-----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, JNG3zxDZ0Ni8u7mUqwWJWFTsB1VFg9WlUVeEvf3cEXvjounWJwZrw5N5k8+6AlUG iVddZqKYRJoKgRJCd2kayw== 0000926274-02-000407.txt : 20021118 0000926274-02-000407.hdr.sgml : 20021118 20021114180813 ACCESSION NUMBER: 0000926274-02-000407 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 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: 02827099 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-902q.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 September 30, 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 November 6, 2002, there were 6,607,422 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............................................... 11-18 ITEM 3--Quantitative and Qualitative Disclosures about Market Risk..... 18 ITEM 4--Controls and Procedures........................................ 18 PART II - OTHER INFORMATION.............................................. 19 SIGNATURES............................................................... 20 CERTIFICATIONS........................................................... 21-22 2 Item 1 - Financial Statements Part I - Financial Information Fidelity Federal Bancorp And Subsidiaries Condensed Consolidated Balance Sheets (In thousands except share data)
September 30, December 31, 2002 2001 --------- --------- (Unaudited) Assets Cash and due from banks $ 1,274 $ 1,711 Interest-bearing demand deposits 9,753 14,605 --------- --------- Cash and cash equivalents 11,027 16,316 Investment securities available for sale 39,354 18,074 Notes receivable 235 Loans, net of allowance for loan losses of $974 and $2,138 70,561 104,432 Premises and equipment 5,802 6,009 Federal Home Loan Bank of Indianapolis stock 2,674 2,620 Deferred income tax receivable 7,008 7,214 Other real estate owned 1,810 Interest receivable and other assets 5,947 4,994 --------- --------- Total assets $ 144,418 $ 159,659 ========= ========= Liabilities Deposits Non-interest bearing $ 4,885 $ 5,008 Interest bearing 112,909 115,147 --------- --------- Total deposits 117,794 120,155 Long-term debt 10,856 24,650 Valuation allowance for letters of credit 440 665 Other liabilities 4,220 2,294 --------- --------- Total liabilities 133,310 147,764 --------- --------- 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--6,607,423 and 5,987,009 shares 6,622 5,987 Additional paid-in capital 15,252 14,692 Stock warrants 261 11 Retained earnings (11,176) (8,757) Accumulated other comprehensive income (loss) 149 (38) --------- --------- Total stockholders' equity 11,108 11,895 --------- --------- Total liabilities and stockholders' equity $ 144,418 $ 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 Nine Months Ended September 30, September 30, 2002 2001 2002 2001 --------------------------------------------------------- Interest Income Loans receivable $ 1,896 $ 2,347 $ 6,033 $ 7,244 Investment securities--taxable 463 290 1,248 954 Deposits with financial institutions 25 93 107 458 Other dividend income 42 49 121 151 ----------- ----------- ----------- ----------- Total interest income 2,426 2,779 7,509 8,807 ----------- ----------- ----------- ----------- Interest Expense Deposits 1,127 1,589 3,400 5,158 Short-term borrowings 4 -- 25 2 Long-term debt 378 517 1,316 1,525 ----------- ----------- ----------- ----------- Total interest expense 1,509 2,106 4,741 6,685 ----------- ----------- ----------- ----------- Net Interest Income 917 673 2,768 2,122 Provision for loan losses (400) 800 (400) 1,147 ----------- ----------- ----------- ----------- Net Interest Income After Provision for Loan Losses 1,317 (127) 3,168 975 ----------- ----------- ----------- ----------- Other Income Service charges on deposit accounts 121 95 319 268 Net gains on loan sales 79 101 155 255 Net gains on investment sales -- -- 73 -- Letter of credit fees 124 125 374 381 Agent fee income 151 464 578 1,059 Gain on disposition of rate swap -- -- 72 -- Servicing fees on loans sold 36 33 110 90 Other income 91 96 532 472 ----------- ----------- ----------- ----------- Total non-interest income 602 914 2,213 2,525 ----------- ----------- ----------- ----------- Other Expenses Salaries and employee benefits 978 904 2,781 2,363 Net occupancy expenses 93 101 278 286 Equipment expenses 85 71 255 199 Data processing fees 83 92 247 271 Deposit insurance expense 13 63 43 185 Legal and professional fees 121 53 248 137 Advertising 33 50 108 103 Letter of credit valuation provision -- (825) -- (1,172) Loss on investments in partnerships 40 80 134 225 Amortization of intangible assets -- 52 53 157 Correspondent bank charges 31 39 97 118 Loss on impairment of assets held for sale and changes in estimated useful lives of intangible assets 1,184 1,184 Other expense 1,474 426 2,347 1,114 ----------- ----------- ----------- ----------- Total non-interest expense 4,135 1,106 7,775 3,986 ----------- ----------- ----------- ----------- Loss Before Income Tax (2,216) (319) (2,394) (486) Income tax expense (benefit) 333 (203) 112 (437) ----------- ----------- ----------- ----------- Loss Before Extraordinary Item (2,549) (116) (2,506) (49) Net gain on extraordinary item -- 196 87 196 ----------- ----------- ----------- ----------- Net Income (Loss) $ (2,549) $ 80 (2,419) $ 147 =========== =========== =========== =========== Basic Earnings (Loss) per Share $ (0.41) $ 0.01 $ (0.40) $ 0.03 Diluted Earnings (Loss) per Share $ (0.41) $ 0.01 $ (0.40) $ 0.03 Average Common and Common Equivalent shares outstanding 6,167,681 5,607,658 6,087,925 4,948,317
See notes to condensed consolidated financial statements 4 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Condensed Consolidated Statements of Changes in Stockholders' Equity (In Thousands, Except Share Data)
Nine Months Ended September 30, --------------------------------------------------- 2002 2001 ---------- ---------- Beginning Balance $11,895 $8,775 Comprehensive income (loss) Net income (2,419) 147 Other comprehensive income - net of tax 188 513 ------ ------ Comprehensive income (loss) (2,231) 660 Issuance of stock 1,194 1,510 Issuance of stock warrants 250 -------- -------- Balances, September 30 (unaudited) $11,108 $10,945 ======== ========
See notes to condensed consolidated financial statements. 5 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Nine Months Ended September 30, ---------------------- 2002 2001 -------- -------- Operating Activities Net income $ (2,419) $ 147 Adjustments to reconcile net income to net cash provided (used) by operating activities Provision for loan losses (400) 1,147 Letter of credit valuation provision (1,172) Gain on extraordinary item, net of tax (87) (196) Gain on sale of land (134) Gain on sale of investment securities (73) Loss on impairment of assets held for sale and changes in estimated useful lives of intangible assets 1,184 Depreciation and amortization 360 303 Valuation allowance--affordable housing investments 40 44 Loans originated for sale (11,975) (19,115) Proceeds from sale of loans 12,019 19,148 Changes in Interest payable and other liabilities 1,926 624 Interest receivable and other assets (2,007) 275 Other (226) -- -------- -------- Net cash provided (used) by operating activities (1,658) 1,071 -------- -------- Investing Activities Purchases of securities available for sale (33,803) -- Proceeds from maturities of securities available for sale 13,107 4,023 Notes receivable (235) -- Net change in loans 32,342 (1,336) Purchase of premises and equipment (192) (378) Proceeds from sales of premises and equipment 100 Purchasers of Federal Home Loan Bank stock (54) -- Funding on outstanding letters of credit (225) (3,043) -------- -------- Net cash provided (used) by investing activities 10,940 (634) -------- -------- Financing Activities Net change in Noninterest-bearing, interest-bearing demand and savings deposits (2,939) 5,802 Certificates of deposit 578 (9,174) Short-term borrowings -- 4,500 Proceeds of long-term debt 10,778 7,470 Repayment of long-term debt (24,432) (5,389) Issuance of stock 1,194 1,510 Issuance of stock warrants 250 -- -------- -------- Net cash provided (used) by financing activities (14,571) 4,719 -------- -------- Net Change in Cash and Cash Equivalents (5,289) 5,156 Cash and Cash Equivalents, Beginning of Period 16,316 16,644 -------- -------- Cash and Cash Equivalents, End of Period $ 11,027 $ 21,800 ======== ======== Additional Cash Flows Information Interest paid $ 4,711 $ 5,367 Supplemental schedule of non-cash inventory activity: Transfer from loans to Real Estate Owned $ 1,910
See notes to condensed consolidated financial statements. 6 Fidelity Federal Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) o Accounting Policies The significant accounting policies followed by Fidelity Federal Bancorp ("Fidelity") and its wholly owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments which are necessary for a fair presentation of the results for the periods reported, consist only of normal recurring adjustments, and have been included in the accompanying unaudited condensed consolidated financial statements. The results of operations for the nine months ended September 30, 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 accounting principles generally accepted in the United States of America 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 July 2002, Fidelity filed a registration statement for a stockholder rights offering with the Securities and Exchange Commission. A total of 750,000 shares were registered in this filing. For every 8.1 shares of Fidelity held on the record date, shareholders could subscribe to purchase one share of Fidelity at $2.00. The rights offering was completed in September 2002. Fidelity raised $770,000, net of costs associated with the offering. The shares purchased by shareholders with these funds were issued in September 2002. During the third quarter, Pedcor Investments, LLC ("Investments") exercised a portion of their option that was granted under the stock purchase agreement in May 2000 and purchased $259,000 in common stock resulting in 137,765 shares being issued. Investments and its affiliates have a remaining option to purchase up to $4.5 million of Fidelity common stock at the current fair market value, which expires in May 2003. In December 2001, Fidelity filed a 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. In September 2001, Fidelity filed a 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 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. 7 The shares purchased by shareholders with these funds were issued in July 2001. o Cash Dividend Fidelity's dividend policy is to pay cash or distribute stock dividends when its Board of Directors deems it to be appropriate, taking into account Fidelity's financial condition and results of operations, economic and market conditions, industry standards, and other factors, including regulatory capital requirements of its savings bank subsidiary. Fidelity is not subject to any regulatory restrictions on payments to its stockholders. United has entered into a Supervisory Agreement ("Agreement") with the Office of Thrift Supervision ("OTS"). One of the provisions of the Agreement requires prior approval from OTS for payments of dividends from United to Fidelity. 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. The agreement as written has been modified by mutual agreement to eliminate certain restrictions. 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 September 30, 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 Agreement at September 30, 2002. o Related Party Transaction During the first quarter of 2002, Fidelity sold two notes held in conjunction with advances made by Fidelity to certain multifamily housing partnerships to a related party. The advances were made to facilitate refinancing activities and resulted in loans subordinated to the first mortgage loans. The advances had been previously charged off and had no value on Fidelity's books. The gain on the note sale totaled $223,000. Fidelity also sold a position in an interest rate swap for a $72,000 gain. The instruments were acquired by Pedcor Funding Corporation and the 8 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. On September 30, 2002, Fidelity signed a definitive agreement to sell its wholly owned affordable housing subsidiary, Village Affordable Housing Corporation and United's wholly owned affordable housing subsidiary, Village Housing Corporation and certain other related affordable housing assets to Pedcor Funding Corporation ("Funding"). Funding is a company controlled by three directors of Fidelity and are members of a group that beneficially owns approximately 60.7% of Fidelity's issued and outstanding stock. The sale price is approximately $1.7 million in cash and is expected to be consummated during the fourth quarter of 2002. It is expected to result in a consolidated after-tax gain under generally accepted accounting principles of approximately $138,000, which consists of a gain from the sale of the affordable housing assets held by Fidelity and United offset by a loss from United's subsidiary, Village Housing Corporation, resulting from the sale of its 1% investment in the general partnerships. o Sale of Village Housing Corporation and Village Affordable Housing Corporation As previously discussed in the Related Party footnote, Fidelity executed a definitive agreement to sell its wholly owned affordable housing subsidiary, Village Housing Affordable Corporation and United's wholly owned affordable housing subsidiary, Village Housing Corporation and certain other related affordable housing assets to Pedcor Funding Corporation. Completion of this transaction is subject to receipt of all required regulatory approvals and receipt of a fairness opinion by Fidelity that the transaction is fair, from a financial point of view, to Fidelity and United. The transaction is expected to be consummated during the fourth quarter of 2002. o Impairment of Assets Upon determination of the purchase price, certain assets including surplus land, a development fee receivable and an interest rate swap were deemed impaired and an expense of $320,000 was recognized during the quarter to write down these assets to their estimated fair values. o Change in the Estimated Useful Lives of Intangible Assets Upon execution of the definitive agreement with Pedcor Funding Corporation, the useful lives of certain intangible assets were determined to have changed. The intangible assets were originally recorded as a result of a five-year guarantee to United from Pedcor Holdings, LLC (Holdings) during 2000 in an aggregate amount up to $1.5 million 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. The useful life of the assets is now expected to end in the fourth quarter. As a result, approximately $864,000 in expense was recorded in the third quarter, and will result in the termination of monthly amortization expense of approximately $18,000. o Securitization United completed its first auto securitization transaction during the quarter for $50 million. The transaction resulted in the sale of $49 million of rated class A notes. Financial Security Assurance (FSA) provided a financial guaranty policy on the class A notes. The transaction also resulted in the sale of $500,000 in un-rated class B notes. The transaction was effected through a wholly-owned subsidiary, United Fidelity Finance, LLC. Krieg Devault LLP served as issuer's counsel and City Securities of Indianapolis served as the lead manager and Underwriter on the transaction. In the transaction, auto loan receivables were transferred to an independent trust (the Trust) that issued certificates representing ownership interests in the Trust, primarily to institutional investors. Although United continues to service the underlying accounts and maintain the customer relationships, this transaction is treated as a sale for financial reporting purposes to the extent of the investors interest in the Trust. Accordingly, the receivables associated with the investors interests are not reflected on the balance sheet. In connection with this transaction, United enhanced the credit protection of the certificate holders by funding a cash reserve account. Due to prepayment risk, the retained interests are measured as available-for-sale securities. Accordingly, the retained interest is reported at fair value, which at September 30, 2002 approximates the net carrying amount of 9 such assets totaling $2.7 million. Unrealized holding gains or losses on the retained interest, if any, are excluded from earnings and reported, net of taxes, as a separate component of shareholders equity, except that, if a decline in fair value is judged to be other than temporary, such a decline is accounted for as a realized loss and is presented as a reduction of securitization income in the accompanying statement of operations. United estimates the fair value of the retained interest at the date of the transfer and during the period of the transaction based on a discounted cash flow analysis. United receives annual servicing fees based on the loan balances outstanding the rights to future cash flows arising after investors in the securitization trust have received their contractual return and after certain administrative costs of operating the trust. These cash flows are estimated over the life of the loans using prepayment, default and interest rate assumptions that market participants would use for financial instruments subject to similar levels of prepayment, credit and interest rate risk. o Earnings per share Earnings per share (EPS) were computed as follows:
Nine Months Ended September 30, 2002 ----------------------------------------------------------- Loss Weighted-Average Per Share Shares Amount ----------------------------------------------------------- Net loss $ (2,419) ---------------- Basic earnings per share Income (loss) available to common stockholders $ (2,419) 6,079,474 $ (0.40) ============== Effect of dilutive securities Stock options -- 8,451 ---------------- --------------- Diluted earnings per share Income (loss) available to common stockholders and assumed conversions $ (2,419) 6,087,925 $ (0.40) ================ =============== ============== Nine Months Ended September 30, 2001 ----------------------------------------------------------- Income Weighted-Average Per Share Amount Shares ----------------------------------------------------------- Net income $ 147 ---------------- Basic earnings per share Income available to common stockholders $ 147 4,948,317 $ 0.03 ============== Effect of dilutive securities Stock options -- 2,712 ---------------- --------------- Diluted earnings per share Income available to common stockholders and assumed conversions $ 147 4,951,029 $ 0.03 ================ =============== ==============
o Reclassifications Reclassifications of certain amounts from the condensed consolidated income statements for the three-month periods ended September 30, 2002 and 2001 and for the nine-month period ended September 30, 2001 have been made to conform to the presentation of the nine-month period ended September 30, 2002. These reclassifications had no effect on net income. 10 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition Special Note Regarding Forward-Looking Statements Certain matters discussed in this Quarterly Report on Form 10-Q are "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as Fidelity "believes", "anticipates", "expects", "estimates" or words of similar import. Similarly, statements that describe Fidelity's future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and which could cause actual results to differ materially from those anticipated as of the date of this report. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this report and Fidelity undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. o Results of Operations Net loss for the three months ended September 30, 2002 was $2.5 million, compared to $80,000 net income for the same period last year. Net loss for the nine months ended September 30, 2002 was $2.4 million, compared to $147,000 net income for the nine months ended September 30, 2001. Book value per share decreased to $1.68 from $1.99 at December 31, 2001, while shareholders' equity decreased to $11.1 million from $11.9 million. The decrease in stockholders equity was due to the loss for the first nine months, but was partially offset by the completion of two stock offerings completed during 2002, as well as the decrease in the unrealized loss on securities. 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 nine months of 2002 and 2001:
Nine Months Ended September 30, (dollars in thousands) ----------------------------------- 2002 2001 ---------------- -------------- Interest-earning assets $143,161 $146,188 Interest-bearing liabilities $143,872 $148,913 ---------------- -------------- Net interest-earning assets or (interest-bearing liabilities) (711) (2,725) ================ ============== Average yield on: Interest-earning assets 6.87% 8.06% Interest-bearing liabilities 4.41 6.00 ---------------- -------------- Net interest spread 2.46% 2.06% Net interest margin 2.44% 1.95%
Net interest income for the first nine months of 2002 was $2.8 million and was $646,000 or 30.4% higher than the $2.1 million earned during the first nine months of 2001. Exclusive of the $156,000 of interest collected during the first nine months of 2002 on loans previously charged off, net interest income increased $490,000 over 2001 as United reduced its liquid assets compared to last year. The $1.9 million decrease in interest expense is a combination of a decrease of $269,000 from a lower average balance of outstanding interest-bearing liabilities plus $1.7 million due to lower interest rates on average interest-bearing liabilities. The decrease of $1.5 million in interest income, is a combination of a decrease of $256,000 because of the decrease in the volume mix of average outstanding interest-bearing assets plus $1.2 million because of decreased rates on average interest-earning assets. 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. The following table sets forth the details of the rate and volume change for the first nine months of 2002 compared to the same period in 2001, excluding the $156,000 of interest collected on previously charged-off loans. 11
Nine Months Ended September 30, 2002 vs 2001 Increase (Decrease) Due to change in ----------------------------------------------------- Volume Rate Total ------------ ---------------- ---------------- Interest Income: Loans and mortgage-backed securities $( 99) $(974) $(1,073) Other interest-earning assets (157) (224) (381) ------------ ---------------- ---------------- Total interest-earning assets (256) (1,198) (1,454) Interest Expense: Deposits (405) (1,353) (1,758) FHLB advances and other borrowings 136 (322) (186) ------------ ---------------- ---------------- Total interest-bearing liabilities (269) (1,675) (1,944) ------------ ---------------- ---------------- Change in net interest income $ 13 $477 $ 490 ============ ================ ================
Net interest income for the three months ended September 30, 2002 was $917,000 compared to $673,000 for the three months ended September 30, 2001. As discussed above this is primarily due to the decrease in rates compared to last year. Provision for Loan Losses and Letters of Credit Valuation Provision The provision for loan losses for the nine months ended September 30, 2002 was a credit of $400,000 compared to $1.1 million in expense for the nine months ended September 30, 2001. During the nine months ended September 30, 2001, Fidelity increased its allowance for loan losses and reduced its letters of credit valuation reserve by $1.1 milliion due to refinancing activities related to letters of credit outstanding completed during the first nine months of 2001. During the first nine months of 2001, eight multi-family partnerships in which Fidelity or United had outstanding classified or impaired letters of credit, obtained non-recourse financing outside of Fidelity. Two such partnerships obtained alternate financing during the first nine months of 2002 with an additional refinancing completed in October 2002. Fidelity provided $225,000 and $3.0 million during the first nine months of 2002 and 2001, respectively, in previously reserved funds in order to complete the refinancing transactions. As a result of the securitization of automobile loans completed during the third quarter of 2002, the allowance for automobile loan losses was reduced during the third quarter of 2002, resulting in a credit provision of $400,000, compared to $800,000 in loan loss provision expense for the three months ended September 30, 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 September 30, 2002, was $602,000 compared to $914,000 for the same period in 2001. The $312,000 decline in non-interest income for the quarter was primarily the result of the decrease in the volume of automobile loans that are originated for a fee when compared to the three months ended at September 30, 2001. Non-interest income for the nine months ended September 30, 2002 and 2001, was $2.2 million and $2.5 million, respectively. Agent fees decreased $481,000 from the first nine months of 2001 primarily due to the decrease in the volume of loans originated for a fee, and the completion of the securitization transaction. Gains on sales of 12 loans decreased $100,000 compared to the nine months ended September 30, 2001. The net gain on new loans sold was lower in the first nine months of 2002 when compared to the same period last year. During the second quarter of 2002, a $73,000 gain was recognized on the sale of an investment security. Servicing fees on loans sold increased $20,000 over last year due to the continuing growth of the loan-servicing portfolio. Deposit service charges increased $51,000 over last year due to an increase in overdraft activity and fees charged on its transaction accounts. Other income increased $60,000 to $532,000 for the nine months ended September 30, 2002 partially due to a $35,000 increase in mortgage loan underwriting fees due to the increase in refinancing activity associated with the low interest rate environment. Non-interest expense Non-interest expense was $4.1 million for the quarter ended September 30, 2002 compared to $1.1 million for the same period in 2001. Total non-interest expense increased by $3.8 million over the first nine months of 2001. Salaries and employee benefits increased $418,000 due to growth in United's consumer lending activity, the opening of a new branch late in the first quarter of 2001, the addition of commercial lending staff due to the resumption of commercial lending and an additional $100,000 increase in expense for the Company's defined benefit pension plan. Federal deposit insurance expense decreased $142,000 in the first nine months of 2002 compared to 2001. This decrease was associated with a reduction in United's FDIC risk assessment rate in 2002. Legal and professional fees increased $111,000 over last year due to expenses related to workout activities with respect to various classified assets and expenses associated with the executed definitive agreement to sell certain assets to Pedcor Funding. Loss on impairment of assets held for sale and changes in the estimated useful lives of intangible assets were $1.2 million compared to zero last year and are discussed in the Sale of Village Housing Corporation and Village Affordable Housing Corporation footnote. Other expense increased $1.2 million over the nine months ended September 30, 2002, which includes the following items. Prepayment fees on FHLB advances of $488,000 were recognized during the quarter end and $504,000 for the nine months ended September 30, 2002. During the third quarter, the Bank repaid FHLB advances that had substantially higher interest rates than advance rates currently offered. The completion of the securitization transaction created liquidity which were used to payoff these higher interest bearing liabilities. It is expected that these higher cost borrowings will be replaced with deposits and borrowings at a much lower rate. This is expected to result in a much lower overall cost of funds for the Company. Expenses of $187,000 have been incurred in connection with the foreclosure of a $3.1 million non-accrual, commercial real estate loan. Net expenses, offset by the reduction in the allowance for loan losses, of $265,000 were recorded in other non-interest expense as a result of the securitization transaction in 2002. Finally, non-interest expense was reduced last year as a result of letter of credit valuation provision credit of $1.2 million during the first nine months of 2001. Extraordinary Gain During the second quarter of 2002, Fidelity liquidated a $500,000 senior note for $360,000 and recorded a gain of $140,000. Tax of $53,000 was recorded and the net gain of $87,000 is reflected as an extraordinary gain. This represents approximately $0.01 per basic and diluted share. There were no liquidations of these notes in the third quarter of 2002. Income tax benefit The income tax expense was $112,000 for the nine months ending September 30, 2002 compared to a $437,000 benefit in the same period last year. Included in this expense are tax credits of $129,000. These credits are received from Fidelity's investment in affordable housing properties and are a component of the overall return on these investments. Offsetting the previously accrued tax benefits this year and tax credits was a valuation allowance that was established for $985,000 at September 30, 2002. Consideration of the need for a valuation allowance for the deferred tax asset was made at September 30, 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 not all carryforwards would be utilized within the carryforward periods (federal and state) and a valuation allowance would be necessary. 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. 13 Fidelity, at December 31, 2001 had 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 Fidelity. Although Fidelity had prepared a model that indicates the deferred tax assets will be fully utilized, profitability for the nine-months ended September 30, 2002, is less than that projected by the model prepared at December 31, 2001 supporting these assets. Due to capital losses that will be generated as a result of the sale of two Company subsidiaries, and a level of projected profitability for 2002 being less than originally anticipated, Fidelity established a valuation allowance of $985,000 until such time that Fidelity meets its future period profitability forecasts. Although profitability is currently less than forecast, the sale of certain assets to Pedcor Funding during the fourth quarter is expected to reduce the deferred tax asset by approximately $1.0 million which will increase the likelihood that Fidelity will ultimately utilize the tax carryforwards represented on the balance sheet. Fidelity 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 September 30, 2002 were $144.4 million, a decrease of $15.3 million from $159.7 million at December 31, 2001. The decrease in total assets was primarily attributable to the sale of $34.5 million in consumer loans in connection with the securitization transaction, partially offset by an increase in investment securities available for sale of $21.3 million. Utilizing excess liquidity attributable to mortgage loan refinancing activity over the past year and the increase in certificate of deposits, United invested in GNMA and FNMA adjustable-rate mortgage-backed securities. United has chosen to sell fixed rate 1-4 family mortgage loans in the secondary market and has therefore experienced declines in the amounts of those assets held. In order to replace the reduction in 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 first quarter of 2002. United also purchased an additional $7.7 million and $5.0 million in adjustable-rate mortgage-backed securities during April and May of 2002, respectively. These securities have an average yield of 5.0% and projected average life of less than four years. During the third quarter of 2002, United purchased approximately $11.1 million in adjustable rate mortgage-backed securities at an average yield of 5.4%. Net loans decreased $33.9 million during the first nine months of 2002 compared to December 31, 2001. Consumer loans decreased $29.4 million, which is primarily associated with the $34.5 million in consumer loans sold in connection with the securitization transaction. Continued paydowns received on fixed rate 1-4 family loans accounted for an additional $4.5 million decrease in total loans outstanding. New commercial loan originations of approximately $5.2 million have been generated thus far in 2002 as United resumed commercial lending in accordance with its business plan in the first quarter of 2002. Premises and equipment decreased $207,000 from December 31, 2001 primarily due to the write-down of certain impaired assets totaling approximately $120,000 and the current years depreciation expense. Further discussion of the write-down is included in the footnotes. Other assets increased $1.0 million over December 31, 2001 primarily due to an interest only STRIP and subordinated interest of approximately $2.7 million recognized in connection with the securitization transaction. See the securitization footnote for additional details. Offsetting a portion of this increase was a decrease in prepaid assets of $872,000, which was primarily associated with the decrease in prepaid dealer interest in connection with the securitization transaction. Intangible assets, which are included in other assets, also decreased $917,000 from the prior year due to the change in the useful lives of these assets, which is discussed in the footnotes. Total liabilities at September 30, 2002 were $133.3 million, a decrease of $14.5 million from $147.8 million at December 31, 2001. This decrease in primarily attributable to a reduction of $13.8 million in long-term debt. Liquidity generated from the securitization transaction was utilized to pay off United's FHLB advances. The remaining decrease is associated with maturing public funds which were not replaced. 14 In the first quarter, approximately $1.5 million in 9.25% junior notes matured and were replaced with $1.0 million of 9% junior notes. As previously mentioned senior notes decreased by $0.5 million that were retired early for a $87,000 gain, net of tax. Stockholder's equity at September 30, 2002 was $11.2 million, a decrease of $675,000 from $11.9 million at December 31, 2001. The decrease was primarily attributable to a net loss of $2.3 million, the completion of Fidelity's notes and warrants offering in 2002, which provided $250,000 for warrants and the issuance of stock of $1.2 million. In addition the net unrealized loss on securities decreased $187,000 from December 31, 2001. Non-Performing Assets Non-performing assets decreased $1.1 million from December 31, 2001 to $2.7 million or 1.8% of total assets at September 30, 2002. The decrease is due to the reclassification of a $3.1 million non-accrual, non-residential real estate loan to other real estate owned for $1.9 million. In September 2002, an additional $100,000 allowance was accrued for the property. See "Other Real Estate Owned" for further details. The following table provides information on Fidelity's non-performing assets as of September 30, 2002 and December 31, 2001:
September 30, December 31, 2002 2001 ----------------------------------------------------------------------------------------- (Dollars in Thousands) Non-accrual loans Consumer $ 115 $ 116 Commercial 233 3,291 Real estate mortgage 228 130 Multifamily 155 - ----- ----- Total non-accrual loans 731 3,537 Restructured Consumer 76 190 Commercial - 53 ----- ----- Total restructured loans 76 243 90 days or more past due and accruing Mortgage 1 - Consumer - 23 Commercial - 22 ----- ----- Total 90 days or more past due and accruing 1 45 Repossessed assets 52 - Other real estate owned 1,810 - ----- ----- Total other non-performing assets 1,862 - ----- ----- Total non-performing assets $2,670 $3,825 ====== ====== Ratio of non-performing assets to total assets 1.85% 2.40%
Other Real Estate Owned Other real estate owned totaled $1.8 million at September 30, 2002, which is primarily due to one non-residential loan that was foreclosed in the first quarter of 2002. In September 2002 an additional $100,000 allowance was recorded to bring the property to its estimated net realizable value. United has employed the services of an independent hotel management company while United aggressively seeks disposition of the property. Occupancy rate has improved from approximately 40% when United took possession of the property and is currently averaging approximately 52%. The Company has received surplus cash disbursements from operations of the property. 15 Classified Assets and Letters of Credit September 30, December 31, 2002 2001 ------------- ----------- Classified assets $4,136 $7,357 Classified letters of credit -- 350 ------ ------ Total classified assets $4,136 $7,707 ====== ====== Classified assets and letters of credit of Fidelity totaled $4.1 million at September 30, 2002 compared to $7.7 million at December 31, 2001, a decrease of 46.8%. Total classified assets were 33.0% and 53.3% of Fidelity's capital and reserves at September 30, 2002 and December 31, 2001, respectively, and 30.5% 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 $15.2 million at September 30, 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 $29.7 million at September 30, 2002 and $30.5 million at December 31, 2001. Specific allocations for letters of credit totaled 1.5% of outstanding letters of credit at September 30, 2002 compared to 2.2% at December 31, 2001. Lower interest rates have reduced debt service requirements and overall credit risk on the letters of credit. 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 September 30, 2002. The following table sets forth an analysis of the allowance for loan losses for the nine months ended September 30, 2002 and the year ended December 31, 2001: Nine months ended Year ended September 30, December 31, 2002 2001 ------------- ------------ (dollars in thousands) Allowance for loan losses at beginning of period $ 2,138 $ 1,921 Provision for losses (400) 1,349 Loans charged off (1,758) (1,401) Recoveries on loans 994 269 ------- ------- Allowance for loan losses at end of period $ 974 $ 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 September 30, 2002 and December 31, 2001, United is categorized as well capitalized and met all subject capital adequacy requirements. United's Capital Ratios
Required for To be well Actual Adequate capital Capitalized Amount Ratio Amount Percent Amount Percent As of September 30, 2002 Total risk-based capital (to risk-weighted assets) $11,572 12.6% $7,335 8.0% $9,168 10.0% Tier 1 capital (to risk-weighted assets) 9,254 10.1 3,667 4.0 5,501 6.0 Core capital (to adjusted total assets) 11,961 8.8 5,407 4.0 4,584 5.0 Core capital (to adjusted tangible assets) 11,961 8.8 2,704 2.0 N/A Tangible capital (to adjusted total assets) 11,456 8.5 2,020 1.5 N/A 16 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 under 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 September 30, 2002, $265,000 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 raising approximately $2.4 million and has completed two offerings in 2002 raising an additional $1.4 million in liquidity. Fidelity will receive approximately $416,000 in cash upon the completion of the sale of certain assets to Pedcor Funding Corporation. Fidelity believes that the above actions will assist it in meeting its future liquidity needs. During the second quarter of 2002, United received approval from the OTS permitting repayment of $1.4 million of the $2.9 million subordinated debt owed to Fidelity. The proceeds of the debt are to reduce, by an equal amount, Fidelity's outstanding debt. During the second and third quarter of 2002, United repaid the permitted amount to Fidelity, assisting Fidelity in retiring $1.5 million in debt. 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 were re-marketed successfully and will be re-marketed again in November 2002. 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 Company believes that it would have the resources to fund all bonds not successfully remarketed, if any. Critical Accounting Policies Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses charged to earnings as losses are estimated to have occurred. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A loan is considered impaired when, based on current information and events, it is probable that Fidelity or any of its wholly owned subsidiaries will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the 17 loan's effective interest rate, the loan's obtainable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, United does not separately identify individual consumer and residential loans for impairment disclosures. 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 September 30, 2002 is not required to be filed with the OTS until 45 days 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 September 30, 2002, management anticipates there has been no material change from the information disclosed in Fidelity's annual report to shareholders at December 31, 2001. Item 4 Controls and Procedures a. Evaluation of Disclosure Controls and Procedures. The Corporation's principal executive officer and principal financial officer have concluded that the Corporation's disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended), based on their evaluation of these controls and procedures as of a date within ninety (90) days prior to the filing date of this Form 10-Q, are effective. b. Changes in Internal Controls. There have been no significant changes in the Corporation's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation thereof, including any corrective actions with regard to significant deficiencies and material weaknesses. 18 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: ---------------------------------------------------- Not applicable ITEM 5 Other Information: ------------------ None ITEM 6 Exhibits and Reports on Form 8-K: --------------------------------- Exhibit Number Description -------------- ----------- a. 3(i) (a) Articles of Incorporation of Fidelity, filed as exhibit 3(a) to Fidelity's 1995 Annual Report on Form 10-K, are incorporated herein by reference 3(i) (b) Articles of Amendment of the Articles of Incorporation, filed as exhibit 4.1 with Fidelity's Registration Statement on Form S-3 (file no. 333-53668), are incorporated by reference 3(ii) By-Laws of Fidelity, filed as exhibit 4.2 with Fidelity's Registration Statement on Form S-3 (file no. 333-53668), are incorporated by reference 10 (a) The 1993 Director's Stock Option Plan, filed as exhibit 10(d) to Fidelity's 1995 Annual Report on Form 10-K, is incorporated herein by reference. (b) The 1995 Key Employee's Stock Option Plan, filed as exhibit 10(c) to Fidelity's 1996 Annual Report on Form 10-K, is incorporated herein by reference. (c) Employment agreement between Fidelity and Donald R. Neel, filed as exhibit 10(d) to Fidelity's 2000 Annual Report on Form 10-K, is incorporated herein by reference b. A form 8-K was filed on August 13, 2002 On August 12, 2002, Fidelity filed with the Securities and Exchange Commission its Quarterly Report on Form 10-Q for the period ended June 30, 2002. The certification by Fidelity's chief executive officer and chief financial officer required pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, accompanies such Quarterly Report. A form 8-K was filed on July 15, 2002 On July 12, 2002, Fidelity issued a press release that it had entered into a non-binding letter of intent to sell all of the stock of its wholly-owned subsidiary Village Housing Corporation and the assets related to the affordable housing line of business to Pedcor Funding Corporation. 19 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: November 14, 2002 By: /s/ DONALD R. NEEL - ---------------------------- -------------------------------- Donald R. Neel President and CEO By: /s/ MARK A. ISAAC -------------------------------- Mark A. Isaac Vice President and CFO (Principal Financial Officer) 20 CERTIFICATIONS I, Donald R. Neel, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Fidelity Federal Bancorp; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of the internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Donald R. Neel ----------------------------- Donald R. Neel President and CEO (principal executive officer) 21 I, Mark A. Isaac, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Fidelity Federal Bancorp; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of the internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Mark A. Isaac ------------------------------ Mark A. Isaac Vice President and CFO (principal financial officer) 21 -----END PRIVACY-ENHANCED MESSAGE-----