10-Q 1 ffb-603q.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 June 30, 2003 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 --- --- Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES NO X --- --- As of July 25, 2003, there were 9,618,658 shares of the Registrant's common stock, $1 stated value, issued and outstanding. FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Index Page PART I - FINANCIAL INFORMATION ITEM 1--Financial Statements: Condensed Consolidated Balance 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........................................ 18-19 PART II - OTHER INFORMATION.............................................. 20 SIGNATURES............................................................... 23 Index to Exhibits........................................................ 24 2 Item 1 - Financial Statements Part I - Financial Information Fidelity Federal Bancorp And Subsidiaries Condensed Consolidated Balance Sheets (In thousands except share data)
June 30, December 31, 2003 2002 --------- --------- (Unaudited) Assets Cash and due from banks $ 1,568 $ 1,454 Interest-bearing demand deposits 3,758 2,369 --------- --------- Cash and cash equivalents 5,326 3,823 Investment securities available for sale 46,883 34,912 Loans, net of allowance for loan losses of $690 and $837 76,604 73,087 Premises and equipment 4,756 4,935 Federal Home Loan Bank of Indianapolis stock 2,710 2,674 Deferred income tax receivable 5,678 5,615 Foreclosed assets held for sale, net of allowance of $0 and $100 219 2,145 Interest receivable and other assets 5,752 5,099 --------- --------- Total assets $ 147,928 $ 132,290 ========= ========= Liabilities Deposits Non-interest bearing $ 5,245 $ 3,209 Interest bearing 105,097 103,582 --------- --------- Total deposits 110,342 106,791 Federal Home Loan Bank Advances 17,000 3,000 Long-term debt 4,302 10,586 Valuation allowance for letters of credit 283 445 Other liabilities 2,254 1,880 --------- --------- Total liabilities 134,181 122,702 --------- --------- 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--9,618,658 and 6,740,883 shares 9,619 6,741 Additional paid-in capital 16,635 15,359 Stock warrants 261 261 Accumulated deficit (12,995) (13,152) Accumulated other comprehensive income 227 379 --------- --------- Total stockholders' equity 13,747 9,588 --------- --------- Total liabilities and stockholders' equity $ 147,928 $ 132,290 ========= =========
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 Six Months Ended June 30, June 30, 2003 2002 2003 2002 ----------------------------------------------------------- Interest Income Loans receivable $ 1,181 $ 1,963 $ 2,360 $ 4,137 Investment securities--taxable 364 474 689 784 Loans held for sale -- -- 39 -- Deposits with financial institutions 16 32 38 82 Other dividend income 35 41 73 80 ----------- ----------- ----------- ----------- Total interest income 1,596 2,510 3,199 5,083 ----------- ----------- ----------- ----------- Interest Expense Deposits 744 1,140 1,633 2,273 Short-term borrowings 3 7 3 24 Long-term debt 233 483 503 935 ----------- ----------- ----------- ----------- Total interest expense 980 1,630 2,139 3,232 ----------- ----------- ----------- ----------- Net Interest Income 616 880 1,060 1,851 Provision for loan losses (18) -- (122) -- ----------- ----------- ----------- ----------- Net Interest Income After Provision for Loan Losses 634 880 1,182 1,851 ----------- ----------- ----------- ----------- Other Income Service charges on deposit accounts 113 111 219 197 Net gains on loan sales 131 176 321 444 Net gains on investment sales -- 73 320 73 Letter of credit fees 121 125 242 250 Underwriting and document prep fees 75 21 117 58 Gain on disposition of rate swap -- -- -- 72 Servicing fees on loans sold 74 37 137 74 Securitization income 54 -- 114 -- Fees recaptured on automobile loans 79 7 162 12 Gain on sale of real estate owned 305 -- 317 -- Other income 154 270 376 570 ----------- ----------- ----------- ----------- Total non-interest income 1,106 820 2,325 1,750 ----------- ----------- ----------- ----------- Other Expenses Salaries and employee benefits 844 866 1,724 1,803 Occupancy 83 89 175 185 Equipment 99 83 199 170 Data processing 115 85 215 165 Deposit insurance 12 14 26 29 Legal and professional 64 64 115 127 Insurance 73 45 135 86 Advertising 44 34 89 75 Printing, postage, and office supplies 54 56 112 133 Bond issuance expense 63 16 79 31 Letter of credit valuation provision (170) -- (170) -- Loss on investment in partnership 20 58 40 94 Amortization of intangible assets -- -- -- 52 Correspondent bank charges 37 32 71 65 Other 320 312 610 625 ----------- ----------- ----------- ----------- Total non-interest expense 1,658 1,754 3,420 3,640 ----------- ----------- ----------- ----------- Income (Loss) Before Income Tax 82 (54) 87 (39) Income tax expense (benefit) (21) (98) (71) (169) ----------- ----------- ----------- ----------- Net Income $ 103 $ 44 $ 158 $ 130 =========== =========== =========== =========== Basic Earnings per Share $ 0.01 $ 0.01 $ 0.02 $ 0.02 Diluted Earnings per Share $ 0.01 $ 0.01 $ 0.02 $ 0.02 Average Common and Common Equivalent shares outstanding $ 9,618,659 $ 6,071,627 $ 8,234,129 $ 6,047,163
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)
Six Months End June 30, ------------------------------------------------- 2003 2002 -------- -------- Beginning Balance $ 9,588 $ 11,895 Comprehensive income Net income 158 130 Other comprehensive income (loss) - net of tax (152) 24 -------- -------- Comprehensive income 6 154 Issuance of stock 4,153 165 Issuance of stock warrants 250 -------- -------- Balances, June 30 (unaudited) $ 13,747 $ 12,464 ======== ========
See notes to condensed consolidated financial statements. 5 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Six Months Ended June 30, --------------------- 2003 2002 -------- -------- Operating Activities Net income (loss) $ 158 $ 130 Adjustments to reconcile net income to net cash provided (used) by operating activities Provision for loan losses (122) -- Letter of credit valuation provision (170) -- Net gain on sales of securities available for sale and foreclosed assets (637) (73) Depreciation and amortization 219 253 Valuation allowance--affordable housing investments -- 28 Loans originated for sale (34,457) (7,739) Proceeds from sale of loans 34,608 7,748 Changes in Interest payable and other liabilities 382 (619) Interest receivable and other assets (615) (447) Other 47 (65) -------- -------- Net cash used by operating activities (587) (784) -------- -------- Investing Activities Purchases of securities available for sale (33,028) (22,902) Proceeds from sales of securities available for sale 8,966 7,786 Proceeds from maturities of securities available for sale 12,098 -- Net change in FHLB stock (36) -- Net change in loans (3,956) 413 Proceeds from sale of foreclosed assets 2,666 Purchase of premises and equipment (40) (52) Funding on outstanding letters of credit -- (230) -------- -------- Net cash used by investing activities (13,330) (14,985) -------- -------- Financing Activities Net change in Noninterest-bearing, interest-bearing demand and savings deposits 454 (1,878) Certificates of deposit 3,097 7,269 Short-term borrowings -- -- Proceeds of FHLB advances 14,000 6,778 Repayment of long-term debt (6,284) (6,436) Issuance of stock 4,153 165 Issuance of stock warrants -- 250 -------- -------- Net cash provided by financing activities 15,420 6,148 -------- -------- Net Change in Cash and Cash Equivalents 1,503 (9,621) Cash and Cash Equivalents, Beginning of Period 3,823 16,316 -------- -------- Cash and Cash Equivalents, End of Period $ 5,326 $ 6,695 ======== ======== Additional Cash Flows Information Interest paid $ 2,127 $ 3,789 Income tax paid (refunded) -- -- Real estate acquired in settlement of loans 657 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 six months ended June 30, 2003 are not necessarily indicative of those expected for the remainder of the year. The condensed consolidated balance sheet at December 31, 2002 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 2002 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. o Stockholders' Equity In April 2003, Fidelity issued 2,777,777 shares of common stock for $4.0 million in cash through the exercise of an option held by Pedcor Holdings and affiliates ("Pedcor"). The exercise price per share was $1.44, and was determined under a formula included in the shareholder-approved stock purchase agreement effective May 19, 2000. The proceeds of the option exercise were utilized to reduce Fidelity's long-term debt outstanding. The remaining options expired on May 19, 2003. Pedcor Holdings is a member of a group of companies which is controlled by Bruce A. Cordingley, Gerald K. Pedigo, and Phillip J. Stoffregen, directors of Fidelity Federal. Following the option exercise, the Pedcor group beneficially owns approximately 65% of Fidelity's issued and outstanding stock. 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. 7 o Cash Dividend Fidelity's dividend policy is to pay cash or distribute stock dividends when its Board of Directors deems it to be appropriate, taking into account Fidelity's financial condition and results of operations, economic and market conditions, industry standards, and other factors, including regulatory capital requirements of its savings bank subsidiary. Fidelity is not subject to any regulatory restrictions on payments to its stockholders. 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 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 strategic plan is updated annually and submitted to the OTS. In addition, 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, 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. The Agreement currently limits the growth of its automobile loan portfolio, including retained interests in an automobile loan securitization transaction in 2002. United received OTS approval in the first quarter of 2002 to resume commercial lending on a limited basis in accordance with its business plan. In 2002, United received OTS approval to complete a $50.0 million automobile loan securitization transaction. Internet banking, a new activity approved by OTS, was introduced to United's customers on July 1, 2003. Management of United has taken, or has refrained from taking, as applicable, the actions requested by the OTS. United believes it was in compliance with the modified provisions of the Agreement at June 30, 2003. o Earnings per share Earnings per share (EPS) were computed as follows:
Three Months Ended June 30, 2003 --------------------------------------------- Income Weighted-Average Per Share Shares Amount --------------------------------------------- Net income $ 103 ===== Basic earnings per share Income (loss) available to common stockholders $ 103 9,618,659 $ 0.01 ====== Effect of dilutive securities Stock options - - ------ ---------- Diluted earnings per share Income (loss) available to common stockholders and assumed conversions $ 103 9,618,659 $ 0.01 ====== ========= ======
8
Three Months Ended June 30, 2002 --------------------------------------------- Income Weighted-Average Per Share Shares Amount --------------------------------------------- Net income $ 44 ==== Basic earnings per share Income available to common stockholders $ 44 6,062,464 $0.01 ===== Effect of dilutive securities Stock options - 9,163 ------ --------- Diluted earnings per share Income available to common stockholders and assumed conversions $ 44 6,071,627 $0.01 ==== ========= ===== Six Months Ended June 30, 2003 --------------------------------------------- Income Weighted-Average Per Share Shares Amount --------------------------------------------- Net income $ 158 ===== Basic earnings per share Income (loss) available to common stockholders $ 158 8,234,129 $ 0.02 ====== Effect of dilutive securities Stock options - - ------ --------- Diluted earnings per share Income (loss) available to common stockholders and assumed conversions $ 158 8,234,129 $ 0.02 ====== ========= ====== Six Months Ended June 30, 2002 --------------------------------------------- Income Weighted-Average Per Share Shares Amount --------------------------------------------- Net income $ 130 ===== Basic earnings per share Income available to common stockholders $ 130 6,037,774 $0.02 ===== Effect of dilutive securities Stock options - 9,389 ------ ---------- Diluted earnings per share Income available to common stockholders and assumed conversions $ 130 6,047,163 $0.02 ===== ========= =====
Options to purchase 326,996 shares of common stock at prices ranging from $1.53 to $11.81 per share as well as stock warrants representing the right to purchase 527,753 share of common stock at prices ranging from $3.00 to $8.93 per share were outstanding at June 30, 2003, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. o Automobile Loan Securitization United completed an automobile loan securitization transaction in 2002. A summary of the components of serviced loans, which represents both owned and securitized loans, follows. The automobile loans presented represent the managed portfolio of indirect prime automobile loans. 9 Loans Past Principal Due Over As of June 30, 2003 Balance 30 Days ------------------------------------------------------------------------------ Total serviced automobile loans $ 84,771 $353 Less: Automobile loans securitized (31,781) (127) Automobile loans serviced (31,358) (74) --------------------------- Total automobile loans held in portfolio $ 21,632 $ 152 =========================== 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 monthly servicing fees based on the principal 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. A summary of the fair values of the interest-only strips and servicing assets retained, key economic assumptions used to arrive at the fair values, and the sensitivity of the June 30, 2003 fair values to immediate 10% and 20% adverse changes in those assumptions follows. Actual credit losses experienced through year-end 2002 and thus far in 2003 on the pool of automobile loans securitized have been consistent with initial projections. As such, the expected static pool loss assumption would perform consistently with that disclosed in the sensitivity analysis. The sensitivities are hypothetical. Changes in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interests is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might either magnify or counteract the sensitivities.
Weighted- Monthly Expected Average Prepayment Cumulative Annual Weighted- Fair Life Speed Credit Discount Average Value (in months) (% ABS) Losses Rate Coupon --------------------------------------------------------------------------------- Interest-only strip As of the date of securitization $ 2,707 39 1.50% 1.50% 15.0% 9.09% As of June 30, 2003 2,035 24 1.83 1.50 15.0 8.64 Decline in fair value of 10% adverse change $ 41 $ 24 $ 35 Decline in fair value of 20% adverse change 80 47 71 Servicing asset As of the date of securitization 362 39 1.50% 1.50% 15.0% As of June 30, 2003 * 246 24 1.83 1.50 15.0 Decline in fair value of 10% adverse change $ 10 $ 0 $ 2 Decline in fair value of 20% adverse change 19 0 5
*Carrying value of the servicing asset approximated fair value at June 30, 2003. o Stock Option Stock options and Fidelity's stock-based incentive compensation plans are discussed more fully in the notes to Fidelity's December 31, 2002 audited financial statements contained in Fidelity's annual report. Fidelity accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price that was equal to or greater than the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share if Fidelity had applied the fair value provisions of FASB statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. 10
Three months ended Six months ended June 30 June 30 --------------------------------------------------- 2003 2002 2003 2002 --------------------------------------------------- Net income as reported $ 103 $ 44 $ 158 $ 130 Less: Total stock-based compensation cost determined under the fair value based method, net of income taxes (8) (48) (16) (54) --------------------------------------------------- Pro forma net income 95 (4) 142 76 =================================================== Basic earnings per share - as reported $0.01 $0.01 $0.02 $0.02 Basic earnings per share - pro forma $0.01 $0.00 $0.02 $0.01 Diluted earnings per share - as reported $0.01 $0.01 $0.02 $0.02 Diluted earnings per share - pro forma $0.01 $0.00 $0.02 $0.01
o Reclassifications Reclassifications of certain amounts from the condensed consolidated income statements for the three and six month periods ended June 30, 2002 have been made to conform to the presentation of the three and six month periods ended June 30, 2003. These reclassifications had no effect on net income. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Fidelity Federal. The information contained in this section should be read in conjunction with the consolidated financial statements and accompanying notes contained in this report. Portions of this Management's Discussion and Analysis, as well as the notes to the consolidated financial statements contain certain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995), which reflect management's current beliefs and expectations and are intended to benefit the reader. These forward-looking statements are inherently subject to various risks and uncertainties which may cause actual results to differ materially from expected results. Such risks and uncertainties include, but are not limited to, economic conditions, generally and in the market areas of the Company, increased competition in the financial services industry, actions by the Federal Reserve Board, changes in interest rates and governmental regulation and legislation. Comparison of Financial Condition at June 30, 2003 and December 31, 2002 Total assets at June 30, 2003 were $147.9 million, an increase of $15.6 million from $132.3 million at December 31, 2002. The increase in total assets was primarily attributable to a $12.0 million increase in investment securities available for sale and $3.5 million increase in net loans. United's investment portfolio consists entirely of mortgage related securities which are classified as "available for sale". Approximately $9.0 million of securities were sold during the first half of 2003 due to continued rapid prepayments in connection with the low market rate environment, but replaced with approximately $33.1 million in similar mortgage-backed securities during the first six months of 2003. Net loans increased $3.5 million to $76.6 million at June 30, 2003. The increase is associated with a $3.5 million increase in consumer loans. Low interest rates resulted in a $1.1 million increase in residential real estate loans. Offsetting these increases was a $2.5 million decrease in loans due to the payoff of two loans on multifamily real estate properties. The allowances for loan losses decreased to $690,000 at June 30, 2003, from $837,000 at December 31, 2002. The decline was due to a $122,000 credit to the provision for loan losses and $25,000 in net charge-offs. The $122,000 loan loss provision credit was due to excess allowance created from consumer loan sales during this year and a reduction of excess reserves on two multifamily real estate properties that paid off during the second quarter of 2003. The allowance for loan losses represented 0.89% of total loans at June 30, 2003, a decrease from 1.13% at December 31, 2002. Relative to non-performing assets, the allowance for loan losses was 41.4% at June 30, 2003, compared to 27.4% at December 31, 2002. 11 The following table sets forth an analysis of the allowance for loan losses for the six months ended June 30, 2003 and the year ended December 31, 2002:
Six months ended Year ended June 30, December 31, 2003 2002 ------------------- ----------------- (dollars in thousands) Allowance for loan losses at beginning of period $ 837 $2,138 Provision for losses (122) (360) Loans charged off (106) (1,954) Recoveries on loans 81 1,013 ------------------- ----------------- Allowance for loan losses at end of period $ 690 $ 837 =================== =================
Foreclosed assets held for sale decreased $1.9 million primarily due to the disposition of a commercial real estate property. Total deposits increased $3.5 million to $110.3 million at June 30, 2003, from $106.8 million at December 31, 2002. Approximately $2.0 million of the increase was associated with an increase in non-interest bearing deposit accounts and the remaining increase was in certificates of deposit. Federal Home Loan Bank advances increased $14.0 million to $17.0 million at June 30, 2003. The increase in borrowings was utilized to fund investment and loan growth during the first half of 2003. Long-term debt decreased $6.3 million to $4.3 million at June 30, 2003. Notes payable secured by multi-family mortgages totaling $2.4 million and bearing interest of 7.42% were paid off during the second quarter. An additional $1.5 million note payable bearing interest at 10.50% was paid off during the second quarter as well. Finally, $2.2 million in senior subordinated notes bearing interest at 10% were retired. Fidelity utilized liquidity from a $4.0 million stock option exercise by Pedcor Holdings and affiliates in April 2003 to pay off the above noted long-term debt. Total stockholders' equity increased $4.1 million from December 31, 2002 to $13.7 million at June 30, 2003. The increase was primarily attributable to the exercise of stock options totaling $4.1 million during the first half of 2003 by Pedcor Holdings and affiliates and net income for the year-to-date. Non-Performing Assets Non-performing assets decreased $1.4 million from December 31, 2002 to $1.7 million or 1.1% of total assets at June 30, 2003. The decrease is primarily due to the sale of one commercial real estate asset with a carrying value of $1.8 million. The following table provides information on Fidelity's non-performing assets as of June 30, 2003 and December 31, 2002:
June 30, December 31, 2003 2002 ------------------------------ (Dollars in Thousands) Non-accrual loans Consumer $ 221 $ 131 Commercial 376 388 Real estate mortgage 754 356 -------- -------- Total non-accrual loans 1,351 875 Restructured Total restructured loans 95 39 90 days or more past due and accruing Mortgage - 1 -------- -------- Total 90 days or more past due and accruing - 1 Foreclosed and repossessed assets 219 2,145 -------- -------- Total non-performing assets $ 1,665 $ 3,060 ======== ======== Ratio of non-performing assets to total assets 1.13% 2.31% ======== ========
12 Foreclosed and Repossessed Assets Forclosed and repossessed assets totaled $219,000 at June 30, 2003, which consists of residential and non-residential properties. As previously discussed, United disposed of a commercial real estate property with a value of $1.8 million during the second quarter of 2003. Classified Assets Classified assets totaled $2.0 million at June 30, 2003 compared to $6.0 million at December 31, 2002. Total classified assets were 13.6% and 55.4% of Fidelity's capital and reserves at June 30, 2003 and December 31, 2002, respectively. In addition to the classified assets and letters of credit, there are other assets and letters of credit totaling $6.8 million at June 30, 2003, compared to $11.9 million at December 31, 2002, for which management was closely monitoring the borrower's abilities to comply with payment terms. Classified assets decreased $4.0 million from December 31, 2002 to $2.0 million at June 30, 2003. The decrease is primarily attributable to two classified multifamily loans totaling $2.6 million that were paid off during the second quarter, in addition to the $1.8 million non-residential property that was sold during the quarter. 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: tangible capital, core capital and risk-based capital 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. The following is a summary of the Bank's regulatory capital and capital requirements at June 30, 2003 based on capital regulations currently in effect for savings institutions. Tangible Core Risk-based Capital Capital Capital Regulatory capital $ 10,841 $ 11,250 $ 11,326 Minimum capital requirement 2,132 5,701 7,246 -------- -------- -------- Excess capital 8,709 5,549 4,080 ======== ======== ======== Regulatory capital ratio 7.63% 7.89% 12.50% Required capital ratio 1.50% 4.00% 8.00% -------- -------- -------- Ratio excess 6.13% 3.89% 4.50% ======== ======== ======== 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 currently 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 provides that, for three years following the approval of the stock purchase agreement, Pedcor is entitled to purchase additional shares at market value from Fidelity in an aggregate amount up to $5.0 million. Prior to the May 2003 expiration of this option, Pedcor Holdings and affiliates had $4.4 million available of the original $5.0 million of which they acquired 2,777,777 shares of common stock for $4.0 million in cash in April 2003. Approximately $388,000 in unexercised options expired in May 2003. Fidelity has a $500,000 line of credit and can draw on this line until its expiration in September 2004. At June 30, 2003, no amount was outstanding on the line of credit. Fidelity's liquidity position may be further improved by the potential issuance of additional stock, additional debt or equity financing, or dividends from United, to Fidelity. Fidelity believes that the above actions, in addition to the recent $6.4 million in debt reduction, will assist it in meeting its future liquidity needs. 13 o Comparison of Operating Results for the Three Months Ended June 30, 2003 and 2002 General. Net income for the quarter ended June 30, 2003 was $103,000 compared to $44,000 for the quarter ended June 30, 2002. Net interest income decreased, while non-interest income increased and non-interest expense decreased. Net Interest Income Net interest income of $616,000 was recognized during the quarter ended June 30, 2003, compared to $880,000 for the same period in 2002. Total interest income decreased $914,000 to $1.6 million for the quarter ended June 30, 2003, from $2.5 million for the same quarter in 2002. Total interest income on loans decreased $782,000 in addition to a $110,000 decrease in interest income from investment securities. Average loans outstanding decreased $29.0 million to $73.8 million at June 30, 2003. During the second half of 2002, United completed a loan securitization transaction resulting in the sale of approximately $50 million in consumer loans. Total interest expense decreased $650,000 to $980,000 for the quarter ended June 30, 2003. The reduction in interest expense was mainly the product of average deposits decreasing $16.5 million to $107.4 million for the quarter ended June 30, 2003, from $123.9 million for the quarter ended June 30, 2002 combined with the average cost of those deposits falling to 3.04% from 3.82% for the respective periods. Also, the average cost of FHLB advances decreased to 1.85% on an average balance of $12.2 million in the most recent quarter compared to a cost of 4.65% on an average balance of $17.0 million for the same period a year ago. Provision for Loan Losses and Letters of Credit Valuation Provision The provision for loan losses for the three months ended June 30, 2003 was a credit of $18,000 compared to zero for the three months ended June 30, 2002. Additional loan loss provisions were made during the current quarter based on loan growth, delinquency and charge-off trends. However, these provisions were offset by the reduction of consumer loan allowances as a result of consumer loan sales completed during the quarter, and the payoffs of two large multifamily loans during the second quarter. During the quarter, a $170,000 credit to the letter of credit valuation provision was recorded along with a corresponding entry to the provision for loan losses in which net income was not impacted by the transaction. Non-interest income Non-interest income for the three months ended June 30, 2003 was $1.1 million compared to $820,000 for the same period in 2002, an increase of $286,000. Net gains on loan sales decreased $45,000 from the prior year's quarter primarily due to a decrease in volume of automobile loans sold. A $73,000 gain on the sale of available for sale investments was recognized for the quarter ended June 30, 2002 compared to none for the same period in 2003. The sale of two foreclosed properties contributed $305,000 during the quarter compared to none in 2002. Income of $54,000 was recognized on the retained interests in securitized assets. Increased mortgage loan volume resulted in a $54,000 increase in underwriting and document fees over the prior year. An increase in early payoffs on automobile loans due to the historically low interest rate environment resulted in the repayment of $79,000 in interest previously paid by United to automobile dealerships compared to $7,000 for the same period in 2002. Included in other income for 2002 was a $140,000 gain in connection with Fidelity liquidating a $500,000 senior note for $360,000. Non-interest expense Non-interest expense decreased $96,000 to $1.7 million for the quarter ended June 30, 2003 compared to $1.8 million for the same period in 2002. Salaries and employee benefits decreased $22,000 from the second quarter of 2002. Equipment expense increased $16,000 over the prior due to increased maintenance and depreciation expense. Data processing expense increased $30,000 over the prior year due to increased volume of mortgage and consumer loans serviced when compared to the same period in 2002. Professional liability insurance expense increased $28,000 over the prior year due to market rate increases during the year. Bond issuance expense increased $47,000 over 2002 in connection with $2.3 million retirement in subordinated notes during the quarter and the deferred costs associated 14 with the retired debt. A $170,000 credit to the valuation provision was recorded compared to none in 2002 as noted above in the provision discussion. Comparison of Operating Results For the Six Months Ended June 30, 2003, and 2002 General. Net Income for the six months ended June 30, 2003, was $158,000 or 21.5% above the $130,000 for the six months ended June 30, 2002. This change was primarily attributable to increases in non-interest income and a reduction in non-interest expense and provision for loan losses. 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 six months of 2003 and 2002:
Six months ended Average yield for June 30, six months ended (dollars in thousands) June 30, ---------------------------- -------------------- 2003 2002 2003 2002 ---------- --------- ------ ------ Interest-earning assets $ 120,212 $ 142,546 5.37% 6.97% Interest-bearing liabilities 120,756 143,339 3.57 4.55 ---------- --------- ---- ---- Net interest bearing liabilities $ (544) $ (793) ========== ========= Net interest spread 1.80% 2.42% ==== ==== Net interest margin 1.78% 2.40% ==== ====
Net interest income for the first six months of 2003 was $1,060,000 compared to $1,851,000 earned during the first six months of 2002. Total interest income decreased $1,884,000 to $3.2 million for the six months ended June 30, 2003 from $5.1 million for the same period in 2002. During the first half of 2002, an additional $156,000 in interest income was recognized on previously charged off loans compared to none in 2003. The remaining decrease in interest income was primarily attributable to a decrease in average consumer loans of $26.0 million resulting from the completion of the securitization transaction in the third quarter of 2002. The decrease in average balances in combination with partially replacing these assets at lower yields resulted in a decrease in consumer loan interest income of $1.2 million. Average mortgage loans decreased $5.8 million due to the refinancing activity of the low interest rate environment over the past year. The majority of refinanced loans have been sold in the secondary market resulting in a decrease in mortgage loan outstandings and interest income of $414,000 when compared to the prior year. Interest expense decreased $1.1 million due to a combination of a decrease of $250,000 and $390,000 due to a decrease primarily in certificate of deposits volume and rate, respectively. The remaining decrease is associated with the decrease in volume and rate of FHLB advances and other borrowing totaling $453,000. The following table sets forth the details of the rate and volume change for the first six months of 2003 compared to the same period in 2002.
Six Months Ended June 30, 2003 vs 2002 Increase (Decrease) Due to change in ---------------------------------------- Volume Rate Total -------- ------ ------- Interest Income: Loans and mortgage-backed securities $ (884) $ (793) $(1,677) Other interest-earning assets (27) (24) (51) ------ ------ ------- Total interest-earning assets (911) (817) (1,728) Interest Expense: Deposits (250) (390) (640) FHLB advances and other borrowings (353) (100) (453) ------ ------ ------ Total interest-bearing liabilities (603) (490) (1,093) ------ ------ ------ Change in net interest income $ (308) $ (327) $ (635) ====== ====== ======
15 Provision for Loan Losses and Letters of Credit Valuation Provision The provision for loan losses for the six months ended June 30, 2003 was a credit of $122,000 compared to zero for the six months ended June 30, 2002. Additional loan loss provisions were made during the current quarter based on loan growth, delinquency and charge-off trends. However, these provisions were offset by the reduction of consumer loan allowances as a result of consumer loan sales completed during the quarter, and the payoffs of two large multifamily loans during the second quarter. 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 six months ended June 30, 2003 was $2.3 million compared to $1.8 million for the same period in 2002, an increase of $575,000 or 31.9%. Net gains on loan sales decreased $123,000 from the prior year's quarter due to a decrease in volume of automobile loans sold. A $320,000 gain on the sale of available for sale investments was recognized in the first half of 2002 compared to $73,000 in 2002 for the same time period. Increased prepayment speeds, remaining premiums and pricing made it advantageous to sell the securities as opposed to holding them during 2003. Although the entire investment portfolio is available for sale, Fidelity believes the sale of investment securities are considered non-recurring in nature. As previously discussed the sale of two foreclosed properties contributed to the $317,000 gain on disposals compared to none in 2002. A $72,000 gain on the sale of an interest rate swap was recognized in 2002 compared to zero in 2003. Income of $114,000 was recognized on the retained interests in securitized assets. An increase in early payoffs on automobile loans due to the historically low interest rate environment resulted in the repayment of $162,000 in interest previously paid by United to automobile dealerships compared to $12,000 for the same period in 2002. Included in other income were non-recurring items which Fidelity received during the first half of 2003 totaling approximately $125,000 from Fidelity's active participation in affordable housing activities, which ended late last year. Also, included in other income for 2002 was a $140,000 gain resulting from the liquidation of a $500,000 senior note at a discount compared to none in 2003. Non-interest expense Non-interest expense decreased $220,000 to $3.4 million for the six months ended June 30, 2003 compared to $3.6 million for the same period in 2002. Salaries and employee benefits decreased $79,000 from the first six months of 2002. Data processing expense increased $50,000 over the prior year due to increased volume of mortgage and consumer loans serviced when compared to the same period in 2002. Equipment expense increased $29,000 over the prior year due to increased maintenance expense. Printing, postage and office supplies decreased $21,000 from the prior year due to various improvements made in the purchasing and printing process. Professional liability insurance expense increased $49,000 over the prior year due to market rate increases during the year. Bond issuance expense increased $48,000 over the prior year in connection with the retirement of $2.3 million in subordinated notes and the deferred cost associated with the retired debt. Intangible asset amortization was $52,000 for the first six months of 2002 compared to zero in 2003 due to the change in the estimated lives of these assets in the third quarter of 2002. Income tax benefit The income tax benefit was $21,000 for the three months ending June 30, 2003 compared to a $98,000 benefit in the same period last year. Included in this benefit are tax credits of $55,000. The income tax benefit was $71,000 16 for the six months ending June 30, 2003 compared to $169,000 in the same period last year. Included in this benefit are tax credits of $111,000. These credits are received from Fidelity's remaining investments in limited partnership interests in affordable housing properties and are a component of the overall return on these investments. Consideration of the need for a valuation allowance for the deferred tax asset was made at June 30, 2003 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 50% of the initiatives included within its current business plan and then achieve 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. Due to capital gains 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 $500,000 at December 31, 2002. Fidelity considers the current valuation allowance adequate at June 30, 2003 based upon the results of the above analysis and assumptions, but cannot assure that future income will be enough to support the current level of deferred taxes. 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. 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 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. Recently Issued Accounting Guidance In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with characteristics of Both Liabilities and Equity." This Statement establishes standards for how an entity classifies and measures certain financial instruments with characteristics of both liabilities and equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of this Standard did not have a material effect on Fidelity's Condensed Consolidated Financial Statements. 17 In November 2002, the FASB issued Interpretation No. 45, (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this Interpretation apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in this Interpretation are effective for periods ending after December 15, 2002. Adoption of the requirements of FIN 45 did not have a material effect on Fidelity's Consolidated Financial Statements. In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities." This Interpretation clarifies that application of ARB No. 51, "Consolidate Financial Statements," for certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties. This interpretation requires variable interest entities to be consolidated by the primary beneficiary which represents the enterprise that will absorb the majority of the variable interest entities' expected losses if they occur, receive a majority of the variable interest entities' residual returns if they occur, or both. Qualifying Special Purpose Entities (QSPE) are exempt from the consolidation requirements of FIN 46. This Interpretation was effective for variable interest entities created after January 31, 2003 and for variable interest entities in which an enterprise obtains an interest after that date. This Interpretation is effective in the first fiscal year or interim period beginning after June 15, 2003 for variable interest entities in which an enterprise holds a variable interest that was acquired before February 1, 2003, with earlier adoption permitted. Fidelity is evaluating the impact of FIN 46 and does not expect to have a material effect on Fidelity's Consolidated Financial Statements. 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 June 30, 2003 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 June 30, 2003, management anticipates there has been no material change from the information disclosed in Fidelity's annual report to shareholders at December 31, 2002. Item 4 - Controls and Procedures a. Evaluation of Disclosure Controls and Procedures. Fidelity's principal executive officer and principal financial officer have concluded that Fidelity'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 by the end of the period covered by this Form 10-Q, are effective. 18 b. Changes in Internal Controls. There have been no significant changes in Fidelity'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. Fidelity's management, including its principal executive officer and principal financial officer, does not expect that Fidelity'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 only be reasonable 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. Exhibits 31.1 and 31.2 contain the Certifications of Fidelity'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. 19 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: ------------------------------------------ On April 1, 2003, Fidelity issued an aggregate of 2,777,777 shares of common stock at the exercise price of $1.44 per share, or approximately $4,000,000 in aggregate, to Pedcor Holdings, LLC and Pedcor Bancorp as a result of their exercise of a stock option. Fidelity had reasonable grounds to believe that the investors were accredited investors, capable of evaluating merits and risks of this investment, and who acquired the shares for investment purposes. The transactions were private in nature, and the shares were issued in reliance upon Section 4(2) of the Securities Act of 1933, as amended. Bruce A. Cordingley, Gerald K. Pedigo and Phillip J. Stoffregen, directors of Fidelity, are executive officers of Pedcor Holdings, LLC and Pedcor Bancorp. ITEM 3 Defaults Upon Senior Securities: -------------------------------- Not applicable. ITEM 4 Submission of Matters to a Vote of Security Holders: ---------------------------------------------------- At the annual meeting of shareholders held on April 24, 2003, in addition to the election of directors, the shareholders voted upon the one board proposal contained in Fidelity Federal Bancorp's Proxy Statement dated March 24, 2003. The Board nominees were elected as directors with the following vote: Nominee For Withheld William R. Baugh 5,122,751 942,574 Paul E. Becker 5,128,095 937,230 Bruce A. Cordingley 5,126,341 938,984 Jack Cunningham 5,125,474 939,851 Donald R. Neel 5,127,908 937,417 Gerald K. Pedigo 5,127,058 938,267 Barry A. Schnakenburg 5,128,095 937,230 Phillip J. Stoffregen 5,126,895 938,430 20 The Board proposal was approved with the following vote:
Abstentions (Other Than Broker Broker Proposal For Against Non-Votes) Non-Votes Board proposal to ratify the appointment of BKD LLP as the Company's independent auditors 5,787,571 272,057 5,697 775,558
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 31.1 Certification of CEO required pursuant to 15d-14(a) of the Securities Exchange Act of 1934 31.2 Certification of CFO required pursuant to 15d-14(a) of the Securities Exchange Act of 1934 32.1 Certification of Chief Executive Officer required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 21 b. A form 8-K was filed on July 27, 2003 announcing that on July 18, 2003, Fidelity issued a press release in connection with Fidelity's second quarter 2003 earnings release. A form 8-K was filed on April 23, 2003 announcing that on April 22, 2003, Fidelity issued a press release in connection with Fidelity's first quarter 2003 earnings release. A form 8-K was filed on April 7, 2003 announcing that on April 4, 2003, Fidelity issued a press release reporting that it had issued 2,777,777 shares of common stock for $4.0 million in cash through the exercise of an option held by Pedcor Holdings and affiliates. 22 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: August 14, 2003 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) 23 Index to Exhibits Page Exhibit Number Exhibit ------------------------------------------------------------------------------- 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 31.1 Certification of CEO required pursuant to 15d-14(a) of the Securities Exchange Act of 1934 31.2 Certification of CFO required pursuant to 15d-14(a) of the Securities Exchange Act of 1934 32.1 Certification of Chief Executive Officer required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 24