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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, 2003
FIDELITY FEDERAL BANCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 0-22880 35-1894432
- ---------------------------- ---------- -------------------
(State of other jurisdiction Commission (IRS Employer
of Incorporation of File No. Identification No.)
Organization)
18 NW Fourth Street
Evansville, Indiana 47708
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(812) 424-0921
--------------------------------------------------
Registrant's telephone number, including area code
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
--- ---
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
YES NO X
--- ---
As of July 25, 2003, there were 9,618,658 shares of the Registrant's common
stock, $1 stated value, issued and outstanding.
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Index
Page
PART I - FINANCIAL INFORMATION
ITEM 1--Financial Statements:
Condensed Consolidated Balance Sheets................................. 3
Condensed Consolidated Statements of Income........................... 4
Condensed Consolidated Statements of Changes in Stockholders' Equity.. 5
Condensed Consolidated Statements of Cash Flows....................... 6
Notes to Condensed Consolidated Financial Statements.................. 7
ITEM 2--Management's Discussion and Analysis of Results of Operations
and Financial Condition........................................ 11-18
ITEM 3--Quantitative and Qualitative Disclosures about Market Risk..... 18
ITEM 4--Controls and Procedures........................................ 18-19
PART II - OTHER INFORMATION.............................................. 20
SIGNATURES............................................................... 23
Index to Exhibits........................................................ 24
2
Item 1 - Financial Statements
Part I - Financial Information
Fidelity Federal Bancorp And Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands except share data)
June 30, December 31,
2003 2002
--------- ---------
(Unaudited)
Assets
Cash and due from banks $ 1,568 $ 1,454
Interest-bearing demand deposits 3,758 2,369
--------- ---------
Cash and cash equivalents 5,326 3,823
Investment securities available for sale 46,883 34,912
Loans, net of allowance for loan losses of $690 and $837 76,604 73,087
Premises and equipment 4,756 4,935
Federal Home Loan Bank of Indianapolis stock 2,710 2,674
Deferred income tax receivable 5,678 5,615
Foreclosed assets held for sale, net of allowance of $0 and $100 219 2,145
Interest receivable and other assets 5,752 5,099
--------- ---------
Total assets $ 147,928 $ 132,290
========= =========
Liabilities
Deposits
Non-interest bearing $ 5,245 $ 3,209
Interest bearing 105,097 103,582
--------- ---------
Total deposits 110,342 106,791
Federal Home Loan Bank Advances 17,000 3,000
Long-term debt 4,302 10,586
Valuation allowance for letters of credit 283 445
Other liabilities 2,254 1,880
--------- ---------
Total liabilities 134,181 122,702
--------- ---------
Commitments and Contingencies -- --
Stockholders' Equity
Preferred stock, no par or stated value
Authorized and unissued--5,000,000 shares
Common stock, $1 stated value
Authorized--15,000,000 shares
Issued and outstanding--9,618,658 and 6,740,883 shares 9,619 6,741
Additional paid-in capital 16,635 15,359
Stock warrants 261 261
Accumulated deficit (12,995) (13,152)
Accumulated other comprehensive income 227 379
--------- ---------
Total stockholders' equity 13,747 9,588
--------- ---------
Total liabilities and stockholders' equity $ 147,928 $ 132,290
========= =========
See notes to condensed consolidated financial statements.
3
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In Thousands, Except Share Data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-----------------------------------------------------------
Interest Income
Loans receivable $ 1,181 $ 1,963 $ 2,360 $ 4,137
Investment securities--taxable 364 474 689 784
Loans held for sale -- -- 39 --
Deposits with financial institutions 16 32 38 82
Other dividend income 35 41 73 80
----------- ----------- ----------- -----------
Total interest income 1,596 2,510 3,199 5,083
----------- ----------- ----------- -----------
Interest Expense
Deposits 744 1,140 1,633 2,273
Short-term borrowings 3 7 3 24
Long-term debt 233 483 503 935
----------- ----------- ----------- -----------
Total interest expense 980 1,630 2,139 3,232
----------- ----------- ----------- -----------
Net Interest Income 616 880 1,060 1,851
Provision for loan losses (18) -- (122) --
----------- ----------- ----------- -----------
Net Interest Income After Provision for Loan Losses 634 880 1,182 1,851
----------- ----------- ----------- -----------
Other Income
Service charges on deposit accounts 113 111 219 197
Net gains on loan sales 131 176 321 444
Net gains on investment sales -- 73 320 73
Letter of credit fees 121 125 242 250
Underwriting and document prep fees 75 21 117 58
Gain on disposition of rate swap -- -- -- 72
Servicing fees on loans sold 74 37 137 74
Securitization income 54 -- 114 --
Fees recaptured on automobile loans 79 7 162 12
Gain on sale of real estate owned 305 -- 317 --
Other income 154 270 376 570
----------- ----------- ----------- -----------
Total non-interest income 1,106 820 2,325 1,750
----------- ----------- ----------- -----------
Other Expenses
Salaries and employee benefits 844 866 1,724 1,803
Occupancy 83 89 175 185
Equipment 99 83 199 170
Data processing 115 85 215 165
Deposit insurance 12 14 26 29
Legal and professional 64 64 115 127
Insurance 73 45 135 86
Advertising 44 34 89 75
Printing, postage, and office supplies 54 56 112 133
Bond issuance expense 63 16 79 31
Letter of credit valuation provision (170) -- (170) --
Loss on investment in partnership 20 58 40 94
Amortization of intangible assets -- -- -- 52
Correspondent bank charges 37 32 71 65
Other 320 312 610 625
----------- ----------- ----------- -----------
Total non-interest expense 1,658 1,754 3,420 3,640
----------- ----------- ----------- -----------
Income (Loss) Before Income Tax 82 (54) 87 (39)
Income tax expense (benefit) (21) (98) (71) (169)
----------- ----------- ----------- -----------
Net Income $ 103 $ 44 $ 158 $ 130
=========== =========== =========== ===========
Basic Earnings per Share $ 0.01 $ 0.01 $ 0.02 $ 0.02
Diluted Earnings per Share $ 0.01 $ 0.01 $ 0.02 $ 0.02
Average Common and Common Equivalent shares outstanding $ 9,618,659 $ 6,071,627 $ 8,234,129 $ 6,047,163
See notes to condensed consolidated financial statements
4
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders' Equity
(In Thousands, Except Share Data)
Six Months End
June 30,
-------------------------------------------------
2003 2002
-------- --------
Beginning Balance $ 9,588 $ 11,895
Comprehensive income
Net income 158 130
Other comprehensive income (loss) - net of tax (152) 24
-------- --------
Comprehensive income 6 154
Issuance of stock 4,153 165
Issuance of stock warrants 250
-------- --------
Balances, June 30 (unaudited) $ 13,747 $ 12,464
======== ========
See notes to condensed consolidated financial statements.
5
FIDELITY FEDERAL BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
June 30,
---------------------
2003 2002
-------- --------
Operating Activities
Net income (loss) $ 158 $ 130
Adjustments to reconcile net income to net
cash provided (used) by operating activities
Provision for loan losses (122) --
Letter of credit valuation provision (170) --
Net gain on sales of securities available for sale and foreclosed assets (637) (73)
Depreciation and amortization 219 253
Valuation allowance--affordable housing investments -- 28
Loans originated for sale (34,457) (7,739)
Proceeds from sale of loans 34,608 7,748
Changes in
Interest payable and other liabilities 382 (619)
Interest receivable and other assets (615) (447)
Other 47 (65)
-------- --------
Net cash used by operating activities (587) (784)
-------- --------
Investing Activities
Purchases of securities available for sale (33,028) (22,902)
Proceeds from sales of securities available for sale 8,966 7,786
Proceeds from maturities of securities available for sale 12,098 --
Net change in FHLB stock (36) --
Net change in loans (3,956) 413
Proceeds from sale of foreclosed assets 2,666
Purchase of premises and equipment (40) (52)
Funding on outstanding letters of credit -- (230)
-------- --------
Net cash used by investing activities (13,330) (14,985)
-------- --------
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand
and savings deposits 454 (1,878)
Certificates of deposit 3,097 7,269
Short-term borrowings -- --
Proceeds of FHLB advances 14,000 6,778
Repayment of long-term debt (6,284) (6,436)
Issuance of stock 4,153 165
Issuance of stock warrants -- 250
-------- --------
Net cash provided by financing activities 15,420 6,148
-------- --------
Net Change in Cash and Cash Equivalents 1,503 (9,621)
Cash and Cash Equivalents, Beginning of Period 3,823 16,316
-------- --------
Cash and Cash Equivalents, End of Period $ 5,326 $ 6,695
======== ========
Additional Cash Flows Information
Interest paid $ 2,127 $ 3,789
Income tax paid (refunded) -- --
Real estate acquired in settlement of loans 657 1,910
See notes to condensed consolidated financial statements.
6
Fidelity Federal Bancorp
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
o Accounting Policies
The significant accounting policies followed by Fidelity Federal Bancorp
("Fidelity") and its wholly owned subsidiaries for interim financial reporting
are consistent with the accounting policies followed for annual financial
reporting. All adjustments which are necessary for a fair presentation of the
results for the periods reported, consist only of normal recurring adjustments,
and have been included in the accompanying unaudited condensed consolidated
financial statements. The results of operations for the six months ended June
30, 2003 are not necessarily indicative of those expected for the remainder of
the year. The condensed consolidated balance sheet at December 31, 2002 has been
derived from the audited financial statements.
Certain information and note disclosures normally included in the company's
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the company's Form 10-K annual report for 2002 filed with the
Securities and Exchange Commission.
o Company Subsidiaries
Fidelity's savings bank subsidiary, United Fidelity Bank, fsb ("United"), was
organized in 1914, is a federally-chartered stock savings bank located in
Evansville, Indiana, and is regulated by the Office of Thrift Supervision
("OTS"). Fidelity, through its savings bank subsidiary, is engaged in the
business of obtaining funds in the form of savings deposits and other borrowings
and investing such funds in consumer, commercial, and mortgage loans, and in
investment and money market securities.
o Stockholders' Equity
In April 2003, Fidelity issued 2,777,777 shares of common stock for $4.0 million
in cash through the exercise of an option held by Pedcor Holdings and affiliates
("Pedcor"). The exercise price per share was $1.44, and was determined under a
formula included in the shareholder-approved stock purchase agreement effective
May 19, 2000. The proceeds of the option exercise were utilized to reduce
Fidelity's long-term debt outstanding. The remaining options expired on May 19,
2003.
Pedcor Holdings is a member of a group of companies which is controlled by Bruce
A. Cordingley, Gerald K. Pedigo, and Phillip J. Stoffregen, directors of
Fidelity Federal. Following the option exercise, the Pedcor group beneficially
owns approximately 65% of Fidelity's issued and outstanding stock.
In July 2002, Fidelity filed a registration statement for a stockholder rights
offering with the Securities and Exchange Commission. A total of 750,000 shares
were registered in this filing. For every 8.1 shares of Fidelity held on the
record date, shareholders could subscribe to purchase one share of Fidelity at
$2.00. The rights offering was completed in September 2002. Fidelity raised
$770,000, net of costs associated with the offering. The shares purchased by
shareholders with these funds were issued in September 2002.
7
o Cash Dividend
Fidelity's dividend policy is to pay cash or distribute stock dividends when its
Board of Directors deems it to be appropriate, taking into account Fidelity's
financial condition and results of operations, economic and market conditions,
industry standards, and other factors, including regulatory capital requirements
of its savings bank subsidiary. Fidelity is not subject to any regulatory
restrictions on payments to its stockholders. United has entered into a
Supervisory Agreement ("Agreement") with the Office of Thrift Supervision
("OTS"). One of the provisions of the Agreement requires prior approval from OTS
for payments of dividends from United to Fidelity. Fidelity is uncertain when it
will pay dividends in the future and the amount of such dividends, if any.
o Other Restrictions
The Agreement with the OTS is in effect until terminated, modified or suspended
by the OTS. The agreement was entered into in February 1999. The agreement as
written has been modified by mutual agreement to eliminate certain restrictions.
Under the terms of the Agreement, United developed and submitted to the OTS for
approval a strategic plan which included, at a minimum, capital targets;
specific strategies; the completion of quarterly projections for a three-year
period; concentration limits for all assets; a plan for reducing United's
concentrations of high risk assets; review of infrastructure, staffing and
expertise with respect to each area of United's operations; and capital
planning. The strategic plan is updated annually and submitted to the OTS.
In addition, United is also prohibited from taking certain actions without prior
approval, including but not limited to: engaging in "sub prime" consumer lending
activities; making capital distributions, including dividends to Fidelity;
making any additional equity investments; real estate development without
specific approval of the OTS; acquiring any additional real estate for future
development; selling any asset to an affiliated party without prior written
approval of the OTS; and engaging in any new activities not included in the
strategic plan.
United is also required to obtain OTS approval prior to adding or replacing any
director or senior executive officer, from entering into any contract with any
executive officer or director which would require a golden-parachute payment and
from increasing any executive benefit package in an amount in excess of the
annual cost of living.
The Agreement currently limits the growth of its automobile loan portfolio,
including retained interests in an automobile loan securitization transaction in
2002.
United received OTS approval in the first quarter of 2002 to resume commercial
lending on a limited basis in accordance with its business plan. In 2002, United
received OTS approval to complete a $50.0 million automobile loan securitization
transaction. Internet banking, a new activity approved by OTS, was introduced to
United's customers on July 1, 2003.
Management of United has taken, or has refrained from taking, as applicable, the
actions requested by the OTS. United believes it was in compliance with the
modified provisions of the Agreement at June 30, 2003.
o Earnings per share
Earnings per share (EPS) were computed as follows:
Three Months Ended June 30, 2003
---------------------------------------------
Income Weighted-Average Per Share
Shares Amount
---------------------------------------------
Net income $ 103
=====
Basic earnings per share
Income (loss) available to common
stockholders $ 103 9,618,659 $ 0.01
======
Effect of dilutive securities
Stock options - -
------ ----------
Diluted earnings per share
Income (loss) available to common
stockholders and assumed conversions $ 103 9,618,659 $ 0.01
====== ========= ======
8
Three Months Ended June 30, 2002
---------------------------------------------
Income Weighted-Average Per Share
Shares Amount
---------------------------------------------
Net income $ 44
====
Basic earnings per share
Income available to common stockholders $ 44 6,062,464 $0.01
=====
Effect of dilutive securities
Stock options - 9,163
------ ---------
Diluted earnings per share
Income available to common stockholders and
assumed conversions $ 44 6,071,627 $0.01
==== ========= =====
Six Months Ended June 30, 2003
---------------------------------------------
Income Weighted-Average Per Share
Shares Amount
---------------------------------------------
Net income $ 158
=====
Basic earnings per share
Income (loss) available to common
stockholders $ 158 8,234,129 $ 0.02
======
Effect of dilutive securities
Stock options - -
------ ---------
Diluted earnings per share
Income (loss) available to common
stockholders and assumed conversions $ 158 8,234,129 $ 0.02
====== ========= ======
Six Months Ended June 30, 2002
---------------------------------------------
Income Weighted-Average Per Share
Shares Amount
---------------------------------------------
Net income $ 130
=====
Basic earnings per share
Income available to common stockholders $ 130 6,037,774 $0.02
=====
Effect of dilutive securities
Stock options - 9,389
------ ----------
Diluted earnings per share
Income available to common stockholders and
assumed conversions $ 130 6,047,163 $0.02
===== ========= =====
Options to purchase 326,996 shares of common stock at prices ranging from $1.53
to $11.81 per share as well as stock warrants representing the right to purchase
527,753 share of common stock at prices ranging from $3.00 to $8.93 per share
were outstanding at June 30, 2003, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares.
o Automobile Loan Securitization
United completed an automobile loan securitization transaction in 2002.
A summary of the components of serviced loans, which represents both owned and
securitized loans, follows. The automobile loans presented represent the managed
portfolio of indirect prime automobile loans.
9
Loans Past
Principal Due Over
As of June 30, 2003 Balance 30 Days
- ------------------------------------------------------------------------------
Total serviced automobile loans $ 84,771 $353
Less: Automobile loans securitized (31,781) (127)
Automobile loans serviced (31,358) (74)
---------------------------
Total automobile loans held in portfolio $ 21,632 $ 152
===========================
United estimates the fair value of the retained interest at the date of the
transfer and during the period of the transaction based on a discounted cash
flow analysis. United receives monthly servicing fees based on the principal
loan balances outstanding, the rights to future cash flows arising after
investors in the securitization trust have received their contractual return and
after certain administrative costs of operating the trust. These cash flows are
estimated over the life of the loans using prepayment, default and interest rate
assumptions that market participants would use for financial instruments subject
to similar levels of prepayment, credit and interest rate risk.
A summary of the fair values of the interest-only strips and servicing assets
retained, key economic assumptions used to arrive at the fair values, and the
sensitivity of the June 30, 2003 fair values to immediate 10% and 20% adverse
changes in those assumptions follows. Actual credit losses experienced through
year-end 2002 and thus far in 2003 on the pool of automobile loans securitized
have been consistent with initial projections. As such, the expected static pool
loss assumption would perform consistently with that disclosed in the
sensitivity analysis. The sensitivities are hypothetical. Changes in fair value
may not be linear. Also, the effect of a variation in a particular assumption on
the fair value of the retained interests is calculated without changing any
other assumption; in reality, changes in one factor may result in changes in
another (for example, increases in market interest rates may result in lower
prepayments and increased credit losses), which might either magnify or
counteract the sensitivities.
Weighted- Monthly Expected
Average Prepayment Cumulative Annual Weighted-
Fair Life Speed Credit Discount Average
Value (in months) (% ABS) Losses Rate Coupon
---------------------------------------------------------------------------------
Interest-only strip
As of the date of securitization $ 2,707 39 1.50% 1.50% 15.0% 9.09%
As of June 30, 2003 2,035 24 1.83 1.50 15.0 8.64
Decline in fair value of 10%
adverse change $ 41 $ 24 $ 35
Decline in fair value of 20%
adverse change 80 47 71
Servicing asset
As of the date of securitization 362 39 1.50% 1.50% 15.0%
As of June 30, 2003 * 246 24 1.83 1.50 15.0
Decline in fair value of 10%
adverse change $ 10 $ 0 $ 2
Decline in fair value of 20%
adverse change 19 0 5
*Carrying value of the servicing asset approximated fair value at June 30, 2003.
o Stock Option
Stock options and Fidelity's stock-based incentive compensation plans are
discussed more fully in the notes to Fidelity's December 31, 2002 audited
financial statements contained in Fidelity's annual report. Fidelity accounts
for these plans under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related Interpretations.
No stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price that was equal to or
greater than the market value of the underlying common stock on the grant date.
The following table illustrates the effect on net income and earnings per share
if Fidelity had applied the fair value provisions of FASB statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
10
Three months ended Six months ended
June 30 June 30
---------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------
Net income as reported $ 103 $ 44 $ 158 $ 130
Less: Total stock-based compensation cost determined
under the fair value based method, net of income taxes (8) (48) (16) (54)
---------------------------------------------------
Pro forma net income 95 (4) 142 76
===================================================
Basic earnings per share - as reported $0.01 $0.01 $0.02 $0.02
Basic earnings per share - pro forma $0.01 $0.00 $0.02 $0.01
Diluted earnings per share - as reported $0.01 $0.01 $0.02 $0.02
Diluted earnings per share - pro forma $0.01 $0.00 $0.02 $0.01
o Reclassifications
Reclassifications of certain amounts from the condensed consolidated income
statements for the three and six month periods ended June 30, 2002 have been
made to conform to the presentation of the three and six month periods ended
June 30, 2003. These reclassifications had no effect on net income.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of Fidelity Federal. The information contained in this
section should be read in conjunction with the consolidated financial statements
and accompanying notes contained in this report.
Portions of this Management's Discussion and Analysis, as well as the notes to
the consolidated financial statements contain certain forward-looking statements
(as defined in the Private Securities Litigation Reform Act of 1995), which
reflect management's current beliefs and expectations and are intended to
benefit the reader. These forward-looking statements are inherently subject to
various risks and uncertainties which may cause actual results to differ
materially from expected results. Such risks and uncertainties include, but are
not limited to, economic conditions, generally and in the market areas of the
Company, increased competition in the financial services industry, actions by
the Federal Reserve Board, changes in interest rates and governmental regulation
and legislation.
Comparison of Financial Condition at June 30, 2003 and December 31, 2002
Total assets at June 30, 2003 were $147.9 million, an increase of $15.6 million
from $132.3 million at December 31, 2002. The increase in total assets was
primarily attributable to a $12.0 million increase in investment securities
available for sale and $3.5 million increase in net loans.
United's investment portfolio consists entirely of mortgage related securities
which are classified as "available for sale". Approximately $9.0 million of
securities were sold during the first half of 2003 due to continued rapid
prepayments in connection with the low market rate environment, but replaced
with approximately $33.1 million in similar mortgage-backed securities during
the first six months of 2003.
Net loans increased $3.5 million to $76.6 million at June 30, 2003. The increase
is associated with a $3.5 million increase in consumer loans. Low interest rates
resulted in a $1.1 million increase in residential real estate loans. Offsetting
these increases was a $2.5 million decrease in loans due to the payoff of two
loans on multifamily real estate properties.
The allowances for loan losses decreased to $690,000 at June 30, 2003, from
$837,000 at December 31, 2002. The decline was due to a $122,000 credit to the
provision for loan losses and $25,000 in net charge-offs. The $122,000 loan loss
provision credit was due to excess allowance created from consumer loan sales
during this year and a reduction of excess reserves on two multifamily real
estate properties that paid off during the second quarter of 2003. The allowance
for loan losses represented 0.89% of total loans at June 30, 2003, a decrease
from 1.13% at December 31, 2002. Relative to non-performing assets, the
allowance for loan losses was 41.4% at June 30, 2003, compared to 27.4% at
December 31, 2002.
11
The following table sets forth an analysis of the allowance for loan losses for
the six months ended June 30, 2003 and the year ended December 31, 2002:
Six months
ended Year ended
June 30, December 31,
2003 2002
------------------- -----------------
(dollars in thousands)
Allowance for loan losses at beginning of period $ 837 $2,138
Provision for losses (122) (360)
Loans charged off (106) (1,954)
Recoveries on loans 81 1,013
------------------- -----------------
Allowance for loan losses at end of period $ 690 $ 837
=================== =================
Foreclosed assets held for sale decreased $1.9 million primarily due to the
disposition of a commercial real estate property.
Total deposits increased $3.5 million to $110.3 million at June 30, 2003, from
$106.8 million at December 31, 2002. Approximately $2.0 million of the increase
was associated with an increase in non-interest bearing deposit accounts and the
remaining increase was in certificates of deposit.
Federal Home Loan Bank advances increased $14.0 million to $17.0 million at June
30, 2003. The increase in borrowings was utilized to fund investment and loan
growth during the first half of 2003.
Long-term debt decreased $6.3 million to $4.3 million at June 30, 2003. Notes
payable secured by multi-family mortgages totaling $2.4 million and bearing
interest of 7.42% were paid off during the second quarter. An additional $1.5
million note payable bearing interest at 10.50% was paid off during the second
quarter as well. Finally, $2.2 million in senior subordinated notes bearing
interest at 10% were retired. Fidelity utilized liquidity from a $4.0 million
stock option exercise by Pedcor Holdings and affiliates in April 2003 to pay off
the above noted long-term debt.
Total stockholders' equity increased $4.1 million from December 31, 2002 to
$13.7 million at June 30, 2003. The increase was primarily attributable to the
exercise of stock options totaling $4.1 million during the first half of 2003 by
Pedcor Holdings and affiliates and net income for the year-to-date.
Non-Performing Assets
Non-performing assets decreased $1.4 million from December 31, 2002 to $1.7
million or 1.1% of total assets at June 30, 2003. The decrease is primarily due
to the sale of one commercial real estate asset with a carrying value of $1.8
million.
The following table provides information on Fidelity's non-performing assets as
of June 30, 2003 and December 31, 2002:
June 30, December 31,
2003 2002
------------------------------
(Dollars in Thousands)
Non-accrual loans
Consumer $ 221 $ 131
Commercial 376 388
Real estate mortgage 754 356
-------- --------
Total non-accrual loans 1,351 875
Restructured
Total restructured loans 95 39
90 days or more past due and accruing
Mortgage - 1
-------- --------
Total 90 days or more past due and accruing - 1
Foreclosed and repossessed assets 219 2,145
-------- --------
Total non-performing assets $ 1,665 $ 3,060
======== ========
Ratio of non-performing assets to total assets 1.13% 2.31%
======== ========
12
Foreclosed and Repossessed Assets
Forclosed and repossessed assets totaled $219,000 at June 30, 2003, which
consists of residential and non-residential properties. As previously discussed,
United disposed of a commercial real estate property with a value of $1.8
million during the second quarter of 2003.
Classified Assets
Classified assets totaled $2.0 million at June 30, 2003 compared to $6.0 million
at December 31, 2002. Total classified assets were 13.6% and 55.4% of Fidelity's
capital and reserves at June 30, 2003 and December 31, 2002, respectively. In
addition to the classified assets and letters of credit, there are other assets
and letters of credit totaling $6.8 million at June 30, 2003, compared to $11.9
million at December 31, 2002, for which management was closely monitoring the
borrower's abilities to comply with payment terms. Classified assets decreased
$4.0 million from December 31, 2002 to $2.0 million at June 30, 2003. The
decrease is primarily attributable to two classified multifamily loans totaling
$2.6 million that were paid off during the second quarter, in addition to the
$1.8 million non-residential property that was sold during the quarter.
Capital Resources
United is subject to various regulatory capital requirements administered by the
federal banking agencies and is assigned to a capital category. The assigned
category is largely determined by three ratios that are calculated according to
the regulations: tangible capital, core capital and risk-based capital ratios.
The ratios are intended to measure capital relative to assets and credit risk
associated with those assets and off balance sheet exposures of the entity. The
capital category assigned to an entity can also be affected by qualitative
judgments made by regulatory agencies about the risk inherent in the entity's
activities that are not part of the calculated ratios.
The following is a summary of the Bank's regulatory capital and capital
requirements at June 30, 2003 based on capital regulations currently in effect
for savings institutions.
Tangible Core Risk-based
Capital Capital Capital
Regulatory capital $ 10,841 $ 11,250 $ 11,326
Minimum capital requirement 2,132 5,701 7,246
-------- -------- --------
Excess capital 8,709 5,549 4,080
======== ======== ========
Regulatory capital ratio 7.63% 7.89% 12.50%
Required capital ratio 1.50% 4.00% 8.00%
-------- -------- --------
Ratio excess 6.13% 3.89% 4.50%
======== ======== ========
Liquidity
Fidelity's principal source of income and funds is dividends from United.
Fidelity is not subject to any regulatory restrictions on the payment of
dividends to its stockholders. However, United is currently restricted from
paying any dividends to Fidelity without prior approval of the OTS under the
terms of the Supervisory Agreement.
The Stock Purchase Agreement approved by Fidelity's shareholders in May 2000
provides that, for three years following the approval of the stock purchase
agreement, Pedcor is entitled to purchase additional shares at market value from
Fidelity in an aggregate amount up to $5.0 million. Prior to the May 2003
expiration of this option, Pedcor Holdings and affiliates had $4.4 million
available of the original $5.0 million of which they acquired 2,777,777 shares
of common stock for $4.0 million in cash in April 2003. Approximately $388,000
in unexercised options expired in May 2003.
Fidelity has a $500,000 line of credit and can draw on this line until its
expiration in September 2004. At June 30, 2003, no amount was outstanding on the
line of credit. Fidelity's liquidity position may be further improved by the
potential issuance of additional stock, additional debt or equity financing, or
dividends from United, to Fidelity. Fidelity believes that the above actions, in
addition to the recent $6.4 million in debt reduction, will assist it in meeting
its future liquidity needs.
13
o Comparison of Operating Results for the Three Months Ended June 30,
2003 and 2002
General. Net income for the quarter ended June 30, 2003 was $103,000 compared to
$44,000 for the quarter ended June 30, 2002. Net interest income decreased,
while non-interest income increased and non-interest expense decreased.
Net Interest Income
Net interest income of $616,000 was recognized during the quarter ended June 30,
2003, compared to $880,000 for the same period in 2002.
Total interest income decreased $914,000 to $1.6 million for the quarter ended
June 30, 2003, from $2.5 million for the same quarter in 2002. Total interest
income on loans decreased $782,000 in addition to a $110,000 decrease in
interest income from investment securities. Average loans outstanding decreased
$29.0 million to $73.8 million at June 30, 2003. During the second half of 2002,
United completed a loan securitization transaction resulting in the sale of
approximately $50 million in consumer loans.
Total interest expense decreased $650,000 to $980,000 for the quarter ended June
30, 2003. The reduction in interest expense was mainly the product of average
deposits decreasing $16.5 million to $107.4 million for the quarter ended June
30, 2003, from $123.9 million for the quarter ended June 30, 2002 combined with
the average cost of those deposits falling to 3.04% from 3.82% for the
respective periods. Also, the average cost of FHLB advances decreased to 1.85%
on an average balance of $12.2 million in the most recent quarter compared to a
cost of 4.65% on an average balance of $17.0 million for the same period a year
ago.
Provision for Loan Losses and Letters of Credit Valuation Provision
The provision for loan losses for the three months ended June 30, 2003 was a
credit of $18,000 compared to zero for the three months ended June 30, 2002.
Additional loan loss provisions were made during the current quarter based on
loan growth, delinquency and charge-off trends. However, these provisions were
offset by the reduction of consumer loan allowances as a result of consumer loan
sales completed during the quarter, and the payoffs of two large multifamily
loans during the second quarter. During the quarter, a $170,000 credit to the
letter of credit valuation provision was recorded along with a corresponding
entry to the provision for loan losses in which net income was not impacted by
the transaction.
Non-interest income
Non-interest income for the three months ended June 30, 2003 was $1.1 million
compared to $820,000 for the same period in 2002, an increase of $286,000.
Net gains on loan sales decreased $45,000 from the prior year's quarter
primarily due to a decrease in volume of automobile loans sold. A $73,000 gain
on the sale of available for sale investments was recognized for the quarter
ended June 30, 2002 compared to none for the same period in 2003. The sale of
two foreclosed properties contributed $305,000 during the quarter compared to
none in 2002. Income of $54,000 was recognized on the retained interests in
securitized assets. Increased mortgage loan volume resulted in a $54,000
increase in underwriting and document fees over the prior year. An increase in
early payoffs on automobile loans due to the historically low interest rate
environment resulted in the repayment of $79,000 in interest previously paid by
United to automobile dealerships compared to $7,000 for the same period in 2002.
Included in other income for 2002 was a $140,000 gain in connection with
Fidelity liquidating a $500,000 senior note for $360,000.
Non-interest expense
Non-interest expense decreased $96,000 to $1.7 million for the quarter ended
June 30, 2003 compared to $1.8 million for the same period in 2002.
Salaries and employee benefits decreased $22,000 from the second quarter of
2002. Equipment expense increased $16,000 over the prior due to increased
maintenance and depreciation expense. Data processing expense increased $30,000
over the prior year due to increased volume of mortgage and consumer loans
serviced when compared to the same period in 2002. Professional liability
insurance expense increased $28,000 over the prior year due to market rate
increases during the year. Bond issuance expense increased $47,000 over 2002 in
connection with $2.3 million retirement in subordinated notes during the quarter
and the deferred costs associated
14
with the retired debt. A $170,000 credit to the valuation provision was recorded
compared to none in 2002 as noted above in the provision discussion.
Comparison of Operating Results For the Six Months Ended June 30, 2003, and 2002
General. Net Income for the six months ended June 30, 2003, was $158,000 or
21.5% above the $130,000 for the six months ended June 30, 2002. This change was
primarily attributable to increases in non-interest income and a reduction in
non-interest expense and provision for loan losses.
Net Interest Income
The following table summarizes Fidelity's average interest-earning assets and
average interest-bearing liabilities with the accompanying average rates for the
first six months of 2003 and 2002:
Six months ended Average yield for
June 30, six months ended
(dollars in thousands) June 30,
---------------------------- --------------------
2003 2002 2003 2002
---------- --------- ------ ------
Interest-earning assets $ 120,212 $ 142,546 5.37% 6.97%
Interest-bearing liabilities 120,756 143,339 3.57 4.55
---------- --------- ---- ----
Net interest bearing liabilities $ (544) $ (793)
========== =========
Net interest spread 1.80% 2.42%
==== ====
Net interest margin 1.78% 2.40%
==== ====
Net interest income for the first six months of 2003 was $1,060,000 compared to
$1,851,000 earned during the first six months of 2002. Total interest income
decreased $1,884,000 to $3.2 million for the six months ended June 30, 2003 from
$5.1 million for the same period in 2002. During the first half of 2002, an
additional $156,000 in interest income was recognized on previously charged off
loans compared to none in 2003. The remaining decrease in interest income was
primarily attributable to a decrease in average consumer loans of $26.0 million
resulting from the completion of the securitization transaction in the third
quarter of 2002. The decrease in average balances in combination with partially
replacing these assets at lower yields resulted in a decrease in consumer loan
interest income of $1.2 million. Average mortgage loans decreased $5.8 million
due to the refinancing activity of the low interest rate environment over the
past year. The majority of refinanced loans have been sold in the secondary
market resulting in a decrease in mortgage loan outstandings and interest income
of $414,000 when compared to the prior year. Interest expense decreased $1.1
million due to a combination of a decrease of $250,000 and $390,000 due to a
decrease primarily in certificate of deposits volume and rate, respectively. The
remaining decrease is associated with the decrease in volume and rate of FHLB
advances and other borrowing totaling $453,000.
The following table sets forth the details of the rate and volume change for the
first six months of 2003 compared to the same period in 2002.
Six Months Ended June 30,
2003 vs 2002
Increase (Decrease)
Due to change in
----------------------------------------
Volume Rate Total
-------- ------ -------
Interest Income:
Loans and mortgage-backed securities $ (884) $ (793) $(1,677)
Other interest-earning assets (27) (24) (51)
------ ------ -------
Total interest-earning assets (911) (817) (1,728)
Interest Expense:
Deposits (250) (390) (640)
FHLB advances and other borrowings (353) (100) (453)
------ ------ ------
Total interest-bearing liabilities (603) (490) (1,093)
------ ------ ------
Change in net interest income $ (308) $ (327) $ (635)
====== ====== ======
15
Provision for Loan Losses and Letters of Credit Valuation Provision
The provision for loan losses for the six months ended June 30, 2003 was a
credit of $122,000 compared to zero for the six months ended June 30, 2002.
Additional loan loss provisions were made during the current quarter based on
loan growth, delinquency and charge-off trends. However, these provisions were
offset by the reduction of consumer loan allowances as a result of consumer loan
sales completed during the quarter, and the payoffs of two large multifamily
loans during the second quarter.
Fidelity makes provisions for loan losses in amounts estimated to be sufficient
to maintain the allowance for loan losses at a level considered necessary by
management to absorb losses in the loan portfolios. Specific reserves are
assigned to certain credits. The reserves are determined by management's
evaluation of those credits, which include evaluations of borrower's ability to
repay outstanding debt, as well as the value of supporting collateral. The
results of internal loan reviews, previous regulatory reviews, and past events
assist Fidelity in making that evaluation. The independent support for the
allowance for loan losses and letter of credit valuation reserve includes
documentation that supports the amount of recorded reserves for these credits.
General reserves for loans and letters of credit not specifically reserved are
also determined. Fidelity computes general reserves for the commercial,
commercial mortgage, residential mortgage and consumer loan portfolios by
utilizing historical information and information currently available about the
loans within those portfolios that provides information as to the likelihood of
loss. The potential effect of current economic conditions is also considered
with respect to establishing general reserve amounts.
Non-interest income
Non-interest income for the six months ended June 30, 2003 was $2.3 million
compared to $1.8 million for the same period in 2002, an increase of $575,000 or
31.9%.
Net gains on loan sales decreased $123,000 from the prior year's quarter due to
a decrease in volume of automobile loans sold. A $320,000 gain on the sale of
available for sale investments was recognized in the first half of 2002 compared
to $73,000 in 2002 for the same time period. Increased prepayment speeds,
remaining premiums and pricing made it advantageous to sell the securities as
opposed to holding them during 2003. Although the entire investment portfolio is
available for sale, Fidelity believes the sale of investment securities are
considered non-recurring in nature. As previously discussed the sale of two
foreclosed properties contributed to the $317,000 gain on disposals compared to
none in 2002. A $72,000 gain on the sale of an interest rate swap was recognized
in 2002 compared to zero in 2003. Income of $114,000 was recognized on the
retained interests in securitized assets. An increase in early payoffs on
automobile loans due to the historically low interest rate environment resulted
in the repayment of $162,000 in interest previously paid by United to automobile
dealerships compared to $12,000 for the same period in 2002. Included in other
income were non-recurring items which Fidelity received during the first half of
2003 totaling approximately $125,000 from Fidelity's active participation in
affordable housing activities, which ended late last year. Also, included in
other income for 2002 was a $140,000 gain resulting from the liquidation of a
$500,000 senior note at a discount compared to none in 2003.
Non-interest expense
Non-interest expense decreased $220,000 to $3.4 million for the six months ended
June 30, 2003 compared to $3.6 million for the same period in 2002.
Salaries and employee benefits decreased $79,000 from the first six months of
2002. Data processing expense increased $50,000 over the prior year due to
increased volume of mortgage and consumer loans serviced when compared to the
same period in 2002. Equipment expense increased $29,000 over the prior year due
to increased maintenance expense. Printing, postage and office supplies
decreased $21,000 from the prior year due to various improvements made in the
purchasing and printing process. Professional liability insurance expense
increased $49,000 over the prior year due to market rate increases during the
year. Bond issuance expense increased $48,000 over the prior year in connection
with the retirement of $2.3 million in subordinated notes and the deferred cost
associated with the retired debt. Intangible asset amortization was $52,000 for
the first six months of 2002 compared to zero in 2003 due to the change in the
estimated lives of these assets in the third quarter of 2002.
Income tax benefit
The income tax benefit was $21,000 for the three months ending June 30, 2003
compared to a $98,000 benefit in the same period last year. Included in this
benefit are tax credits of $55,000. The income tax benefit was $71,000
16
for the six months ending June 30, 2003 compared to $169,000 in the same period
last year. Included in this benefit are tax credits of $111,000. These credits
are received from Fidelity's remaining investments in limited partnership
interests in affordable housing properties and are a component of the overall
return on these investments.
Consideration of the need for a valuation allowance for the deferred tax asset
was made at June 30, 2003 after projecting the reversal of the deferred items.
These analyses were based on projected operating income in future years, action
plans developed and partially implemented included in Fidelity's business plan
and cost reductions. These analyses showed that not all carryforwards would be
utilized within the carryforward periods (federal and state) and a valuation
allowance would be necessary. The analyses assume that Fidelity will execute
approximately 50% of the initiatives included within its current business plan
and then achieve 10% growth in annual earnings thereafter. The conservative
level of earnings contemplated by these analyses, if achieved, will constitute
for the majority of the carryforward periods, earnings levels that are below
other thrift holding companies included within Fidelity's peer group. Due to
capital gains generated as a result of the sale of two Company subsidiaries, and
a level of projected profitability for 2002 being less than originally
anticipated, Fidelity established a valuation allowance of $500,000 at December
31, 2002. Fidelity considers the current valuation allowance adequate at June
30, 2003 based upon the results of the above analysis and assumptions, but
cannot assure that future income will be enough to support the current level of
deferred taxes.
The assumptions used to help consider the need for a valuation allowance for the
deferred tax asset are subject to certain risks and uncertainties that could
impact the final determination regarding the amount of the valuation allowance.
These risks include the failure to implement the business plan targets for
increased revenues, cost reductions, the potential loss of key employees,
ability to maintain projected interest rate margins, and the potential
disruption of activities in key income-producing areas.
Critical Accounting Policies
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses
charged to earnings as losses are estimated to have occurred. Loan losses are
charged against the allowance when management believes the uncollectibility of a
loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it
is probable that Fidelity or any of its wholly owned subsidiaries will be unable
to collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value and the
probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance
of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan-by-loan basis for
commercial and construction loans by either the present value of expected future
cash flows discounted at the loan's effective interest rate, the loan's
obtainable market price or the fair value of the collateral if the loan is
collateral dependent.
Large groups of smaller balance homogenous loans are collectively evaluated for
impairment. Accordingly, United does not separately identify individual consumer
and residential loans for impairment disclosures.
Recently Issued Accounting Guidance
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with characteristics of Both Liabilities and Equity." This Statement
establishes standards for how an entity classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. Adoption of this Standard did not have a
material effect on Fidelity's Condensed Consolidated Financial Statements.
17
In November 2002, the FASB issued Interpretation No. 45, (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which elaborates on the disclosures to be
made by a guarantor about its obligations under certain guarantees issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of
this Interpretation apply on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements in this
Interpretation are effective for periods ending after December 15, 2002.
Adoption of the requirements of FIN 45 did not have a material effect on
Fidelity's Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities." This Interpretation clarifies that application
of ARB No. 51, "Consolidate Financial Statements," for certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated support from other parties. This
interpretation requires variable interest entities to be consolidated by the
primary beneficiary which represents the enterprise that will absorb the
majority of the variable interest entities' expected losses if they occur,
receive a majority of the variable interest entities' residual returns if they
occur, or both. Qualifying Special Purpose Entities (QSPE) are exempt from the
consolidation requirements of FIN 46. This Interpretation was effective for
variable interest entities created after January 31, 2003 and for variable
interest entities in which an enterprise obtains an interest after that date.
This Interpretation is effective in the first fiscal year or interim period
beginning after June 15, 2003 for variable interest entities in which an
enterprise holds a variable interest that was acquired before February 1, 2003,
with earlier adoption permitted. Fidelity is evaluating the impact of FIN 46 and
does not expect to have a material effect on Fidelity's Consolidated Financial
Statements.
Item 3 - Asset/Liability Management--Quantitative and Qualitative Disclosures
about Market Risk
Fidelity is subject to interest rate risk to the degree that its interest
bearing liabilities, primarily deposits with short and medium term maturities,
mature or reprice at different rates than its interest-earning assets. Although
having liabilities that mature or reprice less frequently will be beneficial in
times of rising interest rates, such an asset/liability structure will result in
lower net income during periods of declining interest rates, unless off-set by
other factors.
The OTS utilizes a model, the "Office of Thrift Supervision Net Portfolio Value"
("NPV") model, which uses a net market value methodology to measure the interest
rate risk exposure of savings associations. Under this model, an institution's
"normal" level of interest rate risk in the event of an assumed change in
interest rates is a decrease in the institution's NPV in an amount not exceeding
2% of the present value of its assets. Savings associations with over $300
million in assets or less than 12% risk-based capital ratio are required to file
the OTS Schedule CMR. Data from Schedule CMR is used by the OTS to calculate
changes in NPV (and the related "normal" level of interest rate risk) based upon
certain interest rate changes (discussed below). Associations which do not meet
either of the filing requirements are not required to file OTS Schedule CMR, but
may do so voluntarily. United voluntarily submits a CMR quarterly to the OTS.
Under the regulation, associations which must file are required to take a
deduction (the interest rate risk capital component) from their total capital
available to calculate their risk based capital requirement if their interest
rate exposure is greater than "normal". The amount of that deduction is one-half
of the difference between (a) the institution's actual calculated exposure to a
200 basis point interest rate increase or decrease (whichever results in the
greater pro forma decrease in NPV) and (b) its "normal" level of exposure which
is 2% of the present value of its assets.
The data for June 30, 2003 is not required to be filed with the OTS until 45
days after quarter end, which coincides with the 10-Q filing. Management
monitors its interest rate sensitivity during the quarter and will request the
OTS to run scenarios on the NPV model to determine the change in interest rate
sensitivity for management in an effort to assist management with its decision
making regarding the maturities and pricing of its products.
Although United has not yet submitted its CMR to the OTS for June 30, 2003,
management anticipates there has been no material change from the information
disclosed in Fidelity's annual report to shareholders at December 31, 2002.
Item 4 - Controls and Procedures
a. Evaluation of Disclosure Controls and Procedures. Fidelity's principal
executive officer and principal financial officer have concluded that
Fidelity's disclosure controls and procedures (as defined in Rule 13a-14(c)
under the Securities Exchange Act of 1934, as amended), based on their
evaluation of these controls and procedures by the end of the period
covered by this Form 10-Q, are effective.
18
b. Changes in Internal Controls. There have been no significant changes in
Fidelity's internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation thereof,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
c. Limitations on the Effectiveness of Controls. Fidelity's management,
including its principal executive officer and principal financial officer,
does not expect that Fidelity's disclosure controls and procedures and
other internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within
the company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can only be
reasonable assurance that any design will succeed in achieving its stated
goals under all potential future conditions; over time, control may become
inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error
or fraud may occur and not be detected.
d. CEO and CFO Certifications. Exhibits 31.1 and 31.2 contain the
Certifications of Fidelity's principal executive officer and principal
financial officer. The Certifications are required in accord with Section
302 of the Sarbanes-Oxley Act of 2002 (the "Section 302 Certifications").
This Item of this report which you are currently reading is the information
concerning the Evaluation referred to in the Section 302 Certifications and
this information should be read in conjunction with the Section 302
Certifications for a more complete understanding of the topics presented.
19
PART II -- OTHER INFORMATION
ITEM 1 Legal Proceedings:
------------------
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the Registrant's business, to which
the Registrant or its subsidiaries are a party of or which any of
their property is the subject.
ITEM 2 Changes in Securities and Use of Proceeds:
------------------------------------------
On April 1, 2003, Fidelity issued an aggregate of 2,777,777 shares
of common stock at the exercise price of $1.44 per share, or
approximately $4,000,000 in aggregate, to Pedcor Holdings, LLC and
Pedcor Bancorp as a result of their exercise of a stock option.
Fidelity had reasonable grounds to believe that the investors were
accredited investors, capable of evaluating merits and risks of
this investment, and who acquired the shares for investment
purposes. The transactions were private in nature, and the shares
were issued in reliance upon Section 4(2) of the Securities Act of
1933, as amended. Bruce A. Cordingley, Gerald K. Pedigo and Phillip
J. Stoffregen, directors of Fidelity, are executive officers of
Pedcor Holdings, LLC and Pedcor Bancorp.
ITEM 3 Defaults Upon Senior Securities:
--------------------------------
Not applicable.
ITEM 4 Submission of Matters to a Vote of Security Holders:
----------------------------------------------------
At the annual meeting of shareholders held on April 24, 2003, in
addition to the election of directors, the shareholders voted upon
the one board proposal contained in Fidelity Federal Bancorp's
Proxy Statement dated March 24, 2003.
The Board nominees were elected as directors with the following
vote:
Nominee For Withheld
William R. Baugh 5,122,751 942,574
Paul E. Becker 5,128,095 937,230
Bruce A. Cordingley 5,126,341 938,984
Jack Cunningham 5,125,474 939,851
Donald R. Neel 5,127,908 937,417
Gerald K. Pedigo 5,127,058 938,267
Barry A. Schnakenburg 5,128,095 937,230
Phillip J. Stoffregen 5,126,895 938,430
20
The Board proposal was approved with the following vote:
Abstentions
(Other Than
Broker Broker
Proposal For Against Non-Votes) Non-Votes
Board proposal to ratify the appointment of
BKD LLP as the Company's independent auditors 5,787,571 272,057 5,697 775,558
ITEM 5 Other Information:
------------------
None
ITEM 6 Exhibits and Reports on Form 8-K:
---------------------------------
Exhibit Number Description
-------------- -----------
a. 3(i) (a) Articles of Incorporation of Fidelity, filed as exhibit
3(a) to Fidelity's 1995 Annual Report on Form 10-K, are
incorporated herein by reference
3(i) (b) Articles of Amendment of the Articles of Incorporation,
filed as exhibit 4.1 with Fidelity's Registration Statement
on Form S-3 (file no. 333-53668), are incorporated by
reference
3(ii) By-Laws of Fidelity, filed as exhibit 4.2 with Fidelity's
Registration Statement on Form S-3 (file no. 333-53668), are
incorporated by reference
10 (a) The 1993 Director's Stock Option Plan, filed as exhibit
10(d) to Fidelity's 1995 Annual Report on Form 10-K, is
incorporated herein by reference.
(b) The 1995 Key Employee's Stock Option Plan, filed as exhibit
10(c) to Fidelity's 1996 Annual Report on Form 10-K, is
incorporated herein by reference.
(c) Employment agreement between Fidelity and Donald R. Neel,
filed as exhibit 10(d) to Fidelity's 2000 Annual Report on
Form 10-K, is incorporated herein by reference
31.1 Certification of CEO required pursuant to 15d-14(a) of the
Securities Exchange Act of 1934
31.2 Certification of CFO required pursuant to 15d-14(a) of the
Securities Exchange Act of 1934
32.1 Certification of Chief Executive Officer required pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer required pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
21
b. A form 8-K was filed on July 27, 2003 announcing that on
July 18, 2003, Fidelity issued a press release in connection
with Fidelity's second quarter 2003 earnings release.
A form 8-K was filed on April 23, 2003 announcing that on
April 22, 2003, Fidelity issued a press release in
connection with Fidelity's first quarter 2003 earnings
release.
A form 8-K was filed on April 7, 2003 announcing that on
April 4, 2003, Fidelity issued a press release reporting
that it had issued 2,777,777 shares of common stock for $4.0
million in cash through the exercise of an option held by
Pedcor Holdings and affiliates.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIDELITY FEDERAL BANCORP
Date: August 14, 2003 By: /s/ DONALD R. NEEL
- --------------------- ---------------------------
Donald R. Neel
President and CEO
By: /s/ MARK A. ISAAC
---------------------------
Mark A. Isaac
Vice President and CFO
(Principal Financial Officer)
23
Index to Exhibits
Page Exhibit Number Exhibit
- -------------------------------------------------------------------------------
a. 3(i) (a) Articles of Incorporation of Fidelity, filed as exhibit
3(a) to Fidelity's 1995 Annual Report on Form 10-K, are
incorporated herein by reference
3(i) (b) Articles of Amendment of the Articles of Incorporation,
filed as exhibit 4.1 with Fidelity's Registration Statement
on Form S-3 (file no. 333-53668), are incorporated by
reference
3(ii) By-Laws of Fidelity, filed as exhibit 4.2 with Fidelity's
Registration Statement on Form S-3 (file no. 333-53668), are
incorporated by reference
10 (a) The 1993 Director's Stock Option Plan, filed as exhibit
10(d) to Fidelity's 1995 Annual Report on Form 10-K, is
incorporated herein by reference.
(b) The 1995 Key Employee's Stock Option Plan, filed as exhibit
10(c) to Fidelity's 1996 Annual Report on Form 10-K, is
incorporated herein by reference.
(c) Employment agreement between Fidelity and Donald R. Neel,
filed as exhibit 10(d) to Fidelity's 2000 Annual Report on
Form 10-K, is incorporated herein by reference
31.1 Certification of CEO required pursuant to 15d-14(a) of the
Securities Exchange Act of 1934
31.2 Certification of CFO required pursuant to 15d-14(a) of the
Securities Exchange Act of 1934
32.1 Certification of Chief Executive Officer required pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer required pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
24