10-K 1 ffb-10k.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------------- FORM 10-K [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (fee required) For the fiscal year ended: December 31, 2002 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (no fee required) For the Transition period from ______ to __________. Commission File No. 0-22880 Fidelity Federal Bancorp ------------------------ (Exact name of registrant as specified in its charter) Indiana 35-1894432 -------------------------------------------------------------------------------- (State of other jurisdiction (I.R.S. Employer of Incorporation or Identification No.) Organization) 18 North West Fourth Street, PO Box 1347, Evansville, Indiana 47706-1347 ------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's Telephone number, including area code (812) 424-0921 -------------- Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $1 Stated Value --------------- (Title of Class) DOCUMENTS INCORPORATED BY REFERENCE Documents Part of Form 10-K into which Incorporated Portions of the 2002 Annual Report to Shareholders Part II Portions of the Definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 24, 2003. Part III Exhibit index is on page 18 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No --- --- Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of Registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. [ X ] The aggregate market value of voting stock held by non-affiliates of the Registrant (for purposes of such calculation, includes persons who are not directors, executive officers, or holders of more than 10% of the registrant's common stock) based on the average bid and asked prices of such stock at June 28, 2002 was approximately $6,145,277. Indicated below is the number of shares outstanding of each of the registrant's classes of common stock as of February 14, 2003. Common Stock - 6,740,883 shares FIDELITY FEDERAL BANCORP Index PART I Page ITEM 1 - Business 3 ITEM 2 - Properties 11 ITEM 3 - Legal Proceedings 11 ITEM 4 - Submission of Matters to a Vote of Security Holders 11 PART II ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters 11 ITEM 6 - Selected Financial Data 11 ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 11 ITEM 7 A - Quantitative and Qualitative Disclosures About Market Risk 12 ITEM 8 - Financial Statements and Supplementary Data 12 ITEM 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 12 PART III ITEM 10 - Directors and Executive Officers of the Registrant 12 ITEM 11 - Executive Compensation 12 ITEM 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 12 ITEM 13 - Certain Relationships and Related Transactions 12 ITEM 14 - Controls and Procedures PART IV ITEM 15 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 13 SIGNATURES 15 PART I ITEM 1. BUSINESS CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This discussion contains certain forward-looking statements that are subject to risks and uncertainties and includes information about possible or assumed future results of operations. Many possible events or factors could affect our future financial results and performance. This could cause results or performance to differ materially from those expressed in our forward-looking statements. Words such as "expects", "anticipates", "may", "could", "intends", "projects", "believes", "estimates", and variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Investors and readers should not rely solely on or place undue reliance on the forward-looking statements and should consider all uncertainties and risks discussed throughout this document. These statements are representative only on the date hereof. The possible events or factors include the following: the restrictions imposed by the Supervisory Agreement between the OTS and our savings bank subsidiary, United Fidelity Bank; the dependence of our loan growth and funding on economic conditions, as well as various discretionary factors, such as decisions to sell or purchase certain loans or loan portfolios; participations of loans; retention of residential mortgage loans; and the management of a borrower. The rate of charge-offs and loan and letter of credit loss provisions can be affected by local, regional and international economic and market conditions, concentrations of borrowers, industries, products and geographic locations, the mix of the loan portfolio and management's judgments regarding the collectibility of loans. Liquidity requirements may change as a result of fluctuations in assets and liabilities and off-balance sheet exposures, which will impact our capital and debt financing needs and the mix of funding sources. Decisions to purchase, hold or sell securities are also dependent on liquidity requirements and market volatility, as well as on and off-balance sheet positions. Factors that may impact interest rate risk include local, regional and international economic conditions, levels, mix, maturities, yields or rates of assets and liabilities, and the wholesale and retail funding sources of United. We are also exposed to the potential of losses arising from adverse changes in market rates and prices which can adversely impact the value of financial products, including securities, loans, deposits, debt and derivative financial instruments, such as futures, forwards, swaps, options and other financial instruments with similar characteristics. In addition, the banking industry in general is subject to various monetary and fiscal policies and regulations, which include those determined by the Federal Reserve Board, the OCC, the FDIC, state regulators and the Office of Thrift Supervision, whose policies and regulations could affect our results. Other factors that may cause actual results to differ from the forward-looking statements include the following: competition with other local, regional and international banks, thrifts, credit unions and other nonbank financial institutions, such as investment banking firms, investment advisory firms, brokerage firms, investment companies and insurance companies, as well as other entities which offer financial services, located both within and outside the United States and through alternative delivery channels such as the internet; interest rate, market and monetary fluctuations; inflation; market volatility; general economic conditions and economic conditions in the geographic regions and industries in which we operate; introduction and acceptance of new banking-related products, services and enhancements; fee pricing strategies, mergers and acquisitions and our ability to manage these and other risks. Overview Fidelity Federal Bancorp, ("Fidelity") incorporated in 1993 under the laws of the State of Indiana, is a registered savings and loan holding company with its principal office in Evansville, Indiana. Fidelity's savings bank subsidiary, United Fidelity Bank, fsb ("United"), was organized in 1914 and is a federally-chartered stock savings bank located in Evansville, Indiana. Fidelity, through its savings bank subsidiary, is engaged in the business of obtaining funds in the form of savings deposits and other borrowings and investing such funds in consumer, commercial, and mortgage loans, and in investment and money market securities. United's subsidiaries, Village Management Corporation and Village Capital Corporation have previously been involved in various aspects of providing real estate mortgage banking services and managing affordable housing projects. In May 2000, a subsidiary of Pedcor Holdings LLC ("Pedcor"), began providing management and certain accounting services for the properties previously managed by Village Management Corporation. Village Management completed this transition by the end of June 2000 and is currently inactive. Village Capital Corporation has earned fees by providing real estate mortgage banking services. Village Capital Corporation is currently inactive, other than fee income it records on transactions previously completed. Another subsidiary of United, Village Insurance Corporation, receives fee income for credit life and accident health insurance sales. United, in 2001, formed a new subsidiary, United Fidelity Finance,LLC, for purposes of acquiring, owning, purchasing, holding, selling, transferring, pledging and otherwise dealing with automobile loan receivables. United Fidelity Finance was utilized during 2002 to complete an automobile loan securitization transaction. Fidelity had consolidated total assets of $132.3 million and total shareholders' equity of $9.6 million as of December 31, 2002. Fidelity's subsidiaries at December 31, 2002, are listed below:
Subsidiary Principal Office Year Organized Assets (in thousands) 1. United Fidelity Bank, fsb Evansville, IN 1914 $127,613 Subsidiaries of United Fidelity Bank, fsb: Village Capital Corporation Evansville, IN 1994 68 Village Insurance Corporation Evansville, IN 1980 106 Village Management Corporation Evansville, IN 1992 55
Fidelity's home office is located at 18 North West Fourth Street, Evansville, Indiana, 47708 and its telephone number is (812) 424-0921. Competition Fidelity and United face strong direct competition for deposits, loans and other financial-related services. United competes in Indiana, Kentucky and Illinois with other thrifts, commercial banks, credit unions, stockbrokers, finance companies and insurance companies. Some of these competitors are local, while others are statewide or national. United competes for deposits principally by offering depositors a variety of deposit programs, convenient office locations, hours and other services, and for loan originations primarily through competitive interest rates and fees, the efficiency and quality of service provided and the variety of loan products offered. Some of the non-bank financial institutions and financial services organizations with which United competes are not subject to the same degree of regulation as that imposed on federal savings banks, thrifts, or thrift-holding companies. As a result, such competitors may have advantages over United in providing certain services. As of February 28, 2003, approximately 3 locally based banks (and several others with branch or loan production offices), 2 thrifts, and at least 10 credit unions operated in the Evansville, Indiana metropolitan area, which is United's principal deposit market area. Many competitors are substantially larger or have significantly greater capital resources than United. Due to enacted legislation to allow unlimited interstate branching, Fidelity and United may experience heightened competition from existing competitors and other major financial institutions seeking to expand their regional banking presence in Indiana. SUPERVISION AND REGULATION In addition to the general provisions discussed below, Fidelity and United are also subject to the provisions of the Supervisory Agreement entered into with the OTS in February 1999, which also impacts the operations of the Company and the Savings Bank. The footnote entitled "Other Restrictions" in the audited financial statement provides further details. Regulation of the Company Fidelity is a savings and loan holding company within the meaning of the Home Owners' Loan Act of 1933 ("HOLA"). Fidelity is registered with the Office of Thrift Supervision and is subject to OTS regulations, examinations, supervision and reporting requirements. The Home Owners' Loan Act generally prohibits a savings and loan holding company, without prior approval of the OTS, from (i) acquiring control of any other savings association or savings and loan holding company; or (ii) acquiring more than 5% of the voting shares of a savings association or savings and loan holding company which is not a subsidiary. Except with the prior approval of the OTS, no director or officer of a savings and loan holding company or person owning or controlling more than 25% of such company's stock, may acquire control of any savings association, other than a subsidiary association, or any other savings and loan holding company. Fidelity operates as a unitary savings and loan holding company. There are generally no restrictions on the activities of a unitary savings and loan holding company. However, if the OTS determines that there is reasonable cause to 4 believe that an activity of a savings and loan holding company constitutes a serious risk to the financial safety, soundness, or stability of its subsidiary savings association, the OTS may impose restrictions it considers necessary to address such risk, which may include a limitation on the payment of dividends. If the savings association subsidiary of a unitary savings and loan holding company fails to meet the Qualified Thrift Lender Test ("QTL test"), as discussed below, then the holding company would be required to register as, and become subject to the activities restrictions applicable to, bank holding companies. If Fidelity were to acquire control of another savings association it would become a multiple savings and loan holding company. In general, the activities of Fidelity and any of its subsidiaries (other than United or other subsidiary savings associations) would be subject to further restrictions. The Home Owners' Loan Act generally provides that, among other things, no multiple savings and loan holding company or subsidiary which is not a savings association may engage in any business activity other than (i) furnishing or performing management services for a subsidiary savings association, (ii) conducting an insurance agency or escrow business, (iii) holding, managing or liquidating assets owned by or acquired from a subsidiary savings association, (iv) holding or managing properties used or occupied by a subsidiary savings association, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by regulation as of March 5, 1987, to be engaged in by multiple savings and loan holding companies, or (vii) those activities authorized by regulation of the Board of Governors of the Federal Reserve System as permissible for bank holding companies, unless the OTS by regulation prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above must also be approved by the OTS prior to being engaged in by a multiple savings and loan holding company. No company may acquire control of an insured savings association after May 4, 1999, unless that company either (i) engages only in the financial activities permissible for a financial holding company or (ii) is a grandfathered, unitary savings and loan holding company. Generally, any company that was a unitary savings and loan holding company on May 4, 1999 is grandfathered. Such a company may continue to operate under present law as long as (i) the company continues to control only one savings institution or its successor (excluding supervisory acquisitions) that it controlled on May 4, 1999 and (ii) each controlled institution meets the qualified thrift lender test. Fidelity is a grandfathered unitary savings and loan holding company. The OTS may also approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state. Generally, this may only occur if the state in which the association to be acquired is located specifically permits associations to be acquired by state-chartered associations or savings and loan holding companies located in the state where the acquiring entity is located or by a holding company that controls that state-chartered savings association. Indiana law permits federal and state savings association holding companies with their home offices located outside of Indiana to acquire savings associations whose home offices are located in Indiana and savings and loan holding companies with their principal place of business in Indiana. Indiana savings and loan holding companies also may acquire savings associations with their home offices located outside of Indiana and savings association holding companies with their principal place of business located outside of Indiana. Savings Bank Regulation General. As a federally chartered, SAIF-insured savings association, United is subject to extensive regulation by the OTS and the FDIC. The OTS periodically examines the books and records of United and, in conjunction with the FDIC in certain situations, has examination and enforcement powers. This supervision and regulation are intended primarily for the protection of depositors and federal deposit insurance funds. United's activities and operations are subject to a number of detailed, complex and sometimes overlapping federal and state laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining legislation and antitrust laws. The earnings of financial institutions are also affected by general economic conditions and prevailing interest rates, both domestic and foreign and by the monetary and fiscal policies of the United States Government and its various agencies, particularly the Federal Reserve. Additional legislation and administrative actions affecting the banking industry is often considered by Congress, state legislatures and various regulatory agencies. It cannot be predicted with certainty whether such legislation or administrative action will be enacted or the extent to which the banking industry in general or Fidelity and United in particular would be affected. Financial institutions, including United, are generally prohibited from disclosing nonpublic personal financial information to third parties unless customers have the opportunity to "opt out" of the disclosure and have not chosen to "opt out" of such disclosure. 5 Qualified Thrift Lender Requirement. In order for United to exercise the powers granted to federally-chartered savings associations, it must be a "qualified thrift lender", or a "QTL". A savings association is a QTL if its qualified thrift investments equal or exceed 65% of the savings association's portfolio assets on a monthly basis in 9 out of every 12 months. Qualified thrift investments generally consist of (i) various housing related loans and investments (such as residential construction and mortgage loans, home improvement loans, manufactured housing loans, home equity loans and mortgage-backed securities), (ii) certain obligations of the FSLIC, the FDIC, the FSLIC Resolution Fund and the Resolution Trust Corporation (for limited periods), and (iii) shares of stock issued by any Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association. At December 31, 2002, the qualified thrift investment percentage test for United was 90.5%. Loans-to-One-Borrower Limitations. The Home Owners' Loan Act generally requires savings associations to comply with the loans-to-one-borrower limitations applicable to national banks. In general, national banks may make loans to one borrower in amounts up to 15% of the bank's unimpaired capital and surplus, plus an additional 10% of capital and surplus for loans secured by readily marketable collateral. At December 31, 2002, United's loan-to-one-borrower limitation was approximately $2.4 million and no loans to a single borrower exceeded that amount, except as provided herein. Under certain conditions, a savings association may make loans to one borrower for residential housing developments in amounts up to 30% of the bank's unimpaired capital and surplus provided that all loans made in reliance upon the increased lending limit do not, in the aggregate, exceed 150% of the bank's unimpaired capital and surplus. At December 31, 2002, United had made $7.1 million such loans under this higher lending limit. Commercial Real Property Loans. The Home Owners' Loan Act limits the aggregate amount of commercial real estate loans that a federal savings association may make to an amount not in excess of 400% of the savings association's capital. Consumer Loans. The Home Owners' Loan Act limits the aggregate amount of consumer loans that a federal savings association may make to an amount not in excess of 35% of the savings association's total assets. Under the terms of the Supervisory Agreement with the OTS, United's consumer loans may not exceed $25 million, including the retained interest created from the securitization transaction which totaled $2.1 million at December 31, 2002. Limitation on Capital Distributions. Under OTS regulations, a savings association must file an application with the OTS for a capital distribution, including cash dividends, if (i) it is not eligible for expedited treatment of its application, (ii) the proposed capital distribution, plus all other capital distributions of the savings association during the calendar year, exceeds its net income for that year to date plus its retained net income for the preceding two years, (iii) it would not be at least adequately capitalized, as defined in the prompt corrective action regulations of the OTS, or (iv) the proposed distribution would be in violation of any applicable law, regulation, or agreement with the OTS. A savings association has no restrictions on capital distributions as long as, after the distribution, it is still classified as adequately capitalized. Although no application is required, a prior notice must filed with the OTS if the savings association would not be well capitalized after the distribution, or if the savings association is a subsidiary of a savings and loan holding company. United is currently restricted by the terms of the Supervisory Agreement with the OTS from paying dividends. Insurance of Deposits. The FDIC is an independent federal agency that insures the deposits, up to $100,000 per depositor subject to aggregation rules, of banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the Bank Insurance Fund (the "BIF") for commercial banks and state savings banks and the SAIF for savings associations such as United. The FDIC is required to maintain designated levels of reserves in each fund. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and members of the SAIF. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary depending on the risk the institution poses to its deposit insurance fund. An institution's risk level is determined based on its capital level and the FDIC's level of supervisory concern about the institution. Annual deposit insurance premiums range between $0.00 and $0.27 per $100 of deposits and are in effect, based on the assessment determined in accordance with the risk-assessment system discussed above. 6 The Financing Corporation ("FICO") assessment to service the interest on its bond obligations is separate from the SAIF assessment. As part of the deposit insurance assessments, institutions pay a FICO assessment for debt service requirements. The FICO assessment rate is subject to change on a quarterly basis, depending on the debt service requirements. In 2002, United paid $.004 per $100 of deposits to comply with this assessment. The total deposit insurance expense paid was $57,000, $248,000, and $243,000 for 2002, 2001, and 2000, respectively. Commonly Controlled Banks and Savings Associations. Subject to certain exceptions, commonly controlled banks and savings associations must reimburse the FDIC for any losses suffered in connection with a failed bank or savings association affiliate. Institutions are commonly controlled if one is owned by another or if both are owned by the same holding company. Community Reinvestment Act. Ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") must be disclosed. The disclosure includes both a four-tier descriptive rating using terms such as "outstanding," "satisfactory," "needs to improve," or "substantial non-compliance" and a written evaluation of each institution's performance. United received a satisfactory rating from the OTS in its most recent CRA examination. Also, the Federal Housing Finance Board has adopted regulations establishing standards of community investment and service for members of the FHLB System to meet to be eligible for long-term advances. These regulations take into account a savings association's CRA record and the member's record of lending to first-time home buyers. Brokered Deposits. Pursuant to the FDIC regulations, well-capitalized institutions are subject to no brokered deposits limitations, while adequately capitalized institutions are able to accept, renew or rollover brokered deposit only (i) with a waiver from the FDIC, and (ii) subject to certain restrictions on payment of rates. Undercapitalized institutions are not permitted to accept brokered deposits and may not solicit deposits by offering an effective yield that significantly exceeds the prevailing effective yields on insured deposits of comparable maturity in the institution's normal market area or in which such deposits are being solicited. United is currently restricted by the terms of the Supervisory Agreement with the OTS from accepting brokered deposits. Enforcement. The OTS has primary enforcement responsibility over savings associations and has the authority to bring enforcement action against all "institution-affiliated parties," including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Civil penalties cover a wide range of violations and actions and range up to $25,000 per day unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. In addition, regulators are provided with flexibility to impose enforcement action on an institution that fails to comply with its regulatory requirements, particularly with respect to the capital requirements. Possible enforcement action ranges from the imposition of a capital directive to receivership, conservatorship or the termination of deposit insurance. The FDIC has the authority to recommend to the OTS that enforcement action to be taken with respect to a particular savings institution. If action is not taken by the OTS, the FDIC has authority to take such action under certain circumstances. Standards for Safety and Soundness. The federal banking agencies have prescribed for all insured depository institutions safety and soundness standards in the form of guidelines, relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset quality and growth, earnings, and compensation, fees and benefits, and safekeeping customer information. If an insured depository institution fails to meet any of the standards described above, it will be required to submit to the appropriate federal banking agency a plan specifying the steps that will be taken to cure the deficiency. If an institution fails to submit an acceptable plan or fails to implement the plan, the appropriate federal banking agency will issue an order requiring the institution to take immediate steps to correct a safety and soundness deficiency. Real Estate Lending Standards. OTS regulations require savings associations to establish and maintain written internal real estate lending policies. Each association's lending policies must be consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its operations. The policies must establish loan portfolio diversification standards; establish prudent underwriting standards, including loan-to-value limits that are clear and measurable; establish loan administration procedures for the association's real estate portfolio; and establish documentation, approval, and reporting requirements to monitor compliance with the association's real estate lending policies. The association's written real estate lending policies must be reviewed and approved by the association's Board of Directors at least annually. Further, each association is expected to monitor conditions in its real estate market to ensure that its lending policies continue to be appropriate for current market conditions. Prompt Corrective Regulatory Action. The Federal Deposit Insurance Act establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the banking regulators are required to 7 take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of capitalization. Under the OTS prompt corrective action regulation, generally, a savings association that has a total risk-based capital of less than 8.0% or a tier 1 risk-based capital ratio or leverage ratio of less than 4.0% is considered to be undercapitalized. A savings association that has a total risk-based capital of less than 6.0%, a tier 1 risk-based capital ratio of less than 3%, or a leverage ratio that is less than 3.0% is considered to be "significantly undercapitalized" and a savings association that has a tangible capital to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized." Generally, a capital restoration plan must be filed with the OTS within 45 days of the date an association receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized". In addition, numerous mandatory supervisory actions become immediately applicable to the associations, including, but not limited to, restrictions on growth, investment activities, capital distributions, and affiliate transactions. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Capital Requirements. The OTS has adopted capital standards under which savings associations must maintain (i) "core capital" in an amount not less than 3% of total adjusted assets for a savings association with a composite rating of 1, and not less than 4% for all other savings associations, (ii) "tangible capital" in an amount not less than 1.5% of total adjusted assets, and (iii) a level of risk-based capital equal to 8.0% of risk-weighted assets. Under OTS regulations "core capital" includes common stockholders' equity, noncumulative perpetual preferred stock and related surplus, and minority interests in the equity accounts of consolidated subsidiaries, less nonqualifying intangible assets. In determining compliance with the capital standards, a savings association must deduct from capital its entire investment in and loans to any subsidiary engaged in activities not permissible for a national bank, other than subsidiaries (i) engaged in such non-permissible activities solely as agent for their customers; (ii) engaged in mortgage banking activities; or (iii) that are themselves savings associations or companies, the only investment of which is another savings association, acquired prior to May 1, 1989. Capital requirements higher than the generally applicable minimum requirement may be established for a particular savings association if the OTS determines that the association's capital was or may become inadequate in view of its particular circumstances. Individual minimum capital requirements may be appropriate where the savings association is receiving special supervisory attention, has a high degree of exposure to interest rate risk, losses resulting in capital inadequacy, poor liquidity or cash flow, or poses other safety or soundness concerns. In determining compliance with the risk-based capital requirements, a savings association must determine its interest rate risk and, if such risk exceeds a certain level, it must deduct an interest rate risk component in calculating its total capital for purposes of determining whether it meets its risk-based capital requirements. An association's interest rate risk (IRR) is measured by the decline in the net portfolio value resulting from a 200 basis point increase or decrease in market interest rates. If an association's measured IRR exposure exceeds 2%, it must then deduct an IRR component from total capital for determining its risk-based capital requirement. The Savings Bank's Subsidiaries. The OTS regulations permit federal savings associations to invest in the capital stock, obligations or specified types of securities of subsidiaries known as "service corporations" and as "operating subsidiaries". Operating subsidiaries may engage in any acitivity in which the savings association may engage. There is no limit as to the amount of the investment in an operating subsidiary. A service corporation may engage in certain specified activities. The savings association may make loans to a service corporation and joint ventures in which a service corporation is a participant in an aggregate amount not exceeding 3% of an association's assets, provided any investment over 2% is used for specified community or inner-city development purposes. The FDIC may, after consultation with the OTS, prohibit specific activities if it determines such activities pose a serious threat to SAIF. Assessments. Savings associations are required by OTS regulation to pay assessments to the OTS to fund the operations of the OTS. The general assessment is computed upon the savings association's total assets, condition, and complexity of its operations, including consolidated subsidiaries, as reported in United's latest quarterly Thrift Financial Report. United's total assessment for the year ended December 31, 2002 was $69,000. Acquisitions and Branching The Bank Holding Company Act specifically authorizes a bank holding company, upon receipt of appropriate regulatory approvals, to acquire control of any savings association or holding company thereof wherever located. Similarly, a savings and loan holding company may acquire control of a bank. Moreover, federal savings associations may acquire or 8 be acquired by any insured depository institution. Regulations promulgated by the Federal Reserve Board restrict the branching authority of savings associations acquired by bank holding companies. The OTS has adopted regulations which permit nationwide branching to the extent permitted by federal statute. Federal statutes permit federal savings associations to branch outside of their home state if the association meets the domestic building and loan test in Section 7701(a)(19) of the Internal Revenue Code or the asset composition test of Section7701(c) of the Internal Revenue Code. Branching that would result in the formation of a multiple savings and loan holding company controlling savings associations in more than one state is permitted if the law of the state in which the savings association to be acquired is located specifically authorizes acquisitions of its state-chartered associations by state-chartered associations or their holding companies in the state where the acquiring association or holding company is located. Moreover, Indiana banks and savings associations are permitted to acquire other Indiana banks and savings associations and to establish branches throughout Indiana. Transactions with Affiliates Pursuant to the Home Owners' Loan Act, transactions engaged in by a savings association or one of its subsidiaries with affiliates of the savings association generally are subject to the affiliate transaction restrictions contained in Sections 23A and 23B of the Federal Reserve Act in the same manner and to the same extent as such restrictions now apply to transactions engaged in by a member bank or one of its subsidiaries with affiliates of the member bank. Section 23A of the Federal Reserve Act imposes both quantitative and qualitative restrictions on transactions engaged in by a member bank or one of its subsidiaries with an affiliate, while Section 23B of the Federal Reserve Act requires, among other things, that all transactions with affiliates be on terms substantially the same, and at least as favorable to the member bank or its subsidiary, as the terms that would apply to or would be offered in a comparable transaction with an unaffiliated party. Loans to executive officers, directors, and principal shareholders must comply with Section 22(h) of the Federal Reserve Act, which requires these loans be made on terms substantially the same as offered in comparable transactions to other persons. United was in compliance with these rules at December 31, 2002. Federal Home Loan Bank System United is a member of the Federal Home Loan Bank of Indianapolis. The Federal Home Loan Bank System consists of 12 regional Federal Home Loan Banks ("FHLBs"), each subject to supervision and regulation by the Federal Housing Finance Board (the "FHFB"). The FHLBs provide a central credit facility for members. As a member of the FHLB of Indianapolis, United is required to own shares of capital stock in the FHLB in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts, and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater. As of December 31, 2002, United was in compliance with this requirement. Sarbanes-Oxley Act On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from the type of corporate and accounting scandals that have occurred during the past year. The Sarbanes-Oxley Act's principal legislation includes: o the creation of an independent accounting oversight board; o auditor independence provisions which restrict non-audit services that accountants may provide to their audit clients; o additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer certify financial statements; o the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer's securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; o an increase the oversight of, and enhancement of certain requirements relating to audit committees of public companies and how they interact with the company's independent auditors; 9 o requirements that audit committee members must be independent and are absolutely barred from accepting consulting, advisory or other compensatory fees from the issuer; o requirements that companies disclose whether at least one member of the committee is a "financial expert" (as such term will be defined by the Securities and Exchange Commission) and if not, why not; o expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods; o a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions; o disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; o mandatory disclosure by analysts of potential conflicts of interest; and o a range of enhanced penalties for fraud and other violations. Although we anticipate that we will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on our results of operations or financial condition. US Patriot Act On October 26, 2001, President George W. Bush signed the United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act"). The USA Patriot Act is intended to strengthen the ability of U. S. Law Enforcement to combat terrorism on a variety of fronts. The potential impact of the USA Patriot Act on financial institutions is significant and wide-ranging. The USA Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires financial institutions to implement additional policies and procedures with respect to, or additional measures designed to address, any or all of the following matters, among others: money laundering, suspicious activities and currency transaction reporting; and currency crimes. Personnel As of December 31, 2002 Fidelity had 73 full-time equivalent employees. The employees are not represented by any collective bargaining unit. Fidelity believes its relations with its employees are good. Fidelity maintains group life, hospital, surgical, dental, major medical, and long-term disability programs for full-time employees. Fidelity also participates in a defined benefit pension plan covering all eligible employees, as well as a defined contribution 401(k) plan. 10 ITEM 2. PROPERTIES ------- The following table sets forth the location of Fidelity's savings bank offices, all of which are owned by United, as well as certain additional information relating to these offices as of December 31, 2002. -------------------------------------------------------------------------- Office Location Year Facility Opened Net Book Value -------------------------------------------------------------------------- Home Office 1974 $898,000 18 NW Fourth Street Evansville, IN 47708 -------------------------------------------------------------------------- Eastside Branch 1997 1,673,000 700 S. Green River Rd Evansville, IN 47715 -------------------------------------------------------------------------- Northside Branch 1976 80,000 4441 First Avenue Evansville, IN 47710 -------------------------------------------------------------------------- Westside Branch 1979 83,000 4801 W. Lloyd Expressway Evansville, IN 47712 -------------------------------------------------------------------------- Bell Oaks Branch 2001 481,000 8533 Bell Oaks Drive Newburgh, IN 47630 -------------------------------------------------------------------------- ITEM 3. LEGAL PROCEEDINGS ------- There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Registrant's business, to which the Registrant or its subsidiaries is a party or of which any of their property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------- No matter was submitted to a vote of the Registrant's security holders during the fourth quarter of the year ended December 31, 2002. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS ------- MATTERS The discussion concerning the market for the registrant's common equity and related shareholder matters under the heading "Market Summary" is included in the 2002 Annual Report to Stockholders on page 4 and is incorporated herein by reference. Cash dividends by quarter for the current and previous year appear under the heading "Quarterly Results of Operations" included in the 2002 Annual Report to Stockholders on page 26 and is incorporated herein by reference. As of February 14, 2003 Fidelity had 445 shareholders of record. ITEM 6. SELECTED FINANCIAL DATA ------- Selected Financial and Other Data included in the 2002 Annual Report to Stockholders on page 5 is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ------- RESULTS OF OPERATIONS Management' Discussion and Analysis of Financial Condition and Results of Operations included in the 2002 Annual Report to Stockholders on pages 6 through 26 is incorporated herein by reference. 11 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOVE MARKET RISK -------- The discussion concerning quantitative and qualitative disclosures about market risk under the heading "Asset/Liability Management" included in the 2002 Annual Report to Stockholders on pages 17 and 18, and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------- The financial statements and supplementary data required under this item are incorporated herein by reference to pages 27 through 62 of the 2002 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND ------- FINANCIAL DISCLOSURES No response to this item is required. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------- The information is to be provided under this Item is incorporated by reference to the information under the heading "Information Concerning Nominees, Directors and Executive Officers" on pages 3 and 4 and under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" on page 14, (up to but exclusive of the information presented under the caption "Item 2. Ratification of Independent Auditors of Fidelity"), of the Company's definitive proxy statement dated March 24, 2003, as filed with the Securities and Exchange Commission pursuant to Regulation 14A. ITEM 11. EXECUTIVE COMPENSATION -------- The information to be provided under this Item is incorporated by reference to the information under the heading "Executive Compensation and Other Information" on pages 5 through 11 (up to but exclusive of the information presented under the caption "Security Ownership of Management") of the Company's definitive proxy statement dated March 24, 2003, as filed with the Securities and Exchange Commission pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND -------- RELATED STOCKHOLDER MATTERS The information to be provided under this Item is incorporated by reference to the information under the heading "Beneficial Ownership" on page 2 and 3 (up to but exclusive of the information presented under the caption "Proxies") and under the heading "Security Ownership of Management" on pages 13 and 14 (up to but exclusive of the information presented under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 14), and under the heading "Equity Compensation Plan Information" on page 12 and 13 (up to but exclusive of the information presented under the caption "Security Ownership Management" on page 13) of the definitive proxy statement dated March 24, 2003 as filed with the Securities and Exchange Commission pursuant to regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -------- The information to be provided under this Item is incorporated by reference to the information under the heading "Certain Transactions and Other Matters Between Management and Fidelity" on page 5 (up to but exclusive of the information presented under the caption "Board Meetings") of the Company's definitive proxy statement dated March 24, 2003 as filed with The Securities and Exchange Commission pursuant to Regulation 14A. ITEM 14. 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-K, are effective. 12 (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. (c) Limitations on the Effectiveness of Controls. The Corporation's management, including its principal executive officer and principal financial officer, does not expect that the Corporation's disclosure controls and procedures and other internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. (d) CEO and CFO Certifications. Appearing immediately following the Signatures section of this report there are Certifications of the Corporation's principal executive officer and principal financial officer. The Certifications are required in accord with Section 302 of the Sarbanes-Oxley Act of 2002 (the "Section 302 Certifications"). This Item of this report which you are currently reading is the information concerning the Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K -------- (a) (1) The following consolidated financial statements are included in Item 8: Page Numbers in Annual report Independent Auditor's Report on Consolidated Financial Statements 27 Consolidated Balance Sheet December 31, 2002 and 2001 28 Consolidated Statement of Income- For the years ended December 31, 2002, 2001 and 2000 29-31 Consolidated Statement of Changes in Stockholders' Equity - For the years ended December 31, 2002, 2001 and 2000 32 Consolidated Statement of Cash Flows - For the years ended December 31, 2002, 2001 and 2000 33-34 Notes to consolidated Financial Statements 35-62 13 (2) See response to Item 14 (a) (1). All other financial statement schedules have been omitted because they are not applicable, or the required information is shown in the consolidated financial statements or notes thereto. (3) List of Exhibits Exhibit Number Description -------------- ----------- 3(i) (a) Articles of Incorporation of Fidelity, filed as exhibit 3(a) to Fidelity's 1995 Annual Report on Form 10-K, are incorporated herein by reference 3(i) (b) Articles of Amendment of the Articles of Incorporation, filed as exhibit 4.1 with Fidelity's Registration Statement on Form S-3 (file no. 333-53668), are incorporated by reference 3(ii) By-Laws of Fidelity, filed as exhibit 4.2 with Fidelity's Registration Statement on Form S-3 (file no. 333-53668), are incorporated by reference 10 (a) The 1993 Director's Stock Option Plan, filed as exhibit 10(d) to Fidelity's 1995 Annual Report on Form 10-K, is incorporated herein by reference. (b) The 1995 Key Employee's Stock Option Plan, filed as exhibit 10(c) to Fidelity's 1996 Annual Report on Form 10-K, is incorporated herein by reference. (c) Employment agreement between Fidelity and Donald R. Neel, filed as exhibit 10(d) to Fidelity's 2000 Annual Report on Form 10-K, is incorporated herein by reference 13 Annual report to shareholders 21 Subsidiaries of Fidelity Federal Bancorp 99.1 Regulation FD Disclosure - Chief Executive Officer 99.2 Regulation FD Disclosure - Chief Financial Officer (b) Reports on 8-K A form 8-K was filed on November 14, 2002 stating that Fidelity filed with the Securities and Exchange Commission its Quarterly Report on Form 10-Q for the period ended September 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 February 20, 2003 in connection with Fidelity Federal's fourth quarter earnings release and completion of the sale of its affordable housing subsidiaries and related assets. (c) See the list of exhibits in Item 14 (a) (3). (d) No other financial statement schedules are required to be submitted. 14 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 28th day of March, 2003. FIDELITY FEDERAL BANCORP Registrant By /S/ DONALD R. NEEL ------------------------------------- Donald R. Neel President and Chief Executive Officer (Principal Executive Officer) By /S/ MARK A. ISAAC ------------------------------------- Mark A. Isaac, Vice President and Chief Financial Officer (Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 28, 2003, by the following persons on behalf of the registrant and in the capacities indicated. By /S/ JACK CUNNINGHAM ------------------------------------- Jack Cunningham, Chairman By /S/ BRUCE A. CORDINGLEY ------------------------------------- Bruce A. Cordingley, Director By /S/ WILLIAM R. BAUGH ------------------------------------- William R. Baugh, Director By /S/ PAUL E. BECKER ------------------------------------- Paul E. Becker, Director By /S/ DONALD R. NEEL ------------------------------------- Donald R. Neel, Director By /S/ GERALD K. PEDIGO ------------------------------------- Gerald K. Pedigo, Director By /S/ BARRY A. SCHNAKENBURG ------------------------------------- Barry A. Schnakenburg, Director By /S/ PHILLIP J. STOFFREGEN ------------------------------------- Phillip J. Stoffregen, Director 15 CERTIFICATION I, Donald R. Neel, certify that: 1. I have reviewed this annual report on Form 10-K of Fidelity Federal Bancorp; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and c. presented in this annual 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 annual 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: March 28, 2003 /S/ DONALD R. NEEL --------------------------------- Donald R. Neel President and CEO (principal executive officer) CERTIFICATION I, Mark A. Isaac, certify that: 1. I have reviewed this annual report on Form 10-K of Fidelity Federal Bancorp; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and c presented in this annual 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 annual 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: March 28, 2003 /S/ MARK A. ISAAC -------------------------------------- Mark A. Isaac Vice President and CFO (principal financial officer) INDEX TO EXHIBITS ----------------- Page Exhibit Number Exhibit -------------------------------------------------------------------------------- 13 Annual report to shareholders 21 Subsidiaries of Fidelity Federal Bancorp 99.1 Regulation FD Disclosure - Chief Executive Officer 99.2 Regulation FD Disclosure - Chief Financial Officer 18