering to issue $1.5 million in 9% unsecured junior subordinated notes in addition to 500,000 warrants representing the right to purchase 500,000 shares of common stock at $3.00 per share. The offering expires on February 28, 2002. Fidelity believes that the above actions will assist it in meeting its future liquidity needs. Fidelity has issued letters of credit that back tax-exempt bond financing for two remaining Section 42 multifamily housing developments held at the holding company. The bonds are periodically re-marketed to current or potential bondholders. In June 2002 approximately $1.7 million in bonds are due to be re- marketed. In the event that some of the bonds cannot successfully be re-marketed for their face amounts, 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 utilizing this program, however, there is no assurance that this effort will be successful. An additional $350,000 in bonds backed by a letter of credit issued by Fidelity are expected to be refinanced without recourse to Fidelity in the first quarter of 2002. 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. Supervisory Agreement Management has expended significant time and effort ensuring that United continues to operate in compliance with the Supervisory Agreement. Total commercial and multifamily loans outstanding have continued to decline, and management efforts in this area have been concentrated on compliance, rather than business development. The agreement will likely continue to impact the financial condition and the operating results of United and Fidelity until it 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 "Other Restrictions" footnote to the financial statements provides details as to the restrictions included within the Agreement. During the first quarter of 2002 United received OTS approval to resume commercial lending activities on a limited basis. This has been a result of United following provisions of the Supervisory Agreement and executing its business plan which included the continued focus on divesting of classified assets to a level acceptable by management and the OTS. This will continue to be a primary focus in 2002. 27 [LOGO OF FIDELITY FEDERAL BANCORP] Management's Discussion and Analysis of Results of Operations and Financial Condition 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 such as those experienced in 2001, 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, 2001 and December 31, 2000, 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. On December 31, 2001, the yield on the three month Treasury bill was 1.72%. As a result, the NPV model did not produce results for the minus 200 or 300 basis points scenarios for the quarter ending December 31, 2001. At December 31, 2001 and December 31, 2000, 2% of the present value of United's assets was approximately $3.1 million and $3.2 million respectively. Because the interest rate risk of a 200 basis point increase in 2001 and 2000 (which was greater than the interest rate risk of a 100 or 200 basis point decrease) was $2.0 million at December 31, 2001 and $2.4 million at December 31, 2000, 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, 2000 to December 31, 2001 is due to interest rate changes and a change in United's balance sheet mix. 28 [LOGO OF FIDELITY FEDERAL BANCORP] Management's Discussion and Analysis of Results of Operations and Financial Condition
Interest Rate Risk as of December 31, 2001 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 $13,067 $(3,129) (19)% 8.71% - 160 bp + 200 bp 14,149 (2,047) (13) 9.28 - 103 bp + 100 bp 15,261 (935) (6) 9.86 - 45 bp 0 bp 16,196 10.31 - 100 bp 16,441 245 2 10.36 5 bp
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
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. 29 [LOGO OF FIDELITY FEDERAL BANCORP] [LOGO OF BKD, LLP] Independent Auditor's Report Stockholders and Board of Directors Fidelity Federal Bancorp Evansville, Indiana We have audited the accompanying consolidated balance sheets of Fidelity Federal Bancorp and subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of income, changes in stockholders' equity and cash flows for the years ended December 31, 2001 and 2000 and six months ended December 31, 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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash flows for the years ended December 31, 2001 and 2000 and six months ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. BKD, LLP Evansville, Indiana January 25, 2002 30 [LOGO OF FIDELITY FEDERAL BANCORP] Consolidated Balance Sheets (In Thousands, Except Share Data)
December 31 2001 2000 ------------------------------------------------------------------------------------ Assets Cash and due from banks $ 1,711 $ 1,926 Interest-bearing demand deposits 14,605 14,718 ----------------------- Cash and cash equivalents 16,316 16,644 Investment securities available for sale 18,074 21,001 Loans, net of allowance for loan losses of $2,138 and $1,921 104,432 107,842 Premises and equipment 6,009 5,847 Federal Home Loan Bank of Indianapolis stock 2,620 2,620 Deferred income tax receivable 7,214 7,245 Interest receivable and other assets 4,994 5,267 ----------------------- Total assets $ 159,659 $ 166,466 ======================= Liabilities Deposits Non-interest bearing $ 5,008 $ 4,291 Interest bearing 115,147 122,653 ----------------------- Total deposits 120,155 126,944 Long-term debt 24,650 23,842 Valuation allowance for letters of credit 665 5,153 Other liabilities 2,294 1,752 ----------------------- Total liabilities 147,764 157,691 ----------------------- 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 - 5,987,009 and 4,607,658 shares 5,987 4,607 Additional paid-in capital 14,692 13,674 Stock warrants 11 11 Accumulated deficit (8,757) (8,981) Accumulated other comprehensive loss (38) (536) ----------------------- Total stockholders' equity 11,895 8,775 ----------------------- Total liabilities and stockholders' equity $159,659 $ 166,466 =======================
See notes to consolidated financial statements. 31 [LOGO OF FIDELITY FEDERAL BANCORP] Consolidated Statements of Income (In Thousands, Except Share Data)
Six Months Year Ended Year Ended Ended December 31, December 31, December 31, 2001 2000 1999 --------------------------------------------------------------------------------------- Interest Income Loans receivable $ 9,559 $ 9,436 $ 4,558 Investment securities--taxable 1,220 1,518 849 Deposits with financial institutions 481 873 454 Other dividend income 195 273 158 ------------------------------------ Total interest income 11,455 12,100 6,019 ------------------------------------ Interest Expense Deposits 6,494 6,442 3,151 Long-term debt 2,007 2,015 1,117 ------------------------------------ Total interest expense 8,501 8,457 4,268 ------------------------------------ Net Interest Income 2,954 3,643 1,751 Provision for loan losses 1,349 670 1,345 ------------------------------------ Net Interest Income After Provision for Loan Losses 1,605 2,973 406 ------------------------------------ Other Income Service charges on deposit accounts 364 311 201 Net gains on loan sales 579 54 110 Letter of credit fees 506 530 291 Agent fee income 1,472 240 4 Servicing fees on loans sold 125 109 55 Other income 562 572 340 ------------------------------------ Total non-interest income 3,608 1,816 1,001 ------------------------------------
32 [LOGO OF FIDELITY FEDERAL BANCORP] Consolidated Statements of Income (In Thousands, Except Share Data) (Continued)
Six Months Year Ended Year Ended Ended December 31, December 31, December 31, 2001 2000 1999 --------------------------------------------------------------------------------------- Other Expenses Salaries and employee benefits $ 3,258 $ 3,370 $ 1,747 Net occupancy expenses 368 364 192 Equipment expenses 282 250 166 Data processing fees 348 339 247 Deposit insurance expense 248 243 156 Legal and professional fees 243 544 379 Advertising 327 198 78 Letter of credit valuation provision (1,450) (85) 1,069 Loss on investment in partnerships 304 352 356 Amortization of intangible assets 209 139 Correspondent bank charges 155 156 79 Other expense 1,406 1,444 679 ------------------------------------ Total non-interest expense 5,698 7,314 5,148 ------------------------------------ Loss Before Income Tax (485) (2,525) (3,741) Income tax benefit (513) (1,369) (1,671) ------------------------------------ Net Income (Loss) Before Extraordinary Item 28 (1,156) (2,070) Gain on Extraordinary Item, Net of Tax 196 ------------------------------------ Net Income (Loss) $ 224 $(1,156) $(2,070) ==================================== Basic Earnings (Loss) Per Share, Before Extraordinary Item $ (.29) $ (.66) Gain on Extraordinary Item, Net of Tax $ .04 Basic Earnings (Loss) Per Share $ .04 $ (.29) $ (.66) Diluted Earnings (Loss) Per Share, Before Extraordinary Item $ (.29) $ (.66) Gain on Extraordinary Item, Net of Tax $ .04 Diluted Earnings (Loss) Per Share $ .04 $ (.29) $ (.66)
See notes to consolidated financial statements. 33 [LOGO OF FIDELITY FEDERAL BANCORP] Consolidated Statements of Changes in Stockholders' Equity (In Thousands, Except Share Data)
Accumulated Comprehensive Other Common Stock Paid-in Stock Income Accumulated Comprehensive Shares Amount Capital Warrants (Loss) Deficit Income (Loss) Total -------------------------------------------------------------------------------------------- Balances, July 1, 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 Comprehensive income Net income $224 224 224 Other comprehensive income, net of tax Unrealized gain on securities 498 498 498 --------- Comprehensive income $722 ========= Sale of stock 1,379,353 1,380 1,018 2,398 Purchase of stock (2) --------------------------------------- ------------------------------------- Balances, December 31, 2001 5,987,009 $5,987 $14,692 $11 $(8,757) $ (38) $11,895 ======================================= =====================================
See notes to consolidated financial statements. 34 [LOGO OF FIDELITY FEDERAL BANCORP] Consolidated Statements of Cash Flows (In Thousands)
Six Months Year Ended Year Ended Ended December 31, December 31, December 31, 2001 2000 1999 ------------------------------------------------------------------------------------------------------- Operating Activities Net income (loss) $ 224 $ (1,156) $ (2,070) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities Provision for loan losses 1,349 670 1,345 Letter of credit valuation provision (1,450) (85) 1,069 Gain on extraordinary item, net of tax (196) Depreciation and amortization 573 491 196 Valuation allowance--affordable housing investments 58 69 331 Loans originated for sale (32,397) (5,395) (4,527) Proceeds from sale of loans 32,516 5,384 4,542 Deferred income tax benefit (384) (2,031) (1,673) Changes in Interest payable and other liabilities 542 (114) 219 Interest receivable and other assets (59) 247 594 Other (136) 214 34 -------------------------------------- Net cash provided (used) by operating activities 640 (1,706) 60 -------------------------------------- Investing Activities Purchases of securities available for sale (2,000) Proceeds from maturities of securities available for sale 5,724 3,639 2,463 Proceeds from redemption of FHLB stock 1,300 Net change in loans 1,971 (11,484) 12,069 Purchase of premises and equipment (627) (794) (231) Proceeds from sales of premises and equipment 235 110 Funding on outstanding letters of credit (3,038) (600) (450) -------------------------------------- Net cash provided (used) by investing activities 2,265 (7,829) 13,851 -------------------------------------- Financing Activities Net change in Noninterest-bearing, interest-bearing demand and savings deposits 5,015 (2,030) (2,022) Certificates of deposit (11,804) (6,042) 8,442 Proceeds from long-term debt 7,470 2,000 Repayment of long-term debt (6,312) (1,663) (5,684) Sale of stock 2,398 3,000 -------------------------------------- Net cash provided (used) by financing activities (3,233) (4,735) 736 --------------------------------------
35 [LOGO OF FIDELITY FEDERAL BANCORP] Consolidated Statements of Cash Flows (In Thousands) (Continued)
Six Months Year Ended Year Ended Ended December 31, December 31, December 31, 2001 2000 1999 ------------------------------------------------------------------------------------------------------- Net Change in Cash and Cash Equivalents $ (328) $(14,270) $14,647 Cash and Cash Equivalents, Beginning of Period 16,644 30,914 16,267 -------------------------------------- Cash and Cash Equivalents, End of Period $ 16,316 $ 16,644 $30,914 ====================================== Additional Cash Flows Information Interest paid $ 7,941 $ 8,448 $ 4,211 Income tax paid (refunded) (80) 727 Stock issued in exchange for partnership operating cash flow deficit guarantees and management services 1,265
See notes to consolidated financial statements. 36 [LOGO OF FIDELITY FEDERAL BANCORP] 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 accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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. 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 three 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. United formed a new subsidiary, United Fidelity Finance, LLC, during the fourth quarter of 2001, which is currently inactive. 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. 37 [LOGO OF FIDELITY FEDERAL BANCORP] 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. 38 [LOGO OF FIDELITY FEDERAL BANCORP] 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, 2001, 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 statements 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. All outstanding potentially dilutive instruments were anti-dilutive. Reclassification of certain amounts in the 2000 consolidated financial statements has been made to conform to the 2001 presentation. 39 [LOGO OF FIDELITY FEDERAL BANCORP] 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, 2001 was $100. Investment Securities Available for Sale Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------------------------------------------- December 31, 2001 Mortgage-backed securities $18,137 $ 49 $(112) $18,074 =============================================== December 31, 2000 Mortgage-backed securities $21,888 $(887) $21,001 =============================================== Securities with a carrying value of $18,074 and $20,727 were pledged at December 31, 2001 and 2000 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 2001 2000 ------------------------------------------------------------------------------- Real estate mortgage loans First mortgage loans Conventional $ 43,929 $ 47,809 Construction 513 1,274 Commercial 6,114 6,873 Multifamily 3,856 4,350 Home equity loans 4,577 5,274 Purchased loans 745 1,753 Commercial loans--other than secured by real estate 1,848 2,305 Consumer loans 44,988 40,125 ------------------------ Total loans 106,570 109,763 Allowance for loan losses (2,138) (1,921) ------------------------ Total loans, net of the allowance for loan losses $104,432 $107,842 ======================== 40 [LOGO OF FIDELITY FEDERAL BANCORP] Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) Multifamily first mortgage loans are loans made to affordable housing developments. An additional $973 in multifamily loans is included in construction loans at December 31, 2000.
Six Months Year Ended Year Ended Ended December 31, December 31, December 31, 2001 2000 1999 ------------------------------------------------------------------------------------------ Allowance for Loan Losses Balances, beginning of period $1,921 $2,021 $3,521 Provision for losses 1,349 670 1,345 Recoveries on loans 269 396 32 Loans charged off (1,401) (1,166) (2,877) ----------------------------------------- Balances, end of period $2,138 $1,921 $2,021 =========================================
Information on impaired loans is summarized below:
December 31 2001 2000 ----------------------------------------------------------------------------------------------- Impaired loans with an allowance $4,000 $3,696 Impaired loans without an allowance 2,762 ----------------------- Total impaired loans $6,762 $3,696 ======================= Allowance for impaired loans (included in allowance for loan losses) $1,273 $ 384 =======================
Six Months Year Ended Year Ended Ended December 31, December 31, December 31, 2001 2000 1999 ------------------------------------------------------------------------------------------ Average balance of impaired loans $5,856 $7,298 $13,548 Interest income recognized on impaired loans 496 1,008 663 Cash-basis interest included above 492 1,045 614
41 [LOGO OF FIDELITY FEDERAL BANCORP] 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. Multifamily letters of credit, an off-balance sheet item, carry the same risk characteristics as conventional loans and totaled $30,479 and $43,800 at December 31, 2001 and 2000, respectively.
Six Months Year Ended Year Ended Ended December 31, December 31, December 31, 2001 2000 1999 ------------------------------------------------------------------------------------------ Letter of credit valuation allowance Balances, beginning of year $5,153 $5,787 $5,168 Provision (1,450) (85) 1,069 Recoveries 38 51 Funding of outstanding letters of credit (3,076) (600) (450) --------------------------------------- Balances, end of year $ 665 $5,153 $5,787 =======================================
Premises and Equipment December 31 2001 2000 ------------------------------------------------------------------------------- Land $1,810 $1,695 Building and land improvements 5,601 5,727 Furniture, fixtures and equipment 2,311 2,454 ----------------------- Total cost 9,722 9,876 Accumulated depreciation (3,713) (4,029) ----------------------- Net $6,009 $5,847 ======================= 42 [LOGO OF FIDELITY FEDERAL BANCORP] 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, 2001 and 2000 are investments of $487 and $791 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, 2001 are as follows: Percentage and Type of Amount of Number of Partnership Interest Investment Partnerships -------------------- ---------- ------------ 1%--General (58) 15 1%--General and 31%--Limited 62 1 1%--General and 26%--Limited 87 1 10%--Limited 271 1 10%--Limited 104 1 99%--Limited 21 2 Fidelity records income on the equity method in the income and losses of the limited partnerships, which resulted in losses of $100, $103 and $46 during the years ended December 31, 2001 and 2000 and the six months ended December 31, 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 $319, $375 and $193 for the years ended December 31, 2001 and 2000 and six months ended December 31, 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, 2001 and 2000 and six months ended December 31, 1999 are as follows: December 31 2001 2000 ------------------------------------------------------------------------------- Combined condensed balance sheets (unaudited) Assets Cash $ 510 $ 412 Land and property 51,754 53,226 Other assets 2,799 1,832 ------------------------- Total assets $55,063 $55,470 ========================= Liabilities Notes payable $41,850 $40,958 Other liabilities 3,530 3,133 ------------------------- Total liabilities 45,380 44,091 Partners' equity 9,683 11,379 ------------------------- Total liabilities and partners' equity $55,063 $55,470 ========================= 43 [LOGO OF FIDELITY FEDERAL BANCORP] Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data)
Six Months Year Ended Year Ended Ended December 31, December 31, December 31, 2001 2000 1999 ------------------------------------------------------------------------------------------ Combined condensed statements of operations (unaudited) Total revenue $ 5,357 $ 5,681 $ 3,481 Total expenses 7,646 8,094 4,539 --------------------------------------- Net loss $(2,289) $(2,413) $(1,058) =======================================
Approximately $3,100 and $2,647 of the notes payable are due to Fidelity from these partnerships at December 31, 2001 and 2000, and specific reserves on these notes receivable of $245 and $237 are included in the Company's allowance for loan losses at December 31, 2001 and 2000. Fidelity wrote down its investment in limited partnerships, in addition to the losses recorded, by $204, $249 and $310 during the years ended December 31, 2001 and 2000 and six months ending December 31, 1999, based on the performance of the underlying real estate operations. Included in other assets is interest receivable as follows: December 31 2001 2000 ------------------------------------------------------------------------------ Interest receivable on loans $493 $580 Interest receivable on investment securities and other 149 148 -------------- Total interest receivable $642 $728 ============== Deposits December 31 2001 2000 ------------------------------------------------------------------------------- Non-interest bearing transaction accounts $ 5,008 $ 4,305 Interest-bearing transaction accounts 10,922 18,840 Money market deposit accounts 13,441 1,795 Savings accounts 4,604 4,020 Certificates of $100 or more 14,378 13,026 Other certificates and time deposits 71,802 84,958 ------------------- Total deposits $120,155 $126,944 =================== 44 [LOGO OF FIDELITY FEDERAL BANCORP] Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) Certificates maturing in years ending December 31: 2002 $38,561 2003 32,725 2004 12,244 2005 1,274 2006 1,376 --------- $86,180 ========= Long-Term Debt
December 31 2001 2000 -------------------------------------------------------------------------------------- Note payable, 8.42% adjusted annually, payable $8 per month, including interest, due September 2010, secured by specific multi-family mortgages $ 978 $ 975 Note payable, 8.42% adjusted annually, payable $13 per month, including interest, due September 2010, secured by specific multi-family mortgages 1,495 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 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 6,000 7,000 Federal Home Loan Bank advances, due at various dates through 2010 (weighted-average rates of 5.48% and 6.72% at December 31, 2001 and 2000) 12,333 9,903 Junior subordinated notes, 12.00%, interest paid semi-annually, due April 2004, unsecured 125 Note payable, 7.00%, interest paid monthly, due September 2002, secured by United guarantee 725 ----------------- Total long-term debt $24,650 $23,842 =================
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 $36,018, Fidelity had $18,074 of investment securities pledged at December 31, 2001. 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 $12,317 at December 31, 2001 as compared to $13,939 at December 31, 2000. 45 [LOGO OF FIDELITY FEDERAL BANCORP] Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) The scheduled principal reduction of borrowings at December 31, 2001, is as follows: 2002, $9,571; 2003, $4,521: 2004, $148; 2005, $6,025; 2006, $27; and thereafter, $4,358. Extraordinary Gain In 2001, the Company liquidated a $1,000 senior note for $675 and recorded a gain of $325. Tax of $129 was recorded and the net gain of $196 is reflected as an extraordinary gain. Loan Servicing Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others totaled $54,944, $40,858 and $40,693 at December 31, 2001, 2000 and 1999. The aggregate fair value of capitalized mortgage servicing rights at December 31, 2001 and 2000 approximated $687 and $511. Comparable market prices were used to estimate fair value.
Six Months Year Ended Year Ended Ended December 31, December 31, December 31, 2001 2000 1999 ------------------------------------------------------------------------------------------ Mortgage servicing rights Balances, beginning of period $431 $430 $409 Servicing rights capitalized 274 54 45 Amortization of servicing rights (73) (53) (24) ------------------------------------ Balances, end of period $632 $431 $430 ====================================
46 [LOGO OF FIDELITY FEDERAL BANCORP] Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) Income Tax
Six Months Year Ended Year Ended Ended December 31, December 31, December 31, 2001 2000 1999 ------------------------------------------------------------------------------------------------- Income tax benefit Currently payable Federal $ (89) $ 662 State $ 2 Deferred Federal (390) (1,822) (1,356) State (34) (209) (317) ------------------------------------ Total income tax benefit $(513) $(1,369) $(1,671) ==================================== Reconciliation of federal statutory to actual tax benefit Federal statutory income tax at 34% $(121) $ (859) $(1,272) Effect of state income taxes 4 (138) (208) Nondeductible expenses (22) 3 Affordable housing tax credits and other (374) (375) (191) ------------------------------------ Actual tax benefit $(513) $(1,369) $(1,671) ====================================
47 [LOGO OF FIDELITY FEDERAL BANCORP] Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) The components of the deferred tax asset are as follows: December 31 2001 2000 ------------------------------------------------------------------------------- Assets Allowance for loan losses $3,344 $3,054 Valuation for letters of credit 145 1,498 Unrealized gain/loss on available-for-sale securities 25 351 Alternative minimum tax credit 81 71 Low income housing credit carryforward 1,610 1,311 State net operating loss carryforward 1,020 834 Federal net operating loss carryforward 2,520 1,386 State income tax 131 105 Other 149 6 --------------- Total assets 9,025 8,616 --------------- Liabilities Depreciation and amortization (19) (6) Differences in accounting for certain accrued liabilities (14) Differences in basis of FHLB stock (66) (66) Basis differential on certain partnership interests (1,435) (1,128) Differences in accounting for loan servicing rights (277) (171) --------------- Total liabilities (1,811) (1,371) --------------- $7,214 $7,245 =============== At December 31, 2001, Fidelity has federal net operating loss carryforwards for tax purposes totaling $7,412. These loss carryforwards expire in varying amounts through the year 2021. Fidelity has state net operating loss carryforwards for tax purposes of $9,809. These loss carryforwards expire in varying amounts through the year 2016. Fidelity has affordable housing credit carryforwards of $1,610. These carryforwards expire in varying amounts through the year 2020. In addition, Fidelity has an alternative minimum tax credit carryforward of $81. 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 $3,540 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 $1,610 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. 48 [LOGO OF FIDELITY FEDERAL BANCORP] 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 sheets. 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, 2001 and 2000, commitments to extend credit, which represent financial instruments whose contract amount represents credit risk, were $9,133 and $8,518. 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, 2001 and 2000 was $2,566 and $15,612. 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, 2001 and 2000 was $27,923 and $28,188. Fidelity, at December 31, 2000, also had standby letters of credit of $96 to guarantee the performance of a customer to a third party. 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 that 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. 49 [LOGO OF FIDELITY FEDERAL BANCORP] 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, and in 2001, permitted United to transfer, in the form of a dividend, two real estate properties to Fidelity. 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 offbalance 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, 2001 and 2000, 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. At December 31, 2001, United was in compliance with the targets included within that plan. The Agreement did set a target level to reduce its classified assets to 50% or less of core capital plus the allowance for loan losses and the letter of credit valuation reserves. United's ratio of classified assets to core capital plus the allowance for loan losses and letter of credit valuation reserves was 31.5% at December 31, 2001. 50 [LOGO OF FIDELITY FEDERAL BANCORP] 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, 2001 Total risk-based capital* (to risk- weighted assets) $17,085 14.4% $9,497 8.0% $11,871 10.0% Tier 1 capital* (to risk-weighted assets) 12,716 10.7 4,748 4.0 7,122 6.0 Core capital* (to adjusted total assets) 12,716 8.5 5,998 4.0 7,497 5.0 Core capital (to adjusted tangible assets) 12,716 8.5 2,999 2.0 N/A N/A Tangible capital (to adjusted total assets) 12,716 8.5 2,249 1.5 N/A 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 N/A Tangible capital (to adjusted total assets) 13,327 8.4 2,375 1.5 N/A N/A
*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 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. 51 [LOGO OF FIDELITY FEDERAL BANCORP] Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) At December 31, 2001, 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 taken, or has refrained from taking, as applicable, the actions requested by the OTS. United is in compliance with the provisions of the supervisory agreement at December 31, 2001. At month-end measurement dates during the fourth quarter of 2001, United's concentration of consumer loans exceeded the concentration limit set forth in the agreement. However, at December 31, 2001, United was in compliance with the 30% limitation. Event Subsequent to Financial Statement Date - Commercial Lending In February 2002, the Bank received authority from the OTS to engage in commercial lending activity on a limited basis, as outlined in the Bank's business plan. 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, 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 December 31, 2001, 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). 52 [LOGO OF FIDELITY FEDERAL BANCORP] Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) The consideration paid by Pedcor included $3,000 in cash $(3.00 per share), a five-year guarantee to United in an aggregate amount up to $1,500 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 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, 2001 and 2000 was $917 and $1,126 and is included in other assets. In January 2001, Fidelity 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. For every 4.6 shares of Fidelity held on the record date, shareholders could subscribe to purchase one share of Fidelity at $1.55. All shareholders had the right to oversubscribe for shares not purchased by other shareholders based on their prorated ownership in Fidelity. The rights offering was oversubscribed and completed in June 2001. Fidelity raised $1,500, net of costs associated with the offering. The shares purchased by shareholders with these funds were issued in July 2001. In September 2001, Fidelity filed a second registration statement for a stockholder rights offering with the Securities and Exchange Commission. A total of 650,000 shares were registered in this filing. For every 8.6 shares of Fidelity held on the record date, shareholders could subscribe to purchase one share of Fidelity at $2.50. All shareholders had the right to oversubscribe for shares not purchased by other shareholders based on their pro-rated ownership in Fidelity. The rights offering was completed in November 2001. Fidelity raised $888, net of costs associated with the offering. The shares purchased by shareholders with these funds were issued in December 2001. In December 2001, Fidelity filed a third registration statement for a debt and equity rights offering with the Securities and Exchange Commission. Subscription rights were distributed to persons who owned common stock as of the close of business on December 19, 2001 to purchase $1,500 of 9.00% unsecured junior subordinated notes due February 28, 2009 and 500,000 warrants representing the right to purchase shares of common stock at $3.00 per share, less the purchase price of the warrant. The subscription rights for the notes and warrants will expire on February 28, 2002. Benefit Plans Fidelity is a participant in the Financial Institutions Retirement Fund (FIRF). This defined-benefit plan is a multiemployer 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 did not exceed the value of vested benefits in the aggregate as of June 30, 2001, the date of the latest actuarial valuation. Plan expense of $54 was recognized during 2001 compared to none in 2000 and none during six months ended December 31, 1999. The plan provides pension benefits for substantially all of Fidelity's employees. 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 $16, $15 and $8 for the years ended December 31, 2001 and 2000 and the six months ended December 31, 1999. 53 [LOGO OF FIDELITY FEDERAL BANCORP] Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) 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 $2,958 Composition charge (7) Loans charged off (net of recoveries of $219) (533) New loans, including renewals 629 Payments, etc., including renewals (99) -------- Balances, end of year $2,948 ======== Total internally classified related party loans included in the total related party loans at December 31, 2001 and 2000 were $2,913 and $2,951. Reserves for these classified related party loans totaled $48 and are included in the allowance for loan losses. Deposits from related parties held by the Company at December 31, 2001 and 2000 totaled $589 and $593. Fidelity completed a sale of a parcel of real estate in Adrian, Michigan to Pedcor Investments, a related entity of Pedcor Holdings, for $165,000. Fidelity also completed a sale of two second mortgage loans at a discount to a stockholder of Pedcor for $500,000. Pedcor has also been providing management services to the partnerships in which Fidelity is a general partner at no cost since May 2000, in accordance with the provisions of the sale of stock to Pedcor in May 2000. Stock Option Plans Under Fidelity's stock option plans, Fidelity grants stock option awards which vest and become exercisable at various dates. During the years ended December 31, 2001 and 2000 and the six months ended December 31, 1999, Fidelity authorized the grant of options for up to 10,000, 148,500 and 3,000 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: 54 [LOGO OF FIDELITY FEDERAL BANCORP] Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data)
Six Months Year Ended Year Ended Ended December 31, December 31, December 31, 2001 2000 1999 ----------------------------------------------------------------------------------------------------- Risk-free interest rates 5.3% 6.5% 6.0% Dividend yields 0.0% 0.0% 0.0% Volatility factors of expected market price of common stock 28.1% 29.6% 28.9% Weighted-average expected life of the options 10 years 10 years 10 years
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 Year Ended Ended December 31, December 31, December 31, 2001 2000 1999 ----------------------------------------------------------------------------------------------------- Net income (loss) As reported $224 $(1,156) $(2,070) Pro forma 198 (1,227) (2,076) Basic earnings (loss) per share As reported $.04 $ (.29) $ (.66) Pro forma .04 (.31) (.66) Diluted earnings (loss) per share As reported $.04 $ (.29) $ (.66) Pro forma .04 (.31) (.66)
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 years ended December 31, 2001 and 2000 and the six months ended December 31, 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. 55 [LOGO OF FIDELITY FEDERAL BANCORP] Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) At December 31, 2001, there were 90,206 options available for grant. A summary of the stock options activity for the Directors' Plan is as follows: December 31 2001 2000 1999 ----------------------------------------------------------------------------- Shares under option Outstanding at beginning of year 152,313 118,293 118,293 Granted 36,000 Forfeited/expired (8,740) (1,980) Outstanding at end of year 143,573 152,313 118,293 Exercisable at end of year 143,573 152,313 118,293 Weighted option price per share Exercisable $7.00 $7.05 $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. 56 [LOGO OF FIDELITY FEDERAL BANCORP] Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) At December 31, 2001, there were 49,450 options available for grant. A summary of the stock options activity for the 1995 Plan is as follows: December 31 2001 2000 1999 ------------------------------------------------------------------------------ Shares under option Outstanding at beginning of year 139,143 80,278 77,278 Granted 47,500 75,000 3,000 Forfeited/expired (16,135) Outstanding at end of year 186,643 139,143 80,278 Exercisable at end of year 153,343 130,243 47,620 Weighted option price per share Exercisable $5.91 $6.33 $10.16 Granted 1.57 4.00 3.01 Weighted-average fair value of options granted during the year $0.82 $0.82 $1.64 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. 57 [LOGO OF FIDELITY FEDERAL BANCORP] 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 is 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 $665, 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:
2001 2000 ----------------------------------------- Carrying Fair Carrying Fair December 31 Amount Value Amount Value ----------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 16,316 $16,316 $ 16,644 $ 16,644 Investment securities available for sale 18,074 18,074 21,001 21,001 Loans, net 104,432 105,705 107,842 107,806 Interest receivable 642 642 728 728 FHLB stock 2,620 2,620 2,620 2,620 Liabilities Deposits 120,155 122,877 126,944 127,488 Long-term debt 24,650 25,839 23,842 24,188 Interest payable 898 898 338 338 Standby letters of credit 665 665 5,153 5,153
58 [LOGO OF FIDELITY FEDERAL BANCORP] 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 Sheets December 31 2001 2000 ---------------------------------------------------------------------------- Assets Cash and cash equivalents $ 2 $ 971 Investment in common stock of subsidiaries 16,440 15,008 Loans, net 2,317 2,452 Subordinated debentures and other loan receivables from subsidiaries 2,875 2,875 Income tax receivable 2,852 2,508 Other assets 1,238 1,474 -------------------- Total assets $25,724 $25,288 ==================== Liabilities Long-term debt $12,796 $14,416 Letter of credit valuation allowance 300 1,370 Other liabilities 733 727 -------------------- Total liabilities 13,829 16,513 Stockholders' Equity 11,895 8,775 -------------------- Total liabilities and stockholders' equity $25,724 $25,288 ==================== 59 [LOGO OF FIDELITY FEDERAL BANCORP] Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) Condensed Statements of Income
Six Months Year Ended Year Ended Ended December 31, December 31, December 31, 2001 2000 1999 ----------------------------------------------------------------------------------------------------- Income Dividends from subsidiaries Interest income $ 652 $ 711 $ 485 Other income 39 21 2 ------------------------------------ Total income 691 732 487 ------------------------------------ Expense Interest expense 1,375 1,412 777 Provision for loan losses 595 100 284 Letter of credit valuation provision (715) (735) Other expenses 622 1,186 293 ------------------------------------ Total expense 1,877 2,698 619 ------------------------------------ Loss Before Income Tax and Equity in Undistributed (Distributions in Excess of) Income of Subsidiaries (1,186) (1,966) (132) Income Tax Benefit (473) (779) (52) ------------------------------------ Loss Before Equity in Undistributed (Distributions in Excess of) Income of Subsidiaries (713) (1,187) (80) Equity in Undistributed (Distributions in Excess of) Income of Subsidiaries 741 31 (1,990) ------------------------------------ Net Income (Loss) Before Extraordinary Item 28 (1,156) (2,070) Gain on Extraordinary Item, Net of Tax 196 ------------------------------------ Net Income (Loss) $ 224 $(1,156) $(2,070) ====================================
60 [LOGO OF FIDELITY FEDERAL BANCORP] Notes to Consolidated Financial Statements (Dollar Amounts in Thousands, Except Share Data) Condensed Statements of Cash Flows
Six Months Year Ended Year Ended Ended December 31, December 31, December 31, 2001 2000 1999 ------------------------------------------------------------------------------------------------- Gain on Extraordinary Item, Net of Tax $ (196) Operating Activities Net income (loss) 224 $(1,156) $(2,070) Adjustments to reconcile net income (loss) to net cash used by operating activities Depreciation and amortization 11 13 8 Provision for loan losses 595 100 284 Letter of credit valuation provision (715) (735) Funding on outstanding letters of credit (355) (300) (450) Undistributed net income of subsidiaries (741) (31) 1,990 (Increase) decrease in other assets (119) (1,801) 127 (Increase) decrease in other liabilities (149) 557 (97) ------------------------------------ Net cash used by operating activities (1,445) (2,618) (943) ------------------------------------ Investing Activities Capital contributions to subsidiaries (193) (2,197) Principal payments received on notes from subsidiaries 2,000 Net change in loans (460) (391) 1,363 ------------------------------------ Net cash provided (used) by investing activities (653) (588) 1,363 ------------------------------------ Financing Activities Repayment of long-term debt (2,740) (532) (2,196) Proceeds from issuance of long-term debt 1,471 Sale of common stock 2,398 4,265 ------------------------------------ Net cash provided (used) by financing activities 1,129 3,733 (2,196) ------------------------------------ Change in Cash and Cash Equivalents (969) 527 (1,776) Cash and Cash Equivalents, Beginning of Period 971 444 2,220 ------------------------------------ Cash and Cash Equivalents, End of Period $ 2 $ 971 $ 444 ====================================
61 [LOGO OF FIDELITY FEDERAL BANCORP] Corporation Information Shareholder Inquiries If you have inquiries or questions regarding your Fidelity Federal Bancorp Shareholder account, call shareholder relations at 800.280.8280 or 812.424.0921 ext. 2226. Stock Transfers, Dividend Payments Dividend Reinvestment Fidelity Federal Bancorp Attn: Debbie Fritz, Shareholder Relations 18 NW Fourth St. PO Box 1347 Evansville, IN 47706-1347 Fidelity Federal Bancorp offers its Common shareholders a no-cost way to purchase stock, and when applicable, reinvest cash dividends. For additional information about this plan, contact us at the above address or phone number. Financial Information If you are seeking financial information, contact: Mark A. Isaac, Controller Fidelity Federal Bancorp 18 NW Fourth St. PO Box 1347 Evansville, IN 47706-1347 812.424.0921 ext. 3319 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 Common Stock Information NASDAQ Ticker Symbol: FFED Market Makers Monroe Securities Inc. Spear, Leeds & Kellogg Hill, Thompson, Magid & Co. Natcity Investments, Inc. Products and Services For specific information on products and services offered by the Company's banking subsidiary, United Fidelity Bank, fsb, call 800.280.8280 or 812.424.0921 Corporate Headquarters Fidelity Federal Bancorp 18 NW Fourth St. PO Box 1347 Evansville, IN 47706-1347 800.280.8280 812.424.0921 Annual Meeting Tuesday, April 30, 2002 10:00 am (Central Daylight Time) Sheraton Inn 8787 Keystone Crossing Indianapolis, Indiana 46240 62 [LOGO OF FIDELITY FEDERAL BANCORP] Fidelity Federal Bancorp Board of Directors William R. Baugh Chairman Emeritus, Fidelity Federal Bancorp Director, United Fidelity Bank, fsb Retired President, United Fidelity Bank, fsb Paul E. Becker President, Gaither Technologies STC Director, United Fidelity Bank, fsb Bruce A. Cordingley President and Chief Executive Officer, Pedcor Investments President and Chief Executive Officer, Pedcor Bancorp Director, International City Bank, N.A. (Long Beach, CA) Director, United Fidelity Bank, fsb Jack Cunningham Chairman of the Board, United Fidelity Bank, fsb Chairman of the Board, Fidelity Federal Bancorp Port of Evansville Wharfmaster Donald R. Neel 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 63 [LOGO OF FIDELITY FEDERAL BANCORP] 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 President, Chief Financial Officer and Treasurer United Fidelity Bank, fsb Officers Donald R. Neel President and Chief Executive Officer B. Eugene Dawson Senior Vice President, Commercial Lending Mark A. Isaac Senior Vice President, Chief Financial Officer Thomas D. Wuerth Senior Vice President, Consumer Lending and Retail Banking Michael B. Carroll Vice President, Corporate Planning and Risk Management Karen F. Carter Vice President, Compliance and Loan Review Richard J. Goebel Vice President, Operations Nancy K. Sweazey Vice President, Human Resources William P. Wisuri Vice President, Consumer Lending Gregory W. Brown Assistant Vice President, Assistant Controller W. Ray Buckman Assistant Vice President, Consumer Lending Lawrence H. Coffman Assistant Vice President, Consumer Lending Shanon L. Delong Assistant Vice President, Internal Auditing Marilyn A. Doyle Assistant Vice President, Marketing and Sales Debbie M. Fritz Assistant Vice President, Facilities and Purchasing Dannel R. Garness Assistant Vice President, Loan Administration James W. Goodwin Assistant Vice President, Consumer Lending Carrie L. Howard Assistant Vice President, Consumer Lending Barbara B. Hubbard Assistant Vice President, Collections G. Andrew Jenkins Assistant Vice President, Mortgage Lending Kristi R. Krack Assistant Vice President, Eastside Branch Manager Diane T. Tabor Assistant Vice President, Assistant Controller D. Brent Taylor Assistant Vice President, Branch Administration 64