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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, 2002
FIDELITY FEDERAL BANCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 0-22880 35-1894432
- ---------------------------- ---------- -------------
(State of other jurisdiction Commission (IRS Employer
of Incorporation of File No. Identification No.)
Organization)
18 NW Fourth Street
Evansville, Indiana 47708
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(812) 424-0921
--------------------------------------------------
Registrant's telephone number, including area code
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
--- ---
As of July 8, 2002, there were 6,063,914 shares of the Registrant's common
stock, $1 stated value, issued and outstanding.
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Index
Page
PART I - FINANCIAL INFORMATION
ITEM 1--Financial Statements:
Condensed Consolidated Balance Sheets................................. 3
Condensed Consolidated Statements of Income........................... 4
Condensed Consolidated Statements of Changes in Stockholders' Equity.. 5
Condensed Consolidated Statements of Cash Flows....................... 6
Notes to Condensed Consolidated Financial Statements.................. 7
ITEM 2--Management's Discussion and Analysis of Results of Operations
and Financial Condition...............................................9-16
ITEM 3--Quantitative and Qualitative Disclosures about Market Risk..... 16
PART II - OTHER INFORMATION.............................................. 18
SIGNATURES............................................................... 20
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,
2002 2001
--------- ---------
(Unaudited)
Assets
Cash and due from banks $ 1,007 $ 1,711
Interest-bearing demand deposits 5,688 14,605
--------- ---------
Cash and cash equivalents 6,695 16,316
Investment securities available for sale 33,352 18,074
Loans, net of allowance for loan losses of $1,453 and $2,138 102,116 104,432
Premises and equipment 5,860 6,009
Federal Home Loan Bank of Indianapolis stock 2,620 2,620
Deferred income tax receivable 7,367 7,214
Other real estate owned 1,910 0
Interest receivable and other assets 5,052 4,994
--------- ---------
Total assets $ 164,972 $ 159,659
========= =========
Liabilities
Deposits
Non-interest bearing $ 4,966 $ 5,008
Interest bearing 120,580 115,147
--------- ---------
Total deposits 125,546 120,155
Long-term debt 24,852 24,650
Valuation allowance for letters of credit 435 665
Other liabilities 1,675 2,294
--------- ---------
Total liabilities 152,508 147,764
--------- ---------
Commitments and Contingencies -- --
Stockholders' Equity
Preferred stock, no par or stated value
Authorized and unissued--5,000,000 shares
Common stock, $1 stated value
Authorized--15,000,000 shares
Issued and outstanding--6,063,914 and 5,987,009 shares 6,064 5,987
Additional paid-in capital 14,781 14,692
Stock warrants 261 11
Retained earnings (8,628) (8,757)
Accumulated other comprehensive loss (14) (38)
--------- ---------
Total stockholders' equity 12,464 11,895
--------- ---------
Total liabilities and stockholders' equity $ 164,972 $ 159,659
========= =========
See notes to condensed consolidated financial statements.
3
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In Thousands, Except Share Data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Interest Income
Loans receivable $ 1,963 $ 2,471 $ 4,137 $ 4,897
Investment securities--taxable 474 320 784 664
Deposits with financial institutions 32 153 82 365
Other dividend income 41 51 80 102
----------- ----------- ----------- -----------
Total interest income 2,510 2,995 5,083 6,028
----------- ----------- ----------- -----------
Interest Expense
Deposits 1,140 1,794 2,273 3,569
Short-term borrowings 7 -- 24 --
Long-term debt 483 503 935 1,010
----------- ----------- ----------- -----------
Total interest expense 1,630 2,297 3,232 4,579
----------- ----------- ----------- -----------
Net Interest Income 880 698 1,851 1,449
Provision for loan losses -- 63 -- 347
----------- ----------- ----------- -----------
Net Interest Income After Provision for Loan Losses 880 635 1,851 1,102
----------- ----------- ----------- -----------
Other Income
Service charges on deposit accounts 111 90 197 173
Net gains on loan sales 35 91 370 154
Net gains on investment sales 73 -- 73 --
Letter of credit fees 125 127 250 256
Agent fee income 172 362 427 595
Servicing fees on loans sold 37 29 74 57
Other income 127 235 220 376
----------- ----------- ----------- -----------
Total non-interest income 680 934 1,611 1,611
----------- ----------- ----------- -----------
Other Expenses
Salaries and employee benefits 866 763 1,803 1,459
Net occupancy expenses 89 93 185 184
Equipment expenses 83 68 170 128
Data processing fees 85 89 165 180
Deposit insurance expense 14 61 29 122
Legal and professional fees 64 29 127 84
Advertising 34 87 75 67
Letter of credit valuation provision -- (63) -- (347)
Loss on investments in partnerships 58 56 94 145
Correspondent bank charges 32 41 65 79
Other expense 429 410 928 780
----------- ----------- ----------- -----------
Total non-interest expense 1,754 1,634 3,641 2,881
----------- ----------- ----------- -----------
Loss Before Income Tax (194) (65) (179) (168)
Income tax benefit (151) (108) (222) (235)
----------- ----------- ----------- -----------
Income (Loss) Before Extraordinary Item (43) 43 43 67
Net gain on extraordinary item 87 -- 87 --
----------- ----------- ----------- -----------
Net Income $ 44 $ 43 $ 130 $ 67
=========== =========== =========== ===========
Basic Earnings (Loss) per Share, Before Extraordinary Item
$ (0.01) $ 0.01 $ 0.01 $ 0.02
Gain on Extraordinary Item, Net of Tax 0.01 0.01
Basic Earnings per Share $ 0.01 $ 0.01 $ 0.02 $ 0.02
Diluted Earnings (Loss) per Share, Before Extraordinary Item $ (0.01) $ 0.01 $ 0.01 $ 0.02
Gain on Extraordinary Item, Net of Tax 0.01 0.01
Diluted Earnings per Share $ 0.01 $ 0.01 $ 0.02 $ 0.02
Average Common and Common Equivalent shares outstanding 6,071,627 4,618,647 6,047,163 4,613,183
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 Ended
June 30,
2002 2001
------- -------
Beginning Balance $11,895 $ 8,775
Comprehensive income
Net income 130 67
Other comprehensive income - net of tax 24 408
------- -------
Comprehensive income 154 475
Issuance of stock 165 1,510
Issuance of stock warrants 250
------- -------
Balances, June 30 (unaudited) $12,464 $10,760
======= =======
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,
--------------------
2002 2001
-------- --------
Operating Activities
Net income $ 130 $ 67
Adjustments to reconcile net income to net
cash provided (used) by operating activities
Provision for loan losses -- 347
Letter of credit valuation provision -- (347)
Gain on extraordinary item, net of tax (87) --
Gain on sale of investment securities (73) --
Depreciation and amortization 253 199
Valuation allowance--affordable housing investments 28 30
Loans originated for sale (7,739) (11,680)
Proceeds from sale of loans 7,748 11,695
Changes in
Interest payable and other liabilities (1,065) 12
Interest receivable and other assets (360) 119
Other (65) --
-------- --------
Net cash provided (used) by operating activities (1,230) 442
-------- --------
Investing Activities
Purchases of securities available for sale (22,902) --
Proceeds from sale of securities 4,992 --
Proceeds from maturities of securities available for sale 2,794 2,687
Net change in loans 413 (5,451)
Purchase of premises and equipment (52) (221)
Proceeds from sales of premises and equipment -- 100
Funding on outstanding letters of credit (230) (2,808)
-------- --------
Net cash used by investing activities (14,985) (5,693)
-------- --------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand
and savings deposits (1,878) 5,275
Certificates of deposit 7,269 993
Short-term borrowings -- --
Proceeds of long-term debt 6,778 3,874
Repayment of long-term debt (6,436) (4,476)
Cash received from stock subscriptions, net of expenses 446 1,510
Issuance of stock 165 --
Issuance of stock warrants 250 --
-------- --------
Net cash provided by financing activities 6,594 7,176
-------- --------
Net Change in Cash and Cash Equivalents (9,621) 1,925
Cash and Cash Equivalents, Beginning of Period 16,316 16,644
-------- --------
Cash and Cash Equivalents, End of Period $ 6,695 $ 18,569
======== ========
Additional Cash Flows Information
Interest paid $ 3,789 $ 4,502
Supplemental schedule of non-cash inventory activity:
Transfers from loans to Real Estate Owned $ 1,910 --
See notes to condensed consolidated financial statements.
6
Fidelity Federal Bancorp
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
o Accounting Policies
The significant accounting policies followed by Fidelity Federal Bancorp
("Fidelity") and its wholly owned subsidiaries for interim financial reporting
are consistent with the accounting policies followed for annual financial
reporting. All adjustments which are necessary for a fair presentation of the
results for the periods reported, consist only of normal recurring adjustments,
and have been included in the accompanying unaudited condensed consolidated
financial statements. The results of operations for the six months ended June
30, 2002 are not necessarily indicative of those expected for the remainder of
the year. The condensed consolidated balance sheet at December 31, 2001 has been
derived from the audited financial statements.
Certain information and note disclosures normally included in the company's
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the company's Form 10-K annual report for 2001 filed with the
Securities and Exchange Commission.
o Company Subsidiaries
Fidelity's savings bank subsidiary, United Fidelity Bank, fsb ("United"), was
organized in 1914, is a federally-chartered stock savings bank located in
Evansville, Indiana, and is regulated by the Office of Thrift Supervision
("OTS"). Fidelity, through its savings bank subsidiary, is engaged in the
business of obtaining funds in the form of savings deposits and other borrowings
and investing such funds in consumer, commercial, and mortgage loans, and in
investment and money market securities. Village Affordable Housing Corporation,
the other subsidiary of Fidelity, was formed during the third quarter of fiscal
1998 for the purpose of owning interests in real estate.
o Stockholders' Equity
In January 2001, Fidelity filed a registration statement for a stockholder
rights offering with the Securities and Exchange Commission. A total of
1,000,000 shares were registered in this filing. For every 4.6 shares of
Fidelity held on the record date, shareholders could subscribe to purchase one
share of Fidelity at $1.55. The rights offering was oversubscribed and completed
in June 2001. Fidelity raised $1.5 million net of costs associated with the
offering. The shares purchased by shareholders with these funds were issued in
July 2001.
In September 2001, Fidelity filed a registration statement for a stockholder
rights offering with the Securities and Exchange Commission. A total of 650,000
shares were registered in this filing. For every 8.6 shares of Fidelity held on
the record date, shareholders could subscribe to purchase one share of Fidelity
at $2.50. The rights offering was completed in November 2001. Fidelity raised
$888,000, net of costs associated with the offering. The shares purchased by
shareholders with these funds were issued in December 2001.
In December 2001, Fidelity filed a registration statement for a debt and equity
rights offering with the Securities and Exchange Commission. Subscription rights
were distributed to persons who owned common stock as of the close of business
on December 19, 2001 to purchase $1.5 million of 9.00% unsecured junior
subordinated notes due February 28, 2009 and 500,000 warrants representing the
right to purchase shares of common stock at $3.00 per share, less the purchase
price of $0.50 per warrant. The offering was completed on February 28, 2002.
Fidelity issued approximately $1.0 million in 9% notes and all of the 500,000
warrants, raising an additional $250,000.
In 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 expires on September 13, 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 Supervisory Agreement with the OTS is in effect until terminated, modified
or suspended by the OTS. The agreement was entered into in February 1999. The
agreement as written has been modified by mutual agreement to eliminate certain
restrictions. Under the terms of the Agreement, United developed and submitted
to the OTS for approval a strategic plan which included, at a minimum, capital
targets; specific strategies; the completion of quarterly projections for a
three-year period; concentration limits for all assets; a plan for reducing
United's concentrations of high risk assets; review of infrastructure, staffing
and expertise with respect to each area of United's operations; and capital
planning.
The agreement indicated that United must, among other things, have taken other
specified actions within specified time frames. These actions include the
development of and adherence to a written plan for the reduction of classified
and criticized assets to specified levels; maintenance of sufficient allowances
for loan and lease losses; quarterly reporting to the OTS relating to classified
assets and workout plans; restriction of its growth in total assets to an amount
not in excess of an amount equal to the net interest credited on deposit
liabilities without prior OTS approval; limiting growth of its consumer loan
portfolio to an amount not in excess of 30 percent of its total assets;
development of a written plan to divest all real estate held for development;
adoption of policies and procedures designed to avoid potential conflicts of
interest; development of policies and procedures to increase liquidity; adoption
of a policy with respect to its mortgage brokerage activity, which would address
its operation and methods for risk management; development of a policy to
administer the general partnerships held by Village Housing Corporation; and
maintenance of fully staffed and functioning internal audit and independent loan
review processes.
Previously, United was to refrain from commercial lending, but United received
OTS approval in the first quarter of 2002 to resume commercial lending in
accordance with its business plan.
At June 30, 2002, United is also prohibited from taking certain actions without
prior approval, including but not limited to: engaging in "sub prime" consumer
lending activities; making capital distributions, including dividends to
Fidelity; making any additional equity investments; real estate development
without specific approval of the OTS; acquiring any additional real estate for
future development; selling any asset to an affiliated party without prior
written approval of the OTS; and engaging in any new activities not included in
the strategic plan.
United is also required to obtain OTS approval prior to adding or replacing any
director or senior executive officer. United is also prohibited, without prior
OTS approval, from entering into any contract with any executive officer or
director which would require a golden-parachute payment and from increasing any
executive benefit package in an amount in excess of the annual cost of living.
United also developed a plan to reduce employee turnover, build an experienced
staff, and provide for management succession.
Management of United has taken, or has refrained from taking, as applicable, the
actions requested by the OTS. United believes it is in compliance with the
provisions of the Agreement at June 30, 2002.
o Related Party Transaction
During the first quarter of 2002, Fidelity sold two notes held in conjunction
with advances made by Fidelity to certain multifamily housing partnerships to a
related party. The advances were made to facilitate refinancing activities and
resulted in loans subordinated to the first mortgage loans. The advances had
been previously charged off and had no value on Fidelity's books. The gain on
the note sale totaled $223,000. Fidelity also sold a position in
8
an interest rate swap for a $72,000 gain. The instruments were acquired by
Pedcor Funding Corporation and the purchase price consisted of a 20% down
payment with the remainder financed by a 10 year note totaling $235,000 at a
rate of 5.25% for five years, and 6.50% for the last five years with principal
paid annually and interest paid quarterly.
o Subsequent Events
On July 10, 2002, Fidelity signed a non-binding letter of intent to sell its
wholly-owned affordable housing subsidiary and related affordable housing assets
to Pedcor Funding Corporation. The proposed purchaser, is a company controlled
by three directors of Fidelity and are members of a group that beneficially owns
approximately 60.7% of Fidelity's issued and outstanding stock.
The proposed transaction would be subject to the approval and execution of a
definitive agreement by the independent members of the Board of Fidelity and
United, and the Board of Pedcor Funding; receipt of all required regulatory
approvals; and receipt of a fairness opinion by Fidelity that the transaction is
fair, from a financial point of view, to Fidelity and United.
The proposed transaction, if completed, is expected to have a sale price of
approximately $2.0 million in cash and notes. It is expected to result in a
consolidated after-tax loss under generally accepted accounting principles of
approximately $150,000 to $300,000, which would consist of a gain from the sale
of the affordable housing assets held by United's subsidiary, Village Housing
Corporation, offset by the loss resulting from the sale of an income tax
receivable. Fidelity also would write-off intangible assets related to the
affordable housing line of business, resulting in an additional consolidated
after-tax loss under generally accepted accounting principles of approximately
$500,000 to $700,000. The intangible assets were recorded as a result of a
five-year guarantee to United from Pedcor Holdings, LLC (Holdings) during 2000
in an aggregate amount up to $1.5 million against any negative cash flow from
operations of certain specified affordable housing properties in United's
portfolio, and an agreement to provide certain management services for the
specified properties for ten years at no fee to United or Fidelity. As of June
30, 2002, Holdings has performed according to the guarantee and therefore, no
impairment of the intangible assets is apparent. However, should the transaction
be completed, the cash flow guarantee and the agreement to provide management
services would no longer apply to United or Fidelity and the intangible assets
would no longer be of value to United or Fidelity. Due to the uncertainty
surrounding the potential sale the consolidated condensed financial statements
do not reflect any potential adjustments or accruals with respect to the
transaction.
On July 15, 2002, Fidelity prepaid approximately $4.2 million in fixed rate
Federal Home Loan Bank advances at an average rate of 7.14%. The prepayment fee
associated with these advances totaled approximately $340,000, however by
utilizing excess liquidity and new advances, Fidelity believes it will generate
a benefit well in excess of the prepayment fee. Approximately $2.2 million of
the advances were scheduled to mature late in 2002, with the remaining $2.0
million maturing in 2010. The consolidated condensed financial statements at and
as of June 30, 2002 do not reflect the prepayment fee and this amount will be
reflected in the third quarter as a charge.
o Reclassifications
Reclassifications of certain amounts from the condensed consolidated income
statements for the three-month periods ended June 30, 2002 and 2001 and for the
six-month period ended June 30, 2001 have been made to conform to the
presentation of the six-month period ended June 30, 2002. These
reclassifications had no effect on net income.
Item 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Quarterly Report on Form 10-Q are
"forward-looking statements" intended to qualify for the safe harbors from
liability established by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such because the
context of the statement will include words such as Fidelity "believes",
"anticipates", "expects", "estimates" or words of similar import. Similarly,
statements that describe Fidelity's future plans, objectives or goals are also
forward-looking statements. Such forward-looking statements are subject to
certain risks and uncertainties which are described in close proximity to such
statements and which could cause actual results to differ materially from those
anticipated as of the date of
9
this report. Shareholders, potential investors and other readers are urged to
consider these factors in evaluating the forward-looking statements and are
cautioned not to place undue reliance on such forward-looking statements. The
forward-looking statements included herein are only made as of the date of this
report and Fidelity undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
o Results of Operations
Net income for the three months ended June 30, 2002 was $44,000, compared to
$43,000 for the same period last year. Net income for the six months ended June
30, 2002 was $130,000, compared to $67,000 for the six months ended June 30,
2001. Book value per share increased to $2.06 from $1.99 at December 31, 2001,
while shareholders' equity increased 5.0% to $12.5 million from $11.9 million.
This was due primarily to the stock offering completed in the first quarter of
2002 and a decrease in the unrealized loss on securities.
Net Interest Income
The following table summarizes Fidelity's average interest-earning assets and
average interest-bearing liabilities with the accompanying average rates for the
first six months of 2002 and 2001:
Six Months Ended
June 30,
(dollars in thousands)
---------------------------
2002 2001
----------- -----------
Interest-earning assets $ 142,546 $ 147,856
Interest-bearing liabilities $ 143,339 $ 151,506
----------- -----------
Net interest-earning assets or (interest-bearing liabilities) (793) (3,650)
=========== ===========
Average yield on:
Interest-earning assets 6.97% 8.22%
Interest-bearing liabilities 4.55 6.09
----------- -----------
Net interest spread 2.42% 2.13%
Net interest margin 2.40% 1.97%
Net interest income for the first six months of 2002 was $1,851,000 and was
$402,000 or 27.7% more than $1,449,000 during the first six months of 2001.
Exclusive of the $156,000 of interest collected during the first six months of
2002, as discussed below, net interest income increased $246,000 over 2001 due
to the change in rates and the change in the balance sheet mix as United reduced
its liquid assets compared to last year and invested them into higher earning
assets. The $1,347,000 decrease in interest expense is a combination of a
decrease of $270,000 from a lower average balance of outstanding
interest-bearing liabilities plus $1,077,000 because of decreased rates on
average interest-bearing liabilities. The decrease of $1,101,000 in interest
income, is a combination of a decrease of $243,000 because of the decrease in
the volume mix of average outstanding interest-bearing assets plus $858,000
because of decreased rates on average interest-earning assets. The yield on
interest-earning assets in the above table does not include the collection of
$156,000 in interest on previously charged off loans. A company subsidiary owns
general partnership interests in multi-family housing. Cash flows of certain
partnerships have increased to allow repayment first of interest, and then of
principal on previously advanced loans to the partnerships.
10
The following table sets forth the details of the rate and volume change for the
first six months of 2002 compared to the same period in 2001, excluding the
$156,000 of interest collected on previously charged-off loans.
Six Months Ended June 30,
2002 vs 2001
Increase (Decrease)
Due to change in
-----------------------------
Volume Rate Total
------- ------- -------
Interest Income:
Loans and mortgage-backed securities $ (130) $ (667) $ (797)
Other interest-earning assets (113) (191) (304)
------- ------- -------
Total interest-earning assets (243) (858) (1,101)
Interest Expense:
Deposits (417) (879) (1,296)
FHLB advances and other borrowings 147 (198) (51)
------- ------- -------
Total interest-bearing liabilities (270) (1,077) (1,347)
------- ------- -------
Change in net interest income $ 27 $ 219 $ 246
======= ======= =======
Net interest income for the three months ended June 30, 2002 was $880,000
compared to $698,000 for the three months ended June 30, 2001. As discussed
above this is primarily due to the decrease in rates compared to last year.
Provision for Loan Losses and Letters of Credit Valuation Provision
The provision for loan losses for the six months ended June 30, 2002 was $0
compared to $347,000 for the six months ended June 30, 2001. During the six
months ended June 30, 2001, Fidelity increased its allowance for loan losses and
reduced its letters of credit valuation reserve by $347,000 due to refinancing
activities related to letters of credit outstanding completed during the first
half of 2001. During the first half of 2001, seven multi-family partnerships in
which Fidelity or United had outstanding classified or impaired letters of
credit, obtained non-recourse financing outside of Fidelity. Two such
partnerships obtained alternate financing during the first half of 2002.
Fidelity provided $230,000 and $2.8 million during the first half of 2002 and
2001, respectively, in previously reserved funds in order to complete the
refinancing transactions.
The provision for loan losses decreased $63,000 for the three months ended June
30, 2002 compared to the three months ended June 30, 2001. The decrease is
associated with the refinancing activities as discussed above.
Fidelity makes provisions for loan losses in amounts estimated to be sufficient
to maintain the allowance for loan losses at a level considered necessary by
management to absorb losses in the loan portfolios. Specific reserves are
assigned to certain credits. The reserves are determined by management's
evaluation of those credits, which include evaluations of borrower's ability to
repay outstanding debt, as well as the value of supporting collateral. The
results of internal loan reviews, previous regulatory reviews, and past events
assist Fidelity in making that evaluation. The independent support for the
allowance for loan losses and letter of credit valuation reserve includes
documentation that supports the amount of recorded reserves for these credits.
General reserves for loans and letters of credit not specifically reserved are
also determined. Fidelity computes general reserves for the commercial,
commercial mortgage, residential mortgage and consumer loan portfolios by
utilizing historical information and information currently available about the
loans within those portfolios that provides information as to the likelihood of
loss. The potential effect of current economic conditions is also considered
with respect to establishing general reserve amounts.
Non-interest income
Non-interest income for the quarter ended June 30, 2002, was $680,000 compared
to $934,000 for the same period in 2001.
Non-interest income for the six months ended June 30, 2002 and 2001, was
$1,611,000 for both periods. During 2002 a gain was realized on the sale of two
notes totaling $223,000 and a $72,000 gain on sale of a position in an
11
interest rate swap. Agent fees decreased $168,000 from the first half of 2001
primarily due to the decrease in the volume of loans originated on behalf of
another organization in exchange for a fee. Gains on sales of loans increased
$216,000 compared to the six months ended June 30, 2001. Excluding the $295,000
gain on the sale of the two notes and rate swap previously mentioned, the gain
on the sale of fixed rate 1-4 family loans decreased by $79,000 when compared to
last year. The volume of refinancing activity and new loans sold was lower in
the first six months of 2002 when compared to the same period last year. During
the second quarter of 2002, a $73,000 gain was recognized on the sale of an
investment security. Servicing fees on loans sold increased $17,000 over last
year due to the continuing growth of the loan-servicing portfolio. Deposit
service charges increased $24,000 over last year due to an increase in the
volume of NSF and daily overdrawn charges compared to last year. Other income
decreased $156,000 to $220,000 for the six months ended June 30, 2002, primarily
due to a $134,000 in gain on sale of land recognized during 2001.
Non-interest expense
Non-interest expense was $1,754,000 for the quarter ended June 30, 2002 compared
to $1,634,000 for the same period in 2001.
Total non-interest expense increased by $760,000 over the first six months of
2001. The increase was caused by a letter of credit valuation provision credit
of $347,000 during the first half of 2001 which offset total expense in 2001.
There was no such credit in 2002. Salaries and employee benefits increased
$344,000 due to growth in United's consumer lending activity, the opening of a
new branch late in the first quarter of 2001, and the addition of commercial
lending staff due to the resumption of commercial lending. Offsetting some of
these increases was a $51,000 decrease on loss on investments in partnerships
due to the improved performance as a result of the completed refinancing
activities completed thus far. Federal deposit insurance expense decreased
$93,000 in the first six months of 2002 compared to 2001. This decrease was
associated with a reduction in United's FDIC risk assessment rate in 2002.
Equipment expense increased $42,000 over the prior year due to an increase in
maintenance expense and depreciation associated with the opening of a new branch
office. Legal and professional fees increased $43,000 over last year due to
expenses related to workout activities with respect to various classified
assets. Other expense increased by $148,000 from last year and is due primarily
to expenses for other real estate of $34,000 in connection with the foreclosure
of a $3.1 million non-accrual, commercial real estate loan in the first quarter
of 2002. In addition, due to increases in loan volumes, consumer loan
origination expenses increased by $16,000, the loss on sale of repossessed
assets increased $15,000, and supplies expense increased by $20,000 over the
prior year.
Extraordinary Gain
During the second quarter of 2002, Fidelity liquidated a $500,000 senior note
for $360,000 and recorded a gain of $140,000. Tax of $53,000 was recorded and
the net gain of $87,000 is reflected as an extraordinary gain.
Income tax benefit
The income tax benefit was $222,000 for the six months ending June 30, 2002
compared to $235,000 in the same period last year. Included in this tax benefit
are tax credits of $160,000. These credits are received from Fidelity's
investment in affordable housing properties and are a component of the overall
return on these investments.
Consideration of the need for a valuation allowance for the deferred tax asset
was made at June 30, 2002 after projecting the reversal of the deferred items.
These analyses were based on projected operating income in future years, action
plans developed and partially implemented included in Fidelity's business plan
and cost reductions. These analyses showed that it was more likely than not that
all carryforwards would be utilized within the carryforward periods (federal and
state) and therefore no valuation allowance was recorded. The analyses assume
that Fidelity will execute approximately 75% of the initiatives included within
its current business plan and then achieve 5 to 10% growth in annual earnings
thereafter. The conservative level of earnings contemplated by these analyses,
if achieved, will constitute for the majority of the carryforward periods,
earnings levels that are below other thrift holding companies included within
Fidelity's peer group.
Fidelity, at December 31, 2001 and June 30, 2002, has not established a
valuation allowance to reflect the possibility that all of these assets will not
be utilized. Utilization of these deferred tax assets is based significantly
upon the future profitability of Fidelity. Although Fidelity has prepared a
model that indicates the deferred tax assets will be fully utilized,
profitability for the six-months ended June 30, 2002, is less than that
projected by the model prepared
12
at December 31, 2001 supporting these assets. To the extent profitability does
not improve and total deferred taxes do not otherwise decline, a valuation
allowance would be required to be established in order for the financial
statements to be in conformity with accounting principles generally accepted in
the United States of America. Fidelity has set forth reasonable plans indicating
that future period profitability will increase and be more in line with the
original projections, the ultimate outcome of this uncertainty on net income or
earnings per share, if any, is unknown.
The assumptions used to help consider the need for a valuation allowance for the
deferred tax asset are subject to certain risks and uncertainties that could
impact the final determination regarding the amount of the valuation allowance.
These risks include the failure to implement the business plan targets for
increased revenues, cost reductions, the potential loss of key employees,
ability to maintain projected interest rate margins, and the potential
disruption of activities in key income-producing areas.
Financial Condition
Total assets at June 30, 2002 were $165.0 million, an increase of $5.3 million
from $159.7 at December 31, 2001. The increase in total assets was primarily
attributable to an increase in investment securities available for sale of $15.3
million, partially offset by a $8.9 million decrease in interest bearing demand
deposits.
Utilizing excess liquidity attributable to the 1-4 family refinancing activities
over the past year and the increase in certificate of deposits, United invested
in GNMA and FNMA adjustable-rate mortgage-backed securities. United has chosen
to sell 1-4 family fixed rate products in the secondary market and has therefore
experienced declines in the amounts of those assets held. In order to replace
the loss of mortgage loans outstanding, United purchased $10.2 million of
adjustable-rate mortgage-backed securities at an average yield of 5.5% and
projected average life of 3.5 years during the first quarter of 2002. United
also purchased an additional $7.7 million and $5.0 million in adjustable-rate
mortgage-backed securities during April and May of 2002, respectively. These
securities have an average yield of 5.0% and projected average life of less than
four years.
Net loans decreased $2.3 million during the first six months of 2002 compared to
December 31, 2001. During the first quarter of 2002 a $3.1 million non-accrual,
non-residential real estate loan was foreclosed. The loan was reclassified to
other real estate owned and is currently being marketed for sale. Continued
paydowns received on fixed rate 1-4 family loans accounted for an additional
$4.8 million decrease, which was offset partially by a $1.3 million increase in
consumer loans. Included in net loans is a note receivable for $235,000 that
Fidelity received as part of a related party transaction that is discussed in
the related party footnote. Late in the first quarter of 2002, United received
OTS approval to resume commercial lending activities in accordance with its
business plan.
Total liabilities at June 30, 2002 were $152.5 million, an increase of $4.7
million from $147.8 million at December 31, 2001. The increase in total
liabilities was due to an increase in interest-bearing deposits. United's
interest-bearing checking accounts increased $2.1 million since December 31,
2001, while its money market accounts decreased $4.3 million. Certificates of
deposit increased by $7.3 million since December 31, 2001. During the first six
months of 2002, United increased its public CD's acquired from governmental
units by $12.8 million to offset scheduled maturities of shorter-term
promotional CD's associated with the opening of its new branch last year. Due to
the low interest rate environment, a portion of maturing certificates of deposit
are shifting funds into interest-bearing checking accounts and other accounts
that provide higher liquidity.
Long-term borrowings increased slightly to $24.9 million at June 30, 2002
compared to $24.7 million at December 31, 2001. During the six months
approximately $1.5 million in 9.25% junior notes matured and were replaced with
$1.0 million of 9% junior notes. A total of $775,000 was drawn on Fidelity's
line of credit during the first quarter to service existing debt and provide
liquidity, however $400,000 was repaid during the second quarter of 2002. FHLB
advances increased by $824,000 but was offset by a decrease in junior and senior
subordinated debt of $993,000. As previously mentioned junior notes decreased by
$0.5 million and $0.5 million in senior notes were retired early for a $87,000
gain, net of tax.
Stockholder's equity at June 30, 2002 was $12.5 million, an increase of $.6
million from $11.9 million at December 31, 2001. The increase was primarily
attributable to net income of $130,000, the completion of Fidelity's notes and
warrants offering in February 2002, which provided $250,000 and the issuance of
stock of $165,000. In addition the net unrealized loss on securities decreased
$24,000 from December 31, 2001.
13
Non-Performing Assets
Non-performing assets decreased $1.1 million from December 31, 2001 to $2.7
million or 1.7% of total assets at June 30, 2002. The decrease is due to the
charge down of a $3.1 million non-accrual, non-residential real estate loan to
$1.9 million when foreclosed and placed in other real estate owned.
The following table provides information on Fidelity's non-performing assets as
of June 30, 2002 and December 31, 2001:
June 30, December 31,
2002 2001
------------------------------------------------------------------------------
(Dollars in Thousands)
Non-accrual loans
Consumer $ 92 $ 116
Commercial 286 3,291
Real estate mortgage 124 130
Multifamily 155 -
----- ------
Total non-accrual loans 657 3,537
Restructured
Consumer 91 190
Commercial - 53
------ ------
Total restructured loans 91 243
90 days or more past due and accruing
Consumer - 23
Commercial 18 22
----- ------
Total 90 days or more past due and accruing 18 45
Repossessed assets 66 -
Other real estate owned 1,910 -
----- ------
Total other non-performing assets 1,976 -
----- ------
Total non-performing assets $2,742 $3,825
====== ======
Ratio of non-performing assets to total assets 1.66% 2.40%
Other Real Estate Owned
Other real estate owned totaled $1.9 million, which is primarily due to one
non-residential loan totaling $3.1 million that was subsequently charged down to
$1.9 million, as discussed above, and foreclosed during the first quarter of
2002.
United has employed the services of an independent hotel management company
while United aggressively seeks disposition of the property. Occupancy rate has
improved from approximately 40% when United took possession of the property and
is currently averaging approximately 60%. The property has generated a positive
cash flow from operations for the year-to-date.
14
Classified Assets and Letters of Credit
June 30, December 31,
2002 2001
-------- ------------
Classified assets $6,447 $7,357
Classified letters of credit -- 350
------ ------
Total classified assets $6,447 $7,707
====== ======
Classified assets and letters of credit of Fidelity totaled $6.4 million at June
30, 2002 compared to $7.7 million at December 31, 2001, a decrease of 16.9%.
Total classified assets were 44.9% and 53.3% of Fidelity's capital and reserves
at June 30, 2002 and December 31, 2001, respectively, and 27.8% and 31.5% of
United's core capital and reserves. In addition to the classified assets and
letters of credit, there are other assets and letters of credit totaling $9.5
million at June 30, 2002 for which management was closely monitoring the
borrower's abilities to comply with payment terms.
Multi-family letters of credit, an off-balance sheet item, carry the same risk
characteristics as conventional loans and totaled $29.8 million at June 30, 2002
and $30.5 million at December 31, 2001. Specific allocations for letters of
credit totaled 1.5% of outstanding letters of credit at June 30, 2002 compared
to 2.2% at December 31, 2001. Lower interest rates have reduced debt service
requirements and overall credit risk on the letters of credit. Management
considers the allowance for loan losses and letter of credit valuation reserve
adequate to meet losses inherent in the loan and letter of credit portfolios as
of June 30, 2002.
The following table sets forth an analysis of the allowance for loan losses for
the six months ended June 30, 2002 and the year ended December 31, 2001:
Six months
ended Year ended
June 30, December 31,
2002 2001
----------- ------------
( dollars in thousands)
Allowance for loan losses at beginning of period $ 2,138 $ 1,921
Provision for losses -- 1,349
Loans charged off (1,588) (1,401)
Recoveries on loans 903 269
------- -------
Allowance for loan losses at end of period $ 1,453 $ 2,138
======= =======
Capital Resources
United is subject to various regulatory capital requirements administered by the
federal banking agencies and is assigned to a capital category. The assigned
category is largely determined by three ratios that are calculated according to
the regulations: total risk adjusted capital, Tier I capital, and Tier I
leverage ratios. The ratios are intended to measure capital relative to assets
and credit risk associated with those assets and off balance sheet exposures of
the entity. The capital category assigned to an entity can also be affected by
qualitative judgments made by regulatory agencies about the risk inherent in the
entity's activities that are not part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At June 30, 2002 and December 31,
2001, United is categorized as well capitalized and met all subject capital
adequacy requirements.
15
United's Capital Ratios
Required for To be well
Actual adequate capital Capitalized
Amount Ratio Amount Percent Amount Percent
As of June 30, 2002
Total risk-based capital (to risk-weighted assets) $15,265 12.7% $9,618 8.0% $12,022 10.0%
Tier 1 capital (to risk-weighted assets) 11,982 10.0 4,809 4.0 7,213 6.0
Core capital (to adjusted total assets) 11,982 7.8 6,162 4.0 6,011 5.0
Core capital (to adjusted tangible assets) 11,982 7.8 3,081 2.0 N/A
Tangible capital (to adjusted total assets) 11,982 7.8 2,311 1.5 N/A
As of December 31, 2001
Total risk-based capital (to risk-weighted assets) $17,085 14.4% $9,497 8.0% $11,871 10.0%
Tier 1 capital (to risk-weighted assets) 12,716 10.7 4,748 4.0 7,122 6.0
Core capital (to adjusted total assets) 12,716 8.5 5,998 4.0 7,497 5.0
Core capital (to adjusted tangible assets) 12,716 8.5 2,999 2.0 N/A
Tangible capital (to adjusted total assets) 12,716 8.5 2,249 1.5 N/A
Liquidity
Fidelity's principal source of income and funds is dividends from United.
Fidelity is not subject to any regulatory restrictions on the payment of
dividends to its stockholders. However, United is restricted from paying any
dividends to Fidelity without prior approval of the OTS order the terms of the
Supervisory Agreement.
The Stock Purchase Agreement approved by Fidelity's shareholders in May 2000
indicates that, for three years following the approval of the stock purchase
agreement, Pedcor is entitled to purchase additional shares from Fidelity in an
aggregate amount up to $5.0 million. Fidelity obtained a $1.5 million line of
credit in the first quarter of 2001 and can draw on this line until its
expiration in September 2003. At June 30, 2002, $1.1 million was outstanding on
the line of credit. Fidelity's liquidity position may be further improved by the
potential issuance of additional stock to Pedcor, additional debt or equity
financing, or dividends from United (with OTS approval), to the holding company.
Fidelity completed two successful stock offerings in 2001 and raised
approximately $2.4 million and completed a third offering in 2002 raising an
additional $1.2 million. Fidelity believes that the above actions will assist it
in meeting its future liquidity needs.
During the second quarter of 2002, United received approval from the OTS
permitting repayment of $1,375,000 of the $2,875,000 subordinated debt owed to
Fidelity. The repayment may be undertaken incrementally through December 10,
2002. The proceeds of the debt are to reduce, by an equal amount, Fidelity's
outstanding debt. During the second quarter United repaid $760,000 in debt owed
to Fidelity and Fidelity retired $900,000 in debt. The $140,000 difference
resulted in the extraordinary gain on the extinguishment of debt.
Fidelity has one letter of credit outstanding that backs tax-exempt bond
financing for a housing development. The bonds are periodically re-marketed to
current or potential bondholders. In June 2002 approximately $1.7 million in
bonds were re-marketed successfully and will be re-marketed again in November
2002. In the event that some of the bonds cannot successfully be re-marketed for
their face amounts, Fidelity will be required to fund the difference. The amount
of cash that would be required could be in excess of the amount Fidelity is
anticipated to maintain. As such, alternative strategies for refinancing this
debt such as utilizing the Federal Housing Administration 223(f) program are
being sought. Fidelity has had prior success in refinancing Section 42
multifamily housing debt utilizing this program, however, there is no assurance
that this effort will be successful. The completion of the subsequent event
transaction would also negate need to refinance.
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.
16
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, 2002 is not required to be filed with the OTS until 45
days after quarter end, which coincides with the 10-Q filing. Management
monitors its interest rate sensitivity during the quarter and will request the
OTS to run scenarios on the NPV model to determine the change in interest rate
sensitivity for management in an effort to assist management with its decision
making regarding the maturities and pricing of its products.
Although United has not yet submitted its CMR to the OTS for June 30, 2002,
management anticipates there has been no material change from the information
disclosed in Fidelity's annual report to shareholders at December 31, 2001.
17
PART II -- OTHER INFORMATION
ITEM 1 Legal Proceedings:
------------------
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the Registrant's business, to which
the Registrant or its subsidiaries are a party of or which any of
their property is the subject.
ITEM 2 Changes in Securities and Use of Proceeds:
------------------------------------------
Not applicable.
ITEM 3 Defaults Upon Senior Securities:
--------------------------------
Not applicable.
ITEM 4 Submission of Matters to a Vote of Security Holders:
----------------------------------------------------
Submission of Matters to a Vote of Security Holders: On April 30, 2002
at 10:00 am at the Sheraton Keystone Crossing 8787 Keystone Crossing,
Indianapolis, Indiana, the Annual meeting of Shareholders was held in
order to vote on two matters.
Matter 1 was to elect eight directors to the Board of Directors to
serve until their successors are duly elected and qualified.
The vote tabulation for the election of William R. Baugh was 4,876,069
for and 951,003 shares against; Paul E. Becker was 4,881,736 for and
945,366 shares against; Bruce A. Cordingley was 5,529,043 for and
298,031 shares against; Jack Cunningham was 5,526,199 for and 300,873
shares against; Donald R. Neel was 4,881,554 for and 945,518 shares
against; Gerald K. Pedigo was 5,530,691 for and 296,381 shares
against; Barry A. Schnakenburg was 5,530,639 for and 296,433 shares
against; Phillip J. Stoffregen was 5,529,041 for and 298,031 shares
against
The following directors term continued after the meeting; William
Baugh, Paul E. Becker, Jack Cunningham, Bruce A. Cordingley, Gerald K.
Pedigo, Donald R. Neel, Barry A. Schnakenburg and Phillip Stoffregen.
Matter 2 was the ratification of the appointment of the auditor of
Fidelity. The vote tabulation for BKD LLP was 5,533,162 for, 55,707
shares against, and 238,203 shares abstained.
ITEM 5 Other Information:
------------------
On July 17, 2002, the Board of Directors appointed Donald R. Neel,
Fidelity's President, to the additional post of Chief Executive
Officer of Fidelity. This position was previously held by Fidelity's
Executive Committee. Mr. Neel will continue to serve as a Director of
Fidelity. The Board also appointed Mark A. Isaac, Vice President of
Fidelity, to the additional post of Chief Financial Officer.
18
ITEM 6 Exhibits and Reports on Form 8-K:
---------------------------------
Exhibit Number Description
a. 3(i) (a) Articles of Incorporation of Fidelity, filed as exhibit 3(a) to
Fidelity's 1995 Annual Report on Form 10-K, are incorporated
herein by reference
3(i) (b) Articles of Amendment of the Articles of Incorporation, filed
as exhibit 4.1 with Fidelity's Registration Statement on Form
S-3 (file no. 333-53668), are incorporated by reference
3(ii) By-Laws of Fidelity, filed as exhibit 4.2 with Fidelity's
Registration Statement on Form S-3 (file no. 333-53668), are
incorporated by reference
10 (a) The 1993 Director's Stock Option Plan, filed as exhibit 10(d)
to Fidelity's 1995 Annual Report on Form 10-K, is incorporated
herein by reference.
(b) The 1995 Key Employee's Stock Option Plan, filed as exhibit
10(c) to Fidelity's 1996 Annual Report on Form 10-K, is
incorporated herein by reference.
(c) Employment agreement between Fidelity and Donald R. Neel, filed
as exhibit 10(d) to Fidelity's 2000 Annual Report on Form 10-K,
is incorporated herein by reference
b. A form 8-K was filed on July 15, 2002.
Fidelity announced it has entered into a non-binding letter of intent
to sell all of the stock of its wholly-owned subsidiary, Village
Housing Corporation, and the assets related to its affordable housing
line of business to Pedcor Funding Corporation
Pedcor Funding, is a company controlled by Bruce A. Cordingley, Gerald
K. Pedigo, and Phillip J. Stoffregen, directors of Fidelity Federal
and members of a group which beneficially owns, including stock
options and warrants, approximately 60.7% of Fidelity's issued and
outstanding stock.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIDELITY FEDERAL BANCORP
Date: JULY 29, 2002 By: /s/ DONALD R. NEEL
- ------------------------ ----------------------------------------
Donald R. Neel
President and CEO
By: /s/ MARK A. ISAAC
----------------------------------------
Mark A. Isaac
Vice President and CFO
(Principal Financial Officer)
20