-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A0pg4C0QV2t5eN10w2k/m/BpYxRdSudtCkO0lqhYduoxmIbnOmaIhT9siYm68uop eyyXnK/yqJpvOmJPHka2Kg== 0000926274-02-000247.txt : 20020515 0000926274-02-000247.hdr.sgml : 20020515 20020515163842 ACCESSION NUMBER: 0000926274-02-000247 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIDELITY FEDERAL BANCORP CENTRAL INDEX KEY: 0000910492 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 351894432 STATE OF INCORPORATION: IN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22880 FILM NUMBER: 02653082 BUSINESS ADDRESS: STREET 1: 700 S GREEN RIVER ROAD STREET 2: SUITE 2000 CITY: EVANSVILLE STATE: IN ZIP: 47715 BUSINESS PHONE: 8124692100 MAIL ADDRESS: STREET 1: 18 NW FOURTH ST STREET 2: PO BOX 1347 CITY: EVANSVILLE STATE: IN ZIP: 47706-1347 10-Q 1 ffb-302q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended March 31, 2002 FIDELITY FEDERAL BANCORP ------------------------------------------------------ (Exact name of registrant as specified in its charter) Indiana 0-22880 35-1894432 - ---------------------------- ---------- ------------- (State of other jurisdiction Commission (IRS Employer of Incorporation of File No. Identification No.) Organization) 18 NW Fourth Street Evansville, Indiana 47708 --------------------------------------------------- (Address of principal executive offices) (Zip Code) (812) 424-0921 -------------------------------------------------- Registrant's telephone number, including area code Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- As of April 30, 2002, there were 6,061,914 shares of the Registrant's common stock, $1 stated value, issued and outstanding. FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Index Page PART I - FINANCIAL INFORMATION ITEM 1--Financial Statements: Condensed Consolidated Balance Sheets.................................. 3 Condensed Consolidated Statements of Income............................ 4 Condensed Consolidated Statements of Changes in Stockholders' Equity... 5 Condensed Consolidated Statements of Cash Flows........................ 6 Notes to Condensed Consolidated Financial Statements................... 7 ITEM 2--Management's Discussion and Analysis of Results of Operations and Financial Condition................................................ 9-15 ITEM 3--Quantitative and Qualitative Disclosures about Market Risk...... 15 PART II - OTHER INFORMATION............................................... 16 SIGNATURES................................................................ 17 2 Item 1 - Financial Statements Part I - Financial Information Fidelity Federal Bancorp And Subsidiaries Condensed Consolidated Balance Sheets (In thousands except share data)
March 31, December 31, 2002 2001 --------- ------------ (Unaudited) Assets Cash and due from banks $ 1,013 $ 1,711 Interest-bearing demand deposits 14,126 14,605 --------- --------- Cash and cash equivalents 15,139 16,316 Investment securities available for sale 26,718 18,074 Notes receivable 235 0 Loans, net of allowance for loan losses of $871 and $2,138 99,961 104,432 Premises and equipment 5,944 6,009 Federal Home Loan Bank of Indianapolis stock 2,620 2,620 Deferred income tax receivable 7,384 7,214 Other real estate owned 1,910 0 Interest receivable and other assets 5,175 4,994 --------- --------- Total assets $ 165,086 $ 159,659 ========= ========= Liabilities Deposits Non-interest bearing $ 5,150 $ 5,008 Interest bearing 108,470 115,147 --------- --------- Total deposits 113,620 120,155 Short-term borrowings 11,000 0 Long-term debt 24,930 24,650 Valuation allowance for letters of credit 431 665 Other liabilities 2,862 2,294 --------- --------- Total liabilities 152,843 147,764 --------- --------- Commitments and Contingencies -- -- 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--6,061,915 shares 6,062 5,987 Additional paid-in capital 14,780 14,692 Stock warrants 261 11 Retained earnings (8,672) (8,757) Accumulated other comprehensive loss (188) (38) --------- --------- Total stockholders' equity 12,243 11,895 --------- --------- Total liabilities and stockholders' equity $ 165,086 $ 159,659 ========= =========
See notes to condensed consolidated financial statements. 3 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Condensed Consolidated Statements of Income (In Thousands, Except Share Data) (Unaudited)
Three Months Ended March 31, -------------------- 2002 2001 ------- ------- Interest Income Loans receivable $ 2,173 $ 2,426 Investment securities--taxable 310 344 Deposits with financial institutions 50 212 Other dividend income 40 52 ------- ------- Total interest income 2,573 3,034 ------- ------- Interest Expense Deposits 1,133 1,775 Short-term borrowings 14 1 Long-term debt 455 507 ------- ------- Total interest expense 1,602 2,283 ------- ------- Net Interest Income 971 751 Provision for loan losses 0 284 ------- ------- Net Interest Income After Provision for Loan Losses 971 467 ------- ------- Other Income Service charges on deposit accounts 86 83 Net gains on loan sales 264 63 Letter of credit fees 125 129 Agent fee income 255 233 Gain on disposition of rate swap 72 0 Servicing fees on loans sold 37 27 Other income 91 141 ------- ------- Total non-interest income 930 676 ------- ------- Other Expenses Salaries and employee benefits 937 696 Net occupancy 95 91 Equipment 87 60 Data processing 80 91 Deposit insurance 15 62 Legal and professional 62 55 Advertising 90 55 Letter of credit valuation provision 0 (284) Amortization of intangible assets 52 52 Loss on investment in partnerships 36 55 Correspondent bank charges 33 38 Other expense 399 275 ------- ------- Total non-interest expense 1,886 1,246 ------- ------- Income (Loss) Before Income Tax 15 (103) Income tax benefit (71) (127) ------- ------- Net Income $ 86 $ 24 ======= ======= Basic Earnings Per Share $ 0.01 $ 0.01 Diluted Earnings Per Share $ 0.01 $ 0.01
See notes to condensed consolidated financial statements 4 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity (In Thousands, Except Share Data) Three Months Ended March 31, ---------------------- 2002 2001 -------- -------- Beginning Balance $ 11,895 $ 8,775 Comprehensive income Net income 86 24 Other comprehensive income - net of tax Unrealized gain (loss) on securities (150) 356 -------- -------- Comprehensive income (64) 380 Issuance of stock 162 Issuance of stock warrants 250 -------- -------- Balances, March 31 (unaudited) $ 12,243 $ 9,155 ======== ======== See notes to consolidated financial statements. 5 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, ---------------------- 2002 2001 -------- -------- Operating Activities Net income $ 86 $ 24 Adjustments to reconcile net income to net cash provided (used) by operating activities Provision for loan losses 284 Letter of credit valuation provision (284) Depreciation 154 95 Valuation allowance--affordable housing investments 14 14 Loans originated for sale (5,622) (3,476) Proceeds from sale of loans 5,623 3,497 Changes in Interest payable and other liabilities 568 826 Interest receivable and other assets (319) (7) Other 8 -------- -------- Net cash provided (used) by operating activities (512) 973 -------- -------- Investing Activities Purchases of securities available for sale (10,209) Proceeds from maturities of securities available for sale 1,298 1,094 Notes receivable (235) Net change in loans 2,571 (1,143) Purchase of premises and equipment (37) (89) Funding on outstanding letters of credit (234) (2,185) -------- -------- Net cash used by investing activities (6,846) (2,323) -------- -------- Financing Activities Net change in Noninterest-bearing, interest-bearing demand and savings deposits (923) 2,989 Certificates of deposit (5,612) 779 Short-term borrowings 11,000 Proceeds of long-term debt 1,777 Repayment of long-term debt (1,497) (7) Issuance of stock 162 Issuance of stock warrants 250 -------- -------- Net cash provided by financing activities 5,157 3,761 -------- -------- Net Change in Cash and Cash Equivalents (1,177) 2,411 Cash and Cash Equivalents, Beginning of Period 16,316 16,644 -------- -------- Cash and Cash Equivalents, End of Period $ 15,139 $ 19,055 ======== ======== Additional Cash Flows Information Interest paid $ 1,533 $ 1,292 Supplemental schedule of non-cash investing activity: Transfers from loans to Real Estate Owned $ 1,910
See notes to consolidated financial statements. 6 Fidelity Federal Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) o Accounting Policies The significant accounting policies followed by Fidelity Federal Bancorp ("Fidelity") and its wholly owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments which are necessary for a fair presentation of the results for the periods reported, consist only of normal recurring adjustments, and have been included in the accompanying unaudited condensed consolidated financial statements. The results of operations for the three months ended March 31, 2002 are not necessarily indicative of those expected for the remainder of the year. The condensed consolidated balance sheet at December 31, 2001 has been derived from the audited financial statements. Certain information and note disclosures normally included in the company's annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company's Form 10-K annual report for 2001 filed with the Securities and Exchange Commission. o Company Subsidiaries 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 and money market securities. Village Affordable Housing Corporation, the other subsidiary of Fidelity, was formed during the third quarter of fiscal 1998 for the purpose of owning interests in real estate. o Stockholders' Equity 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. The rights offering was oversubscribed and completed in June 2001. Fidelity raised $1.5 million 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. The rights offering was completed in November 2001. Fidelity raised $888,000, 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 $1.5 million 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 $0.50 per warrant. The offering was completed on February 28, 2002. Fidelity issued approximately $1.0 million in 9% notes and all of the 500,000 warrants, raising an additional $250,000. o Cash Dividend Fidelity's dividend policy is to pay cash or distribute stock dividends when its Board of Directors deems it to be appropriate, taking into account Fidelity's financial condition and results of operations, economic and market conditions, industry standards, and other factors, including regulatory capital requirements of its savings bank 7 subsidiary. Fidelity is not subject to any regulatory restrictions on payments to its stockholders. Fidelity's primary source of income is dividends from United Fidelity Bank ("United"). United has entered into a Supervisory Agreement ("Agreement") with the Office of Thrift Supervision ("OTS"). One of the provisions of the Agreement restricts the payments of dividends from United to Fidelity without prior written OTS approval. Fidelity is uncertain when it will pay dividends in the future and the amount of such dividends, if any. o Other Restrictions The Supervisory Agreement with the OTS is in effect until terminated, modified or suspended by the OTS. The agreement was entered into in February 1999 and 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, have taken 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. Previously, United was to refrain from commercial lending, but United received OTS approval in the first quarter of 2002 to resume commercial lending in accordance with its business plan. At March 31, 2002, United is also prohibited from taking certain actions without prior approval, including but not limited to: engaging in "sub prime" consumer lending activities; making capital distributions, including dividends to Fidelity; making any additional equity investments; real estate development 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; and engaging in any new activities not included in the strategic plan. 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 believes it is in compliance with the provisions of the supervisory agreement at March 31, 2002. o Related Party During the first quarter of 2002, a related party transaction resulted in a gain on the sale of two notes held in conjunction with advances made by the Company to certain multifamily housing partnerships in conjunction with refinancing activities previously completed. The advances had been previously charged off and had no value on Fidelity's books. The gain on the note sale totaled $223,000 along with a $72,000 gain on sale of a position in an interest rate swap. The related party was Pedcor Funding Corporation and the purchase price consisted of a 20% down payment with the remainder financed by a 10 year note totaling $235,000 at a rate of 5.25% for five years, and 6.50% for the last five years with principal paid annually and interest paid quarterly. 8 o Reclassifications Reclassifications of certain amounts in the March 31, 2001 consolidated statement have been made to conform to the March 31, 2002 presentation. Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition Special Note Regarding Forward-Looking Statements Certain matters discussed in this Quarterly Report on Form 10-Q are "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as Fidelity "believes", "anticipates", "expects", "estimates" or words of similar import. Similarly, statements that describe Fidelity's future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and which could cause actual results to differ materially from those anticipated as of the date of this report. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this report and Fidelity undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. o Results of Operations Net income for the three months ended March 31, 2002 was $86,000, compared to $24,000 for the same period last year. Book value per share increased to $2.02 from $1.99, while shareholders' equity increased 32.6% to $12.2 million from $9.2 million. This was due primarily to stock offerings completed in 2002 and 2001. Net Interest Income The following table summarizes Fidelity's average interest-earning assets and average interest-bearing liabilities with the accompanying average rates for the first quarter of 2002 and 2001:
Three Months Ended March 31, (dollars in thousands) ----------------------------- 2002 2001 ----------- ----------- Interest-earning assets $ 138,350 $ 148,004 Interest-bearing liabilities $ 139,525 $ 147,246 ----------- ----------- Net interest-earning assets or (interest-bearing liabilities) (1,175) 758 =========== =========== Average yield on: Interest-earning assets 7.09% 8.31% Interest-bearing liabilities 4.66 6.29 ----------- ----------- Net interest spread 2.43% 2.02% Net interest margin 2.39% 2.06%
The yield on interest-earning assets in the above table does not include the collection of $156,000 in interest on previously charged off loans. A company subsidiary owns general partnership interests in multi-family housing. Cash flows of certain partnerships have increased to allow repayment of interest and then principal on previously advanced loans to the partnerships. Net interest income for the first quarter of 2002 was $971,000 and was $220,000 or 29.3% more than $751,000 during the first quarter of 2001. Exclusive of the $156,000 of interest collected during the quarter, net interest income increased $64,000 over 2001 due to interest expense decreasing more than interest income, as rates have declined in 2001 and 2002. The $681,000 decrease in interest expense is a combination of a decrease of $150,000 from a lower average balance of outstanding interest-bearing liabilities plus 9 $531,000 because of decreased rates on average interest-bearing liabilities. The decrease of $617,000 in interest income exclusive of the $156,000 discussed above, is a combination of a decrease of $192,000 because of the decrease in the volume mix of average outstanding interest-bearing assets plus $425,000 because of decreased rates on average interest-earning assets. The following table sets forth the details of the rate and volume change for the first quarter of 2002 compared to the first quarter of 2001. The table does not include $156,000 of interest collected on previously charged-off loans discussed above. Three Months Ended March 31, 2002 vs 2001 Increase (Decrease) Due to change in ---------------------------- Volume Rate Total ------ ---- ----- Interest Income: Loans and mortgage-backed securities $(144) $(298) $(442) Other interest-earning assets (48) (127) (175) ----- ----- ----- Total interest-earning assets (192) (425) (617) Interest Expense: Deposits (214) (427) (641) FHLB advances and other borrowings 64 (104) (40) ----- ----- ----- Total interest-bearing liabilities (150) (531) (681) ----- ----- ----- Change in net interest income $ (42) $ 106 $ 64 ===== ===== ===== Provision for Loan Losses and Letters of Credit Valuation Provision The provision for loan losses decreased $284,000 for the three months ended March 31, 2002 compared to the first quarter of 2001. During the three months ended March 31, 2001 Fidelity increased its allowance for loan losses and reduced its letters of credit valuation reserve by $284,000 due to refinancing activities completed during the first quarter of 2001. During the first quarter of 2001, four multi-family partnerships in which Fidelity or United had outstanding classified, or impaired letters of credit, obtained non-recourse financing outside of Fidelity. One such partnership obtained alternate financing during the first quarter of 2002. Fidelity provided $234,000 and $2.2 million during the first quarters of 2002 and 2001 in previously reserved funds in order to complete the refinancing transactions. Fidelity anticipates additional refinancing activities related to multi-family loans in the second half of 2002 as efforts continue to reduce classified assets and letters of credit. The ratio of the allowance for loan losses to non-performing assets was 32.0% at March 31, 2002 compared to 182.2% at March 31, 2001. 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. Non-interest income Non-interest income for the quarter ended March 31, 2002, was $930,000 compared to $676,000 for the same period in 2001. This increase was primarily due to a gain on the sale of two notes totaling $223,000 and a $72,000 10 gain on sale of a position in an interest rate swap. Agent fees increased $22,000 over the first quarter of 2001. Other income decreased $50,000 to $91,000 for the three months ended March 31, 2002. Non-interest expense Total non-interest expense increased by $640,000 over the first quarter of 2001. Salaries and employee benefits increased $241,000 due to growth in United's consumer loan activity, the opening of a new branch late in the first quarter of 2001, and the addition of a senior commercial lending officer in anticipation of United's resumption of commercial lending activity. In February 2002, United received authority from the OTS to engage in commercial lending as outlined in United's business plan. The increase was also caused by a letter of credit valuation provision credit of $284,000 during the first quarter of 2001 which offset total expense in 2001. There was no such item in 2002. Federal deposit insurance expense decreased $47,000 in the first quarter of 2002 compared to 2001. This decrease was associated with a reduction in United's risk assessment rate in 2002. Other real estate expense increased $33,000 over the first quarter of 2001 in connection with the foreclosure of a $3.1 million non-accrual, non-residential real estate loan in the first quarter of 2002. Finally, there was a $22,000 increase in indirect dealer promotions compared to last year. Income tax benefit The income tax benefit was $71,000 for the three months ending March 31, 2002 compared to $127,000 in the same period last year, primarily due to a reduction in pre-taxable loss for the first quarter of 2002. Included in this tax benefit are tax credits of $80,000. These credits are received from Fidelity's investment in affordable housing properties and are a component of the overall return on these investments. Consideration of the need for a valuation allowance for the deferred tax asset was made at March 31, 2002 after projecting the reversal of the deferred items. These analyses were based on projected operating income in future years, action plans developed and partially implemented included in Fidelity's business plan and cost reductions. These analyses showed that it was more likely than not that all carryforwards would be utilized within the carryforward periods (federal and state) and therefore no valuation allowance was recorded. The analyses assume that Fidelity will execute approximately 75% of the initiatives included within its current business plan and then achieve 5 to 10% growth in annual earnings thereafter. The conservative level of earnings contemplated by these analyses, if achieved, will constitute for the majority of the carryforward periods, earnings levels that are below other thrift holding companies included within Fidelity's peer group. The Company, at December 31, 2001 and March 31, 2002, has not established a valuation allowance to reflect the possibility that all of these assets will not be utilized. Utilization of these deferred tax assets is based significantly upon the future profitability of the Company. Although the Company has prepared a model that indicates the deferred tax assets will be fully utilized, profitability for the three-months ended March 31, 2002, is less than that projected by the model prepared at December 31, 2001 supporting these assets. To the extent profitability does not improve, valuation allowance would be required to be established in order for the financial statements to be in conformity with accounting principles generally accepted in the United States of America. The Company has set forth reasonable plans indicating that future period profitability will increase and be more in line with the original projections, the ultimate outcome of this uncertainty on net income or earnings per share, if any, is unknown. 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 March 31, 2002 were $165.1 million, an increase of $5.4 million from $159.7 at December 31, 2001. The increase in total assets was primarily attributable to an increase in investment securities available for sale of $8.6 million, partially offset by a $4.5 million decrease in net loans. With the liquidity created by the refinancing of fixed rate 1-4 family mortgages, and with short-term FHLB advances, United invested in adjustable rate GNMA and FNMA adjustable-rate mortgage-backed securities. United has 11 chosen to sell 1-4 family fixed rate products in the secondary market and has therefore experienced declines in the amounts of those assets held. In order to replace the loss of mortgage loans outstanding, United purchased $10.2 million of adjustable-rate mortgage-backed securities at an average yield of 5.5% and projected average life of 3.5 years during the three months ended March 31, 2002. United has also committed to purchase an additional $7.7 million and $5.0 million in adjustable-rate mortgage-backed securities during April and May of 2002, respectively. Net loans decreased $4.5 during the first quarter of 2002 compared to December 31, 2001. During the first quarter of 2002 a $3.1 million non-accrual, non-residential real estate loan was foreclosed. The loan was reclassified to other real estate owned and is currently being marketed for sale. Continued paydowns received on fixed rate 1-4 family loans accounted for an additional $2.5 million decrease, which was offset partially by a $1.1 million increase in consumer loans. Late in the first quarter of 2002, United received OTS approval to resume commercial lending activities in accordance with its business plan. Total liabilities at March 31, 2002 were $152.8 million, an increase of $5.0 million from $147.8 million at December 31, 2001. The increase in total liabilities was due to increases in advances from the FHLB and federal funds purchased, which were partially offset by declines in interest-bearing deposits. Short-term borrowings increased $11.0 million since December 31, 2001 as United positioned its liability structure in an effort to improve the net interest margin in the current interest rate environment. Certificates of deposit decreased by $5.6 million since December 31, 2001 which was primarily due to the low interest rate environment and the apparent shift of funds into MMDA and other accounts that provide higher liquidity. Long-term borrowings increased slightly to $24.9 million at March 31, 2002 compared to $24.7 million at December 31, 2001. During the quarter approximately $1.5 million in 9.25% junior notes matured and were replaced with $1.0 million of 9% junior notes. A total of $775,000 was drawn on Fidelity's line of credit during the quarter to service existing debt and provide liquidity. Stockholder's equity at March 31, 2002 was $12.2 million, an increase of $348,000 from $11.9 million at December 31, 2001. The increase was primarily attributable to net income of $86,000, the completion of Fidelity's notes and warrants offering in February 2002, which provided $250,000 and the issuance of stock of $162,000. These increases were offset by a $150,000 increase in unrealized losses on securities. 12 Non-Performing Assets Non-performing assets decreased $1.1 million from December 31, 2001 to $2.7 million or 2.70% of total loans at March 31, 2002. The decrease is due to the charge down of a $3.1 million non-accrual, non-residential real estate loan to $1.9 million when foreclosed and placed in other real estate owned. The following table provides information on Fidelity's non-performing assets as of March 31, 2002 and December 31, 2001: March 31, December 31, 2002 2001 - -------------------------------------------------------------------------- (Dollars in Thousands) Non-accrual loans Consumer $ 103 $ 116 Commercial 287 3,291 Real estate mortgage 284 130 ------ ------ Total non-accrual loans 674 3,537 Restructured Consumer 104 190 Commercial -- 53 ------ ------ Total restructured loans 104 243 90 days or more past due and accruing Consumer 14 23 Commercial 21 22 ------ ------ Total 90 days or more past due and accruing 35 45 Other real estate owned $1,910 -- ------ ------ Total non-performing assets $2,723 $3,825 ====== ====== Ratio of non-performing assets to total loans 2.70% 3.59% Classified Assets and Letters of Credit March 31, December 31 2002 2001 --------- ----------- Classified assets $6,166 $7,357 Classified letters of credit 350 ------ ------ Total classified assets $6,166 $7,707 ====== ====== Classified assets and letters of credit of Fidelity totaled $6.2 million at March 31, 2002 compared to $7.7 million at December 31, 2001, a decrease of 19.5%. Total classified assets were 45.7% and 53.3% of Fidelity's capital and reserves at March 31, 2002 and December 31, 2001, respectively, and 25.6% and 31.5% 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 $10.3 million at March 31, 2002 for which management was closely monitoring the borrower's abilities to comply with payment terms. Multi-family letters of credit, an off-balance sheet item, carry the same risk characteristics as conventional loans and totaled $29.9 million at March 31, 2002 and $30.5 million at December 31, 2001. Specific allocations for letters of credit totaled 1.4% of outstanding letters of credit at March 31, 2002 compared to 2.2% at December 31, 2001. Management considers the allowance for loan losses and letter of credit valuation reserve adequate to meet losses inherent in the loan and letter of credit portfolios as of March 31, 2002. 13 The following table sets forth an analysis of the allowance for loan losses for the three months ended March 31, 2002 and the year ended December 31, 2001: Three months ended Year ended March 31, December 31, 2002 2001 --------- ------------ (dollars in thousands) Allowance for loan losses at beginning of period $ 2,138 $ 1,921 Provision for losses 1,349 Loans charged off (1,322) (1,401) Recoveries on loans 55 269 ------- ------- Allowance for loan losses at end of period $ 871 $ 2,138 ======= ======= Capital Resources United is subject to various regulatory capital requirements administered by the federal banking agencies and is assigned to a capital category. The assigned category is largely determined by three ratios that are calculated according to the regulations: total risk adjusted capital, Tier I capital, and Tier I leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios. There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. At March 31, 2002 and December 31, 2001, United is categorized as well capitalized and met all subject capital adequacy requirements. Bank Capital Ratios
Required for To be well Actual adequate capital Capitalized Amount Ratio Amount Percent Amount Percent As of March 31, 2002 Total risk-based capital (to risk-weighted assets) $16,040 13.6% $9,428 8.0% $11,785 10.0% Tier 1 capital (to risk-weighted assets) 12,020 10.2 4,714 4.0 7,071 6.0 Core capital (to adjusted total assets) 12,020 7.8 6,172 4.0 5,892 5.0 Core capital (to adjusted tangible assets) 12,020 7.8 3,086 2.0 N/A Tangible capital (to adjusted total assets) 12,020 7.8 2,315 1.5 N/A 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 Tangible capital (to adjusted total assets) 12,716 8.5 2,249 1.5 N/A
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 2003. At March 31, 2002, $1.5 million was outstanding on the line of credit. Fidelity's liquidity position may be further improved by the potential issuance of 14 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 and completed a third offering in 2002 raising an additional $1.2 million. Fidelity believes that the above actions will assist it in meeting its future liquidity needs. Fidelity has one letter of credit outstanding that backs tax-exempt bond financing for a housing development. 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 refinancing 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. Item 3 - Asset/Liability Management--Quantitative and Qualitative Disclosures about Market Risk Fidelity is subject to interest rate risk to the degree that its interest bearing liabilities, primarily deposits with short and medium term maturities, mature or reprice at different rates than its interest-earning assets. Although having liabilities that mature or reprice less frequently will be beneficial in times of rising interest rates, such an asset/liability structure will result in lower net income during periods of declining interest rates, unless off-set by other factors. The OTS utilizes a model, the "Office of Thrift Supervision Net Portfolio Value" ("NPV") model, which uses a net market value methodology to measure the interest rate risk exposure of savings associations. Under this model, an institution's "normal" level of interest rate risk in the event of an assumed change in interest rates is a decrease in the institution's NPV in an amount not exceeding 2% of the present value of its assets. Savings associations with over $300 million in assets or less than 12% risk-based capital ratio are required to file the OTS Schedule CMR. Data from Schedule CMR is used by the OTS to calculate changes in NPV (and the related "normal" level of interest rate risk) based upon certain interest rate changes (discussed below). Associations which do not meet either of the filing requirements are not required to file OTS Schedule CMR, but may do so voluntarily. United voluntarily submits a CMR quarterly to the OTS. Under the regulation, associations which must file are required to take a deduction (the interest rate risk capital component) from their total capital available to calculate their risk based capital requirement if their interest rate exposure is greater than "normal". The amount of that deduction is one-half of the difference between (a) the institution's actual calculated exposure to a 200 basis point interest rate increase or decrease (whichever results in the greater pro forma decrease in NPV) and (b) its "normal" level of exposure which is 2% of the present value of its assets. The data for March 31, 2002 is not required to be filed with the OTS until 45 day after quarter end, which coincides with the 10-Q filing. Management monitors its interest rate sensitivity during the quarter and will request the OTS to run scenarios on the NPV model to determine the change in interest rate sensitivity for management in an effort to assist management with its decision making regarding the maturities and pricing of its products. Although United has not yet submitted its CMR to the OTS for March 31, 2002, management anticipates there has been no material change from the information disclosed in Fidelity's annual report to shareholders at December 31, 2001. 15 PART II -- OTHER INFORMATION ITEM 1 Legal Proceedings: ------------------ There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Registrant's business, to which the Registrant or its subsidiaries are a party of or which any of their property is the subject. ITEM 2 Changes in Securities and Use of Proceeds: ------------------------------------------ Not applicable. ITEM 3 Defaults Upon Senior Securities: -------------------------------- Not applicable. ITEM 4 Submission of Matters to a Vote of Security Holders: ---------------------------------------------------- Submission of Matters to a Vote of Security Holders: On April 30, 2002 at 10:00 am at the Sheraton Keystone Crossing 8787 Keystone Crossing, Indianapolis, Indiana, the Annual meeting of Shareholders was held in order to vote on two matters. Matter 1 was to elect eight directors to the Board of Directors to serve until their successors are duly elected and qualified. The vote tabulation for the election of William R. Baugh was 4,876,069 for and 951,003 shares against; Paul E. Becker was 4,881,736 for and 945,366 shares against; Bruce A. Cordingley was 5,529,043 for and 298,031 shares against; Jack Cunningham was 5,526,199 for and 300,873 shares against; Donald R. Neel was 4,881,554 for and 945,518 shares against; Gerald K. Pedigo was 5,530,691 for and 296,381 shares against; Barry A. Schnakenburg was 5,530,639 for and 296,433 shares against; Phillip J. Stoffregen was 5,529,041 for and 298,031 shares against The following directors term continued after the meeting; William Baugh, Paul E. Becker, Jack Cunningham, Bruce A. Cordingley, Gerald K. Pedigo, Donald R. Neel, Barry A. Schnakenburg and Phillip Stoffregen. Matter 2 was the ratification of the appointment of the auditor of Fidelity. The vote tabulation for BKD LLP was 5,533,162 for, 55,707 shares against, and 238,203 shares abstained. ITEM 5 Other Information: ------------------ None ITEM 6 Exhibits and Reports on Form 8-K: --------------------------------- None 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIDELITY FEDERAL BANCORP Date: MAY 15, 2002 By: /s/ BRUCE A. CORDINGLEY ------------ ------------------------------------ Bruce A. Cordingley Executive Committee Chairman (Acting Principal Executive Officer) By: /s/ DONALD R. NEEL ------------------------------------ Donald R. Neel, President, CFO and Treasurer (Principal Financial Officer) 17 -----END PRIVACY-ENHANCED MESSAGE-----