-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Oaka6Lq3kwMJ8lQsMyT+oUS/j9+uk/j84aXWJG/OedMKplT+gRPDYnLq9bi86pmu 8+FDUjY+iR0MwEUnGN/+yg== 0000926274-03-000393.txt : 20031113 0000926274-03-000393.hdr.sgml : 20031113 20031113123150 ACCESSION NUMBER: 0000926274-03-000393 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIDELITY FEDERAL BANCORP CENTRAL INDEX KEY: 0000910492 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 351894432 STATE OF INCORPORATION: IN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22880 FILM NUMBER: 03996740 BUSINESS ADDRESS: STREET 1: 700 S GREEN RIVER ROAD STREET 2: SUITE 2000 CITY: EVANSVILLE STATE: IN ZIP: 47715 BUSINESS PHONE: 8124692100 MAIL ADDRESS: STREET 1: 18 NW FOURTH ST STREET 2: PO BOX 1347 CITY: EVANSVILLE STATE: IN ZIP: 47706-1347 10-Q 1 ffb-903q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended September 30, 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 October 28, 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......................................... 11-20 ITEM 3--Quantitative and Qualitative Disclosures about Market Risk...... 20 ITEM 4--Controls and Procedures......................................... 20 PART II - OTHER INFORMATION............................................... 22 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)
September 30, December 31, 2003 2002 ----------- ------------ (Unaudited) Assets Cash and due from banks $ 1,229 $ 1,454 Interest-bearing demand deposits 3,266 2,369 --------- --------- Cash and cash equivalents 4,495 3,823 Investment securities available for sale 40,764 34,912 Loans, net of allowance for loan losses of $762 and $837 92,078 73,087 Premises and equipment 4,681 4,935 Federal Home Loan Bank of Indianapolis stock 2,743 2,674 Deferred income tax receivable 6,033 5,615 Foreclosed assets held for sale, net of allowance of $0 and $100 207 2,145 Interest receivable and other assets 5,893 5,099 --------- --------- Total assets $ 156,894 $ 132,290 ========= ========= Liabilities Deposits Non-interest bearing $ 6,599 $ 3,209 Interest bearing 109,555 103,582 --------- --------- Total deposits 116,154 106,791 Federal Home Loan Bank advances 17,000 3,000 Long-term debt 8,302 10,586 Valuation allowance for letters of credit 287 445 Other liabilities 1,746 1,880 --------- --------- Total liabilities 143,489 122,702 --------- --------- 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 Retained earnings (12,969) (13,152) Accumulated other comprehensive income (loss) (141) 379 --------- --------- Total stockholders' equity 13,405 9,588 --------- --------- Total liabilities and stockholders' equity $ 156,894 $ 132,290 ========= =========
See notes to condensed consolidated financial statements. 3 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Condensed Consolidated Statements of Income (Loss) (In Thousands, Except Share Data) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ----------------------------------------------------------- Interest Income Loans receivable $ 1,241 $ 1,896 $ 3,600 $ 6,033 Investment securities--taxable 339 463 1,028 1,248 Loans held for sale -- -- 39 -- Deposits with financial institutions 4 25 42 107 Other dividend income 31 42 105 121 ----------- ----------- ----------- ----------- Total interest income 1,615 2,426 4,814 7,509 ----------- ----------- ----------- ----------- Interest Expense Deposits 630 1,127 2,263 3,400 Short-term borrowings 1 4 5 25 Long-term debt 201 378 703 1,316 ----------- ----------- ----------- ----------- Total interest expense 832 1,509 2,971 4,741 ----------- ----------- ----------- ----------- Net Interest Income 783 917 1,843 2,768 Provision for loan losses 99 (400) (23) (400) ----------- ----------- ----------- ----------- Net Interest Income After Provision for Loan Losses 684 1,317 1,866 3,168 ----------- ----------- ----------- ----------- Other Income Service charges on deposit accounts 108 121 327 319 Net gains on loan sales 165 230 648 733 Net gains on investment sales 19 -- 339 73 Letter of credit fees 125 124 367 374 Underwriting and document prep fees 64 49 182 107 Servicing fees on loans sold 78 36 216 110 Securitization income 42 -- 155 -- Dealer interest received 80 6 243 19 Gain on sale of real estate owned -- -- 317 -- Other income 234 279 444 853 ----------- ----------- ----------- ----------- Total non-interest income 915 845 3,238 2,588 ----------- ----------- ----------- ----------- Other Expenses Salaries and employee benefits 823 978 2,546 2,773 Occupancy 87 93 262 278 Equipment 101 85 300 255 Data processing 107 83 322 247 Deposit Insurance 13 13 39 43 Legal and professional 67 121 182 248 REO expenses 14 153 32 187 Insurance 74 44 209 129 Advertising 30 33 119 108 Printing, postage, and office supplies 50 45 162 177 Loss on securitization -- 265 -- 265 Fee on prepayment of FHLB advances -- 488 -- 504 Letter of credit valuation provision -- -- (170) -- Amortization of intangible assets -- 864 -- 917 Other 297 351 1,078 1,117 ----------- ----------- ----------- ----------- Total non-interest expense 1,663 3,616 5,081 7,248 ----------- ----------- ----------- ----------- Income (Loss) From Continuing Operations Before Income Tax (64) (1,454) 23 (1,492) Income tax expense (benefit) (89) 562 (161) 394 ----------- ----------- ----------- ----------- Income (loss) from continuing operations 25 (2,016) 184 (1,886) Loss on discontinued operations before tax -- (762) -- (762) Income tax expense -- (229) -- (229) ----------- ----------- ----------- ----------- Loss on discontinued operations -- (533) -- (533) ----------- ----------- ----------- ----------- Net Income (Loss) $ 25 $ (2,549) $ 184 $ (2,419) =========== =========== =========== =========== Basic Net Income (Loss) From Continuing Operations $ 0.00 $ (0.32) $ 0.02 $ (0.31) Basic Net Income (Loss) From Discontinued Operations (0.09) (0.09) Basic Net Income (Loss) $ 0.00 $ (0.41) $ 0.02 $ (0.40) Diluted Net Income (Loss) From Continuing Operations $ 0.00 $ (0.32) $ 0.02 $ (0.31) Diluted Net Income (Loss) From Discontinuing Operations (0.09) (0.09) Diluted Net Income (Loss) $ 0.00 $ (0.41) $ 0.02 $ (0.40) Average Common and Common Equivalent Shares Outstanding 9,618,658 6,161,514 8,700,710 6,079,474
See notes to condensed consolidated financial statements 4 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Condensed Consolidated Statements of Changes in Stockholders' Equity (In Thousands, Except Share Data)
Nine Months End September 30, -------------------------------------------------- 2003 2002 ---------- ----------- Beginning Balance $9,588 $11,895 Comprehensive loss Net income (loss) 184 (2,419) Other comprehensive income (loss) - net of tax (520) 188 ------------- --------- Comprehensive loss (336) (2,231) Issuance of stock 4,153 1,194 Issuance of stock warrants 250 ---------- ----------- Balances, September 30 (unaudited) $13,405 $11,108 ========== ===========
See notes to condensed consolidated financial statements. 5 FIDELITY FEDERAL BANCORP AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Nine Months Ended September 30, --------------------- 2003 2002 -------- -------- Operating Activities Net income (loss) $ 184 $ (2,419) Adjustments to reconcile net income to net cash provided (used) by operating activities Provision for loan losses (23) (400) Letter of credit valuation provision (170) -- Net gain on sales of securities available for sale (339) (73) Net gain on sale of foreclosed assets (317) Loss on impairment of assets held for sale and changes in estimated useful lives of intangible assets -- 1,184 Depreciation and amortization 329 360 Valuation allowance--affordable housing investments -- 40 Loans originated for sale (40,954) (11,975) Proceeds from sale of loans 40,859 12,019 Changes in Interest payable and other liabilities (122) 1,926 Interest receivable and other assets (531) (2,094) Other 314 (226) -------- -------- Net cash used by operating activities (770) (1,658) -------- -------- Investing Activities Purchases of securities available for sale (35,488) (33,803) Proceeds from sales of securities available for sale 15,814 13,107 Proceeds from maturities of securities available for sale 12,947 -- Net change in FHLB stock (69) (54) Net change in loans (19,463) 32,107 Proceeds from sale of foreclosed assets 2,544 Purchase of premises and equipment (75) (192) Funding on outstanding letters of credit -- (225) -------- -------- Net cash used by investing activities (23,790) 10,940 -------- -------- Financing Activities Net change in Noninterest-bearing, interest-bearing demand and savings deposits 1,596 (2,939) Certificates of deposit 7,767 578 Short-term borrowings -- -- Proceeds of FHLB advances 14,000 10,778 Proceeds from long-term debt 4,000 -- Repayment of long-term debt (6,284) (24,432) Issuance of stock 4,153 1,194 Issuance of stock warrants -- 250 -------- -------- Net cash provided by financing activities 25,232 (14,571) -------- -------- Net Change in Cash and Cash Equivalents 672 (5,289) Cash and Cash Equivalents, Beginning of Period 3,823 16,316 -------- -------- Cash and Cash Equivalents, End of Period $ 4,495 $ 11,027 ======== ======== Additional Cash Flows Information Interest paid $ 2,643 $ 4,711 Income tax paid (refunded) -- -- Real estate acquired in settlement of loans 192 1,910
See notes to condensed consolidated financial statements. 6 Fidelity Federal Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) o Accounting Policies The significant accounting policies followed by Fidelity Federal Bancorp ("Fidelity") and its wholly owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments which are necessary for a fair presentation of the results for the periods reported, consist only of normal recurring adjustments, and have been included in the accompanying unaudited condensed consolidated financial statements. The results of operations for the nine months ended September 30, 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 67.75% 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. 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. 7 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, in accordance with its business plan. 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. During the third quarter of 2003, United's most recent three year strategic business plan was approved by the OTS. 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 September 30, 2003. o Earnings per share Earnings per share (EPS) were computed as follows:
Three Months Ended September 30, 2003 ------------------------------------------ Income Weighted-Average Per Share Shares Amount ------------------------------------------ Net income $ 25 ===== Basic earnings per share Income available to common stockholders $ 25 9,618,658 $ 0.00 ====== Effect of dilutive securities Stock options - - ----- --------------- Diluted earnings per share Income available to common stockholders and assumed conversions $ 25 9,618,658 $ 0.00 ===== ========= ======
8
Three Months Ended September 30, 2002 ---------------------------------------------- Income Weighted-Average Per Share Shares Amount ---------------------------------------------- Loss from continuing operations $ (2,016) ========= Basic earnings per share Loss available to common stockholders $ (2,016) 6,161,514 $ (0.32) ========= Effect of dilutive securities Stock options - - --------- --------- Diluted earnings per share Loss available to common stockholders and assumed conversions $ (2,016) 6,161,514 $ (0.32) ======== ========= ======== Nine Months Ended September 30, 2003 ---------------------------------------------- Income Weighted-Average Per Share Shares Amount ---------------------------------------------- Net income $ 184 ====== Basic earnings per share Income available to common stockholders $ 184 8,700,710 $ 0.02 ====== Effect of dilutive securities Stock options - - ------ --------- Diluted earnings per share Income available to common stockholders and assumed conversions $ 184 8,700,710 $ 0.02 ====== ========= ====== Nine Months Ended September 30, 2002 ---------------------------------------------- Income Weighted-Average Per Share Shares Amount ---------------------------------------------- Loss from continuing operations $ (1,886) ======== Basic earnings per share Loss available to common stockholders $ (1,886) 6,079,474 $ (0.31) ======== Effect of dilutive securities Stock options - - ------ ---------- Diluted earnings per share Loss available to common stockholders and assumed conversions $ (1,886) 6,079,474 $ (0.31) ======== ========= =======
Options to purchase 345,796 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 shares of common stock at prices ranging from $3.00 to $8.93 per share were outstanding at September 30, 2003, but were not included in the computation of diluted EPS because the options' and warrants' exercise prices were 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 September 30, 2003 Balance 30 Days - ---------------------------------------------------------------------------- Total serviced automobile loans $ 89,924 $348 Less: Automobile loans securitized (27,372) (87) Automobile loans serviced (31,364) (78) ---------------------------- Total automobile loans held in portfolio $ 31,188 $ 183 ============================ 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 September 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% 8.75% As of September 30, 2003 1,880 20 1.42 1.50 15.0 8.59 Decline in fair value of 10% adverse change $ 29 $ 18 $ 29 Decline in fair value of 20% adverse change 64 37 59 Servicing asset As of the date of securitization 362 39 1.50% 1.50% 15.0% As of September 30, 2003 * 181 20 1.42 1.50 15.0 Decline in fair value of 10% adverse change $ 7 $ 0 $ 2 Decline in fair value of 20% adverse change 20 0 4
*Carrying value of the servicing asset approximated fair value at September 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 Nine months ended September 30 September 30 --------------------------------------------------- 2003 2002 2003 2002 --------------------------------------------------- Net income (loss) as reported $ 25 $ (2,549) $ 184 $(2,419) Less: Total stock-based compensation cost determined under the fair value based method, net of income taxes (8) (9) (24) (63) --------------------------------------------------- Pro forma net income (loss) $ 17 $ (2,558) $ 160 $(2,482) =================================================== Basic earnings (loss) per share - as reported $0.00 $(0.41) $0.02 $(0.40) Basic earnings (loss) per share - pro forma $0.00 $(0.42) $0.02 $(0.41) Diluted earnings (loss) per share - as reported $0.00 $(0.41) $0.02 $(0.40) Diluted earnings (loss) per share - pro forma $0.00 $(0.42) $0.02 $(0.41)
o Discontinued Operations On September 30, 2002, Fidelity signed a definitive agreement to sell the stock of its wholly owned affordable housing subsidiary, Village Affordable Housing Corporation and the stock of United's wholly owned affordable housing subsidiary, Village Housing Corporation and certain other related affordable housing assets to Pedcor Funding Corporation (Funding). At September 30, 2002, Funding was a company controlled by three directors of Fidelity and are members of a group that beneficially owns approximately 60.7% of Fidelity's issued and outstanding stock. Certain charges were recorded in the third quarter of 2002 because it was determined that some of the assets held for sale were impaired or their estimated useful lives had changed. Third quarter charges totaled approximately $533,000, net of tax or $0.09 per share, including approximately $860,000 in write-downs of intangible assets whose useful lives were reduced. o Reclassifications Reclassifications of certain amounts from the condensed consolidated income statements for the three and nine month periods ended September 30, 2002 have been made to conform to the presentation of the three and nine month periods ended September 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 September 30, 2003 and December 31, 2002 Total assets at September 30, 2003 were $156.9 million, an increase of $24.6 million from $132.3 million at December 31, 2002. The increase in total assets was primarily attributable to a $5.9 million increase in investment securities available for sale and $19.0 million increase in net loans. United's investment portfolio consists entirely of mortgage related securities which are classified as "available for sale". Approximately $15.8 million of securities were sold during 2003, due to continued rapid prepayments in connection with the low market rate environment, but replaced with approximately $35.5 million in similar mortgage-backed securities during 2003. 11 Net loans increased $19.0 million to $92.1 million at September 30, 2003. The increase is associated with a $13.0 million increase in consumer loans. Low interest rates resulted in a $5.8 million increase in residential real estate loans. Continued expansion in commercial lending resulted in a $2.1 million increase in commercial real estate loans. Offsetting these increases was a $2.9 million decrease in loans due to the payoff of two loans on multifamily real estate properties. The allowances for loan losses decreased to $762,000 at September 30, 2003, from $837,000 at December 31, 2002. The decline was due to a $23,000 credit to the provision for loan losses and $52,000 in net charge-offs. The $23,000 net loan loss provision credit was due to excess allowance created from consumer loan sales during 2003 and a reduction of excess reserves on two multifamily real estate properties that paid off during the second quarter of 2003 offset partially by additional provisions for consumer loans in connection with new loan growth. The allowance for loan losses represented 0.82% of total loans at September 30, 2003, a decrease from 1.13% at December 31, 2002. Relative to non-performing assets, the allowance for loan losses was 36.9% at September 30, 2003, compared to 27.4% at December 31, 2002. The following table sets forth an analysis of the allowance for loan losses for the nine months ended September 30, 2003 and the year ended December 31, 2002: Nine months ended Year ended September 30, December 31, 2003 2002 ------------- ------------ (dollars in thousands) Allowance for loan losses at beginning of period $ 837 $ 2,138 Provision for losses (23) (360) Loans charged off (151) (1,954) Recoveries on loans 99 1,013 ------ --------- Allowance for loan losses at end of period $ 762 $ 837 ====== ========= Foreclosed assets held for sale decreased $1.9 million primarily due to the disposition of a commercial real estate property. Total deposits increased $9.4 million to $116.2 million at September 30, 2003, from $106.8 million at December 31, 2002. Approximately $3.4 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 September 30, 2003. The increase in borrowings was utilized to fund investment and loan growth during 2003. Long-term debt decreased $2.3 million to $8.3 million at September 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 in the second quarter of 2003. 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. In the third quarter United secured $4.0 million in floating rate junior subordinated debentures that qualify for Tier II capital inclusion and currently bear interest at 4.09%. Total stockholders' equity increased $3.8 million from December 31, 2002 to $13.4 million at September 30, 2003. The increase was primarily attributable to the exercise of stock options totaling $4.1 million during the second quarter of 2003 by Pedcor Holdings and affiliates and net income for the year-to-date offset partially by the change in the unrealized gain (loss) on available for sale securities. Non-Performing Assets Non-performing assets decreased $1.0 million from December 31, 2002 to $2.1 million or 1.3% of total assets at September 30, 2003. The decrease is primarily due to the sale of a commercial real estate property with a carrying value of $1.8 million. The decrease was partially offset by a $434,000 real estate mortgage loan which was placed in non-accrual status. 12 The following table provides information on Fidelity's non-performing assets as of September 30, 2003 and December 31, 2002: September 30, December 31, 2003 2002 --------------------------- (Dollars in Thousands) Non-accrual loans Consumer $ 265 $ 131 Commercial 675 388 Real estate mortgage 917 356 ------ ------ Total non-accrual loans 1,857 875 Restructured Total restructured loans 19 39 90 days or more past due and accruing Consumer 3 -- Real estate mortgage -- 1 ------ ------ Total 90 days or more past due and accruing 3 1 Foreclosed and repossessed assets 207 2,145 ------ ------ Total non-performing assets $2,086 $3,060 ====== ====== Ratio of non-performing assets to total assets 1.33% 2.31% ======= ====== Foreclosed and Repossessed Assets Foreclosed and repossessed assets totaled $207,000 at September 30, 2003 compared to $2.1 million at December 31, 2002. The properties consists of two duplex units. A sales contract has been executed on both properties and a sale is expected to close in the fourth quarter of 2003. 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 September 30, 2003 compared to $6.0 million at December 31, 2002. Total classified assets were 13.7% and 55.4% of Fidelity's capital and reserves at September 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 $6.6 million at September 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 September 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 second 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 September 30, 2003 based on capital regulations currently in effect for savings institutions. Tangible Core Risk-based Capital Capital Capital Regulatory capital $11,024 $11,332 $14,460 Minimum capital requirement 2,276 6,083 8,258 ------- ------- ------- Excess capital 8,748 5,249 6,202 ======= ======= ======= Regulatory capital ratio 7.26% 7.45% 14.01% Required capital ratio 1.50% 4.00% 8.00% ------- ------- ------- Ratio excess 5.76% 3.45% 6.01% ======= ======= ======= 13 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. Fidelity has a $500,000 line of credit and can draw on this line until its expiration in September 2004. At September 30, 2003, no balance 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 connection with the recent $6.3 million in debt reduction in the second quarter, and the $1.5 million debt reduction scheduled for the fourth quarter, will assist it in meeting its future liquidity needs. o Comparison of Operating Results for the Three Months Ended September 30, 2003 and 2002 General. Net income for the quarter ended September 30, 2003 was $25,000 compared to a net loss of $2.5 million for the quarter ended September 30, 2002. Net interest income decreased, while non-interest income increased and non-interest expense decreased. Net Interest Income Net interest income of $783,000 was recognized during the quarter ended September 30, 2003, compared to $917,000 for the same period in 2002. Total interest income decreased $811,000 to $1.6 million for the quarter ended September 30, 2003, from $2.4 million for the same quarter in 2002. Total interest income on loans decreased $655,000 in addition to a $124,000 decrease in interest income from investment securities. Average loans outstanding decreased $15.2 million to $84.9 million at September 30, 2003. During the third quarter of 2002, United completed a loan securitization transaction resulting in the sale of approximately $50 million in consumer loans. Total interest expense decreased $677,000 to $832,000 for the quarter ended September 30, 2003. The reduction in interest expense was mainly the product of average deposits decreasing $14.8 million to $111.6 million for the quarter ended September 30, 2003, from $126.5 million for the quarter ended September 30, 2002 combined with the average cost of those deposits falling to 2.77% from 3.72% for the respective periods. Also, the average cost of FHLB advances decreased to 1.87% on an average balance of $19.7 million in the most recent quarter compared to a cost of 3.54% on an average balance of $12.6 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 September 30, 2003 was $99,000 compared to a credit of $400,000 for the three months ended September 30, 2002. Additional loan loss provisions were made during the current quarter based on loan growth, delinquency and performance trends. The $400,000 provision for loan loss credit in 2002 was primarily the result of the allowance for automobile loan losses being reduced as a result of completing the automobile loan securitization transaction. Non-interest income Non-interest income for the three months ended September 30, 2003 was $915,000 compared to $845,000 for the same period in 2002, an increase of $70,000. Net gains on loan sales decreased $65,000 from the prior year's quarter primarily due to a decrease in the volume of automobile loans sold. A $19,000 gain on the sale of available for sale investments was recognized for the quarter ended September 30, 2002, compared to none for the same period in 2003. Income of $42,000 was recognized on the retained interests in securitized assets. Increased mortgage loan volume resulted in a $15,000 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 $80,000 in interest previously written off by United to automobile dealerships compared to $6,000 for the same period in 2002. During the third quarter of 2003, higher interest rates had a negative impact on loan originations but also resulted in a reduction of future prepayment speeds on the mortgage-servicing portfolio. This reduction in prepayment speeds resulted in an increase in the value of United's net mortgage servicing asset. 14 Non-interest expense Non-interest expense decreased $1.9 million to $1.7 million for the quarter ended September 30, 2003 compared to $3.6 million for the same period in 2002. Salaries and employee benefits decreased $155,000 from the third quarter of 2002, due to a reduction in full-time equivalent employees. Equipment expense increased $16,000 over the prior due to increased maintenance and depreciation expense. Data processing expense increased $24,000 over the prior year due to increased volume of mortgage and consumer loans serviced when compared to the same period in 2002 in addition to internet banking that was introduced to customers during the third quarter of 2003. Professional liability insurance expense increased $30,000 over the prior year due to market rate increases during the year. A loss of $265,000 was recognized in connection with the securitization transaction completed in the third quarter of 2002. Lower than expected interest rates and higher costs attributed to the loss, but was offset by a reversal of $360,000 in the provision for loan losses. Non-recurring expenses incurred in the third quarter of 2002 included changes in the estimated useful lives of intangible assets which created additional expense of $864,000, and prepayment fees on FHLB advances of $488,000. Comparison of Operating Results For the Nine Months Ended September 30, 2003, and 2002 General. Net Income for the nine months ended September 30, 2003, was $184,000 compared to the loss of $2.4 million for the nine months ended September 30, 2002. This change was primarily attributable to a decrease in net interest income offset by increases in non-interest income and a reduction in non-interest expense. Net Interest Income The following table summarizes Fidelity's average interest-earning assets and average interest-bearing liabilities with the accompanying average rates for the first nine months of 2003 and 2002:
Nine months ended Average yield for September 30, nine months ended (dollars in thousands) September 30, ------------------------ ---------------------- 2003 2002 2003 2002 -------- -------- ------- ------- Interest-earning assets $125,019 $143,161 5.15% 6.87% Interest-bearing liabilities 123,818 143,872 3.21 4.41 -------- -------- ---- ---- Net interest bearing assets (liabilities) $ 1,201 $ (711) ======== ======== Net interest spread 1.94% 2.46% ===== ===== Net interest margin 1.97% 2.44% ===== =====
Net interest income for the first nine months of 2003 was $1.8 million compared to $2.8 million earned during the first nine months of 2002. Total interest income decreased $2.7 million to $4.8 million for the nine months ended September 30, 2003 from $7.5 million for the same period in 2002. The decrease in interest income was primarily attributable to a decrease in average consumer loans of $22.9 million resulting from the completion of the securitization transaction in the third quarter of 2002. The decrease in average balances in combination with the partial replacement of these assets at lower yields, resulting in a decrease in consumer loan interest income of $1.7 million. Average mortgage loans decreased $2.9 million due to refinancing activity caused by 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 $522,000, when compared to the prior year. Interest expense decreased $1.8 million due to a combination of a decrease of $390,000 and $646,000 due to a decrease primarily in certificate of deposits outstanding and their average interest rate, respectively. The remaining decrease is associated with the decrease in the amount outstanding and the average interest rates of FHLB advances and other borrowings totaling $634,000. 15 The following table sets forth the details of the rate and volume change for the first nine months of 2003 compared to the same period in 2002. Nine Months Ended September 30, 2003 vs 2002 Increase (Decrease) Due to change in ------------------------------- Volume Rate Total ------- ------- ------- Interest Income: Loans and mortgage-backed securities $(1,077) $(1,536) $(2,613) Other interest-earning assets (46) (36) (82) ------- ------- ------- Total interest-earning assets (1,123) (1,572) (2,695) Interest Expense: Deposits (416) (720) (1,136) FHLB advances and other borrowings (416) (218) (634) ------- ------- ------- Total interest-bearing liabilities (832) (938) (1,770) ------- ------- ------- Change in net interest income $ (291) $ (634) $ (925) ======= ======= ======= Provision for Loan Losses and Letters of Credit Valuation Provision The provision for loan losses for the nine months ended September 30, 2003 was a credit of $23,000 compared to a $400,000 credit for the nine months ended September 30, 2002. Additional loan loss provisions were made during first nine months of 2003 based on loan growth, delinquency and charge-off trends. However, these provisions were reduced by consumer loan sales completed during 2003, and the payoffs of two large multifamily loans during the second quarter of 2003. 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 nine months ended September 30, 2003 was $3.2 million compared to $2.6 million for the same period in 2002, an increase of $650,000 or 25.1%. Net gains on loan sales decreased $85,000 from the prior year due to a decrease in volume of automobile loans sold. A $339,000 gain on the sale of available for sale investments was recognized during the first nine months of 2003 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 for a gain. As previously discussed the sale of two foreclosed properties contributed to the $317,000 gain on disposals compared to none in 2002. Income of $155,000 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 $243,000 in interest previously written off compared to $19,000 for the same period in 2002. Servicing fees on loans sold increased $106,000 over the prior year due to the increased size of the mortgage and consumer loan servicing portfolios compared to the prior year. During the third quarter of 2003, higher interest rates had a negative impact on loan originations but also resulted in a reduction of future prepayment speeds on the mortgage-servicing portfolio. This reduction in prepayment speeds resulted in an increase in the value of United's mortgage servicing asset. A gain on the disposition of a rate swap and the early extinguishment of debt of $72,000 and $140,000 were recognized in 2002 compared to none in 2003. Included in other income were non-recurring items which Fidelity received during 2003 totaling approximately $125,000 from Fidelity's active participation in affordable housing activities, which ended late last year. 16 Non-interest expense Non-interest expense decreased $2.1 million to $5.1 million for the nine months ended September 30, 2003 compared to $7.2 million for the same period in 2002. Salaries and employee benefits decreased $227,000 from the first nine months of 2002, due to a reduction in full-time equivalent employees. Data processing expense increased $75,000 over the prior year due to increased volume of mortgage and consumer loans serviced when compared to the same period in 2002 in addition to internet banking that was introduced to customers during the third quarter of 2003. Equipment expense increased $45,000 over the prior year due to increased depreciation and maintenance expense. During the second quarter of 2003, a $170,000 reclassification was recorded between the letter of credit valuation and allowance for loan losses in which net income was not impacted. Printing, postage and office supplies decreased $15,000 from the prior year due to various improvements made in the purchasing and printing process. Professional liability insurance expense increased $80,000 over the prior year due to market rate increases during the year. Intangible asset amortization was $917,000 for the first nine 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. Non-recurring expenses incurred in during 2002 included changes in the estimated useful lives of intangible assets which created additional expense of $864,000, and prepayment fees on FHLB advances of $504,000. Income tax benefit The income tax benefit was $89,000 for the three months ending September 30, 2003 compared to $562,000 in tax expense in the same period last year. The income tax benefit was $161,000 for the nine months ending September 30, 2003 compared to $394,000 in expense for the same period last year. Included in the 2003 benefit are tax credits of $166,000. 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. In 2002, net tax expense of $394,000 was recognized in connection with Fidelity establishing on tax valuation allowance for the deferred tax asset until such time that Fidelity meets its future period profitability forecasts. Consideration of the need for a valuation allowance for the deferred tax asset was made at September 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's deferred tax valuation allowance was $500,000 at December 31, 2002. Fidelity considers the current valuation allowance adequate at September 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 17 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. Automobile Loan Securitizations In 2002, United used the securitization of automobile loans as a source of funding and as a mechanism to reduce its volume of automobile loans. Automobile loans were transferred into a qualifying special purpose entity (SPE) then to a trust in a transaction which is effective under applicable banking rules and regulations to legally isolate the assets from United. Where the transferor is a depository institution such as United, legal isolation is accomplished through compliance with specific rules and regulations of the relevant regulatory authorities. SFAS 140 requires, for certain transactions completed after the initial adoption date, a "true sale" analysis of the treatment of the transfer under state law as if United were a debtor under the bankruptcy code. A "true sale" legal analysis includes several legally relevant factors, such as the nature and level of recourse to United and the nature of retained servicing rights. The analytical conclusion as to a true sale is never absolute and unconditional, but contains qualifications based on the inherent equitable powers of a bankruptcy court, as well as the unsettled state of the common law. Once the legal isolation test has been met under SFAS 140, other factors concerning the nature and extent of United's control over the transferred assets are taken into account in order to determine whether derecognition of assets is warranted, including whether the SPE has complied with rules concerning qualifying special purpose entities. A legal opinion was obtained for the automobile loan securitization transaction in 2002, which was structured as a two-step securitization. While noting the transaction fell within the meaning of a "securitization" under the FDIC regulation, "Treatment by the Federal Deposit Insurance Corporation as Conservator or Receiver of Financial Assets Transferred by an Insured Depository Institution in Connection with a Securitization or Participation" (the "Securitization Rule"), in accordance with accounting guidance, an analysis was also rendered under state law as if United was a debtor under the bankruptcy code. The "true sale" opinion provides reasonable assurance the purchased assets would not be characterized as the property of United's receivership or conservatorship estate in the event of insolvency, and also states United would not be required to substantively consolidate the assets and liabilities of the purchaser SPE with those of United upon such event. In a securitization, the trust issues beneficial interests in the form of senior and subordinated asset-backed securities backed or collateralized by the assets sold to the trust. The senior classes of the asset-backed securities typically receive investment grade credit ratings at the time of issuance. These ratings are generally achieved through the acquisition of a financial guarantee policy, the creation of lower-rated subordinated classes of asset-backed securities, as well as subordinated interests retained by an affiliate of United. In all cases, United or its affiliate retains interests in the securitized assets, which may take the form of seller certificates, subordinated tranches, cash reserve balances, servicing assets, and interest-only strips representing the cash flows generated by the assets in excess of the contractual cash flows required to be paid to the investors and for other obligations such as servicing fees. In accordance with SFAS 140, securitized automobile loans are removed from the balance sheet and a net gain or loss is recognized in income at the time of initial sale and each subsequent sale when the combined net sales proceeds and, if applicable, retained interests differ from the loans' allocated carrying amount. Net gains or losses resulting from securitizations are recorded in noninterest income or expense. Retained interests in the subordinated tranches and interest-only strips are recorded at their fair value and accounted for as available-for-sale securities with subsequent adjustments to fair value recorded through other 18 comprehensive income within stockholders' equity or in other noninterest expense in the income statement if the fair value has declined below the carrying amount and such decline has been determined to be other-than-temporary. United uses assumptions and estimates in determining the fair value allocated to the retained interests at the time of sale and each subsequent sale in accordance with SFAS 140. These assumptions and estimates include projections concerning rates charged to customers, the expected life of the receivables, credit loss experience, loan repayment rates, the cost of funds, and discount rates commensurate with the risks involved. On a quarterly basis, management reviews the historical performance of the retained interest and the assumptions used to project future cash flows. If past performance and future expectations dictate, assumptions are revised and the present value of future cash flows is recalculated. Refer to the automobile loan securitization footnote for further analysis of the assumptions used in the determination of fair value. The retained interest represents United's maximum loss exposure with respect to securitization vehicles. The investors in the debt securities issued by the SPEs have no further recourse against United if cash flows generated by the securitized automobile loans are inadequate to service the obligations of the SPEs. Transaction costs associated with the automobile loan securitization were recognized as a component of the gain or loss at the time of sale. Servicing rights Servicing rights on originated loans that have been sold, including those transferred as part of securitizations, are capitalized by allocating the total cost of the mortgage or consumer loans between the servicing rights and the loans based on their relative fair values. Capitalized servicing rights are amortized in proportion to and over the period of estimated servicing revenues. Impairment of mortgage and consumer loan-servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate. For purposes of measuring impairment, the rights are stratified based on the predominant risk characteristics of the underlying loans. The predominant characteristic currently used for stratification is type of loan. The amount of impairment recognized is the amount by which the capitalized servicing rights for a stratum exceed their fair value. Income tax Income tax in the consolidated statements of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. Fidelity files consolidated income tax returns with its subsidiaries. See the section titled "income tax benefit" for discussion of the deferred income tax receivable and the need for a valuation allowance against that receivable. 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. 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 19 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. Adoption of the requirements of FIN 46 did not 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 September 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 September 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. 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 20 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. 21 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 None ITEM 3 Defaults Upon Senior Securities: -------------------------------- Not applicable. ITEM 4 Submission of Matters to a Vote of Security Holders: ---------------------------------------------------- None 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 Exhibit Number Description -------------- ----------- b. A form 8-K was filed on October 30, 2003 announcing that on October 29, 2003, Fidelity issued a press release in connection with Fidelity's third quarter 2003 earnings release. A form 8-K was filed on July 21, 2003 announcing that on July 18, 2003, Fidelity issued a press release in connection with Fidelity's second quarter 2003 earnings release. 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: November 12, 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 EX-31.1 3 ex31-1.txt Exhibit 31.1 CERTIFICATION I, Donald R. Neel, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Fidelity Federal Bancorp; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2003 /S/ Donald R. Neel ----------------------------------- President and CEO (principal executive officer) EX-31.2 4 ex31-2.txt Exhibit 31.2 CERTIFICATION I, Mark A. Isaac, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Fidelity Federal Bancorp; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2003 /S/ Mark A. Isaac ----------------------------- Vice President and CFO (principal financial officer) EX-32.1 5 ex32-1.txt Exhibit 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) Pursuant to 18 U.S. C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Fidelity Federal Bancorp hereby certifies that: 1. the Quarterly Report on Form 10-Q of Fidelity Federal Bancorp for the quarterly period ended September 30, 2003 as filed with the Securities and Exchange Commission on November 12, 2003 (the Report) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Fidelity Federal Bancorp. Dated: November 12, 2003 /s/ Donald R. Neel - ----------------------------------- Donald R. Neel President and Chief Executive Officer The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference to any filing of Fidelity Federal Bancorp, whether made before or after the date hereof, regardless of any general incorporation language in such filing. EX-32.2 6 ex32-2.txt Exhibit 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) Pursuant to 18 U.S. C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Fidelity Federal Bancorp hereby certifies that: 1. the Quarterly Report on Form 10-Q of Fidelity Federal Bancorp for the quarterly period ended September 30, 2003 as filed with the Securities and Exchange Commission on November 12, 2003 (the Report) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Fidelity Federal Bancorp. Dated: November 12, 2003 /s/ Mark A. Isaac - ----------------------------------- Mark A. Isaac Chief Financial Officer The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference to any filing of Fidelity Federal Bancorp, whether made before or after the date hereof, regardless of any general incorporation language in such filing. -----END PRIVACY-ENHANCED MESSAGE-----